Lesson-3

Computation of taxable income

Contents
• Capital gains
• Income from other sources
• Set-off and carried forward of losses

Capital gains
Capital gain can be defined as any profit that is received through the sale of a
capital asset. The profit that is received falls under the income category. Therefore,
a tax needs to be paid on the income that is received. The tax that is paid is called
capital gains tax and it can either be long term or short term. The tax that is levied
on long term and short-term gains starts from 10% and 15%, respectively.
Types of Capital Assets
The two types of capital assets are mentioned below:
1. Long Term Capital Asset:
In case individuals own an asset for a duration of more than 36 months, the asset is
a long-term capital asset. Debt-oriented mutual funds, jewellery, etc., that are held
for a duration of more than 36 months will come under this category and there is no
24-month reduction period under such circumstances.
The below-mentioned assets are considered as long-term assets if they are
held for a duration of more than 12 months:
• Zero coupon bonds Unit Trust of India (UTI) units,
• Equity-based mutual funds units
• Securities that are listed on a stock exchange that is recognized in India,
Examples of such securities are government securities, bonds, and
debentures,
• Preference shares or equities.
Short Term Capital Asset:
In case assets are held for a duration of 36 months or less, it can be defined as a
short-term capital asset. However, for immovable assets such as house property,
building, and land, the duration has been reduced from 36 months to 24 months.
 Therefore, if an individual wishes to sell a land or house after holding it for a duration
of 24 months, the profit that the individual makes from it comes under long term
capital gain.
Depending on the amount of time that the asset has been held, the calculation of
Capital Gains will vary. Some of the important points that individuals should know
when calculating capital gains are mentioned below:
• Cost of improvement: If there are any expenses that have been incurred by the
seller because of any alterations or additions that have been made to the property.
However, any improvements made before 1 April 2001 cannot be considered.
• Acquisition cost: The amount of money that the seller paid in order to acquire
the property.
• Full value consideration: The amount of money that the seller will receive
because of the property transfer. Capital gains are charged from the year the
transaction was made even if the money was not received in that particular year.
In certain cases where the capital asset is also the property of the taxpayer, the
acquisition cost and the improvement cost of the previous owner will also be
included.
Example to Calculate long term Capital Gains
Mr. Desai purchased an asset on July 10,2003 for 4,60,000 which ne converted in to
stock in trade as on 2nd July,2020. On the date of this conversion the fair market value
of assets was 27,80,000. Mr. Desai sold this stock in December 2020 for 27,98,000.
Computed capital gain during assessment year 2021-22.

Computation of capital gain of Mr. desai

For the assessment year 2021-22

Transfer price of capital asset 27,80,000

Less: cost of acquisition 4,60,000*289/105 12,66,095
Long term capital gain 15,3,905

Indexed Cost of Improvement and Acquisition

The cost that is incurred on improvement and acquisition is indexed with the main
aim of adjusting inflation for the number of years the property was held. This not
only reduces capital gains but also increases the cost base.
 Formula for calculation of indexed tax for improvement: The expenses incurred
for improvement x Cost Inflation Index (CII) for the year the property was sold divided
by the CII of the year the improvement occurred.
Formula for calculation of indexed tax for acquisition: The total expenses
incurred for acquisition x CII of the year the property was sold divided by the CII of
the year the property was initially acquired by the seller (or 2001-2002 whichever is
later).
Exemption capital gain under section 54 of income tax
section. Exemption Condition
54 Capital gain on The house should be Invested in capital gain
transfer of used for residential account scheme,1988
residential house purpose The asses deposit full
The assessee must has amount of capital gain or
acquired a hose one year more than capital gain in
before of the sale of the capital gain account
house or get purchased scheme,1988 in the
the house for residential place of purchase or
for himself or others after construction of two
two years of such house the amount so
transfer or get a new deposited will be
house within a period of exempted.
three years after such
transfer of the house
54B Capital gain on the The agriculture land must Invested I capital gain
transfer of have been used in account scheme,1988 if
agriculture land agriculture purpose 2 the assess cannot take
years before the transfer decision of purchasing
of such land by the new agriculture land
assess or by the parents within 2 years from the
Capital gain on the date of transfer of
transfer of agriculture agriculture land, he can
land of new land has deposit the amount of
capital gain in capital
 been purchased by the gain account scheme,
assess. 1988, in the situation he
will be allowed to avail
exemption
54D Capital gain on Transfer of property must Invested in capital gain
compulsory be under compulsory account scheme,1988
acquisition of land acquisition scheme and the assess can avail
and building of used as industrial exemption.
industrial enterprises.
enterprises It is essential that the use
of the asset was made for
own industrial
enterprises at least 2
years before the date of
acquisition
After acquisition of land
and building the assess
within 3 years purchased
or construction another la
and building for re-
establishing the industrial
enterprise.
54EC Capital gain arising Long term specified w.e.f. 1-4-2008 the
from the transfer of asset means bonds maximum limit of
long-term capital which will be redeemable investment in these
asset invested in after 5 years and these specified assets bonds
long term specified shall be issued by of (NHAI) and RECL or
asset national highways nominated by central
authorities of India government for this
(NHAI) and rural purpose 50 lakh during
electrification corporation the financial year in
limited (RECL) or which the original assets
nominated by central or assets are transferred
 government for this and in the subsequent
purpose. financial year.
If the above specified
bonds are transferred
within 3 years from the
date of issue are
converted into money,
this long-term capital
gain shall be taxable in
the year in which such
transfer took place.

54EE Capital gain not be Any long-term capital Aggregate amount of

charged on asset should be investment on or after 1-
invested in units of transferred on or after 1- 4-2006 should not be
specified fund 4-2016 and capital gain more than 50 lakhs.
should arise on this long-
term capital asset
through this transfer.
Investment in specified
fund should essentially
be done within 6 months
from transfer of long-term
capital asset.
54F Capital gain on the Transferred of assets Calculation of exemption
transfer of other should not be a amount=long term
long-term assets residential house. It capital gain *amount
except residential means sale of residential invested in new
house, if house is not covered house/net sale
consideration under this section. Any consideration.
received is other asset except
invested in new residential house may be
residential house transferred such as gold,
 jewellery, motor, land,
etc.
New residential house
should be purchased
1year before or 2 year
after sale of the asset or
a new residential house
should be constructed
within a period of 3 years.

54G Capital gain on Transfer of industrial Invested in capital gain

shifting industrial enterprises must be form account scheme, 1988.
enterprises from urban area to non-urban Assessee shall be avail
urban areas area for exemption.
The new machine, plant
and land purchased for
enterprises established
in non-urban area should
not be transfer up to a
period of 3 years.
54GA Capital gain on Exemption in connection
transfer of assets with the above shall be
of shifting of available only when the
industrial undertaking is shifted
undertaking from from urban area to
urban area to any special economic zone.
special economic Special economic zone
Zone may be developed in any
urban area or any other
area.
54GB Exemption of long- The assessee should
term capital gains hold more than 25% of
on transfer of share capital before due
 residential date for furnishing his
property on return of income 139(1).
investment in He should invest the net
equity shares of an consideration in equity
approved shares of eligible co.
company under
certain conditions
54H Extension of time Transfer of assets to
limit in purchasing compulsory acquire and
new assets or compensation amount is
investing the not received by the
amount of capital assessee.
gains in case of
compulsory
acquisition of
assets

Income from other sources

Any income which cannot be classified under the above four heads of income forms
part of this head. It is to be noted that for any income to form part of this head, it should
be chargeable to tax as per the provisions of the act.
Examples of other receipts chargeable as income from other sources
• Income from subletting of a house property by a tenant
• Casual income
• Insurance commissions received by the assessee
• Family pension payments received by the legal heirs of dead employees
• Interest on bank deposits and deposits with companies
• Interest on loans given
• Remuneration received by Members of Parliament
• Rent earned from a vacant plot of land
• Agricultural income from agricultural land situated outside India
• Interest paid by the Government on excess payment of advance tax
Income charge in income from other source
1. Income which is not exempt and cannot be charged under the heads of salary,
income from house property, profits and gains from business or profession, or
capital gains, form income from other sources for taxation purpose.

2. All dividends received are taxable under the head of income from other sources.

3. Interest from deposits and bonds are also taxed under Income from other sources.

4. One-time income by way of winnings from lotteries, crossword puzzles, races

including horse races, card games, gambling or betting of any form is treated as
income from other sources.

5. Gifts such as any sum of money and movable or immovable property that’s
received without consideration are also taxable under this head.
Expenses allowed as deductions while computing income chargeable to tax
under the head “Income from other sources
Following major deductions are available from income chargeable to tax under the
head “Income from other sources”:

Deduction in respect of dividend and interest

• Commission paid to bank or any other person in the collection of dividend and
interest
• Interest on loan taken investing it in purchase of shares and security
Deduction in relation of rent received by letting out machine, plant or building
• Expenses on repair incurred on building, machinery, plant and furniture.
• Insurance premium paid in respect of building, machine, plant and furniture .
• Depreciation of building, plant and furniture.
Expenses not allowed as deductions while computing income chargeable to tax
under the head “Income from other sources”
Under section 58, following expenditures are not deductible while computing income
chargeable to tax under the head “Income from other sources”:

1. Personal expenditure [Section 58(1)(a)(i)].

2. Any interest chargeable under the Act which is payable outside India on which tax
has not been paid or deducted at source [Section 58(1)(a)(ii)].
3. Any amount paid which is taxable under the head “Salaries” and payable outside
India on which tax has not been paid or deducted at source [Section 58(1) (a) (iii)].
4. Sum paid on account of wealth-tax is not deductible under section 58(1A).
5. Amount specified under section 40A is not deductible [Section 58(2)].
Example: Mr. pakhraj investment during the year ended 31st march,2021 consisted
of the following
• 7% government securities 25,000
• 8% Agra municipal bonds 15,000
• 9% Mumbai port trust bonds 20,000
• 7-year post office national Saving certificate 10,000
• 7% govt. bonds 18,000
• 7% national plan certificate 5,000
• 6% securities of a foreign govt. 15,000
He paid 160 Rs. as commission for collecting the taxable interest on securities and
1200Rs. as interest on loan which he had taken for the purpose of purchasing the
Mumbai port trust bonds.
Find out his income under the head ‘income from other source’.
Computation of income form other sources
For the assessment year 2021-22
Particular Amount Amount
7% government securities 1,750
8% Agra municipal bonds 1,200
9% Mumbai port trust bonds 1,800 600
Less: interest on loan 1,200
7% govt. bonds 1,260
6% securities of a foreign govt. 900
5,710
Less: collection charge 160
Income from other source 5,550

Setoff and carried forward of losses

Set off of losses means adjusting the losses against the profit or income of that
particular year. Losses that are not set off against income in the same year can
be carried forward to the subsequent years for set off against income of those
years. A set-off could be an intra-head set-off or an inter-head set-off.
S Loss of head Set off of losses Time limit
no.
1 Loss of house Set off from income from of another Up to 8
property house property years
Set off from income from other head
up to a limit of 2 lakh
2 Loss of business Set off form income of other Up to 8
and profession business and profession years
Set off from income from any other
head but no set off from salaried
head
3 Loss of specified This loss of specified business Indefinite
business mentioned in section 35AD can be
set off from the profits of specified
business in that assessment year
4 Loss of speculation Set off from income of speculative Up to 4
business years
5 Long term capital Set off from long term capital gain Up to 8
loss years
6 Short term capital Set off form long term and short- Up to 8
loss term capital gain years
7 Loss from the Set off from the income from activity Up to 4
activity of owing and of owing and maintaining race years
maintaining race horses
horse Remaining loss cannot be set off
against income from other heads
8 Loss from lottery, These losses cannot be set off No
crossword puzzles, against any income provision
 gambling, betting regarding
etc. this loss
9 Unabsorbed Any income (except salary) Indefinite
depreciation

SELF-CHECK QUESTION

Very short question

1. ____________of speculative business can be set off against profit of speculation

business. (profit/loss)
2. Dividend received from foreign company is taxable under head_________ (income
from other source/capital gain)
3. Deposits under section 54EC should be within________form the date of transfer.
(6 months/12 months)
4. Explain bond washing transaction.
5. What is subletting?

Descriptive question

1. Discuss the capital gains which are exempted from tax.

2. Explain different kind of security from income tax purpose.
3. Discuss the provision of income tax act relating to set off and carry forward of
losses.