SHORT TERM AND LONG-TERM CAPITAL GAINS

Short-Term Capital Gains (STCG) refer to the profit made from the sale of an asset that has been held for
a short period. The specific holding period varies by asset type and jurisdiction.
Key Points about STCG:
 Holding Period: The holding period for short-term capital gains is typically less than a year,
although specific regulations may vary.
 Tax Implications: STCG is generally taxed at a higher rate than long-term capital gains. The exact
tax rate depends on the specific asset and the applicable tax laws.
 Types of Assets: STCG can arise from the sale of various assets, including:
o Stocks and shares Mutual funds Real estate Commodities Cryptocurrencies
Example: If you purchase a stock for Rs. 100 and sell it for Rs. 120 within a year, you've made a short-term
capital gain of Rs. 20.
Tax Treatment of STCG
The tax treatment of STCG can vary significantly depending on the jurisdiction and the type of asset. In
many countries, STCG is taxed at a higher rate than long-term capital gains
Long-Term Capital Gains (LTCG) refers to the profit earned from the sale of an asset that has been held for a
specific period, typically more than a year. The exact holding period can vary depending on the type of asset
and the specific tax laws of a country.
Key Points about LTCG:
 Holding Period: The holding period for long-term capital gains is generally longer than one year.
 Tax Implications: LTCG is generally taxed at a lower rate than short-term capital gains.
 Indexation Benefit: In some cases, taxpayers can claim an indexation benefit, which reduces the
taxable capital gain by adjusting the purchase price for inflation.
 Types of Assets: LTCG can arise from the sale of various assets, including:
o Stocks and shares Mutual funds Real estate Gold and other precious metals
o Art and collectibles
Example: If you purchase a stock for Rs. 100 and sell it for Rs. 150 after two years, you've made a long-
term capital gain of Rs. 50.
Tax Treatment of LTCG
The tax treatment of LTCG can vary significantly depending on the specific asset and the applicable tax
laws. In many countries, LTCG is taxed at a lower rate than short-term capital gains, and in some cases, it
may be partially or fully exempt from tax.
Feature STCG LTCG
Holding period Less than a year More than a year (12 months for
equity, 24 months for other assets)
Tax rate Taxed at ordinary income tax rates Lower tax rate
Indexation Not applicable Can be claimed to reduce taxable
benefit gains
Example Selling a stock after 6 months Selling a stock after 2 years
BELATED RETURNS
A belated return is an income tax return filed after the original due date. In India, for individuals, the original
due date for filing an income tax return is typically July 31st of the following financial year. If you miss this
deadline, you can file a belated return up until December 31st of the same financial year.
Important Note: While filing a belated return is better than not filing at all, it comes with penalties:
 Interest under Section 234A: This is levied on the unpaid tax amount.
 Penalty under Section 234F: A flat fee is charged for late filing.
Therefore, it's always advisable to file your income tax return on time to avoid penalties. However, if you
miss the deadline, filing a belated return is a better option than facing potential legal consequences.
Why File a Belated Return?
 Avoiding Penalties: While filing a belated return incurs penalties, it's still better than not filing at all.
Non-filing can lead to severe penalties and legal consequences.
 Claiming Refunds: If you've overpaid taxes, filing a belated return allows you to claim a refund.
 Preventing Future Issues: Filing a belated return ensures that your tax records are up-to-date,
preventing potential issues with future tax filings or loans.
How to File a Belated Return:
1. Gather Necessary Documents: Collect all relevant documents, such as Form 16, salary slips,
investment proofs, etc.
2. Choose the Right ITR Form: Select the appropriate ITR form based on your income sources and
financial situation.
3. Fill in the Details: Accurately fill in all the required information in the ITR form.
4. Verify Your Return: E-verify your return to avoid processing delays.
5. Pay Any Taxes Due: Pay any outstanding taxes, including interest and penalties

PAN
A Permanent Account Number (PAN) is a unique ten-digit alphanumeric number issued by the Income Tax
Department of India. It serves as a unique identifier for all tax-related transactions.
Why is a PAN Important?
 Tax Identification: It's essential for filing income tax returns and other tax-related documents.
 Financial Transactions: It's required for various financial transactions, such as opening bank
accounts, investing in mutual funds, purchasing property, and more.
 Government Services: It's often used for availing government services like passport applications,
vehicle registrations, and obtaining loans.
How to Obtain a PAN Card:
You can apply for a PAN card either online or offline:
Online Application:
1. Visit the NSDL or UTIITSL website: These are authorized agencies for PAN card issuance.
2. Fill the Application Form: Provide accurate personal and address details.
 3. Upload Required Documents: Scanned copies of identity proof, address proof, and passport-sized
photograph.
4. Pay the Fees: Pay the prescribed fees online.
5. Track Application Status: Use the application number to track the status of your application.
Offline Application:
1. Obtain Application Form: Download the Form 49A from the Income Tax Department's website or
collect it from authorized agencies.
2. Fill the Form: Complete the form with accurate details.
3. Attach Required Documents: Attach the necessary documents, including identity proof, address
proof, and passport-sized photographs.
4. Submit the Form: Submit the filled form along with the required documents to an authorized
agency or post it to the designated address.
Key Documents Required for PAN Card Application:
 Proof of Identity (Aadhaar card, passport, driver's license, voter ID)
 Proof of Address (Aadhaar card, passport, voter ID, utility bills)
 Passport-sized photographs
Importance of Linking PAN with Aadhaar:
Linking your PAN with your Aadhaar card is mandatory. This helps the government in various ways:
 Tax Compliance: It helps in identifying tax evaders and ensuring compliance.
 Direct Benefit Transfer: It facilitates the direct transfer of government subsidies and benefits to
eligible beneficiaries.
 Preventing Fraud: It helps in preventing fraudulent activities and identity theft

SEARCH AND SEIZURE

Search and Seizure is a powerful tool used by tax authorities to investigate and uncover tax evasion or
fraud. It involves the inspection of premises, seizure of documents, and questioning of individuals to gather
evidence related to tax liabilities.
Legal Basis for Search and Seizure in India
In India, the Income Tax Act, 1961, empowers the Income Tax Department to conduct searches and seizures
under Section 132. This section grants the Income Tax Officer the authority to enter and search any
premises, including residential and commercial spaces, if they have "reason to believe" that a person has
concealed income or assets.
Procedure for Search and Seizure:
1. Issuance of Search Warrant: The Income Tax Officer must have a valid search warrant issued by a
competent authority.
2. Authorization: A search and seizure operation is typically authorized by a competent authority, such
as a court or a senior tax official.
3. Entry and Search: The officer can enter the premises and search for documents, books of account,
cash, jewelry, or other valuables.
 4. Seizure of Evidence: Any evidence found that is relevant to the tax evasion investigation can be
seized by the officer.
5. Recording Statements: The officer can record statements from the person being searched or other
individuals present.
6. Preparation of Panchnama: A detailed report of the search and seizure operation, including a list of
seized items, is prepared.
Rights of the Assessee:
1. Right to Inspect Search Warrant: The assessee has the right to inspect the search warrant issued by
the appropriate authority.
2. Right to Verify Identity: The assessee can verify the identity of the authorized officers conducting the
search.
3. Right to Presence: The assessee or their authorized representative can be present during the search.
4. Right to Legal Counsel: The assessee has the right to consult with a legal advisor.
5. Right to Challenge the Search: The legality of the search can be challenged before the appropriate
authorities.
6. Right to Witness the Search: The assessee can request the presence of independent witnesses during
the search.
7. Right to Privacy: Reasonable care should be taken to respect the privacy of the assessee and their
family.
Duties of the Assessee:
1. Cooperation: The assessee should cooperate with the authorized officers during the search.
2. Identification of Assets: The assessee should identify and explain the ownership of assets, books of
account, and documents found during the search.
3. Handing Over Keys: The assessee should provide access to locked cabinets, safes, or other secured
areas.
4. Providing Information: The assessee should provide accurate and truthful information when
questioned by the authorized officers.
5. Avoid Obstruction: The assessee should avoid obstructing the search or creating any hindrance to the
authorized officers.
It's important to note that while the assessee has certain rights, it's crucial to cooperate with the authorities
and avoid any actions that may be construed as obstruction or non-cooperation. If the assessee feels that
their rights are being violated or the search is not being conducted legally, they can seek legal advice and
challenge the actions of the authorities.
Important Considerations:
 Reason to Believe: The Income Tax Officer must have a genuine reason to believe that tax evasion
has occurred before initiating a search.
 Proportionality: The search and seizure must be proportionate to the suspected tax evasion.
 Respect for Privacy: The search must be conducted in a reasonable manner, respecting the privacy
of the individuals involved.
SET-OFF AND CARRY FORWARD LOSSES
Set-off and carry forward of losses is a provision in the Income Tax Act that allows taxpayers to reduce
their taxable income by offsetting losses incurred in one year against income earned in the same or
subsequent years.
Set-off and carry forward of losses is a provision in the Income Tax Act that allows taxpayers to reduce their
taxable income by offsetting losses incurred in one year against income earned in the same or subsequent
years. This can be done within the same head of income (intra-head set-off) or across different heads of
income (inter-head set-off), subject to certain conditions. Losses that cannot be fully set off in a particular
year can be carried forward to future years, up to a specified number of years.
Set-Off of Losses
 Intra-Head Set-Off: Losses from one head of income can be set off against income from the same
head within the same financial year. For example, a loss from business income can be set off against
business income.
 Inter-Head Set-Off: Losses from one head of income can be set off against income from other heads
of income, subject to certain limitations. For example, a capital loss can be set off against capital
gains.
Carry Forward of Losses
If a loss cannot be fully set off against income in the same year, it can be carried forward to future
assessment years and set off against future income. The number of years for which losses can be carried
forward varies depending on the type of loss:
 Business Loss: Can be carried forward for 8 assessment years.
 Capital Loss: Can be carried forward for 8 assessment years.
 House Property Loss: Can be carried forward for 8 assessment years.
Important Considerations:
 Time Limit for Filing Return: To carry forward losses, the return for the loss-making year must be
filed on time.
 Specific Conditions: Certain conditions may apply to the carry forward of losses, such as the nature
of the loss and the specific provisions of the Income Tax Act.
 Tax Professional's Advice: It is advisable to consult with a tax professional to understand the
specific rules and regulations related to set-off and carry forward of losses in your particular case.

UNIT 1
TYPES OF TAXES AND DISTINCTION BETWEEN DIRECT AND INDIRECT TAX
Direct tax
A type of tax where the impact and incidence of the tax fall on the same entity. So, the payment of direct tax
cannot be passed on to a different individual or a different entity. The organization or individual upon which
this type of tax is levied is responsible for its payment. Income tax, capital gains tax

BENEFITS

- Social economic balance, as tax slab is based on the age and earnings of an individual, exemptions are
also placed so that the income inequalities are well balanced out
- Higher productivity, if there is a growth in the number of people who work, the return on direct takes
also increases
- Provides certainty to both the tax payer and government. The amount of tax that must be paid and the
amount of tax that must be collected is easy to calculated and known in advance both the government
and the taxpayer

ADVANTAGES DISADVANTAGES
Individuals with lower incomes pay lower taxes Fraudulent practices through which taxpayers often
than people with higher incomes, i.e, progressive in pay lower taxes or avoid taxes.
nature.
Curbs inflation and reduces inequalities The documentation process can be complex and
time-consuming
Sense of certainty as both the government and The burden cannot be transferred to any other in the
taxpayer are aware of what and when to be paid. chain.
Indirect tax
Taxes whose burden can be shifted, indirect tax is levied by the government on goods and services.
Therefore, it can be shifted from one tax-paying individual to another. E.g; the wholesaler can pass it on to
retailers, who then pass it on to customers

GST, VAT, custom duty

1. Transfer tax – a tax is levied on the taxable portion of the property of a deceased individual, including
trusts and financial accounts
2. Property tax- properties such as land, buildings, the tax is used for maintaining public services such as
police and fire departments, schools and libraries etc

ADVANTAGES DISADVANTAGES
Every Individual contributes to nation-building Increase in overall price of goods and services
Easily collectable from the end consumer Consumers often lack knowledge of the taxes paid
Fair Distribution of tax, i.e, essential goods are It is regressive in nature.
charged lesser compared to goods that are
luxurious.
The burden of paying can be transferred to the end The amount received in tax is often unpredictable
consumer as the tax paid depends on the goods and services
purchased
DEFINITION OF CERTAIN TERMS: PERSONS, ASSESSE, INCOME,
APPLICATION OF INCOME AND DIVERSION OF INCOME BY OVERRIDING
TITLES
‘Person’ under the Income Tax Act

The 7 categories of “persons” mentioned under the Income Tax Act:

• Individual
• Hindu Undivided Family
• Partnership Firm
• Company
• Association of Persons (AOP) or Body of Individuals (BOI)
• Local Authority
• Artificial Judicial Body (not covered under any of the above-mentioned categories)
ASSESSE AND ASSESSMENT
An income tax assesse is a person who pays tax or any sum of money under the provisions of the Income
Tax Act, 1961.

Furthermore, Section 2(7) of the act defines an income tax assessee as anyone who is required to pay taxes
on any earned income or incurred loss in a single assessment year. They can also be referred to as each and
every person for whom:

1. Is there any action being taken under the act to evaluate his income
2. The income of another person for which he is taxed

3. Any loss incurred by him or any other person or persons entitled to a tax refund

Normal Assesse
An individual who is liable to pay taxes for the income earned during a financial year is known as a normal
assesse. Every individual who has earned any income earned or losses incurred during the previous financial
years is liable to pay taxes to the government in the current financial year.

All individuals who pay interest/penalty or who are supposed to get a refund from the government are
categorised as normal assesses. Say, Mr A is a salaried individual who has been paying taxes on time over
the past 5 years. Then, Mr A can be considered as a normal assesse under the Income Tax Act, 1961.

Representative Assesse
There may be a case in which a person is liable to pay taxes for the income or losses incurred by a third
party. Such a person is known as a representative assesse.

Representatives come into the picture when the person liable for taxes is a non-resident, minor, or lunatic.
Such people will not be able to file taxes by themselves. The people representing them can either be an agent
or guardian.

Consider the case of Mr. X. He has been residing abroad for the past 7 years. However, he receives rent for
two house properties he owns in India. He takes the help of a relative, Mr. Y, to file taxes in India. In this
case, Mr. Y acts as a representative assesse. If the assessing officer plans to investigate the tax filing, Mr. Y
will be asked to provide the necessary documents as he is the guardian of the property and represents Mr. X.

Deemed Assesse
An individual might be assigned the responsibility of paying taxes by the legal authorities and such
individuals are called deemed assesses.
an individual who is obligated to pay taxes on behalf of someone else as per the instructions of legal
authorities. This occurs when a person is unable to fulfill their tax obligations independently, such as in
cases of death, incapacity, or non-residence.

Deemed assesses can be:

- The eldest son or a legal heir of a deceased person who has expired without writing a will.
- The executor or a legal heir of the property of a deceased person who has passed on his property to
the executor in writing.
- The guardian of a lunatic, an idiot, or a minor.
- The agent of a non-resident Indian receiving income from India.
 They are responsible for filing tax returns and paying taxes on behalf of the person they represent.
 They have the same rights and obligations as any other taxpayer.
 They may be subject to penalties if they fail to comply with their tax obligations.
For example, Mr P owns a commercial building from which he earns rent income. He has prepared and
signed a will stating the property should be handed over to his niece after his death. Upon his death, his
niece will be considered as the executor of the property, i.e. deemed assesse. She will be responsible for
paying tax on the rental income thereon.

EXAMPLES

 Executors or legal heirs of a deceased person: When a person dies, their executors or legal heirs
become responsible for filing their final tax return and paying any outstanding taxes.
 Guardians of minors, lunatics, or idiots: Guardians are responsible for filing tax returns on behalf
of their wards and paying any taxes due.
 Agents of Non-Resident Indians (NRIs): Agents of NRIs who earn income in India are responsible
for filing tax returns on their behalf and paying any taxes due.
 Companies or firms: Companies or firms may be deemed assessees for certain types of income,
such as income from property or capital gains.

Rights and Responsibilities of a Deemed Assessee:

 Filing Tax Returns: Deemed assessees are responsible for filing income tax returns on behalf of the
person they represent.

 Paying Taxes: They must pay any taxes due on the income or assets of the person they represent.
 Responding to Notices: Deemed assessees must respond to any notices or inquiries from the tax
authorities.

 Appealing Assessments: They can appeal against any assessments made by the tax authorities.

Assesse-in-default
Assesse-in-default is a person who has failed to fulfil his statutory obligations as per the income tax act such
as not paying taxes to the government or not filing his income tax return. For example, an employer is
supposed to deduct taxes from the salary of his employees before disbursing the salary. He is, then, required
to pay the deducted taxes to the government by the specified due date. If the employer fails to deposit the tax
deducted, he will be considered as an assesse-in-default.

Roles/Responsibilities and Duties of an Assesse

Assesses must file their returns on time and pay their taxes when they are due. However, an assesse may
frequently fail to file their return on time. In this situation, they may receive a notice from the IT department
or the relevant Assessing Officer requesting information about why the return was not filed for that
particular fiscal year. In this scenario, the assesse must provide a response to the Assessing O fficer
explaining why they did not file his returns on time, and he must also file the returns as soon as he receives
the notification.

The various roles and responsibilities of an Assesse upon receiving a notice:

• As soon as the Assesse receives the notice from the department, they must file their tax returns for the
avoided income for the specific assessment year.

• After filing the returns, they may obtain a copy from the assessing officer that clearly states the grounds for
which the officer issued the notice to them.
• If the Assesse believes that the grounds given in the copy are not valid, and they are not satisfied with the
reasons, they may file an objection and question the legality of the notice.

• The Assesse must also ensure that they have valid reasons for filing the objection and that they have
properly decided to query the government's notification.

• If the officer rejects the Assesse\e's allegations, the Assesse may submit a request to the concerned
Assessing Officer, asking him to provide additional explanations.

• The Assesse may choose to contest the legitimacy of the notification much before the planned assessment
or re-assessment is completed by filing a writ petition with the relevant High Court.

• The Assesse may also choose to challenge the legitimacy of the notice even after the planned assessment is
completed by filing a writ petition with the respective High Court.
• The Assesse must provide details relevant to their income returns within 30 days of the date of issuance of
the notice, not the date on which the notification was received by the Assessee. To avoid complications later
on, the details relevant to the income for which tax payment has been avoided, as well as other associated
income details, must be clearly given and filed with the concerned authorities.

Types of Assessment in Income Tax

3. Self-Assessment
The assesse himself determines the income tax payable. The tax department has made available various
forms for filing income tax returns. The assesse consolidates his income from various sources and adjusts
the same against losses or deductions or various exemptions if any, available to him during the year. The
total income of the assesse is then arrived at. The assesse reduces the TDS and Advance Tax from that
amount to determine the tax payable on such income. Tax, if still payable by him, is called self-assessment
tax and must be paid by him before he files his return of income. This process is known as Self-Assessment.

4. Summary Assessment
It is a type of assessment carried out without any human intervention. In this type of assessment, the
information submitted by the assesse in his income tax return is cross-checked against the information that
the income tax department has access to. In the process, the reasonableness and correctness of the return are
verified by the department. The return gets processed online, and adjustments for arithmetical errors,
incorrect claims, and disallowances are automatically done.

For example, credit for TDS claimed by the taxpayer is found to be higher than what is available against his
PAN as per department records. Making an adjustment in this regard can increase the tax liability of the
taxpayer. After making the aforementioned adjustments, if the assesse is required to pay tax, he will be sent
an intimation under Section 143(1). The assessee must respond to this intimation accordingly.

5. Regular Assessment
The income tax department authorizes the Assessing Officer or Income Tax authority, not below the rank of
an income tax officer, to conduct this assessment. The purpose is to ensure that the assesse has neither
understated his income nor overstated any expense or loss nor underpaid any tax. The CBDT has set certain
parameters based on which a taxpayer’s case gets picked for a scrutiny assessment.

a. If an assesse is subject to a scrutiny assessment, the Department will send a notice well in advance.
However, such notice cannot be served after the expiry of 6 months from the end of the Financial year, in
which the return is filed.
b. The assesse will be asked to produce the books of accounts, and other evidence to validate the income he
has stated in his return. After verifying all the details available, the assessing officer passes an order either
confirming the return of income filed or making additions. This raises an income tax demand, which the
assesse must respond to accordingly.

4. Scrutiny Assessment
After submitting an income tax return, an Income Tax Officer may be assigned by the Income Tax
Department to assess the tax filing. The taxpayer is informed of this through an Income Tax Notice under
Section 143(2). The officer may request information, documents, and books of accounts for scrutiny
assessment, which will be thoroughly examined. The officer then calculates the income tax payable by the
taxpayer, and if there is a mismatch between the income and the tax due, the taxpayer can either pay the
extra amount or receive a refund.

If the taxpayer is not satisfied with the assessment, they can apply for recitation under Section 154 or submit
a revision application under Section 263 or Section 264. If the Scrutiny Assessment order is still considered
invalid, the taxpayer can appeal to higher authorities such as CIT (A), ITAT, High Court, and The Supreme
Court, in that order.

Best Judgement Assessment

This assessment gets invoked in the following scenarios:

a. If the assesse fails to respond to a notice issued by the department instructing him to produce certain
information or books of accounts.
b. If he/she fails to comply with a Special Audit ordered by the Income-tax authorities.
c. The assesse fails to file the return within the due date or such extended time limit as allowed by the
CBDT
d. The assesse fails to comply with the terms as contained in the notice issued under Summary Assessment

After providing an opportunity to hear the assesse’s argument, the assessing officer passes an order based on
all the relevant materials and evidence available to him. This is known as the Best Judgement Assessment.

Income Escaping Assessment

When the assessing officer has sufficient reasons to believe that any taxable income has escaped assessment,
he has the authority to assess or reassess the assesse’s income. The time limit for issuing a notice to reopen
an assessment is 4 years from the end of the relevant assessment Year.

Some scenarios where reassessment gets triggered are given below.

a. The assesse has taxable income but has not yet filed his return.

b. The assesse, after filing the income tax return, is found to have either understated his income or claimed
excess allowances or deductions.

c. The assesse has failed to furnish reports on international transactions, where he is required to do so.
Assessment could close quickly for some taxpayers, while it could prove to be quite gruelling for others.
CAPITAL RECEIPT AND REVENUE RECEIPT
CAPITAL RECEIPTS REVENUE RECEIPTS
Generated from financial activities Generated from operational activities of business
Amount received from bank: loans, investments, Amount received from sale of goods and services
debentures
The benefit from these would derive in the current Benefit is derived in the current year
year as well as future year also
Non recurring in nature Recurring in nature (not necessarily)
Affects the balance sheet Affects the income statement
Has to be repaid after fixed maturity or in No need to repay
instalments
Capitalized- asset creation No capitalization
To improve the working capacity or grow/expand To run the existing business capacity properly
the business
Revenue receipts are matched with revenue
expenditure to match the profit and loss of the year.
Capital Revenue
Capital revenue refers to the income generated from the sale or disposal of capital assets. Capital assets are
long-term assets that are not intended for regular sale or consumption, such as:

Real estate (land, buildings), Stocks and bonds, Machinery and equipment, Intellectual property (patents,
copyrights)

Key Characteristics of Capital Revenue:

- Infrequent: Capital revenue is typically not a regular or recurring source of income.
- Non-Operational: It arises from transactions that are not part of the normal business operations.
- Impact on Financial Position: The sale or disposal of a capital asset can significantly impact the
financial position of an individual or business.

Tax Implications of Capital Revenue:

The tax treatment of capital revenue varies depending on the jurisdiction and specific circumstances.
However, in many cases, capital gains tax is applied to the profit realized from the sale of a capital asset.

Key Factors Affecting Tax Implications:

- Holding Period: The length of time an asset is held can influence the tax rate. Long-term capital
gains are often taxed at lower rates than short-term capital gains.
- Nature of the Asset: The type of asset sold can also impact the tax treatment. For example, real estate
investments may have different tax rules compared to stocks or bonds.
- Tax Laws and Regulations: Tax laws and regulations can change over time, and it's important to stay
updated to ensure compliance

RATES OF INCOME TAX: PROPORTIONAL AND PROGRESSIVE RATE OF

TAXATION
Income tax is one of the primary sources of revenue for governments around the world. It is a direct tax
levied on the income of individuals, companies, and other entities. The rates of income tax can be levied
through two methods – a proportional rate of taxation or a progressive rate of taxation. This research paper
aims to analyse the two methods of taxation, their advantages and disadvantages, and their impact on
government revenue, fairness, and incentives to work harder and earn more.
Indian tax rate:

Amount of salary Tax %

0-3 lakh NIL
3-6 lakh 5%
6-9 lakh 10%
9-12 lakh 15%
12-15 lakh 20%
Above 15 lakh 30%
Progressive Rate of Taxation:
A progressive rate of taxation is a tax where the rate of tax increases with the level of income. In India, a
progressive rate of taxation is applied to individuals, with different tax rates for different levels of income.
A progressive rate of taxation means that individuals with higher incomes pay a higher percentage of their
income in taxes. The progressive rate of taxation is based on the principle of the ability to pay. The more an
individual earns, the higher their ability to pay taxes. The more an individual earns, the higher their ability to
pay taxes

Advantages
- Fairer than a flat tax
- Places a higher burden on high income earners, who have greater ability to pay taxes
- Tax system is more equitable and progressive as it reduces the income gap between low-income and
reliable source of revenue
Disadvantages
- It can reduce incentive to work harder and earn more
- High income earners may feel discouraged
- Can lead to reduction in economic growth as people may not have the motivation to work harder and
increase their income
- Reduce government revenue and increase burden on low-income earners

Proportional rate of taxation

A proportional rate of taxation, also known as a flat tax, is a tax where the rate of tax is the same for all
levels of income. In India, a proportional rate of taxation is applied to companies, with a flat rate of tax of
25% on their income
Advantages
- Simple and easy to understand
- Encourages people to work harder and earn more because they will not be penalized with higher tax
rate
- Reduces administrative burden of tax collection
Disadvantages
- Places higher burden on low-income earners as they have to pay the same % of tax as high-income
earners
- Reduces fairness of the tax system
- Reduces government revenue

Direct income
- The income which is earned from any business operational activities. Income earned from the sale of
goods and services in which business is dealing.
- Accounted for in trading account and Used to calculate gross profit
Indirect income
- The income which is earned from the non-operational activities of the business. Income earned from
the sale of scrap or profit earned from the sale of any asset.
- Accounted for in a profit and loss account
- Used to calculate a business’s net profit

AGRICULTURAL INCOME
Agricultural income is not taxable under Section 10 (1) of the Income Tax Act as it is not counted as a part
of an individual's total income. However, the state government can levy tax on agricultural income if the
amount exceeds Rs.5,000 per year.

It is categorised as a valid source of income and basically includes income from sources that comprise
agricultural land, buildings on or related to an agricultural land and commercial produce from agricultural
land. This income is considered for rate purposes while calculating the income tax liability of an individual.
Section 2 (1A) of the Income tax Act details out the conditions wherein sources can be considered to be
generating agricultural income. The section’s definitions basically point out the following as the sources of
agricultural income –

1. Renting/leasing agricultural land for agriculture, storeroom, residential place and outhouse.
2. Money earned from trees growing in nurseries as seedlings or saplings.

3. Renting/leasing agricultural land for by cultivator or farmer.

4. Any income due to commercial use of agricultural land

5. The agricultural land or the land where the building is located, is being assessed for land revenue or
subject to a local rate assessed.

Income derived from agricultural land by agricultural operations as per section 2 (1A)(b)
- Any income derived by agriculture land situated in india and used for agricultural purpose
- Any income derived by a cultivator or receiver of rent-in-kind of any process ordinarily employed to
render the produce raised or received by him to make it fit to be taken to market
- Any income derived by such land by the sale by a cultivator or receiver of rent-in-kind of the
produce raised or received by him in respect of which no process has been performed other than a process of
the nature described.

A few exclusions to this income will be as follows:

 Revenue from sale of processed produce of agricultural nature without actual agricultural activity

 Revenue from extremely processed produce

 Revenue from trees that have been sold as timber

Key points to remember while considering if an income is actually a valid agricultural income:
1. Income should be from an existent piece of land

2. Income should be from a piece of land that is used for agricultural operations
3. Income should stem from produce achieved after cultivation of the land
 4. Income can be from a land that is not under the assessee’s ownership

AGRICULTURAL INCOME EXAMPLES NON-AGRI

Income from seed sales Income from raising poultry
Sale of trees that have been planted again Agricultural land income is held as stock-in-trade
Rent from agricultural land Income from dairy industry
Earnings from growing creepers and flowers Income from selling and cutting trees for lumber
Income from producing cheese and butter
Is Agricultural Income Taxable?
By default, agricultural income is exempted from taxation and not included under total income. The Central
Government can’t impose or levy tax on agricultural income. The exemption clause is mentioned under
Section 10 (1) of the Income Tax Act of India.

Central Government
The Central Government can’t impose or levy tax on agricultural income. The exemption clause is
mentioned under Section 10 (1) of the Income Tax Act of India.

State Government
State Governments can charge agricultural tax. As of the latest amendment, income from agriculture, if
within INR 5000 in a financial year, will not be accounted for tax purposes. Anything above that will be
taxable as per the applicable rates. As per the finance act, the total tax liability for a person would include
the agriculture income added to the non-agricultural portion.
 Income above Rs.5,000: Though exempted from tax through Section 10 (1), tax on agricultural
income persists at the state level if the mentioned income exceeds INR 5000 per year and if the total
income excluding agricultural income is more than the basic exemption limit.
 Basic threshold: In addition to net agricultural income, total income is higher than the basic
exemption threshold

Tax calculation section 2(1A) it act

Agricultural income + Non-agricultural income = X

Net agricultural income + basic exemption limit = Y
Total amount of tax due = Y-X
For all other normal purposes, the tax calculation will involve the following steps:
 Including the Agricultural Income – Considering B is the base income of the individual and A is
the agricultural income, tax first needs to be computed on the amount of B+A. Let’s call this tax as
T(B+A)

 Adding the basic tax slab benefit – Depending upon changes in the Income Tax rules, the basic tax
slab might change, but for clarity’s sake, let’s consider that as S. That needs to be added to the
agricultural income and another tax is be calculated on the amount. Let’s call this tax as T(S+A)

 Income Tax liability – This is the tax that is subject to deductions. Thus IT = T(B+A) – T(S+A)
APPLICATION OF INCOME V/S DIVERSION OF INCOME
Application of income Diversion of income
Spending of income after it is being earned by the Diverting income before it is earned by the assesse
assesse
Such amount shall not be excluded from total Such amount shall be excluded from the total
income of the assesse as it is merely application of income as the income is diverted to someone else
earned income before being earned by the assesse
Applied income shall be taxable in the hands of the There is an over-riding title of any other person on
assesse such income, so the income before being earned by
the assesse reaches such person and hence not
chargeable to tax in hands of the assesse
Application of Income
 Definition: When an individual, after receiving income, voluntarily applies it towards a specific
purpose, it's termed as the 'application of income'.

 Tax Implications: The income is taxable in the hands of the individual who received it.

 Example: If a person earns a salary and voluntarily donates a portion of it to charity, it's considered
an application of income.

Diversion of Income
 Definition: When income is diverted before it reaches the hands of the intended recipient, it's termed
as 'diversion of income'.

 Tax Implications: The income is taxable in the hands of the person who was originally entitled to it.
 Example: If an employer, before paying a salary, directs it to be paid to a third party, it's a case of
diversion of income.

Key Difference:
The key difference lies in the timing of the diversion. In 'application of income', the income is first received
by the individual and then voluntarily transferred. In 'diversion of income', the income is diverted before it
reaches the individual, often due to a legal obligation or contractual arrangement.

Legal Implications:
Understanding the distinction between application and diversion of income is crucial for accurate tax
assessment. Misclassifying one as the other can lead to tax avoidance or evasion. Tax authorities often
scrutinize transactions to determine whether income has been diverted to avoid tax liability.

UNIT 2 RESIDENTIAL STATUS AND CHARGEABILITY

MEANING AND RULES FOR DETERMINING RESIDENTIAL STATUS OF AN
ASSESSE
The taxability of an individual in India depends upon his residential status in India for
any particular financial year.
An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly,
a foreign citizen may end up being a resident of India for income tax purposes for a particular year, the
residential status of different types of persons viz an individual, a firm, a company etc is determined
differently
Classification of taxable persons:

1. A resident and ordinarily resident (ROR) –

Resident and Ordinarily Resident: A resident and ordinarily resident will be charged to tax in India on his
global income i.e. income earned in India as well as income earned outside India.
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions:

1. Stay in India for a year is 182 days or more in previous year or

2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more
in the relevant financial year

Exceptions:
- In the event an individual who is a citizen of India leaves India as a member of the crew of an Indian
ship for the purpose of employment during the financial year, he will qualify as a resident of India only if he
stays in India for 182 days or more
- Indian citizen or person of Indian origin who stays outside India comes on a visit to India during the
relevant previous year. Such a person having a total income, other than the income from foreign sources
which exceeds Rs. 15 lakhs during the previous year will be treated as a resident in India if-
a. He stays in India during the relevant PY for 182 days or more
b. He stayed in India for 365 days or more during the previous 4 years and has been in India for at least
120 days in the PY
- Deemed resident of India- a citizen of India having total income (other than foreign sources) exceeds
Rs. 15 lakh and nil tax liability in other countries.

2. A resident but not ordinarily resident (RNOR)

Resident but not ordinarily resident: There is a thin line in taxability of income between ROR and RNOR,
on below incomes RNORs are not required to pay taxes.

 Income earned outside India as well as received outside India.

- If an individual qualifies as a resident, the next step is to determine whether he/she is a resident or
ordinarily resident (ROR0 or resident but not ordinarily resident (RNOR)
- He will be ROR if he meets both of the conditions
a. Has been a resident of India in at least 2 out of 10 years immediately previous years
b. Has stayed in India for at least 730 days in 7 immediately preceding years
- Situations in which an individual is said to be RNOR
a. If any individual fails to satisfy either or none of the above-mentioned conditions
b. If an individual is an Indian citizen or person of Indian origin having a total income more than
exceeding Rs. 15 lakh (excluding foreign income), who has been in India for 120 days or more but
less than 182 days during that previous year
c. If an individual is deemed to be a resident in India, by default, he will be considered as a Resident
and Not Ordinary Resident
3. A non- resident (NRI)
A non-resident will be charged tax only on the income ‘received in India’ or source of income ‘received
from India’. However, income earned outside India, having no connection with India, is not taxable.
- An individual failing to satisfy the condition of stay in India for:
a. 182 days or more in the previous year
b. 60 days or more in the PY and 365 days in 4 years preceding PY

Will be considered as a non-resident for that FY.

Income from foreign sources: It implies income earned outside India, excluding the income
sourced from a business operated in or a profession set up in India, which is not deemed to
accumulate or arise in India.
Resident in India and abroad
Non-resident Indian (NRI): An NRI is an individual who is a citizen of India or Indian origin but not a
resident.
Person of Indian Origin (PIO): An individual shall be considered to be of Indian origin if he/she or either
his/her parents or any of his/her grandparents was born in undivided India.
It is not necessary that the 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 the person who is resident in India will be a not be a resident in other country.

Residential status of each previous year

Residential status of an assesse is to be determined in respect of each previous year as it may be from
previous year to previous year.

Residential Status of HUF

Resident: An HUF would be resident in India if its management is made from the members in India, if not
will be considered a Non-resident.
Resident and ordinarily resident/ Resident but not ordinarily resident

If Karta (manager) of resident HUF satisfies the below conditions, then HUF will be treated as resident and
ordinarily resident, otherwise, it will be resident but not ordinarily resident.

 should be resident in at least 2 previous years out of the last 10 years.

 Stay in the last 7 years should be 730 days or more.

Residential Status of a Company

A company would be resident in India in the following circumstances:

 If it is an Indian Company
  The place of effective management in the previous year is in India.
A company's residential status determines the country or jurisdiction in which it is considered a tax resident.
This status significantly impacts the company's tax obligations, including the taxes it needs to pay and the
tax benefits it can claim.

Factors Determining Residential Status:

The specific criteria for determining a company's residential status vary from country to country. However,
common factors include:

1. Place of Incorporation: The country where the company was legally formed.
2. Place of Effective Management and Control (POEM): The location where the key decisions of the
company are made.
3. Principal Place of Business: The location where the company's primary business activities are
conducted.

Types of Residential Status:

1. Resident Company: A company is considered a resident of a particular country if it meets the
specific criteria for residency in that country. Resident companies are subject to tax on their global
income, with certain exemptions and deductions.
2. Non-Resident Company: A company that does not meet the criteria for residency in a particular
country is considered a non-resident company. Non-resident companies are generally only taxed on
income sourced from within that country.

Implications of Residential Status:

The residential status of a company has significant implications for its tax liabilities:

 Tax Rates: Different countries have different corporate tax rates. A company's residential status
determines the tax rate it will be subject to.

 Tax Treaties: International tax treaties can impact the tax treatment of cross-border transactions.

 Transfer Pricing: The pricing of transactions between related companies can be subject to transfer
pricing rules, which can be affected by the company's residential status.
 Withholding Taxes: Withholding taxes may be imposed on payments made to non-resident
companies.
 Compliance Obligations: Resident companies are subject to various compliance obligations,
including filing tax returns, paying taxes, and adhering to local regulations.

Note: Place of effective management means a place where management and commercial decisions that are
necessary for the conduct of business or entity are taken.

Residential Status of Firms, LLPs, AOPs, BOIs, Local authorities and Artificial juridical persons
In simple words, again, the residential status will depend on the place from where the management of the
above persons management is made, similar to HUF, if it's done by members in India, then it will be
resident, else it will be non-resident.
CHARGE OF INCOME TAX AND SCOPE OF TOTAL INCOME
Charge of Income Tax
Section 4 of the Income Tax Act, 1961 (the Act) governs the charge of income tax. It states that income tax
shall be charged for any assessment year at a specified rate or rates on the total income of the previous year
of every person.

Scope of Total Income

Section 5 of the Act defines the scope of total income for different categories of taxpayers:

1. Resident

For a resident individual, the total income includes all income from whatever source derived, which:
 Is received or deemed to be received in India during the previous year.

 Accrues or arises or is deemed to accrue or arise to him in India during the previous year.

 Accrues or arises to him outside India during the previous year.

2. Not Ordinarily Resident

For a not ordinarily resident individual, the total income includes all income from whatever source derived,
which:

 Is received or deemed to be received in India during the previous year.

 Accrues or arises or is deemed to accrue or arise to him in India during the previous year.

3. Non-Resident
For a non-resident individual, the total income includes all income from whatever source derived, which:
 Is received or deemed to be received in India during the previous year.

 Accrues or arises or is deemed to accrue or arise to him in India during the previous year.

Key Points to Remember:

 Income from Any Source: The definition of total income is inclusive and covers income from all
sources, both domestic and foreign.
 Accrual and Receipt Basis: Income can be taxed on both accrual and receipt basis, depending on
the specific provisions of the Act.
 Residential Status: The residential status of a taxpayer determines the extent of income that is
taxable in India.
 Exemptions and Deductions: Various exemptions and deductions are available under the Act,
which can reduce the taxable income.
 Tax Rates: The applicable tax rate varies depending on the category of taxpayer and the nature of
income.
HEADS OF INCOME AND ITS JUSTIFICATION
SALARY
- A salary is a fixed amount of money paid regularly by an employer to an employee for work
performed. It's typically expressed as an annual sum but is often paid in smaller, regular intervals like
monthly or bi-weekly.
Components of Salary Income:
The following components generally constitute salary income:
- Basic Salary: The fixed component of salary paid regularly.
- Dearness Allowance (DA): An allowance paid to compensate for inflation.
- Perquisites: Non-monetary benefits provided by the employer, such as housing, cars, medical
facilities, etc.
- Allowances: Monetary benefits paid to the employee for specific purposes, like travel,
accommodation, or medical expenses.
- Bonus: A lump-sum payment, often linked to performance or profitability.
- Commission: A payment based on a percentage of sales or profits.
- Gratuity: A lump-sum payment made on retirement, resignation, or death.
- Pension: A regular payment received after retirement.
Justification for Taxing Salary Income:
- Salary income is taxed under this head because it represents direct remuneration for services
rendered. The government levies taxes on this income to generate revenue for public expenditure.
Key Considerations for Taxing Salary Income:
- Residential Status: The residential status of the individual determines the extent of salary income
taxable in India.
- Exemptions and Deductions: Various exemptions and deductions are available under the Income
Tax Act to reduce the taxable salary income.
- Tax Slabs: The applicable tax rate depends on the total income, including salary income, and the
relevant tax slab.
- TDS Deduction: The employer is required to deduct TDS (Tax Deducted at Source) on the
employee's salary income.
Key Points about Salary:
 Fixed Amount: Unlike hourly wages, a salary is a fixed amount, regardless of the number of hours
worked.
 Regular Payments: Salaries are usually paid at regular intervals, such as monthly or bi-weekly.

 Benefits: Salaries often come with additional benefits, such as health insurance, retirement plans,
and paid time off.
 Tax Implications: Salaries are subject to various taxes, including income tax, social security taxes,
and other deductions.

Factors Affecting Salary:

Several factors influence the salary an individual can expect to earn:

 Job Role and Responsibilities: The complexity and importance of a job role significantly impact
salary.

 Experience and Skills: More experienced and skilled professionals often command higher salaries.

 Education and Qualifications: Advanced degrees and certifications can increase earning potential.
  Industry and Company: Salaries vary across different industries and companies.
 Location: Geographical location can influence salary levels, with higher salaries often associated
with major cities and high-cost-of-living areas.

 Performance and Productivity: Outstanding performance can lead to salary increases and bonuses.
 Negotiation Skills: Effective negotiation can help secure a higher salary.

GRATUITY
Gratuity is a retirement benefit paid by employers to their employees upon retirement, resignation, or
retrenchment. It's often a significant sum, especially for long-term employees.

Eligibility for Gratuity

Typically, employees who have completed a certain number of years of service with an organization are
eligible for gratuity. The specific eligibility criteria may vary depending on the country's labor laws and the
company's internal policies.

Calculation of Gratuity
The gratuity amount is usually calculated based on the employee's last drawn salary and the number of years
of service. The formula for calculating gratuity 1 in many countries is:

Gratuity = (Last drawn salary) x (Number of years of service) x (15/26)

For example, if an employee's last drawn salary is Rs. 50,000 per month and they have worked for 10 years,
the gratuity would be:

Gratuity = (50,000) x (10) x (15/26) = Rs. 2,88,462

Tax Implications of Gratuity

 Exemption Limit: In many countries, a portion of the gratuity received is exempt from income tax.
The exempt amount varies depending on the specific tax laws.

 Taxable Portion: Any amount exceeding the exempt limit is taxable as income.

Importance of Gratuity
Gratuity serves as a financial safety net for employees, helping them transition to retirement or a new job.
It's a valuable benefit that can provide financial security and peace of mind.

Note: The specific rules and regulations regarding gratuity may vary depending on the country and the
applicable labor laws. It's advisable to consult with a legal or tax professional for accurate information.

LEAVE SALARY
Leave salary refers to the payment an employee receives when they are on leave, such as sick leave,
vacation leave, or maternity leave. It's essentially the salary that the employee would have earned had they
been working during that period.

Key Points about Leave Salary:

 Paid Leave: Employees are typically entitled to a certain number of paid leave days each year,
during which they receive their full salary.
  Unpaid Leave: In some cases, employees may take unpaid leave, meaning they will not receive any
salary during that period.

 Leave Encashment: This refers to the process of converting unused leave into a lump sum payment
at the time of resignation, retirement, or termination.

Calculation of Leave Salary

The calculation of leave salary can vary depending on the specific company policy and local labor laws.
However, it typically involves:
1. Determining the Daily Wage: This is calculated by dividing the monthly salary by the number of
working days in a month.
2. Multiplying by the Number of Leave Days: The daily wage is multiplied by the number of leave
days taken.

Example: If an employee's monthly salary is Rs. 50,000 and they take 10 days of leave, the leave salary
would be calculated as follows:

 Daily wage = Rs. 50,000 / 30 = Rs. 1,667

 Leave salary = Rs. 1,667/day * 10 days = Rs. 16,670

Tax Implications of Leave Salary

The taxability of leave salary can vary depending on the specific circumstances and local tax laws. In many
cases, leave encashment may be subject to income tax, particularly if it exceeds certain limits.

The Income Tax Act, 1961, categorizes income into five main heads :
1. Income from Salary:
o Justification: This head covers income received by an individual from an employer in
exchange for services rendered. It includes salary, wages, bonuses, commissions, perquisites,
and other benefits. Taxing this income ensures that individuals contribute to the government's
revenue based on their earning capacity.

2. Income from House Property:

o Justification: This head includes income derived from owning and letting out property. It
also covers imputed income from self-occupied property. Taxing this income recognizes the
potential for wealth accumulation and income generation from real estate ownership.

3. Income from Profits and Gains of Business or Profession:

o Justification: This head covers income earned from carrying on a business or profession. It
includes profits from trading, manufacturing, services, and other commercial activities.
Taxing this income ensures that businesses contribute to the government's revenue in
proportion to their profitability.

4. Income from Capital Gains:

o Justification: This head covers profits or gains arising from the sale or transfer of capital
assets. It includes gains from the sale of shares, property, and other investments. Taxing
capital gains ensures that individuals contribute to the government's revenue when they
realize profits from asset appreciation.
 5. Income from Other Sources:
o Justification: This head covers income that doesn't fall under any of the above categories. It
includes interest income, dividends, rent from property not let out, and other miscellaneous
income. Taxing this income ensures that all sources of income are subject to taxation.

TAX TREATMENT TO SALARY, PERQUISITES ETC

Salary
 Fully Taxable: Salary, including basic salary, dearness allowance, and other allowances, is fully
taxable under the head "Income from Salary."

Allowances
 Taxable Allowances: Some allowances are fully taxable as they are considered part of the salary
income.
 Partially Taxable Allowances: Certain allowances, like house rent allowance (HRA) and
conveyance allowance, are partially taxable based on specific conditions and limits.
 Exempt Allowances: Some allowances are exempt from tax, such as reimbursement of actual
expenses incurred for business purposes.

Perquisites
 Value Added to Salary: Perquisites, like company cars, accommodation, and other benefits
provided by the employer, are valued and added to the employee's salary income.
 Valuation Rules: The valuation of perquisites is based on specific rules prescribed in the Income
Tax Act.

Key Considerations:
 Residential Status: The residential status of the individual (resident, not ordinarily resident, or non-
resident) determines the extent of income taxable in India.
 Exemptions and Deductions: Various exemptions and deductions, such as Section 80C, 80D, and
80CCD(1B), can reduce the taxable income.
 Tax Slabs: The applicable tax rate depends on the total income and the applicable tax slab.
 TDS Deduction: The employer is required to deduct TDS (Tax Deducted at Source) on the
employee's salary income.

PERQUISITES
Perquisites are additional benefits or privileges offered to employees beyond their regular salary. These
benefits can be monetary or non-monetary and are often provided to attract and retain top talent.
Common Types of Perquisites
 Monetary Perquisites:
o Allowances: These are fixed amounts paid to employees to cover specific expenses, such as
housing, transportation, or medical expenses.
o Bonuses: Extra payments made to employees, often based on performance or company
profits.
 o Commission: A percentage of the sales or revenue generated by an employee.
 Non-Monetary Perquisites:
o Company Car: A vehicle provided by the employer for business and personal use.
o Free or Subsidized Housing: Rent-free or discounted accommodation provided by the
employer.
o Medical Benefits: Health insurance, medical reimbursements, or access to company-
sponsored healthcare facilities.
o Education Reimbursement: Reimbursement for tuition fees and other educational expenses.
o Retirement Benefits: Pension plans, retirement savings accounts, or other retirement
benefits.
o Meal Coupons: Subsidized meals or meal vouchers.
o Travel and Entertainment Expenses: Reimbursement for business travel, conferences, and
entertainment expenses.
Tax Implications of Perquisites
The taxability of perquisites varies depending on the specific benefit and the applicable tax laws. Some
perquisites are fully taxable, while others may be exempt or partially exempt. It's important to consult with a
tax professional to determine the tax implications of specific perquisites.
Factors affecting the taxability of perquisites include:
 Nature of the Perquisite: Whether it's a monetary or non-monetary benefit.
 Purpose of the Perquisite: Whether it's directly related to the employee's job or for personal use.
 Value of the Perquisite: The monetary value assigned to the perquisite.
 Applicable Tax Laws and Regulations: Tax laws and regulations vary from country to country and
may change over time.

ANNUAL VALUE OF HOUSE PROPERTY. INCOME FROM HOUSE PROPERTY

ARE SUBJECT TO TAXATION AND SCOPE OF EXEMPTION
Annual Value (AV) of a house property is the deemed income derived from the property, whether it's self-
occupied or let out. It's a notional value that is used to calculate income tax liability. For self-occupied
properties, a standard deduction is allowed, while for let-out properties, the actual rent received or the
annual value, whichever is higher, is considered. The annual value is generally calculated based on the fair
rental value of the property, which is the rent that could be reasonably expected to be received from the
property
Annual Value (AV) is a concept used in Indian Income Tax law to determine the taxable income from a
house property. It's a notional income that is deemed to be earned from a property, regardless of whether it's
actually rented out or self-occupied.
Calculation of Annual Value
The annual value of a house property is generally calculated based on the fair rental value (FRV) of the
property. The FRV is the rent that could reasonably be expected to be received from the property if it were
let out.
Factors Affecting Annual Value:
 Location of the Property: Properties in prime locations generally have higher annual values.
 Size and Type of Property: Larger properties and properties with more amenities typically have
higher annual values.
  Market Rent: The prevailing rent for similar properties in the area.
 Municipal Valuation: The valuation assigned by local authorities.
Tax Implications of Annual Value
 Self-Occupied Property:
oA standard deduction of up to ₹30,000 is allowed for a self-occupied property.
oIf multiple properties are self-occupied, the deduction can be claimed for only two properties.
 Let-Out Property:
o The actual rent received or the annual value, whichever is higher, is considered as income.
o Certain deductions, such as municipal taxes, ground rent, and interest on a home loan, can be
claimed to reduce the taxable income.
Important Considerations
 Municipal Valuation: The municipal valuation of a property can be used as a basis for determining
the annual value.
 Standard Rent: In certain cases, a standard rent may be prescribed by the tax authorities.
 Vacancy Allowance: A deduction may be allowed for the period when the property is vacant.
 Repair and Maintenance Expenses: Expenses incurred on repairs and maintenance can be claimed
as deductions.
INCOME FROM HOUSE PROPERTY
Income from house property is a type of income that is taxable under the Income Tax Act, 1961. It arises
from owning a house property, whether it's self-occupied or let out.
Types of House Property:
1. Self-Occupied Property: A property that is used for self-residence.
2. Let-Out Property: A property that is rented out to others.
Calculating Income from House Property:
1. Gross Annual Value (GAV):
o For Self-Occupied Property: The GAV is generally considered to be zero.
oFor Let-Out Property: The GAV is the higher of:
 Actual Rent Received: The actual rent received from the tenant.
 Municipal Valuation: The valuation assigned by the local authority.
 Standard Rent: A notional rent determined by the tax authorities.
2. Net Annual Value (NAV):
o NAV = GAV - Municipal Taxes
3. Deductions:
o Standard Deduction: A standard deduction of 30% of the NAV is allowed for let-out
properties.
o Interest on Home Loan: Interest paid on a home loan can be claimed as a deduction, subject
to certain limits.
4. Taxable Income:
o For Self-Occupied Property: The taxable income is the interest paid on a home loan, subject
to certain limits.
o For Let-Out Property: The taxable income is the NAV minus the deductions.
Key Points to Remember:
 Multiple Self-Occupied Properties: Only two properties can be considered self-occupied for tax
purposes.
 Vacancy Allowance: A deduction may be claimed for the period when the property is vacant.
 Municipal Taxes: Municipal taxes paid on the property can be claimed as a deduction.
 Repair and Maintenance Expenses: Certain expenses incurred on repairs and maintenance can be
claimed as deductions.
Taxation of Income from House Property
Self-Occupied Property:
 Taxable Income: Generally, no income is taxable for self-occupied property.
 Interest on Home Loan: Interest paid on a home loan taken for the acquisition, construction, or
improvement of a self-occupied property is deductible up to a certain limit.
Let-Out Property:
 Gross Annual Value (GAV): The higher of the actual rent received or the municipal valuation is
considered the GAV.
 Net Annual Value (NAV): Municipal taxes paid are deducted from the GAV to arrive at the NAV.
 Deductions: A standard deduction of 30% of the NAV is allowed for expenses like repairs,
maintenance, etc.
 Taxable Income: The NAV, minus the deductions, is the taxable income from the let-out property.
Exemptions and Deductions
 Self-Occupied Property:
o Interest on home loan: Up to a certain limit, the interest paid on a home loan can be claimed
as a deduction from the taxable income.
 Let-Out Property:
o Municipal Taxes: Taxes paid to the local authority are deductible from the GAV.
o Standard Deduction: A standard deduction of 30% of the NAV is allowed for expenses like
repairs and maintenance.
o Interest on Home Loan: Interest paid on a home loan taken for the acquisition or
improvement of the let-out property can be claimed as a deduction.

PROVISIONS TO FILING OF RETURNS BY THE ASSESSES AND PROVISIONS

RELATED TO ASSESSMENT
Filing an Income Tax Return (ITR) is a mandatory process for individuals and entities earning taxable
income in India. It's a way to declare your income, pay taxes, and claim deductions and exemptions.
Key Steps to File Your ITR:
1. Determine Your ITR Form:
o ITR-1: For salaried individuals with income up to ₹50 lakh and no other income sources.
o ITR-2: For individuals and HUFs having income from salary, pension, capital gains, house property,
other sources.
 ITR-3: For individuals and HUFs with income from business and profession.
o
ITR-4: For individuals and HUFs having income from business and profession with turnover/gross
o
receipts up to ₹5 crore.
o ITR-5: For firms, LLPs, AOPs, BOIs, trusts, etc.
o ITR-6: For companies.
o ITR-7: For persons of foreign origin.
2. Gather Necessary Documents:
o Form 16 (salary slip) TDS certificates Investment proofs (mutual funds, fixed deposits, etc.)
Property documents (if applicable) Bank account statements PAN card
3. File Your Return Online:
o Log in to the Income Tax e-filing portal: Use your PAN as your user ID.
o Select the ITR Form: Choose the appropriate ITR form based on your income sources.
o Fill in the Details: Provide accurate information about your income, deductions, and tax payments.
o Verify Your Return: E-verify your return using Aadhaar OTP, net banking, or digital signature.
o Pay Taxes: Pay any outstanding taxes through online payment options.
Important Dates: The Income Tax Department sets a deadline for filing income tax returns each year. It's
crucial to file your return before the deadline to avoid penalties.
 Due Date: The Income Tax Department specifies a due date for filing ITRs each year. Typically, the
due date for salaried individuals is July 31st of the following financial year.
 Belated Returns: If a taxpayer fails to file their return on time, they can file a belated return within a
specified period, usually before the end of the assessment year. However, late filing fees may apply.
 Revised Returns: If a taxpayer discovers errors or omissions in their original return, they can file a
revised return within a specified period.
 E-filing: E-filing is mandatory for individuals with a taxable income above a certain threshold. It
simplifies the process and reduces processing time.
 Verification of Returns: Returns must be verified electronically through Aadhaar OTP, net banking, or
digital signature.
 Payment of Taxes: Any tax due must be paid along with the filing of the return.
 Penalty for Late Filing: A penalty may be levied for late filing of returns.
 Interest on Delayed Payment: Interest may be charged on unpaid taxes.
Additional Tips:
 Keep Records: Maintain proper records of all financial transactions.
 Consult a Tax Professional: If you have complex tax situations, consult with a tax expert.
 Stay Updated: Stay informed about the latest tax rules and regulations.
 E-Verify Your Return: E-verification is mandatory to avoid processing delays.
Assessment of Income Tax Returns
Once an Income Tax Return (ITR) is filed, it undergoes a process of assessment by the Income Tax
Department. This process involves verification of the information provided in the return, calculation of tax
liability, and issuance of a final assessment order.
Types of Assessment
1. Self-Assessment:
o Taxpayers assess their own income and calculate their tax liability. The Income Tax
Department may conduct a summary assessment to verify the return.
2. Scrutiny Assessment:
o The Income Tax Department selects certain returns for detailed scrutiny. This involves a
thorough examination of the income, deductions, and credits claimed in the return.
o The Assessing Officer may issue notices to the taxpayer seeking additional information or
clarification.
3. Best Judgment Assessment:
o If a taxpayer fails to provide complete and accurate information or fails to respond to notices,
the Assessing Officer can make an assessment based on the best judgment available.
4. Reassessment:
o In certain cases, the Income Tax Department can reassess a return if it finds that income has
been concealed or understated. This is typically done within a specific time limit and under
certain conditions.
Key Provisions Related to Assessment
 Section 143: This section deals with the processing of income tax returns, including summary
assessment, scrutiny assessment, and issuance of notices.
 Section 147: This section provides for reassessment in cases where income has escaped assessment.
 Section 148: This section outlines the procedure for issuing notices for reassessment.
 Section 149: This section deals with the powers of the Assessing Officer to call for information and
documents.
 Section 153: This section empowers the Income Tax Department to conduct searches and seizures.

CAPITAL ASSET, NATURE AND SCOPE OF TRANSFER OF CAPITAL ASSET.

MODE OF COMPUTATION
A capital asset is any property, whether tangible or intangible, held by an individual or entity. It's generally
an asset that is held for long-term use or investment rather than for immediate sale or consumption.
Capital asset is any property, whether tangible or intangible, held by an individual or entity for long-term use
or investment. This includes assets like land and buildings, plant and machinery, jewelry, shares, securities,
copyrights, patents, and trademarks. When a capital asset is transferred through sale, exchange, gift, or any
other means, a capital gain or loss may arise. The nature of the asset and the holding period determine
whether the gain or loss is short-term or long-term, which, in turn, affects the applicable tax rate.
Examples of Capital Assets:
 Land and Buildings Plant and Machinery Jewelry and Artwork Shares and Securities
 Copyrights, Patents, and Trademarks
Nature and Scope of Transfer of a Capital Asset
A capital asset is transferred when it is sold, exchanged, gifted, or otherwise disposed of. The transfer can be
a complete or partial transfer of ownership.
Types of Transfer:
The scope of transfer of a capital asset is quite broad and encompasses various transactions that result in the
disposal or relinquishment of ownership rights. As per Section 2(47) of the Income Tax Act, 1961, a transfer
includes:
  Sale, exchange, or relinquishment: This is the most common form of transfer, involving the
outright sale or exchange of a capital asset.
 Extinguishment of rights: The termination of any rights associated with a capital asset, such as the
expiry of a lease or the cancellation of a license.
 Compulsory acquisition: The acquisition of a capital asset by the government or a statutory
authority under the power of eminent domain.
 Conversion into stock-in-trade: Converting a capital asset into a business asset for the purpose of
sale or consumption.
 Maturity or redemption of zero-coupon bonds: The redemption of zero-coupon bonds at maturity.
 Part-performance of a contract: Transferring possession of an immovable property as part of a
contract.
 Any transaction that enables the enjoyment of an immovable property: This includes
transactions like power of attorney agreements that effectively transfer the right to use or benefit
from the property.
Mode of Computation of Capital Gains
The capital gain arising from the transfer of a capital asset is calculated as the difference between the sale
price and the indexed cost of acquisition.
Indexation Benefit:
Indexation is a method used to adjust the cost of acquisition of an asset to account for inflation. By indexing
the cost of acquisition, the taxable capital gain is reduced.
Formula for Calculating Capital Gains:
Capital Gain = Sale Price - Indexed Cost of Acquisition
Indexed Cost of Acquisition = Original Cost of Acquisition x (Index Number on the Date of Sale / Index
Number on the Date of Purchase
PREVIOUS YEAR AND ASSESSMENT YEAR
Previous year Assessment year
The previous year refers to the financial year The assessment year refers to the year in which the
immediately preceding the assessment year. It is the income earned during the previous year is assessed
year in which the income is earned and expenses and taxed by the tax authorities. It is the year in
are incurred. which the individual or entity files their income tax
return and settles their tax liability
The previous year starts on April 1st and ends on The assessment year starts immediately after the
March 31st of the following calendar year. It is the previous year ends and runs from April 1st to
year in which financial transactions take place, and March 31st of the subsequent calendar year. It is the
income is generated. year in which the income earned during the
previous year is evaluated, assessed, and taxed.
The previous year is relevant for determining the The assessment year is when the tax authorities
taxable income and calculating the tax liability. review and assess the income earned during the
Income and expenses incurred during the previous previous year. It is the year when the taxpayer files
year are taken into account for tax purposes. their income tax return, provides supporting
documentation, and settles their tax liability
The assessment year is significant for tax
The previous year is crucial for maintaining compliance, as taxpayers are required to file their
financial records, preparing financial statements, income tax returns and fulfill their tax obligations
and analyzing the financial performance of
for the income earned during the previous year.
individuals and businesses.

Examples of the previous year include: From April Examples of the assessment year include: From
1, 2021, to March 31, 2022. It is the year in which April 1, 2022, to March 31, 2023. It is the year in
financial transactions, income, and expenses occur. which the income earned during the previous year
is assessed, and tax returns are filed.
The previous year is relevant for individuals, The assessment year is significant for individuals,
businesses, and entities to maintain their financial businesses, and entities to fulfill their tax
records, track income and expenses, and ensure obligations, accurately report their income, and
compliance with accounting and reporting settle their tax liability based on the assessment of
standards. the previous year's income
The previous year is the primary reference period The assessment year is the primary reference period
for determining the financial performance, for tax authorities to assess and evaluate the income
profitability, and cash flow of individuals and earned during the previous year, determine the tax
businesses. liability, and enforce tax compliance.