Lesson 2 n Basic Concept of Income Tax 19

Lesson 2
Basic Concept of Income Tax

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The taxes are the basic source of revenue for the
– An Overview of Finance Bill
Government. Revenue raised from the taxes are utilized
– Heads of Income [Section 14] for meeting expense of Government like, provision for
– Important Concept education, infrastructure facilities such as roads, dams etc.
Taxes are broadly divided into two parts i.e. direct taxes
– Person [Section 2(31)]
and indirect taxes. The tax that is levied directly on the
– Assessee [Section 2(7)] income or wealth of a person is called direct tax. Income
– Assessment year [Section 2(9)] tax is one of form of direct taxes. The levy of income tax in
India is governed by the Income Tax Act, 1961 and Income
– Previous year [Section 3]
Tax Rules, 1962. It is charged on the Total Income and to
– India [Section 2(25A)] derive the total income one must know certain concepts of
– Maximum Marginal Rage and Average Rate of Tax the Income Tax Act, such as residential status, assessment
– Income [Section 2(24)] year, previous year, assessee etc.

– Total Income [Section 2(45A)] Income tax is leviable on taxable income and to determine
taxable income, residential status of the person and scope
– Capital and Revenue Receipts of total income are the initial steps. There are two types
– Charge of Income Tax (Section 4) of taxpayers from residential point of view - Resident in
– Residential Status and Tax Liability (Section 6) India and Non-resident in India. Sourced based income in
India is taxable in India whether the person earning income
– Test for residence of Individuals is resident or non-resident. Conversely, foreign sourced
– Test for residence of HUF income of a person is taxable in India only if such person
– Test for residence of Companies is resident in India. Therefore, the determination of the
residential status of a person is very significant in order to
Test for residence for Firm, AOP / BOI
find out his tax liability.
– Meaning and Scope of total Income (Section 5)
At the end of this lesson, you will understand:
– Scope of total income on the basis of residential
• Overview of Finance Bill
status
• Some basic concepts like assessment year,
– Income received in India
previous year, income, person, assessee,
– Income deemed to be received Income accrued in
India • Distinguish between capital and revenue
receipts etc.
– Income deemed to accrue or arise in India
• Basic steps in the calculation of tax liability.
– Tax incident vis-a-vis residential status
• Be able to determine the residential status of a
– Computation of Taxable Income and Tax Liability person
of an Assessee
• Be aware of the importance of residential status
– Tax Rates
for tax purposes
– LESSON ROUND UP
• The scope of total income
– SELF TEST QUESTIONS
• The rates of tax

The Income Tax Department is governed by Central Board of Direct Taxes (CBDT) and it is the
part of the Department of Revenue under the Ministry of Finance, Government of India

19
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INTRODUCTION
Tax is the financial charge imposed by the Government on income, commodity or activity. Government imposes
two types of taxes namely Direct taxes and Indirect taxes. Direct tax is one where burden of tax is directly on
the payer e.g. income tax, whereas Indirect tax is paid by the person other than the one who utilizes the product
or service e.g. Custom duty, Goods and Service Tax (GST).
Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law. Thus,
the tax proposed to be levied or collected must be within the legislative competence of the legislature imposing
the tax. Further, the law imposing the tax, like other laws, must not violate any fundamental right.
Income tax being direct tax happens to be the major source of revenue for the Central Government. The
responsibility for collection of income-tax vests with the Central Government. This tax is leviable and collected
under Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). The entire amount of income tax collected by
the Central Government is classified under the head :
1. Corporation Tax (Tax on the income of the companies); and
2. Income Tax (Tax on income of the non-corporate assessees)
The Income tax Act contains the provisions for determination of taxable income, determination of tax liability,
procedure for assessment, appeal, penalties and prosecutions. It also lays down the powers and duties of
various income tax authorities. The income tax law in India consists of the following components.
l Income Tax Act, 1961 : This Act came into force on 1st April, 1962. It contains sections 1 to 298, wherein
each section may have sub- sections, clauses or sub-clauses and may also have Provisos and Explanations.
l Annual Finance Act : Every year a Budget is presented before the parliament by the Finance Minister.
One of the important components of the Budget is the Finance Bill. This Bill contains various amendments
in the Income-Tax Act and other tax laws to prescribe the additions and deletions therein. When the
Finance Bill is approved by both the houses of parliament and receives the assent of President, it
becomes the Finance Act.
l Income Tax Rules,1962 : For implementation of the Act and for administration of the direct taxes
Central Board of Direct Taxes (CBDT) is empowered to frame these rules from time to time. These rules
are collectively called as the Income-tax Rules, 1962. These rules are made applicable by notification
in the Official Gazette of India.
l Notifications : Notifications are issued either by Central Government or by CBDT to take care the
procedural aspects of the Act from time to time. These notifications are binding on everyone i.e. on
Income Tax Authorities as well as on the assessees.
l Circulars/Clarifications : Circulars and clarifications are issued by the CBDT to clarify the doubts
regarding the scope and meaning of certain provisions of the law and primarily to provide guidance
to the Income Tax officers. These circulars are binding on the Income Tax Authorities but not on the
assessee however an assessee can take benefit of these circulars.
l Judicial Decisions (Case Laws) : Decisions pronounced by Supreme Court become Judicial Precedent
and are binding on all the courts, Appellate Tribunal, Income Tax Authorities and on assesses. Further,
High Court decisions are binding on assesses and Income Tax Authorities which come under its
jurisdiction unless it is overruled by a higher authority. The decision of a High Court can not bind other
High Court.

AN OVERVIEW OF FINANCE BILL

Finance Bill as part of the Union Budget is presented usually in the month of February every year and this bill
 Lesson 2 n Basic Concept of Income Tax 21

contains amendments in direct as well as indirect taxes. It is presented in the Parliament by the Union Finance
Minister.
The finance bill is passed by both the houses of Parliament after it is being tabled and necessary recommendation
/ amendments have been made in it. Once the bill has been passed by the Parliament, it goes to the President
for his assent. After Presidents assent, the finance bill becomes the Finance Act.
Finance Bill Presented by Finance Minister

ò
Recommendation / Suggestion considered and changes made to Finance Bill

ò
Parliament Approval

ò
President’s approval

ò
Finance Act

The Finance Bill is presented at the time of presentation of the Annual Financial Statement before Parliament, in
fulfillment of the requirement of Article 110 (1)(a) of the Constitution, detailing the imposition, abolition, remission,
alteration or regulation of taxes proposed in the Budget. It is through the Finance Act that amendments are made
to the various Acts like Income Tax Act 1961, Customs Act 1962 etc. In short, Finance Bill can be considered
as an umbrella Act.
When the proposals are introduced to the Parliament it is called as a Finance Bill. Once it is passed by the
Parliament and assented to by the President, Finance Bill becomes the Finance Act for that year. Finance Bills
for various years may be seen at the website http ://[Link]/
The different clauses in the Finance Act may get notified eventually, but at different times based on the readiness
of the stakeholders and implementing agencies. The effective date of applicability of provisions of the Finance
Act is usually mentioned in the notification in the official gazette or in the Act itself. Generally, the amendments
by the Finance Act are made applicable from the first day of the next financial year. Likewise, amendments by
Finance Act, 2019 are effective from 1st April, 2019. Regarding indirect taxes, the ad valorem tax rates (tax
rates based on value) are effective from the midnight of the date of presentation of the Union Budget.

Effective date of amendments in Finance Bill

ò
Direct Tax
ò
Indirect Tax

ò
Usually Date if Notification
ò
Usually midnight of date
in Official gazette or in of Presentation of Bill
the Finance Act.
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HEADS OF INCOME [SECTION 14]

Under Income Tax Act all incomes are categorized under 5 Heads of Income. There is a charging section under
each head of income which defines the scope of income chargeable under that head. These heads of income
cover all possible avenues for a person to earn any income. Accordingly income earned is classified under the
following heads:
a. Income under the head Salary : Earned by employee from his employer
b. Income under the head House Property : Rental income earned by a landlord from house property
c. Income under the head Profits and Gains from Business and Profession(PGBP) : Business income
d. Income under the head Capital Gains: Income by sale/transfer of Capital Asset
e. Income under the head Other Sources: Residual head of income.
Every person whose Total Income of the previous year exceeds the maximum amount which is not chargeable
to tax, is an assessee and such total income shall be chargeable to Income Tax at the rates prescribed in the Act
for that relevant assessment year. However this Total income shall be determined on the basis of the residential
status of the assessee in India.
To levy income tax, one must have an understanding of the various concepts related to the charge of tax like
previous year, assessment year, Income, total income, person, maximum amount not chargeable to tax etc.

IMPORTANT CONCEPTS
PERSON [SECTION 2(31)] : Income-tax is charged in respect of the total income of the previous year of every
person. Hence, it is important to know the definition of the word person. As per section 2(31), Person includes :

Individual

Every other Hindu

Artificial and Undivided
Judicial Family
Person (HUF)

Person
Loacl
Company
Authority

AOP & BOI Firm & LLP

 Individual : An individual is a natural human being i.e. male, female, minor or a person of sound or
unsound mind.
 HUF : Under Income Tax Act, 1961 a Hindu Undivided Family (HUF) is treated as separate entity for
the purposes of assessment. It consists of all persons lineally descended from a common ancestor and
includes their wives and unmarried daughters and also a stranger who has been adopted by the family.
Members of the HUF are called as co-parceners which includes the head of the HUF who is called as
Karta. A Hindu Coparcenary includes those persons who acquire an interest in joint family property by
 Lesson 2 n Basic Concept of Income Tax 23

birth. The relation of a HUF does not arise from a contract but arises from status. Only the coparceners
have a right to partition. However, other female members of the family, for example, wife or daughter-
in-law of a coparcener are not eligible for such coparcenary rights. Jain undivided families and Sikh
undivided families would also be assessed as a HUF.
HUF’s are governed by two schools

Mitakshara School Dayabhaga School

Applies to whole of India except Applies to the states of

the states of West Bengal and Assam West Bengal and Assam

 Company : It include Domestic company, Foreign company, company in which public are substantially
interested. Section 2(17) defines the term company to mean :
i. any Indian company, or
ii. any body corporate incorporated by or under the laws of a country outside India i.e. a foreign
company, or
iii. any institution, association or body which is or was assessable or was assessed as a company
for any assessment year under the Indian Income Tax Act, 1922 or which is or was assessable or
was assessed under this Act as a company for any assessment year commencing on or before
the 1st day of April, 1970, or
iv. any institution, association or body, whether incorporated or not and whether Indian or non-
Indian, which is declared by general or special order of the CBDT to be a company only for such
assessment year or assessment years as may be specified by the order of CBDT.

Classes of
Companies

Domestic Foreign
Company Company

A company which is
Indian Company not a domestic
company

Company which has made arrangement

for declaring and paying dividend
within India out of the income chargeable to tax in
India.

 Firm : It includes a partnership firm whether registered or not and shall include a Limited Liability
Partnership as defined in the Limited Liability Partnership Act,2008.
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According to Section 4 of the Partnership Act, 1932 persons who have

entered into partnership with one another are called individually, ‘partners’ and
collectively ‘a firm’.

 Association of Person : Two or more persons join in for a common purpose or common action to
produce income, profits or gains.

It may consist of individuals, HUF, companies, firms, etc. as members

The object must be to produce income. It is not enough that the persons
receive the income jointly.

 Body of Individuals denote the status of persons who are assessable in like manner and to the same
extent as the beneficiaries individually.

Only individuals can be Individuals join together

the members for common purposes

Is there any difference

between BOI and AOP ?

The difference between Association of persons and body of individuals is that whereas an association implies a
voluntary getting together for a definite purpose, a body of individuals would be just a body without an intention
to get-together. Moreover, the members of body of individuals can be individuals only whereas the members of
an association of persons can be individual or non-individuals (i.e. artificial persons).

A local authority
It means a municipal committee, district board, body of port commissioners, or other authority legally entitled to
or entrusted by the Government with the control and management of a Municipal or local fund.

Every artificial, juridical person, not falling within any of the above categories
This is a residuary clause. If the assessee does not fall in any of the first six categories, he is assessed under
this clause. Generally, a statutory corporation, deity or charitable institution or an endowment for charitable or
religious purposes falls under artificial juridical person.

ASSESSEE [SECTION 2(7)]

• In layman language tax payer is assessee, he may be the person of any of the above categories
• As per Section 2(7) of Income Tax Act, assessee is A person
– by whom any tax or
– any other sum of money
is payable under Income Tax Act. It includes every person :
 Lesson 2 n Basic Concept of Income Tax 25

(a) in respect of whom any proceeding under Income Tax Act has been taken for assessment of
– his income or
– fringe benefits or
– the income of any other person in respect of which he is assessable or
– the loss sustained by him or by such other person or
– the amount of refund due to him or to such other person
(b) who is deemed to be an assessee under any provision of Income Tax Act;
(c) who is deemed to be an assessee in default under any provision of Income Tax Act;
Accordingly, assessee is a person by whom tax or any other sum is payable under the Act. The expression
“other sum of money” includes
– fine, interest, penalty and tax or
– person to whom any refund of tax etc. is due under the Act or
– if any proceeding under the Act has been taken against any person, he is also an assessee. Remember,
the proceedings must be initiated under the provisions of the Act. In other words, a single enquiry letter
issued by the Income-tax Department without reference to any specific provision of the Act does not
constitute proceeding under the Act and, as such, till proceedings are initiated under the Act, the person
may not become an assessee within the ambit of Section 2(7) of the Act.

ASSESSMENT YEAR [SECTION 2(9)]

“Assessment year” means the period of twelve months commencing on 1st April every year. Therefore, the
period beginning on 1st April of one year and ending on 31st March of the next year. Income of previous year of
an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act.
Exception to the General Rule : In the following situation, the Income of previous year of an assessee is
assessed in the previous year itself:
1. Income of Non-Resident from Shipping: [Section 172]- A non resident who is carrying on a shipping
business and earns income any port in India, shall be charged to tax before the ship is allowed to leave
Indian Port. Hence income is deemed and computed at a presumptive rate of 7.5% of the amount of
the fare/freight charged by the non-resident ship from the Indian port.
2. Income of persons leaving India either permanently or for long duration: [Section 174]- When it appears
to the Assessing Officer (A.O.) that an individual may leave India and has no intentions of returning
back during an assessment year, then the income is charged to tax during the same Assessment year.
3. Income of bodies formed for short duration: [Section 174A]- When it appears to the Assessing Officer
(A.O.) that any organization is formed for a particular event and is likely to be dissolved during the
current assessment year.
4. Income of person trying to transfer his assets with a view to avoid tax: [Section 175]- When it appears
to the Assessing Officer (A.O.) that during the current assessment year any person is likely to charge,
sell, transfer, dispose of or otherwise part with any of his assets to avoid payment of any liability under
this Act, the total income of such person for the period from the expiry of the previous year to the date,
when the Assessing Officer commences proceedings under this section is chargeable to tax in that
assessment year.
5. Income of discontinued business: [Section 176]- Where any business or profession is discontinued
in any assessment year, the income of the period from the expiry of the previous year up to the date
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of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that
assessment year.

PREVIOUS YEAR [SECTION 3]

Income tax is payable on the income which is earned during the Previous Year and it is assessed in the
immediately succeeding financial year which is called an Assessment Year.
All assesses are required to follow a uniform previous year i.e. The Financial Year (1st April to 31st March) as
their Previous year. Although assessee may maintain books of accounts on calendar year basis (1st January to
31st December) but his previous year for income tax purposes shall be the Financial year.
Each financial year is both, a previous year as well as an assessment year. It is the previous year for the income
earned during the financial year and assessment year for the income earned during the preceding previous
year. For example financial year 2019-20 is the previous year for the income earned during the financial year
2019-20 and assessment year for the income earned during the previous year 2018-19.
In case of newly set up business or profession or a source of income newly coming into existence, the first previous
year will be the period commencing from the date of setting up of business/profession or as the case may be, the
date on which the source of income newly comes into existence and ending on the immediately following March, 31.
Examples of previous year in the case of newly set-up business/profession.
Example 1 : Y sets up a new business on May 15, 2019. What is the previous year for the assessment year
2020-21.
Answer : Previous year for the assessment year 2020-21 is the period commencing on May 15, 2019 and
ending on March 31, 2020.
Example 2 : A joins an Indian company on February 17, 2019. Prior to joining this Indian company he was not in
employment nor does he have any other source of income. Determine the previous year of A for the assessment
years 2019-20 and 2020-21.
Answer : Previous years for the assessment years 2018-19 and 2019-20 will be as follows.
Previous year Assessment year
Feb. 17, 2019 to March 31, 2019 2019-20
April 1, 2019 to March 31, 2020 2020-21

INDIA [SECTION 2(25A)]

The term ‘India’ means –
(i) the territory of India as per Article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,
(iii) continental shelf,
(iv) exclusive economic zone or
(v) any other specified maritime zone and the air space above its territory and territorial waters.
Specified maritime zone means the maritime zone as referred to in the Territorial Waters, Continental Shelf,
Exclusive Economic Zone and other Maritime Zones Act, 1976.

MAXIMUM MARGINAL RATE AND AVERAGE RATE OF TAX

As per section 2(10), “Average Rate of income-tax” means the rate arrived at by dividing the amount of income-
tax calculated on the total income, by such total income.
 Lesson 2 n Basic Concept of Income Tax 27

Section 2(29C) defines “Maximum Marginal Rate” to mean the rate of income-tax (including surcharge on the
income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, AOP or
BOI, as the case may be, as specified in Finance Act of the relevant year.

INCOME [SECTION 2(24)]

“Income is the consumption and savings opportunity gained by an entity within a specified timeframe, which is
generally expressed in monetary terms. However, for households and individuals, “income is the sum of all the
wages, salaries, profits, interests payments, rents, and other forms of earnings received in a given period of time.”
In general terms, Income is a periodical monetary return with some sort of regularity. However, the Income Tax
Act, even certain income which does not arise regularly are treated as income for tax purposes e.g. Winnings
from lotteries, crossword puzzles.
The definition of Income as given in Section 2(24) of the Act starts with the word includes therefore the list is
inclusive not exhaustive. The definition enumerates certain items, including those which cannot ordinarily be
considered as income but are treated statutorily as such.
As per section 2(24), the term income includes :

S. No. Income under Section 2(24) Head Of Income

1. Profits and gains PGBP
2. Dividend Other Sources
3. Voluntary contributions received by a trust/institution created wholly Generally exempt under
or partly for charitable or religious purposes or by certain research Section 11 and 12
association or universities and other educational institutions or hospitals
and other medical institutions or an electoral trust.
4. The value of any perquisite or profit in lieu of salary taxable Salary
5. Any special allowance or benefit specifically granted to the assessee to Salary (Generally
meet expenses wholly, necessarily and exclusively for the performance exempt)
of the duties of an office or employment of profit.
6. City Compensatory Allowance/ Dearness allowance : Any allowance Salary
granted to the assessee either to meet his personal expenses at
the place where the duties of his office or employment of profit are
ordinarily performed by him or at a place where he ordinarily resides or
to compensate him for the increased cost of living.
7. Benefit or Perquisite to a Director : The value of any benefit or Salary (If as per
perquisite, whether convertible into money or not, obtained from a employment agreement)
company by. (a) a director, or (b) a person having substantial interest
Else under Other
in the company, or (c) a relative of the director or of the person having
Sources (If not in the
substantial interest, and any sum paid by any such company in respect
terms of employment
of any obligation which, but for such payment, would have been payable
agreement)
by the director or other person aforesaid;
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8. Any Benefit or perquisite to a Representative Assessee : The Other Sources

value of any benefit or perquisite (whether convertible into money or
not) obtained by any representative assessee under Section 160(1) (iii)/
(iv) or beneficiary, or any amount paid by the representative assessee
in respect of any obligation which, but for such payment, would have
been payable by the beneficiary;
9. Deemed profits chargeable to tax under section 28 or section 41 or PGBP
section 59
10. Capital Gain : Any capital gains chargeable to tax under Section 45; Capital Gains
since the definition of income in Section 2(24) is inclusive and not
exhaustive capital gains chargeable under Section 46(2) are also
assessable as income.
11. Insurance Profit : The profits and gains of any Insurance business PGBP
carried on by a mutual insurance company or by a co-operative society
computed in accordance with the provisions of Section 44 or any surplus
taken to be such profits and gains by virtue of the profits contained in
the First Schedule to the Income-tax Act
12. Banking income of a Co-operative Society : The profits and gains PGBP
of any business of banking (including) providing credit facilities carried
on by a cooperative society with its members.
13. Winnings from Lottery : Any winnings from lotteries, crossword Other Sources
puzzles, races, including horse-races, card-games and games of any
sort or from gambling or betting of any form.
14. Employees Contribution Towards Provident Fund : Any sum PGBP if not deposited
received by the assessee from his employees as contributions to any by the assessee to the
provident fund or superannuation fund or any fund set-up under the specified fund
provisions of the Employees State Insurance Act, 1948 (34 of 1948) or
any other fund for the welfare of such employees.
15. Amount Received under Keyman Insurance Policy : Any sum PGBP
received under a Keyman Insurance Policy including the sum allocated
by way of bonus on such policy. Keyman Insurance Policy means a
life insurance policy taken by a person on the life of another person
who is or was the employee of the first mentioned person or is or
was connected with the business of the first mentioned person in any
manner whatsoever.
16. Amount received for not carrying out any activity : Any sum referred PGBP
to in Section 28(va), i.e. any sum, whether received or receivable in
cash or kind, under an agreement for -
(i) not carrying out any activity in relation to any business or profession;
[Amendment vide Finance Act, 2016]
(ii) not sharing any know-how, patent, copyright, trade-mark, license,
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 provision for services
 Lesson 2 n Basic Concept of Income Tax 29

17. Any sum referred to in clause (v) or (vi) of sub-section (2) of section 56 Other sources
18. Gift received for an amount exceeding Rs. 50,000 : Any sum of Other sources
money or value of property referred to in clause (vii) or clause (viia) of
sub-section (2) of Section 56
19. Any consideration received for issue of shares as exceeds the fair Other sources
market value of the shares referred in section 56(2)(viib).
20. Amount received as an advance or otherwise in the course of negotiation Other sources
for transfer of a capital asset referred to in clause (ix) of section 56(2).
21. Any sum of money or value of property received without consideration Other sources
or for inadequate consideration as referred to in clause (x) of Section
56(2)
22. Any compensation or payment in connection with termination of Other sources
employment as referred under clause (xi) of Section 56(2).
23. Assistance in the form of a subsidy or grant or cash incentive or duty PGBP
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 assessee other
than the subsidy or grant or reimbursement which is taken into account
for determination of the actual cost of the asset in accordance with the
provisions of Explanation 10 to clause (1) of section 43.

TOTAL INCOME [SECTION 2(45)]

Total income is computed under the 5 heads of income. Income computed under each head of income is
aggregated and the aggregate income is called as the Gross Total Income, certain deductions are allowed
under Chapter VIA and the balance income taxable after deductions is called as Total Income.
A study of some of the broad principles given below will help to understand the concept of income.
1. Cash or kind
Income may be received in cash or kind. When the income is received in kind, its valuation will be made
in accordance with the rules prescribed in the Income-tax Rules, 1962.
2. Receipt basis/ Accrual basis
Income arises either on receipt basis or on accrual basis. It may accrue to a taxpayer without its actual
receipt. The income in some cases is deemed to accrue or arise to a person without its actual accrual
or receipt. Income accrues where the right to receive arises.
3. Legal or illegal source
The income-tax law does not make any distinction between income accrued or arisen from a legal
source and income tainted with illegality. In CIT v. Piara Singh (1980) 3 Taxman 67, the Supreme Court
has held that if smuggling activity can be regarded as a business, the confiscation of currency notes
by customs authorities is a loss which springs directly from the carrying on of the business and is,
therefore, permissible as a deduction.
4. Temporary/Permanent
There is no difference between temporary and permanent income under the Act. Even temporary
income is taxable under the Income Tax Act.
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5. Lumpsum/instalments
Income whether received in lump sum or in installment is liable to tax. For example : arrears of salary
or bonus received in lump sum is income and charged to tax as salary.
6. Gifts
Normally, gifts constitute a capital receipt in the hands of the recipient. However, certain gifts are
brought within the purview of income- tax, for example, receipt of property without consideration is
brought to tax under section 56(2)(x). Gifts of personal nature do not constitute income subject to
maximum of Rs. 50,000 received in cash. The recipient of gifts like birthday, marriage gifts, etc., is
not liable to income-tax as received in kind however as per the Finance Act, 2009 gifts in kind having
fair value upto Rs. 50,000 are not liable to tax but having fair value of more than Rs. 50,000 is wholly
taxable.
7. Revenue or Capital receipt
Income-tax, as the name implies, is a tax on income and not a tax on every item of money received.
Therefore, unless the receipt in question constitutes income as distinguished from capital, it cannot
be charged to tax. For this purpose, income should be distinguished from capital which gives rise to
income. However, some capital receipts have been specifically included in the definition of income.

CAPITAL AND REVENUE RECEIPTS

The Act contemplates a levy of tax on income and not on capital and hence it is very essential to distinguish
between capital and revenue receipts. Capital receipts cannot be taxed, unless they fall within the scope of the
definition of “income” and so the distinction between capital and revenue receipts is material for tax purposes.
Certain capital receipts which have been specifically included in the definition of income are compensation for
modification or termination of services, income by way of capital gains etc.
It is not possible to lay down any single test as infallible or any single criterion as decisive, final and universal
in application to determine whether a particular receipt is capital or revenue in nature. Hence, the capital or
revenue nature of the receipt must be determined with reference to the facts and circumstances of each case.
Criteria for determining whether a receipt is capital or revenue in nature:
An amount referable to fixed capital is a capital receipt whereas a receipt referable to circulating capital would
be a revenue receipt. While the latter is chargeable to tax, the former is not subject to income-tax unless
otherwise expressly provided.
TYPE OF CAPITAL

Fixed capital Circulating Capital

Fixed capital is that which is not involved directly in Circulating capital is that part of the capital which
the process of business but remains unaffected by the is turned over in the business and which ultimately
process. results in profit or loss. For instance, the proceeds of
sale of stock-in-trade is a revenue receipt while the
sale proceeds of building, machinery or plant will be
capital receipt.

The Income-tax Act does not define the term “Capital receipt” & “Revenue receipt”. Also, it has not laid down
the criterion for differentiating the capital and revenue receipt. Yet, it has exempted certain capital receipts
from taxation while certain capital receipts have been taken into ambit of capital receipts chargeable as
capital gains.
Whether a particular receipt is of the nature of income or capital is explained below by the following examples.
 Lesson 2 n Basic Concept of Income Tax 31

The following test can be applied to determine the nature of particular receipt.

Base Explanation Example

Type of capital will The very same An amount received on account of sale of trading goods
depend upon the thing may be fixed or receipts in respect of circulating capital or of flowing
nature of business capital in the hands capital is revenue receipt, for example sale of a motor car
of one business but by a dealer. On the other hand a receipt on account of sale
circulating capital in of fixed assets is a capital receipt, for example, amount
the hands of another. received on sale of a motor car by a person who is not a
car dealer.
Nature of receipt Whether a particular • The reimbursement of capital outlay is a capital receipt
also depends upon receipt is capital or even if the total amount received exceeds the cost of the
the reference to the revenue in nature outlay itself.
recipient must be determined
• Compensation received for the loss of a capital asset is
with reference to
a receipt of a capital nature whereas the compensation
the recipient who is
received for damage to or loss of a trading asset is a
sought to be taxed as
revenue receipt.
the assessee. For tax
purposes the capital • A capital asset is converted into income and the price
or revenue character realized on its sale takes form of the periodic payments of
of the receipt must a revenue nature;
be determined on the • Where a person sells his properties and the sale price is
basis of the nature payable to him by the purchaser in the form of annuities of
of the trade in the a fixed sum so long as the seller is alive or until he attains
course of which or a particular age.
in connection with
which it arises.
Capital and Revenue Profits and gains • profits on purchase and sale of shares by a share broker
Receipts in Relation arising from the on his own account;
To Business various transactions
• profits arising from dealings in foreign exchange by a
Activities which are entered
banker or other financial institutions,
into in the ordinary
course of the • income from letting out buildings owned by a company to
business of the tax its employees etc.
payers or those which For instance, profit on sale of shares and securities held
are incidental to or by a bank as investments would be of a capital nature.
closely associated Where profits arise from transactions which are outside
with his business the normal dealing of the assessee, although connected
would be revenue with his business, the taxable nature or otherwise of the
receipts chargeable profits would depend upon the fact whether or not the
to tax. transaction(s) in question constitute(s) trading activity.
But even in these
cases the receipts
may be of a capital
nature in certain
circumstances.
32 EP-TL

Factors that do not determine the nature or character of receipt

The capital or revenue nature of a receipt must be determined with reference to each receipt on the basis of
the facts and circumstances of each case., the ultimate conclusion as to the capital or revenue character of the
receipt would be of the High Court or the Supreme Court and the principles laid down by the Court. However,
while determining the question whether a particular receipt is capital or revenue in nature, care must be taken
to ensure that the following are not taken as the basis for determination although these factors may, to a certain
extent, be helpful to arrive at the conclusion.

Factors Explanation
Character and source The nature of receipt should be decided entirely on the basis of its character in
of income the hands of the recipient, the source from which the payment has been received
being immaterial for the purpose.
There may be cases where the payer makes the payment out of capital while
the recipient gets it as income. This may happen in a case where there is a
businessman who deals in plant and machinery; while the purchaser of the
machinery would pay the price out of his capital, the seller would get it as income
from business. Therefore, the taxability of the receipt does not depend upon the
character of payment in the hands of the payer.
Application of Income The application of the income after its receipt by the recipient is immaterial for
purposes of taxability.
Allowance or The payment may represent expenditure in the hands of the payer and in certain
disallowance of the cases may be disallowed in computing the taxable income of the payer. But the
amount to the payer disallowance in the payer’s hands would not in any way affect the taxability of the
entire amount of remuneration in the employees or directors hands although there
may be double taxation of the same amount in two hands for the same period.
Thus, the allowance or disallowance of the amount to the payer is immaterial for
taxing the recipient.
Treatment given in the The name by which the payment is called by the parties concerned and the
books treatment given to it in the books of accounts of the parties would also be irrelevant.
For instance, every item of income from employment is taxable as salary income
whether it is called salary, wages, bonus, pension, and annuity or by any other
name. In other words, it is only the real character of the receipt and not what the
parties call it that would determine its taxability.
Magnitude and method The quantum of the payment, whether it is paid in installments or in lump sum
of payment and also whether it is paid at regular intervals of time or otherwise and even
the magnitude of the payment are not the factors that determine the capital or
revenue character of the receipt for tax purpose.
Basis for measurement The basis for measurement of the receipt (a specified percentage of the estimated
of the receipt profit taken as the basis for measuring damages) should not be taken as the
deciding factor for determining the capital or revenue character of the receipt.
Ways or devices The various devices resorted to by tax payers in arranging their financial affairs
resorted by payer do not also conclusively establish the nature of the receipt because a tax payer
is legally entitled to arrange his affairs in such a way as to reduce his tax burden
to the minimum. In the light of the aforesaid principles the capital or revenue
nature of the receipt should be first determined before proceeding to compute the
taxable income.

Illustration : State whether the following are capital or revenue receipts/expenses and give your reasons :
 Lesson 2 n Basic Concept of Income Tax 33

1. ABC & Co. received Rs. 5,00,000 as compensation from XYZ & Co. for premature termination of
contract of agency.
2. Sales-tax collected from the buyer of goods.
3. PQR Company Ltd. instead of receiving royalty year by year, received it in advance in lump sum.
4. An amount of Rs. 1,50,000 was spent by a company for sending its production manager abroad to
study new methods of production.
5. Payment of Rs. 50,000 as compensation for cancellation of a contract for the purchase of machinery
with a view to avoid an unnecessary expenditure.
6. An employee director of a company was paid Rs. 3,50,000 as a lump sum consideration for not resigning
from the directorship.
Solution
1. Receipt in substitution of a source of income is a capital receipt. Therefore, the amount received by
ABC & Co. from XYZ & Co. for premature termination of an agency contract is a capital receipt though
the same is taxable under Section 28(ii)(c).
2. Sales-tax is the liability of a seller to pay to the Government on the sale of goods made by him, which
is allowed as deduction as revenue expenditure. If any part of Sales-tax is collected from the buyer of
goods that may be treated as a revenue receipt. Thus the sales-tax collected from the buyer of goods
is a revenue receipt.
3. Receipt of lump sum royalty in lieu of future royalties is a revenue receipt, as it is an income from
royalty.
4. Amount spent by a company for sending its production manager abroad to study new methods of
production is revenue expenditure to be allowed as a deduction. Because the new knowledge and
exposure of that manager will assist the company in improving its existing methods of production etc.
5. This is a capital expenditure, as any expenditure incurred by a person to free himself from a capital liability
is a capital expenditure. In the given case, the payment of Rs. 50,000 for cancelling the order for purchase
of the machinery, has helped the assessee to become free from an unnecessary capital liability.
6. The amount of Rs. 3,50,000 received for not resigning from the directorship is a reward received from
the employer. Therefore it is a revenue receipt.

CHARGE OF INCOME TAX [SECTION 4]

Section 4 of the Act is the charging section. It lays down the basis on which tax is imposed. Section 4 of Income
tax act is the most effective and operative of the various provisions in the Act since, it is because of this section
alone all other sections become enforceable. The charging section is the backbone of the act, it lays down the
provisions as to what are taxable and at what rates; income of which period is taxable and in whose hands.
Accordingly, the section provides that :
a) Income tax shall be charged at the rate or rates prescribed in the finance act for the relevant previous
year,
b) the charge of tax is on various persons specified u/s 2(31);
c) the income sought to be taxed is that of the previous year and not of the of assessment year
d) the levy of tax on the assessee is on his total or taxable income computed in accordance with and
subject to the appropriate provisions of the income tax Act, including provisions for the levy of additional
income-tax
34 EP-TL

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income
of a period other than the previous year, income-tax shall be charged accordingly.

RESIDENTIAL STATUS [SECTION 6]

Total income of an assessee cannot be computed unless the person’s residential status in India during the
previous year is known. Thus, determining residential status of a person is important for calculating tax liability
of a person.
Section 6 of the Income tax Act prescribes the tests to be applied to determine the residential status of all tax
payers for purposes of income-tax. An assessee’s residential status must be determined with reference to the
previous year in respect of which the income is sought to be taxed.
Residential status of a person could be :

Resident in India
According to the Residential Status, the
assessee could be either be:
Non-Resident in India

Resident and Ordinarily Resident in

India (ROR)
If Individual or HUF is a resident in
India, they will be either:
Resident but not Ordinarily Resident in
India (RNOR)

Resident in India

In case of person other than Individual

and HUF, it will either be:
Non-Resident in India

There are different test to be applied for different types of person, let us understand test for each category of
person :

TEST OF RESIDENCY FOR INDIVIDUALS

Basic Condition for a person to be Resident

Under Section 6(1) of the Income-tax Act, an individual is said to be resident in India in any previous year
if he:
(a) is in India in the previous year for a period or periods amounting in all to one hundred and eighty-two
days or more i.e., he has been in India for at least 182 days during the previous year; or,
 Lesson 2 n Basic Concept of Income Tax 35

(b) has been in India for at least three hundred and sixty-five days (365 days) during the four years
preceding the previous year and has been in India for at least sixty days (60 days) during the previous
year.

Exception to the basic condition

In the case of following individual –
(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian
ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the
purposes of employment outside India,
Rule 126 Computation of period of stay in India in certain cases
An individual, being a citizen of India and a member of the crew of a ship, the period of stay in India in
respect of an eligible voyage shall not include the period beginning from the date of joining till the date
of signing off as mentioned in the Continuous Discharge Certificate under the Merchant Shipping Act,
1958
“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.
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e)
of section 115C, who, being outside India, comes on a visit to India in any previous year,
The provisions of the second condition shall apply in relation to that year as if for the words “sixty days (60
days)”, occurring therein, the words “one hundred and eighty-two days (182 days) “ had been substituted.
A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in
Undivided India. It may be noted that grandparents include both maternal and paternal grand parents.

Non-Resident
If an individual does not satisfy any of the above basic condition then, he will be treated as Non-Resident.
It must be noted that the fulfillment of any one of the above conditions (a) or (b) as applicable will make an
individual resident in India for tax purposes. Further it is to be noted that these conditions are alternative and
not cumulative in their application.

Resident and Ordinarily Resident (ROR)

An individual may become a resident and ordinarily resident in India if he satisfy both the following conditions
given u/s 6(1)besides satisfying any one of the above mentioned conditions:
(i) he is a resident in atleast any two out of the ten previous years immediately preceding the relevant
previous year, and
(ii) he has been in India for 730 days or more during the seven previous years immediately preceding the
relevant previous year.

Resident but Not Ordinarily Resident (RNOR)

An individual is not ordinarily resident in any previous year if –
36 EP-TL

(a) he has been a non-resident in India in nine out of the ten previous years preceding that year, or
(b) he has during the seven previous years preceding that year been in India for a period of, or periods
amounting in all to, seven hundred and twenty-nine days (729 days) or less.

The Residential Status of an Individual is determined on the basis of the period of his stay in India

Resident Non-Resident

Not satisfies any of

Satisfy Any of the Basic conditions: the Basics
Conditions
i. Present in India for 182 days or more during the previous year;
OR
ii. Present in India for 60 days or more during the previous year
and 365 days or more during the 4 years immediately
preceding the previous year;

The above Basic conditions (ii) are not applicable when:

i. An Indian citizen who leaves India during the previous year for
the purpose of employment outside India or as a member of
the crew of an Indian ship
ii. An Indian citizen or a person of Indian origin who, being
outside India, comes on a visit to India during the previous
year.

If the assessee is the Resident, further Additional Conditions:

check whether;
(i) He is a resident in at least 2 out of 10
previous years preceding the relevant
previous year AND
(ii) His stay in India in the last 7 years preceding
the relevant previous year is 730 days or

ROR – satisfies basic and additional RNOR – satisfies basic but not
conditions the additional conditions

Important Points
• The fact that an assessee is resident in India in respect of one year does not automatically mean that
 Lesson 2 n Basic Concept of Income Tax 37

he would be resident in the preceding or succeeding years as well. Consequently, the residential status
of the assessee should be determined for each year separately. This is in view of the fact that a person
resident in one year may become non-resident or not ordinarily resident in another year and vice versa.
• It must also be noted that the residential status of an individual for tax purposes is neither based upon
nor determined by his citizenship, nationality and place of birth or domicile. This is because of the fact
that, for tax purposes, an individual may be resident in more than one country in respect of the same
year.
• The common feature in both the above conditions is the stay of the individual in India for a specified
period. The period of stay required in each of the conditions need not necessarily be continuous or
consecutive nor it is stipulated that the stay should be at the usual place of residence, business or
employment of the individual. Purpose of stay is immaterial in determining the residential status.
• The stay may be anywhere in India and for any length of time at each place in cases where the stay in
India is at more places than one, what is required is the total period of stay should not be less than the
number of days specified in each condition.
• While determining residential status, the day of leaving and returning to India should be considered as
a stay in India.
• Person of Indian Origin is one who is, or either of his parents or grandparents was born in Undivided
India.
• India means territory of India, its territorial waters, continental shelf, Exclusive Economic Zone (upto
200 nautical miles) and airspace above its territory and territorial waters.
• Where the exact arrival and departure time is not available then the day he comes to India and the day
he leaves India is counted as stay in India.

Steps to solve residential status of an Individual :

Step 1 : Determine whether the individual falls under exception to basic condition;
Step 2 : If yes, apply only first basic condition, if satisfied, then he will be resident otherwise non-resident. If no,
then apply both basic conditions and Individual becomes Resident on satisfaction of any one of the conditions.
Step 3 : Check if satisfy the test of Ordinarily Residents , if yes, then he will be called ROR, otherwise he will
be called RNOR.

Condition 1 : If individual is in India in the previous year for a total period of 182 days or more.
Condition 2 : If he has been in India for at least 365 days during the 4 years preceding the previous year and
38 EP-TL

has been in India for at least 60 days during the previous year. However, this 60 days shall be read as 182 days,
if he is a :
– Citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship, or for
the purpose of employment outside India or
– Citizen of India or of Indian origin engaged outside India (whether for rendering service outside or not)
and who comes on a visit to India in the any previous year.
Condition 3 : An individual who has been a non-resident in India in at least nine out of the ten previous years
preceding that year, and has during the seven previous years preceding that year been in India for a period of,
or periods amounting in all to 729 days or less.
Illustration 1
Mr. A, an Indian Citizen, is living in Mumbai since 1950, he left for China on July 1, 2014 and comes back on
August 7, 2019. Determine his residential status for the assessment year 2020-21.
Solution :
Stay in India for a minimum period of 182 days in the previous year :
Mr. A has stayed in India for 237 (viz. 25 + 30 + 31 + 30 + 31 + 31 + 28 + 31) days in the Previous year 2019-20.
So, this test is satisfied.
So, Mr. A shall be a resident in India during the previous year 2019-20. (Assessment year 2020-21).
Keeping in view the facts of the given case, Mr. A satisfies the two additional conditions also namely :
He is resident in two out of ten previous years preceding the relevant previous year.

PY Stay in PY (days) Stay during PY Basic Condition Resident/Non-

(days) Satisfied Resident
2018-19 Nil - None Non-Resident
2017-18 Nil - None Non-Resident
2016-17 Nil - None Non-Resident
2015-16 Nil - None Non-Resident
2014-15 30+31+30+1= 92 365 days Second Resident
2013-14 365 365 First Resident

His stay in India is also more than 730 days in 7 previous years preceding the relevant previous year. As he left
for Japan on 1st July 2014.

PY Stay (days)
2018-19 Nil
2017-18 Nil
2016-17 Nil
2015-16 Nil
2014-15 92
2013-14 365
2012-13 366
Total Stay in 7 Previous Years 823
Hence, Mr. A is resident and ordinary resident in India for the assessment year 2020-21.
 Lesson 2 n Basic Concept of Income Tax 39

Illustration 2
Mr. Steve Waugh, the Australian cricketers comes to India for 100 days every year. Find out his residential
status for AY 2020-21.
Solution :
Step 1 : The total stay of Steve Waugh in the last 4 preceding years is 400 days and his stay in India during the
previous year is 100 days. Since, he satisfied the second condition in section 6(1), he is resident.
Step 2 : Since his total stay in India in the last 7 years preceding the previous years is 700 days, he does not
satisfy the minimum requirements of 730 days in 7 years.
Therefore the residential status of Mr. Steve Waugh for the assessment year 2020-21 is Resident but not
ordinarily resident in India.
Illustration 3
Dr. A, an Indian Citizen and a Professor in IIM, Lucknow, left India on September 15, 2019 for USA to take up
Professors job in MIT, USA. Determine his residential status for the assessment year 2020-21.
Solution :
Dr. A being a citizen of India and who has gone out of the country for employment, will be governed by 182 days
test only and therefore the second condition under section 6(1), i.e. 60 days during relevant previous year shall
not be applicable.
Dr. A stayed in India for 168 (viz. 30 + 31 + 30 + 31 + 31 + 15) days only in the relevant previous year.
Hence, Dr. A shall be a non-resident in India for the assessment year 2020-21 as condition by stay of 182 days
in relevant previous year is not satisfied.
Illustration 4
Mr. X is a foreign citizen. His father was born in Mumbai in 1960 and mother was born in USA in 1965. His
grandfather was born in Chennai in 1935. Mr. X is coming to India to see Taj Mahal and visit other historical
places in India. He comes to India on 1st November, 2019 for 200 days. He has never come to India before.
Determine his residential status for AY 2019-20.
Solution :
Mr. X falls in exception to basic conditions as he is a Person of Indian Origin (as his grandfather was born
in undivided India) and he comes on a visit to India during relevant Previous year. Therefore, only first basic
condition of 182 days during relevant previous year would be checked.
Stay during relevant PY 2019-20 = 1st Nov, 2019 to 31st March, 2020 = 30+31+31+28+31 = 151 days Mr. X is
Non-resident in India for AY 2020-21 as he does not satisfy first basic condition.
Illustration 5
Mr. Anil, an Indian citizen, leaves India on 22nd September, 2019 for the first time to work as an Engineer in
France. Determine his residential status for AY 2020-21.
Solutions :
During the previous year 2019-20, Mr. Anil, an Indian citizen, was in India for 175 days (i.e. 30+31+30+31+31+22).
He does not satisfy the minimum criteria of 182 days. Also since he is an Indian citizen leaving India for the
purpose of employment outside India, the second condition u/s 6(1) is not applicable to him.
Therefore Mr. Anil is non-resident for the AY 2020-21.
60 EP-TL

COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE

Income tax is a charge on the assessee’s income. Income Tax law lays down the provisions for computing the taxable
income on which tax is to be charged. Taxable income of an assessee shall be calculated in the following manner.
1. Determine the residential status of the person as per section 6 of the Act.
2. Calculate the income as per the provisions of respective heads of income. Section 14 classifies the
income under five heads.
(i) Income from salaries
(ii) Income from House Property
(iii) Profits and gains of business or Profession
(iv) Capital Gains
(v) Income from other sources
3. Consider all the deductions and allowances given under the respective heads before arriving at the net
under each head.
4. Exclude the income exempt under section 10 of the Act.
5. Aggregate of incomes computed under the 5 heads of income after applying clubbing provisions and
making adjustments of set off and carry forward of losses is known as Gross Total Income.
6. Deduct therefrom the deductions admissible under Sections 80C to 80U. The balance is called Total income.
7. The total income is rounded off to the nearest multiple of Rupees ten. (Section 288A)
8. Add agriculture income (if any) in the total income calculated in (6) above. Then calculate tax on the
aggregate as if such aggregate income is the Total Income.
9. Calculate income tax on the net agricultural income as increased by Rs. 2,50,000/3,00,000/5,00,000 as
the case may be, as if such increased net agricultural income were the total income.
10. The amount of income tax determined under (9) above will be deducted from the amount of income tax
determined under (8) above.
11. Calculate income tax on capital gains under Section 112, and on other income at specified rates.
12. The balance of amount of income tax left as per (10) above plus the amount of income tax at (11) above
will be the income tax in respect of the total income.
13. Deduct the following from the amount of tax calculated under (12) above.
– Rebate under section 87A (if applicable).
– Tax deducted and collected at source.
– Advance tax paid.
– Double taxation relief (Section 90 or 91).
14. The balance of amount left after deduction of items given in (13) above, shall be the net tax payable
or net tax refundable for the assessee. Net tax payable/refundable shall be rounded off to the nearest
multiple of Ten rupees (Section 288B).
15. Along with the amount of net tax payable, the assessee shall have to pay penalties or fines, if any,
imposed on him under the Income-tax Act.
For calculation of income, amount received is classified under 5 heads of income; it is then to be adjusted with
reference to the provisions of the Income Tax laws in the following manner.
 Lesson 2 n Basic Concept of Income Tax 61

Particulars Amount (Rs.)

Income under the head :
+ Income from Salaries XXX
+ Income from House Property XXX
+ Profits and gains of business or profession XXX
+ Capital gains XXX
+ Income from other sources XXX
Adjustment in respect of :
+ Clubbing of Income XXX
– Set off and carry forward of losses (XXX)

= Gross Total Income XXX

– Deductions under section 80C to 80U (or Chapter VIA) (XXX)
= Total Income XXX

TAX RATES FOR FY 2019-20 i.e. AY 2020-21

Calculation of Tax on Income
 Tax rate depends upon the category of person
 Amount of income
 Residential status of person
 Age of individual
 Type of Income
Components of Tax are

Education Tax
Tax Surcharge SHEC
Cess Payable

Tax Rates for Different types of person depending upon various parameters :
1. For :
 Resident Individual of the age below 60 years
 Non Residents Individual
 Hindu undivided family
 Association of Persons
 Body of Individuals (other than Co-operative society)
 Artificial Juridical Person

Total Income (Rs.) Tax Rate Tax liability (Rs.)

Upto 2,50,000 Nil Nil
2,50,001 – 5,00,000 5% 5% of (Total Income – 2,50,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 12,500
Above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,12,500
62 EP-TL

2. Applicable for :
Resident individual of the age of 60 years or more but less than eighty years at any time during the previous year

Total Income (Rs.) Tax Rate Tax liability (Rs.)

Upto 3,00,000 Nil Nil
3,00,001 – 5,00,000 5% 5% of (Total Income – 3,00,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 10,000
Above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,10,000

3. Applicable for :
Resident Individual of the age of 80 years or more at anytime during the previous year

Total Income (Rs.) Tax Rate Tax liability (Rs.)

Upto 5,00,000 Nil Nil
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000)
Above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,00,000

CBDT has clarified vide Circular No. 28/2016 27.07.2016, that a person born on 1st April would be considered
to have attained a particular age on 31st March, the day preceding the anniversary of his birthday.
Therefore a resident individual, whose 60th / 80th birthday falls on 1st April, 2020 would be treated as having
attained the age of 60 years/80 years in the P. Yr. 2019-20.
4. For firm and local authroties:

Types of person Tax Rates

i. Firms (including LLP) 30% of total Income
ii. Local Authorities 30% of total Income

Good to Know : Entity or individual other than a company whose adjusted total income exceeds
Rs. 20 lakhs is liable to pay Alternate Minimum tax @18.5%.
5. For Company

Domestic Company Assessment Year 2020-21

- Where it opted for Section 115BAA 22%
[This benefit shall be available when total income of the company is
computed without claiming specified deductions, incentives, exemptions
and additional depreciation available under the Income-tax Act.]
- Where it opted for Section 115BAB 15%
[This regime shall be available only for the manufacturing companies
incorporated in India on or after 01-10-2019. Hence, old companies will
not be able to take the benefit of this section.]
- Where it has not opted for Section 115BAA and the Total Turnover 25%
or Gross receipts of the company in the last previous year does not
exceeds 400 crore rupees
- Any other domestic company 30%
Foreign Company 40%
 Lesson 2 n Basic Concept of Income Tax 63

Good to Know : A company is liable to pay MAT @ 15%.

6. For Co-operative Society :

Income Slabs Tax Rates

i. Where the taxable income does not exceed Rs. 10,000/- 10% of the income
ii. Where the taxable income exceeds Rs. 10,000/- but does Rs. 1,000/- + 20% of income in excess of Rs.
not exceed Rs. 20,000/- 10,000/-
Where the taxable income exceeds Rs. 20,000/- Rs. 3.000/- + 30% of the amount by which the
taxable income exceeds Rs. 20,000/-

Surcharge
Surcharge is an additional tax imposed on certain cases. It is imposed over the basic tax rate calculated on the
income.
For example : Suppose total taxable income of an individual of 45 years is Rs. 1,30,00,000, then Base tax will
be : Rs. 1,12,500 + 30% of (1,20,00,000)= Rs. 37,12,500.
Surcharge @12%* of Rs. 37,12,500 = Rs. 4,45,500. There are different rate of surcharge prescribed in the
following manner :

Types of person Surcharge Rates

i. Individuals, HUF, AOP, BOI If Income exceeds Rs. 50 lakhs but does not 10% of income tax
exceed Rs. 1 crore
If income exceeds Rs. 1 crore but does not 15% of income tax
exceed Rs. 2 crore
If income exceeds Rs. 2 crore but does not 25% of income tax
exceed Rs. 5 crore
If total income exceeds Rs. 5 crore 37% of income tax
ii Firm / Local Authority / Co-operative If income exceeds Rs. 1 crore 12% of income tax
Society
iii. Domestic Companies* If income exceeds Rs. 1 crore but does not 7% of income tax
exceed Rs. 10 crores
If income exceeds Rs. 10 crore 12% of income tax
iv. Companies other than a domestic If income exceeds Rs. 1 crore but does not 2% of income tax
company exceed Rs. 10 crores
If income exceeds Rs. 10 crore 5% of income tax

*The rate of surcharge in case of a company opting for taxability under Section 115BAA or Section 115BAB shall
be 10% irrespective of amount of total income.
Marginal Relief in Surcharge : When an assessee’s taxable income exceeds Rs. 1 crore, he is liable to
pay Surcharge at prescribed rates mentioned above on Income Tax payable by him. However, the amount of
Income Tax and surcharge on total income shall not exceed the amount of income that exceeds Rs. 1 crore.
Example : Suppose Mr. Ram an individual assessee of 42 years is having taxable income of Rs. 1,00,01,000/-

1. Income Tax Rs. 28,12,800

2. Surcharge @15% of Income Tax Rs. 4,21,920
64 EP-TL

3. Income Tax on income of Rs. 1 crore Rs. 28,12,500

4. Maximum Surcharge payable (Income over Rs. 1 crore i.e. Rs. 1,000) Rs. 1,000
5. (Income Tax + Surcharge) payable Rs. 28,13,500

Thus, in the above case, though the surcharge @15% is Rs. 421920. However, since the income of Mr. Ram
exceeds Rs. 1 crore by just Rs. 1,000, Ram will be eligible for marginal relief and maximum surcharge will be
restricted to Rs. 1,000 only.
Cess
 Governments resort to imposition of cess for meeting specific expenditure
 Education Cess and Senior and Higher Education Cess are additional levy on the basic tax liability +
surcharge, if applicable.
 Rate of Education Cess is 2%
 Rate of SHEC is 1%.
 Rate of Health Cess is 1%.

Rebate under section 87A

An assessee, being an individual resident in India, whose total income does not exceed Rs. 5,00,000 shall be
entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this
Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to 100%
of such income-tax or an amount of Rs. 12,500, whichever is less.
Steps involved in calculation of Tax on Total Income

Particulars Amount Rs.

Tax on Special Incomes @ specified tax rates (Long term capital gains @ 20%; Casual Income
@ 30% and Short term capital gains (on Securities transaction tax paid securities) @ 15%;
XXX
Add : Tax on Balance Income @ Slab Rate/Flat Rate (as applicable)
XXX
Total Tax
XXX
Add : Surcharge, if any
XXX
Less : Marginal Relief, if applicable
Tax including Surcharge (XXX)

Add : Education Cess @ 2% on tax including surcharge XXX

Add : SHEC @ 1% on tax including surcharge XXX
Add : Health Cess @ 1% on tax including surcharge XXX
(Combinedly Health and Education Cess on income tax is levied @ 4%) XXX
Tax liability XXX
Add : Interest under Section 234A/234B/ 234C XXX
Net tax liability
Less : Taxes paid by way of :
(XXX)
– Tax deducted at source (TDS)
(XXX)
– Advance tax
(XXX)
– Self Assessment Tax
– Double Taxation Relief (XXX)
Tax Payable/Refundable XXX
 Lesson 2 n Basic Concept of Income Tax 65

CASE LAWS
1. Can capital contribution of the individual partners credited to their accounts in the books of the
firm be taxed as cash credit in the hands of the firm, where the partners have admitted their capital
contribution but failed to explain satisfactorily the source of receipt in their individual hands?
CIT v. M. Venkateswara Rao (2015 T & AP)
The High Court held that the view taken by the AO that the partnership firm has to explain the source of
income of the partners as regards the amount contributed by them towards capital of the firm, in the absence
of which the same would be treated as the income of the firm, was not tenable.
2. Liquidated damages – whether capital or revenue receipt
Commissioner of Income-tax, Gujarat v. Saurashtra Cement Ltd. [2010] [233 CTR 209]
On a question whether the liquidated damages received by the assessee from the supplier of the plant
and machinery on account of delay in the supply of plant is a capital or a revenue receipt, the Supreme
Court held that it was clear from the agreement that the liquidated damages were to be calculated at 0.5
per cent of the price of the respective machinery and equipment which were delivered late, for each month
of delay, without proof of the actual damages suffered by the assessee on account of the delay. The delay
in supply could be of the whole plant or a part thereof but the determination of damages was not based
upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It
was evident that the damages to the assessee were directly and intimately linked with the procurement of
a capital asset, i.e., the cement plant, which would obviously lead to delay in coming into existence of the
profit-making apparatus, rather than a receipt in the course of profit-earning process. Compensation paid for
the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as
supplier had failed to supply the plant within time as stipulated in the agreement. The amount received by the
assessee towards compensation for sterilization of the profit-earning source and not in the ordinary course
of its business, was a capital receipt in the hands of the assessee.

LESSON ROUND UP
– Tax is the financial charge imposed by the Government on income, commodity or activity. Government
imposes two types of taxes namely Direct taxes and Indirect taxes. Direct tax is one where burden of
tax is directly on the payer. While Indirect tax is paid by the person other than the person who utilizes
the product or service.
– The Income tax Act contains the provisions for determination of taxable income, determination of tax
liability, procedure for assessment, appeal, penalties and prosecutions.
– Every year a Budget is presented before the parliament by the Finance Minister. One of the important
components of the Budget is the Finance Bill. The Bill contains various amendments such as the rates
of income tax and other taxes. When the Finance Bill is approved by both the houses of parliament
and receives the assent of President,it becomes the Finance Act.
– To levy income tax, one must have the understanding of the various concepts related to the charge of
tax like previous year, assessment year, Income, total income, person etc.
– Income : No precise definition of the word ‘Income’ is available under the Income-tax Act, 1961. The
definition of Income as given in Section 2(24) of the Act starts with the word includes therefore the list
is inclusive not exhaustive.
– Assessee : In common parlance every tax payer is an assessee. However, the word assessee has
been defined in Section 2(7) of the Act according to which assessee means a person by whom any tax
or any other sum of money (i.e. interest, penalty etc.) is payable under the Act.
66 EP-TL

– Person : Income-tax is charged in respect of the total income of the previous year of every person.
Hence, it is important to know the definition of the word person.
– Assessment year means the period of twelve months commencing on 1st April every year.
– Previous year : Income earned in a year is taxable in the next year. The year in which income is earned
is known as previous year.
– Computation of income : Income tax is a charge on the assessee’s income. Income Tax law lays down
the provisions for computing the taxable income on which tax is to be charged.
– Total income of an assessee cannot be computed unless the person’s residential status in India during
the previous year is known. According to the residential status, the assessee can either be;
(i) Resident in India or
(ii) Non-resident in India
– Section 6 of the Income-tax Act prescribes the tests to be applied to determine the residential status
of all tax payers for purposes of income-tax. There are three alternative tests to be applied for
individuals, two for companies and Hindu Undivided Families and firms, associations of persons,
bodies of individuals and artificial juridical persons.
– Residential status of Individual : The residential status of individual is determined on the basis of the
following conditions :
(i) Condition 1 : If individual is in India in the previous year for a total period of 182 days or more.
(ii) Condition 2 : If he has been in India for at least 365 days during the 4 years preceding the
previous year and has been in India for at least 60 days during the previous year. However, the
clause of 60 days is not applicable if a person is :
– Citizen of India, who leaves India in any previous year as a member of the crew of an Indian
ship, or for the purpose of employment outside India. OR
– Citizen of India or of Indian origin engaged outside India (whether for rendering service
outside or not) and who comes on a visit to India in any previous year.
(iii) Condition 3 : An individual who has been a non-resident in India in at least nine out of the ten
previous years preceding that year, and has during the seven previous years preceding that year
been in India for a period of, or periods amounting in all to 729 days or less.
Resident and Ordinarily Resident - Satisfies either condition 1 or 2; But does not satisfies
condition 3
Not ordinarily resident - Satisfies any one condition from 1 & 2 and condition 3
Non-resident - Does not satisfy any condition from 1 and 2
– Residential status of HUF : The test to be applied to determine the residential status of a HUF, Firm or
other Association of Persons is based upon the control and management of the affairs of the assessee
concerned. A HUF, firm or other association of persons is said to be resident in India within the meaning
of Section 6(2) in any previous year, if during that year the control and management of its affairs is
situated wholly or partly in India during the relevant previous year. If the control and management of its
affairs is situated wholly outside India during the relevant previous year, it is considered non resident.
– A HUF can be “not ordinarily resident”
– If manager/karta has been a not ordinarily resident in India in the previous year in accordance with the
tests applicable to individuals.
 Lesson 2 n Basic Concept of Income Tax 67

– Firms, association of persons, local authorities and other artificial juridical persons can be either
resident (ordinarily resident) or non-resident in India but they cannot be not ordinarily resident in India.
– Residential status of Companies : All Indian companies within the meaning of Section 2(26) of the Act
are always resident in India regardless of the place of effective management.
In the case of a foreign company the place of effective management (POEM) of the affairs is the basis
on which the company’s residential status is determinable.
– Basis of charge : Section 4 of the Act is the charging section which imposes a charge and provides
rules for working out the charge so imposed.
Section 4 of the Act imposes a charge of tax on the total or taxable income of the assessee. The
meaning and scope of the expression of total income is contained in Section 5. The total income of
an assessee cannot determined unless we know the residential status in India during the previous
year. The scope of total income and consequently the liability to income-tax also depends upon the
following facts :
– whether the income accrues or is received in India or outside,
– the exact place and point of time at which the accrual or receipt of income takes place, and
– the residential status of the assessee.

SELF TEST QUESTIONS

These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation.

Multiple Choice Questions ‘MCQs’

1. Basic exemption for a co-operative society for the assessment year 2018-19 is :
a) Rs. 10000
b) Rs. 15000
c) Rs. 20000
d) Nil
Answer: d
2. Person is defined under section ______of the Income Tax Act, 1961
a) 2(31)
b) 2(7)
c) 2(9)
d) 3
Answer: a
3. Income earned by a LLP is taxable at the rate of:
a) 10%
b) 20%
68 EP-TL

c) 30%
d) None of the above
Answer: c
4. Income is defined under section ______of the Income Tax Act, 1961
a) 2(31)
b) 2(24)
c) 2(9)
d) 3
Answer: b
5. Which of the following is not a revenue receipt? (i) Compensation received for the loss of a capital
asset (ii) Compensation received for damage to or loss of a trading asset. (iii) Profits on purchase and
sale of shares by a share broker on his own account. (iv) Income from letting out buildings owned by a
company to its employees etc
a) i only
b) i and ii both
c) i , ii, and iii
d) All of the above
Answer: a

SUGGESTED READINGS
1. Direct Taxes Law and Practice
Author : Dr. Vinod K. Singhania & Dr. Kapil Singhania
Publisher : Taxmann
Year : 2019
Edition : 2019
2. Direct Taxes Ready Reckoner with Tax Planning
Author : Dr. Girish Ahuja & Dr. Ravi Gupta
Publisher : Wloters Kluwer
Year : 2019
Edition : 20th Edition
 Lesson 3
Incomes which do not form
Part of Total Income

LESSON OUTLINE
LEARNING OBJECTIVES
– Background Tax is calculated on the income earned in the
– General Exemption previous year. For providing relief to the tax payers
from payment of tax, income tax law contains
– Exemption under section 10 certain provisions relating to exemption and
– Specific Exemption deduction. Exempted income means the income
which are not charged to tax. Under Income Tax
– Special provisions in respect of newly Act, section 10 provides for incomes which are
established Units in Special Economic Zone exempted from levy of income tax for example
(Section 10AA) Scholarship. Further, deduction means the amount
– LESSON ROUND UP which needs to be included in the income first and
then they are allowed for deduction in full or in part
– SELF TEST QUESTION
on fulfillment of certain conditions. For example,
deduction for payment of donations under section
80G.
This lesson deals with incomes which do not
form part of total income. Section 10 provides for
various categories of income that are exempt from
tax. Section 10AA, deals with exemption in respect
of income of industrial units in special economic
zones.
After going through this lesson, you will learn:
– about the income which does not form part
of the total income
– the conditions to be satisfied for availing
exemption under section 10, 10AA.

71
72 EP-TL

BACKGROUND
Tax is calculated on the total income of an person for the previous year. For providing relief to the tax payer,
Income Tax laws provides for exemption, deduction and rebate. The exempt income is often confused with the
deductions and rebate. However there is difference between these concepts. The same has been explained in
the table below:

There are several incomes that do not form part of the total income of the assessees, which are entailed u/s 10
of the Act. Being exempt, these do not enter the computation of taxable incomes therefore.
There is a major difference between incomes u/s 10 and the deductions under Chapter-VI-A, although and
it is therefore imperative to note that the incomes u/s 10 do not enter the computation of taxable income for
assessees at all, they are exempt; whereas Chapter for VI-A, first incomes are added and form part of Gross
Total Income (GTI) and only then these deductions under the Chapter are allowed.

Incomes exempt u/s 10 will

NOT be included at all for
computing Gross Total Deductions under Chapter VI-A
Income would call for first including the
items in the Gross Total Income
and then the deductions would
be allowable

INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Agricultural Income [Section 10(1)]

Section 10(1) states that agricultural incomes are not included in the total income of the assessees.
The term Agricultural Income can be quite wide in scope as under:
l It could take the form of rent or revenues derives from a land in India(If agricultural land is situated in a
foreign country, the entire income would be taxable), and used for agricultural purposes
 Lesson 3 n Incomes which do not form part of Total Income 73

 The amount received in money or in kind, by one person from another for right to use land is
termed as Rent. The rent can either be received by the owner of the land or by the original tenant
from the sub-tenant. It implies that ownership of land is not necessary. Thus, the rent received by
the original tenant from sub-tenant would also be agricultural income subject the other conditions
mentioned above.
l It could take the form of income through agriculture / cultivation to render the produce fit for being taken
in to the market for sale
 Agriculture would include basic operations which are absolutely necessary for raising produce,
and subsequent operations which are performed after the produce sprouts from the land.
 Therefore, activities like tilling of the land, sowing seeds, and both the basic and subsequent
operations performed together in conjunction with each other would be construed as the
agricultural purpose.
 In order to render the produce, fit for being taken to market for sale, the activities would include all
activities, like cleaning, drying, winnowing, crushing etc. Example, let’s assume the process being
referred to is obtaining rice from paddy, the process ordinarily employed by the cultivator would
include:
l Removing hay from basic grains
l Removing chaff from the grains
l Filtering the grain to remove stones
l Packing the rice in gunny bags
Therefore, all activities, manual or otherwise, all the processes would be included in and therefore constitute the
activities deployed to render the produce fit for being taken to the market.
l It could take the form of sale of agricultural produce itself
 Here, the most important part to be understood is that the produce must be sold in it’s raw form,
and then that will constitute agricultural income. However, if the produce is further subjected to
processes other than the processes ordinarily employed to render the produce fit for the market,
example, for tobacco, cotton, tea, these are subjected to further manufacturing processes before
being commercially sold, and therefore the income so arising from such sale would be treated as
a mix of agricultural and business income.
Reference Case Law : Assessee acquired land from agriculturist on lease and constructed a greenhouse
floriculture project on said land. It started growing of rose flowers / plants on bridge of plastic trays erected
with help of M.S. stand 2.3 ft. above land. The assessee claimed the income from rose flowers as exempt.
The Assessing Officer held that the rose plants were not planted on earth land and no basis operation was
carried out by assessee on land hence, not eligible for exemption. According to assessee, for plantation of
roses a very well treated soil was required, manures were mixed in soil for preparing a base for growing
rose plants trays were filed with mixture of soil, insecticides were sprinkled on plants to save plants from
any disease, root stocks were brought from market and planted in green house, mother plant was otherwise
reared on earth, subsequently saplings were planted on plastic trays which were kept at height of 2-3 ft.
placed on M.S. stand, purpose of growing rose plants at a height was primarily to avoid pest and to develop
in a controlled atmosphere and green house was used for various benefits so that sunlight and humidity level
both could be maintained. The Tribunal held that the claim of exemption was justified. Refer, Dy. CIT v. Best
Roses Biotech (P) Ltd., 49 SOT 277.
74 EP-TL

Whether income from nursery constitutes agricultural income?

Yes, as per Explanation 3 to section 2(1A), income derived from saplings or seedlings grown in a nursery would
be deemed to be agricultural income, whether or not the basic operations were carried out on land.
Rule 7 - Where the income is partially agricultural income and partially business income, the market value
of any agricultural produce so raised by the assessees, which has been further utilised / processed in such
business will be allowed as a deduction in such business.
Determination of market value - There are two possibilities here:
(I) The agricultural produce is capable of being sold in the market either in its raw stage or after application
of any ordinary process to make it fit to be taken to the market. In such a case, the value calculated at the
average price at which it has been so sold during the relevant previous year will be the market value.
(II) It is possible that the agricultural produce is not capable of being ordinarily sold in the market in its raw
form or after application of any ordinary process. In such case the market value will be the total of the
following:—
• The expenses of cultivation;
• The land revenue or rent paid for the area in which it was grown; and
• Such amount as the Assessing Officer finds having regard to the circumstances in each case to
represent at reasonable profit.
Illustration 1 :
Kundan Lal grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory.
40% of the sugarcane produce is sold for INR 15,00,000 and the cost of cultivation of this part is INR 8,00,000.
60% of the sugarcane produce is further subjected to manufacturing sugar and the Market Value (MV) of the
same was INR 33,00,000 and the cost of cultivation of this part was INR 21,00,000.
Post incurring INR 3,00,000 in the manufacturing process for sugar, that the sugarcane was subjected to, the
sugar was sold for INR 40,00,000.
You are required to advise on his Agricultural and Business Income.
Solution :

Particulars In Lakhs In Lakhs

Item Sugarcane Sugar
Sale 48.0 40.0
Cost of cultivation 29.0 33.0
Further Mfg. 0.0 3.0
Agriculture Income 19.0
Business Income 4.0

Notes:
a) 40% of the sugarcane produce was sold raw @ INR 15,00,000 and 60% of the sugarcane produce was
subjected to further manufacturing, MV was INR 33,00,000. Therefore, for the purposes of agricultural
income, the entire produce was disposed at a consideration of INR 48,00,000
b) The cost of 100% produce is INR 800,000 and INR 21,00,000 for the 40% and 60% respectively, which
is INR 29,00,000
 Lesson 3 n Incomes which do not form part of Total Income 75

c) For sugar, the MV of the 60% produce would be taken as the cost hence, and therefore the cost of
cultivation would be INR 33,00,000

Income from manufacture of rubber [Rule 7A]

This rule applies on income from sale of latex, or crepes derived from latex, coagulum obtained from rubber
plants, grown by the seller in India. In such cases, 35% of profits on sales is taxable as business income and
65% as agricultural income, which stands exempt.
Illustration 2:
Nikhil manufactures latex from rubber plants grown by him in India. These are subsequently sold in the market
at INR 50,00,000. The costs incurred are as under:
l Manufacturing Latex: INR 12,00,000
l Growing Rubber Plants: INR 18,00,000
The treatment is explained as under:

Particulars INR
Total Income 50,00,000
Total Costs 30,00,000
Profits 20,00,000
Business Income 7,00,000
Agricultural Income 13,00,000

Note : the business income chargeable to tax under the head “Profits and Gains from Business / Profession” is
taken @ 35% of the profits and the agricultural income is taken @ 65%, which is subsequently exempt from tax.
Illustration 3
Mr. A manufactures latex from the rubber plants grown by him in India. These are then sold in the market for
Rs. 50 lacs. The cost of growing rubber plants is Rs. 20 lacs and that of manufacturing latex is Rs. 10 lacs.
Compute his total income.
Solution:
The total income of Mr. A comprises of agricultural income and business income.
Total profits from the sale of latex= Rs. 50 lacs – Rs. 20 lacs – Rs. 10 lacs = Rs. 20 lacs.
Agricultural income = 65% of Rs. 20 lac = Rs. 13 lacs
Business income = 35% of Rs. 20 lacs = Rs. 7 lacs

Income from the manufacture of coffee [Rule 7B]

This rule applies on income from sale of coffee grown & cured by the seller in India. In such cases, 25% of
profits on sales is taxable as business income and 75% as agricultural income, which stands exempt.
However, in case of income from sale of coffee, grown, cured, roasted and grounded by the seller in India, with
/ without mixing flavoured ingredients, 40% of the income would be taken as taxable as business income and
60% as agricultural income, which stands exempt.

Income from growing and manufacturing of tea [Rule 8]

This rule applies on income, where the assessees themselves grow tea leaves and manufacture tea in India.
In such cases, 40% of profits on sales is taxable as business income and 60% as agricultural income, which
stands exempt.
76 EP-TL

Nature of income Income tax Rule Amount of Amount of non-

applicable agricultural income agricultural income
Income from growing and manufacturing Rule 7A 65% of such income 35% of such income
of rubber
Income derived from sale of coffee Rule 7B(1) 75% of such income 25% of such income
grown and manufactured in India
Income derived from sale of coffee Rule 7B(1A) 60% of such income 40% of such income
grown, cured, roasted and grounded is
India
Income from sale of tea manufactured Rule 8 60% of such income 40% of such income
or grown in India

Income from farm building:

Income arising from the use of farm building for any purpose (including letting for residential purpose or for the
purpose of business or profession) other than agriculture would not be agricultural income.
Further, the income from farm building would be agricultural income only if the following conditions are satisfied:
(a) The building should be on or in the immediate vicinity of the land; and
(b) The receiver of the rent or revenue or the cultivator or the receiver of rent in kind should, by reason of
his connection with such land require it as a dwelling house or as a store house.
In addition to the above conditions any one of the following two conditions should also be satisfied:
(i) The land should either be assessed to land revenue in India or be subject to a local rate assessed and
collected by the officers of the Government as such or;
(ii) Where the land is not so assessed to land revenue in India or is not subject to local rate:-
a. It should not be situated in any area as comprised within the jurisdiction of a municipality or a
cantonment board and which has a population not less than 10,000 or
b. It should not be situated in any area within such distance, measured aerially, in relation to the
range of population as shown hereunder –

Sl. Shortest aerial distance from the Population according to the last preceding
No. local limits of a municipality or census of which the relevant figures have been
cantonment board referred to in published before the first day of the previous
item a. year
(i) ≤ 2 kilometers > 10,000 ≤ 1,00,000

(ii) ≤ 6 kilometers > 1,00,000 ≤ 10,00,000

(iii) ≤ 8 kilometers > 10,00,000

Whether income arising from transfer of agricultural land situated in urban area be agricultural
income?
No, as per Explanation 1 to section 2(1A), the capital gains arising from the transfer of urban agricultural land
would not be treated as agricultural income under section 10 but will be taxable under section 45.

Where there is a combination of agricultural and non-agricultural income

This is applicable to Individuals, HUF, AOP, BOI, and artificial juridical person.
 Lesson 3 n Incomes which do not form part of Total Income 77

Two conditions which needs to be satisfied for partial integration of agricultural income with non-agricultural
income are:
1) The net agricultural income must be > INR 5000/- p.a.; &
2) The non-agricultural income must be > the maximum amount not chargeable to tax (which is INR
250,000 for all individuals / HUF’s; INR 300,000 for senior citizens and INR 500,000 for very senior
citizens)
The manner of computation of Income in such cases would be as under:

Refer to the illustration below which will explain this better.

Income of Mr. A for the previous year 2019-20 is as follows: Compute Tax Liability for the Assessment year
2020-21.

Particulars INR
Income from salary (computed) 2,50,000
Income from house property (computed) 1,25,000
Net Agricultural Income 1,00,000
Total (A) 4,75,000
Tax Liability 11,250
Total (B) 3,50,000
Tax Liability 5,000
(A)-(B) 6,250
Less: Rebate 87A[12500 or tax payable i.e. 6,250 whichever is lower] 6,250
Total tax payable Nil

Note:
1) The (A) would be the combined income and the tax liability is computed per the current slabs and rates
2) The (B) would be the net agricultural income as increased by the minimum exemption amount and the
tax liability is computed per the current slabs and rates
3) The (A)-(B) would be the tax liability on which rebate 87A is allowed to determine the final total tax
liability

Amount received by a member of the HUF from the income of the HUF [Section 10(2)]
As per section 10(2), amount received out of family income, or in case of impartible estate, amount received
out of income of family estate by any member of such HUF is exempt from tax. This is allowable only when the
payments are made by the HUF to it’s members, out of the income of the family or out of the impartible estate
belonging to the family.
78 EP-TL

Illustration:
Mr. P, a member of a HUF, received Rs. 5,000 as his share from the income of the HUF. Is such income
includible in his chargeable income?
Answer:
No. Such income is not includible in Mr. P’s chargeable income since section 10(2) exempts any sum received
by an individual as a member of a HUF where such sum has been paid out of the income of the family.

Share of profit received by a partner from the firm [Section 10(2A)]

As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the hands of the
partner. Further, share of profit received by a partner of LLP from the LLP will be exempt from tax in the hands
of such partner. This exemption is limited only to share of profit and does not apply to interest on capital and
remuneration received by the partner from the firm/LLP.

Interest to non-residents [Section 10(4)]

4 As per section 10(4)(i), in the case of a non-resident; any income by way of interest on certain notified
securities or bonds (including income by way of premium on the redemption of such bonds) is exempt from
tax.
4 As per section 10(4)(ii),
l in the case of an individual,
l any income by way of interest on money standing to his credit in a Non-Resident (External) Account
l in any bank in India in accordance with the Foreign Exchange Management Act, 1999, and the rules
made thereunder is exempt from tax.
l Exemption under section 10(4)(ii) is available only if such individual is a person resident outside
India as defined in clause (w) of section 2 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 [Section 10(4B)]

As per section 10(4B), in the case of an individual, being a citizen of India or a person of Indian origin, who is
a non-resident, any income by way of interest on notified savings certificates subscribed in convertible foreign
exchange) issued before the 1st day of June, 2002 by the Central Government is exempt from tax.

Leave travel concession [Section 10(5)]

An employee can claim exemption under section 10(5) in respect of Leave Travel Concession. Exemption
under section 10(5) is available to all employees (i.e. Indian as well as foreign citizens). Exemption is available
in respect of value of any travel concession or assistance received or due to the employee from his employer
(including former employer) for himself and his family members in connection with his proceeding on leave to
any place in India.
Other provisions to be kept in mind in this regard are as follows:
 Lesson 3 n Incomes which do not form part of Total Income 79

Where journey is performed by air Where journey is performed by rail

Amount of exemption will be lower of Amount of exemption will be lower of
amount of economy class air fare of the amount of air-conditioned first-class
National Carrier by the shortest route or rail fare by the shortest route or actual
actual amount spent. amount spent.

The same rule will apply where journey is performed by any other mode and the place of origin of journey and
destination are connected by rail.

Where the place of origin and destination are not connected by rail and
journey is performed by any mode of transport other than by air. The
exemption will be as follows:

If recognised public If no recognised public

transport exists transport exists

Exemption will be lower of

Exemption will be lower of first amount of air-conditioned
class or deluxe class fare by first class rail fare by the
the shortest route or actual shortest route (considering
amount spent. as if journey is performed
by rail) or actual amount
spent.

Block: Exemption is available for 2 journeys in a block of 4 years. The block applicable for current period is
calendar year 2018-21. The previous block was of calendar year 2014-2017.
Carry over: If an employee has not availed of travel concession or assistance in respect of one or two permitted
journeys in a particular block of 4 years, then he is entitled to carry over one journey to the next block. In this
situation, exemption will be available for 3 journeys in the next block. However, to avail of this benefit, exemption
in respect of journey should be utilised in the first calendar year of the next block. In other words, in case of
carry over, exemption is available in respect of 3 journeys in a block, provided exemption in respect of at least
1 journey is claimed in the first year of the next block. Exemption is in respect of actual expenditure on fare,
hence, if no journey is performed, then no exemption is available.
Family: Family will include spouse and children of the individual, whether dependent or not and parents, brothers,
sisters of the individual or any of them who are wholly or mainly dependent on him. Exemption is restricted to only
2 surviving children born after October 1, 1998 (multiple births after first single child will be considered as one child
only), however, such restriction is not applicable to children born before October 1, 1998.
80 EP-TL

Reference Case Law: In a recent judgment in case of Commissioner of Income tax & ANR vs M/s Larsen &
Toubro Ltd, the Honourable Supreme Court of India has considered the question whether the employer has any
obligation under the Act/Rules to collect evidence to show that the employee had actually utilized the amount
paid towards LTA. The Honourable Supreme Court of India observed that the beneficiary of exemption under
Section 10(5) is the individual employee. It also referred to the annual circular issued by the CBDT under
Section 192 where under guidance is given to employers on the manner in which tax is required to be deducted
from salary paid to employees. The Court has held that the said Circular did not require an employer to examine
the supporting evidence to the declaration submitted by an employee as far as LTA is concerned. Based on this,
the Court has held that the employer has no obligation to collect such evidence or to verify the claim.

Remuneration received by individuals, who are not citizens of India [Section 10(6)]
In case of an individual who are not a citizen of India are entitled to certain exemptions under section 10(6)
which are discussed as follows:

Remuneration received by specified diplomats and their staff [Section 10(6)(ii)]

As per section 10(6)(ii)
l in case of an individual who is not a citizen of India,
l remuneration received by him as an official (by whatever name called) of an Embassy, High Commission,
Legation, Commission, Consulate or Trade Representative of a Foreign State, or member of the staff
of any of that official is exempt from tax, if corresponding Indian official in that foreign country enjoys a
similar exemption.

Salary of a foreign employee and non-resident member of crew [Section 10(6)(vi), (viii)]
As per section 10(6)(vi),
l the remuneration received by
l a foreign national as an employee of a foreign enterprise
l for services rendered by him during his stay in India is exempt from tax,
l provided the following conditions are fulfilled:
(a) the foreign enterprise is not engaged in any trade or business in India ;
(b) his stay in India does not exceed in the aggregate a period of 90 days in such year ; and
(c) such remuneration is not liable to be deducted from the income of the employer.
As per section 10(6)(viii),
l any salaries received by or due to a
l non-resident foreign national for
l services rendered in connection with his employment on a foreign ship
l where his total stay in India does not exceed in the aggregate a period of 90 days in the year
is exempt from tax.

Remuneration of a foreign trainee [Section 10(6)(xi)]

As per section 10(6)(xi),
l the remuneration received by a
 Lesson 3 n Incomes which do not form part of Total Income 81

l foreign trainee as an employee of foreign Government

l during his stay in India in connection with his training in any establishment or office of, or in any undertaking
owned
l by the Government ; or any company owned by the Central Government, or any State Government or
any company which is a subsidiary of a company referred to above or any corporation established by
or under a Central, State or Provincial Act or any co-operative society wholly financed by the Central
Government, or any State Government Tax,
is exempt from tax

Tax paid on behalf of foreign company deriving income by way of royalty or fees for technical
services [Section 10(6A)]
Tax paid by Central Government, State Government or an Indian concern on behalf of a foreign company
deriving income by way of royalty or fees for technical services in pursuance of an agreement made after March
31, 1976 but before June 1, 2002 will be exempt from tax in the hands of such foreign company provided such
agreement is in accordance with the industrial policy of the Indian Government or it is approved by the Central
Government.

Tax paid on behalf of foreign company or non-resident in respect of other income [Section
10(6B)]
Tax paid by Central Government, State Government or an Indian concern on behalf of a foreign company or
non-resident in respect of any income (not being salary, royalty or fees for technical services) will be exempt
from tax in the hands of such foreign company or non-resident if such income is received in pursuance of an
agreement entered into before June 1, 2002 by the Central Government with the Government of a foreign State
or international organisation or any other related agreement approved by the Central Government.

Tax paid on behalf of foreign Government or foreign enterprise deriving income by way of
lease of aircraft or aircraft engine [Section 10(6BB)]
Tax paid by an Indian company, engaged in the business of operation of aircraft, on behalf of foreign Government
or foreign enterprise deriving income by way of lease of aircraft or aircraft engine will be exempt from tax in the
hands of such foreign Government or foreign enterprise if such lease rental is received under an agreement
which is approved by Central Government and entered during the period between 31-3-1997 to 1-4-1999, or
after 31-3-2007.

Technical fees received by a notified foreign company [Section 10(6C)]

Section 10(6C) grants exemption from tax in respect of income arising to notified foreign company by way of
royalty or fees for technical services received in pursuance of an agreement entered into with that Government
for providing services in or outside India in projects connected with security of India.

Royalty or fees for technical services payment by NTRO to a non resident Section 10 (6D)
Any income arising to a
l non-resident, not being a company, or a foreign company,
l by way of royalty from, or fees for technical services rendered in or outside India to the National Technical
Research Organisation (NTRO).
l Consequently NTRO will not be required to deduct tax on such payments.
82 EP-TL

Allowance/perquisites to Government employee outside India [Section 10(7)]

As per section 10(7), any allowances or perquisites paid or allowed as such outside India by the Government
to a citizen of India for rendering service outside India is exempt from tax.

Income of foreign Government employee under co-operative technical assistance programme

[Section 10(8)]
As per section 10(8), remuneration received directly or indirectly by an individual, from the foreign Government in
connection with a co-operative technical assistance programme and projects in accordance with an agreement
entered into by the Central Government and such foreign Government, is exempt from tax. Further, exemption
is available in respect of any other income of such an individual which accrues or arises outside India and is not
deemed to accrue or arise in India, provided such individual is required to pay income-tax/ social security tax
to the foreign Government.

Remuneration or fees received by a non-resident consultant/its foreign employees [Section

10(8A), (8B)]
Under section 10(8A), (a) remuneration or fees received by a consultant directly or indirectly out of the
funds made available to an international organisation, under a technical assistance agreement between
such organisation and the Government of a foreign State and (b) any other income which accrues or arises
to him outside India and is not deemed to accrue or arise in India, in respect of which such consultant is
required to pay income-tax/social security tax to the foreign Government of the country of his origin, is
exempt from tax.

Income of a family member of an employee serving under co-operative technical assistance

programme [Section 10(9)]
As per section 10(9), the income of any member of the family of any such individual as is referred to
in section 10(8)/(8A)/(8B) accompanying him to India, which accrues or arises outside India and is not
deemed to accrue or arise in India, in respect of which such member is required to pay any income or social
security tax to the Government of that foreign State or country of origin of such member, as the case may
be, is exempt from tax.

Retrenchment compensation [Section 10(10B)]

As per section 10(10B), compensation received at the time of retrenchment is exempt from tax to the extent
of lower of the following: (a) An amount calculated in accordance with the provisions of section 25F(b) of the
Industrial Dispute Act, 1947; or (b) Maximum amount specified by the Central Government (Rs. 5,00,000); (c)
Actual amount received.
Under the Industrial Dispute Act, a workman is entitled to retrenchment compensation, equal to 15 days’
average pay for each completed year of continuous service or any part in excess of six months. Compensation
in excess of aforesaid limits is taxable as salary. However, the aforesaid limit is not applicable in cases where
compensation is paid under any scheme approved by the Central Government.

Compensation for Bhopal Gas Leak Disaster [Section 10(10BB)]

Compensation [in accordance with Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985] received by
l victims of Bhopal gas leak disaster is exempt from tax.
l However, compensation received for any expenditure which is allowed as deduction from taxable income
is not exempt.
 Lesson 3 n Incomes which do not form part of Total Income 83

Compensation on account of any disaster [Section 10(10BC)]

Any amount received from the
l Central Government or
l State Government or
l a Local Authority by
l an individual or his legal heirs
l as compensation on account of any disaster
is exempt from tax.
However, no deduction is available in respect of the amount received or receivable to the extent such individual
or his legal heirs has been allowed a deduction under the Act on account of loss or damage caused due to such
disaster.

Disaster here means

l any disaster due to any natural or
l man-made causes or
l by accident/negligence which results in substantial loss of human life or
l damage to property or environment and
l the magnitude of such disaster is beyond coping capacity of community of the affected area.

Payment at the time of voluntary retirement [Section 10(10C)]

As per section 10(10C), any compensation received at the time of voluntary retirement or termination of service
is exempt from tax, if the following conditions are satisfied:
 Compensation is received at the time of voluntary retirement or termination (or in the case of an
employee of public sector Company, at the time of voluntary separation)
 Compensation is received by an employee of following undertakings- a) public sector company; or
b) any other company; or c) an authority established under a Central, State or Provincial Act; or d) a
local authority; or e) a co-operative society ; or f) a University established or incorporated by or under
a Central, State or Provincial Act and an institution declared to be a University under section 3 of the
University Grants Commission Act, 1956 (3 of 1956) ; or g) an Indian Institute of Technology within the
meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or h) any State
Government; or i) the Central Government; or j) Notified institutes having importance throughout India
or in any State or States, k) Notified institute of management
 Compensation is received in accordance with the scheme of voluntary retirement/separation, which is
framed in accordance with guidelines prescribed under Rule 2BA of Income-tax Rules, 1962. Maximum
amount of exemption is Rs. 5,00,000. Where exemption is allowed to an employee under section
10(10C) for any assessment year, no exemption under this section shall be allowed to him for any other
assessment year. With effect from assessment year 2010-11, section 10(10C) has been amended to
provide that where any relief has been allowed to assessees under section 89 for any assessment year
in respect of any amount received or receivable on his voluntary retirement or termination of service or
voluntary separation, no exemption under section 10(10C) shall be allowed to him in relation to such or
any other assessment year.
84 EP-TL

Tax on perquisites paid by the employer [Section 10(10CC)]

Perquisites to employees mean any facility provided by the employer to the employees. There are two types of
perquisites, viz., monetary and non-monetary. Value of perquisite is charged to tax in the hands of the employees,
however, the employer may at his will pay tax (on behalf of employees) on such perquisites. In such a case, the
amount of tax paid on such perquisites by the employer on behalf of the employees will be treated as income of
the employees and is charged to tax in his (i.e., in employee’s) hands. However, by virtue of section 10(10CC) tax
paid by employer (on behalf of employee) on non-monetary perquisites will be exempt from tax in the hands of
employees. Such tax paid by the employer shall not be allowed as a deductible expenditure in the hands of employer
under section 40. Section 10(10CC) provides exemption only in respect of tax on nonmonetary perquisites. In other
words, this section does not provide exemption in respect of perquisites or tax paid on monetary perquisites.
Reference Case Law: The assessee, an employee, claimed that the tax paid by the employer on his salary
income is not liable to be included in his total income as it is exempt under section 10(10CC). Assessing Officer
disallowed the claim. The Tribunal following the Special bench in RBF Rigs Corpn. LIC (RBFRC) v. ACIT (2007)
109 ITD 141 (SB) (Delhi)(Trib.) held that tax borne by the employer on behalf of the employee would constitute
a non-monetary payment as such the same is exempt under section 10(10CC).

Amount paid on life insurance policy [Section 10(10D)]

As per section 10(10D), any amount received under a life insurance policy, including bonus is exempt from tax.
Following points should be noted in this regard:

Situation Exemption u/s 10(10D)

In respect of Any sum received under a LIP including the sum allocated by way of bonus is exempt.
policies issued
before 1.4.2003
In respect of Any sum received under a LIP including the sum allocated by way of bonus is exempt.
policies issued However, exemption would not be available if the premium payable for any of the
between 1.4.2003 years during the term of the policy exceeds 20% of “actual capital sum assured”.
and 31.3.2012

In respect of Any sum received under a LIP including the sum allocated by way of bonus is exempt.
policies issued on However, exemption would not be available if the premium payable for any of the
or after 1.4.2012 years during the term of the policy exceeds 10% of “minimum capital sum assured”
but before 1.4.2013 under the policy on the happening of the insured event at any time during the term of
the policy.
In respect of (a) Where the insurance is on the life of a person with disability or severe disability as
policies issued on referred to in section 80U or a person suffering from disease or ailment as specified
or after 1.4.2013 under section 80DDB.
Any sum received under a LIP including the sum allocated by way of bonus is exempt.
However, exemption would not be available if the premium payable for any of the
years during the term of the policy exceeds 15% of “minimum capital sum assured”
under the policy on the happening of the insured event at any time during the term of
the policy.
(b) Where the insurance is on the life of any person, other than mentioned in (a)
above
 Lesson 3 n Incomes which do not form part of Total Income 85

Any sum received under a LIP including the sum allocated by way of bonus is exempt.
However, exemption would not be available if the premium payable for any of the
years during the term of the policy exceeds 10% of “minimum capital sum assured”
under the policy on the happening of the insured event at any time during the term of
the policy.

Notes:
(a) Amounts not to be considered while computing actual capital sum assured: For the purpose of
calculating the actual capital sum assured,
(1) the value of any premiums agreed to be returned or
(2) the value of any benefit by way of bonus or otherwise, over and above the sum actually assured,
shall not be taken into account.
(b) Meaning of actual capital sum assured: In respect of the life insurance policies to be issued on or
after 1st April, 2012, the 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, not taking into
account -
(1) the value of any premium agreed to be returned; or
(2) 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.
In effect, in case the insurance policy has varied sum assured during the term of policy then the
minimum of the sum assured during the life time of the policy shall be taken into consideration for
calculation of the “actual capital sum assured”, in respect of life insurance policies to be issued on or
after 1st April, 2012.
Exemption is not available in respect of amount received from an insurance policy taken for disabled
person under section 80DD: Any sum received under section 80DD(3) shall not be exempt under
section 10(10D). Accordingly, if the dependent disabled, in respect of whom an individual has paid
or deposited any amount in any scheme of LIC or any other insurer, predeceases the individual, the
amount so paid or deposited shall be deemed to be the income of the individual of the previous year
in which such amount is received. Such amount would not be exempt under 10(10D).
(c) Exemption is not available in respect of the sum received under a Keyman insurance policy: Any sum
received under a Keyman insurance policy shall also not be exempt.
Explanation 1 to section 10(10D) defines “Keyman insurance policy” as a life insurance policy taken by
one person on the life of another person who is or was the employee of the first-mentioned person or is
or was connected in any manner whatsoever with the business of the first- mentioned person. The term
includes within its scope a keyman insurance policy which has been assigned to any person during its
term, with or without consideration. Therefore, such policies shall continue to be treated as a keyman
insurance policy even after the same is assigned to the keyman. Consequently, the sum received by
the keyman on such policies, being “keyman insurance policies”, would not be exempt under section
10(10D).

Payment from account opened in accordance with the Sukanya Samriddhi Account Rules,
2014 [Section 10(11A)]
As per section 10(11A), any payment from an
86 EP-TL

l account opened in accordance with the Sukanya Samriddhi Account Rules, 2014 made under the
Government Savings Bank Act, 1873 is exempt from tax.
l In other words, interest and withdrawals from such account will be exempt from tax under section 10(11A).

Payment from the National Pension System Trust to an employee [Section 10(12A)]
Any payment from the National Pension System Trust to
l an assessee (Word assessee is substituted in place of employee to extend benefit to non-employees)
l on closure of account or his opting out of the pension scheme referred to in section 80CCD,
l to the extent it does not exceed 60% of the total amount payable to him at the time of closure or
l his opting out of the scheme,
is exempt from tax.

Partial withdrawal from NPS [Section 10(12B)]

To provide relief to an employee withdrawing partial amount from National Pension System (NPS) Trust. A
new clause (12B) is inserted under section 10 with effect from assessment year 2018-19 to provide that the
withdrawal from NPS will not be chargeable to tax if the following conditions are satisfied: -

Amount of withdrawal should not exceed 25% of total

contribution made by an employee in NPS.

NPS withdrawal shall

not chargeable to tax if
Partial withdrawal should be made in accordance with
the Pension Fund Regulatory and Development
Authority Act, 2013 and the regulations made
thereunder.

Payment from approved superannuation fund in specified circumstances and subject to

certain limits [Section 10(13)]
Approved superannuation fund means superannuation fund which is approved by the Commissioner of Income-
tax. Tax treatment of such fund is as follows:
Employer’s contribution is exempt from tax, however, from assessment year 2010-11 employer’s contribution
in excess of Rs. 1,50,000 per annum is charged to tax as perquisite. Employee’s contribution qualifies for
deduction under section 80C and interest on accumulated balance is not liable to tax.
Payments made from the fund are exempt from tax under section 10(13) in following cases:
 Payment on death of beneficiary; or
 Payment to employee in lieu of, or in commutation of an annuity on his retirement at or after the
specified age or on his becoming incapable prior to such retirement; or
 Payment by way of refund of contributions on the death of a beneficiary; or
 Payment to employee by way of refund of his contributions on leaving the service in connection with
which the fund is established otherwise than by retirement at or after a specified age or on his becoming
incapacitated prior to such retirement; or Payment to employee by way of transfer to his account under
a pension scheme referred to in section 80CCD
 Lesson 3 n Incomes which do not form part of Total Income 87

Allowances for meeting business expenditure [Section 10(14)]

Discuss in Lesson No. 4 [Income under the head Salary]

Interest Incomes [Section 10(15)]

Interest, Redemption Premium, on notified securities, bonds, certificates, deposits etc., are exempt for all assessees.

Educational scholarship [Section 10(16)]

Any amount received as educational scholarship (i.e., scholarship to meet the cost of education) is exempt from
tax in the hands of recipient.

Daily allowance to a Member of Parliament [Section 10(17)]

Any other Any

Daily allowance Constituency
allowance
allowance

received by a received by a Member

Member of of Parliament under
Parliament or by a the Members of
received by a
Member of State Parliament
Member of State
Legislature or by (Constituency
Allowance) Rules, 1986 Legislature
member of any
committee thereof

Are exempt from tax in the hands of a Member of Parliament

and a Member of State Legislature

Awards [Section 10(17A)]

Any payment received in pursuance of following (whether paid in cash or in kind) is exempt from tax:

Payment received
shall be exempt
from tax if it is
related to

Any award instituted in

Any reward
the public interest

By the Central by the Central

Government or Government or any
State Government State Government
or by any other body for such purpose as
approved by the may be approved by
Central Government the Central
in this behalf Government in this
behalf in the public
interest.
88 EP-TL

Pension to gallantry award winner [Section 10(18)]

Pension received by an
l individual who was employee of the Central Government or State Government and
l who has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or any other notified gallantry
award
is exempt from tax.
In case of death of such individual, any income by way of Family pension received by any member of the
family**of such individual is also exempt.
**Meaning of Family:
Family, in relation to an individual, means –
l The spouse and children of the individual; and
l The parents, brothers and sisters of the individuals or any of them, wholly or mainly dependent on the
individual.

Family pension received by the family members of armed forces [Section 10(19)]
From the assessment year 2005-06, family pension received by
l the widow or children or nominated heirs,
l of a member of armed forces (including paramilitary forces) of the
l Union,
is exempt from tax in the hands of such family members, if
l the death of such member of armed forces has occurred in the course of
l operational duty in prescribed circumstances and subject to such conditions as may be prescribed.
Exemption of disability pension granted to disabled personnel of armed forces who have been
invalided on account of disability attributable to or aggravated by such service [Circular No. 13/2019,
dated 24.6.2019]
The entire disability pension, i.e. “disability element” and “service element” of pension granted to members of
naval, military or air forces who have been invalided out of naval, military or air force service on account of
bodily disability attributable to or aggravated by such service would be exempt from tax.
The CBDT has, vide this circular, clarified that exemption in respect of disability pension would be available
to all armed forces personnel (irrespective of rank) who have been invalided out of such service on account
of bodily disability attributable to or aggravated by such service. However, such tax exemption will be
available only to armed forces personnel who have been invalided out of service on account of bodily
disability attributable to or aggravated by such service and not to personnel who have been retired on
superannuation or otherwise.

Income of a news agency [Section 10(22B)]

Any income of a notified news agency, set-up in India solely for collection and distribution of news is exempt
from tax provided that the news agency applies its income or accumulates it for application solely for collection
and distribution of news and does not distribute its income in any manner to its members.
 Lesson 3 n Incomes which do not form part of Total Income 89

Income of a professional association [Section 10(23A)]

Any income (other than income from house property and income from rendering any specific service or income
by way of interest or dividend on investment) of an professional institution/association is exempt from tax, if the
following conditions are satisfied:

Professional institution is established in India for the purpose of

control, supervision, regulation or encouragement of the profession
of law, medicine, accountancy, engineering or architecture or such
other notified profession.

The institution applies its income, or accumulates it for application,

solely to the objects for which it is established.

The institution is approved by the Central Government by general or

special order.

Income received on behalf of Regimental Fund [Section 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 dependents,
is exempt from tax.

Income of a fund established for welfare of employees [Section 10(23AAA)]

Any income received by any person on behalf of a fund established, for such purpose as may be notified by the
Board in Official Gazette, for the welfare of employees or their dependents and of which fund such employees
are members, is exempt from tax, if such fund applies or accumulates its income for exclusive application
towards its objects, invests its funds in the modes specified in section 11(5) and such fund is approved by the
Principal Commissioner or Commissioner in accordance with rule made in this behalf (see rule 16C and Form
No. 9).

Income of pension fund [Section 10(23AAB)]

Any income of a fund set-up by the Life Insurance Corporation of India on or after August 1, 1996 or any other
insurer to which contribution is made by any person for receiving pension from such fund, and which is approved
by the Controller of Insurance or the Insurance Regulatory and Development Authority, is exempt from tax.

Income from Khadi or village industry [Section 10(23B)]

Income of an institution constituted as a public charitable trust or society which is established for the development
of khadi and village industries (not for profit purpose) is exempt from tax, if following conditions are satisfied: 1)
Income is attributable to the business of production, sale, or marketing, of khadi or products of village industries.
2) Institution applies its income, or accumulates it for application, solely for the development of khadi or village
industries or both 3) Institution is approved by the Khadi and Village Industries Commission.

Income of Hospital [Section 10(23C)

Income arises to any hospital or other institution for the reception and treatment of persons suffering from illness
90 EP-TL

or mental defectiveness or for the reception and treatment of persons during convalescence or of persons
requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes
of profit, shall be exempt from tax under following situations: 1) If the hospital or other institution is wholly or
substantially financed by the Government then exemption would be available under section 10(23C). 2) If the
aggregate annual receipt of such hospital or institution do not exceed Rs. 1 Crore then exemption would be
available under section 10(23C). 3) If the hospital is approved by the prescribed authority

Income of mutual fund [Section 10(23D)]

Any income of following mutual funds (subject to provisions of sections 115R to 115T) is exempt from tax:

A mutual fund registered

under the SEBI Act, 1992 or A mutual fund set-up by a public-
regulation made thereunder. sector bank, or a public financial
institution or authorised by RBI.
(Subject to conditions notified
by the Central Government)

Income of notified investor protection fund [Section 10(23EA)]

Any income by way of contributions received from recognised stock exchanges and the members thereof, of a
notified Investor Protection Fund set up by recognised stock exchanges in India is exempt from tax. Provided
that 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 recognised stock exchange, 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 the notified investor protection fund set-up by commodity exchange [Section
10(23EC)]
Any income by way of contributions received from commodity exchanges and the members thereof, of a notified
Investor Protection Fund set up by commodity exchanges in India is exempt from tax. Provided that 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 commodity exchange, 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 Investor Protection Fund set by a depository [Section 10(23ED)]

Any income, by way of contributions received from a depository, of notified Investor Protection Fund set up by
a depository in accordance with the regulations made under the SEBI Act and Depository Act is exempt from
tax. Provided that 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.
 Lesson 3 n Incomes which do not form part of Total Income 91

Income of a venture capital fund or a venture capital company from investment in a venture
capital undertaking [Section 10(23FB)]
Income of a venture capital fund or a venture capital company from investment in a venture capital undertaking is
exempt from tax from assessment year 2001-02. However, this exemption is subject to satisfaction of conditions
specified in section 10(23FB). These provisions shall not apply in respect of any income of a venture capital
company or venture capital fund, being an investment fund specified in clause (a) of the Explanation 1 to section
115UB, of the previous year relevant to the assessment year beginning on or after the 1st day of April, 2016.

Income of an investment fund [Section 10(23FBA)]

Any income of an investment fund other than the income chargeable under the head “Profits and gains of
business or profession” is exempt under Section 10(23FBA). “Investment fund” shall have the same meaning
assigned to it in clause (a) of the Explanation 1 to section 115UB. Income referred to in section 115UB of a
unit holder of an investment fund [Section 10(23FBB)] Any income referred to in section 115UB, accruing or
arising to, or received by, 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” is exempt
under section 10(23FBB). “Investment fund” shall have the same meaning assigned to it in clause (a) of the
Explanation 1 to section 115UB.

Income of a registered trade union [Section 10(24)]

Any income chargeable under the head
l “Income from house property” and
l “Income from other sources” of a registered union within the meaning of the Indian Trade Union Act, 1926,
formed primarily for the purpose of regulating the relation between workmen and employers or between
workmen and workmen
is exempt from tax. Similar exemption is available to an association of registered unions.

Income of provident fund [Section 10(25)]

Following income is exempt from tax under this section:

Interest on securities
held by a statutory Any income received by
provident fund and any the Board of Trustees on
capital gains arising from behalf of Deposit-linked
such securities Insurance Fund.

Any income received by

the trustee on behalf of a
recognised provident fund
or an approved
superannuation fund or an
approved gratuity fund; and

Income of the Employees’ State Insurance Fund [Section 10(25A)]

Any income of the Employees’ State Insurance Fund of the Employees’ State Insurance Corporation set-up
under the provisions of the Employees’ State Insurance Act, 1948 is exempt from tax under section 10(25A).
92 EP-TL

Income of a member of a Scheduled Tribe [Section 10(26)]

Income of a member of a Scheduled Tribe [as per article 366(25) of the Constitution] is exempt from tax, if
following conditions are satisfied:
 Such member resides in any area in the State of Nagaland, Manipur, Tripura, Arunachal Pradesh,
Mizoram or district of North Cachar Hills, Mikir Hills, Khasi Hills, Jaintia Hills and Garo Hills or in the
Ladakh region of the State of Jammu and Kashmir.
 Such exemption is available in respect of income which accrues/arises from any source in such areas
or income by way of dividends/interest on securities arises from any area.

Specified income of a Sikkimese Individual [Section 10(26AAA)]

(i) The following income, which accrues or arises to a Sikkimese individual, would be exempt from income-
tax –
(a) income from any source in the State of Sikkim; or
(b) income by way of dividend or interest on securities.
(ii) However, this exemption will not be available to a Sikkimese woman who, on or after 1st April, 2008,
marries a non-Sikkimese individual.

Income of Minor [Section 10(32)]

Under section 64(1A) income of a minor child is clubbed along with the income of his/her parent, subject to
certain conditions. If the income of an individual includes any income of his/her minor child (dependent or not,
adopted child), then such individual can claim exemption (in respect of each minor child) of lower of following
amount:
(a) Rs. 1,500 per minor child; or
(b) Amount of income of each minor child (which is clubbed).

Dividends and interest on units [Section 10(34)/(35)]

Following incomes are not chargeable to tax from the assessment year 2004-05:
 Lesson 3 n Incomes which do not form part of Total Income 93

• Any income by way of dividends covered by section 115-O @ 15% [i.e., any dividends from a domestic
company including dividends covered under section 2(22)(e)] at special rate of 30% ; However, as
per section 115BBDA (as inserted by Finance Act, 2016), in the case of resident individual/HUF/firm,
dividend shall be chargeable to tax at the rate of 10% if aggregate amount of dividend received during
the year exceeds Rs. 10,00,000.
• Any income in respect of units of a mutual fund;
• Income received by a unit holder of UTI;
• Income in respect of units of a specified company.
Note : 1. Under section 115-O and section 115R, the person paying the dividends on share or income on units
will have to pay distribution tax on dividend/income distributed.
2. It should be noted that under this clause, Income on transfer of units is not exempt.

Income on Buyback of Shares [Section 10(34A)]

Any income arising to an assessee, being a shareholder, on account of buy back of shares by the company as
referred to in section 115QA is exempt from tax.

Income from international sporting event [Section 10(39)]

From the assessment year 2006-07, any specified income of notified person, arising from an international
sporting event held in India is exempt from tax, if the event is approved by the international body and is notified
by the Central Government and has participation by more than two countries.

Income received as grant by a subsidiary company [Section 10(40)]

Income of any subsidiary company by way of grant or otherwise received from its Indian holding company which
is engaged in the business of generation/ transmission/distribution of power is exempt, if such receipt is for
settlement of dues in connection with reconstruction or revival of an existing business of power generation. The
exemption is available, if the reconstruction or revival is by way of transfer of business to the Indian company
notified under section 80 IA(4)(v)(a).

Income from transfer of asset of an undertaking engaged in the business of generation,

transmission or distribution of power [Section 10(41)]
Under section 10(41), any capital gain arising in the above case is not chargeable to tax, if the transfer has
taken place before April 1, 2006
Income from transfer of capital asset of an undertaking engaged in the business of generation, transmission or
distribution of power where such transfer takes place on or before 31.3.2006 and transfer is made to the Indian
company as notified u/s 801A.
94 EP-TL

Income of a body or authority set up by two countries [Section 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 entered into by the Central Government with two or more
countries or a convention signed by the Central Government;

is established or constituted or appointed not for the purposes of profit;

is notified by the Central Government in the Official Gazette for the

purposes of this clause shall be fully exempted.

Reverse Mortgage [Section 10(43)]

Any amount received by an individual as a loan, either in lump-sum or in installment in a transaction of reverse
mortgage referred in clause (xvi) of Section 47 shall be exempted.

New Pension System Trust [Section 10(44)]

Any income received by any person for, or on behalf of the New Pension System Trust established on 27th
February, 2008 shall be exempted.

Exemption of Allowance or perquisite to chairman/member of UPSC [Section 10 (45)]

Any allowance or perquisite, as may be notified by the Central Government in the Official Gazette, in this behalf,
paid to the chairman or a retired chairman or any other member or retired member of the Union Public Service
Commission, shall be exempt.

Exemption of ‘specified income’ of certain bodies or authorities [Section 10(46)]

Any specified income arising to a body or authority or Board or Trust or Commission which:
• is constituted or established by or under a Central, State or Provincial Act, or has been constituted by
the Central Government or a State Government with the object of regulating or administering an activity
for the benefit of general public;
• is not engaged in commercial activity; and
• is specified by the Central Government by notification in the Official Gazette in this behalf, shall be exempt.
The Central Government has the power to notify the nature and extent of the income of a class of such body
or authority or Board or Trust or Commission which shall constitute the specified income, by single notification.

Exemption of Income of notified ‘Infrastructure debt fund’ [Section 10(47)]

Any income of notified ‘infrastructure debt fund’, which is set up in accordance with the guidelines as may be
prescribed, shall be exempt from income-tax.
 Lesson 3 n Incomes which do not form part of Total Income 95

Exemption of Income of a foreign company from sale of Crude Oil in India [Section 10 (48)]
Any income of a foreign Co. received in India in Indian currency on account of sale of crude oil to any person in
India shall be exempt if the following conditions are satisfied.
• Such Income is in pursuant to an agreement or an arrangement entered into by the Central Govt. or
approved by the Central Govt.;
• having regard to the national interest, the foreign company and the agreement or arrangement are
notified by the Central Govt. in this behalf; and
• the foreign company is not engaged in any activity, other than receipt of such income, in India.

Exemption of income of foreign company from sale of leftover stock of crude oil on termination
of agreement or arrangement [ Section 10(48B) ]
Any income of foreign company on account of sale of leftover stock of crude oil from the facility in India after the
expiry or on termination of the agreement or the arrangement shall be exempt, in accordance with the terms
mentioned therein.

Exemption of income of National Financial Holdings Company [Section 10(49)]

Any income of the National Financial Holdings Company, being a company set-up by the Central Government,
shall be exempt.

Other important exemptions

Apart from above discussed exemption of section 10, following is the list of other important exemptions:
1) Section 10AA provides for exemption in respect of income of newly established units in Special
Economic Zones
Applicability
A deduction of profits and gains which are derived by an assessee being an entrepreneur from the export of
articles or things or providing any service, shall be allowed from the total income of the assessee.
Which assessee is eligible for exemption:
Exemption is available to
l all categories of assessees who derive any profits or gains from an undertaking, being a unit,
l engaged in the manufacturing or production of articles or things or provision of any service.
Such assessee should be an entrepreneur referred to in section 2(j) of the SEZ Act, 2005 i.e., a person who
has been granted a letter of approval by the Development Commissioner under section 15(9) of the said Act.
This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:
(i) it has begun or begins to manufacture or produce articles or things or provide services during the
previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any
Special Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is
formed as a result of the re-establishment, reconstruction or revival by the assessment of the business
of any such undertaking as is referred to in section 33B, in the circumstances and within the period
specified in that section;
(iii) it is not formed by the transfer to a new business, of machinery plant previously used for any purpose.
96 EP-TL

However, deduction under section 10AA will be available if total value of the machinery or plant
transferred does not exceed 20% of the total value of machinery or plant used in the business.
For this purpose, any machinery or plant which was used outside India by any person other than the
assessee shall not be regarded as machinery or plant previously used for any purpose if the following
conditions are fulfilled:
(a) such machinery or plant was not at any time used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation has been allowed in respect of such machinery or plant
to any person earlier.
(iv) The assessee should furnish in the prescribed form, alongwith the return of income, the report of a
chartered accountant certifying that the deduction has been correctly claimed.

Deduction
(i) 100% of profits and gains derived from the export, of such articles or things or from services for
a period of five consecutive assessment years[1st to 5th year] beginning with the assessment
year relevant to the previous year in which the Unit begins to manufacture or produce such articles or
things or provide services, as the case may be, and fifty per cent of such profits and gains for further
five assessment years and thereafter;
(ii) 50% of such profits and gains for further 5 assessment years[ 6th to 10 th year]
for further next five consecutive assessment years[11th to 15th year], so much of the amount not
exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year
in respect of which the deduction is to be allowed and credited to a reserve account (to be called the
“Special Economic Zone Re-investment Reserve Account”) to be created and utilized for the purposes
of the business of the assessee in the manner laid down in sub-section (2).

Computation of profits and gains from exports of such undertakings

The profits derived from export of articles or things or services (including computer software) shall be the
amount which bears to the profits of the business of the undertaking, being the unit, the same proportion as
the export turnover in respect of such articles or things or services bears to the total turnover of the business
carried on by the undertaking i.e.

Export turnover of Unit SEZ

Profits of Unit in SEZ x
Total turnover of Unit SEZ

Clarification on issues relating to export of computer software

Section 10AA provides deduction to assessees who derive any profits and gains from export of articles or
things or services (including computer software) from the year in which the Unit begins to manufacture or
produce such articles or things or provide services, as the case may be, subject to fulfillment of the prescribed
conditions. The profits and gains derived from on site development of computer software (including services for
development of software) outside India shall be deemed to be the profits and gains derived from the export of
computer software outside India.
Meaning of Export turnover: It means the consideration received in India or brought into India by the
assessee in respect of export by the undertaking being the unit of articles or things or services.
However, it does not include
- freight
 Lesson 3 n Incomes which do not form part of Total Income 97

- telecommunication charges
- insurance
attributable to the delivery of the articles or things outside India or expenses incurred in foreign exchange in
rendering of services (including computer software) outside India.
Clarification on issues relating to deduction of freight, telecommunication charges and other expenses
from total turnover [Circular No. 4/2018, dated 14/08/2018]
“Export turnover”, inter alia, does not include freight, telecommunication charges or insurance attributable to the
delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of
services (including computer software) outside India.
CBDT has, vide this notification, clarified that freight, telecommunication charges and insurance expenses are
to be excluded both from “export turnover” and “total turnover’, while working out deduction admissible under
section 10AA to the extent they are attributable to the delivery of articles or things outside India.
Similarly, expenses incurred in foreign exchange for rendering services outside India are to be excluded from
both “export turnover” and “total turnover” while computing deduction admissible under section 10AA.

Calculation of Deduction
Step 1: Calculate the total income of the assessee as per the provisions of the act, but before allowing deduction
under section 10AA.
Step 2 : From the amount calculated in Step 1, allow the deduction under section 10AA, which is least of the
following:
– Amount calculated under step 1; or
– Amount deductible under section 10AA

Conditions:
a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised -
(i) for the purpose of acquiring machinery or plant which is first put to use before the expiry of a
period of three years following the previous year in which the reserve was created; and
(ii) until the acquisition of the machinery or plant as aforesaid, for the purposes 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;
b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause
(b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery
or plant along with the return of income for the assessment year relevant to the previous year in which
such plant or machinery was first put to use.
Where any amount credited to the Special Economic Zone Re-investment Reserve Account has been utilised
for any purpose other than those referred, the amount so utilised; or has not been utilised before the expiry of
the period specified, the amount not so utilised, shall be deemed to be the profits,
(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
(ii) in a case referred to in clause (b), in the year immediately following the period of three years specified
in sub-clause (i) of clause (a) of sub-section (2),
and shall be charged to tax accordingly

Restriction on other tax benefits

(i) The business loss under section 72(1) or loss under the head “Capital Gains” under section 74(1), in
98 EP-TL

so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be
carried forward or set off.
(ii) In order to claim deduction under this section, the assessee should furnish report from a Chartered
Accountant in the prescribed form along with the return of income certifying that the deduction is
correct.
(iii) During the period of deduction, depreciation is deemed to have been allowed on the assets. Written
Down Value shall accordingly be reduced.
(iv) No deduction under section 80-IA and 80-IB shall be allowed in relation to the profits and gains of the
undertaking.
(v) Where a deduction under this section is claimed and allowed in relation to any specified business
eligible for investment-linked deduction under section 35AD, no deduction shall be allowed under
section 35AD in relation to such specified business for the same or any other assessment year.

Deduction allowable in case of amalgamation and demerger

In the event of any undertaking, being the Unit which is entitled to deduction under this section, being
transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit in a
scheme of amalgamation or demerger, -
(a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit for the
previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section would apply to the amalgamated or resulting Unit, as they would have applied
to the amalgamating or the demerged Unit had the amalgamation or demerger had not taken place.

Illustration to explain exemption u/s 10 AA

Rajveer Turbines has 2 undertakings, one in a SEZ and one in a normal zone. The summarised results are as under:

Item SEZ Normal

Domestic turnover 50 125
Export turnover 200 0
Gross Profit 75 25
Expenses & Depreciation 15 10
Net profit 60 15
Compute the business income of the assessee.
The treatment is as under:

Total profit 75
Less : Exempt u/s 10AA 48
Taxable profits 27
Note:
1. Total profits is the sum of the respective net profits for both the units
2. The exemption is in the proportion of the export turnover to total turnover
3. It is assumed that the current FY falls within the 1st 5 years commencing from the year of manufacture
of goods / provision of services by the SEZ Unit, as the quantum of deduction available is 100% of
export profits for the first 5 years and 50% for the next 5 years and 50% of the next 5 years as is
credited to a special reserve a/c.
 Lesson 3 n Incomes which do not form part of Total Income 99

SUMMARY CHART

Fully Partly
Exempt Exempt

Agricultural
Gratuity
Income

Interest on
NRE a/c of a Leave
person resident Encashment
o/s India

Compensation
received in lieu HRA
of disasters

NPS
Government Withdrawals on
Awards closure / opt
outs

Pension by
recepients of Retrenchment
Gallantry Compensation
Awards

Recd. by a
Receipts from
member from
LIC
the HUF

Share of Clubbed
Partner Incomes

Allowances
paid o/s India Commuted
by Govt. to Pension
Indian Citizens

Income of
Payments to member of
MP's / MLA's Scheduled
Tribe
100 EP-TL

LESSON ROUND UP
– This Lesson discusses the general exempted incomes enumerated under section 10 and other specific
exempted income dealt under section 10A, 10AA.
– The scheme applies only to those assessees (being an individual, association of persons or body of
individuals) who have simultaneously net agricultural income exceeding Rs. 5,000 and non agricultural
income exceeds the basis exemption limit of Rs. 2,50,000 or Rs.3,00,000 or Rs. 5,00,000 the case
may be.
– Leave salary means the salary for the period of leave not availed by the employee. The encashment
of accumulated leave can be at the time of retirement or during the continuation of service.
– In case of a Government employee, any death-cum-retirement gratuity received is wholly exempt
under section 10(10)(i). Employees of statutory corporation will not fall under this category.
– Any payment received from an account, opened in accordance with the Sukanya Samriddhi Account
Rules, 2014 made under the Government Savings Bank Act, 1873 is exempt income.

SELF TEST QUESTIONS

These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation.

Multiple Choice Questions (MCQs)

Choose the most appropriate answer from the given options in respect of the following:
(i) Any rent or revenue derived from land may be treated as agricultural income if-
(a) It is derived from land
(b) The land is situated in India
(c) The land is used for agricultural purpose
(d) All the above conditions are satisfied.
Ans: (d)
(ii) Which of the following income is agricultural income—
(a) Rent received from agricultural land
(b) Income from dairy farm
(c) Income from poultry farm
(d) Dividend from a company engaged in agriculture.
Ans: (a)
(iii) Income of an assessee engaged in the business of growing and manufacturing tea in India is taxable
to the extent of-
(a) 40% of such income (b) 60% of such income
(c) 70% of such income (d) 30% of such income.
Answer: (a)
(iv) If non-agricultural income is Rs. 2,02,000 and net agricultural income is Rs. 40,000, the tax liability of
an individual assessee will be:
 Lesson 3 n Incomes which do not form part of Total Income 101

(a) Nil (b) Rs. 200

(c) Rs. 206 (d) Rs. 4,326.
Answer: (a)
(v) Which of the following additional incomes will not be treated as agricultural income under the Income-
Tax Act, 1961:
(a) Additional income from selling ginned cotton as compared to unginned cotton
(b) Additional income from selling dried-up coffee as compared to raw coffee
(c) Additional income from selling cured tobacco as compared to green tobacco leaves
(d) Additional income from selling dried-up tea leaves as compared to raw tea leaves.
Answer: (a)
(vi) Pawan reports net income of Rs. 5 lakh from the activity of growing and manufacturing rubber. How
much of such income is to be treated as non-agricultural income:
(a) Rs. 1,75,000 (b) Rs. 2,00,000
(c) Rs. 1,25,000 (d) Nil
Answer: (a) Rs.1,75,000
(vii) Tax holiday under section 10AA in respect of newly established units in SEZ is allowed for a total period
of —
(a) 5 Years (b) 10 Years
(c) 15 Years (d) 20 Years.
Answer: (c) 15 Years.
(viii) Mr. Vinayak derived income from sale of tea manufactured and grown in Coorg, Karnataka. His income
for the previous year 2017-18 from the said activity is Rs. 20 lakhs. The amount exempt from tax by way
of agricultural income is:
(a) Rs. 8 lakhs (40%) (b) Rs. 5 lakhs (25%)
(c) Rs. 12 lakhs (60%) (d) Rs. 7 lakhs (35%) (1 mark)
Answer: (c) Rs. 12 lakhs (60%)
(ix) Mr. Sankar received Rs. 50,000 as educational scholarship from Nehru Memorial Trust (a charitable
trust). The scholarship is to assist Mr. Sankar for pursuing M.A. (History) at Jawaharlal Nehru University,
New Delhi. The amount of scholarship liable to tax is:
(a) Rs. 50,000 (b) Rs. 10,000
(c) Rs. 25,000 (d) Nil
Answer: (d) Nil
(x) Mr. Chandan (age 70) received Rs. 30,000 every month during the financial year 2017-18 on reverse
mortgage of his property with State Bank of India. The amount of receipt liable to tax in the hands of Mr.
Chandan is:
(a) Rs. 3,60,000 (b) Rs. 2,52,000
(c) Rs. 40,000 (d) Nil
102 EP-TL

Answer: (d) Nil

(xi) Mr. Menon having tea estate in Munnar (Kerala) earned Rs. 5 lakhs by way of growing tea leaves and
manufacturing tea. The income chargeable to tax would be:
(a) Rs. 2,00,000 (b) Rs. 1,75,000
(b) Rs. 1,25,000 (d) None of the above
Answer: (a) Rs. 2,00,000
(xii) Ms. Laxmi received Rs. 60,000 by way of family pension from State Government. The amount of family
pension eligible for exemption under section 10(19) is:
(a) Rs. 60,000 (b) Rs. 40,000
(c) Rs. 20,000 (d) Nil
Answer: As per section 10(19) family pension received by the widow or children or nominated heirs, as
the case may be, of a member of the armed forces (including paramilitary 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 shall be fully exempted. Exemption is available only
to union and not state, hence exemption under 10(19) is NIL.
(xiii) A registered trade union earned income by way of interest on fixed deposit held with State Bank of India
of Rs. 5,60,000. The interest income chargeable to tax in the hands of trade union would be:
(a) Rs. 5,60,000 (b) Nil
(c) Rs. 2,60,000 (d) Rs. 3,10,000
Answer: (b) Nil
(xiv) The income derived from growing, manufacturing and sale of Centrifuged latex or Cenex or Latex
based cops as per Rule 7A of the Income-tax Rules, 1962 shall be taken as agricultural and non-
agricultural income in the following ratio:
(a) 75% and 25% (b) 60% and 40%
(c ) 65% and 35% (d) None of the above
Answer: (c ) 65% and 35%

SUGGESTED READINGS
1. Direct Taxes Law and Practice
Author : Dr. Vinod K. Singhania & Dr. Kapil Singhania
Publisher : Taxmann
Year : 2019
Edition : 2019
2. Direct Taxes Ready Reckoner with Tax Planning
Author : Dr. Girish Ahuja & Dr. Ravi Gupta
Publisher : Wloters Kluwer
Year : 2019
Edition : 20th Edition
 Lesson 4
Lesson 4 n Part I – Income under Head ‘Salaries’ 105

Computation of Income
under Various Heads
LESSON OUTLINE
LEARNING OBJECTIVES
Part I Salaries (Sections 15 to 17); The taxability of income of a person depends on
Part II Income from house property (Sections 22 to the chargeability of such income under the Income
27); tax Act 1961. The total income of an assessee
(subject to statutory exemptions) is chargeable
Part III Profits and gains from business or
under Section 4(1). The scope of the total income,
profession (Sections 28 to 44D);
which varies with the residential status, is defined
Part IV Capital gains (Sections 45 to 55A); and in Section 5. Section 14 enumerates the heads of
income under which the income of an assessee
Part V Income from other sources (Sections 56 to
will fall. The rules for computing income and the
59).
permissible deductions under different heads of
income, are dealt in different sections of the Act. The
heads of income, along with their corresponding
set of sections for the purpose of computation of
income, are given below :
(A) Salaries (Sections 15 to 17);
(B) Income from house property (Sections 22
to 27);
(C) Profits and gains of business or profession
(Sections 28 to 44D);
(D) Capital gains (Sections 45 to 55A); and
(E) Income from other sources (Sections 56 to
59).

105
106 EP-TL

Lesson 4
Part I – Income under the Head “Salaries”
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction At the end of this lesson, you will learn how to
– Basis of Charge calculate income under the head salaries, what
are the deductions, exemptions available from
– Salary [Section 17(1)]
salaries.
– Allowances
– Perquisites [Section 17(2)]
(A) Tax-free perquisites (in all cases)
(B) Taxable perquisites (in all cases)
– Valuation of Perquisites
– Retirement Benefits
– Provident funds - Treatment of Contributions
to and Money Received from the Provident
Fund
– Deductions Allowed from Salaries (Section
16)
– Computation of Salary
– Illustrations
– LESSON ROUND UP
– SELF TEST QUESTION
 Lesson 4 n Part I – Income under Head ‘Salaries’ 107

INTRODUCTION
The provisions related to “Salaries” are contained as under:

Chargeability
(Section 15)

Deductions
(Section 16)

Constituents
(Section 17)

The most fundamental of all aspects is to know that it is a pre-requisite that an employer-employee relationship
exists, and that is the premise basis which the Income can be charged as “Salaries”. It is also important to
note that the employment could be full time or part time, that really doesn’t matter, what matters is that the
relationship should be employer-employee.
The question whether a particular person receives the income in his capacity as an employee or not has to be
decided from the facts of each case.
Let’s examine the following cases, whether payments are chargeable under head salaries;
(i) Professor : The professor of university would be receiving income by way of monthly salary from the
university which is chargeable to tax under this head. But this does not mean that every item of income
received by the employee from his employer would be taxable under this head. Thus, income by way
of examinership fees received by a professor from the same university in which he is employed would
not be chargeable to tax under this head but must be taxed as Income from other sources under
Section 56. This is because of the fact that the essential condition that the income in question must be
received for services rendered in the ordinary course of employment would not be fulfilled in the case
of examinership fees.
(ii) Director :A director of a company may, in some cases, be an employee of a company where there is
a specific contract of employment between him and the company. The fact that the same person has
dual capacity in his relationship with the company does not mean that he cannot be taxed under this
head. Every item of income arising to such a director who is also an employee of the company (e.g.
a managing director or other whole-time director) by virtue of his employment would be taxable as his
income from salary. Thus, income by way of remuneration received by a managing director would be
taxable as his salary income whereas the income received by him as director’s fees in his capacity as
director for attending the meetings of the Board would be assessable under the head “Income from
other sources”.
(iii) Official Liquidator : An official liquidator appointed by the Court or by the Central Government would
also become an employee of the Central Government under Section 448 of the Companies Act, 1956
and consequently the remuneration due to him would also be assessable under the head ‘Salaries’.
108 EP-TL

(iv) Manager : Remuneration received by a manager of a company even if he is wrongly designated as a

director or by any other name would be chargeable to tax under this head regardless of the fact that the
amount is payable to him monthly or is calculated at a certain percentage of the company’s profits.
(v) Partner of a firm : Salary paid to a partner by a firm is nothing but appropriation of profits. Any salary,
bonus, commission, or remuneration by whatever name called due to or received by partner of a firm
shall not be regarded as salary but has to be charged as income from business. It is because of the fact
that the relationship between the firm and its partner is not of employer and employee.
(vi) Member of Parliament : According to a circular of the Board dated 22-5-1967, the salary received by a
person as Member of Parliament will not be chargeable to income-tax under the head “Salaries” but as
“Income from other sources” because a Member of Parliament is not an employee of the Government
but only an elected representative of the people.
(vii) Treasurer of a bank : The income received by a treasurer of a bank would be taxable as his salary
income if the treasurer is an employee of the bank. If he does not happen to be an employee, the income
received by him would be taxable as “Income from other sources”. For this purpose, the question
whether in a particular case the treasurer is an employee or not has to be decided on the basis of the
facts and circumstances of each case having due regard to his powers, responsibilities and functions.
(viii) Person carrying on a profession or vocation : Income derived by any person from carrying on
a profession or vocation must be taxed as business income and not as salary income because
employment is different from profession.
But, if an employee receives any money from his employer as part of the terms of employment for not carrying
on any profession, such income must be taxed as salary income. For instance, the allowance given by employer
to a doctor employed by him for not carrying on a profession in addition to the employment would be income
arising from employment in accordance with the terms and conditions of such employment and must, therefore,
be taxed as salary income. If an employee gets money from persons other than his employer and if such money
is not in any way related to the contract of services with the employer under whom he is working, the receipts,
if taxable as income, must be assessed under the head “Income from other sources”.
However, gratuity, bonus, commission or other items of payment made by the employer without any specific
stipulation in the contract of employment to this effect, would still be taxable as salary, because they are paid
by the employer for the services rendered by the employee. The fact that such payments are voluntary and in
certain circumstances may qualify for exemption from income-tax in the hands of the employee, would not affect
the income being computed under the head salary.

BASIS OF CHARGE
The charging section, Section 15 states that, salary is taxable on “due” or “paid” basis whichever is earlier. That
is, if it is due, it is included in taxable salary, irrespective of whether it is paid or not, and if it is paid, it is taxable,
irrespective of whether it is due or not. Therefore, it is only logical to note that if it has already been taxed on due
basis, the same cannot be taxed again when it is paid. Similarly, if a salary which was paid in advance, if it has
already been taxed in the year of payment, it cannot subsequently be taxed when it becomes due.
KEY POINTS

•Advance salary is taxable; however, an Advance against Salary is

essentially a loan which will be recovered later from the Employee and
therefore that is n’t taxable.
•Salary, if earned in India, is deemed to accrue / arise in India, even if it
is paid outside India
 Lesson 4 n Part I – Income under Head ‘Salaries’ 109

SALARY [SECTION 17(1)]

Salary would include wages, allowances, annuity, pension, gratuity, fees, commission, advance, leave
encashment and also perquisites and profits in lieu of salary etc.

ALLOWANCES
An allowance is defined as a fixed amount of money given periodically in addition to the salary for the purpose
of meeting some specific requirements connected with the service rendered by the employee or by way of
compensation for some unusual conditions of employment. It is taxable on due/accrued basis whether it is paid
in addition to the salary or in lieu thereon. These allowances are generally taxable and are to be included in the
gross salary unless a specific exemption has been provided in respect of allowances provided under the Act.
Allowances

Fully Taxable
(Entertainment, Dearness, Overtime, City
Compensatory, Servant, Meal Allowances)

Partly Taxable
(HRA u/s 10(13A) & Special Allowances u/s
10(14) included)

Fully Exempt
(Allowances to HC/ SC Judges & to Govt.
Employees outside India)

Fully Taxable Allowances

(1) Dearness Allowance, Additional Dearness Allowance and Dearness Pay: This is a very common
allowance these days on account of high prices. Sometimes Additional Dearness Allowance is also
given. It is included in the income from salary and is taxable in full. Sometimes it is given under the
terms of employment and sometimes without it. When it is given under the terms of employment it is
included in salary for purposes of determining the exemption limits of house rent allowance, recognised
provident fund, gratuity and value of rent free house and is also taken into account for the purposes of
retirement benefits.
Sometimes dearness allowance is given as ‘Dearness Pay’. It means that it is being given under the
terms of employment.
(2) Fixed Medical Allowance: It is fully taxable.
(3) Tiffin Allowance: It is given for lunch and refreshments to the employees. It is taxable.
(4) Servant Allowance: It is fully taxable even if it is given to a low paid employee, not being an officer, i.e.,
it is taxable for all categories of employees.
110 EP-TL

(5) Non-practising Allowance: It is generally given to those medical doctors who are in government service
and they are banned from doing private practice. It is to compensate them for this ban. It is fully taxable.
(6) Hill Allowance: It is given to employees working in hilly areas on account of high cost of living in hilly
areas as compared to plains. It is fully taxable, if the place is located at less than 1,000 metres height
from sea level.
(7) Warden Allowance and Proctor Allowance: These allowances are given in educational institutions for
working as Warden of the hostel and/or working as Proctor in the institution. These allowances are fully
taxable.
(8) Deputation Allowance: When an employee is sent from his permanent place of service to some other
place or institution or organisation on deputation for a temporary period, he is given this allowance. It is
fully taxable.
(9) Overtime Allowance: When an employee works for extra hours over and above his normal hours of
duty he is given overtime allowance as extra wages. It is fully taxable.
(10) Other Allowances like Family allowance, Project allowance, Marriage allowance, City Compensatory
allowance, Dinner allowance, Telephone allowance etc. These are fully taxable.

Allowances not fully taxable

House Rent Allowance u/s 10(13A)

House Rent Allowance (HRA) received by any employee is exempt to the extent of least of the following:
– 50% of Salary for Metro Cities (Delhi, Mumbai, Kolkata and Chennai), else 40% of Salary
– HRA actually received
– Rent paid minus 10% of Salary
Note: Salary for the purposes of HRA = Basic + DA (if forming part of salary/retirement benefit)+ Commission
as a fixed % of Turnover
Illustration:
Vir is employed with Happiness Solutions Ltd. and during the FY 2019-20. He had a Basic Pay of INR 75000
per month. Owing to his good performance at workplace, he was given an annual increment in his Salary of
20% effective Feb 2020. He also received during the year, a Dearness Allowance of 100% of Basic (however
only 50% of which was included per his terms of employment). The Company also gave him HRA of INR 30000
per month, which was increased to INR 35000 per month effective Jan 2020. He stayed at his parental home
in Ahmedabad for Apr and May 2019, post which he took up a Rented Accommodation at Surat at a monthly
rental of INR 26000. Effective Nov 19, he was moved to Mumbai to the Corporate Office, and he took up an
accommodation at Mumbai at a monthly rental of INR 36000. You are required to compute the HRA exempt
from Tax and the Gross Salary.
Solution
The computation of HRA exempt from tax would have to be done on a monthly basis as the salary and rental
figures changed during the year, in the manner provided below.
 Lesson 4 n Part I – Income under Head ‘Salaries’ 111

Item Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total
Basic 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 90,000 90,000 9,30,000
D.A. 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 45,000 45,000
Salary for 1,12,500 1,12,500 1,12,500 1,12,500 1,12,500 1,12,500 1,12,500 1,12,500 1,12,500 1,12,500 1,35,000 1,35,000
HRA
Accommoda- Own Own Surat Surat Surat Surat Surat Mumbai Mumbai Mumbai Mumbai Mumbai
tion
40% or 50% – – 45,000 45,000 45,000 45,000 45,000 56,250 56,250 56,250 67,500 67,500
of Salary
HRA Actually 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 35,000 35,000 35,000 3,75,000
Recd
Rent - 10% – – 14,750 14,750 14,750 14,750 14,750 24,750 24,750 24,750 22,500 22,500
Salary
Min – – 14,750 14,750 14,750 14,750 14,750 24,750 24,750 24,750 22,500 22,500 1,93,000

Note:
(1) For the stay at Surat, 40% of Salary and for stay at Mumbai, 50% of Salary is considered for one of the
parameters for exemption.
(2) DA, only to the extent of it being included per terms of employment, is included in Salary for the
purposes of HRA.
Please note the Gross Salary Computation below.

Particulars Rs. Rs.

Basic Salary (75000 x 10 + 90000 x 2) 9,30,000
Dearness Allowance (100% of Basic) 9,30,000
HRA 3,75,000
Less : Exempt 1,93,000 1,82,000
Gross Salary 20,42,000

Special Allowances [Section 10(14)]

i) All special allowances specifically granted to meet expenses, incurred, for the purposes of performance
of duties
a) Wholly
b) Exclusively &
c) Necessarily
These are exempt to the extent such expenses are actually incurred or the amount received whichever
is less. Examples include, Travelling & Conveyance, Relocation, Helper & Uniform Allowances. (no cap
or upper limit)
ii) Special allowances granted to an assessee either to meet his personal expenses at the place of duty OR
to compensate for increased cost of living. Allowances which are granted to meet personal expenses
are exempt to the extent of amount received or the limits specified whichever is less.
Examples include,
a) Tribal Area Allowance capped to INR 200 per month is exempt.
b) Children Education Allowance capped to INR 100 per month (per child, max 2 children) is exempt.
c) Hostel Expenditure Allowance capped to INR 300 per month (per child, max 2 children) is exempt.
d) Transport Allowance for handicapped capped at INR 3200 per month is exempt.
112 EP-TL

Besides the above there are compensatory allowances for hilly areas, and for work in difficult conditions too.
As per section 10(14), read with rule 2BB following allowances granted to an employee are exempt from tax
subject to certain limit:

Allowances Exemption Limit

Children Education Allowance Up to Rs. 100 per month per child up to a maximum
of 2 children is exempt
Hostel Expenditure Allowance Up to Rs. 300 per month per child up to a maximum
of 2 children is exempt
Transport Allowance granted to an employee to Only Rs. 3,200 per month for blind and handicapped
meet expenditure on commuting between place employees is exempt
of residence and place of duty. Consequent to
introduction of Standard Deduction under section 16,
exemption of transport allowance of Rs. 1600 P.M. is
withdrawn.
Allowance granted to an employee working in any Amount of exemption shall be lower of following:
transport business to meet his personal expenditure
a) 70% of such allowance; or
during his duty performed in the course of running
of such transport from one place to another place b) Rs. 10,000 per month
provided employee is not in receipt of daily allowance
Conveyance Allowance granted to meet the Exempt to the extent of expenditure incurred for
expenditure on conveyance in performance of duties official purposes
of an office
Travelling Allowance to meet the cost of travel on tour Exempt to the extent of expenditure incurred for
or on transfer official purposes
Daily Allowance to meet the ordinary daily charges Exempt to the extent of expenditure incurred for
incurred by an employee on account of absence from official purposes
his normal place of duty
Helper/Assistant Allowance Exempt to the extent of expenditure incurred for
official purposes
Research Allowance granted for encouraging the Exempt to the extent of expenditure incurred for
academic research and other professional pursuits official purposes
Uniform Allowance Exempt to the extent of expenditure incurred for
official purposes
Special compensatory Allowance (Hilly A r e a s ) Amount exempt from tax varies from Rs. 300 to Rs.
(Subject to certain conditions and locations) 7,000 per month.
Border area, Remote Locality or Disturbed Area or Amount exempt from tax varies from Rs. 200 to Rs.
Difficult Area Allowance (Subject to certain conditions 1,300 per month.
and locations)
Tribal area allowance in (a) Madhya Pradesh (b) Tamil Up to Rs. 200 per month
Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f)
Assam (g) West Bengal (h) Bihar (i) Orissa
 Lesson 4 n Part I – Income under Head ‘Salaries’ 113

Compensatory Field Area Allowance. If this exemption is Up to Rs. 2,600 per month
taken, employee cannot claim any exemption in respect
of border area allowance(Subject to certain conditions
and locations)
Compensatory Modified Area Allowance. If this exemp- Up to Rs. 1,000 per month
tion is taken, employee cannot claim any exemption in
respect of border area allowance(Subject to certain con-
ditions and locations)
Counter Insurgency Allowance granted to members of Up to Rs. 3,900 per month
Armed Forces operating in areas away from their per-
manent locations. If this exemption is taken, employee
cannot claim any exemption in respect of border area
allowance (Subject to certain conditions and locations)

Underground Allowance to employees working in uncon- Up to Rs. 800 per month

genial, unnatural climate in underground mines
High Altitude Allowance granted to armed forces oper- a) Up to Rs. 1,060 per month (for altitude of 9,000 to
ating in high altitude areas (Subject to certain conditions 15,000 feet)
and locations)
b) Up to Rs. 1,600 per month (for altitude above 15,000
feet)

RETIREMENT BENEFITS

Annuity / Pension
Annuity is a yearly payment to an employee post his retirement on account of the funds that were saved by him
by way of subscription to the annuity fund vide his salary when he was in employment.
Annuity received from the present employer is chargeable to tax as Salary and any amount received from the
past employer is chargeable to tax as Profits In lieu of Salary.
Pension however is generally paid by the Government or a Company to the employee for his past service and
this too is payable after the retirement.
This pension so received could be commuted / uncommuted, explained as under:

Uncommute Commuted
d Pension Pension
Received in
Received
Lumpsum (whole /
periodically
part)

Future right to
receive payments
Fully taxable for all given up to receive
employees immediate lumpsum
(refer below on the
treatment)
114 EP-TL

Treatment of Commuted Pension

Treatment of
Commuted Pension

Employees of Central
Non-Government
Government, Local
Employee,the pension
Authorities, Defence
amount shall be exempt
Services etc., the
from tax to extent of
pension amount

OR

1/3rd of the amount of ½ of the amount of

pension he would have pension he would have
received had he received had he
is fully exempt from tax
commuted in full (if the commuted in full (if the
Employee is in receipt Employee is not in
of Gratuity too) receipt of Gratuity)

Gratuity
Gratuity is normally paid in lieu of the long-term service of an employee (usually > 5 years), but is a voluntary
payment by the employer, as an appreciation of the long-standing services.
The Gratuity so received at the time of retirement or termination of employment or death of employee, is exempt
as under:
a) For the Central / State Government employees and for the members of the Defence Services, any
amount received as Gratuity at the time of retirement/death is fully exempt
b) For all other employees in the private sector:
l In case the employee is covered under the Payment of Gratuity Act, 1972, any death-cum-
retirement Gratuity is exempt to the extent of least of the following:
i. INR 20,00,000
ii. Gratuity actually received
iii. 15 days’ Salary based on salary last drawn for each year of service or part thereof in excess
of 6 months
Note: Here Salary would mean (Basic + DA) and number of days in the month to be assumed to
be 26.
l In case the employee is NOT covered under the Payment of Gratuity Act, 1972, any death-cum-
retirement Gratuity is exempt to the extent of least of the following:
i. INR 20,00,000
ii. Gratuity actually received
iii. Half months’ Salary based on last 10 months’ average salary drawn immediately preceding the
month of retirement / death, for each completed year of service (fraction of year to be ignored)
 Lesson 4 n Part I – Income under Head ‘Salaries’ 115

Note : Here Salary would mean Basic + DA (only to the extent of forming part of the retirement
benefits) + Commission as a % of Turnover and number of days in the month to be taken at 30.
Note :

(i) If employee has received gratuity from any of his past employer, then the amount of gratuity
exempted earlier shall be reduced from Rs. 20,00,000.
(ii) If employee has not received gratuity from any of his past employer, then the period of past
employment shall also be considered for calculating years of service.

Leave Encashment
Leave encashment means getting salary equivalent to the number of leaves which were entitled to an employee
but not availed (i.e. earned). Leave Encashment taken during employment is fully taxable for all employees.
Leave Encashment taken at the time of retirement is exempted as follows :-
Leave Encashment Salary received by employees of the Government, is fully exempt from tax.
For the Non-Government employees, the Leave Encashment Salary so received is exempt from tax to the
extent of least of the following:
a) INR 3,00,000
b) Leave Salary actually received
c) 10 month’s Salary on the basis of average Salary drawn in the last 10 months
d) Cash Equivalent of Leave standing to the credit of the employee at the time of retirement / death, based
on last 10 month’s average salary drawn. Earned leave entitlement per year cannot exceed 30.
Note: Here Salary would mean Basic + DA (only to the extent of forming part of the retirement benefits) +
Commission as a % of Turnover and number of days in the month to be taken at 30.

Leave Encashment Salary

Received by Non-Government
Government employees
employees

It shall be exempt from tax to the extent of

is fully exempted least of the following:
from tax a) INR 3,00,000
b) Leave Salary actually received
c) 10 months’ Salary on the basis of
average Salary drawn in the last 10
months
d) Cash Equivalent of Leave standing to the
credit of the employee at the time of
retirement / death, based on last 10
months’ average salary drawn. Earned
leave entitlement per year cannot exceed
30.
116 EP-TL

Profits in lieu of Salary

Under this the following items are included:
(i) The amount of any compensation due to or received by an assessee from the employer or former employer
at or in connection with the termination of his employment. The termination of employment means retirement,
premature termination of employment, termination by death or voluntary resignation. Generally, under the
Income- tax Act, the income that is chargeable to tax is only a receipt which is revenue in nature; receipts
of a capital nature are not chargeable to tax but this provision constitutes an exception to this rule because
compensation received by an employee for termination of his employment would be a capital receipt since it
is received in replacement of the sources of income itself. Still it is chargeable to tax because of the specific
provision in the Act. However, relief under Section 89(1) would be available to the assessee in cases where
he gets money which represents a profit in lieu of salary.
(ii) The amount of any compensation due to or received by any assessee from his employer in connection with
the modification of the terms and conditions relating to employment. For example, where an employer wants
to cut down the salary payable to the employee, the lump sum paid to compensate the employee shall be
treated as profits in lieu of salary. In the same way, where the remuneration for services is paid at the end of
the period of employment or a lump sum remuneration is paid at the beginning of employment for a number
of years, such payment shall be treated as profits in lieu of salary.
(iii) Any amount due to or received, whether in lump sum or otherwise, by any assessee from any person -
(A) before his joining any employment with that person; or (B) after cessation of his employment with
that person.
(iv) Any payment other than the following payment due to or received by assessee from an employer or a
former employer or from a provident or other fund, other than Gratuity [Section 10(10)], Pension [Section
10(10A)], HRA [Section 10(13A)], Provident Fund / Public Provident Fund/ Recognised Provident Fund.
(v) Any sum received under Keyman Insurance Policy

PERQUISITES
Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition to
salary or wages. It also denotes something that benefits a man by going into his own pocket. Perquisites may
be provided in cash or in kind. However, perquisites are taxable under the head “Salaries” only if they are
a. allowed by an employer to his employee;
b. allowed during the continuance of employment;
c. directly dependent upon service;
d. resulting in the nature of personal advantage to the employee; and
e. derived by virtue of employer’s authority.
It is not necessary that a recurring and regular receipt alone is a perquisite. Even a casual and non-recurring
receipt can be perquisite if the aforesaid conditions are satisfied.
Any facility / benefit that is granted by the employer, the use of which is enjoyed by the employee or any
member of the employee’s household, is construed as a perquisite under the Income Tax Act, and hence
attracts tax.
 Lesson 4 n Part I – Income under Head ‘Salaries’ 117

Taxable Perquisites
• Rent Free Residential Accommodation
• Interest Free / Concessional Loan
• Use of movable assets by employee / any member of his household
• Transfer of movable assets
• Provision of gas / electricity / water
• Provision of free / concessional educational facilities
• Credit Card Expenses
• Club expenditure
• Health Club, Sports, Similar facilities
• Sweat Equity

Tax-free Perquisites (in all cases)

• Medical Facilities
• Refreshment
• Subsidized lunch or dinner
• Recreational facilities
• Telephone facility
• Transport
• Personal accident insurance
• Refresher Course
• Free rations
• Computer/laptops
• Rent free houses / conveyance
• Employers’ Contribution
• Annual Premium

(A) Taxable Perquisites: We need to understand the valuation of perquisites. The table appended below,
summarises the taxable value of various perquisites in the hands of the employee assessees.

Sl. Perquisite Category of Value of perquisites

No. Employee
1 Rent Free Government Licence Fee determined as per the Government Rules,
Residential Employee as reduced by rent actually paid by the employee for
Accommodation unfurnished accommodation.
For a furnished accommodation, 10% p.a. of the
furniture cost is added to the value obtained above for
unfurnished.
In case the furniture is hired, the actual hire charges
would be added to the value obtained above for
unfurnished.
118 EP-TL

Non-Government In case of Unfurnished Accommodation;

Employee a) If the accommodation is owned by the employer, the
value would be based on the population, i.e.,
i) if in cities having a population of > 25 Lacs
(2001 Census) - 15% of Salary;
ii) if the population is between 10 Lacs up to 25
Lacs – 10% of Salary;
iii) else 7.5% of Salary
b) If the accommodation is taken on lease by the
employer, the actual value of lease rentals paid by the
employer subject to a maximum of 15% of Salary is
considered as Value.
For a furnished accommodation, 10% p.a. of the
furniture cost is added to the value obtained above for
unfurnished.
In case the furniture is hired, the actual hire charges
would be added to the value obtained above for
unfurnished.
In all cases, any amount recovered from the employee
should be reduced to arrive at the taxable value of the
perquisite
Where the accommodation is provided by the employer
in a hotel (except where the employee is provided such
accommodation for a period not exceeding in aggregate
15 days on the transfer from one place to another):
The perquisites value would be 24% of salary paid or
payable for the previous year or the actual charges
paid or payable to such hotel, which is lower, for the
period during which such accommodation is provided
as reduced by the rent, if any, actually paid or payable
by the employees.
2 Interest Free / All employees Where the employer grants a loan to an employee,
Concessional exceeding INR 20000, the interest at the rate charged
Loan by SBI, as on the first date of the relevant PY, at
maximum outstanding monthly balance as reduced by
the Interest actually charged to the employee; would be
the taxable value of the perquisite. Known for medical
purpose is exempted.
 Lesson 4 n Part I – Income under Head ‘Salaries’ 119

3 Use of movable All employees 10% p.a. of the actual cost of the asset, if it is owned
assets by by the employer OR the actual hire charges incurred
employee / any by the employer if the asset is hired as reduced by the
member of his amount, if any, paid or recovered from the employee for
household such use would be the taxable value of the perquisite.

Note: Use of laptops and computers wouldn’t attract

taxability as perquisites.
4 Transfer of All employees If Computers / electronic items are transferred, 50%
movable assets Depreciation p.a. (WDV) for every completed year of
usage; if Motor cars are transferred, 20% Depreciation
p.a. (WDV) for every completed year of usage; and
for all other assets transferred, 10% Depreciation p.a.
(SLM) for every completed year of usage would be
treated as the taxable value of perquisite net of any
amount so recovered from the employee.
5 Provision of gas / All employees The value of benefit to the employee resulting from the
electricity / water supply of gas, electric energy or water for his household
consumption shall be determined as the sum equal to
the amount paid on that account by the employer to
the agency supplying the gas, electric energy or water.
Where such supply is made from the sources owned by
the employer, without purchasing them from any other
outside agency, the value of perquisites would be the
manufacturing cost per unit incurred by the employer.
Where the employee is paying any amount in respect
of such services, the amount so paid shall be deducted
from the value so arrived at.
6 Provision of free All employees Amount actually expended by the employer net of
/ concessional the amount so recovered. However, if the educational
educational institution is owned by the employer, and free
facilities educational facilities are provided to the employee’s
children, there wouldn’t be any perquisite as long as the
value of benefit in a month is < INR 1000. Any amount
recovered from the employee would be reduced.
7 Credit Card All employees Membership fees / Annual fees incurred by the
Expenses employer, on a card provided to the employee, would
be the taxable value of perquisite net of the amount, if
any, recovered from him.
8 Club expenditure All employees Cost incurred by the employer at actual, net of recovery
from the employee would be the taxable value of
perquisite. However, in case the employee enjoys
Corporate Membership in a club, the value of benefit
wouldn’t include the initial membership paid by the
Employer to acquire the corporate membership.
120 EP-TL

9 Health Club, All employees No perquisite if provided uniformly by the employer to

Sports, Similar all employees.
facilities
10 Sweat Equity All employees In case where, on the date of exercising the option,
the share of the company is listed on a recognised
stock exchange, the fair market value (FMV) would
be the average of the opening and closing price of
the share on that date on the said stock exchange.
If the shares of the company are listed on more than
one stock exchange, the FMV would be the average
of the opening and closing prices of the share on the
recognised stock exchange which records the highest
volume of trading in the share. In case on the date of
the exercising of the option, if there was no trading
in the share, the FMV would be the closing price on
the recognised stock exchange, on a date closest to
exercising the option, immediately before that date, and
if the shares of the company are listed on more than one
stock exchange, the FMV would be the closing price
of the share on the recognised stock exchange which
records the highest volume of trading in the share.
In case the shares of the company are not listed on any
recognised stock exchange, the FMV would be that as
determined by the Merchant Banker on the specified
date, i.e., the date of exercising the option or any date
earlier not exceeding 180 days prior to the date of
exercise of the option.

Motor Cars – Perquisites Valuation

The taxable value of use of motor cars are dealt with separately, as it is situational, as under:
Where the Expenses are met by the employer
 If the Car is owned / hired by the employer; expenses met by the employer & is used by the employee
wholly for Official purposes, there is no perquisite.
 If the Car is owned / hired by the employer; expenses met by the employer & is used by the employee
wholly for Personal purposes, the running and maintenance charges / wear & tear / hire charges /
driver’s salary would be treated as the taxable value of the perquisite net of the amount so recovered
from the employee. (Including Depreciation @ 10% p.a. on SLM basis)
 If the If the Car is owned / hired by the employer; expenses met by the employer & is used by the
employee partly for Official and partly for Personal purposes, the taxable value of the perquisite
would be based on the cc (cubic capacity) of the engine, as under:
l Up to 1.6 litres, the taxable value of the perquisite would be INR 1800 pm
l > 1.6 litres, the taxable value of the perquisite would be INR 2400 pm
l If chauffer is also provided, INR 900 pm is to be added to either of the above, depending on the
engine capacity. (In this case recovery is not deductible)
 Lesson 4 n Part I – Income under Head ‘Salaries’ 121

 If the Car is owned / hired by the employee; expenses met by the employer & is used by the employee
wholly for Official purposes, there is no perquisite.
 If the Car is owned / hired by the employee; expenses met by the employer & is used by the employee
wholly for Personal purposes, the actual expenditure so incurred would be treated as the taxable
value of the perquisite.
 If the Car is owned / hired by the employee; expenses met by the employer & is used by the employee
partly for Official and partly for Personal purposes, the taxable value of the perquisite would be
the actual expenditure incurred by the employer as reduced by the taxable value of the perquisite
determined above basis the engine capacity.
Where the Expenses are met by the employee
 If the Car is owned / hired by the employer; expenses met by the employee & is used by the employee
wholly for Official purposes, there is no perquisite
 If the Car is owned / hired by the employer; expenses met by the employee & is used by the employee
wholly for Personal purposes, the wear & tear / hire charges / driver’s salary would be treated as the
taxable value of the perquisite. (Including Depreciation @ 10% p.a. on SLM basis)
 If the If the Car is owned / hired by the employer; expenses met by the employee & is used by the
employee partly for Official and partly for Personal purposes, the taxable value of the perquisite
would be based on the cc of the engine, as under:
l Up to 1.6 litres, the taxable value of the perquisite would be INR 600 pm
l > 1.6 litres, the taxable value of the perquisite would be INR 900 pm
l If chauffer is also provided, INR 900 pm is to be added to either of the above, depending on the
engine capacity. (In this case recovery is not deductible)

Illustration on Perquisites
ABC Ltd. provided the following perquisites to its employee Srinivasan, for the FY 2019-20.
1) Leased accommodation provided to the employee. Hire Charges INR 50000 pm; recovered from
employee INR 20000 pm
2) Accommodation was furnished and the actual hire charges paid by the Employer was INR 4050/- pm
3) He was also provided a Hyundai Santro with Chauffer and a Gift Voucher worth INR 9000/-
Salary for the purposes of valuation of perquisites is INR 25,00,000/-.
Compute the taxable value of the perquisites.
Solution :

Accomodation on lease
Salary for the purposes of Valuation of Perquisites 25,00,000
Actual Lease Charges 6,00,000
15% of the above (Cap) 3,75,000
Hence, Gross Taxable Value of the Perquisite 3,75,000
Less: Amount recovered from the employee 2,40,000
Taxable value of unfurnished leased accomodation 1,35,000
Add: Actual hire charges of furniture hired 48,600
122 EP-TL

Taxable value of Furnished Accomodation 1,83,600

Car used partly for Official & partly for Personal
Engine Capacity is within 1.6 l (Santro)
Taxable Value of Perquisite @ 1800 pm 21,600
Chauffer @ 900 pm 10,800
Taxable value of Motor Car provided 32,400
Gift Voucher 9,000
Total Value of Perquisites 2,25,000

Note:
1) Refer to the valuation rules for perquisites – taxable value of perquisite for a hired accommodation is
the actual hire charges incurred by the employer subject to max. 25% of salary reduced by the amount
recovered from the employee.
2) Since the accommodation is furnished, the actual hire charges are added to the above.
3) Gift Vouchers are taxable as perquisites too if received by the employer and more than 5000/-

Tax-free perquisites (in all cases)

The value of the following perquisites is not to be included in the salary income of an employee:

1. Medical Facilities
a) The value of any Medical facility provided to an employee or his family member in any hospitals, clinics,
etc. maintained by the employer.
b) Reimbursement of expenditure actually incurred by the employee on medical treatment for self or
for his family members in any hospitals, dispensaries etc. maintained by the Government or local
authority or in a hospital approved under the Central Health Scheme or any similar scheme of the
state Government or in a hospital, approved by the chief commissioner having regard to the prescribed
guidelines for the purposes of medical treatment of the prescribed diseases or ailments.
c) Group medical insurance obtained by the employer for his employees (including family members of the
employees) or all medical insurance payments made directly or reimbursement of insurance premium
to such employees who take such insurance.
d) Any expenditure incurred or paid by the employer on the medical treatment of the employee or any
family member of the employee outside India, the travel and stay abroad of such employee or any
family member of such employee or any travel or stay abroad of one attendant who accompanies the
patient in connection with such treatment will not be included in perquisites of the employee. However,
the travel expenditure shall be excluded from the perquisites only when the employee’s gross total
income as computed before including the said expenditure does not exceed two lakh rupees and
further to such conditions and limits as the Board may prescribe having regard to guidelines, if any,
issued by the Reserve Bank of India.
2. Refreshment : The value of refreshment provided by the employer during office hours and in office premises
is fully exempt
 Lesson 4 n Part I – Income under Head ‘Salaries’ 123

3. Subsidized lunch or dinner provided by employer is exempt

4. Recreational facilities : The value of recreational facilities provided is exempt. However, the facility should
not be restricted to a selected few.
5. Telephone facility provided at the residence of the employee is exempt to the extent of the amount of
telephone bills paid by the employer when it is used for official and personal purposes of the employee.
6. Transport provided by the employer to the employees as a group (and not to any individual or a few employees
alone) from their place of residence to the place of work and back in the case of an employer engaged in the
business of carriage of goods or passengers, to his employees either free of charge or at a concessional
rate. Also from the assessment year 1990-91, conveyance facility provided for the journey between office and
residence and back at free of charge or at concessional rate.
7. Personal accident insurance, i.e. payment of annual premium by employer on personal accident policy
effected by him to his employee
8. Refresher Course: Where the employee attends any refresher course in management and the fees are paid
by the employer, the amount spent by employer for the purpose.
9. Free rations: The value of free rations given to the armed forces personnel.
10. Computer/laptops provided only for use, ownership is retained by the employer
11. Rent free houses / conveyance to High Court & Supreme Court Judges
12. Employers’ Contribution to Group Insurance Schemes, to recognised Provident Funds
13. Annual Premium by employer on policy taken on life of employee

PROVIDENT FUNDS - TREATMENT OF CONTRIBUTIONS TO AND MONEY RECEIVED FROM

THE PROVIDENT FUND
For purposes of Income-tax, provident funds are grouped under three heads:

Statutory
Provident
Fund

Unrecognised Recognised
Provident Provident
fund Fund

(A) Statutory provident fund

Meaning: All provident funds which are set up under the Provident Funds Act, 1925 are called Statutory
Provident Funds. Provident funds of institutions such an Universities, Colleges or other Educational
Institutions, Reserve Bank of India, State Bank of India, the Central Government and State Government
would constitute Statutory Provident Funds.
124 EP-TL

Treatment: In case of Statutory Provident Fund, the entire amount of employer’s contribution without
any limit or restriction whatsoever and the interest thereon received by the employee shall not be
includible in the total income of the employee both at the time when the contribution is made and at the
time when the money is received by or on behalf of the employee on his retirement, death or otherwise.
This exemption is specifically conferred by Sub-section (11) of Section 10 of the Income-tax Act. The
employee can contribute to this fund out of his salary as much as he likes.
(B) Recognised provident fund
Meaning: All Provident Funds recognised by the Commissioner of Income-tax under Rule 3 of Part
‘A’ of the Fourth Schedule to the Income-tax Act, 1961 and also Provident Funds established under a
scheme framed under the Employees Provident Funds Act, 1952 are known under the Income-tax Act
as Recognised Provident Funds. For the purposes of being treated as Recognised Provident Fund, the
Fund in question must be recognised by the Commissioner of Income-tax at the time of its setting up
and must continue to be so recognised even subsequently. The moment the recognition is withdrawn
by the Commissioner, the Fund ceases to be a Recognised Provident Fund. The Provident Funds of
various Public Sector Undertakings, Semi-Government bodies and other institutions and organisations
including companies which are recognised by the Commissioner for income-tax purposes, would be
treated as Recognised Provident Funds.
Treatment: In the case of a Recognised Provident Fund, the employer’s contribution to the Provident
Fund is not treated as the employee’s income so long as the contribution by the employer does not
exceed 12% of the salary of the employee. But if the contribution of the employer exceeds 12% of the
employee’s salary, the excess of the contribution over 12% of the salary of the employee is to be treated
as part of the taxable income from salaries in the hands of the employee in respect of the financial year
in which the contributions were made by the employer. The fact that the employee concerned does
not receive the money in hand nor is he entitled to get the money immediately does not in any way
affect the taxability of the excess over 12% of the employee’s salary. The employee’s own contribution
qualifies for deduction under Section 80C of the Income-tax Act. [Salary for this purpose, includes basic
salary; dearness allowance/pay (if the terms of employment so provide) and commission (if based on
a fixed percentage of turnover achieved by the employee)]. As regards interest on the contributions to
the Provident Fund, only an amount exceeding a sum calculated at 12% per annum on the balance
standing to the credit of the employee would be treated as part of the taxable income of the employee.
In other words, so long as the amount of interest does not exceed this limit, the interest does not
become chargeable to tax in the hands of the employee.
(C) Unrecognised provident Fund
Meaning: The Provident Fund which is neither Statutory nor recognised by the Commissioner of
Income-tax nor Public Provident Fund, would be an Unrecognised Provident Fund for income-tax
purposes.
Treatment: In the case of an Unrecognised Provident Fund, the employee’s own contribution to the
Fund would not be allowed as a deduction. The employer’s contribution and the interest thereon would,
however, be exempt from tax as and when the contributions are being made. But when the money
in lump sum is received back by the employee, that part of the amount attributable to the employer’s
contribution would be taxable as income from salaries and the interest on the employer’s contribution
would also be taxable as salary income in the hands of the employee. The employee’s own contributions
when received back would not be taxable because they do not contain an element of income. However,
the interest thereon would be chargeable to tax as income from other sources and not as income from
salaries.
 Lesson 4 n Part I – Income under Head ‘Salaries’ 125

Relief when salary is paid in arrears or advance (section 89)

Tax is calculated on total income earned or received during the year. If any portion received ‘salary in arrears
or in advance’, or have received a family pension in arrears, assessee is allowed some tax relief under section
89(1) of the Income Tax Act, 1961.
Relief under section 89(1) for arrears of salary are available in the following cases:
• Salary received in advance or as arrears
• Gratuity
• Compensation on Termination of employment
• Commutation of Pension

Calculating Relief under Section 89(1)

Steps to be followed to calculate relief under section 89 (1)
Step 1: Calculate the tax payable on his total income including arrears of the relevant previous year in which
the same is received. (Ex: X)
Step 2: Calculate the tax payable on his total income excluding arrears. (Ex: Y)
Step 3: Subtract the value obtained in step 1 from the value obtained in step 2. (e., A-B) and keep the result
value as Z.
Step 4: Calculate the tax payable on the total income (including arrears) of the year to which the arrears are
related. (Ex: “A”)
Step 5: Calculate tax payable on the total income (excluding arrears) of the year to which the arrears are
related. (Ex: “B”)
Step 6: Subtract the value obtained in step 5 from the value obtained in step 4 (i.e., A – B). (Ex: “C”).
Excess of tax computed at step 3 over tax computed at step 7 is the amount of relief allowable under section
89. If tax computed at step 3 is less than tax computed at step 7 the taxpayer will not be eligible for any relief.

Tax Liability in the PY in which adv / arrears are received

a) Incl. adv / arrears A
b) Excl. adv / arrears B
Differential A-B
Tax Liability of the PY to which such addl salary relates
a) Incl. adv / arrears C
b) Excl. adv / arrears D
Differential C-D
Relief u/s 89 (A-B)-(C-D)

The Finance (No. 2) Act, 2019 has amended sections 140A (self assessment), 143 (regular assessment),
section 234A, 234B, 234C (interests on late payment of tax) so as to provide that computation of tax liability
shall be made after allowing relief under section 89.
126 EP-TL

DEDUCTIONS FROM SALARY

Standard Deduction
Standard deduction of Rs. 50,000 (fifty thousand) or the amount of the salary, whichever is less w.e.f. Finance
Act 2019 w.e.f. Assessment year 2020-21 [clause (ia) to section 16].
Entertainment Allowance
 Fully taxable
 First to be included in salary and then deduction to be made.
 In case of Government Employees, the deduction is available, which would be lower of:
l 1/5th of Basic Salary Or
l INR 5000/- Or
l Actual Entertainment Allowance received
Profession Tax
 Allowed as a deduction when paid by the employee (recovered from salary) during the previous year

COMPUTATION OF SALARY

Particulars Rs.
Income From Salary
Salary xxxxx
Allowances received (taxable allowances) xxxxx
Taxable value of perquisite xxxxx
=====
Gross Salary xxxxx
Less: Deduction under section 16
Professional Tax xxxxx
Entertainment allowance Xxxxx
=====
Income From Salary (1)

Illustration 1:
Niteen is an employee of XYZ Ltd. He was appointed on 1st Mar 2019 at a scale of 50000 – 5000 – 70000.
He is paid DA (which form part of retirement benefits) @ 15% of Basic Pay and Bonus equivalent to 2 month’s
salary at end of FY. He contributes 18% of his Basic + DA to a recognised provident fund, and the contribution
is matched by the employer.
He is provided rent free accommodation, hired by the employer, @ 25000 pm. He is also provided the following
benefits / amenities:
a) Medical Treatment of his dependant spouse INR 40000
b) Monthly salary to housekeeper INR 4000
c) Telephone Allowance INR 1200 pm
 Lesson 4 n Part I – Income under Head ‘Salaries’ 127

d) Gift Voucher of INR 4500 on account of his marriage anniversary

e) Medical Insurance Premium for Niteen, paid by his employer INR 15000
f) Motor Car owned and driven by Niteen, and engine capacity within 1.6 L; used partly for official and
partly for personal purposes. Running & maintenance expenses borne by the employer INR 36,600/-.
g) Lunch during office hours valued at INR 2200/-.
He was also allotted 2000 sweat equity shares in Sep 2019. The shares were allotted @ INR 227 per share
against the FMV of INR 377 per share as on the date of exercise of the Option.
Compute the Salary Chargeable to tax.
Solution

Particulars INR
Basic 6,05,000
DA 90,750
Bonus 1,10,000
Employers’ Contribution to PF > 12% 41,745
Taxable Allowances
Telephone 14,400
Taxable Perquisites
Medical Reimbursement (Fully Taxable) 40,000
Housekeeper 48,000
Motor Car 15,000
Rent Free Accomodation 1,23,023
Sweat Equity 3,00,000
Gross Salary 13,87,918
Less: Standard Deduction under section 16(ia) (50,000)
Taxable Salary 13,37,918
Note:
1) Employer’s Contribution to Provident Fund in excess of 12% is chargeable to Income Tax.
2) Rent Free Accommodation is valued as under:
a. Since the accommodation is hired, the actual hire charges subject to a cap of 15% of “salary” is
considered
b. “Salary” for this purpose is Basic + DA + Bonus + all Taxable Allowances = INR 8,20,150
3) Medical Treatment is chargeable to Tax, as no more tax free perquisite.
4) Since the value of the gift voucher is below INR 5000, it is not taxable as perquisite.
5) Lunch during office hours is also not taxable as perquisite.
6) Medical Insurance Premium paid by the employer on behalf of Niteen is also not taxable as perquisite.
7) The motor car is chargeable as under:
If the If the Car is owned / hired by the employee; expenses met by the employer & is used by
the employee partly for Official and partly for Personal purposes, the taxable value of the
perquisite would be the actual expenditure incurred by the employer as reduced by the taxable
128 EP-TL

value of the perquisite determined basis the engine capacity, i.e., INR 36600 – INR (1800*12)
= INR 15000
Illustration 2 :
Mr. Ram is employed at Bombay. His basic Salary is Rs. 5,000 per month. He receives Rs. 5,000 p.a. as house
rent allowance. Rent paid by him is Rs. 12,000 p.a. Find out the amount of taxable house rent allowance.
Solution:
As per Rule 2A, the least of the following is exempt from tax:
(i) the actual house rent allowance;
(ii) excess of rent paid over 10% of salary;
(iii) where the accommodation is situated at Bombay, Delhi, Calcutta or Madras, one-half of the amount of
salary due to the assessee for the relevant period;
(iv) Where the accommodation is situate at any other place, two-fifth of the salary due to the assessee for
the relevant period.
Accordingly, Mr. Ram would be entitled to the least of :
(i) Rs. 5,000 or
(ii) Rs. 6,000 being excess of rent over 1/10th of salary; or
(iii) Rs. 30,000 (being one-half of the salary of the assessee).
Rs. 5,000, being the least, would not be included in the total income of Mr. Ram. So the entire amount of HRA
would be exempt from tax.
Salary for this purpose includes basic salary as well as dearness allowance if the terms of employment so
provide. It also includes commission based on a fixed percentage of turnover achieved by an employee
as per terms of contract of employment but excludes all other allowances and perquisites and these are
determined on due basis for the period during which rental accommodation is occupied by the employee
in the previous year.
Illustration 3 :
Mr. Shyam, employed at Mumbai, receives the following from his employer during the previous year:

Particulars Rs.
Basic Salary 60,000
Bonus 1,800
Entertainment allowance (taxable) 6,000
Electricity expenses 2,000
Professional tax paid by the employer 2,000
Rent free house (owned by Employer):
Fair rent 48,000
Salary of gardener 2,400
Garden Maintenance 1,200
Salary of watchman 1,800

Determine the value of taxable perquisites in respect of rent free house assuming (a) Mr. Shyam is a Government
 Lesson 4 n Part I – Income under Head ‘Salaries’ 129

Officer and the fair rent as arrived at by the Government is Rs. 6,000 p.a (b) Mr. Shyam is a semi-Government
employee, and (c) Mr. Shyam is employed by a private company.
Solution:
(a) If Mr. Shyam is a Government Officer: As per Rule 3(1) of Income-tax Rules, Rs. 6,000 p.a being the
rent of the house as per Government rules, will be the taxable value of the perquisite.
(b) If Mr. Shyam is a semi-Government employee : As per Rule 3(1) of the Income-tax Rules, the value of
the perquisite in respect of rent free accommodation is taken at 15% of salary of the employee (as the
house is owned by the Employer and provided in Mumbai).
Salary = Rs. 67,800 (‘Rs. 60,000 + 1,800 + 6,000)
15% of salary = Rs. 10,170 and
Therefore, Rs. 10,170 is taxable value of the perquisite.
Further, the value of Electricity expenses and Professional Tax paid by the employer, being perquisites,
are not included in the salary for valuation of Rent Free House Accommodation.
(c) If Mr. Shyam is employed in Private Company: The value of perquisite in this case shall also be Rs.
10,170. Under the new rules there is no difference between the semi-Govt. and other employees.
Illustration 4 :
Mr. Ramamoorthy, an employee of M/s. Gopalkrishnan & Co. of Chennai receives during the previous year
ended March 31, 2020 the following payments:

Particulars (Rs.) (Rs.)

Basic Salary 40,000

Dearness allowance 3,000

Leave Salary 5,400

Professional tax paid by employer 1,000

Fair rent of the flat provided by employer 6,000

Rent paid for furniture 1,000

Rent recovered by employer 3,000

Contribution to Statutory Provident Fund 4,000

Employer’s contribution to Statutory Provident Fund 4,000

Compute his taxable income for the Assessment Year 2020-21.

Solution:
Computation of taxable income of Mr. Ramamoorty for the Assessment Year 2020-21

Basic Pay 40,000

Dearness allowance 3,000
Leave salary 5,400
Professional tax paid by employer 1,000
130 EP-TL

Perquisite for House :

15% of salary (Rs. 40,000 + 3,000 + 5,400) 7,260
Add: Furniture rent 1,000
Less: Rent recovered (-) 3,000 5,260
54,660
Less: Standard Deduction under section 16(ia) (50,000)
Less: Professional tax u/s 16 1,000
Gross Total Income 3,660
Less: Deduction under Section 80C (3,660)
Total income NIL
Total tax payable NIL

Note: Assumed that dearness allowance forms part of the salary for the purpose of computation of superannuation
or retirement benefits.
Illustration 5 :
Raman, an employee of the Gas Supply Ltd., Agra, receives the following emoluments during the previous year
2019-20.

Particulars (Rs.)
Basic pay 10,000
Project allowance 1,800
Arrears of project allowance of May, 1984 150
Professional tax paid by the employer 200
Rent free furnished house
- Fair rent of the house 2,000
- Rent of furniture 500
Free gas supply 400
Service of sweeper 600
Services of gardener 1,000
Service of cook 800
Free lunch 2,400

Free use of chauffeur driven Fiat car which is used partly for official and partly for private purposes.
He is a member of recognised provident fund to which he contributes Rs.1,500. His employer also contributes
an equal amount. He deposits Rs. 600 per month in 10 year account under the Post Office Savings Bank (CTD)
Rules. Determine his taxable income and tax payable thereon for the assessment year 2020-21. (a) If Raman
is a director in the employer company and the rent-free house is owned by it, (b) If Raman is neither a director
nor a shareholder in the employer company and the rent-free house is not owned by it.
 Lesson 4 n Part I – Income under Head ‘Salaries’ 131

Solution:
His taxable income will be computed as under :

If Raman is a director If Raman is neither

and rent-free house is a director nor a
owned by the company shareholder and
not owned by the rent- free house is
Company
‘B’
‘A’
(1) (2) (3)
Rs. Rs.
Basic Pay 10,000 10,000
Project allowance 1,800 1,800
Arrears of project allowance of May, 1984 150 150
Professional tax paid by the employer 200 200
Rent free furnished house :
– 15% of Salary 1,770 1,770
– Rent of furniture 500 500
Free gas supply 400 Nil
Service of sweeper 600 Nil
Service of gardener 1,000 Nil
Service of cook 800 Nil
Free lunch Nil Nil
Excess of employer’s contribution towards provident fund 300 300
over 12% of salary (1,500 - 12% of’ 10,000)
Gross salary 18,110 15,310
Deduction : Standard Deduction (Maximum Rs. 50,000) 18,110 15,310
Net Income from Salary Nil Nil
Tax on total income Nil Nil

Notes:
(1) It is assumed that the arrears of project allowance are taxable on receipt basis.
(2) Perquisite in respect of Rent Free house is taxable in the hands of all the assessees. In this case
fair market value has no relevancy (w.e.f. AY 2002-03) and assumed that the house is owned by the
employer. Since the house is provided in Agra, population is assumed as exceeding 25 lakhs. Salary
for valuation of perquisite is (10,000 + 1,800).
(3) The free sweeper, gardener, cook, lunch, car etc. are not taxable in the second case, because Raman
does not fall in the category of specified employee under Section 17(2)(iii) of the Act i.e., he is neither
a director nor his salary is Rs. 50,000 p.a. or more.
(4) Free lunch provided is not taxable to the extent of Rs. 50 per day.
(5) Since Raman is employed in a Gas supply company, the value of gas supplied is taxable as cost to the
employer. And it is assumed that the cost of supply is same as Rs. 400 as given.
132 EP-TL

Illustration 6 :
For the financial year 2019-20, ‘A’, a Central Government Officer receives salary of Rs. 77,000 (including
dearness allowance of Rs. 42,000) and entertainment allowance of Rs.18,000. His contribution to provident
fund during this period is Rs. 7,200. In addition, he has purchased National Savings Certificates (VIII Issue) for
Rs. 6,000. He has been provided with accommodation by the Government for which the rent determined is Rs.
375 per month and this is recovered from A’s salary. Compute A’s tax liability for the assessment year 2020-21
assuming that he has no other income.
Solution:
Name of assessee : Mr. A
Assessment Year : 2020-21
Status: Resident/Individual
Statement of assessable income

Salary from Central Government 77,000

Entertainment allowance 18,000

Less: Entertainment Allowance under Section 16(ii) Rs. 5,000 or [1/5th of salary (5,000) (13,000)
exclusive of any allowance, benefit or perquisite]
Less : Standard Deduction under section 16(ia) (50,000)

GROSS TOTAL INCOME 14,000

Less : Deduction under Section 80C (7,200 + 6,000) (13,200)

Total Income 800

Tax liability Nil

Net tax payable Nil

CASE LAW
1. Can notional interest on security deposit given to the landlord in respect of residential premises
taken on rent by the employer and provided to the employee, be included in the perquisite value of
rent-free accommodation given to the employee?
CIT v. Shankar Krishnan (2012) (Bom.)
On appeal by the Revenue, the Bombay High Court held that the Assessing Officer is not right in adding the
notional interest on the security deposit given by the employer to the landlord in valuing the perquisite of rent-
free accomodation, since the perquisite value has to be computed as per Rule 3 and Rule 3 does not require
addition of such notional interest. Thus, the perquisite value of the residential accommodation provided by
the employer would be the actual amount of lease rental paid or payable by the employer, since the same
was lower than 10% (now 15%) of salary.
2. Can the limit of INR 1,000 per month per child be allowed as standard deduction, while computing
the perquisite value of free or concessional education facility provided to the employee by the
employer?
CIT (TDS) v. Director, Delhi Public School (2011) (Punj. & Har.)
The Punjab and Haryana High Court held that on a plain reading of Rule 3(5), it flows that, in case the value
 Lesson 4 n Part I – Income under Head ‘Salaries’ 133

of perquisite for free/concessional educational facility arising to an employee exceeds Rs. 1,000 per month
per child, the whole perquisite shall be taxable in the hands of the employee and no standard deduction of
INR 1,000 per month per child can be provided from the same. It is only in case the perquisite value is less
than INR 1,000 per month per child, the perquisite value shall be nil. Therefore, INR 1,000 per month per
child is not a standard deduction to be provided while calculating such a perquisite.

LESSON ROUND UP
– Basis of Charge: As per section 15, salary is taxable on due or receipt basis whichever is earlier. Under
Section 15 the income chargeable to income tax under the head salaries would include any salary due
to an employee from an employer or a former employer during the previous year irrespective of the fact
whether it is paid or not.
- Different forms of salary:
(A) Basic Salary: Basic salary is taxable in the hands of an employee.
(B) Allowance: An allowance is defined as a fixed amount of money given periodically in addition
to the salary for the purpose of meeting some specific requirements connected with the
service rendered by the employee or by way of compensation for some unusual conditions of
employment. It is taxable on due/accrued basis whether it is paid in addition to the salary or
in lieu thereon.
(C) Perquisites: The term “perquisites” includes all benefits and amenities provided by the employer
to the employee in addition to salary and wages either in cash or in kind which are convertible into
money. These benefits or amenities may be provided either voluntarily or under service contract.
For income-tax purposes, the perquisites are of three types:
(i) Tax-free perquisites

(ii) Taxable perquisites

(iii) Perquisites taxable under specified cases.

– Valuation of perquisites: The basic principles governing valuation of perquisites are as follows:

- The valuation is done on the basis of their value to the employee and not the employer’s cost for
providing the same - Wilkins v. Rogerson (1963) 49 ITR 395 (CA).

- The value of perquisite is included in the salary income only if the perquisite is actually provided
to the employee.

- Perquisite which is not actually enjoyed by the employee (though the terms of employment
provide for the same) cannot be valued and taxed in the employee’s hands. Therefore, where the
employee waives his right of perquisite, he cannot be taxed thereon.

– Allowable deductions under the head Salaries: The following amounts shall be deducted in order to
arrive at the chargeable income under the head “Salaries”.

(A) Standard deduction: Rs. 50,000 or salary whichever is less.

(B) Entertainment allowance

(C) Tax on employment or Professional Tax

– Meaning of Salary under various circumstances:

134 EP-TL

Circumstance Definition
Gratuity (Non-Government Employees covered Basic + DA
by Payment of Gratuity Act, 1972)
Gratuity (Non-Government Employees NOT Basic + DA (if terms of employment so provide)
covered by Payment of Gratuity Act, 1972) + Commission as a % of Turnover
Leave Salary Basic + DA (if terms of employment so provide)
+ Commission as a % of Turnover
HRA Basic + DA (if terms of employment so provide)
+ Commission as a % of Turnover
Rent Free Accommodation Basic + DA (forming part of retirement benefits)
+ Bonus + all Taxable Allowances

SELF-TEST QUESTIONS

Multiple Choice Questions (MCQs)

1. The definition of Salary for the purposes of computing income under the head “Salaries” is Basic +
Dearness Allowance + Commission as a % of Turnover?
a) Always
b) In some cases
c) The definition is irrelevant
d) None of the above
Answer: (b)
2. Conveyance Allowance is exempt to the extent of ______ per month?
a) INR 800
b) INR 1600
c) Nil
d) None of the above
Answer: (c)
3. Uncommuted pension is always taxable irrespective of whether the assessee is a Private Sector or a
Public-Sector employee?
a) Yes
b) Yes, like commuted pension
c) It depends on whether the person is in receipt of Gratuity
d) FALSE
Answer: (a)
4. For the purposes of taxability of Commuted Pension, this is independent of whether you have received
Gratuity or not as these are anyways taxed separately?
a) Incorrect, it depends on whether you are a Government employee or not
 Lesson 4 n Part I – Income under Head ‘Salaries’ 135

b) Incorrect, it depends on whether you are in receipt of Gratuity

c) Both a & b
d) None of the above
Answer: (c)
5. No. of days in a month for purposes of computing taxable Gratuity in case the employee is covered
under the Payment of Gratuity Act, 1972, are?
a) 26
b) 25
c) 30
d) 31

Answer: (a)

SUGGESTED READING
1. Direct Taxes Law and Practice
Author : Dr. Vinod K. Singhania & Dr. Kapil Singhania
Publisher : Taxmann
Year : 2019
Edition : 2019
2. Direct Taxes Ready Reckoner with Tax Planning
Author : Dr. Girish Ahuja & Dr. Ravi Gupta
Publisher : Wloters Kluwer
Year : 2019
Edition : 20th Edition
 Lesson
Lesson 4
4 n Part II – Income under the head House Property 137

Part II – Income under the head

House Property

LESSON OUTLINE
LEARNING OBJECTIVES
– Basis of Charge The provisions for computation of Income from
– Determination of Annual Value house property are covered under sections 22
to 27. This chapter deals with the provisions for
– Deductions from Net Annual Value [Section
computation of Income from house property.
24]
Section 22 is the charging section that identifies
– Inadmissible deductions [Section 25] the basis of charge wherein the annual value is
prescribed as the basis for computation of Income
– Treatment of unrealized rent/Arrear of rent
from House Property. The process of computation
[Section 25A]
of “Income from House Property” starts with the
– Properties owned by Co-owners determination of annual value of the property.
[Section 26] The concept of annual value and the method of
– Deemed Ownership [Section 27] determination are laid down in section 23. The
admissible deductions available from house
– House Propery Income Exempt form Tax property are mentioned in section 24.
– Case Law At the end of this lesson, you will learn
– LESSON ROUND UP l the conditions to be satisfied for income
– SELF TEST QUESTION to be chargeable under the head house
property
l how to determine the annual value of
different type of house properties,
l admissible deductions and inadmissible
deductions from annual value,
l tax treatment of unrealized rent,
l who are deemed owners,
l what is meant by co- ownership and what is
its tax treatment etc.

137
138 EP-TL

BASIS OF CHARGE [SECTION 22]

The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee
is the owner, other than such portions of such property as he may occupy for the purposes of any business
or profession carried on by him, the profits of which are chargeable to income-tax, shall be chargeable to
income-tax under the head Income from House Property”
In other words a house property is taxable under this head if following conditions are satisfied:-
1. There should be a property consisting of any buildings or lands appurtenant thereto;
2. Assessee should be the owner of such property (including deemed owner as given u/s 27)
3. Such property should not be occupied by the assesse for the purposes of any business or profession
carried on by him, the profit of which are chargeable to income tax.
Income from house property is one of the important heads of income under the Income Tax Act. The tax payers have
been, in particular, keen to know about the exemptions and deductions available to them on repayment of interest
and principal of the loan obtained to purchase the house property, if that house property is let out or self-occupied.
The amount of interest on borrowed capital of the current year is available under the head house property further
repayment of principal is available under section 80C to individuals and Hindu Undivided Families.
The annual value (AV) of the property of which the assessee is the owner is chargeable to Income Tax, under the
head “house property”. It is imperative to note though, that the purpose of occupation is also a determinant, for
example, a property that is occupied for the purpose of business / profession carried on by him is not chargeable
under “Income from House Property”, which deals with self-occupied or let out properties for residential use.

•Income from letting out a vacant land is chargeable to tax

under the head “Income From Other Sources”
Exceptions •Income earned by an assessee who is engaged in the
business of letting out properties on rent, would be chargeable
to tax under the head “Profits / Gains from Business /
Profession”

DETERMINATION OF ANNUAL VALUE

The process of determination of Annual Value is exhibited below.

Step 2:
Step 1: Step 3:
Reduce from it
Ascertain the Arrive at the Net
the Municipal
Gross Annual Annual Value
Taxes paid by the
Value (GAV) (NAV)
Owner in the PY
 Lesson 4 n Part II – Income under the head House Property 139

Annual Value: The measure of charging income-tax under this head is the annual value of the property, i.e.,
the inherent capacity of a building to yield income. The expression ‘annual value’ has been defined in Section
23(1) of the Income-tax Act as:
(1) the annual value of any property shall be deemed to be:
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the
owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or
receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the
previous year and owing to such vacancy the actual rent received or receivable by the owner in respect
thereof is less than the sum referred to in clause (a), the amount so received or receivable.
Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of
the previous year in which the liability to pay such taxes was incurred by the owner according to the method of
accounting regularly employed by him) in determining the annual value of the property of that previous year in which
such taxes are actually paid by him, i.e., municipal taxes will be allowed only in the year in which it was paid.
Explanation : For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received
or receivable by the owner shall not include, the amount of unrealized rent.
(2) Where the property consists of a house or part of a house-
(a) which is in the occupation of the owner for the purposes of his own residence;
(b) or cannot actually be occupied by the owner by reason of the fact that owing to his employment,
business or profession carried on at any other place, he has to reside at that other place in a building
not belonging to him,
the annual value of such house or part of the house shall be taken to be nil.
(3) However, the provisions of sub-section (2) shall not apply if:
(a) the house or part of the house is actually let during the whole or any part of the previous year; or
(b) any other benefit therefrom is derived by the owner.
(4) Where the property referred to in Sub-section (2) consists of more than two houses:
(a) the provisions of that sub-section shall apply only in respect of two of such houses, which the assessee
may, at his option, specify in this behalf;
(b) the annual value of the house or houses, other than the house or houses in respect of which the
assessee has exercised an option under clause (a), shall be determined under Sub-section (1) as if
such house or houses had been let.
Unrealized Rent: The amount of rent which the owner cannot realise shall be equal to the amount of rent
payable but not paid by a tenant of the assessee and so proved to be lost and irrevocable only if following
conditions under Rule 4 are satisfied:
(a) tenancy is bonafide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the
unpaid rent or satisfied the Assessing Officer that legal proceedings would be useless.
140 EP-TL

Where the property is let out for the whole year [Section 23(1)]

GROSS ANNUAL VALUE

HIGHER OF THE FOLLOWING

EXPECTED RENT ACTUAL RENT RECEIVED

(cannot exceed standard rent)

HIGHER OF THE FOLLOWING

FAIR RENT MUNICIPAL VALUE

The GAV is the higher of
o Expected Rent (ER) and
o Actual Rent received / receivable (AR)
Note:
ü The Expected Rent is the higher of Fair Rent (FR) and the Municipal Value (MV), but capped to Standard
Rent (SR).
ü Fair Rent is the rental fetched by a similar property in the adjoining neighbourhood.
ü the Municipal Value is the value determined by the Municipal Authorities.
ü the Standard Rent is the rent fixed by the Rent Control Act.
MUNICIPAL TAXES: The taxes including service taxes (fire tax, conservancy tax, education, water tax, etc.)
levied by any municipality or local authority in respect of any house property to the extent to which such
taxes are borne and paid by the owner, and include enhanced municipal tax finally determined on appeal and
payable by assessee - Clive Buildings Cola Ltd. v. CIT (1989) 44 Taxman 160. However, deduction in respect
of municipal taxes will be allowed in determining the annual value of the property only in the year in which
municipal taxes are actually paid by the owner.
Where the tax on property is enchanced with retrospective effect by municipal or local authorities and the
enhanced tax relating to the prior year is demanded during the assessment year, the entire demand is deductible
in the assessment year [C.I.T. v. L. Kuppu Swamy Chettiar (1981) 132 ITR 416 (Mad.)].
Even where the property is situated outside the country taxes levied by local authority is that country are
deductible is deciding the annual value of the property. [CIT v. R Venugopala Riddiar (1965) 58 ITR 439 (Mad.)]

Illustration 1
Mr. X is the owner of three houses, which are all let out and not governed by the Rent Control Act. From the
following particulars find out the gross annual value in each case:
Particulars I II III
Municipal Value 30,000 20,000 35,000
Actual (De facto) Rent 32,000 28,000 30,000
Fair Rent 36,000 24,000 32,000
 Lesson 4 n Part II – Income under the head House Property 141

Solution:
Gross Annual Value (GAV): Higher of Expected or Actual Rent
Expected Rent: Higher of Municipal Valuation or Fair Rent
House I: Rs. 36,000
House II: Rs. 24,000
House III: Rs. 35,000
Actual Rent (given)
GAV:
House I: Rs. 36,000 House II: Rs. 28,000 House III: Rs. 35,000

Illustration 2
Mr. X is the owner of four houses, which are all let out and are covered by the Rent Control Act. From the
following particulars find out the gross annual value in each case, giving reasons for your answer:
Particulars I II III IV
Municipal Value 30,000 26,000 35,000 30,000
Actual (De Facto) Rent 40,000 30,000 32,000 32,000
Fair Rent 36,000 28,000 30,000 36,000
Standard Rent 30,000 35,000 36,000 40,000

Solution
As all the houses are covered by the Rent Control Act, their gross annual value will be higher of expected Rent
or Actual Rent. Expected Rent Shall be higher of Municipal Value or Fair rent but subject to Standard Rent:
Particulars I II III IV
Expected Rent 30,000 28,000 35,000 36,000
Actual (De Facto) Rent 40,000 30,000 32,000 32,000
G.A.V. 40,000 30,000 35,000 36,000
– Annual letting value of self occupied property, subject to Rent Control Act is to be fixed on basis of
standard rent and not on basis of open market Tilak Raj v. CIT (1989) 45 Taxman 279/178 ITR 327
(Punj. & Har.).
– In determining annual value salary paid to caretaker cannot be taken into account CIT v. Smt. Sreelekha
Banerjee (1989) 45 Taxman 358/179 ITR 46 (Cal.).
– Loss relating to self occupied house property could be set off against income from other sources CITv.
K.K. Dhanda (HUF) (1989) 45 Taxman 346/178 ITR 602 (Punj. & Har.).

Where let out property is vacant for part of the year [Section 23(1)]
In a scenario of vacancy for a part of the year, it is quite probable that the Actual Rent received / receivable
would fall lower than Expected Rent and in such an eventuality; therefore the Actual Rent becomes the Gross
Annual Value.
142 EP-TL

Illustration 3 :
(i.e. No vacancy but there is unrealized rent)
Mr. A owns two houses. The expected rent of the house one is Rs. 65,000. This house was let out for Rs. 7,500
p.m. But the rent for the months of February and March, 2019 could not be realized.
The expected rent of another house is Rs. 1,50,000. This house was let out for Rs.12,000 p.m. But the rent for
the last three months could not be realized.
In the both cases, Mr. A fulfills the conditions of Rule 4. You are required to compute the Gross Annual Value of
both the houses.

Solution
House I House II
Expected Rent 65,000 1,50,000
Annual Rent 90,000 144000
Unrealized Rent 15,000 36,000

Computation of Gross Annual Value

Step 1: Expected Rent 65,000 1,50,000
Step 2: Actual Rent (After deducting unrealized rent) if higher 75,000 N.A.
than Expected Rent then Actual rent otherwise Expected rent
Step 3: Applicable only in case of vacancy N.A. N.A.
Gross Annual Value 75,000 1,50,000

Illustration 4 :

(There is vacancy but no unrealized rent)

Find out the gross annual value in the case of the following properties for the Assessment year 2020-21
Rs. in thousands

P Q R S
Expected Rent 70 55 85 125
Rent Per Month (if let out) 7 5 8 8
Let out period (in months) 11 0 9 10
Vacancy (in months) 1 12 3 2
Further all the rent were realized for the year by the assessee.

Solution:
Calculation of Gross Annual Value of Mr. X for A.Y 2020-21
P Q R S
Annual Rent (If let out for 12 months) 84 60 96 96
Loss due to vacancy 7 60 24 16
Unrealized rent Nil Nil Nil Nil
 Lesson 4 n Part II – Income under the head House Property 143

Actual Rent (for let out period) 77 Nil 72 88

Calculation of Gross Annual Value
Step 1: Expected Rent 70 55 85 125
Step 2: If annual rent is more than Expected
Rent then annual rent otherwise expected Rent 84 N.A. 96 125
Step 3: If property remain vacant then decline due 7 0 27 16
to vacancy shall be considered
Gross annual value 77 0 72 109
Illustration 5 :
(Vacancy and unrealized rent both exist)
Mr. X is the owner of a house property. He lets this property during the previous year 2019-20 for Rs. 7,000 p.m.
The house was occupied from 1.4.2019 to 31.1.2020. From 1.2.2020, it remained vacant. Mr. X fails to realize
Rs.. 10,000 from the tenant. The Expected rent of the house is Rs. 82,000 p.a.
Calculate the Gross Annual Value of the house.

Solution
Rs.
Expected Rent 82,000

Annual Rent (Actual for the whole year - 7000 x 12) 84,000

Actual Rent (7,000 x 10) 70,000

Unrealized rent 10,000

Realized rent (70,000 - 10,000) 60,000

Loss Due to vacancy (7,000 x 2) 14,000

Decline due to vacancy (82,000 - 14,000) but not less than actual rent received 68,000

Calculation of Gross Annual Value

Step 1: Expected Rent 82,000

Step 2: If actual rent is more than expected rent than actual rent otherwise expected rent 84,000

Step 3: Decline due to vacancy in Expected Rent (i.e. Expected Rent minus Loss due to vacancy 14,000
but not less than actual rent received)

Gross Annual Value 68,000

Where property is self-occupied / unoccupied [Section 23(2)]

Where the property consists of a house or part of a house in the occupation of the owner for his own residence,
and is not actually let during any part of the previous year and no other benefit is derived therefrom by the
owner, the annual value of such a house or part of the house shall be taken to be nil. The only deduction
available in respect of such house is towards interest on borrowed capital in terms of Section 24(1)(vi) but
subject to a ceiling of Rs. 30,000 or Rs. 2,00,000 as the case may be.. In other words, to this extent there could
be a loss from such house.
144 EP-TL

Concession for two Houses only:

Where the assessee has occupied more than two houses for the purposes of residence for himself and family
members, he has to make a choice of two houses only in respect of which he would like to claim exemption.
Other self-occupied houses will be treated as if they were let out and their annual value will be determined in
the same manner as we have discussed in the case of let out property.
ü Annual Value would be taken as Nil
ü It is imperative that the property is self-occupied OR unoccupied for the whole year
ü This benefit is for two houses
ü This benefit is for Individual / HUF only
ü No deduction is allowed for Municipal Taxes for such property
Illustration 6 :
Mr. R owns a house which uses for residential purposes throughout the previous year 2019-20. Municipal Value:
Rs. 2,40,000. Fair Rent: Rs. 3,00,000. Compute income from house property assuming following expenditure
are incurred by him:
Municipal taxes paid: Rs. 15,000
Repairs: Rs. 12,000
Depreciation: Rs. 10,000
Interest on borrowed capital : Rs. 2,00,000 (loan taken on 1.1.2004). House was purchased on 1.5.2005.
Solution :
Income from House Property:
Net Annual Value Nil
Less : Interest on borrowed capital 2,00,000
(lower of actual interest or 2,00,000; as conditions are satisfied)
Loss from House Property (2,00,000)

Where the property is partly let out and partly self-occupied during the PY [Section 23(3)]
(a) Property let out partially:
When a portion of the house is self-occupied for the full year and a portion is self-occupied for whole year, the
annual value of the house shall be determined as under:
(i) From the full annual value of the house the proportionate annual value for self-occupied portion for the
whole year shall be deducted.
(ii) The balance under (i) shall be the annual value for let out portion for a part of the year.
Illustration 7 :
Mr. R. owns a house. The Municipal value of the house is Rs. 50,000. He paid Rs. 8,000 as local taxes during
the year. He uses this house for his residential purposes but lets out half of the house @ Rs. 3,000 p.m.
Compute the annual value of the house.
 Lesson 4 n Part II – Income under the head House Property 145

Solution :
Rs.
Gross Annual rent or Municipal valuation (higher) 72,000
Less : Local taxes paid 8,000
Net Annual value of House Property 64,000
Less : Half of annual value regarding self occupied portion for the whole year 32,000
Net Annual Value of let out portion 16,000
(b) House let out during any part of the previous year and self occupied for the remaining part of the
year:
In this case the benefit of Section 23(2) is not available and the income will be computed as if the property is
let out.

Illustration 8 :
M is the owner of a house. The municipal value of the house is Rs. 40,000. He paid Rs. 8,000 as local taxes
during the year. He was using this house for his residential purposes but let out w.e.f. 1.1.2020 @ Rs. 4,000
p.m. Compute the annual value of the house.

Solution
Rs.

Gross annual value  Actual rent or Expected Rent (whichever is higher) 48,000
Less : Local taxes 8,000
Net Annual value of the house 40,000
(No benefit shall be given for self occupied period as the house did not remain vacant during
the previous year)
Note: If fair rent is not gives, then assume actual rent as fair rent.
(c) Self-occupied House remaining vacant :
If the assessee has reserved any two houses (owned by him) for his residence or he is the owner of two
houses which is meant for his own residence but could not be occupied by him for residential purposes in the
previous year owing to the fact that he had to live at some other place in a house not belonging to him, then
he can claim non-occupation or vacancy allowance during the previous year for the period during which house
remained vacant. The reason for his living at a different place might be for business or professional purposes
or for a salaried employee due to transfer etc. The annual value of the house, which remained vacant in these
circumstances, shall be nil.
The above mentioned concession will be granted to the assessee only if he has neither let out the said house
nor has derived any benefit from it during the period for which it remained vacant. Only deduction for interest on
borrowed capital upto a maximum of Rs. 2,00,000 is allowed if following conditions are satisfied:-
1. Capital is borrowed for Purchase/Construction of property;
2. Capital borrowed on or after the 1st day of April 1999 and such acquisition or construction is completed
within five years( 3 years up-to assessment year 16-17) from the end of the financial year in which
capital was borrowed.
If any of above conditions are not met then maximum deduction allowed shall be limited to Rs. 30,000 only.
146 EP-TL

Deemed to be let-out property [Section 23(4)]

ü Assessee given the choice of any two houses to be construed as self-occupied and for that the Annual
Value would be NIL
ü For others, they would be treated as deemed to be let out
ü The assessee is allowed by the Income Tax Act; the flexibility to change the option to suit his needs /
benefits
ü In such as case, therefore, the Expected Rent becomes the Gross Annual Value
ü Municipal Taxes paid by the owner for the whole year allowed as a deduction

Notional income from house property held as stock in trade [Section 23(5) w.e.f. AY 2018-19]
Annual value of house property held by a person as stock in trade shall be taken as NIL if following conditions
are satisfied:
(a) The Property (consisting of buildings or land appurtenant thereto) is held as stock in trade by the owner
of the property;
(b) The property (or any part of property) is not let out during whole or any part of the previous year.
Above benefit/concession is available only for 2 years from the end of the financial year in which certificate of
completion of construction of the property is obtained from the competent Authority.

DEDUCTIONS FROM NET ANNUAL VALUE (SECTION 24)

Standard Deduction: 30% of Net Annual Value
a. This is not available when the Annual Value is NIL
b. This is a flat deduction irrespective of the actual expenditure incurred
Interest on Borrowed Capital
a. Interest on borrowed capital for purchase/construction/repair/renewal / re-construction is allowed as a
deduction from gross annual value.
b. Pre-construction period interest is also allowed as a deduction. Pre-construction period refers to the
period starting from the date of taking of loan and ending with the end of financial year immediately
preceding the previous year in which construction is completed (or the date of repayment of loan;
whichever is earlier). This can be claimed for a period of 5 equal installments starting from the year of
acquisition / completion of construction.
c. No deduction shall be made under the second proviso unless the assessee furnishes a certificate,
from the person to whom any interest is payable on the capital borrowed, specifying the amount of
interest payable by the assessee for the purpose of such acquisition or construction of the property, or,
conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan.

Summary on Allowability
Let out / Deemed to be let out property
1) Standard deduction of 30% of NAV is fully allowed [Section 24(a)]
2) Interest on borrowed capital is fully allowed [Section 24(b)]
 Lesson 4 n Part II – Income under the head House Property 147

Self-occupied properties
1) Since the Annual Value is nil, there is no Standard deduction available
2) In case the capital is borrowed
a. for repairs / renewals / reconstruction, the maximum allowable deduction on account of interest is
limited to INR 30000
b. for acquisition / construction, the deduction would depend on whether the loan was taken prior to
1.4.99 or later
i. In case capital borrowed prior to 1.4.99; the maximum allowable deduction on account of
interest is limited to INR 30000
ii. In case capital borrowed post 1.4.99; as long as the acquisition / construction was completed
within 5 years from the end of the FY in which the capital was borrowed, and the assessee
is in possession of a certificate on interest payable from the lender, the maximum allowable
deduction on account of interest is limited to INR 200,000.
Where the assessee has opted for two houses to be treated as self occupied, the combined total
deduction of the amount of interest given above shall in aggregate remain maximum to Rs. 30,000 or
Rs. 2,00,000 as the case may be.

Treatment of Unrealised Rent

Unrealised rent can be reduced from the actual rent received / receivable, if it isn’t capable of being realised,
if the tenancy is bonafide, the defaulting tenant has either vacated or steps are in progress to compel him to
vacate, that he isn’t occupying any other property of the assessee.

Summary of computation of income from house property

A) COMPUTATION OF INCOME IN CASE OF LET OUT PROPERTY
GROSS ANNUAL VALUE XXX
LESS:- DEDUCTION U/S 23(1) FOR MUNICIPAL TAXES XXX
(to the extent actually paid and borne by the owner during previous year)
NET ANNUAL VALUE XXX
LESS:- STANDARD DEDUCTION U/S 24(a)-@ 30% OF NAV XXX
DEDUCTION FOR INTEREST ON BORROWED CAPITAL U/S 24(b) XXX
INCOME FROM HOUSE PROPERTY XXX
B) COMPUTATION OF INCOME IN CASE OF SELF OCCUPIED PROPERTY
GROSS ANNUAL VALUE NIL
LESS: DEDUCTION FOR MUNICIPAL TAXES NIL
(even if paid and borne by the owner during previous year)
NET ANNUAL VALUE NIL
LESS: DEDUCTION U/S 24(a) NIL
LESS: DEDUCTION U/S 24(b) FOR INTEREST ON BORROWED
CAPITAL ACTUAL
INCOME/LOSS FROM HOUSE PROPERTY XXX
148 EP-TL

Illustration 9 :
Nikhil has a property whose Municipal Valuation is INR 500,000 pa. The Fair Rent of the property is INR
400,000 pa and the Standard Rent fixed by Rent Control Act is 450,000 pa. The property was let out for a Rent
of INR 35000 pm and the tenant vacated the same on 31st Jan 2020. Unrealised Rent was INR 35000 and the
conditions are fulfilled with respect to the same. He paid municipal taxes worth INR 15000 during the PY and the
Interest on Loan was INR 60000. Please exhibit the computation and advise the income from house property.
Computation of GAV INR INR
ER
Higher of:
1) Fair Rent 4,00,000
2) Muncipal Value 5,00,000
Limited to Standard Rent
4,50,000
AR 3,50,000
Less: Unrealised Rent 35,000

3,15,000
GAV (as falls Vacant) 3,15,000
Less: Municipal Taxes paid by the owner during the PY 15,000
NAV 3,00,000
Less: Deductions u/s 24
30% NAV 90,000
Interest on borrowed capital 60,000
1,50,000
Income from House Property 1,50,000
Illustration10 :
Smt. Shanti Devi has a house property in Kolkata. The Municipal Valuation for the same is INR 10,00,000. The
Fair Rental for the property is INR 750,000. The Standard Rent per the Rent Control Act is INR 800,000. She let
out the property until 30th Nov’19 for a monthly rent of Rs. 75,000 per month. Thereafter, the tenant vacated the
property and she used the house for self-occupation. Rent for the months of Oct & Nov 19 couldn’t be realised
despite all efforts, and all the conditions for unrealised rent were satisfied. She paid Municipal Taxes @ 12%
during the year. She also paid Interest of INR 25,000 during the year for amount borrowed for repairs. Compute
the Income from House Property for AY 2020-21.
Solution :
Computation of GAV INR INR
ER
Higher of:
1) Fair Rent 7,50,000
 Lesson 4 n Part II – Income under the head House Property 149

2) Muncipal Value 10,00,000

Limited to Standard Rent 8,00,000
Annual Rent 6,00,000
Less: Unrealised Rent 1,50,000

4,50,000
GAV (partly let out and partly self occupied) 8,00,000
Less: Municipal Taxes paid by the owner during the PY 1,20,000
NAV 6,80,000
Less: Deductions u/s 24
30% NAV 2,04,000
Interest on borrowed capital 25,000 2,29,000
Income from House Property 4,51,000

Inadmissible Deductions (Section 25)

•Interest under the Act, which is payable outside India, shall not be allowed as a
deduction, if tax has not been deducted from such Interest and there is no
person in India, who could be treated as an agent.

Treatment of Unrealized Rent / Arrear of Rent (Section 25A)

•Arrears of Rent and the unrealised rent received subsequently from a tenant by
an assessee, shall be deemed to be the income from House Property in the FY
in which such rental is received and shall be included in the Income from
House Property of that year; irrespective of whether he is the owner of the
property any more or not, in that FY.
•30% of such arrears or unrealised rent received subsequently is allowed as a
deduction.

Income from Co-Owned Property (Section 26)

•The share of each co-owner should be determined in accordance with Section 22 –

25 and included in the respective individual assessments
•In a scenario, where the house property owned by co-owners is self-occupied by
them, the AV for each of them will be construed as NIL. Each Co-Owner shall be
allowed a deduction of INR 30000 / INR 200,000 as the case may be vis-à-vis
Interest on Borrowed Capital.
•In a scenario, where the house property owned by the co-owners is let out, the
income from the property will be computed as if the property is owned by one
owner, and thereafter such computed income would be apportioned amongst each
of them as per their respective share.
150 EP-TL

DEEMED OWNERSHIP [SECTION 27]

Deemed Ownership (Section 27)

House property is transferred House property is transferred by an

by an individual to his / her individual to his / her minor child,
spouse, otherwise than for otherwise than for adequate
adequate consideration consideration

The transferor will be the The transferor will be the

deemed owner. deemed owner.

Exception: In case the Exception: In case the

transfer is necessitated owing transfer is to a minor married
to a separation between, daughter, then, the transferor
them, the transferee will be will not be the deemed owner.
the deemed owner

• The holder of an impartible estate, i.e., one that is not legally divisible, shall
be deemed to be the owner of all the properties in the estate.
• A member of a co-operative society, or any AOP, to whom a building is
allotted, under a house building scheme, shall be deemed to be the owner of
the portion so allotted.
• A person who acquires rights with respect to a property, by virtue of transfer
vide lease of > 12 years, shall be deemed to be the owner of the property.

HOUSE PROPERTY INCOMES – EXEMPTED FROM TAX

There are certain cases where the income from the house property are tax-free. They are neither taxable nor
included in the total income for taxation. The incomes that are exempted from tax are described below.
1. The revenue generated from the buildings in and around the agricultural land that forms a part of
agricultural income is exempted from tax as per section 10(1). Eg. Renting or leasing of a farmhouse,
storehouse.
2. Income from property confined to local authorities is tax-exempted as per section 10(20).
 Lesson 4 n Part II – Income under the head House Property 151

3. House property income of a political party is free from tax under section 13A.
4. Revenue earned from a property belonging to an approved scientific research association is exempted
from tax under section 10(21).
5. Property income of educational organizations, medical institutions are free from tax as per section
10(23C).
6. Income from property subjected to charitable or religious purpose is tax-exempted as per section 11.
7. Property income of Certified trade union is exempted from tax under section 10(24).
8. The annual value of one palace possessed by an ex-ruler of Indian states is free from tax as per section
10(19A) where other palaces come under taxation.
9. The annual value of two self-occupied property for own residence is exempted from tax under section
23(2).
10. Income from property used for one’s own business or profession is also tax-exempted under section
22.
Illustration 11 :
Two sisters, Seema and Rashmi, are co-owners of a house property, with 50% share each in the property. The
property was constructed prior to 1st April 1999. The property has 7 equal units and is situated in Bangalore.
During the FY 2019-20, each co-owner occupied one unit each and the balance were let out @ a rental of INR
20000 per unit per month. The Municipal Valuation (MV) was INR 7,00,000 and the Municipal Taxes were @
10% of the MV. Interest payable on loan taken for construction was INR 400,000. One of the let-out units was
vacant for 6 months in the year.
Compute the Income from House Property for each of the sisters.
Solutions :
Computation of GAV INR INR
Estimated Rent
Higher of:
1) Fair Rent -
2) Municipal Value 5,00,000
Limited to Standard Rent 5,00,000
Annual Rent 12,00,000
Less: Unrealised Rent 1,20,000
10,80,000
GAV (partly let out and partly self occupied) 10,80,000
Less: Municipal Taxes paid by the owner during the PY 50,000
NAV 10,30,000
Less: Deductions u/s 24
30% NAV 3,09,000
Interest on borrowed capital 2,85,714
152 EP-TL

5,94,714
Income from House Property 4,35,286
Share of each Co-owner 2,17,643
Loss from House Property (self occupied portions) -30,000
Income from House Property (each co-owner) 1,87,643
Notes:
1) Observe that the computation has been done for the 5 let out and 2 self-occupied portions separately
and commensurately
2) Note that the Interest on Borrowed Capital for let out proportions is fully allowable as deduction without
any cap
3) Note that the AV for the Self Occupied Portion is NIL and the Interest on Borrowed Capital is restricted
to INR 30,000 for each co-owner

Illustration 12:
Mr. X is the owner of four houses. The following particulars are available:
House 1 House 2 House 3 House 4
Municipal valuation 16,000 20,000 24,000 5,600
Rent (Actual) — 14,000 20,000 6,800
Municipal taxes 400 1,000 1,200 300
Repairs and collection charges 200 2,500 1,040 460
Interest on mortgage — — — 1,000
Ground rent — 100 — 60
Fire premium 140 — 200 —
Annual charges — — 360 —
House No. 1 is self-occupied.
House No. 2 is let out for business, construction was completed on 1.3.91 and consists of two residential units.
House No. 3 is 3/4 used for own business 1/4 let out to the manager of the business.
House No. 4 is let out for residential purposes.
His other income is Rs. 30,000. Find out the income of X from house property for the assessment year 2018-19.

Solution:
House No. 1
Rs.
Municipal valuation 16,000
Annual value deemed to be NIL
House No. 2
 Lesson 4 n Part II – Income under the head House Property 153

Fair rental value 20,000

Less: Municipal taxes 1,000
Net annual value 19,000
Less: 30% of Net Annual Value 5,700
13,300
House No. 3
Since the house is used for own business, the income from this house is not taxable under the head ‘Income
from house property’ but will be assessed under ‘Profit and gains of business or profession’. 1/4 of the house
occupied by the Manager is presumed to be incidental to the business and hence not assessable under the
head ‘Income from house property’.
House No. 4
Rent Received 6,800
Less: Municipal taxes 300
Net annual Value 6,500
Less: 30% of Net Annual Value 1,950
4,550
Income from House Property: Rs. NIL + Rs. 13,300 + Rs. 4,550 = Rs. 17,850. It is presumed that House No. 4
has not been mortgaged for purposes of acquiring or repairs on the house property.
Illustration 13 :
Mr. Lal is the owner of a house property. Its municipal valuation is Rs. 80,000. It has been let out for Rs.
1,20,000 p.a. The local taxes payable by the owner amount to Rs. 16,000 but as per agreement between the
tenant and the landlord, the tenant has paid the amount direct to the municipality. The landlord, however, bears
the following expenses on tenant’s amenities:
Rs.
Extension of water connection 3,000
Water charges 1,500
Lift maintenance 1,500
Salary of gardener 1,800
Lighting of stairs 1,200
Maintenance of swimming pool 750
The landlord claims the following deductions:
Repairs and Collection charges 7,500
Land revenue paid 1,500
Compute the taxable income from the house property for the assessment year 2020-21.
Solution :
Computation of income from house property for the assessment year 2020-21
Gross annual value: to be higher of the following:
154 EP-TL

(a) Municipal valuation Rs. 80,000

or
(b) De facto rent (1,20,000 less value of amenities) 1,20,000
Rent Received:
Less: Value of the amenities provided by the assessee:
(i) Extension of water connection not deductible as it is capital expenditure –
(ii) Water charges 1500
(iii) Lift maintenance 1500
(iv) Salary of gardener 1,800
(v) Lighting of stairs 1,200
(vi) Maintenance of swimming pool 750
(6,750)
Gross annual value 1,13,250
Less: Local tax Rs.16,000:
No deduction is permissible as the taxes have been paid by the tenant
Net annual value 1,13,250
Less: Standard deduction from net annual value:
30% of Net Annual Value 33,975
Income from house property 79,275
Illustration 14 :
For the assessment year 2020-21 Sonu submits the following information:
Income from business (speculative) Rs. 40,000
Property Income House I House II
Rs. Rs.
Municipal valuation 35,000 80,000
Rent received 38,000 68,000
Municipal taxes paid by tenant 3,000 4,000
Repairs paid by tenant 500 18,000
Land revenue paid 2,000 16,000
Insurance premium paid 500 2,000
Interest on borrowed capital for payment of municipal tax of 200 400
house property
Nature of occupation Let out for Let out for
residence business
 Lesson 4 n Part II – Income under the head House Property 155

Date of completion of construction 1.4.1996 1.7.1994

Determine the taxable income of Sonu for the assessment year 2020-21.

Solution:
Computation of Taxable Income of Sonu for Assessment Year 2020-21
House I
Gross Annual Value 38000
Less: Municipal Taxes - not deductible since paid by tenant NIL
Net Annual Value 38000
Less: 30% of Net Annual Value Taxable Income 11,400
26,600
House II
Gross Annual Value 80000
Less: Taxes - not deductible, paid by tenant NIL
Net Annual Value 80,000
Less: 30% of Net Annual Value Taxable Income 24,000
56,000
Total Income = Rs. 26,600 + Rs. 56,000 + Rs. 40,000 = Rs. 1,22,600.
Note: Interest on borrowed capital for payment of municipal tax is not allowed as deduction under Section 24
of the Act.

CASE LAW
1. Would income from letting out of properties by a company, whose main object as per its
memorandum of association is to acquire and let out properties, be taxable as its business income,
or as income from house property, considering the fact that the entire income of the company as per
its return of income was only from letting out of properties?
Chennai Properties and Investments Ltd. v. CIT (2015) (SC)
The Supreme Court opined that the judgment in Karanpura Development Co. Ltd.’s case squarely applied
to the facts of the present case, where letting of the properties is in fact the business of the assessee. The
main objective of the company as per its memorandum of association is to acquire and hold properties in
Chennai and let out these properties. Therefore, holding of the properties and earning income by letting out
these properties is the main objective of the company. Further, in the return of income filed by the company
and accepted by the AO, the entire income of the company comprised of income from letting out of such
properties. The Supreme Court, accordingly, held that the assessee had rightly disclosed the income derived
from letting out of such properties under the head “Profits and gains of business or profession”.
2. Income from letting of warehouse whether would constitute Business or Property Income
Nutan Warehousing Company Limited v. Dy. Commissioner of Income Tax [2010] [326 ITR 94, Mumbai]
The question before the Bombay High Court was whether the income from warehousing activity received
by the assessee was assessable as “Income from House Property” or “Income from Business”, the High
156 EP-TL

Court held that the question has to be resolved on the basis of the wellsettled decisions laid down by the
Law in decided cases. The primary object of the assessee while exploiting the property is material. If the
dominant intention to exploit commercial asset by carrying on a commercial activity, the income would be
treated as Income from Business and whether letting out of the property constitutes a dominant aspect of
the transaction or whether it was subservient to the main business of the assessee.
On the facts of the case before the Lordship it was found that the transactions of the warehousing agreements
were not considered by the Tribunal. Merely styling an agreement as warehousing agreement would not be
conclusive of the nature of the transaction. The question that is to be answered by the Tribunal, it was noted,
whether the transaction was a bare letting out of the asset or whether the assessee was carrying on a
commercial activity involving warehousing operations. The matter was remanded to consider these aspects.
What is to be noted from the aforesaid decisions is that the transactions of the leasing deed and also the
dominant intention of the assessee was to exploit commercial asset by carrying out commercial activity. If
the answer is in the positive, it is to be assessed as business income subject to examination of the terms of
warehousing agreements.
Please also refer to the decision of the Madras High Court in C.I.T. v. Indian Warehousing Industries Ltd. and
also the judgement of the Karnataka High Court in C.I.T v. Karnataka State Warehousing Corporation20.
3. Can benefit of self-occupation of house property under section 23(2) be denied to a HUF on the
ground that it, being a fictional entity, cannot occupy a house property?
CIT v. Hariprasad Bhojnagarwala (2012) (Guj.)
The Gujarat High Court observed that a firm, which is a fictional entity, cannot physically reside in a house
property and therefore a firm cannot claim the benefit of this provision, which is available to an individual
owner who can actually occupy the house. However, the HUF is a group of individuals related to each
other i.e., a family comprising of a group of natural persons. The said family can reside in the house, which
belongs to the HUF. Since a HUF cannot consist of artificial persons, it cannot be said to be a fictional entity.
Also, it was observed that since singular includes plural, the word “owner” would include “owners” and the
words “his own” used in section 23(2) would include “their own”. Therefore, the Court held that the HUF is
entitled to claim benefit of self-occupation of house property under section 23(2).

LESSON ROUND UP
– Charging Section: Section 22 of the Act provides that the annual value of property consisting of any
buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions
of such property as he may occupy for the purposes of any business or profession carried on by him,
the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head
Income from House Property”.
– Deemed Owner: As per section 27, the following persons though not the legal owners of a property
are deemed to be the owners for the purposes of sections 22 to 26:
(a) Transfer to a spouse or minor child
(b) Holder of an impartible estate
(c) Member of a co-operative society
(d) Person in possession of a property
(e) Person having right in a property for a period not less than 12 years
– The measure of charging income-tax under this head is the annual value of the property, i.e., the
 Lesson 4 n Part II – Income under the head House Property 157

inherent capacity of a building to yield income. The expression ‘annual value’ has been defined in
Section 23(1) of the Income-tax Act as, the annual value of any property shall be deemed to be:
– the sum for which the property might reasonably be expected to let from year to year; or
– where the property or any part of the property is let and the actual rent received or receivable
by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so
received or receivable; or
– where the property or any part of the property is let and was vacant during the whole or any part
of the previous year and owing to such vacancy the actual rent received or receivable by the
owner in respect thereof is less than the sum referred to in clause (a), the amount so received or
receivable.
– Gross annual value shall be higher of
(a) Expected Rent
(b) Actual rent received or receivable.
The higher of Municipal value and fair rental value shall be Expected rent. However, expected rent
shall not exceed the Standard rent.
– Net annual value shall be computed in the following manner:
– Determine the Gross Annual Value
– Deduct municipal tax actually paid by the owner during the previous year from the Gross Annual
Value.
– Deduction from Annual Value (Section 24): W.e.f. Assessment Year 2002-03, income chargeable under
the head “Income from house property” shall be computed after making the following deductions,
namely:
– Standard deduction: a sum equal to 30% of the annual value;
– Interest on borrowed capital: where the property has been acquired, constructed, repaired, renewed
or reconstructed with borrowed capital, the amount of any interest payable on such capital. The
interest on borrowed money pertaining to pre-construction period is available in 5 equal installments
commencing from the previous year in which house is acquired or constructed. For this purpose
the pre-construction period means the period commencing on the date of borrowing and ending on
31st March immediately prior to the date of completion of construction/date of acquisition or date of
repayment of loan, whichever is earlier. Interest for current year is deductible upto Rs. 30,000/ Rs.
2,00,000 as the case may be.

SELF-TEST QUESTIONS

Multiple Choice Questions (MCQs)

1. The Gross Annual Value is the higher of Actual Rent and?
a) Municipal Valuation
b) Fair Rental Value
c) Standard Rent
d) Expected Rent
Answer: d
158 EP-TL

2. Expected Rent is always the higher of Fair Rental Value and Municipal Valuation?
a) TRUE
b) True but limited to Standard Rent
c) True but limited to INR 250,000
d) FALSE
Answer: b
3. Standard Rent is the rent fetched by a similar property in the neighbourhood?
a) Yes
b) Yes, but not limited to neighbourhood
c) Yes, but with a Cap
d) No
Answer: d
4. If the assessee has more than two house that is self-occupied, the choice of the houses that should be
construed as self-occupied for the others to be considered as deemed to be let out lies with?
a) Assessing Officer
b) Assessee
c) Either
d) Neither
Answer: b
5. Section 24 (a) prescribes the standard deduction from NAV of a sum equal to?
a) 33% of NAV
b) 30% of NAV
c) 1/3rd of NAV
d) Actual cost of repairs
Answer: b

SUGGESTED READINGS
1. Direct Taxes Law and Practice
Author : Dr. Vinod K. Singhania & Dr. Kapil Singhania
Publisher : Taxmann
Year : 2019
Edition : 2019
2. Direct Taxes Ready Reckoner with Tax Planning
Author : Dr. Girish Ahuja & Dr. Ravi Gupta
Publisher : Wloters Kluwer
Year : 2019
Edition : 20th Edition
 Lesson 4
Lesson 4 n Part III – Profit and Gains from Business / Profession 161

Part III – Profit and Gains from

Business / Profession

LESSON OUTLINE
LEARNING OBJECTIVES
– ‘Business’ or ‘Profession’ This lesson deals with the provisions for
– Income Chargeable to Tax under the head computation of Income from Business and
Business or Profession (Section 28) Profession. The provisions for computation of
Income from Business and Profession are covered
– Profits and Losses of Speculation Business
under sections 28 to 44D. Section 28 defines the
– Computation of Profits of Business or scope of income which can be taxed under this
Profession head. Expenses expressly allowed as deductions
by the Act are listed under sections 30 to 37,
– Admissible Deductions
whereas sections 40 and 40A enumerate those
– Expenses Restricted/Disallowed expenses which are expressly disallowed while
– Deemed Profits computing taxable income.

– Special Provision for Deductions and At the end of this lesson, you will learn -
Computing of Profits and Gains – what are the constituent of business or
– Maintenance of Accounts (Section 44AA) profession.

– Compulsory Audit of Accounts of Certain – which incomes are chargeable under this
Persons Carrying on Business or Profession head.

– Presumptive Basis Taxation on Business – which are admissible/inadmissible

expenses while computing the income
– Presumptive Basis Taxation on from business and profession.
Professionals
– when are certain receipts deemed to be
– Question and Answers income chargeable to tax under this head.
– Annexure – which are the deductions allowable on
– Case Law actual payment basis.

– LESSON ROUND UP – which assessees are required to

compulsorily maintain books of account.
– SELF TEST QUESTIONS
– when is audit of accounts compulsory.
– who are the assessees to whom
presumptive tax provisions apply.

161
162 EP-TL

BUSINESS’ OR ‘PROFESSION’
The meaning of the expression ‘Business, has been defined in Section 2(13) of the Income-tax Act. According
to this definition, business includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture.
The concept of business presupposes the carrying on of any activity for profit. The definition of business given
in the Act does not make it essential for any taxpayer to carry on his activities constituting business for a
considerable length of time.
The definition of business given in Section 2(13) being an inclusive definition and not being exhaustive, is wide
enough to cover every case of transaction entered into with the idea of earning income.
Example: If a person purchases a piece of land, gets it surveyed, lays down a scheme of development, divides
it into a number of building plots and sells some of the plots from time to time, he would be chargeable to tax
not only on the notional profits made on individual sale of plots but also on the surplus, if any, remaining after
the sale of all plots and after the venture had come to an end.
The expression ‘Profession’ has been defined in Section 2(36) of the Act to include any vocation. In the case
of a profession, the definition given in the Act is very much inadequate since it does not clearly specify what
activities constitute profession and what activities do not.
According to the generally accepted principles, the meaning of the term ‘profession’ involves the concept of an
occupation requiring either intellectual skill or manual skill controlled and directed by the intellectual skill of the
operator.
For instance, an auditor carrying on his practice, the lawyer or a doctor, a painter, an actor, an architect or
sculptor, would be persons carrying on a profession and not a business.
The common feature in the case of both profession as well as business is that the object of carrying them out
is to derive income or to make profit. The distinction between business, profession and vocation is not however
material because income from all these activities is taxable under the same head.

INCOME CHARGEABLE TO TAX UNDER THE HEAD BUSINESS OR PROFESSION (SECTION

28)
The scope of income chargeable under this head is covered by Section 28 of the Act which lays down the
following:
(i) the profits and gains of any business or profession which was carried on by the assessee at
any time during the previous year.
(ii) any compensation received or receivable by any person, by whatever name called—
(a) For managing the affairs of an Indian company or any other company or in connection with the
termination of his agreement or the modification of the terms and conditions relating thereto.
(b) For holding an agency in India for any part of the activities relating to the business of any other
person or in connection with the termination of the agency or the modification of the terms and
conditions relating thereto.
(c) For or in connection with the vesting in the Government, or in any corporation owned or controlled
by the Government, of the management of any property or business.
(d) Any compensation received or receivable by any person at or in connection with the termination
or the modification of the terms and conditions, whether revenue or capital of any contract
relating to his business. (inserted by the Finance Act, 2018)
 Lesson 4 n Part III – Profit and Gains from Business / Profession 163

(iii) income derived by a trade, professional or similar association from specific services performed for its
members. This is an exception to the general principle of mutuality that no one can make profit out of
himself. Therefore any surplus arising to the mutual associations such as Labour Welfare Association,
Chamber of Commerce etc. by performing specific services to its members is deemed as income
earned as carrying on business in respect of these services and accordingly chargeable to tax.
(iv) Export incentives : Profits on sale of a Import entitlement licence granted under the Imports (Control)
Order. Cash compensatory assistance against export and Duty Drawback of Customs and Central
excise Duties. Profit on the transfer of the Duty Entitlement Pass Book Scheme. Profit on the transfer
of the Duty Free Replenishment Certificate.
(iv) the value of any benefit or perquisite, whether convertible into money or not arising from business or
profession. For Example value of a rent free accommodation secured by an assessee from a company
in consideration of his professional services to the company will be assessable in the hands of the
assessee.
(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received
by, a partner of a firm from such firm to the extent under section 40(b). For Example: A firm pays interest
to a partner at 18% simple interest p.a. The allowable rate of interest is 12% p.a. Hence the excess 6%
paid will be disallowed in the hands of the firm. Since the excess interest has suffered tax in the hands
of the firm, the same will not be taxed in the hands of the partner. The interest taxable in the hands of
the partner shall be 12% only.
(vi) any sum, whether received or receivable, in cash or kind, under an agreement for –
(a) not carrying out any activity in relation to any business or profession, provided it is not taxable as
capital gains. Example Non compete Fees.
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise etc.
(vii) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on
such policy.
(viii) the fair market value of inventory as on the date on which it is converted into, or treated as, a capital
asset determined in the prescribed manner. (inserted by the Finance Act, 2018)
(ix) any sum received from transfer or destruction of any capital asset (other than land or goodwill or
financial instrument) whose cost has been allowed as a deduction under section 35AD.

SPECULATION BUSINESS
Section 43(5) defines the expression “speculative transaction” as “a transaction in which a contract for the
purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise
than by the actual delivery or transfer of the commodity or scrips”. Where any part of the business of a company
consists in the purchase and sale of the shares of other companies, such a company shall be deemed to be
carrying on speculation business to the extent to which the business consists of the purchase and sale of such
shares.
However as per the Explanation to Section 73, this deeming provision does not apply to the following
companies:
a. Where a company whose gross total income consists mainly of income which is chargeable under the
heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other
sources”, or
b. A company, the principal business of which is:
212 EP-TL

ANNEXURE
Rates at which Depreciation shall be allowable from Assessment Year 2006-2007 Onwards
APPENDIX I
[See rule 5]
Table of Rates at which Depreciation is Admissible

Block of assets Depreciation

allowance as
percentage of
written down
value
1 2

PART A

TANGIBLE ASSETS

I. BUILDING [See Notes 1 to 4 below the Table]

(1) Buildings which are used mainly for residential purposes except hotels and boarding 5
houses
(2) Buildings other than those used mainly for residential purposes and not covered by 10
sub-items (1) above and (3) below
(3) Buildings acquired on or after the 1st day of September, 2002 for installing machinery 40
and plant forming part of water supply project or water treatment system and which is
put to use for the purpose of business of providing infrastructure facilities under clause
(I) of sub-section (4) of section 80-IA
(4) Purely temporary erections such as wooden structures 40

II. FURNITURE AND FITTINGS

Furniture and fittings including electrical fittings [See Note 5 below the Table] 10

III. MACHINERY AND PLANT

(1) Machinery and plant other than those covered by sub-items (2), (3) and (8) below 15

(2) Motor cars, other than those used in a business of running them on hire, acquired or 15
put to use on or after the 1st day of April, 1990
(3) (i) Aeroplanes - Aeroengines 40

(ii) Motor buses, motor lorries and motor taxis used in a business of running them on 30
hire
(iii) Commercial vehicle which is acquired by the assessee on or after the 1st day of 40
October, 1998, but before the 1st day of April, 1999 and is put to use for any period before
the 1st day of April, 1999 for the purposes of business or profession in accordance with
the third proviso to clause (ii) of sub-section (1) of section 32 [see Note 6 below the
Table]
 Lesson 4 n Part III – Profit and Gains from Business / Profession 213

(iv) New commercial vehicle which is acquired on or after the 1st day of October, 1998, 40
but before the 1st day of April, 1999 in replacement of condemned vehicle of over 15
years of age and is put to use for any period before the 1st day of April, 1999 for the
purposes of business or profession in accordance with the third proviso to clause (ii) of
sub-section (1) of section 32 [see Note 6 below the Table]
(v) New commercial vehicle which is acquired on or after the 1st day of April, 1999 but 40
before the 1st day of April, 2000 in replacement of condemned vehicle of over 15 years
of age and is put to use before the 1st day of April, 2000 for the purpose of business
or profession in accordance with the second proviso to clause (ii) of sub-section (1) of
section 32 [see Note 6 below the Table]
(vi) New commercial vehicle which is acquired on or after the 1st day of April, 2001 but 40
before the 1st day of April, 2002 and is put to use before the 1st day of April, 2002 for
the purposes of business or profession [see Note 6 below the Table]
(vii) Moulds used in rubber and plastic goods factories 30

(viii) Air pollution control equipment, being 40

(a) Electrostatic precipitation systems

(b) Felt-filter systems

(c) Dust collector systems

(d) Scrubber-counter current/venturi/packed-bed/ cyclonic scrubbers

(e) Ash handling system and evacuation system

(ix) Water pollution control equipment, being— 40

(a) Mechanical screen systems.

(b) Aerated detritus chambers (including air compressor)

(c) Mechanically skimmed oil and grease removal systems

(d) Chemical feed systems and flash mixing equipment

(e) Mechanical flocculators and mechanical reactors

(f) Diffused air/mechanically aerated activated sludge systems

(g) Aerated lagoon systems

(h) Biofilters

(i) Methane-recovery anaerobic digester systems

(j) Air floatation systems

(k) Air/steam stripping systems

(l) Urea Hydrolysis systems

(m) Marine outfall systems

214 EP-TL

(n) Centrifuge for dewatering sludge

(o) Rotating biological contractor or bio-disc

(p) Lon exchange resin column

(q) Activated carbon column

(x) (a) Solidwaste, control equipments being, caustic/ lime/chrome/ mineral/cryolite 40

recovery system
(b) Solidwaste recycling and resource recovery systems

(xi) Machinery and plant, used in semi-conductor industry covering all integrated circuits 30
(ICs) (excluding hybrid integrated circuits) ranging from small scale integration (SSI)
to large scale integration/very large scale integration (LSI/VSLI) as also discrete semi-
conductor devices such as diodes, transistors, thyristors, triacs, etc., other than those
covered by entries (viii), (ix) and (x) of this sub-item and sub-item (8) below.
(xia) Life saving medical equipment, being 40

(a) D.C. Defibrillators for internal use and pace makers

(b) Haemodialysors

(c) Heart Lung Machine

(d) Cobalt Therapy Unit

(e) Colour Doppler

(f) SPECT Gamma Camera

(g) Vascular Angiography System including Digital substraction Angiography

(h) Ventilator used with anaesthesia apparatus

(i) Magnetic Resonance Imaging System

(j) Surgical Laser

(k) Ventilators other than those used with anaesthesia

(l) Gamma knife

(m) Bone Marrow Transplant Equipment including silastic long standing

intravenous catheters for chemotherapy
(n) Fibre optic endoscopes including, Paediatric resectoscope/audit ,
resectoscope, Peritoneo-scopes, Arthoscope, Microlaryngoscopi Fibreoptic
Flexible Nasal Pharyngo Bronchoscope, Fibreoptic Flexible Laryngo
Brochoscope, Video Laryngo Brochoscope and Video Oesophago Gastroscope,
Stroboscope, Fibreoptic Flexible Oesophago Gastroscope
(o) Laparoscope (single incision)

(4) Containers made of glass or plastic used as re-fills 40

(5) Computers including computer software [see Note 7 below the Table] 40
 Lesson 4 n Part III – Profit and Gains from Business / Profession 215

(6) Machinery and plant, used in weaving, processing and garment sector of textile 40
industry, which is purchased under TUFS on or after the 1st day of April, 2001 but
before the 1st day of April, 2004 and is put to use before the 1st day of April, 2004 [see
Note 8 below the Table]
(7) Machinery and plant, acquired and installed on or after the 1st day of September, 40
2002 in a water supply project or a water treatment system and which is put to use
for the purpose of business of providing infrastructure facility under clause (i) of sub-
section (4) of section 80-IA [see Notes 4 and 9 below the Table]
(8) (i) Wooden parts used in artificial silk manufacturing machinery 40

(ii) Cinematograph films - bulbs of studio lights 40

(iii) Match factories - wooden match frames 40

(iv) Mines and quarries: 40

(a) Tubs, winding ropes, haulage ropes and sand stowing pipes

(b) Safety lamps

(v) Salt works - Salt pans, reservoirs and condensers, etc., made of earthy sandy or 40
clayey material or any other similar material
(vi) Flour mills - Rollers 40

(vii) Iron and steel industry - Rolling mill rolls 40

(vi) Sugar works - Rollers 40

(ix) Energy saving devices, being –

A. Specialised boilers and furnaces:

(a) Ignifluid/fluidized bed boilers

(b) Flameless furnaces and continuous pusher type furnaces

(c) Fluidized bed type heat treatment furnaces 40

(d) High efficiency boilers (thermal efficiency higher than 75 per cent in case of
coal fired and 80 per cent in case of oil/ gas fired boilers)
B. Instrumentation and monitoring system for monitoring energy flows:

(a) Automatic electrical load monitoring systems

(b) Digital heat loss meters

(c) Micro-processor based control systems

(d) Infra-red thermography 40

(e) Meters for measuring heat losses, furnace oil flow, steam flow, electric
energy and power factor meters
216 EP-TL

(f) Maximum demand indicator and clamp on power meters

(g) Exhaust gases analyser

(h) Fuel oil pump test bench

C. Waste heat recovery equipment

(a) Economizers and feeds water heaters

(b) Recuperates and air pre-heaters 40

(c) Heat pumps

(d) Thermal energy wheel for high and low temperature waste heat recovery

D. Co-generation systems:

(a) Back pressure pass out, controlled extraction, extraction-cum- condensing

turbines for co-generation along with pressure boilers
(b) Vapour absorption refrigeration systems 40

(c) Organic rankine cycle power systems

(d) Low inlet pressure small steam turbines

E. Electrical equipment:

(a) Shunt capacitors and synchronous condenser systems

(b) Automatic power cut off devices (relays) mounted on individual motors

(c) Automatic voltage controller

(d) Power factor controller for AC motors

(e) Solid state devices for controlling motor speeds 40

(f) Thermally energy-efficient stenters (which require 800 or less kilocalories of

heat to evaporate one kilogram of water)
(g) Series compensation equipment

(h) Flexible AC Transmission (FACT) devices - Thyristor controlled series

compensation equipment
(i) Time of Day (TOD) energy meters

(j) Equipment to establish transmission highways for National Power Grid to

facilitate transfer of surplus power of one region to the deficient region
(k) Remote terminal units/intelligent electronic devices, computer hardware/
software, router/bridges, other required equipment and associated
communication systems for supervisory control and data acquisition systems,
energy management systems and distribution management systems for power
transmission systems
(l) Special energy meters for Availability Based Tariff (ABT)
 Lesson 4 n Part III – Profit and Gains from Business / Profession 217

F. Burners:

(a) 0 to 10 per cent excess air burners

(b) Emulsion burners 40

(c) Burners using air with high pre-heat temperature (above 300oC)

G. Other equipment: 40

(a) Wet air oxidation equipment for recovery of chemicals and heat

(b) Mechanical vapour recompressors

(c) Thin film evaporators

(d) Automatic micro-processor based load demand controllers

(e) Coal based producer gas plants

(f) Fluid drives and fluid couplings

(g) Turbo charges/super-charges

(h) Sealed radiation sources for radiation processing plants

(x) Gas cylinders including valves and regulators 40

(xi) Glass manufacturing concerns - Direct fire glass melting furnaces 40

(xii) Mineral oil concerns: 40

(a) Plant used in field operations (above ground) distribution - Returnable

packages
(b) Plant used in field operations (below ground), but not including kerbside
pumps including under ground tanks and fittings used in field operations
(distribution) by mineral oil concerns
(xiii) Renewable energy devices being: 40

(a) Flat plate solar collectors

(b) Concentrating and pipe type solar collectors

(c) Solar cookers

(d) Solar water heaters and systems

(e) Air/gas/fluid heating systems

(f) Solar crop drivers and systems

(g) Solar refrigeration, cold storages and air conditioning systems

(h) Solar steels and desalination systems

(i) Solar power generating systems

218 EP-TL

(j) Solar pumps based on solar-thermal and solar-photovoltaic conversion

(k) Solar-photovoltaic modules and panels for water pumping and other
applications
(l) Wind mills and any specially designed devices which run on wind mills

(m) Any special devices including electric generators and pumps running on
wind energy
(n) Biogas-plant and biogas-engines

(o) Electrically operated vehicles including battery powered or fuel-cell powered

vehicles
(p) Agricultural and municipal waste conversion devices producing energy

(q) Equipment for utilising ocean waste and thermal energy

(r) Machinery and plant used in the manufacture of any of the above sub-items

(9) (i) Books owned by assessees carrying on a profession:

(a) Books, being annual publications 40

(b) Books, other than those covered by entry (a) above 40

(ii) Books owned by assessees carrying on business in running lending libraries 40

IV. SHIPS

(1) Ocean-going ships including dredgers, lugs, barges, survey launches and other 20
similar ships used mainly for dredging purposes and fishing vessels with wooden hull
(2) Vessels ordinarily operating on inland waters, not covered by sub-item (3) below 20

(3) Vessels ordinarily operating on inland waters being speed boats [see Note 10 below 20
the Table]
PART B INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises or any other business 25

or commercial rights of similar nature
Notes:
1. “Buildings” include roads, bridges, culverts, wells and tubewells.
2. A building shall be deemed to be a building used mainly for residential purposes, if the built-up floor
area thereof used for residential purposes is not less than sixty-six and two-third per cent of its total
built-up floor area and shall include any such building in the factory premises.
3. In respect of any structure or work by way of renovation or improvement in or in relation to a building
referred to in Explanation 1 of clause (ii) of sub-section (1) of section 32, the percentage to be applied
will be the percentage specified against sub-item (1) or (2) of item I percentage to be applied will be the
percentage specified against sub-item (1) or (2) of item I as may be appropriate to the class of building
in or in relation to which the renovation or improvement is effected. Where the structure is constructed
or the work is done by way of extension of any such building, the percentage to be applied would be
such percentage as would be appropriate, as if the structure or work constituted a separate building.
4. Water treatment system includes system for desalinisation, demineralisation and purification of water.
 Lesson 4 n Part IV – Income from Capital Gains 225

Lesson 4
Part IV – Income from Capital Gains

LESSON OUTLINE
LEARNING OBJECTIVES
– Capital Gains The provisions for computation of Income from
– Capital Asset [Section 2(14)] capital gains are covered under sections 45 to 55
of the Income Tax Act, 1961. Section 2(14) defines
– Short Term & Long Term Assets
the term capital gain and section 45, the charging
– Transfer [Section 2(47)] section lays down basis of charge for taxability of
capital gain/loss arises on transfer of capital asset.
– Mode of Computation
Taxability of capital gain depends upon the nature
– Ascertainment of Cost in Specified
of capital gain i.e., short term capital gain or long
Circumstances [Section 49]
term capital gain. The type of capital gain depends
– Advanced Money Received [Section 51] upon the period for which the capital asset is
– Exemption from Capital Gain Tax held. The taxability of capital gain shall satisfy the
conditions like there should be capital asset, the
– Tax Rates asset is transferred by the assessee, such transfer
– Case Law takes place during the previous year, etc. To give
relief to the assessee, the concept of exemption
– LESSON ROUND UP introduced under section 54, 54B, 54D, 54EC,
– SELF TEST QUESTION 54EE, 54F, 54G, 54GA, 54GB and 54H.
At the end of this lesson, you will learn
– the conditions to be satisfied for income to
be chargeable under this head,
– which assets are classified as capital
asset,
– the year in which the capital gains are
chargeable to tax,
– classification of capital gain into long term
and short term,
– which transactions are not regarded as
transfer,
– what are the exemptions available in
respect of capital gains,
– when can the assessing officer make a
reference to the valuation officer.

225
226 EP-TL

CAPITAL GAINS

Proforma for Computation of Income under the head “Capital Gains”

Particulars Short Term Capital Long Term Capital Gain

Gain

Amt. (Rs.) Amt. Amt. (Rs.) Amt.

(Rs.) (Rs.)

Full value of consideration received or Xxxx xxx

accruing as a result of transfer

Less: Expenditure incurred wholly and

exclusively in connection with such
transfer (for e.g., brokerage on sale)

(Note: Deduction on account of STT Xxxx

paid will not be allowed) xxx

Net Sale Consideration Xxx xxx

Less: Cost of Xxx Indexed Cost of acquisition xxx

acquisition
Indexed Cost of improvement xxx
Less: Cost of xxx
improvement

Short Term Xxx Long Term Capital Gain xxx

Capital Gain
Exemption under sections xxx
Exemption 54/ 54B/ 54D/ 54EC/
Xxx
under sections 54EE/54F
54B/54D

Short-term Capital Gain (STCG) xxx Long-term Capital Gains xxx

(LTCG)

Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains.

Section 45 of the Act, provides that any profits or gains arising from the transfer of a capital asset effected in
the previous year shall, save as otherwise provided in various sections of Sec. 54, be chargeable to income-tax
under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer
took place.

Doubts may arise as to whether “Capital Gains” being a capital receipt can be brought to tax as income. It
may be noted that the ordinary accounting canons of distinctions between a capital receipt and a revenue
receipt are not always followed under the Income-tax Act. Section 2(24)(vi) of the Income-tax Act specifically
provides that “Income” includes “any capital gains chargeable under Section 45(1)”. It may not be out of
place to mention here that in the absence of a specific provision in Section 2(24) capital gains have no
logic to be taxed as income. The constitutional validity of the provisions of the Act relating to capital gains
was challenged in Navin Chandra Mafatlal v. C.I.T. (1955) 27 ITR 245. The Supreme Court while upholding
 Lesson 4 n Part IV – Income from Capital Gains 227

the competence of parliament in legislating with regard to capital gains as part of income, observed that
the term income should be given the widest connotation so as to include capital gains within its scope.
However, all capital profits do not necessarily constitute capital gains. For instance, profits on re-issue of
forfeited shares, profits on redemption of debentures, premium on issue of shares, are capital profits and
not capital gains, hence, not liable to tax.

The requisites of a charge to income-tax, of capital gains under Section 45(1) are:

(i) There must be a capital asset.

(ii) The capital asset must have been transferred.

(iii) The transfer must have been effected in the previous year.

(iv) There must be a gain arising on such transfer of a capital asset.

(vi) Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC, 54EE, 54ED, 54F, 54G,
or 54GA

These requisites are briefly analysed below.

CAPITAL ASSET [Section 2(14)]

228 EP-TL

(i) any stock-in-trade(other than securities held by FII mentioned in clause (b) above), consumable stores
or raw-materials held for the purposes of his business or profession;
The exclusion of stock-in-trade from the definition of capital asset is only in respect of sub-clause (a)
above and not sub-clause (b). This implies that even if the nature of such security in the hands of the
Foreign Portfolio Investor is stock in trade, the same would be treated as a capital asset and the profit
on transfer would be taxable as capital gains.
(ii) personal effects that is to say, movable property (including wearing apparel and furniture ) held for
personal use by the assessee or any member of his family dependent on him but excludes
a) jewellery;
b) archaeological collections;
c) drawings;
d) paintings;
e) sculptures; or
f) any work of art
For this purpose, the expression ‘jewellery’ includes the following:
(1) Ornaments made of gold, silver, platinum or any other precious metal or any
alloy containing one or more of such precious metals, whether or not containing
any precious or semi-precious stones and whether or not worked or sewn into any
wearing apparel;
(2) Precious or semi-precious stones, whether or not set in any furniture, utensil or
other article or worked or sewn into any wearing apparel.
(iii) Rural agriculture land excludes :
a) any area within the jurisdiction of a municipality or a cantonment board and which has a population
of not less than ten thousand; or
b) any area within the distance, measured aerially from the jurisdiction of a municipality or a
cantonment board –
I. not being more than two kilometres, from the local limits of any municipality or cantonment
board and which has a population of more than ten thousand but not exceeding one lakh
II. not being more than six kilometres, from the local limits of any municipality or cantonment
board and which has a population of more than one lakh but not exceeding ten lakh
III. not being more than eight kilometres, from the local limits of any municipality or cantonment
board and which has a population of more than ten lakh.
(iv) 6 per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold
Bonds, 1980 issued by the Central Government;
(v) Special Bearer Bonds 1991 issued by the Central Govt.
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under
the Gold Monetisation Scheme, 2015 notified by the Central Government.

The Supreme Court in the case of Vodafone International Holdings B.V vs. Union of India [2012] 204 Taxman
408 held that influence/persuasion of a parent company over its subsidiary could not be construed as a right in
the legal sense.

To supersede this ruling with retrospective effect from 1st April 1962, an Explanation has been inserted to clarify
that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian
company, including rights of management or control or any other rights whatsoever.

SHORT-TERM & LONG-TERM ASSETS

• Section 2(42A) defines short term capital asset as a capital asset held by the assessee for not more
 Lesson 4 n Part IV – Income from Capital Gains 229

than 36 months immediately preceding the date of transfer. Therefore, an asset which is held by the
assessee for period of > 36 months immediately preceding the date of transfer is a long-term capital
asset.

• However, a security (other than a unit) listed in a recognised stock exchange or a unit of an equity
oriented fund, or of UTI or a Zero-Coupon Bond, will be considered as a long-term asset if it is held for
period of > 12 months immediately preceding the date of transfer.

• A share of a company not being a share which is listed on a recognised stock exchange in India or an
immovable property, being land or building or both, would be treated as a short-term capital asset if it
was held by an assessee for not more than 24 months immediately preceding the date of its transfer.
Thus, the period of holding of unlisted shares or an immovable property, being land or building or both,
for being treated as a long-term capital asset would be “more than 24 months” instead of “more than 36
months”.

• Assets other than short-term capital assets are known as ‘long-term capital assets’ and the gains
arising therefrom are known as ‘long-term capital gains’. In the case of other long- term capital assets,
the period of holding is determinable subject to any rules made by CBDT. An asset should be held for
more than 36 months immediately prior to the date of its transfer to become a long term capital asset.
However, where a capital asset, being Immoveable property (land or building or both) is transferred
on or after April 1, 2017, then it will be treated as Long Term Capital Asset if it is held for more than 24
months immediately prior to the date of its transfer.

Period of Holding

STCA, if held for ≤ 12 month • Security (other than unit) listed in a recognized stock exchange
LTCA, if held for > 12 months • Unit of equity oriented fund/ unit of UTI
• Zero Coupon bond

STCA, if held for ≤ 24 month • Unlisted shares

LTCA, if held for > 24 months • Land or building or both

STCA, if held for ≤ 36 month • Unit of debt oriented fund

LTCA, if held for > 36 months • Unlisted securities other than shares
• Other capital assets

In determining the period for which a capital asset is held by an assessee, the following must be noted:

(i) In the case of shares held in a company in liquidation, the period subsequent to the date on which
the company goes into liquidation shall be excluded;

(ii) In case the asset becomes the property of the assessee under the circumstances mentioned in
Section 49(1) - discussed later in this lesson - the period for which the asset was held by the previous
owner shall be included;

(iii) In the case of the shares in an Indian Company which become the property of the assessee in a
scheme of amalgamation, the period for which the shares in the amalgamating company were held
by the assessee shall be included;

(iv) In the case of a capital asset, being a share or any other security subscribed to by the assessee
230 EP-TL

on the basis of his right to subscribe to such financial asset or subscribed to by the person in
whose favour the assessee has renounced his right to subscribe to such financial asset, the
period shall be reckoned from the date of allotment of such financial asset;

(v) In the case of a capital assets, being the right to subscribe to any financial asset, which is renounced
in favour of any other person, the period shall be reckoned from the date of the offer of such right by the
company or institution, as the case may be, making such offer;

(vi) In the case of a capital asset, being a financial asset, allotted without any payment and on the
basis of holding of any other financial asset, the period shall be reckoned from the date of the
allotment of such financial asset;

(vii) In the case of a capital asset, being a share or shares in an Indian company, which becomes the
property of the assessee in consideration of a demerger, there shall be included the period for
which the share or shares held in the demerged company were held by the assessee;

(viii) In the case of a capital asset, being trading or clearing rights of a recognized stock exchange
in India acquired by a person pursuant to demutualisation or corporatisation of the recognized
stock exchange in India as referred to in Clause (xiii) of Section 47, there shall be included the
period for which the person was a member of the recognized stock exchange in India immediately prior
to such demutualisation or corporatisation;

(viiia) In the case of a capital asset, being equity share or shares in a company allotted pursuant to
demutualisation or corporatisation of a recognised stock exchange in India as referred to in
Clause (xiii) of Section 47, there shall be included the period for which the person was a member of
the recognized stock exchange in India immediately prior to such demutualisation or corporatisation;

Where preference shares are converted into equity shares, the period of holding shall be considered from the date
of acquisition of preference shares. Cost of acquisition of preference shares shall be taken as cost of acquisition
of equity shares in the hands of assessee.

Where units are held by an assessee in the consolidating plan of a mutual fund scheme, made in consideration
of the allotment to him of units, in the consolidated plan of that scheme of mutual fund, then the period of holding
shall also include the period for which the units in consolidating plan of mutual fund scheme were held by him.
Cost of acquisition of units in the consolidated plan of mutual fund scheme referred u/s 47(xix) shall be the cost
of acquisition of units in the consolidating plan of mutual fund scheme.

TRANSFER [SECTION 2(47)

The essential requirement for the incidence of tax on capital gains is the transfer of a “capital asset”. The Act
contains an inclusive definition of “transfer”, and hence, it includes:
 Lesson 4 n Part IV – Income from Capital Gains 249

EXEMPTION OF CAPITAL GAINS

Profit on sale of property used for residence [Section 54]

Conditions for claiming exemption:
l Assessee: Individual or HUF
l Which asset to transfer:Residential house(buildings or lands appurtenant thereto)
l It must be a long-term capital asset
l Income from such house should be chargeable to tax under the head “Income from House Property”

[Link]. Situation Investment

1. Where the amount of capital one residential house in India should be –
gains exceeds Rs. 2 crore
l purchased within 1 year before or 2 years after the
date of transfer (or)
l constructed within a period of 3 years after the date
of transfer.
2. Where the amount of capital l purchase two residential houses in India within 1
gains does not exceed Rs. 2 year before or 2 years after the date of transfer (or)
crore
l construct two residential houses in India within a
period of 3 years after the date of transfer.
250 EP-TL

Where during any assessment year, the assessee has exercised the option to purchase or construct two
residential houses in India, he shall not be subsequently entitled to exercise the option for the same or any
other assessment year.
This implies that if an assessee has availed the option of claiming benefit of section 54 in respect of purchase
of two residential houses in Jaipur and Jodhpur, say, in respect of capital gains of Rs. 1.50 crores arising from
transfer of residential house at Bombay in the P.Y.2019-20 then, he will not be entitled to avail the benefit of
section 54 again in respect of purchase of two residential houses in, say, Pune and Baroda, in respect of capital
gains of Rs. 1.20 crores arising from transfer of residential house in Jaipur in the P.Y.2023-24, even though the
capital gains arising on transfer of the residential house at Jaipur does not exceed Rs. 2 crore.
Amount of Exemption under section 54 will be lower of:
l Long term capital gains arising on transfer of residential house; or
l Amount invested in purchase/construction of new residential house or houses. (including the amount
deposited in CGAS before due date of filing of return
If till the date of filing the return of income, the LTCG on such transfer of the house is not utilised (in whole or
in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the
unutilised amount into Capital Gains Deposit Account Scheme (CGAS) with any scheduled bank.
If the amount deposited in the Capital Gains Account Scheme in respect of which the assessee has claimed
exemption under section 54 is not utilised within the specified period for purchase/construction of the residential
house, then the unutilised amount (for which exemption is claimed) will be taxed as income by way of long- term
capital gains of the year in which the specified period of 2 years/3 years gets over.
If the new house is also transferred within 3 years from date of acquisition or construction, the cost of new house
would be reduced by the capital gains exempted earlier under section 54.

Illustration 7:
Mr. Khan purchased a residential house in the previous year 2005-06 for Rs. 2 crores. The house property is
sold for Rs. 10 crores in the previous year 2019-20 and the capital gain is invested in two residential house
properties worth Rs. 4 crores each. Can he claim the benefit of section 54 in respect of both houses ?

Solution :
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being
long-term residential house property. With effect from Assessment Year 2020-21, an assessee has an option
to make investment in two residential house properties in India to claim section 54 exemption. This option can
be exercised by the assessee only once in his lifetime provided the amount of long-term capital gain does not
exceed Rs. 2 crores. Since, the gain arising in hands of Mr. Khan is Rs. 5.06 crores which is more than Rs. 2
crore, he cannot claim the benefit of section 54 by making investment in both the house properties. However he
can claim the benefit only in respect of one residential property invested.
Computation of Long Term Capital Gains (LTCG)

Sale Consideration 10 Crores

Less Indexed Cost of Acquisition (2*289/117) 4.94 Crores
Long Term Capital Gains (LTCG) 5.06 Crores
Less Deduction U/s 54 4 Crores
Taxable LTCG 1.06 Crores
 Lesson 4 n Part IV – Income from Capital Gains 251

Transfer of land used for agricultural purposes [Section 54B]

Conditions for claiming exemption:
l Assessee: Individual or HUF
l There should be a transfer of an urban agricultural land
l Asset must be either short term or long term capital asset.
l Such land has been used for agricultural purposes for immediately preceding 2 years by such Individual
or his parent or HUF
l He should purchase another agricultural land (urban or rural) within 2 years from date of transfer
l If such investment is not made before the date of filing of return of income, then the capital gain has to
be deposited under the CGAS
l Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be
deemed to be the cost of new asset.
Amount of Exemption:
l If cost of new agricultural land ≥ capital gains, entire capital gains is exempt.
l If cost of new agricultural land < capital gains, capital gains to the extent of cost of new agricultural land
is exempt.
If the new agricultural land is also transferred within 3 years from date of acquisition, the cost of land would be
reduced by the capital gains exempted earlier (not applicable if the new land was rural)

Compulsory acquisition of lands and buildings [Section 54D]

Conditions for claiming exemption:
l Assessee: Any assessee
l There must be a compulsory acquisition of land & building or any right in land or building forming part
of an industrial undertaking
l Such land & building should have been used for business purposes of the industrial undertaking for 2
years immediately preceding the date of transfer.
l The assessee must purchase any another land / building / construct any building(for shifting or re-
establishing the existing undertaking or setting up a new industrial undertaking) within 3 years from
date of transfer
l If such investment is not made before the date of filing of return of income, then the capital gain has
to be deposited under the CGAS. Amount utilized by the assessee for purchase of new asset and the
amount so deposited shall be deemed to be the cost of new asset.
In such a case, if the cost of the new land & building is > the Capital Gains, the entire LTCG will be exempt, and
if less, then the LTCG will be exempt only to the extent of the cost of new land& building.
If the new land & building is also transferred within 3 years from date of acquisition, the cost of such land &
building would be reduced by the capital gains exempted earlier

No tax on long-term capital gains if investments made in specified bonds [Section 54EC]
Conditions for claiming exemption:
252 EP-TL

l Assessee: Any assessee

l There should be a transfer of a long-term capital asset being land or building or both.
l Such asset can also be a depreciable asset held for more than 36 months
l The capital gains arising from transfer of such asset should be invested in a long-term specified asset
within 6 months from date of transfer.
l Long-term specified assets would imply, bonds redeemable after 5 years issued on or after 1.4.2018
by National Highways Authority of India (NHAI), or Rural Electrification Corporation Limited or, Power
Finance Corporation Ltd., Indian Railway Finance Corporation Limited or any other bond notified by
central government in this behalf.
l The assessee should neither transfer nor convert / avail loan or advance with this bond as security for a
period of 5 years from date of acquisition of such bonds, and in case that does happen before 5 years,
the capital gain exempted earlier shall be taxed as long-term capital gain in that year.
In this case, the entire LTCG or amount invested in the specified bonds, whichever is lower, is exempt.
The maximum investment which can be made in notified bonds or bonds of NHAI and RECL, out of capital gains
arising from transfer of one or more assets, during the previous year in which the original asset is transferred
and in the subsequent financial year cannot exceed Rs. 50 Lacs.

Practical Questions (MCQs)

State with reason whether the following statements are true or false with regard to the provisions of the Income-
tax Act, 1961 for the Assessment year 2020-21 :
1. Capital gain of Rs. 75 lakh arising from transfer of long term capital assets will be exempt from tax if
such capital gain is invested in the bonds redeemable after three years, issued by NHAI u/s 54 EC of
the Act.
Answer : False : Because the maximum limit of investment in bond of NHAI u/s 54 EC, is just Rs. 50
lakhs.
2. In order to enjoy exemption under section 54EC, the resultant long-term capital gains should be invested
in specified bonds within a period of from the date of transfer.
(a) 36 Months (b) 4 Months
(c) 6 Months (d) 12 Months.
Answer: (c) 6 Months
3. Long-term capital gains on sale of a long-term capital asset in October, 2019 is Rs. 105 lakh. The
assessee invested Rs. 50 lakh in REC bonds in March, 2020 and Rs. 55 lakh in NHAI bonds in May,
2020. The amount of exemption eligible under section 54EC is —
(a) Nil (b) Rs. 50 lakh
(c) Rs. 55 lakh (d) Rs. 105 lakh.
Answer: (b) Rs. 50 lakh
4. Mr. Madan sold a vacant land for Rs. 120 lakhs on 10-10- 2019. The indexed cost of acquisition amounts
to Rs. 18 lakhs. He deposited Rs. 50 lakhs in REC bonds in January 2020 and another Rs. 50 lakhs in
March, 2020. The amount of capital gain liable to tax after deduction under section 54EC is :
(a) Rs. 2 lakhs (b) Rs. 18 lakhs
262 EP-TL
LESSON ROUND UP
– Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains. Section 45 of the Act, provides
that any profits or gains arising from the transfer of a capital asset effected in the previous year shall,
save as otherwise provided in Sections 54, 54B, 54D, 54EC, 54EE, 54ED, 54F, 54G, 54GA and 54H
be chargeable to income-tax under the head “Capital Gains” and shall be deemed to be the income of
the previous year in which the transfer took place.
– Section 2(14) of the Income-tax Act defines the term “capital asset” to means Property of any kind
held by an assessee whether or not connected with his business or profession but does not include
any stock-in-trade, personal effects, agricultural land in India, 6^ per cent Gold Bonds, Special Bearer
Bonds, Gold Deposit Bonds.
– The essential requirement for the incidence of tax on capital gains is the transfer of a ‘capital asset’.-
Any capital gain arising as a result of transfer of a short-term capital asset is known as short-term
capital gain. “Short term” capital asset means a capital asset held by an assessee for not more
than thirty-six months immediately preceding the date of its transfer. In the case of capital assets
(being equity or preference share in a company) held by an assessee for not more than 12 months
immediately prior to its transfer.
– Assets other than short-term capital assets are known as ‘long-term capital assets’ and the gains
arising therefrom are known as ‘long-term capital gains’. Section 48 of the Act provides that the
income chargeable under the head ‘capital gains’ shall be computed by deducting from the full value
of consideration received or accruing as a result of the transfer of the capital asset the f amount of
expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition
of the capital asset and the cost of any improvement thereto.
– ‘Cost of acquisition’ of goodwill of a business or a right to manufacture, produce or process any article
or thing, tenancy rights, stage carriage permits or loom hours is in the case of acquisition of such
asset by the assessee by purchase from a previous owner, cost of acquisition means the amount of
the purchase price; and in any other case cost of acquisition shall be Nil.
– Cost of improvement means all capital expenditure in making any additions or alterations by the
assessee after it became his property and where the capital asset became the property of the
assessee by any of the modes specified in Section 49(1) by the previous owner as the case may be.
– Under Sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G and 54H of the Act, capital gains arising from
the transfer of certain capital assets are exempt from tax under certain circumstances.

SELF TEST QUESTIONS

These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation.

Practical Questions (MCQs)

1. Capital asset excludes all except-
(a) Stock-in-trade (b) Personal effects
(c) Jewellery (d) Agricultural land in India.
Answer: (c) Jewellery
2. In terms of section 2(42A), listed securities are treated as long-term capital asset, if they are held for a
period of more than —
(a) 12 Months (b) 36 Months
 Lesson 4 n Part IV – Income from Capital Gains 263

(c) 24 Months (d) 48 Months.

Answer: (a) 12 Months
3. Which of the following is not a requisite for charging income-tax on capital gains —
(a) The transfer must have been effected in the relevant assessment year
(b) There must be a gain arising on transfer of capital asset
(c) Capital gains should not be exempt under section 54
(d) Capital gains should not be exempt under section 54EC.
Answer: (a) The transfer must have been effected in the relevant assessment year
4. Rajat purchased a car for his personal use for Rs. 5,00,000 in April, 2018 and sold the same for Rs.
5,50,000 in July, 2018. The taxable capital gains is —
(a) Nil (b) Rs. 5,50,000
(c) Rs. 50,000 (d) Rs. 4,00,000
Answer: (a) Nil [Car for personal use is not capital asset. Therefore, no capital gain shall arise.]
5. Which of the following is not a capital asset for Mr. Rao who is employed in a public sector bank?
(a) Urban land
(b) Agricultural land within 2 kms from local limits of municipality
(c) Deposit certificate issued under Gold Monetisation Scheme, 2015
(d) Jewellery
Answer: (c) Deposit certificate issued under Gold Monetisation Scheme, 2015
6. Land or building, or both, if transferred on or after 1st April, 2018 shall be treated as a long term capital
asset, if it is being held immediately prior to the date of its transfer for more than :
(a) 36 months (b) 12 months
(c) 24 months (d) None of the above
Ans: (c)

SUGGESTED READINGS
1. Direct Taxes Law and Practice
Author : Dr. Vinod K. Singhania & Dr. Kapil Singhania
Publisher : Taxmann
Year : 2019
Edition : 2019
2. Direct Taxes Ready Reckoner with Tax Planning
Author : Dr. Girish Ahuja & Dr. Ravi Gupta
Publisher : Wloters Kluwer
Year : 2019
Edition : 20th Edition
 Lesson 4 Part V – Income from Other Sources 265
Lesson 4
n

Part V – Income from Other Sources

LESSON OUTLINE
LEARNING OBJECTIVES
– Income chargeable under the head ‘Income Income chargeable under Income-tax Act, which
from other Sources’ does not specifically fall for assessment under any
– Taxation of Casual Income of the heads discussed earlier, must be charged
to tax as “income from other sources”. This head
– Income from family pension
is thus a residuary head of income under which
– Taxation of Dividends income can be computed only after deciding
whether the particular item of income is otherwise
– Deductions allowable in computing income
assessable under any of the first four heads. In
from other sources
addition to the taxation of income not covered by
– Deemed Income [Section 59] the other heads, Section 56(2) specifically provides
– Computation of Income under the head certain items of incomes as being chargeable to
“Other sources” tax under the head in every case. The provisions
for computation of income from other sources are
– Amounts not Deductible [Section 58] covered under sections 56 to 59. While section
– Case Law 56 defines the scope of income chargeable under
this head, sections 57 and 58 specify the basis of
– LESSON ROUND UP computation of such income.
– SELF TEST QUESTIONS At the end of this lesson, you will learn (i) which
are the income chargeable under the head
income from other sources, (ii) which are the
incomes specifically taxable under this head (iii)
what are admissible deductions, (iv) which are
the inadmissible deductions and (v) what are the
provisions of taxability of gift in kind or in cash from
relative or unrelated persons.

The incomes which are neither covered under the head salary, house property, business income
or capital gains shall be taxable under head Income from other sources. This head of income is a
residual head because it covers all other incomes which are uncovered and which are not exempt
from tax.

265
266 EP-TL

BASIS OF CHARGE OF INCOME FROM OTHER SOURCES [SECTION-56]

Income chargeable under Income-tax Act, which does not specifically fall for assessment under any of the
heads discussed earlier, must be charged to tax as “income from other sources”. This head is thus a residuary
head of income under which income can be computed only after deciding whether the particular item of income
is otherwise assessable under any of the first four heads. Section 56(2) covers certain specific incomes which
are chargeable under the head “Income From Other Sources”. Section 56(1) covers all the residual incomes
which are not covered by first Four Heads of Income and Section 56(2).
In other words any income is taxable under this head if following conditions are satisfied:
1. There is an Income.
2. Such income is not exempt under any provisions of the Income Tax Act.
3. Such income is not taxable under First four heads of Income.
The following specific incomes are chargeable to Income Tax under the head “Income from other sources”
under Section 56(2): -
(a) Dividends [Section 56(2)(i)] : Dividend income other than divided referred under section 10(34) not
exceeding Rs. 10 lakh shall be included under income from other sources.
(b) Keyman Insurance policy : Amount received under a Keyman insurance Policy, including bonus on
such Policy, if it is not taxable under any other head of income shall be chargeable under Income from
other sources.
(c) Winnings from lotteries [Section 56(2)(ib)] : Any winnings from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort or from gambling or betting of any form
or nature shall be chargeable to tax under Income from other sources.
The entire income of winnings, without any expenditure or allowance or deductions under Sections
80C to 80U, will be taxable. However, expenses relating to the activity of owning and maintaining race
horses are allowable.
Further, such income is taxable at a special rate of income-tax i.e., 30% + surcharge + cess @ 4%
[Section115BB]
(d) Contribution to Provident fund : Income of the nature referred to in Section 2(24)(x) (relating to certain
contributions to any provident fund or superannuation fund or any fund set up under the provisions of
the ESI Act or any other fund for the welfare of such employees received by the assessee from his
employees in his capacity as an employer) will be chargeable to income-tax under the head “income
from other sources” if such income is not chargeable to income-tax under the head “profits and gains
of business or profession”. But if the employer deposits such amount on or before due date of deposit
applicable for such contribution, he will be allowed a deduction on account of the same. [Section 56(2)
(ic)].
(e) Income by way of interest on securities : if the income by way of interest on securities is not
chargeable to income-tax under the head,” Profits and gains of business or profession”, then such
income shall be taxable under Income from other sources. It is chargeable on “receipt” basis if books
of accounts are maintained on “Cash Basis”, however if books are maintained on “Mercantile System”
then interest is taxable on “accrual” basis. It is worthwhile to mention here, that many interest incomes
are exempt u/s 10(15).
(f) Income from hiring of machinery, etc. [Section 56(2)(ii)] : Income from machinery, plant or furniture
belonging to the assessee and let on hire; if the income is not chargeable to income-tax under
 Lesson 4 n Part V – Income from Other Sources 267

the head “profits and gains of business or profession” shall be taxable under Income from other
sources.
(g) Hiring out of building with machinery etc. [Section 56(2)(iii)] : Where an assessee lets on hire
machinery, plant or furniture belonging to him and also building and the letting of the building is
inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it
is not chargeable to income-tax under the head “Profits and gains of business or profession” shall be
taxable under Income from other sources.
(h) Share premiums in excess of the fair market value to be treated as income [Section 56(2) (viib)]
Where a company, not being a company in which the public are substantially interested, receives, in
any previous year, from any person being a resident, any consideration for issue of shares that exceeds
the face value of such shares, the aggregate consideration received for such shares as exceeds the fair
market value of the shares shall be taxable under Income from other sources.
However, that this clause shall not apply where the consideration for issue of shares is received:
(i) by a venture capital undertaking from a venture capital company or a venture capital fund [or a
specified fund having Category I or Category II Alternative Investment Fund Certificate ( w.e.f.
Assessment Year 20-21)] or
(ii) by a company from a class or classes of persons as may be notified by the Central Government
in this behalf (for this purpose Govt. has notified that provisions of this section are not applicable
in case consideration is received by a company for issue of shares of a “startup” company)
Provided where the class of companies notified by Central Government does not comply on account
of fulfilment of conditions specified in the notification issued under clause (ii), then, any consideration
received for issue of share that exceeds the face value of such share shall be deemed to be the income
of that company chargeable to income-tax for the previous year in which such failure has taken place.
Explanation - For the purposes of this clause,
(a) the fair market value of the shares shall be the value
(i) as may be determined in accordance with such method as may be prescribed (value is to be
determined as per method given in rule 11UA); or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based
on the value, on the date of issue of shares, of its assets, including intangible assets being
goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature,
whichever is higher;
(i) income by way of interest received on compensation or on enhanced compensation referred to in
clause (b) of section 145A shall be chargeable to tax under Income from other sources. [Section 56(2)
(viii)].
(j) Advance money received- any sum of money, received as an advance or otherwise in the course of
negotiations for transfer of a capital asset is chargeable to income-tax under the head “Income from
other sources”, if such sum is forfeited and the negotiations do not result in transfer of such capital
asset. [Section 56(2)(ix)].
(k) Receipt of Money or Property without consideration or without adequate consideration by any person
[Section 56(2)(x)]
The following shall be taxable under the head ‘Income from other sources’ :
268 EP-TL

Where any person receives, in any previous year, from any person or persons on or after the 1st day of
April, 2017,—
(a) Any sum of money, without consideration, the aggregate value of which exceeds INR 50,000, the
whole of the aggregate value of such sum.
(b) Any immovable property,—
i. without consideration, the stamp duty value of which exceeds INR 50,000, the stamp duty
value of such property is chargeable to tax;
ii. for a consideration, the stamp duty value of such property as exceeds such consideration, if
the amount of such excess is more than the higher of the following amounts, namely:—
• the amount of INR 50,000; or
• the amount equal to five per cent of the consideration
• then the difference between stamp duty value of such property and consideration is
chargeable to tax.
Provided that where the date of agreement fixing the amount of consideration for the transfer of
immovable property and the date of registration are not the same, the stamp duty value on the
date of agreement may be taken for the purposes of this sub-clause.
Provided further that the provisions of the first proviso shall apply only in a case where the amount
of consideration referred to therein, or a part thereof, has been paid by way of an account payee
cheque or an account payee bank draft or by use of electronic clearing system through a bank
account, on or before the date of agreement for transfer of such immovable property.
Provided also that where the stamp duty value of immovable property is disputed by the assessee
on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the
valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-
section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of
such property for the purpose of this sub-clause as they apply for valuation of capital asset under
those sections.
(c) any property, other than immovable property, –
(A) without consideration, the aggregate fair market value of which exceeds INR 50,000, then
the whole of the aggregate fair market value of such property.
(B) for a consideration which is less than the aggregate fair market value of the property by an
amount exceeding INR 50,000, the aggregate fair market value of such property as exceeds
such consideration.
Provided that this clause shall not apply to any sum of money or any property received—
(i) from any relative; or
(ii) on the occasion of the marriage of the individual; or
(iii) under a will or by way of inheritance; or
(iv) in contemplation of death of the payer or donor, as the case may be; or
(v) from any local authority as defined in section 10(2); or
(vi) from any fund or foundation or university or other educational institution or hospital or other
medical institution or any trust or institution referred to in section 10(23C); or
 Lesson 4 n Part V – Income from Other Sources 269

(vii) from or by any trust or institution registered under section 12A; or

(viii) by any fund or trust or institution or any university or other educational institution or any hospital
or other medical institution referred to in section 10(23C); or
(ix) by way of transaction not regarded as transfer under certain clauses of section 47; or
(x) from an individual by a trust created or established solely for the benefit of relative of the individual.
(xi) From such class of persons and subject to such conditions, as may be prescribed. (w.e.f. AY 20-
21)
Explanation—For the purposes of this clause:
a) “fair market value” of a property, other than an immovable property, means the value determined
in accordance with the method as may be prescribed;
b) “property” means the following capital asset of the assessee, namely:—
(i) immovable property being land or building or both;
(ii) shares and securities;
(iii) jewellery;
(iv) archaeological collections;
(v) drawings;
(vi) paintings;
(vii) sculptures;
(viii) any work of art; or
(ix) bullion;
(c) “relative” means,—
(i) in case of an individual—
(A) spouse of the individual;
(B) brother or sister of the individual;
(C) brother or sister of the spouse of the individual;
(D) brother or sister of either of the parents of the individual;
(E) any lineal ascendant or descendant of the individual;
(F) any lineal ascendant or descendant of the spouse of the individual;
(G) spouse of the person referred to in items (B) to (F); and
(ii) in case of a Hindu undivided family, any member thereof;
(l) Any compensation or other payment, due to or received by any person, by whatever name called,
in connection with the termination of his employment or the modification of the terms and conditions
relating thereto. If the same is not taxable under the head Salary. [Section 56(2)(xi)]
If any income is neither covered by first Four Heads of Income nor it falls under Section 56(2) then it is taxable
under Section 56(1). For example:
(1) Any fees or commission received by an employee from a person other than his employer.
270 EP-TL

(2) Any annuity received under a Will. It does not include an annuity received by an employee from his
employer.
(3) All interest other than interest on securities, e.g. interest on bank deposits, interest on loan, etc.
(4) Income of a tenant from sub-letting the whole or a part of the house property.
(5) Remuneration received by a teacher or a lawyer for doing examination work.
(6) Income of Royalty.
(7) Director’s fees.
(8) Rent of land not appurtenant to any building.
(9) Agricultural Income from land situated outside India.
(10) Income from markets, ferries and fisheries, etc.
(11) Income from leasehold property.
(12) Remuneration received for writing articles in Journals.
(13) Income from undisclosed sources.
(14) Interest received by an employee on his own contributions to an unrecognised provident fund.
(15) Casual income
(16) Salary of a Member of Parliament, Member of Legislative Assembly or Council.
(17) Interest received on securities of co-operative society.
(18) Gratuity received by a director who is not an employee of the company.
(19) Director’s commission for giving guarantee to bank.
(20) Director’s commission for underwriting shares of a new company.
Further, under the provisions of Section 60 to 65 an assessee may be chargeable to tax in respect of income
arising to other persons, e.g. spouse or minor children. In such cases, the income in question will be first
computed under the appropriate head after allowing various deductions and includible in the total income of
the assessee under the head “income from other sources”. In other words, wherever the assessee is taxable
in respect of income of somebody else, the income must be charged to tax in the hands of the assessee only
under this head; even if the income is of a character which would otherwise fall for assessment under any other
head of income.

CASUAL INCOME [SECTION 56(2)(IB)]

Casual income includes income by way of winnings from lotteries; crossword puzzles; races including horse
races; gambling and betting of any nature or form; card games, game show or entertainment program on
television or electronic mode and any other game of any sort. All these incomes are chargeable to tax under
the head income from other sources. However, following income are not chargeable under the head “income
from other sources”:
(a) Lottery held as stock in trade: Winning from lottery to an agent or trader out of its unsold stock of
lottery tickets shall be treated as incidental to business and taxed under the head “profit and gains of
business or profession “.
(b) Income of jockey: Income of jockey from such profession is not treated as winning from the horse
races.
 Lesson 4 n Part V – Income from Other Sources 271

(c) Winning from a motor car rally: Winning from a motor car rally is a return for skill and effort and
cannot be created as casual income, these are taxable as normal income.
• No deduction or exemption is provided in respect of the casual income. [Section 58 (4)].
• No deduction can be claimed from such income even if such expenditure is incurred exclusively
and wholly for earning such income.
• Further, deduction under section 80C to 80U is also not available from such income.
Taxation of Casual Income: Casual income is liable to TDS. The casual income is taxed at a flat rate of 30%
plus surcharge (if any), plus health and education cess.
When the TDS has already been deducted from the income, then in order to calculate the tax liability on such
income, the income is to be grossed up. [Section 115BB]
However, the following incomes are not liable to TDS:
(1) Winning from lottery upto amount Rs.10,000
(2) Winning from racing other than horse race
(3) Winning from horse race upto Rs. 10,000

INCOME FROM FAMILY PENSION

Family pension is a regular amount payable by the employer to a family member of a deceased employee. It
is taxable under the head income from other sources. The income by way of family pension is eligible for a
standard deduction under section 57(iia) which is either 1/3rd of such pension or Rs. 15000 whichever is lower.
Family pension received by the widow or children or nominated heirs, as the case may be, of a member of the
armed forces (including paramilitary 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, shall
be exempt from tax. Further, income by way of family pension received as family pension of an individual who
has been in the service of Central/State Government and has been awarded Param Vir Chakra or Maha Vir
Chakra or Vir Chakra or such other gallantry award as may be notified is also exempt from tax.

TAXATION OF DIVIDENDS
Section 10(34) exempts dividend as defined in Section 115-O from tax in the hands of recipients thereof.
Section 115-O, the main operative provision in the Chapter XII-D, however, calls upon a company declaring/
distributing dividend to pay 15% plus surcharge plus Health and Education Cess by way of Dividend Distribution
Tax (DDT) on distributed profits in addition to what it is liable by way of tax on its income in the normal course.
This tax on distribution paid by a company is not available for deduction under any provision of the Act. Grossing
up the dividend for computing the tax liability on account of dividend distribution tax. With the grossing up, the
effective tax rate will be 20.555% as under:

Grossed Up 117.647
DDT @ 15% 17.647
Div 1,00,000
DDT 17,647
SC @ 12% 2,117
Agg 19,764
Cess @ 4% 791
Total 20,555
272 EP-TL

Under the existing provisions of clause (34) of section 10 of the Act, dividend which suffer dividend distribution
tax (DDT) under section 115-O is exempt in the hands of the shareholder. Under section 115-O dividends are
taxed only at the rate of fifteen percent at the time of distribution in the hands of company declaring dividends.

This creates vertical inequity amongst the tax payers as those who have high dividend income are subjected to
tax only at the rate of 15% whereas such income in their hands would have been chargeable to tax at the rate
of 30%.

With a view to rationalise the tax treatment provided to income by way of dividend, it is provided by
amending the section of the Income-tax Act that any income by way of dividend in aggregate exceeding
INR 10 lakh shall be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm
who is resident in India, at the rate of 10% (+SC+EC+SHEC). The taxation of dividend income in aggregate
exceeding ten lakh rupees shall be on gross basis. However, this rule is not applicable in case of deemed
dividend under section 2(22)(e).

Scope of section 115BBDA has been increased: Earlier this section was applicable to an Individual/HUF/ Firm.
However, from AY 2018-19 this section is applicable to individual/HUF/firm or any person (not being a domestic
company, or a fund/institution/trust/university/educational institution/hospital/medical institution referred to in
section 10(23C) (iv)(v)(vi) (via), or a trust/institution registered under section 12A/12AA).

Illustration

ABC Ltd. declared a dividend of INR 200,00,000 for the FY 2017-18 and distributed the same on 15th Jul’18.
Mr. A holds 10% shares and therefore receives INR 20,00,000 as dividend. Mr B hold 4% shares and therefore
receives INR 8,00,000 as dividend.
The tax treatment would be as under:
 Mr A would be taxed on the amount exceeding INR 10,00,000, that is, on INR 10,00,000 he would be
taxed at 10% + SC (if any) + Cess
 Mr B has received dividends < INR 10,00,000 and therefore this would entirely be exempt from tax
under section 10(34)
 The company however would have to pay DDT on the dividend so distributed u/s 115O
Meaning of the term “Dividend” [Section 2(22)] :The term “dividend” is ordinarily used to refer to any
distribution made by a company to its shareholders out of its profits in proportion to the number of shares held
by the shareholder concerned in the company.
Apart from that dividend paid by a company to its shareholders, the definition of dividend includes deemed
dividend as laid down under section 2(22) of the Act, which is inclusive but not exhaustive. Accordingly the
following payments or distribution made by a company to its shareholders are deemed as dividends to the extent
of accumulated profits of the company whether capitalised or not (i.e. bonus shares issued is the capitalisation
of profit). It may be noted that these payments may not be covered as dividend under Companies Act, 2013.:
(a) Any distribution if such distribution entails the release of all or any part of the assets of the company.
Such accumulated profits are distributed in cash or in kind. For in kind distribution, the market value of
assets shall be the deemed dividend in hands of share holders.
(b) Any distribution of debentures, debenture-stock, or deposit certificates in any form, whether with or
without interest to Equity or Preference shareholders. Any distribution of bonus shares to its preference
shareholders. However bonus shares allotted to equity shareholders does not amount to deemed
dividend.

(c) Any distribution made on liquidation of a company

 Lesson 4 n Part V – Income from Other Sources 273

(d) any distribution on the reduction of capital of a company

Deemed dividend under clause (c) and clause (d) does not include :
i. Any distribution by to shareholders on liquidation or reduction of capital of the company in respect
of full cash consideration, where the shareholder is not entitled to participate in the surplus asset
in the event of liquidation.
ii. Any payment made by a company on purchase of its own shares from a shareholder in accordance
with the provisions of section 77A of the Companies Act.
iii. Any distribution of shares made in accordance with the scheme of demerger by the resulting
company to the shareholders of the demerged company (whether or not there is a reduction of
capital in the demerged company).
(e) Any payments in the form of loans or advances to the extent of accumulated profits (excluding
capitalised profit) made by a closely-held company (i.e. a company in which public are not substantially
interested) to:
i. its shareholder who is the beneficial owner of shares holding not less than 10% of voting power in
such company.

ii. to any concern (HUF, Firm, AOP, BOI or Company) in which such shareholder is a member or a
partner and which he has a substantial interest (20% of voting power or share of profit)
iii. any person on behalf of such shareholder for his/her individual benefit.
Deemed dividend under clause (e) does not includes:
• Any dividend paid by a company which is set off by the company against the whole or any part of
any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to
the extent to which it is so set off.
• Vide CBDT circular No. 19/2017, any trade advance in the nature of commercial transactions
would not fall within the ambit of advance.
With amendments by the Finance Act, 2018
• All dividends under section 2(22) are exempt in the hands of shareholders and company is liable
to pay Dividend Distribution Tax (DDT) u/s 115-O @ 15% (gross) on Dividend under section 2(22)
(a) to (d) and @ 30%(Gross) on Dividend under section 2(22)(e) .
• In case of an amalgamated company, accumulated profit or loss shall be increased by the accumulated
profit of amalgamating company (whether capitalized or not) on the date of amalgamation.
Illustration
Suppose, X is holding 29% shares in a company and he took a loan of INR 10,00,000 from the Company and
on the date, the loan was granted, the accumulated profits stood at INR 800,000. The tax treatment would be
as under:
• In case the company is one, where the public is substantially interested, the loan would not be taxable
as deemed dividend in hands of X
• However, in case the company is a private limited company, since X holds > 10% stake, this loan would
be taxable in the hands of X as deemed dividend, but only to the extent of accumulated profits on the
date of grant of loan, i.e., INR 800,000.
274 EP-TL

DEDUCTIONS ALLOWABLE IN COMPUTING INCOME FROM OTHER SOURCES

The income chargeable under the head “Income from other sources” is the income after making the following
deductions:
1. From interest on securities [Section 57(i) and (iii)]: any reasonable sum paid by way of commission
or remuneration to a banker or any other person for the purpose of realising such interest on behalf of
the assessee. Interest on money borrowed for investment in securities can be claimed as a deduction.
2. From the contributions received by employer from employees towards P.F./Superannuation/
other funds [Section 57(ia)]: In the case of income of the nature referred to in Section 2(24(x), which
is chargeable to income-tax under the head “Income from other sources” deduction shall be allowable
in accordance with the provisions of Section 36(1) (va), i.e., if the employer has credited the employee’s
accounts in the respective funds with the amounts of contributions received, the employer shall be
allowed credit thereof.
3. Income derived from letting [Section 57(ii)]: Where income is derived from letting out of machinery,
plant or furniture on hire and also buildings where the letting of building is inseparable from the letting
of such machinery, plant or furniture and the income from such letting is not chargeable to Income-
tax under the head “Profits and Gains of Business or profession”, the following expenses incurred in
respect of those assets:
(a) Current repairs of buildings.
(b) Insurance premium against risk of damage or destruction of the premises.
(c) Current Repairs and insurance of machinery, plant or furniture.
(d) Depreciation.
Where the expenses referred to at (a) to (d) hereinabove are incurred on property used partly for the
business of the assessee, a proportionate deduction shall be allowed.
4. Income in the nature of family pension [Section 57(iia)]: Where a regular monthly amount is payable
by an employer to a person belonging to the family of an employee in the event of his death, i.e., “family
 Lesson 4 n Part V – Income from Other Sources 275

pension”, a sum equal to 33-1/3% of the income orRs. 15,000, whichever is less, is allowable as a
deduction.
All these expenses will be allowed only when the prescribed particulars are furnished by the assessee.
5. Interest on compensation or enhanced compensation [Section 57(iv)]: a deduction of a sum equal
to 50% of such income and no deduction shall be allowed under any other clause of this section.
6. Other deductions [Section 57(iii)]: Any other expenditure (not being in the nature of capital
expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such
income. [Smt. Virmati Ramkrishna v. C.I.T. (1981) 131 ITR 659(Guj)]

AMOUNTS NOT DEDUCTIBLE [SECTION 58]

The following amounts shall not be deducted in computing income chargeable under the head “Income from
other Sources”.
In the case of any assessee:
(i) Any personal expenses of the assessee.
(ii) Any interest chargeable under the Income-tax Act which is payable outside India and from which
income- tax has not been paid or deducted at source.
(iii) Any payment which is chargeable under the head “Salaries” if it is payable outside India unless tax has
been paid thereon or deducted therefrom at source.
Note: The disallowance provisions pertaining to TDS defaults covered by section 40(a)(ia) will be
applicable for computing the Income chargeable under the head Income from Other Sources.
(iv) Any expenditure referred to in Section 40A of Income-tax Act.
No deduction is allowed in respect of any expenditure or allowance in computing the income by way of winnings
from lotteries crossword puzzles races (including horse races) card games and other games of any sort or
from gambling or betting of any form or nature whatsoever. The prohibition however will not apply in respect
of income of an assessee who is owner of horses maintained for running in horse races [Section 58(4)]. The
winnings are now taxed at the rate of 30%. The amount is taxable at source and it does not matter whether
amount goes to one or more recipients. Similarly, the amount spent in buying of in fructuous tickets is not
deductible as the gross amount will be taxed.

DEEMED INCOME [SECTION 59]

Where any allowance or deduction has been provided in the assessment of Income under the head “Income
From Other Sources” in any Assessment Year in respect of loss or expenditure or trading liability incurred by
the assesse and later on during any previous year any amount or any remission or any benefit is obtained by
assesse (whether in cash or otherwise) then such amount or remission or benefit shall be taxable under the
head “ Income From Other Sources” in the previous year in which it is so obtained.

SUMMARY OF COMPUTATION OF INCOME UNDER THE HEAD “INCOME FROM OTHER

SOURCES”
As per section 145 income taxable under this head is to be computed in accordance with the method of
accounting regularly followed by assesse. In other words; if books of accounts are regularly maintained on
“Cash system” then income shall be computed on “receipt basis” and If books are regularly maintained on
“Mercantile system” then Income shall be computed on “accrual basis”.
276 EP-TL

COMPUTATION OF INCOME
Income taxable under Section 56 & 59 XXXX
Less:- Expenditure allowed as deduction under Section 57 XXXX
Income taxable under the head “Income From Other Sources” XXXX

Case Study 1
Nikhil, a dealer in shares received from his friend Anshul, the following without any consideration:
 Cash Gift INR 100,000 on his birthday (14th April)
 Bullion, FMV INR 75,000 on his anniversary (22nd April)
 Plot of land at Gurgaon on 1st Jun’17, stamp duty value INR 750,000 on that date.
Advise on tax treatment.
Answer
a) Cash Gift is > INR 50000, therefore, the entire amount of INR 100,000 is chargeable to tax as Income
from Other Sources
b) Bullion received without consideration is taxable too in full as it is received without consideration,
therefore, the entire amount of INR 75000 is chargeable to tax as Income from Other Sources
c) Plot of land received without consideration is taxable too in full as it is received without consideration,
therefore, the entire amount of INR 750,000 is chargeable to tax as Income from Other Sources

Case Study 2
Nisha, on 1st Dec’19 took possession of a flat booked by her 2 years back, at INR 25,00,000. The Stamp Duty
of the flat on the date of possession was INR 40,00,000 and on the date of booking was INR 29,00,000. She
had paid INR 200,000 by account payee cheque, on date of booking.
Advise tax treatment.
Answer
It is to be noted that where the date of the agreement fixing the amount of consideration for the transfer of
immovable property and the date of registration are not the same, the stamp duty value on the date of the
agreement (in this case booking) may be taken. However, this exception shall apply only in a case where the
amount of consideration referred to therein, or a part thereof, has been paid by any mode other than cash on or
before the date of the agreement for the transfer of such immovable property.
Therefore, the difference between the Stamp Duty Value on date of booking (INR 29,00,000) and the actual
consideration (INR 25,00,000); i.e. INR 400,000 would be taxable under the head “Income from Other
Sources”.

Case Study 3
Discuss the taxability of the following transactions in the hands of the recipient.
1. An HUF received from the Karta’s niece, INR 80,000 in cash
2. Shruti, a member of her father’s HUF, transferred to the HUF a property without any consideration. The
Stamp Duty valuation was INR 12,00,000
3. Robin received from his friend 100 shares of INR 200 each and jewellery worth INR 55,000 (FMV) from
 Lesson 4 n Part V – Income from Other Sources 277

his nephew on the same day

4. An HUF gifted a Car to the Karta’s son, for brilliant performance in the board exams. The FMV of Car
was 10,00,000
Answer
1. Taxable: Sum of money received exceeding INR 50,000 without consideration from a non-relative is
taxable. Therefore INR 80000 is taxable as his niece, not being a member of the HUF is not a relative
of the HUF
2. Non-Taxable: Immovable property received without consideration from a relative is non-taxable. Since
Shruti is a member of the HUF, she is a relative of the HUF and hence the same is not taxable
3. Taxable: In this case, the aggregate FMV of the property other than immovable property, received
without consideration exceeds INR 50000 (INR 75,000 actually for the shares & jewellery together).
Hence, the entire amount would be taxable
4. Non-taxable: Car is not a property for the purposes of Sec. 56 and hence the transaction is non-
taxable

CASE LAW
1. Income from other sources – Deduction of interest under section 57(iii)
Commissioner of Income Tax v. Smt. Swapna Roy [2010] [233 CTR 10, Allahabad High Court]
On a question whether the amount invested by the assessee in sister concerns running in loss since several
years may be treated as investment or expenditure made exclusively for the purpose of making or earning
such income, the Allahabad High Court held that the expenditure towards interest on loan cannot be said to
have been laid out wholly and exclusively for the purpose of making earning income but was a colourable
device, to utilize the funds of one company in the other sister concern and therefore, the interest on loan is
not allowable deduction under section 57(iii).
Further on the principle of consistency, the High Court held that in case an assessee changes his or her
stand repeatedly and does not come with a clean hand, then it shall be sufficient to depart from earlier
practice and the principle of consistency shall not come in the way to assess the income on the basis
of the material on record.
2. Dividend distributed by a company earning agricultural income is liable to be taxed u/s 115-O
Union of India vs Tata Tea- [2017] (SC)
Tata Tea Company is engaged in cultivation of tea which is an agricultural process contends that when
company distributes dividend it is not liable to dividend distribution tax u/s 115-O as tax on this dividend is
nothing but tax on agriculture Income.
Supreme Court decided that when dividend is distributed to company’s shareholders it is not impressed
with the character of its source of income. Dividend is not revenue derived from land and hence cannot be
termed as agriculture income in the hands of the shareholders. Therefore dividend distribution tax u/s 115-O
is to be levied in respect of entire dividend declared and distributed by the Tata Tea Company.
278 EP-TL

LESSON ROUND UP
– Income chargeable under Income-tax Act, which does not specifically fall for assessment under any
of the heads discussed earlier, must be charged to tax as “income from other sources”.
– Section 56(2) specifically provides for the certain items of incomes as being chargeable to tax under the
head such as Dividend, Keyman Insurance policy, Winnings from lotteries, Contribution to Provident
fund, Income by way of interest on securities, Income from hiring machinery etc,Hiring out of building
with machinery, Money Gifts, Share premiums in excess of the fair market value to be treated as
income, income by way of interest received on compensation.
– The entire income of winnings, without any expenditure or allowance or deductions under Sections
80C to 80U, will be taxable. However, expenses relating to the activity of owning and maintaining
race horses are allowable. Further, such income is taxable at a special rate of income-tax i.e., 30% +
surcharge + cess @ 4%.
– Admissible Deductions : The income chargeable under the head “Income from other sources” is the
income after making the deductions such as
– sum paid by way of commission or remuneration to a banker or any other person for the purpose of
realising such interest;
– deduction shall be allowable in accordance with the provisions of Section 36(1)(va), i.e., if the employer
has credited the employee’s accounts in the respective funds;
– a sum equal to 33-1/3% of the income or Rs. 15,000, whichever is less, is allowable as a deduction
from family pension;
– a deduction of a sum equal to 50% of from Interest on compensation or enhanced compensation, and
– any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and
exclusively for the purpose of making or earning such income.
– Inadmissible deductions: The following amounts shall not be deducted in computing income chargeable
under the head ‘Income from other sources’:
– Any personal expenses of the assessee.
– Any interest chargeable under the Income-tax Act which is payable outside India and from which
income-tax has not been paid or deducted at source.
– Any payment which is chargeable under the head “Salaries” if it is payable outside India unless tax
has been paid thereon or deducted therefrom at source.
– Any expenditure referred to in Section 40A of Income-tax Act.

SELF TEST QUESTIONS

These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation.

Multiple Choice Questions “MCQs”

1. Mr. Dev has earned interest of Rs. 12,000 under Post Office Savings Bank Account. The income
taxable as other sources is ?
a) Rs. 12000
b) Fully Exempt
c) Rs. 8,500
d) Rs. 6,000
 Lesson 4 n Part V – Income from Other Sources 279

Answer: c
2. Mr. Raj received Rs. 80,000 from his friends on the occassion of his Marriage anniversary. Taxable
income from other sources is?
a) Entire Rs. 80,000 is exempt
b) Entire Rs. 80,000 is taxable
c) only Rs. 30,000 is taxable
d) Only 50% , i.e. Rs. 40,000
Answer: b
3. Ram received INR 80,000 from his best friend on his birthday?
a) INR 80000 is taxable
b) INR 30000 is taxable
c) Entire amount is exempt
d) None of the above
Answer: a
4. Mr. C aged 72 years, received INR 15,00,000 as dividend, in FY 2017-18. The tax chargeable @ 10%
is on
a) INR 15,00,000
b) INR 5,00,000
c) Nil
d) INR 750000
Answer: b

SUGGESTED READINGS
1. Direct Taxes Law and Practice
Author : Dr. Vinod K. Singhania & Dr. Kapil Singhania
Publisher : Taxmann
Year : 2019
Edition : 2019
2. Direct Taxes Ready Reckoner with Tax Planning
Author : Dr. Girish Ahuja & Dr. Ravi Gupta
Publisher : Wloters Kluwer
Year : 2019
Edition : 20th Edition
 Lesson 6 Deductions from Gross Total Income, Rebate and Relief 309
Lesson 6
n

Deductions from Gross Total Income,

Rebate and Relief
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction At the end of this lesson, you will learn
– Deductions [Sections 80C to 80U] • The type of deductions allowable from
– Relief and Rebate in respect of Income-tax gross total income

– LESSON ROUND UP • What are the permissible deductions in

respect of payments
– SELF TEST QUESTIONS
• What are the permissible deductions in
respect of incomes
• What are the deductions allowable in the
case of a person with disability.
• Provision related to Rebate & Relief

The aggregate of income computed under each head, after giving effect to the provisions for clubbing
of income and set off of losses, is known as “Gross Total Income”. Sections 80C to 80U of the Income-
tax Act lay down the provisions relating to the deductions allowable to assessees from their gross total
income.

309
310 EP-TL

INTRODUCTION
The Income-tax Act provides various tax exemptions and deductions. The incomes which are exempt from tax, i.e.
which are not included in total income are provided under Sections 10 to 13A. Chapter VI A contains deductions
from gross total income under section 80C to 80U in respect of certain payments, investments, incomes and other
deductions. Deduction helps in reducing the taxable income. It decreases the overall tax liabilities and helps to save
tax. However, depending on the type of tax deduction claim, the amount of deduction varies.
The deductions are available only to the assessees where the gross total income is positive. If however, the
gross total income is nil or negative, the question of any deduction from the gross total income does not arise.
For this purpose, the expression ‘gross total income’ means the total income of the assessee computed in
accordance with the provisions of the Income-Tax Act, before making any deduction under Chapter VIA, i.e., the
aggregate income computed under each head, after giving effect to the provisions for clubbing of income and
set off of losses, is known as “Gross Total Income”. Sections 80C to 80U of the Income- tax Act lay down the
provisions relating to the deductions allowable to assessees from their gross total income. The income arising
after deduction under section 80C to 80U is called Total Income.
Summary of Deductions under Chapter VI-A

Section Nature of deduction Who can claim

(1) (2) (3)
80C l Life insurance premium Individual/HUF
l Sum paid towards notified annuity plan of LIC or other insurer, a
contract for a deferred annuity
l Contributions towards Employees’ Provident Fund Scheme, Public
Provident Fund Account, a recognised provident fund, an approved
superannuation fund, notified unit-linked insurance plan of LIC Mutual
Fund, participation in unit-linked Insurance Plan of UTI, any pension
fund set up by any mutual fund which is referred to in section 10(23D)
or by the UTI
l Subscription to any notified security, notified deposit scheme of the
Central Government, notified savings certificates, notified pension
fund set up by National Housing Bank
l Tuition fees paid by an individual to any university, college, school or
other educational institution situated in India, for full time education of
any 2 of his/her children
l Certain payments for purchase/construction of residential house
property
l Subscription to notified schemes of (a) public sector companies
engaged in providing long-term finance for purchase/construction
of houses in India for residential purposes/(b) authority constituted
under any law for satisfying need for housing accommodation or for
planning, development or improvement of cities, towns and villages,
or for both
l Subscription to equity shares or debentures forming part of any
approved eligible issue of capital made by a public company or public
financial institutions, any units of any approved mutual fund referred
to in section 10(23D), notified bonds issued by the NABARD.
l Term deposits for a fixed period of not less than 5 years with a
scheduled bank or post office
l Deposit in an account under the Senior Citizen Savings Scheme
Rules, 2004
80CCC l Contributions to certain pension funds of LIC or any other insurer (up Individual
to Rs. 1,50,000)
 Lesson 6 n Deductions from Gross Total Income, Rebate and Relief 311

80CCD l Contribution to pension scheme notified by Central Government up to

10% of salary.
l Contribution made by employer shall also be allowed as deduction
under section 80CCD(2) while computing total income of the
employee. However, amount of deduction could not exceed 10% of
salary of the employee
Note: The maximum limit of Rs. 1,50,000 is the aggregate of the deduction
that may be claimed under sections 80C, 80CCC and 80CCD. However,
additional deduction of maximum Rs. 50,000 be allowed under section
80CCD(1b) over and above the limit of Rs. 1,50,000.
80CCG 50 per cent of amount invested by specified resident individuals in notified Specified resident individuals
equity savings scheme (subject to certain conditions and limits) (maximum (new retail investors)
deduction : Rs. 25,000)
80D Amount paid (in any mode other than cash) by an individual or HUF to Individual/HUF
LIC or other insurer to effect or keep in force an insurance on the health of
specified person.
Payment towards health scheme and/or on account of preventive health
check-up
80DD Deduction of Rs. 75,000 (Rs. 1,25,000 in case of severe disability) to a Resident Individual/HUF
resident individual/HUF where (a) any expenditure has been incurred for
the medical treatment (including nursing), training and rehabilitation of a
dependant, being a person with disability, or (b) any amount is paid or
deposited under an approved scheme framed in this behalf by the LIC
or any other insurer or the Administrator or the specified company for the
maintenance of a dependent, being a person with disability
80DDB Expenses actually paid for medical treatment of specified diseases and Resident Individual/HUF
ailments subject to certain conditions
80E Interest on loan taken from financial institution/approved charitable Individual
institution for pursuing higher education
80EE Interest payable on loan taken from any financial institution for the purpose Individual
of acquisition of a residential house property
80EEA Tax incentives for affordable housing All assessees

80EEB Tax incentives for electric vehicles All assessees

80G Donations to certain approved funds, trusts, charitable institutions/ All assessees
donations for renovation or repairs of notified temples, etc.
80GG Rent paid in excess of 10% of total income for furnished/unfurnished Individuals not receiving any
residential accommodation (subject to maximum of Rs. 5,000 p.m. or 25% house rent allowance
of total income, whichever is less)
80GGA Certain donations for scientific, social or statistical research or rural All assessees not having any
development programme or for carrying out an eligible project or scheme income chargeable under
or National Urban Poverty Eradication Fund the head ‘Profits and gains of
business or profession’
80GGB Sum contributed to any political party/electoral trust Indian company

80GGC Sum contributed to any political party/electoral trust All assessees, other than local
authority and artificial juridical
person wholly or partly funded
by Government
For certain incomes

80-IA Profits and gains from industrial undertakings engaged in infrastructure All assessees
facility, telecommunication services, industrial park, development of Special
Economic Zone, power undertakings, etc.
312 EP-TL

80-IAB Profits and gains derived by undertaking/enterprise from business of Assessee being Developer of
developing a Special Economic Zone notified on or after 1-4-2005 SEZ

80-IB Profits and gains from industrial undertakings, cold storage plant, hotel, All assesses
scientific research & development, mineral oil concern, housing projects,
cold chain facility, multiplex theatres, convention centres, ships, etc.
80-IC Profits and gains derived by an undertaking or an enterprise in special All assesses
category States (Himachal Pradesh, Uttaranchal, Arunachal Pradesh,
Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura)
80IAC Deduction in respect of eligible Start-Up All assesses

80IBA Deductions in respect of profits and gains from Housing Projects All assesses

80IC Special provisions in respect of certain undertakings or enterprises in All assesses

certain special category States
80-ID Profits and gains from business of hotels and convention centres in All assesses
specified areas
80-IE Deduction in respect of certain undertakings in North Eastern States. All assesses

80JJA Entire income from business of collecting and processing or treating of All assesses
bio-degradable waste for generating power, or producing bio-fertilizers,
bio-pesticides or other biological agents or for producing bio-gas, making
pellets or briquettes for fuel or organic manure
80JJAA Additional wages paid to new regular workmen employed in the previous Indian company having
year for 3 assessment years profits and gains derived from
manufacture of goods in a
factory
80LA Certain incomes of Scheduled banks/banks incorporated outside India Scheduled banks/banks
incorporated outside India
having Offshore Banking Units
in a Special Economic Zone/
Units of International Financial
Services Centre
80P Specified incomes Co-operative societies

80PA Specified incomes Producer Company

80QQB Royalty income of author of certain specified category of books (up to Resident Individual - Author
Rs. 3,00,000)
80RRB Royalty on patents up to Rs. 3,00,000 Resident individuals who is a
patentee and is in receipt of
income by way of royalty in
respect of a patent registered
on or after 1-4-2003
80TTA Interest on deposits in savings bank accounts (up to Rs. 10,000 per year) Individuals/HUFs

80TTB Interest on deposits in case of senior citizens upto Rs. 50,000 Senior Citizen Individuals

80U Deduction of Rs. 75,000, in the case of a person with severe disability, Resident individuals who, at
allowable deduction is Rs. 1,25,000 any time during the previous
year, is certified by the medical
authority to be a person with
disability
Rebates
87A Rebate of Rs. 12,500 or the income tax whichever is less Resident individual whose total
income does not exceed five
lakh rupees
 Lesson 7 Computation of Total Income and Tax Liability of various entities 357
Lesson 7
n

Computation of Total Income and Tax

Liability of various entities
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
In this lesson the Income Tax Treatment with relation
– Taxation of Individuals to Individual, Hindu Undivided Families (HUF),
– Taxation of Hindu Undivided Families Firms, Associations of Persons and Cooperative
Societies is being discussed. The tax implications,
– Computation of Income of the HUF
rates of tax and other issues relating to the above
– Taxation of Firms persons have been discussed elaboratory.
– Alternate Minimum Tax At the end of this lesson, you will learn

– Taxation of Association of Persons/Body of – Computation of taxation of Individuals

Individual – What is a HUF, how it comes into existence
– Taxation of Co-Operative Societies – When and how it can be partitioned and
– Political Parties What are the tax implications before and
after its partition.
– Electoral Trusts
– What is partnership firm
– Exempt organization – Registration u/s
12A/12AA – What are the tax implications in the hands
of partners and firm
– LESSON ROUND UP
– What are admissible expenses/
– SELF TEST QUESTIONS
inadmissible expenses while calculating
the book profit of the firm.
– What are the provisions of Alternate
Minimum Tax
– How Association of persons is formed
– What is the method of computation of
share of a member of AOP.
– What are Co-operative Societies
– How the tax liability of Cooperative
societies determined.
– Provision related to Political Parties;
– Provision related to Electoral Trusts;
– Exempt organization – Registration u/s
12A/ 12AA;

357
358 EP-TL

INTRODUCTION
Income tax is a charge on the assessee’s income. Income Tax law lays down the provisions for computing
the taxable income on which tax is to be charged. Taxable income of an assessee shall be calculated in the
following manner :
1. Determine the residential status of the person as per section 6 of the Act.
2. Calculate the income as per the provisions of respective heads of income. Section 14 classifies the
income under five heads.
(i) Income from salaries
(ii) Income from House Property
(iii) Profits and gains of business or Profession
(iv) Capital Gains
(v) Income from other sources
3. Consider all the deductions and allowances given under the respective heads before arriving at the net
under each head.
4. Exclude the income exempt under section 10 of the Act.
5. Aggregate of incomes computed under the 5 heads of income after applying clubbing provisions and
making adjustments of set off and carry forward of losses is known as Gross Total Income.
6. Deduct therefrom the deductions admissible under Sections 80C to 80U. The balance is called Total income.
7. The total income is rounded off to the nearest multiple of Rupees ten. (Section 288A)
8. Add agriculture income (if any) in the total income calculated in (6) above. Then calculate tax on the
aggregate as if such aggregate income is the Total Income.
9. Calculate income tax on the net agricultural income as increased by Rs. 2,50,000/3,00,000/5,00,000 as
the case may be, as if such increased net agricultural income were the total income.
10. The amount of income tax determined under (9) above will be deducted from the amount of income tax
determined under (8) above.
11. Calculate income tax on capital gains under Section 112, 112A, 111A and on other income at specified
rates.
12. The balance of amount of income tax left as per (10) above plus the amount of income tax at (11) above
will be the income tax in respect of the total income.
13. Deduct the following from the amount of tax calculated under (12) above.
– Rebate under section 87A (if applicable).
– Tax deducted and collected at source.
– Advance tax paid.
– Double taxation relief (Section 90 or 91).
14. The balance of amount left after deduction of items given in (13) above, shall be the net tax payable
or net tax refundable for the assessee. Net tax payable/refundable shall be rounded off to the nearest
multiple of Ten rupees (Section 288B).
 Lesson 7 n Computation of Total Income and Tax Liability of various entities 359

15. Along with the amount of net tax payable, the assessee shall have to pay penalties or fines, if any,
imposed on him under the Income-tax Act.
For calculation of income, amount received is classified under 5 heads of income; it is then to be adjusted with
reference to the provisions of the Income Tax laws in the following manner.

Computation of Tax Liability Sections Amount

1. Income from Salary 15 to 17
Less : Deductions U/s 16
i-a. Standard Deduction of Rs. 50,000 or Gross Salary, whichever is lower. XXX
ii. Entertainment Allowance
iii. Professional Tax Paid
2. Income from House property 22 to 27
Less : Deduction U/s 24
Standard Deduction XXX
Interest on House Property Loan
3. Income from Profits and gains from business and profession 28 to 44 XXX
4. Income from Capital Gains 45 to 55A XXX
Less : Deduction U/s 54
5. Income from Other Sources 56 to 59 XXX
Add/Less : Apply Clubbing and Set Off & Carry Forward Provisions
Gross Total Income [GTI] XXX
Less : Deductions under Chapter VIA 80C to 80U ( XXX )
TOTAL INCOME (Rounded off to nearest Rs.10 U/s 288A) XXX
Tax on Total Income XXX
Add : Surcharge on Total Tax (if applicable) XXX
Less : Rebate U/s 87A (XXX)
Add : 4% Health & Education Cess on [Total tax + Surcharge – Rebate] XXX
Net Tax Liability XXX
Less : (i). TDS (ii). Advance Tax (iii). Relief u/s 89 (XXX)
Balance tax payable on Self Assessment U/s 140A XXX
Less : Self Assessment tax paid XXX
Balance Tax NIL

TAXATION OF INDIVIDUALS

Illustration 1:
Gross total Income of Mr. X, a tax consultant based at Mumbai, is Rs. 18,00,000 (income from profession
360 EP-TL

Rs. 17,00,000 and interest on bank deposit Rs. 1,00,000). He pays Rs. 3,00,000 as house rent. He deposits
Rs. 50,000 in public provident fund. Compute his taxable income for the assessment year 2020-21.
Answer
Computation of taxable Income of Mr. X for the A.Y 2020-21

Particular Amount (Rs.)

Professional Income – PGBP 17,00,000
Interest on Bank Deposit – Other sources 1,00,000
Gross Total Income 18,00,000
Less: Deductions under Chapter VI-A
u/s 80C (PPF) 50,000
u/s 80 GG (Note-1) 60,000
(1,10,000)
Total Income 16,90,000

Note 1: Deduction u/s 80GG is least of the following:

a) Rs. 60,000 (i.e. Rs. 5000 x 12 months)
b) Rs. 4,37,500 [25% of total income (Rs. 18,00,000- 50,000)]
c) Rs. 1,25,000 (Excess of rent paid over 10% of total income (Rs. 3,00,000- 1,75,000))

Illustration 2:
From the following profit and loss account of Vinay for the year ended 31st March, 2020, compute his total
income and tax liability for the assessment year: 2020-21:
Particulars Amount Particulars Amount
Rs. Rs.
Interest on capital 12,000 Gross profit 5,10,000
Insurance 2,000 Brokerage 30,000
Bad debts 30,000 Bad debts recovered 15,000
(earlier allowed as deduction)
Depreciation 34,000 Sundry receipts 18,000
Advance tax 25,000 Interest on debentures
General expenses 12,000 (gross) [TDS Rs. 4,120] 40,000
Advertisement 5,000
Salary 85,000
(including salary to Vinay Rs.20,000)
Interest on loan 8,000
Net profit 4,00,000
Total 6,13,000 Total 6,13,000
 Lesson 7 n Computation of Total Income and Tax Liability of various entities 361

Additional information:
(i) The amount of depreciation allowable as per income-tax rules is Rs. 42,000.
(ii) General expenses include Rs.5,000 given as Health insurance Premium.
(iii) Vinay pays Rs. 5,200 as premium on his own life insurance policy of Rs. 50,000 issued in 2016-17.
(iv) Loan was obtained for payment of income-tax.

Solution
Particulars Amount (Rs.) Amount (Rs.)
(I) Income from business
Net profit for the year 4,00,000
Add : Expenses not allowed under Income tax act but debited to
P & L A/C
Interest on capital (Note 2) 12,000
Depreciation as per books of a/c 34,000
Advance tax 25,000
General Expenses 5,000
Salary to Vinay 20,000
Interest on loan (Note 2) 8,000 1,04,000
Less : Income not related to business and profession but
Credited to P& L a/c
Interest on debentures 40,000
Deductible expenses not debited to P&L Account
Depreciation as per Income tax Act 42,000 (82,000)
Profits and Gains of Business & Profession 4,22,000
(II) Income from other sources Interest on debenture 40,000
Gross total income (I + II) 4,62,000
Less: Deduction U/S 80C – 80U
(i) Premium on life insurance policy (u/s 80C)(Note 1) (5,000)
(ii) Health insurance Premium (u/s 80 D ) (5,000)
Total Taxable Income 4,52,000

Note
1. Under section 80C deduction of life insurance premium cannot exceed 10% of the sum assured.
2. Under Section 36(1)(iii) Interest paid on borrowed capital is allowed as a deduction. Interest on own
capital is not deductible. Similarly, interest on money borrowed to pay income tax in not allowed as a
deduction.
Illustration 3:
For the Assessment year 2020-21, Mr. Ram, who is 58 years old, resident in India, furnishes the following
information:

Basic salary Rs. 15000 pm

Dearness Allowance (20% forming part for retirement benefits) 40% of basic salary
362 EP-TL

City Compensatory Allowance Rs. 300 pm

Children education allowance Rs. 200 pm per child for 2 children

Transport allowance Rs. 2000 pm

House Rent Allowance Rs. 6000 pm

Actual rent paid for a house in Delhi Rs. 7000 pm

He travels via Delhi metro from his residence to office and back in Rs. 1500 pm.
which he spends
Medical allowance Rs. 1000 pm

Lunch allowance Rs. 200 pm

He owns a house property in Mumbai whose construction is completed in 2005 and which is let out for Rs.
40,000 pm. The standard rent as per Rent Control Act is Rs. 3, 10,000. He pays Rs. 32,000 for municipal taxes
and interest on capital borrowed for construction of house Rs. 75,000. Further, he incurs Rs. 10,000 on repairs
of the house.
Long-term capital gains Rs. 225,000
Short term capital gains for the year Rs.1,01,000 (STT not applicable).
Dividend received from Indian Company X Ltd. Rs. 12,000.
Interest received @10% on listed debentures of face value 14,00,000
Diwali Gift of gold coins received from a friend. Market value Rs. 50,000
Share of profit from:

A Firm 40,000

HUF 34,000

Income from Lotteries (gross) 50,000

Mr. Ram invested in PPF Rs.1,50,000 and also paid a life insurance premium of Rs. 21,000. Donation to
National Defence Fund Rs.10,000
Compute the total income and Tax liability of Mr. Ram for the Assessment year 2020-21.
Solution
(A) Computation of Total Income

Income from salary Rs. Rs.

Basic salary (15000 *12) 180,000

Dearness Allowance (180,000*0.40) 72,000

CCA (fully taxable) (300*12) 3600

Children Education Allowance 4800

Less: Exempt 2400 2400

Transport allowance 24000

 Lesson 7 n Computation of Total Income and Tax Liability of various entities 363

Less: Exempt (Exemption withdrawn by Finance Act, 2018) NIL 24000

House Rent Allowance (Note) 7440

Lunch Allowance 2400

Medical Allowance 12000

Less: Deduction under section 16 (ia) Standard Deduction (50,000)

Taxable Salary 2,53,840

Income from house property

Gross annual Value (Rent Received 40,000*12) 4,80,000

Less: Municipal Taxes (32,000)

Net annual Value 4,48,000

Less: Standard Deduction @ 30% of 4,48, 000 (1,34,400)

Less: Interest on capital borrowed (75,000)

Income from House property 2,38,600

Income from Business/Profession

A Firm (Exempt) NIL

HUF (Exempt) NIL

Income under the head Capital Gains

Long-term capital gains u/s 112 2,25,000

Short term Capital Gain u/s 111A 1,01,000

Income from other sources

Dividend received from Indian Company X Ltd. (Exempt) NIL

Interest received on listed debentures 1,40,000

Winning from Lotteries 50,000

Gift in kind 50,000 240,000

Gross Total Income 10,58,440

Less: Deduction under section 80C to 80U

(i) Under section 80C(maximum) (150,000)

(ii) Under section 80G (10,000)

Total Income 8,98,440

(B) Computation of tax on Total Income

Tax on winning from lotteries (30% of Rs. 50,000) 15,000

Tax on long-term capital gains (20% of Rs. 2,25,000) 45000

364 EP-TL

Balance of Total Income Rs. 6,33,440 37,188

Total tax 97,188

Add: Health and Education cess at 4% 3,888

Total liability 1,01,076

Total liability (round off) 1,01,080

Notes:
1. House Rent Allowance: Least of three is exempt
i. 50% of the salary* because the house is in Delhi = 0.50 * 194400 = Rs. 97,200
ii. HRA received = Rs. 72,000
iii. Rent paid – 10% of the salary = (7000 * 12) – 0.10 * 194400 = 84000 - 19440= Rs. 64,560
Exempted HRA = Rs. 64,560
Taxable HRA = 72,000 – 25,680 = Rs. 7,440
*Salary here = Basic salary + Dearness allowance (forming part only) = 180,000 + 180000 *0.40* 0.20
= Rs. 1,94,400
2. The tax liability is subject to set-off of TDS for winning from lotteries and interest from listed debentures.
Illustration 4:
Mr. X aged 62 years, resident individual furnishes the following particulars relevant for the assessment year
2020-21:

Profit and Loss Account

Particulars Amount (Rs.) Particulars Amount(Rs.)

Salaries 30000 Gross profit 436000

General Expenses 45000 Commission 120000

Bad Debts 15000 Sundry Receipts 40000

Reserve for losses 3000 Short term capital gain 30000

Insurance 5200 Discount 2000

Advertisement 10000 Profit on sale of import license 100000

Add: outstanding 2000 12000

Interest on capital 4500

Interest on bank loan 12500

Expenditure on acquisition of patent and 16000

put to use on 30.06.17
Depreciation on Plant 24000

Depreciation on building 10000

Depreciation on Furniture 4000

 Lesson 7 n Computation of Total Income and Tax Liability of various entities 365

Provision for outstanding GST liability 12000

Taxation reserve 12000

Loss by fire of a part of building(Uninsured) 8000

Net profit 514800

Total 728000 Total 728000

Other information
1. Bank loan is used for business purposes.
2. The amount of depreciation as per tax rates, in respect of plant, building, furniture, amounts to Rs.
20000, 12000, 7400 respectively.
3. Salary include payment to a relative which is unreasonable to the extent of Rs. 5000.
4. Out of GST liability Rs. 2000 is paid on 04.07.20 and Rs. 6000 is paid on 03.10.20. The balance is still
outstanding. Due date of filling the return of income is 31.7.20
5. Income of X from other sources is Rs. 24000.
6. X paid medical insurance premium Rs. 16000 for himself and Rs. 16000 for his mother (dependent)
7. X repaid housing loan to the extent of Rs. 45000.
Determine the taxable income and tax liability of Mr. X for the assessment year 2020-21 assuming STT is not
applicable on STCG.
Solution:
Computation of total income of Mr. X for the AY 2020-21

Particular Rs.
Profit and gain from business profession (Note) 537900
Income under the head capital gain [STCG] 30000
Income from other sources 24000
Gross total income 591900
Less: Deduction u/s 80
80C Repayment of housing loan (45000)
(32000)
80D Medical insurance premium
Taxable Income 514900

Computation of Tax on Total Income

Tax on Rs. 300000 Nil

Tax on Rs. 200000 @ 5% 10000
Balance of Total Income 14900 @ 20% 2980
Total tax 12980
Add: Health and Education cess at 4% 519.2
Total liability 13499.2
Total liability (round off) 13,500
366 EP-TL

Working Note:
Calculation of Business Income

Particular Rs.

Profit as per P&L A/C 514800

Add: Inadmissible Expenses

Reserve for losses 3000

Interest on capital 4500

Patent right [16000- 25% of 16000] 12000

Excess salary paid to relative 5000

Outstanding GST liability [12000-2000] 10000

Taxation reserve 12000

Loss by fire of part of building 8000

Less : Admissible Expenses

Depreciation [39400-38000] (1400)

Less : Income taxable under head capital gain

STCG (30000)

Business Income 537900

TAXATION OF HINDU UNDIVIDED FAMILIES

The term ‘Hindu undivided family’ has not been defined in the Income-tax Act but it is treated as a separate
entity or person under section 2(31) of the Income-tax Act, 1961 for the purpose of assessment under the Act.
Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor
and includes their wives and unmarried daughters. Jain and Sikh families even though are not governed by
the Hindu Law, but they are treated as HUF under the Act. An HUF cannot be created under a contract and is
created automatically in a Hindu Family. Creation of a HUF is a God-gifted phenomenon since birth of a child
to a married Hindu, automatically creates a new HUF. It is not at all necessary that every HUF must have joint
property or family income. [R. Subramania Iyer v. CIT (1955) 28, ITR, 352]. However, to become an assessee
under the Income-tax Act, there must be ‘income-yielding’ joint property of the family.
A HUF may consist of a number of smaller HUFs. A smaller HUF has a legal existence and may be assessable
as a unit distinct from the apex joint family even when the bigger HUF is in place [CIT v. Khanna (1963) 49 ITR
232].
The Supreme Court’s decision in the case of Surjit Lal Chhabra v. CIT (1975 101 ITR 776) has come to stay
as one of the leading case laws. The ratio laid down by the Supreme Court had been applied by the Andhra
Pradesh, Orissa and Madras High Courts, followed by Bombay, Patna, Madhya Pradesh and Delhi High Courts
and relied upon by the Punjab High Court. In the latest case, the Delhi High Court held in Commissioner of
Income-tax v. S.P Chopra (1991, 191 ITR 455) that the income from the half share of the property had to be
treated as the individual income of the assessee under the personal law and not as income of the family. The
character of the property had to be determined in accordance with the personal law of the assessee and not on
the basis of how the property had been treated by the revenue in respect of earlier assessments.
458 EP-TL

PERMANENT ACCOUNT NUMBER [SECTION 139A]

Every person, who has not been allotted any permanent account number, is obliged to obtain permanent
account number, if;
- if his total income assessable during the previous year exceeds the maximum amount which is not
chargeable to tax or
– any person carrying on business or profession whose total sales turnover or gross receipts are or is
likely to exceed Rs. 5,00,000 in any previous year or
– is required to furnish a return of income under Section 139(4A) i.e. trust/charitable institutions.
– Every non-individual resident persons (entity) and persons associated with them shall apply for PAN if
the financial transaction entered into by them during the financial year exceeds Rs. 2,50,000 Persons
associated with such resident entity includes every managing director, director, partner, trustee, author,
founder, karta, chief executive officer, principal officer or office bearer of such entity.
Besides above cases, the Assessing Officer may also allot a permanent account number to any other person by
whom tax is payable. Any other person may also apply for a permanent account number. However, Section 139
has been amended w.e.f. August 1, 1998 and provides the alternative of quoting GIR (General Index Register)
number till such time the permanent account number is allotted.
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card,
by the Income Tax Department. The structure of the ten characters of PAN is as under :
a. The first three characters represent the alphabetic series running from AAA to ZZZ.
b. The fourth character of PAN represents the status of the PAN holder i.e. “P” stands for Individual;
“C” stands for Company; “H” stands for Hindu Undivided Family (HUF); “A” stands for Association
of Persons (AOP); “B” stands for Body of Individuals (BOI); “G” stands for Government Agency ;”J”
stands for Artificial Juridical Person; “L” stands for Local Authority; “F” stands for Firm/ Limited Liability
Partnership and “T” stands for Trust.
c. Fifth character of PAN represents the first character of the PAN holder’s last name/surname in case of
an individual. In case of non-individual PAN holders fifth character represents the first character of PAN
holder’s name.
d. Next four characters are sequential numbers running from 0001 to 9999.
e. Last character, i.e., the tenth character is an alphabetic check digit.
PAN enables the department to link all transactions of the “person” with the department. These transactions
include tax payments, TDS/TCS credits, returns of income, specified transactions, correspondence, and so on.
PAN, thus, acts as an identifier for the “person” with the tax department.
PAN was introduced to facilitates linking of various documents, including payment of taxes, assessment, tax
demand, tax arrears etc. relating to an assessee, to facilitate easy retrieval of information and to facilitate
matching of information relating to investment, raising of loans and other business activities of taxpayers
collected through various sources, both internal as well as external, for detecting and combating tax evasion
and widening of tax base.
Inter-changeability of PAN & Aadhaar and mandatory quoting in prescribed transactions.
To ensure ease of compliance, it is provided for inter-changeability of PAN with the Aadhaar number. Accordingly
the provisions of section 139A is amended so as to provide that,-
i. every person who is required to furnish or intimate or quote his PAN under the Act, and who, has not