LESSON 1 - School of Open Learning · PDF fileLESSON 1 BASIC CONCEPTS Naveen Mittal ... income from business or income from other sources, the taxability would depend upon the method

2

LESSON 1

BASIC CONCEPTS Naveen Mittal

The purpose of this chapter is to make the students familiar with the common terms and concepts

used in the Income-tax Act, 1961. After reading this chapter, students would be able to

understand the common terms used in day-to-day transactions relating to income tax.

Definition of “Income” [Sec. 2(24)] Under section 2(24), the term “income” specifically includes the following

• Profits and gains;

• Dividend;

• Voluntary contributions received by a trust in the following cases - Such contribution is received by a trust created wholly or partly for charitable or

religious purposes; or

- Such contribution is received by a scientific research association; or

- Such contribution is received by any fund or institution established for charitable

purpose and notified under section 10(23C)(iv)/ (v); or

- Such contribution is received by any university or other educational institution or

hospital referred to in section 10(23C)(iiiad)/ (vi)/ (iiiea)/ (iva); or

- Such contribution is received by an electoral trust.

• The value of any perquisite or profit in lieu of salary under section 17(2) and 17(3) in the

hands of employee;

• Any special allowance or benefit, other than the perquisite included under the point given

above, specifically granted to the assessee to meet expenses wholly, necessarily and

exclusively for the performance of the duties of and office or employment;

• City compensatory allowance/ dearness allowance;

• The value of any benefit or perquisite, whether convertible into money or not, obtained

from a company either by a director or by a person who has a substantial interest in the

company, or by a relative of the director or such person, and any sum paid by any such

company in respect of any obligation which, but for such payment, would have been

payable by the director or other person aforesaid;

• The value of any benefit or perquisite, whether convertible into money or not, obtained

by any representative assessee (like a trustee appointed under a trust);

• Capital gains;

• The profits and gains of any business of insurance carried on by a mutual insurance

company or by a co-operative society;

• The profits and gains of any business of banking (including providing credit facilities)

carried on by a co-operative society with its members;

• Any winnings from lotteries, crossword puzzles or races including horse race (not being

income from the activity of owning and maintaining race horses) or card game and other

game of any sort or from gambling or betting of any form or nature;

• Employees contribution towards provident fund Any sum received by an employer from his employees as employees’ contribution to the

following is treated as “income” of the employer

- Employees’ contribution to any provident fund (recognized or unrecognized)

- Employees contribution to superannuation fund

- Employees contribution to any fund set up under the provisions of the Employees’

State Insurance Act, 1948

3

- Employees contribution to any other fund for the welfare of employees

• Any sum received under a keyman insurance policy;

• Amount exceeding 50,000 by way of gift or property subject to the conditions of

section 56(2)(vi) and (vii). Concept of “Income”

The definition of the term “income” in section 2(24) is inclusive and not exhaustive. Therefore,

the term “income” not only includes those things which are included in section 2(24) but also

includes other things. Further, it is not the gross receipts but only the net receipts arrived at after

deducting the related expenses incurred in connection with earning such receipts that have made

the base of taxation.

Following are some of the important principles/ characteristics which explain the importance

of income for income-tax purposes

a. Regularity of income- Income connotes periodical monetary return coming in with some

sort of regularity or expected regularity from definite sources. However, this does not

mean that income which does not arise regularly will not be treated as income for tax

purposes, e.g., winnings from lotteries.

b. Form of income- Income may be received by the assessee in cash or kind. When income

is received in non-cash form i.e., in kind, its valuation will be made according to the rules

prescribed in the Income-tax rules. If, however, there is no prescribed value given in the

rules, valuation thereof is made on the basis of market value.

c. Illegal income- The income-tax law does not make any distinction between income

accrued or arisen from a legal source and income tainted with illegality. Even illegal

income is taxed just like any legal income.

d. Disputed income- Income-tax assessment cannot be held up or postponed (for the

assessment of the income in the hands of the recipient) merely because of existence of a

dispute regarding the title of income.

e. Diversion of income Vs. Application of income- Any expenditure/ investment, after

income is received, is an application of income. “Income” under the Income-tax Act,

which is chargeable to tax, is income before application of income; so such income is

chargeable to tax in the hands of the assessee. Any expenditure/ investment out of such

income is deductible only if it is permitted by a provision under the Income-tax Act or

Income-tax Rules. “Diversion of income” is where by an obligation, income is diverted to some other

person. When an assessee on behalf of some other person receives income and later on it

is diverted to such person, it is known as diversion of income and consequently, it is not

chargeable to tax.

f. Contingent income- A contingent income is not an income. Until the contingency has

happened, it cannot be assumed that income has accrued or arisen in the hands of the

assessee.

g. Basis of income- Income can be taxed on receipt basis or on accrual basis. In case of

income from business or income from other sources, the taxability would depend upon

the method of accounting adopted by the assessee whereas in other cases, it would

generally be taxed receipt or accrual basis, whichever happens earlier.

4

h. Income must come from outside- A person cannot make taxable profits out of a

transaction with himself. Income must, therefore, come from outside.

i. Income includes loss- While income, profits and gains represent “plus income”, losses

represent “minus income”.

j. Pin money- Pin money received by wife for her dress/ personal expenses and small

savings made by a woman out of money received from her husband for meeting

household expenses is not treated as income.

k. Award received by a sportsman- In the case of a sportsman, who is a professional, the

award received by him is in the nature of a benefit in exercise of his profession and,

therefore, it is chargeable to tax. In the case of non-professional sportsman, however, the

award received by him is in the nature of gift and/ or personal testimonial which is

taxable subject to the conditions of section 56(2)(vi) and (vii).

l. Revenue receipt Vs. Capital receipt- A revenue receipt is taxable as income unless it is

expressly exempt under the Act. On the other hand, a capital receipt is generally exempt

from tax unless it is expressly taxable.

Assessment year [Sec. 2(9)]

“Assessment year” means the period starting from April 1 and ending on March 31 of the next

year.

For instance, the assessment year 2011-12 which commenced on April 1, 2011, will end on

March 31, 2012.

Income of previous year of an assessee is taxed during the next following assessment year at the

rates prescribed by the relevant Finance Act.

Previous year [Sec. 3]

Income earned in a year is taxable in the next year. The year in which income is earned is known

as previous year and the next year in which income is taxable is known as assessment year.

For instance, for the assessment year 2011-12, the relevant previous year is 2010-11.

Previous year in the case of newly set-up business/ profession

In the case of a newly set-up business/ profession or in the case of a new source of income, the

first previous year commences on the date of setting up of the business/ profession or on the date

when the new source of income comes into existence and ends on immediately following

March 31. However, second and subsequent previous years are always financial years i.e., from

April to March.

For instance, if a new business is set up on January 2, 2011, then the first previous year for that

business will be the period starting from January 2, 2011 to March 31, 2011. Therefore, the first

previous year of a newly set-up business/ profession or a new source of income will be either 12

months or less than 12 months. It can never exceed a period of 12 months.

When income of previous year is not taxable in the immediately following assessment year The rule says the income of previous year is assessable as the income of the immediately

following assessment year or in other words, it can be said that income of previous year is

chargeable to tax in the next following assessment year.

The above rule, however, has certain exceptions which are given below

5

1. Income of non-resident from shipping- A non-resident who is carrying on a shipping

business and earns income from carrying passengers/ livestock/ mail/ goods from a port

in India, will be chargeable to income-tax before the ship is allowed to leave the Indian

port.

2. Income of persons leaving India either permanently or for a long period of time;

3. Income of association of persons or a body of individuals or an artificial judicial persons

formed for short duration;

4. Income of a person trying to alienate his assets with a view to avoiding payment of tax;

and

5. Income of a discontinued business.

In these cases, income of a previous year may be taxed as the income of the assessment year

immediately preceding the normal assessment year.

These exceptions have been incorporated in order to ensure smooth collection of income-tax

from the aforesaid taxpayers who may not be traceable if tax assessment procedure is postponed

till the commencement of the normal assessment.

Double role of financial year It can be said that a financial year plays a double role - it is a previous year as well as an

assessment year. For example, financial year 2011-12 is previous year for the income received or

accrued during April 1, 2011 to March 31, 2012. Also, financial year 2011-12 is the assessment

year for the income received or accrued in the immediately preceding previous year (i.e., April 1,

2010 to March 31, 2011).

Person [Sec. 2(31)]

The term “person” includes

• an individual;

• a Hindu undivided family (HUF), e.g., a joint family of A, Mrs. A and their sons B and

C;

• a company;

• a firm, e.g., AB & Co., firm of A and B;

• an association of persons (AOP) or a body of individuals (BOI), whether incorporated or

not, e.g., XYZ Group Housing Co-operative Society;

• a local authority, e.g., MCD; and

• every artificial juridical person not falling within any of the preceding categories, e.g.,

Delhi University

Assessee [Sec. 2(7)]

“Assessee” means a person by whom income-tax or any other sum of money is payable under the

Act. It includes

• every person in respect of whom any proceedings under the Act has been taken for the

assessment of his income or loss or the amount of refund due to him;

• a person who is assessable in respect of income or loss of another person;

• a person who is deemed to be an assessee, or an assessee in default under any provision

of the Act. A person is said to be an assessee in default if he/ she fails to comply with the

duties imposed upon him/ her under the Income-tax Act.

6

Miscellaneous points to be noted

1. Income-tax is an annual tax on income.

2. Tax rates are fixed by the annual Finance Act and not be the Income-tax Act. For

instance, tax rates for the assessment year 2011-12 are fixed by the Finance Act, 2011. If,

however, on the first day of April of the assessment year, the new Finance Bill has not

been placed on the statue book, the provisions in force in the preceding assessment year

or the provisions proposed in the Finance Bill before Parliament, whichever is more

beneficial to the assessee, will apply until the new provisions becomes effective.

3. Tax is levied on the “Total income” or “Net taxable income” of every assessee computed

in accordance with the provisions of the Act.

4. Total income is calculated in accordance with the provisions of the Income-tax Act, as

they stand on the first day of April of the assessment year. This above rule is applicable

only for the purpose of computing taxable income. If, however, an amendment is made

which is purely procedural (not for computing taxable income), then it is applicable from

the date of amendment.

Miscellaneous points regarding computation of “gross total income” 1. If income is not chargeable to tax, any expenditure for earning such income is not

deductible. From the assessment year 2007-08, the Assessing Officer will determine the

expenditure pertaining to tax-free income, in accordance with a method prescribed by

Central Board of Direct Taxes (CBDT).

2. Rules of set-off and carry forward of losses are applied before computation of gross total

income and after adding all the five heads of income.

Rounding-off of income [Sec. 288A]

The taxable income shall be rounded off to the nearest multiple of ten rupees and for this purpose

any part of a rupee consisting of paise shall be ignored.

For instance, if income comes out to be � 9,23,436, it will be treated as � 9,23,440. If income

comes out to be � 9,23,434, it will be treated as � 9,23,430. If income comes out to be �

9,23,435, it will be treated as �9,23,440.

Rounding-off of tax [Sec. 288B]

The amount payable by the assessee and the amount of refund due, under the provisions of the

Act shall be rounded off to the nearest multiple of ten rupees and for this purpose any part of a

rupee consisting of paise shall be ignored.

Exemption vs. Deduction

If an income is exempt from tax, it is not included in the computation of income. Exemption can

never exceed the amount of income. Deduction is generally given from income chargeable to tax.

Deduction can be less than or equal to or more than the amount of income. If amount deductible

is more than the amount of income, the resulting amount will be taken as loss.

Capital receipts vs. revenue receipts

• A receipt in lieu of source of income is a capital receipt. A receipt in lieu of income is a

revenue receipt. For instance, compensation for loss of employment is a capital receipt,

whereas compensation for temporary disablement is a revenue receipt.

• Lump sum payment, large payment or periodic payment is not relevant in determining

whether a receipt is capital or revenue in nature.

• Treatment of a receipt under company law is not relevant while deciding whether a

receipt is capital or revenue in nature under tax laws.

7

• The fact that the amount paid is not allowed as permissible deduction in the assessment

of a person making payment, cannot determine the character of receipt in the hands of the

recipient.

Relevance of method of accounting in computing income

Mainly there are two types of accounting methods – mercantile system and cash system. Income

chargeable under the head “Profits and Gains of business or profession” or “Income from other

sources” is to be computed in accordance with the method of accounting regularly employed by

the assessee.

In case of income chargeable under the heads “Salaries”, “Income from house property” and

“Capital gains”, method of accounting adopted by the assessee is not relevant in calculating

taxable income. For calculating taxable income under these heads, one has to follow the statutory

provisions of the Income-tax Act which expressly provide whether revenue (or expenditure) is

taxable (or deductible) on “accrual basis” or “cash basis”.

Computation of net taxable income and tax liability of an individual/ HUF

Computation of net taxable income of an individual/ HUF for the assessment year 2011-12

Particulars Amount

Income under the head “Salaries” XX

Income under the head “House Property” XX

Income under the head “Profits and gains of business or profession” XX

Income under the head “Capital Gains” XX

Income under the head “Income from other sources” XX

Gross total income XX

Less Deductions under sections 80C to 80U XX

Net taxable income XX

Computation of tax liability of an individual/ HUF for the assessment year 2011-12

Particulars Amount

Tax on net taxable income XX

Add Surcharge XX

Total XX

Add Education Cess XX

Add Secondary and Higher Education Cess XX

Total tax liability XX

Less Pre-paid taxes XX

Net tax payable XX

Tax slabs for an individual/ HUF for the assessment year 2011-12

Situation 1 For resident women (who is below 65 years on the last day of the previous

year 2010-11)

Annual net taxable income Tax

Up to � 1,90,000 Nil

1,90,001 – �5,00,000 10% of income exceeding � 1,90,000

5,00,001 – �8,00,001 �31,000 + 20% of income exceeding �

5,00,000

Above �8,00,000 �91,000 + 30% of income exceeding �

8,00,000

8

Situation 2 For resident senior citizens (who are 65 years or more of age at any time

during the previous year 2010-11)


Up to �2,40,000 Nil

�2,40,001 – �5,00,000 10% of income exceeding �2,40,000

5,00,001 – 8,00,001 �26,000 + 20% of income exceeding �

5,00,000

Above �8,00,000 86,000 + 30% of income exceeding�8,00,000

Situation 3 For other individuals


Up to �1,60,000 Nil

1,60,001 – �5,00,000 10% of income exceeding �1,60,000

5,00,001 –�8,00,001 34,000 + 20% of income exceeding �5,00,000

Above �8,00,000 94,000 + 30% of income exceeding �8,00,000

Surcharge for an individual/ HUF for the assessment year 2011-12

Nil

Education cess for an individual/ HUF for the assessment year 2011-12

2% of income-tax irrespective of any income

Secondary and Higher education cess for an individual/ HUF for the assessment year 2011-

12


Tax slab for FIRM for the assessment year 2011-12

Income of a firm is taxable at the rate of 30%.

Surcharge for FIRM for the assessment year 2011-12

Nil

Education cess for FIRM for the assessment year 2011-12


Secondary and Higher education cess for FIRM for the assessment year 2011-12


References

1. Singhania, Vinod. K. and Singhania, Monica, “Students Guide to Income-tax”, Taxmann

Publications Pvt.Ltd. (latest edition).

2. Ahuja, Girish and Gupta, Ravi, “Simplified Approach to Income-tax”, Flair Publications

(latest edition).

3. Chandra, Mahesh and Shukla, D.C., “Income-tax Law and Practice”, Pragati

Publications (latest edition).

9

QUESTIONS

Case 1

Mr. X, a senior citizen (age 67 years), has an income of � 10,00,000 in the assessment year

2011-12. How much will be his tax liability.

Solution

Tax on 10,00,000 is calculated as follows

Up to 2,40,000 Nil

2,40,001 to 5,00,000 @ 10% i.e., 26,000

5,00,001 to 8,00,000 @ 20% i.e., 60,000

8,00,001 to 10,00,000 @ 30% i.e., 60,000

Total tax 1,46,000

Add Education cess @ 2% 2,920

Add SHEC @ 1% 1,460

Total tax payable 1,50,380

Case 2

Mrs. X, age 57 years, has an income of �10,00,000 in the assessment year 2011-12. How

much will be her tax liability.

Solution


Up to 1,90,000 Nil

1,90,001 to � 5,00,000 @ 10% i.e., 31,000

5,00,001 to � 8,00,000 @ 20% i.e., 60,000

8,00,001 to � 10,00,000 @ 30% i.e., 60,000

Total tax 1,51,000


Add SHEC @ 1% 1,510


Case 3

Mr. X, age 57 years, has an income of �10,00,000 in the assessment year 2011-12. How much

will be his tax liability.

Solution


Up to 1,60,000 Nil

1,60,001 to 5,00,000 @ 10% i.e., 34,000

5,00,001 to 8,00,000 @ 20% i.e., 60,000

8,00,001 to 10,00,000 @ 30% i.e., �60,000

Total tax 1,54,000


Add SHEC @ 1% 1,540


10

Case 4

X established a new business on October 13, 2010. What is the previous year for the assessment

year 2011-12?

Solution

For the assessment year 2011-12, previous year starts from October 13, 2010 and ends on March

31, 2011.

Case 5

X joins an Indian company on December 15, 2010. Prior to December 15, 2010, he was not in

employment. He has no other source of income. What are the previous years for the assessment

years 2011-12 and 2012-13?

Solution

• For assessment year 2011-12, previous year starts from December 15, 2010 and ends on

March 31, 2011.

• For assessment year 2012-13, previous year starts from April 1, 2011 and ends on March

31, 2012.

Case 6

Compute the tax liability of X, a resident for the assessment year 2011-12 with the following

income details

Amount

Salary income 9,00,000

House property income 2,60,000

Short-term capital gain 90,000

Long-term capital gain 10,000

Winnings from lottery 5,00,000

Gross total income 17,60,000

Less Deductions under section 80C to 80U 1,00,000

Net taxable income 16,60,000

Solution

Tax Tax on LTCG (10,000 @ 20% under section 112) 2,000

Tax on Lottery (5,00,000 @ 30% under section 115BB) 1,50,000

Tax on remaining income

(16,60,000 – �10,000 – �5,00,000 i.e., �11,50,000)

[94,000 + 30% of (11,50,000 – �8,00,000)] 1,99,000

Total 3,51,000

Add Education Cess @ 2% of 3,51,000 7,020

Add Secondary and Higher Education Cess @ 1% of 3,51,000 3,510

Tax payable 3,61,170

Case 7

a. Mrs. X, age 36 years, has an income of �13,60,000 in the assessment year 2011-12. How

much will be her tax liability.

b. What would be the tax liability if Mrs. X is a non-resident for the assessment year 2011-

12?

11

Solution

a. Tax on 13,60,000 is calculated as follows

Up to 1,90,000 Nil

� 1,90,001 to 5,00,000 @ 10% i.e., 31,000

� 5,00,001 to 8,00,000 @ 20% i.e., 60,000

� 8,00,001 to 13,60,000 @ 30% i.e., 1,68,000

Total tax 2,59,000


Add SHEC @ 1% 2,590


b. Since Mrs. X is a non-resident, the basic exemption limit in her case shall be �1,60,000

instead of �1,90,000.


Up to 1,60,000 Nil

� 1,60,001 to 5,00,000 @ 10% i.e., 34,000

� 5,00,001 to 8,00,000 @ 20% i.e., 60,000

� 8,00,001 to 13,60,000 @ 30% i.e., 1,68,000

Total tax 2,62,000


Add SHEC @ 1% 2,620


Case 8

a. Mr. X, a senior citizen (age 67 years), has an income of � 16,70,000 in the assessment

year 2011-12. How much will be his tax liability.

b. What would be the tax liability if Mr. X is a non-resident for the assessment year 2011-

12?

Solution

a. Tax on 16,70,000 is calculated as follows

Up to 2,40,000 Nil

� 2,40,001 to 5,00,000 @ 10% i.e., 26,000

� 5,00,001 to 8,00,000 @ 20% i.e.,� 60,000

� 8,00,001 to 16,70,000 @ 30% i.e., 2,61,000

Total tax 3,47,000


Add SHEC @ 1% 3,470


b. Since Mr. X is a non-resident, the basic exemption limit in his case shall be �1,60,000

instead of � 1,90,000.


Up to 1,60,000 Nil

12

� 1,60,001 to 5,00,000 @ 10% i.e., 34,000

� 5,00,001 to 8,00,000 @ 20% i.e., 60,000

� 8,00,001 to 16,70,000 @ 30% i.e., 2,61,000

Total tax 3,55,000


Add SHEC @ 1% 3,550


Case 9

Mrs. X, a senior citizen (age 67 years), has an income of �20,50,000 in the assessment year

2011-12. How much will be her tax liability.

Solution


Up to 2,40,000 Nil

2,40,001 to 5,00,000 @ 10% i.e., 26,000

5,00,001 to 8,00,000 @ 20% i.e., 60,000

8,00,001 to 20,50,000 @ 30% i.e., 3,75,000

Total tax 4,61,000


Add SHEC @ 1% 4,610


13

LESSON 2

RESIDENTIAL STATUS AND ITS EFFECT ON TAX

INCIDENCE Naveen Mittal

Tax incidence of an assessee depends upon his residential status rather than on his citizenship.

Scope of total income/ Incidence of tax (Sec. 5)

Total income of an assessee cannot be computed unless we know his residential status in India

during the previous year. According to the residential status, the assessee can either be

a. Resident in India; or

b. Non-resident in India.

However, two types of categories of assessee (i.e., individual and HUF), if resident in India, will

be either

i. Resident and ordinarily resident in India; or

ii. Resident but not ordinarily resident in India. The following points should be noted in this regard

1. All taxable entities are divided in the following categories for the purpose of determining

residential status

• An individual;

• A Hindu undivided family;

• A firm or an association of persons;

• A joint stock company; and

• Every other person.

2. Residential status of an assessee is to be determined in respect of each previous year as it

may vary from previous year to previous year.

3. In view of section 6(5), if a person is resident in India for one of the sources of income,

he will be deemed to be resident in India for all other sources of income in the same

assessment year.

4. An assessee may enjoy different residential status for different assessment years.

5. It is not necessary that a person who is “resident” in India cannot become “resident” in

any other country for the same assessment year. A person may be resident in two (or

more) countries at the same time. It is, therefore, not necessary that a person who is

resident in India will be non-resident in all other countries for the same assessment year.

6. Whether an assessee is a resident or a non-resident is a question of fact and it is the duty

of the assessee to place all relevant facts before the income-tax authorities. How to determine residential Status of an individual (Sec. 6)

An individual may be resident or non-resident. Further, if an individual is resident, he may be

resident and ordinarily resident or resident but not ordinarily resident.

Following are the rules to determine the residential status of an individual

a. Resident and ordinarily resident (ROR)- Must satisfy at least one of the basic

conditions and both of the additional conditions

b. Resident but not ordinarily resident (RNOR)- Must satisfy at least one of the basic

conditions and one or none of the additional conditions

14

c. Non-resident (NR)- Must not satisfy any of the basic conditions

Basic conditions [Sec. 6(1)]

a. He is in India in the previous year for a period of 182 days or more; or

b. He is in India for a period of 60 days or more during the previous year and 365 days or

more during 4 years immediately preceding the previous year.

Exception

In the following two situations, basic condition (b) is not applicable 1. An Indian citizen who leaves India during the previous year

• for the purpose of employment outside India or

• as a member of crew of an Indian ship.

2. An Indian citizen or a person of Indian origin who comes on a visit to India during the

previous year.

Additional conditions [Sec. 6(6)] a. He has been resident in India in at least 2 out of 10 previous years immediately

preceding the relevant previous year.

b. He has been in India for a period of 730 days or more during 7 years immediately

preceding the relevant previous year.

Points to be noted

• For the first point of exception, the requirement is not leaving India for taking

employment outside India but leaving India for the purpose of employment (the

employment may be in India or outside India).

• A person is deemed to be of Indian origin if he, or either of his parents or any of his

grand-parents, was born in undivided India. It may be noted that grand-parents include

both maternal and parental grand-parents.

• Where a person is in India only for a part of a day, the calculation of physical presence in

India in respect of such broken period should be made on hourly basis. A total of 24

hours of stay spread over a number of days is to be counted as being equivalent to the

stay of one day. If, However, data is not available to calculate the period of stay of an

individual in India in terms of hours, then the day on which he enters India as well as the

day on which he leaves India shall be taken into account as stay of the individual in India.

How to determine the residential status of a HUF [Sec. 6(2)]- A Hindu undivided family (like

an individual) is either resident in India or non-resident in India. A resident Hindu undivided

family is either ordinarily resident or not ordinarily resident.

Following are the rules to determine the residential status of a Hindu undivided family-

a. A Hindu undivided family is said to be resident in India if control and management of its

affairs are situated –

• Wholly in India or

• Partly in India and partly outside India

A resident Hindu Undivided family is an ordinarily resident in India if karta or

manager of the family (including successive kartas) satisfies the two additional

conditions given above.

b. A Hindu undivided family is said to be non-resident in India if control and management

of its affairs are situated wholly out of India.

15

Control and management for this purpose refers to the decisions taken regarding affairs of the

HUF. The control and management is situated at a place where the head, the seat and the

directing powers are situated.

How to determine the residential status of firm and association of persons [Sec. 6(2)]

a. A partnership firm and an association of persons are said to be resident in India if control

and management of their affairs, during the relevant previous year, are situated –



b. A partnership firm and an association of persons are said to be non-resident in India if

control and management of their affairs, during the relevant previous year, are situated

wholly out of India.

Control and management for this purpose is usually situated at a place where the head, the

seat and the directing powers are situated. While in the case of a firm, control and management is

vested in partners, in the case of an association of persons it is vested in principal officer.

How to determine the residential status of a company [Sec. 6(3)]

a. An Indian company is always resident in India.

b. A foreign company is resident in India only if, control and management of its affairs,

during the relevant previous year, is situated wholly in India.

c. A foreign company is non-resident in India, if control and management of its affairs,

during the relevant previous year, is situated –

• wholly out of India or

• partly in India or partly outside India.

Control and management for this purpose refers to “head and brain” which directs the affairs

of policy, finance, disposal of profits and vital things concerning the management of a company.

Usually control and management of a company’s affairs is situated at a place where meeting of

its board of directors are held. Therefore, in the case of a foreign company, if all the meetings of

the Board of Directors are generally held in India and crucial decisions regarding the

management of the company are taken in India, then the foreign company shall be a resident in

India.

How to determine the residential status of every other person [Sec. 6(4)]

a. Every other person is resident in India if control and management of its affairs, during

the previous year, is situated –



b. Every other person is non-resident in India if control and management of its affairs,

during the previous year, is situated wholly out of India.

Relationship between residential status and incidence of tax (Sec. 5)

Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the

place and time of accrual or receipt of income.

Meaning of “Indian Income” Any of the following three is an Indian income

16

1. If income is received (or deemed to be received) in India during the previous year and at

the same time it accrues or arises (or is deemed to accrue or arise) in India during the

previous year.

2. If income is received (or deemed to be received) in India during the previous year but it

accures or arises (or is deemed to accure or arise) outside India during the previous year.

3. If income is received outside India during the previous year but it accrues or arises (or is

deemd to accrue or arise) in India during the previous year.

Meaning of “Foreign Income” If the following two conditions are satisfied, then such income is “foreign income” –

1. Income is not received (or not deemed to be received) in India and

2. Income does not accrue or arise (or is deemed to accrue or arise) in India.

Conclusions regarding taxability

1. Indian Income Indian income is always taxable in India irrespective of the residential

status of the taxpayer.

2. Foreign Income Foreign income is taxable in the hands of resident (in case of a firm,

an association of persons, a joint stock company and every other person) or resident and

ordinarily resident (in case of an individual and a Hindu Undivided Family) in India.

Foreign income is not taxable in the hands of non-resident in India.

In the hands of resident but not ordinarily resident taxpayer, foreign income is taxable

only in any of the following two situations –

a. If it is business income and business is controlled wholly or partly from India, or

b. If it is professional income and profession is set up in India.

In any other case (like salary, rent, interest etc.), foreign income is not taxable in the

hands of resident but not ordinarily resident taxpayers.

Points to be noted regarding the concept of “receipt of income”

Income received in India is taxable in all cases irrespective of residential status of an individual.

The following points should be noted in this regard

1. The term “receipt” of income refers to the first occasion when the recipient gets the

money under his control. Once an amount is received as income, any remittance or

transmission of the amount to another place does not result in “receipt” at the other place.

In other words, it can be said that an assessee after receiving an income outside India

cannot be said to have received the same again when he brings or remits the same to

India.

2. It is not necessary that income should be received in cash. Income may be received in

cash or in kind.

3. Receipt is not the sole test of chargeability to tax. If an income is not taxable on receipt

basis, it may be taxable on accrual basis.

4. It is not necessary that an income should be actually received in India in order to attract

tax liability. An income deemed to be received in India in the previous year is also

included in the taxable income of the assessee. The Act enumerates the following as

income deemed to be received in India –

a. Interest credited to recognized provident fund account of an employee in excess of

9.5%;

17

b. Excess contribution of employer in the case of recognized provident fund (i.e., the

amount contributed in excess of 12% of salary);

c. Transfer balance from the unrecognized fund to a recognized provident fund;

d. Contribution by the Central Government or any other employer to the account of an

employee under a notified pension scheme referred to in section 80CCD;

e. Tax deducted at source;

f. Deemed profit under section 41 and 59.

Points to be noted regarding the concept of “accrual of income”

Income accrued in India is chargeable to tax in all cases irrespective of residential status of an

assessee. Income is said to be received when it reaches the assessee; when the right to receive the

income becomes vested in the assessee, it is said to accrue or arise.

Points to be noted regarding the concept of “income deemed to accrue or arise in India” In some cases, income is deemed to accrue or arise in India under section 9 even though it may

actually accrue or arise outside India. Section 9 applies to all assessees irrespective of their

residential status and place of business.

The categories of income which are deemed to accrue or arise in India are as under –

1. Income from business connection in India If the following two conditions are satisfied, then the income which arises outside India

because of “business connection” in India, is deemed to accrue or arise in India-

a. The taxpayer has a “business connection” in India and

b. By virtue of “business connection” in India, income actually arises outside India.

Meaning of business connection

It includes a person acting on behalf of a non-resident and who performs any one or more

of the following –

• He exercises in India an authority to conclude contracts on behalf of the non-

resident (it does not cover only purchase of goods or merchandise for the non-

resident).

• He has no such authority but habitually maintains in India a stock of goods or

merchandise from which he regularly delivers goods or merchandise on behalf of

the non-resident.

• He habitually secures order in India (mainly or wholly) for the non-resident or for

non-residents under the same management.

2. Income through or from any property, asset or source of income in India 3. Income through the transfer of capital asset situated in India

4. Income under the head “Salaries”- Income of an individual which falls under the head

“Salaries” is deemed to accrue or arise in India if service is rendered in India. Any salary

payable for rest period or leave period which is both preceded and succeeded by service

in India, will also be regarded as salary earned in India.

5. Salary payable abroad by the Government to a citizen of India

6. Dividend paid by an Indian company- Any dividend paid by an Indian company

outside India is deemed to accrue or arise in India. In case of a company, other than an

Indian company, dividend shall be deemed to accrue or arise at a place where the register

of members is kept.

7. Income by way of interest- Interest income of the following types are deemed to accrue

or arise in India –

18

a. Received from Government Interest received from the Central Government or any State Government is deemed to

accrue/ arise in India in the hands of recipient.

b. Received from resident- Income received from a resident shall be deemed to accrue/

arise in India in the hands of recipient in all cases except in the following

• Interest received from a resident in respect of any debt incurred, or any money

borrowed and used by the payer of the interest, for the purpose of a business

or profession carried on by the payer outside India; and

• Interest received from a resident in respect of any debt incurred, or any money

borrowed and used by the payer of interest for the purpose of making or

earning any income from any source outside India.

c. Received from a non-resident- Interest received from a non-resident shall be

deemed to accrue/ arise in India in the hands of recipient if it is in respect of any debt

incurred, or money borrowed and used, for the purpose of a business or profession

carried on by the payer in India.

8. Income by way of royalty- Royalty income in the following situations is deemed to

accrue or arise in India in the hands of the recipient –

a. Received from Government- Royalty received from the Central Government or any

State Government is deemed to accrue/ arise in India in the hands of recipient.

b. Received from resident- Royalty received from a resident (except where the

payment is relatable to a business or profession carried on by the payer outside India

or to any other source of his income outside India) shall be deemed to accrue/ arise in

India in the hands of recipient.

c. Received from a non-resident- Royalty received from a non-resident (if the payment

is relatable to a business or profession carried on by the payer in India or any other

source of his income in India) is deemed to accrue/ arise in India in the hands of

recipient.

9. Income by way of fees for technical services- Income by way of “fess for technical

services” of the following types are deemed to accrue or arise in India in the hands of the

recipient

a. Received from Government- Fees for technical services received from the Central

Government or any State Government is deemed to accrue/ arise in India in the hands

of recipient.

b. Received from resident- Fees for technical services received from a resident (except

where the payment is relatable to a business or profession carried on by the payer

outside India or to any other source of his income outside India) is deemed to accrue/

arise in India in the hands of recipient.

c. Received from a non-resident- Fees for technical services received from a non-

resident (if the payment is relatable to a business or profession carried on by the payer

in India or any other source of his income in India) is deemed to accrue/ arise in India

in the hands of recipient.

References




(latest edition).



19

QUESTIONS

Case 1- Mr. A comes to India for the first time on January 11, 2010 for a period of 40 days.

Determine his residential status for the assessment year 2011-12.

Solution- Since Mr. A comes to India in the previous year 2010-11 for a period of only 40 days,

he does not satisfy any of the basic condition laid down in section 6(1). He is, therefore, non-

resident in India for the assessment year 2011-12.

Case 2- Mrs. A, an Indian citizen, leaves India, for the first time, on September 10, 2010, for the

purpose of employment outside India. Determine her residential status for the assessment year

2011-12.

Solution- For an Indian citizen who leaves India during the previous year for the purpose of

employment outside India, only basic condition number one i.e., the assessee must be present in

India for 182 days, is applicable.

Since she was present in India for the previous year 2010-11 for only 163 days

(30+31+30+31+31+10), she will be treated as non-resident in India for the assessment year

2011-12.

Case 3- X left India for the first time on November 21, 2007. During the financial year 2010-11,

he came to India once on May 20 for a period of 46 days. Determine his residential status for the

assessment year 2011-12.

Solution- He was present in India for a period of only 46 days during the previous year 2010-11

and thus, he does not satisfy any of the basic conditions. So, he would be treated as non-resident

for the assessment year 2011-12.

Case 4- Z, an American tourist, comes to India for the first time on June 17, 2010. He leaves

India on September 29, 2010. Determine his residential status for the assessment year 2011-12.

Does it make any difference if he comes to India on a business trip or if he is an Indian citizen?

Solution

Previous year 2010-11 105 [14+31+31+29]

Previous year 2009-10 Nil


and so on ……

He is non-resident for the assessment year 2011-12 as he does not satisfy any of the basic

condition. It does not make any difference if he comes on a business trip to India.

Further, it does not make any difference if he is an Indian citizen as far as the answer of non-

resident is concerned. But there is a difference in application of basic conditions as an Indian

citizen who comes on a visit to India during the previous has the option of only one basic

condition of 182 days to become a resident.

Case 5- X comes to India, for the first time on June 19, 2007. During his stay in India up to

November 15, 2010, he stays at Mumbai up to May 20, 2010 and thereafter remains in Kerala till

his departure from India. Determine his residential status for the assessment year 2011-12.

20

Solution

Previous year 2010-11 229 [30+31+30+31+31+30+31+15] us year 2010-

Previous year 2009-10 365 R

Previous year 2008-09 365 R

Previous year 2007-08 287 [12+31+31+30+31+30+31+31+29+31]

Following information is relevant in this case

1. He is present in India for a period of 229 days for the previous year 2010-11.

2. He was present in India for 1017 days during 7 years immediately preceding the relevant

previous year 2010-11. [365+365+287+0+0+0+0 =1017].

3. He is resident in the previous year 2009-10 and 2010-11 as he satisfies the first basic

condition for respective years.

Since X satisfies the basic condition and both of the additional conditions, he is resident and

ordinarily resident for the assessment year 2011-12.

Case 6- X, a foreign citizen, comes to India for the first time on July 12, 2010. On September 16,

2010, he leaves India for Burma on a business trip. He comes back on January 21, 2011. On

January 29, 2011, he leaves for UAE. Determine his residential status for the assessment year

2011-12. Does it make any difference if X is a person of Indian origin?

Solution

Previous year 2010-11 76 [20+31+16+9]


His residential status is non-resident for the assessment year 2011-12 because he does not satisfy

any of the basic condition.

It will not make any difference even if X is a person of Indian origin. In this case also, he would

become a non-resident for the assessment year 2011-12.

Case 7- X, a foreign citizen (not being a person of Indian origin), leaves India for the first time

in the last 32 years on October 25, 2008. During the calendar year 2009, he comes to India on

July 1 for a period of 43 days. During the calendar year 2010, he does not visit India at all but

comes to India on January 19, 2011. Determine the residential status of X for the assessment year

2011-12.

Solution

Previous year Number of Days

2010-11 72 [13+28+31]

2009-10 43 NR

2008-09 208 [30+31+30+31+31+30+25] R

2007-08 366 R

2006-07 365

2005-06 365

2004-05 365

2003-04 366

21

Following information is relevant in this case

1. He is present in India for a period of 72 days for the previous year 2010-11 and 982

[43+208+366+365] days during 4 years immediately preceding the previous year 2011-

12.

2. He was present in India for 2078 days during 7 years immediately preceding the relevant

previous year 2010-11. [43+208+366+365+365+365+366 = 2078].

3. He is resident in the previous year 2008-09 and 2009-10 as he satisfies the first basic

condition for respective years.

He is resident and ordinarily resident for the assessment year 2011-12 as he satisfies one of the

basic and both of the additional conditions.

Case 8- X, an Indian citizen, who is appointed as senior research officer by the Government of

Ethopia, leaves India for the first time, on August 14, 2010 for joining his duties in Nigeria.

During the previous year 2011-12, he came to India for 154 days. Determine the residential

status of X for the assessment years 2011-12 and 2012-13.

Solution Previous year 2011-12 154

Previous year 2010-11 136 [30+31+30+31+14]

Previous year 2009-10 365



He is non-resident for the assessment year 2011-12 he does not satisfy the basic condition of 182

days. It is to be noted that an Indian citizen who leaves India for the purpose of employment

outside India during the previous year has only one basic condition available to become a

resident.

He is non-resident for the assessment year 2012-13 also he does not satisfy the basic condition of

182 days. It is to be noted that an Indian citizen who comes on a visit to India during the

previous year has only one basic condition available to become a resident.

Case 9- For the assessment year 2011-12, X is employed in India and receives �1,49,000 as

salary. His income from other sources includes –

a. Dividend received in Singapore on September 28, 2010 � 56,000 from a foreign

company

b. Share of profit received in Singapore on December 1, 2010 from a business situated in Sri

Lanka but controlled from India �75,000

c. Remittance from Singapore on March 15, 2011 out of past untaxed profit of 2004-05

earned and received there �80,000

Find out the gross total income of X for the assessment year 2011-12 if X is (a) Resident and

ordinarily resident; (b) Resident but not ordinarily resident and (c) Non-resident.

22

Solution

Computation of gross total income for the assessment year 2011-12

Particulars Amount � Amount Amount

1. Income received as well as accrued in

India

1,49,000 1,49,000 1,49,000

2. Dividend income (not a business

income ) received outside India from a

foreign company

56,000 ---- ----

3. Income from a business which is

situated outside India but controlled

from India

75,000 75,000 ----

4. Remittance of income [not taxable] ---- ---- ----

Gross total income 2,80,000 2,24,000 1,49,000

23

LESSON 3

INCOME EXEMPT FROM TAX Naveen Mittal

There are some incomes which do not form part of total income and thus, are also called as

income exempt from tax. Such exempted incomes are given under section 10 of the Income-tax

Act, 1961.

Some of those incomes are explained below

1. Agricultural income [Sec. 10(1)]- Agricultural income in India is totally exempt from

tax. However, such income is to be aggregated in case of certain assessees for the

purpose of determining rate of tax on non-agricultural income.

2. Receipts by a member from a HUF [Sec. 10(2)]- Any sum received by an individual as

a member of a Hindu Undivided Family either out of income of the family or out of

income of estate belonging to the family is exempt from tax.

3. Share of profit received by a partner from a firm [Sec. 10(2A)]- In case of a person

being a partner of a firm which is separately assessed as such, his/ her share in the total

income of the firm is exempt from tax.

4. Interest on Non-resident (External) Account [Sec. 10(4)]- In the case of an individual

who is not resident in India, any income by way of interest on money standing to his

credit in a Non-resident (External) account in any bank in India shall be exempt from tax

if certain conditions are satisfied.

5. Remuneration to persons who are not citizens of India [Sec. 10(6)]- In case of an

individual who is not a citizen of India, the following income shall be exempt from tax

a. Remuneration received by diplomats, etc.

b. Remuneration received by a foreign national as an employee of a foreign enterprise.

c. Non-resident employed on a foreign ship.

d. Remuneration of employee of foreign Government during his training in India.

6. Allowance or perquisites outside India [Sec. 10(7)]- Any allowances or perquisites

paid or allowed, as such, outside India by the Government to a citizen of India, for

rendering services outside India, are exempt.

7. Payments under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 [Sec.

10(10BB)]- Any payments made, under the above Act or any scheme made thereunder,

shall be exempt from tax in the hands of the recipient.

8. Exemption for compensation received or receivable on account of 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 shall be exempt from tax.

However, the exemption is not allowable in respect of amount received or receivable to

the extent such individual or his legal heir has been allowed a deduction under the

Income-tax Act on account of any loss or damage caused by such disaster.

9. Tax on non-monetary perquisites paid by employer [Sec. 10(10CC)]- The tax actually

paid by the employer on a perquisite provided to the employee [other than the perquisite

provided by way of monetary payment within the meaning of section 17(2)] shall be

exempt from tax in the hands of the employee.

10. Provident Fund [Sec. 10(11)]- Any payment from a provident fund to which the

Provident Fund Act, 1925 applies or from Public Provident Fund set up by the Central

Government shall be exempt from tax.

24

11. Educational scholarships [Sec. 10(16)]- Scholarships granted to meet the cost of

education are exempt from tax. In order to avail the exemption, it is not necessary that

scholarship should be financed by the Government.

12. Daily allowances of Members of Parliament [Sec. 10(17)]- The following incomes

shall be exempt from tax in the hands of the persons specified

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

under the Members of Parliament (Constituency Allowance) Rules, 1986;

c. Any constituency allowance received by any person by reason of his membership of

any State Legislature under any Act or Rules made by that State Legislature.

13. Pension received by certain awardees/ any member of their family [Sec. 10(18)]-

Any income by way of pension/ family pension received by an individual or any member

of his family shall be exempt from tax if such individual has been in the service of

Central/ State Government and has been awarded Param Vir Chakra or Maha Vir Chakra

or Vir Chakra or such other gallantry award as may be notified.

14. Exemption of the family pension received by the family members of armed forces

(including para-military forces) personnel killed in action in certain circumstances

[Sec. 10(19)]- Where the death of a member of the armed forces (including para-military

forces) of the Union has occurred in the course of operational duties, in such

circumstances and subject to such conditions as may be prescribed, the family pension

received by the widow or children or nominated heirs, as the case may be, shall be

exempt from tax.

15. Annual value of one palace of the ex-ruler [Sec. 10(19A)]- The ‘annual value’ in

respect of any one palace which is in occupation of an ex-ruler is exempt from tax,

provided such annual value was exempt before 28.12.1971 by virtue of any law or order

then prevailing.

16. Income of minor clubbed in the hands of a parent [Sec. 10(32)]- Under section

64(1A), the income of a minor child is includible in the total income of the parent under

the circumstances mentioned therein, section 10(32) provides that such parent in whose

income the minor’s income is included shall be entitled to exemption to the extent such

income does not exceed of 1,500 in respect of each minor child, whose income is so

includible. In other words, the exemption shall be allowed to the extent of the income of

each minor child included or 1,500 per child, whichever is less.

17. Capital gain on transfer of units of US-64 exempt if transfer takes place on or after

1-4-2002 [Sec. 10(33)]- Any income arising from the transfer of a capital asset, being a

unit of the Unit Scheme, 1964 where the transfer of such asset takes place on or after 1-4-

2002, shall be exempt from tax.

18. Dividend to be exempt in the hands of the shareholders [Sec. 10(34)]- Any dividend

declared, paid or distributed by a domestic company shall be liable to dividend

distribution tax @ 15% plus surcharge @ 10% plus education cess @ 2% plus secondary

and higher education cess @ 1% of the amount so declared, distributed or paid. Hence,

such dividend received by the shareholders shall be exempt from tax in their hands.

19. Income from units to be exempt in the hands of the unit-holders [Sec. 10(35)]- Like

dividends, income received on units of UTI (now known as specified undertaking and

specified company) and Mutual Funds covered under section 10(23D) shall be exempt

from tax in the hands of the unit-holders.

25

20. Exemption of long-term capital gain arising from sale of shares and units [Sec.

10(38)]- Any income arising from the transfer of a long-term capital asset, being an

equity share in a company or a unit of an equity oriented fund shall be exempt from tax

provided

a. Such equity shares are sold through recognized stock exchange, whereas units of

an equity oriented fund may either be sold through the recognized stock exchange

or may be sold to the mutual fund.

b. Such transaction is chargeable to securities transaction tax.

21. Exemption of amount received by an individual as loan under reverse mortgage

scheme [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 referred to in section 47(xvi)

shall be exempt from tax.

References

4. Singhania, Vinod. K. and Singhania, Monica, “Students Guide to Income-tax”,

Taxmann Publications Pvt.Ltd. (latest edition).

5. Ahuja, Girish and Gupta, Ravi, “Simplified Approach to Income-tax”, Flair




26

LESSON 4 and 5

INCOME UNDER THE HEAD “SALARIES” Naveen Mittal

Section 15, 16 and 17 of the Act deals with the computation of income under the head “Salaries”.

This chapter deals with the taxability of remuneration received by the employee from his/ her

employer.

Basis of charge of salary income [Section 15]- As per section 15, salary consists of

1. Any salary due from an employer (or a former employer) to an assessee in the previous

year, whether actually paid or not;

2. Any salary paid or allowed to him in the previous year by or on behalf of an employer (or

a former employer), though not due or before it became due; and

3. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an

employer (or a former employer), if not charged to income-tax for any earlier previous

year.

Basic rules and points

1. Employer-employee relationship- Payer and recipient must have an employer-employee

relationship. In other words, the amount received by an individual shall be treated as

salary only if the relationship between payer and payee is of an employer and employee

or master and servant.

For instance, a Member of Parliament or of State Legislature is not treated as an

employee of the Government. Salary and allowances received by him are, therefore, not

chargeable to tax under the head “Salaries” but are chargeable to tax under section 56

under the head “Income from other sources”.

2. Remuneration received (or due) during the previous year is chargeable to tax under the

head “Salaries” irrespective of the fact whether it is received from a former, present or

prospective employer.

3. Salary is taxable on receipt or due basis, whichever is earlier.

4. Foregoing of salary- Foregoing of salary is taxable. Such voluntary waiver or foregoing

by an employee of salary due to him is merely an application of income and is

nonetheless chargeable to tax.

5. Surrender of salary- If an employee (public sector or private sector) opts to surrender

his salary to the Central Government under section 2 of the Voluntary Surrender of

Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be

excluded while computing his taxable income.

6. Salary paid tax-free- If salary is paid tax-free by the employer, the employee has to

include in his taxable income not only salary received but also the amount of tax paid by

the employer. It does not make any difference whether tax is paid under terms of contract

by the employer or voluntary.

7. Salary under section 17(1)- Under section 17(1), salary is defined to include the

following

a. Wages;

b. Any annuity or pension;

27

c. Any gratuity;

d. Any fees, commission, perquisites or profits in lieu of or in addition to any salary or

wages;

e. Any advance of salary;

f. Any payment received by an employee in respect of any period of leave not availed

by him;

g. The portion of the annual accretion in any previous year to the balance at the credit of

an employee participating in a recognized provident fund to the extent it is taxable;

h. Transferred balance in a recognized provident fund to the extent it is taxable; and

i. The contribution made by the Central Government or any other employer to the

account of an employee under a notified pension scheme referred to in section

80CCD.

8. Place of accrual of salary income- Income under the head “Salaries” is deemed to

accrue or arise at the place where the service (in respect of which it accrues) is rendered.


• Salary in respect of service rendered in India is deemed to accrue or arise in India

even if it is paid outside India or it is paid or payable after the contract of

employment in India comes to an end.

• Pension paid abroad is deemed to accrue in India, if it is paid in respect of

services rendered in India.

• Leave salary paid abroad in respect of leave earned in India is deemed to accrue

or arise in India.

• There is, however, an exception to the aforesaid rule. Salary paid by the Indian

Government to an Indian national is deemed to accrue or arise in India, even if

service is rendered outside India. This provision is applicable only in respect of

salary and not in respect of allowances and perquisites paid or allowed by the

Government to Indian nationals working abroad, as such allowances and

perquisites are exempt under section 10(7).

Computation of Salary Income

Particulars Amount

Income from salary

Income by way of allowances

Taxable value of perquisites

Gross salary

Less Deductions under section 16

Entertainment allowance

Professional tax

Income from salaries

XX

XX

XX

XX

(XX)

(XX)

XX

Different forms of salary

1. Advance salary- Advance salary is taxable on receipt basis in the assessment year

relevant to the previous year in which it is received, irrespective of incidence of tax in the

hands of employee. The recipient can, however, claim relief in terms of section 89. A

loan taken from employer is not taxable as advance salary.

2. Arrear salary- It is taxable on receipt basis, if the same has not been subjected to tax

earlier on due basis. In this case also recipient can claim under section 89.

28

3. Leave Salary- As per service rules, an employee get different leaves. An employee has

to earn leave in the first instance and only when he has leave to his credit, he can apply

for leave. If a leave (standing to his credit) is not taken within a year, as pe the service

rules, it may lapse or it may be encashed or it may be accumulated. Encashment of leave

by surrendering leave standing to one’s credit is known as “Leave salary”.

Nature of leave encashment Status of employee Whether it is taxable

Leave encashment during

continuity of employment

Government/ non-

Government employee

It is chargeable to tax.

However, relief can be

taken under section 89.

Leave encashment at the time of

retirement/ leaving job

1. Government

employee

It is fully exempt from tax

[Section 10(10AA)(i)]

2. Non-Government

employee

See the provisions given

below* [Section

10(10AA)(ii)]

*Non-Government employees getting leave encashment at the time of retirement- In the

case of a non-Government employee (including an employee of a local authority or public sector

undertaking), leave salary is exempt from tax on the basis of least of the following

a. Period of earned leave (in number of months) to the credit of employee at the time of

retirement/ leaving the job (earned leave entitlements cannot exceed 30 days for

every year of actual service)*Average monthly salary

b. 10*Average monthly salary

c. Amount specified by the government (i.e., � 3,00,000 minus amount exempted

earlier)

d. Leave encashment actually received at the time of retirement

• Salary for this purpose means Basic salary (+) dearness allowance (if terms of employment so provide) (+) commission

based upon fixed percentage (%) of turnover achieved by an employee.

• Average salary for this purpose It is to be calculated on the basis of average salary drawn during the period of 10 months

immediately preceding the retirement. For example, if a person retires on 30 Nov. 2010,

average salary will be taken from Feb. 1, 2010 to 30 Nov. 2010.

• While computing completed/ actual years of service, any fraction of the year shall be

ignored.

It is to be noted that salary paid to the legal heirs of the deceased employee in respect of

privilege leave standing to the credit of such employee at the time of his/ her death is not

taxable as salary.

4. Salary in lieu of notice period- It is taxable under section 15 on receipt basis.

5. Salary to a partner- Salary paid to a partner by a firm is an appropriation of profits and

therefore, taxable under the head “Profits and gains of business or profession”.

6. Fees and commission- Fees and commission are taxable as salary irrespective of the fact

that they are paid in addition to or in lieu of salary. However, commission paid to a

29

director (not being an employee) for his giving guarantee for repayment of loan, etc., is

taxable under the head “Income from other sources”.

7. Bonus- It is taxable in the year of receipt if it has not been subject to tax earlier on due

basis. If bonus is received in arrears, the assessee can claim relief in terms of section 89.

8. Gratuity [Sec. 10(10)]- Gratuity is a retirement benefit. It is generally payable to an

employee at the time of cessation (i.e., retirement, death, termination, resignation or on

his becoming incapacitated prior to the retirement) of employment and on the basis of

duration of service.

Status of employee Whether gratuity is taxable

Government employee (including employees of local

authority but not employees of a statutory

corporation)

It is fully exempt from tax [Section

10(10)(i)]

Non-Government employee covered by the Payment

of Gratuity Act,1972

See the provisions given below

[Section 10(10)(ii)]

Non-Government employee not covered by the

Payment of Gratuity Act,1972

See the provisions given below

[Section 10(10)(iii)]

Non-Government employees covered by the Payment of Gratuity Act, 1972- Least of the

following amount is exempt from tax

a. 15 days salary (7 days salary in the case of employees of a seasonal establishment)

based on salary last drawn for every completed year of service or part thereof in

excess of 6 months. For example – If service is rendered for 20 years and 6 months,

then we have to take 20 years

b. 3,50,000 (this limit has been increased to 10,00,000 with effect from May 24,

2010)

c. Gratuity actually received

• Salary for this purpose means salary last drawn by an employee (+) dearness

allowance but does not include any bonus, commission, house rent allowance, overtime

wages and any other allowance and perquisites.

• Calculation of 15 days’ salary Salary of 15 days is calculated by dividing salary last

drawn by 26 i.e. the maximum number of working days in a month.

For example If monthly salary at the time of retirement is �3,000, 15 days salary

would come to 1,730.77 ( �3,000/26*15).

• The Payment of Gratuity Act, 1972 is applicable in the case of every shop/ establishment

(employing 10 0r more persons) and every factory, mine, oilfield, plantation, port, etc.

Non-Government employees not covered by the Payment of Gratuity Act, 1972 Least of the following amount is exempt from tax

a. Half months average salary for each completed year of service

b. 3,50,000 (this limit has been increased to 10,00,000 with effect from May 24,

2010) minus amount exempted earlier

c. Gratuity actually received

30

• Salary for this purpose means Basic salary (+) dearness allowance (if terms of employment so provide) (+) commission

based on fixed percentage on turnover achieved by an employee.

• Average monthly salary It is calculated on the basis of average salary for 10 months immediately preceding the

month in which the employee has retired.

For example If a person retires on 18 March, 2011, average salary will be considered on

the basis of salary drawn from May 1, 2010 to Feb. 28, 2011.

• Gratuity paid while in service is not exempt from tax. However, the assessee can claim

relief under section 89.

• If gratuity becomes due (and paid) during the lifetime of assessee, it will be taxable in the

hands of the assessee. However, the assessee can claim exemption under section 10(10).

• When gratuity becomes due before the death of the assessee but paid after the death of the

assessee, it will be taxable (as per the provisions) in the hands of the assessee even if it is

received by his legal heirs after his death.

• When gratuity becomes due and paid after the death of a person, then the gratuity amount

will neither be taxable in the hands of that person nor in the hands of legal heirs of that

person.

• If nothing is mentioned about the employee in case of Gratuity, then assume that person

as an employee not covered by the Payment of Gratuity Act, 1972.

• Relief can be claimed under section 89 in respect of taxable amount of gratuity.

9. PENSION [Sec. 17 (i) (ii)]

Pension Status of employee Is it chargeable to tax

Uncommuted pension

(Periodical payment)

Government/ Non-Government

employee

It is fully chargeable to tax.

Commuted Pension

(Lump sum payment in

lieu of periodical

payment)

1. Government employee

(including the

employees of local

authority and statutory

corporation)

It if fully exempt from tax.

2. Non-Government

employee

See the provisions given

below

In case where a non-government employee receives Gratuity, the commuted value of one-

third of the pension which he is normally entitled to receive is exempt from tax.

In case where a non-government employee does not receive Gratuity, the commuted value of

one-half of such pension which he is normally entitled to receive is exempt from tax.

31

Points to be noted

• If payment in commutation of pension received by an employee exceeds the aforesaid

limits, such excess is liable to tax in the assessment year relevant to the previous year in

which it is due or paid. The assessee can, however, claim relief in terms of section 89.

• Pension received from UNO by the employees or his family members is not chargeable to

tax.

• Family pension received by the family members of armed forces is exempt from tax

under section 10(19) in some cases.

• Family Pension received by family members (not being the members of armed forces)

after the death of an employee is taxable in the hands of recipients under section 56 under

the head “Income from other sources”. Standard deduction is available under section 57

which is one-third of such pension or 15,000, whichever is lower.

• Judges of the Supreme Court and High Courts are also entitled to the exemption of the

commuted pension.

Pension scheme in case of an employee joining Central Government or any other employer

on or after January 1, 2004

New pension scheme is applicable to new entrants to Government service or any other employer.

As per the scheme, it is mandatory for persons entering the service on or after January 1, 2004, to

contribute 10% of salary every month towards notified pension scheme. A matching contribution

is required to be made by the employer to the said account. The tax treatment under the new

scheme is as follows –

• Contribution by the employer to the notified pension scheme is first included under the

head “Salaries” in hands of the employee.

• Such contribution is deductible (to the extent of 10% of the salary of the employee) under

section 80CCD.

• Employee’s contribution to the notified pension scheme is also deductible (to the extent

of 10% of the salary of the employee) under section 80CCD.

• When pension is received out of the aforesaid amount, it will be chargeable to tax in the

hands of the recipient.

• No deduction will be allowed under section 80C in respect of amounts on which

deduction has been claimed under section 80CCD.

• “Salary” for the above purpose means basic salary and dearness allowance (if forming

part) but excludes all other allowances and perquisites.

• The aggregate amount of deduction under section 80C, 80CCC and 80CCD cannot

exceed � 1,00,000.

10. Annuity

An annuity payable by a present employer is taxable as salary even if it is paid

voluntarily without any contractual obligation of the employer. An annuity received from

an ex-employer is taxed as profits in lieu of salary.

11. Annual accretion to the credit balance in provident fund

12. Amount transferred from unrecognized provident fund to recognized provident

fund

32

13. Retrenchment compensation [Sec. 10(10B)]

Compensation received by a workman at the time of retrenchment is exempt from tax to

the extent of least of the following

a. An amount calculated in accordance with the provisions of section 25F(b) of the

Industrial Disputes Act, 1947; or

b. 5,00,000; or

c. The amount received.

Under the Industrial Disputes Act, a workman is entitled to retrenchment compensation

equal to 15 days average pay, for every completed year of service or any part thereof in

excess of 6 months.

Compensation in excess of the aforesaid limits is taxable as salary. However, the

aforesaid limit is not applicable in cases where compensation is paid under any scheme

approved by the Government.

14. Profits in lieu of salary [Sec. 17(3)] It includes the following

a. The amount of any compensation due to or received by an assessee from his employer

or former employer at or in connection with the termination of his employment.

b. The amount of any compensation due to or received by an assessee from his employer

or former employer at or in connection with the modification of the terms and

conditions of employment.

c. Any payment due to or received by an assessee from his employer or former

employer except the following

i. Payment of gratuity exempted U/S 10(10);

ii. Payment of HRA exempted U/S 10(13A);

iii. Payment of commuted pension exempted U/S 10(10A);

iv. Payment of retrenchment compensation exempted U/S 10(10B);

v. Payment from an approved superannuation fund U/S 10(13);

vi. Payment from statutory provident fund (SPF) or public provident fund (PPF);

vii. Payment from recognized provident fund (RPF) to the extent it is exempt U/S

10(12).

d. Any payment from unrecognized provident fund (UPF) or such other fund to the

extent to which it does not consist of contributions by the assessee or interest on such

contributions.

e. Any sum received under a Keyman insurance policy including the sum allocated by

way of bonus on such policy.

f. Any amount received (in lump sum or otherwise) prior to employment or after

cessation of employment.

15. Remuneration for extra duties- Where an employee agrees to do something outside the

duties of his office, hereby enlarging scope of his office, for which he is given extra

payment, that payment is taxable as salary.

16. Voluntary payments to employees- Voluntary payments made by an employer to his

employee is taxable in the hands of recipient as salary if such payment is made with

reference to services rendered by virtue of employment.

33

However, a lump sum payment made gratuitously or by way of compensation or

otherwise to the widow or other legal heirs of an employee, who dies while still in active

service, is not taxable. Likewise, if ex gratia payment is received from the Central

Government, State Government, local authority or a public sector undertaking,

consequent upon injury to the person or on death while on duty, it is not liable to tax.

17. Salary received from an United Nations Organisation (UNO)- Salary received from a

UNO is not taxable in India.

18. Compensation received at the time of voluntary retirement [Sec. 10(10C)]-

Compensation received at the time of voluntary retirement is exempt from tax if the

following conditions are satisfied

a. Compensation is received/ receivable at the time of voluntary retirement or

separation.

b. Compensation is received by an employee of the following undertakings –

i. An authority established under a Central, State or Provincial Act;

ii. Local authority;

iii. University;

iv. An IIT;

v. The state Government;

vi. The Central Government;

vii. A notified institute having importance throughout India or any state;

viii. Notified institute of management;

ix. Public sector company;

x. Any company or a co-operative society.

c. Compensation is received in accordance with the scheme of voluntary retirement/

separation which is framed in accordance with prescribed guidelines.

d. Maximum amount of exemption is � 5,00,000.

e. Where exemption has been allowed to an employee U/S 10(10C) for any assessment

year, no exemption there under shall be allowed to him in relation to any other

assessment year.

Allowances- Allowance is generally defined as a fixed quantity of money or other substance

given regularly in addition to salary for the purpose of meeting some particular requirement

connected with the services rendered by the employee or as compensation for unusual conditions

of that service. It is fixed, pre-determined and given irrespective of actual expenditure.

Different forms of allowances

1. Fully taxable allowances a. City compensatory allowance

b. Tiffin allowance

c. Fixed medical allowance

d. Servant allowance

e. Dearness allowance

f. Deputation allowance

g. Lunch/ meal/ dinner/ refreshment allowance

h. Overtime allowance

i. Family allowance

34

j. Non practicing allowance

k. Warden allowance

l. Planning allowance

2. Special allowances prescribed as exempt under section 10(14)

a. When exemption depends upon actual expenditure by the employee Lower of the following is allowed as deduction

• the amount of the allowance; or

• the amount utilized for the specific purpose for which allowance is given.

The following are the allowances

i. Travelling allowance/ Transfer allowance- An allowance granted to meet the

cost of travel or on transfer (including any sum paid in connection with transfer,

packing and transportation of personal effects on such transfer).

ii. Conveyance allowance- Conveyance allowance is exempt from tax to the extent

it is utilized for performance of official duties. It is an allowance which is granted

to meet the expenditure on conveyance in performance of duties of an office. It

may be noted that any expenditure for covering the journey between office and

residence is not treated as expenditure in performance of duties of the office and,

consequently, such expenditure is not exempt from tax.

iii. Daily allowance- This allowance is given to meet the ordinary daily charges

incurred by an employee on account of absence from his normal place of duty.

iv. Helper allowance- This allowance is given to meet the expenditure on a helper

where such helper is engaged for the performance of official duties.

v. Research allowance- This allowance is granted for encouraging the academic

research and other professional ethics.

vi. Uniform allowance- This allowance is given to meet the expenditure on the

purchase or maintenance of uniform for wear during the performance of duties of

an office.

b. When exemption does not depend upon expenditure- In the following cases, the

amount of actual expenditure is not taken into consideration. Amount of exemption is

specified in rule 2BB.

i. Allowance for transport employees- It is an allowance 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 that such employee is not in receipt of daily allowance.

Amount of exemption is 70% of such allowance or 10,000/ month whichever

is lower.

ii. Children education allowance- Amount exempt is limited to �100/month per

child up to a maximum of 2 children.

35

iii. Hostel expenditure allowance- Amount exempt is limited to �� 300/month per

child up to maximum of 2 children.

iv. Transport allowance- It is granted to an employee to meet his expenditure for

the purpose of commuting between office and residence. Amount of exemption is

limited to 800/ month 1,600/ month in case of an employee who is blind or

orthopaedically handicapped).

v. Tribal/ scheduled areas allowance- � 200/month if an employee is posted in

U.P., M.P., Tamil Nadu, Karnataka, West Bengal, Bihar, Orissa, Assam or

Tripura.

vi. Underground allowance- Underground allowance is granted to an employee who is working in

uncongenial, unnatural climate in underground mines. Exempt up to � 800/

month

vii. House rent allowance [Sec. 10(13A) and rule 2A] Least of the following amount is exempt from tax

a. An amount equal to 50% of salary, where residential house is situated at

Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of salary where

residential house is situated at any other place.

b. HRA received by the employee in respect of the period during which rental

accommodation is occupied by the employee during the previous year.

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

• Salary for this purpose means- Basic salary (+) dearness allowance (if terms of

employment so provide) (+) commission based on fixed percentage of turnover

achieved by an employee.

• Salary for this purpose is determined on “due” basis in respect of the period during

which rental accommodation is occupied by the employee in the previous year. It,

therefore, follows that salary of a period, other than the previous year, is not

considered even though such amount is received during the previous year and is

taxable on “receipt” basis. Likewise, salary of the period during which rental

accommodation is not occupied in the previous year, is left out of the aforesaid

computations.

• Exemption is denied where an employee lives in his own house, or in a house for

which he does not pay any rent or pays rent which does not exceed 10% of salary.

• Place of posting does not matter. Instead, the place at which rent is paid matters.

• Mode of computation of exemption The amount of exemption in respect of HRA

received by an employee depends upon the following

a. “salary” of the employee;

b. HRA;

c. Rent paid; and

d. The place where house is taken on rent.

Where these four are same throughout the previous year, the exemption should be

calculated on “annual basis”. When, however, there is a change in respect of any of

the aforesaid factors, then the exemption shall be worked out on “monthly basis”.

36

viii. Entertainment allowance [Sec. 16(ii)]- It is first included in salary income under

the head “allowances” and thereafter a deduction is given on the following basis

a. In case of a Government employee, the least of the following is deductible

a. 5,000;

b. 20% of basic salary; or

c. Amount of entertainment allowance granted during the previous year.

• Basic salary for this purpose excludes any allowance, benefit or other perquisites.

• Amount actually expended towards entertainment (out of entertainment allowance

received) is not taken in to consideration.

b. In the case of a non-government employee (including employees of statutory

corporation and local authority), entertainment allowance is not deductible.

ix. Allowance to Government employees outside India [Sec. 10(7)] Any allowance paid or allowed outside India by the Government to an Indian

citizen for rendering service outside India is wholly exempt from tax.

x. Allowance received from a UNO Allowance paid by a UNO to its employees is not taxable by virtue of section 2

of the UN (Privileges and Immunities) Act, 1974.

Perquisites- Perquisite may be defined as any casual emolument or benefit attached to an office

or position in addition to salary or wages. Perquisites may be provided in cash or in kind.

However, perquisites are taxable under the head “Salaries” only if they are

a. allowed by an employer (may be former, present or prospective) to his employee;

b. allowed during the continuance of employment;

c. directly dependent upon service;

d. resulting in the nature of personal advantage to the employee; and

e. derived by virtue of employer’s authority.

Points to be noted 1. Perquisites received from a person other than the employer are taxable under the head

“Profits and gains of business or profession” or “Income from other sources”.

2. Perquisites provided by an employer (directly or indirectly) to employee or any member

of his household (by reason of his employment) shall be chargeable to tax in the hands of

the employee. “Members of household” shall include

a. Spouse (whether dependent or not);

b. Children and their spouses (whether dependent or not);

c. Parents (whether dependent or not);

d. Servants and dependents.

“Perquisites” as defined in the Act [Section 17(2)]- Under the Act, the term “perquisites”

includes the following

a. the value of rent-free accommodation provided to the assessee by his employer;

b. the value of any concession in the matter of rent respecting any accommodation provided

to the assessee by his employer;

c. the value of any benefit or amenity granted or provided free of cost or at concessional

rate in any of the following cases

37

i. by a company to an employee who is a director thereof;

ii. by a company to an employee, being a person who has substantial interest in the

company;

iii. by any employer (including a company) to an employee to whom provisions of (i)

and (ii) above do not apply and whose income under the head “Salaries” exclusive of

the value of all benefits or amenities not provided for by way of monetary benefits,

exceeds � 50,000;

d. Any sum paid by an employer in respect of any obligation which but for such payment

would have been payable by the assessee;

e. Any sum payable by the employer, whether directly or through a fund other than a

recognized provident fund or approved superannuation fund or a deposit-linked insurance

fund, to effect an assurance on the life of the assessee or to effect a contract for an

annuity;

f. 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;

g. The amount of any contribution to an approved superannuation fund by the employer in

respect of the assessee, to the extent it exceeds � 1,00,000;

h. The value of any other fringe benefits or amenity as may be provided.

Perquisites taxable only in the hands of a specified employee- The following perquisites are

taxable only in the hands of specified employees –

• Service of a sweeper, gardener, watchman or personal attendant

• Supply of gas, electricity or water for household purposes

• Education facility to employee’s family members

• Leave travel concession

• Medical facility

• Car or any other automotive conveyance

• Transport facility by a transport undertaking

Specified employee- The following employees are called as “specified employee”.

1. A director-employee- An employer who a director in the employer-company at any time

during the previous year, is a specified employee of the company in which he is a

director.

2. An employee who has substantial interest in the employer-company- An employee who

has a substantial interest in the employer-company at any time during the previous year is

a specified employee of the company in which he has substantial interest. A person has

substantial interest in the employer-company, if he is a beneficial owner of equity shares

carrying 20% or more voting power in the employer-company.

3. An employee drawing in excess of �50,000- An employee (not covered by the above

two cases), whose income chargeable to tax under the head “Salaries” (exclusive of the

value of all benefits or amenities not provided by way of monetary payments) exceeds �

50,000, is a specified employee. For computing the sum of 50,000, the following

are excluded or deducted

38

a. All non-monetary benefits;

b. Monetary benefits which are not taxable under section 10 (for example, house rent

allowance to the extent exempt under section 10(13A) is excluded); and

c. Deduction on account of entertainment allowance and professional tax.

Where salary is received from more than one employer, the aggregate salary from these

employers will have to be taken into account for the purpose of determining the aforesaid

monetary ceiling.

Types of Different Perquisites

Rent-Free Unfurnished Accommodation [Rule 3(1)]- “Accommodation” includes a house,

flat, farm house (or part thereof) or accommodation in a hotel, motel, service apartment, guest-

house, caravan, mobile home, ship or other floating structure.

1. Central and State Government employees including those Central and State Government employees who are on deputation to a

public sector undertaking but the accommodation is provided by the Central Government

or State Government.

The value of perquisite in respect of accommodation provided to such employee 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 for allotment of houses to its officers.

Exception

Rent-free official residence provided to a Judge of a High Court or to a judge of the Supreme

Court is exempt from tax. A similar exception is extended to an official of Parliament, a Union

Minister and a Leader of Opposition in Parliament.

2. Private sector or other employees (including the employees of a local authority or a

foreign Government)

Population of city as per

2001 census where

accommodation is provided

Where the accommodation is

owned by the employer

Where the accommodation is

taken on lease or rent by the

employer

Exceeding 25 lakh 15% of salary in respect of

the period during which the

accommodation is occupied

by the employee

Amount of lease rent paid or

payable or 15% of salary,

whichever is lower

Exceeding 10 lakh but not

exceeding 25 lakh

10% of salary in respect of



by the employee

Same as above

Any other 7.5% of salary in respect of



by the employee

Same as above

39

• Salary for this purpose includes Basic salary, dearness allowance/ pay (if terms of employment so provide), bonus,

commission, fees, all other taxable allowances (excluding amount not taxable) and any

monetary payment which is chargeable to tax (by whatever name called).

• Salary does not include a. Employer’s Contribution to provident fund account of an employee or interest

credited;

b. All allowances which are exempt from tax;

c. Value of perquisites [under section 17(2)]

d. Lump-sum payment 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.

• Salary shall be determined on “accrual” basis For example, advance salary of a period other than the previous year is not included even

if the same is received in the previous year. Similarly, salary due in the previous year is

included, even if it is received after the end of the previous year. In other words, we can

say that salary accrued for the period during which rent-free accommodation is occupied

by the employee will be considered whether it is received during the previous year or not.

In all we can say that advance salary/ bonus for a period other than the previous year will

not to be included in salary for the above purpose.

• Monetary payments which are not in the nature of perquisites under section 17(2) shall be

included. For example, leave encashment of salary pertaining to the current year (not

being a perquisite), or overtime payment (not being a perquisite) is taken in to

consideration. However, payments of gas, electricity, water and income-tax bills [being

perquisites under section 17(2) (iii)/(iv))] are not taken in to consideration.

• Where on account of the transfer of an employee from one place to another, he is

provided with accommodation at the new place of posting while retaining the

accommodation at the other place, the value of perquisite shall be determined with

reference to only one such accommodation which has the lower value for a period not

exceeding 90 days and thereafter the value of perquisite shall be charged for both such

accommodations.

• The above perquisite is not chargeable to tax in respect of any accommodation located in

a ‘remote area’ (i.e., an area located at least 40 kilometres away from a town having a

population not exceeding 20,000) provided to an employee working at a mining site or an

onshore oil exploration site, or a project execution site or a dam site or power generation

site or an offshore site.

Rent-free Furnished accommodation (NOT being a HOTEL)- First, find out the value of the

perquisite assuming that the accommodation is unfurnished and to the figures so arrived, add

a. 10% (p.a.) of the original cost of furniture, if furniture is owned by the employer;

b. actual hire charges (whether paid or payable) if furniture is hired by the employer.

Furniture, here, includes radio sets, televisions sets, refrigerators, air–conditioners and other

household appliances.

40

Rent-free Furnished accommodation provided in a HOTEL- Besides, accommodation in a

hotel, it includes licensed accommodation in the nature of motel, service apartment or guest

house.

The value of perquisite shall be taken as 24% of salary paid or payable for the period during

which such accommodation is provided in the previous year or actual charges paid/ payable by

the employer to such hotel, whichever is lower. Exception- If an accommodation is provided in a hotel and if the following two conditions are

satisfied, nothing is chargeable to tax

1. The hotel accommodation is provided for a period not exceeding in aggregate 15 days in

a previous year and

2. Such accommodation is provided on an employee’s transfer from one place to another

place.

It is to be noted that in the aforesaid case, the hotel accommodation is provided for more than 15

days, then the perquisite is not taxable for the first 15 days. After that it is chargeable to tax.

Accommodation provided at Concessional Rent Accommodation may be furnished or unfurnished or it is provided in a hotel.

The valuation should be made as follows

Step 1 Find out the value of the perquisite on the assumption that no rent is charged by the

employer (as per the rules applicable).

Step 2 From the value so arrived at, deduct the rent charged by the employer from the

employee.

Perquisite in respect of Free Domestic Servants- The value of perquisite shall be the actual

cost to the employer. The actual cost in such a case shall be the total amount of salary paid or

payable by the employer (or any other person on his behalf) for such services as reduced by any

amount paid by the employee for such services. It is to be noted that domestic servant allowance given to an employee is always chargeable to

tax. It is taxable even if the allowance is used for engaging a domestic servant.

Perquisite in respect of Gas, Electric Energy Or Water Supply Provided Free Of Cost- The

value of perquisite shall be the cost to the employer. However, such actual cost shall be reduced

by the amount recovered from the employee.

Perquisite in respect of Free Education a. Providing free education facilities to, and training of, the employee Not taxable

b. Payment of school fees of employee’s children directly to the school Taxable

c. Reimbursement of school fees of employee’s children Taxable

d. Education facility in employer’s institute Employers institute is an institute owned or

maintained by the employer or education facility is provided in any institute by reason of

employee’s employment with the employer.

41

Different situations Amount chargeable to tax

1. Where education facility is provided

to employee’s children –

a. Where cost of education or value of

such benefit does not exceed 1000/

month per child (no restriction on

number of children)

b. Where such amount exceed 1000/

month per child

Nil

Cost of such education in a similar

institution in or near the locality (-) ��1000/

month per child (-) amount paid or

recovered from the employee

2. Where education facility is provided

to member of his household (other

than children)

Cost of such education in a similar

institution in or near the locality (-) amount

paid or recovered from the employee

Points to be noted

a. Amount of scholarship given by employer-company to children of its employees solely at

its discretion without reference to terms of employment is not assessable as perquisite in

the hands of employees.

b. Grand children and other members of household are included in point 2 of the above

table.

Leave Travel Concession in India [Sec. 10(5)]

Different situations Amount of exemption (exemption is

available only in respect of fare for going

anywhere in India along with family twice in

a block of four years)

1. Where journey is performed by air Amount of economy class fare of the

national carrier by the shortest route or the

amount spent, whichever is less.

2. Where journey is performed by rail Amount of air-conditioned first class rail fare

by the shortest route or the amount spent,

whichever is less.

3. Where the places of origin of journey

and destination are connected by rail

and journey is performed by any

other mode of transport.

Same as (2)

4. Where the places of origin of journey

and destination (or part thereof) are

not connected by rail

a. Where a recognized public transport

exists

b. Where no recognized public

transport exists

First class or deluxe class fare by the shortest

route or the amount spent whichever is less.

Air-conditioned first class rail fare by the

shortest route (as if the journey had been

performed by rail) or the amount actually

spent, whichever is less.

42

Points to be noted

1. Family for this purpose includes

a. spouse and children of the employee;

b. parents, brothers and sisters of the employee, who are wholly or mainly dependent

upon the employee.

2. Only two journeys performed in a block of four calendar years is exempt. The different

blocks are

a. 2002-2005 (i.e., January 1, 2002 to December 31, 2005);

b. 2006-2009 (i.e., January 1, 2006 to December 31, 2009);

c. 2010-2013 (i.e., January 1, 2010 to December 31, 2013).

3. “Carry-over” concession

If an assessee has not availed travel concession or assistance during any of the specified

four-year block periods on one of the two permitted occasions (or on both occasions),

exemption can be claimed in the first calendar year of the next block (but in respect of

only one journey). This is known as “carry-over” concession. In such case, exemption so

availed will not be counted for the purposes of claiming the future exemptions allowable

in respect of two journeys in the subsequent block.

4. Exemption is based on actual expenditure. Without performing any journey and incurring

expenses thereon, no exemption can be claimed.

5. Exemption is available in respect of fare and not in respect of any other expenses like

scooter charges, lodging and boarding expenses etc.

6. The exemption shall not be available to more than two surviving children of an individual

after October 1, 1998. However, the above rule will not apply in respect of children born

before October 1, 1998 and also in case of multiple birth after one child.

Employee’s Obligation Met By The Employer [Sec. 17(2)(iv)]- Amount paid by the employer

in respect of any obligation which otherwise would have been payable by the employee is

taxable in all cases.

Amount payable by the employer to effect an Assurance On The Life Of Employee-

Amount payable by an employer, directly or indirectly, to effect an assurance on the life of the

assessee or to effect a contract for an annuity is taxable in the hands of all employees.

This rule is, however, not applicable if the employer makes contribution/payment towards the

following

a. RPF (up to 12% of salary of the employee);

b. Approved superannuation fund;

c. Group insurance schemes;

d. Employee’s state insurance schemes; and

e. Fidelity guarantee schemes.

Perquisite in respect of Interest-Free Loan Or Loan At Concesional Rate Of Interest- If a

loan is given by an employer to the employee (or any member of his household), it is a perquisite

chargeable to tax. Value of perquisite is computed at the rate of interest charged by SBI as on the

first day of the relevant previous year in respect of loan for the same purpose advanced by it.

43

Interest is calculated on the maximum outstanding monthly balance for each loan as on the last

day of each month.

SBI lending rates as on April 1, 2010 are

1. Housing loan 8%

2. Car loan, for new car 8%

3. Two wheeler loan 15.75%

4. Education loan*

Loan amount up to 4 lakh 11.25%

Loan amount above 4 lakh but upto 7.5 lakh 12.75%

Loan amount above 7.5 lakh 11.75%

5. Personal loan 16%

6. To subscribe ESOP 14%

SBI Scholar Loan Scheme 10.75%, 0.5% concession for girl student in the case of SBI Scholar

Loan Scheme

In the following cases, however, the above perquisite is not chargeable to tax

1. If a loan is made available for medical treatment in respect of diseases specified in rule

3A (the exemption is, however, not applicable to so much of the loan as has been

reimbursed to the employee under any medical insurance scheme; in such a case,

perquisite will be chargeable to tax from the date of receipt of insurance compensation).

2. Where the amount of original loan (or loans) are petty, not exceeding 20,000 in

aggregate. Where, however, the amount exceeds ��20,000, perquisite will be chargeable to

tax from the date it exceeds �20,000.

Perquisite in respect of Use Of Movable Assets- Value shall be determined @ 10% p.a. of the

actual cost of such asset (if the asset is owned by the employer) and the amount of rent paid or

payable (if the asset is taken on hire by the employer) less amount paid/ recovered from the

employee.

However, no perquisite is chargeable to tax in respect of use of computer/ laptops.

Perquisite in respect of Movable Assets Sold by an employer to its employees (or any

member of his household) at a nominal price- It is calculated as an actual cost of such asset to

the employer (-) normal wear and tear @ given below for each completed year during which

such asset was put to use by the employer for his business purposes (-) amount paid/ recovered

from the employee.

• Electronic items/ computers 50% by reducing balance method (WDV)

• Motor Car 20% by reducing balance method (WDV)

• Any other 10% of the actual cost

[Electronic item means data storage and handling devices like digital diaries, printers and do not

include household appliances like mixers, washing machines, ovens, etc.]

Medical Facilty

The following expenses whether incurred or reimbursed by the employer are exempt from tax

Medical facilities in India

1. Medical facility in employers hospital (including clinic, dispensary or nursing home).

44

2. Medical facility in a hospital maintained by Central/ State Government or by a local

authority or by any other person approved by the Government for the treatment of its

employees.

3. Treatment of prescribed disease given in rule 3A (2) in a hospital (approved by the

Chief Commissioner).

4. Medical insurance premium on any health insurance policy (i.e., group medical insurance

premium for employees or medical insurance premium for employees and family

members).

5. Medical facility in a private clinic not exceeding, � 15,000 in aggregate in a year

Medical facility outside India

Perquisite not chargeable to tax Conditions to be satisfied

Medical treatment of employee or any

member of family of such employee outside

India

Expenditure shall be excluded from

perquisite only to the extent permitted by

RBI.

Cost on travel of the employee/ any member

of his family and one attendant who

accompanies the patient in connection with

treatment outside India

Expenditure shall be excluded from

perquisite only in the case of an employee

whose gross total income, as computed

before included therein the said

expenditure does not exceed �2,00,000.

Cost of stay abroad of the employee or any

member of the family for medical treatment

and cost of stay of one attendant who

accompanies the patient in connection with

such treatment

Expenditure shall be excluded from the

perquisite only to the extent permitted by

RBI.

Family for this perquisite means

1. the spouse and children of the individual; and

2. the parents, brothers and sisters of the individual or any one of them wholly or mainly

dependent on the individual.

Perquisite in respect of Motor Car

Different situations Valuation

Where car is owned by the employee

1. When car expenses are met by the

employee 2. When maintenance and running

expenses are met or reimbursed by

the employer

a. If the car is used wholly for

official purposes

b. If the car is used wholly for

private purposes

Not a perquisite; hence not taxable

No value provided a few conditions are

satisfied (given below)

Actual expenditure incurred by the employer

minus amount recovered from the employee

- is (if positive amount) the taxable value of

perquisite

45

c. If the car is partly used for

official purposes and partly for

private purposes


minus amount used for official purposes [i.e., �

1,800 per month where the cubic capacity

of the engine does not exceed 1.6 litres or �

2,400 per month if such capacity exceeds 1.6

litres and 900 per month if chauffeur is

provided or a higher sum for official

purposes as per records of the employer as

stated (given below) and as certified by the

employer] minus amount recovered from the

employee - is (if positive amount) the taxable

value of perquisite

When car is owned by the employer

1. When maintenance and running

expenses are met or reimbursed by

the employer


official purposes


private purposes of the employee

or any member of his household

c. If the car is partly used for

official purposes and partly for



2. When maintenance and running

expenses are met by the employee


official purposes







[i.e. expenditure on running and maintenance

including remuneration of the chauffeur plus

normal wear and tear of the car (@ 10% per

annum of actual cost to the employer) or hire

charges if car is taken on hire] minus amount

recovered from the employee - is (if positive

amount) the taxable value of perquisite

1,800 per month where the cubic

capacity of the engine does not

exceed 1.6 litres or � 2,400 per

month if such capacity exceeds 1.6

litres and 900 per month if

chauffeur is provided

Nothing is deductible in respect of any

amount recovered from the employee

Not a perquisite; hence not taxable


[i.e., remuneration of the chauffeur plus

normal wear and tear of the car (@ 10% per

annum of actual cost to the employer) or hire

charges if car is taken on hire] minus amount

recovered from the employee - is (if positive

amount) the taxable value of perquisite

46

c. If the car is partly used for official

purposes and partly for private

purposes and maintenance in

respect of private use is borne by

the employee

600 per month where the cubic

capacity of the engine does not

exceed 1.6 litres or �900 per month

if such capacity exceeds 1.6 litres and

� 900 per month if chauffeur is

provided

Nothing is deductible in respect of any

amount recovered from the employee

When employee owns any automotive

conveyance (other than car) and running and

maintenance charges are met or reimbursed

by the employer

a. If it is used for official purposes

b. If it is used for official and partly for

private purposes




minus amount used for official purposes [i.e.

�900 per month or a higher sum for official

purposes as per records of the employer as

stated (given below) and as certified by the

employer] minus amount recovered from the

employee - is (if positive amount) the taxable

value of perquisite

Conditions to be satisfied if car is used for official purposes- Where the employer or the

employee claim that the motor-car is used wholly and exclusively in the performance of official

duty, the following two conditions should be satisfied –

1. 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.

2. The employer gives a certificate to the effect that the expenditure was incurred wholly

and exclusively for the performance of official duties.

The above conditions should also be satisfied if a car is owned by the employee, expenses are

incurred or reimbursed by the employer and the employee claim that the expenses for official

purposes is more than � 1,800 per month (or 2,400 per month if cc rating of car exceeds

1,600 cc).

The following should also be noted for this perquisite

1. Month-‘Month’ means complete month and a part of the month is left out of

consideration.

2. The use of motor car by an employee for the purposes of going from his residence to the

place where the duties of employment are to be performed or from such place back to his

residence, is not chargeable to tax.

3. Where two or more cars are owned or hired by the employer and the employee (or any

member of his household) are allowed the use of such motor-cars (or all or any of such

motor-cars) (otherwise than wholly and exclusively in the performance of hos duties), in

47

such a situation any one car (as selected by the employee) will be treated as used partly

for official and private purposes and others would be assumed as used wholly for private

purposes for the purpose of valuation of perquisite of car.

4. Conveyance facility provided to High Court Judges under section 22B of the High Court

Judges (Conditions of Service) Act, 1954 and to Supreme Court Judges under section

23A of the Supreme Court Judges (Conditions of Service) Act, 1958 is not chargeable to

tax.

Perquisite in respect of Free Transport

a. Employees of railways/ airlines- Not taxable

b. Employees of any other transport undertaking Value at which such benefit is offered by

the employer to the public minus amount recovered from the employee is the value of the

perquisite.

Perquisite in respect of Lunch/ Refreshment etc. The value of free food, tea and snacks etc. shall be as under

Circumstances Value of perquisite

1. Tea or similar non-alcoholic

beverages and snacks (in the form of

light refreshments) provided during

working hours

NIL

2. Free food and non-alcoholic

beverages is provided in working

hours in remote area or in an offshore

installation

NIL

3. Free food and non-alcoholic

beverages is provided in working

hours at any other place (other than

remote area or in an offshore

installation) either in office or

business premises or through non-

transferable paid vouchers usable

only at eating joints provided by an

employer

NIL, if the value thereof in either case is up

to � 50 per meal. Expenditure in excess of�

50 per meal should be treated as

perquisite.

4. In any other case Actual amount of expenditure incurred by the

employer minus amount paid or recovered

from the employee

Perquisite in respect of Travelling, Touring And Accommodation- Following is the treatment

in respect of traveling, touring, accommodation and any other expenses paid by employer for any

holiday availed by employee (or any member of household) other than leave travel concession

a. Where such facility is available uniformly to all employees Expenditure incurred by the

employer minus amount recovered from the employee is the taxable value of the

perquisite.

b. Where such facility is not available uniformly to all employees Value at which such

facilities are offered by other agencies to the public minus amount recovered from the

employee is the taxable value of the perquisite.

48

Perquisite in respect of Gift, Voucher Or Token- Value of any gift received by the employee

(or by the member of his household) on ceremonial occasions or otherwise shall be determined

as the sum equal to the amount of such gift. Such gift is exempt from tax where, the value of

such gift, voucher or token, as the case may be, is below � 5,000 in the aggregate during the

previous year. However, gifts made in cash or convertible into money (gift cheques) are not

exempt from tax.

Gift-in-kind upto 5,000 in aggregate per annum would be exempt from tax, beyond which it

would be taxable.

Perquisite in respect of Credit Card- Expenditure incurred by the employer in respect of credit

card used by the employee or any member of his household after deducting the expenditure on

use of this credit card for official purposes is the taxable value of the perquisite.

Perquisite in respect of Club Expenditure- Expenditure incurred by the employer in respect of

club facility used by the employee or any member of his household after deducting the

expenditure on use of this club facility for official purposes is the taxable value of the perquisite.

The following expenditure is exempt from tax

1. Health club, sports facilities etc. provided uniformly to all classes of employees by the

employer at employer’s premises.

2. Initial one time deposit or fees for corporate or institutional membership, where benefit

does not remain with a particular employee after cessation of employment.

Perquisite in respect of Sweat Equity Shares- If the given below conditions are satisfied,

perquisite will be taxable in the hands of employee in the assessment year relevant to the

previous year in which shares or securities are allotted or transferred to the employee. The

conditions are as follows –

1. The security or shares involved are “specified security” or “sweat equity shares”. For this

purpose, specified security means shares, scrips, debentures, derivatives, units,

Government Securities, etc. “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”.

2. Specified security or sweat equity shares are allotted or transferred on or after April 1,

2009.

3. Specified security or sweat equity shares are allotted by the employer or former employer

to the employee.

4. Specified security or sweat equity shares may be transferred to the employee or former

employee directly or indirectly.

5. These securities or shares are transferred to the employee either free of cost or at a

concessional rate.

For the purpose of valuation, fair market value of shares or securities has to be calculated on the

date on which the employee exercises the option. Amount actually paid or recovered from the

employee in respect of such shares or securities shall be deducted.

49

Perquisite in respect of Employer’s Contribution Towards Approved Superannuation

Fund- Employer’s contribution towards an approved superannuation fund is chargeable to tax in

the hands of employees to the extent such contribution exceeds � 1,00,000 per assessment year.

It is taxable in the year in which such contribution is made.

Any Other Benefit Or Amenity- It covers any other benefit or amenity, service, right or

privilege provided by the employer. However, it does not cover the following –

a. Perquisites already discussed above

b. Telephone/ mobile phones

Value of such perquisites shall be determined on the basis of cost to the employer under an arm’s

length transaction as reduced by the employee’s contribution, if any.

Deductions from salary income [Sec. 16]

1. Entertainment Allowance

2. Professional tax

Professional tax or tax on employment, levied by a State under article 276 of the

Constitution, is allowed as deduction. Deduction is available only in the year in which

professional tax is paid. If the professional tax is paid by the employer on behalf of an

employee, it is first included in the salary of the employee as a “perquisite” and then the

same is allowed as deduction on account of “professional tax” from gross salary.

It is to be noted that there is no monetary ceiling under the Income-tax Act. Under article 276 of

the Constitution, a State Government cannot impose more than 2,500 per annum as

professional tax. However, under the Income-tax Act, whatever professional tax is paid during

the previous year is deductible.

Provident Funds- Provident fund scheme is a retirement benefit scheme. Under this scheme, a

stipulated sum is deducted from the salary of the employee as his contribution towards the fund.

The employer also, generally, contributes simultaneously the same amount out of his pocket to

the fund. The employee’s and employer’s contributions are invested in gilt-edged securities.

Interest earned thereon is also credited to the provident fund account of the employees. The

accumulated sum is paid to the employee at the time of his retirement or resignation. In the case

of death of an employee, accumulated balance is paid to his legal heirs. Since the scheme

encourages personal saving at micro level and generates funds for investment at macro level, the

Government provides deduction under section 80C.

Different types of provident fund are given below

1. Statutory provident fund- This fund is set up under the provisions of the Provident

Funds Act, 1925. This fund is maintained by the Government and the Semi-Government

organizations, local authorities, railways, universities and recognized educational

institutions.

2. Recognized provident fund- A provident fund scheme to which the Employee’s

Provident Fund and Miscellaneous Provisions Act, 1952 applies is RPF. As per this Act,

any establishment employing 20 or more persons is covered by this Act (establishments

employing less than 20 persons can also join the provident fund scheme if the employer

and employees want to do so).

3. Unrecognized provident fund- If a provident fund is not recognized by the

Commissioner of Income-tax, it is known as UPF.

50

4. Public provident fund- The Central Government has established the PPF for the benefits

of general public to mobilize personal savings. Any member of the public can participate

in the fund by opening a provident fund account at the SBI or its subsidiaries or other

nationalized banks. Any amount subject to a minimum of 500 and maximum of �

70,000 per annum may be deposited under this account. The accumulated sum is

payable after 15 years (it may be extended). Interest on this fund is credited every year

but payable at the time of maturity.

Tax treatment of different types of provident fund

Situations Statutory

Provident

Fund (SPF)

Recognized

Provident Fund

(RPF)

Unrecognized

Provident Fund

(UPF)

Public

Provident

Fund

(PPF)

Employer’s

contribution

to provident

fund

Exempt from

tax

Exempt up to 12%

of salary. Excess of

employer’s

contribution over

12% of salary is

taxable.

Exempt from tax Employer

does not

contribute.

Interest

credited to

provident

fund

Exempt from

tax

Exempt from tax if

rate of interest does

not exceed notified

rate of interest (i.e.

9.5%); excess of

interest over this rate

is taxable.

Exempt from tax Exempt

from tax

Lump sum

payment at

the time of

retirement or

termination of

service

Exempt from

tax

Exempt from taxes in

some cases given

below. When not

exempt, PF will be

treated as an

unrecognized fund

from the beginning.

Employer’s

contribution and

interest thereon is

taxable. However,

payment received in

respect of employee’s

own contribution is

exempt. Interest on

employee’s

contribution is

taxable under the

head “IFOS”.

Exempt

from tax

Salary for this purpose means- Basic salary (+) dearness allowance (if forming part) (+)

commission based on fixed percentage of turnover achieved by an employee.

Cases 1. If the employee has rendered continuous service with his employer for a period of 5 years

or more. If accumulated balance includes any amount transferred from his individual

account in any other recognized provident fund(s) maintained by his former employer(s),

then, in computing the period of 5 years, the period(s) for which the employee rendered

continuous service to his former employer(s) is also to be included.

51

2. If the employee is not able to fulfill the conditions of such continuous service due to his

service having being terminated by reason if his ill-health or by reason of the contraction

or discontinuance of the employer’s business or due to some other reason beyond the

control of the employee.

3. If, on the occasion of his retirement, the employee obtains employment with any other

employer, to the extent the accumulated balance due and becoming payable to him is

transferred to his individual account in any RPF maintained by such other employer.

Tax treatment of Approved Supernannuation Fund

It means a superannuation fund which has been and continues to be approved by the

Commissioner in accordance with rules contained in Part B of the Fourth Schedule.

The tax treatment of contribution to any payment from the fund is as under

1. Employer’s contribution towards an approved superannuation fund will be chargeable to

tax to the extent it exceeds 1,00,000 per annum.

2. Interest on accumulated balance is exempt from tax.

3. Section 10(13) grants exemption in respect of payment from the fund –

a. to the legal heirs on the death of beneficiary (e.g. payment to widow of the

beneficiary);

b. to an employee in lieu of or in commutation of an annuity on his retirement at or after

the specified age or on his becoming incapacitated prior to such retirement; or

c. by way of refund of contribution on the death of the beneficiary; or

d. by way of refund of contribution to an employee on his leaving the service otherwise

than in the circumstances mentioned in (b) to the extent to which such payment does

not exceed the contribution made prior to April 1, 1962 (for instance, where the

amount received by an employee does not include any contribution made prior to

April 1, 1962, the whole amount is taxable).

Miscellaneous points

1. Remuneration received by foreign nationals as diplomatic personnel, consular personnel,

trade commissioners, and staff of a foreign mission is exempt from tax.

References




(latest edition).



QUESTIONS

Case 1

X (age 50 years) receives the following incomes from Y Ltd. during the year ending March 31,

2011

a. Salary @ � 25,000 p.m.

b. Tiffin allowance (Actual expenditure �8,000) @ 1,000 p.m.

c. Commission @ �2,000 p.m.

d. Reimbursement of ordinary medical expenditure for the treatment of X and his family

members �30,000

52

e. Transport allowance @ 1,000 p.m. (Actual expenditure �6,000)

Besides, X enjoys the following perks

f. Unfurnished flat provided at Delhi at a nominal rent of 3,500 p.m. (Rent paid by

employer 12,000 p.m.)

g. The employer company sells the following assets to X on January 10, 2011

Assets Sold Car Computer Fridge

Cost of asset to the employer �4,00,000 �60,000 �20,000

Date of purchase (Put to use on

same day) June 10, 2008 June 10, 2008 June10, 2008

Sale price 2,00,000 18,000 10,000

h. He contributed 20% of his salary to a recognized provident fund account to which his

employer made matching contribution.

i. Interest @ 13% p.a. amounting to 52,000 has been credited to his aforesaid PF account

during the previous year on Dec. 10, 2010.

j. He donated �20,000 to National Defence Fund.

Determine the net income of Mr. X for the previous year 2010-11 relevant to the assessment

year 2011-12.

Solution

Computation of total income of X for the assessment year 2011-12

Particulars Amount

Basic salary 3,00,000

Tiffin allowance 12,000

Commission 24,000

Medical reimbursement (30,000 – 15,000) 15,000

Transport allowance (1,000 - 800)*12 2,400

Accommodation at concessional rent [15% of (3,00,000 + 12,000

+ 24,000 + 2,400) or 1,44,000 whichever is lower i.e., 50,760 –

rent recovered i.e., 3,500*12 = 42,000]

8,760

Sale of movable asset (56,000 + Nil + 6,000) 62,000

Contribution towards RPF (8% of 3,00,000) 24,000

Interest credited (52,000/13*3.5) 14,000

Gross salary 4,62,160

Less Deduction under section 16 Nil

Net salary 4,62,160

Add Other income Nil


Less Deduction under section 80C (20% of 3,00,000) 60,000

Deduction under section 80G 20,000

Total income 3,82,160

Working note

Particulars Car Computer Fridge

Actual cost 4,00,000 60,000 20,000

Less Normal wear and tear (year 1) 80,000 30,000 2,000

WDV 3,20,000 30,000 18,000

Less Normal wear and tear (year 2) 64,000 15,000 2,000

53

WDV 2,56,000 15,000 16,000

Less Sale consideration 2,00,000 18,000 10,000

Taxable value 56,000 Nil 6,000

Case 2

Mr. X (age 56 years) is a Manager of a company in Delhi. He retires from service on 31st

December, 2010 after 28 years and 9 months of service. Other details are as follows for the

previous year ending 31st March, 2011.

a. Basic salary �8,000 p.m.

b. House rent allowance �3,000 p.m. Rent paid by Mr. X �2,500 p.m.

c. Lunch allowance �100 per day for 80 days when Mr. X was on field duty.

d. Reimbursement by the company of salary of a watchman and a sweeper �1,200 p.m.

each who are the employees of Mr. X.

e. He receives � 2,00,000 as gratuity. He was drawings a salary of 8,000 p.m. since

January 1, 2010.

f. After retirement he is in receipt of pension @ �3,500 p.m. On March 1, 2011 he gets

one half pension commuted for �1,50,000.

g. During the previous year he deposited � 70,000 in PPF. He paid the life insurance

premium �4,000 (sum assured �50,000) on the policy taken on the life of his married

son.

Compute his taxable income and tax liability for the assessment year 2011-12.

Solution

Computation of total income of X for the assessment year 2010-11

Particulars Amount �

Basic salary 72,000

HRA (27,000 – 15,300) 11,700

Lunch allowance (100*80) 8,000

Watchman and sweeper (2,400*9) 21,600

Gratuity (2,00,000 – 1,12,000) 88,000

Uncommuted pension 8,750

Commuted pension (1,50,000 – 1,00,000) 50,000



Net salary 2,60,050

Add Other income Nil


Less Deduction under section 80C (70,000 + 4,000) 74,000


Working notes

1. HRA exemption

a. 50% of salary i.e., 36,000 (50% of salary)

b. HRA actually received i.e, 27,000

c. Rent paid – 10% of salary i.e., 22,500 – 7,200 = 15,300

2. If nothing is mentioned, then we have to assume that the employee is not covered under

Payment of Gratuity Act, 1972

54

a. Half month average salary i.e., (28*1/2*80,000/10) = 1,12,000

b. Amount notified by the government i.e., 10,00,000

c. Gratuity actually received i.e., 2,00,000

3. 50% of commuted value = 1,50,000

Therefore, full value = 3,00,000

Amount exempt is = 3,00,000*1/3 = 1,00,000

Case 3

X (age 54 years), a Director of LMN Ltd., receives the following emoluments during the

previous year relevant for the assessment year 2011-12

Basic salary 1,80,000; Dearness allowance 24,000 (not forming part of basic pay);

commission @ 1% of turnover (turnover achieved by X during the previous year 2010-11 ��

10,00,000); arrears of the bonus of the previous year 2006-07 6,000 (not taxed earlier);

employer’s contribution towards RPF 30,000; interest credited in provident fund account @

13.5% on December 3, 2010 � 900; conveyance allowance 1,200 (60% of which is

utilised for official purposes); education allowance for three sons @ 183.33 per month per

child 6,600; rent-free furnished house in Patna (lease rent of un-furnished house paid by the

employer 90,000; rent of furniture 12,000); free services of gardener, cook and

watchman (Salary 3,000, 4,000, 5,000 respectively). On March 10, 2011 LMN (P) Ltd.

sells imported furniture to X for 20,000 (The furniture was purchased by the company on June

30, 2005 for 6,10,000 and since then it was used for business purposes). He runs a business

during the previous year, income from business is 3,40,000.

He makes the following payments during 2010-11

a. Own contribution to RPF 32,000

b. Deposit in Home Loan Account of National Housing Bank �4,000 (including advance

deposit of 1,000)

c. Contribution to NSC VIII issue 24,000

Determine the net income and tax liability for the assessment year 2011-12.

Solution

Computation of Net Taxable Income of X for the assessment year 2011-12

Particulars Amount


Dearness allowance (not forming part) 24,000

Commission (10,00,000*1%) 10,000

Arrears of bonus of the previous year 2006-07 6,000

Employer’s contribution to RPF (30,000-12% of 1,90,000) 7,200

Interest credited to RPF (900/13.5*4) 267

Conveyance allowance (1.200 - 60% of 1,200) 480

Education allowance (6,600-100*2*12) 4,200

Rent free furnished house (working notes) 41,202

Salary of Gardener 3,000

Salary of Cook 4,000

Salary of Watchman 5,000

Sale of furniture (6,10,000- dep. for 5 years i.e., 3,05,000 - 20,000) 2,85,000

Gross salary/ Net salary 5,70,349

Add Income from business 3,40,000

55


Less Deduction under section 80 C (32,000 + 4,000 + 24,000) 60,000

Net taxable income (Rounded off) 8,50,350

Working note

Calculation of salary for RFA 1,80,000 + 10,000 + 480 + 4,200 = 1,94,680

15% of 1,94,680 or 90,000 whichever is less 29,202

Add Furniture 12,000 41,202

Case 4

X, an employee of PQ Ltd. receives �78,000 as gratuity. He is covered by Payment of Gratuity

Act, 1972. He retires on December 12, 2010 after rendering services of 38 years and 8 months.

At the time of retirement, his monthly basic salary and dearness allowance was �2,400 and �

800 respectively. Is the entire amount of gratuity exempt from tax and if not, what is the taxable

amount of gratuity.

Case 5

Mrs. R (age 45 years), a finance manager in D Ltd., New Delhi furnishes the following

particulars for the previous year 2010-11

1. Basic salary 16,000 p.m.

2. Dearness allowance 2,000 p.m.

3. Bonus 3 month’s basic pay

4. Commission 1,000 p.m.

5. Contribution of the employer and employee to RPF is � 28,000 each

6. Entertainment allowance is � 12,000 p.a.

7. Allowance to meet cost of education and hostel expenditure of three children 5,000

p.a. each

8. Rent free unfurnished flat in Delhi provided by the company for which company pays a

rent of � 2,600 p.m.

9. A Titan watch costing � 4,800 was gifted by the company on the foundation day of the

company.

10. A Maruti Esteem car which was purchased by the company on 10-8-2006 for �

4,00,000 was sold to the assessee on 16-9-2010 for 1,80,000.

11. Assessee earned dividends amounting to 16,000 from foreign companies.

Determine the taxable income and tax liability of Mrs. R for the assessment year 2011-12.

Solution

Computation of total income of Mrs. R for the assessment year 2011-12



DA 24,000

Bonus 48,000

Commission 12,000

Employer’s contribution to RPF (28,000 – 23,040) 4,960

Entertainment allowance 12,000

Education and hostel allowance (5,000*3 – 400*2*12) 5,400

Rent free accommodation 31,200

Gift Nil

56

Car Nil



Net salary 3,29,560

Dividend from foreign company 16,000




Working note for the perquisite of car

Actual cost 4,00,000

Less Depreciation (80,000+64,000+51,200+40,960) 2,36,160

1,63,840

Less Sale value 1,80,000

Nil

Case 5

Z is a public relationship officer of M/s. A Ltd. in Gurgaon. He has furnished the following

details of his income for the year ended 31-3-2011

1 Basic salary �30,000 p.m.

2 Dearness allowance (50% forms part of salary for retirement purposes)

�8,000 p.m.

3 Commission �3,000 p.m.

4 Entertainment allowance �800 p.m.

5 Transport allowance (actual expenditure incurred on commutation between office and

residence is � 500 p.m. only) 1,000 p.m.

6 Employer company provided him with rent free accommodation for which the company

was required to pay � 15,000 p.m.

7 He raised interest free loan of �20,000 on 1-4-2010 to purchase a motor cycle.

8 Employer reimbursed medical bills amounting to �20,000 during financial year 2010-

11.

9 Company paid professional tax amounting to �2,500 on his behalf.

10 Company contributed 50,000 to his recognized provident fund account to which he

made similar contribution.

11 Received � 20,000 as share of profit from a partnership firm.

12 30,000 was credited to aforesaid provident fund account during 2010-11 @ 12% p.a.

by way of interest.

13 Dividend received from Tata Motors Ltd., an Indian company 10,000.

14 He paid LIC premium on the life policy of his major married son amounting to 25,000

(sum assured 1,00,000).

Determine the taxable income and tax liability of Mr. Z for the assessment year 2011-12.

Solution

Computation of total income of Mr. Z for the assessment year 2011-12



DA 96,000

Commission 36,000

Entertainment allowance 9,600

57

Transport allowance (1,000 - 800)*12 2,400

Rent free accommodation (4,56,000*15% = 68,400 or 1,80,000) 68,400

Interest free loan Exempt

Reimbursement of medical expenditure (20,000 – 15,000) 5,000

Employee’s obligation met by employer 2,500

Employer’s contribution towards RPF (50,000 – 48,960) 1,040

Interest credited in RPF (30,000/12*2.5) 6,250


Less Deduction under section 16 2,500

Net salary 5,84,690

Dividend from Tata Motors Ltd. [exempt under section 10(34)] Exempt

Share of profit from a firm (PGBP) [exempt under section 10(2A)] Exempt


Less Deduction under section 80C (50,000 + 20,000) 70,000


Working note

It is assumed that loan is taken from the employer. There is no perquisite value because loan

amount upto ��20,000 in a year is not taxable as perquisite.

58

LESSON 6

HOUSE PROPERTY Naveen Mittal

BASIS OF CHARGE [Section 22]

Income is taxable under the head “Income from house property” if the following three

conditions are satisfied

1. The property should consist of any buildings or lands appurtenant thereto.

2. The assessee should be owner of the property.

3. The property should not be used by the owner for the purpose of business or profession

carried on by him, the profits of which are chargeable to income-tax.

COMPOSITE RENT- If apart from recovering rent of the building, in some cases, the owner

gets rent of other assets (like furniture) or he charges for different services provided in the

building (for instance, security, charges for lift, air conditioning, electricity, water etc.), the

amount so recovered is known as “composite rent”.

Following is the tax treatment of “composite rent”

1. Where composite rent includes rent of building and charges for different services

In such situations, composite rent is to be split up and amount of services is chargeable

under the head “Profits and gains of business or profession” or “Income from other sources”

as the case may be and rent of property is chargeable under the head “Income from house

property”. This rule is applicable even if it is difficult to split up the amount.

2. Where composite rent is rent of letting out of building and letting out of other assets (like

furniture) and two letting are not separable i.e., letting of one is not acceptable to the other

party without letting of the other)

In such situations, income is taxable either under the head “Profits and gains of business or

profession” or “Income from other sources” as the case may be. This rule is applicable even

if sum receivable for the two lettings is fixed separately.

3. Where composite rent is rent of letting out of building and letting out of other assets and the

two lettings are separable i.e., letting of one is acceptable to the other party without letting

of the other)

In such situations, income from letting out of building is taxable under the head “Income

from house property” and income from letting out of other assets is taxable under the head

“Profits and gains of business or profession” or “Income from other sources” as the case

may be. This rule is applicable even if the assessee receives composite rent from his tenant

for two lettings.

CO-OWNERS [Section 26]- If a house property is owned by two or more persons, then such

persons are known as co-owners. If respective shares of co-owners are definite and

ascertainable, the share of each such person (in the computed income of property) shall be

included in his total income. It may be noted that co-owners are not taxable as an association of

persons.

WHEN PROPERTY INCOME IS NOT CHARGEABLE TO TAX

In the following cases, rental income is not chargeable to tax

1. Income from farm house

59

2. Annual value of any one palace of an ex-ruler

3. Property income of a local authority

4. Property income of an approved scientific research association

5. Property income of an educational institution and hospital

6. Property income of a trade union

7. House property held for charitable purpose

8. Property income of a political party

9. Property used for own business or profession

10. One self-occupied property

COMPUTATION of income under the head house property (LET OUT)

Gross Annual Value (GAV) XX

Less Municipal taxes XX

Net Annual Value (NAV) XX


Standard deduction XX

Interest on borrowed capital XX XX

Net Income from house property (Let Out) XX

GROSS ANNUAL VALUE [Sec. 23(1)]

Tax under the head “Income from house property” is not a tax upon rent of a property. It is tax

on inherent capacity of a building to yield income. The standard selected as a measure of the

income to be taxed is “annual income”.

Calculation of gross annual value (GAV)

Step 1 Find out reasonable expected rent of the property

[Municipal value or fair rent whichever is higher but subject to a maximum of standard

rent]

Expected Rent It is deemed to be the sum for which the property might reasonably be

expected to be let out from year to year.

Fair rent Rent fetched by a similar property in the same or similar locality.

Standard Rent It is the maximum rent which a person can legally recover from his

tenant under a Rent Control Act.

Step 2 Find out rent actually received or receivable after excluding unrealized rent but

before deducting loss due to vacancy

Step 3 Higher of amount computed in Step 1 or Step 2 is taken

Step 4 Find out loss due to vacancy

Step 5 Step 3 minus Step 4 is gross annual value.

UNREALIZED RENT- Unrealized rent is the rent which the owner could not realize.

Unrealized rent shall be excluded from rent received/ receivable only if the following conditions

are satisfied [Conditions of Rule 4]

1. The tenancy is bonafide.

60

2. The defaulting tenant has vacated, or steps have been taken to compel him to vacate the

property.

3. The defaulting tenant is not in occupation of any other property of the assessee.

4. The assessee has taken all reasonable steps to institute legal proceedings for the

recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings

would be useless.

MUNICIPAL TAXES- Municipal taxes (like house tax, service tax, local tax) levied by any

local authority in respect of the house property are deductible only if these taxes are borne and

actually paid by the owner during the previous year. It doesn’t matter whether the taxes

belong to the earlier years, current year or coming years.

If property is situated in a foreign country, municipal taxes levied by foreign local authority are

deductible (if such taxes are paid by the owner).

STANDARD DEDUCTION [Sec. 24 (a)]- 30% of NAV is deductible irrespective of any

expenditure incurred by the assessee. Thus, no deduction can be claimed in respect of expenses

on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply,

salary of liftman, etc.

INTEREST ON BORROWED CAPITAL [Sec. 24 (b)]- Interest on borrowed capital is

allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair,

renewal or reconstruction of the property.

Interest of pre-construction period- Pre-construction period means the period commencing

from the date of borrowing and ending on –

a. 31st March immediately prior to the date of completion of construction/ date of

acquisition; or

b. Date of repayment of loan, whichever is earlier.

Interest payable by an assessee in respect of funds borrowed for the acquisition or construction

of a house property and pertaining to a period prior to the previous year in which such property

has been acquired or constructed, to the extent it is not allowed as a deduction under any other

provision of the Act, is deductible is five equal annual installments and the first installment

starts from the previous year in which the property is acquired or constructed.

For the purpose of computing pre-construction period, even if the construction is completed on

March 31, 2011, then 31st March prior to date of completion means 31

st March 2010.

Current year interest- It is charged from the year of completion (YOC) to date of repayment

(DOR).


1. Interest on borrowed capital is calculated by adding pre-construction period interest and

current year interest.

2. Interest is borrowed capital is deductible on “accrual basis”. It can be claimed as

deduction on yearly basis, even if the interest is not actually paid during the year.

3. If interest is calculated on the basis of number of days, the date of borrowing is included

while the date of repayment of loan is excluded.

61

4. Income from a self-occupied house property can be negative. Its value always lies

between Zero to (-) 1,50,000.

5. Repayment of any loan taken from a friend/ relative for the purpose of purchasing any

property is not deductible.

Interest on borrowed capital in case of LET OUT property It is fully deductible (according to the rules given above) without any maximum ceiling.

Interest on borrowed Capital in case of SELF-OCCUPIED property

It is deductible (according to the rules given above) subject to a maximum ceiling given below

Case 1 1, 50,000 If capital is borrowed on or after April 1, 1999 for acquiring or constructing a property and if

such acquisition or construction is completed within 3 years from the end of the financial year

in which the capital was borrowed.

Further, one more condition to satisfy is that the person extending the loan certifies that such

interest is payable in respect of the amount advanced for acquisition or construction of the

house or as re-finance of the principal amount outstanding under an earlier loan taken for such

acquisition or construction.

Case 2 �30,000 1. If capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals

of a property.

2. If capital is borrowed before April 1, 1999 for purchase, construction, reconstruction,

repairs or renewals of a property.

COMPUTATION of income under the head house property (SELF-OCCUPIED) Gross Annual Value (GAV) NIL

Less Municipal taxes NIL

Net Annual Value (NAV) NIL


Standard deduction Nil

Interest on borrowed capital (ceiling applicable) XX XX

Income from property (self-occupied) XX

62

Tax treatment of different CASES of self-occupied house property

Self – Occupied Property Tax Treatment

If such property is used by the owner for the

purpose of carrying on his business or

profession

No income is taxable under the head

“Income from house property” but taxable

under the head “Profits and gains of

business or profession”

[Sec. 23(2)(a)] If such property is used

throughout the previous year for own

residential purposes, it is not let out or put to

any other use

Nothing is taxable. Only interest on

borrowed capital is deductible subject to a

maximum ceiling of 30,000 or

�1,50,000 depending upon the case

[Sec. 23(2)(b)] If such property could not

be occupied throughout the previous year

because employment, business or profession

of the owner is situated at some other place

and he has to reside at that other place in a

building not owned by him

Same as point (2) above

When a part of the property (being

independent residential unit) is self-

occupied and the other part is let out

Income from the independent unit (which is

self-occupied) will be taxable as self-

occupied property and income from the

unit which is let out is taxable as if the unit

is let out

When such property is self-occupied for a

part of the year and let out for the other part

of the year

Taxable as a let out property

Where a person has occupied more than one

property for his own residential purpose

Only one property (according to his own

choice) is treated as self-occupied and all

other properties will be taken as deemed to

be let out

The following points should be noted in this regard 1. In the case of “deemed to be let out” properties, the taxable income will be calculated in

the same manner as used for let out properties. In case of “deemed to be let out”

properties, GAV shall be taken as reasonable expected rent.

2. As far as point (6) mentioned above in the table is concerned, the option should be

exercised in such a way that the net income of a taxpayer is reduced to the minimum

possible level. Moreover, the option may be changed every year.

RECOVERY of UNREALIZED RENT which was allowed as deduction in the assessment

year 2001-02 (or earlier) [Section 25A]

Where a deduction has been allowed (in the assessment year 2001-02 or earlier years) in respect

of unrealized rent and subsequently during any previous year (relevant for the assessment year

2002-03 or subsequent year) the assessee has realized any amount in respect of such rent, the

amount so realized will be chargeable to tax under the head “Income from house property”

(without making any deduction under sections 23 and 24).


• The amount so recovered is taxable in the previous year in which it is recovered.

63

• It is taxable even if the house is not owned (or deemed to be owned) by the assessee in

the year of recovery.

• In case of recovery of unrealized rent, expenditure on recovery is not taken in to

consideration.

• It is to be noted that normally income is taxable under the head “Income from house

property” only if the taxpayer is the owner or deemed owner of a house property during

the previous year. However, in the case of recovery of unrealized rent, property income

is taxable even if no house is owned (or deemed to be owned) by the taxpayer.

Amount

recovered

Amount of bad debt (i.e.,

Unrealized rent minus

amount of recovery)

Deduction allowed by the

Assessing Officer

Balance

UNREALIZED RENT of the assessment year 2002-03 (or subsequent year) IS

COLLECTED subsequently [Sec. 25AA]- Where the assessee cannot realize rent during the

previous year 2001-02 (or in any subsequent year) from a property let out to a tenant and,

subsequently, the assessee has realized any amount in respect of such rent, the amount so

realized (to the extent it has not been included in annual value earlier), shall be deemed to

be income chargeable under the head “Income from house property” and accordingly charged to

income-tax as the income of that previous year in which such rent is realized whether or not the

assessee is the owner of that property in that previous year.

Mode of taxation of ARREARS OF RENT in the year of receipt [Sec 25B]- Any amount

received (not charged to income-tax for any previous year) by way of arrears of rent is

chargeable to tax in the year of recovery after deducting a sum equal to 30% of such amount

under the head “Income from house property” even if the assessee is not the owner of that

property in the year in which he has received arrears of rent.

Litigation expenses etc. are not taken in to consideration.

Method of Calculation

Gross Annual Value (Recomputed with new rent) XX

Less Gross Annual Value (Original) XX

Arrear of rent XX

MISCELLANEOUS POINTS

1. If rent actually collected is zero and the entire loss is due to vacancy then the gross

annual value is NIL.

2. Valuation of any property (like valuation of municipal value, fair rent etc.) starts from

the date on which house is purchased. However, difference between the date on which

the house is purchased and the date from which the house is let out is treated as vacancy

period. For example, a house is purchased on Sept.1, 2010 and let out from Dec. 1,

2010. In such a case, period between 1/9/10 to 31/11/10 is treated as vacancy period.

However, municipal value, standard rent etc. would be calculated from Sept. 1, 2010.

3. If any property is self-occupied for some period then the period cannot be treated as

vacancy period.

64

4. If the municipal tax paid by the landlord is more than gross annual value, then net

annual value can be negative.

References




(latest edition).



QUESTIONS

Case 1

Mrs. R (age 50 years) owns two houses. The details of the two houses are as follows

I II

Municipal valuation 3,00,000 2,00,000

Fair rent 3,20,000 2,20,000

Standard rent 2,80,000 2,30,000

Annual rent Self-occupied 2,07,600

Vacancy period ---- 2 months

Municipal taxes paid (2010-11) 20,000 20,000

She raised a loan of �12,00,000 from SBI @ 12% p.a. on June 1, 2006 for construction of

House I. Construction of the house was completed on January 1, 2010. Date of repayment of

loan is October 1, 2010.

Half of the municipal taxes in respect of let out house i.e., house II have been paid by the tenant.

During the previous year 2010-11, Mrs. R was employed in X Ltd. at a monthly salary of �

50,000. Company paid �2,000 as professional tax on her behalf.

Compute the total income and tax liability of Mrs. R for the assessment year 2011-12 assuming

that she does not have any other income.

Solution

Computation of net taxable income of Mrs. R for the assessment year 2011-12

Particulars Amount

Salary income

Basic salary (50,000*12) 6,00,000

Add Perquisites (Employees obligation met by employer 2,000


Less Deduction under section 16

Entertainment allowance Nil

Professional tax 2,000

House property income

House I (Self-occupied)

Net annual value Nil


Standard deduction Nil

Interest on borrowed capital 1,50,000* (1,50,000)

House II (Let out)

6,00,000

65

Step 1 Expected rent 2,20,000

Step 2 Annual rent after deducting unrealized rent 2,07,600

Step 3 Higher of step 1 or step 2 2,20,000

Step 4 Loss due to vacancy (2,07,600/12*2) 34,600

Step 5 Gross annual value 1,85,400

Less Municipal taxes 10,000

Net annual value 1,75,400


Standard deduction (30% of NAV) 52,620

Interest on borrowed capital Nil 1,22,780

Gross total income

Less Deduction under section 80C (Repayment of loan)

Net taxable income

(27,220)

5,72,780

1,00,000

4,72,780

Working notes

1. Calculation of interest on borrowed capital

Annual interest = 12,00,000*12% = 1,44,000

Pre-construction period June 1, 2006 to March 31, 2009

Pre-construction period interest 1,44,000*(34/12)*(1/5) = �81,600

which is deductible during the previous year 2009-10 to 2013-14.

Current year interest Previous year 2009-10 to October 1, 2010.

�1,44,000*6/12 = �72,000

Total interest during the previous year 2010-11 = �81,600 + �72,000 = �1,53,600

Since the capital is borrowed on or after April 1, 1999 for construction of house property

and the construction is completed within 3 years from the end of financial year in which

the capital is borrowed (i.e., till 31st March 2010), the maximum amount that can be

deducted is �1,50,000.

2. Repayment of loan taken for purchase/ construction of a residential house property is

eligible for deduction under section 80C but up to a maximum of �1,00,000.

Case 2

Mr. X owns a house at Delhi. During the previous year 2010-11, 3/4th

portion of the house is

self-occupied for full year and 1/4th

portion is let out for residential purpose on a rent of �

1,500 p.m. Municipal valuation of the house is �48,000 and fair rent �52,000. He incurs the

following expenditure in respect of the house property during the year

Municipal taxes �6,000; Repairs �2,100; Fire Insurance Premium �3,700; Land Revenue

�4,200; Ground Rent �300. A loan of �70,000 was taken on 1-4-2001 @ 15% p.a. for the

construction of the house which was completed on 31-3-2004. Nothing has been repaid on loan

account so far.

Compute Mr. X’s income from house property and tax liability for the assessment year 2011-12.

Solution

Computation of income from house property of Mr. X for the assessment year 2011-12

Particulars SO (3/4th

) LO (1/4th

)

Step 1 Expected rent 12,000

Step 2 Annual rent – Unrealised rent 18,000

Step 3 Higher of step (1) or step (2) 18,000

66

Step 4 Loss due to vacancy Nil

Step 5 Gross annual value Nil 18,000

Less Municipal taxes Nil 1,500

Net annual value Nil 16,500


Standard deduction (30% of NAV) Nil 4,950

Interest on borrowed capital 7,875 2,625

Income from house property (7,875) 8,925

Total income from house property = (7,875) + 8,925 = 1,050

Note- In this question there cannot be any pre construction period interest during our relevant

previous year 2010-11 because in this case, 5 instalments of pre-construction period comes

during previous years 2003-04 to 2007-08.

Current year interest = 70,000*15% = 10,500

Case 3

Mr. X owns a house at Delhi. During the previous year 2010-11, 3/4th

portion of the house was

self-occupied for full year and 1/4th

portion was let out for residential purposes from 1-4-2010 to

31-12-2010 on a rent of �1,400 p.m. From 1-1-2011 this portion was also used for own residence.

Municipal valuation of the house is �20,000. He incurred the following expenditure in respect

of the house property

Municipal taxes due � 12,000; Repairs � 4,000; Fire Insurance Premium � 7,000; Land

Revenue 8,000; Ground Rent �4,000, were all paid during the year. A loan of �2,00,000

was taken on 1-4-2006 @ 9% p.a. for the construction of the house which was completed on 28-

3-2007. Nothing has been paid on loan account so far.

Find out his income from house property for the assessment year 2011-12.

Solution


Particulars SO (3/4th

) LO (1/4th

)

Fair rent (1,400*12) 16,800

Municipal value 15,000 5,000




Step 4 Loss due to vacancy Nil

Step 5 Gross annual value Nil 16,800

Less Municipal taxes Nil Nil






Total income from house property = (13,500) + 7,260 = (6,240)

Note

67

1. In this question there is no pre-construction period and thus, no pre-construction interest

can be calculated.

Current year interest = 2,00,000*9% = 18,000

2. It is assumed that municipal taxes are not paid.

3. In this case, we have applied the assumption that fair rent is equal to annual rent.

However, the same question can also be done without applying the assumption of fair

rent.

Case 4

Mr. X owns at Delhi whose municipal value is 1,20,000 and fair rent is �1,44,000 p.a.

During the previous year 2010-11 the house was vacant for 3 months. For rest of the period it

was let out for residential purposes @ �15,000 p.m. He makes the following expenditure in

respect of the house property

Municipal taxes �18,000

Repairs �12,000

Fire insurance premium �10,000

A loan of 3,00,000 was taken on 1-4-2008 @ 12% p.a. for the construction of the house

which was completed on 21-3-2010, 50% of the loan has been paid back on October 1, 2010.

Solution

Computation of income for house property of X for the assessment year 2011-12

Particulars Amount


Step 2 Annual rent 1,80,000

Step 3 Higher value 1,80,000

Step 4 Loss due to vacancy 45,000

Step 5 GAV 1,35,000


NAV 1,17,000


Standard deduction (30% of NAV) 35,100

Interest on borrowed capital 34,200

Net income from house property 47,700

Working note for calculation of interest on borrowed capital

Annual interest = �3,00,000*12% = �36,000

Pre-construction period April 1, 2008 to March 31, 2009

Pre-construction period interest �36,000*(1/5) = �7,200 which is deductible during

the previous year 2009-10 to 2013-14.

Current year interest April 1, 2010 to September 30, 2010 (full amount for half year) + October

1, 2010 to March 31, 2011 (half amount for half year).

i.e., �36,000*1/2 + 18,000*1/2 = 18,000 + 9,000 = �27,000

Total interest during the previous year 2010-11 = �7,200 + �27,000 = �34,200

68

Case 5

X owns a residential house property. It has two identical units – unit I and unit II. While unit I is

self-occupied by X and his family members, unit II is let out (rent being �7,000 per month, this

unit remained vacant for one month during which it was self-occupied). Municipal value of the

property is 1,25,000. Standard rent is �1,35,000 and fair rent is �1,50,000.

Municipal tax is imposed @ 12% (on municipal value) which is paid by X. Other expenses for

the previous year 2010-11 being repairs �5,000 and insurance �6,000.

X borrowed 8,00,000 on 1-7-2007 from LIC @ 12% p.a. to construct the property.

Construction of the house was completed on June 30, 2009. The entire amount is still unpaid.

Compute the income of Mr. X for the assessment year 2011-12 on the assumption that income of

X from other sources is 3,00,000.

Solution


Particulars Unit I (SO) Unit II (LO)





Step 5 Gross annual value 77,000






Income from house property (64,800) (16,150)

Computation of net taxable income of X for the assessment year 2011-12

Income for house property

Unit 1 (64,800)

Unit 2 (16,150)

(80,950)

Income from other sources 3,00,000


Less Deduction under section 80C to 80U (Chapter VIA) Nil

Net taxable income/ total income 2,19,050

Working note for calculation of interest on borrowed capital

Annual interest = � 8,00,000*12% = �96,000

Pre-construction period July 1, 2007 to March 31, 2009

Pre-construction period interest 96,000*(21/12)*(1/5) = 33,600 which is deductible

during the previous year 2009-10 to 2013-14.

Current year interest April 2010 to March 2011

96,000

Total interest during the previous year 2010-11 = �33,600 + 96,000 = �1,29,600

69

Since the capital is borrowed on or after April 1, 1999 for construction of house property and the

construction is completed within 3 years from the end of financial year in which the capital is

borrowed, the maximum amount that can be deducted is �1.50,000.

Case 6

Mrs. X (age 40 years) owns two houses. The details of the two houses are as follows

First House Second House

Municipal valuation 3,10,000 2,10,000

Fair rent 3,40,000 2,20,000

Standard rent 2,90,000 2,30,000

Annual rent received/ receivable ---- 2,07,600

Unrealised rent ---- 17,300

The first house is used for her own residence while the second is let out. She paid 20,000 as

interest on loan taken for the construction of the first house. The second house remained vacant

for two months during the year 2010-11. Expenses in respect of the second house for the said

year were as follows

Municipal taxes paid 15,000; Land revenue due but unpaid �5,000; Interest on loan for

reconstruction of the house � 20,000. Fire insurance premium paid � 5,000. During the

financial year 2010-11, Mrs. X was employed in ABC Ltd. at a monthly salary of �25,200.

The company paid �2,500 as professional tax on her behalf. Compute total income of Mrs. X

for the assessment year 2011-12 assuming that she does not have any other income.

Solution

Computation of income from house property of Mrs. X for the assessment year 2011-12

Particulars Unit I (SO) Unit II (LO)


Step 2 Annual rent – Unrealised rent (2,07,300 –

17,300)

1,90,300

Step 3 Higher of step (1) or step (2) 2,05,000


Step 5 Gross annual value 1,70,400


Net annual value Nil 1,55,400





Computation of net taxable income of Mrs. X for the assessment year 2011-12

Basic pay (25,200*12) 3,02,400

Add Perquisite (Employees obligation met by employer) 2,500


Less Deduction under section 16 Entertainment allowance Nil

Professional tax 2,500

3,02,400

Income for house property

70

Unit 1 (20,000)

Unit 2 88,780

68,780


Less Deduction under section 80C to 80U (Chapter VIA) Nil

Net taxable income/ total income 3,71,180

71

LESSON 7 and 8

PROFITS AND GAINS OF BUSINESS OR PROFESSION Naveen Mittal

The word ‘Business’ is defined in section 2(13) to include any trade, commerce or manufacture

or any adventure or concern in the nature of trade, commerce or manufacture. Sections 30 to 37

cover expenses which are expressly allowed as deduction while computing business income,

sections 40, 40A and 43B cover expenses which are not deductible.

BASIS OF CHARGE [Section 28]

Under section 28, the following income is chargeable to tax under the head “Profits and gains of

business or profession”

a. Profits and gains of any business or profession;

b. Income derived by a trade, professional or similar association from specific services

performed for its members;

c. The value of any benefit or perquisite, whether convertible into money or not, arising

from business or the exercise of a profession;

d. Export incentive available to exporters;

e. Any interest, salary, bonus, commission or remuneration received by a partner from firm;

f. Any sum received for not carrying out any activity in relation to any business or not to

share any know-how, patent, copyright, trademark, etc.;

g. Any sum received under a Keyman insurance policy including bonus;

h. Profits and gains of managing agency;

i. Income from speculative transaction etc.

RENT, rates, taxes, repairs and insurance for building [Section 30]- Under section 30, the

following deductions are allowed in respect of rent, rates, taxes, repairs and insurance for

premises used for the purpose of business or profession

a. the rent of premises, the amount of repairs (not being capital expenditure), if he has

undertaken to bear the cost of repairs (this is applicable if the assessee has occupied the

property as a tenant);

b. the amount of current repairs (not being capital expenditure) (if the assessee has occupied

the premises otherwise than as a tenant);

c. any sum on account of land revenue, local rates or municipal taxes; and

d. amount of any premium in respect of insurance against risk of damage or destruction of

the premises.

DEPRECIATION ALLOWANCE [Sec. 32]- Following conditions must be satisfied to avail

depreciation

1. Asset must be owned by the assessee.

72

2. Asset must be used for the purpose of business or profession.

3. Asset should be used during the relevant previous year Normal depreciation (i.e., full

year’s depreciation) is available if an asset is put to use at least for sometime during the

previous year. However, where an asset is acquired during the previous year but put to

use for the purpose of business or profession for less than 180 days during that year, in

such a case, half of the normal depreciation is allowed.

4. Depreciation is available on tangible assets (Building, machinery, plant or furniture) as

well as intangible assets (know-how, patents, copyrights, trademarks, licenses,

franchises or any other business or commercial rights of similar nature). However, it must

be noted that the intangible assets must be acquired after March 31, 1998.

If all the above conditions are satisfied, depreciation is available (it is a must, it is not at the

option of the assessee to claim or not to claim, depreciation in such cases).

Basis concepts for computation of depreciation allowance

1. Block of Assets- The term “block of assets” means a group of assets falling within a class

of assets in respect of which the same percentage of depreciation is prescribed. A

taxpayer may have 13 different block of assets (out of which 12 blocks are for tangible

assets and 1 block is for intangible asset). These blocks are given below

Number Nature of asset ROD

Block 1 Buildings Residential buildings other than hotels and boarding

houses 5%

Block 2 Buildings Office, factory, godowns or buildings which are not

mainly used for residential purpose [it covers hotels and boarding

houses but does not cover those which are covered under blocks 1

and 3]

10%

Block 3 Purely temporary erections such as wooden structures 100%

Block 4 Furniture Any furniture/ fittings including electrical fittings 10%

Block 5 Plant and machinery Any plant and machinery (not covered by

block 6, 7, 8, 9, 10, 11 or 12), motor cars (other than those used in a

business of running them on hire) acquired or put to use on or after

April 1, 1990

15%

Block 6 Plant and machinery Ocean-going ships, vessels ordinarily

operating on inland waters including speed boats 20%

Block 7 Plant and machinery Buses, lorries and taxis used in the business

of running them on hire (applicable only when the assessee is in the

business of hiring out its/ his buses, lorries or taxis), machinery used

in semi-conductor industry, moulds used in rubber and plastic goods

factories and life saving medical equipment

30%

Block 8 Plant and machinery Aeroplanes 40%

Block 9 Plant and machinery Containers made of glass or plastic used as

re-fills 50%

Block 10 Plant and machinery Computers including computer software. It

also includes books (other than annual publications) owned by a

professional. It also includes gas cylinders; plant used in field

operations by mineral oil concerns; direct fire glass melting furnaces

60%

Block 11 Plant and machinery Energy saving devices; renewal energy 80%

73

devices; rollers in flour mills, sugar works and steel industry

Block 12 Plant and machinery Air pollution control equipments; water

pollution control equipments; solid waste control equipments,

recycling and resource recovery systems; cinematograph films, bulbs

of studio lights; wooden match frames; and books (being annual

publications) owned by assesses carrying on a profession or books

(may or may not be annual publications) owned by a person carrying

on business in running lending libraries

100%

Block 13 Intangible assets (acquired after March 31, 1998) Know-how,

patents, copyrights, trademarks, licenses, franchises and any other

business or commercial rights of similar nature

25%

2. Written down value/ Depreciated value

WDV at the year end

= WDV of the block on the 1st day of the previous year

Add Actual cost of the asset (falling in the block) acquired during the previous year

Less Money received/ receivable* (together with scrap value) in respect of that asset

(falling within the block of assets) which is sold, discarded, demolished or

destroyed during the previous year

(* It does mean gross consideration. It is net consideration after excluding

expenditure incidental to sale. Further, here actual money received or receivable

in cash or by cheque or draft is deductible. In other words, any other things or

benefit which can be converted in terms of money cannot be deducted.)

3. No depreciation will be charged in the following cases i. If WDV of the BOA is reduced to zero, though the block of assets does not ceases

to exist on the last day of the previous year; or

ii. If BOA is empty or ceases to exist on the last day of the previous year, though the

WDV is not zero (*In such cases WDV of the block on the first day of the next

previous year will be taken as Nil); or

iii. If any imported car is used for the purpose of business or profession in India

which is acquired during March 1, 1975 and March 31, 2001. If, however, such

imported car is used in the business of running it on hire for tourist or for the

purpose of business or profession outside India, then depreciation is admissible at

the usual rate.

4. Meaning of “Actual Cost” - It means the actual cost to the assessee as reduced by the

proportion of the cost thereof, if any, as has been met, directly or indirectly, by any other

person or authority. Actual cost for any asset includes all expenses directly relatable to

acquisition of the asset. It is to note that interest pertaining to the period till the asset is

put to use should be added to the “actual cost” of the asset.

5. The following points should be noted in this regard

i. The restriction of 50% depreciation limit is applicable only in the year in which

an asset is acquired and not in subsequent years.

ii. If an asset is not used at all, no depreciation in respect of that asset is available.

This rule is applicable in the first year in which the asset is acquired as well as

in the subsequent years.

74

iii. If an asset is acquired during any previous year but not put to use during that

previous year; the actual cost of such asset will become part of the block of assets

on day 1 of the next year. For example, if any asset is purchased during the

previous year 2009-10 but put to use in the previous year 2010-11; this asset is a

part of the block on April 1, 2010. This rule is applicable even if the asset is not

put to use in the previous year 2009-10 and depreciation is available for the first

time in the previous year 2010-11.

iv. If nothing is mentioned about the date of use of an asset, then assume that the

asset is put to use on the same day the asset is acquired.

Computation of ADDITIONAL DEPRECIATION- To claim additional depreciation, the

following conditions must be satisfied

1. Manufacture/ production of any article or thing The assessee should be engaged in

the manufacture or production of any article or thing (may be priority sector item or even

non-priority sector item given in the Eleventh Schedule). However, in the case of power

generating units, additional depreciation is not applicable.

2. New plant and machinery installed and acquired after March 31, 2005- Additional

depreciation is available only in respect of new plant and machinery acquired and

installed after March 31, 2005. The following points should be noted in this regard

• Additional depreciation is not available in respect of building or furniture even if

the other conditions are satisfied.

• Additional depreciation is not available in respect of old plant and machinery.

3. Eligible plant and machinery- Any plant and machinery which has been acquired and

installed after March 31, 2005 by an assessee is qualified for additional depreciation.

However, the following assets are not eligible for additional depreciation

a. Ships and aircrafts; or

b. Any machinery or plant which, before its installation by the assessee, was used either

within or outside India by any other person; or

c. Any machinery or plant which is installed in any office premises or any residential

accommodation, or accommodation in the nature of a guest house; or

d. Any office appliances or road transport vehicles; or

e. Any machinery or plant, the whole of the actual cost of which is allowed as a

deduction (whether by way of depreciation or otherwise) in computing the income

chargeable under the head “Profits and gains of business or profession” of any one

previous year.

Rate of additional depreciation- Additional depreciation shall be available @ 20% of

the actual cost of new plant and machinery acquired and installed after March 31, 2005.

If, however, the asset is put to use for less than 180 days in the year in which it is

acquired, the rate of additional depreciation will be 10%.

UNABSORBED DEPRECIATION

Following steps must be applied to claim depreciation

Step 1 Depreciation allowance of the previous year is first deductible from the income

chargeable under the head “Profits and gains of business or profession”.

75

Step 2 Depreciation allowance, if not fully deductible under the head “Profits and gains of

business or profession”, it is deductible from the income chargeable under other heads of income

(except salaries) for the same assessment year.

Step 3 If depreciation allowance is still unabsorbed, it can be carried forward to the subsequent

year.


1. Unabsorbed depreciation can be carried forward for unlimited number of years.

2. Continuity of business is not relevant for the purpose of adjusting unabsorbed

depreciation.

3. In the subsequent year(s), unabsorbed depreciation can be set-off against any income

(except income under the head salaries). In the matter of set-off, following order of

priority must be followed to adjust unabsorbed depreciation from the “Profits and gains

of business or profession” in the subsequent year(s)

a. Current depreciation

b. Brought forward business loss

c. unabsorbed depreciation

TEA/ COFFEE/ RUBBER DEVELOPMENT ACCOUNT [Sec. 33AB]- An assessee can

claim deduction under this section if the following conditions are satisfied

1. The assessee must be engaged in the business of growing and manufacturing tea or

coffee or rubber in India.

2. It must make the following deposit in “special account”

a. Deposit with National Bank for Agriculture and Rural Development (NABARD) any

amount in accordance with, a scheme approved by the Tea Board or Coffee Board or

Rubber Board; or

b. Deposit any amount in deposit account opened by the assessee in accordance with, an

approved scheme framed by the Tea Board or Coffee Board or Rubber Board with the

previous approval of the Central government.

3. The aforesaid amount shall be deposited within 6 months from the end of the previous

year or before the due date of furnishing return of income, whichever is earlier.

Amount of deduction- The amount of deduction is lower of the following

a. A sum equal to amounts “deposited in special account” as mentioned above or

b. 40% of the profit of such business computed under the head “Profits and gains of

business or profession” before making any deduction under section 33AB and before

adjusting brought forward business loss under section 72.

SITE RESTORATION FUND [Sec. 33ABA]- An assessee can claim deduction under this

section if the following conditions are satisfied

1. The assessee must be engaged in the business of the prospecting for, or extraction or

production of, petroleum or natural gas or both in India.

2. The Central Government has entered into an agreement with the taxpayer for such

business.

3. It must make the following deposit in “special account”

76

a. Deposit with SBI any amount in accordance with, a scheme approved by the

Government of India in the Ministry of Petroleum and Natural Gas; or

b. Deposit any amount in an account (referred to as site restoration account) opened by

the assessee in accordance with a scheme framed by the Ministry of Petroleum and

Natural Gas.

4. The aforesaid amount shall be deposited before the end of the previous year.

Amount of deduction- The amount of deduction is lower of the following

a. A sum equal to amounts “deposited in site restoration account” as mentioned above or

b. 20% of the profits of such business computed under the head “Profits and gains of

business or profession” before making any deduction under section 33ABA and before

adjusting business forward business loss under section 72.

EXPENDITURE ON SCIENTIFIC RESEARCH [Sec. 35]- The term “scientific research”

means “any activity for the extension of knowledge in the fields of natural or applied sciences

including agriculture, animal husbandry or fisheries”.

Following is the classification of such expenditures 1. Revenue expenditure incurred by the assessee himself [Sec. 35(1)(i)]- Deduction is

allowed for such expenditure only if such research relates to the business.

Pre-commencement period expenses

Revenue expenses (other than expenditure on providing perquisites to employees)

incurred before the commencement of business (but within 3 years immediately before

commencement of business) on scientific research related to the business are deductible

in the previous year in which the business in commenced. However, the deduction is

limited to the extent it is certified by the prescribed authority.

Such expenses may be the expenditure on purchasing materials used in scientific

research, salary paid to employees (not being a perquisite).

2. Contribution made to outsiders [Sec. 35 (ii)/ (iii)]- Deduction is allowed for any sum

paid to a scientific research association or to a university, college or other institution if

a. the payment is made to an approved scientific research association which has,

as its object, undertaking of scientific research related or unrelated to the

business of assessee, deduction allowed is 175% of actual expenditure [Sec.

35(1)(ii)].

b. the payment to an approved university, college or other institution* for the use

of scientific research related or unrelated to the business of assessee, deduction

allowed is 175% of actual expenditure [Sec. 35(1)(ii)].

c. the payment is made to an approved university, college or other institution* for

the use of research for social science or statistical research related or unrelated

to the business of the assessee, deduction allowed is 125% of actual expenditure

[Sec. 35(1)(iii)].

3. Capital expenditure incurred by an assessee himself [Sec. 35(2)]- Deduction is

allowed for such expenditure, if such research relates to the business. However, the

following points must be noted in this regard

a. Such expense may be on plant or equipment for research or constructing

building (excluding cost of land) for research or expenses of capital nature

77

connected with research like expenses on purchase of buses to transport research

personnel.

b. Where any capital expenditure has been incurred on scientific research related to

business before the commencement of business, the amount of such expenditure

incurred within 3 years immediately preceding the commencement of the

business, is deductible in the previous year in which the business is commenced.

c. Deduction is available even if the relevant asset is not put to use for research

and development purposes during the previous year in which the expenditure is

incurred.

4. Contribution to national laboratory [Sec. 35 (2AA)]- “National Laboratory” for this

purpose means a scientific laboratory functioning at national level under the aegis of the

Indian Council of Agricultural Research (ICAR), the Indian Council of Medical

Research (ICMR) or the Council of Scientific and Industrial Research (CSIR), the

Defence Research and Development Organisation (DRDO), the Department of

Electronics, the Department of Bio Technology or the Department of Atomic Energy.

Deduction allowed is 1.75 times of actual payment made to a “National Laboratory” or a

University or IIT or a specified person. However, the above payment must be used by the

aforesaid person for undertaking scientific research programme approved by the

prescribed authority.

5. Expenditure on in-house research and development expenses [Sec. 35(2AB)] Deduction allowed is 2 times of the expenditure incurred if all the given below

conditions are satisfied

a. The taxpayer is a company.

b. The company should be engaged in the business of manufacture or production of

any article or thing except those specified in the Eleventh Schedule.

c. It incurs any expenditure on scientific research and such expenditure is of capital

nature or revenue nature (not being expenditure in the nature of cost of any land

or building). The expenditure on scientific research in relation to drugs and

pharmaceuticals shall include expenditure incurred on clinical drug trial, regulatory

approval and filling an application for a patent.

d. The above expenditure is incurred on in-house research and development facility up

to March 31, 2012.

e. The research and development facility is approved by the prescribed authority.

f. The taxpayer has entered into an agreement with the prescribed authority for co-

operation in such research and development facility and for audit of the accounts

maintained for that facility.

However, if the aforesaid conditions are not satisfied, then deduction may be claimed as

per the rules mentioned in point (1) and point (3) above relating to revenue expenses and

capital expenses respectively.

78

6. Contribution to a company to be used by such company for scientific research [Sec.

35(1)(iia)]- The taxpayer can claim a deduction of 1.25 times of the amount paid to the

payee-company if all the given below conditions are satisfied

a. The taxpayer is any person (may be an individual, HUF, firm, company or any other

person).

b. The taxpayer has paid any sum to a company (hereinafter referred to as “payee-

company”) to be used by the payee for scientific research.

c. The scientific research may or may not be related to the business of the tax payer.

d. The payee-company is registered in India which has, as its main object, scientific

research and development.

e. The payee-company is for the time being approved by the prescribed authority.

f. The payee-company fulfils such other conditions as may be prescribed.

Point to be noted If on account of inadequacy or absence of profits of the business, deduction

on account of capital expenditure on scientific research cannot be allowed, fully or partly, the

deficiency so arising is to be carried forward as if it is an unabsorbed depreciation.

AMORTIZATION OF TELECOM LICENCE FEES [Sec. 35 ABB]- Following conditions

should be satisfied to claim deduction under this section

1. The expenditure is capital in nature.

2. It is incurred for acquiring any right to operate telecommunication services.

3. The expenditure is incurred either before the commencement of business or thereafter

at any time during any previous year.

4. The payment for the above has actually been made to obtain license.

If all the above conditions are satisfied, then deduction can be claimed under this section.

If the above conditions are not satisfied, then one may claim deduction in respect of revenue

expenditure under section 37(1).

Amount of deduction- The payment will be allowed as deduction in equal installments over

the period starting from the year in which such payment has been made and ending in the year

in which the license comes to an end.

It may be noted that the deduction starts from the year in which actual payment of expenditure is

made irrespective of the previous year in which the liability for the expenditure is incurred

according to the method of accounting regularly employed by the assessee.

In case where the licence fee is actually paid before the commencement of the business to

operate communication services, then deduction is available for the previous years beginning

with the previous year in which such business is commenced and ending with the previous year

in which the licence comes to an end.

Where a deduction is claimed and allowed under section 35ABB, no deduction will be available

in respect of the same expenditure under section 32.

79

PAYMENT TO ASSOCIATIONS AND INSTITUTIONS FOR CARRYING OUT RURAL

DEVELOPMENT PROGRAMMES [Sec. 35CCA]- This section provides deductions of sums

paid by any assessee to

1. any association or institution to be used for carrying out any programme of rural

development approved before March 1, 1983;

2. an association or institution which has its object the training of persons for

implementation of a rural development programme approved before March 1, 1983;

3. the National Fund for Rural Development set up by the Government; and

4. the National Urban Poverty Eradication Fund set up and notified by the Central

Government.

AMORTIZATION OF PRELIMINARY EXPENSES [Sec. 35D]- Deduction is available in

case of an Indian company or a resident non-corporate assessee. A foreign company even if it

is resident in India, cannot claim any deduction under section 35D.

Amount of deduction- One-fifth of the qualifying expenditure is allowable as deduction in

each of the 5 successive years beginning with the year in which the business commences, or as

the case may be, the previous year in which extension of the undertaking is completed or the new

unit commences production or operation.

Qualifying expenditure includes

1. The work should be carried on by the assessee itself or by a concern approved by

the Board- Expenditure in connection with preparation of feasibility report, preparation

of project report, conducting a market survey (or any other survey necessary for the

business of the assessee), or engineering services relating to the business of the assessee,

provided the work is carried on by the assessee himself or by a concern which is for the

time being approved in this behalf by the board.

2. The work can be carried on by the assessee itself or by any concern (approved or

not approved)

i. Legal charges for drafting any agreement between the assessee and any other

person relating to the setting up of the business of the assessee.

ii. Legal charges for drafting the memorandum and articles of association, if the

taxpayer is a company.

iii. Printing expenses of the memorandum and articles of association, if the taxpayer

is a company.

iv. Registration fee of a company under the provisions of the Companies Act.

v. Expenses in connection with the public issue of shares or debentures of a

company, underwriting commission, brokerage and charges for drafting, typing,

printing and advertisement of the prospectus.

vi. Expenses on incorporation.

Maximum ceiling of qualifying expenditure The amount qualified as deduction must never exceed the following limits

1. In the case of a corporate assessee

5% of the cost of project or 5% of capital employed, whichever is more.

2. In the case of a non-corporate assessee 5% of the cost of project.

80

Capital employed It means the aggregate of the issued share capital (sum total of share capital and amount

outstanding as share premium account), debentures and long term borrowings (repayable for not

less than 7 years) as on the last day of the previous year in which the business of the company

commences.

Cost of the project- It means the actual cost (or additional cost incurred after commencement of

business in connection with extension or setting up an undertaking) of fixed assets, namely, land,

buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including

expenditure on development of land and buildings), which are shown in the books of the assessee

on the last day of the previous year in which the business of the assessee commences.

AMORTIZATION OF EXPENDITURE IN THE CASE OF AMALGAMATION/ DEMERGER

[Sec. 35DD]- The taxpayer is an Indian company or co-operative bank.

1. It incurs any expenditure for the purpose of amalgamation or demerger.

2. The expenditure is deductible in 5 equal annual installments and the first installment

starts from the previous year in which amalgamation or demerger takes place.

3. No deduction shall be allowed in respect of the above expenditure under any other

provision of the Act.

AMORTIZATION OF EXPENDITURE UNDER VOLUNTARY RETIREMENT

SCHEME [Sec. 35DDA]

1. An expenditure is incurred in any previous year by way of payment of any sum to an

employee in connection with his voluntary retirement under any scheme of voluntary

retirement.

2. The amount is deductible in 5 equal annual installments and the first installment starts

from the year in which the expenditure is incurred.


1. The above rule is applicable even if the scheme of voluntary retirement has not been

framed in accordance with guidelines prescribed under section 10(10C).

2. Each part of the payment in connection with voluntary retirement is deductible in 5 years

in 5 equal installments.

OTHER DEDUCTIONS [Sec. 36] 1. Premia for insurance on health of employees- An employer can claim deduction in

respect of premia paid by him by any mode other than cash for insurance on the health

of his employees in accordance with the scheme framed by the General Insurance

Corporation (GIC) and approved by the Central Government or any other insurer and

approved by IRDA.

2. Bonus or commission to employees- Bonus or commission paid to an employee is

allowable as deduction subject to certain conditions

a. Amount payable to employees as bonus or commission should not otherwise have

been payable to them as profit or dividend.

b. Bonus or commission is allowed as deduction only where payment is made during the

previous year or on or before the due date of furnishing return of income under

section 139.

81

.

3. Interest on borrowed capital- Interest on capital borrowed is allowed as deduction if the


a. The assessee must have borrowed money.

b. The money so borrowed must be used for the purpose of business or profession.

c. Interest is paid or payable on such borrowing.

4. Employer’s contribution to recognized provident fund and approved

superannuation fund [Sec. 36(1)(iv)]- Employer’s contribution towards a recognized

provident fund or an approved superannuation fund is allowable as deduction subject to

the limits laid down for the purpose of recognizing the provident fund or approving

superannuation fund [Fourth Schedule and rules 87 and 88] subject to the provisions of

section 43B.

5. Employer’s contribution towards an approved gratuity fund [Sec.36(1)(v)]-

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

subject to the provisions of section 43B.

6. Employees’ contribution towards staff welfare Scheme [Sec. 36(1)(va)]- Section 2(24)

defines income. Clause (x) of section 2(24) provides that any sum received by any

taxpayer from his employees as contribution to provident fund or any fund for the welfare

of such employees shall be included in the taxpayer’s income. Moreover, section

36(1)(va) provides that any sum received by the taxpayer as contribution from his

employees towards provident fund [whether RPF or UPF] or any welfare fund of such

employees shall be allowed as deduction only if such sum is credited by the taxpayer to

the employee’s account in the relevant fund on or before the due date. For this purpose,

“due date” means the date by which the assessee is required as an employer to credit such

contribution to the employee’s account in the relevant fund under the provisions of any

law or term of contract of service or otherwise.

7. Bad debts [Sec. 36(1)(vii)]- Amount of any debt or part is allowable as deduction subject

to the following conditions

a. The debt has been taken into account in computing the income of the assessee of that

previous year or of an earlier previous year, or represents money lent in the ordinary

course of business of banking or money-lending which is carried on by the assessee;

and

b. It has been written off as irrecoverable in the accounts of the assessee for that

previous year.

8. Family Planning Expenditure [Sec. 36(1)(ix)]- Any bonafide, expenditure incurred by a

COMPANY for the purpose of promoting family planning among its employees, is

allowable as deduction. If, however, such expenditure is of capital nature, then the

amount is deductible in 5 equal annual installments and the first installment starts from

the year in which the expenditure is incurred.

It is to be noted that any family planning expenditure which is not allowed as deduction

due to inadequacy of profits, shall be set-off and carry-forward as if it is an unabsorbed

depreciation.

82

9. Banking cash transaction tax and securities transaction tax [Sec. 36(1)(xv)]- These

taxes are deductible under section 36.

10. Advertisement expenses [Sec. 37(2B)]- Deduction is not available in respect of

expenditure incurred by an assessee or advertisement in any souvenir, brochure, tract,

pamphlet or the like published by a political party.

GENERAL DEDUCTIONS [Sec. 37 (1)]

Section 37(1) is a residuary section. In order to claim deduction under this section, the following

conditions should be satisfied

1. The expenditure should not be of the nature described under sections 30 to 36.

2. It should not be in the nature of capital expenditure.

3. It should not be assessee’s personal expenditure.

4. It should have been incurred in the previous year.

Note If a business liability has definitely arisen in the previous year, the deduction

should be allowed although the liability may have to be quantified and discharged at a

future date. What should be certain is the incurring of the liability.

5. It should be in respect of business carried on by the assessee.

6. It should have been expended wholly and exclusively for the purpose of such business.

7. It should not have been incurred for any purpose which is an offence or prohibited by

any law.

SPECIFIC DISALLOWANCES

The following expenses given by sections 40, 40A and 43B are expressly disallowed by the Act

while computing income chargeable under the head “Profits and gains of business or profession”.

Besides these expenses, no deduction is permissible under sections 28 to 44D in respect of

income referred to in sections 115A, 115AB, 115AC, 115AD, 115BBA and 115D.

AMOUNT NOT DEDUCTIBLE UNDER SECTION 40(a)

1. Fringe benefit tax- FBT is not deductible while calculating business income.

2. Income-tax- Any sum paid on account of income tax (i.e., any rate or tax levied on the

profits or gains of any business or profession) is not deductible. Similarly, any interest/

penalty/ fine for non-payment or late payment of income-tax is not deductible. This rule

is applicable whether income-tax is payable in India or outside India. Any tax paid

outside India and which is subject to relief under section 90/ 90A/ 91 is not deductible.

3. Wealth-tax- Any sum paid on account of wealth-tax under the Wealth-tax Act, 1957, or

tax of a similar nature chargeable under any law outside India is not deductible.

4. Salary payable outside India without tax deduction [Sec. 40(a)(iii)]- Section 40(a)(iii)

is applicable if the following conditions are satisfied

Condition 1 The payment is chargeable under the head “Salaries” in the hands of the

recipient.

83

Condition 2 It is payable (a) outside India (to any person resident or non-resident); or

(b) in India to a non-resident.

Condition 3 Tax has not been paid to the Government nor deducted at source under the

Income-tax Act, 1961.

If the aforesaid conditions are satisfied, then the payment is not allowed as deduction.

5. Provident fund payment without tax deduction at source [Sec. 40(a)(iv)]- Any

payment to a provident fund (or other fund established for the benefit of employees of the

assessee) in respect of which the assessee has not made effective arrangements to secure

that tax shall be deducted at source from any payment made from the fund which are

taxable under the head “Salaries”.

AMOUNT NOT DEDUCTIBLE UNDER SECTION 40A- In the case of any assessee, the

following expenses are expressly disallowed under section 40A

1. Amount not deductible in respect of payment to relatives [Sec.40A(2)] Any expenditure incurred by an assessee in respect of which payment has been made to

the relatives is liable to be disallowed in computing business profits to the extent such

expenditure is considered to be excessive or unreasonable, having regard to the fair

market value of goods or services or facilities, etc.

Relative [Sec. 2(41]) Relative means the husband, wife, brother or sister or any linear

ascendant or descendant of that individual.

Substantial Interest A person is deemed to have substantial interest in the business or

profession if such person is the beneficial owner of at least 20% of equity capital (in case

of a company) or if such person is entitled to 20% profits of a concern (in any other case)

at any time during the previous year.

2. Amount not deductible in respect of expenditure exceeding �20,000 ( �35,000 in

case of payment made for plying, hiring or leasing goods carriages w.e.f. October 1,

2009) [Sec.40A(3)]- No deduction is allowed if the following conditions are satisfied

a. The assessee incurs any expenditure which is otherwise deductible under other

provisions of the Act for computing business/ profession income (i.e., expenditure for

purchase of raw material, trading goods, expenditure on salary, etc.). The amount of

expenditure exceeds �20,000.

b. A payment (or aggregate of payments made to a person in a day) in respect of the

above expenditure exceeds ��20,000.

c. The above payment is made otherwise than by an account payee cheque or an

account payee demand draft.

The following points must be noted in this regard

- If aggregate payment in a day (otherwise than by an account payee cheque/ draft)

to the same person in respect of an expenditure exceeds �20,000*, it will be

disallowed under section 40A(3), even if none of each payment in a day exceeds

20,000*.

- Where the assessee makes payment over � 20,000* at a time, partly by an

account payee cheque and partly in cash or bearer cheque or crossed cheque to

84

some parties but payment in cash (or by bearer cheque or crossed cheque) alone at

one time does not exceed �20,000*, section 40A(3) is not attracted.

- Provision of section 40A(3) does not apply in respect of an expenditure which is

not to be claimed as deduction under sections 30 to 37.

3. Amount not deductible in respect of provision for unapproved gratuity fund [Sec.

40A(7)] Provision for gratuity fund (for meeting future liability) is deductible only if such gratuity

fund is an approved gratuity fund.

4. Amount not deductible in respect of contributions to non-statutory funds [Sec.

40A(9), (10), (11)]- Any sum paid by the assessee as an employer by way of contribution

towards recognized provident fund, or approved superannuation fund or an approved

gratuity fund is deductible to the extent it is required by any law.

If the following conditions are satisfied, then contribution or payment is not deductible by

section 40A(9)

a. The contribution/ payment is made by an assessee as an employer.

b. It is paid towards setting up (or formation of) any trust, company, association of

persons, body of individuals, society or it is paid by way of contributions to any

fund.

c. The contribution or payment is not required by any law.

AMOUNT NOT DEDUCTIBLE IN RESPECT OF UNPAID LIABILITY [Sec. 43B]- Sec

43B is applicable only if the taxpayer maintains books of account on the basis of merchantile

system of accounting. The following expenses (which are otherwise deductible under the other

provisions of the Income-tax Act) are deductible on payment basis

1. Any sum payable by way of tax, duty, cess or fee (by whatever name called under any

law for the time being in force);

2. Any sum payable by an employer by way of contribution to provident fund or

superannuation fund or any other fund for the welfare of employees;

3. Any sum payable as bonus or commission to employees for service rendered;

4. Any sum payable as interest on any loan or borrowing from a public financial

institution (i.e., ICICI, IFCI, IDBI, LIC and UTI) or a state financial corporation or a

state industrial investment corporation;

5. Interest on any loan or advance taken from a scheduled bank including a co-operative

bank; and

6. Any sum payable by an employer in lieu of leave at the credit of his employee.

The above expenses are deductible in the year in which payment is actually made.

However, if the assessee maintains books of account on merchantile basis and the given below

two conditions are satisfied, then the expenditure is deductible on “accrual” basis in the year in

which the liability is incurred. The conditions are

85

Condition 1 Payment in respect of the aforesaid expenses is actually made on or before the

due date of submission of return of income.

Condition 2 The evidence of such payment is submitted along with the return of income. But

no annexure is possible with the new Income-tax return forms; so such evidence should be kept

by the tax payer himself and it can be produced before the Assessing Officer whenever he is

required to produce it.

TIME FOR FILING RETURN OF INCOME [Sec. 139(1)] The due date for filling returns of incomes are given below

Different situations Due date of submission of return

Where the assessee is a company

- Where the company is required to furnish a

report in Form No. 3CEB under section 92E

pertaining to international transactions

- Any other company

November 30 of the assessment year

September 30 of the assessment year

Where the assessee is a person other than a

company

- In case where accounts of the assessee are

required to be audited under any law

- Where the assessee is a “working partner” in

a firm whose accounts are required to be

audited under any law

- In any other case



July 31 of the assessment year

It is to be noted that where the last day of filling return of income or loss is a day on which the

office is closed, the assessee can file return on the next day afterwards on which the office is

open and, in such cases, the return will be considered to have been filed within the specified time

limit.

DEEMED PROFITS [Sec. 41] 1. Recovery against any deduction [Sec. 41(1)]- Recovery against any deduction is

chargeable to tax in the previous year in which the amount is received or recovered

whether the business is in existence or not.

2. Sale of assets used for scientific research [Sec. 41(3)]- Where any capital asset used in

scientific research is sold without having been used for other purposes and the sale

proceeds, together with the amount of deduction allowed under section 35, exceed the

amount of capital expenditure incurred on purchase of such asset, such surplus (i.e., sale

price) or the amount of deduction allowed, whichever is less, is chargeable to tax as

business income in the year in which the sale took place even if the business is not in

existence.

3. Recovery of bad debts [Sec. 41(4)]- Where any bad debt has been allowed as deduction

under section 36(1)(vii) and the amount subsequently recovered on such debt is greater

than the difference between the debt and the deduction so allowed, the excess realization

is chargeable to tax as business income of the year in which the debt is recovered even if

the business is not in existence.

86

4. Recovery after discontinuance of business or profession [Sec. 176(3A), (4)]- Where

any business or profession is discontinued by reason of retirement or death of the person

carrying on such business or profession, any sum received after the discontinuance of the

business or profession is deemed to be the income of the recipient and charged to tax in

the year of receipt.

TAXATION OF UNDISCLOSED INCOME/ INVESTMENTS

The following are treated as income from undisclosed sources

1. Cash credit [Sec. 68]- Where any sum is found credited in the books of an assessee

maintained for any previous year and the assessee offers no explanation about the nature

and source thereof or the explanation offered by him is not, in the opinion of the

Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the

income of the assessee of that previous year.

2. Unexplained investments [Sec. 69]- Where in the financial year immediately preceding

the assessment year, the assessee has made investments which are not recorded in the

books of account, if any, maintained by him for any source of income and the assessee

offers no explanation about the nature and source of the investments or the explanation

offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of

the investments may be deemed to be the income of the assessee of such financial year.

3. Unexplained money, etc. [Sec. 69A]- Where in any financial year the assessee is found

to be the owner of any money, bullion, jewellery, or other valuable article and such

money, bullion, jewellery, or other valuable article is not recorded in the books of

account, if any, maintained by him for any source of income and the assess offers no

explanation about the nature and scope of acquisition of the money, bullion, jewellery or

other valuable article, or the explanation offered by him is not, in the opinion of the

Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other

valuable article may be deemed to be the income of the assessee for such financial year.

4. Amount of investments, etc., not fully disclosed in books of account [Sec. 69B]- Where in any financial year the assessee has made investments or is found to be the

owner of any bullion, jewellery, or other valuable article, and the Assessing Officer finds

that the amount expended on making such investments or in acquiring such bullion,

jewellery or other valuable article exceeds the amount recorded in this behalf in the books

of account maintained by the assessee for any source of income, and the assessee offers

no explanation about such excess amount or the explanation offered by him is not, in the

opinion of Assessing Officer, satisfactory, the excess amount may be deemed to be the

income of the assessing, for such financial year.

5. Unexplained expenditure, etc. [Sec. 69C]- Where in any financial year an assessee has

incurred any expenditure and he offers no explanation about the source of such

expenditure or part thereof, or the explanation, if any, offered by him is not, in the

opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or

part thereof, as the case may be, deemed to be the income of the assessee for such

financial year.

The proviso to section 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 under any head of income.

87

SPECIAL PROVISIONS- Computation of income on ESTIMATED BASIS in case of

taxpayers engaged in the business of retail trading or civil construction or any other

business [Section 44AD]

This section will be applicable to any business (whether it is retail trading or civil construction or

any other business).

Section 44AD is applicable if all the following conditions are satisfied

1. The assessee should be an eligible assessee. Eligible assessee for this purpose is an

individual, a Hindu undivided family or a partnership firm (not being a limited liability

firm).

2. The assessee should be engaged in any business except the business of plying, hiring or

leasing goods carriages referred to in section 44AE.

3. Total turnover/ gross receipt in the previous year of the eligible business should not

exceed ��60 lakh.

Consequences if section 44AD is applicable

1. The income from the eligible business is estimated at 8% of the gross receipt or total

turnover.

2. A taxpayer can voluntarily declare a higher income in his return.

3. All deductions under sections 30 to 38 (including depreciation and unabsorbed

depreciation) are deemed to have been already allowed and no further deduction is

allowed under these sections. However, in the case of a firm, the normal deduction in

respect of salary and interest to partners under sections 40 (b) shall be allowed. The

written down value is calculated, where necessary, as if depreciation as applicable has

been allowed. Moreover, it will be assumed that disallowance, if any, under sections 40,

40A and 43B has been considered while calculating the estimated income @ 8% per cent.

4. An assessee opting for the above scheme shall be exempted from payment of advance tax

related to such business.

5. An assessee opting for the above scheme shall be exempted from maintenance of books

of account related to such business as required under section 44AA.

Computation of income on estimated basis in the case of taxpayer engaged in the business

of PLYING, LEASING OR HIRING TRUCKS [Sec. 44AE]- Section 44AE is applicable if all

the following conditions are satisfied

1. The taxpayer may be an individual, HUF, AOP, BOI, firm, company, co-operative

society or any other person. He or it may be resident or a non-resident.

2. The taxpayer is engaged in the business of plying, hiring or leasing goods carriage.

3. The taxpayer owns not more than 10 goods carriages at any time during the previous

year. For this purpose, a taxpayer, who is in possession of a goods carriage, whether

taken on hire purchase or on installments and for which the whole or part of the amount

payable is still due, shall be deemed to be the owner of such goods carriage.

88

Consequences if section 44AE is applicable

1. The income from each goods carriage being a “Heavy Goods Vehicle” is estimated at �

5,000 for every month (or part of a month) during which the goods carriage is owned

by the taxpayer.

2. The income from each goods carriage “other than a heavy goods vehicle” is estimated at

� 4,500 for every month (or part of a month) during which the goods carriage is

owned by the taxpayer.

3. However a taxpayer can voluntarily declare a higher income in his return.

4. No deduction under sections 30 to 38 (including depreciation and unabsorbed

depreciation) are further allowed. However, in the case of a firm, the normal deduction

in respect of salary and interest to partners under section 40(b) shall be allowed. The

WDV is calculated, where necessary, as if depreciation as applicable has been allowed.

Moreover, it will be assumed that disallowance, if any, under sections 40, 40A and 43B

has been considered while calculating the estimated income as per the above provisions.

5. The brought forward business losses and other losses can be deducted according to the

normal provisions of the Income-tax Act.

6. “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.

7. “Heavy goods vehicle” means any goods carriage the gross vehicle weight of which, or a

tractor or a road-roller the unladen weight of either of which exceeds 12,000 kilograms.

8. Income is calculated for the period during which the goods carriage is owned by the

taxpayer (not on the basis of the period during which the goods carriage is put to use).

References

1. Singhania, Vinod. K. and Singhania, Monica, “Students Guide to Income-tax”,

Taxmann Publications Pvt.Ltd. (latest edition).

2. Ahuja, Girish and Gupta, Ravi, “Simplified Approach to Income-tax”, Flair




QUESTIONS

Case 1

Mr. Y (age 50 years) has provided the following figures for the previous year 2010-11

1. Net profit as per profit and loss account �4,50,000.

2. The following amounts have been debited to the profit and loss account while calculating

net profit

a. Household expenses �7,000.

b. Rent of own building �1,30,000 (half of the building is in personal use and half in

business use).

c. Municipal taxes of the building �4,000 paid on 1-05-2011.

d. Expenditure on repairs of the building �5,000.

e. Premium paid for insurance of the building �3,000.

89

f. A car purchased for �3,00,000 on 1-01-2011 and was out to use the same day. The

car was used for both personal as well as business purpose. He also debited �5,000

as petrol expenses.

Mr. Y has debited �30,000 as amount invested in PPF.

Compute his taxable income and tax liability for the assessment year 2011-12.

Solution

Computation of net taxable income of Mr. Y for the assessment year 2011-12

Particulars Amount

Net profit as per profit and loss account 4,50,000

Add Expenses disallowed

Household expenses 7,000

Rent of own building 1,30,000

Municipal taxes 2,000

Repair 2,500

Insurance 1,500

Car 3,00,000

Petrol 2,500

Public provident fund 30,000

9,25,500

Less Depreciation of car 11,250


Less Deduction under section 80C (PPF) 30,000


Case 2

Z Ltd. furnishes you the following information

Block I Plant and Machinery (consisting of 3 plants),

Rate of depreciation 15%

WDV on April 1, 2010 �2,50,000

Block II Buildings (two buildings),

Rate of depreciation 10%

WDV on April 1, 2010 6,00,000

Acquired on June 2, 2010, two plants for �2,00,000.

Sold on November 30, 2010 all the five plants for �5,00,000.

Acquired on December 15, 2010 two plants for �1,50,000.

Admissible rate of depreciation in relation to all acquired plants is 15%.

Solution

Block I (Plant and Machinery ROD 15%)

WDV on 1/4/2010 2,50,000

Add Purchase of 2 plants on 2/6/2010 2,00,000

Add Purchase of 2 plants on 15/12/2010 1,50,000

6,00,000

Less Sale of plants 5,00,000

WDV on 31/3/2011 1,00,000

Depreciation @ 7.5% 7,500

90

Block II (Building ROD 10%)

WDV on 1/4/2010 6,00,000

Add Assets acquired Nil

Less Sale value Nil

WDV on 31/3/2011 6,00,000

Depreciation @ 10% 60,000

Total depreciation 7,500 + 60,000 67,500

Case 3

From the following data calculate the depreciation admissible to an individual carrying on

manufacturing business for the assessment year 2011-12

Amount a. Factory building WDV on 1-4-2010 (Rate 10%) 10,00,000

b. Plant and machinery (Rate 15%)

Written down value on 1-4-2010 8,00,000

Additions on 30-6-2010 1,00,000

Additions on 31-12-2010 1,00,000

Sale of old plant on 1-12-2010 6,00,000

c. Motor car (Rate 15%)

Written down value on 1-4-2010 1,20,000

Sale of car on 30-9-2010 1,50,000

Solution

Block I (Factory building ROD 10%)

WDV on 1/4/2010 10,00,000

Add Asset acquired Nil

Less Sale of assets Nil

WDV on 31/3/2011 10,00,000

Depreciation @ 10% 1,00,000

Block II (Plant and Machinery ROD 15%)

WDV on 1/4/2010 8,00,000

Add Purchase on 30/6/2010 1,00,000

Add Purchase on 31/12/2010 1,00,000

10,00,000

Less Sale of plants 6,00,000

WDV on 31/3/2011 4,00,000

Depreciation on 1,00,000 @ 7.5% 7,500

Depreciation on 3,00,000 @ 15% 45,000

Additional depreciation 20% of

1,00,000 +10% of 1,00,000 30,000 82,500

Block III (Motor Car ROD 15%)

WDV on 1/4/2010 1,20,000

Add Assets acquired Nil

Less Sale value 1,20,000*

91

WDV on 31/3/2011 Nil

Depreciation Nil

Total depreciation 1,00,000 + 82,500 1,82,500

Case 4

X submits the following particulars

Previous Years

2010-11 ( �) 2011-12 ( �)

Income from salary 1,50,000 3,10,000

Business profits (before depreciation) 2,00,000 2,30,000

Current depreciation 3,80,000 4,15,000

Income from other sources 12,000 50,000

Determine the taxable income of X for the assessment years 2011-12 and 2012-13.

Solution

Calculation of NTI for the assessment year 2011-12

Income from Salaries 1,50,000

Income from other sources 12,000

Less Current depreciation adjusted 12,000* NIL

Business income 2,00,000

Less Current depreciation 2,00,000* NIL


Less Deduction under section 80C to 80U NIL


Note There is an unabsorbed depreciation of 1,68,000 (3,80,000 – 2,00,000 – 12,000)

Calculation of NTI for the assessment year 2012-13

Income from Salaries 3,10,000

Income from house property 50,000

Less Current depreciated adjusted 50,000* NIL


Less Current depreciation 2,30,000* NIL


Less Deductions under section 80C to 80U Nil


Note There is an unabsorbed depreciation of 3,03,000 [4,15,000 – 2,30,000 + 1,68,000 –

50,000]

Case 5

Mrs. X (age 56 years), a resident individual, is owner of a departmental store at Delhi. He

requests you to compute his total income and tax liability of the assessment year 2011-12 on the

basis of the following profit and loss account for the year ending March 31, 2011

�� Opening stock 3,60,000 Sales 63,00,000

Purchases 48,00,000 Closing stock 4,50,000

Salaries and wages 1,40,000

Rent and rates 60,000

92


Income-tax 80,000

Advertisement 10,000

Postage and telegrams 4,000

Interest on own capital 18,000

Reserve for future losses 12,000

Depreciation (furniture) 9,000

Net profit 12,27,000

67,50,000 67,50,000

The following additional particulars are furnished

1. Stock of goods at the opening as well as the closing day of the accounting year had

consistently been valued at 10 percent below the cost price.

2. Mrs. X contributes �20,000 towards public provident fund.

3. Depreciation according the Income-tax Rules works out to �4,000.

4. Salary and wages include �25,000 being entertainment allowance paid to employees.

5. She has an interest income of �55,000 also.

Solution

Computation of Net Taxable Income of X for the assessment year 2011-12

Particulars Amount




Excess depreciation written off (9,000 – 4,000) 5,000

Income tax 80,000

Interest on own capital 18,000

Reserve for future losses 12,000 1,45,000

13,72,000

Less Undervaluation of opening stock (3,60,000/90*10) 40,000

13,32,000

Add Undervaluation of closing stock (4,50,000/90*10) 50,000

Profits and gains of business or profession 13,82,000

Income from other sources 55,000




Computation of tax liability of Mrs. X for the assessment year 2011-12

Particulars Amount

Tax on 14,17,000 [91,000 + 30% of (14,17,000 - 8,00,000)] 2,76,100

Add Cess @ 3% 8,283

Net tax to be paid by the assessee (Rounded off) 2,84,380

93

Case 6

X (age 27 years) furnishes the following information relevant for the assessment year 2011-12

Profit and Loss Account for the year ending March 31, 2011

Amount Amount

Household expenses 12,000 Gross profit 4,56,000

Bad debts 1,000 Commission 30,000

Provision for bad debts 4,800 Sundry receipts 8,000

Fire insurance 3,000 Interest on investment 20,000

Salary to staff 2,00,000

Salary to X 3,000

Interest on capital of X 13,000

Depreciation on furniture 13,600

Advertisement expenditure 7,000

General expenses 50,000

Net profit 2,06,600

5,14,000 5,14,000

Other information

1. General expenses include medical expenditure of X �20,000.

2. Income of 10,000, accrued during the previous year ending March 31, 2011, is not

recorded in the Profit and Loss Account.

3. X contributes 30,000 annually towards public provident fund.

4. Depreciation on furniture comes to �3,000 according to the tax provision.

Determine the taxable income of X for the assessment year 2011-12.

Solution

Computation of net taxable income of X for the assessment year 2011-12

Particulars Amount



Medical expenditure of X 20,000

Excess depreciation written off (13,600-3,000) 10,600


Provision for bad debts 4,800

Salary to X 3,000

Interest on own capital 13,000 63,400

2,70,000

Add Income not credited 10,000

2,80,000

Less Income not related to business

Interest on investment 20,000


Add Income from other sources

Interest on investment 20,000




94

LESSON 9 and 10

CAPITAL GAINS Naveen Mittal

BASIS OF CHARGE [Sec. 45]- Capital gains tax liability arises when the following conditions

are satisfied

1. There should be a capital asset.

2. The capital asset is transferred by the assessee.

3. Such transfer takes place during the previous year.

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

5. Such profit or gains is not exempt from tax under section 54, 54B, 54D, 54EC, 54F and

54G and 54GA.

If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year

relevant to the previous year in which the capital asset is transferred. CAPITAL ASSET [Section 2(14)]- “Capital asset” is defined to include property of any kind,

whether fixed or circulating, movable or immovable, tangible or intangible but does not include

the following

1. Any stock-in-trade, consumable stores or raw material held for the purposes of business

or profession.

2. Personal effects of the assessee, that is to say, movable property including wearing

apparel and furniture held for his personal use or for the use of any member of his family

dependent upon him (jewellery, house property, immovable asset, archaeological

collections, drawings, paintings, sculptures, or any work of art will not be taken as

“personal effects”. Consequently, on transfer of these shares, capital gain will be

chargeable to tax).

3. Agricultural land in India provided it is not situated –

a. in any area within the territorial jurisdiction of a municipality or a cantonment board,

having a population of 10,000 or more; or

b. in any notified area (within 8 kilometres from a municipality stated above).

4. 6½ per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold

Bonds, 1980 issued by the Central Government.

5. Special Bearer Bonds 1991.

6. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.

SHORT-TERM/ LONG-TERM CAPITAL ASSET- “Short term capital asset” means a

capital asset held by an assessee for not more than 36 months, immediately prior to its date of

transfer.

In the following cases, however, such period is taken as 12 months

1. Equity or Preference Shares in a company (shares may or may not be quoted).

2. Securities (like debentures, Government securities) listed in a recognized stock exchange

in India.

3. Units of UTI (units may or may not be quoted).

4. Units of a mutual fund specified under section 10(23D) [units may or may not be

quoted].

95

5. Zero coupon bonds (bonds may or may not be quoted).

In the aforesaid cases, if the asset is held for more than 12 months immediately prior to its date

of transfer, then it is “long-term capital asset”.

TRANSFER OF CAPITAL ASSET

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

the extinguishment of any rights therein or the compulsory acquisition thereof under any law.

However, certain transactions are not regarded as transfers

1. Transfer of capital asset at the time of liquidation [Sec. 46(1)] If the capital assets

are distributed in kind by a company to its shareholders on its liquidation, then such a

distribution is not treated as “transfer”.

2. Transfer of capital asset at the time of partition of family [Sec. 47(i)] If the capital

assets are distributed in kind by a Hindu Undivided Family on total or partial partition of

the family, then such a distribution is not treated as “transfer”.

3. Transfer of capital asset by gift [Sec. 47(iii)] If a capital asset is transferred in kind by

any of the given mode (viz., under gift, under will or under an irrevocable transfer), then

it is not treated as “transfer”.

Exception The aforesaid rule is not applicable if the following conditions are satisfied

a. The taxpayer is an employee;

b. He has been allotted (directly or indirectly) shares/ debentures/ warrants by the

employer company under a notified Employees’ Stock Option Plan/ Scheme in

accordance with the guidelines issued by the Central Government; and

c. The aforesaid shares/ debentures/ warrants are gifted by the concerned-employee to

any person.

If the aforesaid case, the gift of shares/ debentures/ warrants will be treated as “transfer”.

4. Transfer of capital asset by holding company to subsidiary company [Sec. 47(iv)] If the given below conditions are satisfied, then the transaction is not treated as

“transfer”.

a. Capital asset is transferred by a parent company or its nominee.

b. It is transferred to a wholly* owned subsidiary company (* There should be at least 2

shareholders in a company. To apply this provision, if shares are held by the holding

company, say 99%, along with one of its directors, say 1%, in the subsidiary

company, this condition is satisfied).

c. The subsidiary company is an Indian company.

It may, however, be noted that if capital asset is transferred as stock-in-trade after

February 28,1988, then the aforesaid rule is not applicable and it will be treated as

“transfer”.

5. Transfer of capital asset by subsidiary company to holding company [Sec. 47(v)]- If

the given below conditions are satisfied, then the transaction is not treated as “transfer”.

a. The whole* (* There should be at least 2 shareholders in a company. To apply this

provision, if shares are held by the holding company, say 99%, along with one of its

directors, say 1%, in the subsidiary company, this condition is satisfied) of the share

capital of a subsidiary company is held by the holding company.

b. Capital asset is transferred by the aforesaid subsidiary company to its holding

company.

96

c. The holding company is an Indian company.

It may, however, be noted that if capital asset is transferred as stock-in-trade after

February 28, 1988, then the aforesaid rule is not applicable and it will be treated as

“transfer”.

6. Transfer of capital asset in a scheme of amalgamation [Sec. 47(vi)] If any capital

asset is transferred by the amalgamating company to an Indian amalgamated company,

in a scheme of amalgamation, then the transaction is not treated as “transfer”.

7. Transfer of capital asset in a scheme of amalgamation of two foreign companies

[Sec. 47(via)] If the given below conditions are satisfied, then the transaction is not

treated as “”transfer

a. The capital asset is shares in an Indian company.

b. Such shares are held by a foreign company (amalgamating company).

c. Such shares are transferred in a scheme of amalgamation.

d. Such shares are transferred to another foreign company (amalgamated company).

e. Persons holding at least 25% (in value) shares in the amalgamated foreign company

should become shareholders in the amalgamated foreign company.

f. The above transaction does not attract tax on capital gains in the country in which the

amalgamating company is incorporated.

8. Transfer in a scheme of amalgamation of banking company [Sec. 47(viaa)] Any

transfer of a capital asset by a banking company to a banking institution in a scheme of

amalgamation of such banking company with such banking institution, is not treated as

“transfer”.

9. Transfer of capital asset in a scheme of demerger [Sec. 47(vib)] If any capital asset

is transferred by the demerged company to an Indian resulting company, in a scheme of

demerger, then the transaction is not treated as “transfer”.

10. Transfer of shares in Indian company in a scheme of demerger of a foreign

company [Sec. 47(vic)] If the given below conditions are satisfied, then the transaction

is not treated as “”transfer

a. A foreign company (demerged company) holds shares in Indian company.

b. Such shares are transferred in a scheme of demerger by the aforesaid demerged

company to the resulting foreign company.

c. Persons holding at least 75% (in value) shares in the demerged foreign company

should become shareholders in the resulting foreign company.

d. The above transaction does not attract tax on capital gains in the country in which the

demerged company is incorporated.

11. Issue of shares by the resulting company to the shareholders of the demerged

company [Sec. 47(vid)] Whenever shares are issued in a scheme of demerger by the

resulting company to the shareholders of demerged company, in consideration of

demerger of undertaking, then the transaction is not treated as “transfer”.

12. Allotment of shares in amalgamated company in lieu of shares held in

amalgamating company [Sec. 47(vii)] If the given below conditions are satisfied, then

the transaction is not treated as “transfer”

a. There is an amalgamation of 2 companies.

b. The amalgamated company is an Indian company.

97

c. To the shareholders of amalgamating company, shares are allotted in the

amalgamated company.

d. Such shares are allotted in consideration of allotment of shares in the amalgamating

company.

13. Transfer of agricultural land before March 1, 1970 [Sec. 47(viii)] If agricultural

land is situated in India and it is transferred before March 1, 1970, then it is not treated as

“”transfer

14. Transfer of work of art, manuscript, painting, etc., to Government/ University/

National Museum, etc. [Sec. 47(ix)] If the given below conditions are satisfied, then

the transaction is not treated as “transfer”

a. Capital asset is any work of art, archaeological, scientific or art collection, book,

manuscript, drawing, painting, photograph or print.

b. It is transferred to the Government or a University or the National Museum, National

Art Gallery, National Archives or any other notified institution.

15. Conversion of bonds or debentures into shares [Sec. 47(x)] If the given below

conditions are satisfied, then the transaction is not treated as “”transfer

a. The capital asset is bonds or debentures or debenture-stock or deposit certificate in

any form of a company (the company may be Indian company or foreign company).

b. The above-noted capital asset is converted into shares or debentures of that company.

It may be noted that conversion of preference shares into equity shares is treated as

“transfer” as it is not covered by the aforesaid conditions.

16. Transfer by way of exchange of memberhip of a recognized stock exchange for

shares of a company [Sec. 47(xi)] If the given below conditions are satisfied, then the

transaction is not treated as “transfer”

a. The taxpayer is a person other than a company.

b. The capital asset is membership of a recognized stock exchange.

c. It is transferred to a company in exchange of shares allotted by that company to the

transferor.

d. It is transferred on or before December 31, 1998.

It may be noted that if the transfer is made after December 31, 1998 then such a case may

be covered by section 47(xiv).

17. Transfer of land by a sick industrial company which is managed by its workers’ co-

operative [Sec. 47(xii)] If the given below conditions are satisfied, then the transaction

is not treated as “transfer”

a. The capital asset is land of a sick industrial company.

b. The sick industrial company is being managed by its workers’ co-operative.

c. The land is transferred under a scheme prepared and sanctioned under section 18 of

Sick Industrial Companies (Special Provisions) Act, 1985.

d. The above transfer is made during the period commencing from the previous year in

which the said company has become a sick industrial company and ending with the

previous year during which the entire net worth of such company becomes equal to or

exceeds the accumulated losses.

98

“Net worth” for this purpose is paid-up share capital and free reserves. “Free reserves”

for this purpose means all reserves credited out of profits and securities premium account

but does not include reserves credited out of re-evaluation of assets write back of

depreciation provisions and amalgamation.

18. Transfer of capital assets in the case of conversion of firm into company [Sec.

47(xiii)] Section 47(xiii) covers the following two cases

1. Conversion of a partnership firm into a company.

2. Demutualisation or corporatization (as approved by SEBI) of a recognized stock

exchange in India as a result of which AOP/ BOI which owns the stock exchange is

converted into a company.

In the aforesaid two cases, transfer of capital assets is not taken as “transfer”, if the


a. A firm is converted into a company.

b. All the assets and liabilities of the firm/ AOP/ BOI relating to the business

immediately before succession become the assets and liabilities of the company.

c. All the partners of the firm immediately before succession become shareholders of

the company in the same proportion in which their capital accounts stood in the

books of the firm on the date of succession.

d. The partners of the firm do not receive any consideration or benefit (directly or

indirectly), in any form or manner, other than by way of allotment of shares (may

be equity or preference) in the company.

e. The aggregate of the shareholding in the company of the partners of the firm is not

less than 50% of total voting power in the company for at least 5 years from the date

of succession.

19. Transfer of a capital asset, being a membership right held by a member of a

recognized stock exchange in India [Sec. 47(xiiia)] If the given below conditions are

satisfied, then the transaction is not treated as “transfer”

a. Capital asset is a membership right held by a member of a recognized stock exchange

in India.

b. It is transferred for acquiring shares and trading/ clearing right in the stock exchange

in accordance with a scheme (approved by SEBI) for demutualization or

corporatization of stock exchange.

20. Transfer of a capital asset in the case of conversion of proprietary concern into a

company [Sec. 47(xiv)] If the given below conditions are satisfied, then the transaction

is not treated as “transfer”

a. A sole proprietary concern is converted into a company.

b. All the assets and liabilities of the concern relating to the business immediately before

succession become the assets and liabilities of the company.

c. The shareholding of the proprietor in the company is not less than 50% of the total

voting power in the company for at least 5 years from the date of succession.

d. The proprietor does not receive any consideration or benefit, directly or indirectly, in

any form or manner, other than by way of allotment of shares in the company.

21. Transfer involved in a scheme of lending of securities [Sec. 47(xv)] Any transfer

involved in a scheme for lending of any securities under an agreement or arrangement

subject to the guidelines issued by SEBI or RBI in this regard, which the assessee has

entered into with the borrower of such securities is not treated as “transfer”.

99

COMPUTATION OF CAPITAL GAINS/ LOSS [Sec. 48]- The tax incidence is generally

higher in the case of short-term capital gain as compared to long-term capital gain. It is to be

noted that no deduction is allowed in respect of securities transaction tax in computing income

under the head “Capital gains”.

Short Term Capital Gain/ loss Full value of consideration XX

Less Expenses on transfer XX

Cost of acquisition XX

Cost of improvement XX XX

Balance XX

Less Exemption under section 54B, 54D, 54G and 54GA XX

STCG/ STCL XX

Long Term Capital Gain/ loss Full Value of Consideration XX


Indexed cost of acquisition (ICA) XX

Indexed cost of improvement (ICI) XX XX

Balance XX

Less Exemption under section 54, 54B, 54D, 54EC, 54F, 54G and 54 GA XX

LTCG/ LTCL XX

WHEN THE BENFIT OF INDEXATION IS NOT AVAILABLE IN THE CASE OF

LONG-TERM CAPITAL ASSET- In the following cases, the provisions relating to indexed

cost of acquisition and indexed cost of improvement are not applicable even if a long-term

capital asset is transferred

Capital assets Who is the transferor

Bonds or debentures (other than capital indexed bonds issued by

the Government)

Any person

Shares in or debentures of an Indian company acquired by utilizing

convertible foreign exchange as mentioned under first proviso to

section 48*

Non-resident

CAPITAL GAINS EXEMPT FROM TAX UNDER SECTION 10- In the cases given below,

capital gains are not chargeable to tax by virtue of section 10. Conversely, in the cases given

below, if assets are transferred at a loss, such capital loss is not taken into consideration.

Long-term capital gain on transfer of securities not chargeable to tax in cases not covered

by transaction tax [Section 10(38)] Section 10(38) is applicable if the following conditions

are satisfied

a. The taxpayer is an individual, HUF, firm or company or any other taxpayer.

b. The asset which is transferred is a long-term capital asset.

c. Such asset is equity share in a company or units of equity oriented mutual fund.

d. Such transaction takes place on or after October 1, 2004.

e. At the time of transfer, the transaction is chargeable to securities transaction tax*.

100

If the above conditions are satisfied, long-term capital asset is exempt from tax. However, in the

case given above, if the capital gain is short-term capital asset, it is taxable under section 111A

@ 15% + Surcharge (if any) + Cess (3%).

For the above purpose, “equity oriented fund” means a fund which satisfies the following points

a. the investible funds are invested by way of equity shares in domestic companies to the

extent of more than 65% of the total proceeds of such fund (the percentage of equity

shareholding of the fund shall be computed with reference to the annual average of the

monthly averages of the opening and closing figures); and

b. the fund has been set up under a scheme of a mutual fund specified in section 10(23D).

* If these conditions are satisfied and the transaction is recorded in a stock exchange in India or

units are transferred to the mutual fund, securities transaction tax is applicable.

FULL VALUE OF CONSIDERATION [Sec. 48]- The expression “full value” means the

whole price without any deduction whatsoever. The following points should be noted in this

regard

Full value of consideration is the consideration received or receivable by the transferor in lieu of

assets, which he has transferred. Such consideration may be received in cash or in kind. If it is

received in kind, then fair market value (FMV) of such assets is taken as full value of

consideration.

EXPENDITURE ON TRANSFER- Expenditure incurred wholly and exclusively in connection

with transfer of capital asset is deductible from full value of consideration. The expression

“expenditure incurred wholly and exclusively in connection with such transfer” means

expenditure incurred which is necessary to effect the transfer. Examples of such expenses are

brokerage or commission paid for securing a purchase, cost of stamp, traveling expenses

incurred in connection with transfer, litigation expenditure for claiming enhancement of

compensation awarded in the case of compulsory acquisition of assets.

COST OF ACQUISITION- Cost of acquisition of an asset is the value for which it was

acquired by the assessee. Expenses of capital nature for completing or acquiring the title to the

property are includible in the cost of acquisition.

NOTIONAL COST OF ACQUISITION- In a few cases, notional cost of acquisition is

considered. Some important cases are discussed below

1. Cost of asset to the previous owner [Sec. 49(1)] The cost to the previous owner is deemed to be the cost of acquisition to the assessee in

cases where capital asset became the property of assessee under any mode of transfer

described below

a. acquisition of property on any distribution of assets on the total or partial partition of

a HUF;

b. acquisition of property under a gift or will;

c. acquisition of property

i. by succession, inheritance or devolution, or

ii. on any distribution of assets on the dissolution of a firm, body of individuals or

other association of persons where such dissolution had taken place before

April 1, 1987, or

iii. on any distribution of assets on the liquidation of a company, or

iv. under a transfer to a revocable or an irrevocable trust, or

101

v. on any transfer by a wholly-owned Indian subsidiary company from its holding

company, or

vi. on any transfer, by an Indian holding company from its wholly-owned subsidiary

company, or

d. acquisition of property, by a HUF where one of its members has converted his self-

acquired property into joint property after December 31, 1969.

2. Cost of acquisition being fair market value as on April 1, 1981 [Sec. 55(2)]

In some cases, the assessee may take at his option, either actual cost or the fair market

value of the asset (other than a depreciable asset), as on April 1, 1981 as cost of

acquisition.


a. The option is available only when an asset was acquired by the assessee [or by the

previous owner in case section 49(1) is applicable] before April 1, 1981.

b. The option is not available in the case of depreciable assets.

c. When option is available, the cost of the asset or FMV as on April 1, 1981, whichever

is higher, is taken as the cost of acquisition.

d. The option is not available in respect of transfer of a capital asset being goodwill of a

business; trademark/ brand name associated with a business; right to manufacture,

produce or process any article or thing; right to carry on business; tenancy right; route

permits or loom hours (whether self generated or otherwise).

3. Cost of acquisition in case of depreciable assets [Sec. 50] These provisions are applicable in the case of transfer of a depreciable asset but not

applicable in the case of transfer of a depreciable asset by a power-generating unit

claiming depreciation on the basis of straight-line basis method.

By virtue of section 50, computation of capital gain/ loss can be made in the case of

transfer of a depreciable asset only in the following two situations;

a. When written down value (WDV) is zero [Section 50(1)] This section is

applicable when the WDV of a block of assets on the last day of the previous year is

zero.

Full value of sale consideration xx

Less Expenses on transfer xx

WDV of the BOA at the beginning of the previous year xx

the actual cost of any asset(s) of same block acquired

during the previous year xx xx

Short Term Capital Gain xxx

If the resulting figure is negative, then section 50(1) is not applicable and capital gain is

not chargeable to tax (unless the case comes under situation 2 which is explained below).

b. When block is empty [Section 50(2)] This section is applicable only when a block

of assets ceases to exist on the last day of the previous year because all assets in that

block are sold during the previous year.

Full value of sale consideration xx

Less Expenses on transfer xx

WDV of the BOA at the beginning of the previous year xx

the actual cost of any asset(s) of same block acquired

during the previous year xx xx

Short Term Capital Gain/ Loss xxx

102

4. Cost of acquisition of bonus shares

The following points should be noted regarding bonus shares

a. If bonus shares are allotted before April 1, 1981 FMV on April 1, 1981 is taken

as cost of acquisition.

b. If bonus shares are allotted on or after April 1, 1981 Cost of acquisition is Nil.

c. The period of holding bonus shares shall be determined from the date of allotment of

bonus shares.

d. The above rules are also applicable in respect of shares, securities, debentures, bonds,

units allotted without any payment on the basis of holding of any other financial

assets.

5. Capital gain on transfer of right shares

Cost of acquisition of right shares depends upon the following situations

a. Original shares (on the basis of which the taxpayer becomes entitled to right

shares) Cost of acquisition is the amount actually paid for acquiring shares.

b. Rights entitlement (which is renounced by the assessee in favour of a person) Cost of acquisition is Nil.

In such a case, the amount realized by the original shareholder by selling his rights

entitlement will be short-term capital gains in his hands (as the cost is taken as nil).

The period of holding of the rights entitlement will be considered from the date of

offer to subscribe to shares to the date when such right entitlement is renounced by

the person.

c. Right shares acquired by the taxpayer by exercising his rights entitlement Cost

of acquisition is the amount actually paid by the taxpayer for acquiring the asset. The

period of holding shall be counted from the date of allotment of right shares.

d. Right shares purchased by the person in whose favor rights entitlement has been

renounced Cost of acquisition is the purchase price paid to renouncer of rights

entitlement (+) amount paid to the company which has allotted the rights shares.

6. Cost of acquisition in the case of advance money received [Sec. 51] Advance money

or other money received and forfeited by the assessee shall be deducted from the cost for

which the asset was acquired, or the fair market value, in computing the cost of

acquisition. However, if the previous owner has received and forfeited advance money,

then it shall not be deducted.

7. Conversion of debentures into shares [Sec. 49(2A)] Any transfer by way of conversion of debentures, debenture-stock, or deposit certificates

in any form, of a company into shares or debentures of that company, the transaction is

not considered as a transfer and hence no capital gain is chargeable to tax. On the sale of

shares or debentures received on such conversion, the capital gain shall be computed by

taking the cost of acquisition as that part of the cost of debentures, debenture-stock or

deposit certificates which has been appropriated towards the shares or debentures.

It is to be noted that if preference shares are converted into equity shares, it will be

regarded as transfer.


a. Cost of debentures shall be taken as “cost of acquisition” of shares.

b. The indexation will start from the date of conversion of debentures in to shares.

103

c. To find out whether or not shares are long-term capital asset or short-term capital

asset, the period of holding shall be determined from the date of allotment of shares.

COST OF IMPROVEMENT- Cost of improvement is capital expenditure incurred by an

assessee in making any additions/ improvement to the capital asset. It also includes any

expenditure incurred to protect or complete the title to the capital assets or to cure such title. Cost

of improvement includes only expenditure on improvement incurred on or after April 1, 1981

(whether incurred by the previous owner or by the assessee).

INDEXED COST OF ACQUISITION AND INDEXED COST OF IMPROVEMENT-

Indexed cost of acquisition is the amount which bears to the cost of acquisition, the same

proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost

Inflation Index for the first year in which the asset was held by the assessee or the year beginning

on April 1, 1981, whichever is later. It is to be noted that in case a property is acquired by

making payments by installments, the benefit of indexation is available from the date of

acquisition and not from the date of payment of various installments.

Similarly, indexed cost of improvement is an amount which bears to the cost of improvement,

the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to

the Cost Inflation Index for the year in which the improvement to the asset took place.

Cost inflation index is notified by the Central Government for a previous year having regard to

seventy-five percent of average rise in the Consumer Price Index for urban non-manual

employees of the immediately preceding previous year to such previous year.

COMPUTATION OF INDEXED COST OF ACQUISITION UNDER DIFFERENT

SITUATIONS

Case I Where the capital asset is acquired by the assessee [not being in modes referred to in

section 49(1)] before April 1, 1981

Indexed cost of acquisition =

X CII for the year in which the asset is transferred

Case II Where the capital asset is acquired by the assessee [not being in modes referred to in

section 49(1)] on or after April 1, 1981 Indexed cost of acquisition =

X CII for the year in which the asset is

transferred

Case III Where the capital asset is acquired by the assessee before April 1, 1981 in one of the

modes referred to in section 49(1) and the same is originally acquired by the previous owner

before April 1, 1981


X CII for the year in which

the asset is transferred

104

Case IV Where the capital asset is acquired by the assessee on or after April 1, 1981 in one of

the modes referred to in section 49(1) and the same is originally acquired by the previous owner

on or after April 1, 1981


X CII for the year in which the

asset is transferred

Case V Where the capital asset is acquired by the assessee on or after April 1, 1981 in one of

the modes referred to in section 49(1) but the same is originally acquired by the previous owner

before April 1, 1981


X CII for the year in which

the asset is transferred

COMPUTATION OF INDEXED COST OF IMPROVEMENT

Indexed cost of improvement =

X CII for the year in which the asset is

transferred

Computation of capital gains in the case of LAND AND BUILDING [Sec. 50C]

This section is applicable if the following conditions are satisfied

1. There is a transfer of land or building or both. The asset may be long-term capital asset

or short-term capital asset. It may be depreciable or non-depreciable asset.

2. The sale consideration is less than the value adopted (or assessed) by any authority of a

State Government for the purpose of payment of stamp duty (hereinafter referred to as

“Stamp duty authority”) in respect of such transfer.

If the above conditions are satisfied, the value adopted by the Stamp duty authority shall be

taken as full value of consideration for the purpose of computing capital gain. However

amount of sale consideration depends upon the following situations

Situation I Where the assessee accepts the value adopted by Stamp duty authority, then the

value adopted by Stamp duty authority is taken as full value of consideration.

Situation II Where the assessee has disputed the value adopted by Stamp duty authority

under the Stamp Act, then the stamp duty valuation as finally accepted for stamp duty

purpose is taken as full value of consideration.

Situation III Where the assessee claims before the Assessing Officer that value adopted by

Stamp duty authority is more than the fair market value (but he has not disputed or

challenged such valuation under the Stamp Act), then two possibilities are there

a. Fair market value determined by the Valuation Officer (if it is less than the stamp duty

valuation) is taken as full value of consideration.

b. Stamp duty valuation (if the fair market value determined by the Valuation officer is

more than the Stamp duty valuation) is taken as full value of consideration.

105

Valuation of capital asset – when can be referred to VALAUTION OFFICER

With a view to ascertaining the fair market value of a capital asset, the concerned Assessing

Officer may refer the valuation of the capital asset to the Valuation Officer appointed by the

Income-tax Department in the following cases

a. Where the value of the assets as claimed by the assessee is in accordance with the

estimated made by a registered valuer (who works in a private capacity under a licensce

issued by the Central Board of Direct Taxes and his valuation is not binding on the

Income-tax Department), but the Assessing Officer is of the opinion that the value so

claimed is less than its fair market value;

b. Where the Assessing Officer is of the opinion that the fair market value of the asset

exceeds the value of the asset by more than ��25,000 or 15% of the value claimed by the

assessee, whichever is less (rule 111A); or

c. Where the Assessing Officer is of the opinion that having regard to nature of an asset and

relevant circumstances, it is necessary to do so.

CAPITAL GAIN EXEMPTIONS- Capital gains arising from the TRANSFER OF

RESIDENTIAL HOUSE PROPERTY [Sec. 54]

Capital gain arising from the transfer of a house property is exempt from tax provided the


1. A residential house property whose income is taxable under the head “Income from

house property” should be transferred by an individual or a HUF. The exemption is

available whether the residential house property is self-occupied or let out.

2. The house property which is transferred should be a long-term capital asset.

3. To claim exemption, the taxpayer will have to purchase another residential house

property (old or new) or construct another residential house property within the

specified period. This another residential house may be situated in India or outside India.

4. The specified period is 1 year before, or within 2 years after, the date of transfer of the

residential house property in case of purchase option. However, in case of construction

option, the construction should be completed within 3 years from the date of transfer of

residential house property.


1. If land is purchased for constructing a residential house, it will also be eligible for

exemption under section 54.

2. Exemption is not limited to acquisition of one house property. For instance, a taxpayer

may purchase two houses, or he can purchase a house and construct first floor of the

house so purchased or a person can construct two or more houses, etc. Similarly, a

taxpayer may sell two house properties and he may purchase one house property for the

purpose of availing the exemption.

Amount of exemption- The amount of exemption is lower of the following

a. the amount of capital gain generated on transfer of residential house property; or

b. the amount invested in purchasing or constructing (including the amount deposited in the

deposit scheme, cost of land and cost incurred for making house habitable) another

residential house property.

Consequences-In this case, for the purpose of computing capital gain on such transfer, cost of

acquisition of the new house property shall be reduced by the amount of capital gain exempt

106

under this section i.e., section 54 earlier, and such capital gain will always be a short-term capital

gain. Scheme of deposit- To claim exemption under section 54, the taxpayer should deposit the

amount in “Capital gains deposit account scheme” on or before the due date of submission of

return of income which will have to be utilized for purchase/ construction of the new (old or

new) property within the specified period. On the basis of amount utilized in acquiring the new

(old or new) property and amount deposited in the deposit account, the Assessing Officer will

give exemption under section 54.

By withdrawing from the deposit account, new (old or new) residential property can be

purchased/ constructed within the period given above.

If the amount deposited is not utilized fully for purchase or construction of new (old or new)

residential property within the stipulated period, then the amount not so utilized shall be treated

as LTCG of the previous year in which the period of 3 years from the date of transfer of original

asset expires. In such a case, the assessee can withdraw the unutilized amount at any time after

the expiry of 3 years from the date of the transfer of the original asset in accordance with the

aforesaid scheme.

It is to be noted that if the assessee dies before the expiry of stipulated period (for purchasing the

property) and later on the unutilized amount is refunded to the legal heirs, then in such cases, the

said amount cannot be taxed in the hands of the deceased as well as in the hands of legal heirs.

The amount is not taxable in the hands of legal heirs also as the unutilized portion of the deposit

does not partake the character of income in their hands but is only a part of the estate devolving

upon them.

Capital gains arising from the TRANSFER OF LAND USED FOR AGRICULTURAL

PURPOSE [Sec. 54 B]- Exemption gains arising from the transfer of agricultural land is exempt

from tax provided the following conditions are satisfied

1. The taxpayer is an individual.

2. He transfers an agricultural land. It may be long-term capital asset or short-term

capital asset.

3. The agricultural land was used by the taxpayer or his parents for agricultural purposes for

a period of two years immediately preceding the date of transfer.

4. The taxpayer has purchased another land for agricultural purposes within a period of 2

years from the date of such transfer. In case capital gain arises on compulsory acquisition

of agricultural land by the Government, the time limit of 2 years shall apply from the date

of receipt of compensation (whether initial or additional). The new land may be in urban

area or rural area. Further it is a transfer by way of compulsory acquisition, one may

claim exemption under section 10(37).


a. the amount of capital gain generated on transfer of agricultural land; or

b. the amount invested in purchasing new agricultural land (including the amount deposited

in the deposit scheme).

Consequences- In case the new agricultural land is transferred within a period of 3 years of its

purchase, the capital gain which was exempt earlier under section 54B shall be reduced from the

107

cost of the new agricultural land for the purpose of computation of capital gain in respect of the

new agricultural land and it will be a short-term capital gain.

It is to be noted that if the new agricultural land is situated in a rural area, the gain arising on its

transfer is not chargeable to tax as an agricultural land situated in a rural area is not a “capital

asset” under section 2(14).

Scheme of deposit- To claim exemption under section 54B, the taxpayer should deposit the


return of income which will have to be utilized for purchase of new agricultural land within the

specified period. On the basis of amount utilized in acquiring the new agricultural land and

amount deposited in the deposit account, the Assessing Officer will give exemption under

section 54B.

By withdrawing from the deposit account, new agricultural land can be purchased within the

period given above.

If the amount deposited is not utilized fully for purchase of new agricultural land within the

stipulated period, then the amount not so utilized shall be treated as capital gain of the previous

year in which the period of 2 years from the date of transfer of original asset expires. It will

be taxable as long-term or short-term capital gains depending upon the original capital

gain.

In such a case, the assessee can withdraw the unutilized amount at any time after the expiry of

2 years from the date of the transfer of the original asset in accordance with the aforesaid

scheme.

Capital gains on COMPULSORY ACQUISITION OF LAND AND BUILDING, forming

part of industrial undertaking [Sec. 54D]- Exemption under this section is available if the


1. The taxpayer may be an individual, HUF, firm, company or any other person.

2. The asset may be short-term or long-term.

3. Capital gain arises on transfer by way of compulsory acquisition of land or building

which forms a part of an industrial undertaking belonging to the taxpayer.

4. Such land or building was used by the assessee for the purpose of the industrial

undertaking for at least 2 years preceding the date of compulsory acquisition.

5. Assessee has purchased any other land or building within a period of 3 years from the

date of receipt of compensation or constructed a building within such period.

6. Newly acquired land or building should be used for the purposes of shifting or re-

establishing the said undertaking or setting up another industrial undertaking.


a. the amount of capital gains generated by way of compulsory acquisition of land or

building; or

b. the amount invested in new land and building (including the amount deposited in the

deposit scheme).

Consequences- If case the new land and building is transferred within a period of 3 years from

the date of its acquisition (or completion of construction), the capital gain which was exempt

108

under this section earlier, shall be reduced from the cost of the new asset for the purpose of

computation of capital gain in respect of the transfer of the new asset.

Scheme of deposit- To claim exemption under section 54D, the taxpayer should deposit the


return of income which will have to be utilized for purchase/ construction of new land and

building within the specified period. On the basis of amount utilized in acquiring/ constructing

the new land and building and amount deposited in the deposit account, the Assessing Officer

will give exemption under section 54D.

By withdrawing from the deposit account, new land and building can be purchased within the

period given above.

If the amount deposited is not utilized fully for purchase/ construction of new land and building

within the stipulated period, then the amount not so utilized shall be treated as capital gain of the

previous year in which the period of 3 years from the date of receipt of compensation expires. It

will be taxable as long-term or short-term capital gains depending upon the original capital gain.

In such a case, the assessee can withdraw the unutilized amount at any time after the expiry of 3

years from the date of receipt of compensation in accordance with the aforesaid scheme.

Capital gains not to be charged on INVESTMENT IN CERTAIN BONDS [Section 54EC]

Exemption under this section is given provided the following conditions are satisfied

1. The taxpayer may be an individual, firm, company or any other person.

2. The asset transferred is a long-term capital asset.

3. Within 6 months from the date of transfer of the asset, the assessee should invest the

whole (or any part of) capital gain in long-term specified assets.

“Long-term specified assets” means any bond redeemable after 3 years issued by

a. the National Highways Authority of India (NHAI); or

b. the Rural Electrification Corporation Ltd


a. the amount of capital gains generated on transfer of capital asset; or

b. the amount invested in specified assets as stated above.


1. The cost of specified assets which is considered for the purpose of section 54EC shall not

be eligible for deduction under section 80C.

2. The investment made (on or after April 1, 2007) in the long-term specified assets noted

above by an assessee during any financial year cannot exceed � 50 lakh.

Consequences- If the specified assets are transferred (or converted into money or any loan/

advance is taken on the security of specified assets) within a period of 3 years from the date of

their acquisition, the amount of capital gains arising from the transfer of original asset which was

not charged to tax, will be deemed to be the income by way of LTCG of the previous year in

which specified assets are transferred.

109

Capital gains on transfer of a LONG-TERM CAPITAL ASSET OTHER THAN A HOUSE

PROPERTY [Sec. 54F]

Exemption under this section is available if the following conditions are satisfied

1. The taxpayer is an individual/ HUF.

2. The capital asset which is transferred is a long-term capital asset but other than a

residential house property (for instance, it may be a plot of land, commercial house

property, gold, share or any asset but not a residential house property).

3. To claim exemption, the taxpayer will have to purchase a residential house property (old

or new) or construct a residential house property within the specified period.

4. The specified period is 1 year before, or within 2 years after the date of transfer of the

original asset in case of purchase option. However, in case of construction option, the

construction should be completed within 3 years from the date of transfer of original

asset.


1. A residential house should be purchased or acquired. It is not the requirement that the

new house should also be used for residential purposes.

2. It is to be noted that under section 54F, exemption is available only if on the date of

transfer of the original asset, the taxpayer does not own more than one residential

house property (other than the new house). He should also not purchase within a period

of 2 years after such date (or complete construction within a period of 3 years after such

date) any residential house* (other than the new house). For this purpose, “ownership”

does not mean only registered ownership. Even beneficial ownership would be sufficient

to debar the benefit.

* Whose income is chargeable under the head “Income from house property”.

Amount of exemption

If the above conditions are satisfied, then the exemption is available on the following basis

* Cost of new house


1. The amount of exemption cannot exceed the amount of capital gain.

2. Cost of new house includes cost of land. Further, it includes cost incurred for making

house inhabitable. Cost of vacant land appurtenant to and forming part of a residential

unit is to be considered for the claim of exemption under section 54F, even if no

construction has been done on appurtenant land.

Consequences- In the following circumstances, exemption granted under section 54F may be

withdrawn

Defaults Consequences

1. If the assessee transfers the new

house within 3 years of its purchase/

construction

Capital gain which arises on the transfer of

the new house will be taken as STCG.

Besides, the capital gain which was exempt

under section 54F shall be treated as LTCG

of the year in which the new house is

transferred.

2. If the assessee purchases, within a Capital gain which was exempt under section

110

period of 2 years from the date of

transfer of original asset, or constructs

within a period of 3 years from the

date of transfer of such asset, a

residential house other than the new

house

54F shall be deemed to be income by way of

LTCG of the year in which another

residential house is purchased or constructed.


1. In point 2 in the table (supra), capital gain is chargeable to tax even if no capital asset is

“transferred” during the year.

2. In point 2 in the table (supra), the time-limit shall be determined from the date of transfer

of original asset, even in the case of compulsory acquisition.

For instance, if a plot of land is acquired by the Government on April 20, 2010 and

compensation is received on July 13, 2011, capital gain is taxable of the previous year

2011-12 (i.e., the year in which compensation is received). The taxpayer can purchase a

residential house within 2 years or construct a house within 3 years from July 13, 2011 to

claim exemption under section 54F. He should not purchase within 2 years or construct

within 3 years from April 20, 2010 another residential house. If within this limit, he

purchases/ constructs another house, then exemption under section 54F is not available.

Scheme of deposit- To claim exemption under section 54F, the taxpayer should deposit the


return of income which will have to be utilized for purchase/ construction of the new house

within the specified period. On the basis of amount utilized in acquiring the new property and

amount deposited in the deposit account, the Assessing Officer will give exemption under

section 54F.

By withdrawing from the deposit account, new house can be purchased/ constructed within the

period given above.

If the amount deposited is not utilized fully for purchase or construction of new house within the

stipulated period, then the following amount shall be treated as LTCG of the previous year in

which the period of 3 years from the date of transfer of original asset expires.

In such a case, the assessee can withdraw the unutilized amount at any time after the expiry of 3

years from the date of the transfer of the original asset in accordance with the aforesaid scheme.

Computation of capital gain in the case of SELF-GENERATED ASSETS- An asset which

does not cost anything to the assessee in terms of money in its creation or acquisition is a self-

generated asset.

Transfer of the following self-generated assets is chargeable to tax

Unutilized amount in the deposit account in respect

of which exemption was claimed U/S 54F but X

which is not utilized within the specified time-limit

for purchasing/ constructing a residential house

111

Self-generated assets Sale

consider

ation

Cost of

acquisition

Cost of

improve

ment

Expenses on

transfer

Capital gain

Goodwill of a

business (not a

profession); right to

manufacture, produce

or process any article or

thing or right to carry

on any business

Actual Nil Nil Actual Sale

consideration

minus

expenses on

transfer

Tenancy rights, route

permits; loom hours;

trade mark, brand name

associated with a

business

Actual Nil Actual Actual Sale

consideration

minus cost (or

indexed cost)

of

improvement

minus

expenses on

transfer

The following points should also be noted in this regard

1. When the assets discussed in point 1 above are purchased and later on transferred, the

purchase price will be taken as cost of acquisition and cost of improvement is taken as

nil.

2. When any other asset is purchased and later on sold, then the actual purchase price and

improvement cost are taken as cost of acquisition and cost of improvement. In other

words, the rules given in above table are applicable only in respect of self-generated

asset.

3. Even if the aforesaid assets were acquired before April 1, 1981, the option of adopting

the fair market value on the said date is not available.

MISCELLANEOUS PROVISIONS

TAX on LONG-TERM CAPITAL GAINS [Sec. 112]- LTCG is taxable at a flat rate of 20% +

Surcharge (if any) + EC and SHEC (3%).

Points to be noted

1. Deductions under sections 80C to 80U are not available in respect of LTCG.

2. In case, LTCG is covered by sections 115AB, 115AC, 115AD or 115E, it is taxable @

10% + Surcharge (if any) + EC and SHEC (3%). Moreover, if listed shares/ securities/

units are transferred and the benefit of indexation is not taken, then LTCG is taxable @

10% + Surcharge (if any) + EC and SHEC (3%).

3. Relief The relief is available if the following two conditions are satisfied

a. The taxpayer is a resident individual or a resident HUF. He or it may be ordinarily

resident or not ordinarily resident.

b. Taxable income minus LTCG is less than the exemption limit (i.e., �2,40,000; �

1,90,000 or �1,60,000; depends upon the case)

112

If the aforesaid conditions are satisfied, then the LTCG shall be reduced by the amount

by which the total income (other than LTCG) falls short up to the exemption limit.

TAX INCIDENCE ON TRANSFER OF LISTED SHARES, SECURITIES AND UNITS If the following conditions are satisfied, then tax on LTCG can be computed under two options

and the taxpayer has an option to pay tax under option I or option II, whichever is lower.

The conditions are

1. The taxpayer is an individual, HUF, company or any other person (may be resident or

non-resident).

2. The asset is a long-term capital asset.

3. The long-term capital asset is

a. a security listed in any recognized stock exchange in India; or

b. a unit of UTI or a mutual fund (whether listed in a recognized stock exchange or not);

or

c. zero coupon bonds

Meaning of “securities” As per section 2(h) of the Securities Contracts (Regulation) Act, 1956, “securities” include –

a. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities

of a like nature in or of any incorporated company or other body corporate;

b. Government securities;

c. such other instruments as may be declared by the Central Government to be securities;

and

d. rights or interest in securities.

Tax computation

Option I

Sale consideration XX


Indexed cost of acquisition XX

Indexed cost of improvement XX XX

LTCG XX

Tax liability = 20% + surcharge (if any) + EC and SHEC (3%)

Option II

Sale consideration XX


Cost of acquisition XX

Cost of improvement XX XX

LTCG XX

Tax liability = 10% + surcharge (if any) + EC and SHEC (3%)


1. Capital loss computed from a source with indexation can be set off against capital gain

computed without indexation from another source.

2. In case of a non-resident, capital gain is computed without indexation in foreign currency

[first proviso to section 48]. Even in such case, one can claim the benefit of 10% tax rate.

113

3. The taxpayer has an option in respect of each transaction to pay tax under option I or

Option II, whichever is lower. It is difficult to state when option II is better. However, in

case of transfer of listed bonus shares, listed debentures and listed bonds, option II is

better as compared to option I.

Tax on SHORT-TERM CAPITAL GAIN IN CERTAIN CASES [Sec. 111A]

This section is available if the following conditions are satisfied

1. The taxpayer is an individual, HUF, firm, company or any other person.

2. During the previous year, she/ he have generated STCG on transfer of equity shares or

units in equity – oriented mutual fund.

3. The transaction of transfer takes place on or after October 1, 2004.

4. Such transaction is chargeable to securities transaction tax at the time of transfer.

If the above conditions are satisfied, STCG is taxable @ 15% + surcharge (if any) + EC and

SHEC (3%).


1. Deductions under sections 80C to 80U are not available in respect of STCG under

section 111A.

2. Relief The relief is available if the following two conditions are satisfied

i. The taxpayer is a resident individual or a resident HUF. He or it may be ordinarily

resident or not ordinarily resident.

ii. Taxable income minus STCG (under section 111A) is less than the exemption limit

(i.e., �2,40,000; �1,90,000 or �1,60,000; depends upon the case)

If the aforesaid conditions are satisfied, then such STCG shall be reduced by the amount

by which the total income (other than such STCG) falls short up to the exemption limit.

COST INFLATION INDEX

Previous year CII Previous year CII

1981-82 100 1996-97 305

1982-83 109 1997-98 331

1983-84 116 1998-99 351

1984-85 125 1999-2000 389

1985-86 133 2000-01 406

1986-87 140 2001-02 426

1987-88 150 2002-03 447

1988-89 161 2003-04 463

1989-90 172 2004-05 480

1990-91 182 2005-06 497

1991-92 199 2006-07 519

1992-93 223 2007-08 551

1993-94 244 2008-09 582

1994-95 259 2009-10 632

1995-96 281 2010-11 711

114

QUESTIONS

Case 1 Mr. X (Date of birth 31-03-1943) purchased one house on 01-10-1962 for �7,00,000

and he incurred �9,00,000 on its improvement on 01-10-79 and its market value on 01-04-

1981 is �20,00,000. Mr. X further incurred �5,00,000 on its improvement on 01-10-1991.

The asset was sold for �2,44,00,00,000 on 01-01-11.

He invested �1,00,000 in units of UTI.

Compute his tax liability for the assessment year 2011-12.

[CII 1981-82 = 100, 1991-92 = 199, 2010-11 = 711]

Solution

Assessment year 2011-12

Sale consideration 2,44,00,000

Less Indexed cost of acquisition (20,00,000/100*711) 1,42,20,000

Less Indexed cost of acquisition (5,00,000/199*711) 17,86,432

Long term capital gain 83,93,568

Tax will be payable at 20% provided his income from other source does not exceeds the

exemption limit. No deduction is allowed for investment in units of UTI as from LTCG,

no deduction under chapter VIA is allowed. Case 2 Mr. X sold his properties during the previous year 2010-11 as under

a. Household TV and refrigerator costing �96,000 purchased in 2004 sold in February

2011 for �1,00,000.

b. A car sold on 1-12-2010 for �1,80,000 which was purchased by him in January 2008

for 2,80,000 and its written down value on 1-4-2010 was �1,52,000. The car was

being used for business purposes.

c. Agricultural land was sold for �9,50,000 on 1-2-2011 and its purchase price in 1982-83

was �1,00,000.

d. Gold ornaments acquired in July, 2007 for �2,00,000 were sold for �2,40,000 in

June, 2010.

e. Let out residential house in Agra was inherited by him in 1965. Sale price on 30-11-2010

�14,00,000. Fair market value on 1-4-1981 �2,00,000. Cost of improvement made

during 1989-90 �40,000. Expenses on transfer �60,000.

Compute his total income for the assessment year 2011-12.

[CII are 1981-82 100, 1982-83 109, 1989-90 172, 2003-04 463 and 2010-11 711]

Solution

a. Household TV and refrigerator are personal effects and hence, no capital gain is

chargeable to tax.

b. Sale consideration of car 1,80,000

Less WDV on 1/4/2010 1,52,000

STCG 28,000

c. Sale consideration of agricultural land 9,50,000

Less Indexed cost of acquisition

(1,00,000/109*711) 6,52,294

LTCG 2,97,706

d. Sale consideration on gold 2,40,000

Less Cost of acquisition 2,00,000

115

STCG 40,000

e. Sale consideration of house 14,00,000

Less Expenses on transfer 60,000


(2,00,000/100*711) 14,22,000

Less Indexed cost of improvement

(40,000/172*711) 1,65,349

LTCG (2,47,249)

Total LTCG (2,97,706 – 2,47,249) 50,357

Total STCG (28,000 + 40,000) 68,000

Case 3 Mr. X purchased a house property on 1st September, 1979 for �4,20,000. Fair market

value of the property on 1-4-1981 was �3,40,000. He incurred the following expenses

a. Construction of room during 1980-81 �20,000

b. Reconstruction in 1993-94 �7,32,000

The property was transferred on 31-3-2011 for �48,30,000. Compute the capital gains taxable

for the assessment year 2011-12.

[CII are as follows – 1981-82 100; 1993-94 244, 2010-11 711]

Solution


Sale consideration 48,30,000


Less Indexed cost of improvement (7,32,000/244*711) 21,33,000

LTCG (2,89,200)

Case 4 Mr. X, a senior citizen sold a residential building at Ajmer for �20,00,000 on October

1, 2010. This building was acquired by his father on 1-1-79 for �1,00,000. On the death of his

father on July 5, 1986, he inherited this building. Fair market value of this property on 1-4-1981

was ��1,40,000. He paid brokerage @ 1% to the real estate agent at the time of sale of building.

He purchased a residential building at Bangalore on March 7, 2011 for � 8,00,000 and

deposited �3,00,000 on April 20, 2011 in NABARD Capital Gain Bonds.

His other incomes are �50,000. He deposited �10,000 in PPF.

Compute taxable income of Mr. X for the assessment year 2011-12.

[CII are as follows – 1981-82 100, 1986-87 140, 2010-11 711].

Solution Assessment year 2011-12


Less Brokerage (1% on 20,00,000) 20,000


LTCG (before exemption) 12,69,000

Less Exemption under section 54 8,00,000

LTCG 4,69,000

Add Income from other sources 50,000


Less Deduction under section 80C 10,000


116

Case 5 X has given the following information related to a residential house property which is

situated in Mumbai

He transferred the property of Delhi on December 5, 2012 for �22,00,000. Find out the capital

chargeable to tax in the hands of X for different assessment years.

[CII for 1981-82 100; 1985-86 133 and for 2011-12 711]


Amount Sale consideration 20,00,000

Less Expenses on transfer 30,000

Indexed cost of acquisition

(1,10,000/133*711) 5,88,045


Less Exemption under section 54 13,81,955*

LTCG Nil



Less Cost of acquisition [16,00,000 minus 13,81,955 i.e., the

exemption given earlier under section 54 which will be taken

back as the property of Delhi is transferred within 3 years] 2,18,045

STCG 19,81,955

Case 6 X sells agricultural land in municipal limits of Delhi for 9,00,000 on December 26,

2010 which was acquired by him in 1946. Fair market value of the land on April 1, 1981 was

70,000. To avail exemption under section 54B, he deposits 6,00,000 on July 31, 2011 in a

deposit account. By withdrawing from the deposit account, he purchases agricultural land on

December 27, 2012 for 4,45,000. Determine the amount of capital gain chargeable to tax for

the assessment years 2011-12 and 2013-14. Does it make any difference if the land which is sold

on December 26, 2010, is situated in a rural area?

[CII for 1981-82 100 and for 2011-12 711]




(70,000/100*711) 4,97,700


Less Exemption under section 54B 4,02,300*

LTCG Nil

Particulars X

Date of transfer January 20, 2011

Date of purchase November 5, 1985


Cost of acquisition 1,10,000

Expenses on transfer 30,000

To get the exemption under section 54, he purchased a residential

house property in Delhi on October 10, 2010 for �16,00,000

117


LTCG 4,02,300

Yes it will make a difference because if the land which is sold is situated in a rural area, then it

will not be treated as a “capital asset” and thus, not chargeable to tax. Notes

1. By withdrawing from the deposit account, land has to be purchased till 25th

December

2012.

2. If the amount deposited is not utilized till 25th

December, 2011, then on 26th

December

2012, the unutilized will be treated as LTCG.

Case 7 X has given the following information (he does not own any residential house property) –

Transfer of gold X (� )

Date of transfer October 20, 2010

Date of purchase August 25, 1982


Cost of acquisition 3,00,000

Expenses on transfer 75,000

To get the exemption under section 54F, a residential house property is

purchased by X for 27,00,000 at Kanpur on December 10, 2010

This Kanpur property is transferred on January 13, 2013 for 30,00,000. Find out the capital gain

chargeable to tax in the hands of X for different assessment years.

[CII for 1981-82 100, 1982-83 109 and for 2010-11 711]

Solution



Less Expenses on sale 75,000


(3,00,000/109*711) 19,56,881


Less Exemption under section 54F

(29,68,119/49,25,000*27,00,000) 16,27,192

LTCG 13,40,927


STCG (30,00,000 - 27,00,000) 3,00,000

LTCG 16,27,192

118

LESSON 11

INCOME FROM OTHR SOURCES Naveen Mittal

TREATMENT OF DIVIDEND- Any dividend, declared, distributed or paid by a company to

its shareholders is chargeable to tax under the head “Income from other sources” irrespective of

the fact whether shares are held by the assessee as investment or stock-in-trade.


1. Actual dividend received from a domestic company is exempt in the hands of

shareholders under section 10(34). However, the company declaring dividend has to pay

corporate dividend tax under section 115-O @ 16.995%.

2. Actual dividend received from a non-domestic company is taxable in the hands of

shareholders.

3. Deemed dividend if covered under clause 2(22) (a), (b), (c) or (d), then it is exempt in the

hands of shareholders under section 10(34). However, the payer-company has to pay

CDT/ DDT (corporate dividend tax/ dividend distribution tax) @ 16.995% under section

115–O.

4. However, if dividend is covered under clause 2(22) (e), then it is taxable in the hands of

shareholders. However, it is the obligation of the payer-company to deduct tax at source

@ 10% under section 194 on such dividend.

Treatment of Winnings From Lotteries, Crossword Puzzles, Horse Races And Card

Games, ETC.

1. Gross winnings from lotteries, crossword puzzles, races including horse races (other than

income from the activity of owning and maintaining race horses), card games and other

games of any sort or from gambling or betting of any nature whatsoever are chargeable to

income-tax at a flat rate of 30% + surcharge, if any + cess @ 3% on the amount of gross

winnings (without claiming any allowance or expenditure).

2. No deduction is allowed from such incomes under section 80C to 80U.

Interest Exempt From Tax [Sec. 10(15)]- Interest on the following is exempt from tax

1. Interest on notified securities, bonds or certificates.

2. Interest on 7% Capital Investment Bonds in the hands of individuals and Hindu

undivided families.

3. Interest received by a non-resident Indian from notified bonds [i.e., NRI Bonds and NRI

Bonds (Second Series) issued by the SBI].

4. Interest on notified Relief Bonds, in the case of an individual or HUF.

5. Interest on notified bonds/ debentures of a public sector company.

6. Interest on deposit made by a retired Government employee or an employee of a public

sector company, out of money due to him on account of retirement [a deposit scheme has

been formulated in which such employee may invest (whole or part) of his retirement

benefits for a lock-in-period of three years].

7. Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims, Bhopal, or

interest on deposits for the benefit of the victims of the Bhopal gas leak disaster held in

such account with the RBI or with a public sector bank, as the Central Government may,

by notification in the Official Gazette, specify in this behalf.

8. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.

119

9. Interest on notified bonds issued by a local authority or by a State Pooled Finance Entity.

Receipts Without Consideration To Be Treated As Income [Sec. 56(2)(vii)/ (viia)] Where

a sum of money/ property is received without consideration on or after October 1, 2009

[Sec. 56(2)(vii)]

Under this clause, if an individual or a HUF receives on or after October 1, 2009 a sum of money

or property without consideration (which falls in any of the following four categories), it is

chargeable to tax in the hands of the recipient under the head “Income from other sources”

except in the following cases

1. If money is received on the occasion of the marriage of the individual.

2. If money is received by way of will/ inheritance.

3. If money is received in contemplation of death of the payer.

4. If money is received from any fund, foundation, university, other educational institution,

hospital, medical institution, any trust or institution referred to in section 10(23C).

5. If money is received from a charitable institute registered under section 12AA.

6. If money is received from a relative.

Relative Relative means spouse of the individual, brother or sister of the individual, brother or

sister of the spouse of the individual, brother or sister of either of the parents of the individual,

any linear ascendant or descendant of the individual, any linear ascendant or descendant of the

spouse of the individual.

Following are the four categories

Different

categories

Tax treatment For the ceiling of

�50,000 whether

a single

transaction would

be examined or all

transactions of the

previous year will

be considered

Any sum of

money (gift in

cash or by

cheque or

draft)

If aggregate amount of sum of money received by an

individual/ HUF without any consideration from one

or more persons during a previous year (but on or

after October 1, 2009) exceeds �50,000, the whole

of such aggregate value will be chargeable to tax.

All transactions

Immovable

property

without

consideration

If any immovable property (without any

consideration) is received on or after October 1, 2009

and the stamp duty value of which exceeds �

50,000, stamp duty value will be chargeable to tax. If

however, an immovable property is purchased or

acquired for a consideration which is lower than

stamp duty value, nothing will be chargeable in the

hands of purchaser/ recipient, even if the difference

between the stamp duty value and the consideration

paid/ payable is more than �50,000

Single transaction

Movable

property**

without

consideration

If aggregate fair market value of movable

properties** received without consideration during a

previous year (but on or after October 1, 2009)

exceeds � 50,000, the whole of aggregate fair

All transactions

120

market value of movable property** or properties**

will be chargeable to tax

Movable

property** for

a

consideration

which is less

than fair

market value

If movable property is received for a consideration

which is less than the aggregate fair market value of

the property** by an amount exceeding �50,000,

then the difference between aggregate fair market

value and the consideration will be chargeable to tax

All transactions

The following points must be noted regarding section 56(2)

1. Loan transaction is not covered under section 56(2).

2. *Property “Property” for this purpose means the following capital assets of the

assessee (i.e., recipient)

a. Immovable property being land or building or both;

b. Shares and securities;

c. Jewellery;

d. Archaeological collection;

e. Drawings;

f. Paintings;

g. Sculptures;

h. Any work of art; or

i. Bullion (with effect from June 1, 2010)

3. **Movable Property “Movable Property” for this purpose means the following capital

assets of the assessee (i.e., recipient)

a. Shares and securities;

b. Jewellery;

c. Archaeological collection;

d. Drawings;

e. Paintings;

f. Sculptures;

g. Any work of art; or

h. Bullion

Some deductions allowed from “Income from other sources”

1. In the case of income in the nature of family pension, the amount deductible is �15,000

or 1/3 of such income, whichever is less.

For this purpose, “family pension” means a regular monthly amount payable by the

employer to a person belonging to the family of an employee in the event of his death.

2. Any expenditure is deductible if the following basic conditions are satisfied –

a. The expenditure must be laid out or expended wholly and exclusively for the purpose

of making or earning the income;

b. The expenditure must not be in the nature of capital expenditure;

c. It must not be in the nature of personal expenses of the assessee;

d. It must be laid out or expended in the relevant previous year and not in any prior or

subsequent year.

121

3. Any interest chargeable under the Act which is payable outside India is not deductible if

tax has not been paid or deducted therefrom.

4. Any payment chargeable under the head “Salaries” and payable outside India is not

deductible if tax has not been paid or deducted therefrom.

Points to be noted

1. In the case of public issue, the first interest is payable from the date of allotment till the

first due date as per the terms of the allotment.

2. The term “ex-interest” means the next interest immediately after this transaction will be

given to the seller.

Interest Exempt From Tax [SEC. 10(15)]

1. Interest on notified securities, bonds or certificates.

2. Interest on 7% Capital Investment Bonds in the hands of individuals and HUF.

3. Interest on notified Relief Bonds, in the case of an individual or HUF.

4. Interest payable to any foreign bank performing central banking functions outside India.

5. Interest on notified bonds/debentures of a public sector company.

6. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.

7. Interest on notified bonds issued by a local authority.

8. Interest on deposit made by a retired Government employee or an employee of a public

sector company, out of money due to him on account of retirement.

9. Interest on securities held by the welfare Commissioner, Bhopal Gas Victims, Bhopal, or

interest on deposits for the benefit of the victims of the Bhopal gas leak disaster held in

such account with the RBI or with a public sector bank, as the Central Government may,

by notification in the official Gazette, Specify in this behalf.

10. Interest received by a non-resident Indian from notified bonds issued by the SBI or by

any individual owing the bonds by virtue of being a nominee or survivor of such non-

resident Indian or by an individual to whom the bonds have been gifted by the NRI.

References




(latest edition).



122

Documents

LESSON 1 - School of Open Learning · PDF fileLESSON 1 BASIC CONCEPTS Naveen Mittal ... income from business or income from other sources, the taxability would depend upon the method