CHAPTER 1: DIRECT TAXES AT A G L A N C E

1) Canons of taxation refer to the administrative aspect of a tax. The fundamental canons of taxation are as
follows

Canon of equity: Canon of Certainty; Canon of Convenience; Canon of Economy

2) Direct Taxes are directly levied on Income of the person and its burden cannot be shifted; for example:
Income Tax.

3) Indirect Taxes are imposed on price of goods or services. Person paying the indirect tax can shift the
incidence to another person; for example: GST or Customs Duty.

4) Income Tax was introduced in India for the first time by the British in the year 1860
5) Income Tax A ct, 1886; 1918; 1922; 1961
6) The organizational history of the Income-tax Department starts in the year 1922.
7) The Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax
authorities.

8) In 1924,Central Board of Revenue Act constituted the Board as a statutory body with functional
responsibilities for the administration of the Income-tax Act.

9) The roots of every law in India lies in the Constitution

❖ Article 265: No tax shall be levied or collected except by the Authority of Law.
❖ Article 246:Distributes legislative powers including taxation, between the Parliament of India and
the State Legislature.

❖ Schedule VII- Enumerates powers under three lists

✓ Union List: Powers of Central Government
✓ Legislative List: Powers of State Government
✓ Concurrent List: Both Central and State Government have powers, in case of conflict; law made
by Union Government prevails.

10) The Central Board of Revenue or Department of Revenue is the apex body charged with the
administration of taxes. It is a part of Ministry of Finance which came into existence as a result of the
Central Board of Revenue Act, 1924.
11) The Board was split up into two, namely the Central Board of Direct Taxes (CBDT) and Central Board of
Excise and Customs (CBEC) with effect from 1st January, 1964.
12) This bifurcation was brought about by constitution of the two Boards under Section 3of the Central
Boards of Revenue Act, 1963

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13) The Central Board of Direct Taxes (CBDT) provides essential inputs for policy and planning of direct
taxes in India and is also responsible for administration of the direct tax laws through Income Tax
Department.

14) The CBDT is a statutory authority functioning under the Central Board of Revenue Act, 1963. It is India’s
official Financial Action Task Force (FATF) unit.
15) The CBDT is headed by CBDT Chairman and also comprises six members. The Chairperson holds the
rank of Special Secretary to Government of India while the members rank of Additional Secretary to
Government of India.

Member (Income Tax); Member (Legislation and Computerisation); Member (Revenue); Member
(Personnel & Vigilance); Member (Investigation); Member (Audit & Judicial).

16) The CBDT Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), a premier
civil service of India, whose members constitute the top management of Income Tax Department.

17) Income Tax Department functions under the Department of Revenue in Ministry of Finance. It is
responsible for administering following direct taxation acts passed by Parliament.
❖ Income Tax Act, 1961
❖ Various Finance Acts (Passed Every Year in Budget Session)
18) The Central Board of Indirect Tax and Customs (CBIC) is a part of the Department of Revenue under
the Ministry of Finance, Government of India. It deals with the tasks of formulation of policy concerning
levy and collection of Customs and GST, prevention of smuggling and administration of matters relating
to Customs, GST and Narcotics to the extent under CBIC’s purview.

1 9 ) A G S T Council consisting of representatives from the Centre as well as State has been formulated under
the GST Law of indirect taxes. The Council will make recommendations to the Union and the States on
GST laws, on any other matter relating to GST.

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 CHAPTER 2: BASIC CONCEPT OF I N CO M E TAX
1) The entire amount of income tax collected by the Central Government is classified under the head:
❖ Corporation Tax (Tax on the income of the companies); and
❖ Income Tax (Tax on income of the non-corporate assessees).

2) Income Tax Act, 1961: This Act came into force on 1st April, 1962. It contains Sections 1 to 298
3) Notifications are issued either by Central Government or by CBDT. These notifications are binding on
everyone, i.e., on Income Tax Authorities as well as on the assessee.
4) Income Tax Rules, 1962: For implementation of the Act and for administration of the direct taxes, the
CBDT is empowered to frame these rules from time to time.
5) The Finance Bill as part of the Union Budget is presented usually in the month of February every year.
It is presented in the Parliament by the Union Finance Minister. Effective Date of Amendment in
Direct Tax Indirect Tax
Usually, the Date of Notification in Official Usually midnight of the date of Presentation of
gazette or in the Finance Act. Bill

6) Circulars and clarifications are issued by the CBDT to clarify the doubts regarding the scope and
meaning of certain provisions of the law and primarily to provide guidance to the Income Tax officers.
These circulars are binding on the Income Tax Authorities but not on the assessee. However, an
assessee can take benefit of these circulars.
7) Decisions pronounced by Supreme Court become Judicial Precedent and are binding on all the courts,
Appellate Tribunal, Income Tax Authorities and on assesses. Further, High Court decisions are binding
on assesses and Income Tax Authorities which come under its jurisdiction unless it is overruled by a
higher authority. The decision of a High Court cannot bind other High Court.
8) Person includes: Individual; HUF; Company; Firm; Association of Person; Body of Individuals; A local
authority; every artificial, juridical person, not falling within any of the above categories.

9) HUFs are governed by two schools:

❖ Mitakshara School –Applies to whole of India except West Bengal & Assam
❖ Dayabhaga School - Applies to West Bengal & Assam
10) Domestic company means an Indian Company or any other company which, in respect of its income
liable to income-tax, has made the prescribed arrangements for the declaration and payment of
dividends (including dividends on preference shares) within India, payable out of such income.

11) Foreign Company is a company which is not a domestic company

12) Exception to the General Rule the Income of PY of an assessee is assessed in the PY itself
❖ Income of Non-Resident from Shipping;

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 ❖ Income of persons leaving India either permanently or for long duration
❖ Income of bodies formed for short duration;
❖ Income of person trying to transfer his assets with a view to avoid tax
❖ Income of discontinued business
13) Previous Year [Section 3]
❖ In case of newly set up business or profession- the first previous year will be the period commencing
from the date of setting up of business/profession and ending on the immediately following March,
31
❖ In case of a source of income newly coming into existence - the date on which the source of income
newly comes into existence and ending on the immediately following March, 31

14) Maximum Marginal Rate to mean the rate of income-tax (including surcharge on the income-tax, if any)
applicable in relation to the highest slab of income in the case of an individual, AOP or BOI, as the
case may be, as specified in Finance Act of the relevant year.

15) The income-tax law does not make any distinction between income accrued or arisen from a legal source
and income tainted with illegality. In CIT v. Piara Singh (1980) 3 Taxman 67, the Supreme Court has
held that if smuggling activity can be regarded as a business, the confiscation of currency notes by
customs authorities is a loss which springs directly from the carrying on of the business and is, therefore,
permissible as a deduction

16) An amount referable to fixed capital is a capital receipt whereas a receipt referable to circulating capital
would be a revenue receipt. While the latter is chargeable to tax, the former is not subject to income-tax
unless otherwise expressly provided.

17) Section 4 of the Act is the charging section and the most effective and operative of the various provisions
in the Act since, it is because of this section alone all other sections become enforceable.

18) Income tax : -

a) Income tax shall be charged at the rate or rates prescribed in the finance act for the relevant
previous year,

b) the charge of tax is on various persons specified u/s 2(31);

c) the income sought to be taxed is that of the previous year and not of the of assessment year
d) the levy of tax on the assessee is on his total or taxable income computed in accordance with and
subject to the appropriate provisions of the income tax Act, including provisions for the levy of
additional income-tax.
19) Liquidated damages received under a contract to supply machinery with delay – Whether Capital or
Revenue Receipt? - Capital Receipt [CIT (Appellant) v. Saurashtra Cement Ltd. (Respondent)]

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 RESIDENTIAL STATUS [SECTION 6]

20) Residential Status of Individual

An individual is said to be resident in India in any previous year if he:
❖ Condition 1: has been in India for at least 182 days during the previous year; or,
❖ Condition 2: has been in India for at least 365 days during the 4 years preceding the
previous year and has been in India for at least sixty days (60 days) during the previous
year. [Section 6(1)]

Exception to the Condition 2: 182days shall be substituted over 60 days

❖ Clause (a): Citizen of India, who leaves India in any PY as a member of the crew of an
Indian ship
❖ Clause (b): Citizen of India, or a person of Indian origin who, being outside India, comes
on a visit to India in any PY
Only for Clause (b) - Indian citizen or person of Indian origin having total income, other than
the income from foreign sources, exceeding ₹ 15 lakhs during the PY – 120 days shall be
substituted over 182/60days

Person of Indian Origin: A person is deemed to be of Indian origin if he, or either of his parents
or any of his grandparents, was born in Undivided India

Income from foreign sources means income which accrues or arises outside India (except income
derived from a business controlled in India or profession set up in India).

21) Deemed Resident: Notwithstanding anything contained in Section 6(1), an individual, being a
citizen of India, having total income, other than the income from foreign sources, exceeding ₹
15 lakhs during the PY shall be deemed to be resident in India in that PY, if he is not liable to
tax in any other country or territory by reason of his domicile or residence or any other criteria
of similar nature

22) Resident and Ordinarily Resident (ROR):- (i) He is a resident in at-least any 2 out of the 10 PYs
immediately preceding the relevant PY, and(ii) he has been in India for 730 days or more
during the 7PYs immediately preceding the relevant PY.

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23) An individual is not ordinarily resident in any PY if –
❖ he has been a non-resident in India in 9 out of the 10 PYs preceding that year, or
❖ he has during the 7 PYs preceding that year been in India for a period of, or periods
amounting

in all to, 729 days or less.; or

❖ a citizen of India, or a person of Indian origin, having total income, other than the income
from foreign sources, exceeding ₹ 15 lakhs during the PY, who has been in India for 120 days

or more but less than 182 days; or

❖ a citizen of India who is deemed to be resident in India u/s 6(1A)

2 3 ) A person resident in one year may become non-resident or not ordinarily resident in another
year and vice versa.
24) It must also be noted that the residential status of an individual for tax purposes is neither based
upon nor determined by his citizenship, nationality and place of birth or domicile.
25) India means territory of India, its territorial waters, continental shelf, Exclusive Economic Zone
(up to 200 nautical miles) and airspace above its territory and territorial waters.
26) Where the exact arrival and departure time is not available then the day he comes to India and
the day he leaves India is counted as stay in India.

27) Residential Status of HUF/Firm/AOP

❖ Resident - If control and management of the affairs is situated wholly or partly in India.
✓ If karta is ROR, then the HUF would be ROR
✓ If karta is RNOR, then the HUF would be RNOR

❖ Non-Resident - If control and management of the affairs is situated wholly outside India.
28) It is immaterial whether Karta is Resident or Non-Resident, for the purpose of determining
whether HUF is ROR or RNOR. If Karta satisfies both the additional conditions, then HUF will
be ROR, otherwise RNOR.

2 9 ) A HUF would generally be presumed to be resident in India unless the assessee proves to the
tax authorities that the control and management of its affairs is situated wholly outside India.
30) Firms, AOP, local authorities and other artificial juridical persons can be either ROR or non-
resident in India but they cannot be not ordinarily resident in India.

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32) Residential Status of Companies
Accordingly, a company shall be said to be resident in India in any previous year, if –
❖ it is an Indian company; or
❖ its place of effective management, in that year, is in India
33)Only an individual or a HUF can be resident, not ordinarily resident or non-resident in India.
All other assesses can be either resident or non-resident in India but cannot be RNOR.
34) An Indian Company is always a Resident in India irrespective of the fact whether POEM is
outside India.
3 5 ) A foreign company will be resident in India if its Place of Effective Management during the
previous year is in India
36) Vide Circular No 08 of 2017 dated 23rd February, 2017. it has been clarified that the POEM
provisions shall not apply to a company having turnover or gross receipts of ₹ 50 crore or less
in a FY.

3 7 ) A company shall be said to be engaged in “active business outside India” if the passive income
is not more than 50% of its total income; and
(i) less than 50% of its total assets are situated in India; and
(ii) less than 50% of total number of employees are situated in India or are resident in India;
and
(iii) the payroll expenses incurred on such employees is less than 50% of its total payroll
expenditure.

Passive income of a company shall be aggregate of, income from the transactions where both
the purchase and sale of goods is from / to its associated enterprises; and income by way of
royalty, dividend, capital gains, interest or rental income.

38) The place of effective management in case of a company engaged in active business outside
India shall be presumed to be outside India if the majority meetings of the board of directors
of the company are held outside India.

39) For the purpose of determining whether the company is engaged in active business outside
India, the average of the data of the previous year and two years prior to that shall be taken into
account.

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40) Determination of POEM other than those that are engaged in active business outside India
Step 1:Ascertaining the person who actually make the key management and commercial
decision for conduct of the company business as a whole

Step 2: Determination of place where these decisions are in fact being made

41) Guiding principles for determining the POEM

❖ The location where a company’s Board regularly meets and makes decisions
❖ The location of a company’s head office
❖ The use of modern technology impacts the place of effective management in many ways
If the above factors do not lead to clear identification of POEM, then the following secondary
factors can be considered:

❖ Place where main and substantial activity of the company is carried out; or
❖ Place where the accounting records of the company are kept.

41)TEST OF RESIDENCE FOR FIRM A N D AOP/BOI :-

➢ Resident – if the control and management of its affairs is situated wholly and partly in India.
➢ Non-resident – if the control and management of its affairs is situated wholly outside India.
❖ Business and the whole of it may be done outside India and yet the control and management
of that business may be wholly within India.

❖ It is entirely irrelevant where the business is done and where the income has been earned.
What is relevant and material is from which place has that business been controlled and
managed.

43) Rule of Taxation on the basis of Residential Status

Nature of Income ROR RNOR NR
Income received in India (Whether accrued in or Taxed Taxed Taxed
outside India)
Income deemed to be received in India (Whether Taxed Taxed Taxed
accrued in or outside India)
Income accruing or arising in India (Whether Taxed Taxed Taxed
received in India or outside India)

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 Income deemed to accrue or arise in India (Whether Taxed Taxed Taxed
received in India or outside India)
Income received and accrued outside India from a Taxed Taxed Not
business controlled or a profession set up in India Taxed
Income received and accrued outside India from a Taxed Not Not
business controlled from outside India or a Taxed Taxed
profession set up outside India

Income earned and received outside India but later Not Taxed Not Not
on remitted to India (Whether tax incidence arises at Taxed Taxed
the time of remittance)

44) Scope of Total Income

Residential Income Accrued/D Income Received/Deeme Income Accrued/Deem

Status eemed to Accrue d to Receive in India ed to Accrue outside
in India India

Resident/ROR Taxable Taxable Taxable

RNOR Taxable Taxable Not Taxable
(Business controlled
from outside India
Taxable)

NR Taxable Taxable Not Taxable

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 Income deemed to be received in India [Section 7]

Contribution in excess of 12% of salary to Recognised provident fund or interest credited in

excess of 9.5% p.a. (Annual accretion to the credit of RPF)
Contribution by the Central Government or any other employer in the P.Y. under a pension
scheme referred u/s 80CCD
Amount transferred from unrecognised provident fund to recognised provident fund (being
the employer's contribution and interest thereon)
All sums deducted by way of taxes at source (Section 198)
Unexplained or unrecorded investments / money (Section 69/69A)
Dividend declared by a Company or distributed or paid shall be deemed to be the income of
the PY in which it is declared
Interim Dividend unconditionally made available by the Company to the member who is
entitled to

Income N OT deemed to accrue /arise in India

❖ Business, in respect of which all the operations are NOT carried out in India
❖ Purchase of goods in India for export
❖ Collection of news and views in India for transmission out of India
❖ Shooting of cinematograph films in India
❖ Activities of display of uncut and unassorted diamonds in any special zone notified by Central
Government

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 TAX RATES

(A) Individual/ HUF/AOP/BOI/AJP

Level of Total Income Tax Rate

Up to ₹ 2,50,000 NIL
Next ₹ 2,50,000 [₹ 2,50,001 –₹ 5,00,000] 5%
Next ₹ 5,00,000 [₹ 5,00,001 –₹ 10,00,000] 20%
Above ₹ 10,00,000 30%

For resident individuals of the

age of 60 years or more but less Basic exemption limit is ₹ 3,00,000 (instead of
than 80 years at any time ₹ 2,50,000). Afterwards, the aforesaid slab should
during the PY be applied

For resident individuals of the

Basic exemption limit is ₹ 5,00,000 (instead of
age of 80 years or more at any
₹ 2,50,000). Afterwards, the aforesaid slab should
time during the PY
be applied

The CBDT has clarified that a person born on 1st April would be considered to have attained a
particular age on 31st March, the day preceding the anniversary of his birthday

Rebate u/s 87A (where total income of resident individual does not exceed ₹ 5,00,000) is 100%
of tax liability or ₹ 12,500 whichever is lower

Surcharge Rates

Total Income (₹) Surcharge rate on tax (%)

> ₹ 50 lakhs ≤ ₹ 1 crore 10
> ₹ 1 crore ≤ ₹ 2 crores 15
> ₹ 2 crore ≤ ₹ 5 crores 25
> 5 crores 37

The enhanced surcharge of 25% and 37% on Income-tax has been withdrawn on income-tax
payable at special rates on dividend income, STCG u/s 111A and LTCG u/s 112A arising from
the transfer of equity share in a company or unit of an equity-oriented fund/ business trust,
which has been subject to securities transaction tax.

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 OPTION FOR AVAI L I N G CO N C E S S I O NA L TAX SLAB RATES
[SECTION 115BAC]

Level of Total Income Tax Rate

Upto ₹ 2,50,000 NIL
Next ₹ 2,50,000 [₹ 2,50,001 – ₹ 5,00,000] 5%
Next ₹ 2,50,000 [₹ 5,00,001 – ₹ 7,50,000] 10%
Next ₹ 2,50,000 [₹ 7,50,001 – ₹ 10,00,000] 15%
Next ₹ 2,50,000 [₹ 10,00,001 – ₹ 12,50,000] 20%
Next ₹ 2,50,000 [₹ 12,50,001 – ₹ 15,00,000] 25%
Above ₹ 15,00,000 30%

Certain deductions/exemptions not allowable:

While computing total income, following deductions/exemptions would not be allowed, if an
individual or HUF opts for concessional rates of taxes

Section Exemption/Deduction
EXEMPTIONS FROM TOTAL INCO M E
10(5) Leave travel concession
10(13A) House rent allowance
Exemption from special allowances or benefit to meet expenses relating to
10(14)
duties or personal expenses
10(17) Daily allowance or constituency allowance of MPs and MLAs
Exemption in respect of income of minor child included in the income of
10(32)
parent
10AA Tax holiday for units established in SEZ
I N C O M E FROM SALARIES
(i) Standard deduction under the head “Salaries”
16 (ii) Entertainment allowance
(iii) Professional tax
I N C O M E FROM HOUSE PROPERTY
24(b) Interest on loan in respect of self-occupied property
PROFITS OR G A I N S FROM BUSINESS/PROFESSION
32(1)(iia) Additional depreciation

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 Deduction in respect of contribution to
- notified approved research association/ university/college/other
institutions for scientific research [Section 35(1)(ii)]
- approved Indian company for scientific research [Section 35(1)(iia)]
35(1)(ii),(iia),(ii - notified approved research association/ university/college/other
i) or 35(2AA) institutions for research in social science or statistical research [Section
35(1)(iii)]
- An approved National laboratory/university/ IIT/ specified person for
scientific research undertaken under an approved programme [Section
35(2AA)]

35AD Investment linked tax incentives for specified businesses

35CCC Deduction in respect of expenditure incurred on notified agricultural project
I N C O M E FROM OTHER SOURCES
57(iia) Deduction in respect of family pension
DEDUCTIONS UNDER CHAPTER VI-A
Deductions allowed:
80C – 80U Employers contribution towards NPS u/s 80CCD(2) and
Deduction in respect of employment of new employees u/s 80JJAA

Certain losses not allowed to be set-off:

While computing total income, set-off of any loss would not be allowed.
(i) carried forward or depreciation from any earlier assessment year, if such loss or depreciation is
attributable to any of the deductions referred above; or

(ii) under the head house property with any other head of income;

AM T shall not apply where the individual/HUF opts to pay tax u/s 115BAC

Person Rate of Tax Surcharge on income tax

Partnership Firm (including
Limited Liability Partnership) 30% on Total Income
12% if total income exceeds
/Local Authority
₹ 1 crores

Upto ₹ 10,000 – 10%

Cooperative society Next ₹ 10,000 – 20%
Above ₹ 20,000 – 30%

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 Domestic Company
(i) Where it opted for Section
22% on Total Income
115BAA

(ii) Where it opted for Section

115BAB 15% on Total Income
7% if total income is between ₹ 1
(iii) Where not opted for
cr. – ₹ 10 crs.
Section 115BAA and the
total turnover or gross 25% on Total Income 12% if total income exceeds ₹
receipts in PY 2018-19
10 crs
does not exceed ₹ 400 crs.

(iv) In case of other domestic 30% of the total

companies income

2% if total income is between ₹ 1

50% on specified
cr. – ₹ 10 crs.
royalties and
Foreign Company technical services and
5% if total income exceeds ₹ 10
40% on balance
crs

Rates of surcharge is 10%if the company opts to pay tax u/s 115BAA & 115BAB irrespective of
amount of total income

Health and Education cess @4% on (income tax+ surcharge) in all cases

A company is liable to pay Minimum Alternate Tax @15%

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

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 CHAPTER 3: I N CO M E S WHICH D O N OT FORM PART OF TOTAL
I N CO M E

❖ Exemptions are claimed on the basis of the source of income.

EXEMPTIONS ❖ The exempted income is not included in the total Income of the
assessee.

❖ Deductions are allowed on the basis of the

DEDUCTIONS payments/investments made.
❖ The tax deductions are allowed under different heads of income
as well as from the gross income.

❖ Rebate is a percentage amount reduced from total income tax

REBATE payable.
❖ Tax rebate is allowed as a reduction to the total tax payable

1) Difference between Exempt Income and Deductions: There is a major difference between
incomes u/s 10 and the deductions under Chapter-VI-A, although and it is therefore imperative
to note that the incomes u/s 10 do not enter the computation of taxable income for assessees at
all, they are exempt; whereas Chapter for VI-A, first incomes are added and form part of Gross
Total Income (GTI) and only then these deductions under the Chapter are allowed.

2) Agricultural Income [Section 10(1)]: Section 10(1) states that agricultural incomes are not
included in the total income of the assessees. Forms of Agriculture Income:
❖ It could take the form of rent or revenues derived from a land in India. (If agricultural land
is situated in a foreign country, the entire income would be taxable)

❖ It could take the form of income through agriculture / cultivation to render the produce fit
for being taken into the market for sale.

❖ It could take the form of sale of agricultural produce itself.

3) Income from nursery: As per Explanation 3 to section 2(1A), income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income, whether or not the
basic operations were carried out on land.

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4) Composite Income (Business and Agricultural Income)

Nature of Income Income tax Rule Agricultural Non-Agricultural

applicable income Income

Income from growing Rule 7A 65% of such income 35% of such income
and manufacturing of
rubber
Income derived from Rule 7B(1) 75% of such income 25% of such income
sale of coffee grown and
manufactured in India
Income derived from Rule 7B(1A) 60% of such income 40% of such income
sale of coffee grown,
cured, roasted and
grounded is India
Income from sale of tea Rule 8 60% of such income 40% of such income
manufactured or grown
in India

5) Income from Farm Building: Income arising from the use of farm building for any purpose
(including letting for residential purpose or for the purpose of business or profession) other than
agriculture would not be agricultural income.

The capital gains arising from the transfer of urban agricultural land would not be treated as
agricultural income under section 10but will be taxable under section 45.

6) Partial Integration of agricultural and non-agricultural income: This is applicable to

Individuals, HUF, AOP, BOI, and artificial juridical person.
Two conditions which need to be satisfied for partial integration of agricultural income with
non-agricultural income are:

❖ The net agricultural income must be > INR 5000 p.a.; and

❖ The non-agricultural income must be > the maximum amount not chargeable to tax (which
is INR 250,000 for all individuals / HUF’s; INR 300,000 for senior citizens and INR 500,000
for very senior citizens)

7) Share of profit received by a partner from the Firm [Section 10(2A)]: Share of profit received
by a partner from a firm/LLP is exempt from tax in the hands of the partner. This exemption is
limited only to share of profit and does not apply to interest on capital and remuneration
received by the partner from the firm/LLP.

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8) Income of the HUF [Section 10(2)]: Amount received out of family income, or in case of
impartible estate, amount received out of income of family estate by any member of such HUF
is exempt from tax.

9) Interest to Non-Residents [Section 10(4)]:

(a)As per section 10(4)(i), in the case of a non-resident; any income by way of interest on certain
notified securities or bonds (including income by way of premium on the redemption of such
bonds) is exempt from tax.

(b)As per section 10(4)(ii),

❖ In the case of an individual,
❖ Any income by way of interest on money standing to his credit in a Non-Resident
(External) Account in any bank in India in accordance with the FEMA, 1999 is exempt
from tax.
Exemption under section 10(4)(ii) is available only if such individual is a person resident outside
India

10) Remuneration received by specified diplomats and their staff [Section 10(6)(ii)]

❖ in case of an individual who is not a citizen of India,

❖ Remuneration received by him as an official of an Embassy, High Commission, Consulate
or Trade Representative of a Foreign State, or member of the staff of any of that official is
exempt from tax, if corresponding Indian official in that foreign country enjoys a similar
exemption.

11) Salary of a foreign employee and non-resident member of crew [Section 10(6)(vi),(viii)]: The
remuneration received by a foreign national as an employee of a foreign enterprise for services
rendered by him during his stay in India is exempt from tax, provided the following conditions
are fulfilled:
❖ The foreign enterprise is not engaged in any trade or business in India;
❖ His stay in India does not exceed in the aggregate a period of 90 days in such year; and
❖ Such remuneration is not liable to be deducted from the income of the employer.
As per section 10(6)(viii), any salaries received by or due to a non-resident foreign national for
services rendered in connection with his employment on a foreign ship where his total stay in
India does not exceed in the aggregate period of 90 days in the year is exempt from tax.

12) Remuneration of a foreign trainee [Section 10(6)(xi)]: The remuneration received by a foreign
trainee as an employee of foreign Government during his stay in India in connection with his
training in any establishment or office of, or in any undertaking owned by the Government ; or
any company owned by the Central Government, or any State Government or any company
which is a subsidiary of a company referred to above or any corporation established by or under

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 a Central, State or Provincial Act or any co-operative society wholly financed by the Central
Government, or any State Government Tax, is exempt from tax.

13) Technical fees received by a notified foreign company [Section 10(6C)]: Section 10(6C) grants
exemption from tax in respect of income arising to notified foreign company by way of royalty
or fees for technical services received in pursuance of an agreement entered into with that
Government for providing services in or outside India in projects connected with security of
India.

14) Allowance/perquisites to Government employee outside India [Section 10(7)]: Any

allowances or perquisites paid or allowed as such outside India by the Government to a citizen
of India for rendering service outside India is exempt from tax.

15) Retrenchment compensation [Section 10(10B)]: Compensation received at the time of

retrenchment is exempt from tax to the extent of lower of the following:
❖ An amount calculated in accordance with the provisions of section 25F(b) of the Industrial
Dispute Act,1947; or

❖ Maximum amount specified by the Central Government (Rs. 5,00,000); (c) Actual amount
received. Under the Industrial Dispute Act, a workman is entitled to retrenchment
compensation, equal to 15 days’ average pay for each completed year of continuous service
or any part in excess of six months. Compensation in excess of aforesaid limits is taxable as
salary. However, the aforesaid limit is not applicable in cases where compensation is paid
under any scheme approved by the Central Government.

16) Payment at the time of voluntary retirement [Section 10(10C)]: As per section 10(10C), any
compensation received at the time of voluntary retirement or termination of service is exempt
from tax.

Reference Case Law: The assessee, an employee, claimed that the tax paid by the employer on
his salary income is not liable to be included in his total income as it is exempt under section
10(10CC). Assessing Officer disallowed the claim. The Tribunal following the Special bench in
RBF Rigs Corpn. LIC (RBFRC) v. ACIT (2007) (Special Bench)(Delhi Tribunal) held that tax
borne by the employer on behalf of the employee would constitute a non-monetary payment as
such the same is exempt under section 10(10CC).

17) Amount paid on life insurance policy [Section 10(10D)]: As per section 10(10D), any amount
received under a life insurance policy, including bonus is exempt from tax. Following points
should be noted in this regard:

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 Situation Exemption u/s 10(10D)
In respect of policies Any sum received under a LIP including the sum allocated by way of
issued before bonus is exempt.
1.4.2003
Any sum received Any sum received under a LIP including the sum allocated by way of
under a LIP bonus is exempt. However, exemption would not be available if the
including the sum premium payable for any of the years during the term of the policy
allocated by way of exceeds 20% of “actual capital sum assured”.
bonus is exempt.
In respect of policies Any sum received under a LIP including the sum allocated by way of
issued on or bonus is exempt. However, exemption would not be available if the
after premium payable for any of the years during the term of the policy
1.4.2012 but before exceeds 10% of “minimum capital sum assured “under the policy on
1.4.2013 the happening of the insured event at any time during the term of the
policy.
In respect of policies (a) Where the insurance is on the life of a person with disability or
issued on or after severe disability as referred to in section 80U or a person suffering
1.4.2013 from disease or ailment as specified under section 80DDB.
Any sum received under a LIP including the sum allocated by way of
bonus is exempt. However, exemption would not be available if the
premium payable for any of the years during the term of the policy
exceeds 15% of “minimum capital sum assured” under the policy on
the happening of the insured event at any time during the term of the
policy.

18) Pension to gallantry award winner [Section 10(18)]: Pension received by an

❖ individual who was employee of the Central Government or State Government and
❖ who has been awarded ParamVir Chakra or MahaVir Chakra or Vir Chakra or any other
notified gallantry award is exempt from tax.

In case of death of such individual, any income by way of Family pension received by any
member of the family of such individual is also exempt.

19) Income of a registered trade union [Section 10(24)]: Any income chargeable under the head
❖ “Income from house property” and
❖ “Income from other sources” of a registered union within the meaning of The Trade Unions
Act, 1926, formed primarily for the purpose of regulating the relation between workmen and
employers or between workmen and workmen is exempt from tax.

20) Specified income of a Sikkimese Individual [Section 10(26AAA)]:

(i) The following income, which accrues or arises to a Sikkimese individual, would be exempt
from income tax–

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 ❖ Income from any source in the State of Sikkim; or
❖ Income by way of dividend or interest on securities.
(ii) However, this exemption will not be available to a Sikkimese woman who, on or after 1st
April, 2008, marries a non-Sikkimese individual.

21) Income on Buyback of Shares [Section 10(34A)]: Any income arising to an assessee, being a
shareholder, on account of buy back of shares by the company as referred to in section 115QA
is exempt from tax.

22) Income from international sporting event [Section 10(39)]: Any specified income of notified
person, arising from an international Sporting event held in India is exempt from tax, if the event
is approved by the international body and is notified by the Central Government and has
participation by more than two countries.

23) Exemption of Income of a foreign company from sale of Crude Oil in India [Section 10(48)]:
Any income of a foreign Co. received in India in Indian currency on account of sale of crude oil
to any person in India shall be exempt if the following conditions are satisfied.

24) Exemption of income of foreign company from sale of leftover stock of crude oil on
termination of agreement or arrangement [Section 10(48B)]: Any income of foreign company
on account of sale of leftover stock of crude oil from the facility in India after the expiry or on
termination of the agreement or the arrangement shall be exempt, in accordance with the terms
mentioned therein.

25) Income accruing or arising to Indian Strategic Petroleum Reserves Limited (ISPRL)
[Section10 (48C)]: Any income accruing or arising to Indian Strategic Petroleum Reserves
Limited (ISPRL), being a wholly owned subsidiary of Oil Industry Development Board under
the Ministry of Petroleum and Natural Gas, as a result of an arrangement for replenishment of
crude oil stored in its storage facility in pursuance to directions of the Central Government in
this behalf.
This exemption shall be subject to the condition that the crude oil is replenished in the storage
facility within 3 years from the end of the financial year in which the crude oil was removed
from the storage facility for the first time.

26) Exemption of income of National Financial Holdings Company [Section 10(49)]: Any income
of the National Financial Holdings Company, being a company set-up by the Central
Government, shall be exempt.

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 CHAPTER 4: I N CO M E UNDER THE HEAD “SALARIES”
1) If the assessee opted concessional tax slab under section 115BAC, then assessee is not eligible to
claim exemption from any allowances except:
❖ Travelling Allowances
❖ Daily Allowances
❖ Conveyance Allowance
❖ Transport Allowance (For blind, handicapped, deaf or dumb employee)

2) Fully Taxable Allowances: Dearness Allowance, Additional Dearness Allowance and Dearness
Pay; Fixed Medical Allowance; Tiffin Allowance; Servant Allowance; Non-practicing
Allowance; Hill Allowance; Warden Allowance and Proctor Allowance; Deputation Allowance;
Overtime Allowance; Other Allowances like Family allowance, Project allowance, Marriage
allowance, City Compensatory Allowance, Dinner allowance, Telephone allowance etc.

Fully Taxable
(Entertainment, Dearness,
Allowances

Overtime,
City Compensatory, Servant, Meal
Allowances)

Partly taxable
(HRA u/s 10(13A) & Special
Allowances
u/s 10(14) included)

Fully Exempt
(Allowances to H C / SC Judges
& to Govt.
Employees outside India)

3) Impact of Section 115BAC under the head Salaries:

Sr. Nature of Exemption/Deduction Relating to Salaries New System Existing

No. of Tax u/s system of
115BAC Tax
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

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 VRS Compensation u/s 10(10C) Allowed Allowed
Leave Travel Concession u/s 10(5) Not Allowed Allowed
B ALLOWANCE S
Exemption u/s 10(13A) and Rule 2A from House Rent Not Allowed Allowed
Allowance
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 Not Allowed Allowed
research and 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 Allowed Allowed
Handicapped/Deaf/Dumb/Blind employee
Transport Allowance to other than above employees Not Allowed Not
Allowed
C Perquisites
Free food and beverage through vouchers provided to Not Allowed Allowed
the employee upto 50/meal/Tea & snacks
Other Exemptions from perquisites e.g. Use of Allowed Allowed
Computers Laptops etc
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

4) 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
❖ H R A actually received
❖ Rent paid minus 10% of Salary

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5) Special Allowances [Section 10(14)]:
(i) All special allowances specifically granted to meet expenses, incurred, for the purposes of
performance of duties.
❖ Wholly
❖ Exclusively &
❖ Necessarily

These are exempt to the extent such expenses are actually incurred or the amount received
whichever is less. Examples include, Travelling & Conveyance, Relocation, Helper& Uniform
Allowances. (No cap or upper limit)

(ii) Special allowances granted to an assesse either to meet his personal expenses at the place of
duty OR to compensate for increased cost of living. Allowances which are granted to meet
personal expenses are exempt to the extent of amount received or the limits specified
whichever less is.

Examples include,

❖ Tribal Area Allowance capped to INR 200 per month is exempt.

❖ Children Education Allowance capped to INR 100 per month (per child, max 2 children) is
exempt.
❖ Hostel Expenditure Allowance capped to INR 300 per month (per child, max 2 children) is
exempt.
❖ Transport Allowance for handicapped capped at INR 3200 per month is exempt.
❖ Besides the above there are compensatory allowances for hilly areas, and for work in
difficult conditions too.

Besides the above there are compensatory allowances for hilly areas, and for work in difficult
conditions too.
As per section 10(14), read with rule 2BB following allowances granted to an employee are
exempt from tax subject to certain limit:

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 Only Rs. 3,200 per month for blind,
employee to meet expenditure on handicapped, deaf and dumb employees is
commuting between place of residence and exempt
place of duty.
Allowance granted to an employee working Amount of exemption shall be lower of
in any transport business to meet his following:

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personal expenditure during his duty a) 70% of such allowance; or
performed in the course of running of such b) Rs. 10,000 per month
transport from one place to another place
provided employee is not in receipt of daily
allowance

Conveyance Allowance granted to meet the Exempt to the extent of expenditure incurred
expenditure on conveyance in performance for official purposes
of 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
of absence from his normal place of duty official purposes
Helper/Assistant Allowance Exempt to the extent of expenditure incurred
for official purposes
Research Allowance granted for encouraging Exempt to the extent of expenditure incurred
the for
academic research and other professional official purposes
pursuits
Uniform Allowance Exempt to the extent of expenditure incurred
for official purposes
Special compensatory Allowance (Hilly Amount exempt from tax varies from Rs. 300
Areas) (Subject to certain conditions and to Rs. 7,000 per month
locations)
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

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 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 Up to Rs. 800 per month
working in uncongenial, unnatural climate
in underground mines
High Altitude Allowance granted to armed a. Up to Rs. 1,060 per month (for altitude of
forces operating in high altitude areas 9,000 to 15,000 feet)
(Subject to certain conditions and locations) b. Up to Rs. 1,600 per month (for altitude
above 15,000 feet)

6) Annuity /Pension: Pension however is generally paid by the Government or a Company to the
employee for his past service and this too is payable after the retirement. This pension so
received could be commuted / uncommuted, explained as under:

➢ Uncommuted Pension - Received periodically - Fully taxable for all employees

➢ Commuted Pension - Received in Lumpsum (whole/ part) - Future right to receive

payments given up to receive immediate lumpsum

Treatment of Commuted Pension u/s 10(10A):

❖ Government Employees – Fully Exempt
❖ Non-Government Employees –
✓ 1/3rd of the amount of pension he would have received had he commuted in full or,
✓ ½of the amount of pension he would have received had he Commuted in full

7) Gratuity [Section 10(10)]: The Gratuity so received at the time of retirement or termination of
employment or death of employee, is exempt asunder:
❖ For the Central / State Government employees and for the members of the Defense Services,
any amount received as Gratuity at the time of retirement/death is fully exempt.
❖ For all other employees in the private sector:
(i) In case the employee is covered under the Payment of Gratuity Act, 1972, exempt to
the extent of least of the following:
❖ INR 20,00,000
❖ Gratuity actually received

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 ❖ 15 days’ salary based on salary last drawn for each year of service or part thereof in
excess of 6 months.
(ii) In case the employee is N O T covered under the Payment of Gratuity Act, 1972, any
death-cum retirement Gratuity is exempt to the extent of least of the following:
❖ INR 20,00,000
❖ Gratuity actually received
❖ Half months’ Salary based on last 10 months’ average salary drawn immediately
preceding the month of retirement / death, for each completed year of service
(fraction of year to be ignored).

8) Leave Encashment [Section 10(10AA)]:

(i) Leave Encashment Salary received by employees of the Government, is fully exempt from
tax.
(ii) For the Non-Government employees, the Leave Encashment Salary so received is exempt
from tax to the extent of least of the following:
❖ INR 3,00,000
❖ Leave Salary actually received
❖ 10 month’s Salary on the basis of average Salary drawn in the last 10 months
❖ Cash Equivalent of L eave 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.

9) Compensation on Voluntary Retirement Exemption u/s 10(10C): Refers to compensation

received on voluntarily retirement or termination of service before the date of actual retirement.
Voluntary retirement compensation to be included under the head Salary = Voluntary
Retirement Compensation Less Exemption u/s 10(10C)
Exemption u/s 10(10C)

Types of Employee • Employees of Central or State Government or Local Authority

or Statutory Corporation
• Company or Co-operative Society
• Declared University IIT Notified IIM or Notified institutions
Conditions to be • Compensation received on Voluntary Retirement and
satisfied • The scheme of Voluntary Retirement should be as per rule 2BA
Amount of Exemption • Actual Compensation received/receivable
Least of following • Rs. 5,00,000
• 3 months Total Salary * Completed years of service (Part of the
service to be ignored
•Current Salary per month * Balance months of service left Salary
= Basic + D A (retirement Benefits) + Commission % of turnover

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 Special Points:

1. [Rule 2BA]: The scheme of Voluntary Retirement should be framed in accordance with below
guidelines.

(i) Employee should have completed 10 years of service or 40 years of age. [This condition is
not applicable in the case of an employee of a public sector company].
(ii) Scheme should be applicable to all employee (except Directors).
(iii) Scheme should be drawn to result in overall reduction in existing strength of employees.
(iv) Vacancy caused by voluntary retirement should not be filled up.
(v) Retiring employee shall not be employed in other concern of same management.
If the guidelines are not followed, exemption shall not be available

2. Exemption under 10(10C) can be claimed only once by the Assessee.

10) Profits in lieu of Salary [Section 17(3)]:

❖ The amount of any compensation due to or received by an assessee from the employer or
former employer at or in connection with the termination of his employment.
❖ The amount of any compensation due to or received by any assessee from his employer in
connection with the modification of the terms and conditions relating to employment.
❖ Any amount due to or received, whether in lump sum or otherwise, by any assessee from
any person–
✓ before his joining any employment with that person; or
✓ After cessation of his employment with that person.
❖ Any payment other than the following payment due to or received by assessee from an
employer or a former employer or from a provident or other fund, other than Gratuity
[Section 10(10)], Pension [Section 10(10A)], H R A [Section 10(13A)], Provident F und / Public
Provident F und/ Recognized Provident F und.
❖ Any sum received under Keyman Insurance Policy.

11)PERQUISITES [Section 17(2)]: Any facility / benefit that is granted by the employer, the use of
which is enjoyed by the employee or any member of the employee’s household, is construed as
a perquisite under the Income Tax Act, and hence attracts tax.
Perquisites are taxable under the head “Salaries” only if they are:
❖ allowed by an employer to his employee;
❖ allowed during the continuance of employment;
❖ directly dependent upon service;
❖ resulting in the nature of personal advantage to the employee; and
❖ derived by virtue of employer’s authority.

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12) Taxable Perquisites:
Rent Free Residential Accommodation
Interest Free / Concessional Loan
Use of movable assets by employee / any member of his household
Transfer of movable assets
Provision of gas / electricity / water
Provision of free / concessional educational facilities
Credit Card Expenses
Club expenditure
Health Club, Sports, Similar facilities
Sweat Equity

13) Tax-free Perquisites (in all cases):

Medical F acilities
Refreshment
Subsidized lunch or dinner
Recreational facilities
Telephone facility
Transport
Personal accident insurance
Refresher Course
Free rations
Computer/ laptops
Rent free houses / conveyance
Employer’s Contribution
Annual Premium

14) Taxable Perquisites: We need to understand the valuation of perquisites. The table appended
below, summarises the taxable value of various perquisites in the hands of the employee
assessees.

SI. Perquisite Category of Value of perquisites

NO. Employee
1. Rent Free Government Licence Fee determined as per the Government
Residential Employee Rules, as reduced by rent actually paid by the
Accommodation employee for unfurnished accommodation.
For a furnished accommodation, 10% p.a. of the
furniture cost is added to the value obtained
above for unfurnished.

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 In case the furniture is hired, the actual hire
charges would be added to the value obtained
above for unfurnished.
Non- In case of Unfurnished Accommodation;
Government a) If the accommodation is owned by the
Employee employer, the value would be based on the
population, i.e.,
(i) if in cities having a population of > 25 Lacs
(2001 Census) - 15% of Salary;
(ii) if the population is between 10 Lacs up to
25 Lacs – 10% of Salary;
(iii) else 7.5% of Salary
b) If the accommodation is taken on lease by the
employer, the actual value of lease rentals paid
by the employer subject to a maximum of 15%
of Salary is considered as Value.
For a furnished accommodation, 10% p.a. of the
furniture cost is added to the value obtained
above for unfurnished.
In case the furniture is hired, the actual hire
charges would be added to the value obtained
above for unfurnished.

In all cases, any amount recovered from the

employee should be reduced to arrive at the
taxable value of the perquisite

Where the accommodation is provided by the

employer in a hotel (except where the employee is
provided such accommodation for a period not
exceeding in aggregate 15 days on the transfer
from one place to another):

The perquisites value would be 24% of salary paid

or payable for the previous year or the actual
charges paid or payable to such hotel, which is
lower, for the period during which such
accommodation is provided as reduced by the
rent, if any, actually paid or payable by
the employees.

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2. Interest Free / All employees Where the employer grants a loan to an employee,
Concessional exceeding INR 20000, the interest at the rate
Loan charged by SBI, as on the first date of the relevant
PY, at maximum outstanding monthly balance as
reduced by the Interest actually charged to the
employee; would be the taxable value of the
perquisite. Known for medical purpose is
exempted.
3. Use of movable All employees 10% p.a. of the actual cost of the asset, if it is
assets by owned by the employer OR the actual hire
employee / any charges incurred by the employer if the asset is
member of his hired as reduced by the amount, if any, paid or
household recovered from the employee for such use would
be the taxable value of the perquisite.
Note: Use of laptops and computers wouldn’t
attract taxability as perquisites.
4. Transfer of All employees If Computers/electronic items are transferred,
movable assets 50% Depreciation p.a. (WDV) for every completed
year of usage; if Motor cars are transferred, 20%
Depreciation p.a. (WDV) for every completed
year of usage; and for all other assets transferred,
10% Depreciation p.a. (SLM) for every completed
year of usage would be treated as the taxable
value of perquisite net of any amount so
recovered from the employee.
5. Provision of All employees The value of benefit to the employee resulting
gas/ from the supply of gas, electric energy or water for
electricity/ his household consumption shall be determined
water as the sum equal to the amount paid on that
account by the employer to the agency supplying
the gas, electric energy or water. Where such
supply is made from the sources owned by the
employer, without purchasing them from any
other outside agency, the value of perquisites
would be the manufacturing cost per unit
incurred by the employer. Where the employee is
paying any amount in respect of such services, the
amount so paid shall be deducted from the value
so arrived at.

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6. Provision of All employees Amount actually expended by the employer net
free/ of the amount so recovered. However, if the
concessional educational institution is owned by the employer,
educational and free educational facilities are provided to the
facilities employee’s children, there wouldn’t be any
perquisite as long as the value of benefit in a
month is < INR 1000. Any amount recovered from
the employee would be reduced.
7. Credit Card All employees Membership fees/Annual fees incurred by the
Expenses employer, on a card provided to the employee,
would be the taxable value of perquisite net of the
amount, if any, recovered from him.
8. Club All employees Cost incurred by the employer at actual, net of
expenditure recovery from the employee would be the taxable
value of perquisite. However, in case the
employee enjoys Corporate Membership in a club,
the value of benefit wouldn’t include the initial
membership paid by the Employer to acquire the
corporate membership.
9. Health Club, All employees No perquisite if provided uniformly by the
Sports, Similar employer to all employees.
facilities
10. Sweat Equity All employees In case where, on the date of exercising the
option, the share of the company is listed on a
recognised stock exchange, the fair market value
(FMV) would be the average of the opening and
closing price of the share on that date on the said
stock exchange. If the shares of the company are
listed on more than one stock exchange, the F M V
would be the average of the opening and closing
prices of the share on the recognised stock
exchange which records the highest volume of
trading in the share. In case, on the date of the
exercising of the option, if there was no trading in
the share, the F M V would be the closing price on
the recognised stock exchange, on a date closest to
exercising the option, immediately before that
date, and if the shares of the company are listed
on more than one stock exchange, the FMV would
be the closing price of the share on the recognised

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 stock exchange which records the highest volume
of trading in the share.
In case the shares of the company are not listed on
any
recognised stock exchange, the F M V would be
that as determined by the Merchant Banker on the
specific date, i.e., the date of exercising the option
or any date earlier not exceeding 180 days prior to
the date of exercise of the option.

15)
Motor Car owned/ hired by employer & expenses met by Employer
Exclusively for official Exclusively for private Partly official & partly private
purpose purpose
Nil Sum total of : Car engine capacity upto 1.6
(Provided specified a) Actual running & Litres.
documents are maintained maintenance expenses 1,800 p.m+ 900 pm for
by employer) b) Actual remuneration to chauffer (If any)
chauffeur Car engine capacity > 1.6
c) 10% of cost of car (if Litres.
owned) or hire charges (if 2,400 p.m + 900 p.m for
hired) chauffer (If any)
Less: Amount recovered
from employee

16)
Motor Car owned/ hired by employer & expenses met by Employee
Exclusively for official Exclusively for private Partly official & partly
purpose purpose private
Exempt Sum total of : Car engine capacity upto 1.6
a) Actual running & Litres.
maintenance expenses 600 p.m+ 900 pm for chauffer
b) Actual remuneration to (If any)
chauffeur Car engine capacity > 1.6
(If borne by employer) Litres.
900 p.m + 900 p.m for
chauffer (If any)

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17)
Motor Car owned by Employee & expenses met by Employer
Exclusively for official purpose Exclusively for private Partly official & partly private
purpose
Nil Amount paid by employer Actual Expenses of employer
(Provided specified documents Less :
are maintained by employer) 1,800 pm + 900 pm (car
engine capacity upto 1.6
Litres)
OR
2,400 pm + 900 pm (car
engine capacity > 1.6 Litres)
Higher deduction for official
expenses if specified
documents are maintained

18)
Other Conveyance owned by employee & expenses met by Employer
Exclusively for official Exclusively for private Partly official & partly private
purpose purpose
Nil Expenditure paid by Actual Expenses of employer
(Provided specified employer Perquisite taxable Less : 900 pm
documents are for all employees Higher deduction for official
maintained by expenses if specified
employer) documents are maintained

19) Tax-free perquisites (in all cases):

MEDICAL FACILITIES IN INDIA

( to Employees / Family Members)
Hospital maintained In Government Premium paid for Other Case
by employer Hospital or local Health Insurance
authority hospital or under approved
Government scheme
approved hospital
or Hospital
approved by CCIT
(For prescribed
disease only)
Fully Exempt Fully Exempt Fully Exempt Fully Taxable

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20)
MEDICAL FACILITIES OUTSIDE INDIA
( to Employees / Family Members)
Medical Expenses of Stay Expenses of Patient Travel Expenses of Patient
Patient and One attendant (total with One attendant (total
two persons) two persons)
Tax free to the extent Tax free to the extent Tax free
permitted by RBI permitted by RBI if employee’s GTI upto Rs.
2,00,000/-
(before including such
travel expenses)

21)Tax-free perquisites (in all cases):

Refreshment: The value of refreshment provided by the employer during office hours and
in office premises is fully exempt. [Not available for assessee opted for section 115BAC].
Subsidized lunch or dinner provided by employer is exempt.
Recreational facilities: The value of recreational facilities provided is exempt. However, the
facility should not be restricted to a selected few.

Telephone facility provided at the residence of the employee is exempt to the extent of the
amount of telephone bills paid by the employer when it is used for official and personal
purposes of the employee.

Transport provided by the employer to the employees for the journey between office and
residence and back at free of charge or at concessional rate.

Personal accident insurance, i.e., payment of annual premium by employer on personal

accident policy effected by him to his employee.

Refresher Course: Where the employee attends any refresher course in management and the
fees are paid by the employer, the amount spent by employer for the purpose.
Free Rations: The value of free rations given to the armed forces personnel.

Computer/laptops provided only for use, ownership is retained by the employer.

Rent free houses/conveyance to High Court & Supreme Court Judges.

Employers’ Contribution to Group Insurance Schemes, to recognised Provident Funds

22) Statutory provident fund: In case of Statutory Provident Fund, the entire amount of employer’s
contribution without any limit or restriction whatsoever and the interest thereon received by
the employee shall not be includible in the total income of the employee both at the time when
the contribution is made and at the time when the money is received by or on behalf of the
employee on his retirement, death or otherwise.

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23) Recognised provident fund:

Employer Contribution & Interest: Tax Treatment up to 31.03.2020: In the case of a Recognised
Provident Fund, the employer’s contribution to the Provident F und is not treated as the
employee’s income so long as the contribution by the employer does not exceed 12% of the
salary of the employee. But if the contribution of the employer exceeds 12% of the employee’s
salary, the excess of the contribution over 12% of the salary of the employee is to be treated as
part of the taxable income from salaries in the hands of the employee in respect of the financial
year in which the contributions were made by the employer.

Tax Treatment w.e.f. 01.04.2020 [Amendment vide Finance Act, 2020]: Apart from the limit of
12% for employer contribution and 9.5% p.a. for Interest, there was no monetary limit above
which such amount was taxable. Now these two have been combined with Employer
contribution to Approved Superannuation fund and NPS along with annual interest thereon
within ceiling of Rs.7,50,000. If total exceeds Rs.7,50,000, then excess will also be taxable under
the head Salary.
❖ Total of following in excess of 7,50,000 during p/y will also be taxable under the head salary
❖ Employer contribution to Recognised Provident F und
❖ Employer contribution to Approved Superannuation F und
❖ Employer contribution to National Pension Scheme

24) Unrecognised provident Fund: In the case of an Unrecognised Provident F und, the employee’s
own contribution to the Fund would not be allowed as a deduction. The employer’s contribution
and the interest thereon would, however, be exempt from tax as and when the contributions are
being made. But when the money in lump sum is received back by the employee, which part of
the amount attributable to the employer’s contribution would be taxable as income from salaries
and the interest on the employer’s contribution would also be taxable as salary income in the
hands of the employee.

25) Relief when salary is paid in arrears or advance (section 89): Tax is calculated on total income
earned or received during the year. If any portion received ‘salary in arrears or in advance’, or
has received a family pension in arrears, assessee is allowed some tax relief under section 89(1)
of the Income Tax Act, 1961.
Relief under section 89(1) for arrears of salary are available in the following cases:
❖ Salary received in advance or as arrears
❖ Gratuity
❖ Compensation on Termination of employment
❖ Commutation of Pension
❖ Calculating Relief under Section 89(1)

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 Tax Liability in the PY in which adv /arrears are received
a) Incl. adv / arrears A
b) Excl. adv / arrears B
Differential A-B
Tax Liability of the PY to which such addl salary relates
a) Incl. adv / arrears C
b) Excl. adv / arrears D
Differential C-D
Relief u/s 89 (A-B)-(C-D)

26) 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].

27) 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
✓ INR 5000/- Or
✓ Actual Entertainment Allowance received.

28) Profession Tax [Section 16(iii)]: Allowed as a deduction when paid by the employee (recovered
from salary) during the previous year

COMPUTATION OF SALARY
Particulars (Rs.)
Income From Salary
Salary xxxxx
Allowances received (taxable allowances) xxxxx
Taxable value of perquisite xxxxx
Gross Salary xxxxx
Less: Deduction under section 16
Professional Tax (xxxxx)
Entertainment allowance (xxxxx)
Income From Salary (1) xxxxxx

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 C H A PTER 5 – IN C O M E UN D ER THE HEA D H O U S E PROPERTY

1) House property is taxable under this head if following conditions are satisfied:
❖ There should be a property consisting of any buildings or lands appurtenant thereto;
❖ Assessee should be the owner of such property (including deemed owner as given u/s 27)
❖ Such property should not be occupied by the assessee for the purposes of any business or
profession carried on by him, the profits of which are chargeable to income tax.

2) Exceptions:

❖ Income from letting out a vacant land is chargeable to tax under the head “Income from
Other Sources”
❖ Income earned by an assessee who is engaged in the business of letting out properties on
rent, would be chargeable to tax under the head “Profits / Gains from Business /Profession”

1) Impact of Section 115BAC under the head House Property: Individual and HUF opting for
connectional 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 & deductions are not allowed under the new tax system. The below chart
contains the exemptions and deductions not available under the new system related to Income
under the head house property. Similarly, deductions & exemptions not available under the
new tax system and which are related to other heads are provided in other chapters.

4) Set off of current year House Property loss from other heads in New System of Tax u/s 115BAC
are Not Allowed but in Existing system of Tax is Allowed.

5) The G AV is the higher of -

❖ Expected Rent (ER) and
❖ Actual Rent received / receivable (AR)

Sr. Nature of Exemption/Deduction New System of Existing system

No. Relating to House Property Tax u/s 115BAC of Tax
1 Deduction of Municipal tax from G A V Allowed Allowed
2 Standard Deduction u/s 24(a) from N A V Allowed Allowed
3 Interest Deduction u/s 24(b) from N A V
(a) Let out properties u/s 23(1) Allowed Allowed
(b) Self residential Property u/s 23(2) Not Allowed Allowed
(c) Property which is stock in trade u/s 23(5) Allowed Allowed

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 4 Set off of brought forward House Property Not Allowed if Allowed
losses& brought forward Depreciation from related to
Current year House Property Income disallowed
deduction &
exemptions
5 Set off current year House Property loss from Not Allowed Allowed
other Heads

6) Unrealized Rent: The amount of rent which the owner cannot realise shall be equal to the
amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and
irrevocable only if following conditions under Rule 4 are satisfied:
➢ tenancy is bonafide;
➢ the defaulting tenant has vacated, or steps have been taken to compel him to vacate the
property;
➢ the defaulting tenant is not in occupation of any other property of the assessee;
➢ the assessee has taken all reasonable steps to institute legal proceedings for the recovery of
the unpaid rent or satisfied the Assessing Officer that legal proceedings would be useless.

7) Where the property is let out for the whole year [Section 23(1)]:

GROSS ANNUAL VALUE

HIGHER OF THE FOLLOWING

EXPECTED RENT
ACTUAL RENT RECEIVED
(CANNOT EXCEED STANDARD RENT)

HIGHER OF THE FOLLOWING

FAIR RENT MUNICIPAL VALUE

Note:
➢ The Expected Rent is the higher of F air Rent (FR) and the Municipal Value (MV), but capped
to Standard Rent (SR).
➢ Fair Rent is the rental fetched by a similar property in the adjoining neighbourhood.
➢ the Municipal Value is the value determined by the Municipal Authorities.
➢ the Standard Rent is the rent fixed by the Rent Control Act.

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8) Municipal Taxes: The taxes including service taxes (fire tax, conservancy tax, education, water
tax, etc.) levied by any municipality or local authority in respect of any house property to the
extent to which such taxes are borne and paid by the owner, and include enhanced municipal
tax finally determined on appeal and payable by assessee – Clive Buildings Cola Ltd. v. CIT
(1989) 44 Taxman 160. However, deduction in respect of municipal taxes will be allowed in
determining the annual value of the property only in the year in which municipal taxes are
actually paid by the owner.
Where the tax on property is enchanced with retrospective effect by municipal or local
authorities and the enhanced tax relating to the prior year is demanded during the assessment
year, the entire demand is deductible in the assessment year [C.I.T. v. L. Kuppu Swamy Chettiar
(1981) 132 ITR 416 (Mad.)].
Even where the property is situated outside the country taxes levied by local authority in that
country are deductible in deciding the annual value of the property. [CIT v. R Venugopala
Riddiar (1965) 58 ITR 439 (Mad.)]

9) Where let out property is vacant for part of the year [Section 23(1)]: In a scenario of vacancy
for a part of the year, it is quite probable that the Actual Rent received / receivable would fall
lower than Expected Rent and in such an eventuality; therefore the Actual Rent becomes the
Gross Annual Value.

10) Where property is self-occupied / unoccupied [Section 23(2)]: Where the property consists of
a house or part of a house in the occupation of the owner for his own residence, and is not
actually let during any part of the previous year and no other benefit is derived therefrom by
the owner, the annual value of such a house or part of the house shall be taken to be nil. The
only deduction available in respect of such house is towards interest on borrowed capital in
terms of Section 24(1)(vi) but subject to a ceiling of Rs. 30,000 or Rs. 2,00,000 as the case may be.
In other words, to this extent there could be a loss from such house.

Concession for two Houses only:

Where the assessee has occupied more than two houses for the purposes of residence for himself
and family members, he has to make a choice of two houses only in respect of which he would
like to claim exemption. Other self-occupied houses will be treated as if they were let out and
their annual value will be determined in the same manner as we have discussed in the case of
let out property.
➢ Annual Value would be taken as Nil
➢ It is imperative that the property is self-occupied OR unoccupied for the whole year
➢ This benefit is for two houses
➢ This benefit is for Individual / HUF only
➢ No deduction is allowed for Municipal Taxes for such property

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 Note: The Deduction of Rs. 30,000 / Rs. 2,00,000 with respect to Interest paid on borrowed
capital u/s 24(b) not allowed in case of Self occupied Property, if assessee opted for section
115BAC of the Income Tax Act, 1961

11) Where the property is partly let out and partly self-occupied during the PY [Section 23(3)]

(a) Property let out partially: When a portion of the house is self-occupied for the full year and
a portion is self-occupied for whole year, the annual value of the house shall be determined
as under:
From the full annual value of the house the proportionate annual value for self-occupied
portion for the whole year shall be deducted.
The balance under (i) shall be the annual value for let out portion for a part of the year.

(b) House let out during any part of the previous year and self-occupied for the remaining
part of the year: In this case the benefit of Section 23(2) is not available and the income will
be computed as if the property is let out.

(c)Self-occupied House remaining vacant: If the assesse has reserved any two houses (owned
by him) for his residence or he is the owner of two houses, one of which is meant for his own
residence but could not be occupied by him for residential purposes in the previous year
owing to the fact that he had to live at some other place in a house not belonging to him, then
he can claim non occupation or vacancy allowance during the previous year for the period
during which house remained vacant. The reason for his living at a different place might be
for business or professional purposes or for a salaried employee due to transfer etc. The
annual value of the house, which remained vacant in these circumstances, shall be nil.

The above-mentioned concession will be granted to the assessee only if he has neither let out
the said house nor has derived any benefit from it during the period for which it remained
vacant. Only deduction for interest on borrowed capital up to a maximum of Rs. 2,00,000 is
allowed if following conditions are satisfied:-
❖ Capital is borrowed for Purchase/Construction of property;
❖ Capital borrowed on or after the 1st day of April 1999 and such acquisition or
construction is completed within five years from the end of the financial year in which
capital was borrowed.

If any of above conditions are not met then maximum deduction allowed shall be limited to
Rs. 30,000 only.

Note: The Deduction of Rs. 30,000 /Rs. 2,00,000 with respect to Interest paid on borrowed
capital u/s 24(b) not allowed in case of Self occupied Property, if assessee opted for section
115BAC of the Income Tax Act, 1961

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12) Deemed to be let-out property [Section 23(4)]
❖ Assessee given the choice of any two houses to be construed as self-occupied and for tha the
Annual Value would be NIL
❖ For others, they would be treated as deemed to be let out
❖ The assessee is allowed by the Income Tax Act; the flexibility to change the option to suit
his needs / benefits
❖ In such as case, therefore, the Expected Rent becomes the Gross Annual Value
❖ Municipal Taxes paid by the owner for the whole year allowed as a deduction

13) Notional Income from House Property held as stock in trade [Section 23(5)]: Annual value of
house property held by a person as stock in trade shall be taken as NIL if following conditions
are satisfied:
❖ The Property (consisting of buildings or land appurtenant thereto) is held as stock in trade
by the owner of the property;
❖ The property (or any part of property) is not let out during whole or any part of the previous
year.

14) DEDUCTIONS FROM NET A N N U A L VALUE [SECTION 24]:

Standard Deduction: 30% of Net Annual Value
➢ This is not available when the Annual Value is NIL
➢ This is a flat deduction irrespective of the actual expenditure incurred

Interest on Borrowed Capital

❖ Interest on borrowed capital for purchase/construction/repair/renewal/re-construction is
allowed as a deduction from gross annual value.

❖ Pre-construction period interest is also allowed as a deduction. Pre-construction period

refers to the period starting from the date of taking of loan and ending with the end of
financial year immediately preceding the previous year in which construction is completed
(or the date of repayment of loan; whichever is earlier). This can be claimed for a period of
5 equal installments starting from the year of acquisition / completion of construction.

❖ No deduction shall be made under the second proviso unless the assessee furnishes a
certificate, from the person to whom any interest is payable on the capital borrowed,
specifying the amount of interest payable by the assessee for the purpose of such acquisition
or construction of the property, or, conversion of the whole or any part of the capital
borrowed which remains to be repaid as a new loan.

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15) Summary on Allowability:
Let out /Deemed to be let out property
➢ Standard deduction of 30% of N AV is fully allowed [Section 24(a)]
➢ Interest on borrowed capital is fully allowed [Section 24(b)]

Self-occupied properties
1. Since the Annual Value is nil, there is no Standard deduction available
2. In case the capital is borrowed
(i) for repairs / renewals / reconstruction, the maximum allowable deduction on account
of interest is limited to INR 30000.
(ii) for acquisition / construction, the deduction would depend on whether the loan was
taken prior to or later
a) In case capital borrowed prior to 1.4.99; the maximum allowable deduction on
account of interest is limited to INR 30000;
b) In case capital borrowed post 1.4.99; as long as the acquisition / construction was
completed within 5 years from the end of the FY in which the capital was borrowed,
and the assessee is in possession of a certificate on interest payable from the lender,
the maximum allowable deduction on account of interest is limited to INR 200,000.
Where the assessee has opted for two houses to be treated as self-occupied, the combined
total deduction of the amount of interest given above shall in aggregate remain maximum
to Rs. 30,000 or Rs. 2,00,000 as the case may be.

Note: The Deduction of Rs. 30,000 / Rs. 2,00,000 with respect to Interest paid on borrowed
capital u/s 24(b) not allowed in case of Self occupied Property, if assessee opted for section
115BAC of the Income Tax Act, 1961

Points to Remember
➢ Interest on overdue interest is not allowed u/s 24(b) Income tax Act, 1961. [Shew Kissen
Bhatter V CIT (SC)}

➢ Even interest on unpaid purchase price is allowed as deduction u/s 24(b) of the Income tax
Act, 1961 [CIT V Sunil Kumar Sharma (Punjab & Haryana)

16) Inadmissible Deductions (Section 25):

Interest under the Act, which is payable outside India, shall not be allowed as a deduction, if
tax has not been deducted from such Interest and there is no person in India, who could be
treated as an agent.

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17) Treatment of Unrealised Rent /Arrear of Rent (Section 25A):
Arrears of Rent and the unrealised rent received subsequently from a tenant by an assessee,
shall be deemed to be the income from House Property in the FY in which such rental is received
and shall be included in the Income from House Property of that year; irrespective of whether
he is the owner of the property any more or not, in that FY .

30% of such arrears or unrealised rent received subsequently is allowed as a deduction.

18) Income from Co-Owned Property (Section 26)

❖ The share of each co-owner should be determined in accordance with Section 22 – 25 and
included in the respective individual assessments.
❖ In a scenario, where the house property owned by co-owners is self-occupied by them, the
AV for each of them will be construed as NIL. Each Co-Owner shall be allowed a deduction
of INR 30000 / INR 200,000 as the case may be vis-à-vis Interest on Borrowed Capital.
[Provided not opted for Section 115BAC]
❖ In a scenario, where the house property owned by the co-owners is let out, the income from
the property will be computed as if the property is owned by one owner, and there after
such computed income would be apportioned amongst each of them as per their respective
share.

18)DEEMED OWNERSHIP [SECTION 27]

DEEMED OWNERSHIP (SECTION 27)

House property is transferred by an individual House property is transferred by an individual to

to his/her spouse , otherwise than for his/her Minor child , otherwise than for adequate
adequate consideration consideration

The transferor will be the deemed owner: The transferor will be the deemed
Exception: In case the transfer is owner:
necessiated owing to a sepration between Exception: In case the transfer is to a
,them, the transferee will be the deemed Minor Married daughter,then, the
onwer transferor will not be the deemed onwer

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20) HOUSE PROPERTY INCO M E S – EXEMPTED FROM TAX
There are certain cases where the income from the house property are tax-free. They are neither
taxable nor included in the total income for taxation. The incomes that are exempted from tax
are described below.
❖ The revenue generated from the buildings in and around the agricultural land that forms a
part of agricultural income is exempted from tax as per section 10(1). Eg. Renting or leasing
of a farmhouse, storehouse.
❖ Income from property confined to local authorities is tax-exempted as per section 10(20).
❖ House property income of a political party is free from tax under section 13A.
❖ Revenue earned from a property belonging to an approved scientific research association is
exempted from tax under section 10(21).
❖ Property income of educational organizations, medical institutions are free from tax as per
section 10(23C).
❖ Income from property subjected to charitable or religious purpose is tax-exempted as per
section 11.
❖ Property income of Certified trade union is exempted from tax under section 10(24).
❖ The annual value of one palace possessed by an ex-ruler of Indian states is free from tax as
per section 10(19A) where other palaces come under taxation.
❖ The annual value of two self-occupied properties for own residence is exempted from tax
under section 23(2).
❖ Income from property used for one’s own business or profession is also tax-exempted under
section 22.

21) Concept of Composite Rent

❖ Property is let out by the Assessee.
❖ Together with Services (e.g. electricity, gas, water etc.) or Assets (e.g plant, machinery or
furniture).
❖ Rent charged by the assessee is a consolidated sum (i.e. Rent for property + Rent for
services/assets).

Treatment of Composite Rent is done as under:

Where rent of property and rent of services / assets can be Where rent of property and
separated rent of services / assets
cannot be separated
Rent of letting of property Rent of service, assets Taxable under Other sources
Taxable under House Taxable under Other sources or Business
property or business

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 C H APTER 6 – PROFIT A N D G A IN S FROM BU SIN ESS/PROFES SI O N
1) SPECULATION BUSINESS: Section 43(5) defines the expression “speculative transaction” as “a
transaction in which a contract for the purchase or sale of any commodity including stocks and shares is
periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or
scrips”.
2) Key points for Consideration: The provisions of the Income-tax Act contained in Sections 28 to 44D
regulate the method of computing income from business. The income from business to which a person is
chargeable under this head represents not the gross receipts from the business but the profits and gains
derived from there.
3) Method of Accounting [Section 145]: 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.
The Central Government vide Notification No. 87/2016 dated 29.09.2016 has notified ten Income
Computation and Disclosure Standards (ICDS) to be applicable with effect from 1st April, 2017
relating to assessment year 2017-18 for the purpose of computation of income under the head “Profits
and gains of business or profession” and “Income from other sources” and not for maintaining books
of accounts.
4) Taxability of Certain Income [Section 145B]: Notwithstanding anything to the contrary contained in
section 145, the interest received by an assessee on any compensation or on enhanced compensation, shall
be deemed to be the income of the previous year in which it is received.
Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of
the previous year in which reasonable certainty of its realisation is achieved.
Subsidy or grant from Government as referred in the definition of income under section 2(24) of the Act,
shall deemed to be the income of the previous year in which it is received, if not charged to income-tax
in any earlier previous year
5) ADDIMISIBLE DEDUCTIONS:
❖ Rent, rates, repairs and insurance for buildings [Section 30]
❖ Repairs and insurance for Plant & Machinery, Furniture [Section 31]
❖ Depreciation [Section 32]
❖ Investment in new plant or machinery in notified backward areas in certain States [Section 32AD]
❖ Tea/Coffee/Rubber Development Account [Section 33AB]
❖ Site restoration fund [Section 33ABA]
❖ Scientific Research [Section 35]
❖ Amortization of Spectrum fees [Section 35ABA]
❖ Expenditure on telecom licence [Section 35ABB]
❖ Expenditure of capital nature incurred in respect of specified business [Section 35AD]
❖ Expenditure by way of Payment to Associations and Institutions for carrying out Rural
Development Programmes [Section 35CCA]
❖ Expenditure on Agricultural extension project [Section 35CCC]
❖ Expenditure on skill development project [Section 35CCD]
❖ Amortization of Preliminary Expenses [Section 35D]
❖ Amortization of Expenditure in the case of Voluntary Retirement Scheme [Section 35DDA]
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 ❖ Other Deductions [Section 36]
❖ Other Expenses [Section 37]
6) Rent, Rates, Repairs and Insurance for Buildings [Section 30]: This section allows the deduction in
respect of rent, rates, repairs and insurance for buildings that are used by the assessee for his business /
profession.
❖ Property partly used: If the property is partly used, the deduction will be proportionate to the use.
❖ Part of the property is sub-let: In case part of the property is sub-let, the differential, i.e., rent paid
minus rent recovered would be allowable as deduction.
❖ Occupation by owner himself: No notional rent is allowable for owned properties.
❖ Repair of the premises: Repairs undertaken, whether as a owner / tenant, are allowed.
❖ Expenses Deduction: Municipal taxes, rates, insurance incurred by the assessee for the property is
also allowed
7) Repairs and Insurance for Plant & Machinery, Furniture [Section 31]: This section allows deduction in
respect of expenses on current repairs and insurance of Plant & Machinery & furniture used for business
/ profession.
❖ Usage of the Asset: Allowable in full, even if used for part of the year.
❖ Repairs: Current repairs which are of capital nature aren’t allowed.
❖ Insurance Premium: Insurance premium paid to insure the assets against risks of losses owing to
damage / destruction, provided that the assets are used for business / profession are allowed, only
if these premiums are paid / payable during the Previous Year
8) Depreciation [Section 32]: The provisions for allowing depreciation are contained in Section 32 and are
regulated under Rule 5 of the Income tax Rules. The rates of depreciation are also provided in the Income-
tax Rules. Assets should have been owned and used by the assessee for the purpose of his business /
profession during the Previous Year irrespective they are wholly owned by the assessee or not.

9) Conditions for Allowability of Depreciation:

❖ Classification of Assets
❖ Assets must be owned either wholly or partially
❖ Used for the purpose of Business or Profession
❖ No deduction on sold Assets
❖ Depreciation is allowed on the Written Down Value (WDV) Method
❖ Where an assessee incurs any expenditure for acquisition of depreciable asset in respect of which a
payment otherwise than by an account payee cheque/draft or use of ECS through a bank account
or such other electronic mode as may be prescribed, exceeds Rs. 10,000. such payment shall not be
eligible for normal/ additional depreciation
❖ Depreciation is allowable in the hands of the predecessor and successor, in case of succession of a
firm, proprietary concern, by a company, or predecessor company and successor LLP, in case of
conversion of Pvt. Ltd. Co. to LLP., in case of amalgamation or demerger, and that shall not exceed
the depreciation that would have been allowed if the succession, demerger, amalgamation had not
taken place and such depreciation shall be apportioned between them proportionate to use

❖ Rates of Depreciation
• Buildings (residential use) except hotels and boarding houses : 5%

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 • Buildings (non-residential use): 10%
• Purely temporary errections such as wooden structures: 40%
• Furniture and Fittings including electrical fittings such as electric wiring, switches, socket etc.:
10%
• Computers (Including Computer Software): 40%
• Plant & Machinery: 15%
• Motor cars other than those used in a business of running them on hire, acquired during the
period from
• 23.8.2019 to 31.03.2021 and put to use on or before 31.03.2021: 30%
• Motor cars other than those used in a business of running them on hire, acquired or put to use on
or after 1-4-1990: 15%
• Motors buses, motor lorries, motor taxis used in a business of running them on hire, acquired
during the period from 23.8.2019 to 31.03.2021 and put to use on or before 31.03.2021: 45%
• Motors buses, motor lorries, motor taxis used in the business of running them on hire: 30%
• Ocean going Ships, speed boats: 20%
• Aircrafts: 40%
• Intangible Assets, i.e., know-how, patents, copyrights, trademarks, licences, franchises or any
other business or commercial rights of similar nature: 25%, but not being goodwill of a business
or profession (no depreciation will be allowed on goodwill)

10) Block of Assets: There are four classes of the assets which are further categorized into ten Blocks of Assets
according to different rates of assets prescribed as under:
S. No Class of Asset Block of Asset
1 Building 3 blocks (5%, 10% and 40%)
2 Furniture & Fixture 1 block (10%)
3 Plant and machinery 5 blocks (15%, 20%, 30%, 40%, 45%)
4 Intangible Assets 1 block (25%)

11)Actual Cost [Section 43(1)]:

The actual cost of an asset to the assessee is normally the amount of capital expenditure incurred in
respect of the acquisition, installation, etc., of the asset and also the other expenses, if any, incurred by
him to make the asset ready for the purpose of its use in the business.
The provisions of Section 43(1) of the Act clarify that the actual cost of depreciable asset should be
determined in the following circumstances as indicated below:
❖ Asset used for scientific research initially and then used for Business
❖ Asset acquired as a gift / inheritance
❖ Re-acquisition of Asset
❖ Asset is transferred from a holding co. to a subsidiary co. or vice-versa
❖ Interest paid or payable in connection with acquisition of an Asset
❖ Subsidy or grant or reimbursement by the Central Government or a State Government or any
authority established under any law or by any other person
❖ Asset acquired by a non-resident outside India
❖ Capital Asset acquired under scheme for Corporatisation
❖ Capital Asset on which deduction has been allowed or allowable u/s 35AD shall be treated as nil:

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 ❖ Actual cost of inventory converted into capital asset, if used for business, shall be the Fair Market
Value

12)Written Down Value (WDV) [Section 43(6)]:

❖ Asset acquired during previous year: In case of acquisition of assets during the Previous Year, the
actual cost becomes the WDV.
❖ Asset acquired before previous year: In case of assets acquired before the Previous Year, the W D V
= Actual Cost to the Assessee Less Depreciation c/f if any.
❖ Asset transfer from holding company to subsidiary, or vice-versa: In case of transfer of assets from
holding company to subsidiary, or vice-versa, or from a amalgamating company to an amalgamated
company, then the actual cost of assets in the books of the transferee company would be the W DV
of the block of assets, as in the books of transferor company for the immediately preceding Previous
Year, minus, the allowable depreciation during the Current Year.
❖ WDV in case successor is LLP: In case of a successor LLP, the WDV in the books of the LLP would
be the W D V in the books of the predecessor company on the date of such conversion.
❖ The W D V of the following assets may be reduced to NIL:
• the moneys receivable by the assessee in respect of the assets sold, together with the scrap value
if any is > than the current W DV of the assets at the beginning of the year as increased by the
actual cost of any new asset acquired, OR
• where the entire block of assets is sold during the year.
12)Unabsorbed Depreciation:
❖ It’s the depreciation that couldn’t be consumed fully, that is, the profits were not sufficient to absorb
it.
❖ Can be carried forward indefinitely. The current year depreciation and the brought forward business
losses get priority in the set off over the unabsorbed depreciation, in that order.
10) Balancing Charge [Section 41(2)]: If any asset, on which depreciation is claimed on basis of SLM, asset
is sold and the amount by which moneys payable together with scrap value, exceeds WDV of such asset,
then the least of the following shall be taxable under the head PGBP.
❖ Difference between the actual cost and WDV.
❖ Difference between aggregate of moneys payable and WDV
11) Additional Depreciation [Section 32(1)]: The additional depreciation is available to assessee engaged
in the business of manufacture or production of any article or thing or engaged in the business of
generation, transmission or distribution of power at the rate of 20% of actual cost of eligible new
machinery or plant
However, in case of Investment is made in New Plant and Machinery in Notified Backward areas in state
of Andhra Pradesh or Telangana on or after 1/4/15 but before 01/04/2020, Additional depreciation
shall be allowed @35% of Actual cost

Therefore, in respect of new plant and machinery acquired and installed in such notified backward areas
on or after 01.04.2021 deduction u/s 32AD is not allowable.
Where asset is purchased and put to use in business in the same previous year for less than 180 days
then additional depreciation is allowed at 50% of rate of additional depreciation and balance 50% of
additional depreciation in immediately succeeding financial year

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12) Investment in New Plant or Machinery in Notified Backward Areas in Certain States [Section 32AD]:
Additional investment allowance of an amount equal to 15% of the cost of new asset acquired and
installed by an assessee is allowed, if
❖ he sets up an undertaking or enterprise for manufacture or production of any article or thing on or
after 1st April, 2015 in any notified backward areas in the State of Andhra Pradesh and the State of
Telangana; and
❖ the new assets are acquired and installed for the purposes of said undertaking or enterprise during
the period beginning from the 1st April, 2015 to 31st March, 2020.
Therefore, in respect of new plant and machinery acquired and installed in such notified backward areas
on or after 1.4.2021, deduction under section 32AD is not allowable. Further, additional depreciation is
not allowable at the enhanced rate of 35%.
Note: As per the landmark judgment of CIT V/s Annamalai Finance Ltd. (Madras HC) It is the end
use of the specified asset which is relevant for determining the percentage of depreciation. For
example in case of business of leasing out vehicle, if lessee is using the vehicle for running them on
hire, depreciation shall be allowable at Higher rate of 30% instead of 15%to the lesser.

If an individual or HUF opts to be taxed as per the new alternative regime under section 115BAC he /
it will not be entitled to claim deduction of additional depreciation. [As Amended by Finance Act,
2020]
13) Tea/Coffee/Rubber Development Account [Section 33AB]: Section 33AB is applicable to an assessee
carrying on the business of growing and manufacturing tea in India.
Deduction:
❖ a sum equal to the amount or the aggregate of the amounts so deposited; or
❖ Forty per cent of the profits of such business (computed under the head “Profits and gains of business
or profession” before making any deduction under Section 33AB), whichever is less.

Note:
1.The audit report is to be furnished at least one month prior to the due date for furnishing the return of
income under section 139(1). [As Amended by Finance Act, 2020]
2.If an Individual or HU F opts to be taxed as per the new alternative regime under section 115BAC he/
it will not be entitled to claim deduction on account of Tea/ Coffee/Rubber development account. [As
Amended by Finance Act, 2020]

14) Computation of Business income in cases where income is partly Agriculture and partly Business:
S. No. Nature of composite income Business Agricultural
income(Taxable) Income (Exempt)
1 Income from the manufacture of rubber 35% 65%
2 Income from the manufacture of coffee 25% 75%
• sale of coffee grown and cured
• sale of coffee grown, cured, roasted and ground
3 Income from the manufacture of tea 40% 60%

15) Site Restoration Fund [Section 33ABA]:

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 The taxpayer is engaged in the business of the prospecting for, or extraction or production of, petroleum
or natural gas or both in India.

Amount of Deduction: Lower of the following

❖ a sum equal to amounts deposited as mentioned above; or
❖ 20% of the profit of such business computed under the head “Profits and gains of business or
profession” before making any deduction under Section 33ABA and before adjusting brought
forward business loss under Section 72.

16) Scientific Research (Section 35): The term scientific research connotes and implies activities for the
extension and advancement of knowledge, in the fields of natural or applied science, including,
agriculture, animal husbandries and fisheries.
Section Expenditure Incurred for / Payment made Deduction
35(1)(i) Revenue Expenditure incurred on scientific research 100%
related to assessee’s business
35(1)(ii) Research Association for Scientific Research 100%
35(1)(iia) Paid to Company for Scientific Research 100%
35(1)(iii) Research Association for Social Science OR Statistical 100%
Research
35(1)(iv) Capital Expenditure (except land acquisition) 100%
35(2AA) National Laboratory / IIT for scientific research 100%
undertaken under an approved Programme
35(2AB) Expenditure incurred by a company engaged in Bio- 100%
technology

Note: If an Individual or HU F opts to be taxed as per the new alternative regime under section 115BAC
he / it will not be entitled to claim deduction on account of payment to outside agencies for Scientific
Research under section 35(1)(ii), (iia), (iii) and 35(2AA). [As Amended by Finance Act, 2020]
17) Amortization of Spectrum Fees for Purchase of Spectrum [Section 35ABA]: New section 35ABA is
inserted to provide amortization of amount paid on the acquisition of any right to use spectrum for
telecommunication services by paying spectrum fees.
❖ Any capital expenditure incurred and actually paid by the assessee on acquisition of any right to use
spectrum for Telecom services by paying spectrum fee will be allowed as deduction in equal
instalments
❖ Where the spectrum is transferred and the proceeds of transfer are less than the expenditure
remaining unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the
proceeds of transfer, shall be allowed in the year of transfer of spectrum.
❖ If spectrum is transferred and proceeds of transfer exceed the amount of expenditure remaining
unallowed, the excess amount shall be chargeable to tax as profits and gains of business in the
previous year in which such spectrum has been transferred
❖ Unallowed expenditure in a case where a part of spectrum is transferred would be amortised
❖ there is failure to comply with any of the provisions of this section, then the deduction shall be
deemed to have been wrongly allowed. In such case, the assessing officer can re-compute the total
income of the assessee for the previous year

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 ❖ Under the scheme of amalgamation, if the amalgamating company sells or transfers the spectrum to
an amalgamated company, being an Indian company, then the provisions of this section shall apply
the amalgamated company as they would have applied to the amalgamating company if later had
not transferred the spectrum.

18) Expenditure on Telecom Licence [Section 35ABB]: Deduction of Capital Expenditure: Where any
capital expenditure is incurred by the assessee for acquiring any right to operate telecommunications
services and for which payment has actually been made to obtain a licence, a deduction will be allowed
in equal instalments over the period for which the licence remains in force, subject to the following:
❖ Fees paid before commencement of business: the deduction shall be allowed for the previous years
beginning with the previous year in which such business is commenced.
❖ Fees paid after commencement of business: the deduction shall be allowed for the previous years
beginning with the previous year in which the license fee is actually paid (irrespective of the previous
year in which the liability for the expenditure is incurred).
19) Expenditure of capital nature incurred in respect of Specified Business [Section 35AD]: An assessee
shall be allowed a deduction of capital nature expenditure incurred for any specified business carried on
by him during the previous year in which such expenditure is incurred by him. This section talks about
investment linked incentives for specified businesses as under:
❖ Setting up & operating cold chain facilities for specified products
❖ Setting up & operating warehousing facilities for agricultural produce
❖ Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for
storage and distribution, as a part of the network
❖ Building and operating a 2-star hotel or above, anywhere in India
❖ Building and operating a hospital with > 100 beds, anywhere in India
❖ Developing & building a housing project under a scheme for slum redevelopment / affordable
housing
❖ Production of fertilizers in India
❖ Setting up and operating an Inland Container Depot OR a Container Freight Station, under Customs
Act, 1962
❖ Bee-keeping and production of honey and beeswax
❖ Setting up and operating a warehousing facility for storage of sugar
❖ Laying and operating a slurry pipeline for transportation of iron-ore
❖ Setting up and operating a semi-conductor wafer fabrication manufacturing unit
❖ Developing / maintaining & Operating / Developing & Maintaining & Operating a new
infrastructure facility in India
Capital Expenditure Deduction: 100% of the capital expenditure incurred during the Previous Year,
wholly and exclusively for the above businesses would be allowable as a deduction.
20) Expenditure by way of Payment to Associations and Institutions for carrying out Rural Development
Programmes (Section 35CCA): Any sum paid to a rural development fund set up and notified by the
Central Government and to the National Urban Poverty Eradication Fund similarly set up and notified
qualifies for deduction on fulfilment of certain conditions.
21) Expenditure on Agricultural extension project (Section 35CCC): Where an assessee incurs any
expenditure on agricultural extension project notified by the Board then, there shall be allowed a

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 deduction of a sum equal to 150% of such expenditure. [w.e.f. A Y 2021-22 deduction under section
35CCC is restricted to 100% only - Amendment vide Finance Act, 2016].
22) Expenditure on skill development project (Section 35CCD): Where a company incurs any expenditure
(not being expenditure in the nature of cost of any land or building)on any skill development project
notified by the Board then, there shall be allowed a deduction of a sum equal to 150% of such
expenditure. [w.e.f. A Y 2021-22 deduction under section 35CCD is restricted to 100% only - Amendment
vide Finance Act, 2016].
23) Amortization of Preliminary Expenses [Section 35D]:
Eligible Assessee: Under Section 35D, Indian companies and other non-corporate taxpayers resident in
India would be entitled to amortisation of certain preliminary expenses incurred by them for the
establishment of business concerns or the expansion of the business of existing concerns
Eligible Deduction: The amount qualifying for amortisation would be allowable as a deduction in five
equal instalments beginning with the previous year in which the business of the assessee actually
commences or the previous year in which the extension of the present undertaking is completed or the
new unit commences production or operation, as the case may be.
Amount Qualifying for Deduction:
The maximum aggregate amount of the qualifying expenses that can be amortised has been fixed at
❖ 5% of the cost of the project in case of assessee other than Indian company
❖ In the case of an Indian company, at the option of the company
❖ 5% of the capital employed in the business of the company, or
❖ Cost of Project
Whichever is higher. The excess, if any, of the qualifying expenses shall be ignored.

24) Other Expenses [Section 37]: This Act provides for allowance in respect of any other item of expenditure
not covered by any of the provisions contained in Sections 30 to 36 discussed above and is limited to the
amount actually expended during the Previous Year. This deduction is subject to the following
conditions:

25) EXPENSES DISALLOWED [SECTION 40]:

❖ Interest, royalty, fees for technical services payable outside India or India to a Non-Resident
❖ TDS not deducted on any sum payable to a Resident
❖ Rate or Tax Paid on Profits
❖ Salaries [Section 40a(iii)]
❖ Payment to Provident Funds etc. [Section 40a(iv)]
❖ Payment of tax on non-monetary perquisites [Section 40a(v)
❖ Payment to Partners
❖ Payment by AOPs / BOIs [Section 40(ba)]
26) EXPENSES RESTRICTED:
❖ Payment to Relatives or Associates [Section 40A(2)
❖ Cash Payments exceeding Rs. 10,000 [Section 40A(3)]
❖ Provision for Gratuity [Section 40A(7)]
❖ Restriction on contribution by employers to non-statutory funds [Sections 40A(9), (10) and (11)]

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27) Disallowance of unpaid Statutory Liability [Section 43B]: Under the income-tax law, a person carrying
on a business or profession can maintain account for his income either on cash or mercantile basis. The
latter, however, have to reckon with the restrictions contained in Section 43B of the Income-tax Act. This
section cuts into the freedom of a business to claim certain specified expenses on due basis.The section
has broadly divided the targeted expenses into two, i.e., according to section 43B even if an assessee
maintains books on mercantile system even then the following sums are allowed as deduction only on
the basis ofactual payment within the time limits specified in section 43B.
Note: It is hereby clarified that the provisions of this section shall not apply and shall be deemed
never to have been applied to a sum received by the assessee from any of his employees to which the
provisions of sub-clause (x) of clause (24) of section 2 applies.”[Amendment vide Finance Act, 2021]
28) Changes in Rate of Exchange [Section 43A]: As per Section 43Aof the Income-tax Act, where an assessee
has acquired any asset in any previous year from a country outside India for the purposes of his business
or profession and, in consequence of a change in the rate of exchange during any previous year after the
acquisition of such asset,there is an increase or reduction in the liability of the assessee as expressed in
Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of
making payment towards the whole or part of the cost of the asset or for payment of the whole or part
of the moneys borrowed by him from any person directly or indirectly in any foreign currency
specifically for the purpose of acquiring the capital asset.

29) Transfer of Immovable Property [Section 43CA]: Hence in order to minimise the hardship to the
assessee in case of genuine transactions it is provided that where the stamp duty value does not exceed
110% [Increased from 105% to 110% vide Finance Act, 2020]

30) Compulsory Maintenance of Books of Account (Section 44AA):

❖ Every person carrying on the legal / medical / engineering / architectural profession / accountancy
/ technical consultancy / interior decoration - If total gross receipts exceed Rs. 1, 50,000 in any one
of three immediately preceding years.
❖ An individual or HU F carrying on any business / profession - income from business / profession
exceeds INR 250,000 OR the total turnover / gross receipts as the case may be, exceeds INR 25,00,000
in any 1 of the 3 years immediately preceding the accounting year
❖ Every person other than an Individual / HU F carrying on any business / profession -income from
business / profession exceeds INR 120,000 OR the total turnover / gross receipts as the case may be,
exceeds INR 10,00,000 in any 1 of the 3 years immediately preceding the accounting year
❖ Where profits and gains from business are deemed to be profits and gains under section 44AE or
Section 44BB or Section 44BBB and assessee has claimed his income to be lower than the profits and
gains then such profits and gains shall be deemed to be profits and gains of his business during the
previous year
❖ where the provisions of section 44AD(4) or section 44ADA are applicable to him and his total income
exceeds the maximum amount which is not chargeable to income tax.
Note: The books of accounts and other documents shall be kept and maintained for a period of 6 years
from the end of relevant assessment year.

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31) Compulsory Audit of Books of Account (Section 44AB): Section 44AB makes it obligatory fora person
to get his accounts audited before the “specified date” by a “Chartered Accountant”; if the total sales,
turnover or gross receipts in business for the previous year exceeds INR 1 crore or if his gross receipts in
profession for the previous year exceeds INR 50 lakhs
In order to reduce the compliance burden on the small and medium enterprises carrying on the Business,
the threshold of turnover/sales limit for tax audit requirements has been increased from 1 Crore to 5
Crores, subject to following conditions:
❖ Aggregate of all amounts received including amount received for sales, turnover or gross receipts
during the previous year, in cash, does not exceed five per cent of the said amount; and
❖ Aggregate of all payments made including amount incurred for expenditure, in cash, during the
previous year does not exceed five per cent of the said payment. [As Amended by Finance Act, 2020]

Note: The requirement of audit u/s 44AB, doesn’t apply to a person who declares profits / gains on a
presumptive basis, u/s 44AD, and his total sales / turnover / gross receipts doesn’t exceed INR 2 Cr.

32) SPECIAL PROVISION FOR COMPUTING PROFITS A N D G A I N S OF BUSINESS O N

PRESUMPTIVE BASIS [SECTION 44AD]: The provisions of this section shall be applicable to resident
Individual, HUF, Firm (excluding LLP) carrying on any business except the business of plying, hiring or
leasing goods carriages referred to in section 44AE and whose total turnover or gross receipts in the
previous year does not exceed an amount of 2 Crores.

33) Persons not eligible for Presumptive Taxation Scheme: The following persons are specifically excluded
from the applicability of the presumptive provisions of section 44AD -
❖ A person carrying on profession as referred to in section 44AA(1), i.e., legal, medical, engineering or
architectural profession or the profession of accountancy or technical consultancy or interior
decoration or any other profession as is notified by the Board (namely, authorized representatives,
film artists, company secretaries and profession of information technology have been notified by the
Board for this purpose);
❖ A person earning income in the nature of commission or brokerage; or
❖ A person carrying on any agency business

34) PRESUMPTIVE TAXATION FOR PROFESSIONALS [SECTION 44ADA]: This section allows
presumptive basis, for a assessee being an individual, Hindu undivided family or a partnership firm
other than a limited liability partnership as defined under clause (n) of sub-section (1) of section 2 of the
Limited Liability Partnership Act, 2008, who is a resident in India who is engaged in the following
professions: legal / medical / engineering / architectural / accountancy / technical consultancy /
interior decoration, or any other profession as notified by the Central Board of Direct Taxes (CBDT), in
the Official Gazette and whose gross receipts does not exceed INR 50,00,000 in the PY.
50% of the total gross receipts or such higher sum as may be declared by the assessee shall be deemed as
income under the head Profit and Gains of Business and Profession (PGBP).
No deduction shall be allowed to the assessees under sections 30 to 38 and the salary and interest paid
to the partners shall not be allowed for deduction subject to the conditions and limits specified in section
40(b).

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35) BUSINESS OF PLYING, HIRING OR LEASIN G G O O D S CARRIAGES [SECTION 44AE]: This
section provides a presumptive basis of taxation for estimating business income from plying, hiring or
leasing goods carriages, so long as the assessee does not own > 10 vehicles at any time in the PY.
The current presumptive income scheme is applicable to all classes of goods carriages being less than 10
in number, irrespective of their tonnage capacity. Hence with amendment by Finance Act, 2018 the
presumptive income shall be as under:

❖ In case of heavy goods vehicle (the gross vehicle weight of which exceeds 12,000 kilograms), the
presumptive income would deemed to be an amount equal to Rs. 1,000 per ton of gross vehicle
weight or unladen weight, as the case may be, for every month or part of a month during which the
heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have
been actually earned from such vehicle, whichever is higher.
❖ The vehicles other than heavy goods vehicle will continue to be taxed at as per the existing rates of
Rs. 7,500 for every month or part of a month during which the goods carriage is owned by the
assessee in the previous year or an amount claimed to have been actually earned from such goods
carriage, whichever is higher.
An assessee may claim lower income than the presumptive income as specified under this section, if he
keeps and maintains such books of account under section 44AA and gets his accounts audited and
furnishes a report of suchaudit as required under section 44AB.
An assessee, who is in possession of a goods carriage, whether taken on hire purchase or on instalments
and for which the whole or part of the amount payable is still due, shall be deemed to be the owner of
such goods carriage.

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 C H A PTER 7 – Income from Capital Gains
1) The provisions for computation of Income from Capital Gains are covered under sections 45 to
55 of the Income Tax Act, 1961. Section 2(14) defines the term capital asset and section 45 is
charging section which lays down the basis of charge for taxability of Capital Gain / Loss arises
on transfer of Capital Asset.

2) The type of capital gain depends upon the period for which the capital asset is held. The
taxability of capital gain shall satisfy the following conditions:
❖ There should be Capital Asset
❖ The Capital Asset is transferred by the Assessee
❖ Such Transfer takes place during the Previous Year
3) Section 45 of the Act, provides that any profits or gains arising from the transfer of a capital asset
effected in the previous year shall, save as otherwise provided in various sections of Section 54,
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.

4) CAPITAL ASSETS [SECTION 2(14)]

Capital Assets Means

any securities held by a

Foreign
property of any kind held
Institutional Investor
by an assessee
which has
invested in such securities

whether or not in accordance with the

connected with his regulations made under
business or profession the SEBI Act, 1992

5) SHORT-TERM & LONG-TERM CAPITAL ASSETS Section 2(42A) of the Income-tax Act,
1961 defines short term capital asset as a capital asset held by the assessee for not more than 36
months immediately preceding the date of transfer. Therefore, an asset which is held by the
assessee for period of more than 36 months immediately preceding the date of transfer is a long-
term capital asset.

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6) However, a security (other than a unit) listed in a recognised stock exchange or a unit of an
equity oriented fund, or of U TI or a Zero-Coupon Bond, will be considered as a long-term asset
if it is held for a period of more than 12 months immediately preceding the date of transfer.

7 ) A share of a company not being a share which is listed on a recognised stock exchange in India
or an immovable property, being land or building or both, would be treated as a short-term
capital asset if it was held by an assessee for not more than 24 months immediately preceding
the date of its transfer.

8) The period of holding of unlisted shares or an immovable property, being land or building or
both, for being treated as a long-term capital asset would be “more than 24 months” instead of
“more than 36 months”.

9) Assets other than short-term capital assets are known as ‘long-term capital assets’ and the gains
arising therefrom are known as ‘long-term capital gains’.

10) Period of Holding

STCA, if held for ≤ 12 month ❖ Security (other than unit) listed in a recognized stock
LTCA, if held for > 12 months exchange
❖ 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

11) CAPITAL G A I N S O N DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION

[SECTION 46]:

❖ In the hands of liquidated company: Where the assets of a company are distributed to its
shareholders on its liquidation, such distribution shall be regarded as a transfer by the
company for the purposes of section 45 [Section 46(1)].

❖ In the hands of shareholders: Shareholders receive money or other assets from the company
on its liquidation. They will be chargeable to income-tax under the head ‘capital gains’ in
respect of the market value of the assets received on the date of distribution, or the moneys
so received by them.

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12) CAPITAL G A I N S O N BUYBACK OF SHARES OR SPECIFIED SECURITIES [SECTION 46A]:

❖ In case of specified securities other than shares: Any consideration received by a holder of
specified securities (other than shares) from any company on purchase of its specified
securities is chargeable to tax in the hands of the holder of specified securities. The difference
between the cost of acquisition and the value of consideration received by the holder of
securities is chargeable to tax as capital gains in his hands. The computation of capital gains
shall be made in accordance with the provisions of section 48.

❖ In case of shares (whether listed or unlisted): With effect from 5.7.2019, in case of buyback
of shares (whether listed or unlisted) by domestic companies, additional income-tax @ 20%
(plus surcharge @12% and cess @4%) is leviable in the hands of the company.
13) Indexed cost of acquisition means an amount which bears to the cost of acquisition the same
proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost
Inflation Index for the first year in which the asset was held by the assessee or for the year
beginning on the 1st day of April 2001 whichever is later.

14) Indexed cost of improvement means an amount which bears to the cost of improvement the
same proportion as Cost Inflation Index for the year in which the asset is transferred bears to
the Cost Inflation Index for the year in which the improvement to the asset took place.

15) Cost inflation index, in relation to a previous year, means such Index as the Central
Government may, having regard to seventy-five per cent of average rise in the Consumer P rice
Index (urban) the immediately preceding previous year to such previous year, by notification
in the Official Gazette, specify in this behalf.

16) Cost of Acquisition of Certain Assets

Asset Cost of Acquisition

Goodwill, if Self-Generated NIL
Goodwill, if acquired Purchase Price
On Gift / inheritance / distribution of assets Cost to the previous owner
of HUF on partition
Bonus Shares allotted prior to 1st April 2001 FMV (1st April 2001)
Bonus Shares allotted post 1st April 2001 NIL
Rights Shares Amount paid to acquire the shares
Rights shares which are purchased by person Purchase price paid to the renouncer + P rice
in whose favour the assessee has renounced paid for acquiring rights shares
the rights entitlement

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17)CAPITAL G A I N S IN RESPECT OF SLUMP SALE [SECTION 50B]: Meaning of Slump Sale
[Section 2(42C)]:

Slump Sale means the transfer of one or more undertakings as a result of the sale for a lump
sum consideration without values being assigned to the individual assets and liabilities in such
sales.
❖ Any gains arising from the slump sale of one / more undertakings held for more than 36
months, shall be charge able to tax as Long-Term Capital Gains in the Previous Year in which
the slump sale was effected
❖ Any gains arising from the slump sale of one / more undertakings held for less than 36
months, shall be chargeable to tax as Short-Term Capital Gains in the Previous Year in which
the slump sale was effected

18) Capital Gain on Transfer of Unlisted Shares in a Company [Section 50CA]: This Section is applicable
if an assessee transfers shares in a company (other than quoted shares) at less than the fair market value
of such share determined in accordance with prescribed manner. In such case, the F M V of such shares
shall be deemed to be the full value of consideration for the purpose of computation of capital gain.
Provided that the provisions of this section shall not apply to such transactions undertaken by certain
class of persons and subject to such conditions as may be prescribed by CBDT.

1 9 ) A DVA N C E M O N E Y RECEIVED [SECTION 51]: Section 51 provides that while calculating

capital gains, the above advance retained by the assessee must go to reduce the cost of
acquisition. However, if advance has been received and retained by the previous owner and not
the assessee himself, then the same will not go to reduce the cost of acquisition of the assessee.

20) Conditions for claiming exemption u/s 54

❖ Assessee: Individual or HUF
❖ Which asset to transfer: Residential house (buildings or lands appurtenant there to )
❖ It must be a long-term capital asset
❖ Income from such house should be chargeable to tax under the head “Income from House
Property”
21) Amount of Exemption under section 54 will be lower of:
❖ Long term capital gains arising on transfer of residential house; or
❖ Amount invested in purchase/construction of new residential house or houses. (including
the amount deposited in C G A S before due date of filing of return

22) Transfer of land used for agricultural purposes [Section 54B]:

Conditions for claiming exemption:
❖ Assessee: Individual or HUF
❖ There should be a transfer of an urban agricultural land
❖ Asset must be either short term or long term capital asset.

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 ❖ Such land has been used for agricultural purposes for immediately preceding 2 years by
such Individual or his parent or HUF
❖ He should purchase another agricultural land (urban or rural) within 2 years from the date
of transfer
❖ If such investment is not made before the date of filing of return of income, then the capital
gain has to be deposited under the C G A S
❖ Amount utilized by the assessee for purchase of new asset and the amount so deposited shall
be deemed to be the cost of new asset.
Amount of Exemption:
❖ If cost of new agricultural land ≥ capital gains, entire capital gain is exempt.
❖ If cost of new agricultural land < capital gains, capital gain to the extent of cost of new
agricultural land is exempt.
If the new agricultural land is also transferred within 3 years from date of acquisition, the cost
of land would be reduced by the capital gains exempted earlier

23) Compulsory acquisition of lands and buildings [Section 54D]:

Conditions for claiming exemption:
❖ Assessee: Any assessee
❖ There must be a compulsory acquisition of land & building or any right in land or building
forming part of an industrial undertaking
❖ Such land & building should have been used for business purposes of the industrial
undertaking for 2 years immediately preceding the date of transfer.
❖ The assessee must purchase any another land / building / construct any building (for
shifting or re-establishing the existing undertaking or setting up a new industrial
undertaking) within 3 years from date of transfer
❖ If such investment is not made before the date of filing of return of income, then the capital
gain has to be deposited under the CGAS . Amount utilized by the assessee for purchase of
new asset and the amount so deposited shall be deemed to be the cost of new asset.

In such a case, if the cost of the new land & building is > the Capital Gains, the entire LTCG will
be exempt, and if less, then the LTCG will be exempt only to the extent of the cost of new land
& building.
If the new land & building is also transferred within 3 years from date of acquisition, the cost of
such land & building would be reduced by the capital gains exempted earlier.

24) Capital Gains Exemption in case of investments is made in Specified Bonds [Section 54EC]:
Conditions for claiming exemption:
❖ Assessee: Any assessee
❖ There should be a transfer of a long-term capital asset being land or building or both.
❖ Such asset can also be a depreciable asset held for more than 36 months.

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 ❖ The capital gains arising from transfer of such asset should be invested in a long-term
specified asset within 6 months from the date of transfer.
❖ Long-term specified assets would imply, bonds redeemable after 5 years issued on or after
1.4.2018 by National Highways Authority of India (NH AI), or Rural Electrification
Corporation Limited or, Power Finance Corporation Ltd., Indian Railway Finance
Corporation Limited or any other bond notified by central government in this behalf.
❖ The assessee should neither transfer nor convert / avail loan or advance with this bond as
security for a period of 5 years from date of acquisition of such bonds, and in case that does
happen before 5 years, the capital gain exempted earlier shall be taxed as long-term capital
gain in that year.

In this case, the entire LTCG or amount invested in the specified bonds, whichever is lower, is
exempt.

The maximum investment which can be made in notified bonds or bonds of N H A I and RECL,
out of capital gains arising from transfer of one or more assets, during the previous year in which
the original asset is transferred and in the subsequent financial year cannot exceed Rs. 50 Lacs.

25) Tax incentives for Start-ups [Section 54EE]: Conditions for claiming exemption:
❖ Assessee: Any assesse
❖ Which asset to transfer: One or more original Assets
❖ Investment of Long-term Capital Gains in units of a specified fund (to finance start-ups in
India) issued before 1st April, 2019 of such fund, as may be notified by the Central
Government in this behalf
❖ Within 6 months from date of transfer
❖ Maximum Investment Allowed in any financial year or years is INR 50,00,000

In such case, the entire LTCG or amount invested in the bonds, whichever is lower, is exempt.

Units so acquired should not be transferred for a period of 3 years, and if that does happen
before 3 years, the capital gain exempted earlier shall be taxed as long-term capital gain in that
year

26) Capital gain on the transfer of certain capital assets not to be charged in case of investment in
residential house [Section 54F]: Conditions for claiming exemption:
❖ Assessee: Individual or HUF
❖ There must be a transfer of a long-term capital asset other than a residential house
❖ The assessee should purchase 1 residential house situated in india within 1 year before OR
2 years after the date of transfer OR construct one residential house in India within 3 years
from date of transfer

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 ❖ If such investment is not made before the date of filing of return of income, then the net sale
consideration has to be deposited under the CGAS . Amount utilized by the assessee for
purchase or construction of new asset and the amount so deposited shall be deemed to be
the cost of new asset.
If the cost of the investment in a new residential house is > the N et Sale Consideration, the
entire LTCG is exempt, and if less than N et Sale Consideration, then, LTCG is exempt
proportionately (that is: LTCG * Investment in New House / Net Sale Consideration).

There is also a condition, that the assessee should not own more than one residential house on
the date of transfer and should not purchase any other residential house within 2 years OR
construct any other residential house within 3 years from date of transfer of original asset, and
if that does happen then, the entire LTCG exempted earlier will be chargeable to tax as LTCG in
that year.

Additionally, if the new house is transferred within 3 years of purchase, capital gains would
arise on transfer and the LTCG exempt earlier would be taxable as LTCG in that year.

27) Exemption of capital gain on transfer of assets of shifting of industrial undertaking from urban
area to a Special Economic Zone [Section 54GA]:
Conditions for claiming exemption:
❖ Assessee: Any Assessee
❖ 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.

28) Capital Gain on Transfer of Residential Property (a house or a plot of land) [Section 54GB]:

Person An Individual or a Hindu undivided family.

Eligible Asset On transfer of a long term residential property (a house or a plot of
land)
if transfer takes place during April 1, 2012 and March 31, 2017.
Acquirable Asset Equity share of 25% of share capital or voting rights in an “eligible
company”
Time limit for Equity shares in an “eligible company” should be acquired on or
acquiring the new before
asset The due date of furnishing of return of income under section 139(1).
Exempt Amount Investment in “new asset” by the eligible company net sale
consideration
x capital gain. Exemption cannot exceed capital gain.

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 Revocation of In the following cases, exemption will be taken back and the amount
exemption of Exemption given earlier under section 54 GB will become long-term
capital gain of the assessee It shall be taxable in the year in which the
assessee or
the eligible company commits the following defaults-
If the equity shares in the eligible company are sold or otherwise
transferred by the assessee within 5 years from the date of acquisition.
If the “new asset” is sold or otherwise transferred by the eligible
company within 5 years from the date of acquisition.
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).

29) 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.

30) Tax on long-term capital gains in case of specified securities [Section 112A]: 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).
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 [excess will be taxable]. 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.
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:
❖ The actual cost of acquisition of such asset; or
❖ Lower of following :
✓ Fair market value of such shares as on January 31, 2018; or
✓ Actual sales consideration accruing on its transfer

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31)TAX RATES:
Short-term Capital Gains (STCG)
❖ STCG is clubbed with Total Income and therefore charged to tax at normal rates
❖ However, STCG on transfer of listed equity shares / unit of an equity-oriented fund / unit
of a business trust, where STT has been paid, STCG is taxable @15% under section 111A.
❖ However, short-term capital gains arising from transactions undertaken in foreign currency
on a recognized stock exchange located in an International Financial Services Centre (IFSC)
would be taxable at a concessional rate of 15% even though STT is not leviable in respect of
such transaction.
❖ Deductions under Chapter VI-A cannot be availed in respect of such short-term capital gains
on equity shares of a company or units of an equity oriented mutual fund or unit of a
business trust included in the total income of the assessee.

Long-term Capital Gains (LTCG):

Person Rate of Particulars
tax
1. Resident persons, Unexhausted basic In case of transfer of
Other than Companies exemption limit can listed securities (other
Resident Individuals be exhausted against than units) and Zero
and HUF 20% LTCG taxable u/s Coupon Bonds, LTCG
Resident AOPs and 20% 112 / 112A for would be taxable
BOIs 20% Resident Individual at the lower of the
Resident Firms and & Resident HUF following rates –
LLPs (1)10%without
2. Domestic Companies 20% indexation benefit;
3. Non-Corporate, Non 10% Capital Assets, other and
Residents and foreign than unlisted (2)20%with
companies 20% securities or shares of Indexation
closely held benefit.
companies Unlisted
securities or shares of
closely held
companies (without
benefit of indexation
or foreign currency
fluctuation)

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 Chapter 8 – Income from O ther S ources
1) The following specific incomes are chargeable to Income Tax under the head “Income from other
sources” under Section 56(2): -
❖ Dividends [Section 56(2)(i)]: Dividend income.
❖ Keyman Insurance policy: Amount received under a Keyman insurance Policy, including bonus
on such Policy, if it is not taxable under any other head of income shall be chargeable under
Income from other sources.
❖ Winnings from lotteries [Section 56(2)(ib)]: Any winnings from lotteries, crossword puzzles,
races including horse races, card games and other games of any sort or from gambling or betting
of any form or nature shall be chargeable to tax under Income from other sources.
The entire income of winnings, without any expenditure or allowance or deductions under
Sections 80C to 80U, will be taxable. However, expenses relating to the activity of owning and
maintaining race horses are allowable.
Further, such income is taxable at a special rate of income-tax i.e., 30% + surcharge + cess @ 4%
[Section115BB]
❖ Contribution to Provident fund: Income of the nature referred to in Section 2(24)(x) will be
chargeable to income-tax under the head “income from other sources” if such income is not
chargeable to income-tax under the head “profits and gains of business or profession”. But if the
employer deposits such amount on or before due date of deposit applicable for such contribution,
he will be allowed a deduction on account of the same. [Section 56(2)(ic)].
❖ Income by way of interest on securities: if the income by way of interest on securities is not
chargeable to income-tax under the head, “Profits and gains of business or profession”, then such
income shall be taxable under Income from other sources.
❖ Income from hiring of machinery, etc. [Section 56(2)(ii)]: Income from machinery, plant or
furniture belonging to the assessee and let on hire; if the income is not chargeable to income-tax
under the head “profit and gains of business or profession” shall be taxable under Income from
other sources.
❖ Hiring out of building with machinery etc. [Section 56(2)(iii)]: Where an assessee lets on hire
machinery, plant or furniture belonging to him and also building and the letting of the building
is inseparable from the letting of the said machinery, plant or furniture, the income from such
letting, if it is not chargeable to income-tax under the head “Profits and gains of business or
profession” shall be taxable under Income from other sources.

❖ Share premiums in excess of the fair market value to be treated as income [Section 56(2) (viib)]:
Where a company, not being a company in which the public are substantially interested, receives,
in any previous year, from any person being a resident, any consideration for issue of shares that
exceeds the face value of such shares, the aggregate consideration received for such shares as
exceeds the fair market value of the shares shall be taxable under Income from other sources.

1) The following shall be taxable under the head ‘Income from other sources’ : Where any person
receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

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 ❖ Any sum of money, without consideration, the aggregate value of which exceeds INR 50,000, the
whole of the aggregate value of such sum.
❖ Any immovable property,—
✓ without consideration, the stamp duty value of which exceeds INR 50,000, the stamp duty
value of such property is chargeable to tax;
✓ for a consideration, the stamp duty value of such property as exceeds such consideration, if the
amount of such excess is more than the higher of the following amounts, namely:—
➢ the amount of INR 50,000; or
➢ the amount equal to 10% per cent of the consideration [Increased from 5% to 10% by
Finance Act, 2020];
➢ Then the difference between stamp duty value of such property and consideration is
chargeable to tax.
❖ any property, other than immovable property, –
✓ without consideration, the aggregate fair market value of which exceeds INR 50,000, then the
whole of the aggregate fair market value of such property.
✓ For a consideration which is less than the aggregate fair market value of the property by an
amount exceeding INR 50,000, the aggregate fair market value of such property as exceeds
such consideration.

3) Provided that this clause shall not apply to any sum of money or any property received—
❖ from any relative; or
❖ on the occasion of the marriage of the individual; or
❖ under a will or by way of inheritance; or
❖ In contemplation of death of the payer or donor, as the case may be; or
❖ from any local authority as defined in section 10(2); or
❖ 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
❖ from or by any trust or institution registered under section 12A; or Section 12AB; [Inserted vide
Finance Act, 2020]; or
❖ by any fund or trust or institution or any university or other educational institution or any hospital
or other medical institution referred to in section 10(23C); or
❖ by way of transaction not regarded as transfer under certain clauses of section 47; or
❖ from an individual by a trust created or established solely for the benefit of relative of the individual;
❖ From such class of persons and subject to such conditions, as may be prescribed. (w.e.f. A Y 20-21).

4) “Fair market value” of a property, other than an immovable property, means the value determined in
accordance with the method as may be prescribed.
5) “property” means the following capital asset of the assessee, namely:—
❖ immovable property being land or building or both;
❖ shares and securities;
❖ jewellery;
❖ archaeological collections;
❖ drawings;
❖ paintings;
❖ sculptures;
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 ❖ any work of art; or
❖ Bullion.
6) “relative” means,—
❖ in case of an individual—
✓ Spouse of the individual;
✓ Brother or sister of the individual;
✓ Brother or sister of the spouse of the individual;
✓ Brother or sister of either of the parents of the individual;
✓ Any lineal ascendant or descendant of the individual;
✓ Any lineal ascendant or descendant of the spouse of the individual;
✓ Spouse of the person referred to in items (B) to (F); and
❖ In case of a Hindu undivided family, any member thereof.

7) Impact of Section 115BAC under the head Income from Other Sources: 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. A / Y 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 A Y 2021-22 or FY 2020-21, there are two operative tax systems:
❖ 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.
❖ 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 section 115BAC itself.
8) 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 HU F opting to pay tax under concessional tax regime under section
115BAC of the Income Tax Act, 1961.
9) Taxation of Casual Income: Casual income is liable to TDS. The casual income is taxed at a flat rate of
30% plus surcharge (if any), plus health and education cess.
When the TDS has already been deducted from the income, then in order to calculate the tax liability on
such income, the income is to be grossed up. [Section 115BB]
However, the following incomes are not liable to TDS:
❖ Winning from lottery upto amount Rs.10,000
❖ Winning from racing other than horse race
❖ Winning from horse race upto Rs. 10,000.
1 0 ) I N C O M E FROM FAMILY PENSION: The income by way of family pension is eligible for a standard
deduction under section 57(iia) which is either 1/3rd of such pension or Rs. 15,000 whichever is lower.
Above Standard Deduction from family pension is not applicable for Assessee opting for section
115BAC.
Family pension received by the widow or children or nominated heirs, as the case may be, of a member
of the armed forces (including paramilitary 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, shall be exempt from tax u/s 10. Further, income by way of family pension received
as family pension of an individual who has been in the service of Central/State Government and has

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 been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or such other gallantry award as
may be notified is also exempt from tax u/s 10.
11) TAXATION OF DIVIDENDS:
Taxability of Dividend upto AY 2020-21
Domestic company was liable to Pay Dividend Distribution (DDT) tax u/s 115-O on dividend declared
or paid by it. Dividend included deemed dividend u/s 2(22).Therefore DDT was payable both on actual
dividend as well as deemed dividend.
Actual and deemed dividend u/s 2(22)(a),(b),(c) & (d) was subject to DDT @ 15% plus surcharge @ 12%
plus Health & education cess @ 4%. But deemed dividend u/s 2(22)(e) was liable to be DDT at higher
rate of 30% plus surcharge @12% plus Health & Education cess @4%
Since Domestic company was liable to pay DDT, the dividend received by shareholder was exempt u/s
10(34) up to 10 lakhs on receipt of actual dividend and deemed dividend u/s 2(22)(a),(b),(c) & (d).
Dividend u/s 2(22)(e) was fully exempt in hands of the shareholder u/s 10(34).
Since Actual and Deemed dividend u/s 2(22)(a),(b),(c) & (d) was chargeable to DDT at less rates as
compared to 2(22)(e), they were also chargeable to additional tax @ 10% in hands of specified
shareholders u/s 115BBDA in excess of Rs.10 lakhs.
Taxability of Dividend w.e.f. AY 2021-22
The Finance Act, 2020 has abolished Dividend Distribution Tax for dividend declared or paid w.e.f.
1/4/2020. Hence, implication is as follows:
Section 115-O is not applicable on Domestic company on dividend paid or declared w.e.f.
1/4/2020.Therefore domestic company is not liable to pay Dividend Distribution Tax ‘DDT’ on dividend
paid or declared w.e.f. 1/4/2020.
Since domestic company is not liable to pay DDT, exemption u/s 10(34) shall also not be applicable in
hands of shareholder for dividend received on or after 1/4/2020.Therefore now dividend received from
domestic company will be taxable in hands of shareholders. Section 115BBDA will also not be applicable
w.e.f. 1/4/2020

1 2 ) A M O U N T S N OT DEDUCTIBLE [SECTION 58]: The following amounts shall not be deducted in

computing income chargeable under the head “Income from other Sources”.
In the case of any assessee:
❖ Any personal expenses of the assessee.
❖ Any interest chargeable under the Income-tax Act which is payable outside India and from which
income- tax has not been paid or deducted at source.
❖ Any payment which is chargeable under the head “Salaries” if it is payable outside India unless tax
has been paid thereon or deducted therefrom at source.
❖ Any expenditure referred to in Section 40A of Income-tax Act.
13) DEEMED I N C OM E [SECTION 59]: Where any allowance or deduction has been provided in the
assessment of Income under the head “Income From Other Sources” in any Assessment Year in respect
of loss or expenditure or trading liability incurred by the assessee and later on during any previous year
any amount or any remission or any benefit is obtained by assessee (whether in cash or otherwise) then
such amount or remission or benefit shall be taxable under the head “ Income From Other Sources” in
the previous year in which it is so obtained.

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 Chapter 9: Clubbing Provisions and Set Off and/ or Carry Forward of
Losses

1) TRANSFER OF I NC OME [SECTION 60]: Section 60 of Income Tax Act, 1961 provides the provisions
relating to clubbing of income where transfer of income is done without transferring the assets. Where a
person transfers to any other person, income (whether revocable or not) from an asset without
transferring that asset, the income shall be included in the total income of the transferor.
2) REVOCABLE TRANSFER OF ASSETS [SECTION 61]: Where a person transfers any asset to any
person with a right to revoke the transfer, all income accruing to the transferee from the asset shall be
included in the total income of the transferor. The income under revocable transfer of asset shall be
included in the income of transferor even when only a part of income from transferred asset has been
applied for the transferor.
3 ) I N C OM E OF SPOUSE: The following incomes of the spouse of an individual shall be included in the
total income of the individual:
❖ Income to spouse from a concern in which such individual has substantial interest [Section
64(1)(ii)]
❖ Income to spouse from the assets transferred [Section64(1)(iv)]
4) Substantial Interest: An individual shall be deemed to have a substantial interest in a concern -
❖ In a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in profits) carrying not less than
20% of the voting power are, at any time during the previous year, owned beneficially by such
person or partly by such person and partly by one or more of his relatives;
❖ In any other case, if such person is entitled, or such person and one or more of his relatives are
entitled in the aggregate, at any time during the previous year, to not less than 20% of the profits
of such concern.

5 ) I N C O M E FROM ASSETS TRANSFERRED TO S O N ’ S WIFE [SECTION 64(1)(vi)]:

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6) TRANSFER FOR IMMEDIATE OR DEFERRED BENEFIT OF SO N ’ S WIFE [SECTION 64(1)(viii)]:
Any income arising, directly or indirectly, to any person or association of persons from assets transferred
directly or indirectly after June 1, 1973, otherwise than for adequate consideration to the person or
association of persons by such individual shall, to the extent to which the income from such assets is for
the immediate or deferred benefit of his son’s wife be included in computing the total income of such
individual.
7 ) I N C OM E TO SPOUSE THROUGH A THIRD PERSON [SECTION 64(1)(vii)]: Where a person
transfers some assets directly or indirectly to a person or association of persons without adequate
consideration for the immediate or deferred benefit of his or her spouse, all such income as arises directly
or indirectly from assets transferred shall be included in the income of the transferor.
8) CLUBBING OF IN COME OF MINOR CHILD [SECTION 64(1A)]: All income which arises or accrues to
the minor child (not being a minor child suffering from any disability of the nature specified in Section
80U) shall be clubbed in the income of his parent. Further, the income of the minor shall be included in
the income of that parent whose total income excluding income includible under this sub-section is
greater, where the marriage of minor’s parents subsists, otherwise the income of the minor will be
includible in the income of that parent who maintains the minor child in the relevant previous year.
9) However, any income which is derived by the minor from manual work or from any activity involving
application of his skill, talent or specialised knowledge and experience will not be included in the
income of his parent.

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10) CONVERTED PROPERTY: Where an individual, being a member of Hindu Undivided Family,
transfers his self-acquired property after 31st December, 1969 to the family for the common benefit of the
family, or throwing it into the common stock of the family, or transfers it directly or indirectly to the
family otherwise than for adequate consideration, such property is known as converted property.
1 1 ) I N C OM E FROM THE CONVERTED PROPERTY [SECTION 64(2)]: The income derived from the
converted property or any part thereof, shall be included in the income of the transferor.
1 2 ) I N C OM E FROM CONVERTED PROPERTY TO SPOUSE AFTER PARTITION: Where the converted
property has been the subject matter of total or partial partition amongst the members of the family, the
income derived from such converted property as is received by the spouse of the transferor on partition
shall be included in the income of the individual.
13) DUAL LIABILITY FOR TAX: The tax on the income of the other person which has been included in the
income of the assessee can either be recovered from the assessee or from the other person. The liability
of other person is limited to the portion of the tax levied on the assessee which is attributable to the
income so included. His liability arises after the service of a notice of demand by the Assessing Officer
in this behalf.
14) The process of adjustment of loss from a source under a particular head of income against income from
other source under the same head of income is called intra-head adjustment, e.g., Adjustment of loss
from business A against profit from business B.
15) Loss from speculation business cannot be set of against profit from a non-speculation business however
loss from non-speculative business can be set-off against speculation income.
16) Long Term Capital Loss (LTCL) can only be set off against Long Term Capital Gain (LTCG) and cannot
be set off against Short term Capital Gain (STCG) however STCL can be set off against LT CG
17) No loss can be set-off against casual income, i.e., Income from lotteries, crossword puzzles, race including
horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
No expenses can be claimed against casual income.
18) Loss from the business of owning and maintaining race horses cannot be set off against any income other
than income from the business of owning and maintaining race horses.
19) If income from a particular source is exempt from tax, then loss from such source cannot be set off against
any other income which is chargeable to tax, e.g., Agricultural income is exempt from tax, hence, if the
taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other
taxable income.
20) Loss from business specified under section 35AD cannot be set off against any other income except
income from specified business
21) Any loss from business or profession (other than speculation business or loss from the activity of owning
and maintaining race horses) can be set off against the income from any other business or profession
including the income from speculation business or income from the activity of owning and maintaining
race horses.
22) If any business has been discontinued during the year, the loss from such business can also be set-off
from the income of other business or profession.
23) The loss suffered by a wholly owned subsidiary company cannot be set-off by the parent company, since
both are separate assessees. Similarly, where loss incurred by a wholly owned subsidiary company is
reimbursed by the holding company, the subsidiary company does not use the right to carry forward
and set-off the loss. [C.I.T v. Handicraft Handloom Export Corporation (1982) 133 ITR 590 (Delhi)].

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24) Loss from Speculation Business can be set-off only against the income from speculation business. It is
not essential that the nature of the other speculation transaction must be the same.
25) The following losses could be carried forward :
❖ Loss in non-speculation business or profession.
❖ Loss in speculation business.
❖ Loss in transfer of capital assets [whether short-term or long-term].
❖ Loss from activity of owning and maintaining of race horses.
❖ Loss under the head ‘Income from House Property’. However, losses suffered under the following
heads are not allowed to be carried forward and set off:
✓ Losses under the head ‘salaries’.
✓ Losses under the head ‘Income from other sources’ (excepting loss suffered from the activity
of owning and maintaining race horses).
26) Loss in Non-Speculation Business [Section 72]:It shall be set-off against the profits and gains, if any, of
any business or profession carried on by him and assessable for that assessment year.
27) The loss can be carried forward to a maximum of eight consecutive assessment years immediately
succeeding the assessment year for which the loss was first computed.
28) Any balance of loss can be carried forward to the succeeding seven assessment years.
29) Where any unabsorbed depreciation or capital expenditure on scientific research has been brought
forward along with business loss, the business loss shall first be set-off.
30) Order of Set-off of losses:
❖ Current scientific research expenditure [under Section 35(1)]
❖ Current Depreciation [under Section 32(1)]
❖ Brought forward business losses [under Section 72(1)]
❖ Unabsorbed family planning promotion capital expenditure [under Section 36(1)(ix)]
❖ Unabsorbed Depreciation [under Section 32(2)]
❖ Unabsorbed scientific research expenditure [under Section 35(4)]
31) Loss in Speculation Business [Section 73]: Where, for any assessment year, any loss computed in respect
of a speculation business has not been wholly set-off against the profits of another speculation business,
it shall be carried forward to the following assessment year and shall be set-off against the profits of any
speculation business carried on by him and assessable for the assessment year.
32) Carry forward of losses in Speculative Business: In case of speculation loss even if the particular
speculation business in which there is loss is discontinued, this loss can be carried forward to be set-off
in the succeeding year against the profits of any other speculation business. This loss can be carried
forward to a maximum of four consecutive assessment years immediately succeeding the assessment
year for which the loss was first computed.
33) Carry Forward and Set Off of Losses by Specified Business [Section 73A]:
❖ Any loss of any specified business in section 35AD shall not be set off except against profits and
gains of any other specified business.
❖ Where for any assessment year any loss computed of the specified business has not been wholly
set off, the loss not set off shall be carried forward to the following assessment year, and
✓ it shall be set off against the profits and gains of any specified business carried on by him; and
✓ if the loss cannot be wholly set off, the amount of loss not set off shall be carried forward to the
following assessment year and so on.

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34) Set-Off and Carry Forward of Capital Losses [Section 74]: it can be carried forward to the following
assessment year. The short-term and long-term losses shall be separately carried forward. In case of
short-term capital loss it can be set off against income, if any, under the head “Capital gains” (whether
short-term or long-term) assessable for that assessment year in respect of any other capital asset. But in
case of long-term capital loss, it can be set off only against long-term capital gain.
While losses on transfer of capital assets, whether short-term or long-term cannot be set off against any
other income of the assessee under other heads of income.
35) Loss on Maintenance of Race Horses [Section 74A]: Where an assessee who is the owner of race horses
sustains a loss in the activity of owning and maintaining race horses, he can carry-forward and set-off
such loss against his income (Prize money received on a race horse or race horses) from the activity of
owning and maintaining race horses in subsequent years. This loss can be carried forward to a maximum
of four assessment years immediately succeeding the assessment year for which the loss was first
computed.

36) Loss Under the Head “Income From Other Sources”: Except the loss from the activity of owning and
maintaining of race horses, the unabsorbed loss from no other activity under the above head is permitted
to be carried forward and set off against income of subsequent years.
37) Carry-forward and set-off of losses in case of change in constitution of firm [Section 78]: Where a
change has occurred in the constitution of a firm, the firm is not entitled to carry forward and set off so
much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits,
if any, in the firm in respect of the previous year.
38) Carry-forward and set-off of losses in case of succession of business or profession: When a business
or profession is succeeded by another person, the brought forward losses by the predecessor can be set-
off against the income earned by the predecessor before the succession. The successor is not entitled to
carry forward the losses sustained by the predecessor and set them off against the income earned by him.
However, there is exception. If the succession is by inheritance, the heir-at-law is entitled to carry forward
and set-off the losses sustained by the predecessor provided the business in question continues to be
carried on by the successor.
39) Set-Off of Losses [Sections 70, 71]
Loss Set-Off
1. Loss from House Property (a) Income from any other House Property
(b)Any other head of income upto maximum of
Rs. 2,00,000
2. Loss from Business or Profession (a) Income from any other Business or
Profession.
(b)Any other head of income except under the
head “Salaries”
3. Loss from Speculation Income from Speculation
4. Short-term Capital Loss (a) Short-term Capital Gain
(b) Long-term Capital Gain
5. Long-term Capital Loss Long-term Capital Gain
6. Loss from activity of owning and Income from activity of owing and maintaining
maintaining race horses race horses.

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40) Carry Forward and Set-Off of Losses [Section 72]:
Loss Carry Forward and Set-Off
1. Loss from House Property In following eight years, Income from House
Property

2. Loss from Business or Profession In following eight years, income from Business or
Profession
3. Loss from Speculation In following four years, Income from Speculation

4. Short-term Capital Loss In following eight years :

(a) Short-term Capital Gain
(b) Long-term Capital Gain
5. Long-term Capital Loss In following eight years, Long-term Capital Gain
6. Loss from activity of owning and In following four years, Income from activity of
maintaining race horses owing and maintaining race horses

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