Subject: Taxation

Module Number: 2

Module Name: Computation of taxable income

under the different heads of Income

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Subject: Taxation

Syllabus
Income from Salary- Meaning of salary, Allowances, Perquisites, Deductions from salary (Theory and
Problems);Income from House Property - Basis of Chargeability, Annual Value, Self occupied and let out
property- Deductions (Theory and Problems);Profits and Gains of Business & Profession -Definitions,
Concepts, Practical Aspects - Deductions expressly allowed and disallowed (Theory only); Capital Gains -
Chargeability-Definitions-Practical aspects - Cost of Improvement – Indexation - Short term and long term
capital gains-Exemptions (Theory only);Income from other sources - Chargeability-Deductions-Amounts
not deductible (Theory only)

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Subject: Taxation

AIM:

To explain the students in detail the meaning of salary, how to claim deduction for non-taxable allowance
and perquisites, computation of salary income and its treatment under Income tax, to provide the students
the detailed explanation of Income from House Property and equip them to compute the taxable income
from house property, to provide a detailed explanation of the computation of taxable income under profits
and gains of business and profession and to introduce the students with the knowledge of Capital Gains
and Income from other sources, apply its rules, exemptions, computation, deductions and basis of charges
to calculate the total Income

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Subject: Taxation

Course Objectives:
• Explain the meaning of the term salary and the basis of charges for salary income

• Explain how to compute the income under the head “Salaries”

• Explain the basis of charge for Income from House Property

• Explain the deductions available from house property income

• Define terms business and profession and basis of charge under the head “Profits and Gains of Business
or Profession”

• Explain how to compute the income from business and profession

• Explain the basis of charge for capital gains

• Explain the basis of charge for Income from other

4 sources
Subject: Taxation

Course Outcomes :

• Identify salary and the basis of charges of salary income

• Compute the income under the head “Salaries”

• Identify Income from House Property

• Compute house property income

• Distinguish business from profession

• Compute the income from business and profession

• Identify and compute capital gains

5

• Identify Income from other sources

Subject: Taxation

Table of Content:
• Income from Salary- Meaning of salary, Allowances, Perquisites, Deductions from salary

• Income from House Property - Basis of Chargeability, Annual Value, Self occupied and let out
property- Deductions

• Profits and Gains of Business & Profession -Definitions, Concepts, Deductions expressly allowed and
disallowed

• Capital Gains - Chargeability-Definitions-Practical aspects - Cost of Improvement – Indexation -

Short term and long term capital gains

• Income from other sources - Chargeability-Deductions-Amounts not deductible

6
Subject: Taxation

Introduction
As per section 14 of Income Tax Act, all kinds of taxable income of an assesse fall under five heads
of income

The five heads are given below:

1. Income from Salary

2. Income from house property

3. Profits and Gains of Business and Profession

4. Capital Gains

5. Income from Other Sources

7
Subject: Taxation

Income from Salary

84
Subject: Taxation

Salary
• Any remuneration paid by an employer to employees in consideration for their services. Payer and
payee must have employer and employee relationship. Salary received by a partner from its firm
shall not be taxable as salary, because there is no employer-employee relationship between the firm
and the partner. Such salary shall be taxable under the head “Profits & gains of business or
profession”.

• Payment must have been made by the employer in such capacity. For example employee gives
tuition to the employer’s child on weekends and in return receives fees for his services. The fees,
although paid by the employer to the employee, is not salary and the fees do not stem from the
employer-employee relationship.

• Includes monetary value of benefits and facilities provided by employer which are taxable
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Subject: Taxation

Definition of Salary under Section 17(1)

Wages

Annuity or pension

Gratuity
Fee, commission,
perquisites or
profits in lieu of or
in addition to any
salary or wages

Advance from
salary

Any payment
received by an
employee for leave
not availed 10

The annual addition to the balance for an employee participating in a recognised provident fund to the extent of
 Subject: Taxation

Quiz / Assessment
1. Income that do not fall under first four heads of income, is included in the fifth head that is .
a. Income from house property
b. Income from salary
c. Income from business
d. Income from other sources
Answer: d

2. Which of the following is included under the definition of salary as per section 17(1) ?
e. Rent
f. Wages
g. Money earned by investing in stock
h. Interest on fixed deposit
Answer: b 11
Subject: Taxation

Basis of Charge of Salary Income

Under section 15, the following income shall be chargeable to income tax under the head
“Salaries”:

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier

1. Any salary due from an employer or former employer to an assesse in the previous year,
whether paid or not;

2. Any salary paid or allowed in the previous year by or on behalf of employer or former employer
though not due or before it becomes due to him/her;

3. Any arrear of salary paid or allowed to the employee in previous year by or on behalf of an
employer or former employer, if not charged to income tax for any earlier previous year.
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Subject: Taxation

Quiz / Assessment
3. If salary paid in advance is included in total income in the same year, it:
a. Must be included again when it is due
b. Need not be included when it is actually due
c. Not considered salary
d. None of the above
Answer: b
4.Any salary, commission, bonus or remuneration due to or received by partners in a firm is considered
salary. This statement is:
e. True
f. False
Answer: b

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Subject: Taxation

Profit in Lieu of Salary

Following payments are received by employee on lieu or in addition to salary or wages is fully taxable.
• Any compensation due or received by assesse from his employer or former employer against termination
of his employment or modifications of terms and conditions of the employment.

• Any payment received under a Keyman Insurance Policy including the amount of bonus.

• Any amount due or received before joining or after cessation of employment

• Any payment due or received by an assesse from an employer or a former employer.

• Any payment made from unrecognized provident fund or other provident fund to the extent of
employer’s contribution and interest thereon
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Subject: Taxation

Allowances
An allowance is the fixed amount of money given to the employee by the employer over and
above the regular salary to meet particular requirement. There are three types of allowances:

Allowances Exempt Fully Exempted

Fully Taxable Allowances
up to Certain Limit
Allowances
• Dearness Allowance • House Rent Allowance • Compensatory
• Overtime Allowance • Special Allowance allowance under the
• Deputation Allowance (Travelling, Daily, article 222(2) of the
• Tiffin/Meals Helper, Academic, Constitution is fully
Allowance Uniform, Children exempt
education, Transport, • Allowance to judges of
• Medical
Conveyance, etc.) the High Court and the
Allowance
• Servant Supreme Court
Allowance • Allowances received
from UNO

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Subject: Taxation
Allowances Exempt up to Certain Limit

House rent allowance

Least of the following is exempted from tax:

a. Actual HRA received.

b. An amount equal to 50% of salary (when house is situated in a metro city) or 40% of salary (when
house is situated in any other place)

c. The excess of rent paid over 10% of salary

Salary here means: Basic + D.A + Commission as a fixed percentage on turnover achieved

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Subject: Taxation

Illustration
Raghu furnishes the following details of his salary income. Compute the taxable amount of HRA.

Basic Salary Rs 45,000 p.m.

Dearness Allowance Rs 15,000 p.m. (forms part of retirement benefit)
Commission on sales Rs 60,000

HRA Rs 10,000 p.m.

Rent paid Rs 18,500 p.m.

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Income from Salary
Solution
Computation of taxable HRA
Actual HRA Rs 1,20,000

Less Exempt amount 1,20,000

Taxable HRA Nil

Working
Salary for the purpose
Basic Salary Rs 5,40,000 Least of the following is exempt
Dearness Allowance 1,80,000 Actual HRA 1,20,000

Commission on sales 60,000 40 % of salary 3,12,000

Total Salary 7,80,000 Rent paid – 10% of salary (2,22,000 -78,000)=1,44,000
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Subject: Taxation
Allowances Exempt up to Certain Limit

Allowance u/s 10(14)(i), deductions from which depends upon actual expenditure
•Travel or Transfer allowance

• Daily Allowance

•Conveyance Allowance

•Assistant Allowance

•Professional Development/Research Allowance

• Uniform Allowance

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Subject: Taxation
Allowances Exempt up to Certain Limit

•Children Education Allowance-: Rs. 100 per month per child (to the maximum of two children) or
actual allowance received whichever is lower.
•Children Hostel Allowance-: Rs. 300 per month per child (to the maximum of two children) or actual
allowance received whichever is lower.
•Transport Allowance-: Rs. 3,200 p.m. or actual allowance received whichever is lower, if assessee is
blind / deaf and dumb / orthopaedically handicapped.

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 Subject: Taxation
Perquisites
• It is a kind of benefit, attached to an office or position in addition to salary or wages like Value of rent-free
accommodation provided by the employer, Amount paid by an employer in respect of any obligation which
otherwise would have been payable by the employee etc.

• There are three forms of tax liability on perquisites. These are:

1. Perquisites taxable for all (non-specified and specified employees)

2. Perquisites taxable in case of specified employees

3. Tax free perquisites. Employer’s Contribution to the New pension System (as specified u/s 80CCD) is
fully taxable under the head ‘Salaries’. However, deduction is available u/s 80CCD. Employer's
contribution to National pension scheme, Provident Fund and other superannuation funds is taxable in
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the hands of an employee in excess of Rs 7.5 lakh in a financial year on an aggregate basis from FY
Subject: Taxation

Deductions from Salaries

After computation of gross salary, the following three deductions are allowed under Sec.16:
• Standard Deduction-: Least of the following shall be allowed as standard deduction to all employee: Rs.
50,000 or amount of gross salary
• Entertainment allowance-: It is available to the Government employee only

Deduction for Entertainment allowance being minimum of the following: a. Actual Entertainment Allowance
b. Rs. 5,000/- c. 20% of Basic Salary.
• Professional tax-: It is allowed as deduction on cash basis, whether paid by employee or by employer (on
behalf of employee) from gross taxable salary. If employer (on behalf of employee) pays Professional
tax then, first, it is to be included as taxable perquisite and further, it is allowed as deduction.

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Subject: Taxation

Income from House Property

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4
Subject: Taxation

Basis of Charge (Sec 22)

The house property should

The house property must
The assessee must be the not be used by the assessee
comprise either building or
owner of the house to conduct any business or
land appurtenant thereto.
property. That ‘s why, income profession
Building includes residential
from sub-letting is not taxable
as well as commercial
under this head but under
houses.
the head ‘Income from other
sources’.

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6
Subject: Taxation

Quiz/Assessment
5. Which of the following does not serve as a condition for charging income from house property?

a.The assessee must be the owner of the house property

b.The house property must comprise either building or land appurtenant thereto

c.The house property must be in use for the purpose of business or profession carried on by the
assessee.

d.Should not be used for the purpose of business or profession carried on by the taxpayer.

Answer: c

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7
Subject: Taxation

Gross Annual Value

The tax on the income from house property is computed by calculating the annual value of the property. It is an
exceptional feature of this head that rather than actual income from house property, earning capacity of house
property is taxable. So, “annual value” of the property is taxable rather than actual income of the property

Step 1: Calculate reasonable expected rent (RER) of the

property being higher of the following: a) Gross Municipal
Value. b) Fair Rent of the property. But it cannot exceed
Standard Rent.

Step 2: If the actual rent received or receivable(less unrealized rent) is higher than
the expected rent of the property, the rent actually received or receivable is
considered as gross annual value.

Step 3: If there is property vacancy resulting in lesser rent actually received or

receivable than the gross value determined under step 1, the rent actually received
or receivable is considered as gross annual value under Sec. 23(1(c)

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 Subject: Taxation

Illustration Compute Gross Annual Value from the following details:

Particulars House 1 House 2 House 3

Municipal value 10,00,000 25,00,000 12,00,000
Fair Rent 8,00,000 23,00,000 15,00,000
Standard Rent 9,00,000 20,00,000 13,00,000
Actual Rent Received 8,00,000 16,00,000 15,00,000
Vacancy period 2 months 4 months nil

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Subject: Taxation
Solution
Particulars House 1 House 2 House 3
Municipal value 10,00,000 25,00,000 12,00,000
Fair Rent 8,00,000 23,00,000 15,00,000
Higher amount 10,00,000 25,00,000 15,00,000
Standard Rent 9,00,000 20,00,000 13,00,000
Lower amount is Expected Rent 9,00,000 20,00,000 13,00,000
Actual Rent Received 8,00,000 16,00,000 15,00,000
Gross Annual value 8,00,000 16,00,000 15,00,000

The rent for 12 months for House 1 is Rs 9,60,000 and for House 2 is Rs 24,00,000.
Gross Annual value is the higher of expected rent and actual rent. But if actual rent is low due to vacancy
then the actual rent itself is the GAV despite it being low. 28
Subject: Taxation

Net Annual Value

Net annual value is the amount remaining after deducting the municipal tax or local tax actually paid by
the owner during the previous year from Gross Annual value. Municipal tax must be related to the
previous year or any year preceding the previous year. The annual value is ascertained by performing
the following

Step 1 Step 2

• Deduct municipal tax

• Calculate the gross from the gross
annual value annual value
determined in the
first step.

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Subject: Taxation

Quiz / Assessment
6. Which of the following is the first step to calculate net annual value?
a. Add the municipal tax from net annual value
b. Calculate the gross annual value
c. Add municipal tax to gross annual value
d. Determine the municipal tax paid by the assessee
Answer: b

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Subject: Taxation
Standard Deduction 30%
Deductions U/S 24
of the net annual value is
allowed
Deductions under U/S
24

Interest on borrowed Capital- Interest payable on

amount borrowed for the purpose of purchase,
construction, renovation, repairing, extension,
renewal or reconstruction of house property can
be claimed as deduction on accrual basis.

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Subject: Taxation

Types of house property

•Self occupied property-: The annual value of such house or part of the house shall be taken to be nil. If Loan is
utilized for construction or acquisition of house property on or after 1-4-1999, deduction in respect of interest on
loan on all self-occupied properties(taken as a whole) cannot exceed Rs. 2,00,000 in a year. In any other case, Rs.
30,000 is allowed.
•Deemed to be let out-: If an assessee occupies more than two house properties as self-occupied, he is allowed to
treat only two houses as self-occupied at his option. The remaining self-occupied house property(ies) shall be
treated as ‘Deemed to be let out’.
•Let out-If the house is given on rent. No maximum limit on deduction in respect of interest on loan of let out
property.

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7
Subject: Taxation

Computation of Taxable Income from Self-occupied Property

Mr Mehra owns a house property. It is used by him throughout the year for his and his family members’ residence. The
particulars are:: Municipal value : 1, 66, 000, Fair rent : 1, 76, 000, standard rent: 1, 50, 000, Repairs: 20, 000, municipal tax
paid: 16, 000, Insurance paid: 2, 000, Interest on capital borrowed to construct the property: 1, 36, 000, interest borrowed
by
mortgaging the property for daughter’s marriage: 20, 000, income from business : 7, 10, 00. The computation of the income
from House Property is as follows:
Description If Loan is before 1- If Loan is after 1-
Apr-1999 Apr-1999

Gross Annual Value(As it is self occupied property) Nil Nil

Less Municipal Tax(Municipal Tax deduction is not allowed if Annual value is Nil) Nil Nil
Net Annual Value Nil Nil
Less Interest on borrowed capital(maximum is Rs 30,000 if borrowed before -30,000 -1,36,000
1.Apr.1999 else 2,00,000 )
Income from house property -30,000 -1,36,000
Business Income 7,10,000 7,10,000
Net Income (6+5) 6,80,000 5,74,000

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Subject: Taxation

Profits and Gains from Business

and Profession

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Subject: Taxation
Definitions and Concepts
Business
• Under the Income Tax Act,
the term business is defined
as any trade or any
commercial activity or any
other activity from which the
profits are generated
Profession
• Under the Income Tax Act,
the word profession is defined
as the attainment of
specialised knowledge which
is applied by the individual for
the purpose of earning his
livelihood
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Profits and Gains
• These are terms which are
defined as the excess or the
surplus amount which is left
after the deduction of the
expenses from the receipts
which are obtained from the
various operations of the
business.
Subject: Taxation

Basic Principles for Arriving at Business Income

The business or the profession should have been carried out by the assessee. The business or the profession should have
been carried out during the previous year.

The income accrued in the previous year is taxable in the subsequent assessment year

The losses should have been actually incurred in the year under consideration and not anticipated

The profit should have been actually occurred and must not have been anticipated

Loses must be not be notational or fictional. They must be real and must have occurred in reality

There is no difference between legal or illegal business from income tax point of view. Even income of illegal business shall be
taxable.

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Subject: Taxation

Principles Governing Business Deductions/Allowances

Capital Depreciation is Any personal

Any expenditure
expenditures allowed if asset has Expenses are allowed expenditures of
incurred in the are not been used for assessee and
only if they have
consideration of allowed as business purpose provisions are not
been incurred in the
carrying out any deduction. during the previous allowed.
previous year. It must
commercial activity year and owned by be real and not
for the business the assessee. notional, fictitious. It
until & unless Depreciation shall be must be lawful and
expressly allowed on written not have been
disallowed under down value method incurred for any
the Income tax Act. at the rates purpose, which is an
prescribed offence or prohibited,
under any law

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Subject: Taxation

Deductions Expressly Allowed and Disallowed

Deductions Allowed:

Repairs carried out Amount which is

Any amount paid on
Rent of the premises in the current paid for Insurance
account of Land
on which the financial year and against the risk of
Revenue, Local
business or the cost of which is damage or
Taxes or Municipal
profession is carried borne by the destruction of
Taxes
out assessee building/assets

The amount paid The amount paid

The amount to be towards the audit or towards advertising
paid for the official the fee paid for the expenses, travelling
or administrative legal issues and or conveyance
expenses,bad expenses expenses
debts

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Subject: Taxation
Deductions Expressly Allowed and Disallowed
Deductions Disallowed:
Any expenditure in
respect of which payment
has been made in excess
of Rs. 10,000 in a day
otherwise than by an
account payee cheque or
account payee bank draft
or use of electronic
clearing system through a
bank account or through
other prescribed electronic
modes, 100% is
disallowed
Any salary, interest or
For employers who do
commission or brokerage,
not deposit
fees for professional
PF(employee’s
services or fee for
contributions only) into
technical services payable
employees accounts-late
to a resident or amounts
deposits will not be
payable to a contractor or
allowed as deduction to
sub- contractor being
the employers.
resident for carrying out
any work on which tax is
deductible at source is not
to be allowed as
deduction(30%), if TDS
has not been deducted or
not paid after deduction
39
Subject: Taxation

Quiz / Assessment
7. Which of the following deduction is allowed in the computation of profits or losses?
a. Rent of the premises on which the business or profession is being carried
b. Repairs carried out in the previous financial year and the cost of which is not borne by the assessee
c. Amount which is received for Insurance against the risk of damage or destruction of building
d. The amount to be received for the official or administrative expenses
Answer: a

16
40
Subject: Taxation

Computation of Income from Business and Profession

Steps for the computation of income:

Step 2:Add the expenses which

Step 1:Compute the profit Step 3: The total of all the items
are claimed but are not
balance as per the P&L A/c. In as listed in step 2 is added to the
allowed under the Act. For
other words, we determine the example, Rent for residential profit or is adjusted in case
profit earned from the business there is a loss as depicted in the
portion, personal life insurance
operations premiums, all capital losses P&L A/c.
etc.

Step 4:The next step is the

deduction of the amount which
is allowed under the income tax Step 5: Deduction of any Step 6:The total of all these
act. income from step 4 which is deducted from step 4 is the
For example, actual bad debt either exempt or is not taxable profit which is taxable in the
which is not charged in P and L under the this head business
A/c.; Depreciation which is
not charged in P and L A/c.
Etc.

41
Subject: Taxation

Capital Gains

42
4
Subject: Taxation

Capital Gains
When we buy capital assets, such as land, house, financial assets or drawing, paintings
etc., and sell such capital assets later, we make either gain or loss. This gain or loss is
called capital gain or loss.

Capital gain is not regular income like salary or house rent. They are one time profit
and hence it must be dealt individually. Capital gain arises from transaction in capital
assets.

Loss on account of sale of assets is also covered under the capital gains.

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Subject: Taxation

Basis of Charge under Section 45(1)

The essential elements of capital gains are

Capital Asset

Transfer of capital asset

There must be profit or gain (including

negative profit or gain) on such transfer

44
Subject: Taxation

Quiz/Assessment
8. Which of the following is excluded from the basis of charge of capital gains under section 45(1)?
a. Capital Asset
b. Transfer of capital asset
c. Computation of income from house property
d. Computation of capital gain
Answer: c

45
 Subject: Taxation

What is Capital Asset?

As per section 2(14) of Income Tax Act, capital asset means
Any property of any kind held by assessee, related or not related with his business. Stock in trade, consumable
stores or raw materials held for business or profession is not a capital asset.

Personal effect means any movable property held for personal use of the assessee or for any dependent member of
his family but excludes jewellery, archaeological collections, drawings, paintings, sculptures, any work of art. Any
income on transfer of personal effect shall not be treated as capital gain.

It may be movable/immovable, tangible/intangible, fixed/floating. It includes land building, goodwill, plant

machinery, shares, investment, manufacturing rights etc.

Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the
regulations made under the Securities and Exchange Board of India Act, 1992

46
Subject: Taxation

Quiz / Assessment

9. Which of the following is included in capital Asset?:

a. Tangible/intangible property
b. Movable/immovable property
c. Land, buildings, and goodwill
d. All of the above
Answer: d

47
Subject: Taxation

Types of Capital Assets

Types of capital Assets

Short term capital Long term capital

Assets (It means a capital asset held
by an assessee for not more than 36
months immediately before the date
of transfer.)
48
Assets(A capital asset, which is not a
short-term capital asset, is a long-term
capital asset.)
Subject: Taxation

Exceptions
In the following cases, an asset shall be termed as a short-term capital asset (STCA) if it is held for not more than
following period before the date of transfer

12 months-: Equity or preference share in a company (listed in India)

Any security e.g. debenture, Government securities, etc. (listed in India)
A unit of an equity oriented fund (whether quoted or not)
Zero-Coupon Bonds (whether quoted or not)
Units of UTI (whether quoted or not)

24 months-: Equity or preference share in an unlisted company

Immovable property being land or building or both

For calculating the period of holding of a capital asset, the date on which the asset is transferred is to be excluded.

49
Subject: Taxation

Transfer of Capital Asset

As per Section2(47) of income tax act, transfer in relation to capital assets includes:

When asset is converted in to

The sale, exchange or Extinguishment of any right The Compulsory acquisition
stock in trade by owner related
relinquishment of any asset or therein under any law
to his business

Any transaction involving either

Redemption or maturity of zero
Conversion of business into coupon bond (inserted wef AY
limited company or
2006-07)
possession or retaining of
immovable property in a part
performance of a contract as
referred in Section53 of Transfer
of Property Act 1882 or
Any transaction which has the
effect of transferring or
enjoyment of any immovable
property

50
Subject: Taxation
Full value of consideration
Expenditure on transfer
Any expenditure incurred wholly and
exclusively in connection with the
transfer of capital asset shall be
allowed as deduction.
51
Cost of acquisition, Cost of
improvement shall be allowed as
deduction in case of short term capital
gain and indexed Cost of acquisition,
indexed Cost of improvement shall be
allowed as deduction in case of long
term capital gain
Subject: Taxation

Indexed cost of acquisition and index cost of improvement

Index cost of acquisition
Indexed cost of acquisition is calculated keeping in view the cost inflation index.

Indexed cost of acquisition means an amount which bears to the cost of acquisition the same
proportion as the cost inflation index for the respective year i.e. the year in which the assets
have been transferred.

Indexed cost of acquisition = Cost of acquisition × Index of the year of transfer/ Index of the
year of acquisition

Indexed cost of improvement = Cost of improvement × Index of the year of transfer/ Index of
the year of improvement

52
Subject: Taxation

Computation of Short term and Long term Capital Gain

Short Term Gain

Less
• Cost of acquisition
of the capital Short term loss is
asset set off against any
• Cost of short term or long
Capital gain= Full term gain.
Full value of • improvement
Any expenditure
value of STT(Securities
consideration incurred towards
consideration-(Cost Transaction Tax)
received or accruing transfer
of acquisition+Cost shall not be allowed
as a result of capital • Expenditure of improvement+ as deduction.
asset transfer incurred wholly Selling expenses).
and exclusively in
connection with
such transfer

53
Subject: Taxation

Computation of Short term and Long term Capital Gain

Long Term Gain

Less
• Indexed Cost of Indexed cost of
acquisition acquisition and
• Indexed Cost of indexed cost of
improvement will
Full value of improvement not apply to long
• Any Long term capital
consideration STT shall not be term capital gain
expenditure loss is set off against
received or accruing allowed as arising from long
long term capital
as a result of wholly and deduction. term asset like
gain only.
capital asset exclusively bond/debenture.
transfer incurred However, it is
towards applicable to indexed
transfer bond issued by the
government.

54
Subject: Taxation

Income from Other Sources

55
Subject: Taxation

Income from Other Sources

Basis of charge for income from other sources

There must be income

Such income is not exempt under the provision of this act

Such income is not chargeable to tax under any first four heads i.e. Income from
Salaries, Income from House Property, Income from Business and Income from
Capital Gain

Dividends, Winning from lotteries, Interest on securities , Income from letting of

machinery, plant or furniture, Income from sub- letting of house property, Interest
on bank deposits, Rent from a vacant land, Income from undisclosed sources,
Income from private tuition, Interest on income tax refund are examples of this
income

56
Subject: Taxation

Income from Other Sources

Deductions under 57 while computing income from other sources

In the case of interest on securities, Collection expenditure, Interest on loan are allowed

1/3rd of family pension or Rs.15000/ which ever is less

Any other expenditure (not being capital expenditure) laid out or used wholly and exclusively for the purpose of
making or earning such income.

In case of sub-letting of a house the rent, repairs charges etc. regarding sub-let portion are deductible.

No deduction in respect of any expenditure shall be allowed in computing the income by way of any
winnings from lotteries, crossword puzzles, races including horse races, card games and other games of
any sort or form, gambling or betting of any form or nature, etc. taxable under the head “Income from
other sources”.

57
Subject: Taxation

Quiz / Assessment
10. Which of the following does not serve as the basis of charge for income from other
sources?
a. There must be income
b. Such income is not exempt under the provision of Section 56(1)
c. Such income is not chargeable to tax under any first four heads
d. Such income must be exempt under the provision of Section 56(1)
Answer: d

58
Subject: Taxation

Summary
• The different forms of salary are: Leave encashment, allowances, perquisites, Bonus, Gratuity,
Pension, etc.

• There are three type allowances: Taxable Allowances, Allowances Exempt up to Certain Limit and
Fully Exempted Allowances.

• There are three types of perquisites: Perquisites taxable in all cases i.e. taxable in all types of assesse,
perquisites taxable in specified cases only and tax free perquisites.

• The Income Tax Act explains the concept of the House Property under section 22, where in it provides
taxation of ‘annual value’ of a property comprising buildings or lands appurtenant thereto, of which the
assessee is owner, under the head “income from house property”.
59
Subject: Taxation

Summary
• Net annual value is the amount remaining after deducting the municipal tax or local tax paid by the owner
from Gross Annual value.
• Deduction on the interest on borrowed capital refers to the deduction in the form of interest on the capital
borrowed by the assessee for acquiring, constructing, repairing, renewing or reconstructing the property.
•The term profession refers to professed attainments in special knowledge as distinguished from mere skill;
"special knowledge" which is "to be acquired only after patient study and application".
•While calculating the tax liability there are certain principles which govern the deductions and allowances
and on the basis of which the taxable income is computed.
•Capital Asset means property of any kind held by an assessee, whether or not connected with his business of
profession. It may be moveable or immoveable, tangible or intangible.
60
Subject: Taxation

Summary
•Transfer means sale, exchange, relinquishment of the asset, compulsory acquisition under law, conversion
into stock-in-trade.
• Long term Capital gain is determined by deducting Indexed cost of acquisition, indexed cost of
improvement, cost of selling expenses from the full value of consideration.
•Indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion
as the cost inflation index for the respective year i.e. the year in which the assets have been transferred

61
Subject: Taxation
ACTIVITY
Brief description of activity

• Lalit, a family man with a son, is the Production

Officer of ABC Ltd. Bangalore.
• In the previous year he got Rs. 7,20,000 as
salary and Rs. 2,40,000 as Dearness
Allowance(60% is part of salary for calculating
Offline Activity retirement benefits).
(20 min) • He gets health club facility of Rs. 75,000/- which
is
available only to a few employees.
• He enjoys credit card facility of Rs. 30,000 of
which Rs. 20,000 is for purchase of goods and Rs.
10,000 is for annual fees.
• He receives Rs. 5,000 per month as house rent
allowance. He stays with his parents in the own house
to save rent payment. Calculate taxable salary
62
Subject: Taxation
ACTIVITY
Brief description of activity

• Description:
• You are employed by X and Co., an audit firm,
which requires you to conduct a training to the
Offline Activity
(20 min) interns. Make a presentation on the tax treatment in
each of the following cases:
• Conversion of capitals assets into stock in trade
• Distribution of capital assets by a firm to its
partners at the time of its dissolution
• Compulsory acquisition
63
of a capital asset
Subject: Taxation
ACTIVITY
Brief description of activity

• Please calculate taxable income of your parents

Offline Activity
(20 min)

64
Subject: Taxation
ACTIVITY
Brief description of activity

• Make a report on the items causing difference

between accounting profit and tax profit in the
calculation of ‘Profits and Gains from Business or
Offline Activity Profession.
(20 min)

65
Subject: Taxation

Document Link

Topic URL Notes

5 Heads of Income for

Computation of Income http://www.charteredclub.com/5-heads-of-income/ Computation of 5 heads of income
Tax

https://taxguru.in/income-tax/income-tax-provisions-
Tax Treatment of
related-to-income-from-salary-including-allowances-and- Allowances and perquisites
Income from Salary
perquisites.html

5 heads of income in the https://taxguru.in/income-tax/computation-income-tax-

Computation of 5 heads of income
Indian Income Tax Act faqs-examples.html
Subject: Taxation

Video Link

Topic URL Notes

Calculating Gross and Gross and Net Annual Value

https://www.youtube.com/watch?v=tV_z-kk6dJE
Net Annual Value calculation

Self-occupied and let out Income from house property

https://www.youtube.com/watch?v=DPavWySMNf0
property calculation

Income Tax Profit &

Profit & Gains from Business &
Gains from Business & https://www.youtube.com/watch?v=L89tuzpcqEM
Profession calculation
Profession
Subject: Taxation

E- Book Link

Ebook name Chapter Page No. Notes URL

https://
www.incometaxindia.gov.
Direct taxation 3 60-334 Five heads of Income
in/pages/acts/income-tax-
act.aspx

68
Subject: Taxation

References
1. Singhania,V. K. & Singhania, M.(2021). Student’s guide to income tax. Taxmann
Publications.
2. Pathak, A., & Godiawala, S.(2021). Business taxation, New Delhi: McGraw Hill Education
(India) Private Limited.
2. Lal, B.B. (2021). Income tax. New Delhi: Dorling Kindersley (India) Private Limited