INTERMEDIATE

Paper 7

DIRECT TAXATION
Study Notes
SYLLABUS 2022

The Institute of Cost Accountants of India

CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
www.icmai.in
First Edition : August 2022
Reprint : November 2022
Reprint : January 2023
Reprint : March 2023
Reprint : June 2023
Reprint : August 2023
Revised Edition : February 2024

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 PAPER 7 : DIRECT TAXATION
SECTION - A
Syllabus Structure:

The syllabus in this paper comprises the following topics and study weightage:

Module No. Module Description Weight

Section A: Direct Taxation 50%

1 Basics of Income Tax Act 10%

2 Heads of Income 25%

3 Total Income and Tax Liability of Individuals & HUF 15%

 Learning Environment
Subject Title DIRECT TAXATION (Section - A)
Subject Code DITX
Paper No. 7
Course This section deals with the provisions of Income Tax Act, 1961 relating to computation of income under
Description various heads and determination of total income and tax liability of individuals and HUFs. It also covers
relevant provisions for filing of return and assessment procedure.
CMA Course 1. Interpret and appreciate emerging national and global concerns affecting organizations and be in a state
Learning of readiness for business management.
Objectives
a. Identify emerging national and global forces responsible for enhanced/varied business challenges.
(CMLOs)
b. Assess how far these forces pose threats to the status-quo and creating new opportunities.
c. Find out ways and means to convert challenges into opportunities
2. Acquire skill sets for critical thinking, analyses and evaluations, comprehension, syntheses, and
applications for optimization of sustainable goals.
a. Be equipped with the appropriate tools for analyses of business risks and hurdles.
b. Learn to apply tools and systems for evaluation of decision alternatives with a 360-degree
approach.
c. Develop solutions through critical thinking to optimize sustainable goals.
3. Develop an understanding of strategic, financial, cost and risk-enabled performance management in a
dynamic business environment.
a. Study the impacts of dynamic business environment on existing business strategies.
b. Learn to adopt, adapt and innovate financial, cost and operating strategies to cope up with the
dynamic business environment.
c. Come up with strategies and tactics that create sustainable competitive advantages.
4. Learn to design the optimal approach for management of legal, institutional, regulatory and ESG
frameworks, stakeholders’ dynamics; monitoring, control, and reporting with application-oriented
knowledge.
a. Develop an understanding of the legal, institutional and regulatory and ESG frameworks within
which a firm operates.
b. Learn to articulate optimal responses to the changes in the above frameworks.
c. Appreciate stakeholders’ dynamics and expectations, and develop appropriate reporting
mechanisms to address their concerns.
5. Prepare to adopt an integrated cross functional approach for decision management and execution with
cost leadership, optimized value creations and deliveries.
a. Acquire knowledge of cross functional tools for decision management.
b. Take an industry specific approach towards cost optimization, and control to achieve sustainable
cost leadership.
c. Attain exclusive knowledge of data science and engineering to analyze and create value.
Subject Direct Taxation
Learning 1. To acquire application-oriented knowledge and skill for appreciating various provisions of the Income
Objectives
Tax Act, 1961 and attain abilities to solve problems while computing tax liabilities. (CMLO 4 a)
[SLOB(s)]
2. To attain abilities to apply various provisions of direct taxation laws, including assessment to identify
the impacts thereof on business decisions. (CMLO 3a and b)
3. To gather knowledge of various compliance related provisions of direct taxation laws and attain
abilities to ensure due compliance to avoid any eventual risks. (CMLO 4 c)
Subject SLOCs:
Learning 1. Students will be able to appropriately apply various provisions of direct taxation laws and perform tax
Outcome
computation of taxable income and tax liability for different types of assessees.
[SLOC(s)]
and 2. They will be able to ensure compliance of legal provisions related to direct taxes.
Application APSs:
Skill [APS]
1. Students will acquire skill to compute taxable income and tax liabilities of various person like
individual, Hindu Undivided Family, Firm, Co-operative Society, Political Parties and Association of
Persons & Body of Individuals.
2. Students will attain skill sets for solving computation related issues of direct taxes.
3. Students will be able to ensure compliances of direct taxation related provisions.

Module wise Mapping of SLOB(s)

Module Additional Resources (Research

Topics and Sub-topics SLOB Mapped
No. articles, case studies, blogs)
1 Basics of Income tax Act Common for Modules of Direct 1. To acquire application-oriented
Taxation 1,2, & 3: knowledge and skill for appreciating
various provisions of the Income
Income-tax Act, 1961 (Bare Act) and the Tax Act, 1961 and attain abilities to
Income-tax Rules solve problems while computing tax
www.incometaxindia.gov.in liabilities.
2. To attain abilities to apply various
For this Module: provisions of direct taxation laws,
Refer Chapter I, II & III of the Income including assessment to identify the
Tax Act. impacts thereof on business decisions.
2 Heads of income Refer Chapter IV of the Income-tax Act, 3. To gather knowledge of various
compliance related provisions of
1961 (Bare Act)
direct taxation laws and attain abilities
3 Total income and tax liability Refer Chapter V, VI & VIA of the to ensure due compliance to avoid any
of individuals and HUF Income-tax Act, 1961 (Bare Act) eventual risks.
 Contents as per Syllabus
SECTION A : DIRECT TAXATION 01 - 542
Module 1. Basics of Income Tax Act 01 - 64
1.1 Basic Concepts, Basis of Charge and Capital & Revenue Receipts
1.2 Residential Status and Scope of Total Income
1.3 Agricultural Income
1.4 Income which do not form part of Total Income
Module 2. Heads of Income 65 - 356
2.1 Salaries
2.2 Income from House Property
2.3 Profits and Gains of Business or Profession including Tax Audit u/s 44AB;
and Provisions u/s 43A, 43B, 43AA, 44AD, 44ADA and 44AE (excluding
Sections 42 to 44DB)
2.4 Capital Gains
2.5 Income from Other Sources
Module 3. Total Income and Tax Liability of Individuals & HUF 357 - 542
3.1 Income of Other Person included in Assesses Total Income (Clubbing of
Income)
3.2 Set off and Carry Forward of Losses
3.3 Deductions, Rebate and Relief
3.4 Taxation of Individual (including AMT but excluding Non-resident) & HUF
3.5 Advance Tax
3.6 Tax Deducted at Source & Tax Collected at Source (excluding Non-resident)
3.7 Filing of Return of Income
3.8 PAN
3.9 Self-Assessment & Intimation
 SECTION - A
DIRECT TAXATION
 Basics of Income Tax Act 1
This Module includes

1.1 Basic Concepts, Basis of Charge and Capital & Revenue Receipts

1.2 Residential Status and Scope of Total Income

1.3 Agricultural Income

1.4 Income which do not form part of Total Income

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Basics of Income Tax Act
SLOB Mapped against the Module:
1. To acquire application-oriented knowledge and skill for appreciating various provisions of the Income
Tax Act, 1961 and attain abilities to solve problems while computing tax liabilities.
2. To attain abilities to apply various provisions of direct taxation laws, including assessment to identify
the impacts thereof on business decisions.
3. To gather knowledge of various compliance related provisions of direct taxation laws and attain
abilities to ensure due compliance to avoid any eventual risks.

Module Learning Objectives:

After studying this module, the students will be able to –
 Appreciate the various type of taxations
 Appreciate the source of tax laws
 Understand the meaning of various terms like previous year, assessment year, etc.
 Appreciate the provisions relating to residential status
 Apply the knowledge to ascertain the taxability of income in India
 Appreciate various income which are not liable to be taxed in India

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 Basics of Income Tax Act

Basic Concepts, Basis of Charge and

1.1
Capital & Revenue Receipts

T
ax is the compulsory levy by the government on income, commodity, services, activities or transaction.
The word ‘tax’ derived from the Latin word ‘Taxo’. Taxes are the basic source of revenue for the
government, which are utilized for the welfare of the people of the country through government policies,
provisions and practices. Income Tax is levied on the total income of the previous year of every person,
subject to residential status of that person. Further, few of the income of the person are not subject to income tax,
those income are termed as exempted income.
Basic Reasons to impose taxation
 To provide basic facilities for every citizen of the country: Whatever money is received by the government
from taxation is spent by it for the welfare of the citizens of the country. Some of the services provided by
the government are: health care, electricity, roads, education system, free houses for the poor, water supply,
police, firefighters, judiciary system, disaster relief, taking care of bridges and other things of public welfare.
 To finance multiple governments: All the local governments of the state like village panchayats, block
panchayats and municipal corporations receive funds from the finance commission.
 Protection of the life: Taxpayers receive the protection of life and wealth from the government in case of
external aggression, internal armed rebellion or any other situation.

1.1.1 Constitutional Validity of taxes

The Constitution of India is the supreme law of India. It consists of a Preamble, 22 parts containing 444 articles and
12 schedules. Any tax law, which is not in conformity with the Constitution, is called ultra vires the Constitution
and held as illegal and void. Some of the provisions of the Constitution are given below:
Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. It
means the tax proposed to be levied must be within the legislative competence of the legislature imposing the tax1.

Article 246 read with Schedule VII divides the subject matter of law made
by the legislature into three categories:
¾¾ Union list (only the Central Government has the power of legislation on
subject matters covered in the list)
¾¾ State list (only the State Government has the power of legislation on
subject matters covered in the list)
¾¾ Concurrent list (both Central & State governments can pass legislation on
subject matters). If a state law relating to an entry in List III is repugnant
to a Union law relating to that entry, the Union law will prevail, and the
state law shall, to the extent of such repugnancy, be void. (Article 254).

1 Kunnathat Thathunni Moopil Nair –vs.- The State of Kerala 1961 AIR 552 (SC)

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Direct Taxation

1.1.2 Administration of tax laws

The administrative hierarchy of tax law is as follows:
Taxpoint:

 Both of the Boards have been constituted

under the Central Board of Revenue
Act, 1963.
 CBDT deals with levy and collection of
all direct tax whereas matters relating to
levy and collection of Central indirect
tax are dealt by CBIC.

1.1.3 Sources of Income Tax Law in India

1. Income tax Act, 1961 (Amended up to date)

The provisions of income tax extend to the

whole of India and became effective from
1/4/1962 (Sec. 1). The Act contains provisions
for:
(a) determination of taxable income;
Source of Income Tax
(b) determination of tax liability;
(c) procedure for assessment, appeals, penalties and prosecutions; and
(d) powers and duties of Income-tax authorities.
Taxpoint: The Income-tax Act, 1961 has been divided into 23 chapters (covering 298 sections) and 14
schedules. Few of them are further sub-divided.
2. Annual Amendments
(a) Income-tax tax Act has undergone several amendments from the time it was originally enacted through
the Union Budget2. Every year, a Finance Bill (a part of the Union Budget) is presented before the
Parliament by the Finance Minister. The Bill contains various amendments which are sought to be made
in the areas of direct and indirect taxes levied by the Central Government.
(b) When the Finance Bill is approved by both the Houses of Parliament and receives the assent of the
President, it becomes the Finance Act. The provisions of such Finance Act are thereafter incorporated in
the Income Tax Act.
(c) If on the 1st day of April of the Assessment Year, the new Finance Act has not been enacted, the provisions
in force in the preceding Assessment Year or the provisions proposed in the Finance Bill before the
Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become
effective [Sec. 294]

2 According to Article 112 of the Indian Constitution, the Union Budget of a year is a statement of the estimated receipts and expenditure of
the government for that particular year. Union Budget is classified into Revenue Budget and Capital Budget.
Revenue budget includes the government’s revenue receipts and expenditure. There are 2 kinds of revenue receipts - tax and non-tax revenue.
If revenue expenditure exceeds revenue receipts, the government incurs a revenue deficit. Capital Budget includes capital receipts and
payments of the government. Loans from public, foreign governments and RBI form a major part of the government’s capital receipts. Fiscal
deficit is incurred when the government’s total expenditure exceeds its total revenue.

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 Basics of Income Tax Act

Note: Besides these amendments, whenever it is found necessary, the Government introduces amendments in
the form of various Amendment Acts and Ordinances.
3. Income tax Rules, 1962 (Amended up to date)
(a) As per Sec. 295, the Board may, subject to the control of the Central Government, make rules for the
whole or any part of India for carrying out the purposes of the Act.
(b) Such rules are made applicable by notification in the Gazette of India.
(c) These rules were first made in 1962 and are known as Income tax Rules, 1962.
Since then, many new rules have been framed or existing rules have been amended from time to time and the
same has been incorporated in the aforesaid rules.
4. Circulars and Clarifications by CBDT
(a) U/s 119, the Board may issue certain circulars and clarifications from time to time, which have to be
followed and applied by the Income tax authorities.
(b) Effect of circulars: These circulars or clarifications are binding upon the Income tax authorities, but the
same are not binding on the assessee. However, assessee can claim benefit under such circulars.
Note: These circulars are not binding on the Income Tax Appellate Tribunal or on the Courts.
5. Judicial decision
(a) Decision of the Supreme Court: Any decision given by the Supreme Court shall be applicable as law till
there is any change in law by the Parliament. Such decision shall be binding on all the Courts, Tribunals,
Income tax authorities, assessee, etc.
(b) Contradiction in the decisions of the Supreme Court: In case, there is apparently contradiction in two
decisions, the decision of larger bench, whether earlier or later, shall always prevail. However, where
decisions are given by benches having equal number of judges, the decision of the recent case shall be
applicable.
(c) Decisions given by a High Court or ITAT: Decisions given by a High Court or ITAT are binding on all
assessees and Income tax authorities, which fall under their jurisdiction, unless it is over ruled by a higher
authority.

1.1.4 Basic principles for charging Income Tax [Sec. 4]

1. Income of the previous year of a person is charged to tax in the immediately following assessment year.
2. Rate of tax is applicable as specified by the Annual Finance Act of that year. Further, though the Finance
Act prescribes the rates of tax, in respect of certain income, the Income Tax Act itself has prescribed specific
rates, e.g. Lottery income is to be taxed @ 30% (Sec.115BB), Long term capital gain is to be taxed @ 20%
(Sec.112), short term capital gain on listed shares u/s 111A is to be taxed @ 15%, etc.
3. In respect of income chargeable to tax, tax shall be deducted at source, or paid in advance (wherever applicable).
Sec. 4 is a charging section and it is the backbone of the Income Tax Act. The tax liability arises by virtue of this
section and it arises at the close of a previous year. However, the finalisation of amount of tax liability is postponed
to the assessment year. It follows the rule that the liability to tax is not dependent upon assessment.

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Direct Taxation

1.1.5 Assessment Year (A.Y.) [Sec. 2(9)]

Assessment year means the period of 12 months commencing on the 1st day of April every year. It is the year (just
after the previous year) in which income earned in the previous year is charged to tax. E.g., A.Y.2024-25 is a year,
which commences on April 1, 2024 and ends on March 31, 2025. Income of an assessee earned in the previous year
2023-24 is assessed in the A.Y. 2024-25.

1.1.6 Previous Year or Uniform Previous Year [Sec.3]

Previous Year means the financial year immediately preceding the Assessment Year. Income earned in a year is
assessed in the next year. The year in which income is earned is known as Previous Year and the next year in which
income is assessed is known as Assessment Year. It is mandatory for all assessee to follow financial year (from 1st
April to 31st March) as previous year for Income-Tax purpose.
Financial Year
According to sec. 2(21) of the General Clauses Act, 1897, a Financial Year means the year commencing on the 1st
day of April. Hence, it is a period of 12 months starting from 1st April and ending on 31st March of the next year. It
plays a dual role i.e. Assessment Year as well as Previous Year.

Example 1: Financial year 2023-24 is -

 Assessment year for the Previous Year 2022-23; and
 Previous Year for the Assessment Year 2024-25.

Determination of the first previous year in case of a newly set-up business or profession or for a new source
of income
In case of Previous year is the period
Business or profession being Beginning with the date of setting up of the business & ending on 31st March
newly set-up of that financial year.
A source of income newly Beginning with the date on which the new source of income comes into
coming into existence existence & ending on 31st March of that financial year.
Note: Calender year cannot be considered as previous year though calender year is followed as accounting
year by a person

Exceptions to the general rule that income of a Previous Year is taxed in its Assessment Year
This is the general rule that income of the
previous year of an assessee is charged to
tax in the immediately following assessment
year. However, in the following cases, income
of the previous year is assessed in the same
year in order to ensure smooth collection of
income tax from the taxpayer who may not
be traceable, if assessment is postponed till
the commencement of the Assessment Year:

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1. Income of a non-resident assessee from shipping business (Sec. 172)

2. Income of a person who is leaving India either permanently or for a long period (Sec. 174)
3. Income of bodies, formed for a short duration (Sec. 174A)
4. Income of a person who is likely to transfer property to avoid tax (Sec. 175)
5. Income of a discontinued business (Sec. 176). In this case, the Assessing Officer has the discretionary power
i.e. he may assess the income in the same previous year or may wait till the Assessment year.

1.1.7 Assessee [Sec. 2(7)]

“Assessee” means,
a. a person by whom any tax or any other sum of money (i.e., penalty or interest) is payable under this Act
(irrespective of the fact whether any proceeding under the Act has been taken against him or not);
b. every person in respect of whom any proceeding under this Act has been taken (whether or not he is liable for
any tax, interest or penalty) for the assessment of his income or loss or the amount of refund due to him;
c. a person who is assessable in respect of income or loss of another person;
d. every person who is deemed to be an assessee under any provision of this Act; and
e. a person who is deemed to be an ‘assessee in default’ under any provision of this Act. E.g. A person, who was
liable to deduct tax but has failed to do so, shall be treated as an ‘assessee in default’.

1.1.8 Person [Sec. 2 (31)]

The term person includes the following:

¾¾ an Individual;
¾¾ a Hindu Undivided Family (includes Jain and Sikh
family);
¾¾ a Company;
¾¾ a Firm (includes LLP);
¾¾ an Association of Persons (AOP) or a Body of
Individuals (BOI), whether incorporated or not;
¾¾ a Local authority; &
¾¾ every artificial juridical person not falling within
any of the preceding categories.

Illustration 1:
Determine the status of the following:

Case Status
(a) Howrah Municipal Corporation Local authority
(b) Corporation Bank Ltd. Company
(c) Mr. Amitabh Bachchan Individual

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Direct Taxation

Case Status
(d) Amitabh Bachchan Corporation Ltd. Company
(e) A joint family of Sri Ram, Smt. Ram and their son Lav and Kush HUF
(f) Calcutta University Artificial juridical person
(g) X and Y who are legal heirs of Z BOI
(h) Sole proprietorship business Individual
(i) Partnership Business Firm
(j) Reserve Bank of India Artificial juridical person

1.1.9 Income [Sec. 2(24)]

To consider any receipt as income, following points should be kept in mind:-

Cash vs. Kind Income may be received in cash or in kind. Income received in kind is to be valued as per
the rules prescribed and if there is no specific direction regarding valuation in the Act or
Rules, it may be valued at market price.
Significance Method of accounting is irrelevant In case of income under the head “Salaries”,
of method of “Income from house property” and “Capital gains”
accounting method of accounting is irrelevant.
Method of accounting is relevant In case of income under the head “Profits & gains
of business or profession” and “Income from other
sources” (other than Dividend) income shall be
taxable on cash or accrual basis as per the method
of accountancy regularly followed by the assessee.
Notional income A person cannot make profit out of transaction with himself. Hence, goods transferred
from one department to another department at a profit, shall not be treated as income of
the business.
Source of income Income may be from a temporary source or from a permanent source.
Capital vs. A capital receipt is not liable to tax, unless specifically provided in the Act, whereas, a
Revenue receipt revenue receipt is not exempted, unless specifically provided in the Act. (Further refer
following heading)
Loss Income also includes negative income.
Disputed income In case of dispute regarding the title of income, assessment of income cannot be withheld
and such income, normally, be taxed in the hands of recipient.
Lump-sum receipt There is no difference between income received in lump sum or in installment.
Reimbursement Mere reimbursement of expenses is not an income.
Legality The Act does not make any difference between legal or illegal income.

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 Basics of Income Tax Act

Double taxation Same income cannot be taxed twice.

Income by mutual In this regard it is to be noted that in case of mutual activities, where some people contribute
activity to the common fund and are entitled to participate in the fund and the surplus arises which
is distributed among the contributors of the fund, such surplus cannot be termed as income.
Exceptions:
¾¾ Income derived by a trade, professional or similar association from rendering specific
services to its members shall be taxable u/s 28(iii).
¾¾ Profits and gains of any insurance business carried on by a mutual insurance company
or by a co-operative society.
¾¾ Profits and gains of any business of banking (including providing credit facilities)
carried on by a co-operative society with its members.
Pin money Pin money is money received by wife for her personal expenses & small savings made by
a woman from money received from her husband for meeting household expenses. Such
receipt is not treated as income.
Note: Income on investment out of pin money shall be treated as income.
Award Award received, by a person related to his business or profession, shall be treated as income
incidental to such business or profession. However, award received by a non-professional
person is in nature of gift and/or personal testimonial, the taxability thereof is subject to
other provisions of the Act
Embezzlement Money embezzled is a gain to the embezzler and, therefore, falls within the wider definition
of income
Contingent A contingent or anticipated income is not taxable.
income
Subsidy Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver
or concession or reimbursement (by whatever name called) by the Central Government or
a State Government or any authority or body or agency in cash or kind to the assesse, e.g.
LPG Subsidy3, Subsidy for establishing manufacturing unit in backward area, etc.

However,
a. subsidy or grant or reimbursement which is taken into account for determination of the
actual cost of the asset as per Explanation 10 to sec. 43(1) is not taxable separately.
b. the subsidy or grant by the Central Government for the purpose of the corpus of a trust
or institution established by the Central Government or a State Government
- shall not be taxable.

3 Finance Ministry has clarified that LPG subsidy received by an individuals in their bank accounts will continue to be exempt from income tax.

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1.1.10 Heads of Income [Sec. 14]

According to Sec.14 of the Act, all income of a person shall be classified under the following five heads:

1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
For computation of income, all taxable income
should fall under any of the five heads of income
as mentioned above. If any type of income does not
become part of any one of the above mentioned first
four heads, it should be part of the fifth head, i.e.
Income from other sources, which may be termed as
the residual head.

Computation of Total Income for the A.Y.

Particulars Amount
Salaries ***
Income from house property ***
Profits and gains of business or profession ***
Capital gains ***
Income from other sources ***
Gross Total Income ****
Less: Deduction under chapter VIA (Sec 80C to 80U) ****
Total Income ****

1.1.11 Rounding-off of total income [SEC. 288A]

The total income so computed will have to be rounded off to the nearest multiple of ₹ 10, i.e., if the last figure in
the ‘rupee element’ is ₹ 5 or more, it should be rounded off to the next higher amount, which is a multiple of ₹ 10.
The ‘paise’ element should be ignored.
Thus, if the total income works out to ₹ 41,645, it should be rounded off to ₹ 41,650, but if it works out to
₹ 41,644.98, it should be rounded off to ₹ 41,640.

1.1.12 Rounding-off of Tax [SEC. 288B]

The tax calculated on the total income should be rounded off to the nearest ₹ 10. Amount of tax (including TDS or
advance tax), interest, penalty, etc. and refund shall be rounded off to the nearest ₹ 10.
Provision illustrated

Tax liability actually worked out (₹) 4,876.49 6,452.50 8,738.92 5,132.75

Tax liability as rounded off (₹) 4,880 6,450 8,740 5,130

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1.1.13 Capital -vs.- Revenue

Receipts
A capital receipt is not liable to tax, unless specifically provided in the Act, whereas, a revenue receipt is not
exempted, unless specifically provided in the Act. Further, capital receipts are to be charged to tax under the head
“Capital Gains” and revenue receipts are taxable under other heads. The Act does not provide exhaustive definition
of the income, thus, distinction between capital receipts and revenue receipts is not easily made. However, based
on a number of judicial pronouncements, the following principles are worthwhile to note:
1. Receipt in lump sum or in Instalments: Whether any income is received in lump sum or in instalments, it
will not make any difference as regards its nature, e.g., an employee is to get a salary of ₹ 10,000 p.m. Instead
of this he enters into an agreement to get a sum of ₹ 3,60,000 in lump sum to serve for a period of 3 years. The
receipt where it is monthly remuneration or lump sum for 3 years is a revenue receipt.
2. Nature of receipt in the hands of recipient: Whether a receipt is capital or revenue will be determined in
the hands of the persons receiving such income. No attention will be paid towards the source from which the
amount is coming. Salary even if paid out of capital by a new business will be it revenue receipt in the hands
of employee.
3. Accounting treatment: The name given to the transaction by the parties involved or its treatment in the books
of account may not alter its character as capital or revenue.
4. Income from wasting assets: Profits from capital which is consumed and exhausted in the process of
realization, e.g. royalties from mines and quarries, is taxable as income regardless of the consumption of
capital involved in the process.
5. Magnitude of receipt: The magnitude of the receipt, whether big or small, cannot decide the nature of the
receipt.
6. Time of receipt: The nature of the receipt has to be determined at the time when it is received and not
afterwards when it has been appropriated by the recipient.
7. Quality of receipt: Whether the income is received voluntarily or under a legal obligation, it will not make
any difference as regards its nature.
8. Tests as to the purpose of keeping an article: If a person purchases a piece of sculpture to keep as decoration
piece in his house, if sold later on, will bring capital receipt but if the same sculpture is sold by an art dealer it
will be his revenue receipt.

Instances of transactions which are capital in nature but specifically taxable:

1. Capital gains arising from sale of capital assets being defined u/s 2(14). [Sec. 45]
2. Compensation for termination of service or modification in the terms of service [Sec. 17(3)]
3. Compensation or other payments due to or received by the persons specified u/s 28(ii)/28(va).

Expenses
Similarly, a capital expenditure is not allowable as expenses, unless specifically allowed in the Act, whereas, a
revenue expenditure is allowable as expenses, unless specifically disallowed in the Act. Based on a number of
judicial pronouncements, the following principles are worthwhile to note:
1. Acquiring asset or advantage of enduring nature: Bringing into existence an asset or advantage of enduring
nature4 would lead to the inference that the expenditure disbursed is of a capital nature.

4 ‘enduring’ does not mean ‘everlasting’ or ‘perpetual’.

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2. Capital assets belonging to third parties: Even though a expenditure results in the creation of a capital asset,
if the capital asset belongs to a third party, such expenses will be treated as revenue expenditure.
3. Profit-earning process: Where the outgoing expenditure is so related to the carrying on or the conduct of
the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of
an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the
business, the expenditure may be regarded as revenue expenditure
4. Object of the transaction: The object of the transaction which has impact on the business, the nature of trade
for which the expenditure is incurred and the purpose thereof, etc.
5. Fixed capital -vs.- Circulating capital: An item of disbursement may be regarded as of a capital nature when
it is relatable to a fixed capital, whereas if it is related to circulating capital or stock-in-trade it would be treated
as revenue expenditure.
6. Expenditure on removing restriction: Where the assessee has an existing right to carry on a business, any
expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction
or disability would be on revenue account, provided the expenditure does not result in the acquisition of any
capital asset.
7. Payment made to rival dealer to ward off competition in business would constitute capital expenditure
8. If the expenditure is a part of the working expenses in ordinary commercial trading, it is not capital but revenue
expenditure.
9. If the expenditure is incurred for the initial outlay or for extension of business or substantial replacement of
equipment, it is capital expenditure but if it is incurred for running the business or is laid out as part of the
process of profit making, it is revenue in character.
10. If expenditure is incurred for ensuring the regular supply of raw material, maybe for period extending over
several years, it is on revenue account
11. When an owner incurs expenditure on additions in a building which enhances its value the expenditure can be
of a capital nature. But, if a tenant incurs an expenditure on a rented building for its renovation, he does not
acquire any capital asset, because the building does not belong to him and, ordinarily, such an expenditure will
be of a revenue nature.
12. Acquisition of the goodwill of the business is acquisition of a capital asset, and, therefore, its purchase price
would be capital expenditure. It would not make any difference whether it is paid in a lump sum at one time
or in instalments distributed over a definite period. Where, however, the transaction is not one for acquisition
of the goodwill, but for the right to use it, the expenditure would be revenue expenditure

13. Expenses incurred by the assessee for the purpose of creating, curing or completing the title is capital
expenditure and on the other hand if such expenses are incurred for the purpose of protecting the same, it is
revenue expenditure.

Illustration 2

Birla Ltd., a cement manufacturing company, entered into an agreement with a supplier for purchase of additional
cement plant. One of the conditions in the agreement was that if the supplier failed to supply the machinery
within the stipulated time, the company would be compensated at 5% of the price of the respective portion of
the machinery without proof of actual loss. The company received ₹ 8.50 lakhs from the supplier by way of
liquidated damages on account of his failure to supply the machinery within the stipulated time. What is the nature

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 Basics of Income Tax Act

of liquidated damages received by Birla Ltd. from the supplier of plant for failure to supply machinery to the
company within the stipulated time — a capital receipt or a revenue receipt? [CMA – Inter Dec. 2011]

Answer:

In the case of CIT -vs.- Saurashtra Cement Ltd. (2010) 325 ITR 422, the Apex Court has held that the damages
were directly and intimately linked with the procurement of a capital asset, which lead to delay in coming into
existence of the profit-making apparatus. It was not a receipt in the course of profit earning process. Therefore,
the amount received by the assessee towards compensation for sterilization of the profit earning source, not in the
ordinary course of business, is a capital receipt in the hands of the assessee.

1.1.14 Diversion & Application of Income

There is a very thin line of difference between Diversion of income & Application of income.
Diversion of income: Where by virtue of an obligation, income is diverted before it reaches to the assessee, it is
known as diversion of income & it is not taxable (i.e. even if the assessee were to collect the income he does so on
behalf of the person to whom it is payable).
Example 2. A, B and C are co-authors of a book. The publisher of the book gave the whole royalty of Rs.6,00,000
to A. A paid Rs.2,00,000 to B and C each. Such payment is not application of income but diversion of income.
Application of income: Whereas, application of income means to discharge an obligation (which is gratuitous or
self-imposed) after such income reaches the assessee & hence it is taxable.

Annexure
TAX RATES FOR THE A. Y. 2024-25
Default Tax Regime for Individual / HUF / AOP / BOI / AJP [Sec. 115BAC]
Applicable to
Individual / HUF / AOP (other than co-operative society) / BOI / AJP
Rate of Tax
Under this tax regime, income tax shall be computed at the option of the assessee considering the following rate:
Total income Rate of tax
Upto ₹ 3,00,000 Nil
From ₹ 3,00,001 to ₹ 6,00,000 5%
From ₹ 6,00,001 to ₹ 9,00,000 10%
From ₹ 9,00,001 to ₹ 12,00,000 15%
From ₹ 12,00,001 to ₹ 15,00,000 20%
Above ₹ 15,00,000 30%

Taxpoint: If a person opts for this regime, ₹ 3,00,000 shall be considered as basic exemption limit irrespective
of his age. In other words, for all category of individual i.e, senior citizen, super senior citizen and others, basic
exemption limit is ₹ 3,00,000

Rebate u/s 87A for tax computed as per sec. 115BAC

Applicable to: Resident Individual
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Direct Taxation

Conditions to be satisfied: Total income of the assessee does not exceed ₹ 7,00,000.
Quantum of Rebate: Lower of the following:
a. 100% of tax liability as computed above; or
b. ₹ 25,000/-

Marginal relief is available even total income exceeds ₹ 7,00,000 [available upto ₹ 7,27,770]
Marginal relief = Positive value of (Tax on income – Income in excess of ₹ 7,00,000)
Example 3

Particulars Case 1 Case 2 Case 3 Case 4

Assessee Individual Individual Senior Citizen Individual
Residential status Resident Resident Resident
Regime Default Default Default Default
Total Income (₹) 6,00,000 6,80,000 7,10,000 7,30,000
Tax on above 15,000 23,000 26,000 28,000
Rebate u/s 87A 15,000 23,000 16,000 Nil
Reason [₹ 26,000 – (₹ 7,10,000 - [₹ 28,000 – (₹ 7,30,000 -
₹ 7,00,000)], is positive ₹ 7,00,000)], is negative
Tax after rebate Nil Nil 10,000 28,000

Surcharge on tax after rebate u/s 87A

Surcharge at the following rate is also payable on tax as computed above after rebate u/s 87A

Total Income Rate of Surcharge

Total income does not exceed ₹ 50 lacs Nil
Total income exceeds ₹ 50 lacs but does not exceed ₹ 1 crore 10% of tax
Total income exceeds ₹ 1 crore but does not exceed ₹ 2 crores 15% of tax
Total income exceeds ₹ 2 crores 25% of tax*
Subject to Marginal Relief.
* Where the total income includes dividend, any income chargeable u/s 111A, 112 and 112A, the surcharge on the
amount of income-tax computed on that part of income shall not exceed 15%. In other words, surcharge higher than
15% is applicable only on tax on income other than dividend, income covered u/s 111A, 112 and 112A. Moreover,
in case of an AOP consisting of only companies as its members, the rate of surcharge on the amount of Income-tax
shall not exceed 15%.

Health & Education Cess

Applicable on: All assessee
Rate of cess: 4% of Tax liability after Surcharge.
Section 115BAC has been discussed in details later.

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 Basics of Income Tax Act

Old Tax Regime

Individual/HUF/Association of Persons/Body of Individuals/Artificial Juridical Person
In case of Super Senior citizen

Total Income Range Rates of Income Tax

Up to ₹ 5,00,000 Nil
₹ 5,00,001 to ₹ 10,00,000 20% of (Total income – ₹ 5,00,000)
₹ 10,00,001 and above ₹ 1,00,000 + 30% of (Total income – ₹ 10,00,000)
Super Senior Citizen means an individual who is resident in India and is of at least 80 years of age at any time
during the relevant previous year (i.e. any resident person, male or female, born before 02-04-1943).
In case of Senior citizen

Total Income Range Rates of Income Tax

Up to ₹ 3,00,000 Nil
₹ 3,00,001 to ₹ 5,00,000 5% of (Total Income – ₹ 3,00,000)
₹ 5,00,001 to ₹ 10,00,000 ₹ 10,000 + 20% of (Total income – ₹ 5,00,000)
₹ 10,00,001 and above ₹ 1,10,000 + 30% of (Total income – ₹ 10,00,000)
Senior Citizen means an individual who is resident in India and is of at least 60 years of age at any time during the
relevant previous year. (i.e., a resident person, male or female, born on or after 02-04-1943 but before 02-04-1963)
In case of other Individual1 / HUF / Association of Persons / Body of Individuals / Artificial Juridical Person

Total Income Range Rates of Income Tax

Up to₹ 2,50,000 Nil
₹ 2,50,001 to ₹ 5,00,000 5% of (Total Income – ₹ 2,50,000)
₹ 5,00,001 to ₹ 10,00,000 ₹ 12,500 + 20% of (Total income – ₹ 5,00,000)
₹ 10,00,001 and above ₹ 1,12,500 + 30% of (Total income – ₹ 10,00,000)
1
. born on or after 02-04-1963 or non-resident individual
Rebate u/s 87A
Applicable to: Resident Individual
Conditions to be satisfied: Total income of the assessee does not exceed ₹ 5,00,000.
Quantum of Rebate: Lower of the following:
(a) 100% of tax liability as computed above; or
(b) ₹ 12,500/-
Surcharge on tax after rebate u/s 87A

Surcharge at the following rate is also payable on tax as computed above after rebate u/s 87A

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Direct Taxation

Total Income Rate of Surcharge

Total income does not exceed ₹ 50 lacs Nil
Total income exceeds ₹ 50 lacs but does not exceed ₹ 1 crore 10% of tax
Total income exceeds ₹ 1 crore but does not exceed ₹ 2 crores 15% of tax
Total income exceeds ₹ 2 crores but does not exceed ₹ 5 crores 25% of tax*
Total income exceeds ₹ 5 crores 37% of tax*

* Where the total income includes dividend, any income chargeable u/s 111A, 112 and 112A, the surcharge on the
amount of income-tax computed on that part of income shall not exceed 15%. In other words, surcharge higher than
15% is applicable only on tax on income other than dividend, income covered u/s 111A, 112 and 112A. Moreover,
in case of an AOP consisting of only companies as its member, the rate of surcharge shall not exceed 15%.

Health & Education Cess

Applicable on: All assessee
Rate of cess: 4% of Tax liability after Surcharge

Marginal Relief
Example 4: Compute tax liability of the assessee (52 years) whose total income is:
(Case 1) ₹ 49,90,000 (Case 2) ₹ 50,10,000; (Case 3) ₹ 60,00,000

Particulars Working Case 1 Case 2 Case 3

Tax liability before Rebate ₹ 2,50,000 × Nil Nil Nil Nil
₹ 2,50,000 × 5% 12,500 12,500 12,500
₹ 5,00,000 × 20% 1,00,000 1,00,000 1,00,000
Balance Income × 30% 11,97,000 12,03,000 15,00,000
Total 13,09,500 13,15,500 16,12,500
Less: Rebate u/s 87A As income exceeds ₹ 5,00,000 Nil Nil Nil
Liability [A] 13,09,500 13,15,500 16,12,500
Add: Surcharge B = [10% of (A)] Nil 1,31,550 1,61,250
Tax and surcharge payable 13,09,500 14,47,050 17,73,750

Analysis of case (1) and case (2)

Increase in income ₹ 20,000

Liability for surcharge increased ₹ 1,31,550

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 Basics of Income Tax Act

To provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above ₹50
lakh or ₹ 1 crore or 2 crores or 5 crores, the concept of marginal relief is designed.
Condition: Total income exceeds ₹ 50,00,000 (or ₹ 1 crore or 2 crores or 5 crores)
Relief: Marginal relief is provided to ensure that the additional income tax payable including surcharge on excess
of income over ₹ 50,00,000 or ₹ 1,00,00,000 or ₹ 2,00,00,000 or ₹ 5,00,00,000 is limited to the amount by which
the income is more than ₹ 50,00,000 or ₹ 1,00,00,000 or ₹ 2,00,00,000 or ₹ 5,00,00,000
Marginal relief = Calculated Surcharge - 70% (Income – ₹ 50,00,000)] (if positive)
Or
Marginal relief = [(Income tax + surcharge) on income] – [(Income tax on ₹ 50,00,000) + (Income –
₹ 50,00,000)]
Similar relief shall also be provided where income exceeds marginally above ₹ 1 crore or ₹ 2 crores or ₹ 5 crores.
In that case, the aforesaid equation shall be changed accordingly.
Now, computation of tax liability is made after considering marginal relief:
Particulars Working Case 1 Case 2 Case 3
Liability [A] 13,09,500 13,15,500 16,12,500
Add: Surcharge B = [10% of (A)] Nil 1,31,550 1,61,250
Tax and surcharge 13,09,500 14,47,050 17,73,750
Less: Marginal relief [(B) –{70% (50,10,000 – 50,00,000)}] Nil 1,24,550 Nil
Effective Surcharge [C] Nil 7,000 1,61,250
Liability after surcharge [A + C] 13,09,500 13,22,500 17,73,750
Add: Health & Education 4% of above 52,380 52,900 70,950
cess
Total Rounded off u/s 288B 13,61,880 13,75,400 18,44,700
Taxpoint: The concept of marginal relief is not applicable in case of cess.

An Individual / HUF/AOP/BOI/AJP can opt for alternative tax regime u/s 115BAC. The provision relating to
sec. 115BAC will be discussed in subsequent chapter.

Quick MCQs:-

1. Income Tax Act extends to –

(a) Whole of India
(b) Whole of India except Jammu & Kashmir
(c) Whole of India except Sikkim
(d) Option (a) except Jammu & Kashmir and Sikkim

2. Which one of the following is not treated as Deemed Assessee.

(a) Legal Representative of deceased person
(b) Agent of a Non-Resident
(c) Trustee of a Trust
(d) None of the above

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Direct Taxation

3. Person u/s. 2(31) does not include

(a) Minor
(b) Local Authority
(c) Unsound Person
(d) None of the above

4. Which of the following are Revenue Receipts?

(a) Bonus Shares received by a dealer of shares.
(b) Money received by a tyre manufacturing company for sale of technical know-how regarding
manufacturing of tyres.
(c) Premium on issue of new shares
(d) All of the above

5. Which of the following is a Capital Receipt?

(a) Perquisites received by a professional during the course of carrying on profession.
(b) Compensation received in respect of permanent disablement due to an accident.
(c) Compensation received in respect of temporary disablement due to an accident.
(d) All of the above

6. Which of the following is not a Capital Expenditure?

(a) Expenditure incurred in connection with the acquisition or installation of a Fixed Asset.
(b) Expenditure incurred in raising capital.
(c) Expenditure incurred for improving the profit earning capacity of an asset.
(d) Expenditure incurred for repairing an asset.

7. Which of the following is a Revenue Expenditure?

(a) Lumpsum payment made by a employer as a gratuity to the employee.
(b) Legal expenses incurred by a person in defending or maintaining his right or title to the property
used for business.
(c) Expenditure incurred for the purchase of goods for resale.
(d) All of the above

8. Receipt of amount on maturity of LIC Policy is

(a) Capital Receipt
(b) Casual Receipt
(c) Revenue Receipt
(d) None of the above

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 Basics of Income Tax Act

Residential Status and Scope of Total

1.2
Income

T
he taxability of a person depends upon his residential status in India for any particular previous year. The
term residential status must not be confused with an individual’s citizenship in India. An individual may be
a citizen of India but may not be a resident for a particular previous year. Similarly, a foreign citizen may
be a resident of India for the purpose of income tax for a particular previous year. Residential status of an assessee
determines the scope of chargeability of his income. Whether a person will be charged to a particular income or
not, depends on his residential status.
Sec. 6 provides the test for residential status for the persons which can be categorized as under:

1.2.1 General points to be kept in mind regarding residential status of a person

Different for each Residential status is determined in respect of each previous year. In other words,
previous year residential status of a person may vary from one previous year to another previous year.
Single Status for each A person can have only one residential status for a previous year i.e. he cannot be a
source of income resident for one source of income and non-resident for another source.
Impact of citizenship Citizenship and residential status are two different concepts. A citizen of India may not
be a resident in India for the purpose of income-tax.
Country Specific A person can have same residential status in more than one country.

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Direct Taxation

1.2.2 Determination of Residential Status

Individual [Sec. 6(1)]
First of all, an individual is classified as resident or non-resident and again a resident individual may further be
categorized as Ordinarily Resident or Not Ordinarily Resident in India.

Resident in India
An individual is said to be a resident in India, if he satisfies any one of the following conditions -
(i) He is in India in the previous year for a period of 182 days or more [Sec. 6(1)(a)]; or
(ii) He is in India for a period of 60 days or more during the previous year and for 365 or more days during 4
previous years immediately preceding the relevant previous year [Sec. 6(1)(c)]
Taxpoint: Given Conditions are alternative in nature i.e. assessee needs to satisfy any one condition.

Sec. 6(1)(a): P.Y: Stays 182 days or more

Or
Sec/ 6(1)(c): P.Y: Stays 60 days or more
+ 4 PPY: Stays 365 days or more

Non-Resident in India
An assessee who is not satisfying sec. 6(1) shall be treated as a non-resident in India for the relevant previous year.

Illustration 3
Sam came to India first time during the P.Y. 2023-24. During the previous year, he stayed in India for (i) 50 days;
(ii) 183 days; & (iii) 153 days. Determine his residential status for the A.Y. 2024-25.
Solution:
(i) Since Sam resides in India only for 50 days during the P.Y. 2023-24, he does not satisfy any of the conditions
specified in sec. 6(1). He is, therefore, a non-resident in India for the P.Y. 2023-24.
(ii) Since Sam resides in India for 183 days during the previous year 2023-24, he satisfies one of the conditions
specified in sec. 6(1). He is, therefore, a resident in India for the P.Y. 2023-24.
(iii) Sam resides in India only for 153 days during the previous year 2023-24. Though he resided for more than 60
days during the previous year but in 4 years immediately preceding the previous year (as he came India first
time), he did not reside in India. Hence, he does not satisfy any of the conditions specified in sec. 6(1). Thus,
he is a non-resident for the P.Y. 2023-24.

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 Basics of Income Tax Act

Illustration 4
Andy, a British national, comes to India for the first time during 2019-20. During the financial years 2019-20,
2020-21, 2021-22, 2022-23 and 2023-24, he was in India for 55 days, 60 days, 80 days, 160 days and 70 days
respectively. Determine his residential status for the assessment year 2023-24.
Solution:
During the previous year 2023-24, Andy was in India for 70 days & during 4 years immediately preceding the
previous year, he was in India for 355 days as shown below:

Year 2019-20 2020-21 2021-22 2022-23 Total

No. of days stayed in India 55 60 80 160 355
Thus, he does not satisfy Sec.6(1) & consequently, he is a non-resident in India for the P.Y. 2023-24.

Exceptions to the above rule

A. In the following cases, condition (ii) of sec. 6(1) [i.e. sec. 6(1)(c)] is irrelevant:
1. An Indian citizen, who leaves India during the previous year for employment purpose.
2. An Indian citizen, who leaves India during the previous year as a member of crew of an Indian ship.
Taxpoint: Above assessee shall be treated as resident in India only if he resides in India for 182 days or more
in the relevant previous year.
B. In case of an Indian citizen or a person of Indian origin# comes on a visit to India during the previous year,
modified condition (ii) of sec. 6(1) is applicable:

Case Modified condition (ii) of sec. 6(1)

His total income, other than the income from He is in India for a period of 120 days or more (but
foreign sources!, exceeds ` 15 lakhs during the less than 182 days) during the previous year and for
previous year 365 or more days during 4 previous years immediately
preceding the relevant previous year
His total income, other than the income from He is in India for a period of 182 days or more during
foreign sources, does not exceed `15 lakhs during the previous year In short, sec. 6(1)(c) is not applicable.
the previous year
# P
 erson of Indian origin: A person is deemed to be of Indian origin if he or either of his parents or grand
parents were born in undivided India. Here, grand parents may be paternal or maternal.
!
“ Income from foreign sources” means income which accrues or arises outside India (except income derived
from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in
India.
C. An individual shall be deemed to be resident in India, if following conditions are satisfied
a. He is a citizen of India
b. His total income, other than the income from foreign sources, exceeds ₹ 15 lakhs during the previous
year;
c. He is not satisfying any of the basic conditions given u/s 6(1) [i.e., 182 days or 60 days + 365 days]; and
d. He is not liable to tax in any other country or territory by reason of his domicile or residence or any other
criteria of similar nature. [Sec. 6(1A)]

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Direct Taxation

Taxpoint:
¾¾ However, if such individual has satisfied either of the basic conditions, then he shall be treated as resident
in India u/s 6(1).
¾¾ Further note that the exception is not applicable in case of foreign citizen even if he is a person of Indian
origin.
¾¾ If these conditions are satisfied, then such individual shall be deemed as resident irrespective of number
of days of his stay in India.

In case of an individual, being a citizen of India and a member of the crew of a ship, the period or periods of
stay in India shall, in respect of an eligible voyage, not include the period beginning on the date entered into the
Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and
ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual
from the ship in respect of such voyage. In simple words, in the Continuous Discharge Certificate the date of
joining is recorded as 1st January 2020 and the date of ending the voyage is recorded as 31st January 2020, then
the entire period of 31 days shall be excluded from his stay in India
“Eligible voyage” shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where-
(i) for the voyage having originated from any port in India, has as its destination any port outside India; and
(ii) for the voyage having originated from any port outside India, has as its destination any port in India.’.

Illustration 5
Miss Pal, an Indian citizen, left India for first time on 1st April, 2023 for joining job in Tokyo. She came to India on
11th Jan, 2024 for only 170 days. Determine her residential status for P.Y. 2023-24.

Solution:
Number of days Miss Pal stayed in India can be calculated as under:

P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
23-24 1 - - - - - - - - 21 29 31 82
24-25 30 31 29 - - - - - - - - - 89

Since she left India for employment purpose, hence for becoming resident she has to stay in India for at least 182
days. However, she is in India for only 82 days during the previous year, thus she is a non-resident for the P.Y.
2023-24.
Points to be kept in mind
(a) Stay at same place in India is not necessary.
(b) Continuous stay in India is not necessary.
(c) A person shall be deemed to reside in India, if he is on the territorial waters of India5. For instance, if an
individual stays on a ship, which is in the territorial waters of India, then it shall be treated as his presence in
India.

5 Territorial water extends to 12 nautical miles (1 nautical miles = 1.1515 miles = 1.853 km) into the sea from the base line on the coast of India and
include any bay, gulf, harbour, creek or tidal river

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 Basics of Income Tax Act

Additional conditions to test whether resident individual is ‘Ordinarily resident or not’ [Sec. 6(6)]
A resident individual in India can further be categorised as -

(i) Resident and ordinarily resident in India (ii) Resident but not ordinarily resident in India

Resident and ordinarily resident

If a resident individual satisfies the following two

additional conditions, he will be treated as resident
& ordinarily resident in India -
(a) He has been resident in India [as per sec.
6(1)] in at least 2 out of 10 previous years
immediately preceding the relevant previous
year; and
(b) He has resided in India for a period of 730 days
or more during 7 previous years immediately
preceding the relevant previous year.
Taxpoint: To be a Resident & Ordinarily resident
in India, one has to satisfy at least one condition of
sec. 6(1) & both the additional conditions of sec.
6(6).

Resident but not ordinarily resident

If a resident individual does not satisfy both additional conditions as given u/s 6(6), he is “Resident but not
ordinarily resident in India”.
Exceptions
A. An individual shall be deemed to be resident but not ordinarily resident in India, if following conditions
are satisfied:
(a) He is a citizen of India
(b) His total income, other than the income from foreign sources, exceeds ₹ 15 lakhs during the previous
year; and
(c) He is not liable to tax in any other country or territory by reason of his domicile or residence or any other
criteria of similar nature.
(d) He is deemed to be resident in India u/s 6(1A).
B. An individual shall be deemed to be resident but not ordinarily resident in India, if following conditions
are satisfied:
(a) He is an Indian citizen or a person of Indian origin.
(b) He comes on a visit to India during the previous year
(c) His total income, other than the income from foreign sources, exceeds ₹ 15 lakhs during the previous
year
(d) He is in India for a period of 120 days or more (but less than 182 days) during the previous year and for
365 or more days during 4 previous years immediately preceding the relevant previous year.

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Direct Taxation

Taxpoint: If aforesaid conditions are satisfied, then such individual shall be deemed to be resident but not
ordinarily resident even though he has satisfied both conditions specified u/s 6(6).
Provision Illustrated
Determine the residential status in the following different cases:

Case A B C D E F G H
Citizenship Foreign India India India Foreign Foreign India Foreign
Is he person of Indian origin Yes Yes Yes Yes Yes Yes Yes No
Total income (excluding income from Yes No Yes Yes Yes Yes No No
foreign source) exceeds ` 15,00,000
Liable to pay tax in other country No No No Yes No No No No
Stay in India during the previous year 30 30 30 30 138 185 85 85
Stay in India during 4 years immediately 380 380 380 380 380 180 380 380
preceding previous year
Are dual conditions given u/s 6(6) Yes Yes Yes Yes Yes Yes Yes Yes
satisfied
Residential Status NR NR NOR NR NOR ROR NR ROR
Note 1 2 3 4 5 6 7 8
1. He is not an Indian citizen, hence sec. 6(1A) is not applicable. Further his stay in India during the previous year
does not exceed 120 days.
2. His total income does not exceed ₹ 15,00,000.
3. All conditions of sec. 6(1A) are satisfied.
4. He is liable to pay tax in other country.
5. His stay in India exceeds 120 days (but does not exceed 182 days)
6. He has satisfied one condition of sec. 6(1) [i.e. 182 days criteria] and dual conditions of sec. 6(6)
7. He is not satisfying any of the condition provided in sec. 6(1)
8. He has satisfied one condition of sec. 6(1) [i.e. 182 days criteria] and dual conditions of sec. 6(6)

Illustration 6
Mr. X, aged 19 years, left India for first time on May 31, 2023. Determine his residential status for the previous
year 2023-24 if:
(i) He left India for employment purpose
(ii) He left India on world tour.
Solution:
During the previous year 2023-24, Mr. X was in India for 61 days as shown below –

P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
23-24 30 31 - - - - - - - - - - 61

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 Basics of Income Tax Act

During the previous year 2023-24, X stayed in India for 61 days. Further, he was in India for more than 365 days
during 4 years immediately preceding the relevant previous year (as he left India for first time).
(i) Since he left India for employment purpose, condition of sec. 6(1)(c) shall not be applicable on such assessee.
He will be treated as resident in India, if and only if, he resided in India for at least 182 days during the
previous year. Hence, Mr. X is a non-resident in India for the previous year 2023-24.
(ii) Since he left India on world tour, which is not an exception of sec. 6(1), satisfaction of any one condition of
sec. 6(1) makes him resident in India for the previous year 2023-24. As he satisfies 2nd condition of sec. 6(1)
[shown above], he is resident in India. Further, he also satisfies dual conditions specified u/s 6(6) (since he left
India for first time). Therefore, he is an ordinarily resident for the previous year 2023-24.

Illustration 7
X came India for first time on July 24, 2019. From July 24, 2019 to December 25, 2020 he was in India. Again,
he came to India on August 5, 2023 for employment purpose & left India on November 25, 2023 permanently.
Determine his residential status for the previous year 2023-24 assuming -

(a) He is a foreign citizen (b) He is an Indian citizen

Solution:
During the previous year 2023-24, X was in India for 113 days as shown below:

Year Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
23-24 - - - - 27 30 31 25 - - - - 113
Further, he was in India for more than 365 days during 4 years immediately preceding the previous year as shown
below:

Year Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
19-20 - - - 8 31 30 31 30 31 31 29 31 252
20-21 30 31 30 31 31 30 31 30 25 - - - 269
21-22 - - - - - - - - - - - - -
22-23 - - - - - - - - - - - - -
As he satisfies condition given in sec. 6(1)(c), he is a resident in India.
Further, he was resident during 2 out of 10 years immediately preceding the relevant previous year but he was in
India only for 521 days in 7 years immediately preceding the relevant previous year. As he is not satisfying dual
conditions of sec. 6(6), he is a resident but not ordinarily resident in India for the previous year 2023-24.
Note: His status shall remain same in both the cases as -
(a) Foreign citizens are not covered by ‘exceptions to sec. 6(1)(c)’.
(b) Coming in India for employment purpose is not covered by ‘exceptions to sec. 6(1)(c)’.

Illustration 8
X, a foreign citizen, resides in India during the previous year 2023-24 for 83 days. Determine his residential status
for previous year 2023-24 assuming his stay in India during the last few previous years are as follows -

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Direct Taxation

Year Days Year Days Year Days Year Days

2008-09 220 days 2012-13 36 days 2016-17 137 days 2020-21 175 days
2009-10 15 days 2013-14 115 days 2017-18 265 days 2021-22 15 days
2010-11 257 days 2014-15 123 days 2018-19 310 days 2022-23 67 days
2011-12 110 days 2015-16 65 days 2019-20 121 days

Solution:
During previous year 2023-24, X was in India for 83 days & during 4 years immediately preceding the previous
year, he was in India for 378 days as shown below:

Year 2019-20 2020-21 2021-22 2022-23 Total

No. of days stayed in India 121 175 15 67 378

Thus, he satisfies one of the conditions specified u/s 6(1) & consequently, he becomes resident in India in the P.Y.
2023-24. Further, to determine whether X is an ordinarily resident or not, he needs to satisfy both conditions laid
down u/s 6(6).

Year Presence in India Resident or Non Condition satisfied to become a

(In Days) resident resident
2022-2023 67 Resident 6(1)(c)
2022-2022 15 Non Resident None
2020-2021 175 Resident 6(1)(c)
2019-2020 121 Resident 6(1)(c)
2018-2019 310 Resident Both
2017-2018 265 Resident Both
2016-2017 137 Non Resident None
2015-2016 65 Resident 6(1)(c)
2014-2015 123 Resident 6(1)(c)
2013-2014 115 Resident 6(1)(c)

Condition (i) of sec. 6(6) requires that an individual should be resident in India for at least 2 out of 10 years
preceding the relevant previous year. X was resident in India for 8 out of 10 years immediately preceding the
previous year. Thus, he satisfies this condition.
Condition (ii) of sec. 6(6) requires that an individual should be present in India for at least 730 days during 7 years
preceding to relevant previous year. X was in India for 1090 days during 2016-17 to 2022-23. Hence, he satisfies
this condition also.
X satisfies condition (ii) of sec. 6(1) as well as both the conditions of sec. 6(6). Thus, he is a resident and ordinarily
resident in India for the previous year 2023-24.

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Hindu Undivided Family (HUF) [Sec. 6(2)]

An HUF can be either a resident or non-resident in India. Again, a resident HUF can further be classified as
‘Ordinarily resident’ and ‘Not ordinarily resident’.
Resident HUF: When the control & management1 of affairs of HUF is wholly or partly situated in India during the
relevant previous year, then it is treated as resident in India.
1
Control & management means -
 controlling & directive power;
 actual control & management (mere right to control & manage is not enough);
 central control & management and not the carrying out of day to day affairs.
The place of central control & management is situated where the head, the seat & the directing power is situated.
Non-resident HUF: An HUF is non-resident in India if the control & management1 of its affairs is wholly situated
outside India.
Ordinarily resident in India: If the ‘karta’ or manager of a resident HUF satisfies both additional conditions
given u/s 6(6), HUF is said to be an ordinarily resident. If the ‘karta’ or manager of a resident HUF do not satisfies
both additional conditions given u/s 6(6), HUF is said to be a not-ordinarily resident.

1.2.3 Incidence of Tax [Sec. 5]

The following chart highlights the provisions of tax incidence in brief:

Tax incidence in the case of

Resident
Nature of Income Resident &
but not
ordinarily Non resident
ordinarily
resident
resident
Income accrued or deemed to be accrued and received or deemed Taxable Taxable Taxable
to be received in India
Income accrued outside India but received or deemed to be
Taxable Taxable Taxable
received in India.
Income accrued or deemed to be accrued in India but received
Taxable Taxable Taxable
outside India
Income accrued and received outside India from a business
Taxable Taxable Not taxable
controlled in or profession set-up in India.
Income accrued and received outside India from a business
Taxable Not taxable Not taxable
controlled or profession set-up outside India.
Income accrued and received outside India in the previous year
Taxable Not taxable Not taxable
(it makes no difference if the same is later remitted to India).
Income accrued and received outside India in any year preceding
the previous year and later on remitted to India in current Not taxable Not taxable Not taxable
financial year.
Note: In case of resident assessee like company, firm etc. (other than Individual and HUF) in which there is
no classification as ‘Resident but not ordinarily resident’, income accrued and received outside India from a
business controlled or profession setup outside India shall be taxable.

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Illustration 9
Ram provides following details of income, calculate the income which is liable to be taxed in India for the
A.Y.2024-25 assuming that –

(a) He is an ordinarily resident (b) He is not an ordinarily resident (c) He is a non-resident.

Particulars Amount
Salary received in India from a former employer of UK 1,40,000
Income from tea business in Nepal being controlled from India 10,000
Interest on company deposit in Canada (1/3rd received in India) 30,000
Profit from a business in Mumbai controlled from UK 1,00,000
Profit for the year 2012-13 from a business in Tokyo remitted to India 2,00,000
Income from a property in India but received in USA 45,000
Income from a property in London but received in Delhi 1,50,000
Income from a property in London but received in Canada 2,50,000
Income from a business in Jambia but controlled from Turkey 10,000
Solution:
Calculation of income liable to be taxed in India of Ram for the A.Y.2024-25
Resident & Resident but
Non-
Particulars Ordinarily not ordinarily
resident
resident resident
Salary received in India from a former employer of UK 1,40,000 1,40,000 1,40,000
Income from tea business in Nepal being controlled from India 10,000 10,000 Nil
Interest on company deposit in Canada -
- 1/3rd received in India 10,000 10,000 10,000
- 2/3rd received outside India 20,000 Nil Nil
Profit from a business in Mumbai controlled from UK 1,00,000 1,00,000 1,00,000
Past Profit from a business in Tokyo remitted to India Nil Nil Nil
Income from a property in India but received in USA 45,000 45,000 45,000
Income from a property in London but received in Delhi 1,50,000 1,50,000 1,50,000
Income from a property in London but received in Canada 2,50,000 Nil Nil
Income from a business in Jambia but controlled from Turkey 10,000 Nil Nil
Income liable to tax in India 7,35,000 4,55,000 4,45,000

Test Yourself
1. Mr. Rupankar Roy, an Indian Citizen, left India for the purpose of employment in USA for the first time
on 1st October, 2023. He came back to India on 30th March, 2024 for visit and returned back to USA after
staying 20 days in India. During the previous year 2023–24, he earned the following Income:
(i) Interest earned in USA ₹ 5,00,000 and credited in USA.
(ii) Interest received in India out of Fixed Deposit in Bank ₹ 1,20,000.
Determine his residential status and Tax Incidence in India for the A.Y. 2024-25

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 Basics of Income Tax Act

2. Mr. Ajnabi provides following information regarding his income of P.Y. 2023-24. Compute income liable to
be charged in India in the following cases:
a) He is an ordinarily resident b) He is not an ordinarily resident. c) He is a non-resident
Particulars ₹
Business income from USSR received in India 10,000
Business income earned in India received in Pakistan 20,000
Salary income from a company of UK situated in India 15,000
Interest on German Development Bond (2/5th received in India) 60,000
Income from agriculture in Nepal received there but later on remitted to India 1,81,000
Income from property in Jakarta received outside India 86,000
Income earned from business in UAE which is controlled from Delhi (₹ 15,000 received in 65,000
India)
Past untaxed profit of 15-16 brought to India during previous year 10,43,000
Profit from a business in Madras and managed from outside India 27,000
Profit on a sale of a building in India but received in Sri Lanka 14,80,000
Pension from a former employer in India received in USSR 36,000
Hints
1. Resident and ordinarily resident; ₹ 6,20,000/- 2. ₹ 19,80,000; ₹ 16,77,000; ₹ 16,27,000

1.2.4 Income received in India

Income received in India is taxable in all cases (whether accrued in India or elsewhere) irrespective of residential
status of the assessee, therefore it is significant to know the meaning of income received in India. If the place,
where the recipient gets the money (on first occasion) under his control, is in India, it is said to be income received
in India.
Taxpoint: Receipt is different from remittance. The receipt of income refers to the first occasion when the recipient
gets the money under his control. Once the amount is received as income (at any place outside India), any subsequent
remittance or transmission of the amount to India does not result to receipt in India
Example 5: Mr. X, a non-resident, received dividend from an Italian company in Japan on 15/12/2022. On
17/12/2022, he remitted such income in India. Such income shall not be taxable in India as income has neither
received in India nor accrued in India.

Salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian
flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in
the NRE account maintained with an Indian bank by the seafarer.

1.2.5 Income deemed to be received in India

Following incomes shall be deemed to be received in India and taxable in hands of all assessee irrespective of their
residential status -
a) The annual accretion in the previous year to the balance at the credit of an employee participating in a
recognized provident fund, to the extent provided in Rule 6 of part A of the IV schedule i.e.-
i) Employer’s contribution to the recognised provident fund in excess of 12% of salary.

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Direct Taxation

ii) Interest credited on the above balance by a rate exceeding 9.5% [Sec. 7(i)]
b) The transferred balance in recognised provident fund, to the extent liable to income tax [Sec. 7(ii)]
c) The contribution made, by the employer in the previous year, to the account of an employee under a pension
scheme notified u/s 80CCD [Sec. 7(iii)]
d) Tax Deducted at source [Sec. 198]
e) Deemed profit.
f) Income from undisclosed sources

1.2.6 Income deemed to accrue or arise in India [Sec. 9]

Following incomes are deemed to accrue or arise in India:

Income Salary Salary from Income Income from Income Income Deemed
from earned Govt. by an from interest from from receipt
connection in India Indian citizen dividend payable by royalty technical of gift
in India for services paid by specified services by non-
rendered outside an Indian person resident
India company
Sec. Sec. 9(1) Sec. 9(1)(iii) Sec. 9(1) Sec. Sec. 9(1) Sec. 9(1) Sec. 9(1)
9(1)(i) (ii) (iv) 9(1)(v) (vi) (vii) (viii)

Quick MCQs:

1. A Person may be Resident of

(a) Only one country always
(b) More than one country for any previous year.
(c) Only one country for any previous year.
(d) No specific rule

2. Residential Status is to be determined for –

(a) Previous Year
(b) Assessment Year
(c) Financial Year
(d) Accounting Year

3. Incomes which accrue or arise outside India but are received directly into India are taxable in case of –
(a) Resident only
(b) Both Ordinarily Resident and NOR
(c) Non-Resident
(d) All Assesses

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 Basics of Income Tax Act

4. Total Income of a person is determined on the basis of his –

(a) Residential Status in India
(b) Citizenship in India
(c) Residential Status and Citizenship in India
(d) None of the above

5. R was born in England, his parents were born in India in 1952. His grand parents were born in South
Africa. RB shall be a-
(a) Person of India Origin
(b) Foreign National
(c) Artificial Person
(d) Citizen of India

6. R a person of Indian Origin visited India on 03.10.2023 and plans to stay here for 185 days. During 4
years prior to previous year 2024-25, he was in India for 750 days. Earlier to that he was never in India.
For A.Y. 2024-25, RE shall be-
(a) Resident and Ordinarily Resident in India
(b) Resident but not Ordinarily Resident in India
(c) Non-Resident
(d) Deemed Resident

7. Asha leave India for the first time on 24-12-2023, Determine her Residential status for the AY 2024-2025.
(a) Resident
(d) Resident and Ordinary Resident
(c) Resident and Not Ordinary Resident
(d) Non-Resident

8. Foreign Income earned by Seema will be taxable in India if she is a

(a) Non-Resident
(b) Resident and Ordinary Resident
(c) Resident and Not Ordinary Resident
(d) All of the above

9. Interest paid by a Resident for any other purpose other than carrying on business or profession, outside
India is deemed to accrue or arise in India, if the receiver is a
(a) Non-Resident
(b) Resident and Ordinary Resident
(c) Resident and Not Ordinary Resident
(d) All of the above

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10. Determine residential status of Chidambaram which carries out its transactions in Malaysia. Its affairs are
partly controlled from India. The Karta of HUF, Mr. Chidambaram who is from Chennai visits India on
01-06-2022 and leaves to Malaysia on 10-02-2023. He has not visited India for the past 11Years.
(a) Non-resident
(b) Resident but not ordinarily resident
(c) Deemed resident
(d) Resident and ordinarily resident

11. Share of Profit of Mr. Vivek who is Partner in M/S.VIVA & Co. is-
(a) Exempt from tax
(b) Taxable as his Business Income
(c) Taxable as his Salary
(d) Taxable as Income from Other Sources

12. Casual Income received by the Assessee is –

(a) Fully Exempt
(b) Exempt upto ` 5,000
(c) Fully Taxable
(d) None of the above.

13. The Circulars issued by CBDT are binding on –

(a) Assessee
(b) Income Tax Authorities
(c) Both of the above
(d) Assessee and Court

14. Chennai Corporation falls under the category –

(a) Artificial Judicial Person
(b) Local Authority
(c) Association of Persons
(d) None of the above

15. Surcharge on Income Tax is payable by –

(a) Foreign Company
(b) Individual and HUF
(c) A Domestic Company
(d) All of the above

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16. The maximum amount on which Income – Tax is not chargeable in case of HUF for AY 2024-25 is –
(a) ` 2,50,000
(b) ` 5,00,000
(c) ` 3,00,000
(d) ` 2,00,000

17. Health and Education Cess is leviable on –

(a) Income Tax
(b) Income Tax + Surcharge
(c) Surcharge
(d) None of the above

18. The total income of the assesse has been computed as ` 2,53,494.90. For rounding off, the Total Income
will be taken as –
(a) ` 2,53,500
(b) ` 2,53,490
(c) ` 2,53,495
(d) ` 2,53,400

19. Undisclosed Income u/s. 68 to 69D are charged to tax at the effective rate of –
(a) 60% only
(b) 78% (Inclusive of surcharge @ 25% & HEC @ 4%)
(c) 75% (inclusive of surcharge @ 25%)
(d) 100%

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Direct Taxation

Agricultural Income 1.3

A
griculture income is exempt under the Indian Income Tax Act. The reason for exemption of agriculture
income from Central Taxation is that the Constitution gives exclusive power to make laws with respect to
taxes on agricultural income to the State Legislature.

1.3.1 Meaning
By virtue of sec. 2(1A), agricultural income means -

1. Rent or Revenue: Any rent or revenue derived

from a land, which is situated in India & is used
for agricultural purposes$;
Taxpoint:
¾¾ Rent may be in cash or in kind.
¾¾ Assessee may be the owner or tenant of
such land.

2. Cultivation of Land: Any income derived from such land by agriculture $

3. Income from Process: Any income derived from such land by the performance by –
(a) a cultivator;
(b) receiver of rent in kind;
- of any process ordinarily employed by a them to render the produce raised or received by him fit to be taken
to market.
4. Income from Sale of Produce: Any income derived from such land by the sale by
(a) a cultivator of the produce raised by him; or
(b) receiver of rent-in-kind of the produce received by him;
- in respect of which no process has been performed other than a process required to render it fit for the market.
Taxpoint: The process must be employed only to convert ‘the produce or rent in kind’ in marketable form.
If marketing process is performed on the ‘produce or rent in kind’, which can be sold in its raw form in
market, then income derived from such product is partly agricultural & partly non-agricultural income. (Detail
discussion is given later in this chapter)
5. Income from Let Out of Agricultural House Property: Any income derived from a building subject to
fulfillment of the following conditions -
(a) The building should be occupied by the cultivator or receiver of rent in kind.
(b) The building should be on or in the immediate vicinity of the land, being situated in India and used for
agricultural purposes.

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(c) The building should be used as dwelling house or store-house or other out building.
(d) The land is either situated in –
(i) Rural area; or
(ii) Urban area6 and assessed to land revenue / local rates.
Taxpoint:
¾¾ Where such land or building is used for non-agricultural purpose then any income derived from such land
or building shall not be treated as agricultural income.
¾¾ Income derived from land being let out for storing crop shall not be agricultural income.
¾¾ Building should be owned and occupied by the land-holder if he receives rent or revenue from the land.
On the other hand, in case of cultivator or receiver of rent in kind, it is enough that the building is
occupied by him.

(a) Profit on transfer of agricultural land: Profit on transfer of agricultural land shall not be treated as
agricultural income.
(b) Nexus between agro-activity and agro-income: There must be a close nexus between agro-activity
and agro-income. Income by way of sale of commodity, being different from what is raised and
processed, is not agricultural income. E.g. Assessee growing mulberry leaves to feed silkworms
and to obtain silk-cocoons, income on sale of such silk-cocoons shall not be treated as agricultural
income.
$
Agriculture or Agricultural operations or Agricultural purposes: The Act nowhere defines the term agricultural
operations or agricultural purposes. However, the Supreme Court laid down guidelines for the determination of the
scope of these terms in CIT -vs.- Raja Benoy Kumar Sahas Roy. Accordingly, for the purpose, agricultural activity
is divided into two parts:

(a) Basic Operation: It means application of human skill & labour

upon the land, prior to germination.
E.g. Tilling of land, sowing of seeds, planting, irrigation, etc.
Taxpoint: Any spontaneous growth from land itself (i.e. without
any human effort) cannot be termed as agricultural operation.
(b) Subsequent Operation: It means operations -

¾¾ which fosters the growth and preserves the produce;

6 Following is considered as urban area:
a. land which is situated within the jurisdiction of any Municipality (whether known as a municipality, municipal corporation, notified area
committee, town area committee, town committee, or by any other name) or Cantonment Board having population of 10,000 or more; or
b. in any area within the distance, measured aerially,—
Population of the municipality or cantonment board Area within the aerial distance from the local limits of such
municipality or cantonment board is treated as non-rural area
More than 10,000 but not exceeding 1,00,000 Upto 2 kilometres
More than 1,00,000 but not exceeding 10,00,000 Upto 6 kilometres
More than 10,00,000 Upto 8 kilometres

Population, according to the last preceding census of which the relevant figures have been published before the first day of the previous
year, shall be considered.

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Direct Taxation

¾¾ for rendering the produce fit for sale in market; and

¾¾ which are performed after the produce sprouts from the land.
E.g. Digging the soil around the growths, removal of undesirable undergrowths, weeding, tending, pruning,
cutting, harvesting, etc.
Taxpoint:

Activity Whether treated as agricultural activity?

Mere Basic Operation Agricultural activity
Mere Subsequent Operation Not an agricultural activity
Subsequent operation together with basic operation Agricultural activity

Agricultural Income, at a glance

Land must be in India

1.3.2 Instances of Agricultural (Agro) Income

1. Income from growing trade or commercial products like jute, cotton, etc. is an agro income.
2. Income from growing flowers and creepers is an agro income.
3. Plants sold in pots are an agro income provided basic operations are performed.
4. Remuneration and interest to partner: Any remuneration (salary, commission, etc.) received by a partner
from a firm engaged in agricultural operation is an agro income.
Interest on capital received by a partner from a firm, engaged in agricultural operation is an agro income.
5. Income arising by sale of trees grown on denuded parts of the forest after replanting and by carrying on
subsequent operations, is an agro income.
6. Compensation received from insurance company for damage caused by hail-storm to the green leaf of the
assessee’s tea garden is agricultural income. Further, no part of such compensation consists of manufacturing
income, as such compensation cannot be apportioned under Rule 8 between manufacturing income and
agricultural income.

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7. Any fee derived from land used for grazing of cattle, being used for agricultural operation, is an agro income.
8. Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income

1.3.3 Instances of Non-agricultural (Non-agro) Income

1. Salary received by an employee from any business (having agricultural income) is non-agro income.
2. Dividend received from a company engaged in agricultural operation is non-agro income.
3. Income from salt produced by flooding the land with sea-water is non-agro income.
4. Income from fisheries, poultry farming, dairy farming, butter & cheese making, etc. is non-agro income.
5. Breeding & rearing of livestock is non-agro income.
6. Interest received by a moneylender in the form of agricultural produce is non-agro income.
7. Profit on sale of standing crops after harvest, where such crops were acquired through purchase is non-agro
income.
8. Royalty income from mines is non-agro income.
9. Remuneration to a Director or Managing Director from a company engaged in agricultural business is non-
agro income. The provision holds good even when such remuneration is on the basis of certain percentage of
net profit.
10. Income earned by a cultivator from conversion of sugarcane (raised on own land) to jaggery is non-agro
income to the extent to which income is related to such conversion only. This is because sugarcane itself is
marketable.
11. Interest on arrears of rent receivable in respect of agricultural land is non-agro income.
12. Income from a land situated outside India is non-agro income
13. Annuity received by a person in consideration of transfer of agricultural land, is non-agro income.
14. Income on supply of water for agricultural operation is non-agro income. The provision holds good even when
such income is received in the form of agro-produce.
15. Income from sale of trees and grasses grown spontaneously (without any human effort), is non-agro income.

1.3.4 Treatment of Partly Agricultural & Partly Non-Agricultural Income

In case assessee is engaged in an integrated activity, comprising of agricultural activity as well as non- agricultural
activity, then profit of such integrated activity shall be segregated into agricultural income and non-agricultural
income in the following manner –

Agricultural Non-Agricultural
Rule Case
Income Income
8 Assessee is engaged in the business of growing and 60% of income 40% of income
manufacturing tea in India
E.g., If an assessee earns ₹ 5 lakh (as per sec. 28) from the business of growing & manufacturing tea
in India, then his business income will be ₹ 2 lakh (i.e., 40% of ₹ 5 lakh) & agro income will be ` 3
lakh (i.e. 60% of ₹ 5 lakh)

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Direct Taxation

Agricultural Non-Agricultural
Rule Case
Income Income
7A Assessee is engaged in the business of growing and 65% of income 35% of income
manufacturing rubber in India
Assessee is engaged in the business of growing and manufacturing Coffee in India
7B(1) ¾¾ Coffee grown and cured by the seller in India 75% of income 25% of income
7B(1A) ¾¾ Coffee grown, cured, roasted and grounded by the 60% of income 40% of income
seller in India, with or without mixing chicory or
other flavouring ingredients
Salary and interest received by a partner from a firm growing and manufacturing tea, coffee or rubber:
Such remuneration or interest shall be treated as partly agricultural income and partly business income as stated
above.
Any other case
For computing agricultural income from a business having both agricultural as well as non-agricultural income,
1. Assessee is required to prepare two Profit or Loss statements, one for agro-business & another for non agro-
business
2. Agro expenses debited to Agro Profit or Loss and non agro expenses shall be debited to Non agro-business
Profit or Loss
Note: Non-apportionable expenditure, related to composite business of agriculture and non-agriculture, is
fully charged to non-agricultural business.
3. Market value of any agricultural produce, which is utilised as raw material in such business, is to be treated as
income for agro-business and expenditure for non agro-business.
Illustration 10
X Ltd. grows sugarcane to manufacture sugar. Details for the previous year 2023-24 are as follows:

Particulars ₹ in lacs.
Cost of cultivation of sugarcane (5,000 tons) 10
Sugarcane sold in market (1,000 tons) 3
Sugarcane used for sugar manufacturing (4,000 tons) -
Cost of conversion 5
Sugar produced & sold in market 25
Compute income of X Ltd.
Solution:
Computation of income of X Ltd. for the A.Y. 2024-25 ₹ in lacs

Particulars Manufacturing Agriculture

Sale of agro product in market - 3
Sale of manufactured product in market 25 -

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 Basics of Income Tax Act

Particulars Manufacturing Agriculture

Notional sale of agro product used in the process of manufacturing - 12
(4,000 ton × ₹ 3 lacs per ‘000 ton)
Revenue [A] 25 15
Less: Expenses incurred
Cost of conversion 5 -
Market value of sugarcane used (4,000 ton × ₹ 3 lacs per ‘000 ton) 12 -
Cost of cultivation - 10
Expenditure [B] 17 10
Income [A – B] 8 5

1.3.5 Impact of agricultural income on tax computation

Sec. 10(1) of the Act exempts agricultural income from tax as our Constitution does not provide power to the
Parliament to levy tax on agro-income. However, since 1973 an indirect method7 has been found, to levy tax on
agro-income. According to this method, agricultural income is included in the total income of the assessee for
deciding the tax slab of the assessee.
The way to apply higher rate of tax-slab on non-agricultural income by including agricultural income in the total
income of the assessee are as under:
Conditions for including agricultural income in the total income of the assessee
1. The assessee is an individual, a Hindu-undivided family, a body of individual, an association of person or an
artificial juridical person.
2. The assessee has non-agricultural income exceeding the maximum amount of exemption (i.e. in case of Senior
citizen ₹ 3,00,000, Super Senior citizen ₹ 5,00,000 and in case of other individual/ HUF/AOP / BOI /artificial
juridical person ₹ 2,50,000)
3. The agricultural income of the assessee exceeds ₹ 5,000.

Treatment
Step 1: Compute income tax on total income of assessee including Agro-income.
Step 2: Compute income tax on (Agro-income + Maximum exempted limit)
Step 3: Tax liability before cess = (Tax as per step 1) - (Tax as per step 2)

Illustration 11
Mr. X aged 42 years has non-agro income of ₹ 3,25,000 and agro income of ₹ 2,55,000. Compute his tax liability
for the A.Y. 2024-25.

7 On the recommendation of the Committee on Taxation of Agricultural Wealth and Income headed by Dr. K. N. Raj

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Direct Taxation

Solution:
Computation of tax liability of Mr. X for the A.Y. 2024-25

Particulars ₹
Income Tax on ₹ 5,80,000 (i.e. agro income ₹ 2,55,000 + non agro ₹ 3,25,000) 28,500
Less: Tax on ₹ 5,05,000 (i.e. agro income ₹ 2,55,000 + maximum exempted limit ₹ 2,50,000) 13,500
Tax liability 15,000
Less: Rebate u/s 87A 12,500
2,500
Add: Health & Education Cess (4% of ₹ 2,500) 100
Tax and cess payable (Rounded off u/s 288B) 2,600

Test Yourself
1. Mr. X aged 62 years has non-agro income of ₹ 3,25,000 and agro income of ₹ 2,55,000. Compute his tax
liability for the A.Y. 2024-25.
2. Mr. Y aged 62 years has non-agro income of ₹ 3,75,000 and agro income of ₹ 2,55,000. Compute his tax
liability for the A.Y. 2024-25.
3. Mr. Z aged 82 years has non-agro income of ₹ 6,75,000 and agro income of ₹ 2,55,000. Compute his tax
liability for the A.Y. 2024-25.
4. Mr. A aged 32 years has non-agro income of ₹ 2,25,000 and agro income of ₹ 5,55,000. Compute his tax
liability for the A.Y. 2024-25.
Hints
1. Nil; 2. ₹ 2,600; 3. ₹ 36,400; 4. Nil
Illustration 12
Mr. Tony had estates in Rubber, Tea and Coffee. He derives income from them. He has also a nursery wherein he
grows plants and sells. For the previous year ending 31.3.2024, he furnishes the following particulars of his sources
of income from estates and sale of plants. Compute taxable income:
(a) Manufacture of Rubber ₹ 5,00,000.
(b) Manufacture of Coffee grown and cured ₹ 3,50,000.
(c) Manufacture of Tea ₹ 7,00,000.
(d) Sale of plants from nursery ₹ 1,00,000.
Solution:
Computation of income of Mr. Tony for the A.Y. 2024-25

Particulars Agricultural income Business income

Income from growing and manufacturing rubber [Rule 7A]
65% of ₹ 5,00,000 3,25,000
35% of ₹ 5,00,000 1,75,000

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 Basics of Income Tax Act

Particulars Agricultural income Business income

Income from growing and curing coffee [Rule 7B(1)]
#

75% of ₹ 3,50,000 2,62,500

25% of ₹ 3,50,000 87,500
Income from growing and manufacturing tea [Rule 8]
60% of ₹ 7,00,000 4,20,000
40% of ₹ 7,00,000 2,80,000
Sale of plants from nursery 1,00,000
Total 11,07,500 5,42,500
#
Assume the coffee grown and cured is not roasted and grounded by the seller.

Test Yourself
1. Mr. Krishna Daripa, engaged in growing and manufacturing of tea, furnished the following information for
the previous year 2022-23
Sale of Tea ₹ 15,00,000
Growing and manufacturing expenses of tea ₹5,00,000
You are required to compute the taxable income of Ms. Krishna Daripa for the A. Y. 2024-25.
Hints
1. ₹ 4,00,000

Illustration 13
State the tax treatment of the following income -
(a) A is employed in an agricultural farm and entrusted with tilling of land, his remuneration being 50% of the net
profits earned by the farm.
(b) C receives a dividend of ₹ 12,000 from a company whose entire income is derived from agricultural operations
only.
(c) D of Kolkata earns an income of ₹ 12,000 from agricultural land owned by him and situated in Bangladesh.
Such income is received in Bangladesh.
(d) F receives ₹ 600 on account of interest on loan on the mortgage of land which is used for agricultural purposes.
(e) G earns an income of ₹ 1,200 from lease of land for grazing of cattle required for agricultural operations.
(f) H receives ₹ 400 on account of interest on arrears of rent in respect of land used by tenant for agricultural
operations.
(g) Income from the sale of replanted trees where the denuded parts of the forest are replanted and subsequent
operation in forestry are carried out.
(h) Income from sale of trees of forest which are of spontaneous growth and in relation to which forestry operations
alone are performed or Income from sale of wild grass of spontaneous growth

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Direct Taxation

(i) Income from sale of tea leaf from a tea garden.

(j) Income from sale of jute produced in land situated in Bangladesh.
(k) Income from poultry farming
(l) Income from growing flowers in gardens
(m) Income from sale of tobacco leaves after being dried to make it fit for sale.
(n) Income from fisheries or poultry or dairy
(o) Income of ₹ 50,000 from agricultural land, the land is situated in Bangladesh
(p) Income of ₹ 25,000 from the land used as stone quarries.

Solution:
(a) Since Mr. A is an employee of the concern, therefore his income shall be taxable under the head ‘Salaries’ and
shall not be treated as agricultural income. However, if Mr. A is a partner of the concern then such income shall
be treated as agricultural income.
(b) Dividend received from a company (engaged in agricultural business) cannot be treated as agricultural income.
Such dividend shall be taxable under the head “Income from other sources”.
(c) Any income from a land situated outside India is not an agro-income and taxable under the head “Income from
other sources”. It is to be noted that such income shall be taxable only if the assessee is an ordinarily resident
in India.
(d) Interest on loan on the mortgage of land used for agricultural purpose is not an agro-income.
(e) Any rent derived from land used for grazing of cattle, used for agricultural operation, is an agro-income.
(f) Interest on arrears of rent receivable in respect of agricultural land is non-agricultural income.
(g) Assume replantation of trees has been done with application of basic operation on land. Hence such income is
agro-income.
(h) Income from sale of trees, grass grown spontaneously and without any human effort is non-agricultural income.
(i) It will be treated as agricultural income.
(j) Income from sale of jute produced in land situated in Bangladesh is not treated as agricultural income. For the
purpose of this, land should be situated in India.
(k) Income from Poultry farming is not an agricultural income because such income is not derived from land.
(l) Income from growing flowers in garden is as an agricultural Income as the same is derived from a land by
performing agricultural operations on it.
(m) Income from sale of tobacco leaves after being dried to make it fit for sale is an agricultural income.
(n) Income from fisheries or poultry or dairy is not considered as agricultural income as the same is not derived
from land.
(o) Since the land in situated outside India, hence income is not considered as agricultural income.
(p) It is not an agricultural income as no agricultural operation has been carried on the land.

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Quick MCQs:

1. CG arising from compulsory acquisition of urban agricultural land is-

(a) Taxable
(b) Exempt
(c) Exempt if acquired by RBI or Central Government
(d) None of the above

2. An Assessee is engaged in the business of growing and manufacturing of rubber, the agricultural income
in that case shall be-
(a) 40% of the income from such business
(b) 60% of the income from such business
(c) 65% of the income for such business
(d) None of above

3. If a Firm earns Agricultural Income, it will be exempt –

(a) In the hand of Firm
(b) In the hands of Firm but taxable in Partner’s hands
(c) In the hands of Firm as well as Partners
(d) In the hands of the firm as well as its Partner but would be included for computation of tax on
partners’ incomes.

4. If a Company declares divided out of Agricultural Income, such dividend declared by the Company shall
be-
(a) Exempt in the hands of the Shareholder
(b) Not be subject to any Income Tax, either in the hand of Company or the Share holders
(c) Included in the Total Income of the Company
(d) Taxable in the hands of the Shareholders.

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Direct Taxation

Income which do not form part of Total 1.4

Income
1.4.1 Income Exempt from Tax
Sec. 10 enlists the various income which are exempt from tax i.e. does not form part of total income of the assessee.
These are –
Agricultural Income [Sec. 10(1)]
Refer chapter Agricultural income
Member’s Share in Income of HUF [Sec. 10(2)]
Any sum received by an individual as a member of a Hindu undivided family –
–– Where such sum has been received out of the income of the family; or
–– Where such sum has been received out of the income of an impartible estate belonging to the family.
Share of Profit from a Firm [Sec. 10(2A)]
Share in the total income of the firm is exempt in the hands of partner.
Interest Income of Non-resident [Sec. 10(4)/(4B)]
 Interest on specified securities or bonds, including premium on redemption of such bonds is exempted in the
hands of a non-resident [Sec. 10(4)(i)]
 Interest on Non-Resident (External) Account in any bank in India to a person who is a resident outside India
as per as defined in sec. 2(w) of the Foreign Exchange Management Act, 1999 or is a person who has been
permitted by the Reserve Bank of India to maintain the aforesaid Account
 Interest on notified savings certificates issued before 1-6-2002 by the Central Government to a non-resident,
being a citizen of India or a person of Indian origin [Sec. 10(4B)]
Interest on Rupee Denominated Bond [Sec. 10(4C)]
Interest payable to a non-resident, not being a company, or to a foreign company, is exempt if following conditions
are satisfied:
(a) Interest is payable by any Indian company or business trust.
(b) Such interest is payable in respect of monies borrowed from a source outside India by way of issue of rupee
denominated bond, as referred to in sec. 194LC(2)(ia).
(c) Such bond has been issued during 17-09-2018 and 31-03-2019.

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Income received by specified fund [Sec. 10(4D)]Amended

any income accrued or arisen to, or received by a specified fund as a result of transfer of capital asset referred to in
sec. 47(viiab), on a recognised stock exchange located in any International Financial Services Centre; and
Where the consideration for such transaction is paid or payable in convertible foreign exchange or as a result of
transfer of securities (other than shares in a company resident in India) or any income from securities issued by a
non-resident (not being a permanent establishment of a non-resident in India); and
Where such income otherwise does not accrue or arise in India or any income from a securitisation trust which is
chargeable under the head “Profits and gains of business or profession”,
–– to the extent such income accrued or arisen to, or is received, is attributable to units held by non-resident (not
being the permanent establishment of a non-resident in India) or is attributable to the investment division of
offshore banking unit, as the case may be, computed in the prescribed manner.
Income of IFSC [Sec. 10(4E)/(4F)]Amended
 Any income accrued or arisen to, or received by a non-resident as a result of transfer of non-deliverable
forward contracts or offshore derivative instruments or over-the-counter derivatives entered into with an
offshore banking unit of an International Financial Services Centre as referred to in sec. 80LA(1A), which
fulfils such conditions as may be prescribed;
 Any income of a non-resident by way of royalty or interest, on account of lease of an aircraft or a ship in
a previous year, paid by a unit of an International Financial Services Centre, if the unit has commenced its
operations on or before 31-03-2024.
¾¾ “Aircraft” means an aircraft or a helicopter, or an engine of an aircraft or a helicopter, or any part thereof;
¾¾ “Ship” means a ship or an ocean vessel, engine of a ship or ocean vessel, or any part thereof.
Income of IFSC [Sec. 10(4G)]New
Any income received by a non-resident from portfolio of securities or financial products or funds, managed or
administered by any portfolio manager on behalf of such non-resident, in an account maintained with an Offshore
Banking Unit in any International Financial Services Centre, as referred to in sec. 80LA(1A), to the extent such
income accrues or arises outside India and is not deemed to accrue or arise in India.
Capital gain from transfer of equity shares [Sec. 10(4H)]
Income in respect of capital gain from transfer of equity shares of a domestic company engaged in aircaraft leasing
business in IFSC is exempt.
Leave Travel Concession [Sec. 10(5)]
Refer chapter Salaries.
Remuneration to Person who is not a Citizen of India in certain cases [Sec. 10(6)]
Following remuneration to an individual who is not a citizen of India shall be exempt –
 Remuneration received by him as an official of an embassy, high commission, legation, commission, consulate,
or the trade representation of a foreign state or as a staff of any of these officials provided corresponding Indian
officials in that foreign country enjoy similar exemptions in their country - Sec. 10(6)(ii).
 Remuneration received as an employee of a foreign enterprise for services rendered by him during his stay in
India provided -

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Direct Taxation

(a) the foreign enterprise is not engaged in any business or profession in India;
(b) his stay in India does not exceed 90 days in aggregate; and
(c) such remuneration is not liable to be deducted from the income of the employer under this Act - Sec.
10(6)(vi)
 Remuneration for services rendered in connection with his employment on a foreign ship provided his total
stay in India does not exceed 90 days in the previous year - Sec. 10(6)(viii)
 Remuneration received as an employee of the Government of a foreign State during his stay in India in
connection with his training in any undertaking owned by Government, Government company, subsidiary of a
Government company, corporation established by any Central, State or Provincial Act and any society wholly
financed by the Central or State Government – Sec. 10(6)(xi)
Tax paid by Government on Royalty or Fees for Technical Service [Sec. 10(6A)]
Tax paid by Government on Income of a Non-resident or a Foreign Company [Sec. 10(6B)]
Tax paid on Income from Leasing of Aircraft [Sec. 10(6BB)]
Tax paid by an Indian company on income arising from leasing of aircraft, etc. to the Government of a foreign
state or foreign enterprise under an approved agreement entered into with such Indian company engaged in the
business of operation of aircraft, provided such agreement was entered into between 1-4-1997 and 31-3-1999 or
after 31-3-2007.
Taxpoint: Only tax paid on such income is exempt, however such income is taxable.
Fees for Technical Services in Project connected with Security of India [Sec. 10(6C)]
Any income arising to notified foreign company by way of royalty or fees for technical services received in
pursuance of an agreement entered into with Central Government for providing services in or outside India in
projects connected with security of India.
Income from service provided to National Technical Research Organisation [Sec. 10(6D)]
Any income arising to a non-resident or to a foreign company, by way of royalty from, or fees for technical services
rendered in or outside India to, the National Technical Research Organisation
Allowance or Perquisite paid Outside India [Sec. 10(7)]
Any allowance or perquisite paid outside India by the Government to a citizen of India for rendering services
outside India.
Death-cum-retirement-gratuity [Sec. 10(10)]
Refer chapter Salaries.
Commutation of Pension [Sec. 10(10A)]
Refer chapter Salaries.
Leave Encashment [Sec. 10(10AA)]
Refer chapter Salaries.
Workmen’s Retrenchment Compensation [Sec. 10(10B)]
Refer chapter Salaries.

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Compensation under Bhopal Gas Leak Disaster Act, 1985 [Sec. 10(10BB)]
Compensation for any Disaster [Sec. 10(10BC)]
Any amount received or receivable from the Central Government or a State Government or a local authority by
an individual or his legal heir by way of compensation on account of any disaster, except the amount received or
receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of
any loss or damage caused by such disaster.
Payment under Voluntary Retirement Scheme [Sec. 10(10C)]
Refer chapter Salaries.
Tax paid by Employer on behalf of Employee on Non-monetary Perquisites u/s 17(2) [Sec. 10(10CC)]
Refer chapter Salaries.

Sum received under a Life Insurance Policy [Sec. 10(10D)]Amended

Any sum received under a life insurance policy including bonus on such policy is wholly exempt from tax.
However, exemption is not available on -
1. any sum received u/s 80DD(3) or u/s 80DDA(3); or
2. any sum received under a Keyman insurance policy; or
3. any sum received under an insurance policy issued on or after 1-4-20128 in respect of which the premium
payable for any of the years during the term of the policy exceeds 10%9 of the actual capital sum assured.
4. Where any Unit Linked Insurance Policy (ULIP), is issued on or after 01-02-2021 and the premium payable
for any of the previous year during the term of such policy exceeds ₹ 2,50,000
¾¾ Where the premium is payable, by a person, for more than one ULIP, issued on or after 01-02-2021, the
exemption shall apply only with respect to those ULIP, where the aggregate amount of premium does not
exceed the aforesaid limit in any of the previous year during the term of any of those policies.
Notes:
(a) Point (3) & (4) shall not apply to any sum received on the death of a person.
(b) Actual capital sum assured shall mean the minimum amount assured under the policy on happening of the
insured event at any time during the term of the policy.
(c) If the exemption u/s 10(10D) is not available in respect of ULIP due to point (4), income shall be taxable under
the head Capital Gains u/s 45(1B) and tax liability shall be computed as per sec. 112A.
(d) For calculating actual capital sum assured (for point 3), no account shall be taken for -
¾¾ the value of any premiums agreed to be returned; or
¾¾ any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may
be received under the policy by any person.
Payment from Statutory or Public Provident Fund [Sec. 10(11)]Amended

8 If policy is issued between 01-04-2003 and 31-03-2012, premium payable for any of the years during the term of the policy exceeds 20% of
the actual capital sum assured
9 Where policy is issued on or after 01-04-2013 and Insured is disable or severe disable as per sec. 80U or suffering from disease specified u/s
80DDB – 15%

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Direct Taxation

Any payment from a provident fund to which the Provident Funds Act, 1925, applies or from any other notified
provident fund set up by the Central Government is exempt.
Exceptions
Interest accrued during the previous year in the account of an employee maintained by the fund shall not be
exempted to the extent it relates to the following amount:

Case Interest not exempted

Where employer is giving Interest on employee’s contribution (made on or after 01-04-2021) in
contribution excess of ₹ 2,50,000 per year
Where employer is not giving Interest on employee’s contribution (made on or after 01-04-2021) in
contribution excess of ₹ 5,00,000 per year
In such case, income shall be computed in such manner as may be prescribed.
Payment from Sukanya Samriddhi Account [Sec. 10(11A)]
Any payment from an account, opened in accordance with the Sukanya Samriddhi Account Rules, 2014 made
under the Government Savings Bank Act, 1873.
Payment from Recognised Provident Fund [Sec. 10(12)]
The accumulated balance due and becoming payable to an employee participating in a recognised provident fund,
to the extent provided in rule 8 of Part A of the Fourth Schedule is exempt
Exceptions
Interest accrued during the previous year in the account of an employee maintained by the fund shall not be
exempted to the extent it relates to the following amount:

Case Interest not exempted

Where employer is giving Interest on employee’s contribution (made on or after 01-04-2021) in
contribution excess of ₹ 2,50,000 per year
Where employer is not giving Interest on employee’s contribution (made on or after 01-04-2021) in
contribution excess of ₹ 5,00,000 per year
In such case, income shall be computed in such manner as may be prescribed.
Payment from National Pension Trust [Sec. 10(12A) & 10(12B)]
Any payment from the National Pension System Trust to an assessee on closure of his account or on his opting out
of the pension scheme referred to in sec. 80CCD, to the extent it does not exceed 60% of the total amount payable
to him at the time of such closure or his opting out of the scheme [Sec. 10(12A)]
Any payment from the National Pension System Trust to an employee under the pension scheme referred to in
sec. 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified
under the Pension Fund Regulatory and Development Authority Act, 2013, to the extent it does not exceed 25% of
the amount of contributions made by him [Sec. 10(12B)]
Payment from ACF [Sec. 10(12C)]
Any payment from the “Agniveer Corpus Fund” by a person enrolled under the “Agnipath Scheme 2022” is
exempt.

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

Any payment from an approved superannuation fund made -
 on the death of a beneficiary; or
 to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his
becoming incapacitated prior to such retirement; or
 by way of refund of contributions on the death of a beneficiary; or
 by way of refund of contributions to an employee on his leaving the service (otherwise than by retirement at
or after a specified age or on his becoming incapacitated prior to such retirement) to the extent to which such
payment does not exceed the contributions made prior to 1-4-1962 and any interest thereon.
 by way of transfer to the account of the employee under a pension scheme referred to in sec. 80CCD and
notified by the Central Government
House Rent Allowance [Sec. 10(13A)]
Refer chapter Salaries.
Notified Special Allowances [Sec. 10(14)]
Refer chapter Salaries.
Interest on Securities [Sec. 10(15)]
1. Interest, premium on redemption or other payment on notified securities, bonds or certificates
2. Interest in the hands of an individual and Hindu undivided family on Specified Capital Investment Bonds or
Specified Relief Bonds
3. Interest on specified bonds to non resident or his nominees if such bonds are purchased by a non-resident
Indian in foreign exchange; and
4. The interest and principal received in respect of such bonds, whether on their maturity or otherwise, is not
allowable to be taken out of India. Interest on securities held by the Issue Department of the Central Bank of
Ceylon;
5. Interest payable to any bank incorporated in a country outside India and authorised to perform central banking
functions in that country on any deposits made by it, with the approval of the RBI, with any scheduled bank;
6. Interest payable on a loan advanced by the Nordic Investment Bank for an approved project;
7. Interest payable to the European Investment Bank for financial co-operation agreement;
8. Interest payable by a Government, local authority, certain industrial undertakings or financial institution on
money borrowed before 1/6/2001
9. Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims or deposits for the benefit of the
victims of the Bhopal gas leak disaster.
10. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued
under the Gold Monetisation Scheme, 2015
11. Interest on specified bonds issued by a local authority or by a State Pooled Finance Entity.
12. Interest received by a non-resident or a person who is not ordinarily resident, in India on a deposit made on or
after 1-4-2005 in an offshore banking unit referred in the Special Economic Zones Act, 2005

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Direct Taxation

13. Interest payable to a non-resident by a unit located in an International Financial Services Centre in respect of
monies borrowed by it on or after 01-09-2019

Income from Leasing of Aircraft [Sec. 10(15A)]

Any payment made, by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or
an aircraft engine (other than a payment for providing spares, facilities or services in connection with the operation
of leased aircraft) on lease from the foreign Government or a foreign enterprise under an approved agreement. The
agreement must not be entered into -
 between 1-4-1997 to 31-3-1999; and
 on or after 1-4-2007.
Note: “Foreign enterprise” means a person who is a non-resident.

Taxpoint: Tax paid on an agreement made between 1-4-1997 and 31-3-1999 is eligible for exemption u/s 10(6BB).

Scholarship [Sec. 10(16)]

Scholarships granted to meet the cost of education.

Notes:
(a) Cost of education also includes incidental expenses incurred for education.
(b) The exemption is irrespective of actual expenditure.

Daily Allowance, etc. to MP and MLA [Sec. 10(17)]

Any income by way of -
(a) Daily allowance received by any person by reason of his membership of Parliament or of any State Legislature
or of any Committee thereof;
(b) Any allowance received by any person by reason of his membership of Parliament;
(c) Constituency Allowance received by any person by reason of his membership of State legislature;

Awards and Rewards [Sec. 10(17A)]

Any payment made, whether in cash or in kind -
(a) in pursuance of any award instituted in the public interest by the Central Government or any State Government
or by any other approved body; or
(b) as a reward by the Central Government or any State Government for approved purposes.

Pension to receiver of Gallantry Awards [Sec. 10(18)]

Any income by way of -
(a) pension received by an individual who has been in the service of the Central or State Government and has been
awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other notified gallantry award10;
or
(b) family pension received by any member of the family of such individual.
10 Asadharan Suraksha Seva Praman Patra

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Family Pension to Widow or Children of Armed Force [Sec. 10(19)]

Family pension received by the widow or children or nominated heirs, of a member of the armed forces (including
para-military forces) of the Union, where the death of such member has occurred in the course of operational
duties, in such circumstances and subject to such conditions, as may be prescribed.
Palace of Ex-ruler [Sec. 10(19A)]
The annual value in respect of any one palace, which is in the occupation of an ex-ruler
Income of Local Authority [Sec. 10(20)]
Following income of a local authority is exempt -
(a) Income chargeable under the head Income from House Property, Capital Gains or Income from other Sources
(b) Income from the supply of commodities (other than water or electricity) or services, within its own jurisdiction
(c) Income from the supply of water services or electricity within or outside its jurisdiction
Income of Scientific Research Association [Sec. 10(21)]
Any income of a scientific research association [being approved for the purpose of Sec. 35(1)(ii)] or research
association which has its object, undertaking research in social science or statistical research [being approved and
notified for the purpose of Sec. 35(1)(iii)], is exempt provided such association—
(a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is
established; and
(b) invest or deposit its funds in specified investments.
Income of Professional Institutions [Sec. 10(23A)]
Any income (other than income chargeable under the head “Income from house property” or any income received
for rendering any specific services or income by way of interest or dividends derived from its investments) of
professional association shall be exempt provided -
(a) Such association or institution is established in India having as its object the control, supervision, regulation or
encouragement of the profession of law, medicine, accountancy, engineering or architecture or other specified
profession;
(b) Such association or institution applies its income, or accumulates it for application, solely to the objects for
which it is established; and
(c) The association or institution is approved by the Central Government.
Income of Regimental Fund [Sec. 10(23AA)]
Any income received by any person on behalf of any Regimental Fund or Non-public Fund established by the
armed forces of the Union for the welfare of the past and present members of such forces or their dependants is
exempt.
Income of specified Employee Welfare Fund [Sec. 10(23AAA)]
Income of specified Pension Fund [Sec. 10(23AAB)]
Income of trust for Development of Khadi and Village Industries [Sec. 10(23B)]
Income of Khadi and Village Industries Boards [Sec. 10(23BB)]
Income of body formed for Administration of Public Religious or Charitable Trusts [Sec. 10(23BBA)]

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Direct Taxation

Any income of any body established under any Central, State or Provincial Act which provides for the administration
of any public, religious or charitable trusts or endowments including Maths, Temples, Gurudwaras, Wakfs, Churches
or other places of public religious worship or societies for religious or charitable purposes.
Income of European Economic Community [Sec. 10(23BBB)]
Income of SAARC Fund [Sec. 10(23BBC)]
Income of ASOSAI-SECRETARIAT [Sec. 10(23BBD)]
Income of Insurance Regulatory Authority [Sec. 10(23BBE)]
Income of the Central Electricity Regulatory Commission [Sec. 10(23BBG)]
Income of the Prasar Bharati (Broadcasting Corporation of India) [Sec. 10(23BBH)]
Income of Certain Funds [Sec. 10(23C)]Amended
Any income received by any person on behalf of
1. The Prime Minister’s National Relief Fund or the Prime Minister’s Citizen Assistance and Relief in Emergency
Situations Fund (PM CARES FUND); [sec. 10(23C)(i)]
2. The Prime Minister’s Fund (Promotion of Folk Art); [sec. 10(23C)(ii)]
3. The Prime Minister’s Aid to Students Fund; [sec. 10(23C)(iii)]
4. The National Foundation for Communal Harmony; [sec. 10(23C)(iiia)]
5. The Swachh Bharat Kosh; [sec. 10(23C)(iiiaa)]
6. The Clean Ganga Fund; [sec. 10(23C)(iiiaaa)]
7. The Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund; [sec. 10(23C)(iiiaaaa)]
8. Any other charitable fund or institution notified by the prescribed authority (subject to condition) [sec. 10(23C)
(iv)]
9. Any trust or institution wholly for public religious purposes or wholly for public religious and charitable
purposes notified by the prescribed authority (subject to conditions) [sec. 10(23C)(v)]
10. Any university or other education institutions, (wholly or substantially financed by Government or having
annual receipt of prescribed limit upto ₹ 5 crores) existing solely for education purposes and not for profit.
[sec.10(23C)(iiiac), (iiiad) (vi)]
11. Any hospital or other institution (wholly or substantially financed by Government or having annual receipt
upto ` 5 crores) for treatment of person suffering from illness or mental defectiveness or during convalescence
or requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for profit.
[sec.10(23C)(iiiac), (iiiae) and (via)]

Income of Mutual Fund [Sec. 10(23D)]

Any income of -
(a) A Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulation made
thereunder;
(b) A Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve
Bank of India and subject to certain notified conditions.

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 Basics of Income Tax Act

Income of Securitisation Trust [Sec. 10(23DA)]

Any income of a securitisation trust from the activity of securitisation.
 “Securitisation” shall have the same meaning as assigned to it,
(a) in regulation 2(1)(r) of the Securities and Exchange Board of India (Public Offer and Listing of Securitised
Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992
and the Securities Contracts (Regulation) Act, 1956; or
(b) in clause (z) of sub-section (1) of section 2 of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002; or
(c) under the guidelines on securitisation of standard assets issued by the Reserve Bank of India;
 “Securitisation trust” shall have the meaning assigned to it in the Explanation below sec. 115TCA
Income of Investor Protection Fund [Sec. 10(23EA)]
Income (by way of contribution received from recognized Stock exchange and members thereof) of Investor
Protection Fund set up by the recognised Stock Exchanges in India as the Central Government may by notification
in Official Gazette specify shall be exempt.

Income of Credit Guarantee Fund Trust for Small Industries [Sec. 10(23EB)]

Income of Investor Protection Fund set up by Commodity Exchange [Sec. 10(23EC)]

Income of Investor Protection Fund of Depositories [Sec. 10(23ED)]

Any income, by way of contributions received from a depository, of notified Investor Protection Fund set up in
accordance with the regulations by a depository.
However, where any amount standing to the credit of the Fund and not charged to income-tax during any previous
year is shared, either wholly or in part with a depository, the whole of the amount so shared shall be deemed to
be the income of the previous year in which such amount is so shared and shall, accordingly, be chargeable to
income-tax.
Income of Core Settlement Guarantee Fund [Sec. 10(23EE)]
Any specified income of such Core Settlement Guarantee Fund, set up by a recognised clearing corporation in
accordance with the regulations notified by the Central Government.
However where any amount standing to the credit of the Fund and not charged to income-tax during any previous
year is shared, either wholly or in part with the specified person, the whole of the amount so shared shall be deemed
to be the income of the previous year in which such amount is so shared.
Income of Ventures Capital Fund or Venture Capital Company [Sec 10(23FB)]
Any income of a venture capital company or venture capital fund from investment in a venture capital undertaking.
However, w.e.f. A.Y. 2016-17, the exemption is not applicable to any income of a venture capital company or
venture capital fund, being an investment fund specified in clause (a) of the Explanation 1 to sec. 115UB
Non-business income of Investment Fund [Sec. 10(23FBA)]
Any income of an investment fund other than the income chargeable under the head “Profits and gains of business
or profession”.

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Direct Taxation

Income of Unit holder [Sec. 10(23FBB)]

Any income, referred to in sec. 115UB, to a unit holder of an investment fund, being that proportion of income
which is of the same nature as income chargeable under the head “Profits and gains of business or profession”.
 For the purposes of sec. 10(23FBA) and (23FBB), “investment fund” shall have the meaning assigned to it in
clause (a) of the Explanation 1 to sec. 115UB.
Income from specified fund [Sec. 10(23FBC)]
Any income accruing or arising to, or received by, a unit holder from a specified fund or on transfer of units in a
specified fund is exempt.
 “Specified fund” shall have the same meaning as assigned to it sec. 10(4D)
 “Unit” means beneficial interest of an investor in the fund and shall include shares or partnership interests
Income of Business Trust [Sec 10(23FC)]
Any income of a business trust by way of
(a) interest received or receivable from a special purpose vehicle; or
(b) dividend received or receivable from a special purpose vehicle
 “Special purpose vehicle” means an Indian company in which the business trust holds controlling interest and
any specific percentage of shareholding or interest, as may be required by the regulations under which such
trust is granted registration
Income of Real Estate Investment Trust [Sec. 10(23FCA)]
Any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any
real estate asset owned directly by such business trust.
Distributed Income to unit holder of a Business Trust [Sec 10(23FD)]
Any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not
being that proportion of the income which is of the same nature as the income referred to in 10(23FC)(a) [i.e.,
proportionate interest income] or 10(23FC)(b) [i.e., proportionate dividend income where the special purpose
vehicle has exercised the option u/s 115BAA] or 10(23FCA) [i.e., proportionate rental income]
Taxpoint: Such income is taxable in hands of unitholders.
Income to wholly owned subsidiary of Abu Dhabi Investment Authority and Sovereign Wealth Fund [Sec
10(23FE)]
Any income of the specified person in the nature of dividend, interest or long-term capital gains arising from an
investment made by it in India, whether in the form of debt or share capital or unit, if the investment:
(i) is made on or after 01-04-2020 but on or before 31-03-2024;
(ii) is held for at least 3 years; and
(iii) is in:
(a) a business trust referred to in sec. 2(13A)(i); or
(b) a company or enterprise or an entity carrying on the business of developing, or operating and maintaining,
or developing, operating and maintaining any infrastructure facility or other specified business; or

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(c) a domestic company, set up and registered on or after 01-04-2021, having minimum 75% investments in
one or more of the companies or enterprises or entities referred to in item (b); or
(d) a non-banking financial company registered as an Infrastructure Finance Company as referred to in
notification number RBI/2009-10/316 issued by the Reserve Bank of India or in an Infrastructure Debt
Fund, a non-banking finance company, as referred to in the Infrastructure Debt Fund - Non-Banking
Financial Companies (Reserve Bank) Directions, 2011, issued by the Reserve Bank of India, having
minimum 90% lending to one or more of the companies or enterprises or entities referred to in item (b)
(e) a Category-I or Category-II Alternative Investment Fund regulated under the Securities and Exchange
Board of India (Alternative Investment Fund) Regulations, 2012, having 50% investment in one or more
of the company or enterprise or entity referred above or in an Infrastructure Investment Trust referred to
in sec. 2(13A)(i)
Capital Gains of Resultant Fund [Sec. 10(23FF)]
Any income of the nature of capital gains, arising or received by a non-resident or a specified fund, which is on
account of transfer of share of a company resident in India, by the resultant fund or a specified fund to the extent
attributable to units held by non-resident (not being a permanent establishment of a non-resident in India) in
such manner as may be prescribed, and such shares were transferred from the original fund, or from its wholly
owned special purpose vehicle, to the resultant fund in relocation, and where capital gains on such shares were not
chargeable to tax if that relocation had not taken place.
Income of Trade Union [Sec. 10(24)]
Any income chargeable under the heads “Income from house property” and “ Income from other sources” of -
(a) a registered union within the meaning of the Indian Trade Unions Act, 1926, formed primarily for the purpose
of regulating the relations between workmen and employers or between workmen and workmen.
(b) an association of registered unions
Income of specified Provident Funds, etc. (e.g. RPF, Superannuation fund, Approved gratuity fund) [Sec.
10(25)]
Income of Employees’ State Insurance Fund [Sec. 10(25A)]
Income of Scheduled Tribe [Sec. 10(26)]
Following income of member of a Scheduled Tribe is exempt –
(a) from any source in specified areas or States; or
(b) by way of dividend or interest on any securities.
–– provided he resides in specified area or States.

Income of Sikkimese [Sec. 10(26AAA)]

Following income of an individual, being a Sikkimese, is exempt:
(i) from any source in the State of Sikkim; or
(ii) by way of dividend or interest on securities:
Note: The exemption is not available to a Sikkimese woman who, on or after 1/4/2008, marries an individual who
is not a Sikkimese, except when non-sikkimese male or his ancestors were domiciled in Sikkim or when non-

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sikkimese male or his father or brother from same father or parental grand father were domiciled in Sikkim on or
before 26.04.1975.
Income of an Agricultural produce Market Committee [Sec. 10(26AAB)]
Income of an agricultural produce market committee or board constituted under any law for the time being in force
for the purpose of regulating the marketing of agricultural produce is exempt.
Income of Corporation for promoting the Interests of the Members of the Scheduled Castes or the Scheduled
Tribe or Backward Classes [Sec. 10(26B)]
Income of Corporation for promoting Interest of Members of a Minority Community [Sec. 10(26BB)]
Income of Corporation for the Welfare and Economic Upliftment of Ex-servicemen [Sec. 10(26BBB)]
Income of a Co-operative Society for promoting the Interests of the Members of Scheduled Castes or
Scheduled Tribes [Sec. 10(27)]
Income of specified Boards [Sec. 10(29A)]
Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board; The Tobacco Board; The
Marine Products Export Development Authority; The Coir Board; The Agricultural and Processed Food Products
Export Development Authority and The Spices Board.
Subsidy received from Tea Board [Sec. 10(30)]
Any subsidy received from or through the Tea Board under any scheme for replantation or replacement of tea
bushes or for rejuvenation or consolidation of areas used for cultivation of tea as the Central Government may
specify, is exempt
Subsidy received from other Board [Sec. 10(31)]
Any subsidy received from or through the concerned Board (like Coffee Boards, Rubber Board, etc.) under any
such scheme for replantation or replacement of rubber plants, coffee plants, cardamom plants or plants for the
growing of such other commodity or for rejuvenation or consolidation of areas used for cultivation of rubber,
coffee, cardamom or such other specified commodity is exempt.
Income of Minor [Sec. 10(32)]
Income up to ₹ 1,500 is exempt in respect of each minor child whose income is clubbed u/s 64(1A).
Income on Transfer of Units of US 64 [Sec. 10(33)]
Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 where such transfer
takes place on or after the 1st day of April, 2002.
Income of Shareholder on Buy-back of Shares [Sec. 10(34A)]
Any income arising to an assessee, being a shareholder, on account of buy back of shares by the company,
which pay additional income-tax u/s 115QA.
Dividend of IFSC unit [Sec 10(34B)]
Dividend income of IFSC unit involved in aircraft leasing business from a company in IFSC engaged in aircraft
leasing business in IFSC is exempt.
Capital Gain on compulsory Acquisition of Urban Land [Sec. 10(37)]
Refer Chapter Capital Gains

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Capital Gain on transfer under Land Pooling Scheme for Andhra Pradesh [Sec. 10(37A)]
Refer Chapter Capital Gains
Specified Income, Arising from any International Sporting Event [Sec. 10(39)]
Any specified income, arising from any international sporting event held in India, to the person(s) notified by the
Central Government in Official Gazette, if such international sporting event –
(a) is approved by the International body regulating the international sport relating to such event;
(b) has participation by more than 2 countries;
(c) is notified by the Central Government in the Official Gazette for the purpose of this clause.
Note: For the purpose of this clause “the specified income” means the income, of the nature and to the extent,
arising from the international sporting event, which the Central Government may notify in this behalf.
Reconstruction or Revival of Power Generation Subsidiary Company [Sec. 10(40)]
Any income of any subsidiary company by way of grant or otherwise received from an Indian company, being its
holding company engaged in the business of generation, transmission or distribution of power, if such receipts is
for the settlement of dues in connection with reconstruction or revival of an existence business of power generation.
Note: The above clause is applicable if reconstruction or revival of any existing business of power generation is by
way of transfer of such business to the Indian company notified u/s 80-IA (4)(v)(a)
Income of a Non-profit Body or Authority specified by the Central Government [Sec. 10(42)]
Any specified income arising to a body or authority which -
 has been established or constituted or appointed under a treaty or an agreement enterted into by the Central
Government with tow or more countries or a convention signed by the Central Government;
 is established or constituted or appointed not for the purpose of profit;
 is notified by the Central Government.
Reverse Mortgage [Sec. 10(43)]
Any amount received by an individual as a loan, either in lump sum or in instalment, in a transaction of reverse
mortgage is exempt.
New Pension Trust [Sec. 10(44)]
Any income received by any person for, or on behalf of, the New Pension System Trust is exempt
Specified Income of notified body or authority or Board or Trust or Commission [Sec. 10(46)]]
Any specified income arising to a body or authority or Board or Trust or Commission (by whatever name called),
or a class thereof, which —
(a) has been established or constituted by or under a Central, State or Provincial Act, or constituted by the Central
Government or a State Government, with the object of regulating or administering any activity for the benefit
of the general public;
(b) is not engaged in any commercial activity; and
(c) is notified by the Central Government in the Official Gazette

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Credit Guarantee Trust/Fund [Sec 10(46B)]

Any income of specified Credit Guarantee Trust/Fund is exempt.
Infrastructure Debt Fund [Sec. 10(47)]
Any income of notified infrastructure debt fund is exempt.
Import of Crude Oil [Sec. 10(48)]
Any income received in India in Indian currency by a foreign company on account of sale of crude oil or other
notified goods or service to any person in India provided:
(a) receipt of such income in India by the foreign company is pursuant to an agreement or an arrangement entered
into by the Central Government or approved by the Central Government;
(b) having regard to the national interest, the foreign company and the agreement or arrangement are notified by
the Central Government in this behalf; and
(c) the foreign company is not engaged in any activity, other than receipt of such income, in India.
Storage of Crude Oil [Sec. 10(48A)]
Any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and
sale of crude oil therefrom to any person resident in India provided:
(i) the storage and sale by the foreign company is pursuant to an agreement or an arrangement entered into by the
Central Government or approved by the Central Government; and
(ii) having regard to the national interest, the foreign company and the agreement or arrangement are notified by
the Central Government in this behalf.
Sale of leftover stock of crude oil [Sec. 10(48B)]
Any income accruing or arising to a foreign company on account of sale of leftover stock of crude oil, if any, from
the facility in India after the expiry of the agreement or the arrangement referred to sec. 10(48A) or on termination
of the said agreement or the arrangement, in accordance with the terms mentioned therein, as the case may be.
Income of Indian Strategic Petroleum Reserves Limited [Sec. 10(48C)]
Any income accruing or arising to the Indian Strategic Petroleum Reserves Ltd., being a wholly owned subsidiary
of the Oil Industry Development Board under the Ministry of Petroleum and Natural Gas, as a result of arrangement
for replenishment of crude oil stored in its storage facility in pursuance of directions of the Central Government in
this behalf is exempt.
However, nothing contained in this clause shall apply to an arrangement, if the crude oil is not replenished in the
storage facility within 3 years from the end of the financial year in which the crude oil was removed from the
storage facility for the first time.
Income of certain institutions [Sec. 10(48D)/(48E)]
 Any income accruing or arising to an institution established for financing the infrastructure and development,
set up under an Act of Parliament and notified by the Central Government for the purposes of this clause, for
a period of 10 consecutive assessment years beginning from the assessment year relevant to the previous year
in which such institution is set up [Sec. 10(48D)]
 Any income accruing or arising to a developmental financing institution, licensed by the Reserve Bank of
India under an Act of the Parliament referred to in sec. 10(48D) and notified by the Central Government for
this purposes, for a period of 5 consecutive assessment years beginning from the assessment year relevant to
the previous year in which the developmental financing institution is set up

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However, the Central Government may, by issuing notification, extend the period of exemption for a further
period, not exceeding 5 more consecutive assessment years, subject to fulfilment of such conditions as may be
specified in the said notification;
Equalization Levy [Sec. 10(50)]
Any income arising from any specified service provided on or after the date on which the provisions of Chapter
VIII of the Finance Act, 2016 comes into force or arising from any e-commerce supply or services made or
provided or facilitated on or after 01-04-2020 and chargeable to equalisation levy under that Chapter.
However, the income shall not include and shall be deemed never to have been included any income which is
chargeable to tax as royalty or fees for technical services in India under this Act read with the agreement notified
by the Central Government u/s 90 or 90A.
Expenditure related to Exempted Income [Sec. 14A]
For the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred
by the assessee in relation to income, which does not form part of the total income under this Act. Where the AO is
not satisfied with the correctness of the claim of such expenditure by assessee, he can determine the disallowable
expenditure in accordance with the method prescribed by the CBDT.
 The provisions of this section shall be applicable even in a case where the income, not forming part of the total
income, has not accrued or arisen or has not been received during the previous year relevant to an assessment
year and the expenditure has been incurred during the said previous year in relation to such income not
forming part of the total income.
Special Provision in respect of Newly established Units in SEZ [Sec. 10AA]
Applicable to: All assessee
Conditions to be satisfied
1. The assessee is an entrepreneur as defined in Sec.2(j) of SEZ Act, 2005.
2. The undertaking has begun or begins to manufacture or produce articles or things or provide services on or
after 01/04/2005 but not after 31/03/2021 in any SEZ.
3. New Business: Business should not be formed by splitting up or reconstruction of an existing business.
Exception:
However, this condition is not applicable when conditions given u/s 33B are satisfied, which are as follows -
(a) The business of an industrial undertaking carried on in India is discontinued in any previous year by
reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by
the assessee being used for business purpose.
(b) Such damage was caused due to -
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of
war),
(c) Such business is re-established, reconstructed or revived by the assessee at any time before the expiry of
3 years from the end of previous year in which such damage was caused.

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4. New Plant and Machinery: Such undertaking should not be formed by transfer of machinery or plant
previously used for any purpose.
Exception:
(a) A plant or machinery is deemed as a new asset if the following conditions are satisfied -
(i) Such plant or machinery is imported into India;
(ii) Depreciation on such asset has not been allowed under this Act to any person; and
(iii) The assessee was the first user of such asset in India.
(b) Where the total value of old plant and machinery transferred to the new business does not exceed 20% of
total value of plant and machinery used in such business, then this condition is deemed to be satisfied.
Taxpoint: Usage of old plant and machinery upto 20% of total value of plant and machinery is allowed.
5. A report of a chartered accountant in specified Form must be uploaded one month prior to the due date of filing
return of income.

Quantum of Deduction

Period Deduction
For first 5 years from Profits of the business of the undertaking × Export turnover
the commencement of Total turnover of the business carried on by the undertaking
operation
For next 5 years 50% of [Profits of the business of the undertaking × Export turnover]
Total turnover of the business carried on by the undertaking
For next 5 years 50% of [Profits of the business of the undertaking × Export turnover]
Total turnover of the business carried on by the undertaking
Conditions: Such profit must be credited in reserve account called “SEZ Re-
investment Allowance Reserve A/c”.
Utilisation of such Reserve:
¾¾ Such reserve shall be utilised for the purposes of acquiring new machinery
or plant, which is first put to use before the expiry of a period of next 3 years
following the previous year in which the reserve was created.
¾¾ Until the acquisition of new machinery or plant, such reserve can be utilised
for any purpose of the business of the undertaking other than for distribution by
way of dividends or profits or for remittance outside India as profits or for the
creation of any asset outside India.
Export turnover means -
It means the consideration in respect of export by the undertaking, being the Unit of articles or things or
services received in or brought into, India but does not include:
1. Freight, telecommunication charges and insurance attributable to the delivery of the articles or things
outside India;
2. Expenses incurred in foreign exchange in providing technical services outside India.

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Quick MCQs:-

1. Income that do not form part of the total Income are called
(a) Exempt Income
(b) Deduction
(c) Excluded Income
(d) None of the above

2. Compensation receive on account of disaster is exempt u/s 10(10BC) if it is received form

(a) Central Government
(b) State Government
(c) Local Authority
(d) All of the above

3. Which of the following income is not exempt under Section 10?

(a) Share in total income of firm
(b) Bonus on life insurance
(c) Income from agriculture in Lahore
(d) Income from mutual funds

4. Sec.10AA exemption is applicable for –

(a) Special Economic Zone only
(b) Special Economic Zone and Domestic Tariff Area
(c) SEZ and FTZ & ETP converted into SEZ
(d) None of the above

5. Which of the following income would be exempt in the hands of a Sikkimese Individual?
(a) Only income from any sources in the State so of Sikkim
(b) Only income by way of dividend
(c) Only income from interest on securities
(d) All of the above

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Exercise
A. Theoretical Questions:
¾¾ Multiple Choice Questions:
1. Out of the following which one is not a capital receipt?
a. Dividend on investment
b. Bonus Shares
c. Sale of know-how
d. Compensation received for vacating business place
2. Which of the following is Casual Income?
a. Dividend income
b. Winning from lotteries
c. Interest received
d. Pension received
3. Which of the following receipt is not included in the term ‘Income’ under the Income-tax Act,
1961?
a. Profits and gains of Business or Profession
b. Profit in lieu of salary
c. Dividend
d. Reimbursement of travelling expenses
4. A person is said to be a person of Indian origin if –
a. He or either of his parents were born in undivided India
b. He or either of his siblings were born in undivided India
c. He or either of his parents or either of his grandparents were born in undivided India
d. He was born in India
5. Income received in India in the previous year is taxable in the hands of –
a. Resident
b. Non-Resident
c. All assessee irrespective of residential status
d. Not Ordinarily resident
6. An individual is said to be resident in India if –
a. He has a house in India
b. He is in India in the previous year for a period of 182 days or more
c. He is in India for a period of 30 days or more during the previous year and for 365 or more
days during 4 previous years immediately preceding the relevant previous year
d. His parents are Indian citizen

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7. The incidence of taxation depends on the –

a. Residential status of the assessee
b. Accommodation of the assessee
c. Citizenship of the as assessee
d. Marital status of the assessee
8. Which of the following is an agriculture income?
a. Dividend paid by a company to its shareholders out of agricultural income
b. Share of Profit of a Partner from a firm engaged in an agriculture operation
c. Income from supply of water by an assessee from a tank in agriculture land
d. Interest received by a money lender in the form of agricultural produce
9. In case of an assessee engaged in the business of manufacturing of tea, his agricultural income is –
a. 60% of total receipt of the business
b. 60% of income of the business
c. Nil
d. 40% of income of the business
10. Income from saplings shall be considered as __________ .
a. Agricultural Income
b. Business Income
c. Partly agricultural income and partly business income
d. Income from other sources
[Answer : 1-a ; 2-b ; 3-d ; 4-c ; 5-c ; 6-b ; 7-a ; 8-b ; 9-c ; 10-a]

B. Numerical Questions
¾¾ Multiple Choice Questions
1. An individual (aged 28 Years) born in India left for first time for employment in France on
30.10.2023. His visit outside India is for the first time. His residential status for the assessment
year 2024-25 will be –
a. Resident and ordinarily resident
b. Resident but not ordinarily resident
c. Non-resident
d. Residential Status is not applicable
2. Income of ₹ 3,00,000 is received in Sri Lanka by an ordinarily resident of India. But later on
₹ 50,000 is remitted to India –

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a. ₹ 3,00,000 will be taxable

b. ₹ 3,50,000 will be taxable
c. It is not taxable at all
d. ₹ 50,000 will be taxable

3. An individual is said to be a resident in India in the previous year (in which the Feb month has 29
days) if he is in India in that year for a period of ___.
a. 182 days or more
b. 183 days or more
c. 70 days or more
d. 150 days or more
4. Mr. X is engaged in growing and manufacturing tea in India. His income from this activity is
₹ 1,40,000. His agriculture income will be –
a. ₹ 70,000
b. ₹ 84,000
c. ₹ 1,40,000
d. ₹ 56,000
[Answer : 1-a ; 2-a ; 3-a ; 4-b]
¾¾ Unsolved Case
1. Parikshit (aged 25 years) is engaged in growing and manufacturing tea in India. His profit for the
previous year 2023-24 amounts to ₹ 10,00,000 which includes profit of ₹ 2,00,000 from sale of
green leaves plucked in his own garden. He has no other income during the year.
On the basis of aforesaid information, you are requested to answer the following:
a. What would be his agricultural income?
b. What would be his tax liability for the relevant assessment year
[Answer : [Hints: (a) ₹ 6,80,000; (b) ₹ 1,560]]
¾¾ References:
https://www.incometaxindia.gov.in/
https://www.incometax.gov.in/
https://www.indiabudget.gov.in/

64 The Institute of Cost Accountants of India

 Heads of Income 2
This Module includes

2.1 Salaries

2.2 Income from House Property

2.3 Profits and Gains of Business or Profession

2.4 Capital Gains

2.5 Income from Other Sources

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Heads of Income
SLOB Mapped against the Module:
1. To acquire application-oriented knowledge and skill for appreciating various provisions of the Income
Tax Act, 1961 and attain abilities to solve problems while computing tax liabilities.
2. To attain abilities to apply various provisions of direct taxation laws, including assessment to identify
the impacts thereof on business decisions.
3. To gather knowledge of various compliance related provisions of direct taxation laws and attain
abilities to ensure due compliance to avoid any eventual risks.

Module Learning Objectives:

After studying this module, the students will be able to –

� Appreciate the provisions of computing income under different heads of income

� Appreciate the point of time when income is taxable in respective heads

� Apply the knowledge to ascertain the gross total income of the person

� Understand the various compliances like tax audit, etc.

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Salaries 2.1
Salary is the recompense or consideration given to a person for the pains he has bestowed upon another’s business”
– Stroud’s Judicial Dictionary

2.1.1 Basic Elements of Salary

 Payer and payee must have
employer and employee (or
Master & Servant) relationship;
and
 Payment must have been made by
the employer in such capacity.

Employer-employee relationship
A payment can be construed as salary only if the payer is the employer and the payee is the employee of the payer.
 Criteria for employer-employee relationship : The key criteria to hold this relationship is that, employee is
always bound to work as per the direction and supervision of the employer.
 Payment in employer’s capacity : To treat any payment as salary it is necessary that the payer, being the
employer, must have made the payment in such (employer’s) capacity.
 Contract of service vs contract for service : In “contract of service”, the employer can direct and control the
duties and the manner of performance of the employee hence employer-employee relationship exists in such
contract. However, in case of “contract for service” the contractee can simply decide and quote the object or
target to be achieved but cannot decide or direct the manner of performance.
 Agent and Principal : If a person is acting as an agent for his principal, any commission or remuneration
earned by the agent is not taxable under the head “Salaries”. This is because, an agent is not the employee of
his principal.
 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”.
 Salary received by proprietor from his proprietorship firm is not an income. As proprietor and proprietorship
firm are the same person and no one can earn from himself.
 Remuneration to director from his company can be treated as salary only if the director is employee of the
company, otherwise the same shall be taxable under the head “Income from other sources”.
Note : Directors’ sitting fee is taxable under the head “Income from other sources”.

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Direct Taxation

 Pension received by the widow or legal heir of deceased employee is not taxable as salary as no employer-
employee relationship exists between the payer and the payee. However, such amount shall be taxable under
the head “Income from other sources”.
 Remuneration received by Judges is taxable under the head “Salaries” even though they are not having any
employer.
Concluding the above discussions, a payment received for services rendered, from a person other than employer, is
not taxable under the head “Salaries” but may be taxed under the head “Profits & gains of business or profession”
or “Income from other sources”.

Illustration 1 :
State whether the following receipts should be treated as salary or not?
 A teacher receives emoluments in kind from school in which he teaches.
Yes, it is immaterial whether salary has been received in cash or in kind.
 A teacher of a college receives fees from an University for checking answer sheets.
No, as employer – employee relationship does not exist between payer and payee. (College-teacher is not the
employee of the University). Such receipt shall be taxable under the head ‘Income from other sources’.
 A payment made to the Member of the Parliament or the State legislature.
No, as employer-employee relationship does not exist.
A member of the Parliament or the State legislature is not treated as employee of the Government. Payment
received by them shall be taxable under the head “Income from other sources”.

2.1.2 Section-wise Scheme

2.1.3 Definition of Salary [Sec. 17(1)]

As per sec. 17(1) of the Income-tax Act, 1961, salary includes the following :
a. Wages;
b. Any annuity or pension;
c. Any gratuity;
d. Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages;

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 Heads of Income

e. Any advance of salary;

f. Any payment received in respect of any period of leave not availed of by the assessee;
g. The portion of the annual accretion in any previous year to the balance at the credit of an employee, participating
in recognised provident fund, to the extent it is taxable;
h. Transferred balance in a Recognised Provident Fund to the extent it is taxable.
i. Contribution made by the employer in the previous year, to the account of an employee under a pension
scheme referred to in sec. 80CCD [National Pension Scheme and Atal Pension Yojana].

2.1.4 General Notes

 Salary & Wages are identical in the Income-tax Act
 Voluntary Payments : The Act does not make any difference between voluntary and contractual payment.
Both are taxable as salary.
 Remuneration for Extra Work : Where an employee gets extra payment from his employer (in such capacity)
for work performed outside the duties of his office and thus, such payment shall be taxable as salary.
 Salary from more than one source : If an individual receives salary from more than one employer during the
same previous year, salary from each employer shall be accumulated and taxable under the head “Salaries”.
 Salary from former, present or prospective employer is chargeable to tax under the head “Salaries”. E.g.
Pension from a former employer and advance salary from prospective employer shall be taxable under the
head “Salaries”.
 Foregoing of salary : Once salary has been earned by an employee, its subsequent waiver does not make it
exempt from tax liability. Such waiver shall be treated as application of the income.
Note : However, where an employee opts to surrender his salary to the Central Government u/s 2 of Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered shall not be taxable.

2.1.5 Basis of Charge [Sec. 15]

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. Hence, taxable salary
includes :
a. Advance salary (on ‘receipt’ basis): Salary paid in advance is taxable under the head ‘Salaries’ in the year of
receipt.
Note : Such advance salary shall not be included again in the total income when the salary becomes due.
b. Outstanding salary (on ‘due’ basis) : Salary falling due is taxable under the head ‘Salaries’ in the year in
which it falls due.
Note : Such due salary shall not be included again in the total income when it is received.
c. Arrear salary : Any increment in salary with retrospective effect which have not been taxed in the past, such
arrears will be taxed in the year in which it is allowed. Arrear salary are taxable on receipt basis
Provision illustrated
Mr. X joined A Ltd. for a salary of ₹ 25,000 p.m. on 1/4/2021. In the year 2022-23, his increment decision was
pending. On 1/12/2023, his increment was finalized as for 2022-23: ₹ 5,000 p.m. and for 2023-24 ₹ 7,500 p.m.
Such arrear salary received on 5/12/2023. Find Gross taxable salary. Further, salary of April 2024 has also been
received in advance on 15/03/2024.

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Direct Taxation

Solution :
Gross taxable salary for the previous year 2023-24 shall be calculated as under :

Particulars Workings Amount

Salary for 2023-24 (25,000 + 5,000 + 7,500) x 12 4,50,000
Arrear salary for 2022-23 (5,000) × 12 60,000
Advance salary for April 2024 37,500
Gross total salary 5,47,500
Taxpoint : Method of accounting followed by the employee is irrelevant
Salary due vs Salary accrued
Salary due is different from salary accrued.
Example 1 : Mr. X joined an organisation for ₹ 10,000 p.m. on 1st Dec. 2023, in which salary falls due on 1st
day of every next month. In such case taxable salary for the previous year 2023-24 shall be ₹ 30,000 calculated as
under :

Month Amount of Salary Due date of salary Taxable in the P.Y.

December 2023 10,000 1/1/2024 2023-24
January 2024 10,000 1/2/2024 2023-24
February 2024 10,000 1/3/2024 2023-24
March 2024 10,000 1/4/2024 2024-25
Advance salary vs Advance against salary
‘Advance salary’ is taxable u/s 17(1)(e) whereas ‘Advance against salary’ is treated as loan hence, not taxable
under the head “Salaries”.
Place of accrual of salary
Salary which is received in India or earned in India shall be taxable in hands of all assessee whether resident or non
resident in India. Salary is deemed to be earned in India provided -
a. The service is rendered in India;
b. The rest period or leave period, which is preceded and succeeded by the service rendered in India and forms
part of the service contract of employment.
Exceptions :
 Salary paid to a Government employee, being a citizen of India, is deemed to accrue in India, irrespective of
place of work [Sec. 9(1)(iii)].
 Pensions payable outside India to certain categories of Government employees and Judges who permanently
reside outside India, shall not be deemed to arise or accrue in India. [Sec. 9(2)]
Taxpoint : Salary is earned at the place where service is rendered.

Employee Employer Place of service Salary received Taxable

Any Any India Any where Yes

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 Heads of Income

Employee Employer Place of service Salary received Taxable

Any Any Any where In India Yes
Ordinarily resident in India Any Any where Any where Yes
Indian citizen Any Government Outside India Any where Yes
Not ordinarily resident/Non resident Any Outside India Outside India No

 Basic Salary : It is the sum paid by employer

to employee as salary and shall be fully
taxable.
 Pay-Scale (Grade system) : It is a system of
payment where increment scale is pre-known
to employee. E.g. Basic salary is given as
5,000 – 1,000 – 8,000 – 2,000 – 12,000. The
above data indicates the increment schedule.
As per this schedule initial payment is ₹ 5,000
p.m. which will increased by ₹ 1,000 every
year until salary reaches to ₹ 8,000 p.m. Once
salary reaches to ₹ 8,000 then increment will
be ₹ 2,000 every year till salary reaches the
scale of ₹ 12,000. Accordingly, basic salary is
calculated.
 Dearness Allowance (DA) or Dearness
Pay (DP) : It is an extra amount given to an
employee to meet the burden of inflation or
increased cost of living. This is fully taxable.
Note : Sometimes, it is given that DA/DP is not forming a part of retirement benefit (Leave encashment,
Pension, Provident Fund, etc.). In such case, DA/DP itself shall be fully taxable. However, for calculating
taxable Leave encashment, Pension, HRA, etc., DA/DP will be included in ‘salary’ only if it forms a part of
retirement benefit.
 Fees : An employee may be given apart from basic salary, extra remuneration for doing specific job under the
terms of employment. Such extra remuneration is termed as fee and shall be fully taxable.
 Commission : It may be as a percentage of turnover or as a percentage of profit. In either case, it is taxable.
 Bonus : Bonus may be contractual or voluntary. In either case, it is fully taxable.
(i) Contractual bonus is taxable as bonus whereas voluntary bonus is taxable as perquisite.
(ii) It is taxable in the year of receipt.
(iii) If arrear bonus is received, assessee can claim relief u/s 89(1).

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Direct Taxation

Retirement Benefits

2.1.6 Gratuity
Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Sec. 10(10)
deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity
received by an assessee other than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received
by an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of India.
Treatment :

Case A: Gratuity received during continuation of service

Gratuity received during continuation of service is fully taxable in the hands of all employees (whether Government
or non-Government employee).
Case B: Gratuity received at the time of termination of service by Government employee
Gratuity received at the time of termination of service by Government employee is fully exempt from tax u/s
10(10)(i).
Taxpoint : Government employee, here, includes employee of the Central or the State Government or local
authority but does not include employee of statutory corporation.
Case C: Gratuity received at the time of termination of service by non–government (including foreign
government) employee, covered by the Payment of Gratuity Act
In such case, minimum of the following shall be exempted from tax u/s 10(10)(ii) :

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 Heads of Income

1. Actual Gratuity received;

2. ₹ 20,00,000; or
3. 15 working days salary for every completed year of service

[Arithmetically, 15 × Completed year of service × Salary p.m.]

26
Notes :
a. Completed year of service includes any fraction in excess of 6 months. (e.g. 7 years 9 months will be treated
as 8 years; 7 years 5 months will be treated as 7 years and 7 years 6 months will be treated as 7 years).
b. Salary here means Basic + DA, last drawn

In case of an employee of a seasonal establishment: 15 days shall be replaced by 7 days. (i.e., 7 × Completed
26
year of service × Salary p.m.)
In case of a piece-rated employee: 15 days salary would be computed on the basis of average of total wages
(excluding wages paid for over time) received for a period of 3 months immediately preceding the termination
of his employment.

Illustration 2 :
Ashok, an employee of ABC Ltd., receives ₹ 8,05,000 as gratuity under the Payment of Gratuity Act, 1972. He
retires on 10th September, 2023 after rendering service for 35 years and 7 months. The last drawn salary was
₹ 32,700 per month. Calculate the amount of gratuity chargeable to tax.
Solution :
Computation of taxable gratuity of Mr. Ashok for the A.Y. 2024-25 :

Particulars Details Amount

Gratuity received 8,05,000
Less : Minimum of the following is exempted as per Sec 10(10)(ii) :
a) Actual gratuity received 8,05,000
b) Statutory Amount 20,00,000

c) 15 × completed year of service × salary p.m. [ 15 × 36 × ₹ 32,700] 6,79,154 6,79,154

26 26
Taxable Gratuity 1,25,846
Case D : Gratuity received at the time of termination of service by non-government employee (including
foreign government employee) not covered under the Payment of Gratuity Act
Gratuity received at the time of termination of service by non-government employee being not covered under the
Payment of Gratuity Act shall be exempted from tax u/s 10(10)(iii) to the extent of lower of the following :
1. Actual Gratuity received;
2. ₹ 20,00,000; and
3. ½ × Completed year of service x Average Salary p.m.

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Direct Taxation

Notes :
a. While calculating completed year of service ignore any fraction of the year. (e.g. 7 years 9 months will be
treated as 7 years only)
b. Average Salary here means, Basic + DA# + Commission (being a fixed percentage on turnover) being last
10 months average salary, immediately preceding the month of retirement. (E.g. If an employee retires on
18/11/2023 then 10 months average salary shall be a period starting from Jan’ 2023 and ending on Oct’ 2023).
#
If DA is not forming a part of retirement benefit then the same shall not be included in salary for above
purpose. However, DA itself shall be fully taxable.

Illustration 3 :
Mr. Oldman retired from his job after 29 years 6 months and 15 days of service on 17/12/2023 and received gratuity
amounting ₹ 4,00,000. His salary at the time of retirement was basic ₹ 6,000 p.m., dearness allowance ₹ 1,200 p.m.,
House rent allowance ₹ 2,000, Commission on turnover 1%, Commission on profit ₹ 5,000. He got an increment
on 1/4/2023 of ₹ 1,000 p.m. in Basic. Turnover achieved by assessee ₹ 1,00,000 p.m. Calculate his taxable gratuity
if he is a —
a. Government employee
b. Non-Government employee, covered by the Payment of Gratuity Act;
c. Non-Government employee not covered by the Payment of Gratuity Act
Solution :
a. Government employee: Taxable amount: Nil as per section 10(10)(i).
b. & c. Other cases :
Computation of taxable gratuity of Mr. Oldman for the A.Y. 2024-25 :

Case (b) Case (c)

Particulars
Details Amount Details Amount
Gratuity received 4,00,000 4,00,000
Less : Min. of the following is exempted u/s 10(10)
–– Actual gratuity received 4,00,000 4,00,000
–– Statutory Amount 20,00,000 20,00,000
15 × completed year of service × salary p.m. 1,24,615 1,24,615
––
26
[ 15 × 30 × 7,200]
26
–– ½ x completed year of service x salary p.m. 1,16,000 1,16,000
[½ x 29 x 8,000]
Taxable Gratuity 2,75,385 2,84,000
Workings for case (b) :
1. Completed year of service is 30 years.
2. Salary here means (Basic + Dearness Allowance) last drawn. i.e. (₹ 6,000 + ₹ 1,200) = ₹ 7,200

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 Heads of Income

Workings for case (c) :

1. Completed year of service is 29 years.
2. Salary here means Basic + Dearness Allowance + Commission on turnover, being last 10 months average just
preceding the month of retirement, as shown below :

Particulars 1 2 3 4 5 6 7 8 9 10 Total
Feb’23 Mar Apr May June July Aug Sept Oct Nov
Basic 5,000 5,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 58,000
D.A. 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 12,000
Commission 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 10,000
Total 80,000
Average salary = ₹ 80,000 / 10 months 8,000

Note : Applicable in Case D and not in Case C

While claiming the statutory amount (i.e. ₹ 20,00,000) any amount earlier claimed as deduction u/s 10(10) shall
be reduced from ₹ 20,00,000.
Example 2 : An assessee left a job in the year 2001-02 and claimed a deduction of ₹ 40,000 for gratuity in that
year. He joined another organisation, left the same in the year 2023-24, and received a gratuity of ₹ 19,80,000.
While calculating exemption for gratuity for the assessment year 2024-25, statutory amount of ₹ 20,00,000 shall
be reduced by earlier deduction claimed i.e. ₹ 40,000. Hence, statutory deduction limit for the assessee in the
A.Y. 2024-25 will be ₹ 19,60,000 only.
Note : Applicable in Case C and Case D
Where gratuity is received from more than one employer : Where gratuity is received from more than one
employer in the same previous year, the aggregate amount exempt from tax shall not exceed statutory deduction.

Test Yourself
1. Mrs. Payal retired from Pajeb Ltd. on 29/8/2023 after completing 30 years 9 months of service and received
a gratuity of ₹ 2,00,000. Her last drawn salary: Basic ₹ 10,000 p.m. + DA ₹ 5,000 p.m. + Commission
being a fixed percentage on turnover ₹ 2,000 p.m. (turnover evenly accrued during the previous year) +
Commission on Profit ₹ 23,000 for this year. Her last increment was on 1/1/2023 in Basic ₹ 1,000 and in DA
₹ 500. Find taxable gratuity assuming that she is not covered by the Payment of Gratuity Act.
Hints
1. Nil;

Case E : Gratuity received after death of employee

The Act is silent on treatment of gratuity received after death of employee. However, on following grounds, it can
be concluded that gratuity received by a legal heir shall not be taxable in the hands of the recipient -
 A lump sum payment made gratuitously to widow or legal heir of employee, who dies while in service, by way
of compensation or otherwise is not taxable under the head “Salaries”. [Circular No.573, Dated 21.08.1990]
 Unutilised deposit under the capital gains deposit account scheme shall not be taxable in the hands of legal
heir. [Circular No.743 dated 6/5/1996]

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Direct Taxation

 Legal representative is not liable for payment of tax on income that has not accrued to the deceased till his
death.
 Leave salary paid to the legal heir of deceased employee is not taxable as salary. [Circulars Letter No.
F.35/1/65-IT(B), dated 5/11/1965]. Further, leave salary by a legal heir of the Government employee who died
in harness is not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].
Taxpoint : If gratuity becomes due before the death of the assessee (no matter when and by whom received), it
shall be taxable in the hands of employee. Whereas if gratuity becomes due after the death of assessee, it shall
not be taxable (even in the hands of legal heir of the assessee).

Illustration 4 :
Mrs. X is working with ABC Ltd. since last 30 years 9 months. Her salary structure is as under :
Basic ₹ 5,000 p.m. Dearness allowance ₹ 3,000 p.m.
On 15/12/2023, she died. State the treatment of gratuity in following cases:
Case 1 : Mrs. X retired on 10/12/2023 & gratuity ₹ 4,00,000 received by her husband (legal heir) as on 18/12/2023.
Case 2 : Husband of Mrs. X received gratuity on 18/12/2023 falling due after death of Mrs. X.
Mrs. X is covered by the Payment of Gratuity Act.
Solution :
In Case 1, Computation of taxable gratuity in hands of Mrs. X for the A.Y. 2024-25 :

Particulars Details Amount

Total Gratuity received 4,00,000
Less : Minimum of the following is exempted as per Sec 10(10)(ii):
a) Actual gratuity received 4,00,000
b) Statutory Amount 20,00,000

c) 15 × completed year of service x salary p.m. [ 15 × 31 × ₹ 8,000] 1,43,077 1,43,077

26 26
Taxable Gratuity 2,56,923
In Case 2, Since gratuity falls due after the death of Mrs. X hence the same is not taxable in hands of Mrs. X. The
said gratuity is not taxable even in hands of husband of Mrs. X.

2.1.7 Leave Salary Encashment

As per service contract and discipline, normally, every employee is allowed certain period of leave (with pay) every
year. Such leave may be availed during the year or accumulated by the employee. The accumulated leave lying to
the credit of an employee may be availed subsequently or encashed. When an employee receives an amount for
waiving leave lying to his credit, such amount is known as leave salary encashment.

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Treatment :

Case A : Leave salary received during continuation of service

Leave salary during continuation of service is fully taxable in the case of the Government employee as well as other
employees [Sec. 17(1)(va)].
Case B : Leave salary received by Government employee on termination of service
At the time of termination of service, leave salary received by the Central or State Government employee is fully
exempted u/s 10(10AA)(i).
Taxpoint : Government employee here does not include employee of local authority or public sector undertaking
or foreign Government employee.
Case C : Leave salary received by non-Government employee on termination of service
At the time of termination of service, leave salary received by a non-Government employee (including employee
of foreign Government, local authority, public sector undertaking) is exempted to the minimum of the following
u/s 10(10AA)(ii) :
a. Actual amount received as leave salary
b. ₹ 25,00,000/-
c. 10 × Average salary p.m.
d. To the maximum of 30 days (normally taken as 1 month) average salary1 for every completed year of service2,
subject to deduction for actual leave availed during the tenure of service.
Academically : [{(1 x completed year of service) – leave actually taken in terms of month} x average salary
p.m.]
1 Average salary means Basic + DA# + Commission (as a fixed percentage on turnover) being last 10
months average salary ending on the date of retirement or superannuation. (e.g. if an employee retires on
18/11/2022 then 10 months average salary shall be a period starting from 19th Jan’ 2022 and ending on
18th Nov’ 2022).
# If DA is not forming a part of retirement benefit then the same shall not be included in salary for the
above purpose. However, DA itself shall be fully taxable.
2 While calculating completed year of service, ignore any fraction of the year. E.g. 10 years 9 months shall
be taken as 10 years.

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Direct Taxation

Notes :
a. Leave encashment received from more than one employer: Where leave encashment is received from more
than one employer in the same previous year, the aggregate amount exempt from tax shall not exceed the
statutory deduction i.e. ₹ 25,00,000.
b. Earlier deduction claimed for leave encashment: While claiming the statutory amount (i.e. ₹ 25,00,000) any
deduction claimed earlier as leave encashment shall be reduced from ₹ 25,00,000.

Illustration 5 :
a. Mr. Bhanu is working in Zebra Ltd. since last 25 years 9 months. Company allows 2 months leave for every
completed year of service to its employees. During the job, he had availed 20 months leave. At the time of
retirement on 10/8/2023, he got ₹ 1,50,000 as leave encashment. As on that date, his basic salary was ₹ 5,000
p.m., D.A. was ₹ 2,000 p.m., Commission was 5% on turnover + ₹ 2,000 p.m. (Fixed p.m.). Turnover effected
by the assessee during last 12 months (evenly) ₹ 5,00,000. Bhanu got an increment of ₹ 1,000 p.m. from
1/1/2023 in basic and ₹ 500 p.m. in D.A. Compute his taxable leave encashment salary.
b. How shall your answer differ if the assessee had taken 2 months leave instead of 20 months, during his
continuation of job.
Solution :
Working :
1. Completed year of service: 25 years 9 months = 25 years
2. As per sec. 3(35) of the General Clauses Act, 1897, month shall mean a month reckoned according to the
British calendar e.g. the period commencing from 7th September & end on 6th October shall be a month.
3. Salary here means Basic + Dearness Allowance + Commission on turnover (last 10 months average from the
date of retirement)

Oct’ Aug
22 Jan’ 10
Particulars Nov Dec Feb Mar April May June July Total
(21 23 Days
days)
Basic 2,710 4,000 4,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 1,613 47,323
D.A. 1,016 1,500 1,500 2,000 2,000 2,000 2,000 2,000 2,000 2,000 645 18,661
Commission 500000 × 5% × 10/12 20,833
Total 86,817
Average salary i.e. ₹ 86,817 / 10 months 8,682
Monthly fixed commission is irrelevant. Commission as fixed percentage of turnover is to be considered.
Computation of taxable leave encashment salary of Mr. Bhanu for the A.Y. 2024-25

Case (b) Case (c)

Particulars
Details Amount Details Amount
Leave encashment received 1,50,000 1,50,000
Less: Min. of the following is exempted u/s 10(10AA)(ii):
a. Actual amount received 1,50,000 1,50,000

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Case (b) Case (c)

Particulars
Details Amount Details Amount
b. Statutory Amount 25,00,000 25,00,000
c. 10 months × Av. Salary p.m. (10 × 8,682) 86,820 86,820
d. [{1x completed year of service - Leave taken} × 1,16,000 1,16,000
salary p.m.]
43,410^ 43,410 1,99,686# 86,820
Taxable Leave Encashment 1,06,590 63,180
^ [{1 x 25 – 20} × 8,682]
# [{1 x 25 – 2} × ₹ 8,682]
Illustration 6 :
Mr. Das retired on 31/3/2024. At the time of retirement, 18 months leave was lying to the credit of his account.
He received leave encashment equivalent to 18 months Basic salary ₹ 1,26,000. His employer allows him 1½
months leave for every completed year of service. During his tenure, he availed of 12 months leave. At the time of
retirement, he also gets D.A. ₹ 3,000. His last increment of ₹ 1,000 in basic was on 1/4/2023. Find taxable leave
encashment.
Solution :
Working :
1. Calculation of completed year of service: Employee has received 18 months leave encashment on termination
of service as well he had enjoyed leave of 12 months during his tenure. That means he had received a leave
benefit of 30 months. Since leave allowed by employer is 1½ months for every completed year of service, this
signifies that Mr. Das had completed 20 years (being 30 ÷ 1½) of service.
2. Salary here means, Basic + DA + Commission, being last 10 months average from the date of retirement.
There is no increment in last 10 months (last increment was on 1/4/2023) and there is no commission, hence
Average Salary = ₹ 7,000 (i.e. ₹ 1,26,000/18) + ₹ 3,000 = ₹ 10,000 p.m.
Computation of taxable leave encashment of Mr. Das for the A.Y. 2024-25 :
Particulars Details Amount
Leave Encashment received 1,26,000
Less : Minimum of the following is exempt u/s 10(10AA)(ii):
a) Actual amount received 1,26,000
b) Statutory Amount 25,00,000
c) 10 months × Avg. Salary p.m. (10 × 10,000) 1,00,000
d) {1 × completed year of service - Leave taken} × Avg. salary p.m. 80,000 80,000
[{1 × 20 – 12} × ₹ 10,000]
Taxable Leave Encashment 46,000
Case D: Leave salary paid to the legal heir
Leave salary paid to the legal heir of deceased employee is not taxable. [Circulars Letter No. F.35/1/65-IT(B),
dated 5/11/1965]. Further, leave salary received by a legal heir of the Government employee who died in harness
is not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].

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Test Yourself
1. Miss Mamta has been working with X Ltd. for last 20 years and 11 months. Before that, she was employed
in Y Ltd. wherefrom, she received leave encashment ₹ 40,000 (fully claimed as deduction).
On 31/7/2023, she has taken voluntary retirement from X Ltd. and received leave encashment ₹ 3,00,000. At
the time of retirement, her monthly salary detail was as under:
Basic Salary ₹ 5,000, D.A. ₹ 2,000, Commission as a % on turnover ₹ 2,000 p.m. (Turnover accrued evenly
throughout the year). Her last increment was ₹ 1,000 in basic salary fell due on 1/1/2023.
X Ltd. allows 20 days leave to its employees for each completed year of service. During continuation of
service she availed 160 days leave. Find her taxable leave salary.
Hints
1. ₹ 2,30,400;

2.1.8 Pension [Sec. 17(1)(ii)]

Pension means a periodical payment received by an employee after his retirement. On certain occasions, employer
allows to withdraw a lump sum amount as the present value of periodical pension. When pension is received
periodically by employee, it is known as Uncommuted pension. On the other hand, pension received in lump sum
is known as Commuted pension. Such lump sum amount is determined considering factors like the age and health
of the recipient, rate of interest, etc.
Treatment :

Case A : Uncommuted pension

Uncommuted pension is fully taxable in the hands of all employees whether Government or Non – Government
employee.
Case B : Commuted pension received by a Government employee
Commuted pension received by a Government employee is fully exempt from tax u/s 10(10A)(i).
Note: Government employee here includes employee of the Central or State Government, Local authority as well
as employee of Statutory corporation. Judges of the High Court and the Supreme Court are also entitled to the
exemption [Circular No.623 dated 6/1/1992]
Case C : Commuted pension received by an employee who also received gratuity [Sec. 10(10A)(ii)]

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One third of total pension (which assessee is normally entitled for) commuted is exempt.
Taxpoint: It is immaterial whether the employee is covered by the Payment of Gratuity Act or not.
Case D : Commuted pension received by an employee who does not receive gratuity [Sec. 10(10A)(ii)]
One half of total pension (which assessee is normally entitled for) commuted is exempt.
Notes :
a. Pension received by a widow or legal heir of a deceased employee shall not be taxable as salary but taxable u/s
56 as income from other sources (further refer chapter “Income from other sources”.)
b. Where commuted pension is taxable, relief u/s 89 is available.
c. Pension received from United Nations Organisation is not taxable. Further, pension received by a widow of the
United Nations ex-officials from UN Joint Staff Pension Fund is also exempt
Illustration 7 :
Mr. Amit has retired from his job on 31/3/2023. From 1/4/2023, he was entitled to a pension of ₹ 3,000 p.m. On
1/8/2023, he got 80% of his pension commuted and received ₹ 1,20,000. Compute taxable pension if he is:
Case a) Government employee; Case b) Non-Government employee & not receiving gratuity;
Case c) Non-Government employee (receiving gratuity, but not covered by the Payment of Gratuity Act)
Solution :
Computation of taxable pension of Mr. Amit for the A.Y. 2024-25 :
Particulars Case a Case b Case c
Details Amount Details Amount Details Amount
Uncommuted Pension
- 1/4/2023 to 31/7/2023 (₹ 3,000x4) 12,000 12,000 12,000
- 1/8/2023 to 31/3/2024 (₹ 600 x 8) 4,800 16,800 4,800 16,800 4,800 16,800
Commuted Pension 1,20,000 1,20,000 1,20,000
Fully exempted u/s 10(10A)(i) 1,20,000 Nil
Exempted u/s 10(10A)(ii) 75,000 45,000
(½ of ₹ 1,50,000#)
Exempted u/s 10(10A)(ii) 50,000 70,000
(1/3 of ₹ 1,50,000#)
Taxable Pension 16,800 61,800 86,800
# Commuted Amount for 80% of pension = ₹ 1,20,000. Commuted amount for 100% of pension = ₹ 1,50,000

Test Yourself
1. Mr. Narayan retired from service on 1/6/2023. As on that date, his monthly salary was Basic ₹ 5,000 p.m.,
Commission on turnover 5%. Total turnover achieved by him during last 10 months (occurred evenly)
₹ 5,00,000. On retirement, after 20 years 6 months of service, he received gratuity ₹ 5,00,000, leave salary
₹ 3,00,000. He is entitled to pension of ₹ 1,500 p.m. On 1/1/2024, he commuted 60% of his pension and
received ₹ 90,000. Compute gross salary assuming he is covered by the Payment of Gratuity Act.
Hints
1. ₹ 7,34,608;

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2.1.9 Retrenchment Compensation

Retrenchment means cancellation of contract of service by employer.
Tax Treatment [Sec. 10(10B)] : Any compensation received by a worker at the time of retrenchment is exempted
to the extent of minimum of the following :
a. Actual amount received;
b. ₹ 5,00,000; or
c. An amount calculated in accordance with the provisions of sec. 25F(b) of Industrial Dispute Act, 1947 (Under
the said Act a workman is entitled to retrenchment compensation equivalent to 15 days’ average pay, for every
completed year of service or any part thereof in excess of 6 months).
Notes :
a. In case, where the compensation is paid under any scheme approved by the Central Government nothing shall
be taxable.
b. Compensation received by a workman at the time of closing down of the undertaking in which he is employed
is treated as compensation received at the time of his retrenchment.

2.1.10 Compensation Received at the time of Voluntary Retirement [Sec. 10(10C)]

If an employee accepts retirement willingly in lieu of compensation then such retirement is known as Voluntary
Retirement. Voluntary retirement compensation received or receivable by an employee is eligible for exemption
subject to the following conditions -
Conditions for exemption
1. Compensation is received from specified employer#
2. Compensation is received as per Voluntary Retirement Scheme (VRS) framed in accordance with prescribed
guidelines*
Amount of exemption
Exemption shall be minimum of the following -
a. Actual amount received as per guidelines; or
b. ₹ 5,00,000.
*Guidelines [Rule 2BA]
1. Scheme (VRS) must be applicable to all employees (other than director) who have either completed age of
40 years or has completed 10 years of service. (This condition is, however, not applicable in the case of an
employee of a public sector company)
2. Such scheme must be framed to reduce the number of employees.
3. The vacancy caused by VRS is not to be filled up.
4. The retiring employee is not to be employed in another company or concern belonging to the same management.
5. The amount of compensation does not exceed
¾¾ the amount equivalent to 3 months salary for each completed year of service; or
¾¾ salary at the time of retirement multiplied by the balance month of service left.

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Note: Salary here means [Basic + DA (if forms a part of retirement benefit) + fixed percentage of commission
on turnover], last drawn.
# Specified Employer
Any company; or An authority established under Central, State or Provincial Act; or A local authority; or A Co-
operative society; or A specified University; or An Indian Institute of Technology (IIT); or Any State Government;
or The Central Government; or Notified Institution of Management (IIM Ahmedabad, IIM Banglore, IIM Calcutta,
IIM Lucknow, and the Indian Institute of Foreign Trade New Delhi); or Notified Institution.
Taxpoint: Voluntary retirement compensation received from the employer being an individual, firm, HUF, AOP,
etc. is fully taxable in the hands of employee.
Note:
 Where exemption is allowed to an assessee under this section in any assessment year then no deduction is
allowed in any subsequent assessment years. It means deduction under this section is allowed once in life of
an assessee.
 Where any relief has been allowed to an assessee u/s 89 in respect of voluntary retirement, no exemption shall
be allowed under this section.

2.1.11 Annuity [Sec. 17(1)(ii)]

Annuity means a yearly allowance, income, grant of an annual sum, etc. for life or in perpetuity.
Treatment :
Case Treatment
Annuity payable by a present employer, whether Fully taxable as salary
voluntarily or contractual
Annuity received from an ex-employer Fully taxable as ‘profit in lieu of salary’ u/s 17(3)(ii).
Annuity received from a person other than employer Taxable as per provision of Sec. 56 as ‘Income from
e.g. from insurer, etc. other sources’.

2.1.12 Salary received in lieu of notice period

When an employer retrenches an employee then he has to give a proper notice. If an employer fails to do so then he
will have to pay salary equivalent to notice period, apart from retrenchment compensation. Such amount is known
as salary received in lieu of notice period and it is fully taxable.

2.1.13 Profits in lieu of salary [Sec. 17(3)]

Following receipts are taxable as profits in lieu of salary :
1. The amount of any compensation due to or received by an assessee from his employer or former employer at
or in connection with the (a) termination of his employment, (b) modification of the terms and conditions of
employment.
2. Any payment due to or received by an assessee from his employer or former employer except the following:
¾¾ Gratuity exempted u/s 10(10);
¾¾ House rent allowance exempted u/s 10(13A);
¾¾ Commuted pension exempted u/s 10(10A);
¾¾ Retrenchment compensation exempted u/s 10(10B);

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¾¾ Payment from an approved Superannuation Fund u/s 10(13);

¾¾ Payment from statutory provident fund or public provident fund;
¾¾ Payment from recognised provident fund to the extent it is exempt u/s 10(12).
3. Any payment from unrecognised provident fund or such other fund to the extent to which it does not consist
of contributions by the assessee or interest on such contributions.
4. Any sum received by the employee under the Keyman Insurance Policy including the sum allocated by way of
bonus on such policy.
5. Any amount due to or received by the employee (in lump sum or otherwise) prior to employment or after
cessation of employment.

2.1.14 Allowances
Allowance means fixed quantum of money given regularly in addition to salary to meet particular requirement. The
name of particular allowance may reveal the nature of requirement, e.g. House Rent Allowance, Tiffin Allowance,
Medical Allowance etc.
Allowances at a glance :

Tax treatment of various allowances

Following allowances are fully taxable :

Allowances Meaning
City Compensatory An allowance to meet personal expenses, which arise due to special circumstances,
Allowance or to compensate extra expenditure by reason of posting at a particular place.
Tiffin Allowance An allowance to meet the expenditure on tiffin, refreshment etc.
Medical Allowance An allowance to meet the expenditure on medical treatment etc.
Servant Allowance An allowance to meet the expenditure of servant for personal purpose.

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Non-practicing Allowance given to professionals to compensate them for restriction on private

Allowance practice.
Warden or Proctor Allowances given to employees of educational institutions for working as warden of
Allowance the hostel or working as proctor in the institutions.
Allowances given to an employee, when he is sent on deputation for a temporary
Deputation Allowance
period from his permanent place of service.
Entertainment It is an allowance to meet expenditure on entertainment, by whatever name called.
Allowance Government employee can claim deduction u/s 16(ii) discussed later in this chapter.
House rent allowance (HRA) [Sec. 10(13A) and rule 2A]
An allowance to meet the expenses in connection with the rent of the house, by whatever name called.
Tax Treatment: Minimum of the following is exempted from tax :
a. Actual HRA received.
b. An amount equal to 50% of salary1 (when house is situated in a metro city) or 40% of salary1 (when house is
situated in any other place) for the relevant period
c. The excess of rent paid over 10% of salary1. [Arithmetically, (Rent Paid – 10% of Salary)]
1.
Salary here means: Basic + D.A. (if it forms a part of retirement benefit) + Commission as a fixed % on turnover.
Notes :
a. Salary shall be determined on due basis for the period for which the employee occupies rented accommodation
in the previous year and gets HRA.
b. Exemption is not available if employee lives in his own house, or in a house for which he does not pay any
rent.
c. For criteria of 50% or 40% of salary as deduction, place of employment is not significant but place where the
house is situated is important.
d. Deduction from HRA depends on Salary of the employee, Amount of HRA, place of residence (not place of
employment), rent paid by the employee.
Illustration 8:
X, a resident of Ajmer, receives ₹ 48,000 as basic salary during the previous year 2023-24. In addition, he gets
₹ 4,800 as dearness allowance forming part of basic salary, 7% commission on sales made by him (sale made by X
during the relevant previous year is ₹ 86,000) and ₹ 6,000 as house rent allowance. He, however, pays ₹ 5,800 as
house rent. Determine the quantum of exempted house rent allowance.
Solution :
Computation of taxable house rent allowance of X for the A.Y. 2024-25 :
Particulars Details Amount
House Rent Allowance Received 6,000
Less : Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 6,000
b) 40% of Salary (Note) 23,528
c) Rent paid – 10% of salary [₹ 5,800 – ₹ 5,882] Nil Nil
Taxable House Rent Allowance 2,56,923

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Note : Salary for the purpose of HRA

Basic salary ₹ 48,000

Dearness Allowance ₹ 4,800
Commission (7% of ₹ 86,000) ₹ 6,020
Total ₹ 58,820

Hence, exemption u/s 10(13A) is Nil.

Illustration 9 :

Compute the taxable house rent allowance of Mr. Abhijeet from the following data :

 Basic Salary ₹ 5,000 p.m., D.A. ₹ 2,000 p.m., HRA ₹ 4,000 p.m., Rent paid ₹ 4,000 p.m. in Pune.

 On 1/07/2023, there is an increment in Basic salary by ₹ 1,000.

 On 1/10/2023, employee hired a new flat in Kolkata at the same rent as he was posted to Kolkata.

 On 1/01/2024, employee purchased his own flat and resides there.

Solution :

Computation of taxable house rent allowance of Mr. Abhijeet for the A.Y. 2024-25 :

Particulars Details Amount Amount

House Rent Allowance Received (from 1.4.2023 to 30.6.2023) 12,000
Less : Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 12,000
b) 40% of Salary [(₹ 5,000 + ₹ 2,000) x 3] 8,400
c) Rent paid – 10% of salary (₹ 12,000 – ₹ 2,100) 9,900 8,400 3,600
House Rent Allowance Received (from 1.7.2023 to 30.9.2023) 12,000
Less : Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 12,000
b) 40% of Salary [(₹ 6,000 + ₹ 2,000) x 3] 9,600
c) Rent paid – 10% of salary (₹ 12,000 – ₹ 2,400) 9,600 9,600 2,400
House Rent Allowance Received (from 1.10.2023 to 31.12.2023) 12,000
Less : Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 12,000
b) 50% of Salary [(₹ 6,000 + ₹ 2,000) x 3] 12,000
c) Rent paid – 10% of salary (₹ 12,000 – ₹ 2,400) 9,600 9,600 2,400
House Rent Allowance Received (from 1.1.2024 to 31.3.2024)
(Fully taxable as assessee resides in his own house) 12,000
Taxable House Rent Allowance 20,400

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Test Yourself

1. Mr. Mohit has following salary structure:

Basic salary ₹ 5,000 p.m., D.A. ₹ 2,000 p.m. (40% does not form a part of retirement benefit), HRA ₹ 5,000
p.m. Rent paid by assessee for a house in Kolkata ₹ 4,000 p.m. Find taxable HRA.

Hints

1. ₹ 22,800;

Special allowance exempt u/s 10(14)

Allowances, deduction from which depends on actual expenditure [Sec. 10(14)(i)] :

Allowance Meaning

An allowance, by whatever name called, to meet the cost of travel on tour. Cost of travel
Travel or transfer
includes any sum paid in connection with transfer, packing and transportation of personal
Allowance
effects on such transfer.
An allowance, by whatever name called, granted on tour (or for the period of journey in
Daily Allowance connection with transfer) to meet the ordinary daily charges incurred by employee on
account of absence from his normal place of duty.
Any allowance granted to meet the expenditure on conveyance in performance of duties of
the office, provided free conveyance is not provided by the employer.
Conveyance
Allowance Taxpoint : Expenditure for covering the journey between office and residence is not treated
as expenditure in performance of duties of office and consequently not covered under this
allowance. (Refer Transport allowance)
Any allowance (by whatever name called) to meet the expenditure of assistant or helper,
Helper / Assistant provided such helper is appointed for the performance of duties of an office.
Allowance
Taxpoint : Servant allowance is fully taxable.
Any allowance, by whatever name called, granted to encourage academic, research
Research
and other professional pursuits. This allowance may also be termed as Professional
Allowance
Development / Academic allowance
Any allowance, by whatever name called, to meet the expenditure on purchase or
Uniform maintenance of uniform wear, during the performance of duties of an office.
Allowance Taxpoint : Uniform allowance is different from Dress allowance. Dress allowance is fully
taxable.
Tax Treatment of aforesaid allowances :
Minimum of the following shall be exempted :
a. Actual amount received; or
b. Actual expenditure incurred for such purpose.

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Allowances, deduction from which do not depend on actual expenditure [Sec. 10(14)(ii)]
Children Education Allowance
An allowance to meet the expenses in connection with education of children, by whatever name called.
Treatment : Minimum of the following is exempted from tax -
a. ₹ 100 per month per child (to the maximum of two children)
b. Actual amount received for each child (to the maximum of two children)
Children Hostel Allowance
An allowance to meet the hostel expenses of children, by whatever name called.
Treatment : Minimum of the following is exempted from tax -
a. ₹ 300 per month per child (to the maximum of two children)
b. Actual amount received for each child (to the maximum of two children)
Notes for Children Education Allowance and Hostel Allowance :
a. Child includes adopted child, step-child but does not include illegitimate child and grandchild.
b. Child may be major or minor child.
c. Deduction is available irrespective of actual expenditure incurred on education of child.

Illustration 10 :
Mr. Laloo Singh, received education allowance of ₹ 80 p.m. for his 1st child, ₹ 90 p.m. for his 2nd child and ₹ 120
p.m. for his 3rd child. He also received hostel allowance of ₹ 1,000 p.m. None of his children are studying. Find
taxable Children Education Allowance and Hostel allowance.
Solution :
Computation of taxable children education allowance for Mr. Laloo Singh for the A.Y. 2024-25 :

Particulars Details Amount

Hostel allowance 12,000
Less : Exempted (₹ 300 x 2 x 12) 7,200 4,800
Children Education allowance [(₹ 80 x 12) + (₹ 90 x 12) + (₹ 120 x 12)] 3,480
Less : Exempted {(₹ 100 + ₹ 90) x 12} 2,280 1,200
Taxable Allowance 6000
Note : Education allowance is allowed for any two children of assessee therefore education allowance of first child
(which is the lowest one i.e. ₹ 80 only) is not considered, to avail higher deduction.

Illustration 11 :
Mr. & Mrs. X have three children and two of them are not studying. Both Mr. & Mrs. X are working in A Ltd. and
getting children education allowance ₹ 500 per month and hostel allowance ₹ 1,000 per month. Compute taxable
children education allowance and hostel allowance.

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Solution :
Computation of taxable allowance of Mr. & Mrs. X for the A.Y. 2024-25 :
Mr. X Mrs. X
Particulars
Details Amount Details Amount
Education allowance (₹ 500 x 12) 6,000 6,000
Less : Exemption (₹ 100 x 12 x 2) 2,400 3,600 2,400 3,600
Hostel Allowance (₹ 1,000 x 12) 12,000 12,000
Less : Exemption (₹ 300 x 12 x 2) 7,200 4,800 7,200 4,800
Taxable Allowance 8,400 8,400

Test Yourself
1. Mr. Anand has six children. He receives Children education allowance ₹ 1,000 p.m. and Hostel allowance
₹ 1,500 p.m. None of his children are studying. Compute taxable allowances.
2. Mr. Sushank has only one child aged one year. His employer allows him Education allowance ₹ 80 p.m. and
Hostel allowance ₹ 1,000 p.m. His child has neither been sent to school nor to any hostel. Compute taxable
allowances.
Hints
1. ₹ 20,400; 2. ₹ 8,400

Truck Driver’s Allowance

Any allowance (by whatever name called) granted to an employee working in any transport system to meet his
personal expenditure during his duty performed in the course of running of such transport (from one place to
another place), provided such employee is not in receipt of daily allowance.
Treatment : Minimum of the following shall be exempted :
a. 70% of allowance.
b. ₹ 10,000 p.m.
Taxpoint : If assessee is in receipt of Daily allowance then above allowance shall be fully taxable.

Transport Allowance
An allowance, by whatever name called, to meet the expenditure for the purpose of travelling between the place of
residence and the place of duty.
Available to: Assessee is blind / deaf and dumb / orthopaedically handicapped.
Treatment : Minimum of the following shall be exempted :
a. Actual amount received; or
b. ₹ 3,200 p.m.
Taxpoint : No exemption is available to the assessee other than specified above.
Allowance to Government employees outside India
As per sec. 10(7), any allowance or perquisite allowed outside India by the Government to an Indian citizen for
rendering services outside India is wholly exempt from tax.

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Taxpoint :
1. Assessee must be -
a. Government employee b. Citizen of India; and c. Working outside India
2. Any allowance or perquisite to such employee shall be exempted u/s 10(7)
Allowance received from UNO (United Nations Organisation)
Basic salary or Allowance paid by the UNO to its employees are not taxable.
Compensatory allowance under Article 222(2) of the Constitution
It is fully exempt from tax.
Allowance to judges of the High Court or the Supreme Court
Any allowance paid to Judges of the High Court u/s 22A(2) and sumptuary allowance u/s 22C of the “High Court
Judges (Conditions of Service) Act, 1954” is not taxable. Allowance to the Supreme Court Judges u/s 23B of the
“Supreme Court Judges (Conditions of Service) Act, 1958” is also exempt.
Salary to teacher or professor from SAARC Member States [DTAA]
Salary including allowances and perquisites of a teacher or professor or research scholars from SAARC Member
States shall not be taxable if following conditions are satisfied :
1. Such professor, teacher or research scholar is a resident of other SAARC member State (i.e., Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan & Sri Lanka) prior to visiting another member State.
Taxpoint : An individual is deemed to be a resident of a member State if he/she is resident in that member
State in the fiscal year in which he visits the other member State or in the immediately preceding fiscal year.
2. Such visit is for the purposes of teaching or engaging in research or both at a university or college or similar
approved institution in that other Member State.
3. The remuneration from aforesaid activities in other Member State is exempt for a period of 2 years from the
date of arrival in the other member State.
Illustration 12 :
Mr. Mugal joined Star Ltd. on 1/4/2023. Details regarding his salary are as follows :
Particulars Amount (in `)
Basic 5,000 p.m.
Dearness Allowance 2,000 p.m. (50% considered for retirement benefit)
Education Allowance 1,000 p.m. (he has 1 son and 3 daughters)
Hostel Allowance 2,000 p.m. (none of the children is sent to hostel)
Medical Allowance 1,000 p.m. (total medical expenditure incurred ₹ 3,000)
Transport Allowance 1,800 p.m. (being used for office to residence & vice versa)
Servant Allowance 1,000 p.m.
City compensatory Allowance 2,000 p.m.
Entertainment Allowance 1,000 p.m.
Assistants Allowance 3,000 p.m. (paid to assistant ₹ 2,000 p.m.)
Professional Development Allowance 2,000 p.m. (actual expenses for the purpose ₹ 8,000 p.m.)
Bonus 24,000 p.a.
Commission 9,000 p.a.
Fees 5,000 p.a.
Compute his gross taxable salary for the assessment year 2024-25.

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Solution :
Computation of gross taxable salary of Mr. Mugal for the A.Y. 2024-25 :
Particulars Details Amount Amount
Basic Salary 60,000
Bonus 24,000
Commission 9,000
Fees 5,000
Allowances
Dearness Allowance 24,000
Education Allowance 12,000
Less : Exemption (₹ 100 x 2 x 12) 2,400 9,600
Hostel Allowance 24,000
Less : Exemption (₹ 300 x 2 x 12) 7,200 16,800
Medical Allowance 12,000
Transport Allowance 21,600
Less : Exemption Nil 21,600
Servant Allowance 12,000
City Compensatory allowance 24,000
Entertainment Allowance 12,000
Assistance Allowance 36,000
Less : Exemption (Being actual expenditure) 24,000 12,000
Professional development allowance 24,000
Less : Exemption (Actual expenditure max. of amount received) 24,000 Nil 1,44,000
Gross Taxable Salary 2,42,000
Illustration 13 :
Miss Sonal, being a citizen of India and Government employee has following salary details :
(Amount in `)
Basic Salary 2,000 p.m.
Dearness Allowance 3,000 p.m.
Dearness Pay 1,000 p.m.
Fees 50,000 p.a.
House Rent Allowance 5,000 p.m. (Rent paid for Kolkata house ₹ 4,000 p.m.)
Children Education allowance 3,000 p.m. (She is having one adopted child)
Children allowance 1,000 p.m.
Hostel allowance 2,000 p.m.
Dress Allowance 5,000 p.m. (Actual expenditure ₹ 10,000 p.m.)
Uniform Allowance 2,000 p.m. (Actual expenditure ₹ 1,000 p.m.)
Tiffin Allowance 1,000 p.m.
Education Allowance for her own education 2,000 p.m. (Actual expenditure ₹ 1,500 p.m.)
Compute her gross salary for the assessment year 2024-25.

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Solution :
Computation of gross taxable salary of Miss Sonal for the A.Y. 2024-25 :

Particulars Details Amount Amount

Basic Salary 24,000
Fees 50,000
Allowances
Dearness Allowance 36,000
Dearness Pay 12,000
House Rent Allowance 60,000
Less : Minimum of the following u/s 10(13A)
a) Actual Amount Received ₹ 60,000
b) 50% of Salary, i.e. 50% of (24,000 + 36,000 + 12,000) ₹ 36,000
c) Rent Paid – 10% of Salary (48,000 – 7,200) ₹ 40,800 36,000 24,000
Children Education Allowance 36,000
Less : Exemption (₹ 100 x 1 x 12) 1,200 34,800
Children Allowance 12,000
Hostel Allowance 24,000
Less : Exemption (₹ 300 x 1 x 12) 3,600 20,400
Dress Allowance (fully taxable) 60,000
Uniform Allowance 24,000
Less : Exemption (₹ 1,000 x 12) 12,000 12,000
Tiffin Allowance 12,000
Education allowance for own study 24,000
Less : Exemption (₹ 1,500 x 12) 18,000 6000 2,29,200
Gross Taxable Salary 3,03,200

Illustration 14 :
In the above illustration, how shall your answer differ if Miss Sonal is working outside India and rent paid for the
house in Japan.

Solution :
Computation of gross taxable salary of Miss Sonal for A.Y. 2024-25 :

Particulars Amount
Basic Salary 24,000
Fees 50,000
Gross Taxable Salary 74,000
Note : Since, Miss Sonal, being Government-employee and citizen of India, is working outside India. Hence, all
allowances paid to her by the Government are exempted u/s 10(7).

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2.1.15 Perquisite [Sec. 17(2)]

Meaning and Chargeability
In common parlance, perquisite means, any casual emoluments or benefits attached to an office or position, in
addition to salary or wages, which is availed by an employee. In other words, perquisites are the benefits in addition
to normal salary.
As per sec. 17(2) of the Income tax Act, Perquisite includes -
i. Value of rent-free accommodation provided by the employer.
ii. Value of concession in rent in respect of accommodation provided to the assessee by his employer.
iii. The value of any benefit or amenity granted or provided free of cost or at a concessional rate to a ‘specified
employees$.
iv. Amount paid by an employer in respect of any obligation which otherwise would have been payable by the
employee.
Taxpoint : Any obligation of the employee met by the employer shall be taxable on cash basis i.e. in the year
in which the amount is paid by the employer.
Example 3 : Employer has paid employees’ professional tax liability pertaining to period 2022-23 in April
2023, such perquisite shall be taxable in the previous year 2023-24.
v. Sum payable by an employer, whether directly or through a fund other than recognised provident fund or
approved superannuation fund or deposit-linked insurance fund, to effect an assurance on the life of the
assessee or to effect a contract for an annuity.
Taxpoint : Such sum shall be taxable on accrual basis.
vi. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the
employer, or former employer, free of cost or at concessional rate to the assessee.
vii. The amount or the aggregate of amounts of any contribution made to the account of the assessee by the
employer :
a. in a Recognised Provident Fund (RPF);
b. in the scheme referred to in sec. 80CCD(1) [i.e., NPS]; and
c. in an approved superannuation fund,
- to the extent, it exceeds ₹ 7,50,000 in a previous year.
Taxpoint : There is combined upper limit of ₹ 7,50,000 in respect of employer’s contribution in a year to
NPS, superannuation fund and recognised provident fund and any excess contribution is taxable.
viii. The annual accretion (like interest, dividend, etc.) during the previous year to the balance at the credit of the
aforesaid fund or scheme to the extent it relates to the contribution referred above.
Taxpoint : Such accretion shall be included in the total income and shall be computed in such manner as may
be prescribed.
ix. the value of any other fringe benefit or amenity as may be prescribed.

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Notes :
a. Perquisites are taxable under the head “Salaries” only if, they are :
¾¾ Allowed by an employer to his employee or any member of his household.
¾¾ Resulting in the nature of personal advantage to the employee.
¾¾ Derived by virtue of employee’s authority.
b. Perquisite may be contractual or voluntary. In other words, it is not necessary that the benefit must have been
received under an enforceable right.
c. Perquisite may be received from the former, present or prospective employer
d. Member of household includes :
¾¾ Spouse (whether dependent or not) ¾¾ Parents (whether dependent or not); ¾¾ Servants; and
¾¾ Children and their spouse (whether dependent or not); ¾¾ Dependents.
$
Specified employees [Sec. 17(2)(iii)]
Specified employee means :
1. A director employee.
Note : It is immaterial -
a. whether he is a nominee of the workers, financial institutions, etc. on the board;
b. whether the employee is full time director or a part time; and
c. whether he was a director throughout the previous year or not.

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Taxpoint :
¾¾ A director-employee shall be treated as specified employee of that company only.
Example 4 : If Manu is working with X Ltd. as director-employee and with Y Ltd. as employee only, she will
be treated as specified employee only for X Ltd. and not for Y Ltd.
¾¾ Director even for a day is construed as specified employee of such company.
2. An employee who has substantial interest in the employer company.
Substantial interest means the employee who beneficially holds 20% or more voting power in the employer
company.
Taxpoint :
¾¾ Such employee shall be treated as specified employee of that company only.
¾¾ The main criteria is beneficial ownership and not the legal ownership.
¾¾ Substantial interest must be held by the assessee individually, and not together with relative.
Example 5 : Mr. Mohan holds 18% equity share of X Ltd. and his wife holds 7% equity share of the same
company. In such case Mr. Mohan will not be treated as specified employee.
3. An employee whose aggregate salary from all employers together exceeds ₹ 50,000 p.a.
For computing the sum of ₹ 50,000, following are to be excluded/deducted :
a. All non-monetary benefits;
b. Non-taxable monetary benefits;
c. *Deduction u/s 16(ia), 16(ii) and 16(iii) [Discussed later in this chapter]; and
d. Employer’s contribution to Provident Fund.
Taxpoint :
¾¾ Where salary is received from two or more employers, the aggregate salary from all employers shall be
considered for calculation of above ceiling. And if aggregate salary exceeds ₹ 50,000 p.a. the employee
shall be treated as specified employee of all employers.
Example 6 : Mr. Rohan is working with X & Co. and Y Ltd. His taxable monetary salary from X & Co.
is ₹ 36,000 p.a. and from Y Ltd. is ₹ 45,000 p.a. Since the aggregate salary is more than ₹ 50,000 p.a. Mr.
Rohan will be treated as specified employee for both the employer i.e. X & Co. and Y Ltd.
¾¾ Even ‘DA not forming a part of salary for retirement benefit’ shall be included in salary, while determining
the above limit of ₹ 50,000 p.a.

Exempted Perquisites
Following perquisites are exempted in hands of employee :
1. Tea or snacks : Tea, similar non-alcoholic beverages and snacks provided during working hours.
2. Food : Food provided by employer in working place.
3. Recreational facilities : Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate : Goods manufactured by employer and sold by him to his
employees at concessional (not free) rates.

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5. Conveyance facility : Conveyance facility provided -

¾¾ to employees for journey between office and residence and vice versa.
¾¾ to the judges of High Court and Supreme Court
6. Training : Amount spent on training of employees including boarding & lodging expenses for such training.
7. Services rendered outside India : Any perquisite allowed outside India by the Government to a citizen of
India for rendering services outside India.
8. Contribution in some specified schemes
¾¾ Employer’s contribution to a pension or deferred annuity scheme.
¾¾ Employer’s contribution to staff group insurance scheme.
¾¾ Annual premium paid by the employer on personal accident policy affected by him in respect of his
employee.
9. *Loans
¾¾ Loan given at nil or at concessional rate of interest by the employer provided the aggregate amount of loan
does not exceed ₹ 20,000.
¾¾ Interest free loan for medical treatment of the diseases specified in Rule 3A.
10. *Medical facility : A provision of medical facility at office is exempt. Reimbursement of medical expenses for
treatment of Covid-19 is exempt
Note : However, medical allowance is fully taxable.
11. Periodicals and journals : Periodicals and journals required for discharge of work.
12. Telephone, mobile phones : Expenses for telephone, mobile phones actually incurred on behalf of employee
by the employer whether by way of direct payment or reimbursement.
13. *Free education facility : Free education facility to the children of employee in an institution owned or
maintained by the employer provided cost of such facility does not exceed ₹ 1,000 p.m. per child.
Note : Such facility is not restricted to two children as in case of Children Education allowance.
14. Computer or Laptop : Computer or Laptop provided whether to use at office or at home (provided ownership
is not transferred to the employee).
15. *Movable assets : Sale or gift of any movable asset (other than car and electronic items) to employee after
being used by the employer for 10 or more years.
16. *Leave Travel Concession : Leave Travel Concession (LTC) subject to few conditions.
17. Rent-free accommodation
¾¾ Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
¾¾ Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a Union Minister
or a Leader of opposition in Parliament.
18. *Accommodation : Accommodation provided -
¾¾ on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.

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¾¾ in a remote area to an employee working at a mining site or an onshore exploration site or a project
execution site or a dam site or a power generation site or an offshore site.
19. Tax on non-monetary perquisite paid by employer on behalf of employee. With effect from A.Y. 2003-04 a
new sec. 10(10CC) has been inserted which provides that income tax paid by employer on behalf of employee
on income, being non-monetary perquisite, is not a taxable perquisite.
20. Health club, Sports club facility
* Discussed later in this chapter

2.1.16 Valuation of Accommodation

Valuation of Rent-free unfurnished accommodation (RFA) [Rule 3(1)]
Rent-free accommodation is taxable in the hands of all employees (except the Judges of High Court or Supreme
Court and Official of the Parliament or Union Minister and a leader of Opposition).
Accommodation here includes fixed as well as floating structure.
Fixed Structure A house, flat, farm house (or a part there of), accommodation in hotel, motel, service
apartment, a guest house, etc
Floating Structure A caravan, mobile home, ship etc.
For the purpose of valuation, employees are divided into two categories :
a. Employees of the Central or State Government or of any undertaking under the control of the Government;
b. Other employees
I) Central and State Government Employee (including military person)

Where the accommodation is provided

by the Central Government or any State
Government to the employees either
holding office or post in connection with
the affairs of the Union or of such State,
the value of perquisite in respect of such
accommodation is equal to the licence
fee, which would have been determined
by the Central or State Government in
accordance with the rules framed by the
Government.
{Academically, the taxable value of
the perquisite will be mentioned in the
problem}

Taxpoint : Employees of a local authority or a foreign government are not covered under this category.
II) Other Employees (residual category)
The value of perquisite is determined as per the following table:

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City in which accommodation is Accommodation is owned by the Accommodation is not owned by

provided employer the employer
Having population exceeding 25 15% of salary for the period during Rent paid or payable by the
lacs as per 2001 census which the employee occupied the employer or 15% of salary,
said accommodation. whichever is lower.
Having population exceeding 10 10% of salary for the period during
lacs but not exceeding 25 lacs as per which the employee occupied the
2001 census said accommodation.
Any other city 7.5% of salary for the period during
which the employee occupied the
said accommodation.
Notes :
a. Salary for the purpose of Rent free accommodation: Salary here means:
Basic + Dearness allowance/pay (if it forms a part of retirement benefit) + Bonus + Commission + Fees
+ All other taxable allowances (only taxable amount) + Any other monetary payment by whatever name
called (excluding perquisites and lump-sum payments received at the time of termination of service
or superannuation or voluntary retirement, like gratuity, severance pay leave encashment, voluntary
retrenchment benefits, commutation of pension and similar payments)
Taxpoint :
¾¾ Salary shall be determined on due basis.
¾¾ Where an assessee is receiving salary from two or more employers, the aggregate salary for the period
during which accommodation has been provided (by any of the employer) shall be considered.
¾¾ Monetary payments, which are not in the nature of perquisite, shall be considered. E.g. Leave encashment
received during the continuation of service shall be included in salary for this purpose. However, if such
pay leave is received at the time of retirement, then such receipt shall not be considered.
¾¾ Here salary does not include employer’s contribution to Provident Fund of the employee.
b. Exemption of 90 days in case of allotment of two houses: Where an employee is transferred from one place
to another and he is provided with an accommodation at new place also, the value of perquisite shall be taken
for only one such house having lower value for a period not exceeding 90 days. Thereafter, the values of both
such houses are taxable.
c. Any accommodation provided to an employee working at a mining site; or an on-shore oil exploration site; or
a project execution site; or a dam site; or a power generation site; or an off-shore site, which
a) being of a temporary nature and having plinth area not exceeding 800 sq.ft. is located not less than 8 kms
away from the local limits of any municipality or a cantonment board; or
b) is located in a remote area.
d. Remote area here means an area located at least 40 K.M. away from a town having population not
exceeding 20,000 as per latest published census.
e. Where the accommodation is provided by the Central Government or any State Government to an employee
who is serving on deputation with any body or undertaking under the control of such Government:
i. the employer of such an employee shall be deemed to be that body or undertaking where the employee
is serving on deputation; and

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ii. the value of perquisite of such an accommodation shall be the amount calculated as per residual
category (II) considering as if the accommodation is owned by the employer.
Illustration 15 :
Mr. Chauhan has the following salary structure :
a) Basic Salary ₹ 5,000 p.m. b) Entertainment Allowance ₹ 1,000 p.m.
c) Education Allowance ₹ 500 p.m. (he has 3 children) d) DA ₹ 3,000 p.m.
e) Fees ₹ 5,000 p.a. f) Bonus ₹ 10,000 p.a.
g) Professional tax of employee paid by employer ₹ 2,000 for the year
h) He has been provided a rent-free accommodation in Mumbai.
i) 60% of DA only forms part of retirement benefits
Compute taxable value of accommodation in the hands of Mr. Chauhan in the following cases :
I) The employer owns such accommodation.
II) The employer hires such accommodation at a monthly rent of ₹ 900.
Solution :
Taxable value of rent-free accommodation for the A.Y. 2024-25 :

Particulars Basis of determination Taxable

Perquisite
i) Owned by employer 15% of Salary (Working) ₹ 16,830
ii) Hired by employer 15% of Salary or Actual rent paid by employer, whichever is lower ₹ 10,800
Working : Salary for the purpose of Rent-free accommodation :

Particulars Details Amount Amount

Basic Salary 60,000
Bonus 10,000
Fees 5,000
Allowances
Dearness allowance ₹ 36,000 x 60% 21,600
Entertainment Allowance 12,000
Education Allowance ₹ 6,000 – ₹ 2,400 3,600 37,200
Gross Taxable Salary 1,12,200
Note : Professional tax paid on behalf of employee is a perquisite; hence the same shall not be included in salary
for the aforesaid purpose.

Illustration 16 :
In above illustration, how shall answer differ if the property is situated in a city where population is only 14,60,000.
Solution :
Taxable value of rent free accommodation for the A.Y.2024-25 :

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Particulars Basis of determination Taxable value of Perquisite

Owned by employer 10% of Salary (as per the above working) ₹ 11,220
Hired by employer 15% of Salary or Actual rent paid by ₹ 10,800
employer, whichever is lower

Illustration 17 :
Miss Stuti has the following salary structure :
₹

a) Basic salary 15,000 p.m.

b) Dearness Allowance 5,000 p.m. (not forming part of retirement benefit)
c) Hostel Allowance 1,000 p.m. (does not have any child)
d) Tiffin Allowance 500 p.m.
e) Transport Allowance 200 p.m.
f) Bonus 20,000 p.a.
g) Commission 15,000 p.a.
h) Free refreshment in office worth 5,000 p.a.
i) Mobile phone facility by employer 900 p.m.
j) Computer facility worth 10,000 p.a.
She has been provided a Rent-free Accommodation (owned by employer) in Kolkata. The house was allotted to
her with effect from 1/5/2023 but she could occupy the same only from 1/6/2023. Find her gross taxable salary.
Solution :
Computation of gross taxable salary of Miss Stuti for the A.Y. 2024-25 :

Particulars Details Amount Amount

Basic Salary 1,80,000
Bonus 20,000
Commission 15,000
Allowances :
Dearness Allowance 60,000
Hostel Allowance (Fully taxable as she has no child) 12,000
Tiffin Allowance 6,000
Transport Allowance 2,400 80,400
Perquisite u/s 17(2) :
Free Refreshment (not taxable) Nil
Mobile or telephone facility Nil
Computer facility Nil
Rent Free Accommodation Working 29,425 29,425
Gross Salary 3,24,825

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Working : Salary for the purpose of rent-free accommodation :

Basic Salary 1,80,000

Bonus 20,000
Commission 15,000
Allowances
Dearness allowance Nil
Hostel Allowance 12,000
Tiffin Allowance 6,000
Transport Allowance 2,400
Total 2,35,400
Value of Rent-Free Accommodation (being 15% x ₹ 2,35,400 x 10/12) 29,425

Illustration 18 :

Miss Khushi has the following salary details :

i) Basic salary ₹ 6,000 p.m.

ii) DA ₹ 3,000 p.m.

iii) Academic development allowance ₹ 1,000 p.m., expenditure incurred ₹ 700 p.m.

iv) Entertainment allowance ₹ 500 p.m.

She has been provided with a rent-free accommodation in Purulia. On 1/7/2023, she was posted to Kolkata. A new
house further allotted to her on same date. But she surrendered her Purulia house only on 31/12/2023. Rent paid
by employer for Purulia House ₹ 500 p.m. while Kolkata house is owned by the employer. Find her gross taxable
salary.

Solution :

Computation of gross taxable salary of Miss Khushi for the A.Y. 2024-25 :

Particulars Details Amount Amount

Basic Salary 72,000
Allowances:
Dearness Allowance 36,000
Academic Development Allowance 12,000
Less : Exempted to the extent of actual expenditure 8,400 3,600 45,600
Entertainment Allowance 6,000
Perquisite u/s 17(2):
Rent Free Accommodation Working 13,320
Gross Taxable Salary 1,30,920
Working : Since Miss Khushi has been transferred from Purulia to Kolkata and she is provided with an
accommodation at Kolkata also, the value of perquisite shall be taken for only one such house having lower value
for a period not exceeding 90 days. Thereafter, the value of both such houses is taxable.

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Valuation of rent-free accommodation :

Period Particulars Purulia house Kolkata house Taxable Amount

1/4/2023 - She is having only Purulia 15% of (₹ 1,17,600 x 3/12) or Not applicable 1,500
30/6/2023 house Rent paid by employer (₹ 500
x 3) whichever is lower
1/7/2023 - She has both house but the ₹ 1,500 (as calculated above) 15% of Salary1 1,500
30/9/2023 house having lower value
i.e. ₹ 4,410
shall be taxable
1/10/2023 - She has both house and ₹ 1,500 (as calculated above) ₹ 4,410 5,910
31/12/2023 both shall be taxable
(as above) (Note b)
1/1/2024 - She has only Kolkata Not applicable ₹ 4,410 4,410
31/3/2024 house
(as above)
Taxable perquisite 13,320
Note :
a. For the sake of simplicity, 3 months have been taken as equivalent to 90 days.
b. After 90 days, value of both houses shall be considered.
1
. Salary for valuation of rent- free accommodation :
Basic Salary 72,000
Allowances
Dearness allowance 36,000
Entertainment allowance 6,000
Academic development Allowance 3,600
Total 1,17,600
Valuation of Rent-free furnished accommodation
Furnished accommodation means Accommodation + Furniture.
Value of Furnished accommodation = Value of accommodation + Value of furniture
Valuation of Accommodation: As discussed above.
Valuation of Furniture : As per the following table
Case Taxable value
Furniture owned by the employer 10% of original cost of furniture
Furniture hired by the employer Actual hire charges paid/payable by the employer
Notes :
1. “Furniture” here, includes refrigerator, television, radio, air-conditioner and other household appliances, etc.
2. The above rule is applicable to Government as well as Non-Government Employees.
Illustration 19 :
Sri Ashutosh has been provided with a furnished accommodation in a city having population of 14,00,000 as per
last census. Municipal Value of the house (owned by employer) is ₹ 80,000 whereas Fair rent of the house is ₹
1,00,000. His salary details are as under :

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Basic 25,000 p.m.

Allowance for increased cost of living 5,000 p.m.
Children Education allowance 3,000 p.m. [He has one son and two married daughters]
Furniture details as under :
Particulars Hired by the employer Owned by the employer
(Hire charge) (Original Cost)
T.V. 2,000 p.a. -
Refrigerator - 10,000
Washing Machine - 5,000
Other furniture 1,000 p.m. 20,000
Calculate gross taxable salary of Sri Ashutosh for the A.Y. 2024-25.
Solution :
Computation of gross taxable salary of Sri Ashutosh for the A.Y. 2024-25 :
Particulars Amount Amount
Basic Salary 3,00,000
Dearness allowance (Allowance for increased cost of living) 60,000
Children Education Allowance 36,000
Less : Exemption (₹ 100 x 2 x 12) 2,400 33,600
Rent Free Furnished Accommodation
Value of Accommodation (10% of Salary1) 39,360
Value of furniture2 17,500 56,860
Gross Taxable Salary 4,50,460
1
Salary for valuation of rent- free accommodation :
Basic Salary 3,00,000
Dearness allowance 60,000
Education Allowance 33,600
Total 3,93,600
2Valuation of taxable perquisite for furniture :
Furniture Perquisite for hired Perquisite for owned Total Taxable value of
furniture furniture furniture
T.V. 2,000 - 2,000
Refrigerator - 10% of 10,000 1,000
Washing Machine - 10% of 5,000 500
Other furniture 12,000 10% of 20,000 14,000
Total 17,500
Municipal value and Fair rent are irrelevant.
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Test Yourself
1. Mr. Raja is the employee of an Indian company. He has been provided a rent-free accommodation in Mumbai
on 1/4/2023 for which the employer is to pay a monthly rent of ₹ 3,000. During the year, employer paid rent
of ₹ 30,000 (2 months rent is outstanding). On 1/9/2023, furniture of ₹ 4,00,000 owned by the employer is
also provided. His Basic salary is ₹ 10,000 p.m. and DA is ₹ 5,000 p.m. Find taxable value of perquisite.
Hints :
1. ₹ 50,333;
Valuation of accommodation provided at concessional rent

Valuation will be made as if the rent-free accommodation is provided and the amount so computed will be reduced
by the rent payable by the employee.

Value of Rent free accommodation as usual *****

Less : Rent payable by employee to employer for the above facility ****
Taxable value of perquisite ****

Taxpoint : The above rule of valuation shall be applicable in case of the Government employee also.

Test Yourself
1. Mr. Saket has been provided an accommodation in Patna (owned) with furniture (hire charges paid by
employer ₹ 10,000). His salary details are as under :
¾¾ Basic ₹ 10,000 p.m.
¾¾ D.A. ₹ 2,000 p.m.
¾¾ Transport allowance ₹ 3,000 p.m.
¾¾ Bonus ₹ 10,000 p.a.
¾¾ Fee ₹ 5,000 p.a.
¾¾ Rent paid by employee is ₹ 1,000 p.m. for such house.
Find taxable value of perquisite.
Hints
1. ₹ 27,250;

Accommodation provided in a hotel

In this case, value of perquisite shall be minimum of the following :

a. 24% of salary for the period such accommodation is provided; or

b. Actual charges paid or payable to such hotel.

However, if the following conditions are satisfied then nothing is taxable -

 Such accommodation is provided for a period not exceeding in aggregate 15 days; and

 Such accommodation is provided on transfer of employee from one place to another place.

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Note : If the employee pays any rent, the value so determined shall be reduced by the rent actually paid or payable
by the employee

Taxpoint :
 Salary here has the same meaning as in the case of rent-free accommodation.
 Above rule shall be applicable whether the assessee is a Government or a Non-Government employee.
 If the facility is provided for more than 15 days, then the perquisite is exempt for first 15 days and thereafter
taxable. E.g. if facility has been provided for 45 days then taxable perquisite shall be only for last 30 days.
 Hotel includes licensed accommodation in the nature of motel, service apartment or guest house.

2.1.17 Insurance premium payable by employer

As per sec. 17(2)(v), following sums payable by an employer shall be taxable perquisite in the hands of all employees,
whether it is paid directly or through a fund (other than recognised provident fund or approved superannuation fund
or deposit-linked insurance fund),
 to effect an assurance on the life of the assessee; or
 to effect a contract for an annuity
Note : Employee can claim deduction u/s 80C for LIC premium paid by employer
 Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for
consideration other than cash for providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
Taxpoint : If such shares are allotted or transferred not for above reasons (i.e, for providing know-how,
etc.), then it is not taxable as perquisite. E.g., if such option is granted to the employee against acquisition
of immovable property by the company, then such benefit shall not be considered as perquisite. However,
employee is liable to pay tax, if any, under the head ‘Capital Gain’
Perquisites :
Value of any specified security or sweat equity shares shall be considered as perquisites in hands of employee if
the following conditions are satisfied :
a. Such security or sweat equity shares are allotted or transferred on or after 01-04-2009
b. Such security or sweat equity shares are allotted or transferred by the employer (former or present) directly or
indirectly.
c. Such security or sweat equity shares are allotted or transferred free of cost or at concessional rate to the
assessee.
Valuation :
Value of such perquisite shall be computed as under :

Particulars Amount
The fair market value of the specified security or sweat equity shares, as the case may be, on the ***
date on which the option is exercised by the assessee

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Less : The amount actually paid by, or recovered from the assessee in respect of such security or ***
shares
Value of perquisite ***
Notes : Option means a right but not an obligation granted to an employee to apply for the specified security or
sweat equity shares at a predetermined price.

2.1.18 Valuation of perquisites in respect of Motor Car [Rule 3(2)]

Motor-car facility provided by an employer is taxable in the hands of employee on the following basis :

Car is Car is Used by Who is

Taxable value
owned by Maintained by employee for Chargeable
Office purpose Not a perquisite Not applicable
Employer Personal M1+D2
Specified
purpose
Employee
Both purpose ₹ 1800 or ₹ 2400 p.m.3
Office purpose Not a perquisite Not applicable
Employer Employee Personal D
Specified
purpose
employee
Both purpose ₹ 600 / ₹ 900 p.m.4
Office purpose Not a perquisite Not applicable
Personal M All employee
purpose
Both purpose Actual expenditure incurred by the employer
as reduced by ₹ 1800 / ₹ 2400 p.m.3 (further
deduction of ₹ 900 p.m. for driver) or a
higher deduction if prescribed conditions are
Employee Employer satisfied5
Employee Any purpose Not a perquisite Not applicable
1 M =Maintenance cost
2 D = Depreciation @ 10% of actual cost of the car. However, if the car is not owned by employer then actual hire
charge incurred by employer shall be considered.
3 ₹ 2400 p.m. in case of higher capacity car# and ₹ 1800 p.m. for lower capacity car.
4 ₹ 900 p.m. in case of higher capacity car# and ₹ 600 p.m. for lower capacity car.
#
Higher capacity car means a car whose cubic capacity of engine exceeds 1.6 litres.
5 Conditions to be fulfilled for claiming higher deductions :
 The employer has maintained complete details of journey undertaken for official purpose, which may include
date of journey, destination, mileage, and the amount of expenditure incurred thereon; and
 The employer gives the certificate to the effect that the expenditure was incurred wholly and exclusively for
the performance of official duties.

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Chauffeur / Driver
If chauffeur is also provided, then salary of chauffeur is further to be added to the value of perquisite (as computed
above). However, if car is used for both i.e. official and personal purpose then ₹ 900 p.m. (irrespective of higher or
lower capacity of car) is to be taken as value of chauffeur perquisite.
Notes :
a. If motor car is provided at a concessional rate then charges paid by employee for such car, shall be reduced
from the value of perquisite.
b. The word “month” denotes completed month. Any part of the month shall be ignored.
c. When more than one car is provided to the employee, otherwise than wholly and exclusively for office purpose,
the value of perquisite for -
¾¾ One car shall be taken as car is provided partly for office and partly for private purpose i.e. ₹ 1,800 or ₹
2,400 p.m. (plus ₹ 900 p.m. for chauffeur, if provided); and
¾¾ For other car(s), value shall be calculated as car(s) are provided exclusively for private purpose.
d. Conveyance facility to the judges of High Court or Supreme Court is not taxable.
e. Use of any vehicle provided to an employee for journey from residence to work place or vice versa is not a
taxable perquisite.

Illustration 20:
Sonam, has been provided a car (1.7 ltr.) by his employer Vikash Ltd. The cost of car to the employer was ₹3,50,000
and maintenance cost incurred by the employer ₹ 30,000 p.a. Chauffeur salary paid by the employer ₹3,000 p.m.
Find value of perquisite for Sonam for the A.Y. 2024-25, if the car is used for:
a) Office purpose. b) Personal purpose. c) Both purposes.
In case (b) and (c), employee is being charged ₹ 15,000 p.a. for such facility.
Solution :
a. Nil, as car is used for office purpose.
b. Taxable value of car facility :

Particulars Details Amount

Depreciation of Car 10% of ₹ 3,50,000 35,000
Maintenance cost Actual 30,000
Driver’s salary Actual 36,000
Total 1,01,000
Less : Amount charged from employee 15,000
Taxable Perquisite 86,000
c. ₹ 2,400 p.m. for car facility + ₹ 900 p.m. for driver facility = ₹ 3,300 p.m.
Taxable value of perquisite ₹ 3,300 × 12 = ₹ 39,600.
Note : Whenever statutory value (₹ 1,800 or ₹ 2,400 and ₹ 600 or ₹ 900) is taken as taxable value of perquisite
then amount charged from employee shall not be subtracted.

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Illustration 21 :
Mr. Piyush has been provided a car (1.5 ltr.) on 15/7/2023. The cost of car to the employer was ₹ 6,00,000 and
maintenance cost incurred by employer ₹ 20,000 p.a. Chauffeur salary paid by employer (Mr. Ratan) ₹ 4,000 p.m.
The car is 40% used for office and 60% for personal purpose. Charges paid by employee for such facility ₹ 5,000
p.a. Find taxable value of perquisite.
Solution :
Taxable value of perquisite :

Particulars Details Amount

Car ₹ 1,800 × 8 14,400
Driver ₹ 900 × 8 7,200
Taxable Perquisite 21,600
1. A part of month shall not be considered for this purpose.
2. Whenever statutory value is taken as taxable value of perquisite then amount charged from employee shall not
be subtracted.

Illustration 22 :
Mr. Vikram being a Government employee has a car (1.7 ltr.) used for office as well as for personal purpose. During
the year, he incurred ₹ 40,000 on maintenance and ₹ 20,000 on driver’s salary. The entire cost is reimbursed by
employer. Find taxable perquisite.
Solution :
Taxable perquisite in the hands of Mr. Vikram :
As the car is owned by the assessee & maintained by the employer, taxable value of perquisite shall be -
Actual expenditure incurred by the employer as reduced by ₹ 2,400 p.m. (in case of 1.7 ltr.) and ₹ 900 p.m. for
driver’s salary. Hence, taxable amount shall be -

Amount reimbursed by employer (₹ 40,000 + ₹ 20,000) ₹ 60,000

Less: Deduction for the amount used for office purpose (₹ 2,400 + ₹ 900) × 12 ₹ 39,600
Taxable amount ₹ 20,400

Illustration 23 :
Wasim has a car (1.5 ltr.) used for office as well as for personal purpose. During the year car is used 80% for
business purpose being certified by the employer. During the year, he incurred ₹ 50,000 on maintenance and
running of such car. The entire cost is reimbursed by the employer. Find taxable perquisite if assessee wish to claim
higher deduction, when – (a) A proper log book is maintained; (b) A proper log book is not maintained
Solution :
a. When log book is maintained
Taxable perquisite in the hands of Wasim

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Actual expenditure incurred by the employer is reduced to the extent it is used for office purpose, as a proper
record is kept and duly certified by employer.

Amount reimbursed by the employer ₹ 50,000

Less : Deduction (80% of ₹ 50,000) ₹ 40,000
Taxable amount ₹ 10,000
b. When log book is not maintained
Taxable perquisite in the hands of Wasim
Actual expenditure incurred by the employer is reduced to the extent of ₹ 1,800 p.m. even though it is used for
office purpose but a proper record is not kept.

Amount reimbursed by the employer ₹ 50,000

Less : Deduction (₹ 1,800 x 12) ₹ 21,600
Taxable amount ₹ 28,400

Illustration 24:
Amit is provided with two cars, to be used official & personal work, by his employer Raj. The following information
is available from the employer records for computing taxable value of perk (assuming car 1, is exclusively used
by Amit).

Particulars Car 1 Car 2

Cost of the car 6,00,000 4,00,000
Running and maintenance (borne by the company) 40,800 28,000
Salary of driver (borne by the company) 24,000 24,000
Solution :
Valuation of perquisite for Mr. Amit :

Particulars Workings Details Amount

Valuation of perquisite in respect of Car 1
- Depreciation of car 10% of ₹ 6,00,000 60,000
- Maintenance 40,800
- Driver salary 24,000 1,24,800
Valuation of perquisite in respect of Car 2 (₹ 1,800 + ₹ 900) × 12 32,400
(assumed capacity of engine does not exceed 1.6 cc)
Value of car perquisite 1,57,200

Illustration 25 :
Mr. Vijay, manager, has been provided the following car facilities by Kishan Ltd. (his employer) :

Particulars Car A Car B Car C

Owned by Employer Employer Employer
Used for Office as well as personal purpose Personal purpose
Cost of car 3,00,000 5,00,000 2,00,000

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Particulars Car A Car B Car C

Maintenance expenditure incurred by employer 50,000 60,000 -
Maintenance expenditure incurred by employee - - 40,000
Capacity of car 1.8 ltr. 1.4 ltr. 1.6 ltr.

Find taxable value of car facility.

Case a) Mr. Vijay holds 17% of equity share capital and 30% of preference share capital of Kishan Ltd. and his wife
holds 13% equity share capital of the same company. Assume his total salary during the year other than perquisite
is ₹ 40,000;

Case b) Mr. Vijay holds 25% equity share capital of the employer company.

Solution :

Case a) Since Mr. Vijay is not a specified employee & employer owns all cars therefore car facility shall not be
taxable.

Case b) Since Mr. Vijay holds substantial interest in employer-company hence he is a specified employee.

As employee has been provided 2 cars, used for office as well as for personal purpose, therefore he will have to opt
one car as for ‘office as well as personal purpose’ & the other car for personal purpose. In the given case, assessee
has two options -

Option 1) Car A is used for office as well as personal purpose and car B is used for personal purpose.

Option 2) Car A is used for personal purpose and car B is used for office as well as personal purpose.

In any case, Car C is used for Personal purpose.

Option 1 Option 2
Particulars Workings
Car A Car B Car C Car A Car B Car C
Car used for Both Personal Personal Personal Both Personal
₹ 2,400 x 12 28,800
10% of ₹ 5,00,000 + ₹ 60,000 1,10,000
10% of ₹ 2,00,000 20,000 20,000
10% of ₹ 3,00,000 + ₹ 50,000 80,000
₹ 1,800 x 12 21,600
Total 1,58,800 1,21,600
As option 2 has lesser taxable value, hence assessee will opt for option 2 & taxable value shall be ₹ 1,21,600.

2.1.19 Valuation of Perquisite in respect of Vehicle other than Motor Car

The facility provided by employer is taxable in the hands of employee on the following basis :

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Who is
Owned by Maintained by Used for Taxable Value of perquisite
Chargeable
Not
Office purpose Nil
Applicable
Actual Maintenance + Depreciation @ 10% Specified
Personal purpose
of Original cost employee

Employer Reasonable proportion of (Maintenance +

Both purpose
Depreciation @ 10% of Original cost)
Office purpose Nil Not Applicable
Personal purpose Actual Maintenance
Employee Employee Actual expenditure incurred by the employer
Both as reduced by ₹ 900 p.m. or as reduced by
purpose higher sum if prescribed conditions (as
discussed in case of Car facility) are satisfied. All employee

2.1.20 Valuation of perquisite in respect of Free Domestic Servants [Rule 3(3)]

Value of perquisite is determined as under :

Servant appointed by Taxable value of perquisite Taxable in hands of

Employer Actual cost to the employer is Specified employee
Employee taxable as perquisite All employee
Notes :
a. If rent-free accommodation (owned by the employer) is provided with gardener then gardener’s salary and
maintenance cost of garden shall not be taxable. [Circular No.122 dated 19/101973]
b. Any amount charged from the employee for such facility shall be reduced from above value.
c. Domestic servant allowance given to employee is fully taxable.
d. Reimbursement of servant-salary by the employer shall be taxable in hands of all employee.
Illustration 26:
Sri Bhagawan, has been provided with the following servants by his employer :
Servant Appointed by Salary of Servant
Watchman Employer 2,000 p.m.
Cook Employee’s wife 3,000 p.m.
Maid servant Employer 1,000 p.m.
Sweeper Employee 500 p.m.
Gardener Employer 1,000 p.m.
Sri Bhagawan has also been provided a rent-free accommodation, which is owned by the employer. Find taxable
value of servant facility if - Case a) He is a specified employee. Case b) He is a non-specified employee.

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Solution :

Computation of taxable value of perquisite for A.Y. 2024-25 :

Taxable Amount
Servant
Case a Case a
Watchman 24,000 Nil
Cook 36,000 36,000
Maid servant 12,000 Nil
Sweeper 6,000 6,000
Gardener (since Rent free accommodation, owned by employer, is provided) Nil Nil
Taxable Perquisite 78,000 42,000

2.1.21 Gas, electricity or water facility [Rule 3(4)]

It is taxable on the following basis :
Taxable value of perquisite
Case Facility is provided Facility is provided Taxable in the hands of
from own sources from other agency
Facility is in name of employee Manufacturing cost to Prices paid to such All employees
Facility is in name of employer the employer agency Specified employees

Note : Where the employee is paying any amount for such facility, the amount so paid by employee shall be
reduced from the value determined above.

2.1.22 Valuation of perquisite in respect of free education [Rule 3(5)]

Taxable value of perquisite is as follows :

Case Taxable Value

Facility provided to employee Not taxable
Facility provided to family member
Facility provided in an institution owned by the Child of the assessee : Cost of such education in similar
employer institution subject to an exemption of ₹ 1,000 p.m. per child
Facility provided in any institution (not owned by shall be taxable*.
the employer) by reason of his being in employment.
Other family member : Cost of such education in similar
institution shall be taxable.
Reimbursement of education expenditure to Actual reimbursement shall be taxable. Such reimbursement
employee. of tuition fee shall also be taxable in the hands of Central
Government employee. (Circular letter No 35/7/65–IT(B) dt
12/2/1965)

* However, Hon’ble Punjab & Haryana High Court in the case of CIT –vs.- Director, Delhi Public School (2011) 202 Taxman 318 has held that if value
of perquisite exceeds ₹ 1,000/-, then entire amount shall be taxable.

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Who is chargeable?

Case Taxability in the hands of

In case of reimbursement; or
School fee of family member of the employee paid by the employer directly to All employee
school
In any other case Specified employee

Notes :

a. ₹ 1,000 per month

per child shall be
exempted without
any restriction on
number of children.
b. Child includes
adopted child,
stepchild of the
assessee, but
does not include
grandchild or
illegitimate child.

c. Any amount charged from the employee for such facility shall be reduced from the above value.
d. Contribution made under an Educational Trust, created for the children of particular group of employees, is not
taxable.

2.1.23 Valuation of perquisite in respect of Free Transport [Rule 3(6)]

The facility provided by employer is taxable in the hands of employee on the following basis :

Case Treatment
If employer is engaged in transportation business. Amount charged from public for such facility is taxable
in the hands of specified employee.
In any other case Actual cost of employer for such facility is taxable in
the hands of all employees.
Notes :
a. In case above facility is provided to employees of Railways & Airlines, nothing shall be chargeable to tax.
b. Any amount charged from the employee for such facility shall be reduced from the above value.
c. Conveyance facility provided to the employee for journey between office and residence is not taxable.

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2.1.24 Valuation of perquisite in respect of interest free loan or concessional rate of interest
[Rule 3(7)(i)
Perquisite in respect of interest free loan or loan
at concessional rate of interest to th]e employee
or any member of his household by the employer
or any person on his behalf, is not taxable if
aggregate amount of loan given by the employer
(or any other person on his behalf) does not
exceed ₹ 20,000. The taxable value of such
perquisite shall be determined as per the rate
as on the 1st day of the relevant previous year
charged by the State Bank of India in respect of
loans for the same purpose advanced by it.
Notes :
a. Maximum outstanding monthly balance: Interest is calculated on the maximum outstanding monthly
balance. Maximum outstanding monthly balance means the aggregate outstanding balance for each loan as on
the last day of each month.
b. Loan for medical treatment: Nothing is taxable if loan is given for medical treatment of the employee or any
member of his household in respect of diseases specified in rule 3A. However, such exempted loan will not
include the amount that has been reimbursed by an insurance company under any medical insurance scheme.
c. Concessional interest: Any interest paid by the employee to the employer for such loan shall be reduced from
the above computed value. If rate of interest charged by the employer is higher than the above rate, nothing is
taxable as perquisite.
d. Amount on which interest shall be calculated: If loan amount is more than ₹ 20,000, interest shall be levied
on total loan amount, rather than the excess amount.
e. Treatment of outstanding loan taken earlier: Interest on loan, taken before insertion of this provision, shall
also be treated as taxable perquisite. [Circular No.15/2001dated 12/12/2001]

2.1.25 Travelling / Touring / Holiday Home expenditure on Holiday [Rule 3(7)(ii)]

Valuation of perquisite in respect of travelling, touring, holiday home or any other expenses paid for or borne or
reimbursed by the employer for any holiday availed of by the employee or any member of his household is taxable
in the hands of all employees as per the following table :

Case Taxable value of perquisite

Where such facility is maintained by employer and is Notional cost of such facility. In other words, value at
not available uniformly to all employee which such facilities are offered by other agencies to
the public.
Where the employee is on official tour and the expenses The amount of expenditure so incurred for the
are incurred in respect of any member of his household accompanying member of his household.
accompanying him
Where any official tour is extended as a vacation The value will be limited to the expenses incurred in
relation to such extended period of stay or vacation.
In any other case Amount incurred by the employer.

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Notes :
a. Any amount charged from employee shall be reduced from the above determined value.
b. The above provisions are not applicable in case of Leave Travel Concession (discussed earlier)

2.1.26 Valuation of perquisite in respect of free meals [Rule 3(7)(iii)]

The facility provided by employer is taxable in the hands of employee on the following basis :

Case Tax Treatment

Tea, snacks or other non-alcoholic beverages in
the form of light refreshment provided during
Nil
office hours (including over-time)
Free meals provided during office hours in:
¾¾ Remote area; or Nil
¾¾ An offshore installation
Free meals provided by the employer during Expenditure on free meals in excess of ₹ 50 per meal shall
office hours: be taxable perquisite to the extent of excess amount in hands
of all employees.
¾¾ At office or business premises; or
E.g. Free meal given to employee worth ₹ 70 per meal
¾¾ Through paid vouchers which are not
through non-transferable coupon for 300 times in a year.
transferable and usable only at eating joints.
Taxable perquisite in such case shall be ₹ 6,000 {being ₹
(70 – 50) x 300}.
The actual expenditure incurred by employer as reduced
by amount charged from employee for such lunch or meal
In any other case
shall be taxable in the hands of all employees. i.e. [Actual
expenditure to employer – Amount charged from employee]

2.1.27 Gift, voucher or token given by employer [Rule 3(7)(iv)]

The value of any gift, voucher, or token (in lieu of which any gift may be received) given to the employee (or
any member of his household) on ceremonial occasion or otherwise by the employer shall be taxable in the hands
of all employees. However, gift, voucher or token upto ₹ 5,000, in aggregate, during the previous year, shall be
exempted.
Notes :
a. Where worth of gift is in excess of ₹ 5,000 then entire amount shall be taxable.
b. No such exemption (₹ 5,000) is available on gift made in cash or convertible into money.
Illustration 27 :
Determine taxable perquisite in the following cases :
1. Miss Shradha received a wrist-watch of ₹ 3,000 on 17/7/2023 and a golden chain worth ₹ 12,000 on 18/8/2023
from her employer, Mr. Raju.
2. Miss Rakhi received ₹ 11,000 cash–gift from her employer, Dipu Ltd.
3. Mr. Anirudha is working with X & Co. a partnership firm. During the year, the employer firm gifted a diamond
ring worth ₹ 80,000 to wife of Mr. Anirudha.

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Solution :
1. Taxable perquisite in the hands of Shradha shall be ₹ 15,000 (being ₹ 3,000 + ₹ 12,000)
2. Taxable perquisite in the hands of Rakhi shall be ₹ 11,000.
3. Taxable perquisite in the hands of Mr. Anirudha shall be ₹ 80,000.

2.1.28 Credit Card [Rule 3(7)(v)]

Expenditure incurred by an employer in respect of credit card facility to employee shall be treated as under :

Case Tax Treatment

Where such credit card is used wholly and exclusively Nil
for office purpose and specified conditions# are satisfied.

Where expenses (including membership and annual If directly paid by the employer
fees) are incurred by the employee or any member
Any amount incurred by the employer as reduced by
of his household, which is charged to a credit card
amount charged from the employee shall be taxable in
(including any add-on card) provided by the employer
the hands of all employees
or otherwise, are paid or reimbursed by the employer.
If amount reimbursed by the employer
Any amount reimbursed by the employer shall be
taxable in the hands of all employees.
#
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for office
purpose :
a. Complete details in respect of such expenditure are maintained by the employer which may, inter-alia, include
the date of expenditure and the nature of expenditure; and
b. The employer gives a certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duty.

2.1.29 Club Expenditure [Rule 3(7)(vi)]

Expenditure incurred by employer in respect of club facility to employee shall be treated as under :

Case Tax Treatment

Where such expenses are incurred wholly and
exclusively for office purpose and specified conditions#
Nil
are satisfied.

Where health club, sports and similar facilities are Nil

provided uniformly to all employees by the employer.
Where the employer has obtained corporate Amount incurred by employer for such facility shall
membership of the club and the facility is enjoyed by be taxable perquisite in the hands of all employees.
the employee or any member of his household However, initial fees paid for obtaining corporate
membership shall not be a taxable perquisite.

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Case Tax Treatment

Any payment or reimbursement by the employer of any If directly paid by the employer
expenditure incurred (including the amount of annual
Any amount incurred by the employer as reduced by
or periodical fee) in a club by employee or any member
amount charged from the employee shall be taxable in
of his household
the hands of all employees.
If amount reimbursed by the employer
Any amount reimbursed by the employer shall be
taxable in the hands of all employees.
#
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for office
purpose :
a. Complete details in respect of such expenditure is maintained by the employer which may, inter alia, include
the date of expenditure, the nature of expenditure and its business expediency; and
b. The employer gives a certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duty;

2.1.30 Valuation of perquisite in respect of use of movable assets [Rule 3(7)(vii)]

If employee (or any member of his household) uses any movable asset (other than the assets for which provisions
have been made) belonging to employer, then such facility is taxable in the hands of all employees. The value of
such benefit is determined as per the following table :

If the asset is owned by the employer 10% of the original cost of such asset.
If the asset is hired by the employer Charges paid or payable by the employer
Notes :
a. Any sum charged from the employee shall be reduced from the value determined as above.
b. Use of computer, laptop, etc. (as discussed earlier) is exempted perquisite.
c. Here movable asset does not include car.

2.1.31 Valuation of the perquisite in respect of movable assets sold by an employer [Rule
3(7)(viii)]
If the sale price is less than
the written down value
(calculated as per method and
rate mentioned below) then the
difference would be treated as
perquisite and taxable in the
hands of all employees.
Rates and methods of
depreciation for different types
of assets are as follow :

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Types of asset Rate of depreciation Method of depreciation

Electronic items#/Computer 50% Reducing balance
Motor car 20% Reducing balance
Any other 10% Straight line
#
Electronic items here means data storage and handling devices like computer, digital diaries and printers. They do
not include household appliances like washing machines, microwave ovens, mixers, etc.
Mathematically, taxable perquisite is as under :

Original cost to the employer *****

Less : Accumulated depreciation for each completed year during which such asset is used by the ****
employer
Written down value ****
Less : Amount charged from employee ****
Value of Perquisite (if positive) *****
Taxpoint : No depreciation shall be charged for a part of the year.

Illustration 28:
X Ltd. has sold the following assets to its employee, Mr. Amit. Compute taxable perquisite.

Assets Date of purchase Purchase value Date of sale Sale price

Computer 1/7/2020 2,00,000 18/8/2023 20,000
Car 1/4/2021 3,00,000 1/3/2024 50,000
Television 1/4/2018 50,000 1/4/2023 2,000
Sofa set 1/4/2008 80,000 1/7/2023 5,000
Solution :
Computation of taxable value of perquisite in hands of Mr. Amit for the A.Y.2024-25 :

Assets Written down value Sale value Taxable perquisite

Computer 25,0001 20,000 5,000
Car 1,92,0002 50,000 1,42,000
Television 25,0003 2,000 23,000
Sofa set Nil4 5,000 Nil
Taxable Perquisite 1,70,000
1. Calculation of WDV of Computer :
Particulars Amount
Purchase value 2,00,000
Less : Depreciation from 1/7/2020 to 30/6/2021 @ 50% 1,00,000
WDV as on 1/7/2021 1,00,000
Less : Depreciation from 1/7/2021 to 30/6/2022 @ 50% 50,000
WDV as on 1/7/2022 50,000

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Particulars Amount
Less : Depreciation from 1/7/2022 to 30/6/2023 @ 50% 25,000
WDV as on 1/7/2023 25,000
Less : Depreciation from 1/7/2023 to 18/8/2023 (as not being a complete year) Nil
WDV as on the date of sale 25,000
2. Calculation of WDV of Car :
Particulars Amount
Purchase value 3,00,000
Less : Depreciation from 1/4/2021 to 31/3/2022 @ 20% 60,000
WDV as on 1/4/2022 2,40,000
Less : Depreciation from 1/4/2022 to 31/3/2023 @ 20% 48,000
WDV as on 1/4/2023 1,92,000
Less : Depreciation from 1/4/2023 to 1/3/2024 (as not being a complete year) Nil
WDV as on date of sale 1,92,000
3. Calculation of WDV of television :
Particulars Amount
Purchase value 50,000
Less : Depreciation from 1/4/2018 to 31/3/2023 @ 10% 25,000
WDV as on the date of sale 25,000
4. Depreciation on sofa set is charged @ 10% as per straight-line method. Since the asset is used for more than
10 years, hence its WDV will be Nil.

Test Yourself
1. Mr. Lucky has been provided furniture for household use on 1/7/2023, original cost to employer being
₹ 5,00,000 on 17/8/2019. On 1/2/2024, such furniture being sold to the assessee for ₹ 60,000. Find taxable
perquisite for the previous year 2023-24.
Hints
1. ₹ 2,69,167;

2.1.32 Medical Facility [Proviso to Sec. 17(2)]Amended

Medical facility is taxable as under :
a. Medical facility provided in India

Case Treatment
1. Medical facility provided to the employee or his family in a hospital, clinic, dispensary or Fully Exempted
nursing home maintained by the employer.
2. Reimbursement of medical bill of the employee or his family of -
¾¾ Any hospital maintained by Government or Local Authority; or Fully Exempted
¾¾ Any hospital approved by the Government for its employee.

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Case Treatment
3. Payment/reimbursement by employer of medical expenses incurred by an employee
on himself/his family in a hospital, which is approved by the CCIT, for the prescribed
diseases (like Cancer, TB, AIDS, etc.)
Employee must attach with the return of income -
Fully Exempted
¾¾ a certificate from the approved hospital specifying the prescribed disease or ailment
for which hospitalisation was required; and
¾¾ a receipt for the amount paid to the hospital.
4. Group medical insurance (i.e. Mediclaim) obtained by the employer for his employees. Fully Exempted
5. Any reimbursement by employer of any insurance premium paid by the employee, for Fully Exempted
insurance of his health or the health of any member of his family.
6. Reimbursement of medical bill of the employee or his family in respect of any illness Fully Exempted
relating to Covid 19 subject to certain restrictions
b. Medical facility provided outside India

Case Treatment
Medical Expenditure Exempted to the extent permitted by RBI.
Cost of stay abroad (Patient + One Exempted to the extent permitted by RBI.
Attendant/Care taker)
Cost of travel (Patient + One Exempted only when gross total Income of the employee excluding this
Attendant/Care taker) (cost of travel) perquisite, does not exceed ₹ 2,00,000 p.a.
Taxpoint : In calculation of gross total income ceiling, taxable value of
medical treatment perquisite and cost of stay perquisite shall be included.
Notes :
a. Hospital includes a dispensary, a clinic or a nursing home.
b. For this purpose ‘family’ means :
¾¾ Spouse, children of the individual; and
¾¾ Parents, brothers, sisters of the individual, wholly or mainly dependent on him.
c. Fixed Medical Allowance is fully taxable.
d. The expenditure on medical treatment by the employer may be by way of payment or reimbursement.
e. The perquisite is taxable in the hands of specified employee, however if the bills are issued in the name of
employee and reimbursed by the employer, then it shall be taxable in the hands of all employees.

Illustration 29:
Find taxable amount of perquisite in the following cases :
1. Y has been allowed a fixed medical allowance of ₹ 2,000 p.m.
2. Apart from reimbursement of petty medical bill of ₹ 25,000, Z and his family get medical treatment in a
dispensary maintained by the employer. Value of facility provided to Z and his family members during the
previous year are as follows :

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Particulars Amount
a. Z 2,000
b. Mrs. Z 5,000
c. Major son of Z (independent) 8,000
d. Minor daughter of Z 25,000
e. Dependent younger brother of Z 8,000
f. Independent younger sister of Z 10,000
g. Dependent sister-in-law 5,000
Solution :
1. Medical allowance is fully taxable, hence the taxable amount is ₹ 24,000
2. Taxable perquisite in hands of Mr. Z is as under :
Particulars Amount
a. Z Nil
b. Mrs. Z Nil
c. Major son of Z (independent) Nil
d. Minor daughter of Z Nil
e. Dependent younger brother of Z Nil
f. Independent younger sister of Z 10,000
g. Dependent sister-in-law 5,000
h. Reimbursement of medical bill 25,000
Taxable Perquisite 40,000
Illustration 30:
Himalaya Ltd. reimburses the following expenditure on medical treatment of the son of an employee Karan. The
treatment was done at UK :
1. Travelling expenses ₹ 1,15,000.
2. Stay expenses at UK permitted by RBI ₹ 45,000 (Actual expenses ₹ 70,000).
3. Medical expenses permitted by RBI ₹ 50,000 (Actual expenses ₹ 70,000).
Compute the taxable perquisites for the assessment year 2024-25 in the hands of Karan, if his annual income from
salary before considering medical facility perquisite was (i) ₹ 1,50,000; (ii) ₹ 2,00,000.
Solution :
Taxable value of perquisite in hands of Mr. Karan is as under :
Particulars Workings Details Case 1 Case 2
Medical expenditure Amount paid in excess of RBI permission
and actual expenditure shall not qualify
₹ 70,000 – ₹ 50,000 ₹ 20,000 ₹ 20,000
for exemption.
Stay cost Stay cost in excess of RBI permission
and actual expenditure shall not qualify
₹ 70,000 – ₹ 45,000 ₹ 25,000 ₹ 25,000
for exemption.
Travel cost Travel cost (Note) Nil ₹ 1,15,000
Total taxable perquisite ₹ 45,000 ₹ 1,60,000

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Note : Travel cost shall be eligible for exemption only if gross total income of the assessee does not exceed
₹ 2,00,000, which can be evaluated as under :

Particulars Case 1 Case 2

Salaries
Annual income from salary other than foreign medical perquisites 1,50,000 2,00,000
Add : Medical facility
Medical expenditure perquisite 20,000 20,000
Stay cost perquisite 25,000 25,000
Gross Total Income for the purpose of foreign travel medical facility 1,95,000 2,45,000

2.1.33 Leave Travel Concession [Sec. 10(5)]

If an employee goes on travel (on leave) with his family and traveling cost is reimbursed by the employer, then
such reimbursement is fully exempted.
Notes :
1. Journey may be performed during service or after retirement.
2. Employer may be present or former.
3. Journey must be performed to any place within India.
4 In case, journey was performed to various places together, then exemption is limited to the extent of cost of
journey from the place of origin to the farthest point reached, by the shortest route. E.g., if you want to go Goa
from Kolkata, you cannot go Manali first and then Goa.
5. Employee may or may not be a citizen of India.
6. Stay cost is not exempt.
Exemption : Exemption is limited to the amount actually incurred on the travel to the extent as under:

Journey performed Maximum exempted fare

By Air Air economic class fare of shortest route
By Rail Air conditioned 1st class fare of shortest route
When the place of origin and destination is connected
by rail but journey is performed by any other mode of
Same as above
transport
When the place of origin and destination is not connected by rail:
Where a recognised public transport system exists First class or deluxe class fare, as the case may be, on
such transport.
Amount equivalent to air-conditioned 1st class rail
fare, for the distance of the journey by the shortest
Where no recognised public transport system exists
route, as if journey had been performed by rail.

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Notes :

a. No exemption can be claimed

without performing journey and
incurring expenses thereon.
b. Block-period: Exemption is
available in respect of 2 journeys
performed in a block of 4 calendar
years commencing from 1st January
1986.
Academically, for the A.Y. 2024-
25, the relevant block is Jan 2022 to
Dec. 2025.

c. Carry-forward facility: Where concession is not availed during the preceding block (whether on one occasion
or both), then any one journey performed in the first calendar year of the immediately succeeding block will be
additionally exempted (i.e. not counted in two journey limit)
d. Family: Family here means -
¾¾ Spouse and children of the individual; and
¾¾ Parents, brothers and sisters of the individual, who are wholly or mainly dependent on him.
e. Restriction on number of children: Exemption can be claimed for any number of children born on or before
30/9/1998. In addition, exemption is available only for 2 surviving children born on or after 1/10/1998.
However, children born out of multiple birth, after the first child, will be treated as one child only.
f. Fixed Leave travel allowance: Fixed amount paid to employees by way of leave travel allowance shall not
be exempt.
g. The exemption u/s 10(5) is for travel cost and does not include stay cost or other cost.

2.1.34 Other Perquisites

The value of any other facilities, benefits, amenities, services, rights or privileges (which is not discussed earlier)
provided by the employer shall be determined on the basis of cost to the employer under an arms length transaction,
as reduced by the employee’s contribution, if any.
Taxability of perquisites at a glance

Whether it is taxable
in the hands of
Rule / Section Perquisites Specified Non-specified
employee employee
Rent-free residential accommodation
- Unfurnished
Rule 3(1) - Furnished Yes
- Concessional
- Hotel accommodation

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Whether it is taxable
in the hands of
Rule / Section Perquisites Specified Non-specified
employee employee
Motor car
- If car is owned by employer Yes No
Rule 3(2)
- If car is owned by employee Yes Yes
Free domestic servant
- Appointed by employer Yes No
Rule 3(3)
- Appointed by employee Yes Yes
Gas, electricity or water facility
- If facility is in the name of employer Yes No
Rule 3(4)
- If facility is in the name of employee Yes Yes
Free education
- In case of reimbursement Yes Yes
Rule 3(5)
- In any other case Yes No
Free transport
- If employer is engaged in transport business Yes No
Rule 3(6)
- In any other case Yes Yes
Rule 3(7) Other fringe benefits or amenities
- (i) - Interest free loan or concessional rate of interest
- (ii) -Traveling / Touring / Holiday Home expenditure
- (iii) - Meals / Refreshments
- (iv) - Gift, voucher or token Yes
- (v) - Credit card
- (vi) - Club membership
- (vii) - Use of movable assets
- (viii) - Movable assets sold by employer to its employee
Fair market value of the specified security or sweat
Rule 3(8) & (9) Yes
equity shares allotted to the employee
Sec. 10(5) Leave travel concession No No
Income tax paid by employer on -
Sec.10(10CC) - Non-monetary perquisite No No
- In any other case Yes Yes
Medical facility
Proviso to
- In case of reimbursement Yes Yes
Sec. 17(2)
- In any other case Yes No
Any obligation of employee paid by employer (unless
Sec. 17(2)(iv) Yes Yes
otherwise specifically exempted)

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Whether it is taxable
in the hands of
Rule / Section Perquisites Specified Non-specified
employee employee
Allotment/transfer of specified securities or sweat
Sec.17(2)(vi) Yes Yes
equity shares
Sec.17(2)(vii) Contribution to superannuation fund Yes Yes

2.1.35 Provident Fund

Provident fund scheme is a saving device in the hands of salaried class. It is a retirement benefit scheme. Under
this scheme, a stipulated sum is regularly deducted from the salary of the employee as his contribution towards
the fund. The employer also, generally, contributes a similar amount out of his pocket to the fund. The employer’s
and employee’s contribution are together invested in such fund. Interest earned thereon is also credited to the fund
of the employee. Thus, provident fund scheme is a great media to initiate and mobilise small savings to a large
scale. On termination of service or retirement, employee receives the whole accumulated fund, subject to certain
conditions. Hence, provident fund has four components i.e. Employer’s contribution; Employee’s contribution;
Interest on employer’s contribution; and Interest on employee’s contribution
Provident fund is of four types, viz :
a. Statutory Provident Fund (SPF): Statutory provident fund is set up under the provisions of the Provident
Funds Act, 1925. Government and Semi-Government organisations, local authorities, railways, Universities
and recognised educational institutions maintain Statutory Provident Fund.
b. Recognised Provident Fund (RPF): The provident fund scheme is framed under the Employee’s Provident
Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred as PF Act). The PF Act covers any
establishment employing 20 or more persons. However, any establishment employing less than 20 persons
can also join the scheme provided employer and employee both agree to do so. Further, if an employer creates
his own scheme for provident fund then he can do so subject to recognition from the Commissioner of Income
tax.
c, Unrecognised Provident Fund (URPF): If a provident fund scheme is created by an employer, which is not
recognised by the Commissioner of Income tax, then such fund is known as Unrecognised provident fund.
d. Public Provident Fund (PPF): The Central Government has established a fund for the benefit of public to
mobilise personal savings. Any member of the public, whether salaried or self-employed, can contribute to
the fund by opening a provident fund account at any branch of the State Bank of India or its subsidiaries or
other specified bank. Even a salaried employee can simultaneously become a member of employee’s provident
fund (whether statutory, recognised or unrecognized) and public provident fund. Any amount in multiple of
₹5 (subject to minimum of ₹ 500 and maximum of ₹ 1,50,000 p.a.) may be deposited in this account. Interest
is credited every year but payable only at the time of maturity. Interest earned on this fund is exempt from tax
u/s 10(11).
Tax Treatment :

Particulars SPF RPF URPF PPF

Exempted up to 12% of Salary
Employer’s (here, salary means Basic + DA# + Not
Not taxable Not taxable
Contribution Commission as a fixed percentage Applicable
on turnover

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Particulars SPF RPF URPF PPF

Not eligible Eligible for
Employee’s Eligible for
Eligible for deduction u/s 80C for deduction deduction
Contribution deduction u/s 80C
u/s 80C u/s 80C
Exempted @ 9.5% p.a. (Interest
Interest Not Taxable rate), any excess interest will be Not Taxable Not Taxable
taxable as salary.
Exempted u/s Exempted u/s 10(12)
Lump Sum 10(11). However,
(Subject to Note 2)
withdrawal in few cases, it is
taxable* However, in few cases, it is taxable* Note 1 Not taxable
#
D.A., forming part of retirement benefit, only to be considered.
Notes :
1. Lump sum amount withdrawn from URPF

Particulars Tax treatment

Accumulated employer’s contribution Fully taxable under the head Salaries
Accumulated employee’s contribution Not taxable
Accumulated interest on employer’s contribution Fully taxable under the head Salaries
Accumulated interest on employee’s contribution Fully taxable as income from other sources
2. Lump sum amount withdrawn from RPF
a. Amount withdrawn from RPF is not taxable, if
i. Employee retires or terminates job after 5 years of continuous service; or
ii. Employee has resigned before completion of 5 years and joins another organization (who also
maintains recognized provident fund and his fund balance with current employer is transferred to the
new employer).
iii. The entire balance standing to the credit of the employee is transferred to his account under New
Pension Scheme as referred u/s 80CC
iv. Employee retires or terminates job before 5 years of continuous service -
●● by reason of ill health; or
●● by reason of contraction or discontinuance of employer’s business; or
●● any other reason beyond the control of employee.
Taxpoint : Though aforesaid conditions are satisfied, in few cases, it is taxable [Refer sec. 10(12)]

b. In any other case, amount withdrawn shall be taxable as in the case of URPF. [Refer Note 1].
Points to be remembered
1. 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.

* W.e.f. A.Y. 2022-23, section 10(11)/(12) has been amended to provide that exemption shall not be available to the interest income accrued during the
previous year in the provident fund account of the employee to the extent it relates to the amount of the contribution made by such person exceeding
₹ 2,50,000 [₹ 5,00,000, if contribution by such person is in a fund in which there is no contribution by the employer of such person] in a previous
year in that fund.

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2. The amount or the aggregate of amounts of any contribution made to the account of the assessee by the
employer:
(a) in a Recognised Provident Fund (RPF);
(b) in the scheme referred to in sec. 80CCD(1) [i.e., NPS]; and
(c) in an approved superannuation fund,
- in excess of ₹ 7,50,000 in a previous year shall be taxable
Taxpoint : There is combined upper limit of ₹ 7,50,000 in respect of employer’s contribution in a year to NPS,
superannuation fund and recognised provident fund and any excess contribution is taxable.
3. The annual accretion (like interest, dividend, etc.) during the previous year to the balance at the credit of the
aforesaid fund or scheme to the extent it relates to the contribution referred above shall be taxable
Taxpoint : Such accretion shall be included in the total income and shall be computed in such manner as may
be prescribed.
4. Central government contribution to Agniveer Corpus Fund is fully taxable. However, deduction is available
u/s 80CCH.

Illustration 31 :
Mr. X has the following salary structure –

Basic pay ₹ 10,000 p.m. Commission (fixed) ₹ 2,000

DA ₹ 1,000 p.m. Entertainment allowance ₹ 2,000 p.m.
X contributes ₹ 20,000 to provident fund. Employer also makes a matching contribution. Compute gross salary of
if –
a. Mr. X is a Government employee and such provident fund is a statutory provident fund.
b. Mr. X is an employee of Y Ltd. and such fund is a recognized fund.
c. Mr. X is an employee of Z Ltd. and such fund is an unrecognized fund.
Solution :
Computation of taxable salary of Mr. X for the A.Y. 2024-25 :

Case A Case B Case A

Particulars
Details Amount Details Amount Details Amount
Basic 1,20,000 1,20,000 1,20,000
Commission 2,000 2,000 2,000
Allowances
Dearness allowance 12,000 12,000 12,000
Entertainment allowance 24,000 36,000 24,000 36,000 24,000 36,000
Employer’s contribution to PF 20,000 20,000 20,000
Less : Exempted 20,0001
Nil 15,840 2
4,160 20,0001 Nil
Gross Salary 1,58,000 1,62,160 1,58,000

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Notes :
1. Contribution to statutory and unrecognised provident fund is fully exempted.
2. Contribution to recognised provident fund is exempt upto 12% of salary. Salary for such purpose –

Particulars Amount
Basic 1,20,000
Commission (as fixed) Nil
Dearness allowance 12,000
Total 1,32,000

Test Yourself
1. Miss Sanchita has the following salary structure, compute her gross salary for the A.Y.2024-25 :
a. Basic 5,000 p.m.
b. D.A. 2,500 p.m. (60% forms a part of retirement benefit)
c. Commission on turnover 20,000 during the year
d. Medical allowance 1,000 p.m.
e. She contributes 14% of her salary to RPF. Her employer contributes a similar amount.
f. Interest credited to this fund during the year is ₹ 3,000 @ 12% p.a.
Hints
1. ₹ 1,24,585;

Transferred Balance (Conversion of URPF to RPF) [Rule 11(4) of Part A of the Fourth schedule]
An organisation maintaining URPF, may later get recognition from Commissioner of Income tax. In such case, the
accumulated balance under URPF shall be converted to RPF. Tax treatment of such transferred balance will be as
under :
Calculation is made of all sums comprised in the transferred balance that would have been liable to income tax if
the recognition of the fund had been in force from the date of institution of the fund. However, in case of serious
accounting difficulty, the Commissioner may make a summary calculation of such aggregate.
Such aggregate sum is deemed to be the income received by the employee in the previous year in which the
recognition of the fund takes effect.
Note : On taxability of such conversion, assessee cannot claim relief u/s 89(1).

Illustration 32 :
Mr. Sharma has been appointed as an accountant of ABC Ltd as on 1/4/2021, since then he is working with the
same company. The salary structure and increment details are as under:
Basic ₹ 5000 - 1000 - 8000 -1500 - 14000
D.A. ₹ 3000 – 500 – 5000 – 1000 - 10000
He and his employer contribute to URPF 14% of basic and DA.
Every year 9% interest is credited to such fund. As on 1/4/2023, the fund gets recognition. Hence, the accumulated
balance in URPF was transferred to RPF. Comment on tax treatment of such transferred balance.

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Solution :
Statement showing treatment of transferred balance :

Year Employer’s contribution to fund Exempted amount considering the Difference

fund as RPF
2021-2022 14% of (60,000 + 36,000) i.e. ₹ 13,440 12% of ₹ 96,000 i.e. ₹ 11,520 ₹ 1,920
2022-2023 14% of (72,000 + 42,000) i.e. ₹ 15,960 12% of ₹ 1,14,000 i.e. ₹ 13,680 ₹ 2,280
Total ₹ 4,200
Current year (i.e. 2023-24) contribution shall be treated as RPF and taxable amount will be ₹ 2,640 [being (14
-12)% of (₹ 84,000 + ₹ 48,000) i.e. 2% of ₹ 1,32,000].
Since interest rate is less than the exempted limit (i.e. 9%), hence interest portion is not taxable.
Total taxable salary on account of provident fund for the A.Y. 2024-25 is ₹ 6,840 (being ₹ 4,200 + ₹ 2,640).

Deduction from Gross Salary [Sec. 16]

2.1.36 Standard Deduction [Sec. 16(ia)

Lower of the following shall be allowed as standard deduction to all employee :
a. ₹ 50,000
b. Amount of gross salary

2.1.37 Entertainment Allowance [Sec. 16 (ii)]

Entertainment allowance is initially included in taxable allowances as fully taxable. Thereafter, a deduction
is allowed under this section from gross taxable salary. However, deduction u/s 16(ii) shall be available to the
Government employee only.
Deduction for Entertainment allowance being minimum of the following :
a. Actual Entertainment Allowance
b. ₹ 5,000/-
c. 20% of Basic Salary.
Taxpoint :
 Deduction allowed shall be irrespective of actual expenditure incurred, whether for office or personal purpose.
 No deduction is available under this section to a Non-government employee.

Illustration 33:
Compute taxable Entertainment allowance & net salary of Sri Hanuman Prasad from the following data :
Basic salary ₹ 8,000 p.m. D.A. ₹ 2,000 p.m. Taxable perquisite ₹ 35,000, Entertainment Allowance ₹ 4,000 p.m.
Out of such allowance ₹ 20,000 is expended and balance amount is saved. Assuming he is:
a. Government employee b. Non-Government employee.

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Solution :
Computation of taxable income of Sri Hanuman Prasad for the A.Y.2024-25 :

Government Employee Non-Government

Particulars Employee
Details Amount Details Amount
Basic Salary 96,000 96,000
Dearness Allowance 24,000 24,000
Entertainment Allowance 48,000 48,000
Taxable perquisite 35,000 35,000
Gross Taxable Salary 2,03,000 2,03,000
Less : Deduction u/s
16(ia) Standard Deduction 50,000 50,000
16(ii) Entertainment allowance# 5,000 55,000 Nil 50,000
Net Taxable Salary 1,48,000 1,53,000
#
Entertainment Allowance is exempted to the extent of minimum of the following :
a. Actual Entertainment Allowance ₹ 48,000
b. 20% of Basic Salary ₹ 19,200
c. Statutory amount ₹ 5,000

2.1.38 Tax on employment or professional tax [Sec. 16(iii)]

Tax on employment, profession, trade, etc. levied by a State under Article 276 of the Constitution will be allowed
as deduction on cash basis, whether paid by employee or by employer (on behalf of employee) from gross taxable
salary.
Note : If employer (on behalf of employee) pays Professional tax then :
a. Firstly, it is to be included as taxable perquisite; and
b. Further, it is allowed as deduction u/s 16(iii).

Illustration 34 :
Mr. Rohit a non-Government employee has the following salary details :

a. Basic Salary ₹ 5,000 p.m. b. D.A. ₹ 2,000 p.m.

c. Entertainment Allowance ₹ 300 p.m. d. Professional tax paid by ₹ 600
employee
e. LIC Premium paid by employer ₹ 3,600 f. Income tax paid by employee ₹ 2,000
g. Professional tax paid by employer ₹ 1,600
on behalf of employee
Find his taxable salary.

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Solution :
Computation of taxable salary Mr. Rohit for the A.Y.2024-25 :

Particulars Details Amount

Basic Salary 60,000
Allowances
Dearness Allowance 24,000
Entertainment Allowance 3,600 27,600
Taxable perquisite
Professional tax paid by employer 1,600
LIC Premium paid by employer 3,600 5,200
Gross Taxable Salary 92,800
Less : Deduction u/s 92,800
16(ia) Standard Deduction 50,000
16(ii) Entertainment allowance (Assessee is a Non-government employee) Nil
16(iii) Professional Tax (₹ 1,600 + ₹ 600) 2,200 52,200
Taxable Salary 40,600
Notes :

A. Conversion of Net Salary into Gross Salary

Sometimes net basic salary is given after deduction of TDS, Loan repayment, PF deduction etc that needs to
be grossed up as under :

Net Salary = Gross Salary – Employee’s contribution to provident fund – TDS – loan repayment by employee
– other deduction from salary (if any).

Example 7 : Find basic salary of Mr. Singh having the following salary structure :

a. Net Basic Salary received ₹ 1,00,000

b. Deduction from salary 10% of basic salary as contribution to RPF

c. TDS ₹ 9,000

d. Repayment of earlier loan ₹ 35,000

In this case, Basic Salary shall be computed as under :

Net basic salary = Basic salary – TDS – Loan repayment – Contribution to RPF

Let the basic salary be X

1,00,000 = X – 9,000 – 35,000 – 0.1X

1,44,000 = 0.9X

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X = 1,60,000. Hence, basic salary for the year is ₹ 1,60,000.

B. Meaning of Salary for different purposes :

For Retirement benefit

Gratuity (covered by the Payment of Gratuity Act) (Basic + DA) last drawn
Gratuity (not covered by the Payment of Gratuity Act) (Basic +DA1 + Commission2) being average of last
10 months preceding the month of retirement.
Leave encashment (Basic +DA1 + Commission2) being average of last 10
months immediately from the retirement.
Voluntarily retirement (Basic +DA1 + Commission2) last drawn
For regular benefit
Rent Free Accommodation (Basic + DA1 + Commission2 + Bonus + Fees + Any
other taxable allowance + Any other monetary benefits
excluding perquisite)
Specified employee (Basic + DA + Commission2 + Bonus + Fees + Any
other taxable allowance + Any other monetary benefits
– Deduction u/s 16)
Entertainment Allowance Basic only
Any other case (Basic +DA1 + Commission2)
1.
DA only if it forms a part of retirement benefit. 2.
Commission as a fixed percentage on turnover.

Illustration 35 :
Mr. Bharat of Siliguri is offered an employment by Vimal & Co. Ltd., Kolkata on a basic salary of ₹ 5,500 p.m.
Other allowances are dearness allowance (not forming part of salary for retirement benefits) ₹ 4,000 p.m., medical
allowance ₹ 1,000 p.m. and bonus being 1 month’s basic salary. The company gives an option to him either to
take a rent-free accommodation in Kolkata of the fair rental value of ₹ 1000 p.m. or to accept a cash house rent
allowance of ₹ 1,000 p.m. He decides to accept house rent allowance and takes a house in Kolkata at a monthly
rent of ₹ 1,000.
Do you think he has made a wise choice from tax advantage view? State reasons.
Solution :
Computation of Gross Taxable Salary of Mr. Bharat for the A.Y.2024-25 :

When he takes HRA When he takes RFA

Particulars
Amount Amount Amount Amount
Basic 66,000 66,000
Bonus 5,500 5,500
Dearness allowance 48,000 48,000

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When he takes HRA When he takes RFA

Particulars
Amount Amount Amount Amount
Medical allowance 12,000 12,000
HRA 12,000
Less : Minimum of the following
a) Actual amount received 12,000
b) 50% of salary 33,000
c) Rent paid over 10% of salary 5,400 5,400 6,600 Nil
Rent free accommodation (being 15% of salary) Nil 12,525
Gross Taxable Salary 1,38,100 1,44,025
Note : Salary for the purpose :

Particulars Accommodation HRA

Basic salary 66,000 66,000
Medical Allowance 12,000 --
Bonus 5,500 --
Total 83,500 66,000
The above computation indicates that if the assessee chooses rent-free accommodation, then his gross taxable
salary increases by ₹ 5,925 (being ₹ 1,44,025 – ₹ 1,38,100), which may increase his tax bill. Hence, assessee has
taken right decision.

Illustration 36:
Following are the particulars of income of Mrs. S. Choudhury for the Previous Year 2023-24 :
a. Basic salary @ ₹ 15,000 per month.
b. Dearness Allowance @ 60% of salary.
c. Medical Allowance @ 600 per month (Actual expenditure ₹ 5,000).
d. House Rent Allowance received @ ₹ 6,000 per month and she pays rent of ₹ 7,200 per month for her house in
Durgapur.
e. City compensatory allowance ₹ 1,500 per month.
f. She owns a car which she is using for official purposes. Her employer reimburses her @ ₹ 3,000 per month.
g. She is contributing ₹ 2,100 per month towards a recognized provident fund. The employer is also contributing
the same amount. Interest credited to R.P.F @ 11% ₹ 2,200.
h. She paid ₹ 1,800 as professional tax during the year.
Compute income from salary of Mrs. Choudhury for the assessment year 2024-25.

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Solution :
Computation of Taxable Salary of Mrs. S Choudhury for the A.Y.2024-25 :

Particulars Working Details Amount Amount

Salaries
Basic 1,80,000
Allowances
Dearness allowance 60% of basic 1,08,000
Medical Allowance 7,200
City compensatory allowance 18,000
House rent allowance 72,000
Less : Exempted u/s 10(13A)
Minimum of the following :
a. Actual HRA 72,000
b. 40% of (Basic + DA) 1,15,200
c. Rent paid – 10% (Basic + DA 57,600 57,600 14,400 1,47,600
Perquisites u/s 17(2):
Car facility - -
Employer’s contribution to RPF 25,200
Less : Exempted u/s 10(12) 12% of (Basic + DA) 25,200
Interest on RPF 2,200
Less : Exempted Upto 9% 1,800 400 400
Gross taxable salary 3,27,600
Less : Deduction u/s
16(ia) Standard Deduction 50,000
16(iii) Professional tax 1,800 51,800
Taxable Salary 2,75,800

Quick MCQs:-
1. Salary received by the Partner of a Firm is charged under the head
(a) Salaries
(b) Business Income
(c) Other Sources
(d) Its exempt from tax

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2. Commission received by a Director of the Company is charged under the head.

(a) Salaries
(b) Business Income
(c) Other Sources
(d) Its exempt from tax

3. Salary is a taxable on
(a) Receipt basis
(b) due basis
(c) due to receipt basis whichever is earlier
(d) due or receipt basis whichever is later.

4. Arrears of Pension is taxable on

(a) receipt basis
(c) due basis
(d) due or receipt basis whichever is earlier
(d) due or receipt basis whichever is later

5. The Notified amount of Gratuity that is exempt

(a) ` 10,00,000
(b) ` 20,00,000
(c) ` 2,00,000
(d) ` 5,00,000

6. Uncommuted Pension received by a Government Employee is-

(a) Exempt
(b) Taxable
(c) Partially Taxable
(d) None of the above

7. Encashment of Leave Salary at the time of retirement is fully exempt in the case of-
(a) Central Government Employee
(b) State Government Employee
(c) Both Central and State Government Employees
(d) Government Employee and Employee of Local Authority.

8. Interest credited to Statutory Provident Fund shall be-

(a) Fully Exempt
(b) Exempt upto 12% p.a.
(c) Fully Taxable
(d) Exempt upto 9.5% p.a

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9. Interest credited to Recognized Provident Fund is –

(a) Fully Taxable
(b) Fully Exempt
(c) Exempt upto 12% of Salary
(d) Exempt upto 9.5% p.a.

10. For an employee in receipt of Hostel Expenditure Allowance for his 3 children, the maximum annual
allowance exempt u/s 10(14) is –
(a) D 10, 8000
(b) D 7,200
(c) D 9, 600
(d) D 3, 600

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Income from House Property 2.2

A
s per sec. 22, the annual value of property consisting of any building or land appurtenant thereto of
which assessee is the owner, other than such portion of such property as he may occupy for the purposes
of any business or profession carried on by him shall be chargeable to income tax under the head
“Income from house property.”

It is an exceptional feature of this head that rather than actual income from house property, earning
capacity of house property is taxable. As stated u/s 22 that “annual value” of the property is taxable rather
than actual income of the property. (Annual value being discussed in later part of this chapter)

2.2.1 Chargeability [Sec. 22]

Annual value of the property shall be taxable under the head “Income from house property” subject to the
following :

Condition 1 : Building or land appurtenant thereto

The term ‘house property’ is not defined in Income tax Act. However, various judicial interpretation has construed
the term house property as -
 any land surrounded by wall having roof or not; and
 any land appurtenant to a building.
Notes :
a. Building includes an enclosure of bricks, stone work or even mud walls
b. Building includes residential as well as commercial houses.
c. Vacant land is not a house property. Hence, income from letting of vacant land is not taxable under this head
but taxed as business income or as income from other sources.
d. Roof is not necessary for a non-residential house property. A large stadium or a open air swimming pool is also
considered as building

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e. It should be a permanent structure meant for a useful purpose.

f. If a building consists of several flats, then each flat is considered as a separate house property.
g. An incomplete, a ruined or demolished house cannot be termed as house property.
h. Land appurtenant to a building includes car parking area, approach roads, backyards, courtyards, etc. attached
to such building.
Condition 2 : Owner
Annual value of a property is assessed to tax only in the hands of the owner even if he is not in receipt of any
income. Any person other than the owner, even though he is in receipt of rent shall not be liable to tax under this
head. That is why, income from sub-letting is not taxable under this head but under the head ‘Income from other
sources’. E.g. Mr. X being a tenant of a house property acquired it at a monthly rent of ₹ 10,000 from Mr. Y (owner
of such house property). Mr. X sublets the property to Mr. Z for a monthly rent of ₹ 12,000. Income from subletting
being ₹ 2,000 p.m. is taxable as business income or as income from other sources.
Owner includes legal owner, beneficial owner and deemed owner.
Legal owner : Legal owner means a person who has the legal title of the property as per the Transfer of Property
Act, Registration Act, etc.
Beneficial owner : For income tax purpose it is not necessary that the property must be registered in the name of
the assessee. If the assessee is enjoying the property as an owner to full extent he will be treated as a beneficial
owner of such property and will be charged under the head ‘Income from house property’.

Fictional owner or Deemed owner [Sec. 27]

U/s 27, in the following cases, a person shall be treated as deemed owner of the property and liable to tax (in such
case legal owner or beneficial owner shall not be further liable to tax)

1. Transfer to spouse or minor child [Sec.

27(i)] : When an individual transfer a house
property to -
¾¾ his or her spouse (not being a transfer
in connection with an agreement to live
apart); or
¾¾ a minor child (not being a married
daughter)
- without adequate consideration, then
transferor shall be treated as deemed
owner of such property.
E.g. : Mr. X transfers his house property worth ₹ 5,00,000 to Mrs. X out of love and affection. In such case,
though Mrs. X is the legal owner but Mr. X will be liable to tax as deemed owner of such property.
Note : In case of transfer to spouse, marriage should subsist on both the days i.e., on the day of transfer as well
as on the day when income arises.
Taxpoint :
¾¾ Transferee must be spouse or minor child other than married daughter.
¾¾ Transfer must be without adequate consideration.
¾¾ Transferred property must be a house property. E.g. Mr. X transfers cash of ₹ 5,00,000 to Mrs. X and

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Mrs. X purchases a house property from such cash, then such transfer of cash and subsequent purchase of
property shall not attract provision of sec. 27(i). However, the income from such property shall be clubbed
in the hands of Mr. X as per the provision of sec. 64(1)(iv) [For detail refer chapter Clubbing of Income].
2. The holder of an impartible estate [Sec. 27(ii)] : The holder of an impartible estate (property which is not
legally divisible) is treated as deemed owner of house property. Impartible estate is an estate to which the
assessee has succeeded by grant or covenant.
3. Property held by a member of a company, society or any other association [Sec. 27(iii)] : Property held
by a member of a company, co-operative society or other association of persons to whom a building or a part
thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed
owner of that building or a part thereof.
Taxpoint :
¾¾ Assessee is the member of a company, co-operative society or other AOP.
¾¾ He has been allotted or leased a building on account of such membership.
¾¾ Though he is not the legal owner of such property, still he will be liable to tax.
4. A person who acquired a property u/s 53A of the Transfer of Property Act [Sec. 27(iiia)] : A person who
is allowed to take or retain possession of any building (or part thereof) in part performance of a contract u/s
53A of the Transfer of Property Act, 1882, is deemed as the owner of that building (or part thereof).
Taxpoint :
¾¾ Assessee has taken the possession of the property.
¾¾ He has partly performed or promised to perform the contract i.e., he has paid (or is ready to pay) a part of
the consideration.
¾¾ The contract must be in writing. Though sale-deed might not be executed in favour of the buyer, still
certain other document like ‘power of attorney’ or ‘agreement to sell’ has been executed.
5. Lessee of a building u/s 269UA(f) [Sec. 27(iiib)] : A person who acquires any right u/s 269UA(f) in or with
respect to any building or part thereof, by way of lease agreement for a period not less than 12 years is deemed
as the owner of that building (or part thereof).
Notes :
a. Lease period should not be less than 12 years [as per sec. 269UA(f)] including extension period.
b. Above provision does not include any right by way of lease from month to month or for a period not
exceeding 1 year.
E.g. : X lets out a property to Miss Y on a lease of 9 years. However, Miss Y has a right to renew the lease
for further period of 3 years. In such case, Miss Y shall be deemed as an owner of the property u/s 27.
However, if such right of renewal of lease (for 3 years) is subject to condition that at each occasion it will
be renewed for a period of 11 months, then X will be owner of the property and liable to tax u/s 22.

Condition 3: Property is not used for business or profession carried on by the assessee
When a person carries on business or profession in his own house property, annual value thereof is not taxable u/s
22 provided income of such business is chargeable to tax.
Incidences thereof
 Letting out to employees: If an assessee lets out the property to his employee, where such letting out supports
smooth flow of his business, then such letting out shall be deemed to be incidental to business and such rent

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shall be chargeable under the head “Profits & gains of business or profession”.
 Letting out to Government Agencies: Where an assessee let out his property to any Government agency
for locating branch of a nationalized bank, police station, post office, excise office, railway staff quarters,
etc. for the purpose of running the business of assessee more efficiently, such letting out shall be deemed to
be incidental to business and such rent shall be chargeable under the head “Profits & gains of business or
profession”.
 Letting out to ancillary units: Where an assessee lets out its property to ancillary units, which manufactures
components required by the assessee. Income from such letting out shall be taxable under the head “Profits &
gains of business or profession”.
Letting out property for promotion of own business –vs.- Business of letting out the property :

2.2.2 Some special cases

Foreign property
If house property is situated abroad, then annual value of such property shall be taxable as :

Assessee Condition for taxability

Ordinarily resident Always taxable
Not ordinarily resident or Non resident Income must be received in India
Note : The annual value of such property would be computed as if the property is situated in India.
Disputed ownership
Merely, due to dispute regarding the title of property, assessment cannot be postponed. In such case, person who is
in receipt of income or who enjoys the possession of the property is assessable to tax.
Composite rent
Together with rent of the building, if the owner gets charges for other services or rent of other assets provided in
the building (e.g. furniture, machinery, etc.), amount so received is termed as ‘composite rent’.
Composite Rent = Rent for building + Rent for assets / Charges for various services
Tax treatment of composite rent is as follows :

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 Rent including charges for amenities or services like garden facility, food, lighting, etc. or other separable
assets (like machinery, plant, furniture): If the owner of house property gets composite rent for both property
as well as for services rendered or other separable asset, such composite rent shall be treated as under :

Particulars Taxable under the head

Sum received for the use of building. ‘Income from house property’.
Sum received for other amenities or other separable ‘Profits & gains of business or profession’; or
assets.
‘Income from other sources’
However, if segregation of composite rent is not possible, then the whole amount will be taxed either under the
head ‘Profits & gains of business or profession’ or ‘Income from other sources’.
Taxpoint : Rent from paying guest is, generally, taxable under the head ‘Income from other sources’.
 Letting of building with other inseparable assets (like machinery, plant, furniture): If letting of only building
is not possible or not acceptable to the other party, then sum received as rent from the properties is chargeable
as business income or income from other sources even if the composite rent is segregable. E.g., letting out of
hotel rooms, auditoriums, etc.

Co-ownership [Sec. 26]

If two or more persons own a house property jointly, then they are known as co-owners. If individual share of each
co-owner is definite and ascertainable then the share of each such person shall be taxable as his income from house
property.
Tax treatment :
1. Share of each co-owner in the income from the property as computed in accordance with sec. 22 to 25 shall be
included in his total income.
2. Where the house property is owned by co-owners and is occupied by each of the co-owner then all of them can
claim benefit u/s 23(2)(a) and interest on loan shall be allowed to all the co-owners to the extent of ₹ 30,000 /
₹ 2,00,000 as the case may be.
Note : Provision of Sec. 26 is mandatory and not optional.
Partner’s property used by the firm
The business carried on by the firm should be regarded as carried on by all the partners. Thus, annual letting value
of a property belonging to the assessee which is in occupation of the firm in which assessee is the partner, is not
includible in income of the assessee-partner u/s 22
Property held as stock-in-trade [Sec. 23(5)]
Where house property is held as stock-in-trade & not let out during any part of the previous year, then annual value
of such property shall be computed as under :

Period Annual Value

Up to 2 year from the end of the financial year in which Annual value of such property shall be taken to be nil.
the certificate of completion of construction of the
property is obtained from the competent authority
After the completion of aforesaid period Annual value of such property shall be computed as per
other provisions. (Discussed later)

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Doctrine of mutuality
Sec. 22 levies tax on annual value of house-property and not on actual income from house property. In case of a
club, which provides recreational facilities exclusively to its member and their guest and not to any non-members,
it is considered as a non-profit seeking person and run on no-profit no-loss basis. Such club is running on the
principle of mutuality and its members are not entitled to any share of profit. In the case of such a mutual concern,
not only the surplus of the organisation but also the annual value of the club house shall be exempted from tax.

2.2.3 Exempted properties

Income from the following house properties are exempted from tax :
1. Any one palace or part thereof of an ex-ruler, provided the same is not let out [Sec. 10(19A)].
Taxpoint : If the ex-ruler has a house property and the part of which is self-occupied and remaining let out
then only the self occupied part of the house property shall be exempted.
2. House property of a local authority [Sec. 10(20)].
3. House property of an approved scientific research association [Sec. 10(21)].
4. House property of an educational institution [Sec. 10(23C)].
5. House property of a hospital [Sec. 10(23C)].
6. House property of a person being resident of Ladakh [Sec. 10(26A)]
7. House property of a political party [Sec. 13A]
8. House property of a trade union [Sec. 10(24)]
9. A farm house [Sec. 10(1)]
10. House property held for charitable purpose [Sec. 11]
11. House property used for own business or profession [Sec. 22].

2.2.4 Computation of Income

The chapter is divided into the following categories for the purpose of computation:

¾¾ Let out property [Sec. 23(1)]

¾¾ Self-occupied property [Sec. 23(2)(a)].
¾¾ Deemed to be let out property [Sec. 23(4)].
¾¾ Property not actually occupied by the owner [Sec. 23(2)(b)]
¾¾ Partly let out and partly self occupied property [Sec. 23(3)]
¾¾ Recovery of arrears of rent and unrealized rent [Sec. 25A]

2.2.5 Let out property [Sec. 23(1)]

Computation at a glance
Computation of Income from house property of …………. for the Assessment Year ……….

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Particulars Details Amount

Gross Annual Value (GAV) ****
Less : Municipal tax ****
Net Annual Value (NAV) ****
Less : Deductions u/s
24(a) Standard deduction [30% of NAV] ****
24(b) Interest on borrowed capital **** ****
Income from house property ****
Gross Annual Value (GAV) :

Normally, income tax is charged

on income, but under the head
‘Income from house property’,
tax is not charged on the rent
earned from house property but
on the inherent earning capacity
of the house property. Such
earning capacity is termed as
Annual Value. Annual value
is determined considering the
following factors :

A. Actual Rent Receivable [ARR]

Any sum receivable as rent of the house property for the previous year is an evidence for determining the
earning capacity of the building. Such actual rent receivable is to be computed on accrual basis. However,
where tenant pays rent, which is influenced by benefits provided by the owner of the property, such rent must
be disintegrated to determine actual rent i.e. De-facto rent of the property.
De facto rent = ARR – Cost of amenities.
Taxpoint : While computing actual rent receivable, outstanding rent shall be considered but advance rent
received during the financial year is not to be considered.
B. Gross Municipal Value
It means the annual value of the property decided by municipality on which they charge municipal tax. Such
valuation may also be taken as evidence of earning capacity of a property.
In metro cities (i.e. Chennai, Delhi, Kolkata, Mumbai), municipal authorities charge tax on Net Municipal
Value after giving a deduction for repairs (being 10% of Gross Municipal value) and an allowance for service
taxes (like sewerage tax, water tax etc. as a % of Net Municipal value). Hence, the relation between Gross
Municipal Value and Net Municipal Value can be concluded as under -
In metro cities NMV = GMV – 10% of GMV – Sewerage/Water Tax etc. (as a % of NMV)
In non-metro cities GMV = NMV
C. Fair or Notional rent of the property
Fair or notional rent of a property means rent fetched by a similar property in the same or similar locality.

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Though two properties might not be exactly similar still it is an indicator of rent reasonably expected from
the property. An inflated or deflated rent due to emergency, relationship and such other conditions need to be
adjusted to determine fair rent.
For instance, a property was let out to a friend for a monthly rent of ₹ 2,000 which might be let out to another
person at the rate of ₹ 2,500 p.m. In such case, fair rent of the property shall be ₹ 2,500 p.m.
D. Standard rent under the Rent Control Act
Standard rent is the maximum rent, which a person can legally recover from his tenant under the Rent Control
Act prevailing in the State in which the property is situated. A landlord cannot reasonably expect to receive
from a tenant any amount more than Standard Rent. Accordingly, it can be concluded that if the property is
covered by the Rent Control Act then Reasonable Expected Rent (RER) cannot exceed Standard Rent.
Taxpoint : Reasonable Expected Rent cannot exceed Standard Rent but can be lower than Standard Rent
Computation of Gross Annual Value
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.
Note : RER cannot exceed Standard Rent.
* Reasonable Expected Rent (RER) is also known as Annual Letting Value (ALV).
Step 2 : Calculate Actual Rent Received or Receivable (ARR) for the year less current year unrealised rent (UR)
subject to certain conditions#.
#Unrealised Rent [Rule 4]: Unrealised Rent of current year shall be deducted in full from Actual Rent
Receivable, provided the following conditions are satisfied :
i) The tenancy is bona fide;
ii) The defaulting tenant has vacated the property or steps have been taken to compel him to vacate the
property;
iii) The defaulting tenant is not in occupation of any other property of the assessee;
iv) The assessee has taken all reasonable steps to institute legal proceeding for the recovery of the unpaid rent
or has satisfied the Assessing Officer that legal proceedings would be worthless.
Step 3 : Compare the values calculated in step 1 and step 2 and take the higher one.
Step 4 : Where there is vacancy and owing to such vacancy the ‘ARR – UR’ is less than the RER, then ‘ARR -
UR’ computed in step 2 will be treated as GAV.
In nutshell, GAV shall be computed as under :
Steps Particulars Amount
Compute Reasonable Expected Rent [RER]
Gross Municipal Value (a) ****
Fair Rent (b) ****
1st
Higher of the (a) and (b) [A] ****
Standard Rent [B] ****
Reasonable Expected Rent [Lower of (A and B)] [C] ****
Actual Rent Received or Receivable (ARR) – Unrealised Rent of the current year
2nd ****
(UR) [D]

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Steps Particulars Amount

3rd Gross Annual Value
Higher of C and D shall be considered as GAV ****
4th However, where ‘ARR – UR’ is lower due to vacancy, then ‘ARR - UR’ computed
****
in step 2 will be treated as GAV.
Illustration 37 : [Computation of Reasonable Expected Rent]
Calculate Reasonable Expected Rent from the following details :
Particulars House 1 House 2 House 3 House 4 House 5
Gross Municipal Value (a) 10,000 12,000 12,000 18,000 16,000
Fair Rent (b) 8,000 16,000 16,000 10,000 17,000
Higher of the [(a) and (b)] [A] 10,000 16,000 16,000 18,000 17,000
Standard Rent as per Rent Control Act [B] 10,000 14,000 N.A 8,000 20,000
Reasonable Expected Rent [Lower of [(A) & (B)] 10,000 14,000 16,000 8,000 17,000

Illustration 38 : [When there is neither unrealised rent nor vacancy period]

Calculate Gross Annual Value for the following house properties. (₹ in ‘000)
Particulars H1 H2 H3 H4 H5 H6
Gross Municipal value for the whole year 120 130 140 150 160 180
Fair rent for the whole year 105 115 135 155 175 168
Standard rent (for the whole year) NA 100 135 180 165 144
Actual rent receivable 100 110 135 175 200 100
Period of the previous year (in months) 12 12 12 12 12 10
Solution :
Computation of Gross annual value (GAV) (₹ in ‘000)

Step Particulars H1 H2 H3 H4 H5 H6
Calculation of RER
Gross Municipal Value (a) 120 130 140 150 160 1501
Fair Rent (b) 105 115 135 155 175 1401
Higher of the [(a) and (b)] [A] 120 130 140 155 175 150
Standard Rent [B] NA 100 135 180 165 1201
1st RER [Lower of (A) and (B)] 120 100 135 155 165 120
2nd ARR 100 110 135 175 200 1001
3rd Gross Annual Value 120 110 135 175 200 120
1.
In case of H6, previous year period is of 10 months, which denotes that construction or acquisition of such house
property was completed on 1st of June of the previous year, therefore, Municipal Value, Fair Rent and Standard
Rent has been proportionately reduced.

Illustration 39 : [When there is unrealised rent but no vacancy period]

Find out the gross annual value in case of the following properties let out throughout the
previous year for the assessment year 2024-25 : (₹ in ‘000)

Particulars H1 H2 H3 H4 H5
Municipal annual value 90 500 30 100 315

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Fair rent 300 300 300 300 300

Standard rent under the Rent Control Act 50 800 240 250 500
Actual rent receivable p.a. 120 600 180 360 150
Unrealised rent of the P.Y. 2023-24 (in terms of months) 2 3 1 3 2
Solution :

Computation of gross annual value : (₹ in ‘000)

Steps Particulars H1 H2 H3 H4 H5
Calculation of RER
Gross Municipal Value 90 500 30 100 315
Fair Rent 300 300 300 300 300
1st
Higher of the above [A] 300 500 300 300 315
Standard Rent [B] 50 800 240 250 500
Reasonable Expected Rent [lower of A and B] [C] 50 500 240 250 315
Calculation of (ARR – Unrealised Rent)
Actual rent receivable p.a. 120 600 180 360 150
2 nd
Unrealised rent 20 150 15 90 25
ARR – Unrealised Rent [D] 100 450 165 270 125
3rd Gross Annual Value (being higher of step 1 and step 2) 100 500 240 270 315
Assume, conditions prescribed under Rule 4 being satisfied.

Illustration 40 : [When there is vacancy period but no unrealised rent]

Find out the Gross annual value in case of the following properties : (₹ in 000)

Particulars H1 H2 H3 H4 H5 H6
Gross Municipal Value p.a. 200 300 400 500 300 300
Fair rent p.a. 300 600 750 180 200 400
Standard rent under the Rent Control Act p.a. 300 180 280 225 250 240
Actual rent p.a. 600 900 300 240 216 240
Property remains vacant (in number of month) 1 3 2 1 2 1

Solution :

Computation of Gross Annual Value : (₹ in ‘000)

Step Particulars Working H1 H2 H3 H4 H5 H6

1st Calculation of RER Higher of GMV and FR (RER 300 180 280 225 250 240
cannot exceed SR)
2nd ARR For the period actually let out 550 675 250 220 180 220
3rd Higher of above Higher of Step 1 & Step 2 550 675 280 225 250 240
4th Gross Annual Value 5501 6751 2502 2202 2503 2204

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1. In H1 and H2 Actual rent receivable is already higher than RER therefore vacancy period is not making any
impact (i.e. step 4 of computation discussed earlier in theory) on GAV.
2. In H3 & H4, ARR is less than RER due to vacancy (otherwise ARR would have been ₹ 3,00,000 & ₹ 2,40,000
respectively). Therefore, GAV will be the ARR computed in step 2.
3. In H5, ARR is less than RER not only due to vacancy but also due to other factors. In such case, value of
RERshall be taken as GAV.
4. In H6, ARR is less than RER due to vacancy period otherwise ARR would have been equal to RER.

Illustration 41 :
X owns a house property in Pune, details relating to which are Municipal value ₹ 2,00,000 p.a., Fair rent ₹ 1,80,000
p.a., Standard rent ₹ 2,10,000 p.a. It is let out throughout the previous year (rent ₹ 10,000 p.m. up to 15/10/2023
and ₹ 12,000 p.m. thereafter). The property is transferred by X to Y on February 28, 2024. However, Y failed to
recover rent for March, 2024. Find gross annual value of the property in the hands of X and Y for the A.Y. 2024-25
Solution :
Since the property being sold to Y on 28/02/2024 hence previous year period for X is 11 months and for Y is 1
month, accordingly gross annual value shall be :

X Y
Steps Particulars
(11 months) (1 month)
Fair rent (FR) 1,65,000 15,000
Municipal Value 1,83,333 16,667
Higher of the above [A] 1,83,333 16,667
Standard Rent (SR) [B] 1,92,500 17,500
1st RER [Lower of A and B] [C] 1,83,333 16,667
2nd ARR – Unrealised Rent [D] 1,19,000# Nil1
3rd Gross Annual Value [Higher of C and D] 1,83,333 16,667
#
Calculation of Rent Receivable for 11 months 1.
₹ 12,000 – ₹ 12,000
[(₹ 10,000 * 6.5 months) + (₹ 12,000 * 4.5 months)] = ₹ 1,19,000

Illustration 42 : [When there is unrealised rent as well as vacancy period]

Find out the gross annual value in respect of the following properties for the A.Y. 2024-25 : (₹ in ‘000)

Particulars H1 H2 H3
Gross Municipal value 150 180 120
Fair rent 140 140 240
Standard rent 120 240 300
Actual rent if property is let out throughout the previous year 2023-24 180 300 150
Unrealised rent of the previous year 2023-24 25 40 20
Unrealised rent of the year prior to the previous year 2022-23 30 50 60
Period when the property remains vacant (in number of months) 3 1 -

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Solution :
Working: Calculation of ARR – Unrealised Rent
H1 : [{(1,80,000/12) * 9} – 25,000] = ₹ 1,10,000
H2 : [{(3,00,000/12) * 11} – 40,000] = ₹ 2,35,000
H3 : [1,50,000 – 20,000] = ₹ 1,30,000
Computation of Gross Annual Value : (₹ in ‘000)

Step Particulars Working H1 H2 H3

1st Calculation of RER Higher of GMV and FR (RER 120 180 240
cannot exceed SR)
2nd ARR less current year unrealized Working 1 110 235 130
rent (for let out period only)
3rd Higher of above Higher of Step 1 & Step 2 120 235 240
4th Gross Annual Value 1101 235 2402
1.
In H1, till step 3 ARR is less than RER due to vacancy [otherwise ARR would have been ₹ 1,55,000 (being ₹
1,80,000 – ₹ 25,000). Therefore, GAV will be the ARR computed in step 2.
2.
In H3 there is no vacancy hence step 3 gives GAV.
Illustration 43 :
Find out the gross annual value in the following cases for the A.Y. 2024-25 :
Particulars H1 (₹) H2 (₹)
Situated at Chandigarh Amritsar
Municipal value p.a. 60,000 60,000
Fair rent p.a. 70,000 70,000
Standard rent under the Rent Control Act p.a. 80,000 50,000
Actual rent p.m.:
From April 1, 2023 to July 31, 2023 5,000 6,000
From October 1, 2023 to February, 2024 9,000 8,500
For the remaining period properties were vacant.
Solution :
Working 1) Actual rent
For H1 [(5,000 * 4) + (9,000 * 5)] = ₹ 65,000 For H2 [(6,000 * 4) + (8,500 * 5)] = ₹ 66,500
Computation of gross annual value
(₹ in ‘000)
Step Particulars Working H1 H2
1st RER Higher of GMV and FR (RER cannot exceed SR) 70 50
2nd ARR Working 1 65 66.5
3rd Higher of above Higher of Step 1 & Step 2 70 66.5
4th Gross Annual Value 651 66.52

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1 In H1, ARR is less than RER due to vacancy [otherwise ARR would have been ₹ 86,667 {being (₹ 65,000/9) *
12}]. Therefore, GAV will be the ARR computed in step 2.
2 In H2, Actual rent receivable is not less than RER, therefore vacancy period is not making any impact (i.e. step 4
of computation discussed earlier in theory) on GAV.
Illustration 44 :
Find out the gross annual value in respect of the following properties : (₹ in thousands)
Particulars H1 H2 H3
Value determined by the Municipality for determining Municipal tax 500 800 600
Rent of the similar property in the same locality 400 900 600
Rent determined by the Rent Control Act 700 720 700
Actual rent receivable 350 540 600
Unrealised rent of the previous year 2023-24 10 Nil 150
Period when the property remains vacant (in number of months) 5 3 2
Solution :
Computation of Gross Annual Value : (₹ in thousands)
Step Particulars Working H1 H2 H3
Higher of GMV and FR (RER
1st RER 500 720 600
cannot exceed SR)
2nd ARR less Unrealised rent 340 540 450
3rd Higher of above Higher of Step 1 & Step 2 500 720 600
(ARR less Unrealised rent) if there [{ARR/(12 – vacancy period)} *
Working 570
would have been no vacancy 12] - Unrealised rent 590 720
Is value of Step 2 less than step 1
Yes Yes No
due to vacancy
If yes than step 2 will be GAV
4th Gross Annual Value 340 540 600
otherwise step 3 shall be GAV

Test Yourself
1. Find out the Gross Annual value in respect of the following properties for the A.Y. 2024-25
(₹ in thousands)
Particulars H1 H2 H3
Gross Municipal value 150 180 120
Fair rent 140 140 240
Standard rent 120 240 300
Actual rent if property is let out throughout the previous year 2023-24 180 300 150
Unrealised rent of the previous year 2023-24 25 40 20
Unrealised rent of the previous year 2021-22 30 50 60
Period when the property remains vacant (in number of months) 3 1 -
Hints
1. H1: ₹ 1,10,000; H2: ₹ 2,35,000; H3: ₹ 2,40,000

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2.2.6 Taxes levied by local authority (Municipal Tax) [Proviso to Sec. 23(1)]
Tax levied by the municipality or local authority is deductible from Gross Annual Value (GAV). As per sec. 27(vi),
taxes levied by a local authority in respect of any property shall include service taxes levied by such local authority
in respect of such property. Municipal tax includes Service taxes like fire tax, water tax, etc. levied by a local
authority.
Such taxes shall be computed as a % of Net Municipal Value and allowed as deduction subject to the following
conditions :
1. It should be actually paid during the previous year.\
2. It must be paid by the assessee.
Taxpoint : Unpaid municipal tax or municipal tax paid by tenant shall not be allowed as deduction.
3. It must be related to the previous year or any year preceding the previous year.
Taxpoint :
Tax paid to foreign local If property is situated in a foreign country, tax paid to foreign local authority shall
authority be allowed as deduction
Tax exceeds GAV In case municipal tax paid includes tax paid for several past years and the total
(Negative NAV) amount of tax so paid by the owner exceeds GAV, then Net Annual Value (NAV)
can be negative.
Refund of tax Refund of Municipal tax paid for a property is not taxable u/s 22.
Advance Municipal Tax Municipal tax paid in advance is not allowed, as the Act provides that “the taxes
paid by the assessee levied by any local authority in respect of property shall be deducted, irrespective
of the previous year in which the liability to pay such taxes was incurred by the
owner.” [Proviso to sec. 23 of Income tax Act, 1961]
As per the above language it is construed that for claiming deduction in respect
of municipal tax, such tax must have already been levied by the local authority.
Hence payment of municipal tax in advance (liability in respect of which has not
yet incurred) shall not be allowed as deduction in the year of payment.

Illustration 45 :
Compute net annual value with the following details for the A.Y. 2024-25 :
Particulars H1 H2 H3 H4 H5 H6
Situated at Patna Anand Hyderabad Balurghat Jodhpur Etawa
Municipal Value ₹ 1,00,000 ₹ 2,00,000 ₹ 3,00,000 ₹ 4,00,000 ₹ 4,25,000 ₹ 6,00,000
Gross Annual Value ₹ 1,00,000 ₹ 2,50,000 ₹ 1,80,000 ₹ 5,00,000 ₹ 8,00,000 ₹ 5,00,000
Municipal tax for P.Y. ₹ 5,000 10% 5% 20% 12% 10%
Sewerage tax - 5% ₹ 1,000 3% ₹ 3,750 ₹ 1,000
Water Tax - 3% 5% 2% 5% -
Additional information :
a. In case of H3, municipal tax paid for the financial year 1995-96 to 2022-23 is ₹ 2,00,000.
b. In case of H4, municipal tax paid for the financial year 2024-25 is ₹ 3,000.
c. In case of H6, all taxes charged by municipality are paid to the extent of 80% (50% by owner and 30% by
tenant).

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Solution :
Computation of Net Annual Value for A.Y. 2024-25 : (Amount in ₹)

Particulars H1 H2 H3 H4 H5 H6
Gross Annual Value (a) 1,00,000 2,50,000 1,80,000 5,00,000 8,00,000 5,00,000
Less : (i) Municipal Tax 5,000 20,000 2,15,0003 80,0001 51,000 30,0002
(ii) Sewerage tax - 10,000 1,000 12,000 3,750 5002
(iii) Water Tax - 6,000 15.000 8,000 21,250 -
Total (b) 5,000 36,000 2,31,000 1,00,000 76,000 30,500
Net Annual Value [(a) – (b)] 95,000 2,14,000 (-), 51,000 4,00,000 7,24,000 4,69,500
Municipal tax is calculated on municipal value.
Notes :
1. Though municipal tax is allowed on cash basis (only if paid by owner) but advance municipal tax is not
allowed.
2. Municipal tax paid by tenant is not allowed as deduction.
3. ₹ 2,00,000 (being municipal tax of past years paid during the year) + 5% of ₹ 3,00,000 (municipal tax of
current year paid during the year).

2.2.7 Deductions u/s 24

The list of deduction u/s 24 is exhaustive i.e., no deduction can be claimed in respect of expenditures which are
not specified under this section e.g., no deduction is allowed for repairs, collection charges, insurance, ground rent,
land revenue, etc.
1. Standard deduction u/s 24(a)
30% of the net annual value is allowed as standard deduction in respect of all expenditures (other than interest
on borrowed capital) irrespective of the actual expenditure incurred.
Note : Where NAV is negative or zero, standard deduction u/s 24(a) is not available.
Test Yourself
1. Calculate standard deduction available in the following cases (₹ in ‘000)
Particulars H1 H2 H3 H4 H5
Gross Annual Value 80 60 30 20 50
Municipal Tax paid 10 20 10 00 10
Repair Charges 2 20 - 5 -
Rent Collection Charges 5 10 2 20 -
Hints
1. H1: ₹ 21,000; H2: ₹ 12,000; H3: ₹ 6,000; H4: ₹ 6,000; H5: ₹ 12,000

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2. Interest on loan or borrowed capital u/s 24(b)

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.
For the purpose of calculation, interest on loan is divided into two parts :

In nutshell, tax treatment is as under :

Particulars Pre-construction period Post-construction period

Starts from The day of commencement of construction or the The first day of the previous year in
day of borrowing, whichever is later which construction is completed
Ends on March 31 immediately prior to the year of completion When loan is fully paid
of construction
Tax treatment The interest incurred during aforesaid period shall The interest expenses for the year
be accumulated and allowed as deduction in 5 (on accrual basis) shall be allowed
equal installments from the year of completion of as deduction in the respective year.
construction.
Other Points :
a. Interest on borrowed capital is allowed on accrual basis even if the books of account are kept on cash basis.
b. Interest paid on fresh loan, which is taken to repay the original loan (being taken for above-mentioned purpose)
shall be allowed as deduction.
c. Interest on new loan, taken for paying outstanding interest on old loan, is not deductible

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d. Amount paid as brokerage or commission, for arrangement of the loan, is not deductible.
e. Interest on loan taken for payment of municipal tax, etc. is not allowed as deduction.

Amount not deductible from Income from house property [Sec. 25]
Any interest chargeable under this Act which is payable outside India, is not allowed as deduction if :
 on such interest, tax has not been deducted at source and paid as per the provision of chapter XVIIB; and
 in respect of such interest there is no person in India who may be treated as an agent u/s 163.

Illustration 46 :
Following information are provided by an assessee for his house properties for computing interest on loan allowed
u/s 24(b) :

Particulars HP1 HP2 HP3 HP4 HP5

a) Interest on loan taken for repair of H.P. 20,000 30,000 10,000 15,000 25,000
b) Interest on loan taken for purchasing H.P. (50% 20,000 25,000 30,000 17,000 18,000
paid)
c) Interest on new loan taken for repaying old loan 10,000 12,000 13,000 14,000 16,000
which was taken for purchasing H.P.
d) Interest on loan taken for payment of interest on 10,000 10,000 10,000 10,000 10,000
earlier loan
e) Interest on loan for payment of Municipal tax 2,000 2,000 2,000 2,000 2,000
f) Interest on loan by mortgaging HP3 for business -- -- 5,000 -- --
purpose
g) Interest on loan for reconstruction of HP1 paid 20,000 -- -- -- --
outside India without deducting tax at source
h) Interest on loan for reconstruction of HP2 -- 20,000 -- -- --
payable outside India on which TDS has not
been deducted and no payment yet been made
i) Interest on loan on mortgage of HP1 for 10,000 -- -- -- --
renovation of HP2
Solution :
Calculation of ‘Interest on loan’ allowed u/s 24(b) : (₹ in ‘000)

Particulars Note HP1 HP2 HP3 HP4 HP5

a) Interest on loan taken for repair of H.P. Allowed 20 30 10 15 25
b) Interest on loan taken for purchasing 1 20 25 30 17 18
H.P.
c) Interest on new loan taken for repaying Allowed 10 12 13 14 16
old loan which was taken for purchasing
H.P.
d) Interest on loan taken for payment of Not - - - - -
interest on earlier loan
Allowed

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Particulars Note HP1 HP2 HP3 HP4 HP5

e) Interest on loan for payment of Not - - - - -
Municipal tax
Allowed
f) Interest on loan by mortgaging HP3 for 2 - - - - -
business purpose
g) Interest on loan for reconstruction 3 - - - - -
of HP1 paid outside India without
deducting tax at source
h) Interest on loan for reconstruction of 4 - - - - -
HP2 payable outside India on which
TDS has not been deducted, and no
payment yet made.
i) Interest on loan on mortgage of HP1 for 5 - 10 - - -
renovation of HP2
Interest on loan allowed u/s 24(b) 50 77 53 46 59
Notes :
1. Interest on loan is allowed on accrual basis.
2. The purpose of loan must be repair, renovation, construction or purchase of property.
3. As per sec. 25, any payment outside India without deduction of tax at source and when the payee has no agent
in India is not allowed as deduction. It is assumed that the payee has no agent in India.
4. Interest payable outside India without TDS whether paid or unpaid is not allowed as deduction. It is assumed
that the payee has no agent in India.
5. Since loan is utilised for renovation of HP2 hence deduction shall be allowed from income of HP2. Mortgage
of HP1 is irrelevant.

Illustration 47 :
Calculate interest on loan allowed for assessment year 2019-20 to 2024-25 from the following information :
Loan was taken on 1/1/2015 ₹ 5,00,000 @ 12% p.a.
Construction commenced on 1/8/2015. Construction completed on 31/3/2020. Repayment made as under :

On 1/4/2016 On 1/4/2019 On 1/4/2022 On 1/7/2023

₹ 1,00,000 ₹ 1,00,000 ₹ 1,00,000 ₹ 1,00,000
Solution :
Since construction started on 1/8/2015, hence pre-construction period starts from 1/8/2015 and since construction
completed on 31/3/2020, hence pre construction period ends on 31/3/2019 and post construction period starts from
the year 2019-20. Finally, pre construction period is from previous year 2015-16 to previous year 2018-19 and post
construction period is from previous year 2019-20 onwards. Thus, pre-construction period interest are as under :

Previous Year Amount Month Interest @ 12%

2015-16 5,00,000 8 40,000

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2016-17 4,00,000 12 48,000

2017-18 4,00,000 12 48,000
2018-19 4,00,000 12 48,000
Total interest for pre-construction period 1,84,000
Total interest for pre-construction period is ₹ 1,84,000 which shall be allowed in 5 equal installments i.e., ₹ 36,800
p.a. from P.Y. 2019-20 to 2023-24.
Computation of interest :

Pre construction Post construction

Assessment Year Total Interest
period Interest period Interest
2019-20 -- -- --
2020-21 36,800 36,0001 72,800
2021-22 36,800 36,0001 72,800
2022-23 36,800 36,0001 72,800
2023-24 36,800 24,0002 60,800
2024-25 36,800 15,0003 51,800

1.
₹ 3,00,000 * 12% ₹ 2,00,000 * 12%
2.

3.
On ₹ 2,00,000 @ 12% for 3 months ₹ 6,000
On ₹ 1,00,000 @ 12% for 9 months ₹ 9,000
Total ₹ 15,000

Test Yourself
1. As on 1/1/2018, Mr. Fantoosh borrowed ₹ 5,00,000 @ 10% p.a. from State Bank of India, to be repaid in
two equal installments on 1/4/2023 and 1/4/2027. Construction completed on 17/6/2021. Due to liquidity
problem, he borrowed ₹ 3,50,000 @ 8% from his friend on 1/4/2023 and paid 1st installment of previous
loan. Calculate interest on loan allowed for assessment year 2024-25.
Hints
1. ₹ 77,500

Illustration 48 :
Mr. Rajesh owns two house properties both of which are let out. Compute his income from the following details :

Particulars H1 H2
Situated at Gaya Mumbai
Gross Municipal value 1,00,000 2,00,000
Fair rent 95,000 2,10,000
Standard rent 90,000 2,00,000
Actual rent receivable 1,00,000 1,80,000
Unrealised rent of current year 8,000 2,000

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Municipal tax 10% 1,000

Fire insurance 2,000 1,200
Repairs Nil 2,000
Interest on loan for construction (@ 12%) 10,000 Nil

Other Information :
a. Loan taken for construction is still unpaid.
b. Municipal tax of H1 is still unpaid, while, that of H2 is half paid by tenant.
Solution :
Computation of income from house property of Mr. Rajesh for the A.Y. 2024-25 :

Particulars Details Amount Amount

H1: Let out
Gross Annual Value# 92,000
Less : Municipal tax Nil
Net Annual Value 92,000
Less : Deduction u/s 24
a. Standard deduction (30% of NAV) 27,600
b. Interest on loan 10,000 37,600 54,400
H2: Let out
Gross Annual Value# 2,00,000
Less : Municipal tax 500
Net Annual Value 1,99,500
Less : Deduction u/s 24
a. Standard deduction (30% of NAV) 59,850
b. Interest on loan Nil 59,850 1,39,650
Income from House Property 1,94,050

Note : Unpaid municipal tax and municipal tax paid by tenant is not allowed.
#.
Computation of Gross Annual Value :

Particulars Details H1 H2
Reasonable Expected Rent Higher of GMV or FR subject to SR 90,000 2,00,000
Actual Rent Receivable – Unrealised Rent 92,000 1,78,000
Gross Annual Value Higher of above 92,000 2,00,000

2.2.8 Self-occupied property [Sec. 23(2)(a)]

As per sec. 23(2)(a), a house property shall be termed as self occupied property where such property or part
thereof :

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 is in the occupation of the owner for the purposes of his own residence;
 is not actually let out durin g the whole or any part of the previous year; and
 no other benefit there from is derived by the owner.
Treatment : The annual value of such house or part of the house shall be taken to be nil.
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’. [Treatment of ‘deemed to be let out’ property is discussed later in this chapter.]

Taxpoint : In the light of the above provision :

Combination Treated as
Fully self occupied Self occupied property
Partly self occupied & partly vacant Self occupied property
Partly self occupied & partly let out Partly self occupied & partly let out (discussed later)
Partly self occupied & partly use for business purpose Self occupied to the extent used for self occupation

Note :

Available to Benefit u/s 23(2)(a) can be claimed by an Individual and HUF. The benefit is not
available to other assessee like company, firm, etc.
When owner want to It is not necessary that once a house property is treated as self-occupied it shall
change his option be continuously treated as self-occupied. Such option may be changed every year
without any permission.
When owner occupies When the assessee occupies his house but not in the capacity of owner then benefit
a house in some other under this section cannot be claimed. E.g. Owner let out the house to his employer &
capacity gets back the property as rent free accommodation. In such case, though the owner
himself occupies the property but as an employee of the tenant & not as an owner. In
such case, property shall be treated as let-out & not self-occupied.
When more than one If an assessee has a house property, which consist of two or more residential units
house property used in a & all such units are self-occupied used in a combined form, the annual value of the
combined form entire house shall be taken as nil as there is only one property, though it has more
than one residential unit.

Computation of taxable income of self-occupied property

Net annual value of self-occupied property shall be taken as nil. As a consequence, deduction u/s 24(a) (standard
deduction) shall also be nil. Interest on loan u/s 24(b) shall be allowed, subject to certain ceiling.
Computation at a glance :

Particulars Amount
Net Annual Value Nil
Less : Interest on borrowed capital u/s 24(b) ***
Income from house property (***)
Standard deduction u/s 24(a) is not available

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Net Annual value :

Net Annual value of two self-occupied house properties, at the choice of the assessee, is taken as nil. He can choose
those house properties as self-occupied through which tax liability can be reduced.
Normally (but not always) house property with higher gross annual value is treated as self-occupied property
but it is advised to calculate total income under the head ‘Income from house property’ by applying each option
separately and then choose the option which reduces total income.
Interest on loan u/s 24(b)
Interest on loan taken for construction, acquisition, repair, renovation or extension is allowed according to the
following table :

Maximum Interest
Conditions
allowed in aggregate
Where loan is taken on or after 1/4/1999 and following conditions are satisfied -
1. Loan is utilized for construction or acquisition of house property on or after 1-4-
1999;
2. Such construction or acquisition is completed within 5 years from the end of the
financial year in which the capital was borrowed; and
3. The lender certifies that such interest is payable in respect of the loan used for the
acquisition or construction of the house or as refinance of the earlier loan outstanding ₹ 2,00,000
(principal amount) taken for the acquisition or construction of the house.
In any other case ₹ 30,000
Taxpoint : In any case, deduction in respect of interest on loan on self-occupied properties cannot exceed
₹ 2,00,000 in a year.

Notes :
a. Calculation and deduction of interest for the period of pre and post construction, acquisition, etc. is same as
discussed in the case of let out house property.
b. Assessee shall always have nil income or loss upto ₹ 2,00,000 from properties u/s 23(2)(a).
In nutshell, treatment of interest on loan is as under :
Nature of property When loan was taken Purpose of loan Allowable
(Maximum limit)2, 3
Self-occupied On or after 01/04/1999 Construction or purchase of ₹ 2,00,000
house property1
Self-occupied On or after 01/04/1999 For Repairs of house property ₹ 30,000
Self-occupied Before 01/04/1999 Construction or purchase of ₹ 30,000
house property
Self-occupied Before 01/04/1999 For Repairs of house property ₹ 30,000
Let-out Any time Construction or purchase of No maximum limit
house property

1. Subject to other two other conditions. If other two conditions are not fulfilled, then maximum limit is restricted
to ₹ 30,000.

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2. Including interest for pre-construction period.

3. Aggregate limit for all house properties treated as self-occupied.

Illustration 49 :
Mr. Pandey, owner of three houses in Chennai, furnished the following information. Compute his income from
house property for the assessment year 2024-25 :

House No. House No. House No.

Particulars 1 2 3
Self occupied Self occupied Self occupied
Standard rent under Rent Control Act 1,50,000 15,00,000 18,00,000
Municipal value 2,00,000 13,00,000 13,50,000
Fair rent 2,50,000 16,00,000 19,00,000
Municipal tax (10% of municipal value) paid
Interest on loan taken for purchases of houses 90,000 1,70,000 1,65,000
(Loan taken in P.Y. 2020-21)

Solution :
Computation of Income from House property of Mr. Pandey for the A.Y. 2024-25 :

Particulars Details Details Amount

House 1: Deemed to be Let out
Gross Annual Value (Working) 1,50,000
Less : Municipal Tax (10% of ₹ 2,00,000) 20,000
Net Annual Value (NAV) 1,30,000
Less : Deduction u/s
24(a) Standard Deduction (30% of NAV) 39,000
24(b) Interest on loan 90,000 1,29,000 1,000
House 2 & 3 : Self occupied
Net Annual Value Nil
Less : Deduction u/s
24(b) Interest on loan [(₹1,70,000 + ₹ 1,65,000), subject to max. of 2,00,000 (2,00,000)
₹ 2,00,000]
Income from House Property (1,99,000)

Working :
Computation of Gross Annual Value of House 1 :

Particulars House 1
Municipal Value (A) 2,00,000
Fair Rent (B) 2,50,000

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(C) = Higher of (A) and (B) 2,50,000

Standard Rent (D) 1,50,000
Gross Annual Value [Lower of (C) and (D)] 1,50,000

Illustration 50 :
Sri Jayram has a house property used for own residence for 9 months and for remaining 3 months of the previous
year, it was unused. Gross Municipal value of the property ₹ 6,00,000 p.a. Fair Rent ₹ 5,00,000, Standard Rent
₹ 4,00,000. He incurred repair expenditure of ₹ 10,000 & paid municipal tax ₹ 5,000 during the year. Compute
income from house property in the following cases for the A.Y. 2024-25 :
1. He borrowed ₹ 1,00,000 @ 12% (simple interest) on 17/8/1998 for purchase of the house property and such
amount as well as interest is still unpaid.
2. He borrowed ₹ 10,00,000 @ 12% (simple interest) on 17/8/1998 for purchase of the house property and such
amount as well as interest is still unpaid.
3. He borrowed ₹ 5,00,000 @ 12% (simple interest) on 17/8/1999 for construction of the house property,
construction of which was completed on 31/3/2000 and such amount is still unpaid.
4. He borrowed ₹ 20,00,000 @ 18% (simple interest) on 17/8/1999 for construction of the house property,
construction of which was completed on 31/3/2000 and such amount is still unpaid.
5. He borrowed ₹ 1,80,000 @ 15% on 1/4/1998 and further borrowed ₹ 10,00,000 @ 10% on 17/8/1999 for
construction of the house property and such amount is still unpaid. Construction completed on 1/2/2000.
6. He borrowed ₹ 5,00,000 @ 12% on 1/4/2001 for repairs of the house property.
7. He borrowed ₹ 1,80,000 @ 15% on 1/4/1998 and further borrowed ₹ 20,00,000 @ 14% on 17/8/1999 for
construction of the house property and such amount is still unpaid. Construction completed on 1/2/2000.
Solution :
Computation of income from house property in different cases :

Particulars Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7

Net Annual Value Nil Nil Nil Nil Nil Nil Nil
Less : Deduction u/s
24(b) Interest on Loan 12,000 30,000 60,000 2,00,000 1,27,000 30,000 2,00,000
Income from House
(12,000) (30,000) (60,000) (2,00,000) (1,27,000) (30,000) (2,00,000)
Property
Notes - 1 2 3 4 5 6

Notes :
1. As loan was taken before 1/4/1999 hence, the maximum ceiling is ₹ 30,000.
2. As loan was taken on or after 1/4/1999 for the construction of house property, which is completed within 5
years from the end of financial year in which such loan was taken, hence the maximum ceiling is enhanced to
₹ 2,00,000. It is assumed that required certificate has been furnished.
3. Maximum ceiling is ₹ 2,00,000.
4. If loan was taken before 1/4/1999 as well as on or after 1/4/1999 then the total interest allowed in aggregate

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cannot exceed ₹ 2,00,000. However, the limit for interest allowed in respect of loan taken prior to 1/4/1999
shall be ₹ 30,000. Since the first loan is taken on 1/4/1998 and construction completed on 1/2/2000. Hence the
pre-construction period is 1998-99, for which interest ₹ 27,000 (i.e. ₹ 1,80,000 * 15%) shall be allowed in 5
equal installments i.e. ₹ 5,400 every year. However, such pre-construction period interest is allowed only for 5
years i.e. from 1999-2000 to 2003-2004, therefore such interest shall not be allowed in subsequent year. Total
eligible interest on first loan is ₹ 27,000 (i.e. Pre-construction period interest Nil + Post construction period
interest ₹ 27,000). Further eligible interest on second loan is ₹ 1,00,000 (i.e. 10% of ₹ 10,00,000). Hence the
total allowable interest u/s 24(b) shall be ₹ 1,27,000.
5. The enhanced limit is only for construction or acquisition of house property, here the loan is taken for repair
purpose for which maximum ceiling is ₹ 30,000.
6. If loan was taken before 1/4/1999 as well as on or after 1/4/1999 then the total interest allowed in aggregate
cannot exceed ₹ 2,00,000. However, the limit for interest allowed in respect of loan taken prior to 1/4/1999
shall be ₹ 30,000. Since the first loan is taken on 1/4/1998 and construction completed on 1/2/2000. Hence the
pre-construction period is 1998-99, for which interest ₹ 27,000 (i.e., ₹ 1,80,000 * 15%) shall be allowed in 5
equal installments i.e. ₹ 5,400 every year. However, such pre-construction period interest is allowed only for 5
years i.e. from 1999-2000 to 2003-2004, therefore such interest shall not be allowed in subsequent years. Total
eligible interest on first loan is ₹ 27,000 (i.e., Pre-construction period interest Nil + Post construction period
interest ₹ 27,000), i.e. within the ceiling of ₹ 30,000. Further eligible interest on second loan ₹ 2,80,000 (i.e.
14% of ₹ 20,00,000). However, the total ceiling of interest in case of self occupied property cannot exceed ₹
2,00,000, hence the total allowable interest u/s 24(b) shall be ₹ 2,00,000.

Illustration 51 : [Rent free accommodation –vs.- Self occupied house property]

Miss Anjali owns a house property, which is let out, to her employer company for a monthly rent of ₹ 20,000.
Company allotted the same house to Miss Anjali as rent-free accommodation. Municipal tax paid ₹ 20,000, interest
on loan paid ₹ 90,000. Comment on tax treatment under the head income from house property.
Solution :
Though Miss Anjali owns the house and uses it for self-occupation as well, still she cannot treat the said house
property as self occupied. This is because she uses the property not as owner but as an employee.
Hence, rent received by her from employer shall be taxable as under :

Particulars Details Amount

Gross Annual Value (20,000 * 12) 2,40,000
Less : Municipal tax 20,000
Net Annual Value 2,20,000
Less : Deduction u/s
24(a) Standard deduction 66,000
24(b) Interest on loan 90,000 1,56,000
Income from house property 64,000

Note: Since the assessee receives the benefit of rent-free accommodation hence she will be further taxed under the
head ‘Salaries’ for perquisite being rent-free accommodation.

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2.2.9 Unoccupied property [Sec. 23(2)(b)]

Where an assessee has a residential house (kept for self-occupation) and it cannot actually be occupied by the
owner owing to his employment, business or profession carried on at any other place and hence he has to reside at
that place in a building not belonging to him, such house shall be termed as unoccupied property.
Taxpoint :

 Assessee has a residential house kept for self-occupation.

 The house cannot be occupied by the owner owing to his employment and no other benefit is derived from
such house. In case house remains unoccupied by the owner owing to his personal convenience, then no
benefit under this section shall be allowed
 He has to reside in a house not belonging to him, whether rent is paid for that house or not.
Treatment : Same as self occupied property.
Computation at a glance

Particulars Amount
Net Annual Value Nil
Less : Interest on borrowed capital u/s 24(b) ***
Income from house property (***)

Notes :
a. An assessee cannot claim benefit u/s 23(2)(a) as well as 23(2)(b) in the same previous year.
b. An assessee can claim benefit u/s 23(2)(b) even though he has other house properties.

2.2.10 Deemed to be let-out house property [Sec. 23(4)]

Where the assessee occupies more than two house properties as self-occupied or has more than two unoccupied
properties, then for any two of them, benefit u/s 23(2) can be claimed (at the choice of the assessee) and remaining
property or properties shall be treated as ‘deemed to be let out’.
Treatment :

1. Gross Annual value: Since assessee does not let out such property & do not receive rent, therefore GAV will
be determined from Step 1 only. Step 2, 3 & 4 of calculation GAV are irrelevant.
Taxpoint : GAV of deemed to be let out property will be the ‘Reasonable expected rent (RER)’of the property.
2. Municipal taxes and deduction u/s 24(a) and 24(b) shall be available as in the case of let out house property.

Illustration 52 :
Compute income under the head ‘Income from house property’ of Sri from the following information :

Particulars H1 H2 H3 H4
Used for Self occupied Self occupied Self occupied Own Business
Situated at Mumbai Abu Kolkata Hyderabad
Gross Municipal Value 3,00,000 2,00,000 7,00,000 3,00,000

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Fair Rent 2,00,000 2,00,000 6,00,000 1,20,000

Standard Rent 3,00,000 2,40,000 7,00,000 2,00,000
Municipal Tax 15% 15% 15% 15%
Repairs 13,000 4,000 8,000 8,000
Ground Rent 20,000 Nil Nil 6,000
Land Revenue Nil 10,000 Nil Nil
Interest on Loan 40,000 10,000 2,10,000 20,000
Loan taken on 1998-99 1998-99 2019-20 1999-00

Solution :
In the given case, there are two options :
Option 1 : Take H1 & H3 as Self-Occupied (S/O) and H2 as Deemed to be Let-Out (DLO)
Option 2 : Take H1 as Deemed to be Let-Out (DLO) and H2 & H3 as Self-Occupied (S/O)
Option 3 : Take H3 as Deemed to be Let-Out (DLO) and H1 & H2 as Self-Occupied (S/O)
Total income under the head house property shall be computed applying each option separately and then the option,
which yields least income under this head, shall be opted.

Option1 Option2 Option3

Particulars H1 & H3 H2 DLO H1 DLO H2 & H3 H3 DLO H1 & H2
S/O S/O S/O
Gross Annual Value Nil 2,00,000 3,00,000 Nil 7,00,000 Nil
Less : Municipal Tax (15% of Nil 30,000 45,000 Nil 1,05,000 Nil
Municipal value)
Net Annual Value (A) Nil 1,70,000 2,55,000 Nil 5,95,000 Nil
Less : Deduction u/s
24(a) Standard deduction (30% Nil 51,000 76,500 Nil 1,78,500 Nil
of NAV)
24(b) Interest on loan 2,00,0002 1,00,000 40,000 2,00,0002 2,10,000 30,0001
Total deduction (B) 2,00,000 1,51,000 1,16,500 2,00,000 3,88,500 30,000
Income from house property (-) 2,00,000 19,000 1,38,500 (-) 2,00,000 2,06,500 (-) 30,000
[(A) – (B)]
Income from house property (-) 1,81,000 (-) 61,500 1,76,500

Notes :
1. In case of H1 & H2 loan was taken prior to 1/4/1999.
2. Since loan was taken for construction on or after 1/4/1999.
3. Since H4 is used for own business purpose so it is not taxable under this head.
Total income under the head Income from house property as per option 1 is (-) ₹ 1,81,000
Computation of Income from house property of Sri for the A.Y. 2024-25 :

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Particulars Details Details Amount

H1 & H3 : Self-occupied u/s 23(2)(a)
Net Annual Value Nil
Less : Deduction u/s
24(b) Interest on loan
- For H1 (Max Limit) 30,000
- For H2 (Max Limit) 2,00,000
Subject to maximum of ₹ 2,00,000 2,30,000 2,00,000 (2,00,000)
H2 : Deemed to be let out u/s 23(4)
Gross Annual Value 2,00,000
Less : Municipal Tax 30,000
Net Annual Value 1,70,000
Less : Deduction u/s
24(a) Standard Deduction (30% of NAV) 51,000
24(b) Interest on loan 1,00,000 1,51,000 19,000
Income from house property (1,81,000)

2.2.11 Partly self-occupied and partly let-out [Sec. 23(3)]

Where a house or part of the house, which is self-occupied, is let out during any part of the previous year, such
property is termed as ‘Partly self-occupied and partly let out’. Further, such division may be made in the following
ways :

1) Area wise division 2) Time wise division 3) Area as well as Time wise division

Case 1) Area wise Division

In this case, a house property consists of two or more independent units and one or more of which are self-occupied
and remaining units are let out.
Treatment :
 Self-occupied portion & let out portion shall be treated as two separate house (i.e. Unit A & Unit B);
 Common value like municipal value, fair rent, standard rent, municipal tax and interest shall be
proportionately divided;
 Income of both units shall be computed separately.
Illustration 53 :
Miss Paro has a house property having two separate residential units (unit A covering 40% of total area and unit B
covering 60% of total area). Unit A is self-occupied by the assessee and unit B is let out to Sri Devdas for a monthly
rent of ₹ 3,000. With the following further information, compute her taxable income from house property :
Municipal Value ₹ 1,00,000 Municipal Tax 10%
Fair Rent ₹ 1,20,000 Interest on Loan ₹ 30,000
Standard Rent ₹ 2,00,000 Annual charge ₹ 5,000

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Solution :
Computation of Income from house property of Miss Paro for the A.Y. 2024-25 :

Unit A Unit A
Particulars Working
Details Amount Details Amount
Gross Annual Value 1 Nil 72,000
Less : Municipal Tax Nil 6,000
Net Annual Value Nil 66,000
Less : Deduction u/s
24(a) Standard Deduction Nil 19,800
24(b) Interest on loan 40:60 12,000 12,000 18,000 37,800
Income from house property (-) 12,000 28,200
Income under the head ‘Income from house property’ 16,200

Working 1 : Computation of Gross Annual Value (GAV) :

Steps Particulars Working Unit A Unit B

Municipal Value 40:60 40,000 60,000
Fair Rent 40:60 48,000 72,000
Standard Rent 40:60 80,000 1,20,000
1. RER Higher of MV & FR (RER cannot exceed SR) NIL (As S/O) 72,000
2. ARR ₹ 3,000 * 12 - 36,000
3. Gross Annual Value Higher of Step 1 & 2 - 72,000

(Case 2) Time wise division - In such case, the house property is self occupied by the assessee for a part of the year
and let out for remaining part of the year.
Treatment :
In such case, assessee will not get deduction for the self-occupied period and income will be computed as if the
property is let out throughout the year. In this regard, it is to be noted that the reasonable expected rent (RER) shall
be taken for the full year but the actual rent receivable (ARR) shall be taken only for the let-out period.
Illustration 54 :
Mr. Rana used his house property for self-occupation till 1/8/2023 and let out the same for remaining period for
rent of ₹ 6,000 p.m. Compute his income from house property from the following details:
Municipal value ₹ 1,00,000, Fair Rent ₹ 80,000, Standard Rent ₹ 96,000, Municipal tax 16%, Interest on loan
₹ 10,000

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Solution :
Computation of income from house property of Mr. Rana for the A.Y. 2024-25 :

Particulars Working Details Amount

Municipal Value 1,00,000
Fair Rent 80,000
Standard Rent 96,000
Reasonable Expected Rent Higher of MV & FR (RER cannot exceed SR) 96,000
Actual Rent Receivable ₹ 6,000 * 8 48,000 96,000
Gross Annual Value Higher of RER and ARR 16,000
Less : Municipal Tax 16% of Municipal Value 80,000
Net Annual Value
Less : Deduction u/s
24(a) Standard deduction 30% of NAV 24,000
24(b) Interest on loan 10,000 34,000
Income from house property 46,000

Illustration 55 :
How shall your answer differ if in the above illustration, property is let out to tenant from 1/4/2023 to 1/12/2023
and from 1/12/2023 to 1/3/2024, it was self-occupied. Standard rent of such property is ₹ 50,000.
Solution :
Computation of Income from house property of Mr. Rana for the A.Y. 2024-25 :

Particulars Working Details Amount

Municipal Value 1,00,000
Fair Rent 80,000
Standard Rent 50,000
Reasonable Expected Rent Higher of MV & FR (RER cannot exceed SR) 50,000
Actual Rent Receivable ₹ 6,000 * 8 48,000
Higher of RER and ARR 50,000
However, ARR is less than RER due to vacancy period [otherwise ARR would have
been ₹ 54,000 (being ₹ 6,000 * 9)] therefore ARR shall be treated as GAV.
Gross Annual Value 48,000
Less : Municipal Tax 16% of MV 16,000
Net Annual Value 32,000
Less : Deduction u/s
24(a) Standard Deduction 30% of NAV 9,600
24(b) Interest on Loan 10,000 19,600
Income from house property 12,400

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Illustration 56 :
Miss Rani used her house property for self-occupation till 1/9/2023 and let out the same for remaining period for
rent of ₹ 6,000 p.m. Municipal tax paid ₹ 5,000, interest on loan accrued ₹ 10,000. Compute her taxable income
from house property.
Solution :
Computation of income from house property of Miss Rani for the A.Y. 2024-25 :
Steps Particulars Working Details Amount
Fair Rent (Note) ₹ 6,000 * 12 72,000
1. Reasonable Expected Rent Fair Rent 72,000
2. Actual Rent Receivable ₹ 6,000 * 7 42,000
3. Gross Annual Value Higher of RER and ARR 72,000
Less : Municipal Tax 5,000
Net Annual Value 67,000
Less : Deduction u/s
24(a) Standard Deduction 30% of NAV 20,100
24(b) Interest on Loan 10,000 30,100
Income from house property 36,900
Note : Since the property has been let out for 7 months @ ₹ 6,000 p.m., therefore fair rent of the property is ₹
72,000 (being ₹ 6,000 * 12).

Case 3) Area as well as Time wise Division

Merger of Case 1 and Case 2

Illustration 57 :
Mr. Ajnabi has a house property in Cochin. The house property has two equal dimension residential units. Unit 1 is
self occupied throughout the year and unit 2 is let out for 9 months for ₹ 10,000 p.m. and for remaining 3 months
it was self-occupied. Compute his taxable income from the following details :
Municipal value ₹ 2,00,000, Fair Rent ₹ 1,60,000, Standard rent ₹ 3,00,000, Municipal tax 10% (60% paid by
assessee), Interest on loan ₹ 40,000, Expenditure on repairs ₹ 20,000.
Solution :
Working
1. Computation of Gross Annual Value (GAV)

Particulars Working Unit 1 Unit 2

Municipal Value 1:1 1,00,000 1,00,000
Fair Rent 1:1 80,000 80,000
Standard Rent 1:1 1,50,000 1,50,000
Reasonable Expected Rent Higher of MV & FR (RER cannot exceed SR) Nil 1,00,000
Actual Rent Receivable ₹ 10,000 * 9 - 90,000
Gross Annual Value Higher of Step 1 & 2 Nil 1,00,000

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2. Municipal tax = 10% of ₹ 2,00,000 = ₹ 20,000 being divided in the ratio 1:1 between Unit 1 and Unit 2. Out of
such Municipal tax only 60% is paid, therefore, Municipal tax allowed as deduction in case of Unit 2 is only
₹ 6,000 [i.e. ₹ 20,000 * ½ * 60%].
3. Interest on loan is divided in unit A and unit B in 1:1 as both units are of equal dimension.

Computation of income from house property of Mr. Ajnabi for the A.Y. 2024-25

Unit 1 Unit 2
Particulars Working
Details Amount Details Amount
Gross Annual Value 1 Nil 1,00,000
Less : Municipal Tax 2 Nil 6,000
Net Annual Value Nil 94,000
Less : Deduction u/s
24(a) Standard Deduction Nil 28200
24(b) Interest on loan 3 20,000 20,000 20000 48,200
Income from house property (-) 20,000 45,800
Conclusion : Income under the head Income from house property is ₹ 25,800 (being ₹45,800 – ₹20,000).

2.2.12 Recovery of Unrealized Rent and Arrears Rent [Sec. 25A]

Applicability
The assessee has received arrears of rent received from a tenant or the unrealised rent realised subsequently from
a tenant
Tax Treatment :
The amount so received shall be taxable under the head ‘Income from house property’ in the year of receipt after
deducting standard deduction @ 30% of such amount.
Arithmetically, taxable amount shall be -

70% × [Recovery of Arrear Rent or Unrealised Rent]

Taxpoint :
 No other deduction shall be allowed from such income except standard deduction i.e. 30% of such receipt.
(even legal expenditure shall not be allowed as deduction)
 The income is taxable on cash basis.
Note : Such receipt shall be chargeable as income from house property although the assessee is not the owner of
such property in the year of receipt.

Illustration 58 :
Mr. Lucky Ali owns a house property let out since 1/4/2019 to a school for monthly rent of ₹ 10,000. There was
no change in rent till 31/3/2023. On 1/4/2023, as per court decision rent was increased to ₹ 12,000 p.m. with
retrospective effect from 1/4/2021 and duly paid by school in the same year. Legal expenditure for such suit has
been incurred by Mr. Ali ₹ 30,000. Discuss tax treatment u/s 25A.

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Solution :
Arrears rent belongs to the period 1/4/2021 to 31/3/2023 i.e., for 24 months.
Arrears rent received = ₹ 2,000 * 24 months = ₹ 48,000
Such rent is taxable in the year of receipt as under :

Particulars Amount
Arrears of rent received 48,000
Less : Standard deduction u/s 24(a) equal to 30% of such rent 14,400
Income from house property u/s 25A 33,600
Note: Legal expenditure is not deductible.

Illustration 59 :
X Ltd. has two house properties both of which are vacant. Municipal value of 1st house property is ₹ 1,00,000 and
that of 2nd is ₹ 80,000. It has computed income from house property as under :

Particulars Details Amount

HP1: Self occupied [Sec. 23(2)(a)]
Net Annual Value (NAV) Nil
Less : Interest on loan u/s 24(b) Nil
Income from HP1 Nil
HP2: Deemed to be let out [Sec. 23(4)]
Gross Annual Value (GAV) 80,000
Less : Municipal tax Nil
Net Annual Value (NAV) 80,000
Less : Standard deduction u/s 24(a) @ 30% of NAV 24,000 56,000
Income from house property 56,000
Do you agree with the computation of income from house property of the assessee.
Solution :
In the above computation, X Ltd. Has claimed benefit of self-occupation, whereas, such benefit can be claimed
only by an individual or HUF. A company form of assessee cannot claim such benefit. Hence, income under the
head Income from house property will be as under :
Computation of income from house property of X Ltd. For the A.Y. 2024-25 :

Particulars Details Amount

HP1: Deemed to be let out [Sec. 23(4)]
Gross Annual Value (GAV) 1,00,000
Less : Municipal tax Nil

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Particulars Details Amount

Net Annual Value (NAV) 1,00,000
Less : Standard Deduction u/s 24(a) @ 30% of NAV 30,000 70,000
HP2: Deemed to be let out [Sec. 23(4)]
Gross Annual Value (GAV) 80,000
Less : Municipal tax Nil
Net Annual Value (NAV) 80,000
Less : Standard Deduction u/s 24(a) @ 30% of NAV 24,000 56,000
Income from house property 1,26,000

Illustration 60 :
Mr. Abul Hasan owns three houses at Ranchi. He furnishes the following particulars for the previous year 2022-23 :
House No. I : The house was constructed in 2022 and let out to a friend at a monthly rent of ₹ 10,000 upto
31.1.2024 and thereafter, it was let out at its fair rent of ₹ 15,000 per month. He has paid
₹ 15,000 as municipal taxes @ 10% of Municipal Value. He has also paid fire insurance
premium of ₹ 2,000.
House No. II : Ground floor is let out @ ₹ 20,000 p.m. first floor, identical to ground floor, is occupied by
him for his residence. Municipal taxes paid @ 20% amounted to ₹ 80,000.
House No. III : The house was constructed in 2012 and is used for his business. The annual value of this
house is ₹ 1,00,000 and he spent ₹ 5,000 as municipal taxes and ₹ 2,000 for repairs.
Other information :
A loan of ₹ 40,00,000 has been taken on 01-6-2021 for construction of House No. II. Construction of the house was
completed on 01-6-2022. He repaid the entire loan on 31-12-2023. Interest on loan is payable @ 12% p.a. Compute
his income from house property for the A.Y. 2024-25.
Solution :
Computation of Income from House Property of Mr. Abul Hasan for the A.Y. 2024-25 :

Particulars Details Details Amount

House 1 : Let out
Gross Annual Value 1,80,000
Less : Municipal Tax 15,000
Net Annual Value 1,65,000
Less : Deduction u/s
24(a) Standard Deduction 49,500
24(b) Interest on loan Nil 49,500 1,15,500
House 2 : Ground Floor (Let out)
Gross Annual Value 2,40,000

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Particulars Details Details Amount

Less : Municipal Tax [50%] 40,000
Net Annual Value 2,00,000
Less : Deduction u/s
24(a) Standard Deduction 60,000
24(b) Interest on loan 2,20,000 2,80,000 (80,000)
House 2 : First Floor (Self occupied)
Net Annual Value Nil
Less : Deduction u/s
24(b) Interest on loan 2,00,000 (2,00,000)
House 3 : Used in own business Nil
Income from House Property (1,64,500)

Workings :
1 Fair Rent : Since 1st house is let out by assessee to his friend @ ₹ 10,000 p.m. and the same property is let out to
other tenant @ ₹ 15,000 p.m., this signifies that 2nd house has fair rent ₹ 15,000 * 12 = ₹ 1,80,000.
2 Calculation of Interest to be deducted in A.Y. 2024-25

Previous Year Month Interest

Pre-construction Interest
2020-21 10 4,00,000
1/5 of pre-construction (a)
th
80,000
Post-construction interest (b) [₹ 40,00,000 × 12% x 9/12] 9 3,60,000
Total interest charged (a) + (b) 4,40,000
50% for Ground Floor 2,20,000

Illustration 61 :
Sarju Middey is the owner of 2 houses in Kolkata. From the following particulars of the houses, compute his
income from house property for the assessment year 2024-25 :

House A : Let-out to an employee of the business of Sarju @ ₹ 5,000 p.m. which is necessary for the purpose
of business. Municipal tax paid ₹ 3,000 and interest on loan taken for purchasing the house
amounted to ₹ 9,000.
House B : The house consists of 3 identical flats. First flat is used by him for his own business. Second flat is
used by him for his own residence. The third flat is let out at a monthly rent of ₹ 15,000. Municipal
taxes paid @ 5% amounted to ₹ 20,250.
Other information :
a. Unrealised rent for the P.Y. 2023-24 relating to third flat of House B amounted to ₹ 10,000.

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b. A loan of ₹ 20,00,000 was taken on 01.07.2020 for construction of the House B. Construction of House B was
completed on 01.06.2022. Interest on loan is 12% p.a. No repayment was made.

Particulars Details Details Amount

Flat III : Let out
Gross Annual Value (Working 1) 1,80,000
Less : Municipal Tax 20,250/3 6,750
Net Annual Value 1,73,250
Less : Deduction u/s
24(a) Standard Deduction 51,975
24(b) Interest on loan [₹ 3,24,000 / 3] 1,08,000 1,59,975 13,275
Flat II : Self occupied
Net Annual Value Nil
Less : Deduction u/s
24(b) Interest on loan [₹ 3,24,000 / 3] 1,08,000 (1,08,000)
Income from House Property 94,725

Working 1 : Computation of Gross Annual Value

Steps Particulars Working Unit 3

Municipal Value (₹ 20,250 / 5%) / 3 1,35,000
Fair Rent ₹ 15,000 × 12 1,80,000
Standard Rent -
1 Reasonable Expected Rent Higher of MV & FR (RER cannot exceed SR 1,80,000
2 Actual Rent Receivable ₹ 15,000 × 12 – ₹ 10,000 1,70,000
3 Gross Annual Value Higher of Step 1 & 2 1,80,000
Working 2 : Calculation of Interest to be deducted in respect of House 2

Previous Year Month Interest

Pre-construction Interest
2020-21 9 1,80,000
2021-22 12 2,40,000
Total 4,20,000
1/5 of pre-construction (a)
th
84,000
Post-construction interest (b) 12 2,40,000
Total interest (a) + (b) 3,24,000

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Quick MCQs:-
1. The basis of chargeability of income under the head income from house property is
(a) Rental value
(b) Annual value
(c) Value fixed by the government
(d) None of the above

2. Income from vacant plot is taxable under the head-

(a)Income from House Property
(b) Income from Other Sources
(c) Profits & Gains of Business or Profession
(d) Capital Gains

3. House Property Income is exempt for-

(a) Local Authority
(b) Charitable Trust
(c) Political Property
(c) All of the above.

4. Advance Municipal Tax paid-

(a) Shall be allowed as deduction in the year of payment
(b) can be claimed in the year in which it falls due
(c) cannot be claimed
(d) None of above

5. A has two house properties. Both are self-occupied. The Annual Value-
(a) of both house shall be Nil
(b) one house shall be Nil
(c) of no house shall be Nil
(d) Both (a) & (b)

6. “A” borrowed D 5,00,000 at 12% p.a on 01-04-2015 for construction of house property which was
completed on 15-03-2024 and let out. The amount is still unpaid. The deduction on account of interest for
the previous year 2023-24 shall be-
(a) D 60,000
(b) D 96,000
(c) D 1,80,000
(d) D 2,40,000

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7. Unrealized Rent is a deduction from-

(a) Actual Rent
(b) Net Annual Value
(c) Income from the head House Property
(d) None of above

8. Megha received D 30, 000 as arrears of rent during the previous year 2023-24. The amount taxable under
section 25A would be_______
(a) Nil
(b) D 21,000
(c) D 30,000
(d) D 25,000

9. Ms. Shilpa let out a property for D 20,000 per month during the year 2022-23. The municipal tax on the
let-out property was enhanced retrospectively. Hence, she paid D 60,000 as municipal tax which included
arrears of municipal tax of D 45,000.Her income from house property is-
(a) D 1,80,000
(b) D 1,26,000
(c) D 1,57,500
(d) D 1,36,500

10. Jaya and Vijaya are co-owners of a self-occupied property. They own 50% share each. The interest paid
by each co-owner during the previous year 2023-24 on loan (taken for acquisition of property during the
year 2004) is D 2,05,000. The amount of allowable deduction in respect of each co-owner is –
(a) D 2,05,000
(b) D 1,02,500
(c) D 2,00,000
(d) D 1,00,000

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Profits and Gains of Business or

2.3
Profession
2.3.1 Meaning of Business & Profession
Business [Sec. 2(13)]
Business includes –
 any trade, commerce or manufacture; or
 any adventure or concern in the nature of trade, commerce or manufacture.
Generally, business means recurring economic activity, but for income tax purpose an isolated activity may be
termed as business depending upon facts and circumstances. Following elements shall be considered to judge a
transaction as business transaction:

¾¾ Nature of commodity ¾¾ Intention of the party ¾¾ Efforts applied in transaction

¾¾ Periodicity of transaction ¾¾ Nature of transaction (whether incidental to a business or not)

Profession [Sec. 2(36)]

Profession includes vocation. Profession requires purely intellectual skill or manual skill on the basis of some
special learning and qualification gathered through past training or experience e.g. chartered accountant, doctor,
lawyer etc. Professional skill can be acquired only after patient study (in a particular system either a college,
university or institute) and application (i.e. experience)
Vocation implies natural ability of a person to do some particular work e.g. singing, dancing, etc. The term “vocation”
is different from the term “hobby”. Vocation must have the earning feature. It can be treated as an earning means by
which a man passes his life. Unlike profession, vocation does not require a degree or special learning.

Notes
1. Profit Motive: If the motive of an activity is pleasure only, it shall not be treated as business activity.
2. Business vs Profession: An income arising out of trade, commerce, manufacture, profession or vocation
shall have the same treatment in Income tax Act. However, a little segregation is required to be made between
business and profession while applying sec. 44AA, sec. 44AB, sec. 40AD, sec. 44ADA, etc. (discussed later
in this chapter).

2.3.2 Income chargeable under the head Profits & gains of business or profession [Sec. 28]
Sec. 28 enlists the incomes, which are taxable under the head ‘Profits & gains of business or profession’:
1. Profits & gains of any business or profession [Sec. 28(i)]: Any income from business or profession including
income from speculative transaction shall be taxable under this head.

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2. Compensation to Management agency [Sec. 28(ii)]: Any compensation/other payment due to or received -

By In connection with
Any person managing the affairs of an Indian
company Termination or modification of terms and conditions of
Any person managing the affairs of any company his appointment
in India
Any person holding an agency in India for any part
Termination of agency or the modification of terms and
of the activities relating to the business of any other
conditions in relation thereto
person
The vesting in the Government or in any corporation
Any person owned/controlled by the Government, of the
management of any property or business.
The termination or the modification of the terms and
Any person
conditions, of any contract relating to his business
3. Income of trade or professional association’s [Sec. 28(iii)]: Income derived by a trade, professional or
similar association from rendering specific services to its members shall be taxable under this head.
Note: This is an exception to the general principle that a surplus of mutual association cannot be taxed.
4. Export incentive [Sec. 28(iiia) (iiib) & (iiic)]: An export incentive in form of -
¾¾ Profit on sale of import license or duty entitlement pass book. [Sec. 28(iiia)/(iiid)/(iiie)]
¾¾ Cash assistance received/receivable by an exporter under a scheme of the Government of India [Sec.
28(iiib)]
¾¾ Duty draw back (received/receivable) for export e.g. duty drawback, etc. [Sec. 28(iiic)]
5. Perquisite from business or profession [Sec. 28(iv)]: The value of any benefit or perquisite, whether
convertible into money or not, arising from business or profession shall be taxable under this head.
Example 1: If an authorized dealer of a company receives a car (over and above his commission) from the
company on achieving sale-target then market value of such car shall be taxable under the head ‘Profits &
gains of business or profession’.
6. Remuneration to partner [Sec. 28(v)]: Any interest salary, bonus, commission or remuneration received by
a partner from the firm (or Limited Liability Partnership) shall be taxable as business income in the hands of
the partner to the extent allowed in hands of firm (or Limited Liability Partnership) u/s 40(b).
7. Amount received or receivable for certain agreement [Sec. 28(va)]: Any sum, whether received or
receivable in cash or in kind, under an agreement for -
¾¾ not carrying out any activity in relation to any business or profession; or
¾¾ not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business or
commercial right of similar nature or information or technique likely to assist in the manufacture or
processing of goods or provisions for services.
Exceptions: The aforesaid provision is not applicable in respect of the following:
a. any sum received or receivable in cash or in kind on account of transfer of the right to manufacture,
produce or process any article or thing; or right to carry on any business or profession, which is chargeable
under the head Capital gains;

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b. any sum received as compensation from the multilateral fund of the Montreal Protocol on Substances that
Deplete the Ozone Layer under the United Nation Environment Programme, in accordance with the terms
of agreement (whether or not in writing, whether or not intended to be enforceable by legal proceedings)
entered into with the Government of India
8. Keyman Insurance Policy [Sec. 28(vi)]: Any sum received under a Keyman Insurance Policy including
bonus on such policy. As per sec. 10(10D) Keyman insurance policy is a life insurance policy taken by a person
on the life of another person who is or was -
¾¾ an employee of the first mentioned person; or
¾¾ in any manner whatsoever connected with the business of the first mentioned person.
and includes such policy which has been assigned to a person, at any time during the term of the policy, with
or without any consideration
9. Conversion of stock into capital asset [Sec. 28(via)]: The fair market value of inventory as on the date on
which it is converted into, or treated as, a capital asset. (Discussed later in the chapter)
10. Recovery against certain capital assets covered u/s 35AD [Sec. 28(vii)]: Any sum received or receivable
(in cash or kind) on account of any capital asset (other than land or good­will or financial instrument) being
demolished, destroyed, dis­carded or transferred, if the whole of the expenditure on such capital asset has been
allowed as a deduction u/s 35AD (Discussed later in this chapter).

General Points
1. Chargeability: As per sec. 145(1), income chargeable under the head “Profits & gains of business or
profession” or “Income from other sources”, shall subject to the provision of sec. 145(2), is to be computed in
accordance with the method of accounting (i.e. either on cash or on accrual basis) regularly followed by the
assessee. However, there are certain expenditures specified u/s 43B, which shall be deductible only on cash
basis.
As per sec. 145(3), where the Assessing Officer is not satisfied about the correctness or completeness of
the accounts of the assessee, or has not been regularly followed by the assessee, or income has not been
computed in accordance with the notified standards, the Assessing Officer may make an assessment in the
manner provided u/s 144 i.e. Best Judgment Assessment.
2. Negative income: Income includes negative income i.e. loss.
3. Notional profit: A person cannot do business with himself, hence notional profit is not taxable. E.g. If proprietor
withdraws goods costing ₹ 10,000 for personal use at an agreed value of ₹ 12,000 then profit of ₹ 2,000 shall
not be taxable.
4. Anticipated profit or loss: Anticipated or potential profit or loss, which may or may not arise in future are not
considered for deriving taxable income.
5. Legality of business: There is no difference between legal or illegal business from income tax point of view.
Even income of illegal business shall be taxable.
6. Compilation of income of all business or profession: If an assessee carries on several business or profession,
then income from all business or profession shall be merged together.
7. Business or profession must be carried on during the previous year. Income is chargeable under the head
“Profits & gains of business or profession” only if the business is carried on by the assessee during the previous
year. It is not necessary that the business should continue throughout the year or till the end of previous year.

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Exceptions
However, in the following cases, income may be charged under the head Profits & gains of business or
profession even though the business is not carried on during the previous year:
Sections Details
176(3A)/(4) Applicability: Where any business or profession is discontinued in any year and any sum
received after the discontinuance.
Treatment: The sum so received shall be deemed to be the income of the recipient & charged
to tax accordingly in the year of receipt, if such sum would have been included in the total
income of the person who carried on the business had such sum been received before such
discontinuance
*41(1) Recovery of any amount earlier allowed as deduction
*41(2) Balancing charge in case of power sector unit
*41(3) Sale of an asset used for scientific research
*41(4) Bad debt recovery which was earlier allowed as deduction
*41(4A) Amount withdrawn from a reserve created u/s 36(1)(viii)
* Discussed later in this chapter

2.3.3 Incomes not taxable under the head Profits and gains of business or profession
Following incomes are though in the nature of profits and gains of business or profession, shall not be taxable under
this head:
1. Rent from house property is taxable u/s 22 under ‘Income from house property’ even though -
¾¾ the assessee is engaged in the business of letting out properties on rent; or
¾¾ such property is held as stock in trade
Note: However, where letting of house supporting the smooth running of the business (i.e. incidental to
business), then such income shall be taxable under this head.
2. Dividend on shares is taxable u/s 56(2)(i) under the head ‘Income from other sources’ even though the
assessee deals in shares and such shares are held as stock in trade. The provision is not applicable in case of
interest on securities held as stock in trade.
3. Winning from lotteries, races etc. are taxable under the head ‘Income from other sources’ even if such
income is derived through regular business activity.
Treatment of lottery ticket held as stock in trade: However, where an assessee deals in lottery tickets and
some of the lottery tickets remained unsold, any winning from such unsold lottery ticket shall be treated as
incidental to business and taxed under the head ‘Profits and gains of business or profession
4. Exempted income by virtue of sec. 10, 11 or 13A.
5. Sum taxable under the head ‘Capital gains’ for the purpose of sec. 28 (va) shall not be taxable under this
head. E.g. profit on sale of route permit shall not be taxable under the head ‘Profits & gains of business or
profession’.

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2.3.4 Expenditures allowed as deduction

General Notes
1. Capital -vs.- Revenue expenditure: Capital expenditures are not allowed as deduction, unless & until
expressly allowed whereas revenue expenditures are allowed as deduction until & unless expressly disallowed
under the Income tax Act.
2. Expenditure of non-assessable business: Any expenditure of a non-assessable business is not allowed as
deduction. For instance, expenditure for earning agricultural income is not allowed as deduction from income
of an assessable business.
3. Expenditure must relate to the business of the assessee: Expenditure must have been incurred by the
assessee for its business.
Note: In case where the assessee incurs expenditure for its own business, the mere fact that the benefit of such
expenditure is enjoyed by some other person, cannot deny the admissibility of the expenditure.
4. Anticipated loss or expenditure: Subject to certain exceptions, no deductions are allowed for anticipated
losses. E.g. provision for bad & doubtful debts.
5. Notional expenditure: No one can earn income from himself/herself. For instance, rent paid to a sole proprietor,
salary to proprietor, interest on capital to proprietor, etc. are not income in the hands of the proprietor. Hence,
it is not deductible from the income of business as expenditure.
6. Onus to proof: Onus to proof lies with the assessee. It is the responsibility of the assessee to prove that a
particular expenditure is to be allowed as deduction in his case.

2.3.5 Specific Deductions

As per sec. 29, income under this head will be computed considering the provisions of sec. 30 to 43DB, which
decides the admissibility of expenditures for computing income under this head.

2.3.6 Rent, rates, taxes, repairs & insurance for building [Sec. 30]
Rent, rates, taxes, repairs & insurance for premises used for the purpose of business or profession shall be allowed
under this section. Points to be noted in this regard:
1. Use of building: The building is to be used for the purpose of business or profession. However, if the building
is not exclusively used for the purpose of business or profession then deduction shall be restricted to a fair
proportion of above expenditure which the Assessing Officer may determine [Sec. 38(2)].
2. Notional Rent: Rent paid to proprietor is disallowed but rent paid by firm to its partner for using his premises
is an allowed expenditure.
3. Current repair vs Capital repair: Only current repairs are allowed as deduction. Capital repairs are not
allowed as deduction whether the assessee occupies the building as a tenant or as a landlord.
Current repair (irrespective of the amount involved) means -
 a repair incurred to preserve and maintain an existing asset; and
 a repair which does not result in a new or fresh advantage.
4. Municipal taxes: Rates & taxes (for e.g. land revenue, municipal tax, etc) are deductible on cash basis [Sec.

30 read with sec. 43B]

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2.3.7 Repairs & insurance of machinery, plant & furniture [Sec. 31]
Repairs & insurance of plant, machinery & furniture are allowed as deduction. Points to be noted in this regard:
1. Use of asset: The asset must be used for the purpose of business or profession. However, if the asset is not
exclusively used for the purpose of business or profession then deduction shall be restricted to a fair proportion
of above expenditure, which the Assessing Officer may determine [Sec. 38(2)].
2. Current repair vs Capital repair: Only current repairs are allowed as deduction.
Example 2:
¾¾ Heavy expenditure incurred for replacement of part of a ship without creating any asset is deductible
¾¾ Any expenditure on the replacement of petrol engine by a diesel engine on his vehicle is allowed u/s 31.
3. Rent for furniture, plant or machinery: Only repairs & insurance of machinery, plant & furniture is covered
under this section. Rent paid for use of such assets is deductible u/s 37(1).

2.3.8 Depreciation [Sec. 32]

Sec. 32 provides for depreciation on -
Tangible assets Building, Machinery, Plant and Furniture.
Intangible assets Know how, Copyright, Trade Mark, Patent, Licence, Franchise, or any other business or
commercial right of the similar nature acquired on or after 1/4/1998
However, it does not include goodwill

Conditions for claiming depreciation

Depreciation is allowed provided the following conditions are satisfied:

Condition 1: Asset must be owned by the Condition 2: Asset must be used for the purpose of business or
assessee. profession during the previous year.

Notes
¾¾ Beneficial owner: Assessee need not be a
registered owner, even a beneficial owner ¾¾ Passive use -vs.- Active use: Use includes active use
can claim depreciation. as well as passive use. Active use means actual use of the
property for the purpose of business or profession. Whereas
passive use includes “ready to use”. It means, if a property
¾¾ Co-owner: In case of joint ownership,
was not actually used for business or profession but was
depreciation is allowed on proportionate
ready to use in the previous year, in such case, assessee can
basis.
claim depreciation on such assets

¾¾ Property acquired on hire purchase: In ¾¾ Partly used for business or profession: As per sec.
case of hire purchase, the buyer can claim 38, if an asset is partly used for business or profession
depreciation even though he does not get and partly used for personal purpose, then proportionate
legal title of the asset till he pays the last depreciation (as determined by the Assessing Officer) shall
instalment. be allowed.

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¾¾ Capital expenditure on a property by ¾¾ House property let out to tenant for smooth running
the lessee: Where an assessee being a of the business: If an assessee lets out a property to his
lessee of a property incurs any capital employee and where such letting-out supports smooth
expenditure by way of improvement, flow of his business, then rent received from employee
extension, super construction, etc. on a shall be chargeable under the head “Profits & gains of
building being used for his business or business or profession” and such property shall be eligible
profession, he is entitled to depreciation for depreciation u/s 32. Similarly, where an assessee makes
in respect of such capital expenditure. available his property to any Government agency for
locating branch of a nationalized bank, police station, post
¾¾ Sec. 53A of Transfer of Property Act:
office, tax office, railway staff quarters, etc. for the purpose
Possessor of an immovable property u/s
of running the business of assessee more efficiently, then
53A of Transfer of Property Act can claim
such letting out shall be deemed to be incidental to business
depreciation even though he is not the
and depreciation on such building shall be allowed u/s 32.
registered owner of the property.

Method of computing depreciation (other than power units)

The method of computing depreciation as per Income tax Act is entirely different from accountancy method. For
Income tax purpose, assets are categorised into Block of Assets.

Block of Assets [Sec. 2(11)]

Block of assets means a group of assets of same nature, in respect of which same rate of depreciation is charged.
In other words, to fall in the same block, the following two conditions are to be satisfied:
 Assets must be of same nature;
Tangible assets being building, machinery, plant or furniture, and
Intangible assets, being know-how, patents, copy-rights, trade marks, licenses, franchises or any other business
or commercial rights of similar nature acquired on or after 1-4-1998 (it does not include goodwill);
 Rate of depreciation on such asset must be same.

Method of Depreciation
Depreciation shall be allowed on written down value method at the rates prescribed.
Calculation of depreciation (at a glance)
Particulars Amount
W.D.V of the block at the beginning of the previous year ***
Add: Assets (falling within the block) acquired during the previous year ***
ABC
Less: Sale Proceeds of assets (falling within the block) sold during the previous year [$subject to (DE)$
max. of ABC]
Written Down Value [# XYZ cannot be negative] XYZ#
Less: Depreciation (as a % on XYZ) (***)
Opening WDV for 1st day of next year ****

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When depreciation is not charged

Depreciation is not charged in the following two cases:
1. When ‘DE’ (Sale proceeds) exceeds ABC, the excess shall be treated as short term capital gain.
2. When ‘XYZ’ (Value of block before depreciation) is positive but the block does not have any asset. In such
case, such positive value shall be treated as short term capital loss.

Significance of date of purchase (Effect of time on depreciation)

Where -
a. an asset is acquired by the assessee during the previous
year; and
b. is put to use in the same previous year for less than 180
days,
- the depreciation in respect of such asset is restricted
to 50% of the normal depreciation.
Except above, date of purchase has no relevance.
Taxpoint: There is no significance of date of sale for
computation of depreciation.

Extract of depreciation-rate
Block Nature of Asset
Buildings1 5% Residential building other than hotels and boarding
Buildings 10% Non residential building, godown, office, factory, etc. including hotels and boarding
Buildings 40% Temporary construction
Furniture 10% Any furniture including electrical fittings
Plant/Machinery 20% Ocean going ships, vessels, speed boats
Plant/Machinery 30% Motor car (including lorries and buses) used for hiring purposes
Motor car, other than used in a business of running them on hire, acquired and put
Plant/Machinery 30%
to use between 23-08-2019 and 31-03-2020
Motor buses, motor lorries and motor taxis used in a business of running them on
Plant/Machinery 45%
hire, acquired and put to use between 23-08-2019 and 31-03-2020
Computer including computer software
Plant/Machinery 40%
Books owned by a professional
Plant/Machinery 40% Air or water pollution control equipment
Plant/Machinery 15% Oil Wells
In general (if nothing is mentioned regarding nature of plant & machinery and
Plant/Machinery 15%
including motor car not used for hiring purpose)
Intangible assets3 25% Acquired after 31/3/98
1.
Buildings include roads, bridges, culverts, wells (excluding oil wells) and tube wells.
2.
Plant does not include tea bushes or live stocks or buildings or furniture & fittings.
3
Patent, Know-how, Copy-rights, Trade-mark, Licences, Franchises and other business or commercial right of
similar nature (it does not include goodwill)

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Illustration 62:
M/s Anita Enterprises has written down value in furniture block (depreciation rate 10%) as on 1/4/2023 ₹ 80,000.
The block consists of two furniture X and Y.
Compute depreciation u/s 32 for the A.Y. 2024-25 in the following cases:
Case A Furniture X sold for ₹ 20,000 on 1/5/2023
Case B Furniture X sold for ₹ 1,00,000 on 1/1/2024
Case C Furniture X sold for ₹ 1,00,000 and Furniture S purchased for ₹ 35,000 as on 1/7/2023
Case D Furniture X sold for ₹ 10,000 and Furniture S purchased for ₹ 40,000 as on 1/7/2023
Case E Furniture X sold for ₹ 10,000 and Furniture S purchased for ₹ 40,000 as on 11/11/2023
Case F Furniture X sold for ₹ 2,00,000 and Furniture S purchased for ₹ 40,000 as on 11/11/2023
Case G Furniture X and Furniture Y both sold for ₹ 10,000 and ₹ 35,000 respectively.
Case H Furniture X and Furniture Y both sold for ₹ 10,000 and ₹ 35,000 respectively as on 11/11/2023. New
Furniture T purchased for ₹ 5,000 as on 1/7/2023.
Case I Furniture Z purchased for ₹ 40,000 on 1/7/2023 and the same being put to use on 11/11/2023.
Case J Furniture Q purchased for ₹ 50,000 on 1/7/2023 but put to use on 1/11/2024.
Case K Furniture R purchased for ₹ 30,000 on 1/7/2022 but put to use on 11/11/2023.
Case L Furniture S purchased for ₹ 10,000 on 1/7/2023 but put to use on 11/11/2023 and Furniture X and Y
sold for ₹ 10,000 and ₹ 6,000 respectively.
Case M Furniture R purchased for ₹ 30,000 on 1/7/2023 and sold the same for ₹ 40,000 on 11/11/2023.
Case N Sold Furniture X and Y for ₹ 95,000 on 1/7/2023 & purchased Furniture R for ₹ 30,000 on 11/11/2023
Case O Sold Furniture X for ₹ 90,000 on 11/7/2023 and following Furniture put to use -
¾¾ Furniture A on 18/12/2023, purchased on 17/12/2023 for ₹ 30,000;
¾¾ Furniture B on 18/2/2024, purchased on 15/8/2023 for ₹ 50,000;
¾¾ Furniture Z on 18/4/2023, purchased on 17/7/2022 for ₹ 60,000;
¾¾ Furniture P on 8/12/2023, purchased on 17/5/2022 for ₹ 10,000;
¾¾ Furniture Q on 1/4/2024, purchased on 31/3/2024 for ₹ 20,000.
Assume in all cases new furniture is charged to deprecation @ 10%
Solution :
Computation of depreciation for the A.Y. 2024-25

Particulars Case A Case B Case C Case D Case E Case F Case G Case H

Block: Furniture (10%)
W.D.V. as on 1/4/2023 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000
Add: Purchase Nil Nil 35,000 40,000 40,000 40,000 Nil 5,000
80,000 80,000 1,15,000 1,20,000 1,20,000 1,20,000 80,000 85,000
Less: Sale Proceeds 20,000 80,000# 1,00,000 10,000 10,000 1,20,000# 45,000 45,000
60,000 Nil 15,000 1,10,000 1,10,000 Nil 35,000 40,000
Depreciation 6,000 Nil 1,500 11,000 9,0001 Nil Nil 4,000
Short term capital gain 20,000 80,000
Short term capital Loss (35,000)

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#
Sale Proceeds cannot exceed Opening WDV as increased by actual cost of asset acquired during the previous
year. Excess, if any, shall be considered as short term capital gain.

Computation of depreciation for the A.Y. 2024-25

Particulars Case I Case J Case K Case L Case M Case N

Block: Furniture (10%)
W.D.V. as on 1/4/2023 80,000 80,000 80,000 80,000 80,000 80,000
Add: Purchase 40,000 Nil 30,000 10,000 30,000 30,000
1,20,000 80,000 1,10,000 90,000 1,10,000 1,10,000
Less: Sale Proceeds Nil Nil Nil 16,000 40,000 95,000
1,20,000 80,000 1,10,000 74,000 70,000 15,000
Depreciation 10,000 2
8,000 11,000 3
6,900 4
7,000 7505
Short term capital gain
Short term capital Loss
1
(₹ 70,000 * 10%) + (₹ 40,000 * 10% * ½) 2
(₹ 80,000 * 10%) + (₹ 40,000 * 10% * ½)
3
Though the asset was put to use for less than 180 days but since it was not acquired in the current year hence
provision for ½ year depreciation shall not be applicable
4
(₹ 10,000 * 10% * ½) + (₹ 64,000 * 10%) 5
(₹ 15,000 * 10% * ½)

Case O: Computation of depreciation for the A.Y. 2024-25

Particulars Details Amount

Block: Furniture (10%)
W.D.V. as on 1/4/2023 80,000
Addition during the year:
–– Furniture A (eligible for ½ year depreciation) 30,000
–– Furniture B (eligible for ½ year depreciation) 50,000
–– Furniture Z 60,000
–– Furniture P 10,000 1,50,000
2,30,000
Less: Sale Proceeds 90,000
1,40,000
Depreciation [{₹ 80,000 * 10% * ½} + {₹ 60,000 i.e. (₹ 1,40,000 – ₹ 80,000) * 10%)] 10,000
Since, furniture Q was put to use on 1/4/2024, therefore depreciation shall not be charged in the P.Y.2023-24.

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Illustration 63:
Mr. X, a grower and manufacturer of tea, purchased machinery (15%) on 10-04-2022 for ₹ 10 lakh. He computed
depreciation for A.Y. 2024-25 as given below; needs your comment on his working:

Particulars Amount

Opening W.D.V. as on 1/4/2022 Nil

Add: Assets purchased during the year 10,00,000

10,00,000

Less: Depreciation for the P.Y. 2022-23 [₹ 10,00,000 * 15% * 40%] 60,000

(As he is engaged in the business of growing and manufacturing tea; hence 60% is considered as
part of agricultural income)

Opening W.D.V. as on 1/4/2023 9,40,000

Less: Depreciation for the P.Y. 2023-24 [₹ 9,40,000 * 15% * 40%] 56,400

Opening W.D.V. as on 1/4/2023 8,83,600

Further, compute his business income for A.Y. 2024-25 assuming that his income before depreciation and without
reducing element of agricultural income is ₹ 8,00,000/-
Solution :
The method of computation of depreciation followed by Mr. X is not correct as Expl. 7 to sec.43(6) provides that:
“Where the income of an assessee is derived, in part from agriculture and in part from business chargeable to
income-tax under the head “Profits and gains of business or profession”, for computing the written down value of
assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire income
is derived from the business of the assessee under the head “Profits and gains of business or profession” and the
depreciation so computed shall be deemed to be the depreciation actually allowed under this Act.”
The correct computation of depreciation is as follow:

Particulars Amount
Opening W.D.V. as on 1/4/2022 Nil

Add: Assets purchased during the year 10,00,000

10,00,000

Less: Depreciation for the P.Y. 2022-23 [₹ 10,00,000 * 15%]

(Considering the entire income as taxable income) 1,50,000

Opening W.D.V. as on 1/4/2023 8,50,000

Less: Depreciation for the P.Y. 2023-24 [₹ 8,50,000 * 15%] 1,27,500

Opening W.D.V. as on 1/4/2024 7,22,500

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Computation of business income of Mr. X for A.Y. 2024-25

Particulars Amount

Income before depreciation and without reducing element of agricultural income 8,00,000

Less: Depreciation 1,27,500

6,72,500
Less: Agricultural Income being 60% of above 4,03,500
Profits and Gains of Business or Profession 2,69,000

2.3.9 Additional depreciation [Sec. 32(1)(iia)]

Applicability
Additional depreciation is applicable on all assessee engaged in the business of manufacture or production of any
article or thing or in the business of generation, transmission or distribution of power
Conditions to be satisfied
1. Assessee must be an industrial undertaking, which manufactures or produces any article or thing or in the
business of generation, transmission or distribution of power.
2. Assessee acquired and installed after 31st March, 2005, a new plant or machinery, other than the following:
¾¾ Ships and air crafts; or
¾¾ Any plant or machinery which was used either within or outside India by any other person before such
installation; or
¾¾ Any plant or machinery installed in office premises or any residential accommodation or guest house; or
¾¾ Any office appliances or road transport vehicle; or
¾¾ Any plant or machinery, which is allowed for 100% deduction (whether by way of depreciation or
otherwise) in the previous year.
Taxpoint: Additional depreciation shall be available only on plant and machinery and not on other asset like
furniture, building, etc.
Rate of additional depreciation
Rate of additional depreciation is 20% of actual cost of such plant or machinery.
 Where, if the asset is acquired and put to use for less than 180 days then additional depreciation @ 10% (i.e.,
50% of 20%) of actual cost shall be allowed in that previous year and the deduction for the balance 10% shall
be allowed in the immediately succeeding previous year.
Taxpoint
1. Additional depreciation shall be reduced while computing the closing WDV of the respective block.
2. Additional depreciation is not available if the new plant or machinery is sold in the year of acquisition.
3. Additional depreciation is not available if the power unit is claiming depreciation under straight line method
i.e. u/s 32(1)(i)

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Provision Illustrated
B Ltd., a newly formed manufacturing concern, has furnished you the following details to compute Depreciation
allowed for the A.Y. 2023-24 and 2024-25:
Assets Date of Acquisition Cost of Acquisition Rate of depreciation
Plant A 02/04/2022 5,00,000 15%
Plant B 07/05/2022 3,00,000 15%
Plant C 15/12/2022 2,00,000 15%
Plant D 05/05/2023 1,00,000 15%
Solution:
Computation of Additional Depreciation

Additional depreciation
Assets Rate Cost
A.Y. 2023-24 A.Y. 2024-25
Plant A 20% 5,00,000 1,00,000 Nil#
Plant B 20% 3,00,000 60,000 Nil#
Plant C 10% 2,00,000 20,000 20,000
Plant D 20% 1,00,000 Nil 20,000
Total 1,80,000 40,000
Calculation of Depreciation u/s 32 of Plant (15%) for the A.Y.2023-24 and 2024-25
Particulars Details Amount
W.D.V. as on 1/4/2022 -
Add: Purchase during the year 10,00,000
10,00,000
Less: Sale during the year Nil
10,00,000
Depreciation (normal) [(₹ 8,00,000 * 15%) + (₹ 2,00,000 * 15% * ½)] 1,35,000
Additional depreciation (as computed above) 1,80,000 3,15,000
W.D.V. as on 1/4/2023 6,85,000
Add: Purchase during the year 1,00,000
7,85,000
Less: Sale during the year Nil
7,85,000
Depreciation (normal) [₹ 7,85,000 *15%] 1,17,750
Additional depreciation (as computed above) 40,000 1,57,750
W.D.V. as on 1/4/2024 6,27,250

Illustration 64:
An industrial undertaking, which commenced the manufacturing activity with effect from 1st September, 2023 has
acquired the following assets during the previous year 2023-24:

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Assets Date of acquisition Date when put to use Cost of acquisition

Factory building 4-4-2023 1-9-2023 50,00,000
Plant & Machinery
Machinery A 5-5-2023 1-9-2023 2,00,000
Machinery B 7-6-2023 1-9-2023 5,00,000
Machinery C 30-8-2023 1-9-2023 10,00,000
Machinery D 1-9-2023 31-10-2023 4,00,000
Machinery E 1-1-2024 28-2-2024 3,00,000
Machinery F (second hand) 11-1-2024 13-1-2024 2,00,000
Motor car 1-2-2024 1-2-2024 5,00,000
Air-conditioner (installed in the office) 1-2-2024 2-2-2024 1,00,000
Compute the depreciation allowable for the assessment year 2024-25 and the written down value as on 1st April
2024.
Solution :
Computation of depreciation allowable for the A.Y. 2024-25
Particulars Building Plant & Machinery1
Rate 10% 15%
W.D.V. as on 1-4-2023 Nil Nil
Add: Purchase during the year 50,00,000 32,00,000
50,00,000 32,00,000
Less: Sale proceeds Nil Nil
50,00,000 32,00,000
Depreciation on above 5,00,000 7,77,500
W.D.V. as on 1-4-2024 45,00,000 24,22,500 (Note)
1.
Block consists of Machinery A to Machinery F, Motor Car & Air-conditioner.
2.
Depreciation on plant and machinery

- Normal [(₹ 17,00,000 * 15%) + (₹ 15,00,000 * 15% * ½)] 3,67,500

- Additional (on Machinery A to E) [(₹ 17,00,000 * 20%) + (₹ 7,00,000 * 20% * ½)] 4,10,000
Total Depreciation 7,77,500
Note
1. Asset which was put to use for less than 180 days is eligible for ½ year depreciation. However, additional
depreciation of ₹ 70,000/- (i.e. ₹ 7,00,000 * 20% * ½) shall be available in the A.Y.2025-26.
2. Additional depreciation is not available on following assets:

Asset Reason
Factory building As it is not plant and machinery
Machinery-F As it is a second hand machinery

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Asset Reason
Motor car As it is a road transport vehicle
Air conditioner As it is installed in office

2.3.10 Treatment of Slump sale

Slump sale [Sec. 2(42C)]: It means transfer of undertaking(s) for a lump sum consideration without assigning
values to the individual assets of such undertaking(s).
Computation of written down value of block of assets in case of slump sale

Particulars Amount
W.D.V of the block at the beginning of the previous year ***
Add: Purchase during the previous year ***
Mno
Less: Sale consideration for assets sold (to the maximum of mno) (****)
Pqr
Less: WDV (Note) of the asset sold under slump sale (abc)
[Value of deduction at this stage i.e. abc cannot exceed pqr]
XYZ
Less: Depreciation (as a % on XYZ) (***)
WDV of the block at the end of year ****
Note: Written down value of the asset sold under slump sale
Particulars Amount
Original cost of asset sold under slump sale ***
Less: Depreciation (actual) allowed on such asset in respect of any previous year (***)
commencing before 1987-88
Less: Depreciation (notional) that would have been allowable from the previous year (***)
1987-88 onwards as if the asset is only asset in the relevant block.
Written down value of the asset sold under slump sale ***

2.3.11 Depreciation in case of Power Units

An undertaking engaged in the business of generation or generation and distribution of power may charge
depreciation (in respect of asset acquired after 31/3/1997) at its choice under -
 Written-down value method as followed by all other assessee (usual); or
 Straight-line method at the prescribed rate in ‘Appendix IA’ of the Income Tax Rules on actual cost of asset
(not the block value of asset)
However, such option shall be exercised before the due date of furnishing return of income. Further, it may be noted
that once the option is exercised, it shall be applicable for all subsequent assessment years.

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Note: Additional depreciation is not available to the assessee who claims depreciation as per Straight-Line Method.

Terminal Depreciation and Balancing Charge

Applicable
Assessee engaged in generation or generation and distribution of power.
to
1. Assessee must follow the straight-line method of depreciation at specified rates.
Conditions 2. The asset is sold, discarded, demolished or destroyed in the previous year (other than the
previous year in which it is first brought into use).
Terminal Depreciation Balancing Charge
Loss on transfer of such asset is Profit on transfer of such asset to the maximum of accumulated
treated as terminal depreciation. depreciation shall be treated as balancing charge.
Taxpoint: The difference between sale price and actual cost shall be
treated as capital gain.
¾¾ Terminal depreciation = + ve
Meaning
value of [WDV of assets – Taxpoint:
(Sale value or Scrap value)]
Balancing Charge = - ve value of [WDV of assets – (Sale
¾¾ Terminal depreciation is value + Scrap value)]
written off in the books of
However, balancing charge cannot exceed accumulated
accounts.
depreciation claimed on such asset.
As per sec. 41(2), balancing charge is fully taxable as business
Terminal depreciation is fully
income in the previous year in which such income falls due.
Treatment allowed as deduction as a business
The provision holds good even if the business does not exist
loss.
in that year.

Illustration 65:
Important Ltd. is a power-generating unit. On 1-4-2021, it purchased a plant of ₹ 50,00,000 eligible for depreciation
@ 15% on SLM. Compute balancing charge or terminal depreciation assuming the plant is sold on 21/4/2023 for:
A) ₹ 7,50,000 B) ₹ 30,00,000 C) ₹ 45,00,000 D) ₹ 55,00,000

Solution :
Computation of capital gain or balancing charge or terminal depreciation for the A.Y.2024-25

Amount
Particulars Note
A B C D
Written down value as on 1/4/2023 1 35,00,000 35,00,000 35,00,000 35,00,000
Less: Sale Proceeds 7,50,000 30,00,000 45,00,000 55,00,000
Balance 27,50,000 5,00,000 (-) 10,00,000 (-) 20,00,000
Terminal depreciation 27,50,000 5,00,000 Nil Nil
Balancing Charge 2 Nil Nil 10,00,000 15,00,000
Short term capital gain 2 Nil Nil Nil 5,00,000

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Notes
1. Computation of Written down value as on 1/4/2023

Particulars Amount
Original cost 50,00,000
Less: Depreciation for the year 2021-22 7,50,000
WDV as on 1/4/2022 42,50,000
Less: Depreciation for the year 2022-23 7,50,000
WDV as on 1/4/2023 35,00,000
2. Balancing charge cannot exceed accumulated depreciation claimed on such asset. The total negative balance
in case D is ₹ 20,00,000 but the accumulated depreciation is ₹ 15,00,000 only. Hence, balancing charge is
restricted to ₹ 15,00,000 & the balance i.e. ₹ 5,00,000 shall be treated as short-term capital gain.

Test Yourself
1. Taj Electric Supply Company Ltd. which was charging depreciation on straight line method and whose actual
cost of the asset was ₹ 20,00,000 and written down value ₹ 18,72,300 sold the said asset during 2023-24 after
2 years. What will be the tax treatment for assessment year 2024-25 if the asset is sold for:
i. ₹ 30,000;
ii. ₹ 18,72,300;
iii. ₹ 19,80,000;
iv. ₹ 21,00,000
Hints
(i) ₹ 18,42,300 Terminal Depreciation (ii) Nil (iii) ₹ 1,07,700 Balancing Charge (iv) ₹ 1,27,700 Balancing charge
and ₹ 1,00,000 Short Term Capital Gain
In all the cases, no further depreciation is allowable to the assessee in respect of such asset.

2.3.12 Actual cost of assets [Sec. 43(1)]

In calculation of actual cost, apart from cost price of the asset, following expenditure incurred relating to such asset
shall be included:
 Expenses directly related to acquisition of the asset including travelling expenditure incurred for acquiring
asset.
 Expenses necessary to bring the asset to site, installation, and to make it ready to use, e.g. carriage inward,
loading and unloading charges, installation cost, trial run cost, etc.
 Expenses incurred to increase the capacity of the asset or to make it fit prior to its use.
Actual cost means the actual cost of the assets to the assessee, as reduced by that portion of the cost thereof, if any,
as has been met directly or indirectly by any other person or authority. Eg.: If an asset is purchased for ₹ 5,00,000
and Government grant received for the same ₹ 1,00,000, then the actual cost of the asset for tax purpose shall be
₹ 4,00,000.

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Following points shall be considered -

Particulars Actual cost of acquisition

In respect of acquisition of any asset or part thereof:
a) payment or aggregate of payments made to a person in a day is made
otherwise than by an account payee cheque drawn on a bank or an
account payee bank draft or use of electronic clearing system through
Assets acquired against cash a bank account or through other prescribed electronic mode; and
b) such payment exceeds ₹ 10,000
c) Such payment shall be ignored for the purposes of determination of
actual cost.
Actual cost to the previous owner as reduced by -
(a) Amount of depreciation actually allowed under this Act till the A.Y.
Asset acquired by way of gift or 1987-88; and
inheritance (b) Amount of depreciation that would have been allowable to the
assessee from A.Y. 1988-89, as if the asset was the only asset in the
relevant block.
Interest treatment in case of asset Before asset is put to use Interest to be added to actual cost
acquired out of borrowed fund After asset is put to use Interest is allowed u/s 36(1)(iii)
Any subsidies received from the Grant or subsidies will be subtracted from cost of acquisition of such asset.
Government or any other authority
for purchase of an asset
Actual cost of asset shall be reduced by the amount of input tax credit
GST included in the invoice
taken against GST
Asset acquired from any person
Actual cost to be determined by the AO with the prior permission of
using the asset for his business or
Deputy Commissioner
profession with a view to avoid tax

WDV at the time of first transfer or the price paid for reacquisition,
Reacquisition of transferred asset
whichever is lower

Asset acquired by an assessee from

another person and given on lease
WDV of the asset to the transferor
to the same person who had earlier
claimed depreciation on such asset

Building used for personal purpose Cost of purchase or construction of the building as reduced by the notional
subsequently brought into business depreciation by applying the rate applicable on the date of such conversion
Asset, which was acquired outside Actual cost to the assessee, as reduced by an amount equal to the amount of
India, is brought by a non-resident depreciation calculated at the rate in force that would have been allowable
assessee to India and used for had the asset been used in India for the said purposes since the date of its
the purposes of his business or acquisition by the assessee
profession

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Particulars Actual cost of acquisition

Any capital asset transferred by Actual cost to the transferee company shall be taken to be the same as
a holding company to its 100% it would have been if the transferor company had continued to hold the
subsidiary company or vice versa capital asset for the purpose of its business
where transferee company is an
Indian company.
Any capital asset transferred by Actual cost to the amalgamated company shall be taken to be the same as it
the amalgamating company to the would have been if the amalgamating company had continued to hold the
amalgamated company where the capital asset for the purpose of its own business
amalgamated company is an Indian
company
Any capital asset transferred by the
Actual cost to the resulting company shall be taken to be the same as it
demerged company to the resulting
would have been if the demerged company had continued to hold the
company where the resulting
capital asset for the purpose of its own business
company is an Indian company
Capital asset is acquired by the Actual cost of the asset shall be deemed to be the amount which would
assessee under a scheme for have been regarded as actual cost had there been no such corporatisation
corporatisation of a recognised
stock exchange in India
Where an assessee was not required Actual cost shall be reduced by the total amount of depreciation on such
to compute his total income under asset, provided in the books of account (as adjusted by amount attributable
Income tax Act for any previous to the revaluation of assets) of the assessee in respect of such previous
year(s) preceding the relevant year(s) preceding the relevant previous year
previous year
The actual cost of any capital asset Actual cost of the asset shall be taken as nil. (Discussed later in this chapter)
on which deduction is allowable u/s
Note: If such asset is transferred to other person as gift, etc., actual cost of
35AD
asset shall be taken as Nil in hands of transferee.
Conversion of inventory into capital Where inventory is converted into capital asset and such converted asset
asset is used for the purposes of business or profession, the actual cost of such
asset to the assessee shall be the fair market value which has been taken
into account for the purposes of sec. 28(via)

Illustration 66:
Dr. R purchased a house property on 1-12-2021 for ₹ 10,00,000. Till 1-12-2023, the same was self-occupied as a
residence. On this date, the building was brought into use for the purpose of his medical profession. What would
be the depreciation allowable for the assessment year 2024-25?
Solution :
In case a building is used for personal purpose subsequently brought into business, the cost of acquisition shall
be the purchase or construction cost of the building as reduced by the notional depreciation by applying the rate
applicable on the date of such conversion. In the given case cost of asset for the business shall be computed as
under:

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Particulars Building
Rate of depreciation 10%
Cost of building on 1.12.2021 10,00,000
Less: Depreciation (Being used for less than 180 days hence, depreciation charged 50% of normal 50,000
depreciation i.e. ₹ 10,00,000 * 50% * 10%)
WDV on 31.3.2022 9,50,000
Less: Depreciation 95,000
WDV on 31.3.2023 8,55,000
Computation of depreciation u/s 32
Cost of building on 1/4/2023 8,55,000
Depreciation for the year 2023-24 85,500
WDV on 01.04.2023 7,69,500

Illustration 67:
Roshan started a business of designing on 01-04-2022. He acquired a laptop on 01-04-2022 for ₹ 50,000 for his
business use. Since his gross total income for the previous year 2022-23 is only ₹ 55,000/-, he did not file his return
of income. During the previous year 2023-24, his business income before depreciation u/s 32 is ₹ 5,60,000. Since
he is required to file his return of income for the assessment year 2024-25, he seeks your advice for computing
depreciation. Please compute depreciation on his behalf assuming that:
a. He is maintaining books of account from 01-04-2022 but did not provide any depreciation on laptop.
b. He is maintaining books of account from 01-04-2022 and provided depreciation ₹ 8,000 on laptop.
c. He is maintaining books of account from 01-04-2023.
Solution :
Computation of depreciation in various cases:

Particulars Case (a) & (c) Case (b)

Cost of Laptop as on 01-04-2022 50,000 50,000
Less: Depreciation for the P.Y. 2022-23 provided in the books of account Nil 8,000
WDV on 31.3.2023 50,000 42,000
Less: Depreciation for the P.Y. 2023-24 @ 40% 20,000 16,800
WDV on 31.3.2024 30,000 25,200

Illustration 68:
A car was purchased by S on 10.8.2019 for ₹ 3,25,000 for personal use is brought into the business of the assessee on
01.12.2023, when its market value is ₹ 1,50,000. Compute the actual cost of the car and the amount of depreciation
for the Assessment year 2024-25 assuming the rate of depreciation to be 15%.

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Solution :
Computation of depreciation on car for the A.Y. 2024-25

Particulars Amount
Cost of the car (Note 1) 3,25,000
Less: Depreciation @ 15% (Note 2) 48,750
Closing W.D.V. 2,76,250
1. As per explanation 5 to Sec. 43(1), where any building used for personal purpose subsequently brought into
business, then the cost of purchase or construction of the building as reduced by the notional depreciation
by applying the rate applicable on the date of such conversion shall be taken as actual cost of such building.
However, such provision is applicable only in case of building.
2. Where an asset is acquired by the assessee during the previous year and is put to use in the same previous year
for less than 180 days, the depreciation in respect of such asset is restricted to 50% of the normal depreciation.
However, in the case, car was not acquired in the P.Y. 2023-24, hence such provision is not applicable.

Illustration 69:
Compute depreciation u/s 32 for the A.Y. 2024-25 from the following information:
a. W.D.V. of plant and machinery (15%) as on 01-04-2023 ₹ 10,00,000
b. Plant D acquired on 10-07-2023 for ₹ 5,00,000/-. ₹ 1,00,000 has been paid in cash to the vendor and balance
amount has been paid through an account payee cheque. Such plant was put to use on the same day.
c. The assessee is engaged in the business of manufacturing of industrial paints.
Solution :
Computation of depreciation for A.Y. 2024-25
Particulars Amount Amount
WDV as on 01-04-2023 10,00,000
Add: Actual cost of Plant D acquired during the year [₹ 5,00,000 – ₹ 1,00,000] 4,00,000
14,00,000
Less: Depreciation for the P.Y. 2023-24 [₹ 14,00,000 x 15%] 2,10,000
Less: Additional Depreciation for the P.Y. 2023-24 [₹ 4,00,000 x 20%] 80,000 2,90,000
WDV on 01-04-2023 11,10,000

2.3.13 Consequence of changes in rate of exchange of currency [Sec. 43A]

Conditions
1. Assessee has acquired any asset in any previous year from a country outside India;
2. In consequence of a change in the rate of exchange during any previous year after the acquisition of such asset,
there is an increase or reduction in the liability of the assessee (as compared to the liability existing at the time
of acquisition of the asset) at the time of making payment -
a. towards the whole or a part of the cost of the asset; or
b. towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or
indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest.
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Treatment
The amount by which such liability is increased or reduced at the time of making the payment (irrespective of the
method of accounting adopted by the assessee) shall be added to or deducted from the actual cost (as reduced by
depreciation already claimed) of the asset
Taxpoint
 If such increase or decrease arises after the depreciable asset is transferred (but block exists), then such increase
or decrease shall be adjusted in the WDV. If, however, block is cease to exist, then such amount shall be treated
as capital receipt or expenditure.
 Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by
any other person or authority, the liability so met shall not be taken into account for the purposes of this section.

Illustration 70:
Narang Textiles Ltd. purchased a machinery from Germany for Euro 1,00,000 on 03-09-2022 through a term
loan from Fortune Bank Ltd. The exchange rate on the date of acquisition was ₹ 65. The assessee took a forward
exchange rate on 05-10-2023 when the rate specified in the contract was ₹ 67 per USD. Compute depreciation for
the assessment years 2023-24 and 2024-25. Ignore additional depreciation.
Solution :
Computation of Depreciation
Particulars Amount
Opening W.D.V. as on 1/4/2022 Nil
Add: Assets purchased during the year [Euro 1,00,000 * 65] 65,00,000
65,00,000
Less: Depreciation for the P.Y. 2022-23 [₹ 65,00,000 * 15%] 9,75,000
Opening W.D.V. as on 1/4/2023 55,25,000
Add: Difference in Conversion rate [Euro 1,00,000 * 2] 2,00,000
57,25,000
Less: Depreciation for the P.Y. 2023-24 [₹ 57,25,000 * 15%] 8,58,750
Opening W.D.V. as on 1/4/2024 48,66,250

2.3.14 Taxation of foreign exchange fluctuation [Sec. 43AA]

Any gain (or loss), being computed in accordance with the ICDS, arising on account of any change in foreign
exchange rates shall be treated as income (or loss).
Taxpoint:
 Such gain or loss shall arise in respect of all foreign currency transactions, including those relating to:
i. monetary items and non-monetary items;
ii. translation of financial statements of foreign operations;
iii. forward exchange contracts;
iv. foreign currency translation reserves*
 The provision of sec. 43AA is not applicable in respect of cases covered u/s 43A (like computation of actual
cost of the asset, etc)
* ICDS is not dealing with foreign currency translation reserves

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2.3.15 Unabsorbed depreciation [Sec. 32(2)]

Depreciation which could not be fully deducted from profits and gains of current year of business or profession
(due to insufficient profit), is termed as unabsorbed depreciation.
Treatment: The unabsorbed depreciation can be deducted from income under any other head (except with Casual
income and Salaries) of the same assessment year.
If depreciation still remains unabsorbed, it can be carried forward for indefinite period and can be set off against
any income (except with Casual income and Salaries) of the assessee.
Notes
1. It is not necessary that the same business should be continued.
2. For set-off purpose following order is to be followed:
¾¾ Current year depreciation;
¾¾ Brought forward business loss;
¾¾ Unabsorbed depreciation
3. Unabsorbed depreciation shall be (subject to sec. 72 and sec. 73) added to the amount of the depreciation for
the following previous year and deemed to be the depreciation-allowance for that previous year, and so on for
the succeeding previous years.
4. Unabsorbed depreciation shall be allowed to be carried forward for any number of years and such carried
forward unabsorbed depreciation may be set off against any income, other than salary income and winning
from lotteries, cross word puzzles, etc.
5. Unabsorbed depreciation can be carried forward even return of income has not been filed.

2.3.16 Mandatory provision of Depreciation

From the A.Y. 2002-03, if all conditions of sec. 32 are satisfied, depreciation shall be available whether the assessee
has claimed the same or not.

2.3.17 Depreciation in case of amalgamation, demerger or succession

In the year of -
 Amalgamation;
 Demerger;
 Succession [referred in sec. 47(xiii), (xiiib) & (xiv) or sec. 170]
depreciation u/s 32 shall be apportioned between –
 the amalgamating company and the amalgamated company
 the demerged company and the resulting company
 the predecessor and the successor
- in the ratio of number of days for which the asset was used by them

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2.3.18 Special deduction for assessee engaged in Tea, Coffee or Rubber growing &
manufacturing business [Sec. 33AB and Rule 5AC]
Applicable to All assessee carrying on business of growing and manufacturing of the followings in India:
a. Tea; b. Coffee; or c. Rubber
Conditions to be 1. Deposit of amount: Assessee must deposit (hereinafter referred to as special account) an
satisfied amount in:
¾¾ National Bank for Agriculture & Rural Development (NABARD) in an account
maintained by him in accordance with, and for the purpose specified in the scheme
approved by Tea Board, Coffee Board or Rubber Board, as the case may be; or
¾¾ An account in accordance with, and for the purpose specified in a scheme approved by
Tea Board or Coffee Board or Rubber Board, as the case may be, with prior approval
of the Central Government.
2. Time of deposit: The amount must be deposited within 6 months from the end of the
previous year or before the due date of furnishing the return of income, whichever is
earlier.
3. Audit of accounts: Accounts of assessee should be audited by a chartered accountant &
the report of an auditor in Form 3AC is required to be uploaded one month prior to the
due date of filing of return
Note: In case, where the assessee is required under any other law to get his accounts
audited, it shall be sufficient compliance if such assessee gets the accounts audited under
such law and furnishes the report in Form 3AC.
Quantum of Minimum of the following -
Deduction
a. Amount so deposited (as discussed above); or
b. 40% of the profit of such business computed under the head “Profits & gains of business
or profession” before allowing any deduction u/s 33AB and before adjusting brought
forward business loss.

Other points

1. Excess Deposit: Any excess deposit made during a previous year is not treated as deposit made for the next
year(s).

2. Restriction on utilisation of amount for certain purposes: No deduction shall be allowed in respect of any
amount, being credited in special account, utilised for the purpose of:
¾¾ Purchase of plant or machinery to be installed in any office premises / residential accommodation /
accommodation in the nature of guest-house.
¾¾ Purchase of any office appliances (other than computer)
¾¾ Purchase of any plant or machinery, the entire cost of which is allowed as deduction in form of depreciation
or otherwise in any one previous year.
¾¾ Purchase of any plant or machinery to be installed in an industrial undertaking for constructing,
manufacturing or producing any items specified in Schedule XI of the Act.
Note: If any amount is so utilised, then the whole of such amount so utilised shall be deemed to be the profits
and gains of business of the previous year in which such misutilisation takes place.

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3. Withdrawal from account:

During continuation of business: The amount credited to such special account shall be withdrawn only for
the purpose(s) specified in respective schemes.

If the amount so withdrawn is not utilised for the specified purpose in the same previous year then the amount
not so utilised shall be treated as income of the year.

On closure of business: Apart from the specified purpose(s) of scheme, the amount deposited may be
withdrawn in the following circumstances: -

Case Tax Treatment

Closure of business# Fully taxable
Dissolution of firm# Fully taxable
Death of the tax payer $ Not taxable
Partition of Hindu Undivided Family $ Not taxable
Liquidation of company $ Not taxable
#
The amount withdrawn shall be taxable under the head “Profits & gains of business or profession” as if the
business is continued or the firm had not been dissolved.
$
It is not taxable even though the amount has not been utilised for any of the purposes specified in the scheme.

4. Double deduction is not permissible

¾¾ Where an amount standing to the credit of the assessee in the special account is utilised by the assessee
for the purposes of any expenditure in connection with such business in accordance with the scheme, then
such expenditure shall not be allowed in computing the income chargeable under the head ‘Profit and gains
of business or profession’.
¾¾ Where the assessee is a firm, AOP or BOI, then deduction under this section shall not be allowed in
computation of income of any partner/member.
¾¾ Where any deduction in respect of an amount deposited in any special account has been allowed in any
previous year, no deduction shall be allowed in respect of such amount in any other previous year.
5. Restriction on sale of new asset: If any asset is acquired as per the scheme, then such asset cannot be sold or
transferred within 8 years from the end of the previous year in which it was acquired. If such asset is sold or
otherwise transferred, then such part of the cost of such asset as is relatable to the deduction allowed earlier
under this section will be treated as profit.

However, in the following cases, above provision shall not be applicable -

¾¾ Sale or transfer to the Government, local authority, statutory corporation or Government company.
¾¾ Sale or otherwise transfer, in connection with the succession of a firm by a company, provided the following
conditions are satisfied –
a. All assets & liabilities of firm (immediately before succession) become the assets & liabilities of the
company.
b. All shareholders of the company were partners of the firm immediately before the succession.
c. The scheme continues to apply to the company in the manner applicable to the firm.

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6. Calculation of taxable income

Nature of Business Calculation of Income

Tea growing & manufacturing business (Rule 8) 40% of [Income from business – Deduction u/s
33AB]
Coffee growing & manufacturing business (Rule 25% / 40% of [Income from business – Deduction
7B) u/s 33AB]
Rubber growing & manufacturing business (Rule 35% of [Income from business – Deduction u/s
7A) 33AB]

2.3.19 Site Restoration Fund [Sec. 33ABA & Rule 5AD]

Applicable to All assessee engaged in the business of -
¾¾ Prospecting for petroleum or natural gas; or
¾¾ Extraction or production of petroleum or natural gas; or
¾¾ Both
- in India.
Conditions to be 1. Agreement with the Central Government: The Central Government has entered into
satisfied an agreement with the assessee for such business.
2. Deposit of amount: The assessee must deposit an amount -
¾¾ With the State Bank of India in an account (herein after referred to as special
account) maintained
¾¾ in an account (hereinafter referred as Site Restoration Account) opened by the
assessee
- in accordance with and for the purposes specified in a scheme approved by the
Government of India in the Ministry of Petroleum & Natural Gas.
Treatment of interest: Any amount credited in the special account or site restoration
account by way of interest shall be deemed to be a deposit.
3. Time of deposit: Such amount must be deposited before the end of the previous year.
4. Audit of books of account: Accounts must be audited & auditor’s report should be
filed in Form 3AD is required to be uploaded one month prior to the due date of filing
of return
Note: In case, where the assessee is required under any other law to get his accounts
audited, it shall be sufficient compliance if such assessee gets the accounts audited
under such law and furnishes the report of audit required under such other law and a
report in Form 3AD.
Quantum of Minimum of the following:
Deduction a. Amount so deposited (as discussed above); or
b. 20% of the profit of such business computed under the head “Profits & gains of
business or profession” before allowing deduction under this section and before
adjusting brought forward business loss.

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Other points
1. Excess Deposit: Any excess deposit made during a previous year is not treated as deposit made for the next
year(s).

2. Restriction on utilisation of amount for certain purposes: No deduction shall be allowed in respect of any
amount, being credited in special account or site restoration account, utilised for the purpose of -

¾¾ Purchase of plant and machinery to be installed in any office premises / residential accommodation /
accommodation in the nature of guest-house.
¾¾ Purchase of office appliances (other than computer)
¾¾ Purchase of a plant or machinery, the entire cost of which is allowed as deduction in the form of depreciation
or otherwise in computation of business income of any one previous year.
¾¾ Purchase of a plant or machinery to be installed in an industrial undertaking for constructing, manufacturing
or producing any items specified in Schedule XI of the Act.
Note: If any amount is so utilised, then the whole of such amount shall be deemed to be the profit and gains of
business of the previous year in which such mis-utilisation takes place

3. Withdrawal from account

During continuation of business: The amount credited to such special account or the site restoration account
shall be withdrawn only for the purpose(s) specified in respective scheme.

If the amount withdrawn in a year is not utilised for the specified purpose in the same previous year then the
amount not so utilised shall be treated as income of the year.
On closure of account: Where any amount standing to the credit of the assessee in the special account or in
the site restoration account is withdrawn on closure of the account during any previous year, the following
amount shall be deemed to be the profits & gains of business or profession (whether business is continued or
not) -
Particulars Amount
Amount so withdrawn from the account ****
Less: Amount, if any, payable to the Central Government by way of profit or
(****)
production share as provided in the agreement u/s 42
Taxable amount ****
Note: In case of closure of business, the amount stated above shall be taxable as if the business is in existence.
4. Double deduction is not permissible
¾¾ Where any amount standing to the credit of the assessee in the special account or site restoration account is
utilised by the assessee for the purpose of any expenditure in connection with such business in accordance
with the scheme, then such expenditure shall not be allowed in computing the income chargeable under the
head ‘Profit and gains of business or profession’.
¾¾ Where the assessee is a firm, AOP or BOI, the deduction under this section shall not be allowed in the
computation of the income of any partner/member.
¾¾ Where any deduction in respect of any amount deposited in any special account or site restoration account
has been allowed in any previous year, then no deduction shall be allowed in respect of such amount in
any other year.
5. Restriction on sale of such asset: If any asset is acquired as per the scheme, then such asset cannot be sold

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or transferred within 8 years from the end of the previous year in which it was acquired. If such asset is sold
or otherwise transferred, then such part of the cost of the asset as is relatable to the deduction allowed shall be
treated as taxable profit under the head “Profits & gains of business or profession”, in the year in which the
asset is transferred. However, in the following cases, the provision shall not be applicable -
¾¾ Sale or otherwise transfer to the Government, local authority, statutory corporation or Government
Company.
¾¾ Sale or otherwise transfer, in connection with the succession of a firm by a company, subject to following
conditions:
a. All assets and liabilities of the firm, immediately before the succession became assets and liabilities
of the company.
b. All the shareholders of the company were the partners of the firm immediately before succession.
c. The scheme continues to apply to the company in the manner applicable to the firm
2.3.20 Scientific Research [Sec. 35]
Scientific research means any activity for the extension of knowledge in the fields of natural or applied science
including agriculture, animal husbandry or fisheries [Sec. 43(4)]
Such research can be categorised either as -
a. In-House research : Research done by the assessee himself (in connection with his business)
b. Research through : Any sum paid to outside agencies, engaged in scientific research, to be used for
outside institutions scientific research
In-House research
Revenue After Where the assessee himself carries on scientific research related to his
expenditure commencement of business and incurs revenue expenditure, such expenses are allowed
business as deduction in the year in which such expenditure is incurred by the
sec. 35(1)(i)
assessee.
Before Following revenue expenditures (certified by the prescribed authority)
commencement of incurred during 3 years immediately before commencement of business,
business shall be allowed as deduction in the year of commencement of business –
¾¾ Payment of salary to an employee engaged in scientific research
(excluding perquisite).
¾¾ Purchase of materials used for scientific research.
Capital After Any capital expenditure incurred (other than land) for scientific research,
Expenditure commencement of related to the business of the assessee, will be allowed as deduction in
business full. 100% deduction shall be allowed for such capital expenditure, in the
sec.35(1)(iv)
year in which the expenditure is so incurred.
/sec.35(2)
Before Any capital expenditure incurred (other than land) during 3 years
commencement of immediately preceding the year of commencement of business shall
business be deemed to have been incurred in the year in which the business
commenced and is allowed as deduction in that year.

Note: Where a deduction is allowed in any previous year in respect of any capital expenditure
for scientific research, no deduction u/s 32 shall be allowed on such assets. [Sec. 35(2)(iv)]

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Notes: In-house research for a purpose not related to the business of the assessee shall not be allowed as deduction.

In-house research & development expenses incurred by certain companies [Sec. 35(2AB)]

Applicable to Company engaged in the business of bio-technology or any business of manufacture or production
of any article or thing (other than those specified in the 11th Schedule)

Conditions to 1. The expenditure shall be incurred on in-house scientific research and development facility
be satisfied including capital expenditure (other than expenditure in the nature of cost of any land or
building).
2. In-house research and development facility shall be approved by the Secretary, Department
of Scientific and Industrial Research.
3. The assessee must enter into an agreement with the prescribed authority -
¾¾ for co-operation in such research and development facility; and
¾¾ fulfils such conditions with regard to maintenance of accounts and audit thereof and
furnishing of reports in such manner as may be prescribed.

100% of the expenditure incurred on in-house research and development facility shall be allowed.
Notes
Deduction  If the above conditions are not satisfied, then deduction may be claimed as per the provision
of sec. 35(1)(i) or sec. 35(2).
 Where deduction is allowed in any previous year in respect of any capital expenditure under
this section, then no deduction u/s 32 shall be allowed on such asset.

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Direct Taxation

Research through outside institutions

Deduction @ 100% shall be allowed in respect of expenditure on Research through following outside institution:

Institution Purpose
Any payment to National Laboratory or a University Scientific research undertaken under programme
or Indian Institute of Technology or a specified person. approved by the prescribed authority (whether related
[Sec. 35(2AA)] to business or not)
Any payment made to a notified (by the Central
Government) research association or to an approved Scientific research (whether related to business or not)
university, college or other institutions3 [Sec. 35(1)(ii)]
Any payment made to a notified (by the Central
Research in Social science or Statistical Research
Government) research association, university, college or
(whether related to business or not)
other institution3 [Sec. 35(1)(iii)].
Any payment to an approved Indian company (main
object of whom is scientific research & development)3 Scientific research (whether related to business or not)
[Sec. 35(1)(iia)]
1.
National laboratory means a scientific laboratory functioning at the national level under the aegis of the Indian
Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific and Industrial
Research, the Defence Research and Development Organisation, the Department of Electronics, the Department
of Bio-Technology or the Department of Atomic Energy and which is approved as National Laboratory by the
prescribed authority.
2.
Such association, University, college or institution must be approved in accordance with prescribed guidelines
and must be notified by the Central Government.
3.
The deduction in respect of any sum paid to the research association, university, college or other institution or
company shall be allowed on the basis of a certificate issued by the donee.
Other points
1. Such association, University, college or institution must be approved in accordance with prescribed guidelines
and must be notified by the Central Government.
2. Withdrawal of approval: Deduction shall not be denied merely on the ground that subsequent to the payment
made by the assessee, the approval granted to the association, university, IIT, etc. has been withdrawn.
3. Carry forward of unabsorbed scientific research expenditure: Unabsorbed capital expenditure can
be carried forward for unlimited years and set off in any subsequent assessment year(s) like unabsorbed
depreciation.
4. Effect of amalgamation [Sec. 35(5)]: Provisions of sec. 35 shall apply to the amalgamated company, as it
would have been applied to the amalgamating company, if the latter had not transferred such asset.

Illustration 71:
Dynamic India & Co. commences production on 16/8/2023. It incurred the following expenses related to scientific
research, find deduction u/s 35 for the P.Y. 2023-24.

Date Particulars Amount Purpose

18/8/2023 Paid to an Approved University for research in Social science 50,000 Non- business
15/10/2023 Paid to a scientist (not the employee of the company) 30,000 Business

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 Heads of Income

Date Particulars Amount Purpose

18/11/2023 Paid to approved National laboratory 60,000 Non- business
Purchase of land & building for in house research (cost of land
15/12/2023 5,00,000 Business
₹ 1,50,000)
18/12/2023 Purchase of car to carry research-workers 2,00,000 Business
16/8/2020
to Capital expenditure (including cost of land ₹ 1,00,000) 5,00,000 Business
15/8/2023
“ Purchase of material 3,00,000 Business
“ Payment of salary (other than Perquisites) 2,00,000 Business
“ Perquisites provided to research-personnel 1,00,000 Business
“ Other revenue expenditure 80,000 Business
1/4/2020 to
Capital expenditure (other than land) 9,00,000 Business
15/8/2020
“ Payment of salary (other than Perquisites) 50,000 Business
1/4/2018 to
Capital expenditure 80,000 Business
31/3/2020
“ Revenue expenditure 30,000 Business

Solution :

Computation of deduction u/s 35 to Dynamic India & Co. for the A.Y. 2024-25

Date Particulars Section Amount Deduction

1/4/2018 to Capital expenditure NA1 80,000 Nil
31/3/2020 Revenue expenditure NA1 30,000 Nil
1/4/2020 to Capital expenditure (other than land) NA1 9,00,000 Nil
15/8/2021 Payment of salary (other than Perquisites) NA1 50,000 Nil
Capital expenditure (excluding cost of land ₹ 1,00,000) 35(2) 5,00,000 4,00,000
Payment of salary (other than Perquisites) 35(1)(i) 2,00,000 2,00,000
16/8/2020
to Perquisites provided to research-personnel NA2 1,00,000 Nil
15/8/2023
Purchase of material 35(1)(i) 3,00,000 3,00,000
Other Revenue expenditure NA2 80,000 Nil
18/8/2023 Paid to an Approved University for research in Social
science
35(1)(iii) 50,000 50,000

15/10/2023 Paid to a scientist (not the employee of the company) 35(1)(i) 30,000 30,000
18/11/2023 Paid to approved National laboratory 35(2AA) 60,000 60,000
15/12/2023 Purchase
1,50,000)
of land & building (excluding cost of land ₹ 35(2) 5,00,000 3,50,000

18/12/2023 Purchase of car to carry research-workers 35(2) 2,00,000 2,00,000

Total amount of deduction 15,90,000

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Direct Taxation

Note
1.
Expenditure (whether revenue or capital) incurred before 3 years immediately preceding the year of commencement
of business shall not be allowed as deduction.
2
Expenditure incurred within 3 years prior to commencement of business: Only material and salary (other than
perquisite) of research personnel shall be allowed as deduction

Sale of asset used for scientific research [Sec. 41(3)]

Sale consideration to the extent of cost of such asset shall be taxable as business income
Without having been in the year of sale. The excess of sale consideration over original cost (or indexed cost of
used for other purpose acquisition) is taxable as capital gain u/s 45. This is applicable even if the business is not
in existence in that year)
Sale consideration shall be subtracted from relevant block of assets. It is to be noted that
After being used for
at the time of conversion of scientific research asset into normal business asset, the cost
other purposes
of acquisition shall be taken as nil in the relevant block.

Illustration 72:
Awishkar Enterprises purchased machinery for ₹ 5,00,000 as on 18/8/2022 for scientific research.
On 17/7/2023, the research work being completed. On 31/3/2024, the machinery being sold for -
Case 1) ₹ 1,00,000
a. After using the same for business purpose other than scientific research. The WDV of the respective block is
₹ 4,80,000. Depreciation rate 15%.
b. Without using the same for any other purpose
Case 2) ₹ 7,00,000
a. After using the same for business purpose other than scientific research. The WDV of the respective block is
₹ 4,80,000. Depreciation rate 15%.
b. Without using the same for any other purpose
State tax implications

Solution :
Tax impact in case 1(a) and 2(a)
Particulars Case 1(a) Case 2(a)
Opening WDV of the block 4,80,000 4,80,000
Add: Addition during the year being machinery earlier used for scientific research Nil Nil
Less: Sale value of the machinery [ Max. to the extent of (Opening WDV +
#
(1,00,000) (4,80,000)#
Addition made)]
Written down value before charging depreciation 3,80,000 Nil
Less: Depreciation @ 15% (57,000) Nil
Written down value after charging depreciation 3,23,000 Nil
Short term capital gain [@ Excess sale proceeds] Nil 2,20,000@

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Tax impact in case 1(b) and 2(b)

Case 1(b) Case 2(b)
Particulars
Details Amount Details Amount
Profits & gains of business or profession
Being minimum of the following
• Earlier deduction claimed 5,00,000 5,00,000
• Surplus i.e. {Sale consideration – (Cost of assets –
Earlier deduction allowed in respect of such asset)} 1,00,000 1,00,000 7,00,000 5,00,000
Capital gains
Sale consideration NA1 7,00,000
Less: Cost of acquisition NA1 (5,00,000)
Short-term capital gain (loss) NA1 2,00,000
1Capital gain shall arise only if the sale price exceeds the cost of the asset held for scientific research [CIT –vs.-
Artex Mfg. Co. (SC)]

2.3.21 Deduction in respect of expenditure on specified business [Sec. 35AD]

Applicable to Specified assessee engaged in the business of:
a. setting up and operating a cold chain facility##;
b. setting up and operating a warehousing facility for storage of agricultural produce; or
c. laying and operating a cross-country natural gas or crude or petroleum oil pipeline network
for distribution, including storage facilities being an integral part of such network
Note: The project has been approved by the Petroleum and Natural Gas Regulatory Board
and being notified by the Central Government.
d. building and operating, anywhere in India, a hotel of two-star or above category as classified
by the Central Government;
e. building and operating, anywhere in India, a hospital with at least 100 beds for patients;
f. developing and building a notified housing project under a scheme for slum redevelopment
or rehabilitation framed by the Central Government (or a State Government)
g. developing and building a notified housing project under a scheme for affordable housing
framed by the Central Government (or a State Government)
h. production of fertilizer in India;
i. setting up and operating an inland container depot or a container freight station notified or
approved under the Customs Act, 1962;
j. bee-keeping and production of honey and beeswax;
k. setting up and operating a warehousing facility for storage of sugar
l. laying and operating a slurry pipeline for the transportation of iron ore
m. setting up and operating a semi-conductor wafer fabrication manufacturing unit, and which
is notified by the Board in accordance with such guidelines as may be prescribed
n. developing or maintaining and operating or developing, maintaining and operating a new
infrastructure facility by an Indian company (or consortium thereof) / authority / board
/ corporation having agreement with Central Government or State Government or local
authority or any statutory body

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Direct Taxation

Conditions to Cross-country oil pipeline Other Business

be satisfied Owned by An Indian company or by a consortium of such Any assessee
companies or by an authority or a board or a corporation
established or constituted under any Central/State Act
Date of On or after 01-04-2007 On or after date
commencement given in Note*
of business below
Restriction on It has made not less than such proportion of its total No Restriction
usage pipeline capacity as specified by the Petroleum and
Natural Gas Regulatory Boardβ available for use on
common carrier basis by any person other than the
assessee or an associated person#.
New Business Such business should not be set up by splitting up, or the reconstruc­tion, of
a business already in existence.