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• This edition has been revised in the light of amendments made by finance Act 2021.
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CA SURAJ SATIJA

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 TAX LAW
DIRECT TAX
PART - 1
INDEX
SR.NO. CHAPTER PAGE NO.

1 BASIC CONCEPT OF TAX 1.1-1.26

2 INCOME UNDER THE HEAD SALARIES 2.1-2.32

3 INCOME UNDER THE HEAD CAPITAL GAINS 3.1-3.35

4 INCOME FROM OTHER SOURCES 4.1-4.22

5 CLUBBING PROVISIONS 5.1-5.07

SET OFF AND / OR CARRY FORWARD OF

6 6.1-6.05
LOSSES
 BASIC CONCEPT OF INCOME TAX
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1. BASIC CONCEPTS OF INCOME TAX
WHAT IS TAX?
 Tax is NOT “Compulsory Extortion of Money” by the government.
 It is the financial charge (fee) imposed by the Government on income,
commodity or activity.

WHY ARE TAXES LEVIED?

 Taxes constitute the basic source of revenue to the Government which are
utilized for meeting the expenses of Government like defense, provision of
education, health-care, infrastructure facilities like roads, dams etc.

TAXATION SYSTEM IN INDIA

 In India, Constitution of India is the parent law. All other laws should be enacted
(made) without exceeding the framework of Constitution & subject to the norms
(T&C) laid down in it.
 Article 265 of Constitution provides that no tax shall be levied or collected
except by authority of law. Further, the law imposing the tax must not violate
any fundamental right.
 Constitution empowers Central Government (CG) & State Government to levy &
collect tax on Income.
 Parliament (Union) & SG are empowered to levy taxes by virtue of Article 246 of
Constitution.
 Entry 82 of Union List (List I to Seventh Schedule of Constitution) gives power to
Parliament to levy taxes on Income other than Agricultural Income.
 Seventh Schedule to Article 246 contains three lists which enumerate the
matters under which the Union & SGs have the authority to make laws for the
purpose of levy of taxes.
The following are the lists:
1) Union List: CG has exclusive power to make laws on the matters contained in
Union List.
2) State List: SG has exclusive power to make laws on matters contained in the
State List.
3) Concurrent List: Both CG & SG have power to make laws on matters contained in this list.
Particulars Direct Tax Indirect Tax
Levied on Income/wealth of the Price of Goods or Services
person
Examples Income tax, Tax on GST, Custom duty.
undisclosed foreign Income
or Assets.
Shifting of burden There is No Shifting of Tax burden is shifted to
burden. subsequent buyer /user.

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 Direct Taxes are  Thus whole burden falls
directly borne by on final consumer.
taxpayer
Time of Collected on yearly basis Collected at the time of
Collection sale/purchase of goods or
rendering of services.

COMPONENTS OF INCOME TAX LAWS

A. INCOME TAX ACT, 1961
 It came into force on 1st April, 1962. The act contains 298 sections & XIV schedules.
 A section may have sub-sections, clauses & sub-clauses.
 Ex: Clause (1A) of Section 2 defines “agricultural income”, Clause (1B) defines “amalgamation”.
 Section 5 defining the scope of total income has two sub-sections (1) & (2).
 Sub-section (1) defines the scope of total income of a resident;
 Sub-section (2) defines the scope of total income of a non-resident.
 A Section may also have Provisos & Explanations.
 Proviso gives the exceptions to the provision contained in the respective by sub-section/clause.
(Proviso gives the cases where the provision contained in the respective section/sub-
section/clause would not apply or where the provision would apply with certain modification).
 Explanation gives clarification relating to the provision contained in that by sub-section/clause.
The Act (since it is Revenue-based Act) undergo changes every year with additions & deletions
brought by the Annual Finance Act passed by the parliament ACT.

B. ANNUAL FINANCE ACT

 Every year, Finance Minister Introduces the Finance Bill in Parliament’s Budget session .
 Part A of budget speech contains the proposed policies of government in the area .
 Part B of budget speech contains the detailed tax proposals.
 When the Finance Bill is passed by both the houses of the Parliament & gets the assent of the
President, it becomes the Finance Act which is incorporated in the Income- Tax Act.
 Amendments are made every year to the Act & other tax laws by the Finance Act.

C. NOTIFICATIONS
 Notifications are subordinate legislation issued by CG to give effect to the provisions of the Act.
 The CBDT is also empowered to make & amend rules by issuing notifications.
 They are binding on everyone. [ Assessee + Income Tax department]

D. INCOME TAX RULES

 The CBDT is empowered to make rules for proper administration of the ACT.
 Ex: Sec 32 states that depreciation will be allowed as deduction but the rates for computation of
depreciation are given by Rule 5.

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 Rules also have sub-rules, provisos and Explanations.
 The First Schedule to the Finance Act contains four parts which specify the rates of tax.
 Part I: Rate of Tax applicable for the current Assessment Year.
 Part II: Rate of TDS for the current Financial Year.
 Part III: Rate of Advance Tax & Rate of tax to be deducted from income u/h ‘Salaries’.
 Part IV: Rules for computing Net Agricultural Income.

E. CIRCULARS
 Circulars are issued by the CBDT to deal with certain specific problems & to clarify the doubts
regarding the scope & meaning of the provisions of the law.
 Circulars provide guidance to the Income Tax officers & Assesses.
 These circulars are binding on the department but not on the assessee.
 However assessee can take advantage of beneficial circulars.

F. CASE LAWS (JUDICIAL DECISIONS)

 It is not possible for the parliament to provide for all possible issues that may arise in the
implementation of any act. Hence the judiciary will hear the disputes between the assesses &
the Income tax Department & give its decisions.
 Supreme Court Decisions becomes Judicial Precedent (Law) & are binding on all the courts,
Appellate Tribunal, Income Tax Authorities & on assesses.
 High Court decisions are binding on the assesses & Income Tax Authorities which come under
its jurisdiction unless it is overruled by a higher authority (Supreme Court).
 Decision of a High Court cannot bind other High Court.

LEVY / CHARGE OF INCOME TAX [SECTION 4]

Income-tax is a tax levied on the total income of the Previous Year of every person (Section 4).
Procedure for Computation of total income of person for levy of income tax is as follows :

Step 1 - Determination of Residential Status

Step 2 - Classification of Income under 5 different heads

Step 3 - Computation of Income under each head.

Step 4 - Clubbing of income of spouse, minor child etc.

Step 5 - Set-off or carry forward and set-off of losses.

Step 6 - Computation of Gross Total Income [Net Result of Step 1 – 5].

Step 7 - Deductions from Gross Total Income. [Payment based/Income

Based deductions].

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Step 8 - Total income [GTI – Deductions under Step 7].

Step 9 - Application of Rates of Tax on the total income.

Step 10 - Surcharge / Rebate u/s 87A.

Step 11 - Health & Education Cess on Income Tax.

Step 12 - Advance tax & TDS.

Step 13 - Tax Payable/Tax Refundable.

We will study all the above steps in details in the respective chapters

SOME IMPORTANT DEFINITIONS

 Terms defined in the Act: Section 2 gives definitions of various terms used in the Act. If a
particular definition is given in the Act itself, we will have to use that definition only.
 Terms not defined under the Act: If a particular definition is not given in the Act, reference is
to be made to the General Clauses Act or dictionaries, day-to-day meanings.

1. INDIA [SECTION 2(25A)]

 The term 'India' means –
 Territory of India as per Article 1 of the Constitution,
 Territorial Waters of India (TWI), seabed and subsoil underlying such waters,
 Continental Shelf,
 Exclusive Economic Zone
 Any other specified maritime zone & air space above its territory & TWI. Specified maritime
zone means the maritime zone as referred to in Territorial Waters, Continental Shelf, Exclusive
Economic Zone and other Maritime Zones Act, 1976.

2. ASSESSEE - [SECTION 2(7)]

 Any person by whom any tax or any other sum of money is payable under this Act.
 It includes –
a) Tax Payable: Every Person by whom any tax or any other sum of money is payable under this Act
whether or not any proceeding under this act has started against him.
b) Proceeding started: Any Person in respect of whom any proceeding under the act has been taken
whether or not any tax, interest or penalty is payable by him under this act. Proceeding may be
taken for/of –

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 Assessment of his income (or loss) sustained by him;
 Income (or loss) of any other person in respect of whom he is assessable;
 Refund due to him or to such other person.
 Assessment of Fringe Benefits.
c) Deemed Assessee: Sometimes, a person becomes assessable in respect of the income of some
other persons. In such a case, he may be deemed as an assessee.
d) Representative Assessee: Sometimes a person may be assessed for Income of another person.
Such person is known as representative assessee.
Ex: Legal Heir is assessable for the income of deceased person.
e) Assessee in default: Any person who does not deduct tax at source or after deducting tax, fails to
pay deducted tax to the government or who fails to pay advance tax is deemed to be assessee in
default u/s [201(1)]/218.

3. ASSESSMENT [SECTION 2(8)]

 This is the procedure by which the income of an assessee is determined by AO.
 It may be normal assessment or by way of reassessment of an income previously assessed.

4. PERSON [SECTION 2(31)]

AN INDIVIDUAL
Individual means only A Natural Human Being (Male/Female/Minor/Unsound Mind).
Note: Income of Minor & Person of unsound Mind → Assessed in hands of Manager/Guardian u/s
161(1).

COMPANY [SECTION 2(17)]

‘Company’ has a much wider meaning under Income Tax Act than Companies Act.
It means:
 Any Indian Company defined in section 2(26);
 Any Body Corporate incorporated under the foreign laws [Foreign company];
 Any institution, association or body (incorporated/not) whether indian or non-Indian,
 which is declared by general or special order of CBDT to be a company

A FIRM [SECTION 2(23)]

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 A firm includes a partnership firm (registered or not) & shall include a LLP.
 “Partnership firm” has same meanings as assigned to them in Indian Partnership Act.
 However, for IT purposes, a minor admitted to the benefits of existing partnership would also
be treated as partner. This is specified u/s 2(23) of the Act.
 Same Tax Treatment would be applicable for both General Partnerships & LLPs.

ASSOCIATION OF PERSONS (AOP)

 When two or more persons combine together for promotion of joint enterprise, they are
assessable as an AOP when they do not constitute a partnership legally.
 Conditions to form AOP: Persons must join in a common purpose, common action & their object
must be to produce Income, but they should not form a partnership.
 Co-heirs, co-donees joining together for common purpose would be chargeable as AOP.

BODY OF INDIVIDUALS (BOI)

Persons who merely receive the income jointly & who may be assessable in like manner & to the
same extent as the beneficiaries individually. (Ex: Executors/trustees).
 Co-Executors/Co-trustees are assessable as BOI since their title & interest are indivisible.
 Note: Tax is not payable by the assessee on share of Income received by him from BOI on which
the tax has already been paid by such BOI. [To avoid Double Taxation]

LOCAL AUTHORITY
Municipal committee, district board, Municipality, body of port commissioners etc. legally
entitled/entrusted by Government with control & management of Municipal/ local fund.
Note: Income of LA is taxable only if it is derived from the business of supply of commodity/service
(other than water & electricity) outside its own jurisdictional area. Income arising from supply of
water & electricity even outside its own jurisdictional areas → Exempt.
EVERY OTHER ARTIFICIAL JURIDICAL PERSON (not falling within above categories)
 This is a residuary clause. If the assessee does not fall in any of the first six categories, he is
assessed under this clause.
Ex: An idol, or deity.

Q. What is the difference between AOP & BOI?

Answer: The difference between AOP & BOI is that whereas an association implies a voluntary
getting together for a definite purpose, a body of individuals would be just a body without an

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intention to get-together. Moreover, members of BOI can be individuals only but members of AOP
can be individual or non-individuals (i.e. artificial persons).

5. CLASSES OF COMPANIES
HINDU UNDIVIDED FAMILY
 HUF is not defined under IT Act. However, it is treated as separate entity under IT Act.
 As per Hindu Law, it consists of all males lineally descended from a common ancestor & includes
their wives & unmarried daughters.
 The Status in HUF is received by birth & not by operation of law.
 Even a single male member can have HUF (w.e.f 6/9/2005).
 Only Co-parceners have the right to Partition.
Coparceners → HUF may contain many members, but only members within 4 degrees including
KARTA are called co-parceners (including daughters w.e.f 6/9/2005).
Note: wife/ daughter-in-law cannot be co-parceners; however they can be members.
 Jain & Sikh undivided families would also be assessed as a HUF under IT Act. .

DOMESTIC COMPANY [SECTION 2(22A)]

 An Indian company or
 Any other company, which has made prescribed arrangements for declaration & payment of
dividends within India payable out of the taxable Income in India.

6. PERSON HAVING SUBSTANTIAL INTEREST IN THE COMPANY [Section 2(32)]

 Any person who is the beneficial owner of shares (not being shares entitled to fixed rate of
dividend), whether participating in profit or not, carrying at least 20% of total voting power.

7. AVERAGE RATE OF TAX [SECTION 2(10)]

 Generally, the word ‘Income’ covers receipts in the shape of money or money’s worth, which
arise with certain regularity.
 Average Rate of Tax = Amount of Income Tax calculated on Total Income using applicable slab
rate/Total Income

8. MAXIMUM MARGINAL RATE OF TAX [SECTION 2(29C)]

 Rate of Income Tax (including SC) applicable in relation to Highest Slab of Income specified in
the Finance Act of the relevant Previous Year, in the case of

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(i) An Individual, or (ii) An AOP /BOI.

INCOME & ITS CONSTITUENTS [SECTION 2(24)]

1) MEANING & DEFINITION OF INCOME
 Income is a periodical monetary return with some sort of regularity. However, all receipts do
not form the basis of taxation under the Act.
Income for the purpose of Income Tax Act includes:
[Each of these will be covered in respective chapter]

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

1. Profits and gains PGBP
2. Dividend Other Sources
3. Voluntary contributions received by a trust/institution created Generally exempt
wholly or partly for charitable or religious purposes or by under Section 11 and
certain research association or universities and other 12
educational institutions or hospitals and other medical
institutions or an electoral trust.
4. The value of any perquisite or profit in lieu of salary taxable Salary
5. Any special allowance or benefit specifically granted to the Salary (Generally
assessee to meet expenses wholly, necessarily and exclusively for exempt)
the performance of the duties of an office or employment of
profit.
6. City Compensatory Allowance/ Dearness allowance : any Salary
allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or
employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for the
increased cost of living.
7. Benefit or Perquisite to a Director : The value of any benefit Salary (if as per
or perquisite, whether convertible into money or not, obtained employment
from a company by. (a) a director, or (b) a person having agreement) else
substantial interest in the company, or (c) a relative of the under Other Sources
director or of the person having substantial interest, and any (if not in the terms of
sum paid by any such company in respect of any obligation employment
which, but for such payment, would have been payable by the agreement)
director or other person aforesaid;
8. Any Benefit or perquisite to a Representative Assessee : Other Sources
the value of any benefit or perquisite (whether convertible into
money or not) obtained by any representative assessee under
Section 160(1) (iii)/ (iv) or beneficiary, or any amount paid by
the representative assessee in respect of any obligation which,

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but for such payment, would have been payable by the
beneficiary;

9. Deemed profits chargeable to tax under section 28 or section 41 PGBP

or section 59
10. Capital Gain : any capital gains chargeable to tax under Section Capital Gains
45; since the definition of income in Section 2(24) is inclusive
and not exhaustive capital gains chargeable under Section 46(2)
are also assessable as income.
11. Insurance Profit : The profits and gains of any Insurance PGBP
business carried on by a mutual insurance company or by a co-
operative society computed in accordance with the provisions of
Section 44 or any surplus taken to be such profits and gains by
virtue of the profits contained in the First Schedule to the
income-tax act
12. Banking income of a Co-operative Society : The profits and PGBP
gains of any business of banking (including) providing credit
facilities carried on by a cooperative society with its members.
13. Winnings from Lottery : any winnings from lotteries, Other Sources
crossword puzzles, races, including horse-races, card-
games and games of any sort or from gambling or betting of
any form.
14. Employees Contribution Towards Provident Fund : any PGBP if not deposited
sum received by the assessee from his employees as by the assessee to the
contributions to any provident fund or superannuation specified fund
fund or any fund set-up under the provisions of the
employees State insurance act, 1948 (34 of 1948) or any
other fund for the welfare of such employees.
15. Amount Received under keyman Insurance Policy : any PGBP
sum received under a Keyman insurance Policy including
the sum allocated by way of bonus on such policy. Keyman
insurance Policy means a life insurance policy taken by a
person on the life of another person who is or was the
employee of the first mentioned person or is or was
connected with the business of the first mentioned person
in any manner whatsoever.
16. Amount received for not carrying out any activity : any sum PGBP
referred to in Section 28(va), i.e. any sum, whether received
or receivable in cash or kind, under an agreement for -
(i) not carrying out any activity in relation to any
business or profession; [amendment vide Finance act,
2016]
(ii) not sharing any know-how, patent, copyright, trade-

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mark, license, franchise or any other business or
commercial right of similar nature or information or
technique likely to assist in the manufacture or processing
of goods or provision for services
17. any sum referred to in clause (v) or (vi) of sub-section (2) Other sources
of section 56
18. Gift received for an amount exceeding Rs. 50,000 : any sum Other sources
of money or value of property referred to in clause (vii) or
clause (viia) of sub-section (2) of Section 56
19. any consideration received for issue of shares as exceeds Other sources
the fair market value of the shares referred in section
56(2)(viib).
20. amount received as an advance or otherwise in the course Other sources
of negotiation for transfer of a capital asset referred to in
clause (ix) of section 56(2).
21. any sum of money or value of property received without Other sources
consideration or for inadequate consideration as referred
to in clause (x) of Section 56(2)
22. any compensation or payment in connection with Other sources
termination of employment as referred under clause (xi) of
Section 56(2).
23. assistance in the form of a subsidy or grant or cash PGBP
incentive or duty drawback or waiver or concession or
reimbursement (by whatever name called) by the Central
Government or a State Government or any authority or
body or agency in cash or kind to the assessee other than
the subsidy or grant or reimbursement which is taken into
account for determination of the actual cost of the asset in
accordance with the provisions of explanation 10 to clause
(1) of section 43.

2) REGULARITY OF INCOME
 Income means periodical monetary return coming from definite source with some sort of
regularity.
 However, this does not mean that income, which does not arise regularly, will not be treated as
income for tax purposes. Ex: Winnings from lotteries, card games, etc. which do not arise from
definite source & do not have element of regularity are specifically included in Income under IT
Act.
 Even a single transaction can constitute business. Repetition of such transactions is not
necessary under Income Tax Act.

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3) CASH/KIND
 The income received by the assessee need not be in the form of cash only.
 It may also be some other property or right which has monetary value.
 Wherever income is received in kind (like perquisites), then their value has to be found as per
the prescribed rules & this value shall be taken to be the income.
4) ILLEGAL/ TAINTED INCOME
 Income is income, though tainted. Thus, illegal Income is also taxed.
 For purposes of Income-tax, there is no difference between legal & tainted income.
Case Law: If smuggling activity can be regarded as a business, confiscation of currency notes by
customs authorities is a loss which is directly relatable to carrying of business & thus is permissible
as deduction
5) DISPUTED INCOME
 Any dispute regarding the title of the income cannot stop the assessment of the income in the
hands of the recipient.
 Thus, disputed income is taxable in the hands of recipient though there may be rival claims to
the income.
6) CONTINGENT INCOME
 A contingent income is not income. Until the contingency has happened, it cannot be assumed
that income has accrued or has arisen to the assessee.
7) PERSONAL GIFTS

 Gifts of personal nature do not constitute income upto Rs. 50,000 received in cash
 However, Gifts in kind having FMV > Rs. 50,000 is wholly taxable. [To be studied in IFOS].
8) COMPOSITE INCOME
 Income-tax is a tax on all incomes received by or arising to a taxpayer during a FY.
9) PIN MONEY
 Pin money received by a woman (Moneys given to a woman by her husband for running the
expenses of the kitchen) would not be income in the eyes of the law.
 Any property acquired using such money/savings is a Capital Asset of the lady.
10) LUMPSUM RECEIPT
 Receipt in lumpsum or in instalments would not affect its taxability.
 Ex: If a person receives arrears of salary in a lump sum amount, it would still be his income.
11) INCOME MUST COME FROM OUTSIDE
 A person cannot earn income from himself
 In case of mutual activities, where some people contribute to the common fund & are entitled to
participate in the fund & a surplus arises which are distributed to the contributors of the fund,

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such surplus cannot be called income.
12) RELEVANCE OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE
HEADS Relevant Method of Accounting

Salaries (15- ▪ Taxable on due basis or on receipt basis whichever is earlier.

17) ▪ Method of accounting followed by the assessee is irrelevant

HP (22-27) Taxable on Accrual basis. Method of accounting of assessee is

irrelevant.

PGBP PGBP Income is taxable as per method of accounting followed

(28-44DB) by assessee.
If assessee follows Accrual basis of accounting → Income taxed on
accrual basis. If assessee follows Cash basis of accounting → Income
taxed on Cash basis.
 Certain payments are allowable only on Payment basis. [Refer
PGBP]
Cap. Gain (45 Taxable in the PY in which the capital asset is transferred.
– 55A)  Method of accounting followed by the assessee is irrelevant.

IFOS (56 – 59) Same as PGBP.

13) CAPITAL & REVENUE RECEIPTS

Particular Capital Receipts Revenue Receipts

Meaning ▪ Receipt referable to fixed ▪ Receipt referable to

capital. circulating capital.
▪ Receipts towards substitution ▪ Any receipt toward
of source of income. substitution of Income.
▪ Amount received as ▪ Any compensation received
compensation for surrender of for the Loss of future profit.
any right of ownership
Tax ▪ Not Taxable unless ▪ Taxable.
Treatment expressly provided. Ex: Profits arising from sale of
Ex: Profit from Sale of Capital Asset is Trading Asset is taxable as
chargeable to tax u/h Capital Gains Business Income
u/s 45.

Q. How to determine whether a receipt is a Revenue receipt or Capital receipt?

 If the Income-generating activity is within the normal dealing of the assessee → Revenue receipt.

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 If the Income-generating activity is outside the normal dealing of the assessee (although
connected to business) → Capital receipt.
Ex: Profit on sale of shares & securities held by a bank as investments would be of Capital Nature.
But Profit on sale of shares & securities held by a stock broker as SIT would be of Revenue Nature.

Note: Where profits arise from transactions which are outside the normal dealing of the assessee,
although connected with his business, taxability would depend upon the fact whether transactions
constitute trading activity for the Assessee.

CRUX: Only Revenue Receipt is taxable. Capital Receipts are normally Exempt. But certain capital
receipts which have been specifically included in the definition of “Income u/s 2(24) are taxable.
14) CAPITAL EXPENDITURE & REVENUE EXPENDITURE
Capital Expenditure Revenue Expenditure

1. Cost of acquisition & installation 1. Purchase price of a current Asset

charges of Fixed Asset. for resale or manufacture.

2. Incurred to increase operating 2. Incurred to maintain the asset.

capacity.
3. Expenditure incurred to free 3. Expenditure incurred to free
oneself form a Capital Liability oneself from a Revenue liability

4. Expenditure for acquisition of 4.Expenditure incurred for earning

source of Income income

Liquidated damages → Capital receipt. Amount received towards compensation for sterilization
of profit earning source is not in ordinary course of business.
Compensation on Termination of Agency → Capital receipt. Receipt of compensation on
termination of the agency business being the only source of income by the assessee. But if the
assessee has several agencies and one of them is terminated & compensation is received, the receipt
would be revenue receipt since taking agencies & exploiting the same for earning income is the
ordinary course of business & loss of one agency would be made good by taking another.
Compensation received from the employer or from any person for premature termination of
the service contract is a capital receipt but is taxable as profit in lieu of salary u/s 17(3) or IFOS u/s
56(2)(xi), respectively .
Compensation received or receivable in connection with termination/modification of T&Cs of
any contract relating to its business shall be taxable as business income

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15) APPLICATION OF INCOME VS DIVERSION OF INCOME
Application of Income Diversion of Income

 If assessee applies his  If there is an overriding charge on the source

income to discharge his of such income, which diverts the income, it is
obligation called diversion of Income.
 after the income reaches  In case of diversion of income before it
in the hands of the reaches in the hands of the assessee,
assessee,  it cannot be treated as an income of the
 it would be an application assessee & thus NO TAX
(apportionment) of
income &
 this would result in
taxation of such
income in the hands of
the assesse
▪ Conditions: ▪ Conditions:
1. Income accrues to the 1. An overriding charge/title on income &
assessee 2. Income is diverted at source.
2. Income reaches the 3. Charge is on sources of income & not on the
assessee Receiver.
3. Income is applied to
discharge obligation (Self-
imposed/gratuitous)

CONCEPT OF FINANCIAL YEAR, PREVIOUS YEAR & ASSESSMENT YEAR

Financial Year.
▪ Financial year means a year starting on 1st April & ending on 31st March.
PY [Sec 3]
▪ FY in which the income is earned is called “Previous Year”.
▪ PY means the Financial Year immediately preceding the AY.
▪ PY 2021-22-will commence on 1.4.2021 & will end on 31.3.2022.
AY
[Sec 2(9)] ▪ The year in which income is assessed to tax is called
Assessment Year.
▪ AY 2022-23 will commence on 1.4.2022 & will end on 31.3.2023.
▪ Thus Income earned during PY 2021-22 will be assessed/taxed
in AY 2022-23.
CRUX: PY → Year in which Income is earned; AY → Next year in which income is
taxed is AY.
Ex: A is running a business from 2003 onwards. Determine PY for AY 2022-23. [Ans:
PY = 1.4.2021 - 31.3.2022].

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DUAL ROLE OF A FINANCIAL YEAR

▪ Each financial year is both Previous Year as well as Assessment Year.
▪ It is PY for income earned during that FY & AY for the income earned during the
preceding FY.
Financial PREVIOUS YEAR ASSESSMENT YEAR
year
2020-21 FY 2020-21 is PY for income FY 2021-22 is AY for incomes
received/accrued during 1 earned in PY 2020-21.
April 2020 to 31 March 2021

2021-22 FY 2021-22 is PY for income FY 2022-23 is AY for incomes

received/accrued during earned in PY 2021-22.
April 1, 2021 to March 31,
2022.

FIRST PREVIOUS YEAR FOR NEWLY SET-UP BUSINESS/PROFESSION DURING FY

 First PY = The period beginning from the date of setting up of the business or
from the date the new source came into existence & ending on the last day of
that FY (31st March).
 Therefore, first PY 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.

Note: The same provision will be applicable for the “New Source of Income.”

QUESTIONS
Q1. Mr. SS set up a new business on 24.2.2021, what will be the first PY for that
business?
Answer: From 24.02.2021 – 31.3.2022; PY 2021-22; AY 2022-23.
Q2. What will be the 2nd PY for his business?
Answer: PY 2022-23; AY 2023-24.

UNIFORM PREVIOUS YEAR

 Assessees are required to follow Financial year as Previous Year uniformly for
every year. [From 1st April to 31st March]
 An Assessee may maintain books of account on calendar year basis but for
Income Tax purpose, his previous year will be financial year & not the calendar
year.

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Ex: Mr. SS can maintain books of accounts on calendar year basis, but tax will be
levied on the basis of financial year only.
A/cing year Income as per Splitting of income as per Taxable Income
books of A/c. FY
JAN-MARCH APRIL –DEC
2019 60000 18000 42000 .

2020 70000 26000 44000 PY 19-20 & AY 20-21 =

68000(42000+26000)

2021 90000 21000 69000 PY 20-21 & AY 21-22

=6 5 0 0 0
(44000+21000)

CASES WHERE INCOME OF PREVIOUS YEAR IS ASSESSED IN SAME YEAR

 General Rule: Income earned during any PY is assessed to tax in immediately
succeeding AY.
 However, in following circumstances, income is taxed in PY in which it is earned.
Thus AY & PY in these exceptional circumstances will be the same.
 These exceptions have been made to protect the interests of revenue.

FOLLOWING ARE THE EXCEPTIONS:

1. SHIPPING BUSINESS OF NON-RESIDENTS [SECTION 172]
 If a ship belonging to or chartered by NR carries passengers /livestock /mail
/goods shipped at a port in India,
 Such Ship is allowed to leave the port only when tax has been paid or satisfactory
arrangement has been made for payment thereof.
 Income = 7.5% of the freight paid/payable to the owner or his agent
whether in India or o/s India for such carriage.
 Such income is charged to tax in the same year in which it is earned.

2. PERSONS LEAVING INDIA [SECTION 174]

 Where it appears to AO that any individual may leave India during the current AY
or shortly after its expiry &
 He has no present intention of returning to India,
Then Total Income of such individual for the period from the expiry of the
respective PY up to the probable date of his departure from India is chargeable to
tax in that AY
Ex: Suppose Mr. X is leaving India for USA on 10.6.2021 & it appears to AO that he
has no intention to return. Before leaving India, Mr. X will be required to pay tax on
the income earned during PY 2021-22 as well as the total income earned during the

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period 1.4.2021 to 10.06.2022.

3. AOP/BOI/AJP FORMED FOR A PARTICULAR EVENT OR PURPOSE [SEC 174A]

 If AOP/BOI etc. is formed or established for a particular event or purpose &
 AO apprehends that AOP/BOI is likely to be dissolved in the same year or in next
 year,
 he can make assessment of the income upto date of dissolution as income of
relevant AY.

4. PERSONS LIKELY TO TRANSFER PROPERTY TO AVOID TAX [SECTION 175]

 During the current AY, if it appears to AO that a person is likely to charge, sell,
transfer, dispose any of his assets
 to avoid payment of any liability under this Act,
Total income of such person for the period from the expiry of PY to the date when
AO commences proceedings is chargeable to tax in that assessment year.

5. DISCONTINUED BUSINESS [SECTION 176]

 If any business or profession is discontinued in any AY,
 Income of the period from the expiry of the PY up to the date of such
discontinuance may,
 at the discretion of AO may be charged to tax in that assessment year.

Note: Section 176 is a Discretionary power. The Assessing Officer has the
discretion of applying it. AO may choose not to apply it & wait till the end of the
Assessment Year

VITAL STATISTICS AND LAYOUT

Contribution of Direct Taxes to Total Tax Revenue
(Rs. in crore)

Financial Year Direct Taxes Indirect Taxes Total Taxes Direct Tax As %
Of Total Taxes
2000-01 68305 119814 188119 36.31%
2001-02 69198 117318 186516 37.10%
2002-03 83088 132608 215696 38.52%
2003-04 105088 148608 253696 41.42%
2004-05 132771 170936 303707 43.72%
2005-06 165216 199348 364564 45.32%

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2006-07 230181 241538 471719 48.80%
2007-08 314330 279031 593361 52.97%
2008-09 333818 269433 603251 55.34%
2009-10 378063 243939 622002 60.78%
2010-11 445995 343716 789711 56.48%
2011-12 493987 390953 884940 55.82%
2012-13 558989 472915 1031904 54.17%
2013-14 638596 495347 1133943 56.32%
2014-15 695792 543215 1239007 56.16%
2015-16 741945 711885 1454180 51.03%
2016-17 849818 861515 1711333 49.66%
2017-18 1002037 915256 1918210 52.24%
2018-19* 1137685 939018 2076703 54.78%

COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE

Particulars Amount (Rs.)

Income under the head :
+ income from Salaries XXX
+ income from House Property XXX
+ Profits and gains of business or profession XXX
+ Capital gains XXX
+ income from other sources XXX
Adjustment in respect of :
+ Clubbing of income XXX
– Set off and carry forward of losses (XXX)
= Gross Total Income xxx
– deductions under section 80C to 80U (or Chapter Via) (XXX)
= Total Income xxx

TAX RATES FOR FY 2021-22 i.e. AY 2022-23

Calculation of tax on income
 tax rate depends upon the category of person
 amount of income

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 residential status of person
 age of individual
 type of income
Components of tax are

Tax
Tax SHEC
Cess

Tax Rates for Different types of person depending upon various parameters :
1. For :
 resident individual of the age below 60 years
 Non-Residents individual
 Hindu undivided family
 association of Persons
 Body of individuals (other than Co-operative society)
 Artificial Juridical Person
Total Income (Rs.) Tax Rate Tax liability (Rs.)
upto 2,50,000 Nil Nil
2,50,001 – 5,00,000 5% 5% of (Total Income – 2,50,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 12,500
above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,12,500

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

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

upto 3,00,000 Nil Nil
3,00,001 – 5,00,000 5% 5% of (Total Income – 3,00,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 10,000
above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,10,000
3. Applicable for :
Resident individual of the age of 80 years or more at anytime during the previous year

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

upto 5,00,000 Nil Nil
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000)

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above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,00,000
CBDT has clarified vide Circular No. 28/2016 27.07.2016, that a person born on 1st April would be
considered to have attained a particular age on 31st March, the day preceding the anniversary of
his birthday.
Therefore a resident individual, whose 60th / 80th birthday falls on 1st April, 2022 would be
treated as having attained the age of 60 years/80 years in the P. yr. 2021-22.

4. For firm and local authroties:

Types of person Tax Rates
i. Firms (including LLP) 30% of total Income
ii. Local authorities 30% of total Income

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

5. FOR COMPANY
Domestic Company Assessment Year 2022-23
 Where it opted for Section 115BA 25%
 Where it opted for Section 115BAA 22%
[This benefit shall be available when total income of the
company is computed without claiming specified
deductions, incentives, exemptions and additional
depreciation available under the income-tax act.]
 Where it opted for Section 115BAB 15%
[this regime shall be available only for the manufacturing
companies incorporated in India on or after 01-10-2019.
Hence, old companies will not be able to take the benefit of
this section.]
 Where it has not opted for Section 115BAA and the 25%
total turnover or Gross receipts of the company in
the last previous year does not exceeds 400 crore
rupees
 any other domestic company 30%
Foreign Company 40%

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

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6. For Co-operative Society :

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

Surcharge
Surcharge is an additional tax imposed on certain cases. it is imposed over the basic tax rate
calculated on the income.
For example : Suppose total taxable income of an individual of 45 years is rs. 1,30,00,000, then
Base tax will be : Rs. 1,12,500 + 30% of (1,20,00,000)= Rs. 37,12,500.
Surcharge @12%* of Rs. 37,12,500 = Rs. 4,45,500. There are different rate of surcharge prescribed
in the following manner :
Types of person Surcharge Rates
i. individuals, HUF, AOP, BOI if income exceeds rs. 50 lakhs but 10% of income
does not exceed rs. 1 crore tax
if income exceeds rs. 1 crore but does 15% of income
not exceed rs. 2 crore tax
if income exceeds rs. 2 crore but does 25% of income
not exceed rs. 5 crore tax
if total income exceeds rs. 5 crore 37% of income
tax
ii Firm / local authority / Co- if income exceeds rs. 1 crore 12% of income
operative Society tax
iii. domestic Companies* if income exceeds rs. 1 crore but does 7% of income tax
not exceed rs. 10 crores
if income exceeds rs. 10 crore 12% of income
tax
iv. Companies other than a if income exceeds rs. 1 crore but does 2% of income tax
domestic company not exceed rs. 10 crores
if income exceeds rs. 10 crore 5% of income tax
*The rate of surcharge in case of a company opting for taxability under Section 115Baa or Section

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115BaB shall be 10% irrespective of amount of total income.

Marginal Relief in Surcharge : When an assessee’s taxable income exceeds rs. 1 crore, he is
liable to pay Surcharge at prescribed rates mentioned above on income tax payable by him.
However, the amount of income tax and surcharge on total income shall not exceed the amount of
income that exceeds rs. 1 crore.
Example : Suppose Mr. ram an individual assessee of 42 years is having taxable income of rs.
1,00,01,000/-
1. income tax rs. 28,12,800
2. Surcharge @15% of Income Tax rs. 4,21,920
3. income tax on income of rs. 1 crore rs. 28,12,500
4. Maximum Surcharge payable (income over rs. 1 crore i.e. rs. rs. 1,000
1,000)
5. (income tax + Surcharge) payable rs. 28,13,500
Thus, in the above case, though the surcharge @15% is Rs. 421920. However, since the income of
Mr. Ram exceeds rs. 1 crore by just rs. 1,000, ram will be eligible for marginal relief and
maximum surcharge will be restricted to rs. 1,000 only.

CESS
 Governments resort to imposition of cess for meeting specific expenditure
 education Cess and Senior and Higher education Cess are additional levy on the basic tax
liability + surcharge, if applicable.
 Rate of Education Cess is 2%
 Rate of SHEC is 1%.
 Rate of Health Cess is 1%.

Special Tax Regime for Individual and HUFs [Section 115BAC)

The Finance act, 2021, has provided an option to individuals and HUF for payment of taxes at the
following reduced rates from assessment year 2022-23 and onwards:
Total Income (Rs) Rate
up to 2,50,000 Nil
From 2,50,001 to 5,00,000 5%
From 5,00,001 to 7,50,000 10%
From 7,50,001 to 10,00,000 15%
From 10,00,001 to 12,50,000 20%

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From 12,50,001 to 15,00,000 25%
above 15,00,000 30%

Surcharge: Surcharge is levied on the amount of income-tax at following rates if total income of an
assessee exceeds specified limits:
rs. 50 rs. 1 Crore to rs. 2 Crores to rs. 5 crores to exceeding rs.
lakhs to rs.2 Crores rs. 5 Crores rs. 10 Crores 10 Crores
rs. 1 Crore
10% 15% 25% 37% 37%
Note: Marginal relief is available from surcharge.
Health and Education Cess: Health and Education Cess is levied at the rate of 4% on the amount of
income-tax plus surcharge.
Alternate Minimum tax: The assessee opting for this scheme have been kept out of the purview
of alternate Minimum Tax (AMT). Further the provision relating to the computation, carry forward
and set off of AMT credit shall not apply to these assessees.
Conditions to be satisfied:
1. The option to pay tax at lower rates shall be available only if the total income of individual or
HUFs is computed without claiming following exemptions or deductions:
a) Leave travel concession [Section 10(5)]
b) House rent allowance [Section 10(13a)]
c) Official and personal allowances (other than those as may be prescribed) [Section 10(14)]
d) allowances to MPs/MLAs [Section 10(17)]
e) allowances for income of minor [Section 10(32)]
f) deduction for units established in Special economic Zones (SEZ) [Section 10aa];
g) Standard deduction [Section 16(ia)]
h) entertainment allowance [Section 16((ii)]
i) Professional tax [Section 16(iii)]
j) interest on housing loan [Section 24(b)]
k) additional depreciation in respect of new plant and machinery [Section 32(1)(iia)];
l) Deduction for investment in new plant and machinery in notified backward areas [Section
32AD];
m) Deduction in respect of tea, coffee or rubber business [Section 33AB];
n) deduction in respect of business consisting of prospecting or extraction or production of

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petroleum or natural gas in India [Section 33ABA];
o) Deduction for donation made to approved scientific research association, university college or
other institutes for doing scientific research which may or may not be related to business
[Section 35(1) (ii)];
p) Deduction for payment made to an Indian company for doing scientific research which may
or may not be related to business [Section 35(1)(iia)];
q) deduction for donation made to university, college, or other institution for doing research in
social science or statistical research [Section 35(1) (iii)];
r) Deduction for donation made for or expenditure on scientific research [Section 35(2AA)];
s) Deduction in respect of capital expenditure incurred in respect of certain specified businesses,
i.e., cold chain facility, warehousing facility, etc. [Section 35ad];
t) deduction for expenditure on agriculture extension project [Section 35CCC];
u) deduction for family Pension [Section 57(iia)]
v) Deduction in respect of certain incomes other than specified under Section 80JJAA, 80CCD(2)
and deduction under section 80la for unit located in iFSC [Part C of Chapter Vi-a].
2. total income of the assessee is calculated after claiming depreciation under section 32, other
than additional depreciation, and without adjusting brought forward losses and depreciation
from any earlier year (if such loss or depreciation pertains to any deduction under the aforesaid
sections). Further, loss under the head house property can’t be set off against other heads of
Income. Moreover, such loss and depreciation will not be carried forward.
3. if the assessee has any unabsorbed depreciation, relating to additional depreciation, which has
not been given full effect, the corresponding adjustment shall be made to WDV of the block of
assets in the prescribed manner.
4. in case the assessee has business or professional income, this option shall be exercised on or
before the due date for furnishing the returns of income.
5. Once the assessee has exercised the option for any previous year, it cannot be subsequently
withdrawn for the same or any other previous year. T he option once exercised for any
previous year can be withdrawn only once in subsequent previous year (other than the year in
which it was exercised) and thereafter, he shall never be eligible to exercise this option again
except where such person ceases to have any business income.
6. if assessee does not have business or professional income, the option must be exercised along with
the return of income for every previous year. if an assessee, after opting for Section 115BaC,
claims any of prescribed deduction or allowance in any previous year, then the option to pay tax
at concessional rate shall become invalid for that year.

SPECIAL TAX REGIME APPLICABLE TO A CO-OPERATIVE SOCIETIES [SECTION 115BAD]

The Finance act, 2020 has inserted a new section 115Bad in income-tax act to provide an option to

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the resident co-operative societies to get taxed at the rate of 22% plus 10% surcharge and 4% cess.
The resident co- operative societies have an option to opt for taxation under newly section 115Bad
of the act w.e.f. assessment year 2021-22. the option once exercised under this section cannot be
subsequently withdrawn for the same or any other previous year.
if the new regime of Section 115Bad is opted by a co-operative society, its income shall be
computed without providing for specified exemption, deduction or incentive available under the
Act. The societies opting for this section have been kept out of the purview of alternate Minimum
Tax (AMT). Further, the provision relating to computation, carry forward and set-off of AMT
credit shall not apply to these assessees.
The option to pay tax at lower rates shall be available only if the total income of cooperative society
is computed without claiming following exemptions or deductions:
a) deduction for units established in Special economic Zones (SEZ) [Section 10aa];
b) additional depreciation in respect of new plant and machinery [Section 32(1)(iia)];
c) Deduction for investment in new plant and machinery in notified backward areas [Section
32AD];
d) Deduction in respect of tea, coffee or rubber business [Section 33AB];
e) deduction in respect of business consisting of prospecting or extraction or production of
petroleum or natural gas in India [Section 33ABA];
f) Deduction for donation made to approved scientific research association, university college or
other institutes for doing scientific research which may or may not be related to business
[Section 35(1) (ii)];
g) Deduction for payment made to an Indian company for doing scientific research which may or
may not be related to business [Section 35(1)(iia)];
h) deduction for donation made to university, college, or other institution for doing research in
social science or statistical research [Section 35(1) (iii)];
i) Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research
which may or may not be related to business [Section 35(2aa)];
j) Deduction in respect of capital expenditure incurred in respect of certain specified businesses,
i.e., cold chain facility, warehousing facility, etc. [Section 35ad];
k) deduction for expenditure on agriculture extension project [Section 35CCC];

l) Deduction in respect of certain incomes other than specified under Section 80JJAA [Part C of
Chapter Vi-a].
Where a co-operative society exercises option for availing benefit of lower tax rate under section
115BAD, it shall not be allowed to claim set-off of any brought forward losses or depreciation
attributable to any restricted exemption or deduction in the assessment year for which the option has
been exercised and for any subsequent assessment year.

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Rebate under section 87A
An assessee, being an individual resident in India, whose total income does not exceed Rs. 5,00,000
shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the
deductions under this Chapter) on his total income with which he is chargeable for any assessment
year, of an amount equal to 100% of such income-tax or an amount of Rs. 12,500, whichever is less.
Steps involved in calculation of Tax on Total Income

Particulars Amount Rs.

Tax on Special Incomes @ specified tax rates (Long term capital gains @ 20%;
Casual Income @ 30% and Short-term capital gains (on Securities transaction tax XXX
paid securities) @ 15%;
add : Tax on Balance income @ Slab rate/Flat rate (as applicable) XXX
Total Tax xxx
XXX
add : Surcharge, if any
(XXX)
less : Marginal relief, if applicable
xxx
Tax including Surcharge XXX
Add : Education Cess @ 2% on tax including surcharge XXX
Add : SHEC @ 1% on tax including surcharge
Add : Health Cess @ 1% on tax including surcharge
xxx
(Combinedly Health and Education Cess on income tax is levied @ 4%)
XXX
Tax liability
add : interest under Section 234a/234B/234C xxx
Net tax liability
Less : Taxes paid by way of :
(XXX)
– Tax deducted at source (TDS)
(XXX)
– advance tax
– Self assessment tax (XXX)
– Double taxation relief (XXX)
Tax Payable/Refundable xxx

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2. INCOME UNDER THE HEAD OF SALARIES
CONDITION FOR CHARGING INCOME UNDER THE HEAD OF “SALARIES”

Income is taxable under the head ‘salaries’ only if there exists employer-employee relationship
between the payer and the payee.
IMPORTANT FEATURES OF EMPLOYER-EMPLOYEE RELATIONSHIP:
1. Contract of Services (Salary) Vs Contract for services (PGBP)
2. Master servent relationship
3. Direct supervision and control of the employer.
4. It is distinct from principle-agent relationship.

Let’s examine the following cases, whether payments are chargeable under head salaries;
1) Director of a company: In the case of a Director of a company, employer – employee relationship
cannot be presumed but should be ascertained based on the service agreement, if any, executed or
the Articles of Association of the company.
2) MPs/MLAs: The CBDT has issued instructions that salaries of MPs and MLAs [Member of
legislative assemblies] is not chargeable under the head 'salaries' but it is chargeable under the head
'income from other sources' since there is no employer – employee relationship between them and
the Government.
3) Paper-setters/Examiners: Where a teacher of college receives remuneration for setting
question paper for examination or works as an invigilator in University then the remuneration
received by him will be taxable under the head ‘income from other sources’.
4) Judges: It was held that what the Judges receive is salary since there is employment as created
by the constitution of India.

BASIS OF CHARGE
The following Income shall be chargeable to income tax under the head “Salaries”
 Salary Due: Any Salary due from an employer or a former employer to an assessee in the
previous year, whether paid or not.
 Advance Salary: Any salary paid or allowed to the assessee in the previous year by or on behalf
of an employer or a former employer though not due or before it became due to him
 Arrears of Salary: Any arrears of salary paid or allowed to assessee 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.

Note:
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1. Salary chargeable to tax either on ‘due’ basis or on ‘receipt’ basis whichever is earlier.
 advance salary is taxable; however, an advance against Salary is essentially a loan which will be
recovered later from the employee and therefore that isn’t taxable.
 Salary, if earned in india, is deemed to accrue / arise in india, even if it is paid outside india

SALARY [SECTION 17(1)]

Salary would include
a) Wages,

b) any Annuity or Pension,

c) any Gratuity,

d) any Fees, Commission, Perquisite or Profits in lieu of or in addition to any Salary or Wages,

e) any Advance of salary,

f) any payment received in respect of any period of leave not availed by him i.e. Leave Salary or leave
encashment,
g) the portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in a recognised provident fund to the extent it is taxable,
h) the aggregate of all sums that are comprised in the transferred balance of an employee
participating in a recognized provident fund to the extent it is taxable,

i) the contribution made by the Central Government or any other employer in the previous year to
the account of an employee under a pension scheme referred to in section 80CCD.

TAX TREATMENT OF DIFFERENT FORM OF ‘SALARY’

Advance Salary:
Salary can’t be taxed twice i.e. where any salary paid in advance is taxed on receipt basis (in the yr.
of receipt) it can’t be taxed again on the due basis (in the yr. in which it becomes due).

Arrear of Salary:
Arrear of Salary received by an assessee is charged to tax on receipt basis (if it was not taxed earlier
on due basis).

Salary to Partners {Explanation 2 to Section 15}:

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Any salary, bonus, commission or remuneration received by a partner from his firm is taxed as
business income and not as salary income.

Fees & Commission:

Fees & Commission paid to an employee are taxed as salary income.
Overtime Payment:
Overtime payment is a taxable salary income.
Annuity {Section 17(1) (ii)}:
Annuity received from present employer will be taxed as salary.
Bonus:
Bonus is taxed in the year of receipt , it is not taxed on due basis.
Salary from UNO {Sec. 2 of UN (Privileges & Immunities Act, 1947)}:
Salaries, emoluments & pension paid by UNO to its officials are exempt from tax.
Full-time or part-time employment:
It does not matter whether the employee is a fulltime employee or a part-time one. Once the
relationship of employer and employee exists, the income is to be charged under the head “salaries”.

Foregoing of Salary:
Once salary accrues, the subsequent waiver by the employee does not absolve him from liability to
income-tax. Such waiver is only an application and hence, chargeable to tax.

Surrender of Salary:
If an employee [Govt/PSU/Pvt] surrenders 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 exempt while computing his taxable income.

TDS on Salary:
As Per Section 192, every employer has to deduct Tax on the Taxable salary of his employee if such
salary is more than the basic exemption limit and handover the net salary which is after TDS, to the
employee. While calculating taxable Income of employee ‘Salary before TDS’ has to be taken and not
the net salary after TDS.

Salary Paid Tax-Free:

In this arrangement, the employer bears the burden of the tax on the salary of the employee. In such
a case, the income from salaries in the hands of the employee will consist of his salary income and
also the tax on this salary paid and bears by the employer.

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Loan or Advance against Salary:
Loan is different from salary. When an employee takes a loan from his employer, which is repayable
in certain specified installments, the loan amount cannot be brought to tax as salary of the employee.

Similarly, advance against salary is different from advance salary. It is an advance taken by the
employee from his employer. This advance is generally adjusted with his salary over a specified
time period. It cannot be taxed as salary.

PLACE OF ACCRUAL OF SALARY

 Section 9(1)(ii) provides that salary earned 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 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]

 Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for
services outside India shall be deemed to accrue or arise in India.

Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted

Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen of India,
for rendering service outside India is fully exempt.

Example: If an employee gets pension paid abroad in respect of services rendered in India, the
same will be deemed to accrue in India. Similarly, leave salary paid abroad in respect of leave
earned in India is deemed to accrue or arise in India.

Example: A, a citizen of India is posted in the United States as our Ambassador. Obviously, he
renders his services outside India. He also receives his salary outside India. He is also a non-resident.
The same will be deemed to accrue or arise in India.

ALLOWANCES
Different types of allowances are given to employees by their employers. Generally, allowances are
given to employees to meet some particular requirements like house rent, expenses on uniform,
conveyance etc. Under the Income-tax Act, allowance is taxable on due or receipt basis, whichever
is earlier.

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Note: If the assessee opted concessional tax slab under section 115BAC of the Income tax Act, 1961,
then assessee is not eligible to claim exemption from any allowances except:

1. Travelling Allowances
2. Daily Allowances
3. Conveyance Allowance
4. Transport Allowance (For blind, handicapped, deaf or dumb employee)

FULLY TAXABLE ALLOWANCES

1) City Compensatory Allowance:
City Compensatory Allowance is normally intended to compensate the employees for the higher
cost of living in cities. It is taxable irrespective of the fact whether it is given as compensation for
performing his duties in a particular place or under special circumstances.
2) Entertainment Allowance:
This allowance is given to employees to meet the expenses towards hospitality in receiving
customers etc. The Act gives a deduction towards entertainment allowance only to a Government
employee. The details of deduction permissible are discussed later on in this Unit.
3) Dearness Allowance:
It is fully taxable allowance. It is of following 2 types:

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 DA which is forming part of salary for computation of retiremental benefits as per the terms of
employment.
 DA which is NOT forming part of salary for computation of retiremental benefits as per the terms
of employment.

Note: If the Question is silent, it is to be assumed that DA is not forming part of salary.
4) Medical Allowance: It is a fully taxable allowance.
5) Lunch Allowances / Tiffin Allowances / Cash Allowance/ Deputation Allowance
6) Overtime Allowances / Servant Allowances / Warden Allowance / Family Allowance etc.

ALLOWANCES NOT FULLY TAXABLE

House Rent Allowance u/s 10(13A)
House Rent Allowance (HRA) received by any employee is exempt to the extent of least of the
following:
– 50% of Salary for Metro Cities (Delhi, Mumbai, Kolkata and Chennai), else 40% of Salary
– HRA actually received
– Rent paid minus 10% of Salary
Note: Salary for the purposes of HRA = Basic + DA (if forming part of salary/retirement benefit)+
Commission as a fixed % of Turnover

(a) If the employee receives HRA but does not incur any expenditure of Rent on residential
accommodation, then HRA received is fully taxable.

(b) Exemption is not available to an assessee who lives in his own house.

(c) The exemption shall be calculated on the basis of where the accommodation is situated.

(d) If Place of employment, Rent, HRA, Salary etc is the same for the whole year, then exemption
shall be calculated for the whole year.

(e) If there is a change in place, change in rent paid, Change in HRA or change in Basic Salary
structure during the previous year, then it shall be calculated on monthly/periodic basis.

(f) Exemption should be calculated in respect of the period during which rental accommodation is
occupied by the Employee during the previous year.

(g) Salary means Salary on Due Basis.

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ALLOWANCES WHICH ARE EXEMPT IN CASE OF CERTAIN PERSONS
1) Allowances to a citizen of India, who is a Government employee, rendering services outside India.
[Section 10(7)]
2) Travelling Allowances to High Court judges
3) Sumptuary allowance to HC/SC judges & Serving member/Chairmen of UPSC.
4) Allowance received by an employee of UNO from his employer.

SPECIAL ALLOWANCES [SECTION 10(14)]

ALLOWANCES EXEMPT TO THE EXTENT ACTUALLY EXPENDED FOR THE OFFICIAL PURPOSES
[SECTION 10(14) (i)]
These allowances are given for official purposes and lower of the below two is the Exempted
amount:
I. Amount of Allowance Actually Received from the Employer; OR
II. Amount Spent for official purpose.

SR. Nature Particulars

(a) Traveling Allowance To meet the cost of travel on tour or on transfers
(including any sum paid in connection with
transfer, packing and transportation of personal
effects on such transfer.
(b) Daily Allowance For ordinary daily charges on account of absence from
his normal place of duty on tour or journey

(c) Conveyance Allowance To meet the expenditure on local conveyance in

performance of official duties if free conveyance is not
provided by the employer
(d) Helper Allowance (Servant Granted to meet the expenditure incurred on a helper
Allowance is different) engaged for the duties.

(e) Academic/Research allowance Granted for encouraging academic research & other
professional pursuits.
(f) Uniform Allowance Granted to meet the expenditure incurred on the
purchase or maintenance of uniform for wears during
the performance of the employee

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ALLOWANCES MEANT FOR PERSONAL EXPENSES EXEMPT TO THE EXTENT NOTIFIED BY
RULES [SECTION 10(14(ii)]
In these allowances, the actual amount spend by the assessee is not relevant.
Lower of the below two amount is Exempted amount:
I. Amount of Allowance Actually Received from the Employer OR
II. Limit specified in the Act

Allowances Exemption
Limit
Children education allowance up to rs. 100 per month per child up to a
maximum of 2 children is exempt
Hostel expenditure allowance up to rs. 300 per month per child up to a
maximum of 2 children is exempt
transport allowance granted to an employee Only rs. 3,200 per month for blind,
to meet expenditure on commuting between handicapped, deaf and dumb employees is
place of residence and place of duty. exempt
Consequent to introduction of Standard
deduction under section 16, exemption of
transport allowance of rs. 1600 P.M. is
withdrawn.
allowance granted to an employee working in amount of exemption shall be lower of
any transport business to meet his personal following:
expenditure during his duty performed in the
course of running of such transport from one a) 70% of such allowance; or
place to another place provided employee is b) rs. 10,000 per month
not in receipt of daily allowance
(AMENDMENT) NOTE
Conveyance allowance granted to meet the exempt to the extent of expenditure incurred
expenditure on conveyance in performance of for official purposes
duties of an office
travelling allowance to meet the cost of exempt to the extent of expenditure incurred
travel on tour or on transfer for official purposes
daily allowance to meet the ordinary daily exempt to the extent of expenditure incurred
charges incurred by an employee on account for official purposes
of absence from his normal place of duty
Helper/assistant allowance exempt to the extent of expenditure incurred
for official purposes
research allowance granted for exempt to the extent of expenditure incurred
encouraging the academic research and other for official purposes
professional pursuits

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uniform allowance exempt to the extent of expenditure incurred
for official purposes
Special compensatory allowance (Hilly areas) amount exempt from tax varies from rs. 300
(Subject to certain conditions and locations) to rs. 7,000 per month.
Border area, remote locality or disturbed amount exempt from tax varies from rs. 200
area or Difficult Area Allowance (Subject to to rs. 1,300 per month.
certain conditions and locations)
tribal area allowance in (a) Madhya Pradesh up to rs. 200 per month
(b) tamil Nadu (c) uttar Pradesh (d)
Karnataka (e) tripura (f) assam (g) West
Bengal (h) Bihar (i) Orissa

Compensatory Field area allowance. if this up to rs. 2,600 per month

exemption is taken, employee cannot claim
any exemption in respect of border area
allowance(Subject to certain conditions and
locations)
Compensatory Modified Area Allowance. If up to rs. 1,000 per month
this exemption is taken, employee cannot
claim any exemption in respect of border area
allowance(Subject to certain conditions and
locations)
Counter insurgency allowance granted to up to rs. 3,900 per month
members of armed Forces operating in areas
away from their permanent locations. if this
exemption is taken, employee cannot claim
any exemption in respect of border area
allowance (Subject to certain conditions and
locations)
underground allowance to employees working up to rs. 800 per month
in uncongenial, unnatural climate in
underground mines
High altitude allowance granted to armed a) up to rs. 1,060 per month (for
forces operating in high altitude areas (Subject altitude of 9,000 to 15,000 feet)
to certain conditions and locations) b) up to rs. 1,600 per month (for altitude
above 15,000 feet)

NOTE :
Allowance allowed to transport employees working in any transport system [This allowance,
shall not be exempt if the employee opts to be taxed under section 115BAC]: If any fixed
allowance is given by the employer to the employee who is working in any transport system, to
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meet his personal expenditure during his duty performed in the course of running of such transport
from one place to another, the amount of exemption shall be 70% of such allowance or Rs.10,000
p.m., whichever is less.
Exemption will be allowed to the transport employees only when they are not in receipt of daily
allowance. If they are in receipt of daily allowance, they can claim exemption under para 4.13a
clause (b) above.
Notification No. 38/2020, dated 26.6.2020
Notwithstanding anything contained in para 4.13a to para 4.13b above, an employee, being an
assessee, who has exercised option under section 115BAC(5) shall be entitled to exemption only in
respect of the following allowances:
(a) any allowance granted to meet the cost of travel on tour or on transfer;
(b) any allowance, whether granted on tour or for the period of journey in connection with transfer,
to meet the ordinary daily charges incurred by an employee on account of absence from his normal
place of duty;
(c) any allowance granted to meet the expenditure incurred on conveyance in performance of duties
of an office or employment of profit:
Provided that free conveyance is not provided by the employer;
(d) Transport allowance upto Rs.3,200 p.m. granted to an employee, who is blind or deaf and dumb
or orthopaedically handicapped with disability of lower extremities, to meet his expenditure for the
purpose of commuting between the place of his residence and the place of his duty.
Further, the exemption provided in respect of free food and nonalcoholic beverage provided by such
employer through paid voucher shall not apply to an employee, being an assessee, who has
exercised option under section 115BAC(5).
Note.—If the employee opts to be taxed under section 115BAC (i.e. new regime), he shall be entitled
to exemption of the above four allowances only.

RETIREMENT BENEFITS
ANNUITY / PENSION
“Pension” may be defined as a periodic payment made especially by Government or a company or
other employers to the employee in consideration of past service payable after his retirement.
Pension is of two types: Commuted and Uncommuted
Uncommuted Pension: Uncommuted pension refers to pension received periodically. It is fully
taxable in the hands of both government and non-government employees.

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Commuted Pension: Commuted pension means lump sum amount taken by commuting the whole
or part of the pension.
EMPLOYEES OF THE CENTRAL / STATE GOVERNMENT / LOCAL AUTHORITIES / STATUTORY
CORPORATION

Any commuted pension received is fully exempt from tax.

IN CASE OF OTHER EMPLOYEES:
Case I: If the Employee receives the Gratuity also:
Then Exemption = 1/3 * Full Commutable value of Pension.

Case II: If the Employee DOES NOT receive any Gratuity:

Then Exemption = 1/2 * Full Commutable value of Pension.
Here, Full Commutable value of Pension = Commuted Amount
% of Commutation

GRATUITY [Section 10(10)]

Any gratuity received by an Individual on his death or retirement is eligible for exemption u/s
10(10) as under –
IN CASE OF GOVT. EMPLOYEES (CG/SG), EMPLOYEE OF LOCAL AUTHORITY (BUT NOT
STATUTORY CORPORATION)
Gratuity received is FULLY EXEMPT
IN CASE OF OTHER EMPLOYEES
(a) If covered under Payment of Gratuity Act, 1972, then least of the following is exempt:-
(i) Actual Amount received
(ii) 20,00,000 (notified w.e.f. 29/03/2018)
(iii) 15 days * last drawn salary for each completed year of service or part thereof 26 in excess of 6
months
NOTE:

1. Salary means Basic Salary and Dearness Allowance (Whether or not forming part of retirement
benefit) on DUE BASIS

2. In case of SEASONAL ESTABLISHMENT – “15 days” will be replaced with “7 days”.

(b) If not covered under Payment of Gratuity Act, 1972, then least of the following is exempt:-

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(i) Actual amount received
(ii) 20,00,000 (notified on 08/03/2019 but effective from 29/03/2018)
(iii) Half month’s salary (based on last 10 months’ average salary immediately preceding the month
of retirement or death) for each completed year of service (fraction to be ignored)

NOTE:
1. Salary means Basic Salary and Dearness Allowance, if provided in the terms of employment for
retirement benefits, forming part of salary and commission which is expressed as a fixed percentage
of turnover achieved by the employee. [Basic Salary + DA (R) + Commission (Sales)] - [Gestetner
Duplicators Pvt. Ltd (SC)]

2. It should be on DUE BASIS.

3. Half Month Salary should be read as 15/30.

NOTE :
(i) If employee has received gratuity from any of his past employer, then the amount of gratuity
exempted earlier shall be reduced from Rs. 20,00,000.

(ii) If employee has not received gratuity from any of his past employer, then the period of past
employment shall also be considered for calculating years of service.

(iii) Gratuity received during the period of service is always taxable for all employees.

(iv) If Employee receives gratuity from two or more employers, then aggregate amount of gratuity
exempt from tax cannot exceed 20,00,000.

(v) Exemption under this provision will be available only in case where employer employee
relationship exists.

LEAVE ENCASHMENT [SECTION 10(10AA)]

Leave encashment means getting salary equivalent to the number of leaves which were entitled to
an employee but not availed (i.e. earned). Leave Encashment taken during employment is fully
taxable for all employees. Leave Encashment taken at the time of retirement is exempted as follows:-

Leave Encashment Salary received by employees of the Government, is fully exempt from tax.
For the Non-Government employees, the Leave Encashment Salary so received is exempt from
tax to the extent of least of the following:

a) INR 3,00,000

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b) Leave Salary actually received
c) 10 month’s Salary on the basis of average Salary drawn in the last 10 months
d) Cash Equivalent of Leave standing to the credit of the employee at the time of retirement / death,
based on last 10 month’s average salary drawn. Earned leave entitlement per year cannot exceed
30.
Note: Here Salary would mean Basic + DA (only to the extent of forming part of the retirement
benefits) + Commission as a % of Turnover and number of days in the month to be taken at 30.

(1) Leave salary received during the period of service (i.e. during continuity of employment) is fully
taxable.

(2) Leave encashment on retirement by way of resignation will also be eligible for exemption.

(3) Where leave salary is received from two or more employers in the same year, then the aggregate
amount of leave salary exempt from tax cannot exceed 3,00,000.

(4) Where leave salary is received in any earlier year from a former employer and again received
from another employer in a later year, the limit of 3,00,000 will be reduced by the amount of leave
salary exempt earlier.

RETRENCHMENT COMPENSATION [SECTION 10(10B)]

Any compensation received by a workman at the time of his retrenchment, under the Industrial
Disputes Act, 1947, shall be exempt to the extent of least of the following:

(i) Actual amount received;

(ii) An amount calculated in accordance with Section 25F(b) of the Industrial Disputes Act, 1947 i.e.
15 / 26 day’s average pay [3 months basis] for every completed year of service or part thereof in
excess of 6 months;

(iii) 5,00,000.

[In case where the retrenchment scheme is approved by the Central government, the entire amount
is exempt.]

Note: Pay will include Basic Salary + D.A (Whether or not forming part of retirement benefit) etc.

PROFITS IN LIEU OF SALARY [SECTION 17(3)]

(a) TERMINAL COMPENSATION:

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The amount of any compensation due to or received by employee from his employer or former
employer in connection with the termination of his employment or the modification of the terms
and conditions relating thereto. [Usually, such compensation is treated as a capital receipt.
However, by virtue of this provision, the same is treated as a revenue receipt and is chargeable as
salary.]

(b) PAYMENT FROM AN UNRECOGNIZED PROVIDENT FUND:

Any payment due / received by an assessee from unrecognized Provident Fund or other Fund to the
extent to which it does not consist of employee’s contributions or interest on such contributions.

(c) PAYMENT UNDER KEYMAN INSURANCE POLICY:

Any payment due to or received by an assessee under a Keyman Insurance policy including the sum
allocated by way of bonus on such policy.

(d) ANY AMOUNT, WHETHER IN LUMPSUM OR OTHERWISE, DUE TO THE ASSESSEE OR

RECEIVED BY HIM, FROM ANY PERSON
i. before joining employment with that person, or
ii. after cessation of his employment with that person.
(e) ANY OTHER PAYMENT due to or received by an assessee from an employer or a former
employer or any fund [Other than the payments exempt under section 10]

PERQUISITES [SECTION 17(2)]

1) The term ‘perquisite’ indicates some extra benefit in addition to the amount that may be legally
due by way of contract for services rendered.

2) Perquisite may be provided in cash or in kind.

3) Perquisite may arise in the course of employment or in the course of profession. If it arises from
a relationship of employer-employee, then the value of the perquisite is taxable as salary. However,
if it arises during the course of profession, the value of such perquisite is chargeable as profits and
gains of business or profession.

4) Perquisite will become taxable only if it has a legal origin.

5) Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
(6) Perquisites taxable in the case of all employees
(7) Perquisites exempt from tax in the case of all employees
(8) Perquisites taxable only in the hands of specified employees.

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TAXABILITY OF PERQUISITE
Section 17(2) of the Income Tax Act gives an inclusive definition of perquisite.

Perquisite includes:
i) VALUE OF RENT-FREE ACCOMMODATION [RFA] PROVIDED to the assessee by his employer
[Section 17(2)(i)].

ii) Value of CONCESSION IN RENT IN RESPECT OF ACCOMMODATION PROVIDED to the assessee

by his employer [Section 17(2)(ii)].

iii) The value of any benefit or amenity GRANTED OR PROVIDED free of cost or at concessional rate
to SPECIFIED EMPLOYEES i.e.

a. by a company to an employee in which he is a director;

b. by a company to an employee being a person who has substantial interest in the company (i.e.
20% or more of the voting rights of the company);

c. by any employer (including a company) to an employee to whom the provisions of (a) & (b) do
not apply and whose income under the head ‘salaries’ (whether due from, or paid or allowed by,
one or more employers) exclusive of the value of all benefits or amenities not provided for by way
of monetary benefits exceeds 50,000 - Section 17(2)(iii);

[i.e. Salary for this purpose = Basic Salary + D.A. + Commission, whether payable monthly or
turnover based + Bonus + Fees + Advance Salary + Arrear Salary + Any other taxable payment + Any
taxable allowances + Any other monetary benefits – Deductions under section 16 (ia) / (ii) / (iii)]

Such benefits are:

1. Motor Car

2. Sweeper, Gardener, Watchman etc.

3. Gas, Electricity & Water

4. Free Education Facility

5. Free / Concessional Fare

iv) AMOUNT PAID by an employer in respect of any obligation which otherwise would have been
payable by the employee [Section 17(2)(iv)].

v) 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, other than payment made to RPF or approved
superannuation fund - Section 17(2)(v).

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a. However, there are schemes like group annuity scheme, employees state insurance scheme and
fidelity insurance scheme, under which insurance premium is paid by employer on behalf of the
employees. Such payments are not regarded as perquisite in view of the fact that the employees
have only an expectancy of the benefit in such schemes.

b. In Case employer has paid life insurance premium on behalf of the employee then it will be taxable
for the employee and further employee can claim deduction under section 80C from GTI

vi) The Value Of Any Specified Security Or Sweat Equity Shares ALLOTTED OR TRANSFERRED,
directly or indirectly, by the employer or former employer, free of cost or at concessional rate to the
assessee – Section 17(2)(vi).

vii) the amount of any CONTRIBUTION TO AN APPROVED SUPERANNUATION FUND by the

employer in respect of the assessee, to the extent it EXCEEDS 1,50,000 – Section 17(2)(vii).

viii) The value of any other fringe benefit or amenity as may be prescribed by the CBDT – Section
17(2)(viii). They are

a) Concessional or Interest Free Loan

b) Travelling, touring & accommodation other than LTC

c) Free Food & Beverage to employees during office hours

d) Gift to the employees

e) Credit Card expenses

f) Club Expenses

g) Use of Movable assets by the employees

h) Transfer of any Movable Assets to the employees

i) Value of any other benefit or amenity, service, right / privilege

EXEMPTED PERQUISITES

Following perquisites are exempted in hands of employee:

1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.

2. Food: Food provided by employer in working place upto Rs. 50 per meal. Remote area – full
exempt.

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The exemption provided in respect of free food and nonalcoholic beverage provided by such
employer through paid voucher shall not apply to an employee, being an assessee, who has
exercised option under section 115BAC(5). [Notification No. 38/2020, dated 26.6.2020]
3. Recreational facilities:

Recreational facilities extended to a group of employees.

4. Goods sold to employee at concessional rate:

Goods manufactured by employer and sold by him to his employees at concessional (not free) rates.

5. Conveyance facility: Conveyance facility provided –

 to employees for journey between office and residence and vice versa.

 to the judges of High Court and Supreme Court

6. Training: Amount spent on training of employees including boarding and lodging expenses of
the employees on such training.

7. Services rendered outside India: Any perquisite/allowances allowed outside India by the
Government to a citizen of India for rendering services outside India.

8.Contribution in some specified schemes

 Employer's contribution to staff group insurance scheme.

 Payment of annual premium by employer on personal accident policy affected by him in respect
of his employee.

9. Loans

 Loan given at nil or at concessional rate of interest by the employer provided the aggregate
amount of loan does not exceed 20,000.

 Interest free loan for medical treatment of the diseases specified in Rule 3A.

10. Medical facility A provision of medical facility at office is exempt.

11. Periodicals and journals: Periodicals and journals required for discharge of work.
12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf
of employee by the employer whether by way of direct payment or reimbursement.

13. Free education facility: Free education facility to the children of employee in an institution
owned or maintained by the employer provided cost of such facility does not exceed Rs.1000 per
month per child.

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14. Computer or Laptop: Computer or Laptop provided whether to use at office or at home
(provided ownership is not transferred to the employee).

15. Movable assets: Sale or gift of any movable asset (covered under SLM method) to employee
after being used by the employer for 10 or more years.

16. Leave Travel Concession: Leave Travel Concession (LTC) to the extent of lowest cost incurred.

17. Rent-free accommodation

 Rent-free official residence provided to a Judge of a High Court or the Supreme Court.

 Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a Union

Minister or a Leader of opposition in Parliament.

18. Accommodation: Accommodation provided –

 on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.

 in a remote area to an employee working at a mining site or an onshore exploration site or a project
execution site or a dam site or a power generation site or an offshore site.

19. Tax on non-monetary perquisite paid by employer on behalf of employee.

20. Health club. Sports club facility

(A) TAXABLE PERQUISITES:

IN CASE OF GOVT. EMPLOYEES [CG/SG] : As per License Fee determined by Govt.

IN CASE OF NON – GOVT. EMPLOYEES:

(i) If Accommodation is not owned by Employer:
Value shall be the lower of
(i) Rent paid by the Employer OR
(ii) 15% of salary

(ii) If Accommodation is owned by Employer:

Value shall be
If population < 10 Lakhs: 7.5% of Salary
If 10 Lakhs < Population < 25 Lakhs: 10% of Salary

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SSGURU CA SURAJ SATIJA
If Population > 25 Lakhs: 15% of Salary

If ACCOMODATION IS PROVIDED AT CONCESSIONAL RATE

then value = Value determine as above Less Rent actually paid by employee.

RENT FREE FURNISHED ACCOMMODATION

Value of unfurnished accommodation shall be calculated as above and shall be increased by value
of furnished accommodation, which is:
10% p.a. of the original COST OF FURNITURE if owned by employer and/or
The actual hire charges paid/payable, if hired from a third party
Note: The valuation shall be reduced by any amount recovered from the employee.

SALARY FOR THE PURPOSE OF VALUATION OF ACCOMMODATION

Basic Salary + DA (Forming Part of Salary) + Bonus + Fees + Commission + All other Taxable
Allowance + Any monetary payment by employer to employee, by whatever name called
[Above does not include Perquisites (Monetary or Non-Monetary) and Employer’s contribution to
PF + Arrear Salary + Advance Salary]
NOTE:
1. Salary are to be considered on due basis for the relevant period for which accommodation is
provided.
2. If the employee receives salary from more than one employer, the aggregate of the salary received
from both the employers has to be taken into account for valuation of rent free accommodation

VALUATION OF ACCOMMODATION PROVIDED IN A HOTEL:

Where the accommodation is provided by the employer (Government or other employer) in a hotel,
the value of the perquisite will be lower of:
a. 24% OF SALARY paid or payable for the previous year OR
b. the actual charges paid or payable to such hotel for the period during which such accommodation
is provided.
The above value is reduced by the rent, if any, actually paid or payable by the employee.
NOTE:
The value of this perquisite will not be calculated if the employee is provided such accommodation
for a period not exceeding in aggregate 15 days on the transfer from one place to another.

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 INCOME UNDER THE HEAD OF SALARIES
SSGURU CA SURAJ SATIJA
FOR FIRST 90 DAYS - ANY ONE
Where on account of his transfer from one place to another, the employee 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 (as determined according to the above provisions) for a period not
exceeding 90 days and thereafter the value of perquisite shall be charged for both such
accommodations in accordance with the valuation rules.

EXCEPTIONS:
However, none of the above valuation rules would be applicable to any accommodation provided to
an employee working at a mining site/onshore oil exploration site/project execution site/dam
site/power generation site/offshore site which:

a. being of a temporary nature and is located at least 8 kms away from the local limits of any
municipality or cantonment board; or

b. is located in a remote area.

[Remote area means an area that is located at least 40 kms away from a town having a population
not exceeding 20,000 based on latest published all India census].

MOTOR CARS – PERQUISITES VALUATION

Situation Use Tax treatment
Car owned and Official use Exempt
maintained by employer Private use 10% of cost or actual hire
charges
-) running and maint.
expenses
-) amount recoverable
Partly official partly private Taxable amount –
For below 1.6 ltr c.c. = 1800
pm
Above 1.6 ltr c.c. = 2400 pm
(nothing deductible on
account of amount
recovered.
Car owned by employer Official use Exempt
and maintained by Private use 10% of cost or actual hire
employee charges
-) amount recoverable
Partly official partly private Taxable amount =

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 INCOME UNDER THE HEAD OF SALARIES
SSGURU CA SURAJ SATIJA
For below 1.6 ltr c.c. = 1800
pm
Above 1.6 ltr c.c. = 2400 pm
(nothing deductible on
account of amount
recovered.
Car owned and Nothing is taxable
maintained by employee
Car owned by employer Official use Nil
and maint. By employer Private use Amount of expenditure
Partly official partly private Actual expenditure
-) 1800pm/2400 pm
(depending on cc)
-) 900 pm if chaufer
Taxable amount
Any other automotive Official use Nil
owned by employer Private use Amount of expenditure
Partly official partly private Actual expenditure
Less : 900 p.m.
[greater deduction can be
allowed if records shows
expenses for official use]

PROVISION OF DOMESTIC SERVANTS (Sweeper, Gardener, watchman or a personal

attendant)

Servant Servant’s Value of perquisite Taxable in the hands of

salary paid by
appointed by

Employee Employee Nil Not applicable

Employee Employer Actual cost incurred by All employees

the Employer on the
servant

Employer Employer Actual cost incurred by Specified employee

the Employer on the
servant

Employer Employee Nil Not applicable

NOTE:

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 INCOME UNDER THE HEAD OF SALARIES
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1. Where the employee is paying any amount in respect of such servant facility, the amount so paid
shall be deducted from the value of perquisite determined above.

2. Domestic Servant Allowance given to an employee is always chargeable to tax.

SUPPLY OF GAS, ELECTRICITY OR WATER

Facility in the VALUE OF PERQUISITE Taxable in the hands of
name of
Provided from own from
Provided source outside
Employer Mfg. cost to the employer Amount paid to the Specified employees
supplier

Employee Mfg. cost to the employer Amount paid to the All employees
supplier

NOTE:
1. Where the employee is paying any amount in respect of such above facility, the amount so paid
shall be deducted from the value of perquisite determined above.

2. Gas/Electricity/Water Allowance given to an employee is always fully chargeable to tax.

FREE OR CONCESSIONAL EDUCATION FACILITY

The value of perquisite is determined as under:
Facility provided Value of perquisite Taxable in
To the
Provided in a school Provided in any other school
owned by the employer [Case 2] hands of
[Case 1]

Children [Any No.] Cost of such education in Cost of such education Specified
similar school*
employee
(There would be no Perquisite
if the cost of
education does not exceed
1,000 pm per child)

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SSGURU CA SURAJ SATIJA
OTHER HOUSEHOLD Cost of such education in similar Cost of such education Specified
MEMBER school incurred
employee

NOTE:
1) If the employee incurs the expenditure of school fees and the same is reimbursed by the
employer, then the entire amount of reimbursement so made, shall be fully taxable in the hands of
all employees.
2) Child includes step child as well as the adopted child of the employee.
* If cost of education exceeds 1,000 p.m. then full amount is taxable. An alternate view possible is
that only the sum in excess of 1,000 per month is taxable.

VALUATION IN RESPECT OF FREE TRANSPORT

In case of employees of Taxable value

Railways / Airlines Nil

Any other transport Value at which such benefit is offered by the xx

employer to the public
undertaking
Less: Recovery from the employee xx

Travelling, Touring & Accommodation

Valuation of perquisite in respect of traveling, touring, accommodation and any other expenses paid
/ reimbursed by employer for any holiday availed by EMPLOYEE (OR ANY MEMBER OF
HOUSEHOLD) other than LTC (section 10(5) read with Rule 2B):

(a)Where such facility is maintained by the employer and available uniformly to all employees, then
value shall be:-
Expenditure incurred by the employer LESS Amount recovered from the employee.
(b)Where such facility is maintained by employer and not available uniformly to all employees, then
value shall be:-
Value at which such facilities are offered by other agencies to the public LESS Amount recovered
from the employee.
Notes:
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(1) Where the employee is on official tour & the expenses are incurred in respect of any member of
his household accompanying him, the amount of expenditure so incurred in respect of such member
only shall be liable to be tax as perquisite.

(2) Where any official tour is extended as vacation, then expenses incurred in relation to such
extended period of stay or vacation, shall be treated as perquisite.

FREE LUNCH/REFRESHMENT/ BEVERAGES ETC

THE TAXABLE VALUE OF THIS PERQUISITE SHALL BE:
Cost incurred by the employer LESS Amount recovered from the employee
However, facility in the following cases is exempt from Tax:
FREE FOOD AND NON-ALCOHOLIC BEVERAGES UPTO RS. 50 PER MEAL provided by employer,
> during working hours at office or business premises; or
> through paid voucher which are not transferable and usable only at eating joints; I Tea or snacks
provided during working hours; or

Free food and non-alcoholic beverages during working hours provided in a remote area or
an offshore installation.

Note:- Working hours includes extended office hours (like working on holiday, overtime etc).
The exemption provided in respect of free food and nonalcoholic beverage provided by such
employer through paid voucher shall not apply to an employee, being an assessee, who has
exercised option under section 115BAC(5). [Notification No. 38/2020, dated 26.6.2020]

GIFT, VOUCHER OR TOKEN

 The Value of any gift, or any voucher/ token made by employer to THE EMPLOYEE OR HIS
HOUSEHOLD MEMBER, in excess of 5,000, is fully taxable.
 If the value of such gift, voucher or token is below 5,000 in the aggregate during the previous
year, the value of perquisite shall be taken as NIL.
 The aforesaid exemption of 5,000 shall be denied in case of cash gift.

Note:

An alternate view possible is that only the sum in excess of 5,000 is taxable in view of the language
of Circular No. 15/2001 that such gifts upto 5,000 in the aggregate per annum would be exempt,
beyond which it would be taxed as perquisite. As per this view, the value of perquisite would be
difference between Gift Value & 5,000

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 INCOME UNDER THE HEAD OF SALARIES
SSGURU CA SURAJ SATIJA
CREDIT CARD
 The amount of expenses including membership fees and annual fees incurred by THE
EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD which is charged to a credit card (including
add on card) provided by the employer or otherwise, paid for or reimbursed by the employer
shall be taken to be the value of perquisite chargeable to tax.
 Amount recovered from such employee will be reduced from the value determined.
 However, such expenses incurred wholly and exclusively for official purposes would not be
treated as a perquisite if it is supported by necessary documents.

CLUB EXPENDITURE
 If employer reimburses or makes payment of any expenditure incurred in a club including the
amount of annual or periodical fee for the EMPLOYEE OR ANY MEMBER OF HOUSEHOLD, the
actual amount of such expenditure shall be the value of perquisite.
 Amount recovered from such employee will be reduced from the value determined. / Initial fee
paid for acquiring corporate membership is not a taxable perquisite
 No taxable perquisites in case health club, sports club and similar facilities provided uniformly
to all employees
 No taxable perquisite if the club expenditure is incurred wholly and exclusively for business
purposes.

USE OF EMPLOYER’S MOVABLE ASSETS

If the facility of usage of any movable asset (Except LAPTOP & Computers) is provided by employer
to EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD, the taxable value shall be:
- 10% P.A. OF THE ACTUAL COST of asset (if owned by the employer) or - Actual amount of hire
charges (if taken on hire by the employer)
Note:
1. Where the employee is paying any amount in respect of such asset, the amount so paid shall be
deducted from the value of perquisite determined above.
2. Member of household shall include- (a) Spouse; (b) Children and their spouses; (c) parents; and
(d) Servants and dependents.

TRANSFER OF ANY MOVABLE ASSET

If any movable asset is transferred by the employer to employee, then, taxable value of this
perquisite shall be:
Actual cost of the asset to the employer

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 INCOME UNDER THE HEAD OF SALARIES
SSGURU CA SURAJ SATIJA
Less: Dep. for every completed year of usage by employer
Less: The amount charged from the employee.
The following will be the rate and method of depreciation:
S.N. Asset Rate Method

Computer & electronic items 50% W.D.V.

[Not covering Household appliances]

Motor Car 20% W.D.V.

Any other asset 10% Straight Line

SECTION 10(10CC) – INCOME IN THE NATURE OF PERQUISITE – Exempted

As per section 10(10CC), tax paid by employer on non-monetary perquisite income of employee
shall be exempt in the hands of employee
TAX IMPLICATION IN HANDS OF EMPLOYER: Section 40(a)(v) disallows such expenditure in the
hands of the employer. Therefore, the tax so paid by the employer will not be deductible
expenditure in his hands.

Medical Facilities Provided by Employer [Proviso to Section 17(2)]

In the following cases, medical facilities/ reimbursement incurred for employee/his family member
are treated as tax FREE perquisites:-
I. Expenditure incurred in a HOSPITAL MAINTAINED BY THE EMPLOYER.
II. Sum paid by the employer for any expenditure for medical treatment: > in any hospital
maintained by
o the Govt. or local authority or
o an approved hospital under CGHS or
> of prescribed diseases/ ailment in a hospital approved by CCIT. [Certificate is required]
III. Group Medical Insurance paid u/s 36(1)(ib).
IV. Medical Insurance paid u/s 80D.
V. Premium of Accidental Insurance Policy.
VI. Any other medical expenditure reimbursed to the extent of 15,000 in the Previous Year. This
exemption is not available from AY 19-20.

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 INCOME UNDER THE HEAD OF SALARIES
SSGURU CA SURAJ SATIJA
MEDICAL TREATMENT OUTSIDE INDIA:
The following expenditure incurred by employer on treatment of the employee/his family
members, outside India is also a tax-free perquisite:
1. EXPENSES ON MEDICAL TREATMENT OF THE EMPLOYEE OR ANY FAMILY MEMBER: Exempt
to the extent permitted by RBI.

2. EXPENSES ON STAY ABROAD OF THE PATIENT AND ONE ATTENDANT: Exempt to the extent
permitted by RBI

3. TRAVEL EXPENSES FOR ABROAD OF THE PATIENT AND ONE ATTENDANT:

Travel expenses shall be wholly exempt if the employee’s GTI before including therein, the said
travel expenditure ≤ 2,00,000.
Notes
> Family = Spouse + Children + Dependent [Parents + Brothers + Sister]
> Hospital includes a dispensary or a clinic or a nursing home.
> Fixed medical allowance – always taxable.

SECTION 7 – INCOME DEEMED TO BE RECEIVED

The following incomes shall be deemed to be received in India in the previous year:
I. Employer’s contribution to RPF in excess of 12% of the salary of the employee.
II. Interest credited to RPF balance in excess of 9.5% p.a.
III. The taxable transfer balance from URPF to RPF.
IV. Contribution made, by the any employer, to the account of an employee under a pension scheme
referred to in Sec. 80CCD.
Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time
of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee
as his contribution towards the fund. The employer also generally contributes the same amount out
of his pocket, to the fund. The contribution of the employer and the employee are invested in
approved securities. Interest earned thereon is also credited to the account of the employee. Thus,
the credit balance in a provident fund account of an employee consists of the following:

a) Employee’s Contribution
b) Interest on Employee’s Contribution
c) Employer’s Contribution
d) Interest on Employer’s Contribution.

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 INCOME UNDER THE HEAD OF SALARIES
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The accumulated balance is paid to the employee at the time of his retirement or resignation. In the
case of death of the employee, the same is paid to his legal heirs. The provident fund represents an
important source of small savings available to the Government. Hence, the Income-tax Act gives
certain deductions on savings in a provident fund account.

STATUTORY PROVIDENT FUND SPF

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government, railways,
semi-government institutions, local bodies, universities and all recognised educational institutions.

(i) PUBLIC PROVIDENT FUND [PPF]

Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of the
fund is open to every individual though it is ideally suited to self employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer. An individual
may contribute to the fund on his own behalf as also on behalf of a minor of whom he is the guardian.

(ii) RECOGNISED PROVIDENT FUND [RPF]

Recognised provident fund means a provident fund recognised by the Commissioner of Income-tax
for the purposes of income-tax. A fund constituted under the Employees’s Provident Fund and
Miscellaneous Provisions Act, 1952 will also be a recognised Provident Fund.

(iii) UNRECOGNISED PROVIDENT FUND [UPF]

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.
THE TAX TREATMENT IS
Particulars SPF PPF RPF URPF
Employer’s Fully Exempt N.A. in excess of 12% of Not taxable at the
Contribution salary* is taxable time of contribution

Ded. u/s 80C Available Available Available Not Available

(Employee’s
[500 – 150,000]
Cont)

Interest Fully Exempt Fully Exempt in excess of 9.5% p.a. is

credited taxable (Salary)
(IOS Head) ----

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 INCOME UNDER THE HEAD OF SALARIES
SSGURU CA SURAJ SATIJA
Amount Fully Exempt Fully Exempt Fully Exempt sub. to  Interest on
received on u/s. 10(11) u/s. 10(11) condition u/s. 10(12) Employee’s
retirement, Contribution is
death etc. taxable u/h. “IOS”
 Employer’s
Contribution and
interest. On such
Contribution is fully
taxable

The payment from R.P.F. balance is fully exempt from tax in following cases:
Accumulated balance in RPF payable to an employee (subject to certain following conditions).
Condition 1– Employee has rendered continuous service for a period of at least 5 years; or
Condition 2–Where employee could not complete 5 years of service by reason of
- ill-health; or
- discontinuance of the employer’s business or
- other cause beyond the control of the employee.
In any other case, the payment from RPF is fully taxable in the manner given below:
(i) Interest on Employee’s contribution is fully taxable u/h Other Sources.
(ii) Employer’s contribution and Interest thereon is taxable as salary u/s 17(3).
Note: If employee gets transfer of balance of RPF with another employer who also maintains RPF,
then, the period of service under former employer shall also be included in calculating the period of
continuous service.

DEDUCTIONS FROM SALARY

Standard Deduction [Section 16(ia)]
Standard deduction of Rs. 50,000 (fifty thousand) or the amount of the salary, whichever is less
w.e.f. Finance Act 2019 w.e.f. Assessment year 2020-21 [clause (ia) to section 16].

Entertainment Allowance [Section 16(ii)]

 Fully taxable
 First to be included in salary and then deduction to be made.
 In case of Government Employees, the deduction is available, which would be lower of:
 1/5th of Basic Salary Or
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 INR 5000/- Or
 Actual Entertainment Allowance received

Profession Tax [Section 16(iii)]

Allowed as a deduction when paid by the employee (recovered from salary) during the previous
year

Note: The deduction u/s 16(ia), 16(ii), 16(iii) not available for assessee opted for section 115BAC]

IMPACT OF SECTION 115BAC UNDER THE HEAD SALARY

Finance Act, 2020 has introduced a New Optional Tax System for Individuals and HUFs u/s 115BAC
of the Income Tax Act, 1961 w.e.f. AY 21-22 to provide for concessional rate of Slab Rates to be
applied on Total Income calculated without claiming specified deductions and exemptions.
Hence, from AY 2021-22 or FY 2020-21, there are two operative tax systems –
1. One is the Existing tax system where all the applicable deductions and exemptions are allowed
and the tax rates are as per the Slab rates of tax specified in the Finance Act, 2020.
2. The second one is section 115BAC which is a Optional Tax System and under which many
deductions and exemptions have not been allowed but lower slab tax rates are provided in the
section 115BAC itself.
Individual and HUF opting for concessional tax regime under section 115BAC: The deduction under
Chapter VI-A other than the provisions of sub-section (2) of section 80CCD or section 80JJAA; not
available to the Individual and HUF opting to pay tax under concessional tax regime under section
115BAC of the Income Tax Act, 1961.
Many exemptions & deduction are not allowed under the new tax system. The below chart contains
the exemptions and deduction not available under the new system related to Income under the head
Salary. Similarly, deductions & exemptions not available under the new tax system and which are
related to other heads are provided in other chapters.
Sr. Nature of Exemption/Deduction Relating to Salaries New System Existing
No. of Tax u/s system of Tax
115BAC
A RETIREMENT BENEFITS EXEMPTIONS
Leave Salary u/s 10(10AA) Allowed Allowed
gratuity u/s 10(10) Allowed Allowed
Commutation of Pension u/s 10(10A) Allowed Allowed
Retrenchment Compensation u/s 10(10B) Allowed Allowed
VRS Compensation u/s 10(10C) Allowed Allowed
Leave Travel Concession u/s 10(5) Not Allowed Allowed

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 INCOME UNDER THE HEAD OF SALARIES
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B ALLOWANCES
Exemption u/s 10(13A) and Rule 2A from House Rent Allowance Not Allowed Allowed
1. Exemption u/s 10(14)(i) and Rule 2BB
Travelling Allowance Allowed Allowed
Conveyance Allowance Allowed Allowed
Daily Allowance Allowed Allowed
Helper Allowance Not Allowed Allowed
Any allowance granted for encouraging the academic, research and Not Allowed Allowed
training pursuits in educational and research institutions
Uniform Allowance Not Allowed Allowed
2. Exemption u/s 10(14)(ii) and Rule 2BB
Children Education Allowance Not Allowed Allowed
Hostel Expenditure Allowance Not Allowed Allowed
Tribal Area Allowance Not Allowed Allowed
Transport Allowance to Handicapped/Deaf/Dumb/Blind employee Allowed Allowed
Transport Allowance to other than above employees Not Allowed Not Allowed
C Perquisites
Free food and beverage through vouchers provided to the employee Not Allowed Allowed
upto 50/meal/Tea & snacks
Other Exemptions from perquisites e.g. Use of Computers, Laptops etc Allowed Allowed
D Deductions u/s 16
Standard Deduction u/s 16(ia) Not Allowed Allowed
Entertainment Allowance u/s 16(ii) Not Allowed Allowed
Professional Tax u/s 16(iii) Not Allowed Allowed

Clarification in respect of option under section 115BAC of the Income-tax Act, 1961
[Notification No. 38/2020] Section 115BAC of the Income-tax Act, 1961, inserted by the Finance
Act, 2020 w.e.f. the assessment year 2021-22, inter alia, provides that a person, being an individual
or a Hindu undivided family having income other than income from business or profession, may
exercise option in respect of a previous year to be taxed under the said section 115BAC alongwith
his return of income to be furnished under sub-section (1) of section 139 of the Act for each year.
The concessional rate provided under section 115BAC of the Act is subject to the condition that the
total income shall be computed without specified exemption or deduction, set-off ofloss and
additional depreciation.
Representations expressing concern regarding tax to be deducted at source (TDS) have been
received stating that as the option is required to be exercised at the time of filing of return, the
deductor, being an employer, would not know if the person, being an employee, would opt for
taxation under section 115BAC of the Act or not. Hence, there is lack of clarity whether the
provisions of section 115BAC of the Act are to be considered at the time of deducting tax.

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In order to avoid the genuine hardship in such cases, the Board, in exercise of powers conferred
under section 119 of the Act, hereby clarifies that an employee, having income other than the
income under the head “profit and gains of business or profession” and intending to opt for the
concessional rate under section 115BAC of the Act, may intimate the deductor, being his employer,
of such intention for each previous year and upon such intimation, the deductor shall compute his
total income, and make TDS thereon in accordance with the provisions of section 115BAC ofthe
Act.If such intimation is not made by the employee,the employer shall make TDS without
considering the provision of section 115BAC of the Act.
It is also clarified that the intimation so made to the deductor shall be only for the purposes of TDS
during the previous year and cannot be modified during that year. However, the intimation would
not amount to exercising option in terms of sub-section (5) of section 115BAC of the Act and the
person shall be required to do so along with the return to be furnished under sub-section (1) of
section 139 of the Act for that previous year. Thus, option at the time of filing of return of income
under sub-section (1) of section 139 of the Act could be different from the intimation made by such
employee to the employer for that previous year.
Further, in case of a person who has income under the head “profit and gains of business or
profession” also, the option for taxation under section 115BAC of the Act once exercised for a
previous year at the time of filing of return of income under sub-section (1) of section 139 of the Act
cannot be changed for subsequent previous years except in certain circumstances.
Accordingly, the above clarification would apply to such person with a modification that the
intimation to the employer in his case for subsequent previous years must not deviate from the
option under section 115BAC of the Act once exercised in a previous year.

NOTE: QUESTIONS OF CHAPTER IS PROVIDED SEPARATELY IN THE LINK.

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3. INCOME UNDER THE HEAD CAPITAL GAINS
Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains.
Section 45(1)
CHARGING SECTION FOR CAPITAL GAINS
LANGUAGE OF SECTION 45(1): Any profits or gains arising from the transfer of a capital asset
effected in the previous year, shall be chargeable to income tax under the head capital gains and
shall be deemed to be the income of the previous year in which the transfer took place unless such
capital gain is exempt u/s 54, 54B, 54D, 54EC, 54EE, 54F, SAG, 54GA or 54GB.
The requisites of a charge to income-tax, of capital gains under Section 45(1) are:
(i) There must be a capital asset.
(ii) The capital asset must have been transferred.
(iii) The transfer must have been effected in the previous year.
(iv) There must be a gain arising on such transfer of a capital asset.
(v) Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC, 54EE, 54ED, 54F,
54G, or 54GA

Section 2(14) - DEFINITION OF ‘CAPITAL ASSET’

GENERAL MEANING- Capital asset means property of any kind held by an assessee, whether or not
connected with his business or profession (such property can be movable, immovable, tangible,
intangible, etc). Eg: Shares & securities, land & building, etc. Property also includes any rights in
Indian company, including rights of management or control or any other rights whatsoever.
EXCLUSIONS: Following items shall NOT be treated as capital assets:
1. STOCK-IN-TRADE:
Any stock-in-trade, consumable stores or raw materials held by an assessee for the purposes of his
business or profession.
2. PERSONAL EFFECTS:
Personal effects refer to movable property held for the personal use of the assessee or any member
of his family dependent on him.
Examples: Personal motor car, household furniture, electronic appliances meant for personal use,
etc. However, the following assets shall not be treated as personal effects even though these assets
are movable and are held by the assessee for personal use:
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 INCOME UNDER THE HEAD CAPITAL GAIN
SSGURU CA SURAJ SATIJA
• Jewellery and bullion (jewellery includes ornaments of gold, silver, platinum or any other
precious metal; precious or semi-precious stones, whether or not set in any furniture, utensil or
other article or worked or sewn into any wearing apparel);
• archaeological collections (relating to past/ancient times);
• drawings & paintings;
• sculptures; or
• any work of art.
Note: If items likes motor car, electronic appliances, etc are held for business purposes, they are
treated as capital assets.
Note: Silver utensils like thalis, katoris, tumblers, etc held for personal use were held to be personal
effects. Thus, no capital gains would arise on sale of such silver utensils (Benarshilal v CIT).
Note: Sale of silver coins, gold coins, silver bars, gold utensils, etc used for the purposes of
Mahalaxmi Pooja and other festivals was held to be liable to capital gains as such asset did not
qualify as personal effects (SC's judgement in the case of Maharaja Rana Hemant Singh v CIT).
3. RURAL AGRICULTURAL LAND IN INDIA:
• Agricultural land outside India: Always a capital asset whether situated in rural area or urban
area.
• Agricultural land in India: Capital asset only if situated in urban area. If situated in rural area,
such agricultural land shall not qualify as a capita! asset.
Meaning of 'Urban Area'
The following two points define the scope of urban area':
(i) any area situated within the local limits of a municipality/cantonment board having a population
of 10,000 or more;
(ii) agricultural land situated in any area within such distance, measured aerially, in relation to
the range of population as shown hereunder –
Population of the area as per the latest census Shortest aerial distance from the local
published before the commencement of relevant limits of the municipality/cantonment
PY
> 10,000 and ≤ 1,00,000 2 kilometers
> 1,00,000 and ≤ 10,00,000 6 kilometers
> 10,00,000 8 kilometers

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 INCOME UNDER THE HEAD CAPITAL GAIN
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4. Gold Deposit Bonds issued under the Gold Deposit Scheme. 1999 or Deposit Certificates
issued under the Gold Monetisation Scheme. 2015 notified by the Central Government.
NOTE: Any security held by foreign institutional investor which has invested in such security in
accordance with the regulations made under the Securities and Exchange Board of India Act, 1992
would be treated as capital asset only so that any income arising from transfer of such security by a
Foreign Portfolio Investor (FPI) would be in the nature of capital gain.
The Supreme Court in the case of Vodafone International Holdings B.V vs. Union of India [2012] 204
Taxman 408 held that influence/persuasion of a parent company over its subsidiary could not be
construed as a right in the legal sense.
To supersede this ruling with retrospective effect from 1st April 1962, an Explanation has been
inserted to clarify that “property” includes and shall be deemed to have always included any rights
in or in relation to an Indian company, including rights of management or control or any other rights
whatsoever.

Shortest aerial Population according to the

distance from the last preceding census of
Is the land situated
local limits of a which the relevant figures
SR.NO. in this area a capital
municipality or have been published
Asset
cantonment board before the first day of the
refeered to in item (a) previous year.

(i) A 1 Km 9000 No
(ii) B 1.5 kms 12,000 Yes
(iii) C 2 kms 11,00,000 Yes
(iv) D 3 kms 80,000 No
(v) E 4 kms 3,00,000 Yes
(v) F 5 kms 12,00,000 Yes
(vi) G 6 kms 8,000 No
(vii) H 7 kms 4,00,000 No
(viii) I 8 kms 10,50,000 Yes
(ix) J 9 kms 15,00,000 No

Section 2(47)
DEFINITION OF ‘TRANSFER’

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Transfer, in relation to capital asset, includes:
□ the sale, exchange or relinquishment of the asset;
□ the extinguishment of any rights therein (like forfeiture of shares, repayment in case of liquidation
of companies, etc);
□ the compulsory acquisition thereof under any law for the time being in force;
□ conversion of a capital asset into stock-in-trade;
□ the maturity or redemption of zero-coupon bonds (Section 2(48) defines a ‘zero coupon bond' to
mean a bond in respect of which no benefit is received before maturity or redemption and are
generally redeemable after a period of minimum 10 years and maximum 20 years. Such bonds are
generally issued by infrastructure capital company or infrastructure capital fund or any scheduled
bank or public sector companies notified by the Central Government};
□ Any transaction allowing possession of any immovable property to be taken or retained in
part performance of a contract of the nature referred to u/s 53A of the Transfer of Property
Act, 1882 (Section 53A covers cases where possession of the property has been handed to a
proposed buyer and consideration has been paid/promised to be paid by the proposed buyer to the
proposed seller but the property has not yet been registered in the name of the proposed buyer.
Handing over the possession in such cases shall also be regarded as transfer); and
□ Any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative
society, company, AOP, etc or in any other manner whatsoever) which has the effect of transferring,
or enabling the enjoyment of any immovable property permanently.
Example: Mr X enters into an agreement to sell his house property on 01.01.2021 to Mr Y for Rs
20,00,000. Mr X hands over the possession of house property to Mr Y on 15.02.2021. Mr Y makes
the payment of Rs 20,00,000 on 30.04.2021.
The house property is registered in the name of Mr Y on 30.06.2021. When has the transfer taken
place?

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Section 48 MODE OF COMPUTATION OF CAPITAL GAINS

Computation Computation of Short-Term Capital Gains

Of Short-Term Full Value of Consideration (FVC) XXXX
Capital Gains
Less Expenditure incurred wholly and exclusively in connection (XXXX)
with transfer (like advertisement expenses, brokerage, legal
expenses, selling commission, etc)
Net Value of Consideration XXXX
Less: Cost of Acquisition (COA) (XXXX)
Less Cost of Improvement (COI) (XXXX)

Gross Short Term Capital Gains XXXX

Less: Exemption u/s 54B/54D (54/54EC/54EE/54F) (XXXX)
Taxable Short Term Capital Gains (’STCG’) XXXX
Fifth Proviso to Section 48 - STT Not Allowed as Deduction:
Securities Transaction Tax (’STT) paid on sale of shares/units shall not be reduce
from the sale proceeds and STT paid on purchase of shares/units shall not be added
to the cost of acquisition of shares/units held as capital assets.
Computation Computation of Long-Term Capital Gains
of Full Value of Consideration (FVC) XXXX
Long-Term Less. Expenditure incurred wholly and exclusively in connection (XXXX)
Capital Gains with transfer (like advertisement expenses, brokerage, legal
expenses, selling commission, etc)
Net Value of Consideration XXXX
Less: Indexed Cost of Acquisition (Indexed COA) (XXXX)
Less: Indexed Cost of Improvement (Indexed COI) (XXXX)
Gross Long Term Capital Gains XXXX
Less: Exemption u/s 54/54B/54D/54EC/54EE/54F (XXXX)
Taxable Long Term Capital Gains (‘LTCG’) XXXX

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Fifth Proviso to Section 48 - STT Not Allowed As Deduction: XXXX
Securities Transaction Tax (‘STT) paid on sale of shares/units shall not be
reduced from the sale proceeds and STT paid on purchase of shares/units
shall not be added to the cost of acquisition of shares/units held as capital
assets.

SHORT TERM AND LONG TERM ASSET

PERIOD OF HOLDING

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

 Zero Coupon bond

STCA, if held for ≤ 24 month  Unlisted shares
LTCA, if held for > 24 months
 Land or building or both
STCA, if held for ≤ 36 month  Unit of debt-oriented fund
LTCA, if held for > 36 months
 Unlisted securities other than shares

 Other capital assets

Proviso to Section 48 - INDEXATION

While computing long-term capital gains, ‘indexed cost of acquisition' shall be taken instead of ’cost
of acquisition' and ‘indexed cost of improvement' shall be taken instead of ‘cost of improvement'.
Cost Inflation Index For The Year In Which The Asset Is
Indexed Transferred
Cost of
Cost of = ×
Acquisition Cost Inflation Index For The Year In Which The Asset Was Held
Acquisition By The Assessee OR For The Year Beginning On 01.04.2001,
Whichever Is Later

Cost Inflation Index For The Year In Which The Asset Is

Indexed Cost
Cost of Transferred
of = ×
Improvement Cost Inflation Index For The Year In Which The
Improvement
Improvement To The Asset Took Place

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IMPORTANT POINT: As a general rule, benefit of indexation is not allowed in case of LT CG
arising from transfer of bonds or debentures issued by any company or government.
However, there are two exceptions to this general rule. In case of LT CG arising from transfer
of sovereign gold bonds and capital indexed bonds issued by government, benefit of
indexation is available.
INDEXATION TABLE
Financial Year CII Factor Financial Year CII Factor Financial Year CII Factor
2001-02 100 2007-08 129 2013-14 220
2002-03 105 2008-09 137 2014-15 240
2003-04 109 2009-10 148 2015-16 254
2004-05 113 2010-11 167 2016-17 264
2005-06 117 2011-12 184 2017-18 272
2006-07 122 2012-13 200 2018-19 280
2019-20 289 2020-21 301 2021-22 317

Section 55 - COST OF ACQUISITION (‘COA’)

General • Case (a): Capital Asset Has Been Purchased:

Provision Date of Before 01.04.2001 On or After 01.04.2001
Purchase
Cost of Higher of the following two: Cost incurred by the
Acquisition assessee on the
 Cost incurred by the assessee on
purchase of capital asset
the purchase of capital asset; or
 FMV as on 01.04.2001
• Case (b): Capital Asset Has Been Self-Generated:
As per the decision of the Supreme Court in the case of B.C.Srinivasa Setty, cost of
acquisition of any self-generated capital asset other than thqse given under
Category 2 below shall be INDETERMINATE. Therefore, no capital gains would
arise in such cases. Examples: Sale of spontaneously grown trees, goodwill of
profession, etc
Special • CATEGORY 1: Shares/Securities:

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Cases Option to take FMV as on 01.04.2001 is available in respect of these capital assets.

Capital Asset Cost of Acquisition Period of Holding

Starts from the date of
Original Shares/
Purchase price purchase/ allotment of
Securities
shares/securities
 If allotted before 01.04.2001: Starts from the date of
Bonus Shares/ FMV
allotment of bonus
Securities
 Otherwise – NIL shares/securities

Renouncement of
Right to Subscribe NIL Short-term (Always)
Shares/Securities
Right Shares/
Securities Period of holding to start
Price actually paid under the right
from the date of allotment of
- Purchased by the issue right shares/securities
person to whom
right is issued
Price paid to the person who
Period of holding to start
- Purchased by the renounced the right and the
from the date of allotment of
person to whom amount paid to the company
right shares/securities
right is renounced under the right issue
• CATEGORY 2: Specified Capital Assets:
Option to take FMV as on 01.04.2001 is not available in respect of these capital
assets even if they are acquired before 01.04.2001.
Cost of Acquisition
Capital Asset Acquired Asset Self-Generated Asset
I
Goodwill of Business (Profession) Purchase Price NIL
Trademark/Brand Name associated with Purchase Price NIL
Business
Tenancy Rights Purchase Price NIL
Stage Carriage Permit (Route Permits) Purchase Price NIL
Loom Hours Purchase Price NIL

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Right to Carry on any Business/Profession Purchase Price NIL
Right to Manufacture, Produce or Process any Purchase Price NIL
Article or Thing

Section 55 - COST OF IMPROVEMENT

General Cost of improvement refers to any capital expenditure incurred by the assessee for
improving the capital asset. Eg - construction of additional floors, etc.
Meaning
Quantum • CATEGORY 1: Specified Capital Assets:
The cost of improvement of the following capital assets shall be taken to be NIL:
□ Goodwill of business;
□ Right to manufacture, produce or process any article or thing; and
□ Right to carry on any business/profession.
• CATEGORY 2: Other Capita! Assets:
Cost of improvement shall be the actual capital expenditure incurred by the assessee on
the improvement of the capital asset. However, cost of improvement incurred before
01.04.2001 shall be ignored in all cases.

COMPUTATION OF CAPITAL GAINS - SPECIAL CASES

Section 45(1A)
TAXABILITY OF INSURANCE COMPENSATION IN RE5EPCT OF CAPITAL ASSETS
Applicability Section 45(1A) applies if both the conditions listed below are fulfilled:
of Section
• Capital asset has been destroyed, damaged, etc on account of the following
45(1A)
reasons:
 Flood, typhoon, hurricane, cyclone, earthquake, etc; or
 Riot or civil disturbance; or
 Accidental fire or explosion; or
 Action by an enemy or action taken in combating an enemy (whether with or
without declaration of war).

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• Money or any other asset has been received from an insurance company as
compensation under an insurance policy.

Full Value of The value of money/Fair Market Value of any other asset received shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly.
Year of Capital gains shall be computed in the year in which the asset has been
Taxability of destroyed, damaged, etc but they shall be taxable in the year in which money
Capital Gains or any other asset has been received from the insurance company.

Section 45(2)
CONVERSION OF CAPITAL ASSETS INTO STOCK-IN-TRADE
Applicability Section 45(2) applies where an assessee converts his capital asset into
of Sec 45(2) stock-in-trade to be used by him for his business purposes.
Full Value of The Fair Market Value of the asset as on the date of conversion shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly.
Year of • Capital gains shall be computed in the year in which the capital asset has
Taxability of been converted into stock-in-trade but they shall be taxable in the year in
Capital Gains which such stock-in-trade has been sold by the assessee.
• The income arising from sale of stock-in-trade shall be taxable u/h PGBP.
Business Income = Sale Price (-) FMV of Asset on the Date of Conversion

Section 45(3)
TRANSFER OF CAPITAL ASSET BY PARTNER/MEMBER TO FIRM/AOP/BOI
Applicability • Section 45(3) applies where a partner/member transfers any capital asset
of Sec 45(3) to a firm/AOP/BOI as his capital contribution or otherwise. (Such
partner/member can be existing or new).
• Capital gains shall be computed in the hands of the partner/member
transferring the capital asset.
Full Value of The amount recorded in the books of accounts of the firm/AOP/BOI shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly. (FMV)

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Year of Capital gains shall be taxable in the year in which the capital asset is transferred
Taxability by the partner/member to the firm/AOP/BOI.

Section 45(4) - TRANSFER OF CAPITAL ASSET BY FIRM/AOP/BOI

TO PARTNER/MEMBER BY WAY OF DISTRIBUTION ON DISSOLUTION
Applicability • Section 45(4) applies in case of transfer of capital asset by a
of Sec 45(4) firm/AOP/BOI to its partner/member at the time of dissolution or otherwise.
• Capital gains shall be computed in the hands of the firm/AOP/BOI transferring
the capital asset to its partner/member.
Note: Provisions relatinq to capital gains do not apply where the firm/AOP/BOI
transfers any stock-in-trade to its partner/member on dissolution or otherwise.
Full Value of The Fair Market Value of the capital asset as on the date of transfer shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly.
Year of Capital gains shall be taxable in the year in which the capital asset is transferred
Taxability by the firm/AOP/BOI to the partner/member.

Section 45(5)
TRANSFER OF CAPITAL ASSET BY WAY OF COMPULSORY ACQUSITION
Applicability Section 45(5) applies in the following two situations:
of Sec 45(5)
* Capital asset has been compulsorily acquired by the Government or any
other similar agency under any law; OR
* Transfer of capital asset has taken place and consideration for such transfer is
to be determined or approved by the Central Government or RBI.
Full Value of . ORIGINAL COMPENSATION:
Consideration
Capital gains shall be computed in the year in which the transfer has taken
(+)
place but the entire capital gains shall be taxable in the year in which the first
instalment of

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Year of the original compensation is received by the assessee. Cost of acquisition and cost
Taxability of of improvement shall be allowed to be deducted in the normal manner.
Capital Gains
• ENHANCED COMPENSATION:
□ If the assessee is not satisfied with the amount of compensation, he can file a
case for receiving enhanced compensation. Such enhanced compensation is
taxable in the year in which it is received by the assessee- The nature of capital
gains (LT/ST) would be same as in case of original compensation.
□ Where enhanced compensation has been received on the basis of an interim
order of the Court, the amount of enhanced compensation shall be taxable only
when the final order has been passed by the Court.
□ While computing capital gains on enhanced compensation, the assessee will be
allowed to deduct legal expenses incurred to earn the enhanced compensation.
Cost of acquisition and cost of improvement shall be taken as Nil.
□ If the original assessee has died at the time of receipt of enhanced
compensation, such enhanced compensation shall be taxable in the hands of the
legal heir.
□ Interest received on original/enhanced compensation is taxable u/h ‘income
from other sources’ in the year of receipt irrespective of the year to which it
pertains (Section 145A). 50% of such interest is allowed as deduction u/s 57.

Section 45(5A) - Latest Section Introduced Vide The Finance Act. 2017
• As per Section 45(1) of the Income Tax Act, 1961, capital gains are chargeable to tax in the year in
which transfer takes place except in certain cases. The definition of 'transfer' includes any
arrangement or transaction where any rights are handed over in execution of part performance of
contract, even though the iegal title has not been transferred. In such a scenario, execution of Joint
Development Agreement between the owner of immovable property and the developer triggers
capital gains tax liability in the hands of the owner in the year in which the possession of immovable
property is handed over to the developer for development of a project.
• With a view to minimise the genuine hardship which the owner of iand may face in paying capital
gains tax in the year of transfer, Section 45(5A) has been newly introduced so as to provide that
in case of an assessee being individual or HUF, who enters into a specified agreement for
development of a project, the capital gains shall be taxable in the previous year in which the
certificate of completion for the whole or part of the project is issued by the competent
authority.

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Section 45(5A)
TRANSFER OF CAPITAL ASSET UNDER JOINT DEVELOPMENT AGREEMENT
Applicability • Section 45(5A) applies where an individual/HUF owning land/building/both
of Sec 45(5A) enters into a registered agreement with a developer allowing the developer to
develop a real estate project on such land/building/both.
• As a consideration for receiving the right to develop the real estate project, the
developer shares a portion of land/building/both in the project with the
individual/HUF.
In some cases, the developer might also pay some additional consideration in
cash over and above the share in project.
Year of • Capital gains shall be computed in the hands of individual/HUF in the year in
Taxability of which the possession of immovable property is handed over to the developer for
Capital Gains development of a project.
• Capital gains so computed shall be considered as income of the previous year
in which the certificate of completion for the whole or part of the project is issued
by the competent authority.
Full Value of SDV of land/building/both in the project handed over by the developer to
Consideration individual/HUF as his share as on the date of issue of the aforementioned
completion certificate
(+)
Cash received by the individual/HUF from the developer, if any
Note: The full value of consideration adopted for calculating capital gains u/s
45(5 A) shall be deemed as the cost of acquisition of the share in the hands of
individual/HUF.

IMPORTANT NOTE: The beneficial provisions stated u/s 45(5A) shall not apply where the
assessee transfers his share in the project to any other person on or before the date of issue
of the aforementioned completion certificate. In such cases, capital gains would be taxable
in the year in which possession of immovable property is handed over to the developer for
development of project.

SPECIAL PROVISIONS RELATING TO COMPANIES

Section 46

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Capital Gains on Distribution Of Assets By Companies In Liquidation
Section 46 applies in case of distribution of assets by a company to its shareholders in the event of
its liquidation. The tax treatment of this transaction have been explained below:
• IN THE HANDS OF THE COMPANY: Distribution of assets by a company to its shareholders in the
event of its liquidation is not regarded as transfer and thus no capital gain arises in the hands of the
company.
• IN THE HANDS OF THE SHAREHOLDERS:
Capital gains shall be computed in the hands of the shareholders in the manner shown in the table
given below. For determining the period of holding, the period subsequent to the date on which the
company goes into liquidation shall not be considered.
Particulars Amount (Rs)
Sum of Money (+) FMV of Assets Received as on the Date of Distribution XXXX
Less: Deemed Dividend u/s 2(22)(c) (XXXX)
Full Value of Consideration for Calculation of Capital Gains XXXX
Less: Sellinq Expenses (if any) (XXXX)
Less: Cost of Acauisition/Indexed Cost of Acquisition (as the case may be) (XXXX)
Capital Gains (ST/LT) XXXX
Note: If an asset received by a shareholder from a company in the event of its liquidation is
subsequently sold by him, the FMV of the asset as on the date of distribution shall be taken as its
cost of acquisition.
Section 46A
Capital Gains In Case Of Buy-Back Of Shares, etc
• BUY-BACK OF LISTED SHARES:
Capital gains shall be computed in the hands of the shareholders as per the normal provisions.
• BUY-BACK OF UNLISTED SHARES (DETAILED DISCUSSION IN CA-FINAL):
 The company is liable to pay additional income tax on the amount of distributed income u/s
115QA @ 23.072% (20% plus 12% surcharge plus 3% cess). The manner of calculating
distributed income specified u/s 115QA shall be studied in detail at CA-Final Level.
 Since tax has been recovered from the company in the form of additional income tax, income
arising to the shareholders due to buy-back of unlisted shares shall be exempt in their hands u/s
10(34A).

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Taxability in the Buy-back of Listed Shares by Buy-back of Unlisted Shares by
hands of the Domestic Companies Domestic Companies
Company Not subject to tax in the hands of the Subject to additional income-tax @
company 23.072% in the hands of the company
Shareholders Income arising to shareholders taxable Income arising to shareholders exempt
as capital gains u/s 46A u/s 10(34A)

Section 47 (Most Important)

TRANSACTIONS NOT REGARDED AS ‘TRANSFER’
The following transactions shall not be regarded as "transfer and therefore no capital gains
would arise in the following circumstances: (the list is not exhaustive; only the portions relevant
for our syllabus have been included hereunder)
1. Any distribution of capital assets on the total or partial partition of a HUF;
2. Any transfer of capital asset under a gift or will or inheritance or under an irrevocable
trust;
3. Any transfer of a capital asset by a holding company to its subsidiary company or vice versa
provided the following two conditions are satisfied:
 100% shares of the subsidiary company are held by the holding company; and
 the transferee company is an Indian company.

Section 47A - Withdrawal of Exemption (Holding-Subsidiary Transaction):

• The above exemption will be withdrawn if before the expiry of 8 years from the date of transfer of
a capital asset:
a) the capital asset is converted into stock-in-trade by the transferee company; OR
b) the holding company ceases to hold 100% share capital of the subsidiary company.
• In the above two cases, the amount of capital gains exempt earlier shall be deemed to be the
income of the transferor company chargeable u/h ‘capital gains' of the year in which the original
transfer took place.
4. Any transfer of a capital asset by the amalgamating company to the amalgamated company in a
scheme of amalgamation provided the amalgamated company is an Indian company;
5. Any transfer of a capital asset by the demerged company to the resulting company in a scheme of
demerger provided the resulting company is an Indian company;

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6. Allotment of shares of the amalgamated company to a shareholder of the amalgamating company
in lieu of his shareholding in the amalgamating company provided the amalgamated company is an
Indian company;
7. Allotment of shares of the resulting company to a shareholder of the demerged company in lieu
of his shareholding in the demerged company provided the resulting company is an Indian
company;
8. Conversion of bonds, debentures, deposit certificates, etc of a company into shares or
debentures of that company;
9. Conversion of preference shares of a company into equity shares of that company;
10. Any transfer of any of the following capital assets to the Government, University, the National
Museum,
National Art Gallery, National Archives or any other public museum or institution notified by the
CG:
 work of art;
 archaeological, scientific or art collection;
 book;
 manuscript;
 drawing/painting/photograph; or
 print.

11. Any transfer of a capital asset in a transaction of reverse mortgage (meaning of reverse
mortgage has been given later in this chapter);
12. Transfer of sovereign gold bonds issued by RBI under Sovereign Gold Bonds Scheme,
2015 by an individual provided such transfer takes place by way of redemption (sale);
Combined Analysis of Section 56(2)(vii)/56(2)(x), Section 47, Section 49 and Section 50
CASE 1: Gift Is Exempt In The Hands Of The Recipient (EX:-Inheritance, Related party) {ie No
Amount is Taxable u/s 56(2)(vii)/56(2)(x)}

Transferor Transferee

Any Person Any Person

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Any Sum of a) Shares or e)
Money Immovable Archaeological
By Cheque Property Securities; Collections
Or Cash
b) Jewellery f) Sculptures
c) Drawings g) Any Work
of Art
d) Paintings h) Bullion

Exempt Received Received for

Irrespectiv Consideration
Without
e of the Gift Less Than SDV of
Amount Consideration the Property

Received Received for

Consideration
Without
Less Than
Consideratio FMV of Capital
n Asset
SELLER: Capital
SELLER: Section
Gains Exempt
50C Shall Apply
u/s 47
SELLER: Capital SELLER: Capital
Gains Gains Taxable
BUYER:
Exempt u/s 47 (Section 50C)
BUYER: • Gift: Not Taxable
• Gift: Not Taxable • COA for New
Owner: Purchase BUYER:• Gift:
• COA for New Owner: BUYER: • Gift: Not Taxable •
Price
COA of Previous Not Taxable • COA for New
Owner • Period of COA for New Owner:Purchase
Holding of Owner: COA of Price
• Period of Holding of • Period
Previous Owner Previous Owner of Holding of
Previous Owner to be
NOT to be • Period of Previous Owner
Considered
Considered Holding of NOT' to be
• CIT v. Manjula Shah Previous Owner Considered• CIT
• CIT v. Manjula
Applicable to be v. Manjula Shah
Shah NOT
Applicable Considered • NOT Applicable

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CIT v. Manjula
Shah Applicable

POINTS TO BE NOTED:
 Redemption of debentures, zero coupon bond as well as preference shares is treated as
’transfer* and capital gains shall be computed in the hands of the holder of the security in
the normal manner.
 Section 47 applies where any capital asset is gifted by a person to any other person. The
gift has to be a pure gift (i.e no consideration should be involved at all).
 Where a capital asset has been sold for a value less than its FMV/SDV, capital gains shall
be computed and Section 47 shall not apply.
 In case of land or building or both, Section 5OC would apply where land or building or
both have been transferred for a value less than their respective SDV. Further, Section
50CA would apply where unlisted shares have been transferred for a value less than their
FMV.
 Where a person receives any ’property’ from any non-related person without
consideration (ie pure gift) or for inadequate consideration, provisions relating to
taxation of gifts as given u/s 56(2)(x)would apply. Section 56(2)(x) has been introduced
with effect from PY 2017-18. Till PY 2016-17, taxation of gifts was governed by Section
56(2)(vii) which was applicable only in case of individual/HUF.

SOVEREIGN GOLD BOND SCHEME, 2015

• Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold issued by
the RBI on behalf of Government of India. Investors have to pay the issue price in cash and the
quantity of gold for which the investor pays is protected, as he receives the ongoing market price at
the time of redemption/premature redemption.
• This scheme has been introduced by the Government of India to reduce the demand for physical
gold and thus reduce the foreign exchange outflow due to import of gold. The two-fold benefits of
this scheme are:
1. The gold bond would serve as a substitute for physical gold; and
2. The gold bond would provide security to the individual investor investing in gold for meeting
their social obligation.

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 INCOME UNDER THE HEAD CAPITAL GAIN
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• SGBs offer a superior alternative to holding gold in physical form. The risks and costs of storage
are eliminated. Investors are assured of the market value of gold at the time of maturity and
periodical interest. SGBs are free from issues like making charges and purity in the case of gold in
jewellery form. The bonds are held in the books of the RBI or in Demat form eliminating risk of loss
of scrip, etc.
• A fixed interest of 2.75% p.a. is payable on the amount of initial investment on semi-annual basis.
Such periodical interest is fully taxable in the hands of the investor.
• Redemption at the time of maturity:
If an individual investor doesn't sell SGBs during their prescribed duration and waits for
their redemption, capital gains arising to the individual investor on redemption of SGBs are
exempt from capital gains tax. Section 47 provides that such redemption shall not be treated
as a ‘transfer’ for the purposes of levy of capital gains tax.
• Sale before maturity (premature redemption):
If SGBs are transferred by an assessee to any other person before their maturity, such sale would
be liable to capital gains tax. However, benefit of indexation would be available in respect of long-
term capital gains arising from transfer of such SGBs.
Combined Analysis of Section 56(2)(vii)/56(2)(x), Section 47, Section 49 and Section 50C
CASE 2: Gift Is Taxable In The Hands Of The Recipient {ie Gift Provisions Given u/s
56(2)(vii)/56(2)(x) Apply}
Transferor Transferee

Any Person Any Person

Any a) Shares or e) Any Work of

Sum of Immovable Art.
Money Property Securities; f)
By Aggregat Aggregat
Archaeological
Cheque eeeEEEE e
Or Cash b) Jewellery Collections
c) Drawings g) Sculptures
d) Paintings h) Bullion
Aggregat
Taxable Received Received for e
if Gift
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 INCOME UNDER THE HEAD CAPITAL GAIN
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Amount Without Consideration
Exceeds Less Than Received for
Consideration Received
Rs Consideration
SDV of the Without Less Than
50,000
Property FMV of Capital
Consideration
Asset

SELLER: Capital
SELLER: Section
Gains Exempt
50C Shall Apply
u/s 47
SELLER:
SELLER: Capital Capital Gains
Gains Exempt u/s 47 Taxable
(Section 50C)
BUYER: BUYER:
• Gift: Taxable if • Gift: Taxable if BUYER:
SDV of Property Diff. b/w Purchase
Exceeds Rs Price &. SDV • Gift: Taxable if
50,000 Exceeds Rs 50,000 BUYER: Diff. b/w
Purchase Price
• COA for New • COA for New • Gift: Taxable if FMV
& FMV Exceeds
Owner: SDV of Owner: SDV of of Property Exceeds
Rs 50,000
Property Property Rs 50,000
• COA for New
• Period of • Period of • COA for New
Owner: FMV of
Holding of Holding of Owner: FMV of
Property
Previous Previous Owner Property
Owner NOT to NOT to be • Period of
• Period of Holding of
be Considered Considered Holding of
Previous Owner NOT
Previous Owner
• CIT v. Manjula • CIT v. Manjula to be Considered
NOT to be
Shah NOT Shah NOT • CIT v. Manjula Shah Considered
Applicable Applicable NOT Applicable
• CIT v. Manjula
Shah NOT
Applicable

Section 49 (Most Important)

ASCERTAINMENT OF COST OF ACQUISITION IN SPECIFIED CIRCUMSTANCES

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Nature of Transaction Cost of Acquisition to the Period of Holding (For
Assessee Determining Whether Capital
Asset is ST/LT)
Allotment of Shares in the Cost of acquisition of shares of the Period of holding would also
Amalgamated Company amalgamating company shall be include the time period for which
in a Scheme of treated as the cost of acquisition of the shares were held in the
Amalgamation shares of the amalgamated amalgamating company
company
Conversion of Cost of acquisition of debentures Period of holding would include
Debentures into Shares shall be treated as the cost of the time period for which
acquisition of shares debentures were held by the
assessee
Conversion of Preference Cost of acquisition of preference Period of holding would include
Shares into Equity Shares shares shall be treated as the cost of the time period for which
acquisition of equity shares. preference shares were held by
the assessee
Gift Transactions (Pure Gift /Inadequate Consideration) (+) Other Transactions Covered u/s 47
• Property Gifted is SDV/FMV of the property Period of holdinq would not
Taxable in the hands of considered for determining the include the period of holding of
Recipient u/s taxable amount of gift u/s the previous owner
56(2)(vii)/56(2)(x) 56(2)(vii)/56(2)(x) shall be taken
as cost of acquisition in the hands of
the new owner
• Other Transactions Cost of acquisition of previous Period of holding would also
Covered u/s 47 owner shall be taken as cost of include the period of holding of
acquisition in the hands of the new the previous owner
owner
Note 1: Previous owner means the last previous owner of the capital asset, who acquired it through
a mode of acquisition other than those covered u/s 47. In other words, previous owner means the
last previous owner who actually paid for the asset.
Note 2: Where the capital asset has been acquired by the previous owner before 01.04.2001, option
to take FMV of the capital asset as on 01.04.2001 shall be available.
Note 3: Cost of improvement incurred by the previous owner on or after 01.04.2001 shall also be
taken into consideration at the time of computation of capital gains in the hands of the new owner.
Note 4: Indexation in case of transactions covered u/s 47:

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• Cost of Improvement:
Proviso to Section 48 states that indexation in respect of cost of improvement shall apply from the
year in which improvement to the asset took place. Therefore, cost of improvement shall be indexed
from the year in which the expenditure was actually incurred by the previous owner or the new
owner. •
• Cost of Acquisition:
□ Proviso to Section 48 states that indexation in respect of cost of acquisition shall apply from the
year in which the asset was first held by the assessee.
□ However, in a recent decision given by the Bombay High Court in the case of CIT v Manjula Shah,
it was held that indexation in respect of cost of acquisition shall apply from the year in which the
capital asset was acquired by the previous owner as opposed to taking indexation from the year in
which the current owner acquires it.
□ ICSI’s / ICAI’s study material has solved the answer using both the approaches. For examination
purposes, we shall follow the judgement given by the Bombay High Court and justify our approach
with the help of a note to this effect.

Section 50 (Already Discussed u/h PGBP)

CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS
• Capital gains arising on sale of depreciable assets shall always be deemed to be short-term capital
gains irrespective of their period of holding (ie indexation benefit would not be available even if the
period of holding of such assets is more than 36 months).
• The manner of computation of capital gains in case of sale of depreciable assets has already been
discussed u/h PGBP. (To arrive at taxable capital gains, WDV of the block and expenses on transfer
shall be deducted from full value of consideration)

Section 50A (Already discussed u/h PGBP)

CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS OF ELECTRICITY COMPANIES
• Section 50A applies to assessees engaged in the generation or generation A distribution of
power if they have opted to charge depreciation as per SLM method. The excess of sale price
over the actual cost of the asset shall be treated as capital gains as per Section 50A.
Section 50B - CAPITAL GAINS IN CASE OF SLUMP SALE

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Meaning of Slump sale refers to sale of entire business of an undertaking as a whole for a
Slump Sale lumpsum consideration. In case of slump sale, the purchase consideration
should be arrived at without assigning individual values to individual assets
and individual liabilities.
Note: If the values of assets and liabilities have been determined individually only
for the purpose of payment of stamp duty, registration fees or other similar taxes,
such transaction would still be covered under the scope of ‘slump sale'.
Computation • Capital gains shall be taxable in the year in which the undertaking has been
of Capital sold.
Gains
The amount of capital gains shall be computed as follows:
Particulars Amount (Rs)
Price at which Undertaking has been sold XXXX
Less: Expenses in connection with sale of (XXXX)
Undertaking
Less: Net-Worth of the Undertaking (XXXX)
Capital Gains (ST/LT) XXXX
• Short-term capital gains would arise if the undertaking was owned by the
assessee for a period of 36 months or less.
• Long-term capital gains would arise if the undertaking was owned by the
assessee for a period exceeding 36 months. Benefit of indexation would not be
available in such cases.
How to Net Worth = Total Assets (-) Total Liabilities
Calculate Net-
• In case of depreciable assets, their WDV shall be taken into consideration
Worth of the
whereas for other non-depreciable assets, their book values shall be taken into
Undertaking
consideration.

• Revaluation of assets shall be completely ignored.

• Where the full cost of an asset has been allowed as deduction u/s 35AD, its value
shall be taken as NIL at the time of computation of net worth.
• All the liabilities payable shall be taken into consideration.

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Determination of Full Value of Consideration/SC

Value Of Consideration Received Value Of Consideration Received CAN

CANNOT Be Ascertained/Determined Be Ascertained/Determined

Any Of The Special Cases Mentioned On The

Section 50D shall apply and the FMV of Adjacent Page Is Applicable {Section 45(1A),
the asset transferred as on the date of 45(2), 45(3), 45(4), 45(5), 45(5A), 46(2)}
transfer shall be adopted as the full vaiue
of consideration
Determine the full value of consideration as per
the law stated under the applicable section

Land/Building/Both Have Been Transferred

(Special Cases)

Section 50C shall apply and higher of sale price

and SDV shall be taken as full value of
consideration

Unlisted Shares Have Been Transferred

(Special Cases)

Section 50CA shall apply and higher of sale price

and FMV shall be taken as full value of
consideration

Asset Transferred Is Other Than Immovable

Property & Unlisted Shares (Special Cases)

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No specific section applicable in this case. Actual
consideration received/receivable shall be
adopted as the full value of consideration

FULL VALUE OF CONSIDERATION ('FVC')

General Full Value of Consideration (FVC) refers to the whole amount
received/receivable by the transferor in connection with the transfer of a
Meaning
capital asset. In its general sense, FVC does not have any reference to the market
value of the capital asset.
Full Value of
Consideration
Relevant Mode of Transfer Deemed Full Value of
in Special
Section Consideration
Cases
45(1A) Money/asset received from an Money/FMV of asset received as
insurance company on damage, on the date of receipt
destruction, etc of a capital asset
45(2) Conversion of capital asset into FMV of the capital asset as on the
stock-in- trade date of conversion
45(3) Capital contribution in kind by a Amount recorded in the books of
partner or member into accounts of Firm/AOP/BOI to
Firm/AOP/BOI give effect to such capital
contribution
45(4) Distribution of capital asset to FMV of the capital asset as on the
partner or member on dissolution of date of dissolution
Firm/AOP/BOI
46(2) Money/asset received by the [{Money + FMV of asset as on the
shareholders of a company in the date of distribution} - {Amount
event of liquidation of the company deemed as dividend u/s
2(22)(c)}]

Section 50CA (Introduced Vide The Finance Act, 2017)

FULL VALUE OF CONSIDERATION IN CASE OF UNQUOTED SHARES
• Section 50CA has been made applicable with effect from PY 2017-18 in case of transfer of
unquoted shares (ie unlisted shares). Section 50CA is not applicable in case of transfer of listed
shares.
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 INCOME UNDER THE HEAD CAPITAL GAIN
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• Section 50CA provides that where the consideration received for transfer of unlisted shares
is less than their Fair Market Value ('FMV'), the FMV of such unlisted shares shall be deemed
as the full value of consideration for the purposes of computation of capital gains. The FMV of
unlisted shares shall be calculated in such manner as may be prescribed.
Illustration: Mr X transfers 1,000 shares in A Ltd on June 28, 2021 to Mr Y for a consideration of Rs
9,40,000 (FMV of shares as on the date of transfer is Rs 10 lakhs). These shares were purchased by
Mr X on July 19, 2020 for Rs 7 lakhs. Find out the tax consequences of the above transaction in the
following two cases:
• Case 1: Shares of A Ltd are not quoted on any stock exchange in India.
• Case 2: Shares of A Ltd are regularly quoted on BSE/NSE but Mr X has transferred the shares to
Mr Y privately and not through stock exchanges.

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COMPOSITE TRANSFER OF LAND & BUILDING:
• Land and building are treated as two separate assets under the Income Tax Act, however there
might be a case of composite transfer where both the assets are transferred simultaneously. In such
situations, it may be possible that the period of holding of land is more than the period of holding of
building.
• Transferor doesn't carry any business/profession:
Both land and building would be treated as long-term capital assets if their holding period is more
than 24 months. If their holding period doesn't exceed 24 months, they would be treated as short-
term capital assets.
• Transferor carries on business/profession:
 If depreciation is claimed on building, the building would always qualify as a short-term capital
asset irrespective of the period of its holding.
 Depreciation is not available in respect of land. Land would be treated as a long-term capital
asset if its holding period is more than 24 months. If its holding period doesn't exceed 24 months,
it would be treated as a short-term capital asset.

• How to attempt practical questions?

 If both land and building qualifies as long-term capital assets, capital gains can be computed
combinedly where the cost of land can be taken as cost of acquisition and the cost of building
can be taken as cost of improvement. Same position can be adopted if both the assets qualify as
short-term capital assets.
 If land qualifies as long-term capital asset and building qualifies as short-term capital
asset, capital gains in respect of land and capital gains in respect of building should be
computed separately as per the decision of the Karnataka High Court in the case of CIT v.
C.R.Subramanian {(1999) 242 ITR 342}].

ADOPTION OF SDV IN CASE OF AGREEMENT TO SELL LAND/BUILDING/BOTH:

Section 43CA: Transfer of SDV on the date of agreement can be adopted if the advance
Land/Building/Both as amount has been received by any mode other than cash on
Stock-in-Trade or before the date of agreement.

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Section 50C: SDV on the date of agreement can be adopted if the advance
Transfer of amount has been received by account payee cheque or
Land/Building/Both as account payee draft or ECS through a bank account on or
Capital Asset before the date of agreement.

Illustration: SDV on the date of agreement = Rs 80 lakhs; and SDV on the date of registration = Rs
90 lakhs.
Cases Mode Of Receipt Of Advance SDV To Be Adopted u/s SDV To Be Adopted u/s
43CA 50C
Case 1 Booking amount has been
received in cash
Case 2 Booking amount has been
received by a bearer/crossed
cheque
Case 3 Booking amount has been
received by an account payee
cheque

Section 50D
FMV DEEMED TO BE FULL VALUE OF CONSIDERATION IN CERTAIN CASES
Where, on transfer of a capital asset, consideration received by an assessee is not ascertainable
or cannot be determined, then fair market value of the asset as on the date of transfer shall
be deemed as the full value of consideration received or accruing as a result of such transfer.

Section 50C
FULL VALUE OF CONSIDERATION IN CASE OF REAL ESTATE TRANSACTIONS
Section 50C makes a special provision for determining the full value of consideration in cases of
transfer of immovable property. it provides that where the consideration declared to be received or
accruing as a result of the transfer of land or building or both, is less than the value adopted or
assessed by any authority of a State Government (i.e. “stamp valuation authority”) for the purpose
of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be

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deemed to be the full value of the consideration, and capital gains shall be computed on the basis of
such consideration under Section 48 of the income-tax act. Provided that where the stamp duty
value does not exceed 110% of the consideration received or accruing as a result of the transfer, the
consideration so received or accruing as a result of the transfer shall, for the purposes of computing
profits and gains from transfer of such asset, be deemed to be the full value of the consideration.
(Amended by the Finance Act, 2020)
Rationalization of section 50C in case sale consideration is fixed under agreement executed prior to
the date of registration of immovable property.
– Section 50C of the act has been amended in line with section 43Ca to provide that where the date
of the agreement fixing the amount of consideration and the date of registration for the transfer
of the capital asset are not the same, the value adopted or assessed or assessable by the stamp
valuation authority on the date of agreement may be taken for the purposes of computing full
value of consideration for such transfer.
– it is further provided that this provision shall apply only in a case where the amount of
consideration referred to therein, or a part thereof, has been received by way of an account payee
cheque or account payee bank draft or by use of electronic clearing system through a bank
account or through such other prescribed electronic mode as may be prescribed on or before the
date of the agreement of transfer of such immovable property.
Reference to Valuation Officer: Where

– the assessee claims before an Assessing Officer that the value so adopted or assessed or
assessable by the authority for payment of stamp duty exceeds the fair market value of the
property as on the date of transfer and
– the value so adopted or assessed or assessable by such authority has not been disputed in any
appeal or revision or no reference has been made before any other authority, court or High Court,
the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer as defined
in section 2(r) of the Wealth-tax act, 1957 [Section 50C(2)].
– Where the value ascertained by such Valuation Officer exceeds the value adopted or
assessed or assessable by the Stamp authority: the value adopted or assessed or assessable
shall be taken as the full value of the consideration received or accruing as a result of the transfer
[Section 50C(3)].

Reverse Mortgage [Transaction of Reverse Mortgage Exempt u/s 47]

• Regular Mortgage: The assessee mortgages his house with the bank for taking a loan, which will
be repaid by him along with applicable interest.

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• Reverse Mortgage:
□ Under reverse mortgage, an individual (generally a senior citizen) mortgages his house with a
bank under the relevant scheme and the bank agrees to pay him a specified value of the property in
lumpsum or installments. The borrowed money is not required to be repaid by the individual during
his lifetime.
□ On the death of the individual, the bank shall release the mortgaged property to his legal heirs if
they repay the principal amount along with the applicable interest. In case the legal heirs are unable
to repay the amount, the bank can sell the property and recover its dues.
□ Tax on capital gains arising on such sale shall be paid by the bank to the government and the
leftover balance (if any) shall be handed to the legal heirs of the individual.
□ As per Section 47, mortgage of property by the individual with the bank shall not be treated
as transfer and thus not liable to capital gains. Further, as per Section 10(43), any money
received by individual from the bank on mortgage of property in lumpsum or in installments
is exempt from tax.

MISCELLANEOUS TOPICS
Section 51 {Read Along with Section 56}: Forfeiture Of Advance Money
• General Meaning: A person initially enters into an agreement for sale of any capital asset and
receives the advance money from the proposed buyer but subsequently the proposed buyer refuses
to purchase the said capital asset and the proposed seller forfeits the advance money received.
• Treatment:
 Advance Money Received and Forfeited by the Assessee on or after 01.04.2014:

As per Section 56, the advance money so forfeited by the assessee is treated as the income of the
assessee u/h ’income from other sources'.
 Advance Money Received and Forfeited by the Assessee upto 31.03.2014:

Advance money so forfeited shall be reduced from the cost of acquisition of the capital asset while
computing gains when the capital asset is finally transferred or sold. In case of long-term capital
gains, indexation would be calculated on the cost so reduced.
Example: Mr A, a recently married individual, buys a house for Rs 10 lakhs on 01.07.2012. His wife
runs away with his neighbour shortly after moving into this house. He agrees to sell his house to Mr
B and an advance money of Rs 2 lakhs has been received by Mr A from Mr B on 01.10.2012. After
coming to know about the tragedy which happened with Mr A, Mr B cancels this deal and the
advance money is forfeited. Mr A ultimately sells the house to Mr C for Rs 13 lakhs on 01.06.2013.

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In this case, cost of acquisition shall be taken to be Rs 8 lakhs (Rs 10 lakhs - Rs 2 lakhs) and STCG of
Rs 5 lakhs would arise to Mr A.

CAPITAL GAINS EXEMPT UNDER SECTION 10

Section 10(37): Exemption From Capital Gains In Case Of Urban Agricultural Land
• Section 10(37) provides that capital gains arising on transfer of urban agricultural land are exempt
if all the following conditions are fulfilled:
□ Capital gains have been earned by an individual/HUF from the transfer of an agricultural land
situated in urban area.
□ The agricultural land is used for agricultural purposes by such individual or his parents or such
HUF for at least 2 years immediately preceding the date of transfer.
□ The transfer takes place by way of any of the two modes prescribed u/s 45(5):
1) Agricultural land has been compulsorily acquired by the Government or any other similar agency
under any law; OR
2) Consideration for transfer of agricultural land has been determined or approved by the Central
Government or RBI.
• Capitals gains computed with reference to original compensation as well as enhanced
compensation are exempt.
Further, both STCG as well as LTCG are exempt.
 Tax on long-term capital gains in case of specified securities [Section - 112A New section
Inserted by Finance Act of 2018](IMP)

Applicable on sale of equity share listed on a recognised Stock exchange or unit of equity-oriented
fund or unit of business trust, where such sale transaction is chargeable to securities transaction
tax (STT).
Prior to 01.04.2018 any LTCG on sale of such specified securities was exempt under Section 10(38).
This exemption has been withdrawn by the Finance Act, 2018 w.e.f. Assessment Year 2019-20 and
a new section 112A is introduced in the Income-tax Act.
As per this new section, where the total income of an assessee, includes any LTCG income [which
was earlier exempt under section 10(38) upto 31.03.2018] shall now be taxed at the rate of 10% on
such capital gains exceeding Rs. 1,00,000. The benefit of indexation shall not be allowed on such
LTCG. Deductions under Chapter VIA (section 80C to 80U) not to be allowed from such LTCG. Rebate
of tax under section 87A not to be allowed from the tax payable on such LTCG.

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The cost of acquisitions for computing LTCG in respect of a listed equity share acquired by the
assessee before February 1, 2018, shall be deemed to be the higher of following:
a) The actual cost of acquisition of such asset; or

b) Lower of following :

(i) Fair market value of such shares as on January 31, 2018; or

(ii) Actual sales consideration accruing on its transfer

Note: The Fair market value of listed equity share shall mean its highest price quoted on the stock
exchange as on January 31, 2018.
Illustration: Mr. Raman is a salaried employee. In the month of January, 2015 he purchased 100 shares
of X Ltd. @ Rs. 1,400 per share from Bombay Stock Exchange. These shares were sold through BSE in
April, 2018 @ Rs. 2,600 per share. The highest price of X Ltd. share quoted on the stock exchange on
January 31, 2018 was Rs. 1,800 per share. What will be the nature of capital gain in this case?

TAXABILITY OF CAPITAL GAINS

Section 111 A: Tax on Short Term Capital Gains On Sale Of Equity Shares And Units Of Equity
Oriented Funds On Which STT Is Chargeable
• As per Section 111 A, short-term capital gains arising on sale of equity shares and units of equity-
oriented fund are taxable @ 15% if STT has been paid on sale of such shares/units. (STCG not
covered u/s 111A are taxable at normal rates applicable to the assessee).
• Deductions u/s 80C-80U are not allowed from STCG u/s 111 A. However, in case of resident
individuals and resident HUF, adjustment of deficiency is allowed from STCG u/s 111 A.
Section 112: Tax on Long Term Capital Gains
• Long-term capital gains other than those covered u/s 10(38) are taxable @ 20%.
• Deductions u/s 80C-80U are not allowed from LTCG. However, in case of resident individuals and
resident HUF, adjustment of deficiency is allowed from LTCG.
• In case of long-term capital gains arising from the transfer of following capital assets, the assessee
has the option to pay tax at the rate of 20% with indexation benefit or 10% without indexation
benefit:
 Listed shares (Listed-units)
 Listed securities (such as debentures, bonds, etc)
 Zero Coupon Bond

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(In case of bonds and debentures, benefit of indexation is not available. Accordingly, it is beneficial
for the assessee to pay tax @ 10% on LTCG arising on transfer of listed bonds and listed debentures.)

Adjustment of LTCG u/s 112, u/s 112A and STCG u/s111A against the basic exemption limit
Only a resident individual/HUF can adjust the basic exemption limit (i.e. Rs. 2,50,000 or 3,00,000 or
Rs. 5,00,000 limits) against LTCG U/s 112, U/s 112A and STCG U/s 111A. Thus a non-resident
individual/ HUF cannot adjust their basic exemption limit (Rs. 2,50,000) against such capital gains.
But such adjustment is possible only after making adjustment of other income first. In other words,
first other incomes are to be adjusted against the exemption limit and then the remaining limit (if
any) can be adjusted against LTCG U/s 112, U/s 112A and STCG U/s 111A.

Summary of Exemptions Available u/s 54, 54B, 54D, 54EC, 54EE & 54F
Particulars Section 54 Section 54B Section 54D Section Section Section 54F
54EC 54EE
Eligible • Individual • Individual Any Person Any Person Any Person • Individual
Assessee • HUF • HUF • HUF
Eligible CG Long-Term LT/ST LT/ST Long-Term Long-Term Long-Term
Any Long-
Any Long-
Term
Term Any Long-
Transfered. Residential Urban Capital
Capital Term Capital
HP Agricultural Land A Asset
Asset Asset except
Land Building
Residential
Eligible
HP
Asset 1 Residential LT Bonds
Notified
HP/ OR 2 R Agricultural Land A of NHAI,
Bonds of
H/P UPTO 2 Land Building RECL or
Specified Residential
Purchased CRORES (Urban/Rural) Any Other
Start-up HP
Notified
Fund
Bonds
Time Period • Purchase: 2 Years After 3 Years After 6 Months 6 Months • Purchase:
for Purchase the Date of the Date of After the After the
1 Year 1 Year Before;
of New Asset Transfer Receipt of Date of Date of
Before; or or
Compensation Transfer Transfer

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2 Years After 2 Years After
the Date of the Date of
Transfer Transfer
• •
Construction: Construction:
3 Years After 3 Years After
the Date of the Date of
Transfer Transfer
Amount of 100% 100% 100% 100% 100% Investment x
Exemption Investment Investment Investment Investment Investment LTCG Net
Allowed as Allowed as Allowed as Allowed as Allowed as Consideration
Exemption Exemption Exemption Exemption Exemption
(No (No Maximum (No Maximum (Max Rs 50 (Max Rs 50
Maximum Limit) Limit) Lakhs) Lakhs)
Limit)
Applicability Applicable Applicable Applicable Not Not Applicable
of CGAS Applicable Applicable
Withdrawal 3 Years Lock- 3 Years Lock- 3 Years Lock- 3 Years 3 Years 3 Years Lock-
of in Period; in Period; in Period; Lock-in Lock-in in Period;
Exemption Period; Period; Exemption
Exemption Exemption Exemption
Exemption Exemption Allowed
Allowed Allowed Allowed
Allowed Allowed Earlier
Earlier to be Earlier to be Earlier to be
Earlier Earlier Taxable as
Reduced Reduced from Reduced from
Taxable as Taxable as LTCG when
from COA COA when the COA when the
LTCG when LTCG when the New Asset
when the New Asset is New Asset is
the New the New is Tfd.
New Asset is Tfd. Tfd.
Asset is Asset is Tfd.
Tfd.
Tfd.

Section 54B: URBAN Section 54D: L&B transferred Section 54F: On the date of transfer,
AGRI.LAND trfd should should be used for the purposes the individual/HUF should not own
be used for agricultural of industrial undertaking for more than 1 Residential HP.
purposes for at least Exemption shall also be withdrawn in
at least 2 years immediately
last 2 years before the cases where any additional Residential
before the date of
transfer date by the HP is purchased (within a period of 1
individual himself (or year before and 2 years after) or
his parents) or HUF.

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transfer and the transfer of L&B constructed (within a period of 3
should take place by way of years).
compulsory acquisition.

Section 54
EXEMPTION ON TRANSFER OF HOUSE PROPERTY USED FOR RESIDENCE
Eligible Individual or HUF
Assessee
Nature of Asset • The asset transferred should be a residential house, the income from which is
Transferred & chargeable u/h 'income from house property'.
Period of its
• The residential house so transferred should be a long-term capital asset.
Holding
• Therefore, exemption u/s 54 is available in respect of long-term capital gains
arising from transfer of a residential house.
Qualifying The assessee should purchase/construct one residential /OR TWO Residential
Asset & Time houses in India at the option of the assessee, where capital gains do not
Limit for its exceed Rs.2 crores within the following time limits:
Acquisition
• In case of purchase: 1 year before or 2 years after the date of transfer
• In case of construction: 3 years after the date of transfer

Amount of Lower of the following two shall be available as exemption:

Exemption
• Amount of long-term capital gains; or
• Amount invested in purchase/construction of one residential house
Capital Gains • The amount of capital gains, which is not utilized by the assessee for purchase/
Account construction of a new house till the due date of furnishing of ROI, should be
Scheme, 1988 deposited by him under Capital Gains Account Scheme till the last date of
furnishing ROI. If the amount is not so deposited, capital gains would become
taxable.
• The amount deposited in Capital Gains Account Scheme should be withdrawn
and utilized for the specified purpose within the prescribed time period.
Otherwise, the unutilized amount shall be considered to be LTCG of the previous
year in which such prescribed time period has expired.

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Example: Mr A has transferred a Iong-term residential house on 01.10.2021. The
time limits for acquiring one residential house for availing exemption u/s 54
are:
 In case of purchase: 01.10.2020 to 30.09.2021
 In case of construction: 01.10.2021 to 30.09.2024

Let's suppose that 31.07.2022 is the due date of filing ROI for PY 2021-22 in Mr
A's case. If Mr A has not invested any amount till 31.07.2022 and he wants to
claim exemption u/s 54, he should deposit the amount in CGAS by 31.07.2022.
If the amount deposited in CGAS is not utilized by 30.09.2024, the unutilized
amount shall be taxable as LTCG during PY 2024-25.
Withdrawal of • The new house so purchased/constructed should not be transferred for a
Exemption period of 3 years from the date of its purchase/construction.
• Otherwise, at the time of computation of capital gains on the transfer of the
new house, the cost of acquisition of the new house shall be reduced by the
amount of exemption allowed earlier u/s 54. Accordingly, the amount of capital
gains would increase.
Example: Mr A transferred a Long-term residential house on 01.10.2021. He
bouaht a new house for Rs 20 lakhs on 01.02.2022 and an exemption of Rs 15
lakhs was allowed to him u/s 54. The new house is transferred by Mr A on
01.05.2023 for Rs 45 lakhs. The COA of the new house shall be recomputed as
Rs 5 lakhs (20L - 15L). Accordingly, an amount of Rs 40 lakhs (45L - 5L) would
be taxable as STCG during PY 2023-24.

Note: Exemption can be claimed only in respect of one residential house property
purchased/constructed in India.
The Finance Act, 2019 has amended to extend the benefit of exemption in respect of
investment made by way of purchase or construction of two residential house properties in
India. This benefit can be exercised subject to the following conditions:
a. Benefit shall be available if the amount of long term capital gains does not exceed Rs. 2
crores.
b. This benefit is available once in a lifetime of the assesse for a particular assessment year
in relation to which this option is exercised.
If till the date of filing the return of income, the LTCG on such transfer of the house is not
utilised (in whole or in part) to purchase or construct another house, then the benefit of

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exemption can be availed by depositing the unutilised amount into Capital Gains Deposit
Account Scheme (CGAS) with any scheduled bank.
If the amount deposited in the Capital Gains Account Scheme in respect of which the assessee
has claimed exemption under section 54 is not utilised within the specified period for
purchase/construction of the residential house, then the unutilised amount (for which
exemption is claimed) will be taxed as income by way of long- term capital gains of the year
in which the specified period of 2 years/3 years gets over.
If the new house is also transferred within 3 years from date of acquisition, the cost of new
house would be reduced by the capital gains exempted earlier under section 54.

Illustration :
Mr. Khan purchased a residential house in the previous year 2006-07 for Rs. 2 crores. The house
property is sold for Rs. 10 crores in the previous year 2021-22 and the capital gain is invested in
two residential house properties worth Rs. 4 crores each. Can he claim the benefit of section 54 in
respect of both houses ?

Section 54 B
EXEMPTION ON TRANSFER OF URBAN AGRICULTURAL LAND
Eligible Individual or HUF
Assessee
Nature of• The asset transferred should be an urban agricultural land used by the
Asset assessee or his parents (in case of an individual) or HUF for agricultural
Transferred A purposes for a minimum period of 2 years immediately preceding its
Period of its transfer.
Holding • The urban agricultural land so transferred can be short-term/long-
term.
[Transfer of urban agricultural land is exempt in certain cases u/s 10(37)]
Qualifying The assessee should purchase another agricultural land (rural/urban)
Asset A Time within 2 years from the date of transfer of original agricultural land.
Limit for its Section 54H: Where an asset has been compulsorily acquired by the
Acquisition Government, the period of investment shall be computed with reference
to the date of receipt of compensation (date of compulsory acquisition).

Amount of Lower of the following two shall be available as exemption:

Exemption • Amount of capital gains; or
• Cost of new agricultural land
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the normal
manner.

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Withdrawal of The new agricultural landshould not be transferred for a period of 3 years
Exemption from the date of its purchase. Otherwise, at the time of computation of
capital gains on thetransfer of new agricultural land, the cost of
acquisition ofsuch land shallbe reduced by the amount of exemption
allowed earlier u/s 54B.

Section 54D
EXEMPTION ON COMPULOSRY ACQUSITION OF LAND & BUILDING
Eligible All assessees (individual, HUF, firms, companies, etc)
Assessee
Nature of Asset • The asset should be land A building forming part of an industrial
Transferred A undertaking and the transfer should take place by way of compulsory
Period of its acquisition of such undertaking.
Holding
• Further, the land A building so transferred should be used for industrial
purposes for a minimum period of 2 years immediately preceding its
transfer.
• The land A building so transferred can be short-term/long-term.
Qualifying The assessee should invest the amount in new land A building to be used
Asset A Time in new industrial undertaking within 3 years from the date of receipt of
Limit for its compensation from the government.
Acquisition
Amount of Lower of the following two shall be available as exemption:
Exemption
• Amount of capital gains; or
• Cost of new land A building
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the normal
manner.
Withdrawal of The new land A building should not be transferred for a period of 3 years
Exemption from the date of its purchase. Otherwise, at the time of computation of
capital gains on the transfer of new land A building, the cost of acquisition
of land A building shall be reduced by the amount of exemption allowed
earlier u/s 54D.

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Section 54 EC
EXEMPTION ON TRANSFER OF ANY LONG-TERM CAPITAL ASSET
Eligible All assessees (individual, HUF, firms, companies, etc)
Assessee
Nature of The asset transferred can be any type of long-term capital asset. In other words,
Asset LTCG from any capital asset are eligible for exemption u/s 54EC.
Transferred
Qualifying The assessee should invest the amount in long-term specified asset within a
Asset A Time period of 6 months from the date of transfer of original long-term capital asset.
Limit for its
Meanina of Iona-term specified asset: Bonds redeemable after 3 years issued by:
Acquisition
• National Highways Authority of India ('NHAI')
• Rural Electrification Corporation Limited (’RECL')
• Any other bond notified by the Central Government in this behalf.
Section 54H: Where an asset has been compulsorilv acquired by the Government,
the period of investment shall be computed with reference to the date of receipt
of compensation (date of compulsory acquisition).
Amount of Lower of the following two shall be available as exemption:
Exemption
• Amount of long-term capital gains; or
• Amount invested in long-term specified asset
However, maximum exemption available u/s 54EC per financial year is limited to
Rs 50 lakhs.
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 do not apply.
Withdrawal of If the long-term specified asset is transferred or converted into money within 3
Exemption years from the date of its purchase, the amount of exemption allowed earlier u/s
54EC shall be deemed to be LTCG of the year in which such asset is transferred
or converted. (Converting long-term specified asset into money refers to a
situation where any loan or advance has been taken on the security of long-term
specified asset)

Section 54 EE (Introduced Vide The Finance Act, 2016)

EXEMPTION ON INVESTMENT IN NOTIFIED UNITS OF SPECIFIED FUND

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Eligible All assessees (individual, HUF, firms, companies, etc)
Assessee
Nature of The asset transferred can be any type of long-term capital asset. In other words,
Asset LTCG from any capital asset are eligible for exemption u/s 54EE.
Transferred
Qualifying For promoting the start-up culture in India, the Government of India has launched
Asset A Time a ’Start-up India Action Plan' which envisages establishment of a fund to raise Rs
Limit for its 2,500 crores annually for four years to finance existing/upcoming start-ups. The
Acquisition assessee should invest the amount in notified units of such a fund which has been
set-up for financing start-ups. The investment should be made within a period of
6 months from the date of transfer of original long-term capital asset.
Amount of Lower of the following two shall be available as exemption:
Exemption
• Amount of long-term capital gains; or
• Amount invested in notified units of specified fund
However, maximum exemption available u/s 54EE per financial year is limited to
Rs 50 lakhs.
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 do not apply.
Withdrawal of If the notified units are transferred or converted into money within 3 years from
Exemption the date of their purchase, the amount of exemption allowed earlier u/s 54EE
shall be deemed to be LTCG of the year in which such asset is transferred or
converted.
(Converting notified units into money refers to a situation where any loan or
advance has been taken on the security of such units)

Section 54 F
EXEMPTION ON TRANSFER OF ANY CAPITAL ASSET OTHER THAN RESIDENTIAL HOUSE
Eligible Individual/HUF provided on the date of transfer of original asset, the
Assessee individual/HUF does not own more than one residential house.
Nature of Asset The asset transferred can be any type of long-term capital asset other than a
Transferred residential house.

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Qualifying The assessee should purchase/construct one residential house in India within:
Asset A Time
• In case of purchase: 1 year before or 2 years after the date of transfer
Limit for its
Acquisition • In case of construction: 3 years after the date of transfer
Section 54H: Where an asset has been compulsorily acquired by the Government
the period of investment shall be computed with reference to the date of receipt
of compensation (date of-compulsory-acquisition).
Amount of Long-Term Investment in New Residential House
Exemption
Capital Gains × Net Consideration (Gross Consideration - Selling
Expenses)

CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the normal manner.
In respect of unutilized amount, exemption proportionate to the unutilized
amount allowed earlier u/s 54F shall be considered to be LTCG of the year in
which such prescribed time period has expired.
Example: Mr A has transferred a Iong-term capital asset other than
residential house on 01.10.2021. The time limits for acquiring one residential
house for availing exemption u/s 54F are:
* In case of purchase: 01.10.2020 to 30.09.2023
* In case of construction: 01.10.2021 to 30.09.2024
Let's suppose that 31.07.2022 is the due date of filing ROI for PY 2019-20 in
Mr As case. If Mr A has not invested any amount till 31.07.2022 and he wants
to claim exemption u/s 54F, he should deposit the amount in CGAS by
31.07.2022.
If the amount deposited in CGAS is not utilized by 30.09.2024, the exemption
which is proportionate to the unutilized amount shall be taxable as LTCG
during PY 2024-25. Let us say amount deposited in CGAS was Rs 40L and
exemption allowed u/s 54F in respect of such deposit was Rs 24L and Rs 15L
was not utilized till the expiry of the prescribed period. Rs 9L (15L*24L/40L)
would be deemed as LTCG of PY 2024-25.
Withdrawal of • If the new residential house is transferred within 3 years from the date of
Exemption its purchase/construction, the amount of exemption allowed earlier u/s 54F
shall be deemed to be LTCG of the year in which the new residential house is
transferred.
• Exemption shall also be withdrawn where the assessee purchases/constructs
any additional residential house other than the new house
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purchased/constructed within the following period. Exemption shall be
withdrawn in the year in which the new house is purchased/constructed:
 In case of purchase:

1 year before or 2 years after the date of transfer of original asset

 In case of construction:

3 years after the date of transfer of asset

OTHER EXEMPTION NOT MUCH IMP

Exemption of capital gain on transfer of assets of shifting of industrial undertaking from
urban area to a Special Economic Zone [Section 54GA]
The exemption is available to all categories of assesses in respect of capital gain arising on the
transfer of fixed assets other than furniture and fittings of industrial undertaking effected in the
course of shifting of such industrial undertaking to any Special Economic Zone.
The conditions for claiming exemptions are as under:
(i) The transfer is effected in the course of or in consequence of shifting the undertaking from an
urban area to any Special Economic Zone. The special Economic Zone may be developed in any
urban area or any other area.

1. Any other area means an area not declared as an urban area.

2. ‘Urban Area’ means any such area within the limits of a municipal corporation of municipality, as
the Central Government may, having regard to the population, concentration of industries, need
for proper planning of the area and other relevant factors, by general or special order, declare
to be an urban area for the purposes of this sub-section.
3. “Special Economic Zone” means each Special Economic Zone notified under the proviso to Sub
section (4) of Section 3 and Sub-section (1) of Section 4 of the Special Economic Zone Act, 2005
(including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone.
[Section 2(za) of the Special Economic Act, 2005].
(ii) Asset transferred is machinery, plant, building, land or any right in building or land used for the
business of industrial undertaking in an urban area;
(iii) The capital gain arising on the asset transferred may be short-term or long-term capital gain.
Normally, it will be short-term capital gain because most of the assets of the industrial
undertaking will be depreciable assets;

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(iv) The capital gain is utilized within 1year before or 3 years after the date of transfer for the
specified purpose.
Specified purpose includes the following:
(a) for purchase of new machinery or plant for the purpose of business of the Industrial
Undertaking in the Special Economic Zone to which the said undertaking is shifted;
(b) acquisition of building or land or construction of building for the purposes of the assessee’s
business in the Special Economic Zone;
(c) expenses on shifting of the old undertaking and its establishment to the Special Economic Zone;
and
(d) incurring of expenditure on such other purposes as specified by the Central Government for
this purpose.

Capital Gain on Transfer of Residential House Property. If inserted in a new manufacturing

SME Company/Eligible Startup [Section 54GB]

Who can claim exemption An Individual or a Hindu undivided family.

Which specified asset is On transfer of a long term residential property (a house or a plot
eligible of land) if transfer takes place during April 1, 2013 and March
31, 2018. (in case of eligible start up, residential property can
be transferred up to March 31, 2022.

Which asset the taxpayer Equity shares of 25% of share capital or voting rights in an
“eligible company
should acquire to get
benefit of exemption
What is the time-limit for Equity shares in an “eligible company” should be acquired on or
before the due date of furnishing of return of income under
acquiring the new asst. section 139(1). The “eligible company” should utilize this
amount for the purchase of a “new asset” within one year from
the date of subscription in equity shares.
How much is exempt Investment in “new asset” by the eligible company net sale
consideration x capital gain. Exemption cannot exceed capital
gain.
It is possible to revokethe In the following cases, exemption will be taken back and the
amount of exemption (or proportionate exemption) given
exemption earlier under section 54 GB will become long-term capital gain
of the assessee (i.e. transferor of residential property). It shall
be taxable in the year in which the assessee or the eligible
company commits the following defaults-
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1. If the equity shares in the eligible company are sold or
otherwise transferred by the assessee within 3 years from the
date of acquisition
2. If the “new asset” is sold or otherwise transferred by the eligible
company within 3 years from the date of acquisition.
3. If the deposit account is not utilized fully or partly by the eligible
company for purchasing the new asset within 1 year from the
date of subscription in equity shares (by the assessee).

Extension of Time for Acquiring New Asset or Depositing or Investing Amount of Capital
Gain (Section 54H)
This section states that where the transfer of the original asset is by way of compulsory acquisition
under any law and the amount of compensation awarded for such acquisition is not received by the
assessee on the date of such transfer, the period of acquiring the new asset by the assessee referred
to in Sections 54, 54B, 54D, 54EC and 54F or for depositing or investing the amount of capital gain
shall be extended. This extended period shall be reckoned from the date of receipt of such
compensation.

AMENDMENT AS PER FINANCE ACT 2021

Definition: According to section 2(14), a capital asset means –

(a) property of any kind held by an assessee, whether or not connected with hisbusiness or
profession;
(b) any securities held by a Foreign Institutional Investor which has invested insuch securities
in accordance with the SEBI regulations.
(c) any unit linked insurance policy (ULIP) issued on or after 1.2.2021, to which exemption
under section 10(10D) does not apply on account of –
(i) premium payable exceeding ` 2,50,000 for any of the previous years during the
term of such policy; or
(ii) the aggregate amount of premium exceeding ` 2,50,000 in any of the previous
years during the term of any such ULIP(s), in a case where premium is payable by
a person for more than one ULIP issued on orafter 1.2.2021.

Unit Linked Insurance Policy Receipts [Section 45(1B)]

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Where any person receives, at any time during any previous year, any amount, under a ULIP
issued on or after 1.2.2021, to which exemption under section 10(10D) does not apply on account
of –
(i) premium payable exceeding ` 2,50,000 for any of the previous years during the term of
such policy; or
(ii) the aggregate amount of premium exceeding ` 2,50,000 in any of the previous years
during the term of any such ULIP(s), in a case where premiumis payable by a person for
more than one ULIP issued on or after 1.2.2021,
then, any profits or gains arising from receipt of such amount by such person shallbe chargeable
to income-tax under the head “Capital gains” and shall be deemedto be the income of the such
person for the previous year in which such amount was received. The income taxable shall
be calculated in such manner as may be prescribed.

COST OF ACQUISITION [SECTION 55(2)]

Goodwill of a business or profession or a trademark or brand name associated with a business or
profession or a right to manufacture, produce or process any article or thing, or right to carry on
any business or profession, tenancy rights, stage carriage permits and loom hours
(1) In case of acquisition from previous owner: In the case of the above capital assets, if
the assessee has purchased them from a previous owner, thecost of acquisition means the
amount of the purchase price.
However, in case of a capital asset, being goodwill of a business or profession,in respect of which
depreciation under section 32(1) has been obtained by the assessee in any previous year (upto
P.Y.2019-20), the cost of acquisition ofsuch goodwill would be the amount of the purchase
price as reduced by thetotal amount of depreciation (upto P.Y.2019-20) obtained by the assessee
under section 32(1).

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4.OTHER SOURCES
Any income includible in the total income of an assessee, which cannot be included under any of the
first four heads of income, is chargeable under the head ‘IOS’.
Following conditions must be satisfied before an income can be taxed under the head “Other
Sources”:
a) There must be an income
b) Such income must not be exempted income
c) Such income must not be income falling under first four heads.
IOS Income may include: (list is not exhaustive)
a) Casual Income
b) Family Pension
c) Gift
d) Dividend Income
e) Premium amount (shares issued on premium)
f) Income from undisclosed sources
g) Income from Sub-Letting of a House Property
h) Director’s Sitting Fee
i) Remuneration received by MP/MLA
j) Interest on bank deposit / deposits with companies or on loan
k) Examiner-ship fee from non-employer
l) Rent from a vacant piece of plot of land
m) Agricultural Income from land situated outside India
n) Interest on Income Tax Refunds
o) Sum received from Keyman Insurance Policy
p) Compensation in connection with termination/modification of employment (if not taxable under
the head “Salaries”)
q) Advance money forfeited in the course of negotiation for transfer of a capital asset.
The following income is chargeable under the head “Income from other sources” only if such
income is not chargeable under the head “Profits and gains of business or profession”:

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a) Income from letting out of plant, machinery or furniture.
b) Where letting out of buildings is inseparable from the letting out of plant, machinery or furniture,
the income from such letting.
c) Interest on Securities.
d) Any sum received by an employer-assessee from his employees as contributions to any provident
fund, superannuation fund or any other fund for the welfare of the employees.

CASUAL INCOME
1) Casual income includes income in the nature of winning from lotteries, crossword puzzles, horse
races (including camel race), card games and other games of any sort, gambling, betting etc.
2) Such winnings are chargeable to tax as per section 115BB. Section 115BB provides that above
casual income would be taxed at a flat rate of 30% [plus surcharge, if applicable, plus H&EC].
3) No expenditure or allowance can be allowed from such income.
4) Loss under other head or under the head of IOS is not allowed to be set off with casual income.
5) No Deduction under Chapter VI-A [Section 80C to 80U]
6) Adjustment of unexhausted basic exemption limit is also not permitted against such income.
7) Grossing up where earning given after TDS:
Income by way of winnings from lotteries / crossword puzzles / card game or other game of any
short exceeding ` 10,000/- and from Horse Races [Not a camel Races] exceeding ` 10,000 is subject
to TDS u/s 194B or 194BB. [TDS Rate is 30%, No change in rate for AY 2022-23]
Thus, it is included in total income of the assessee after being grossed up as follows:
Gross Winnings= [Net winnings × 100 / (100 - Rate of TDS)]
Notes:
a) Income derived from owning & maintaining racehorses is not a casual income and normal slab
rate will be applicable on such income.
b) Income of jockey: Income of jockey from such profession is not treated as winning from horse
races.
c) Winning from a motor car rally: Winning from a motor car rally is a return for skill and effort and
cannot be treated as casual income but taxable as normal income

SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY

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Any sum received under a Keyman insurance policy (including any bonus) is chargeable under the
head “IOS” if such income is not chargeable under the head “PGBP” or under the head “Salaries” i.e.
if such sum is received by any person [Family Members] other than the employer who took the
policy (PGBP Income) and the employee in whose name the policy was taken (Salary Income).
Note:
(i) If it is received by Employer: PGBP
(ii) If it is received by Employee: Salary
[Sum received under a Keyman insurance policy is not exempt under section 10(10D)]

INTEREST ON COMPENSATION OR ENHANCED COMPENSATION

As per section 145(1), income chargeable under the head “Profits and gains of business or
profession” or “Income from other sources”, shall be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee.
Section 145B(1) provides that notwithstanding anything contained in section 145(1), the interest
received by an assessee on compensation or on enhanced compensation shall be deemed to be his
income for the year in which it is received, irrespective of the method of accounting followed by the
assessee.
Section 56(2)(viii) provides that income by way of interest received on compensation or on
enhanced compensation referred to in section 145B(1) shall be assessed as “Income from other
sources” in the year in which it is received.
Interest received on compensation/enhanced compensation deemed to be income in the year
of receipt and taxable under the head “Income from Other Sources”.
Note: A fixed deduction of 50% of interest received will be allowed under section 57
irrespective of actual expenses.

Advance forfeited due to failure of negotiations for transfer of a capital asset to be taxable as
“Income from other sources” [Section 56(2)(ix)]
(For Detailed Discussion – Refer Capital Gain chapter)
1. Prior to A.Y. 2015-16, any advance retained or received in respect of a negotiation for transfer
which failed to materialise is reduced from the cost of acquisition of the asset or the written down
value or the fair market value of the asset, at the time of its transfer to compute the capital gains
arising therefrom as per section 51. In case the asset transferred is a long-term capital asset,
indexation benefit would be on the cost so reduced.

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2. With effect from A.Y. 2015-16, section 56(2)(ix) provides for the taxability of any sum of money,
received as an advance or otherwise in the course of negotiations for transfer of a capital asset. Such
sum shall be chargeable to income-tax under the head ‘Income from other sources’, if such sum is
forfeited and the negotiations do not result in transfer of such capital asset.
3. In order to avoid double taxation of the advance received and retained, section 51 was amended
to provide that where any sum of money received as an advance or otherwise in the course of
negotiations for transfer of a capital asset, has been included in the total income of the assessee for
any previous year, in accordance with section 56(2)(ix), such amount shall not be deducted from
the cost for which the asset was acquired or the written down value or the fair market value, as the
case may be, in computing the cost of acquisition.
4. It may be noted that advance received and forfeited upto 31.3.2014 has to be reduced from cost
of acquisition while computing capital gains, since such advance would not have been subject to tax
under section 56(2)(ix). Only the advance received and forfeited on or after 1.4.2014 would be
subject to tax under section 56(2)(ix). Hence, such advance would not be reduced from the cost of
acquisition for computing capital gains.

Compensation or any other payment received in connection with termination of his

employment [Section 56(2)(xi)]
Any compensation or any other payment, due to or received by any person, by whatever name
called, in connection with the termination of his employment or the modification of the terms and
conditions relating thereto shall be chargeable to tax under this head.

Taxability of Family Pension

1) Family pension means pension received by the family members of the deceased employee. It is
chargeable to tax under the head ‘Income from Other Sources’.
2) Deduction u/s 57: Least of the following is allowed as a deduction:
(a) 1/3rd of such income
(b) Statutory Limit: ` 15,000
Note: This Deduction would not be available in case of an employee, being an assessee, who
opts for the provisions of section 115BAC.
3) Exemptions:
(a) any income by way of—
i. pension received by an individual who has been in the service of the Central Government or State
Government and has been awarded "Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra" or

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such other gallantry award as the Central Government may, by notification in the Official Gazette,
specify in this behalf;
ii. family pension received by any member of the family of an individual referred to in subclause (i).
is exempt in full [Section 10(18].
(b) Family pension received by the widow or children or nominated heirs, as the case may be, of a
member of the armed forces (including para-military forces) of the Union, where the death of such
member has occurred in the course of operational duties, in such circumstances and subject to such
conditions, as may be prescribed; is exempt in full [Section 10(19)].

Lump sum payment made gratuitously or by way of compensation or otherwise to widow / legal heirs
of an employee, who dies while in service, will not be taxable under the Act. [CBDT Circular]
Ex-gratia payment received, by a person or his legal heir, from the Central / State Govt. / Local
Authority / Public Sector Undertaking, consequent upon injury to the person / death of a family
member, while on duty, will not be taxable under the Act. [CBDT Circular]

Taxability of Allowances to MLA/MP

A member of the Parliament or the State legislature is not treated as employee of the Government.
Payment received by them shall be taxable under the head “Income from other sources”.
However, Daily Allowances & Constituency Allowances to MLA & MP are exempt from tax u/s
10(17).
Note: This exemption would not be available in case of an Individual, being an assessee, who opts
for the provisions of section 115BAC.

METHOD OF ACCOUNTING [SECTION 145]

Income chargeable under the head “Income from other sources” has to be computed in accordance
with the cash or mercantile system of accounting regularly employed by the assessee.

TAXABILITY OF INTEREST ON SECURITIES

Interest on securities may be taxed on Receipt basis or on Due basis, depending on the system of
accounting adopted by the assessee. If no system of accounting is followed, it will be taxable on
‘DUE’ basis.
LIABILITY FOR TAX: The person who owns the security on the due date of payment of interest is
liable for the entire interest even if he is not the owner for the entire period to which the
interest relates.

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INTEREST AFTER TDS: If interest is received after TDS, then such amount is required to be grossed
up to include in the total income. The interest is grossed up as follows:-
Gross Interest = [Net Interest × 100 / (100 – Rate of TDS)]
Note:
1. Rate of TDS (under Section 193) is 10%. However, rate is reduced to 7.5% between for the period
from 14th May, 2020 to 31st March, 2021 [Section 197B].
2. In case of Govt. Securities – Rate of TDS is NIL (refer TDS chapter also – Section 193)
a. No TDS upto ` 10,000 in case of interest from investment in 7.75 % GOI Saving (taxable
bonds) 2018
b. No TDS upto ` 10,000 in case of interest from investment in 8% Taxable Saving Bonds 2003
3. No TDS is deductible if debentures is issued by a widely held company if interest is paid /payable
to a Resident Individual/HUF by an account payee cheque & the aggregate amount of such interest
during the FY does not exceeds ` 5,000.

Section 10(15) – Interest on Securities (Exempted income)

1. Interest, premium on redemption or other payment on notified securities, bonds or certificates
Interest from Post Office Saving Bank Accounts is exempt to the extent of ` 3,500 in case of an
Individual Account and ` 7,000 in the case of Joint Account.
2. Interest in the hands of an individual and Hindu undivided family from Specified Relief Bonds
3. Interest on securities held by the Issue Department of the Central Bank of Ceylon (now known as
Central Bank of Sri Lanka);
4. Interest payable to any bank incorporated in a country outside India and authorised to perform
central banking functions in that country on any deposits made by it, with the approval of the RBI,
with any scheduled bank;
5. Interest payable on a loan advanced by the Nordic Investment Bank for an approved project;
6. Interest payable to the European Investment Bank for financial co-operation agreement;
7. Interest payable by public sector companies on certain specified bonds and debentures subject
to the conditions which the Central Government may specify by notification, including the condition
that the holder of such bonds or debentures registers his name and holding with that company;

Accordingly, the Central Government has specified tax free bonds issued by India Infrastructure
Company Ltd. and tax free, secured, redeemable, non-convertible Bonds of the Indian Railway Finance
Corporation Ltd. (IRFCL), National Highways Authority of India (NHAI), Rural Electrification
Corporation Ltd. (RECL), Housing and Urban Development Corporation Ltd. (HUDCL), Power Finance

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Corporation (PFC),Jawaharlal Nehru Port Trust, Dredging Corporation of India Limited, Ennore Port
Limited and The Indian Renewable Energy Development Agency Limited, the interest from which
would be exempt under this section.

8. Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims OR deposits for the
benefit of the victims of the Bhopal gas leak disaster.
9. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold Monetisation Scheme, 2015
10. Interest on specified bonds issued by a local authority or by a State Pooled Finance Entity.

“State Pooled Finance Entity” means such entity which is set up in accordance with the guidelines for
the Pooled Finance Development Scheme notified by the Central Government in the Ministry of Urban
Development.
Accordingly, the Central Government has specified the “Tax-free Pooled Finance Development Bonds”
under Pooled Finance Development Fund Scheme of Government of India, interest from which would
be exempt under section 10(15).

11. Interest received by a non-resident or a person who is not ordinarily resident, in India on a
deposit made on or after 1-4-2005 in an offshore banking unit referred in the Special Economic
Zones Act, 2005.
12. Interest payable to a non-resident by a unit located in an International Financial Services Centre
in respect of monies borrowed by it on or after 01-09-2019.

Interest from non-SLR Securities of Banks: Whether chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”? [Circular No. 18, dated
2.11.2015]
The issue addressed by this circular is whether in the case of banks, expenses relatable to
investment in non-SLR securities need to be disallowed under section 57(i), by considering interest
on non-SLR securities as “Income from other sources."
Section 56(1)(id) provides that income by way of interest on securities shall be chargeable to
income-tax under the head "Income from Other Sources", if the income is not chargeable to
income-tax under the head "Profits and Gains of Business and Profession".
The CBDT clarified that the investments made by a banking concern are part of the business of
banking. Therefore, the income arising from such investments is attributable to the business of
banking falling under the head "Profits and Gains of Business and Profession".

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Interest income taxable under the head “Other Sources”:
1. Interest from Tax Saving Bonds
 Investment in Notified Tax saving bonds is eligible for Deduction under Section 80C
2. Interest from Monthly Income Scheme of Post office
3. Interest from NSC
 Investment in NSC is eligible for deduction under Section 80C
 Accrued Interest from NSC is also eligible for deduction under Section 80C
4. Interest from Bank FD
 Investment in 5 Years notified FD is eligible for deduction under Section 80C
 Interest income is eligible for deduction under section 80TTB
5. Interest from Saving Bank Interest (any Bank)
 Such interest income is eligible for Deduction under Section 80TTA/80TTB

Section 10(4) – Interest Income from Non-Resident External Account

In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-
Resident (External) Account in any bank in India in accordance with the Foreign Exchange
Management Act, 1999, is exempt.
Provided such individual is a person resident outside India as per FEMA Act or is a person who has
been permitted by the Reserve Bank of India to maintain the aforesaid Account
Section 10(11) – Interest from PPF
Any payment (including interest income) from a Public Provident Fund is exempt. [Amount
deposited in PPF will qualify for deduction u/s 80C]
Section 10(11A) – Interest from SSA
Any payment including interest Income from account opened as per Sukanya Samriddhi Account
Rules 2014 is exempt from tax. [Amount deposited in SSA will qualify for deduction u/s 80C]

BOND WASHING TRANSACTIONS [Section 94]

A bond-washing transaction is a transaction where securities are sold some time before the due
date of interest and reacquired after the due date is over. This practice is adopted by persons in the
higher income group to avoid tax by transferring the securities to their relatives/friends in the
lower income group just before the due date of payment of interest.

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In such a case, interest would be taxable in the hands of the transferee, who is the legal owner of
securities. In order to discourage such practice, section 94(1) provides that where the owner of a
security transfers the security just before the due date of interest and buys back the same
immediately after the due date and interest is received by the transferee, such interest income will
be deemed to be the income of the transferor and would be taxable in his hands.
NOTE: CONCEPT OF DIVIDEND STRIPPING & BONUS STRIPPING ARE COVERED IN CAPITAL
GAIN CHAPTER.

DEDUCTIONS ALLOWABLE [SECTION 57]

The income chargeable under the head “Income from other sources” shall be computed after making
the following deductions:
(i) In the case of dividend income or income in respect of units of a mutual fund (as specified in
Section 10(23D)] or income in respect of units of a specified company (as defined in Section 10(35):
Only Interest expenditure to earn such income is allowed as deduction subject to a maximum of
20% of such income included in the total income, without deduction under this section. [Added by
Finance Act 2020, w.e.f. AY 2021-22]
(ii) In the case of interest on securities:
Any reasonable sum paid by way of commission or remuneration to a banker or any other person
for the purpose of realising such interest on behalf of the assessee.
(iii) Income consists of recovery from employees as contribution to any provident fund etc. in terms
of section 2(24)(x):
A deduction will be allowed in accordance with the provisions of section 36(1)(va) i.e., to the extent
the contribution is remitted before the due date under the respective Acts.
(iv) Where the income to be charged under this head is from letting on hire of machinery, plant and
furniture, with or without building:
The following items of deductions are allowable in the computation of such income:
a) the amount paid on account of any current repairs to the machinery, plant, furniture or building.
b) the amount of any premium paid in respect of insurance against risk of damage or destruction of
the machinery or plant, furniture or building.
c) the normal depreciation allowance in respect of the machinery, plant or furniture, due thereon.
(v) In the case of income in the nature of family pension:
A deduction of a sum equal to 33-1/3 per cent of such income or ` 15,000, whichever is less, is
allowable.

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For the purposes of this deduction, “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.
(vi) Any other expenditure not being in the nature of capital expenditure laid out or expended
wholly and exclusively for the purpose of making or earning such income.
(vii) In case of income by way of interest on compensation/ enhanced compensation received
chargeable to tax under section 56(2)(viii):
Deduction of 50% of such income. No deduction would be allowable under any other clause of
section 57 in respect of such income.

DEDUCTIONS NOT ALLOWABLE [SECTION 58]

Following expenditures shall not be deducted from any income under this head:
S. No. Deduction not allowable
1 Any personal expense of the assessee
2 Any interest chargeable to tax under the Act which is payable outside India on which
tax has not been paid or deducted at source.
3 Any payment chargeable to tax under the head “Salaries”, if it is payable outside India
unless tax has been paid thereon or deducted at source.
4 30% of expenditure in respect of sum which is payable to a resident on which tax is
deductible at source, if such tax has not been deducted OR after deduction has not
been paid on or before the due date of return specified in section 139(1) [Similar to
Section 40(a)(ia) - PGBP]
5 Any expenditure in respect of which a payment is made to a related person, to the
extent the same is considered excessive or unreasonable by the Assessing Officer,
having regard to the FMV. [Similar to Section 40A(2) - PGBP]
6 Any expenditure in respect of which a payment or aggregate payments exceeding `
10,000 is made to a person in a day otherwise than by account payee cheque or draft
or ECS through bank account or through such other prescribed electronic mode such
as credit card, debit card, net banking, IMPS, UPI, RTGS, NEFT, and BHIM Aadhar Pay.
[Similar to Section 40A(3) - PGBP]
7 Any expenditure or allowance in connection with income by way of earnings from
lotteries, cross word puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature.
Above provision shall not apply in computing the income of an assessee, being the
owner of horses maintained by him for running in horse races, from the activity of
owning and maintaining such horses.
In respect of the activity of owning and maintaining race horses, expenses incurred
shall be allowed even in the absence of any stake money earned. Such loss shall be
allowed to be carried forward in accordance with the provisions of section 74A [Refer
set-off of loss chapter for Section 74A].

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DEEMED INCOME CHARGEABLE TO TAX [SECTION 59]
The provisions of section 41(1) [Refer PGBP Chapter] are made applicable, so far as may be, to the
computation of income under this head, as they apply in computing the income of an assessee under
the head "Profits and gains of business or profession"
Accordingly, where –
a) An allowance or deduction has been allowed for any year in respect of loss, expenditure or trading
liability incurred by the assessee; and
b) Subsequently, any amount is obtained, as revocation of such loss, expenditure or remission of
liability, whether in cash or in any other manner, during any previous year,
- then such amount received or amount remitted shall be charged to tax.
Note: Above provision holds good even in case of succession or inheritance.

TAXABILITY OF GIFTS Section 56(2)(vii) - Taxability from 01.10.2009 to 31.03.2017: -

INDIVIDUAL/HUF
Section 56(2)(x) - Taxability from 01.04.2017: - ANY PERSON
Gift of any sum of money or property or transfer of property for inadequate consideration on or
after 1st April, 2017 to be subject to tax in the hands of Any Person as IOS subject to the following:
Nature of asset Particulars Taxable value
Money Without consideration The whole of aggregate amount if the same
exceeds ` 50,000.
Movable property Without consideration The aggregate Fair Market Value (FMV) of the
property, if it exceeds ` 50,000.
Movable property Inadequate The difference between the aggregate FMV and
consideration the consideration, if such difference exceeds `
50,000.
Immovable property Without consideration The Stamp Duty Value [SDV] of the property, if it
exceeds ` 50,000. [Each Property Separately]
Immovable property Inadequate The difference between the SDV and the
(amended by FA 20) consideration consideration, if such difference exceeds higher
of the following amount:
a) ` 50,000 or
b) 10% 5% of the consideration [Each Property
Separately]

Note:

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1) Gift provisions will not be applicable if property is received as stock in trade, consumable stores
and raw materials.
2) Sum of money may includes not only cash but also cheque, drafts, fixed deposits receipts or a NSC
(alternate view possible) since it represents a sum of money though not in cash.
3) For this purpose, “property” means the capital Asset of the assessee namely immovable property
being land or building or both, shares and securities, jewellery, archaeological collections, drawings,
paintings, sculptures or any work of art or bullion.
4) Stamp Duty Value means the value adopted by any authority for the purpose of payment of stamp
duty in respect of an immovable property.
5) If the Stamp Duty Value of immovable property is disputed by the assessee, the AO may refer the
valuation of such property to a Valuation Officer. In such a case, the provisions of section 50C shall,
as far as may be, apply for determining the value of such property. – CG Class
6) When date of agreement and date of registration are not same - Where the date of an agreement
fixing the value of consideration for the transfer of the asset and the date of registration of the
transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement
for transfer and not as on the date of registration for such transfer. However, this exception shall
apply only in those cases where amount of consideration (or a part thereof) for the transfer has
been paid by way of an account payee cheque or an account payee draft or by use of electronic
clearing system through a bank account or through such other electronic modes as may be
prescribed on or before the date of the agreement.
The prescribed electronic modes notified are credit card, debit card, net banking, IMPS (Immediate
payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT
(National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay as other
electronic modes of payment [CBDT Notification No. 8/2020 dated 29.01.2020].
Exceptions: However, any gift received from following ways would be outside the ambit of
Section 56(2)(x):
(1) from any relative; or
(2) on the occasion of the marriage of the individual; or
(3) under a will or by way of inheritance; or
(4) in contemplation of death of the payer or donor, as the case may be; or
(5) from any local authority; or
(6) from any fund or foundation or university or other educational institution or hospital or other
medical institution or any trust or institution referred to in section 10(23C); or
(7) by any fund or trust or institution or university or other educational institution or hospital or
other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via);

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(8) from or by any trust or institution registered under section 12AA [Charitable or Religious Trust]
(9) from an Individual by a Trust created or established solely for the benefit of relative of the
Individual.
(10) From HUF on Total/Partial Partition of HUF to members
(11) Asset received by Amalgamated Indian company from Amalgamating company
(12) From Holding Company to 100% Subsidiary Company or vice versa where transferee is an
Indian Company.
(13) Asset received by Indian Resulting Company from Demerged company in a demerger
(14) Any shares received by shareholders under Amalgamation/Demerger which is not regarded
as Transfer u/s 47.
(15) from such class of persons and subject to such conditions, as may be prescribed.

 For the purpose of this clause, the expression “RELATIVE” means

In Case of Individual:
(i) spouse of the individual,
(ii) brother or sister of the individual,
(iii) brother or sister of the spouse of the individual,
(iv) brother or sister of either of the parents of the individual,
(v) any lineal ascendant or descendant of the individual,
(vi) any lineal ascendant or descendant of the spouse of the individual, and
(vii) spouse of a person referred to in items (ii) to (vi) mentioned above.
In Case of HUF: Any Member

Clubbing Provisions: As per Section 64(2), if a member of the HUF converts his separate property
into the property belonging to the family otherwise than for adequate consideration, the income
derived from the converted property shall be deemed to arise to the individual and not the
family.

TAXABILITY OF DIVIDEND INCOME – Amended from AY 2021-22

Basis of charge of dividend

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Any income by way of dividends received from a company, whether domestic or foreign, is taxable
in the hands of shareholder at normal rates of tax.
However, dividend distributed by a domestic company before 1.4.2020 and received by the
shareholders on or after 1.4.2020 and on which tax under section 115-O, if applicable, has been paid
would be exempt in the hands of the shareholders except dividend chargeable to tax u/s 115BBDA
(Provisions before amendment will be applicable in this situation).
[Upto F.Y. 2019-20 (AY 2020-21), domestic company was liable to pay additional income-tax u/s
115- O @15% [30%, in respect of deemed dividend u/s 2(22)(e)] on dividend distributed by it,
consequent to which dividend was exempt in the hands of shareholder u/s 10(34) except dividend
chargeable to tax u/s 115BBDA. Specified assessee, resident in India, was liable to pay tax @10%
on aggregate dividend received exceeding ` 10 lakhs u/s 115BBDA without any deduction of related
expenses – Position before amendment]
Section 10(34) – Clause 34 of Section 10
Upto AY 2020-21 From AY 2021-22 (as amended by Finance
Act 2020)
Any income by way of dividends referred to in Nothing contained in this clause shall apply to
section 115-O shall be exempt except income by any income by way of dividend received on or
way of dividend chargeable to tax in accordance after the 1st day of April, 2020 other than the
with the provisions of section 115BBDA; dividend on which tax under section 115-O and
section 115BBDA, wherever applicable, has
been paid;

Section 10(35) – Clause 35 of Section 10

Upto AY 2020-21 From AY 2021-22 (as amended by Finance
Act 2020)
Any income by way of income received in Nothing contained in this clause shall apply to
respect of the units of a Mutual Fund specified any income in respect of units received on or
under Section 10(23D) or income received in after the 1st day of April, 2020
respect of units of UTI shall be exempt.

Tax on Certain Dividends received from Domestic Com. [Sec 115BBDA]

[Withdrawn from AY 2021-22]
1. Notwithstanding anything contained in this Act, where the total income of a Specified Assessee,
resident in India includes any income in aggregate exceeding ten lakh rupees, by way of dividends
[except 2(22)(e)] declared, distributed or paid by a domestic company or companies on or before
31st day of March 2020 (Added by Finance Act 2020), then dividend in excess of ` 10,00,000 shall
be taxable at the rate of 10% (plus applicable surcharge & cess).

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2. No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the
assessee under any provision of this Act in computing the income by way of dividends as referred
above.
3. Specified Assessee means a person other than
(a) A Domestic Company
(b) A Trust/Institution registered under Section 12A or Section 12AA.
(c) A Fund/Institute/Trust/Any University/Other Educational Institution/Any Hospital/other
Medical Institution/Hospital/Medical Institution as referred in Section 10(23C)(iv)/(v)/(vi)/(via).

Tax on certain dividends distributed by domestic companies before 1.4.2020 but received
on or after 1.4.2020 [Section 115BBDA]
Any income by way of aggregate dividend in excess of ` 10 lakh distributed by domestic companies
before 1.4.2020 but received on or after 1.4.2020 shall be chargeable to tax in the case of specified
assessee who is resident in India, at the rate of 10% [further, increased by surcharge, if applicable
and health and education cess @4%].

SECTION 115-O - TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES

[Withdrawn from AY 2021-22]
Every Domestic Company, which has declared, distributed or paid any amount by way of dividends
(whether interim / otherwise) on or before the 31st Day of March 2020, whether out of current or
accumulated profits shall be charged to tax on Distributed Profits @ 20.56% [i.e. 15% (net of tax
basis) + SC @ 12% + 4% Cess], in addition to the income-tax chargeable in respect of the Total
Income of such a domestic company. In case of deemed divided u/s 2(22)(e), Tax Rate (DDT) is 30%
(without grossing up) + SC@12% + 4% cess.

Important Points: No Amendment in AY 2022-23

1) Dividend received from a Foreign Company is taxable in hands of shareholder at the normal tax
rates subject to Section 115BBD.
2) Dividends from cooperative society are Taxable in the hands of members.

TAXATION OF CERTAIN FOREIGN DIVIDEND @ 15% [Section 115BBD]

(No amendment in this Section for AY 2022-23)

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1. Section 115BBD provides that where Total Income of an Indian Company includes any dividend
income received from a foreign specified company, then such dividends shall be taxable at the rate
of 15% (plus applicable surcharge and cess) on the gross amount of dividends.
2. No expenditure in respect of such dividends shall be allowable under the Act.
3. Specified Foreign Company means a foreign company in which the Indian Company holds 26%
or more in nominal value of the equity share capital of the company.

SECTION 194 [TDS on Dividend payable to Resident Shareholders]

Amended w.e.f. AY 2021-22
1. Applicability of TDS under section 194
The principal officer of a domestic company is required to deduct tax on dividend distributed or
paid by it to its resident shareholders.
2. Rate of TDS
The rate of deduction of tax in respect of such dividend is 10%. Rate of TDS u/s 194 has been
reduced from 10% to 7.5% (i.e., ¾th of the specified rate) for the period from 14th May, 2020 to
31st March, 2021 [Section 197B].
3. Time of tax deduction at source
The deduction of tax has to be made before making any payment by any mode in respect of any
dividend or before making any distribution or payment to a resident shareholder of any amount
deemed as dividend under section 2(22)(a)/ (b)/(c)/(d)/(e).
4. Non-applicability of TDS under section194
i. No tax is to deducted in case of a shareholder, being an individual, where –
a. the dividend is paid by any mode other than cash; and
b. the amount of such dividend or aggregate of dividend distributed or paid or likely to be
distributed or paid during the financial year by the company to such shareholder does not exceed `
5,000.
ii. The TDS provisions will not apply to such dividend credited or paid to LIC, GIC, subsidiaries of
GIC or any other insurer provided the shares are owned by them, or they have full beneficial interest
in such shares

SECTION 194K [TDS on Income in respect of Units]

Inserted by Finance Act 2020 w.e.f. AY 2021-22

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Applicability and rate of tax
Section 194K provides for deduction of tax at source @10% by any person responsible for paying
to a resident any income in respect of –
a. units of a Mutual fund
b. units from Administrator of the specified undertaking
c. units from the specified company
Rate of TDS u/s 194K has been reduced from 10% to 7.5% (i.e., ¾th of the specified rate) for
the period from 14th May, 2020 to 31st March, 2021 [Section 197B].
Time of deduction
The deduction is to be made at the time of credit of such sum to the account of the payee or at the
time of payment by any mode, whichever is earlier.
Non-applicability of section 194K
No tax is required to be deducted if –
a. the amount of such income or the aggregate of the amounts of such income credited or paid or
likely to be credited or paid during a financial year does not exceed ` 5,000; or
b. the income is of the nature of capital gains.

DEEMED DIVIDEND
a) Distribution of accumulated profits, entailing the release of company’s assets -
Any distribution of accumulated profits, whether capitalised or not, by a company to its
shareholders is dividend if it entails the release of all or any part of its assets.
For example, if accumulated profits are distributed in cash, it is dividend in the hands of the
shareholders.
Where accumulated profits are distributed in kind, for example by delivery of shares etc. entailing
the release of company’s assets, the market value of such shares on the date of such distribution is
deemed as dividend in the hands of the shareholder.
b) Distribution of debentures, deposit certificates to shareholders and bonus shares to
preference shareholders –
Any distribution of debentures / debenture-stock / deposit certificates etc. by a company to its
shareholders
OR

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Any distribution of shares by way of bonus by a company to its preference shareholders shall be
deemed to be the dividend to the extent the company possesses accumulated profits whether
capitalized or not.
Note:
(i) For the purpose of CG, the COA of above debenture in the hands of the shareholders shall be
taken to be NIL
(ii) Bonus shares given to equity shareholders are not treated as dividend.
c) Distribution on Liquidation:
Any distribution made by a company to the shareholders (equity only) on its liquidation shall be
deemed to be the dividend to the extent of accumulated profits of the company standing
immediately before its liquidation whether capitalized or not.
d) Distribution on Reduction of Capital :
Any Distribution by company to its shareholders (equity only) on reduction of its capital shall be
deemed to be the dividend to the extent to which company possesses accumulated profits whether
capitalized or not. Sec. 2(22)(d)
Example: A Ltd. Has issued bonus shares to its equity shareholders. Subsequently company has
reduced its share capital and refunded the amount so reduced to the shareholders. The amount so
received by the shareholders to the extent of accumulated profit (whether capitalized or not) will
be considered as dividend.
e) Advance or loan by a Closely Held Company to its Shareholder [Sec. 2(22)(e)] – 5 Marks
Any payment, by a closely held company, of any sum by way of loan or advance:
 to a shareholder, being the beneficial owner of shares holding not less than 10% of voting power,
OR
 to any concern, in which such a shareholder is a member/partner and in which he has a
substantial interest, OR
 to any persons on behalf of or for the individual benefit of such a shareholder,
shall be deemed to be the dividend to the extent to which the company possesses accumulated
profits.
Notes
1) Following conditions must be satisfied on the date on which loan/advance is given to the
shareholder/concern/any other person by a closely held company in order to attract section
2(22)(e):
(a) Beneficial owner of shares
(b) Holding 10% or more voting power

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(c) Member/ Partner in concern
2) Where loan is given and accumulated profits exceeds the loan, then the entire loan will be deemed
as dividend. No consideration is to be given to the proportionate share of the assessee in the
accumulated profits.
3) If any such loan was given to more than such shareholders, accumulated profits shall be reduced
by the amount of the loan given to the earlier shareholders.
4) Dividend shall not include any advance or loan made to a shareholder or a concern by a company
in the ordinary course of its business where the money lending is substantial part of the business of
the company.
5) Buy Back of Own Shares: Any payment made by a company on purchase of its own shares from a
shareholder is not a deemed dividend.
6) Any distribution of shares on demerger by the resulting companies to the shareholders of the
demerged company (whether or not there is a reduction of capital in the demerged company), is
not a deemed dividend.
Clarification regarding trade advance not to be treated as deemed dividend under section
2(22)(e) [Circular No. 19/2017, dated 12.06.2017]
Section 2(22)(e) provides that "dividend" includes any payment by a company in which public are
not substantially interested, of any sum by way of advance or loan to a shareholder who is the
beneficial owner of shares holding not less than 10% of the voting power, or to any concern in which
such shareholder is a member or a partner and in which he has a substantial interest or any payment
by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent
to which the company in either case possesses accumulated profits.
The CBDT observed that some Courts in the recent past have held that trade advances in the nature
of commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) and
such views have attained finality.
In view of the above, the CBDT has, vide this circular, clarified that it is a settled position that trade
advances, which are in the nature of commercial transactions, would not fall within the ambit of the
word 'advance' in section 2(22)(e) and therefore, the same would not to be treated as deemed
dividend.

Share premium in excess of the FMV to be treated as income [Section 56(2)(viib)]

1. Section 56(2)(viib) provides that where a company, not being a company in which the public are
substantially interested (i.e. Closely held Company), receives any consideration from issue of shares
in excess of the face value of such shares from any person being a resident, then consideration as
exceeds from FMV of the shares shall be chargeable to income tax under the head “IOS”

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2. However, the above provision shall not apply where the consideration is received
a) by a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital Fund or
a specified fund, or
b) by a company from a class or classes of persons as may be notified by the Central Government in
this behalf.
3. Fair market value of the shares shall be the higher of, the value as may be –
a) determined in accordance with the prescribed method; or
b) substantiated by the company to the satisfaction of the Assessing Officer, based on the value of
its assets on the date of issue of shares.
For the purpose of computation of FMV, the value of assets would include the value of intangible
assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature.

PREVIOUS YEAR FOR UNDISCLOSED SOURCES OF INCOME

Unexplained Cash Credits [Sec. 68]
 The sum is found credited in the books of assessee.
 He offers no explanation about its nature and source OR the explanation offered is not
satisfactory in the opinion of AO
 The amount so credited is treated as the income of the Previous Year in which the same is found
credited.
Note:
Section 68 further provides that the nature and source of any sum credited, as share application
money, share capital, share premium etc., in the books of a closely held company shall be treated as
explained only if the source of funds is also explained by the assessee company in the hands of the
resident shareholder (other than SEBI regulated entity) and such explanation in the opinion of the
AO is found to be satisfactory.
Unexplained Investment [Sec. 69]

 The assessee made investments which are not recorded in the books of accounts
 He offers no explanation about its nature and source OR the explanation offered is not satisfactory
in the opinion of AO
 The value of investment so made is treated as the income of the Previous Year in which the
investment is made.
Unexplained Money etc. [Sec. 69A]

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 In search, the assessee was found to be owner of any money, bullion or jewellery or other valuable
article etc,

 Such money, bullion etc are not recorded in the books of accounts of the assessee
 He offers no explanation about its nature and source of acquisition or the explanation offered is
not satisfactory.
 The value of such items shall be treated as the income of that previous year in which it is found .
Investment not fully disclosed [Sec. 69B]
 The assessee made investments or found to be owner of bullion, jewellery or other valuable
article, but has not fully recorded in his books of accounts.
 He offers no explanation about such excess amount or the explanation offered is not satisfactory.
 The excess value of the investment made shall be treated as the income of the Previous Year in
which the investment is made.
Unexplained Expenditure [Sec. 69C]
 The assessee has incurred expenditure during the financial year

 He offers no explanation about such expenditure or the explanation offered is not satisfactory.
 The amount of such expenditure shall be treated as income of the Previous Year in which it was
incurred.
Amount borrowed or repaid on Hundi other than by way of account payee cheque [Sec. 69D]
 Where any amount is borrowed on a hundi or any amount due thereon is repaid other than
through an account-payee cheque drawn on a bank,
 the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or
repaying for the PY in which the amount was borrowed or repaid, as the case may be.
 However, where any amount borrowed on a hundi has been deemed to be the income of any
person, he will not be again liable to be assessed in respect of such amount on repayment of such
amount.

Taxation of Cash Credit, Unexplained Money, Unexplained Investment etc. covered u/s 68,
69, 69A, 69B, 69C & 69D [Section 115BBE]
A. Section 115BBE has been inserted to tax the unexplained credits, money, investment,
expenditure, etc., which has been deemed as income under section 68, 69, 69A, 69B, 69C & 69D
Total Income of an assessee

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a) includes any income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C
or Section 69D and reflected in the return of income furnished under section 139; or
b) determined by the Assessing Officer includes any income referred to in Section 68, Section
69, Section 69A, Section 69B, Section 69C or Section 69D, if such income is not covered under
clause (a),
B. Tax Rate: 60% [plus surcharge (25%) and cess (4%) as applicable]
C. No deduction in respect of any expenditure or allowances or Set off of any loss shall be allowed
in computing above deemed income (point ‘a’ or ‘b’ above).
D. Benefit of Basic Exemption Limit is also not available while computing tax liability.

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5. CLUBBING
INTRODUCTION
An assessee is taxable on the income earned by him but sometimes he is also made liable to tax for
the income earned by some other person. This happens when assessee tries to reduce his tax
liability by transferring his income/assets to some other person in a manner whereby his tax
liability falls on some other person. Income Tax Act 1961 has introduced the concept of clubbing of
income Whereby income is taxed for one though such income legally belongs to some other person.

INCOME TRANSFERRED WITHOUT TRANSFER OF ASSET: SECTION 60

 If an assessee owns an asset from which he derives some income and
 There is a transfer of such income without the transfer of ownership of such asset from which
income has been earned then such income shall be chargeable to tax as the income of transferor
and not as the income of transferee.
 It does not matter whether transfer is revocable or irrevocable

QUESTION 1 Mr. J is holder of Rs2,00,000 14% debentures of D Ltd from where he earns annual
interest Income of Rs28,000. Mr. J has transferred interest income of these debentures to his
brother Mr. A while retaining the ownership of such debentures. This interest income shall not be
taxable for Mr. A but shall be taxable for Mr. J

REVOCABLE TRANSFER OF ASSETS: SECTION 61

Income from asset transferred under revocable transfer shall be taxable in the hands of transferor.
As per Section 63 Revocable transfer means:
(1) If whole or any part of income or assets can be re-transferred to transferor.
(2) If transferor can re-assume power over the whole or any part of income of asset.
Section 62: However revocable transfer does not include any other transfer which is not revocable
during the lifetime of the transferee

QUESTION 2 Mr. J has transferred his house to his son Mr. S under the condition that Mr. S is owner
till the date of Diwali of 2022. This transfer where transferor has put a rights to invoke the transfer
the happening of an event which is a certain event is called revocable transfer. The Income from the

house any earned by Mr. S shall be taxable for Mr. J and not Taxable for Mr. S.

CLUBBING OF REMUNERATION OF SPOUSE: SECTION 64(1)(ii)

(1) An individual is chargeable to tax in respect of any salary, commission, fees or any other form of
remuneration received either in cash or in kind by the spouse from a concern in which the individual
has substantial interest.
(2) Such spouse should be employed in the concern without technical or professional skills or
experience
(3) This shall not be applicable if spouse earns income due to application of technical or professional
skills or experience.

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(4) If husband and wife both have substantial interest in the concern and both are in receipt of
remuneration from the concern, then the remuneration of both shall be clubbed in the hands of
spouse whose Total Income is greater, (excluding such salary Income).
(5) The salary income to be clubbed, shall computed first in the hands of receiver under the head of
salary and then it shall be included in the total income of the individual under same head. This
means that only taxable salary shall be clubbed.
(6) Substantial interest means
(a) In case of a company it means that individual along with relatives should hold 20% or more
of equity shares at any time during the previous year.
(b) In case of other concerns, it means that individual along with relatives should be entitled
to 20% or more of profits at any time during the previous year.
(7) Relative means spouse, brother or sister or any lineal ascendant or descendant of the individual

QUESTION 3 Mr. J is a partner in a partnership firm with 50% profit sharing ratio. His wife is
working in this partnership firm and is getting remuneration. Her remuneration does not match
her technical or professional knowledge or experience. This salary income earned by her shall be
taxable for Mr. J and not for her.

QUESTION 4 Mr. J is a shareholder of D Ltd. holding 35% of shares. His wife is employed in the
same company. She is getting the salary of Rs 25,000 pm, allowances of Rs 2,000 pm and pays the
professional tax of Rs 200 pm. Her salary does not match her qualifications or experience. Mr. J is
owner of shop from which he has earned Rs 50,000pm as rent. Municipal taxes paid by him are Rs
10,000pa. Both husband and wife have earned pa each as interest from debentures. Calculate their
total incomes for the AY 2022-2023 i.e. PY 2021-2022.
Solution: Calculation of salary income of Mrs. J for the AY 2022-2023 i.e. PY 2021-2022
Particulars Amount Amount in
Basic salary 25,000 x 12 3,00,000
Allowances 2,000 x 12 24,000
Gross salary 3,24000
Less: Deduction u/s 16(ia): Standard deduction 50,000
Less: Deduction u/s 16(iii): Professional tax paid 2,400
Taxable salary 2,71,600
Calculation of Taxable Income of Mr. J and Mrs. J for the AY 2022-2023 i.e PY 2021-2022

Particulars Calculation in Mr. J Mrs. J

Amount in Amount in
Rs Rs

Income under the head Clubbed as per Section 64(1)(ii) 2,71,600 NIL
salary

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Income under the head GAV 50,000 x 12 4,13,00
6,00,000
house property Less: Municipal Taxes paid 10,000
NAV 5,90,000
Less: deduction u/s 24(a) 1,77,000
Income 4,13,000

Income from other 2,00,000 2,00,000

sources
Taxable Income 8,84,600 2,00,000

CLUBBING OF INCOME FROM ASSETS TRANSFERRED TO SPOUSE: SECTION 64(1)(iv)

When an individual transfers any assets other than House Property to his/her spouse without any
consideration, then any income from such assets shall be deemed to be the income of transferor.
However, it shall not be applicable if
(1) Transfer is for adequate consideration OR
(2) Transfer is under an agreement to live apart OR
(3) If relationship of husband and wife does not exist either at time of transfer or at the time of
accrual of Income.
If transferred Asset is invested by spouse in
(1) Any business being done by transferee OR
(2) As a capital in a Partnership firm

Then the following amount shall be taxable as the Income of transferor and the balance amount
shall be taxable as the Income of transferee
Taxable Income earned x Amount invested out of Assets transferred on the first of PY
Total investment of transferee on the first day of the PY

QUESTION 5 Mrs. J starts with the business of boutique on 1/4/2019 by investing rs 5,00,000 Mr. J
gifts her rs 2,00,000 on 15/4/2021. Profits earned by her for the PY ending 31/3/2022 is rs 70,000
and for the PY ending 31/3/2022 is 72,500. Calculate amount of the profits to be clubbed in hands
of Mr. J for the different AYs.
Solution: Calculation of the Income to be clubbed in the hands of Mr. J for the AY 2021-2022

Particulars AY 2021-2022 Amount in rs

Total investment of Mrs. J as on 1/4/PY 5,00,000
Amount of investment as on 1/4/PY out of gifted NIL
money
Profits earned 70,000
Profits Taxable for Mr. J 70,000 x NIL/5,00,000=NIL
Profits Taxable for Mrs. J (70,000 - NIL) =70,000

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Calculation of the Income to be clubbed in the hands of Mr. J for the AY 2022-2023
Particulars AY 2022-2023 Amount in rs
Total investment of Mrs. J as on 1/4/PY 7,70,000
Amount of investment as on 1/4/PY out of gifted 2,00,000
money
Profits earned 72,500
Profits Taxable for Mr. J 72,500 X 200,000/7,70,000 = 18,831
Profits Taxable for Mrs. J (72,500 - 18,831) =53,669

CLUBBING OF INCOME FROM ASSETS TRANSFERRED TO SON'S WIFE: SECTION 64(1)(vi)

If an individual transfers any asset to daughter-in-law (after 31/5/1973) without adequate
consideration, then Income from the Asset will be included in the Total Income of transferor. But
for clubbing to be effective, the relationship with daughter-in-law should exist both at the time of
accrual and at the time of clubbing.
CLUBBING OF INCOMES FROM ASSET TRANSFERRED FOR THE BENEFIT OF SPOUSE: SECTION
64(1)(vii)
Income from Asset transferred to any person or Association of Persons (AOP) for the benefit of
spouse without adequate consideration shall be included in the Total Income of transferor. It is not
necessary that Asset should be transferred to spouse itself

CLUBBING OF INCOME FROM ASSET TRANSFERRED FOR THE BENEFIT OF SON'S WIFE
SECTION 64(1)(viii)
Income from Asset transferred to any person or Association of Persons (AOP) for the benefit of son's
wife without adequate consideration shall be included in the Total Income of transferor. It is not
necessary that Asset should be transferred to daughter-in-law itself

CLUBBING OF INCOME OF MINOR CHILD: SECTION 64(1A)

(1) Income of minor child will be included in the total income of that parent whose total income is
greater (before including Income of child).
(2) If marriage of parents does not subsist, it shall be income of that parent who maintains the child.
(3) Where any such income is once included in the total income of either parent, any such income
arising in any succeeding year shall not be included in the total income of the other parent unless
the assessing officer (AO) is satisfied that it is necessary to do so.
(4) Clubbing of incomes of minor accruing till the date of attaining majority shall be done and not
thereafter. On and from the date of attaining majority the Incomes shall be taxed in the hands of
child himself.
(5) Brought forward loss of an individual assessee can be set off against the business income of
minor child which has been so clubbed under this section.
(6) Only net incomes shall be clubbed and that too under the same head of income.

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(7) Deductions of Section 80C to 80U shall be allowed till the aggregate of the income of minor child
and that of parent of a minor child.
(8) Minor shall not be allowed the deductions under Sections 80C to 80U on account of the income,
which have been clubbed in the hands of parent.
(9) In the following cases, income of minor shall not be clubbed:
(a) Child is suffering from any disability of the nature specified in Section 80U like physical
disability, totally blind etc.
(b) Income of child on account of manual work or activity involving skill, talent or specialized
knowledge etc.
(10) If Income of child is so included, the parent shall be entitled to an exemption in respect of each
minor child u/s 10(32) which shall be of the lower of:
(a) Rs1,500 pa per child
(b) Income of minor so included in income of parent.
Such exemption is available from the total income of the minor child that is included in the total
income of the assessee.
(11) Exemption to parent u/s 10(32) for Rs 1,500 shall be available if the clubbing of minor child's
income is done as per Section 64(1A). If income is added as per Section 27 of deemed
ownership, then exemption of Section 10(32) shall not be allowed.

INCOME FROM SELF-ACQUIRED PROPERTY CONVERTED INTO HUF PROPERTY: SECTION

64(2)
(A) If following conditions are satisfied, then clubbing of Income shall be done in a manner given in
Para(B)
(a) An individual being a member of HUF converts his own property into the property of HUF
after 31/12/1969
(b) Such a property is a separate property of the individual.
(c) The conversion is done by throwing property into common stock of the family or
transferring to the family, whether directly or indirectly.
(d) Such conversion is made without adequate consideration

(B) Clubbing shall be done as follows:

(a) From the time of conversion till the time it is partitioned among members of HUF: The
Income from such converted property shall be clubbed in the hands of transferor.
(b) On the partition of the property amongst members of family the Income arising to such
individual and to his or spouse shall be clubbed in the Income of such individual.
(c) And the Incomes accruing to other members shall be included in their respective Incomes.

OTHER RELEVANT POINTS

Income from the accretion to the assets: Any Income arising to transferee from the accretion of
property or from accumulated Income of such property is not included in the total income of
transferor.
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Clubbing of loss: under the above provisions, if income of one person is to be clubbed in the hands
of another person, then in the case of loss, it shall also be clubbed.
Section 65: Under the above provisions, if income of one person is to be clubbed in the hands of
transferor, then tax on income from such assets can be demanded from the transferee. The same
provision is applicable in case of deemed owner u/s 27(i).
Clubbing of income from capital gains: Capital gains on sale of an asset transferred within the
meaning of the section 64 is also clubbed with the income of the transferor.
Cross transfers: In case of cross transfers also (e.g., A making gift of Rs50,000 to the wife of his
brother B for the purchase of a house by her and a simultaneous gift by B to A's minor son of shares
in a foreign company worth Rs50,000 owned by him), the income from the assets transferred would
be assessed in the hands of the deemed transferor if the transfers are so intimately connected as to
form part of a single transaction, and each transfer constitutes consideration for the other by being
mutual or otherwise. Thus, in the instant case, the transfers have been made by A and B to persons
who are not their spouse or minor child so as to circumvent the provisions of this section, showing
that such transfers constituted consideration for each other.
CIT v Keshavji Morarji [1967] 66 ITR 142: The Supreme Court, in this case, observed that if two
transactions are inter-connected and are parts of the same transaction in such a way that it can be
said that the circuitous method was adopted as a device to evade tax, the implication of clubbing
provisions would be attracted.
Accordingly, the income arising to Mrs. B from the house property should be included in the total
income of B and the dividend from shares transferred to A's minor son would be taxable in the
hands of A. This is because A and B are the indirect transferors to their minor child and spouse,
respectively, of income-yielding assets, so as to reduce their burden of taxation.
QUESTION 6 Mr. Vasudevan gifted a sum of Rs 6,00,000 to his brother's wife on 14/6/2021. On
12/7/2021, his brother gifted a sum of Rs 5,00,000 to Mr. Vasudevan's wife. The gifted amounts
were invested as fixed deposits in banks by Mrs. Vasudevan and wife of Mr. Vasudevan's brother
on 1/8/2021 at 9% pa interest. Discuss the consequences of the above in the hands of Mr.
Vasudevan and his brother.
Solution: In the given case, Mr. Vasudevan gifted a sum of Rs 6,00,000 to his brother's wife on
14/6/2021 and simultaneously, his brother gifted a sum of Rs 5,00,000 to Mr. Vasudevan's wife on
12/7/2021. The gifted amounts were invested as fixed deposits in banks by Mrs. Vasudevan and
his brother's wife. These transfers are in the nature of cross transfers. Accordingly, the income from
the assets transferred would be assessed in the hands of the deemed transferor because the
transfers are so intimately connected to form part of a single transaction and each transfer
constitutes consideration for the other by being mutual or otherwise.
Accordingly, the interest income arising to Mrs. Vasudevan in the form of interest on fixed deposits
would be included in the total income of Mr. Vasudevan and interest income arising in the hands of
his brother's wife would be taxable in the hands of Mr. Vasudevan's brother as per section 64(1), to
the extent of amount of cross transfers i.e. Rs5,00,000 This is because both Mr. Vasudevan and his

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brother are the indirect transferors of the income to their respective spouses with an intention to
reduce their burden of taxation. However, the interest income earned by his spouse on fixed deposit
of Rs5,00,000 alone would be included in the hands of Mr. Vasudevan's brother and not the interest
income on the entire fixed deposit of Rs6,00,000 since the cross transfer is only to the extent of
Rs5,00,000

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6. SET OFF OF LOSSES AND CARRY FORWARD OF LOSSES
INTRA HEAD SET OFF: SECTION 70
Loss from one source of income can be set off against any income of other sources under the
same head of Income, but exceptions to this are:
1) Losses from the speculative business can be set off only against incomes of speculative business.
2) Losses from owning and maintaining race horses can be set only from income of owning and
maintaining race horses.
3) Loss of long-term capital asset is allowed to be set off against the income of long-term capital
asset only. But loss of short-term capital asset is allowed to be set off from income of long-term
capital asset or income of short-term capital asset.
4) No kind of loss can be set off against casual income.
5) No kind of loss is allowed to be set off from a source of income, the income of which is not taxed.
6) Loss from the specified business referred in Section 35AD can be set off from income of some
other specified business referred in Section 35AD

INTER HEAD SET OFF: SECTION 71

If there is a loss under one head of income and income under different heads of income, then
they are allowed to be set off but the exceptions are:
1) Losses from the speculation business can be set off only from such income.
2) Losses from owning and maintaining of race horses can be set off only from such income.
3) Loss under the head capital gains can be set off only from the income of capital gains.
4) No loss is allowed to be set off from a source, the income of which is not taxed.
5) As per Section 71(4) loss under the head PGBP cannot be set off from income under the head
salary. Similarly, unabsorbed depreciation cannot be set off from salary income.
6) As per Section 73A any loss computed in respect of the specified business mentioned in Section
35AD shall only be set off against profits and gains of any other specified business.
7) Section 71(3A) if assessee has incurred loss under the head of house property then such loss
can be set off from income from any other head. However maximum loss that can be set off has
been restricted to 2,00,000. Any loss exceeding 2,00,000 shall be carry forwarded.

MANDATORY FILING OF ITR TO DO CARRY FORWARD OF LOSSES: SECTION 80

After doing set off of loss, if assessee still has a loss then such loss of one financial year can be
carried forward to the next financial year only if the income tax return (ITR) has been filed as per
due dates mentioned u/s 139(1). If not, then the loss will not be allowed to be carried forward.
Income tax return (ITR) has to be filed on or before the due date mentioned u/s 139(1) in the
case of following losses:
1) Loss of business u/s 72
2) Loss of speculative business u/s 73
3) Loss of specified business as referred u/s 73A
4) Loss of capital gains u/s 74

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5) Loss of owning and maintaining race horses u/s 74A
However,
1) Loss of house property
2) Unabsorbed depreciation of business and profession
can be carried forward if income tax return (ITR) has not been filed as per section 139(1).

CARRY FORWARD AND SET OFF OF LOSS FROM HOUSE PROPERTY: SECTION 71B
1) If there has been a loss under the head of house property, then such loss can be set off against
income of some other head. If there is no income under any other head, then loss can be carried
forward to the next year.
2) In next year, the brought forward loss of the preceding year can be set off only against income
from house property of that year.
3) If loss could not be set off, then such a loss can be carried forward for eight years following the
year when loss was first computed.
4) Loss of house property can be carried forward even if assessee has not filed ITR by the due date
as given in section 139(1).
5) There is no condition that an assessee should own the house for which the loss is to be carried
forward.

CARRY FORWARD AND SET OFF OF BUSINESS LOSSES: SECTION 72

1) Business loss other than speculation loss, which could not be set off during any year, shall be
carried forward to the next year and set off against income from PGBP of that year.
2) The term business loss will not include
(a) unabsorbed depreciation
(b) unabsorbed capital expenditure on scientific research and
(c) unabsorbed capital expenditure on family planning promotion
3) Loss shall be carried forward to the next year and set off against the income from business or
professions carried on by the assessee for that year. This business can be speculative or non-
speculative business.
4) This means that the loss of normal business can be set off from the speculation incomes but vice
a versa is not possible.
5) Loss of business can be set off from the incomes from the professions being carried on by the
assessee.
6) Loss can also be set off against an income, which arises due to business activity, but it is not
charged under the head of PGBP.
7) Business loss can be carried forward for eight years following the year when loss was first
computed
8) Business may or may not be continued for which the carry forward and set off is desired.

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9) Loss of business shall be allowed to be carried forward only if ITR has been filed as per the time
period mentioned in Section 139(1).
10)To have a carry forward and set off of loss of business, the assessee must be the same.

Priority of set off, when assessee has brought forward losses

1) Current year's depreciation, current year's capital expenditure on scientific research and
current year's capital expenditure on family planning.
2) Brought forward business loss.
3) Brought forward depreciation, brought forward capital expenditure on scientific research and
brought forward capital expenditure on family planning.

CARRY FORWARD AND SET OFF OF SPECULATION BUSINESS LOSSES: SECTION 73

1) Loss of a speculation business shall be set off only against the profits of another speculation
business.
2) The loss can be carried forward for four years following the year when loss was first computed.
3) In this case there is no condition that the same speculative business must be carried on.
4) To have carry forward and set off, the assessee must be the same and exceptions discussed above
shall also apply.
5) Loss shall be allowed to be carried forward and set off only if ITR has been filed as per the time
period mentioned u/s 139(1).

SPECULATIVE BUSINESS: SECTION 43(5): Means a business in which a contract for the purchase
or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery
or transfer of the commodity or scripts.
However, eligible transaction in respect of trading in commodity derivatives carried out
in a recognised association, which is chargeable to CTT (commodities transaction tax) shall
not be regarded as a speculative transaction.

EXPLANATION TO SECTION 73: In case of a company deriving its income mainly under the head
of PGBP (other than a company whose principal business is business of trading in shares or banking
or granting of loans and advances), any part of its business consisting of purchase or sale of shares
shall be deemed to be speculation business for the purpose of this section.
NOTE: In order to encourage participation in trading of agricultural commodity derivatives,
transactions which are not chargeable to CTT shall be treated as non-speculative transitions.

CARRY FORWARD AND SET OFF OF LOSS OF THE SPECIFIED BUSINESS MENTIONED UNDER
SECTION 35AD: SECTION 73A
1) Any loss in the specified business shall be set off only against profits of any other specified
business.

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2) The loss which cannot be set off will be carried forward for set off against profits from any
specified business in the following year.
3) Loss shall be carried forward for unlimited period of time.
4) Loss of the assessee on the account of specified business claiming deduction u/s 35AD would be
allowed to be set off against the profits of another specified business, whether or not the latter
is eligible for deduction u/s 35AD

CARRY FORWARD AND SET OFF OF LOSS UNDER CAPITAL GAINS: SECTION 74
1) Loss of long-term capital asset can be set off only against income of long term capital asset but
loss of short-term capital asset can be set off against income of long-term capital asset or income
of short-term capital asset u/s 70
2) The loss can be carried forward for eight years following the year when loss was first computed
3) Loss can be carried forward only if ITR has been filed as per time period mentioned u/s 139(1)

CARRY FORWARD AND SET OFF OF LOSS FROM THE ACTIVITY OF OWNING AND
MAINTAINING RACE HORSES: SECTION 74A
1) Loss from activity of owning and maintaining of race horses can be set off only from the income
of same activity
2) The loss can be carried forward for four years following the year when loss was first computed
3) The carry forward of loss is permissible only if the assessee continues the activity of owning
and maintaining of race horses. This is because loss cannot be set off from the income of any
other activity
4) Loss shall be allowed to be carried forward and set off only if ITR has been filed as per time
period mentioned u/s 139(1)

SET OFF AND CARRY FORWARD OF UNABSORBED DEPRECIATION: SECTION 32(2)

CIT v Virmani Industries (P.) Ltd. [1995] 83 Taxman 343 (SC): The Honorable Supreme
Court has set the following rules for set off and carry forward of unabsorbed depreciation
Step 1: Where there is current year's depreciation relating to a business it should be set off from the
profits the same business.
Step 2: If full depreciation cannot be set off under Step 1 such depreciation which could not be set
off would be known as unabsorbed depreciation and such unabsorbed depreciation shall be
set off against the profits of any business or from income of profession carried on by the
assessee during the current previous year.
Step 3: If still full depreciation cannot be set off under Step 2, then it can be set off from the incomes
of any other head of income, except from the income under the head salary and casual
incomes
Step 4: If full deprecation cannot be set off under Step 3, then it shall be carried forward to next
previous year.
Step 5: Add such unabsorbed depreciation to the amount of depreciation of such previous year in
which it has been brought forward. Brought forward depreciation shall be treated as part of
current year's depreciation. Now set off aggregated depreciation as per Steps 1-3.

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Step 6: Repeat Steps 1 to 5 without any time limits. This means that unabsorbed depreciation can
be carried forward for unlimited period of time.
However, Steps 5 and 6 are subject to the conditions of Section 72(1). This means that if there is
any brought forward loss of the business then it shall be set off in priority to such unabsorbed
depreciation.
Note: Business may or may not be carried on for which there is unabsorbed depreciation and
for which set off is claimed.

BROUGHT FORWARD LOSSES MUST BE SET OFF IN IMMEDIATELY SUCCEEDING YEAR

Losses which are carried forward must be set off against the income of the immediately
succeeding year/years in which income is available. If carry forward loss is not set off in the
immediately succeeding year in which income is available, then it cannot be set off in later year.

CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CERTAIN COMPANIES: SECTION 79
In case of a company in which public is not substantially interested (private company and closely
held companies), losses of prior previous year shall be allowed to be carried forward and set off
against income of current year only if:
1) On the last day of the PY in which losses were incurred; and
2) On the last day of the PY in which losses are to be carried forward and set off
at least 51% of the voting power were beneficially held by the same persons.
However, even if the said condition is not satisfied in case of an eligible start-up referred u/s 80-IAC,
losses of preceeding PYs shall be allowed to be carried forward and set off against the income of the
previous year if
a) all shareholders continue to hold their shareholding on 31/3/PY in the same manner as they
held shares during 31/3/preceding PY and
b) such loss has been incurred during the period of seven years beginning from the year in which
such company is incorporated.
However, the change because of the following transactions shall not be considered as a change in
the shareholding:
1) The death of a shareholder
2) Gift by a shareholder to his relative, and
3) Transfer of shares in Indian company which is a subsidiary of a foreign company as a result of
amalgamation or demerger of a foreign company subject to the condition that fifty-one per cent
shareholders of amalgamating or demerged foreign company continue to be the shareholders of
the amalgamated or the resulting foreign company.
4) To a company where a change in the shareholding takes place in a previous year pursuant to a
resolution plan approved under the Insolvency and Bankruptcy Code, 2016
5) Where change in the share-holding takes place in the PY due to approved resolution plan under
Insolvency and Bankruptcy Code, 2016

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