PROJECT REPORT ON

“THE VERIOUS TYPE OF HEADS OF INCOME”

SUBMITTED
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR
THE AEARS OF DGREE

MASTER IN COMEERECE
By
JESAL DHANJI MAKWANA
ROLL NO :

M.COM (SEMESTER III)

Academic Year: 2022-23
UNDER THE GUIDANCE OF
DR. HELEN SELVARAJ

N.R SWAMY COLLEGE OF COMMERCE & ECONOMICS

SMT . THIRUMALAI COLLEGE OF SCIENCE
337, SEWREE – WADALA ESTATE,
WADALA, MUMBAI -400031
DECEMBER 2022

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 PROJECT REPORT ON
“THE VERIOUS TYPE OF HEADS OF INCOME”

SUBMITTED
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR
THE AWARD OF DEGREE

MASTER IN COMMERCE
By
JESAL DHANJI MAKWANA
ROLL NO:

M.COM ( SEMESTER III)

Academic Year: 2022-23

UNDER THE GUIDANCE OF

DR. HELEN SELVARAJ

N.R SWAMY COLLEGE OF COMMERCE & ECONOMICS

SMT. THIRUMALAI COLLEGE OF SCIENCE
337, SEWREE – WADALA ESTATE,
WADALA, MUMBAI -400031
DECEMBER 2022

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 CERTIFICATE
S.I.W.S
N.R SWAMY COLLEGE OF COMMERCE & ECONOMICS
SMT. THIRUMALAI COLLEGE OF SCIENCE

NAAC RE-ACCREDITED: GRADE A

This is to certify that, Mr./Miss JESAL DHANJI MAKWANA student of
S.I.W.S N.R swamy college of commerce & Economic studying in
MASTER IN COMMERCE (ADVANCED ACCOUNTANCY)
(SEMESTER IV) PROJECT REPORT ON “THE VERIOUS TYPE OF
HEADS OF INCOME” in the academic year 2022-2023. The
informationsubmitted is true and original to the best of the knowledge.

____________________ ________________
(Signature of Project Guide ) (Signature
of External Examiner)

_________________ __________________
(Signature of Co-ordinator) (Signature of Principal)

Date of Submission :-

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4|Page
 DECLARATION
I the undersigned Miss. JESAL DHANJI MAKWANA hereby declare that
the work embodied in this project work titled “THE VERIOUS TYPE OF
HEADS OF INCOME” from my own contribution to the research work
carried out the under the guidance of DR. HELEN SELVARAJ is a result
of my own research work and has not been previously submitted to any
other university for any other degree/diploma to this or any other
university.
Wherever reference has been made to previous work of other, it has been
clearly indicated has such and included in the bibliography.
I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rule and ethical
conduct.

JESAL MAKWANA
Name and signature

Certified by

DR.HELEN SELVARAJ

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6|Page
 ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so numerous,
and the depth is so enormous.
I would like to acknowledgment the following as being idealistic
channels and fresh dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me
chance to do this project.
I would like to thank my principal, DR. SUNITA SHIRVALKAR for
providing the necessary facilities required for completion of this project.
I take this opportunity to thank our vice principal (self-financing)
PROF.AYYAPAN IYER for her moral support and guidance.
I would also like to express my sincere gratitude toward my project
guide DR. HELEN SELVARAJ whose guidance and care made the
project successful.
I would like to thank my college Library, for having provided various
reference books and magazines related to my project.
Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion of the project especially my
parents and peers who supported me throughout my project.

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 INDEX

SR. NO PARTICULAR PAGE NO

1 INTRODUCTION

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INTRODUCTION

According to the Income Tax Act, a taxpayer’s earnings are divided into 5 heads of income.

At the end of each financial year, you must correctly classify your earnings under these heads

of income for accurate tax calculation. 

It is essential for you to know which of your earnings falls under what category. To get a

clear understanding of the income heads, keep reading.

Under the Income Tax Act, there are five heads which are known as the heads on income. At

the end of each year, you or your accountant is expected to classify your yearly earning under

these heads of income as per the Income Tax Act to calculate the amount of tax payable by

you as a registered citizen of a country abiding the laws of the prevailing Government. These

heads of income are here to ensure the proper maintenance of monetary power within the

social and governing system.

As per the Section 14 Income Tax Act,1961, there are five main income tax heads for an

individual. The computation of income tax is an important part and has to be calculated

according to the income of a person. For a hassle-free calculation, the income has to be

classified properly so that there is no confusion regarding the same. The government has

classified the sources of income under separate heads and then the income tax is computed

accordingly. The provisions and rules are according to the details mentioned in the Income

Tax Act

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Classification of income

Income tax is payable by an assessee on his total income from all the source of income. Each
source has its own unique features and requires specific treatment for correct computation of
income from that particular source. Naturally, rules and method for computation of income
from each such source are different according to the nature of the source. These sources of
income are classifiled under various heads of income in section 14. These heads of income
are as follows

Income under the head salaries (section 15 - 17)

Income from house property (section 22 – 27)

Profits and gains from business or profession (section 28 – 44)

Capital gain ( section 45 – 55)

Income from other source (Section 56 – 59 )

Importance of different heads

Each head of income provides a different scheme of computation of taxable income under
that head depending upon the nature of income and the complexities attached with that head
of income. For this reason, each of the head of income has its own deeming provisions and
provisions for exclusions and deductions and deductions of expenses etc.

It is therefore, necessary that an income belonging to a specific head must be computed

under that head only. If an income cannot be placed under any of the first four heads, it will
be taxed under the head “Income from other sources”.

Aggregate of net income under various heads gives total income of the assessee person, from
which deductions are made under chapter VIA. The net result is called the total income or
sometimes taxable income. Therefore, computation of income under different heads provides
the starting point of determining the tax liability.

Heads to be mutually exclusive

All the heads of income are mutually exclusive. If any income is considered under a
particular head e.g., Income from house property, it will not be taken into consideration for

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another head e.g., Profits and Gains from business and profession. The nature of income is
such that at times, it may not be possible to have water-tight compartmentalization.

Tax on aggregate income under all the heads

Although the income is computed under five different heads of income, tax will be computed
on the aggregate or total income from all the sources taken together at the prescribed rates.
However, different tax treatment is given to different items. For instance, Long term Capital
gains (LTCG) are generally taxed at 20%. But LTCG on listed securities is exempt from tax.
Similarly, short term capital gain on sale of equity shares is taxed at 18%. The amount of
such short term capital gains would be deducted from the aggregate total income and
accordingly tax rates are applied. Similarly, shipping companies are taxed on the basis of
tonnage of the shipping fleet. Lotteries, horse races etc are taxed at the maximum rate of tax
@ 30% All such incomes are excluded and tax is computed on rest of the total income.

Common residential status for all the heads

S. 6 provides that where a person is resident for the purpose of any particular head of income,
he will also be considered as resident for the purposes of computation of income under all the
heads of income.

Separate sources of income under one head.

Income is classified for each head of income. That head of income may have different
sources of income falling under that head. For instance a person may be in receipt of his
salary from more than one employer or rent from two or more house properties or more than
one business. All such sources will be clubbed together to arrive at the income from that
head.

Expenses under each head of income

It may be noted that expenses may be allowed under each head of income according to the
provisions applicable. The recent trend is to restrict and Direct Tax 34 standardize the
allowance of expenditure. For instance virtually no expenses except professional tax are

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allowed under the head salaries. Capital gains envisage deduction if only the cost of
acquisition and improvement and transfer expenses and so on and so forth.

Expenditure incurred in relation to income not includible in total income

Section 14 A provides that no deduction shall be allowed in respect of expenditure incurred

by the assessee in relation to exempted income that is the income which does not form part of
the total income under this Act

For example:

Under which head would the income of 3 offices are compositely let out on rent by alongwith
services like intercom, security guard, telephone connection, furniture and fixtures, etc. of
Swayam will be taxable?

Solution

The rent in respect of the commercial property should be taxed under “Income from House
Property”. However, income arising out of rentals of the other services should be taxable
under the head “Income from Other Sources”. Alternatively, the entire income arising out of
the property as well as the services could be taxable as “Income from Business or Profession”
As per departmental clarification, the income in respect of properties should be taxed as
“Income from House Property” and the income out of rentals of the other services to be taxed
under “Income from Other source”.

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PROVISIONS

Section 14 of The Income Tax Act states that “ all income shall, for the purposes of change of

income tax and computation of total income, be classified under the following the heads of

income.

Salaries

Income from house property

Pofits and gains from business or profession

Capital gains

Income from other sources.”

What are the 5 types of income tax?

1. The 5 heads of income tax are:

2. Income from salary

3. Income from house property

4. Income from profits and gains from business or profession

5. Income from capital gains

6. Income from other sources

Any income that you receive in terms of the service you provide on a contract of employment

is applicable for taxation under this head. This includes salary, advance salary, perquisites,

gratuity, commission, annual bonus and pension.

What are the differences between heads of income and sources of income?

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The heads of income are ways to classify the earnings or gains of an individual during a

given year as per the Income Tax Act. This is necessary for taxation purposes. They are:

Income from house or property

Capital gains

Income from salaries

Gains and profits from profession or business

Income from capital gains

On the other hand, sources of income for any person or business are monetary sources from

which they can earn an income. 

For individuals, they are:

Salary

Interest

Commission, etc. 

In case of businesses, they are:

Returns on investments

Profits

Grants from the government and more

Income from Salary

The salary for the purpose of calculation of income from salary includes:

 Wages;
 Pension;
 Annuity;
 Gratuity;
 Advance Salary paid;
 Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages;
 Annual accretion to the balance of Recognized Provident Fund;
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  Leave Encashment;
 Transferred balance in Recognized Provident Fund.
 Contribution by Central Govt. or any other employer to Employees Pension A/c as
referred

in Sec. 80CCD.

SALARIES

(Sections 15, 16 & 17)

INTRODUCTION

 The first head of Income Tax heads is income from salary whichThis clause essentially
assimilates any remuneration, which is received by an individual in terms of services
provided by him based on a contract of employment. This amount qualifies to be considered
for income tax only if there is an employer-employee relationship between the payer and the
payee respectively. Salary also should include the basic wages or salary, advance salary,
pension, commission, gratuity, perquisites as well as the annual bonus.

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(1) Who are the persons liable to pay tax on Salaries ?

(2) When is Salary taxable - on accrual or on receipt?

(3) What is the place of accrual for Salary income?

(4) How is Salary computed? Which items are included, which items are exempt and what are
the deductions available?

BASIS OF CHARGE AND MEANING (SECTION 15)

(SECTION 15)

(i) Section 15 deals with the basis of charge. Salary is chargeable to tax either on 'due' basis
or on 'receipt' basis, whichever is earlier.

(ii) However, where any salary, paid in advance, is assessed in the year of payment, it cannot
be subsequently brought to tax in the year in which it becomes due.

(iii) If the salary paid in arrears has already been assessed on due basis, the same cannot be
taxed again when it is paid.

Example 7: If A draws his salary in advance for the month of April 2023 in the month of
March 2023 itself, the same becomes chargeable on receipt basis and is to be assessed as
income of the P.Y.2022-23 ie., A.Y.2023-24. However, the salary for the A.Y.2024-25 will
not include that of April 2023.

Example 8: If the salary due for March 2023 is received by A later in the month of April
2023, it is still chargeable as income of the P.Y.2022-23 ie., A.Y.2023-24 on due basis.
Obviously, salary for the A.Y.2024-25 will not include that of March 2023.

1.2.1 Advance Salary

Advance salary is taxable when it is received by the employee irrespective of the fact whether
it is due or not. It may so happen that when advance salary is included and charged in a

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particular previous year, the rate of tax at which the employee is assessed may be higher than
the normal rate of tax to which he would have been assessed. Section 89 provides for relief in
these types of cases. The concept of relief under section 89 is explained in this unit later on.

Difference between advance salary and advance against salary

Loan is different from salary. When an employee takes a loan from his employer, which is
repayable in certain specified installments, the loan amount cannot be brought to tax as salary
of the employee.

Similarly, advance against salary is different from advance salary. It is an advance taken by
the employee from his employer. This advance is generally adjusted with his salary over a
specified time period. It cannot be taxed as salary.

1.2.2 Arrears of salary

Normally speaking, salary arrears must be charged on due basis. However, there are
circumstances when it may not be possible to bring the same to charge on due basis.

Example 9:

If the Pay Commission is appointed by the Central Government and it recommends revision
of salaries of employees with retrospective date, the arrears received in that connection will
be charged on receipt basis. Here also, relief under section 89 is available.

LEGAL PROVISION

According to Section 15, the following income shall be chargeable to tax under the head
"Salaries"-

(a) any salary due from an employer or former employer to an assessee in the previous year,
whether paid or not;

(b) any salary paid or allowed to him, in the previous year, by or on behalf an employer or
former employer, though not due or before it became due to him;
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(c) any arrears of salary paid or allowed in the previous year, by or on behalf of employer or
former employer, if not charged to income-tax in any earlier previous year.

Salary
section17(1)

Section
17
Profits in
Perquisite
lieu of salary
Section17(2)
Section17(3)

WHAT IS INCLUDED IN SALARY [S.17 (1)]

DEFINITION

According to Section 17(1) Salary includes - (1) wages and salaries including advance of
salary,

(1) wages and salaries including advance of salary,

(2) annuity or pension.
(3) gratuity
(4) fees and commission.
(5) perquisites,
(6) profits in lieu of salary or in addition to salary or wages,
(7) advance,
(8) contribution made by the Central Government, or any other employer in the account of an
employee under a pension scheme.
(9) payment received by an employee in respect of any period of leave not availed of by him,
i.e. leave encashment,
(10) annual accretion to the balance at the credit of an employee participating in a recognised
provident fund to the extent it is taxable, and
(11) transferred balance in a recognised provident fund to the extent it is taxable.
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In brief, Salaries include wages, annuity, pension, fees, commission, perquisites, profits in
lieu of salary, advance, leave encashment, and taxable contribution/interest/ transferred
balance in a recognised provident fund account. Since this is an 'inclusive' definition, the term
salary would include other items commonly understood to indicate salary such as
Allowances, Bonus, etc. The following points should be noted in this regard:

(1) Advance/Arrears: Salary also includes (a) advance salary (b) arrears of salary and (c)
salary in lieu of notice period, if any.

(2) Voluntary Payments: Normally salary is paid as per the terms of contract of employment.
If the employer makes any voluntary payment to the employee in addition to the contracted
amount, in connection with any service rendered, it is taxed as Salary.

(3) Gross Salary: "Salary" means Gross Salary and not the net salary received by the
employee after deductions such as the employee's contributions to Provident Fund or to
Employees State Insurance Fund, Income-tax deducted at source, Profession Tax etc. These
deductions should be added to the Net Salary received to determine the Gross Salary to be
included in income.

(4) Exempt: The amounts received by way of remuneration which are exempt from tax under
Section 10, should be excluded and ignored while computing salaries (see Para 5).

PERQUISITES

Meaning:

Perquisites mean any casual emoluments or benefits attached to an office or position in

addition to Salary. Perquisite is a personal advantage or benefit derived by virtue of
employment, office or position. It is an incidental income from employment in addition to the
regular salary. Mere reimbursement of expenses does not amount to a perquisite. A perquisite
denotes an additional monetary benefit going into the pocket of or enriching the employee.
Perquisites may be in cash or kind.

Definition:

The definition of Perquisites under s.17 can be summarised and studied under the following
heads: (A) Perquisites taxable in case of all employees (B) Perquisites taxable only in case of
specified employees like directors etc. and (C) Perquisites not taxable at all.
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Perquisites Taxable In Case of All Employees:

The following perquisites are taxable in case of every employee :

1. value of rent-free accommodation provided by the employer.

2. value of concession in rent in respect of accommodation provided by employer.

3. sum paid by the employer in respect of any obligation payable by the assessee

4. sum payable by the employer to effect an assurance on the life of the assessee or to effect a
contract for an annuity. However this is not applicable to paid as employer's contribution to-

(a) a recognised provident fund

(b) an approved superannuation fund (upto 1,50,000)

(c) a Deposit-linked Insurance fund, etc.

5. Value of security under Employee Stock Option Plan (ESOP) or sweat equity shares
allotted/ transferred by the employer, free of cost or at concessional rate.

6. value of any other prescribed fringe benefit or amenity i.e. (1) Interest-free or concessional
loan (2) Use of movable assets; and (3) Transfer of movable assets.

Perquisites Taxable Only In Case of Specified Employees:

The value of any benefit or amenity given free of cost or at a concessional rate to a specified
employee is treated as a perquisite and included in the salary of a specified employee.
"Specified employee" means -

a. a director who is an employee of the company;

b. an employee having substantial interest in the company (i.e. an employee holding equity
shares in the employer-company carrying more than 20% or more voting power);

c. any other employee whose income from Salary is more than 50,000 during the relevant
previous year. (The amount of 50,000 is to be computed after excluding non-monetary
benefits and deducting entertainment allowance and professional tax under S. 16, explained
later).
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The following perquisites are taxable in case of a specified employee-

1. Gas, electricity or water supply provided free of cost.

2. Free education facilities for family members of employee.

3. Free domestic servants such as sweeper, watchman, gardener, cook.

(5) Perquisites Not Taxable At All

(a) Section 17 specifically provides that following are not regarded as perquisites in any case-

1. Cost of medical treatment, in a hospital maintained by the employer provided to an

employee or any member of his family.

2. Reimbursement of medical expenses incurred by employee on medical treatment of

himself or his family member in a hospital maintained by the Government or any local
authority or approved by Government.

3. Any sum paid by an employer directly to a hospital, approved by the Chief Commissioner
of Income-tax, for medical treatment of the employee or his family member.

4. Reimbursement by employer of any expenditure incurred by the employee on medical

treatment of himself or his family in any hospital approved by the Chief Commissioner of
Income-tax. subject to the condition that the employee will attach with his return of income a
certificate from the hospital specifying the disease or ailment for which medical treatment
was required. and the receipt for the amount paid to the hospital for such treatment.

5. Premium on Employee Health Insurance under any scheme approved by the Central
Government under S.36(1)(ib).

6. Premium on Insurance (Medi-claim) on the health of employee or his family member

under any Scheme approved for the purpose of S.80D.

7. Expenditure incurred by employer on -

(a) medical treatment of the employee or his family member outside India,

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(b) travel or stay abroad of the employee or his family member for medical treatment.

(c) travel and stay abroad of one attendant who accompanies the patient in connection of
such treatment;

(d) expenditure on medical treatment and stay abroad will be exempt only to the extent
permitted by the Reserve Bank of India; and

(e) expenditure on travel shall be exempt only if the gross total income of such an employee
does not exceed 2,00,000 in the previous year.

8. Reimbursement of expenses specified in 7 above.

(b) The following Perquisites are not taxable at all as per other Acts/decisions of
Courts/circulars issued by the Central Board of Direct Taxes:

(1) Telephone provided by an employer to an employee at his residence;

(2) Transport facility provided by an employer engaged in the business of carrying of

passengers or goods to his employees either free of charge or at concessional rate;

(3) Privilege passes and privilege ticket orders granted by Indian Railways to its employees;

(4) Perquisites allowed outside India by the Government to a citizen of India for rendering
services outside India

(5) Sum payable by an employer to a RPF or an approved superannuation fund or deposit-

linked insurance fund established under the Coal Mines Provident Fund or the Employees'
Provident Fund Act;

(6) Employer's contribution to staff group insurance scheme;

(7) Leave travel concession;

(8) Payment of annual premium by employer on personal accident policy effected by him on
the life of the employee;

(9) Refreshment provided to all employees during working hours in office premises; (10)
Subsidised lunch or dinner provided to an employee.

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(11) Recreational facilities, including club facilities, extended to employees in general i.e.,
not restricted to a few select employees; (12) Amount spent by the employer or training of
employees or amount paid for refresher management course including expenses on boarding
and lodging;

(13) Medical facilities subject to certain prescribed limits; (14) Rent-free official residence
provided to a Judge of a High Court or the Supreme Court;

(15) Rent-free furnished residence including maintenance provided to an Officer of

Parliament, Union Minister and a Leader of Opposition in Parliament;

(16) Conveyance facility provided to High Court Judges under section 22B of the High
Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under section
23A of the Supreme Court Judges (Conditions of Service) Act, 1958.

VALUATION OF PERQUISITES

The rules relating to valuation of such benefits and amenities have been prescribed in rule 3.
It is further provided that 'profits in lieu of salary' shall include amounts received in lump
sum or otherwise, prior to employment or after cessation of employment for the purposes of
taxation. The rules for valuation of perquisite are as under:

1 Accommodation

For purpose of valuation of the perquisite of unfurnished accommodation, all employees are
divided into two categories: (i) Central Govt. & State Govt. employees; and (ii) Others. The
valuation is explained in Para 5.2 (3) above. Other points to be noted are:

(1) "Accommodation": "Accommodation" includes a house, flat, farm house, hotel

accommodation, motel, service apartment guest house, a caravan, mobile home, ship etc.

(2) Off-shore Site: However, the value of any accommodation located in a remote area
provided to an employee working at a mining site or an on-shore oil exploration site or a
project execution site or an accommodation provided in an off-shore site will not be treated
as a perquisite. A project site for the purposes of this sub-rule means a site of project upto the
stage of its commissioning. A "remote area" means an area located at least 40 kilometers
away from a town having a population not exceeding 20,000 as per the latest published all

23 | P a g e
India census. Off-shore sites of similar nature do not have to meet any requirement of
distance.

(3) "Salary": For the purpose of valuation of perquisite in respect of rent-free

accommodation, salary includes (a) basic salary; (b) dearness allowance/pay, if terms of
employment so provide; (c) bonus; (d) commission; (e) fees; (fall other taxable allowances
(excluding amount not taxable); and (g) any monetary payment (by whatever name called).
For this purpose salary does not include the following: (1) dearness allowance/pay, if not
taken into account while calculating retirement benefits, like provident fund, gratuity, etc., or
if term of employment does not so provide; (ii) employer's contribution to provident fund
account of an employee, (ii) all allowances which are exempt from tax; and (iv) value of
perquisites (under section 17(2)].

(4) Accommodation in Hotel: If an accommodation is provided by an employer in a hotel the

value of the benefit in such a case shall be 24% of the annual salary or the actual charges paid
or payable to such hotel, whichever is lower, for the period during which such
accommodation is provided as reduced by any rent actually paid or payable by the employee.
However, in cases where the employee is provided such accommodation for a period not
exceeding in aggregate fifteen days on transfer from one place to another, no perquisite value
for such accommodation provided in a hotel shall be charged. It may be clarified that while
services provided as an integral part of the accommodation, need not be valued separately as
perquisite, any other services over and above that for which the employer makes payment or
reimburses the employee shall be valued as a perquisite as per the residual clause. In other
words, composite tariff for accommodation will be valued as per these rules and any other
charges for other facilities provided by the hotel will be separately valued under the residual
clause.

(5) Transfer: Also, if on account of an employee's transfer from one place to another, the
employee is provided with accommodation at the new place of posting while retaining the
accommodation at the other place, the value of perquisite shall be determined with reference
to only one such accommodation which has the lower value as per the table prescribed in rule
3 of the Income-tax Rules, for a period upto 90 days. However, after that the value of
perquisite shall be charged for both accommodations as prescribed.

2 Personal Attendants, etc.

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The value of free service of all personal attendants including a sweeper, gardener, and a
watchman is to be at actual cost to the employer. Where the attendant is provided at the
residence of the employee, full cost will be taxed as perquisite in the hands of the employee
irrespective of the degree of personal service rendered to him. Any amount paid by the
employee for such facilities or services shall be reduced from the above amount.

3 Gas, Electricity & Water

For free supply of gas, electricity and water for household consumption, the rules provide that
the amount paid by the employer to the agency supplying the amenity shall be the value of
perquisite. Even where the supply is made from the employer's own resources, the
manufacturing cost per unit incurred by the employer would be the value of perquisite. Any
amount paid by the employee for such facilities or services shall be reduced from the above
amount.

4 Free or Concessional Education

Free or concessional education to the children of the employee shall be valued in a manner
assuming that such expenses are borne by the employee, and would cover cases where an
employer may be running, maintaining or directly or indirectly financing the educational
institution. Any amount paid by the employee for such facilities or services shall be reduced
from the above amount. However, where such educational institution itself is maintained and
owned by the employer or where such free educational facilities are provided in any
institution by reason of his being in employment of that employer, the value of the perquisite
to the employee shall be determined with reference to the cost of such education in a similar
institution in or near the locality if the cost of such education or such benefit per child
exceeds 1,000 p.m.

5 Interest Free or Concessional Loans

It is common practice, particularly in financial institutions, to provide interest free or

concessional Ioans to employees or any member of his household. The value of perquisite
arising from such loans would be the excess of interest payable at prescribed interest rate
over interest, if any, actually paidby the employee or any member of his household. The

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prescribed interest rate would now be the rate charged per annum by the State Bank of India
as on the 1st day of the relevant financial year in respect of loans of same type and for the
same purpose advanced by it to the general public. Perquisite value would be calculated on
the basis of the maximum outstanding monthly balance method. For valuing perquisites
under this rule, any other method of calculation and adjustment otherwise adopted by the
employer shall not be relevant

However, small loans up to 20,000 in the aggregate are exempt. Loans for medical treatment
specified in rule 3A are also exempt, provided the amount of loan for medical reimbursement
is not reimbursed under any medical insurance scheme. Where any medical insurance
reimbursement is received, the perquisite value at the prescribed rate shall be charged from
the date of reimbursement on the amount reimbursed, but not repaid against the outstanding
loan taken specifically for this purpose.

6 Use of Assets

It is common practice for an asset owned by the employer to be used by the employee. This
perquisite is to be charged at the rate of 10% of the original cost of the asset as reduced by
any charges recovered from the employee for such use. However, the use of computers and
laptops would not give rise to any perquisite.

7 Transfer of Assets

Often an employee or member of his household benefits from the transfer of movable asset
(not being shares or securities) at no cost or at a cost less than its market value from the
employer. The difference between the original cost of the movable asset (not being shares or
securities) and the sum, if any, paid by the employee, shall be taken as the value of perquisite.
In case of a movable asset, which has already been put to use, the original cost shall be
reduced by a sum of 10% of such original cost for every completed year of use of the asset.
Owing to a higher degree of obsolescence, in case of computers and electronic gadgets,
however, the value of perquisite shall be worked out by reducing 50% of the actual cost by
the reducing balance method for each completed year of use. Electronic gadgets in this case
means data storage and handling devices like computer, digital diaries and printers. They do
not include household appliance (ie. white goods) like washing machines, microwave ovens,
mixers, hot plates, ovens, etc. Similarly, in case of cars, the value of perquisite shall be
worked out by reducing 20% of its actual cost by the reducing balance method for each
completed year of use.
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8 Employee Stock Option Plan

The value of any specified security or sweat equity share allotted or transferred directly or
indirectly, by the employer, or former employer, free of cost or at concessional rate is
chargeable to tax as perquisite.

According to the Explanation to the section,

(a) 'specified security' means the securities as defined in section 2(h) of the Securities
Contracts (Regulation) Act, 1956 and, where employees' stock option has been granted under
any plan or scheme therefor, includes the securities offered under such plan or scheme.

(b) 'sweat equity shares means equity shares issued by a company to its employees or
directors at a discount or for consideration other than cash for providing know-how or
making available rights in the nature of intellectual property rights or value additions, by
whatever name called.

(c) the value of any specified security or sweat equity shares shall be the fair market value of
the specified security or sweat equity shares, as the case may be, on the date on which the
option is exercised by the assessee (employee) as reduced by the amount actually paid by, or
recovered from the assessee in respect of such security or shares.

(d) 'fair market value' means the value determined in accordance with the method as may be
prescribed. As per Rule 40C, in case of shares listed in one recognized stock exchange, fair
market value means the average of opening price and closing price of the share on the said
stock exchange as on the date of vesting.

(e) 'option' means a right but not an obligation granted to an employee to apply for the
specified security or sweat equity shares at a predetermined price.

9 Contribution to Superannuation Fund

The amount of any contribution to an approved superannuation fund by the employer in

respect of the assessee, to the extent it exceeds one lakh rupees.

10 Residual Clause

A benefit or amenity not included in the rules shall be valued at the cost under an arm's-
length transaction to the employer where the employer pays for the benefit or amenity.
27 | P a g e
However, the benefit of conveyance to and from residence to place of work, periodicals and
journals required for discharge of work and expenses on telephones including a mobile phone
shall not be included in calculating perquisite value.

It is pertinent to mention that benefits specifically exempt under sections 10(13A), 10(5),
10(14), 17 etc. would continue to be exempt. These include benefits like travel on tour and
transfer, leave travel, daily allowance to meet tour expenses as prescribed, medical facilities
subject to conditions.

PROFIT IN LIEU OF SALARY

The term Profit in lieu of salary, according to Section 17(3), includes the following

(1) Compensation for Termination of Employment:

Normally, compensation for termination of employment, being a capital receipt, is not

taxable at all. But Section 17(3) has specifically provided that such compensation would be
taxable under the head Salary. However, the following compensations are exempt under
Section 10 (see Para 5)-

(a) Retrenchment compensation to workers [S.10(10B)]

(b) Voluntary Retirement compensation to employees (S.10(10C)]

(2) Compensation for Modification of the terms and conditions relating to employment.

(3) Payments from Employer or Provident or any other Fund over and above the employee's
own contributions and interest, except the following payments exempt u's 10 (See Para 5)

Gratuity [S.10(10)]

Commutation of Pension [S.10(10A)]

Retrenchment Compensation [S.10(1OB]

Payment from Statutory or Public Provident Fund [S.10(11)]

Payment from Recognised Provident Fund [S.10(12)]

Payment from Approved Superannuation Fund [S.10(13)]

28 | P a g e
 Thus, lumpsum payments from Unrecognised Provident Fund to an employee, on his
retirement, over and above his own contributions, are taxable under this provision. The
annuity received from a former employer is also taxable under this provision.

(4) Receipts from Keyman Insurance Policy, including bonus, if any.

(5) Any amount due to or received, whether in lump sum or otherwise, by any assessee from
any person-

(A) before his joining any employment with that person; or

(B) after cessation of his employment with that person.

Provident fund

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

(i) employee's contribution

(ii) interest on employee's contribution

(iii) employer's contribution

(iv) interest on employer's contribution.

Type of Provident Funds

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Recognised Unrecognised Statutory
Provident Fund Provident Fund Provident Fund
 Public Provident
Fund

(PPF)

ALLOWANCES

(1) Meaning:

Allowances mean a fixed amount regularly paid to an employee in addition to his basic salary
for various purposes. Thus Expense Allowances are granted to meet expenses for the
performance of duties or to meet the employee's personal expenses at office. Dearness
Allowance, City Compensatory Allowance or House Rent Allowance are granted to
compensate him for the increased cost of living. All Allowances are taxable as salaries,
unless specifically exempted.

(2) Exempt u/s 10:

Following allowances are exempt to the extent provided under section 10

(a) Allowances for expenses on Travelling on tour or transfer, Conveyance on office duties,
Outstation duties, Helpers in office, Professional research or development, and Purchase and
maintenance of uniform are fully exempt to the extent actually spent.

(b) Leave travel allowance and House rent allowance are exempt to the extent of lower of the
amount actually spent or the prescribed limits.

(c) Allowances for Duties at difficult areas (border/remote/disturbed/tribal areas etc.),

Children education allowance and Children hostel expenses allowance are exempt to the
30 | P a g e
extent of lower of allowance received or the lump-sum amount prescribed, irrespective of
actual expenditure.

(d) Allowances and perquisites paid outside India by the Government to a citizen of India for
rendering service outside India [S.10(7)].

(3) Deduction u/s 16: Further, Entertainment allowance can be deducted from the Gross
salary to the extent provided under section 16(n) explained later (in para 6.1

GRATUITY [S.10(10)]

Gratuity is a lump-sum amount paid to an employee, on the basis of the duration of his
employment, on termination of service due to retirement, resignation, death etc. It is exempt
from tax, either fully or partly, depending on the type of employee receiving it. Gratuity
received while still in service is not exempt; it is taxable as salary.

6.2.1 Gratuity to Government Employees

[A]Any death-cum-retirement gratuity received under -

(a) the Revised Pension Rules of the Central Government,

(b) the Central Civil Services (Pension) Rules, 1972,

(c) any similar scheme applicable to -

(1) the members of civil services of the Union, (2) holders of defence or civil posts under the
Union,

(3) the members of the All India Services,

(4) the members of the civil services of a State,

(5) holders of civil posts under a State,

(6) the employees of a Local Authority; and

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[B]any retirement gratuity under the Pension Code or Regulations applicable to the members
of the defence services,

is wholly exempt from tax. In short, the gratuity received by any employee of the
Central/State Government(s), Union, Local Authority or the defence services is entirely
exempt from tax.

6.2.2 Gratuity Under Payment of Gratuity Act, 1972

(1) A person working in any factory, mine, oil field, plantation, port, railways, and a shop or
establishment (employing 10 or more persons) is covered under the Payment of Gratuity Act,
1972.

(2) Any gratuity received by such person is exempt from tax, to the extent of the least of the
following amounts -

(a) Gratuity actually received;

(b) 20,00,000, being the notified limit (as amended vide Notification dt. 29-3-2019); 15 days

(c) Salary last drawn x 26 days x No. of completed years

3) It should be noted that -

a basically, gratuity is equal to 15 days' salary (based on salary last drawn), for every
completed year of service (part of year exceeding 6 months is treated as one year);

b. in case of a seasonal establishment, 7 days' salary is taken instead of 15 days; 26 days refer
to the working days per month;

C. 26 days refer to the working days per month

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d. "salary" includes Basic + Dearness Allowance, but excludes bonus, commission, other
allowances, overtime etc.

WORKSHEET 1: EXEMPTION ON GRATUITY UNDER PAYMENT OF GRATUITY

ACT

Step Find Out Formula Result

1. Salary last drawn Basic Pay + D.A =[A]
(last drawn)
2. Completed Years of Retirement date Less =[B]
Service Joining date
3. 15 days’ salary Years of service =[C]
Salary X 15/
26=[A*B*15/26]
4. Gratuity exempt Least of
1) 15 days’ salary
for period of service
[i.e.C]
2) 2000000
3) Gratuity actually
received.

COMMUTATION OF PENSION [S.10(10A)]

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Pension is the monthly payment by the ex-employer to a retired employee which is taxed as
"salary". An employee may opt to get a one-time lump-sum payment in lieu of such monthly
payments. This is known as commutation of pension, which is exempt fully or partly
depending on the category of the employee, as explained below.

6.3.1 Government Employees

A payment in commutation of pension is fully exempt, if received under- (1) the Civil
Pensions (Commutation) Rules of the Central Government,

(2) a similar scheme applicable to members of civil services of the Union, holders of defence
or civil posts under the Union,

(3) members of All India Services, defence services, State civil services,

(4) holders of civil posts under a State,

(5) employees of a Local Authority or statutory corporation.

6.3.2 Other Employees

Any payment in commutation of pension received under any scheme of any other employer
(the commuted value being determined having regard to the age, and health of the recipient,
the rate of interest and official table of mortality) is exempt to the extent, it does not exceed -

34 | P a g e
(a) where the employee receives any gratuity, the commuted value of 1/3 of the pension
which he is normally entitled to receive (i.e. 100+% of Pension Commuted x Amount
Commuted+3). (b) in any other case, the commuted value of 1/2 of such pension; (i.e. 100+%
of Pension Commuted

x Amount of Commuted Pension + 2).

The above discussion is summed up in the following exhibit.

TAX ON PERQUISITES PAID BY EMPLOYER [S. 10(10CC)]

(1) In the case of an employee, being an individual

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(2) deriving income by way of non-monetary perquisites [i.e. not being monetary payments
as defined u/s 17(2)]

(3) the tax on whole or part of such income

(4) actually paid by his employer, at the option of the employer

(5) on behalf of such employee

(6) shall be exempt from tax

(7) notwithstanding anything contained in section 200 of the Companies Act, 1956 (which
prohibits payment of tax-free salary by a company).

Such tax paid cannot be claimed as business expenditure by the employer, as provided in S.
40(a)(vi)

6.8 PAYMENT FROM STATUTORY / PUBLIC P.F. [S. 10(11)]

This exemption is in respect of -

(1) any payment to a member from,

(2) a Provident Fund to which the Provident Funds Act, 1925 applies,

36 | P a g e
(3) or from any other Provident Fund set up and notified by the Central Government (i.e. the
Public Provident Fund).

Interest accrued during the previous year in the account of an employee maintained by the
fund shall not be exempted to the extent it relates to the following amount:

Case Interest Not Exempted

Where employer is giving Interest on employees’s contribution (made
contribution on or after 01-04-2021) in excess of
2,25,000 per year
Where employer is not giving Interest on employees contribution (made
contribution on or after 01-04-2021) in excess of
5,00,000 per year

PAYMENT FROM RECOGNISED P.F. [S. 10(12)]

This exemption pertains to -

(1) the accumulated balance due and becoming payable,

(2) to any employee participating in a recognised provident fund,

(3) to the extent provided in rule 8 of Part A of the 4th Schedule to the Act.

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Interest accrued during the previous year in the account of an employee maintained by the
fund shall not be exempted to the extent it relates to the following amount:

Case Interest Not Exempted

Where employer is giving contribution Interest on employee's contribution (made

on or after 01-04-2021) in excess of
2,50,000 per year

Where employer is not giving contribution Interest on employee's contribution (made

on or after 01-04-2021) in excess of
5,00,000 per year

6.10 PAYMENT FROM NPS [S. 10(12A&12B)]

As per section 80CCD, any payment from National Pension System Trust to an assesse
(employee or not) on account of closure or his opting out of the pension scheme is chargeable
tax. Any payment from National Pension System Trust to an assessee on account of closure
or his opting out of the pension scheme referred to in section 80CCD, to the extent it does not
exceed 60% of the total amount payable to him at the time of closure or his opting out of the
scheme, shall be exempt from tax vide S.10 (12A). However, the whole amount received by
the nominee, on death of the assessee shall be exempt from tax.

Further, any payment from the National Pension System Trust to an employee under the
pension scheme referred to in section 80CCD, on partial withdrawal made out of his account
in accordance with the terms and conditions, specified under the Pension Fund Regulatory
and Development Authority Act, 2013 (23 of 2013) and the regulations made thereunder, to
the extent it does not exceed 25% of the amount of contributions made by him shall be
exempt.

6.11 PAYMENT FROM SUPERANNUATION FUND [S. 10(13)]

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This exemption is in respect of -

(1) any payment made from an approved superannuation fund

(2) on the death of the beneficiary, or

to an employee in lieu of or in commutation of an annuity -

(a) on his retirement, at or after certain age, or

(b) on his becoming incapacitated prior to such retirement; or (4) by way of refund of
contributions on the death of a beneficiary,

(5) or, refund of contributions to an employee on leaving the service otherwise than on
retirement, incapacitation etc., so far as the payment relates to the contributions made by him
before 1-4-1962 and any interest thereon.

6.12 HOUSE RENT ALLOWANCE [S.10(13A)]

The exemption is in respect of - res

(a) any special allowance granted to an employee by his employer to specifically meet
expenditure actually incurred on the payment of rent for residential accommodation occupied
by him,

(b) to such extent as may be prescribed, having regard to the area or the place and such other
considerations;

39 | P a g e
(c) provided that no exemption is available if -

(i) such accommodation occupied by the assessee is owned by him, or

(ii) the assessee has not actually incurred any expenditure on payment of rent in respect of
such accommodation occupied by him.

1.4 DEDUCTIONS FROM SALARY

The income chargeable under the head 'Salaries' is computed after making the following
deductions:

(1) Standard deduction [Section 16(ia)]

(2) Entertainment allowance [Section 16(ii)]

(3) Professional tax [Section 16(iii)]

1.4.1 Standard Deduction

A standard deduction of 50,000 or the amount of salary, whichever is lower, is to be provided

to the employees.

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1.4.2 Entertainment allowance

Entertainment allowance received is fully taxable and is first to be included in the salary and
thereafter the following deduction is to be made from gross salary:

However, deduction in respect of entertainment allowance is available in case of Government

employees only. The amount of deduction will be lower of.

(1) One-fifth of his basic salary or

(ii) * 5,000 or

(iii) Entertainment allowance received.

Amount actually spent by the employee towards entertainment out of the entertainment
allowance received by him is not a relevant consideration at all.

1.4.3 Professional tax on employment

Professional tax or taxes on employment levied by a State under Article 276 of the
Constitution is allowed as deduction only when it is actually paid by the employee during the
previous year. The total amount by way of professional tax payable in respect of any one
person shall not exceed 2,500 per annum. However, the amount paid during the previous year
can be more than 2,500 as the employee may have paid the professional tax of an earlier year
during the previous year.

If professional tax is reimbursed or directly paid by the employer on behalf of the employee,
the amount so paid is first included as salary income and then allowed as a deduction u/s 16.
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Computing income from salary

Particular amount
Income from salary
1) Salary

1.1 Gross = Net + Deduction

1.2 Due/ Deemed to Accrue in india
1.3 Advance / Areears Received
1.4 Voluntary Payment
Less : Exempt u/s 10 XXX

2 ) Allowances
2.1 Dearness Allowance
2.2 Entertainment Allowance
2.3 Leave Travel Allowance
[less : exempt u/s 10(10)]
2.4 House Rent Allowance
[less: exempt u/s 10(13A)]
2.5 Expense Allowance XXX
[Less: exempt u/s 10(14)
3. Annuity [Less: Exempt u/s 10(13)] XXX
4. Pension
4.1 Uncommuted (monthly)
4.2 Commuted
Less: Commuted Pension exempt u/s 10(10A)
1. Govt. Employee - fully
II. Non-Govt. employee-
a. with Gratuity, 1/3 of full commuted value
b. otherwise, 1/2 of full commuted value XXX
5. Gratuity [Gross Less: Exempt u/s 10(10)]
1 Gratuity [Gross Less: Exempt u/s 10(10)]

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2 Employee under Payment of Gratuity Act - least of
a. Salary p.m. x 15/26 x Completed years of service
b. 20,00,000
c. Gratuity actually received
3 Other Employee - Lower of
a. Average Salary of last 10 months x 1/2 x No. of years of service
b. 20,00,000
c. Gratuity actually received
6. Fees & Commission XXX
7. Perquisites XXX
7.1 Perquisites Taxable for All Employees:
7.1.1 Rent-free Accommodation
7.1.2 Concession in Rent
7.1.3 Payment of Employee's Obligation
7.1.4 Premium to Insure Life of Employee or for Annuity
7.1.5 Prescribed Amenities (Interest-free Loans/Use or Transfer of
Movable Assets)
7.2 Perquisites Not Taxable At All:
7.2.1 Medical treatment in employer's hospital
7.2.2 Medical treatment in Govt. /approved hospital
7.2.3 Premium on employee Health Insurance
7.2.4 Premium on (medi-claim) Insurance
7.2.5 Medical treatment, travel and stay abroad
8. Profit in lieu of salary
8.1 Compensation for termination of Employment
8.2 Compensation for Modification of Terms of Employment
8.3 Employer's Contribution to PF + Interest thereon
8.4 Keyman Insurance Policy
8.5 Less: Exempt u/s 10:
8.5.1 Compensation to Workman/Retrenchment/VRS
8.5.2 Payment from Statutory P.F./RPF
8.5.3 Payment from Superannuation Fund XXX

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9. Leave encashment [Gross Less: Exempt u/s 10(10AA)]
1. Government Employee – fully
II. Non-Govt. Employee least of
a. Encashment of earned leave (@ 30 days p.a.)
b. 10 x Average Salary for last 10 months
C. 3,00,000
d. Amount actually received XXX
10. Gross Taxable Salary (1 to 12) XXX
11. Less: Deductions under S.16
11.1 Standard Deduction (upto 50,000)
11.2 Entertainment Allowance
11.2.1 Govt. Employee - least of
a. 1/5th of Basic Salary
b 5,000
c Actual Allowance
11.2.2 Other Employee - Nil
11.3 Professional tax XXX
11.3 Professional tax XXX

INCOME FROM HOUSE PROPERTY [S.22-27]

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Income from house Property” is significantly different from the other heads of income unlike
the other heads as it covers not only the actual income but also the notional income.

This lesson explains the taxing provisions related to “Income from house property”
contained in Sections 22 to 27 namely -.

 S 22 defines the scope of Income from House Property;

 S .3 gives the mode of computation of income,

 S. 24 specifies the amounts deductible therefrom.

 S. 25 deals with the amounts not deductible.

 S.26 deals with the income of co-owners of a property and

 S. 27 gives the cases where a person not being an owner of the property will be taxed as the
deemed owner of such property

WHAT IS CHARGED UNDER THIS HEAD

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Section 22 of the Income-tax Act defines the basis of charge of income under the head -
Income from House Property. It states that the "Annual value of the property, consisting of
any buildings or lands appurtenant thereto, of which the assessee is the owner, shall be
chargeable to Income-tax under the head" Income from House Property". This is, however,
not applicable to the property occupied for the purpose of any business or profession carried
on by the owner, profits of which are chargeable to income-tax.

4.2 BASIS OF CHARGE: S. 22:

2.2.1 Annual Value of property consisting of any building or lands appurtenant thereto of
which the assessee is the owner, shall be chargeable under the head Income from House
Property. This is however not applicable to property occupied for the purpose of assessees
own business or profession-Sec 22.

2.2.2 In order to charge any income from any property under this head, following conditions
are satisfied namely –

a) The property must consist of buildings or land appurtenant or adjacent thereto. other
properties are not covered under this head

 ‘Building ‘means any habitable four-wall structure covered by a roof. It is immaterial

whether the building is residential or commercial such as warehouse, office or factory
godown, wedding hall, auditorium, business centre, etc.

 ‘Land appurtenant’ means the land connected or adjacent to the building e.g. open space,
approach roads, courtyard, compounds, courtyards, backyards, playgrounds, parking spaces,
etc Income from any other property e.g. rental Income from a vacant plot of land is not
chargeable to tax under this head unless it is appurtenant to a building.

b) The assessee must own the property. It is only the owner or deemed owner of house
property who is liable to tax on income under this head. Following points are important in
this regard :

(a) Owner may be any person i.e. an individual, HUF, firm, company, cooperative society or
association of persons etc.

(b) The person must be the owner in the previous year. Subsequent change in the ownership
of the property is immaterial.

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(c) Similarly, Sub-letting income of a tenant, who sub-lets the property to another tenant, is
also not covered under this head since the tenant is not the owner of the property. Such
income will be treated either as business income or as income from Other Sources.

c) The property may be either let-out or used for own residence but it must not be used for
the purpose of assessee’s own business or profession.

4 what is annual value

DEFINITION

Once all the conditions mentioned in S.22 are satisfied, the 'annual value' of the house
property is taxed under the head 'Income for House property'. This is a peculiar head of
income. It charges to tax a notional amount called annual value (AV), i.e. the estimated value
of income expected if the property is rented. AV indicates the capacity of the property to
produce income. Section 2(2) defines annual value in relation to any property, as its annual
value determined by section 23.

ANNUAL VALUE IS RLV OR ACTUAL RENT

AV, broadly speaking, may be either of the following two amounts-

(1) reasonable Lettable Value (RLV): This is the expected rent i.e. the sum for which the
property

might reasonably be expected to let from year to year

(2) Actual Rent (AR): This is the actual rent received or receivable by the owner in respect of
a property which is actually let.

REASONABLE LETTABLE VALUE (RLV)

(1) RLV is to be computed whether the property is actually let or not.

(2) RLV is a notional figure. But it is not a fictitious figure. It must be computed on some
reasonable

i.e. logical basis. It must be computed on a long term basis since it indicates the expected rent

47 | P a g e
from year to year.

(3) RLV may be estimated on the basis of the (a) Fair Rent or (b) Municipal Valuation or (c)
the Standard Rent fixed under the Rent Control Act.

(a) Fair Rent is the rent fetched by a similar house in the same locality.

(b) Municipal Valuation is the Gross Rateable Value fixed by the Municipality for levy of the
property taxes. At times the Net Municipal Value is available which is after deduction of
allowance of say, 10% from gross value. Thus, if Net Municipal Value is 9,000 after
allowance of 10%, the Gross Municipal Value is 10,000 (i.e. 9,000 x 100/90.) The Gross
Value is to be considered for ascertaining the Reasonable Lettable Value.

(c) Standard Rent is the rent fixed under the Rent Control Act, if any, applicable to the area in
which the property is situated. Standard Rent is not mentioned in the Income-tax Act or
Rules. However, as per Court Judgements, the Reasonable Lettable Value cannot exceed the
Standard Rent fixed under the Rent Control Act, if applicable.

(4) RLV is computed as shown below:

Reasonable Lettable Value

A. Fair Rent XXX

B. Municipal Value XXX

C. Higher of [A] and [B] XXX

D. Standard Rent, if any XXX

E Lower of [C] and [D] = [RLV] XXX

Notes:

(1) If standard Rent is not applicable, RLV is equal to Higher of Fair Rent and Municipal
Value. (2) While RLV cannot exceed standard rent, RLV, may, however, be lower than the
standard rent.

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4.4 ACTUAL RENT (AR)

(1) Actual Rent is applicable only if the property is actually let. Thus Actual Rent is
irrelevant in case the property is not rented but is self-occupied or is un-occupied or is
deemed to be let.

(2) Actual Rent means the actual rent received or receivable. Actual Rent means the rent
actually received or receivable in respect of the property let for the period of letting. Actual
rent depends on (i) area or portion let and (ii) the period of letting. Actual rent will be
different depending on whether the entire property is let throughout the year, or part of the
property is let for part of the year and so on.

(3) The amount of Actual Rent would not include the amount of rent which the owner cannot
realise to the extent allowable under the Income-tax Rules (i.e. unrealised rent or 'bad debts').

(4) Expenses, such as water charges, lift maintenance, etc., incurred by the owner on
providing amenities to the tenant, are deducted from the actual rent received to arrive at the
Actual Rent for property.

(5) Actual Rent is computed as shown below -

Actual Rent XXX

Rent Received/Receivable XXX

Less: Allowable Unrealised Rent XXX

= (AR)

4.5 ANNUAL VALUE DEPENDS ON USE OF PROPERTY

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Under S. 23, the annual value (AV) depends upon the use of the property i.e. whether the
property is let out entirely, or let out but remains vacant partly, or self-occupied or un-
occupied or is deemed to be let. This is briefly outlined below, and explained in detail
subsequently in para 7 to 10.

(1) LOP: In case of a let out property (LOP), Annual Value is higher of the Reasonable
Lettable Value or Actual Rent [S. 23(1)(b)].

(2) VLOP : In case of a let out property which was vacant for sometime during the year
(VLOP), basically, the AV is the same as in (1) above i.e. Annual Value is higher of the
Reasonable LettableValue or Actual Rent, but with one exception. The Annual Value is taken
as the Actual Rent, if the actual rent is lower than the RLV due to such vacancy [S. 23(1)(c)].

(3) Two SOPS: The Annual Value will be taken as Nil, in respect of maximum two SOPs; i.e.
whether a house in the occupation of the owner for his own residence, i.e. a Self-occupied
house [SOP] [S. 23(2)(a)], or a house which cannot be occupied by the owner because of his
working elsewhere. The AV cannot be taken as Nil, in case such house (or any part) is let
during the year or any other benefit is derived from the property by the owner (S. 23(3)].
[Only a house remaining vacant due to employment elsewhere can be treated as SOP; a house
remaining vacant due to any other reasons cannot be treated as an SOP.]

(4) Other SOP Treated as DLOP: In case more than two houses are used by the owner for
self-

occupation, he can choose only two houses whose annual value is to be taken as Nil as
explained above. The income from other self-occupied house(s) is to be computed as if let out
i.e. deemed to be let out property [DLOP] [S. 23(4)].

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(5) Property held as stock-in-trade : Annual value of house property will be charged under the
head "Income from house property", where it is held by the assessee as stock-in-trade of a
business also. However, the annual value of property being held as stock in trade would be
treated as Nil for a period of two years from the end of the financial year in which certificate
of completion of construction of the property is obtained from the competent authority, if
such property is not let- out during such period [Section 23(5)]. Thus, in case of a house
property held as stock-in-trade by assessee (which is not let out), income has to be computed
on a notional basis by taking the Reasonable Lettable Value (RLV) as the GAV after two
years from the end of the financial year in which certificate of completion of construction of
the property is obtained from the competent authority.

Q mr Vaibhav owns five houses at Cochin. Compute the gross annual value of each house
from the information given below:

Particulars House 1 House 2 House 3 House 4 House 5

Municipal value 1,20,000 2,40,000 1,10,000 90,000 75,000
Fair rent 1,50,000 2,40,000 1,14,000 84,000 80,000
Standard rent 1,08,000 N.A 1,44,000 N.A 78,000
Actual rent received/ 1,80,000 2,10,000 1,20,000 1,08,000 72,000
receivable

Solution

Particular House 1 House 2 House 3 House 4 House 5

Municipal value 1,20,000 2,40,000 1,10,000 90,000 80,000
Fair rent 1,50,000 2,40,000 1,14,000 84,000 80,000
Standard rent 1,08,000 N.A 1,44,000 N.A 78,000
Actual rent received/ 1,08,000 2,40,000 1,14,000 90,000 78,000
receivable
GAV 1,80,000 2,40,000 1,20,000 1,08,000 78,000

DEDUCTION

From the Net Annual Value, the following deductions are allowed under S.24:
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1 Standard Deduction

2 Interest

5.1

STANDARD DEDUCTION [S. 24(a)]

A lumpsum amount equal to 30% of the Net Annual Value (NAV), can be deducted on
account of all expenses on property (repairs, collection charges, ground rent, insurance, land
revenue, state taxes and so on, except interest explained below). Such deduction is allowed
on notional basis, irrespective of who (owner or tenant) bears the expenses or the amount of
actual expenses incurred. [Thus, Income from House Property is truly a deemed income -
both the gross income (annual value) and expenses allowed (standard deduction) are deemed
and not actual figures].

5.2

INTEREST [S. 24(b)]

(1) Interest Payable on Loan For Property

The interest payable on amounts borrowed for (i) acquisition, (ii) construction, (iii) repairs,
(iv) renewal, or (v) reconstruction of property can be deducted from the Net Annual Value.
This is the only deduction allowed from NAV, in addition to Standard Deduction. Interest is
allowable on accrual basis, whether actually paid or not, irrespective of the method of
accounting followed by the assessee. The purpose of borrowing must be related to the
property i.e. its purchase, construction, repair, renewal or reconstruction. If loan is taken by
mortgaging the house but for any other reason, e.g. daughter's marriage, the interest cannot be
deducted.

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(2) Interest Payable For Pre-construction Period

(1) Where property has been (i) constructed or (ii) purchased with borrowed funds, the
interest payable for the period prior to acquisition or construction, can be deducted in 5 equal
instalments beginning with the previous year in which property is acquired or constructed and
4 succeeding years.

(2) However, any amount already allowed as deduction under any other provision of the Act
cannot be claimed again.

(3) Interest is to be aggregated from the date of borrowing till the end of the previous year
prior to the year in which the house is completed (and not till the date of completion of
construction).

(4) Thus, if a loan is taken on 1st April, 2019 and the construction is complete on 15th
March, 2022: (i) interest from 1st April, 2019 (the date of borrowing) to 31st March, 2020
(the previous year prior to the year in which the construction is completed) will be treated as
interest for pre-construction period whose 1/5th amount will be allowed in current previous
year 2021-22 and (b) entire interest from 1st April, 2021 to 31st March, 2022 will be treated
as interest for the current previous year 2021-22 even though the house is completed only
towards the end of the year.

LET OUT PROPERTY (LOP)

What is let out property?

A property that is given by the owner to the tenant for some consideration is treated as a let-
out property. In case a person has more than one self-occupied property then only two
properties shall be treated as self-occupied and others shall be treated as deemed to be let out
property.

Let out property, occupied property, income tax return In this page we explained about the let
out property and the conditions under which this will applicable.
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EXPLANATION

(1) Standard Rent: RLV cannot exceed standard rent but can be lower than the standard rent.

(2) Exclude Other Charges: Actual Rent means amount paid towards property; it excludes
amounts paid towards other benefits provided by the owner to the tenant such as electricity,
lift maintenance etc.

(3) Let Out Independent Unit/Portion: The computation of income, in case of independent
units (flat, floor etc.) or separate portions (25% let out etc.) which are let out is also to be
done as shown above (See Para 13).

COMPUTATION OF INCOME FROM LOP

Q MR . Mehra owns a house at Delhi, which is let-out. Fair rent of the house is 24,000
whereas actual rent received is 30,000. He also received 10,000 from the tenant for charges
towards lift, generator and security. He makes the following expenditure in respect of the
house property-

Particular Amount Particular Amount

Municipal taxes paid by Mehra 4,000 Repairs 2,000

Fire insurance 2,400 Land revenue 3,8000

Collection charges 500 Ground rent paid 2,000

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Interest on borrowed capital during the previous year 2021-22 is 4,000. Fund borrowed on
April 1,2018 40,000 @ 10% interest p. a. were used for construction of the house which was
completed on march 31, 2022. Compute the income earned by Mr. Mehra from his let-out
house property during the assessment year 200-23.

Solution ;

INCOME FROM HOUSE PROPERTY OF MR. MEHRA.

PREVIOUS YEAR : 2021-22

Particulars Amount
A )Gross annual value 30,000
Higher of R.L.V. (24,000) Or Rent received
(30,0000)
B ) less: municipal taxes paid 4,000
C ) net Annual Value 26,000
d) less : Deduction u/s 24
1) standard deduction (30% of 26,000) 7,800
2 ) interest on borrowed funds during P.Y 4,000
3) Interest on borrowed funds during pre- 2,400
construction
Total Deduction 14,200
E) Net Income from House Property 11,800

Working Notes:

(1) 'Rent' includes only charges for house property. Charges received for lift etc. are taxed not
as 'income from house property' but as 'income from other sources'.

(2) Pre-construction interest is computed as follows:

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(a) Construction completed in previous year 2021-22.

(b) Pre-construction Period = Period from date of borrowing to End of Preceding Financial
Year = 1-4-2018 to 31-3-2021.

(c) Pre-construction Interest = * 40,000 x 10% x 3 years = 12,000.

(d) Pre-construction Interest Allowable during current previous Year = 1/5 x 12,000 = 2,400.

PARTYLY VACANT LET OUT PROPERTY (VLPO)

8.2 EXPLANATION

(1) Applicability:

The above rules of computation apply if the following conditions are satisfied-

(a) if the property is let out; and

(b) if the property (or any part) is vacant during the whole or part of the year.

(2) AR & Extent of Vacancy:

Actual rent is to be computed when (i) the entire property is vacant for part of the year; or (ii)
part of property is vacant for the entire or part of the year. If the entire property is vacant for

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the entire year, Annual Value is to be computed as explained either under Para 9 [Self-
occupied Property] or Para 10 [Deemed Let Out], depending on the facts.

(3) Loss Due to Vacancy :

(a) If AR is less than RLV due to loss caused by vacancy, AR is taken as GAV.

(b) If AR is less than RLV for reasons other than vacancy, RLV is taken as GAV. This
situation will arise (due to, say, undercharging of rent) if RLV is more than the total of AR +
Loss caused by vacancy.

TWO HOUSES SELF-OCCUPIED(SOP)

EXPLANATION

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(1) No Deduction for Municipal Tax :

In respect of such house(s), deduction for municipal taxes paid is not allowed, as the Annual
Value itself is Nil (i.e. GAV = NAV = Nil).

(2) No Standard Deduction: In respect of such house(s), the standard deduction @ 30%
cannot be claimed, as the annual value itself is Nil.

(3) Applicable to Only Two SOPs [S. 23(4)(a)]:

The above concession is available for only two houses (either self-occupied or lying un-
occupied due to employment etc.). Where there are three or more such houses, income from
only two houses, as selected by the owner, is computed in the above manner applicable to a
SOP. Other houses are "deemed to be let out" and the taxable income is computed as
explained below (see para 10). The assessee should select the two houses having the highest
Annual Value for this purpose, to minimise his tax liability.

(4) Provisions Not Applicable:

The above provisions for taking Nil Annual Value do not apply to

(1) an assessee other than an individual (e.g. HUF, Firm etc.).

(2) more than two such houses.

(3) a house remaining un-occupied not due to employment etc. elsewhere.

(4) a house or part whereof which was actually let anytime during the year.

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(5) a house from which any other benefit is derived by the owner.

(6) a house occupied not by the owner himself for his residence e.g. a house occupied by the
owner's brother.

(7) an individual who lives at his place of employment away from his residence but in a
house belonging to him.

In such cases, income is computed as if from a house deemed to be let out (see Para 10,
below).

(5) Types of Self-Occupation: Various ways in which a house may be self occupied and its

computation is explained in the following worksheet.

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Co-owners of a property – Section 26

If there are two or more owners of a property and if the share of co-owners is determinate, the
income generated from such property is calculated as income from one property and it is
divided amongst co-owners. They are entitled to relief under section 23.

Unrealized rent (rent not paid by the tenant for some reason)

The unrealized rent is not included while calculation of net annual value. If the rent is
received in the subsequent years, then the amount will be added to the income from house
property of that particular year. 

Set-off and carry forward of losses

Computation of Income from House Property

Step 1 – deduct the municipal taxes paid during the year from the Gross Annual Value, which
will be Net Annual Value.

Step 2 – deduct the amount under section 24(a) and under section 24(b) for which deduction
is provided. 

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Example – 

An individual, let’s say Mr. X owned three properties and give it on rent. What will the Gross
Annual Value of all the Properties? Details of the properties provided below-

Particulars     Property 1     Property 2       Property 3

Municipal Rent 7,50,000 7,50,000 2,00,000

Fair Rent 2,00,000 2,00,000 7,50,000

Standard Rent – 80,000 9,00,000

Amount at Step 1 8,00,000 50,000 8,50,000

Unrealised Rent 1,00,000 NIL 50,000

Ans : Step 1: reasonable expected rent, higher values of municipal rent or fair rent.

Particulars     Property 1     Property 2       Property 3

Municipal Rent 7,50,000 7,50,000 2,00,000

Fair Rent 2,00,000 2,00,000 7,50,000

Standard Rent   80,000 9,00,000

Amount at Step 1 7,50,000 80,000 7,50,000

Step 2: deduct unrealised rent (e.g. 8,00,000-1,00,000)

Particulars     Property 1     Property 2       Property 3

Amount at step 2 7,00,000 50,000 8,00,000

Step 3: higher values computed from step 1 and step 2 will be Gross Annual Income.

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 Particulars     Property 1     Property 2       Property 3

Amount at step 1 7,50,000 80,000 7,50,000

Amount at step 2 7,00,000 50,000 8,00,000

Amount at step 3 7,50,000 80,000 8,00,000

PROFITS OF BUSINESS OR PROFESSION [S.28-43B]

MEANING OF 'BUSINESS' AND 'PROFESSION

The tax payable by an assessee on his income under this head is in respect of the profits and
gains of any business or profession, carried on by him or on his behalf during the previous
year.

BASIS OF CHARGE

1.1 PROVISION

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S. 28 states that the following income shall be chargeable to income tax under the head
"Profits and gains of business or profession" –

(1) Profits and gains of business or profession, which was carried on by the assessee at any
time

during the previous year. [S.28(1)] This is discussed below in detail in Para 2.

(2) Any compensation or other payment due to or received by-

(a) any person, by whatever name called, managing the whole or substantially the whole of
the affairs of an Indian company, at or in connection with the termination of his management
o the modification of the terms and conditions relating thereto;

(b) any person, by whatever name called, managing the whole or substantially the whole of
the affairs in India of any other company, at or in connection with the termination of his
office or the modification of the terms and conditions relating thereto:

(c) any person, by whatever name called, holding an agency in India for any part of the
activities relating to the business of any other person, at or in connection with the termination
of the agency or the modification of the terms and conditions relating thereto;

(d) any person, for or in connection with the vesting in the Government, or in any corporation
owned or controlled by the Government, under any law for the time being in force, of the
management of any property or business;

(e) any person, by whatever name called, holding an agency in India for any part of the
activities

relating to the business of any other person, at or in connection with the termination of the
agency or the modification of the terms and conditions relating thereto;

(d) any person, for or in connection with the vesting in the Government, or in any corporation
owned or controlled by the Government, under any law for the time being in force, of the
management of any property or business;

(e) any person, by whatever name called, at or in connection with the termination of the

modification of the terms and conditions, of any contract relating to his business.

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(3) Income derived by a trade, professional or similar association from specific

for its members. [S.28(i)]

(4) Profit on sale of Import Licence [S.28(iiia)]

(5) Export cash assistance earned by any person from Government. [S.28(iiib)]

(6) Drawback (refund) of customs or excise duty against exports. [S.28(ilic))

(7) Profit on transfer of Duty Entitlement Pass Book (DEPB) Scheme. [S.28(id)]

(8) Profit on transfer of Duty Free Replacement Certificate (DFRC). [S.28(iiid)]

(9) Value of any benefit or perquisite, whether convertible into money or not, arising from
business or profession. [S.28(iv)]

(10) Interest, salary, bonus, commission or remuneration due to or received by a partner from
firm

to the extent it is allowed to be deducted from the firm's income under section 40(b). [S.28(v)

(11) Any sum whether received or receivable, in cash or kind, under an agreement for not
carrying

out any activity in relation to any business or profession or not to share any know-how,
patent,

copyright, trade-mark, licence, franchise or any other business or commercial right of similar
nature of information or technique likely to assist in the manufacture or processing of goods a
provision for service, shall be chargeable to income-tax under the head "Profits and gains af
business or profession" (for example receipt by a retiring partner for agreeing not to carry
similar business after retirement] [5.28(a)] However, the following shall not be taxable-

(a) Any sum (whether received or receivable), in cash or kind, on account of transfer of the
right to manufacture, produce or process any article or thing or right to carry on any business
or profession, which is chargeable under the head "Capital gains".

(b) Any sum received as compensation, from the multilateral fund of the Montreal Protocol
on Substances that Deplete the Ozone layer under the United Nations Environment
Programme, in accordance with the terms of agreement entered into with the Government of
India.

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(12) Any sum received under a Keyman Insurance Policy including bonus.

(13) The fair market value of inventory as on the date on which it is converted into, or treated
as, a capital asset determined in the prescribed manner.

(14) Any sum received / receivable against transfer of any capital asset which has been
allowed as deduction u/s 35 AD (cold storage, etc.).

Illustration 1: (Answer in brief)

State whether the following receipts are taxable, giving reasons:

(1) M is an agent of R Ltd. He gets a compensation of 30,000 for termination of his agency
from R Ltd.

(2) MV is a trade association of motor manufacturers. MV gets a payment of 70,000 from its
members for advising them on how to reduce the cost of manufacturing.

(3) A profit of 3,50,000 is earned by R on sale of licence granted under the Imports (Control)
Order, 1955.

(4) A sum of * 37,000 is received by S as cash assistance against exports from the
Government of India.

(5) M exports goods outside India. During the previous year, it gets as customs duty
drawback of sum of 95,000.

(6) A car owned by a partnership firm is used by one of the partners for private purposes.

(7) M is a partner in ABC, a partnership firm. He gets * 2,000 per month as salary from the
firm.

(8) M gets a sum of 60,000 from R Ltd. for not carrying out the activity of selling goods in
Mumbai for a period of two years from April 1, 2021.

Solution
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(1) 30,000 is treated as "income" of M being compensation for termination of agency
[Section 28(ii)]

(2)70,000 is treated as "income" of MV being income derived by a trade association from

specific services performed for its members. [Section 28(iii)]

(3) 3,50,000 is treated as "income" of A Ltd. being profits on sale of a licence granted under
the Imports (Control) Order, 1955. [Section 28 (iiia)]

(4) 37,000 is treated as "Income" of S Ltd. being cash assistance received by any person
against exports under any scheme of the Government of India. [Section (28(ilib)]

(5)95,000 is treated as "Income" of M Ltd. being any duty of customs re-paid as drawback
against exports. [Section 28(iiic)]

(6) The perquisite value of the car is "income" in the hands of the partner being the value of
any non-monetary benefit arising from business. [Section 28(iv)]

(7) 2,000 per month is treated as "income" of M being the remuneration received by a partner
from a firm. [Section 28 (v)]

(8) 60,000 is treated as "income" of M Ltd. being any sum received for not carrying out any
activity in relation to any business. [Section 28(va)].

Profit of business carried on by assessee in P.Y.

The charge under this head depends on the following conditions

(1) There should be a business or profession

(2) It should be carried on by the assessee;

(3) It should be carried on during the previous year.

Once the above conditions are satisfied, the 'profits and gains' of such business are charged to
tax under this head. Let us study all these conditions in detail.

COMPUTING INCOME FROM BUSINESS

Particulars AMOUNT
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INCOME FROM BUSINESS
1. FROM RECEIPTS & PAYMENTS ACCOUNT
1.1 Business Receipts vide R & PA/c 1.1.1 Income from Business /
Profession
1.1.2 Profits chargeable u/s 28
(Compensation; Export benefits; Perks)
1.1.3. Remuneration/Interest from firm
1.2 Less: Payments vide R & PA/c
1.2.1 Business Expenses
(Materials, Administration, Selling)
1.2.2 expenses expressly deduction [S. 30-32:35,35D,36,37]
Net Income from Business / Profession
1.3 Ignore following receipts -
1.3.1 Capital Receipts
1.3.2 Exempt income
1.3.3 Income under other heads
1.4 Ignore following payments -
1.4.1 Capital expenditure Personal expenses
1.4.2 Personal expenses
1.4.3 Expenses related to income under other heads
1.4.4 Appropriations such as Tax, Drawings, donations Expenses
expressly disallowed (S.37, 40, 40A, 43B)
1.4.5 EXPENSES EXPRESSLY DISALLOWED [s37,40,40a,43b]
2 FROM PROFIT & LOSS ACCOUNT
2.1 Net Profit vide P & L A/c
2.2 Add: Unrelated items debited to P & L A/c
2.2.1 Expenses related to earlier or future period
2.2.3 capital losses
2.2.4 personal expenses
2.2.5 Expenses related to income under other head
2.2.6 Appropriation from profits (reserves, drawings, income-tax)
2.3 Add: Expenses separately allowable

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2.3.1 Depreciation debited to P & L A/C
2.4 Add: Expenses expressly disallowable [S. 37(2), 40, 40A, 43B]
2.4.1 Payments without T.D.S., WT
2.4.2 Securities Transaction Tax
2.4.3 Fringe Benefits Tax
2.4.4 Tax on Profits
2.4.5 Excess Remuneration or Interest, Paid by Firm to Partner Excessive
Payments to Specified Persons (Relatives etc.)
2.4.6 excessive Payment to Specified Persons ( Relative ect.)
2.4.7 100% expenses exceeding 10,000 paid in cash
2.4.8 Provision for Gratuity on retirement
2.4.9 Employer’s Contribution to Non- Statutory Fund
2.4.10 Tax, bonus, interest, contributions paid late Add: Items taxable; not
shown in P & L A/c
2.5 add: Items taxable: not show in P&L A/c
2.5.1 Income from Business / Profession
2.5.2 Profits chargeable u/s 28
(Compensation; Export benefits; Perks)
2.5.3 Remuneration / Interest from firm
2.6 Less: Unrelated items credited to P & L A/c
2.6.1 Business income for earlier or future years
2.6.2 Capital Receipt (loan, personal gifts, income-tax refund)
2.6.3 Exempt Income (agriculture income, casual income.) 2.6.4 Income
from other heads (from Salary, House-Property etc.)
2.6.4 income from other heads from Salary, House, House-Property ect.)
2.7 Less: Deductions separately allowable
2.7.1 Depreciation (as allowable)
2.8 Less: Deductions expressly allowable
2.8.1 Expenditure on Family Planning (only by a Co.)
Net Income from Business / Profession

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Income from capital gains
4.1 INTRODUCTION

In this unit on capital gains, we begin our discussion with the definition of "capital asset" and
"transfer". Thereafter, we will proceed to discuss the various circumstances under which
capital gains tax is levied. There are certain transactions which are not to be regarded as
transfer for the purposes of capital gains. These transactions have also been discussed in this
chapter. For computing long-term capital gains, application of cost inflation index is
necessary. Again, there is a separate method of computation of capital gains in respect of
depreciable assets. Also, there are exemptions in cases where capital gains are invested in
specified assets. All these aspects are being discussed in this unit.

Section 45 provides that any profits or gains arising from the transfer of a capital asset
effected in the previous year will be chargeable to income-tax under the head 'Capital Gains.
Such capital gains will be deemed to be the income of the previous year in which the transfer
took place. In this charging section, two terms are important. One is "capital asset" and the
other is "transfer".

CAPITAL ASSET

Definition: According to section 2(14), a capital asset means –

(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 which has invested in such
securities in accordance with the SEBI regulations.

(c) any unit linked insurance policy (ULIP) issued on or after 1.2.2021, to which exemption
under section 10(10D) does not apply on account of premium payable exceeding 2,50,000 for
any of the previous years during the term of such policy.

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In a case where premium is payable by a person for more than one ULIP issued on or after
1.2.2021 and the aggregate of premium payable on such ULIPS exceed 2,50,000 for any of
the previous years during the term of any such ULIP(s), the exemption under section 10(10D)
would be available in respect of any of those ULIPS (at the option of the assessee) whose
aggregate premium payable does not exceed 2,50,000 for any of the previous years during
their term. All other ULIPS would be capital assets.

However, it does not include

(1) Stock-in trade: Any stock-in-trade [other than securities referred to in (b) above],
consumable stores or raw materials held for the purpose of the business or profession of the
assessee;

(ii) Personal effects: Personal effects, that is to say, movable property (including wearing
apparel and furniture) held for personal use by the assessee or any member of his family
dependent on him.

EXCLUSIONS:

(a) jewellery;

(b) archaeological collections;

(c) drawings

(d) paintings;

(e) sculptures; or

(f) any work of art.

(iii) Rural agricultural land in India i.e., agricultural land in India which is not situated in any
specified area

As per the definition, only rural agricultural lands in India are excluded from the purview of
the term 'capital asset'. Hence urban agricultural lands constitute capital assets. Accordingly,
the agricultural land described in (a) and (b) below, being land situated within the specified

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urban limits, would fall within the definition of "capital asset", and transfer of such land
would attract capital gains tax

(a) agricultural land situated in any area within the jurisdiction of a municipality or
cantonment board having population of not less than ten thousand, or

(b) agricultural land situated in any area within such distance, measured I aerially, in relation
to the range of population as shown hereunder –

Shortest aerial distance from the Population according to the last preceding
local limits of a municipality or census of which the relevant figures have been
cantonment board referred to in published before the first day of the previous
item (a) year.
A < 2 kms > 10,000
B > 2 kms but ≤ 6 kms > 1,00,000
C > 6 kms but ≤ 8 kms > 10,00,000

Example :

Area Shortest aerial distance from Population according to the Is the lan
the local limits of a last preceding census of situated in this
municipality or cantonment which the relevant figures area a capital
board referred to in item (a) have been published before asset?
the first day of the previous
year.
1 A 1 km 9,000 No
2 B 1.5 kms 12,000 Yes
Yes
3 C 2 kms 11,00,000 Yes
4 D 3 kms 80,000 No
5 E 4 kms 3,00,000 Yes
6 F 5 kms 12,00,000 Yes
7 G 6 kms 8,000 No
8 H 7 kms 4,00,000 No
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 9 I 8 kms 10,50,000 Yes
10 J 9 kms 15,00,000 No

Explanation regarding gains arising on the transfer of urban agricultural land - Explanation 1
to section 2(1A) clarifies that capital gains arising from transfer of any agricultural land
situated in any non-rural area (as explained above) will not constitute agricultural revenue
within the meaning of section 2(1A).

In other words, the capital gains arising from the transfer of such urban agricultural lands
would not be treated as agricultural income for the purpose of exemption under section 10(1).
Hence, such gains would be subject to tax under section 45.

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(iv) Specified Gold Bonds: 62% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National
Defence Gold Bonds, 1980, issued by the Central Government;

(v) Special Bearer Bonds, 1991 issued by the Central Government;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or

deposit certificates issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation
Scheme, 2018 notified by the Central Government.

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4.4 TRANSFER: WHAT IT MEANS? 2(47)]

The Act contains an inclusive definition of the term 'transfer'. Accordingly, transfer in
relation to a capital asset includes the following types of transactions-

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

(iv) the owner of a capital asset may convert the same into the stock-in-trade of a business
carried on by him. Such conversion is treated as transfer, or

(v) the maturity or redemption of a zero coupon bond; or

(vi) Part-performance of the contract: Sometimes, possession of an immovable property is

given in consideration of part-performance of a contract.

(g) An asset held for exactly 36

Illustration 4:

Classify the gains arising from the following, into short term capital gains and long term
capital gains: (1) Mr. A purchases a building on 1-1-2006 and sells it on 1-1-2022.

(2) Mr. A purchases a building on 1-2-2021 and sells it on 1-1-2022. (3) Mr. A acquires listed
shares on 1-5-2021 and sells them on 1-3-2022.

(4) Mr. A acquires Units of an equity-oriented Mutual Fund on 1-5-2017 and sells them on 1-
4-2021.

Solution:

(1) Long Term Capital Gains; as the building is held for more than 24 months.

(2) Short Term Capital Gains; as the building is held for less than 24 months.

(3) Short Term Capital Gains; as the shares were held for less than 12 months. (4) Long Term
Capital Gains; as the units were held for more than 12 months.

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Computation of capital gains [ S 48]

(1) e Computation of capital gains:

The income chargeable under the head 'capital gains' shall be computed by deducting the
following items from the full value of the consideration received or accruing as a result of the
transfer of the capital asset:

(1) Expenditure incurred wholly and exclusively in connection with such transfer.

(2) The cost of acquisition and cost of any improvement thereto.

(ii) No deduction in respect of STT:

No deduction shall, however, be allowed in computing the income chargeable under the head
"Capital Gains" in respect of any amount paid on account of securities transaction tax (STT)
under Chapter VII of the Finance (No.2) Act, 2004.

(iii) Cost inflation index:

Under section 48, for computation of long-term capital gains, the cost of acquisition and cost
of improvement will be increased by applying the cost inflation index (CII). Once the cost
inflation index is applied to the cost of acquisition and cost of improvement, it becomes
indexed cost of acquisition and indexed cost of improvement.

This means an amount which bears to the cost of acquisition, the same proportion as CII for
the year in which the asset is transferred bears to the CII for the first year in which the asset
was held by the assessee or for the year beginning on 1st April, 2001, whichever is later.

Similarly, indexed cost of any improvement means an amount which bears to the cost of
improvement, the same proportion as CII for the year in which the asset is transferred bears
to the CII for the year in which the improvement to the asset took place.

The cost inflation indices for the financial years so far have been notified as under :

Financial Year Cost inflation Index

2001-02 100
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 2002-03 105
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
2018-19 280
2019-20 289
2020-21 301
2021-22 317
2022-23 331

Mr. A converts his capital asset acquired for an amount of 50,000 in June, 2003 into stock-in-
trade in the month of November, 2019. The fair market value of the asset on the date of
conversion is 4,50,000. The stock-in-trade was sold for an amount of 6,50,000 in the month
of September, 2022. What will be the tax treatment?

Financial year Cost Inflation Index

2003-04 109
2019-20 289

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Solution

The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the
given case. It arises in the year of conversion (i.e. P.Y. 2019-20) but will be taxable only in
the year in which the stock-in-trade is sold (i.e. P.Y. 2022-23). Profits from business will also
be taxable in the year of sale of the stock-in-trade (P.Y. 2022-23).

Particular Amount Amount

Profits and Gains from Business or Profession

Sale proceeds of the stock-in-trade 6,50,000

Less: Cost of the stock-in-trade (FMV on the date of 4,50,000 2,00,000

4,50,000 2,00,000 conversion)

Long Term Capital Gains

Full value of the consideration (FMV on the date of the 4,50,000

4,50,000 conversion)

Less: Indexed cost of acquisition ( 50,000 x 289/109) 1,32,569 3,17,431

Note: For the purpose of indexation, the cost inflation index of the year in which the asset is
converted into stock-in-trade should be considered.

Income from other source [S. 56-59]

INTRODUCTION

Any income, profits or gains includible in the total income of an assessee, which cannot be
included under any of the preceding heads of income, is chargeable under the head income
from other sources. Thus, this head is the residuary head of income and brings within its
scope all the taxable income, profits or gains of an assessee which fall outside the scope of
any other head. Therefore, when any income, profit or gain does not fall precisely under any
of the other specific heads but is chargeable under the provisions of the Act, it would be
charged under this head.
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INCOMES CHARGEABLE UNDER THIS HEAD [SECTION 56]

(i) The income chargeable only under the head 'Income from other sources

(1) Dividend income [Section 56(2)(i)]

Dividend income is always taxable under the head "Income from other sources". The term
'dividend' as used in the Act has a wider scope and meaning than under the general law.

Dividend [covered by sections 2(22)(a) to (e)l:

According to section 2(22), the following receipts are deemed to be dividend:

(a) Distribution of accumulated profits, entailing the release of company's assets - Any
distribution of accumulated profits, whether capitalised or not, by a company to its
shareholders is dividend if it entails the release of all or any part of its assets.

Note: If accumulated profits are distributed in cash, it is dividend in the hands of the
shareholders. Where accumulated profits are distributed in kind, for example by delivery of
shares etc. entailing the release of company's assets, the market value of such shares on the
date of such distribution is deemed as dividend in the hands of the shareholder.

(b) Distribution of debentures, deposit certificates to shareholders and bonus shares to

preference shareholders Any distribution to its shareholders by a company of debentures,
debenture stock or deposit certificate in any form, whether with or without interest, and any
distribution of bonus shares to preference shareholders to the extent to which the company
possesses accumulated profits, whether capitalised or not, will be deemed as dividend.

The market value of such bonus shares is deemed as dividend in the hands of the preference
shareholder.

In the case of debentures, debenture stock etc., their value is to be taken at the market rate
and if there is no market rate they should be valued according to accepted principles of
valuation.

Note: Bonus shares given to equity shareholders are not treated as dividend.

(c) Distribution on liquidation - Any distribution made to the shareholders of a company on

its liquidation, to the extent to which the distribution is attributable to the accumulated profits
of the company immediately before its liquidation, whether capitalised or not, deemed to be
dividend income.
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Note: Any distribution made out of the profits of the company after the date of the liquidation
cannot amount to dividend. It is a repayment towards capital.

(d) Distribution on reduction of capital - Any distribution to its shareholders by a company on

the reduction of its capital to the extent to which the company possessed accumulated profits,
whether capitalised or not, shall be deemed to be dividend.

(e) Advance or loan by a closely held company to its shareholder - Any - payment by a
company in which the public are not substantially interested, of any sum by way of advance
or loan to any shareholder who is the beneficial owner of 10% or more of the equity capital of
the company will be deemed to be dividend to the extent of the accumulated profits. If the
loan is not covered by the accumulated profits, it is not deemed to be dividend.

Advance or loan by a closely held company to a specified concern Any payment by a

company in which the public are not substantially interested, to any concern (ie. HUF/ Firm/
AOP/ BOI/ Company) in which a shareholder, having the beneficial ownership of atleast 10%
of the equity shares is a member or a partner and in which he has a substantial interest (ie.
atleast 20% share of the income of the concern) will be deemed to be dividend.

Also, any payments by such a closely held company on behalf of, or for the individual benefit
of any such shareholder will also be deemed to be dividend. However, in both cases the
ceiling limit of dividend is to the extent of accumulated profits.

Exceptions: The following payments or loan given would not be deemed as dividend:

(i) Loan granted in the ordinary course of business - If the loan is granted in the ordinary
course of its business and lending of money is a substantial part of the company's business,
the loan or advance to a shareholder or to the specified concern is not deemed to be dividend.

(ii) Dividend paid is set off against the deemed dividend - Where a loan had been treated as
dividend and subsequently, the company declares and distributes dividend to all its
shareholders including the borrowing shareholder, and the dividend so paid is set off by the
company against the previous borrowing, the adjusted amount will not be again treated as a
dividend.

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Note: Subsequent repayment of loan or charge of interest at market rate does not make any
difference in the applicability of section 2(22)(e).

Other exceptions

Apart from the exceptions cited above, the following also do not constitute "dividend" -

(1) Distribution in respect of non-participating shares issued for full cash consideration - Any
distribution made in accordance with (c) or (d) in respect of any share issued for full cash
consideration and the holder of such share is not entitled to participate in the surplus asset in
the event of liquidation.

(ii) Payment on buy back of shares - Any payment made by a

company on purchase of its own shares from a shareholder in accordance with the provisions
of section 77A of the Companies Act, 1956

O Distribution of shares to the shareholders on demerger by the resulting company - Any

distribution of shares on demerger by the resulting companies to the shareholders of the
demerged company (whether or not there is a reduction of capital in the demerged company).

Basis of charge of dividend [Section 8]

Dividend declared

Dividend declared by the company at its annual general meeting is deemed to be the income
of the shareholder in the previous year in which it is so declared.

Deemed dividend u/s 2(22)(a)/(b)/(c)/(d)

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Distribution by a company which is deemed as dividend u/s 2(22)(a)/(b)/(c)/(d) would be the
income of the previous year in which it is so distributed.

Deemed dividend u/s 2(22) (e)

Payment of advance or loan to a shareholder or a concern, as the case may be, which is
deemed as dividend u/s 2(22) (e) will be the income of the previous year in which it is so
paid.

Interim dividend –

Interim dividend would be deemed to be the income of the previous year in which such
dividend id unconditionally made available by the company to the members who is entitled to
it.

Tax rate on dividend income –

Any income by way of dividends received by a resident from a company, whether domestic
or foreign, is taxable in the hands of a resident shareholder at normal rates of tax.

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5.5 DEDUCTIONS NOT ALLOWABLE [SECTION 58]

No deduction shall be made in computing the "Income from other sources" of an assessee in
respect of the following items of expenses:

(1) In the case of any assessee:

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(1) any personal expense of the assessee;

(2) any interest chargeable to tax under the Act which is payable outside India on which tax
has not been paid or deducted at source.

(3) any payment chargeable to tax under the head "Salaries", if it is payable outside India
unless tax has been paid thereon or deducted at source.

(ii) Any expenditure in respect of which a payment is made to a related person: In addition to
these disallowances, section 58(2) specifically provides that the disallowance of any
expenditure in respect of which a payment is made to a related person, to the extent the same
is considered excessive or unreasonable by the Assessing Officer, having regard to the FMV.
and disallowance of payment or aggregate of payments exceeding 10,000 made to a person
during a day otherwise than by account payee cheque or draft or ECS through bank account
or through such other prescribed electronic mode such as credit card, debit card, net banking,
IMPS, UPI, RTGS, NEFT, and BHIM Aadhar Pay covered by section 40A will be applicable
to the computation of income under the head 'Income from other sources' as well.

(iii) Disallowance of 30% of expenditure: 30% of expenditure shall not be allowed, in

respect of a sum which is payable to a resident and on which tax is deductible at source, if

such tax has not been deducted or;

such tax after deduction has not been paid on or before the due date of return specified in
section 139(1),

(iv) No deduction in respect of any expenditure incurred in connection with casual income:

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No deduction in respect of any expenditure or allowance in connection with income by way
of earnings from lotteries, cross word puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of any form or nature whatsoever shall
be allowed in computing the said income.

The prohibition will not, however, apply in respect of the income of an assessee, being the
owner of race horses, from the activity of owning and maintaining such horses. In respect of
the activity of owning and maintaining race horses, expenses incurred shall be allowed even
in the absence of any stake money earned. Such loss shall be allowed to be carried forward in
accordance with the provisions of section 74A.

DEEMED INCOME CHARGEABLE TO TAX [SECTION 59]

The provisions of section 41(1) are made applicable, so far as may be, to the computation of
income under this head. Accordingly, where a deduction has been made in respect of a loss,
expenditure or liability and subsequently any amount is received or benefit is derived in
respect of such expenditure incurred or loss or trading liability allowed as deduction, then it
shall be deemed as income in the year in which the amount is received or the benefit is
accrued.

Gifts in the hands of individuals and HUFs:

In a major deviation to the principle that income tax is a tax on income and not on capital
receipts, the Finance Act, 2004 amended Sec 56 to bring gifts under the tax net. Since then,
the section has been amended several times to widen the scope of taxable gifts. The latest
legal position as applicable in the assessment year 2021-22 summarised as follows:

Taxable Gifts

U/s 56(2) ((vii), Following receipts by an individual or a Hindu undivided family, in any
previous year from any person or persons will be taxable as “Income from Other Sources:

a. Any sum of money, without consideration, the aggregate value of which exceeds fifty
thousand rupees, the whole of the aggregate value of such sum

b. Any immovable property,

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i. without consideration, the stamp duty value of which exceeds fifty thousand rupees, the
stamp duty value of such property;

ii. for a consideration which is less than the stamp duty value of the property by an amount
exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such
consideration:

Following points are important in this regard :

 Date of valuation

Date of agreement will be the date for considering the stamp , if the date of agreement and
the date of registration are not the same and part or whole of the amount of consideration
thereof, has been paid by any mode other than cash on or before the date of the agreement, in
other cases it will be the date of registration.

 Disputed Value If the stamp duty value of immovable property is disputed by the assessee
u/s 50C(2) , the Assessing Officer may refer the valuation of such property to a Valuation
Officer as per the provisions of Sec 50C and 155(15) will apply for valuation of capital asset.

c. Any property, other than immovable property

i. without consideration, the aggregate fair market value of which exceeds fifty thousand
rupees, the whole of the aggregate fair market value of such property; or

ii. for a consideration which is less than the aggregate fair market value of the property by an
amount exceeding fifty thousand rupees, the aggregate fair market value of such property as
exceeds such consideration 5.7.2.

Exceptions:

The provisions will not apply to any sum of money or property received- :

(a) from any relative; or

(b) on the occasion of the marriage of the individual; or

(c) under a will or by way of inheritance; or

(d) in contemplation of death of the payer or donor; or

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(e) from any local authority defined in S 10[20]-Explanation

(f) from any fund or foundation or university or other educational institution or hospital or
other medical institution or any trust or institution referred to in S. 10 (23C) ; or

(g) from any trust or institution registered u/s 12AA

5.7.3 Meaning of Property:

Property” means the following capital asset of the assessee: —

a. immovable property being land or building or both;

b. shares and securities;

c. jewellery;

d. archaeological collections;

e. drawings; f. paintings;

g. sculptures;

h. any work of art; or

i. Bullion w. e. f 01/06/2010

5.7.4 Meaning of Relative

Relative “means:

I. In relation to an Individual :

a. spouse of the individual;

b. brother or sister of the individual.

c. brother or sister of the spouse of the individual ;

d. brother or sister of the either of the parents of the individual,

e. any lineal ascendant or descendant of the individual

f. any lineal ascendant or descendant of the spouse of the individual

g. spouse of the persons referred to in (2) to (6) above

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Note: This relationship is explained in a diagram, where Lineal ascendants or descendants
taken on male side

II.

In Relation a Hindu Undivided Family any member thereof.

5.8 Cost of Acquisition

While computing capital gains, cost of acquisition of a property received by a transferor from
any exempted mode of transfer e.g. will, is taken at the same cost as that of the previous
owner. Further, cost of acquisition of a property received without consideration and is
chargeable u/s 56 when it is subsequently sold or transferred shall be the value considered u/s
56.

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Important Points:

1. Limit of Rs 50,000 is for each category in case of cash and movable assets and cash but Rs.
50,000 is per immovable property as the section says “such property’

2. Rs 50,000 is not the basic limit. Once the limit of Rs 50,000 exceeds, entire sum will be
taxable. For instance, A receives cash gift of Rs 40,000 it will be exempt as it is below Rs
50,000 If he receives another gift of Rs. 10,100 from C. The aggregate gifts of Rs 50,100 will
be taxable without any basic exemption

3. The list of relatives does not include nephews/nieces/ cousins

4. List of relatives includes Spouses, Siblings - own, spouses’ and parents , lineal ascendants
and descendants and spouses.

5. List of relatives includes uncles and aunts of the individual but not those of the spouse.

6. Stamp duty valuation will have same meaning as in S 50C.

7. Fair Market Value can be determined by the valuers.

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8. Business assets like stock are not covered by these provisions and normal sale or purchase
transactions will not attract the provisions of this section.

9. Any movable property like shares, securities, jeweler, drawings, paintings, sculptures,
work of art or archaeological collections or immovable , without consideration the fair market
value of which exceeds Rs 50,000 in aggregate during a previous year, or for a consideration
falling short of their aggregate fair market value by more than Rs 50,000 will be covered by
this provision.

Gifts Received by firms and companies

When a firm or a closely held company receives, in any previous year, from any person or
persons, on or after 01-06-2010 any shares of another closely held company

i. Without consideration and the aggregate fair value of such shares exceeds Rs 50,000, the
whole of the aggregate fair market value of such shares or property;

ii. for a consideration which is less than the aggregate fair market value of the shares by an
amount exceeding Rs 50,000, the aggregate fair market value of such property as exceeds
such consideration :

This section will not how ever apply to transactions not regarded as transfer u/s 47 .

DEDUCTIONS -S. 57

Following deductions are available u/s 57 in computing the income from other sources:

I In case of taxable dividend income and interest from securities:

Any reasonable sum paid by way of remuneration or commission for the purpose of realising
such income including interest on borrowed capital if such borrowed capital is used for
making investment in shares or securities.

II In case of income from plant, machinery or furniture given out on hire:

a. Current repairs to building.

b. Current repairs to machinery, plant or furniture.

c. Insurance premium paid for insuring the plant, machinery, building or furniture.

d. Depreciation on building, machinery, plant or furniture.

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e. Any expenditure (not being capital expenditure or personal expenditure) which has been
incurred wholly, necessarily and exclusively for earning income, such expenditure will also
be allowed as a deduction, e.g. sub-letting expenses. Office stationery, rent, salaries, etc
where maintenance of office is necessary for earning the income.

III In case of family pension received by legal heirs of an employee,

A standard deduction of 1/3rd of such amount received as family pension or Rs. 15,000,
whichever is less.

For this purpose, family pension means a regular monthly payment made to the legal heirs of
the employee after his death. Significantly, pension amount received during the lifetime of
employee is taxable as salaries and not entitled to standard deduction.

COMPUTATION INCOME FROM OTHER SOURCES

PARTICULARS AMOUNT
INCOME FROM OTHER SOURCES
1. Dividend
Less : interest on loans upto 20%
2. Winning from lottery etc
3. employee’s contribution to PF etc.
Less: Paid/ Credited within Due Date
4. Interest on securities
Less: Exempt u/s 10(15)
Less: Realisation Charges/ Interest on loans
5. Income from machinery, building, furniture on hire
Less: Repairs / Insurance/ Depreciation
6. Family pension
Less : Exempt u/s 10(18)
Less : standard Deduction (lower of 1/3 or 15,000)
7. gifts> 50,000 from non-relatives
8. Keyman Insurance Policy
9. Shares of Private Company w/o Consideration
10. Premium on Shares Private Company
11. Interest on compensation/ Enhanced compensation

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 Less: 50% of such interest
12. Advance for Capital Asset Transfer, Forfeited
Less: Govt. Awards & Rewards Exempt u/s 10 (17A)
Less: General Expenditure for Earing Income
a. Capital Expenditure
b. Personal Expenditure
c. Interest/salary Payable Outside India without T.D.S
d. Wealth tax paid
e. Expenses regarding lottery ect.
f. Provision of S. 40A
g. 30% of expenditure if TDS not deducted / paid
13. Add: Recovery against earlier deduction
Income from other Sources

Mrs. Batliboi is a professor of law in M.K. college. The particulars of her income for the year
ending 31-3-2022 are as follows:-

1. Salary-32,000

2. Royalty from books-25,000. Expenses on typing etc. were ₹ 2,000.

3. Honorarium received from a management Institute as a visiting lecturer - 3,000.

Conveyance for visiting the Institute - 200.

4. Examinership fees from the University of Mumbai - ₹1,000.

5. Family pension of 42,000 on death of her husband from his employer.

6. She received the 'Dronacharya' Award of 10,000 for the 'Best Teacher of the Year' from the
State Government. Compute Gross Taxable Income of Mrs. Batliboi for the assessment year
2022-23.

Solution:

COMPUTATION OF INCOME OF MRS. BATLIBOL (RESIDENT)

PREVIOUS YEAR: 2021-22 ASSESSMENT YEAR : 2022-23

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Particulars Amount Amount

SALARY 32,000
INCOME FROM OTHER SOURCES 25,000

(1) Royalty from Books Less: Expenses on typing 2,000 23,000

Less: Expenses on typing 3,000

(2) Honorarium from Management Institute Less: 200 2,800
Conveyance
(3) Examinership Fees 1,000
(4) Family Pension 42,000
Less: Standard deduction
1/3 or 15,000 whichever is less
(5) Dronacharya Award is exempt u/s 10(17A) 14,000 28,000
GROSS TOTAL INCOME 86,800

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