SUBJECT: FUNDAMENTALS OF BUSINESS TAXATION

Semester : V
PROGRAMME: BMS

Student Workbook

Edition: 2023
#44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru,
Karnataka 560069

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 V SEMESTER
Program: BMS Semester: V
Subject: Fundamentals of Business Taxation
Total Lecture Hours: 60 Credits: 04
Course Objectives:
 Explain the various terminologies and types of taxes in India
 Discuss the Residential status of Individuals and enlist the incomes exempt from tax
 Illustrate the calculation of Individual’s tax liability from various sources of incomes
 Explain the Indirect tax laws of the country- Customs Act, Central Excise, VAT
 To understand the concepts of Service tax and migration to GST

Module 1: Introduction (08 Hours)

Introduction, Canons of Taxation, Types of Taxes, Definitions- Income, Person, Assesse,
Assessment year,Pervious year, Agricultural Income (Simple numerical).
Exempted Incomes U/S 10, Capital and Revenue Income and expenditure, Residential Status and
Incidence of Tax.

Module 2: Computation of Taxable Income under the different heads of

Income (16 Hours)
Income from Salary- Meaning of salary, Allowances, Perquisites, Deductions from salary. (Theory and
Problems)
Income from House Property - Basis of Chargeability, Annual Value, Self-occupied and let out
property-Deductions (Theory and Problems)
Profits and Gains of Business & Profession -Definitions, Concepts, Practical Aspects - Deductions
expressly allowed and disallowed (Theory only)
Capital Gains - Chargeability-Definitions- Cost of Improvement – Indexation - Short term and long-
term capital gains-Exemptions (Theory only)
Income from other sources - Chargeability-Deductions-Amounts not deductible (Theory only)

Module 3: Computation of Total Taxable Income of an Individual (12 Hours)

Gross total Income- deductions from GTI, Calculation of tax liability- (Rates applicable for
respective Assessment year) Education cesses, Refund of tax.

Module 4: Customs Act & GST (10 Hours)

Customs Act - Meaning – Types of Custom Duties - Valuation for Customs Duty, GST and
Customs Duty, levy and exemption from custom duty, Offences and prosecution, Baggage rules,
carrying of currency, gold and goods (Theory only)

Module 5: GST (14 Hours)

Introduction to GST Act, Definitions, GST Structure in India,Supply under GST, Registration,
HSN, Goods and Services exempt from GST, GSTN, Time and Value of Supply, Charge and Levy of
tax, Input Tax Credit, Filing of Returns.

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 Reference Books:
1. Dr. Vinod k Singhania – Direct Taxes Law and Practice, Taxman.
2. T N Manoharan – Student’s hand book on Income Tax Law, Snow white.
3. Dr. Vinod k Singhania –GST & Customs Law, Taxmann publications
4. V.S. Datey- Taxmann publications
5. Bhagwati Prasad – Direct Taxes Law and Practice, VishwaPrakashana.
6. Gaur and Narang – Income Tax Law and Practice, Kalyani Publishers.
7. Dr. H C Mehrotra& Dr. S P Goyal– Income Tax Law and Practice, SahityaBhawan Publishers

Course Outcomes (CO)

CO1 Outline the importance of taxation and its role in economy
Determine the taxable income from different heads of income and list out the deductions from
CO2 respective heads
CO3 Explain the concept of Gross total income highlighting all the deductions U/S 80 C to 80 U
CO4 Describe various types of customs duty and its administration in India.
CO5 Differentiate the pre -GST tax system and post - GST tax system.

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 Income Tax Slab Rate for AY 2023-24 for Individuals:
Individual (resident or non-resident), who is of the age of less than 60 years on the last day of the
relevant previous year:

Net income range Income-Tax rate

Up to Rs. 2,50,000 Nil
Rs. 2,50,000- Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Resident senior citizen, i.e., every individual, being a resident in India, who is of the age of 60
years or more but less than 80 years at any time during the previous year:

Net income range Income-Tax rate

Up to Rs. 3,00,000 Nil
Rs. 3,00,000 – Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Resident super senior citizen, i.e., every individual, being a resident in India, who is of the age
of 80 years or more at any time during the previous year:

Net income range Income-Tax rate

Up to Rs. 5,00,000 Nil
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Plus:-
 Health and Education cess: - 4% of income tax and surcharge.

 Surcharge: -
Rs. 50 Lakhs to Rs. Rs. 1 Crore to Rs. 2 Rs. 2 Crores to Rs. 5 Rs. 5 crores to Rs. 10 Exceeding Rs. 10
1 Crore Crores Crores Crores Crores
10% 15% 25% 37% 37%

Note: - A resident individual is entitled for rebate under section 87A if his total income does
not exceed Rs. 5, 00,000. The amount of rebate shall be 100% of income-tax or Rs. 12,500,
whichever is less.

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 Module – I INTRODUCTION

Tax is levied by the government to form a pool of resources to be used for the collective
benefit of the public. Taxes collected would be used by the government for public welfare programs,
maintenance of law and order in the country, running public sector undertakings etc.
There are two types of taxes – Direct and Indirect. Direct tax is a type of tax where the tax is imposed
on a person and it is paid by the same person. That means the incidence and the impact of tax are on
the same person.

OBJECTIVES OF THIS MODULE:

1. To understand the basic concepts of tax.
2. To know various terminologies used.
3. To give a clear idea about, how individuals are treated under taxing system.
4. To be familiar with the authorities related to income tax and their functioning.

1.1Brief History of Income Tax:

The concept of income tax was introduced in India for the first time by Sir James Wilson in
the year 1860 in order to recover the expenditure incurred by the Government on account of Sepoy
Munity in 1857 (First war of Indian Independence). Thereafter several amendments were made in 1918,
1921 etc. In 1961, based on the recommendation of the Direct Tax Committee and in consultation with
the Law Ministry a Bill was framed and introduced in the Parliament on 1st September 1961 and the
same came to force with effect from 1st April 1962.
The comprehensive Income Tax Act 1961 includes 14 section and sub section running into
thousands and many amendments which were made since 1961. Finance minister presents budget
every year in the parliament with a view to change rates and laws of income tax if any needed in the
interest of the nation building.
Income tax is levied by the Central Government and administered by Central Board of Direct
Taxes (CBDT). Income tax shall be levied only on those persons whose income exceeds certain limit.
Total tax revenue collected by the Central Government is shared by Central and State Government
on the basis of recommendation of finance commission.

1.2 Legal framework:

Income tax is a direct tax. It is levied and collected from the public who have income more than the
exempted limit for a given financial year. Income tax is a central subject and it is levied, collected,
administered, regulated and monitored by the Central Board of Direct Taxes (CBDT) under the
Ministry of Finance, Government of India. The scope of Income tax subject covers the following
aspects. Viz
1. Income Tax Act,1961 (Bare Act – subjected to many amendments from time to time till date)
2. Income Tax Rules 1962
3. Finance Act (passed in the Parliament every year)
4. Judicial pronouncements relating to various issues in Income Tax.

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 1.3 Tax:
It is compulsory levy under certain conditions and it is meant for the general purposes of the state.

1.3.1 Features of tax:

1) It is compulsory payment to be paid by the citizens who are liable to pay it, hence refused to
pay tax is a punishable offence.
2) It is levied to meet public expenditure incurred by the government in the common interest of the
nation.
3) The payment of tax by a person does not entitle him to receive any direct benefits from the
government in return for the tax.
4) There is no direct relationship between the tax paid by the person and the benefits that he may
receive as a result of government expenditure.
5) It has to be paid regularly and periodically as determined by the tax authority.

1.3.2 Types of taxes:

1) Direct Taxes: It is a kind of tax where in incidence and impact is on the

same person. ‘Incidence’ means liability to pay tax to the Government and
‘Impact means burden of paying the tax.
E.g. Income Tax, Wealth Tax,
Property Tax etc. Customs Duty,
GST
Difference between Direct tax and Indirect Tax

Particulars Direct Tax Indirect Tax

Meaning It is a kind of tax where in incidence and It is a kind of tax where in ‘incidence’ and
impact is on the same person. ‘impact’ is on two different persons.
Nature of Tax Progressive in nature. Regressive in nature.
Taxable event Taxable income of the Assessee Purchase/Sale/Manufacture of goods and
or rendering of services.
Levy and Levied and collected from the Assessee. Levied and collected from the consumer
Collection but paid or deposited to the exchequer by
the Assessee or Dealer.
Shifting of Tax burden is borne by the person on Tax burden is shifted to the subsequent or
Burden whom it is levied. Hence, the burden ultimate user.
cannot be shifted.
Tax Collection Tax is collected on the income for a year is At the time of sale or purchase or
earned. rendering of services.
Examples Income Tax, Wealth Tax, Property Tax Excise Duty, Customs Duty, Sales Tax,
etc. Service Tax etc.
1.3.4. Principles or Canons of taxation:

1) Canon of Equality:
According to this canon taxes imposed should be in accordance with an individual’s ability to pay.
That is it should be impartial and based on one’s ability to pay.
2) Canon of Certainty: The amount to be paid, the time and the method of payment should be
clear and certain for the tax payers to adjust his/her income and expenditure accordingly.

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 3) Canon of Convenience: This canon says that the time of payment and the manner payment
should be convenient to the tax payer.
4) Canon of Economy: Every tax involves a collection cost. It is important that the cost of
collection should be the minimum possible. The tax is economical, in the sense that the cost of
collection is very small.
5) Canon of Productivity: The tax system should sufficiently yield the revenue needed to meet
the requirements of the state. Productivity again means that the government should not depend
upon deficits.
6) Canon of Elasticity: Elasticity is closely connected with fiscal adequacy. This canon implies that
yield from taxation should grow along with increase in population and development of economy.
7) Canon of Simplicity: Calculation of taxable income and taxable liability should be simple
and understandable to the tax payer.
8) Canon of Flexibility: Income tax authorities should revise the tax structure at the right time in
order to meet the changing needs of the economy.

1.4 BASIC TERMINOLOGIES UNDER INCOME TAX:

1.4.1. Income Tax:

It is a tax on the income earned by an assessee during the previous year and the tax is payable in the
assessment year at the rates prescribed by the relevant Finance Act. It is a tax levied by the Central
Government on the income earned by an assessee every year.

1.4.2. Assessment U/S 2(8):

According to section 2(8) of Income Tax Act, 1961 the term assessment means-
1) Computation of total income or taxable income
2) Computing the tax on the income and
3) Imposition of tax liability

1.4.3. Assessment Year U/S 2(9):

Assessment year is defined as “the period of twelve months starting from 1st of April and ending of 31st
March every year”. The current Assessment year is 2023-24.

1.4.4. Previous Year U/S 2 (34)

It is the financial year immediately preceding the Assessment year. In other words, the year in which
income is earned is known as previous year. The previous year for the assessment year 2023-24 is
2022- 23.

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 1.4.5. Difference between Previous year and Assessment year
Previous year Assessment year
The year in which income is earned. The year in which the income of the previous
year is assessed to tax.

It always precedes the assessment year. It always succeeds the previous year.
It may be either a full year or part of the It is always a full year
year.
The present previous year is 2022-23. The present assessment year is 2023-24.

1.4.6. Exception to the General Rule Previous Year:

Normally all the incomes of the P.Y are assessed to tax in the A.Y. But there are certain exceptions
to this rule. In these cases, the income of a financial year is assessed to tax in the same year. They
are:
1) Sec. 172 – Income of non-resident from shipping business.
2) Sec. 174 – Income of persons leaving India either permanently or for a long period of time.
3) Sec. 174 (A) – Income of bodies formed for short duration.
4) Sec. 175 – Income of a person trying to transfer his/her assets to avoid the payment of tax.
5) Sec. 176 – Income of a discontinued business.

1.4.7. Assessee U/Sec 2(7):

An assessee means a person by whom any tax or any other sum is payable under the Income Tax
Act of 1961, it includes:
a) Every person in respect of whom any proceeding under this Act has been taken for the
assessment of income or any refund due to him or to such other person.
b) Deemed Assessee.
c) Deemed Assessee in default.

1.4.7(1) Deemed Assessee:

A person may be liable not only for his own income but also on the income of other persons. A person
who is liable to pay any tax or file return of income for the income earned by a minor, agent of non-
resident or by any other person is called Deemed Assessee.
Deemed assessee is a person who is assessable for the income of any other person under this act and
includes the following.
1) The executors or the legal heirs of a deceased person
2) The guardian of a minor, lunatic or idiot having taxable income
3) The agent of any non – resident Indian having income in India.

1.4.7(2) Assessee in Default: When a person is responsible for doing any work under the Income Tax
Act and fails to do it, he is called as assessee in Default. E.g. A company is treated as assessee in default
for non- deduction of TDS.

1.4.8. Person Sec 2(31):

The term person includes:
a) An individual

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 b) A Hindu Undivided Family
c) A Firm
d) A Company
e) An association of persons/body of individuals
f) A Local Authority
g) Artificial Juridical Person

1.4.9. Income Sec 2(24):

The term income means and includes
1) Profit and gains of business
2) Dividends
3) Voluntary contribution received by a Trust or an Institutions
4) Perquisites of profit in lieu of salary/Allowance
5) Capital Gains
6) Winning from Lottery/ Cross word Puzzle/ Race
7) Sum received under Keyman insurance policies including bonus thereon
8) Gifts as per section 56
9) Any consideration received for issue of share as exceeds the fair market value of shares as referred in
clause of (vii)(b) of section 56(2)
10)Any sum of money referred to in section 56(2)(ix) sum of money received as an advance or otherwise
in course of negotiations for transfer of Capital Asset, if it is forfeited and negotiations do not result in
transfer of such capital asset.

1.4.10. Casual Income:

An income becomes casual income, if it contains the following feature: It is unanticipated, it is non-
recurring in nature, it arises from an unknown source, no specific efforts were put in to earn such
income. For example,
1) Winning from lottery
2) Income from cross word Puzzles and card games
3) Tips given to taxi drivers
4) Prize awarded for coin or stamp collection

1.4.11. Heads of Income:

Different heads of income are:
1) Income from Salary
2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources

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 1.4.12. Gross Total Income:
It is the aggregate of the income computed under various heads of income after allowing set-off of losses
according to the provision of Income Tax Act. Section 14 deals with the Gross Total Income and it includes:
1) Income from Salary
2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources

1.4.13. Total Income Sec 5:

Total income of an assessee is Gross Total Income after making deductions u/s 80C to [Link] is
also called as taxable income.

1.5 Exempted Incomes U/S 10

The exempted incomes are given u/s 10(1) to 10 (49) of the act and are not included for the calculation
of total income of the assessee. Some of these incomes are listed below:
1. Agricultural income from a land in India – fully exempted u/s 10(1).
2. Share of income from HUF- fully exempt u/s 10(2)
3. Share of income from firms assessed as firm u/s 184 or 185 is fully exempt u/s 10(2A)
4. Any income from investment by an NRI in bonds and securities –fully exempted u/s10
(4)(i). No exemption on such bonds issued after 1.6.2002.
5. Any income from interest on Non-resident (external) account – fully exempted u/s 10 (4)(ii).
6. Leave travel concession to an Indian citizen employee – exempted up to limits laid down u/s 10(5)
7. Tax paid by government or an Indian concern on behalf of foreign company (sec 10(6A))
8. Perquisites and allowances given by the government to its employees posted abroad - fully
exempted u/s 10 (7).
9. Any income of employees of foreign countries working in India under co-operative technical
assistance Programme – fully exempted u/s 10(8).
10. Amount of retrenchment compensation given to workers – fully exempted u/s 10(10B)
11. Compensation received in case of any disaster [sec 10(10BC)] – in case an individual or his legal
heir receives any compensation on account of any disaster from central or state Government or a local
authority, the same shall be exempted.
12. Any amount received from life insurance corporation on maturity of policy with or without bonus
– fully exempt u/s 10(10D). The sum assured shall be exempt along with bonus in the following
cases:
If any sum received from insurance company on insurance of a dependent handicapped member
a) If any sum received from insurance company when a dependent, or a member of family is suffering
from a notified disease,
b) Any sum received under a key man insurance policy
13. Payment received out of statutory provident fund – fully exempt u/s 10(11)
14. Payment received out of recognized provident fund – fully exempt u/s 10(12)
15. House rent Allowance – exempted as per conditions given u/s 10 (13A).
16. Income from certain exempted securities u/s 10(15).
17. Educational scholarships given by government or any other organizations - fully exempt under
sec 10(16).
18. Allowances received by MPs/MLAs – exempted u/s 10(17) up to the following extent:
 Daily allowance and Constituency allowance – fully exempted.

19. Any Awards instituted or notified by central or state government in the following fields– fully
exempt u/s 10(17 A)

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 a) Literary, scientific or artistic work or attainment
b) Services alleviating the distress of the poor, the week and the ailing
c) Proficiency in sports or games
d) Gallantry awards (paramveerchakra, Mahaveer chakra) approved by the government
20. Any pension received by winners of Param veer chakra, Mahaveer chakra and veer chakra and
familypension received by their dependents- fully exempted under sec 10(18)
21. Family pension received by family members of armed forces. u/s 10(19).
22. Annual value of any one palace of an ex-ruler of Indian states shall be fully exempt u/s 10(19A)
23. Income of a local authority – exempted as per conditions given u/s 10(20)
24. Income of a scientific research association – exempted as per conditions given u/s 10(21).
25. Income of a fund set up for welfare of employees or their dependents exempted as per conditions
given u/s 10(23AAA).
26. Any income of a trust or society approved by Khadi and Village Industries Commission u/s 10(23B).
27. Income of mutual fund – exempted as per conditions u/s 10(23D).
28. Income of a venture fund - exempted as per conditions u/s 10(23FA)
29. Income by way of dividend from an Indian company –fully exempted u/s 10(34)
30. Income from units of UTI and other mutual funds (sec
10(35) Any income by way of:
a) Any income received by way of dividend from a domestic company.
b) Income received in respect of units from the specified company.
31. Income from sale of shares in certain cases [sec 10(36)]
Any income arising from the transfer of a long-term capital asset, being an eligible equity share
in a company purchased on or after march 1, 2003 and before march 1, 2004 and held for a period of
twelve months or more.
32. Any income from long- term capital asset being self-cultivated urban agricultural land on
compulsory acquisition [section 10(37)]- in case of an assessee, being an individual or a Hindu
Undivided family, capital gain arising from the compulsory acquisition of self-cultivated land shall be
fully exempted.
33. Income from international sporting event (sec 10(39))
Any specified income of specified persons from any international event held in India shall be fully
exempt if:
a) Such event is approved by the international body regulating the international sport relating to such event;
b) It has participation by more than two countries; and
c) It is notified by the central government in this regard.

1.6.1 Agriculture income

According to Sec 2 (IA) Agriculture income means:
1) Any rent or revenue received from land which is used for agricultural purpose and situated in India.
2) Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale
of such produce.
3) Income attributable to a farm house subject to the condition that building is situated on or in
immediate vicinity of the land and is used as a dwelling house, store house etc.

1.6.1(a) Examples of Agricultural Income:

1) Income from sale of replanted trees.
2) Rent received from agricultural land.

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 3) Income from growing flowers and creepers.
4) Share of profit of a partner from a firm engaged in agricultural operations.
5) Interest on capital received by a partner from a firm engaged in agricultural operations.
6) Income derived from sale of seeds, straw, dried Tobacco leaves.
7) Land leased for grazing of animals required for agriculture purpose.
8) Insurance money received for destruction of agricultural produce.
1.6.1(b) Examples of Non- Agricultural Income:
1) Income from sale of earth for brick making.
2) Income from stone quarries and fishing
3) Income from sale of spontaneously grown trees.
4) Income from dairy farming, poultry farming.
5) Interest received by a money lender in the form of agriculture products.
6) Income of salt produced by flooding the land with sea water.
7) Royalty income from mines.
8) Income from butter and cheese making.
9) Maintenance allowance charged on agriculture land.
10)Remuneration received as an employee of an agriculture farm.
11)Dividend received from a company engaged in agricultural
operations.
Illustration
Determine whether the following incomes are agricultural incomes or not.
1. Income from interest on arrears of rent payable in respect of land used for agricultural purpose.
2. Income from use of land for grazing of cattle required for agricultural operations.
3. Income from the sale of trees spontaneously grown.
4. Income from the sale of replanted trees in the forest.
5. Lease rent for letting out a tea estate by the assessee doing the business of growing and manufacturing tea.

Solution:
1. Non-agricultural income as the income is derived from a financial activity and not from direct
agricultural activity.
2. Agricultural income as it is an agricultural activity.
3. Non-agricultural income because no agricultural activity is involved.
4. Agricultural income as there is some agricultural activity involved.
5 It is agricultural income as the estate is used for agricultural activities

1.6.1(c) Partly Agricultural Income:

Sometimes, there is composite income which is partially agricultural and partially non-agricultural
income. For certain crops, income tax act gives fixed percentages to segregate agricultural and non-
agricultural incomes. Agricultural income is not taxable and the non-agricultural portion would be
taxable.

Table 1.1
PARTLY AGRICULTURAL AND PARTLY NON-AGRICULTURAL INCOME

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 Crop Rule Agricultural Non-
income agricultural
income
1) Growing and manufacturing of tea 8 60% 40%
2) Rubber manufacturing business 7A 65% 35%
3) Coffee grown and cured by seller 7B(1) 75% 25%
4) Coffee grown and cured, roasted and 7B(1A) 60% 40%
grounded by the seller in India with or without
mixing chicory or other flavoring agents

1.6.2Integration of Agricultural Income with Non-Agricultural Income: [sec 2(2)]:

Agricultural income is exempt from tax u/s 10(1) but it is included in the total income for tax liability
calculation. The object of aggregating the net agricultural income with non-agricultural income is to
tax the non-agricultural income at higher rates.

1.6.3Conditions for aggregation:

 Integration is done only in case of Individuals, HUF, Firms assessed as association of persons (AOP),
Association of persons, Bodies of individuals, artificial juridical persons.
 Integration is done only if Non-agricultural income of persons mentioned above exceeds the
exempted limits which are Rs.2,50,000 for individuals and HUF, and Rs. 3,00,000 for senior citizens
in the relevant previous year.
 Integration is done if net agricultural income of all these persons exceeds Rs. 5000 in the relevant
previous year, companies and co-operative societies.

1.6.4 Calculation of net agricultural income:

It is computed in accordance with the rules laid down u/s 2(iA) of the Income tax act 1961 and rules 7
& 8 of the income tax rules 1962. These rules are:
1. Rent or revenue derived from agricultural land will be computed on the same basis which is adopted
for computation of income under the head income from other sources u/s 57 to 59 of the income tax
act.
2. Income derived from agricultural operations will be computed as if it is income chargeable to tax
under the head profits & gains of business or profession. Depreciation and loss on the death of animals
used in agricultural operations are allowed as expenses.
3. Income from agricultural house property will be computed as if such income is chargeable to tax under
the head ‘income from house property’ and provisions under section 22 to 27 shall be applicable.
4. For computing share of income from tea business income is computed under rule 8 which
shall be considered to be agricultural income.
5. For computing share of income or loss of a firm assessed as AOP same rules are applicable as
provided in income tax act for computing share of profits and losses from firm assessed as firm.
6. Loss incurred in agriculture will be allowed to be set off only against agricultural incomes.
7. Any sum payable by the person on account of any tax levied by State Govt. on agricultural income
will be allowed as deduction.
8. Where the net result of agricultural income from the various sources stated above in a particular
previous year is a loss, such loss will be disregarded and net agricultural income shall be taken as nil.

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 1.7Capital and Revenue:
1.7.1Introduction
It is necessary to understand the distinction between capital and revenue items to determine the tax
treatment of expenses and incomes. For the understanding of the concepts, it is divided into three parts:
i) Receipts
ii) Expenditure
iii) Losses

Capital Receipt Revenue Receipt

[Link] of fixed capital received is a capital [Link] received as circulating capital is a
receipt. revenue receipt.
2.A receipt in substitution of a source of income 2. A receipt in substitution of an income is a
is a capital receipt. E.g. Compensation revenue receipt. E.g. Bonus received by an
received from his employer for the employee from his employer is a revenue
termination of service is a capital receipt. receipt.
[Link] amount received as a compensation for the 3. An amount received under an agreement as
surrender of certain rights under an agreement is compensation for loss of future profits is a
a capital receipt. E.g. Amount paid to a retiring revenue receipt. Compensation paid for breach
director of a company for of agreement is a revenue receipt
not starting a competing business after his
retirement
4. If the asset is used by the assessee as an 4. If the asset is kept in the business as stock in
investment then the sale proceeds thereof will trade i.e. for the purpose of making profit from
be a capital receipt. E.g.: Motor car used by a its sale then the sale proceeds thereof is a revenue
business is a capital asset and the sale receipt. E.g. Sale proceeds of motor
proceed thereof is a capital receipt. cars maintained by vehicle dealer.
5. Subsidies or grants received from the 5. Subsidies or grants received from the
government for specific capital purpose. E.g., government for meeting foreign competition or
For any development scheme or renovation otherwise assisting the trader in his
or modernization is a capital receipt. business are revenue receipts.
6. Insurance money received for a capital 6. Insurance money received for a trading
asset is capital receipt. asset is revenue receipt.

1.7.2. Capital Expenditure and Revenue Expenditure:

Capital expenditure is not deductible from the gross income of the business but the revenue
expenditure is deductible therefore, it is essential to know the difference between the two:

Capital expenditure Revenue expenditure

1. Cost of acquisition and installation of a1. Purchase price of goods bought for
fixed asset is a capital expenditure. resale along with expenses on their
purchase is revenue expenditure.
2. An expenditure incurred to discharge a 2. An expenditure incurred to discharge a
capital liability is a capital expenditure. revenue liability is revenue
expenditure.
3. An expenditure incurred for acquiring a 3. An expenditure incurred for earning an
source of income is a capital expense. income is a revenue expense.
e.g. acquisition expenses of a business

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 4. An expenditure incurred for 4. An expenditure incurred for maintaining
increasing the earning capacity of a a fixed asset in good condition is revenue
business by improving its fixed assets is a expenditure.
capital expenditure.
5. Capital expenditure is a non- recurring 5. It is recurring in nature.
item.
6. Expenditure in obtaining capital by 6. Expenditure incurred in raising loans
issuing shares is a capital expenditure. or issuing debentures is revenue
expenditure.

1.7.3 Capital and revenue Losses:

Loss on the sale of a capital asset is a capital loss whereas loss on sale of goods of the business is a
revenue loss. Loss sustained on account of embezzlement done by an employee, destruction of
goods or non-recovery of any amount due in connection with business is a revenue loss. Loss
sustained by theft committed by an employee during usual business hours or outside business hours
is a revenue loss being incidental to the trade.

RESIDENTIAL STATUS AND INCIDENCE OF TAX

It refers to the status of an individual, which determined on the basis of his/her total stay in India. Under section
6, the residential status of an individual is divided into the following categories.

Residential status of an individual

Resident Non- Resident

Ordinary Resident Not Ordinary Resident

Basic Conditions u/s 6

(i) An assessee must be in India for a period of 182 days or more during the previous year
OR
(ii) An Assessee must be in India for a period of 60 days or more during the previous year and 365 days
in 4 years preceding the relevant previous year.

Exception: II Basic condition is subject to the following exceptions

(i) In case of an assessee who is an Indian citizen leaves India for employment purpose or as a crew
member of an Indian ship.
(ii) In case of an assessee who is of an Indian origin comes to India during the previous year for a visit.
In the above cases 60 days, as suggested u/s 6 (1) shall be replaced by 182. In other words the second basic
condition shall not be applicable.

Additional Conditions u/s 6(6)

(i) An assessee must be a Resident for 2 or more years out of 10 years preceding the relevant previous
year.
AND

FOR PRIVATE CIRCULATION ONLY

 (ii) An assessee must have been in India for at least 730 days in 7 years preceding the relevant previous
year.

FOR PRIVATE CIRCULATION ONLY

Types of Residential Status
An individual who satisfies any one of the above Basic conditions u/s 6(1) is treated as a resident for the previous
year.
1) Ordinary Resident (O.R): An individual who satisfies any one of the basic condition and both the additional
conditions.
2) Not Ordinary Resident (N.O.R): An individual who satisfies any one of the basic condition and any one or
none of the additional conditions
3) Non-Resident (N.R): An individual who does not satisfy any of the basic conditions will be treated as Non-
Resident; here the additional conditions are irrelevant.

Incidence of tax or taxability of total income on the basis of residence:

1) Resident: Total income of any previous year of a person who is an “Ordinary Resident” includes all income
from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India c)
Accrues or arises to him outside India during the previous year.

2) Resident but not Ordinary Resident

The total income of a person who is a resident but not ordinary resident includes all income from whatever source
derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or deemed to accrue or arise to him in India
c) Accrues or arises to him outside India from a business controlled in or a profession setup in India.

3) Non–resident
Total income of a Non-resident includes all income from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India during such year.

Illustration 1:

Problems on Residential Status

Illustration 1
BRET lee an Australian cricket player, visits India for 100 days in every financial year. This has been in practice
from the past 10 financial years.
Find out his residential status for the assessment year A.Y. 2023-24.
Solution:
Assesse: Bret lee
Previous Year: 2022-23
Assessment Year: 2023-24
Determination of Residential Status of Bret Lee for the AY 2023-24.
Si.N AP MA JU AU OC NO DE FE MA PY / 4PP 7PP 2/10
Years JUNE SEP JAN
o R Y L G T V C B R Total Y Y PPY
2022- ***
100 **** yes
23 *
2021-
1 100 Yes
22
2020-
2 100 Yes
21
400 700
2019-
3 100 Yes
20
2018-
4 100 Yes
19

FOR PRIVATE CIRCULATION ONLY

 2017- ***
5 100 Yes
18 *
2016- ***
6 100 Yes
17 *
2015- ***
7 100 ****
16 *
2014- ***
8 100 **** ****
15 *
2013- ***
9 100 **** ****
14 *
2012-
10 Nil Nil Nil Nil
13

COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6)
Basic conditions Under Section 6(1)

6(1) A. An Individual Should be in India for a period of182 Days or More In the Previous Not
Year Satisfied

6(1) B. An Individual Should be in India for a period of 60 Days or More In Previous Year & Satisfied&
365 Days out of 4 Preceding to Previous Year Satisfied

Additional Conditions Under Section 6(6)

6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied

6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Not Satisfied

INTERPRETATION:
Bret lee satisfied one of the conditions under section 6(1), AND satisfied one of the 6(6).
So Bret lee is called as resident but not ordinary resident.

Problems on Residential Status

Illustration 2
Mr Emad an Indian citizen left for South Korea on July1, 2019. He came back on August 7, 2022. Determine his
residential status for the A.Y. 2023-24.
Solution:
Assesse: Mr Emad
Previous Year: 2022-23
Assessment Year: 2023-24
Determination of Residential Status of Mr Emad for the AY 2023-24.
AP MA JU AU OC NO DE JA FE MA PY / 2/10
Sl. No Years JUNE SEP 4PPY 7PPY
R Y L G T V C N B R Total PPY
*** *** ***
PY 2022-23 **** 25 30 31 30 31 31 28 31 237
* * *
*** *** *** *** *** *** *** *** ***
1 2021-22 **** **** **** Nil ****
* * * * * * * * *
*** *** *** *** *** *** *** *** ***
2 2020-21 **** **** **** Nil ****
* * * * * * * * * 457
*** *** *** *** *** ***
3 2010-20 30 31 30 1
*
****
* * * * *
**** 92 Yes
1552
4 2018-19 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes

5 2017-18 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 **** Yes

6 2016-17 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** Yes

7 2015-16 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** Yes

FOR PRIVATE CIRCULATION ONLY

 8 2014-15 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** **** Yes

9 2013-14 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 **** **** Yes

10 2012-13 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** **** Yes

COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6)
Basic conditions Under Section 6(1)

6(1) A. An Individual Should be in India for a period of182 Days or More In the Previous Satisfied
Year

6(1) B. An Individual Should be in India for a period of 60 Days or More In Previous Year Satisfied&
& 365 Days out of 4 Preceding to Previous Year Satisfied

Additional Conditions Under Section 6(6)

6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied

6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Satisfied

INTERPRETATION:
Mr Emad satisfied both of the conditions under section 6(1), AND satisfied both of the 6(6).
So Mr Emad is called as resident - ordinary resident.

Problems on Residential Status

Illustration 3

Dr. Sreeraj, an Indian citizen and Professor in IIM, Lucknow, left India on September 15 2022 for USA to take
up professor’s job in MIT, USA.
Determine his residential status for the A.Y. 2023-24.
Solution:
Assesse: Dr. Sreeraj
Previous Year: 2022-23
Assessment Year: 2023-24
Determination of Residential Status of Dr. Sreeraj, for the AY 2023-24.
AP MA JUN JU AU OC NO DE JA FE MA PY / 4PP 7PP 2/10
[Link] Years SEP
R Y E L G T V C N B R Total Y Y PPY
*** *** *** *** *** ***
2022-23 30 31 30 31 31 15
* * * * * *
168
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔
1 2021-22 366 Yes
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
2 2020-21 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Full Yes
3 2019-20 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
4 2018-19 365 Full
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
5 2017-18 366
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
6 2016-17 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
7 2015-16 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
8 2014-15 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
9 2013-14 366
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
10 2012-13 365

FOR PRIVATE CIRCULATION ONLY

COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6)
Basic conditions Under Section 6(1)

6(1) A. An Individual Should be in India for a period of182 Days or More In the Not Satisfied
Previous Year

6(1) B. An Individual Should be in India for a period of 182 Days or More In Not Satisfied
Previous Year & 365 Days out of 4 Preceding to Previous Year

Note: Second basic condition of 60 days is going to substitute with 182 days since he left India for employment
purpose.

Dr. Sreeraj, not satisfied both of the conditions under section 6(1), so checking of conditions under section 6(6)
is immaterial.
Means if an assesse will not satisfy basic condition itself, additional conditions will not be applicable for him.
Dr. Sreeraj is called as Non-resident.

Problems on Residential Status

Illustration 4
Mr. Kamath, after about 30 years, stays in India, returns to America on June 30, 2019. He returns India on 11th
January 2023 to join American Company as its overseas branch manager.
Determine his residential status for the assessment year A.Y. 2023-24.
Solution:
Assesse: MR. Kamath
Previous Year: 2022-23
Assessment Year: 2023-24
Determination of Residential Status of MR. Kamath for the AY 2023-24.
AP MA JUN JU AU OC NO DE JA FE MA PY / 4PP 7PP 2/10
Years SEP
[Link] R Y E L G T V C N B R Total Y Y PPY
*** *** **** *** *** **** *** *** ***
2022-23 21 28 31 80 Yes
* * * * * * *
*** *** **** *** *** **** *** *** *** *** *** *** ****
1 2021-22
* * * * * * * * * *
*** *** **** *** *** **** *** *** *** *** *** *** ****
2 2020-21
* * * * * * * * * *
456
*** *** **** *** *** *** *** *** *** 91
3 2019-20 30 31 30
* * * * * * * *
Yes
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 1552
4 2018-19 Yes
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 Yes
5 2017-18
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
6 2016-17 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
7 2015-16 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
8 2014-15 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
9 2013-14 366
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
10 2012-13 365

FOR PRIVATE CIRCULATION ONLY

COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6)
Basic conditions Under Section 6(1)

6(1) A. An Individual Should be in India for a period of182 Days or More In the Not Satisfied
Previous Year

6(1) B. An Individual Should be in India for a period of 60 Days or More In Satisfied& Satisfied
Previous Year & 365 Days out of 4 Preceding to Previous Year

Additional Conditions Under Section 6(6)

6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied

6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Satisfied

INTERPRETATION:
MR. Kamath satisfied one of the conditions under section 6(1), AND satisfied Both of the conditions under section 6(6).
So MR. Kamath is called as resident -ordinary resident.

Problems on Residential Status

Illustration 5
Ms Priya, is a foreign citizen, not being a person of Indian origin. Determine her residential status for the
assessment year 2023-24. On the assumption that during financial year 2008-2009 she was present in India as
follows:
Years No of Days Years No of Days Years No of Days
2008-09 221 2013-14 340 2018-19 182
2009-10 22 2014-15 30 2019-20 85
2010-11 50 2015-16 160 2021-22 280
2011-12 72 2016-17 96 2022-23 86
2012-13 130 2017-18 286 2023-24 65

Solution:
Assesse: Ms Priya,
Previous Year: 2022-23
Assessment Year: 2023-24
Determination of Residential Status of Ms Priya, for the AY 2023-24.

Si.N AP MA JU AU OC NO DE JA FE MA PY / 2/10
Years JUNE SEP 4PPY 7PPY
o R Y L G T V C N B R Total PPY
/// /// /// /// /// /// /// /// /// /// /// ///
PY 2022-23 65
/// /// /// /// /// /// /// /// /// /// /// /// 86
1 2021-22 Yes
/// /// /// /// /// /// /// /// /// /// /// /// 280
2 2020-21 633 1175 Yes
/// /// /// /// /// /// /// /// /// /// /// /// 85
3 2019-20 Yes

FOR PRIVATE CIRCULATION ONLY

 /// /// /// /// /// /// /// /// /// /// /// /// 182
4 2018-19 Yes
/// /// /// /// /// /// /// /// /// /// /// /// 286 /// Yes
5 207-18

/// /// /// /// /// /// /// /// /// /// /// /// /// Yes
6 2016-17 96
/// /// /// /// /// /// /// /// /// /// /// /// /// Yes
7 2015-16 160
/// /// /// /// /// /// /// /// /// /// /// /// /// /// ////
8 2014-15 30
/// /// /// /// /// /// /// /// /// /// /// /// /// /// Yes
9 2013-14 340
/// /// /// /// /// /// /// /// /// /// /// /// /// /// ///
10 2012-13 130

COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6)
Basic conditions Under Section 6(1)

6(1) A. An Individual Should be in India for a period of182 Days or More In the Not Satisfied
Previous Year

6(1) B. An Individual Should be in India for a period of 60 Days or More In Satisfied &
Previous Year & 365 Days out of 4 Preceding to Previous Year satisfied

Additional Conditions Under Section 6(6)

6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied

6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Satisfied

INTERPRETATION:
Ms Priya, satisfied one of the conditions under section 6(1), AND satisfied both of the conditions under section 6(6).
So, Ms Priya, is called as resident -ordinary resident.

Problems on Residential Status

Illustration 6

Mr. Bhaskar, born and brought up in India, joined a company in Bahrain on 1st October 2018. He came back to
India on 25th April 2019 and went back on 25th may 2019. He again came to India on 25th March 2020 and left
back on 22nd May 2020. Due to acute illness, he came back to India on leave on 15th October 2020 and joined
back his duty on 1st august 2022. He resigned from his job on 1st January 2023 and came back to India on 1st
February 2023.
Determine his residential status for the assessment year 2023-24.
Departure Arrival
01/10/2018 25/04/2019
25/05/2019 25/03/2020
22/05/2020 15/10/2020
01/08/2022 01/02/2023

FOR PRIVATE CIRCULATION ONLY

 AP MA JU AU OC NO DE JA FE MA PY / 2/10
[Link] Years JUNE SEP 4PPY 7PPY
R Y L G T V C N B R Total PPY

PY 2022-23 30 31 30 31 1 0 0 0 0 0 28 31 182
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔
1 2021-22 365

2 2020-21 30 22 0 0 0 0 17 30 31 31 28 31 220 Yes

807 Yes
3 2019-120 6 25 0 0 0 0 0 0 0 0 0 7 38
Yes
4 2018-19 30 31 30 31 31 30 1 0 0 0 0 0 184 1902
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
5 2017-18 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
6 2016-17 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
7 2015-16 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
8 2014-15 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
9 2013-14 365
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes
10 2012-13 365

Solution:
Assesse: Mr. Bhaskar
Previous Year: 2022-23
Assessment Year: 2023-24
Determination of Residential Status of Mr. Bhaskar, for the AY 2023-24.

COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6)
Basic conditions Under Section 6(1)
6(1) A. An Individual Should be in India for a period of182 Days or More In the Previous Year Satisfied

6(1) B. An Individual Should be in India for a period of 182 Days or More In Previous Year & Satisfied
365 Days out of 4 Preceding to Previous Year

Additional Conditions Under Section 6(6)

6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied
6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Satisfied

INTERPRETATION:
Mr. Bhaskar, satisfied both of the conditions under section 6(1), AND satisfied Both of the conditions under section 6(6).
Mr. Bhaskar, is called as resident -ordinary resident.
7. Mr. Irfan comes to India for the first time on April 16, 2022; he has stayed in India up to October 5th 2022. Determine his
residential status for the AY 2023-24.
8. Mr. Piyush an Indian Citizen left India on 15th August 2022 for the first time to UK. For the purpose of employment. He
plans to visit India every year and stay here from 15h April to 10th September from 2023 onwards. What will be his
residential status for AY 2023-24?
9. Mr. Anil went to England for studies on 5th August 2020 and came back to India on 25th February 2022. He had never
been out of India before. Determine the residential status for the assessment year 2023-24

FOR PRIVATE CIRCULATION ONLY

Incidence of Tax
Section 5 of Act provides the scope of the total income in terms of residential status of person. It depends
upon following 3 considerations:
(i)The residential status of the person.
(ii) The place of accrual or receipt of income.
(iii)The point of time at which the income is accrued or received.

The tax incidence can be understood from the following table:

Whether taxable or not
Incomes Ordinary Not Non
Ordinary
Resident Resident Resident
1. Income received in India whether accrued or arisen Yes Yes Yes
in India or outside
2. Income deemed to be received in India whether Yes Yes Yes
accrued or arisen in India or outside India
3. Income accruing or arising in India whether received Yes Yes Yes
in India or outside India
4. Income deemed to accrue or arise in India whether Yes Yes Yes
received in India or outside India
5. Income received and accrued or arisen outside India
from a business controlled in or a profession set up in Yes Yes No
India
6. Income received and accrued or arisen outside India
from a business controlled from outside India or Yes No No
profession setup outside India
7. Income received and accrued or arisen outside India Yes No No
from any other source
8. Income accrued or arisen and received outside India
No
in earlier years but later on remitted to India during the No No
previous year.

Illustration 1
Mr. Satya gives you the following information being a Resident Ordinary Resident.
1. Salary Rs.80,000 received in Japan for the services rendered in India.
2. Commission received in India for the services given in Sri Lanka Rs.1,40,000.
3. House rent of the house situated in Nepal received in India Rs.30,000.
4. Dividend of a England based company received in India Rs.75,000.
5. Profit of the business situated in Japan brought to India Rs.5,00,000.
Determine the residential status of Mr. Satya for the previous year 2021-22 and explainthat on
which income he is liable to pay tax in India.
Compute his taxable income for the AY 2023-2024.

FOR PRIVATE CIRCULATION ONLY

 Computation of Total income
Name of the Assessee: Ms. Satya P.Y.2022-2023
Residential status: Resident Ordinary Resident A. Y. 2023-2024
Types of Income NI R
Salary received in Japan for the services rendered in
1
India (Assumed to be computed income) Rs.80,000
Commission received in India for the services given
2
in Sri Lanka Rs.1,40,000.
House rent of the house situated in Nepal received in
4
India Rs.30,000.
5 Dividend of a England based company received in India Rs.75,000.
6 Profit of the business situated in Japan brought to India Rs.5,00,000.
GTI/ TOTAL INCOME 8,16,000

Illustration2
Kishan, a foreign national furnishes the following particulars of his income relevant for the previous year 2022-
23
1. Profit on sale of plant at London (one half is received in India) 1,46,000.
2. Profit on sale of plant at Delhi (one half is received in London) 1,02,000
3. Salary from an Indian company received in London (one half is paid for services rendered in India) Rs.60,
000.
4. Interest on UK development bonds (entire amount received in London) Rs. 40,000
5. Income from property in London received there Rs. 30,000
6. Profit from a business in Delhi managed from India Rs. 49,000
7. Income from agriculture in London received there, half of which is used for meeting hostel expenses of his
son and remaining amount is later on remitted to India Rs. 25,000.
8. Dividend (gross) received in London from a company registered in India but mainly operating in London
Rs.17,000.
9. Rental income from a property in Nepal deposited by the tenant in a foreign branch of an Indian bank operating
there. Rs. 12,000
10. Gift from a relative in foreign currency (one third of which is received in India and remaining amount is
used for meeting education expenses of Kumar’s son in USA) Rs. 3,90,000.
Determine gross total income of Kishan for the assessment year 2023-24, if he is
a) Resident and ordinary resident
b) Resident but not Ordinary resident, and
c) Non-resident.

Solution:
Computation of Gross Total Income of Kishan for the A.Y 2023-24

Not
Ordinary Non-
Particulars ordinary
Resident resident
resident
1. Profit on sale of plant at London 1,46,000 73,000 73,000
2. Profit on sale of plant at Delhi 1,02,000 1,02,000 1,02,000
3. salary from an Indian company 60,000 30,000 30,000

FOR PRIVATE CIRCULATION ONLY

 4. Interest on UK development bonds 40,000 ----- -----
5. Income from property in London 30,000 ----- -----
6. profit from a business in Delhi 49,000 49,000 49,000
7. income from agriculture in London 25,000 ----- -----
8. Dividend from an Indian company Exempt Exempt Exempt
9. Rental income from property in Nepal 12,000 ---- ----
10. gift from a relative Exempt Exempt Exempt
Gross total income 4,64,000 254,000 2,54,000

Illustration 3. From the following particulars of Mr. Uday compute his Gross total income for the
A.Y.2023-24 if he is 1. Resident, 2. Not Ordinarily Resident and 3. Non-Resident
(a) Income from business from Raichur Rs. 50,000
(b) Profit from business in U.K. controlled from India Rs 60, 000
(c) Income from house property in Japan not received in India Rs 30, 000
(d) Income from business in India but received in Pakistan Rs 50, 000
(e) Salary received in India for service rendered in USA Rs 70, 000
(f) Interest on deposit with State Bank in Bangalore Rs 10, 000
(g) Profit from business in Ceylon controlled from India (1/3 profit received in India)
Rs 30,000
(h) Salary received in India for service rendered in Kuwait Rs 35, 000
(i) Past untaxed foreign income brought into India Rs 8, 000
(j) Dividend received from Domestic Company Rs 5,000
(k) Interest on Post Office Savings Bank A/c Rs 1,000
(l) Agriculture income earned in Nepal Rs 25,000.
(m) Gift in cash from a relative received in India Rs 60000.
(n) Interest received from a firm in UK later on remitted to India Rs 10000

Computation of Total income

Previous year2022-2023
Name of the Assessee: [Link] Assessment Year: 2023-2024
Types of Income N R NOR NR
I
(a) Income from business from Raichur II 50,000 50,000 50,000
Not
(b) Profit from business in U.K. controlled from India 60, 000 60, 000
CI Taxable
Income from house property in Japan not received in Not Not
(c) 30, 000
India FI Taxable Taxable
Income from business in India but received in
(d) 50, 000 50, 000 50, 000
Pakistan Rs II

(e) Salary received in India for service rendered in USA 70,000 70,000 70,000
II

(f) Interest on deposit with State Bank in Bangalore 10, 000 10, 000 10, 000
II

FOR PRIVATE CIRCULATION ONLY

 (g) Profit from business in Ceylon controlled from India II& CI 10, 000 10, 000 10, 000
(1/3 profit received in India) Rs 30,000
20,000 20,000
(h) Salary received in India for service rendered in Kuwait 35, 000 35, 000 35, 000
Rs II
(i) Past untaxed foreign income brought into India Not Not Not
EI Taxable Taxable Taxable
(j) Dividend received from Domestic Company 5,000 5,000 5,000
II
(k) Interest on Post Office Savings Bank A/c Not Not Not
EI Taxable Taxable Taxable
(l) Agriculture income earned in Nepal. 25,000 Not Not
FI Taxable Taxable
(m) Gift in cash from a relative received in India II 60000 60000 60000

(n) Interest received from a firm in UK later on remitted to 10,000 10,000 Not
India CI Taxable

FOR PRIVATE CIRCULATION ONLY

 TERMINAL QUESTIONS:

Terminal questions:
Section A – 5Marks Questions
1. Mention the different types of residents for income tax purpose.
2. Briefly explain the Canon of income tax.
3. Briefly explain the exceptions to the general rule of previous year.
4. Differentiate between Capital expenditure and Revenue expenditure.
5. Mention any 10 items which are exempted from tax U/S 10
6. Describe any 5 Agricultural and Non- agricultural income.

Section B :
1. Mr. Raj, citizen of U.S. came to India for the first time on 01.05.2018. He
stayed here without any break for 3 years and left for Bangladesh. on
01.05.2021. He returned to India on 01.04.2022 and went back to U.S. on
01.12.2022 He was posted back to India on 20.01.2023. Determine his
residential status for the A.Y 2023-24.
2. Vaishak, a foreign national (not being a person of Indian origin), comes
to India for the first time on April 15, 2018. During financial years 2018-
19, 2019-20, 2020-21, 2021- 22, 2022-2023 he was in India for 130days,
80days, 13 days, 210 days and 75 days respectively. Determine his
residential status for the A.Y 2023-24.
3. Mr. Dhiraj, a citizen of India, is an export manager of Arjun Overseas
Limited, an Indian 4 Company, since 1.5.2018. He has been regularly
going to USA for export promotion. He spent the following days in U.S.A.
for the last five years: Previous year ended No. of days spent in USA
31.3.2019 317 days 31.3.2020 150 days 31.3.2021 271 days 31.3.2022
311 days 31.3.2023 294 days Determine his residential status for
assessment year 2023-2024. assuming that prior to 1.5.2018 he had never
travelled abroad.
4. Mr. James a citizen of West Indies was appointed as sales manager in
India on 1stApril 2018 at Mumbai. On 25 January 2021he went to
Uganda on deputation for period of 3 years, but left his wife and children
in India. On 1st May 2021 he came to India and took with him his family
to Uganda on 30th June 2021. He returned to India and joined his original
job on 24th January 2022. Determine his residential status for the A.Y
2023-24.

FOR PRIVATE CIRCULATION ONLY

 Section C:

1. Mr. Naresh is an Indian Citizen. He left India on 16th July 2022 to

England and return to India on 02 Feb 2023. During the Previous Year
his details of income were as follows:
Interest on Securities of an Indian Company received in England Rs 22,000
Agricultural Income in Gujarat Rs 30,000
Dividend from Indian Company Rs 10,000
Interest received from a firm in England remitted to India Rs 9,500
Amount brought to India out of past untaxed profit earned in England Rs 22,000
Income from business in Pakistan being controlled from India Rs 15,000
Interest earned & received in England from bank & deposited there Rs20,000
Income from Salary received in India for services rendered in England Rs20,000
Determine his Residential Status & Gross Total Income for the AY 2023-24.

2. Krishna is an Indian citizen went out of India on 28th august 2020 for service in a company
in Japan and came back to India on 1st April 2022 to meet his family. During the year 2022-
23, he received the following incomes:
Incomes from salary in Japan Rs 28000.
Interest on bonds of central government of India Rs28000
Taxable income from shares from foreign company Rs 7500 received in Japan.
Income from agricultural land situated in Punjab Rs 10000
Interest received from firm in U.K. remitted to India Rs.9200
Payment from public provident fund Rs 20000.
Commission received in India for the services given in Nepal Rs.10000.
Profit from business in Srilanka Rs.40000 (business controlled from Chennai) of which
Rs15000 was received in India.
Profit of the business in Nepal brought to India. Rs 50000
Amount brought to India out of past-untaxed profit earned in Japan Rs 8000.
Share of income from HUF Rs 12000.
Calculate the gross total income of Krishna after ascertaining his residential status for
assessment year 2023-2024.

FOR PRIVATE CIRCULATION ONLY

 MODULE II

Computation of Taxable Income under the different heads of Income

Different heads of income are:

2.1Income from Salary
2.2Income from House Property
2.3Profits and gains from Business or Profession
2.4Capital Gains
2.5Income from Other Sources

Objective of this module:

 Understand the concept of different heads of income
 To know perquisites for each heads of income
 To identify exempted income
 To know deduction for each heads
 To know calculation of income from each heads

2.1 INCOME FROM SALARY

Salary (Section 15 – 17)
Salary is the remuneration received by or accruing to an individual, periodically, for service
rendered as a result of an express or implied contract. The actual receipt of salary in the previous
year is not material as far as its taxability is concerned. According to Income Tax Act there are
certain conditions where all such remuneration is chargeable to income tax:
 When due from the former employer or present employer in the previous year,
whether paid or not
 When paid or allowed in the previous year, by or on behalf of a former
employer or present employer, though not due or before it becomes due.
 When arrears of salary are paid in the previous year by or on behalf of a former
employer or present employer, if not charged to tax in the period to which it
relates.

1.1 Basis of charge:

 Relationship between payer and payee is vital.

 Salaries and wages are not conceptually different. Both are compensation for work
done or services rendered.
 Salary from more than one source or employer also considered.
 Salary from former employer, present or prospective employer shall also taxable.
 Salary income must be real and not fictitious.
FOR PRIVATE CIRCULATION ONLY
  Foregoing of salary: Section 15 taxes salary on ‘’due’’ basis even if it is not received.
 Voluntary payments: Salary perquisites or allowances may be given as a gift to an employee
yet they would be taxable.

Section 17(1) of the Income Tax Act gives an inclusive and not exhaustive definition of “Salaries”,
which includes:
1. Wages.
2. Annuity or pension.
3. Gratuity.
4. Fees, Commission, allowances perquisites or profits in lieu of salary.
5. Advance of Salary.
6. Amount transferred from unrecognized provident fund to recognized provident fund.
7. Contribution of employer to a Recognized Provident Fund in excess of the prescribed limit.
8. Encashment of Earned Leave Salary.
9. Compensation as a result of variation in Service contract etc.
10. Employer’s contribution in excess of 12% of employee’s salary to RPF and interest on RPF
in excess of 9.5% p.a.
11. Contribution made by the Central Government to the account of an employee under a notified
Pension scheme.

1.2 Arrears of Salary - Salary in arrears / advance, received in lump sum, is liable to
tax in the year of receipt. Relief can be obtained for salary arrears u/s 89(1) of the
Income Tax Act.

1.3 Salary: is paid by the employer to the employee in consideration of the service
rendered by him to the organization. It includes monetary value or non-monetary value
of benefits and facilities provided by the employee. Any amount received other than
from employer cannot be termed as salary.

1.4 Computation of taxable income from salary of for the assessment year 2022-23

Format for Computing Taxable Income from Salary

Name of the Assesse: XXX Previous year: 2021-22

Residential Status: - R/NOR/NR Assessment year: 2022-23

Particulars ₹ ₹
1. Basic Pay xxx
2. Advance salary xxx
3. Arrear salary (If it not taxed earlier) xxx
4. Dearness Pay/ Dearness Allowances xxx
5. Fees, xxx
FOR PRIVATE CIRCULATION ONLY
 6. Bonus, xxx
7. Commission xxx
8. Allowance’s u/s 17(2) xxx
9. Taxable perquisites u/s 17(3) xxx
10. Profits in lieu of salary xxx
[Link] of Earned Leave xxx
12. Employer's contribution to RPF in excess of 12% of salary xxx
13. Accrued Interest on RPF in excess of 9.5% xxx
14. Taxable portion of gratuity xxx

15. Taxable portion of compensation on retirement xxx

16. Taxable portion of compensation on Voluntary retirement xxx

17. Pension from the date of retirement to the end of previous year xxx
18. Taxable portion of the commuted value of pension xxx

Gross Salary xxxx

Less: Deductions U/s 16

a) Standard Deductions U/S 16(i) (Maximum limit

of 50,000or gross salary, WEL) xxx
b) Entertainment Allowance U/S 16(ii)
(In case of Government employee) xxx
c) Professional tax U/S 16(iii) xxx
xxx
TAXABLE INCOME FROM SALARIES xxx

1.5 Basic Salary: It is fully taxable; there are two methods of calculating Basic Salary,
1) Receipts Basis: Under this method salary will be received at the end of every month.
It falls due on the last date of the same month (1st April 2021 to 31st March 2022)
2) Due Basis: Under this method, salary of any month will be received in the first week
of next month. It falls due on the first day of next month (March 2021-Februray 2022).

1.6 Leave Salary: Section 17 (1) (a)

It is also called as salary in lieu of leave. An assesse is entitled for certain number of
leaves as per the employment contract. If the assesse does not avail such leave, then
he can get the salary for the number of days he has not availed leave.

FOR PRIVATE CIRCULATION ONLY

 Leave Salary Received can be classified into two types. They are:

1. Leave Salary received while in service: It is fully taxable for both government
employees and non- government employees.
2. Leave salary received at the time of retirement: It is fully exempt U/S 10(10AA)
for government employee and it is partially exempted U/S 10(10AA) for non–
government employee.
3. Encashment of Leave Salary [Sec. 10(10AA)]
Encashment of leave by surrendering earned leave standing to the employee's credit
is known as encashment of leave salary.
Format for computation of encashment of earned leave
Particulars Amount
Actual EL Received Xxx
Less: Least of the following is exempted:

1. Actual EL Received xxx

2. Maximum allowed limit as per IT Act Rs. 3,00,000
3. 10 months’ Average Salary xxx
4. Approved period x Average Salary xxx xxx

TAXABLE SALARY XXX

Note:
1. Average salary means the total of basic salary, dearness allowance (forming part of salary),
commission (if it is based on a fixed percentage of turnover achieved by the employee),
for 10 months immediately preceding the date of retirement, divided by 10.
2. To find out the duration of service period, fraction of the year shall be ignored.
3. Actual EL received = Service period - Leave Used period x last drawn salary.
4. Approved Period is the cash equivalent to the leave to the credit of employee at the time of
retirement as per IT Rules
5. If employee receives leave salary from two or more employers in the same year, the
maximum limit of 3,00,000 shall be reduced by the amount of leave salary exempted
earlier. This provision is applicable for non-government employees receiving leave salary
at the time of retirement.
6. Leave salary paid to the legal heirs of the deceased employee is fully exempt from tax. If
total earned leave less leave availed is negative, it must be taken as nil.
7. An Assesse is entitled only for 30 days of earned leave for every completed year of service.

Illustration-1

Mr. Nagaraj (resident) was a manager in a Private Company. He sought pre

mature retirement fromservice on 1st November 2022 after completing 25 years
of service. His salary for 10 months preceding retirement was Rs. 36,900. He had
seven months leave to his credit on the basis of 30 days per year which was
approved and he was paid 27,300 as salary. Compute the amount of leave
FOR PRIVATE CIRCULATION ONLY
 encashment exempt from tax for A. Y. 2023-24, if his last drawn salary is Rs3,900.
Assessee: Mr. Govind
Status: Resident Previous Year: 2022-23
Category: Non-Govt. Employee Assessment Year: 2023-24
Particulars ₹ ₹.
Computation of Taxable Leave Salary

Assessee: Mr. Nagraj Previous Year: 2022-2023

Status: Resident Assessment Year: 2023-24
Category: Non-Govt. Employee
Particulars ₹ ₹
Actual leave salary received 27,300
(25-18=7x3,900)
Less: Exempt : Least of the following:
1. Actual leave salary received 27,300
2. Leave salary as per IT law 25,830
(25-18=7x3,690)
3. (10x3,690), 10 months average salary 36,900
4. Maximum limit 3,00,000 25,830
Taxable Leave 1,470
Salary

Note: Average Salary = Rs. 36900 / 10 mths = Rs. 3,690

Illustration-2

Mr. Govind (resident) resigned from his service from a public company on 30th
November 2022 after completing 24 years and 10 months of service. During his service
he was allowed to get 45 days of earned leave for every completed year of service. During
his service he had availed 10 months leave and had encashed 6 months leave. On
resignation he was paid leave salary of Rs. 2,20,000 for his credit of 20 months earned
leave. His average salary during the 10 months preceding to the date of his resignation
was 11,000.

Compute his taxable leave salary for the assessment year 2023-24.

Solution:
Computation of Taxable Leave Salary

Note: Last drawn salary is not specified in the problem. Therefore, average salary is assumed

FOR PRIVATE CIRCULATION ONLY

 2,20,000
1080 / 30 -
Leave encashment received (45 x 24 = ( 3 6 - 1 6 ) = 20 (20 ∗
11,000)
Less: Exempt: Least of the following:
i) Leave encashment received 2,20,000
ii) Leave salary as per IT law
720 88,000
(30*24= = 24 − 16 = 8) (8 ∗ 11,000)
30
iii) 10 months average salary (11,000 × 10). 1,10,000
iv) Maximum limit 3,00,000
Exempted amount of earned leave 88,000
Taxable Leave Salary 1,32,000
to be last drawn salary, i.e., Rs. 11,000

Illustration-3

Mr. Suresh (resident) retired from ABC Ltd. On 1-11-22 after serving the company for
25 years and 9 months. At the time of retirement his basic pay was Rs. 20,000 p.m. and
D.A. of Rs. 800 p.m. [which is treated as salary for the purpose of all retirement benefits]
but it was Rs. 18,000 per month basic and Rs. 200p.m DA up to 31-7-2022.

He is entitled for 45 days of leave per year of service and has availed 55 days leave and
encashed 20 days of leave throughout his service and received a leave salary Rs. 7,28,000.
Compute taxable part of leave salary for the A.Y. 2023-24.

Solution:

Computation of Taxable Leave Salary

Assessee: Mr. Suresh

Status: Resident Previous Year: 2022-23
Category: Non-Govt. Employee Assessment Year: 2023-24
Particulars ₹ ₹.
1,050
Leave encashment received (25 x 45) = (1,125-75) = 30
= 35 ∗ 20,800) -

Less: Least of the following: 7,28,000

i) Leave encashment received 7,28,000
ii) Leave salary as per IT law
675
4,27,050
(25*30) =750-75= = 22.5 ∗ 18,980
30

FOR PRIVATE CIRCULATION ONLY

 iii) 10 months average salary (18,980 × 10). 1,89,800
iv) Maximum limit 3,00,000
Exempted amount of earned leave 1,89,800
Taxable Leave Salary 5,38,200

Calculation of Average Salary: (Salary from 01-01-2021 to 30-10-2022)

1. Salary = (18,000 x 7) = {1,26,000} + (20,000 x 3) = {60,000} = 1,86,000
2. DA = (200 x 7) = {1,400} + (800 x 3) = {2, 400} = 3,800
Avg. Salary = 186900 + 3800 = 1,89,800/10 = Rs. 18,980
Gratuity:
Gratuity is a retirement benefit generally payable at the time of cessation of
employment and on the basis of duration of service.
Gratuity received can be classified into two types. They are:

1. Gratuity received while in service:

it is fully taxable for both government and non–government employees.
2. Gratuity received at the time of retirement: This includes
a. Gratuity received by government employees: It is fully exempt
b. Gratuity received by non–government employees who are covered by the payment of gratuity
Act 1972 it is taxable but exemption can be availed U/S 10(10).
c. Gratuity received by non– government employees who are not covered by the payment of
gratuity Act 1972 it is taxable but exemption can be availed U/S 10(10).

A) Format of Calculation of Taxable Gratuity (non–government employee when gratuity

received is covered by payment of gratuity act, 1972)

Particulars ₹. ₹.
Actual Gratuity Received XXX
Less: Least of the following is exempted u/s 10(10):
a) Actual Gratuity received XXX
b) Maximum amount 20,00,000
c) 15/26 x Last Salary Drawn x No. of years completed service XXX
Exempted Gratuity XXX
Taxable Gratuity XXX

NOTE:
1. Salary last drawn comprises of
Basic salary + Dearness allowance of the month of retirement (full month salary should be
taken)
2. No. of years of service (rounded off): if it is 6 months or less ignore and if it is more
than 6 months round it off to next year.
3. For Seasonal employments, period is taken as 7/26 in place of 15/26

FOR PRIVATE CIRCULATION ONLY

B. Calculation of taxable gratuity (non – government employee when gratuity received
is not covered under payment of gratuity act, 1972)

Particulars ₹. ₹.
Actual Gratuity Received XXX
Less: Least of the following is exempted u/s 10(10):
a) Actual Gratuity received XXX
b) Maximum amount 20,00,000
c) 15/30 x Average salary x No of years completed service XXX
Exempted Gratuity XXX

Taxable Gratuity XXX

NOTE:
1. Average salary: It is the average of last 10 months’ salary preceding the month of
retirement. It includes
Basic salary
(+) Dearness allowance (if it enters retirement benefit)
(+) Commission at a fixed rate calculated on turnover achieved by assesse.

2. For the service period any fractional month is given in the problem should be
ignored (Only completed number of years must be considered).

If Gratuity is already received previously from any employer, it will be deducted from
maximum allowable limit
Illustration 1.
Mr. Ganesh (resident) employed at a salary of ₹ 6,200 per month. He is also getting DA
of ₹ 2,800 per month. He receives ₹ 5,000 as bonus. On 30/5/2022 he retired from his
service. He had service of 29 years and 5 months. He received ₹ 2,00,000 as gratuity
under the Payment of Gratuity Act, 1972. Compute his taxable gratuity for the
Assessment year 23-24.

Name of the Assesse: Mr. Ganesh Previous year: 2022-23

Residential Status: - Resident Assessment year: 2023-24

Category- Non Govt. employee

Particulars ₹. ₹.

FOR PRIVATE CIRCULATION ONLY

 Actual Gratuity Received 2,00,000
Less:
Least of the following is exempted u/s 10(10):
1. Actual Gratuity received 2,00,000
2. Maximum amount 20,00,000
3. (15/26) X (9,000 X 29) 1,50,577 *Bonus will
Exempted Gratuity (1,50,577)
be excluded
Taxable Gratuity 49,423 from Salary
calculation for gratuity purpose

Last drawn salary ---6,200+2,800= 9,000, Service period -29 years (fractional months
should be ignored as covered under POGA)

Illustration 2.
Sri. Moushumi Das is employed at a salary of ₹ 6,000 per month in a seasonal factory.
Besides, he also gets DA at ₹ 2,500 per month and annual Bonus ₹ 5,000. He retires on
30/9/2022. He gets ₹ 1,75,000 gratuity under the Payment of Gratuity Act, 1972. He
served for 30 years and 7-month, Compute taxable amount of Gratuity for the
Assessment year 2023-24.

computation of taxable gratuity

Name of the Assessee: Sri. Moushumi Previous year: 2022-23
Residential Status: - Resident Assessment year: 2023-24
Category- Non Govt employee
Particulars ₹ ₹
Actual Gratuity Received 1,75,000
Less:
Least of the following is exempted u/s 10(10):
[Link] Gratuity received 1,75,000
2. Maximum amount 20,00,000
3. (7/26) X (8,500X 31) 70,942

Exempted Gratuity (70,942)

Taxable Gratuity 1,04,058
Note: Salary last drawn- 6,000 + 2,500 = Rs. 8,500; Service period 30 years + 1 years (7
months is more than 6 months, so fractional month is converted into one year)

FOR PRIVATE CIRCULATION ONLY

Illustration 3.
Sri. Venial Patra, received ₹ 60,000 on his retirement on 30/9/2022 as Gratuity from his
employer with whom he served for 29 years and 7 months. If his salary during calendar
year 2021 was ₹ 2,000 and during 2022 was 2,400 and it is due on 1st of every month. He
had worked earlier with a company for 6 years and received Rs. 92,000 as gratuity,
which was fully exempted. Compute taxable amount in each of the following cases:

a) He is Govt. Employee
b) Non. Govt. Employee
(i) covered under POGA (ii) not covered under POGASolution:
a) If Sri. Venial Patra is a Govt. employee, entire gratuity amount of Rs. 60,000 is
exempted from tax.
b) i) Computation of taxable gratuity (Under the payment of gratuity Act)

Computation of taxable gratuity

Name of the Assessee: Sri. Venial Patra Previous year: 2022-23
Residential Status: - Resident Assessment year: 2023-24
Category-Non Govt. employee

Particulars ₹ ₹

Actual Gratuity Received 60,000

Less:
Least of the following is exempted u/s 10(10):
[Link] Gratuity received 60,000
2. Maximum amount (20,00,000-92,000) 19,08,000
3.(15/26) x (2,400 x 30)
41,538
Exempted Gratuity (41,538)

Taxable Gratuity 18,462

FOR PRIVATE CIRCULATION ONLY

b) ii) Computation of taxable gratuity (Not Under the payment of gratuity Act)

Computation of taxable gratuity

Name of the Assessee: Sri. Venial Patra Previous year: 2022-23
Residential Status: - Resident Assessment year: 2023-24
Category-Non Govt. employee

Particulars ₹ ₹

Actual Gratuity Received 60,000

Less:
Least of the following is exempted u/s 10(10):
[Link] Gratuity received 60,000
2. Maximum amount (20,00,000-92,000) 19,08,000
3.(15/30) x (2,320 x 29) 33,640

Exempted Gratuity (33,640)

Taxable Gratuity 26,360

Notes.
Average salary- (1/11/20 to 30/8/2021) Form (Nov to Dec)- 2000 x 2= 4000
From (Jan to Aug)- 2400 x 8 =19200 (19,200 +4,000) = 23200/10 = 2320
Fractional month should not be considered therefore serviced period is 29 months.

Pension U/S 17(1)(ii) – [Exemption U/S10(10A)]

It is a periodical amount received by an employee from his employer after his retirement for
the service rendered in the past. This amount is paid by the employer to ensure livelihood of
his employee post his retirement. Pension received by the employee is only covered here. Any
pension received by family members after the death of employee is discussed under income
from other sources (Family Pension). The periodical amount of pension received by an
employee is taxable like salary. Such pension is referred as Uncommuted Pension. This type
of pension is fully taxable for both Govt. as well as Non Govt. employees. However, if an
employee receives a lump sum instead of receiving monthly pension, it is called Commuted
Pension. Such type of pension is fully exempt for Govt. employee’s u/s 10 (10A).
FOR PRIVATE CIRCULATION ONLY
Commuted pension for non govt. employees would be taxed in the following manner:

Non-Government employees
If employee receives gratuity If employee does not receives
gratuity
Least of the following is exempt Least of the following is exempt

1. Actual commuted pension 1. Actual commuted pension

received received
Or or
1/3 rd of *full pension 1/2 of full pension

Note: *Full Pension is an amount equivalent to the total pension commuted entirely

Format for Calculation of Taxable amount of Pension

Particulars ₹. ₹.
Actual Commuted Pension Received XXX
Less: Least of the following is exempted:
a) Actual Commuted Pension received XXX
b) 1/3 (receives gratuity) x full pension or
½ (does not receive gratuity) x full pension XXX
Exempted Pension XXX
Taxable Pension XXX

Illustration-1
Mr. Sumeet Basak (resident) retired from services on 31st March 2021. His pension was fixed
at ₹ 6,000 p.m. He commutes one-half of his pension and received ₹.3,00,000. Find out the
taxable amount of commuted pension, if:
a) He is a government employee.
b) He is a non-Govt. employee who also gets gratuity and
c) He is a non-Govt. employee who does not get any gratuity

Solution:
Computation of Taxable Pension
Assessee: Mr. Sumeet Basak Previous Year: 2022-23
Status: Resident Assessment Year: 2023-24
Particulars ₹. ₹.
(a) If Mr. Sumeet Basak is a Government employee
Entire commuted pension of 3,00,000 will be
exempted from tax
FOR PRIVATE CIRCULATION ONLY
 Total Taxable Commuted Pension Nil

(b) If Mr. Sumeet Basak is a Non Govt. employee, who

also gets gratuity
Commuted pension received
Less: Least of the following is exempt: 3,00,000
1. Actual commuted pension received 3,00,000
2.1/3 of full value of commuted pension 2,00,000
(1/3 x 2/1 x 3,00,000)
2,00,000
Total Commuted Taxable Pension 1,00,000

b) If he is a Non Govt. employee, who does not get gratuity

Commuted pension received 3,00,000

Less: Least of the following is exempt
1. Actual commuted pension received
2. 1/2 of full value of commuted pension 3,00,000
3,00,000 3,00,000
(1/2 x 2/1 x 3,00,000)
Total Commuted Taxable Pension Nil

Provident Fund (PF)

To encourage savings for the social security of employees, government has setup various kinds
of provident funds. The employee contributes a fixed percentage of salary towards these funds
and in many cases, employer also contributes an equal amount. The mechanism of PF works
like this. Any fund to be provided in the future is known as provident fund. In this fund certain
percentage is deducted from the salary of an employee and an equal sum is contributed by the
employer and both the amounts are deposited in provident fund account by the employer on
behalf of employee.

The mechanism of PF works like this:

1. Every month the employee will be contributing to this fund for his future benefits.
2. Normally the same amount will be contributed by the employer also to the fund.
3. Interest will be earned by investing these funds in some good rated securities.
4. Assesse can withdraw this at the time of leaving the job or retirement or death.

FOR PRIVATE CIRCULATION ONLY

 Types of Provident Fund:

1. Statutory Provident Fund (SPF): Any fund maintained as per the Provident Fund Act of
1925 and it is generally maintained by the employees of Government & Statutory
Corporation.
2. Recognized Provident Fund (RPF): Provident Fund which is recognized by
commissioner of Income Tax of the purpose of tax exemption is known as RPF and
generally maintained by private companies.
3. Unrecognized Provident Fund (URPF): It is a fund which is not recognized by
commissioner of income tax but still contribution can be made in this fund. Employee of
private and unorganized sector will contribute to this fund.
4. Public Provident Fund (PPF): Any member of the public whether salaried employee or
self-employed can invest in the public provident fund by opening a PPF account at the State
Bank of India and its subsidiaries or any other nationalized banks.

S. No. Particulars SPF RPF URPF PPF

1 Employers Fully Exempted up to To be ignored Not
Contribution Exempted 12% of employee’s at the time of applicable
salary contribution
2 Employees Qualifies Qualifies for Not qualifies for Qualifies
Contribution for deduction u/s deduction u/s 80C for
deduction 80C deduction
u/s 80C u/s 80C
3 Interest on Fully Exempted up to To be ignored in Fully
PF Exempted 9.5% p.a. the year of Exempted
credit
4 Refund from Fully It is fully Employee Fully
Provident Exempted exempted If the contribution is Exempted
fund deposit employee has fully exempted.
rendered
continuous service Employers’
of 5 years contribution and
otherwise it is interest thereon
treated as refund is taxed under the
from URPF and head income
accordingly taxed from salary.

Interest on
employee
contribution is
taxed under the
head income
from other
sources
FOR PRIVATE CIRCULATION ONLY
 Illustration-1
Calculate the taxable amount of annual accretion to RPF if the following information is
provided by Mr. Kiran (resident)
1. Basic salary @ 10,000 P.m.
2. Commission received by him on the basis of turnover of ₹. 5,00,000@ 10%
3. Employer contribution towards RPF @b15% of salary.
4. Interest credited on 30th June 2020 to RPF balance @ 14% is ₹. 50,000

Computation of Taxable amount of annual accretion

Name of the assessee: Mr Kiran Previous year 2022 - 23

Status: Resident Assessment year: 2023 -24
Category: Non-Government employee
Particulars Amount (₹.)
Employer towards RPF @ 15% salary
15/100 X (1,20,000 + 50,000) 25,500

Less 12% of salary is exempted

(12% of 1,70,000) (20,400) 5, 100
Interest credited to RPF @ 14% 50,000

Less: Exempted up to 9.5%

(50,000 X 9.5/ 14) ( 33,929 )

Taxable amount of Interest towards RPF 16,071

Taxable portion of annual accretion Rs. 21, 171

Allowances:
Fixed sum of money given regularly in addition to basic salary to meet a particular purpose
are known as allowances. The types of allowances are:

1) Fully Exempted Allowances:

Fully Exempt from Tax and hence not included in salary income
1. Foreign allowance to Government employee
2. Allowance from UNO
3. Allowances given to judges of High Court and Supreme Court

2) Fully Taxable Allowance

Fully Taxable and hence to be added fully to salary income

FOR PRIVATE CIRCULATION ONLY

 1. Dearness allowance
2. City compensatory allowance
3. Tiffin allowance
4. Medical allowance
5. Servant allowance
6. Foreign allowance to non-government employee
7. Overtime allowance
8. Deputation allowance
9. Project allowance
10. Warden allowance
11. Lunch allowance
12. Non practicing allowance
13. Marriage allowance

3) Partly Taxable Allowance

(a) Allowance related to official duties: These allowances are exempted to the extent they are
spent and balance is taxable.
1. Uniform allowance
2. Daily allowance
3. Transfer allowance
4. Conveyance allowance
5. Helper allowance
6. Research allowance
7. Professional Development allowance

(b) Allowance related to employee’s personal expenses: A fixed amount determined by

Central Government is exempted irrespective of the actual expenditure incurred and
the rest is amount is taxable.

1. Tribal Area Allowance: Exempted up to ₹. 200 p.m.

2. Border Area Allowance – Exempted up to ₹. 200 p.m. to ₹. 1,300 p.m.
3. Compensatory Hill Allowance: Exempted up to ₹. 300 p.m. to ₹. 7,000 p.m. based on the
area.
4. Children Education Allowance: Exempted up to ₹. 100 p.m. per child up to a maximum
of two children.
5. Child Hostel Allowance: Exempted up to ₹. 300 p.m. per child up to a maximum of two
children.
6. Transport Allowance: Fully Taxable for normal employee and in case of
handicapped employee up to ₹. 3,200 p.m.
7. Allowance for transport employees: Exempted to the least of 70% of such
allowance or ₹. 10,000 p.m. whichever is less.
8. Underground Allowance: Exempt up to ₹. 800 p.m.
9. High Altitude Allowance: Exempt up to ₹. 1,060 pm to 1,600 pm depending on altitude
10. Entertainment Allowance: It is the amount paid by employer for availing
entertainment services. It is first added to gross salary and then allowed as deduction

FOR PRIVATE CIRCULATION ONLY

 u/s 16(ii).
In case of government employee, Least of the following is given as deduction u/s 16(ii):
- Actual Entertainment Received or
- 20% of basic salary or
- Maximum limit of ₹. 5,000

11. House Rent Allowance: It is an allowance given by an employer to an employee to

meet the cost of accommodation which is partly exempted, according to section
10(13A). Exemption for HRA is not available if the assesse is living in his own house
or a house for which he is not paying rent.

Particulars Amount Amount

Actual HRA received Xxx
Less: Least of the following is exempted:
1. Actual HRA received xxx
2. Excess of Rent paid over 10% of salary xxx
3. 40% of salary (50% in case of Delhi, Mumbai, xxx
Kolkata and Chennai) Xxx
Exempted HRA
Taxable HRA Xxx

Salary for HRA:

1. Basic pay
2. Dearness pay
3. Dearness allowance (If it enters into retirement benefit)
4. Commission based on turnover

Illustration-1

X, who resides in Chennai gets ₹ 3,00,000 per annum as basic salary. He receives ₹
50,000 per annum as house rent allowance. Rent paid by him is ₹ 40,000 per annum.
Find out the amount of taxable house rent allowance for the assessment year 2023-24.
Amount Amount
Particulars (₹) (₹)

Actual HRA received 50,000

Less: Least of the following is exempted:
1) Actual HRA received 50,000
2) Excess of Rent paid over 10% of salary (40,000-
10,000
30,000) (3,00,000 x 10%)
3) 50% of salary (50% in case of Delhi, Mumbai,
1,50,000
Kolkata and Chennai)
FOR PRIVATE CIRCULATION ONLY
 Exempted HRA -10,000
Taxable HRA 40,000

Illustration-2

X is a resident of Ajmer, receives ₹ 1,92,000 per annum as a basic salary during the
previous year 2022-23. In addition, he gets ₹. 19,200 per annum as dearness allowance
forming part of basic salary for computation of all retirement benefits, 7% commission
on sales made by him (sales during the relevant previous year is ₹. 86,000) and ₹.24,000
per annum as house rent allowance. He however, pays ₹. 21,500 per annum as a house
rent. Determined the quantum of house rent allowance exempt from tax.

Amount Amount
Particulars (₹) (₹)

Actual HRA received 24,000

Less: Least of the following is exempted:
1) Actual HRA received 24,000
2) Excess of Rent paid over 10% of salary(21500-21,722)(
NIL
2,17,220X10%)
3) 40% of salary (50% in case of Delhi, Mumbai,
86,888
Kolkata and Chennai) (2,17,220*40/100)
Exempted HRA 24,000
Taxable HRA NIL

Perquisites
Monetary or Non-monetary benefits (either in cash or in kind) received by an employee from
an employer in addition to salary.

Definition:
According to Sec 17 (2), perquisites means and includes “any casual emoluments attached to
an office in addition to basic salary” and includes

1) The value of rent free accommodation

2) The value of concessional rent paid by an employer on behalf of an employee
3) Contribution to any fund other than recognized provident fund (RPF)
4) The value of any other fringe benefits or amenities

FOR PRIVATE CIRCULATION ONLY

 Tax free perquisites
Perquisites

Tax Free perquisites Taxable perquisites

Taxable in all cases Taxable in hands of

specified employee only

a) Tax free perquisites

1) Computer, laptops given to employee for official or personal use.

2) Employer’s contribution towards Staff Group Insurance Scheme.
3) Employee’s refreshments provided by an employer to all employees during working hours
in office.
4) Refreshments during working hours provided outside the place of work upto Rs.
50 per day will be exempted.
5) Rent free house provided to the judges of High Court, Supreme Court or an officer of
parliament or Union Minister.
6) Amount spent on training of employees or fees paid for refreshing management course.
7) Free ration provided to Defense force.
8) Medical insurance premium paid by the employer.
9) Telephone facility provided by employer to employee.
10) Interest on loan given by the employer is not taxable if the loan amount does not exceed
Rs. 20,000.
11) Perquisites given to Government employee who is staying abroad.
12) Gifts in kind if the value is less than ₹ 5,000.
13) Family planning expenses.
14) Products at concessional rate to employee sold by his/her employer.

b) Taxable perquisites in hands of specified cases

Specified employee is one who satisfies any one of the following conditions:
(a) The assesse must be a director employee in the employer company or
(b) If he is the beneficial owner of equity share carrying 20% or more voting power in the
employer company or
(c) The total taxable monetary receipts of the employee from all employers during the
Previous Year after deduction u/s 16 exceed ₹ 50,000.

c) Taxable perquisites in the hands of specified employee

1. Free service of Sweeper, Gardner, Watchman and Personal Attendant: Actual salary paid
FOR PRIVATE CIRCULATION ONLY
 by employer is taxable.
2. Free supply of gas, electricity, water supply for household purpose: Manufacturing cost or
amount paid byemployer is taxable.
3. Educational Facilities:

(a) If education institution owned by the employer

- If it is for the children of the employee- cost of such education in similar school less Rs. 1,000
pm per child (irrespective of number of children) less amount recovered from employee is
taxable.
- If it is for other members of the employee – cost of such education in similar school less
amount recovered from employee is taxable.

(b) For outside institutions

For children of employee - Amount incurred less amount recovered from employees (an
exemption of Rs. 1,000 per month per child is allowed)
Other family member – Cost of such education incurred

Other Education Facilities:

a) Reimbursement of school fees of children or family members of employees – Fully Taxable

b) Free Educational Facilities / Training of Employees - Fully Exempt

4. Leave Travel Concession in India (LTC): Leave travel benefits extended by an

employer to an employee for going anywhere in India along with his family are exempt
from tax as per the provision of the IT Act. The exemption is available only in respect
of fare for going anywhere in India along with family twice in a block of four years.

5. Medical Facilities: If the employer reimburses or provides the expenditure incurred

by the employee is taxable as follows:

- If medical treatment is taken from a hospital maintained by the employer – not taxable
- If medical treatment is taken in Government Hospital – not taxable
- If medical treatment is taken in Private Hospital – exempted up to Rs. 15,000
- Medical Insurance premium paid or reimbursed by the employer is not chargeable to tax

Treatment Outside India

- Expenditure on medical treatment or expenses on stay abroad for patient and attendant is
exempt to the extent permitted by RBI

6. Motor Car Facility:

FOR PRIVATE CIRCULATION ONLY

 Illustration
Mr. Shashank owns a car and it is used for official as well as private purposes. The car’s
maintenance expenses of Rs. 75,000 including driver’s salary for the year is reimbursed by his
employer. Calculate the value of perquisite of car for the year if-
(i) C.C of engine does not exceed 1.6 liters
(ii) C.C of engine exceed 1.6 liters
Solution: Calculate the value of perquisite
(i) C.C of engine does not exceed 1.6 liters
Expenses reimbursed by his employer including driver’s salary 75,000
Less: Value of perquisite of car (1800*12) 21600
Driver’s salary (900*12) 10800 32400
Value of Perquisite 42,600

(ii) C.C of engine exceed 1.6 liters

Expenses reimbursed by his employer including driver’s salary 75,000
Less: Value of perquisite of car (2400*12) 28800
Driver’s salary (900*12) 10800 39600
Value of Perquisite 35,400

FOR PRIVATE CIRCULATION ONLY

 d)Taxable Perquisites under all cases u/s 17(2)(d)
1) Rent Free Accommodation: Free accommodation provided by the employer to the
employee with furniture or without furniture.
To calculate the value of furnished accommodation, first calculate the value of
unfurnished accommodation and then add cost of furniture or furniture hire charges to
arrive at the value of furnished accommodation.
In other words, first assume all accommodation as unfurnished and then if required, add
cost of furniture or hire charges to convert unfurnished to furnished accommodation.
The following table shows the various calculations for unfurnished value of
accommodation for perquisite purpose:

Other Perquisites:

FOR PRIVATE CIRCULATION ONLY

Deductions from Salary u/s 16
1) Standard Deduction @ Rs. 50,000 p.a. - Sec 16(i)
2) Entertainment Allowance (only for govt. employees) – Sec 16 (ii)
3) Professional Tax / Employment Tax actually paid – Sec 16 (iii)

Illustration 1:

FOR PRIVATE CIRCULATION ONLY

Illustration 2:

FOR PRIVATE CIRCULATION ONLY

 Illustration- 1

Following are the particulars furnished by Mr. Jayanth (Resident) for the year ending 31/3/2022.
Net salary received Rs. 1,74,000 after deduction of the following

a) His contribution towards to RPF 16,800

b) Income Tax of Rs. 20,000
c) Housing loan instalment Rs. 12,000
Other Components of his salary are
a) Employers’ contribution to RPF Rs.16,800
b) Interest on RPF (on accumulated balance Rs. 1,50,000) Rs.15,000
c) House rent allowances of Rs 24,000 (the house is in Chennai
and rent paid by him is Rs. 50,000)
d) Conveyance allowance Rs. 1,000 P.M. (60% spent for official purpose)

e) Education allowances for his three children Rs. 48.000

f) Transport allowance Rs. 8,000
g) He paid insurances premium on his own life policy Rs. 10,000
h) Entertainment allowances. 500 per month
i) Hostel allowance for his 3 children Rs. 20,000
j) Professional tax paid by the employer Rs. 300 P.M. and
paid by Jayanth Rs. 200 per month
k) Reimbursement of medical expenses Rs. 25,000
(treatment taken in a recognized hospital)
i) Education facility to his dependent brother in remote area Rs. 500 P. M.
Compute salary income of Mr. Jayanth for the Assessment Year 2023- 24

FOR PRIVATE CIRCULATION ONLY

 Previous Year
Name of the assessee: Mr. Jayanth :2022 – 23
Assessment Year:
Status: Resident 2023-24
Category: Non-Government Employee
1 Basic salary (1,74,000+ 20,000 + 16,800+ 12,000) 2,22,800

Employers’ contribution to Recognized

2 Provident fund 16,800
less: Exemption 12% of salary (26,736) NIL
Taxable RPF (Refer Notes 1)
3 Interest on Recognized Provident fund @10% 750
(15,000/ 1,50,000 X 100) of 10%
Taxable interest is (0.5 %X 15000) (Refer Notes 2)

4 House Rent allowance received 24000

Less: Least of the following is exempt from tax
a) Actual HRA received (24,000)
b) 50% of 2,22,800 1,11,400
c) Excess rent Paid 27,720
Exempted HRA -24000
Taxable HRA Nil
5 Conveyance Allowance (40% only) (Refer Notes 3) 4,800
6 Entertainment allowances (500 X12) 6,000
7 Education Allowance for three children 48,000
Less: Exemption (100 X2=200 X12) (2,400 )
Taxable Education Allowance 45,600
8 Transport Allowance 8,000
9 Hostel Allowance for three children 20,000
Less: Exemption (300 X2=600 X12) (7,200 )
Taxable Hostel Allowance 12,800
10 Professional Tax paid by the employer (300 X 12) 3,600
11 Reimbursement of medical expenses Tax free
12 Education facility in remote area (500 X 12) 6,000
Gross Salary 3,10,350
Less deduction U/S 16
Standard Deduction/S 16 (ia) 50,000
Professional Tax paid by the employer (3600 + 2400)
FOR PRIVATE CIRCULATION ONLY
 6,000 -56,000
Taxable Salary 2,54,350
Notes
1. More than 12% of RPF is Taxable but Jayanth RPF contribution is less than
12% therefore there is no taxable RPF it is Nil

2. As per interest of RPF exempted is 9.5 % whereas Jayanth is getting10% the

difference of
10%-9.5%= 0.5% is Taxable
3. For Conveyance allowance exempted per months. Out of total benefit 60% is for
official purpose therefore 40% has to be taken into consideration

4. Entertainment allowances
Entertainment allowances is first included in the salary then the deduction has to be
made U/S 16(ii)
The tax treatment
1. Under Non-Government employee fully Taxable
2. For Government Employees least of the following
a) Maximum limit of 5,000
b) 20% 0f basic pay or 1/5 of basic pay
c) Actual amount received

TERMINAL QUESTIONS:

SECTION A

1) Define Salary and show the calculation table for computation of gross salary.
2) What are Perquisites? Explain various Taxable Perquisites.
3) Explain the provisions of Gratuity and identify the taxable gratuity is calculated under various
situations.
4) Differentiate between the taxation provisions of recognized and unrecognized provident fund.
5) Discuss about various deductions applicable on income from salary.
6) Show with hypothetical example how taxable House Rent Allowance (HRA) is calculated?
7) Explain various provisions applicable for calculation of perquisite value of Rent Free
Accommodation.
8) Discuss about various taxable allowances. Identify any five taxable allowances and mention
their exemption limits.
9) Name any five fully exempt allowances from salary
10) What is the difference between commuted and uncommuted pension? How are both of them
treated for calculation of gross salary?

FOR PRIVATE CIRCULATION ONLY

11) Mr. A retires from his job on 30th November 2021 after putting 30 years and 7 months’ service.
He received₹ 1,80,000 as gratuity under the payment of gratuity Act. His salary including Dearness
Allowance at the time of retirement was Rs. 7,800 . Compute taxable gratuity for the A.Y.2023-24
12) Mr. Dinesh an employee of Reliance industries ltd receives ₹.96, 000 as gratuity. He is not
covered under payment of Gratuity Act. He retires from service on 31-12-2022 after 28 years and
9 months’ service. At the time of his retirement his monthly salary was Rs.6,300. Find out the
amount of Gratuityexempt u/s 10(10).
13) Mr. Rajiv retired on 31-12-2022 and his pension was fixed at Rs.3,600 p.m. He got 3/4th of the
pension commuted for which he receives Rs. 1, 80,000 from his employer.
Find the taxable pension if:
a) He gets gratuity; b) he does not get gratuity &c) if he is Government employee
14) Find out the taxable HRA in each of the following cases:
(a) Basic pay Rs. 7,000 p.m., Dearness Pay @ 10% of basic pay, Commission based on fixed
percentage of turnover Rs. 12,000 for the whole year. House rent allowance Rs. 2,000 p.m.,
Actual rent paid by the assesse Rs. 1,600 p.m., House situated at Agra.
(b) Basic pay Rs. 9,000 p.m., Dearness Allowance @ 10% of basic pay, House rent allowance
Rs. 1,500 p.m., Actual rent paid by the assesse Rs. 2,100 p.m., House situated at Mathura.
(c) Basic pay Rs. 8,000 p.m., Dearness Allowance @ 10% of basic pay (enters into retirement
benefits), House Rent Allowance Rs.800 p.m., Actual rent paid by the assesse Rs. 2,000
p.m., House situated at Delhi.
15. Mr. Vikas gets a salary of Rs. 13,000. p.m. and he has been provided with a rent-free furnished
accommodation at Manipal (population below 10,00,000). The fair rental value of the unfurnished
house is Rs 20,000. p.a. He gets D.A. @ 40% salary which is given as per terms of employment.
The cost of furnishing of the house is Rs.30,000. The employee has been provided with hired air
conditioner for five months and hire charges of Rs 1,000. p.m. is paid by the employer. Calculate
the value of RFA.

SECTION B
1) Smt. Jyothi’s the principal of a private college in Chennai. She is in the grade of 6,500-
200-8,500 since 1st January 2015.
a) She gets Rs. 6,000 p.m. as dearness allowance and Rs. 200.p.m. as CCA.
b) She has been provided with furnished accommodation by the college. The college is
not the owner of the house. The rental value of the house is Rs. 3,000 p.m. and
furniture costing Rs 24,000 has also been provided by the college.
c) She has been provided with the facility of a gardener, watchman and a servant who are
paid by the college @ Rs. 150.p.m, Rs. 1, 200.p.m, and Rs. 800 p.m. respectively.
d) She gets LTC for going to a hill station Rs. 26,500. Actual expenses were Rs. 19,650.
e) She contributes 10% of her pay to R.P.F. towards which the college contributes @ 8%.
Determine her taxable salary income for the A.Y.2023-24.

2) Sri Rama Krishna is employed as an engine driver in southern railway.

a) He is getting Rs. 7,[Link] basic pay, Rs. 2,500 as dearness allowance. During
the previous year he received the following allowances also:
b) Rs. 200 p.m. per child as education allowance for the education of his two sons.
c) One of these sons is living in hostel on whom Sri. Ramakrishna is spending Rs. 800p.m.,
FOR PRIVATE CIRCULATION ONLY
 He is getting hostel allowance of Rs. 500 p.m. for his son for meeting this expenditure.
d) Rs. 250 p.m. as city compensatory allowance
e) Rs. 400 p.m. as uniform allowance which was fully spent for employment purpose
f) Rs. 1,250 p.m. as House Rent Allowance. Sri. Ramakrishna has taken a house for his
residence at Coimbatore at Rs. 1,500 p.m. as rent.
g) He contributes 10% of his Basic pay and dearness pay to his statutory fund and the southern
railway also contributes the same.
Compute the salary income of Rama Krishna for the A.Y.2023-2024.

3) Mr. Naveen is the Manager of a company at Kolkata since 1st March, 2011. He is in
the grade of Rs. 10,000- 500-15,000-750-25,000
a) Dearness allowance @ 20% of his basic pay, half of which enters into retirement benefits.
b) He contributes 14% of his salary to Recognized Provident Fund to which his employer
contributes an equal amount.
c) Interest on PF during the year is Rs. 10,500 at 10.5% p.a.
d) He has been provided with a house owned by the Co., the fair rent of which is Rs. 20,000
per annum.
e) He is getting conveyance allowance of Rs. 500 p.m. for private purposes,
f) Medical allowance of Rs. 400 p.m and Servant allowance of Rs. 600 p.m.
g) His club bills of Rs. 3,000 were also paid by the Company.
h) He received Rs. 60,000 for encashment of leave on 1st September, 2018, being 10
months' leave not availed of. As per the rules of the company Mr. Nair was entitled to
30 days' leave for every year of service.
i) He had been provided with the facility of a gardener and a cook, who are each paid
Rs. 150 p.m. by the employer.
j) He is also provided with a small car by the employer for official use only.
Compute Mr. Nair's taxable salary for the assessment year 2023-2024.

FOR PRIVATE CIRCULATION ONLY

SECTION C:
Question 1:
Smt. Ambika, an employee of RKS LTD, Delhi receives the following incomes during the year ending
31.3.2023.

Basic salary up to 31.08.2022 Rs.12,000 per month and thereafter at Rs.12,500 per month. Dearness pay
Rs.30,000; Dearness Allowance Rs. 15,000 (it does not enter for retirement benefits); Children Education
Allowance Rs. 250 per month for 1 child. Reimbursement of medical expenses Rs.21,500 (private hospital).

Smt. Ambika has been provided with rent free flat at Delhi (rent paid by the company Rs.80,000 per annum),
facility of a watchman and a cook (each of whom is paid a salary of Rs.700 per month), interest free loan
for purchasing home appliances Rs.1,20,000(date of loan borrowed 01.04.2022) and (Assume SBI lending
rate for similar loan on 1.04.2022 is 12% p.a.)

Determine Smt. Ambika's Salary income for the A.Y. 2023-24 assuming that she paid Rs.200 per month as
professional tax.

Question 2:
Mrs. Smitha is working as sales Executive in Maruthi Suzuki Ltd. Kolkata and his salary details are as
follows for the previous year 2022-23.

a) Basic salary Rs. 21,000 per month

b) Bonus equal to two months basic salary
c) Commission 3% on sales (During the year the reached sales targeted of 5,00,000)
d) Dearness allowance of Rs.7,000 per month (Eligible for Retirement benefits)
e) Medical allowances Rs. 1,400 per month (medical expenses Rs.15,000)
f) Children Hostel Allowance for her two children @ Rs. 500 per month per child.
g) Children Education Allowance for her two children @ Rs.400 per child
h) RPF contribution by the company Rs. 6,000 per month
i) RPF contribution by employee Rs. 5,000 per month
j) Interest credited on RPF @ 11% Rs. 44,000
k) She has been provided with company’s owned rent free furnished house in Mumbai and Cost of
furniture provided Rs.60,000.
l) Mrs Mitha paid her professional tax Rs.2,400 p.a.

Compute Taxable Salary for the A.Y. 2023-24.

Question 3:
Mrs. Gowri Bai is working as Sales Executive in Hero Motors Ltd. Mumbai her salary income details are
as follows:

 Basic salary Rs.21,000 p.m.

 Bonus = 2 months Basic Pay
 Commission 3% on sales. During the year she reached a sales target of Rs.5,00,000
 Dearness Allowance forming part of salary Rs.7,000 p.m.
 Medical Allowance Rs.1,400 p.m. (Medical expenses were Rs. 20,000)
 Entertainment Allowance Rs.3,000 p.m.
 Children’s Hostel Allowance for her two children @ Rs. 500 p.m. per child Rs.12,000

FOR PRIVATE CIRCULATION ONLY

  RPF company’s contribution Rs.6,000 p.m.
 RPF own contribution Rs.5,000 p.m.
 Interest accrued on RPF @ 11% Rs.44,000
 Diwali Gift Rs. 7,000
 Holiday home facility at Kulu Rs.26,000

She has been provided with rent free furnished accommodation in Mumbai for which Company pays
monthly rent of Rs.10,000 and cost of furniture being Rs.60,000
Honda city car above 1600 cc has been provided along with driver for both private and Official use.
Company owns the car and spent Rs.55,000 on petrol and Rs.36,000 on drivers’ salary.
Gowri Bai paid professional tax Rs.2,400.
Compute Taxable salary for the Assessment Year 2023-24

Question 4:
Sri Yadunandan (aged 50 years), an employee director of Maruthi Udyog Ltd., submits the following
information relevant for the assessment year 2023-24.
Salary Rs.56,000, entertainment allowance Rs.6,000, bonus Rs.10,200, education allowance for a child
Rs.3,000, income tax penalty paid by the company Rs.1,500, medical expenses reimbursed by the company
for the treatment taken in private hospital Rs.21,000, leave travel concession Rs.1,300(first time in the
current block of period), free residential telephone provided by the company telephone bill paid by the
company Rs.1,200, free refreshment during office hours Rs.2,000, payment of electricity bills by the
employer Rs.1,000, reimbursement of gas bills by the company Rs.1,900 furnished flat owned by the
company at Cochin (population: 31 lakh) fair rent of the flat Rs.40800, salary of watchman 1,000.
He is also provided with air condition which is obtained by the company on rent of Rs.2,000. Furniture
costing Rs.18,000 is also provided. He is provided with the Maruthi 800CC car which is used by him for
both personal and official purposes and expenses are paid by the company. Company’s contribution towards
recognized provident fund is Rs.7,920, interest credited to it at 14% Rs.14,000.
Sri Yadunandan made the following payments during the Financial Year 2022-23.
(1) Own contribution to R.P.F at 14% of salary.
(2) Professional tax Rs2,400.

Calculate the net salary income of [Link] for the Assessment Year 2023-24

FOR PRIVATE CIRCULATION ONLY

2.2 INCOME FROM HOUSE PROPERTY

Introduction:

This is the second head of income which charges income from house properties by way of
rent received or receivable.

1.1. Basis of charge:

According to Sec 22, Annual value of a property, consisting of any building, or land
appurtenant thereto, of which the assesse is the owner, is chargeable to tax under the head
“income from house property”.
Rental income is taxable under the head “income from house property if the
following conditions are satisfied.
a) The property should consist of any building or land appurtenant thereto
b) The assessee should be the ‘OWNER’ and
c) The property should NOT BE USED BY THE OWNER for any business or profession
carried on by him

1.2. Explanation:

a) Building and land appurtenant thereto: - Income tax is charged on buildings and land
appurtenant (belonging) thereto. Income from a land which is not part of any building
will be charged under income from other sources.
b) Land appurtenant to building include compound walls, playground, garden etc., in case
of non- residential building car parking spaces, drying grounds, connecting roads in
the factory building shall be included in lands appurtenant to buildings.
c) Buildings include residential houses, warehouses, auditoriums, cinema halls, buildings
let out for office use, dance halls, lecture halls etc.,

1.3. Exceptions to the rule that income from house property is taxable under
the head house property:
The income from following buildings is not taxable under the head house property:
1) Buildings or staff quarters let out to employees – if the assessee lets out staff
quarters to his employees whose residence there is necessary for the efficient conduct
FOR PRIVATE CIRCULATION ONLY
 of business, then the rent collected by the assessee is taxable as income from business
and not as income from house property.
2) If a building is let out to authorities for locating bank, post office, police station etc.,
the income is taxable as business income, provided the dominant purpose of letting
out the building was to carry on assessee business more efficiently.
3) Composite letting of building with other assets: - where the assessee gives on hire,
building along with machinery, plant for a composite rent and the rent of the building
is inseparable from other assets, the income from such letting is chargeable under
income from other sources or business income.
4) Income from paying guest accommodation is chargeable under business income.

1.4. Deemed owners:

Deemed owners are not legal owners of the property, but according to Income Tax Act
they are treated as owners of the property. In the following circumstances assesse shall be
treated as deemed owners:
1) An individual who transfers any house property to his or her spouse, without adequate
consideration, or to a minor child, not being a married daughter shall be deemed to be the
owner of the house property so transferred.
2) The holder of an impartible estate is deemed to be the owner of all the properties comprised in
the estate.
3) A member of a co-operative society, company, or an AOP to whom a building or its part is
allotted or leased under a house building scheme shall be deemed to be owner of that
property.

4) Person in possession of property.

1.5. Exemptions regarding income from house property:

Income from the following sources is not taxable under income from house property.
 Income from agricultural properties used as store house
 Income from property owned by local authorities
 Income from properties owned by Universities, Colleges, Hospitals, political
parties and institutions of national importance like ISRO, HAL etc.), approved
scientific research associations
FOR PRIVATE CIRCULATION ONLY
  Income from property used for assesses own business or profession.
 Income from two self-occupied houses
 Income from house properties held for charitable purpose

1.6. BASIC TERMINOLOGIES UNDER HOUSE PROPERTY:

a) Annual Value: Income from house property does not mean rental income, but it is
a sum for which the building might reasonably be expected to be let from year to year.
Annual value of the property is calculated by considering the municipal valuation of
the property; fair rental value, standard rent and actual rent receivable of the house
property Annual value may be Gross Annual Value (GAV) or Net Annual Value
(NAV).
b) Municipal rental value (MRV): It refers to the rental value of the house property
fixed by the municipal authorities to levy the municipal taxes.
c) Fair Rental value (FRV): It refers to the rental value of similar accommodation
in the same or similar locality as determined by local authority or any other competent
authority.
d) Standard Rental value (SRV)/ Minimum Rent: It refers to the rental value fixed
by the Rent Control Authority.

e) Annual Rental Value (ARV)/ De-facto Rent: It refers to the rent received or
receivable by the owner of the property. It is also called as de-facto rent. While
determining the de facto rent, rent collected for other services such as water,
electricity, garden maintenance and security should be excluded from the composite
rent.
f) Composite rent: It refers to the rent collected by the owner for the house property
let out along with the facilities of water, gardening, stair case lighting, security
charges, pump maintenance etc. composite rent should be split into Annual Rental
value and service charges for associated services.
g) Expected Rental Vale (ERV): It refers to the highest of MRV or FRV but subject
to a maximum of SRV

 Unrealized Rent - Unrealized rent is the amount of rent which the owner
cannot realize or which is payable but not paid by the tenant. It is allowed to
FOR PRIVATE CIRCULATION ONLY
 be deducted from GAV if conditions of Rule 4 are satisfied. Those conditions
are as follows:
 The tenancy is Bonafide.
 The defaulting tenant has vacated, or steps have been taken to compel him to vacate
the property;
 The defaulting tenant is not in occupation of any other property of the assesse
 The assesse has taken all reasonable steps of insisting legal proceedings for the
recovery of the unpaid rent or satisfies the assessing officer that legal
proceedings would be useless.

i) Vacancy Allowance: It relates to rent of premises during the vacant period.

Format Determination of Gross Annual Value

Name of the Assessee: Previous Year 2022-23
Status: Assessment Year 2023- 24
Municipal Value
Whichever xxx
Step 1
OR is higher
Fair rental value xxx
Notional Rent xxxx

Notional Rent
Whichever
step 2 ( The resultant of step 1) xxxx
is Less
OR
Standard Rent xxx
Expected Rent xxxx
Expected Rent
( The resultant of step 2 ) Whichever xxx
step 3
is higher
OR

Actual rent xxx

(Actual rent =Actual rent-Unrealized rent- cost of common facilities)
Gross annual Value before vacancy period loss xxx
Less: - Vacancy period loss xxx
Gross annual Value xxxx

Computation of gross annual value (GAV)

FOR PRIVATE CIRCULATION ONLY
 b) Computation of income from house property of an L.O.P/D.L.O. P

Gross annual value xxx

Less: municipal taxes “paid by owner” xxx
xxx
Net annual value xxx
Less: deduction u/s 24
(i)Standard deduction 30% of NAV.
(ii)Interest on loan: (paid or due)
Pre-construction interest 1/5th
Post-construction interest. xxx
Income or loss from house property. xxx

1.8. Determination of actual rent:

Sometimes the owner takes upon under an agreement the burden of providing certain
facilities to the tenant, e.g. lift, water pump, electricity, vehicle parking, gardener, etc.,
in such a case the actual rent received or receivable minus the cost of providing such
facilities will be the actual rent.
If the tenant has undertaken the obligations of the landlord, the amount so paid will be
added in rent received to arrive at the actual rent. However, no adjustment will be
made in determination of actual rent regarding the following:
i) Tax paid by the tenant to the local authority
ii) Repair charges borne by the tenant
iii) Notional interest on deposit taken from the tenant.

Pre-Construction Period Interest: It refers to the interest payable for the period commencing

FOR PRIVATE CIRCULATION ONLY

from date of borrowing loan to the date of re-payment of instalment or 31st March of previous year
in which the construction is completed, whichever occurs earlier. It will be allowed at the rate of
1/5 (20%) over a period of 5 years.
Post-Construction Period Interest: It is the current previous year interest and will be allowed at
actual whether paid or not. Interest for the year in which the construction was completed is also
allowed as post construction interest.

*Interest on fresh loan raised to repay original loan is also allowed as deduction
**Brokerage or commission paid for arranging the loan is not allowed

Treatment of Pre-Construction Period Interest.

Calculate the allowable interest on loan from NAV of the house property.

1. Date of borrowing loan 01-06-2014

2. Date of repayment of loan 10-05-2022

Date of completion of
Construction May-2019
4. Amount of loan borrowed Rs. 30,000
5. Interest on Loan 20% P.A
01-06-2014 31-03-2015 30,000 X 20 % X 10 months 5,000
01-04-2015 31-03-2016 30,000 X 20% X 12 months 6,000
01-04-2016 31-03-2017 30,000 X 20% X 12 months 6,000
01-04-2017 31-03-2018 30,000 X 20% X 12 months 6,000
01-04-2018 31-03-2019 30,000 X 20% X 12 months 6,000
Total 29,000

For the first-year loan taken is in the month of June, so the total interest is calculated
only for 10 months in 2014- 2015. The total of 29,000 has to be adjusted from 2018
to 2023 (5 years)

Pre-Construction Period interest deductible in the previous year = 29,000/5= 5,800

Previous year interest 2022-23 (i.e., Current year interest) = 6,000

FOR PRIVATE CIRCULATION ONLY
 Total -11,800 (5,800 +6,000)

1.9 Treatment of unrealized rent recovered or realized during the P.Y.2022-23 or

subsequently {sec 25A & Sec 25AA:}

(i) Any unrealized rent recovered during the previous year, which was disallowed earlier, is
not taxable.
(ii) Any unrealized rent recovered during the previous year, which was allowed earlier,
is fully taxable as deemed income.
Note: No standard deduction under Sec 24 is allowed. Similarly, expenses incurred
to realize unrealized rent is also not allowed.
1.10 Deductions from Annual value (Sec 24)

While computing income from house property the following items are to be deducted

i) A sum equal to 30% of Net Annual value as standard deduction.

ii) Interest on loan taken in respect of house property:
Interest on loan taken for the purpose of purchasing, constructing, reconstructing or
repairing the house property is allowed as deduction on accrual basis (paid or due).

If the Loan is borrowed on or after 1-4-1999 for purchase or construction, then total
eligible interest deduction is up to Rs. 2,00,000 for a self-occupied property. If the loan
is borrowed for repairs or renovation, then interest up to Rs. 30,000 is allowed as
deduction.

For Loans borrowed before 31-3-1999only a maximum deduction of Rs. 30,000 is

allowed. This restriction is applicable only for any two self-occupied properties of the
assesse. For Let Out or Deemed to be let out property, no limit is applicable. Any amount
of interest paid or payable is allowed.

House property self-occupied for a part of the previous year and let out for the
remaining part of the previous year:
 In such a case the house shall be treated as let out house property (deemed
to be let out house property).

More than one house is in occupation of the house:

 Where the owner of the house occupies more than one house for his residence
for full previous year, except one house all other houses are deemed to be let
out.
Points to be noted:

FOR PRIVATE CIRCULATION ONLY

  The EXPECTED RENT would be GAV as the house property is not actually let out.
 The full amount of interest on loan taken for such property shall be allowed to deduct
from annual value u/s 24.
 The assesse can choose the house which would be treated as self-occupied house.
 For the FY 2022-23 and onwards, the benefit of considering the houses as self-
occupied has been extended to 2 HOUSES. Now, a homeowner can claim his 2
properties as self-occupied and remaining house as let out for Income tax purposes.

Illustration 1
Mrs. Shanthi (resident) owns two houses in Bangalore. She has let-out both the
houses throughout the year for residential purpose.
House 1 House 2
4,00,000 12,00,000
Municipal value
7,20,000 7,20,000
Fair Rental value
4,80,000 8,00,000
Rent received
6,00,000 6,00,000
Standard Rent
Repairs 72,000 1,00,000
Municipal Tax paid 40,000 1,20,000
Insurance Premium paid 48,000 70,000

On 1st April 2021, she bought residential house for self-occupation for Rs. 10,00,000
by taking a housing loan in Canara Bank.

Loan amount was Rs. 7,00,000 and rate of interest 12% p.a.

Compute taxable income from House property for the Assessment Year 2023-24.

Assessee: Mrs. Shanthi Previous Year: 2022-23

Assessment Year: 2023-

Status: Resident 24
Particulars House I House II House III
Self-
LOP LOP Occupied
Municipal rental value 4,00,000 12,00,000
or whichever
Fair rental value is higher 7,20,000 7,20,000
Notional rent 7,20,000 12,00,000
7,20,000 12,00,000
FOR PRIVATE CIRCULATION ONLY
 Notional rent whichever
or is less 6,00,000 6,00,000
Standard rent
Expected rent 6,00,000 6,00,000
Expected rent 6,00,000 6,00,000
or whichever
Actual rent is higher 4,80,000 8,00,000
Gross Annual Value 6,00,000 8,00,000 Nil

Less: Municipal tax 40,000 1,20,000 -

Net Annual Value 5,60,000 6,80,000 Nil
Less: Standard Deduction
U/s 24
30% of NAV 1,68,000 2,04,000 -
Interest on borrowed
capital for the previous
year
(7,00,000x12/100) - - (84,000)
Income from HP 3,92,000 4,76,000 (84000)

Computation of Taxable
Income of House
Property
House I Let-out property 3,92,000
House II Let-out property 4,76,000
House III Self occupied
property (84,000)

Taxable Income from House

Property 7,84,000
Illustration 2
Mr. Praveen is the owner of three houses. The particulars are as follows:

Particulars House A House B House C

Annual fair rent 40,000 35,000 50,000
Municipal valuation 50,000 40,000 50,000
Standard rent 45,000 42,000 55,000
Let out (per month) 3,000 2,500 -
Purpose of use Let out Let out Self
Residential Business Occupied
Repairs 2,000 - 5,000
Collection charges 3,000 1,000 -
Interest on loan 15,000 5,000 2,000
FOR PRIVATE CIRCULATION ONLY
Municipal tax is 10% of MV. Municipal tax of House A was paid by tenant, but Municipal
Tax of House B was not paid till 31.03.23, municipal tax of House C was paid by owner.
House A remained vacant for 4 months. Compute income from House Property for A.Y. 2023-
24.

Solution: Assessee: Mr. Praveen

Previous Year: 2022-23
Status: Resident
Assessment Year: 2023-24

House A House B House C

Particulars Let out
residential LOB Self-Occupied
Municipal rental value 50,000 40,000
or whichever
Fair rental value is higher 40,000 35,000
Notional rent 50,000 40,000
Notional rent 50,000 40,000
or whichever
Standard rent is less 45,000 42,000
Expected rent 45,000 40,000
Expected rent 45,000 40,000
or whichever
Actual rent (3,000x12) is higher 36,000 30,000
Gross Annual Value 45,000 40,000 Nil
Less: Vacancy period
(3,000x4) 12,000 NIL -

Gross/Net Annual
Value 33,000 40,000 Nil
Less: Municipal tax
Paid Nil Nil Nil
Net annual value 33,000 40,000
Less: Deduction U/s
24 -
(i) 30% of NAV 9,900 12,000 Nil
(ii) Interest on loan 15,000 5,000 (2,000)
Income from House
Property 8,100 23,000 (2,000)
Computation of Taxable Income from House Property
FOR PRIVATE CIRCULATION ONLY
Computation of Taxable Income of House Property

House A 8,100
House B 23,000
House C (2,000)
Taxable Income from House Property 29,100

Terminal Questions:

Section – A
1) Define Annual Value? How to determine the annual value?
2) Describe the meaning by Municipal Valuation of Property and Fair rental value.
3) Explain in short note on
(a) Municipal value
(b) Fair rent
(c) Standard rent
(d) Unrealized rent
4) Mention the deductions available U/S 24 in computing income from house property.
5) Identify the amount not deductible U/S 24 in computing income from house property.

Section – B

1) Roopa is the owner of the following house properties. Find out the net annual value
for the assessment year 2023-43.

Particular A B C
Municipal value 1,80,000 1,80,000 3,60,000
Fair rental value 1,92,000 1,68,000 3,96,000
Standard rent 2,04,000 2,40,000 3,00,000
Actual rent (p.a) 2,16,000 1,92,000 2,88,000
Municipal tax paid 12,000 24,000 -
Municipal tax due 12,000 - 24,000

2) Compute GAV from the following information

Particulars A B C D

FOR PRIVATE CIRCULATION ONLY

 FRV 1,25,000 1,20,000 1,44,000 1,08,000
MRV 1,20,000 1,25,000 1,08,000 1,44,000
SRV 1,10,000 1,44,000 1,25,000 1,20,000
ARV 1,44,000 1,08,000 1,20,000 1,32,000
Unrealized rent 27,000 10,000 11,000
Vacancy Allowance 24,000 9,000 20,000 22,000

3) Calculate NAV in the following cases:

Particular H-1 H-2 H-3

Municipal value 80,000 1,40,000 1,40,000
Fair rental value 78,000 1,50,000 1,50,000
Standard rent 85,000 1,20,000 1,20,000
Actual rent 72,000 96,000 1,44,000
Unrealized rent 6,000 16,000 12,000
Vacancy Allowance 3 Months 4 Months 2 Months
Municipal tax paid 10% of Municipal value.

4) From the following information compute Net Annual Value of House Property
for the A.Y. 2023-2024.
Municipal Value Rs. 1,80,000
Fair Rental Value Rs. 1,00,000
Let out (per month) Rs. 16,000
Standard Rent Rs. 1,20,000
Unrealized rent for one month.
Vacancy Allowance one month.
Municipal tax paid by owner of house property Rs. 20,000
Municipal tax paid by tenant Rs. 10,000

5) Mr. A is the owner of a house. The particulars

of which are as follows:

Municipal value Rs. 1,80,000

Faire Rental value Rs. 1,95,000
Standard rent Rs. 1,90,000
Actual rent Rs. 15,500 p.m.
Vacancy period 1 month
Municipal tax paid by owner Rs. 20,500
Municipal tax paid by tenant Rs. 2,500
Determine the taxable income from house property for the A.Y. 2023-24.

6) From the following information compute Net Annual Value of House Property
for the A.Y. 2023-24.
Municipal Value Rs. 1,80,000
Fair Rental Value Rs. 1,00,000
FOR PRIVATE CIRCULATION ONLY
 Let out (per month) Rs. 16,000
Standard Rent Rs. 1,20,000
Unrealized rent for one month.
Vacancy Allowance one month.
Municipal tax paid by owner of house property Rs. 20,000
Municipal tax paid by tenant Rs. 10,000

7) Arun owns a house in Bangalore. From the particulars given below compute the income
from house property for the P.Y.2022-23.
 Municipal value Rs 1,10,000
 Fair rental value Rs 1,30,000
 Standard rent Rs 1,25,000
 Actual rent per month Rs 12,000
 Municipal taxes paid Rs 11,000
 Expenses on repairs Rs 5,000
 Insurance premium Rs 2,000
 Unrealized Rent Recovered during the year 15,000 of 15-16

SECTION – C

1)From the following particulars of house properties owned by Sri. Viswanath. Compute his income
from house property for the A.Y.2023-24.

Particulars I House II House III House IV House

Municipal value 8,000 9,000 20,000 24,000
Actual rent -- --- 24,000 30,000
Local taxes paid 1,600 1,800 4,000 4,800
Repair charges 1,000 -- 3,000 --
Fire insurance premium Interest 50 150 200 500
on loan for construction 1,180 -- 1,800 4,200
Unrealized rent -- --- 3,000 --
Vacancy period -- -- 3 months ---

The first and second house is self-occupied. The third house is let out for residence and the fourth house is
let out for business. The tenant paid local taxes of the fourth house.

2) Mr. Sukruth is the owner of four houses in Bangalore. He gives the following particulars of
these properties.

Use of the House I HP SOP II HP Self III HP LOP IV HP LOP

Business

FOR PRIVATE CIRCULATION ONLY

 Rent received - - 66,000 54,000
Fair rental value 60,000 70,000 56,000 90,000
Municipal value 62,000 67,000 70,000 60,000
Municipal Tax 10% - Paid by Paid by Tenant but
Tenant deducted from Rent
Repairs 5,000 3,000 - -
Interest on loan - - - 3,000
Vacancy period 2 months - 1 month -

Find out the Income from House Property for the AY 2023-24.

3) Mr. Chopra owns four houses. The details of these properties are given below for the PY 2022-
23.
Self-occupied Self-occupied for
Particulars for Residence Let out Residence Let out
Municipal value 1,20,000 1,32,000 10,80,000 2,20,000
Fair rental value 1,50,000 1,60,000 12,00,000 2,50,000
Standard rent - 1,55,000 10,00,000 2,48,000
Rent receivable per month - 8,000 - 15,000
Vacancy period 3 months 1month - -
Unrealized rent (conditions - - - 6,000
satisfied)
Municipal tax
Paid by Chopra 9,600 4,000 42,000 1,000
Paid by Tenant 6,000 11,000

Interest on loan borrowed - 8,600 1,00,000 3,900

4) Mr. Gurudas owns following four house properties. Other particulars are as follows:

House 3 House 4
House 1 House 2
Let out to a Used for
Particulars Self- Self-
business own
occupied occupied house business
Municipal value 20,000 50,000 70,000 45,000
Standard rent --- ---- 72,000 48,000
Fair rental value 26,000 60,000 80,000 50,000
Annual rent --- --- 96,000 ----
Vacancy --- --- 1 month ----
Unrealized rent --- --- 16,000 ----
Municipal taxes 5,000 2,000 6,000 4,000
Repairs 4,000 2,000 8,000 5,000

FOR PRIVATE CIRCULATION ONLY

 Interest on money
borrowed 8,000 10,000 18,000 ----
(construction)

Determine the house property income of Mr. Gurudas. [Hint: House 3 is treated as two
separate units]

5) Mr. Ramachandran owns two houses at Chennai which are let out for residential
and business purpose. Compute his income from house property for the A.Y. 2023-24.

F.R.V. 36,000 1,20,000

Actual Rent 4,000 p.m. 12,000 p.m.
Municipal Rental Value 40,000 1,30,000
Standard rent Municipal 38,000 N.A.
Tax 10%. 10%
Actual repairs expenses 4,000 12,000
Ground Rent Collection 2,000 2,500
Charges 500 1,200
Interest on loan Vacancy 12,000 48,000
period 3 months NIL
Bona fide unrealized rent of current year NIL 36,000

Compute taxable income from house property of Mr. Thomas for the assessment year 2023-24

6) Smt. Ramya owns 4 houses. HP 1 is let out for business purpose, HP2 is occupied
for own business and HP3 and HP4 are occupied for own residence. Following
particulars are available with respect to these properties for the PY 2022-23.

Particulars HP1 HP2 HP3 HP4

Municipal value 60,000 10,000 1,36,000 1,90,000
Fair Rental Value 78,000 36,000 1,54,000 1,90,000
Standard Rent 72,400 24,000 1,50,000 1,80,000
Annual Rent 84,000 - - -
Unrealized Rent 7,000 - - -
Municipal tax-
Paid by owner 3,000 8,000 12,000 16,000
Paid by tenant 3,000 - - -
Date of completion 31-05-2015 31-05-2015 31-03-2015 01-04-16
of Construction
Interest on loan for 63,900 - 84,921 1,37,996
pre-construction

Compute taxable income from house property of Smt. Ramya for the assessment year 2023-24

FOR PRIVATE CIRCULATION ONLY

 2.3 INCOME FROM BUSINESS AND PROFESSION
Introduction
Income from Business or Profession is the third head of income, maximum number of
assesses pertain to this head. Section 22 to 44 of the Income Tax Act 1961 deals with
the taxability of income either from business or profession.

Objectives
1. Understand the meaning of ‘Business’ and ‘Profession’ and the scope of
income chargeable to tax under this head.
2. Identify the expenses, payments that are admissible as deduction and the
conditions to avail the same.
3. Identify the expenditures which are not admissible as deduction.
4. Compute the capital gains from transfer of capital assets in the manner prescribed
5. Compute cost of acquisition and indexed cost of acquisition
6. Identify the income which are chargeable to tax under ‘Income from other sources’
7. Compute the tax on casual income

Chargeability (Section 28)

The following types of incomes are chargeable to tax u/s 28 under the head-profit and Gains
of Business:

 Profits and gains of any business.

 Any compensation due or received by a person in connection with
termination or modification of terms and conditions relating to this head.
 Income derived by a trade, profession or similar association from specific
services performed for its members.
 Profit on sale of import licenses, incentives by way of cash compensatory
support and draw-back of duty.
 The value of any benefit or perquisite convertible into money or not arising
from business or the exercise of a profession.
 Any interest, salary, bonus, commission or remuneration received by a
partner of a firm assessed as such.
 Any some whether received or receivable in cash or in kind under an
agreement for not carrying out any activity in relation to any business or
profession.
 Income from speculation business.
 Any amount (including bonus) received under a key man insurance policy.
 Interest on securities where such securities are held as stock in trade.

Business u/s 2(13)

Business includes any trade, commerce or manufacture or any adventure or concern in
the nature of trade, commerce or manufacture. In simple terms Business means buying,
selling and manufacturing of goods to earn profit.
FOR PRIVATE CIRCULATION ONLY
 It is not necessary that there should be a series of transactions in a business, neither
repetition nor continuity of similar transactions is necessary.

Profession u/s 2(36)

Profession means those activities for earning livelihood which requires, intellectual skill
and specialized knowledge e.g. Doctors, Lawyers, Engineers, Chartered Account
profession also include vocation.
Vocation refers to any activity which a person practices to earn his livelihood e.g.
practice of religion, painting etc.
Under section 2(36) profession includes vocation.
Vocation means any type of activity in which a person is engaged and earns his
livelihood from such activity. The practice of religion and writing of articles in a magazine
is also vocation.
In other words, Vocation is the inbuilt talent/skill which is not acquired or possessed by
a systematic study.

Speculative Business
It means any business in which a contract for the purchase and sale of any commodity
including stock and shares are periodically or ultimately settled otherwise than by the
actual delivery or transfer of the commodity.

Format of Computation of Taxable Income from Business for the AY 2022-23

Particulars Amount Amoun
t
Net profit as per Profit and Loss A/c XXX
Add:
1) Inadmissible, Non-Business Expenses, Excess expenses debited to XXX
P/L A/c. (Expenses debited to P&L A/c but not allowable as per
IT act)
2) Business Incomes not credited to P&L A/c XXX
3) Over Valuation of opening Stock XXX
4) Under Valuation of Closing Stock XXX XXX

Less:
XXX
1) Allowed, Admissible Expenses not debited to P/L A/c (Expenses
XXX
not debited to P/L A/c and allowed as per IT act)
2) Non-Business income credited to P/L A/c XX
3) Undervaluation of Opening Stock X
4) Overvaluation of Closing stock XX XXX
X
XX
X
Taxable Income from Business XXX
FOR PRIVATE CIRCULATION ONLY
 Disallowed or Inadmissible Expenses
All expenses incurred either directly or indirectly related to business are allowed as
business expenses. However, the following expenses, are disallowed and hence to be
added back to the net profit.
1) Personal expense like marriage expense, drawing, premium on life and medical
insurance, proprietor salary, rent paid for own building, saving made in NSC, PF,
etc. household expenses like electricity, telephone uses for residence.
2) Any payment made in excess of 10,000 either in cash or bearer cheque, the entire
amount is inadmissible.
3) Income tax, Wealth Tax or Advance Income Tax paid.
4) Interest on loan, taken for personal purpose.
5) Provision for bad debts, doubtful debts, reserve for future losses.
6) Bonus and commission paid to employees not allowed it is paid after the due date
of filing the returns, (in case of individual 31st July 2021).
7) Sales tax, Customs Duty, Excises Duty, if it is not paid before the due date of filing the
returns.
8) Any losses related to Capital in nature like loss on sale of assets.
9) Donation and Charities.
10)Any purchase of Capital Assets, renovation and
extension of buildings. 11)Cost of sign board fixed
on office premises.
12)Contribution to Staff Welfare
Fund and political party.
13)Difference in trial balance.
14) Speculation losses
15) Preliminary expenses 4/5 are disallowed. E.g. Market survey,
Discount on issue of shares 16)Interest on capital.
17) Employer’s contribution to URPF is not allowed.
18) Any gratuity not approved or given on ad-
hoc basis is not allowed. 19)Expenses related to
other heads of income
20) Theft at assesee residence
21) Family planning expenses of the employer is allowed only if the
assesse is a company. 22)Personal gifts and presents.
22) Penalties and fines on excise and customs duty.
23) Any amount paid outside India without making TDS (30% of such
payment is disallowed) 25)Salary paid to family members who are not
professionally qualified.
26) Legal expenses incurred to defend criminal proceeding will not be allowed.
27) Any payment made to non-residents after deducting TDS, and if that TDS
amount is not paid on or before the due date of filing return (30% of such payment
is disallowed).

FOR PRIVATE CIRCULATION ONLY

 Business Income
1) Bad debts recovered allowed earlier. 6) Profit on sale of import license.
2) Sundry 7) Sales tax refund (allowed earlier).
income/sales/commission 8) Smuggling income.
received/discount received/brokerage. 9) Export incentive.
3) Miscellaneous incomes.
4) Interest from debtors.
5) Refund of customs duty.

Allowed Expenses

Expenses incurred for earning the business income are called as allowed expenses. Besides the regular
and common expenses, the following expenses are also treated as business expenses and they allowed
to be deducted from business incomes.
1) Repairs and renewals of business 20) Salarytostaff.
premises. 21)Discount allowed.
2) Rent/taxes/rates related to business. 22)Guest house and holiday homes expenses.
3) Bad debts. 23)Electricity/telephone bill/water bill related to
4) Fire insurance paid for buildings and business premises.
goods used for business. 24)Printing/stationary.
5) Expenditure on scientific research.
6) Any contribution to approved scientific
research institution, colleges, universities
150% of the amount contributed is
allowed as deduction.
7) Group insurance premium paid before the
due date.
8) Bonus commission paid before the due
date.
9) Sales tax paid before the due
date.
10)Theft in office premises.
11)Pooja expenses at office.
12)Employer contribution
to RPF
13) Revenue advertisement expenses will
be allowed in full.
14) Demurrage paid to
railways.
15)Establishment
expenses.
16) Audit fees/salaries to
employees/office expenses.
17) Staff welfare expenses.
18) Interest on loan, if loan is taken for
business purpose.
19) Compensation to retrenched employees in
the interest of the business.
FOR PRIVATE CIRCULATION ONLY
 25) Travelling expenses relating to business liability and to defend the assesses
business purpose. title of business.
26) Loss of goods or cash embezzled 29) Legal expenses for filing Income Tax
by an employee. appeal. 30)Deposits made under Tatkal
27) Depreciation. Telephone
28) Legal expenses incurred to avoid Scheme or Scheme own your telephone

FOR PRIVATE CIRCULATION ONLY

 Non-Business Incomes
1) Interest on securities.
2) Agriculture income.
3) Rent received or income from house property.
4) Bad debts recovered but not allowed earlier.
5) Profit on sale of fixed assets and investments.
6) Dividend received.
7) Interest on Deposit, Dividend on UTI and Mutual Funds.
8) Life Insurance Policy amount received.
9) Gifts received
from relatives.
10)Income tax
refund.
11) Share of Incomes from HUF.
12) Winnings from lottery/cross word puzzles/horse race.
Depreciation
It is a continuous, gradual and permanent fall in the value of an asset due to wear
and tear, passage of time and obsolescence of technology and change of
ownership etc.
Depreciation under income tax is to be claimed on the block of assets & not on
individual asset.

Rate of depreciations prescribed according to Income Tax Act 1961

Particulars Rate %
p.a.

I. Buildings

Buildings which are used mainly for residential purposes except for 5%
hotels and Boarding House

Non-residential building like offices, factory, godown. 10%

Books owned by assessees carrying on business in running lending 40%

libraries

II. Furniture and fittings

Any Furniture and Fittings 10%

III. Plant and Machinery

Plant and machinery 15%

FOR PRIVATE CIRCULATION ONLY 81

 Motor cars, other than those used in a business of running them on hire 15%

Motor buses, Motor lorries, and Motor used in a business of running

them on hire
30%

Motor buses, Motor lorries, and Motor used in a business of running 45%
them on hire acquired on or after 23rd August 2019 but before 1st
April 2021 and is put to use before 1st April 2021

Water pollution control equipment 40%

Lifesaving Medical equipment 40%

Computers 40%

Books (Annual publication or other than annual publication) owned by40%

assessees carrying on a profession

Books owned by assessees carrying on business in running lending 40%

libraries

IV. Ships 20%

V. Intangible assets

Intangible assets: Patents, copyrights, technical know-how,

trademarks, licenses, franchises. Etc.
25%

Methods of depreciation

Only WDV Method of charging depreciation is recognized under the Act.

However, Power Generation units have option to claim depreciation on SLM.

1) If assets are newly purchased in the previous year and put to use for less
than 180 days then 50% of rate of depreciation will be given.
2) If the block of assets ceases to exist on the last date of the previous
year then depreciation is inadmissible.
3) Additional depreciation

FOR PRIVATE CIRCULATION ONLY 82

  In case any new plant & machinery is acquiredand installedon or after
01-04- 2005, it shall qualify for additional depreciation.

 Rate of additional depreciation: 20% of actual cost.

 Undertakings set up in any backward area in State of Telangana/West

Bengal/Andhra Pradesh/Bihar during 1 April 2015 to 1 April 2021 : 35%
of Actual Cost of New P&M

Eligibility: The Assessee must be engaged in the business of – (a)

Manufacturing or production of any article or thing, or (b) Generation,
transmission or Distribution of Power

Essential Features of Profits and Gains of Business.

1. Business carried on by the Assessee: It is a must that the business

should have been carried on by the assessee himself during the previous
year. It does not mean that an assessee should physically carry on a
business. What is more important is that he must have right to carry on
the business and the business must have been carried on in the exercise
of that right by the assessee either personally or through his agent or
servant. A business may be carried on in India or outside India. It is the
residential status of an assessee which determines the incidence of tax.
2. Business is carried on during the previous year: The business should
have been carried on during the previous year. The business may be
carried on by the assessee at any time during the previous year. Thus, it
is not necessary that the business should be carried on throughout the
year. Sometimes some of the receipts are taxable as income from
business even if no business is carried on by the assessee in the year of
receipt. Following are some of the examples:
 Recovery against any excess payment.
 Sale of an asset used for scientific research.
 Bad debts recovered (allowed as expenditure in the earlier years).
 Any amount withdrawn from special reserve.
 Amounts received relating to a discontinued business.
3. Aggregate income of different businesses is assessed to tax: If an
assessee has different businesses, the profits of all of them will be
aggregated and put to tax.
4. Speculation Profits: Profits from speculation business are taxed under
the head – Profits and Gains of Business. However, speculation loss
cannot be set-off against the legal business profits.
5. Income of previous year is put to tax in the following assessment year.
6. Any gain arising on the transfer of a capital asset used in the business
cannot be treated as business income. It can, however, be treated to tax
under the head- Capital Gains.
7. Profit on the revaluation of capital assets is not to be taxed under this head.

FOR PRIVATE CIRCULATION ONLY 83

 8. Anticipated or future profits are not taxable in the current year. But, the
real profits i.e. the profits received or receivable during the year are taxed in
the relevant assessment year.
9. Profits on winding up are not taxable as business income but are
liable to tax under the head-Capital Gains.
Computation of Profits and Gains {Section 29}

The profits and gains of a business or profession are to be computed in

accordance with the provisions of sections 30 to 43 D (sec 29). The list of
provisions/allowances is not exhaustive. We should apply ordinary
commercial principles while determining real and true profits of a business
or profession. Sometimes there may be an expenditure or loss which may not
be covered under the above sections 30 to 43 D. Yet such losses would have
to be allowed in order to determine true profits. Some of the usually
occurring types of trading losses are given below:

1. Loss of Stock in trade: Loss of stock- in- trade because of energy

action, freezing of stocks, leakages, by ravages of white ants, fire or
negligence etc. are allowed as deduction. However, any amount
recovered shall be treated as revenue receipt.
2. Loss through embezzlement by employee or agent is allowed as
deduction in computing business income.
3. Loss by theft: If robbery or theft takes place during the normal
working hours of the business, it is allowed as expenditure. Any loss
by theft should be incidental to the operations of the business e.g.
theft by a pretended customer, or loss of cash before being deposited
in the bank etc.
4. Loss incurred for standing as surety: Where a trader stands surety
for the debts of another and such guarantee is for the purpose of
the trade, any payment made as a result of such guarantee can be
deducted as a business loss.
5. Loss incurred on account of insolvency of banker with which current
account is maintained by assessee.
6. Loss due to forfeiture of deposit made by the assessee for properly
carrying out of contract for supply of commodities.
7. Loss incurred due to devaluation of rupee in foreign country which
is being utilized in the course of business.
8. Loss due to exchange rate fluctuation of foreign currency held
on revenue account.
General Principles Governing Admissibility of Deductions

Following are the general principles which should be taken into

consideration while allowing deduction in respect of allowances, expenses
or losses. As has already been explained, these are not exhaustive by nature
but simply lay some guidelines which

FOR PRIVATE CIRCULATION ONLY 84

may help us arriving at a decision while allowing or disallowing a
particular deduction.

1. Expenditure must be incidental to the business.

2. Deduction must be in respect of an existing business.
3. Expenditure should relate to the previous year. This depends upon the
method of accounting. Under mercantile system of accounting
expenditure is allowed only when it is related to the previous year.
However, under cash system of accounting, amount actually paid during
the year is allowed. There are certain exceptions with regard to sales tax,
excise duty and bonus etc.
4. Expenditure should be in relation to one’s own business.
5. Expenditure incurred should be in the commercial expediency. An
expenditure sometimes need not be for direct and immediate benefit
of the business.
6. Expenditure once incurred may give extended benefit to the business,
i.e. benefit of expenditure may be extended beyond the year of
expenditure viz. deferred revenue expenditure.
7. No deduction of expenditure incurred before setting up of a business,
except in the case of preliminary expenses u/s 35 D.
8. Expenditure must have relationship with taxable profits.
9. Estimated losses are not allowed as deduction.
10. Expenditure incurred on wasting assets is not allowed.
11. Expenditure in relation to non-existing liability is not allowed.
12. Expenditure incurred in defending against the breach of law is not
allowed e.g. fines and penalties.
13. Depreciation on investment is disallowed.
14. Revenue expenses are allowed in full, while capital expenses are
allowed over a period of time.
Deduction expressly allowed

Section 30 to 37 contains a list of certain expenses/ deductions which are

allowed in computing the income under this head. While considering these
deductions, the word ’paid’ means actually paid or incurred depending upon
the method of accounting. Under cash system, the word ’paid’ means
‘actually paid’, under
mercantile system the word ’paid’ means ‘actually

incurred’. The following deductions are expressly

allowed:

1. Rent, rates, taxes, repairs and insurance of building used for the
business (Sec 30): The building may be own building or rented one.
As a tenant, any amount paid towards the current repairs is also
deductible. However, any premium paid towards rented house is not
allowed.
2. Repairs and insurance expenses paid in relation to plant and
machinery and furniture are allowed (sec.32): Any expenditure
incurred to replace petrol engine by diesel engine in a jeep to
augment the profit is allowed.
3. Depreciation u/s 32: Under Section 32 depreciation on assets is
allowed as deduction while computing income from business or
profession. To claim this deduction following conditions should be
satisfied: 1) Assessee should be owner of the asset. 2) Asset must be
used for the business. 3) Such use must be in the previous year.
4. Site restoration fund (sec. 33 ABA): Deduction in respect of
prospecting for or extraction or production of petroleum or natural
gas or both in India and abroad is allowed. Amount of deduction is-
Amount deposited or amount deposited or 20% of profits, whichever
is lesser.
5. Expenditure on Scientific research (sec. 35): Scientific research
means anyactivity for the extension of knowledge in the fields of
natural or applied science including for the extension of
knowledge in the fields of natural applied science including
agriculture, animal husbandry or fisheries. The following
deductions are allowed in respect of expenditure on scientific
research:
a Revenue expenditure on in-house scientific research related to
business [Sec.35 (1) (i)]: Any expenditure of revenue nature
incurred on scientific research related to business is allowed in
full. Any expenditure incurred for the payment of salaries,
material within three years immediately preceding the
commencement of business is also allowed.
b Contribution of outsiders [Sec 35 (1)(ii)]: Any amount paid to
 scientific research association which has object of
undertaking scientific research or
 To a university, college, or other institution to be used for
scientific research is deductible at 150% of the sum paid.
The research programme may be related to business or not
related to business. From financial year 2022-22 the rate will
be 100%.
 Payment of research in social science to any approved
institution, university or college is deductible at 100% of the
sum paid u/s 35 (1)
(ii) & 35(1) (iii).
 Capital expenditure incurred by an assessee who carries on
scientific research himself is fully deductible u/s 35 (2) in that
every year in which it is incurred. Unabsorbed part of such
expenditure will be carried forward and set off as unabsorbed
depreciation.
If the asset is sold without having been used for other purposes,
the sale proceeds or deduction allowed whichever is less is
treated as business income if the previous year in which the
sale took place. The excess of sale proceeds over deduction
allowed however is taxed as capital gain.
 Contribution of National Laboratory [Sec.35 (2AA)]: Any
amount paid to any national laboratory will get a deduction
at 150% of actual amount given. National Laboratory means
a scientific laboratory functioning at national level under the
aegis of the Indian Council of Agricultural Research, Indian
 Council of Medical Research or Council of Industrial and
Scientific Research, the Defense Research and Development
Organization, the Department of Electronics, the Department of
Bio-Technology, or the Department of Atomic Energy and which
is approved by the prescribed authority for this purpose.
From financial year 2022-22 the rate will be 100%.
 Any amount of expenditure incurred up to 31-3-2012 on
scientific research by a company engaged in the business of
bio-technology, drugs; pharmaceutical, electronic
equipment’s, computers, telecommunications etc. will get a
weighted deduction of 200% (sec. 35 2AA). (vii) Contribution
to research & Development: Sec. 35 2 AB provides for
weighted deduction at the rate of 125% in respect of
contribution made to IIT, approved university college etc.,
towards research activities. This weighted deduction is in
addition to the special benefit available to a person for in
house research. In case of Biotechnology, Drugs
Pharmaceutical companies a weighted deduction of 200% is
allowed.

6. Expenditure incurred on acquisition of patent rights or copy

rights (sec. 35A): Where capital expenditure is incurred by the
assessee (after 1966 but before 1-4-1998) on the acquisition of
patent rights, copying for the purpose of business, the whole amount
is deductible in 14 equal instalments. Where the right became
effective in any year prior to the previous year in which expenditure
is incurred, the number of completed years which have elapsed
since commencement of the patent shall be reduced from 14 years
and the deduction is allowed in remaining years. In the case of patent
rights acquired on or after 1-4-1998, the expenditure incurred on the
acquisition of such rights shall be capitalized and depreciation u/s
32 is allowed.
7. Expenditure incurred on Technical know-how (Sec.35 AB) : Any
sum paid before 1-4-1998 on the acquisition of technical know-how
for use for the purpose of his business will be allowed as deduction
by spreading it equally over six years, namely, the year in which the
lump-sum consideration is paid and the five immediately succeeding
years. Where the knowhow is developed in a government laboratory,
or a laboratory owned by a public sector company or university, the
consideration will be spread over 3 years. But the know-how
acquired after 1-4-1998 will be treated as capital expenditure and
will be depreciated u/s 32.
8. Capital expenditure to obtain license to operate
telecommunication services (Sec. 35 ABB) :Any capital
expenditure incurred and actually paid by an assessee on the
acquisition of any right to operate telecommunication services by
obtaining license will be allowed as deduction in equal instalments
over the period starting from the year in which such payment has
been made and ending in the year in which the license comes to an
end.
9. Expenditure on eligible project or scheme (Sec. 35 AC): No
 deduction will be allowed from business income in respect of
expenditure incurred for an eligible projector scheme on or after 01-04-
2018. Eligible project or scheme means such project or scheme which is
meant for promoting social and economic welfare or uplift of the public as
may be certified by the Government of India on the recommendation of
National Committee Constituted by Central Government consisting of
persons of eminence in public life.
10. Payment of Rural Development Fund (Sec.35 CCA) : Any sum
paid to Rural Development Fund set up and notified by the central
Government is fully deductible. This section applies to the National
Poverty Eradication Fund also. But once this deduction is claimed
and allowed u/s 35 CCA, the same is not allowed as a deduction
under any other provision of this Act.
11. Amortization of preliminary expense (Sec .35 AD) : Where any
Indian Company or resident non-corporate assessee incurs after 31st
March 1998 any preliminary expenditure, the assessee shall be
allowed a deduction of an amount equal to one-fifth of such
expenditure of each of the five successive previous years beginning
with the previous year in which the business commences. Expenses
incurred before 1-4-1998 are to be spread over 10 years preliminary
expenses include: expenditure in connection with the preparation of
feasibility report, project report conducting marketing survey,
engineering services, legal charges for drafting agreements,
Memorandum of Association, Printing of Memorandum of
Association and registration expenses. The maximum amount
eligible for deduction under this section shall not exceed 5% of the
cost of the project. But in the case of Indian companies, it is at the
option of the company, whether 5% of cost of the project or 5% of
the capital employed in the business of the company.
12. Expenditure for amalgamation or demerger of an undertaking
(sec. 35 DD): Where an Indian Company incurred expenditure after
31-3- 1999. Wholly and exclusively for the purpose of
amalgamation of demerger of an undertaking 20% of such
expenditure for each of the five successive years beginning with the
year in which amalgamation of demerger takes place shall be allowed
as deduction.
13. Expenditure on voluntary retirement (Sec. 35 DDA): The amount
received by an assessee in consequence of an employee’s voluntary
retirement, the assessee shall be allowed a deduction of 20% of such
expenditure for each of the five successive previous years beginning
with the year in which such payment was made.
14. Expenditure on prospecting etc. for development of certain
minerals (Sec. 35E) : Any expenditure incurred by an Indian
Company or Indian Resident non-Corporate assessee wholly and
exclusively on the prospecting of any mineral or on the
development of mines or other natural deposit of any such
minerals the assessee shall be allowed a deduction of an amount
equal to 1/10th of he such expenditure for each of the ten
successive previous years beginning with the year of commercial
production.
Other Deductions (Section 36). While computing profits and gains
business or profession the following other deduction are allowed:

1. The amount of any insurance premium paid in respect of

insurance against risk of damages or a destruction of stocks or
stores used for the business is fully deductible [Sec 36(1)(i)].
2. Insurance premium paid by a federal milk co-operative
society is fullydeductible [Sec.36 (1) (ia)].
3. Insurance of health of employees [Sec.36 (1) (ib)]: Any
premium paid under a scheme framed in this behalf by the
general Insurance Corporation of India and approved by the
Central Government, shall be fully deductible.
4. Bonus or commission paid to an employee [Sec.36 (1) (ii):
Any bonus or Commission paid to an employee for services
rendered shall be deductible. But such sum should not, in any
way, be paid as profit or dividend.
5. Interest on borrowed capital [Sec.36 (1) (iii): Any interest
paid in respect of capital borrowed for the purpose of
business/profession is fully deductible. Interest on own
capital is not deductible.
6. Employer’s contribution Provident Fund [Sec.36 (1) (iv)
(v)]: Anyamount paid by an assessee as an employer by way
of contribution towards Recognized Provident Fund, or an
approved superannuation Fund or approved Gratuity Fund
shall qualify for deduction .
7. Loss regarding animals [Sec.36 (1)(iv)] : In respect of
animals which have been used for the purpose of business (not
as stock in trade) and have died or become useless for such for
such purpose, deduction is allowed to the extent of the amount
equal to the difference between the actual cost to the assessee
and the amount, if any, realized in respect of the carcasses of
animals. If sale proceeds are Nil then the entire cost will be
allowed as loss.
8. Bad debts[Sec. 36 (1) (vii) and (2)]: Amount of any bad
debts of part thereof, which is written off as irrecoverable in
the accounts of the assessee for the previous year is allowed
as deduction subject to the following conditions:
a The debt has been taken into account in computing the
income ofthe assessee of the previous year in which the
amount is written off or of an earlier previous year; or
b It represents money lent in the ordinary course of
business of money lending which is carried on by
the assessee.
c There must be a debt.
d Debt must be incidental to the business.
e Debt must have been taken into account while
computing business income.
f Debt must have been written off in the books of
account of the assessee.
Notes:

 If the amount of any part thereof of bad debts is recovered

 at a later date, the same will be treated as business income
of the previous yearduring which such recovery takes place.
 Bad debts of a discontinued business or to a successor of the
business are not deductible.

9. Provision for bad debts [Sec .36 (1) (iii a)]: Normally any
provision forbad and doubtful debts is not allowed as deduction.
But the same may be allowed in the case of rural branches of
commercial banks.
10. Transfer to special reserve [Sec. 36 (1) (viii)] : The amount
transferred to a special reserve account and maintained by a
financial corporation which is engaged in providing long term
finance for industrial or agricultural or infrastructure
development, in India or by a public company formed and
registered in India with the main object of carrying on the
business of providing long term finance for construction or
purchase of houses in India for residential purposes is allowed
to the extent of 20% of its profits.
11. Family Planning Expenditure [Sec. 36 (1) (ix)]: Any bona fide
expenditure incurred by a company for the purpose of
promoting family planning amongst its employees is allowed as
deduction. If such expenditure is of a capital nature. It shall be
allowed as a deduction in five equal annual instalments
commencing from the precious year in which the expenditure is
incurred.
12. Contribution of |Exchange Risk Administration Fund [Sec.
36 (1)(x)]: The contribution made by the public financial
institutions to the Exchange Rick Administration Fund will be
allowed as business deduction while computing their income.
Income from Profession

Format for computation of Profession Income

Particulars Amount

Professional receipt XXX

Less: Professional expenses XXX

Taxable Income from XXX

Profession

Chartered Account/Auditor
Professional Receipt Professional Expense
 1. Audit fees 1) Office expenses/rent/salaries
2. Financial consultancy service 2) Printing and Stationery
3. Income from Accountancy work 3) Depreciation on Professional
4. Gifts and presents from clients books
5. Income from Appellate Tribunal 4) Depreciation on furniture/motor
Appearance car/
6. Tax consultation fees, Examiner’s office equipment
fees 5) Expenses of motor car.
7. Tuition fees 6) Allowance to clerk
8. Fees from income tax appeal, 7) Membership fees
Remuneration from Articles 8) OYT expenses (own your
published in professional journals Telephone)
9) Stipends to trainees
10) Subscription to CA Institute

Lawyer
Professional Receipt Professional Expense

1) Legal Income/fees 1) Office rent/expenses/salaries

2) Special commission 2) Law journals
3) Cash gifts and presents from clients 3) Telephone expenses
4) Consultation fees 4) Magazines subscription
5) Remuneration from articles 5) Motor car expenses
published in 6) Depreciation on motor car/
Professional journals furniture/
6) Arbitration fees Office equipment
7) Purchase of professional books
8) Printing and stationery
9) Electricity charges
10) Miscellaneous /general/ office
expenses

Doctor
Professional Receipt Professional Expense

1) Sale of medicines 1) Cost of medicines purchased

2) Consultation and visiting fees 2) Depreciation on surgical expenses
3) Gifts and presents from patients 3) Salaries paid to staff
4) Remuneration from articles 4) Rent of clinic/dispensary
published in 5) Purchase of professional books
Professional journal 6) Telephone charges
5) Retainer fees 7) Printing and stationery
6) Examiner fees 8) Motor car expenses
9) Depreciation on motor car/office
equipment/furniture.
 Treatment of Cost of Medicine
In case of calculation of cost of medicine, if the cash system of accounting is followed, then
the actual cost of purchases has to be taken as the cost ofmedicine. If mercantile system of
accounting is followed, then the cost of goodssold has to be taken as the cost of medicine
and to be deducted as professional expenses. (Cost of goods sold = Opening stock +
Purchases – Closing stock)

TERMINAL QUESTIONS
Section A
1. Define Business.
2. How to treat bad debts recovered but disallowed earlier?
3. Mention any four “inadmissible items” while calculating income from business.
4. Define depreciation U/S. 32 (1) of the ac
5. Mention any five expressly admissible expenses?

Section B

1. list out inadmissible expenses and non business income of 5 each.

2. Mention profession incomes and expenditures Doctor

Section C

Problems on profit from business

1) Mr. Dhoni is the owner of a business. His profit and loss account for the year ending 31-03-
2023 was as follows:
Particulas Amount Particulars Amount

To salaries 5,000 By Gross profit 55,000

To Rent rates and taxes 2,900 By Interest on Investments 5,000
To Printing and stationery 750 By Rent received 6,000
To personal expenses 3,000 By Winning from lottery 10,000
To Commission 2,000
To Discount on allowance 450
To Provision for bad debts 1,200
To Postage and telegram 270
To law charge 450
To Advertisement 1,550
To Gifts and presents 150
To Fire insurance premium on 500
Stock
To Sales tax 1,250
To Repairs and renewal(not for 480
business)
To loss on sale of machinery 1,800
(used for private purpose)
To Life insurance premium 1,700
To Wealth tax 740
To Interest on capital 730
To Audit fee 300
 To Interest on bank loan 1,380
To Provision for depreciation 2,500
To Provision for income tax 3,900
To Net Profit 43,000
76,000 76,000

Additional Information:
1. Actual bad debts were Rs. 500.
2. Actual amount of income tax paid during the year Rs. 4,000.
3. Allowable depreciation as per IT. Rules Rs. 1,500
4. Advertisement expenses include Rs. 450 spent on special advertisement
campaign to open a new shop.
5. He carried out the business in a rented house, 40%(IA) of which is used
for his residence.
6. Rent, rates and taxes include Rs, 2,400 paid as rent of the property during the year.
Compute taxable his income from business for the A. Y. 2022-23.

Problems on Chartered Accountants/Auditor

1) The following is the Receipts and Payments a/c of AB practicing

CharteredAccountant for the year ended 31/03/2022.
Particulars Amount Particulars Amount

To Audit fees 20,000 By Office expenses 10,000

To Consultation fees 10,000 By Office rent 15,000
To Appellate tribunal 20,000 By Salaries and wages 12,000
Appearance By Printing and stationery 2,000
To Miscellaneous income 12,000 By Subscription to CA Institute 3,600
To Interest on govt. securities 12,000 By Purchase of professional 2,000
To rent received 9,000 books(Annual publication)
To Presents from clients 10,000 By Travelling expenses 6,000
By Interest on bank loan 12,000
By Donation to National Defense 15,000
Fund
By Stipend to trainers
18,400
96,000 96,000

Adjustment:
1. Loan from banks was taken for construction of house in which he lives.
Themunicipal value of the house is ₹. 8,400 and local taxes ₹. 800.
2. ¼ of travelling expenses is not allowed.
Calculate income from profession for the AY 2023-24
 Problems on Profession of Doctors or Medical practitioner

2) Dr. Rekha is a registered medical practitioner, she provides her Receipts

andpayments A/c for the year ended 31st March 2023.
Particulars Amount Particulars Amount

To Balance b/d 1,30,000 By Salaries 66,000

To Visiting fees 1,40,000 By Clinic rent 96,000
To Consultation fees 4,76,000 By Motor car expenses 70,000
To Special Medical camp By Driver’s salary 60,000
Remuneration 50,000 By Medical books 30,000
To Rent from H.P 1,20,000 By Motor car 5,00,000
To Gifts 60,000 Purchased
To Dividend from Sun By Household 92,000
Pharma Ltd. 11,600 expenses.
To Interest on debentures of By Telephone 29,000
Tata Power Ltd. 18,800 By Travelling 20,000
By Surgical equipment 33,000
By Balance c/d 10,400
10,06,400 10,06,400

Additional Information:
1. Remuneration received for special medical camp was donated to an
orphanage.
2. 30% of motor car usage, 20% of travelling expenses and 25% of
telephonebills relate to personal use.
3. Allow depreciation as per IT rules.
4. 50% of gifts are from patients.
5. Medical books include annual publication worth ₹. 10,000 remaining
aregeneral medical books.
Compute taxable professional income for the A.Y. 2023-24.
 2.4 INCOME FROM CAPITAL GAINS

Any profit or gain that arises from the sale of a ‘capital asset’ Under section2(14)
is chargeable to tax under section 45, is a capital gain. This gain or profit comes
under the category ‘income’, and hence assessee will need to pay tax for that
amount in the year in which the transfer of the capital asset takes place. This is
called capital gain tax, which can be short-term or long-term.
Capital gains are not applicable to an inherited property as there is no sale, but
only a transfer of ownership [except such transfers as are given in sections 46 and 47].
The Income Tax Act has specifically exempted assets received as gifts by way
of an inheritance or will. However, if the person who inherited the asset decides
to sell it, capital gains tax will be applicable. Any gains arising out of transfer of
capital asset in the previous year is called as capital gains. To tax an income
under the head capital gains the following conditions are to be fulfilled.
WHAT IS THE BASIS OF CHARGE [SEC. 45]

Any gain arising from the transfer of a capital asset during a previous year is chargeable
to tax under the head "Capital gains" in the immediately following assessment year, if
it is not eligible for exemption under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA
and 54GBt. In other words, capital gain's tax liability arises only when the following
conditions are satisfied:

Condition 1 There should be a capital asset.

Condition 2 The capital asset is transferred by the assessee.
Condition 3 Such transfer takes place during the previous year.

Condition 4 Any profit or gains arises as a result of transfer.

Such profit or gains is not exempt from tax under sections 54, 548,
Condition 5 54D, 54EC, 54EE, 54F, 54G, 54GA and 54CB1.

Section 45 in The Income- Tax Act, 1995

45. Capital gains 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, 54E, 54F, 54G 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.
(1) Notwithstanding anything contained in sub- section
(2) the profits or gains arising from the transfer by way of conversion by the
owner of a capital asset into, or its treatment by him as, stock- in- trade of a
business carried on by him shall be chargeableto income- tax as his income of the
previous year in which such stock- in- trade is sold or otherwise transferred by
FOR PRIVATE CIRCULATION ONLY 95
 him and, for the purposes of section 48, the fair market value of the asset on the
date of such conversion or treatment shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of the capital asset.
(3) The profits or gains arising from the transfer of a capital asset by a
person to a firm or other association of persons or body of individuals (not
being a company or a co- operative society) in which he is or becomes a
partner or member, by way of capital contribution or otherwise, shall be
chargeable to tax as his income of the previous year in which such transfer
takes place and, for the purposes of section 48, the amount recorded in the books
of account of the firm, association or body as the value of the capital asset shall
be deemed to be the full value of the consideration received or accruing as a
result of the transfer of the capital asset.
(4) The profits or gains arising from the transfer of a capital asset by way of
distribution of capital assets on the dissolution of a firm or other association
of persons or body of individuals (not being a company or a co- operative
society) or otherwise, shall be chargeable to tax as the income of the firm,
association or body, of the previous year in which the said transfer takes place
and, for the purposes of section 48, the fair market value of the asset on the date
of such transfer shall be deemed to be the full value of the consideration received
or accruing as a result of the transfer.]
(5) Notwithstanding anything contained in sub- section (1), where the capital
gain arises from the transfer of a capital asset, being a transfer by way of
compulsory acquisition under any law, or a transfer the consideration for which
was determined or approved bythe Central Government or the Reserve Bank of
India, and the compensation or the consideration for such transfer is enhanced or
further enhanced by any court, tribunal or other authority, the capital gain shall
be dealt with in the following manner, namely:-

FOR PRIVATE CIRCULATION ONLY 96

 (a) the capital gain computed with reference to the compensation awarded in the
first instance or, as the case may be, the consideration determined or approved
in the first instance by the Central Government or the Reserve Bank of India
shall be chargeable as income under the head" Capital gains of the previous year
2 in which such compensation or part thereof, or such consideration or part
thereof, was first received]; and
(b) the amount by which the compensation or consideration is enhanced or
further enhanced by the court, tribunal or other authority shall be deemed to be
income chargeable under the head" Capital gains" of the previous year in which
such amount is received by the assessee. Explanation. - For the purposes of
this sub- section,-
(i) in relation to the amount referred to in clause (b), the cost of acquisition and
the cost of improvement shall be taken to be nil;
(ii) the provisions of this sub- section shall apply also in a case where the transfer
took place prior to the 1st day of April, 1988 ;
(iii) where by reason of the death of the person who made the transfer, or for any
other reason, the enhanced compensation or consideration is received by any
other person, the amount referred to in clause (b) shall be deemed to be the
income, chargeable to tax under the head" Capital gains", of such other person.]
(6) 3 Notwithstanding anything contained in sub- section (1), the difference
between the repurchase price of the units referred to in subsection (2) of section
80CCB and the capitalvalue of such units shall be deemed to be the capital gains
arising to the assessee in the previous year in which such repurchase takes place
or the plan referred to in that section is terminated and shall be taxed
WHICH ARE THE ASSETS, INCLUDED IN AND EXCLUDED FROM CAPITAL
ASSET

"Capital asset" is defined by section 2(14).

"Capital asset" means property of any kind, whether fixed or circulating,

movable or immovable, tangible or intangible. Besides, it includes the
following-

1. Any rights in or in relation to an Indian company, including rights of

management or control or any other rights whatsoever.

2. Property of any kind held by an assessee (whether or not connected with his
business or profession).
3. Any securities held by a Foreign Institutional Investor which has invested
FOR PRIVATE CIRCULATION ONLY 97
 in such securities in accordance with the regulations made under the SEBI
Act.
4. Any unit-linked insurance plan (ULIP policy) issued on or after February
1, 2021 to which exemption under the term of such section 10(10D) does not
apply (ie, if insurance premium payable in any previous year during policy
exceeds Rs. 2.50 lakh).

The following assets are excluded from the definition of "capital assets" –

1. Stock-in-trade (other than securities referred to in point 3 above).

2. Personal effects (movable assets).

3. Agricultural land in a rural area in India.

4. A few gold bonds and special bearer bonds (this point does not have any
practical utility).

5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999
or deposit certificates issued under the Gold Monetization Scheme,
2015.

WHAT IS TRANSFER OF CAPITAL ASSET?

Transfer, in relation to a capital asset, includes sale, exchange or

relinquishment of the asset or the extinguishment of any rights therein or the
compulsory acquisition thereof under any law [sec. 2(47)]

Certain transactions not included in transfer- For the purpose of section 45, the
following transactions are not regarded as transfers (in other words, in the
following cases, there is no capital gain)

1. Distribution of assets in kind by a company to its shareholders on its liquidation.

2. Any distribution of capital assets in kind by a Hindu undivided family to its

members at the time of total or partial partition.

3. Any transfer of capital asset under a gift or a will or an irrevocable trust

(exception- gift of ESOP shares is chargeable to tax).

4. Transfer of capital asset between holding company and its 100 per cent
subsidiary company, if the transferee company is an Indian company.

5. Transfer of capital asset in the scheme of amalgamation/demerger, if the

transferee- company is an Indian company.6. Transfer of shares in
amalgamating company/demerged company in lieu of allotment of shares in
amalgamated company/resulting company in the above case.

FOR PRIVATE CIRCULATION ONLY 98

 The following transactions are not treated as Transfer:
1. Transfer of asset in a scheme of amalgamation, demerger.
2. Transfer of agricultural land before 01-04-1970.
3. Transfer of debenture or bonds into shares.
4. Transfer of asset in kind at the time of liquidation.
5. Transfer of asset by a parent company to the own subsidiary company.
6. Transfer of asset under gift or will.
7. Transfer of capital asset at the time of partition of HUF.
8. Transfer of capital asset, being a government security, made outside India
by Non- Resident to another Non-Resident.
CAPITAL GAINS HOW COMPUTED [SEC. 48]

Computation of capital gain depends upon the nature of capital asset

transferred, viz, short-term capital asset or long-term capital asset. Capital gain
arising on transfer of a short-term capital asset is short-term capital gain,
whereas transfer of long-term capital asset generates long-term capital gain. The
tax incidence is generally higher in the case of short-term capital gain as
compared to long-term capital gain.

The method of computation of short-term and long-term capital gain is as follows:

Computation of short-term capital gain Computation of long-term capital gain

1. Find out full value of consideration 1. Find out full value of consideration
2. Deduct the following:
2. Deduct the following: a. expenditure incurred wholly and
a. expenditure incurred wholly and exclusively in connection with such
exclusively in connection with such transfer
transfer b. indexed cost of acquisition [in some
b. cost of acquisition cases cost of acquisition is deducted]
c. cost of improvement c. indexed cost of improvement (in some
cases cost of improvement is deducted)
3. From the resulting sum deduct the 3. From the resulting sum deduct the
exemptions provided by sections 54B, exemption provided by 54, 548, 54D,
54D, 54G and 54GA. 54EC. 54EE, 54F, 54G, SIGA and 54GB
4. The balance amount is short-term 4. The balance amount is long-term
capital gain. capital gain.

Notes

1. Securities transaction tax is not deductible while computing income under

the head "Capital gains".
FOR PRIVATE CIRCULATION ONLY 99
 WHAT IS FULL VALUE OF CONSIDERATION [SEC. 48]

Full value of consideration is the consideration received or receivable by the

transferor in lieu of assets, which he has transferred. Such consideration may be
received in cash orin kind. If it is received in kind, then fair market value of such
assets is taken as full value of consideration. Full value of consideration does not
mean market value of that asset which is transferred.

 Adequacy of consideration - Adequacy or inadequacy of consideration is

not a relevant factor for the purpose of determining full value
consideration. However, in the case of transfer of land or building (or
both), if stamp duty value is more than 110 per cent of sale consideration,
the stamp duty value is taken as full value of consideration.
 Receipt of consideration-It makes no difference whether (or not) "full
value of consideration" is received during the previous year. Even if
consideration is not received, capital gain is chargeable to tax in the year
of transfer.
 If consideration is not determinable- Where in the case of a transfer,
consideration for the transfer of a capital asset(s) is not determinable, then
for the purpose of computing capital gains, the fair market value of the
asset shall be taken to be the full market value of consideration [sec.
50D).

HOW TO FIND OUT EXPENDITURE ON TRANSFER

Expenditure incurred wholly and exclusively in connection with transfer of

capital asset is deductible from full value of consideration. The expression
"expenditure incurred wholly and exclusively in connection with such transfer
means expenditure incurred which is necessary to effect the transfer.

Examples of such expenses are: brokerage or commission paid for securing a

purchaser, cost of stamp registration fees borne by the vendor, travelling
expenses incurred in connection with transfer, litigation expenditure for
claiming enhancement of compensation awarded in the case of compulsory
acquisition of assets.

FOR PRIVATE CIRCULATION ONLY 100

 WHAT IS COST OF ACQUISITION
Cost of acquisition of an asset is the value for which it was acquired by the assessee.
Expenses of capital nature for completing or acquiring the title to the property are
includible in the cost of acquisition. Interest on money borrowed to purchase asset is part
of actual cost of asset.

The amount paid for discharge of a mortgage is part of "cost of acquisition", if

the mortgage was not created by the transferor. For instance,

on June 1, 2020, X took a loan of Rs. 5 lakhs by mortgaging his house

property. X could not repay the loan during his lifetime and after his death
on July 2, 2022, the property (with mortgage) is transferred to Mrs. X. Mrs.
X transfers the property on march2, 2023 and before transfer, a sum of Rs.
7.2 lakh is paid to clear the mortgage. Rs. 7.2 lakh will be deductible as part
of cost of acquisition of the property while calculating capital gains in the
hands of Mrs. X. If, however, loan is taken by Mrs. X. then repayment of
loan will not be deductible as part of cost of acquisition of the property while
calculating capital gains in the hands of Mrs. X.

WHAT IS COST OF IMPROVEMENT

Cost of improvement is capital expenditure incurred by an assessee in making

any additions/improvement to the capital asset. It also includes any expenditure
incurred to protect or complete the title to the capital assets or to cure such title.
Any expenditure incurred to increase the value of the capital asset is treated as
cost of improvement.

Improvement cost incurred before April 1, 2001-Cost of

improvement incurred before April 1, 2001 is never taken into
consideration. This rule does not have any exception.

HOW TO CONVERT COST OF ACQUISITION/IMPROVEMENT

INTO INDEXED COST OF ACQUISITION/IMPROVEMENT

Indexed cost of acquisition is calculated as follows

Indexed cost of Acquisition = Cost of Acquisition x CII for the year of sale
CII of the year of Acquisition or for 2001-02 WEL
Indexed cost of Improvement = Cost of Improvement x CII for the year of sale
CII of the year of Acquisition or for 2001-02 WEL

FOR PRIVATE CIRCULATION ONLY 101

 Cost inflation index for different previous years

Cost of Inflation Cost of Inflation

Previous Year index Previous Year index
(CII) (CII)
2001-02 100 2012-13 200
2002-03 105 2013-14 220
2003-04 109 2014-15 240
2004-05 113 2015-16 254
2005-06 117 2016-17 264
2006-07 122 2017-18 272
2007-08 129 2018-19 280
2008-09 137 2019-20 259
2009-10 148 2020-21 301
2010-11 167 2021-22 317
2011-12 184 2022-23 331
Financial Assets:
It means the capital assets which comprises of securities, bonds, shares, mutual
funds. Etc.
Short Term Capital Gain: Any gains arising from transfer of Short-term
capital asset is known as short term capital gain.
Long term Capital Gain:
Any again arising from transfer of Long-term capital asset is known as Long-
germ capital gains

a) Indexed cost of Acquisition (If the Assessee acquires the property before
01-04- 2001)

It means inflating the cost of an asset acquired to the present value.

Indexation benefits are available only for long term capital assets.
However, the indexation benefits is a not available in case of
debentures, goodwill, intangible assets, bonus shares and depreciable
assets even it is a long term assets.

FOR PRIVATE CIRCULATION ONLY 102

 Summary of the period of holding:

Brokerage or Selling expenses:

It is the expenses incurred for transferring the capital asset, the expenses
includes, brokerage, commission and other expenses related to transfer.
4.4 Cost of acquisition:
It refers to the cost incurred by an assessee to acquire the capital asset. It
includes all capital expenses incurred in acquiring the assets.

Cost of Acquisition of certain assets

Asset Cost of Acquisition
Goodwill, if self-generated NIL
Goodwill, if acquired Purchase Price
On Gift / inheritance / distribution of assets of
HUF on partition Cost to the previous owner
Bonus Shares allotted prior to 1st Apr’01 FMV (1st Apr’01)
Bonus Shares allotted post 1st Apr’01 NIL
Rights Shares Amount paid to acquire the shares
Purchase price paid to the renouncer + Price
Rights shares which are purchased by person in paid for acquiring rights shares
whose favor the assessee has renounced the
rights

FOR PRIVATE CIRCULATION ONLY 103

 Cost of acquisition shall have to be adjusted by the Cost Inflation Index to arrive
at the indexed cost of acquisition.

Note: Base year for the purpose for calculation of Indexed cost of acquisition or
improvement has been shifted from 1981-82 to 2001-2002. Accordingly, if any
assessee/previous owner has acquired capital asset prior to 1-4-2001 then he will
have option to choose actual cost of acquisition or FMV as on 1-4-2001 as his
cost of acquisition. Cost of improvement incurred by assessee or previous owner
prior to 1-4- 2001 shall be taken as NIL.

b) If the Assessee acquires the property after 01-04-2001

Situation 1: (Before – Before, that is both the previous owner and present owner
acquired the property before 1st April 2001)
Situation 2: (Before – After, that is that the previous owner acquired the property
before 1st April 2001 and the present owner acquired the property after 1st April
2001)
Situation 3: (After – After, that is both the previous owner and the present
owner acquired the property after 1st April 2001)

4.7 Indexed Cost of Improvements:

It is the cost incurred by the assessee for improving the utility of the asset or
enhancing the value of the asset.
- Any cost incurred by the assessee or by the previous owner before 01-04-
2001 is to be ignored and should not be considered for deduction.
- The cost incurred on or after 01-04-2001 will be allowed as deduction.
a) For the Short them capital asset the actual cost of improvement is
allowed as deduction.
b) For Long term capital asset, it will be indexed and allowed as deduction

FOR PRIVATE CIRCULATION ONLY 104

 A. Section 54:

1. Eligible assessee: Individual and HUF

2. Type of asset: The house property transferred should be a long-term capital asset.
3. Transfer(sale) of: Residential house2021-22
4. Purchase or construction of: Residential house
5. Time limit:
a. For purchase: Within 1 year before or within 2 years after the date of
transfer of residential house.
b. For construction: within 3 years after the date of transfer of residential house.
6. Other conditions:
i. Construction should be complete within 3 years from the date of
transfer (Date of commencement of construction, being irrelevant).
ii. No limit on number of properties that can be acquired.
iii. Amount of exemption u/S 54 is:
DETAILS AMT AMT
(₹) (₹)
Section 54:

Amount of capital gain XXX

Amount invested in purchase or
construction of residential house XXX
Whichever is less is exempt u/s 54 XXX

i. The new residential property shall not be transferred within a period of 3 years
from the date of its purchase or completion of construction. If transferred (sold)
then exemption given earlier shall be taxable in the previous year of such
transfer.
ii. Amount deposited in capital gain account scheme shall also be exempted.
however the deposit amount shall be utilized for the said purpose within the time
limit .If not ,then it shall be taxable in the P.Y in which it was utilized for other
purposes or on the expiry of time limit. If the assessee is not utilizing the amount
till the expiry of 3 years, if he withdraws after three years for the said purpose or
for other purpose is taxable.

Note: From the AY 2021-22 in order to save tax on long-term capital gains on
the sale of house property one can invest capital gains in two house properties
instead of one but this benefit is available once in a lifetime only if capital gains
do not exceed Rs 2 crore.

FOR PRIVATE CIRCULATION ONLY 105

 Section 54B:

1. Eligible Assessee: Individual

2. Type of Asset: Short term or long-term capital asset being
transferred whichis an agricultural land.
3. Transfer of: Agricultural land
4. Purchase of: Agricultural land
5. Time limit: The assessee can purchase another agriculture land
within 2 yearsfrom the date of transfer.
6. Other conditions:
i. The agricultural land was used by the assessee or his parents
for a periodof 2 years immediately before the date of transfer.
ii. The new agricultural land purchased may be in rural or
urban area. However, the transfer (sale) of agricultural land
shall be situated only inurban area (since agricultural land in
rural area is not a capital asset U/S2(14).

i. Amount of exemption u/s 54B is,

DETAILS AMT(₹) AMT(₹)

Amount of exemption U/ S 54B
Amount of capital gain XXX
Amount invested in purchase of new agricultural land
/Amount Invested in capital gain A/c Scheme XXX
Whichever is less is exempt u/s 54B XXX
i. The new agricultural land shall not be transferred within a period of 3 years
from the date of its purchase. If transferred, the exemption given earlier shall be
taxable in the previous year of such transfer.

Amount deposited in capital gain account scheme shall also be exempted.

however, the deposit amount shall be utilized for the said purpose within the time
limit. if not, then it shall be taxable in the P.Y in which it was utilized for other
purposes or on the expiry of time limit. If the assessee is not utilizing the
amount till the expiry of 2 years, if he withdraws after three years for the said
purpose or for other purpose is taxable. (Capital gain A/c scheme shall be
maintained by nationalized bank).

FOR PRIVATE CIRCULATION ONLY 106

 C. Capital gains on compulsory acquisition of land and building forming
part of industrial undertaking (Sec 54 D):
Section 54D:

1. Eligible Assessee: All persons

2. Type of Asset: Short term or long-term capital asset
3. Transfer of: Compulsory acquisition of land or building forming part of
Industrial undertaking which is compulsorily acquired by Government.
4. Purchase of: Land or building forming part of industrial undertaking
5. Time limit: Within a period of 3 years after the date transfer
6. Other conditions:
i. Such land or building forming part of industrial undertaking was
used by the assessee for at least 2 years before the date compulsory
acquisition (Transfer)
ii. Amount of exemption U/S 54D:

DETAILS AMT(₹ AMT(₹

) )
Amount of exemption U/ S 54D
Amount of capital gain XXX
The amount invested in purchase or construction of newland or
building forming part of industrial undertaking
XXX
Whichever is less is exempt u/s 54B XXX

i. The new land or building purchased or constructed shall not be transferred

within a period of 3 years from the date of its purchase or construction. If
transferred the exemption given earlier shall be taxable in the previous year of
such transfer.
ii. Amount deposited in capital gain account scheme shall also be exempted.
However,the deposit amount shall be utilized for the said purpose within the time
limit. If not, then it shall be taxable in the P.Y in which it was utilized for other
purpose or on the expiry of time limit.

FOR PRIVATE CIRCULATION ONLY 107

 D. Capital gain on transfer of any long-term capital asset and invested in
specified assets (Sec 54 EC):
1. Eligible Assessee: All persons
2. Type of Asset: long-term capital asset
3. Transfer of: Any long-term capital asset
4. Investment in: Long- term specified capital asset
5. Time limit: Within 6 months from the date of transfer
6. Other conditions:
i. Long -term specified capital assets
a) National Highway Authority of India (NHAI)
b) Rural Electrification Corporation (REC)
ii. Amount of exemption u/s 54EC:
DETAILS AMT(₹ AMT(₹
) )
Amount of exemption U/ S 54EC
Amount of capital gain XXX
The amount invested in long term specified capital asset XXX
Whichever is less is exempt u/s 54EC XXX

i. Maximum amount that can be invested during any financial year is Rs.50,00,000
ii. The investment made in long term specified capital asset shall not be
transferred or liquidated within a period of 3 years from the date of making
investment. If transferred, the exemption given earlier shall be taxable in the
previous year of such transfer.
iii. The above investments in specified capital assets are not eligible for
deduction U/S 80C.
iv. Amount deposited in capital gain account scheme shall also be exempted.
However, the deposit amount shall be utilized for the said purpose within the
time limit. If not then it shall be taxable in the P.Y in which it was utilized for
other purposes or on the expiry of time limit.

E. Capital gains on transfer of a long-term capital asset other

than a houseproperty, but invested in residential house (Sec 54
F):
Section 54 F:
1. Eligible Assessee: Individual and HUF
2. Type of asset: Long-term capital asset.
3. Transfer (sale) of: Any long-term capital asset other than residential house
4. Purchase or construction of: Residential house
FOR PRIVATE CIRCULATION ONLY 108
 5. Time limit:
a. For Purchase: Within 1 year before or within 2 years after
the date oftransfer.
b. For construction: within 3 years after the date of transfer.
6. Other conditions:
i. Construction should be complete within 3 years from the date
of transfer. (Date of commencement of construction, being
irrelevant).
ii. The assessee owns not more than 1 residential house on
the date oftransfer (other than new residential house)
ii. Amount of exemption U/S 54 F is:

DETAIL
S AMT(₹) AMT(₹)
Amount of exemption U/ S 54F
Amount of capital gain XXX
Capital gain x cost of new house /Net sale
consideration XXX

Whichever is less is exempt XX

X

(Note: Net sale consideration= Full value consideration - Expenses related

to transfer)
i. The new residential property shall not be transferred within a period of 3 years
from the date of its purchase or completion of construction. If transferred (sold)
then exemption given earlier shall be taxable in the previous year of such
transfer.
ii. Amount deposited in capital gain account scheme shall also be exempted
.however the deposit amount shall be utilized for the said purpose within the time
limit .If not ,then it shall be taxable in the P.Y in which it was utilized for other
purposes or on the expiry of time limit (i.e. Above the time limit) .

F. Capital gain on shifting of industrial undertaking from urban to non-

urban areas (Sec 54 G):
Section 54G:
1. Eligible Assessee: All persons
2. Type of Asset: Short-term or long-term capital asset

FOR PRIVATE CIRCULATION ONLY 109

 3. Transfer of: Land, Building, Plant or Machinery used for the purpose of
an industrial undertaking situated in urban area.
4. Purchase of: Land or building or Plant or Machinery used for the purpose of
an industrial undertaking shifted from urban area to any area other than an urban
area (Rural area or semi urban area).
5. Time limit: Within a period of 1 year before or 3 years after the date transfer

6. Other conditions:
i. Amount of exemption u/s 54GA:

DETAILS
AMT(₹) AMT(₹)
Amount of exemption U/ S 54GA

Amount of capital gain XXX

The amount invested in purchase or construction of new land
or building, Plant or Machinery forming part of industrial
undertaking XXX

Whichever is less is exempt U/S 54GA XXX

ii. The new land or building or plant, machinery purchased or constructed shall
not be transferred within a period of 3 years from the date of its purchase or
construction. If transferred the exemption given earlier shall be taxable in the
previous year of such transfer.
iii. Amount deposited in capital gain account scheme shall also be exempted.
however, the deposit amount shall be utilized for the said purpose within the
time limit. If not, then it shall be taxable in the P.Y in which it was utilized for
other purpose or on the expiry of time limit.

G. Investment on compensation received (Sec 54 H):

In case any asset was taken over by Govt. and additional compensation is
received it will be deemed as income of the year in which it is received and period
for reinvestment will be counted from the date of receipt of such additional
compensation.

Illustration: 1
Q1. Mr. Suraj residing in Chennai acquired a residential house on 28th May
2003 for Rs. 30,00,000. This house was sold for a consideration of Rs. 2 crores in
May, 2022. Brokerage

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 and other expenses in connection with transfer amounting to Rs. 3 lakhs were
spent. In March 2023, the sale consideration was invested in a residential property
for Rs. 60 lakhs and at the same time a sum of Rs. 25 lakhs were invested in the
bonds issued by NHAL A sum of Rs. 40 Lakhs was invested in long term
specified units in July 2022. Compute the taxable Capital gain for the AY 2023-
24.
Computation of taxable Capital gains for the AY
2023-24

Particulars Rs. Rs.

Sale consideration 2,00,00,000
Less: Expenses incurred 3,00,000
Net consideration 1,97,00,000
Less: Indexed cost of acquisition (30,00,000
x331/105) 94,57,143
Gross capital gains 1,02,42,857
Less: Exempt - u/s. 54 Cost of the new house 60,00,000
- u/s. 54EC-NHAI - invested beyond 6 months
- not eligible Nil
- u/s 54EE-specified long term units - invested
within 6 months 40,00,000 1,00,00,000
Taxable Capital gains 2,42,857

Note: Since the amount of Capital gains is less than 2 crores, the assessee has
an option to invest in two residential house properties in India. (This option can
only be exercised once in a lifetime for an assessee).
Terminal Questions:
Section A
3. Distinguish short term capital assets and long term capital asset.
4. Explain the capital gain which are exempt from tax.
5. Write a short note on :
(a) Indexed cost of acquisition
(b) Indexed cost of Improvement
(c) Cost of inflation index.

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Section B
1. Mr. Raj purchased a house for Rs. 40,000 in the year 1992 and
immediately sent Rs. 10,000 on its renovation. . The house was sold for
Rs. 15,39,000 on 1-8-2022. He paid Rs. 16,000 for sale and other
expenses. Fair market value of the house as on 1-4-2001 was Rs.
1,00,000. The cost of inflation index for the financial years 2001-02 and
2022-23 were 100 and 331 respectively.
Compute his gross total income for the AY 2022-23.
Section C
1. From the following particulars of capital assets sold by Mr. Kishan during
the previous year 2022-23. Compute his income from capital gain for the
AY 2023-24
Particulars Sale
proceeds
(in Rs)
(a) A residential house purchased on 1-1-2011 for
Rs.32,000 and sold on 31-3-2023 1,89,522
(b) A residential house let out by him of the cost of
Rs. 70,000 purchased in December 2020 and
sold on 31-03-2023 1,50,000
(c) Self- cultivated agricultural land purchased on 1-
1-2011 for Rs. 1,50,000 and sold on 1-2-2023 3,93,284
(d) A block of asset consisting of machinery of the
W.D.V of Rs. 10,000 as on 1-4-2022 and sold on 12,000
1-3-2023
(e) Non-listed shares of Jute Co. ltd purchased on 1-
2-2013 for Rs. 19,900 and sold on 15-2-2023 53,384
During the year Mr. Kishan purchased a new residential house for
Rs.40,000. He also deposited Rs. 50,000 of the sale proceeds of the above
agricultural land in a specified bank under the notified scheme within the
specified date.
The cost of inflation index for the financial years 2010-11, 2011-12,
2012-13, and 2022-23 were 167, 184, 200 and 331 respectively.

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 2.5 Income from Other sources

Income from other sources is the fifth and last head of income. Any source of income
which doesn’t fall under any of the other heads of income is chargeable to tax under the
head income from other sources. Examples:

a) Fee, commission and remuneration received by an employee form other than

his own employer.

b) Salary or pension received by an MLA, MP and MLC

c) Income from guest lectures

d) Remuneration received from universities for examination work by a non-
employee of the university.
e) Director’s fee
f) Interest from foreign securities
g) Income from undisclosed sources
h) Composite rent received for letting building along with plant and
machinery and furniture.
i) Rent from letting vacant plot
j) Dividends from Mutual funds, companies etc.
k) Interest on securities
l) Interest on bank deposits
m) Gift received
n) Insurance Commission received
o) Casual income received
p) Family pension received
q) Agriculture income from land situated outside India etc.
r) Any income from paying guest accommodation, sub-letting etc.,
s) Royalty received by the owner of an asset
t) Directors commission for underwriting of shares of new company
u) Gratuity received by the directors, who is not an employee of a company
v) Interest on income tax refunds
w) Rent of subletting
x) Withdrawal of amount under NSS including interest thereon

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 Securities:
The term security is defined as the document held by a creditor as guarantee of his
right to payment.
It means all the debt should be secured in some way or other. The borrower issues the
investor some document as acknowledgement of debt this called as security.

Types of Securities

1. Tax Free Government Securities:

These are securities issued either by state or central government. They are
exempted from tax under 10(15) and it should not include in total income.
2. Less Tax Government Securities:
These are security issued by the government and interests on these securities are fully
taxable without deducting tax at source.

3. Tax Free Commercial Securities:

These are securities issued by Local authority, Statutory Corporation or a company in a
form of Bonds and Debentures. The tax on interest paid by company, hence it is called
as tax-free securities.
4. Less Tax Commercial Securities:
These are the securities issued by the company and tax will be deducted at source before
paying any interest to the investors.

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 Bond Washing Transactions:
It refers to selling of a security to friend or relative immediately before the due date for accrual or receipt
of interest and acquiring the securities back after the due date. This practice is usually adopted by high
income class assessee to escape from paying tax, by transferring the securities to a low-income class
assessee.

Cum- Interest Securities:

It is the amount of interest accrued in the duration between the last coupon date and
the settlement date or transaction date. Hence cum interest refers to ‘with interest’.
Ex – Interest Securities:
It is the amount of coupon interest between transaction date or settlement date and the
next coupon date. Hence, it is also known as ‘without interest’.

Deduction available under income from other sources

1. Family pension: 15,000 or 1/3rd of the amount received whichever is less will
be allowed as deduction.
2. Collection charges paid for collecting dividend and interest is deducted
provided such income is chargeable to tax.
3. Any other expenses incurred to earn an income will be allowed as deduction. For
example, depreciation, repairs, insurance etc. incurred on letting out building with plant,
machinery and furniture, expenses on sub-letting, expenses relating to owning and
maintain the race horse etc (except the expenditures incurred for purchasing the lottery
tickets)

Tax free Government Securities:

a) Post office Cash Certificates (5 years)
b) Post Office National Saving Certificates (12 years)
c) Post Office Saving Bank A/c, exempted up to Rs. 3,500 and in case of Joint A/c
Rs. 7,000 is exempted.
d) Post office cumulative time deposit A/c
e) Public Account of Post Office Saving A/c (Interest up to Rs. 5,000)
f) Fixed Deposit in Post Office
g) National Plan Certificates (10 years)
h) 12 years National Saving Certificates

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 i) National Plan Saving Certificates (12 years)
j) National Defense Gold Bonds 1980
k) Special Deposit Scheme 1981
l) Special Bearer Bonds 1991
m) Treasury Saving Deposit Certificate (10 years)
n) Interest on 7% capital Investment Bonds
o) Notified NRI Bonds
p) Interest on Bonds Issued by Local Authority of State Finance Entity notified
by Central Government
q) Interest on Relief Bonds and Saving Bonds
Rates of TDS

Income Rate of TDS

Interest on debentures/securities issued by or on behalf of any local 10%

authority/statutory corporation, listed debentures of a company, any security of
the Central or State Government

Any other interest on securities (including interest on non-listed debentures 10%

Interest other than interest on securities to a resident 10%

Winning from lottery, horse race or crossword puzzle or card game or other game 30%
of any sort to a resident/ non –resident

Insurance commission to a resident 10%

Frees for professional or technical services to a resident 10%

Tax shall not be deducted at source for the following

a) 4.25% National Defense Bonds

b) National Development Bonds
c) 7 years National Saving Certificate
d) Debentures issued by Co-operative Society or a Public Sector Company or any
Institution notified by Central Government.
e) 6.5% Gold Bonds 1980
f) Any Security of Central or State Government
g) Debentures issued by the company or recognized Stock Exchange provided
that the
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interest is payable 116
 exceed Rs. 2,500.

1. Bank Interest on Fixed Deposit: is fully taxable by deducting TDS if it exceeds

Rs. 40,000 p.a.
Gross Interest = Net Interest Received x 100/90
2. Gifts received: gifts received from a relative are not taxable and gifts received
fromfriends or non-relatives exceeding Rs. 50,000 is fully taxable.
3. Insurance Commission Received: is fully taxable. If it is more than Rs. 15,000
it is subject to TDS.
Gross Commission = Net Amount x 100/90
4. Casual Income: Income from crossword puzzle, lottery, card games if it exceeds
Rs. 10,000 and Horse race Exceeds Rs. 10,000 it is subjected to TDS. No expense is
allowed as deduction fromthese incomes.
Gross Winnings =Net Winning x 100/70
Illustration1

X a resident individual, submits the following particulars of his

income for the previous year ending March31,2023
Interest paid by X on
capital borrowed
Date of declaration Amount paid to
Name of the company to invest in shares
of dividend X

A Ltd a foreign company July15,2022 90,000 14,000

B Ltd a foreign company April1, 2022 43,000 50,000
C Ltd an Indian
company October 31,2022 4,00,000 Nil
Rent from letting a factory along with plant and machinery (letting out of plant and machinery):
₹30,600. Collection charges in respect of rent: ₹400. Fire insurance premium in respect of building
₹600. Fire insurance premium in respect of plant & machinery: 750. Repairs in respect of building ₹
4,600. Depreciation of building, plant and machinery ₹ 18,[Link] from lottery on December
1,2022 net amount ₹70,000 Tax deducted at sources ₹30,000Winning from card game ₹ 13,500(gross) (
Tax deducted by the payer) Interest on securities issued by the, Government of Japan ₹ 30,670 During
the previous year,X has received the following gift:
Amount
Gift from whom Date of Gift (₹)
Gift received from a friend August20,2022 1,00,000
Gift received from friend september10,2022 60,000
Gift from a brother December 30,2022 90,000
Gift received at the time of marriage of X October10, 2022 1,35,000
Gift from grandfather received by will October1, 2022 1,40,000
Gift received from friend september20,2022 20,000

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 Computation of income from other sources
Previous year-2022-23
Name of the Assessee: Mr.X Assessment
Status: Resident Year-2023-24
Dividend
A Ltd 90,000
B Ltd 43,000
C Ltd 4,00,00
Total 5,33,000

Less: Interest on borrowed capital

( 14000+50,000+Nil) (deductible doesn’t exceed
20% of ₹5,33,000) -64,000 4,69,000
Rent received 30,600
Less expenses
Collection charges 400
Insurance (600+750) 1,350
Repairs 4,600
Depreciation 18,600
Total -24,950 5,650
Winning from lottery
Net Amount 70,000
AddTax deducted at sources: 30,000 1,00,000
Winning from card games 13,500 1,13,500
Interest on securities of a foreign government 30,670
GIFT
Gift received from August20,2022 1,00,000
Gift received from friend on september10,2022 60,000
Gift from a brother ( gift received from a relative is not
taxable) Nil
Gift received at the time of marriage ( Not taxable) Nil
Gift received by will ( Not Taxable) Nil
Gift received from friend 20,000
Total ( Amount exceeds 50,000 is taxable) 1,80,000
Income from other sources 7,98,820

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 Terminal Questions

Section A – Marks Questions

1. Mention Ten incomes taxable under the head of income from other sources.
2. Write a short note ( a) Grossing up of interest (b) Deemed incomes

Section B – Marks Questions

1. State the income which is chargeable under the head income from other sources
2. Explain the various kinds of securities

Sections C – Marks Questions

1. From the following particulars compute the income taxable under income from other
sources of Mr. Kiran, compute is taxable income for the A.Y. 2023-24
i. Interest on PO SB a/c Rs.5,000
ii. Interest from National Relief Bonds Rs10,000
iii. Family Pension received Rs. 3,500 per month
iv. Winnings from horse race Rs.1,00,000
v. Lottery won from play win Rs.20,000
vi. Prize amount received from Sikkim lottery Rs. 70,000
vii. Dividend from Reliance ltd Rs.12,000
viii. Dividend from foreign company Rs. 2,500
ix. Dividend from Cooperative society Rs. 5,000
x. Interest on F.D. with State Bank of Mysore Rs.10,000
xi. Interest received on listed bonds of Birla ltd Rs 9,000
xii. Amount invested in 8%, Karnataka govt securities Rs.10,000
xiii. Rs. 20,000 invested in 11.5% tax free securities of Mudra ltd. (unlisted)
xiv. Fees Rs. 12,500
xv. She lives in a house taken on rent for Rs. 9,000 p.m. she had sub-let 1/3rd of the
house to Kavitha on a monthly rent of Rs. 5,000
xvi. She had written some articles in Times of India for which she received Rs 20,000
xvii. She is the author of a text book titled “Art of Cooking” published by
Banashankari publishers amount received Rs18, 000. Amount spent on typing
books and telephone Rs. 300, & 1,200 respectively.

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