INTERMEDIATE

Paper 7

DIRECT TAXATION
Study Notes
SYLLABUS 2022

The Institute of Cost Accountants of India

CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
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First Edition : August 2022
Revised Edition : March 2024
Revised Edition : January 2025

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 PAPER 7 : DIRECT TAXATION
SECTION - A
Syllabus Structure:

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

Module No. Module Description Weight

Section A: Direct Taxation 50%

1 Basics of Income Tax Act 10%

2 Heads of Income 25%

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

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

Module wise Mapping of SLOB(s)

Module Additional Resources (Research

Topics and Sub-topics SLOB Mapped
No. articles, case studies, blogs)
1 Basics of Income tax Act Common for Modules of Direct 1. To acquire application-oriented
Taxation 1,2, & 3: knowledge and skill for appreciating
various provisions of the Income
Income-tax Act, 1961 (Bare Act) and the Tax Act, 1961 and attain abilities to
Income-tax Rules solve problems while computing tax
[Link] liabilities.
2. To attain abilities to apply various
For this Module: provisions of direct taxation laws,
Refer Chapter I, II & III of the Income including assessment to identify the
Tax Act. impacts thereof on business decisions.
2 Heads of income Refer Chapter IV of the Income-tax Act, 3. To gather knowledge of various
compliance related provisions of
1961 (Bare Act)
direct taxation laws and attain abilities
3 Total income and tax liability Refer Chapter V, VI & VIA of the to ensure due compliance to avoid any
of individuals and HUF Income-tax Act, 1961 (Bare Act) eventual risks.
 Contents as per Syllabus
SECTION A : DIRECT TAXATION 01 - 588
Module 1. Basics of Income Tax Act 01 - 78
1.1 Basic Concepts, Basis of Charge and Capital & Revenue Receipts
1.2 Residential Status and Scope of Total Income
1.3 Agricultural Income
1.4 Income which do not form part of Total Income
Module 2. Heads of Income 79 - 392
2.1 Salaries
2.2 Income from House Property
2.3 Profits and Gains of Business or Profession including Tax Audit u/s 44AB;
and Provisions u/s 43A, 43B, 43AA, 44AD, 44ADA and 44AE (excluding
Sections 42 to 44DB)
2.4 Capital Gains
2.5 Income from Other Sources
Module 3. Total Income and Tax Liability of Individuals & HUF 393 - 588
3.1 Income of Other Person included in Assesses Total Income (Clubbing of
Income)
3.2 Set off and Carry Forward of Losses
3.3 Deductions, Rebate and Relief
3.4 Taxation of Individual (including AMT but excluding Non-resident) & HUF
3.5 Advance Tax
3.6 Tax Deducted at Source & Tax Collected at Source (excluding Non-resident)
3.7 Filing of Return of Income
3.8 PAN
3.9 Self-Assessment & Intimation
 SECTION - A
DIRECT TAXATION
 Basics of Income Tax Act 1
This Module includes

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

1.2 Residential Status and Scope of Total Income

1.3 Agricultural Income

1.4 Income which do not form part of Total Income

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

Module Learning Objectives:

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

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 Basics of Income Tax Act

Basic Concepts, Basis of Charge and

1.1
Capital & Revenue Receipts
“It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from
the Earth to give it back a thousand folds” – Kalidas in Raghuvansh eulogizing King Dalip

I
ncome Tax has been in force in different forms for years. If we go through the history of India, we get relevant
information regarding the taxation system in India. In ancient history, it is mentioned about such system
which was imposed on the income, expenditure and other subject. When most of the European civilization
were in hopping stage, the Maurya Empire in India had a well-developed taxation policy. Kautilya, a minister
in the Maurya Empire, wrote a book (Arthashastra) on taxation around 327 B.C., is good evidence of contemporary
Indian thinking on State administration, economics and fiscal policy. In modern India, income tax was introduced
for the first time in 1860 by Sir James Wilson in order to meet the losses sustained by the Government on account of
the Military Mutiny of 1857. The Act was replaced with the new Act from time to time and the present the Income-
tax Act, 1961 comes into force from 01/04/1962.

Why Taxation

In a welfare state, the government is responsible for the welfare of its citizens, which includes healthcare, education,
employment, infrastructure, social security, and other development needs. To finance these services, the government
needs revenue, and its primary source of revenue is taxation. This means that the government collects taxes from
the public to fund public welfare expenditures. Though nobody enjoys handing over their hard-earned money,
taxes are compulsory or enforced contributions to the government’s revenue by the public. The government
may levy taxes on income, business profits, or wealth, or add it to the cost of some goods, services and transactions.

Basic Reasons to impose taxation

• To provide basic facilities for every citizen of the country: Whatever money is received by the government
from taxation is spent by it for the welfare of the citizens of the country. Some of the services provided by the
government are: health care, electricity, roads, education system, free houses for the poor, water supply, police,
firefighters, judiciary system, disaster relief, taking care of bridges and other things of public welfare.

• To finance multiple governments: All the local governments of the state like village panchayats, block
panchayats and municipal corporations receive funds from the finance commission.

• Protection of the life: Taxpayers receive the protection of life and wealth from the government in case of
external aggression, internal armed rebellion or any other situation.
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Direct Taxation

Direct Tax & Indirect Tax

There are two types of taxes: Direct Tax and Indirect Tax
Tax, of which incidence and impact fall on the same person,
is known as Direct Tax, such as Income Tax. On the other
hand, tax, of which incidence and impact fall on two
different persons, is known as Indirect Tax, such as GST,
etc. It means, in the case of Direct Tax, tax is recovered
directly from the assessee, who ultimately bears such taxes,
whereas in the case of Indirect Tax, tax is recovered from
the assessee, who passes such burden to another person &
is ultimately borne by consumers of such goods or services.
Type of Taxation

Direct Tax Indirect Tax

● Incidence and impact fall on the ● Incidence and impact fall on two different persons
same person ● Tax is recovered from the assessee, who passes such burden to another
● Assessee, himself bears such taxes. person. Thus, it does not pinch the taxpayer.
Thus, it pinches the taxpayer. ● Levied on goods and services. Thus, this type of tax leads to inflation
and have wider base.
● Levied on income
● E.g. GST, Customs Duty, etc.
● E.g. Income Tax
● Regressive in nature i.e., all persons will bear equal wrath of tax on
● Progressive in nature i.e., higher goods or service consumed by them irrespective of their ability.
tax are levied on person earning ● Useful tool to promote social welfare by checking the consumption of
higher income and vice versa. harmful goods or sin goods through higher rate of tax.

Direct tax: Progressive in nature Indirect Tax: Regressive in nature

Constitutional Validity of Taxes
The Constitution of India is the supreme law of India. Any tax law, which is not in conformity with the Constitution,
is called ultra vires the Constitution and held as illegal and void.
Some of the provisions of the Constitution are given below:

Article 265 No tax shall be levied or collected (it includes collection or recovery) except by the authority
(Article 245 and Article 123) of law.
Article 245 Parliament may make laws for the whole or any part of the territory of India
Article 123 When Parliament is in recess, the President has the power to promulgate Ordinances
Article 270 All the taxes & duties except specified shall be levied by the Central Government & distributed
between Union & State Governments in the manner specified by the President or through
recommendation of the finance commission.

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Article 271 Parliament may at any time increase any of the duties or taxes referred in those articles by a
surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part
of the Consolidated Fund India
Article 246 Read with Schedule VII divides the subject matter of law made by the legislature into three
categories
Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. It
means the tax proposed to be levied must be within the legislative competence of the legislature imposing the tax*.
Article 246 read with Schedule VII divides the subject matter of law made by the legislature into three categories:
• Union list (only the Central Government has the power of
legislation on subject matters covered in the list)

• State list (only the State Government has the power of legisla-
tion on subject matters covered in the list)

• Concurrent list (both Central & State governments can pass leg-
islation on subject matters).

If a state law relating to an entry in List III is repugnant to a Union

law relating to that entry, the Union law will prevail, and the state
law shall, to the extent of such repugnancy, be void. (Article 254).

Following major entries in the respective list enable the legislature to make law on the matter:

Union List (List I) Entry 82 - Taxes on income other than agricultural income i.e. Income-tax
State List (List II) Entry 46 - Taxes on agricultural income.

Administration of Tax Laws

The administrative hierarchy of tax law is as follows:
Taxpoint:
 Both of the Boards have been constituted
under the Central Board of Revenue Act, Central Board of
1963. Direct Taxes (CBDT)
Ministry of Department
 CBDT deals with levy and collection of all Finance of Revenue
direct tax whereas matters relating to levy Central Board of
and collection of Central indirect tax are Indirect Taxes &
dealt by CBIC. Customs (CBIC)
Sources or Component of Income Tax Law
in India
1. Income tax Act, 1961 (Amended
up to date) [Provides What to do?]
The provisions of income tax extend to
the whole of India and became effective
from 1/4/1962 (Sec. 1). The Act contains
provisions for: Sources of Income Tax

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Direct Taxation

(a) determination of taxable income;

(b) determination of tax liability;
(c) procedure for assessment, appeals, penalties and prosecutions; and
(d) powers and duties of Income-tax authorities.
Taxpoint:
 The Act has been divided into 23 chapters (covering 298 sections) and 14 schedules. Few of them are further
sub-divided.
 It is extended to the whole of India
 “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters,
seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other
maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and
other Maritime Zones Act, 1976, and the air space above its territory and territorial waters [Sec. 2(25A)]
2. Income-tax Rules, 1962 (Amended up to date) [Provides How to do?]
(a) As per Sec. 295, the Board may, subject to the control of the Central Government, make rules for the whole
or any part of India for carrying out the purposes of the Act.
(b) Such rules are made applicable by notification in the Gazette of India.
(c) These rules were first made in 1962 and are known as Income tax Rules, 1962.
(d) Rules are for implantation or execution of the Act.
Since then, many new rules have been framed or existing rules have been amended from time to time and the
same has been incorporated in the aforesaid rules.
3. Annual Amendments
(a) Income-tax tax Act has undergone several amendments from the time it was originally enacted through
the Union Budget*. Every year [on 1st Feb**], a Finance Bill (a part of the Union Budget) is presented
before the Parliament by the Finance Minister. The Bill contains various amendments which are sought to
be made in the areas of direct and indirect taxes levied by the Central Government.
(b) When the Finance Bill is approved by both the Houses of Parliament and receives the assent of the
President, it becomes the Finance Act. The provisions of such Finance Act are thereafter incorporated in
the Income Tax Act.
 Amendments made in the direct tax shall be effective from next year, unless specified otherwise
 In GST, amendments are expected after every GST council meeting.
 Amendments made in other indirect tax shall be effective from mid night, unless specified otherwise
(c) If on the 1st day of April of the Assessment Year, the new Finance Act has not been enacted, the provisions

* According to Article 112 of the Indian Constitution, the Union Budget of a year is a statement of the estimated receipts and expenditure of the
government for that particular year. Union Budget is classified into Revenue Budget and Capital Budget. Revenue budget includes the government’s
revenue receipts and expenditure. There are 2 kinds of revenue receipts - tax and non-tax revenue. If revenue expenditure exceeds revenue receipts,
the government incurs a revenue deficit. Capital Budget includes capital receipts and payments of the government. Loans from public, foreign
governments and RBI form a major part of the government’s capital receipts. Fiscal deficit is incurred when the government’s total expenditure
exceeds its total revenue. Budget is prepared under the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act).
** However, in the year of election, in the month of Feb, interim budget is presented by the Govt and after election final budget is presented by the new
Govt.

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in force in the preceding Assessment Year or the provisions proposed in the Finance Bill before the
Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become
effective [Sec. 294]
Note: Besides these amendments, whenever it is found necessary, the Government introduces amendments
in the form of various Amendment Acts and Ordinances.
4. Notification, Circulars and Clarifications
(a) U/s 119, the Board may issue certain notifications*, circulars and clarifications** from time to time, which
have to be followed and applied by the Income tax authorities.
(b) Effect of circulars: These circulars or clarifications are binding upon the Income tax authorities, but the
same are not binding on the assessee. However, assessee can claim benefit under such circulars.
Note: These circulars are not binding on the Income Tax Appellate Tribunal or on the Courts.
5. Judicial decision
(a) Decision of the Supreme Court: Any decision given by the Supreme Court shall be applicable as law till
there is any change in law by the Parliament. Such decision shall be binding on all the Courts, Tribunals,
Income tax authorities, assessee, etc.
(b) Contradiction in the decisions of the Supreme Court: In case, there is apparently contradiction in two
decisions, the decision of larger bench, whether earlier or later, shall always prevail. However, where
decisions are given by benches having equal number of judges, the decision of the recent case shall be
applicable.
(c) Decisions given by a High Court or ITAT: Decisions given by a High Court or ITAT are binding on all
assessees and Income tax authorities, which fall under their jurisdiction, unless it is over ruled by a higher
authority.
Basic principles for charging Income Tax [Sec. 4]
1. Income of the previous year of a person is charged to tax in the immediately following assessment year.
2. It is not a one-time tax.
3. Rate of tax is applicable as specified by the Annual Finance Act of that year. Further, though the Finance Act
prescribes the rates of tax, in respect of certain income, the Income Tax Act itself has prescribed specific rates,
e.g. Lottery income is to be taxed @ 30% (Sec.115BB)
4. In respect of income chargeable to tax, tax shall be deducted at source, or paid in advance (wherever applicable).
Sec. 4 is a charging section and it is the backbone of the Income Tax Act. The tax liability arises by virtue of this
section and it arises at the close of a previous year. However, the finalisation of amount of tax liability is postponed
to the assessment year.

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

Assessment year means the period of 12 months commencing on the 1st day of April every year. It is the year (just
after the previous year) in which income earned in the previous year is charged to tax. E.g., A.Y.2025-26 is a year,
which commences on April 1, 2025 and ends on March 31, 2026. The income of an assessee earned in the previous
year 2024-25 is assessed in the A.Y. 2025-26.
* Notification is a mode of communication system, though one way, by the department with all stakeholders
** Circulars and clarifications are internal communication systems, though one way, by the department to their subordinates.

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Direct Taxation

Taxpoint:
 Duration: Period of 12 months starting from 1st April.
 Relation with Previous Year: It falls immediately after the Previous Year.
 Purpose: Income of a previous year is assessed and taxable in immediately following Assessment Year.
Previous Year [Sec.3]

Previous Year means the financial year immediately preceding the Assessment Year. Income earned in a year is
assessed in the next year. The year in which income is earned is known as Previous Year and the next year in which
income is assessed is known as Assessment Year. It is mandatory for all assessee to follow financial year (from 1st
April to 31st March) as previous year for Income-Tax purpose.

Financial Year
According to sec. 2(21) of the General Clauses Act, 1897, a Financial Year means the year commencing on the 1st
day of April. Hence, it is a period of 12 months starting from 1st April and ending on 31st March of the next year.
It plays a dual role i.e. Assessment Year as well as Previous Year.
Example: Financial year 2024-25 is -
• Assessment year for the Previous Year 2023-24; and
• Previous Year for the Assessment Year 2025-26.
Determination of the first previous year in case of a newly set-up business or profession or for a new source
of income

In case of Previous year is the period

Business or profession being Beginning with the date of setting up of the business & ending on 31st March of
newly set-up that financial year.
A source of income newly Beginning with the date on which the new source of income comes into existence
coming into existence & ending on 31st March of that financial year.
Notes:
1. Above explanation signifies that the first previous year may be a period of less than 12 months but in any
case it cannot exceed a period of 12 months. However, next and subsequent previous years shall always be a
period of 12 months.
2. Where an assessee has an existing regular income from various sources and he earns an income from a new
source during the financial year, his previous year shall commence -
• For the existing income: From 1st April of previous year; and
• For new income: From the date when on which the new source of income comes into existence.
However, assessee is liable to tax on aggregate income from all the sources, therefore, all the income will be
included in the previous year.

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Exceptions to the general rule that income of a Previous Year is taxed in its Assessment Year
This is the general rule that
income of the previous year
of an assessee is charged to
tax in the immediately
following assessment year.
However, in the following
cases, income of the
previous year is assessed in
the same year in order to
ensure smooth collection of
income tax from the
taxpayer who may not be
traceable, if assessment is
postponed till the
commencement of the
Assessment Year:
1. Income of a non-resident assessee from shipping business (Sec. 172)
2. Income of a person who is leaving India either permanently or for a long period (Sec. 174)
3. Income of bodies, formed for a short duration (Sec. 174A)
4. Income of a person who is likely to transfer property to avoid tax (Sec. 175)
5. Income of a discontinued business (Sec. 176). In this case, the Assessing Officer has the discretionary power
i.e. he may assess the income in the same previous year or may wait till the Assessment year.
Assessee [Sec 2(7)]
“Assessee” means,
a. a person by whom any tax or any other sum of money (i.e., penalty or interest) is payable under this Act
(irrespective of the fact whether any proceeding under the Act has been taken against him or not);
b. every person in respect of whom any proceeding under this Act has been taken (whether or not he is liable for
any tax, interest or penalty) for the assessment of his income or loss or the amount of refund due to him;
c. a person who is assessable in respect of income or loss of another person;
d. every person who is deemed to be an assessee under any provision of this Act; and
e. a person who is deemed to be an ‘assessee in default’ under any provision of this Act. E.g. A person, who was
liable to deduct tax but has failed to do so, shall be treated as an ‘assessee in default’.
Person [Sec. 2 (31)]
The term person includes the following:
i) an Individual;
ii) a Hindu Undivided Family (HUF);
iii) a Company;
iv) a Firm;
v) an Association of Persons (AOP) or a Body
of Individuals (BOI), whether incorporated
or not;

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vi) a Local authority; &

vii) every artificial juridical person not falling within any of the preceding categories.
Notes
1. On the basis of a well settled principle that “the Crown cannot be charged to tax”, it can be said that unless
otherwise specifically mentioned the Union Government cannot be taxed in India.
2. An association of persons or a body of individuals or a local authority or an artificial juridical person shall
be deemed to be a person, whether or not such person or body or authority or juridical person was formed or
established or incorporated with the object of deriving income, profits or gains.
3. A firm includes limited liability partnership.
Individual
The word ‘individual’ means a natural person, i.e. human being. “Individual” includes a minor or a person of
unsound mind. However, Deities are assessable as juridical person.
Trustee of a discretionary trust shall be assessed as an individual
Hindu Undivided Family (HUF)
A Hindu Undivided Family (on which Hindu law applies) consists of all persons lineally descended from a common
ancestor & includes their wives & daughters.
Taxpoint:
 Only those undivided families are covered here, to which Hindu law applies. It also includes Jain and Sikh
families.
 Once a family is assessed as Hindu undivided family, it will continue to be assessed as such till its partition.
 An HUF is not the creation of a contract. Its membership arises from status.
Company [Sec. 2(17)]
Company means:
a. any Indian company; or
b. any body corporate, incorporated under the laws of a foreign country; or
c. any institution, association or body which is or was assessable or was assessed as a company for any assessment
year on or before April 1, 1970; or
d. any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is
declared by general or special order of the Central Board of Direct Taxes to be a company.
Indian Company [Sec. 2(26)]
An Indian company means a company formed & registered under the Companies Act, 1956 & includes
a. a company formed and registered under any law relating to companies formerly in force in any part of India
other than the state of Jammu & Kashmir and the Union territories specified in (c) infra;
b. a company formed and registered under any law for the time being in force in the State of Jammu & Kashmir;
c. a company formed and registered under any law for the time being in force in the Union territories of Dadar &
Nagar Haveli, Goa, Daman & Diu and Pondicherry;

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 Basics of Income Tax Act

d. a corporation established by or under a Central, State or Provincial Act;

e. any institution, association or body which is declared by the Central Board of Direct Taxes (CBDT) to be a
company u/s 2(17).
In the aforesaid cases, a company, corporation, institution, association or body will be treated as an Indian company
only if its registered office or principal office, as the case may be, is in India.
Domestic Company [Sec. 2(22A)]
Domestic company means:
i) an Indian company; or
ii) any other company, which in respect of its income liable to tax under the Act, has made prescribed arrangements
for the declaration and payment of dividends (including dividend on preference share), payable out of such
income, within India.
Foreign Company [Sec. 2(23A)]
Foreign company means a company which is not a domestic company.
Company in which public are substantially interested [Sec. 2(18)]
Following companies are said to be a company in which public are substantially interested:
1. Government Company;
2. A company u/s 8 of the Companies Act, 2013;
3. Mutual benefit finance company;
4. Listed company;
5. Company in which shares are held by co-operative societies;
6. Company which is prescribed by CBDT
Firm
As per sec. 4 of Indian Partnership Act, 1932, partnership means “relationship between persons who have agreed
to share profits of the business carried on by all or any one of them acting for all”.
Persons, who enter into such business, are individually known as partners and such business is known as a Firm.
Firm is, though not having a separate legal entity, but has separate entity in the eyes of I-tax Act.
Taxpoint:
 A partnership firm is a separate taxable entity apart from its partners.
 In Income tax, a Limited liability partnership shall be treated at par (excluding sec. 44AD / 44ADA) with firm.
Association of Persons (AOP) or Body of Individuals (BOI)
AOP means a group of persons (whether individuals, HUF, companies, firms, etc.) who join together for common
purpose(s). Every combination of person cannot be termed as AOP. It is only when they associate themselves in an
income-producing activity then they become AOP. Whereas, BOI means a group of individuals (individual only)
who join together for common purpose(s) whether or not to earn income.

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Direct Taxation

Difference between AOP and BOI

 In case of BOI, only individuals can be the members, whereas in case of AOP, any person can be its member
i.e. entities like Company, Firm etc. can be the member of AOP but not of BOI.
 In case of an AOP, members voluntarily get together with a common will for a common intention or purpose,
whereas in case of BOI, such common will may or may not be present.
Local Authority
As per Sec. 3(31) of the General Clause Act, a local authority means a municipal committee, district board, body
of Port Commissioners, Panchayat, Cantonment Board, or other authorities legally entitled to or entrusted by the
Government with the control and management of a municipal or local fund.
Artificial Juridical Person
Artificial juridical person are entities -
• which are not natural person;
• has separate entity in the eyes of law;
• may not be directly sued in a court of law but they can be sued through person(s) managing them
E.g: Deities, Idols, University, Bar Council, etc.
Note: Under the Income-tax Act, such person has been provided exemption from payment of tax under separate
provisions of the Act, if certain conditions mentioned therein are satisfied.
Illustration 1
Determine the status of the following:

Case Status
a) Howrah Municipal Corporation Local authority
b) Corporation Bank Ltd. Company
c) Mr. Amitabh Bachchan Individual
d) Amitabh Bachchan Corporation Ltd. Company
e) A joint family of Sri Ram, Smt. Ram and their son Lav and Kush HUF
f) Calcutta University Artificial juridical person
g) X and Y who are legal heirs of Z BOI
h) Sole proprietorship business Individual
i) Partnership Business Firm
Income [Sec. 2(24)]
To consider any receipt as income, following points should be kept in mind: -

Cash vs. Kind Income may be received in cash or in kind. Income received in kind is to be valued as per the
rules prescribed and if there is no specific direction regarding valuation in the Act or Rules, it
may be valued at market price.

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 Basics of Income Tax Act

Significance Method of accounting In case of income under the head “Salaries”, “Income from house
of method of is irrelevant property” and “Capital gains” method of accounting is irrelevant.
accounting Method of accounting In case of income under the head “Profits & gains of business or
is relevant profession" and “Income from other sources” (other than Dividend)
income shall be taxable on cash or accrual basis as per the method of
accountancy regularly followed by the assessee.
Notional A person cannot make profit out of transaction with himself. Hence, goods transferred from
income one department to another department at a profit, shall not be treated as income of the business.
Source of Income may be from a temporary source or from a permanent source.
income
Capital vs. A capital receipt is not liable to tax, unless specifically provided in the Act, whereas, a revenue
Revenue receipt receipt is not exempted, unless specifically provided in the Act.
Loss Income also includes negative income.
Disputed In case of dispute regarding the title of income, assessment of income cannot be withheld and
income such income, normally, be taxed in the hands of recipient.
Lump-sum There is no difference between income received in lump sum or in installment.
receipt
Reimbursement Mere reimbursement of expenses is not an income.
Legality The Act does not make any difference between legal or illegal income.
Double taxation Same income cannot be taxed twice.
Income by In this regard it is to be noted that in case of mutual activities, where some people contribute
mutual activity to the common fund and are entitled to participate in the fund and the surplus arises which
is distributed among the contributors of the fund, such surplus cannot be termed as income.
Exceptions:
 Income derived by a trade, professional or similar association from rendering specific
services to its members shall be taxable u/s 28(iii).
 Profits and gains of any insurance business carried on by a mutual insurance company or
by a co-operative society.
 Profits and gains of any business of banking (including providing credit facilities) carried
on by a co-operative society with its members.
Pin money Pin money is money received by wife for her personal expenses & small savings made by a
woman from money received from her husband for meeting household expenses. Such receipt
is not treated as income.
Note: Income on investment out of pin money shall be treated as income.
Award Award received, by a person related to his business or profession, shall be treated as income
incidental to such business or profession. However, award received by a non-professional
person is in nature of gift and/or personal testimonial, the taxability thereof is subject to other
provisions of the Act
Embezzlement Money embezzled is a gain to the embezzler and, therefore, falls within the wider definition
of income
Contingent A contingent or anticipated income is not taxable.
income

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Direct Taxation

Subsidy Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver
or concession or reimbursement (by whatever name called) by the Central Government or a
State Government or any authority or body or agency in cash or kind to the assesse, e.g. LPG
Subsidy*, Subsidy for establishing manufacturing unit in backward area, etc. However,
a. subsidy or grant or reimbursement which is taken into account for determination of the
actual cost of the asset as per Explanation 10 to sec. 43(1) is not taxable separately.
b. the subsidy or grant by the Central Government for the purpose of the corpus of a trust or
institution established by the Central Government or a State Government
- shall not be taxable.
Heads of Income [Sec. 14]
According to Sec.14 of the Act, all income of a person shall be classified under the following five heads:
1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
For computation of income, all taxable income should fall
under any of the five heads of income as mentioned above.
If any type of income does not become part of any one of
the above mentioned first four heads, it should be part of
the fifth head, i.e. Income from other sources, which may
be termed as the residual head.
Significance of heads of income

• Income chargeable under a particular head cannot be charged under any other head.

• The Act has self-content provisions in respect of each head of income.

• If any income is charged under a wrong head of income, the assessee may lost the benefit of deduction available
to him under the correct head.

Distinguish between Heads of income and Sources of income

There are only five heads of income as per Sec. 14 of the Act, but the assessee may generate the income from
various sources. Income from various sources is required to be classified into given heads (i.e., 5 heads) of income.
Each head of income contains a method of computation of income under the respective head.
In the same head of income, there may be various sources of income. E.g. under the head ‘Income from house
property’, there may be two or more house properties and each house property shall be termed as a source of
income. The source of income decides under which head (among the five heads) income shall be taxable.

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

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 Basics of Income Tax Act

Point Heads of Income Sources of Income

There are 5 heads of income under the Act There are not countable numbers of sources of
Number
income
Source of income is categorized under respective Each source of income is required to be
Sequence
head. classified under respective head.
The Act contains different code for computation There is no code for different sources of income
Provision
of income for each head of income.
It is mere classification of various source of It refers to the origin wherefrom income arises.
Origin
income
ILLUSTRATION 2
State under which Head the following incomes will be
taxable:
(a) Tarun received ₹ 7,200 as interest on fixed deposit
with SBI.
(b) Akash made a gain of ₹ 35,000 on sale of shares
held by him.
(c) ₹ 2,700 received by Atul as remuneration as an
examiner from Calcutta University.
(d) Barnali, a lawyer, earned an income of ₹ 1,45,000
from her profession.
(e) Swarnli received rent of ₹ 84,000 by letting out one
of her flat to a tenant.
Solution
(a) Income from Other Sources
(b) Capital Gains
(c) Income from Other Sources
(d) Profits and Gains of Business or Profession
(e) Income from House Property
Gross Total Income (GTI) [Sec. 80B(5)]
Gross total income is the aggregate of income under all the five heads of income after adjusting the set-off & carry
forward of losses. Deductions under chapter VIA is provided from GTI, to arrive at Total income or taxable income.

Generally, an assessee is taxed on income accruing to him only and he is not liable to tax for income of another
person. However, there are certain exceptions to the above rule (mentioned u/s 60 to 64). Sec. 60 to 64 deals with
the provisions of clubbing of income, under which an assessee may be taxed in respect of income accrued to other
person, e.g. certain income of minor child shall be clubbed in the hands of his parents, income from asset transferred
to spouse for inadequate consideration shall be clubbed in the hands of the transferor, etc. These provisions have

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Direct Taxation

been enacted to counteract the tendency on the part of

the taxpayers to dispose off their income or income
generating assets to escape tax liability. Income shall
be, first, computed in the hands of recipient and then
clubbing shall be made head wise. Gross total income
shall also include income to be clubbed in hands of
assessee and, of course, income received by the assessee
which is subject to be clubbed in hands of other person
shall be reduced from the gross total income of the
assessee.
For computation of Gross Total Income (GTI), income
from various sources is computed under the five heads of income. If all the sources and heads are having positive
income (i.e. profit) then the same can simply be added to compute GTI. However, if certain source(s) or certain
head(s) have negative income (i.e. loss) then such loss needs to be adjusted with income of another source(s) or
head(s). Set off means adjustment of loss from one source or one head against income from another source or
another head.
If a negative income is not fully set off in the current year, then the unabsorbed loss shall be carried forward to
subsequent years subject to certain restrictions and conditions [e.g. Income from other sources (other than losses
from activity of owning and maintaining horse races) cannot be carried forward.]

Loss which could not be

adjusted shall be carried
forward to next year subject
to certain conditions and
exceptions

Computation of Total Income for the A.Y.___

Particulars Amount
1. Salaries ***
2. Income from house property ***
3. Profits and gains of business or profession ***
4. Capital gains ***
5. Income from other sources ***
Gross Total Income ****
Less: Deduction u/s 80C to 80U ****
Total Income ****

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 Basics of Income Tax Act

Total Income (TI) [Sec. 2(45) read with section 80A(1)]

Total income means the total amount of
income referred to in sec. 5, computed in the
manner laid down in this Act. In other words,
it means gross total income as reduced by
deductions admissible under chapter VIA.
Total Income = Gross Total Income –
Deduction under chapter VIA (i.e.,
deduction u/s 80C to 80U)
Tax is required to be computed on total
income after applying provision of rounding
off as provided in sec. 288A. For the purpose
of computation of tax, total income may be divided into two parts viz. income on which special rate of tax is applicable
and other income. Income which is subject to special rate of tax shall be taxed at special rate mentioned in the Act
itself and tax on other income shall be computed considering regular rate of tax mentioned in the Finance Act.
Further, it is to be noted that tax is calculated on total income rather than aggregate of separate tax calculated on
income falling under each head of income. That’s why it is said that income tax is one tax and not collection of tax.
Distinguish between Gross Total Income and Total Income

Basis Gross Total Income Total Income

Meaning Gross total income is the aggregate of income Total income means the total amount of
under all the five heads of income after adjusting income referred to in sec. 5, computed in the
the set-off & carry forward of losses manner laid down in this Act [Sec. 2(45)]
Tax Tax is not calculated on this income Tax is required to be calculated on this income
calculation
Rounded off Gross total income is not required to be rounded Total income is required to be rounded off u/s
off 288A
Clubbing of Gross total income includes (exclude) income Total income includes (excludes) income
Income which is subject to club which is subject to club
Set off of Current year’s losses and brought forward No adjustment is required again for such
losses eligible losses shall be adjusted headwise and losses
aggregate of income after adjusting such loss
shall be considered as gross total income.
Deductions Eligible deduction under chapter VIA shall Eligible deduction under chapter VIA shall
under chapter not be considered while computing gross total be reduced from gross total income to derive
VIA income total income
Rounding-off of total income [Sec. 288A]

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

Thus, if the total income works out to ₹ 7,41,645, it should be rounded off to ₹ 7,41,650, but if it works out to ₹
7,41,644.98, it should be rounded off to ₹ 7,41,640.

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Direct Taxation

Rounding-off of tax [Sec. 288B]

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

Tax liability actually worked out (₹) 4,876.49 6,452.50 8,738.92 5,132.75
Tax liability as rounded off (₹) 4,880 6,450 8,740 5,130

Procedure for computation of tax liability (in case of an individual)

1st Step Determination of Determine the residential status of the assessee.

Residential status
2nd Step Computation of income Compute income under several heads of income giving the effect of
clubbing of income.
3 Step
rd
Aggregate the income i.e., Tax is levied on the total income of the assessee, hence income under
Gross Total Income several heads is to be aggregated giving the effect of set-off and carry
forward of losses.
4 Step
th
Deduction under chapter Provide deductions as per several provisions (Sec. 80C to 80U) of
VIA chapter VIA from gross total income. The result is total income.
5 Step
th
Total Income [Rounding Total Income is rounded off to the nearest multiple of ₹ 10 (ignoring
off of income (u/s 288A)] paise).
6 Step
th
Compute tax liability Annual-tax Income tax is charged annually.
considering these points Rate of tax Rate of tax as applicable in the relevant Assessment Year.
Rates fixed by Rates of tax being fixed by the annual Finance Act are
the Finance considered. However, few rates are specified in the Act
Act itself.
Total income and tax liability shall be calculated as per the provisions of
the Act as they stand on 1st April of the Assessment Year
7th Step Rebate u/s 87A Resident individual whose income does not exceed specified limit,
is eligible for rebate from tax. Reduce the amount of rebate from tax
liability calculated in step 6
8th Step Surcharge If total income of the assessee exceeds the specified limit, surcharge on
tax (as computed in step 6) shall be levied. Such surcharge is subject to
marginal relief.
9th Step Health and Education To the amount so derived (in step 6 less step 7 add step 8), add Health and
cess Education Cess [@ 4% on tax liability] and ascertain total tax liability
(being tax, surcharge and cess).
10th Step Rounding off of tax (u/s The amount so payable (after reducing relief, TDS, TCS and Advance
288B) Tax) shall be rounded off to the nearest multiple of ₹ 10 (ignoring paise).

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 Basics of Income Tax Act

Capital -vs.- Revenue

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

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

1. Capital gains arising from sale of capital assets being defined u/s 2(14). [Sec. 45]
2. Compensation for termination of service or modification in the terms of service [Sec. 17(3)]
3. Compensation or other payments due to or received by the persons specified u/s 28(ii)/28(va).
Expenses
Similarly, a capital expenditure is not allowable as expenses, unless specifically allowed in the Act, whereas, a
revenue expenditure is allowable as expenses, unless specifically disallowed in the Act. Based on a number of
judicial pronouncements, the following principles are worthwhile to note:
1. Acquiring asset or advantage of enduring nature: Bringing into existence an asset or advantage of enduring
nature* would lead to the inference that the expenditure disbursed is of a capital nature.
*
‘enduring’ does not mean ‘everlasting’ or ‘perpetual’.

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Direct Taxation

2. Capital assets belonging to third parties: Even though a expenditure results in the creation of a capital asset,
if the capital asset belongs to a third party, such expenses will be treated as revenue expenditure.
3. Profit-earning process: Where the outgoing expenditure is so related to the carrying on or the conduct of
the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of
an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the
business, the expenditure may be regarded as revenue expenditure
4. Object of the transaction: The object of the transaction which has impact on the business, the nature of trade
for which the expenditure is incurred and the purpose thereof, etc.
5. Fixed capital -vs.- Circulating capital: An item of disbursement may be regarded as of a capital nature when
it is relatable to a fixed capital, whereas if it is related to circulating capital or stock-in-trade it would be treated
as revenue expenditure.
6. Expenditure on removing restriction: Where the assessee has an existing right to carry on a business, any
expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction
or disability would be on revenue account, provided the expenditure does not result in the acquisition of any
capital asset.
7. Payment made to rival dealer to ward off competition in business would constitute capital expenditure
8. If the expenditure is a part of the working expenses in ordinary commercial trading, it is not capital but revenue
expenditure.
9. If the expenditure is incurred for the initial outlay or for extension of business or substantial replacement of
equipment, it is capital expenditure but if it is incurred for running the business or is laid out as part of the
process of profit making, it is revenue in character.
10. If expenditure is incurred for ensuring the regular supply of raw material, maybe for period extending over
several years, it is on revenue account
11. When an owner incurs expenditure on additions in a building which enhances its value the expenditure can be
of a capital nature. But, if a tenant incurs an expenditure on a rented building for its renovation, he does not
acquire any capital asset, because the building does not belong to him and, ordinarily, such an expenditure will
be of a revenue nature.
12. Acquisition of the goodwill of the business is acquisition of a capital asset, and, therefore, its purchase price
would be capital expenditure. It would not make any difference whether it is paid in a lump sum at one time or
in instalments distributed over a definite period. Where, however, the transaction is not one for acquisition of
the good¬will, but for the right to use it, the expenditure would be revenue expenditure
13. Expenses incurred by the assessee for the purpose of creating, curing or completing the title is capital
expenditure and on the other hand if such expenses are incurred for the purpose of protecting the same, it is
revenue expenditure.
Diversion & Application of Income
There is a very thin line of difference between Diversion of income & Application of income.
Diversion of income: Where by virtue of an obligation, income is diverted before it reaches to the assessee, it is
known as diversion of income & it is not taxable (i.e. even if the assessee were to collect the income he does so on
behalf of the person to whom it is payable).
Example: A, B and C are co-authors of a book. The publisher of the book gave the whole royalty of ₹6,00,000 to
A. A paid ₹2,00,000 to B and C each. Such payment is not application of income but diversion of income.
Application of income: Whereas, application of income means to discharge an obligation (which is gratuitous or
self-imposed) after such income reaches the assessee & hence it is taxable.

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 Basics of Income Tax Act

Annexure
TAX RATES FOR THE A.Y. 2025-26
An Individual / HUF / AOP (other than co-operative society) / BOI / AJP are required to calculate his tax liability
as per following tax regime:
a. Default Tax Regime specified u/s 115BAC(1A)
In this regime, the income of the assessee shall be taxable at concessional rate. However, he is required to
sacrifice certain deductions and benefits.
b. Old Tax Regime or Regular Tax Regime by exercising the option available u/s 115BAC(6)
Subject to certain conditions and exceptions, the aforesaid taxpayer is free to choose either of the tax regime
RATE OF TAX UNDER THE OLD TAX REGIME
Applicable if the assessee has exercised the option given u/s 115BAC(6)
Individual/HUF/Association of Persons/Body of Individuals/Artificial Juridical Person
In case of Super Senior citizen
Total Income Range Rates of Income Tax
Up to ₹ 5,00,000 Nil
₹ 5,00,001 to ₹ 10,00,000 20% of (Total income – ₹ 5,00,000)
₹ 10,00,001 and above ₹ 1,00,000 + 30% of (Total income – ₹ 10,00,000)
Super Senior Citizen means an individual who is resident in India and is of at least 80 years of age at any time
during the relevant previous year (i.e. any resident person, male or female, born before 02-04-1945).
The CBDT has clarified that a person born on 1st April would be considered to have attained a particular age on
31st March, the day preceding the anniversary of his birthday. E.g., a resident individual whose 60th birthday
falls on 1st April, 2025, would be treated as having attained the age of 60 years in the P.Y.2024-25 [Circular No.
28/2016 dated 27-07-2016]
In case of Senior citizen
Total Income Range Rates of Income Tax
Up to ₹ 3,00,000 Nil
₹ 3,00,001 to ₹ 5,00,000 5% of (Total Income – ₹ 3,00,000)
₹ 5,00,001 to ₹ 10,00,000 ₹ 10,000 + 20% of (Total income – ₹ 5,00,000)
₹ 10,00,001 and above ₹ 1,10,000 + 30% of (Total income – ₹ 10,00,000)
Senior Citizen means an individual who is resident in India and is of at least 60 years of age at any time during the
relevant previous year. (i.e., a resident person, male or female, born on or after 02-04-1945 but before 02-04-1965)
In case of other Individual1 / HUF / Association of Persons / Body of Individuals / Artificial Juridical Person
Total Income Range Rates of Income Tax
Up to ₹ 2,50,000 Nil
₹ 2,50,001 to ₹ 5,00,000 5% of (Total Income – ₹ 2,50,000)
₹ 5,00,001 to ₹ 10,00,000 ₹ 12,500 + 20% of (Total income – ₹ 5,00,000)
₹ 10,00,001 and above ₹ 1,12,500 + 30% of (Total income – ₹ 10,00,000)
1. born on or after 02-04-1965 or non-resident individual
The Institute of Cost Accountants of India 21
Direct Taxation

Rebate u/s 87A

Applicable to: Resident Individual
Conditions to be satisfied: Total income of the assessee does not exceed ₹ 5,00,000.
Quantum of Rebate: Lower of the following:
a. 100% of tax liability as computed above; or
b. ₹ 12,500/-
Example
Compute rebate u/s 87A in the following cases:

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

Assessee Individual Individual Senior Citizen Senior Citizen Individual HUF
Residential status Resident Resident Non-Resident Resident
Total Income ₹ 4,90,000 ₹ 5,12,000 ₹ 4,25,000 ₹ 5,40,000 ₹ 2,60,000 ₹ 2,65,000
Tax on above ₹ 12,000 ₹ 14,900 ₹ 6,250 ₹ 18,000 ₹ 500 ₹ 750
Rebate u/s 87A ₹ 12,000 Nil ₹ 6,250 Nil Nil Nil
Reason Total Total income Assessee is Assessee
income exceeds ₹ 5 non-resident is not an
exceeds ₹ 5 lacs individual
lacs
Tax after rebate Nil ₹ 14,900 Nil ₹ 18,000 ₹ 500 ₹ 750
Surcharge on tax after rebate u/s 87A
Surcharge at the following rate is also payable on tax as computed above after rebate u/s 87A

Total Income Rate of Surcharge

Total income does not exceed ₹ 50 lacs Nil
Total income exceeds ₹ 50 lacs but does not exceed ₹ 1 crore 10% of tax
Total income exceeds ₹ 1 crore but does not exceed ₹ 2 crores 15% of tax
Total income exceeds ₹ 2 crores but does not exceed ₹ 5 crores 25% of tax*
Total income exceeds ₹ 5 crores 37% of tax*
* Where the total income includes dividend, any income chargeable u/s 111A, 112 and 112A, the surcharge on the
amount of income-tax computed on that part of income shall not exceed 15%. In other words, surcharge higher than
15% is applicable only on tax on income other than dividend, income covered u/s 111A, 112 and 112A. Moreover,
in case of an AOP consisting of only companies as its members, the rate of surcharge on the amount of Income-tax
shall not exceed 15%.
Health & Education Cess
Applicable on: All assessee
Rate of cess: 4% of Tax liability after Surcharge

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 Basics of Income Tax Act

Marginal Relief
Example: Compute tax liability of the assessee (52 years) whose total income is:
(Case 1) ₹ 49,90,000 (Case 2) ₹ 50,10,000; (Case 3) ₹ 60,00,000; (Case 4) ₹ 1,01,00,000

Particulars Working Case 1 Case 2 Case 3 Case 4

Tax liability before Rebate ₹ 2,50,000 * Nil Nil Nil Nil Nil
₹ 2,50,000 * 5% 12,500 12,500 12,500 12,500
₹ 5,00,000 * 20% 1,00,000 1,00,000 1,00,000 1,00,000
Balance Income * 30% 11,97,000 12,03,000 15,00,000 27,30,000
Total 13,09,500 13,15,500 16,12,500 28,42,500
Less: Rebate u/s 87A As income exceeds ₹ 5,00,000 Nil Nil Nil Nil
Liability [A] 13,09,500 13,15,500 16,12,500 28,42,500
Add: Surcharge B = [10% or 15% of (A)] Nil 1,31,550 1,61,250 4,26,375
Tax and surcharge payable 13,09,500 14,47,050 17,73,750 32,68,875
Analysis of case (1) and case (2)

Increase in income ₹ 20,000

Liability for surcharge increased ₹ 1,31,550

To provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above ₹
50 lakh or ₹ 1 crore or 2 crores or 5 crores, the concept of marginal relief is designed.
Condition: Total income exceeds ₹ 50,00,000 (or ₹ 1 crore or 2 crores or 5 crores)
Relief: Marginal relief is provided to ensure that the additional income tax payable including surcharge on excess
of income over ₹ 50,00,000 or ₹ 1,00,00,000 or ₹ 2,00,00,000 or ₹ 5,00,00,000 is limited to the amount by which
the income is more than ₹ 50,00,000 or ₹ 1,00,00,000 or ₹ 2,00,00,000 or ₹ 5,00,00,000
Marginal relief = [(Income tax + surcharge) on income] - [(Income tax (including surcharge, if applicable)
on ₹ 50,00,000) + (Income – ₹ 50,00,000)] (if positive)
Similar relief shall also be provided where income exceeds marginally above ₹ 1 crore or ₹ 2 crores or ₹ 5 crores.
In that case, the aforesaid equation shall be changed accordingly.
Now, computation of tax liability is made after considering marginal relief:
Particulars Working Case 1 Case 2 Case 3 Case 4
Liability [A] 13,09,500 13,15,500 16,12,500 28,42,500
Add: Surcharge B = [10% of (A)] Nil 1,31,550 1,61,250 4,26,375
Tax and surcharge C 13,09,500 14,47,050 17,73,750 32,68,875
Less: Marginal relief [(C)-{₹ 13,12,500 + ₹ 10,000}] Nil 1,24,550 Nil
[(C)-{₹30,93,750+₹ 1,00,000}] 75,125
Effective Surcharge [D] Nil 7,000 1,61,250 3,51,250
Liability after [A + D] 13,09,500 13,22,500 17,73,750 31,93,750
surcharge

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Direct Taxation

Add: Health & 4% of above 52,380 52,900 70,950 1,27,750

Education cess
Total Rounded off u/s 288B 13,61,880 13,75,400 18,44,700 33,21,500
Taxpoint: The concept of marginal relief is not applicable in case of cess.

Default Tax Regime for Individual / HUF / AOP / BOI / AJP [Sec. 115BAC]
Applicable to
Individual / HUF / AOP (other than co-operative society) / BOI / AJP
Rate of Tax
Under this tax regime, income tax shall be computed at the option of the assessee considering the following rate:
Total income Rate of tax
Upto ₹ 3,00,000 Nil
From ₹ 3,00,001 to ₹ 7,00,000 5%
From ₹ 7,00,001 to ₹ 10,00,000 10%
From ₹ 10,00,001 to ₹ 12,00,000 15%
From ₹ 12,00,001 to ₹ 15,00,000 20%
Above ₹ 15,00,000 30%
Taxpoint
• If a person opts for this regime, ₹ 3,00,000 shall be considered as basic exemption limit irrespective of his
age. In other words, for all category of individual i.e., senior citizen, super senior citizen and others, basic
exemption limit is ₹ 3,00,000
• Rebate u/s 87A is available
• Computed tax is further increased by applicable surcharge, if any, and health and education cess
• If any income is taxable at special rate u/s 110 to sec. 115BBG (except sec. 115BAC), such income shall be
taxable at that special rate of tax.
• Where an assessee is computing his tax liability under this regime, then certain deductions or exemptions
or benefits shall not be available to him. (Discussion regarding those deduction or exemption will be made
afterwards)
 Where an assessee opt for old regime of taxation (or want to shift from default tax regime to alternative
regime), then he should exercise the option in the prescribed manner:

Where the person Alongwith the return of income to be furnished u/s 139(1) for a previous year relevant
not having to the assessment year. He may choose to pay tax under default tax regime u/s
aforesaid income 115BAC(1A) in one year and exercise the option to shift out of default tax regime in
another year.

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 Basics of Income Tax Act

Where the person Within the due date specified u/s 139(1) for furnishing the returns of income for any
has income previous year relevant to the assessment year and such option once exercised shall
from business or apply to subsequent assessment years.
profession Such person who has exercised the above option of shifting out of the default tax
regime u/s 115BAC(1A) for any previous year shall be able to withdraw such option
only once and pay tax under the default tax regime u/s 115BAC(1A) for a previous
year other than the year in which it was exercised.
Thereafter, such person shall never be eligible to exercise this option, except where
such person ceases to have any business income in which case, option would be
available.
Rebate u/s 87A for tax computed as per sec. 115BAC
Applicable to: Resident Individual
Conditions to be satisfied: The total income of the assessee does not exceed ₹ 7,00,000.
Quantum of Rebate: Lower of the following:
a. 100% of tax liability as computed above; or
b. ₹ 25,000/-
Marginal relief is available even if total income exceeds ₹ 7,00,000 [available upto ₹ 7,22,220]
Marginal relief = Positive value of (Tax on income – Income in excess of ₹ 7,00,000)
Example

Particulars Case 1 Case 2 Case 3 Case 4

Assessee Individual Individual Senior Citizen Individual
Residential status Resident Resident Resident
Regime Default Default Default Default
Total Income (₹) 6,00,000 6,80,000 7,20,000 7,30,000
Tax on above 15,000 19,000 22,000 23,000
Rebate u/s 87A 15,000 19,000 2,000 Nil
Reason [₹ 22,000 – (₹ 7,20,000 - [₹ 23,000 – (₹ 7,30,000 -
₹ 7,00,000)], is positive ₹ 7,00,000)], is negative
Tax after rebate Nil Nil 20,000 23,000
Surcharge on tax after rebate u/s 87A
Surcharge at the following rate is also payable on tax as computed above after rebate u/s 87A

Total Income Rate of Surcharge

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

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Direct Taxation

Marginal Relief as discussed in the old regime is also available.

* Where the total income includes dividend, any income chargeable u/s 111A, 112 and 112A, the surcharge on the
amount of income-tax computed on that part of income shall not exceed 15%. In other words, surcharge higher than
15% is applicable only on tax on income other than dividend, income covered u/s 111A, 112 and 112A. Moreover,
in case of an AOP consisting of only companies as its members, the rate of surcharge on the amount of Income-tax
shall not exceed 15%.
Health & Education Cess
Applicable on: All assessee
Rate of cess: 4% of Tax liability after Surcharge

Firm or Limited Liability Partnership (LLP)

A partnership firm (including limited liability partnership) is taxable at the rate of 30%
Surcharge: 12% of income-tax (if total income exceeds ₹ 1 crore otherwise Nil)
Marginal Relief: Available
Health & Education Cess: 4% of tax liability after surcharge
Company

Company Rate
In the case of a domestic company
- Where its total turnover or gross receipts during the previous year 2022-23 does not exceed ₹ 400 25%
crore
- In any other case 30%
In the case of a foreign company 35%
Surcharge

Total Income Domestic Company Foreign Company

If total income exceeds ₹ 10 crore 12% 5%
If income exceeds ₹ 1 crore but does not exceed ₹ 10 crore 7% 2%
If income does not exceed ₹ 1 crore Nil Nil
Marginal Relief: Available at both points (i.e., income exceeds ₹ 1,00,00,000 or ₹ 10,00,00,000)

Health & Education Cess: 4% of tax liability after surcharge

In few cases and subject to certain conditions, companies are liable to be taxed at different rate.

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 Basics of Income Tax Act

Residential Status and Scope of Total

Income 1.2

W
ill income of Mr. Elon Musk in US taxable in India. The answer is no. One may thought that who is
lia-ble to be taxed in India. Loosely, it can be said that taxability of income of a person depends on his
chanc-es of utilization of Indian resources. In whose case chances of utilization of Indian resources
are high, he will pay tax more and vice versa. Sec. 6 and sec. 5 of the Act provides the parameter. Section 4 of the
In-come-tax Act, which is the charging section, provides that income-tax shall be charged on every person at the
rates prescribed for the year by the annual Finance Act. The charge of tax shall be made on the total in-come of the
assessee computed in accordance with the various provisions of the Act. Section 5 of the Act, however, provides
the meaning and scope of total income in terms of residential status of an assessee.

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

Sec. 6 provides the test for residential status for the persons which can be categorized as under:

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Direct Taxation

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

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

1.2.2 Determination of Residential Status

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

Resident in India
An individual is said to be a resident in India, if he satisfies any one of the following conditions -
(i) He is in India in the previous year for a period of 182 days or more [Sec. 6(1)(a)]; or
(ii) He is in India for a period of 60 days or more during the previous year and for 365 or more days during 4
previous years immediately preceding the relevant previous year [Sec. 6(1)(c)]
Taxpoint:
► Given Conditions are alternative in nature i.e. assessee needs to satisfy any one condition.
► For the purpose of counting the number of days stayed in India, both the date of departure as well as the date
of arrival are considered to be in India.
►
Sec. 6(1)(a): P.Y: Stays 182 days or more
Or
Sec/ 6(1)(c): P.Y: Stays 60 days or more
+ 4 PPY: Stays 365 days or more

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

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 Basics of Income Tax Act

Illustration 3
Sam came to India first time during the P.Y. 2024-25. During the previous year, he stayed in India for (i) 50 days;
(ii) 183 days; & (iii) 153 days. Determine his residential status for the A.Y. 2025-26.
Solution:
(i) Since Sam resides in India only for 50 days during the P.Y. 2024-25, he does not satisfy any of the conditions
specified in sec. 6(1). He is, therefore, a non-resident in India for the P.Y. 2023-24.
(ii) Since Sam resides in India for 183 days during the previous year 2024-25, he satisfies one of the conditions
specified in sec. 6(1). He is, therefore, a resident in India for the P.Y. 2024-25.
(iii) Sam resides in India only for 153 days during the previous year 2024-25. Though he resided for more than 60
days during the previous year but in 4 years immediately preceding the previous year (as he came to India for
the first time), he did not reside in India. Hence, he does not satisfy any of the conditions specified in sec. 6(1).
Thus, he is a non-resident for the P.Y. 2024-25.
Illustration 4
Andy, a British national, comes to India for the first time during 2020-21. During the financial years 2020-21,
2021-22, 2022-23, 2023-24 and 2024-25, he was in India for 55 days, 60 days, 80 days, 160 days and 70 days
respectively. Determine his residential status for the assessment year 2025-26.
Solution:
During the previous year 2024-25, Andy was in India for 70 days & during 4 years immediately preceding the
previous year, he was in India for 355 days as shown below:
Year 2020-21 2021-22 2022-23 2023-24 Total
No. of days stayed in India 55 60 80 160 355
Thus, he does not satisfy Sec.6(1) & consequently, he is a non-resident in India for the P.Y. 2024-25.
Exceptions to the above rule
A. In the following cases, condition (ii) of sec. 6(1) [i.e. sec. 6(1)(c)] is irrelevant:
1. An Indian citizen, who leaves India during the previous year for employment purpose*.
2. An Indian citizen, who leaves India during the previous year as a member of the crew of an Indian ship.
Taxpoint: The above assessee shall be treated as a resident in India only if he resides in India for 182 days or
more in the relevant previous year.
B. In case of an Indian citizen or a person of Indian origin# comes on a visit to India during the previous year,
modified condition (ii) of sec. 6(1) is applicable:
Case Modified condition (ii) of sec. 6(1)
His total income, other than the income from He is in India for a period of 120 days or more (but
foreign sources!, exceeds ` 15 lakhs during the less than 182 days) during the previous year and for
previous year 365 or more days during 4 previous years immediately
preceding the relevant previous year
His total income, other than the income from He is in India for a period of 182 days or more during
foreign sources, does not exceed `15 lakhs the previous year. In short, sec. 6(1)(c) is not applicable.
during the previous year

* The employment may be in India or may be outside India

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Direct Taxation

# P
 erson of Indian origin: A person is deemed to be of Indian origin if he or either of his parents or grand
parents were born in undivided India. Here, grand parents may be paternal or maternal.
!
 “Income from foreign sources” means income which accrues or arises outside India (except income derived
from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in
India.
C. An individual shall be deemed to be resident in India, if the following conditions are satisfied
a. He is a citizen of India
b. His total income, other than the income from foreign sources, exceeds ₹ 15 lakhs during the previous
year;
c. He is not satisfying any of the basic conditions given u/s 6(1) [i.e., 182 days or 60 days + 365 days]; and
d. He is not liable to tax in any other country or territory by reason of his domicile or residence or any other
criteria of similar nature. [Sec. 6(1A)]
Taxpoint:
¾ However, if such individual has satisfied either of the basic conditions, then he shall be treated as resident
in India u/s 6(1).
¾ Further note that the exception is not applicable in the case of a foreign citizen even if he is a person of
Indian origin.
¾ If these conditions are satisfied, then such individual shall be deemed as resident irrespective of number
of days of his stay in India.
¾ Liable to tax in relation to a person and with reference to a country means that there is an income-tax
liability on such person under the law of that country for the time being in force. It shall include a person
who has subsequently been exempted from such liability under the law of that country.
Rule 126
In the case of an individual, being a citizen of India and a member of the crew of a ship, the period of stay in India
shall, in respect of an eligible voyage, not include the following period:
the period beginning the period ending
Period beginning on the date entered into the Period ending on the date entered into the Continuous
Continuous Discharge Certificate in respect of joining Discharge Certificate in respect of signing off by that
the ship by the said individual for the eligible voyage individual from the ship in respect of such voyage
Explanation:
“Eligible voyage” shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where-
i. for the voyage having originated from any port in India, has as its destination any port outside India; &
ii. for the voyage having originated from any port outside India, has as its destination any port in India.’.
Example: In the Continuous Discharge Certificate the date of joining is recorded as 1st January 2025 and the
date of ending the voyage is recorded as 31st January 2025, then the entire period of 31 days shall be excluded
from his stay in India

Illustration 5
Miss Pal, an Indian citizen, left India for first time on 1st April, 2024 for joining job in Tokyo. She came to India on
11th Jan, 2025 for only 170 days. Determine her residential status for P.Y. 2024-25.

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 Basics of Income Tax Act

Solution:
Number of days Miss Pal stayed in India can be calculated as under:
P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
24-25 1 - - - - - - - - 21 28 31 81
25-26 30 31 30 19 - - - - - - - - 110

Since she left India for employment purpose, hence for becoming resident she has to stay in India for at least 182
days. However, she is in India for only 81 days during the previous year, thus she is a non-resident for the P.Y.
2024-25.
Points to be kept in mind
(a) Stay at same place in India is not necessary.
(b) Continuous stay in India is not necessary.
(c) A person shall be deemed to reside in India, if he is on the territorial waters of India*. For instance, if an
individual stays on a ship, which is in the territorial waters of India, then it shall be treated as his presence in
India.
Additional conditions to test whether resident individual is ‘Ordinarily resident or not’ [Sec. 6(6)]
A resident individual in India can further be categorised as -
(i) Resident and ordinarily resident in India (ii) Resident but not ordinarily resident in India
Resident and ordinarily resident
If a resident individual satisfies the following two
additional conditions, he will be treated as resident
& ordinarily resident in India -
(a) He has been resident in India [as per sec.
6(1)] in at least 2 out of 10 previous years
immediately preceding the relevant previous
year; and
(b) He has resided in India for a period of 730 days
or more during 7 previous years immediately
preceding the relevant previous year.
Taxpoint: To be a Resident & Ordinarily resident
in India, one has to satisfy at least one condition of
sec. 6(1) & both the additional conditions of sec.
6(6).
Resident but not ordinarily resident
If a resident individual does not satisfy both additional conditions as given u/s 6(6), he is “Resident but not
ordinarily resident in India”.
Exceptions
A. An individual shall be deemed to be resident but not ordinarily resident in India, if following conditions
are satisfied:

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

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Direct Taxation

(a) He is a citizen of India

(b) His total income, other than the income from foreign sources, exceeds ₹ 15 lakhs during the previous
year; and
(c) He is not liable to tax in any other country or territory by reason of his domicile or residence or any other
criteria of similar nature.
(d) He is deemed to be resident in India u/s 6(1A).
B. An individual shall be deemed to be resident but not ordinarily resident in India, if following conditions
are satisfied:
(a) He is an Indian citizen or a person of Indian origin.
(b) He comes on a visit to India during the previous year
(c) His total income, other than the income from foreign sources, exceeds ₹15 lakhs during the previous year
(d) He is in India for a period of 120 days or more (but less than 182 days) during the previous year and for
365 or more days during 4 previous years immediately preceding the relevant previous year.
Taxpoint: If aforesaid conditions are satisfied, then such individual shall be deemed to be resident but not
ordinarily resident even though he has satisfied both conditions specified u/s 6(6).
Provision Illustrated
Determine the residential status in the following different cases:
Case A B C D E F G H
Citizenship Foreign India India India Foreign Foreign India Foreign
Is he person of Indian origin Yes Yes Yes Yes Yes Yes Yes No
Total income (excluding income from Yes No Yes Yes Yes Yes No No
foreign source) exceeds ` 15,00,000
Liable to pay tax in other country No No No Yes No No No No
Stay in India during the previous year 30 30 30 30 138 185 85 85
Stay in India during 4 years immediately 380 380 380 380 380 180 380 380
preceding previous year
Are dual conditions given u/s 6(6) satisfied Yes Yes Yes Yes Yes Yes Yes Yes
Residential Status NR NR NOR NR NOR ROR NR ROR
Note 1 2 3 4 5 6 7 8
1. He is not an Indian citizen, hence sec. 6(1A) is not applicable. Further his stay in India during the previous year
does not exceed 120 days.
2. His total income does not exceed ₹ 15,00,000.
3. All conditions of sec. 6(1A) are satisfied.
4. He is liable to pay tax in other country.
5. His stay in India exceeds 120 days (but does not exceed 182 days)
6. He has satisfied one condition of sec. 6(1) [i.e. 182 days criteria] and dual conditions of sec. 6(6)
7. He is not satisfying any of the condition provided in sec. 6(1)
8. He has satisfied one condition of sec. 6(1) [i.e. 182 days criteria] and dual conditions of sec. 6(6)

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Illustration 6
Mr. X, aged 19 years, left India for first time on May 31, 2024. Determine his residential status for the previous
year 2024-25 if:
(i) He left India for employment purpose
(ii) He left India on the world tour.
Solution:
During the previous year 2024-25, Mr. X was in India for 61 days as shown below –

P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
24-25 30 31 - - - - - - - - - - 61
During the previous year 2024-25, X stayed in India for 61 days. Further, he was in India for more than 365 days
during 4 years immediately preceding the relevant previous year (as he left India for the first time).
(i) Since he left India for employment purpose, condition of sec. 6(1)(c) shall not be applicable on such assessee.
He will be treated as resident in India, if and only if, he resided in India for at least 182 days during the
previous year. Hence, Mr. X is a non-resident in India for the previous year 2024-25.
(ii) Since he left India on the world tour, which is not an exception of sec. 6(1), satisfaction of any one condition
of sec. 6(1) makes him resident in India for the previous year 2024-25. As he satisfies 2nd condition of sec. 6(1)
[shown above], he is resident in India. Further, he also satisfies dual conditions specified u/s 6(6) (since he left
India for the first time). Therefore, he is an ordinarily resident for the previous year 2024-25.

Illustration 7
X came to India for first time on July 24, 2020. From July 24, 2020 to December 25, 2021 he was in India. Again,
he came to India on August 5, 2024 for employment purpose & left India on November 25, 2024 permanently.
Determine his residential status for the previous year 2024-25 assuming -

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

Solution:
During the previous year 2024-25, X was in India for 113 days as shown below:

Year Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
24-25 - - - - 27 30 31 25 - - - - 113
Further, he was in India for more than 365 days during 4 years immediately preceding the previous year as shown
below:
Year Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
20-21 - - - 8 31 30 31 30 31 31 28 31 251
21-22 30 31 30 31 31 30 31 30 25 - - - 269
22-23 - - - - - - - - - - - - -
23-24 - - - - - - - - - - - - -
As he satisfies condition given in sec. 6(1)(c), he is a resident in India.

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Direct Taxation

Further, he was resident during 2 out of 10 years immediately preceding the relevant previous year but he was in
India only for 520 days in 7 years immediately preceding the relevant previous year. As he is not satisfying dual
conditions of sec. 6(6), he is a resident but not ordinarily resident in India for the previous year 2024-25.
Note: His status shall remain same in both the cases as -
(a) Foreign citizens are not covered by ‘exceptions to sec. 6(1)(c)’.
(b) Coming in India for employment purpose is not covered by ‘exceptions to sec. 6(1)(c)’.
Illustration 8
X, a foreign citizen, resides in India during the previous year 2024-25 for 83 days. Determine his residential status
for the previous year 2024-25 assuming his stay in India during the last few previous years are as follows -
Year Days Year Days Year Days Year Days
2009-10 220 days 2013-14 36 days 2017-18 137 days 2021-22 175 days
2010-11 15 days 2014-15 115 days 2018-19 265 days 2022-23 15 days
2011-12 257 days 2015-16 123 days 2019-20 310 days 2023-24 67 days
2012-13 110 days 2016-17 65 days 2020-21 121 days
Solution:
During the previous year 2024-25, X was in India for 83 days & during 4 years immediately preceding the previous
year, he was in India for 378 days as shown below:

Year 2020-21 2021-22 2022-23 2023-24 Total

No. of days stayed in India 121 175 15 67 378
Thus, he satisfies one of the conditions specified u/s 6(1) & consequently, he becomes resident in India in the P.Y.
2024-25. Further, to determine whether X is an ordinarily resident or not, he needs to satisfy both conditions laid
down u/s 6(6).
Year Presence in India Resident or Non Condition satisfied to become a
(In Days) resident resident
2023-2024 67 Resident 6(1)(c)
2022-2023 15 Non Resident None
2021-2022 175 Resident 6(1)(c)
2020-2021 121 Resident 6(1)(c)
2019-2020 310 Resident Both
2018-2019 265 Resident Both
2017-2018 137 Non Resident None
2016-2017 65 Resident 6(1)(c)
2015-2016 123 Resident 6(1)(c)
2014-2015 115 Resident 6(1)(c)

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Condition (i) of sec. 6(6) requires that an individual should be resident in India for at least 2 out of 10 years
preceding the relevant previous year. X was resident in India for 8 out of 10 years immediately preceding the
previous year. Thus, he satisfies this condition.
Condition (ii) of sec. 6(6) requires that an individual should be present in India for at least 730 days during 7 years
preceding to relevant previous year. X was in India for 1090 days during 2017-18 to 2023-24. Hence, he satisfies
this condition also.
X satisfies condition (ii) of sec. 6(1) as well as both the conditions of sec. 6(6). Thus, he is a resident and ordinarily
resident in India for the previous year 2024-25.
Residential Status, at a glance

# Subject to certain exceptions

Hindu Undivided Family (HUF) [Sec. 6(2)]
An HUF can be either a resident or non-resident in India. Again, a resident HUF can further be classified as
‘Ordinarily resident’ and ‘Not ordinarily resident’.
Resident HUF: When the control & management1 of affairs of HUF is wholly or partly situated in India during
the relevant previous year, then it is treated as resident in India.
1
Control & management means -
� controlling & directive power;
� actual control & management (mere right to control & manage is not enough);
� central control & management and not the carrying out of day to day affairs.
The place of central control & management is situated where the head, the seat & the directing power is situated.
Non-resident HUF: An HUF is non-resident in India if the control & management1 of its affairs is wholly situated
outside India.
Ordinarily resident in India: If the ‘karta’ or manager of a resident HUF satisfies both additional conditions
given u/s 6(6), HUF is said to be an ordinarily resident. If the ‘karta’ or manager of a resident HUF do not satisfies
both additional conditions given u/s 6(6), HUF is said to be a not-ordinarily resident.
Taxpoint: Residential status of the karta for the previous year is not important but his status for preceding 10 years
is important.

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Direct Taxation

Company [Sec. 6(3)]

Resident Company: An Indian company is always a resident in India.
A non-Indian company is said to be a resident in India, if its place of effective management, in that year, is in India.
“Place of effective management” means a place where key management and commercial decisions that are
necessary for the conduct of the business of an entity as a whole, are in substance made.’
Non-Resident Company: If place of effective management, in that year, is not in India, the said company is non-
resident in India for the relevant previous year.
Taxpoint: In case of company, there is no sub-division like ‘Ordinarily resident’ or ‘Not ordinarily resident’.
Firm or an Association of Persons (AOP) or Body of Individuals (BOI) [Sec. 6(4)]
Resident: A firm or an AOP or BOI is said to be a resident in India, if control & management of its affairs are
wholly or partly situated in India during the relevant previous year.
Control & management is vested in hands of partners in case of firm and principal officer in case of an AOP/BOI.
Non-resident: If control & management of its affairs are situated wholly outside India, then it is a non-resident in
India.
Taxpoint: In case of firm or BOI or AOP, there is no subdivision like ‘Ordinarily resident’ or ‘Not ordinarily
resident’.
Any other person
Resident: Any other assessee will be treated as resident in India if the control & management of its affairs is
situated wholly or partly in India.
Non-Resident: If control & management of affairs of the assessee, are situated wholly outside India, it is a non-
resident in India.
1.2.3 Incidence of Tax [Sec. 5]
The following chart highlights the provisions of tax incidence in brief:
Tax incidence in the case of
Resident
Nature of Income Resident &
but not
ordinarily Non resident
ordinarily
resident
resident
Income accrued or deemed to be accrued and received or deemed Taxable Taxable Taxable
to be received in India
Income accrued outside India but received or deemed to be
Taxable Taxable Taxable
received in India.
Income accrued or deemed to be accrued in India but received
Taxable Taxable Taxable
outside India
Income accrued and received outside India from a business
Taxable Taxable Not taxable
controlled in or profession set-up in India.
Income accrued and received outside India from a business
Taxable Not taxable Not taxable
controlled or profession set-up outside India.

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Income accrued and received outside India in the previous year

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

Taxpoint
� Explanation 1: Income accruing or arising outside India shall not be deemed to be received in India within the
meaning of sec. 5 by reason only of the fact that it is taken into account in a balance sheet prepared in India.
� Explanation 2: Income which has been included in the total income of a person on the basis that it has accrued
or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is
received or deemed to be received by him in India.
Illustration 9
Ram provides the following details of income, calculate the income which is liable to be taxed in India for the A.Y.
2025-26 assuming that –
(a) He is an ordinarily resident (b) He is not an ordinarily resident (c) He is a non-resident.
Particulars Amount
Salary received in India from a former employer of UK 1,40,000
Income from tea business in Nepal being controlled from India 10,000
Interest on company deposit in Canada (1/3rd received in India) 30,000
Profit from a business in Mumbai controlled from UK 1,00,000
Profit for the year 2022-23 from a business in Tokyo remitted to India 2,00,000
Income from a property in India but received in USA 45,000
Income from a property in London but received in Delhi 1,50,000
Income from a property in London but received in Canada 2,50,000
Income from a business in Jambia but controlled from Turkey 10,000
Solution:
Calculation of income liable to be taxed in India of Ram for the A.Y. 2025-26
Resident & Resident but
Non-
Particulars Ordinarily not ordinarily
resident
resident resident
Salary received in India from a former employer of UK 1,40,000 1,40,000 1,40,000
Income from tea business in Nepal being controlled from India 10,000 10,000 Nil
Interest on company deposit in Canada -
- 1/3rd received in India 10,000 10,000 10,000
- 2/3rd received outside India 20,000 Nil Nil
Profit from a business in Mumbai controlled from UK 1,00,000 1,00,000 1,00,000

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Past Profit from a business in Tokyo remitted to India Nil Nil Nil
Income from a property in India but received in USA 45,000 45,000 45,000
Income from a property in London but received in Delhi 1,50,000 1,50,000 1,50,000
Income from a property in London but received in Canada 2,50,000 Nil Nil
Income from a business in Jambia but controlled from Turkey 10,000 Nil Nil
Income liable to tax in India 7,35,000 4,55,000 4,45,000

1.2.4 Income received in India

Income received in India is taxable in all cases (whether accrued in India or elsewhere) irrespective of residential
status of the assessee, therefore it is significant to know the meaning of income received in India. If the place,
where the recipient gets the money (on first occasion) under his control, is in India, it is said to be income received
in India.

Taxpoint: Receipt is different from remittance. The receipt of income refers to the first occasion when the recipient
gets the money under his control. Once the amount is received as income (at any place outside India), any subsequent
remittance or transmission of the amount to India does not result to receipt in India

Example 5: Mr. X, a non-resident, received dividend from an Italian company in Japan on 15/12/2024. On
17/12/2024, he remitted such income in India. Such income shall not be taxable in India as income has neither
received in India nor accrued in India.

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

1.2.5 Income deemed to be received in India

Following incomes shall be deemed to be received in India and taxable in hands of all assessee irrespective of their
residential status -

a) The annual accretion in the previous year to the balance at the credit of an employee participating in a
recognized provident fund, to the extent provided in Rule 6 of part A of the IV schedule i.e.-

i) Employer’s contribution to the recognised provident fund in excess of 12% of salary.

ii) Interest credited on the above balance by a rate exceeding 9.5% [Sec. 7(i)]

b) The transferred balance in recognised provident fund, to the extent liable to income tax [Sec. 7(ii)]

c) The contribution made, by the employer in the previous year, to the account of an employee under a pension
scheme notified u/s 80CCD [Sec. 7(iii)]

d) Tax Deducted at source [Sec. 198]

e) Income from undisclosed sources

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

Following incomes are deemed to accrue or arise in India:
Income Salary Salary from Income Income from Income Income Deemed
from earned Govt. by an from interest from from receipt
connection in India Indian citizen dividend payable by royalty technical of gift
in India for services paid by specified services by non-
rendered outside an Indian person resident
India company
Sec. Sec. 9(1) Sec. 9(1)(iii) Sec. 9(1) Sec. Sec. 9(1) Sec. 9(1) Sec. 9(1)
9(1)(i) (ii) (iv) 9(1)(v) (vi) (vii) (viii)
Income from connection in India [Sec. 9(1)(i)]
All income accruing or arising, whether directly or indirectly,:
a) through* or from any business connection in India; or
b) through or from any property / asset or source of income in India; or
c) through the transfer of a capital asset situated in India.
Income from business connection in India
Income, which arises outside India because of business connection (or Professional connection) in India is deemed
to accrue or arise in India (subject to certain exceptions) and shall be taxable in hands of all assessee irrespective
of his residential status.
Income from any property/assets or source of income in India
Following income shall be deemed to accrue or arise in India -
• Income from any assets or property in India whether tangible / intangible, movable / immovable; or
• Income from a source situated in India
Income on transfer of a capital asset situated in India
Any gain on transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.
Taxpoint: The provision is applicable irrespective of the fact whether:
• The capital asset is movable or immovable, tangible or intangible;
• The place of registration of the document of transfer, etc. is in India or outside; and
• The place of payment of the consideration for the transfer is within India or outside
Salaries earned in India [Sec. 9(1)(ii)]
Salary payable for –
a) Services rendered in India; and
b) The rest period or leave period which is preceded and succeeded by the period during which services were
rendered in India and forms part of the service contract of employment,
- shall be deemed to accrue or arise in India.
* The expression “through” shall mean and include “by means of”, “in consequence of” or “by reason of”. [Explanation 4]

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Salary payable by the Government to Indian citizens for services rendered outside India [Sec. 9(1)(iii)]
Any salary -
• payable by the Government of India;
• to a citizen of India (Resident or non-resident);
• for services rendered outside India;
- shall be deemed to accrue or arise in India.
Note: In this regard it is to be noted that any allowances or perquisites paid by the Government to a citi-zen of India
for services rendered outside India shall be exempted [Sec. 10(7)]
� The exemption is available in both regime.
Income from dividend [Sec. 9(1)(iv)]
Any dividend paid by an Indian company outside India is deemed to accrue or arise in India.
Income from Interest [Sec. 9(1)(v)]
Following interest shall be deemed to accrue or arise in India –
Interest payable by Condition
The Government Nil
A resident person Money borrowed is not used for the purpose of -
• business or profession carried on by such person outside India; or
• earning any income from any source outside India.
A non-resident person Money borrowed is used for the purpose of business or profession carried on by such
person in India.
Taxpoint: In case money borrowed and used for the purpose of earning an income from
any other source in India, interest shall not be treated as deemed to accrue or arise in
India.
Income from royalty [Sec. 9(1)(vi)]
Following royalty shall be deemed to accrue or arise in India –
Royalty payable by Condition
The Government Nil
A resident person The right, property, information or services are not utilized for the purpose of -
• business or profession carried on by such person outside India; or
• earning any income from any source outside India.
A non-resident person The right, property, information or services must be utilised for the purpose of -
• business or profession carried on by such person in India; or
• earning any income from any source in India.
Income from technical services [Sec. 9(1)(vii)]
Following income by way of fees for technical service shall be deemed to accrue or arise in India –
Fee for technical
Condition
services payable by
The Government Nil
A resident person Such services must not be utilised in -
• business or profession carried on by such person outside India; or
• earning any income from any source outside India

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A non-resident person Such services must be utilized in -

• business or profession carried on by such person in India; or
• earning any income from any source in India.
Deemed Receipts of Gift [Sec. 9(1)(viii)]
When
- a non-resident or a not ordinarily resident or a foreign company receives any sum of money referred to in sec.
56(2)(x)*
- such receipt is from a resident person
- such money is received outside India
then
- such receipt is treated as income deemed to accrue or arise in India** .
General Illustration

Illustration A

Miss Monica, a foreign national, comes India every year for 90 days since 2008-09.

a) Determine her residential status for the previous year 2024-25.

b) Will your answer differ, if she comes India for 100 days instead of 90 days every year.

Solution

a) Since Miss Monica stayed for 90 days during the previous year 2024-25 and for 360 days (90 days x 4 years)
during the 4 years immediately preceding the previous year, hence, she is not satisfying any of the conditions
of sec. 6(1). Thus, she is a non-resident for the previous year 2024-25.

b) Since Miss Monica stayed for 100 days during the previous year 2024-25 and for 400 days (100 days × 4 years)
during the 4 years immediately preceding the previous year, hence, she is satisfying sec. 6(1)(c). Thus, she is
resident for the previous year 2024-25. Further, she resided for only 700 days (100 days × 7 years) during the
7 years immediately preceding the previous year. Hence, she does not satisfy one of the conditions of sec. 6(6).
Thus, she is resident but not ordinarily resident for the pre-vious year 2024-25.

Illustration B

Mr. Sid, a British national, joined XYZ Co. Ltd. as an engineer in India on 1st May, 2014. On 31st December, 2015,
he went to Sri Lanka on deputation. On 1st April, 2020, he came back to India and left for Sri Lanka again on 31st
May, 2020. He returned to India and joined his original post on 1st July, 2024. Determine his residential status for
the A.Y. 2025-26.

*
Refer chapter “Income from Other Sources”. Further, the deeming provision is applicable only in case of money and not applicable in case
of movable or immovable properties.
**
Subject to DTAA and exceptions provided in sec. 56(2)(x)

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Solution

Number of days Mr. Sid stayed in India in past few years can be calculated as under:

SN P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
0 24-25 - - - 31 31 30 31 30 31 31 28 31 274
1 23-24 - - - - - - - - - - - - 0
2 22-23 - - - - - - - - - - - - 0
3 21-22 - - - - - - - - - - - - 0
4 20-21 30 31 - - - - - - - - - - 61
5 19-20 - - - - - - - - - - - - 0
6 18-19 - - - - - - - - - - - - 0
7 17-18 - - - - - - - - - - - - 0
8 16-17 - - - - - - - - - - - - 0
9 15-16 30 31 30 31 31 30 31 30 31 - - - 275
10 14-15 - 31 30 31 31 30 31 30 31 31 28 31 335
On the basis of data drawn, residential status of Mr. Sid in last few years can be decided as under:

Resident (R) or Condition satisfied to

Year Previous Year Presence in India (In days)
Non resident (NR) become a resident
1 2023-2024 0 NR None
2 2022-2023 0 NR None
3 2021-2022 0 NR None
4 2020-2021 61 NR None
5 2019-2020 0 NR None
6 2018-2019 0 NR None
7 2017-2018 0 = 61 NR None
8 2016-2017 0 NR None
9 2015-2016 275 R 6(1)(a)
10 2014-2015 335 R 6(1)(a)
Since assessee resided in India for 274 days in the previous year 2024-25, hence he satisfies sec. 6(1)(a). Therefore,
he is resident in India.

Further, since he is resident in India for 2 years out of 10 years preceding the previous year (as shown in the above
working), but resided in India for less than 730 days out of 7 immediately preceding years, hence he does not
satisfy one of the conditions of sec. 6(6), therefore, he is resident but not ordinarily resident.

Conclusion: Resident but not ordinarily resident.

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Agricultural Income 1.3

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

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

1. Rent or Revenue: Any rent or revenue derived

from a land, which is situated in India & is used
for agricultural purposes$;
Taxpoint:
¾ Rent may be in cash or in kind.
¾ Assessee may be the owner or tenant of
such land.

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

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

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Direct Taxation

(c) The building should be used as dwelling house or store-house or other out building.
(d) The land is either situated in –
(i) Rural area; or
(ii) Urban area* and assessed to land revenue / local rates.
Taxpoint:
¾ Where such land or building is used for non-agricultural purpose then any income derived from such land
or building shall not be treated as agricultural income.
¾ Income derived from land being let out for storing crop shall not be agricultural income.
¾ Building should be owned and occupied by the land-holder if he receives rent or revenue from the land.
On the other hand, in case of cultivator or receiver of rent in kind, it is enough that the building is
occupied by him.

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

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

upon the land, prior to germination.
E.g. Tilling of land, sowing of seeds, planting, irrigation, etc.
Taxpoint: Any spontaneous growth from land itself (i.e. without
any human effort) cannot be termed as agricultural operation.
(b) Subsequent Operation: It means operations -
¾ which fosters the growth and preserves the produce;

* Following is considered as urban area:

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

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

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¾ for rendering the produce fit for sale in market; and

¾ which are performed after the produce sprouts from the land.
E.g. Digging the soil around the growths, removal of undesirable undergrowths, weeding, tending, pruning,
cutting, harvesting, etc.
Taxpoint:

Activity Whether treated as agricultural activity?

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

Agricultural Income, at a glance

Agricultural
Income [Exempted
income u/s 10(1)]

Land must be in India

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

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Direct Taxation

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

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

Agricultural Non-Agricultural
Rule Case
Income Income
8 Assessee is engaged in the business of growing and 60% of income 40% of income
manufacturing tea in India
E.g., If an assessee earns ₹ 5 lakh (as per sec. 28) from the business of growing & manufacturing tea
in India, then his business income will be ₹ 2 lakh (i.e., 40% of ₹ 5 lakh) & agro income will be ` 3
lakh (i.e. 60% of ₹ 5 lakh)
7A Assessee is engaged in the business of growing and 65% of income 35% of income
manufacturing rubber in India
Assessee is engaged in the business of growing and manufacturing Coffee in India
7B(1) ¾ Coffee grown and cured by the seller in India 75% of income 25% of income

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Agricultural Non-Agricultural
Rule Case
Income Income
7B(1A) ¾ Coffee grown, cured, roasted and grounded by the 60% of income 40% of income
seller in India, with or without mixing chicory or
other flavouring ingredients
Salary and interest received by a partner from a firm growing and manufacturing tea, coffee or rubber:
Such remuneration or interest shall be treated as partly agricultural income and partly business income as stated
above.
Any other case
For computing agricultural income from a business having both agricultural as well as non-agricultural income,
1. Assessee is required to prepare two Profit or Loss statements, one for agro-business & another for non agro-
business
2. Agro expenses debited to Agro Profit or Loss and non agro expenses shall be debited to Non agro-business
Profit or Loss
Note: Non-apportionable expenditure, related to composite business of agriculture and non-agriculture, is
fully charged to non-agricultural business.
3. Market value of any agricultural produce, which is utilised as raw material in such business, is to be treated as
income for agro-business and expenditure for non agro-business.
Illustration 10
X Ltd. grows sugarcane to manufacture sugar. Details for the previous year 2024-25 are as follows:
Particulars ₹ in lacs.
Cost of cultivation of sugarcane (5,000 tons) 10
Sugarcane sold in market (1,000 tons) 3
Sugarcane used for sugar manufacturing (4,000 tons) -
Cost of conversion 5
Sugar produced & sold in market 25

Compute income of X Ltd.

Solution:
Computation of income of X Ltd. for the A.Y. 2025-26 ₹ in lacs
Particulars Manufacturing Agriculture
Sale of agro product in market - 3
Sale of manufactured product in market 25 -
Notional sale of agro product used in the process of manufacturing - 12
(4,000 ton × ₹ 3 lacs per ‘000 ton)
Revenue [A] 25 15
Less: Expenses incurred
Cost of conversion 5 -

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Direct Taxation

Particulars Manufacturing Agriculture

Market value of sugarcane used (4,000 ton × ₹ 3 lacs per ‘000 ton) 12 -
Cost of cultivation - 10
Expenditure [B] 17 10
Income [A – B] 8 5

1.3.5 Impact of agricultural income on tax computation

Sec. 10(1) of the Act exempts agricultural income from tax as our Constitution does not provide power to the
Parliament to levy tax on agro-income. However, since 1973 an indirect method* has been found, to levy tax on
agro-income. According to this method, agricultural income is included in the total income of the assessee for
deciding the tax slab of the assessee.
The way to apply higher rate of tax-slab on non-agricultural income by including agricultural income in the total
income of the assessee are as under:
Conditions for including agricultural income in the total income of the assessee
1. The assessee is an individual, a Hindu-undivided family, a body of individual, an association of person or an
artificial juridical person.
2. The assessee has non-agricultural income exceeding the maximum amount of exemption (i.e. ₹ 3,00,000/- if
assessee is paying tax under the default tax regime, however, if assessee is paying tax under old regime then in
case of Senior citizen ₹ 3,00,000, Super Senior citizen ₹ 5,00,000 and in case of other individual/ HUF/AOP /
BOI /artificial juridical person ₹ 2,50,000)
3. The agricultural income of the assessee exceeds ₹ 5,000.
Treatment
Step 1: Compute income tax on total income of assessee including Agro-income.
Step 2: Compute income tax on (Agro-income + Maximum exempted limit)
Step 3: Tax liability before cess = (Tax as per step 1) - (Tax as per step 2)

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

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Illustration 11

Mr. X aged 42 years has non-agro income of ₹ 7,30,000 and agro income of ₹ 3,10,000. Compute his tax liability
for the A.Y. 2025-26.

How shall your answer differ if assessee has opted for old regime.

Solution

Computation of tax liability of Mr. X for the A.Y. 2025-26

Particulars ₹
Income Tax on ₹ 10,40,000 (i.e. agro income ₹ 3,10,000 + non agro ₹ 7,30,000) 56,000
Less: Tax on ₹ 6,10,000 (i.e. agro income ₹ 3,10,000 + maximum exempted limit ₹ 3,00,000) 15,500
Tax liability 40,500
Less: Rebate u/s 87A Nil
40,500
Add: Health & Education Cess (4% of ₹ 40,500) 1,620
Tax and cess payable (Rounded off u/s 288B) 42,120

Computation of tax liability of Mr. X for the A.Y. 2025-26 [If he has opted for old regime]

Particulars ₹
Income Tax on ₹ 10,40,000 (i.e. agro income ₹ 3,10,000 + non agro ₹ 7,30,000) 1,24,500
Less: Tax on ₹ 5,60,000 (i.e. agro income ₹ 3,10,000 + maximum exempted limit ₹ 2,50,000) 24,500
Tax liability 1,00,000
Less: Rebate u/s 87A Nil
1,00,000
Add: Health & Education Cess (4% of ₹ 1,00,000) 4,000
Tax and cess payable (Rounded off u/s 288B) 1,04,000

Illustration 12

Mr. Tony had estates in Rubber, Tea and Coffee. He derives income from them. He has also a nursery wherein he
grows plants and sells. For the previous year ending 31.3.2025, he furnishes the following particulars of his sources
of income from estates and sale of plants. Compute taxable income:

(a) Manufacture of Rubber ₹ 5,00,000.

(b) Manufacture of Coffee grown and cured ₹ 3,50,000.

(c) Manufacture of Tea ₹ 7,00,000.

(d) Sale of plants from nursery ₹ 1,00,000.

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Solution:
Computation of income of Mr. Tony for the A.Y. 2025-26

Particulars Agricultural income Business income

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

75% of ₹ 3,50,000 2,62,500

25% of ₹ 3,50,000 87,500
Income from growing and manufacturing tea [Rule 8]
60% of ₹ 7,00,000 4,20,000
40% of ₹ 7,00,000 2,80,000
Sale of plants from nursery 1,00,000
Total 11,07,500 5,42,500
#
Assume the coffee grown and cured is not roasted and grounded by the seller.
Illustration 13
State the tax treatment of the following income -
(a) A is employed in an agricultural farm and entrusted with tilling of land, his remuneration being 50% of the net
profits earned by the farm.
(b) C receives a dividend of ₹ 12,000 from a company whose entire income is derived from agricultural operations
only.
(c) D of Kolkata earns an income of ₹ 12,000 from agricultural land owned by him and situated in Bangladesh.
Such income is received in Bangladesh.
(d) F receives ₹ 600 on account of interest on loan on the mortgage of land which is used for agricultural purposes.
(e) G earns an income of ₹ 1,200 from lease of land for grazing of cattle required for agricultural operations.
(f) H receives ₹ 400 on account of interest on arrears of rent in respect of land used by tenant for agricultural
operations.
(g) Income from the sale of replanted trees where the denuded parts of the forest are replanted and subsequent
operation in forestry are carried out.
(h) Income from sale of trees of forest which are of spontaneous growth and in relation to which forestry operations
alone are performed or Income from sale of wild grass of spontaneous growth
(i) Income from sale of tea leaf from a tea garden.
(j) Income from sale of jute produced in land situated in Bangladesh.
(k) Income from poultry farming
(l) Income from growing flowers in gardens

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(m) Income from sale of tobacco leaves after being dried to make it fit for sale.
(n) Income from fisheries or poultry or dairy
(o) Income of ₹ 50,000 from agricultural land, the land is situated in Bangladesh
(p) Income of ₹ 25,000 from the land used as stone quarries.
Solution:

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

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Income which do not form part of Total

Income 1.4
1.4.1 Income Exempt From Tax
Sec. 10 enlists the various income which are exempt from tax i.e. does not form part of total income of the assessee.
These are –
Agricultural Income [Sec. 10(1)]
Refer chapter Agricultural income
Member’s Share in Income of HUF [Sec. 10(2)]
Any sum received by an individual as a member of a Hindu undivided family –
• Where such sum has been received out of the income of the family; or
• Where such sum has been received out of the income of an impartible estate belonging to the family.
Share of Profit from a Firm [Sec. 10(2A)]
Share in the total income of the firm is exempt in the hands of partner.
Interest Income of Non-resident [Sec. 10(4)/(4B)]
• Interest on specified securities or bonds, including premium on redemption of such bonds is exempted in the
hands of a non-resident [Sec. 10(4)(i)]
• Interest on Non-Resident (External) Account in any bank in India to a person who is a resident outside India
as per as defined in sec. 2(w) of the Foreign Exchange Management Act, 1999 or is a person who has been
permitted by the Reserve Bank of India to maintain the aforesaid Account
• Interest on notified savings certificates issued before 1-6-2002 by the Central Government to a non-resident,
being a citizen of India or a person of Indian origin [Sec. 10(4B)]
Interest on Rupee Denominated Bond [Sec. 10(4C)]
Interest payable to a non-resident, not being a company, or to a foreign company, is exempt if following conditions
are satisfied:
a) Interest is payable by any Indian company or business trust.
b) Such interest is payable in respect of monies borrowed from a source outside India by way of issue of rupee
denominated bond, as referred to in sec. 194LC(2)(ia).
c) Such bond has been issued during 17-09-2018 and 31-03-2019.
Income received by specified fund [Sec. 10(4D)]Amended
any income accrued or arisen to, or received by a specified fund as a result of transfer of capital asset referred to in
sec. 47(viiab), on a recognised stock exchange located in any International Financial Services Centre; and

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Where the consideration for such transaction is paid or payable in convertible foreign exchange or as a result of
transfer of securities (other than shares in a company resident in India) or any income from securities issued by a
non-resident (not being a permanent establishment of a non-resident in India); and
Where such income otherwise does not accrue or arise in India or any income from a securitisation trust which is
chargeable under the head “Profits and gains of business or profession”,
- to the extent such income accrued or arisen to, or is received, is attributable to units held by non-resident (not
being the permanent establishment of a non-resident in India) or is attributable to the investment division of
offshore banking unit, as the case may be, computed in the prescribed manner.
 “Specified Fund” means,—
i. a fund established or incorporated in India in the form of a trust or a company or a limited liability
partnership or a body corporate,—
I. a. which has been granted a certificate of registration as a Category III Alternative Investment
Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment
Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 or
International Financial Services Centre Authority Act, 2019;
b. which has been granted a certificate as a retail scheme or an Exchange Traded Fund, and is
regulated under the International Financial Services Centres Authority (Fund Management)
Regulations, 2022, made under the International Financial Services Centres Authority Act, 2019
and satisfies prescribed conditions.
II. which is located in any International Financial Services Centre; and
III. of which all the units other than unit held by a sponsor or manager are held by non-residents;
• However, this condition shall not be applicable where any unit holder(s), being non-resident
during the previous year when such unit(s) were issued, becomes resident u/s 6(1) or 6(1A) in
any previous year subsequent to that year, if the aggregate value and number of the units held by
such resident unit holder or holders do not exceed 5% of the total units issued and fulfil such other
conditions as may be prescribed.
ii. investment division of an offshore banking unit, which has been—
I. granted a certificate of registration as a Category-I foreign portfolio investor under the Securities and
Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 made under the Securities
and Exchange Board of India Act, 1992 and which has commenced its operations on or before the 31st
day of March, 2025; and
II. fulfils such conditions including maintenance of separate accounts for its investment division, as may
be prescribed;
Income of IFSC [Sec. 10(4E)/(4F)]
• Any income accrued or arisen to, or received by a non-resident as a result of:
i. transfer of non-deliverable forward contracts or offshore derivative instruments or over-the-counter
derivatives; or
ii. distribution of income on offshore derivative instruments,
entered into with an offshore banking unit of an International Financial Services Centre referred to in sec.
80LA(1A), which fulfils such conditions as may be prescribed

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• Any income of a non-resident by way of royalty or interest, on account of lease of an aircraft or a ship in a
previous year, paid by a unit of an International Financial Services Centre, if the unit has commenced its
operations on or before 31-03-2025.
 “Aircraft” means an aircraft or a helicopter, or an engine of an aircraft or a helicopter, or any part thereof;
 “Ship” means a ship or an ocean vessel, engine of a ship or ocean vessel, or any part thereof.
Income of IFSC [Sec. 10(4G)]
Any income received by a non-resident from:
i. portfolio of securities or financial products or funds, managed or administered by any portfolio manager on
behalf of such non-resident; or
ii. such activity carried out by such person, as may be notified by the Central Government,
in an account maintained with an Offshore Banking Unit in any International Financial Services Centre, as referred
to in sec. 80LA(1A), to the extent such income accrues or arises outside India and is not deemed to accrue or arise
in India.
Income of IFSC [Sec. 10(4H)]
Any income of a non-resident or a Unit of an International Financial Services Centre as referred to in sec. 80LA(1A),
engaged primarily in the business of leasing of an aircraft, by way of capital gains arising from the transfer of
equity shares of domestic company, being a Unit of an International Financial Services Centre, as referred to in
sec. 80LA(1A), engaged primarily in the business of lease of an aircraft which has commenced operations on or
before 31-03-2026
However, this clause shall apply for capital gains arising from the transfer of equity shares of such domestic
company in a previous year relevant to an assessment year falling within the:
a. period of 10 assessment years beginning with the assessment year relevant to the previous year in which the
domestic company has commenced operations; or
b. period of ten assessment years beginning with the assessment year commencing on 01-04-2024, where the
period referred to in clause (a) ends before 01-04-2034.
Taxpoint: Aircraft means an aircraft or a helicopter, or an engine of an aircraft or a helicopter, or any part thereof;
Leave Travel Concession [Sec. 10(5)]
Refer chapter Salaries.
Remuneration to Person who is not a Citizen of India in certain cases [Sec. 10(6)]
Following remuneration to an individual who is not a citizen of India shall be exempt –
• Remuneration received by him as an official of an embassy, high commission, legation, commission, consulate,
or the trade representation of a foreign state or as a staff of any of these officials provided corresponding Indian
officials in that foreign country enjoy similar exemptions in their country - Sec. 10(6)(ii).
• Remuneration received as an employee of a foreign enterprise for services rendered by him during his stay in
India provided -
a. the foreign enterprise is not engaged in any business or profession in India;
b. his stay in India does not exceed 90 days in aggregate; and
c. such remuneration is not liable to be deducted from the income of the employer under this Act - Sec. 10(6)
(vi)

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• Remuneration for services rendered in connection with his employment on a foreign ship provided his total
stay in India does not exceed 90 days in the previous year - Sec. 10(6)(viii)
• Remuneration received as an employee of the Government of a foreign State during his stay in India in
connection with his training in any undertaking owned by Government, Government company, subsidiary of a
Government company, corporation established by any Central, State or Provincial Act and any society wholly
financed by the Central or State Government – Sec. 10(6)(xi)
Tax paid by Government on Royalty or Fees for Technical Service [Sec. 10(6A)]
Tax paid by Government on Income of a Non-resident or a Foreign Company [Sec. 10(6B)]
Tax paid on Income from Leasing of Aircraft [Sec. 10(6BB)]
Tax paid by an Indian company on income arising from leasing of aircraft, etc. to the Government of a foreign
state or foreign enterprise under an approved agreement entered into with such Indian company engaged in the
business of operation of aircraft, provided such agreement was entered into between 1-4-1997 and 31-3-1999 or
after 31-3-2007.
Taxpoint: Only tax paid on such income is exempt, however such income is taxable.
Fees for Technical Services in Project connected with Security of India [Sec. 10(6C)]
Any income arising to notified foreign company by way of royalty or fees for technical services received in
pursuance of an agreement entered into with Central Government for providing services in or outside India in
projects connected with security of India.
Income from service provided to National Technical Research Organisation [Sec. 10(6D)]
Any income arising to a non-resident or to a foreign company, by way of royalty from, or fees for technical services
rendered in or outside India to, the National Technical Research Organisation
Allowance or Perquisite paid Outside India [Sec. 10(7)]
Any allowance or perquisite paid outside India by the Government to a citizen of India for rendering services
outside India.
Death-cum-retirement-gratuity [Sec. 10(10)]
Refer chapter Salaries.
Commutation of Pension [Sec. 10(10A)]
Refer chapter Salaries.
Leave Encashment [Sec. 10(10AA)]
Refer chapter Salaries.
Workmen’s Retrenchment Compensation [Sec. 10(10B)]
Refer chapter Salaries.
Compensation under Bhopal Gas Leak Disaster Act, 1985 [Sec. 10(10BB)]
Compensation for any Disaster [Sec. 10(10BC)]
Any amount received or receivable from the Central Government or a State Government or a local authority by
an individual or his legal heir by way of compensation on account of any disaster, except the amount received or
receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of
any loss or damage caused by such disaster.

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Payment under Voluntary Retirement Scheme [Sec. 10(10C)]

Refer chapter Salaries.
Tax paid by Employer on behalf of Employee on Non-monetary Perquisites u/s 17(2) [Sec. 10(10CC)]
Refer chapter Salaries.
Sum received under a Life Insurance Policy [Sec. 10(10D)]
Any sum received under a life insurance policy including bonus on such policy is wholly exempt from tax.
However, exemption is not available on -
1. any sum received u/s 80DD(3) or u/s 80DDA(3); or
2. any sum received under a Keyman insurance policy; or
3. any sum received under an insurance policy issued on or after 1-4-2012* in respect of which the premium
payable for any of the years during the term of the policy exceeds 10%** of the actual capital sum assured.
4. Where any Unit Linked Insurance Policy (ULIP), is issued on or after 01-02-2021 and the premium payable
for any of the previous year during the term of such policy exceeds ₹ 2,50,000
 Where the premium is payable, by a person, for more than one ULIP, issued on or after 01-02-2021, the
exemption shall apply only with respect to those ULIP, where the aggregate amount of premium does not
exceed the aforesaid limit in any of the previous year during the term of any of those policies.
Notes:
a. Point (3) & (4) shall not apply to any sum received on the death of a person.
b. However, exemption shall not be applicable with respect to any life insurance policy, other than a unit linked
insurance policy, issued on or after 01-04-2023, if the amount of premium payable for any of the previous
years during the term of such policy exceeds ₹ 5 lakh
• However, if the premium is payable by a person for more than one life insurance policy, other than unit
linked insurance policy, issued on or after 01-04-2023, this clause shall apply only with respect to those
life insurance policies, other than unit linked insurance policies, where the aggregate amount of premium
does not exceed the aforesaid amount in any of the previous years during the term of any of those policies
• If exemption is not available in respect of life insurance, then income would be taxable under the head
Income from Other Sources.
• Further, this restriction shall not apply to any sum received on the death of a person.
c. Actual capital sum assured shall mean the minimum amount assured under the policy on happening of the
insured event at any time during the term of the policy.
d. If the exemption u/s 10(10D) is not available in respect of ULIP due to point (4), income shall be taxable under
the head Capital Gains u/s 45(1B) and tax liability shall be computed as per sec. 112A.
e. For calculating actual capital sum assured (for point 3), no account shall be taken for -
• the value of any premiums agreed to be returned; or
• any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may
be received under the policy by any person.
* If policy is issued between 01-04-2003 and 31-03-2012, premium payable for any of the years during the term of the policy exceeds 20% of
the actual capital sum assured
** Where policy is issued on or after 01-04-2013 and Insured is disable or severe disable as per sec. 80U or suffering from disease specified u/s
80DDB – 15%

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Payment from Statutory or Public Provident Fund [Sec. 10(11)]

Any payment from a provident fund to which the Provident Funds Act, 1925, applies or from any other notified
provident fund set up by the Central Government is exempt
Exceptions
Interest accrued during the previous year in the account of an employee maintained by the fund shall not be
exempted to the extent it relates to the following amount:
Case Interest not exempted
Where employer is giving Interest on employee’s contribution (made on or after 01-04-2021) in excess of ₹
contribution 2,50,000 per year
Where employer is not Interest on employee’s contribution (made on or after 01-04-2021) in excess of ₹
giving contribution 5,00,000 per year
In such case, income shall be computed in such manner as may be prescribed.
Payment from Sukanya Samriddhi Account [Sec. 10(11A)]
Any payment from an account, opened in accordance with the Sukanya Samriddhi Account Rules, 2014 made
under the Government Savings Bank Act, 1873.
Payment from Recognised Provident Fund [Sec. 10(12)]
The accumulated balance due and becoming payable to an employee participating in a recognised provident fund,
to the extent provided in rule 8 of Part A of the Fourth Schedule is exempt
Exceptions
Interest accrued during the previous year in the account of an employee maintained by the fund shall not be
exempted to the extent it relates to the following amount:
Case Interest not exempted
Where employer is giving Interest on employee’s contribution (made on or after 01-04-2021) in excess of
contribution ₹2,50,000 per year
Where employer is not Interest on employee’s contribution (made on or after 01-04-2021) in excess of
giving contribution ₹5,00,000 per year
In such case, income shall be computed in such manner as may be prescribed.
Payment from National Pension Trust [Sec. 10(12A) & 10(12B)]
Any payment from the National Pension System Trust to an assessee on closure of his account or on his opting out
of the pension scheme referred to in sec. 80CCD, to the extent it does not exceed 60% of the total amount payable
to him at the time of such closure or his opting out of the scheme [Sec. 10(12A)]
Any payment from the National Pension System Trust to an employee under the pension scheme referred to in
sec. 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified
under the Pension Fund Regulatory and Development Authority Act, 2013, to the extent it does not exceed 25% of
the amount of contributions made by him [Sec. 10(12B)]
Payment from Approved Superannuation Fund [Sec. 10(13)]
Any payment from an approved superannuation fund made -
• on the death of a beneficiary; or
• to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his
becoming incapacitated prior to such retirement; or
• by way of refund of contributions on the death of a beneficiary; or
• by way of refund of contributions to an employee on his leaving the service (otherwise than by retirement at
or after a specified age or on his becoming incapacitated prior to such retirement) to the extent to which such
payment does not exceed the contributions made prior to 1-4-1962 and any interest thereon.

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• by way of transfer to the account of the employee under a pension scheme referred to in sec. 80CCD and
notified by the Central Government
House Rent Allowance [Sec. 10(13A)]
Refer chapter Salaries.
Notified Special Allowances [Sec. 10(14)]
Refer chapter Salaries.
Interest on Securities [Sec. 10(15)]
1. Interest, premium on redemption or other payment on notified securities, bonds or certificates
2. Interest in the hands of an individual and Hindu undivided family on Specified Capital Investment Bonds or
Specified Relief Bonds
3. Interest on specified bonds to non resident or his nominees if such bonds are purchased by a non-resident
Indian in foreign exchange; and
4. The interest and principal received in respect of such bonds, whether on their maturity or otherwise, is not
allowable to be taken out of India. Interest on securities held by the Issue Department of the Central Bank of
Ceylon;
5. Interest payable to any bank incorporated in a country outside India and authorised to perform central banking
functions in that country on any deposits made by it, with the approval of the RBI, with any scheduled bank;
6. Interest payable on a loan advanced by the Nordic Investment Bank for an approved project;
7. Interest payable to the European Investment Bank for financial co-operation agreement;
8. Interest payable by a Government, local authority, certain industrial undertakings or financial institution on
money borrowed before 1/6/2001
9. Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims or deposits for the benefit of the
victims of the Bhopal gas leak disaster.
10. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued
under the Gold Monetisation Scheme, 2015
11. Interest on specified bonds issued by a local authority or by a State Pooled Finance Entity.
12. Interest received by a non-resident or a person who is not ordinarily resident, in India on a deposit made on or
after 1-4-2005 in an offshore banking unit referred in the Special Economic Zones Act, 2005
13. Interest payable to a non-resident by a unit located in an International Financial Services Centre in respect of
monies borrowed by it on or after 01-09-2019
Income from Leasing of Aircraft [Sec. 10(15A)]
Any payment made, by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or
an aircraft engine (other than a payment for providing spares, facilities or services in connection with the operation
of leased aircraft) on lease from the foreign Government or a foreign enterprise under an approved agreement. The
agreement must not be entered into -
 between 1-4-1997 to 31-3-1999; and
 on or after 1-4-2007.
Note: “Foreign enterprise” means a person who is a non-resident.
Taxpoint: Tax paid on an agreement made between 1-4-1997 and 31-3-1999 is eligible for exemption u/s 10(6BB).
Income from lease rental of cruise ship [Sec. 10(15B)]
Any income of a foreign company from lease rentals (by whatever name called) of cruise ships, shall be exempted
if the following conditions are satisfied:

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Such income shall be received from a specified company which operates such ship(s) in India
Such foreign company and the specified company are subsidiaries of the same holding company; and
Such income is received or accrues or arises in India for any relevant assessment year beginning on or before 01-
4-2030.
Taxpoint
 Specified company means any company, other than a domestic company which operates cruise ships in India
and opts to pay tax in accordance with the provisions of sec. 44BBC
 Holding company, in relation to a foreign company or a specified company, means a company of which such
companies are subsidiary companies
 Subsidiary company or “subsidiary”, in relation to a holding company, means a company in which the holding
company exercises or controls more than one-half of the total share capital either at its own or together with
one or more of its subsidiary companies;
Scholarship [Sec. 10(16)]
Scholarships granted to meet the cost of education.
Notes:
a. Cost of education also includes incidental expenses incurred for education.
b. The exemption is irrespective of actual expenditure.
Daily Allowance, etc. to MP and MLA [Sec. 10(17)]
Any income by way of -
a. Daily allowance received by any person by reason of his membership of Parliament or of any State Legislature
or of any Committee thereof;
b. Any allowance received by any person by reason of his membership of Parliament;
c. Constituency Allowance received by any person by reason of his membership of State legislature;
Awards and Rewards [Sec. 10(17A)]
Any payment made, whether in cash or in kind -
a. in pursuance of any award instituted in the public interest by the Central Government or any State Government
or by any other approved body; or
b. as a reward by the Central Government or any State Government for approved purposes.
Pension to receiver of Gallantry Awards [Sec. 10(18)]
Any income by way of -
a. pension received by an individual who has been in the service of the Central or State Government and has been
awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other notified gallantry award*; or
b. family pension received by any member of the family of such individual.
Family Pension to Widow or Children of Armed Force [Sec. 10(19)]
Family pension received by the widow or children or nominated heirs, of a member of the armed forces (including
para-military forces) of the Union, where the death of such member has occurred in the course of operational
duties, in such circumstances and subject to such conditions, as may be prescribed.
Palace of Ex-ruler [Sec. 10(19A)]
The annual value in respect of any one palace, which is in the occupation of an ex-ruler

* Asadharan Suraksha Seva Praman Patra.

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Income of Local Authority [Sec. 10(20)]

Following income of a local authority is exempt -
a. Income chargeable under the head Income from House Property, Capital Gains or Income from other Sources
b. Income from the supply of commodities (other than water or electricity) or services, within its own jurisdiction
c. Income from the supply of water services or electricity within or outside its jurisdiction
Income of Scientific Research Association [Sec. 10(21)]
Any income of a scientific research association [being approved for the purpose of Sec. 35(1)(ii)] or research
association which has its object, undertaking research in social science or statistical research [being approved and
notified for the purpose of Sec. 35(1)(iii)], is exempt provided such association—
a. applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is
established; and
b. invest or deposit its funds in specified investments.
Income of News Agency [Sec. 10(22B)]
Any income of specified news agency (Press Trust of India Ltd., New Delhi) set up in India solely for collection
and distribution of news shall be exempt provided:
a. The news agency applies its income or accumulates it for application solely for collection and distribution of
news; and
b. It does not distribute its income in any manner to its members.
Income of Professional Institutions [Sec. 10(23A)]
Any income (other than income chargeable under the head “Income from house property” or any income received
for rendering any specific services or income by way of interest or dividends derived from its investments) of
professional association shall be exempt provided -
a. Such association or institution is established in India having as its object the control, supervision, regulation or
encouragement of the profession of law, medicine, accountancy, engineering or architecture or other specified
profession;
b. Such association or institution applies its income, or accumulates it for application, solely to the objects for
which it is established; and
c. The association or institution is approved by the Central Government.
Income of Regimental Fund [Sec. 10(23AA)]
Any income received by any person on behalf of any Regimental Fund or Non-public Fund established by the
armed forces of the Union for the welfare of the past and present members of such forces or their dependants is
exempt.
Income of specified Employee Welfare Fund [Sec. 10(23AAA)]
Income of specified Pension Fund [Sec. 10(23AAB)]
Income of trust for Development of Khadi and Village Industries [Sec. 10(23B)]
Income of Khadi and Village Industries Boards [Sec. 10(23BB)]
Income of body formed for Administration of Public Religious or Charitable Trusts [Sec. 10(23BBA)]
Any income of any body established under any Central, State or Provincial Act which provides for the administration
of any public, religious or charitable trusts or endowments including Maths, Temples, Gurudwaras, Wakfs,
Churches or other places of public religious worship or societies for religious or charitable purposes.
Income of European Economic Community [Sec. 10(23BBB)]
Income of SAARC Fund [Sec. 10(23BBC)]

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Income of ASOSAI-SECRETARIAT [Sec. 10(23BBD)]

Income of Insurance Regulatory Authority [Sec. 10(23BBE)]
Income of the Central Electricity Regulatory Commission [Sec. 10(23BBG)]
Income of the Prasar Bharati (Broadcasting Corporation of India) [Sec. 10(23BBH)]
Income of Certain Funds [Sec. 10(23C)]
Any income received by any person on behalf of
1. The Prime Minister’s National Relief Fund or the Prime Minister’s Citizen Assistance and Relief in Emergency
Situations Fund (PM CARES FUND); [sec. 10(23C)(i)]
2. The Prime Minister’s Fund (Promotion of Folk Art); [sec. 10(23C)(ii)]
3. The Prime Minister’s Aid to Students Fund; [sec. 10(23C)(iii)]
4. The National Foundation for Communal Harmony; [sec. 10(23C)(iiia)]
5. The Swachh Bharat Kosh; [sec. 10(23C)(iiiaa)]
6. The Clean Ganga Fund; [sec. 10(23C)(iiiaaa)]
7. The Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund; [sec. 10(23C)(iiiaaaa)]
8. Any other charitable fund or institution notified by the prescribed authority (subject to condition) [sec. 10(23C)
(iv)]
9. Any trust or institution wholly for public religious purposes or wholly for public religious and charitable
purposes notified by the prescribed authority (subject to conditions) [sec. 10(23C)(v)]
10. Any university or other education institutions, (wholly or substantially financed by Government or having
annual receipt of prescribed limit upto ₹ 5 crores) existing solely for education purposes and not for profit.
[sec.10(23C)(iiiac), (iiiad) (vi)]
11. Any hospital or other institution (wholly or substantially financed by Government or having annual receipt
upto ₹ 5 crores) for treatment of person suffering from illness or mental defectiveness or during convalescence
or requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for profit.
[sec.10(23C)(iiiac), (iiiae) and (via)]
Notes:
 Institution covered u/s 23C(iv), (v), (vi) and (via) shall get their accounts audited and upload the audit report
one month prior to the due date of filing the return of income.
 For the purposes of (iiiad) and (iiiae), it is hereby clarified that if the person has receipts from university
or universities or educational institution or institutions as referred to in (iiiad), as well as from hospital or
hospitals or institution or institutions as referred to in (iiiae), the exemptions shall not apply, if the aggregate
of annual receipts of the person from such university or universities or educational institution or institutions or
hospital or hospitals or institution or institutions, exceed ₹ 5 crores;
 The calculation of income required to be applied or accumulated during the previous year shall be made
without any set off or deduction or allowance of any excess application of any of the year preceding to the
previous year;
 Income of the funds or trust or institution or any university or other educational institution or any hospital or
other medical institution, shall not include income in the form of voluntary contributions made with a specific
direction that they shall form part of the corpus of such fund or trust or institution or any university or other
educational institution or any hospital or other medical institution provided that such voluntary contributions
are invested or deposited in one or more of the forms or modes specified in sec. 11(5) maintained specifically
for such corpus
 Further, for the purposes of determining the amount of application:

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a. application for charitable or religious purposes from the corpus as referred above, shall not be treated as
application of income for charitable or religious purposes.
However, the amount not so treated as application or part thereof, shall be treated as application for
charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or
deposited back, into one or more of the forms or modes specified in sec. 11(5) maintained specifically for
such corpus, from the income of that year and to the extent of such investment or deposit; and
b. application for charitable or religious purposes, from any loan or borrowing, shall not be treated as
application of income for charitable or religious purposes:
However, the amount not so treated as application or part thereof, shall be treated as application for
charitable or religious purposes in the previous year in which the loan or borrowing, or part thereof, is
repaid from the income of that year and to the extent of such repayment.
 For the purposes of determining the amount of application, where 85% of the income is not applied wholly
and exclusively to the objects for which the fund or institution or trust or any university or other educational
institution or any hospital or other medical institution is established, during the previous year but is accumulated
or set apart, either in whole or in part, for application to such objects, such income so accumulated or set apart
shall not be included in the total income of the previous year of the person in receipt of the income, if the
following conditions are complied with, namely:
a. such person furnishes a statement in such form and manner, as may be prescribed, to the Assessing Officer
stating the purpose for which the income is being accumulated or set apart and the period for which the
income is to be accumulated or set apart, which shall in no case exceed 5 years;
b. the money so accumulated or set apart is invested or deposited in the forms or modes specified in sec.
11(5); and
c. such statement is furnished on or before the due date for furnishing the return of income for the previous
year.
Taxpoint: In computing the period of 5 years, the period during which the income could not be applied for the
purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.
 Any income, which:
a. is applied for purposes other than wholly and exclusively to the objects for which the fund or institution
or trust or any university or other educational institution or any hospital or other medical institution is
established or ceases to be accumulated or set apart for application thereto; or
b. ceases to remain invested or deposited in any of the forms or modes specified in sec. 11(5); or
c. is not utilised for the purpose for which it is so accumulated or set apart during such period; or
d. is credited or paid to any trust or institution registered u/s 12AA or 12AB or to any specified fund or
institution or trust or any university or other educational institution or any hospital or other medical
institution
- shall be deemed to be the income of such person of the previous year—
i.
in which it is so applied or ceases to be so accumulated or set apart; or
ii. in which it ceases to remain so invested or deposited; or
iii. being the last previous year of the period, for which the income is accumulated or set apart, but
not utilised for the purpose for which it is so accumulated or set apart; or
iv. in which it is credited or paid to any fund or institution or trust or any university or other educational
institution or any hospital or other medical institution.
 However, where due to circumstances beyond the control of the person in receipt of the income, any income
invested or deposited cannot be applied for the purpose for which it was accumulated or set apart, the Assessing

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Officer may, on an application made to him in this behalf, allow such person to apply such income for such
other purpose in India as is specified in the application by that person and as is in conformity with the objects
for which the fund or institution or trust or any university or other educational institution or any hospital or
other medical institution is established; and thereupon the aforesaid provisions shall apply as if the purpose
specified by that person in this application were a purpose specified in the notice given to the Assessing Officer
However, the Assessing Officer shall not allow application of such income by way of payment or credit made
to other
 Anonymous donation referred u/s 115BBC is not exempt.
 Any concern which has been approved or notified for exemption u/s 10(23C) shall not be entitled to claim any
other exemption (except exemption for agricultural income) u/s 10.
 While computing business income, the provision of sec. 40(a)(ia) and 40A(3) / (3A) shall be applicable.
Income of Mutual Fund [Sec. 10(23D)]
Any income of -
a. A Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulation made
thereunder;
b. A Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve
Bank of India and subject to certain notified conditions.
Income of Securitisation Trust [Sec. 10(23DA)]
Any income of a securitisation trust from the activity of securitisation.
• “Securitisation” shall have the same meaning as assigned to it,
a. in regulation 2(1)(r) of the Securities and Exchange Board of India (Public Offer and Listing of Securitised
Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992
and the Securities Contracts (Regulation) Act, 1956; or
b. in clause (z) of sub-section (1) of section 2 of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002; or
c. under the guidelines on securitisation of standard assets issued by the Reserve Bank of India;
• “Securitisation trust” shall have the meaning assigned to it in the Explanation below sec. 115TCA
Income of Investor Protection Fund [Sec. 10(23EA)]
Income (by way of contribution received from recognized Stock exchange and members thereof) of Investor
Protection Fund set up by the recognised Stock Exchanges in India as the Central Government may by notification
in Official Gazette specify shall be exempt.
Income of Investor Protection Fund set up by Commodity Exchange [Sec. 10(23EC)]
Income of Investor Protection Fund of Depositories [Sec. 10(23ED)]
Any income, by way of contributions received from a depository, of notified Investor Protection Fund set up in
accordance with the regulations by a depository.
However, where any amount standing to the credit of the Fund and not charged to income-tax during any previous
year is shared, either wholly or in part with a depository, the whole of the amount so shared shall be deemed to be
the income of the previous year in which such amount is so shared and shall, accordingly, be chargeable to income-tax.
Income of Core Settlement Guarantee Fund [Sec. 10(23EE)]
Any specified income of such Core Settlement Guarantee Fund, set up by a recognised clearing corporation in
accordance with the regulations notified by the Central Government.
However where any amount standing to the credit of the Fund and not charged to income-tax during any previous
year is shared, either wholly or in part with the specified person, the whole of the amount so shared shall be deemed

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to be the income of the previous year in which such amount is so shared.

Income of Ventures Capital Fund or Venture Capital Company [Sec 10(23FB)]
Any income of a venture capital company or venture capital fund from investment in a venture capital undertaking.
However, w.e.f. A.Y. 2016-17, the exemption is not applicable to any income of a venture capital company or
venture capital fund, being an investment fund specified in clause (a) of the Explanation 1 to sec. 115UB
Non-business income of Investment Fund [Sec. 10(23FBA)]
Any income of an investment fund other than the income chargeable under the head “Profits and gains of business
or profession”.
Income of Unit holder [Sec. 10(23FBB)]
Any income, referred to in sec. 115UB, to a unit holder of an investment fund, being that proportion of income
which is of the same nature as income chargeable under the head “Profits and gains of business or profession”.
 For the purposes of sec. 10(23FBA) and (23FBB), “investment fund” shall have the meaning assigned to it in
clause (a) of the Explanation 1 to sec. 115UB.
Income from specified fund [Sec. 10(23FBC)]
Any income accruing or arising to, or received by, a unit holder from a specified fund or on transfer of units in a
specified fund is exempt.
 “Specified fund” shall have the same meaning as assigned to it sec. 10(4D)
 “Unit” means beneficial interest of an investor in the fund and shall include shares or partnership interests
Income of Business Trust [Sec 10(23FC)]
Any income of a business trust by way of
a) interest received or receivable from a special purpose vehicle; or
b) dividend received or receivable from a special purpose vehicle
 “Special purpose vehicle” means an Indian company in which the business trust holds controlling interest and
any specific percentage of shareholding or interest, as may be required by the regulations under which such
trust is granted registration
Income of Real Estate Investment Trust [Sec. 10(23FCA)]
Any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any
real estate asset owned directly by such business trust.
Distributed Income to unit holder of a Business Trust [Sec 10(23FD)]
Any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not
being that proportion of the income which is of the same nature as the income referred to in 10(23FC)(a) [i.e.,
proportionate interest income] or 10(23FC)(b) [i.e., proportionate dividend income where the special purpose
vehicle has exercised the option u/s 115BAA] or 10(23FCA) [i.e., proportionate rental income]
Taxpoint: Such income is taxable in hands of unitholders.
Income to wholly owned subsidiary of Abu Dhabi Investment Authority and Sovereign Wealth Fund [Sec
10(23FE)]
Any income of the specified person in the nature of dividend, interest, any income referred to in sec. 56(2)(xii) or
long-term capital gains arising from an investment made by it in India, whether in the form of debt or share capital
or unit, if the investment:
i. is made on or after 01-04-2020 but on or before 31-03-2025;
ii. is held for at least 3 years; and

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iii. is in:
a. a business trust referred to in sec. 2(13A)(i); or
b. a company or enterprise or an entity carrying on the business of developing, or operating and maintaining,
or developing, operating and maintaining any infrastructure facility or other specified business; or
c. a domestic company, set up and registered on or after 01-04-2021, having minimum 75% investments in
one or more of the companies or enterprises or entities referred to in item (b); or
d. a non-banking financial company registered as an Infrastructure Finance Company as referred to in
notification number RBI/2009-10/316 issued by the Reserve Bank of India or in an Infrastructure Debt
Fund, a non-banking finance company, as referred to in the Infrastructure Debt Fund - Non-Banking
Financial Companies (Reserve Bank) Directions, 2011, issued by the Reserve Bank of India, having
minimum 90% lending to one or more of the companies or enterprises or entities referred to in item (b)
e. a Category-I or Category-II Alternative Investment Fund regulated under the Securities and Exchange
Board of India (Alternative Investment Fund) Regulations, 2012, having 50% investment in one or more
of the company or enterprise or entity referred above or in an Infrastructure Investment Trust referred to
in sec. 2(13A)(i)
Capital Gains of Resultant Fund [Sec. 10(23FF)]
Any income of the nature of capital gains, arising or received by a non-resident or a specified fund, which is on
account of transfer of share of a company resident in India, by the resultant fund or a specified fund to the extent
attributable to units held by non-resident (not being a permanent establishment of a non-resident in India) in
such manner as may be prescribed, and such shares were transferred from the original fund, or from its wholly
owned special purpose vehicle, to the resultant fund in relocation, and where capital gains on such shares were not
chargeable to tax if that relocation had not taken place.
Income of Trade Union [Sec. 10(24)]
Any income chargeable under the heads “Income from house property” and “ Income from other sources” of -
a. a registered union within the meaning of the Indian Trade Unions Act, 1926, formed primarily for the purpose
of regulating the relations between workmen and employers or between workmen and workmen.
b. an association of registered unions
Income of specified Provident Funds, etc. (e.g. RPF, Superannuation fund, Approved gratuity fund) [Sec.
10(25)]
Income of Employees’ State Insurance Fund [Sec. 10(25A)]
Income of Scheduled Tribe [Sec. 10(26)]
Following income of member of a Scheduled Tribe is exempt –
a. from any source in specified areas or States; or
b. by way of dividend or interest on any securities.
– provided he resides in specified area or States.
Income of Sikkimese [Sec. 10(26AAA)]
Following income of an individual, being a Sikkimese, is exempt:
i. from any source in the State of Sikkim; or
ii. by way of dividend or interest on securities:
Note: The exemption is not available to a Sikkimese woman who, on or after 1/4/2008, marries an individual who
is not a Sikkimese.
Income of an Agricultural produce Market Committee [Sec. 10(26AAB)]
Income of an agricultural produce market committee or board constituted under any law for the time being in force
for the purpose of regulating the marketing of agricultural produce is exempt.

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Income of Corporation for promoting the Interests of the Members of the Scheduled Castes or the Scheduled
Tribe or Backward Classes [Sec. 10(26B)]
Income of Corporation for promoting Interest of Members of a Minority Community [Sec. 10(26BB)]
Income of Corporation for the Welfare and Economic Upliftment of Ex-servicemen [Sec. 10(26BBB)]
Income of a Co-operative Society for promoting the Interests of the Members of Scheduled Castes or
Scheduled Tribes [Sec. 10(27)]
Income of specified Boards [Sec. 10(29A)]
Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board; The Tobacco Board; The
Marine Products Export Development Authority; The Coir Board; The Agricultural and Processed Food Products
Export Development Authority and The Spices Board.
Subsidy received from Tea Board [Sec. 10(30)]
Any subsidy received from or through the Tea Board under any scheme for replantation or replacement of tea
bushes or for rejuvenation or consolidation of areas used for cultivation of tea as the Central Government may
specify, is exempt
Subsidy received from other Board [Sec. 10(31)]
Any subsidy received from or through the concerned Board (like Coffee Boards, Rubber Board, etc.) under any
such scheme for replantation or replacement of rubber plants, coffee plants, cardamom plants or plants for the
growing of such other commodity or for rejuvenation or consolidation of areas used for cultivation of rubber,
coffee, cardamom or such other specified commodity is exempt.
Income of Minor [Sec. 10(32)]
Income up to ₹ 1,500 is exempt in respect of each minor child whose income is clubbed u/s 64(1A).
Income on Transfer of Units of US 64 [Sec. 10(33)]
Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 where such transfer
takes place on or after the 1st day of April, 2002.
Income of Shareholder on Buy-back of Shares [Sec. 10(34A)]
Any income arising to an assessee, being a shareholder, on account of buy back of shares by the company, which
pay additional income-tax u/s 115QA.
However, the exemption is not available if buy-back of shares by a company has been made on or after 01-10-2024.
Capital Gain on compulsory Acquisition of Urban Land [Sec. 10(37)]
Refer Chapter Capital Gains
Capital Gain on transfer under Land Pooling Scheme for Andhra Pradesh [Sec. 10(37A)]
Refer Chapter Capital Gains
Specified Income, Arising from any International Sporting Event [Sec. 10(39)]
Any specified income, arising from any international sporting event held in India, to the person(s) notified by the
Central Government in Official Gazette, if such international sporting event –
a) is approved by the International body regulating the international sport relating to such event;
b) has participation by more than 2 countries;
c) is notified by the Central Government in the Official Gazette for the purpose of this clause.
Note: For the purpose of this clause “the specified income” means the income, of the nature and to the extent,
arising from the international sporting event, which the Central Government may notify in this behalf.
Reconstruction or Revival of Power Generation Subsidiary Company [Sec. 10(40)]
Any income of any subsidiary company by way of grant or otherwise received from an Indian company, being its

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holding company engaged in the business of generation, transmission or distribution of power, if such receipts is
for the settlement of dues in connection with reconstruction or revival of an existence business of power generation.
Note: The above clause is applicable if reconstruction or revival of any existing business of power generation is by
way of transfer of such business to the Indian company notified u/s 80-IA (4)(v)(a)
Income of a Non-profit Body or Authority specified by the Central Government [Sec. 10(42)]
Any specified income arising to a body or authority which -
 has been established or constituted or appointed under a treaty or an agreement enterted into by the Central
Government with tow or more countries or a convention signed by the Central Government;
 is established or constituted or appointed not for the purpose of profit;
 is notified by the Central Government.
Reverse Mortgage [Sec. 10(43)]
Any amount received by an individual as a loan, either in lump sum or in instalment, in a transaction of reverse
mortgage is exempt.
New Pension Trust [Sec. 10(44)]
Any income received by any person for, or on behalf of, the New Pension System Trust is exempt
Specified Income of notified body or authority or Board or Trust or Commission [Sec. 10(46)]]
Any specified income arising to a body or authority or Board or Trust or Commission (by whatever name called)
other than those covered u/s 10(46A), or a class thereof, which —
a) has been established or constituted by or under a Central, State or Provincial Act, or constituted by the Central
Government or a State Government, with the object of regulating or administering any activity for the benefit
of the general public;
b) is not engaged in any commercial activity; and
c) is notified by the Central Government in the Official Gazette
Income of Development Authorities [Sec. 10(46A)]
Any income arising to a body or authority or Board or Trust or Commission, not being a company, which—
a. has been established or constituted by or under a Central Act or State Act with one or more of the following
purposes, namely:--
i. dealing with and satisfying the need for housing accommodation;
ii. planning, development or improvement of cities, towns and villages;
iii. regulating, or regulating and developing, any activity for the benefit of the general public; or
iv. regulating any matter, for the benefit of the general public, arising out of the object for which it has been
created; and
b. is notified by the Central Government;
Credit Guarantee Fund [Sec. 10(46B)]
Any income accruing or arising to,—
i. National Credit Guarantee Trustee Company Limited, being a company established and wholly financed by the
Central Government for the purposes of operating credit guarantee funds established and wholly financed by
the Central Government; or
ii. a credit guarantee fund established and wholly financed by the Central Government and managed by the
National Credit Guarantee Trustee Company Limited; or

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iii. Credit Guarantee Fund Trust for Micro and Small Enterprises, being a trust created by the Government of India
and the Small Industries Development Bank of India established u/s 3(1) of the Small Industries Development
Bank of India Act, 1989
Infrastructure Debt Fund [Sec. 10(47)]
Any income of notified infrastructure debt fund is exempt.
Import of Crude Oil [Sec. 10(48)]
Any income received in India in Indian currency by a foreign company on account of sale of crude oil or other
notified goods or service to any person in India provided:
a. receipt of such income in India by the foreign company is pursuant to an agreement or an arrangement entered
into by the Central Government or approved by the Central Government;
b. having regard to the national interest, the foreign company and the agreement or arrangement are notified by
the Central Government in this behalf; and
c. the foreign company is not engaged in any activity, other than receipt of such income, in India.
Storage of Crude Oil [Sec. 10(48A)]
Any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and
sale of crude oil therefrom to any person resident in India provided:
i. the storage and sale by the foreign company is pursuant to an agreement or an arrangement entered into by the
Central Government or approved by the Central Government; and
ii. having regard to the national interest, the foreign company and the agreement or arrangement are notified by
the Central Government in this behalf.
Sale of leftover stock of crude oil [Sec. 10(48B)]
Any income accruing or arising to a foreign company on account of sale of leftover stock of crude oil, if any, from
the facility in India after the expiry of the agreement or the arrangement referred to sec. 10(48A) or on termination
of the said agreement or the arrangement, in accordance with the terms mentioned therein, as the case may be.
Income of Indian Strategic Petroleum Reserves Limited [Sec. 10(48C)]
Any income accruing or arising to the Indian Strategic Petroleum Reserves Ltd., being a wholly owned subsidiary
of the Oil Industry Development Board under the Ministry of Petroleum and Natural Gas, as a result of arrangement
for replenishment of crude oil stored in its storage facility in pursuance of directions of the Central Government in
this behalf is exempt.
However, nothing contained in this clause shall apply to an arrangement, if the crude oil is not replenished in the
storage facility within 3 years from the end of the financial year in which the crude oil was removed from the
storage facility for the first time.
Income of certain institutions [Sec. 10(48D)/(48E)]
• Any income accruing or arising to an institution established for financing the infrastructure and development,
set up under an Act of Parliament and notified by the Central Government for the purposes of this clause, for
a period of 10 consecutive assessment years beginning from the assessment year relevant to the previous year
in which such institution is set up [Sec. 10(48D)]
• Any income accruing or arising to a developmental financing institution, licensed by the Reserve Bank of India
under an Act of the Parliament referred to in sec. 10(48D) and notified by the Central Government for this
purposes, for a period of 5 consecutive assessment years beginning from the assessment year relevant to the
previous year in which the developmental financing institution is set up
However, the Central Government may, by issuing notification, extend the period of exemption for a further period,
not exceeding 5 more consecutive assessment years, subject to fulfilment of such conditions as may be specified
in the said notification;

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Expenditure related to Exempted Income [Sec. 14A]

For the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred
by the assessee in relation to income, which does not form part of the total income under this Act. Where the AO is
not satisfied with the correctness of the claim of such expenditure by assessee, he can determine the disallowable
expenditure in accordance with the method prescribed by the CBDT.
 The provisions of this section shall be applicable even in a case where the income, not forming part of the total
income, has not accrued or arisen or has not been received during the previous year relevant to an assessment
year and the expenditure has been incurred during the said previous year in relation to such income not forming
part of the total income.
Special Provision in respect of Newly established Units in SEZ [Sec. 10AA]
Not Available under default tax regime*
Applicable to: All assessee
Conditions to be satisfied
1. The assessee is an entrepreneur as defined in Sec.2(j) of SEZ Act, 2005 i.e., a person who has been granted a
letter of approval by the Development Commissioner u/s 15(9) of the said Act.
2. The undertaking has begun or begins to manufacture or produce articles or things or provide services on or
after 01/04/2005 but not after 31/03/2020 in any SEZ.
However, in case where letter of approval, required to be issued in accordance with the provisions of the SEZ
Act, 2005, has been issued on or before 31-03-2020 and the manufacture or production of articles or things
or providing services has not begun on or before 31-03-2020 then, the date for manufacture or production of
articles or things or providing services has been extended to 31-03-2021 or such other date as notified by the
Central Government.
3. New Business: Business should not be formed by splitting up or reconstruction of an existing business.
Exception:
However, this condition is not applicable when conditions given u/s 33B are satisfied, which are as follows -
a) The business of an industrial undertaking carried on in India is discontinued in any previous year by
reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by the
assessee being used for business purpose.
b) Such damage was caused due to -
i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
ii) riot or civil disturbance; or
iii) accidental fire or explosion; or
iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of
war),
c) Such business is re-established, reconstructed or revived by the assessee at any time before the expiry of
3 years from the end of previous year in which such damage was caused.
4. New Plant and Machinery: Such undertaking should not be formed by transfer of machinery or plant
previously used for any purpose.

*
In case of companies and co-operative societies, deduction would not be available if they opt for the special provisions u/s 115BAA/115BAB
and section 115BAD/115BAE, respectively.

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Exception:
a) A plant or machinery is deemed as a new asset if the following conditions are satisfied -
i) Such plant or machinery is imported into India;
ii) Depreciation on such asset has not been allowed under this Act to any person; and
iii) The assessee was the first user of such asset in India.
b) Where the total value of old plant and machinery transferred to the new business does not exceed 20% of
total value of plant and machinery used in such business, then this condition is deemed to be satisfied.
Taxpoint: Usage of old plant and machinery upto 20% of total value of plant and machinery is allowed.
5. A report of a chartered accountant in specified Form must be uploaded one month prior to the due date of filing
return of income.
6. Return of income is required to be furnished within due date specified u/s 139(1) and such deduction should be
claimed in the return of income.
Quantum of Deduction

Period Deduction
For first 5 years from the Profits of the business of the undertaking * Export turnover
commencement of operation Total turnover of the business carried on by the undertaking
50% of [Profits of the business of the undertaking * Export turnover]
For next 5 years
Total turnover of the business carried on by the undertaking
For next 5 years 50% of [Profits of the business of the undertaking * Export turnover]
Total turnover of the business carried on by the undertaking
Conditions: Such profit must be credited in reserve account called “SEZ Re-
investment Allowance Reserve A/c”.
Utilisation of such Reserve:
• Such reserve shall be utilised for the purposes of acquiring new machinery
or plant, which is first put to use before the expiry of a period of next 3 years
following the previous year in which the reserve was created.
• Until the acquisition of new machinery or plant, such reserve can be utilised
for any purpose of the business of the undertaking other than for distribution
by way of dividends or profits or for remittance outside India as profits or
for the creation of any asset outside India.
• The prescribed particulars in the specified Form have been furnished by
the assessee in respect of new machinery or plant along with the return of
income for the assessment year relevant to the previous year in which such
plant or machinery was first put to use.
Misutilisation of Reserve: Where any amount credited to such reserve -
a) Has been misutilised; or
b) Has not been utilised before the expiry of the specified period,
– then such amount shall be deemed to be the taxable profits of the previous
year in which the amount was so misutilised or after the expiry of 3
years, as the case may be.

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Notes:
a) Export turnover means -
It means the consideration in respect of export by the undertaking, being the Unit of articles or things or
services received in or brought into, India by the assessee in convertible foreign exchange, within a period of 6
months from the end of the previous year or, within such further period as the competent authority may allow
in this behalf.
But turnover does not include:
1. Freight, telecommunication charges and insurance attributable to the delivery of the articles or things
outside India;
2. Expenses incurred in foreign exchange in providing technical services outside India.
The export proceeds from sale of goods or provision of services shall be deemed to have been received in India
where such export turnover is credited to a separate account maintained for that purpose by the assessee with
any bank outside India with the approval of the Reserve Bank of India.
b) Export means taking goods or providing services out of India from a SEZ by land, sea, air, or by any other
mode, whether physical or otherwise.
c) Profits and gains derived from on-site development of computer software (including services for development
of software) outside India shall be deemed to be profits and gains derived from the export of computer software
outside India.
d) Business loss or loss under the head ‘Capital Gains’ relates to such unit shall be allowed to be carried forward.
e) The deduction shall be allowed from the total income of the assessee, computed before giving effect to the
provisions of this section and the deduction under this section shall not exceed such total income of the
assessee.
f) Power of Assessing Officer to re-compute profit – In the following cases, Assessing Officer may recompute
profit of the undertaking –

Case 1: Transaction between two undertakings of the same

Case 2: Transaction between two assessee
assessee
Conditions
a. Assessee has entered into business
a. Assessee carries on at least two undertakings
transactions with any other person
b. Out of such undertakings at least one is eligible for exemption b. Business between the assessee carrying
u/s 10A and at least one is not eligible for exemption u/s 10A on the eligible business and any other
person is so arranged that the business
c. Goods are transferred from eligible undertaking to any non
transacted between them produces to the
eligible undertaking or vice versa
assessee more than the ordinary profits,
d. The consideration for such transfer does not correspond to the which might be expected to arise in such
market value of such goods as on the date of transfer. eligible business.
Treatment
The Assessing Officer shall, in computing
Profits & gains of eligible business shall be recomputed by the AO, the profits and gains of such eligible
as if the transfer, in either case, had been made at the market value business, take the amount of profits as
of such goods as on that date. may reasonably be deemed to have been
derived therefrom.

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Inter-unit transfer (Sec.80A): Where -

a. Assessee carries on at least two units
b. Out of such units at least one is eligible for deduction and at least one is not eligible for exemption
c. Goods or services are transferred from eligible unit to any non eligible unit or vice versa
d. The consideration for such transfer does not correspond to the market value of such goods as on the date of
transfer
e. then, deduction shall be computed as if the transfer, in either case, had been made at the market value$ of such
goods or services as on that date.
f. $
Market value in relation to any goods or services

Case Market value means

Sold or The price that such goods or services would fetch if these were sold by the unit in the open
supplied market, subject to statutory or regulatory restrictions, if any
The price that such goods or services would cost if these were acquired by the unit from
Acquired
the open market, subject to statutory or regulatory restrictions, if any.
g) Consequences of Amalgamation or Demerger – Where any undertaking is transferred by an Indian company
to another Indian company in a scheme of amalgamation or demerger -
• Amalgamating or the demerged company shall not be eligible for deduction under this section from the
previous year in which the amalgamation or the demerger takes place; and
• Amalgamated or the resulting company shall be entitled to deduction under this section from the previous
year in which the amalgamation or the demerger takes place in the same manner if the amalgamation or
demerger had not taken place.
h) Conversion of FTZ into SEZ – Where an undertaking initially located in any free trade zone or export
processing zone is subsequently located in a special economic zone by reason of conversion (i.e. such free
trade zone or export processing zone into a special economic zone), the period of 10 consecutive assessment
years shall be reckoned from the assessment year relevant to the previous year in which the undertaking begins
to manufacture or produce such articles or things or computer software in such free trade zone or export
processing zone.
i) Double deduction is not permissible.
j) Where a deduction under this section is claimed and allowed in respect of profits of any of the specified
business, referred to in sec. 35AD(8)(c), for any assessment year, no deduction shall be allowed under the
provisions of section 35AD in relation to such specified business for the same or any other assessment year.

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Exercise
Multiple Choice Questions:

Choose the correct alternative

1. Financial Year 2024-25 shall be considered as

a. Assessment Year for the P.Y. 2023-24 and previous year for the A.Y. 2024-25
b. Assessment Year for the P.Y. 2023-24 and previous year for the A.Y. 2025-26
c. Assessment Year for the previous year 2024-25
d. Previous year for the assessment year 2024-25
2. For the purpose of levying tax on income other than agricultural income, Union List contained entry
a. 82
b. 92C
c. 92D
d. None of the Above
3. Following is not a head of income:
a. Income from House Property
b. Salaries
c. Income from Interest on securities
d. None of the Above
4. If total income of a person is ₹ 2,67,888.34, it shall be rounded off to:
a. ₹ 2,67,888/-
b. ₹ 2,67,890/-
c. ₹ 2,67,880/-
d. None of the Above
5. Income tax is a:
a. Indirect Tax
b. Entertainment Tax
c. Direct Tax
d. None of the Above
6. Mr. X, partner of M/s XYZ, is assessable as
a. Firm
b. HUF
c. An Individual
d. None of the Above

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7. A Hindu Undivided family is said to be resident in India if

a. The family has a house in India where some of its members reside
b. The member of such HUF is in India during the previous year
c. Control and management of its affairs wholly or partly situated in India
d. The Karta has been resident in India in at list 9 out of 10 previous years preceding the relevant previous
year
8. An individual is said to be resident in India if
a. He has a house in India
b. He is in India in the previous year for a period of 182 days or more
c. He is in India for a period of 30 days or more during the previous year and for 365 or more days during 4
previous years immediately preceding the relevant previous year
d. His parents are Indian citizen.
9. An Indian citizen leaving India during the previous year for employment purpose is said to be resident if
a. He has a house in India
b. He is in India in the previous year for a period of 182 days or more
c. He is in India for a period of 60 days or more during the previous year and for 365 or more days during 4
previous years immediately preceding the relevant previous year
d. His parents are Indian citizen.
10. An individual, being foreign national, came to India first time during the previous year 2024-25 on 01-03-2025
for 200 days, his residential status for the previous year 2024-25 is.
a. Non-resident
b. Resident but not ordinarily resident in India
c. Resident and ordinarily resident in India
d. Resident in India
11. Following income of a resident and ordinarily resident is taxable in India, that is
a. Bank interest from State Bank of India, Delhi
b. Bank interest from Bank of America, New York Branch
c. Rental income from house property located in London
d. All of the above
12. Which of the following is an agriculture income?
a. Dividend paid by a company out of its agriculture income.
b. Share of Profit of a Partner from a firm engaged in an agriculture operation
c. Income from supply of water by a assessee from a tank in its agriculture land.
d. Interest received by a money lender in the form of agricultural produce.

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13. Which of the following incomes received by an assessee are exempt under section 10 of the Income Tax Act?
a. Agriculture Income
b. Salary of a partner from a firm
c. Salary received by a member of a ship’s crew.
d. All of (a), (b) and (c) above
14. In case of an individual or HUF, agricultural income is
a. Exempted
b. Exempted but included in the total income for the rate purpose
c. Fully taxable provided it is earned from India
d. Taxable at flat rate of 10%
15. In case of an assessee engaged in the business of manufacturing of tea, his agricultural income is:
a. 60% of total receipt of the business
b. 60% of income of the business
c. Nil
d. Total business income
16. Remuneration to partner of a firm engaged in the business of growing and manufacturing rubber in India is:
a. Partly agricultural income and partly non-agricultural income
b. Agricultural income
c. Non-Agricultural income
d. None of the above
17. Following activity shall be considered as agricultural activity:
a. Subsequent operation on the agricultural land
b. Basic operation on the agricultural land
c. Basic and subsequent operation on the agricultural land
d. Both (b) and (c)

Answer:

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
b a c b c c c b b a d b a b c a d

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Fill in the blanks:

1. Receipts from TV serial shooting in farm house _________ agricultural income.
2. Any payment received from an account opened under Sukanya Samriddhi Account Rules, 2014 is ___________.
3. A company incorporated outside India is said to be resident in India, if place of effective management is
_____________in India.
4. A foreign company is liable to surcharge at 5%, if the total income exceeds _________.
5. A partnership firm will be treated as non-resident, only if the ____________ of the control and management of
its affairs is situate outside India.
6. Amount received under Keyman Insurance Policy including bonus thereon is ____________ (income/
exempted income) under the Income-tax Act, 1961.
7. A _______ means a company which is not a domestic company.

Answer:

1 is non 2 exempt
3 situated / located 4 ₹ 10 crore
5 Whole 6 Income
7 Foreign company

State whether the following statements are true or false:

1. Where a person does basic operations on lands and later sells the saplings grown by him in a nursery owned by
him, the same will be agricultural income. If the basic operations are not done by the assessee and the saplings
are sold in his nursery, the same will still be regarded as agricultural income.
2. Profit from growing and manufacturing tea in India is fully exempted from income tax under section 10(1) of
the Income-tax Act.
3. Prize given to Suresh by the Government of Madhya Pradesh on account of higher crop yield is an agricultural
income.
Answer:

1 2 3
True False True

Short Essay Type:

1. Who is termed as person?
2. What do you mean by the previous year?
3. What do you mean by the assessment year?

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 Comprehensive Numerical Problems

Problem 1:

Mr. X is an Indian Citizen. He went to Japan on 1.1.2022 for employment in a Japanese Company for 3 years. On
1.10.2023, he came to India for a visit of 45 days. After the completion of the tenure of his service, he came back
to India permanently from Japan on 03.01.2025. Determine his residential status for the A.Y. 2025-26.
[Hints: Resident and Ordinarily Resident]
Problem 2:
Ms. Rajnita Bose is 60 years old and furnished the following information for the previous year 2024–25. Compute
her taxable income for the Assessment year 2025–26.
- Income from growing and manufacturing Tea ₹ 1,20,000.
- Income from growing and manufacturing Rubber ₹ 2,00,000.
[Hints: ₹ 1,18,000]

Case Let - Solved

Arun, a citizen of India residing in Germany for the past 10 years, came back to India for the first time during
January, 2025. During the financial year 2024-25, he received the following income:
- He works in a company in Germany and earns a salary of Euro 1000 p.m.
- He owns agricultural land near Bangalore and a residential house in Delhi, which has been let out. While the
agricultural income is being remitted to his account in Germany every year, the rental income of ₹ 84000 is
being deposited in his bank account at Delhi; and
- He also owns shares in various Indian companies and receives dividend every year, which has been regularly
deposited in his bank account at Delhi. During the year ₹ 22,000 has been credited on account of dividend
He seeks your advice in relation to the following:
a. What will be his residential status for the previous year 2024-25?
b. What will be his taxable income
Solution:
a. During the relevant previous year, Mr. Arun neither satisfies sec.6(1)(a) (i.e. not resided for 182 days in India)
nor satisfies sec.6(1)(c) (i.e. not resided in India for 365 days or more during 4 years immediately preceding
the previous year), hence he is non resident.
b. Computation of income of Arun is as follow:
Particulars Working Amount
Salary As neither earned nor received in India Nil
Agricultural income Exempt u/s 10(1) Nil
Income from let out Indian house property As reduced by standard deduction @ 30% 58,800
Dividend 22,000
Total Income 80,800

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Case Let - Unsolved

Parikshit (aged 25 years) is engaged in growing and manufacturing tea in India. His profit for the previous year
2024-25 amounts to ₹ 10,00,000 which includes profit of ₹ 2,00,000 from sale of green leaves plucked in his own
garden. He has no other income during the year.
On the basis of aforesaid information, you are requested to answer the following:
a. What would be his agricultural income?
b. What would be his tax liability for the relevant assessment year
[Hints: (a) ₹ 6,80,000; (b) ₹ 1,560]

� References:
[Link]
[Link]
[Link]

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 Heads of Income 2
This Module includes

2.1 Salaries

2.2 Income from House Property

2.3 Profits and Gains of Business or Profession

2.4 Capital Gains

2.5 Income from Other Sources

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

Module Learning Objectives:

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

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

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

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

� Understand the various compliances like tax audit, etc.

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

2.1.1 Basic Elements of Salary

� Payer and payee must have Employer
Examples - Taxable as Salary
Payment Taxable
employer and employee (or Employee in such under
 Salary received by Managing Director of
relationship the head a Company
Master & Servant) relationship; Capacity
"Salaries"  Salary Received by Minister of Govt
and If either of the comditions is not satisfied then receipt Examples - Not Taxable as Salary
is not taxable under the head "Salaries" but taxable  Salary received by MP or MLA
� Payment must have been made by under the head "Income from Other Sources" or  Seating fee received by Director
the employer in such capacity. "Profits and Gains of Business or Profession".  Salary paid to partner

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

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Direct Taxation

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

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

2.1.2 Section-wise Scheme

Salaries

Sec. 15 Sec. 16 Sec. 17

Charging Definitions
Deductions
Section

Due or Entertainment
Standard Professional Profit in lieu
Receipt, Allowance to Salary [Sec. Perquisites
Deduction Tax paid u/s of salary [Sec.
whichever is Govt. Employee 17(1)] [Sec. 17(2)]
u/s 16(ia) 16(iii) 17(3)]
earlier u/s 16(ii)

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

As per sec. 17(1) of the Income-tax Act, 1961, salary includes the following :
a) Wages;

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b) Any annuity or pension;

c) Any gratuity;
d) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages;
e) Any advance of salary;
f) Any payment received in respect of any period of leave not availed of by the assessee;
g) The portion of the annual accretion in any previous year to the balance at the credit of an employee, participating
in recognised provident fund, to the extent it is taxable;
h) Transferred balance in a Recognised Provident Fund to the extent it is taxable.
i) Contribution made by the employer in the previous year, to the account of an employee under a pension
scheme referred to in sec. 80CCD [National Pension Scheme and Atal Pension Yojana]
j) Contribution made by the Central Government in the previous year, to the Agniveer Corpus Fund account of
an individual enrolled in the Agnipath Scheme referred to in sec. 80CCH.

2.1.4 General Notes

� Salary & Wages are identical in the Income-tax Act
� Voluntary Payments: The Act does not make any difference between voluntary and contractual payment.
Both are taxable as salary.
� Remuneration for Extra Work: Where an employee gets extra payment from his employer (in such capacity)
for work performed outside the duties of his office and thus, such payment shall be taxable as salary.
� Salary from more than one source: If an individual receives salary from more than one employer during the
same previous year, salary from each employer shall be accumulated and taxable under the head “Salaries”.
� Salary from former, present or prospective employer is chargeable to tax under the head “Salaries”. E.g.
Pension from a former employer and advance salary from prospective employer shall be taxable under the head
“Salaries”.
� Salary paid tax-free: If tax on salary is paid by the employer, then it is termed as ‘salary paid tax-free’. In such
case, to compute the income under the head ‘Salaries’ the amount of tax paid by the employer (on behalf of
employee) has to be added to the amount received by the employee. However, tax paid by the employer should
be subtracted from tax liability of the employee.
Further, as per sec. 10(10CC), the income-tax paid by the employer on non-monetary perquisites on behalf of
the employee would be exempt in the hands of the employee
� Foregoing of salary: Once salary has been earned by an employee, its subsequent waiver does not make it
exempt from tax liability. Such waiver shall be treated as application of the income.
Note: However, where an employee opts to surrender his salary to the Central Government u/s 2 of Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered shall not be taxable.
2.1.5 Basis of Charge [Sec. 15]
Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. Hence, taxable salary
includes:
a) Advance salary (on ‘receipt’ basis): Salary paid in advance is taxable under the head ‘Salaries’ in the year of
receipt.
Note: Such advance salary shall not be included again in the total income when the salary becomes due.

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Direct Taxation

b) Outstanding salary (on ‘due’ basis): Salary falling due is taxable under the head ‘Salaries’ in the year in
which it falls due.
Note: Such due salary shall not be included again in the total income when it is received.
c) Arrear salary: Any increment in salary with retrospective effect which have not been taxed in the past, such
arrears will be taxed in the year in which it is allowed. Arrear salary are taxable on receipt basis
Provision Illustrated:
Mr. X joined A Ltd. for a salary of ` 25,000 p.m. on 1/4/2022. In the year 2023-24, his increment decision was
pending. On 1/12/2024, his increment was finalized as for 2023-24: ` 5,000 p.m. and for 2024-25 ` 7,500 p.m.
Such arrear salary received on 5/12/2024. Find Gross taxable salary. Further, salary of April 2025 has also been
received in advance on 15/03/2025.
Solution :
Gross taxable salary for the previous year 2024-25 shall be calculated as under :

Particulars Workings Amount

Salary for 2024-25 (25,000 + 5,000 + 7,500) x 12 4,50,000
Arrear salary for 2023-24 (5,000) x 12 60,000
Advance salary for April 2025 (25,000 + 5,000 + 7,500) 37,500
Gross total salary 5,47,500
Taxpoint : Method of accounting followed by the employee is irrelevant.
Salary due vs Salary accrued
Salary due is different from salary accrued.
Example: Mr. X joined an organisation for ` 40,000 p.m. on 1st Dec. 2024, in which salary falls due on 1st day of
every next month. In such case taxable salary for the previous year 2024-25 shall be ` 30,000 calculated as under:

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

December 2024 40,000 1/1/2025 2024-25
January 2025 40,000 1/2/2025 2024-25
February 2025 40,000 1/3/2025 2024-25
March 2025 40,000 1/4/2025 2025-26
Advance salary vs Advance against salary
‘Advance salary’ is taxable u/s 17(1)(e) whereas ‘Advance against salary’ is treated as loan hence, not taxable
under the head “Salaries”.
Place of accrual of salary
Salary which is received in India or earned in India shall be taxable in hands of all assessee whether resident or non
resident in India. Salary is deemed to be earned in India provided -
(a) The service is rendered in India;
(b) The rest period or leave period, which is preceded and succeeded by the service rendered in India and forms
part of the service contract of employment.

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Exceptions: Salary paid to a Government employee, being a citizen of India, is deemed to accrue in India,
irrespective of place of work [Sec. 9(1)(iii)].

Taxpoint: Salary is earned at the place where service is rendered.

Employee Employer Place of service Salary received Taxable

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

Computation of Salary, at a glance

Computation of income under the head “Salaries” of ….. for the A.Y. ……

Particulars Details Amount

Basic Salary *****
Fees *****
Commission *****
Bonus *****
Gratuity *****
Leave Encashment *****
Pension *****
Retrenchment Compensation *****
Compensation received under Voluntary Retirement Scheme *****
Allowances:
Dearness Allowance (DA) /Dearness Pay (DP) *****
House Rent Allowance *****
Children Education Allowance *****
Children Hostel Allowance *****
Entertainment Allowance *****
Medical Allowance *****
Conveyance Allowance *****
City Compensatory Allowance *****
Uniform Allowance *****
Professional Development Allowance *****
Transport Allowance *****
Other Allowances ***** *****
Perquisites u/s 17(2)
Accommodation *****
Any Obligation of Employee paid by Employer *****

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Direct Taxation

Particulars Details Amount

Shares and securities issued under ESOP *****
Gas, Electricity & Water *****
Medical Facility *****
Other fringe benefits ***** *****
Leave Travel Concession *****
Employer’s contribution to Provident Fund *****
Interest on Recognised Provident Fund *****
Any other item *****
Gross Salary *****
Less: Deduction u/s 16
(ia) Standard Deduction ****
(ii) Entertainment Allowance [Available only if assessee opts for old regime] ****
(iii) Tax on employment/Professional tax [Available only if assessee opts for old regime] **** ****
Taxable Salary *****

� Basic Salary : It is the sum paid by employer

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

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� Commission : It may be as a percentage of turnover or as a percentage of profit. In either case, it is taxable.

� Bonus: Bonus may be contractual or voluntary. In either case, it is fully taxable.
(i) Contractual bonus is taxable as bonus whereas voluntary bonus is taxable as perquisite.
(ii) It is taxable in the year of receipt.
(iii) If arrear bonus is received, assessee can claim relief u/s 89(1).

Retirement Benefits

Retirement
Benefits

Leave
Gratuity Pension VRS Other
Encashment

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

During continuation
of service (Case A)
By Govt. Employee
(Case B) Covered by the
On termination of
Gratuity Payment of Gratuity
service
Act (Case C)
By Other Employee
Received after death Not Covered by the
of employee Payment of Gratuity
(Case E) Act (Case D)

Case A: Gratuity received during continuation of service

Gratuity received during continuation of service is fully taxable in the hands of all employees (whether Government
or non-Government employee).
Case B: Gratuity received at the time of termination of service by Government employee
Gratuity received at the time of termination of service by Government employee is fully exempt from tax u/s
10(10)(i).
Taxpoint: Government employee, here, includes employee of the Central or the State Government or local
authority but does not include employee of statutory corporation.

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Case C: Gratuity received at the time of termination of service by non–government (including foreign
government) employee, covered by the Payment of Gratuity Act
In such case, minimum of the following shall be exempted from tax u/s 10(10)(ii):
1. Actual Gratuity received;
2. ` 20,00,000; or
3. 15 working days salary for every completed year of service
[Arithmetically, 15 × Completed year of service × Salary p.m.]
26
Notes:
a) Completed year of service includes any fraction in excess of 6 months. (e.g. 7 years 9 months will be treated
as 8 years; 7 years 5 months will be treated as 7 years and 7 years 6 months will be treated as 7 years).
b) Salary here means Basic + DA, last drawn

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

Illustration 2 :
Ashok, an employee of ABC Ltd., receives ` 8,05,000 as gratuity under the Payment of Gratuity Act, 1972. He
retires on 10th September, 2024 after rendering service for 35 years and 7 months. The last drawn salary was `
32,700 per month. Calculate the amount of gratuity chargeable to tax.
Solution :
Computation of taxable gratuity of Mr. Ashok for the A.Y. 2025-26 :

Particulars Details Amount

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

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

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

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Notes:
a) While calculating completed year of service ignore any fraction of the year. (e.g. 7 years 9 months will be
treated as 7 years only)
b) Average Salary here means, Basic + DA# + Commission (being a fixed percentage on turnover) being last
10 months average salary, immediately preceding the month of retirement. (E.g. If an employee retires on
18/11/2024 then 10 months average salary shall be a period starting from Jan’ 2024 and ending on Oct’ 2024).
#
If DA is not forming a part of retirement benefit then the same shall not be included in salary for above
purpose. However, DA itself shall be fully taxable.

Illustration 3 :
Mr. Oldman retired from his job after 29 years 6 months and 15 days of service on 17/12/2024 and received
gratuity amounting ` 18,00,000. His salary at the time of retirement was basic ` 60,000 p.m., dearness allowance
` 10,200 p.m., House rent allowance ` 12,000, Commission on turnover 1%, Commission on profit ` 50,000. He
got an increment on 1/4/2024 of ` 5,000 p.m. in Basic. Turnover achieved by assessee ` 10,00,000 p.m. Calculate
his taxable gratuity if he is a —
a. Government employee
b. Non-Government employee, covered by the Payment of Gratuity Act;
c. Non-Government employee not covered by the Payment of Gratuity Act
Solution :
a) Government employee: Taxable amount: Nil as per section 10(10)(i).
b) Other cases:
Computation of taxable gratuity of Mr. Oldman for the A.Y. 2025-26

Case (b) Case (c)

Particulars
Details Amount Details Amount
Gratuity received 18,00,000 18,00,000
Less : Min. of the following is exempted u/s 10(10)
– Actual gratuity received 18,00,000 18,00,000
– Statutory Amount 20,00,000 20,00,000
15 × completed year of service × salary p.m. 12,15,000 12,15,000
–
26
[ 15 × 30 × 70,200]
26
– ½ × completed year of service × salary p.m. 11,48,400 11,48,400
[½ × 29 × 79,200]
Taxable Gratuity 5,85,000 6,51,600
Workings for case (b):
1. Completed year of service is 30 years.
2. Salary here means (Basic + Dearness Allowance) last drawn. i.e. (` 60,000 + ` 10,200) = ` 70,200

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Workings for case (c):

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

1 2 3 4 5 6 7 8 9 10
Particulars
Feb’24 Mar Apr May June July Aug Sept Oct Nov Total
Basic 55,000 55,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 5,90,000
D.A. 10,200 10,200 10,200 10,200 10,200 10,200 10,200 10,200 10,200 10,200 1,02,000
Commission 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 1,00,000
Total 7,92,000
Average salary = ` 7,92,000 / 10 months 79,200

Note :
1. Gratuity may be paid in the case of retirement, resignation, termination or death.
2. While claiming the statutory amount (i.e. ` 20,00,000) any amount earlier claimed as deduction u/s 10(10)
shall be reduced from ` 20,00,000.
Example: An assessee left a job in the year 2001-02 and claimed a deduction of ` 40,000 for gratuity in
that year. He joined another organisation, left the same in the year 2024-25, and received a gratuity of `
19,80,000. While calculating exemption for gratuity for the assessment year 2025-26, statutory amount of `
20,00,000 shall be reduced by earlier deduction claimed i.e. ` 40,000. Hence, statutory deduction limit for
the assessee in the A.Y. 2025-26 will be ` 19,60,000 only.
3. Where gratuity is received from more than one employer: Where gratuity is received from more than
one employer in the same previous year, the aggregate amount exempt from tax shall not exceed statutory
deduction.

Case E : Gratuity received after death of employee

The Act is silent on treatment of gratuity received after death of employee. However, on following grounds, it can
be concluded that gratuity received by a legal heir shall not be taxable in the hands of the recipient -
� A lump sum payment made gratuitously to widow or legal heir of employee, who dies while in service, by way
of compensation or otherwise is not taxable under the head “Salaries”. [Circular No.573, Dated 21.08.1990]
� Unutilised deposit under the capital gains deposit account scheme shall not be taxable in the hands of legal
heir. [Circular No.743 dated 6/5/1996]
� Legal representative is not liable for payment of tax on income that has not accrued to the deceased till his
death.
� Leave salary paid to the legal heir of deceased employee is not taxable as salary. [Circulars Letter No.
F.35/1/65-IT(B), dated 5/11/1965]. Further, leave salary by a legal heir of the Government employee who died
in harness is not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].
Taxpoint: If gratuity becomes due before the death of the assessee (no matter when and by whom received), it
shall be taxable in the hands of employee. Whereas if gratuity becomes due after the death of assessee, it shall not
be taxable (even in the hands of legal heir of the assessee).

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Illustration 4 :
Mrs. X is working with ABC Ltd. since last 20 years 9 months. Her salary structure is as under:
Basic ` 35,000 p.m. Dearness allowance ` 13,000 p.m.
On 15/12/2024, she died. State the treatment of gratuity in following cases:
Case 1: Mrs. X retired on 10/12/2024 & gratuity ` 8,00,000 received by her husband (legal heir) as on 18/12/2024.
Case 2: Husband of Mrs. X received gratuity on 18/12/2024 falling due after death of Mrs. X.

Mrs. X is covered by the Payment of Gratuity Act.

Solution :
In Case 1, Computation of taxable gratuity in hands of Mrs. X for the A.Y. 2025-26

Particulars Details Amount

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

c) 15 × completed year of service x salary p.m. [ 15 × 21 × ` 48,000] 5,81,538 5,81,538

26 26
Taxable Gratuity 2,18,462
In Case 2, Since gratuity falls due after the death of Mrs. X hence the same is not taxable in hands of Mrs. X. The
said gratuity is not taxable even in hands of husband of Mrs. X.

2.1.7 Leave Salary Encashment

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

During continuation of
service (Case A)
Govt. Employee
(Case B)
Leave Salary Encashment On termination of
service
Other Employee
(Case C)
Paid to legal heir
(Case D)

Case A : Leave salary received during continuation of service

Leave salary during continuation of service is fully taxable in the case of the Government employee as well as other
employees [Sec. 17(1)(va)].

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Case B: Leave salary received by Government employee on termination of service

At the time of termination of service, leave salary received by the Central or State Government employee is fully
exempted u/s 10(10AA)(i).
Taxpoint: Government employee here does not include employee of local authority or public sector undertaking
or foreign Government employee.
Case C: Leave salary received by non-Government employee on termination of service
At the time of termination of service, leave salary received by a non-Government employee (including employee
of foreign Government, local authority, public sector undertaking) is exempted to the minimum of the following
u/s 10(10AA)(ii):
a) Actual amount received as leave salary
b) ` 25,00,000/-
c) 10 × Average salary p.m.
d) To the maximum of 30 days (normally taken as 1 month) average salary1 for every completed year of service2,
subject to deduction for actual leave availed during the tenure of service.
Academically: [{(1 x completed year of service) – leave actually taken in terms of month} x average salary
p.m.]
1.
Average salary means Basic + DA# + Commission (as a fixed percentage on turnover) being last 10
months average salary ending on the date of retirement or superannuation. (e.g. if an employee retires on
18/11/2024 then 10 months average salary shall be a period starting from 19th Jan’ 2024 and ending on
18th Nov’ 2024).
# If DA is not forming a part of retirement benefit then the same shall not be included in salary for the
above purpose. However, DA itself shall be fully taxable.
2.
While calculating completed year of service, ignore any fraction of the year. E.g. 10 years 9 months shall
be taken as 10 years.
Notes :
a. Leave encashment received from more than one employer: Where leave encashment is received from more
than one employer in the same previous year, the aggregate amount exempt from tax shall not exceed the
statutory deduction i.e. ` 25,00,000.
b. Earlier deduction claimed for leave encashment: While claiming the statutory amount (i.e. ` 25,00,000) any
deduction claimed earlier as leave encashment shall be reduced from ` 25,00,000.
Illustration 5 :
a. Mr. Bhanu is working in Zebra Ltd. since last 25 years 9 months. The Company allows 2 months leave for
every completed year of service to its employees. During the job, he had availed 20 months leave. At the time
of retirement on 10/8/2024, he got ` 7,50,000 as leave encashment. As on that date, his basic salary was `
35,000 p.m., D.A. was ` 20,000 p.m., Commission was 5% on turnover + ` 2,000 p.m. (Fixed p.m.). Turnover
effected by the assessee during last 12 months (evenly) ` 50,00,000. Bhanu got an increment of ` 10,000 p.m.
from 1/1/2024 in basic and ` 5,000 p.m. in D.A. Compute his taxable leave encashment salary.
b) How shall your answer differ if the assessee had taken 2 months leave instead of 20 months, during his
continuation of job.

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Solution :
Working :
1. Completed year of service: 25 years 9 months = 25 years
2. As per sec. 3(35) of the General Clauses Act, 1897, month shall mean a month reckoned according to the
British calendar e.g. the period commencing from 7th September & end on 6th October shall be a month.
3. Salary here means Basic + Dearness Allowance + Commission on turnover (last 10 months average from the
date of retirement)
Oct’ Aug
Particu- 23 Jan’ 10
Nov Dec Feb Mar April May June July Total
lars (21 24 Days
days)
Basic 16,935 25,000 25,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 11,290 3,23,225
D.A. 10,161 15,000 15,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 6,452 1,86,613
Com- 50,00,000 × 5% × 10/12 2,08,333
mission
Total 7,18,171
Average salary i.e. ` 7,18,171 / 10 months 71,817
Monthly fixed commission is irrelevant. Commission as fixed percentage of turnover is to be considered.
Computation of taxable leave encashment salary of Mr. Bhanu for the A.Y.2025-26
Case (a) Case (b)
Particulars
Details Amount Details Amount
Leave encashment received 7,50,000 7,50,000
Less: Min. of the following is exempted u/s 10(10AA)(ii):
a) Actual amount received 7,50,000 7,50,000
b) Statutory Amount 25,00,000 25,00,000
c) 10 months x Av. Salary p.m. (10 × 71,817) 7,18,170 7,18,170
d) [{1×completed year of service -Leave taken}×salary p.m.]
^
[{1 × 25 – 20} × 71,817] #[{1 × 25 – 2} × ` 71,817] 3,59,085^ 3,59,085 16,51,791# 7,18,170
Taxable Leave Encashment 3,90,915 31,830
Illustration 6 :
Mr. Das retired on 31/3/2025. At the time of retirement, 18 months leave was lying to the credit of his account.
He received leave encashment equivalent to 18 months Basic salary ` 1,26,000. His employer allows him 1½
months leave for every completed year of service. During his tenure, he availed of 12 months leave. At the time of
retirement, he also gets D.A. ` 3,000. His last increment of ` 1,000 in basic was on 1/4/2024. Find taxable leave
encashment.
Solution :
Working :
1. Calculation of completed year of service: Employee has received 18 months leave encashment on termination
of service as well he had enjoyed leave of 12 months during his tenure. That means he had received a leave
benefit of 30 months. Since leave allowed by employer is 1½ months for every completed year of service, this
signifies that Mr. Das had completed 20 years (being 30/1½) of service.

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2. Salary here means, Basic + DA + Commission, being last 10 months average from the date of retirement.
There is no increment in last 10 months (last increment was on 1/4/2024) and there is no commission, hence
Average Salary = ` 7,000 (i.e. ` 1,26,000/18) + ` 3,000 = ` 10,000 p.m.

Computation of taxable leave encashment of Mr. Das for the A.Y. 2025-26 :

Particulars Details Amount

Leave Encashment received 1,26,000
Less: Minimum of the following is exempt u/s 10(10AA)(ii):
a) Actual amount received 1,26,000
b) Statutory Amount 25,00,000
c) 10 months × Av. Salary p.m. (10 × 10,000) 1,00,000
d) {1 × completed year of service - Leave taken} × Avg. salary p.m. 80,000 80,000
[{1 x 20 – 12} × ` 10,000]
Taxable Leave Encashment 46,000
Case D: Leave salary paid to the legal heir
Leave salary paid to the legal heir of deceased employee is not taxable. [Circulars Letter No. F.35/1/65-IT(B),
dated 5/11/1965]. Further, leave salary received by a legal heir of the Government employee who died in harness
is not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].
2.1.8 Pension [Sec. 10(10A)]
Pension means a periodical payment received by an employee after his retirement. On certain occasions, employer
allows to withdraw a lump sum amount as the present value of periodical pension. When pension is received
periodically by employee, it is known as Uncommuted pension. On the other hand, pension received in lump sum
is known as Commuted pension. Such lump sum amount is determined considering factors like the age and health
of the recipient, rate of interest, etc.
Treatment :

Uncommuted
Pension
Pension (Case A) Govt. Employee
(Case B) Assessee receives
Commuted Gratuity
Pension (Case C)
Other Employee
Assessee does not
receive Gratuity
(Case D)

Case A: Uncommuted pension

Uncommuted pension is fully taxable in the hands of all employees whether Government or Non –Government
employee.
Case B: Commuted pension received by a Government employee
Commuted pension received by a Government employee is fully exempt from tax u/s 10(10A)(i).

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Note: Government employee here includes employee of the Central or State Government, Local authority as well
as employee of Statutory corporation. Judges of the High Court and the Supreme Court are also entitled to the
exemption [Circular No.623 dated 6/1/1992]
Case C: Commuted pension received by an employee who also received gratuity [Sec. 10(10A)(ii)]
One third of total pension (which assessee is normally entitled for) commuted is exempt.
Taxpoint: It is immaterial whether the employee is covered by the Payment of Gratuity Act or not.
Case D: Commuted pension received by an employee who does not receive gratuity [Sec. 10(10A)(ii)]
One half of total pension (which assessee is normally entitled for) commuted is exempt.
Notes:
a) Pension received by a widow or legal heir of a deceased employee shall not be taxable as salary but taxable u/s
56 as income from other sources (further refer chapter “Income from other sources”.)
b) Where commuted pension is taxable, relief u/s 89 is available.
c) Pension received from United Nations Organisation is not taxable. Further, pension received by a widow of the
United Nations ex-officials from UN Joint Staff Pension Fund is also exempt.

Illustration 7 :
Mr. Amit has retired from his job on 31/3/2024. From 1/4/2024, he was entitled to a pension of ` 3,000 p.m. On
1/8/2024, he got 80% of his pension commuted and received ` 1,20,000. Compute taxable pension if he is:
Case a) Government employee; Case b) Non-Government employee & not receiving gratuity

Case c) Non-Government employee (receiving gratuity, but not covered by the Payment of Gratuity Act)
Solution :
Computation of taxable pension of Mr. Amit for the A.Y.2024-25:
Case a Case b Case c
Particulars
Details Amount Details Amount Details Amount
Uncommuted Pension
- 1/4/2024 to 31/7/2024 (` 3,000x4) 12,000 12,000 12,000
- 1/8/2024 to 31/3/2025 (` 600 x 8) 4,800 16,800 4,800 16,800 4,800 16,800
Commuted Pension 1,20,000 1,20,000 1,20,000
Fully exempted u/s 10(10A)(i) 1,20,000 Nil
Exempted u/s 10(10A)(ii)
75,000 45,000
(½ of ` 1,50,000#)
Exempted u/s 10(10A)(ii)
50,000 70,000
(1/3 of ` 1,50,000#)
Taxable Pension 16,800 61,800 86,800
#
Commuted Amount for 80% of pension = ` 1,20,000. Commuted amount for 100% of pension = ` 1,50,000

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2.1.9 Retrenchment Compensation

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

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

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

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

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

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

2.1.12 Salary received in lieu of notice period

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

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

Following receipts are taxable as profits in lieu of salary:
1. The amount of any compensation due to or received by an assessee from his employer or former employer at
or in connection with the (a) termination of his employment, (b) modification of the terms and conditions of
employment.
2. Any payment due to or received by an assessee from his employer or former employer except the following:
� Gratuity exempted u/s 10(10);
� House rent allowance exempted u/s 10(13A);
� Commuted pension exempted u/s 10(10A);
� Retrenchment compensation exempted u/s 10(10B);
� Payment from an approved Superannuation Fund u/s 10(13);
� Payment from statutory provident fund or public provident fund;
� Payment from recognised provident fund to the extent it is exempt u/s 10(12).

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3. Any payment from unrecognised provident fund or such other fund to the extent to which it does not consist
of contributions by the assessee or interest on such contributions.
4. Any sum received by the employee under the Keyman Insurance Policy including the sum allocated by way of
bonus on such policy.
5. Any amount due to or received by the employee (in lump sum or otherwise) prior to employment or after
cessation of employment.
2.1.14 Allowances
Allowance means fixed quantum of money given regularly in addition to salary to meet particular requirement. The
name of particular allowance may reveal the nature of requirement, e.g. House Rent Allowance, Tiffin Allowance,
Medical Allowance etc.
Allowances at a glance :
Taxability
Sec. Particulars
Old Regime New Regime
10(13A) House Rent Allowance Amount received by the employee No exemption
in excess of specified limits will
be taxable.
10(14) Special allowance or benefit, not being in the
(i) nature of a perquisite, specifically granted
to meet expenses wholly, necessarily and
exclusively incurred in the performance
of the duties of an office or employment of
profit. Following allowances are covered
Cat A i. Actual allowance received; or
a. Travel or Tour or Transfer* Allowance ii. Actual amount spent for the
b. Daily Allowance purpose, No Exemption
c. Conveyance Allowance - whichever is less would be
exempt
Cat B i. Actual allowance received;
d. Helper Allowance or
e. Uniform Allowance ii. Actual amount spent for the
f. Research or Training Allowance purpose,
- whichever is less would
be exempt
10(14) Special allowances granted to the assessee Amount received by the Partial exemption
(ii) either to meet his personal expenses at employee in excess of specified is available
the place where the duties of his office limits [specified under rule only in respect
or employment of profit are ordinarily 2BB(2)] will be taxable. of transport
performed by him or at the place where he Taxpoint: Deduction is available allowance to
ordinarily resides or to compensate him irrespective of actual expenditure employee who
for the increased cost of living E.g., City is blind / deaf
Compensatory Allowance, Tiffin Allowance, and dumb /
Medical Allowance, Servant Allowance, orthopaedically
Transport Allowance, etc. handicapped

* Allowance granted to meet the cost of travel on transfer includes any sum paid in connection with transfer, packing and transportation of
personal effects on such transfer.

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Tax treatment of various allowances are as follows

Following allowances are fully taxable:

Allowances Meaning
City Compensatory An allowance to meet personal expenses, which arise due to special circumstances,
Allowance or to compensate extra expenditure by reason of posting at a particular place.
Tiffin Allowance An allowance to meet the expenditure on tiffin, refreshment etc.
Medical Allowance An allowance to meet the expenditure on medical treatment etc.
Servant Allowance An allowance to meet the expenditure of servant for personal purpose.
Non-practicing Allowance given to professionals to compensate them for restriction on private
Allowance practice.
Warden or Proctor Allowances given to employees of educational institutions for working as warden of
Allowance the hostel or working as proctor in the institutions.
Deputation Allowance Allowances given to an employee, when he is sent on deputation for a temporary
period from his permanent place of service.
Entertainment Allowance It is an allowance to meet expenditure on entertainment, by whatever name called.
Government employee can claim deduction u/s 16(ii) discussed later in this chapter.

House rent allowance (HRA) [Sec. 10(13A) and rule 2A]

An allowance to meet the expenses in connection with the rent of the house, by whatever name called.
Tax Treatment: Minimum of the following is exempted from tax (Available only if assessee opts for old regime):
a. Actual HRA received.
b. An amount equal to 50% of salary1 (when house is situated in a metro city) or 40% of salary1 (when house is
situated in any other place) for the relevant period
c. The excess of rent paid over 10% of salary1. [Arithmetically, (Rent Paid – 10% of Salary)]
1.
Salary here means: Basic + D.A. (if it forms a part of retirement benefit) + Commission as a fixed % on turnover.
Notes :
a) Salary shall be determined on due basis for the period for which the employee occupies rented accommodation
in the previous year and gets HRA.
b) Exemption is not available if employee lives in his own house, or in a house for which he does not pay any rent.
c) For criteria of 50% or 40% of salary as deduction, place of employment is not significant but place where the
house is situated is important.
d) Deduction from HRA depends on Salary of the employee, Amount of HRA, place of residence (not place of
employment), rent paid by the employee.

Illustration 8:
X, a resident of Ajmer, receives ` 11,48,000 as basic salary during the previous year 2024-25. In addition, he gets
` 1,14,800 as dearness allowance forming part of basic salary, 7% commission on sales made by him (sale made
by X during the relevant previous year is ` 10,86,000) and ` 1,16,000 as house rent allowance. He, however, pays
` 2,15,800 as house rent. Determine the quantum of exempted house rent allowance, if he opts for old regime.

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Solution :
Computation of taxable house rent allowance of X for the A.Y. 2025-26:
Particulars Details Amount
House Rent Allowance Received 1,16,000
Less: Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 1,16,000
b) 40% of Salary (Note) 5,35,528
c) Rent paid – 10% of salary [[₹ 2,15,800 – ₹ 1,33,882] 81,918 81,918
Taxable House Rent Allowance 34,082
Note: Salary for the purpose of HRA

Basic salary ` 11,48,000

Dearness Allowance ` 1,14,800
Commission (7% of ` 10,86,000) ` 76,020
Total ` 13,38,820
Hence, exemption u/s 10(13A) is Nil.
However, if the assessee is under default tax regime, entire house rent allowance shall be taxable.

Illustration 9 :

Compute the taxable house rent allowance of Mr. Abhijeet (opts for old regime) from the following data:

� Basic Salary ` 50,000 p.m., D.A. ` 20,000 p.m., HRA ` 40,000 p.m., Rent paid ` 40,000 p.m. in Pune.
� On 1/07/2024, there is an increment in Basic salary by ` 10,000.
� On 1/10/2024, employee hired a new flat in Kolkata at the same rent as he was posted to Kolkata.
� On 1/01/2025, employee purchased his own flat and resides there.
Solution :

Computation of taxable house rent allowance of Mr. Abhijeet for the A.Y. 2025-26:

Particulars Details Amount Amount

House Rent Allowance Received (from 1.4.2024 to 30.6.2024) 1,20,000
Less: Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 1,20,000
b) 40% of Salary [(₹ 50,000 + ₹ 20,000) x 3] 84,000
c) Rent paid – 10% of salary (₹ 1,20,000 – ₹ 21,000) 99,000 84,000 36,000
House Rent Allowance Received (from 1.7.2024 to 30.9.2024) 1,20,000
Less: Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 1,20,000
b) 40% of Salary [(₹ 60,000 + ₹ 20,000) x 3] 96,000

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c) Rent paid – 10% of salary (₹ 1,20,000 – ₹ 24,000) 96,000 96,000 24,000

House Rent Allowance Received (from 1.10.2024 to 31.12.2024) 1,20,000
Less: Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 1,20,000
b) 50% of Salary [(₹ 60,000 + ₹ 20,000) x 3] 1,20,000
c) Rent paid – 10% of salary (₹ 1,20,000 – ₹ 24,000) 96,000 96,000 24,000
House Rent Allowance Received (from 1.1.2025 to 31.3.2025)
(Fully taxable as assessee resides in his own house) 1,20,000
Taxable House Rent Allowance 2,04,000

Special allowance exempt u/s 10(14)

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

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

Tax Treatment of aforesaid allowances :

Minimum of the following shall be exempted:
a) Actual amount received; or
b) Actual expenditure incurred for such purpose.

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Taxpoint: Under default regime, aforesaid exemption is available only in respect of Travel or transfer Allowance,
Daily Allowance and Conveyance Allowance. In other words, under default regime, exemption is not available
from Helper Allowance, Research Allowance and Uniform Allowance..
Allowances, deduction from which do not depend on actual expenditure [Sec. 10(14)(ii)] [No benefit is
available under default tax regime except for transport allowance]
Children Education Allowance [Available if opts for old regime]
An allowance to meet the expenses in connection with education of children, by whatever name called.
Treatment: Minimum of the following is exempted from tax -
a) ` 100 per month per child (to the maximum of two children)
b) Actual amount received for each child (to the maximum of two children)
Children Hostel Allowance [Available if opts for old regime]
An allowance to meet the hostel expenses of children, by whatever name called.
Treatment: Minimum of the following is exempted from tax -
a) ` 300 per month per child (to the maximum of two children)
b) Actual amount received for each child (to the maximum of two children)
Notes for Children Education Allowance and Hostel Allowance:
a) Child includes adopted child, step-child but does not include illegitimate child and grandchild.
b) Child may be major or minor child.
c) Deduction is available irrespective of actual expenditure incurred on education of child.

Illustration 10 :
Mr. Laloo Singh, received education allowance of ` 80 p.m. for his 1st child, ` 90 p.m. for his 2nd child and ` 120
p.m. for his 3rd child. He also received hostel allowance of ` 1,000 p.m. None of his children are studying. Find
taxable Children Education Allowance and Hostel allowance if he opts for old regime.
Solution :
Computation of taxable children education allowance for Mr. Laloo Singh for the A.Y. 2025-26:

Particulars Details Amount

Hostel allowance 12,000
Less: Exempted (` 300 x 2 x 12) 7,200 4,800
Children Education allowance [(` 80 x 12) + (` 90 x 12) + (` 120 x 12)] 3,480
Less: Exempted {(` 100 + ` 90) x 12} 2,280 1,200
Taxable Allowance 6,000
Note: Education allowance is allowed for any two children of assessee therefore education allowance of first child
(which is the lowest one i.e. ` 80 only) is not considered, to avail higher deduction.
If the assessee is under default tax regime, no exemption shall be available in respect of children hostel allowance
and children education allowance.

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Illustration 11 :
Mr. & Mrs. X have three children and two of them are not studying. Both Mr. & Mrs. X are working in A Ltd. and
getting children education allowance ` 500 per month and hostel allowance ` 1,000 per month. Compute taxable
children education allowance and hostel allowance, if they opt for old regime.
Solution :
Computation of taxable allowance of Mr. & Mrs. X for the A.Y. 2025-26:
Mr. X Mrs. X
Particulars
Details Amount Details Amount
Education allowance (` 500 × 12) 6,000 6,000
Less: Exemption (` 100 × 12 × 2) 2,400 3,600 2,400 3,600
Hostel Allowance (` 1,000 × 12) 12,000 12,000
Less: Exemption (` 300 × 12 × 2) 7,200 4,800 7,200 4,800
Taxable Allowance 8,400 8,400

Truck Driver’s Allowance [Available if opts for old regime]

Any allowance (by whatever name called) granted to an employee working in any transport system to meet his
personal expenditure during his duty performed in the course of running of such transport (from one place to
another place), provided such employee is not in receipt of daily allowance.
Treatment: Minimum of the following shall be exempted:
a) 70% of allowance.
b) ` 10,000 p.m.
Taxpoint: If assessee is in receipt of Daily allowance then above allowance shall be fully taxable.
Transport Allowance [Available under both regime]
An allowance, by whatever name called, to meet the expenditure for the purpose of travelling between the place of
residence and the place of duty.
Available to: Assessee is blind / deaf and dumb / orthopaedically handicapped.
Treatment: Minimum of the following shall be exempted:
a. Actual amount received; or
b. ` 3,200 p.m.
Taxpoint: No exemption is available to the assessee other than specified above.
Allowance to Government employees outside India [Available under both regime]
As per sec. 10(7), any allowance or perquisite allowed outside India by the Government to an Indian citizen for
rendering services outside India is wholly exempt from tax.

Taxpoint:
1. Assessee must be -
a) Government employee b) Citizen of India; and c) Working outside India

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2. Any allowance or perquisite to such employee shall be exempted u/s 10(7)

Allowance received from UNO (United Nations Organisation) [Available under both regime]
Basic salary or Allowance paid by the UNO to its employees are not taxable.
Compensatory allowance under Article 222(2) of the Constitution [Available under both regime]
It is fully exempt from tax.
Allowance to judges of the High Court or the Supreme Court [Available under both regime]
Any allowance paid to Judges of the High Court u/s 22A(2) and sumptuary allowance u/s 22C of the “High Court
Judges (Conditions of Service) Act, 1954” is not taxable. Allowance to the Supreme Court Judges u/s 23B of the
“Supreme Court Judges (Conditions of Service) Act, 1958” is also exempt.
Special allowances as prescribed in rule 2BB(2) [Available if assessee opt for old regime]
The following special allowances are notified by the Government as exempt u/s 10(14)(ii):

Name of allowance Place Exemption

1. Any special compensatory allowance in the nature a. Specified area of Manipur, ` 800 p.m.
of special compensatory (hilly area) allowance or Arunachal Pradesh, Sikkim, Uttar
high altitude allowance or uncongenial climate Pradesh, Himachal Pradesh, Jammu
allowance or snow bound area allowance or & Kashmir
avalanche allowance. b. Siachen area of Jammu & Kashmir. ` 7,000 p.m.
c.
All places located at a height of ` 300 p.m.
1,000 meters or more above the sea
level, other than places specified
above.
2. Any special compensatory allowance in the 1. Specified area of Little Andaman, ` 1,300 p.m.
nature of Border Area Allowance or Remote Nicobar & Narcondum Islands,
Locality allowance or Difficult Area Allowance North and Middle Andamans,
or Disturbed Area Allowance. [no exemption Throughout Lakshadweep Minicoy
is available if exemption is claimed against any Islands, All places or north of
allowance referred to in point 8, 9 and 10] the demarcation line, Himachal
Pradesh, Mizoram, Jammu &
Kashmir, UP, Sikkim
2. Installations in the Continental ` 1,100 p.m.
Shelf of India & the Exclusive
Economic Zone.
3. Specified area of: ` 1,050 p.m.
a. Throughout Arunachal Pradesh
other than areas covered by
point (3) above.
b. Throughout Nagaland
c. South Andaman (including
Port Blair)

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Name of allowance Place Exemption

d. Throughout Lunglei District
(excluding areas beyond 25
km, from Lunglei town) of
Mizoram.
e. Dharmanagar, Kailasahar,
Amarpur and khowai in
Tripura.
f. Jammu and Kashmir &
Himachal Pradesh
4. Specified area of Throughout ` 750 p.m.
Aizawal district of Mizoram,
Tripura, Manipur, Himachal
Pradesh, Jammu & Kashmir
5. Jog falls in Shimoga district in ` 300 p.m.
Karnataka.
6. Specified area of Himachal Pradesh, ` 200 p.m.
Assam & Meghalaya.
3. Tribal area/Schedule Areas/Agency Areas Specified area of (a) Madhya Pradesh; ` 200 p.m.
allowance (b) Tamil Nadu; (c) Uttar Pradesh; (d)
Karnataka; (e) Tripura; (f) Assam; (g)
West Bengal; (h) Bihar; (i) Orissa.
4. Any allowance in the nature of high altitude (a) For altitude of 9000 to 15000 ft. ` 1,060 p.m.
granted to the member of Arm force operating in (b) For altitude above 15000 ft. ` 1,600 p.m.
high altitude.
5. Under Ground Allowance to an employee who Whole of India ` 800 p.m.
is working in uncongenial, unnatural climate in
underground mines.
6. Compensatory field Area Allowance Specified area of Arunachal Pradesh, ` 2,600 p.m.
Manipur & Nagaland, Sikkim, Himachal
Pradesh, Uttar Pradesh, Jammu &
Kashmir
7. Compensatory Modified field area allowance Specified area of Punjab, Rajasthan, ` 1,000 p.m.
Haryana, Himachal Pradesh, Arunachal
Pradesh, Assam, Mizoram, Tripura,
Uttar Pradesh, Jammu & Kashmir,
Sikkim & West Bengal
8. Any allowance in the nature of counter insurgency Whole of India ` 3,900 p.m.
allowance granted to the members of armed forces
operating in areas away from their permanent
locations
9. Compensatory highly active field area allowance Whole of India ` 4,200 p.m.
granted to Armed forces.
10. Island (duty) allowance to armed force Andaman & Nicobar & Lakshadweep ` 3,250 p.m.
Islands

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Illustration 12 :
Mr. Mugal joined Star Ltd. on 1/4/2024. Details regarding his salary are as follows:
Particulars Amount
Basic 75,000 p.m.
Dearness Allowance 2,000 p.m. (50% considered for retirement benefit)
Education Allowance 1,000 p.m. (he has 1 son and 3 daughters)
Hostel Allowance 2,000 p.m. (none of the children is sent to hostel)
Medical Allowance 1,000 p.m. (total medical expenditure incurred ` 3,000)
Transport Allowance 1,800 p.m. (being used for office to residence & vice versa)
Servant Allowance 1,000 p.m.
City compensatory Allowance 2,000 p.m.
Entertainment Allowance 1,000 p.m.
Assistants Allowance 3,000 p.m. (paid to assistant ` 2,000 p.m.)
Professional Development Allowance 2,000 p.m. (actual expenses for the purpose ` 8,000 p.m.)
Bonus 2,40,000 p.a.
Commission 9,000 p.a.
Fees 5,000 p.a.
Compute his gross taxable salary for the assessment year 2025-26, assuming he has opted for old regime
Solution :
Computation of gross taxable salary of Mr. Mugal for the A.Y.2025-26:
Particulars Details Amount Amount
Basic Salary 9,00,000
Bonus 2,40,000
Commission 9,000
Fees 5,000
Allowances
Dearness Allowance 24,000
Education Allowance 12,000
Less: Exemption (` 100 x 2 x 12) 2,400 9,600
Hostel Allowance 24,000
Less: Exemption (` 300 x 2 x 12) 7,200 16,800
Medical Allowance 12,000
Transport Allowance 21,600
Less: Exemption Nil 21,600
Servant Allowance 12,000
City Compensatory allowance 24,000
Entertainment Allowance 12,000
Assistance Allowance 36,000
Less: Exemption (Being actual expenditure) 24,000 12,000
Professional development allowance 24,000

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Less: Exemption (Actual expenditure max. of amount received) 24,000 Nil 1,44,000
Gross Taxable Salary 12,98,000
However, if the assessee is under default tax regime, computation are as under:
Particulars Details Amount Amount
Basic Salary 9,00,000
Bonus 2,40,000
Commission 9,000
Fees 5,000
Allowances
Dearness Allowance 24,000
Education Allowance 12,000
Less: Exemption Nil 12,000
Hostel Allowance 24,000
Less: Exemption Nil 24,000
Medical Allowance 12,000
Transport Allowance 21,600
Less: Exemption Nil 21,600
Servant Allowance 12,000
City Compensatory allowance 24,000
Entertainment Allowance 12,000
Assistance Allowance 36,000
Less: Exemption Nil 36,000
Professional development allowance 24,000
Less: Exemption Nil 24,000 2,01,600
Gross Taxable Salary 13,55,600

Illustration 13 :
Miss Sonal, being a citizen of India and a Government employee has the following salary details :
(Amount in `)
Basic Salary 52,000 p.m.
Dearness Allowance 23,000 p.m.
Dearness Pay 1,000 p.m.
Fees 50,000 p.a.
House Rent Allowance 15,000 p.m. (Rent paid for Kolkata house ` 20,000 p.m.)
Children Education allowance 3,000 p.m. (She is having one adopted child)
Children allowance 1,000 p.m.
Hostel allowance 2,000 p.m.
Dress Allowance 5,000 p.m. (Actual expenditure ` 10,000 p.m.)
Uniform Allowance 2,000 p.m. (Actual expenditure ` 1,000 p.m.)
Tiffin Allowance 1,000 p.m.
Education Allowance for her own education 2,000 p.m. (Actual expenditure ` 1,500 p.m.)
Compute her gross salary for the assessment year 2025-26, assuming she has opted for old regime.

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Solution :
Computation of gross taxable salary of Miss Sonal for the A.Y.2025-26 :

Particulars Details Amount Amount

Basic Salary 6,24,000
Fees 50,000
Allowances
Dearness Allowance 2,76,000
Dearness Pay 12,000
House Rent Allowance 1,80,000
Less: Minimum of the following u/s 10(13A)
a) Actual Amount Received ` 1,80,000
b) 50% of Salary i.e. 50% of (6,24,000+2,76,000+12,000) = `4,56,000
c) Rent Paid – 10% of Salary (2,40,000 – 91,200) = ` 1,48,800 1,48,800 31,200
Children Education Allowance 36,000
Less: Exemption (` 100 × 1 × 12) 1,200 34,800
Children Allowance 12,000
Hostel Allowance 24,000
Less: Exemption (` 300 × 1 × 12) 3,600 20,400
Dress Allowance (fully taxable) 60,000
Uniform Allowance 24,000
Less: Exemption (` 1,000 × 12) 12,000 12,000
Tiffin Allowance 12,000
Education allowance for own study 24,000
Less: Exemption (` 1,500 × 12) 18,000 6,000 4,76,400
Gross Taxable Salary 11,50,400
Illustration 14 :
In the above illustration, how shall your answer differ if Miss Sonal is working outside India and rent paid for the
house in Japan.
Solution :
Computation of gross taxable salary of Miss Sonal for A.Y.2025-26 :

Particulars Amount
Basic Salary 6,24,000
Fees 50,000
Gross Taxable Salary 6,74,000
Note: Since, Miss Sonal, being Government-employee and citizen of India, is working outside India. Hence, all
allowances paid to her by the Government are exempted u/s 10(7).

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2.1.15 Perquisite [Sec. 17(2)]

Meaning and Chargeability
In common parlance, perquisite means, any casual emoluments or benefits attached to an office or position, in
addition to salary or wages, which is availed by an employee. In other words, perquisites are the benefits in addition
to normal salary.
As per sec. 17(2) of the Income tax Act, Perquisite includes -
i. Value of rent-free accommodation provided by the employer.
ii. Value of concession in rent in respect of accommodation provided to the assessee by his employer.
iii. The value of any benefit or amenity granted or provided free of cost or at a concessional rate to a ‘specified
employee’.
iv. Amount paid by an employer in respect of any obligation which otherwise would have been payable by the
employee.
Taxpoint: Any obligation of the employee met by the employer shall be taxable on cash basis i.e. in the year
in which the amount is paid by the employer.
Example: Employer has paid employees’ professional tax liability pertaining to the period 2024-25 in April
2025, such perquisite shall be taxable in the previous year 2025-26.
v. Sum payable by an employer, whether directly or through a fund other than recognised provident fund or
approved superannuation fund or deposit-linked insurance fund*, to effect an assurance on the life of the
assessee or to effect a contract for an annuity.
Taxpoint: Such sum shall be taxable on accrual basis.
vi. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the
employer, or former employer, free of cost or at concessional rate to the assessee.
vii. The amount or the aggregate of amounts of any contribution made to the account of the assessee by the
employer:
(a) in a Recognised Provident Fund (RPF);
(b) in the scheme referred to in sec. 80CCD(1) [i.e., NPS]; and
(c) in an approved superannuation fund,
- to the extent, it exceeds ` 7,50,000 in a previous year.
Taxpoint: There is combined upper limit of ` 7,50,000 in respect of employer’s contribution in a year to NPS,
superannuation fund and recognised provident fund and any excess contribution is taxable.
viii. The annual accretion (like interest, dividend, etc.) during the previous year to the balance at the credit of the
aforesaid fund or scheme to the extent it relates to the contribution referred above.
Taxpoint: Such accretion shall be included in the total income and shall be computed in such manner as may
be prescribed.
ix. the value of any other fringe benefit or amenity as may be prescribed.
* established under the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 or Employees’ Provident Fund and Miscellaneous
Provisions Act, 1952

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Notes:
a) Perquisites are taxable under the head “Salaries” only if, they are:
� Allowed by an employer to his employee or any member of his household.
� Resulting in the nature of personal advantage to the employee.
� Derived by virtue of employee’s authority.
b) Perquisite may be contractual or voluntary. However, an unauthorized advantage taken by an employee without
his employer’s sanction cannot be considered as a perquisite under the head salary (but it shall be taxable as
income from other sources).
c) Perquisite may be received from the former, present or prospective employer
d) Member of household includes:
� Spouse (whether dependent or not)
� Parents (whether dependent or not);
� Servants; and
� Children and their spouse (whether dependent or not);
� Dependents.
$
Specified employees [Sec. 17(2)(iii)]
Specified employee means:
1. A director employee.
Note: It is immaterial -

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a) whether he is a nominee of the workers, financial institutions, etc. on the board;

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

* Such payments are not regarded as perquisite as the employees have only an expectancy of the benefit in such schemes.

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1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.
2. Food: Food provided by employer in working place.
3. Recreational facilities: Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate: Goods manufactured by employer and sold by him to his
employees at concessional (not free) rates.
5. Conveyance facility: Conveyance facility provided -
� to employees for journey between office and residence and vice versa.
� to the judges of High Court and Supreme Court
6. Training: Amount spent on training of employees including boarding & lodging expenses for such training.
7. Services rendered outside India: Any perquisite allowed outside India by the Government to a citizen of
India for rendering services outside India.
8. Contribution in some specified schemes*
� Employer’s contribution to a pension or deferred annuity scheme.
� Employer’s contribution to staff group insurance scheme.
� Annual premium paid by the employer on personal accident policy affected by him in respect of his
employee.
9. *
Loans
� Loan given at nil or at concessional rate of interest by the employer provided the aggregate amount of
loan does not exceed ` 20,000.
� Interest free loan for medical treatment of the diseases specified in Rule 3A.
10. *
Medical facility: A provision of medical facility at office is exempt. Reimbursement of medical expenses for
treatment of Covid-19 is exempt
Note: However, medical allowance is fully taxable.
11. Periodicals and journals: Periodicals and journals required for discharge of work.
12. Privilege passes and privilege ticket: Privilege passes and privilege ticket orders granted by Indian Railways
to its employees is exempt
13. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf of employee
by the employer whether by way of direct payment or reimbursement.
14. Free education facility: Free education facility to the children of employee in an institution owned or
*

maintained by the employer provided cost of such facility does not exceed ` 1,000 p.m. per child.
Note: Such facility is not restricted to two children as in case of Children Education allowance.
15. Computer or Laptop: Computer or Laptop provided whether to use at office or at home (provided ownership
is not transferred to the employee).
16. *Movable assets: Sale or gift of any movable asset (other than car and electronic items) to employee after
being used by the employer for 10 or more years.
* Such payments are not regarded as perquisite as the employees have only an expectancy of the benefit in such schemes.

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17. *Leave Travel Concession: Leave Travel Concession (LTC) subject to few conditions. [Exemption is
available only if assessee has opted for the old regime]
18. Rent-free accommodation
� Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
� Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a Union Minister
or a Leader of opposition in Parliament.
19. *Accommodation: Accommodation provided -
� on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.
� in a remote area to an employee working at a mining site or an onshore exploration site or a project
execution site or a dam site or a power generation site or an offshore site.
20. Tax on non-monetary perquisite paid by employer on behalf of employee. With effect from A.Y. 2003-04 a
new sec. 10(10CC) has been inserted which provides that income tax paid by employer on behalf of employee
on income, being non-monetary perquisite, is not a taxable perquisite.
21. Health club, Sports club facility
*
Discussed later in this chapter

2.1.16 Valuation of Perquisites

Valuation of Rent-free unfurnished accommodation (RFA) [Rule 3(1)]
Rent-free accommodation is taxable in the hands of all employees (except the Judges of High Court or Supreme
Court and Official of the Parliament or Union Minister and a leader of Opposition).
Accommodation here includes fixed as well as floating structure.

Fixed Structure A house, flat, farm house (or a part there of), accommodation in hotel, motel, service
apartment, a guest house, etc.
Floating Structure A caravan, mobile home, ship etc.
For the purpose of valuation, employees are divided into two categories:
a. Employees of the Central or State Government or of any undertaking under the control of the Government;
b. Other employees
I) Central and State Government Employee (including military person)
Where the accommodation is provided by the Central Government or any State Government to the employees
either holding office or post in connection with the affairs of the Union or of such State, the value of perquisite in
respect of such accommodation is equal to the licence fee, which would have been determined by the Central or
State Government in accordance with the rules framed by the Government.
{Academically, the taxable value of the perquisite will be mentioned in the problem}
Taxpoint: Employees of a local authority or a foreign government are not covered under this category.

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II) Other Employees (residual category)

The value of perquisite is determined as per the following table:

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

provided employer by the employer
Having population exceeding 40 10% of salary for the period during Rent paid or payable by the
lacs as per 2011 census which the employee occupied the said employer or 10% of salary,
accommodation. whichever is lower.
Having population exceeding 15 7.5% of salary for the period during
lacs but not exceeding 40 lacs as which the employee occupied the said
per 2011 census accommodation.
Any other city 5% of salary for the period during
which the employee occupied the said
accommodation.

Notes :

a) Salary for the purpose of Rent free accommodation: Salary here means:

Basic + Dearness allowance/pay (if it forms a part of retirement benefit) + Bonus + Commission + Fees
+ All other taxable allowances (only taxable amount) + Any other monetary payment by whatever name
called (excluding perquisites and lump-sum payments received at the time of termination of service or
superannuation or voluntary retirement, like gratuity, severance pay leave encashment, voluntary
retrenchment benefits, commutation of pension and similar payments)

Taxpoint :

� Salary shall be determined on due basis.

� Where an assessee is receiving salary from two or more employers, the aggregate salary for the period
during which accommodation has been provided (by any of the employer) shall be considered.

� Monetary payments, which are not in the nature of perquisite, shall be considered. E.g. Leave encashment
received during the continuation of service shall be included in salary for this purpose. However, if such
pay leave is received at the time of retirement, then such receipt shall not be considered.

� Here salary does not include employer’s contribution to Provident Fund of the employee.

b) Cap on Valuation in subsequent year(s): W.e.f. 01-09-2023, where the same accommodation is continued to
be provided to the same employee for more than one previous year, the aforesaid calculation shall be restricted
to the amount calculated as per the following formula:

Amount calculated CII for the P.Y. for which the amount is calculated
×
for the first P.Y. CII for the P.Y. in which the accommodation was initially provided to the employee
� CII – Cost Inflation Index as notified for the purpose of sec. 48
� First previous year means the previous year 2023-24, or the previous year in which the accommodation
was provided to the employee, whichever is later.

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Provision Illustrated

Particulars P.Y.2023-24 P.Y.2024-25

Cost Inflation Index (CII) 348 363
Salary ` 20,00,000 ` 28,00,000
Valuation of RFA, say 10% of salary [a] ` 2,00,000 ` 2,80,000
Valuation after applying inflation linked capping [b] ` 2,00,000 ` 2,12,644
As it is first P.Y. i.e., ` 2,00,000 × 363 / 348
Valuation to be taken [Lower of (a) and (b)] ` 2,00,000 ` 2,08,621
Exemption of 90 days in case of allotment of two houses: Where an employee is transferred from one place
to another and he is provided with an accommodation at new place also, the value of perquisite shall be taken
for only one such house having lower value for a period not exceeding 90 days. Thereafter, the values of both
such houses are taxable.
c) Any accommodation provided to an employee working at a mining site; or an on-shore oil exploration site; or
a project execution site; or a dam site; or a power generation site; or an off-shore site, which
a. being of a temporary nature and having plinth area not exceeding 1000 sq. ft is located not less than 8 kms
away from the local limits of any municipality or a cantonment board; or
b. is located in a remote area.
“Remote area”, means any area other than an area which is located:
i. within the local limits of; or
ii. within a distance, measured aerially, of 30 kilometers from the local limits of,
any municipality or a cantonment board having a population of 1,00,000 or more based on the 2011 census
d) Where the accommodation is provided by the Central Government or any State Government to an employee
who is serving on deputation with any body or undertaking under the control of such Government:
i. the employer of such an employee shall be deemed to be that body or undertaking where the employee is
serving on deputation; and
ii. the value of perquisite of such an accommodation shall be the amount calculated as per residual category
(II) considering as if the accommodation is owned by the employer.

Illustration 15 :
Mr. Chauhan has the following salary structure:

a) Basic Salary ` 75,000 p.m. b) Entertainment Allowance ` 1,000 p.m.

c) Education Allowance ` 500 p.m. (he has 3 children) d) DA ` 3,000 p.m.
e) Fees ` 5,000 p.a. f) Bonus ` 10,000 p.a.
g) Professional tax of employee paid by employer ` 2,000 for the year
He has been provided a rent-free accommodation in Chennai.
h) 60% of DA only forms part of retirement benefits

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Compute the taxable value of accommodation in the hands of Mr. Chauhan in the following cases:
i) The employer owns such accommodation.
ii) The employer hires such accommodation at a monthly rent of ` 7,900.
Assume that he has opted for the old regime
Solution :
Taxable value of rent-free accommodation for the A.Y. 2025-26 :
Particulars Basis of determination Taxable
Perquisite
i) Owned by employer 10% of Salary (Working) ` 95,220
ii) Hired by employer 10% of Salary or Actual rent paid by employer, whichever is lower ` 94,800
Working: Salary for the purpose of Rent-free accommodation:

Particulars Details Amount Amount

Basic Salary 90,000
Bonus 10,000
Fees 5,000
Allowances
Dearness allowance ` 36,000 × 60% 21,600
Entertainment Allowance 12,000
Education Allowance ` 6,000 – ` 2,400 3,600 37,200
Gross Taxable Salary 9,52,200
Note: Professional tax paid on behalf of employee is a perquisite; hence the same shall not be included in salary
for the aforesaid purpose.

Illustration 16 :
In above illustration, how shall answer differ if the property is situated in a city where population is only 24,60,000.
Solution :
Taxable value of rent free accommodation for the A.Y.2025-26:

Particulars Basis of determination Taxable value of Perquisite

Owned by employer 7.5% of Salary (as per the above working) ` 71,415
Hired by employer 10% of Salary or Actual rent paid by ` 94,800
employer, whichever is lower

Illustration 17 :
Miss Stuti has the following salary structure:
`
a) Basic salary 15,000 p.m.
b) Dearness Allowance 5,000 p.m. (not forming part of retirement benefit)
c) Hostel Allowance 1,000 p.m. (does not have any child)

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d) Tiffin Allowance 500 p.m.

e) Transport Allowance 200 p.m.
f) Bonus 20,000 p.a.
g) Commission 15,000 p.a.
h) Free refreshment in office worth 5,000 p.a.
i) Mobile phone facility by employer 900 p.m.
j) Computer facility worth 10,000 p.a.
She has been provided a Rent-free Accommodation (owned by employer) in Kolkata. The house was allotted to
her with effect from 1/5/2024 but she could occupy the same only from 1/6/2024. Find her gross taxable salary.
Solution :
Computation of gross taxable salary of Miss Stuti for the A.Y. 2025-26 :
Particulars Details Amount Amount
Basic Salary 1,80,000
Bonus 20,000
Commission 15,000
Allowances:
Dearness Allowance 60,000
Hostel Allowance (Fully taxable as she has no child) 12,000
Tiffin Allowance 6,000
Transport Allowance 2,400 80,400
Perquisite u/s 17(2):
Free Refreshment (not taxable) Nil
Mobile or telephone facility Nil
Computer facility Nil
Rent Free Accommodation Working 19,617 19,617
Gross Salary 3,15,017
Working : Salary for the purpose of rent-free accommodation :

Basic Salary 1,80,000

Bonus 20,000
Commission 15,000
Allowances
Dearness allowance Nil
Hostel Allowance 12,000
Tiffin Allowance 6,000
Transport Allowance 2,400
Total 2,35,400
Value of Rent-Free Accommodation (being 10% × ` 2,35,400 × 10/12) 19,617

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Illustration 18 :
Miss Khushi has the following salary details:
i) Basic salary ` 6,000 p.m.
ii) DA ` 3,000 p.m.
iii) Academic development allowance ` 1,000 p.m., expenditure incurred ` 700 p.m.
iv) Entertainment allowance ` 500 p.m.
She has been provided with a rent-free accommodation in Purulia. On 1/7/2024, she was posted to Kolkata. A new
house further allotted to her on same date. But she surrendered her Purulia house only on 31/12/2024. Rent paid
by employer for Purulia House ` 500 p.m. while Kolkata house is owned by the employer. Find her gross taxable
salary, assuming she has opted for the old regime.
Solution :
Computation of gross taxable salary of Miss Khushi for the A.Y. 2025-26 :

Particulars Details Amount Amount

Basic Salary 72,000
Allowances:
Dearness Allowance 36,000
Academic Development Allowance 12,000
Less: Exempted to the extent of actual expenditure 8,400 3,600
Entertainment Allowance 6,000 45,600
Perquisite u/s 17(2):
Rent Free Accommodation Working 10,380
Gross Taxable Salary 1,27,980
Working: Since Miss Khushi has been transferred from Purulia to Kolkata and she is provided with an
accommodation at Kolkata also, the value of perquisite shall be taken for only one such house having lower value
for a period not exceeding 90 days. Thereafter, the value of both such houses is taxable.
Valuation of rent-free accommodation:

Period Particulars Purulia house Kolkata house Taxable Amount

1/4/2024 - She is having only Purulia 10% of (` 1,17,600 x 3/12) or Not applicable 1,500
30/6/2024 house Rent paid by employer (` 500
x 3) whichever is lower
1/7/2024 - She has both house but the ` 1,500 (as calculated above) 10% of Salary1 1,500
30/9/2024 house having lower value i.e. ` 2,940
shall be taxable
1/10/2024 - She has both house and ` 1,500 (as calculated above) ` 2,940 (as 4,440
31/12/2024 both shall be taxable above) (Note b)
1/1/2025 - She has only Kolkata house Not applicable ` 2,940 (as 2,940
31/3/2025 above)
Taxable perquisite 10,380

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Note:
a. For the sake of simplicity, 3 months have been taken as equivalent to 90 days.
b. After 90 days, value of both houses shall be considered.
1.
Salary for valuation of rent- free accommodation:

Basic Salary 72,000

Allowances
Dearness allowance 36,000
Entertainment allowance 6,000
Academic development Allowance 3,600
Total 1,17,600
Valuation of Rent-free furnished accommodation
Furnished accommodation means Accommodation + Furniture.
Value of Furnished accommodation = Value of accommodation + Value of furniture
Valuation of Accommodation: As discussed above.
Valuation of Furniture: As per the following table
Case Taxable value
Furniture owned by the employer 10% of original cost of furniture
Furniture hired by the employer Actual hire charges paid/payable by the employer
Notes:
1. “Furniture” here, includes refrigerator, television, radio, air-conditioner and other household appliances, etc.
2. The above rule is applicable to Government as well as Non-Government Employees.
Illustration 19 :
Sri Ashutosh has been provided with a furnished accommodation in a city having population of 44,00,000 as per
last census. Municipal Value of the house (owned by employer) is ` 80,000 whereas the Fair rent of the house is `
1,00,000. His salary details are as under:

Basic 25,000 p.m.

Allowance for increased cost of living 5,000 p.m.
Children Education allowance 3,000 p.m. [He has one son and two married daughters]
Furniture details as under:

Furniture Hired by the employer Owned by the employer

(Hire charge) (Original Cost)
T.V. 2,000 p.a. -
Refrigerator - 10,000
Washing Machine - 5,000
Other furniture 1,000 p.m. 20,000
Calculate gross taxable salary of Sri Ashutosh for the A.Y. 2025-26, assuming he has opted for the old regime.

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Solution :
Computation of gross taxable salary of Sri Ashutosh for the A.Y. 2025-26 :

Particulars Amount Amount

Basic Salary 3,00,000
Dearness allowance (Allowance for increased cost of living) 60,000
Children Education Allowance 36,000
Less: Exemption (` 100 × 2 × 12) 2,400 33,600
Rent Free Furnished Accommodation
Value of Accommodation (10% of Salary1) 39,360
Value of furniture2 17,500 56,860
Gross Taxable Salary 4,50,460
1.
Salary for valuation of rent- free accommodation:

Basic Salary 3,00,000

Dearness allowance 60,000
Education Allowance 33,600
Total 3,93,600
2.
Valuation of taxable perquisite for furniture:

Furniture Perquisite for Perquisite for Total Taxable value of

hired furniture owned furniture furniture
T.V. 2,000 - 2,000
Refrigerator - 10% of 10,000 1,000
Washing Machine - 10% of 5,000 500
Other furniture 12,000 10% of 20,000 14,000
Total 17,500
Municipal value and Fair rent are irrelevant.
Valuation of accommodation provided at concessional rent
Valuation will be made as if the rent-free accommodation is provided and the amount so computed will be reduced
by the rent payable by the employee.

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

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

Taxpoint:
� The above rule of valuation shall be applicable in case of the Government employee also.
� Accommodation shall be deemed to have been provided at a concessional rate, if the value of accommodation
computed in such manner as may be prescribed, exceeds the rent recoverable from, or payable by, the assessee

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Accommodation provided in a hotel

In this case, value of perquisite shall be minimum of the following:
a) 24% of salary for the period such accommodation is provided; or
b) Actual charges paid or payable to such hotel.
However, if the following conditions are satisfied then nothing is taxable -
� Such accommodation is provided for a period not exceeding in aggregate 15 days; and
� Such accommodation is provided on transfer of employee from one place to another place.
Note: If the employee pays any rent, the value so determined shall be reduced by the rent actually paid or payable
by the employee
Taxpoint:
� Salary here has the same meaning as in the case of rent-free accommodation.
� Above rule shall be applicable whether the assessee is a Government or a Non-Government employee.
� If the facility is provided for more than 15 days, then the perquisite is exempt for first 15 days and thereafter
taxable. E.g. if facility has been provided for 45 days then taxable perquisite shall be only for last 30 days.
� Hotel includes licensed accommodation in the nature of motel, service apartment or guest house.
2.1.17 Insurance premium payable by employer
As per sec. 17(2)(v), following sums payable by an employer shall be taxable perquisite in the hands of all employees,
whether it is paid directly or through a fund (other than recognised provident fund or approved superannuation fund
or deposit-linked insurance fund),
� to effect an assurance on the life of the assessee; or
� to effect a contract for an annuity
Note: Employee can claim deduction u/s 80C (if opted for old regime) for LIC premium paid by employer
2.1.18 Valuation of sweat equity shares allotted or transferred to the assessee
Meaning:
 Specified security means the securities as defined in sec.2(h) of the Securities Contracts (Regulation) Act,
1956 and, where employees’ stock option has been granted under any plan or scheme therefore, includes the
securities offered under such plan or scheme.
As per sec.2(h) of the Securities Contracts (Regulation) Act, 1956, securities includes:
a. shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in
or of any incorporated company or other body corporate;
b. derivative;
c. units or any other instrument issued by any collective investment scheme to the investors in such schemes;
d. security receipt as defined in sec. 2(zg) of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
e. units or any other such instrument issued to the inves¬tors under any mutual fund scheme;

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f. any certificate or instrument (by whatever name called), issue to an investor by any issuer being a special
purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to
such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including
mortgage debt, as the case may be;
g. Government securities;
h. such other instruments as may be declared by the Central Government to be securities; and
i. rights or interest in securities.
 Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for
consideration other than cash for providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
Taxpoint: If such shares are allotted or transferred not for above reasons (i.e., for providing know-how, etc.), then
it is not taxable as perquisite. E.g., if such option is granted to the employee against acquisition of immovable
property by the company, then such benefit shall not be considered as perquisite. However, employee is liable to
pay tax, if any, under the head ‘Capital Gain’
Perquisites :
Value of any specified security or sweat equity shares shall be considered as perquisites in hands of employee if
the following conditions are satisfied:
a. Such security or sweat equity shares are allotted or transferred on or after 01-04-2009
b. Such security or sweat equity shares are allotted or transferred by the employer (former or present) directly or
indirectly.
c. Such security or sweat equity shares are allotted or transferred free of cost or at concessional rate to the
assessee
Valuation :
Value of such perquisite shall be computed as under:
Particulars Amount
The fair market value of the specified security or sweat equity shares, as the case may be, on the ***
date on which the option is exercised by the assessee
Less: The amount actually paid by, or recovered from the assessee in respect of such security or ***
shares
Value of perquisite ***
Notes:
Option means a right but not an obligation granted to an employee to apply for the specified security or sweat
equity shares at a predetermined price.
Tax on perquisite of specified securities and sweat equity shares is required to be paid in the year of exercising of
option. However, where such shares or securities are allotted by the current employer, being an eligible start-up,
the perquisite is taxable in the year
- after the expiry of 48 months from the end of the relevant assessment year
- in which sale of such security or share are made by the assessee
- in which the assessee ceases to be the employee of the employer,
whichever is earlier.

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Illustration 20 :
A company ‘X’ grants option to its employee ‘R’ on 1st April, 2019 to apply for 100 shares of the company for
making available right in the intellectual property to the employer-company at a pre-determined price of ` 50 per
share with date of vesting of the option being 1st April, 2020 and exercise period being 1st April, 2020 to 31st
March, 2025. Employee ‘R’ exercises his option on 31st March, 2024 and shares are allotted/transferred to him on
3rd April, 2024.
Fair market value of such share on different dates are as under:

01-04-2019 01-04-2020 31-03-2024 03-04-2024

` 100 ` 180 ` 440 ` 470
Compute taxable perquisite, if any, in hands of Mr. R for A.Y. 2025-26.
Solution :
Since shares are allotted by the company after 31-03-2024 (even though it is exercised by the employee on 31-03-
2024), hence, it is taxable in A.Y. 2025-26. Value of the perquisite is as under:
Particulars Amount
The FMV of shares on the date on which the option is exercised [` 440 × 100 shares] 44,000
Less: The amount actually paid by assessee in respect of such shares [` 50 × 100 shares] 5,000
Value of perquisite 39,000
Note: For the purpose of computing capital gain on the transfer of these shares by Mr. R, ` 44,000 (i.e. ` 440 per
share) shall be considered as cost of acquisition of such shares.
2.1.19 Valuation of perquisites in respect of Motor Car [Rule 3(2)]
Motor-car facility provided by an employer is taxable in the hands of employee on the following basis:

Car is Car is Used by employee Taxable value Who is

owned by Maintained by for Chargeable
Employer Office purpose5 Not a perquisite Not applicable
Personal purpose M1 + D2 Specified
Both purpose ₹ 1800 or ₹ 2400 p.m.3 Employee
Employer Employee Office purpose5 Not a perquisite Not applicable
Personal purpose D Specified
Both purpose ` 600 / ` 900 p.m.4 employee
Employee Employer Office purpose5 Not a perquisite Not applicable
Personal purpose M All employee
Both purpose Actual expenditure incurred by the
employer as reduced by ₹1800 / ₹2400
p.m.3 (further deduction of ₹900 p.m.
for driver) or a higher deduction if
prescribed conditions are satisfied5
Employee Any purpose Not a perquisite Not applicable
1.
M =Maintenance cost

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2.
D = Depreciation @ 10% of actual cost of the car. However, if the car is not owned by employer then actual
hire charge incurred by employer shall be considered.
3.
` 2400 p.m. in case of higher capacity car# and ` 1800 p.m. for lower capacity car.
4.
` 900 p.m. in case of higher capacity car# and ` 600 p.m. for lower capacity car.
#
Higher capacity car means a car whose cubic capacity of engine exceeds 1.6 litres.
5.
Conditions to be fulfilled for claiming higher deductions or establishing that the car is used for office purpose:
� The employer has maintained complete details of journey undertaken for official purpose, which may include
date of journey, destination, mileage, and the amount of expenditure incurred thereon; and
� The employer gives the certificate to the effect that the expenditure was incurred wholly and exclusively for
the performance of official duties.

Chauffeur / Driver
If chauffeur is also provided, then salary of chauffeur is further to be added to the value of perquisite (as computed
above). However, if car is used for both i.e. official and personal purpose then ` 900 p.m. (irrespective of higher or
lower capacity of car) is to be taken as value of chauffeur perquisite.
Notes :
a) If motor car is provided at a concessional rate then charges paid by employee for such car, shall be reduced
from the value of perquisite. However, where statutory value (` 1,800 or ` 2,400 and ` 600 or ` 900) is taken
as taxable value of perquisite then amount charged from employee shall not be subtracted.
b) The word “month” denotes completed month. Any part of the month shall be ignored.

c) When more than one car is provided to the employee, otherwise than wholly and exclusively for office purpose,
the value of perquisite for -

� One car shall be taken as car is provided partly for office and partly for private purpose i.e. ` 1,800 or `
2,400 p.m. (plus ` 900 p.m. for chauffeur, if provided); and

� For other car(s), value shall be calculated as car(s) are provided exclusively for private purpose.

d) Conveyance facility to the judges of High Court or Supreme Court is not taxable.

e) Use of any vehicle provided to an employee for journey from residence to work place or vice versa is not a
taxable perquisite.
Illustration 21 :
Sonam, has been provided a car (1.7 ltr.) by his employer Vikash Ltd. The cost of car to the employer was `
3,50,000 and maintenance cost incurred by the employer ` 30,000 p.a. Chauffeur salary paid by the employer `
3,000 p.m. Find value of perquisite for Sonam for the A.Y.2025-26, if the car is used for:

a) Office purpose. b) Personal purpose. c) Both purposes.

In case (b) and (c), employee is being charged ` 15,000 p.a. for such facility.
Solution :

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a) Nil, as car is used for office purpose.

b) Taxable value of car facility:
Particulars Details Amount
Depreciation of Car 10% of ` 3,50,000 35,000
Maintenance cost Actual 30,000
Driver’s salary Actual 36,000
Total 1,01,000
Less: Amount charged from employee 15,000
Taxable Perquisite 86,000
c. ` 2,400 p.m. for car facility + ` 900 p.m. for driver facility = ` 3,300 p.m.
Taxable value of perquisite ` 3,300 × 12 = ` 39,600.
Note: Whenever statutory value (` 1,800 or ` 2,400 and ` 600 or ` 900) is taken as taxable value of perquisite
then amount charged from employee shall not be subtracted.
Illustration 22 :
Mr. Piyush has been provided a car (1.5 ltr.) on 15/7/2024. The cost of car to the employer was ` 6,00,000 and
maintenance cost incurred by employer ` 20,000 p.a. Chauffeur salary paid by employer (Mr. Ratan) ` 4,000 p.m.
The car is 40% used for office and 60% for personal purpose. Charges paid by employee for such facility ` 5,000
p.a. Find taxable value of perquisite.
Solution :
Taxable value of perquisite
Particulars Details Amount
Car ` 1,800 × 8 14,400
Driver ` 900 × 8 7,200
Taxable Perquisite 21,600
1. A part of a month shall not be considered for this purpose.
2. Whenever statutory value is taken as the taxable value of perquisite then the amount charged from employee
shall not be subtracted.
Illustration 23 :
Mr. Vikram being a Government employee has a car (1.7 ltr.) used for office as well as for personal purpose.
During the year, he incurred ` 40,000 on maintenance and ` 20,000 on driver’s salary. The entire cost is reimbursed
by employer. Find taxable perquisite.
Solution :
Taxable perquisite in the hands of Mr. Vikram
As the car is owned by the assessee & maintained by the employer, taxable value of perquisite shall be -
Actual expenditure incurred by the employer as reduced by ` 2,400 p.m. (in case of 1.7 ltr.) and ` 900 p.m. for
driver’s salary. Hence, taxable amount shall be -
Amount reimbursed by employer (` 40,000 + ` 20,000) ` 60,000
Less: Deduction for the amount used for office purposes (` 2,400 + ` 900) x 12 ` 39,600
Taxable amount ` 20,400

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Illustration 24 :
Wasim has a car (1.5 ltr.) used for office as well as for personal purpose. During the year car is used 80% for
business purpose being certified by the employer. During the year, he incurred ` 50,000 on maintenance and
running of such car. The entire cost is reimbursed by the employer. Find taxable perquisite if assessee wish to claim
higher deduction, when – (a) A proper log book is maintained; (b) A proper log book is not maintained.
Solution :
a) When log book is maintained
Taxable perquisite in the hands of Wasim
Actual expenditure incurred by the employer is reduced to the extent it is used for office purpose, as a proper
record is kept and duly certified by employer.
Amount reimbursed by the employer ` 50,000
Less: Deduction (80% of ` 50,000) ` 40,000
Taxable amount ` 10,000
b) When log book is not maintained
Taxable perquisite in the hands of Wasim
Actual expenditure incurred by the employer is reduced to the extent of ` 1,800 p.m. even though it is used for
office purposes but a proper record is not kept.
Amount reimbursed by the employer ` 50,000
Less: Deduction (` 1,800 × 12) ` 21,600
Taxable amount ` 28,400
Illustration 25 :
Amit is provided with two cars, to be used the official & personal work, by his employer Raj. The following
information is available from the employer records for computing the taxable value of perk (assuming car 1, is
exclusively used by Amit).
Particulars Car 1 Car 2
Cost of the car 6,00,000 4,00,000
Running and maintenance (borne by the company) 40,800 28,000
Salary of driver (borne by the company) 24,000 24,000
Solution :
Valuation of perquisite for Mr. Amit

Particulars Workings Details Amount

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

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llustration 26 :
Mr. Vijay, manager, has been provided the following car facilities by Kishan Ltd. (his employer) -

Particulars Car A Car B Car C

Owned by Employer Employer Employer
Used for Office as well as personal purpose Personal purpose
Cost of car 3,00,000 5,00,000 2,00,000
Maintenance expenditure incurred by employer 50,000 60,000 -
Maintenance expenditure incurred by employee 40,000
Capacity of car 1.8 ltr. 1.4 ltr. 1.6 ltr.
Find taxable value of car facility.

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

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

Solution :

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

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

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

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

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

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

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

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

The facility provided by employer is taxable in the hands of employee on the following basis:
Owned Maintained Who is
Used for Taxable Value of perquisite
by by Chargeable
Office purpose1 Nil Not Applicable
Personal purpose Actual Maintenance + Depreciation @ 10% of Specified
Employer
Original cost employee
Both purpose Reasonable proportion of (Maintenance +
Depreciation @ 10% of Original cost)
Employee Employer Office purpose 1
Nil Not Applicable
Personal purpose Actual Maintenance All employee
Both purpose Actual expenditure incurred by the employer as
reduced by ₹ 900 p.m. or as reduced by higher
sum if prescribed conditions (see note 1) are
satisfied.
1
Conditions to be fulfilled for claiming higher deductions or establishing that the car is used for office purpose:
� The employer has maintained complete details of journey undertaken for official purpose, which may include
date of journey, destination, mileage, and the amount of expenditure incurred thereon; and
� The employer gives the certificate to the effect that the expenditure was incurred wholly and exclusively for
the performance of official duties.
2.1.21 Valuation of perquisite in respect of Free Domestic Servants [Rule 3(3)]
Value of perquisite is determined as under:
Servant appointed by Taxable value of perquisite Taxable in hands of
Employer Actual cost to the employer is taxable as Specified employee
Employee perquisite All employee
Notes :
a) If rent-free accommodation (owned by the employer) is provided with gardener then gardener’s salary and
maintenance cost of garden shall not be taxable. [Circular No.122 dated 19/101973]
b) Any amount charged from the employee for such facility shall be reduced from above value.
c) Domestic servant allowance given to employee is fully taxable.
d) Reimbursement of servant-salary by the employer shall be taxable in hands of all employee.
Illustration 27 :
Sri Bhagawan, has been provided with the following servants by his employer:
Servant Appointed by Salary of Servant
Watchman Employer 12,000 p.m.
Cook Employee’s wife 3,000 p.m.
Maid servant Employer 1,000 p.m.
Sweeper Employee 500 p.m.
Gardener Employer 1,000 p.m.
Sri Bhagawan has also been provided a rent-free accommodation, which is owned by the employer. Find taxable
value of servant facility if - Case a) He is a specified employee. Case b) He is a non-specified employee.

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Solution :
Computation of taxable value of perquisite for A.Y. 2025-26

Servant Taxable Amount

Case a Case b
Watchman 1,44,000 Nil
Cook 36,000 36,000
Maid servant 12,000 Nil
Sweeper 6,000 6,000
Gardener (since Rent free accommodation, owned by employer, is provided) Nil Nil
Taxable Perquisite 1,98,000 42,000
2.1.22 Gas, electricity or water facility [Rule 3(4)]
It is taxable on the following basis:

Taxable value of perquisite

Case Facility is provided Facility is provided Taxable in the hands of
from own sources from other agency
Facility is in name of employee Manufacturing cost to Prices paid to such All employees
Facility is in name of employer the employer agency Specified employees
Note: Where the employee is paying any amount for such facility, the amount so paid by employee shall be reduced
from the value determined above.
2.1.23 Valuation of perquisite in respect of free education [Rule 3(5)]
Taxable value of perquisite is as follows:

Case Taxable Value

Facility provided to employee Not taxable
Facility provided to family member
Facility provided in an institution owned by the employer Child of the assessee: Cost of such education in
similar institution subject to an exemption of `
Facility provided in any institution (not owned by the 1,000 p.m. per child shall be taxable .
*

employer) by reason of his being in employment. Other family member: Cost of such education in
similar institution shall be taxable.
Reimbursement of education expenditure to employee or
Actual reimbursement shall be taxable.
direct payment of the fee by the employer to the school
Who is chargeable
Case Taxability in the hands of
In case of reimbursement; or All employee
School fee of family member of the employee paid by the employer directly to school
In any other case Specified employee

However, Hon’ble Punjab & Haryana High Court in the case of CIT –vs.- Director, Delhi Public School (2011) 202 Taxman 318 has held that
* 

if value of perquisite exceeds ₹ 1,000/-, then entire amount shall be taxable.

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Notes :
Education Facility provided to a) ` 1,000 per month
per child shall be
Employee Child Other exempted without
Value of perquisit any restriction
Institution is Institution not owned
Not a
owned by the but due to reason of Other Cost or fair value of such on number of
perquisite facility – Amount
employer employment
Recovered children.
Value of perquisite
Value of Expenses is directly paid Expenses is b) Child includes
Fare Value – ` 1,000 p.m. by the employer to the reimbursed by the
per child – Amount
perquisite
Institution employer adopted child,
Recovered Cost / Fare Value
– ` 1,000 p.m. stepchild of the
per child –
Amount
Value of perquisite
Value of perquisite assessee, but
Recovered
Actual Expenses –
Actual Reimbursed does not include
Amount
Amount Recovered
(All Employees)
(All Employees) grandchild or
illegitimate child.

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

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

The facility provided by employer is taxable in the hands of employee on the following basis:
Case Treatment
If employer is engaged in the business of Amount charged from public for such facility is taxable in the
transportation of goods or passengers hands of specified employee.
In any other case Actual cost of employer for such facility is taxable in the hands
of all employees.
Notes :
a) In case above facility is provided to employees of Railways & Airlines, nothing shall be chargeable to tax.
b) Any amount charged from the employee for such facility shall be reduced from the above value.
c) Conveyance facility provided to the employee for journey between office and residence is not taxable.
2.1.25 Valuation of perquisite in respect of interest free loan or concessional rate of interest
[Rule 3(7)(i)]
Loan is given to Perquisite in respect of interest free loan or loan
employee or member of at concessional rate of interest to the employee
his household for
or any member of his household by the employer
or any person on his behalf, is not taxable if
Medical Treatment Other Purpose aggregate amount of loan given by the employer
(or any other person on his behalf) does not exceed
Not a taxable
Aggregate Loan
In excess of ` 20,000. The taxable value of such perquisite
amount upto
perquisite ` 20,000
` 20,000 shall be determined as per the rate as on the 1st
SBI Rate on 1st day
day of the relevant previous year charged by the
Not a taxable
perquisite
of the P.Y. less State Bank of India in respect of loans for the same
Int. paid is taxable
purpose advanced by it.

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Notes :
a) Maximum outstanding monthly balance: Interest is calculated on the maximum outstanding monthly
balance. Maximum outstanding monthly balance means the aggregate outstanding balance for each loan as on
the last day of each month.
b) Loan for medical treatment: Nothing is taxable if loan is given for medical treatment of the employee or any
member of his household in respect of diseases specified in rule 3A. However, such exempted loan will not
include the amount that has been reimbursed by an insurance company under any medical insurance scheme.
c) Concessional interest: Any interest paid by the employee to the employer for such loan shall be reduced from
the above computed value. If rate of interest charged by the employer is higher than the above rate, nothing is
taxable as perquisite.
d) Amount on which interest shall be calculated: If loan amount is more than ` 20000, interest shall be levied
on total loan amount, rather than the excess amount.
e) Treatment of outstanding loan taken earlier: Interest on loan, taken before insertion of this provision, shall
also be treated as taxable perquisite. [Circular No.15/2001dated 12/12/2001]

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

Valuation of perquisite in respect of travelling, touring, holiday home or any other expenses paid for or borne or
reimbursed by the employer for any holiday availed of by the employee or any member of his household is taxable
in the hands of all employees as per the following table:
Case Taxable value of perquisite
Notional cost of such facility. In other words, value at
Where such facility is maintained by employer and is
which such facilities are offered by other agencies to the
not available uniformly to all employee
public.
Where the employee is on official tour and the The amount of expenditure so incurred for the
expenses are incurred in respect of any member of his accompanying member of his household.
household accompanying him
Where any official tour is extended as a vacation The value will be limited to the expenses incurred in
relation to such extended period of stay or vacation.
In any other case Amount incurred by the employer.
Notes :
a) Any amount charged from employee shall be reduced from the above determined value.
b) The above provisions are not applicable in case of Leave Travel Concession (discussed earlier)
2.1.27 Valuation of perquisite in respect of free meals [Rule 3(7)(iii)]
The facility provided by employer is taxable in the hands of employee on the following basis:
Case Tax Treatment
Tea, snacks or other non-alcoholic beverages in the form of
light refreshment provided during office hours (including Nil
over-time)
Free meals provided during office hours in:
� Remote area (as discussed while valuation of RFA); or Nil
� An offshore installation

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Free meals and non-alcoholic beverages provided by the Expenditure on free meals in excess of ` 50 per
employer during office hours: meal shall be taxable perquisite to the extent
� At office or business premises; or of excess amount in hands of all employees.
[Available only under old regime]
� Through paid vouchers which are not transferable and
usable only at eating joints. E.g. Free meal given to employee worth ` 70 per
meal through non-transferable coupon for 300
times in a year. Taxable perquisite in such case
shall be ` 6,000 {being ` (70 – 50) x 300}.
An alternate view is possible that where value
exceeds ₹ 50, then entire value shall be taxable.
In that case value of perquisite would be ₹ 21,000
In any other case The actual expenditure incurred by employer as
reduced by amount charged from employee for
such lunch or meal shall be taxable in the hands of
all employees. i.e. [Actual expenditure to employer
– Amount charged from employee]

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

The value of any gift, voucher, or token (in lieu of which any gift may be received) given to the employee (or
any member of his household) on ceremonial occasion or otherwise by the employer shall be taxable in the hands
of all employees. However, gift, voucher or token upto ` 5,000, in aggregate, during the previous year, shall be
exempted.
Notes :
a) Where worth of gift is in excess of ` 5,000 then amount in excess of ` 5,000 shall be taxable.
b) No such exemption (` 5,000) is available on gift made in cash or convertible into money.
Illustration 28 :
Determine taxable perquisite in the following cases:
1. Miss Shradha received a wrist-watch of ` 3,000 on 17/7/2024 and a golden chain worth ` 12,000 on 18/8/2024
from her employer, Mr. Raju.
2. Miss Rakhi received ` 11,000 cash–gift from her employer, Dipu Ltd.
3. Mr. Anirudha is working with X & Co. a partnership firm. During the year, the employer firm gifted a diamond
ring worth ` 80,000 to wife of Mr. Anirudha.
Solution :
1. Taxable perquisite in the hands of Shradha shall be ` 10,000 (being ` 3,000 + ` 12,000 – ` 5,000)
An alternate view is possible that where value of the gift exceeds ` 5,000, then entire value shall be taxable. In
that case value of perquisite would be ` 15,000
2. Taxable perquisite in the hands of Rakhi shall be ` 11,000.
3. Taxable perquisite in the hands of Mr. Anirudha shall be ` 75,000.
An alternate view is possible that where value of the gift exceeds ` 5,000, then the entire value shall be taxable. In
that case value of the perquisite would be ` 80,000.

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

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

Case Tax Treatment

Where such credit card is used wholly and exclusively Nil
for office purpose and specified conditions# are satisfied.
Where expenses (including membership and annual If directly paid by the employer
fees) are incurred by the employee or any member Any amount incurred by the employer as reduced by
of his household, which is charged to a credit card amount charged from the employee shall be taxable in
(including any add-on card) provided by the employer the hands of all employees
or otherwise, are paid or reimbursed by the employer.
If amount reimbursed by the employer
Any amount reimbursed by the employer shall be
taxable in the hands of all employees.
#
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for office
purpose:
a. Complete details in respect of such expenditure are maintained by the employer which may, inter-alia, include
the date of expenditure and the nature of expenditure; and
b. The employer gives a certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duty.
2.1.30 Club Expenditure [Rule 3(7)(vi)]
Expenditure incurred by employer in respect of club facility to employee shall be treated as under:
Case Tax Treatment
Where such expenses are incurred wholly and
exclusively for office purpose and specified conditions# Nil
are satisfied.
Where health club, sports and similar facilities are
Nil
provided uniformly to all employees by the employer.
Where the employer has obtained corporate membership Amount incurred by employer for such facility shall
of the club and the facility is enjoyed by the employee be taxable perquisite in the hands of all employees.
or any member of his household However, initial fees paid for obtaining corporate
membership shall not be a taxable perquisite.
Any payment or reimbursement by the employer of any If directly paid by the employer
expenditure incurred (including the amount of annual Any amount incurred by the employer as reduced by
or periodical fee) in a club by employee or any member amount charged from the employee shall be taxable in
of his household the hands of all employees.
If amount reimbursed by the employer
Any amount reimbursed by the employer shall be
taxable in the hands of all employees.
#
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for office
purpose:
a. Complete details in respect of such expenditure is maintained by the employer which may, inter alia, include
the date of expenditure, the nature of expenditure and its business expediency; and

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b. The employer gives a certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duty;
2.1.31 Valuation of perquisite in respect of use of movable assets [Rule 3(7)(vii)]
If employee (or any member of his household) uses any movable asset (other than the assets for which provisions
have been made) belonging to employer, then such facility is taxable in the hands of all employees. The value of
such benefit is determined as per the following table:
If the asset is owned by the employer 10% of the original cost of such asset.
If the asset is hired by the employer Charges paid or payable by the employer
Notes :
a) Any sum charged from the employee shall be reduced from the value determined as above.
b) Use of computer, laptop, etc. (as discussed earlier) is exempted perquisite.
c) Here movable assets do not include car.

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

Types of asset Rate of depreciation Method of depreciation

Electronic items#/Computer 50% Reducing balance
Motor car 20% Reducing balance
Any other 10% Straight line
#
Electronic items here means data storage and handling devices like computer, digital diaries and printers. They do
not include household appliances like washing machines, microwave ovens, mixers, etc.
Mathematically, taxable perquisite is as under:
Original cost to the employer *****
Less: Accumulated depreciation for each completed year during which such asset is used by ****
the employer
Written down value ****
Less: Amount charged from employee ***
Value of Perquisite (if positive) *****
Taxpoint: No depreciation shall be charged for a part of the year.

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Illustration 29 :
X Ltd. has sold the following assets to its employee, Mr. Amit. Compute taxable perquisite.

Assets Date of purchase Purchase value Date of sale Sale price

Computer 1/7/2021 2,00,000 18/8/2024 20,000
Car 1/4/2022 3,00,000 1/3/2025 50,000
Television 1/4/2019 50,000 1/4/2024 2,000
Sofa set 1/4/2009 80,000 1/7/2024 5,000

Solution :
Computation of taxable value of perquisite in hands of Mr. Amit for the A.Y.2025-26 :

Assets Written down value Sale value Taxable perquisite

Computer 25,0001 20,000 5,000
Car 1,92,0002 50,000 1,42,000
Television 25,0003 2,000 23,000
Sofa set Nil4 5,000 Nil
Taxable Perquisite 1,70,000

1. Calculation of WDV of Computer :

Particulars Amount
Purchase value 2,00,000
Less: Depreciation from 1/7/2021 to 30/6/2022 @ 50% 1,00,000
WDV as on 1/7/2022 1,00,000
Less: Depreciation from 1/7/2022 to 30/6/2023 @ 50% 50,000
WDV as on 1/7/2023 50,000
Less: Depreciation from 1/7/2023 to 30/6/2024 @ 50% 25,000
WDV as on 1/7/2024 25,000
Less: Depreciation from 1/7/2024 to 18/8/2024 (as not being a complete year) Nil
WDV as on the date of sale 25,000
2. Calculation of WDV of Car :

Particulars Amount
Purchase value 3,00,000
Less: Depreciation from 1/4/2022 to 31/3/2023 @ 20% 60,000
WDV as on 1/4/2023 2,40,000
Less: Depreciation from 1/4/2023 to 31/3/2024 @ 20% 48,000
WDV as on 1/4/2024 1,92,000
Less: Depreciation from 1/4/2024 to 1/3/2025 (as not being a complete year) Nil
WDV as on date of sale 1,92,000

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3. Calculation of WDV of television :

Particulars Amount
Purchase value 50,000
Less: Depreciation from 1/4/2019 to 31/3/2024 @ 10% 25,000
WDV as on the date of sale 25,000
4. Depreciation on sofa set is charged @ 10% as per straight-line method. Since the asset is used for more than
10 years, hence its WDV will be Nil.
2.1.33 Medical Facility [Proviso to Sec. 17(2)]
Medical facility is taxable as under:
a) Medical facility provided in India
Case Treatment
1 Medical facility provided to the employee or his family in a hospital, clinic, dispensary Fully
or nursing home maintained by the employer. Exempted
2 Reimbursement of medical bill of the employee or his family of - Fully
� Any hospital maintained by Government or Local Authority; or exempted
� Any hospital approved by the Government for its employee.
3 Payment/reimbursement by employer of medical expenses incurred by an employee Fully
on himself/his family in a hospital, which is approved by the CCIT, for the prescribed exempted
diseases (like Cancer, TB, AIDS, etc.)
Employee must attach with the return of income -
� a certificate from the approved hospital specifying the prescribed disease or ailment
for which hospitalisation was required; and
� a receipt for the amount paid to the hospital.
4 Approved [by CG or Insurance Regulatory Development Authority (IRDA)] Group Fully
medical insurance (i.e. Mediclaim) obtained by the employer for his employees. Exempted
5 Any reimbursement by employer of any insurance premium paid by the employee, for Fully
insurance of his health or the health of any member of his family under any scheme Exempted
approved by the Central Government or the IRDA
6. Reimbursement of medical bill of the employee or his family in respect of any illness Fully
relating to Covid 19 provided the employee submits the following documents to the Exempted
employer, –
a. the COVID-19 positive report of the employee or family member, or medical report
if clinically determined to be COVID-19 positive through investigations, in a hospital
or an in-patient facility by a treating physician of a person so admitted;
b. all necessary documents of medical diagnosis or treatment of the employee or his
family member for COVID-19 or illness related to COVID-19 suffered within 6
months from the date of being determined as COVID-19 positive; and
c. a certification in respect of all expenditure incurred on the treatment of COVID-19 or
illness related to COVID-19 of the employee or of any member of his family.
b) Medical facility provided outside India
Case Treatment
Medical Expenditure Exempted to the extent permitted by RBI.
Cost of stay abroad (Patient + One Attendant/Care taker) Exempted to the extent permitted by RBI.

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Cost of travel (Patient + One Attendant/Care taker) Exempted only when gross total Income of the
employee excluding this (cost of travel) perquisite,
does not exceed ` 2,00,000 p.a.
Taxpoint: In calculation of gross total income
ceiling, taxable value of medical treatment perquisite
and cost of stay perquisite shall be included.
Notes :
a. Hospital includes a dispensary, a clinic or a nursing home.
b. For this purpose ‘family’ means:
� Spouse, children of the individual; and
� Parents, brothers, sisters of the individual, wholly or mainly dependent on him.
c. Fixed Medical Allowance is fully taxable.
d. The expenditure on medical treatment by the employer may be by way of payment or reimbursement.
e. The perquisite is taxable in the hands of specified employee, however if the bills are issued in the name of
employee and reimbursed by the employer, then it shall be taxable in the hands of all employees.
Illustration 30.
Find taxable amount of perquisite in the following cases:
1. Y has been allowed a fixed medical allowance of ` 2,000 p.m.
2. Apart from reimbursement of petty medical bills of ` 25,000, Z and his family get medical treatment in a
dispensary maintained by the employer. Value of facility provided to Z and his family members during the
previous year are as follows:
Particulars Amount
a. Z 2,000
b. Mrs. Z 5,000
c. Major son of Z (independent) 8,000
d. Minor daughter of Z 25,000
e. Dependent younger brother of Z 8,000
f. Independent younger sister of Z 10,000
g. Dependent sister-in-law 5,000
Solution :
1. Medical allowance is fully taxable, hence the taxable amount is ` 24,000
2. Taxable perquisite in hands of Mr. Z is as under:
Particulars Amount
a. Z Nil
b. Mrs. Z Nil
c. Major son of Z (independent) Nil
d. Minor daughter of Z Nil
e. Dependent younger brother of Z Nil
f. Independent younger sister of Z 10,000
g. Dependent sister-in-law 5,000
h. Reimbursement of medical bill 25,000
Taxable Perquisite 40,000

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Illustration 31.
Himalaya Ltd. reimburses the following expenditure on medical treatment of the son of an employee Karan. The
treatment was done at UK:
1. Travelling expenses ` 1,15,000.
2. Stay expenses at the UK permitted by RBI ` 45,000 (Actual expenses ` 70,000).
3. Medical expenses permitted by RBI ` 50,000 (Actual expenses ` 70,000).
Compute the taxable perquisites for the assessment year 2025-26 in the hands of Karan, if his annual income from
salary before considering medical facility perquisite was (i) ` 1,50,000; (ii) ` 2,00,000.
Solution :
Taxable value of perquisite in hands of Mr. Karan is as under:

Particulars Workings Details Case 1 Case 2

Amount paid in excess of RBI permission
Medical
and actual expenditure shall not qualify `70,000 – ` 50,000 ` 20,000 ` 20,000
expenditure
for exemption.
Stay cost in excess of RBI permission and
Stay cost actual expenditure shall not qualify for `70,000 – ` 45,000 ` 25,000 ` 25,000
exemption.
Travel cost Travel cost (Note) Nil ` 1,15,000

Total taxable perquisite `45,000 ` 1,60,000

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

Particulars Case 1 Case 2

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

2.1.34 Leave Travel Concession [Sec. 10(5)] [Available only under old regime]
If an employee goes on travel (on leave) with his family and traveling cost is reimbursed by the employer, then
such reimbursement is fully exempted.
Notes :
1) Journey may be performed during service or after retirement.
2) Employer may be present or former.
3) Journey must be performed to any place within India.

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4) In case, journey was performed to various places together, then exemption is limited to the extent of cost of
journey from the place of origin to the farthest point reached, by the shortest route. E.g., if you want to go Goa
from Kolkata, you cannot go Manali first and then Goa.
5) Employee may or may not be a citizen of India.
6) Stay cost is not exempt.
Exemption: Exemption is limited to the amount actually incurred on the travel to the extent as under:

Journey performed Maximum exempted fare

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

a) No exemption can be claimed

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

c) Carry-forward facility: Where concession is not availed during the preceding block (whether on one occasion
or both), then any one journey performed in the first calendar year of the immediately succeeding block will
be additionally exempted (i.e. not counted in two journey limit)
d) Family: Family here means -
� Spouse and children of the individual; and
� Parents, brothers and sisters of the individual, who are wholly or mainly dependent on him.
e) Restriction on number of children: Exemption can be claimed for any number of children born on or before
30/9/1998. In addition, exemption is available only for 2 surviving children born on or after 1/10/1998.
However, children born out of multiple birth, after the first child, will be treated as one child only.

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f) Fixed Leave travel allowance: Fixed amount paid to employees by way of leave travel allowance shall not be
exempt.

g) Value of Leave travel concession provided to the High Court judge or the Supreme Court Judge and members
of his family are completely exempt without any conditions under both regime.

h) The exemption u/s 10(5) is for travel cost and does not include stay cost or other cost.

2.1.35 Other Perquisites

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

Taxability of perquisites at a glance

Whether it is taxable in the

hands of
Rule / Section Perquisites
Specified Non-specified
employee employee
Rent-free residential accommodation
- Unfurnished
Rule 3(1) - Furnished Yes
- Concessional
- Hotel accommodation
Motor car
Rule 3(2) - If car is owned by employer Yes No
- If car is owned by employee Yes Yes
Free domestic servant
Rule 3(3) - Appointed by employer Yes No
- Appointed by employee Yes Yes
Gas, electricity or water facility
Rule 3(4) - If facility is in the name of employer Yes No
- If facility is in the name of employee Yes Yes
Free education
Rule 3(5) - In case of reimbursement Yes Yes
- In any other case Yes No
Free transport
Rule 3(6) - If employer is engaged in transport business Yes No
- In any other case Yes Yes

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Whether it is taxable in the

hands of
Rule / Section Perquisites
Specified Non-specified
employee employee
Rule 3(7) Other fringe benefits or amenities
- (i) - Interest free loan or concessional rate of interest
- (ii) -Traveling / Touring / Holiday Home expenditure
- (iii) - Meals / Refreshments
- (iv) - Gift, voucher or token Yes
- (v) - Credit card
- (vi) - Club membership
- (vii) - Use of movable assets
- (viii) - Movable assets sold by employer to its employee
Fair market value of the specified security or sweat
Rule 3(8) & (9) Yes
equity shares allotted to the employee
Sec. 10(5) Leave travel concession No No
Income tax paid by employer on -
Sec.10(10CC) - Non-monetary perquisite No No
- In any other case Yes Yes
Medical facility
Proviso to
- In case of reimbursement Yes Yes
Sec. 17(2)
- In any other case Yes No
Any obligation of employee paid by employer (unless
Sec. 17(2)(iv) Yes Yes
otherwise specifically exempted)
Allotment/transfer of specified securities or sweat
Sec.17(2)(vi) Yes Yes
equity shares
Sec.17(2)(vii) Contribution to superannuation fund Yes Yes

2.1.36 Provident Fund

Provident fund scheme is a saving device in the hands of salaried class. It is a retirement benefit scheme. Under
this scheme, a stipulated sum is regularly deducted from the salary of the employee as his contribution towards
the fund. The employer also, generally, contributes a similar amount out of his pocket to the fund. The employer’s
and employee’s contribution are together invested in such fund. Interest earned thereon is also credited to the fund
of the employee. Thus, provident fund scheme is a great media to initiate and mobilise small savings to a large
scale. On termination of service or retirement, employee receives the whole accumulated fund, subject to certain
conditions. Hence, provident fund has four components i.e. Employer’s contribution; Employee’s contribution;
Interest on employer’s contribution; and Interest on employee’s contribution
Provident fund is of four types, viz:
a) Statutory Provident Fund (SPF): Statutory provident fund is set up under the provisions of the Provident
Funds Act, 1925. Government and Semi-Government organisations, local authorities, railways, Universities
and recognised educational institutions maintain Statutory Provident Fund.

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b) Recognised Provident Fund (RPF): The provident fund scheme is framed under the Employee’s Provident
Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred as PF Act). Further, if an employer creates
his own scheme for provident fund then he can do so subject to recognition from the Commissioner of Income
tax. It is governed by Part A of Schedule IV to the Income-tax Act, 1961. This schedule contains various rules
regarding the following:

(i) Recognition of the fund

(ii) Employee’s and employer’s contribution to the fund

(iii) Treatment of accumulated balance etc.

c) Unrecognised Provident Fund (URPF): If a provident fund scheme is created by an employer, which is not
recognised by the Commissioner of Income tax, then such fund is known as an Unrecognised provident fund.

d) Public Provident Fund (PPF): The Central Government has established a fund for the benefit of public to
mobilise personal savings. Any member of the public (on his own behalf or on behalf of a minor of whom
he is a gurdian), whether salaried or self-employed, can contribute to the fund by opening a provident fund
account at any branch of the State Bank of India or its subsidiaries or other specified bank or post offices. Even
a salaried employee can simultaneously become a member of employee’s provident fund (whether statutory,
recognised or unrecognized) and public provident fund. For getting a deduction u/s 80C (available only under
old regime), a member is required to contribute to the PPF a minimum of ` 500 in a year. The maximum
amount that may qualify for deduction on this account is ` 1,50,000 as per PPF rules. Interest is credited every
year but payable only at the time of maturity. Interest earned on this fund is exempt from tax u/s 10(11).

Tax Treatment

Particulars SPF RPF URPF PPF

Not taxable Exempted up to 12% of Salary Not taxable Not
Employer’s (here, salary means Basic + DA# + Applicable
Contribution Commission as a fixed percentage
on turnover
Eligible for Eligible for deduction u/s 80C Not eligible for Eligible for
deduction u/s 80C [only under old regime] deduction u/s deduction u/s
Employee’s
[only under the old 80C 80C [only
Contribution
regime] under the old
regime]
Interest on Not Taxable u/s Exempted @ 9.5% p.a. u/s 10(12), Not taxable Not
employer’s 10(11) any excess interest will be taxable Applicable
contribution as salary.
Not Taxable u/s Exempted @ 9.5% p.a. u/s 10(12), Not Taxable Not taxable
Interest on
10(11) any excess interest will be taxable
employee’s
(Subject to Note 1) as salary.
contribution
(Subject to Note 1)
Lump Sum Exempt u/s 10(11) Exempt u/s 10(12) Note 2 Exempt u/s
withdrawal (Subject to Note 3) 10(11)
#
D.A., forming part of retirement benefit, only to be considered.

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Notes :
1. As per sec. 10(11)/(12), w.e.f. 01-04-2021, interest accrued during the previous year in the account of an
employee maintained by the fund shall not be exempted to the extent it relates to the following amount:

Case Interest not exempted

Where employer is giving Interest on employee’s contribution (made on or after 01-04-2021) in
contribution excess of ` 2,50,000 per year
Where employer is not giving Interest on employee’s contribution (made on or after 01-04-2021) in
contribution excess of ` 5,00,000 per year
Calculation of taxable interest relating to contribution in a provident fund or RPF, exceeding specified
limit [Rule 9D]
For this purpose, separate accounts within the provident fund account shall be maintained during the P.Y.
2021-22 and all subsequent previous years for taxable contribution and non-taxable contribution made by
a person and the interest accrued during the previous year in the taxable contribution account shall not be
exempt.
Taxpoint :
� Non-taxable contribution account shall be the aggregate of the following:
i. closing balance in the account as on 31-03-2021;
ii. any contribution made by the person in the account during the P.Y. 2021-22 and subsequent previous
years, which is not included in the taxable contribution account; and
iii. interest accrued on aforesaid balances
as reduced by the withdrawal, if any, from such account;
� Taxable contribution account shall be the aggregate of the following:
i. contribution made by the person in a previous year in the account during the previous year 2021-22
and subsequent previous years, which is in excess of the threshold limit (` 2,50,000 / ` 5,00,000); and
ii. interest accrued on that,
as reduced by the withdrawal, if any, from such account
2. Lump sum amount withdrawn from URPF

Particulars Tax treatment

Accumulated employer’s contribution Fully taxable under the head Salaries
Accumulated employee’s contribution Not taxable
Accumulated interest on employer’s contribution Fully taxable under the head Salaries
Accumulated interest on employee’s contribution Fully taxable as income from other sources
3. Lump sum amount withdrawn from RPF
a) Amount withdrawn from RPF is not taxable, if
i. Employee retires or terminates job after 5 years of continuous service; or

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ii. Employee has resigned before completion of 5 years and joins another organization (who also
maintains recognized provident fund and his fund balance with current employer is transferred to the
new employer).

iii. The entire balance standing to the credit of the employee is transferred to his account under New
Pension Scheme as referred u/s 80CCD

iv. Employee retires or terminates job before 5 years of continuous service -

� by reason of ill health; or

� by reason of contraction or discontinuance of employer’s business; or

� any other reason beyond the control of employee.

b) In any other case, amount withdrawn shall be taxable as in the case of URPF. [Refer Note 2].

Illustration 32 :

Mr. X has the following salary structure –

Basic pay ` 10,000 p.m. Commission (fixed) ` 2,000
DA ` 1,000 p.m. Entertainment allowance ` 2,000 p.m.
X contributes ` 20,000 to provident fund. Employer also makes a matching contribution. Compute gross salary of
if –
a) Mr. X is a Government employee and such provident fund is a statutory provident fund.
b) Mr. X is an employee of Y Ltd. and such fund is a recognized fund.
c) Mr. X is an employee of Z Ltd. and such fund is an unrecognized fund.
Solution :
Computation of taxable salary of Mr. X for the A.Y. 2025-26

Case A Case B Case C

Particulars
Details Amount Details Amount Details Amount
Basic 1,20,000 1,20,000 1,20,000
Commission 2,000 2,000 2,000
Allowances
Dearness allowance 12,000 12,000 12,000
Entertainment allowance 24,000 36,000 24,000 36,000 24,000 36,000
Employer’s contribution to PF 20,000 20,000 20,000
Less: Exempted 20,0001 Nil 15,8402 4,160 20,0001 Nil
Gross Salary 1,58,000 1,62,160 1,58,000
Notes :
1. Contribution to statutory and unrecognised provident fund is fully exempted.
2. Contribution to recognised provident fund is exempt upto 12% of salary. Salary for such purpose –

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

Illustration 33:
Sri Ramprasad retired on 1/7/2024. On retirement, he received from his provident fund ` 3,00,000 as lump sum
consisting of:
Employer’s contribution ` 1,25,000
Employee’s contribution ` 1,25,000
Mention the treatment of amount so received if –
1) The Provident Fund is Unrecognised Provident Fund
2) The Provident Fund is Recognised Provident Fund and
a) Employee retired after 23 years 7 months service.
b) Employee retired after 4 years 7 months service due to his blindness.
c) Employee retired after 3 years 7 months service and joined another company having RPF and the old RPF
balance has been transferred to new employer’s RPF.
d) Employee retired after 3 years 10 months service and started his own business.
Solution :
1) Lump sum received from URPF is taxable as under:

Employer’s contribution ` 1,25,000 taxable as salary

Employee’s contribution ` 1,25,000 not taxable
Interest on employer’s contribution ` 25,000 taxable as salary
Interest on employee’s contribution ` 25,000 taxable as income from other sources
Note: Total amount received is ` 3,00,000. Employer’s and employee’s contribution together is ` 2,50,000. So,
the balance ` 50,000 is interest. As employer and employee contributed equal amount hence the interest is also
divided equally.
2. (a) Since employee retires after five years of service hence lump sum amount received from
RPF is fully exempted – Sec. 10(12)
(b) Since employee retires due to his incapability to work, hence lump sum received from RPF is fully
exempted - Sec. 10(12)
(c) Though employee left the job before five years of service but joined another organisation maintaining RPF
and did not withdrew the amount but transferred the balance in RPF account with new organisation, hence
the same will be treated as continuation of service and lump sum from RPF is fully exempted - Sec. 10(12)
(d) Since employee left the job before five years of service, hence amount received shall be taxable as in case
of URPF [discussed above in (1)].

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Points to be remembered
1. Employer’s Contribution to the New pension System (as specified u/s 80CCD) is fully taxable under the head
‘Salaries’. However, deduction is available u/s 80CCD.
Deduction u/s 80CCD(2) in respect of employer’s contribution would be available to an assessee irrespective
of the regime under which he pays tax. However, deduction u/s 80CCD(1)/(1B) in respect of employee’s
contribution would be available to an assessee only if he opts for old regime
2. Central Government’s contribution to Agniveer Corpus Fund account would form part of salary.
Deduction u/s 80CCH(2) in respect of Central Government’s contribution would be available to an assessee
irrespective of the regime under which he pays tax. However, deduction u/s 80CCH(1) in respect of employee’s
contribution would be available to an assessee only if assessee opts for old regime
3. The amount or the aggregate of amounts of any contribution made to the account of the assessee by the
employer:
(a) in a Recognised Provident Fund (RPF);
(b) in the scheme referred to in sec. 80CCD(1) [i.e., NPS]; and
(c) in an approved superannuation fund,
- in excess of ` 7,50,000 in a previous year shall be taxable
Taxpoint: There is combined upper limit of ` 7,50,000 in respect of employer’s contribution in a year to NPS,
superannuation fund and recognised provident fund and any excess contribution is taxable.
4. The annual accretion (like interest, dividend, etc.) during the previous year to the balance at the credit of the
aforesaid fund or scheme to the extent it relates to the contribution referred above shall be taxable

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

Any payment from an approved superannuation fund made -
• on the death of a beneficiary; or
• to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on
his becoming incapacitated prior to such retirement; or
• by way of refund of contributions on the death of a beneficiary; or
• by way of refund of contributions to an employee on his leaving the service (otherwise than by retirement at
or after a specified age or on his becoming incapacitated prior to such retirement) to the extent to which such
payment does not exceed the contributions made prior to 1-4-1962 and any interest thereon.
• by way of transfer to the account of the employee under a pension scheme referred to in sec. 80CCD and
notified by the Central Government
- is exempt
Transferred Balance (Conversion of URPF to RPF) [Rule 11(4) of Part A of the Fourth schedule]
An organisation maintaining URPF, may later get recognition from Commissioner of Income tax. In such case, the
accumulated balance under URPF shall be converted to RPF. Tax treatment of such transferred balance will be as
under:
Calculation is made of all sums comprised in the transferred balance that would have been liable to income tax if
the recognition of the fund had been in force from the date of institution of the fund. However, in case of serious
accounting difficulty, the Commissioner may make a summary calculation of such aggregate.

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Such aggregate sum is deemed to be the income received by the employee in the previous year in which the
recognition of the fund takes effect.
Note: On taxability of such conversion, assessee cannot claim relief u/s 89(1).

Illustration 34 :
Mr. Sharma has been appointed as an accountant of ABC Ltd as on 1/4/2022, since then he is working with the
same company. The salary structure and increment details are as under:
Basic ` 5000 - 1000 - 8000 -1500 - 14000
D.A. ` 3000 – 500 – 5000 – 1000 - 10000
He and his employer contribute to URPF 14% of basic and DA.
Every year 9% interest is credited to such fund. As on 1/4/2024, the fund gets recognition. Hence, the accumulated
balance in URPF was transferred to RPF. Comment on tax treatment of such transferred balance.
Solution :
Statement showing treatment of transferred balance:

Year Employer’s contribution to fund Exempted amount considering Difference

the fund as RPF
2022-2023 14% of (60,000 + 36,000) i.e. ` 13,440 12% of ` 96,000 i.e. ` 11,520 ` 1,920
2023-2024 14% of (72,000 + 42,000) i.e. ` 15,960 12% of ` 1,14,000 i.e. ` 13,680 ` 2,280
Total ` 4,200
Current year (i.e. 2024-25) contribution shall be treated as RPF and the taxable amount will be ` 2,640 [being (14
-12)% of (` 84,000 + ` 48,000) i.e. 2% of ` 1,32,000].
Since the interest rate is less than the exempted limit (i.e. 9%), hence interest portion is not taxable.
Total taxable salary on account of provident fund for the A.Y. 2025-26 is ` 6,840 (being ` 4,200 + ` 2,640).

Deduction from Gross Salary [Sec. 16]

2.1.37 Standard Deduction [Sec. 16(ia)]

Lower of the following shall be allowed as standard deduction to all employee:
a. ` 50,000
b. Amount of gross salary
From gross salary, Standard Deduction is available to the following extent:

If assessee has opted for the old (or regular) tax regime If assessee is under default tax regime
Lower of the following shall be allowed as standard deduction Lower of the following shall be allowed as
to all employee: standard deduction to all employee:
a. ₹ 50,000 a. ₹ 75,000
b. Amount of gross salary b. Amount of gross salary

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2.1.38 Entertainment Allowance [Sec. 16 (ii)] [Available only in old regime]

Entertainment allowance is initially included in taxable allowances as fully taxable. Thereafter, a deduction is
allowed under this section from gross taxable salary. However, deduction u/s 16(ii) shall be available to the
Government employee only.
Deduction for Entertainment allowance being minimum of the following:
a. Actual Entertainment Allowance
b. ` 5,000/-
c. 20% of Basic Salary.
Taxpoint:
� Deduction allowed shall be irrespective of actual expenditure incurred, whether for office or personal purpose.
� No deduction is available under this section to a Non-government employee.
Illustration 35 :
Compute taxable Entertainment allowance & net salary of Sri Hanuman Prasad from the following data:
Basic salary ` 8,000 p.m. D.A. ` 2,000 p.m. Taxable perquisite ` 35,000, Entertainment Allowance ` 4,000 p.m.
Out of such allowance ` 20,000 is expended and balance amount is saved. Assuming he is:
a. Government employee, opts for old regime b. Non-Government employee, opts for old regime
How shall your answer differ if the assessee has not opted for the old tax regime
Solution :
Under old tax regime
Computation of taxable income of Sri Hanuman Prasad for the A.Y. 2025-26
Particulars Government Employee Non-Government Employee
Details Amount Details Amount
Basic Salary 96,000 96,000
Dearness Allowance 24,000 24,000
Entertainment Allowance 48,000 48,000
Taxable perquisite 35,000 35,000
Gross Taxable Salary 2,03,000 2,03,000
Less: Deduction u/s
16(ia) Standard Deduction 50,000 50,000
16(ii) Entertainment allowance# 5,000 55,000 Nil 50,000
Net Taxable Salary 1,48,000 1,53,000
#
Entertainment Allowance is exempted to the extent of minimum of the following:

a. Actual Entertainment Allowance ` 48,000

b. 20% of Basic Salary ` 19,200
c. Statutory amount ` 5,000

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Under the default tax regime

Computation of taxable income of Sri Hanuman Prasad for the A.Y.2025-26

Particulars Government Employee Non-Government Employee

Details Amount Details Amount
Basic Salary 96,000 96,000
Dearness Allowance 24,000 24,000
Entertainment Allowance 48,000 48,000
Taxable perquisite 35,000 35,000
Gross Taxable Salary 2,03,000 2,03,000
Less: Deduction u/s
16(ia) Standard Deduction 75,000 75,000
16(ii) Entertainment allowance Nil 75,000 Nil 75,000
Net Taxable Salary 1,28,000 1,28,000
2.1.39 Tax on employment or professional tax [Sec. 16(iii)] [Available only in old regime]
Tax on employment, profession, trade, etc. levied by a State under Article 276 of the Constitution will be allowed
as deduction on cash basis, whether paid by employee or by employer (on behalf of employee) from gross taxable
salary.

Note: If employer (on behalf of employee) pays Professional tax then:

a. Firstly, it is to be included as taxable perquisite; and

b. Further, it is allowed as deduction u/s 16(iii).

Illustration 36 :

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

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

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

Find his taxable salary, if he opt for the old regime.

Solution :
Computation of taxable salary Mr. Rohit for the A.Y.2025-26 :
Particulars Details Amount
Basic Salary 60,000
Allowances
Dearness Allowance 24,000

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Entertainment Allowance 3,600 27,600

Taxable perquisite
Professional tax paid by employer 1,600
LIC Premium paid by employer 3,600 5,200
Gross Taxable Salary 92,800
Less: Deduction u/s
16(ia) Standard Deduction 50,000
16(ii) Entertainment allowance (Assessee is a Non-government employee) Nil
16(iii) Professional Tax (` 1,600 + ` 600) 2,200 52,200
Taxable Salary 40,600
Notes :
A. Conversion of Net Salary into Gross Salary
Sometimes net basic salary is given after deduction of TDS, Loan repayment, PF deduction etc that needs to
be grossed up as under:
Net Salary = Gross Salary – Employee’s contribution to provident fund – TDS – loan repayment by employee
– other deduction from salary (if any).
Examples: Find basic salary of Mr. Singh having the following salary structure:

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

b. Deduction from salary 10% of basic salary as contribution to RPF
c. TDS ` 9,000
d. Repayment of earlier loan ` 35,000
In this case, Basic Salary shall be computed as under:
Net basic salary = Basic salary – TDS – Loan repayment – Contribution to RPF
Let the basic salary be X
1,00,000 = X – 9,000 – 35,000 – 0.1X
1,44,000 = 0.9X
X = 1,60,000. Hence, basic salary for the year is ` 1,60,000.
B. Meaning of Salary for different purposes

For Retirement benefit

Gratuity (covered by the (Basic + DA) last drawn
Payment of Gratuity Act)
Gratuity (not covered by the (Basic +DA1 + Commission2) being average of last 10 months preceding the
Payment of Gratuity Act) month of retirement.
Leave encashment (Basic +DA1 + Commission2) being average of last 10 months immediately
from the retirement.
Voluntarily retirement (Basic +DA1 + Commission2) last drawn

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For regular benefit

Rent Free Accommodation (Basic + DA1 + Commission2 + Bonus + Fees + Any other taxable allowance
+ Any other monetary benefits excluding perquisite)
Specified employee (Basic + DA + Commission2 + Bonus + Fees + Any other taxable allowance
+ Any other monetary benefits – Deduction u/s 16)
Entertainment Allowance Basic only
Any other case (Basic +DA1 + Commission2)
1.
DA only if it forms a part of retirement benefit. 2.
Commission as a fixed percentage on turnover.

Illustration 37 :
Mr. Bharat of Siliguri is offered an employment by Vimal & Co. Ltd., Kolkata on a basic salary of ` 5,500 p.m.
Other allowances are dearness allowance (not forming part of salary for retirement benefits) ` 4,000 p.m., medical
allowance ` 1,000 p.m. and bonus being 1 month’s basic salary. The company gives an option to him either to
take a rent-free accommodation in Kolkata of the fair rental value of ` 1000 p.m. or to accept a cash house rent
allowance of ` 1,000 p.m. He decides to accept house rent allowance and takes a house in Kolkata at a monthly
rent of ` 1,000. He has opted for old regime
Do you think he has made a wise choice from tax advantage view? State reasons.
Solution :
Computation of Gross Taxable Salary of Mr. Bharat for the A.Y.2025-26

Particulars Amount When he takes HRA When he takes RFA

Amount Amount Amount Amount
Basic 66,000 66,000
Bonus 5,500 5,500
Dearness allowance 48,000 48,000
Medical allowance 12,000 12,000
HRA 12,000
Less: Minimum of the following
a) Actual amount received 12,000
b) 50% of salary 33,000
c) Rent paid over 10% of salary 5,400 5,400 6,600 Nil
Rent free accommodation (being 10% of salary) Nil 8,350
Gross Taxable Salary 1,38,100 1,39,850
Note: Salary for the purpose:

Particulars Accommodation HRA

Basic salary 66,000 66,000
Medical Allowance 12,000 --
Bonus 5,500 --
Total 83,500 66,000

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Comment :

The above computation indicates that if the assessee chooses rent-free accommodation, then his gross taxable
salary increases by ` 1,750 (being ` 1,39,850 – ` 1,38,100), which may increase his tax bill. Hence, assessee has
taken right decision.

Illustration 38 :

Following are the particulars of income of Mrs. S. Choudhury for the Previous Year 2024-25:

(a) Basic salary @ ` 15,000 per month.

(b) Dearness Allowance @ 60% of salary.

(c) Medical Allowance @ 600 per month (Actual expenditure ` 5,000).

(d) House Rent Allowance received @ ` 6,000 per month and she pays rent of ` 7,200 per month for her house in
Durgapur.

(e) City compensatory allowance ` 1,500 per month.

(f) She owns a car which she is using for official purposes. Her employer reimburses her @ ` 3,000 per month.

(g) She is contributing ` 2,100 per month towards a recognized provident fund. The employer is also contributing
the same amount. Interest credited to R.P.F @ 11% ` 2,200.

(h) She paid ` 1,800 as professional tax during the year.

Compute income from salary of Mrs. Choudhury for the assessment year 2025-26, if he opts for old regime.

Solution :
Computation of Taxable Salary of Mrs. S Choudhury for the A.Y. 2025-26
Particulars Working Details Amount Amount
Salaries
Basic 1,80,000
Allowances
Dearness allowance 60% of basic 1,08,000
Medical Allowance 7,200
City compensatory allowance 18,000
House rent allowance 72,000
Less: Exempted u/s 10(13A) Minimum
of the following:
a. Actual HRA 72,000
b. 40% of (Basic + DA) 1,15,200
c. Rent paid – 10% (Basic + DA) 57,600 57,600 14,400 1,47,600
Perquisites u/s 17(2):

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Particulars Working Details Amount Amount

Car facility - -
Employer’s contribution to RPF 25,200
Less: Exempted u/s 10(12) 12% of (Basic + DA) 25,200 -
Interest on RPF 2,200
Less: Exempted Upto 9% 1,800 400 400
Gross taxable salary 3,27,600
Less: Deduction u/s
16(ia) Standard Deduction 50,000
16(iii) Professional tax 1,800 51,800
Taxable Salary 2,75,800

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Income from House Property 2.2

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

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

2.2.1 Chargeability [Sec. 22]

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

Condition 1 : Building or land appurtenant thereto

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

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

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

Fictional owner or Deemed owner [Sec. 27]

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

1. Transfer to spouse or minor child [Sec.

27(i)] : When an individual transfer a house
property to -
¾ his or her spouse (not being a transfer
in connection with an agreement to live
apart); or
¾ a minor child (not being a married
daughter)
- without adequate consideration, then
transferor shall be treated as deemed
owner of such property.
E.g. : Mr. X transfers his house property worth ` 5,00,000 to Mrs. X out of love and affection. In such case,
though Mrs. X is the legal owner but Mr. X will be liable to tax as deemed owner of such property.
Note : In case of transfer to spouse, marriage should subsist on both the days i.e., on the day of transfer as well
as on the day when income arises.
Taxpoint :
¾ Transferee must be spouse or minor child other than married daughter.
¾ Transfer must be without adequate consideration.
¾ Transferred property must be a house property. E.g. Mr. X transfers cash of ` 5,00,000 to Mrs. X and

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Mrs. X purchases a house property from such cash, then such transfer of cash and subsequent purchase of
property shall not attract provision of sec. 27(i). However, the income from such property shall be clubbed
in the hands of Mr. X as per the provision of sec. 64(1)(iv) [For detail refer chapter Clubbing of Income].
2. The holder of an impartible estate [Sec. 27(ii)] : The holder of an impartible estate (property which is not
legally divisible) is treated as deemed owner of house property. Impartible estate is an estate to which the
assessee has succeeded by grant or covenant.
3. Property held by a member of a company, society or any other association [Sec. 27(iii)] : Property held
by a member of a company, co-operative society or other association of persons to whom a building or a part
thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed
owner of that building or a part thereof.
Taxpoint :
¾ Assessee is the member of a company, co-operative society or other AOP.
¾ He has been allotted or leased a building on account of such membership.
¾ Though he is not the legal owner of such property, still he will be liable to tax.
4. A person who acquired a property u/s 53A of the Transfer of Property Act [Sec. 27(iiia)] : A person who
is allowed to take or retain possession of any building (or part thereof) in part performance of a contract u/s
53A of the Transfer of Property Act, 1882, is deemed as the owner of that building (or part thereof).
Taxpoint :
¾ Assessee has taken the possession of the property.
¾ He has partly performed or promised to perform the contract i.e., he has paid (or is ready to pay) a part of
the consideration.
¾ The contract must be in writing. Though sale-deed might not be executed in favour of the buyer, still
certain other document like ‘power of attorney’ or ‘agreement to sell’ has been executed.
5. Lessee of a building u/s 269UA(f) [Sec. 27(iiib)] : A person who acquires any right u/s 269UA(f) in or with
respect to any building or part thereof, by way of lease agreement for a period not less than 12 years is deemed
as the owner of that building (or part thereof).
Notes :
a. Lease period should not be less than 12 years [as per sec. 269UA(f)] including extension period.
b. Above provision does not include any right by way of lease from month to month or for a period not
exceeding 1 year.
E.g. : X lets out a property to Miss Y on a lease of 9 years. However, Miss Y has a right to renew the lease
for further period of 3 years. In such case, Miss Y shall be deemed as an owner of the property u/s 27.
However, if such right of renewal of lease (for 3 years) is subject to condition that at each occasion it will
be renewed for a period of 11 months, then X will be owner of the property and liable to tax u/s 22.

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

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

*However where the assessee is engaged in the business of letting out of commercial properties, income therefrom
would be chargeable under the head Profits and Gains of Business or Profession.
2.2.2 Some special cases
Foreign property
If house property is situated abroad, then annual value of such property shall be taxable as :
Assessee Condition for taxability
Ordinarily resident Always taxable
Not ordinarily resident or Non resident Income must be received in India
Note: The annual value of such property would be computed as if the property is situated in India.
Disputed ownership
Merely, due to dispute regarding the title of property, assessment cannot be postponed. In such case, person who is
in receipt of income or who enjoys the possession of the property is assessable to tax.
Composite rent
Together with rent of the building, if the owner gets charges for other services or rent of other assets provided in
the building (e.g. furniture, machinery, etc.), amount so received is termed as ‘composite rent’.
Composite Rent = Rent for building + Rent for assets / Charges for various services

* Rayala Corporation -vs.- ACIT (2016) 386 ITR 500 (SC) read with amendment made through Finance (No. 2)
Act, 2024

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Tax treatment of composite rent is as follows :

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

Particulars Taxable under the head

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

Co-ownership [Sec. 26]

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

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2.2.3 Exempted properties

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

2.2.4 Computation of Income

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

¾ Let out property [Sec. 23(1)]

¾ Self-occupied property [Sec. 23(2)(a)].
¾ Deemed to be let out property [Sec. 23(4)].
¾ Property not actually occupied by the owner [Sec. 23(2)(b)]
¾ Partly let out and partly self occupied property [Sec. 23(3)]
¾ Recovery of arrears of rent and unrealized rent [Sec. 25A]

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

Computation at a glance
Computation of Income from house property of …………. for the Assessment Year ……….
Particulars Details Amount
Gross Annual Value (GAV) ****
Less : Municipal tax ****
Net Annual Value (NAV) ****
Less : Deductions u/s
24(a) Standard deduction [30% of NAV] ****
24(b) Interest on borrowed capital **** ****
Income from house property ****

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Gross Annual Value (GAV) :

Normally, income tax is charged

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

A. Actual Rent Receivable [ARR]

Any sum receivable as rent of the house property for the previous year is an evidence for determining the
earning capacity of the building. Such actual rent receivable is to be computed on accrual basis. However,
where tenant pays rent, which is influenced by benefits provided by the owner of the property, such rent must
be disintegrated to determine actual rent i.e. De-facto rent of the property.
De facto rent = ARR – Cost of amenities.
Taxpoint:
 While computing actual rent receivable, outstanding rent shall be considered but advance rent received
during the financial year is not to be considered.
 Municipal tax paid by the tenant should not be considered while computing de-facto rent.
 Similarly, de-facto rent shall not be increased by notional interest on deposit received by the owner from
the tenant.
B. Gross Municipal Value
It means the annual value of the property decided by municipality on which they charge municipal tax. Such
valuation may also be taken as evidence of earning capacity of a property.
In metro cities (i.e. Chennai, Delhi, Kolkata, Mumbai), municipal authorities charge tax on Net Municipal
Value after giving a deduction for repairs (being 10% of Gross Municipal value) and an allowance for service
taxes (like sewerage tax, water tax etc. as a % of Net Municipal value). Hence, the relation between Gross
Municipal Value and Net Municipal Value can be concluded as under -
In metro cities NMV = GMV – 10% of GMV – Sewerage/Water Tax etc. (as a % of NMV)
In non-metro cities GMV = NMV
C. Fair or Notional rent of the property
Fair or notional rent of a property means rent fetched by a similar property in the same or similar locality.
Though two properties might not be exactly similar still it is an indicator of rent reasonably expected from
the property. An inflated or deflated rent due to emergency, relationship and such other conditions need to be
adjusted to determine fair rent.
For instance, a property was let out to a friend for a monthly rent of ` 2,000 which might be let out to another
person at the rate of ` 2,500 p.m. In such case, fair rent of the property shall be ` 2,500 p.m.

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D. Standard rent under the Rent Control Act

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

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Illustration 39 : [Computation of Reasonable Expected Rent]

Calculate Reasonable Expected Rent from the following details :
Particulars House 1 House 2 House 3 House 4 House 5
Gross Municipal Value (a) 10,000 12,000 12,000 18,000 16,000
Fair Rent (b) 8,000 16,000 16,000 10,000 17,000
Higher of the [(a) and (b)] [A] 10,000 16,000 16,000 18,000 17,000
Standard Rent as per Rent Control Act [B] 10,000 14,000 N.A 8,000 20,000
Reasonable Expected Rent [Lower of [(A) & (B)] 10,000 14,000 16,000 8,000 17,000

Illustration 40 : [When there is neither unrealised rent nor vacancy period]

Calculate Gross Annual Value for the following house properties. (` in ‘000)
Particulars H1 H2 H3 H4 H5 H6
Gross Municipal value for the whole year 120 130 140 150 160 180
Fair rent for the whole year 105 115 135 155 175 168
Standard rent (for the whole year) NA 100 135 180 165 144
Actual rent receivable 100 110 135 175 200 100
Period of the previous year (in months) 12 12 12 12 12 10
Solution :
Computation of Gross annual value (GAV) (` in ‘000)
Step Particulars H1 H2 H3 H4 H5 H6
Calculation of RER
Gross Municipal Value (a) 120 130 140 150 160 1501
Fair Rent (b) 105 115 135 155 175 1401
Higher of the [(a) and (b)] [A] 120 130 140 155 175 150
Standard Rent [B] NA 100 135 180 165 1201
1st RER [Lower of (A) and (B)] 120 100 135 155 165 120
2nd ARR 100 110 135 175 200 1001
3rd Gross Annual Value 120 110 135 175 200 120
1.
In case of H6, previous year period is of 10 months, which denotes that construction or acquisition of such house
property was completed on 1st of June of the previous year, therefore, Municipal Value, Fair Rent and Standard
Rent has been proportionately reduced.

Illustration 41 : [When there is unrealised rent but no vacancy period]

Find out the gross annual value in case of the following properties let out throughout the
previous year for the assessment year 2025-26 : (` in ‘000)

Particulars H1 H2 H3 H4 H5
Municipal annual value 90 500 30 100 315
Fair rent 300 300 300 300 300
Standard rent under the Rent Control Act 50 800 240 250 500
Actual rent receivable p.a. 120 600 180 360 150
Unrealised rent of the P.Y. 2024-25 (in terms of months) 2 3 1 3 2

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Solution :
Computation of gross annual value : (` in ‘000)
Steps Particulars H1 H2 H3 H4 H5
Calculation of RER
Gross Municipal Value 90 500 30 100 315
Fair Rent 300 300 300 300 300
1st
Higher of the above [A] 300 500 300 300 315
Standard Rent [B] 50 800 240 250 500
Reasonable Expected Rent [lower of A and B] [C] 50 500 240 250 315
Calculation of (ARR – Unrealised Rent)
Actual rent receivable p.a. 120 600 180 360 150
2nd Unrealised rent 20 150 15 90 25
ARR – Unrealised Rent [D] 100 450 165 270 125
3 rd
Gross Annual Value (being higher of step 1 and step 2) 100 500 240 270 315
Assume, conditions prescribed under Rule 4 being satisfied.
Illustration 42 : [When there is vacancy period but no unrealised rent]
Find out the Gross annual value in case of the following properties : (` in 000)

Particulars H1 H2 H3 H4 H5 H6
Gross Municipal Value p.a. 200 300 400 500 300 300
Fair rent p.a. 300 600 750 180 200 400
Standard rent under the Rent Control Act p.a. 300 180 280 225 250 240
Actual rent p.a. 600 900 300 240 216 240
Property remains vacant (in number of month) 1 3 2 1 2 1
Solution :
Computation of Gross Annual Value : (` in ‘000)

Step Particulars Working H1 H2 H3 H4 H5 H6

1st Calculation of RER Higher of GMV and FR (RER 300 180 280 225 250 240
cannot exceed SR)
2nd ARR For the period actually let out 550 675 250 220 180 220
3rd Higher of above Higher of Step 1 & Step 2 550 675 280 225 250 240
4th Gross Annual Value 5501 6751 2502 2202 2503 2204
1. In H1 and H2 Actual rent receivable is already higher than RER therefore vacancy period is not making any
impact (i.e. step 4 of computation discussed earlier in theory) on GAV.
2. In H3 & H4, ARR is less than RER due to vacancy (otherwise ARR would have been ` 3,00,000 & ` 2,40,000
respectively). Therefore, GAV will be the ARR computed in step 2.
3. In H5, ARR is less than RER not only due to vacancy but also due to other factors. In such case, value of
RERshall be taken as GAV.
4. In H6, ARR is less than RER due to vacancy period otherwise ARR would have been equal to RER.

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Illustration 43 :
X owns a house property in Pune, details relating to which are Municipal value ` 2,00,000 p.a., Fair rent ` 1,80,000
p.a., Standard rent ` 2,10,000 p.a. It is let out throughout the previous year (rent ` 10,000 p.m. up to 15/10/2024
and ` 12,000 p.m. thereafter). The property is transferred by X to Y on February 28, 2025. However, Y failed to
recover rent for March, 2025. Find gross annual value of the property in the hands of X and Y for the A.Y. 2025-26
Solution :
Since the property being sold to Y on last day of February 2025 hence previous year period for X is 11 months and
for Y is 1 month, accordingly gross annual value shall be:

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

[(` 10,000 * 6.5 months) + (` 12,000 * 4.5 months)] = ` 1,19,000

Illustration 44 : [When there is unrealised rent as well as vacancy period]

Find out the gross annual value in respect of the following properties for the A.Y. 2025-26 : (` in ‘000)

Particulars H1 H2 H3
Gross Municipal value 150 180 120
Fair rent 140 140 240
Standard rent 120 240 300
Actual rent if property is let out throughout the previous year 2024-25 180 300 150
Unrealised rent of the previous year 2024-25 25 40 20
Unrealised rent of the year prior to the previous year 2023-24 30 50 60
Period when the property remains vacant (in number of months) 3 1 -

Solution :

Working: Calculation of ARR – Unrealised Rent

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

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Step Particulars Working H1 H2 H3

1st Calculation of RER Higher of GMV and FR (RER 120 180 240
cannot exceed SR)
2nd ARR less current year unrealized Working 1 110 235 130
rent (for let out period only)
3rd Higher of above Higher of Step 1 & Step 2 120 235 240
4th Gross Annual Value 1101 235 2402
1.
In H1, till step 3 ARR is less than RER due to vacancy [otherwise ARR would have been ` 1,55,000 (being `
1,80,000 – ` 25,000). Therefore, GAV will be the ARR computed in step 2.
2.
In H3 there is no vacancy hence step 3 gives GAV.
Illustration 45 :
Find out the gross annual value in the following cases for the A.Y. 2025-26 :
Particulars H1 (`) H2 (`)
Situated at Chandigarh Amritsar
Municipal value p.a. 60,000 60,000
Fair rent p.a. 70,000 70,000
Standard rent under the Rent Control Act p.a. 80,000 50,000
Actual rent p.m.:
From April 1, 2024 to July 31, 2024 5,000 6,000
From October 1, 2024 to February, 2025 9,000 8,500

For the remaining period properties were vacant.

Solution :
Working 1) Actual rent
For H1 [(5,000 * 4) + (9,000 * 5)] = ` 65,000 For H2 [(6,000 * 4) + (8,500 * 5)] = ` 66,500
Computation of gross annual value

(` in ‘000)
Step Particulars Working H1 H2
1st RER Higher of GMV and FR (RER cannot exceed SR) 70 50
2nd ARR Working 1 65 66.5
3rd Higher of above Higher of Step 1 & Step 2 70 66.5
4th Gross Annual Value 651 66.52

1 In H1, ARR is less than RER due to vacancy [otherwise ARR would have been ` 86,667 {being (` 65,000/9) ×
12}]. Therefore, GAV will be the ARR computed in step 2.
2 In H2, Actual rent receivable is not less than RER, therefore vacancy period is not making any impact (i.e. step 4
of computation discussed earlier in theory) on GAV.

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Illustration 46 :
Find out the gross annual value in respect of the following properties : (` in thousands)
Particulars H1 H2 H3
Value determined by the Municipality for determining Municipal tax 500 800 600
Rent of the similar property in the same locality 400 900 600
Rent determined by the Rent Control Act 700 720 700
Actual rent receivable 350 540 600
Unrealised rent of the previous year 2024-25 10 Nil 150
Period when the property remains vacant (in number of months) 5 3 2
Solution :
Computation of Gross Annual Value : (` in thousands)
Step Particulars Working H1 H2 H3
Higher of GMV and FR (RER
1st RER 500 720 600
cannot exceed SR)
2nd ARR less Unrealised rent 340 540 450
3rd Higher of above Higher of Step 1 & Step 2 500 720 600
(ARR less Unrealised rent) if there [{ARR/(12 – vacancy period)} *
Working 570
would have been no vacancy 12] - Unrealised rent 590 720
Is value of Step 2 less than step 1
Yes Yes No
due to vacancy
If yes than step 2 will be GAV
4th Gross Annual Value 340 540 600
otherwise step 3 shall be GAV

Test Yourself
1. Find out the Gross Annual value in respect of the following properties for the A.Y. 2025-26
(` in thousands)
Particulars H1 H2 H3
Gross Municipal value 150 180 120
Fair rent 140 140 240
Standard rent 120 240 300
Actual rent if the property is let out throughout the previous year 2024-25 180 300 150
Unrealised rent of the previous year 2024-25 25 40 20
Unrealised rent of the previous year 2022-23 30 50 60
Period when the property remains vacant (in number of months) 3 1 -
Hints
1. H1: ` 1,10,000; H2: ` 2,35,000; H3: ` 2,40,000

2.2.6 Taxes levied by local authority (Municipal Tax) [Proviso to Sec. 23(1)]
Tax levied by the municipality or local authority is deductible from Gross Annual Value (GAV). As per sec. 27(vi),
taxes levied by a local authority in respect of any property shall include service taxes levied by such local authority
in respect of such property. Municipal tax includes Service taxes like fire tax, water tax, etc. levied by a local

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

Illustration 47 :
Compute net annual value with the following details for the A.Y. 2025-26 :
Particulars H1 H2 H3 H4 H5 H6
Situated at Patna Anand Hyderabad Balurghat Jodhpur Etawa
Municipal Value ` 1,00,000 ` 2,00,000 ` 3,00,000 ` 4,00,000 ` 4,25,000 ` 6,00,000
Gross Annual Value ` 1,00,000 ` 2,50,000 ` 1,80,000 ` 5,00,000 ` 8,00,000 ` 5,00,000
Municipal tax for P.Y. ` 5,000 10% 5% 20% 12% 10%
Sewerage tax - 5% ` 1,000 3% ` 3,750 ` 1,000
Water Tax - 3% 5% 2% 5% -
Additional information :
a. In case of H3, municipal tax paid for the financial year 2000-01 to 2023-24 is ₹ 2,00,000.
b. In case of H4, municipal tax paid for the financial year 2025-26 is ₹ 3,000.
c. In case of H6, all taxes charged by municipality are paid to the extent of 80% (50% by owner and 30% by
tenant).

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Solution :
Computation of Net Annual Value for A.Y. 2025-26 : (Amount in `)

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

2.2.7 Deductions u/s 24

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

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

Interest payable on amount borrowed for the purpose of purchase, construction, renovation, repairing,
extension, renewal or reconstruction of house property can be claimed as deduction on accrual basis.
For the purpose of calculation, interest on loan is divided into two parts :

In nutshell, tax treatment is as under :

Particulars Pre-construction period Post-construction period

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

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Direct Taxation

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

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

Illustration 48 :
Following information are provided by an assessee for his house properties for computing interest on loan allowed
u/s 24(b) :

Particulars HP1 HP2 HP3 HP4 HP5

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

Particulars Note HP1 HP2 HP3 HP4 HP5

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

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Particulars Note HP1 HP2 HP3 HP4 HP5

e) Interest on loan for payment of Not - - - - -
Municipal tax
Allowed
f) Interest on loan by mortgaging HP3 for 2 - - - - -
business purpose
g) Interest on loan for reconstruction 3 - - - - -
of HP1 paid outside India without
deducting tax at source
h) Interest on loan for reconstruction of 4 - - - - -
HP2 payable outside India on which
TDS has not been deducted, and no
payment yet made.
i) Interest on loan on mortgage of HP1 for 5 - 10 - - -
renovation of HP2
Interest on loan allowed u/s 24(b) 50 77 53 46 59
Notes :

1. Interest on loan is allowed on accrual basis.

2. The purpose of loan must be repair, renovation, construction or purchase of property.

3. As per sec. 25, any payment outside India without deduction of tax at source and when the payee has no agent
in India is not allowed as deduction. It is assumed that the payee has no agent in India.

4. Interest payable outside India without TDS whether paid or unpaid is not allowed as deduction. It is assumed
that the payee has no agent in India.

5. Since loan is utilised for renovation of HP2 hence deduction shall be allowed from income of HP2. Mortgage
of HP1 is irrelevant.

Illustration 49 :

Calculate interest on loan allowed for assessment year 2020-21 to 2025-26 from the following information :

Loan was taken on 1/1/2016 ` 5,00,000 @ 12% p.a.

Construction commenced on 1/8/2016. Construction completed on 31/3/2021. Repayment made as under :

On 1/4/2017 On 1/4/2020 On 1/4/2023 On 1/7/2024

` 1,00,000 ` 1,00,000 ` 1,00,000 ` 1,00,000
Solution :
Since construction started on 1/8/2016, hence pre-construction period starts from 1/8/2016 and since construction
was completed on 31/3/2021, hence pre construction period ends on 31/3/2020 and post construction period starts
from the year 2020-21. Finally, pre construction period is from previous year 2016-17 to previous year 2019-20
and post construction period is from previous year 2020-21 onwards. Thus, pre-construction period interest are as
under :

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Direct Taxation

Previous Year Amount Month Interest @ 12%

2016-17 5,00,000 8 40,000
2017-18 4,00,000 12 48,000
2018-19 4,00,000 12 48,000
2019-20 4,00,000 12 48,000
Total interest for pre-construction period 1,84,000
Total interest for pre-construction period is ` 1,84,000 which shall be allowed in 5 equal installments i.e., ` 36,800
p.a. from P.Y. 2020-21 to 2024-25.
Computation of interest :

Pre-construction Post-construction
Assessment Year Previous Year Total Interest
period Interest period Interest
2020-21 2019-20 -- -- --
2021-22 2020-21 36,800 36,0001 72,800
2022-23 2021-22 36,800 36,0001 72,800
2023-24 2022-23 36,800 36,0001 72,800
2024-25 2023-24 36,800 24,0002 60,800
2025-26 2024-25 36,800 15,0003 51,800

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

Test Yourself
1. As on 1/1/2019, Mr. Fantoosh borrowed ₹ 5,00,000 @ 10% p.a. from State Bank of India, to be repaid in
two equal installments on 1/4/2024 and 1/4/2028. Construction completed on 17/6/2022. Due to liquidity
problem, he borrowed ₹ 3,50,000 @ 8% from his friend on 1/4/2024 and paid 1st installment of previous
loan. Calculate interest on loan allowed for assessment year 2025-26.
Hints
1. ` 77,500

Illustration 50 :
Mr. Rajesh owns two house properties both of which are let out. Compute his income from the following details :

Particulars H1 H2
Situated at Gaya Mumbai
Gross Municipal value 1,00,000 2,00,000
Fair rent 95,000 2,10,000
Standard rent 90,000 2,00,000

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Actual rent receivable 1,00,000 1,80,000

Unrealised rent of the current year 8,000 2,000
Municipal tax 10% 1,000
Fire insurance 2,000 1,200
Repairs Nil 2,000
Interest on loan for construction (@ 12%) 10,000 Nil

Other Information :
a. Loan taken for construction is still unpaid.
b. Municipal tax of H1 is still unpaid, while, that of H2 is half paid by tenant.
Solution :
Computation of income from house property of Mr. Rajesh for the A.Y. 2025-26 :

Particulars Details Amount Amount

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

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

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

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2.2.8 Self-occupied property / Unoccupied Property [Sec. 23(2)]

As per sec. 23(2)(a), a house property shall be termed as self occupied property where such property or part
thereof :
 is in the occupation of the owner for the purposes of his own residence;
 is not actually let out during the whole or any part of the previous year; and
 no other benefit there from is derived by the owner.
Where an assessee has a residential house (kept for self-occupation) and it cannot actually be occupied by the
owner owing to his employment, business or profession carried on at any other place and hence he has to reside at
that place in a building not belonging to him, such house shall be termed as unoccupied property.

Treatment : The annual value of such house or part of the house shall be taken to be nil.

If an assessee occupies more than two house properties as self-occupied, he is allowed to treat only two houses as
self-occupied at his option. The remaining self-occupied house property(ies) shall be treated as ‘Deemed to be let
out’. [Treatment of ‘deemed to be let out’ property is discussed later in this chapter.]

Taxpoint : In the light of the above provision :

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

Note :

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

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Computation of taxable income of self-occupied property

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

Particulars Amount
Net Annual Value Nil
Less : Interest on borrowed capital u/s 24(b) [Available only if assessee opt for old regime] ***
Income from house property (***)
Standard deduction u/s 24(a) is not available
Net Annual value :
Net Annual value of two self-occupied house properties, at the choice of the assessee, is taken as nil. He can choose
those house properties as self-occupied through which tax liability can be reduced.
Normally (but not always) house property with higher gross annual value is treated as self-occupied property
but it is advised to calculate total income under the head ‘Income from house property’ by applying each option
separately and then choose the option which reduces total income.

Interest on loan u/s 24(b) [Available only if assessee opts for old regime]
Interest on loan taken for construction, acquisition, repair, renovation or extension is allowed according to the
following table :

Maximum Interest
Conditions
allowed in aggregate
Where loan is taken on or after 1/4/1999 and following conditions are satisfied -
1. Loan is utilized for construction or acquisition of house property on or after 1-4-
1999;
2. Such construction or acquisition is completed within 5 years from the end of the
financial year in which the capital was borrowed; and
3. The lender certifies that such interest is payable in respect of the loan used for the
acquisition or construction of the house or as refinance of the earlier loan outstanding ` 2,00,000
(principal amount) taken for the acquisition or construction of the house.
In any other case ` 30,000
Taxpoint : In any case, deduction in respect of interest on loan on self-occupied properties cannot exceed
` 2,00,000 in a year.
Notes :
a. Calculation and deduction of interest for the period of pre and post-construction, acquisition, etc. is same as
discussed in the case of let out house property.
b. Assessee shall always have nil income or loss upto ` 2,00,000 from properties u/s 23(2)(a).
In nutshell, treatment of interest on loan is as under :

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Direct Taxation

Nature of property When loan was taken Purpose of loan Allowable

(Maximum limit)2, 3
Self-occupied On or after 01/04/1999 Construction or purchase of ` 2,00,000
house property1
Self-occupied On or after 01/04/1999 For Repairs of house property ` 30,000
Self-occupied Before 01/04/1999 Construction or purchase of ` 30,000
house property
Self-occupied Before 01/04/1999 For Repairs of house property ` 30,000
Let-out Any time Construction or purchase of No maximum limit
house property

1. Subject to other two other conditions. If other two conditions are not fulfilled, then maximum limit is restricted
to ` 30,000.
2. Including interest for pre-construction period.
3. Aggregate limit for all house properties treated as self-occupied.

Illustration 51 :
Mr. Pandey, owner of three houses in Chennai, furnished the following information. Compute his income from
house property for the assessment year 2025-26 :

House No. House No. House No.

Particulars 1 2 3
Self occupied Self occupied Self occupied
Standard rent under Rent Control Act 1,50,000 15,00,000 18,00,000
Municipal value 2,00,000 13,00,000 13,50,000
Fair rent 2,50,000 16,00,000 19,00,000
Municipal tax (10% of municipal value) paid
Interest on loan taken for purchases of houses 90,000 1,70,000 1,65,000
(Loan taken in P.Y. 2021-22)
Assume that the assessee has opted for old regime.
Solution :
Computation of Income from House property of Mr. Pandey for the A.Y. 2025-26 :

Particulars Details Details Amount

House 1: Deemed to be Let out
Gross Annual Value (Working) 1,50,000
Less : Municipal Tax (10% of ` 2,00,000) 20,000
Net Annual Value (NAV) 1,30,000
Less : Deduction u/s
24(a) Standard Deduction (30% of NAV) 39,000
24(b) Interest on loan 90,000 1,29,000 1,000

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House 2 & 3 : Self occupied

Net Annual Value Nil
Less : Deduction u/s
24(b) Interest on loan [(`1,70,000 + ` 1,65,000), subject to max. of 2,00,000 (2,00,000)
` 2,00,000]
Income from House Property (1,99,000)

Working :
Computation of Gross Annual Value of House 1 :

Particulars House 1
Municipal Value (A) 2,00,000
Fair Rent (B) 2,50,000
(C) = Higher of (A) and (B) 2,50,000
Standard Rent (D) 1,50,000
Gross Annual Value [Lower of (C) and (D)] 1,50,000

Illustration 52 :

Sri Jayram has a house property used for own residence for 9 months and for remaining 3 months of the previous
year, it was unused. Gross Municipal value of the property ` 6,00,000 p.a. Fair Rent ` 5,00,000, Standard Rent
` 4,00,000. He incurred repair expenditure of ` 10,000 & paid municipal tax ` 5,000 during the year. Compute
income from house property in the following cases for the A.Y. 2025-26 (assuming he has opted for the old regime):

1. He borrowed ` 1,00,000 @ 12% (simple interest) on 17/8/1998 for purchase of the house property and such
amount as well as interest is still unpaid.

2. He borrowed ` 10,00,000 @ 12% (simple interest) on 17/8/1998 for purchase of the house property and such
amount as well as interest is still unpaid.

3. He borrowed ` 5,00,000 @ 12% (simple interest) on 17/8/1999 for construction of the house property,
construction of which was completed on 31/3/2000 and such amount is still unpaid.

4. He borrowed ` 20,00,000 @ 18% (simple interest) on 17/8/1999 for construction of the house property,
construction of which was completed on 31/3/2000 and such amount is still unpaid.

5. He borrowed ` 1,80,000 @ 15% on 1/4/1998 and further borrowed ` 10,00,000 @ 10% on 17/8/1999 for
construction of the house property and such amount is still unpaid. Construction completed on 1/2/2000.

6. He borrowed ` 5,00,000 @ 12% on 1/4/2001 for repairs of the house property.

7. He borrowed ` 1,80,000 @ 15% on 1/4/1998 and further borrowed ` 20,00,000 @ 14% on 17/8/1999 for
construction of the house property and such amount is still unpaid. Construction completed on 1/2/2000.

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Solution :
Computation of income from house property in different cases :

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

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

Notes :

1. As loan was taken before 1/4/1999 hence, the maximum ceiling is ` 30,000.

2. As loan was taken on or after 1/4/1999 for the construction of house property, which is completed within 5
years from the end of financial year in which such loan was taken, hence the maximum ceiling is enhanced to
` 2,00,000. It is assumed that required certificate has been furnished.

3. Maximum ceiling is ` 2,00,000.

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

5. The enhanced limit is only for construction or acquisition of house property, here the loan is taken for repair
purpose for which maximum ceiling is ` 30,000.

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

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Illustration 53 : [Rent free accommodation –vs.- Self occupied house property]

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

Particulars Details Amount

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

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

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

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

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

Illustration 54 :
Compute income under the head ‘Income from house property’ of Sri from the following information :

Particulars H1 H2 H3 H4
Used for Self occupied Self occupied Self occupied Own Business
Situated at Mumbai Abu Kolkata Hyderabad
Gross Municipal Value 3,00,000 2,00,000 7,00,000 3,00,000
Fair Rent 2,00,000 2,00,000 6,00,000 1,20,000
Standard Rent 3,00,000 2,40,000 7,00,000 2,00,000

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Municipal Tax 15% 15% 15% 15%

Repairs 13,000 4,000 8,000 8,000
Ground Rent 20,000 Nil Nil 6,000
Land Revenue Nil 10,000 Nil Nil
Interest on Loan 40,000 10,000 2,10,000 20,000
Loan taken on 1998-99 1998-99 2021-22 1999-00

Further, how shall your answer differ if he has opted for old regime.
Solution :
In the given case, there are two options :
Option 1 : Take H1 & H3 as Self-Occupied (S/O) and H2 as Deemed to be Let-Out (DLO)
Option 2 : Take H1 as Deemed to be Let-Out (DLO) and H2 & H3 as Self-Occupied (S/O)
Option 3 : Take H3 as Deemed to be Let-Out (DLO) and H1 & H2 as Self-Occupied (S/O)
Under default tax regime u/s 115BAC
Total income under the head house property shall be computed applying each option separately and then the option,
which yields least income under this head, shall be opted.

Option1 Option2 Option 3

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

Computation of Income from house property of Sri for the A.Y.2025-26 (as per default regime)

Particulars Details Details Amount

H1 & H3: Self-occupied u/s 23(2)(a)
Net Annual Value Nil
Less: Deduction u/s
24(b) Interest on loan NA Nil
H2: Deemed to be let out u/s 23(4)
Gross Annual Value 2,00,000

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Less: Municipal Tax 30,000

Net Annual Value 1,70,000
Less: Deduction u/s
24(a) Standard Deduction (30% of NAV) 51,000
24(b) Interest on loan 1,00,000 1,51,000 19,000
Income from house property 19,000
If he opt out of default tax regime
Total income under the head house property shall be computed applying each option separately and then the option,
which yields least income under this head, shall be opted.

Option1 Option2 Option 3

Particulars H1 & H3 H2 DLO H1 DLO H2 & H3 H3 DLO H1 & H2
S/O S/O S/O
Gross Annual Value Nil 2,00,000 3,00,000 Nil 7,00,000 Nil
Less: Municipal Tax (15% of Nil 30,000 45,000 Nil 1,05,000 Nil
Municipal value)
Net Annual Value (A) Nil 1,70,000 2,55,000 Nil 5,95,000 Nil
Less: Deduction u/s
24(a) Standard deduction Nil 51,000 76,500 Nil 1,78,500 Nil
(30% of NAV)
24(b) Interest on loan 2,00,0002 1,00,000 40,000 2,00,0002 2,10,000 30,0001
Total deduction (B) 2,00,000 1,51,000 1,16,500 2,00,000 3,88,500 30,000
Income from house property (-) 2,00,000 19,000 1,38,500 (-) 2,00,000 2,06,500 (-) 30,000
[(A) – (B)]
Income from house property (-) 1,81,000 (-) 61,500 1,76,500
Notes:
1. In case of H1 & H2 loan was taken prior to 1/4/1999.
2. Since loan was taken for construction on or after 1/4/1999.
3. Since H4 is used for own business purpose so it is not taxable under this head.
Total income under the head Income from house property as per option 1 is (-) ` 1,81,000
Computation of Income from house property of Sri for the A.Y.2025-26 (if opted for old regime)

Particulars Details Details Amount

H1 & H3: Self-occupied u/s 23(2)(a)
Net Annual Value Nil
Less: Deduction u/s
24(b) Interest on loan
- For H1 (Max Limit) 30,000
- For H2 (Max Limit) 2,00,000
Subject to maximum of ` 2,00,000 2,30,000 2,00,000 (2,00,000)

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H2: Deemed to be let out u/s 23(4)

Gross Annual Value 2,00,000
Less: Municipal Tax 30,000
Net Annual Value 1,70,000
Less: Deduction u/s
24(a) Standard Deduction (30% of NAV) 51,000
24(b) Interest on loan 1,00,000 1,51,000 19,000
Income from house property (1,81,000)
2.2.10 Partly self-occupied and partly let-out [Sec. 23(3)]
Where a house or part of the house, which is self-occupied, is let out during any part of the previous year, such
property is termed as ‘Partly self-occupied and partly let out’. Further, such division may be made in the following
ways :

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

Case 1) Area wise Division

In this case, a house property consists of two or more independent units and one or more of which are self-occupied
and remaining units are let out.
Treatment :
 Self-occupied portion & let out portion shall be treated as two separate house (i.e. Unit A & Unit B);
 Common value like municipal value, fair rent, standard rent, municipal tax and interest shall be
proportionately divided;
 Income of both units shall be computed separately.
Illustration 55 :
Miss Paro has a house property having two separate residential units (unit A covering 40% of total area and unit
B covering 60% of the total area). Unit A is self-occupied by the assessee and unit B is let out to Sri Devdas for a
monthly rent of ` 3,000. With the following further information, compute her taxable income from house property
(Assume that he has opted for the old regime) :
Municipal Value ` 1,00,000 Municipal Tax 10%
Fair Rent ` 1,20,000 Interest on Loan ` 30,000
Standard Rent ` 2,00,000 Annual charge ` 5,000

Solution :
Computation of Income from house property of Miss Paro for the A.Y. 2025-26 :

Unit A Unit A
Particulars Working
Details Amount Details Amount
Gross Annual Value 1 Nil 72,000
Less : Municipal Tax Nil 6,000

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Net Annual Value Nil 66,000

Less : Deduction u/s
24(a) Standard Deduction Nil 19,800
24(b) Interest on loan 40:60 12,000 12,000 18,000 37,800
Income from house property (-) 12,000 28,200
Income under the head ‘Income from house property’ 16,200

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

Steps Particulars Working Unit A Unit B

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

(Case 2) Time wise division - In such case, the house property is self occupied by the assessee for a part of the year
and let out for remaining part of the year.
Treatment :
In such case, assessee will not get deduction for the self-occupied period and income will be computed as if the
property is let out throughout the year. In this regard, it is to be noted that the reasonable expected rent (RER) shall
be taken for the full year but the actual rent receivable (ARR) shall be taken only for the let-out period.

Illustration 56 :
Mr. Rana used his house property for self-occupation till 1/8/2024 and let out the same for remaining period for
rent of ` 6,000 p.m. Compute his income from house property from the following details:
Municipal value ` 1,00,000, Fair Rent ` 80,000, Standard Rent ` 96,000, Municipal tax 16%, Interest on loan
` 10,000 [Assume that he has opted for old regime].
Solution :
Computation of income from house property of Mr. Rana for the A.Y. 2025-26 :

Particulars Working Details Amount

Municipal Value 1,00,000
Fair Rent 80,000
Standard Rent 96,000

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Particulars Working Details Amount

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

Illustration 57 :
How shall your answer differ if in the above illustration, property is let out to tenant from 1/4/2024 to 1/12/2024
and from 1/12/2024 to 1/3/2025, it was self-occupied. Standard rent of such property is ` 50,000. [Assume that he
has opted for old regime]
Solution :
Computation of Income from house property of Mr. Rana for the A.Y. 2025-26 :
Particulars Working Details Amount
Municipal Value 1,00,000
Fair Rent 80,000
Standard Rent 50,000
Reasonable Expected Rent Higher of MV & FR (RER cannot exceed SR) 50,000
Actual Rent Receivable ` 6,000 * 8 48,000
Higher of RER and ARR 50,000
However, ARR is less than RER due to vacancy period [otherwise ARR would have
been ` 54,000 (being ` 6,000 * 9)] therefore ARR shall be treated as GAV.
Gross Annual Value 48,000
Less : Municipal Tax 16% of MV 16,000
Net Annual Value 32,000
Less : Deduction u/s
24(a) Standard Deduction 30% of NAV 9,600
24(b) Interest on Loan 10,000 19,600
Income from house property 12,400
Illustration 58 :
Miss Rani used her house property for self-occupation till 1/9/2024 and let out the same for remaining period for
rent of ` 6,000 p.m. Municipal tax paid ` 5,000, interest on loan accrued ` 10,000. Compute her taxable income
from house property.
Solution :
Computation of income from house property of Miss Rani for the A.Y. 2025-26 :

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Steps Particulars Working Details Amount

Fair Rent (Note) ` 6,000 * 12 72,000
1. Reasonable Expected Rent Fair Rent 72,000
2. Actual Rent Receivable ` 6,000 * 7 42,000
3. Gross Annual Value Higher of RER and ARR 72,000
Less : Municipal Tax 5,000
Net Annual Value 67,000
Less : Deduction u/s
24(a) Standard Deduction 30% of NAV 20,100
24(b) Interest on Loan 10,000 30,100
Income from house property 36,900
Note : Since the property has been let out for 7 months @ ` 6,000 p.m., therefore fair rent of the property is `
72,000 (being ` 6,000 × 12).

Case 3) Area as well as Time wise Division

Merger of Case 1 and Case 2

Illustration 59 :
Mr. Ajnabi has a house property in Cochin. The house property has two equal dimension residential units. Unit 1 is
self occupied throughout the year and unit 2 is let out for 9 months for ` 10,000 p.m. and for remaining 3 months
it was self-occupied. Compute his taxable income from the following details assume that he has opted for the old
regime :
Municipal value ` 2,00,000, Fair Rent ` 1,60,000, Standard rent ` 3,00,000, Municipal tax 10% (60% paid by
assessee), Interest on loan ` 40,000, Expenditure on repairs ` 20,000.
Solution :
Working
1. Computation of Gross Annual Value (GAV)

Particulars Working Unit 1 Unit 2

Municipal Value 1:1 1,00,000 1,00,000
Fair Rent 1:1 80,000 80,000
Standard Rent 1:1 1,50,000 1,50,000
Reasonable Expected Rent Higher of MV & FR (RER cannot exceed SR) Nil 1,00,000
Actual Rent Receivable ` 10,000 * 9 - 90,000
Gross Annual Value Higher of Step 1 & 2 Nil 1,00,000
2. Municipal tax = 10% of ` 2,00,000 = ` 20,000 being divided in the ratio 1:1 between Unit 1 and Unit 2. Out
of such Municipal tax only 60% is paid, therefore, Municipal tax allowed as a deduction in case of Unit 2 is
only ` 6,000 [i.e. ` 20,000 * ½ * 60%].
3. Interest on loan is divided in unit A and unit B in 1:1 as both units are of equal dimension.

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Computation of income from house property of Mr. Ajnabi for the A.Y. 2025-26
Unit 1 Unit 2
Particulars Working
Details Amount Details Amount
Gross Annual Value 1 Nil 1,00,000
Less : Municipal Tax 2 Nil 6,000
Net Annual Value Nil 94,000
Less : Deduction u/s
24(a) Standard Deduction Nil 28200
24(b) Interest on loan 3 20,000 20,000 20000 48,200
Income from house property (-) 20,000 45,800
Conclusion : Income under the head Income from house property is ` 25,800 (being `45,800 – `20,000).
2.2.12 Recovery of Unrealized Rent and Arrears Rent [Sec. 25A]
Applicability
The assessee has received arrears of rent received from a tenant or the unrealised rent realised subsequently from
a tenant
Tax Treatment :
The amount so received shall be taxable under the head ‘Income from house property’ in the year of receipt after
deducting standard deduction @ 30% of such amount.
Arithmetically, taxable amount shall be -
70% × [Recovery of Arrear Rent or Unrealised Rent]
Taxpoint :
 No other deduction shall be allowed from such income except standard deduction i.e. 30% of such receipt.
(even legal expenditure shall not be allowed as deduction)
 The income is taxable on cash basis.
Note : Such receipt shall be chargeable as income from house property although the assessee is not the owner of
such property in the year of receipt.
Illustration 60 :
Mr. Lucky Ali owns a house property let out since 1/4/2020 to a school for monthly rent of ₹ 10,000. There was
no change in rent till 31/3/2024. On 1/4/2024, as per court decision rent was increased to ₹ 12,000 p.m. with
retrospective effect from 1/4/2022 and duly paid by school in the same year. Legal expenditure for such suit has
been incurred by Mr. Ali ₹ 30,000. Discuss tax treatment u/s 25A.
Solution :
Arrears rent belongs to the period 1/4/2022 to 31/3/2024 i.e., for 24 months.
Arrears rent received = ` 2,000 × 24 months = ` 48,000
Such rent is taxable in the year of receipt as under :
Particulars Amount
Arrears of rent received 48,000
Less : Standard deduction u/s 24(a) equal to 30% of such rent 14,400
Income from house property u/s 25A 33,600
Note: Legal expenditure is not deductible.

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Illustration 61 :
X Ltd. has two residential house properties both of which are vacant. Municipal value of 1st house property is `
1,00,000 and that of 2nd is ` 80,000. It has computed income from house property as under :
Particulars Details Amount
HP1: Self occupied [Sec. 23(2)(a)]
Net Annual Value (NAV) Nil
Less : Interest on loan u/s 24(b) Nil
Income from HP1 Nil
HP2: Deemed to be let out [Sec. 23(4)]
Gross Annual Value (GAV) 80,000
Less : Municipal tax Nil
Net Annual Value (NAV) 80,000
Less : Standard deduction u/s 24(a) @ 30% of NAV 24,000 56,000
Income from house property 56,000
Do you agree with the computation of income from house property of the assessee.
Solution :
In the above computation, X Ltd. Has claimed benefit of self-occupation, whereas, such benefit can be claimed
only by an individual or HUF. A company form of assessee cannot claim such benefit. Hence, income under the
head Income from house property will be as under :
Computation of income from house property of X Ltd. For the A.Y. 2025-26 :

Particulars Details Amount

HP1: Deemed to be let out [Sec. 23(4)]
Gross Annual Value (GAV) 1,00,000
Less : Municipal tax Nil
Net Annual Value (NAV) 1,00,000
Less : Standard Deduction u/s 24(a) @ 30% of NAV 30,000 70,000
HP2: Deemed to be let out [Sec. 23(4)]
Gross Annual Value (GAV) 80,000
Less : Municipal tax Nil
Net Annual Value (NAV) 80,000
Less : Standard Deduction u/s 24(a) @ 30% of NAV 24,000 56,000
Income from house property 1,26,000

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Illustration 62 :
Mr. Abul Hasan owns three houses at Ranchi. He furnishes the following particulars for the previous year 2024-25 :

House No. I : The house was constructed in 2024 and let out to a friend at a monthly rent of ` 10,000 upto
31.1.2025 and thereafter, it was let out at its fair rent of ` 15,000 per month. He has paid
` 15,000 as municipal taxes @ 10% of Municipal Value. He has also paid fire insurance
premium of ` 2,000.
House No. II : Ground floor is let out @ ` 20,000 p.m. first floor, identical to ground floor, is occupied by
him for his residence. Municipal taxes paid @ 20% amounted to ` 80,000.
House No. III : The house was constructed in 2012 and is used for his business. The annual value of this
house is ` 1,00,000 and he spent ` 5,000 as municipal taxes and ` 2,000 for repairs.
Other information :
A loan of ` 40,00,000 has been taken on 01-6-2022 for construction of House No. II. Construction of the house was
completed on 01-6-2023. He repaid the entire loan on 31-12-2024. Interest on loan is payable @ 12% p.a. Compute
his income from house property for the A.Y. 2025-26 assume that he has opted for old regime.
Solution :
Computation of Income from House Property of Mr. Abul Hasan for the A.Y. 2025-26 :
Particulars Details Details Amount
House 1 : Let out
Gross Annual Value 1,80,000
Less : Municipal Tax 15,000
Net Annual Value 1,65,000
Less : Deduction u/s
24(a) Standard Deduction 49,500
24(b) Interest on loan Nil 49,500 1,15,500
House 2 : Ground Floor (Let out)
Gross Annual Value 2,40,000
Less : Municipal Tax [50%] 40,000
Net Annual Value 2,00,000
Less : Deduction u/s
24(a) Standard Deduction 60,000
24(b) Interest on loan 2,20,000 2,80,000 (80,000)
House 2 : First Floor (Self occupied)
Net Annual Value Nil
Less : Deduction u/s
24(b) Interest on loan 2,00,000 (2,00,000)
House 3 : Used in own business Nil
Income from House Property (1,64,500)

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Workings :
1 Fair Rent : Since 1st house is let out by assessee to his friend @ ` 10,000 p.m. and the same property is let out to
other tenant @ ` 15,000 p.m., this signifies that 2nd house has fair rent ` 15,000 * 12 = ` 1,80,000.
2 Calculation of Interest to be deducted in A.Y. 2025-26
Previous Year Month Interest
Pre-construction Interest
2020-21 10 4,00,000
1/5th of pre-construction (a) 80,000
Post-construction interest (b) [` 40,00,000 × 12% x 9/12] 9 3,60,000
Total interest charged (a) + (b) 4,40,000
50% for Ground Floor 2,20,000
Illustration 63 :
Sarju Middey is the owner of 2 houses in Kolkata. From the following particulars of the houses, compute his
income from house property for the assessment year 2025-26 assuming he has opted for old regime :
House A : Let-out to an employee of the business of Sarju @ ` 5,000 p.m. which is necessary for the purpose
of business. Municipal tax paid ` 3,000 and interest on loan taken for purchasing the house
amounted to ` 9,000.
House B : The house consists of 3 identical flats. First flat is used by him for his own business. Second flat is
used by him for his own residence. The third flat is let out at a monthly rent of ` 15,000. Municipal
taxes paid @ 5% amounted to ` 20,250.
Other information :
a. Unrealised rent for the P.Y. 2024-25 relating to third flat of House B amounted to ` 10,000.
b. A loan of ` 20,00,000 was taken on 01.07.2021 for construction of the House B. Construction of House B was
completed on 01.06.2023. Interest on loan is 12% p.a. No repayment was made.
Solution :
Computation of Income from House Property of Sarju Middey for the A.Y. 2025-26
Particulars Details Details Amount
Flat III : Let out
Gross Annual Value (Working 1) 1,80,000
Less : Municipal Tax 20,250/3 6,750
Net Annual Value 1,73,250
Less : Deduction u/s
24(a) Standard Deduction 51,975
24(b) Interest on loan [` 3,24,000 / 3] 1,08,000 1,59,975 13,275
Flat II : Self occupied
Net Annual Value Nil
Less : Deduction u/s
24(b) Interest on loan [` 3,24,000 / 3] 1,08,000 (1,08,000)
Income from House Property 94,725

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Working 1 : Computation of Gross Annual Value

Steps Particulars Working Unit 3

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

Previous Year Month Interest

Pre-construction Interest
2021-22 9 1,80,000
2022-23 12 2,40,000
Total 4,20,000
1/5th of pre-construction (a) 84,000
Post-construction interest (b) 12 2,40,000
Total interest (a) + (b) 3,24,000
Illustration 64: (Co-ownership)
Ram and Shyam are co-owners of a house property (individual share being Ram 75%, Shyam 25%). The property
is self-occupied by the co-owners. Interest on capital borrowed to purchase the property is ₹ 4,00,000 (loan taken
on 17/10/2020). Find income from house property of Ram and Shyam for the A.Y. 2025-26.
Solution:
Computation of Income from House Property of Ram and Shyam for the A.Y. 2025-26
Particulars Ram Shyam
Net annual Value Nil Nil
Less: Interest on loan (Note) 2,00,000 1,00,000
Income from House Property (-) 2,00,000 (-) 1,00,000
Note: Interest on loan divided as under:

Particulars Working Share of int. Maximum limit Allowed interest

In case of Ram 4,00,000 * 75% 3,00,000 2,00,000 2,00,000
In case of Shyam 4,00,000 * 25% 1,00,000 2,00,000 1,00,000
Illustration 65: (Co-ownership)
Ram and Balram are co-owners of a house property (individual share being Ram 60%, Balram 40%). The property
has been let out for a rent of ₹ 10,000 p.m. Interest on borrowed capital ₹ 80,000, fire insurance premium paid
for the building ₹ 10,000, municipal tax paid ₹ 5,000. Compute income from house property of Ram and Balram
for the A.Y. 2025-26.

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Solution:
Computation of Income from House Property of Ram and Balram for the A.Y. 2025-26

Particulars Ram Balram

Details Amount Details Amount
Gross Annual Value 72,000 48,000
Less: Municipal Tax 3,000 2,000
Net Annual Value 69,000 46,000
Less: Deduction u/s
24(a) Standard deduction @ 30% of NAV 20,700 13,800
24(b) Interest on loan 48,000 68,700 32,000 45,800
Income from House Property 300 200

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Profits and Gains of Business or

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

¾ Nature of commodity ¾ Intention of the party ¾ Efforts applied in transaction

¾ Periodicity of transaction ¾ Nature of transaction (whether incidental to a business or not)

Profession [Sec. 2(36)]

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

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

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

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

By In connection with
Any person managing the affairs of an Indian
company Termination or modification of terms and conditions of
Any person managing the affairs of any company his appointment
in India
Any person holding an agency in India for any part
Termination of agency or the modification of terms and
of the activities relating to the business of any other
conditions in relation thereto
person
The vesting in the Government or in any corporation
Any person owned/controlled by the Government, of the
management of any property or business.
The termination or the modification of the terms and
Any person
conditions, of any contract relating to his business
3. Income of trade or professional association’s [Sec. 28(iii)]: Income derived by a trade, professional or
similar association from rendering specific services to its members shall be taxable under this head.
Note: This is an exception to the general principle that a surplus of mutual association cannot be taxed.
4. Export incentive [Sec. 28(iiia) (iiib) & (iiic)]: An export incentive in form of -
¾ Profit on sale of import license or duty entitlement pass book. [Sec. 28(iiia)/(iiid)/(iiie)]
¾ Cash assistance received/receivable by an exporter under a scheme of the Government of India [Sec.
28(iiib)]
¾ Duty draw back (received/receivable) for export e.g. duty drawback, etc. [Sec. 28(iiic)]
5. Perquisite from business or profession [Sec. 28(iv)]: The value of any benefit or perquisite arising from
business or the exercise of a profession, whether:
a. convertible into money or not; or
b. in cash or in kind or partly in cash and partly in kind
Examples: If an authorized dealer of a company receives a car (over and above his commission) from the
company on achieving sale-target then market value of such car shall be taxable under the head ‘Profits &
gains of business or profession’.
6. Remuneration to partner [Sec. 28(v)]: Any interest salary, bonus, commission or remuneration received by
a partner from the firm (or Limited Liability Partnership) shall be taxable as business income in the hands of
the partner to the extent allowed in hands of firm (or Limited Liability Partnership) u/s 40(b).
7. Amount received or receivable for certain agreement [Sec. 28(va)]: Any sum, whether received or
receivable in cash or in kind, under an agreement for -
¾ not carrying out any activity in relation to any business or profession; or
¾ not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business or
commercial right of similar nature or information or technique likely to assist in the manufacture or
processing of goods or provisions for services.

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Exceptions: The aforesaid provision is not applicable in respect of the following:

a. any sum received or receivable in cash or in kind on account of transfer of the right to manufacture,
produce or process any article or thing; or right to carry on any business or profession, which is chargeable
under the head Capital gains;
b. any sum received as compensation from the multilateral fund of the Montreal Protocol on Substances that
Deplete the Ozone Layer under the United Nation Environment Programme, in accordance with the terms
of agreement (whether or not in writing, whether or not intended to be enforceable by legal proceedings)
entered into with the Government of India
8. Keyman Insurance Policy [Sec. 28(vi)]: Any sum received under a Keyman Insurance Policy including
bonus on such policy. As per sec. 10(10D) Keyman insurance policy is a life insurance policy taken by a person
on the life of another person who is or was -
¾ an employee of the first mentioned person; or
¾ in any manner whatsoever connected with the business of the first mentioned person.
and includes such policy which has been assigned to a person, at any time during the term of the policy, with
or without any consideration
9. Conversion of stock into capital asset [Sec. 28(via)]: The fair market value of inventory as on the date on
which it is converted into, or treated as, a capital asset. (Discussed later in the chapter)
10. Recovery against certain capital assets covered u/s 35AD [Sec. 28(vii)]: Any sum received or receivable
(in cash or kind) on account of any capital asset (other than land or good­will or financial instrument) being
demolished, destroyed, dis­carded or transferred, if the whole of the expenditure on such capital asset has been
allowed as a deduction u/s 35AD (Discussed later in this chapter).

General Points
1. Chargeability: As per sec. 145(1), income chargeable under the head “Profits & gains of business or
profession” or “Income from other sources”, shall subject to the provision of sec. 145(2), is to be computed in
accordance with the method of accounting (i.e. either on cash or on accrual basis) regularly followed by the
assessee. However, there are certain expenditures specified u/s 43B, which shall be deductible only on cash
basis.
As per sec. 145(3), where the Assessing Officer is not satisfied about the correctness or completeness of
the accounts of the assessee, or has not been regularly followed by the assessee, or income has not been
computed in accordance with the notified standards, the Assessing Officer may make an assessment in the
manner provided u/s 144 i.e. Best Judgment Assessment.
2. Speculative transaction: Explanation 2 to section 28 specifically provides that where an assessee carries on
speculation business, that business of the assessee must be deemed as distinct and separate from any other
business.
Taxpoint
 Speculative transaction means a transaction in which contract for purchase and sale of any commodity
including stock and shares, is periodically or ultimately settled otherwise than by the actual delivery or
transfer of the commodity or scripts. [Sec. 43(5)]
 Further, as per explanation to sec. 73, where any part of the business of a company consists of purchase and
sale of shares of other companies, such company shall be deemed to be carrying on speculation business to
the extent of purchase and sale of shares. However, this rule is not applicable in case of companies -

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a) of which gross total income mainly consists of income which is chargeable under the head “Income
from house property”, “Capital gains”, and “Income from other sources”; or
b) of which principal business is the business of trading in shares or banking or granting of loans and
advances.
Above explanation covers only transactions of purchase and sale of shares. Debentures, units of UTI or of
Mutual Funds are not covered by this explanation.
Transactions not deemed to be speculative transactions
1. Hedging Contract:
 Contracts in respect of raw materials or merchandise entered into by a person in the course of his
manufacturing or merchanting business to guard against loss through future price fluctuations in
respect of his contracts for actual delivery.
 Contracts in respect of stocks and shares entered into by a dealer or investor in stocks and shares to
guard against loss in his holdings through price fluctuations.
 Contracts entered into by members of forward markets and stock exchanges in the course of any
transactions in the nature of jobbing or arbitrate to guard against losses which may arise in the ordinary
course of their businesses
2. Derivative Trading: An eligible transaction in respect of trading in derivative referred to in sec.2(ac) of
the Securities Contracts (Regulation) Act, 1956 carried out in a recognised stock exchange shall not be
treated as speculative transaction. Similarly, an eligible transaction in respect of trading in commodity
derivatives carried out in a recognised stock exchange (and liable for Commodities Transaction Tax in case
of trading in commodity derivatives other than agricultural commodity derivatives) shall not be treated as
speculative transaction.
However, in respect of trading in agricultural commodity derivatives, the requirement of chargeability of
commodity transaction tax is not applicable.
3. Negative income: Income includes negative income i.e. loss.
4. Notional profit: A person cannot do business with himself, hence notional profit is not taxable. E.g. If
proprietor withdraws goods costing ` 10,000 for personal use at an agreed value of ` 12,000 then profit of `
2,000 shall not be taxable.
5. Anticipated profit or loss: Anticipated or potential profit or loss, which may or may not arise in future are not
considered for deriving taxable income.
6. Legality of business: There is no difference between legal or illegal business from income tax point of view.
Even income of illegal business shall be taxable. However, expenditure incurred by an assessee for any purpose
which is an offence or which is prohibited by law would not be allowable as deduction while computing profits
of such business
7. Voluntary receipts: Voluntary payment made by persons who were under no obligation to pay anything at
all would be income in the hands of the recipient, if they were received in the course of a business or by the
exercise of a profession or vocation.
8. Compilation of income of all business or profession: If an assessee carries on several business or profession,
then income from all business or profession shall be merged together.
9. Business or profession must be carried on during the previous year. Income is chargeable under the head
“Profits & gains of business or profession” only if the business is carried on by the assessee during the previous
year. It is not necessary that the business should continue throughout the year or till the end of previous year.

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

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

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2.3.4 Expenditures allowed as deduction

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

2.3.5 Specific Deductions

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

2.3.6 Rent, rates, taxes, repairs & insurance for building [Sec. 30]
Rent, rates, taxes, repairs & insurance for premises used for the purpose of business or profession shall be allowed
under this section. Points to be noted in this regard:
1. Use of building: The building is to be used for the purpose of business or profession. However, if the building
is not exclusively used for the purpose of business or profession then deduction shall be restricted to a fair
proportion of above expenditure which the Assessing Officer may determine [Sec. 38(2)].
2. Notional Rent: Rent paid to proprietor is disallowed but rent paid by firm to its partner for using his premises
is an allowed expenditure.
3. Current repair vs Capital repair: Only current repairs are allowed as deduction. Capital repairs are not
allowed as deduction whether the assessee occupies the building as a tenant or as a landlord.
Current repair (irrespective of the amount involved) means -
 a repair incurred to preserve and maintain an existing asset; and
 a repair which does not result in a new or fresh advantage.
Current repairs connote repairs which are attended to when the need for them arises and which are not allowed
to be accumulated.
4. Municipal taxes: Rates & taxes (for e.g. land revenue, municipal tax, etc) are deductible on cash basis [Sec.
30 read with sec. 43B]

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2.3.7 Repairs & insurance of machinery, plant & furniture [Sec. 31]
Repairs & insurance of plant, machinery & furniture are allowed as deduction. Points to be noted in this regard:
1. Use of asset: The asset must be used for the purpose of business or profession. However, if the asset is not
exclusively used for the purpose of business or profession then deduction shall be restricted to a fair proportion
of above expenditure, which the Assessing Officer may determine [Sec. 38(2)].
2. Current repair vs Capital repair: Only current repairs are allowed as deduction.
3. Rent for furniture, plant or machinery: Only repairs & insurance of machinery, plant & furniture is covered
under this section. Rent paid for use of such assets is deductible u/s 37(1).
2.3.8 Depreciation [Sec. 32]
Sec. 32 provides for depreciation on -
Tangible assets Building, Machinery, Plant and Furniture.
Intangible assets Know how, Copyright, Trade Mark, Patent, Licence, Franchise, or any other business or
commercial right of the similar nature acquired on or after 1/4/1998
However, it does not include goodwill
Conditions for claiming depreciation
Depreciation is allowed provided the following conditions are satisfied:
Condition 1: Asset must be owned by the Condition 2: Asset must be used for the purpose of business or
assessee. profession during the previous year.
Notes
¾ Beneficial owner: Assessee need not be a ¾ Passive use -vs.- Active use: Use includes active use as well
registered owner, even a beneficial owner as passive use. Active use means actual use of the property
can claim depreciation. for the purpose of business or profession. Whereas passive
use includes “ready to use”. It means, if a property was not
¾ Co-owner: In case of joint ownership, actually used for business or profession but was ready to
depreciation is allowed on proportionate use in the previous year, in such case, assessee can claim
basis. depreciation on such assets
¾ Property acquired on hire purchase: In
¾ Partly used for business or profession: As per sec. 38, if
case of hire purchase, the buyer can claim
an asset is partly used for business or profession and partly
depreciation even though he does not get
used for personal purpose, then proportionate depreciation
legal title of the asset till he pays the last
(as determined by the Assessing Officer) shall be allowed.
instalment.
¾ Capital expenditure on a property by ¾ House property let out to tenant for smooth running
the lessee: Where an assessee being a of the business: If an assessee lets out a property to his
lessee of a property incurs any capital employee and where such letting-out supports smooth
expenditure by way of improvement, flow of his business, then rent received from employee
extension, super construction, etc. on a shall be chargeable under the head “Profits & gains of
building being used for his business or business or profession” and such property shall be eligible
profession, he is entitled to depreciation for depreciation u/s 32. Similarly, where an assessee makes
in respect of such capital expenditure. available his property to any Government agency for
¾ Sec. 53A of Transfer of Property Act: locating branch of a nationalized bank, police station, post
Possessor of an immovable property u/s office, tax office, railway staff quarters, etc. for the purpose
53A of Transfer of Property Act can claim of running the business of assessee more efficiently, then
depreciation even though he is not the such letting out shall be deemed to be incidental to business
registered owner of the property. and depreciation on such building shall be allowed u/s 32.
Method of computing depreciation (other than power units)
The method of computing depreciation as per Income tax Act is entirely different from accountancy method. For
Income tax purpose, assets are categorised into Block of Assets.

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Block of Assets [Sec. 2(11)]

Block of assets means a group of assets of same nature, in respect of which same rate of depreciation is charged.
In other words, to fall in the same block, the following two conditions are to be satisfied:
 Assets must be of same nature;
Tangible assets being building, machinery, plant or furniture, and
Intangible assets, being know-how, patents, copy-rights, trade marks, licenses, franchises or any other business
or commercial rights of similar nature acquired on or after 1-4-1998 (it does not include goodwill);
 Rate of depreciation on such asset must be same.
Method of Depreciation
Depreciation shall be allowed on written down value method at the rates prescribed.
Calculation of depreciation (at a glance)
Particulars Amount
W.D.V of the block at the beginning of the previous year ***
Add: Assets (falling within the block) acquired during the previous year ***
ABC
Less: Money payable* alongwith scrap value in respect of that asset (falling within the block) which is (DE)$
sold, discarded, demolished or destroyed during the previous year [$subject to max. of ABC]
Written Down Value [# XYZ cannot be negative] XYZ#
Less: Depreciation (as a % on XYZ) (***)
Opening WDV for 1st day of next year ****
When depreciation is not charged
Depreciation is not charged in the following two cases:
1. When ‘DE’ (Sale proceeds) exceeds ABC, the excess shall be treated as short term capital gain.
2. When ‘XYZ’ (Value of block before depreciation) is positive but the block does not have any asset. In such
case, such positive value shall be treated as short term capital loss.
Significance of date of purchase (Effect of time on depreciation)
Where -
a. an asset is acquired by the assessee during the
previous year; and
b. is put to use in the same previous year for less
than 180 days,
- the depreciation in respect of such asset is
restricted to 50% of the normal depreciation.
Except above, date of purchase has no relevance.
Taxpoint: There is no significance of date of sale for
computation of depreciation.

* As per explanation to sec. 41, money payable in respect of any building, machinery, plant or furniture includes:
(a) any insurance, salvage or compensation moneys payable in respect thereof;
(b) where the building, machinery, plant or furniture is sold, the price for which it is sold.
The word ‘money’ has to be interpreted only as actual money or cash, and not as any other thing or benefit which could be evaluated in terms of money
[CIT -vs.- Kasturi & Sons Ltd. (SC).]
Gross amount shall be deducted, expenses on transfer may be allowed as deduction u/s 37(1).

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Extract of depreciation-rate

Block Nature of Asset

Buildings1 5% Residential building other than hotels and boarding
Buildings 10% Non residential building, godown, office, factory, etc. including hotels and boarding
Buildings 40% Temporary construction
Furniture 10% Any furniture including electrical fittings
Plant/Machinery 20% Ocean going ships, vessels, speed boats
Plant/Machinery 30% Motor car (including lorries and buses) used for hiring purposes
Computer including computer software
Plant/Machinery 40%
Books owned by a professional
Plant/Machinery 40% Air or water pollution control equipment
Plant/Machinery 15% Oil Wells
In general (if nothing is mentioned regarding nature of plant & machinery and
Plant/Machinery 15%
including motor car not used for hiring purpose)
Intangible assets3 25% Acquired after 31/3/98
1.
Buildings include roads, bridges, culverts, wells (excluding oil wells) and tube wells.
2.
Plant does not include tea bushes or live stocks or buildings or furniture & fittings.
3
Patent, Know-how, Copy-rights, Trade-mark, Licences, Franchises and other business or commercial right of
similar nature (it does not include goodwill)
Illustration 66:
M/s Anita Enterprises has written down value in furniture block (depreciation rate 10%) as on 1/4/2024 ` 80,000.
The block consists of two furniture X and Y.
Compute depreciation u/s 32 for the A.Y. 2025-26 in the following cases:

Case A Furniture X sold for ` 20,000 on 1/5/2024

Case B Furniture X sold for ` 1,00,000 on 1/1/2025
Case C Furniture X sold for ` 1,00,000 and Furniture S purchased for ` 35,000 as on 1/7/2024
Case D Furniture X sold for ` 10,000 and Furniture S purchased for ` 40,000 as on 1/7/2024
Case E Furniture X sold for ` 10,000 and Furniture S purchased for ` 40,000 as on 11/11/2024
Case F Furniture X sold for ` 2,00,000 and Furniture S purchased for ` 40,000 as on 11/11/2024
Case G Furniture X and Furniture Y both sold for ` 10,000 and ` 35,000 respectively.
Case H Furniture X and Furniture Y both sold for ` 10,000 and ` 35,000 respectively as on 11/11/2024. New
Furniture T purchased for ` 5,000 as on 1/7/2024.
Case I Furniture Z purchased for ` 40,000 on 1/7/2024 and the same being put to use on 11/11/2024.
Case J Furniture Q purchased for ` 50,000 on 1/7/2024 but put to use on 1/11/2025.
Case K Furniture R purchased for ` 30,000 on 1/7/2023 but put to use on 11/11/2024.
Case L Furniture S purchased for ` 10,000 on 1/7/2024 but put to use on 11/11/2024 and Furniture X and Y
sold for ` 10,000 and ` 6,000 respectively.
Case M Furniture R purchased for ` 30,000 on 1/7/2024 and sold the same for ` 40,000 on 11/11/2024.
Case N Sold Furniture X and Y for ` 95,000 on 1/7/2024 & purchased Furniture R for ` 30,000 on 11/11/2024

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Case O Sold Furniture X for ` 90,000 on 11/7/2024 and following Furniture put to use -
¾ Furniture A on 18/12/2024, purchased on 17/12/2024 for ` 30,000;
¾ Furniture B on 18/2/2025, purchased on 15/8/2024 for ` 50,000;
¾ Furniture Z on 18/4/2024, purchased on 17/7/2023 for ` 60,000;
¾ Furniture P on 8/12/2024, purchased on 17/5/2023 for ` 10,000;
¾ Furniture Q on 1/4/2025, purchased on 31/3/2025 for ` 20,000.

Assume in all cases new furniture is charged to deprecation @ 10%

Solution :
Computation of depreciation for the A.Y. 2025-26

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

Block: Furniture (10%)
W.D.V. as on 1/4/2024 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000
Add: Purchase Nil Nil 35,000 40,000 40,000 40,000 Nil 5,000
80,000 80,000 1,15,000 1,20,000 1,20,000 1,20,000 80,000 85,000
Less: Sale Proceeds 20,000 80,000# 1,00,000 10,000 10,000 1,20,000# 45,000 45,000
60,000 Nil 15,000 1,10,000 1,10,000 Nil 35,000 40,000
Depreciation 6,000 Nil 1,500 11,000 9,000 1
Nil Nil 4,000
Short term capital gain 20,000 80,000
Short term capital Loss (35,000)
#
Sale Proceeds cannot exceed Opening WDV as increased by actual cost of asset acquired during the previous
year. Excess, if any, shall be considered as short-term capital gain.

Computation of depreciation for the A.Y. 2025-26

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

Block: Furniture (10%)
W.D.V. as on 1/4/2024 80,000 80,000 80,000 80,000 80,000 80,000
Add: Purchase 40,000 Nil 30,000 10,000 30,000 30,000
1,20,000 80,000 1,10,000 90,000 1,10,000 1,10,000
Less: Sale Proceeds Nil Nil Nil 16,000 40,000 95,000
1,20,000 80,000 1,10,000 74,000 70,000 15,000
Depreciation 10,000 2
8,000 11,000 3
6,900 4
7,000 7505
Short term capital gain
Short term capital Loss
1
(` 70,000 * 10%) + (` 40,000 * 10% * ½) 2(` 80,000 * 10%) + (` 40,000 * 10% * ½)
3
Though the asset was put to use for less than 180 days but since it was not acquired in the current year hence
provision for ½ year depreciation shall not be applicable
4
(` 10,000 * 10% * ½) + (` 64,000 * 10%) 5(` 15,000 * 10% * ½)

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Case O: Computation of depreciation for the A.Y. 2025-26

Particulars Details Amount

Block: Furniture (10%)
W.D.V. as on 1/4/2024 80,000
Addition during the year:
– Furniture A (eligible for ½ year depreciation) 30,000
– Furniture B (eligible for ½ year depreciation) 50,000
– Furniture Z 60,000
– Furniture P 10,000 1,50,000
2,30,000
Less: Sale Proceeds 90,000
1,40,000
Depreciation [{` 80,000 * 10% * ½} + {` 60,000 i.e. (` 1,40,000 – ` 80,000) * 10%)] 10,000
Since, furniture Q was put to use on 1/4/2025, therefore depreciation shall not be charged in the P.Y.2024-25.
Illustration 67:
Mr. X, a grower and manufacturer of tea, purchased machinery (15%) on 10-04-2022 for ` 10 lakh. He computed
depreciation for A.Y. 2025-26 as given below; needs your comment on his working:

Particulars Amount

Opening W.D.V. as on 1/4/2023 Nil

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

10,00,000

Less: Depreciation for the P.Y. 2023-24 [` 10,00,000 * 15% * 40%] 60,000

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

Opening W.D.V. as on 1/4/2024 9,40,000

Less: Depreciation for the P.Y. 2024-25 [` 9,40,000 * 15% * 40%] 56,400

Opening W.D.V. as on 1/4/2025 8,83,600

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

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is derived from the business of the assessee under the head “Profits and gains of business or profession” and the
depreciation so computed shall be deemed to be the depreciation actually allowed under this Act.”
The correct computation of depreciation is as follow:

Particulars Amount
Opening W.D.V. as on 1/4/2023 Nil

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

10,00,000

Less: Depreciation for the P.Y. 2023-24 [` 10,00,000 * 15%]

(Considering the entire income as taxable income) 1,50,000

Opening W.D.V. as on 1/4/2024 8,50,000

Less: Depreciation for the P.Y. 2024-25 [` 8,50,000 * 15%] 1,27,500

Opening W.D.V. as on 1/4/2025 7,22,500

Computation of business income of Mr. X for A.Y. 2025-26

Particulars Amount

Income before depreciation and without reducing element of agricultural income 8,00,000

Less: Depreciation 1,27,500

6,72,500
Less: Agricultural Income being 60% of above 4,03,500
Profits and Gains of Business or Profession 2,69,000

2.3.9 Additional depreciation [Sec. 32(1)(iia)] Available only in Old Regime

Applicability
Additional depreciation is applicable on all assessee engaged in the business of manufacture or production of any
article or thing or in the business of generation, transmission or distribution of power
Conditions to be satisfied
1. Assessee must be an industrial undertaking, which manufactures or produces any article or thing or in the
business of generation, transmission or distribution of power.
2. Assessee acquired and installed after 31st March, 2005, a new plant or machinery, other than the following:
¾ Ships and air crafts; or
¾ Any plant or machinery which was used either within or outside India by any other person before such
installation; or
¾ Any plant or machinery installed in office premises or any residential accommodation or guest house; or
¾ Any office appliances or road transport vehicle; or

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¾ Any plant or machinery, which is allowed for 100% deduction (whether by way of depreciation or
otherwise) in the previous year.
Taxpoint: Additional depreciation shall be available only on plant and machinery and not on other asset like
furniture, building, etc.
Rate of additional depreciation
Rate of additional depreciation is 20% of actual cost of such plant or machinery.
 Where, if the asset is acquired and put to use for less than 180 days then additional depreciation @ 10% (i.e.,
50% of 20%) of actual cost shall be allowed in that previous year and the deduction for the balance 10% shall
be allowed in the immediately succeeding previous year.

Taxpoint
1. Additional depreciation shall be reduced while computing the closing WDV of the respective block.
2. Additional depreciation is not available if the new plant or machinery is sold in the year of acquisition.
3. Additional depreciation is not available if the power unit is claiming depreciation under straight line method
i.e. u/s 32(1)(i)
4. The business of printing or printing and publishing amounts to manufacture or production of an article or
thing and is, therefore, eligible for additional depreciation [Circular No. 15/2016 dt 19-05-2016]
Provision Illustrated
B Ltd., a newly formed manufacturing concern, has furnished you the following details to compute Depreciation
allowed for the A.Y. 2024-25 and 2025-26:
Assets Date of Acquisition Cost of Acquisition Rate of depreciation
Plant A 02/04/2023 5,00,000 15%
Plant B 07/05/2023 3,00,000 15%
Plant C 15/12/2023 2,00,000 15%
Plant D 05/05/2024 1,00,000 15%
Solution:
Computation of Additional Depreciation
Additional depreciation
Assets Rate Cost
A.Y. 2024-25 A.Y. 2025-26
Plant A 20% 5,00,000 1,00,000 Nil#
Plant B 20% 3,00,000 60,000 Nil#
Plant C 10% 2,00,000 20,000 20,000
Plant D 20% 1,00,000 Nil 20,000
Total 1,80,000 40,000

Calculation of Depreciation u/s 32 of Plant (15%) for the A.Y.2024-25 and 2025-26
Particulars Details Amount
W.D.V. as on 1/4/2023 -
Add: Purchase during the year 10,00,000
10,00,000
Less: Sale during the year Nil

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10,00,000
Depreciation (normal) [(` 8,00,000 * 15%) + (` 2,00,000 * 15% * ½)] 1,35,000
Additional depreciation (as computed above) 1,80,000 3,15,000
W.D.V. as on 1/4/2024 6,85,000
Add: Purchase during the year 1,00,000
7,85,000
Less: Sale during the year Nil
7,85,000
Depreciation (normal) [` 7,85,000 *15%] 1,17,750
Additional depreciation (as computed above) 40,000 1,57,750
W.D.V. as on 1/4/2025 6,27,250

Illustration 68:
An industrial undertaking, which commenced the manufacturing activity with effect from 1st September, 2024 has
acquired the following assets during the previous year 2024-25:

Assets Date of acquisition Date when put to use Cost of acquisition

Factory building 4-4-2024 1-9-2024 50,00,000
Plant & Machinery
Machinery A 5-5-2024 1-9-2024 2,00,000
Machinery B 7-6-2024 1-9-2024 5,00,000
Machinery C 30-8-2024 1-9-2024 10,00,000
Machinery D 1-9-2024 31-10-2024 4,00,000
Machinery E 1-1-2025 28-2-2025 3,00,000
Machinery F (second hand) 11-1-2025 13-1-2025 2,00,000
Motor car 1-2-2025 1-2-2025 5,00,000
Air-conditioner (installed in the office) 1-2-2025 2-2-2025 1,00,000
Compute the depreciation allowable for the assessment year 2025-26 and the written down value as on 1st April
2025.
Solution :
Computation of depreciation allowable for the A.Y. 2025-26
Particulars Building Plant & Machinery1
Rate 10% 15%
W.D.V. as on 1-4-2024 Nil Nil
Add: Purchase during the year 50,00,000 32,00,000
50,00,000 32,00,000
Less: Sale proceeds Nil Nil
50,00,000 32,00,000
Depreciation on above 5,00,000 7,77,500
W.D.V. as on 1-4-2025 45,00,000 24,22,500 (Note)

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1.
Block consists of Machinery A to Machinery F, Motor Car & Air-conditioner.
2.
Depreciation on plant and machinery
- Normal [(` 17,00,000 * 15%) + (` 15,00,000 * 15% * ½)] 3,67,500
- Additional (on Machinery A to E) [(` 17,00,000 * 20%) + (` 7,00,000 * 20% * ½)] 4,10,000
Total Depreciation 7,77,500
Note :
1. Asset which was put to use for less than 180 days is eligible for ½ year depreciation. However, additional
depreciation of ` 70,000/- (i.e. ` 7,00,000 * 20% * ½) shall be available in the A.Y. 2025-26.
2. Additional depreciation is not available on following assets:
Asset Reason
Factory building As it is not plant and machinery
Machinery-F As it is a second hand machinery
Motor car As it is a road transport vehicle
Air conditioner As it is installed in office

2.3.10 Treatment of Slump sale

Slump sale [Sec. 2(42C)]: It means transfer of undertaking(s) for a lump sum consideration without assigning
values to the individual assets of such undertaking(s).
Computation of written down value of block of assets in case of slump sale

Particulars Amount
W.D.V of the block at the beginning of the previous year ***
Add: Purchase during the previous year ***
MNO
Less: Sale consideration for assets sold (to the maximum of MNO) (****)
PQR
Less: WDV (Note) of the asset sold under slump sale (ABC)
[Value of deduction at this stage i.e. abc cannot exceed PQR]
XYZ
Less: Depreciation (as a % on XYZ) (***)
WDV of the block at the end of year ****
Note: Written down value of the asset sold under slump sale
Particulars Amount
Original cost of asset sold under slump sale ***
Less: Depreciation (actual) allowed on such asset in respect of any previous year (***)
commencing before 1987-88
Less: Depreciation (notional) that would have been allowable from the previous year (***)
1987-88 onwards as if the asset is only asset in the relevant block.
Written down value of the asset sold under slump sale ***

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2.3.11 Depreciation in case of Power Units

An undertaking engaged in the business of generation or generation and distribution of power may charge
depreciation (in respect of asset acquired after 31/3/1997) at its choice under -
 Written-down value method as followed by all other assessee (usual); or
 Straight-line method at the prescribed rate in ‘Appendix IA’ of the Income Tax Rules on actual cost of asset*
(not the block value of asset)
However, such option shall be exercised before the due date of furnishing return of income. Further, it may be
noted that once the option is exercised, it shall be applicable for all subsequent assessment years.
Note: Additional depreciation is not available to the assessee who claims depreciation as per Straight-Line Method.

Terminal Depreciation and Balancing Charge

Applicable
Assessee engaged in generation or generation and distribution of power.
to
1. Assessee must follow the straight-line method of depreciation at specified rates.
Conditions 2. The asset is sold, discarded, demolished or destroyed in the previous year (other than the
previous year in which it is first brought into use).
Terminal Depreciation Balancing Charge
Loss on transfer of such asset is Profit on transfer of such asset to the maximum of accumulated
treated as terminal depreciation. depreciation shall be treated as balancing charge.
Taxpoint: The difference between sale price and actual cost shall be
treated as capital gain.
¾ Terminal depreciation = + ve
Meaning
value of [WDV of assets – Taxpoint:
(Sale value or Scrap value)]
Balancing Charge = - ve value of [WDV of assets – (Sale
¾ Terminal depreciation is value + Scrap value)]
written off in the books of
However, balancing charge cannot exceed accumulated
accounts.
depreciation claimed on such asset.
As per sec. 41(2), balancing charge is fully taxable as business
Terminal depreciation is fully
income in the previous year in which such income falls due.
Treatment allowed as deduction as a business
The provision holds good even if the business does not exist
loss.
in that year.

Illustration 69:
Important Ltd. is a power-generating unit. On 1-4-2022, it purchased a plant of ` 50,00,000 eligible for depreciation
@ 15% on SLM. Compute balancing charge or terminal depreciation assuming the plant is sold on 21/4/2024 for:

A) ` 7,50,000 B) ` 30,00,000 C) ` 45,00,000 D) ` 55,00,000

* Where asset is acquired during the previous year and put to use for less than 180 days, depreciation @ 50% of the prescribed rate shall be
available.

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Solution :
Computation of capital gain or balancing charge or terminal depreciation for the A.Y.2025-26

Amount
Particulars Note
A B C D
Written down value as on 1/4/2024 1 35,00,000 35,00,000 35,00,000 35,00,000
Less: Sale Proceeds 7,50,000 30,00,000 45,00,000 55,00,000
Balance 27,50,000 5,00,000 (-) 10,00,000 (-) 20,00,000
Terminal depreciation 27,50,000 5,00,000 Nil Nil
Balancing Charge 2 Nil Nil 10,00,000 15,00,000
Short term capital gain 2 Nil Nil Nil 5,00,000
Notes :
1. Computation of Written down value as on 1/4/2024

Particulars Amount
Original cost 50,00,000
Less: Depreciation for the year 2022-23 7,50,000
WDV as on 1/4/2023 42,50,000
Less: Depreciation for the year 2023-24 7,50,000
WDV as on 1/4/2024 35,00,000
2. Balancing charge cannot exceed accumulated depreciation claimed on such asset. The total negative balance
in case D is ` 20,00,000 but the accumulated depreciation is ` 15,00,000 only. Hence, balancing charge is
restricted to ` 15,00,000 & the balance i.e. ` 5,00,000 shall be treated as short-term capital gain.

Test Yourself
1. Taj Electric Supply Company Ltd. which was charging depreciation on straight line method and whose actual
cost of the asset was ` 20,00,000 and written down value ` 18,72,300 sold the said asset during 2024-25 after
2 years. What will be the tax treatment for assessment year 2025-26 if the asset is sold for:
i. ` 30,000;
ii. ` 18,72,300;
iii. ` 19,80,000;
iv. ` 21,00,000
Hints
(i) ` 18,42,300 Terminal Depreciation (ii) Nil (iii) ` 1,07,700 Balancing Charge (iv) ` 1,27,700 Balancing charge
and ` 1,00,000 Short Term Capital Gain
In all the cases, no further depreciation is allowable to the assessee in respect of such asset.

2.3.12 Actual cost of assets [Sec. 43(1)]

In calculation of actual cost, apart from cost price of the asset, following expenditure incurred relating to such asset
shall be included:

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 Expenses directly related to acquisition of the asset including travelling expenditure incurred for acquiring
asset.
 Expenses necessary to bring the asset to site, installation, and to make it ready to use, e.g. carriage inward,
loading and unloading charges, installation cost, trial run cost, etc.
 Expenses incurred to increase the capacity of the asset or to make it fit prior to its use.
Actual cost means the actual cost of the assets to the assessee, as reduced by that portion of the cost thereof, if any,
as has been met directly or indirectly by any other person or authority. Eg.: If an asset is purchased for ` 5,00,000
and Government grant received for the same ` 1,00,000, then the actual cost of the asset for tax purpose shall be
` 4,00,000.
Following points, given by way of explanation to sec. 43(1), shall be considered -
Particulars Actual cost of acquisition
In respect of acquisition of any asset or part thereof:
a) payment or aggregate of payments made to a person in a day is made
otherwise than by an account payee cheque drawn on a bank or an
account payee bank draft or use of electronic clearing‡ system through
Assets acquired against cash a bank account or through other prescribed electronic mode; and
b) such payment exceeds ₹ 10,000
Such payment shall be ignored for the purposes of determination of actual
cost.
Asset used for business after it The actual cost to the assessee
ceases to be used for scientific Less: Any deduction allowed u/s 35
research [Explanation 1]
Actual cost to the previous owner:
Less: Amount of depreciation that would have been allowable to the
Asset acquired by way of gift or assessee, as if the asset was the only asset in the relevant block.
inheritance [Explanation 2] Further, any expenditure incurred by the assessee such as expenditure on
freight, installation etc. of such asset would also be includible in the actual
cost
Interest treatment in case of asset Before asset is put to use Interest to be added to actual cost
acquired out of borrowed fund After asset is put to use Interest is allowed u/s 36(1)(iii)
[Explanation 8]
Any subsidies received from the Grant or subsidies will be subtracted from cost of acquisition of such asset.
Government or any other authority
for purchase of an asset [Explanation
10]
GST included in the invoice [Read Actual cost of asset shall be reduced by the amount of input tax credit
with Explanation 9] taken against GST(or any other indirect tax)

‡
The prescribed electronic modes include credit card, debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment
Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money)
Aadhar Pay [Notification No. 8/2020 dated 29-01-2020]

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Particulars Actual cost of acquisition

Where, before the date of its acquisition by the assessee, the asset was
at any time used by any other person for the purposes of his business or
profession, and the Assessing Officer is satisfied that the main purpose
of the transfer of the asset directly or indirectly to the assessee was the
reduction of liability of income-tax directly or indirectly to the assessee (by
Second hand asset [Explanation 3] claiming depreciation with reference to an enhanced cost) the actual cost
to the assessee shall be taken to be such an amount which the Assessing
Officer may, with the previous approval of the Joint Commissioner,
determine, having regard to all the circumstances of the case
In nutshell, actual cost to be determined by the AO with the prior permission
of Joint Commissioner
Reacquisition of transferred asset WDV at the time of first transfer or the price paid for reacquisition,
[Explanation 4] whichever is lower
Asset acquired by an assessee from
WDV of the asset to the transferor
another person and given on lease
to the same person who had earlier Taxpoint: Explanation 4A overrides Explanation 3.
claimed depreciation on such asset
[Explanation 4A]
Building used for personal purpose Cost of purchase or construction of the building as reduced by the notional
subsequently brought into business depreciation by applying the rate applicable on the date of such conversion
[Explanation 5]
Asset, which was acquired outside Actual cost to the assessee, as reduced by an amount equal to the amount of
India, is brought by a non-resident depreciation calculated at the rate in force that would have been allowable
assessee to India and used for had the asset been used in India for the said purposes since the date of its
the purposes of his business or acquisition by the assessee
profession [Explanation 11]
Any capital asset transferred by Actual cost to the transferee company shall be taken to be the same as
a holding company to its 100% it would have been if the transferor company had continued to hold the
subsidiary company or vice versa capital asset for the purpose of its business
where transferee company is an
Indian company.
Any capital asset transferred by Actual cost to the amalgamated company shall be taken to be the same as it
the amalgamating company to the would have been if the amalgamating company had continued to hold the
amalgamated company where the capital asset for the purpose of its own business
amalgamated company is an Indian
company
Any capital asset transferred by the
Actual cost to the resulting company shall be taken to be the same as it
demerged company to the resulting
would have been if the demerged company had continued to hold the
company where the resulting
capital asset for the purpose of its own business
company is an Indian company
Capital asset is acquired by the Actual cost of the asset shall be deemed to be the amount which would
assessee under a scheme for have been regarded as actual cost had there been no such corporatisation
corporatisation of a recognised
stock exchange in India

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Particulars Actual cost of acquisition

Where an assessee was not required Actual cost shall be reduced by the total amount of depreciation on such
to compute his total income under asset, provided in the books of account (as adjusted by amount attributable
Income tax Act for any previous to the revaluation of assets) of the assessee in respect of such previous
year(s) preceding the relevant year(s) preceding the relevant previous year
previous year
The actual cost of any capital asset Actual cost of the asset shall be taken as nil. (Discussed later in this chapter)
on which deduction is allowable u/s
Taxpoint:
35AD [Explanation 13]
 If such asset is transferred to other person as gift, etc., actual cost of
asset shall be taken as Nil in hands of transferee.
 However, where an asset, in respect of which deduction is claimed
and allowed u/s 35AD is deemed to be the income of the assessee in
accordance with the provisions of sec. 35AD(7B) (on account of asset,
being used for a purpose other than specified business u/s 35AD), the
actual cost of the asset to the assessee shall be
Actual cost to assessee
Less: The amount of depreciation allowable had the asset been used for
the purpose of business, calculated at the rate in force, since the date of its
acquisition [Proviso to Explanation 13 to section 43(1)].
Conversion of inventory into capital Where inventory is converted into capital asset and such converted asset
asset [Explanation 1A] is used for the purposes of business or profession, the actual cost of such
asset to the assessee shall be the fair market value of the inventory as on
the date of its conversion into capital asset

Illustration 70:
Dr. R purchased a house property on 1-12-2022 for ` 10,00,000. Till 1-12-2024, the same was self-occupied as a
residence. On this date, the building was brought into use for the purpose of his medical profession. What would
be the depreciation allowable for the assessment year 2025-26?
Solution :
In case a building is used for personal purpose subsequently brought into business, the cost of acquisition shall
be the purchase or construction cost of the building as reduced by the notional depreciation by applying the rate
applicable on the date of such conversion. In the given case cost of asset for the business shall be computed as
under:

Particulars Building
Rate of depreciation 10%
Cost of building on 1.12.2022 10,00,000
Less: Depreciation (Being used for less than 180 days hence, depreciation charged 50% of normal 50,000
depreciation i.e. ` 10,00,000 * 50% * 10%)
WDV on 31.3.2023 9,50,000

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Less: Depreciation 95,000

WDV on 31.3.2024 8,55,000
Computation of depreciation u/s 32
Cost of building on 1/4/2024 8,55,000
Depreciation for the year 2024-25 85,500
WDV on 01.04.2025 7,69,500

Illustration 71:
Roshan started a business of designing on 01-04-2023. He acquired a laptop on 01-04-2023 for ` 50,000 for his
business use. Since his gross total income for the previous year 2023-24 is only ` 55,000/-, he did not file his return
of income. During the previous year 2024-25, his business income before depreciation u/s 32 is ` 5,60,000. Since
he is required to file his return of income for the assessment year 2025-26, he seeks your advice for computing
depreciation. Please compute depreciation on his behalf assuming that:
a. He is maintaining books of account from 01-04-2023 but did not provide any depreciation on laptop.
b. He is maintaining books of account from 01-04-2023 and provided depreciation ` 8,000 on laptop.
c. He is maintaining books of account from 01-04-2024.
Solution :
Computation of depreciation in various cases:

Particulars Case (a) & (c) Case (b)

Cost of Laptop as on 01-04-2023 50,000 50,000
Less: Depreciation for the P.Y. 2023-24 provided in the books of account Nil 8,000
WDV on 31.3.2024 50,000 42,000
Less: Depreciation for the P.Y. 2024-25 @ 40% 20,000 16,800
WDV on 31.3.2025 30,000 25,200

Illustration 72:
A car was purchased by S on 10.8.2020 for ` 3,25,000 for personal use is brought into the business of the assessee on
01.12.2024, when its market value is ` 1,50,000. Compute the actual cost of the car and the amount of depreciation
for the Assessment year 2025-26 assuming the rate of depreciation to be 15%.
Solution :
Computation of depreciation on car for the A.Y. 2025-26

Particulars Amount
Cost of the car (Note 1) 3,25,000
Less: Depreciation @ 15% (Note 2) 48,750
Closing W.D.V. 2,76,250

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1. As per explanation 5 to Sec. 43(1), where any building used for personal purpose subsequently brought into
business, then the cost of purchase or construction of the building as reduced by the notional depreciation
by applying the rate applicable on the date of such conversion shall be taken as actual cost of such building.
However, such provision is applicable only in case of building.
2. Where an asset is acquired by the assessee during the previous year and is put to use in the same previous year
for less than 180 days, the depreciation in respect of such asset is restricted to 50% of the normal depreciation.
However, in the case, car was not acquired in the P.Y. 2024-25, hence such provision is not applicable.
Illustration 73:
Compute depreciation u/s 32 for the A.Y. 2025-26 from the following information:
a. W.D.V. of plant and machinery (15%) as on 01-04-2024 ` 10,00,000
b. Plant D acquired on 10-07-2024 for ` 5,00,000/-. ` 1,00,000 has been paid in cash to the vendor and balance
amount has been paid through an account payee cheque. Such plant was put to use on the same day.
c. The assessee is engaged in the business of manufacturing of industrial paints and has opted for the old tax
regime.
Solution :
Computation of depreciation for A.Y. 2025-26
Particulars Amount Amount
WDV as on 01-04-2024 10,00,000
Add: Actual cost of Plant D acquired during the year [` 5,00,000 – ` 1,00,000] 4,00,000
14,00,000
Less: Depreciation for the P.Y. 2024-25 [` 14,00,000 x 15%] 2,10,000
Less: Additional Depreciation for the P.Y. 2024-25 [` 4,00,000 x 20%] 80,000 2,90,000
WDV on 01-04-2025 11,10,000
2.3.13 Consequence of changes in rate of exchange of currency [Sec. 43A]
Conditions
1. Assessee has acquired any asset in any previous year from a country outside India;
2. In consequence of a change in the rate of exchange during any previous year after the acquisition of such asset,
there is an increase or reduction in the liability of the assessee (as compared to the liability existing at the time
of acquisition of the asset) at the time of making payment -
a. towards the whole or a part of the cost of the asset; or
b. towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or
indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest.
Treatment
The amount by which such liability is increased or reduced at the time of making the payment (irrespective of the
method of accounting adopted by the assessee) shall be added to or deducted from the actual cost (as reduced by
depreciation already claimed) of the asset
Taxpoint
 If such increase or decrease arises after the depreciable asset is transferred (but block exists), then such increase
or decrease shall be adjusted in the WDV. If, however, block is cease to exist, then such amount shall be treated
as capital receipt or expenditure.
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 Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly,
by any other person or authority, the liability so met shall not be taken into account for the purposes of this
section.

Illustration 74:
Narang Textiles Ltd. purchased a machinery from Germany for Euro 1,00,000 on 03-09-2023 through a term
loan from Fortune Bank Ltd. The exchange rate on the date of acquisition was ` 65. The assessee took a forward
exchange rate on 05-10-2024 when the rate specified in the contract was ` 67 per USD. Compute depreciation for
the assessment years 2024-25 and 2025-26. Ignore additional depreciation.
Solution :
Computation of Depreciation
Particulars Amount
Opening W.D.V. as on 1/4/2023 Nil
Add: Assets purchased during the year [Euro 1,00,000 * 65] 65,00,000
65,00,000
Less: Depreciation for the P.Y. 2023-24 [` 65,00,000 * 15%] 9,75,000
Opening W.D.V. as on 1/4/2024 55,25,000
Add: Difference in Conversion rate [Euro 1,00,000 * 2] 2,00,000
57,25,000
Less: Depreciation for the P.Y. 2024-25 [` 57,25,000 * 15%] 8,58,750
Opening W.D.V. as on 1/4/2025 48,66,250

2.3.14 Taxation of foreign exchange fluctuation [Sec. 43AA]

Any gain (or loss), being computed in accordance with the ICDS, arising on account of any change in foreign
exchange rates shall be treated as income (or loss).
Taxpoint:
 Such gain or loss shall arise in respect of all foreign currency transactions, including those relating to:
i. monetary items and non-monetary items;
ii. translation of financial statements of foreign operations;
iii. forward exchange contracts;
iv. foreign currency translation reserves*
 The provision of sec. 43AA is not applicable in respect of cases covered u/s 43A (like computation of actual
cost of the asset, etc)

2.3.15 Unabsorbed depreciation [Sec. 32(2)]

Depreciation which could not be fully deducted from profits and gains of current year of business or profession
(due to insufficient profit), is termed as unabsorbed depreciation.
Treatment: The unabsorbed depreciation can be deducted from income under any other head (except with Casual
income and Salaries) of the same assessment year.
If depreciation still remains unabsorbed, it can be carried forward for indefinite period and can be set off against
any income (except with Casual income and Salaries) of the assessee.
* ICDS is not dealing with foreign currency translation reserves

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Notes
1. It is not necessary that the same business should be continued.
2. For set-off purpose following order is to be followed:
¾ Current year depreciation;
¾ Brought forward business loss;
¾ Unabsorbed depreciation
3. Unabsorbed depreciation shall be (subject to sec. 72 and sec. 73) added to the amount of the depreciation for
the following previous year and deemed to be the depreciation-allowance for that previous year, and so on for
the succeeding previous years.
4. Unabsorbed depreciation shall be allowed to be carried forward for any number of years and such carried
forward unabsorbed depreciation may be set off against any income, other than salary income and winning
from lotteries, cross word puzzles, etc.
5. Unabsorbed depreciation can be carried forward even return of income has not been filed.
6. In a case where the assessee is paying tax under default tax regime u/s 115BAC and there is a depreciation
allowance in respect of a block of asset from an earlier assessment year attributable to additional depreciation,
which has not been given full effect to prior to A.Y. 2024-25 and which is not allowed to be set-off in the
A.Y.2024-25, corresponding adjustment shall be made to the WDV of such block of assets as on 1.4.2023 in the
prescribed manner i.e., the WDV as on 1.4.2023 will be increased by the unabsorbed additional depreciation
not allowed to be set-off
2.3.16 Mandatory provision of Depreciation
From the A.Y. 2002-03, if all conditions of sec. 32 are satisfied, depreciation shall be available whether the assessee
has claimed the same or not.
2.3.17 Depreciation in case of amalgamation, demerger or succession
In the year of -
 Amalgamation;
 Demerger;
 Succession [referred in sec. 47(xiii), (xiiib) & (xiv) or sec. 170]
depreciation u/s 32 shall be apportioned between –
 the amalgamating company and the amalgamated company
 the demerged company and the resulting company
 the predecessor and the successor
- in the ratio of number of days for which the asset was used by them

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2.3.18 Special deduction for assessee engaged in Tea, Coffee or Rubber growing &
manufacturing business [Sec. 33AB and Rule 5AC][Available only under the old regime]
Applicable to All assessee carrying on business of growing and manufacturing of the followings in India:
a. Tea; b. Coffee; or c. Rubber
Conditions to be 1. Deposit of amount: Assessee must deposit (hereinafter referred to as special account) an
satisfied amount in:
¾ National Bank for Agriculture & Rural Development (NABARD) in an account
maintained by him in accordance with, and for the purpose specified in the scheme
approved by Tea Board, Coffee Board or Rubber Board, as the case may be; or
¾ An account in accordance with, and for the purpose specified in a scheme approved by
Tea Board or Coffee Board or Rubber Board, as the case may be, with prior approval
of the Central Government.
2. Time of deposit: The amount must be deposited within 6 months from the end of the
previous year or before the due date of furnishing the return of income, whichever is
earlier.
3. Audit of accounts: Accounts of assessee should be audited by a chartered accountant &
the report of an auditor in Form 3AC is required to be uploaded one month prior to the
due date of filing of return
Note: In case, where the assessee is required under any other law to get his accounts
audited, it shall be sufficient compliance if such assessee gets the accounts audited under
such law and furnishes the report in Form 3AC.
Quantum of Minimum of the following -
Deduction a. Amount so deposited (as discussed above); or
b. 40% of the profit of such business computed under the head “Profits & gains of business
or profession” before allowing any deduction u/s 33AB and before adjusting brought
forward business loss.

Other points
1. Excess Deposit: Any excess deposit made during a previous year is not treated as deposit made for the next
year(s).
2. Restriction on utilisation of amount for certain purposes: No deduction shall be allowed in respect of any
amount, being credited in special account, utilised for the purpose of:
¾ Purchase of plant or machinery to be installed in any office premises / residential accommodation /
accommodation in the nature of guest-house.
¾ Purchase of any office appliances (other than computer)
¾ Purchase of any plant or machinery, the entire cost of which is allowed as deduction in form of depreciation
or otherwise in any one previous year.
¾ Purchase of any plant or machinery to be installed in an industrial undertaking for constructing,
manufacturing or producing any items specified in Schedule XI of the Act.
Note: If any amount is so utilised, then the whole of such amount so utilised shall be deemed to be the profits
and gains of business of the previous year in which such misutilisation takes place.

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3. Withdrawal from account:

During continuation of business: The amount credited to such special account shall be withdrawn only for
the purpose(s) specified in respective schemes.

If the amount so withdrawn is not utilised for the specified purpose in the same previous year then the amount
not so utilised shall be treated as income of the year.

On closure of business: Apart from the specified purpose(s) of scheme, the amount deposited may be
withdrawn in the following circumstances: -

Case Tax Treatment

Closure of business# Fully taxable
Dissolution of firm# Fully taxable
Death of the tax payer $ Not taxable
Partition of Hindu Undivided Family $ Not taxable
Liquidation of company $ Not taxable
#
The amount withdrawn shall be taxable under the head “Profits & gains of business or profession” as if the
business is continued or the firm had not been dissolved.
$
It is not taxable even though the amount has not been utilised for any of the purposes specified in the scheme.

4. Double deduction is not permissible

¾ Where an amount standing to the credit of the assessee in the special account is utilised by the assessee
for the purposes of any expenditure in connection with such business in accordance with the scheme, then
such expenditure shall not be allowed in computing the income chargeable under the head ‘Profit and gains
of business or profession’.
¾ Where the assessee is a firm, AOP or BOI, then deduction under this section shall not be allowed in
computation of income of any partner/member.
¾ Where any deduction in respect of an amount deposited in any special account has been allowed in any
previous year, no deduction shall be allowed in respect of such amount in any other previous year.
5. Restriction on sale of new asset: If any asset is acquired as per the scheme, then such asset cannot be sold or
transferred within 8 years from the end of the previous year in which it was acquired. If such asset is sold or
otherwise transferred, then such part of the cost of such asset as is relatable to the deduction allowed earlier
under this section will be treated as profit.

However, in the following cases, above provision shall not be applicable -

¾ Sale or transfer to the Government, local authority, statutory corporation or Government company.
¾ Sale or otherwise transfer, in connection with the succession of a firm by a company, provided the following
conditions are satisfied –
a. All assets & liabilities of firm (immediately before succession) become the assets & liabilities of the
company.
b. All shareholders of the company were partners of the firm immediately before the succession.
c. The scheme continues to apply to the company in the manner applicable to the firm.

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6. Calculation of taxable income

Nature of Business Calculation of Income

Tea growing & manufacturing business (Rule 8) 40% of [Income from business – Deduction u/s
33AB]
Coffee growing & manufacturing business (Rule 25% / 40% of [Income from business – Deduction
7B) u/s 33AB]
Rubber growing & manufacturing business (Rule 35% of [Income from business – Deduction u/s
7A) 33AB]

2.3.19 Site Restoration Fund [Sec. 33ABA & Rule 5AD]

[Available only under the old regime]
Applicable to All assessee engaged in the business of -
¾ Prospecting for petroleum or natural gas; or
¾ Extraction or production of petroleum or natural gas; or
¾ Both
- in India.
Conditions to be 1. Agreement with the Central Government: The Central Government has entered into
satisfied an agreement with the assessee for such business.
2. Deposit of amount: The assessee must deposit an amount -
¾ With the State Bank of India in an account (herein after referred to as special
account) maintained
¾ in an account (hereinafter referred as Site Restoration Account) opened by the
assessee
- in accordance with and for the purposes specified in a scheme approved by the
Government of India in the Ministry of Petroleum & Natural Gas.
Treatment of interest: Any amount credited in the special account or site restoration
account by way of interest shall be deemed to be a deposit.
3. Time of deposit: Such amount must be deposited before the end of the previous year.
4. Audit of books of account: Accounts must be audited & auditor’s report should be
filed in Form 3AD is required to be uploaded one month prior to the due date of filing
of return
Note: In case, where the assessee is required under any other law to get his accounts
audited, it shall be sufficient compliance if such assessee gets the accounts audited
under such law and furnishes the report of audit required under such other law and
a report in Form 3AD.
Quantum of Minimum of the following:
Deduction
a. Amount so deposited (as discussed above); or
b. 20% of the profit of such business computed under the head “Profits & gains of
business or profession” before allowing deduction under this section and before
adjusting brought forward business loss.

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Other points
1. Excess Deposit: Any excess deposit made during a previous year is not treated as deposit made for the next
year(s).
2. Restriction on utilisation of amount for certain purposes: No deduction shall be allowed in respect of any
amount, being credited in special account or site restoration account, utilised for the purpose of -
¾ Purchase of plant and machinery to be installed in any office premises / residential accommodation /
accommodation in the nature of guest-house.
¾ Purchase of office appliances (other than computer)
¾ Purchase of a plant or machinery, the entire cost of which is allowed as deduction in the form of depreciation
or otherwise in computation of business income of any one previous year.
¾ Purchase of a plant or machinery to be installed in an industrial undertaking for constructing, manufacturing
or producing any items specified in Schedule XI of the Act.
Note: If any amount is so utilised, then the whole of such amount shall be deemed to be the profit and gains of
business of the previous year in which such mis-utilisation takes place
3. Withdrawal from account
During continuation of business: The amount credited to such special account or the site restoration account
shall be withdrawn only for the purpose(s) specified in respective scheme.
If the amount withdrawn in a year is not utilised for the specified purpose in the same previous year then the
amount not so utilised shall be treated as income of the year.
On closure of account: Where any amount standing to the credit of the assessee in the special account or in
the site restoration account is withdrawn on closure of the account during any previous year, the following
amount shall be deemed to be the profits & gains of business or profession (whether business is continued or
not) -
Particulars Amount
Amount so withdrawn from the account ****
Less: Amount, if any, payable to the Central Government by way of profit or
(****)
production share as provided in the agreement u/s 42
Taxable amount ****
Note: In case of closure of business, the amount stated above shall be taxable as if the business is in existence.
4. Double deduction is not permissible
¾ Where any amount standing to the credit of the assessee in the special account or site restoration account is
utilised by the assessee for the purpose of any expenditure in connection with such business in accordance
with the scheme, then such expenditure shall not be allowed in computing the income chargeable under the
head ‘Profit and gains of business or profession’.
¾ Where the assessee is a firm, AOP or BOI, the deduction under this section shall not be allowed in the
computation of the income of any partner/member.
¾ Where any deduction in respect of any amount deposited in any special account or site restoration account
has been allowed in any previous year, then no deduction shall be allowed in respect of such amount in
any other year.
5. Restriction on sale of such asset: If any asset is acquired as per the scheme, then such asset cannot be sold
or transferred within 8 years from the end of the previous year in which it was acquired. If such asset is sold

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or otherwise transferred, then such part of the cost of the asset as is relatable to the deduction allowed shall be
treated as taxable profit under the head “Profits & gains of business or profession”, in the year in which the
asset is transferred. However, in the following cases, the provision shall not be applicable -
¾ Sale or otherwise transfer to the Government, local authority, statutory corporation or Government
Company.
¾ Sale or otherwise transfer, in connection with the succession of a firm by a company, subject to following
conditions:
a. All assets and liabilities of the firm, immediately before the succession became assets and liabilities
of the company.
b. All the shareholders of the company were the partners of the firm immediately before succession.
c. The scheme continues to apply to the company in the manner applicable to the firm
2.3.20 Scientific Research [Sec. 35]
Scientific research means any activity for the extension of knowledge in the fields of natural or applied science
including agriculture, animal husbandry or fisheries [Sec. 43(4)]
Such research can be categorised either as -
a. In-House research : Research done by the assessee himself (in connection with his business)
b. Research through : Any sum paid to outside agencies, engaged in scientific research, to be used for
outside institutions scientific research
[Available only under
old regime]
In-House research
Revenue After Where the assessee himself carries on scientific research related to his
expenditure commencement of business and incurs revenue expenditure, such expenses are allowed
business as deduction in the year in which such expenditure is incurred by the
sec. 35(1)(i)
assessee.
Before Following revenue expenditures (certified by the prescribed authority)
commencement of incurred during 3 years immediately before commencement of business,
business shall be allowed as deduction in the year of commencement of business –
¾ Payment of salary to an employee engaged in scientific research
(excluding perquisite).
¾ Purchase of materials used for scientific research.
Capital After Any capital expenditure incurred (other than land) for scientific research,
Expenditure commencement of related to the business of the assessee, will be allowed as deduction in
business full. 100% deduction shall be allowed for such capital expenditure, in the
sec.35(1)(iv)
year in which the expenditure is so incurred.
/sec.35(2)
Before Any capital expenditure incurred (other than land) during 3 years
commencement of immediately preceding the year of commencement of business shall
business be deemed to have been incurred in the year in which the business
commenced and is allowed as deduction in that year.
Note: Where a deduction is allowed in any previous year in respect of any capital expenditure
for scientific research, no deduction u/s 32 shall be allowed on such assets. [Sec. 35(2)(iv)]

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Taxpoint:

 In-house research for a purpose not related to the business of the assessee shall not be allowed as deduction.

 Capital expenditure incurred on scientific research which cannot be absorbed by the business profits of the
relevant previous year can be carried forward to the immediately succeeding previous year and shall be treated
as the allowance for that year. In effect, this means that there is no time bar on the period of carry forward.
It shall be accordingly allowable for that previous year against any head of income other than salaries [Sec.
35(4)].

Research through outside institutions [Available only under the old regime]
100% deduction shall be allowed in respect of contributions made to the following:

Institution Purpose
Any payment to National Laboratory1 or a University Scientific research undertaken under programme
or Indian Institute of Technology or a specified person. approved by the prescribed authority (whether related
[Sec. 35(2AA)] to business or not)
Any payment made to a notified (by the Central
Government) research association or to an approved Scientific research (whether related to business or not)
university, college or other institutions3 [Sec. 35(1)(ii)]
Any payment made to a notified (by the Central
Research in Social science or Statistical Research
Government) research association, university, college or
(whether related to business or not)
other institution3 [Sec. 35(1)(iii)].
Any payment to an approved Indian company (main
object of whom is scientific research & development)3 Scientific research (whether related to business or not)
[Sec. 35(1)(iia)]
1.
National laboratory means a scientific laboratory functioning at the national level under the aegis of the Indian
Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific and Industrial
Research, the Defence Research and Development Organisation, the Department of Electronics, the Department
of Bio-Technology or the Department of Atomic Energy and which is approved as National Laboratory by the
prescribed authority.

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Direct Taxation

2.
Such association, University, college or institution must be approved in accordance with prescribed guidelines
and must be notified by the Central Government.
3.
The deduction in respect of any sum paid to the research association, university, college or other institution or
company shall be allowed on the basis of a certificate issued by the donee.

Other points
1. Such association, University, college or institution must be approved in accordance with prescribed guidelines
and must be notified by the Central Government.
2. Withdrawal of approval: Deduction shall not be denied merely on the ground that subsequent to the payment
made by the assessee, the approval granted to the association, university, IIT, etc. has been withdrawn.
3. Carry forward of unabsorbed scientific research expenditure: Unabsorbed capital expenditure can
be carried forward for unlimited years and set off in any subsequent assessment year(s) like unabsorbed
depreciation.
4. Effect of amalgamation [Sec. 35(5)]: Provisions of sec. 35 shall apply to the amalgamated company, as it
would have been applied to the amalgamating company, if the latter had not transferred such asset.
Illustration 75:
Dynamic India & Co. commences production on 16/8/2024. It incurred the following expenses related to scientific
research, find deduction u/s 35 for the P.Y. 2024-25.

Date Particulars Amount Purpose

18/8/2024 Paid to an Approved University for research in Social science 50,000 Non- business
15/10/2024 Paid to a scientist (not the employee of the company) 30,000 Business
18/11/2024 Paid to approved National laboratory 60,000 Non- business
Purchase of land & building for in house research (cost of land
15/12/2024 5,00,000 Business
` 1,50,000)
18/12/2024 Purchase of car to carry research-workers 2,00,000 Business
16/8/2021
to Capital expenditure (including cost of land ` 1,00,000) 5,00,000 Business
15/8/2024
“ Purchase of material 3,00,000 Business
“ Payment of salary (other than Perquisites) 2,00,000 Business
“ Perquisites provided to research-personnel 1,00,000 Business
“ Other revenue expenditure 80,000 Business
1/4/2020 to
Capital expenditure (other than land) 9,00,000 Business
15/8/2021
“ Payment of salary (other than Perquisites) 50,000 Business
1/4/2019 to
Capital expenditure 80,000 Business
31/3/2021
“ Revenue expenditure 30,000 Business

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Solution :

Computation of deduction u/s 35 to Dynamic India & Co. for the A.Y. 2025-26

Deduction (Regime)
Date Particulars Section Amount
Old Default
1/4/2019 to Capital expenditure NA1 80,000 Nil Nil
31/3/2021 Revenue expenditure NA1 30,000 Nil Nil
1/4/2020 to Capital expenditure (other than land) NA1 9,00,000 Nil Nil
15/8/2021 Payment of salary (other than Perquisites) NA1 50,000 Nil Nil
Capital expenditure (excluding cost of land 35(2) 5,00,000 4,00,000 4,00,000
` 1,00,000)
16/8/2021 Payment of salary (other than Perquisites) 35(1)(i) 2,00,000 2,00,000 2,00,000
to
15/8/2024 Perquisites provided to research-personnel NA2 1,00,000 Nil Nil
Purchase of material 35(1)(i) 3,00,000 3,00,000 3,00,000
Other Revenue expenditure NA2 80,000 Nil Nil
18/8/2024 Paid to an Approved University for research in 35(1)(iii)
Social science
50,000 50,000 Nil

15/10/2024 Paid to a scientist (not the employee of the 35(1)(i)

company)
30,000 30,000 30,000

18/11/2024 Paid to approved National laboratory 35(2AA) 60,000 60,000 Nil

Purchase
15/12/2024 ` 1,50,000)of land & building (excluding cost of land 35(2) 5,00,000 3,50,000 3,50,000

18/12/2024 Purchase of car to carry research-workers 35(2) 2,00,000 2,00,000 2,00,000

Total amount of deduction 15,90,000 14,80,000
Note :
1.
Expenditure (whether revenue or capital) incurred before 3 years immediately preceding the year of commencement
of business shall not be allowed as deduction.
2
Expenditure incurred within 3 years prior to commencement of business: Only material and salary (other than
perquisite) of research personnel shall be allowed as deduction
Sale of asset used for scientific research [Sec. 41(3)]
Sale consideration to the extent of cost of such asset shall be taxable as business income
Without having been in the year of sale. The excess of sale consideration over original cost (or indexed cost of
used for other purpose acquisition) is taxable as capital gain u/s 45. This is applicable even if the business is not
in existence in that year)
Sale consideration shall be subtracted from relevant block of assets. It is to be noted that
After being used for
at the time of conversion of scientific research asset into normal business asset, the cost
other purposes
of acquisition shall be taken as nil in the relevant block.
Illustration 76:
Awishkar Enterprises purchased machinery for ` 5,00,000 as on 18/8/2023 for scientific research.
On 17/7/2024, the research work being completed. On 31/3/2025, the machinery being sold for -
Case 1) ` 1,00,000

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Direct Taxation

a. After using the same for business purpose other than scientific research. The WDV of the respective block is
` 4,80,000. Depreciation rate 15%.
b. Without using the same for any other purpose
Case 2) ` 7,00,000
a. After using the same for business purpose other than scientific research. The WDV of the respective block is
` 4,80,000. Depreciation rate 15%.
b. Without using the same for any other purpose
State tax implications
Solution :
Tax impact in case 1(a) and 2(a)
Particulars Case 1(a) Case 2(a)
Opening WDV of the block 4,80,000 4,80,000
Add: Addition during the year being machinery earlier used for scientific research Nil Nil
Less: Sale value of the machinery [# Max. to the extent of (Opening WDV + (1,00,000) (4,80,000)#
Addition made)]
Written down value before charging depreciation 3,80,000 Nil
Less: Depreciation @ 15% (57,000) Nil
Written down value after charging depreciation 3,23,000 Nil
Short term capital gain [@ Excess sale proceeds] Nil 2,20,000@

Tax impact in case 1(b) and 2(b)

Case 1(b) Case 2(b)
Particulars
Details Amount Details Amount
Profits & gains of business or profession
Being minimum of the following
• Earlier deduction claimed 5,00,000 5,00,000
• Surplus i.e. {Sale consideration – (Cost of assets –
Earlier deduction allowed in respect of such asset)} 1,00,000 1,00,000 7,00,000 5,00,000
Capital gains
Sale consideration NA1 7,00,000
Less: Cost of acquisition NA1 (5,00,000)
Short-term capital gain (loss) NA1 2,00,000
1Capital gain shall arise only if the sale price exceeds the cost of the asset held for scientific research [CIT –vs.-
Artex Mfg. Co. (SC)]

2.3.21 Deduction in respect of expenditure on specified business [Sec. 35AD]

In case of an individual/HUF/AoP/BoI carrying on specified business, deduction u/s 35AD would be available
only if they are paying tax under old regime. On the other hand, a company would not be eligible for deduction u/s
35AD, if it opts for the special provisions of sec. 115BAA/115BAB.

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Applicable to Specified assessee engaged in the business of:

a. setting up and operating a cold chain facility##;

b. setting up and operating a warehousing facility for storage of agricultural produce; or

c. laying and operating a cross-country natural gas or crude or petroleum oil pipeline network
for distribution, including storage facilities being an integral part of such network

Note: The project has been approved by the Petroleum and Natural Gas Regulatory Board
and being notified by the Central Government.

d. building and operating, anywhere in India, a hotel of two-star or above category as classified
by the Central Government;

e. building and operating, anywhere in India, a hospital with at least 100 beds for patients;

f. developing and building a notified housing project under a scheme for slum redevelopment
or rehabilitation framed by the Central Government (or a State Government)

g. developing and building a notified housing project under a scheme for affordable housing
framed by the Central Government (or a State Government)

h. production of fertilizer in India;

i. setting up and operating an inland container depot or a container freight station notified or
approved under the Customs Act, 1962;

j. bee-keeping and production of honey and beeswax;

k. setting up and operating a warehousing facility for storage of sugar

l. laying and operating a slurry pipeline for the transportation of iron ore

m. setting up and operating a semi-conductor wafer fabrication manufacturing unit, and which
is notified by the Board in accordance with such guidelines as may be prescribed

n. developing or maintaining and operating or developing, maintaining and operating a new

infrastructure facility by an Indian company (or consortium thereof)/authority/board/
corporation having agreement with Central Government or State Government or local
authority or any statutory body
## Date of commencement of business (on or after)
Warehousing facility Hotel Slum redevelopment Fertilizer Inland container
for storage of 01-04-2010 01-04-2010 01-04-2011 depot 01-04-2012
Warehousing facility
agricultural produce Hospital Affordable housing Cold chain facility Bee-keeping for storage of Sugar
01-04-2009 01-04-2010 01-04-2011 01-04-2009 01-04-2012 01-04-2012
Slurry pipeline for transportation semi-conductor wafer fabrication Infrastructure
of iron-ore 01-04-2014 manufacturing unit 01-04-2014 facility 01-04-2017

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Direct Taxation

Conditions to Cross-country oil pipeline Other Business

be satisfied Owned by An Indian company or by a consortium of such Any assessee
companies or by an authority or a board or a corporation
established or constituted under any Central/State Act
Date of On or after 01-04-2007 On or after date
commencement given in Note*
of business below
Restriction on It has made not less than such proportion of its total No Restriction
usage pipeline capacity as specified by the Petroleum and
Natural Gas Regulatory Boardβ available for use on
common carrier basis by any person other than the
assessee or an associated person#.
New Business Such business should not be set up by splitting up, or the reconstruc­tion, of
a business already in existence.
New Plant Such business should not be set up by the transfer to the specified business
Machinery of machinery or plant previously used for any purpose
Exceptions
i. A plant or machinery is deemed as new asset if:
a. Such plant or machinery is imported into India;
b. Depreciation on such asset has not been allowed under this Act to
any person; and
c. The assessee was the first user of such asset in India.
ii. Where the total value of old plant and machinery transferred to the new
business does not exceed 20% of total value of plant and machinery
used in such business, then this condition is deemed to be satisfied.
Audit Books of account should be audited by a Chartered Accountant
Quantum of 100% of capital expenditure incurred during the previous year, wholly and exclusively, for the
deductions purposes of any specified busi­ness.
Capital Expenditure shall not include the following:
a. Any expenditure incurred on the acquisition of any land or goodwill or financial instrument
b. Any expenditure in respect of which the payment (or aggregate of payments made to a
person in a day), otherwise than by an account payee cheque drawn on a bank or an account
payee bank draft or use of electronic clearing system through a bank account or through
other prescribed electronic mode, exceeds ` 10,000
Pre-commencement expenditure: Where the expenditure is incurred prior to the commencement
of its operations which has been capitalised in the books of account of the assessee on the date
of commencement of its operations, shall be allowed as deduction in the previous year in which
the assessee commences such business.

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Other Points ¾ Option: The deduction under this section is optional in nature. For claiming deduction
under this section, assessee is required to claim the same.
¾ No Double Deduction: No deduction for such expenditure shall be allowed to the assessee
under any other section in any previous year or under this section in any other previous year.
Further, the assessee shall not be allowed any deduction u/s 10AA or 80HH to 80RRB in
respect of the specified business for the same or any other assessment year.
¾ Restriction of use of the asset: Any asset in respect of which a deduction is claimed and
allowed under this section shall be used only for the specified business, for a period of 8
years beginning with the previous year in which such asset is acquired or constructed.
Consequences of usage of asset otherwise than for specified purpose: Where such asset
is used for a purpose other than the specified business during that period, then following
amount shall be deemed to be the income of the assessee chargeable under the head
“Profits and gains of business or profession” of the previous year in which the asset is so
used:
The total amount of deduction so claimed and allowed in one or more previous ***
years
Less: Depreciation allowable in accordance with the provisions of section 32, as ***
if no deduction under this section was allowed
Deemed Income ***
However, the provision of reversal of deduction shall not be applied to a company which
has become a sick industrial company u/s 17(1) of the Sick Industrial Companies (Special
Provisions) Act, 1985, during that period.
¾ Actual cost of asset for depreciation: The actual cost of any capital asset for the purpose
of computing depreciation, on which deduction has been allowed to the assessee u/s 35AD,
shall be treated as ‘nil’.
¾ Treatment of Realisation: If the whole of the expenditure on capital asset has been allowed
as a deduction u/s 35AD, any sum received or receivable (in cash or kind) on account of
such capital asset being demolished, destroyed, dis¬carded or transferred shall be taxable
as business income.
¾ Carry forward and set off of losses [Sec. 73A]: Any loss, computed in respect of such
specified business shall be set off only against profits and gains, if any, of any other specified
busi¬ness. Further, if there is no such profit or such loss is not fully adjusted with such
profit, the unabsorbed loss shall be carried forward for set off against the profits and gains, if
any, of any specified business in the next assessment year and so on. [Further Refer Chapter
‘Set-off and Carry Forward]
¾ Transfer of operation: Where the assessee builds a hotel of two-star or above category
as classified by the Central Government and subsequently, while continuing to own the
hotel, transfers the operation thereof to another person, the assessee shall be deemed to be
carrying on the specified business.
¾ Inter-unit transfer: Where -
1. Assessee carries on at least two units

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2. Out of such units at least one is eligible u/s 35AD and at least one is not eligible for
exemption
3. Goods or services are transferred from eligible unit to any non eligible unit or vice
versa
4. The consideration for such transfer does not correspond to the market value of such
goods as on the date of transfer
then, deduction shall be computed as if the transfer, in either case, had been made at the
market value$ of such goods or services as on that date.

#
An “associated person”, in relation to the assessee, means a person:
a. who participates, directly or indirectly, or through one or more intermediaries in the management or control or
capi­tal of the assessee;
b. who holds, directly or indirectly, 26% of equity share capital of the assessee;
c. who appoints more than half of the Board of direc­tors or members of the governing board, or one or more
executive directors or executive members of the governing board of the assessee (it is to be noted that
appointing power does not suffice the purpose); or
d. who guarantees not less than 10% of the total borrowings of the assessee;
##
“Cold chain facility” means a chain of facilities for storage or transportation of agricultural and forest produce,
meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture
and proc­essed food items under scientifically controlled conditions including refrigeration and other facilities
necessary for the preservation of such produce.
$
Market value in relation to any goods or services

Case Market value means

Sold or The price that such goods or services would fetch if these were sold by the unit in the open market,
supplied subject to statutory or regulatory restrictions, if any
Acquired The price that such goods or services would cost if these were acquired by the unit from the open
market, subject to statutory or regulatory restrictions, if any.
β
The Petroleum and Natural Gas Regulatory Board has specified following conditions for common carrier:

Following proportion of total pipeline capacity should available for

Particulars use on common carrier basis by any person other than the assessee
or an associated person
Natural gas pipeline network 1/3 of total pipeline capacity
rd

Petroleum product pipeline network 1/4th of total pipeline capacity

“Infrastructure facility” means:
i. road including toll road, a bridge or a rail system;
ii. highway project including housing or other activities being an integral part of the highway project;
iii. water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste
management system;
iv. port, airport, inland waterway, inland port or navigational channel in the sea

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2.3.22 Amortisation of telecom-licence fee [Sec. 35ABB]

Applicable to All assessee
a. Assessee has incurred capital expenditure for acquiring any right to operate
telecommunication services.
b. Payment for such expenditure has actually been made.
Conditions to be Notes
satisfied
1. Such expenditure may be incurred before or after commencement of business.
[Link] expenditure incurred relating to telecom licence fee shall not be eligible
for deduction u/s 35ABB. However, assessee can claim deduction u/s 37(1) for such
expenditure.
Actual expenditure incurred and paid shall be allowed as deduction in equal installments
over the period for which the license remains in force starting from the year as under -
Case Period starts from
Deduction u/s Where the license-fee is paid before the The previous year in which such business
35ABB(1) commencement of business. commenced.
When license is acquired after
The previous year in which license fee has been
commencement of business
actually paid.
In any other case
Note: No depreciation is allowed on such capital expenditure.

Where such license is sold in full u/s 35ABB(2) & (3)

 Loss on sale shall be deductible as business loss in the year of sale.
 Profit on sale, to the extent of aggregate of deduction allowed in preceding year(s) shall be treated as business
income.
Capital gain treatment: The excess of sale consideration over original cost (or indexed cost of acquisition) is
taxable as capital gain u/s 45.
Where such licence is transferred in a scheme of amalgamation or demerger
The amalgamated company or resulting company (being Indian company) as the case may be shall be entitled
to claim deduction u/s 35ABB for the residual period as if the amalgamating or demerged company had not
transferred the licence.

Similar, deduction is also available u/s 35ABA for capital expenditure incurred for acquiring any right to use
spectrum for telecommunication services

Illustration 77:
Telefast Ltd., a company providing telecommunication services, obtain a telecom licence on 20-4-2024 for a period
of 10 years which ends on 31-3-2034 (licence fee being ` 18 lakh). Find out the amount of deduction u/s 35ABB
of the Income Tax Act, 1961, if:
(a) the entire amount is paid on 6-5-2024; (b) the entire amount is paid on 1-4-2025;
(c) the entire amount is paid in equal installments on 30-4-2024; 30-4-2025 and 30-4-2026

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Direct Taxation

Solution :
Tax consequence u/s 35ABB in several previous years

Particulars Case (a) Case (b) Case (c)

Deduction u/s 35ABB(1) in previous year:
2024-25 1,80,000 NA 60,0002
2025-26 1,80,000 2,00,0001 1,26,6672
2025-26 to 2033-34 1,80,000 2,00,000 2,01,6672
1. In case (b), though licence was acquired in the previous year 2024-25 but payment was made in the previous
year 2025-26, hence deduction shall be available u/s 35AAB(1) in 9 years (10 year – 1 year) starting from the
previous year 2025-26. Amount of deduction shall be ` 18,00,000 / 9 = ` 2,00,000.
2. In case (c), payment has been made in three installments. Hence deduction u/s 35ABB(1) shall be available as
under:

Particulars 1st Installment 2nd Installment 3rd Installment Total

Amount of installment 6,00,000 6,00,000 6,00,000
Remaining life (in years) 10 9 8
Deduction available in
- P.Y.: 2024-25 60,000 - - 60,000
- P.Y.: 2025-26 60,000 66,667 - 1,26,667
- P.Y.: 2026-27 to 2033-34 60,000 66,667 75,000 2,01,667

Illustration 78:
Twinkle Enterprises has acquired a telecom licence. Details in respect of such licence are as under:

Particulars Particulars
Acquisition cost ` 1,00,000 Life of licence 10 years
Date of purchase 16/8/2023 Licence sold 100%
Payment terms Lump sum Date of sale of licence 15/3/2026
Date of first payment 16/8/2023 Sale value ` 1,20,000

State the tax consequence in the several previous years up to 2025-26 related to such transactions.
Solution :
Tax consequence u/s 35ABB in several previous years up to 2025-26
Particulars Licence A
Deduction u/s 35ABB(1) in previous year:
2023-24 10,000
2024-25 10,000
2025-26 Nil1
Business income on sale of licence u/s 35ABB(3) in the P.Y.2025-26 20,0002
Capital gain on sale of licence in the P.Y.2025-26 20,0002
1. No deduction is available in the previous year in which licence is 100% sold or otherwise transferred.

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2. Sale of licence
Particulars Details Amount
Profits & Gains of Business or Profession
Being minimum of the following
 Earlier deduction claimed for the P.Y. 2023-24 and 2024-25 20,000
 Surplus i.e. {Sale proceeds – (Cost of assets - Earlier deduction allowed in respect
of such asset)} [1,20,000 – (1,00,000 – 20,000) = 40,000] 40,000 20,000
Capital gains
Sale consideration 1,20,000
Less: Cost of acquisition 1,00,000
Short-term capital gain (as asset is not held for more than 3 years) 20,000

Illustration 79:
Tweety Enterprises has acquired telecom licence. Details in respect of this licence are as under:

Particulars Particulars
Acquisition cost ` 3,00,000 Life of licence 7 years
Date of purchase 14/7/2021 Licence sold 40%
Payment terms Lump sum Date of sale of licence 12/12/2024
Date of first payment 14/7/2022 Sale value ` 1,20,000
State the tax consequence in the several previous years up to 2024-25 related to such transactions.
Solution :
Tax consequence u/s 35ABB in several previous years up to 2024-25
Particulars Amount
Deduction u/s 35ABB(1) in previous year:
2021-22 Nil1
2022-23 50,0001
2023-24 50,0001
2024-25 20,0002
Business income on sale of licence u/s 35ABB(3) in the P.Y.2024-25 Nil
Capital gain on sale of licence in the P.Y.2024-25 Nil
1. Though licence was acquired in the previous year 2021-22 but payment was made in the previous year 2022-
23, hence deduction shall be available u/s 35AAB(1) in 6 years (7 year – 1 year) starting from the year 2022-
23. Amount of deduction will be ` 3,00,000/6 = ` 50,000.
2. Sale of part of licence B

Particulars Details Amount

Balance of licence as on 1/4/2024 ` 3,00,000 – ` 1,00,000 2,00,000
Less: Sale of licence 1,20,000
Balance value 80,000
Balance life 4 years
Deduction in the previous year 2024-25 ` 80,000 / 4 20,000

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2.3.23 Payment to associations and institutions for carrying out rural development
programmes [Sec. 35CCA]
Where an assessee incurs any expenditure by way of payment of any sum—
a. to an association or institution, which has as its object the undertaking of any programme of rural development,
to be used for carrying out any programme of rural development approved by the prescribed authority and the
assessee furnishes a certificate from such association or institution ; or
b. to an association or institution, which has as its object the training of persons for implementing programmes
of rural development and the assessee furnishes a certificate from such association or institution; or
c. the National fund for rural development; or
d. to the National Urban Poverty Eradication Fund set up and notified by the Central Government in this behalf,
the assessee shall, be allowed a deduction of the amount of such expenditure incurred during the previous year.
Double deduction is not permissible: Where a deduction under this section is claimed and allowed for any
assessment year in respect of any expenditure, deduction shall not be allowed in respect of such expenditure u/s
80G or any other provision of this Act.
Withdrawal of approval: Deduction shall not be denied merely on the ground that subsequent to the contribution
made by the assessee, the approval granted to such programme, etc. has been withdrawn.

2.3.24 Expenditure on agricultural extension project [Sec. 35CCC] [Old regime]

Where an assessee incurs any expenditure on notified agricultural extension project, such expenditure is fully
allowed.
Double deduction is not permissible: Where a deduction under this section is claimed and allowed for any
assessment year in respect of any expenditure, deduction shall not be allowed in respect of such expenditure under
any other provisions of this Act for the same or any other assessment year.

2.3.25 Expenditure on skill development project [Sec. 35CCD]

Where a company incurs any expenditure (not being expenditure in the nature of cost of any land or building) on
any notified skill development project, such expenditure is fully allowed.
Double deduction is not permissible: Where a deduction under this section is claimed and allowed for any
assessment year in respect of any expenditure, deduction shall not be allowed in respect of such expenditure under
any other provisions of this Act for the same or any other assessment year.

2.3.26 Amortisation of preliminary expenses [Sec. 35D & Rule 6AB]

Meaning: Following expenses are known as preliminary expenses -
1. Expenses in connection with –
¾ Preparation of project report;
¾ Preparation of feasibility report;
¾ Conducting market survey or any other survey necessary for the business;
¾ Engineering services related to the business.
Note: The assessee shall furnish a statement containing the particulars of aforesaid expenditure within such
period, to such income-tax authority, in such form and manner, as may be prescribed.

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2. Legal charges for drafting any agreement between the assessee and any other person for any purpose related
to the setting up or conduct of business of the assessee.
3. Legal charges for drafting & printing of Memorandum of Association & Articles of Association (in case of
company-assessee only).
4. Registration fees under provisions of the Companies Act, 1956 (in case of company-assessee only).
5 Expenses in connection with public issue of shares in or debentures of the company being underwriting
commission, brokerage & charges for drafting, typing, printing & advertisement of the prospectus (in case of
company-assessee only).
6. Any other prescribed expenditure.
Tax Treatment
An Indian company or a resident non-corporate assessee.
Applicable to Taxpoint: A foreign company, which is resident in India, is not covered under this
section.
1. Assessee has incurred certain amount as preliminary expense.
2. Purpose of expense
¾ Where such expense is incurred before commencement of business then expense
must be incurred for setting up a new undertaking or business.
¾ Where such expense is incurred after commencement of business then expense
Conditions
must be incurred in connection with extension of any undertaking or in connection
with setting up a new unit.
3. Report of a chartered accountant: In the case of a non-corporate assessee, an
audit report from a chartered accountant should be submitted one month prior to the
due date of filing of return relating to the year in which such expenditure was first
claimed.
Total preliminary In case of non-corporate resident assessee 5% of the ‘cost of project1’.
expense (maximum
amount) eligible for 5% of the ‘cost of project1’ or ‘capital
In case of Indian company
deduction employed2’ whichever is higher
1/5th of the total eligible preliminary expense is allowed in 5 equal annual installments
Amount of deduction starting from the year in which the business commences or unit expanded or the new unit
commences production or operation.
In case of transfer of undertaking under the scheme of amalgamation or demerger, the
amalgamated company or resulting company (being Indian company) shall be entitled to
Effect of claim deduction u/s 35D for the residual period as if the amalgamation or demerger had
amalgamation or not taken place [Sec. 35D(5) & (5A)].
demerger
Note: In the year of amalgamation or demerger, deduction shall be available to
amalgamated company or resulting company as the case may be.
1
Cost of Project
In case of new business: Actual cost of fixed assets (being land, buildings, leaseholds, plant machinery, furniture,
fittings and railway sidings) which are shown in the books of the assessee as on the last day of the previous year in
which the business commences.

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Direct Taxation

In case of an existing business: Actual cost of fixed assets (being land, building, leaseholds, plant, machinery,
furniture, fittings and railway-sidings) which are shown in the books of the assessee as on the last day of the previous
year in which the extension of industrial undertaking is completed or new industrial undertaking commences
production or operation, in so far as such fixed assets have been acquired or developed in connection with the
extension of the industrial undertaking or setting up of the new industrial unit.
2
Capital employed
In case of new business: The aggregate of issued share capital, debentures & long-term borrowings as on the last
day of the previous year in which the business commences.
In case of existing business: The aggregate of the issued share capital, debentures and long term borrowings as on
the last day of the previous year in which the extension is completed so far as such capital etc. have been issued or
obtained in connection with the extension of the business.

Illustration 80:
Jardine Ltd. is an existing Indian company, which sets up a new industrial unit. It incurs the following expenditure
in connection with the new unit:

Particulars Amount
Preparation of project report 4,00,000
Market survey 5,00,000
Legal and other charges for issue of additional capital required for the new unit 2,00,000
Total 11,00,000
The following further data is given:

Particulars Amount
Cost of project 30,00,000
Capital employed in the new unit 40,00,000
What is the deduction admissible to the company u/s 35D?
Solution :
Calculation of admissible preliminary expenditure

Particulars Amount
Cost of project (A) 30,00,000
Capital employed (B) 40,00,000

Eligible preliminary expenditure being minimum of the following:

a) Actual expenditure 11,00,000
b) 5% of (A) or (B) whichever is higher (i.e. ` 40,00,000 * 5%) 2,00,000
Amount eligible for amortization 2,00,000
Amount of deduction u/s 35D for current year (till 5 years) being 1/5th of ` 2,00,000 40,000

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2.3.27 Deduction of expenses incurred in case of amalgamation or demerger [Sec. 35DD]

Applicable to: An Indian company
Conditions
1. Assessee has incurred certain expenditure wholly & exclusively for the purpose of amalgamation or demerger.
2. No deduction has been claimed for such expenses under any other section.
Quantum of deduction: 1/5th of expenses so incurred for a period of 5 years commencing from the year in which
amalgamation or demerger takes places.

2.3.28 Amortisation of expenditure incurred under VRS [Sec. 35DDA]

Applicable to: All assessee

Condition: Assessee has incurred any expenditure, by way of compensation to employees in connection with their
voluntary retirement.

Quantum of deduction: 1/5th of expenditure so paid for a period of 5 years commencing from the year in which
such expenditure was paid.

Effect of amalgamation or demerger: In case of transfer of undertaking under the scheme of amalgamation or
demerger, the amalgamated company or resulting company (being Indian company) as the case may be, shall be
entitled to claim deduction u/s 35DDA for the residual period as if the amalgamation or demerger had not taken
place.

Effect of succession of business: Where there has been eductibledn of business, whereby a firm or proprietary
concern is succeeded by a company fulfilling the conditions laid down in sec. 47 (xiii) & (xiv) or a private company
or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in sec.
47 (xiiib), the provisions of this section shall apply to the successor concern, as they would have applied to the
predecessor, if eductibledn of business had not taken place. Further, it is to be noted that:

a. No deduction shall be allowed to amalgamating company, demerged company, a firm, proprietary or other
concern in the previous year in which amalgamation, demerger or succession, as the case may be, takes place.

b. No deduction shall be allowed in respect of such expenditure under any other provisions of the Act.

A comparative study of Sec. 10(10C) {under the head “Salaries”} and Sec. 35DDA {under the head “Profits
& gains of business or profession”}

 Exemption u/s 10(10C) for “Compensation for voluntary retirement” is not available to employee of the
partnership firm, HUF, proprietorship firm, etc. Deduction u/s 35DDA can be claimed by all assessee.

 Exemption u/s 10(10C) for “Compensation for voluntary retirement” is available only if the scheme is
approved by the Board. Deduction can be claimed u/s 35DDA even if the scheme is not approved by the Board.

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Direct Taxation

2.3.29 Amortisation of expenditure on prospecting etc. for development of minerals [Sec.

35E]
Applicable to Any Indian company and any other resident assessee.
Conditions to 1. Assessee is engaged in operations relating to prospecting for or extraction or production of
be satisfied mineral specified in Seventh Schedule.
2. Expenditure has been incurred by the assessee on –
a. Prospecting for any mineral specified in Seventh Schedule; or
b. Development of a mine or other natural deposit of any such mineral.
Period during which expenditure is incurred: Expenditure incurred during following pe-
riod shall qualify for deduction –
¾ In the previous year in which commercial production commences; and
¾ At any time during the period of 4 years preceding the year in which commercial
production commences.
Expenditures which are not qualified for deduction: Following expenditures do not qual-
ify for deduction:
¾ Expenditure on acquisition of site or any right in or over such site; or
¾ Expenditure on acquisition of deposits of mineral or any rights in or over such deposits;
¾ Expenditure of capital nature (being building, plant, machinery or furniture) in respect
of which depreciation allowance is admissible u/s 32.
¾ Any expenditure which is met directly or indirectly by any other person or authority and
any sale, salvage, compensation or insurance moneys realized by the assessee in respect
of any property or rights brought into existence as a result of the expenditure shall be
excluded.
3. In case of a non-corporate assessee, accounts of the assessee, for the year(s) in which the
expenditure is incurred, have been audited by a chartered accountant and the audit report in
Form 3AE (electronically) must be uploaded one month prior to the due date of filing of the
return of income of the first year in which deduction is claimed.
Quantum of Total eligible expenditure shall be allowed in 10 equal installments from the year of commer-
Deduction cial production. However, deduction in a previous year cannot exceed income (before making
deduction under this section) of the previous year arising from the commercial exploitation of
any mine(s)
Treatment of unabsorbed amount: The unabsorbed amount of installment relating to any pre-
vious year can be carried forward and added to the installment of the succeeding year.
In this manner, unabsorbed amount can be carried forward maximum up to the 10th previous year
commencing from the year when commercial production starts.

Taxpoint
 In case of transfer of undertaking (of an Indian company) in a scheme of amalgamation or demerger, the
amalgamated company or resulting company (being Indian company) shall be entitled to claim deduction u/s
35E for the residual period as if no amalgamation or demerger had taken place.

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No deduction shall be allowed to amalgamating company or demerged company in the previous year in which
amalgamation or demerger takes place.
 No deduction shall be allowed in respect of such expenditure under any other provisions of this Act.

2.3.30 Insurance premium for stocks & stores [Sec. 36(1)(i)]

Any amount paid as insurance premium against risk of damage or destruction of stocks & stores, used for the
purpose of business or profession is allowable as deduction in full.
Paid means actually paid or incurred according to the method of accounting upon the basis of which the profits and
gains of business are computed. [Sec. 43(2)]

2.3.31 Insurance premium for life of cattle [Sec. 36(1)(ia)]

Any amount paid as insurance premium by a federal milk co-operative society on the lives of cattle owned by the
members of a primary milk co-operative society affiliated to it, is allowed as deduction in full.

2.3.32 Insurance premium for health of employees [Sec. 36(1)(ib)]

Any premium paid (other than by cash) by the assessee as an employer to effect or to keep in force an insurance on
the health of his employees under a scheme framed in this behalf by—
 the General Insurance Corporation of India & approved by the Central Government
 any other insurer and approved by the Insurance Regulatory and Development Authority
- shall be allowed as deduction.

2.3.33 Bonus or commission to employees [Sec. 36(1)(ii)]

Any bonus or commission (other than in lieu of profit or dividend) paid1 to employees shall be allowed as deduction.
Such amount must have been actually paid before the due date of furnishing return [Sec. 43B]

2.3.34 Interest on borrowed capital [Sec. 36(1)(iii)]

Amount of interest paid in respect of capital borrowed for the purposes of business or profession shall be allowed
as deduction.
Conditions
To claim deduction under this section following conditions must be satisfied -
a. The assessee must have borrowed money.
b. The money so borrowed must have been used for the purpose of business or profession during the previous
year.
c. The assessee must have incurred interest on the borrowed amount.
Other points
1. Interest paid to another person: Interest should be paid to another person. Hence, interest on capital to
proprietor is disallowed expenditure. However, interest on capital to partners is allowed u/s 40(b) [to be
discussed in the chapter ‘Firm Assessment’]
2. Interest paid by one unit of the assessee to another unit is not deductible.
3. Interest paid to relative is allowed as deduction subject to sec. 40A(2) i.e. if the interest paid is in excess of
market rate then excess portion shall be disallowed.

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Direct Taxation

4. Need of borrowed capital: Whether borrowed money is needed or not, is at the discretion of the assessee and
income tax authority cannot examine the same. It is sufficient that money has been borrowed and applied in
the business and the need of such borrowings cannot be challenged by the Assessing Officer
5. Interest on share capital is not allowed
6. Interest on borrowings made for acquiring & installing assets:

Interest for the period Treatment of interest

Prior to commencement of business
Interest is to be added to actual cost of the
After commencement of business but before asset is put to
asset
use
After asset is put to use Interest is allowed u/s 36(1)(iii)
7. Borrowed money used partly for business purpose: If borrowed money is utilised in earning non assessable
income, interest on such borrowing shall not be allowed as deduction.
8. Interest on money borrowed to pay income tax is not allowed
Note: Interest on money borrowed for payment of sales tax is allowed as deduction.
9. Interest paid outside India without deducting tax at source is not allowed.
10. Revenue vs Capital expenditure: Amount borrowed may be applied for the purpose of revenue expenditure
or capital expenditure.
11. Interest on money borrowed for investing as capital in partnership firm is allowed as deduction. Brokerage
& Commission for arranging loan paid to an agent is not allowed under this section but allowed u/s 37(1).
12. Other interest: Interest other than interest on borrowed capital e.g. interest on deferred payment for purchased
of asset, interest on delayed payment of electricity charges, interest on purchase price of raw-material, etc.
shall not be allowed under this section but can be claimed u/s 37(1)

2.3.35 Discount on issue of Zero Coupon Bonds (ZCB) [Sec. 36(1)(iiia)]

Meaning: As per Sec.2(48) “Zero Coupon Bond” means a bond—
– issued by any infrastructure capital company or infrastructure capital fund or public sector company or
scheduled bank on or after 1/6/2005;
– in respect of which no payment and benefit is received or receivable before maturity or redemption from the
issuer; and
– which the Central Government may, by notification in the Official Gazette, specify in this behalf.
Treatment: Discount on issue of Zero Coupon Bonds shall be allowed on pro rata basis having regard to the period
of life of such bond.
Infrastructure capital company [Sec.2(26A)] means
Such company which makes investment by way of acquiring shares or providing long term finance to any enterprise
or undertaking wholly engaged in the following business:
 Business referred u/s 80IA or 80IAB;
 Any undertaking developing and building a housing project referred u/s 80IB(10);
 A project for constructing a hotel for not less than 3 star category;
 Project for constructing a hospital with at least 100 beds for patients.

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Infrastructure capital fund [Sec.2(26B)] means

Such fund operating under a trust deed established to raise money by the trustees for investment by way of acquiring
shares or providing long term finance to any enterprise or undertaking wholly engaged in the following business:
 Business referred u/s 80IA, 80IAB
 Any undertaking developing and building a housing project referred u/s 80IB(10)
 A project for constructing a hotel for not less than 3 star category.
 Project for constructing a hospital with at least 100 beds for patient

2.3.36 Contribution towards RPF & Superannuation Fund [Sec. 36(1)(iv)]

Any sum paid1, by the employer towards recognised provident fund or an approved superannuation fund as per
rules specified in the fourth schedule of the Act is allowed as deduction in full.
1.
Such amount must have been actually paid before the due date of furnishing return [Sec. 43B]
Taxpoint:
 Contribution towards unrecognised provident fund is not allowed as deduction.
 Contribution towards statutory provident fund is allowed as deduction u/s 37(1).

2.3.37 Contribution towards Notified Pension Scheme U/s 80CCD [Sec. 36(1)(iva)]
Any sum paid by the assessee, as an employer, by way of contribution towards a pension scheme, as referred to in
section 80CCD, on account of an employee is allowed as a deduction.
Maximum Limit: Such contribution should not exceed 14% of the salary of the employee in the previous year.
“Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances
and perquisites

2.3.38 Contribution towards approved gratuity fund [Sec. 36(1)(v)]

Any sum paid1 as employer’s contribution towards an approved gratuity fund created by him exclusively for the
benefit of his employees under an irrevocable trust is allowed as deduction.
1.
Such amount must have been actually paid before the due date of furnishing return [Sec. 43B]

2.3.39 Employee’s contribution towards staff welfare scheme [Sec. 36(1)(va)]

Any sum received by an employer from his employees as contribution towards -
 Provident Fund; or
 Superannuation Fund; or
 Any other fund set up under the provision of the Employee’s State Insurance Act, 1948; or
 Any other fund for the welfare of such employees
- is treated as an income of the employer. Subsequently, when such sum is credited by the employer to the employee’s
account in the relevant fund on or before the due date of crediting such contribution prescribed under the relevant
Act#, then deduction is allowed.
#
Example: As per the provisions Employee State Insurance Act, 1948 (ESI), all the contributions under this
Act are to be deposited within 21 days of the following month. Similarly, all contributions under the Employees’
Provident Fund and Miscellaneous Provisions Act, 1952 must be deposited within 15 days of the following month.

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Direct Taxation

Taxpoint

If employees contribution is deposited by the employer on or before the No treatment.

due date1
If employees contribution is not deposited by the employer on or before Taxable as business income.
the due date1
1.
Due date means the date by which the assessee is required as an employer to credit an employee’s contribution
to the employee’s account in the relevant fund under any Act, rule, order or notification issued there under or
under any standing order, award, contract of service or otherwise
As per the Employees Provident Funds Scheme, 1952, the amounts under consideration in respect of wages of
the employees for any particular month shall be paid within 15 days of the close of every month.

2.3.40 Allowance in respect of dead or useless animals [Sec. 36(1)(vi)]

Sec. 36(1)(vi) provides for deduction in respect of animals used for the purpose of business or profession.
Conditions
a. Animals are used for the purpose of business or profession.
b. Such animals are not held as stock-in-trade.
c. Such animals have died or become permanently useless for such purpose.
Quantum of deduction
Difference between actual cost of the animals to the assessee and the amounts realised, if any, in respect of carcasses
or sale of animals is allowed as deduction.

2.3.41 Bad Debts [Sec. 36(1)(vii)]

Any debt or part thereof, which becomes bad shall be allowed as deduction.
Taxpoint: It is the assessee, who decides whether a debt has become bad or not and the Assessing Officer can never
insist the assessee for production of proof that the debt had became bad.
Conditions
1. Debt must be incidental to the business or profession of the assessee. There must be a close nexus between the
debt and the business of the assessee.
Example 11: Bad debt arising out of advances made by a lawyer to his client to assist him in purchasing
properties is not admissible as bad debt. As it is not the business of lawyer to provide loans. Such loss is not
allowed in any provision of the Act
2. The debt has been considered as income of the assessee of that previous year or of earlier previous years.
Example 12: Advance given to supplier for purchase of raw-material later forfeited, is not allowed as
deduction under this section, this is because the same has never been a part of income. However deduction can
be claimed u/s 37(1).
Exception: Bad debt arising due to insolvency of borrower is allowed as deduction provided money has been
lent in ordinary course of money lending business (even though such money lent had never been a part of
income)
3. It must have been written off in the accounts of the assessee.

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Taxpoint: Provision for bad debt is not allowed as deduction.

¾ Exception: Where the amount of such debt has been taken into account in computing the income of the
assessee of the previous year in which the amount of such debt becomes irrecoverable or of an earlier
previous year on the basis of notified Income Computation and Disclosure Standards (ICDS) without
recording the same in the accounts, then, such debt shall be allowed in the previous year in which such
debt becomes irrecoverable and it shall be deemed that such debt has been written off as irrecoverable in
the accounts.
4. Business must be carried on during the previous year or any part of the previous year.
Taxpoint: Bad debt of a discontinued business is not allowed as deduction even though the assessee has any
other business continued.
5. It must be of a revenue nature
Taxpoint: Bad debt arising due to insolvency of a debtor for sale of an asset (not goods) is not allowed as
deduction.
Notes
a. Bad debt is not allowed as deduction to the assessee who maintains accounts on cash basis.
b. Bad debts are also allowed in the hands of successor of the business.

Recovery of bad debts [Sec. 41(4)]

As per sec. 41(4), where a deduction has been allowed in respect of a bad debt or part of debt u/s 36(1)(vii), then,
if the amount subsequently recovered on any such debt or part thereof is greater than the difference between the
debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or
profession.
Mathematically
Particulars Amount
Amount recovered ******
Less: Bad debt claimed – Bad debt allowed as deduction ******
Taxable bad debt recovery ******
Note: Such recovery shall be taxable irrespective of the fact whether the business is continued or not.

2.3.42 Provision for Bad Debts [Sec. 36(1)(viia)]

In the case of following person, provision for bad debts shall be allowed to the extent of specified amount:

Person To that extent PBDD is allowed

A. Scheduled bank [not being a foreign bank] or a non- 8.5% of the total income (computed before
scheduled bank or a co-operative bank other than a primary making any deduction under this section and
agricultural credit society or a primary co-operative Chapter VIA)
agricultural and rural development bank
Additional Deduction for the Person covered under (A)
a. 10% of the aggregate average advances made by the rural branches of such bank.
b. Further, at its option, further deduction shall also be allowed for an amount not exceeding the income derived
from redemption of securities in accordance with a scheme framed by the Central Government provided such
income has been disclosed in the return of income under the head “Profits and gains of business or profession”

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Person To that extent PBDD is allowed

B. foreign bank or Public financial institution or State 5% of the total income (computed before making
financial corporation or State industrial investment any deduction under this section and Chapter
corporation or Non-banking financial company VIA)

Notes :
 In case of person covered under this section, the deduction for bad debts u/s 36(1)(vii) shall be limited to an
amount by which such debts exceed the credit balance in the provision for bad and doubtful debts. If the actual
bad debt during the previous year is less or equal to the provision for doubtful debts, no deduction for bad debt
shall be allowed.
 Rural branch means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a
population of not more than 10000 according to the last preceding census of which the relevant figures have
been published before the first day of the previous year.

2.3.43 Deduction is respect of Special Reserve [Sec. 36(1)(viii)]

Deduction is allowed in respect of any special reserve created and maintained by a specified entity in respect of
reserve created from the specified business. The amount of deduction shall be least of the following:
a. Amount transferred to the reserve account during the previous year; or
b. 20% of the profits derived from the specified business of providing long-term finance; or
c. twice the amount of the paid-up share capital and the general reserve.
Notes :
Meaning of specified entity and specified business

Specified Business means the business of

Specified Entity
providing long-term finance for
A financial corporation u/s 2(72) of the Companies Act, a. industrial or agricultural development;
2013 or a financial corporation which is a public sector
b. development of infrastructure facility in India;
company or a banking company or a co-operative bank
or
other than a primary agricultural credit society or a primary
co-operative agricultural and rural development bank c. development of housing in India
A housing finance company Construction or purchase of houses in India for
residential purposes.
Any other financial corporation including a public company Development of infrastructure facility in India
Long-term finance means any loan or advance where the terms under which moneys are loaned or advanced
provide for repayment along with interest thereof during a period of not less than 5 years.

Treatment on withdrawal from Special Reserve Account

As per sec. 41(4A), if a deduction has been allowed in respect of any special reserve created under this section,
any amount subsequently withdrawn from such special reserve shall be deemed to be profits or gains of business
or profession and shall be taxable in the year of such withdrawal. The above rule holds good even if the business
is no longer in existence in the year of such withdrawal.

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2.3.44 Expenditure on promotion of family planning among employees [Sec. 36(1)(ix)]

Applicable to: Company only
Purpose of such expenditure: Such expenditure must have been incurred for promotion of family planning among
its employees.
Quantum of Deduction
 Revenue expenditure is fully allowed as deduction.
 Capital expenditure shall be allowed in 5 equal installments commencing from the previous year in which it
is incurred.
Note: Where deduction is allowed in respect of any expenditure under this section then no deduction shall be
allowed u/s 32 or any other provisions of this Act.
Treatment of unabsorbed capital expenditure: As in case of unabsorbed depreciation.
Sale of assets acquired for family planning: Treated in the same manner as in case of sale of assets used for
scientific research.

2.3.45 Expenditure incurred by a corporation or a body corporate [Sec. 36(1)(xii)]

Any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by
whatever name called, if,—
a. it is constituted or established by a Central, State or Provincial Act;
b. such corporation or body corporate, having regard to the objects and purposes of the respective Act is notified
by the Central Government in the Official Gazette for the purposes of this clause; and
c. the expenditure is incurred for the objects and purposes authorised by the Act under which it is constituted or
established;
- shall be allowed as deduction.

2.3.46 Credit Guarantee Fund Trust [Sec. 36(1)(xiv)]

Any sum paid by a public financial institution by way of contribution to specified credit guarantee fund trust for
small industries shall be allowed as deduction.

2.3.47 Securities Transaction Tax [Sec. 36(1)(xv)]

Any amount of Securities Transaction Tax (STT) paid by the assessee during the previous year shall be allowed
as deduction provided income arising from such transactions is included in the income computed under the head
“Profits and gains of business or profession.’

2.3.48 Commodities Transaction Tax [Sec. 36(1)(xvi)]

Any amount of Commodities Transaction Tax (CTT) paid by the assessee in respect of the taxable commodities
transactions entered into in the course of his business during the previous year shall be allowed as deduction
provided income arising from such transactions is included in the income computed under the head “Profits and
gains of business or profession.’
Taxpoint:
 A ‘taxable commodities transaction’ means a transaction of sale of commodity derivatives or sale of commodity
derivatives based on prices or indices of prices of commodity derivatives or option on commodity derivatives

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or option in goods in respect of commodities, other than agricultural commodities, traded in recognised stock
exchange.
 A “commodity derivative” means –
1. A contract for delivery of goods which is not a ready delivery contract
2. A contract for differences which derives its value from prices or indices of prices -
i. of such underlying goods; or
ii. of related services and rights, such as warehousing and freight; or
iii. with reference to weather and similar events and activities having a bearing on the commodity sector.

2.3.49 Purchase of Sugarcane [Sec. 36(1)(xvii)]

The amount of expenditure incurred by a co-operative society engaged in the business of manufacture of sugar for
purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the Government shall
be allowed.

2.3.50 Loss as per ICDS [Sec. 36(1)(xviii)]

Marked to market loss or other expected loss as computed in accordance with the ICDS shall be allowed.

2.3.51 General deductions [Sec. 37(1)]

Any expenditure which is not specifically provided in any provisions (discussed earlier) of the Act and fulfills
following conditions, shall be allowed as deduction under this section -
1. It must be real and not notional, fictitious or in lieu of distribution of profit.
2. It must be expended wholly & exclusively for the purpose of business or profession carried on by the assessee.
3. It must have been incurred in the previous year.
4. It must not be a personal expenditure.
5. It must not be a capital expenditure.
6. It must be lawful and not have been incurred for any purpose, which is an offence or prohibited, under any law.
¾ It also includes the expenditure incurred by an assessee:
i. for any purpose which is an offence or prohibited by any law for the time being in force, in India or
outside India; or
ii. to provide any benefit or perquisite to a person, whether or not carrying on a business or exercising a
profession, and acceptance of such benefit or perquisite by such person is in violation of any law or
rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct
of such person [see Taxpoint 3 given below]; or
iii. to compound an offence under any law for the time being in force, in India or outside India; or
iv. to settle proceedings initiated in relation to contravention under such law
Taxpoint:
1. Corporate Social Responsibility: Any expenditure incurred by an assessee on the activities relating to corporate
social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an
expenditure incurred by the assessee for the purposes of the business or profession.

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However, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that CSR expenditure,
which is of the nature described in sec. 30 to 36, shall be allowed as deduction under those sections subject to
fulfillment of conditions, if any, specified therein
2. Expenditure incurred on Keyman Insurance Policy: The premium paid on the Keyman Insurance Policy is
allowed as business expenditure [Circular No. 762/1998 dated 10-02-1998]. In case of a firm, premium paid by
the firm on the Keyman Insurance Policy of a partner, to safeguard the firm against a disruption of the business,
is an admissible expenditure u/s 37 – Circular no. 38/2016.
3. The claim of any expense incurred in providing any Gift, Travel facility, Hospitality, Cash or monetary grant or
similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and
Ethics) Regulations, 2002 shall be inadmissible u/s 37(1) of the Income Tax Act being an expense prohibited by
the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries
or other assessee which has provided said freebees and claimed it as a deductable expense in its accounts
against income. Further, the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner
or professional associations is also taxable as business income or income from other sources as the case may
be. [Circular 05/2012 dated 01-08-2012]

2.3.52 Advertisement in souvenir etc. of a political party [Sec. 37(2B)]

Expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or like, published
by a political party is disallowed.

2.3.53 Disallowed Expenditure [Sec. 40]

Whereas sec. 30 to 37(1) deals with the expenditure, which are allowed, the Act also lists certain expenditures
which are specifically disallowed. Sec. 40 states that, notwithstanding anything to the contrary in sec. 30 to 38,
certain amounts shall not be deducted in computing the income chargeable under the head “Profits & gains of
business or profession”. Such provisions are discussed below:
Following expenditures are expressly disallowed u/s 40(a):
a. Interest, royalty, fees for technical services payable to a non-resident or outside India [Sec.40(a)(i)]
Any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable ,—
¾ outside India; or
¾ in India to a non resident (not being a company) or to a foreign company,
- on which tax is deductible at source under Chapter XVIIB; and
such tax -
¾ has not been deducted; or
¾ after deduction, has not been paid within the due date of submission of return of income u/s 139(1).
Taxpoint:
¾ Where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted
during the previous year but paid after the due date of submission of return of income u/s 139(1), such
sum shall be allowed as a deduction in computing the income of the previous year in which such tax has
been paid.
¾ Where an assessee fails to deduct the whole or any part of the tax on any sum but is not deemed to be
an assessee in default under the first proviso to sec. 201(1), then, it shall be deemed that the assessee has
deducted and paid the tax on such sum on the date of furnishing of return of income by the payee.

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Notes
1. Since the date of furnishing the return of income by the payee is taken to be the date on which the payer
has deducted tax at source and paid the same, such expenditure/payment in respect of which the payer
has failed to deduct tax at source shall be disallowed u/s 40(a)(i) in the year in which the said expenditure
is incurred. However, such expenditure will be allowed as deduction in the subsequent year in which the
return of income is furnished by the payee, since tax is deemed to have been deducted and paid by the
payer in that year.
2. He shall not be deemed as assessee in default under the first proviso to sec. 201(1) by reason that such
payee:
a. has furnished his return of income u/s 139
b. has taken into account such sum for computing income in such return of income;
c. has paid the tax due on the income declared by him in such return of income; and
d. The payer furnishes a prescribed certificate to this effect from a chartered accountant
3. Royalty shall have the same meaning as in sec. 9(1)(vi).
4. Fees for technical services shall have the same meaning as in sec. 9(1)(vii).
b. Any sum payable to a resident on which TDS provision is applicable [Sec. 40(a)(ia)]
30% of any sum payable (or paid during the year*) to a resident on which tax is deductible at source under
Chapter XVII-B if:
Such tax:
¾ has not been deducted; or
¾ after deduction, tax has not been paid on or before the due date of furnishing return of income
Notes :
1. Where such tax has been deducted in any subsequent year, or tax has been paid after the due date of
furnishing return of relevant assessment year, then the amount disallowed earlier (i.e., 30% portion)
shall be allowed as deduction in the following assessment year
Where such tax has been deducted in any subsequent year Disallowed amount shall be allowed as a
Where such tax has been deducted in the relevant financial deduction in computing the income of the
year but tax has been paid after the due date of furnishing previous year in which such tax has been
return of relevant assessment year paid
2. Where an assessee fails to deduct the whole or any part of the tax but is not deemed to be an assessee in
default under the first proviso to section 201(1), then, it shall be deemed that the assessee has deducted
and paid the tax on such sum on the date of furnishing of return of income by the resident payee.
 This relaxation is not available where the payer has deducted tax but fails to deposit such tax to the
credit of the Central Government.
 As per first proviso to sec.201(1), the payer is not deemed as an assessee in default:
i. Such resident recipient has furnished his return of income u/s 139
ii. Such resident recipient has taken into account such sum for computing income in such return
of income; and
iii. Such resident recipient has paid the tax due on the income declared by him in such return of
income,
iv. The payer furnishes a prescribed certificate to this effect from a chartered accountant
*
Circular No. 10/2013 dated 16-12-2013. However, some judicial authorities have held that the provision is applicable only on the amount
which is payable on the last date of the relevant previous year and would not be invoked to disallow the amount which had actually been
paid during the previous year without deduction of tax at source. Thus, the said circular is not operative in the area falling the jurisdiction of
the relevant High Court.

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3. Since the date of furnishing the return of income by the payee is taken to be the date on which the payer
has deducted tax at source and paid the same, 30% of such expenditure/payment in respect of which
the payer has failed to deduct tax at source shall be disallowed u/s 40(a)(ia) in the year in which the
said expenditure is incurred. However, 30% of such expenditure will be allowed as deduction in the
subsequent year in which the return of income is furnished by the payee, since tax is deemed to have
been deducted and paid by the payer in that year.
4. Commission or brokerage includes any payment received or receivable by a person acting on behalf of
another person for services rendered (not being professional services) or for any services in the course of
buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing,
not being securities.
Illustration : 81
Details in respect of interest expenditure is given here-in-below. Determine the year of allowability.
Status of Date on which tax Actual Due date of Actual date of Allowability
Deductee is supposed to be date of depositing depositing TDS
deducted TDS TDS
Resident 20-7-2024 20-7-2024 7-8-2024 7-8-2024
Resident 20-7-2024 20-7-2024 7-8-2024 2-9-2024 100% allowed in the A.Y.
Resident 20-7-2024 20-7-2024 7-8-2024 3-4-2025 2025-26
Resident 20-7-2024 20-7-2024 7-8-2024 30-06-2025
30% of such sum shall be
disallowed (70% shall be
Resident 20-7-2024 20-7-2024 7-8-2024 12-12-2025 allowed) in the A.Y. 2025-
26 but allowed in the A.Y.
2026-27
30% of such sum shall be
disallowed (70% shall be
Resident 20-7-2024 20-7-2024 7-8-2024 3-4-2026 allowed) in the A.Y. 2025-
26 but allowed in the A.Y.
2027-28
Resident 17-6-2024 17-6-2024 7-7-2024 Not deposited 30% of such sum shall be
disallowed (70% shall be
allowed) in the A.Y. 2025-
Not de- 26 but allowed in the A.Y.
Resident 10-11-2024 7-12-2024 Not deposited
ducted relevant to the P.Y. in
which tax is paid
Non-
20-7-2024 20-7-2024 7-8-2024 7-8-2024
Resident
Non- 100% allowed in the A.Y.
20-7-2024 20-7-2024 7-8-2024 2-9-2024
Resident 2025-26
Non-
20-7-2024 20-7-2024 7-8-2024 3-7-2024
Resident
100% of such sum shall
Non- be disallowed in the A.Y.
16-2-2025 16-2-2025 7-3-2025 10-12-2025
Resident 2025-26 but allowed in
the A.Y. 2026-27

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c. Income tax (Indian or foreign) [Sec. 40(a)(ii)]

Even, income tax paid by the assessee on income of predecessor is not deductible. The term “tax” includes any
surcharge or cess, by whatever name called, on such tax.
Taxpoint: Professional tax is an allowed expenditure [Circular No. 16 & 18 dated 18/9/69]
d. Wealth-tax [Sec. 40(a)(iia)]
e. Royalty, licence fees, etc. payable by State Government Undertaking [Sec. 40(a)(iib)]
Any amount
a. paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge,
by whatever name called, which is levied exclusively on; or
b. which is appropriated, directly or indirectly, from,
a State Government undertaking by the State Government.
Note: State Government undertaking includes—
i. a corporation established by or under any Act of the State Government;
ii. a company in which more than 50% of the paid-up equity share capital is held by the State
Government;
iii. a company in which more than 50% of the paid-up equity share capital is held by the entity referred
to in above clauses (whether singly or taken together);
iv. a company or corporation in which the State Government has the right to appoint the majority of the
directors or to control the management or policy decisions, directly or indirectly, including by virtue
of its shareholding or management rights or shareholders agreements or voting agreements or in any
other manner;
v. an authority, a board or an institution or a body established or constituted by or under any Act of the
State Government or owned or controlled by the State Government;
f. Any payment which is chargeable under the head “Salaries”, if it is payable—
(i) outside India; or (ii) to a non-resident,
and if the tax has not been paid in India thereon nor deducted therefrom [Sec. 40(a)(iii)]
g. Any payment to a provident fund or any other fund established for the benefit of employees of the assessee
in respect of whom the assessee has not made effective arrangement to secure that tax shall be deducted at
source from any payment made from the fund, which are taxable under the head ‘Salaries’ [Sec. 40(a)(iv)]; and
h. Any tax on non-monetary perquisite [which is exempt in the hands of employee u/s 10(10CC)] actually paid
by employer on behalf of employee [Sec. 40(a)(v)].

2.3.54 Payment made to relatives in excess of requirement [Sec. 40A(2)]

Any payment made by an assessee to a related person1 shall be disallowed to the extent it is excess or unreasonable2
as per the Assessing Officer.
1.
Related person: Sec. 40A(2)(b) deals with the related person. Before explaining the provision, it is imperative
to understand the meaning of the terms “Relative” and “Person having substantial interest”
Relative u/s 2(41) means the spouse, brother, sister or any lineal ascendant or descendant of that individual.
Person having substantial interest: A person is deemed to have substantial interest in the business or
profession, if

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i. in a case, where the business or profession is carried on by a company, such person is at any time during
the previous year, the beneficial owner of equity share carrying not less than 20% of voting power;
ii. in any other case, such person is at any time during the previous year, the beneficially entitled to not less
than 20% of the profits of such business or profession.
List of related persons in case of different assessee

For the assessee Related Person means

Relative
An Individual
A person in whose business or profession the individual has substantial interest.
Director of the company or any relative of the director
A person in whose business or profession the company or any of its director or relative of
such director has substantial interest.
Any other company carrying on business or profession in which the aforesaid company
A Company
has substantial interest.
E.g. X Ltd. holds 20% equity shares in Y Ltd., the assessee. Further, X Ltd. also holds
20% equity shares in Z Ltd. Z Ltd. shall also be considered as relative for Y Ltd. provided
Z Ltd. is carrying on business or profession.
Partner of the firm or relative of partner
A Firm A person in whose business or profession the firm or any of its partner or relative of such
partner has substantial interest.
A member of the Association or a relative of the member.
An AOP A person in whose business or profession the AOP or any of its member or relative of such
member has substantial interest.
A member of the family or relative of such person
An HUF A person in whose business or profession the HUF or any of its member or relative of such
member has substantial interest.
� An individual who has a substantial interest in the business or profession of the
assessee or the relative of such individual.
� A company, which has a substantial interest in the business or profession of the
assessee or the director of such company or relatives of such a director.
� A Firm/HUF/AOP etc., which has a substantial interest in the business or profession
of the assessee or the partner/member of such firm/HUF/AOP or relatives of such
Any assessee partner/member.
� A company, one of whose director has a substantial interest in the business or
profession of the assessee or directors of such company or any relative of such
directors.
� Firm, AOP, HUF, one of whose partner/member has a substantial interest in the
business or profession of the assessee or any partner/member of such Firm/AOP/
HUF or any relative of such person.
2.
Excessive or unreasonable: Whether any expenditure is in excess or unreasonable is to be decided after
considering the fair market value of the goods, services or facilities for which payment is made or the legitimate
need of the business or profession of the assessee or the benefit arising to the assessee therefrom.

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3.
Where an assessee sells his goods at a lower rate, there is no expenditure incurred by him, hence sec. 40A(2)
shall not be invoked.

2.3.55 Consequences of payment exceeding ` 10,000/- otherwise than by account payee

cheque or demand draft [Sec. 40A(3)/(3A)]
Applicability: Any expenditure in respect of which payment has been made in excess of ` 10,000 in a day otherwise
than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank
account or through other prescribed electronic modes[Sec. 40A(3)]
Treatment: 100% of such payment shall be disallowed.
Exception: In the case of payment made for plying, hiring or leasing goods carriages (hereinafter referred to as
Road Transport), the limit of ` 10,000 has been increased upto ` 35,000.
Taxpoint: The monetary limit for attracting sec.40A(3) are as follows:

Case Monetary Limit

Payment made for plying, hiring or leasing goods carriages ` 35,000
Payment made for other expenses ` 10,000

Other points
¾ Where:
a. an allowance has been made in the assessment for any year in respect of any liability incurred by the
assessee for any expenditure; and
b. subsequently during any previous year the assessee makes any payment in violation of this provision,
then, the payment so made shall be deemed to be the profits and gains of business or profession of such
subsequent year [Sec. 40A(3A)]
¾ If an assessee makes payment of two different bills (none of them exceeds ` 10,000 / ` 35,000) at the same
time in cash to the same person, provision of sec. 40A(3) is not attracted.
¾ If an assessee makes payment of a single bill (exceeding ` 10,000 / ` 35,000) on different days to the same
person in cash, provision of sec. 40A(3) is not attracted, provided any of the payment does not exceed ` 10,000
/ ` 35,000.
¾ Where payment is made over ` 10,000 (or ` 35,000) at a time, partly by account payee cheque & partly in cash
but the payment in cash alone at one time does not exceed ` 10,000 (or ` 35,000), assessee is not attracted by
sec. 40A(3).
¾ The provision of sec. 40A(3) is attracted only when such expenditure is claimed as deduction u/s 30 to 37.
¾ Loan transactions are not covered under this section.

Exceptions [Rule 6DD]

Under the following circumstances as prescribed under Rule 6DD, provision of Sec.40A(3) is not attracted even
the payment in excess of ` 10,000 (or ` 35,000) has been made otherwise than by a account payee cheque or
account payee bank draft or other prescribed modes –
a. Where the payment is made to—
¾ The Reserve Bank of India or any banking company

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¾ The State Bank of India or any subsidiary bank

¾ Any co-operative bank or land mortgage bank;
¾ Any primary agricultural credit society or any primary credit society
¾ The Life Insurance Corporation of India
b. Where the payment is made to the Government and, under the rules framed by it, such payment is required to
be made in legal tender;
c. Where the payment is made by—
¾ Any letter of credit arrangements through a bank;
¾ A mail or telegraphic transfer through a bank;
¾ A book adjustment from any account in a bank to any other account in that or any other bank;
¾ A bill of exchange made payable only to a bank;
d. Where the payment is made by way of adjustment against the amount of any liability incurred by the payee for
any goods supplied or services rendered by the assessee to such payee i.e., Book Adjustment;
e. Where the payment is made for the purchase of
¾ Agricultural or forest produce; or
¾ The produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming;
or
¾ Fish or fish products; or
¾ The products of horticulture or apiculture,
- to the cultivator, grower or producer* of such articles, produce or products;
f. Where the payment is made for the purchase of the products manufactured or processed without the aid of
power in a cottage industry, to the producer of such products;
g. Where the payment is made in a village or town, which on the date of such payment is not served by any bank,
to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village
or town;
h. Where any payment is made to an employee of the assessee or the heir of any such employee, on or in
connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of
gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the
employee or his heir does not exceed ` 50,000;
i. Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax
from salary in accordance with the provisions of section 192 of the Act, and when such employee -
i. is temporarily posted for a continuous period of 15 days or more in a place other than his normal place
of duty or on a ship; and
ii. does not maintain any account in any bank at such place or ship;
j. Where the payment is made by any person to his agent who is required to make payment in cash for goods or
services on behalf of such person;
k. Where the payment is made by an travelers or dealer or a money changer against purchase of foreign currency
or travelers cheques in the normal course of his business.
* The 'producers' of fish or fish products for the purpose of Rule 6DD(e) would include, besides the fishermen, any headman of fishermen, who
sorts the catch of fish brought by fishermen from the sea, at the sea shore itself and then sells the fish or fish products to traders, exporters etc

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Example 13:
Points to be kept in mind Examples
If an assessee makes payment to Mr. X against
a bill of ` 50,000 on a same day but at different
Entire ` 50,000 shall be disallowed u/s 40A(3)
time but each time the amount of payment does
not exceed ` 10,000.
If an assessee makes payment of two different X paid to Y ` 12,000 in cash against his Bill No.482 of ` 7,000
bills (none of them exceeds ` 10,000) at the same and Bill No.572 of ` 5,000.
time to the same person in cash, provision of sec.
40A(3) is not attracted. Nothing shall be disallowed under this section.
X paid to Y in cash (against bill 421) of ` 23,000 as follows -
If an assessee makes payment of a single bill
(exceeding ` 10,000) on different days to the On 7/12/2024: ` 8,000
same person in cash, provision of sec. 40A(3) is On 8/12/2024: ` 9,000
not attracted, provided any of the payment does On 9/12/2024: ` 6,000
not exceed ` 10,000.
Nothing shall be disallowed.
Where payment is made over ` 10,000 at a time,
partly by account payee cheque & partly in cash X paid to Y (against bill 712) of ` 50,000, in form of account
but the payment in cash alone at one time does payee cheque ` 42,000, bearer cheque ` 3,000 and in cash `
not exceed ` 10,000, assessee is not attracted by 5,000. Nothing shall be disallowed.
sec. 40A(3).
If part of the expenditure is already disallowed X purchased goods from his brother of ` 14,000 (market
under any provision of this Act, then disallowance value of which is ` 8,000) and paid in cash. ` 6,000 shall be
shall be calculated on the allowed portion of the disallowed u/s 40A(2) and nothing shall be disallowed u/s
expenditure. 40A(3) as allowed expenditure does not exceed ` 10,000.
Mr. X made following payment in cash to a road transport
operator for their respective bills:
The monetary limit for payment to Road Carrier - ` 23,000 to Mr. A on 10-05-2024 against his Bill No. 540
is ` 35,000 - ` 32,000 to Mr. B on 10-12-2024 against his Bill No. 770
- ` 37,000 to Mr. C on 10-01-2025 against his Bill No. 992
Payment made to Mr. C shall be disallowed fully u/s 40A(3)
Where an allowance has been made in the
assessment year in respect of any liability Mr. X purchased goods on credit on 7/7/2024 for ₹ 60,000 and
incurred by the assessee for any expenditure claimed the expenditure as deduction in the A.Y. 2025-26. On
and subsequently during any previous year the 7/7/2026 he paid to creditor ₹ 60,000 in cash.
assessee makes any payment in respect thereof Since amount has been paid in cash in excess of ₹ 10,000,
in a sum exceeding ` 10,000 otherwise than by therefore the allowance originally made shall be considered as
a account payee cheque or account payee bank income of the previous year in which such payment has been
draft, the allowance originally made shall be made i.e. P.Y.2026-27.
considered as income of the previous year in
which such payment has been made.

2.3.56 Provision for Gratuity [Sec. 40A(7)]

No deduction shall be allowed in respect of any provision (by whatever name called) made by the assessee for the
payment of gratuity to his employees.
Exceptions: Any provision made by the assessee for the purpose of payment of a sum -

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� by way of any contribution towards an approved gratuity fund; or

� for the purpose of payment of any gratuity, that has become payable during the previous year;
- shall be allowed as deduction.
2.3.57 Certain contributions not deductible [Sec. 40A(9)]
No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards setting up or
formation of, or as contribution to, any fund, trust, company, AOP, BOI, society or other institution for any purpose.
Exception: Where such sum is paid by way of contribution towards approved superannuation fund, recognised
provident fund, approved gratuity fund, NPS as per the requirements under any law, then such sum is allowed.
Taxpoint: Contribution to unrecognized provident fund is disallowed.
2.3.58 Expenditures allowed on cash basis [Sec. 43B]
Category A
Deduction in respect of following expenses are allowed only if payment is made on or before the due date for
furnishing return of income u/s 139(1)1 of the previous year in which such liability is incurred:
1. Any sum payable2 by way of tax, duty, cess, fee, by whatever name called, under any law for the time being in
force.
2. Any sum payable as bonus or commission to employees for services rendered.
3. Any sum payable as interest on loan or borrowing from any
� public financial institutions;
� a State financial corporation; or
� State industrial investment corporation.
4. Any sum payable by the assessee as interest on any loan or borrowing from notified class of non-banking
financial companies, in accordance with the terms and conditions of the agreement governing such loan or
borrowing
5. Any sum payable as interest on any loans and advances from a scheduled bank or a co-operative bank other
than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in
accordance with the terms and conditions of the agreement governing such loan or advances.
6. Any sum payable by an employer in lieu of any leave at the credit of employee (i.e. leave encashment).
7. Any sum payable by an employer by way of contribution to any provident fund, superannuation fund, gratuity
fund or any other fund for the welfare of employees.
8. Any sum payable by the assessee to the Indian Railways for the use of railway assets
Taxpoint:
� If payment is not made before the date mentioned above, then no allowance shall be allowed in respect of
the outstanding liability. Deduction can, however, be claimed in the year of payment.
� The method of accounting followed by the assessee is irrelevant.
� Sec.43B is applicable only on those expenditure which are allowed under the provisions of this Act, if an
expenditure is already disallowed under the provision of this Act, payment of such expenditure within time
shall not be sufficient to make it an allowed expenditure. E.g. Income tax paid ` 5,000 before due date of
filing of return, is not allowed as deduction.

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1
. In general, due date for furnishing return of income u/s 139(1)
- Where audit of books of account is compulsory under any law : 31st October† of the A.Y.
- In any other case : 31st July of the A.Y.
2
. Any sum payable means a sum for which the assessee incurred liability in the previous year even though
such sum might not have been payable within that year under the relevant law i.e. liability must have been
accrued whether falls due or not.
Notes :
1. Sec.43B is applicable only if the assessee is following mercantile system of accounting. However, if an asses-
see follows cash basis of accounting, deduction shall be allowed only in the year in which payment is made,
even though the payment has been made on or before due date of filing of return.
2. The provision that “for claiming deduction, payment must be made on or before the due date of filing of return”
shall be applied only for the relevant previous year in which such liability is incurred. If payment is made after-
wards, deduction shall be allowed in the previous year in which payment is actually made, without considering
the due date of filing of return.
Example: Mr. X paid professional tax ₹ 10,000 related to previous year 2021-22 on 7/5/2025. Deduction for
such expenditure shall be allowed in the P.Y 2025-26 and not in P.Y.2024-25.
3. Where outstanding interest on loan (taken from Banks, NBFC, PFIs, etc.) is converted into loan debenture or
any other instrument by which the liability to pay is deferred to a future date, then such interest is not deemed
as interest paid.
4. Where a deduction in respect of the aforesaid expenditure is allowed in an earlier year on accrual basis the
same will not again be allowed as deduction under this section on payment basis.
5. As per sec. 36(1)(va), any sum received by an employer from his employees as contribution towards provident
fund, superannuation fund, any other fund set up under the provision of the ESI Act, 1948 or any other fund
for the welfare of such employees, is treated as an income of the employer. Subsequently, when such sum is
credited by the employer to the employee’s account in the relevant fund on or before the due date of crediting
such contribution prescribed under the relevant Act, then deduction is allowed. If such contribution is not de-
posited within time allowed as per the provisions of the relevant Act, the deduction shall never be allowed, i.e.
not now then never.
Illustration 82 :
Debit side of the profit and loss account of Mayank Ltd. Shows the following expenses, which have been due but
are outstanding as on 31-3-2025
Payment outstanding on 31-3-2025 First payment Second payment
Particulars Amount Date Amount paid Date Amount paid
Leave encashment expenses 65,000 01-06-2025 15,000 25-12-2025 50,000
Interest payable to Bank 14,000 10-06-2025 3,000 13-12-2025 11,000
Bonus payable to employees 87,000 02-05-2025 30,000 30-09-2025 57,000
Interest payable to LIC loan 75,000 13-05-2025 50,000 10-01-2026 25,000
Due date for filing return of income is 31-10-2025
Find out the previous years in which the aforesaid payments are deductible. The company maintains books of
accounts on the basis of mercantile system of accounting.
†
30th November, in case of assessee required to furnish Audit Report u/s 92E

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Solution :

As per provision of sec. 43B following payment shall be allowed.

Deduction allowed in the assessment year

Particulars Amount paid
2025-26 2026-27
Leave encashment expenses 65,000 15,000 50,000
Interest payable to Bank 14,000 3,000 11,000
Bonus payable to employees 87,000 87,000 -
Interest payable to LIC loan 75,000 50,000 25,000
Category B
Any sum payable by the assessee to a micro or small enterprise (other than a trading unit) beyond the time limit
specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 would be allowed as
deduction only in that previous year in which such sum is actually paid.
Sec. 15 of the Micro, Small and Medium Enterprises Development Act, 2006 mandates payment of goods or ser-
vices to supplier, being a micro or small enterprises by the buyer on or before:

Where written agree- the date agreed upon between them in writing i.e., as per the written agreement. However,
ment exists between in any circumstance such date cannot be more than 45 days from the day of acceptance
parties or the day of deemed acceptance of any goods or services by a buyer from a supplier.
Where there is no the payment shall be made before the appointed day i.e., within 15 days.
such written agree-
ment

Availability of deduction

Where the payment has been made The deduction can be claimed on accrual basis if mercantile method of
within the aforesaid date accounting is followed by the assessee.
In other case The deduction would be allowed in the previous year in which it is
actually paid.
Taxpoint
� The provision is applicable only in case where payee is micro or small enterprise. That means the provision is
not applicable in case of medium enterprises
� For this clause, due date of furnishing return is not relevant.
� Meaning of micro and small enterprise

Investment in Plant & Machinery Investment in equipment (applicable for

Enterprise service provider)
(applicable for industrial unit)
Micro Investment ≤ ` 25 lakhs Investment ≤ ` 10 lakhs
Small ` 25 lakhs < Investment ≤ ` 5 crore ` 10 lakhs < Investment ≤ ` 2 crore
For calculating investment in plant and machinery, the cost of pollution control, research and development,
industrial safety devices and such notified items shall be excluded

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Example :
Liability Payment Applicability of Allowed in the
Type of Liability
Accrued on made on sec. 43B A.Y.
Micro and Small enterprise related 29/03/2025 02/04/2025 No A.Y. 2025-26
Micro and Small enterprise related 29/03/2025 30/12/2025 Yes A.Y. 2026-27
Micro and Small enterprise related 29/03/2025 30/06/2025 Yes A.Y. 2026-27
Bonus to employee 31/03/2025 30/06/2025 Yes A.Y. 2025-26

2.3.59 Deemed profit chargeable to tax as business Income

The following receipts are chargeable to tax as business income even if the business to which such receipt is related
is not in existence during the previous year.
Section Contents
41(1) Recovery against any deduction (given below)
41(2) Balancing charge (discussed earlier)
41(3) Sale of asset used for scientific research (discussed earlier)
41(4) Recovery of Bad debts (discussed earlier)
41(4A) Withdrawal from special reserve created by financial corporation u/s 36(1)(viii)
176(3A) & (4) Recovery after discontinuance of business or profession (given below)
Recovery against any deduction [Sec. 41(1)]
Conditions
1. Where an allowance or deduction is allowed in any assessment year in respect of loss, expenditure, or trading
liability incurred by the assessee; and
2. Subsequently during any previous year such assessee has obtained, whether in cash or in any other manner
any amount in respect of such loss, expenditure, or any benefit in respect of such trading liability by way of
remission or cessation thereof.
Treatment: The amount obtained or benefit accrued shall be deemed to be the profits & gains of business or
profession and chargeable to income tax as income of the previous year in which such benefit is obtained.
Notes :
1. The provision holds good, whether the business or profession in respect of which such allowance or deduction
has been made is in existence in that year or not.
2. The remission or cessation of trading liability may be unilateral act of the assessee by way of writing off such
liability in his accounts
3. The first and the most necessary ingredient for the application of sec. 41(1) is that an allowance or deduction
must have been made previously while computing the taxable income
4. Where benefit has been obtained by the successor in business, such benefit shall be taxable in hands of
successor.
� Successor in business means:
i. where there has been an amalgamation of a company with another company, the amalgamated
company;
ii. where a firm carrying on a business or profession is succeeded by another firm, the other firm;

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iii. in any other case, where one person is succeeded by any other person in that business or profession,
the other person;
iv. where there has been a demerger, the resulting company.

Recovery after discontinuance of business or profession [Sec. 176(3A) and (4)]

Condition: Business or profession is discontinued in any year due to death or retirement of the person carrying on
such business or profession.
Treatment: Any sum received after such discontinuance shall be deemed to be the income of the recipient and
chargeable to tax in the year of receipt.

2.3.60 Maintenance of books of account [Sec. 44AA & Rule 6F]

Person
falling Turnover or income criteria
Case
under this Maintenance of Accounts
category Existing business New business
Gross receipts in the profession Gross total receipts Maintain such books of
exceeds ` 1,50,000 in all of in the profession for account and other documents as
A Persons the three years immediately that year is likely to prescribed by Rule 6F2
carrying on preceding the previous year. exceed ` 1,50,000.
specified Gross receipts in the profession Gross total receipts Maintain such books of account
professions1 does not exceed ` 1,50,000 in the profession and other documents as may
B in any one of the three years for that year is not enable the Assessing Officer to
immediately preceding the likely to exceed ` compute their taxable income
previous year. 1,50,000. under the Income-tax Act.
Profit from such profession or Income/ total sales, Maintain such books of account
business exceeds ` 1,20,000 etc. is likely to and other documents as may
(in case of individual & HUF ` exceed the said enable the Assessing Officer to
2,50,000); or amount. compute their taxable income
under the Income-tax Act.
The total sales or turnover or
C Persons gross receipts thereof is in
carrying excess of ` 10,00,000 (in case of
on a “non- individual & HUF ` 25,00,000),
specified
profession - in any of the 3 years
or any immediately preceding the P.Y.
business”: Aforesaid limit does not exceed Income is not likely Not required to maintain any
in all of the 3 years immediately to exceed said limit books of account.
preceding the P.Y. and total sales,
D
turnover or gross
receipt is not likely
to exceed said limit.
An assessee (covered u/s 44AE, 44BB or 44BBB) who claims Maintain such books of account
E income from such business to be lower than the deemed income & other documents as may
computed in accordance with the respective sections. enable the AO to compute
Where the provision of sec. 44AD(4) is applicable and income of the his taxable income under the
F assessee exceeds the maximum amount which is not chargeable to Income-tax Act.
income-tax (i.e. basic exemption limit)

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Specified Profession: Legal, medical, engineering, architectural profession or profession of accountancy, technical
1.

consultancy, interior decoration, information technology, company secretary, authorised representative, film artist
or any other profession as is notified by the Board in the Official Gazette.
2.
Following books of account are required to be maintained as per Rule 6F
a. Cash book;
b. Journal, if mercantile system of accounting is followed;
c. Ledger;
d. Carbon copies of machine numbered bills, exceeding ` 25, issued by the person; and
e. Original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or,
where such bills and receipts are not issued and expenditure incurred does not exceed ` 50, payment vouchers
prepared and signed by the person.
f. Assessee engaged in medical profession are required to maintain two more books -
� Daily Case Register in Form 3C.
� Inventory records of drugs, medicines and other consumable accessories used in the profession.
Notes :
1. Period for which books of account is to be maintained [Rule 6F(5)]: The books of account and other
documents shall be kept and maintained for a period of 6 years from the end of the relevant assessment year.
2. Place at which books to be kept and maintained: The books of account and other documents [other than
those relating to a previous year which has come to an end] shall be kept and maintained by the person at the
place where he is carrying on the profession or, where the profession is carried on in more places than one, at
the principal place of his profession. However if he keeps and maintains separate books of account in respect
of each place of his profession, such books of account and other documents may be kept and maintained at the
respective places
3. Penalty: Where an assessee fails to comply with the provision of sec 44AA, he shall be liable to pay penalty
u/s 271A of ` 25,000.
4. As per sec. 2(12A), books or books of account includes ledgers, day-books, cash books, account-books and
other books, whether kept in the written form or in electronic form or in digital form or as print-outs of data
stored in such electronic form or in digital form or in a floppy, disc, tape or any other form of electro-magnetic
data storage device.
2.3.61 Tax Audit [Sec. 44AB]
Following assessee are required to get their accounts audited by a chartered accountant and to furnish (electronical-
ly) the audit report in a specified form one month** prior to the due date of filing of return of income:
1. An assessee carrying on business
Condition: Total sales, turnover or gross-receipts of business for the previous year exceeds ` 1 crore.
Exception 1: Where a person:
� Declares profits and gains for the previous year u/s 44AD; and
� His total sales / turnover / gross receipts in business does not exceed ` 2 crore in the previous year,
- then, the provision of tax audit is not applicable.
Exception 2: Where a person:
**
In general, tax audit report is required to be filed by 30th September of the assessment year. However, in case where transfer pricing audit u/s 92E is
applicable, then the date for filing report is 31st Oct of the assessment year

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� Declares profits and gains for the previous year u/s 44AD; and
� His total sales / turnover / gross receipts in business does not exceed ` 3 crore in the previous year; and
� Aggregate of all amounts received during the previous year in cash does not exceed 5% of the total turn-
over or gross receipt of such previous year,
- then, the provision of tax audit is not applicable.
Exception 3: If the following conditions are satisfied, then the higher threshold limit of ` 10 crore shall be
applicable for a person carrying on business:
a. aggregate of all amounts received including amount received for sales, turnover or gross receipts during
the previous year, in cash, does not exceed 5% of the said amount; and
b. aggregate of all payments made including amount incurred for expenditure, in cash, during the previous
year does not exceed 5% of the said payment.
Taxpoint: The payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which
is not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash
In nutshell, applicability of tax audit in case of business assessee are as under:
Case Applicability
Turnover exceeds ` 10 crore Applicable
Turnover does not exceed ` 2 crore and assessee is covered u/s 44AD Not applicable
Turnover does not exceed ` 3 crore and his cash receipt does not exceed 5% of total Not applicable
turnover and assessee is covered u/s 44AD
Turnover does not exceed ` 10 crore and aforesaid conditions are satisfied Not applicable
Turnover does not exceed ` 10 crore but exceed ` 1 crore and aforesaid conditions are Applicable
not satisfied (assessee is not covered u/s 44AD)
2. An assessee carrying on profession
Condition: Gross receipts of profession for the previous year exceeds ` 50 lacs.
Exception: Where a person:
� Declares profits and gains for the previous year u/s 44ADA; and
� His gross receipts from profession does not exceed ` 75 lakhs in the previous year; and
� Aggregate of all amounts received during the previous year in cash does not exceed 5% of the gross receipt
of such previous year,
- then, the provision of tax audit is not applicable.
3. An assessee covered u/s 44AE, 44BB or 44BBB
Condition: Assessee has claimed that his income from such business is lower than the deemed income com-
puted in accordance with the respective section.
4. An assessee covered u/s 44ADA
Condition: Assessee has claimed that:
a. his income is lower than the presumptive income (computed u/s 44ADA); and
b. his income exceeds the maximum amount which is not chargeable to income-tax (i.e. basic exemption
limit)
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5. An assessee covered u/s 44AD(4) and his income exceeds the maximum amount which is not chargeable to
income-tax in any previous year
Penalty: If any assessee does not upload such audit report one month prior to the due date of filing of return of
income, then he is liable to pay penalty being lower of the following:
� ½ percent of turnover or gross receipt; or
� ` 1,50,000.

2.3.62 Special provision in case of income of public financial institutions, etc. [Sec. 43D]
Notwithstanding anything to the contrary to any other provision of the Act following shall be applicable:

In case of Nature of income Tax treatment

A public financial institution, a scheduled Income by way of interest in Chargeable to tax in the
bank, a co-operative bank other than a primary relation to such categories of previous year in which -
agricultural credit society or a primary co- prescribed (as per guidelines
operative agricultural and rural development issued by the Reserve Bank • it is credited to the
bank, a State financial corporation or a State of India) categories of bad or profit and loss account;
industrial investment corporation, a deposit doubtful debts or
taking non-banking financial company, a • it is actually received.
systemically important non-deposit taking
non-banking financial company - whichever is earlier

2.3.63 Method of accounting in certain cases [Sec. 145A]

Valuation of stock
 The valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance
with the ICDS.
 The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the
amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to
bring the goods or services to the place of its location and condition as on the date of valuation. Such tax, duty,
etc. shall include all such payment notwithstanding any right arising as a consequence to such payment.
 The inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a
recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised
in accordance with the ICDS.
 The inventory being securities other than above, shall be valued at lower of actual cost or net realisable value
in accordance with the ICDS
 The inventory being securities held by a scheduled bank or public financial institution shall be valued in
accordance with the ICDS after taking into account the extant guidelines issued by the Reserve Bank of India
in this regard.
 The comparison of actual cost and net realisable value of securities shall be made category-wise.

2.3.64 Taxability of certain income [Sec. 145B]

 Interest received on compulsory acquisition: The interest received by an assessee on any compensation or
on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which
it is received.

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 Export incentives: Any claim for escalation of price in a contract or export incentives shall be deemed to be
the income of the previous year in which reasonable certainty of its realisation is achieved.
 Subsidy: Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) shall be deemed to be the income of the previous
year in which it is received, if not charged to income-tax in any earlier previous year.

Computation of income on basis of estimation

To give relief to small taxpayers from maintenance of books of account and from getting the accounts audited, the
Income-tax Act has framed the presumptive taxation scheme u/s 44AD, 44ADA and 44AE.
Computation of Business Profit on Presumptive Basis [Sec. 44AD]
A resident individual, resident Hindu undivided family or a resident partnership firm
Note: The provision is not applicable in case of the following:
¾ Limited liability partnership firm
Applicable ¾ A person carrying on profession as referred to u/s 44AA
to ¾ A person earning income in the nature of commission or brokerage; or
¾ A person carrying on any agency business
¾ A person carrying on the business of plying, hiring or leasing goods carriages referred to in
sec. 44AE
a. Eligible Business: Assessee must be engaged in any business other than the business
referred above
b. Maximum Turnover:
Option 1
Total turnover or gross receipts in the previous year of eligible business should not exceed
` 2 crore.
Or
Conditions Option 2
Where aggregate amounts received during the previous year, in cash, does not exceed 5% of
the total turnover or gross receipts of such previous year, then total turnover or gross receipts
in the previous year of eligible business should not exceed ` 3 crore.
Taxpoint: Where receipt by a cheque drawn on a bank or by a bank draft, which is not
account payee, shall be deemed to be the receipt in cash.
c. Restriction on claiming deductions: The assessee has not claimed any deduction u/s 10AA
or 80HH to 80RRB in the relevant assessment year.
¾ Where amount of turnover or gross receipts is received by an 6% of such turnover
account payee cheque or account payee bank draft or use of ECS or or receipts
through other prescribed electronic modes† during the previous year
Estimated or before the due date of filing return of income
income
¾ In any other case 8% of such turnover
or receipts
However, a taxpayer can voluntarily declare a higher income in his return.

†
Credit card, debit card, net banking, IMPS, UPI, RTGS, NEFT and BHIM Aadhar Pay

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Notes :
1. No Deduction in respect of expenses: The estimated income is comprehensive and no further deductions
relating to expenses shall be allowed.
2. Depreciation: Depreciation is deemed to have been already allowed. The written down value of asset will be
calculated, as if depreciation has been allowed.
3. Deductions: The above estimated income is aggregated with other income of the assessee, from any other
business or under any other heads of income. Further deduction under chapter VIA (other than those mentioned
above) shall be available to the assessee as usual.
4. Brought forward loss: Brought forward loss (if any) shall be subtracted from such estimated income as per
provisions of this Act.
5. Provision is not applicable [Sec. 44AD(4)]: Where an eligible assessee:
a. declares profit for any previous year in accordance with the provisions of this section (i.e., specified
percentage of the turnover); &
b. declares lower profit (i.e., less than specified percentage of the turnover) for any of the 5 assessment
years relevant to the previous year succeeding aforesaid previous,
then, he shall not be eligible to claim the benefit of the provisions of this section for 5 assessment years
subsequent to the assessment year relevant to the previous year in which he has declared lower profit.
E.g. an assessee claims to be taxed on presumptive basis u/s 44AD for A.Y. 2024-25. For A.Y. 2025-26 and
2026-27, he offers income on the basis of presumptive taxation scheme. However, for A.Y. 2027-28, he did
not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive
taxation scheme for next 5 A.Y.s, i.e. from A.Y. 2028-29 to 2032-33.
6. Effect on the assessee if sec. 44AD(4) is applicable: An assessee to whom provision of sec. 44AD(4) is
applicable and whose total income exceeds the maximum amount which is not chargeable to tax (i.e., basic
exemption limit), he shall be required:
� To maintain books of account and other documents as required u/s 44AA; and
� To get his accounts audited and furnish a report of such audit as prescribed u/s 44AB

In nutshell
The applicability of sec. 44AD and sec. 44AB are enumerated here in below:

Turnover of the assessee Applicability of Sec. 44AD Applicability of Tax Audit

Upto ` 1crore Yes Not required even if income is not
offered u/s 44AD provided he is not
covered by sec. 44AD(4)
` 1 crore+ - ` 2 crore Yes Not required if income is offered u/s
44AD, else required
` 2 crore+ - ` 3 crore Yes, subject to certain rider Not required if income is offered u/s
44AD, else required
` 2 crore+ (if conditions are not satis- No Not required if certain conditions are
fied) / ` 3 crore+ - ` 10 crore satisfied
` 10 crore+ No Required

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Illustration 83 :
X Co., a firm, is engaged in the business of trading of cloth (turnover of 2024-25 being ` 1,57,80,000, out of which
` 25,00,000 has been received in account payee cheque). It wants to claim the following deductions:

Particulars Amount
Salary and interest to partners [as permitted by sec. 40(b)] 60,000
Salary to employees 4,90,000
Depreciation 2,70,000
Cost of materials used 1,20,90,000
Other expenses 13,45,000
Total 1,42,55,000
Net profit (` 1,57,80,000 – ` 1,42,55,000) 15,25,000
Determine the net income of X & Co. for the assessment year 2025-26 assuming that (i) taxable interest income is
` 90,000; (ii) Long term capital gain is ` 1,40,000; and (iii) the firm is eligible for a deduction of ` 15,000 under
sec. 80G.
Solution :
Since turnover from business does not exceed ` 2 crore, hence sec. 44AD is applicable. However, income computed
as per provision other than provision of sec. 44AD is less than estimated income, hence, the firm may be assessed
for such lesser income provided following conditions are satisfied –
a. Maintain books of account as prescribed u/s 44AA; and
b. Get accounts audited u/s 44AB.
Where it maintains accounts and gets it audited
Computation of total income of X & Co. for the A.Y. 2025-26

Particulars Amount
Profits and gains of business or profession: Income from cloth business 15,25,000
Capital gains: Long term capital gain 1,40,000
Income from Other Sources: Interest Income 90,000
Gross Total Income 17,55,000
Less: Deduction u/s 80G 15,000
Total Income 17,40,000
It is assumed that all the expenditures are allowed.
Where it does not maintain account or fails to get accounts audited
Computation of total income of X & Co. for the A.Y.2025-26

Particulars Details Amount

Profits and gains of business or profession
Income from cloth business (being 6% of ` 25,00,000) 1,50,000
Income from cloth business (being 8% of ` 1,32,80,000) 10,62,400 12,12,400
Capital gains: Long term capital gain 1,40,000
Income from Other Sources: Interest Income 90,000

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Gross Total Income 14,42,400

Less: Deduction u/s 80G 15,000
Total Income 14,27,400

2.3.65 Computation of Professional Income on Presumptive Basis [Sec. 44ADA]

Applicable to Any resident individual and resident firm (other than LLP)
a. Engaged in Profession: Assessee must be engaged in any profession referred to in sec. 44AA
(i.e., Legal, medical, engineering, architectural profession or profession of accountancy,
technical consultancy, interior decoration, etc.)

b. Maximum Receipts:

Option 1

Gross receipts of the assessee in the previous year should not exceed ` 50 lakh.
Conditions Or

Option 2

Where aggregate amounts received during the previous year, in cash, does not exceed 5% of
the gross receipts of such previous year, then gross receipts in the previous year should not
exceed ` 75 lakh.

Taxpoint: Where receipt by a cheque drawn on a bank or by a bank draft, which is not
account payee, shall be deemed to be the receipt in cash.
Estimated 50% of the gross receipts.
income However, a taxpayer can voluntarily declare a higher income in his return.
Notes :
1. Deduction u/s 30 to 38: The estimated income is comprehensive and no further deductions u/s 30 to 38 shall
be allowed.
2. Depreciation: Depreciation is deemed to have been already allowed. The written down value of asset will be
calculated, as if depreciation has been allowed.
3. Deductions: The above estimated income is aggregated with other income of the assessee, from any other
business or under any other heads of income. Further deduction under chapter VIA shall be available to the
assessee as usual.
4. Brought forward loss: Brought forward loss (if any) shall be subtracted from such estimated income as per
provisions of this Act.
5. Effect if assessee declares lower income: An assessee can declare his income lower than the estimated income
as per provision of this section. In such case he will have to:
¾ Maintain books of account and other documents as required u/s 44AA if his total income exceeds the
maximum exemption limit; and
¾ Get his accounts audited and furnish a report of such audit as prescribed u/s 44AB (irrespective of amount
of turnover or gross receipts) if his total income exceeds the maximum exemption limit.
Note: Assessee can change his option from year to year

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2.3.66 Business of plying, leasing or hiring goods carriage [Sec. 44AE]

Applicable to All assessee engaged in the business of plying, hiring or leasing goods carriage.
Number of carriages: Assessee must not own more than 10 goods carriages at any time during
the previous year.
Owner of carriages includes a buyer under hire purchase or installment system even if the
Condition whole amount is unpaid.
Goods carriage means any motor vehicle constructed or adapted for use solely for the carriage
of goods, or any motor vehicle not so constructed or adapted when used for the carriage of
goods;
Income from each goods carriage shall be
Type of Goods Carriage Presumptive Income (Per month or part of a month)
Heavy ` 1,000 per ton of gross vehicle weight or unladen weight
Estimated
income Other ` 7,500
1. Income shall be calculated from the month when assessee acquired the property whether
it has been put to use or not.
2. An assessee can declare higher income.
Notes:
1. Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12000 kilograms
2. Deduction u/s 30 to 38: The estimated income is comprehensive and no further deductions u/s 30 to 38 shall
be allowed.
3. Deduction u/s 40(b): In the case of a firm, deduction in respect of remuneration and interest to partner u/s
40(b) shall be further deductible from income so computed.
4. Depreciation: Depreciation is deemed to have been already allowed. The written down value of asset will be
calculated, as if depreciation has been allowed.
5. Deductions: The above estimated income is aggregated with other income of the assessee, from any other
business or under any other heads of income. Further deduction under chapter VIA shall be available to the
assessee as usual.
6. Brought forward loss: Brought forward loss (if any) shall be adjusted from such estimated income.
7. Maintenance of books of account and audit: An assessee, who estimates income from such business as per
section 44AE, or a higher income, is not required to -
¾ Maintain books of account u/s 44AA; and
¾ Get his accounts audited u/s 44AB
- in respect of his income from such business.
However, he has to comply with the requirements of both sec. 44AA and 44AB in respect of his other
businesses. Further to note that in computing the monetary limits u/s 44AA and 44AB, the gross receipts or
income from the said business shall be excluded.
8. Effect if assessee declares lower income: An assessee can declare his income lower than the estimated
income as per provision of this section. In such case he will have to
¾ Maintain books of account and other documents as required u/s 44AA; and
¾ Get his accounts audited and furnish a report of such audit as prescribed u/s 44AB irrespective of amount
of turnover or gross receipts.
Note: Assessee can change his option from year to year.

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Illustration 84:
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2024, he owns 10 trucks (out
of which 6 are heavy good vehicles of (unladen weight of each is 20 ton)). On 2/5/2024, he sold one of the heavy
goods vehicles & purchased a light goods vehicle on 6th May, 2024. This new vehicle could however be put to use
only on 15-6-2024.
Compute the total income of Mr. Sukhvinder for the A.Y. 2025-26, taking note of the following data:
Particulars Amount Amount
Freight Charges collected 1,08,70,000
Less: Operational expenses 99,25,000
Depreciation as per Sec. 32 1,85,000
Other Office expenses 15,000 1,01,25,000
Net Profit 7,45,000
Other business and non-business income 70,000
Solution
Alternative 1) Direct estimation of income u/s 44AE
Vehicle No. of vehicle Details Amount
Light 4 ` 7,500 × 4 vehicles × 12 months 3,60,000
Heavy 5 ` 1,000 × 5 vehicles × 12 months × 20 ton 12,00,000
Heavy 1 ` 1,000 × 1 vehicle × 2 months × 20 ton
# 40,000
Light 1 ` 7,500 × 1 vehicles × 11 months
# 82,500
Income from business of plying goods carriage 16,82,500
Add: Other business and non-business income 70,000
Total Income 17,52,500
#
Income shall be calculated from the month when assessee acquired the property whether it has been put to use or
not. For this purpose, any fraction of the month shall be considered as month.
Alternative 2) Computation of income as per the provision of sec. 28 to 38
Particulars Amount Amount
Freight charges collected 1,08,70,000
Less: Expenditure related to business
Operational expenses 99,25,000
Depreciation u/s 32 1,85,000
Other office expenses 15,000 1,01,25,000
Income from business of plying goods carriage 7,45,000
Add: Other business and non-business income 70,000
Total Income 8,15,000
Since Mr. Sukhvinder has lower taxable income in alternative 2 hence his total income is ` 1,15,000. But to claim
such lower income than the estimated income (computed in alternative 1) as per provision of section 44AE, he will
have to —
- Maintain books of account as required u/s 44AA; and - Get his accounts audited.

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2.3.67 Computation of income from construction and service contracts [Sec. 43CB]
The profits and gains arising from a construction contract or a contract for providing services shall be determined
on the basis of percentage of completion method in accordance with the ICDS.
Taxpoint:
� Profits and gains arising from a contract for providing services:

Case Method
Contract for providing services with duration of not more than 90 days Project completion method
A contract for providing services involving indeterminate number of acts over Straight line method
a specific period of time

 For the purpose of percentage of completion method:

¾ the contract revenue shall include retention money;
¾ the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or
capital gains.

2.3.68 Consequences of undisclosed income or investment

Following undisclosed income shall be charged to tax –

Section Conditions Tax Treatment

a. Any sum credited in the books of account of the
assessee; and
The sum so credited may be
Sec. 68 b. Assessee offers no explanation about the nature and charged to tax as the income of
Cash Credit source thereof (or the explanation offered by him
the assessee of that previous year.
is not satisfactory in the opinion of the Assessing
Officer)
Notes
¾ Where the assessee is a company, (not being a company in which the public are
substantially interested) and the sum so credited consists of share application money,
share capital, share premium or any such amount by whatever name called, any
explanation offered by such assessee-company shall be deemed to be not satisfactory,
unless:
– the person, being a resident in whose name such credit is recorded in the books of
such company also offers an explanation about the nature and source of such sum
so credited; and
– such explanation in the opinion of the Assessing Officer aforesaid has been found
to be satisfactory:
¾ Where the sum so credited consists of loan or borrowing or any such amount, by
whatever name called, any explanation offered by such assessee shall be deemed to be
not satisfactory, unless,—
– the person in whose name such credit is recorded in the books of such assessee also
offers an explanation about the nature and source of such sum so credited; and
– such explanation in the opinion of the Assessing Officer aforesaid has been found
to be satisfactory

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Section Conditions Tax Treatment

However, if the person, in whose name the sum (share application or loan or borrowing)
referred to therein is recorded, is a venture capital fund or a venture capital company as
referred to in sec.10(23FB), then the aforesaid notes are not applicable.

a. In a previous year the assessee has made investments

which were not recorded in the books of account;
Sec. 69 and Value of the investment may be
Unexplained b. Assessee offers no explanation about the nature deemed to be the income of the
investments and source of the investments (or the explanation assessee for such previous year.
offered by him is not satisfactory in the opinion of
the assessing officer)

a. In a previous year the assessee is found to be the

owner of any money, bullion, jewellery, or other
valuable article;
Sec. 69A The money and the value of such
b. Such money, bullion, jewellery, or other valuable
assets may be deemed to be the
Unexplained article is not recorded in the books of account; and
income of the assessee for such
money, etc. c. The assessee offers no explanation about the nature
previous year.
and source of acquisition of such assets (or the
explanation offered by him is not satisfactory in the
opinion of the Assessing Officer)
a. In a previous year the assessee has made investments
or is found to be the owner of any bullion, jewellery
Sec. 69B or other valuable article;
b. Assessing Officer finds that the amount expended
Amount of on making such investments or in acquiring such The excess amount may be
Investments, etc., bullion, jewellery or other valuable article exceeds deemed as income of the assessee
not fully disclosed the amount recorded in this behalf in the books of for such previous year.
in books of account maintained by the assessee; and
account c. The assessee offers no explanation about such
excess amount (or the offered explanation is not
satisfactory in the opinion of the AO)
a. In a previous year an assessee had incurred any
expenditure; and Amount incurred on such
Sec. 69C b. Assessee offers no explanation about the source of expenditure or part thereof, may
such expenditure or part thereof (or the explanation, be deemed to be the income of the
Unexplained
if any, offered by him is not satisfactory in the assessee for such previous year.
expenditure etc.
opinion of the Assessing Officer)
Note: The proviso to sec. 69C provides that notwithstanding anything contained in any
other provisions of the Act, such unexplained expenditure which is deemed to be the income
of the assessee shall not be allowed as a deduction in any year under any head of income.

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Section Conditions Tax Treatment

Amount so borrowed or repaid
Any amount is borrowed on a hundi from, or any shall be deemed to be the
amount due thereon is repaid to, any person otherwise income of the person borrowing
than through an account payee cheque. or repaying the amount for
the previous year in which the
Sec. 69D amount was borrowed or repaid
Amount borrowed as case may be.
or repaid on hundi Notes
� For avoiding double taxation, if in any case any amount borrowed on a hundi has been
taxed under this section, such person shall not be liable to tax again in respect of such
amount on repayment of such amount.
� Amount repaid shall include the amount of interest paid on the amount borrowed.
Income referred to in sec. 68 to sec. 69D shall be taxable @ 60% (+ SC @ 25% + cess)
Tax Rate without giving effect to any deduction in respect of any expenditure or allowance or set off
of any loss. [Sec. 115BBE]

2.3.69 Firm Assessment

Introduction
1. Under Income Tax Act, a partnership firm has a separate identity apart from its partner. It is taxed as a separate
entity at a flat rate of 30% + applicable surcharge + Health & Education cess @ 4%.
Taxpoint: Unless and until otherwise mentioned, a partnership firm shall include limited liability partnership.
Further, the word ‘Partner’ includes partner of a limited liability partnership.
2. The share of partner (member) in the income of the firm is not taxable in the hands of partners [Sec. 10(2A)].
3. As in case of any other assessee, income of the firm (including LLP) is also assessed under heads of income i.e.
‘Income from house property’, ‘Profits & gains of business or profession’, ‘Capital gains’ and ‘Income from
other sources’.
Taxpoint:
� A firm cannot have income under the head ‘Salaries’
� Registration of firm is not compulsory to assess a firm as such for income tax purpose.
Deduction u/s 40(b)
In case of computation of income under the head “Profits & gains of business or profession” a partnership firm
shall, apart from all deductions discussed in the said chapter, be further allowed deduction u/s 40(b) in respect of -
� interest to partner; and
� remuneration to partner.
Conditions: As per sec. 185, to claim deduction u/s 40(b), the firm shall have to fulfil the following conditions as
laid down u/s 184.
1. The partnership must be evidenced by an instrument [Sec. 184(1)(i)].
2. A certified copy of the instrument of partnership shall accompany the return of income of the year in which
assessment as a firm is first sought [Sec. 184(2)].

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3. The individual shares of the partners must be specified in the instrument. [Sec. 184(1)(ii)]
4. There is no failure as specified u/s 144 on part of the firm
Effect of non-fulfilment of above conditions: As per sec. 185, where a firm does not comply with the provisions
of sec. 184 for any assessment year, then no deduction by way of interest to partner or remuneration to partner
shall be allowed
Interest to partner
Interest to partners whether on capital or on loan is allowed as deduction.
Conditions
1. Interest must be authorised by the partnership deed.
2. Payment must pertain to a period after the partnership deed.
Deduction: Minimum of the following is allowed as deduction -
a. Actual interest given to partner as per deed.
b. 12% p.a. simple interest.
Illustration 85 :
Case Interest on capital Rate of interest Interest allowed Workings Disallowed
as per books of allowed to as per partnership amount
account partner deed
A 20,000 10% 10% Nil
B 30,000 15% 12% (` 30,000/15) * 3 6,000
C 30,000 15% Deed is silent Interest must be 30,000
given as per deed
D 30,000 20% 18% (` 30,000/20) * 8 12,000
E 30,000 15% 10% (` 30,000/15) * 5 10,000
F 30,000 30% 30% (` 30,000/30) * 18 18,000
Applicability of sec. 40(A)(2): Interest to partner paid at a rate higher than the normal market rate of interest shall
be governed by sec. 40(A)(2) and excess interest shall be disallowed.
Interest to representative partner
Meaning: Where an individual is a partner in a firm on behalf of or for the benefit of any other person, he is
termed as a representative partner.
Treatment: Interest to representative partner –
1. Governed by sec. 40(b): Interest paid by the firm -
� to such individual as partner in a representative capacity; and
� to the person so represented.
- shall be governed by sec. 40(b).
2. Not governed by sec. 40(b): Interest paid by the firm to such individual otherwise than as partner in a repre-
sentative capacity, shall not be governed by sec. 40(b) but by sec. 36(1)(iii).
Interest on drawings: Interest on drawings, charged by the firm from its partner(s), shall be treated as taxable
income.

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Remuneration to partner
Remuneration to a partner includes salary, fees, commission, bonus, etc.
Conditions: Remuneration is allowed subject to fulfilment of the following conditions:
1. Partner must be a working partner.
2. Remuneration must be authorised by the partnership deed.
3. Payment must pertain to a period after the partnership deed.
Working partner means an individual who is actively engaged in conducting the affairs of the business or profes-
sion of the firm. ‘Time devotion’ is not the key factor for deciding the status of partner as a working partner.
Deduction: Remuneration (in total) is allowed to the minimum of the following:
a. Actual remuneration allowed to all partners.
b. Maximum permissible limit u/s 40(b)(v) as discussed under:

Maximum permissible limit

Amount of book-profit1 Maximum remuneration allowed

In case of loss ` 3,00,000
In case of profit
First ` 6,00,000 90% of book profit or ` 3,00,000, whichever is higher
On balance book-profit 60% of next book profit
1.
Computation of Book Profit
Step 1: Find out the net profit of the firm as per Profit & Loss A/c
Step 2: Make adjustment as per sec. 28 to 44DB (including adjustment for interest on partner’s capital)
Step 3: Add remuneration to partner, if debited to the Profit & Loss A/c
Step 4: Subtract unabsorbed depreciation but do not subtract brought forward business losses. The resultant figure
is book profit.
Note: Due to subtraction of unabsorbed depreciation the residual profit should not be less than the brought forward
losses, which are to be set-off in the current year.
Notes :
� Income from house property, Income from other sources and Capital gains do not form part of book profit.
� Deduction under chapter VIA (i.e. 80C to 80U) shall be ignored for this purpose.
Illustration 86 :
Uttar and Dakshin, partners of PP Traders, furnishes the following details –
Profit and loss account for the year ended 31-3-2025
Particulars Amount Particulars Amount
Bonus paid to employee 50,000 Gross Profit 20,00,000
Interest on loan taken from bank 45,000 Interest on drawings
Other Expenses 40,000 Uttar 2,000

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Direct Taxation

Salary to partners Dakshin 3,000

Uttar 4,88,000
Dakshin 9,76,000
Interest on capital @ 15%
Uttar 4,500
Dakshin 6,000
Depreciation 40,000
Net profit 3,55,500
20,05,000 20,05,000
Additional information
1. Depreciation for the year allowed u/s 32 is ` 30,000.
2. During the last year, firm has incurred loss of ` 17,00,000 (which includes unabsorbed depreciation of `
1,00,000).
3. Interest on loan taken from bank is yet to be paid. Compute total income of firm.
Solution :
Working 1 Computation of remuneration allowed to the partners
Particulars Details Amount
Profits and gains of business or profession
Net profit as per Profit & loss account 3,55,500
Add: Expenditure disallowed but debited in P/L A/c
Salary to partners 14,64,000
Interest on capital (in excess of 12%) [(` 4,500 + ` 6,000)/15 × 3] 2,100
Depreciation 40,000
Interest on loan taken from bank is disallowed u/s 43B 45,000 15,51,100
19,06,600
Less: Expenditure allowed but not debited in P/L A/c
Depreciation 30,000
18,76,600
Less: Unabsorbed Depreciation (allowed to the extent that the remaining book profit is
not less than brought forward business losses) 1,00,000
Book profit 17,76,000
Remuneration paid to the partners (being minimum of the following)
- Actual remuneration 14,64,000
- Maximum remuneration u/s 40(b) [` 6,00,000 × 90% + ` 11,76,600 × 60%] 12,45,960 12,45,960

Computation of total income of PP Traders for A.Y. 2025-26

Particulars Amount
Book Profit before adjusting unabsorbed depreciation 18,76,600
Less: Salary to partner (as computed above) 12,45,960
6,30,640

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Less: Brought forward business loss 6,30,640

Total Income Nil
Remaining brought forward loss ` 10,69,360 & unabsorbed depreciation ` 1,00,000 shall be carried forward.
Illustration 87 :
How shall your answer differ if brought forward loss is `18 lacs (which includes unabsorbed depreciation of `2 lac)
Solution :
Computation of remuneration allowed to the partners
Particulars Amount Amount
Net profit as per profit and loss account 3,55,500
Add: Expenditure disallowed but debited in P/L Account
Salary to partners 14,64,000
Interest on capital (in excess of 12%) [(` 4,500 + ` 6,000)/15 * 3] 2,100
Depreciation 40,000
Interest on loan taken from bank as disallowed u/s 43B 45,000 15,51,100
19,06,600
Less: Expenditure allowed but not debited in P/L Account
Depreciation 30,000
18,76,600
Less: Unabsorbed Depreciation (allowed to the extent that the remaining book profit 76,600
is not less than brought forward business losses)
Book profit 18,00,000
Remuneration paid to the partners (being minimum of the following)
- Actual remuneration 14,64,000
- Maximum remuneration u/s 40(b) [` 6,00,000 * 90% + ` 12,00,000 * 60%] 12,60,000 12,60,000
Computation of total income of PP Traders for A.Y. 2025-26
Particulars Amount
Book Profit before adjusting unabsorbed depreciation 18,76,600
Less: Salary to partner (as computed above) 12,60,000
6,16,600
Less: Brought forward business loss 6,16,600
Total Income Nil
Remaining brought forward loss ` 11,83,400 & unabsorbed depreciation ` 2,00,000 shall be carried forward.
Remuneration to a representative partner
Remuneration to a representative partner shall be taxable in the hands of such partner and not in hands of organi-
zation so represented. However, provision of sec. 40(b) will be applicable.
Treatment in the hands of partner
Share of profit: Partners’ share in the total income of the firm is exempt in the hands of partner [Sec. 10(2A)]. In-
come of a firm shall be taxed in hands of firm only and the same can under no circumstances be taxed in hands of
its partners. The entire profit credited to the partner’s account in the firm would be exempt from tax in hands of such

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partners, even if the income chargeable to tax becomes Nil in the hands of the firm on account of any exemption of
deduction as per provisions of the Income-tax Act.
Interest and remuneration to partner: Interest and remuneration to partner shall be taxable in the hands of part-
ner, to the extent it is exempted in the hands of firm.
Example: A, B & C are partners in ABC & Co. Interest on capital allowed @ 16% to A ` 16,000, B ` 8,000 and
C ` 32,000. Interest treatment in the hands of firm is as under –

Partner Allowed @ 12% Remaining Disallowed Business Income of the Partner

A 12,000 4,000 12,000
B 6,000 2,000 6,000
C 24,000 8,000 24,000
Example: A, B & C are partners in ABC & Co which has sustained a loss of ` 4,00,000 during the previous year.
Remuneration paid to A ` 1,50,000, B ` 2,00,000 and C ` 1,00,000. Since the firm is running in loss hence the
maximum remuneration allowed to the firm is ` 1,50,000. In such case, taxable amount in hands of partner shall be
the proportionate amount of remuneration allowed in hands of firm, calculated as under:

Partner Workings Taxable remuneration

A 1,50,000 / 4,50,000 × 3,00,000 1,00,000
B 2,00,000 / 4,50,000 × 3,00,000 1,33,333
C 1,00,000 / 4,50,000 × 3,00,000 66,667
General note related to firm Assessment
Effect of registration of firm: Registration of firm is not compulsory to assess a firm as such for income tax pur-
pose.
Change in constitution or profit share ratio: As per sec.184(3), a firm shall be assessed as firm for the purposes
of this Act, if there is no change in -
� the constitution of the firm1.
� profit sharing ratio.
Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised
instrument of partnership (partnership deed) along with the return of income of the relevant assessment year [Sec.
184(4)].
Note: In case of mere change in remuneration to partner or interest to partner, the revised instrument should be
submitted to claim benefit u/s 40(b). However, if the revised instrument has not been filed then the interest and
remuneration shall be allowed as per the old instrument.
1.
Change in the constitution of the firm means —
� one or more of the partners cease to be partner(s); or
� one or more new partners are admitted
Carry forward & Set-off of loss of Firm on change in constitution of firm [Sec.78]: Where a change occurs
in the constitution of firm, on account of retirement or death of a partner, the proportionate loss of the retired or
deceased partner shall not be carried forward. However, this section shall not apply in case of unabsorbed depre-
ciation.

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General Illustrations
Illustration 88:
Mr. Sunil is a practicing Chartered Accountant. He also runs a private coaching institute. His bank accounts for the
year ended 31/3/2025 is given below:

Receipts ` Payments `
To Balance b/f 20,000 By Office expenses 18,000
To Audit fees 22,00,000 By Municipal tax on property 800
To Income from other professional work 1,00,000 By Coaching expenses 800
To Coaching fees 1,200 By Personal expenses 5,000
To Interest on Investment 2,000 By Membership fees 500
To Examiner’s fees 1,000 By Life insurance premium 13,000
To Rent from property 5,000 By Income tax 5,000
By Motor Car purchased 1,80,000
By Motor Car expenses 10,200
By Insurance of property 1,600
By Balance c/d 20,94,300
23,29,200 23,29,200

Additional Information
a. 20% of motor car expenses is in respect of profession.
b. Depreciation allowance for motorcar is ` 27,000, if wholly used for profession.
c. Outstanding fees on 31-3-2025 ` 2,000. Whereas ` 500 receivable from Mita is considered as bad.
d. Outstanding fees of P.Y. 2021-22 ` 10,000 received during the year, which is included in the audit fees.
e. Office expenses include payment of ` 2,000 incurred during the previous year 2023-24.
Compute his gross total income for the A.Y. 2025-26 assuming he maintains accounts on cash basis.
Solution :
Computation of total income of Mr. Sunil for the A.Y. 2025-26

Particulars Workings Details Details Amount

Income from house property
Gross Annual Value Rent received 5,000
Less: Municipal tax 800
Net Annual Value 4,200
Less: Deduction u/s
24(a) Standard Deduction 30% of NAV 1,260
24(b) Interest on loan Nil 1,260 2,940

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Particulars Workings Details Details Amount

Profits & gains of business or profession
Audit fees 22,00,000
Income from other professional work 1,00,000 23,00,000
Less: Expenses allowed
Office expenses 18,000
Membership fees 500
Motor car expenses 20% of expenses 2 2,040
Depreciation on motor car 20% of depreciation 2 5,400 25,940 22,74,060
Income from other sources
Interest on investment 2,000
Coaching fees 1,200
Less: Coaching expenses 800 400
Examiners’ fees 1,000 3,400
Gross Total Income 22,80,400

Notes :
1. Insurance premium on property is not deductible from income from house property.
2. As 20% use of motor car is related to professional purpose, hence as per sec. 38 expenditure and depreciation
is apportioned.
3. Payment of LIC premium is a personal expense. However, deduction u/s 80C is available.
4. Income tax is specifically disallowed u/s 40(a).
5. As per sec. 145, income chargeable under the head “Profits & gains of business or profession” shall be
computed only in accordance with the method of accounting regularly followed by the assessee. In this case,
assessee follows cash system of accounting.

Illustration 89:
From the following particulars of Shri Khote for the year ending 31st March, 2025, find out his taxable income from
business for the assessment year 2025-26:

Particulars ` Particulars `
To Opening Stock 1,20,000 By Sales 2,14,20,000
To Purchases 2,10,00,000 By Profit on sale of import licence 5,000
To Salaries 25,000 By Gift received 24,000
To Legal Expenses 10,000 By Closing Stock 2,00,000
To Bad Debts 5,000
To Rent 50,000
To Interest on loan 2,500

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 Heads of Income

Particulars ` Particulars `
To Depreciation 15,000
To Income tax paid 2,000
To Outstanding Customs Duty 25,000
To Advertisement 2,000
To Legal expenses 12,000
To Contribution towards URPF 5,000
To General expenses 17,500
To Traveling expenses 1,00,000
To Net Profit 2,58,000
2,16,49,000 2,16,49,000

In computing the income, the following facts are to be taken into consideration:

1. Interest on loan is paid to brother of Shri Khote for loan taken for payment of advance income tax.

2. During the previous year 2020-21, assessee had claimed `45,000 as bad debt out of which only ` 35,000 was
allowed. During the previous year, he recovers ` 25,000.

3. Contribution towards unrecognised provident fund was paid within time.

4. Legal expenses include ` 2,000 paid for preparation of income tax return.

5. Stock is undervalued by 10%.

6. Gift received was given by a supplier for achieving target sale.

7. Outstanding customs duty has been paid on 31-12-2025.

8. During the previous year, he comes to know that his former employee had embezzled cash of `5,000 on 31-
3-2024, which was not accounted for.

9. Traveling expenses include ` 50,000 being cost of trip to Singapore by an employee for 10 days. However,
only 8 days of trip is useful to business and 2 days has been allowed as holiday to employee.

10. Rent includes expenditure on extension of shed on rented building ` 26,000. However, such extension was
completed on 1-5-2025 with total cost of ` 50,000.

11. General expenses includes –

¾ Salary of `1,200 paid to domestic servant.

¾ Compensation of ` 2,000 paid for retrenchment of an employee.

Compute his business income for the A.Y. 2025-26

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Solution :
Computation of Profits and gains of business or profession of Shri Khote for the A.Y. 2025-26

Particulars Notes Details Amount

Net profit as per Profit and Loss A/c 2,58,000
Add: Expenditure disallowed but debited in P/L A/c
Income tax paid 1 2,000
Outstanding Customs Duty 2 25,000
Contribution towards unrecognised provident fund 3 5,000
Interest on loan 4 2,500
Expenditure on extension of building shed 5 26,000
Salary paid to domestic servant 6 1,200
Add: Income taxable but not credited to P/L A/c
Recovery of bad debts [` 25,000 – (` 45,000 – ` 35,000)] 7 15,000 76,700
3,34,700
Less: Expenditure allowed but not debited to P/L A/c
Embezzlement by employee 8 5,000
3,29,700
Adjustment for valuation of stock
Add: Under valuation of closing stock 12 22,222
Less: Under valuation of opening stock 13 13,333 8,889
Profits and gains of business or profession 3,38,589

Notes :
1. Income tax is specifically disallowed u/s 40(a).
2. Customs Duty paid after due date of filing of return shall not be allowed as deduction [Sec. 43B]
3. Contribution to unrecognised provident fund is disallowed.
4. Interest on loan taken for payment of advance tax is disallowed.
5. Extension of building shed is an expenditure of capital nature, hence disallowed u/s 30.
6. Any expenditure of personal nature is disallowed.
7. As per sec. 41(4), where a deduction has been allowed in respect of bad debt or part of debt u/s 36(1)(vii), then
if the amount subsequently recovered on any such debt or part is greater than the difference between the debt
or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or
profession.
8. Loss by embezzlement of cash by employee is allowed as deduction in the year in which such fact was known
to the assessee.

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9. Legal expenditure for preparation of income tax return is allowed expenditure u/s 37(1).
10. Gift received for achieving target-sale is perquisite related to business and shall be taxable u/s 28.
11. Traveling expenditure shall be fully allowed as deduction, as trip was for 10 days out of which 8 days spent
for business purpose and remaining 2 days trip shall be treated as staff welfare expenditure being allowed u/s
37(1).
12. Under valuation of closing stock
Actual value of closing stock (` 2,00,000/90%) = ` 2,22,222
Under valuation of closing stock is 10% of ` 2,22,222 = ` 22,222
13. Under valuation of opening stock
Actual value of opening stock (` 1,20,000/90%) = ` 1,33,333
Under valuation of opening stock is 10% of `1,33,333 = ` 13,333

Illustration 90:
During the previous year 2024-25, profit and loss account of Shri Raj, proprietor of Raj Enterprises engaged in the
business of readymade garments, shows profits of ` 1,50000. With the following information, compute his taxable
income from business –
a. Interest on capital ` 5,000
b. Purchases include goods of `12,000 from his younger brother in cash. However, market value of such goods
is ` 9,000.
c. Interest paid outside India ` 1,00,000 without deducting tax at source.
d. Penalty paid to Government for non-filing of GST return ` 5,000
e. Penalty paid to customer for non-fulfilling of order within time ` 10,000
f. Bad debts ` 1,00,000. Money has been advanced for purchase of Building.
g. Revenue expenditure on promoting family planning among employees `10,000.
h. Premium paid on health of employees ` 6,000 in cash
i. Premium paid on health of his relatives ` 6,000 in cheque
j. Employer’s contribution to RPF ` 12,000. One-half of the amount is paid after due date as per relevant Act but
before 31-7-2025.
k. Employees contribution to RPF ` 10,000. ½ of the amount is paid after due date as per relevant Act.
l. Interest on late payment of professional tax ` 1,000 (yet to be paid)
m. Interest on loan from State Bank of India ` 10,000 (` 5,000 is not paid till due date of filing of return)
n. Interest on late refund from income tax department ` 500
o. Sale includes sale to Raj ` 10,000. (Cost of such goods ` 8,000; Market value of such goods ` 12,000)
p. He received ` 80,000 from a debtor at a time in cash.
q. Recovery of bad debt ` 10,000 (out of which ` 8,000 was allowed as deduction during A.Y.2020-21)
r. Depreciation (being not debited in accounts) ` 20,000 allowed as deduction u/s 32

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Solution :
Computation of Profits and gains of business or profession of Shri Raj for the A.Y. 2025-26

Particulars Note Details Amount

Net profit as per Profit and Loss account 1,50,000
Add: Expenditure disallowed but debited in P/L A/c
Interest on capital 1 5,000
Payment to relative in excess of market value of goods 2 3,000
Interest paid outside India without deducting tax at source 3 1,00,000
Penalty paid to government for non-filing of GST return 4 5,000
Bad debt 6 1,00,000
Premium paid on health of employees in cash 8 6,000
Premium paid on health of his relatives in cheque 9 6,000
Employees contribution to RPF 11 5,000
Interest on loan from State Bank of India 13 5,000
Cost of goods sold to himself 14 8,000 2,43,000
3,93,000
Less: Expenditure allowed but not debited in P/L A/c
Depreciation u/s 32 20,000
Less: Income not taxable but credited to P/L A/c
Sa