Taxation Direct and Indirect

Taxation – Direct and Indirect
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COURSE DESIGN COMMITTEE
Chief Academic Officer

Dr. Shalini Kalia
NMIMS Global Access – School for Continuing Education
TOC Reviewer Content Reviewer

CA Purva Shah CA Purva Shah
Assistant Professor, NMIMS Global Assistant Professor, NMIMS Global
Access - School for Continuing Education Access - School for Continuing Education
Specialization: Finance and Taxation Specialization: Finance and Taxation
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Author : CA Sapna Jain

Reviewed By: CA Purva Shah
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Copyright:
2021 Publisher
ISBN:
978-93-90457-13-7
Address:
4435/7, Ansari Road, Daryaganj, New Delhi–110002
Only for
NMIMS Global Access - School for Continuing Education School Address
V. L. Mehta Road, Vile Parle (W), Mumbai – 400 056, India.
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 33
3 Income From Salaries 55
4 Income from House Property 81
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Profits and Gains of Business or Profession 101
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6 Income from Capital Gains 129
7 Income from Other Sources 163

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8 Deductions to be made in Computing Total Income 177

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9 Exemptions & Rebates 205
10 Set-Off and Carry Forward of Losses 215
11 Indirect Taxation – Goods and Services Tax 235
12 International Taxation 261
13 Case Studies 275

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Taxat i o n – D ir e ct a n d I ndir e c t
c u r r i c u l um
Introduction to Taxation: Meaning and Nature of Taxes: Vital Attributes of Taxes; Objectives
of Taxation; Tax Structure; 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); Obligations of a 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 Firm/AOP/BOI/Local Authority/
Artificial Judicial Person; Residential Status of a Company Assessee; Scope of Total Income; Income
Deemed to be Received in India (Section 7); Income Deemed to Accrue or Arise in India (Section 9).
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Income from Salaries: Basis of Charge; What is Salary?; Definition of Salary under Section 17(1)
of the Income Tax Act, 1961; Types of Emoluments/Perquisites; Gratuity; Commutation of Pension;
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Leave Encashment; Retrenchment Compensation; Keyman Insurance Policy; Value of Leave
Travel Concession; Valuation in Respect of Unfurnished Rent-Free Accommodation; Provisions
of Educational Facilities for an Employee’s Family; Interest-Free Loan and Loan at Concessional
Rate of Interest; Profits in Lieu of Salary; Medical Facilities Treated as Perquisites; Perquisites for
Motor Cars; Deductions from Salary; Tax Treatment on Provident Funds; Computation of Income
from Salaries.
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Income from House Property: Chargeability of Income from House Property; Basis of Charge
(Section 22); House Property not Chargeable to Tax; Deemed Ownership (Section 27); Annual Value
of House Property (Section 23); Deductions from House Property (Section 24); Special Provisions of
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House Property; Recovery of Arrears of Rent and Unrealised Rent (Section 25A); Property Owned
by Co-Owners (Section 26); Income from Self-Occupied House Property.
Profits and Gains of Business or Profession: General Principles of Business and Profession;
Profits and Gains of Business or Profession (Section 28); Computation of Income from Profits and
Gains of Business or Profession (Section 29); Deductions Expressly Allowable under Section 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 the Concept of Block of Assets (Section 32); Expenditure on Scientific Research (Section
35); Other Deductions under Section 36(1); General Expenditure for the Purpose of Business or
Profession (Section 37); Amounts not Deductible under Section 40; Section 40A, Section 40A(2),
Section 40A(3) and Section 43B.
Income from Capital Gains: Basis of Charge; Capital Asset under Section 2(14); Capital Assets
and its Types; Short-term Assets and Long-term Assets; Period of Holding; Capital Gains (Section
45); Transfer as Defined under Section 2(47); Computation of Capital Gain (Sections 48 and 50);
Full Value of Consideration; Cost of Acquisition; Cost of Transfer; Cost of Improvement; Capital

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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; Exemptions/
Deductions under Capital Gains (under Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA); Deemed Full Value
Consideration (DFVC): Special Cases.
Income from Other Sources: Incomes Chargeable Under this Head (Section 56); Deductions Allowable
(Section 57); Deductions Not Allowable (Section 58); Deemed Income Chargeable to Tax (Section 59).
Deductions to be Made in Computing Total Income: Deduction vs. Exemption; Deductions to be

Made in Computing Total Income (Section 80A); Deduction in Respect of Investments/Contributions to
Specified Assets (Section 80C); Deduction in Respect of Contribution to Pension Fund (Section 80CCC)
and Deduction in Respect of Contribution to Pension Scheme of Central Government (Section 80CCD);
Limit of Deduction Under Section 80C, 80CCC and 80CCD (Section 80CCE); Deduction in Respect
of Health Insurance Premia (Section 80D); Deduction in Respect of Maintenance Including Medical
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Treatment of a Dependant 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) and Deduction in Respect of Interest on Deposits in Case of Senior Citizens
(Section 80TTB); Deduction in the Case of a Person with Disability (Section 80U).
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Exemptions & Rebates: Incomes not included in Total Income (Exemptions under Section 10);
Agricultural Income [Section 10(1)]; Receipts from HUF [Section 10(2)]; Partners Share in the Income
of the Firm [Section 10(2A)]; Income Earned by Non-Resident from NTRO [Section 10(6D)]; Payment
from Provident Fund [Section 10(11)]; House Rent Allowance [Section 10(13A)]; Scholarship [Section
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10(16)]; Clubbed Income of a Minor Child [Section 10(32)]; Rebates and Reliefs.
Set-off and Carry Forward of Losses: Clubbing of Income; Income of Other Persons Included in
Assessee’s Total Income; Concept of Set-off and Carry Forward of Losses; Inter Source Adjustment
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of Losses; Inter Head Adjustment of Losses and Set-off of Brought Forward Losses; Summarised
Provisions of Set-off and Carry Forward of Losses; Computation of Total Income.
Indirect Taxation – Goods and Services Tax: Introduction to GST; Importance of GST; Features and
Benefits of GST; Evolution of GST Goods and Service Tax Network; GST Rates in India; Levy and
Collection of GST (Charging Section); Exemption from GST; Supply of Goods; Input Tax Credit (ITC);
Transfer of Input Tax Credit; Payment of Tax; Reverse Charge and Returns; Offences and Penalties;
E-way Bill.
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
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1.2.1 Vital Attributes of Taxes
1.2.2 Objectives of Taxation
1.2.3 Tax Structure
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
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Activity
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 Obligations of a Tax Deductor
1.7.2 Implications of Not Following TDS Provisions
Activity

2 TAXATION – DIRECT AND INDIRECT
Contents
1.8 Summary
1.9 Descriptive Questions
1.10 Answers and Hints
1.11 Suggested Readings & References
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Introduction to Taxation 3
Introductory Caselet
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DETERMINATION OF PREVIOUS YEAR BY THE

ASSESSING OFFICER
The term ‘Assessment Year’ has been defined under Section 2(9)
Case Objective
of the Income Tax Act, 1961. This term refers to a period of 12
months commencing from 1st April every year. The income is This Caselet discusses
earned in the previous year and the same is put to taxation by the the provisions relevant for
determining ‘previous year’ for
Income Tax Department in the immediately following year which
income tax purposes.
is called the assessment year. For example, income earned during
the previous year 2020-2021 is assessable to tax in the Assessment
Year 2021-2022.
Similarly, previous year is defined under Section 3 of the Income

Tax Act, 1961. It refers to the financial year immediately preceding
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the assessment year. The income which is earned by an assessee
during the previous year is made taxable in the assessment year.
The Act specifies that in cases of newly set up businesses or

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professions, which is put to place during the part of the financial
year, the previous year shall be the period that commences from
the date of the set-up of such businesses or professions and ends
on 31st March of the said financial year.
As an example, Mr David, a newly qualified lawyer, sets up his

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profession on 1st August, 2020. Since he started his profession in

the middle of the financial year 2020-2021, the previous year shall
be the period from 1.8.2020 to 31.3.2021. On the other hand, his
relative, Mr Gaurav, is running a business from 1999 onwards.
Therefore, the previous year for him would be 1.4.2020 to 31.3.2021
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for the Assessment Year 2021-2022.
There is a rule that if any source of income comes into effect

during a financial year, then the previous year shall be taken from
the date on which the new source of income comes into existence
to the end of the same financial year.

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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 is
responsible for maintaining law and order in the country and ensuring
that all its citizens are able to attain 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 may vary. In a country
like India, this disparity is widespread. It is the duty and obligation of
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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, a taxation and subsidy
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system must be established.
Taxation is a legal system for assessing and collecting taxes. Under the
taxation system, the government makes it mandatory for all individuals
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 are revised from time to time.
This book will make you aware of the taxation system in India. In
India, various kinds of taxes are levied and collected by different
entities, such as the central government, state government and
various local bodies, such as municipality. Article 265 of the Indian
Constitution, which states that ‘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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1.2 Meaning and Nature of Taxes

The word ‘tax’ has its origin in a Latin word Taxo. Tax refers to a kind
of financial charge that is imposed on an individual or a company by
the central government or state governments of a country 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
collecting taxes is to construct a pool of money that can be used for
various public expenditures, such as providing subsidies and carrying
out developmental activities. In other words, we can say that the
government 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

government, state governments and local municipal bodies are
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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),
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excise duty, customs duty and cess. All these types of taxes can be
classified 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 Services Tax (GST).
In India, tax is levied on the income generated by a person or an

organisation in a financial year. Income tax and corporate tax are
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the most important sources of revenue for the Government of India.

The Income Tax Department functions under the Central Board of
Direct Taxes (CBDT) which further works under the Department of
Revenue, Ministry of Finance, Government of India. Another board
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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:
Department of Central Board of

Economic Affairs Direct Taxes
(CBDT)
Government of Department of
Ministry of Finance
India Revenue
Central Board of
Department of Customs and
Expenditure Excise(CBEC)
Figure 1.1: Hierarchy of Bodies Related to Taxation

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1.2.1 Vital Attributes of Taxes

Vital attributes or characteristics of a taxes are as follows:
Taxes must be paid within the defined timelines.
Taxes are levied on assets owned/income earned by persons.
Taxes are levied for achieving economic parity in the society.
Taxes are collected on the income generated by persons and by
property owned by people.
1.2.2 Objectives of Taxation
As stated earlier, taxes are an instrument of social and economic
policies in the hands of the government. Other important objectives of
taxation are as follows:
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Revenue generation (Social objective)
Preventing the concentration of wealth in a few hands (Equality
objective)
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Redistribution of wealth (Redistribution objective)
Providing boost to the economy (Economic growth objective)
Reducing unemployment (Employment objective)
Eliminating regional disparities (Regional equality objective)
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1.2.3 Tax Structure

Before we understand the concept of income tax, it is important to
understand the tax structure of India. The tax structure has undergone
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a lot of changes in the past few years. Let us revisit the old tax structure
of India which is shown in Figure 1.2:
Income Tax
Direct Tax
Wealth Tax (Now
Excise
Abolished)
Old Tax Structure Central Tax Service Tax
Customs
Indirect Tax
VAT/Sales/CST
State Tax Miscellaneous

Taxes (Entry Tax
Luxury Tax,
Lottery Tax, etc.)
Figure 1.2: Old Tax Structure of India

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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 Customs
Inter-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:
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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 assessee to another.
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It is levied on the annual income of an assessee.

Itis governed by the Income Tax (IT) Act, 1961 which is subject to
amendments made to the Act by the Finance Act passed each year. Know More
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Determination of taxable income, tax liability and procedure for Circulars and notifications
issued by the CBDT help
tax assessment, appeal, penalties and prosecutions is done as per in clarifying the scope and
extant laws. meaning of various provisions
of the IT Act. These are used
The Government enacts the law in the Parliament, whereas it is by IT officers and assessees.
administered by the Central Board of Direct Taxes (CBDT). These are binding upon the
IT Assessing Officers. It is
Section 295 of the IT Act empowers the CBDT to frame rules important that CBDT circulars
(called Income Tax Rules) from time to time in order to implement are not in contrast to the
amendments in tax provisions for proper administration of the Act. provisions of the IT Act.
CBDT frames rules which, in turn, prescribe forms, procedures A notification or circular
and principles of valuation of perquisites under the Act. issued by CBDT is also called a
Subordinate Legislation.
Section 119 of the IT Act prescribes that CBDT can issue circulars
and notifications from time to time.
1.2.4 Tax Planning, Avoidance and Evasion
The terms ‘tax planning’, ‘tax avoidance’ and ‘tax evasion’, all are
methods of reducing the tax liability of a person or a corporate body

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or any assessee. Before explaining these concepts in detail, let us first

look at their definitions.
Tax Planning refers to the practice of availing all available exemptions,

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

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
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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
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reduction of tax liability of an assessee. Tax evasion is achieved using
dishonest means, such as concealing income, claiming excessive
expenditures and forged accounts.

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1. India has a three-tier tax structure which means that the

central government, state governments and local municipal
bodies are allowed to levy and collect taxes as per _________ of
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the Constitution.
2. Which of the following is not an objective of taxation?
a. Revenue generation
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
reduce their tax liability.

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1.3 Types of Taxes

All taxes which are the liability of an assessee (taxpayer) come under
the category of direct tax. Examples include income tax, capital gains
tax (CGT), perquisite tax, wealth tax (now abolished) and corporate
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 three-
tier system that includes the central government, state governments
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.
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1.3.1 Direct Tax
As explained earlier, direct taxes are taxes that are to be paid by

an 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. Various types of direct taxes include
income tax, capital gains tax, securities transaction tax, perquisite
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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
chairman along with six other members. The chairman acts as the
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special secretary to the Government of India.
Some of the important direct taxes imposed in India are as follows:

Income Tax: This is the most important direct tax. Almost
everybody is acquainted with the concept of income tax. CBDT
fixes the annual income range till which a person has to 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’.
Property Tax: In India, property is considered to be a source of
income. Therefore, tax is levied on properties, such as 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.

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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.
Gift Tax (now abolished): Gift tax was imposed when a living
person gifted certain amount of money or property to another
living person.
1.3.2 Indirect Tax
Indirect tax refers to a group of tax laws and regulations. In India, it is

NOTE levied on various business activities including manufacturing, trading,
As compared to direct taxes, imports and exports, stamp duty, registration, transfer, etc. It is levied
indirect taxes have a wider by both central and state governments. In recent years, the indirect
tax base and generate more taxation system in India has undergone extensive reforms in order to
revenue since majority of
meet the requirements of international markets.
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the goods and services are
subjected to indirect tax.
Till the F.Y. 2016-17, and for the first quarter of F.Y. 2017-18, India had
in place a host of indirect taxes, such as sales tax, service tax, Central
Excise Duty, Additional Excise Duties, the Excise Duty levied under
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the Medicinal and Toilet Preparations 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 lottery, betting
and gambling, state cesses, surcharges related to supply of goods and
services, and Entry tax.
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The Government of India rolled out the Goods and Services 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:
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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)
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
local bodies)

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Taxes on advertisements
Purchase tax
Taxes on lotteries, betting and gambling
State surcharges and cesses so far as they relate to supply of goods
and services
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 introduction
of GST, the Centre was responsible for taxing the manufacturing
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
power would have become a roadblock. Therefore, an amendment was
made to the Constitution Act, 2016 in order to allow both the Centre
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and the States to levy and collect this tax. All this was done in order to
smoothly implement GST.
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Exhibit
S. No. Direct Tax Indirect Tax

1. Direct tax is levied on Indirect taxes are filed by
and is paid by entities, businesses but are ultimately paid
such as individuals, for by the end consumer of goods
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HUFs, and companies, or service. For example, 5% GST

etc. For example, any is applicable for selling space for
company that earns advertisement in print media. The
profit has to file direct cost of advertisement includes GST
tax. and is charged by the print media
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from the customer who gives the

advertisement, but it is paid by the
concerned print media.
2. Burden of tax cannot be Burden of tax can be shifted. For
shifted. For example, an example, addition of GST on a
individual must pay his luxury tax increases the cost of the
tax in his own name. product and shifts the burden on
the purchaser.
3. Direct taxes may help Indirect taxes may lead to

in decreasing inflation. increased inflation. Increasing the
During periods of high amount of indirect tax leads to
inflation, the government increased price of the product or
may increase the tax rate service, which is an inflationary
which leads to a decrease act. In addition, this may lead to an
in consumption demand, inflationary spiral if workers are
which, in turn, helps in involved in production of goods
reducing the inflation. and services start demanding
greater wages.

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S. No. Direct Tax Indirect Tax

4. Collection of direct taxes is Collection of indirect taxes
easier and less costly, leading is a bit tough as they have to
to better allocation. It is easier be collected from multiple
to collect direct taxes because sources.
they have to be collected from
known parties. For example,
tax is collected from wage and
salary earners using the Pay-
As-You-Earn (PAYE) system.
5. Direct taxes are progressive Indirect taxes are regressive
taxes. A progressive tax because the poor and the rich
means that the people who pay the same price (same tax)
are earning more pay more while purchasing the same
taxes as compared to people product and service.
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who are earning less. It
means that progressive taxes
take into consideration the
taxpayer’s ability to pay.
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6. They involve higher They involve lower
administrative costs. It is so administrative costs. It is
because they involve a lot of so because they involve
exemptions. convenient and stable
collections.
Taxes are majorly differentiated on the basis of nature, incidence

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and impact, evasion, transfer of burden, impact on inflation, costs

involved in collection, collection coverage, etc.
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self assessment Questions
4. Tax which an assessee can recover from other person(s), but

the liability of payment of which lies with him/her is called
____________.
a. Direct tax 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. Governor
6. Direct taxes are progressive taxes. (True/False)
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
related products.

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Terms Related to income Tax

1.4
(Sections 2 and 3)
The Income Tax Act, 1961 extends to the whole of India. With a view
to understand the provisions of the Income Tax Act, 1961, it is first
necessary to gain a thorough knowledge of the terms defined under
the Act. Section 2 defines the terms and expressions used under the
Income Tax law, and Section 3 provides the meaning of the term
‘previous year’. Let us understand some of these important terms and
definitions.
India – Section 2(25A)
The term ‘India’ means:

the territory of India
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the territorial waters of India including the seabed and subsoil
extending up to 12 nautical miles
the continental shelf and exclusive economic zone extending up to
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200 nautical miles
other maritime zones specified under the Act including the
airspace above its territory and territorial waters
Person – Section 2(31)

Study
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The term ‘person’ includes the following: Hint

an individual An Association of Persons
(AOP), a Body of Individuals
a Hindu Undivided Family (HUF) (BOI), a local authority
and other artificial judicial
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a company
person(s) shall be deemed to
a firm be a person, whether or not it
is formed or incorporated for
an Association of Persons (AOP) or a Body of Individuals (BOI) the purpose of earning profits
or income.
a local authority
every other artificial judicial person not covered above
Assessee – Section 2(7)

Know More
The term ‘assessee’ includes any person who is liable to pay any tax or HUF is not defined under the
other sum of money under the Act. It includes the following: Income Tax Act, but is defined
under the Hindu law, as a
Any person in respect of whom income tax assessment proceedings family consisting of all male
have been initiated under the Act members lineally descended
from a common ancestor, along
Any person deemed to be an assessee or assessee in default under with their wives and unmarried
the provisions of the Act daughters. An HUF is taxed
separately from the members
Firm – Section 2(23) of HUF.
The term ‘firm’ and ‘partner’ mean the same as defined under the
Indian Partnership Act, 1932. A firm also includes a Limited Liability

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Partnership (LLP) and a partner also includes the partner of LLP as

Know More defined under the Limited Liability Partnership Act, 2008. Any minor
Partnership refers to the admitted to the benefits of a firm shall also be treated as partner for
relationship between two the purposes of the Income Tax Act.
or more persons who share
the profits or losses from a Company – Section 2(17)
business carried on by all
or any of them acting for all. The term ‘company’ includes the following:
The persons who formed the
relationship are individually Indian company
termed as partners and
collectively termed as a firm. Foreign company as incorporated under the laws of a country
outside India
Any institution or body which is assessable or assessed under the
earlier Income Tax Act, 1922, or under the current Income Tax Act.
Any institution or body, whether Indian or foreign and whether
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incorporated or not, which is declared to be a company by the
special orders of CBDT
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Assessment – Section 2(8)
Assessment refers to the procedure through which the assessing

officer determines the income of an assessee. It may include normal
assessment or reassessment of a previously assessed income.
Income – Section 2(24)

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As income is the main source which is put to tax, the term ‘income’ has
been exhaustively defined in an illustrative manner under the Act. It
majorly includes the following:
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Dividend
Profits and gains

Any capital gains
Export incentives
Any voluntary contribution received by religious trust, charitable
institution, hospital, educational university, etc.
Perquisites or profits in lieu of salary and special allowances
granted to meet personal expenses or to perform official duties
Salary, interest, bonus and commission received by partners of the
QUICK TIP firm
The items described under
the definition of ‘income’ in Winnings from lotteries, races including horse races, crossword
this chapter are only inclusive
in nature. The exhaustive list
puzzles, card games or such other forms of gambling
contained in the Income Tax Act, Sums received under a keyman insurance policy
1961 covers many other items of
income also. Money or any movable or immovable property received as gifts

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Agricultural Income – Section 2(1A)
Agricultural income derived in India is exempt from tax by virtue of

Section 10(1). Agricultural income may arise in any of the following
ways:
Rent received from land situated in India and used for agricultural
purposes
Any income derived by performance of agricultural operations on
such land
Revenue received from sale of agricultural produce in the market
by the cultivator or receiver of rent in kind
Income derived from farm building operations
Previous Year (PY) – Sections 2(34) and 3
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The financial year in which the income is earned is referred to as the
previous year. It means the financial year which immediately precedes
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the assessment year.
However, in cases of new sources of income or newly set up businesses

or professions, previous year shall be the year beginning from the date
of set-up of such new source of income and ending on the 31st March
of the said financial year.
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Only one financial year, i.e., 1st April to 31st March is considered as the
previous year for the purpose of the provisions of this Act.
Assessment Year (AY) – Section 2(9)

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The financial year in which the income is subjected to tax by the

Income Tax Authority is referred to as the assessment year. It means
the financial year which immediately succeeds the previous year.
It is the period of 12 months beginning on the 1st of April every

year. Therefore, it is very important to note that the income earned
in a previous year is assessed/put to tax in an assessment year. The
chargeability of income tax is based on this rule of thumb. Income of
the previous year 2020-2021 is assessed to tax in the Assessment Year
2021-2022.
Exceptions to the General Rule of Taxation
The general rule of taxation states that the income of the assessee
earned in the previous year is charged to tax in the relevant assessment
year. However, there are certain exceptions to this rule. Under these
exemptions, the income of the previous year is assessed to tax in the
same previous year itself.

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Some instances of these cases are explained in Table 1.1:
Table 1.1: Exceptions to the General Rule of

Taxability
Nature of Exception Amount taxable in the previous
year itself
Shipping business run by non- Amount taxable is 7.5% of the
residents carriage paid to owner or charterer
or any person on his behalf,
whether paid or payable in or
outside India
Persons leaving outside India Amount taxable from the period of
during the current assessment year expiry of the respective previous
with no intention of returning to year to his probable departure date
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India from India in the AY
AOP or BOI or other artificial Amount taxable from the expiry of
judicial person established for a the respective previous year to the
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particular purpose and likely to be date of its dissolution in the AY
dissolved in the current AY
Persons appearing to the Assessing Amount taxable from the expiry
Officer as likely to transfer property of the respective previous year
to avoid tax payment in the AY to the date of commencement of
assessment proceedings in the AY
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Discontinuance of business in the Amount taxable from the expiry of

AY the respective previous year to the
date of discontinuance in the AY
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7. Which of the following items does/do not attract income tax?

a. Profits and gains
b. Dividend income
c. Income from salaries
d. Agricultural income
8. Previous year means the financial year immediately preceding
the ___________.
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 discussed
in the above-mentioned text.

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1.5 Heads of Income

For the purpose of computation of total taxable income under the
Income Tax Act, 1961, there are five heads of income prescribed for
the classification of income. The charging section of each head of
income exhaustively defines the scope of income to be charged to tax
under that particular head. These five heads of income are as follows:
1. Salaries: Sections 15 to 17 – Salary and pension earned by the
assessee is taxable under this head.
2. Income from house property: Sections 22 to 27 – Rental income
derived by the assessee is taxable under this head.
3. Profits and gains of business or profession: Sections 28 to 44DB
– Income earned from carrying on of business or profession by
the assessee is taxable under this head.
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4. Capital Gains: Sections 45 to 55A – Profits arising to an assessee
from the sale of capital assets is taxable under this head.
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5. Income from Other Sources: Sections 56 to 59 – Incomes which
are not taxable under the above four heads are to be made taxable
under this head. This head is also known as the residuary head
of income.
Tax payers are required to appropriately classify their incomes under

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the relevant heads of income. The aggregate amount of taxable income

under all the heads of income is adjusted for set off of the current
year and brought forward losses to arrive at the Gross Total Income
of the assessee. The Gross Total Income is to be further adjusted for
deductions allowable under Chapter VI-A to arrive at the Total Income
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of the assessee for putting it subject to tax.
Table 1.2 gives an overview of the different heads of income:
Table 1.2: Different Heads of Income

Head of Income Nature of Income
Salaries It includes incomes earned by an assessee by
virtue of the pursuance of employee-employer
relationship. Moreover, it includes any sum
received before joining of employment or after
cessation of employment. The income is taxable
in the previous year in which it is received or
due, whichever is earlier. Certain deductions/
exemptions are allowed to assessees from their
salary income. These are standard deduction under
Section 16 and other exemptions of allowances and
perquisites. For example, exemption is available in
respect of House Rent Allowance (HRA) allowed to
an employee from his employer towards payment
of rent for his residential accommodation.

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Head of Income Nature of Income

Income from House Under this head, the annual value of buildings or
Property lands appurtenant thereto is chargeable in the
hands of the assessee who is the owner or deemed
owner of such house property. The purpose is to tax
the rental income received by letting out of house
property. The income is taxable in the previous
year in which the tax payer is the owner or deemed
owner of the house property. Certain deductions
are allowed to assessees under Sections 23 and 24
in respect of municipal taxes paid and interest on
funds borrowed for the acquisition or construction
of house property.
Profits and gains Under this head, all profits and gains derived
of business or from the activity of carrying on of a business or
profession profession are chargeable to tax in the hands of
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the assessee. Moreover, deemed business profits
and income from discontinued business are also
subjected to tax under this head. The income is
taxable on the basis of receipt method or accrual
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method as regularly followed by the assessee.
Capital Gains It includes incomes or gains arising from the
transfer of a capital asset by the assessee. Capital
gains on sale of capital assets are categorised into
short-term capital gains and long-term capital gains
depending upon the period for which the asset was
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held by the tax payer during the previous year. The

amount is taxable in the previous year in which
the capital asset is transferred. Certain deductions
and/or exemptions are allowed from capital gains
income under Sections 54 to 54F.
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Income from Other Any income of an assessee which is not includible

Sources in the above heads is chargeable under this head.
Thus, it includes income of all other sources not
covered under the preceding heads. The nature
of income taxable under this head may include
dividend income, winnings from lotteries or
other casual income, gifts received in cash or
kind, transfer of movable or immovable property
for no or inadequate consideration, etc. Certain
deductions are allowed income from other sources
under Section 57.
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

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10. The HRA paid to a salaried employee is fully taxable if

a. the employee is living in his own house
b. the rent paid by the employee is below `8000
c. the rent is paid to a relative of the employee
d. None of these
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.
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1.6 Income Tax Rates and Slabs
Different tax rates have been furnished for several sections of taxpayers
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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 barring some
exceptions. Tax rates applicable to two classes of taxpayers, namely
domestic and foreign companies, for Assessment Year 2021-2022 have
also been discussed. Tax rates applicable to all other categories of
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taxpayers for Assessment Year 2021-2022 are as follows:

For individuals, the rates of income tax are as explained in
Table 1.3:
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Table 1.3: Rates of INCOME tax for Individuals

Individuals
Net Income Range Rate of Income-tax
Assessment Year 2021-22
Up to ` 2,50,000 -
` 2,50,000 to ` 5,00,000 5%
` 5,00,000 to ` 10,00,000 20%
Above ` 10,00,000 30%
Senior Citizen
Up to ` 3,00,000 -
` 3,00,000 to ` 5,00,000 5%
` 5,00,000 to ` 10,00,000 20%
Above ` 10,00,000 30%

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Super Senior Citizen

(who is 80 years or more at any time during the previous year)
Up to ` 5,00,000 -
` 5,00,000 to ` 10,00,000 20%
Above ` 10,00,000 30%
For HUF, AOP, BOI and AJP, the rates of income tax are as
Know More explained in Table 1.4:
The basic exemption limit for
non-residents is ` 2,50,000 only, Table 1.4: Rates of Tax for HUF/AOP/BOI/AJP
irrespective of any age limit.
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Up to ` 2,50,000 -
` 2,50,000 to ` 5,00,000 5%
` 5,00,000 to ` 10,00,000 20%
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Above ` 10,00,000 30%
Add:
a. Surcharge:
Rate of Surcharge
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Range of Income Rate
` 50 Lakhs to ` 1 Crore 10%
` 1 Crore to ` 2 Crores 15%
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` 2 Crores to ` 5 Crores 25%

` 5 crores to ` 10Crores 37%
Exceeding ` 10 Crores 37%
b. Health and Education Cess: Health and Education Cess is
levied at the rate of 4% on the amount of income-tax plus
surcharge.
Special Tax Rate for Individual and HUFs
Total Income (`) Rate
Up to ` 2,50,000 Nil
From ` 2,50,001 to ` 5,00,000 5%
From ` 5,00,001 to ` 7,50,000 10%
From ` 7,50,001 to ` 10,00,000 15%
From ` 10,00,001 to ` 12,50,000 20%
From ` 12,50,001 to ` 15,00,000 25%
Above ` 15,00,000 30%

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Add:
Surcharge
Assessment Year 2021-22 NOTE

The enhanced surcharge of
Range of Income Rate
25% and 37%, as the case
` 50 lakhs to `1 crore 10% may be, is not levied, from the
income chargeable to tax under
` 1 crore to ` 2 crores 15% Sections 111A, 112A and 115AD.
Therefore, the maximum tax
` 2 crores to ` 5 crores 25% surcharge rate payable on such
income is 15 %.
` 5 crores to ` 10 crores 37%
Exceeding ` 10 crores 37%
For firms, LLPs and local authority, the rate of income tax is 30%
of total income.
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For co-operative societies, the rates of income tax are as explained
in Table 1.5:
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Table 1.5: Rates of Tax for Co-operative
Societies
Total income (in `) Rates of tax (in %)
Up to ` 10,000 10%
From ` 10,001 to ` 20,000 20%
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Above ` 20,000 30%
Tax Rate on Special Tax Rates Applicable to a Co-operative Society

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Taxable income Tax Rate

Any income 22%
For domestic and foreign companies, the rates of income tax are as
explained in Table 1.6:
Table 1.6: Rates of income Tax for Companies

Tax Rate on Domestic Company
Domestic Company Assessment Year

2021-22
Where its total turnover or gross receipt during NA
the previous year 2017-18 does not exceed ` 400
crores
Where its total turnover or gross receipt during 25%
the previous year 2018-19 does not exceed ` 400
crores
Any other domestic company 30%

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Tax rate on Foreign Company

Nature of Income Tax Rate
Royalty received from the Government or an 50%
Indian concern in pursuance of an agreement
made with the Indian concern after March 31,
1961, but before April 1, 1976 or fees for rendering
technical services in pursuance of an agreement
made after February 29, 1964 but before April 1,
1976 and where such agreement has, in either
case, been approved by the Central Government
Any other income 40%
The above income tax rates are as prescribed by the Finance Act, 2018.
However, in respect of certain types of income, such as long-term capital
gains under Section 112 or 112A, some specific rates are prescribed by
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the Income Tax Act, 1961, as the case may be. These rates are discussed
along with the relevant sections at appropriate places.
Rebate – Section 87A

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A tax rebate is allowed to resident individuals under Section 87A. If
the total income of resident individuals does not exceed ` 5,00,000
during the previous year, a tax rebate of ` 12,500 or 100% of total
income tax, whichever is less, is allowed to them. It is very important
to note here that the rebate, if any, is deducted from total income tax
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before calculating the health and education cess.
Health and Education Cess
It is computed on total income tax (i.e., income tax and surcharge, if

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applicable). After allowing for rebate under Section 87A, health and
education cess is levied @ 4% of income tax plus surcharge, if any.
Thus, health and education cess is an additional surcharge computed
on income tax as increased by surcharge and as reduced by rebate, if
any. Net income tax payable is arrived at after the tax is increased by
health and education cess.
11. For Assessment Year 2021-2022, the amount of rebate under

Section 87A available to resident individuals is__________.
a. ` 5,000 b.
` 12,500
c. ` 10,000 d.
`0
12. TrustMe is a domestic company and this company received an
amount of ` 51 lakh in gross receipts during Assessment Year
2021-2022. It will be subject to a tax rate of ___________.

a.
10% b.
20%

c.
25% d.
30%

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Activity
Make a comparative table of tax rates applicable for different classes

of tax payers from Assessment Year 2019-2020 to Assessment Year
2021-2020. Highlight major changes and comment on their impact
for each class of tax payers.
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),
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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
throughout the year, while at the same time ensuring that people do
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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
deducted 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
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called the assessee needs to file a return stating that the TDS has been
deducted 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 certificate to the deductee within a specified time. It is the duty of
a deductor to deduct the appropriate amount of TDS and deposit it to
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the government. The TDS must be deducted irrespective of the mode

of payment. It means that whether the income is paid to the deductee
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

expenditure) including: Know More
TCS is also leviable on sale
Salaries of specified goods, such as
alcoholic liquor, scrap, motor
Interest payments by banks vehicle, etc. The seller of
specified goods or contract is
Commission payments
required to collect tax at source
Rent payments (TCS) under Section 206C from
the buyer at prescribed rates on
Consultation fees purchase value.
Professional fees
Lotteries
TDS is a kind of advance tax. While making payments under such

segments, a percentage of the overall payment is withheld by the

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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
deducted and the associated rates are shown in Table 1.8:
Table 1.8: TDS Rates for Different Items

Nature of Payment Relevant Section TDS Rate (in %)
Salaries 192 At relevant income
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tax rates including
cess.
Accumulated Taxable Part of 192A 10%
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Provident Fund
Interest on Securities 193 10%
Income by way of dividend 194 10%
Interest other than Interest on 194A 10%
Securities
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Winnings from lotteries, 194B 30%

crosswords or any sort of
game
Winning from horse race 194BB 30%
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Insurance commission 194D 5%

received by an individual
Payment in respect of life 194DA 5% (w.e.f. 1/9/2019,
insurance policy the tax shall be
deducted on the
amount of income
comprised in
insurance pay-out)
Commission or brokerage 194H 5% if the payment in
received except for insurance the F.Y. exceeds
commission ` 15,000.
Payment made while 194IA 1%
purchasing land or property
Payment of rent by individual 194IB 5%
or HUF the amount of which
exceeds ` 50,000 per month

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Some of the important terms used in the TDS concept are shown in
Figure 1.4:
Deductor
Deductee
TDS Returns
TDS Certificate
Figure 1.4: Important Terms Used in TDS
Let us now study these terms in detail.
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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.
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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 required to issue Form 16A (for non-salary/other payment
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deductees), 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
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payment is accrued.
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.
TDS makes it possible for taxes to be paid on behalf of the individual
at regular intervals and there is no burden at the last moment.
TDS takes care of the time value of money.
1.7.1 Obligations of a Tax Deductor
The tax deductor has to fulfil a number of duties, some of which are
as follows:
QUICK TIP
Obtain TAN: Tax Deduction and Collection Account Number Any amount of TDS standing
(TAN) is an identification number allotted to tax deductors for tax to the credit of a payee (i.e.
recipient of income) is always
deduction or collection on behalf of its nature of business. It is a adjusted at the time of tax
10-digit alphanumeric number; the first four digits of TAN are a assessment against his final tax
letter of alphabet, followed by five integers and a letter of alphabet. liability.

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For TDS, as well as TCS, the same TAN is to be used. For obtaining
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 rates: 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 the time of receipt of cash or de-
mand draft.
Making credit entries or debit entries to the account of the buy-
er or the seller.
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Remit in the government account in due time: The TDS deducted
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 the 7th of December, while the
TDS of March can be deposited by the 30th of April.
File TDS statement on or before the due date: The TDS statement
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 statements
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are shown in Table 1.9:
Table 1.9: Due Dates of Filing the TDS

statements
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Particulars Due Date for Non-Govt.

Govt. Deductor Deductor
Quarter ending 30th June 31st July 15th July
Quarter ending 30th September 31st October 15th October
Quarter ending 31st December 31st January 15th January
Quarter ending 31st March 15th May 15th May
Issue TDS certificates on time: The deductor shall issue the
TDS certificate to the deductee in the form specified as per the
applicable Income Tax Rules. There are different forms specified
for different types of taxes deducted. The brief details of the forms
(types of TDS certificates) to be provided to the deductee are
shown in Table 1.10:
Table 1.10: types of tds certificates

to be submitted
Description Period Form No. Due Date
Deduction of tax Annually 16 By 31st May of following
from salary F.Y. when TDS is deducted

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Description Period Form No. Due Date
Deduction of tax Quarterly 16A Within 15 days of

from other than furnishing the TDS
salary statement
TCS Quarterly 27D Within 15 days from the

due date of furnishing the
TCS statement
Further, Table 1.11 shows forms that are required to be submitted to

the Income Tax Department for filing the returns:
Table 1.11: Forms Required to be submitted
Nature of Deduction Form No.
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TDS on payments to residents for salary 24Q
TDS on payments made to residents other than salary 26Q

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TDS on payments made to foreigners and non-residents other 27Q
than salary
TCS 27EQ
Statements of non-deduction of TDS by the banking company 27QAA

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1.7.2 Implications of not following TDS

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

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

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Penalty can be levied under sections 221, 271C, 272A(2).

Prosecution can be launched under sections 276B and 277.
Penalties for default in TDS are shown in Figure 1.5:
Tax demand
Penalty
Interest
Prosecution
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Figure 1.5: Penalties for Default in TDS
Let us now study these penalties in detail.

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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
arrears.
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Interest: If the TDS is deposited late, interest @1% or 1.5% can

be levied.
Prosecution: Prosecution is also possible for a period of minimum
3 months and maximum 7 months along with fine.
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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 TDS is
deducted.

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1.8 Summary S
Income tax is a direct tax that is levied by the government of a
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
Assessment Year.
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 GST.
For the purpose of computation of taxable income under the Act,
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whole income is classified under five major heads: salaries, income
from house property, profits and gains of business or profession,
capital gains and income from other sources.
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Different tax rates have been furnished for several sections of
taxpayers and for varied sources of income. Individuals, senior
citizens, super senior citizens, partnership firms, local authority,
domestic company, foreign company and co-operative societies
are taxed as per different income tax rates.
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TDS is deducted 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 is called the Assessee (TDS deductee).
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Key Words
Arrears: 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
Rebate: A form of deduction available to resident individuals
from their tax liability
Assessing Officer: An individual person appointed and
authorised by the Income Tax Department to perform functions
in relation to assessment of income of an assessee
1.9 Descriptive Questions ?

1. Explain the meaning of the ‘term taxes’. Also discuss the nature
of taxes. At the end, also explain the meaning of ‘income tax’.

n o t e s
2. Explain in detail the concepts of tax planning, tax avoidance

and tax evasion. Also describe major differences between tax
avoidance and tax evasion along with examples.
3. List and explain two major categories of taxes. Also give examples.
4. Define the following terms as per Sections 2 and 3 of the Income
Tax Act, 1961.
a. Assessee
b. Income
c. Assessment year
d. HUF
e. Company
f. Firm
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g. Previous year
5. Describe major heads of income.
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6. Explain in detail the concept of Tax Deducted at Source.
Answers for Self Assessment Questions

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Topic Q. No. Answer

Meaning and Nature of Taxes 1. Article 256
2. c. Increasing the GDP of the

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country
3. Tax evasion
Types of Taxes 4. b. Indirect tax
5. c. Municipal authority
6. True
Terms Related to Income Tax 7. d. Agricultural income

(Sections 2 and 3)
8. assessment year
Heads of Income 9. c. five
10. a. the employee is living in his

own house
Income Tax Rates and Slabs 11. b. ` 12,500
12. d. 30%

n o t e s
Topic Q. No. Answer

Concept of Tax Deducted at 13. Salaries; Commission
Source (TDS) payments
14. c. 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 or any other
recognised local body of a country. 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. Refer to Section 1.2 Meaning and Nature
of Taxes
3. Direct taxes are the taxes that are to be paid by the assessee or
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the taxpayer (person or corporate) directly to the government.
Indirect taxes are taxes which are transferable and the liability
to pay tax is shifted to another person. 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. 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
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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 the prescribed rates and is
mandatory to be filed by certain persons responsible for making
payments. Refer to Section 1.7 Concept of Tax Deducted at
Source (TDS)
Suggested Readings
Bhargava, U. (2017). Taxmann’s Income Tax Act as Amended by
Finance Act, 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Mishra, M. (1999). Freedom of Trade and Commerce and Taxation
in India. New Delhi: Mittal Publications.

n o t e s
e-References
Tax Laws & Rules > Acts > Income-tax Act, 1961. (2018).
Incometaxindia.gov.in. Retrieved 16 February 2018, from https://
www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx
Income Tax Rates: AY 2018-19 (FY 2017-18) - Smart Paisa. (2018).
Smart Paisa. Retrieved 16 February 2018, from http://www.
smartpaisa.in/income-tax-rates-ay-2018-19-fy-2017-18/
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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 Firm/AOP/BOI/Local Authority/Artificial
Judicial Person
2.2.4 Residential Status of a Company Assessee
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Activity
2.3 Scope of Total Income
Activity
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2.4 Income Deemed to be Received in India (Section 7)

Activity
2.5 Income Deemed to Accrue or Arise in India (Section 9)
Activity
2.6 Summary

Determination of Residential Status of

an Individual
Brett Lee, an Australian cricket player, comes to India in every

Case Objective financial year for 102 days. He has been following this practice
This Caselet discusses the
since the past 10 financial years. He is concerned about his
manner of determination residential status in India to determine whether and how his
of residential status of an income is subject to tax in India for the Assessment Year 2021-
individual. 2022.
Section 6 of the Income Tax Act, 1961, specifies the basic and
additional conditions for determining residency of individuals. A
person is a resident in India if he satisfies any one of the following
two basic conditions:
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1. The individual is present in India for 182 days or more during
the relevant previous year, or
2. The individual is present in India for 60 days or more during
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the relevant previous year and for 365 days or more during
the immediately preceding 4 years from the relevant previous
year.
Otherwise, the person is a non-resident.
The resident shall be ‘resident and ordinarily resident’ in India if

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he satisfies both the following additional conditions:

The individual is resident in minimum 2 out of 10 immediately
preceding years from the relevant previous year, and
His today stay is 730 days or more during 7 years immediately
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preceding the relevant previous year.
Otherwise, the person is ‘resident but not ordinarily resident’.
In Bret Lee’s case, the period of stay during the previous year
2020-2021 was 102 days (less than 182). However, his stay in India
for the past 4 years was 408 days.
The previous year 2019-2020 102 days

Total 408 days
It is observed that since he satisfies the second basic condition

of staying in India for more than 60 days during previous year
2020-2021 and for more than 365 days during the immediately

RESIDENTIAL STATUS 35
preceding 4 previous years, he is a resident in India for the

Assessment Year 2021-2022.
In addition, his total period of stay during 7 continuous years

preceding the previous year 2020-2021 was 714 days (less than
730).

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Total 714 days
Since the additional condition of staying in India for 730 days or

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more during the past 7 previous years is not satisfied by Brett Lee,
he cannot be regarded as ‘resident and ordinarily resident’.
Therefore, he would be charged to income tax as ‘resident but

not ordinarily resident’ in India. The provisions of the scope of
total income applicable to ‘resident but not ordinarily resident’
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individuals shall assess the taxability of Brett Lee in India.

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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 received
in India
>> Discuss what is considered as income deemed to accrue or
arise in India
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2.1 Introduction
Quick Revision In the previous chapter, we discussed the concept of tax. Let us now
study the concept of residential status.
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All over the world and in India, the chargeability of income tax
depends upon two major factors, namely the scope of income tax and
the residential status of the assessees. There are three basic categories
of assessees for charge of income tax, viz., ordinary resident, not-
ordinary resident and non-resident. Section 6 of the Act contains
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conditions that must be tested to determine the residential status of

various assessees. The tests are based on the physical presence of the
assessees in India during the course of ‘previous year’.
This chapter would also clarify the differences between the concepts
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of citizenship and residence. This chapter begins by describing

residency conditions for various types of assessees, viz., individual,
HUF, company and firm/Association of Persons (AOP). The total
income of an assessee and the amount 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 accrued or arisen in India and income
deemed to accrue or arise in India.
Residential Status of Different

2.2
Kinds of Assessees
Under the Income Tax Act, 1961, the scope of taxable income
and incidence of tax on any assessee is dependent upon his or her
residential status. The residential status has to be determined in
respect of every previous year because it may happen that an assessee
is resident in India in one previous year and becomes non-resident in
another previous year or vice versa.

For the purposes of income tax, tax payers are classified into following NOTE
categories depending upon their residential status: Section 6 – Residence in India
is organised in the following
Resident in India: This may be further classified into following manner:
categories:
6 (1) – Rules for determining
Resident and Ordinarily Resident (ROR) the residential status of an
individual.
Resident but not Ordinarily Resident (RNOR)
6 (2) – Rules for determining the
Non-resident in India residential status of an HUF.
Figure 2.1 shows different categories of residential status in India on 6 (3) – Rules for determining the
residential status of a company.
the basis of the type of ‘person’:
6 (4) – Rules for determining the
residential status of every other
Determination person.
of Residential
Status in India
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Individual/ Firm/AOP/ Any Other
Company
HUF BOI Person
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Non-
Resident Resident Resident
(NR)
Resident and
Non-
Ordinarily
Resident
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Resident
(NR)
(ROR)
Resident but
Not Ordinarily
Resident
(RNOR)
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Figure 2.1: Different Categories of Residential Status in India on the

Basis of Type of ‘Person’
NOTE
2.2.1 Residential Status of an Individual In the following cases, Condition
B is not applicable, i.e., an
Resident: Section 6(1) provides that an individual is said to be resident individual shall be treated as
in India if he satisfies any one of the following two basic conditions resident only if he satisfies
Condition A:
during the previous year:
• I ndian citizen who leaves
Basic Condition A: The individual is in India for minimum India for employment during
182 days during the relevant previous year. the previous year.
Basic Condition B: The individual is in India for minimum • I ndian citizen who leaves
India as a crew member of
60 days during the relevant previous year and for minimum 365 an Indian ship during the
days during 4 years immediately preceding the relevant previous previous year.
year.
• I ndian citizen or person of
Indian origin who, residing
However, from the financial year 2020-21, the period is reduced to 120
outside India, visits India
days or more for such an individual whose total income (other than during the previous year.

foreign sources) exceeds ` 15 lakh. In another significant amendment

from FY 2020-21, 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
total income (other than foreign sources) exceeds ` 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.
Resident Not Ordinarily Resident: An individual is said to be non-

resident in India if both the basic conditions are not satisfied by him.
Section 6(6) provides for two additional conditions to classify a resident

into ‘resident and ordinarily resident’ and ‘resident but not ordinarily
Study resident’. If a resident individual satisfies both the following additional
Hint conditions, he will be regarded as resident and ordinarily resident:
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For the purpose of calculating Additional Condition A: The individual is resident in India in
the number of days of stay in minimum 2 out of 10 previous years immediately preceding the
India, both the date of arrival in
India and the date of departure
relevant previous year.
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from India shall be taken into Additional Condition B: The individual is in India for 730 days
consideration.
or more during last 7 years immediately preceding the relevant
previous year.
A resident individual is said to be resident, but not ordinarily resident

if he satisfies either one or none of the additional conditions.
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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
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his total income (other than foreign sources) exceeds ` 15 lakh. Also, a
citizen of India who is deemed to be a resident in India (w.e.f FY 2020-
21) will be a resident and ordinarily resident in India.
NOTE Let us now understand the above-mentioned concept with the help of
Income from foreign sources some illustrations.
means income which accrues
or arises outside India (except Illustration 1: Ms. Elizabeth Miller is an American citizen. She always
income derived from a business
dreamt of visiting India. She came to India on 5 August, 2020 and
controlled in India or profession
set up in India). visited four states. She finally left for America on 25 December, 2020.
What will be her residential status for assessment year 2021-2022?
Solution: The total number of days of stay of Ms. Elizabeth during

previous year 2020-2021 = 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.

Illustration 2: An Argentinian football player, Mr White comes to

India for playing yearly tournaments. For Assessment Year 2021-2022
calculate his residential status if you are given the following data:
Year Number of Days of Stay
2020-2021 85
2019-2020 120
2018-2019 140
2017-2018 130
2016-2017 110
Solution: Here, the relevant previous year is 2020-2021. The number

of days of Mr White in previous year is 85 days which is less than 182
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days but more than 60 days. Therefore, we need to check the Basic
Condition (B). Number of days of stay of Mr White in the four previous
years before the relevant or the current previous year = 500 days
(120+140+130+110). Since Mr White satisfies the Basic Condition B,
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he is a resident for the previous year 2020-2021.
Illustration 3: Refer to Illustrations 2 above. Find out whether Mr

White is ordinarily resident in India or not ordinarily resident if you
are given the following additional information.
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2015-2016 80
2014-2015 70
2013-2014 60
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Solution: The total number of stays of Mr White in seven years

preceding the previous year 2020-2021 is 500 + 80 + 70 + 60 = 710
days. Therefore, Mr White is resident but not ordinarily resident in
India for the given previous year.
Illustration 4: Refer to Illustrations 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.

2015-2016 80
2014-2015 80
2013-2014 80
Solution: The total number of stays of Mr White in seven years

preceding the previous year 2020-2021 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
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
administration of its undertakings are completely managed out of
India.
A business may be carried out outside India and its control and
management might be situated in India. In other words, the resident
HUF would be considered ordinarily resident 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 previous years immediately preceding to the relevant previous
year
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The Karta has been in India for minimum period of 730 days
during seven previous years immediately preceding the relevant
previous year
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If one or none of the aforesaid conditions are satisfied, then the HUF
is termed as ‘resident but not ordinary resident’.
Exhibit
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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 Supreme Court said that in order to know as to

who controls and manages the affairs of the family, one has to see
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who actually controls the affairs and not merely the one who has the
right to control the affairs. Though, normally, the right to control
the affairs 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-facto control and management and not merely the right or power
to control and manage.
Know More
Only individuals and HUF can 2.2.3 Residential Status of Firm/AOP/BOI/Local
be classified as ‘resident and
ordinarily resident’, ‘resident
Authority/Artificial Judicial Person
but not ordinarily resident’ or
‘non-resident’ depending upon Section 6(4) of the Income Tax Act, 1961, comprises provisions for the
their residential status. All other determination of residential status of a firm, Association of Persons
categories of assessees can (AOP), Body of Individuals (BOI), local authority and other artificial
be classified as only resident or judicial persons.
non-resident.

The residency is determined as follows:

Resident in India: A firm, AOP, BOI, etc., would be considered as
resident in India if the control and management of its affairs are
wholly or partly situated in India.
Non-resident: A firm, AOP, BOI, etc., would be considered as non-
resident if the control and management of its affairs are wholly
situated outside India.
2.2.4 Residential Status of a Company Assessee
According to Section 6(3) of the Act, Indian companies are taxable

in India on their worldwide income irrespective of their 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. Thus, the tax liability on income of
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a company depends upon the residential status of the company. The
residency is determined as follows:
Study
Resident in India: A company would be considered as resident
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Hint
in India if it is an Indian company or where the place of effective
management of the company during the previous year is in India. Place of effective management
means where the key
Non-resident: A company would be considered as non-resident if commercial and managerial
it is not an Indian company and the place of effective management decisions, essential for
the conduct of business of
of the company during the previous year is also not in India. the entity as a whole, are
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substantially made.
Similarly, a company not satisfying any of the above conditions will
be called a non-resident company. 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
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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. To
overcome these situations, Double Taxation Avoidance Agreements
(DTAA) exist. Table 2.1 highlights the above-mentioned detail:
TABLE 2.1: 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 NOTE
affairs of a company is situated:
1. The residential status of
zz Exclusively in India Resident Resident individuals and HUFs is
zz Exclusively outside India Resident Non-Resident determined on the basis of
number of days of his/her
zz Partly in India and partly out- Resident Non-Resident stay in India.
side India
2. The residential status of all
other persons is determined
Let us now look at some illustrations to better understand the concept on the basis of place of
of residential status of a company. incorporation and place of
management.

Illustration 5: Asha Electronics is an Indian company. It has regional

offices and operations in more than 60 countries. During the previous
year 2020-2021, all board meetings of the company took place in its
regional offices. Determine the residential status of Asha Electronics
for Assessment Year 2021-2022.
Solution: Since Asha Electronics is an Indian company, it will always

be resident in India irrespective of where it conducts its business
meetings.
Illustration 6: Super Mini Inc. is a US-based company. Its head office

is located in Texas. It also has an office in India. In the previous year
2020-2021, 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 2021-2022.
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Solution: Since the management and control of Super Mini was partly
in India and partly outside India for the previous year 2020-2021, it
will be considered as non-resident.
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1. The incidence of tax on any assessee is dependent upon his or

her __________.
2. Which of the following is not a legitimate category?
a. Ordinary resident individual
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b. Not ordinary resident HUF

c. Resident company
d. Not ordinary resident company
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3. 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
4. For a company, when the same income of an assessee becomes
taxable in more than one country, it amounts to double
taxation. (True/False)
5. When the control and management of the affairs of a firm/
AOP are situated exclusively in India, then
a. Indian firm/AOP is considered as resident and non-Indian
firm/AOP is also 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-In-

dian firm/AOP is considered as resident.
d. Indian firm/AOP is considered as non-resident and non-In-
dian firm/AOP is also considered as non-resident
Activity
Using the Internet as your primary source of information, find out

the names of a few prominent foreign companies in India that were
considered as resident for the purpose of taxation for Assessment
Year 2019-20 (previous year 2018-19).
2.3 Scope of Total Income
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Section 5 of the Income Tax Act, 1961 provides for provisions related
to scope of income of an assessee based on his or her residential
status. The distinction between scope of income of assessees arises
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only because of income which accrues or arises outside India. In
simple words, for ROR assessees, their global income is taxable in
India. Whereas for non-resident assessees, the income which accrues
or arises outside India is not taxed in India at all. In case of RNOR,
the income which accrues or arises outside India shall be taxed in
India only if it is derived from a business or profession controlled from
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India.
Figure 2.2 describes the scope of total income for different assessees:
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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
a business controlled
from or profession set
up in India.
Figure 2.2: Scope of Total Income for Different Assessees

Table 2.2 presents the scope of total income and taxability of different
types of incomes of different assessees:
TABLE 2.2: Scope of Total Income and Taxability
of Different Types of Incomes of Different
Assessees
Nature of Income Resident and Resident but Non-Resi-
Ordinarily Not Ordinari- dent
Resident ly Resident
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 Included Included Included
received in India
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Income accruing or arising Included Included Included
in India
Income deemed to accrue Included Included Included
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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
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profession set-up in
India
2. From a business con- Included Excluded Excluded
trolled outside India or
profession set up outside
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India
6. 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 assessee
7. 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
profession set up in India for ROR

b. Income accruing or arising outside India and received

outside India from business controlled from India or
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
profession set up outside India for ROR
Activity
Prepare a real-life case study related to the scope of income tax

under Section 5 of the Act.
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Income Deemed to be Received in
2.4
India (Section 7)
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In the previous Section, we used four terms, viz., income received,
income 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. Let us understand the meaning of the terms ‘income
received’ and ‘income deemed to be received’.
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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
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transfer and remittance of the amount so received from one place

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 Study
the Act. Hint
An income is to be included
As studied under Section 5, when an assessee receives income in India
in the total taxable income of
or is deemed to receive income in India, he/she is liable to pay tax in an assessee immediately on
India irrespective of his residential status and the place of accrual of its actual receipt or deemed
such income. This is the rule for taxing income received or deemed receipt.
to be received in India. Now, let us discuss the concept of income
deemed to be received in India as per Section 7 of the Act.
As per section 7, the following incomes shall be deemed to be received

in India by the assessee during the previous year:
Employer’s contribution in excess of 12% of salary to Recognised
Provident Fund
Interestcredited in excess of 9.5% p.a. to Recognised Provident
Fund balance

Contribution by Central Government or other employer under a

pension scheme specified under Section 80CCD
Amounts (employer’s contribution and interest thereon)
transferred from Unrecognised Provident Fund to Recognised
Provident Fund
8. 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
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
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other employer in the previous year to the account of an
employee under a pension scheme referred to in Section
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 (Section 9)
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As studied in Section 5, the place of income accrual or arousal

and incomes, which are deemed to accrue or arise in India, play a
determining role in deciding the scope of income of an assessee. Let
us first understand the meaning of the terms accrue, ‘income accrued’,
‘income arisen’ and ‘income deemed to accrue or arise’.
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 service 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.
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 is incurred. Second is the accounting on the basis

of accrual under which the revenues and expenses are recorded Study
when earned and incurred and not when cash is received or paid. Hint
Arisen:An expense or revenue is said to have arisen when it Income that has been taxed
emerges or becomes apparent. on accrual basis cannot
be charged to tax again on
Income deemed to accrue/arise: It is defined under Section 9 of receipt. It is so because the
the Act. same amount cannot be taxed
twice and, if done, amounts to
Section 9 states that certain types of income which may actually double taxation.
accrue or arise outside India are deemed to accrue or arise in India
for income tax purposes. Various components of income which are
deemed to accrue or arise in India as per Section 9(1) are explained in
Table 2.3: NOTE
For Section 9(1)(i), business
Table 2.3: Components of Income Deemed to connection means any business
activity carried out in India
Accrue or Arise in India
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by a non-resident through his
Section Income deemed to accrue or arise in India agent; or significant economic
Section 9(1)(i) Income accruing or arising outside India, presence of a non-resident in
India.
directly or indirectly through or from:
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zz any business connection in India
zz any property/asset or source of income in
India
zz transfer of capital asset situated in India
Section 9(1)(ii) Salary earned for services rendered in India
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Section 9(1)(iii) Salary payable by the Government to an Indian

citizen for services rendered outside India
Section 9(1)(iv) Dividend paid by an Indian company outside
India
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Section 9(1)(v) Interest, if payable by

zz A non-resident – Income deemed to accrue
or arise in India only if money is borrowed
and used for the purpose of business or pro-
fession carried on in India
zz Government
zz Person resident in India – Income deemed
to accrue or arise in India except if the money
borrowed and used is utilised for the purpose
of business or profession carried on outside Study
India or if the money borrowed and used is
Hint
utilised for making income from any source
outside India Any interest, royalty or fees
for technical services payable
Section 9(1)(vi) Royalty, if payable by
to a non-resident by the
zz A non-resident – Income deemed to accrue Government of India shall be
or arise in India only if royalty services are taxable in India as income
utilised for the purpose of business or pro- deemed to accrue or arise in
fession carried on in India or making income India.
from any source in India

Section Income deemed to accrue or arise in India
zz Government
to accrue or arise in India except if royalty
services are utilised for the purpose of busi-
ness or profession carried on outside India or
if royalty services are utilised for making in-
come from any source outside India
Section 9(1)(vii) Fees for technical services, if payable by

zz A non-resident – Income deemed to accrue
or arise in India only if technical services are
utilised for the purpose of business or pro-
fession carried on in India or making income
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from any source in India
zz Government
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to accrue or arise in India except if technical
services are utilised for the purpose of busi-
ness or profession carried on outside India or
if technical services are utilised for making
income from any source outside India
Illustration 7: Mr Arun, a citizen of UK, came to India for the first time
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in May 2016. During the previous years 2016-2017, 2017-2018, 2018-

2019, and 2019-2020, he was in India for 157 days, 73 days, 184 days and
162 days, respectively. He resided in India during the previous year
2020-2021 for 85 days. Evaluate the residential status of Mr Arun for
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the Assessment Year 2021-2022.
Solution: Number of days Arun stayed in India during the previous

year 2020-2021 = 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
previous year. Therefore, Arun satisfies the second basic condition for
residing in India. Therefore, Arun is a resident of India for the previous
year 2020-2021 and his income would be taxable for Assessment Year
2021-2022.
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

resident.
Condition 1: Arun was resident in India in at least 2 years out of

10 previous years preceding the previous year 2020-2021.
We need to check the residential status of Arun for the previous years
2019-2020 and 2018-2019.
In 2017-18, he stayed for 162 days and also stayed in the preceding
4 years for 184+73+157+Nil = 414 days. Here, the second basic
condition is being fulfilled. Therefore, Mr Arun is resident in India for
the previous year 2019-2020.
In 2018-2019, he stayed for 184 days which is more than 182 days
required for satisfying the first basic condition. Therefore, Mr Arun is
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resident in India for the previous year 2018-2019.
Condition 2: To satisfy the second additional condition, Arun must be

a resident in India for minimum of 730 days in the 7 previous years
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preceding the relevant previous year (2020-2021). 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 the analysis of both the conditions, Arun does not satisfy the
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second additional condition. Therefore, Arun is resident, but not

ordinarily resident in India.
Illustration 8: Following are the particulars of income of Ms. Raksha

for the previous year 2020-2021:
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S. No. Particulars Amount (in `)

1. Rent received from a property in Punjab, 90,000
received in Japan
2. Income from a business in Japan controlled 130,000
from Punjab
3. Income from business in Pune controlled from 190,000
Japan
4. Rent from a property in Japan received there 70,000
but remitted to India
5. Interest from deposits with an Indian company 30,000
received in Japan
6. Profit for the year 2018-2019 of a business in 85,000
Japan remitted to India during the previous
year 2020-2021 that is taxed earlier
7. Gifts received from her parents 55,000

Compute her income for the Assessment Year 2021-2022 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)
Solution: For the given situation, please note that the profit earned
in 2019-2020 is not the income pertaining to the previous year of 2020-
2021.Therefore, it would not be taxable in the Assessment Year 2021-
2022. In addition, gifts received from relatives are not considered
as income. Therefore, the incomes of Ms. Raksha under different
residential statuses would be as follows:
Particulars ROR RNOR NR
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Rent from property in Punjab, received in 90,000 90,000 90,000
Japan
Income from business in Japan 1,30,000 1,30,000 NA

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Income from business in Pune 1,90,000 1,90,000 1,90,000
controlled from Japan
Interest from an Indian company received 30,000 30,000 30,000

in Japan
Rent from property in Japan 70,000 NA NA

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received there but remitted to India
Gross taxable income 5,10,000 4,40,000 3,10,000
In the illustration above, note that the tax incidence is the maximum
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for an ordinary resident and the least for a non-resident.
9. 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
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
Indian company outside India.

2.6 Summary S
Chargeability of income tax depends upon two major factors,
namely the scope of income tax and the residential status of the
assessees.
The tests of residence for determining the residential status of
different persons are described in Section 6 of the Act.
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 which include:
Basic Condition (A): The individual was in India for a mini-
mum period of 182 days in the relevant previous year.
Basic Condition (B):
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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
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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
administration of its issues (affairs of the family) are completely or
partially managed in India.
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The tax liability on income of a company depends upon the

residential status of the company. According to Section 6 of the
Act, Indian companies are taxable in India on their worldwide
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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 Association of Persons (AOP) is said to be resident in India if the
control and administration of its issues are completely or partially
managed in India. An AOP is said to be non-resident in India if
the control and administration of its undertakings are completely
managed out of India.
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.
key words
Capital asset: Any movable or immovable, tangible or intangible,

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: The eldest adult male in an HUF who is given the
responsibility and authority to manage the affairs and assets of
the HUF
Person of Indian Origin (PIO): People of Indian birth or
descent who live outside the Republic of India
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
? 2.7 DESCRIPTIVE QUESTIONS
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1. Explain the criteria for determining the residential status of an
individual assessee.
2. Explain the criteria for determining the residential status of
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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.
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5. List and explain various incomes which are deemed to accrue

or arise in India in accordance with Section 9 of the Income Tax
Act, 1961.
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Topic Q. No. Answer

Residential Status of 1. residental status
Different Kinds of Assessees
2. d. Not ordinary resident com-
pany
3. d. 365
4. True
5. a. Indian firm/AOP is
considered as resident and
non-Indian firm/AOP is also
considered as resident.
Scope of Total Income 6. b. Legal jurisdiction of the
place of accrual

Topic Q. No. Answer

7. 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 8. c. Dividend income received
Received in India (Section 7) by an individual
Income Deemed to Accrue or 9. a. Section 9(1)(i) – Royalty
Arise in India (Section 9) payable by Government

1. According to Section 6(1), an individual is treated as resident in
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India in the given previous year if he satisfies at least one of the
two basic conditions. Refer to Section 2.2 Residential Status of
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2. According to Section 6(3) of the Act, Indian companies are
taxable in India on their worldwide income, irrespective of its
source and origin. Refer to Section 2.2 Residential Status of
3. Section 5 of the Act relates to the scope of total income for the
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purpose of taxation. Refer to Section 2.3 Scope of Total Income

4. Section 7 of the Act states that three types of incomes shall
be deemed to be received in the previous year. These include:
annual accretion in the previous year to the balance at the credit
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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 include: Business Income, Professional
Income, House Property Income, Capital Gains, etc. Refer to
Section 2.5 Income Deemed to Accrue or Arise in India
Suggested Readings
Bhargava, U. (2017). Taxmann’s Income Tax Act As Amended by
Finance Act 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Ahuja, D., & Gupta, D. (2017). Bharat’s Systematic Approach to
Taxation (37th ed.). Delhi: Bharat Law House.

E-References
Jain, S. (2018). Residential Status and Incidence of Tax on Income
under Income Tax Act, 1961. Indian Tax Updates. Retrieved 8 March
2018, from https://www.indiantaxupdates.com/residential-status-
and-incidence-of-tax-on-income-under-income-tax-act-1961/
Fourth Schedule. (2018). Incometaxindia.gov.in. Retrieved
8 March 2018, from https://www.incometaxindia.gov.in/Acts/
Income-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
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Activity
3.3 What is Salary?
3.3.1 Definition of Salary under Section 17(1) of the Income Tax Act, 1961
3.3.2 Types of Emoluments/Perquisites
3.3.3 Gratuity
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3.3.4 Commutation of Pension

3.3.5 Leave Encashment
3.3.6 Retrenchment Compensation
3.3.7 Keyman Insurance Policy
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3.3.8 Value of Leave Travel Concession

3.3.9 Valuation in Respect of Unfurnished Rent-Free Accommodation
3.3.10 Provisions of Educational Facilities for an Employee’s Family
3.3.11 Interest-Free Loan and Loan at Concessional Rate of Interest
3.3.12 Profits in Lieu of Salary
3.3.13 Medical Facilities Treated as Perquisites
3.3.14 Perquisite for Motor Cars
Activity
3.4 Deductions from Salary
Activity
3.5 Tax Treatment on Provident Funds
Activity

CONTENTS
3.6 Computation of Income from Salaries

Activity
3.7 Summary
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INCOME FROM SALARIES 57
COMPUTATION OF GROSS SALARY OF MR. BASTON
Mr Baston works with GYT Ltd. and has the following details
for the previous year 2020-2021. His basic salary is ` 10,000 per Case Objective
month. The dearness allowance is ` 7,000 per month, of which This Caselet discusses the
50% is for retirement benefits. The commission earned by him as manner of computation of
a percentage of turnover is 0.1% (turnover during the year being gross salary of an individual
` 50,00,000). He also gets a bonus of ` 42,000 and gratuity of employee.
` 26,000 during the year. In addition, the contribution made by
him in the RPF was ` 20,000 and his employer’s contribution in
the RPF was 20% of the basic salary. The interest accrued in the
RPF was ` 14,000 @ 14% p.a.
He wants to know about the deductions allowable and disallow-

able from his salary income for the previous year 2020-2021 in
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order to assess tax payable on his gross salary under the head of
‘salaries’. A tax advisor of GYT Ltd. computed his gross salary in
the following manner:
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Computation of Gross Salary of Mr Baston for the Assessment Year
2021-2022:
Particulars Workings (in `) Amount (in `)

Basic Salary 10,000 × 12 120,000
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Dearness Allowance 7,000 × 12 84,000

Commission as a percentage of 0.1% × 5,000
turnover 50,00,000
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Bonus - 42,000
Gratuity (Gratuity amount received - 26,000
during the tenure of service is fully
taxable)
Employee’s contribution to RPF - -
(not taxable, eligible for deduction
under Section 80C)
Employer’s contribution to RPF 20% × 1,20,000
= 24,000
Less: Amount exempted* 12% {1,20,000 3,960
+ 84,000/2 +
5,000) = 20,040
Interest accrued in the RPF @ 14% 14,000
p.a.
Less: Amount exempted** 9.5/14 × 14,000 4,500
= 9,500

Particulars Workings (in `) Amount (in `)

Gross Salary under the head 285,460
‘Income from Salaries’
* Employer’s contribution to RPF in excess of 12% of salary is taxable. The

amount exempted = 12% of {Basic Salary + Dearness Allowance if provided
in the employment terms for retirement benefits + Commission as a percent-
age of turnover}
** Interest accrued in the RPF in excess of 9.5% p.a. is taxable.
From the gross salary, Mr Baston will also be allowed a standard

deduction of up to ` 40,000 under Section 16. The balance amount
would become taxable under the head ‘income from salaries’.
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learning objectives

>> Describe the chargeability of income derived from salary
>> Define salary under Section 17(1) of the 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 under Section 16 of the Act
>> Calculate the value of income under the head ‘salaries’ for
the purpose of taxation
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3.1 INTRODUCTION
In the previous chapter, you studied about the residential status of
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Quick Revision
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.
For the purpose of taxation, the term ‘salary’ has been defined under
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Section 17(1) of the Income Tax Act, 1961. In addition, important

concepts, such as employer-employee relationship, arrears of salary,
allowances, gratuity and the taxability of different types of perqui-
sites, have been discussed at length. Perquisites have been defined
under Section 17(2) of the Income Tax Act, 1961. The concept of prof-
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its in lieu of salary under Section 17(3) has also been described.
Section 16 of the Act describes deductions that may be made from

the overall income generated from salary. These include deductions
against entertainment allowance and professional tax. The chapter
also discusses the taxability of various components of the provident
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 assessee.
3.2 BASIS OF CHARGE

As per Section 15 of the Income Tax Act, 1961, income chargeable to
tax under the head of ‘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
such amount is not due to the assessee in the accounting year.

c. any arrears of salary paid or allowed to the employee in the

NOTE previous year by or on behalf of an employer or a former
Due Basis: When income is employer will be charged to tax during previous year if they have
earned even if it is not received not been charged to income tax in any of the earlier previous
in the previous year (Accrual of years.
income)
Receipt Basis: When income is
For charging tax under income from salary, following points must be
received even if it is not earned remembered:
in the previous year (Advance a. Income from salary becomes chargeable to tax either on ‘due
payment of income)
basis’ or on ‘receipt basis’, whichever is earlier.
b. Employee-employer relationship must exist between the payer
and payee in order to tax the income under this head.
c. Where salary is assessed in the year of payment or in the year
when it becomes due, the same cannot be subjected to tax
subsequently in the year when it gets due or paid, as the case
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may be.

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1. Which of the following incomes are not chargeable to tax
under the head ‘salaries’?
a. Salary due to an employee from a former employer not
paid during the previous year
b. Arrears of salary paid in an earlier previous year
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c. Rental income from property

d. Salary paid to an assessee not due to the assessee in the
accounting year.
2. Which of the following is true in relation to taxability under
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the 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
Search on the Internet and prepare a report that describes the

impact of contract of service and place of accrual on the taxability
of income from salary.
3.3 WHAT IS SALARY?

Salary refers to a fixed and regular payment that is being paid by
an employer to his/her employees usually on a monthly basis. This

amount is paid by an employer to employee in lieu of employee’s work.

The salary is often expressed as an annual sum and is mostly given to
professionals and people doing white-collar jobs.
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.
3.3.1 DEFINITION OF SALARY under Section 17(1) OF

the INCOME TAX ACT, 1961 NOTE
Gross Salary is computed by
According to Section 17(1) of the Act, salary is defined to include: adding basic salary, dearness
i. Wages allowance, taxable perquisites
after allowing for exemptions,
ii. Annuity or pension taxable allowances after
allowing for exemptions, taxable
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iii. Gratuity gratuity, fees and commission,
pension, leave encashment and
iv. Fees, commission, perquisites, profits in lieu of or in addition to so on.
salary or wages
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Exemptions to certain
v. Advance of salary allowances and perquisites are
computed to the extent specified
va. Leave encashment by applicable provisions of their
relevant sections under the
vi. Annual accretion to the balance at the credit of an employee Income Tax Act. Taxable salary
participating in a Recognised Provident Fund, i.e., RPF under the head ‘Salaries’ is
employer’s contribution in excess of 12% of salary and interest then computed by subtracting
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credited in excess of 9.5% p.a. deductions under Section 16

from Gross Salary.
vii. Transferred balance in an RPF
viii. Contribution by the Central Government or any other employer
to Employees Pension Account as referred to in Section 80CCD.
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3.3.2 TYPEs OF EMOLUMENTS/PERQUISITES
Emoluments or perquisites can be described as any reward or some

extra benefit linked to an office or position in addition to salary or
wages which may be legally due by way of contract for services ren-
dered. Perquisite is defined in 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 assessee.
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.
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 assessee.

The amount of any contribution to an approved superannuation

fund by the employer in respect of the assessee to the extent it
exceeds ` 1,50,000 is chargeable as perquisites.
The value of any other fringe benefit or amenity as may be
prescribed.
3.3.3 GRATUITY
Gratuity refers to a payment that is made in appreciation of an employ-

ee’s past services rendered by him/her to the employer. Gratuity can
be received by:
the employee himself at the time of his retirement
the legal heir of the employee in the event of death of the employee
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Any amount of gratuity received at the time of retirement or death of
the employee is taxable to the extent as shown is Table 3.1:
Table 3.1: Taxable value of Gratuity

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NOTE Category Taxable Value of Gratuity
For Section 10(10)(ii), ‘Salary
means basic salary plus Employee of Central Government Fully exempt
dearness allowance.’ or local authority or member of
Civil Services – Section 10(10)(i)
For Section 10(10)(iii), ‘Salary
means basic salary, dearness Employee covered under the Pay- Least of the following is exempt from
ment of Gratuity Act, 1972 – Sec- the amount of gratuity received:
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allowance if provided in the terms

of employment for retirement tion 10(10)(ii) zz ` 20 lakhs
benefits, and commission as a
fixed percentage of turnover.’ zz Gratuity actually received
zz 15/26 × Last drawn salary × No. of
completed years of service or part
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thereof in excess of 6 months

Employee not covered under the Least of the following is exempt from
Payment of Gratuity Act, 1972 – the amount of gratuity received:
Section 10(10)(iii) zz ` 20 lakhs
zz Gratuity actually received
zz 15/30 × Average salary of last 10
months preceding retirement
month × No. of completed years
QUICK TIP of service ignoring fractions
Gratuity received during the
tenure of service is fully taxable. 3.3.4 COMMUTATION OF PENSION
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
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 shown in Table 3.2:
Table 3.2: Taxability of Pension

Category Taxable Value of Pension under Section
10(10A)
Uncommuted Pension Fully taxable in the hands of both Govern-
ment and Non-Government employees
Commuted Pension in Fully exempt from tax
case of Government
employees
Commuted Pension in zz If the employee is in receipt of gratuity, Know More
case of Non-Government following amount is exempt from the Commuted pension converts
employees amount of commuted pension received: the future right of an employee
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1 Commuted pension received to receive pensions into a lump
× × 100% sum amount which is receivable
3 % of commutation immediately.
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zz If the employee is not in receipt of gratu-
ity, following amount is exempt from the
amount of commuted pension received:
1 Commuted pension received
× × 100%
2 % of commutation
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3.3.5 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
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credit for the given year, but he/she does not utilise some or all of those
leaves, then the leaves may either be:
Lapsed (due to non-use)
Encashed each year
Accumulated and encashed after retirement or death
Payment received in respect of encashment of unavailing leave forms

part of salary subject to exemptions specified under Section 10(10AA)
as shown in Table 3.3:
Table 3.3: Taxability of Leave Encashment

Category Taxable Value
Received during the Fully taxable
tenure of service
Received on retire- Fully exempt
ment by a government
employee

Category Taxable Value

Received on retire- Least of the following is exempt from the amount
ment by a non-govern- of leave salary received:
NOTE ment employee zz ` 3,00,000
For computation of leave zz Leave salary actually received
encashment exemption, ‘Salary
zz 10 months’ salary based on average salary of
means basic salary, dearness
allowance if provided in terms
the last 10 months preceding the retirement
of employment for retirement month
benefits, and commission as a  Leaves standing to the 
fixed percentage of turnover’.  
 credit of employee  ×  Average salary of the last 10 months 
zz  
30 days  preceding retirement month 
3.3.6 RETRENCHMENT COMPENSATION
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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 their retrenchment. Retrenchment compensation
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is governed by the provisions of the Industrial Disputes Act, 1947. As
per Section 10(10B), 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
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` 5,00,000
Any compensation received by the employee in excess of the above
-mentioned amount is taxable as salary.
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3.3.7 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 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. There can be more than
one key person within the same company who possesses the requisite
background, knowledge, experience, etc.
The purpose of keyman insurance is to indemnify or protect the com-
pany against financial loss upon the death of a key employee. The
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
employer on the life of the employee who is a key person in the com-
pany. Three necessary constituents of a keyman insurance policy are
as follows:
Insurance so purchased is a life insurance policy.

Insurance policy is taken by one (first) person on the life of another

(second) person.
The relationship between the first and second persons should be
either that of an employer-employee or any other business rela-
tionship.
3.3.8 VALUE OF LEAVE TRAVEL CONCESSION
Certain allowances paid by employers to employees are exempted in

the hands of an employee subject to limits specified under the Act.
Leave Travel Concession (LTC) is one of them. Section 10(5) specifies
the amount of exemption which can be claimed/deducted by employ-
ees from the sums received from employers for travelling to any place
in India. The exemption is available for travel concessions received in
the following cases:
S
By employee on leave
By employee after retirement from service
IM
By employee after termination of his service
The amount of exemption available in respect of LTC is summarised

in Table 3.4:
Table 3.4: Exemption of LTC

Journey Executed by Amount of Exemption
M
Air Exemption shall be equal to the amount

not more than air economy fare of the
National Carrier by the shortest route to
the destination place
N
Any transport mode other Exemption shall be equal to the amount

than air where rail service is not more than first-class air-conditioned
available rail fare by the shortest route to the desti-
nation place
Any transport mode other than air where rail service is not available
zz A recognised public trans- Exemption shall be equal to the amount
port system exists not more than first-class or deluxe-class
fare of such transport by the shortest
route to the destination place
zz A recognised public trans- Exemption shall be equal to the amount Know More
port system does not exist not more than first-class air-conditioned
The current block for which LTC
rail fare by the shortest route to the des- exemption can be availed is
tination place, assuming that the journey 2018-21.
was executed by rail
This exemption is available to an employee for 2 trips in a block of

4 calendar years. However, he can carry forward LTC up to one trip
which is not availed during the current block to the succeeding block.
Moreover, the exemption in respect of LTC can be claimed by an
assessee for expenditure spent by him on himself, spouse, two surviv-

ing children, brothers and sisters, parents and any other individual
wholly dependent upon the assessee.
3.3.9 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
is received and given in kind. However, it is taxable under the Income
Tax Act, 1961.
Taxable value of rent-free residential accommodation is computed as
discussed in Table 3.5:
Table 3.5: Value of Rent-free Accommodation
S
Category Taxable Value of Rent-Free Accommodation
Government employee License fee determined by Government rules
Non-Government employee zz 15% of salary (In the city having population
IM
more than 25lakhs as per 2001 census)
zz 10% of salary (In the city having population
between 10 lakhs and 25 lakhs as per 2001
census)
zz 7.5% of salary (In the city having popula-
tion less than 10 lakhs as per 2001 census)
M
Non-Government employee Actual charges paid or payable by the employer,

where the accommodation or 24% of salary, whichever is lower
is taken on lease or rent by
an employer
Any of the above cases Taxable value as determined herewith
N
Add: 10% cost per annum of furniture owned by

an employer
3.3.10 PROVISIONS OF EDUCATIONAL FACILITIES FOR an

EMPLOYEE’S FAMILY
Sometimes, employers provide free or concessional education facili-
Know More ties to any member or members of the employee’s household. The tax-
Any fixed children education able value of this perquisite provided by an employer to an employee
allowance provided by the is as discussed in Table 3.6:
employer to employee is exempt
to the extent of ` 100 per month
Table 3.6: Taxability of Concessional Education
per child for a maximum of two
children. Facility provided to AN Employee’s Household
Circumstance Taxable value of benefit in the hands
of an employee
If education facility is offered Taxable value is the cost of such educa-
in an educational institution tional expenditure in a similar institu-
owned and maintained by the tion in the nearby location as reduced
employer by any amount paid or recovered by an
employee.

Table 3.6: Taxability of Concessional Education

Facility provided to AN Employee’s Household
Circumstance Taxable value of benefit in the hands
of an employee
If education facility is offered Taxable value is the amount of such
in any other educational insti- educational expenditure incurred by
tution owing to the reason of the employer as reduced by any amount
employee being in employment paid or recovered by an employee.
of such employer
However, no perquisite shall be taxable in the above cases if the value NOTE
of education facility per child does not exceed ` 1,000 per month. In The exemption of ` 1,000 per
simple words, if the value of education facility offered by the employer month is allowed only in case of
is more than ` 1,000 per month, then the whole perquisite value is children of an employee and not
subject to tax. any other household member of
the employee.
S
3.3.11 INTEREST-FREE LOAN and LOAN AT
CONCESSIONAL RATE OF INTEREST
IM
Employees (or any member of his/her household) may be provided
interest-free loans or loans at concessional rates by his or her employer.
Interest-free loans and concessional loans are taxable perquisites in NOTE
the hands of all employees. Interest-free or concessional
loan is to be valued as a
However, no tax would be charged if such loans are provided to an perquisite based on the rates of
interest charged by SBI as on the
M
employee or any member of his/her household:

first day of the relevant previous
where the amount of petty loans does not exceed ` 20,000. year.
where the loan is for the purpose of medical treatment with

respect to diseases specified in rule 3A, which include neurologi-
N
cal diseases, cancer, AIDS, chronic renal failure and haemophilia

(specified diseases).
3.3.12 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 wages.
These are mentioned under Section 17(3) of the Income Tax Act.
These payments include:
Terminal compensation
Compensation for modification of the terms of employment
Payment from an unrecognised provident fund or an unrecognised
superannuation fund
Payment under Keyman Insurance Policy
Any amount received or due to be received before joining or after
cessation of employment

3.3.13 MEDICAL FACILITIES TREATED AS PERQUISITEs
Fixed medical allowance is always fully taxable. However, medical

facilities provided by an employer to an employee are taxable subject
to certain specified limits under Provision to Section 17(2). Medical
facilities are not regarded as a perquisite, and, hence, are not taxable
(fully exempt from tax) if:
Provided by an employer in respect of medical treatment of
employee or any member of his family in a hospital owned and
maintained by the employer.
The value of medical facility is reimbursed by an employer to
an employee in respect of medical treatment of employee or any
member of his family in a central, state or any local hospital/a pri-
vate hospital recommended by the Government.
S
The value of specified medical facility for prescribed diseases
reimbursed by an employer in respect of medical treatment of an
employee or any member of his family in a hospital approved by
IM
the Chief Commissioner. Value of specified medical facility for pre-
scribed diseases reimbursed by an employer in respect of medical
treatment of an employee or any member of his family in a hospital
approved by the Chief Commissioner.
Any medical health insurance premium paid by an employer on
M
behalf of an employee on the health of the employee or a member

of his family under a scheme approved by the Central Government
or IRDA.
N
MEDICAL TREATMENT OUTSIDE INDIA
Expenses incurred by an employer on the medical treatment of an

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 pro-
vided 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.

3.3.14 PERQUISITE FOR MOTOR CARs

Know More
As prescribed under Rule 3(2) of the Income Tax Act, the motor car Though employees are paid
perquisite is taxable in the following manner: salary, they are provided
with certain extra benefits or
No perk value is to be added when a car is used for official purpose.
perquisites in addition to salary
The entire expense cost including the driver’s salary and depreci- that motivate and encourage
them. One such perquisite is
ation of the motor car @10% will be added if the car is used by the motor car perquisite. After
employer for private purposes only. abolition of the Fringe Benefit
Tax (FBT), effective from
If the car is used partly for official purpose, the rate has been spec-
financial year 2009-10 onwards,
ified as per rules, and, hence, there is no role of estimation either many perquisites, such as
from employer or from the assessing officer’s side. motor car facility are also
taxable.
On the other hand, the taxability of cars which have been used partly
for official purposes and partly for personal purposes will be as fol-
S
lows:
Small cars with engines below 1.6 litres of capacity will have a per-
quisite value of ` 1,800 a month.
IM
Cars with an engine above 1.6 litres of capacity will have a per-
quisite value of ` 2,400 a month, if expenses on maintenance and
running are reimbursed by the employer.
Ifa chauffeur is also provided by the employer, ` 900 per month
should be added to the perquisite value.
M
Certain specific documents to be maintained by the employer for cars

used for official purpose are as follows:
Complete details of the journey undertaken for official purpose
including the date of journey, destination, mileage and the amount
N
of expenditure incurred thereon

A certificate that the expenditure was incurred wholly and exclu-
sively for the performance of his official duty
3. 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
d. Usually paid on a bi-monthly basis
4. 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
Act, 1961?
a. Retrenchment compensation
b. Leave salary

c. Employee’s monetary obligation paid by employer

d. Pension
5. Mr Ansh Gujral works for Fictitious Pvt. Ltd. His company
was running into losses and, therefore, was not able to pay
its employees’ salaries including Ansh’s salary. His three-
months’ salary for March, April and May 2018 was due with
his employer. Which of the following is true in this case if he is
filing the returns for Assessment Year 2018-19?
a. Due salary of March 2018 will be considered in the total
taxable income.
b. Due salary of April and May 2018 will be considered in the
total taxable income.
c. Due salary of all three months will be considered in the
S
total taxable income.
d. All due salaries will be taxed for Assessment Year 2019-20
6. Which of the following is not a perquisite as defined under
IM
Section 17(2) of the Income Tax Act?
a. Accommodation at concessional rent
b. Amount of any contribution to an approved superannua-
tion fund by the employer
c. Gratuity amount
M
d. Any benefit/amenity granted free or at concessional rates

7. Employees are divided into three different categories under
___________ for the purpose of exemption of gratuity.
N
8. For calculating half month’s average salary for every

completed year of service in case of employees covered under
the Payment of Gratuity Act, we use the formula:
a. Basic salary + Dearness allowance
b. Basic salary + Commission
c. Basic salary + Dearness allowance + Value of all perqui-
sites
d. Basic salary
9. Mr Sahil retired on 30th April, 2020. 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 2019 to March 2020
b. May 2019 to February 2020
c. February 2020 to December 2020
d. July 2019 to April 2020

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
3.4 DEDUCTIONS FROM SALARY

Section 16 of the Act is related to deductions from salaries. According
to this section, the income chargeable under the head ‘Salaries’ shall
be computed after making certain deductions from gross salary which
are as follows:
S
Section 16(ia) – Standard Deduction
Section 16(ii) – Entertainment Allowance
Section 16(iii) – Professional Tax
IM
These deductions are explained in Table 3.7: Study
Hint
Table 3.7: Deductions from Salary The amount actually spent
under Section 16 by the employee towards
entertainment out of the
Name of Deduction Deductible Amount entertainment allowance
M
Standard Deduction A standard deduction of ` 50,000 or amount of received from his employer is
gross salary, whichever is lower, is allowed to not relevant.
the employees.
Entertainment Allowance Entertainment allowance received has to be
N
first included in gross salary and, thereafter,

deduction can be allowed to the least of the
following:
1. One-fifth of basic salary Know More
The total amount of maximum
2. ` 5,000 professional tax payable in
3. Entertainment allowance received respect of one person is ` 2,500
per annum.
Deduction in respect of entertainment allow-
ance is available only in case of Government
employees.
Professional Tax Any sum actually paid by the employee on
account of tax on employment is allowed as a
deduction.
In case where professional tax is reimbursed
or paid by an employer on behalf of an em-
ployee, such amount should be first included
in gross salary as a perquisite and, thereafter,
deduction can be allowed.

10. What is the maximum limit of professional tax that can be

charged by the State Government from any person?
a. ` 2,500/year
b. ` 5,000/year
c. ` 25,000/year
d. ` 50,000/year
Activity
Explain briefly the relevance of professional tax and the process of

collecting it.
3.5
S
TAX TREATMENT ON PROVIDENT
IM
FUNDS
Provident Fund Scheme refers to a welfare scheme for employees,
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
M
built up on investments is also credited to the provident fund account

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 his/her retirement or death, provided that certain conditions
N
are satisfied.
The taxability provisions of provident fund in the hands of employees

are as discussed in Table 3.8:
Table 3.8: Taxability of Provident Funds

Particulars Recognised Provident Fund Unrecognised
Provident Fund
Employer’s Taxable amount is amount of It is not taxable yearly

contribution contribution in excess of 12% at the time of contribu-
of salary tion
Employee’s Eligible for claiming as deduc- Not eligible for claim-

contribution tion under Section 80C ing as deduction under
Section 80C
Interest Taxable amount is amount of It is not taxable yearly

credited interest in excess of 9.5% p.a.

Particulars Recognised Provident Fund Unrecognised

Provident Fund
Amount Fully exempt only if: Employee’s contribu-
received on zz Employee has rendered tion is exempt and in-
retirement, etc. service for a continuous pe- terest credited thereon
riod of 5 years or more with is taxable under the
the employer, or head ‘income from oth-
er sources’. Employer’s
zz Employee has retired be- contribution and inter-
fore rendering service for a est credited thereon are
continuous period of 5 years taxable as salary
because of the reason of ill
health or contraction or dis- NOTE
continuance of employer’s The meaning of the term ‘salary’
business or reasons beyond for computation of taxable
contribution to Recognised
S
his control
Provident Fund is as follows:
For Statutory Provident Fund or Public Provident Fund notified by the ‘Salary means basic salary,
Central Government, employer’s contribution, interest credited, and dearness allowance if provided
IM
amounts received on retirement, etc., are fully exempt. The employ- in terms of employment
for retirement benefits,
ee’s contribution towards Statutory Provident Fund or Public Provi-
and commission as a fixed
dent Fund is eligible for deduction under Section 80C. percentage of turnover.’

M
11. Which of the following is true in respect of interest received by

an assessee from PPF?
a. Eligible for deduction under Section 80C
b. Exempt under Section 10 up to 9.5% per annum
N
c. Taxable under income from other sources

d. Fully exempt
Activity
Make a list of at least 10 recognised and unrecognised provident

funds operating in India.
COMPUTATION OF INCOME FROM

3.6
SALARIES
For the purpose of calculating the amount of tax payable by an individ- NOTE
ual/entity to the Government of India, it is important to calculate the The provisions relating to house
total income of each such individual/entity under different heads of rent allowance are discussed in
chapter 9 of the book.

income (whichever are applicable) after applying appropriate exemp-

tions and after deducting the amounts as applicable.
In this section, you will study how income from salaries is calcu-
lated. Income from salary chargeable to tax is calculated as shown in
Table 3.9:
TABLE 3.9: CALCULATION OF INCOME FROM SALARY

CHARGEABLE TO TAX
Add: Components of Salary Amount (in `) Amount (in `)
Basic Salary xxx xxx
+ Dearness Allowance xxx
+ Bonus xxx
+ Commission xxx
S
+ Arrears of Salary xxx
+ HRA xxx xxx
– Exempted HRA (xxx)
IM
+ LTA received xxx xxx
– Exempted LTA (xxx)
+ Perquisites xxx xxx
– Exempted Amount (xxx)
+ Other Allowances received xxx xxx
M

+ Retrenchment Compensation/VRS xxx xxx
+ Gratuity Received xxx xxx
N
– Exempted Gratuity Amount (xxx)

+ Leave Encashment xxx xxx
+ Pension xxx xxx
– Exempted Pension Amount (xxx)
+ Employer’s Contribution to Salary in xxx
Excess of 12% of Salary of Employee
+ Interest Credited to Provident Fund in xxx
Excess of Notified Amount
Gross Salary xxx
Less: Deductions under Section 16
Standard Deduction xxx (xxx)
Entertainment Allowance xxx
Professional Tax Paid xxx
Income Chargeable under the head xxx
‘Salaries’

Let us now understand the calculation of income from salaries charge-

able to tax by working out an illustration as follows:
Illustration 1: Calculate the amount of income chargeable to tax

under the head ‘salaries’ of Mr Om Prakash for the Assessment Year
2021-2022 if you are given the following information:
1. Basic salary 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
salary.
3. He also got a bonus amounting to 2.2 times the salary he received
in the last month of the assessment year.
4. His employer makes a contribution towards an RPF at the rate
of 20%.
S
5. Om Prakash’s company pays a premium of ` 5,000 towards a
life insurance policy in his name. The insurance has been taken
from state insurer, LIC.
IM
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.
M
Solution: Salary of Om Prakash chargeable to tax can be calculated

as shown:
N
Particulars Amount (in ` )

Basic salary (20,000 × 8 + 22,000 × 4) 2,48,000
D.A. (12% of basic salary) 29,760
Bonus (2.2 × 22,000) 48,400
Employer’s contribution towards an RPF in excess of 22,220.80
12% [(20 – 12%) of Basic + D.A.]
Medical insurance premium Exempted
Taxable allowances 10,000
Taxable perquisites
1. Rent-free accommodation – 25,000 25,000
2. Medical Reimbursement* Exempted
Gross Salary 3,83,380.80
Less: Deductions under Section 16 50,000
Income from Salary Chargeable to Tax 3,33,380.80
* Medical reimbursement is not a perquisite if conditions prescribed under Proviso

to Section 17(2) are met.

12. 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
d. None of these
Activity
Assume that Rati’s employer contributes 20% (towards an RPF) in

excess of 12% of basic salary. Calculate and show the impact of this
S
change on her income from salary.
S 3.7 SUMMARY
IM
As per Section 15 of the Income Tax Act, 1961, income charge-
able to tax under the head ‘salaries’ includes any salary due to an
employee, any salary paid or allowed to an assessee in the previous
year, and any arrears of salary paid or allowed to the employee in
the previous year.
M
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 ‘sal-
N
aries’, it must be ensured that there exists an employer-employee

relationship between the receiver and the payer.
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.
The employee is entitled to exemption under Section 10(5) with
respect to the value of travel concession received by him or due
from his or her employer for himself/herself and his family.
Section 16 of the Act is related to deductions from salaries.
According to this Section, the income chargeable under the head

‘Salaries’ shall be computed after making certain deductions for

entertainment allowance and professional tax.
key words
Encashment: The exchange of a tangible or intangible item,

such as cheques and leaves for a sum of money
Keyman: A person whose service has a significant effect on the
profitability of the company is known as a keyman
Legal hier: A person, whether male or female, who is entitled
to receive and inherit the entire property of a person who dies
without declaring a will
Retrench: The practice of reducing the employee strength
Substantial interest: A person or assessee is said to have sub-
S
stantial interest in a company who holds more than 20% of
shares or controls more than 20% of board of directors
IM
3.8 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.
M
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
N
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.
6. Calculate the amount of income of Ms. Durga from salaries
for Assessment Year 2021-2022 if you are given the following
information regarding Ms. Durga:
i. Basic salary = ` 12,000 p.m.
ii. DA = ` 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. Durga contributes 15% of her basic salary towards an RPF.

vii. Durga’s employer contributes a sum equivalent to 18% of

her basic salary towards the RPF.
viii. Ms. Durga’s mother is dependent on her. Durga’s mother
was admitted in a hospital for a chronic heart condition.
Durga was billed for ` 20,000. This bill was subsequently
reimbursed by her employer.
3.9 ANSWERS AND HINTS
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic Q. No. Answer

Basis of Charge 1. c. Rental income from property
2. a. Salary accrues in India; it will be
S
taxed.
What is Salary? 3. d. Usually paid on bi-monthly basis
4. c. Employee’s monetary obligation
IM
paid by employer
5. a. Due salary of March 2018 will be
considered in total taxable income.
6. c. Gratuity amount
7. Section 10(10)
M
8. a. Basic salary + Dearness allowance
9. a. June 2017 to March 2020

Deductions from 10. a. ` 2,500/year
Salary
N
Tax Treatment on 11. d. Fully exempt

Provident Funds
Computation of 12. c. Standard deduction of ` 20,000
Income from Salaries
HINTS FOR DESCRIPTIVE QUESTIONS

1. Section 15 of the Income Tax Act, 1961 describes what incomes
are chargeable to tax under the head ‘salaries’. Under this
Section, the salaries and arrears of salary are chargeable to tax.
Refer to Section 3.2 Basis of Charge
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,
advance of salary, leave encashment, etc. Refer to Section 3.3
What is Salary
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 3.3 What is Salary

4. In case of a non-government employer, the taxability of

accommodation perquisites depends on two factors. First, the
city in which the accommodation has been provided; second,
whether the accommodation so provided by an employer is
owned by him/her or it has been taken on lease. Refer to Section
3.3 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 3.4 Deductions from Salary
6. Durga’s gross income from salary after exemptions and
deductions under Section 16 can be calculated as shown below:
Amount Amount
Particulars
(in `) (in `)
S
Basic salary (` 12,000 × 12) 2,40,000
DA (` 6,000 × 12) 72,000
IM
Education allowance for two children 3,600
(` 300 × 12)
Less: Exempted value (` 100 × 2 × 12) (2,400) 1,200
HRA (` 4,000 × 12) 4,800
Employer’s contribution in excess of 12% 56,160
M
of her basic salary (18% of 3,12,000 – 12% (37,440) 18,720

of 3,12,000)
Medical reimbursement* Exempted
Gross Salary 3,36,720
N
Less: Deduction under Section 16

1. Standard Deduction (40,000)
2. Professional Tax --
Income from Salary Chargeable to Tax 2,96,720
* Medical reimbursement is not a perquisite assuming conditions prescribed
under Proviso to Section 17(2) are met.
Refer to Section 3.6 Computation of Income from Salaries
3.10 SUGGESTED READINGS & REFERENCES
SUGGESTED READINGS
Bhargava, U. (2017). Taxmann’s Income Tax Act As Amended by
Finance Act, 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Ahuja, D., & Gupta, D. (2017). Bharat’s Systematic Approach to
Taxation (37th ed.). Delhi: Bharat Law House.

E-REFERENCES
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/Medi-
cal-Treatment-/-Medical-Reimbursement-Perquisite/category/
Taxability-of-Perquisites/
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Ch a
4 pt e r
Income from House Property
Contents
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4.1 Introduction
4.2 Chargeability of Income from House Property
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4.2.1 Basis of Charge (Section 22)
4.2.2 House Property not Chargeable to Tax
4.2.3 Deemed Ownership (Section 27)
Activity
4.3 Annual Value of House Property (Section 23)
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Activity
4.4 Deductions from House Property (Section 24)
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Activity
4.5 Special Provisions of House Property
4.5.1 Recovery of Arrears of Rent and Unrealised Rent (Section 25A)
4.5.2 Property Owned by Co-Owners (Section 26)
4.5.3 Income from Self-Occupied House Property
Activity
4.6 Summary

INCOME FROM HOUSE PROPERTY OF MR. ANIRUDH
Anirudh, a software engineer, owns a house property. The munic-

Case Objective ipal valuation of that house is ` 1,30,000 p.a. The standard rent
This Caselet discusses the was fixed by the Rent Control Act to be ` 1,20,000 p.a. and the
provisions for calculation of fair rental value of the house was ` 1,10,000 p.a. Anirudh is con-
income from house property cerned about the tax to be paid by him on the house property for
of an assessee. the Assessment Year 2021-2022. He rented out the property for a
monthly rent of ` 11,000 throughout the previous year 2020-2021.
He also paid municipal taxes @ 10% of the municipal value of
house along with a yearly interest payment of ` 40,000.
Anirudh approached his chartered accountant for the purpose

of ascertainment of income from house property taxable in his
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hands. The tax consultant guided him through the provisions
applicable to the calculation.
The annual value of the property is determined as laid down under

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Section 23 of the Income Tax Act, 1961. The expected rent is the
higher of municipal value and fair rental value, i.e., ` 1,30,000, but
restricted to standard rent which is ` 1,20,000. The gross annual
value, being the higher of expected rent and actual rent received
during the previous year 2020-2021, was arrived at ` 1,32,000.
From the Gross Annual Value (GAV), the municipal taxed paid by
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Anirudh during the previous year were deducted to arrive at the

Net Annual Value (NAV). In addition, standard deductions under
Section 24 allowed from taxable income are 30% of NAV and any
interest paid on capital borrowed for the acquisition of house
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property.
Thus, the income from house property was calculated by the tax
consultant in the following manner:
Particulars Amount (in `)

Computation of GAV
Step 1 Higher of Municipal Value of `1,30,000 1,30,000
and Fair Rent of ` 1,10,000
Step 2 Expected Rent = Lower of Step 1 and 1,20,000
Standard Rent of ` 1,20,000
Step 3 GAV = Higher of Expected rent and 1,32,000
Actual rent received
(Actual rent received = 11,000×12, i.e., ` 1,32,000)
GAV 1,32,000
Less: Municipal taxes paid by Anirudh during the 13,000
previous year 2020-2021
(10% of ` 1,30,000)

Income from House Property 83

NAV 1,19,000
Less: Deductions under Section 24
(A) 30% of NAV 35,700
(B) Interest paid on capital borrowed 40,000
Income derived from house property of 43,300
Mr Anirudh for A.Y. 2021-2022
The taxes to be paid by Anirudh will be computed on his total

income including income from salaries, income from house prop-
erty, income from business or profession and income from other
sources as per the slab rates applicable to him.
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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
>> Describe the value of house property not chargeable to tax
>> Define deemed owner
>> Discuss the computation of annual value of property
>> Explain the deductions from house property
4.1 Introduction
Quick Revision In the previous chapter, you studied the tax treatment of income
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under 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
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incomes 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.
Income from house property is the only income that is charged 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 poten-
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tial 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 chargeability of the income from house
property.
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In this chapter, you will study about Sections 22 to 27 of the Act related
to income from house property.
CHARGEABILITY OF Income from

4.2
House Property
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
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 the above concept with the help of an example.
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’.
4.2.1 BASIS OF CHARGE (SECTION 22)
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 Study
value of property consisting of any buildings or lands appurtenant thereto Hint
of which the assessee is the owner other than such portions of such prop- For chargeability of income
erty as he may occupy for the purposes of any business or profession car- from house property, asses-
see must be the owner of
ried on by him the profits of which are chargeable to income tax shall be
the house property. Here,
chargeable to income tax under the head ‘Income from House Property’.” ownership includes deemed
ownership.
According to this section, land, buildings and the lands that are
attached to buildings are chargeable to tax, provided that such house
property is not used for the purpose of business of the assessee’s own
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business, the income of which is chargeable to tax.
For taxing an income under the head, ‘Income from House Property’,
three conditions must be fulfilled, which are as follows:
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1. The property must consist of buildings and lands appurtenant
thereto.
2. The assessee must be the owner of such house property.
3. The property may be used for any purpose, such as renting NOTE
or letting out, but it should not be used by the owner for the
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Lands appurtenant comprise of

purpose of any business or profession carried on by him, the
any pieces land which are con-
profit of which is chargeable to tax. If the property is used for nected with the building, such as
own business or profession, it shall not be chargeable to tax. garage, garden, etc.
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If the assessee is engaged in the business of letting out of property on

rent, the income earned would be taxable as his business income.
It should be noted that if the house property is held by an assessee

as stock-in-trade of his business, then also the annual value of such
house property shall be charged under the head ‘Income from house
property’.
The process of computation of income from house property is

explained in Table 4.1 below: QUICK TIP
The assessee should be the
Table 4.1: Income from House Property owner of the house property
during the relevant previous
Step 1 Determination of Gross Annual Value (GAV) year. It is immaterial whether or
Step 2 Less: Municipal taxes paid by the owner during the previous year not he continues to be the owner
in the assessment year.
Step 3 Net Annual Value (NAV) = Step 1 – Step 2
Step 4 Less: Deductions under Section 24
1. 30% of NAV
2. Interest on borrowed capital
Step 5 Income from House Property = Step 3 – Step 4

4.2.2 House Property not Chargeable to Tax
Cases where income from house property is not chargeable to tax

under the head ‘Income From House Property’ include:
House property does not include the empty area within the prop-
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.
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.
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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
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vicinity of agricultural land.

The income of property that is held for religious or charitable pur-
poses is exempted from being taxed.
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Property that is used for own business or profession is taxable un-

der the head ‘Income From Business or Profession’.
No tax is charged on the self-occupied property of an assessee.
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 OWNERSHIP (SECTION 27)
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, which are as follows:
Following persons, though not legal owners, are deemed to be owners

of house property for the purpose of chargeability under Sections 22
to 26.

Transfer to spouse {Section 27(i)}: In case of transfer of house

property by an individual to his or her spouse for inadequate con- Know More
sideration, the transferor shall be the deemed owner. If the house property is acquired
from cash being transferred by
Exception – This section is not applicable where the transfer is the transferee to spouse/minor
made in connection with an agreement to live apart. child, the transferor shall not be
treated as deemed owner. How-
Transfer to minor child {Section 27(i)}: In case of transfer of ever, clubbing provisions apply in
house property by an individual to his or her minor child for in- such a case.
adequate consideration, the transferor shall be the deemed owner.
Exception – This section is not applicable where the transfer is
made to a minor married daughter.
The holder of an impartible estate {Section 27(ii)}: The holder
of an impartible estate shall be the deemed individual owner in
respect of all properties comprised in the estate.
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Impartible estate – It refers to a property that is not legally divisi-
ble.
Member of co-operative society/association {Section 27(iii)}: In
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case of allotment or lease of building/part thereof under House
Building Scheme of a co-operative society/association to its mem-
ber, the member shall be the deemed owner. Although the legal
owner of such building/part thereof is the co-operative society/as-
sociation.
A person possessing a property {Section 27(iiia)}: A buyer who is NOTE
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allowed to take possession of a building/part thereof in part perfor-

In the case where the ownership
mance of the contract under Section 53A shall be deemed to be the
title of a property is disputed in
owner. For example, this may happen when the sale consideration a court of law, the Income Tax
is paid by the buyer to the seller, although the property is not yet Department will decide as to
registered in the buyer’s name. who shall be the owner charge-
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able to tax under charging Sec-

A person having rights in the property for 12 years or more tion 22 until the time the court
{Section 27(iiib)}: A person who acquires rights of a building/part gives its order in respect of the
thereof by virtue of transfer by way of lease of 12 years or more suit filed for such property.
shall be the deemed owner.
Exhibit
Composite Rent
At times, the house owner rents out the property along with cer-
tain services or facilities, such as lift, A.C., furniture, electricity,
water, etc. The amount received by the owner of the house in such
a case is called composite rent. The composite rent is broken down
into two components, namely income from house rent and income
by way of providing various facilities. The first component is tax-
able under the head ‘Income From House Property’ and the sec-
ond one is taxable under the head ‘Income From Other Sources’.

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. Which of the following incomes will be charged under the
head ‘Income From House Property’?
a. Building that is located besides an agricultural land
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b. Self-occupied property of an individual
c. Rent received by the owner of a commercial shop by his
tenant
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d. Residential quarters for employees
4. 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.
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Activity
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Look out for at least 4 examples from the real-life situations where
income earned from a property does not come under the gambit of
Sections 22 to 27 of the Income Tax Act, 1961.
ANNUAL VALUE OF HOUSE PROPERTY

4.3
(SECTION 23)
Annual value refers to the amount of money for which a property
owner may rent his property from year to year. The annual value does
not refer to the actual rent received for the property or the munici-
pal value of the property. As stated earlier, annual value of the house
property 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 as follows:
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.

Municipal Value (MV): Municipal value refers to the value deter-

mined by local municipal authorities based on which it collects
municipal taxes. NOTE
Fair Rent of a Property (FR): Fair rent of a property refers to the Municipal taxes are allowed as
a deduction from GAV only when
amount of money that can be expected to be received in a year by they are borne by the assessee
letting a property of similar size in the same locality. (owner) and are actually paid
during the previous year.
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.
According to the Act, the annual value of a property is the value

received after deduction of municipal taxes (if any) paid by the owner.
At a broader level, the annual value of the property may be deter-
mined in just two steps as shown in Figure 4.1:
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Step I: Determine the gross annual value of house property
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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-
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sidered to be the annual value of the house property for all purposes
related to the Income Tax Act.
The Gross Annual Value (GAV) is determined by following the steps

mentioned in Table 4.2:
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Table 4.2: Determination of Gross Annual Value

Step 1 Compare Fair Rental Value with Municipal Value, whichever is
higher
Step 2 Compare Standard Rent with Step 1 value. The lower of the
two is the Expected Rent
Step 3 Compare Expected Rent and Actual Rent
If Actual Rent > Expected Rent, Actual Rent is the GAV
If Actual Rent < Expected Rent owing to the vacancy of the
property, Actual Rent is the GAV
If Actual Rent < Expected Rent owing to any other reason,
Expected Rent is the GAV
Illustration 1: Calculate the GAVs 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 GAVs 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
4. Expected Realisable Rent 24,000 16,000 45,000

(ERR) (`)
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* (higher of 1 or 2, but not
more than 3)
5. Actual Rent Received (`) 24,000 17,000 35,000

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6. GAV (`) 24,000 17,000 45,000
* (higher of 4 or 5)
Therefore, the GAVs of House 1, House 2 and House 3 are ` 24,000;

` 17,000; and ` 45,000; respectively.
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Illustration 2: Mr Ram owns three house properties in Delhi, the par-

ticulars of which are as under:

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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 —
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 Munici- 20,000 60,000

pal Value
Municipal Taxes Paid During 20,000 40,000 40,000

the Year (`)
Calculate the GAV before deductions for each house property.
Solution: Let us calculate the GAV before deductions for each house
property.

House 1: As the house property is let out throughout the previous

year, the GAV shall be determined as per clauses (a) and (b) of Section
23(1) as follows:
Particulars Amount (`)

Calculate the GAV (higher of a and b)
a. Municipal Value or the Fair Rent, 1,20,000 or 1,50,000, whichever
whichever is higher subject to maxi- is 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
GAV 1,30,000
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House 2: 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
Section 23(1) as follows:
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Calculate the gross annual value (higher of a and b)
a. Municipal Value or the Fair Rent, whichever is higher 1,80,000
subject to maximum of Standard Rent (Municipal Value
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(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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GAV 1,40,000
House 3: 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
Section 23(1) as follows:

Calculate the GAV (higher of a and b)
a. Municipal value or the fair rent, whichever is higher 2,00,000
subject to maximum of Standard Rent [Municipal Value
(1,80,000)];
Fair Rent (2,00,000); Standard Rent (–)

b. Actual Rent Received or Receivable (ARR) (25,000 × 9) 2,25,000
GAV 2,25,000

QUICK TIP Self Assessment Questions

If the let-out property is vacant
for part of the year and because
5. Municipal taxes shall be deducted from GAV if they are
of such vacancy, actual rent is a. Paid by the tenant during the previous year
lower than the expected rent,
then the actual rent received/ b. Accrued during the previous year
receivable shall be the GAV.
c. Paid by the owner during the previous year
d. Paid by the tenant or owner during the previous year
6. Rent fixed under the Rent Control Act, 1958 is called
__________.
Activity
Take an example to illustrate how the annual value will be deter-
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mined in case of a house property that remains vacant for part of
the year.
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DEDUCTIONS FROM HOUSE PROPERTY
4.4
(SECTION 24)
For the income chargeable under the head ‘Income from House Prop-
erty’, there are only two deductions, namely:
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1. Standard deduction: 30% of the net annual value of house property

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,
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repairs, electricity, water supply for the house, etc., is higher or

lower.
2. 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 NAV of the house property. The deduction
for interest is allowed on an accrual basis, i.e., it is immaterial
whether the interest has been actually paid or not during the
assessment year.
Interest Attributable to the Period Prior to

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 completed
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 Study
acquisition/construction was completed. In addition, interest will be Hint
aggregated from the date of borrowing till the end of the previous year
Any interest payable on a fresh
prior to the previous year in which the house is completed and not till loan raised to repay the origi-
the date of completion of construction. nal loan taken for the purposes
specified under Section 24 is
The deductions allowable from NAV while computing the income also allowed as a deduction.
from house property are explained in Table 4.3:
Table 4.3: Deductions Allowed from NAV

For let-out property or deemed to be let-out property, following deduc-
tions are allowed:
A Standard Under Section 30% of NAV
Deduction 24(a)
B Interest on Under Section Fully allowed without ceiling
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borrowed capital 24(b) limit
For self-occupied property, only interest on borrowed capital under
Section 24(b) is allowed as a deduction as below:
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A When the loan is Interest on borrowed capital under Section 24(b)
taken for renewal, maximum up to ` 30,000 p.a.
reconstruction or
repair of house
property
B When the loan is 1. The loan is Interest on borrowed capital
taken for construc- taken prior under Section 24(b) maximum
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tion or acquisition to 1.4.99 up to ` 30,000 p.a.

of house property 2. The loan is If the construction or ac-
taken on or quisition of house property
after 1.4.99 is completed within 5 years
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from the end of the financial

year in which the capital was
borrowed, and a certificate is
obtained from the lender speci-
fying the interest payable, then
interest on borrowed capital
under Section 24(b) is allowed
maximum up to ` 2,00,000 p.a.
Otherwise, interest on bor-
rowed capital under Section
24(b) is allowed maximum up
to ` 30,000 p.a.
Pre-construction interest refers to interest for the period prior to the

previous year in which property is acquired or construction is com-
pleted. The deduction of pre-construction interest is allowed in 5
equal installments beginning from the previous year of acquisition
or completion of construction of house property. Interest for the year
in which construction/acquisition is completed and interest for the
subsequent years can be fully claimed in their respective years. Most
importantly, the ceiling limits of interest on borrowed capital, i.e.,

` 30,000, ` 2,00,000 p.a. as specified in the table are inclusive of appor-

tioned pre-construction interest. Hence, these are the maximum per-
missible limits of deduction.
7. The ceiling limit for deduction of interest on capital borrowed

on 1.4.2018 for repairing of self-occupied property is
a. ` 30,000 p.a. b.
` 1,50,000 p.a.
c. ` 2,00,000 p.a. d. No limit
Activity
Find out whether deduction of pre-construction interest is allowed
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in case of repairs or re-construction of house property.
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SPECIAL PROVISIONS OF HOUSE
4.5
PROPERTY
For computation of income from house property, some issues may
arise in respect of arrears of rent received by the assessee at a later
date, co-ownership of property by two or more persons, and determi-
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nation of income of house property self-occupied by the owner.
4.5.1 RECOVERY OF ARREARS OF RENT AND UNREALISED

RENT (SECTION 25A)
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While determining the gross annual value, the actual rent received or
receivable shall not include the amount of unrealised rent (i.e., rent
which is not capable of being realised from the tenant). However, this
is true, provided the below conditions specified under Rule 4 are met:
It is a bona fide tenancy.
The defaulting tenant has vacated the property or compelling
steps have been taken against him to vacate.
The defaulting tenant does not occupy any other house property
of the assessee.
The assessee has taken reasonable steps for instituting legal pro-
ceedings to recover the amount of unpaid rent.
Any amount of unrealised rent subsequently realised from a tenant

or any amount of rent received in arrears from a tenant shall be sub-
jected to tax as follows:
Recovery of such amount shall be taxable in the year of receipt or
realisation.

A deduction of 30% of the amount received or realised shall be

allowed.
The recovery is taxable even if the assessee is no longer an owner
of the property during the financial year of receipt or realisation.
4.5.2 PROPERTY OWNED BY CO-OWNERS (SECTION 26)
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-
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 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
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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
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for own residence.
4.5.3 INCOME FROM SELF-OCCUPIED HOUSE PROPERTY
As per Section 23(2), the annual value of the house property shall be
taken to be Nil in the following cases: Know More
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House property is self-occupied by the assessee for his own resi- In respect of self-occupied or
dence; or unoccupied house property
specified under Section 23(2), no
House property is unoccupied throughout the previous year be- deduction for municipal taxes
shall be allowed.
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cause of the assessee’s employment/business or profession being

carried out at some other place. He resides at such other place in a
building not belonging to him.
This benefit of Nil annual value can be taken only if no other benefit is
derived by the owner from such house property.
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Section 23(4) states that if more than two house properties are self-oc- Hint
cupied or unoccupied, then the assessee can avail the benefit of Nil
If one portion of house
annual value in respect of only two house properties chosen at his own property is self-occupied
option. The other house properties shall be deemed to be let out prop- and another portion is let out
erties and GAV shall be computed with respect to the expected rent. during the previous year, the
income from house property
The deductions under Section 24 in case of self-occupied house prop- will be computed separately
erty will be computed as explained in Table 4.3 referred to in Section for the let-out portion and the
self-occupied portion.
4.4: Deductions from House Property.
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
is allowed depending upon the case.

If a house property is let out for a part of the year and self-occupied for
the remaining part of the year, then the GAV will be determined as per
normal rules as shown in Table 4.2. Expected rent for the whole year is
compared with actual rent for the let-out period. If actual rent is more
than the expected rent, actual rent shall be the GAV. If actual rent is
less than the expected rent, expected rent shall be the GAV.
8. If the assessee has self-occupied two house properties, the

benefit of Nil annual value will be available for both of them.
(True/False)
9. During the previous year 2020-2021, Seema received arrears
of rent of ` 30,000. The amount taxable under Section 25A
shall be
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a. ` 30,000
b. ` 21,000
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c. ` 15,000
d. ` 20,000
10. For determining income from house property, unrealised rent
is
a. To be deducted from actual rent
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b. To be deducted from expected rent

c. To be deducted from annual value under Section 24
d. To be deducted from both actual rent and expected rent
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11. In case of property owned by co-owners, if the share of co-

owners is not definite, then the co-owners shall be assessed as a/
an ____________.
Activity
List the differences between the calculations of annual value in

case of self-occupied property and let-out properties.
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The owner of a house property (in whose name the property
stands) is considered as the assessee for the purpose of taxation.
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’.

For taxing an income under the head ‘Income from House Proper-
ty’, three conditions must be fulfilled, which are as follows:
The property must consist of buildings and lands appurtenant
thereto.
The assessee must be the owner of such house property.
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
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Act.
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/
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her [Actual rent received or receivable (ARR)].
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
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previous year from the gross annual value calculated in Step I.

For the income chargeable under the head ‘Income from House
Property’, there are only two deductions, namely standard deduc-
tion and interest on borrowed capital.
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Key Words
Actual rent: Actual rent received/receivable is a vital cause

in establishing the annual value of a property
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 of the Income Tax Act
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 ob-
tain a rent higher than the standard rent set under the Rent
Control Act

? 4.7 Descriptive Questions

1. Explain three essential conditions for taxing under head ‘Income
from House Property’.
2. Describe the concept of a 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’?
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Topic Q. No. Answer
Chargeability of Income 1. d. either a or b
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from House Property
2. Section 22
3. c. Rent received by the owner
of a commercial shop by his
tenant
4. deemed
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Annual Value of House Prop- 5. c. Paid by the owner during the

erty (Section 23) previous year
6. Standard rent
Deductions from House 7. a. ` 30,000 p.a.
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Property (Section 24)

Special Provisions of House 8. False
Property
9. b. ` 21,000
10. a. To be deducted from actual
rent
11. Association of Persons (AOP)

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
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 Chargeability of 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 Chargeability of 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 GAV; and
Step II: From the GAV computed in Step I, deduct Municipal
Tax actually paid by the owner during the previous year. Refer to
Section 4.3 Annual Value of House Property (Section 23)
4. In respect of the ‘Income from House Property’, an assessee can
claim two deductions: standard deduction and the interest paid
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 4.4 Deductions
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from House Property (Section 24)

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Suggested Readings
Singhania, Vinod, K., & Singhania, Monica, Students’ Guide to
Income Tax. New Delhi: Taxmann Publications Pvt. Ltd.
Chandra, Mahesh, Goyal, S.P., & D.C. Shukla, D.C., Income Tax
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Law and Practice. Delhi: Pragati Prakashan.
e-References
Business.gov.in. (2014). Business Portal of India: Taxation: Taxa-
N
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>
Rent Can Be Taxed On Notional Basis – Karvy. (2018). Karvy.com.
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 Profits and Gains of Business or Profession (Section 28)
Activity
5.4 Computation of Income from Profits and Gains of Business or Profession
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(Section 29)
Activity
5.5 Deductions Expressly Allowable under Section 30-43D
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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 the Concept of
Block of Assets (Section 32)
5.5.4 Expenditure on Scientific Research (Section 35)
5.5.5 Other Deductions under Section 36(1)
5.5.6 General Expenditure for the Purpose of Business or Profession
(Section 37)
Activity
5.6 Amounts not Deductible under Section 40
5.6.1 Section 40A, Section 40A(2), Section 40A(3) and Section 43B
Activity

CONTENTS
5.7 Summary
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DISALLOWANCE OF EXPENDITURES ON WHICH TAX IS

NOT DEDUCTED AT SOURCE
Section 40(a)(ia) of the Income Tax Act, 1961 makes certain deduc- Case Objective
tions from profits or gains of business or profession to be inadmis-
sible, if tax required to be deducted on specified payments has not provisions relating to
been deducted by the assessee. When tax is deductible at source disallowance of certain
on any sum payable to a resident under Chapter XVII-B during expenditure while computing
the previous year, 30% of such sum shall be disallowed if: business or professional
income.
Such tax has not been deducted at source, or
Such tax has been deducted but has not been paid or remitted
to the Government on or before the due date specified under
Section 139(1).
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In cases where tax is deducted in any subsequent year or has been
deducted during the previous year but paid after the due date,
then 30% of such payment shall be allowed as a deduction of the
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previous year in which such payment is made.
Mr Gajendra (a resident individual) having a turnover of ` 99 lakhs,

incurred certain expenditures during the year ended 31.3.2020,
which shall be disallowed by the Income Tax Department while
computing his business income for the A.Y. 2021-2022. These are
as follows:
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Expenditure Allowed/ Reason

Disallowed
Royalty paid to 30% of The tax was deducted at source by
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Mr Bani, a resi- Expenditure Mr Gajendra during the P.Y. 2020-

dent, during the disallowed 2021, but the same was not paid or
P.Y. 2020-2021. deposited by 31st July/30th Septem-
TDS is deduct- ber, 2021. The tax was paid after
ed but not paid the due date. Therefore, 30% of
before the due this expenditure will be disallowed
date. for computing the income of A.Y.
2021-2022, but will be allowed for
computing the income of the year
in which the payment is made, i.e.,
P.Y. 2020-2021/A.Y. 2021-2022.
Payment of sal- 30% of Section 192 requires TDS to be
aries during the Expenditure deducted by all assessees from the
P.Y. 2020-2021 to disallowed salary paid to employees, irre-
resident indi- spective of the assessees’ turnover.
vidual payees While computing the income for
without the de- A.Y. 2021-2022, failure to deduct
duction of tax. TDS will result in disallowance of
30% of the amount of salaries paid
without deduction of tax.

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 under Sec-
tion 30-43D
>> Describe amounts not deductible under Section 40
5.1 INTRODUCTION
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Quick Revision In the previous chapter, you studied the concept of income from house
property. In this chapter, we will discuss profits and gains of business
or profession. Under Sections 28 to 44DB of the Income Tax Act, 1961,
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we will discuss the chargeability of profits and gains of business or
profession and the scope of income under this head.
The chapter begins with a discussion on the general principles of busi-

ness and profession. Next, the chapter explains the incomes charge-
able under the head ‘Profits and Gains of Business or Profession’. In
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addition, the chapter discusses the computation of income from busi-

ness or profession. The chapter also explains deductions expressly
allowable under Section 30-43D. Some other important topics covered
in the chapter are amounts not deductible under Section 40, which
are not allowed to be claimed as a deduction by the assessee while
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computing his/her income from business or profession.
GENERAL PRINCIPLES OF BUSINESS

5.2
AND PROFESSION
Profits 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 the termi-
nologies 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
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 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
in such a manner that ‘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 form of money other than cash, the cash equivalent
must be taken as the value of income received in kind on the date
of receipt.
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1. ____________ can be defined as any job requiring some

thought, skill and expert knowledge.
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2. Profit is recognised in terms of money or money’s worth.
(True/False)
3. When profit is realised in any form of money other than cash,
the cash equivalent must be taken as the value of __________
received in kind on the date of receipt.
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Activity
Using the Internet, find out the share contributed by businesses/

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professions towards the national income of India. Include only the

latest relevant data.
PROFITS AND GAINS OF BUSINESS OR

5.3
PROFESSION (SECTION 28)
Section 28 is the charging section of profits and gains of business or
profession. The items of income which are chargeable to tax under the
head ‘Profits and Gains of Business or Profession’ include the follow-
ing as discussed in Table 5.1:
Table 5.1: Various Items Chargeable

under this Head
Nature of Income Explanation
Profits and gains Any profits and gains arising from any busi-
ness or profession carried on by the assessee
during the previous year.

Table 5.1: Various Items Chargeable

under this Head
Nature of Income Explanation
Compensation due to or Any compensatory payment due to or re-
received in connection ceived by a person in relation to termination/
with specified cases under modification of his management in the affairs
Section 28(ii) of an Indian company, termination/modifi-
cation of his office in the affairs of an Indian
company, termination/modification of condi-
tions of any contract related to his business,
etc.
Income earned by trade Any income derived by a professional, trade
or similar association or similar association from some specific ser-
vices rendered for the members.
Export incentives Export incentives derived by an assessee car-
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rying on an export business, such as profit on
sale of import entitlements, customs or excise
duty repayable as a drawback, cash assistance
against exports, and profit on transfer of du-
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ty-free replenishment certificate.
Benefits or perquisites Value of benefits or perquisites arising from
from business or profes- business or profession, whether such perqui-
sion sites are convertible into money or not.
Interest, bonus, commis- Any interest, bonus, commission, salary or
sion, salary or remunera- remuneration due to or received by a part-
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tion received by partner ner from a firm is taxable in his hands to the
extent it can be claimed as a deduction in the
hands of the firm under Section 40(b).
Sum received under Key- Any sum received under Keyman Insurance
man Insurance Policy Policy including sums allocated by way of
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bonus.
Sum received on capital Any sum, whether received or receivable, in
asset being discarded or relation to a capital asset being transferred,
demolished demolished, destroyed or discarded, for
which whole expenditure has been allowed as
deduction under Section 35AD.
FMV of inventory The fair market value of inventory as on the
date on which it is treated as or converted
into a capital asset.
Sum received under an Any sum, whether received or receivable, in
agreement for not carry- respect of an agreement for not carrying out
ing out an activity any activity related to a business or profes-
sion, or for not sharing any know-how, copy-
right, patent, commercial right, etc.
Speculation Business
If speculative transactions are carried on by the assessee, which con-

stitute a business, then such business has to be considered as a dis-
tinct and separate business for the purpose of computation of income
under the head ‘Profits and Gains of Business or Profession’. Here, a

speculative transaction means a transaction under which a contract

for sale or purchase of commodities including shares and stocks is Know More
periodically and ultimately settled through modes other than actual The income chargeable under
delivery or transfer of such commodities or shares. the head ‘Profits and Gains
of Business or Profession’ is
Moreover, in case where both speculative and non-speculative trans- computed in accordance with
actions are carried out by the assessee on a composite basis, it is imper- the method of accounting
ative to determine the income or loss from such speculative business regularly followed by the
assessee, i.e., cash basis or
and non-speculative business separately and distinctly. accrual basis of accounting.
4. ___________ incentives derived by an assessee carrying on an

export business are chargeable to tax under the head ‘Profits
and Gains of Business or Profession’.
QUICK TIP
Under Section 35AD, 100%
5. Speculation business has to be considered as a distinct and deduction is allowed in respect
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of capital expenditure incurred
separate business for the purpose of computation of income by certain businesses specified
from business or profession. (True/False) therein.
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Activity
Meet three people from different businesses or professions and list

down their various sources of incomes which are taxable under law
while assessing their taxability of business or professional income.
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COMPUTATION OF INCOME FROM

5.4 PROFITS and GAINS OF BUSINESS or
PROFESSION (SECTION 29)
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While computing income under the head ‘Profits 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 do-
ing the business himself 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,
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 businesses/profes-
sions carried out by the assessee during the previous year: The
net outcome of any business or profession carried out by an asses-
see is calculated separately. However, when tax is imposed, out-
comes 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 a profit, it will be taxed with other busi-

ness incomes. On the other hand, if there is a loss, it can be set

off against the profit of speculation business and not with other
business’s profit.
Incurrence of expenditure: For claiming deductions under this
head, expenditure should have been incurred during the previous
year and incurred for the purpose of business or profession. Con-
tingent expenses and expenses which are incurred prior to setting
up of business are not allowed as deductions unless specifically
prescribed under the Act.
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 an expectation of profit, tax
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cannot be levied only on notional basis or assumption. Therefore,
profit can be taxed only if it actually occurs.
Business/profession may be legal or illegal: The income from le-
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gal as well as illegal business is taxable under this head.
Business/professional 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
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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
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to 43D. Apart from specific allowances and deductions stated in Sec-

tions 30 to 36, the act also permits the allowance of items of expenses
under residuary Section 37(1) (which extends the allowance to items
of business expenditure not covered by Sections 30 to 36).
6. For claiming deduction of expenditure from taxable income

of business or profession, the expenditure should have been
incurred during the previous year for the purpose of business
or profession. (True/False)
7. Tax is imposed only on the _____________ year’s real earned
profits.
Activity
Using the Internet, search for the manner of computation of

income of an assessee who has both speculative business income
and non-speculative business income.

DEDUCTIONS EXPRESSLY ALLOWABLE

5.5
Under Section 30-43D
According to Section 29 of the Act, the income from profits and gains
of business and profession is calculated after accounting for allow- QUICK TIP
ances/disallowances as per provisions of Sections 30-43D. Let us now If certain expenditure is incurred
study provisions of Sections 30-43D in the upcoming text. to restore an existing asset to
its original condition, then such
expenditure shall be treated
5.5.1 DEDUCTION FOR RENT, RATES, REPAIRS AND as current repairs if it does not
INSURANCE OF BUILDING (SECTION 30) change the capacity or enhance
the efficiency of the asset
beyond its original efficiency.
An assessee is allowed a deduction for any amount paid by him in rela-
tion to rent, rates, repairs, taxes and insurance for buildings, provided
the buildings are used for the purpose of business or profession.
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However, no expenditure is allowed as a deduction if the expenditure Study
is of capital nature. Hint
Where the assessee has occupied the premises as a tenant, then the If the premises are used partly
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for business purposes and
amount of repair can be claimed as a deduction only if the assessee partly for other purposes, then
has undertaken to bear the cost of such repairs to the premises. deduction would be allowed
only to the proportionate
If some part of the premises is sub-let by the assessee, then the amount amount of expenses
of deduction under this section would be limited to rent paid by the attributable to the part of
assessee as reduced by rent recovered from sub-tenant. premises used for business.
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5.5.2 DEDUCTION FOR REPAIRS AND INSURANCE OF

MACHINERY, PLANT AND FURNITURE (SECTION 31)
Section 31 of the Act relates to the deductions in respect of expenses

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incurred on the repairs and insurance of machinery, plant and furni-

ture used for the purpose of business or profession. As per this Sec-
tion, following deductions are allowed:
amount spent on current repairs NOTE
If the plant, machinery and
amount spent on premium paid with respect to insurance against furniture are hired, the rent
risk of damage or destruction payable is not deductible under
Section 31 but under Section
amount paid on account of current repairs shall not include any 31(1).
expenditure in the nature of capital expenditure
5.5.3 DEDUCTION FOR DEPRECIATION INCLUDING the

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
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.

As per the Act, there are two methods for calculating the value of
depreciation. They are the Straight Line Method (SLM) and the Writ-
ten Down Value (WDV) Method.
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-
NOTE ciation calculations under the income tax barring the power genera-
A special deduction under tion and distribution companies which use the SL method.
Section 32AD may also be
allowed in cases where Depreciation under Section 32(1) is mandatory. It means that even if
investment is done in new the assessee does not claim deduction in respect of depreciation, it
plant and machinery in notified
backward areas in certain will still be allowed while calculating the total income of the assessee.
specified states. In such a case, the assessing officer must allow depreciation as per the
law.
For a thorough understanding of depreciation and its computation,
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you must be aware of the following concepts:
(A) Conditions for claiming depreciation
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(B) Block of assets [Section 2(11)]
(C) Actual cost [Section 43(1)]
(D) Written Down Value (WDV) [Section 43(6)]
(E) Rates of depreciation [Appendix I (Rule 5)]
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(F) Types of depreciation

(G) Unabsorbed depreciation [Sec. 32(2)]
Let us now discuss these concepts in detail:

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(A) Conditions for claiming depreciation: For claiming deduction in

respect of depreciation, following conditions must be met:
Assessee 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
purpose of carrying on business or profession, any capital
expenditure 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 way of renovation
or extension of, or improvement to, the building, the provisions
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
capitalising the value equivalent to cash price of the asset.
Assessee must use the asset for the purpose of carrying on the
business or profession. The asset must be used for the purpose
of business or profession of assessee. In case where the asset is
used for both professional and personal purposes, the portion be-
ing 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.
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No depreciation can be claimed on land.
Asset must fall under the eligible class of assets which includes:
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Tangible assets, such as buildings, machinery, plant and furni-
ture.
Intangible assets, such as know-how, patents, copyrights, trade-
marks, licenses, 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.
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Illustration 1: Mirabai Pvt. Ltd. manufactures the fuel injection

systems. The company has constructed restrooms and a gym for its
employees. Can the restrooms and gym be considered for claiming
depreciation?
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Solution: Yes, Mirabai Pvt. Ltd. can claim deduction with respect
to depreciation of restrooms and gym under Section 32 because any
asset (irrespective of whether it is earning income or not) that helps in
business or profession can be claimed for deduction.
(B) Block of assets [Section 2(11)]: As per the Income Tax Act, depre-
ciation is allowed on the block of assets and not on individual assets.
The term ‘block of assets’ refers to a group of tangible assets or a
group of intangible assets in respect of 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 include know-how, patents, copyrights,
trademarks, licenses, franchises or any other business or commercial
rights of similar nature, in respect of which the same percentage of
depreciation is prescribed. Know-how refers to any information or
technique that may assist in the manufacturing or processing of goods
or in the working of a mine, oil-well or other sources of mineral depos-
its. Each block is differentiated as consisting of tangible and intangi-
ble assets on the basis of its unique rate of depreciation.

(C) Actual cost [Section 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, 2020 (Assessment Year 2021-2022), 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 clearing system and such payment exceeds
` 10,000 in a day, then such expenditure will be ignored for determin-
ing 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.
Study
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(D) Written Down Value (WDV) [Section 43(6)]: The percentage of
Hint depreciation as prescribed for each block of assets is applied on WDV
According to Section 43(6), computed at the end of the previous year relevant to the assessment
Written Down Value refers to year. The WDV can be calculated by following certain steps as shown
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the following:
in Table 5.2:
• In case of assets
acquired by the assessee
during the previous year, TABLE 5.2: CALCULATION OF WRITTEN
WDV is the actual cost to DOWN VALUE OF AN ASSET
the assessee.
• In case of assets
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acquired by the assessee Opening value of the block of assets at the beginning of the XXX
before the previous previous year
year, WDV is the actual Add: Actual Cost of assets (P&M) acquired during the previ- XXX
cost to the assessee as ous year and belonging to the same block of assets
reduced by the aggregate
Total XXX
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of all deductions actually

allowed in respect of Less: Monies payable to the assessee with respect to any
depreciation. asset in the block which is sold, discarded, demolished,
destroyed, together with scrap value (if any)
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
For a block of assets, there is little or no depreciation in the following

cases:
Ifa block exists, and the written down value for the block is zero.
The block value below zero implies short-term capital gain.
If a block ceases to exist, but the written down value still exists.
The block value is considered to be a short-term capital loss.
If the 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 2021-2022, the maximum ceiling of depre-

ciation eligible for claim on assets has been restricted to 40% of the
WDV. The block of assets and depreciation rates applicable for them
are shown in Table 5.3:
TABLE 5.3: RATES OF DEPRECIATION APPLICABLE FOR

VARIOUS ASSETS
A. TANGIBLE ASSETS
Asset Class Asset Type Depreciation
Rate
S
1. Buildings Residential buildings except hotels 5%
and boarding houses
Hotels and boarding houses 10%
Purely temporary erections such as 40%
IM
wooden structures
2. Furniture and Furniture – Any furniture/fittings 10%
fittings including electrical fittings and air
conditioners
3. Plant and ma- Motor car, motor cycle, bike, scooter 15%
chinery other than those used in a business of
M
running them on hire, mobile phone

(General rate for plant and machinery
is 15%)
Motor buses/taxies/lorries used in a 30%
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business of running them on hire

Computer, laptop, computer software, 40%
printer, scanner, UPS and other pe-
ripheral devices
Books owned by assessee, carrying on 40%
profession being annual publications
profession not being annual publica-
tions
business in running lending libraries
Energy-saving devices, water-treat- 40%
ment plant, etc.
B. INTANGIBLE ASSETS
Intangible assets Know-how, patents, copyrights, trade- 25%
marks, licenses, franchises or any
other business or commercial rights of
similar nature

Illustration 2: An assessee determines the WDV of a particular trade-

NOTE mark as ` 2,00,000. Find the amount of depreciation charged using the
To derive the income tax depreciation rate as applicable.
depreciation, simply multiply
the WDV value of the block of Solution: The rate of depreciation for intangible assets is 25%. There-
asset with depreciation. This fore, the depreciation charged is equal to 25% of WDV of trademark,
depreciation is deducted from
the asset and also charged to
i.e., 25% of ` 2,00,000 which comes down to ` 50,000.
the P&L Account.
(F) Types of depreciation
Two types of depreciation allowance that are allowed under the

Income Tax Act are as follows:
1. Normal depreciation for the 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.
S
2. Additional depreciation: Even after providing for the normal
depreciation, additional depreciation of 20% (or 35% in some
prescribed cases) of the actual cost shall be allowed for new
plant and machinery acquired and installed by an assessee who
IM
is engaged in:
i. manufacturing or production of articles or things; or
ii. in the business of generation or generation, transmission and
distribution of power.
M
CASES WHERE ADDITIONAL DEPRECIATION IS NOT ALLOWED

Ships and aircraft
Second-hand machinery (machinery used earlier by other persons
within or outside India)
N
Any machinery installed in an 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, the assessee can claim only 50% of the total deprecia-
tion as deduction. Also, this restriction is also applicable in the 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 3: The written down value of plant and machinery of IDD

Ltd. on 1st April, 2020 is ` 40 crores. IDD purchases new plant and
machinery worth ` 6 crores on 25th April, 2020. The purchase includes

purchasing second-hand machinery equipment from the USA

amounting to ` 2 crores. The company wants to increase its capac-
ity from 1,200 tones per annum to 1,500 tones per annum. The new
machinery commenced production from 1st December, 2020. Calculate
the amount of depreciation allowed for A.Y. 2021-2022.
Solution:
COMPUTATION OF ALLOWABLE DEPRECIATION

Particulars Amount (in `) Amount (in `)
Opening WDV 40,00,00,000
Add: Actual cost of assets (P&M) ac- 6,00,00,000
quired during the previous year and
belonging to the same block of assets
Total 46,00,00,000
S
Less: Depreciation of the year
a. Depreciation on opening block 6,00,00,000
@ 15% of 40,00,00,000
IM
b. Depreciation on additional P&M 45,00,000
(Period of usage less than 180 days,
i.e., from 1st December, 2020 till 31st
March, 2021)
@ 15% of 50% of 6,00,00,000
Total 6,45,00,000
M
Closing WDV 39,55,00,000
Please note that the second-hand machinery equipment purchased

from the USA amounting to ` 2 crores is not an eligible asset for the
purpose of computation of Additional Depreciation. Therefore, the
N
cost of eligible assets = ` 4 crores. And the additional depreciation on

eligible assets @ 10% = ` 40 lakhs.
(G) Unabsorbed depreciation [Section 32(2)]: If, owing to depreci-

ation, 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 assessee should set off the losses
brought forward as follows:
1. Adjust all the current year depreciations.
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 for the income from salary and capital gains.
Illustration 4: Calculate unabsorbed depreciation if you are given the

following information:
Profit from business before depreciation = ` 7,00,000; Income from

capital gains = ` 2,00,000; and Depreciation = ` 12,00,000
Solution:
Profit from business before depreciation = ` 7,00,000
Depreciation = ` 12,00,000
S
Income from capital gains = ` 2,00,000 (cannot be adjusted against
unabsorbed depreciation)
IM
Unabsorbed depreciation = ` 5,00,000
5.5.4 EXPENDITURE ON SCIENTIFIC RESEARCH

(SECTION 35)
Section 35 provides for deduction in respect of any expenditure of sci-

entific research incurred by the assessee in relation to his business or
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profession. Various amounts of deductions allowed under Section 35

are discussed in Table 5.4:
Table 5.4: Expenditure on Scientific Research

N
Nature of Payment eligible for deduction Deduction allowed

Expenditure
Inhouse scientific research ex- 100% of the expend-
penditure of revenue nature is iture is allowed as
incurred by the assessee related deduction
to his business
Inhouse Scientific Research
Inhouse scientific research 100% of the expend-

expenditure of capital nature is iture is allowed as
incurred by the assessee related deduction (except
to his business expenditure on ac-
quisition of land and
building)
Expenditure on an approved in- 150% of the expend-
house research and development iture is allowed as
facility incurred by a compa- deduction (except
ny engaged in the business of expenditure on ac-
bio-technology or manufacturing/ quisition of land and
production of an article other building)
than those specified in the Elev-
enth Schedule

Nature of Payment eligible for deduction Deduction allowed

Expenditure
Amount paid by the assessee to 100% of the expend-
an approved Indian company for iture is allowed as
the purpose of scientific research deduction
Amount paid by the assessee 100% of the expend-
to a notified approved college/ iture is allowed as
research association/university/ deduction
Contribution to Outsiders
other institutions for the purpose

of social science or statistical
research
Amount paid by the assessee 150% of the expend-
to a notified approved college/ iture is allowed as
research association/university/ deduction
other institutions for the purpose
S
of scientific research
Amount paid by the assessee to 150% of the expend-
an approved National Laborato- iture is allowed as
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ry/IIT/university/other specified deduction
persons for the purpose of scien-
tific research undertaken under a
prescribed programme
Know More
5.5.5 OTHER DEDUCTIONS under Section 36(1) According to Section 43(4)(i),
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scientific research means

This Section provides for deductions in respect of certain specific activities undertaken for the
expenses. The items of expenditure and their corresponding condi- extension of knowledge in
tions for claiming deductions under Section 36(1) while computing the fields of natural or applied
sciences including animal
income from business or profession are discussed in Table 5.5:
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husbandry, agriculture or
fisheries.
Table 5.5: Other Deductions
Section Nature of Expenses Quantum of Deduction Allowable
36(1)(i) Insurance premium Whole amount is allowable
paid against risk of
damage and destruction
of stocks or stores of the
business or profession
36(1)(ib) Insurance premium Whole amount is allowable
paid by an employer
otherwise than by way
of cash to secure an
insurance cover on the
health of his employees
36(1)(ii) Any sum paid by an Whole amount is allowable subject to
employer by way of Section 43B. However, such amount
bonus or commission to should not have been otherwise paya-
employees ble as profits or dividends if it had not
been paid as bonus or commission

Section Nature of Expenses Quantum of Deduction Allowable
36(1)(iii) Interest payment on Whole amount is allowable. However,

borrowed capital for the interest paid on capital borrowed for
purpose of business or acquisition of an asset for the period
profession beginning from the date of borrowing
of capital to the date on which the as-
set was first put to use is not allowed
as a deduction
36(1)(iv) Employer’s contribution Whole amount is allowable subject to

by the assessee to Rec- Section 43B
ognised Provident Fund
or approved superannu-
ation fund
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36(1) Employer’s contribution Deduction of amount is allowable to
(iva) by the assessee towards the extent of 10% of salary of employ-
a pension scheme re- ee
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ferred to under Section
80CCD
36(1) Bad debts written off Whole amount is allowable subject to

(vii) as irrecoverable in the following conditions:
accounts of the assessee 1. Debt is incidental to the business
of the assessee
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2. It has been taken into account

while computing the business
income or represents money lent
in the ordinary business of bank-
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ing or money lending

3. It has been written off in the books
36(1)(ix) Bona fide expenditure Whole amount is allowable. Howev-

incurred by a company er, expenditure of capital nature will
on promoting family be allowed in five equal instalments
planning amongst its beginning from the previous year in
employees which the expenditure was incurred
36(1) Any amount of Secu- Whole amount is allowable provided

(xv) rities Transaction Tax the income arising from such taxa-
(STT) paid ble securities transactions has been
Study included in the income of business or
Hint profession
Salary for the purpose of
Section 36(1)(iva) includes 36(1) Any amount of Com- Whole amount is allowable provided
dearness allowance if (xvi) modities Transaction the income arising from such taxable
provided in the employment Tax (CTT) paid commodities transactions has been
terms for retirement benefits, included in the income of business or
but excludes all other profession
allowances.

5.5.6 GENERAL EXPENDITURE FOR the PURPOSE OF

BUSINESS or PROFESSION (SECTION 37)
This Section allows for claiming deductions in respect of residuary

expenses. To claim deduction under Section 37(1), following condi-
tions should be satisfied:
Expenditure should not be of the nature described under Section
30 to 36.
Expenditure should not be capital expenditure.
Expenditure should not be assessee’s personal expenditure.
Expenditure should have been incurred in the previous year.
Expenditure must have been incurred in respect of business of an
assessee.
S
Expenditure must not have been incurred on any illegal or prohib-
ited activity.
Expenditure incurred by an assessee on the activities relating to
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corporate social responsibility referred to in Section 135 of the
Companies Act, 2013 shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or pro-
fession.

M
8. _______________ means depletion in real value of assets over a

period of time.
9. The term ______________ means a group of assets falling in
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the 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.
11. If a particular expenditure is of the nature as described under
Section 36, then deduction can be claimed under Section
37(1). (True/False)
12. Deductions under Section 36(1) include the amount of any
__________ paid in respect of insurance against risk of damage
or destruction of stocks or stores used for the purposes of
business or profession.
13. Bonus or commission paid to employees would be allowed as
deduction subject to Section ________.
Activity
Visit some manufacturing units and discuss the depreciation

method adopted by them for their assets.

AMOUNTS NOT DEDUCTIBLE Under

5.6
Section 40
There are certain provisions under the Income Tax Act which hinder
an assessee from claiming deduction of expenses while computing his
income from business or profession if certain prescribed conditions
are not fulfilled. The relevant sections of disallowance are discussed
as follows:
Section 40(a) – Disallowance of expenses for all assessees
While computing the business income in the hands of any assessee,

following expenses are not deductible as shown in Table 5.6:
Table 5.6: Disallowance of Certain Expenses
S
Section Nature of Expenses Quantum of Deduc-
tion Allowable/Dis-
allowable
IM
40(a)(i) Interest, royalty, fees for technical ser- Whole amount is
vices or other sums payable outside In- disallowable. Howev-
dia or to a non-corporate non-resident/ er, such sum shall be
foreign company in India, on which allowed in the pre-
TDS has not been deducted or after vious year in which
deduction has not been paid within the such TDS is paid
due date specified under Section 139(1) subsequently
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40(a)(ia) Any sum payable to a resident in India, 30% of such amount

on which TDS has not been deducted is disallowable.
or after deduction has not been paid However, 30% of such
within the due date specified under sum shall be allowed
N
Section 139(1) in the previous year

in which such TDS is
paid subsequently
40(a)(ii) Any sum paid on account of income Whole amount is
tax on profits and gains of business or disallowable
profession
40(a)(iii) Any amount chargeable under the Whole amount is
head ‘Salaries’ payable outside India disallowable
or to a non-resident in India, on which
TDS has neither been deducted nor
paid
40(a)(iib) Any amount of license fee, royalty, ser- Whole amount is
vice fee or any other fee levied exclu- disallowable
sively on or appropriated from a State
Government Undertaking by the State
Government
40(a)(v) Tax paid by an employer on non-mon- Whole amount is
etary perquisites which are exempt disallowable
under Section 10(10CC) in the hands of
employees

Section 40(b) – Disallowance in case of Partnership Firms or LLPs
While computing the business income of a partnership firm or LLP,

following amounts are inadmissible and not allowed to be claimed as
a deduction in the hands of the firm:
Payment of interest to a partner is not deductible. However, de-
duction shall be allowed only if all the following conditions are sat-
isfied:
It is authorised by and in accordance with the terms of part-
nership deed.
It relates to period falling after the date of partnership deed.
The amount of admissible deduction is restricted to the amount
calculated @ 12% simple interest p.a.
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Payment of salary, commission, bonus or any remuneration to a
partner is not deductible. However, deduction shall be allowed
only if all the following conditions are satisfied:
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It is authorised by and in accordance with the terms of part-
nership deed.
It relates to period falling after the date of partnership deed.
The payment is made to a working partner.
The amount of admissible deduction of remuneration is re-
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stricted to the below-mentioned prescribed amounts, i.e.,
Book Profits Quantum of Remuneration Deduction

as a Percentage of Book Profits
On first ` 3 lakhs of book prof- Higher of ` 1,50,000 or 90% of book
N
its or in case of loss profits

On balance book profits 60% of book profits
Section 40(ba) – Disallowance in case of Association of Persons

(AOP) or Body of Individuals (BOI)
While computing the business income of AOP or BOI, any interest,

salary, commission, remuneration or bonus paid by AOP or BOI to its
members shall not be allowed as a deduction.
5.6.1 SECTION 40A, SECTION 40A(2), SECTION 40A(3) AND

SECTION 43B
Section 40A – Expenses not deductible in certain circumstances
Some inadmissible expenses are disallowable either on account of

non-fulfilment of prescribed requirements or due to the reason of
exceeding certain limits specified. The circumstances where certain

payments or expenses are not allowed to be deductible are discussed

as follows:
Section 40A(2) – Disallowance of unreasonable expenditure

If any expenditure has been incurred by an assessee and in respect of
which payment is made to a related person or entity, then such pay-
ment shall be disallowed under Section 40A(2) to the extent to which
it is considered excessive or unreasonable by the Assessing Officer. In
other words, any payment made by an assessee for goods or services
rendered or facilities provided by related parties is not allowed as a
deduction subject to the extent that the assessing officer considers it
unfair. Some of the examples of related persons in this case are as
shown in Table 5.7:
Table 5.7: Related Persons Specified in relation

Know More
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to Payment made by Assessee
For purposes of Section
Payment made by Payment made to Related Person
40A(2), relative in relation to
an individual includes spouse, Assessee
brother, sister or any lineal Individual A relative of the individual
IM
zz
ascendant or descendant of the
individual.
zz A person in whose business or profession the indi-
vidual or his relative has a substantial interest
Firm zz A partner of the firm or any relative of such partner
zz A person in whose business or profession the part-
ner or his relative has a substantial interest
M
HUF or AOP zz A member of the association or any relative of such

member
zz A person in whose business or profession the mem-
ber or his relative has a substantial interest
N
Company zz A director of the company or any relative of such

director
zz A person in whose business or profession the di-
QUICK TIP rector or his relative has a substantial interest
A person is said to have a All assessees zz Any individual who has a substantial interest in
substantial interest in the the business or profession of the assessee; or any
business/profession of the relative of such individual
assessee when he holds 20%
or more voting power (owner of zz A company/firm/HUF/AOP whose director/part-
equity shares) or is beneficially ner/member has a substantial interest in the busi-
entitled to 20% or more profits in ness or profession of the assessee, or any director/
the business/profession of the partner/member of such entity, or any relative of
assessee. such director/partner/member
Section 40A(3) and Rule 6DD – Disallowance of payments made

otherwise than by specific modes
As per Section 40A(3), if both the following conditions are satisfied,
the entire expenditure made by an assessee shall be disallowed:
1. Payment is made otherwise than by account-payee cheque or
account-payee bank draft or through electronic clearing system
of a bank account, and

2. The aggregate of payment or payments made to a person in one

single day exceeds ` 10,000.
However, in case where payment is made by assessee to transport

operators for plying/leasing/hiring goods carriages, the limit of `
10,000 should be read as ` 35,000.
Moreover, according to Section 40A(3A), if an expenditure had been

claimed as a deduction on accrual basis in a previous year and the
payment of such expenditure qualifies for the provisions of Section
40A(3) in the subsequent previous year, then such payment/aggregate
payments shall be deemed to be the profits and gains of the business
or profession and shall be taxable in the subsequent previous year to
cancel the deduction as claimed earlier.
No disallowance under Section 40A(3) or 40A(3A) is attracted if such
S
payment/aggregate of payments otherwise than by an account-payee
cheque or bank draft is made in cases and circumstances as covered
under Rule 6DD. The cases of expenses covered under Rule 6DD are
as follows:
IM
Payment to RBI, SBI, LIC, Cooperative Bank or Primary Agricul-
tural Credit Society
Payment required to be made in legal tender to the Government
Payment made by letter of credit arrangements of bank, telegraph-
ic or mail transfer of bank, credit card, debit card, bills of exchange
M
payable to bank, electronic clearing system of bank, or book ad-

justments in bank accounts
Payment made to adjust a liability incurred by a payee in relation
to goods or services rendered by the assessee to such payee
N
Payment made to cultivator, producer or grower for the purchase

of agricultural produce, produce of animal husbandry or dairy and
poultry farming, fish products or horticulture products
Payment made for purchase of goods manufactured or processed
in a cottage industry without the aid of power
Payment made to a person residing or carrying on business, pro-
fession or vocation in a village or town where such village or town
is not served by any bank on the date of such payment
Payment of gratuity, retrenchment compensation or any other ter-
minal benefit to an employee of an aggregate amount not exceed-
ing ` 50,000
Payment of salary to an employee after deduction of TDS under
Section 192 when the employee is posted for 15 days or more to a
place or a ship and he does not maintain a bank account at such
place or ship
Payment required to be made on a day of bank holiday or bank
strike

Payment made by a person to his agent who is required to make

payment in cash for any goods or services on his behalf.
Payment made by an authorised dealer or money changer in the
Study normal course of business against purchase of foreign currency
Hint
The cases of expense payment Section 43B – Certain Deductions to be allowed only on Actual Pay-
covered under Rule 6DD shall ment
be allowed as deduction even
if payment is made otherwise Following expenses will be allowed only if payment in respect of them
than by an account-payee is made by the assessee within the due date of filing return of income
cheque or an account-payee
under Section 139(1). Otherwise, they will be disallowed.
bank draft and it exceeds
` 10,000 in one single day. Tax, cess or duty under any law for the time being in force
Contribution to provident fund, gratuity fund, superannuation
fund or any other fund for employees’ welfare
S
Bonus or commission paid as an employer for services provided
by employees
Interest on borrowings from Public Financial Institution, State Fi-
IM
nancial Corporation or State Industrial Investment Corporation
Interest on borrowings from Scheduled Bank or Cooperative Bank
except for Primary Agricultural and Rural Bank
Payment as an employer in lieu of any leave standing at the credit
of employees
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Any amount paid or payable to Indian Railways for the use of rail-
way assets

N
14. Any payment in the 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 __________.
15. List any two deductions that become eligible only on the
actual payment of amount.
Activity
Using various sources, find more information on the taxation sys-

tem for the non-resident assessees of India.
5.7 SUMMARY
S
The income under head ‘Profits and Gains of Business or Profes-
sion’ 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 payments due

or received; income derived by a trade, professional or similar as-
sociation; etc.
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.
While computing income under the head ‘Profits and Gains of
Business or Profession’, certain important principles should be
kept in mind, which are: business carried on by the assessee; tax
levied on aggregate income from all business professions carried
out by the assessee during the previous year; profit on sale of as-
sets on the winding up of a business; tax on real owner; business/
professional income to be computed for each previous year, etc.
S
Amounts not deductible under Section 40 include:
In case of any assessee: any interest, royalty, fees for technical
services or any other sum chargeable; any interest, commis-
IM
sion 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; etc.
In the case of any firm assessable as such: any payment of sal-
ary, bonus, commission or remuneration, etc.
M
If any expenditure has been incurred by an assessee and in respect

of which payment is made to a related person or entity, then such
payment shall be disallowed under Section 40A(2) to the extent to
which it is considered excessive or unreasonable by the Assessing
Officer.
N
According to Section 43B, certain expenses will be allowed only if

payment in respect of them is made by the assessee within the due
date of filing return of income under Section 139(1).
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
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
b. Scientific research
c. Speculative transaction
d. Written down value
S
3. Explain the principles that should be kept in mind while
computing income under the head ‘Profits and Gains of Business
or Profession’.
IM
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.
6. Describe various amounts that are not deductible under Section
M
40 of the Act.

N
Topic Q. No. Answer

General Principles of Business and 1. Profession
Profession
2. True
3. income
Profits and Gains of Business or 4. Export
Profession (Section 28)
5. True
Computation of Income from Profits 6. True
and Gains of Business or Profession
(Section 29)
7. previous
Deductions Expressly 8. Depreciation
Allowable under Section 30– 43D
9. block of assets

Topic Q. No. Answer

10. Section 31
11. False
12. premium
13. 43B
Amounts not Deductible 14. AOP/BOI
under Section 40
15. Any sum payable by the
assessee as an employer
in lieu of any leave at the
credit of his employee;
and any sum payable by
the assessee as interest
on loan from a Sched-
uled Bank.
S
IM
1. Some of the general principles of business and profession include:
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
M
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 Profits and Gains of Business or Profession
(Section 28)
N
3. Principles that should be kept in mind while computing income

under the head ‘Profits and Gains of Business or Profession’
include: business must be carried on by the assessee; speculation
business of an assessee is kept separate; etc. Refer to Section 5.4
Computation of Income from Profits and Gains of Business or
Profession (Section 29)
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.
Refer to Section 5.5 Deductions Expressly Allowable under
Section 30- 43D
5. Two types of depreciation allowance that are allowed under the
Income Tax Act include: normal depreciation for a block of assets
and additional depreciation. Refer to Section 5.5 Deductions
Expressly Allowable under Section 30-43D
6. Under Section 40, certain amounts that are not deducted in
computing the income chargeable under the head ‘Profits and

Gains of Business or Profession’ include: any interest, royalty,

fees for technical services or another sum chargeable; any interest,
commission or brokerage, rent, royalty, fees for professional
services; etc. Refer to Section 5.6 Amounts not Deductible
under Section 40
SUGGESTED READINGS
Lal, B.B., Income Tax Law and Practice. New Delhi: Konark Pub-
lications.
Manoharan, T., & Hari, G. (2018). Student’s Handbook on Taxation
(31st ed.). Mumbai: Snow White Publications Pvt. Ltd.
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E-REFERENCES
(2018). Retrieved from https://resource.cdn.icai.org/46438bosin-
ter-p4-seca-cp4-u3.pdf
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Income Tax deduction under section 80C, 80CCD, 80CCC. (2018).
Cleartax.in. Retrieved 11 April 2018, from https://cleartax.in-
/s/80c-80-deductions
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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
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Activity
6.3 Capital Asset under Section 2(14)
Activity
6.4 Capital Assets and its Types
6.4.1 Short-term Assets and Long-term Assets
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Activity
6.5 Period of Holding
Activity
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6.6 Capital Gains (Section 45)

Activity
6.7 Transfer as Defined under Section 2(47)
Activity
6.8 Computation of Capital Gains (Sections 48 and 50)
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
6.14 Capital Gain on Transfer of Capital Assets
(Other Than Securities)
Activity
6.15 Indexation
Activity
6.16 Cost Inflation Index
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Activity
6.17 Short-Term Capital Gain
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Activity
6.18 Long-Term Capital Gain
Activity
6.19 Exemptions/Deductions under Capital Gains (Under Section 54, 54B,
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54D, 54EC, 54F, 54G, 54GA)

Activity
6.20 Deemed Full Value Consideration (DFVC): Special Cases
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Activity
6.21 Summary

INCOME FROM CAPITAL GAINS 131
TRANSACTIONS NOT REGARDED AS TRANSFER OF

CAPITAL ASSETS FOR COMPUTING CAPITAL GAINS
The charging Section 45(1) of capital gains states that profits or

gains arising from the transfer of a capital asset during a previous
Case Objective
year are deemed to be the income of the previous year in which This Caselet discusses the
such transfer took place. However, certain transactions as con- transfers of capital assets
tained under Section 47 are not considered as a transfer for the which are not considered
purpose of computing capital gains. Some of these include distribu- while computing the capital
gains tax.
tion of capital assets under the partition of an HUF; conversion of
preference shares into equity shares of the company; conversion of
debentures/bonds/deposit certificates into shares or debentures of
the company; transfer of assets under a will/irrevocable trust/gift;
and transfer of assets from holding company to 100% subsidiary
company or subsidiary company to 100% holding company.
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Mr Amit and its HUF entered into three transactions during the
previous year 2020-2021 and consider whether such transactions
would attract taxability of capital gains.
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Mr Amit acquired gold in 1979 for ` 31,200. He gifted this to his son
on the occasion of his marriage in the previous year 2020-2021. On
the day of transfer, the fair market value of the gold was ` 2,04,000.
As per Section 47(iii), capital assets transferred as a gift are not
regarded as transfer. Therefore, capital gains taxability shall not
arise in the hands of Mr Amit under this situation.
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At the time of partition of HUF property among the family members

in the previous year 2020-2021, Mr Amit is given a house property,
the fair market value of which is ` 11,00,000. The house property
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was acquired by the HUF in 1954 for ` 19,000. As per Section 47(i),
capital assets transferred to family members under the partition of
HUF are not regarded as transfer. Therefore, capital gains taxabil-
ity shall not arise in the hands of HUF under this situation.
In 2000, Mr Amit purchased 60 convertible debentures of a com-
pany for ` 55,000. These debentures are converted by the com-
pany into 600 shares worth ` 98,000 in October 2020. As per Sec-
tion 47(x), conversion of bonds or debentures into any shares
or debentures of the same company is not regarded as transfer.
Therefore, capital gains taxability shall not arise in the hands of
Mr Amit under this situation.
Gain from gift of gold to son on the Taxability in the Does not
occasion of his marriage hands of Mr Amit arise
Gain from distribution of house Taxability in the Does not
property under the partition of HUF hands of HUF arise
Gain from the conversion of deben- Taxability in the Does not
tures into shares hands of Mr Amit arise
Capital gains tax liability does not arise under situations which
are not regarded as transfer.

learning objectives

>> Discuss capital asset under Section 2(14) of Income Tax Act,
1961
>> Explain transfer as defined under Section 2(47) of Income
Tax Act, 1961
>> Discuss 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 the cost of improvement and transfer
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>> Describe capital gains on transfer of securities
>> Discuss capital gains on transfer of capital assets (other than
securities)
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>> Explain indexation
>> Describe the cost of inflation index
>> Discuss the exemptions based on certain investments (un-
der Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA)
>> Explain Deemed Full Value Consideration (DFVC): special
cases
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6.1 INTRODUCTION
In the previous chapter, you studied about the profits and gains of
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Quick Revision
business and profession and its related tax treatment. Capital gain
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.
This chapter discusses capital assets under Section 2 (14) and defines
transfer under Section 2(47). It also explains different types of capital
assets and capital gains as well as the period of holding. Further, the
chapter describes full value of consideration, cost of acquisition and
cost of improvement and transfer. Capital gain on transfer of securi-
ties and transfer of capital assets is also discussed. Indexation, cost of
inflation index and exemptions based on certain investments (under
Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA) are also described. Finally,
Deemed Full Value Consideration (DFVC) has been discussed.

6.2 BASIS OF CHARGE

Capital gains shall be taxable if the 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 gains arising from the transfer.
1. There should be a capital asset which means that the asset

transferred should be a capital asset on the date of transfer.
(True/False)
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Activity
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Using the Internet, find information on the basis of charge for
Salary Income.
6.3 CAPITAL ASSET Under Section 2(14)

According to Section 2(14) of the Income Tax Act, 1961, unless the con-
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text otherwise requires, the term ‘capital asset’ refers to:

(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)
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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-
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
member of his family dependent on him/her, but excludes the
following:
jewellery
archaeological collections
drawings
paintings
sculptures
any work of art

Activity
Make a list of capital assets that are exempted under the head ‘per-
sonal effects’ for an individual.
6.4 CAPITAL ASSETS AND ITS TYPES

There are two types of capital assets, long-term and short-term capi-
NOTE tal assets. The basis of differentiation depends on the time period for
Income that accrues as a result which the asset was held by the taxpayer before its transfer. In case
of transfer of long-term asset is the asset is acquired as inheritance, gift or succession, the period for
long-term capital gain, whereas which the asset was held by its preceding owner would also be included
the income that accrues as a
result of transfer of short-term
while classifying the asset as a short-term or a long-term asset.
asset is short-term capital gain.
6.4.1 SHORT-TERM ASSETS and LONG-TERM ASSETS
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A long-term asset is one that is held for more than 36 months. How-
ever, from the financial year 2017-18, this criterion has been revised to
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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 period of 24 months. In this case, any income aris-
ing will be treated as a long-term capital gain. This reduced period
is, however, not applicable to the 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-
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chase. However, the period of holding should be less than 12 months

in case of shares (equity and preference). For example, short-term
assets 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.
Let us look at a few examples to understand the difference clearly:
Example 1: Consider Mr X as a salaried employee. In the month of

April, 2014, he purchased a piece of land and disposed the same off
in December 2015. In this case, land is a capital asset for Mr X. He
purchased 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 a short-term capital asset.
Example 2: Consider Mr Y as 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.
2. ____________ asset is one that is held for more than 36 months.
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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- Study
stand the concept of a period of holding of a capital asset. This is Hint
because the tax treatment of capital gains and losses on short- and
The capital gains/losses
long-term capital assets is different. Period of holding refers to the
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are classified as being

time during which an assessee holds on to a given capital asset. It is short-term or long-term on
the elapsed time between the initial date of purchase of a capital asset the basis of their period of
and the date on which it was sold. holding.
Example 3: Mr A purchased a security on January 1, 2009 and sold the

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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. Classification of capital
gains on the basis of period of holding is shown in Figure 6.1:
• Security (other than a unit) listed in a

STCA, if held for ≤ 12 months recognised stock exchange
LTCA, if held for > 12 months • Unit of equity-oriented fund/unit of UTI
• Zero coupon bond
STCA, if held for ≤ 24 months • Unlisted shares

LTCA, if held for > 24 months • Land or building or both
• Unit of debt -oriented fund

STCA, if held for ≤ 36 months
• Unlisted securities other than shares
LTCA, if held for > 36 months
• Other capital assets
Figure 6.1: Classification of Capital Gains on the basis

of Period of Holding

Activity
Describe in brief how the period of holding classifies the type of

asset.
6.6 CAPITAL GAINS (SECTION 45)

Section 45 of the Income Tax Act, 1961 deals with the computation
of capital gains resulting from the transfer of capital assets. This
Section also specifies the year and scope of chargeability of the profits
or gains. A capital gain’s tax liability arises if the following conditions
are met:
Presence of a capital asset
Capital asset is transferred by the assessee
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Transfer takes place in the previous year
Transfer results in some profit or gain
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Profit or gain so resulted is not exempt from tax under relevant
sections
According to Section 45(1), any profits or gains arising from the trans-
fer of a capital asset effected in the previous year other than certain
exemptions are chargeable to Income Tax under capital gains in the
immediately following assessment year and the year of chargeability
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is the previous year in which the transfer took place. Exemptions from
being charged under this head are covered under Sections 54, 54B,
54D, 54E, 54EA, 54EB, 54F, 54G and 54H.
According to Section 45(1A), in case a person receives any money or

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assets at any time during the previous year from an insurer in lieu
of damage or destruction of any capital asset, then the value of the
money received (or the fair market value) chargeable to tax and the
year of chargeability would be the previous year in which the person
has received the money or asset from the insurer.
According to Section 45(2), in case an owner converts (or treats) his

capital asset into stock-in-trade, the profits or gains arising from the
same are chargeable to tax and the year of chargeability would be the
previous year in which the stock-in-trade is sold or transferred. The
amount of consideration is the fair market value of the stock-in-trade
as on the date of conversion or treatment.
According to Section 45(2A) relates to the taxation of the profits or

gains arising from securities held by a person who had held more
than 25% securities (beneficial interest) at any time during a previous
year. When a depository registered under the Depositories Act, 1996
transfers any securities in a previous year based on First-In-First-Out
method, the profits or gains arising from this transfer are chargeable
to tax. The amount receivable on transfer is chargeable in the hands
of both the beneficial owner as well as the depository.

According to Section 45(3), if a person transfers any capital asset to a

firm/AOP/BOI in which he/she is a partner or member, then the prof-
its or gains arsing out of such transaction are chargeable to tax. The
year of chargeability is the previous year in which the transfer took
place and the value to be charged to tax is the value of the capital asset
that is recorded in the books of accounts of the firm/AOP/BOI.
According to Section 45(4), in case the capital assets of a firm/AOP/

BOI are distributed upon dissolution of the firm/AOP/BOI or oth-
erwise, then the profits or gains arising out of such transaction are
chargeable to tax. The year of chargeability is the previous year in
which the transfer took place. The value to be charged to tax is the fair
market value of the capital asset on the date of such transfer.
According to Section 45(5), there can be a transfer of capital asset

by way of compulsory acquisition under any law in the form of initial
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compensation or enhanced compensation. In such a case, the initial
or the enhanced compensation is chargeable to tax. For initial com-
pensation, the year of chargeability is the previous year in which the
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compensation or a part of compensation is received. For the enhanced
compensation, the year of chargeability is the latter of the previous
years in which the compensation is received or the year in which the
competent authority (court/tribunal) passes its final order.
According to Section 45(5A), if an individual or HUF transfers any

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land or building or both by means of an agreement for the develop-

ment of a project, then the profits or gains arising out of such transac-
tion are chargeable to tax. Here, the consideration is the stamp duty
on the share of the project of the individual/HUF as on the date of
issue of a certificate and the consideration received in cash. In this
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case, the year of chargeability is the previous year in which the certif-
icate of completion of the project or part of the project is issued by the
competent authority.
According to Section 45(6), if an assessee repurchases any mutual

fund units of an Equity-Linked Savings Scheme as mentioned in Sec-
tion 80CCB, then the profits or gains arising out of such transaction
are chargeable to tax. Here, the consideration is the repurchase price
of the units. The capital gain is calculated as the difference between
the repurchase price and the capital value of the units. The year of
chargeability is the previous year in which the repurchase takes place.
3. Sanjay transfers a capital asset to an AOP. He is a member

of the AOP. In this case, the profits or gains arising out
of this transfer are chargeable to tax. The value to be charged
to tax is the value of the capital asset that is recorded in
the ______________.

Activity
Using the Internet, find out when an assessee can claim deductions
under Sections 80C to 80U in the case of income from capital gains.
TRANSFER AS DEFINED Under

6.7
Section 2(47)
According to Section 2(47) of Income Tax Act, 1961, unless otherwise
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
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(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
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owned by him/her, such conversion or treatment
(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 nature referred to in Section 53A of the Transfer of Property
Act, 1882
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(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
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enjoyment of, any immovable property.
From the above definition, it can be concluded that the term ‘Trans-
fer’ 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.
Section 47 of the Income Tax Act defines the transactions which are
not regarded as transfer for purpose of capital gains. Some of the
transactions that are not regarded as transfers for the purpose of cap-
ital gains are as follows:
Any transfer done by distributing capital assets on the total or par-
tial value of the partition of an HUF.
Any transfer of capital asset done under a will or gift or an irrevo-
cable trust.
Any transfer of capital asset from a holding company to any of its
wholly owned Indian subsidiary company or vice versa.

Any transfer or issue of shares from the company/companies re-

sulting from the demerger to the shareholders of the demerged
company.
In case two or more companies have resolved to amalgamate, then,
if a shareholder holding any shares in the amalgamating compa-
nies transfers his/her shares in exchange for shares in the amal-
gamated company, then such transfer is not taxable.
Any transfer of sovereign gold bonds issued by RBI and held by an
individual by way of redemption.
Any conversion of bonds, debentures, debenture stock and deposit
certificates of a company into the shares and debentures of the
same company.
Any conversion of the preference shares of a company into the eq-
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uity shares of the same company.
Activity
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Make a list of items mentioned in Section 2(47) of the Act, which
cannot be considered as transfers.
COMPUTATION OF CAPITAL GAINS

6.8
(SECTIONS 48 AND 50)
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The capital gain on transfer of the capital asset is computed as follows:

QUICK TIP
Short-term capital assets Long-term capital assets While computing the income
(Section 48) (Section 48) chargeable under the head
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Capital Gains, no deduction is

Full value of consideration Full value of consideration
allowed in respect of amount
Less: Cost of acquisition of asset Less: Indexed cost of acquisition paid for Securities Transaction
Less: Cost of improvement Less: Indexed cost of improvement Tax (STT).
Less: Expenditure incurred wholly Less: Expenditure incurred wholly

and exclusively in connection with and exclusively in connection with
such transfer such transfer
Less: Exemptions provided under
sections 54, 54EC, 54F, and 54B
Resulting figure is short-term capi- Resulting figure is long-term capital
tal gain gain
For example, Mr X purchased shares worth ` 1000 on September 30,

2017 and disposed them off on December 31, 2020 for ` 1200. The stock
value was ` 1100 as on 31st January, 2020. Out of the capital gains real-
ised by Mr X, ` 200 (1200–1000), ` 100 (1100–1000) 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.
Section 50 of the Income Tax Act gives the provisions for computation
of capital gains arising from depreciable assets. Accordingly, in case

a taxpayer has transferred a capital asset forming part of a block of

assets (building, machinery, etc.) on which the depreciation has been
allowed under the Income Tax Act, the income arising from such cap-
ital 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 the last day of the previous year, Written Down Value
(WDV) of the block of asset is zero.
b. When, on the last day of the previous year, block ceases to exist.
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
2021. His gross salary for the Assessment Year 2021-2022 shall
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be:
a. ` 1,40,000
b. ` 1,20,000
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c. Not enough information for computation
d. It will be decided by the assessing office
6.9 FULL VALUE OF CONSIDERATION

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Full Value of Consideration (FVC) 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:
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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 consider-
ation 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.

6.10 COST OF ACQUISITION

Cost of Acquisition (COA) refers to the cost that is paid by the asses-
see towards the acquisition of the capital asset. Expenses incurred for
completing the title of the asset constitute a part of the cost of acqui-
sition.
However, following points should be considered:

Ground rent cannot be taken as expenditure incurred by the as-
sessee 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
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part of the acquisition.
DEEMED COST OF ACQUISITION

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Where the capital asset becomes the property of the assessee in any
of the below-mentioned cases, the cost to the previous owner shall be
the deemed to be cost of acquisition for the purpose of computation of
capital gains:
Onthe distribution of assets on the total/partial partition of Hindu
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Undivided Family (HUF)

Under a Gift/Will
By succession, inheritance or devolution
On the distribution of assets on liquidation of the firm
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Under a transfer to a revocable or irrevocable trust

On transfer by a wholly owned subsidiary firm to its holding firm
or vice versa
Onconversion of the 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 under Section 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/

debenture stock/deposit certificate, in relation to which such an

asset is acquired by the assessee.
For example, A subscribed to 15 partly convertible debentures
worth ` 100 each of XYZ Ltd. in 2020. On December 10, 2021, A
received 5 shares worth ` 10 each in lieu of each debenture. Thus,
the cost of 5 shares received will be the cost of 5 debentures con-
verted 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 the property of the assessee on consolida-

tion, conversion, etc.:
Deemed acquisition cost is the cost of such stock or shares from
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which asset is derived.
Illustration 1: Mr Sharma subscribed to 300 debentures which are

partly convertible. The face value of debentures is ` 100 each. One-
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third of the debentures are convertible. A debenture may be converted
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: COA = Cost of unconvertible debentures to be converted

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into shares/no. of shares to be issued after conversion
= (100 × 100)/(2 × 10 × 5)
= ` 100 per share

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6. Ground rent can be considered as expenditure incurred by

the assessee for the acquisition of the capital asset. (True/
False)
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

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-
sary for the transfer to take place. While computing the tax on capital

gains for any assessee, these costs referred to as the cost of transfer
are permissible for deduction from sale proceeds. For example, in the
case of sale of a house property, 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 the transfer
Where a property has been inherited, expense related to proce-
dures associated with the will and inheritance, obtaining succes-
sion certificate, costs of executor, etc.
In case of sale of shares, a taxpayer may be allowed to deduct bro-

ker’s commission for shares sold. Similarly, in case of sale of jewellery,
expense on broker’s services for securing a buyer can be deducted to
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compute tax on capital gains.

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7. While computing the tax on capital gains for any assessee,
________ is permissible for deduction from sale proceeds.
Activity
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Using the Internet, prepare a list of costs of transfers for different

transactions relating to capital assets.
6.12 COST OF IMPROVEMENT

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After acquiring or purchasing any capital asset, the assessee may add
value to the asset by way of improvement or addition to the asset. Know More
The capital expenditure incurred by an assessee in carrying out these The capital expenditure that
is incurred for improving a
additions and improvements in the capital asset is referred to as the
capital asset, but which is not
cost of improvement. It also includes any cost incurred in protect- allowed as a deduction under
ing or curing the title. Therefore, it can be concluded that the cost of any other head of income can
improvement includes all those expenditures incurred by a taxpayer be included under the Cost of
Improvement (COI).
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
(Interest on Securities)’ would not be considered as cost of improve-
ment. Cost of improvement does not include normal repairs.
Cost of improvement with reference to the following shall be consid-

ered to be nil:
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 the year 2001 with effect from the
financial year 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 the 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.
Illustration 2: Mr A purchased a house property constructed up to the
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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 expenditure
incurred in the process was ` 30,000. After a while, he began construct-
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ing the first floor of the house as per the plan incurring an expendi-
ture of ` 40,500 by 31.3.2010. The finishing took place between 1.4.2010
and 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)/

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CII 2007–08)
= 5,00,000 × (167/129)
Indexed Cost of Improvement (2) = 30,000 × (CII 2010–11)/CII 2007–

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08) + 40,500 × (CII 2010–11)/CII 2009–10) + 80,500 × (CII 2010–11)/CII

2010–11)
Total indexed cost =(1)+(2)
8. ___________ includes all expenditures incurred by a taxpayer

in increasing the value of the capital asset.
Activity
Using the Internet, prepare a list of costs of improvement for differ-

ent transactions relating to capital assets.
CAPITAL GAIN ON TRANSFER OF

6.13
SECURITIES
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 commod-
ities 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 gains tax is not chargeable on transactions
where STT is paid.
When the total income of an assessee includes any income that is

chargeable under the head ‘Capital Gains’ that results on account of
transfer of equity shares in a company or an equity fund unit, such
transaction is chargeable to STT. In such a case, the assessee has to
pay tax on his/her total income that is a sum of the following two:
Short-Term Capital Gains (STCG) as a result of the transfer of se-
curities are charged at the rate of 15%, and
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Balance amount that results after deducting the STCG amount
from the total income is charged at normal rates of tax as applica-
ble.
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Section 111A deals with tax on short-term capital gains in certain
cases. As per Section 111A, if an STCG occurs as a result of the trans-
fer of equity shares and the units of equity-linked fund and if STT has
been paid on such sale, then, a tax of 15% is applicable to such trans-
action. Also, according to this section, if a STCG arises as a result of
transaction that is undertaken on a recognised stock exchange in any
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International Financial Services Centre in foreign currency and irre-

spective of whether STT has been paid or not, tax at the rate of 15% is
applicable on it. STCG resulting by way of transfer of all other normal
Short Term Capital Assets are chargeable at normal tax rates.
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Section 112 deals with tax on long-term capital gains. This section
describes the tax payable by assessees if their total income includes QUICK TIP
any income that arises as a result of the transfer of a long-term capital If you meet any person
asset that is chargeable under the head of ‘Capital Gains’. The LTCG (assessee) whose total income
tax applicable to various LTCAs and for different persons is presented includes any income which is
categorised as STCG under
in Table 6.1: Section 111A, then you can
suggest him/her get a rebate
Table 6.1: Section 112 – LTCG Tax Applicable on under Section 88.
Transfer of Securities
LTCA Rate of LTCG tax
Unlisted securities of a Transfer made by non-corporate/non-resi-
closely held company dent/foreign company – 10% (no benefit of
indexation and currency fluctuation)
Study
Others including resident individual/resi- Hint
dent HUF – 20% (with indexation benefit)
In respect of capital gains
Listed securities not traded 10% without benefit of indexation or 20% considered under Section
through a recognised stock with benefit of indexation, whichever is 111A, 112 and 112A, no
exchange and STT not paid more beneficial for the assessee deduction under Chapter VI
A is allowed.
Zero-coupon bonds 10% without the benefit of indexation

Until recently, the long-term capital gains that arise as a result of trans-
fer of listed equity shares or units of equity-oriented fund or units of
business trusts, were exempt from income-tax as per Section 10(38) of
the Act. However, in the budget of 2018 and in the Finance Act, 2018,
this exemption has been withdrawn and a new Section, Section 112A
has been inserted. Section 10(38) now stands deleted. It used to deal
with the long-term capital gains resulting from the sale or transfer of
securities that were not chargeable to tax under the Income Tax Act.
Section 112A (Long-term capital gain on listed securities) shall be

effective from A.Y. 2019-20. As per this Section, the long-term capital
gains in excess of ` 1 lakh arising from the transfer of listed equity
shares in the company or a unit of an equity-oriented fund/business
trust that are listed on a recognised stock exchange and are subject to
the STT are taxed at 10%. The transactions of shares that are listed
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on a recognised stock exchange in an International Financial Service
Centre and irrespective of whether STT has been paid or not, tax at
rate of 10% is applicable to it.
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Exhibit
LTCG under Grandfathering Provisions
The Finance Bill 2018 reintroduced tax on LTCG made from listed
shares and equity-oriented mutual funds. With Effective 1st
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April 2018, LTCG arising from the sale of these shares and equi-
ty-oriented funds that are held for more than 12 months are tax-
able at the rate of 10% if such LTCG exceeds ` 1 lakh in the given
Financial Year.
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The LTCG can be taxable under two things—the exemption for

LTCG up to ` 1 lakh, and the grandfathering provision. If you had
invested in equity mutual funds or shares before 31st January 2018,
any gains till that date will be considered as grandfathered and
thus will be exempt from tax.
Method of determining Cost of Acquisition:
A method of determining the Cost of Acquisition (COA) of such

investments has been specifically laid down according to which the
COA of such investments shall be deemed to be the higher of-
1. The actual COA of such investments
2. The lower of-
Fair Market Value (‘FMV’) of such investments; and
the Full Value of Consideration received or accruing as a
result of the transfer of the capital asset i.e., the Sale Price.

Tax implications under Grandfathering rule:
Sl. No. Scenario Tax Implications

1. Purchase and sale before Exempt under Section 10(38)
31/1/2018
2. Purchase before 31/1/2018 Exempt under Section 10(38)
Sale after 31/1/2018 but before
1/4/2018
3. Purchase before 31/1/2018 LTCG taxable
Sale on or after 1/4/2018 Gains accrued before
31/1/2018 exempt
4. Purchase after 31/1/2018 LTCG taxable
Sale on or after 1/4/2018
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For Example:
Mr Amit bought equity shares on 10/03/2016 for ` 12,000.

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FMV of the shares was ` 15,000 as on 31/01/18.
He sold the shares on 10/05/2018 for ` 18,000.
What will be the long-term capital gain/ loss?

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Cost of Acquisition (COA)
Higher of –
Original COA i.e., ` 12,000, and
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Lower of –
FMV on 31.1.18 i.e., ` 15,000, and
Sale Price i.e., ` 18,000
Hence, COA = Higher of (` 12,000 or ` 15,000) = ` 15,000
Capital Gain/ (Loss)

Sale Price – Cost of Acquisition
` 18,000 – ` 15,000
` 3,000
9. _________ is a tax paid for the transactions undertaken by the

stock exchange.

CAPITAL GAIN ON TRANSFER OF

6.14 CAPITAL ASSETS (OTHER THAN
SECURITIES)
Section 50 of the Income Tax Act, 1961 deals with the computation of
Know More
For all assessees, normal capital gains with respect to depreciable assets. When an assessee
rates of tax are chargeable has sold a capital asset that forms a part of a block of assets (building,
on the income reduced by the machinery, etc.) on which depreciation has been allowed under the
amount of long-term capital Act, the gain or loss arising out of such a transfer is considered as
gains. If the total income
reduced by long-term capital Short-Term Capital Gain.
gains is below the maximum
amount not chargeable In this case, two conditions may arise. One, some assets of the block of
to income tax, then the assets are sold. And two, all the assets (whole block) in the block are
long-term capital gains are sold.
reduced by the amount by
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which the total income falls Section 50C deals with the computation of capital gains with respect
short of the maximum amount
not chargeable to tax. The to transfer of immovable property (land and building). If, in a trans-
balance long-term capital fer of a land or building or both, the value received or accrued is less
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gains would be taxed at the than the value adopted or assessed by the stamp valuation authority
rate of 20%. for payment of stamp duty in respect of the transfer, then the value so
adopted or assessed is considered as the FVC received. If the dates of
agreement and registration are different, then the stamp duty value as
on the date of agreement is considered for computing the FVC.
Self-generated assets are those assets that bear no date or cost of

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acquisition to the assessee in relation to their acquisition or creation.

The computation of capital assets in case of self-generated assets is
done as follows:
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Self-generated asset Treatment

Goodwill of a business Full value of consideration will be
taken on actual basis.
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
actual basis.
Tenancy rights Full value of consideration will be
taken on actual basis.
Route permits Cost of acquisition will be taken as
nil.
Loom hours Cost of improvement will be taken
on actual basis.
Trademarks and brand name asso- Expenses on transfer will be
ciated with the business deductible on actual basis.

DEEMED FULL VALUE OF CONSIDERATION FOR COM-

PUTING CAPITAL GAINS [SECTIONS 50C, 50CA & 50D]
S. No. Capital Sec- Circumstance Deemed Full
Asset tion Value of con-
sideration for
computing
Capital Gains
1. Land or 50C (1) If the Value of Stamp Value of Stamp
Building or Duty is >110% of con- Duty
both sideration obtained or
accruing as a result of
the transfer
(a) If the date of agree- Value of Stamp
ment differs from the Duty on the
date of transfer, and the date of agree-
entire or a portion of the ment
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consideration is obtained
on or before the date of
agreement via account
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payee cheque, bank
draft, ECS, or other spec-
ified electronic modes
(IMPS, UPI, RTGS,
NEFT, Net banking,
debit card, credit card, or
BHIM Aadhar Pay),
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(b) If the date of agree- Value of Stamp

ment differs from the Duty on the
date of transfer, but the date of transfer
entire or a portion of the
consideration has not
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been issued on or before

the date of agreement by
account payee cheque,
bank draft, ECS, or other
specified electronic mode
If the value of stamp duty Consideration
on the date of agreement so received
or transfer, as the case
may be, is ≤ 110 percent
of the selling considera-
tion obtained,
2. Unquote d 50CA If consideration received FMV of such
shares or accruing as a result of share deter-
transfer < FMV of such mined in the
share determined in the prescribed
prescribed manner manner
The provisions of this
section, on the other
hand, will not apply
to any consideration
obtained or accruing as

DEEMED FULL VALUE OF CONSIDERATION FOR COM-

PUTING CAPITAL GAINS [SECTIONS 50C, 50CA & 50D]
S. No. Capital Sec- Circumstance Deemed Full
Asset tion Value of con-
sideration for
computing
Capital Gains
a result of a transfer by
such a class of people
and under such con-
ditions as may be pre-
scribed.
3. Any Capital 50D When the consideration FMV of the said
asset obtained or accruing as asset on the
a result of an assessee date of transfer
transfer of a capital asset
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is uncertain or cannot be
calculated
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Illustration 3: Mrs. Shikha purchased a flat in Gurgaon for ` 25 lakhs
on 10th May, 2016 from her colleague, Mr Raj. The stamp duty as deter-
mined 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-
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tions on the assessment of Mrs. Shikha and Mr Raj for the Assessment
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:

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Deemed Consideration under Section 50C 27,00,000
Less: Cost of Acquisition 12,00,000
STCG 15,00,000
Computation of capital gain for Mrs. Shikha:

Sale Price 32,00,000
Less: Cost of Acquisition 25,00,000
STCG 7,00,000
Illustration 4: 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.
Solution: When the land is gifted on 1st June, 1980:
Particulars Amount (in `) Amount(in `)
Sale Consideration 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:
Cost or fair market value as on 1st April, 1981, whichever is more,
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i.e., ` 3,00,000 × (CII of the year of transfer/CII of 1981–82)
` 3,00,000 × (1081/100) = ` 32,43,000

IM
10. In a transfer of a land, the date of agreement and registration

are 1st April, 2017 and 30th June, 2017, respectively. In this
case, the stamp duty value as on ___________ is considered for
computing the FVC.
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Activity
List a few examples of self-generated assets.

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6.15 INDEXATION
The value of money at present will not be the same for tomorrow. The
prices keep on 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’.
Activity
State the steps for computation of indexed cost of an asset.

6.16 COST INFLATION INDEX

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 owner
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
the asset 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 rate, taking into consideration the erosion of
value due to inflation. The CII for a particular year is decided by the
government and announced before the accounting year ends. The
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Central Board of Direct Taxes (CBDT) has notified the ‘Cost Inflation
Index’ applicable from financial year 2017-18 (Assessment Year 2018-
19) onwards, with base year shifted to 2001-02, in line with the amend-
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ments made in the budget 2017. Cost Inflation Index as per amended
provisions has been fixed at 280 for financial year 2018-19/Assessment
Year 2019-20, with cost inflation index for base year (financial year
2001-02) at 100.
The list of ‘Cost Inflation Index’ (CII) is as follows:

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FINANCIAL YEAR INDEX

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

FINANCIAL YEAR INDEX

2018-19 280
2019-2020 289
2020-2021 301
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 5: Ms. Priya purchased as apartment for ` 20 lakhs in Jan-

uary 2001 and Sold it for ` 35 lakhs in January 2009. The profit or cap-
ital gain is ` 15 lakhs. Compute the tax liability on capital gain.
Solution: The CII for the year the apartment was purchased is 100.
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The CII for the year the apartment was sold is 148.
Then, the cost inflation index is 148/100 = 1.48

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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 = 2000000 × 1.48 = 2960000
The long-term capital gain = Sale value of the asset – indexed cost of
acquisition
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3500000 – 2960000 = 540000
The tax liability for long-term capital gains is charged at 20 per cent.
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Tax liability will be 20 percent of 5400000 = ` 108000.
11. ________ 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 the tax-
ability, capital gains are classified into short-term and long-term. In
other words, the rates at which capital gain is taxed are different 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 always con-
sidered as short-term capital gain. Short-term capital gains are calcu-
lated 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
3. The resultant figure is short-term capital gain. Such gain
is charged to tax at 15 percent (plus surcharge and cess as
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applicable).

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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 (i.e., brokerage,
commission, etc.)
Net Sale Consideration XXXXX
Less: Cost of acquisition (i.e., the purchase price of the (XXXXX)
capital asset)
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Less: Cost of improvement (i.e., post-purchase capital (XXXXX)

expenses on improvement of capital asset)
Short-term Capital Gains XXXXX
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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-
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 from transfer of equity shares, units of equity-oriented
mutual-funds, or units of business trust, transferred on or after 1-10-
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.

12. Exemptions permitted by Income Tax Act, 1961 on income

from capital gains can be applied on short-term capital gains.
(True/False)
Activity
List five examples where an individual earns short-term capital

gains for a given financial year.
6.18 LONG-TERM CAPITAL GAIN
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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
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to be long-term capital gains (LTCG). For stocks, shares and bonds,
this period is more than 12 months instead of 36 months. Unlisted
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:

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1. Take the full value of consideration

2. From the above, deduct the following:
Expenditure incurred wholly and exclusively in connection
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with such transfer

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 (XXXXX)

connection with transfer of capital asset (i.e., brokerage,
commission, etc.)
Net Sale Consideration XXXXX


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 )
Less: Exemptions provided under sections 54, 54EC, (XXXXX)
54F, and 54B XXXXX
Long-Term Capital Gains (LTCG)
For the financial year 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 will be taxed at 10 percent without the benefit
of indexation. Till 31st March, 2018, taxpayers were offered relief to
exempt capital gains realised up to 31st January, 2018. The capital
gains arising beyond this time period will be taxed at the given rate.
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Debt-oriented mutual funds and preference shares, however, are sub-
ject to general long-term capital gains tax rules. They will be subjected
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to a tax liability at the rate of 20 percent for no-equity assets after
inflation indexation and 10 percent without indexation. Indexation
increases the purchase price and, thus, the capital gain decreases
accordingly. The taxpayer may apply indexation on acquisition and
calculate tax at 20 percent, or compute tax at 10 percent tax without
indexation. Thereafter, he/she may choose the tax slab which is lower
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of the two.
13. For stocks, shares and bonds, the period of holding with
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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.
EXEMPTIONS/DEDUCTIONS UNDER
6.19 CAPITAL GAINS (Under Section 54,
54B, 54D, 54EC, 54F, 54G, 54GA)
Exemptions under Section 54: Exemptions of Section 54 is appli-
cable to an individual and HUF. It states that any long-term capi-
tal 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. If the amount of capital gains exceeds ` 2 crore, the

assessee i.e., individual or HUF, should purchase one residential
house in India within 1 year before or 2 years after the date of
transfer/constructed within a period of 3 years after the date of
transfer.
On the other hand, if the amount of capital gains does not exceed `
2 crore, the assessee may purchase two residential houses in India
within 1 year before or 2 years after the date of transfer/construct
two residential houses in India within a period of 3 years after the
date of transfer. NOTE
Exemptions under Section 54B: Section 54B deals with the trans- Capital gains (compensation
fer of agricultural land. It states that if any sale of agricultural land or enhanced compensation)
arising to an individual or HUF
takes place, the capital gain arising out of that shall be exempt-
on compulsory acquisition of
ed to the extent that new agricultural land is purchased within agricultural land situated in
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2 years of the transfer or two years prior to the transfer. specified areas is exempted
from tax under Section 10(37).
Illustration 6: Ravi had purchased certain agricultural land in This exemption is available
1990-91 for ` 1,00,000. The land was being used for agricultural pur- only when such land was used
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pose by him. This land was later sold by him in 2015 for ` 15,00,000. for agricultural purposes for
preceding two years from the
Compute taxable capital gains for Assessment Year 2016-17 if the date of transfer.
agricultural land, which was sold, is rural agricultural land.
Solution: There is no capital gain since rural agricultural land is
not a capital asset.
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Exemptions under Section 54D: Section 54D is applicable to any

assessee who holds an industrial undertaking. To claim an exemp-
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
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constructed or purchased a land or building within a period of

3 years after the date of compulsory acquisition.
Illustration 7: 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 pay-
ment of tax on capital gain or not?
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
is applicable to all gains arising from the transfer of any long-term
capital asset that was held or put to use for more than 24 months.
The maximum quantum of the exemption amount is ` 50,00,000 in
the year of transfer and in the subsequent financial year and the
proceeds should be invested within the period of 6 months from
the date of transfer in bonds issued by NHAI or RECL or PFCL
or IRFCL. The new asset should be held for 5 years. If any of the

given conditions is violated, then the capital gain which was ex-
empted will be taxed as LTCG in the previous year in which the
asset was transferred.
Illustration 8: 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
S
assessee constructs a residential property within 3 years of sales
or purchases a residential property within 1 year before sale or
2 years after the sale of the asset. This is only available to individ-
uals and HUF. The assessee claiming this exemption should not
IM
have more than one 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
M
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 one year before the transfer
or 3 years after the transfer.
Exemptions under Section 54GA: Section 54GA is only applica-
N
ble to capital gains arising from the transfer of assets in cases of

shifting of an industrial undertaking to any special economic zone
(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.
14. For claiming exemption under Section 54B, the assessee

should purchase:
a. Urban agricultural land b. Rural agricultural land
c. Any agricultural land d. House property
Activity
Find out ways through which an assessee can claim exemptions

under Sections 54, 54B and 54 D against income from capital gains.

DEEMED FULL VALUE CONSIDERATION

6.20
(DFVC): SPECIAL CASES
There are certain cases where instead of actual consideration, the full
value of consideration is considered to be the deemed value for the
purpose of calculating the capital gains. These are listed in Table 6.2
as follows:
TABLE 6.2: 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 Value of money received
S
from an insurer on and/or full market value of
account of damage/ asset on the receipt date
destruction of capital
asset
IM
2. 45(2) Conversion of or treat- Full market value of asset on
ment of capital asset into the date of its conversion or
stock-in-trade treatment
3. 45(3) Introduction of capital Amount recorded in the

in kind into a firm by a books of accounts of the firm
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partner/member as the value of capital asset
4. 45(4) Distribution of capital Full market value of assets

asset in kind on dissolu- on the date of distribution
tion of firm
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5. 46(2) Shareholders receiving Market value of the assets

assets from liquidator on the date of distribution
on the liquidation of a less the amount assessed
company as deemed dividend under
Section 2(22)(e)
6. 48(4) Gift, etc., of shares/deben- Market value on the date of

tures allotted under gift
employee stock owner-
ship plan (ESOP)
7. 50C Transfer of land and/or Value declared by the asses-

building see or value as assessed by
the Stamp Valuation Author-
ity, whichever is higher
Activity
List the main points of Section 50C of the Income Tax Act, 1961.

S 6.21 SUMMARY
Under Section 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 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.
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.
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).
S
A long-term asset is one that is held for more than 36 months.
However, from financial year 2017-18, this criterion has been
revised to 24 months in the case of immovable property, such as
IM
land, building and house property.
The period of holding refers to the time during which an assessee
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
M
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-
N
able by the transferor with respect to the transfer of a capital asset,

which may be received in cash or kind.
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 (FII): An institution registered
as FIIs under Section 2 (f) of the SEBI (FII) Regulations 1995,
incorporated outside India which offers investment in securi-
ties in India
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 (WDV): The value of an asset derived af-
ter accounting for depreciation
6.22 DESCRIPTIVE QUESTIONS ?

1. Explain a capital asset as defined under Section 2(14) of the
Income Tax Act, 1961.
2. What are different types of capital gains?
3. What is meant by full value of consideration?
4. Explain the concept of Cost Inflation Index (CII) and the benefits
of indexing.
S
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 worth
IM
` 10,000. Determine the amount of taxable capital gain.

M
Topic Q. No. Answer

Basis of Charge 1. True
Capital Assets and its Types 2. Long-term capital
N
Capital Gains (Section 45) 3. books of accounts of the

firm/AOP/BOI
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
Capital Gain on Transfer of Cap- 10. 1st April, 2017
ital Assets (Other Than Securi-
ties)
Cost Inflation Index 11. Cost Inflation Index
Short-Term Capital Gain 12. False
Long-Term Capital Gain 13. True

Topic Q. No. Answer

Exemptions/Deductions under 14. c. Any agricultural land
Capital Gains (under Section 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
paintings. Refer to Section 6.3 Capital Asset under Section 2(14)
2. There are basically two types of assets that determine the
computation of capital gains: short-term assets and long-term
assets. Refer to Section 6.4 Capital Assets and its Types
3. Full value of consideration refers to the amount received/
S
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
IM
4. The cost inflation index (CII) is a means to measure inflation
used in the computation of long-term capital gains. Refer to
Section 6.16 Cost 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
Section 6.17 Short-Term Capital Gain
M
SUGGESTED READINGS
N
Niyogi, J. (1929). The Evolution of the Indian Income Tax. London:

P.S. King.
Sampath Iyengar A., Rajaratnam, S. (2005). The Law of Income
Tax. New Delhi: Bharat Law House.
E-REFERENCES
Cost Inflation Index in India - Check Calculation for FY 2016-17 &
AY 2017-18. (2018).Bankbazaar.com. Retrieved 12 April 2018, from
https://www.bankbazaar.com/tax/cost-inflation-index.html
Satapathy, S. (2018). Set Off and Carry Forward of Losses : [Com-
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
S
7.1 Introduction
7.2 Incomes Chargeable Under this Head (Section 56)
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Activity
7.3 Deductions Allowable (Section 57)
Activity
7.4 Deductions Not Allowable (Section 58)
M

Activity
7.5 Deemed Income Chargeable to Tax (Section 59)
N
Activity
7.6 Summary

n o t e s
GIFTS AND INTEREST ON COMPENSATION TO BE TAXED

UNDER INCOME FROM OTHER SOURCES
The charging Section 56(1) states that if any profits, income or

Case Objective gains of an assessee cannot be included under any other head of
income, then such income would become chargeable under the
concept of gifts and interest head ‘Income from Other Sources’.
on compensation to be taxed
under income from other Section 56(2)(x) of the Income Tax Act, 1961 states that where an
sources. assessee receives a sum of money or value of a property without
consideration or for inadequate consideration, the whole of such
amount shall be liable to tax if the aggregate value of the same
exceeds ` 50,000.
However, if such sum of money or value of property is received
S
from a relative, on the occasion of the marriage of the individual,
under a will or through inheritance, from a local authority or reg-
istered trust, or in contemplation of death of the payer, etc., then
IM
such receipt is exempted from the applicability of Section 56(2)(x)
and is not taxable.
During the previous year 2020-2021, Rishabh, a government em-

ployee, receives a sum of ` 2,40,000 from non-relatives on the oc-
casion of the marriage of his son, Ravi. Here, the exemption from
the applicability of Section 56(2)(x) shall be available only if the
M
gift is given by a relative or the gift is given on the occasion of the

marriage of the individual himself. In this case, since the value of
money is received by Rishabh from non-relatives and on the occa-
sion of the marriage of his son, Ravi, therefore, the whole amount
N
shall be chargeable to tax.
Section 56(2)(viii) of the Income Tax Act, 1961 provides for taxabil-
ity of any interest received on compensation or enhanced com-
pensation. Such income is deemed to be income of the assessee
in the year of receipt and is taxable under the head ‘Income from
Other Sources’. However, Section 57(iv) allows for a deduction of
50% of such income, i.e., interest on compensation/enhanced com-
pensation.
On 11.3.2021, Rishabh also receives ` 98,000 from the State Gov-

ernment as interest on enhanced compensation for compulsory
acquisition of his urban land. Out of this amount, 42% is related to
the earlier year.
As per Section 56(2)(viii), interest received on enhanced compen-

sation is deemed to be the income of the assessee for the year in
which it is received, irrespective of the accounting method fol-
lowed by the assessee and irrespective of the financial year to
which it relates. Thus, interest on enhanced compensation of

INCOME FROM OTHER SOURCES 165
n o t e s
` 98,000 is liable to tax in the year of its receipt i.e. P. Y. 2020-2021

after allowing for a deduction of 50% of such interest under Sec-
tion 57(iv). Therefore, the amount chargeable to tax is ` 49,000 in
the A.Y. 2021-2022.
Particulars Taxable or not Amount taxable

Interest on enhanced Taxable ` 2,40,000
compensation
` 2,40,000
Receipt of gift of money Taxable ` 49,000
` 96,000
S
IM
M
N

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
Quick Revision In the previous chapter, you studied about income from capital gains.
In this chapter, you will study about income from other sources in de-
S
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
IM
per Section 59.
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
M
rent, casual income (winnings from crossword puzzles, winnings from

lotteries, winnings from card games, etc.), income from furniture, ma-
chinery or plant on hire and interest on securities.
Incomes Chargeable Under this

N
7.2
Head (Section 56)
Section 56 of the Income Tax Act relates to the provisions of ‘Income
from Other Sources’. Under Section 56 (1) of the Act, income of every
kind which is not to be excluded from the total income shall be charge-
able 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 in-
cludes incomes from salaries, house property, capital gains, and busi-
ness 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.
Following incomes shall be specifically charged to tax under the head

‘Income from other sources’:
Dividend Income {Section 56(2)(i)}: Dividends are chargeable to
tax under the head ‘Income from Other Sources’. The taxability or
otherwise of dividend income received by a shareholder is based
upon the provisions explained in Table 7.1:

n o t e s
Table 7.1: Taxability Of Dividend Income in the Study

Hands of the Shareholder Hint
Dividend under Section
(A) Dividend received from a Fully taxable 115BBDA is taxable @10%
foreign company plus surcharge, if any,
plus health and education
(B) Taxability of Dividend received from a domestic company cess @4%. No allowance,
expenditure, loss or
Type of Dividend Taxability Criteria deductions under Chapter
VI-A can be allowed/set off
1. Deemed dividend under Fully exempt under Section 10(34) from such income.
Section 2(22)(e)
2. In case of Actual If the aggregate Fully exempt under
Dividend received; and dividend does Section 10(34)
Deemed Dividend under not exceed ` 10
Section 2(22)(a) to 2(22) lakhs during the
S
(d) previous year
If the aggregate ` 10 lakhs exempt

dividend exceeds under Section 10(34);
IM
` 10 lakhs during and remaining amount
the previous year taxable under Section
115BBDA
For this purpose, the term ‘dividend’ is explained as follows:
Section 2(22)(a): Distribution of accumulated profits by a com-
pany to its shareholders, entailing the release of all or some of
M
the company’s assets, is deemed as a dividend in the hands of

the shareholder.
Section 2(22)(b): Distribution of debentures/deposit certifi-
N
cates by a company to its shareholders or distribution of bonus

shares to preference shareholders, is deemed as a dividend in
the hands of the shareholder to the extent of accumulated prof-
its of the company.
Section 2(22)(c): Distribution made by a company to its share-
holders on its liquidation is deemed as a dividend in the hands
NOTE
of the shareholder to the extent of accumulated profits of the Section 2(22)(e) also includes
any advance or loan payment
company immediately prior to liquidation. made by a closely held company
Section 2(22)(d): Distribution made by a company to its share- to a concern in which a
beneficial shareholder holding
holders on reduction of its share capital is deemed as a divi- 10% or more of equity shares
dend in the hands of the shareholder to the extent of accumu- of the company is a member/
lated profits of the company. partner and has substantial
interest (i.e., minimum 20% share
Section 2(22)(e): Any advance or loan payment made by a in income of the concern). Such
closely held company to a beneficial shareholder holding 10% payment is deemed as a dividend
in the hands of the concern to
or more of equity shares is deemed as a dividend in the hands the extent of accumulated profits
of the shareholder to the extent of the accumulated profits of of the company.
the company.

n o t e s
Study Sum of money or value of property received by any person {Sec-

Hint tion 56(2)(x)}: Any value of money or property received without
Section 56(2)(x) was
consideration or value of property received for inadequate con-
imposed to prevent the sideration are charged to tax under the head ‘Income from Other
practices of taking money Sources’ in the hands of the recipient.
or property without
consideration by any Table 7.2 below summarises the taxable value in case of receipt of
person. money or property without consideration or receipt of property for
inadequate consideration:
Table 7.2: Sum of money or value of property

received by any person
Nature of Asset Consideration Taxable Amount
1. Money Without consid- The whole amount is taxable if

received eration the same is more than `50,000
S
2. Movable Without consid- The total fair market value
property eration (FMV) of the property if the
received same is more than ` 50,000
IM
3. Movable For inadequate The difference between the total
property consideration fair market value (FMV) of the
received property and the consideration,
if the difference is more than
` 50,000
4. Immovable Without consid- The total stamp duty value of the
M
property eration property if the same is more than

received ` 50,000
5. Immovable For inadequate Difference between the total
property consideration stamp duty value of the proper-
received ty and the consideration, if the
N
difference is more than ` 50,000

or 10% of such consideration,
whichever is higher
Study The provisions of this section apply only in case of a property

Hint which is of the nature of capital asset in the hands of the recipient
Mr K acquired a building for and not stock-in-trade/consumables/raw materials of the business
` 15,00,000 from his friend of the recipient. Hence, only transfer of capital assets, whether
on 11.11.2018. The stamp without consideration or for inadequate consideration, is covered
duty value as on the date
under the provisions of this Section.
of purchase is ` 15,70,000.
The amount chargeable Some receipts of money or value of the property are outside the
in the hands of Mr K shall
ambit of Section 56(2)(x), i.e., these are exempted from the applica-
be Nil. This is because the
difference of ` 70,000 is bility of this section even if they fulfil the above conditions. These
less than the higher of ` are as follows:
50,000 and
` 75,000 (5% of ` 15,00,000), money or property received from any relative
i.e., ` 75,000.
money or property received on the accession of the marriage of
the individual himself
money or property received by way of inheritance or under a
will

n o t e s
money or property received in contemplation of death of the

donor or payer Know More
The transactions of transfer
money or property received from a local authority of money or property between
a subsidiary company and its
money or property received from a fund/educational institu- 100% Indian holding company
tion/university/medical institution/ hospital/trust/other institu- or between a holding company
tion and its 100% Indian subsidiary
company are not subjected to
money or property received from a registered trust or institu- tax, i.e., are outside the ambit of
tion Section 56(2)(x).
money or property received by a fund/educational institution/

university/medical institution/hospital/trust/other institution
money or property received by way of transactions not regarded
as a transfer under the clauses of Section 47
S
money or property received by a trust from an individual where
the trust is established wholly and solely for the benefit of the
relative of the individual
IM
For the purposes of Section 56(2)(x), the term ‘property’ means any
capital asset of the assessee, namely:
jewellery
drawings
paintings
M
archaeological collections
sculptures
shares and securities

N
immovable property including land or building or both

bullion
any art works

For the purposes of Section 56(2)(x), the term ‘relative’ in case of
an individual, means:
spouse of an individual
sister or brother of an individual
sister or brother of the spouse of an individual
sister or brother of either of the parents of an individual
lineal ascendants or lineal descendants of an individual
lineal ascendants or lineal descendants of the spouse of an
individual
spouse of all the persons mentioned above

n o t e s
The term ‘relative’ in case of a Hindu Undivided Family (HUF)

means any member of the HUF.
Casual Income {Section 56(2)(ib)}: Casual income refers to any
income earned by way of winnings from lotteries, races including
horse races, crossword puzzles, betting, gambling, card games,
such other games, etc. These incomes are chargeable to tax under
the head ‘Income from other sources’. Section 115BB is applicable
to casual income, wherein such incomes are taxed at a flat rate
of 30% plus surcharge, if any, plus health and education cess of
4%. No allowance, expenditure, loss, or deductions under Chapter
VI-A can be allowed/set off from casual income. Also, the unex-
hausted basic exemption limit is also not permitted to be adjusted
against such income.
Interest on compensation/enhanced compensation {Section
S
56(2)(viii)}: Any interest income received on compensation or
enhanced compensation payable by the Government on compul-
sory acquisition of land of the assessee shall be taxed under the
IM
head ‘Income from Other Sources’. Such interest income shall be
deemed to be the income in the year of receipt irrespective of the
method of accounting followed by the assessee.
Consideration in excess of FMV of shares {Section 56(2)(viib)}:
Any consideration received from a resident shareholder for shares
issued by a closely held company to the extent to which it exceeds
M
the fair market value (FMV) of shares, is deemed to the income of

such company under the head ‘Income from Other Sources’. This
section is applicable only when the shares are issued at a premium.
Sums forfeited on the transfer of capital assets {Section 56(2)
Know More
N
(ix)}: This Section covers any amount of money received as an

Common methods of
accounting followed by
advance or otherwise during the course of negotiations for the
assessees are cash method transfer of a capital asset. Such amounts are taxable under the
of accounting and the head ‘Income from Other Sources’ if the negotiations did not result
mercantile/accrual method of in the transfer of a capital asset and, thus, the sums are forfeited.
accounting.
Compensation received on termination of employment {Section
56(2)(xi)}: This Section covers any compensation or other pay-
ments, by whatever name called, due to or received by a person
in relation to the termination of his employment or modification
of terms and conditions relating to his employment. Such income
is chargeable to tax under the head ‘Income from Other Sources’.
Sums not chargeable under the head ‘Profits and gains of busi-
ness or profession’: The below-mentioned incomes shall be tax-
able under the head ‘Income from Other Sources’ if and only if
they are not taxable under the head ‘Profits and Gains of Business
or Profession’:
Sums received by employers from their employees as contri-
butions to provident funds, superannuation funds, or other

n o t e s
employee welfare funds.

Income received from letting out of the plant, machinery or
furniture on hire, whether with or without building
Interest on securities
Keyman Insurance Policy: All sums including bonus, received
under a Keyman insurance policy, are chargeable to tax under the
head ‘Income from Other Sources’. This is true only when such Know More
sums allocated are not taxable under the head ‘Profits and Gains Sums received under
of Business or Profession’ or under the head ‘Salaries’. Keyman insurance policies
are taxable only if they are
Residual income: Any income not falling under other heads of received by persons other
income is chargeable to tax under the head ‘Income from Other than employers who took
the policies and employees
Sources’. For example, salaries received by MPs/MLAs are not in whose name the policies
charged to tax under the head ‘Salaries’ but charged under Sec- are taken.
S
tion 56.

IM
1. Mr J received a sum of ` 51,000 from his relatives on the
occasion of his marriage on 7.7.2018.
a. Entire ` 51,000 is chargeable
b. Only ` 1,000 is chargeable
M
c. Only ` 25,500 (i.e., 50%) is chargeable

d. Entire ` 51,000 is non-taxable
2. In respect of a dividend received by an individual from a
domestic company in excess of ` 10 lakhs, no deduction under
N
Chapter VI-A and no set-off of losses is allowed against such

income. (True/False)
3. Income received from letting out of the plant, machinery or
furniture on hire is taxable under the head ‘Income from other
sources’ only if not chargeable under the head _____________.
4. Compensation received by a person in connection with the
termination of his employment is charged to tax under the
head ‘Income from Other Sources’. (True/False)
Activity
Read all the sub-sections of Section 56 and make a brief presen-

tation on various sums chargeable to tax under the head ‘Income
from Other Sources’.

n o t e s
7.3 DEDUCTIONS ALLOWABLE (SECTION 57)

The income under the head ‘Income from Other Sources’ is calculated
NOTE after making the deductions as given in Table 7.3:
Family pension refers to a
monthly amount regularly Table 7.3: Deductions allowable under
payable by the employer to a
family member of an employee in Section 57
the event of his death. S. No. Particulars Deduction(s) allowable
1. Income from recovery from Amount to the extent the contri-
employees as the contribu- bution is remitted prior to the due
tion to provident fund, super- date under different respective
annuation fund, etc. Acts as per the provisions of Sec-
tion 36(1)(va)
2. Income from dividends (ex- Any amount reasonably paid to a
S
cept dividends under Section banker or other person as remu-
115-O on which corporate neration or commission
dividend tax is leviable) or
interest income on securities
IM
3. Income received from letting zz Insurance premium paid
out of the plant, machinery zz Depreciation or unabsorbed
or furniture on hire, whether depreciation
with or without building
zz Amount paid on current repairs
to plant, machinery, furniture,
or building
M
4. Family pension received Least of the following:

zz ` 15,000
zz 33-1/3% of family pension re-
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ceived
5. Any interest income on 50% of interest income
compensation or enhanced
compensation received
6. Any other expenditure (except that of capital nature) incurred
wholly and exclusively for the purpose of earning such income.
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 Section 57.
Activity
Take a few examples of tax payers by searching on the Internet

and determine the applicability of Section 57 when computing net
income tax payable.

n o t e s
DEDUCTIONS NOT ALLOWABLE

7.4
(SECTION 58)
The items of expenses which are not allowed as deductions in the
computation of ‘Income from Other Sources’ of an assessee are dis-
cussed in Table 7.4:
Table 7.4: Deductions not allowable under

Section 58
S. No. Deductions not allowable
1. Personal expenses incurred by an assessee
2. An interest chargeable under the Act and payable outside
India, on which tax has not been deducted at source or paid
3. A payment chargeable under the ‘Salaries’ and payable outside
S
India, on which tax has not been deducted at source or paid
4. Payment of any expense made to a related person to the extent
to which it is unreasonable or excessive from its Fair Market
Value (FMV) on consideration by the Assessing Officer.
IM
5. Payment of any expense made to a person otherwise than by
draft/account-payee cheque/ECS through a bank account, if the
aggregate payment exceeds ` 10,000 in a day
6. Any expense connected to income or earnings from lotteries, Study
races including horse races, crossword puzzles, card games, Hint
gambling or other games of such nature Deduction of 30% of the
M
7. 30% of any sum or expenditure payable to a resident, if the tax sum on which tax has not
been deducted at source
on it deductible at source, has not been deducted or has been
is also disallowable under
deducted but not paid on or before the due date specified the head ‘Income from
under Section 139(1). Business or Profession’ by
N
virtue of Section 40(a)(ia).

6. An assessee claim a deduction of personal expenses exceeding

` 10,000 while computing income taxable under the head
‘Other Sources’. (True/False)
Activity
Go through Section 58 of the Income Tax Act, 1961 in detail and

find out whether expenses connected to all causal incomes are dis-
allowed or not. Whether the activity of owning and maintaining
race horses is also covered by Section 58?
Deemed income chargeable to tax

7.5
(SECTION 59)
Under appropriate circumstances, following incomes will be treated
as incomes under the head ‘Income from Other Sources’, like they
are treated as business income when computing ‘Profits and Gains of

n o t e s
Study Business or Profession’:

Hint Cessation or remission of trade liabilities
If any amount of
expenditure/liability/ Cessation or remission of trade liabilities of discontinued business
loss, etc., claimed as a
A business successor getting any benefit with respect to the deduc-
deduction under this head
is subsequently recovered/ tion availed by the predecessor
received, then such amount
Bad debt that has been written off and allowed and subsequently
shall be deemed to be the
income of the year of its recovered is considered to be the previous year income in which
subsequent receipt. 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.
Activity
S
IM
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.
7.6 SUMMARY
M
S Section 56 the Income Tax Act talks about the provisions of ‘Income
from Other Sources’.
Specifically and without prejudice to the provisions of generality
of sub-section (1), following incomes are taxable under the head
N
‘Income from Other Sources’:

Dividends
Incomes from renting plant, machinery or furniture

Incomes received under a Keyman insurance policy
Specific incomes by a Hindu Undivided Family (HUF) or an
individual
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, following deductions are available:
Amount reasonably paid in relation to income from dividends
and interest income from securities
Some expenses in relation to a certain income from plant,
machinery or furniture given out on hire

n o t e s
Any expenditure other than that of capital nature

50% of interest income received through interest on compen-
sation or enhanced compensation
As per Section 59, 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
Section58 lists certain items of expenses which are not allowed as
a deduction from income from other sources.
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
IM
company 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
M
wives and unmarried daughters

Immovable property: An immovable object or an item of prop-
erty that cannot be moved without altering or destroying it
N

?
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 Sections 58 and 59 and also their applicability.
Topic Q. No. Answer

Incomes Chargeable Under this 1. Entire ` 51,000 is
d.
Head (Section 56) non-taxable
2. True
3. ‘Profits and gains of
business or profession’

n o t e s
Topic Q. No. Answer

4. True
Deductions Allowable (Section 57) 5. 50%
Deductions Not Allowable (Section 6. False
58)
Deemed Income Chargeable to 7. previous
Tax (Section 59)

1. Section 56 of the Income Tax Act talks about the provisions
of ‘Income from Other Sources’. Refer to Section 7.2 Incomes
Chargeable Under this Head (Section 56)
2. Section 57 provides for various deductions such as amount
S
reasonably paid in relation to income from dividends and
interest income from securities, some expenses in relation to
certain income from plant, machinery or furniture given out on
hire, any expenditure other than that of capital nature, and 50%
IM
of interest income received through interest on compensation
or enhanced compensation. Refer to Section 7.3 Deductions
Allowable (Section 57)
3. Section 59 lists certain incomes to be treated as incomes such as
incomes related to cessation or remission of trade liabilities, a
M
business successor getting any benefit, and certain recovered bad

debts. Moreover, Section 58 lists certain items of expenses which
are not allowed as a deduction from income from other sources.
Refer to Sections 7.4 Deductions Not Allowable (Section 58)
and 7.5 Deemed income chargeable to tax (Section 59)
N
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
(2018).Taxmann.com. Retrieved 3 April 2018, from https://www.
taxmann.com/budget-2015-16/file/samd307/earlier-section.aspx
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

Ch a
8 pt e r
Deductions to be made in
Computing Total Income
Contents
S
8.1 Introduction
8.2 Deduction vs. Exemption
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Activity
8.3 Deductions to be Made in Computing Total Income (Section 80A)
Activity
8.4 Deduction in Respect of Investments/Contributions to Specified Assets
M
(Section 80C)
Activity
8.5 Deduction in Respect of Contribution to Pension Fund (Section 80CCC)
N
and Deduction in Respect of Contribution to Pension Scheme of Central

Government (Section 80CCD)
Activity
8.6 Limit of Deduction under Section 80C, 80CCC and 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

Contents
8.10 Deduction in Respect of Interest on Deposits in Savings Account (Section

80TTA) and Deduction in Respect of Interest on Deposits in Case of Senior
Citizens (Section 80TTB)
Activity
8.11 Deduction in the Case of a Person with Disability (Section 80U)
Activity
8.12 Summary
S
IM
M
N

Deductions to be made in Computing Total Income 179
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 Case Objective
around ` 2 lakhs as HRA apart from a few other allowances. This Caselet discusses certain
deductions which can be
claimed by an assessee while
computing his/her taxable
income.
The company deducts a heavy amount of TDS on the salary be-

ing paid to Mr Ghai. He was too worried about the deduction.
S
He goes to a financial advisor to find some measures to save
his tax. The financial advisor suggests him get a life insurance
cover of around ` 80 lakhs to 90 lakhs and invest his savings into
IM
the PPF account and national savings certificate. He also suggests
Mr Ghai 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 measures,
Mr Ghai was successful in saving a substantial part of his tax and
M
reducing his overall tax burden.

N

learning objectives
>> Differentiate between deductions and exemptions

>> Explain the deductions to be made in computing total in-
come as per Section 80A
>> Explain the deductions to be made in computing total in-
come as per Sections 80C, 80CCC and 80CCD
>> Outline the limit of deductions under Section 80C, 80CCC,
80CCD as prescribed in Section 80CCE
>> List the deductions in respect of health insurance premia as
per Section 80D
>> List the deductions in respect of maintenance including
medical treatment of a dependent who is a person with dis-
S
ability as per Section 80DD
>> List the deductions in respect of loan taken for higher edu-
cation as per Section 80E
IM
>> List the deductions in respect of interest on deposits in
savings account as per Section 80TTA
>> Describe the deductions in the case of persons with disabili-
ties as per Section 80U
M
8.1 Introduction
Quick Revision In the previous chapter, you studied about the tax treatment of income
from other sources as per the Income Tax Act. In this chapter, you will
N
study about the deductions to be made in calculating the total income.
In a previous financial year, whatever income you earn under the

five income heads is summed up to arrive at the Gross Taxable In-
come, which is chargeable to income tax. However, to compute the net
taxable income of an assessee, certain deductions are applicable on
which income tax is not chargeable. Tax deductions help an assessee
reduce his or her taxable income and decrease the overall tax liability
in order to save taxes. The amount of deduction, however, varies with
the type of tax deduction claimed by an assessee.
This chapter will list all deductions defined under the Income Tax Act
available for taxpayers.
8.2 Deduction vs. Exemption

Before we discuss various clauses of deduction, let us have a clear idea
of differences between deductions and exemptions.

Table 8.1 shows differences between deduction and exemption:
Table 8.1: Differences between Deduction

and Exemption
Basis Deduction Exemption
Definition Subtractions; sum of Exclusions; if a specific income
money that can be is exempt from tax, it would not
reduced from the taxa- contribute to a person’s total
ble income income
Concept To get the net income, For the taxpayer, the entire
the deduction amount amount is an exemption. The
is first included in the exempted income is not consider-
total gross income and able under the total income
then deducted from it
S
What is it? It is concession. It is relaxation.
Objective Promoting investments Boosting that specific Section in
and savings of people which tax has been exempted
IM
Income is Tax-deductible Tax-free
Allowable to Specific people Everyone
Applicable Sections 80C to 80U Section 10
Sections
Is it Yes No
M
conditional?
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 the part of the taxpayer’s gross total income
N
and then deductions can be used to calculate the total income. There
are four categories of the deductions which are as follows:
1. Deduction regarding certain payments: Some examples include
medical insurance premium, life insurance premium paid and
donations to charitable institutions.
2. Deduction regarding certain incomes: Some examples include
royalty on patents and specific incomes from cooperative
societies.
3. Deduction regarding other incomes: Some examples include
interest income on savings account, time deposits, etc.
4. Other deductions: For example, deduction in case of a person
with disability.
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 source of income is not included from taxable 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-
ing part of the income is subject to tax and, hence, considerable when
calculating the gross total income.
1. Deductions and exemptions from total income mean the same

thing under the Income Tax Act. (True/False)
Activity
Search on the Internet for various exemptions available to an as-

sessee under Section 10 of the Income Tax Act, 1961 and make a
S
tabular report on it.
Deductions to be made in
IM
8.3 Computing Total Income
(Section 80A)
Study Gross Total Income (GTI) of an assessee is the total of what the asses-
Hint see earns in any previous year under five different heads of income
as specified under Section 14 of the Income Tax Act, 1961. Howev-
M
If the GTI for any previous

year is nil or negative, the
er, for the computation of actual taxable income of an assessee, cer-
deductions allowable under tain general deductions are allowed from GTI, which are covered by
Chapter VI-A lapse and none of Chapter VI-A of the Income Tax Act, 1961. According to Section 80A,
the deductions can be carried deductions specified under Section 80C to 80U covered by Chapter
forward to the succeeding VI-A shall be allowed while computing the total income of the assessee
N
years.
from his/her GTI.
The deductions covered under Chapter VI-A of the Income Tax Act,
1961 are as given in Figure 8.1:
(A) Deductions in (B) Deductions in (C) Deductions in

(D) Other
respect of certain respect of certain respect of other
deductions
payments incomes incomes
• Section 80C • Section 80JJAA • Section 80TTA • Section 80U
• Section 80CCC • Section 80RRB • Section 80TTB
• Section 80CCD • Section 80QQB
• Section 80D
• Section 80DD
• Section 80DDB
• Section 80E
• Section 80EE/
EEA
• Section 80G
• Section 80GG
• Section 80GGA
• Section 80GGB
• Section 80GGC
Figure 8.1: Deductions under Chapter VI-A

It is also worth clarifying here that certain incomes are not eligible for
deductions. These are long-term capital gains taxable under Section
112/112A, short-term capital gains taxable under Section 111A, win-
nings from lotteries, etc., as referred to in Section 115BB, and some
specified incomes of non-residents including presumptive income.
Hence, the GTI is reduced by these amounts to arrive at the qualifying
limit eligible for deductions under Chapter VI-A.
Now let us discuss these deductions in detail.
Exhibit
Income Tax Deductions under New Tax Regime FY 2020-21
Individuals opting to pay tax under the new proposed lower per-
sonal income tax regime will have to forgo almost all tax breaks that
S
you have been claiming in the old tax structure.
Below is the list of the main tax exemptions and deductions that are
not available for the tax payers if you opt for the new regime;
IM
The most commonly claimed deductions under section 80C
will go.
Section 80C deductions claimed for provident fund contribu-
tions, life insurance premium, school tuition fee for children
and various specified investments such as ELSS, NPS, PPF,
M
cannot be availed.
House rent allowance
Leave travel allowance
N
Standard deduction of ` 50,000

Deduction available under section 80TTA (Deduction in respect
of Interest on deposits in savings account) and 80TTB (Deduc-
tion in respect of Interest on deposits to senior citizens)
Interest paid on housing loan taken (Section 24)
Under the new tax regime, set-off of loss under
“Income from House Property” is not allowed. However, you can

still use it to nullify rental income from a let-out property.
The deduction claimed for medical insurance premium under
section 80D will also not be claimable.
Tax break on interest paid on education loan will not be claim-
able-section 80E.
Tax break on donations to charitable institutions available un-
der section 80G will not be available.

So, all deductions under chapter VIA (like section 80C, 80CCC,
80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG,
80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.) will not
be claimable by those opting for the new tax regime. The above are
part a total of 70 deductions and tax exemptions that will not be
available in the new tax regime.
(A) DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
Section 80DDB
Deduction under Section 80DDB is available to a resident individual

or an HUF in respect of amount paid for medical treatment of some
specified diseases or ailments for himself or a dependent of an individ-
ual or an HUF. In case of an individual, the payment for medical treat-
S
ment of specified diseases may be made for himself or his dependent
being spouse, children, brothers, sisters, or parents who are mainly
dependent upon the individual for his support and maintenance. In
case of an HUF, the payment for medical treatment of specified diseas-
IM
es may be made for any member of the HUF.
The amount of deduction is lower of the following:
Amount actually paid
` 40,000 (` 1,00,000 if the payment is made for medical treatment
of a senior citizen).
M
The amount of deduction as computed above will be reduced by any

amount reimbursed by employer or received from an insurance com-
pany.
N
Section 80EE
Deduction under Section 80EE is available to an individual who pays

interest on loan taken from a financial institution (any housing finance
company or bank) for the purpose of acquiring a residential house
property. The quantum of deduction allowed is ` 50,000 or the actual
amount of interest payable on loan, whichever is lower.
Deduction under this section shall not be allowed if the following con-
ditions are not met:
The loan should have been sanctioned by the financial institution
during the period of previous year 2016-17.
The amount of sanctioned loan should be less than or equal to
` 35 lakhs and the value of residential house should be less than
or equal to ` 50 lakhs.
The assessee should not be the owner of any residential house as
on the date of sanction of loan.

If,for any assessment year, deduction is claimed by the assessee

under this section, then he or she cannot claim similar deduction
under any other provision of the Act for such interest payment for
the same assessment year.
Section 80G
Deduction under Section 80G is available to all assessees for making

donations to certain charitable funds, institutions, etc. The donations QUICK TIP
No deduction under Section 80G
are divided into following four categories depending upon the nature shall be allowed for donations
of donee: made by way of cash payments
in excess of ` 2,000.
Donation to Prime Minister’s National Relief Fund, National Chil-
dren’s Fund, etc., (Category I) – 100% deduction of amount donat-
ed is allowed to the assessee without any qualifying limit.
Donation to Prime Minister’s Drought Relief Fund, Jawaharlal
S
Nehru Memorial Fund, etc., (Category II) – 50% deduction of
amount donated is allowed to the assessee without any qualifying
limit.
IM
Donation to Government or local authority for promotion of family
planning, etc., (Category III) – 100% deduction of amount donated
is allowed to the assessee subject to qualifying limit.
Donation to Government or any local authority for other specified
charitable purposes, renovation of notified temple, etc., (Category
IV) – 50% deduction of amount donated is allowed to the assessee
M
subject to qualifying limit.
Qualifying limit is the maximum permissible deduction allowed that is

computed with respect to 10% of the GTI.
N
Section 80GG
Deduction under Section 80GG shall be allowed to an individual as-

sessee. The deduction is available in respect of rent payments made
by an assessee for his residential accommodation, provided the as-
sessee is not in receipt of House Rent Allowance or owns a rent-free
accommodation. The quantum of deduction allowed is the least of the
following:
` 5,000 per month
25% of the total income (Total income here means income arrived
at after allowing for deductions under Chapter VI-A except Sec-
tion 80GG)
Rent paid in excess of 10% of total income
However, no deduction shall be allowed to the assessee if he/his

spouse/HUF/minor child owns a residential accommodation in a place
where he resides ordinarily or carries on his business or profession or
performs his official duties of employment.

Section 80GGA
Deduction under Section 80GGA is allowed to any assessee who does

not have incomes chargeable under the head ‘Profits and Gains of
Business or Profession’. The deduction is available in respect of do-
nations made by the assessee to some specified research associations,
institutions, etc., for the purpose of scientific research or rural devel-
opment. The quantum of deduction allowed is 100% of the amount
donated. However, no deduction shall be allowed for donations by way
of cash payments in excess of ` 2,000. Also, if for any assessment year,
deduction is claimed by the assessee under this Section, then he or
she cannot claim similar deduction under any other provision of the
Act for such payment for the same assessment year.
Section 80GGB
S
Deduction under Section 80GGB is allowed to an Indian company in
respect of contribution made by Indian company during the previous
year to a political party or an electoral trust. The amount of deduction
allowable is 100% of the actual contribution made by an Indian com-
IM
pany otherwise than by way of cash. No deduction shall be allowed if
the contribution is made by the assessee by way of cash.
Section 80GGC
Deduction under this Section is allowed to any person other than a

NOTE
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local authority or an artificial judicial person wholly or partly funded

For the purposes of Sections by the Government. The deduction is available in respect of a contri-
80GGB and 80GGC, a political bution made by such person during the previous year to any political
party means a political party
as registered and described
party or an electoral trust. The amount of deduction allowable is 100%
of the amount of actual contribution made otherwise than by way of
N
under Section 29A of the

Representation cash. Thus, no deduction is allowed if the contribution is made to the
of the People Act, 1951. political parties by cash.
Remaining deductions under this head have been explained in detail

in the later parts of this chapter.
(B) DEDUCTIONS IN RESPECT OF CERTAIN INCOMES

Study
Hint Section 80JJAA
Section 44AB pertains to Deduction under Section 80JJAA is allowed to an assessee whose GTI
provisions relating to tax
audit applicable to specified
includes profits and gains of business or profession and who is sub-
assessees. A tax audit ensures jected to tax audit under Section 44AB. The deduction is available
that the assessee has properly to the eligible assessee in respect of employee cost incurred by the
maintained his books of assessee for employment of new employees during the previous year.
accounts which truly reflect
the income of the tax-payer Some of the conditions for claiming this deduction are as follows:
and has also complied with
income tax requirements, such The business of the assessee should not be formed by way of split-
as filing of return, accurate ting up or reconstruction of an existing business.
specification of deductions
and claims, etc. The business of the assessee should not be formed by way of trans-
fer from another person or through reorganisation.

Audit report of the accountant giving prescribed particulars has to

be furnished along with the return of income.
The amount of deduction allowed under this Section is equal to 30%

of the additional employee cost incurred by the assessee (cost paid
to new employees) in respect of new employees employed during the
previous year. Moreover, such 30% deduction is available for three as-
sessment years comprising the assessment year relevant to the previ-
ous year in which such new employment is provided.
Section 80RRB
Deduction under Section 80RRB is allowed to a resident individual as-

sessee. The deduction is available to the assessee on his or her income by
the way of royalty on patents. For claiming this deduction, the assessee
should have earned royalty income on patents which are registered on or
S
after 01.04.2003. The eligible assessee is one who is registered under
the Patents Act, 1970 as the true and first inventor in relation to an in-
vention (including the co-owner of patents). The amount of deduction
allowed from GTI is ` 3,00,000 or the whole of such royalty income,
IM
whichever is lower.
Section 80QQB
Deduction under Section 80QQB is allowed to a resident individual

being an author. This deduction is available in respect of consider-
ation for grant of the author’s interests in the copyright of a book of
M
scientific, literary or artistic nature; or in respect of royalty income

of authors from books excluding brochures, guides, diaries, commen-
taries, newspapers, journals, pamphlets, magazines, school textbooks
and other publications of the same nature.
N
The deduction allowed is lower of the following:

Income derived in the exercise of profession, or
` 3,00,000
For this purpose, the income derived in the exercise of profession is

equal to the amount received or receivable in case of lump sum royal-
ty, or up to 15% of the value of books sold during the relevant previous
year if the royalty is not paid in lump sum.
(C) DEDUCTIONS IN RESPECT OF OTHER INCOME
Deductions under Section 80TTA and 80TTB have been explained in

detailed in the later parts of this chapter.
(D) OTHER DEDUCTIONS
Deduction under Section 80U has been explained in detailed in the

later parts of this chapter.

2. Section 80GGB allows for deduction in respect of contributions

made by a/an____________ to political parties or electoral
trust.
3. _____________ provides for deduction in respect of income by
way of royalty on patents.
Activity
Interview a tax payer in your neighbourhood and calculate his/her

applicable deductions as per Section 80A for the current assess-
ment year.
S
DEDUCTION IN RESPECT OF
8.4 INVESTMENTS/CONTRIBUTIONS TO
IM
SPECIFIED ASSETS (SECTION 80C)
Deduction under Section 80C is allowed to an individual or an HUF
for making certain payments or contributions in respect of life insur-
ance premium, specified term deposits, provident fund, etc. The eligi-
bility and conditions for claiming deductions under this Section are as
discussed in Table 8.2:
M
Table 8.2: Deduction under Section 80C

Eli- Conditions for Claiming Deduction Amount of
gible Permissible
N
Asses- Deduction
see from GTI
Individ- Deduction is available in respect of some The amount
ual or specified investments made by an individual or of deduction
HUF an HUF during the previous year. Some of the is equal to
investments which qualify for claiming deduc- the sums paid
tion under this section are as follows: or deposited
zz Payment of life insurance premium on the life subject to the
of specified persons, i.e., individual, spouse, maximum
children or member of HUF limit of
` 1,50,000.
zz Contribution by an employee towards Statu-
tory Provident Fund or Recognised Provident
Fund or Approved Superannuation Fund
zz Any amount deposited in Public Provident
Fund (in the name of individual, spouse or
children)
zz Any amount invested in NSC certificates and
interest accrued thereon

Eli- Conditions for Claiming Deduction Amount of

gible Permissible
Asses- Deduction
see from GTI
zz Repayment of housing loan taken for the
construction or acquisition of new residential
house property from bank, Government, LIC,
specified employer, financial institution, etc.
zz Tuition fees paid to any university, education-
al institution, college or school in India for the
education of the children (deduction can be
claimed for maximum of 2 children for their
full-time education)
zz Investment made in the units of mutual fund
specified under Section 10(23D) or any other
notified schemes
S
zz Any amount deposited in five-year post-office
deposit scheme
zz Contribution towards Unit-Linked Insurance
Plan (ULIP) of LIC Mutual Fund
IM
zz Deposits made in Senior Citizen Saving
Scheme account
zz Subscription to/deposits made in notified
bonds of NABARD
zz Subscription to certain equity shares/deben-
tures or certain units of mutual fund
zz Amount deposited in term deposits with a
M
scheduled bank for a fixed period of not less

than 5 years
zz Amount paid or deposited to Sukanya Sam-
riddhi Account Scheme (in the name of in-
dividual or girl child or a girl child for whom
N
the individual is the legal guardian)
Exhibit
Life Insurance Premium Allowable as Deduction

The insurance premium paid in relation to a life insurance policy is
allowable as a deduction subject to the following limits:
For policies issued on or before 31.03.2012, the premium paid to
the extent of 20% of a actual capital sum assured is allowed as
a deduction.
For policies issued on or after 01.04.2012, the premium paid to
the extent of 10% of a actual capital sum assured is allowed as
a deduction.
For policies issued on or after 01.04.2013 and where insurance
is on the life of a person with disability/severe disability as spec-
ified under Section 80U or a person suffering from specified
disease/ailment as prescribed under Section 80DDB, premium
paid to the extent of 15% of actual capital sum assured is al-
lowed as a deduction.

Let us now understand this concept with the help of an illustration.
Illustration 1: Following Details is given by Mr Amit.
Date of Person insured Actual capital Insurance pre-

issue of sum assured (`) mium paid dur-
Policy ing 2020- 21 (`)
(i) 30/3/2012 Self 5,00,000 51,000
(ii) 1/5/2016 Spouse 1,50,000 20,000
(iii) 1/6/2018 Handicapped 4,00,000 80,000

son (section 80U
disability)
S
Compute the eligible deduction under section 80C for A.Y. 2021-22
in respect of life insurance premium paid by Mr Amit During the
P.Y.2020-21
IM
Solution:
Date of Person Actual Insurance Deduct- ion Remark

issue of insured capital premium u/s 80C for (restricted
policy sum paid during A.Y.2021- 22 to %
assured 2020-21 (`) (`) of sum
M
(`) assured)
(`)
(i) 30/3/2012 Self 5,00,000 51,000 51,000 20%

N
(ii) 1/5/2016 Spouse 1,50,000 20,000 15,000 10%
(iii) 1/6/2018 Handi- 4,00,000 80,000 60,000 15%

capped
son (sec-
tion 80U
disability)
Total 1,26,000
It should be noted 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’.
4. Deduction under Section 80C can be claimed in respect of

tuition fees paid by an individual for a maximum of 2 children
for their ___________ education.

5. Deduction under Section 80C for making certain payments or NOTE

contributions to specified assets/investments is allowed to an For the purposes of Section
individual or an HUF. (True/False) 80CCD, the entire amount of
employer’s contribution shall be
includible in the salary of the
employee.
Activity
Interview a taxpayer in your neighbourhood and calculate his/her

applicable deductions as per Section 80C for the current assess-
ment year.
DEDUCTION IN RESPECT OF
S
CONTRIBUTION TO PENSION FUND
(SECTION 80CCC) AND DEDUCTION
8.5
IN RESPECT OF CONTRIBUTION
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TO PENSION SCHEME OF CENTRAL
GOVERNMENT (SECTION 80CCD)
Deduction under Section 80CCC is available to an individual in re-
spect of contribution made to an approved annuity plan of LIC or cer-
tain pension funds.
M
The eligibility and conditions for claiming deduction under this Sec-
tion are as discussed in Table 8.3:
N
Table 8.3: Deduction under Section 80CCC
Eligible Conditions for Claiming Amount of Permissible

Assessee Deduction Deduction from GTI
Individual Deduction is available to any The amount of deduc-

individual who has paid or tion allowed is limited to
deposited any amount dur- ` 1,50,000.
ing the previous year to keep
in effect a contract for any
annuity plan of LIC of India or
other insurer for the purpose
of receiving pension from such
fund set up by LIC or other
insurers.
Deduction under Section 80CCD can be availed by an individual as-

sessee in respect of contribution made to the Central Government
Pension Scheme.

The eligibility and conditions for claiming deductions under this Sec-
tion are as discussed in Table 8.4:
Table 8.4: Deduction under Section 80CCD

Eligible Conditions for Claiming Amount of Permissible
Assessee Deduction deduction from GTI
Individual Deduction is available to an For salaried assessees, the

assessee individual who is employed by deduction allowed under
employed the Central Government on or Section 80CCD(1) is the
by the Cen- after 01.01.2004 or any other amount of employee’s con-
tral Gov- employer or any other assessee tribution made which is
ernment or and who has made a contribu- restricted to 10% of salary.
employed tion, deposit or payment of any In addition, the deduction
any other amount to his account under of employer’s contribu-
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employer the notified pension scheme of tion is restricted to 10%
or self-em- the Central Government, such of salary under Section
ployed as National Pension Scheme. 80CCD(2).
For other assessees, the
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deduction allowed under
Section 80CCD(1) is the
amount of employee’s con-
tribution made which is
restricted to 20% of GTI.
M
Under Section 80CCD(1B), a further additional deduction of up to ` 50,000

shall be available to all assessees.
N
6. Under Section 80CCD(1B), a further additional deduction of

up to ` 20,000 is available to the assessee. (True/False)
7. As per Section 80CCD, what is the percentage of GTI deduction
allowed?
a. 5%
b. 10%
c. 15%
d. 20%
Activity

applicable deductions as per Section 80CCC for the current assess-
ment year.

LIMIT OF DEDUCTION Under

8.6 Sections 80C, 80CCC AND 80CCD
(SECTION 80CCE)
According to Section 80CCE, the amount of maximum permissible
deduction under Sections 80C, 80CCC and 80CCD(1) is restricted to
`1,50,000. However, the limit of ` 1,50,000 under Section 80CCE is not
applicable to deductions allowed under Section 80CCD(2) and Section
80CCD(1B).
Now, let us understand this concept with the help of some illustra-
tions.
Illustration 2: Determine deductions available as per Section 80CCD

for Mrs. Nikky who does not derive salary income. She has made a
S
contribution of ` 2,20,000 towards a notified pension scheme by the
Central Government. The GTI of Mrs. Nikky for the Assessment Year
2021-2022 is ` 9,00,000.
IM
Solution: Now, as per Section 80CCD (1), 20% of the GTI, which is
` 1,80,000 is deductible. However, as per Section 80CCE, the limit of
deduction applicable to Sections 80C, 80CCC, 80CCC(1) is ` 1,50,000.
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 80CCD(1B) to the maximum of
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` 50,000. Therefore, the total deduction under Section 80CCD(1) and

80CCD(1B) will be ` 2,00,000.
Illustration 3: Mahesh who is currently self-employed earns a GTI of

` 6,00,000. He made a deposit of ` 1,25,000 in public Provident Fund
N
and 80,000 in a Central Government-approved pension scheme. Com-

pute his taxable income.
Solution:
Computation of Taxable Income

Particulars Amount (in `) Amount (in `)
Gross Total Income 6,00,000
Less: Deductions
Under Section 80C 1,25,000
Under Section 80CCD (1) equal to ` 80,000 1,20,000
but limited to 20% of GTI of ` 6,00,000
Total deductions 2,45,000
But limited to ` 1,50,000 as per Section 1,50,000
80CCE
Additional deduction under Section 50,000 2,00,000
80CCD (1B)
Total income 4,00,000

8. 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

applicable deductions as per Section 80CCE for the current assess-
S
ment year.
Deduction in Respect of Health

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8.7
Insurance Premia (Section 80D)
Deduction under Section 80D is available to an individual or an HUF
in respect of payment of medical health insurance premium for self or
a family member. The eligibility and conditions for claiming deduc-
tions under this Section are as discussed in Table 8.5:
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Table 8.5: Deduction under Section 80D

Eligible Assessee Conditions for Claiming Amount of Permissible
Deduction Deduction from GTI
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Any individual Medical health insurance The amount of deduc-

or HUF premium paid otherwise tion is limited to the
than by cash for keeping maximum of ` 25,000.
in force insurance on the However, in case the
health of self, spouse and individual or spouse or
dependent children in case member of HUF is a sen-
of an individual (or family ior citizen, the maximum
member of HUF in case amount deductible is
the assessee is an HUF). ` 50,000.
AND/OR
Any contribution made
by an individual other-
wise than by way of cash
to CGHS or such other
scheme as may be notified
by the Central Govern-
ment is also eligible for
deduction.


Individual Medical health insurance The amount of further

premium paid otherwise deduction in addition to
than by way of cash to above is limited to the
keep in force a medical maximum of ` 25,000.
insurance for the health However, in case either
of the parents, whether or both of the parents
they are dependent on the are senior citizens,
individual or not. the maximum amount
deductible is ` 50,000.
Individual or HUF Any medical expenditure The amount of deduc-

incurred otherwise by way tion is limited to the
of cash on the health of maximum of ` 50,000.
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the individual or his family
member or parents or
member of HUF, provided
such person is a senior cit-
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izen and no other amount
has been incurred to give
effect to the insurance pol-
icy on the health of such
person.
Some important points:
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zz Also, if any amount has been incurred by any mode including cash
payment on account of preventive health-check up of the assessee him-
self, spouse, dependent children and parents, an amount of deduction
equivalent to ` 5,000 is allowed. However, the said deduction is within
and subject to the aggregate limit of deduction of ` 25,000/` 50,000, as
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the case may be.

zz If the individual or his family member or member of HUF is a senior
citizen, the aggregate deduction in respect of insurance premium,
CGHS and medical expenditure is restricted to ` 50,000.
zz It is also clarified here that if one parent is a senior citizen for whom
medical insurance premium is paid and the other parent is a senior
citizen for whom medical expenditure is incurred by the assessee, then
the maximum allowable deduction is restricted to ` 50,000.
Let us discuss now, an example to understand the above-men-

tioned concept.
Study
Illustration 4: Determine deduction under Section 80D for Mr Sha- Hint
shank who is 50 years old and provides the following information re- For availing deduction under
lated to Mediclaim policy premium paid for the year ending Mar 31, Section 80D, the amount of
2019 by cheque. insurance premium must have
been paid during the previous
(a) For self: ` 10,000 year out of the income
chargeable to tax.
(b) For spouse who is 48 years old: ` 9,000

(c) For dependent mother who is 70 years old: ` 7,000

(d) For dependent 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:
` 50,000
In case the premium has been paid in cash, would the answer differ?
Solution: The calculation of deduction under Section 80D for Mr Sha-

shank is shown as follows:
Particulars Amount Eligibility Deduction
Paid Allowed
(a) For individual and
his family
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Self – Mediclaim pre- ` 10,000 Yes ` 10,000
mium
Spouse – Mediclaim ` 9,000 Yes ` 9,000
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premium
Self and Spouse – Pre- ` 6,000 Yes, but restricted ` 5,000

ventive Health Check-up to
` 5,000
Total ` 25,000 ` 24,000

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(b) For Parents
Dependent mother – ` 7,000 Yes ` 7,000

Mediclaim Premium
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Father – Medical ` 50,000 Yes, but ` 43,000

Expenditure restricted to
` 43,000
Total ` 50,000 ` 50,000
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
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
health check-up of self and spouse in cash of ` 5,000 is allowed.
9. Any contribution made by an individual otherwise than by

way of cash to CGHS is eligible for deduction under Section
80D. (True/False)

Activity
Interview a tax payer in your neighbourhood and calculate his/her

applicable deductions as per Section 80D for the current assess-
ment year.
Deduction in respect of
Maintenance including Medical
8.8 Treatment of a Dependent who is
a Person with Disability (Section
80DD)
Deduction under Section 80DD is available to a resident individual
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or HUF for payments in respect of maintenance including medical
treatment of a dependent disabled. The eligibility and conditions for
claiming deductions under this section are as discussed in Table 8.6:
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Table 8.6: Deduction under Section 80DD

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Resident individ- The deduction from GTI zz In case of normal dis-

ual or HUF shall be available to the ability of dependent,
assessee who has made the amount of deduc-
expenditure in relation tion allowed is ` 75,000.
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to a medical treatment zz In case of severe

(including nursing), disability of depen-
training and rehabili- dent (i.e., 80% or more
tation of a dependent disability), the amount
having a disability; or of deduction allowed is
who has deposited any ` 1,25,000.
sum in this behalf under
a scheme framed by LIC/ zz The assessee is al-
other insurers/approved lowed to claim a flat
specified company for deduction of ` 75,000/`
maintenance of the 1,25,000 as the case
dependent disabled. may be, irrespective
of the amount actually
spent by the assessee.
Know More
Deduction under Section 80DD
can be claimed by the assessee
only when deduction under
For the purpose of Section 80DD, the meaning of a dependent person
Section 80U is not claimed by the
is as follows: dependant disabled in computing
the total income of that previous
In case of an individual, a dependent may be his or her spouse/
year.
children/parents/brothers or sisters who is wholly dependent upon
such individual for maintenance and support.

In case of an HUF, dependent may be any member of the HUF who

is wholly dependent upon such HUF for maintenance and support.
10. Who of the following is/are not a dependent?

a. Spouse b. Children
c. Brothers and sisters d. Spouse of brother
Activity
Interview a tax-payer in your neighbourhood and calculate his/her

applicable deductions as per Section 80DD for the current assess-
ment year.
S
Deduction in respect of Loan
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8.9 taken for Higher Education
(Section 80E)
Study While computing the gross total income, Section 80E allows an indi-
Hint vidual assessee to claim a deduction in respect of interest payment on
any loan taken for pursuing higher education. The eligibility and con-
For the purpose of Section 80E,
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a financial institution means a ditions for claiming deductions under this Section are as discussed in
banking company to which the Table 8.7:
Banking Regulation Act, 1949
applies or any other financial
institution as may be notified Table 8.7: Deduction under Section 80E
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by the Central Government

in the Official Gazette in this Eligible Conditions for claiming Amount of permissible
behalf. Assessee deduction deduction from Gross
Total Income
Individual Deduction is available to an The amount of deduction

individual who pays interest allowed is without any
on loan taken from any finan- limit. It can be claimed
cial institution or an approved from the initial year of
charitable institution for higher commencement of interest
education of himself or his rel- payment to seven assess-
atives (spouse and children of ment years succeeding
the individual) or a student for the initial commence-
whom the individual is a legal ment year or until the full
guardian. interest payment is made,
Deduction under this Section whichever is earlier.
can be claimed only when inter-
est is paid out of the income
chargeable to tax under the
Act.

11. A ‘financial institution’ means a banking company to which

the Banking Regulation Act, 1949 applies. (True/False)
Activity
Interview a tax-payer in your neighbourhood and calculate his/her

applicable deductions as per Section 80E for the current assess-
ment year.
DEDUCTION IN RESPECT OF INTEREST
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ON DEPOSITS IN SAVINGS ACCOUNT
(SECTION 80TTA) AND DEDUCTION IN
8.10
RESPECT OF INTEREST ON DEPOSITS
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IN CASE OF SENIOR CITIZENS (SECTION
80TTB)
Deduction under Section 80TTA is available to assessees whose GTI
includes any interest income from deposits in a savings account main-
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tained with banks. The eligibility and conditions for claiming deduc-
tions under this Section are as discussed in Table 8.8:
Table 8.8: Deduction under Section 80TTA

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Eligible Assessee Conditions for Claiming Amount of Permissi-

Deduction ble Deduction from
GTI
Individual Deduction is available to an The amount of deduc-

(except senior individual other than senior tion allowed is the
citizen) or HUF citizen who earns interest lower of the following:
income from deposits in a zz Actual interest, or
savings account with a bank,
a co-operative society bank, zz ` 10,000
or a post office. The depos-
its for this purpose exclude
any time deposits which are
repayable after the comple-
tion of certain fixed time.
Deduction under Section 80TTB is available to individuals aged 60

years or more during the previous year, who have an interest income
on deposits with banks.

The eligibility and conditions for claiming deductions under this sec-
QUICK TIP tion are as discussed in Table 8.9:
A senior citizen is an individual
of the age of 60 years or more Table 8.9: Deductions under Section 80TTB
at any time during the previous
year. Eligible Assessee Conditions for Claiming Amount of Permissible
Individual senior Deduction is available to an The amount of deduc-
citizen individual (of age 60 years tion allowed is the lower
or more), who earns inter- of the following:
est income from deposits zz Actual interest, or
with a banking company, a
zz ` 50,000
co-operative society bank,
or a post office. The depos-
its for this purpose may
include time deposits.
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12. Which of the following means deposits repayable on expiry of

fixed periods?
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a. Mutual funds b. Term deposits
c. Time deposits d. Insurance
13. The deduction available under Section 80TTB is allowed for
senior citizens only. (True/False)
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Activity

applicable deductions as per Section 80TTA for the current assess-
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ment year.
Deduction in the Case of A Person

8.11
with Disability (Section 80U)
NOTE Deduction under Section 80U is available to resident individuals suf-
The term ‘disability’ is defined
fering from disability. The eligibility and conditions for claiming de-
in harmony with conditions laid ductions under this Section are as discussed in Table 8.10:
down under the Persons with
Disability (Equal Opportunities, Table 8.10: Deduction under Section 80U
Protection of Rights and Full
Participation) Act, 1995, and Eligible Conditions for Claiming Amount of Permissible
includes persons suffering Assessee Deduction Deduction from GTI
from autism, cerebral palsy and Resident Deduction is available zz For persons with disability,
multiple disabilities. individual to a person who, at any a flat deduction of ` 75,000
having disa- time during the previous is allowed.
bility year, has been certified zz For persons with severe
by the medical authority disability, i.e., persons hav-
to be a person holding ing 80% or more disability,
disability. a flat deduction of
` 1,25,000 is allowed.

14. A person with severe disability means a person with ______

percent or more of one or more disabilities as referred to under
the Persons with Disabilities (Equal Opportunities, Protection
of Rights and Full Participation) Act, 1995.
Activity

applicable deductions as per Section 80U for the current assess-
ment year.
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8.12 Summary S
According to Section 80A, the deductions specified under Sections
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80C to 80U covered by Chapter VI-A shall be allowed while com-
puting 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 an-
nuity, contributions to provident fund (PF), Unit-Linked Insurance
Plan (ULIP) mutual fund, subscription to certain equity shares or
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debentures, term deposits, etc.

Limit on Deductions under Sections 80C, 80CCC and 80CCD (Sec-
tion 80CCE); the aggregate amount of deduction under Section
80C, 80CCC and 80CCD(1) [excluding employer’s contribution to
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pension scheme or contribution made by the assessee under Sec-

tion 80CCD(1B)] shall not, in any case, exceed ` 1,50,000.
Section 80D (Individual/HUF) allows deduction of up to ` 25,000
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 dependent 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.

Key Words
Assessee: An individual that is liable to pay taxes for himself/

herself or on behalf of somebody else
Gross Total Income (GTI): An individual’s total pay before
accounting for taxes or other deductions
Health Insurance Premium: The sum of money that an indi-
vidual pays towards an insurance policy to cover health care
issues
Resident Individual: An 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
?
S
IM
1. Write an explanatory note on Section 80A.
2. Explain the deductions applicable as per Sections 80C and
80CCC.
3. Describe Sections 80DD, 80E and 80U.
4. List the conditions for claiming deductions under Section 80TTA
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and 80TTB.

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Answers For Self Assessment Questions
Topic Q. No. Answer

Deduction vs. Exemption 1. False
Deductions to be Made in Computing 2. Indian company
Total Income (Section 80A)
3. Section 80RRB
Deduction in Respect of Investments/ 4. full-time
Contributions to Specified Assets (Sec-
tion 80C)
5. True
Deduction in Respect of Contribution 6. False
to Pension Fund (Section 80CCC) and
Deduction in Respect of Contribution
to Pension Scheme of Central Govern-
ment (Section 80CCD)
7. d. 20%

Topic Q. No. Answer

Limit of Deduction Under Section 80C, 8. a. ` 1,50,000
80CCC and 80CCD (Section 80CCE)
Deduction in Respect of Health Insur- 9. True
ance Premia (Section 80D)
Deduction in Respect of Maintenance 10. d. Spouse of
Including Medical Treatment of a brother
Dependent Who is a Person with Disa-
bility (Section 80DD)
Deduction in Respect of Loan Taken 11. True
for Higher Education (Section 80E)
Deduction in Respect of Interest on 12. c. Time deposits
Deposits in Savings Account (Section
80TTA) and Deduction in Respect of
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Interest on Deposits in Case of Senior
Citizens (Section 80TTB)
13. True
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Deduction in the Case of a Person with 14. eighty
Disability (Section 80U)

1. Chapter VI-A of the Income Tax Act covers Section 80 and the
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deductions are covered by Sections 80C to 80U. Refer to Section

8.3 Deductions to be Made in Computing Total Income (Section
80A)
2. Section 80C deductions are applicable to an individual and
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an HUF. The eligible assessee for deduction of Section 80CCC

is individuals. Refer to Sections 8.4 Deduction in Respect of
Investments/Contributions to Specified Assets (Section 80C)
and 8.5 Deduction in Respect of Contribution to Pension Fund
(Section 80CCC) and Deduction in Respect of Contribution to
Pension Scheme of Central Government (Section 80CCD)
3. For Section 80DD, the eligible assessee is an individual or an
HUF. The eligible assessee for Section 80E is an individual.
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 a Person with Disability (Section 80U)
4. Deduction under Section 80TTA is allowed to an individual
assessee or an HUF other than a senior citizen who earns
interest income on savings account with banks. Refer to Section
8.10 Deduction in Respect of Interest on Deposits in Savings
Account (Section 80TTA) and Deduction in Respect of Interest
on Deposits in case of Senior Citizens (Section 80TTB)

Suggested Readings
1961 (Act no. 43 of 1961) together with Finance Act, 1962-1963 and
Rules.
1964.
E-References
(2018). Retrieved 9 April 2018, from https://www.incometaxindia.
gov.in/pages/acts/income-tax-act.aspx
S
List of Income Tax Exemptions for FY 2017-2018 and AY 2018-2019
| 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 under Section 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 Partner’s Share in the Income of the Firm [Section 10(2A)]
9.2.4 Income Earned by a Non-Resident from NTRO [Section 10(6D)]
9.2.5 Payment from Provident Fund [Section 10(11)]
9.2.6 House Rent Allowance [Section 10(13A)]
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9.2.7 Scholarship [Section 10(16)]

9.2.8 Clubbed Income of a Minor Child [Section 10(32)]
Activity
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9.3 Rebates and Reliefs

Activity
9.4 Summary

n o t e s
RENT PAID TO PARENTS
Sowmya is working with an MNC situated in Bengaluru. Her

Case Objective organisation provides her the benefits of House Rent Allowance
(HRA). However, she lives with her parents and not in a rented
This Caselet discusses accommodation.
the exemption that can be
claimed by an assessee on
account of HRA.
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HRA is the tax benefit that is available only to salaried individuals
who have an HRA component as part of their salary structure and
are staying in a rented accommodation.
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Section 10(13A) describes the taxability/exemption of HRA. It
states that the least of the following amounts is exempted from
the HRA provided by employers:
Actual HRA received
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50% of Salary (for employees staying in metro cities) and 40%

of Salary (for employees staying in non-metro cities)
Rent paid (–) 10% of Salary
Sowmya is living in a metro city but she cannot use this allowance
N
for attaining any tax benefit. However, if she wants to, she can pay
the rent to her parents and claim HRA exemption, provided that
the parents own the house. For this, she would need to enter into a
rental agreement with her parents and give them monthly rentals.
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 as ‘income from house
property’ which would become subject to tax.

EXEMPTIONS & REBATES 207
learning objectives

>> Explain incomes not included in the total income, i.e.,
exemptions under Section 10 of the Income Tax Act
>> Describe various rebates of income tax
9.1 INTRODUCTION
In the previous chapter, you studied the difference between deduc- Quick Revision
tions and exemptions.
There are various incomes which are either not at all taxable or are
taxable partially. You will study such incomes in this chapter. Various
S
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 incomes are not
considered while computing the taxable income of an assessee.
IM
In this chapter, you will learn about various categories of exempted
incomes under Section 10 of the Act.
INCOMES NOT INCLUDED IN TOTAL

9.2 INCOME (EXEMPTIONS under
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SECTION 10)
Section 10 covers the incomes that do not form the part of the 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-
N
tions under Section 10 of the 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- NOTE
ture are totally exempted if it falls within the definition of agricultural In case of individuals/HUF/
income given under Section 2(1A). The reason for totally exempting AOP/BOI, when agricultural
agricultural income is that under the Constitution, the Parliament has income exceeds ` 5,000 p.a. and
no power to levy a tax on agricultural income. However, tax can be when non-agricultural income
exceeds the basic exemption
levied on agricultural income in an indirect way, which is known as
limit, agricultural income and
partial integration of taxes. For example, if an income is made by a non-agricultural income shall
seller of standing crops, who has invested labour and skill to make the be aggregated to determine the
crop sprout out of the land is agricultural income. However, if some- rate at which non-agricultural
one buys a standing crop, and generates profits out of it, that income income is to be taxed.
will not be considered as agricultural income.
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

identity 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 earned ` 5,00,000 in the last year and
has already paid tax on his/her income. Mr X 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.
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9.2.3 PARTNER’S 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-
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son 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. 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 income
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tax.
9.2.4 INCOME EARNED BY A NON-RESIDENT FROM NTRO

[SECTION 10(6D)]
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Know More In the Union Budget of 2018, a new clause 6D was added under Sec-
Under Section 10(4), interest
income earned by a non-resident
tion 10. As per this clause, if a non-resident not being a company or a
on his NRE Account (Non- foreign company arises any income by way of royalty from or fees for
resident External Account) is also technical services rendered in or outside India to the National Techni-
exempted from tax. cal Research Organisation (NTRO), then such income will be exempt
from income tax.
9.2.5 PAYMENT FROM PROVIDENT FUND [SECTION 10(11)]
As per Section 10 (11), Payment from Provident Funds, any pay-

ment from a provident fund, to which the Provident Funds Act, 1925,
applies or from any other provident fund set up by the Central Gov-
ernment and notified by it in this behalf in the Official Gazette, will be
exempted 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 (8.5%) on a yearly
basis, which will also be exempted from tax.

9.2.6 HOUSE RENT ALLOWANCE [SECTION 10(13A)]
As per Section 10 (13A), House Rent Allowance (HRA), tax exemp-

tion is available on any special allowance specifically granted to an NOTE
assessee by his employer to meet expenditure actually incurred on the Any payment made by an
payment of rent (by whatever name called) in respect of residential assessee towards Bhopal Gas
accommodation occupied by the assessee, to such extent as may be victims is exempted from tax by
prescribed having regard to the area or place in which such accommo- virtue of Section 10(10BB).
dation is situated and other relevant considerations.
Explanation: For enhanced clarity, it is hereby declared that nothing
contained in this clause shall apply in a case where: NOTE
(a) the residential accommodation occupied by the assessee is Any compensation received by
owned by him; or an individual or his legal heir
from the Government on account
(b) the assessee has not actually incurred expenditure on the of loss or damage caused due
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payment of rent (by whatever name called) in respect of the to any disaster is exempted from
residential accommodation occupied by him. tax under Section 10(10BC).
For example: Mr Kapoor receives ` 3,000 as the basic pay and ` 600 as
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the dearness allowance. His HRA allowance is ` 900 per month, while
he pays ` 1,000 per month as his accommodation in Kanpur Metropol-
itan Area. In this case, we can calculate the taxable HRA as follows:
Least of the following is exempt u/s 10 (13A):

1. Actual HRA received = 900 × 12 = `10,800
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2. 50% of basic salary (for employees staying in metro cities) and

40% of Salary (for employees staying in non-metro cities)
Since, Kanpur is a metro city, we calculate 50% of basic salary as
= 50% ((3000+600) × 12) = 50% of ` 43,200 = ` 21,600
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3. Actual rent paid – 10% of basic salary = (1000 × 12) – 10% (3600
× 12) = 12,000 – 4,320 = ` 7,680
Least of these is ` 7,680.
Therefore, Mr Kapoor’s taxable HRA will be = 10,800 – 7,680 = ` 3,120.
9.2.7 SCHOLARSHIP [SECTION 10(16)]

As per Section 10 (16), Education Scholarships, tax is exempt on schol- QUICK TIP
arships granted to meet the cost of education. The value of scholarship
received is exempted in
For example, if a student receives ` 1,00,000 as the scholarship amount the hands of the recipient
from his/university, that amount will be exempted from tax. irrespective of the source or
amount of scholarship.
9.2.8 CLUBBED INCOME OF A MINOR CHILD [SECTION 10(32)]
As per Section 10(32), Income of Minor, in the case of an assessee

referred 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.
1. As per __________, Amounts Received by a Member from the

Income of the Hindu Undivided Family (HUF), an HUF is a
separate legal identity and any income earned by the HUF is
taxable in the hands of HUF only.
2. HRA is:
a. partly taxable
b. fully exempted
c. actual rent paid alone is taxable
d. fully taxable
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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/False)
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4. As per __________, House Rent Allowance (HRA), tax
exemption is available on any special allowance specifically
granted to an assessee by his employer to meet expenditure
actually incurred on the payment of rent (by whatever name
called) in respect of residential accommodation occupied by
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the assessee, to such an extent as may be prescribed having

regard to the area or place in which such accommodation is
situated and other relevant considerations.
5. As per Section 10(32), __________, in the case of an assessee
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referred to in sub-section (1A) of Section 64, any income is

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.
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.
9.3 REBATES AND RELIEFS

Chapter VIII of the Income Tax Act deals with the allowable rebates
and reliefs for income tax. Part A of Chapter VIII details out the
rebates of Income Tax, whereas Part B details out the relief for Income
Tax. Part A contains Sections 87, 87A, 88 and 88E. Part B contains
Section 89.

Tax rebates are another form of deduction available to the tax-pay-

ers. Tax rebates are available to those individuals whose income falls
within the income-tax slabs 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.
Important rebates covered under Part A are explained as follows:

Section 87 and Section 87A of the Income Tax Act describe the
rebates to be allowed in computing the income-tax. While calcu-
lating the tax for any assessee, the applicable tax on his/her total
income tax, the applicable rebates under Sections 87A, 88 and
88E are allowed. While allowing such rebate, it must be ensured
that the amount of rebate calculated under Sections 87A, 88 and
88E should not exceed the amount of the income-tax on the total
income of the assessee.
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Section 87A describes the rebates to be allowed in computing the
income-tax in case of certain individuals. As per this Section, a
resident assessee, whose net taxable income (income after making
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deductions under Section 80) does not exceed ` 5,00,000, can claim
rebate under this Section. The amount of rebate is the lower of
` 12,500 or 100% of the income tax payable. Rebate amount is
deducted from the total tax liability of the assessee. If the tax lia-
bility of the assessee is more than ` 12,500, rebate will be limited
to ` 12,500. If the net taxable income of the assessee is more than
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` 2.5 lakh, no rebate under Section 87A can be claimed. The rebate Know More
under Section 87A can be claimed while filing the tax return. In Apart from individuals, taxpayers
case, an assessee’s tax has been deducted through TDS, he claims such as HUFs, companies and
NRIs cannot claim this benefit.
the same as a refund.
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As per Section 89 of the Act, if an assessee receives arrears of salary or

advance salary or arrears of family pension, then the amount received
is taxable in the financial year in which it is received. However, an
assessee can seek relief and reduce the additional tax burden caused
by delay in receiving such income under Section 89.
The format in which rebate and relief under Sections 87A and 89,
respectively can be claimed is shown in Table 9.1:
Table 9.1: Format of Rebate under section 87A

and Relief under section 89
QUICK TIP
Amount (in `) The amount of rebate should not
exceed the income-tax payable
Tax on Total Income (after deductions) XXXX by an assessee. If the rebate
amount the exceeds net payable
Less: Rebate as per Section 87A XXXX tax, the difference cannot be
claimed as refund.
Add: Health and Education Cess (4%) XXXX
Less: Relief as per Section 89 XXXX

6. If the net taxable income of the assessee is more than `____

lakhs, no rebate under Section 87A can be claimed.
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.
S 9.4 SUMMARY
Section 10 covers the income that does not form the part of tax-
able income. These are those incomes on which the income-tax is
S
exempted. In other words, no tax is applied on these incomes.
Some of the exemptions under Section 10 of the Income Tax Act,
1961 are:
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Agricultural Income [Section 10(1)]
Receipts from HUF [Section 10(2)]
Partners share in the income of the firm [Section 10(2A)]
Income Earned by Non-Resident from NTRO [Section 10(6D)]
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Payment from Provident Fund [Section 10(11)]

House Rent Allowance [Section 10(13A)]
Scholarship [Section 10(16)]
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Clubbed Income of a Minor Child [Section 10(32)]

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.
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 individu-
als.
Section 89, Relief when salary, etc., is paid in arrears or in ad-
vance
Key Words
House Rent Allowance (HRA): A part of the salary provided

by an employer to his employee for his rented accommodation

Scholarships: A grant or payment awarded on the basis of aca-

demic or other achievement
Tax rebate: A refund on taxes when the tax liability is less than
the taxes paid

?
1. Summarise the incomes not included in Total Income
(Exemptions under Section 10).
2. Explain exemptions of income as per Section 10(2A).
3. Summarise the rebates and reliefs of income tax.
S
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Topic Q. No. Answer
Incomes not included in Total Income 1. Section 10(2)
(Exemptions under Section 10)
2. a. partly taxable
3. True
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4. Section 10 (13A)
5. Income of Minor
Rebates and Reliefs 6. 2.5
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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. Refer to Section 9.2 Incomes not included in Total
Income (Exemptions under Section 10)
2. As per Section 10(2A), Share Income of Partner, 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. Refer to Section 9.2 Incomes not included in Total
Income (Exemptions under Section 10)
3. Tax rebates are another form of deduction or relief available
to the taxpayers. Tax rebates are available to those individuals
whose income falls within the income-tax slabs that are modified
every year as per the government’s directions. Refer to Section
9.3 Rebates and Reliefs

SUGGESTED READINGS
1961 (Act no. 43 of 1961) together with Finance Act, 1962-1963 and
rules
1964
E-REFERENCES
Satapathy, S. (2018). List of Exempted Incomes (Tax-Free) Under
Section-10. Incometaxmanagement.com. Retrieved 11 April 2018,
from http://incometaxmanagement.com/Pages/Tax-Ready-Reck-
S
oner/Exempted-Incomes/Exempted-Incomes-Under-Section-10.
html
Tax Rebate Under Section 87A. (2018). Cleartax.in. Retrieved 11
IM
April 2018, from https://cleartax.in/s/income-tax-rebate-us-87
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Ch
10 a pt e r
Set-Off and Carry Forward of Losses
Contents
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10.1 Introduction
10.2 Clubbing of Income
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10.2.1 Income of Other Persons Included in Assessee’s Total Income
Activity
10.3 Concept of Set-Off and Carry Forward of Losses
10.3.1 Inter Source Adjustment of Losses
10.3.2 Inter Head Adjustment of Losses and Set-off of Brought Forward
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Losses
10.3.3 Summarised Provisions of Set-off and Carry Forward of Losses
Activity
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10.4 Computation of Total Income

Activity
10.5 Summary

SET-OFF AND CARRY FORWARD OF LOSSES
Sections 70 to 74 of the Income Tax Act, 1961, deal with set-off

Case Objective and carry forward of losses. Mr Einy had the following business
incomes/losses for the Assessment Year 2021-2022:
provisions of set-off and
carry forward of losses while 1. Income from salary ` 1,50,000
computing the Gross Total 2. Speculation business income ` 71,000
Income of an assessee.
3. Non-speculation business losses ` 39,000
4. Short-term capital gains ` 79,000
5. Long-term capital loss relating to A.Y. 2018-2019 ` 28,000
6. Lottery and gambling income ` 30,000
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Speculation business losses can be set-off only against speculation
business profits. However, losses from other businesses can be
set-off against speculation business gains and gains under other
heads of income except for salaries.
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Losses from speculation business can be carried forward for four
assessment years for set-off against income from speculation busi-
ness. Other unabsorbed business losses can be carried forward
for 8 assessment years for set-off against profits and gains from
business or profession.
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A long-term capital loss can be set-off against long-term capital

gain only. However, a short-term capital loss can be set-off against
both long-term and short-term capital gains. Also, capital gains/
losses cannot be set-off from any other head of income. Both
long-term and short-term capital losses can be carried forward
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for eight assessment years for set-off against long-term and long-
term/short-term gains, respectively.
The taxable income of Mr Einy for the Assessment Year 2021-2022

will be as follows:
Particulars Amount in ` Amount in `

Income from Salary 1,50,000
Speculation business income 71,000
Less: Set-off of non-speculation busi- 39,000 32,000
ness loss
Short-term capital gains 79,000
Lottery income 30,000
Total Income 2,91,000
Since long-term capital loss (` 28,000) can be set-off only against

long-term capital gains, it shall be carried forward to the next
assessment year.

Set-Off and Carry Forward of Losses 217
learning objectives

>> Explain the concept of clubbing of income
>> Describe the provisions of intra-head and inter-head set-off
of losses
>> Discuss the sections of carry forward and set-off of brought
forward losses
>> Outline the steps in computation of total income
10.1 Introduction
In the previous chapter, you studied about Section 10 which covers Quick Revision
S
the income that does not form the part of taxable income. In this chap-
ter, you will study in detail about the concept of set-off and carry for-
ward of losses.
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Specific provisions have been made in the IT Act, 1961, for the set-
off and carry forward of losses. Set-off refers to adjustment of losses
against the profits from another source/head of income in the same
assessment year. If losses cannot be set-off in the same year due to
inadequacy of eligible profits, then such losses are carried forward for
the next assessment year for adjustment against the eligible profits of
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that year. The maximum period for which different losses can be car-
ried forward for set-off has been given in the Act.
Moreover, the chapter also discusses the provisions of clubbing

wherein income of a person is to be clubbed with another person to
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ensure that taxpayers do not manipulate their tax liability by transfer-

ring assets and incomes among family members. In the last section of
this chapter, the process of computation of total income of an assessee
is also explained.
10.2 CLUBBING OF INCOME

According to the Income Tax Act, 1961, the income of an assessee is
generally put to tax in his own hands and not in the hands of any other
person. With a view to reduce tax burden, sometimes assessees with
huge taxable income tend to shift their burden of tax by deliberately
transferring their portion of income to other assessees who do not
have taxable income or are taxed at lower rates of taxes. For exam-
Know More
ple, this can be achieved by increasing revenue generating capacity or Clubbing provisions are
gifting income generating assets to immediate family members. applicable to income which
includes loss. Thus, the
In order to curb these practices adopted by assessees, the Income Tax provisions of clubbing get
Department has imposed restrictions by virtue of Sections 60 to 64. attracted in all the cases,
As per these provisions, although the income may be earned by one even when there is a loss and
person, it is sought to be clubbed and taxed in the hands of another not income.
person so as to protect the revenue interests of the government. In

certain cases, the assessee has to pay tax in respect of the income
derived by another person. These sections counteract the tendency
of the taxpayers to transfer their income or dispose of their property
with a view to avoid or reduce their tax liability.
10.2.1 INCOME OF OTHER PERSONS INCLUDED IN

Study ASSESSEE’S TOTAL INCOME
Hint
Under the provisions of clubbing, the income derived by one person
Revocable transfer means
where the transfer contains shall be includible in the total income of the assessee and charged to
a provision for retransfer of tax in his hands.
the assets or income to the
transferor, and which gives These provisions are explained in Table 10.1 below:
the transferor the right to
re-assume power over the Table 10.1: Clubbing Provisions
assets or income.
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Section Nature of Income to be Clubbed Taxability
Section There is a transfer by a person of Such income shall be
60 income accruing to an asset with- included in the total
out the transfer of the asset itself income of the transferor.
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giving rise to such income. It is immaterial whether
such transfer is revocable
or irrevocable.
Section There is a revocable transfer of Such income shall be
61 assets and income arises to any included in the total in-
person on assets obtained by virtue come of the transferor.
of revocable transfer of assets.
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Section Section 61 does not apply where Such income shall be

62 the asset is transferred by way of included in the total in-
trust and is not revocable during come of the transferee.
the lifetime of the beneficiary or
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where the asset is transferred oth-

erwise, and is not revocable during
the lifetime of the transferee.
Section Remuneration is received by an Such income arising to
64(1)(ii) individual’s spouse from a concern spouse shall be included
where the individual holds a sub- in the total income of the
stantial interest. individual.
However, if the remuneration re-
NOTE ceived by spouse is solely attributa-
ble to her technical or professional
For Section 64(1)(ii), a person
is deemed to have substantial
knowledge and experience, then
interest in a concern if he alone such income shall not be clubbed.
or along with his relatives is According to Explanation to Sec-
the beneficial owner of equity tion 64(1)(ii), in case where both
shares carrying 20% or more individual and the spouse have
voting power. Similarly, a person
substantial interest in a concern
is deemed to have substantial
interest in any other concern and both receive remuneration
if he alone or along with his from such concern, then such in-
relatives is beneficially entitled come shall be clubbed in the hands
to receive 20% or more profits of of that spouse whose total income
such concern. excluding such income is higher.


Section Income arises to spouse of an indi- Such income arising
QUICK TIP
For the purposes of Section
64(1)(iv) vidual from assets transferred (oth- from assets transferred to 64(1)(ii), remuneration may be
er than house property) to spouse spouse shall be included received from the concern in
without adequate consideration or in the total income of the cash or kind.
under an agreement to live apart. transferor (i.e., individ-
This section does not apply where ual).
house property is transferred to
spouse, because in that case, the
transferor shall be deemed to be
the owner of such house property
under Section 27 and his income
shall be computed under the head
‘Income from House Property’.
Section Income arises to son’s wife from Such income arising from
64(1)(vi) assets transferred by the individual assets transferred to son’s
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to the son’s wife without adequate wife shall be included in
consideration. the total income of the
transferor (i.e., individ-
ual).
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Section Income arises to any person or Such income shall be
64(1)(vii) AOP from assets transferred oth- included in the total in-
and Sec- erwise than for adequate consider- come of the transferor.
tion 64(1) ation by an individual; where such
(viii) assets are transferred for the imme-
diate or deferred benefit of the
individual’s spouse or son’s wife.
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Section Income arises or accrues to a minor Such income of the minor Study
64(1A) child (including minor married child shall be included in Hint
daughter). the total income of his or Once clubbing of income of a
The clubbing provisions, however, her parent. minor child is done with the
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will not be attracted in case the Such income of the minor income of one of the parents,
income of the minor child accrues child shall be clubbed the same will be clubbed
on account of his manual work, with the income of that with that parent only for the
application of skills, knowledge, parent whose total in- subsequent years unless the
experience, etc. or where the minor come excluding minor’s Assessing Officer considers it
child is suffering from disability as income is higher, where necessary to do otherwise.
specified under Section 80U. the marriage of parents
subsists. Where the
marriage of parents does
not subsist, the income of
the minor child shall be
clubbed with the income
of the parent who main-
tains the minor child.
The parent in whose total
income the minor child’s
income is clubbed, shall
be entitled to an exemp-
tion of maximum ` 1,500
per child in respect of
such income under Sec-
tion 10(32).


Section Income arises from a self-acquired Such income shall be
64(2) property which is converted for included in the total in-
inadequate consideration by an income of the individual.
dividual into a property of an HUF
of which he is a member.
1. Clubbing provisions are also applicable to losses. (True/False)

2. __________ deals with provisions for income to be clubbed on
conversion of self-acquired property into joint family property.
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Activity
Search on the Internet about the clubbing of income of a minor

child with his or her parent. Make a list of any exemptions available
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to the parent while computing his or her total taxable income.
CONCEPT OF SET-OFF AND CARRY

10.3
FORWARD OF LOSSES
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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. Set-off
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of losses refers to the adjustment of losses incurred by an assessee

against the profit of that financial year. Losses can be carried forward
to subsequent assessment years in case there are no adequate profits
in the given financial year.
Regarding the set-off and carry forward of loss, the following points
must be remembered:
Loss from a source of income that is exempted from tax cannot
be set-off against any other income which is taxable. For exam-
ple, loss on the grounds of agricultural activity (which is exempted
from tax) cannot be adjusted against profit or income from any
other taxable source of income.
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 adjust-

ment. For example, if an assessee runs two businesses X and Y,
then loss from business X can be set-off against profits from busi-
ness Y.
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.
At times, some part of the loss may still remain even after making
intra-head and inter-head adjustments. In such cases, the unad-
justed loss can be carried forward to the next year for adjustment
against subsequent years’ income. This is called carry forward of
S
loss. Different heads of income have different provisions for carry
forward of loss.
IM
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
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in the subsequent years, inter-head adjustment would not be allowed.

Such amount of loss can be carried forward for eight years succeeding
the year in which the loss occurred.
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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. The provisions 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.
10.3.1 INTER-SOURCE ADJUSTMENT OF LOSSES
As per Section 70 of Income Tax Act, 1961, if the assessee has incurred
losses under a certain income head, then he/she is permitted to adjust
these losses from any other income source under the same head. This
is referred to as intra-head adjustment. A taxpayer is not allowed to
carry out intra-head/inter-source 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.
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.
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 business. How-
S
ever, loss from other business can be set-off against the profit of
the specified business in a given financial year.
IM
10.3.2 INTER-HEAD ADJUSTMENT OF LOSSES AND SET-
OFF OF BROUGHT FORWARD LOSSES
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
income under other heads of income, he/she is allowed to adjust the
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loss from one head against income from other heads. Some examples
are as follows:
House property income losses: House property income losses
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can be set-off against profits from other heads. Such loss can be
adjusted against salary income, business income, income from cap-
ital gain, and income from other sources except for casual income.
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

Study inter-head adjustments:
Hint
Speculative business loss
Loss from business or
profession can be set-off and Specified business loss
carried forward and set-off
even against speculation Capital gain income loss
business income and specified
business income under Loss from owning and maintaining race horses
Section 35AD.
Even after the taxpayer has made intra-head or inter-head adjust-
ments, it may be the case that the losses continue to remain unad-
justed. Such unadjusted loss can be carried forward to the subsequent
year for adjustment against the income from that subsequent year.

The Act lays down different provisions for carrying forward of losses
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 losses incurred under
the head house property up to a period of eight years immedi-
ately succeeding the assessment year in which the loss has been
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 busi-
ness loss up to a period of eight years immediately succeeding the
assessment year in which the loss has been 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
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against business income.
Speculative business losses: Section 73 of the Act specifies that
losses in speculative businesses can be carried forward up to a
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period of four years immediately succeeding the assessment year
in which the loss has been incurred. An assessee must file the ITR
within due date prescribed to carry forward the losses from specu-
lative business. Such loss can be adjusted only against income
from speculation business.
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Specified business loss: According to Section 73A of Income Tax

Act, 1961, losses in specified business can be carried forward sub-
ject to the following conditions:
Loss in respect of any specified business referred to in section
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35AD shall not be set-off except against profits and gains, if

any, of any other specified business.
If the loss in specified business has not been wholly set-off, so
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 next assessment year. It shall be NOTE
set-off against profits and gains, if any, of any specified busi- Section 35AD provides
investment linked incentives
ness, carried on by him assessable for that assessment year. to assessees incurring capital
Capital gain losses: If a taxpayer is unable to set-off the capital loss expenditure in respect of setting
up and operation of certain
in the given financial year, both long-term loss and short term loss specified businesses.
can be carried forward immediately for eight assessment years.
Brought forward losses or unabsorbed depreciation: In case
where a company suffers a loss before claiming depreciation, then
the entire amount of depreciation 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.

10.3.3 SUMMARISED PROVISIONS OF SET-OFF AND CARRY

FORWARD OF LOSSES
Now let us summarise the provisions of set-off and carry forward of

losses in Table 10.2 below:
Table 10.2: Set-off and Carry Forward of Losses

Section Nature Inter-Source/Inter-Head Maximum no. of Years
of Loss Set-off of Losses for Carry Forward and
Set-off of Losses
Section Loss Inter-source: Can be set- Brought forward loss of
71B from off against income from one assessment year can
house another house property be carried forward to the
property Inter-head: Can be set- following eight assess-
off against income under ment years to be set-off
any other head, but against income under the
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restricted to the extent of head ‘Income from House
` 2 lakhs Property’
Section Loss Inter-source: Can be Brought forward loss of
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72 from set-off against income one assessment year can
business from another business or be carried forward to the
or pro- profession following eight assess-
fession Inter-head: Can be set- ment years to be set-off
off against income under against income under the
any other head, but not head ‘Profits and Gains of
against income under the Business or Profession’
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QUICK TIP head ‘Salaries’

Unabsorbed depreciation can be
carried forward for adjustment Section Loss Inter-source: Can be set- Brought forward loss of
even though the business 73 from off only against income one assessment year can
related to such depreciation has specu- from any other specula- be carried forward to the
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been discontinued. lation tion business following four assessment

business Inter-head: Cannot be years to be set-off against
set-off against income income from any specula-
under any other head tion business
73A from off only against income one assessment year can
specified from any other specified be carried forward to the
business business under Section following any no. of as-
under 35AD sessment years to be set-
Section Inter-head: Cannot be off against income from
35AD set-off against income any specified business
under any other head
Section Long- Inter-source: Can be set- Brought forward loss of
74 term off only against long-term one assessment year can
capital capital gain be carried forward to the
loss Inter-head: Cannot be following eight assess-
set-off against income ment years to be set-off
under any other head against long-term capital
gain

Section Nature Inter-source/Inter-head Maximum no. of years

of loss set-off of losses for carry forward and
set-off of losses
Section Short- Inter-source: Can be Brought forward loss of
74 term set-off against both short- one assessment year can
capital term capital gain or long- be carried forward to the
loss term capital gain following eight assess-
Inter-head: Cannot be ment years to be set-off
set-off against income against long-term capital
under any other head gain or short-term capital
gain
74A from the off only against income one assessment year can
activity from such activity be carried forward to the
of own- Inter-head: Cannot be following four assessment
ing and years to be set-off against
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set-off against income
main- under any other head income from the activity
taining of owing and maintaining
race race horses
horses
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Section Unab- Inter-source: Can be set- Brought forward loss
32(2) sorbed off against income from of one assessment year
depreci- any business can be carried forward
ation Inter-head: Can be set- to the following any no.
off against income under of assessment years to
any other head except be set-off against income
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salary from any head other than

salaries
Mandatory filing of Return of income (Section 80)

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According to Section 80, in order to be eligible to carry forward and

set-off a loss suffered in a particular assessment year, the assessee Know More
Losses from gambling, betting,
must have filed the return of income within the time limit as pre- lottery, card games, etc., are
scribed under Section 139(1). However, this condition is not applica- not allowed to be set-off or
ble of loss from house property income (Section 71B) and unabsorbed carried forward. Similarly,
depreciation (Section 32(2)). losses from an exempt source
of income are not allowed to
be set-off or carried forward.
Order for set-off of losses
The order in which set-off of losses shall be given effect is as follows:

1. Depreciation of current year or capital expenditure of current
year on scientific research and current year expenditure on
family planning, to the extent allowed.
2. Brought forward losses of business or profession
3. Unabsorbed depreciation
4. Unabsorbed capital expenditure on scientific research
5. Unabsorbed expenditure on family planning

Let us discuss some illustrations to understand the concept of set-off

and carry forward.
Illustration 1: Mr Mukherjee submits the following particulars of his

income for the A.Y. 2021-2022. Find his gross total income setting off
and carrying forward losses.

Income from the let out house (Computed) 15,000
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
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Winnings in card game 8,000
The items brought forward for set-off:

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Loss from Sugar Mill of A.Y. 2013-2014 which is discontinued 13,000
Loss from publication business of A.Y. 2013-2014 9,000
Loss in card game of A.Y. 2014-2015 4,000
Speculation loss of A.Y. 2012-2013 24,000
Short-term capital loss of A.Y. 2016-2017 12,000
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Long-term capital loss of A.Y. 2006-2007 14,000
Solution: Computation of gross total income of Mr Mukherjee:
Income from House Property

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(15,000 – 14,000, being loss from self-occupied house) 1,000

Income from Business and Profession:
(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)
(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 18,000
capital loss ` 12,000) (B/F long-term capital loss cannot be set-
off, on account of expiry of time limit of 8 years)
Income from other sources (winnings in card game, B/F loss 8,000
cannot be set-off)
Gross Total Income 50,600
Illustration 2: From the following particulars regarding income, com-

pute the total income of Ms. Mehak for the A.Y. 2021-2022:
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 ` 70,000
Solution: Computation of gross total income of Ms. Mehak for

A.Y. 2021-2022:
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Salary 1,08,000
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Income from house property (` 40,000 – ` 20,000 – (30,000)
` 50,000)*
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 carried forward to A.Y. 2022-2023
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Capital gains :
(i) Short-term capital gains (` 30,000 – ` 40,000) (10,000)
(ii) Long-term capital gains 1,00,000 90,000
Income from other sources : [` 50,000 + ` 70,000] 1,20,000
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(Loss from horse races of ` 30,000 to be carried forward

to next A.Y. 2022-2023)
Total income 2,38,000
* Loss from house property can be set-off against salary income and
loss from general business can be set-off against income from other
sources.
3. Loss from a source of income that is exempted from tax can be

set-off against any other income which is taxable. (True/False)
4. Loss from house property can be carried forward for ______
years succeeding the year in which the loss occurred.
5. The provisions of set-off and carry forward of losses has been
made so as to divide the _________ of assessee in the case of
losses.

6. Loss from a speculation business of a particular assessment

year can be set-off in the same assessment year from which of
the following:
a. Profit and gains from any business
b. Profit and gains from any business other than speculation
business
c. Income of speculation business
d. Income of any business
7. 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.
(True/False)
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Activity
Prepare a list of losses incurred by an assessee which cannot be set-

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off under inter-head adjustments.
10.4 COMPUTATION OF TOTAL INCOME

As we know, the income tax is levied on the total income of an assessee.
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Such total income is computed in accordance with the provisions laid

down under the Income Tax Act, 1961. After making deductions under
Chapter VI-A from the Gross Total Income for a previous year, the
total income of an individual is arrived at. Gross Total Income (GTI) is
computed by the summation of the net income calculated under the
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different heads of income, after giving consideration to the provisions

of clubbing of income and set-off and carry forward of losses.
For the purpose of levy of income tax, the procedure for computation
of total income of an assessee is discussed in Table 10.3 below:
Table 10.3: Computation of Total Income and Net

Tax Payable
Step Treatment under the Income Tax Act
QUICK TIP Step 1 – The determination of residential status forms the founda-
After aggregation of income
computed under each head, Determi- tion for computation of assessable income of an assessee. It
clubbing provisions are applied nation of is determined in order to ascertain as to which income shall
first and, thereafter, provisions residential be subject to tax and included while computing the taxable
of set-off and carry forward are status income of an assessee. The number of days of stay of an in-
incorporated. dividual in India determine his/her residential status, which
in turn, determines the scope of total income. Similarly, for
a company assessee, the place of effective management and
control of affairs of the company determine its residential
status. The provisions of residential status are discussed ear-
lier in Chapter 2 of the book.


The categories of residential status of an assessee are:
zz Resident
zz Resident and ordinarily resident
zz Resident but not ordinarily resident
zz Non-resident
Step 2 The income of an assessee is identified, classified and
– Classi- grouped under different heads of income as prescribed un-
fication der the Income Tax Act. The incomes are classified based on
of income the charging section of each head which defines the incomes
under chargeable to tax under the relevant heads (for example, Sec-
different tion 15 is the charging section for taxability of salaries). The
heads charging section and other deeming sections of a particular
head of income determine the scope of income to be taxed
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under such head.
The five heads of income are:
1. Salaries
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2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other Sources
Step 3 The provisions governing a specific head of income are
– Compu- applied to compute the income chargeable to tax under each
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tation of head. The taxable income under each head is calculated

income after allowing or disallowing for exemptions and permissible
under each deductions contained in the provisions of each head, and also
head, re- accounting for certain exemptions contained in Section 10 of
spectively the Act.
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Step 4 – Individuals falling within higher tax brackets generally have

Clubbing a tendency to divert their income to some other person (e.g.,
of income family members) who falls within a lower tax bracket or is
of spouse, not subject to tax. With a view to prevent tax evasion by such
minor means, clubbing provisions are incorporated under the Act.
child, etc. Under these provisions, income arising to certain persons
(e.g., family members) have to be aggregated with the income
of the person who has diverted his revenue/income to such
persons.
Step 5 – An assessee can have different sources of income and may
Set-off have profit from one source and loss from another. The provi-
of losses sions of Income Tax Act allow an assessee to adjust loss from
and carry one head or source of income with profits earned under an-
forward other head or source of income under the same head. There
and set-off are different provisions for inter-source set-off of losses (set-
of losses off of loss of one source from profits of another source of the
same head), inter-head set-off of losses (set-off of loss of one
head from profits of another head) and carry forward, and
set-off of brought forward losses.


Step 6 The total income under each head is aggregated and, there-
– Compu- after, clubbing and set-off/carry forward provisions are given
tation of effect to arrive are at the Gross Total Income.
Gross Total Gross Total Income = Submission of income calculated un-
Income der each head + Application of clubbing provisions + Appli-
cation of provisions of set-off and carry forward of losses
Step 7 – Certain deductions are allowed to assessees under Chapter
Deduction VI-A of the Income Tax Act. These deductions from Gross
under Total Income are categorised into:
Chapter zz Deductions in respect of certain payments
VI-A
zz Deductions in respect of certain incomes
zz Deduction in respect of other incomes
zz Other deductions
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The provisions of residential status are discussed earlier in
Chapter 8 of the book.
Step 8 The Gross Total Income as reduced by the above deductions
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– Com- is referred to as Total Income.
putation Total Income = Gross Total Income – Deductions under
of Total Chapter VI-A
Income
The total income should be rounded off to the nearest multi-
ple of `10.
Step 9 – Tax is computed on the Total Income of an assessee. Slab
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Applicabil- rates as prescribed by the Finance Act, 2018 are to be ap-

ity of rates plied on the total income to compute the tax liability of an
of income assessee. These rates are discussed in Chapter 1 of the book.
tax on the Also, there are some specific tax rates on some special types
total in- of income prescribed under relevant sections of the Act itself
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come of an such as tax rates on long-term capital gains under Section

assessee 112 or 112A.
Step 10 – Surcharge is an additional tax levied in income tax as calcu-
Computa- lated above. After adding surcharge to income tax calculated
tion of Sur- at the normal rates, the total income tax is arrived at. Under
charge and Section 87A, a tax rebate is also allowed to resident individu-
Rebate als whose total income does not exceed ` 3,50,000 during the
previous year. The rebate is deducted from total income tax
before calculating the health and education cess. The con-
cept and rates of surcharge and rebate are discussed earlier
in Chapter 1 of the book.
Step 11 Health and Education Cess is computed on income tax as
– Compu- increased by surcharge and as reduced by rebate, if any.
tation of After the tax is increased by Health and Education Cess, net
Health and income tax payable is arrived at. Heath and Education Cess
Education is payable by all assesses who are liable to pay tax regardless
Cess of their level of income.
Health and Education Cess on income tax = 4% of income
tax and surcharge, if applicable.
The concept and rates of Health and Education Cess are
discussed earlier in Chapter 1 of the book.


Step 12 The total tax liability is computed as follows:
– Compu- Total Tax Liability = Tax on Total Income at applicable rates
tation of + Surcharge – Rebate + Health and Education Cess
Total Tax
Liability
Step 13 – From the total tax due, the advance tax paid, TDS and TCS
Credit for for the relevant assessment year has to be deducted to arrive
Advance at the net tax liability.
tax, TDS Net Tax Liability = Total Tax Liability – Tax Deducted at
and TCS source (TDS) – Tax Collected at source (TCS) – Advance Tax
paid
Net Tax Payable or Net Tax Refundable is rounded off to the
nearest multiple of `10.
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8. Surcharge is an additional tax leviable on income tax. (True/

False)
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9. The Gross Total Income as reduced by deductions under
__________ is referred to as Total Income.
Activity
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Search on the Internet and prepare a report on the treatment of

income earned by an assessee in various capacities such as an indi-
vidual, as a partner of the firm, as a member of an HUF, etc.
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10.5 Summary S
With a view to reduce tax burden, sometimes assessees with huge
taxable income tend to shift their burden of tax by deliberately
transferring their portions of income to other assessees who do
not have taxable income or are taxed at lower rates of taxes. In
order to curb these practices adopted by assessees, the Income
Tax Department has imposed restrictions by virtue of Sections 60
to 64.
Ifthe loss from house property is not fully adjusted in the same
year in which the loss incurred, then such loss can be carried for-
ward to the next year.
As per Section 70 of Income Tax Act, 1961, if the assessee has
incurred losses under a certain income head, then he/she is per-
mitted to adjust these losses from any other income source under
the same head. This is referred to as intra-head adjustment.
The other method of carrying forward or set-off of losses is through
inter-head adjustments. As per Section 71 of Income Tax Act,

1961, if an assessee incurs loss under one head of income and has
earned any income under other heads of income, he/she is allowed
to adjust the loss from one head against income from other heads.
The losses incurred in the following cases cannot be set-off under
inter-head adjustments:
Speculative business loss
Specified business loss
Capital gain income loss
Loss from owning and maintaining race horses
Gross Total Income is computed by the summation of the net
income calculated under the different heads of income, after giv-
ing consideration to the provisions of clubbing of income, and set-
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off and carry forward of losses.
Key Words
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Clubbing: In case of computation of Gross Total Income of an
assessee, the income of another member of his or her family is
also included and taxed
Inter-head adjustments: After the intra-head adjustments,
the taxpayers can set-off remaining losses against income from
other heads
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Intra-head adjustments: Losses from one source of income can

be set-off against income from another source under the same
head of income
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Set-off of loss: The adjustment of losses from one head against

the income, profits or gains of any other head of income during
the assessment year
? 10.6 Descriptive Questions

1. What do you understand by set-off and carry forward of loss?
2. What are the cases under which a taxpayer is not allowed to
carry out intra-head adjustments of loss?
3. Write short note on the following:
a. Non-speculative business losses
b. Speculative business losses
4. Briefly explain the provisions of clubbing as described under the
Income Tax Act.
5. Explain the process of computation of total income of an assessee.

Topic Q. No. Answer

Clubbing of Income 1. True
2. Section 64(2)
Concept of Set-Off and Carry 3. False
Forward of Losses
4. eight
5. Tax burden
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6. c. Income of speculation
business
7. True
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Computation of Total Income 8. True
9. Chapter VI-A

1. Set-off of loss means that a particular amount of loss is equated
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and negated by an equal amount of profit. Refer to Section 10.3

Concept of Set-Off and Carry Forward of Losses
2. Speculative business losses, long-term capital loss, income losses
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from owning and maintaining race horses, and so on. Refer to

Section 10.3.1 Inter Source Adjustment of Losses
3. Section 73 of the Act specifies that losses in speculative businesses
can be carried forward up to a period of four years immediately
succeeding the assessment year in which the loss has incurred.
Refer to Section 10.3.2 Inter Head Adjustment of Losses and
Set-off of Brought Forward Losses
4. According to Sections 60 to 64, although the income may be
earned by one person, it is sought to be clubbed and taxed in the
hands of another person so as to protect the revenue interests of
the Government. Refer to Section 10.2 Clubbing of Income
5. The total income is computed in accordance with the provisions
laid down under the Income Tax Act, 1961. After making
deductions under Chapter VI-A from the Gross Total Income for
a previous year, the total income of an individual is arrived at.
Refer to Section 10.4 Computation of Total Income

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-
tants. Retrieved 5 April 2018, from http://blog.ritulpatwa.com/
income-tax-calculation-of-partnership-firms-llps-for-f-y-2018-19/
Singhania, V., & Singhania, K. (2004). Taxmann’s direct taxes. New
Delhi: Taxmann Publications.
S
e-References
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
IM
https://www.hrblock.in/guides/income-tax-slab-rates/
Lohani, C. (2018). Gross Total Income-Total Income meaning
under Income Tax Act 1961. Abcaus.in. Retrieved 5 April 2018,
from http://abcaus.in/articles/income-tax/gross-total-income.html
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Ch
11 a pt e r
INDIRECT TAXATION – GOODS AND SERVICES TAX
Contents
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11.1 Introduction
11.2 Introduction to GST
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11.2.1 Importance of GST
11.2.2 Features and Benefits of GST
11.2.3 Evolution of GST
11.2.4 Goods and Service Tax Network
11.2.5 GST Rates in India
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Activity
11.3 Levy and Collection of GST (Charging Section)
11.3.1 Exemption from GST
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11.3.2 Supply of Goods

Activity
11.4 Input Tax Credit (ITC)
11.4.1 Transfer of Input Tax Credit
Activity
11.5 Payment of Tax
Activity
11.6 Reverse Charge and Returns
Activity
11.7 Offences in GST
Activity

Contents
11.8 E-way Bill

Activity
11.9 Summary
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INDIRECT TAXATION – GOODS AND SERVICES TAX 237
n o t e s
ROLE OF GOODS AND SERVICEs TAX IN ELIMINATING

THE CASCADING EFFECT OF TAXES
By subsuming Central and State taxes into a single tax and by Case Objective
offering a set-off of prior stage taxes for all transactions across the
value chain process, GST mitigates the ill effects of cascading and This caselet shows the role
double taxation. This improves liquidity and competitiveness of of GST in eliminating the
cascading effect of taxes
businesses.
There is a local supply of goods/services by supplier Amar to

Bhargav in Madhya Pradesh. Supplier Amar would charge dual
GST on the supply, including CGST and SGST at the specified
rates. These taxes charged on Bhargav will be remitted by Amar
to the respective accounts of Central and State Governments.
Since Amar is the first stage supplier, he cannot avail any input
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tax credit of CGST/SGST/IGST.
Supply of goods/services by Amar to Bhargav Amount in `

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Value of goods and services 10,000
Add: CGST@ 9% 900
Add: SGST@ 9% 900
Total price charged by Amar from Bhargav 11,800
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On supply of goods/services by supplier Bhargav to the ultimate

consumer Chinmay, Bhargav shall avail input tax credit of CGST
and SGST paid by him on the prior purchase transaction. This
input credit will be set-off against the tax payable on the supply of
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goods/services by Bhargav to Chinmay.
Supply of goods/services by Bhargav to Chinmay Amount in `

Value of goods and services at value addition of 20% 12,000
Add: CGST@ 9% 1,080
Add: SGST@ 9% 1,080
Total price charged by Bhargav from Chinmay 14,160
The amount of tax paid to the government, i.e., `360 shall be cal-
culated after netting off the input tax credit availed by Bhargav,
i.e., `1,800 from tax payable on the last transaction, i.e., `2,160,
thus preventing double taxation. The input tax credit of CGST
and SGST is available throughout the supply chain. Similarly, if
there is an inter-state sale, the cross-utilisation of CGST/SGST
and IGST is also allowed.

n o t e s
CGST and SGST payable by Bhargav to the Amount in `

Government
CGST payable 1,080
Less: Input credit of CGST 900
Tax payable to Central Government 180
SGST payable 1,080
Less: Input credit of SGST 900
Tax payable to State Government 180
Total Tax revenue deposited by Bhargav (`180 + `180) 360
Total Tax revenue deposited by Amar (`900 + `900) 1,800
Final CGST and SGST on supply of goods (`1,080 + 2,160
`1,080)
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The final amount of tax is ultimately recovered from the final con-
sumer, i.e., Chinmay. Thus, GST entails tax to be imposed only on
the value added at each stage, preventing a tax on tax or cascad-
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ing effect. The suppliers are permitted to avail input tax credit
of GST paid on purchases of goods/services, that can be set-off
against tax payable on the supply of goods/services by them at
each subsequent stage.
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learning objectives

>> Explain the concept of GST
>> Describe the charging section of the GST that relates to levy
of tax
>> Discuss the concept of Input Tax Credit
>> Explain how the payments are made in case of GST
>> Describe the concept of reverse charge and returns
>> Discuss the various offences related to GST and the penal-
ties related to these offences
>> Explain the concept of E-way Bill as it relates to GST
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11.1 INTRODUCTION
In the previous chapter, you studied about the provisions related to Quick Revision
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the clubbing of income, set-off and carry forward of losses and process
of computing the total income. 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 Goods and Services Tax
(GST) has been introduced from the year 2017. In this chapter, you
will study GST in detail.
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GST is considered to be one of the most important reforms in the tax

after independence. Goods and Services Tax (GST) is an exhaustive
indirect tax that is levied on the production, sales and consumption of
goods and services throughout India.
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11.2 INTRODUCTION TO GST

GST is a consumption-based tax imposed on goods and services. It is a
single uniform tax which has eliminated and absorbed 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 ser-
vices, manufactured or supplied inside India; however, there are three
products which are exempted from GST, i.e., alcohol for human con-
sumption, petroleum products and electricity.
Broadly, the GST is categorised into four categories. These are:

1. Central Goods and Services Tax (CGST)
2. Integrated Goods and Services Tax (IGST)
3. State Goods and Services Tax (SGST)
4. Union Territory Goods and Services Tax (UTGST)

Let us discuss about these categories in the subsequent sections.

1. CGST: CGST is a constituent of GST. CGST comes under the
Central Goods and Services Tax Act, 2016. CGST is levied on the
migration of goods and services within a state and amendments
can be made to it from time to time by a separate body. The
total revenue collected under CGST is intended for the Centre.
However, the states get input tax credit on CGST and it may be
utilised against the Central GST’s payment.
2. IGST: IGST is a constituent of Integrated Goods and Services Tax
Act, 2016. IGST is levied on the migration of goods and services
from one state to another. The share of the revenue earned on
IGST is divided according to the rates fixed by the governing
authorities among state governments and central government.
3. SGST: SGST is a constituent of State Goods and Services Tax Act,
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2016. SGST is introduced as the replacement of all the present
taxes including sales tax, VAT, luxury tax, entertainment tax ,
entry tax, taxes on lottery, betting and gambling. However, it has
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not replaced Octroi, State Cesses and Surcharges. The revenue
accumulated under SGST is solely for the state government.
4. UTGST: UTGST is a constituent of GST in India. GST levied
on the supply of goods and services in the Union Territories like
Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar
Haveli, Daman and Diu, Delhi (National Capital Territory of
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Delhi), Lakshadweep, Puducherry, etc. category.
There is a separate Act, namely UTGST Act implemented for Union

Territories, for imposing and administering GST in India. Under this
Act, the entire details of GST rates against the migration of goods and
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services in Union Territories are stated. There is a bill named UTGST

bill, which has been presented in states government to implement it
as UTGST Act.
11.2.1 IMPORTANCE OF GST
GST has 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. 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 been viewed by the taxpay-
ers and critics with some worry, with a fear that two sources of inter-
face would be involved. However, this structure should also be consid-
ered from a point of view of creating 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 has made the tax structure simple and clear. It has
made the entire Indian market unified, resulting into lower business
costs. It also enables smooth goods movement across India and low-
ers 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 time passes, it would translate into low prices of
consumer 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 trans-
parency.
11.2.2 FEATURES AND BENEFITS OF GST
Salient features of GST are as follows:
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Dual goods and services tax: GST is an indirect tax structure,
dual in nature, which enables both central government and state
governments to levy the tax.
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Inter-State transactions and the IGST mechanism: Integrated
Goods and Services Tax (IGST) is to be levied by the Centre at the
inter-state level on the distribution of goods and services. The de-
sign of the IGST mechanism guarantees a coherent flow of input
tax credit between any two states. IGST will have to be paid by
the inter-state seller on goods sold by him/her after adjusting for
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IGST, CGST and SGST on his purchases. The state that exports
will transfer SGST’s credit used in IGST’s payment to the Centre.
The claim of IGST’s credit can be done by the dealer who imports,
in his own state only, while releasing the output tax liability (both
the CGST and SGST). The IGST’s credit used in the payment of
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SGST will be transferred to the state that is imported by the Cen-

tre.
Destination-based consumption tax: GST is a tax based on des-
tination, which means that all the accumulated SGST will com-
plemented to the State where the consumer of the sold goods and
services resides.
Computation of GST on the basis of invoice credit method: Un-
der GST, the invoice credit method will be the liability, i.e., the in-
voice is issued by the suppliers will be the basis for allowing CEN-
VAT credit.
Payment of GST: The payment of CGST and SGST are to be done
to the central accounts and state accounts, respectively.
Goods and Services Tax Network (GSTN): GSTN is a joint
non-government and not-for-profit company set-up by the central
and state governments which allocate the IT infrastructure and
services shared by central and state governments, taxpayers and
other stakeholders.

Input Tax Credit (ITC) Set-off: For the taxes that are allowed
against central and state, ITC for CGST and SGST will be allowed
to be taken.
GST on imports: IGST will be levied by the centre on supply of
inter-state goods and services. The centre will levy IGST on the
inter-state supply of goods and services. Goods that are imported
will be subject to customs duty and IGST.
Maintenance of records: To avail, utilise or refund ITC of CGST,
SGST and IGST, separate details in books of account will have to
be maintained by the taxpayer or the exporter.
Administration of GST: The GST Council will be responsible for
the administration of GST and it also acts as the prime policy-mak-
ing body of the GST. The council comprises central and state min-
isters, who are in-charge of the financial body.
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GST Council: The GST Council is a union of the Centre and the
States. Recommendations will be made to the Union and the
States by the Council on vital issues like rates of tax, list of exemp-
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tion, threshold limits, etc. Half of the gross members of the Council
form the GST Council’s quorum.
Some benefits of GST are as follows:

QUICK TIP No more multiple taxes: GST has eliminated multiple indirect tax-
es. The taxes that existed earlier will not be levied after the GST is
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By subsuming majority of
the indirect taxes, GST implemented. Taxes like Excise duty, Sales tax, CENVAT, Service
implementation has been able to
tax and are no more applicable. All these taxes fall under GST.
ensure a seamless flow of credit
and improve business liquidity. Uniformity of tax rates and structure: GST guarantees that all
indirect taxes and their structures must be common throughout
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the country as this will increase the conviction and comfort of car-
rying out any business. Each state will come under one tax regi-
men only, hence preventing any unhealthy competitions amongst
states. GST proves to be beneficial for all those who do inter-state
business or want to expand their business in other states.
Easy tax filing: For entrepreneurs and small businessmen, the
complicacy that is associated with taxing documentation can be
easily avoided. Filing returns, payment of taxes and the process
of refund is convenient. Tax evasion and corruption has been re-
duced to an extent, making the system more efficient.
Reduction in cost: After GST, dual charges have been eliminat-
ed. Earlier, VAT was applicable on the goods such as cosmetics,
detergents, etc., apart from excise. GST has eliminated these type
of dual charges. Therefore, the prices of goods and services may
decrease, enabling consumers to save more money. GST is advan-
tageous for both the businessman and the consumers.
Better control on leakage: A sturdy IT infrastructure makes it
possible to adapt with GST. The coherent transfer of input tax

credit from one stage to another in the chain of value-addition is a

built-in mechanism in GST design.
From input to output: From manufacturing to consumption, GST
is applicable to all the stages. Every stage of the chain is entitled
to the benefit of tax credit. The margin of tax is added and the tax
will be paid on the total amount at every stage. GST is to be paid
on the margin amount only.
Saving more money: The application of GST for a consumer im-
plies the dual charging system elimination. This helps the consum-
er save more money as a result of reduced prices.
11.2.3 EVOLUTION OF GST
The entire timeline of GST and how it has evolved over time is pre-
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sented in Table 11.1:
TABLE 11.1: GST TIMELINE

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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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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
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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
announced a compensation of ` 9,000 crore for states.
December The Finance Minister introduces bill in the Lok Sabha
2014
February 2016 New deadline (i.e., April 01, 2016) was set up
January 2017 New deadline to roll out GST was set up (i.e., July 01, 2017)
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
11.2.4 GOODS AND SERVICE TAX NETWORK
Goods and Service Tax Network (GSTN) is a non-government body

that handles the IT system of the GST portal. It gives a IT infrastruc-

ture and services to both central and state governments, tax payers
and other stakeholders to implement GST.
The functions of GSTN are as follows:

It gives the facility to register under GST.
It forwards the return to both the central and the state authorities.
It provides the facility to calculate and settle the amount of IGST.

It verifies the tax payment details with concerning banks.
It offers various MIS reports to both central and state govern-
ments.
It provides analysis of taxpayers’ profile.
It runs the matching engine for comparing and reclaiming of input
tax credit.
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11.2.5 GST RATES IN INDIA
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The rates of GST in India do not come under the provision of the Act
but there was a promise made by Hon. Finance Minister, Shri Arun
Jaitley in the Rajya Sabha for making the upper limit of the tax rate a
part of the law. Thus, 14% is fixed as the upper limit for CGST/SGST
rate and 28% is fixed as the upper limit on IGST rate. Table 11.2 shows
the categories of the tax rates:
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Study Table 11.2: Tax Rate Categories

Hint Rate of Tax Expected Bifurcation Products
The GST rates for various Nil (0% of CGST & 0% of Milk, Kajal, Eggs, Educations
products are revised (Exempted SGST) Services, Curd, Health Services,
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periodically by the GST Supply) Lassi, Children’s Drawing and

Council. Colouring Books, Unpacked Food-
grains, Unbranded Atta, Unpacked
Paneer, Unbranded Maida, Gur,
Besan, Unbranded Natural Honey,
Prasad, Fresh Vegetables, Pal-
myra Jaggery, Salt, and Phool
Bhari Jhadoo, Cereals, Fresh Fish
(not frozen), Meat (not frozen or
processed), Tender Coconut Water,
Silkworm Laying Cocoon, Raw
Silk, Silk Waste, Puja Samagri,
Live Animals Except Horses,
Unroasted Coffee Beans, Fresh
Ginger, Fresh Turmeric, Contra-
ceptives, Betel Leaves, Handloom,
Hearing Aids, etc.
Services by the Reserve Bank of
India, Services by a foreign dip-
lomatic mission located in India,
Services relating to cultivation of
plants.

Rate of Tax Expected Bifurcation Products

5% (2.5% of CGST and Sugar, Packed Paneer, Tea, Coal,
2.5% of SGST) Edible Oils, Raisin, Domestic
LPG, Roasted Coffee Beans, PDS
Kerosene, Skimmed Milk Powder,
Cashew Nuts, Footwear (<` 500),
Milk Food for Babies, Apparels
(<` 1,000), Fabric, Coir Mats,
Matting & Floor Covering, Spices,
Agarbatti, Coal, Mishti/Mithai
(Indian Sweets), Life-saving drugs,
and Coffee (except instant), etc.
12% (6% of CGST and 6% Butter, Ghee, Processed food,
of SGST) Almonds, Mobiles, Fruit Juice,
Preparations of Vegetables, Fruits,
Nuts or other parts of Plants
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including Pickle Murabba, Chut-
ney, Jam, Jelly, Packed Coconut
Water, and Umbrella, etc. (comput-
ers and processed foods)
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18% (9% of CGST and 9% Hair Oil, Capital goods, Tooth-
of SGST) paste, Industrial Intermediaries,
Soap, Ice-cream, Pasta, Toiletries,
Corn Flakes, Computers, Soups,
and Printers, etc.
28% (14% of CGST and All other items that directly reach
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14% of SGST) the consumer including luxury

goods, i.e., white goods and bev-
erages are covered under this
category
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Exhibit
GSTIN STRUCTURE
Goods and Services Tax Identification Number (GSTIN) is a 15

digit unique code. It is a state and PAN based code that is assigned
to each taxpayer. The structure of GSTIN is as follows:
Pan number of Manufacturers/

Traders/Exporters/Dealers
The description of the structure of GSTIN is as follows:

The first two digits of GSTIN signify the state code. This state
code is numbered as per Indian Census 2011.

The next ten digits of GSTIN signify PAN number of the tax-
payer.
The thirteenth digit of GSTIN signifies the number of registra-
tion in a state.
The fourteenth digit of GSTIN is ‘Z’ by default.
The last digit of GSTIN signifies the check code, which can be
an alphabet or a number.
Exhibit
CRITERIA TO GET REGISTERED UNDER GST
The following is the criteria to decide whether a person needs to get
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registered under the GST Act:
Aggregate turnover: A person whose aggregate turnover in a
financial year is over ` 20 lakhs. This aggregate turnover crite-
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rion is over ` 10 lakhs for the states who fall under the special
category states.
Compulsory GST registration: The persons who are required
to compulsorily get themselves registered under the GST Act
are as follows:
Persons supplying any taxable goods or services at the in-
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ter-state level.
Casual taxable persons supplying any taxable goods or ser-
vices.
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Persons required to pay tax under the reverse charge.

Taxable NRIs supplying taxable goods or services.
Persons authorised to deduct tax under GST.
Persons supplying any taxable goods or services on behalf
of other persons.
Input Service Distributor.
Electronic Commerce Operator.
Persons supplying services related to online information,
and database access or retrieval.
Personssupplying any goods or services through electronic
commerce operators.
Existing Service Tax or VAT or Central Excise registration: It
is mandatory for all persons who are registered under existing
service tax or VAT or central excise license to get themselves
registered under GST.

Transferee or successor of a business: A person who carries

forward a business that was run by a person who was registered
under GST is required to get a GST registration.
1. List any two products which are exempted from GST.

2. GST has a dual monitoring structure wherein the tax is
monitored by the ________ and the ________.
3. Integrated Goods and Services Tax (IGST) is levied by the
Centre at the ________ level on the distribution of goods and
services.
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4. Name the body that is the prime policy-making body of the
GST.
5. GSTN provides an analysis of taxpayers’ profile. (True/False)
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6. What is the GST on salt?
a. 0% b. 5%
c. 12% d. 18%
7. Manufacturers, suppliers, retailers and wholesalers can
recover the GST that has been incurred as ________ on input
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costs.
8. The states get input tax credit on ________ and it may be
utilised against the payment of CGST.
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Activity
Randomly pick any ten items up that you use in your daily life.
Against each item, list the rate of GST that is charged on them.
LEVY AND COLLECTION OF GST

11.3
(CHARGING SECTION)
The Section 9(1) of the GST Act, 2017, states that the GST shall be
levied on supply of all goods and services on inter-state and intra- Know More
state level. The rates of GST are decided by the GST Council’s In the budget of 2018, it has
recommendation and shall be levied in a prescribed manner according been stated that ‘services’
include facilitating or arranging
to the Act provisions. transactions in securities.
Any person who carries out a business at any place throughout India,
who is already registered or needs to get registered under the GST Act
can be called a taxable person. Additionally, a person who is engaged
in any kind of economic activity, involving in trade and commerce will
also be considered a taxable person.

The ‘person’ in the GST act may include any of the following:
Individuals
Hindu Undivided Family or HUF

Company or Firm
Limited Liability Partnership
Association of Persons or Body of Individuals
Corporation or Government company
Body incorporated under any foreign country’s laws
Co-operative Society
Local Authority
Government
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Trust
Artificial Juridical Person

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11.3.1 EXEMPTION FROM GST
Know More On the basis of the kind of goods or services supplied by a person,
The procedure for registration there are some exemptions for some people from GST registration.
under the GST Act for every The persons who are exempted from GST registration are:
person liable to pay GST and
is detailed under Section 25 of Agriculturists
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the Act.
Persons falling under Threshold Exemption Limit
Persons supplying goods or services that are covered under Nil-
Rated/Exempted category
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Persons supplying goods or services that are Non-Taxable/ Non-

GST
Persons involved in activities other than supply of goods or ser-
vices
Persons supplying goods or services that are covered under the
reverse charge
11.3.2 SUPPLY OF GOODS
Any activity that falls under the taxable category as per GST rules is
called a supply. The government considers an activity as a supply if it
meets any of the following criteria:
Supply of goods or services
Any taxable supply
A taxable person making the supply
Supply that is made in a territory and is taxable

Supply made in exchange for cash or reward

Supply made during business course or for growing business
The supply of goods and services that fall under GST can be divided
into two categories, namely Taxable supplies and Non-taxable sup-
plies. Further, classification of these supplies can be divided into dif-
ferent categories on the basis of the nature of the supply.
The classifications are as follows:

Taxable supplies: These supplies refer to the taxable goods and
services under GST. Taxpayers who are registered are eligible for
ITC, i.e., they can claim for refunds on the tax paid by them during
their purchases. The taxable supplies are further divided into the
following:
Regular taxable supplies: The goods or services whose GST
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rate is greater than 0% fall under the category of regular tax-
able supply.
Nil-rated supplies: The goods and services whose GST rate is
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by default 0% fall under this category.
Zero-rated supplies: The supply of goods or services to a SEZ
unit or exports is taken to be deemed. Whenever anything is
exported, the GST rate associated with them becomes Zero.
However, the GST rate for such items is greater than 0%, when
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supplied in India.
Non-taxable supplies: These supplies refer to the goods and ser-
vices that are not taxable under GST. Further, they can be divided
into the following:
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Exempt supplies: There is no GST for the supply of goods or

services even being in the purview of GST. A taxpayer who is
registered cannot claim for refunds for such supplies.
Non-GST supplies: These are the supplies of goods and ser-
vices that do not fall under the purview of the GST.
There are three components based on which the GST tax owed by a Study
person is calculated for a transaction. These components are described Hint
as follows:
Some activities specified in the
1. Place of supply: The determination of the type of transaction, Negative List under Section
7(2) shall be neither treated
whether it is an inter-state, intra-state or an external trade is done
as a supply of goods nor as
through this component. It will determine the GST type associated a supply of services for the
with it. purpose of taxability.
2. Value of supply: The value that is taxable for the supply is

determined through this component. It also determines the tax
amount to be paid.
3. Time of supply: The date on which the taxes associated and the
returns for GST are due is determined by this component.

To determine the right amount of tax that needs to be charged on the

transaction of goods and services, one needs to understand the con-
cept of ‘place of supply’.
The place from where the goods are delivered becomes the place of
supply. It is the place where the ownership of the goods are changed.
In case, the goods are not moved from one place to another, the loca-
tion of goods at the time of delivery becomes the place of supply.
In case of services, the location of the person who receives the ser-
vice becomes the place of supply. If the services are provided to any
unregistered dealer and the location information is not available, then
the service provider’s location will become the place of supply. The
provisions specially provided to determine the place of supply are as
follows:
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Services related to immovable property
Restaurant services
Admission to events
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Transportation of goods and passengers
Telecom services
Banking, financial and insurance services
If the services are associated with immovable property, then the prop-
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erty location becomes the place of supply.
The amount of money that the seller collects for the goods and ser-
vices that he supplies is considered as the value of supply. Addition-
ally, the amount of money that a seller collects from the buyer is also
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considered as value of supply.
In cases, when both parties are related and the value that is reason-
able may not be charged, or the transaction occurs as an exchange,
the GST must be charged on the transactional value of the supplies.
The value of supply enables the parties, which are unrelated, to make
transactions in the normal business course. It is responsible to ensure
that GST is properly charged and collected, irrespective of the full
payment of the value.
The time when goods and services are supplied is considered to be the
time of supply. The time of supply helps the seller to determine the
due date for the tax payment.
At the time of the supply of goods and services, the GST must be paid.
The time of supply is identified on the basis of goods and services.
For goods, the time of supply shall be the earliest of the following dates:
Invoice issue date

Last invoice issuing date

Advance or payment receipt date
For services, the time of supply shall be the earliest of the following
dates:
Invoice issue date
Advance or payment receipt date
The services provision date (in case the invoice is not issued within
a stipulated time)
9. A person who is engaged in any kind of economic activity,

related to trade and commerce will also be considered
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a ________.
Activity
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Prepare a list of five Non-GST supplies.
11.4 INPUT TAX CREDIT

Input Tax Credit (ITC) allows the businesses in India to claim for
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reduction in the tax paid already by them while buying goods for the
company and pay just the balance amount. The buyer receives credit
at every stage in a supply chain for the amount of input tax paid. It can
be used to claim reduction in the amount of GST needed to be paid
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to central and state governments. For instance, the payable amount

of tax by a manufacturer of shoes is `500 and for that on purchases is
`350. The manufacturer can claim for an input credit of `350 and only
needs to pay `150 as tax.
Businesses can claim for ITC excluding the goods and services which
are used for:
Personal use
Supplies exempted
Supplies that are covered by ITC
For claiming ITC, the businesses must comply with the following rules:
A buyer must have a valid tax invoice issued by a registered dealer.
The supply must be received by the buyer. If the supply is received

in instalments, ITC can be claimed in the last instalment’s tax in-
voice.
The tax due on the purchase of the buyer must have been paid by
the supplier to the government in cash or through ITC.

The returns must have been filed by the supplier. ITC can be
claimed on purchases, only if the supplier of the goods complies
with the rules of GST and pays tax to the government.
The buyer must pay for the supplies received to the supplier with-
in a time period of 180 days from invoice issue date in order to
claim for ITC.
The cases in which a business cannot claim ITC are as follows:

Capital goods purchased, not for the purpose of business
Composition dealers
Capital goods purchased for the manufacture of goods that are ex-
empted
Purchases for which the buyer pays tax on the basis of the reverse
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charge
Credits that are blocked
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NOTE Tax invoices and debit notes that are less than a year old qualify to be
Section 2(59) defines the term claimed for ITC. In other cases, ITC can be claimed by earliest of the
‘input’ as any goods other following dates:
than capital goods which are
used or intended to be used The end of the financial year which applies to that invoice followed
by the supplier in the course by the date of filing GST returns for September
of business or furtherance of
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business. The date before filing an annual return that is relevant
There are some special cases apart from the ones mentioned above
that are eligible for claiming ITC.
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Goods are sent to a job worker for processing by the principal man-
ufacturer. For instance, a company that manufactures bags sends its
half-made bags to the job workers for chain fitting. The manufacturer
is allowed to claim ITC on purchased goods that are sent to job work-
ers.
There are two cases in which ITC is allowed on goods sent to job work-
ers:
1. From the principal manufacturer’s place of business
2. From the goods supplier’s place directly
To enjoy the ITC benefit, the principal manufacturer must receive the
goods back within a year (within 3 years for capital goods).
A head office, a branch office, or a registered office can serve as an

Input Service Distributor (ISD) under GST. ITC is collected by ISD
on the purchases made and, thereafter, it is distributed among all the
receiving branches under CGST, SGST/UTGST and IGST.

At the time of a merger or a transfer of business, the ITC available

with the transferor is passed onto the transferee.
As already discussed, ITC cannot be claimed for non-business pur-

poses, and on exempted supplies. There are certain conditions, in
which ITC will be reversed, if claimed. ITC is reversed in the following
conditions:
If invoices are not paid within 180 days
The seller issues a credit to ISD
The inputs that are partially for business, and partially for sup-
plies that are exempted or fall under the personal use category
The capital goods that are partially for business and partially for
supplies that are exempted or fall under the personal use category
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If the reversed ITC is less than required
ITC that is claimed by a person must match the details mentioned

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by the supplier of the goods in the GST return filed. If there is a mis-
match, both the parties will be informed about the discrepancies.
Let us learn about the transfer of ITC.
11.4.1 TRANSFER OF INPUT TAX CREDIT

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In accordance with the GST law, any person who is taxable can claim
for ITC for the amount of tax paid on the purchase of capital goods
of the company. ITC that falls under the present tax scheme can be
transferred to GST scheme during the migration process.
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The Transitional Provisions rules of GST describe the procedure of

moving existing ITC to GST. According to the GST Transitional Pro-
visions, all the registered persons are required to file GST TRAN-1.
GST TRAN-1 needs to be filed on GST common portal within 90 days
time-period from the day of enactment of GST. To simplify the migra-
tion process, the Commissioner can extend the time-period of migra-
tion by another 90 days, if the Council recommends.
To transfer the existing ITC to GST, one needs to file the GST TRAN-1
form on GST common portal. The GST TRAN-1 form can be filed by
logging into the GST portal and fill the electronic GST TRAN-1 form,
which states the tax amount or duty, that needs to be claimed as ITC.
10. A businessman Dinesh bought some items and paid tax on the
basis of the reverse charge. He cannot claim ________.

Activity
Write a short note explaining the concept of composition dealers

and blocked credits.
11.5 PAYMENT OF TAX

The taxes to be paid by a taxpayer under the GST are classified into
three categories:
1. IGST: It should be paid to the Center in case of an inter-state
supply
2. CGST: It should be paid to the Center in case an intra-state supply
3. SGST: It should be paid to the State in case of an inter-state supply
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The tax must be paid by every 20th day of the month by every taxpayer
who is registered under GST. An additional interest may be charged
on the due tax if the tax is not paid by the stipulated date. The tax
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returns cannot be filed for next reporting period.
A taxpayer needs to maintain three ledgers, which are specified by the

government in the GST tax scheme. In the GST common portal, there
are different E-ledgers provided for management and facilitation of
GST payments.
M
11. The GST payments can be made either through the ITC or
________ available in the E-ledgers.
N
Activity
Using the Internet, find out the conditions under which the debit
entry is made in an ITC ledger.
11.6 REVERSE CHARGE and RETURNS

Reverse charge is a mechanism where the person who receives goods
NOTE and services is responsible to pay GST rather than the supplier. Nor-
Central Board of Excise &
mally, the business owners collect tax from the customers and then
Customs (CBEC) has been pay it to the government. However, in reverse charge mechanism, the
rechristened as Central Board of liability of paying tax directly to the government is of the buyer. The
Indirect Taxes & Customs (CBIC). accountability of reverse charge is mostly only on the buyer; however,
it is also shared between the buyer and the seller in certain cases. The
reverse charge is applicable on goods and services in the following
cases:
A business owner who is registered and receives goods and
services from a vendor who is not registered

Any service which is offered by an electronic commerce operator

or an aggregator
Annual returns and final returns are different from each other. When
a registered taxpayer applies for the cancellation of his registration, NOTE
then the returns filed by that person are called final returns. Filling Under the Composition scheme
the last return is mandatory within three months of the cancellation of GST, the small taxpayers can
avoid paying GST through the
date. The annual return will be filed by every registered person who
normal and tedious mechanism.
pays the tax as a general taxpayer. Instead, taxpayers having a
turnover of less than `1 crore
A registered taxpayer can file his own GST return in different ways. A can opt to pay GST at a fixed
registered taxpayer can file a return of his business invoice online on rate of turnover.
the common GST portal. However, if taxpayers have a huge number of
invoices, then it is very difficult to file on GST portal and it consumes
a lot of time.
S
12. An electronic commerce operator X provides some services.

IM
These services are subject to________.
Activity
Prepare a case study that shows the mechanism of reverse charge.

M
11.7 OffenceS IN GST

The GST tax scheme in India has brought simplicity and transpar-
ency in the taxing policies. Also, GST has less potential of evading tax
N
than the earlier taxation schemes. To prevent the misuse and exploita-
tion of the policies, the government has laid down a list of offences
and penalties associated with them. An offence is any non-compliant
or illegal activity performed against the provisions of the GST tax
scheme. A taxpayer found involved in any of such activities is likely to
invoke penalties. A penalty is a form of punishment prescribed in the
law that is enforced against the offence committed by the taxpayers.
Table 11.3 shows the offences along with the activities involved, which
are listed by the in GST Act:
Table 11.3: Offences and ACTIVITIES INVOLVED

Offence Activities involved
Fraud Giving wrong information during registration process
Giving wrong information or false documents to GST offi-
cials for evading tax
Acquiring tax refunds of GST through false means

Offence Activities involved

Fake Providing incorrect invoices on sale of goods or services
invoices Supply of goods or services without providing appropriate
invoices
Using another taxpayer’s ID for supplying goods and/or
services
Providing an invoice without the supply of goods or services
Improper Movement of goods without suitable documents
supply of Movement of taxable goods without a GST registration
goods or
services Supply or storage of goods that can be confiscated
Tax evasion Non-remittance of the collected tax to the government

within a time of 3 months
S
Acquiring refund from the government in a false manner
Subduing the sales of goods or services for evading tax

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Fully or partial utilisation of ITC without receiving goods or
services
Delay in Failing to file returns for the monthly sales

returns Failing to file returns for the monthly purchases
filing
Failing to file annual returns
M
Tampering Destruction of seized goods

or destruc- Destruction of or tampering legal documents or any mate-
tion rial evidence
Barring a tax official from performing their duty
N
Repeated Three short payments of tax in three returns during six con-
short tax secutive tax period
payments
13. An __________ is any non-compliant or illegal activity

performed against the provisions of the GST tax scheme.
Activity
Using various e-newspaper websites, study some GST related

offences and list the ways in which offences have been committed.
11.8 E-WAY BILL

The E-way bill provision under the GST system is defined as a dis-
tinctive bill that is generated electronically for the shipment of goods

worth the value of more than ` 50,000 within a state or outside the
state. It aims at a speedy and trouble-free movement of goods all over
India, without any sort of obstacle.
It has replaced the former bill, which used to be a paper bill under
the VAT system with the name of road permit, way bill, etc. It helped
in monitoring the movement of goods to or from a state, to keep an
eye on tax evasion. It was required while transporting goods from the
supplier to the receiver. However, these bills were subjected to the
rules which were specific to a state and had to be generated from the
portals of different states. Earlier, the transporter issued a way bill
and it acted as a receipt that provided details and directives related
to the shipment of the delivery of goods. The details contained the
names of the supplier and the recipient, the source and destination of
the delivery, and the route.
S
It is obligatory for all the inter-state shipment of goods valued above
` 50,000. It is also obligatory for intra-state movement of goods. Some
goods including the items that are liable to rot, such as milk and
IM
milk products, meat, fruits, and vegetables are out of the scope of the
E-way bill. Few other items that do not need the E-way bill include
gold and silver jewellery, cooking gas cylinders, raw silk, wool and
handlooms.
The E-way bill can be generated through the GSTN set-up, before the
M
goods begin to move. An E-way bill number (EBN) is allotted after the
E-way bill is produced. The EBN number is available to be accessible
to the transporter, the supplier and the recipient.
N
14. E-way Bill is obligatory for all the inter-state shipments of

goods valued above ` 25,000. (True/False)
Activity
Search the Internet and discuss at least five cases when e-way bill
is not required.
11.9 SUMMARY S
GST is a consumption-based tax, which means that all the accu-
mulated SGST will complement to the State where the consumer
of the sold goods and services resides.
Goods and Services Tax Network (GSTN) is a joint non-govern-
ment and not-for-profit company set-up by the Central and the
State governments which allocate the IT infrastructure and ser-

vices shared by the Central and the State governments, taxpayers

and other stakeholders.
From manufacturing till consumption, GST is applicable to all
the stages. Every stage of the chain is entitled to the benefit of tax
credit.
The supply of goods and services that fall under GST can be divid-
ed into two categories, namely Taxable supplies and Non-taxable
supplies.
Input Tax Credit (ITC) allows the businesses in India to claim for
reduction in the tax paid already by them while buying goods for
the company and pay just the balance amount.
The buyer receives credit at every stage in a supply chain for the
amount of input tax paid. It can be used to claim reduction in the
amount of GST needed to be paid to the central government and
S
the state governments.
Reverse charge is a mechanism where the person who receives
goods and services is responsible to pay GST rather than the sup-
IM
plier.
key words
Basic customs duty: A tax imposed on imports and exports of

goods
M
Electronic commerce operator: A person who, directly or indi-

rectly, owns, operates or manages an electronic platform which
is engaged in facilitating the supply of the goods and/or services
Indirect tax: A tax levied on goods and services rather than on
N
income or profits
Tax evasion: An illegal practice of underpaying or not paying
taxes
Tax compliance: The practice of making payments and produc-
ing and submitting the information sought by the tax authori-
ties
? 11.10 DESCRIPTIVE QUESTIONS

1. Describe the features of GST.
2. Explain the concept of supply of goods.
3. What is Input Tax Credit?
4. Discuss the methods used in payment of GST.
5. List the various offences and the activities involved.
6. Explain the use of E-way bill in case of GST.

Topic Q. No. Answer

Introduction to GST 1. alcohol for human consump-
tion; electricity
2. centre government; state
government
3. inter-state
4. GST Council
5. True
6. a. 0%
S
7. tax credits
8. CGST
Levy and Collection of GST 9. taxable person
(Charging Section)
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Input Tax Credit 10. ITC
Payment of Tax 11. Cash
Reverse Charge and Returns 12. reverse charge
Offences and Penalties 13. offence
E-way Bill 14. False
M

1. Salient features of GST include: Destination-based Consumption
Tax; Computation of GST on the Basis of Invoice Credit Method;
N
etc. Refer to Section 11.2 Introduction to GST

2. The supply of goods and services that fall under GST can be
divided into two categories, namely Taxable supplies and Non-
taxable supplies. Refer to Section 11.3 Levy and Collection of
GST (Charging Section)
3. Input Tax Credit (ITC) allows the businesses in India to claim for
reduction in the tax paid by them already while buying goods for
the company and pay just the balance amount. Refer to Section
11.4 Input Tax Credit
4. The payment of tax can be done through various options,
namely counter payments, challan generation and Cards/NEFT
Payments. Refer to Section 11.5 Payment of Tax
5. Different offences include fraud, fake invoicing, tax evasion, etc.
Refer to Section 11.7 Offences in GST
6. The E-way bill provision under the GST system is defined as a
distinctive bill that is generated electronically for the shipment

of goods worth the value of more than ` 50,000 within a state or

outside the state. Refer to Section 11.8 E-way Bill
SUGGESTED READINGS &

11.12
REFERENCES
SUGGESTED READINGS
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
S
What is GST in India? Goods & Services Tax Bill Explained. (2018).
Cleartax.in. Retrieved 13 April 2018, from https://cleartax.in/s/gst-
law-goods-and-services-tax
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M
N

Ch
12 a pt e r
INTERNATIONAL TAXATION
CONTENTS
S
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
M
12.3.2 Double Taxation Avoidance Agreement (DTAA)

Activity
12.4 Implication of Section 195
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Activity
12.5 Summary

n o t e s
DOUBLE TAXATION AVOIDANCE AGREEMENT
DTAA prevents taxing twice the same income in the hands of the
Case Objective assessee. It helps in cases when a certain income is subjected to
This caselet highlights the use tax both in India and a country outside India. In India, persons are
of Double Taxation Avoidance taxed on the basis of their residential status; and it may be possi-
Agreements (DTAAs) ble that they are taxed on the same income in another country on
the same/any other basis.
ABC Ltd. engages in the business of providing services globally to

different countries. It receives payments from various countries.
A business entity in the US which receives services from ABC
Ltd. argues that tax shall be deducted while making payment for
technical services provided by ABC Ltd.
S
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 by the Indian Gov-
IM
ernment with US Government.
Section 90 of the Income-tax Act, 1961, provides bilateral relief

wherein the Governments of both countries enter into a mutual
agreement to provide protection against double taxation. The
agreements may be entered in two ways; one to ensure that a
particular income is taxed in only one country, and the other to
M
ensure that the resident country allows a tax credit for the tax
charged on the same income in the source country.
India-US DTAA states that tax will be collected by the Indian gov-
N
ernment only rather than by the US government. Thus, US com-

panies will not deduct any tax on the payment made to ABC Ltd.
The DTAA saves companies like ABC Ltd. from paying tax twice.

INTERNATIONAL TAXATION 263
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 goods and services tax Quick Revision
and its significance.
S
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
for another country. Thus, the possibility of double taxation can occur.
IM
For example, if the home country deducts tax on foreign income of
its 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, con-

cept of double taxation and implications of Section 195 of the Income
N
Tax 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 NOTE
country. However, when income is earned or remitted from one coun- There is an accepted convention
try to another country, the concept of international taxation comes in international taxation that one
into purview. country cannot enforce tax on
territory of another country.
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

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
S
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.
M
12.2.2 CENTRAL PRINCIPLES OF INTERNATIONAL

TAXATION
Some of the central principles of international taxation are as follows:

N
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 assessees.
Principle of Taxation Rights (Source versus residency): 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.

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)
S
Activity
Using various resources, study the concept of international taxa-

IM
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
Know More
effect of taxation on its business, trade and commerce. Double taxa-
M
Taxing the same income in the

tion occurs because companies are considered to be separate entities hands of the assessee twice is
from their employees. Double taxation arises from two rules, namely: called as double taxation.
1. Source rule
N
2. Residence rule
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 taxa-
tion. Know More
There are three popular
BILATERAL RELIEF model conventions that are
used in preparing the tax
agreements. They are OECD
Under this method, a double taxation avoidance agreement is estab-
Model Convention, UN Model
lished between the two countries in order to avoid double taxation Convention and US Model
Convention.

on the generation of income of the individual. India has entered into

DTAA with more than 90 countries. The relief under the bilateral
method is provided under two methods:
1. 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.
2. 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.
Section 90 of the Income Tax Act covers the bilateral relief agreement
between countries. This section provides that the Central Govern-
ment can enter into an agreement with any other country or countries
of the world in order to:
NOTE
S
Grant relief with respect to the income which has been earned in
Section 90(2) states that where some other country and has been taxed in that particular country
the DTAA is entered into by the as well as in India
Government, then the Income
IM
Tax Act provisions would apply Grant relief from tax laws and provisions so as to promote the eco-
only to the extent to which nomic relations through trade and commerce with other countries
they are more beneficial to the
assessee. Avoid double taxation on the income
UNILATERAL RELIEF
M
Under this method, relief is provided by the home country in the

cases 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.
N
Know More Section 91 of the Income Tax Act covers the provision of unilateral
The specific provisions of the agreements in which no agreement has been established between two
DTAA take precedence over the countries. In case no agreement exists between the countries, relief
general provisions of the Income would be provided by the country on the fulfilment of the following
Tax Act, 1961.
conditions:
The assessee who is under the tax jurisdiction must be a resident
Study in India during the previous years in which the income has been
Hint earned.
Relief is granted under The income should have been earned by him outside India.
Section 91 in the form of a
deduction from Indian income The income is not deemed to be earned by the assessee in India.
tax payable. The deduction is
The assessee has paid taxes on the income earned in the foreign
equal to tax calculated on the
doubly taxed income at Indian country as per the rules of taxation of that country.
rate of tax or rate of tax in the
No DTAA has been established between India and that country in
other country, whichever is
lower. 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.
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. Know More
With effect from 1st April, 2019,
DOCUMENTS REQUIRED FOR CLAIMING RELIEF UNDER DTAA the capital gains on investments
made in India through companies
A non-resident Indian (NRI) can claim the benefit of DTAA on pro- in Mauritius and Singapore will
be fully taxable.
ducing the following documents:
Tax Residency Certificate (TRC)
S
PAN card copy duly self-attested in Form 10F
Self-declaration cum indemnity form
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Passport and Visa copy duly attested
CONCEPT OF PERMANENT ESTABLISHMENT
In order to determine the jurisdiction and the taxability of an asses-

see, the concept of Permanent Establishment (PE) must be known.
M
As per Article 5 of the DTAA, PE means any fixed place of business

in India through which any foreign company is operating its business
wholly or partially. PE includes:
A place of management
N
A branch office
A factory
A workshop
A sales outlet
FEATURES OF PE
NOTE
As per Section 9(1), for deeming
The features of permanent establishment are as follows: the business income to accrue
or arise in India, there must exist
PE is a fixed place anywhere in India from where business can be a business connection.
conducted exclusively or partially. In contrast, as per DTAA, the
business income of an entity
PE is handled by the clauses of the DTAA and every DTAA has a
is taxable only if there is a
clause for the PE in India. permanent establishment.
An NRI will not be taxed in India until he/she has a PE 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.
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
S
and is a resident in another country.
Activity
IM
Using the Internet, study how double taxation relief is provided in
countries other than India. Prepare a report on it.
12.4 IMPLICATION OF SECTION 195

QUICK TIP
M
According to Section 195 of the Income Tax Act, 1961, any person
Section 195 identifies TDS rates responsible for the payment of interest to a non-resident or foreign
and deductions on business
transactions with non-residents
company or any other taxable amount in India, not being salaries,
on a daily basis. shall deduct tax at the rates in force at the time of payment.
N
Tax shall be deducted at the time of payment of income or at the

NOTE time of its credit to the account of the NRI, whichever is earlier.
However, when interest is to be paid in accordance with Clause 23D of
Section 10 (23D). In computing
Section 10 to the Government or a public sector bank or a public
the total income of a previous
year of any person, the following financial institution, thereby, deduction of tax would be made only at
incomes shall not be included— the time of payment either in cash or by cheque or by draft.
(i) a Mutual Fund registered
under the Securities LIABILITY FOR DEDUCTION
and Exchange Board
of India Act, 1992 (15 of Any individual, who is paying taxable income to an NRI, is liable for
1992) or regulations made deducting the tax. If the payer is a company, then the company itself
thereunder;
is liable to recover tax and pay it to the central government. In any
(ii) such other Mutual Fund set other case also, the payer has to deduct the tax from the income to be
up by a public sector bank or
a public financial institution
remitted to the non-resident and to pay the same to the tax department.
or authorised by the Reserve
Bank of India and subject NO DEDUCTION IN CERTAIN CASES
to such conditions as the
Central Government may, In the following cases, no tax shall be deducted under Section 195:
by notification in the Official
Gazette, specify in this No deduction has to be made if the income does not involve any
behalf. credit of the payment.

Section 172 of the Income Tax Act is applicable, wherein it concerns

the levy or recovery of tax in the case of any ship that belongs to a
non-resident and is carrying passengers, livestock, mail or goods
to a port in India, then Section 195 does not apply.
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 Section 115AD.
REQUIREMENT OF 15CA AND 15CB FOR THE REMITTANCE OF

PAYMENT TO A NON-RESIDENT
Any person should fill the Forms 15CA and 15CB before making pay-
ments to any non-resident individual. Figure 12.1 shows the proce-
dure for Furnishing Form 15CA:
S
Remitter
IM
Obtain the certificate of account (from 15CB).
This form is available at the website www.tin-nsdl.com
Accesses the above website
Electronically uploads the remittance detail in Form 15CA

M
Take the printout of filled undertaking Form (15CA)

with the system-generated acknowledgement number.
N
Printout of the undertaking Form (15CA) is signed)
Submit the signed paper undertaking form to the

RBI/Authorised dealer along with the certificate of
an Accountant in duplicate.
RBI/Authorised dealer remits the amount
A copy of undertaking (Form 15CA) and certificate of

Accountant (Form 15CB) forwarded to Assessing Officer
Figure 12.1: Procedure for Furnishing Form 15CA

(Source: http://www.charteredclub.com/wp-content/uploads/2012/04/Form-15CA.png)
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
Income Tax Act before uploading Form 15CA. Generally, bankers in

India are responsible for making payments to non-residents and they

require Forms 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.
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
an NRI for signature and submission to the bank to get the
S
acknowledgement generated. An acknowledgement is generated
on the website which has to be deposited to the bank along with
the certificate of the chartered accountant.
IM
5. The bank will remit the amount to the payee.
12. Any individual, who is paying taxable income to an NRI, is

liable for deducting the tax. (True/False)
M
13. The Form _________ is a certificate which is issued by a

chartered accountant to the person making the remittance
payment.
14. The person responsible for making a payment has to obtain a
N
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

Income Tax Act.
12.5 SUMMARY
S International taxation is the study of tax laws applicable on indi-
viduals or business enterprises subject to tax laws of different
countries.
The objectives of international taxation are to avoid double taxa-
tion, prevent tax evasion, allocate tax jurisdiction and exchange
information.

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.
There are two means in which the relief can be granted from dou-
ble taxation. These are termed as bilateral relief and unilateral
relief.
DTAA refers to a bilateral agreement, according to which, they
have decided whether to avoid or eliminate double taxation on the
same income in the 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,
S
shall at the time of payment, deduct tax at the rates in force.
key words
IM
Bilateral relief: A method under which a double taxation
avoidance agreement is established between two countries in
order to avoid double taxation on the generation of income of
the individual
Double taxation: A principle of taxation wherein income taxes
are paid twice on the same source of the earned income
M
Double Taxation Avoidance Agreement (DTAA): A bilateral

agreement between the two countries according to which they
have decided whether to avoid or eliminate double taxation on
the same income in the two countries
N
International taxation: The study of those tax laws that are

applicable on individuals or business enterprises subject to the
laws of different other countries
Unilateral relief: A method under which relief has been pro-
vided by the home country in case where there is no agreement
entered by that country with the other country

1. Explain the concept of international taxation. ?
2. List the objectives of international taxation.
3. Discuss the concept of double taxation and double taxation relief.
4. Describe the Double Taxation Avoidance Agreement (DTAA) in
detail.
5. Discuss the implication of Section 195 of Income Tax Act.
6. Explain the central principles of international taxation.

Topic Q. No. Answer

Concept of International 1. International
Taxation
2. True
3. Jurisdictional rights
4. True
5. To avoid double taxation; To allo-
cate tax jurisdiction
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6. True
Double Taxation 7. True
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8. Source
9. Section 90
10. False
11. Double taxation
Implication of Section 195 12. True
M
13. 15 CB
14. 15CA
N

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
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
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
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 Readings & REFERENCEs
SUGGESTED READINGS
S
Isenbergh, J. (2005). International Taxation. Foundation Press.
Lymer, A. and Hasseldine, J. (2002). The International Taxation
System. Springer Science+Business Idea, New York.
IM
E-REFERENCES
International Taxation. Retrieved from http://www.incometaxin-
dia.gov.in/pages/international-taxation.aspx.
Agarwal, R. (2013). What is Double Taxation Avoidance Agree-
ment (DTAA)?. goodreturns.in. Retrieved 30 April 2016, from
M
http://www.goodreturns.in/classroom/2013/07/what-is-double-tax-
ation-avoidance-agreementdtaa-193501.html
N

N
M
IM
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Ch
13 a pt e r
CASE STUDIES
CONTENTS
S
Case Study 1 Tax Evasion
Case Study 2 Impact of Residential Status on Scope of Total Income
IM
Case Study 3 Taxability of Gratuity of Mr Rishi Based on the Nature of his
Employment
Case Study 4 Tax Issues Related to Self-Occupied House Property
Case Study 5 Expenditure on Scientific Research
Case Study 6 Capital Gains of Mr Chugh
Case Study 7 Income from Other Sources
M
Case Study 8 Computation of Deductions from Total Income

Case Study 9 House Rent Allowance
Case Study 10 Computation of Total Income of Cazy and Hazy
Case Study 11 Goods and Services Tax
N
Case Study 12 Unilateral Relief for Double Taxation where no Agreement Exists
with Foreign Country

Case Study 1
n o t e s
TAX EVASION
Under the Income Tax Act, 1961, tax evasion is defined as an

Case Objective attempt to avoid tax payments by using of some common illegal
This Case Study discusses the
means. These may include suppression or misrepresentation of
concept of tax evasion and its facts, claiming an expenditure not substantiated by proper evi-
related consequences. It is dence, recording of false entries in the books of accounts, failure
with respect to Chapter 1 of to record investments, failure to record a receipt of income in the
the book.
books of accounts, etc. Such practices may falsify the total income
of an assessee.
During the Previous Year 2020-2021, FGP Ltd., an Indian Com-

pany in Gujarat, issued a credit note of ` 96,000 as brokerage pay-
able to Mr Parvesh. Mr Parvesh is the son of the managing direc-
tor of FGP Ltd.
S
Issuance of a credit note of ` 96,000 by FGP Ltd. to the son of
the director of the company as an amount of brokerage payable
IM
will increase the total income of Mr Parvesh from ` 4,00,000 to
` 4,96,000 and correspondingly reduce the taxable income of FGP
Ltd. This amounts to the recording of a fictitious transaction in
the books of accounts for the purpose of reducing the tax liability
of the company.
This is due to the fact that the company pays tax at a flat rate of
M
30%; whereas Mr Parvesh, an individual, pays tax @ 5% over and

above the basic exemption limit of ` 2,50,000 as his total income is
less than ` 5,00,000. This attempt to reduce the overall tax liability
by the recording of a fictitious transaction would tantamount to
N
tax evasion practice.
Any attempt by an assessee to reduce tax liability through artifi-

cial methods or dubious/downright fraud is illegal and prevents
the State from receiving its legitimate share of tax. Misreporting
of income constitutes a severe offence under the Income Tax Act,
1961, which may attract penalty @200% under Section 270A.
questions
1. Is tax evasion a criminal offence?

(Hint: Yes, it can lead to heavy penalties under Section
270A of the Income Tax Act, 1961.)
2. Give any two common examples of tax evasion practice?
(Hint: Claiming of false expenditure, recording of wrong
entries, etc.)

Case Study 2: IMPACT OF RESIDENTIAL STATUS ON SCOPE OF TOTAL INCOME 277
Case Study 2
n o t e s
IMPACT OF RESIDENTIAL STATUS ON SCOPE OF

TOTAL INCOME
Ms. Soumya earns the following incomes pertaining to the Previ- Case Objective
ous Year 2020-2021:
1. Short term capital gains of ` 15,000 from the sale of shares in
scope of total income based
an Indian company, received in USA. on the residential status. It is
2. A dividend of ` 8,500 from an Indian Company, PR Ltd. with respect to Chapter 2 of
the book.
3. A dividend of ` 11,500 from a German Company, received in
Germany.
4. ` 26,000 agricultural income from land in Madhya Pradesh.
5. Rent of ` 80,000 from a house property in London, deposited
S
in London bank and remitted to India later on.
The computation of total income for the Assessment Year 2021-

2022 will vary depending upon her residential status, i.e., resident
IM
and ordinarily resident, resident but not ordinarily resident, or
non-resident. Section 5 of the Income Tax Act, 1961, states the
following:
i. For resident and ordinarily residents, income received or
deemed to be received/income accrued or arisen or deemed
to accrue or arise, in India or outside India is taxable in the
M
hands of assesses.
ii. For resident but not ordinarily residents, income received or
deemed to be received/income accrued or arisen or deemed
to accrue or arise, in India is taxable in the hands of assesses.
N
In addition to this, income accrued or arisen outside India

from a business/profession controlled from India is also
taxable in India.
iii. For non-residents, income received or deemed to be received/
income accrued or arisen or deemed to accrue or arise in
India is taxable in the hands of assesses.
The incidence of tax on Ms. Soumya is dependent upon her resi-

dential status. The residential status will determine the scope of
income to be taxed in India in the hands of Soumya. Thus, the
total income of Ms. Soumya for the A.Y. 2021-2022 shall be com-
puted as follows:
Particulars If Soumya is If Soumya If Soumya is

ROR (Amount is RNOR NR (Amount
in `) (Amount in `) in `)
Short-term capital gains 15,000 15,000 15,000
from sale of shares in
an Indian company,
received in USA

Case Study 2
n o t e s
Particulars If Soumya is If Soumya If Soumya is

ROR (Amount is RNOR NR (Amount
in `) (Amount in `) in `)
(Income accrued or arisen in India)
Dividend from an Indian Nil Nil Nil
Company, PR Ltd.
{Dividend received from Indian Company upto 10 lacs is exempt under Sec-
tion 10(34)}
Dividend from a Ger- 11,500 Nil Nil
man Company, received
in Germany.
(Not accrued/arisen or deemed to accrue or arise in India)
Agricultural income Nil Nil Nil
from land in Madhya
Pradesh.
S
{Agricultural income is exempt under Section 10(1)}
Rent from house proper- 56,000 (80,000 - Nil Nil
ty in London, deposited 24,000)
IM
in London bank, and
remitted to India later
on
{Income accrued or arisen outside India (Income from property is taken after
allowing 30% deduction)}
Total Income 82,500 15,000 15,000
ROR = Resident and ordinarily resident

M
TECH RNOR = Resident and not ordinarily resident

INFO
NR = Non-resident
N
` 24,000 = ` 80,000 × 30%
It can be observed that when Ms. Soumya is resident and ordi-

narily resident, her global income is taxable. However, when she is
a non-resident, only Indian income is taxable. It is to be noted that
when she is resident but not ordinarily resident, income accrued
outside India shall be taxable in India only if the same is derived
from a business connection or profession controlled from India.
questions
1. Does the status of residency affect the taxable income of

Ms. Soumya?
(Hint: Yes, based on Section 5 of the Income Tax Act,
1961)
2. What incomes are deemed to accrue or arise in India even
though they actually accrue or arise outside India?
(Hint: Refer to Section 9(1) of the Income Tax Act, 1961)

Case Study 3
n o t e s
TAXABILITY OF GRATUITY OF MR. RISHI BASED ON

THE NATURE OF HIS EMPLOYMENT
The amount of gratuity received by an employee during the Pre-

Case Objective
vious Year 2021-2022 becomes taxable in the Assessment Year
2021-2022 on the basis of his nature of employment. Gratuity is This Case Study discusses
a voluntary payment made by employers for the appreciation of the provisions relating to the
services rendered by his employees. The Payment of Gratuity Act, exemption of gratuity. It is with
respect to Chapter 3 of the
1972, gives statutory recognition to the payment of the gratuity. book.
Mr Rishi retired on 14th June, 2020 after completely serving a
period of 26 years and 8 months of his service. He received a gra-
tuity of ` 7,00,000 in the Previous Year 2020-2021. At the time of his
retirement, he was drawing a basic salary of ` 8,000 per month.
Dearness allowance was ` 4,000 per month, of which 60% was
S
meant for retirement benefits as per the terms of employment.
Also, he was eligible to a commission @ 1% of turnover (turn-
over amounted to ` 12,00,000 in the past 12 months). Mr Rishi also
IM
received a bonus of ` 12,000 p.a.
Under the Income Tax Act, 1961, any gratuity received during the
tenure of service is fully taxable. The amount of exemption avail-
able in respect of gratuity received at the time of retirement/death
of an employee differs under three situations:
M
Section 10(10)(i): Employees of Central Government/Local

Authority employees/Members of Civil Services – The death
cum retirement gratuity is fully exempt.
Section 10(10)(ii): Employees covered by the Payment of Gra-
N
tuity Act, 1972 – The death cum retirement gratuity is exempt

to the extent of least of the following:
1. ` 20 lacs
2. The actual amount of gratuity received
3. 15 days’ salary for every completed year or part thereof in
excess of 6 months (based on last drawn salary)
Salary, in this case, means (Basic Salary + Dearness
Allowance) and the number of days in a month are taken
as 26.
Section 10(10)(iii): Employees not covered by the Payment
of Gratuity Act, 1972 – The death cum retirement gratuity is
exempt to the extent of least of the following:
1. ` 20 lacs
2. The actual amount of gratuity received

Case Study 3
n o t e s
3. Half month’s salary for every completed year of service

(based on an average of past 10 months’ salary)
Salary, in this case, means (Basic Salary + Dearness Allowance

forming part of retirement benefits + Commission as a % of turn-
over) and the number of days in a month are taken as 30.
Therefore, by applying these provisions for Mr Rishi, the amount

of gratuity taxable under the head salaries for the Assessment
Year 2021-2022 will be computed as follows:
If Mr Rishi is a Government employee Amount in `

Amount of Gratuity received on retirement 7,00,000
Less: Amount exempt under Section 10(10)(i) 7,00,000
S
Taxable Gratuity -
IM
If Mr Rishi is a private sector employee Amount in `
covered by Payment of Gratuity Act
Less: Amount exempt under Section 10(10)(ii) 1,86,923
Least of the following:
M
1. ` 7,00,000
2. ` 20,00,000
3. ` {(8,000 + 4,000) × 15/26 × 27}= ` 1,86,923
Taxable Gratuity 5,13,077
N
If Mr Rishi is a private sector employee not Amount in `

covered by Payment of Gratuity Act
Less: Amount exempt under Section 10(10)(iii) 1,48,200
Least of the following:
1. ` 7,00,000
2. ` 20,00,000
TECH 3. = ` 1,48,200
INFO   10  
( 8,00 × 10 ) + ( 4,000 × 60% × 10 ) +  1% × 12,00,000 × 12  
15   
= × × 26
30 10
Taxable Gratuity 551,800

Case Study 3: TAXABILITY OF GRATUITY OF MR. RISHI BASED ON
THE NATURE OF HIS EMPLOYMENT 281
Case Study 3
n o t e s
questions
1. Under which of the three situations of employment (i.e.,

government employee or employee covered by Gratuity
Act or employee not covered by Gratuity Act) does Mr
Rishi enjoy the maximum exemption?
(Hint: Government employee)
2. How is exemption from gratuity is calculated if an
employee is not covered under the Payment of Gratuity
Act?
(Hint: Refer to Section 10(10)(iii))
S
IM
M
N

Case Study 4
n o t e s
TAX ISSUES RELATED TO SELF-OCCUPIED

HOUSE PROPERTY
Mr Swapnil, a Delhi-based IT professional, owns a flat in South

Case Objective
Delhi. He is planning to purchase another property in North
This Case Study discusses Delhi. He is considering the following options:
the tax issues related to
the income from the house Let it out on rent
property of Swapnil. It is with Use it as a residence for himself or his family
book. Keep it vacant/unoccupied
Use it as a holiday home
Each of these alternatives has its own tax implications. Therefore,

it becomes important for Swapnil to understand the tax implica-
S
tion for each option in accordance with the Income Tax Act, 1961
before deciding what he should do with his new property. The tax
implications for the above alternatives are as follows:
IM
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 property, he will
have to pay tax for his annual rental income, i.e., ` 1,20,000 after
tax deductions including municipal taxes, standard deductions
and interest (if any).
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If the new property is used as a residence for his family: In this

situation, Swapnil will have the alternative to select any one prop-
erty for living purpose. The other property will be deemed to be
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rented out and the estimated annual rent will be considered as

taxable.
If the new property remains vacant: In this case, the property

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 advantage

of the self-occupied home will not be applied in this case. So, the
estimated annual rent will be considered as the taxable value.
As per Section 23(2) of the Income Tax Act, 1961, whether a

house property is self-occupied for own residency or unoccupied
throughout the previous year, the annual value shall be taken as
Nil unless any other benefit is derived by the owner from such
house property. However, this benefit of exemption can be claimed
by any individual or HUF for two self-occupied properties.
Furthermore, by applying Section 23(4), if the assessee owns more

than two self-occupied house property, then the income of such

Case Study 4: TAX ISSUES RELATED TO SELF-OCCUPIED HOUSE PROPERTY 283
Case Study 4
n o t e s
self-occupied house property shall be taken to be nil at the option

of the owner. The remaining self-occupied properties shall be
treated as let out properties for the purpose of taxation and their
expected rents shall be taken as Gross Annual Values.
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. He may claim the benefit of Nil Annual
Value only in respect of one house property at his option.
questions
1. List the deductions that will have to be borne by Swapnil

from the rental income of his property.
S
(Hint: Municipal taxes, standard deductions and interest,
etc.)
2. Explain the computation of income from ‘self-occupied
IM
property’ as per the provisions of the Income Tax Act.
(Hint: Refer to Section 23(2) and 23(4))
M
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Case Study 5
n o t e s
EXPENDITURE ON SCIENTIFIC RESEARCH
Mr L.P., a resident individual in Bangalore, incurs certain sci-

Case Objective entific research expenditures during the financial year ended
This Case Study discusses 31.3.2021.
the deductions allowed in
respect of scientific research While computing the profits and gains of a business or profession,
expenditure. It is with respect assessees are allowed to claim a deduction in respect of scientific
to Chapter 5 of the book. expenditure by virtue of Section 35 of the Income Tax Act, 1961.
A deduction in respect of the expenditure incurred on the scien-
tific research related to the assessee’s business can be claimed to
reduce the taxable business income. Various provisions of Sec-
tion 35 provide for weighted deduction (100% or 150%, as the case
may be) for expenditures incurred by the assessee or contribu-
tions made by the assessee towards certain specified institutions
S
approved by prescribed authorities.
For calculating the taxable business income for the A.Y. 2021-
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2022, Mr L.P. wishes to claim a deduction of scientific research
expenditures for his business entity, L.P. Ltd. By applying the spe-
cific provisions of Section 35, the deductions shall be allowed as
follows:
Payment by Mr Amount Relevant Section % of Deduction

L.P. (in `) Weighted Amount
M
Deduction (`)
Allowed
Amount paid for 1,20,000 Section 35(1)(ii)-Contribu- 150% 1,80,000
scientific research tion to notified approved
to approved Indian college/university/institu-
Institute of Scienc- tion/research association
N
es, Mysore for scientific research

Amount paid for a 2,30,000 Section 35(2AA)-Contri- 150% 3,45,000
scientific research bution to approved IIT/
programme to IIT, university/National Lab-
Roorkee oratory/specified person
for an approved scientific
research programme un-
dertaken by it
Amount paid to Y 3,90,000 Section 35(1)(iia)-Contribu- 100% 3,90,000
Ltd., an approved tion to an approved Indian
Indian registered Company for scientific
company whose research
main objective is
scientific research
and development
Revenue expend- 3,00,000 Section 35(1)(i)-Scientific 100% 3,00,000
iture incurred by research expenditure of
LP Ltd. on scientif- revenue nature incurred
ic research in relation to assessee’s
business

Case Study 5: EXPENDITURE ON SCIENTIFIC RESEARCH 285
Case Study 5
n o t e s
Payment by Mr Amount Relevant Section % of Deduction

L.P. (in `) Weighted Amount
Deduction (`)
Allowed
Capital expendi- 7,50,000 Section 35(1)(iv)-Scientific 100% 2,50,000
ture on in-house research expenditure of
scientific research capital nature incurred in
(of which ` 5,00,000 relation to assessee’s busi-
relates to acquisi- ness (except expenditure
tion of land) on land)
- - Section 35(2AB)-Expendi- 150% -
ture incurred on approved
in-house research and
development by a company
engaged in the business of
biotechnology, etc.
- - Section 35(1)(iii)-Contribu- 100% -
tion to notified approved
S
college/university/institu-
tion/research association
for social science/statistical
research
IM
Total deduction allowable under Section 35 14,65,000
questions
1. What is the maximum percentage of deduction allowed

for scientific research expenditure?
M
(Hint: 100%/150%, as the case may be, Refer to

Section 35.)
2. Is there a specific deduction for expenditure incurred on
in-house scientific research by company assessees?
N
(Hint: Yes, Section 35(2AB) is specifically for company

assessees.)

Case Study 6
n o t e s
CAPITAL GAINS OF MR. CHUGH
Case Objective Mr Chugh, a businessman, purchased a house property on 1.5.1978

for ` 1,12,000. He incurred the following expenses for making
This Case Study discusses the some additions and alterations to the house property:
capital gains of an individual.
It is with respect to Chapter 6 Construction cost of first floor, incurred in 1984-85, for
of the book. ` 2,95,000.
Construction cost of second floor, incurred in 2003-04, for
` 8,05,000.
Renovation expenses of the building, incurred in 2013-14, for
` 5,11,000.
The fair market value of the property as on 1.4.2001 is ` 9,40,000.
S
This house property was sold by Mr Chugh on 11.8.2018 for
` 77,00,000 after incurring expenses of ` 40,000 on the transfer.
The capital gains on such transfer are calculated as follows:
IM
Financial Year (FY) Cost Inflation Index (CII)
2001-02 100
2003-04 105
2013-14 200
2018-19 280
M
2019-20 289
2020-21 301
Computation of Capital Gains of Mr Chugh from the sale of house

property for the Assessment Year 2021-2022.
N
Particulars Amount Amount

(in `) (in `)
Gross consideration of sale 77,00,000
Less: Expenses incurred on transfer 40,000
Net consideration of sale 76,60,000
Less: Indexed cost of acquisition (COA) 26,32,000
Less: Indexed cost of improvement 28,62,067
(COI)
Long-term capital gains 21,65,933
TECH Indexed cost of acquisition (COA) = ` 9,40,000 × 301/100

INFO = ` 28,29,400
Cost of acquisition is taken as fair market value as on 1.4.2001

= ` 9,40,000

Case Study 6: CAPITAL GAINS OF MR. CHUGH 287
Case Study 6
n o t e s
(Actual cost of acquisition is ignored as it is lower than the fair

market value)
Indexed Cost of Improvement (COI) is computed as follows:

Construction cost of first floor in 1984-85 Nil
(Expenses incurred before 1.4.2001 are ignored for
computing capital gains)
Construction cost of second floor in 2003-04 TECH
(Indexed COI = ` 8,05,000 × 301/105) 23,07,667 INFO
Renovation expenses of the building in 2013-14

(Indexed COI = ` 5,11,000 × 301/200) 7,69,055
S
Total Indexed COI 30,76,722
The capital gains on the sale of house property by Mr Chugh

would be taxable @20% in the Assessment Year 2021-2022.
IM
questions
1. What are the rates of income tax chargeable on long-term

capital gains?
(Hint: Refer to Sections 112A and 112).
M
2. How is the cost of acquisition computed if the asset is

acquired from a previous owner?
(Hint: Cost to the previous owner or fair market value as
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on 1.4.2001, at the option of the assessee).

Case Study 7
n o t e s
INCOME FROM OTHER SOURCES
Mohan is a salaried personnel and works for a company which

Case Objective provides services to different organisations in different capacities.
He earns a lot from dividends of his past investments. Apart from
This Case Study discusses
the income earned by Mohan this, he earns from gambling, lotteries, betting and horse races.
from other sources. It is with This means that his income from other sources is very high.
book. Following are the details of the income of Mohan from other
sources:
1. He earns ` 8 lakhs from job.
2. He gets ` 3 lakhs as rent from his property.
3. He earns around ` 9 lakhs as dividends.
S
4. He won a lottery and earned around ` 3 lakhs.
5. He won ` 3 lakhs by winning a bet in horse race.
IM
6. He received a gift from his father which is an envelope and
carries around ` 50,000.
7. He received ` 24,000 as gift from his friends on his birthday.
8. His grandfather gifted him ` 2,52,000.
9. He received ` 35,000 as gift on his marriage anniversary.
M
10. He earned ` 47,000 from interest earned from securities.
questions
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1. Ascertain the total amount of gifts charged to tax.

(Hint: Exclude salary, house property, dividend exempt
under Section 10(34), gifts received from relatives,
lottery income, horse race income, and interest income.
The remaining value of gifts, if aggregate value exceeds
` 50,000)
2. Out of the total income stated above, which income will
come under the head ‘Income from Other Sources’?
(Hint: Value of taxable gifts, lottery income, horse race
income, and interest income)

Case Study 8
n o t e s
COMPUTATION OF DEDUCTIONS FROM TOTAL INCOME
During the previous year 2020-2021, Mr XY, a resident individual

Case Objective
aged 63 years, has earned an income of ` 1,48,000 from his busi-
ness/profession and gross lottery income of ` 1,10,000. The inter- This Case Study discusses the
est earned by him on fixed deposits with banks was ` 55,000. He computation of deductions
under Chapter VI-A. It is with
had also made an investment of ` 1,50,000 in the Public Provident
Fund account during the year. book.
Mr XY seeks help from his tax accountant to determine the

amount of total deduction eligible under Chapter VI-A for compu-
tation of total income for tax purposes. The tax accountant com-
putes the deductions as follows:
Particulars Workings Amount
S
(in `) (in `)
Profits and gains of business or 148,000
profession
IM
Income from Other Sources
1. Lottery Income 110,000
2. Interest on Fixed Deposits 55,000
Gross Total Income 313,000
Less: Deductions allowed under Chapter
M
VI-A
1. Deduction under Section 80C
Amount contributed to Public Provi- 150,000
dent Fund
N
2. Deduction under Section 80TTB

Interest on deposits with banks 50,000
200,000
Amount of deductions restricted to 203,000
Total Income 110,000
The maximum deduction allowed under Section 80C is ` 1,50,000

of sums paid or deposited to recognised funds. The deduction
allowed under Section 80TTB to resident senior citizens is the
amount of actual interest earned on bank deposits or ` 50,000,
whichever is lower.
Although the eligible value for deduction amounts to ` 2,00,000,

however, deductions under Chapter VI-A cannot be more than
the gross total income exclusive of long-term capital gains under
Section 112/112A, short-term capital gains under Section 111A,
and lottery winnings.

Case Study 8
n o t e s
TECH Thus, the amount of maximum permissible deductions under

INFO Chapter VI-A = ` 3,13,000 – ` 1,10,000 = ` 2,03,000
The taxable income of Mr XY for the previous year 2020-2021

amounts to ` 1,10,000. Since his total income falls within the
basic exemption limit of ` 3,00,000, he does not fall within the tax
bracket for the Assessment Year 2021-2022.
questions
1. Which sums are eligible for claiming a deduction under

Section 80C?
(Hint: Contribution to specific funds, Refer to Section
80C)
S
2. Who are eligible for claiming a deduction under Section
80TTB?
(Hint: Resident senior citizens, Refer to Section 80TTB)
IM
M
N

Case Study 9
n o t e s
House Rent Allowance
House Rent Allowance (HRA) is a special allowance provided Case Objective

by an employer to his employee towards the payment of rent of
employee’s residence. However, HRA exemption is not available This Case Study discusses
to assessees living in their own houses or in houses for which they the applicability of house rent
allowance (HRA). It is with
have not incurred any rental expense.
book.
Mr Raj Singh resides in Kanpur in a rented accommodation. He
works for a reputed multinational company which gives him a
house rent allowance of ` 950 per month. The basic salary drawn
by him is ` 3,000 per month and dearness allowance forming part
of the salary for retirement benefits is ` 600 per month. He pays a
monthly rent of ` 1,000 for his accommodation in Kanpur.
S
While computing his taxable income under the head ‘Salaries’, he
desires to claim an exemption of HRA. For this purpose, he goes
through the rules mentioned in the taxation laws.
IM
Section 10(13A) of the Income Tax Act, 1961 states that HRA is
exempt to the least of the following in the hands of an employee:
HRA actually received during the previous year
Rent paid minus 10% of the salary
50% of salary if accommodation is located in Delhi/Mumbai/
M
Chennai/Kolkata
OR
40% of salary if accommodation is located in non-metro cities
N
The amount of taxable HRA is arrived at by deducting the exemp-

tion amount from the HRA granted to an employee.
questions
1. Calculate the amount of taxable HRA and exempted HRA.

(Hint: Follow the rules of Section 10(13A))
2. What items are included in the definition of salary for
computation of HRA exemption?
(Hint: Salary means Basic Salary + Dearness Allowance
if provided in the employment terms for retirement
benefits + Commission as a percentage of turnover)

Case Study 10
n o t e s
COMPUTATION OF TOTAL INCOME OF CAZY AND HAZY
Cazy and Hazy are two sisters born and brought up in Delhi.
Case Objective While Cazy is settled in Australia after her marriage in 1981, Hazy
This Case Study discusses the is settled in Delhi. Both of them, being aged below 60 years, earn
concept of computation of the the following incomes during the previous year ended 31st March,
total income of an assessee. 2021:
It is with respect to Chapter 10
of the book.
Particulars Cazy (`) Hazy (`)
Pension granted by State Government - 51,000
Pension granted by Australian Government 21,000 -
TECH
INFO Long-term capital gain from the sale of land 1,03,000 49,000
situated in Delhi
Rent received from house property situated in 59,000 31,000
S
Delhi
LIC premium paid - 9,000
Australian Life Insurance Corporation 41,000 -
IM
premium paid at Australia
Short-term capital gain from the sale of shares 21,000 2,49,000
of the listed Indian company, STT paid
Premium on Mediclaim policy paid - 24,000
Contribution to PPF - 18,000
M
The taxable income and total tax liability of Cazy and Hazy for the
Assessment Year 2021-2022 are computed as follows:

N
Income from Salary (A)

TECH Pension granted by State Government - 51,000
INFO
Less: Standard Deduction allowed under - 40,000
Section 16
{In case of a non-resident, pension granted by - -
Australian Government is not taxable in India
because it is earned and received outside India}
- 11,000
Income from House Property (B)
Rent received from house property in Delhi (as- 59,000 31,000
sumed as Net Annual Value)
Less: Deduction under Section 24 @ 30% 17,700 9,300
41,300 21,700
Income from Capital Gains (C)
Short-term capital gain from the sale of shares of 21,000 2,49,000
the listed Indian company

Case Study 10: COMPUTATION OF TOTAL INCOME OF CAZY AND HAZY 293
Case Study 10
n o t e s

Long-term capital gain from the sale of land situ- 1,03,000 49,000
ated in Delhi
1,24,000 2,98,000
Gross Total Income (A+B+C) 1,65,300 3,30,700 TECH
Less: Deductions allowed under Chapter VI-A INFO
Deduction under Section 80C
1) LIC premium - 9,000
2) Premium paid to Australian Life Insurance 41,000 -
Corporation
3) Contribution to PPF - 18,000
41,000 27,000
Deduction under Section 80D
S
Premium paid on Mediclaim policy - 24,000
- 24,000
Total deduction under Chapter VI-A is restricted 41,000 32,700
IM
to Gross Total Income exclusive of long-term and
short-term capital gains
Total Income = Gross Total Income – Deductions 1,24,300 2,98,000
The tax liability of Cazy (Non-resident) Amount (in `) TECH

Tax on long-term capital gain @20% on ` 1,03,000 20,600 INFO
M
Tax on short-term capital gain @15% on ` 21,000 3,150

Tax on balance income of ` 300 -
23,750
Add: Health and Education Cess @4% 950
N
Total Tax Liability 24,700
The tax liability of Hazy (Resident) Amount (in `)

Tax on long-term capital gain = Nil, by utilising the -
TECH
unexhausted basic exemption limit INFO
Tax on short-term capital gain = ` 2,49,000 - 7,200
` 2,01,000 (` 2,01,000 being the unexhausted limit)
= 15% of ` 48,000
Less: Rebate under Section 87A 2,500
4,700
Add: Health and Education Cess @4% 188
Total Tax Liability 4,888
Long-term capital gains are subject to tax at a flat rate of 20%

under Section 112. Short-term capital gains on the sale of shares
in respect of which STT (Securities Transaction Tax) has been
paid are subject to tax @15% under Section 111A.

Case Study 10
n o t e s
In case the basic exemption limit of ` 2,50,000 is not exhausted

against other income, the benefit of utilising/deducting the unex-
hausted basic exemption limit against/from long-term and short-
term capital gains is available to resident individuals only. There-
fore, Cazy cannot utilise the basic exemption limit against capital
gains. Also, the rebate under Section 87A can be availed only by
resident individuals whose total income is up to ` 5,00,000.
questions
1. Can non-residents adjust the unexhausted basic

exemption limit from tax payable on capital gains?
(Hint: No; Refer to Sections 111A, 112 and 112A)
2. Discuss the provisions relating to the rebate under income
S
tax law.
(Hint: Refer to Section 87)
IM
M
N

Case Study 11
n o t e s
Goods and Services Tax
Indirect taxation regime in India witnessed a paradigm shift Case Objective

on 1st July, 2017 when multiple numbers of indirect taxes were
amalgamated into one unified tax called Goods and Services Tax application of GST. It is with
(GST). The introduction of GST proved to be a significant indirect respect to Chapter 11 of the
tax reform for India. However, customs duty continues to co-exist book.
in the post-GST regime.
Majority of the existing Central- and State-level indirect taxes

have been subsumed into one tax, namely GST, which is leviable
uniformly on all goods and services across the country. Since its
introduction, GST has made business operations easier and also
tackles complex issues of double taxation and cascading. GST
has brought a win-win situation for the whole economy including
S
industry stakeholders, consumers and the government. It has low-
ered the cost of goods and services, boosted the economy and has
made products and services globally competitive. This is because
IM
the GST system offers a continuous chain of input tax credits
from producer/service provider’s point up to the final retailer’s/
consumer’s point. A set-off of these credits from GST payable at
various stages of supply, thus, results in taxing the value addition
only at each supply chain stage.
Some of the Central- and State-level taxes subsumed in GST are

M
central excise duty, additional excise duty, service tax, central

sales tax, entertainment tax, VAT/sales tax, entry tax, luxury tax,
etc. GST is levied on all goods and services except for some, such
as alcoholic liquor, petroleum crude, diesel and natural gas.
N
Goods and Services Tax is a type of indirect tax reform that aims
to remove taxation barriers between states, thereby creating
a unified market and provides unrestricted access to the entire
nation to buy, sell, import and export within the country. It has
created a uniform market and the consumers get benefitted from
the reduction of prices of different items.
The start-ups are benefitting from the reduction of the logistics

costs, simplified procedures, lower tax burdens and removal of
cascading effect.
GST has helped widen the tax base, with the number of registra-
tions crossing 10 million. The growth rate projected by the IMF
after implementing the GST is beyond 8%.

Case Study 11
n o t e s
questions
1. What is the impact you see as a common man after the

implementation of GST?
(Hint: Basic observations in your daily life)
2. GST has subsumed all the taxes. Make a presentation to
prove this fact.
(Hint: Refer to the types of taxes subsumed)
S
IM
M
N

Case Study 12
n o t e s
UNILATERAL RELIEF FOR DOUBLE TAXATION WHERE

NO AGREEMENT EXISTS WITH A FOREIGN COUNTRY
Double Taxation Avoidance Agreements (DTAA) are very signifi-

Case Objective
cant to prevent double taxation. Double taxation can occur when
a taxpayer is resident in one country and has a source of income This Case Study discusses
from another country. If both the countries charge tax on the same how relief can be granted for
income, it would increase the cost of international operations double taxation in case of no
Double Taxation Avoidance
and prohibit the globalisation process. To ensure that the same Agreement. It is with respect
income is not subjected to the tax twice in the hands of an asses- to Chapter 12 of the book.
see, the governments of two countries mutually enter into DTAA
to grant bilateral relief. However, Section 91 of the Income Tax
Act, 1961 provides for some unilateral relief by the home country
even when no mutual agreement is entered into by two countries.
S
Nandita, aged 62 years, was a resident retired employee of Prasar
Bharati. She derived a foreign income of ` 1,10,000 from her
theatrical works. A tax of ` 11,000 was deducted in the foreign
IM
country and India did not have any Double Taxation Avoidance
Agreement with the said country. Her Indian income amounted
to ` 5,10,000. For tax-saving purpose, she made a contribution
to Public Provident Fund of ` 1,50,000 during the previous year
2018-19. She is worried about the double tax to be paid by her on
the foreign income and seeks advice from a taxation consultant
M
on Section 91.
In cases where income arises in countries with which India does

not have DTAA, relief is granted under Section 91 on the fulfil-
ment of certain conditions. These include the residency of the
N
assessee in India during the relevant previous year, accrual of

income outside India, payment of income tax in a foreign country
on such income, etc. Since these conditions are satisfied in case of
Nandita, relief can be claimed under Section 91.
The tax consultant computed the tax liability of Nandita for the
Assessment Year 2021-2022 in the following manner:

Indian Income 510,000
Foreign Income 110,000
Gross total Income 620,000
Less: Deduction under Section 80C 150,000
Total Income 470,000
Tax on Total Income 8,500
@5% (` 3,00,000 basic exemption limit for senior
citizens)
Add: Health and education cess@4% 340

Case Study 12
n o t e s

TECH Indian Tax 8,840
INFO
The average rate of tax in India
(` 8,840/` 4,70,000 × 100) 1.88%
The average rate of tax in the foreign country
(` 11,000/` 1,10,000 × 100) 10%
Deduction under Section 91 on ` 1,10,000 @1.88% 2,068
(being lower of Indian tax rate or foreign tax rate)
Tax payable in India (` 8,840 – ` 2,068) 6,772
The assessee is allowed for a deduction of tax paid on the doubly

taxed foreign income from the Indian income tax payable. The
deduction for Nandita equals a sum calculated on the doubly
S
taxed income at the India tax rate or the rate of tax in the foreign
country, whichever is lower.
IM
questions
1. If there were no protection under Sections 90 and 91 of

the Income Tax Act, 1961, would international business
be impacted?
(Hint: Yes, due to the underlying concept of double
M
taxation).
2. How can relief be availed if there is no Double Taxation
Avoidance Agreement between two countries?
(Hint: Refer to Section 91).
N

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Taxation – Direct and Indirect

Chief Academic Officer

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Author : CA Sapna Jain

NMIMS Global Access - School for Continuing Education

CHAPTER NO. CHAPTER NAME PAGE NO.

3 Income From Salaries 55

4 Income from House Property 81

7 Income from Other Sources 163

8 Deductions to be made in Computing Total Income 177

9 Exemptions & Rebates 205

10 Set-Off and Carry Forward of Losses 215

11 Indirect Taxation – Goods and Services Tax 235

12 International Taxation 261

13 Case Studies 275

NMIMS Global Access - School for Continuing Education

Residential Status: Residential Status of Different Kinds of Assessees; Residential Status of an

NMIMS Global Access - School for Continuing Education

Deductions to be Made in Computing Total Income: Deduction vs. Exemption; Deductions to be

International Taxation: Concept of International Taxation; Objectives of International Taxation;

NMIMS Global Access - School for Continuing Education

1.3 Types of Taxes

NMIMS Global Access - School for Continuing Education

NMIMS Global Access - School for Continuing Education

DETERMINATION OF PREVIOUS YEAR BY THE

Similarly, previous year is defined under Section 3 of the Income

The Act specifies that in cases of newly set up businesses or

As an example, Mr David, a newly qualified lawyer, sets up his

profession on 1st August, 2020. Since he started his profession in

for the Assessment Year 2021-2022.

There is a rule that if any source of income comes into effect

NMIMS Global Access - School for Continuing Education

After studying this chapter, you will be able to:

the government of a country to implement a system that would help in

system must be established.

NMIMS Global Access - School for Continuing Education

1.2 Meaning and Nature of Taxes

India has a three-tier tax structure. It means that the central

In India, tax is levied on the income generated by a person or an

the most important sources of revenue for the Government of India.

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

NMIMS Global Access - School for Continuing Education

1.2.1 Vital Attributes of Taxes

1.2.3 Tax Structure

Old Tax Structure Central Tax Service Tax

State Tax Miscellaneous

Figure 1.2: Old Tax Structure of India

NMIMS Global Access - School for Continuing Education

The new tax structure of India post introduction of GST is shown in

Indirect Tax=GST SGST (State)

Inter-state IGST (Central)

Figure 1.3: New Tax Structure of India

 It is levied on the annual income of an assessee.

1.2.4 Tax Planning, Avoidance and Evasion

NMIMS Global Access - School for Continuing Education

or any assessee. Before explaining these concepts in detail, let us first

Tax Planning refers to the practice of availing all available exemptions,

Tax Avoidance is an act of dodging tax without breaking the law.

Self Assessment Questions

1. India has a three-tier tax structure which means that the

Describe the importance of tax planning for corporates. Also, make

NMIMS Global Access - School for Continuing Education

It is levied on the annual income of an assessee.

Inheritance Tax (now abolished): Inheritance tax was also known

Central excise duty

Profits and gains