Income Tax

INCOME TAX – 1
QUESTION AND ANSWERS MODULE WISE

MODULE 1
INCOME TAX ACT 1961
BASIC CONCEPTS
Tax is a fee collected by the government on income, product or service. The direct tax collected by the
Central government of India is called Income Tax. It is an important source of income of Government.
Income tax is imposed on the income of individuals and corporate.
The Income tax Act 1961 which came into force on 1st April 1962, The Income Tax Rules 1962 and
Finance Act passed by the parliament every year, govern the income tax law in India. The rates of tax for
a financial year are determined by the Finance Act.
Question and Answers (2 Marks)

1. Who is liable to pay income tax?
Every person whose total income exceeds the exempted limit is liable to pay income tax. During
the previous year 2019-2020 if an assessee’s income exceeds Rs 2,50,000, is liable to pay income
tax under the Act.
2. Differentiate between Direct Tax & Indirect Tax.
There are two types of taxes:
Direct Tax and Indirect Tax, of which incidence and impact fall on the same person, is known as
Direct Tax, such as Income Tax. On the other hand, tax, of which incidence and impact fall on two
different persons, is known as Indirect Tax, such as GST, etc. It means, in the case of Direct Tax, tax is
recovered directly from the assessee, who ultimately bears such taxes, whereas in the case of Indirect
Tax, tax is recovered from the assessee, who passes such burden to another person & is ultimately
borne by consumers of such goods or services.
3. Define the term Income sec 2(24).

Income includes:
(a) Profits and gains
(b) Dividend
(c) Voluntary contribution received by a trust
(d) Capital gains
(e) Salary
(f) Value of any perquisite or profit in lieu of salary
(g) Any allowance granted to the employee
(h) Any sum chargeable under the head business or profession
(i) Any sum received under a key man insurance policy
(j) Gift received other than from a relative exceeding Rs 50,000
(k) Receipt of interest from deposit or investments.
(l) Receipt of rent from house property
(m) Casual income like winning from lottery, horse race.
(n) Income may be positive or negative.
4. What is Diversion of income?

It is the process of diverting income before it is earned by the assessee. Ie, income diverted
before it reaches the assessee and not taxable.
For eg: M/s ABC is a partnership firm in which A and his two sons B & C are partners. The
partnership deed provides that after the death of Mr. A, B & C shall continue the business of the
firm subject to a condition that 20 % of profit of the firm shall be given to Mrs. D (Wife of Mr. A/
Mother of B & C).
5. What is application of income?

It means spending of Income after it is being earned by the assessee. Applied income shall be
taxable in the hands of the assessee. ie, after receiving income it is given to someone else.
Eg: Mr. A is liable to pay Rs. 2,000/- per month to Ms. B (his ex-wife) as an alimony sum. Mr. A
being an employee of Mr. C, instructs him to pay Rs.2,000/- per month out of his salary and
disburse the remaining salary to him.
6. What is GTI?
The aggregate income under the five heads of income is termed as “gross total income”.
The income of a person is computed under the following five heads:
1. Income from Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
7. What is Total Income or taxable income?

Total income means the amount left after making the deductions under section 80C to 80U from
the gross total income.
Total Income = GTI – Deductions u/s 80.
Income tax is computed based on total income.
8. What is casual income?

Any receipt which is of a casual or non repeating and non-recurring nature is called casual
income. Casual income includes the following receipts:
1. Winning from lotteries,
2. Winning from crossword puzzles,
3. Winning from races (including horse races),
4. Winning from card games and other games of any sort
5. Winning from gambling or betting of any form or nature.
9. Define the term Assessment Year sec 2(9).

It means the period of 12 months starting from April 1 and ending on March 31 of the next year.
Eg: Assessment year 2020-2021 which commenced on April 1, 2020 and ends on March 31,
2021. Income of previous year of an assessee is taxed during the assessment year. Every person
who is liable to pay tax under this act shall file return of income and these returns are processed
by the income tax officers.
10. Define the term Previous year sec 3.

Income earned in a particular year is taxable in the next year. The year in which income is
earned is known as previous year and the next year in which income is taxable is known as
assessment year. In other words, previous year is the financial year immediately preceding the
assessment year. Current Assessment year is 2020-2021 and the previous year is 2019-2020.
11. Define the term Assessee.

 Every tax payer is an assessee.
 As per sec2(7), a person who is liable to pay tax or any other sum of money is payable under this
Act.
1. Ordinary assessee:
i) any person against whom proceedings under Income Tax Act are going on, irrespective of the
fact whether any tax or other amount is payable by him or not;
ii) any person who has sustained loss can carry forward such loss and filed return of loss u/s
139(3);
iii) any person by whom some amount of interest, tax or penalty is payable under this Act;
iv) any person who is entitled to refund of tax under this Act when excess tax has been paid.
2. Deemed Assessee:
A person who is bound to pay tax in respect of income of another person.
Representative assessee is known as deemed assessee.
For eg: tax payable by a guardian on the income of a minor, lunatic or
Legal representative on the income of a deceased assessee etc
3. Assessee in default:
When a person fails to comply with the legal requirements or statutory duties under the Act as
not paid tax to government or not file his income tax return.
If a person fails to pay whole or part of tax or interest or both.
If a person who is bound to deduct tax at source and remit the amount to the Government
doesn’t do so. For eg: an employer is liable to deduct tax from the salary of the employee and
remit the same to the government, when he fails to do so become an assessee in default.
12. What is return of income?

Every person who has a total income that exceeds the exemption limit is liable to
furnish Income Tax Return within the due date.
Assessee has to furnish information related to his taxable income, tax payable, tax paid, balance
tax payable, or refund of tax etc
Details of income under different heads, GTI, Deductions from GTI etc.
Return is filed during the AY.
Last date of filing return is 31st July of the AY.
Failure of filing return results in penalties.
13. What is surcharge?

It is a tax on tax.
It is an additional amount charged on tax if the Total Income exceeds Rs. 50 lakhs.
The current rate of surcharge is:
Total Income Tax Rates
Rs 50 Lakhs to Rs 1 Crore 10% of Income tax
Rs 1 Crore to Rs 2 Crore 15% of Income tax
Rs 2 Crore to Rs 5 Crore 25% of Income tax
Above Rs 5 Crore 37% of income tax
14. What is Average Rate of Income Tax?

It is the rate of tax arrived at by dividing the tax by the total income.
Average rate of Income tax = Tax x 100/Total Income.
15. What is MMR?

Maximum Marginal Rate is the rate of tax applicable to highest slab of income of a person.
It is 30% for the AY 2020-2021.
16. Define the term person sec 2(31).

The term person includes:
Individual
Hindu Undivided Family (HUF)
Company
Firm
Association of person or Body Of Individual
Local Authorities
Artificial juridical person eg: University
17. What is Agricultural income?

It includes
a. Any rent or revenue derived from agricultural land situated in India.
b. Any income from
Cultivation of agricultural land in India.
A process carried on to make the produce or rent in kind.
Sale of produce.
c. Income from agriculture house property.
18. What are the test to determine Agriculture income?
1. Income is derived from land
2. The land must be used for agriculture purpose.
3. The land must be situated in India.
19. What is Partly Agricultural income?
When as assessee performs both agricultural and manufacturing process (non agricultural)
simultaneously his total income consist of agricultural and non agricultural income.
1. When green tea, leaves brought from own plantations are used as raw materials 60% of
income is agricultural income and 40% is business income.
2. for coffee, 75% agriculture income and 25% business income.
3. for rubber 65% agriculture income and 35% business income.
20. What is clubbing of agricultural income with non agricultural income?
The agricultural income is exempt from tax.
The process of adding agricultural income with non agricultural income is known as integration.
It is made when non agricultural income exceeds the basic exemption limit (2,50,000) and
agricultural income exceeds Rs 5,000 in the relevant previous year.
21. Distinguish between Finance Act and Finance Bill?

The budget which is presented by the Finance Minister in the parliament every year, is
accompanied by the Finance Bill. The Finance Bill is document presented to the parliament.
When the Finance bill is passed by the parliament and gets the assent of the President, it
becomes Finance Act. It fixes the rates of tax for the current year rate for deduction of tax at
source as well as advance payment of tax.
22. What is CBDT?
Central Board of Direct Taxes. It is the highest authority of Income Tax and it works under the
ministry of Finance.
23. Distinguish between Capital loss and revenue loss.
A loss which relates to a fixed asset is a capital loss. For eg: loss on sale of furniture.
A loss made by selling or destruction of goods is a revenue loss. For eg: bad debts incurred.
Loss sustained due to embezzlement done by an employee is a revenue loss.

24. Explain different situations of Accelerated Assessment.
Or
Income earned during the previous year is normally charged to tax in the financial year next
following it. What are the exceptions to this rule?
If the assessment is made in the previous year itself is known as accelerated assessment. Usually
income earned by the assessee is assessed during the assessment year. In certain circumstances
the assessee is assessed during the previous year itself. The following are the situations in which
accelerated assessment is done:
1. Income of non-resident from shipping company sec 172
Income of a non resident from shipping business is taxable during the same year. 7.5% of the
freight charges collected by the shipping company is deemed to be the income of the company
and tax is charged on such income.
2. Income of person leaving India sec 174
If the assessing officer has sufficient reason to believe that the assessee may leave India and
there is no possibility of his returning to India.
3. Income of an AOP or BOI or an Artificial Juridical person sec 174A
4. Transfer of property to avoid tax sec 175
If the assessing officer has sufficient reasons to believe that the assessee is likely to transfer his
property to avoid tax, he shall charge tax on the assessee during the same year itself.
5.Discontinuance of business or profession Sec 176
25. Explain the features of income.

(a) Definite source: Income should derive from a definite source. For eg: rent from the source of
building.
(b) The income must come from outside source:
(c) Tainted income /illegal income: Illegal income is also taxable like Legal income.
(d) Income will be taxed at the time of its first receipt only.
(e) Temporary or permanent incomes are taxable.
(f) Income received either in cash or in kind or in service is taxable.
(g) Gift received from a non relative and exceeds Rs 50,000 is treated as deemed income and is
taxable.
26. Explain the undisclosed income of the previous year.

(a) Cash credits (sec 68)
(b) Unexplained Investments (sec 69)
(c) Unexplained Money (sec 69A)
(d) Unexplained expenditure (sec 69C)
27. Distinguish between capital receipts and revenue receipts.
(i)Nature of receipt:
If a receipt is related to fixed assets, it is a capital receipt. For eg: Sale of plant.
If a receipt is relate to current assets it is a revenue receipt. For eg: Sale of goods.
(ii)Termination of source of income:
Any sum received as compensation for the termination of a source of income is capital
receipt. For eg: compensation received by an employee from his employer on termination of
the services.
(iii) Receipt in substitution of income:
Any sum received in substitution of an income is a revenue receipt. For eg: reward received
by an employee.
(iv) Compensation on surrender of a right:
Any amount received as compensation on surrendering a right is called capital receipt

whereas any amount received for loss of future income is revenue receipt. For eg: when an
author gives up his copyright and receives compensation is a capital receipt but when he
receives it as advance royalty for future years is revenue receipt.
(v) Purpose of transaction:
When an asset is purchased for personal or domestic use and later sold by chance is not
revenue receipt. On the other hand when the same asset is purchased by a trader with the
purpose of selling the same, the receipt is revenue receipt.
28. Difference between Capital expenditure and Revenue Expenditure.
(i)Any expenditure incurred to acquire a fixed asset or in connection with the installation of fixed
asset capital expenditure. Whereas any expenditure incurred in connection purchase of goods is
revenue expenditure.
(ii)Any payment made to discharge a capital liability is a capital expenditure. Any payment made
to discharge a revenue liability is revenue expenditure.
(iii)Any expenditure incurred to acquire a source of income is a capital expenditure. Whereas
expenditure incurred to earn an income is revenue expenditure.
(iv)Any amount spent for increasing earning capacity or reducing expenditure of a business is a
capital expenditure. But an expenditure incurred in keeping an asset in running condition is
revenue expenditure.
Rates of Tax
(AY 2020-2021)
(PY 2019-2020)
 1. In case of an Individual (resident or non-resident) or HUF or Association of Person or Body
of Individual or any other artificial juridical person.
Total Income Tax Rate
Upto Rs 2,50,000 Nil
Rs 2,50,000 to Rs 5,00,000 5%
Rs 5,00,000 to Rs 10,00,000 20%
Above Rs 10,00,000 30%
 2. In case of a resident senior citizen (who is 60 years or more at any time during the previous
year but less than 80 years
Total income Tax rate

Rs 3,00,001 to Rs 5,00,000 5%
Rs 5,00,001 to Rs 10,00,000 20%
Above Rs 10,00,000 30%
 3. In case of a resident super senior citizen (who is 80 years or more at any time during the
previous year)
Total income Tax rates

Rs 5,00,001 to Rs 10,00,000 20%
Above Rs 10,00,000 30%

MODULE 2
RESIDENCE AND TAX LIABILITY
Residential status is very important in determining the tax liability of an assessee. The total income of an
assessee during the previous year is computed on the basis of his residential status in India during that
PY. Ie, the Residential status of a person is determined based on his stay in India in the PY.
Previous Year 1/4/2019 – 31/3/2020
Assessment Year 1/4/2020 – 31/3/2021

1. What are the basic conditions for determining residential status of an individual?
Residential status of an Individual (sec 6)
 Residential status is determined on the basis of the following conditions:
 1. Basic Conditions:
(a) The assessee is in India for a period of 182 days or more during the PY.
(b) The assessee is in India for a period of 60 days or more during the PY and has been in India
for a period of 365 days or more during the 4 years preceding the PY.
 The 60 days mentioned is extended to 182 days in the following cases:
(i)An Indian citizen going abroad on a job approved by central Government or as a member of
the crew of an Indian ship.
(ii)An Indian citizen or a person of Indian origin who comes on a visit to India in any PY.
2. What are the additional conditions for determining residential status of an individual?
1. The assessee has been resident in India (satisfying any 1 of the basic conditions) at least 2 out
of 10 years preceding the previous year.
2. The assessee has been in India for a period of 730 days or more during the 7 years preceding
the PY.
3. When does an individual become Resident but Not Ordinarily Resident?
(B=1, A=0)
An individual is said to be not ordinarily resident in India, when he satisfies any 1 of the basic
condition but not satisfying both additional conditions.
4.When a HUF becomes non resident?

If the control and management of its (HUF’s) affairs is situated wholly outside India is non resident.
4. How to determine the residential status of a Company?

A company may be resident or non resident.
Resident company
• If it is an Indian company or
• Its place of effective management in that year is in India.
• Management of a company is situated at the place where meetings of it s board of
directors are held.
Non resident company
• It is neither an Indian company nor its place of effective management in that year is
in India.
5. How to determine the residential status of HUF?

HUF may be ordinarily resident, not ordinarily resident or non resident depending on the place
of control and status of karta.
(i)Ordinarily resident:
If the control and management of its HUF’s affairs is situated wholly or partly in India and
its manager (Karta) satisfies both the conditions. Conditions are:
• The assessee has been resident in India (satisfying any 1 of the basic conditions) at
least 2 out of 10 years preceding the previous year.
• 2. The assessee has been in India for a period of 730 days or more during the 7 years
preceding the PY.
(ii) Not ordinarily resident:
If the control and management of its HUF’s affairs is situated wholly or partly in India and
its manager (Karta) does not satisfies both the conditions. Control and management in India means the
place of directing powers are in India.
(iii)Non resident:
If the control and management of its affairs is situated wholly outside India.
6. How to determine the residential status of a Firm?

Resident:
If the control and management of their affairs are situated wholly or partly in India.
Non resident:
If the control and management of their affairs are situated wholly outside India.
7. Residential status of an Individual

a. Resident and Ordinarily Resident:
(B =1,A=2)
any 1 of the basic conditions and both additional conditions.
b. Resident but Not Ordinarily Resident:
(B=1,A=0)
Any 1of the basic conditions but not satisfying both additional conditions.
c. Non Resident: (B=0,A=0)
none of basic conditions.
8. Residential status of joint stock company
Resident in India Non Resident In India
Indian Company
Foreign company whose turnover or Foreign company whose turnover is

gross receipts is Rs 50 crore or upto Rs 50 crore and place of
above effective management outside India.
1. Mr.Jaisal an Indian citizen, left for USA for the first time on 15/2/2019 for business purposes. He
returned to India on 1/4/2019 and again went for a European tour on 30/4/2019. he returned to
India on 5/3/2020 and remains in the country thereafter. Determine his residential status for
the previous year 2019-2020.
First basic condition not satisfied. Mr.Jaisal was in India for 57 days only during the PY 2019-
2020.
Second basic condition also not satisfied. He was resident in India for more than 365 days during
the 4 years preceeding the PY, but was not in India for more than 60 days during the PY.
He doesn’t satisfy any of the basic conditions and hence he is Non Resident in India for the PY
2019-2020.
2. Mr.Shankar is an Indian Citizen and a person of Indian origin. He used to go for business tour
and every year stays abroad for 3 months. During the financial year 2019-2020 he was in Europe
for a period of 300 days in connection with his business promotion. While in Europe he earned
an income of Rs 10,00,000 by winning a lottery there. Is he liable to pay tax in India for the
amount?
(Hint: Resident and Ordinarily Resident. He is liable to pay tax in India on lottery winnings
abroad.)
3. Mr. A an engineer left for London on 15/3/2019 for taking practical training in a firm there. He
returned to India on 28/3/2020. he was never out of India in the past.
Find out his residential status for the AY 2020-2021.
(Non Resident -4 days in India)
4. Mr.Jaz came to India for the first time from Kuwait on 25/10/2012. he stayed here for 4 years
and left for U.K on deputation for the Govt of India on 26/10/2016. he returned to India on
1/5/2017 and again went to U.K for a job offered by an English Company on 15/12/2017. he
came to Indi for permanent settlement on 26/10/2018. Determine his residential status for the
PY 2019-2020.
(Resident)
5. Mr. Ching a Japanese citizen left India after a stay of 10 years on 1/6/2017. During 2018-2019 he
comes back to India for 46 days. Later he returns to India for one year on 10/10/2019.
Determine his residential status for the PY 2019-20?
(Ordinarily resident)
6. The following are the incomes of Mrs.Raj during the PY 2019-2020. compute his Total Income if
she is,
(i) Resident (ii) NOR (iii) Non resident
Income accrued in UK but received in India Rs 39,000
Rs 34,000 in Japan and but later brought to India.
Rs 75,000 earned in India but received in Dubai.
Income earned from a business controlled from India in Russia Rs 55,000.
Rent received in Sharjah for a building there Rs 23,000
Income Resident Not ordinarily Non Residen

resident
come accrued in UK but received in India 39,000 39,000 39,000
come earned in Japan but later brought to India. 34,000 Nil Nil
come earned in India but received in Dubai 75,000 75,000 75,000
come earned from a business controlled from India in Russia 55,000 55,000 Nil
ent received in Sharjah for a building there 23,000 Nil Nil
Total 2,26,000 1,69,000 1,14,000
7. Briefly explain the 5 heads of income?

The 5 heads of income are:
• Income from salaries(sec 15 to 17)
All income received by an employee from the employer.
• Income from house property (sec 22 to 27)
Rent received from house property by the tax payer.
• Income from profits and gains from Business or Profession (sec 28 to 44)
Income received from carrying a business or profession.
• Income from Capital Gain (sec 45 to 55)
Profit on sale of capital assets.
• Income from other sources (sec 56 to 59)
(For more practical problems please refer text book and note book)
1. What is the scope of total income on the basis of residence or incidence of tax?
Incidence of Tax or Scope of Total Income
Tax is levied on the Total Income on the basis of residential status of the assessee.
‘
SL NO INCOME RESIDENT NOR NON
RESIDENT
1 Income received or deemed to be Taxable Taxable Taxable
received in India
2 Income accrues or arises or deemed to Taxable Taxable Taxable
accrues or arises in India.
3 Income which arise outside India from a Taxable Taxable Not Taxable
business set up and controlled from
India.
4 Income accrues or arises outside India Taxable Not Not Taxable
Taxable
5 Past untaxed income which was Not Not Not taxable
exempted earlier brought to India taxable taxable
• 1. Income Received or deemed to be received in India:

• Deemed to be received means income not received by the assessee but considered as received.
• For eg: income of other persons clubbed with income of assessee, Employers contribution to
RPF and Interest credited to RPF,any dividend declared or distributed or paid by a company etc.
• 2. Income accruing or arising or earned in India:
• 3. Income deemed to accrue or arise in India(right to receive income ):
• Income arise outside India but deemed to accrue in India. For eg: salary paid by Govt of India to
its employees posted abroad, dividend paid by an Indian company outside India etc
• 4. Income accruing and received outside India.
2. Explain the incomes exempt from tax?
Incomes are classified into 3:

(a) Taxable Income
(b) Exempted Income
© Rebatable Income(Tax Free)
a. Taxable Income
They are fully taxable.

These incomes are from:
• Income from Salary
• Income from house property
• Income from Business or profession
• Capital Gain
• income from other sources.
b. Exempted Income
• Agricultural income
• share of income from HUF
• share of income of a partner from firm
• interest paid to NRI
• Leave travel concession used in India:
( exempted based on certain conditions)
• Remuneration received by foreign diplomats, for rendering services as an official of
an embassy or high commission.
• salary received by a ship crew who is a foreigner and non resident.
• Remuneration of a foreign trainee from a foreign government during training
period in India is exempted.
• Foreign allowance by Govt of India for rendering service outside India:
• Gratuity:
Any amount received by an employee for his service or under law at the time of retirement
is called gratuity. Gratuity received by Govt employees at the time off retirement is fully
exempted from tax. For other employees partially exempted based on certain conditions.
• Commutation of pension:
Lump sum amount received at the time of retirement instead of monthly pension is known
as commutation of pension. Commuted pension received by Govt. employees is fully
exempted from tax. For other employees exemption is available subject to certain
conditions.
• Leave salary:
• Retrenchment compensation:(compensation received by retrenched workers)
• HRA
• Amount received from SPF, RPF and PPF
• Amount received from Approved Superannuation Fund:
• Voluntary Retirement Scheme:
• Amount received from insurance policy:
• Special allowance to meet official expenses:
• Income from interest
• Educational scholarship
• Allowance to MLA
• Family pension
• Income of minor child: (clubbed with income of assessee and exempted upto Rs
1,500)
• Income from dividend:(Dividend from an Indian company is exempted upto Rs 10
Lakhs. If it exceeds Rs 10 Lakh 10% tax will be paid.
C. Rebatable Incomes(Rebate of Tax) sec 86
• These incomes are members share of income from AOP/BOI.

• Members share of income from firm.
• These incomes are added to the total income of its members.
• When the total income of an assessee includes such incomes, deduction is allowed
from the amount of tax is known as rebate of tax.
• Rebate = Tax on total income/Total income x share of AOP.
MODULE 3
INCOME FROM SALARY (SEC 15 TO 17)
Salary is the periodical remuneration received by an employee from the employer for service rendered
to him.
Advanced salary or arrears of salary are taxed if it is received during the previous year.
1. What is chargeability under sec 15?

Salary may be taxed either on due basis or on receipt basis whichever comes first.
1. Due basis:
salary due from an employer or former employer in the previous year whether received or
not.
2. Receipt basis:
Any salary paid or allowed to an employee in the previous year though not due or becomes
due to him. Eg; Advance salary.
2. Definition of salary(sec 17(1)
Salary includes the following:
• wages
• Annuity/pension
• Gratuity
• Encashment of leave
• Any fees, commission, bonus, allowance, perquisites and profits in lieu of salary
• Advance/arrears of salary
• Annual accretion to Recognised Provident Fund
• Transferred balance in Unrecognised provident Fund
• contribution by Central Govt to new pension scheme of new employees under sec
80CCD.
3. Pension(sec 10(10A)
It is the periodic payment made by an employer to the employee in consideration of past service
payable after retirement.
Commuted Pension
Receiving lump sum amount at the time of retirement instead of monthly pension is known as
commutation of pension.
Uncommuted Pension
The monthly pension or balance pension is fully taxable under the head salary.
4. Define Perquisites (PERKS)sec 17(2).

It means any casual emolument, fee or profit attached to an office or position in addition to
salary or wages. Perquisites may be in cash or in kind or in service.
In short Perquisites means monetary benefits, emoluments, facilities provided by the employer
to the employee in addition to salary.
5. Meaning of profit in lieu of salary.

Following receipts are taxable as profits in lieu of salary:
➢ The amount of any compensation due to or received by an assessee from his employer
or former employer at or in connection with the (a) termination of his employment, (b)
modification of the terms and conditions of employment.
➢ Any payment due to or received by an assessee from his employer or former employer
except the following: • Gratuity exempted u/s 10(10); • House rent allowance exempted
u/s 10(13A); • Commuted pension exempted u/s 10(10A); • Retrenchment
compensation exempted u/s 10(10B); • Payment from an approved Superannuation
Fund u/s 10(13); • Payment from statutory provident fund or public provident fund; •
Payment from recognised provident fund to the extent it is exempt u/s 10(12).
➢ Any payment from unrecognised provident fund or such other fund to the extent to
which it does not consist of contributions by the assessee or interest on such
contributions.
➢ Any sum received by the employee under the Keyman Insurance Policy including the
sum allocated by way of bonus on such policy.
➢ Any amount due to or received by the employee (in lump sum or otherwise) prior to
employment or after cessation of employment.
➢
6. Meaning of Annual Accretion to RPF.
Annual accretion is the increase in the balance of RPF due to contributions and interest credited
in it. Employer’s contribution and interest credited to the RPF is called annual accretion.
7. What is the tax treatment of annual accretion to RPF?

➢ Employer’s contribution to the RPF – EXEMPTED UO TO 12% OF SALARY AND EXCESS
TAXABLE.
➢ Interest credited to RPF – EXEMPTED UP TO 9.5% OF BALANCE IN RPF and EXCESS
TAXABLE.
8. Meaning of Transferred Balance:
The balance of URPF which is transferred to RPF is known as transferred balance. When URPF is
recognized by the Commissioner of Income Tax the balance in URPF is transferred to RPF. The
tax treatment of transferred balance is:
 Employers contribution in excess of 12% of salary.
 Interest credited in excess of 9.5% is taxable.

9. What is National Pension System(NPS)?
NPS is applicable to those who join service after 1/1/2004 under contributory pension scheme.
It is manadatory for persons entering the Govt service on or after 1/1/2004, to contribute 10%
of salary every month towards NPS. The employer also makes a matching contribution to the
account. Here salary = Basic + DA if + Commission if.
10. Meaning of Retrenchment compensation.

Compensation received by retrenched workers under the Industrial Disputes act 1947 is known
as retrenchment compensation.
Least of the following is exempted:
(i) Actual amount received.
(ii) Maximum limit Rs 5,00,000
(iii) Amount payable under Industrial Dispute Act.
11. Tax treatment of Voluntary Retirement Scheme (VRS)

Any amount received by an employee under VRS is exempt to the least of the following:
(i) Statutory limit Rs 5,00,000
(ii) Actual amount received.
(iii) 3 months salary for each completed year of service.
(iv) salary for the number of months remaining service left.
Here salary = Basic + DA if + Commission if.
1. Explain the tax treatment of commuted pension?

Commuted pension is exempted based on the following conditions:
• Govt Employees – Fully exempt
• Non Govt Employees:
(a) Receiving Gratuity: 1/3 of the full value of pension is exempt.
(b) Not Receiving Gratuity; ½ of the full value of pension is exempt.
• Full value of pension = Commuted + Uncommuted pension
2. Mr Ram was getting pension from a bank Rs 12,000 pm. With effect from 1/6/2019, he
commuted 2/3 of the pension and received Rs 4,80,000. compute the amount of pension
includible under the head salary for the year 2019- 2020 if:
(i) he received gratuity at the time of retirement.
(ii) he did not receive gratuity at the time of retirement.
Computation of Taxable pension for the year 2019-2020
Working note:
2/3 of full pension = 4,80,000
Full pension = 4,80,000 x3/2 =7,20,000
(i) If he received gratuity (1/3 exempt)
(a) pension(12,000 x2)+(4,000 x10) 64,000
(12,000 x 1/3=4,000)
(b) Commuted pension(4,80,000 -2,40,000) 2,40,000
1/3 of Full pension exempted=7,20,000x1/3=2,40,000)
3,04,000
(ii) If he did not receive gratuity (1/2 exempt)
(a) pension(12,000 x2)+(4,000 x10) 64,000
(b) commuted pension (4,80,000-3,60,000) 1,20,000
½ of full pension exempted= 7,20,000x1/2=3,60,000)
1,84,000
3. Mrs Raja retired from a private company on 30/3/2019. she received a monthly pension of
Rs 2,400 upto 30/6/2019. with effect from 1/7/2019 she commuted 2/3 of her pension for
Rs 1,50,000. what will be her taxable pension if she:
(a) Received gratuity
(b) Not received gratuity (assume the pension is received on the last day of the month
Working Note:
2/3 of full pension =1,50,000
Full pension = 1,50,000 x 3/2 =2,25,000
(a) Received gratuity(1/3 exempt)

Monthly pension(2400x3) +(800x9) 14,400
Commuted pension(1,50,000 -75,000) 75,000
1/3 of full pension exempted=(2,25,000x1/3=75,000)
Taxable pension (14,400 + 75,000) = 89,400
(b)Not receiving gratuity
Monthly pension(2400x3) +(800x9) 14,400
Commuted pension (1,50,000 -1,12,500) 37,500
½ of full pension exempted =2,25,000 x1/2=1,12,500)
Taxable pension (14,400 + 37,500) = 51,900
4. Mr.Chopra retired from service on 30/4/2019. He got pension of Rs 6,000 pm upto
31/12/2019 and thereafter he commuted 40% of his pension for Rs 84,000. compute his
taxable pension for the previous year 2019-2020 if he is
(a) Govt.employee
(b) private employee who received gratuity.
© private employee who didn’t received gratuity
(a) Govt employee:

commuted pension is fully exempt as he is a government employee.
Monthly pension = (6,000x8)+(3,600x3) 58,800
less standard Deduction ( 50,000)
Taxable pension 8,800
(b) when he receives gratuity:(1/3 exempt)

Commuted Pension (84,000 – 70,000) 14,000
Total pension 72,800
Taxable Pension 22,800
© when he doesn’t receives gratuity:(1/2 exempt)

Commuted Pension NIL
Taxable pension 8,800
Working Note:
40/100 of full pension = 84,000
Full pension = 84,000 x100/40 =2,10,000
2,10,000 x1/3 = 70,000
2,10,000 x1/2 =1,05,000
5. What is the tax treatment of Gratuity?

Gratuity is paid at the time of retirement of an employee in consideration of the past
services. An employee is eligible to receive gratuity once he/she has completed 5 years of
service.
Taxable Gratuity = Actual Gratuity - Exempted
Gratuity is exempt as under:
• Govt employees: - Fully exempt from tax
• Employees covered under the payment of Gratuity Act 1972, least of the following is
exempted:
(a) Actual amount of gratuity received
(b) Notified Limit Rs 20,00,000
© 15 days average salary for every one completed year of service and part there of in
excess of 6 months.
(here 15 days salary = 15/26 x monthly salary)
(salary = Basic + DA)
• Employees not covered under the payment of Gratuity Act 1972
Least of the following is exempted.
(a) Actual amount of gratuity received.
(b) Notified limit Rs 20,00,000
© ½ month average salary for each completed year of service (months to be ignored)
Average salary = 10 months average salary preceding the month of retirement.
Here salary = Basic + DA (if it is used for retirement benefit) + commission on turnover if any
6. Mrs Kala retired from service on 31/3/2020 after serving 34 years and 9 months. At the time
of retirement her basic salary was Rs 48,500 pm and DA Rs 20,000 pm(not forming part of
pay). She was also getting commission of Rs 10,000 pm. At the time of retirement he was
paid retirement gratuity of Rs 16,00,000. compute taxable amount of Gratuity if she is:
(a) covered under the Gratuity Act of 1972
(b) not covered under the Gratuity Act of 1972
© Govt employee
Computation of taxable amount of Gratuity
(a) covered under the Gratuity Act of 1972
(a) Actual amount received = 16,00,000
(b)Notified Limit = 20,00,000
© 15 days average salary for each completed year of service = 13,83,173
in excess of 6 months.(15/26 x 68,500 x35)
(salary = Basic + DA = 48,500 +20,000 =68,500)
Least = 13,83,173
Taxable Gratuity = Actual – Exempted = 2,16,827
= (16,00,000 – 13,83,173)
(b) Not covered under Gratuity Act of 1972
(a) Actual amount received = 16,00,000
(b)Notified Limit = 20,00,000
©1/2 months salary for each completed year of service = 8,24,500
(1/2 x 48,500 x 34)
(salary = Basic + DA if + Commission if)
Least = 8,24,500
Taxable Gratuity = Actual – Exempted = 7,75,500
= (16,00,000 – 8,24,500)
(c) © Government Employees = NIL
7. Explain the tax treatment of leave encashment?

Encashment of Earned Leave (sec10(10AAA)
An employee can encash the earned leave standing to his credit either during service or at
the time of retirement. Amount received on encashment of earned leave during service is
fully taxable. Encashment of earned leave received at the time of retirement is exempt as
follows:
• Govt employees – Fully exempt from tax.
• Others – Least of the following is exempted:
(a)Notified Limit Rs 3,00,000
(b)Actual amount received
(c) 10 Months average salary(average salary x10)
(d) Average salary x No. of months leave due.
Taxable Leave salary = Actual - Exempted
Here Salary = Basic + DA if + Commission if
Leave Due = one month leave due for every one year of completed service – leave already
encashed or availed.
Average salary = 10 months average salary preceding the date of retirement.
8. Calculate the taxable leave salary of Mr.Mahesh for the previous year 2019-2020.
1. Leave salary received Rs 4,00,000
2. Monthly salary at the time of retirement:
Basic salary Rs 14,000, DA Rs4,000, Entertainment Allowance Rs 1,000.
3. Duration of service 23 years and 8 months.
4. leave allowed by the employer 40 days for each year of service.
5. Leave availed while in service 4 months
Assume that Mr. Mahesh was working in a private limited Company.
Computation of taxable leave salary
• Actual amount received = 4,00,000
• 10 months average salary(10 x 14,000) =1,40,000
• statutory limit = 3,00,000
• Average salary x No of months leave due (14,000 x 19) = 2,66,000
• (Leave due = 23 -4 =19)
• Least = 1,40,000
• Taxable Leave Salary = Actual – Exempted =4,00,000 – 1,40,000 =2,60,000
•
9. Explain the tax treatment of HRA?
• Fully exempted from tax if received by judges of High court and Supreme court.
• Fully taxable if the employee who is living in his own house.
Least of the following is exempted to those employees living in a rented house;
(i) Actual HRA received
(ii) Rent paid – 10% of salary
(iii) 50% of salary in case of accommodation at Mumbai, Kolkata, Delhi and Chennai and 40%
of salary in other places.
Taxable HRA = Actual HRA received – Exempted(Least)
Salary = Basic + DA if + Commission if
10. Mr. Alwin is an employee in Chennai. He resides in a rented house for which he pays
monthly rent of Rs 4,000. He receives HRA from the employer at the rate of Rs 5,500 pm.
Along with HRA his monthly salary consist of the following:
Basic pay Rs 12,000
DA Rs 4,000
Uniform allowance Rs 200
Bonus Rs 1,000
Compute taxable portion of HRA for the year 2019-2020.
Computation of Taxable HRA for the year 2019-20

 Actual HRA received (5,500 x 12) = 66,000
 Rent paid – 10% of salary (48,000 – 14,400) = 33,600
 (salary =12,000 x12 =1,44,000)
 50% of salary (1,44,000 x50%) = 72,000
 Least = 33,600
 Taxable HRA = 66,000 – 33,600 = 32,400

11. Compute taxable HRA of Mr Anoop an employee of a limited company in Mumbai for the Py
2019-2020.
Salary received by him during the year includes the following;
Basic Pay Rs 7,500 pm
Dearness pay Rs 1,000 pm
Dearness Allowance Rs 2,000 pm
Advance salary for April 2020 Rs 14,000 pm
Arrears of salary for the year 2018-19 Rs 40,000
Fixed Commission Rs 14,400
Commission 3% on sales target acheived (sales target Rs 1,00,000)
HRA Rs 36,000
Rent paid by him during the year amounted to Rs 36,000.
Computation of taxable HRA
 Actual HRA received = 36,000
 Rent paid – 10% salary (36,000 -10,500) = 25,500
 50% of salary (1,05,000 x50%) = 52,500
 Least = 25,500
 Taxable HRA (36,000 – 25,500) =10,500
 Working note:
 Salary = Basic + DA if (DP) + commission if
 (7,500 x12) + (1000 x12) + (1,00,000x3% =3,000)
 90,000 + 12,000 +3,000 =1,05,000

12. What are the allowances under section 10(14)?
The following allowances are Exempted up to actual expenses:
• Helper Allowances
• Uniform allowance
• Academic Allowance
• Conveyance Allowance
• Travelling Allowance
• Hill Compensatory Allowance – exempted up to Rs 300 to Rs 700 pm.
• Under ground Allowance – Exempted up to Rs 800 pm.
• Children Education Allowance – Exempted up to Rs 100 pm per child for 2 children
only.
• Hostel Expenditure Allowance –Exempted up to Rs 300 pm per child for 2 children
only.
• Domestic servant allowance – Fully taxable.
•
13. Explain the tax treatment of valuation of Motor car?
A. Car owned or hired by the employer/ employee: (taxable for specified employees)
i. Car used for official purpose – value of car is nil.
ii. Car used for private purpose –
 Actual expenditure incurred on running and maintenance of the car +
 Remuneration paid to driver +
 Depreciation @10% of actual cost of car
 Less any amount charged by employer from the employee.
iii. Car used for both official and private purpose:
▪ Running and maintenance expenses met by employer:
➢ Small car Rs 1,800 p.m
➢ Large car Rs 2,400 p.m
➢ If driver is provided add Rs 900 p.m
▪ Running and maintenance met by employee:
➢ Small car Rs 600 p.m
➢ Large car Rs 900 p.m
➢ If driver is provided add Rs 900 p.m
14. Briefly explain the types of PF?
Types of PF
➢ Statutory PF(SPF):
Maintained for Government and semi govt employees. Any amount received from this
PF is fully exempted from tax.
➢ Recognised PF(RPF):
Recognised by Commissioner of Income Tax.
PF maintained by factories and business organisations.
It is partially exempted from tax.
Employers contribution in excess of 12% of salary is taxable.
Interest credited to RPF in excess of 9.5% is also taxable.
➢ Unrecognised PF (URPF):
Maintained by private organizations.
PF not recognised by Commissioner of Income Tax.
Any contribution made by the employer to such fund or interest allowed on employers
contribution or on employees contribution is not taxable.
It becomes taxable only when lump sum is received or when the fund is recognised.
➢ Public PF (PPF):
It is meant for public and managed by SBI.
Contribution to this fund is fully exempt.
The minimum contribution to PPF is Rs 500 and maximum is Rs 1,50,000 pa.
Here salary = Basic + DA if + Commission if.
15. Mr Tom was retrenched from service on 31/3/2020 and he was given Rs 5,40,000 as
compensation for the same. However the compensation payable according to the Industrial
Dispute Act was Rs 5,90,000. compute taxable amount of compensation.
Computation of Taxable amount
1. Actual amount received = 5,40,000
2. amount payable as per Industrial Dispute Act = 5,90,000
3. statutory limit = 5,00,000
Least = 5,00,000
Taxable Actual – Least) = 5,40,000 – 5,00,000 = 40,000
16. Mr Bimal was employed in a public company. On 30/1/2020 he took voluntary retirement
and the company paid him Rs 6,00,000 under VRS. The normal age of retirement in the
company is 60 years and Mr Bimal was of 50 years of age at the time of retirement and had
completed 20 years of service.
His monthly salary at the time of retirement was as follows:
1. Basic pay Rs 25,000
2. DA Rs 12,000 (50% includible for retirement benefits)
3. Transport Allowance Rs 5,000
4. Education Allowance Rs 3,000
Compute the amount of compensation taxable.
• Computation of taxable amount
• (a) 3 months salary for each completed year of service (31,000 x 3 x 20) = 18,60,000
• (b) statutory limit = 5,00,000
• © Actual amount received = 6,00,000
• (d) salary for the number of months remaining (31,000 x 12 x 10) = 37,20,000
• Least = 5,00,000
• Taxable (6,00,000 – 5,00,000) = 1,00,000
17. What are the deductions allowable u/s 16?

 Standard Deduction (sec 16ia) Rs 50,000 w.e.f PY 2019- 2020.
 Entertainment Allowance (sec 16(ii)
This is an allowance given by the employer to the employees to entertain the

customers, clients etc.
In case of Govt employees, entertainment allowance is included in the income and

deduction allowed up to the least of the following:
(a) Actual amount received
(b) 1/5 of salary
© Rs 5,000
Here salary = basic salary only.
In case of other employees no deduction is allowable for entertainment allowance, it is fully
taxable.
 Professional Tax/ Tax on Employment(sec 16(iii)
Any amount paid as professional tax or tax on employment is deductible in full.
When professional tax is paid by employer on behalf of employee it is first added to the
salary and then deduction is allowed u/s 16(iii)
1. Explain the types of Perquisites?

• perks exempted for all employees/Tax free perks.
• perks taxable for all employees.
• perks taxable only for specified employees.
✓ Tax free perquisites
The following perquisites are tax free and hence they are not included in the
salary income of assessee.
• Medical Benefits
A. Medical benefits in India:
free medical facilities or reimbursement of medical expenditure for
treatment of self, wife, dependent children, dependent parents and
dependent brothers and sisters based on the following conditions:
(i) if treatment is taken in a Govt hospital –Fully exempted
(ii) If treatment from a hospital maintained by the employer – Fully
exempted.
(iii) if employer pays medical insurance premium – Fully exempted.
(iv) If employer pays health insurance premium –Fully exempted.
B. Medical benefits outside India
• Expenditure on treatment of employee or any member of his family:
• If the employer incurs any expenditure on stay of the patient and one attendant abroad shall be
exempted as follows:
• (i) expenditure on medical treatment and stay abroad shall be exempt to the foreign exchange
permitted by RBI.
• (ii) expenditure on travel shall be fully exempt if the Gross Total Income(excluding expenditure
on travel) does not exceed Rs 2,00,000. Fully taxable when GTI exceeds Rs 2,00,000.
• Family for the purpose of medical benefits include spouse, children, parents, brothers and
sisters who are wholly dependent on the assessee.
• 2. free meals – exempt up to Rs 50 per meal.
• Free refreshment/free recreation facility –fully exempt from tax
• Free education – up to Rs 1,000 p.m per child if its educational institution is owned by the
employer.
• Cost of refresher course –fully exempt.
• Free residential accommodation to judges/ministers – fully exempt.
• Free ration to armed forces – fully exempt.
• Perquisites allowed to employees posted abroad – fully exempt.
• Transfer of movable assets used for more than 10 years – fullyexempt.
• Interest free loan – not exceeding Rs 20,000 or loan taken for medical treatment – fully exempt.
• Free conveyance for going and coming from the place of employment – fully exempt.
• Expenses on telephones including mobile phones – fully exempt.
• Laptops and computers provided for personal use of employee or any member of his family –
fully exempt.
✓ Perquisites taxable for all employees:
a. Rent free house.
Valuation of unfurnished house:
A. House owned by the employer :
• Govt employees – Rent fixed by the Govt.
• Others –
i. Cities having population above Rs 25 lakhs – 15% of salary.
ii. Cities having population between 10 lakhs to 25 lakhs – 10%
of salary
iii. Cities having population below 10 lakhs – 7.5%of salary.
B. Hired by the employer:
• 15% of salary or actual rent w.e.l
C. Hotel accommodation in connection with transfer:
• For more than 15 days – 24% of salary or actual rent w.e.l is
taxable.
Valuation of Furnished house:
• Furniture owned by the employer – add 10% of cost of
furniture to the value computed.
• Furniture hired by the employer – add actual hire charges to
the value of the house computed
• Here salary = Basic + DA if + Fee + Commission + Bonus +
other taxable allowance.
b. Concessional rented house.
The employer deducts an amount from the employee for the free
house.
Value of rent free accommodation = find the value of rent free house as
per the rules – rent paid by the employee.
c. Obligation of employee met by the employer.

It includes:
(i)payment made by the employer for the employee like club bills, gas
and electricity bill, education bill of children.
(ii)income tax, professional tax paid by the employer.
(iii)salary of domestic servant.
d. Any other fringe benefits given by the employer.
(i)Interest free loans:
(a) Interest on loan upto Rs 20,000 exempt.
(b)Loan for medical treatment of critical illness – interest fully exempt.
©other loans at a rate less than SBI interest are treated as perks.
Present SBI interest is 10 to 10.5%.
(ii)use of movable assets except laptops, computers -10% of cost.
(iii) Transfer of movable assets (assets which are more than 10 years are
exempted). Other assets are valued at WDV after allowing the following
rates of depreciation: Electric items -50% on WDV.
Motor car – 20% on WDV.
Other assets – 10% on actual cost.
(iv) club expense.
(v) holiday enjoyment.
(vi) expense charges on credit card.
(vii) Gift – the value of gift in kind by the employer is taxable if its value
exceeds Rs 5,000. If given in cash is fully taxable.
(viii) free food: lunch allowance, dinner allowance, refreshment
allowance fully taxable. Lunch allowance exempted upto Rs 50 per
meal.
✓ Perks taxable for specified employees
A specified employee means:
• A director of a company.
• Holds 20% or more equity shares of a company.
• Whose salary income is more than Rs 50,000.
Here salary = Basic + DA + Commission + Bonus + Fees + any other
taxable allowance + any other monetary benefits – deductions u/s
16.
Perquisites taxable for specified employees :
• Free gas, light and water.
• Free servants.
• Free education exempted upto Rs 1000 p.m per child.
•
2. Mr. Ashok is employed in Chennai in a public Ltd company on annual package salary of
Rs 10,00,000. The company gives the salary as follows:
Basic salary 7,00,000
Travelling Allowance 20,000
Medical Allowance 20,000
Special Allowance 12,000
HRA 1,20,000
Employees contribution to RPF 60,000
Company’s contribution to RPF 60,000
Deposit to approved gratuity fund 8,000
Mr. Ashok lives in a rented house paying monthly rent Rs 15,000. during the year 2019-
20, he paid tax on employment Rs 2,000.
Compute income from salary for the assessment year 2020-2021.
Computation of Income from salary for the AY 2020-21.
Basic Salary 7,00,000
Travelling allowance Nil
Medical allowance 20,000
Special allowance 12,000

HRA 10,000
Employees contribution to RPF Nil
Company’s contribution to RPF NIL
Deposit to approved gratuity fund Nil
Gross salary 7,42,000

Less Standard Deduction sec 16ia 50,000
Employment Tax sec 16iii 2,000
Income From Salary 6,90,000

WORKING NOTES:
 Computation of HRA:
Actual HRA received = 1,20,000
Rent paid – 10% of salary = 1,10,000
(1,80,000 – 70,000)
50% of salary = 3,50,000
Least = 1,10,000
Taxable HRA = 1,20,000 – 1,10,000 = 10,000
 Employers contribution to RPF upto 12% of salary is not taxable.

 Deposit to approved gratuity fund is not taxable.
 Medical allowance and special allowance are taxable in full.
• 3. Mr. Anand is a manager of private limited company in a small town where the population is
less than 10 lakhs. He gives the following details of salary during the year 2019-20.
Basic pay upto 31/12/2019 Rs 10,000 pm and afterwards Rs 12,000 pm.
DA Rs 25,000 pm
Transport Allowance Rs 200 pm
Entertainment Allowance Rs 1,500 pm
Bonus Rs 20,000
The company has provided him a rent free house (with furniture Rs 50,000)
His electricity bill amounting to Rs 300 pm was paid by the company. Further the company paid
his medical bills Rs 10,000 during the year (Hospital owned by the company). He has been given
a large car for official use with driver and the expenses in this connection Rs 40,000 were met by
the company. He has been given a telephone facility at home and the bills paid by the company
during the year amounted to Rs 7,200.
The company has given him a laptop which is used by his family members for their domestic use
also.
The cost of laptop was Rs 40,000
He paid professional tax Rs 2,500 during the year.
Compute his Income from salary for the PY 2019-20.
Computation of Income from salary of Mr.Anand (PY 2019-20)
Basic Pay (10,000 x9 + 12,000 x3) 1,26,000
DA (25,000 X 12) 3,00,000

Transport Allowance (200 x 12) 2,400
Entertainment Allowance (1,500 x 12) 18,000
Bonus 20,000
Rent Free House 17,480
Electricity Bill (300 x 12) 3,600
GROSS SALARY 4,87,480

Less Standard Deduction 50,000
Professional Tax 2,500
Income from salary 4,34,980
Working Note: (i) Rent free house 7.5% of salary(1,26,000

+2,400+18,000+20,000) + 10% of 50,000.
(ii) Car used for official purpose only and hence not a taxable
perks.
(iii) Laptop is a tax free perks. Telephone bills not taxable.
(iv) Transport Allowance is fully taxable. Entertainment
Allowance is fully taxable for private employees.
FORMAT FOR COMPUTATION OF INCOME FROM SALARY
Basic pay (wages or fines)

Dearness pay
Special pay
Dearness allowance
Bonus
Commission
Taxable allowances
Taxable perquisites
Advance salary
Arrears of salary
Profit in lieu of salary
Any payment made by the employer on behalf of the employee
Annuity or pension
Taxable portion of commuted pension
Taxable portion of gratuity
Taxable portion of compensation on VRS or Retrenchment
Taxable portion of encashment of Earned leave
Annual accretion
Transferred balance
Gross Salary
Deductions u/s 16
1. Standard deduction u/s 16(ia) (for any employee)
2. Entertainment Allowance u/s 16(ii) (for any government employee)
3. Employment tax u/s 16(iii) (for any employee)
Income From Salary
MODULE 4
INCOME FROM HOUSE PROPERTY (SEC 22 – 27)
• Income in the form of rent from house property is assessed under the head.
QUESTION AND ANSWERS (2 MARKS)
1. Meaning of Basis of charge under sec 22.

The assessee is chargeable to tax on the annual value(annual rental value) of the property,
consisting of any building or land appurtenant thereto of which he is the owner and which is not
used by him for his own business or profession.
2. What are the Conditions to charge income under income from house property?
 the property should consist of building or land appurtenant thereto.
 the assessee should be the owner of the property.
 the property should be one which is not used for own business or profession of the
assessee.
3. Who are Deemed owners for charging income from house property?
 when an individual transfers house property without adequate consideration to spouse
or to a minor child (not being married daughter) –transferor is the deemed owner.
 A member of a cooperative society or a company to whom building has been allotted or
leased – Member is the deemed owner.
 A person who is allowed to take or retain possession of a property in performance of
contract shall be the deemed owner.
 A person who takes a land on lease and constructs a building he shall be the deemed
owner.
 In case of long term lease 12 years or more in which the lessee takes land on lease and
constructs building on it, the lessor will become liable to tax only when the property is
handed over to him after the period of lease.
4. What is Composite rent?

When HP is let out along with furniture and rent is inseparable is known as composite rent
which is taxable under the head Income from other sources or under the head Income from
Business or profession if such letting is his business.
5. What is Annual value?

Tax is levied on the annual value of house property.
It is computed based on reasonable rent of house property.
It is the sum for which the property might reasonably be expected to let out from year to year.
6. What is the tax treatment of income from house property situated outside India?
In case of resident in India, income from house property outside India is taxable. In case of not
ordinarily resident and non resident it is taxable only when it is received in India.
7. What is Unrealised rent?

It can be deducted from the annual value if the owner could not realise the rent even after
taking genuine steps to recover the amount. Unrealised rent is allowed as deduction subject to
the following conditions:
 the tenancy is genuine.
 the defaulting tenant has vacated the building or adequate steps have been taken to
vacate him from the rented house.
 the defaulting tenant is not occupying any other property of the assessee.
 the assessee has taken sufficient steps to legally proceed against the defaulting tenant
to recover the rent like filing a case against him.
8. What is the Treatment of unrealised rent recovered?

Unrealised rent recovered would be taxable in the year in which it is received. 30% deduction
will be allowed out of such income.
9. How will you treat loss from house property?

Loss can be set off against income from another house property.
Any loss which remains unadjusted after setting off with other house property is allowed to be
set off out of other heads of income.
If still balance, it can be carried forward for 8 succeeding previous years.
10. What is pre construction interest?

Preconstruction period is the period commencing from the date of borrowing of loan (or date of beginning
of construction of the property) and ends on 31st March immediately prior to the date of completion of
the construction/acquisition of the property. For eg: if the construction started on 31/3/2011 and ended
on 31/3/2017, preconstruction period starts on 31/3/2011 and ends on 31//3/2016.
Interest pertaining to pre construction period is allowed as deduction in 5 equal annual installments
commencing from the year in which the house property is acquired.
11. What is net annual value?

From the Gross Annual Value (GAV) deduct Municipal or Building or Local taxes paid by the
owner in the previous year is known as NAV. Here local taxes include service charges like
Sanitation cess, library cess etc.
12. What is the tax treatment of municipal tax?

Municipal authorities or other local authorities may impose tax on properties is known as
municipal tax. Such taxes paid by the owner during the previous year can be deducted from the
gross annual value of the property. Municipal taxes pertaining to the past or future periods can
be deducted if the assessee has actually paid the amount.
1. Briefly explain the types of rental value ?

 Actual rent
Rent which is actually received by the owner from the tenant.
 Real Rental Value
Rent includes cost of common facilities like salary of gardener, watchman etc.
 Municipal Rental Value (MRV)
Rent fixed by local authorities for a building for levying local taxes such as
municipal taxes or building tax.
 Fair Rental Value (FRV)
Fair or notional rent of a property means rent fetched by a similar property in
the same or similar locality. Though two properties might not be exactly similar
still it is an indicator of rent reasonably expected from the property.
For EG:, a property was let out to a friend for a monthly rent of ` 2,000 which
might be let out to another person at the rate of ` 2,500 p.m. In such case, fair
rent of the property shall be ` 2,500 p.m.
 Standard Rental Value (SRV)
Standard rent is the maximum rent, which a person can legally recover from his
tenant under the Rent Control Act prevailing in the State in which the property
is situated. A landlord cannot reasonably expect to receive from a tenant any
amount more than Standard Rent.
 Expected Rental Value (ERV)
For computing ERV, MRV is compared with FRV whichever is higher is selected
which is compared with SRV and whichever is lower is selected is the ERV.
2. State the income from house property exempt from tax?

Income from the following house properties are exempted from tax:
 Any one palace or part thereof of an ex-ruler, provided the same is not let out
[Sec. 10(19A)]. Taxpoint: If the ex-ruler has a house property and the part of
which is self-occupied and remaining let out then only the self occupied part of
the house property shall be exempted.
 House property of a local authority [Sec. 10(20)].
 House property of an approved scientific research association [Sec. 10(21)].
 House property of an educational institution [Sec. 10(23C)].
 House property of a hospital [Sec. 10(23C)].
 House property of a person being resident of Ladakh [Sec. 10(26A)]
 House property of a political party [Sec. 13A]
 House property of a trade union [Sec. 10(24)]
 A farm house [Sec. 10(1)]
 House property held for charitable purpose [Sec. 11]
 House property used for own business or profession [Sec. 22].
3. Briefly explain the computation of income from house property of self occupied house?
Gross Annual Value Nil for any 2 houses
Deduction U/s 23 (Municipal Not allowable

Taxes)
Annual Value Nil
Deduction u/s 24 (standard Not allowable

deduction)
Interest on borrowed capital Maximum Rs 30,000 for loan taken before 1/4/1999 and aslo for, loan taken for the repairing, renewal or recon
Maximum Rs 2,00,000 for loans taken on or after 1/4/1999 to purchase or construct.
When a part of the house is self occupied and the remaining part is let out, annual value of the self occupied part and let out part are separately co
the self occupied part will be nil.
When a house is self occupied for a part of the year and let out for the remaining part, annual value for the whole year is taxable.
Loss from house property upto Rs 2,00,000 shall be set off against any other income during the current year. The loss could not be set off can be ca
years and such carried forward loss can be set off against income from house property only.
4. Briefly explain the deduction from annual value u/s 24?

If an assessee has more than 2 houses as self occupied, 2 houses are considered as self occupied
and all other houses will be assessed as deemed to be let out. In such cases 2 houses having the
highest annual value can be taken as self occupied. In case of house deemed to be let out there is
no maximum limit for interest deductible on borrowed capital.
1. Standard Deduction:
A standard deduction of 30% can be claimed from the annual value of the property.
2. Interest on capital borrowed for the property:
An Assesee can claim deduction for interest on capital borrowed for the purchase, construction,
reconstruction, repairing or renovation of the house property. The deduction shall be subject to
the following conditions:
(a) current years interest:
Deductions can be claimed for the interest on loan for taken for the purchase, construction,
reconstruction, renovation or repairing of the property from the annual value.
(b) preconstruction period interest:
Preconstruction period is the period commencing from the date of borrowing of loan (or date of
beginning of construction of the property) and ends on 31st March immediately prior to the date
of completion of the construction/acquisition of the property. For eg: if the construction started
on 31/3/2011 and ended on 31/3/2017, preconstruction period starts on 31/3/2011 and ends on
31//3/2016.
Interest pertaining to pre construction period is allowed as deduction in 5 equal annual
installments commencing from the year in which the house property is acquired.
5. Mr.Anil has 5 houses let out for residential purposes as follows:(amount in lakhs). Determine NAV
in each case:
H1 H2 H3 H4
MRV 105 105 105 105
FRV 107 107 107 107
SRV - 88 88 135
Actual rent 102 110 85 112

received
Municipal taxes 2 3 4 3
paid
SOLUTION
GAV – 107, 110, 88, 112, 107
NAV – 105, 107, 84, 109, 105
6. How to compute annual value of let out house property?

Computation of Annual value of Let out HP
1. Compare MRV and FRV which ever is

higher.
2. Which ever is higher compared to SRV

=W.E.L (ERV)
3. Which ever is lower compared to Actual

rent = W.E.H (Gross Annual Rental Value)
4. Annual rent = (Actual Rent – unrealized rent)
7. Compute Annual rental value from the following:

particulars A B C D
MRV 60,000 48,000 36,000 96,000
FRV 75,000 60,000 45,000 1,16,000
Actual Rent 69,000 54,000 40,000 1,20,000
SRV 80,000 72,000 42,000 1,15,000
Computation of Annual Rental value
Particulars A B C
MRV 60,000 48,000 36,000
FRV 75,000 60,000 45,000
W.E.H 75,000 60,000 45,000
SRV 80,000 72,000 42,000
W.E.L 75,000 60,000 42,000
ARV 69,000 54,000 40,000
W.E.H (ERV) 75,000 60,000 42,000

1. The particulars of a residential house are given below for the assessment year 2020-21:
MRV = 44,000
FRV = 48,000
SRV = 36,000
Actual rent = 37,200
Municipal taxes paid = 8,800
Ground rent payable = 60
Interest on money borrowed for construction = 5,000
Collection charges actually paid = 300
The assessee mortgaged the property for Rs 36,000 which was spent on his daughters marriage.
The assessee paid interest of Rs 3,000 on mortgage loan this year. Compute his income from
house property.
SOLUTION
• GAV = 37,200
• NAV = 28,400
• Income from House property = 14,880
2. Mr. Ganesh has a house property let out for a monthly rent of Rs 9,000. the municipal
valuation of the house is Rs 8,500 pm, which is rent payable under the Rent Control Act. The
FRV of the house is Rs 10,000 pm. The assessee has paid 5% of municipal valuation as local
taxes and 5% as education and health cess. The construction of the property started on 1st
October 2014 and completed in February 2018. He had borrowed Rs 5,00,000 @ 10% for the
construction of the house on which he had paid interest upto 31/3/2017 and Rs 50,000 as
interest during the previous year.
Fire insurance premium paid for the house is Rs 2,000. he could not realise one month rent.
Compute income from house property.
Income from house property of Mr. Ganesh for the year 2019-20.
GAV 99,000
Less Municipal taxes paid (5% +5% = 10%) 10,200 10,200

( 1,02,000 X 10%)
NAV 88,800
Less Standard Deduction @ 30% 26,640 1,01,640

Interest on loan : Current year interest 50,000
Preconstruction period (1/5) 25,000
Loss from house property (12,840)
Working note:
1. Pre construction period from 1/10/2014 to 31/3/2017
Pre construction period interest = 5,00,000 x 10% x 30/12 = 1,25,000
2. Municipal taxes are levied on the basis of municipal valuation.
3. Fire insurance premium is not deductible.
4. Education and health cess can be deducted as municipal taxes.
3. From the following information compute the Income from House property of Ms. Hima for the year
2019-20.
The house has two floors, one is let out and the other is self occupied. The let out portion fetches a
monthly income of Rs 10,000. Municipal value of the house is Rs 2,00,000 while the Standard rent is
Rs 2,50,000. The Fair Rental value is Rs 2,20,000. Municipal taxes paid during the year Rs 10,000.
Interest due on loan taken for the construction of the house was Rs 80,000 during the year. Loan was
taken in 2014.
Computation of Income from House property for the year 2019-20
• Let out portion
• GAV = 1,20,000
• Less Municipal taxes paid (half) = 5,000
• NAV = 1,15,000
• Less Standard deduction(30% of NAV) =34,500
• Interest on Loan (half) = 40,000
• Self Occupied Portion
• NAV = NIL
• Less Interest on Loan (half) = 40,000
• Loss from House property = (40,000)
• Net Income from House property
• 40,500 – 40,000 = 500
4. Determine the income from house property in the following case for the year 2019-20. 2/3rd portion
of the house is self occupied and 1/3rd is let out for Rs 10,000 pm. The let out portion remained
vacant for 3 months. Further the tenant did not pay one month rent but he is still residing in the
house. Municipal tax Rs 3,000 was paid during the year which is 1% of municipal valuation. Interest
on loan taken in 2013 for construction of the house Rs 1,20,000 was due but not paid till 31/3/2020.
Computation of Income from house property (PY 2019-20)
• Let out portion:
• GAV (1,20,000 – 30,000) = 90,000
• Less municipal tax (1/3 x 3,000) = 1,000
• NAV = 89,000
• Less standard deduction(30%) = 26,700
• Interest on loan (1/3 x 1,20,000) = 40,000
• Self occupied:
• NAV = NIL
• Less standard deduction = NIL
• Interest on loan (2/3 x 1,20,000) = 80,000
• Loss from house property = (80,000)
• Total loss from house property
• 80,000 – 22,300 = 57,700
• Points to remember
• 1. unrealised rent cannot be deducted when the tenant is residing in the house.
MODULE 5
PROFITS AND GAINS FROM BUSINESS OR PROFESSION
• Income of every assessee from own business or profession is assessed under the head profits
and gains from business or profession.
Sec 28 to 44 of the Income Tax Act relate to the provisions under this head
Questions and answers (2 Marks)
1. Meaning of the term Business sec 2(13):

It includes any trade, commerce or concern in the nature of trade, commerce or
manufacture. For tax purpose business includes any venture with the aim of making profits.
2. Define Profession sec 2 (36):

It means those activities for which specialized knowledge, academic qualification and
intellectual or manual skill are required. For eg: Doctor, Lawyer, Architect etc. Income from
professions as well as from vocations are assessed under this head.
Vocation includes all those activities performed to earn livelihood like self employment
ventures, dancing, music, painting, brokerage etc.
3. What is Block of Assets?

Block of assets:
A group of assets having same nature and the same rate of depreciation.
Assets are classified in to 2 groups:
(a) Tangible assets including building, machinery, plant or furniture.
(b) Intangible assets including technical know how, patents, copyrights, trademarks etc.
4. What is Key man insurance policy?
 It is policy taken on the life of one person on another person in whose organisation the
person plays a key role. Its tax treatment is as follows:
(a) If it is received by the organisation it is taxable under the head profits and gains from
business or profession.
(b) If it is received by the employee, it is taxable under the head income from salaries.
© if it is received by any other person, it is taxable under the head income from other source.
5.What are the two Methods of Depreciation under IT Act?
 Straight line method:

This method of depreciation is followed by undertakings engaged in generation and
distribution of power.
 Written down value method:
In all other cases WDV method of depreciation is followed.
5. What is Unabsorbed depreciation?

If the assessee doesnot have sufficient profits during the previous year to charge the
depreciation fully the balance of depreciation which couldnot be written off is known as
unabsorbed depreciation.
When the total depreciation is more than available profits, the excess is called unabsorbed
depreciation.
It can be set off with any other heads of income other than income from salary.
If still there is unabsorbed depreciation, it can be carried forward till it is fully adjusted in
succeeding years profits.
6. Mr. Sreekumar gives you the following details of his income

Financial year 2019-2020 2020-21
Income from salary 5,00,000 10,00,000
Business profit 80,000 90,000
Depreciation current year 6,70,000 6,60,000
Income from other sources 50,000 4,00,000
Compute taxable income of Mr sreekumar for the assessment year 2020-21 and 2021-22.
Computation of taxable income AY 2020-21
• Income from salary 5,00,000
• Income from Business: 80,000
• Less depreciation current year 6,70,000
• Unabsorbed depreciation (-5,90,000)
• Income from other sources: 50,000
• Less unabsorbed depreciation 50,000
• Taxable income 5,00,000
• Unabsorbed depreciation carried forward
5,90,000 – 50,000 = 5,40,000
7. What is Terminal depreciation?

If depreciation is charged under SLM and the asset is sold at a loss (sales value is less than
WDV) is known as terminal depreciation. (state the meaning of depreciation also).
8. What is Balancing charge?

If any asset is sold more than its WDV is known as balancing charge.
Questions and answers (5 Marks)
1. What are the provisions chargeable u/s28?

 profits and gains of business or profession carried on by the assessee during the
previous year.
 Any compensation due to or received by any person on termination of his
management or modification of terms and conditions thereto.
 income of a trade, professional or similar association.
 profit on sale of import or export license granted to the assessee.
 cash assistance from government for export ie export subsidy.
 Any Duty of Customs or Excise repaid or drawback as per the Customs and Central
Excise Duties Draw back Rules 1971.
 value of any benefit or perquisite received by a businessman or professional. For
eg: gift received by an advocate from client or presents received by a doctor from
his patient etc are taxable as professional income.
 salary, bonus, interest, commission or remuneration received by a partner under a
partnership.
 income from speculation business. trading a financial instrument .
 profit from illegal business.
 Any sum received under a key man insurance policy.
2. What are the steps to compute depreciation allowance?

 Take WDV as on 1/4/2019 of all those assets have the same rate of depreciation
within the same group ie block of assets.
 Add any additions made to the block of assets during the previous year.
 Deduct the sale value of assets sold or value of asset destroyed, discarded or
demolished during the previous year.
 Balance will be the WDV of block of assets on 31/3/2020.
 On the balance amount, allow depreciation on those assets which were used for a
period of less than 180 days at half of the rate applicable for the block and allow full
depreciation on the balance of assets which were used for the whole year.
 Additional depreciation to be charged :
 In case of new plant and machinery installed or acquired an additional depreciation
of 20% of the actual cost of plant and machinery is allowed, if assessee is engaged in
the manufacturing of any goods and the asset is used for more than 180 days. 10%
is allowed if the asset is used for less than 180 days .
3. Compute depreciation for the year 2019-20
WDV of factory building on 1/4/2019 Rs 1,00,000.
New buildings added on 30/6/2019 Rs 2,00,000.
Amount realized on building demolished Rs 50,000.
Rate of depreciation 10%
Computation of depreciation
• WDV of factory building = 1,00,000
• + new buildings on 30/6/2019 = 2,00,000
• - Amount realized on build. Demolished = 50,000
• WDV of building on 31/3/2020 = 2,50,000
• Depreciation at 10% on 2,50,000 = 25,000
4. Compute depreciation and WDV of plant and machinery as on 1/4/2020
WDV of plant and machinery as on 1/4/2019 Rs 6,00,000
Cost of additional purchase of plant and machinery on 1/7/2019 Rs 1,00,000
(eligible for additional depreciation)
Cost of additional purchase of Plant and machinery on 1/1/2020 Rs 2,00,000
(eligible for additional depreciation)
Sale of a part of plant on 1/7/2019 Rs 1,00,000
Rate of depreciation 15%
Computation of depreciation and WDV
• WDV of plant and machinery on 1/4/2019 = 6,00,000
• + cost of additional purchase on 1/7/2019 =1,00,000
• + purchase of plant on 1/1/2020 = 2,00,000
• - Amount realized on sale of plant = 1,00,000
• WDV of Plant and machinery on 31/3/2020 = 8,00,000
• Less plant purchase on 1/1/2020(less than 180 days) = 2,00,000
• = 6,00,000
• Depreciation on 6,00,000 @ 15% for full year = 90,000
• Depreciation on 2,00,000 @ 15% for half year = 15,000
• Additional depreciation @ 20% on 1,00,000 = 20,000
• Additional depreciation @ 10% on 2,00,000 = 20,000
• Total depreciation = 1,45,000
• Less total depreciation = 1,45,000
5. State the incomes exempted under the head income from business or profession?
Exempted income:
 interest on post office savings bank a/c.
 Agricultural receipt.
 Gifts from relative.
 income tax refund.
 bad debts recovered – disallowed earlier
 withdrawal from PPF.
 Amount received from life insurance premium.
 Dividend received from an Indian company.
 Interest on debentures, Govt.Bonds.
 profit on sale of investment.
 undervaluation of opening stock

6. State the expenses disallowed under the head income from business or profession?
 All provisions and reserves such as provision for bad debts, provision for income tax,
transfer to reserve etc.
 all taxes such as income tax, advance tax, wealth tax, etc. except sales tax, excise
duty etc.
 life insurance premium of partners or assesse.
 contribution to political parties.
 All capital expenses except expenses on scientific research.
 All capital losses.
 legal expenses of the owner of business.
 legal expenses on acquiring an asset.
 expenses on illegal business.
 Loss by theft at home.
 All charities and donations.
 Gifts made on the occasion of marriage of family members of friends.
 Expenses relating to other heads of income like tax on house property.
 Drawing, interest on capital , life insurance premium etc.
 Any fine or penalty.
 Past losses charged to profit and loss account.
 Speculation loss.
 Employer’s contribution to URPF.
 Rent for residential portion
 undervaluation of closing stock
7. How will you treat expenditure on scientific research?
The following are the expenses on scientific research:
 All revenue expenditure incurred by the assessee relating to assesses own
field of business during the PY.
 Any capital or revenue expenditure incurred during a period of 3 years prior
to the commencement of business.
 All capital expenditure incurred during the py.
 Unabsorbed capital expenditure of the previous years.
 Any amount given to any institution engaged in scientific research or social
science or statistical research – 125% of sum paid.
 Any amount given to any university or research association or national
laboratory – 200% of the actual expenditure.
 Any amount spent by a company in house research approved by authority –
200% of actual expenditure.
1. Dr. Rajan is a medical practitioner. He gives you the following summary of cash book for
the PY 2019-20.
Receipts & Payment for the year ended 31/3/2020:
Opening balance 1,00,000 Rent of clinic 1,80,000
Consultation fee 6,00,000 Purchase of medicine 3,80,000
Visiting fees 4,50,000 Staff salaries 2,80,000
Gifts and presents 80,000 Surgical equipment 4,00,000
Sale of medicine 4,20,000 Motor car expenses 80,000
Dividend from UTI 60,000 Purchase of car 10,00,000
Insurance maturity 10,00,000 Household expenses 70,000

sum
Dividend on shares 60,000 Closing balance 3,80,000
Other information:
1. 50% of the motor car expenses are incurred in connection with profession. The car was purchased in December 201
2. Household expenses include Rs 6,800 insurance premium.
3. Gifts and presents include Rs 30,000 from relatives.
4. Closing stock for medicine Rs 1,20,000, opening stock on 1/4/2019 was Rs 40,000.
5. Depreciation of car and surgical equipment at 15%.
6. Compute his taxable income from profession.
Computation of Income from Profession for the AY 2020-21
Professional receipts:
Consultation fee 6,00,000
Visiting fees 4,50,000
Gifts and presents(80,000 -30,000) 50,000
Sale of medicine 4,20,000
Less Expenses related to profession:

Medicines used (opening stock +purchases –closing 3,00,000
stock) 40,000+3,80,000 – 1,20,000
Rent of clinic 1,80,000
Staff salaries 2,80,000
Depreciation on surgical equipment(4,00,000 x15%) 60,000
Depreciation on car(10,00,000 x15% x50%) for half year 37,500
Motor car expenses (80,000 x50%) 40,000
Income from profession 6,22,500
Points to remember:
1. Gifts received by professionals from client is taxable.
2. Car used for less than 180 days, hence half depreciation.
3. P&L a/c of a trader shows net profit of Rs 38,00,000 after debiting the following items. Find out income
from business for the Assessment year 2020-21:
1. payment of income tax Rs 7,00,000 and income tax proceedings expenses Rs 1,00,000.
2. interest on loan taken for payment of income tax Rs 50,000.
3. customs duty Rs 10,000 and interest Rs 4,000 of GST.
4. cash payment to a creditor Rs 12,000.
5. municipal tax Rs 18,000. 1/3rd portion of the house is used for business and half portion is used for self
residence and remaining portion is let out.
6. Income Rs 75,000 accrued during the year is not recorded in P&L a/c.
During the year old bad debts Rs 30,000 were recovered out of wgich Rs 10,000 were disallowed by
Income Tax officer at the time of earlier assessment.
Interest on bank deposit Rs 50,000 and profit on sale of a business vehicle Rs 80,000 and rent Rs 60,000
have been credited to P&L a/c.
COMPUTATION OF INCOME FROM BUSINESSFOR THE AY 2020-21
Net profit 38,00,000
Add items disallowed:

Income tax 7,00,000
Interest on loan 50,000
cash payment(above Rs 10,000) 12,000
Municipal tax(2/3 of 18,000) 12,000
unrecorded income 75,000
Bad debts recovered(allowed earlier) 20,000
Less incomes not taxable under business :

interest on deposit (income from other source) 50,000
profit on sale of vehicle(capital gain) 80,000
Rent(income from house property) 60,000
Income from business 44,79,000
• 4. From the following P&L a/c of Mrs Divya ascertain taxable profit:
Salaries 14,800 Gross profit 1,25,000
General expenses 12,550 Miscellaneous receipt 2,000
Bad debts reserve 3,000 Commission earned 4,000
Income tax 1,500 Interest on govt.securities 3,000
Gifts and presents 2,000 Dividend from Indian company 10,000
Life insurance premium 1,300
Fire insurance 1,000

premium(shop)
Commission paid 15,000
Audit fee 2,750
Interest on capital 4,500
Discount allowed 6,000
Trade expenses 24,500
Net profit 55,100
Depreciation allowance eligible to the business is Rs 6,500.

General expense include Rs 4,000 being the cost of a table purchased for domestic use.
Commission paid in cash.
COMPUTATION OF INCOME FROM BUSINESS FOR THE AY 2020-21
Net profits as per P&L a/c 55,100

Add expenses disallowed:
Bad debts reserve 3,000
Income tax(personal expenses) 1,500
Gifts and presents 2,000
Life insurance premium(personal expenses) 1,300
commission paid in cash 15,000
Interest on capital 4,500
General expense (cost of table) 4,000
Less incomes not taxable under business:

Depreciation not charged to p&l a/c 6,500
Interest on govt securities (income from other sources) 3,000
Dividend from an Indian company 10,000
Income from Business 66,900
Points to remember:
1. Gifts and presents are allowable only if spent as a part of advertisement expenditure.
2. Payment in cash exceeding Rs 10,000 is fully taxable.
3. Dividend from an Indian company is exempted.
THANK YOU

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INCOME TAX – 1

QUESTION AND ANSWERS MODULE WISE

Question and Answers (2 Marks)

There are two types of taxes:

3. Define the term Income sec 2(24).

4. What is Diversion of income?

5. What is application of income?

7. What is Total Income or taxable income?

8. What is casual income?

9. Define the term Assessment Year sec 2(9).

10. Define the term Previous year sec 3.

11. Define the term Assessee.

12. What is return of income?

13. What is surcharge?

Total Income Tax Rates

Rs 50 Lakhs to Rs 1 Crore 10% of Income tax

Rs 1 Crore to Rs 2 Crore 15% of Income tax

Rs 2 Crore to Rs 5 Crore 25% of Income tax

Above Rs 5 Crore 37% of income tax

14. What is Average Rate of Income Tax?

15. What is MMR?

16. Define the term person sec 2(31).

17. What is Agricultural income?

18. What are the test to determine Agriculture income?

1. Income is derived from land

2. The land must be used for agriculture purpose.

3. The land must be situated in India.

19. What is Partly Agricultural income?

2. for coffee, 75% agriculture income and 25% business income.

3. for rubber 65% agriculture income and 35% business income.

20. What is clubbing of agricultural income with non agricultural income?

The agricultural income is exempt from tax.

21. Distinguish between Finance Act and Finance Bill?

22. What is CBDT?

23. Distinguish between Capital loss and revenue loss.

Loss sustained due to embezzlement done by an employee is a revenue loss.

Question and Answers (5 Marks)

25. Explain the features of income.

26. Explain the undisclosed income of the previous year.

27. Distinguish between capital receipts and revenue receipts.

(ii)Termination of source of income:

(iii) Receipt in substitution of income:

(iv) Compensation on surrender of a right:

Any amount received as compensation on surrendering a right is called capital receipt

Total Income Tax Rate

Upto Rs 2,50,000 Nil

Rs 5,00,000 to Rs 10,00,000 20%

Above Rs 10,00,000 30%

Total income Tax rate

Upto Rs 3,00,000 Nil

Total income Tax rates

Upto Rs 5,00,000 Nil

Above Rs 10,00,000 30%

Previous Year 1/4/2019 – 31/3/2020

Assessment Year 1/4/2020 – 31/3/2021

Question and Answers (2 Marks)

3. When does an individual become Resident but Not Ordinarily Resident?

4.When a HUF becomes non resident?

4. How to determine the residential status of a Company?

Non resident company

5. How to determine the residential status of HUF?

(ii) Not ordinarily resident:

6. How to determine the residential status of a Firm?

7. Residential status of an Individual