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Finance
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1 Introduction to Taxation 1
2 Residential Status 33
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4 IM Income from House Property 81
Taxat i o n – D ir e ct a nd In d ir e c t
c u r r i c u l u m
Introduction to Taxation: Meaning and Nature of Taxes: Vital Attributes of Taxes; Objectives
of Taxation; Tax Structure; Tax Planning, Avoidance and Evasion; Types of Taxes; Direct Tax;
Indirect Tax; Terms Related to Income Tax (Sections 2 and 3); Heads of Income; Income Tax Rates
and Slabs; Concept of Tax Deducted at Source (TDS); Obligations of a Tax Deductor; Implications
of Not Following TDS Provisions.
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Deemed to be Received in India (Section 7); Income Deemed to Accrue or Arise in India (Section 9).
Income from Salaries: Basis of Charge; What is Salary?; Definition of Salary under Section 17(1)
of the Income Tax Act, 1961; Types of Emoluments/Perquisites; Gratuity; Commutation of Pension;
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Leave Encashment; Retrenchment Compensation; Keyman Insurance Policy; Value of Leave
Travel Concession; Valuation in Respect of Unfurnished Rent-Free Accommodation; Provisions
of Educational Facilities for an Employee’s Family; Interest-Free Loan and Loan at Concessional
Rate of Interest; Profits in Lieu of Salary; Medical Facilities Treated as Perquisites; Perquisites for
Motor Cars; Deductions from Salary; Tax Treatment on Provident Funds; Computation of Income
from Salaries.
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Income from House Property: Chargeability of Income from House Property; Basis of Charge
(Section 22); House Property not Chargeable to Tax; Deemed Ownership (Section 27); Annual Value
of House Property (Section 23); Deductions from House Property (Section 24); Special Provisions of
House Property; Recovery of Arrears of Rent and Unrealised Rent (Section 25A); Property Owned
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Profits and Gains of Business or Profession: General Principles of Business and Profession;
Profits and Gains of Business or Profession (Section 28); Computation of Income from Profits and
Gains of Business or Profession (Section 29); Deductions Expressly Allowable under Section 30-
43D; Deduction for Rent, Rates, Repairs and Insurance of Building (Section 30); Deduction for
Repairs and Insurance of Machinery, Plant and Furniture (Section 31); Deduction for Depreciation
including the Concept of Block of Assets (Section 32); Expenditure on Scientific Research (Section
35); Other Deductions under Section 36(1); General Expenditure for the Purpose of Business or
Profession (Section 37); Amounts not Deductible under Section 40; Section 40A, Section 40A(2),
Section 40A(3) and Section 43B.
Income from Capital Gains: Basis of Charge; Capital Asset under Section 2(14); Capital Assets
and its Types; Short-term Assets and Long-term Assets; Period of Holding; Capital Gains (Section
45); Transfer as Defined under Section 2(47); Computation of Capital Gain (Sections 48 and 50);
Full Value of Consideration; Cost of Acquisition; Cost of Transfer; Cost of Improvement; Capital
Gain on Transfer of Securities; Capital Gain on Transfer of Capital Assets (Other Than Securities);
Indexation; Cost of Inflation Index; Short-Term Capital Gain; Long-Term Capital Gain; Exemptions/
Deductions under Capital Gains (under Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA); Deemed Full Value
Consideration (DFVC): Special Cases.
Income from Other Sources: Incomes Chargeable Under this Head (Section 56); Deductions Allowable
(Section 57); Deductions Not Allowable (Section 58); Deemed Income Chargeable to Tax (Section 59).
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of Health Insurance Premia (Section 80D); Deduction in Respect of Maintenance Including Medical
Treatment of a Dependant Who is a Person with Disability (Section 80DD); Deduction in Respect of
Loan Taken for Higher Education (Section 80E); Deduction in Respect of Interest on Deposits in Savings
Account (Section 80TTA) and Deduction in Respect of Interest on Deposits in Case of Senior Citizens
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(Section 80TTB); Deduction in the Case of a Person with Disability (Section 80U).
Exemptions & Rebates: Incomes not included in Total Income (Exemptions under Section 10);
Agricultural Income [Section 10(1)]; Receipts from HUF [Section 10(2)]; Partners Share in the Income
of the Firm [Section 10(2A)]; Income Earned by Non-Resident from NTRO [Section 10(6D)]; Payment
from Provident Fund [Section 10(11)]; House Rent Allowance [Section 10(13A)]; Scholarship [Section
10(16)]; Clubbed Income of a Minor Child [Section 10(32)]; Rebates and Reliefs.
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Set-off and Carry Forward of Losses: Clubbing of Income; Income of Other Persons Included in
Assessee’s Total Income; Concept of Set-off and Carry Forward of Losses; Inter Source Adjustment
of Losses; Inter Head Adjustment of Losses and Set-off of Brought Forward Losses; Summarised
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Indirect Taxation – Goods and Services Tax: Introduction to GST; Importance of GST; Features and
Benefits of GST; Evolution of GST Goods and Service Tax Network; GST Rates in India; Levy and
Collection of GST (Charging Section); Exemption from GST; Supply of Goods; Input Tax Credit (ITC);
Transfer of Input Tax Credit; Payment of Tax; Reverse Charge and Returns; Offences and Penalties;
E-way Bill.
Introduction to Taxation
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Contents
1.1 Introduction
1.2 Meaning and Nature of Taxes
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1.2.1 Vital Attributes of Taxes
1.2.2 Objectives of Taxation
1.2.3 Tax Structure
1.2.4 Tax Planning, Avoidance and Evasion
Self Assessment Questions
Activity
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Contents
1.8 Summary
1.9 Descriptive Questions
1.10 Answers and Hints
1.11 Suggested Readings & References
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Introductory Caselet
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The term ‘Assessment Year’ has been defined under Section 2(9)
Case Objective
of the Income Tax Act, 1961. This term refers to a period of 12
months commencing from 1st April every year. The income is This Caselet discusses
earned in the previous year and the same is put to taxation by the the provisions relevant for
determining ‘previous year’ for
Income Tax Department in the immediately following year which
income tax purposes.
is called the assessment year. For example, income earned during
the previous year 2022-2023 is assessable to tax in the Assessment
Year 2023-2024.
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Tax Act, 1961. It refers to the financial year immediately preceding
the assessment year. The income which is earned by an assessee
during the previous year is made taxable in the assessment year.
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The Act specifies that in cases of newly set up businesses or
professions, which is put to place during the part of the financial
year, the previous year shall be the period that commences from
the date of the set-up of such businesses or professions and ends
on 31st March of the said financial year.
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learning objectives
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>> Describe the concept of Tax Deducted at Source (TDS)
1.1 INTRODUCTION
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A country is governed by its government. The government is
responsible for maintaining law and order in the country and ensuring
that all its citizens are able to attain basic minimum standard of living.
In all countries, there exists a disparity of income among the rich and
the poor; however, the degree of this disparity may vary. In a country
like India, this disparity is widespread. It is the duty and obligation of
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Taxation is a legal system for assessing and collecting taxes. Under the
taxation system, the government makes it mandatory for all individuals
and corporates earning over and above a particular amount to pay a
part of their income as income tax. The rates at which the income of
an individual and corporate is taxed are set by the Ministry of Finance
and are revised from time to time.
This book will make you aware of the taxation system in India. In
India, various kinds of taxes are levied and collected by different
entities, such as the central government, state government and
various local bodies, such as municipality. Article 265 of the Indian
Constitution, which states that ‘no tax can be collected or levied on
any individual or firm except by the authority of law’, grants the
right to levy taxes exclusively to the government. It means that the
government cannot impose any tax unless it is passed as a law.
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government, state governments and local municipal bodies are
allowed to levy and collect taxes as per Article 256 of the Constitution.
You might have heard about various types of financial charges (taxes
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and cesses), such as sales tax, income tax, Value Added Tax (VAT),
excise duty, customs duty and cess. All these types of taxes can be
classified into two major categories: direct tax and indirect tax. A few
of them are non-existent as they have been subsumed under the newly
introduced Goods and Services Tax (GST).
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1.2.2 Objectives of Taxation
As stated earlier, taxes are an instrument of social and economic
policies in the hands of the government. Other important objectives of
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taxation are as follows:
Revenue generation (Social objective)
Preventing the concentration of wealth in a few hands (Equality
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Redistribution of wealth (Redistribution objective)
Providing boost to the economy (Economic growth objective)
Reducing unemployment (Employment objective)
Eliminating regional disparities (Regional equality objective)
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Income Tax
Direct Tax
Wealth Tax (Now
Excise
Abolished)
Customs
Indirect Tax
VAT/Sales/CST
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Income Tax
Direct Tax
Wealth Tax (Now
Abolished)
New Tax Structure CGST (Central)
Intra-state
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Figure 1.3: New Tax Structure of India
CBDT frames rules which, in turn, prescribe forms, procedures A notification or circular
and principles of valuation of perquisites under the Act. issued by CBDT is also called a
Subordinate Legislation.
Section 119 of the IT Act prescribes that CBDT can issue circulars
and notifications from time to time.
The terms ‘tax planning’, ‘tax avoidance’ and ‘tax evasion’, all are
methods of reducing the tax liability of a person or a corporate body
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loopholes present in the tax law without breaking any law or doing
anything illegal. This is done for reducing an assessee’s overall tax
liability.
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Tax Evasion refers to the use of any illegal methods that lead to the
reduction of tax liability of an assessee. Tax evasion is achieved using
dishonest means, such as concealing income, claiming excessive
expenditures and forged accounts.
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As you have studied earlier, the tax system of India is primarily a three-
tier system that includes the central government, state governments
and some local government bodies. The central government levies
income tax, Central GST (CGST) and customs duty. The state
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governments have the right to levy taxes, such as State GST (SGST).
tax, corporate tax, etc. Direct taxes are overseen by the Central Board
of Direct Taxes (CBDT). The CBDT was formed in accordance with
the Central Board of Revenue Act, 1924. The CBDT is headed by a
chairman along with six other members. The chairman acts as the
special secretary to the Government of India.
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1.3.2 Indirect Tax
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revenue since majority of
the goods and services are
meet the requirements of international markets.
subjected to indirect tax.
Till the F.Y. 2016-17, and for the first quarter of F.Y. 2017-18, India had
in place a host of indirect taxes, such as sales tax, service tax, Central
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Excise Duty, Additional Excise Duties, the Excise Duty levied under
the Medicinal and Toilet Preparations Act, Additional Customs Duty or
the Countervailing Duty (CVD), Special Additional Duty of Customs –
(SAD), Surcharges, Cesses, VAT/Sales tax, Entertainment tax (unless
it is levied by the local bodies), Luxury tax, Taxes on lottery, betting
and gambling, state cesses, surcharges related to supply of goods and
services, and Entry tax.
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The Government of India rolled out the Goods and Services Tax (GST)
on July 01, 2017. GST is a tax that subsumed a number of state and
central indirect taxes. The taxes subsumed under GST are as follows:
Central excise duty
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Taxes on advertisements
Purchase tax
Taxes on lotteries, betting and gambling
State surcharges and cesses so far as they relate to supply of goods
and services
India has adopted a dual model of GST under which the GST is levied
and collected by both the Centre and the State. Prior to the introduction
of GST, the Centre was responsible for taxing the manufacturing
of goods, whereas the State was responsible for taxing the sales of
goods. With respect to services, only the Centre had the authority
to levy Service Tax. If GST was to be introduced, this segregation of
power would have become a roadblock. Therefore, an amendment was
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made to the Constitution Act, 2016 in order to allow both the Centre
and the States to levy and collect this tax. All this was done in order to
smoothly implement GST.
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Exhibit
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taxes as compared to people product and service.
who are earning less. It
means that progressive taxes
take into consideration the
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6. They involve higher They involve lower
administrative costs. It is so administrative costs. It is
because they involve a lot of so because they involve
exemptions. convenient and stable
collections.
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the territory of India
the territorial waters of India including the seabed and subsoil
extending up to 12 nautical miles
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the continental shelf and exclusive economic zone extending up to
200 nautical miles
other maritime zones specified under the Act including the
airspace above its territory and territorial waters
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an individual An Association of Persons
(AOP), a Body of Individuals
a Hindu Undivided Family (HUF) (BOI), a local authority
a company and other artificial judicial
person(s) shall be deemed to
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The term ‘firm’ and ‘partner’ mean the same as defined under the
Indian Partnership Act, 1932. A firm also includes a Limited Liability
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Any institution or body, whether Indian or foreign and whether
incorporated or not, which is declared to be a company by the
special orders of CBDT
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Assessment – Section 2(8)
As income is the main source which is put to tax, the term ‘income’ has
been exhaustively defined in an illustrative manner under the Act. It
majorly includes the following:
Dividend
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Previous Year (PY) – Sections 2(34) and 3
Only one financial year, i.e., 1st April to 31st March is considered as the
previous year for the purpose of the provisions of this Act.
The general rule of taxation states that the income of the assessee
earned in the previous year is charged to tax in the relevant assessment
year. However, there are certain exceptions to this rule. Under these
exemptions, the income of the previous year is assessed to tax in the
same previous year itself.
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with no intention of returning to year to his probable departure date
India from India in the AY
AOP or BOI or other artificial Amount taxable from the expiry of
judicial person established for a the respective previous year to the
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particular purpose and likely to be date of its dissolution in the AY
dissolved in the current AY
Persons appearing to the Assessing Amount taxable from the expiry
Officer as likely to transfer property of the respective previous year
to avoid tax payment in the AY to the date of commencement of
assessment proceedings in the AY
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– Income earned from carrying on of business or profession by
the assessee is taxable under this head.
4. Capital Gains: Sections 45 to 55A – Profits arising to an assessee
from the sale of capital assets is taxable under this head.
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5. Income from Other Sources: Sections 56 to 59 – Incomes which
are not taxable under the above four heads are to be made taxable
under this head. This head is also known as the residuary head
of income.
under all the heads of income is adjusted for set off of the current
year and brought forward losses to arrive at the Gross Total Income
of the assessee. The Gross Total Income is to be further adjusted for
deductions allowable under Chapter VI-A to arrive at the Total Income
of the assessee for putting it subject to tax.
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profession profession are chargeable to tax in the hands of
the assessee. Moreover, deemed business profits
and income from discontinued business are also
subjected to tax under this head. The income is
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method as regularly followed by the assessee.
Capital Gains It includes incomes or gains arising from the
transfer of a capital asset by the assessee. Capital
gains on sale of capital assets are categorised into
short-term capital gains and long-term capital gains
depending upon the period for which the asset was
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1.6 Income Tax Rates and Slabs
Different tax rates have been furnished for several sections of taxpayers
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and for varied sources of income. Individuals, Hindu Undivided Families
(HUFs), Association of Persons (AOP), Body of Individuals (BOI) or
Artificial Juridical Person (AJP) are taxed as per different income
tax rates. However, companies are taxed at a fixed rate barring some
exceptions. Tax rates applicable to two classes of taxpayers, namely
domestic and foreign companies, for Assessment Year 2023-2024 have
also been discussed. Tax rates applicable to all other categories of
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Individuals
Net Income Range Rate of Income-tax
Assessment Year 2023-24
Up to ` 2,50,000 -
` 2,50,000 to ` 5,00,000 5% above ` 2,50,000
` 5,00,000 to ` 10,00,000 20%
Above ` 10,00,000 30%
Senior Citizen
Net Income Range Rate of Income-tax
Assessment Year 2023-2024
Up to ` 3,00,000 -
` 3,00,000 to ` 5,00,000 5%
` 5,00,000 to ` 10,00,000 20%
Above ` 10,00,000 30%
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Assessment Year 2023-2024
Up to ` 2,50,000 -
` 2,50,000 to ` 5,00,000 5%
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Above ` 10,00,000 30%
Add:
a. Surcharge:
Rate of Surcharge
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Add:
Surcharge
For firms, LLPs and local authority, the rate of income tax is 30%
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of total income.
For co-operative societies, the rates of income tax are as explained
in Table 1.5:
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Table 1.5: Rates of Tax for Co-operative
Societies
Total income (in `) Rates of tax (in %)
Up to ` 10,000 10%
From ` 10,001 to ` 20,000 20%
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The above income tax rates are as prescribed by the Finance Act, 2022.
However, in respect of certain types of income, such as long-term capital
gains under Section 112 or 112A, some specific rates are prescribed by
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the Income Tax Act, 1961, as the case may be. These rates are discussed
along with the relevant sections at appropriate places.
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segments, a percentage of the overall payment is withheld by the
source that is making payments. TDS is one of the major sources of
direct taxes, which is paid to the government by the person on whom
it is imposed. The TDS concept is based on the system of ‘Pay As You
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Earn (PAYE)’, which means the government obtains the benefit as
soon as others receive the net payment. The TDS is to be deducted
when the payment is to be made.
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or HUF the amount of which
exceeds ` 50,000 per month
Some of the important terms used in the TDS concept are shown in
Figure 1.4:
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Deductor
Deductee
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TDS Returns
TDS Certificate
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The tax deductor has to fulfil a number of duties, some of which are
as follows:
Obtain TAN: Tax Deduction and Collection Account Number
QUICK TIP (TAN) is an identification number allotted to tax deductors for tax
Any amount of TDS standing deduction or collection on behalf of its nature of business. It is a
to the credit of a payee (i.e. 10-digit alphanumeric number; the first four digits of TAN are a
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recipient of income) is always
adjusted at the time of tax letter of alphabet, followed by five integers and a letter of alphabet.
assessment against his final tax For TDS, as well as TCS, the same TAN is to be used. For obtaining
liability. TAN, the tax deductor is required to apply in Form 49B.
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Identify the nature of payment: The identification of the nature
of payment is equally important because only after doing so, the
rate at which the tax is to be deducted can be identified.
Deduct tax at the prescribed rates: After identifying the nature
of payment, the tax is to be deducted at the prescribed rates under
different heads at the following instances, whichever is earlier:
At the time of payment or receipt of cash.
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Description Period Form No. Due Date
Deduction of tax Annually 16 By 31st May of following F.Y.
from salary when TDS is deducted
Deduction of tax Quarterly 16A Within 15 days of furnishing
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from other than the TDS statement
salary
TCS Quarterly 27D Within 15 days from the due
date of furnishing the TCS
statement
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Tax demand
Penalty
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Interest
Prosecution
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Activity
Using the Internet, find out the cases where TDS is not deducted.
Make a note of the same.
Select any retail outlet and gather information about the nature of
payments on which TDS is applicable and the rate at which TDS is
deducted.
1.8 Summary S
Income tax is a direct tax that is levied by the government of a
country on the personal income of an individual or corporate.
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Under the IT Act, the Income Tax is charged at the rates that
have been fixed for the year as finalised in the Finance Act for the
Assessment Year.
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All those taxes which an assessee can recover from other person(s),
but the liability of payment of which lies with him/her are called
indirect taxes.
Indian GST is based on dual GST model under which both the
centre and the state levy and collect GST.
For the purpose of computation of taxable income under the Act,
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Key Words
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avoidance and tax evasion along with examples.
3. List and explain two major categories of taxes. Also give examples.
4. Define the following terms as per Sections 2 and 3 of the Income
Tax Act, 1961.
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a. Assessee
b. Income
c. Assessment year
d. HUF
e. Company
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f. Firm
g. Previous year
5. Describe major heads of income.
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3. Tax evasion
5. c. Municipal authority
6. True
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8. assessment year
12. d. 30%
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Concept of Tax Deducted at 13. Salaries; Commission
Source (TDS) payments
14. c. 193
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Hints for Descriptive Questions
1. Taxes refer to a kind of financial charge that is imposed on
an individual or a company by the government or any other
recognised local body of a country. Refer to Section 1.2 Meaning
and Nature of Taxes
2. The terms ‘Tax Planning’, ‘Tax Avoidance’ and ‘Tax Evasion’, all
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Suggested Readings
Bhargava, U. (2017). Taxmann’s Income Tax Act as Amended by
Finance Act, 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Mishra, M. (1999). Freedom of Trade and Commerce and Taxation
in India. New Delhi: Mittal Publications.
e-References
Tax Laws & Rules > Acts > Income-tax Act, 1961. (2018).
Incometaxindia.gov.in. Retrieved 16 February 2018, from https://
www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx
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Income Tax Rates: AY 2018-19 (FY 2017-18) - Smart Paisa. (2018).
Smart Paisa. Retrieved 16 February 2018, from http://www.
smartpaisa.in/income-tax-rates-ay-2018-19-fy-2017-18/
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RESIDENTIAL STATUS
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CONTENTS
2.1 Introduction
2.2 Residential Status of Different Kinds of Assessees
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2.2.1 Residential Status of an Individual
2.2.2 Residential Status of HUF
2.2.3 Residential Status of Firm/AOP/BOI/Local Authority/Artificial
Judicial Person
2.2.4 Residential Status of a Company Assessee
Self Assessment Questions
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2.3 Scope of Total Income
Self Assessment Questions
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2.4 Income Deemed to be Received in India (Section 7)
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Introductory Caselet
Section 6 of the Income Tax Act, 1961, specifies the basic and
additional conditions for determining residency of individuals. A
person is a resident in India if he satisfies any one of the following
two basic conditions:
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1. The individual is present in India for 182 days or more during
the relevant previous year, or
2. The individual is present in India for 60 days or more during
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the relevant previous year and for 365 days or more during
the immediately preceding 4 years from the relevant previous
year.
In Bret Lee’s case, the period of stay during the previous year
2022-2023 was 102 days (less than 182). However, his stay in India
for the past 4 years was 408 days.
Introductory Caselet
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The previous year 2015-2016 102 days
Total 714 days
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Since the additional condition of staying in India for 730 days or
more during the past 7 previous years is not satisfied by Brett Lee,
he cannot be regarded as ‘resident and ordinarily resident’.
learning objectives
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2.1 Introduction
Quick Revision In the previous chapter, we discussed the concept of tax. Taxation is
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a legal system for assessing and collecting taxes. Under the taxation
system, the government makes it mandatory for all individuals and
corporates earning over and above a particular amount to pay a part
of their income as income tax. The rates at which the income of an
individual and corporate is taxed are set by the Ministry of Finance
and are revised from time to time.
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All over the world and in India, the chargeability of income tax
depends upon two major factors, namely the scope of income tax and
the residential status of the assessees. There are three basic categories
of assessees for charge of income tax, viz., ordinary resident, not-
ordinary resident and non-resident. Section 6 of the Act contains
conditions that must be tested to determine the residential status of
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various assessees. The tests are based on the physical presence of the
assessees in India during the course of ‘previous year’.
This chapter would also clarify the differences between the concepts
of citizenship and residence. This chapter begins by describing
residency conditions for various types of assessees, viz., individual,
HUF, company and firm/Association of Persons (AOP). The total
income of an assessee and the amount which is subject to tax in India
is determined by making use of concepts, such as Indian income
and foreign income, income received in India, income deemed to
be received in India, income accrued or arisen in India and income
deemed to accrue or arise in India.
For the purposes of income tax, tax payers are classified into following NOTE
categories depending upon their residential status: Section 6 – Residence in India
is organised in the following
Resident in India: This may be further classified into following manner:
categories:
6 (1) – Rules for determining
Resident and Ordinarily Resident (ROR) the residential status of an
individual.
Resident but not Ordinarily Resident (RNOR)
6 (2) – Rules for determining the
Non-resident in India residential status of an HUF.
Figure 2.1 shows different categories of residential status in India on 6 (3) – Rules for determining the
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residential status of a company.
the basis of the type of ‘person’:
6 (4) – Rules for determining the
residential status of every other
Determination person.
of Residential
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Status in India
Non-
Resident Resident Resident
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(NR)
Resident and
Non-
Ordinarily
Resident
Resident
(NR)
(ROR)
Resident but
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Not Ordinarily
Resident
(RNOR)
NOTE
Figure 2.1: Different Categories of Residential Status in India on the In the following cases, Condition
Basis of Type of ‘Person’ B is not applicable, i.e., an
individual shall be treated as
resident only if he satisfies
2.2.1 Residential Status of an Individual Condition A:
Resident: Section 6(1) provides that an individual is said to be resident • I ndian citizen who leaves
India for employment during
in India if he satisfies any one of the following two basic conditions the previous year.
during the previous year:
• I ndian citizen who leaves
Basic Condition A: The individual is in India for minimum India as a crew member of
182 days during the relevant previous year. an Indian ship during the
previous year.
Basic Condition B: The individual is in India for minimum
• I ndian citizen or person of
60 days during the relevant previous year and for minimum 365 Indian origin who, residing
days during 4 years immediately preceding the relevant previous outside India, visits India
year. during the previous year.
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(iii) If such individual is an Indian citizen or person of Indian origin
(who, being outside India, comes on a visit to India in any previous
year) having total income, other than the income from foreign
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sources [i.e., income which accrues or arises outside India (other
than income derived from a business controlled in or profession
set up in India) and which is not deemed to accrue or arise in
India], exceeding ` 15 lakhs during the previous year, who has
been in India for 120 days or more but less than 182 days during
that previous year, or
(iv) If such individual is an Indian citizen who is deemed to be
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some illustrations.
NOTE Illustration 1: Mr. Anand is an Indian citizen and a member of
Income from foreign sources the crew of a Singapore bound Indian ship engaged in carriage of
means income which accrues passengers in international traffic departing from Chennai port on 6th
or arises outside India (except June, 2022. From the following details for the P.Y. 2022-23, determine
income derived from a business
controlled in India or profession
the residential status of Mr. Anand for A.Y. 2023-24, assuming that his
set up in India). stay in India in the last 4 previous years (preceding P.Y. 2022-23) is 400
days:
Particulars Date
Date entered into the Continuous Discharge Certifi- 6 June, 2022
th
Solution: In this case, since Mr. Anand is an Indian citizen and leaving
India during P.Y. 2022-23 as a member of the crew of the Indian ship,
he would be resident in India if he stayed in India for 182 days or more.
Therefore, the period beginning from 6th June, 2022 and ending
on 9th December, 2022, being the dates entered into the Continuous
Discharge Certificate in respect of joining the ship and signing off
from the ship by Mr. Anand, an Indian citizen who is a member of the
crew of the ship, has to be excluded for computing the period of his
stay in India. Accordingly, 187 days [25+31+31+30+31+30+9] have
to be excluded from the period of his stay in India. Consequently, Mr.
Anand’s period of stay in India during the P.Y. 2022-23 would be 178
days [i.e., 365 days – 187 days]. Since his period of stay in India during
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the P.Y. 2022-23 is less than 182 days, he is a non- resident for A.Y.
2023-24.
(c) What would be your answer if Srinath had visited India for 120
days instead of 100 days every year, including P.Y.2022-23?
Solution:
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Mr. Brett Lee has been in India for a period more than 60 days during
previous year 2022-23 and for a period of more than 365 days during
the 4 immediately preceding previous years. Therefore, since he
satisfies one of the basic conditions under section 6(1), he is a resident
for the assessment year 2023-24.
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Total 700 days
Since his period of stay in India during the past 7 previous years is less
than 730 days, he is a not-ordinarily resident during the A.Y. 2023-24.
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(b) If the above facts relate to Mr. Srinath, an Indian citizen, who
residing in Australia, comes on a visit to India, he would be treated
as non-resident in India, irrespective of his total income (excluding
income from foreign sources), since his stay in India in the current
financial year is, in any case, less than 120 days.
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Solution:
During the previous year 2022-23, Mr. B was in India for 70 days and
during the 4 years preceding the previous year 2022-23, he was in
India for 355 days (i.e. 55+ 60+ 90+ 150 days).
Thus, he does not satisfy the basic condition under section 6(1).
Therefore, he is a non-resident for the previous year 2022-23.
A business may be carried out outside India and its control and
management might be situated in India. In other words, the resident
HUF would be considered ordinarily resident if the Karta of the HUF
satisfies the following conditions:
The Karta has been a resident in India for at least 2 out of the
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10 previous years immediately preceding to the relevant previous
year
The Karta has been in India for minimum period of 730 days
during seven previous years immediately preceding the relevant
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previous year
If one or none of the aforesaid conditions are satisfied, then the HUF
is termed as ‘resident but not ordinary resident’.
Exhibit
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is deemed to have arisen in India. Thus, the tax liability on income of
a company depends upon the residential status of the company. The
residency is determined as follows:
Study
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Resident in India: A company would be considered as resident
Hint in India if it is an Indian company or where the place of effective
Place of effective management management of the company during the previous year is in India.
means where the key
Non-resident: A company would be considered as non-resident if
commercial and managerial
decisions, essential for it is not an Indian company and the place of effective management
the conduct of business of of the company during the previous year is also not in India.
the entity as a whole, are
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substantially made. Similarly, a company not satisfying any of the above conditions will
be called a non-resident company. At times, there could be situations
where the same income becomes taxable for the same company in
more than one country. This is called double taxation. The core
reasons for double taxation may be due to a company or a person
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Solution: Since the management and control of Super Mini was partly
in India and partly outside India for the previous year 2022-2023, it
will be considered as non-resident.
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Self Assessment Questions
Activity
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2.3 Scope of Total Income
Section 5 of the Income Tax Act, 1961 provides for provisions related
to scope of income of an assessee based on his or her residential
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status. The distinction between scope of income of assessees arises
only because of income which accrues or arises outside India. In
simple words, for ROR assessees, their global income is taxable in
India. Whereas for non-resident assessees, the income which accrues
or arises outside India is not taxed in India at all. In case of RNOR,
the income which accrues or arises outside India shall be taxed in
India only if it is derived from a business or profession controlled from
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India.
Figure 2.2 describes the scope of total income for different assessees:
Scope of Total
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Income
Income which is
Global income is
received/deemed Income received/deemed
taxable in India.
to be received/accrued to be received/accrued or
or arisen/deemed arisen/deemed to accrue
to accrue or arise in India. or arise in India.
Table 2.2 presents the scope of total income and taxability of different
types of incomes of different assessees:
TABLE 2.2: Scope of Total Income and Taxability
of Different Types of Incomes of Different
Assessees
Nature of Income Resident and Resident but Non-Resi-
Ordinarily Not Ordinari- dent
Resident ly Resident
Income accruing or arising outside India and received in India, i.e.,
Indian income
Income received in India Included Included Included
Income deemed to be Included Included Included
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received in India
Income accruing or arising Included Included Included
in India
Income deemed to accrue Included
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or arise in India
Income accruing or arising outside India and received outside India,
i.e., foreign income
1. From business con- Included Included Excluded
trolled from India or
profession set-up in
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India
2. From a business con- Included Excluded Excluded
trolled outside India or
profession set up outside
India
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Activity
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under Section 5 of the Act.
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b. Transferred balance in a recognised provident fund
c. Dividend income received by an individual
d. The contribution made by the Central Government or any
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other employer in the previous year to the account of an
employee under a pension scheme referred to in Section
80CCD.
Activity
Study of accrual under which the revenues and expenses are recorded
Hint when earned and incurred and not when cash is received or paid.
Income that has been taxed Arisen: An expense or revenue is said to have arisen when it
on accrual basis cannot emerges or becomes apparent.
be charged to tax again on
receipt. It is so because the Income deemed to accrue/arise: It is defined under Section 9 of
same amount cannot be taxed the Act.
twice and, if done, amounts to
double taxation. Section 9 states that certain types of income which may actually
accrue or arise outside India are deemed to accrue or arise in India
for income tax purposes. Various components of income which are
deemed to accrue or arise in India as per Section 9(1) are explained in
Table 2.3:
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Accrue or Arise in India
NOTE
Section Income deemed to accrue or arise in India
For Section 9(1)(i), business
connection means any business Section 9(1)(i) Income accruing or arising outside India,
activity carried out in India
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by a non-resident through his zz any business connection in India
agent; or significant economic
presence of a non-resident in zz any property/asset or source of income in
India. India
zz transfer of capital asset situated in India
Section 9(1)(ii) Salary earned for services rendered in India
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zz Government
zz Person resident in India – Income deemed
to accrue or arise in India except if technical
services are utilised for the purpose of busi-
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ness or profession carried on outside India or
if technical services are utilised for making
income from any source outside India
Illustration 6: Mr. Arun, a citizen of UK, came to India for the first time
in May 2018. During the previous years 2018-2019, 2019-2020, 2020-
2021, and 2021-2022, he was in India for 157 days, 73 days, 184 days and
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Number of days Arun stayed in India in the four years preceding the
previous year = 157 + 73 + 184 + 162 = 576 days.
We can observe that Mr. Arun was in India for a minimum of 60 days
in the relevant previous year and has been in India for more than 365
days during the 4 previous years immediately preceding the relevant
previous year. Therefore, Arun satisfies the second basic condition for
residing in India. Therefore, Arun is a resident of India for the previous
year 2022-2023 and his income would be taxable for Assessment Year
2023-2024.
We need to check the residential status of Arun for the previous years
2021-2022 and 2020-2021.
In 2019-2020, he stayed for 162 days and also stayed in the preceding
4 years for 184+73+157+Nil = 414 days. Here, the second basic
condition is being fulfilled. Therefore, Mr. Arun is resident in India for
the previous year 2020-2021.
In 2020-2021, he stayed for 184 days which is more than 182 days
required for satisfying the first basic condition. Therefore, Mr. Arun is
resident in India for the previous year 2020-2021.
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From the analysis of both the conditions, Arun does not satisfy the
second additional condition. Therefore, Arun is resident, but not
ordinarily resident in India.
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Illustration 8: Following are the particulars of income of Ms. Raksha
for the previous year 2022-2023:
S. No. Particulars Amount (in `)
1. Rent received from a property in Punjab, 90,000
received in Japan
2. Income from a business in Japan controlled 130,000
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from Punjab
3. Income from business in Pune controlled from 190,000
Japan
4. Rent from a property in Japan received there 70,000
but remitted to India
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Compute her income for the Assessment Year 2023-2024 if she is:
i. Resident and ordinarily resident in India (ROR)
ii. Resident but not ordinarily resident in India (RNOR)
iii. Non-resident in India (NR)
Solution: For the given situation, please note that the profit earned
in 2021-2022 is not the income pertaining to the previous year of 2022-
2023. Therefore, it would not be taxable in the Assessment Year 2023-
2024. In addition, gifts received from relatives are not considered
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In the illustration above, note that the tax incidence is the maximum
for an ordinary resident and the least for a non-resident.
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Self Assessment Questions
Activity
2.6 Summary S
Chargeability of income tax depends upon two major factors,
namely the scope of income tax and the residential status of the
assessees.
The tests of residence for determining the residential status of
different persons are described in Section 6 of the Act.
According to Section 6(1), an individual is treated as resident in
India in the given previous year if he satisfies at least one of the
two basic conditions which include:
Basic Condition (A): The individual was in India for a mini-
mum period of 182 days in the relevant previous year.
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Act, Indian companies are taxable in India on their worldwide
income, irrespective of its source and origin. Foreign companies
are taxed only on income which arises from operations carried out
in India or, in certain cases, on income which is deemed to have
IM arisen in India.
An Association of Persons (AOP) is said to be resident in India if the
control and administration of its issues are completely or partially
managed in India. An AOP is said to be non-resident in India if
the control and administration of its undertakings are completely
managed out of India.
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key words
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2.8 Answers and Hints
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Answers for Self Assessment Questions
3. d. 365
4. True
5. a. Indian firm/AOP is
considered as resident and
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the contribution made by the Central Government or any other
employer in the previous year to the account of an employee
under a pension scheme referred to in Section 80CCD. Refer to
Section 2.4 Income Deemed to be Received in India
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5. Incomes deemed to accrue or arise in India in the previous year
under Section 9 of the Act include: Business Income, Professional
Income, House Property Income, Capital Gains, etc. Refer to
Section 2.5 Income Deemed to Accrue or Arise in India
Suggested Readings
Bhargava, U. (2017). Taxmann’s Income Tax Act As Amended by
Finance Act 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
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E-References
Jain, S. (2018). Residential Status and Incidence of Tax on Income
under Income Tax Act, 1961. Indian Tax Updates. Retrieved 8 March
2018, from https://www.indiantaxupdates.com/residential-status-
and-incidence-of-tax-on-income-under-income-tax-act-1961/
Fourth Schedule. (2018). Incometaxindia.gov.in. Retrieved
8 March 2018, from https://www.incometaxindia.gov.in/Acts/
Income-tax%20Act,%201961/1968/102120000002035558.htm#rfn1b
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CONTENTS
3.1 Introduction
3.2 Basis of Charge
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Self Assessment Questions
Activity
3.3 What is Salary?
3.3.1 Definition of Salary under Section 17(1) of the Income Tax Act, 1961
3.3.2 Types of Emoluments/Perquisites
3.3.3 Gratuity
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CONTENTS
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Introductory Caselet
Mr. Baston works with GYT Ltd. and has the following details
for the previous year 2022-2023. His basic salary is ` 10,000 per Case Objective
month. The dearness allowance is ` 7,000 per month, of which This Caselet discusses the
50% is for retirement benefits. The commission earned by him manner of computation of
as a percentage of turnover is 0.1% (turnover during the year gross salary of an individual
being ` 50,00,000). He also gets a bonus of ` 42,000 and gratuity of employee.
` 26,000 during the year. In addition, the contribution made by
him in the RPF was ` 20,000 and his employer’s contribution in
the RPF was 20% of the basic salary. The interest accrued in the
RPF was ` 14,000 @ 14% p.a.
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able from his salary income for the previous year 2022-2023 in
order to assess tax payable on his gross salary under the head of
‘salaries’. A tax advisor of GYT Ltd. computed his gross salary in
the following manner:
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Computation of Gross Salary of Mr. Baston for the Assessment Year
2023-2024:
Bonus - 42,000
Introductory Caselet
From the gross salary, Mr. Baston will also be allowed a standard
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deduction of up to ` 40,000 under Section 16. The balance amount
would become taxable under the head ‘income from salaries’.
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learning objectives
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3.1 INTRODUCTION
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In the previous chapter, you studied about the residential status of Quick Revision
different assessees. In this chapter, you will study various provisions
of Income Tax Act and tax incidences on various components of salary
and other perquisites attained by an employee which are offered by
an employer.
For the purpose of taxation, the term ‘salary’ has been defined under
Section 17(1) of the Income Tax Act, 1961. In addition, important
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subsequently in the year when it gets due or paid, as the case
may be.
IM self assessment Questions
Activity
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allowing for exemptions, taxable
iii. Gratuity gratuity, fees and commission,
pension, leave encashment and
iv. Fees, commission, perquisites, profits in lieu of or in addition to so on.
salary or wages
IM Exemptions to certain
v. Advance of salary allowances and perquisites are
computed to the extent specified
va. Leave encashment by applicable provisions of their
relevant sections under the
vi. Annual accretion to the balance at the credit of an employee Income Tax Act. Taxable salary
participating in a Recognised Provident Fund, i.e., RPF under the head ‘Salaries’ is
employer’s contribution in excess of 12% of salary and interest then computed by subtracting
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3.3.3 GRATUITY
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Any amount of gratuity received at the time of retirement or death of
the employee is taxable to the extent as shown is Table 3.1:
IM Table 3.1: Taxable value of Gratuity
NOTE Category Taxable Value of Gratuity
For Section 10(10)(ii), ‘Salary
means basic salary plus Employee of Central Government Fully exempt
dearness allowance.’ or local authority or member of
Civil Services – Section 10(10)(i)
For Section 10(10)(iii), ‘Salary
means basic salary, dearness Employee covered under the Pay- Least of the following is exempt from
allowance if provided in the terms ment of Gratuity Act, 1972 – Sec- the amount of gratuity received:
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6 months
Employee not covered under the Least of the following is exempt from
Payment of Gratuity Act, 1972 – the amount of gratuity received:
Section 10(10)(iii) zz ` 20 lakhs
zz Gratuity actually received
zz Half month’s salary (based on last
10 months’ average salary imme-
QUICK TIP diately preceding the month of
retirement or death) for each com-
Gratuity received during the
tenure of service is fully taxable. pleted year of service (fraction to
be ignored)
3.3.4 COMMUTATION OF PENSION
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Commuted Pension in zz If the employee is in receipt of gratuity, Know More
case of Non-Government following amount is exempt from the Commuted pension converts
employees amount of commuted pension received: the future right of an employee
1 Commuted pension received to receive pensions into a lump
×
IM × 100% sum amount which is receivable
3 % of commutation immediately.
zz If the employee is not in receipt of gratu-
ity, following amount is exempt from the
amount of commuted pension received:
1 Commuted pension received
× × 100%
2 % of commutation
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3.3.5 LEAVE ENCASHMENT
credit for the given year, but he/she does not utilise some or all of those
leaves, then the leaves may either be:
Lapsed (due to non-use)
Encashed each year
Accumulated and encashed after retirement or death
3.3.6 RETRENCHMENT COMPENSATION
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Retrenchment is defined as forced laying off of employees in order to
cut down the payroll. When an organisation decides to retrench cer-
tain workforce, the workmen are entitled to retrenchment compensa-
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tion at the time of their retrenchment. Retrenchment compensation
is governed by the provisions of the Industrial Disputes Act, 1947. As
per Section 10(10B), the retrenchment compensation shall be exempt
from tax to the extent of minimum of the following limits:
Actual amount received as retrenchment compensation
15 days average pay x completed years of service and part thereof
in excess of 6 months
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Leave Travel Concession (LTC) is one of them. Section 10(5) specifies
the amount of exemption which can be claimed/deducted by employ-
ees from the sums received from employers for travelling to any place
in India. The exemption is available for travel concessions received in
the following cases:
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By employee on leave
By employee after retirement from service
By employee after termination of his service
in Table 3.4:
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which the employee would have to incur charges. Such a perquisite
is received and given in kind. However, it is taxable under the Income
Tax Act, 1961.
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Taxable value of rent-free residential accommodation is computed as
discussed in Table 3.5:
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employer
However, no perquisite shall be taxable in the above cases if the value NOTE
of education facility per child does not exceed ` 1,000 per month. In The exemption of ` 1,000 per
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simple words, if the value of education facility offered by the employer month is allowed only in case of
is more than ` 1,000 per month, then the whole perquisite value is children of an employee and not
subject to tax. any other household member of
the employee.
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The value of medical facility is reimbursed by an employer to
an employee in respect of medical treatment of employee or any
member of his family in a central, state or any local hospital/a pri-
IM vate hospital recommended by the Government.
The value of specified medical facility for prescribed diseases
reimbursed by an employer in respect of medical treatment of an
employee or any member of his family in a hospital approved by
the Chief Commissioner. Value of specified medical facility for pre-
scribed diseases reimbursed by an employer in respect of medical
treatment of an employee or any member of his family in a hospital
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lows:
Small cars with engines below 1.6 litres of capacity will have a per-
quisite value of ` 1,800 a month.
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Cars with an engine above 1.6 litres of capacity will have a per-
quisite value of ` 2,400 a month, if expenses on maintenance and
running are reimbursed by the employer.
Ifa chauffeur is also provided by the employer, ` 900 per month
should be added to the perquisite value.
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total taxable income.
d. All due salaries will be taxed for Assessment Year 2021-
2022
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6. Which of the following is not a perquisite as defined under
Section 17(2) of the Income Tax Act?
a. Accommodation at concessional rent
b. Amount of any contribution to an approved superannua-
tion fund by the employer
c. Gratuity amount
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Activity
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Section 16(ia) – Standard Deduction
Section 16(ii) – Entertainment Allowance
Section 16(iii) – Professional Tax
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These deductions are explained in Table 3.7: Study
Hint
Table 3.7: Deductions from Salary The amount actually spent
under Section 16 by the employee towards
entertainment out of the
Name of Deduction Deductible Amount entertainment allowance
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Standard Deduction A standard deduction of ` 50,000 or amount of received from his employer is
gross salary, whichever is lower, is allowed to the not relevant.
employees.
Entertainment Entertainment allowance received has to be first
Allowance included in gross salary and, thereafter, deduc-
Know More
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Activity
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collecting it.
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Accumulated balance due and becoming payable to an employee par- The meaning of the term ‘salary’
ticipating in a Recognized Provident Fund (RPF) would be exempt for computation of taxable
contribution to Recognised
under section 10(12).
IM Provident Fund is as follows:
However, the exemption under section 10(11) or 10(12) would not be ‘Salary means basic salary,
available in respect of income by way of interest accrued during the dearness allowance if provided
previous year to the extent it relates to the amount or the aggregate in terms of employment
for retirement benefits,
of amounts of contribution made by that person/employee exceeding
and commission as a fixed
`2,50,000 in any previous year in that fund, on or after 1st April, 2021. percentage of turnover.’
Activity
In this section, you will study how income from salaries is calcu-
lated. Income from salary chargeable to tax is calculated as shown in
Table 3.9:
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CHARGEABLE TO TAX
Add: Components of Salary Amount (in `) Amount (in `)
Basic Salary xxx xxx
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+ Dearness Allowance xxx
+ Bonus xxx
+ Commission xxx
+ Arrears of Salary xxx
+ HRA xxx xxx
– Exempted HRA (xxx)
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2023-2024 if you are given the following information:
1. Basic salary received by Om Prakash for 8 months is ` 20,000 and
for the remaining 4 months, it is ` 22,000.
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2. Om Prakash gets Dearness Allowance at the rate of 12% of basic
salary.
3. He also got a bonus amounting to 2.2 times the salary he received
in the last month of the assessment year.
4. His employer makes a contribution towards an RPF at the rate
of 20%.
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12. Which of the following is not a deduction allowable under
Section 16 of the Act?
a. Entertainment tax
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b. Professional tax
c. Standard deduction of ` 20,000
d. None of these
Activity
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S 3.7 SUMMARY
As per Section 15 of the Income Tax Act, 1961, income charge-
able to tax under the head ‘salaries’ includes any salary due to an
employee, any salary paid or allowed to an assessee in the previous
year, and any arrears of salary paid or allowed to the employee in
the previous year.
Salary income becomes chargeable to tax either on ‘due basis’ or
on ‘receipt basis’, whichever is earlier.
Before the income of an assessee is charged under the head ‘sal-
aries’, it must be ensured that there exists an employer-employee
relationship between the receiver and the payer.
Gratuity refers to a payment that is made in appreciation of an
employee’s past services rendered by him/her to the employer. It
can be received either by the employee himself at the time of his
retirement or by the legal heir of the employee in the event of the
death of the employee.
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key words
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viii. Ms. Durga’s mother is dependent on her. Durga’s mother
was admitted in a hospital for a chronic heart condition.
Durga was billed for ` 20,000. This bill was subsequently
reimbursed by her employer.
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3.9 ANSWERS AND HINTS
paid by employer
5. a. Due salary of March 2018 will be
considered in total taxable income.
6. c. Gratuity amount
7. Section 10(10)
8. a. Basic salary + Dearness allowance
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4. In case of a non-government employer, the taxability of
accommodation perquisites depends on two factors. First, the
city in which the accommodation has been provided; second,
whether the accommodation so provided by an employer is
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owned by him/her or it has been taken on lease. Refer to Section
3.3 What is Salary
5. According to Section 16 of the Act, income chargeable under
the head ‘Salaries’ shall be computed after making deductions
against entertainment allowance and professional tax. Refer to
Section 3.4 Deductions from Salary
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Amount Amount
Particulars
(in `) (in `)
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Amount Amount
Particulars
(in `) (in `)
Less: Deduction under Section 16
1. Standard Deduction (40,000)
2. Professional Tax --
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SUGGESTED READINGS
Bhargava, U. (2017). Taxmann’s Income Tax Act As Amended by
IM Finance Act, 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Ahuja, D., & Gupta, D. (2017). Bharat’s Systematic Approach to
Taxation (37th ed.). Delhi: Bharat Law House.
E-REFERENCES
Deductions allowable to tax payer. (2018). Incometaxindia.gov.in.
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cal-Treatment-/-Medical-Reimbursement-Perquisite/category/
Taxability-of-Perquisites/
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Contents
4.1 Introduction
4.2 Chargeability of Income from House Property
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4.2.1 Basis of Charge (Section 22)
4.2.2 House Property not Chargeable to Tax
4.2.3 Deemed Ownership (Section 27)
Self Assessment Questions
Activity
4.3 Annual Value of House Property (Section 23)
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Introductory Caselet
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of ascertainment of income from house property taxable in his
hands. The tax consultant guided him through the provisions
applicable to the calculation.
From the Gross Annual Value (GAV), the municipal taxed paid by
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Thus, the income from house property was calculated by the tax
consultant in the following manner:
Introductory Caselet
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learning objectives
4.1 Introduction
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Quick Revision In the previous chapter, you studied the tax treatment of income
under the head of ‘salaries’. This chapter will introduce you to income
tax laws and tax treatment of income from house property. For every
income tax assessee, it is mandatory that he/she discloses his/her
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incomes from various sources and attribute each income source to
one of the heads of income. Income from house property is one of the
five heads of income.
Income from house property is the only income that is charged on the
notional basis. It means that the incidence of tax depends not only on
the income earned from the property, but also on the inherent poten-
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tial of the property to earn income. Tax has to be paid even in cases
where no income is being earned. Income from House Property has
been described under Sections 22 to 27 of the Income Tax Act, 1961.
Section 22 of the Act relates to chargeability of the income from house
property.
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In this chapter, you will study about Sections 22 to 27 of the Act related
to income from house property.
Mr. Ram has a house. It incorporates a large open area. The house has
been let out at a rent of ` 1,00,000 per month, out of which a lease of
` 25,000 per month is attributable to the open area. In this situation,
the whole rental wage is assessable under the head ‘house property’.
Section 22 of the Income Tax Act 1961, deals with the levying of tax on
house property. As per Section 22 of the Income tax Act, 1961, “Annual Study
value of property consisting of any buildings or lands appurtenant thereto Hint
of which the assessee is the owner other than such portions of such prop- For chargeability of income
erty as he may occupy for the purposes of any business or profession car- from house property, asses-
see must be the owner of
ried on by him the profits of which are chargeable to income tax shall be
the house property. Here,
chargeable to income tax under the head ‘Income from House Property’.” ownership includes deemed
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ownership.
According to this section, land, buildings and the lands that are
attached to buildings are chargeable to tax, provided that such house
property is not used for the purpose of business of the assessee’s own
business, the income of which is chargeable to tax.
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For taxing an income under the head, ‘Income from House Property’,
three conditions must be fulfilled, which are as follows:
1. The property must consist of buildings and lands appurtenant
thereto.
2. The assessee must be the owner of such house property.
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3. The property may be used for any purpose, such as renting NOTE
or letting out, but it should not be used by the owner for the
Lands appurtenant comprise of
purpose of any business or profession carried on by him, the
any pieces land which are con-
profit of which is chargeable to tax. If the property is used for nected with the building, such as
own business or profession, it shall not be chargeable to tax. garage, garden, etc.
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Cases where income from house property is not chargeable to tax
under the head ‘Income From House Property’ include:
House property does not include the empty area within the prop-
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erty; therefore, any income received from such an empty area is
charged either under the head ‘Income from Business or Profes-
sion’ or under the head ‘Income from Other Sources’.
In case of rental income from a vacant plot; however, it can be
charged under profits and gains of business or profession or under
the income from other sources.
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sideration, the transferor shall be the deemed owner. If the house property is acquired
from cash being transferred by
Exception – This section is not applicable where the transfer is the transferee to spouse/minor
made in connection with an agreement to live apart. child, the transferor shall not be
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Transfer to minor child {Section 27(i)}: In case of transfer of ever, clubbing provisions apply in
house property by an individual to his or her minor child for in- such a case.
adequate consideration, the transferor shall be the deemed owner.
Exception – This section is not applicable where the transfer is
made to a minor married daughter.
The holder of an impartible estate {Section 27(ii)}: The holder
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Exhibit
Composite Rent
At times, the house owner rents out the property along with cer-
tain services or facilities, such as lift, A.C., furniture, electricity,
water, etc. The amount received by the owner of the house in such
a case is called composite rent. The composite rent is broken down
into two components, namely income from house rent and income
by way of providing various facilities. The first component is tax-
able under the head ‘Income From House Property’ and the sec-
ond one is taxable under the head ‘Income From Other Sources’.
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Self Assessment Questions
Activity
Look out for at least 4 examples from the real-life situations where
income earned from a property does not come under the gambit of
Sections 22 to 27 of the Income Tax Act, 1961.
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the amount expected to be received by him/her.
Municipal Value (MV): Municipal value refers to the value deter-
mined by local municipal authorities based on which it collects
municipal taxes. NOTE
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Municipal taxes are allowed as
Fair Rent of a Property (FR): Fair rent of a property refers to the a deduction from GAV only when
amount of money that can be expected to be received in a year by they are borne by the assessee
letting a property of similar size in the same locality. (owner) and are actually paid
during the previous year.
Standard Rent (SR): Standard rent refers to the rent that is fixed
under the Rent Control Act, 1958. Under this Act, the maximum
rent has been prescribed for all the localities.
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Step II: Deduct the municipal taxes actually paid by the owner in the
previous year from the gross annual value calculated in Step I.
The net annual value obtained after deducting municipal taxes is con-
sidered to be the annual value of the house property for all purposes
related to the Income Tax Act. The Gross Annual Value (GAV) is deter-
mined by following the steps mentioned in Table 4.2:
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Standard Rent (`) N.A. 16,000 45,000
Actual Rent (`) 24,000 17,000 35,000
* (higher of 4 or 5)
Illustration 2: Mr. Ram owns three house properties in Delhi, the par-
ticulars of which are as under:
Solution: Let us calculate the GAV before deductions for each house
property.
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b. Actual rent received or receivable = 10,000 × 12
= 1,20,000
GAV 1,30,000
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House 2: As the house property is not let out throughout the previous
year, the annual value shall be determined as per clauses (a) and (c) of
Section 23(1) as follows:
GAV 1,40,000
House 3: As the house property is not let out throughout the previous
year, the annual value shall be determined as per clauses (a) and (c) of
Section 23(1) as follows:
Activity
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Take an example to illustrate how the annual value will be deter-
mined in case of a house property that remains vacant for part of
the year.
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DEDUCTIONS FROM ANNUAL VALUE
4.4
(SECTION 24)
For the income chargeable under the head ‘Income from House Prop-
erty’, there are only two deductions, namely:
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lower.
2. Interest on borrowed capital: If an individual takes a (home) loan
for purchasing, construction, repair, renewal or reconstruction of
his/her house property, the interest paid by him/her is allowed as
a deduction from the NAV of the house property. The deduction
for interest is allowed on an accrual basis, i.e., it is immaterial
whether the interest has been actually paid or not during the
assessment year.
in five successive financial years starting from the year in which the Study
acquisition/construction was completed. In addition, interest will be Hint
aggregated from the date of borrowing till the end of the previous year
Any interest payable on a fresh
prior to the previous year in which the house is completed and not till loan raised to repay the origi-
the date of completion of construction. nal loan taken for the purposes
specified under Section 24 is
The deductions allowable from NAV while computing the income also allowed as a deduction.
from house property are explained in Table 4.3:
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B Interest on Under Section Fully allowed without ceiling
borrowed capital 24(b) limit
For self-occupied property, only interest on borrowed capital under
Section 24(b) is allowed as a deduction as below:
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A When the loan is Interest on borrowed capital under Section 24(b)
taken for renewal, maximum up to ` 30,000 p.a.
reconstruction or
repair of house
property
B When the loan is 1. The loan is Interest on borrowed capital
taken for construc- taken prior under Section 24(b) maximum
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Activity
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Find out whether deduction of pre-construction interest is allowed
in case of repairs or re-construction of house property.
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SPECIAL PROVISIONS OF HOUSE
4.5
PROPERTY
For computation of income from house property, some issues may
arise in respect of arrears of rent received by the assessee at a later
date, co-ownership of property by two or more persons, and determi-
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While determining the gross annual value, the actual rent received or
receivable shall not include the amount of unrealised rent (i.e., rent
which is not capable of being realised from the tenant). However, this
is true, provided the below conditions specified under Rule 4 are met:
It is a bona fide tenancy.
The defaulting tenant has vacated the property or compelling
steps have been taken against him to vacate.
The defaulting tenant does not occupy any other house property
of the assessee.
The assessee has taken reasonable steps for instituting legal pro-
ceedings to recover the amount of unpaid rent.
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the head of income from house property shall be included in the total
income of such persons.
As per Section 23(2), the annual value of the house property shall be
taken to be Nil in the following cases: Know More
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House property is self-occupied by the assessee for his own resi- In respect of self-occupied or
dence; or unoccupied house property
specified under Section 23(2), no
House property is unoccupied throughout the previous year be- deduction for municipal taxes
cause of the assessee’s employment/business or profession being shall be allowed.
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This benefit of Nil annual value can be taken only if no other benefit is
derived by the owner from such house property.
Study
Section 23(4) states that if more than two house properties are self-oc- Hint
cupied or unoccupied, then the assessee can avail the benefit of Nil
If one portion of house
annual value in respect of only two house properties chosen at his own property is self-occupied
option. The other house properties shall be deemed to be let out prop- and another portion is let out
erties and GAV shall be computed with respect to the expected rent. during the previous year, the
income from house property
The deductions under Section 24 in case of self-occupied house prop- will be computed separately
erty will be computed as explained in Table 4.3 referred to in Section for the let-out portion and the
self-occupied portion.
4.4: Deductions from House Property.
Please note that in case of let out or deemed to be let out property, the
entire interest amount is allowed as deduction whereas in the case of
self-occupied property, a maximum deduction of ` 30,000 or ` 2,00,000
is allowed depending upon the case.
If a house property is let out for a part of the year and self-occupied for
the remaining part of the year, then the GAV will be determined as per
normal rules as shown in Table 4.2. Expected rent for the whole year is
compared with actual rent for the let-out period. If actual rent is more
than the expected rent, actual rent shall be the GAV. If actual rent is
less than the expected rent, expected rent shall be the GAV.
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shall be
a. ` 30,000
b. ` 21,000
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c. ` 15,000
d. ` 20,000
10. For determining income from house property, unrealised rent
is
a. To be deducted from actual rent
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Activity
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The owner of a house property (in whose name the property
stands) is considered as the assessee for the purpose of taxation.
If an individual has given his house property on rent or lease and
derives any income from it, it is termed as ‘income from house
property’.
For taxing an income under the head ‘Income from House Proper-
ty’, three conditions must be fulfilled, which are as follows:
The property must consist of buildings and lands appurtenant
thereto.
The assessee must be the owner of such house property.
The property may be used for any purpose, such as renting or
letting-out, but it should not be used by the owner for the pur-
pose of any business or profession carried on by him, the profit
of which is taxable. If the property is used for own business or
profession, it shall not be taxable.
A deemed owner is an individual who does not have the property
registered in his name, but is liable to pay tax for the income re-
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ceived from house property as per Section 27 of the Income Tax
Act.
The annual value of the property is based on the actual rent re-
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ceived by the owner or the amount expected to be received by him/
her [Actual rent received or receivable (ARR)].
Ata broader level, the annual value of the property may be deter-
mined in just two steps:
Step I: Determine the gross annual value of house property; and
Step II: Deduct municipal taxes actually paid by the owner in the
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Key Words
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Answers for Self Assessment Questions
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or 2,00,000 as the case may be. Refer to Section 4.4 Deductions
from House Property (Section 24)
e-References
Business.gov.in. (2014). Business Portal of India: Taxation: Taxa-
tion of Individuals: Sources of Income: Income from House prop-
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CONTENTS
5.1 Introduction
5.2 General Principles of Business and Profession
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Self Assessment Questions
Activity
5.3 Profits and Gains of Business or Profession (Section 28)
Self Assessment Questions
Activity
5.4 Computation of Income from Profits and Gains of Business or Profession
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(Section 29)
Self Assessment Questions
Activity
5.5 Deductions Expressly Allowable under Section 30-43D
5.5.1 Deduction for Rent, Rates, Repairs and Insurance
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CONTENTS
5.7 Summary
5.8 Descriptive Questions
5.9 Answers and Hints
5.10 Suggested Readings & References
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Introductory Caselet
Section 40(a)(ia) of the Income Tax Act, 1961 makes certain deduc- Case Objective
tions from profits or gains of business or profession to be inadmis-
This Caselet discusses the
sible, if tax required to be deducted on specified payments has not provisions relating to
been deducted by the assessee. When tax is deductible at source disallowance of certain
on any sum payable to a resident under Chapter XVII-B during expenditure while computing
the previous year, 30% of such sum shall be disallowed if: business or professional
income.
Such tax has not been deducted at source, or
Such tax has been deducted but has not been paid or remitted
to the Government on or before the due date specified under
Section 139(1).
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In cases where tax is deducted in any subsequent year or has been
deducted during the previous year but paid after the due date,
then 30% of such payment shall be allowed as a deduction of the
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previous year in which such payment is made.
dent, during the disallowed 2023, but the same was not paid or
P.Y. 2022-2023. deposited by 31st July/30th Septem-
TDS is deduct- ber, 2023. The tax was paid after
ed but not paid the due date. Therefore, 30% of
before the due this expenditure will be disallowed
date. for computing the income of A.Y.
2023-2024, but will be allowed for
computing the income of the year
in which the payment is made, i.e.,
P.Y. 2022-2023/A.Y. 2023-2024.
Payment of sal- 30% of Section 192 requires TDS to be
aries during the Expenditure deducted by all assessees from the
P.Y. 2022-2023 to disallowed salary paid to employees, irre-
resident indi- spective of the assessees’ turnover.
vidual payees While computing the income for
without the de- A.Y. 2023-2024, failure to deduct
duction of tax. TDS will result in disallowance of
30% of the amount of salaries paid
without deduction of tax.
learning objectives
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5.1 INTRODUCTION
Quick Revision In the previous chapter, you studied the concept of income from house
property. In this chapter, we will discuss profits and gains of business
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or profession. Under Sections 28 to 44DB of the Income Tax Act, 1961,
we will discuss the chargeability of profits and gains of business or
profession and the scope of income under this head.
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self assessment Questions
Activity
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Export incentives Export incentives derived by an assessee car-
rying on an export business, such as profit on
sale of import entitlements, customs or excise
duty repayable as a drawback, cash assistance
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ty-free replenishment certificate.
Benefits or perquisites Value of benefits or perquisites arising from
from business or profes- business or profession, whether such perqui-
sion sites are convertible into money or not.
Interest, bonus, commis- Any interest, bonus, commission, salary or
sion, salary or remunera- remuneration due to or received by a part-
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tion received by partner ner from a firm is taxable in his hands to the
extent it can be claimed as a deduction in the
hands of the firm under Section 40(b).
Sum received under Key- Any sum received under Keyman Insurance
man Insurance Policy Policy including sums allocated by way of
bonus.
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Speculation Business
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5. Speculation business has to be considered as a distinct and deduction is allowed in respect
of capital expenditure incurred
separate business for the purpose of computation of income by certain businesses specified
from business or profession. (True/False) therein.
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Activity
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year’s real earned profits. If there is an expectation of profit, tax
cannot be levied only on notional basis or assumption. Therefore,
profit can be taxed only if it actually occurs.
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Business/profession may be legal or illegal: The income from le-
gal as well as illegal business is taxable under this head.
Business/professional income to be computed for each previous
year: The profits and gains must be taxed in relation to the previ-
ous year.
Negative income from business/profession: As per the prescribed
rules, negative income or loss from business/profession can be set
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As per Section 29, the profits and gains of a business or profession are
computed in accordance with the provisions contained in Sections 30
to 43D. Apart from specific allowances and deductions stated in Sec-
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tions 30 to 36, the act also permits the allowance of items of expenses
under residuary Section 37(1) (which extends the allowance to items
of business expenditure not covered by Sections 30 to 36).
Activity
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However, no expenditure is allowed as a deduction if the expenditure Study
is of capital nature. Hint
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Where the assessee has occupied the premises as a tenant, then the If the premises are used partly
for business purposes and
amount of repair can be claimed as a deduction only if the assessee partly for other purposes, then
has undertaken to bear the cost of such repairs to the premises. deduction would be allowed
only to the proportionate
If some part of the premises is sub-let by the assessee, then the amount amount of expenses
of deduction under this section would be limited to rent paid by the attributable to the part of
assessee as reduced by rent recovered from sub-tenant. premises used for business.
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ture used for the purpose of business or profession. As per this Sec-
tion, following deductions are allowed:
amount spent on current repairs NOTE
If the plant, machinery and
amount spent on premium paid with respect to insurance against furniture are hired, the rent
risk of damage or destruction payable is not deductible under
Section 31 but under Section
amount paid on account of current repairs shall not include any 31(1).
expenditure in the nature of capital expenditure
As per the Act, there are two methods for calculating the value of
depreciation. They are the Straight Line Method (SLM) and the Writ-
ten Down Value (WDV) Method.
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For a thorough understanding of depreciation and its computation,
you must be aware of the following concepts:
(A) Conditions for claiming depreciation
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(B) Block of assets [Section 2(11)]
(C) Actual cost [Section 43(1)]
(D) Written Down Value (WDV) [Section 43(6)]
(E) Rates of depreciation [Appendix I (Rule 5)]
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year, no depreciation can be claimed.
No depreciation can be claimed on land.
Asset must fall under the eligible class of assets which includes:
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Tangible assets, such as buildings, machinery, plant and furni-
ture.
Intangible assets, such as know-how, patents, copyrights, trade-
marks, licenses, franchises or any other business or commer-
cial rights of similar nature, being intangible assets acquired
on or after the 1st day of April, 1998.
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Solution: Yes, Mirabai Pvt. Ltd. can claim deduction with respect
to depreciation of restrooms and gym under Section 32 because any
asset (irrespective of whether it is earning income or not) that helps in
business or profession can be claimed for deduction.
(B) Block of assets [Section 2(11)]: As per the Income Tax Act, depre-
ciation is allowed on the block of assets and not on individual assets.
The term ‘block of assets’ refers to a group of tangible assets or a
group of intangible assets in respect of which the same percentage of
depreciation is prescribed. Block of assets has been defined in clause
(11) of Section 2. Tangible assets include buildings, machinery, plant
or furniture. Intangible assets include know-how, patents, copyrights,
trademarks, licenses, franchises or any other business or commercial
rights of similar nature, in respect of which the same percentage of
depreciation is prescribed. Know-how refers to any information or
technique that may assist in the manufacturing or processing of goods
or in the working of a mine, oil-well or other sources of mineral depos-
its. Each block is differentiated as consisting of tangible and intangi-
ble assets on the basis of its unique rate of depreciation.
(C) Actual cost [Section 43(1)]: Actual cost” means the actual cost of
the assets to the assessee, reduced by that portion of the cost thereof,
if any, as has been met directly or indirectly by any other person or
authority:
Provided that where the actual cost of an asset, being a motor car,
which is acquired by the assessee after the 31st day of March, 1967,
but before the 1st day of March, 1975, and is used otherwise than in a
business of running it on hire for tourists, exceeds twenty-five thou-
sand rupees, the excess of the actual cost over such amount shall be
ignored, and the actual cost thereof shall be taken to be twenty-five
thousand rupees:
Provided further that where the assessee incurs any expenditure for
acquisition of any asset or part thereof in respect of which a payment
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or aggregate of payments made to a person in a day, otherwise than by
an account payee cheque drawn on a bank or an account payee bank
draft or use of electronic clearing system through a bank account or
through such other electronic mode as may be prescribed, exceeds ten
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thousand rupees, such expenditure shall be ignored for the purposes
of determination of actual cost.
Study (D) Written Down Value (WDV) [Section 43(6)]: The percentage of
Hint depreciation as prescribed for each block of assets is applied on WDV
According to Section 43(6), computed at the end of the previous year relevant to the assessment
Written Down Value refers to year. The WDV can be calculated by following certain steps as shown
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the following:
in Table 5.2:
• In case of assets
acquired by the assessee
during the previous year, TABLE 5.2: CALCULATION OF WRITTEN
WDV is the actual cost to DOWN VALUE OF AN ASSET
the assessee.
Particulars Amount (`)
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• In case of assets
acquired by the assessee Opening value of the block of assets at the beginning of the XXX
before the previous previous year
year, WDV is the actual Add: Actual Cost of assets (P&M) acquired during the previ- XXX
cost to the assessee as ous year and belonging to the same block of assets
reduced by the aggregate
of all deductions actually Total XXX
allowed in respect of Less: Monies payable to the assessee with respect to any
depreciation. asset in the block which is sold, discarded, demolished,
destroyed, together with scrap value (if any)
WDV (for purpose of depreciation) XXX
Depreciation at the prescribed percentage – actually XXX
allowed (Depreciation for the year, i.e., depreciation on
opening block and depreciation on additional P&M)
Closing Value of block XXX
Ifa block ceases to exist, but the written down value still exists.
The block value is considered to be a short-term capital loss.
Ifthe asset was used for less than 180 days in the year when it was
acquired, it will be charged at 50% of normal rate for depreciation
and deprecation rate will be normal if the asset is then used in the
subsequent year.
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TABLE 5.3: RATES OF DEPRECIATION APPLICABLE FOR
VARIOUS ASSETS
A. TANGIBLE ASSETS
Asset Class Asset Type Depreciation
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1. Buildings Residential buildings except hotels and 5%
boarding houses
Hotels and boarding houses 10%
Purely temporary erections such as wood- 40%
en structures
2. Furniture Furniture – Any furniture/fittings includ- 10%
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2. Additional depreciation: Even after providing for the normal
depreciation, additional depreciation of 20% (or 35% in some
prescribed cases) of the actual cost shall be allowed for new
IM plant and machinery acquired and installed by an assessee who
is engaged in:
i. manufacturing or production of articles or things; or
ii. in the business of generation or generation, transmission and
distribution of power.
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CASES WHERE ASSETS ARE PUT TO USE FOR LESS THAN 180
DAYS IN THE RELEVANT PREVIOUS YEAR
In cases where a newly acquired asset is put to use for less than 180
days in a year, the assessee can claim only 50% of the total deprecia-
tion as deduction. Also, this restriction is also applicable in the case of
additional depreciation of 20% or 35%, as the case may be. In the case
of additional depreciation being charged at half of the rate, the rest
half will be charged in the successive assessment year.
Solution:
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Total 46,00,00,000
Less: Depreciation of the year
a. Depreciation on opening block 6,00,00,000
@ 15% of 40,00,00,000
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b. Depreciation on additional P&M 45,00,000
(Period of usage less than 180 days,
i.e., from 1st December, 2022 till 31st
March, 2023)
@ 15% of 50% of 6,00,00,000
Total 6,45,00,000
Closing WDV 39,55,00,000
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In the case of unabsorbed losses, the assessee should set off the losses
brought forward as follows:
1. Adjust all the current year depreciations.
2. Now, set off the brought forward business losses (speculative or
non-speculative).
3. Unabsorbed depreciation will now be set off against the business
income.
Solution:
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Depreciation = ` 12,00,000
Expenditure
Inhouse scientific research ex- 100% of the expend-
penditure of revenue nature is iture is allowed as
incurred by the assessee related deduction
to his business
Inhouse Scientific Research
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other institutions for the purpose
of scientific research
Amount paid by the assessee to 150% of the expend-
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an approved National Laborato- iture is allowed as
ry/IIT/university/other specified deduction
persons for the purpose of scien-
tific research undertaken under a
prescribed programme
Know More
5.5.5 OTHER DEDUCTIONS under Section 36(1) According to Section 43(4)(i),
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fisheries.
Table 5.5: Other Deductions
Section Nature of Expenses Quantum of Deduction Allowable
36(1)(i) Insurance premium Whole amount is allowable
paid against risk of
damage and destruction
of stocks or stores of the
business or profession
36(1)(ib) Insurance premium Whole amount is allowable
paid by an employer
otherwise than by way
of cash to secure an
insurance cover on the
health of his employees
36(1)(ii) Any sum paid by an Whole amount is allowable subject to
employer by way of Section 43B. However, such amount
bonus or commission to should not have been otherwise paya-
employees ble as profits or dividends if it had not
been paid as bonus or commission
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36(1) Employer’s contribution Deduction of amount is allowable to
(iva) by the assessee towards the extent of 10% of salary of employ-
a pension scheme re- ee
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ferred to under Section
80CCD
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assessee.
Expenditure must not have been incurred on any illegal or prohib-
ited activity.
Expenditure
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incurred by an assessee on the activities relating to
corporate social responsibility referred to in Section 135 of the
Companies Act, 2013 shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or pro-
fession.
Activity
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Table 5.6: Disallowance of Certain Expenses
Section Nature of Expenses Quantum of Deduc-
tion Allowable/Dis-
allowable
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40(a)(i) Interest, royalty, fees for technical ser- Whole amount is
vices or other sums payable outside In- disallowable. Howev-
dia or to a non-corporate non-resident/ er, such sum shall be
foreign company in India, on which allowed in the pre-
TDS has not been deducted or after vious year in which
deduction has not been paid within the such TDS is paid
due date specified under Section 139(1) subsequently
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Payment of salary, commission, bonus or any remuneration to a
partner is not deductible. However, deduction shall be allowed
only if all the following conditions are satisfied:
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It is authorised by and in accordance with the terms of part-
nership deed.
It relates to period falling after the date of partnership deed.
The payment is made to a working partner.
The amount of admissible deduction of remuneration is re-
stricted to the below-mentioned prescribed amounts, i.e.,
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40A(2), relative in relation to
an individual includes spouse, Assessee
brother, sister or any lineal Individual zz A relative of the individual
ascendant or descendant of the
individual.
zz A person in whose business or profession the indi-
IM vidual or his relative has a substantial interest
Firm zz A partner of the firm or any relative of such partner
zz A person in whose business or profession the part-
ner or his relative has a substantial interest
HUF or AOP zz A member of the association or any relative of such
member
zz A person in whose business or profession the mem-
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A person is said to have a All assessees zz Any individual who has a substantial interest in
substantial interest in the the business or profession of the assessee; or any
business/profession of the relative of such individual
assessee when he holds 20%
or more voting power (owner of zz A company/firm/HUF/AOP whose director/part-
equity shares) or is beneficially ner/member has a substantial interest in the busi-
entitled to 20% or more profits in ness or profession of the assessee, or any director/
the business/profession of the partner/member of such entity, or any relative of
assessee. such director/partner/member
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draft/ use of ECS through a bank account or through such other elec-
tronic modes prescribed in rule 6ABBA [Rule 6DD]:
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Study normal course of business against purchase of foreign currency
Hint
The cases of expense payment Section 43B – Certain Deductions to be allowed only on Actual Pay-
covered under Rule 6DD shall ment
be allowed as deduction even
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if payment is made otherwise Following expenses will be allowed only if payment in respect of them
than by an account-payee
is made by the assessee within the due date of filing return of income
cheque or an account-payee
bank draft and it exceeds under Section 139(1). Otherwise, they will be disallowed.
` 10,000 in one single day.
Tax, cess or duty under any law for the time being in force
Contribution to provident fund, gratuity fund, superannuation
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Activity
5.7 SUMMARY S
The income under head ‘Profits and Gains of Business or Profes-
sion’ are covered under Section 28 of the Income Tax Act, 1961.
Incomes chargeable to income tax under the head ‘Profits and
Gains of Business or Profession’ include profits and gains of any
business or profession any compensation or other payments due
or received; income derived by a trade, professional or similar as-
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sociation; etc.
According to Section 29, the income referred to in Section 28 shall
be computed in accordance with the provisions contained in Sec-
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tions 30 to 43D of the Income Tax Act, 1961.
While computing income under the head ‘Profits and Gains of
Business or Profession’, certain important principles should be
kept in mind, which are: business carried on by the assessee; tax
levied on aggregate income from all business professions carried
out by the assessee during the previous year; profit on sale of as-
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key words
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Speculation: An investment made by an investor or individual
without having any specific knowledge regarding the concerned
investment sector only in the expectation of gaining
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5.8 DESCRIPTIVE QUESTIONS
? 1. List and describe the general principles of business and
profession.
2. As per Section 43 of the Act, describe the following terms:
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a. Actual cost
b. Scientific research
c. Speculative transaction
d. Written down value
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10. Section 31
11. False
12. premium
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Amounts not Deductible 14. AOP/BOI
under Section 40
15. Any sum payable by the
assessee as an employer
in lieu of any leave at the
credit of his employee;
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fees for technical services or another sum chargeable; any interest,
commission or brokerage, rent, royalty, fees for professional
services; etc. Refer to Section 5.6 Amounts not Deductible
under Section 40
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5.10 SUGGESTED READINGS & REFERENCES
SUGGESTED READINGS
Lal, B.B., Income Tax Law and Practice. New Delhi: Konark Pub-
lications.
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E-REFERENCES
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CONTENTS
6.1 Introduction
6.2 Basis of Charge
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Self Assessment Questions
Activity
6.3 Capital Asset under Section 2(14)
Activity
6.4 Capital Assets and its Types
6.4.1 Short-term Assets and Long-term Assets
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CONTENTS
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6.16 Cost Inflation Index
Self Assessment Questions
Activity
6.17 Short-Term Capital Gain
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Self Assessment Questions
Activity
6.18 Long-Term Capital Gain
Self Assessment Questions
Activity
6.19 Exemptions/Deductions under Capital Gains (Under Section 54, 54B,
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6.21 Summary
6.22 Descriptive Questions
6.23 Answers and Hints
6.24 Suggested Readings & References
Introductory Caselet
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company or subsidiary company to 100% holding company.
Mr. Amit and its HUF entered into three transactions during the
previous year 2022-2023 and consider whether such transactions
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would attract taxability of capital gains.
Mr. Amit acquired gold in 1979 for ` 31,200. He gifted this to his son
on the occasion of his marriage in the previous year 2022-2023. On
the day of transfer, the fair market value of the gold was ` 2,04,000.
As per Section 47(iii), capital assets transferred as a gift are not
regarded as transfer. Therefore, capital gains taxability shall not
arise in the hands of Mr. Amit under this situation.
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Gain from gift of gold to son on the Taxability in the Does not
occasion of his marriage hands of Mr. Amit arise
Gain from distribution of house Taxability in the Does not
property under the partition of HUF hands of HUF arise
Gain from the conversion of deben- Taxability in the Does not
tures into shares hands of Mr. Amit arise
Capital gains tax liability does not arise under situations which
are not regarded as transfer.
learning objectives
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than securities)
>> Discuss the exemptions based on certain investments (un-
der Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA)
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6.1 INTRODUCTION
Quick Revision In the previous chapter, you studied about the profits and gains of
business and profession and its related tax treatment. Capital gain
means any profit arising from the transfer of a capital asset (affected
in the previous year) shall be chargeable to income tax. Moreover, it
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shall be deemed as the income of the previous year in which the trans-
fer took place. Capital gain takes place only when a capital asset is
transferred. However, if the asset, that has been transferred, is not a
capital asset, then the amount will not be considered as capital gain.
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This chapter discusses capital assets under Section 2 (14) and defines
transfer under Section 2(47). It also explains different types of capital
assets and capital gains as well as the period of holding. Further, the
chapter describes full value of consideration, cost of acquisition and
cost of improvement and transfer. Capital gain on transfer of securi-
ties and transfer of capital assets is also discussed. Indexation, cost of
inflation index and exemptions based on certain investments (under
Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA) are also described. Finally,
Deemed Full Value Consideration (DFVC) has been discussed.
Activity
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6.3 CAPITAL ASSET Under Section 2(14)
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According to Section 2(14) of the Income Tax Act, 1961, unless the con-
text otherwise requires, the term ‘capital asset’ refers to:
(a) Property of any kind held by an assessee, whether or not
connected with his business or profession;
(b) Any securities held by a Foreign Institutional Investor (FII)
which has invested in such securities in accordance with the
regulations made under the Securities and Exchange Board of
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Activity
Make a list of capital assets that are exempted under the head ‘per-
sonal effects’ for an individual.
A long-term asset is one that is held for more than 36 months. How-
ever, from the financial year 2017-18, this criterion has been revised to
24 months in the case of immovable property, such as land, building
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and house property. For example, Mr. A sells his house property after
holding it for a period of 24 months. In this case, any income aris-
ing will be treated as a long-term capital gain. This reduced period
is, however, not applicable to the movable property, such as jewellery,
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debt-oriented mutual funds, etc. These items will be classified as long-
term capital assets only if they are held for more than 36 months.
Capital assets are considered short-term in case they are held for a
period less than 36 months from the date of transfer. This rule applies
to assets transferred after 10th July, 2014 regardless of the date of pur-
chase. However, the period of holding should be less than 12 months
in case of shares (equity and preference). For example, short-term
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It should be noted that in case these assets are held for a period above
12 months, they will be considered as long-term capital assets.
shares are capital assets for Mr. Y. He purchased shares in April 2015
and sold them in December 2017. The period of holding in this case is
more than 12 months. Therefore, the equity shares will be considered
as long-term capital assets.
Activity
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For proper tax computation, it is important for a taxpayer to under- Study
stand the concept of a period of holding of a capital asset. This is Hint
because the tax treatment of capital gains and losses on short- and
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long-term capital assets is different. Period of holding refers to the
are classified as being
time during which an assessee holds on to a given capital asset. It is short-term or long-term on
the elapsed time between the initial date of purchase of a capital asset the basis of their period of
and the date on which it was sold. holding.
the period of holding for the given capital asset. Classification of capital
gains on the basis of period of holding is shown in Figure 6.1:
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sections
According to Section 45(1), any profits or gains arising from the trans-
fer of a capital asset effected in the previous year other than certain
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exemptions are chargeable to Income Tax under capital gains in the
immediately following assessment year and the year of chargeability
is the previous year in which the transfer took place. Exemptions from
being charged under this head are covered under Sections 54, 54B,
54D, 54E, 54EA, 54EB, 54F, 54G and 54H.
place and the value to be charged to tax is the value of the capital asset
that is recorded in the books of accounts of the firm/AOP/BOI.
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compensation or a part of compensation is received. For the enhanced
compensation, the year of chargeability is the latter of the previous
years in which the compensation is received or the year in which the
competent authority (court/tribunal) passes its final order.
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According to Section 45(5A), if an individual or HUF transfers any
land or building or both by means of an agreement for the develop-
ment of a project, then the profits or gains arising out of such transac-
tion are chargeable to tax. Here, the consideration is the stamp duty
on the share of the project of the individual/HUF as on the date of
issue of a certificate and the consideration received in cash. In this
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case, the year of chargeability is the previous year in which the certif-
icate of completion of the project or part of the project is issued by the
competent authority.
Activity
Using the Internet, find out when an assessee can claim deductions
under Sections 80C to 80U in the case of income from capital gains.
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(v) the maturity or redemption of a zero-coupon bond
(vi) any transaction containing the consent to possess any immovable
property to be taken or retained in part performance of a contract
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Act, 1882
(vii) any transaction involving becoming a member of, or acquiring
shares in, a co-operative society, company or other association
of persons or by way of any agreement or any arrangement or in
any other manner, which results in transferring, or enabling the
enjoyment of, any immovable property.
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From the above definition, it can be concluded that the term ‘Trans-
fer’ under the Income Tax is important to understand to compute the
tax liability arising under the head ‘income from capital gains’ arising
from the transfer of a capital asset.
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Section 47 of the Income Tax Act defines the transactions which are
not regarded as transfer for purpose of capital gains. Some of the
transactions that are not regarded as transfers for the purpose of cap-
ital gains are as follows:
Any transfer done by distributing capital assets on the total or par-
tial value of the partition of an HUF.
Any transfer of capital asset done under a will or gift or an irrevo-
cable trust.
Any transfer of capital asset from a holding company to any of its
wholly owned Indian subsidiary company or vice versa.
Any transfer or issue of shares from the company/companies re-
sulting from the demerger to the shareholders of the demerged
company.
In case two or more companies have resolved to amalgamate, then,
if a shareholder holding any shares in the amalgamating compa-
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cannot be considered as transfers.
Less: Cost of acquisition of asset Less: Indexed cost of acquisition paid for Securities Transaction
Less: Cost of improvement Less: Indexed cost of improvement Tax (STT).
Section 50 of the Income Tax Act gives the provisions for computation
of capital gains arising from depreciable assets. Accordingly, in case
a taxpayer has transferred a capital asset forming part of a block of
assets (building, machinery, etc.) on which the depreciation has been
allowed under the Income Tax Act, the income arising from such cap-
ital asset shall be considered as short-term capital gain. Short-term
capital gain or loss from sale of depreciable asset shall be realised only
in the following two conditions:
a. When, on the last day of the previous year, Written Down Value
(WDV) of the block of asset is zero.
b. When, on the last day of the previous year, block ceases to exist.
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b. ` 1,20,000
c. Not enough information for computation
d. It will be decided by the assessing office
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6.9 FULL VALUE OF CONSIDERATION
Full Value of Consideration (FVC) refers to the amount received/
receivable by the transferor with respect to the transfer of a capital
asset, which may be received in cash or kind. However, some points to
be noted here are as follows:
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Activity
Using the Internet, explain fair market value and full market value
of a capital asset.
completing the title of the asset constitute a part of the cost of acquisi-
tion. However, following points should be considered:
Ground rent cannot be taken as expenditure incurred by the as-
sessee for the acquisition of the capital asset.
Interest
paid on the capital taken on loan to purchase an asset is
supplemented in the total cost of the asset.
Estate duty remunerated with respect to the inherited property
cannot be considered as the cost of enhancement or should form a
part of the acquisition.
Where the capital asset becomes the property of the assessee in any
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of the below-mentioned cases, the cost to the previous owner shall be
the deemed to be cost of acquisition for the purpose of computation of
capital gains:
On
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the distribution of assets on the total/partial partition of Hindu
Undivided Family (HUF)
Under a Gift/Will
By succession, inheritance or devolution
On the distribution of assets on liquidation of the firm
Under a transfer to a revocable or irrevocable trust
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into 2 equity shares of ` 10 each and at a premium of ` 5 per share.
Mr. Sharma writes to the debenture-issuing authority to convert his
1/3rd debentures into equity shares. Calculate the cost of acquisition of
the shares.
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Solution: COA = Cost of unconvertible debentures to be converted
into shares/no. of shares to be issued after conversion
= (100 × 100)/(2 × 10 × 5)
= ` 100 per share
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Activity
Until now, the base year for purposes of tax computation was 1981.
However, this has been revised to the year 2001 with effect from the
financial year 2017-18.
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1.4.2010 and 28.06.2010 which cost him another ` 80,500. He sold the
house on 01.03.2011. Find the cost of improvement and total indexed
cost.
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Solution: Indexed Cost of Acquisition (1) = 5,00,000 × (CII 2010–11)/
CII 2007–08)
= 5,00,000 × (167/129)
2010–11)
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Section 111A deals with tax on short-term capital gains in certain
cases. As per Section 111A, if an STCG occurs as a result of the trans-
fer of equity shares and the units of equity-linked fund and if STT has
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been paid on such sale, then, a tax of 15% is applicable to such trans-
action. Also, according to this section, if a STCG arises as a result of
transaction that is undertaken on a recognised stock exchange in any
International Financial Services Centre in foreign currency and irre-
spective of whether STT has been paid or not, tax at the rate of 15% is
applicable on it. STCG resulting by way of transfer of all other normal
Short Term Capital Assets are chargeable at normal tax rates.
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QUICK TIP
Section 112 deals with tax on long-term capital gains. This section If you meet any person
describes the tax payable by assessees if their total income includes (assessee) whose total income
includes any income which is
any income that arises as a result of the transfer of a long-term capital categorised as STCG under
asset that is chargeable under the head of ‘Capital Gains’. The LTCG Section 111A, then you can
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tax applicable to various LTCAs and for different persons is presented suggest him/her get a rebate
under Section 88.
in Table 6.1:
Until recently, the long-term capital gains that arise as a result of trans-
fer of listed equity shares or units of equity-oriented fund or units of
business trusts, were exempt from income-tax as per Section 10(38) of
the Act. However, in the budget of 2018 and in the Finance Act, 2018,
this exemption has been withdrawn and a new Section, Section 112A
has been inserted. Section 10(38) now stands deleted. It used to deal
with the long-term capital gains resulting from the sale or transfer of
securities that were not chargeable to tax under the Income Tax Act.
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the STT are taxed at 10%. The transactions of shares that are listed
on a recognised stock exchange in an International Financial Service
Centre and irrespective of whether STT has been paid or not, tax at
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rate of 10% is applicable to it.
Exhibit
The Finance Bill 2018 reintroduced tax on LTCG made from listed
shares and equity-oriented mutual funds. With Effective 1st
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April 2018, LTCG arising from the sale of these shares and equi-
ty-oriented funds that are held for more than 12 months are tax-
able at the rate of 10% if such LTCG exceeds ` 1 lakh in the given
Financial Year.
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Sale on or after 1/4/2018
For Example:
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Mr. Amit bought equity shares on 10/03/2016 for ` 12,000.
Higher of –
Original COA i.e., ` 12,000, and
Lower of –
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reduced by the amount by
which the total income falls Section 50C deals with the computation of capital gains with respect
short of the maximum amount
not chargeable to tax. The to transfer of immovable property (land and building). If, in a trans-
fer of a land or building or both, the value received or accrued is less
balance long-term capital
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gains would be taxed at the than the value adopted or assessed by the stamp valuation authority
rate of 20%. for payment of stamp duty in respect of the transfer, then the value so
adopted or assessed is considered as the FVC received. If the dates
of agreement and registration are different, then the stamp duty
value as on the date of agreement is considered for computing the
FVC.
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date of transfer, and the date of agree-
entire or a portion of the ment
consideration is obtained
on or before the date of
agreement via account
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payee cheque, bank
draft, ECS, or other spec-
ified electronic modes
(IMPS, UPI, RTGS,
NEFT, Net banking,
debit card, credit card, or
BHIM Aadhar Pay),
(b) If the date of agree- Value of Stamp
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a result of an assessee date of transfer
transfer of a capital asset
is uncertain or cannot be
calculated
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Illustration 3: Mrs. Shikha purchased a flat in Gurgaon for ` 25 lakhs
on 10th May, 2016 from her colleague, Mr. Raj. The stamp duty as deter-
mined by the Stamp Duty Authority amounted to ` 2 lakhs with the
deemed consideration being ` 27 lakhs. Mr. Raj had initially purchased
the flat on 21st May, 2011 for ` 12 lakhs. On 10th Nov., 2016, Mrs. Shikha
sold the flat for ` 32 lakhs. Determine the effect of the above transac-
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tions on the assessment of Mrs. Shikha and Mr. Raj for the Assessment
Year 2016–17. (Assume that the value for stamp duty purpose in case
of the second sale was not more than the sale consideration.)
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i.e., ` 3,00,000 × (CII of the year of transfer/CII of 1981–82)
Activity
6.15 INDEXATION
The value of money at present will not be the same for tomorrow. The
prices keep on increasing due to inflation. Indexation is a technique
to adjust income payments by means of a Price Index to maintain the
purchasing power of the public in inflation. The actual prices should
not be used while computing the capital gains; rather, these prices
should be indexed in line with the inflation in a country so that people
could obtain the real value from sale of their assets. For computing
capital gains using indexation, the numerator is the index value of
the year in which the asset is sold, while the denominator is the index
value of the year when the asset was purchased. The index value is
derived from the index known as ‘Cost of Inflation Index’.
Activity
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government and announced before the accounting year ends. The
Central Board of Direct Taxes (CBDT) has notified the ‘Cost Inflation
Index’ applicable from financial year 2017-18 (Assessment Year 2018-
19) onwards, with base year shifted to 2001-02, in line with the amend-
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ments made in the budget 2017. Cost Inflation Index as per amended
provisions has been fixed at 280 for financial year 2018-19/Assessment
Year 2019-20, with cost inflation index for base year (financial year
2001-02) at 100.
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
Cost Inflation Index(CII) = (CII for the year the asset was transferred
or sold/CII for the year the asset was acquired or purchased)
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Illustration 5: Ms. Priya purchased as apartment for ` 20 lakhs in Jan-
uary 2001 and Sold it for ` 35 lakhs in January 2009. The profit or cap-
ital gain is ` 15 lakhs. Compute the tax liability on capital gain.
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Solution: The CII for the year the apartment was purchased is 100.
The CII for the year the apartment was sold is 148.
To find the indexed cost of acquisition, CII is multiplied with the pur-
chase price. This is the actual cost of the asset.
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The long-term capital gain = Sale value of the asset – indexed cost of
acquisition
The tax liability for long-term capital gains is charged at 20 per cent.
Activity
Find the effect on calculation of tax on capital gains using CII and
without using CII.
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Cost of improvement
3. The resultant figure is short-term capital gain. Such gain
is charged to tax at 15 percent (plus surcharge and cess as
applicable).
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Particulars Amount (in `)
Full value of consideration (i.e., Sales value of the asset) XXXXX
Less: Expenditure incurred wholly and exclusively in (XXXXX)
connection with transfer of capital asset (i.e., brokerage,
commission, etc.)
Net Sale Consideration XXXXX
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The same is not applicable to stocks and bonds which are faster-mov-
ing assets compared to real estate or jewellery. In this case, if stocks
and bonds are held for 12 months or less before sale, then the prof-
its or gains arising from them are considered to be short-term capital
gains. However, this rule is valid only to securities listed and traded
on a recognised stock exchange. Section 111A is applicable in case of
STCG arising from transfer of equity shares, units of equity-oriented
mutual-funds, or units of business trust, transferred on or after 1-10-
2004 through a recognised stock exchange and the transaction shall
be liable to securities transaction tax (STT). Such gain is charged to
tax at 15 percent (plus surcharge and cess as applicable).
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As per the Income Tax Act, immovable property held by an assessee
for more than 36 months before sale shall be considered as long-term
capital asset. Profits or gains arising/accruing thereof, shall be deemed
to be long-term capital gains (LTCG). For stocks, shares and bonds,
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this period is more than 12 months instead of 36 months. Unlisted
securities, on the other hand, will be considered as long-term capital
gains only if sold after 36 months. Such gain is charged to tax at 20
percent (plus surcharge and cess as applicable).
For the financial year 2018–19, in case long-term capital gains on sale
of equity shares/units of equity oriented mutual fund is more than
` 1 lakh, the same will be taxed at 10 percent without the benefit
of indexation. Till 31st March, 2018, taxpayers were offered relief to
exempt capital gains realised up to 31st January, 2018. The capital
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gains arising beyond this time period will be taxed at the given rate.
13. For stocks, shares and bonds, the period of holding with
reference to LTCG is more than 12 months. (True/False)
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Activity
EXEMPTIONS/DEDUCTIONS UNDER
6.19 CAPITAL GAINS (Under Section 54,
54B, 54D, 54EC, 54F, 54G, 54GA)
Exemptions under Section 54: Exemptions of Section 54 is appli-
cable to an individual and HUF. It states that any long-term capi-
tal gain arising from the transfer of the residential house property
shall be exempted from the capital gain tax if another residential
property is purchased within one year before transfer or two years
after transfer. If the amount of capital gains exceeds ` 2 crore, the
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2 years of the transfer or two years prior to the transfer. specified areas is exempted
from tax under Section 10(37).
Illustration 6: Ravi had purchased certain agricultural land in This exemption is available
1990-91 for ` 1,00,000. The land was being used for agricultural pur- only when such land was used
pose by him. This land was later sold by him in 2015 for ` 15,00,000. for agricultural purposes for
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preceding two years from the
Compute taxable capital gains for Assessment Year 2023-2024 if date of transfer.
the agricultural land, which was sold, is rural agricultural land.
Solution: There is no capital gain since rural agricultural land is
not a capital asset.
Exemptions under Section 54D: Section 54D is applicable to any
assessee who holds an industrial undertaking. To claim an exemp-
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tion under this Section, the asset must have been used for 2 years
immediately preceding the date of the transfer for the purpose of
the business undertaking. Alternatively, the assessee must have
constructed or purchased a land or building within a period of
3 years after the date of compulsory acquisition.
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assessee constructs a residential property within 3 years of sales
or purchases a residential property within 1 year before sale or
2 years after the sale of the asset. This is only available to individ-
uals and HUF. The assessee claiming this exemption should not
IM have more than one residential property. Furthermore, the asset
sold may be any asset, but the asset acquired must be a residential
property.
Exemptions under Section 54G: Section 54G is only applicable to
industrial undertakings. The exemption is granted for capital gain
arising from the transfer of capital assets in the case of shifting
of industrial undertaking from an urban area. This exemption is
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available for purchases made within one year before the transfer
or 3 years after the transfer.
Exemptions under Section 54GA: Section 54GA is only applica-
ble to capital gains arising from the transfer of assets in cases of
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Activity
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1. 45(1A) Money/asset received Value of money received
from an insurer on and/or full market value of
account of damage/ asset on the receipt date
destruction of capital
asset
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2. 45(2) Conversion of or treat- Full market value of asset on
ment of capital asset into the date of its conversion or
stock-in-trade treatment
Activity
List the main points of Section 50C of the Income Tax Act, 1961.
S 6.21 SUMMARY
Under Section 45(1) of the Income Tax Act, any profits or gains
arising from the transfer of a capital asset effected in the previous
year, unless otherwise provided in Section 54, will be chargeable
to income tax under the head ‘Capital Gains’ and shall be deemed
to be the income of the previous year in which the transfer took
place.
A capital asset is defined to include property of any kind held by
an assessee, whether connected with their business or profession
or not connected with their business or profession.
Capital assets are considered as short-term in case they are held
for a period of not more than 36 months from the date of transfer.
However, the period of holding should be less than 12 months in
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the case of shares (equity and preference).
A long-term asset is one that is held for more than 36 months.
However, from financial year 2017-18, this criterion has been
IM revised to 24 months in the case of immovable property, such as
land, building and house property.
The period of holding refers to the time during which an assessee
holds on to a given capital asset.
Any profits or gains arising from the transfer of a capital asset ef-
fected in the previous year unless otherwise provided in Sections
54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, will be charge-
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able to income tax under the head ‘Capital Gains’, and shall be
considered as the income of the previous year in which the trans-
fer of the capital asset took place.
Full value of consideration refers to the amount received/receiv-
able by the transferor with respect to the transfer of a capital asset,
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key words
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of indexing.
5. Mr. Rai is a salaried employee. He purchased gold worth ` 8,00,000
in the month of December 2016 and sold the same in August 2017
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for ` 8,40,000. At the time of the sale, he paid brokerage worth
` 10,000. Determine the amount of taxable capital gain.
firm/AOP/BOI
Computation of Capital Gain 4. a. ` 1,40,000
(Sections 48 and 50)
Full Value of Consideration 5. Full value of consideration
Cost of Acquisition 6. False
Cost of Transfer 7. cost of transfer
Cost of Improvement 8. Cost of improvement
Capital Gain on Transfer of 9. Securities Transaction Tax
Securities
Capital Gain on Transfer of Cap- 10. 1st April, 2017
ital Assets (Other Than Securi-
ties)
Cost Inflation Index 11. Cost Inflation Index
Short-Term Capital Gain 12. False
Long-Term Capital Gain 13. True
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3. Full value of consideration refers to the amount received/
receivable by the transferor in respect of a capital asset being
transferred, which may be received in cash or kind. Refer to
Section 6.9 Full Value of Consideration
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4. The cost inflation index (CII) is a means to measure inflation
used in the computation of long-term capital gains. Refer to
Section 6.16 Cost Inflation Index
5. Classify the capital gain as short-term or long-term based on
the period of holding. Compute the gain accordingly. Refer to
Section 6.17 Short-Term Capital Gain
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SUGGESTED READINGS
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E-REFERENCES
Cost Inflation Index in India - Check Calculation for FY 2016-17 &
AY 2017-18. (2018).Bankbazaar.com. Retrieved 12 April 2018, from
https://www.bankbazaar.com/tax/cost-inflation-index.html
Satapathy, S. (2018). Set Off and Carry Forward of Losses : [Com-
putation of GTI ] :.Incometaxmanagement.com. Retrieved 12 April
2018, from http://incometaxmanagement.com/Pages/Gross-To-
tal-Income/Set-Off-Carry-Forward-Losses/Set-Off-and-Carry-For-
ward-of-Losses.html
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CONTENTS
7.1 Introduction
7.2 Incomes Chargeable Under this Head (Section 56)
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Self Assessment Questions
Activity
7.3 Deductions Allowable (Section 57)
Self Assessment Questions
Activity
7.4 Deductions Not Allowable (Section 58)
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7.6 Summary
7.7 Descriptive Questions
7.8 Answers and Hints
7.9 Suggested Readings & References
Introductory Caselet
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However, if such sum of money or value of property is received
from a relative, on the occasion of the marriage of the individual,
under a will or through inheritance, from a local authority or reg-
istered trust, or in contemplation of death of the payer, etc., then
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such receipt is exempted from the applicability of Section 56(2)(x)
and is not taxable.
Section 56(2)(viii) of the Income Tax Act, 1961 provides for taxabil-
ity of any interest received on compensation or enhanced com-
pensation. Such income is deemed to be income of the assessee
in the year of receipt and is taxable under the head ‘Income from
Other Sources’. However, Section 57(iv) allows for a deduction of
50% of such income, i.e., interest on compensation/enhanced com-
pensation.
Introductory Caselet
n o t e s
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n o t e s
learning objectives
7.1 INTRODUCTION
In the previous chapter, you studied about income from capital gains.
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Quick Revision
In this chapter, you will study about income from other sources in de-
tail. You will learn about taxable incomes as per Section 56, deduc-
tions applicable as per Section 57 and amounts that are not deductible
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as per Section 58. In addition, you will learn about taxable profits as
per Section 59.
Incomes that are taxable under this head include royalty, income from
interest on bank loans and deposits, ground rent, directors fees, exam-
ination fee obtained by a teacher, agricultural income from outside In-
dia, insurance commission, rent of a plot of land, mining royalties and
rent, casual income (winnings from crossword puzzles, winnings from
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lotteries, winnings from card games, etc.), income from furniture, ma-
chinery or plant on hire and interest on securities.
n o t e s
Exhibit
Study
Dividend income taxable in hands of shareholders w.e.f. 1-4-2020 Hint
Dividend under Section
Till Assessment Year 2020-21, the dividend income from a domes- 115BBDA is taxable @10%
tic company was exempted in the hands of shareholders by virtue plus surcharge, if any,
of exemption under section 10(34) of the Income Tax Act. But in plus health and education
this case, the company was liable to pay Dividend Distribution cess @4%. No allowance,
expenditure, loss or
Tax (DDT) under section 115-O. However, the Finance Act, 2020 deductions under Chapter
has made provisions of section 115-O ineffective which means that VI-A can be allowed/set off
the domestic companies are no more liable to pay DDT on such from such income.
dividends paid by them. Thus, with effect from A.Y. 2021-22, the
dividend income shall be taxable in the hands of the shareholders
and the burden of tax payment is shifted from the company to the
shareholders. Thus, the shareholders are now required to declare
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the dividend income while e-filing of income tax return.
Section 115BBDA not relevant from A.Y. 2021-22
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Due to this amendment, Section 115BBDA has also lost its rele-
vance. Section 115BBDA provides for the taxability of dividends
over Rs. 10 Lakhs in the hands of the shareholders. Since from
A.Y. 2021-22, the entire amount of dividend income is taxable in
the hands of the shareholders, the threshold limit of ` 10 Lakhs as
given u/s 115BBDA is of no effect.
n o t e s
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2. Movable Without con- The total fair market value (FMV)
property sideration of the property if the same is more
received than ` 50,000
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property consideration fair market value (FMV) of the
received property and the consideration, if
the difference is more than
` 50,000
4. Immovable Without con- The total stamp duty value of the
property sideration property if the same is more than
received ` 50,000
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Study
Hint The provisions of this section apply only in case of a property
which is of the nature of capital asset in the hands of the recipient
Mr. K acquired a building
and not stock-in-trade/consumables/raw materials of the business
for ` 15,00,000 from his
friend on 11.11.2018. The of the recipient. Hence, only transfer of capital assets, whether
stamp duty value as on without consideration or for inadequate consideration, is covered
the date of purchase is under the provisions of this Section.
` 15,70,000. The amount
chargeable in the hands Some receipts of money or value of the property are outside the
of Mr. K shall be Nil. This ambit of Section 56(2)(x), i.e., these are exempted from the applica-
is because the difference bility of this section even if they fulfil the above conditions. These
of ` 70,000 is less than the are as follows:
higher of ` 50,000 and
` 75,000 (5% of ` 15,00,000), money or property received from any relative
i.e., ` 75,000.
money or property received on the accession of the marriage of
the individual himself
money or property received by way of inheritance or under a
will
money or property received in contemplation of death of the
donor or payer
n o t e s
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relative of the individual
by an individual, from any person, in respect of any expen-
diture actually incurred by him on his medical treatment or
treatment of any member of his family, for any illness related
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to COVID-19 subject to conditions notified by the Central Gov-
ernment.
99 by a member of the family of a deceased person
99 from the employer of the deceased person (without any lim-
it); or
from any other person or persons to the extent that such sum
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person; and
99 subject to such other conditions notified by the Central
Government.
For the purposes of Section 56(2)(x), the term ‘property’ means any
capital asset of the assessee, namely:
jewellery
drawings
paintings
archaeological collections
sculptures
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means any member of the HUF.
Casual Income {Section 56(2)(ib)}: Casual income refers to any
income earned by way of winnings from lotteries, races including
horse races, crossword puzzles, betting, gambling, card games,
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such other games, etc. These incomes are chargeable to tax under
the head ‘Income from other sources’. Section 115BB is applicable
to casual income, wherein such incomes are taxed at a flat rate
of 30% plus surcharge, if any, plus health and education cess of
4%. No allowance, expenditure, loss, or deductions under Chapter
VI-A can be allowed/set off from casual income. Also, the unex-
hausted basic exemption limit is also not permitted to be adjusted
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n o t e s
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Interest on securities
Keyman Insurance Policy: All sums including bonus, received
under a Keyman insurance policy, are chargeable to tax under the
Know More
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head ‘Income from Other Sources’. This is true only when such
sums allocated are not taxable under the head ‘Profits and Gains Sums received under
Keyman insurance policies
of Business or Profession’ or under the head ‘Salaries’. are taxable only if they are
Residual income: Any income not falling under other heads of received by persons other
than employers who took
income is chargeable to tax under the head ‘Income from Other the policies and employees
Sources’. For example, salaries received by MPs/MLAs are not in whose name the policies
charged to tax under the head ‘Salaries’ but charged under Sec- are taken.
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tion 56.
n o t e s
Activity
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the event of his death. S. No. Particulars Deduction(s) allowable
1. Income from recovery Amount to the extent the contribu-
from employees as the tion is remitted prior to the due date
contribution to provident under different respective Acts as
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fund, superannuation per the provisions of Section 36(1)
fund, etc. (va)
2. In the case of dividend or Interest expenditure to earn such
income in respect of units income is allowed as deduction
of a mutual fund or income subject to a maximum of 20% of
in respect of units of a such income included in the total
specified company income, without deduction under
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this section.
3. Income received from zz Insurance premium paid
letting out of the plant, zz Depreciation or unabsorbed de-
machinery or furniture preciation
on hire, whether with or
zz Amount paid on current repairs
without building
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n o t e s
Activity
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Table 7.3: Deductions not allowable under
Section 58
S. No. Deductions not allowable
1. Personal expenses incurred by an assessee
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2. An interest chargeable under the Act and payable outside
India, on which tax has not been deducted at source or paid
3. A payment chargeable under the ‘Salaries’ and payable outside
India, on which tax has not been deducted at source or paid
4. Payment of any expense made to a related person to the extent
to which it is unreasonable or excessive from its Fair Market
Value (FMV) on consideration by the Assessing Officer.
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Activity
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recovered is considered to be the previous year income in which
income of the year of its
subsequent receipt. the sale took place
Activity
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Go through the official Income Tax website and study various claus-
es and sub-clauses applicable to Section 59. Create a report on this
subject.
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Section 56 the Income Tax Act talks about the provisions of ‘Income
from Other Sources’.
Specifically and without prejudice to the provisions of generality
of sub-section (1), following incomes are taxable under the head
‘Income from Other Sources’:
Dividends
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Certain recovered bad debts
Section58 lists certain items of expenses which are not allowed as
a deduction from income from other sources.
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key words
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of ‘Income from Other Sources’. Refer to Section 7.2 Incomes
Chargeable Under this Head (Section 56)
2. Section 57 provides for various deductions such as amount
reasonably paid in relation to income from dividends and
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interest income from securities, some expenses in relation to
certain income from plant, machinery or furniture given out on
hire, any expenditure other than that of capital nature, and 50%
of interest income received through interest on compensation
or enhanced compensation. Refer to Section 7.3 Deductions
Allowable (Section 57)
3. Section 59 lists certain incomes to be treated as incomes such as
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E-REFERENCES
(2018).Taxmann.com. Retrieved 3 April 2018, from https://www.
taxmann.com/budget-2015-16/file/samd307/earlier-section.aspx
Government, C. (2018). Income Tax Act 1961 Section 56 - Citation
23220 - Bare Act | Legal Crystal. Legalcrystal.com. Retrieved 3 April
2018, from https://www.legalcrystal.com/act/23220/income-tax-act-
1961-section-56
Deductions to be made in
Computing Total Income
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Contents
8.1 Introduction
8.2 Deduction vs. Exemption
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Self Assessment Questions
Activity
8.3 Deductions to be Made in Computing Total Income (Section 80A)
Self Assessment Questions
Activity
8.4 Deduction in Respect of Investments/Contributions to Specified Assets
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(Section 80C)
Self Assessment Questions
Activity
8.5 Deduction in Respect of Contribution to Pension Fund (Section 80CCC)
and Deduction in Respect of Contribution to Pension Scheme of Central
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Contents
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8.15 Suggested Readings & References
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Introductory Caselet
Mr. Ghai is an employee of M/s Nestle India Ltd. The gross pack
age of Mr. Ghai is about ` 20 lakh per annum, in which he receives Case Objective
around ` 2 lakhs as HRA apart from a few other allowances. This Caselet discusses certain
deductions which can be
claimed by an assessee while
computing his/her taxable
income.
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ing paid to Mr. Ghai. He was too worried about the deduction.
He goes to a financial advisor to find some measures to save
his tax. The financial advisor suggests him get a life insurance
cover of around ` 80 lakhs to 90 lakhs and invest his savings into
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the PPF account and national savings certificate. He also suggests
Mr. Ghai buy mutual funds and medical insurance for his wife and
children.
All these investments are eligible for deduction under Section 80C
of the Income Tax Act, 1961. Thus, by applying all these measures,
Mr. Ghai was successful in saving a substantial part of his tax and
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learning objectives
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medical treatment of a dependent who is a person with dis-
ability as per Section 80DD
>> List the deductions in respect of loan taken for higher edu-
IM cation as per Section 80E
>> List the deductions in respect of interest on deposits in
savings account as per Section 80TTA
>> Describe the deductions in the case of persons with disabili-
ties as per Section 80U
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8.1 Introduction
Quick Revision In the previous chapter, you studied about the tax treatment of income
from other sources as per the Income Tax Act. In this chapter, you will
study about the deductions to be made in calculating the total income.
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This chapter will list all deductions defined under the Income Tax Act
available for taxpayers.
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What is it? It is concession. It is relaxation.
Objective Promoting investments Boosting that specific Section in
and savings of people which tax has been exempted
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Income is Tax-deductible Tax-free
Allowable to Specific people Everyone
Applicable Sections 80C to 80U Section 10
Sections
Is it Yes No
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conditional?
The term ‘exemption’ has been derived from the word ‘exempt’, which
implies a sum of money that is not liable to anything. These are those
incomes that are not considerable when computing the total income.
Therefore, such source of income is not included from taxable income
or chargeable to tax.
Some incomes are entirely exempt from tax, which include agricul-
tural income. However, some incomes are partly exempted and the
exemption is provided only to a specific limit. In this case, the exceed-
ing part of the income is subject to tax and, hence, considerable when
calculating the gross total income.
Activity
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sessee under Section 10 of the Income Tax Act, 1961 and make a
tabular report on it.
Deductions to be made in
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8.3 Computing Total Income
(Section 80A)
Study Gross Total Income (GTI) of an assessee is the total of what the asses-
Hint see earns in any previous year under five different heads of income
as specified under Section 14 of the Income Tax Act, 1961. Howev-
If the GTI for any previous
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The deductions covered under Chapter VI-A of the Income Tax Act,
1961 are as given in Figure 8.1:
It is also worth clarifying here that certain incomes are not eligible for
deductions. These are long-term capital gains taxable under Section
112/112A, short-term capital gains taxable under Section 111A, win-
nings from lotteries, etc., as referred to in Section 115BB, and some
specified incomes of non-residents including presumptive income.
Hence, the GTI is reduced by these amounts to arrive at the qualifying
limit eligible for deductions under Chapter VI-A.
Exhibit
Individuals opting to pay tax under the new proposed lower per-
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sonal income tax regime will have to forgo almost all tax breaks that
you have been claiming in the old tax structure.
Below is the list of the main tax exemptions and deductions that are
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not available for the tax payers if you opt for the new regime;
The most commonly claimed deductions under section 80C
will go.
Section 80C deductions claimed for provident fund contribu-
tions, life insurance premium, school tuition fee for children
and various specified investments such as ELSS, NPS, PPF,
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cannot be availed.
House rent allowance
Leave travel allowance
Standard deduction of ` 50,000
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So, all deductions under chapter VIA (like section 80C, 80CCC,
80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG,
80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.) will not
be claimable by those opting for the new tax regime. The above are
part a total of 70 deductions and tax exemptions that will not be
available in the new tax regime.
Section 80DDB
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ual or an HUF. In case of an individual, the payment for medical treat-
ment of specified diseases may be made for himself or his dependent
being spouse, children, brothers, sisters, or parents who are mainly
dependent upon the individual for his support and maintenance. In
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case of an HUF, the payment for medical treatment of specified diseas-
es may be made for any member of the HUF.
The amount of deduction is lower of the following:
Amount actually paid
` 40,000 (` 1,00,000 if the payment is made for medical treatment
of a senior citizen).
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Section 80EE
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Deduction under this section shall not be allowed if the following con-
ditions are not met:
The loan should have been sanctioned by the financial institution
during the period of previous year 2016-17.
The amount of sanctioned loan should be less than or equal to
` 35 lakhs and the value of residential house should be less than
or equal to ` 50 lakhs.
The assessee should not be the owner of any residential house as
on the date of sanction of loan.
If,for any assessment year, deduction is claimed by the assessee
under this section, then he or she cannot claim similar deduction
under any other provision of the Act for such interest payment for
the same assessment year.
Section 80G
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Nehru Memorial Fund, etc., (Category II) – 50% deduction of
amount donated is allowed to the assessee without any qualifying
limit.
Donation to Government or local authority for promotion of family
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planning, etc., (Category III) – 100% deduction of amount donated
is allowed to the assessee subject to qualifying limit.
Donation to Government or any local authority for other specified
charitable purposes, renovation of notified temple, etc., (Category
IV) – 50% deduction of amount donated is allowed to the assessee
subject to qualifying limit.
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Section 80GG
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Section 80GGA
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Section 80GGB
Section 80GGC
Section 80JJAA
The business of the assessee should not be formed by way of trans- Study
fer from another person or through reorganisation. Hint
Audit report of the accountant giving prescribed particulars has to Section 44AB pertains to
be furnished along with the return of income. provisions relating to tax
audit applicable to specified
The amount of deduction allowed under this Section is equal to 30% assessees. A tax audit ensures
of the additional employee cost incurred by the assessee (cost paid that the assessee has properly
maintained his books of
to new employees) in respect of new employees employed during the
accounts which truly reflect
previous year. Moreover, such 30% deduction is available for three as- the income of the tax-payer
sessment years comprising the assessment year relevant to the previ- and has also complied with
ous year in which such new employment is provided. income tax requirements, such
as filing of return, accurate
Section 80RRB specification of deductions
and claims, etc.
Deduction under Section 80RRB is allowed to a resident individual as-
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sessee. The deduction is available to the assessee on his or her income by
the way of royalty on patents. For claiming this deduction, the assessee
should have earned royalty income on patents which are registered on or
after 01.04.2003. The eligible assessee is one who is registered under
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the Patents Act, 1970 as the true and first inventor in relation to an in-
vention (including the co-owner of patents). The amount of deduction
allowed from GTI is ` 3,00,000 or the whole of such royalty income,
whichever is lower.
Section 80QQB
Activity
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DEDUCTION IN RESPECT OF
8.4 INVESTMENTS/CONTRIBUTIONS TO
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SPECIFIED ASSETS (SECTION 80C)
Deduction under Section 80C is allowed to an individual or an HUF
for making certain payments or contributions in respect of life insur-
ance premium, specified term deposits, provident fund, etc. The eligi-
bility and conditions for claiming deductions under this Section are as
discussed in Table 8.2:
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notified schemes
zz Any amount deposited in five-year post-office
deposit scheme
zz Contribution towards Unit-Linked Insurance
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Plan (ULIP) of LIC Mutual Fund
zz Deposits made in Senior Citizen Saving
Scheme account
zz Subscription to/deposits made in notified
bonds of NABARD
zz Subscription to certain equity shares/deben-
tures or certain units of mutual fund
zz Amount deposited in term deposits with a
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Exhibit
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Compute the eligible deduction under section 80C for A.Y. 2023-24
in respect of life insurance premium paid by Mr. Amit During the
P.Y.2022-23
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Solution:
Total 1,26,000
DEDUCTION IN RESPECT OF
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CONTRIBUTION TO PENSION FUND
(SECTION 80CCC) AND DEDUCTION
8.5
IN RESPECT OF CONTRIBUTION
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TO PENSION SCHEME OF CENTRAL
GOVERNMENT (SECTION 80CCD)
Deduction under Section 80CCC is available to an individual in re-
spect of contribution made to an approved annuity plan of LIC or cer-
tain pension funds.
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The eligibility and conditions for claiming deduction under this Sec-
tion are as discussed in Table 8.3:
The eligibility and conditions for claiming deductions under this Sec-
tion are as discussed in Table 8.4:
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any other amount to his account under of employer’s contribu-
employer the notified pension scheme of tion is restricted to 10%
or self-em- the Central Government, such of salary under Section
ployed as National Pension Scheme. 80CCD(2).
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deduction allowed under
Section 80CCD(1) is the
amount of employee’s con-
tribution made which is
restricted to 20% of GTI.
Activity
Now, let us understand this concept with the help of some illustra-
tions.
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for Mrs. Nikky who does not derive salary income. She has made a
contribution of ` 2,20,000 towards a notified pension scheme by the
Central Government. The GTI of Mrs. Nikky for the Assessment Year
2023-2024 is ` 9,00,000.
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Solution: Now, as per Section 80CCD (1), 20% of the GTI, which is
` 1,80,000 is deductible. However, as per Section 80CCE, the limit of
deduction applicable to Sections 80C, 80CCC, 80CCC(1) is ` 1,50,000.
Therefore, the deduction amount that can be claimed is ` 1,50,000.
With respect to the balance of ` 70,000, Mrs. Nikky becomes eligible
for additional deduction under Section 80CCD(1B) to the maximum of
` 50,000. Therefore, the total deduction under Section 80CCD(1) and
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Solution:
Activity
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applicable deductions as per Section 80CCE for the current assess-
ment year.
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Deduction in Respect of Health
8.7
Insurance Premia (Section 80D)
Deduction under Section 80D is available to an individual or an HUF
in respect of payment of medical health insurance premium for self or
a family member. The eligibility and conditions for claiming deduc-
tions under this Section are as discussed in Table 8.5:
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of cash on the health of maximum of ` 50,000.
the individual or his family
member or parents or
member of HUF, provided
such person is a senior cit-
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izen and no other amount
has been incurred to give
effect to the insurance pol-
icy on the health of such
person.
Some important points:
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zz Also, if any amount has been incurred by any mode including cash
payment on account of preventive health-check up of the assessee him-
self, spouse, dependent children and parents, an amount of deduction
equivalent to ` 5,000 is allowed. However, the said deduction is within
and subject to the aggregate limit of deduction of ` 25,000/` 50,000, as
the case may be.
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In case the premium has been paid in cash, would the answer differ?
Solution: The calculation of deduction under Section 80D for Mr. Sha-
shank is shown as follows:
Particulars Amount Eligibility Deduction
Paid Allowed
(a) For individual and
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his family
Self – Mediclaim pre- ` 10,000 Yes ` 10,000
mium
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Spouse – Mediclaim ` 9,000 Yes ` 9,000
premium
Expenditure restricted to
` 43,000
It should be noted that ` 5,000 that has been paid for mother-in-law is
not allowed for deduction because it is not included in the definition
of ‘family’.
Activity
Deduction in respect of
Maintenance including Medical
8.8 Treatment of a Dependent who is
a Person with Disability (Section
80DD)
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Deduction under Section 80DD is available to a resident individual
or HUF for payments in respect of maintenance including medical
treatment of a dependent disabled. The eligibility and conditions for
claiming deductions under this section are as discussed in Table 8.6:
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Table 8.6: Deduction under Section 80DD
Eligible Assessee Conditions for Claiming Amount of Permissible
Deduction Deduction from GTI
Resident individ- The deduction from GTI zz In case of normal dis-
ual or HUF shall be available to the ability of dependent,
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Activity
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ment year.
Activity
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DEDUCTION IN RESPECT OF INTEREST
ON DEPOSITS IN SAVINGS ACCOUNT
(SECTION 80TTA) AND DEDUCTION IN
8.10
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RESPECT OF INTEREST ON DEPOSITS
IN CASE OF SENIOR CITIZENS (SECTION
80TTB)
Deduction under Section 80TTA is available to assessees whose GTI
includes any interest income from deposits in a savings account main-
tained with banks. The eligibility and conditions for claiming deduc-
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The eligibility and conditions for claiming deductions under this sec-
QUICK TIP tion are as discussed in Table 8.9:
A senior citizen is an individual
of the age of 60 years or more Table 8.9: Deductions under Section 80TTB
at any time during the previous
year. Eligible Conditions for Claiming Amount of Permissible
Assessee Deduction Deduction from GTI
Individual Deduction is available to an The amount of deduc-
senior citizen individual (of age 60 years tion allowed is the lower
or more), who earns interest of the following:
income from deposits with a zz Actual interest, or
banking company, a co-oper-
zz ` 50,000
ative society bank, or a post
office. The deposits for this pur-
pose may include time deposits.
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Self Assessment Questions
Activity
Activity
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8.12 Summary S
According to Section 80A, the deductions specified under Sections
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80C to 80U covered by Chapter VI-A shall be allowed while com-
puting the total income of the assessee from his/her GTI.
Section 80C (Individual/HUF) allows deduction of up to ` 1,50,000
in respect of Life Insurance Premium (LIC) for policy, deferred an-
nuity, contributions to provident fund (PF), Unit-Linked Insurance
Plan (ULIP) mutual fund, subscription to certain equity shares or
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Key Words
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state and who is present in this state
and 80TTB.
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80TTA) and Deduction in Respect of
Interest on Deposits in Case of Senior
Citizens (Section 80TTB)
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Deduction in the Case of a Person with 14. eighty
Disability (Section 80U)
Suggested Readings
Uma Pat Rai, Ejaz Ahmad. Commentary on the Income Tax Act,
1961 (Act no. 43 of 1961) together with Finance Act, 1962-1963 and
Rules.
India, K. K. Malik. The Income Tax Act, 1961. Eastern Book Co.,
1964.
E-References
(2018). Retrieved 9 April 2018, from https://www.incometaxindia.
gov.in/pages/acts/income-tax-act.aspx
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List of Income Tax Exemptions for FY 2017-2018 and AY 2018-2019
| Primo Payroll India. (2018). Primo Payroll India. Retrieved 9 April
2018, from https://primopayroll.co.in/blog/2017/07/list-income-tax-
IM exemptions-fy-2017-2018-ay-2018-2019/
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CONTENTS
9.1 Introduction
9.2 Incomes not included in Total Income (Exemptions under Section 10)
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9.2.1 Agricultural Income [Section 10(1)]
9.2.2 Receipts from HUF [Section 10(2)]
9.2.3 Partner’s Share in the Income of the Firm [Section 10(2A)]
9.2.4 Income Earned by a Non-Resident from NTRO [Section 10(6D)]
9.2.5 Payment from Provident Fund [Section 10(11)]
9.2.6 House Rent Allowance [Section 10(13A)]
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Introductory Caselet
n o t e s
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HRA is the tax benefit that is available only to salaried individuals
who have an HRA component as part of their salary structure and
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are staying in a rented accommodation.
Sowmya is living in a metro city but she cannot use this allowance
for attaining any tax benefit. However, if she wants to, she can pay
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the rent to her parents and claim HRA exemption, provided that
the parents own the house. For this, she would need to enter into a
rental agreement with her parents and give them monthly rentals.
This will not only help her save taxes, but it would also be a nice
gesture by financially assisting her parents.
However, it must be noted that her parents will have to show the
rent received from Sowmya in their income as ‘income from house
property’ which would become subject to tax.
learning objectives
9.1 INTRODUCTION
In the previous chapter, you studied the difference between deduc- Quick Revision
tions and exemptions.
There are various incomes which are either not at all taxable or are
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taxable partially. You will study such incomes in this chapter. Various
income items that have been defined in various clauses of Section 10
are excluded from the total income of an assessee. These incomes are
termed as exempted incomes. Consequently, such incomes are not
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considered while computing the taxable income of an assessee.
SECTION 10)
Section 10 covers the incomes that do not form the part of the taxable
income. These are those incomes on which income tax is exempted. In
other words, no tax is applied on these incomes. Some of the exemp-
tions under Section 10 of the Income Tax Act, 1961 are discussed in
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As per Section 10(1), Agricultural Income; the earnings from agricul- NOTE
ture are totally exempted if it falls within the definition of agricultural In case of individuals/HUF/
income given under Section 2(1A). The reason for totally exempting AOP/BOI, when agricultural
agricultural income is that under the Constitution, the Parliament has income exceeds ` 5,000 p.a. and
no power to levy a tax on agricultural income. However, tax can be when non-agricultural income
exceeds the basic exemption
levied on agricultural income in an indirect way, which is known as
limit, agricultural income and
partial integration of taxes. For example, if an income is made by a non-agricultural income shall
seller of standing crops, who has invested labour and skill to make the be aggregated to determine the
crop sprout out of the land is agricultural income. However, if some- rate at which non-agricultural
one buys a standing crop, and generates profits out of it, that income income is to be taxed.
will not be considered as agricultural income.
identity and any income earned by the HUF is taxable in the hands
of HUF only. Subject to the provisions of sub-section (2) of Section 64,
any sum received by an individual as a member of a Hindu Undivided
Family, where such sum has been paid out of the income of the family,
or, in the case of any impartible estate, where such sum has been paid
out of the income of the estate belonging to the family, is exempt from
tax.
For example, let’s say an HUF earned ` 5,00,000 in the last year and
has already paid tax on his/her income. Mr. X is a co-parcener in the
HUF and earns ` 20,000 per month as his salary. In the last year, Mr.
X also received ` 1,00,000 from HUF. In this case, Mr. X will pay tax
on his taxable salary income but not on the sum he received from his
HUF. This money is not chargeable to tax.
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9.2.3 PARTNER’S SHARE IN THE INCOME OF THE FIRM
[SECTION 10(2A)]
As per Section 10(2A), Share Income of Partner; in the case of a per-
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son being a partner of a firm which is separately assessed as such, his
share in the total income of the firm will be exempt from tax. In other
words, the share of the partner in the firm’s total income determined
in accordance with the profit sharing ratio will be exempted from tax.
For example, if you are a partner of a firm, any amount of money that
you have as a share in the firm’s total income is exempted from income
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tax.
For example, if your basic salary is not more than ` 15,000, you need
to contribute 12% of the basic component of your salary every month
towards PF. This amount will be deducted from your income and will
be exempted from tax. You also earn some interest (8.5%) on a yearly
basis, which will also be exempted from tax.
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(b) the assessee has not actually incurred expenditure on the of loss or damage caused due
payment of rent (by whatever name called) in respect of the to any disaster is exempted from
residential accommodation occupied by him. tax under Section 10(10BC).
For example: Mr. Kapoor receives ` 3,000 as the basic pay and ` 600 as
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the dearness allowance. His HRA allowance is ` 900 per month, while
he pays ` 1,000 per month as his accommodation in Kanpur Metropol-
itan Area. In this case, we can calculate the taxable HRA as follows:
3. Actual rent paid – 10% of basic salary = (1000 × 12) – 10% (3600
× 12) = 12,000 – 4,320 = ` 7,680
does not exceed ` 1,500 in respect of each minor child whose income
is so includible.
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d. fully taxable
3. In the case of a person being a partner of a firm, which is
separately assessed as such, his share in the total income of
IM the firm will be exempt from tax. (True/False)
4. As per __________, House Rent Allowance (HRA), tax
exemption is available on any special allowance specifically
granted to an assessee by his employer to meet expenditure
actually incurred on the payment of rent (by whatever name
called) in respect of residential accommodation occupied by
the assessee, to such an extent as may be prescribed having
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Activity
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income of the assessee.
Section 87A describes the rebates to be allowed in computing the
income-tax in case of certain individuals. As per this Section, a
resident assessee, whose net taxable income (income after making
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deductions under Section 80) does not exceed ` 5,00,000, can claim
rebate under this Section. The amount of rebate is the lower of
` 12,500 or 100% of the income tax payable. Rebate amount is
deducted from the total tax liability of the assessee. If the tax lia-
bility of the assessee is more than ` 12,500, rebate will be limited
to ` 12,500. If the net taxable income of the assessee is more than
` 2.5 lakh, no rebate under Section 87A can be claimed. The rebate Know More
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under Section 87A can be claimed while filing the tax return. In Apart from individuals, taxpayers
case, an assessee’s tax has been deducted through TDS, he claims such as HUFs, companies and
NRIs cannot claim this benefit.
the same as a refund.
The format in which rebate and relief under Sections 87A and 89,
respectively can be claimed is shown in Table 9.1:
Activity
S 9.4 SUMMARY
Section 10 covers the income that does not form the part of tax-
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able income. These are those incomes on which the income-tax is
exempted. In other words, no tax is applied on these incomes.
Some of the exemptions under Section 10 of the Income Tax Act,
IM 1961 are:
Agricultural Income [Section 10(1)]
Receipts from HUF [Section 10(2)]
Partners share in the income of the firm [Section 10(2A)]
Income Earned by Non-Resident from NTRO [Section 10(6D)]
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Key Words
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9.6 ANSWERS AND HINTS
4. Section 10 (13A)
5. Income of Minor
Rebates and Reliefs 6. 2.5
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SUGGESTED READINGS
Uma Pat Rai, Ejaz Ahmad. Commentary on the Income Tax Act,
1961 (Act no. 43 of 1961) together with Finance Act, 1962-1963 and
rules
India, K. K. Malik. The Income Tax Act, 1961. Eastern Book Co.,
1964
E-REFERENCES
Satapathy, S. (2018). List of Exempted Incomes (Tax-Free) Under
Section-10. Incometaxmanagement.com. Retrieved 11 April 2018,
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from http://incometaxmanagement.com/Pages/Tax-Ready-Reck-
oner/Exempted-Incomes/Exempted-Incomes-Under-Section-10.
html
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Tax Rebate Under Section 87A. (2018). Cleartax.in. Retrieved 11
April 2018, from https://cleartax.in/s/income-tax-rebate-us-87
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Contents
10.1 Introduction
10.2 Clubbing of Income
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10.2.1 Income of Other Persons Included in Assessee’s Total Income
Self Assessment Questions
Activity
10.3 Concept of Set-Off and Carry Forward of Losses
10.3.1 Inter Source Adjustment of Losses
10.3.2 Inter Head Adjustment of Losses and Set-off of Brought Forward
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Losses
10.3.3 Summarised Provisions of Set-off and Carry Forward of Losses
Self Assessment Questions
Activity
10.4 Computation of Total Income
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Introductory Caselet
S
Speculation business losses can be set-off only against speculation
business profits. However, losses from other businesses can be
set-off against speculation business gains and gains under other
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heads of income except for salaries.
for eight assessment years for set-off against long-term and long-
term/short-term gains, respectively.
The taxable income of Mr. Einy for the Assessment Year 2023-2024
will be as follows:
learning objectives
10.1 Introduction
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In the previous chapter, you studied about Section 10 which covers Quick Revision
the income that does not form the part of taxable income. In this chap-
ter, you will study in detail about the concept of set-off and carry for-
ward of losses.
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Specific provisions have been made in the IT Act, 1961, for the set-
off and carry forward of losses. Set-off refers to adjustment of losses
against the profits from another source/head of income in the same
assessment year. If losses cannot be set-off in the same year due to
inadequacy of eligible profits, then such losses are carried forward for
the next assessment year for adjustment against the eligible profits of
that year. The maximum period for which different losses can be car-
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ring assets and incomes among family members. In the last section of
this chapter, the process of computation of total income of an assessee
is also explained.
certain cases, the assessee has to pay tax in respect of the income
derived by another person. These sections counteract the tendency
of the taxpayers to transfer their income or dispose of their property
with a view to avoid or reduce their tax liability.
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assets or income.
Section Nature of Income to be Clubbed Taxability
Section There is a transfer by a person of Such income shall be
60 income accruing to an asset with- included in the total
IM out the transfer of the asset itself income of the transferor.
giving rise to such income. It is immaterial whether
such transfer is revocable
or irrevocable.
Section There is a revocable transfer of Such income shall be
61 assets and income arises to any included in the total in-
person on assets obtained by virtue come of the transferor.
of revocable transfer of assets.
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64(1)(vi) assets transferred by the individual assets transferred to son’s
to the son’s wife without adequate wife shall be included in
consideration. the total income of the
transferor (i.e., individ-
IM ual).
Section Income arises to any person or Such income shall be
64(1)(vii) AOP from assets transferred oth- included in the total in-
and Sec- erwise than for adequate consider- come of the transferor.
tion 64(1) ation by an individual; where such
(viii) assets are transferred for the imme-
diate or deferred benefit of the
individual’s spouse or son’s wife.
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Section Income arises or accrues to a minor Such income of the minor Study
64(1A) child (including minor married child shall be included in Hint
daughter). the total income of his or Once clubbing of income of a
The clubbing provisions, however, her parent. minor child is done with the
will not be attracted in case the Such income of the minor income of one of the parents,
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income of the minor child accrues child shall be clubbed the same will be clubbed
on account of his manual work, with the income of that with that parent only for the
application of skills, knowledge, parent whose total in- subsequent years unless the
experience, etc. or where the minor come excluding minor’s Assessing Officer considers it
child is suffering from disability as income is higher, where necessary to do otherwise.
specified under Section 80U. the marriage of parents
subsists. Where the
marriage of parents does
not subsist, the income of
the minor child shall be
clubbed with the income
of the parent who main-
tains the minor child.
The parent in whose total
income the minor child’s
income is clubbed, shall
be entitled to an exemp-
tion of maximum ` 1,500
per child in respect of
such income under Sec-
tion 10(32).
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Activity
against the profit of that financial year. Losses can be carried forward
to subsequent assessment years in case there are no adequate profits
in the given financial year.
Regarding the set-off and carry forward of loss, the following points
must be remembered:
Loss from a source of income that is exempted from tax cannot
be set-off against any other income which is taxable. For exam-
ple, loss on the grounds of agricultural activity (which is exempted
from tax) cannot be adjusted against profit or income from any
other taxable source of income.
In any year, if a taxpayer has incurred loss from any source under
a particular head of income, then, the taxpayer may adjust such
loss against income from any other source falling under the same
head of income. This process of adjustment of a loss from a source
under a particular head of income against income from some other
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against subsequent years’ income. This is called carry forward of
loss. Different heads of income have different provisions for carry
forward of loss.
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Provisions under the income tax law in relation to carry forward
and set-off of loss from house property:
If the loss from house property is not fully adjusted in the same year in
which the loss incurred, then such loss can be carried forward to the
next year. However, such loss can only be adjusted against the head of
income from house property in the subsequent years. It means that
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set-off and carry forward the income losses incurred by him/her to the
coming years. The provisions of set-off and carry forward of income
losses has been made so as to divide the tax burden of assessee in the
case of losses.
As per Section 70 of Income Tax Act, 1961, if the assessee has incurred
losses under a certain income head, then he/she is permitted to adjust
these losses from any other income source under the same head. This
is referred to as intra-head adjustment. A taxpayer is not allowed to
carry out intra-head/inter-source adjustment of loss in the following
cases:
Speculative business losses: Speculative business losses are not
allowed to be set-off against any income other than income from
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any other income except income from the specified business. How-
ever, loss from other business can be set-off against the profit of
the specified business in a given financial year.
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10.3.2 INTER-HEAD ADJUSTMENT OF LOSSES AND SET-
OFF OF BROUGHT FORWARD LOSSES
loss from one head against income from other heads. Some examples
are as follows:
House property income losses: House property income losses
can be set-off against profits from other heads. Such loss can be
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The Act lays down different provisions for carrying forward of losses
under different heads of income, which are as follows:
House property income losses: As per Section 71(B) of Income
Tax Act, 1961, an assessee can carry forward losses incurred under
the head house property up to a period of eight years immedi-
ately succeeding the assessment year in which the loss has been
incurred. It can be adjusted only against house property income
loss. In this case, the assessee can file the deferred return.
Non-speculative business losses: As per Section 72 of Income
Tax Act, 1961, an assessee can carry forward non-speculative busi-
ness loss up to a period of eight years immediately succeeding the
assessment year in which the loss has been incurred. He/she must
file Income Tax Return (ITR) within the due date prescribed under
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Section 139 (1) of Income Tax Act, 1961. The loss can be set-off only
against business income.
Speculative business losses: Section 73 of the Act specifies that
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losses in speculative businesses can be carried forward up to a
period of four years immediately succeeding the assessment year
in which the loss has been incurred. An assessee must file the ITR
within due date prescribed to carry forward the losses from specu-
lative business. Such loss can be adjusted only against income
from speculation business.
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any other head, but against income under the
restricted to the extent of head ‘Income from House
` 2 lakhs Property’
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Section Loss Inter-source: Can be Brought forward loss of
72 from set-off against income one assessment year can
business from another business or be carried forward to the
or pro- profession following eight assess-
fession Inter-head: Can be set- ment years to be set-off
off against income under against income under the
any other head, but not head ‘Profits and Gains of
against income under the Business or Profession’
QUICK TIP
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head ‘Salaries’
Unabsorbed depreciation can be
carried forward for adjustment Section Loss Inter-source: Can be set- Brought forward loss of
even though the business 73 from off only against income one assessment year can
related to such depreciation has specu- from any other specula- be carried forward to the
been discontinued. lation tion business following four assessment
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Inter-head: Cannot be
ing and set-off against income years to be set-off against
main- under any other head income from the activity
taining of owing and maintaining
race race horses
horses
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Section Unab- Inter-source: Can be set- Brought forward loss
32(2) sorbed off against income from of one assessment year
depreci- any business can be carried forward
ation Inter-head: Can be set- to the following any no.
off against income under of assessment years to
any other head except be set-off against income
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set-off a loss suffered in a particular assessment year, the assessee Know More
Losses from gambling, betting,
must have filed the return of income within the time limit as pre- lottery, card games, etc., are
scribed under Section 139(1). However, this condition is not applica- not allowed to be set-off or
ble of loss from house property income (Section 71B) and unabsorbed carried forward. Similarly,
depreciation (Section 32(2)). losses from an exempt source
of income are not allowed to
be set-off or carried forward.
Order for set-off of losses
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Long-term capital gains 4,000
Winnings in card game 8,000
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Salary 1,08,000
Capital gains :
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* Loss from house property can be set-off against salary income and
loss from general business can be set-off against income from other
sources.
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Activity
IMPrepare a list of losses incurred by an assessee which cannot be set-
off under inter-head adjustments.
For the purpose of levy of income tax, the procedure for computation
of total income of an assessee is discussed in Table 10.3 below:
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head of income determine the scope of income to be taxed
under such head.
The five heads of income are:
1. Salaries
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2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other Sources
Step 3 The provisions governing a specific head of income are
– Compu- applied to compute the income chargeable to tax under each
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zz Other deductions
The provisions of residential status are discussed earlier in
Chapter 8 of the book.
Step 8 The Gross Total Income as reduced by the above deductions
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– Com- is referred to as Total Income.
putation Total Income = Gross Total Income – Deductions under
of Total Chapter VI-A
Income
The total income should be rounded off to the nearest multi-
ple of `10.
Step 9 – Tax is computed on the Total Income of an assessee. Slab
Applicabil- rates as prescribed by the Finance Act, 2018 are to be ap-
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ity of rates plied on the total income to compute the tax liability of an
of income assessee. These rates are discussed in Chapter 1 of the book.
tax on the Also, there are some specific tax rates on some special types
total in- of income prescribed under relevant sections of the Act itself
come of an such as tax rates on long-term capital gains under Section
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self assessment Questions
Activity
10.5 Summary S
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1961, if an assessee incurs loss under one head of income and has
earned any income under other heads of income, he/she is allowed
to adjust the loss from one head against income from other heads.
The losses incurred in the following cases cannot be set-off under
inter-head adjustments:
Speculative business loss
Specified business loss
Capital gain income loss
Loss from owning and maintaining race horses
Gross Total Income is computed by the summation of the net
income calculated under the different heads of income, after giv-
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ing consideration to the provisions of clubbing of income, and set-
off and carry forward of losses.
Key Words
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Clubbing: In case of computation of Gross Total Income of an
assessee, the income of another member of his or her family is
also included and taxed
Inter-head adjustments: After the intra-head adjustments,
the taxpayers can set-off remaining losses against income from
other heads
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6. c. Income of speculation
business
7. True
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Computation of Total Income 8. True
9. Chapter VI-A
Suggested Readings
Niyogi, J. (1929). The evolution of the Indian income tax. London:
P.S. King.
Singhania, V., & Singhania, K. (2004). Taxmann’s direct taxes. New
Delhi: Taxmann Publications.
e-References
Income Tax Slab Rates in India for AY 2017-18 and 2018-19 | H&R
Block. (2018). H&R Block India. Retrieved 5 April 2018, from
https://www.hrblock.in/guides/income-tax-slab-rates/
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Lohani, C. (2018). Gross Total Income-Total Income meaning
under Income Tax Act 1961. Abcaus.in. Retrieved 5 April 2018,
from http://abcaus.in/articles/income-tax/gross-total-income.html
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Contents
11.1 Introduction
11.2 Introduction to GST
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11.2.1 Importance of GST
11.2.2 Features and Benefits of GST
11.2.3 Evolution of GST
11.2.4 Goods and Service Tax Network
11.2.5 GST Rates in India
Self Assessment Questions
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Activity
11.3 Levy and Collection of GST (Charging Section)
11.3.1 Exemption from GST
11.3.2 Supply of Goods
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Contents
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Introductory Caselet
n o t e s
By subsuming Central and State taxes into a single tax and by Case Objective
offering a set-off of prior stage taxes for all transactions across the
value chain process, GST mitigates the ill effects of cascading and This caselet shows the role
double taxation. This improves liquidity and competitiveness of of GST in eliminating the
cascading effect of taxes
businesses.
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to the respective accounts of Central and State Governments.
Since Amar is the first stage supplier, he cannot avail any input
tax credit of CGST/SGST/IGST.
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Supply of goods/services by Amar to Bhargav Amount in `
Value of goods and services 10,000
Add: CGST@ 9% 900
Add: SGST@ 9% 900
Total price charged by Amar from Bhargav 11,800
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The amount of tax paid to the government, i.e., `360 shall be cal-
culated after netting off the input tax credit availed by Bhargav,
i.e., `1,800 from tax payable on the last transaction, i.e., `2,160,
thus preventing double taxation. The input tax credit of CGST
and SGST is available throughout the supply chain. Similarly, if
there is an inter-state sale, the cross-utilisation of CGST/SGST
and IGST is also allowed.
Introductory Caselet
n o t e s
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The final amount of tax is ultimately recovered from the final con-
sumer, i.e., Chinmay. Thus, GST entails tax to be imposed only on
the value added at each stage, preventing a tax on tax or cascad-
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ing effect. The suppliers are permitted to avail input tax credit
of GST paid on purchases of goods/services, that can be set-off
against tax payable on the supply of goods/services by them at
each subsequent stage.
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learning objectives
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11.1 INTRODUCTION
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In the previous chapter, you studied about the provisions related to Quick Revision
the clubbing of income, set-off and carry forward of losses and process
of computing the total income. You studied tax slab rates applicable
for each of these categories. When it comes to sale and purchase of
goods and services, a new tax structure called Goods and Services Tax
(GST) has been introduced from the year 2017. In this chapter, you
will study GST in detail.
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S
3. SGST: SGST is a constituent of State Goods and Services Tax Act,
2016. SGST is introduced as the replacement of all the present
taxes including sales tax, VAT, luxury tax, entertainment tax ,
entry tax, taxes on lottery, betting and gambling. However, it has
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not replaced Octroi, State Cesses and Surcharges. The revenue
accumulated under SGST is solely for the state government.
4. UTGST: UTGST is a constituent of GST in India. GST levied
on the supply of goods and services in the Union Territories like
Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar
Haveli, Daman and Diu, Delhi (National Capital Territory of
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11.2.1 IMPORTANCE OF GST
GST has improved tax governance in two ways. The first one is related
to the self-policing incentive inherent to a VAT. For claiming input
tax credit, dealers have an incentive of requesting documents from
other dealers situated behind him in the VAT chain. The second one is
related to the GST’s dual monitoring structure, one by the Centre and
one by the States. The dual structure has been viewed by the taxpay-
ers and critics with some worry, with a fear that two sources of inter-
face would be involved. However, this structure should also be consid-
ered from a point of view of creating the desired tax competition and
coordination between central and state authorities. In this case, if one
set of tax authorities fails in detecting evasion, the possibility is the
other would not.
To conclude, GST has made the tax structure simple and clear. It has
made the entire Indian market unified, resulting into lower business
costs. It also enables smooth goods movement across India and low-
ers down business transaction costs. It is not applicable for goods and
services exported from India and, therefore, it is good for businesses
oriented to export. As time passes, it would translate into low prices of
consumer goods. Manufacturers, suppliers, retailers and wholesalers
can recover the GST that has been incurred as tax credits on input
costs. This lowers down the cost of running a business, which allows
fair costs for consumers. It brings better compliance and more trans-
parency.
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Salient features of GST are as follows:
Dual goods and services tax: GST is an indirect tax structure,
dual in nature, which enables both central government and state
governments to levy the tax.
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Inter-State transactions and the IGST mechanism: Integrated
Goods and Services Tax (IGST) is to be levied by the Centre at the
inter-state level on the distribution of goods and services. The de-
sign of the IGST mechanism guarantees a coherent flow of input
tax credit between any two states. IGST will have to be paid by
the inter-state seller on goods sold by him/her after adjusting for
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IGST, CGST and SGST on his purchases. The state that exports
will transfer SGST’s credit used in IGST’s payment to the Centre.
The claim of IGST’s credit can be done by the dealer who imports,
in his own state only, while releasing the output tax liability (both
the CGST and SGST). The IGST’s credit used in the payment of
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Input Tax Credit (ITC) Set-off: For the taxes that are allowed
against central and state, ITC for CGST and SGST will be allowed
to be taken.
GST on imports: IGST will be levied by the centre on supply of
inter-state goods and services. The centre will levy IGST on the
inter-state supply of goods and services. Goods that are imported
will be subject to customs duty and IGST.
Maintenance of records: To avail, utilise or refund ITC of CGST,
SGST and IGST, separate details in books of account will have to
be maintained by the taxpayer or the exporter.
Administration of GST: The GST Council will be responsible for
the administration of GST and it also acts as the prime policy-mak-
ing body of the GST. The council comprises central and state min-
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isters, who are in-charge of the financial body.
GST Council: The GST Council is a union of the Centre and the
States. Recommendations will be made to the Union and the
IM States by the Council on vital issues like rates of tax, list of exemp-
tion, threshold limits, etc. Half of the gross members of the Council
form the GST Council’s quorum.
the indirect taxes, GST implemented. Taxes like Excise duty, Sales tax, CENVAT, Service
implementation has been able to
tax and are no more applicable. All these taxes fall under GST.
ensure a seamless flow of credit
and improve business liquidity. Uniformity of tax rates and structure: GST guarantees that all
indirect taxes and their structures must be common throughout
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the country as this will increase the conviction and comfort of car-
rying out any business. Each state will come under one tax regi-
men only, hence preventing any unhealthy competitions amongst
states. GST proves to be beneficial for all those who do inter-state
business or want to expand their business in other states.
Easy tax filing: For entrepreneurs and small businessmen, the
complicacy that is associated with taxing documentation can be
easily avoided. Filing returns, payment of taxes and the process
of refund is convenient. Tax evasion and corruption has been re-
duced to an extent, making the system more efficient.
Reduction in cost: After GST, dual charges have been eliminat-
ed. Earlier, VAT was applicable on the goods such as cosmetics,
detergents, etc., apart from excise. GST has eliminated these type
of dual charges. Therefore, the prices of goods and services may
decrease, enabling consumers to save more money. GST is advan-
tageous for both the businessman and the consumers.
Better control on leakage: A sturdy IT infrastructure makes it
possible to adapt with GST. The coherent transfer of input tax
11.2.3 EVOLUTION OF GST
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The entire timeline of GST and how it has evolved over time is pre-
sented in Table 11.1:
2012 New deadline (i.e., December 31, 2012) was set up by the
then Finance Minister
2014 In the budget speech, the then Finance Minister
announced a compensation of ` 9,000 crore for states.
December The Finance Minister introduces bill in the Lok Sabha
2014
February 2016 New deadline (i.e., April 01, 2016) was set up
January 2017 New deadline to roll out GST was set up (i.e., July 01, 2017)
March 2017 Four key bills (CGST, IGST, SGST and UTGST) are passed
in both houses
May 2017 Four slab rates (i.e., 5%, 12%, 18% and 28%) are unveiled
by the GST council
July 01, 2017 GST rolled out
ture and services to both central and state governments, tax payers
and other stakeholders to implement GST.
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tax credit.
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Nuts or other parts of Plants
including Pickle Murabba, Chut-
ney, Jam, Jelly, Packed Coconut
Water, and Umbrella, etc. (comput-
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ers and processed foods)
18% (9% of CGST and 9% Hair Oil, Capital goods, Tooth-
of SGST) paste, Industrial Intermediaries,
Soap, Ice-cream, Pasta, Toiletries,
Corn Flakes, Computers, Soups,
and Printers, etc.
28% (14% of CGST and All other items that directly reach
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Exhibit
GSTIN STRUCTURE
Goods and Services Tax Identification Number (GSTIN) is a 15
digit unique code. It is a state and PAN based code that is assigned
to each taxpayer. The structure of GSTIN is as follows:
Exhibit
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Aggregate turnover: A person whose aggregate turnover in a
financial year is over ` 20 lakhs. This aggregate turnover crite-
rion is over ` 10 lakhs for the states who fall under the special
category states.
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1. States with threshold limit of `10 lakh for supplier of goods
and/or Services
Manipur Nagaland
Mizoram Tripura
2. States with threshold limit of ` 20 lakh for supplier of goods
and/or Services
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Meghalaya Puducherry
Sikkim Telangana
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person who carries forward a business that was run by a person
who was registered under GST is required to get a GST regis-
tration.
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self assessment Questions
GST.
5. GSTN provides an analysis of taxpayers’ profile. (True/False)
6. What is the GST on salt?
a. 0% b. 5%
c. 12% d. 18%
7. Manufacturers, suppliers, retailers and wholesalers can
recover the GST that has been incurred as ________ on input
costs.
8. The states get input tax credit on ________ and it may be
utilised against the payment of CGST.
Activity
Randomly pick any ten items up that you use in your daily life.
Against each item, list the rate of GST that is charged on them.
Any person who carries out a business at any place throughout India,
who is already registered or needs to get registered under the GST Act
can be called a taxable person. Additionally, a person who is engaged
in any kind of economic activity, involving in trade and commerce will
also be considered a taxable person.
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The ‘person’ in the GST act may include any of the following:
Individuals
Hindu Undivided Family or HUF
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Company or Firm
Limited Liability Partnership
Association of Persons or Body of Individuals
Corporation or Government company
Body incorporated under any foreign country’s laws
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Co-operative Society
Local Authority
Government
Trust
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Any activity that falls under the taxable category as per GST rules is
called a supply. The government considers an activity as a supply if it
meets any of the following criteria:
Supply of goods or services
Any taxable supply
A taxable person making the supply
Supply that is made in a territory and is taxable
Supply made in exchange for cash or reward
Supply made during business course or for growing business
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The supply of goods and services that fall under GST can be divided
into two categories, namely Taxable supplies and Non-taxable sup-
plies. Further, classification of these supplies can be divided into dif-
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ferent categories on the basis of the nature of the supply.
following:
Regular taxable supplies: The goods or services whose GST
rate is greater than 0% fall under the category of regular tax-
able supply.
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Study There are three components based on which the GST tax owed by a
Hint person is calculated for a transaction. These components are described
as follows:
Some activities specified in the
Negative List under Section 1. Place of supply: The determination of the type of transaction,
7(2) shall be neither treated whether it is an inter-state, intra-state or an external trade is done
as a supply of goods nor as
a supply of services for the
through this component. It will determine the GST type associated
purpose of taxability. with it.
2. Value of supply: The value that is taxable for the supply is
determined through this component. It also determines the tax
amount to be paid.
3. Time of supply: The date on which the taxes associated and the
returns for GST are due is determined by this component.
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To determine the right amount of tax that needs to be charged on the
transaction of goods and services, one needs to understand the con-
cept of ‘place of supply’.
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The place from where the goods are delivered becomes the place of
supply. It is the place where the ownership of the goods are changed.
In case, the goods are not moved from one place to another, the loca-
tion of goods at the time of delivery becomes the place of supply.
In case of services, the location of the person who receives the ser-
vice becomes the place of supply. If the services are provided to any
unregistered dealer and the location information is not available, then
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the service provider’s location will become the place of supply. The
provisions specially provided to determine the place of supply are as
follows:
Services related to immovable property
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Restaurant services
Admission to events
Transportation of goods and passengers
Telecom services
Banking, financial and insurance services
If the services are associated with immovable property, then the prop-
erty location becomes the place of supply.
The amount of money that the seller collects for the goods and ser-
vices that he supplies is considered as the value of supply. Addition-
ally, the amount of money that a seller collects from the buyer is also
considered as value of supply.
In cases, when both parties are related and the value that is reason-
able may not be charged, or the transaction occurs as an exchange,
the GST must be charged on the transactional value of the supplies.
The value of supply enables the parties, which are unrelated, to make
transactions in the normal business course. It is responsible to ensure
that GST is properly charged and collected, irrespective of the full
payment of the value.
The time when goods and services are supplied is considered to be the
time of supply. The time of supply helps the seller to determine the
due date for the tax payment.
At the time of the supply of goods and services, the GST must be paid.
The time of supply is identified on the basis of goods and services. For
goods, the time of supply shall be the earliest of the following dates:
Invoice issue date
Last invoice issuing date
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Advance or payment receipt date
For services, the time of supply shall be the earliest of the following
dates:
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Invoice issue date
Advance or payment receipt date
The services provision date (in case the invoice is not issued within
a stipulated time)
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Activity
Businesses can claim for ITC excluding the goods and services which
are used for:
Personal use
Supplies exempted
Supplies that are covered by ITC
For claiming ITC, the businesses must comply with the following rules:
A buyer must have a valid tax invoice issued by a registered dealer.
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the supplier to the government in cash or through ITC.
The returns must have been filed by the supplier. ITC can be
claimed on purchases, only if the supplier of the goods complies
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with the rules of GST and pays tax to the government.
The buyer must pay for the supplies received to the supplier with-
in a time period of 180 days from invoice issue date in order to
claim for ITC.
Purchases for which the buyer pays tax on the basis of the reverse
charge
Credits that are blocked
NOTE Tax invoices and debit notes that are less than a year old qualify to be
Section 2(59) defines the term claimed for ITC. In other cases, ITC can be claimed by earliest of the
‘input’ as any goods other
than capital goods which are
following dates:
used or intended to be used
The end of the financial year which applies to that invoice followed
by the supplier in the course
of business or furtherance of by the date of filing GST returns for September
business.
The date before filing an annual return that is relevant
There are some special cases apart from the ones mentioned above
that are eligible for claiming ITC.
Goods are sent to a job worker for processing by the principal man-
ufacturer. For instance, a company that manufactures bags sends its
half-made bags to the job workers for chain fitting. The manufacturer
is allowed to claim ITC on purchased goods that are sent to job work-
ers.
There are two cases in which ITC is allowed on goods sent to job work-
ers:
1. From the principal manufacturer’s place of business
2. From the goods supplier’s place directly
To enjoy the ITC benefit, the principal manufacturer must receive the
goods back within a year (within 3 years for capital goods).
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Input Service Distributor (ISD) under GST. ITC is collected by ISD
on the purchases made and, thereafter, it is distributed among all the
receiving branches under CGST, SGST/UTGST and IGST.
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At the time of a merger or a transfer of business, the ITC available
with the transferor is passed onto the transferee.
The capital goods that are partially for business and partially for
supplies that are exempted or fall under the personal use category
If the reversed ITC is less than required
In accordance with the GST law, any person who is taxable can claim
for ITC for the amount of tax paid on the purchase of capital goods
of the company. ITC that falls under the present tax scheme can be
transferred to GST scheme during the migration process.
To transfer the existing ITC to GST, one needs to file the GST TRAN-1
form on GST common portal. The GST TRAN-1 form can be filed
by logging into the GST portal and fill the electronic GST TRAN-1
form, which states the tax amount or duty, that needs to be claimed as
ITC.
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self assessment Questions
10. A businessman Dinesh bought some items and paid tax on the
basis of the reverse charge. He cannot claim ___________.
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Activity
supply
2. CGST: It should be paid to the Center in case an intra-state supply
3. SGST: It should be paid to the State in case of an inter-state supply
The tax must be paid by every 20th day of the month by every taxpayer
who is registered under GST. An additional interest may be charged
on the due tax if the tax is not paid by the stipulated date. The tax
returns cannot be filed for next reporting period.
11. The GST payments can be made either through the ITC or
________ available in the E-ledgers.
Activity
Using the Internet, find out the conditions under which the debit
entry is made in an ITC ledger.
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it is also shared between the buyer and the seller in certain cases. Central Board of Excise &
Customs (CBEC) has been
The reverse charge is applicable on goods and services in the follow- rechristened as Central Board of
Indirect Taxes & Customs (CBIC).
ing cases:
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A business owner who is registered and receives goods and
services from a vendor who is not registered
Any service which is offered by an electronic commerce operator
or an aggregator
Annual returns and final returns are different from each other. When
NOTE
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Activity
Table 11.3 shows the offences along with the activities involved, which
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are listed by the in GST Act:
Activity
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tinctive bill that is generated electronically for the shipment of goods
worth the value of more than ` 50,000 within a state or outside the
state. It aims at a speedy and trouble-free movement of goods all over
India, without any sort of obstacle.
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It has replaced the former bill, which used to be a paper bill under
the VAT system with the name of road permit, way bill, etc. It helped
in monitoring the movement of goods to or from a state, to keep an
eye on tax evasion. It was required while transporting goods from the
supplier to the receiver. However, these bills were subjected to the
rules which were specific to a state and had to be generated from the
portals of different states. Earlier, the transporter issued a way bill
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The E-way bill can be generated through the GSTN set-up, before the
goods begin to move. An E-way bill number (EBN) is allotted after the
E-way bill is produced. The EBN number is available to be accessible
to the transporter, the supplier and the recipient.
Activity
Search the Internet and discuss at least five cases when e-way bill
is not required.
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GST is a consumption-based tax, which means that all the accu-
mulated SGST will complement to the State where the consumer
of the sold goods and services resides.
Goods and Services Tax Network (GSTN) is a joint non-govern-
ment and not-for-profit company set-up by the Central and the
State governments which allocate the IT infrastructure and ser-
vices shared by the Central and the State governments, taxpayers
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and other stakeholders.
From manufacturing till consumption, GST is applicable to all
the stages. Every stage of the chain is entitled to the benefit of tax
IM credit.
The supply of goods and services that fall under GST can be divid-
ed into two categories, namely Taxable supplies and Non-taxable
supplies.
Input Tax Credit (ITC) allows the businesses in India to claim for
reduction in the tax paid already by them while buying goods for
the company and pay just the balance amount.
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The buyer receives credit at every stage in a supply chain for the
amount of input tax paid. It can be used to claim reduction in the
amount of GST needed to be paid to the central government and
the state governments.
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key words
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Topic Q. No. Answer
Introduction to GST 1. alcohol for human consump-
IMtion; electricity
2. centre government; state
government
3. inter-state
4. GST Council
5. True
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6. a. 0%
7. tax credits
8. CGST
Levy and Collection of GST 9. taxable person
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(Charging Section)
Input Tax Credit 10. ITC
Payment of Tax 11. Cash
Reverse Charge and Returns 12. reverse charge
Offences and Penalties 13. offence
E-way Bill 14. False
3. Input Tax Credit (ITC) allows the businesses in India to claim for
reduction in the tax paid by them already while buying goods for
the company and pay just the balance amount. Refer to Section
11.4 Input Tax Credit
4. The payment of tax can be done through various options,
namely counter payments, challan generation and Cards/NEFT
Payments. Refer to Section 11.5 Payment of Tax
5. Different offences include fraud, fake invoicing, tax evasion, etc.
Refer to Section 11.7 Offences in GST
6. The E-way bill provision under the GST system is defined as a
distinctive bill that is generated electronically for the shipment
of goods worth the value of more than ` 50,000 within a state or
outside the state. Refer to Section 11.8 E-way Bill
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SUGGESTED READINGS &
11.12
REFERENCES
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SUGGESTED READINGS
V.S. Datey. GST Ready Reckoner
Vashishtha Chaudhary Ashu. GST - A Practical Approach
E-REFERENCES
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INTERNATIONAL TAXATION
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CONTENTS
12.1 Introduction
12.2 Concept of International Taxation
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12.2.1 Objectives of International Taxation
12.2.2 Central Principles of International Taxation
Self Assessment Questions
Activity
12.3 Double Taxation
12.3.1 Relief from Double Taxation
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Activity
12.5 Summary
12.6 Descriptive Questions
12.7 Answers and Hints
12.8 Suggested Readings & References
Introductory Caselet
n o t e s
DTAA prevents taxing twice the same income in the hands of the
Case Objective assessee. It helps in cases when a certain income is subjected to
This caselet highlights the use tax both in India and a country outside India. In India, persons are
of Double Taxation Avoidance taxed on the basis of their residential status; and it may be possi-
Agreements (DTAAs) ble that they are taxed on the same income in another country on
the same/any other basis.
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technical services provided by ABC Ltd.
ensure that the resident country allows a tax credit for the tax
charged on the same income in the source country.
India-US DTAA states that tax will be collected by the Indian gov-
ernment only rather than by the US government. Thus, US com-
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panies will not deduct any tax on the payment made to ABC Ltd.
The DTAA saves companies like ABC Ltd. from paying tax twice.
learning objectives
12.1 INTRODUCTION
In the previous chapter, you have studied about goods and services tax Quick Revision
and its significance.
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Due to the movement of goods on an international scale, each move-
ment may be subject to tax jurisdictions in both the countries. Export
of a good or service from one country is, by its very definition, import
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for another country. Thus, the possibility of double taxation can occur.
For example, if the home country deducts tax on foreign income of
its residents and the foreign country deducts tax on the income of its
non-residents originating in its country, then such income is said to be
subject to double taxation.
CONCEPT OF INTERNATIONAL
12.2
TAXATION
The system of taxation varies from country to country. These systems
are applicable to the persons or the business entity residing in that NOTE
country. However, when income is earned or remitted from one coun- There is an accepted convention
try to another country, the concept of international taxation comes in international taxation that one
into purview. country cannot enforce tax on
territory of another country.
International taxation involves rules with respect to the taxation of an
entity which operates in more than one country.
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has earned the income, then the assessee shall be assessed in that
country only and will pay tax to that country only.
To exchange information: International taxation aims to promote
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exchange taxation information relating to assesses between the
concerned countries. It also helps in gathering knowledge about
illegal activities conducted by the assessees, if any.
Activity
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Using various resources, study the concept of international taxa-
tion with respect to India and prepare a report.
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12.3 DOUBLE TAXATION
In the present era of world economy, a country should consider the
effect of taxation on its business, trade and commerce. Double taxa- Know More
Taxing the same income in the
tion occurs because companies are considered to be separate entities hands of the assessee twice is
from their employees. Double taxation arises from two rules, namely: called as double taxation.
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1. Source rule
2. Residence rule
The source rule states that the income has to be taxed in the country
in which it is generated irrespective of whether the person is residing
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The residence rule states that the income has to be taxed in the coun-
try in which the individual resides irrespective of whether the income
is earned in the same country or not.
There are two ways in which relief can be granted from double taxa-
tion. Know More
There are three popular
BILATERAL RELIEF model conventions that are
used in preparing the tax
agreements. They are OECD
Under this method, a double taxation avoidance agreement is estab- Model Convention, UN Model
lished between the two countries in order to avoid double taxation Convention and US Model
on the generation of income of the individual. India has entered into Convention.
DTAA with more than 90 countries.
The relief under the bilateral method is provided under two methods:
1. It is agreed between the countries involved that the income will
be taxed only by one of the countries The other country will not
tax the income of the assessee.
2. Both the countries will tax the income as per their taxation rules,
but the tax paid by the assessee in one country can be claimed as
a input in relief while paying the tax in the other country.
Section 90 of the Income Tax Act covers the bilateral relief agreement
between countries. This section provides that the Central Govern-
ment can enter into an agreement with any other country or countries
of the world in order to:
NOTE Grant relief with respect to the income which has been earned in
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Section 90(2) states that where some other country and has been taxed in that particular country
the DTAA is entered into by the as well as in India
Government, then the Income
Tax Act provisions would apply Grant relief from tax laws and provisions so as to promote the eco-
nomic relations through trade and commerce with other countries
only to the extent to which
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they are more beneficial to the
assessee. Avoid double taxation on the income
UNILATERAL RELIEF
this case, the residency country does not charge taxes on the income
earned in the other country.
Know More Section 91 of the Income Tax Act covers the provision of unilateral
The specific provisions of the agreements in which no agreement has been established between two
DTAA take precedence over the countries. In case no agreement exists between the countries, relief
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general provisions of the Income would be provided by the country on the fulfilment of the following
Tax Act, 1961.
conditions:
The assessee who is under the tax jurisdiction must be a resident
Study in India during the previous years in which the income has been
Hint earned.
Relief is granted under The income should have been earned by him outside India.
Section 91 in the form of a
deduction from Indian income The income is not deemed to be earned by the assessee in India.
tax payable. The deduction is
The assessee has paid taxes on the income earned in the foreign
equal to tax calculated on the
doubly taxed income at Indian country as per the rules of taxation of that country.
rate of tax or rate of tax in the
No DTAA has been established between India and that country in
other country, whichever is
lower. which the assessee has earned the income.
If all the above conditions have been fulfilled by the assessee who has
earned the income and wants a tax relief in India, then such person is
entitled to have the tax relief under the Act.
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Passport and Visa copy duly attested
A factory
A workshop
A sales outlet
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FEATURES OF PE
NOTE
As per Section 9(1), for deeming
The features of permanent establishment are as follows: the business income to accrue
or arise in India, there must exist
PE is a fixed place anywhere in India from where business can be a business connection.
conducted exclusively or partially. In contrast, as per DTAA, the
PE is handled by the clauses of the DTAA and every DTAA has a business income of an entity
clause for the PE in India. is taxable only if there is a
permanent establishment.
An NRI will not be taxed in India until he/she has a PE in India.
Activity
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QUICK TIP According to Section 195 of the Income Tax Act, 1961, any person
Section 195 identifies TDS rates responsible for the payment of interest to a non-resident or foreign
and deductions on business
company or any other taxable amount in India, not being salaries,
transactions with non-residents
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on a daily basis. shall deduct tax at the rates in force at the time of payment.
incomes shall not be included— the time of payment either in cash or by cheque or by draft.
(i) a Mutual Fund registered
under the Securities LIABILITY FOR DEDUCTION
and Exchange Board
of India Act, 1992 (15 of Any individual, who is paying taxable income to an NRI, is liable for
1992) or regulations made
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deducting the tax. If the payer is a company, then the company itself
thereunder;
is liable to recover tax and pay it to the central government. In any
(ii) such other Mutual Fund set other case also, the payer has to deduct the tax from the income to be
up by a public sector bank or
a public financial institution
remitted to the non-resident and to pay the same to the tax department.
or authorised by the Reserve
Bank of India and subject NO DEDUCTION IN CERTAIN CASES
to such conditions as the
Central Government may, In the following cases, no tax shall be deducted under Section 195:
by notification in the Official
Gazette, specify in this No deduction has to be made if the income does not involve any
behalf. credit of the payment.
Section 172 of the Income Tax Act is applicable, wherein it concerns
the levy or recovery of tax in the case of any ship that belongs to a
non-resident and is carrying passengers, livestock, mail or goods
to a port in India, then Section 195 does not apply.
No deduction shall be made in case tax on income of the Foreign
Institutional Investors (FII) arising from transfer of securities or
capital gains under Section 115AD.
Any person should fill the Forms 15CA and 15CB before making pay-
ments to any non-resident individual. Figure 12.1 shows the proce-
dure for Furnishing Form 15CA:
Remitter
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Electronically uploads the remittance detail in Form 15CA
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13. The Form _________ is a certificate which is issued by a
chartered accountant to the person making the remittance
payment.
14. The person responsible for making a payment has to obtain a
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certificate in Form 15CB from a certified chartered accountant.
After this, the individual has to furnish information with
respect to payment in the form ______.
Activity
S 12.5 SUMMARY
International taxation is the study of tax laws applicable on indi-
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key words
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the same income in the two countries
International taxation: The study of those tax laws that are
applicable on individuals or business enterprises subject to the
laws of different other countries
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Unilateral relief: A method under which relief has been pro-
vided by the home country in case where there is no agreement
entered by that country with the other country
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Implication of Section 195 12. True
13. 15 CB
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SUGGESTED READINGS
Isenbergh, J. (2005). International Taxation. Foundation Press.
Lymer, A. and Hasseldine, J. (2002). The International Taxation
System. Springer Science+Business Idea, New York.
E-REFERENCES
International Taxation. Retrieved from http://www.incometaxin-
dia.gov.in/pages/international-taxation.aspx.
Agarwal, R. (2013). What is Double Taxation Avoidance Agree-
S
ment (DTAA)?. goodreturns.in. Retrieved 30 April 2016, from
http://www.goodreturns.in/classroom/2013/07/what-is-double-tax-
ation-avoidance-agreementdtaa-193501.html
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CASE STUDIES
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CONTENTS
Case Study 12 Unilateral Relief for Double Taxation where no Agreement Exists
with Foreign Country
Case Study 1
n o t e s
TAX EVASION
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tor of FGP Ltd.
This is due to the fact that the company pays tax at a flat rate of
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questions
Case Study 2
n o t e s
Ms. Soumya earns the following incomes pertaining to the Previ- Case Objective
ous Year 2022-2023:
This Case Study discusses the
1. Short term capital gains of ` 15,000 from the sale of shares in
scope of total income based
an Indian company, received in USA. on the residential status. It is
2. A dividend of ` 8,500 from an Indian Company, PR Ltd. with respect to Chapter 2 of
the book.
3. A dividend of ` 11,500 from a German Company, received in
Germany.
4. ` 26,000 agricultural income from land in Madhya Pradesh.
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5. Rent of ` 80,000 from a house property in London, deposited
in London bank and remitted to India later on.
hands of assesses.
ii. For resident but not ordinarily residents, income received or
deemed to be received/income accrued or arisen or deemed
to accrue or arise, in India is taxable in the hands of assesses.
In addition to this, income accrued or arisen outside India
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Case Study 2
n o t e s
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Pradesh.
{Agricultural income is exempt under Section 10(1)}
Rent from house proper- 56,000 (80,000 - Nil Nil
ty in London, deposited 24,000)
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in London bank, and
remitted to India later
on
{Income accrued or arisen outside India (Income from property is taken after
allowing 30% deduction)}
Total Income 82,500 15,000 15,000
questions
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Dearness allowance was ` 4,000 per month, of which 60% was
meant for retirement benefits as per the terms of employment.
Also, he was eligible to a commission @ 1% of turnover (turnover
amounted to ` 12,00,000 in the past 12 months). Mr. Rishi also
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received a bonus of ` 12,000 p.a.
Under the Income Tax Act, 1961, any gratuity received during the
tenure of service is fully taxable. The amount of exemption avail-
able in respect of gratuity received at the time of retirement/death
of an employee differs under three situations:
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Case Study 3
n o t e s
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Less: Amount exempt under Section 10(10)(i) 7,00,000
Taxable Gratuity -
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If Mr. Rishi is a private sector employee Amount in `
covered by Payment of Gratuity Act
Amount of Gratuity received on retirement 7,00,000
Less: Amount exempt under Section 10(10)(ii) 1,86,923
Least of the following:
1. ` 7,00,000
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2. ` 20,00,000
3. ` {(8,000 + 4,000) × 15/26 × 27}= ` 1,86,923
Taxable Gratuity 5,13,077
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Case Study 3
n o t e s
questions
S
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N
Case Study 4
n o t e s
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it becomes important for Swapnil to understand the tax implica-
tion for each option in accordance with the Income Tax Act, 1961
before deciding what he should do with his new property. The tax
implications for the above alternatives are as follows:
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If the new property is let out on rent: In this situation, the rent
received from the property will be taxed. For example, if Swapnil
is getting a rent of ` 10,000 per month from his property, he will
have to pay tax for his annual rental income, i.e., ` 1,20,000 after
tax deductions including municipal taxes, standard deductions
and interest (if any).
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taxable.
Case Study 4
n o t e s
questions
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(Hint: Municipal taxes, standard deductions and interest,
etc.)
2. Explain the computation of income from ‘self-occupied
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property’ as per the provisions of the Income Tax Act.
(Hint: Refer to Section 23(2) and 23(4))
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Case Study 5
n o t e s
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tions made by the assessee towards certain specified institutions
approved by prescribed authorities.
For calculating the taxable business income for the A.Y. 2023-
IM
2024, Mr. L.P. wishes to claim a deduction of scientific research
expenditures for his business entity, L.P. Ltd. By applying the spe-
cific provisions of Section 35, the deductions shall be allowed as
follows:
Deduction (`)
Allowed
Amount paid for 1,20,000 Section 35(1)(ii)-Contribu- 150% 1,80,000
scientific research tion to notified approved
to approved Indian college/university/institu-
Institute of Scienc- tion/research association
es, Mysore for scientific research
N
Case Study 5
n o t e s
S
tion to notified approved
college/university/institu-
tion/research association
for social science/statistical
research
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Total deduction allowable under Section 35 14,65,000
questions
assessees.)
Case Study 6
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S
The fair market value of the property as on 1.4.2001 is ` 9,40,000.
This house property was sold by Mr. Chugh on 11.8.2018 for
` 77,00,000 after incurring expenses of ` 40,000 on the transfer.
The capital gains on such transfer are calculated as follows:
IM
Financial Year (FY) Cost Inflation Index (CII)
2001-02 100
2003-04 105
2013-14 200
2018-19 280
M
2019-20 289
2020-21 301
Case Study 6
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S
(Indexed COI = ` 5,11,000 × 301/200) 7,69,055
Total Indexed COI 30,76,722
questions
Case Study 7
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3. He earns around ` 9 lakhs as dividends.
4. He won a lottery and earned around ` 3 lakhs.
5. He won ` 3 lakhs by winning a bet in horse race.
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6. He received a gift from his father which is an envelope and
carries around ` 50,000.
7. He received ` 24,000 as gift from his friends on his birthday.
8. His grandfather gifted him ` 2,52,000.
9. He received ` 35,000 as gift on his marriage anniversary.
M
questions
S
Particulars Workings Amount
(in `) (in `)
Profits and gains of business or 148,000
profession
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Income from Other Sources
1. Lottery Income 110,000
2. Interest on Fixed Deposits 55,000
Gross Total Income 313,000
Less: Deductions allowed under Chapter
VI-A
M
Case Study 8
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questions
S
80C)
2. Who are eligible for claiming a deduction under Section
80TTB?
IM (Hint: Resident senior citizens, Refer to Section 80TTB)
M
N
S
While computing his taxable income under the head ‘Salaries’, he
desires to claim an exemption of HRA. For this purpose, he goes
through the rules mentioned in the taxation laws.
IM
Section 10(13A) of the Income Tax Act, 1961 states that HRA is
exempt to the least of the following in the hands of an employee:
HRA actually received during the previous year
Rent paid minus 10% of the salary
50% of salary if accommodation is located in Delhi/Mumbai/
M
Chennai/Kolkata
OR
40% of salary if accommodation is located in non-metro cities
N
questions
Case Study 10
n o t e s
Cazy and Hazy are two sisters born and brought up in Delhi.
Case Objective While Cazy is settled in Australia after her marriage in 1981, Hazy
This Case Study discusses the is settled in Delhi. Both of them, being aged below 60 years, earn
concept of computation of the the following incomes during the previous year ended 31st March,
total income of an assessee. 2023:
It is with respect to Chapter 10
of the book.
Particulars Cazy (`) Hazy (`)
Pension granted by State Government - 51,000
Pension granted by Australian Government 21,000 -
TECH
INFO Long-term capital gain from the sale of land 1,03,000 49,000
situated in Delhi
S
Rent received from house property situated in 59,000 31,000
Delhi
LIC premium paid - 9,000
IM
Australian Life Insurance Corporation 41,000 -
premium paid at Australia
Short-term capital gain from the sale of shares 21,000 2,49,000
of the listed Indian company, STT paid
Premium on Mediclaim policy paid - 24,000
Contribution to PPF - 18,000
M
The taxable income and total tax liability of Cazy and Hazy for the
Assessment Year 2023-2024 are computed as follows:
Case Study 10
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Deduction under Section 80D
Premium paid on Mediclaim policy - 24,000
- 24,000
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Total deduction under Chapter VI-A is restricted 41,000 32,700
to Gross Total Income exclusive of long-term and
short-term capital gains
Total Income = Gross Total Income – Deductions 1,24,300 2,98,000
Case Study 10
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questions
S
2. Discuss the provisions relating to the rebate under income
tax law.
(Hint: Refer to Section 87)
IM
M
N
S
has brought a win-win situation for the whole economy including
industry stakeholders, consumers and the government. It has low-
ered the cost of goods and services, boosted the economy and has
made products and services globally competitive. This is because
IM
the GST system offers a continuous chain of input tax credits
from producer/service provider’s point up to the final retailer’s/
consumer’s point. A set-off of these credits from GST payable at
various stages of supply, thus, results in taxing the value addition
only at each supply chain stage.
Goods and Services Tax is a type of indirect tax reform that aims
to remove taxation barriers between states, thereby creating
a unified market and provides unrestricted access to the entire
nation to buy, sell, import and export within the country. It has
created a uniform market and the consumers get benefitted from
the reduction of prices of different items.
GST has helped widen the tax base, with the number of registra-
tions crossing 10 million. The growth rate projected by the IMF
after implementing the GST is beyond 8%.
Case Study 11
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questions
S
IM
M
N
S
even when no mutual agreement is entered into by two countries.
The tax consultant computed the tax liability of Nandita for the
Assessment Year 2022-2023 in the following manner:
Case Study 12
n o t e s
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deduction for Nandita equals a sum calculated on the doubly
taxed income at the India tax rate or the rate of tax in the foreign
country, whichever is lower.
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questions