Taxation

TAXATION
Semester – II
B.com - Honors
Student Workbook
Edition: 2020
#44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru, Karnataka 56006
FOR PRIVATE CIRCULATION ONLY P a g e 1 | 125
TAXATION
CONTENTS
1. Introduction to taxation
2. Heads of Income tax – I
3. Heads of Income tax – II
4. Deductions from Gross Total Income & Tax Liability of Individuals
5. Tax planning for Individual

SYLLABUS
Module – 1: Introduction to taxation (15 Hrs)

Brief history of Indian Taxation – Legal Frame work – Cannons of Taxation – Finance Bill – Scheme of Income Tax-
Meaning of Assessee – Person – Assessment year – Previous year – Income – Gross Total Income – Total Income-
Agricultural income- Capital and Revenue- Residential Status and Incidence of Tax on individual- Exempted Incomes.
Income tax authorities: CBDT – powers and functions; Commissioner of Income Tax – powers and functions; Types of
assessment and rectification of mistakes; Recovery of tax and refunds. Time limits for the submission of information,
claims and payment of tax, penalties for non-compliance.
Module-2: Heads of Income tax - I (30 Hrs)

Income from Salary
Basic Salary- Allowance - Types – Perquisites – Types section 89(1) – Tax Rebate U/S 88 - Problems. (Restricted to
Individual Assessee) Allowance – Leave Encashment – Pension –Gratuity – Perquisites compensation received on
termination of the service.
Income from House Property
Introduction – Annual value under different situations (self occupied – Let out – Partly self-occupied partly let out –
Portion wise and time wise) – Deductions (u/s 24) – Problems.
Module-3
Heads of Income tax - II
Profits And Gains From Business And Profession
Meaning of business, profession, profits of business or profession, features of assessment of profits and gains, rules for
adjustment of profit and loss account- Depreciation u/s 32.
Capital Gains
Meaning and kinds of capital asset, transfer, transactions not regarded as transfer, full value of consideration, cost of
acquisition, cost of improvement, capital gains exempt from tax, exemptions from capital gains u/s 54. Problems on
computation of short term and long term capital gains.
Income from Other Sources
General income, specific incomes, treatment of specific incomes, deduction of tax at source with respect to interests,
winnings, prizes etc. Problems on computation of taxable income from other sources and deduction u/s 57 and amounts
expressly disallowed u/s 58. 6
Module – 4: Deductions from Gross Total Income & Tax Liability of Individuals (10 Hrs)
(Provisions relating to individuals only) u/s 80 – Deduction in respect of certain payments and deduction in respect of
certain incomes- Carry forward and set off of losses - Computation of total taxable income and tax liability of an
individual.
Module -5: Tax planning for Individual (10 hrs)

Introduction, Meaning, Tax planning- Tax Avoidance – Tax Evasion, Methods of Tax Planning – Tax planning of individual
under Heads of Income
Reference Books:
 Vinod K Singhania. and Monica Singhania, Students’ Guide to Indirect Taxes, Taxmann Publications Pvt. Ltd.,
Delhi. – 2016
 Swamynathan. C, Abhirami.D, Srinivas. G, Income tax – Kalyani Publications – Bangalore. – 2016.
 B.B. Lal Income Tax Law and Practice. Konark Publications, New Delhi. B.Com Programme CBCS Department
of Commerce, University of Delhi, Delhi . – 2016
 Dr. Mehrorea and Dr. Goyal : Direct taxes – Law and practice, Taxmann publication . – 2016
 Gaur and Narang: Income Tax – 2016.

Module – I
Introduction to Taxation
INTRODUCTION TO INCOME TAX
Tax is levied by the government to form a pool of resources to be used for the collective benefit of the public.
Taxes collected would be used by the government for public welfare programs, maintenance of law and order in
the country, running public sector undertakings etc.
There are two types of taxes – Direct and Indirect. Direct tax is a type of tax where the tax is imposed on a
person and it is paid by the same person. That means the incidence and the impact of tax are on the same
person. When the incidence and impact of tax are on different persons, it is called as indirect taxes.
OBJECTIVES OF THIS MODULE:

1. Understand the basic concepts of tax.
2. Know various terminologies used.
3. Have clarity about, how individuals are treated under taxing system.
4. Be familiar with the authorities related to income tax and their functioning.
1.Brief History of Income Tax:

The concept of income tax was introduced in India for the first time by Sir James Wilson in the year
1860 in order to recover the expenditure incurred by the Government on account of Sepoy Munity in 1857 (First
war of Indian Independence). Thereafter several amendments were made in 1918, 1921 etc. In 1961, based on
the recommendation of the Direct Tax Committee and in consultation with the Law Ministry a Bill was framed
and introduced in the Parliament on 1st September 1961 and the same came to force with effect from 1st April
1962.
The comprehensive Income Tax Act 1961 includes 14 section and sub section running into thousands
and many amendments which were made since 1961. Finance minister presents budget every year in the
parliament with a view to change rates and laws of income tax if any needed in the interest of the nation
building.
Income tax is levied by the Central Government and administered by Central Board of Direct Taxes
(CBDT). Income tax shall be levied only on those persons whose income exceeds certain limit. Total tax
revenue collected by the Central Government is shared by Central and State Government on the basis of
recommendation of finance commission.
1.2 Legal framework:
Income tax is a direct tax. It is levied and collected from the public who have income more than the exempted
limit for a given financial year. Income tax is a central subject and it is levied, collected, administered, regulated
and monitored by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance, Government of
India. The scope of Income tax subject covers the following aspects. Viz
1. Income Tax Act,1961 (Bare Act – subjected to many amendments from time to time till date)
2. Income Tax Rules 1962
3. Finance Act (passed in the Parliament every year)
4. Judicial pronouncements relating to various issues in Income Tax.
1.3 Tax:
It is compulsory levy under certain conditions and it is meant for the general purposes of the state.
1.3.1 Features of tax:
1) It is compulsory payment to be paid by the citizens who are liable to pay it, hence refused to pay tax is a
punishable offence.
2) It is levied to meet public expenditure incurred by the government in the common interest of the nation.
3) The payment of tax by a person does not entitle him to receive any direct benefits from the government in
return for the tax.
4) There is no direct relationship between the tax paid by the person and the benefits that he may receive as a
result of government expenditure.
5) It has to be paid regularly and periodically as determined by the tax authority.
1.3.2 Types of taxes:
1) Direct Taxes: It is a kind of tax where in incidence and impact is on the same person.
‘Incidence’ means liability to pay tax to the Government and
‘Impact means burden of paying the tax.
E.g. Income Tax, Wealth Tax, Property Tax etc.
2) Indirect Taxes: It is a kind of tax where in ‘incidence’ and ‘impact’ is on two different persons.
E.g. Excise Duty, Customs Duty, Sales Tax, Service Tax etc.
Difference between Direct tax and Indirect Tax
Particulars Direct Tax Indirect Tax

Meaning It is a kind of tax where in incidence and It is a kind of tax where in ‘incidence’ and
impact is on the same person. ‘impact’ is on two different persons.
Nature of Tax Progressive in nature. Regressive in nature.
Taxable event Taxable income of the Assessee Purchase/Sale/Manufacture of goods and
or rendering of services.
Levy and Levied and collected from the Assessee. Levied and collected from the consumer
Collection but paid or deposited to the exchequer by
the Assessee or Dealer.
Shifting of Burden Tax burden is borne by the person on Tax burden is shifted to the subsequent or
whom it is levied. Hence, the burden ultimate user.
cannot be shifted.
Tax Collection Tax is collected on the income for a year is At the time of sale or purchase or
earned. rendering of services.
Examples Income Tax, Wealth Tax, Property Tax etc. Excise Duty, Customs Duty, Sales Tax,
Service Tax etc.
1.3.3. Principles or Canons of taxation:

1) Canon of Equality:
According to this canon taxes imposed should be in accordance with an individual’s ability to pay. That is it
should be impartial and based on one’s ability to pay.
2) Canon of Certainty: The amount to be paid, the time and the method of payment should be clear and
certain for the tax payers to adjust his/her income and expenditure accordingly.
3) Canon of Convenience: This canon says that the time of payment and the manner payment should be
convenient to the tax payer.
4) Canon of Economy: Every tax involves a collection cost. It is important that the cost of collection should
be the minimum possible. The tax is economical, in the sense that the cost of collection is very small.
5) Canon of Productivity: The tax system should sufficiently yield the revenue needed to meet the
requirements of the state. Productivity again means that the government should not depend upon deficits.
6) Canon of Elasticity: Elasticity is closely connected with fiscal adequacy. This canon implies that yield
from taxation should grow along with increase in population and development of economy.
7) Canon of Simplicity: Calculation of taxable income and taxable liability should be simple and
understandable to the tax payer.
8) Canon of Flexibility: Income tax authorities should revise the tax structure at the right time in order to
meet the changing needs of the economy.
9) Canon of Co-ordination: There should be co-ordination between the various taxes imposed by Central,
State and Local bodies. Otherwise, there will be over lapping and unnecessary inconvenience to all tax
payers.
1.4 BASIC TERMINOLOGIES UNDER INCOME TAX:
1.4.1. Income Tax:
It is a tax on the income earned by an assessee during the previous year and the tax is payable in the assessment
year at the rates prescribed by the relevant Finance Act. It is a tax levied by the Central Government on the
income earned by an assessee every year.
1.4.2. Assessment U/S 2(8):
According to section 2(8) of Income Tax Act, 1961 the term assessment means-
1) Computation of total income or taxable income
2) Computing the tax on the income and
3) Imposition of tax liability
1.4.3. Assessment Year U/S 2(9):

Assessment year is defined as “the period of twelve months starting from 1st of April and ending of 31st March
every year”. The current Assessment year is 2020-2021.
1.4.4. Previous Year U/S 3
It is the financial year immediately preceding the Assessment year. In other words, the year in which income is
earned is known as previous year. The previous year for the assessment year 2020-2021 is 2019-2020.
1.4.5. Difference between Previous year and Assessment year
Previous year Assessment year

The year in which income is earned. The year in which the income of the previous
year is assessed to tax.
It always precedes the assessment year. It always succeeds the previous year.
It may be either a full year or part of the year. It is always a full year
The present previous year is 2019-2020. The present assessment year is 2020-21.
1.4.6. Exception to the General Rule Previous Year:
Normally all the incomes of the P.Y are assessed to tax in the A.Y. But there are certain exceptions to this rule.
In these cases, the income of a financial year is assessed to tax in the same year. They are:
1) Sec. 172 – Income of non-resident from shipping business.
2) Sec. 174 – Income of persons leaving India either permanently or for a long period of time.
3) Sec. 174 (A) – Income of bodies formed for short duration.
4) Sec. 175 – Income of a person trying to transfer his/her assets to avoid the payment of tax.
5) Sec. 176 – Income of a discontinued business.
1.4.7. Assessee Sec 2(7):
An assessee means a person by whom any tax or any other sum is payable under the Income Tax Act of 1961, it
includes:
a) Every person in respect of whom any proceeding under this Act has been taken for the assessment of
income or any refund due to him or to such other person.
b) Deemed Assessee.
c) Deemed Assessee in default.
1.4.7(1) Deemed Assessee:
A person may be liable not only for his own income but also on the income of other persons. A person who is
liable to pay any tax or file return of income for the income earned by a minor, agent of non-resident or by any
other person is called Deemed Assessee.
Deemed assessee is a person who is assessable for the income of any other person under this act and includes
the following.
1) The executors or the legal heirs of a deceased person

2) The guardian of a minor, lunatic or idiot having taxable income
3) The agent of any non – resident Indian having income in India.
1.4.7(2) Assessee in Default: When a person is responsible for doing any work under the Income Tax Act and
fails to do it, he is called as assessee in Default. E.g. A company is treated as assessee in default for non-
deduction of TDS.
1.4.8. Person Sec 2(31):
The term person includes:

a) An individual
b) A Hindu Undivided Family
c) A Firm
d) A Company
e) An association of persons/body of individuals
f) A Local Authority
g) Artificial Juridical Person
1.4.9. Income Sec 2(24):
The term income means and includes

1) Profit and gains of business
2) Dividends
3) Voluntary contribution received by a Trust or an Institutions
4) Perquisites of profit in lieu of salary/Allowance
5) Capital Gains
6) Winning from Lottery/ Cross word Puzzle/ Race
7) Sum received under Keyman insurance policies including bonus thereon
8) Gifts as per section 56
9) Any consideration received for issue of share as exceeds the fair market value of shares as referred in
clause of (vii)(b) of section 56(2)
10) Any sum of money referred to in section 56(2)(ix) sum of money received as an advance or otherwise in
course of negotiations for transfer of Capital Asset, if it is forfeited and negotiations do not result in
transfer of such capital asset.
1.4.10. Casual Income:
An income becomes casual income, if it contains the following feature: It is unanticipated, it is non-
recurring in nature, it arises from an unknown source, no specific efforts were put in to earn such income.
For example,
1) Winning from lottery
2) Income from cross word Puzzles and card games
3) Tips given to taxi drivers
4) Prize awarded for coin or stamp collection

1.4.11. Heads of Income:
Different heads of income are:
1) Income from Salary
2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources
Income from Salary All the money you receive while rendering your job as
a result of an employment contract
Income from house Income from house property you own; property can be
property self-occupied or rented out.
Income from Income/loss arising as a result of carrying on a

business and business or profession. Freelancers income come
profession under this head.
Income from capital Income earned from the sale of a capital asset (mutual
gains funds or house property).
Income from other Income accrued from fixed deposits and savings
sources account come under this head.
1.4.12. Gross Total Income:
It is the aggregate of the income computed under various heads of income after allowing set-off of losses
according to the provision of Income Tax Act. Section 14 deals with the Gross Total Income and it includes:
1) Income from Salary

2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources
1.4.13. Total Income Sec 5:
Total income of an assessee is Gross Total Income after making deductions u/s 80C to 80U.This is also called
as taxable income.

1.5.Income tax Authorities
To discharge executive and administrative functions efficiently, the following authorities have been constituted
under section 116 of the income tax act, 1961:
i. The Central Board of Direct Taxes (CBDT)
ii. Director General of Income Tax (DGIT) or Chief Commissioner of Income Tax (CCIT)
iii. Directors of Income Tax (DIT) or Commissioners of income tax or commissioners of income tax
(appeals)
iv. Additional Directors of Income Tax (ADIT) or Additional Commissioners of Income Tax (ACIT) or
Additional Commissioners of Income Tax (appeals)
v. Joint Directors of Income Tax (JDIT) or Joint Commissioners of Income Tax (JCIT)
vi. Deputy Directors of Income Tax (DDIT) or Deputy Commissioners of Income Tax (DCIT) or Deputy
Commissioners of Income Tax (appeals)
vii. Assistant Directors of Income Tax (ADIT) or Assistant Commissioners of Income viii. Tax (ACIT)
ix. Income Tax Officer (ITO)
x. Tax Recovery Officers (TRO)
xi. Income Tax Inspectors (ITI)
1.5.1 Appointment of Income Tax Authorities (117)
The following authorities have the power to appoint Income Tax Authorities:
I. Central Government
II. Board or Director-general or Chief Commissioner or Commissioner of IT department.
III. Appoint of executive or ministerial staff by an income tax authority, authorized by the board.
1.5.2. Power and Functions of Central Board of Direct Taxes (CBDT)
It is the top most authority in the sphere of direct taxes. The CBDT is created under the Central Boards of
Revenue Act, 1963. CBDT works under the Ministry of Finance.
1.5.2(1) Powers of CBDT:

i. To make rules for carrying out the objectives of IT act
ii. To issue orders and instructions to subordinate authorities for proper administration of IT act
iii. To authorize other IT authorities to accept application of claims for any exemption, deduction, refund or any
other relief after the expiry of the prescribed period
iv. To exercise control over IT authorities
v. To decide jurisdiction of IT authorities
vi. To empower authorities with the power of search
1.5.3. Commissioner of Income Tax (CIT)
He is vested with the following powers:

i) To review the order of the assessing officer
ii) To set-off refund against arrears of tax
iii) To appoint an IT authority below the rank of an Assistant Commissioner or Deputy Commissioner
iv) To authorize Joint Commissioner to exercise the powers of an assessing officer
v) To transfer cases from one subordinate assessing officer to another

vi) To authorize any Joint Commissioner, Assistant Commissioner or Deputy Director or IT Officer to make
search and seizure
vii) To make any enquiry under this act
viii) To sanction the re-opening of an assessment after the expiry of 4 years.
1.5.4. Income Tax Officer (ITO)
ITO is the person with whom an assessee comes into direct contact. The important powers and functions of
ITO are narrated below:
i) To grant refunds
ii) To impose penalty for a non-payment of tax
iii) To re-assess the escaped income
iv) To allot permanent account number
v) To exercise power of search and seizure, if authorized by the designated authority
vi) To inspect register of companies
vii) To issue a certificate prescribing lower rate of deduction of tax at source
viii) To determine appropriate proportion of expenses for deduction in respect of premises partly used for
business or profession
1.6 Procedure of Assessment:
Every person whose total income during the previous year exceeds the minimum taxable limit, shall, on or
before the due date, furnish his return of income in the prescribed form
1.6.1 Types of Assessment
1. Self-Assessment
2. Assessment on the basis of return
3. Regular Assessment
4. Re- Assessment or Income escaping Assessment
5. Precautionary Assessment
1.6.1 (a) Self-Assessment:
The assessee has to compute the tax liability by adding heads of Income and giving the deductions u/s 80s
finally applying the provisions of set off and carrying forward of losses.
1.6.1(b) Assessment on the basis of returns:
This assessment is also known as summary assessment [Us 143 (1)] under this provision, where a return has
been filed under Section 139 or in response to a notice under Section 142 (1)
i. If any tax or interest is found on the basis of such return, an intimation will be sent to the assessee specifying
the sum payable by him and such intimation will be deemed to be a notice of demand issued under Section 156
and
ii. If any refund is due on the basis of such return, it will be granted to the assessee.
1.6.1(c ) Regular Assessment:

Regular assessment means the assessment made on the following basis:
i) Basis of evidence U/s 143 (3)- When the assessing officer considers it necessary to verify the correctness or
completeness of the return, to ensure that the income has not been under-stated or the tax has not been
underpaid, he can serve a notice on the assessee either to attend his office or to produce, on a date specified, any
evidence on which the assessee may rely in support of the return. Such a notice can be served on the assessee
only during the financial year in which the return is filed, or within six months from the date of filing the return,
whichever is later.
ii) Best judgment assessment U/s 144 - are of two types:
a) Compulsory Best judgment assessment: Best judgment assessment (Eec.144): The Assessing Officer is
to make an assessment to the best of his judgment against a person who is in default as regarding supplying
information. Sec. 144 provides that the Assessing Officer shall make assessment to the best of his judgment
in the following cases:
 Where the assessee has failed to make voluntary return under Sec.139 (1) or has not filed belated
return under Sec. 139 (4) or revised return under Sec. 139 (5).
 Where there has been a failure to comply with all terms of notice under Sec. 142 (1) requiring the
assessee to produce accounts or other documents or information specified therein or fails to get the
accounts audited under Sec. 142 (2A).
 Where the return has been made but the Assessing Officer considers it to be incorrect or incomplete
and serves a notice under Sec.143 (2) upon the assessee requiring his appearance or the production
by him of evidence in support of his return, but the assessee does not comply with the terms of the
notice.
b) Discretionary Best judgment assessment: Where the Assessing Officer is not satisfied about the
correctness of the accounts of the assessee or where no method of accounting has been regularly employed
by the assessee, the Assessing Officer may at his discretion make the best judgment assessment
1.6.1(d) Re-Assessment (Section 147):
This assessment is also known as income escaping assessment. If the assessing officer has reason to believe
that any income chargeable to tax escaped assessment for any assessment year he may assess or reassess such
income keeping in view the provisions of Section 148 to 153.
1.6.1(e ) Precautionary Assessment:
Where it is not clear as to who has received the income and primafacie, it appears that the income may have
been received either by A or by B or by both together, the assessing officer can commence proceedings against
both A and B to determine the question as who is responsible to pay tax.
1.7. Rectification of Mistakes:
The rectification of mistakes can be done by the concerned authority on its own or on an application made by
the assessee. Further, the order of rectification shall be passed in writing by the concerned authority only. If an
application for rectification is made by the assessee, the concerned authority shall pass an order within a period
of six months from the end of the month in which the application is received by it, either accepting to make the
amendment or refusing to allow the claim.
If the rectification enhances the liability of the assessee or reduce the refund, the concerned authority shall give
notice to the assessee, asking him to pay the tax immediately. On the other hand, if the rectification reduces the
liability of the assessee, the authority shall make arrangements to refund the amount, which is due to the
assessee.
1.8. Permanent Account Number (PAN) – Section 139 (A)
PAN or Permanent Account Number is a ten-digit alphanumerical number (a number containing a combination
of alphabets and numerals), issued by the Regional Computer Centre of the Income Tax Department. A typical
PAN is AFRPP1595D
1.8.1 Who should have a PAN?
The following persons are required to obtain PAN:

i) Any existing assessee or tax payer or person who is required to furnish a return of income (even on behalf
of others)
ii) Any person carrying on business or profession whose total sales, turnover, gross receipts in any financial
year is more than Rs.5 lakhs
iii) Any person who intends to enter into economic or financial transactions where quoting PAN is
compulsory
PAN may be allotted or asked for by other persons also:

i) The Assessing Officer may allot PAN to any person either on his own or on a specific request from such
person.
ii) Any other person can apply for and obtain PAN?
Assessment is the process where in an assessee calculates the taxable income, tax liability and files the income
tax returns with the Department of Income Tax. This process is usually done in the year following the financial
year that is in Assessment Year.
1.9. Filing of Returns:
Every person if his total income exceeds the maximum amount not chargeable to tax i.e. basic exemption limit
has to file a return of income in Income Tax Department. Filing of Return is compulsory even if tax payable is
nil or refundable.
a) Loss return-Sec.139 (3): Any person who sustained loss in any previous year and claims that such loss
should be carried forward shall furnish a return of loss within the time allowed u/s. 139(1) in the prescribed
form.
b) Belated return-Sec.139 (4): Any person who has not furnished a return within the time allowed u/s.139 (1)
or within the time allowed by the notice issued u/s.142 (1), can file a belated return, for any previous year at any
time before one year from the end of the relevant assessment year or before the assessment is completed,
whichever is earlier.
c) Revised return-Sec.139 (5): If the assessee discovers any omission or any wrong statement in the return
filed earlier. Such revised return can be furnished at any time before the expiry of one year from the end of the
relevant assessment year or before completion of assessment whichever is earlier.
1.9.1. Due date of Filing of return of Income:
(a) For company assessee By 30th September, the Assessment Year
(b) For all non-corporate persons whose accounts By 30th September, the Assessment Year
are subject to audit and working partners of a
firm whose account are subject to audit
(c) For all other persons By 31st day of July of the Assessment
Year
TERMINAL QUESTIONS:
Section A – 2 Marks Questions
1. What is Indirect Tax? Give examples.

2. Define a) Assessee
b) Assessment
c) Assessee in default
d) Deemed Assessee
e) Previous Year
f) Assessment Year
g) Person
h) Income
4. Expand ‘CBDT’ and ‘CIT’.
5. Mention four important Income Tax Authorities
6. What is Assessment Procedure?
7. What is Best Judgment Assessment?
8. What do you mean by PAN?
9. What do you mean by Precautionary Assessment?
10. What is Re-assessment?
Section B – 5 Marks Questions
1. 1.Briefly explain the exceptions to the general rule of previous year.

2. Briefly Explain the Power and Function of CBDT.
3. Explain the types of Assessments.
4. What is Filing of Return? Explain in brief different types of Filing the Return of Income.
2.0.EXEMPTED, AGRICULTURE INCOME, CAPITAL AND REVENUE:
A) Taxable incomes
These incomes are fully taxable and are included in calculation of total income of the assessee.
B) Exempted incomes
The exempted incomes are given u/s 10(1) to 10 (49) of the act and are not included for the calculation of total
income of the assessee. Some of these incomes are listed below:
1. Agricultural income from a land in India – fully exempted u/s 10(1).

2. Share of income from HUF- fully exempt u/s 10(2)
3. Share of income from firms assessed as firm u/s 184 or 185 is fully exempt u/s 10(2A)
4. Any income from investment by an NRI in bonds and securities –fully exempted u/s10 (4)(i). No exemption
on such bonds issued after 1.6.2002.
5. Any income from interest on Non-resident (external) account – fully exempted u/s 10 (4)(ii).
6. Leave travel concession to an Indian citizen employee – exempted up to limits laid down u/s 10(5)
7. Tax paid by government or an Indian concern on behalf of foreign company (sec 10(6A))
8. Perquisites and allowances given by the government to its employees posted abroad - fully exempted u/s 10
(7).
9. Any income of employees of foreign countries working in India under co-operative technical assistance
programme – fully exempted u/s 10(8).
10. Amount of retrenchment compensation given to workers – fully exempted u/s 10(10B)
11. Compensation received in case of any disaster [sec 10(10BC)] – in case an individual or his legal heir
receives any compensation on account of any disaster from central or state Government or a local authority, the
same shall be exempted.
12. Any amount received from life insurance corporation on maturity of policy with or without bonus – fully
exempt u/s 10(10D). The sum assured shall be exempt along with bonus in the following cases:
a) If any sum received from insurance company on insurance of a dependent handicapped member
b) If any sum received from insurance company when a dependent, or a member of family is suffering
from a notified disease,
c) Any sum received under a key man insurance policy
13. Payment received out of statutory provident fund – fully exempt u/s 10(11)
14. Payment received out of recognized provident fund – fully exempt u/s 10(12)
15. House rent Allowance – exempted as per conditions given u/s 10 (13A).
16. Income from certain exempted securities u/s 10(15).
17. Educational scholarships given by government or any other organisations - fully exempt under sec 10(16).
18. Allowances received by MPs/MLAs – exempted u/s 10(17) up to the following extent:
 Daily allowance and Constituency allowance – fully exempted.
19. Any Awards instituted or notified by central or state government in the following fields– fully exempt u/s
10(17 A)
a) Literary, scientific or artistic work or attainment
b) Services alleviating the distress of the poor, the weak and the ailing
c) Proficiency in sports or games
d) Gallantry awards (paramveerchakra, mahaveer chakra) approved by the government
20. Any pension received by winners of paramveer chakra, mahaveer chakra and veer chakra and family
pension received by their dependents- fully exempted under sec 10(18)
21. Family pension received by family members of armed forces. u/s 10(19).
22. Annual value of any one palace of an ex-ruler of Indian states shall be fully exempt u/s 10(19A)
23. Income of a local authority – exempted as per conditions given u/s 10(20)
24. Income of a scientific research association – exempted as per conditions given u/s 10(21).
25. Income of a fund set up for welfare of employees or their dependents exempted as per conditions given u/s
10(23AAA).
26. Any income of a trust or society approved by Khadi and Village Industries Commission u/s 10(23B).
27. Income of mutual fund – exempted as per conditions u/s 10(23D).
28. Income of a venture fund - exempted as per conditions u/s 10(23FA)
29. Income by way of dividend from an Indian company –fully exempted u/s 10(34)
30. Income from units of UTI and other mutual funds (sec 10(35)
Any income by way of:
a) Any income received by way of dividend from a domestic company.
b) Income received in respect of units from the specified company.
31. Income from sale of shares in certain cases [sec 10(36)]
Any income arising from the transfer of a long term capital asset, being an eligible equity share in a
company purchased on or after march 1, 2003 and before march 1, 2004 and held for a period of twelve months
or more.
32. Any income from long- term capital asset being self-cultivated urban agricultural land on compulsory
acquisition [section 10(37)]- in case of an assessee, being an individual or a Hindu Undivided family, capital
gain arising from the compulsory acquisition of self-cultivated land shall be fully exempted.
33. Income from international sporting event (sec 10(39))
Any specified income of specified persons from any international event held in India shall be fully exempt if:
a) Such event is approved by the international body regulating the international sport relating to such event;
b) It has participation by more than two countries; and
c) It is notified by the central government in this regard.
2.1 Agriculture income
According to Sec 2 (IA) Agriculture income means:

1) Any rent or revenue received from land which is used for agricultural purpose and situated in India.
2) Any income derived from such land by agricultural operations including processing of agricultural
produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.
3) Income attributable to a farm house subject to the condition that building is situated on or in immediate
vicinity of the land and is used as a dwelling house, store house etc.
2.1(a) Examples of Agricultural Income:
1) Income from sale of replanted trees.

2) Rent received from agricultural land.
3) Income from growing flowers and creepers.
4) Share of profit of a partner from a firm engaged in agricultural operations.
5) Interest on capital received by a partner from a firm engaged in agricultural operations.
6) Income derived from sale of seeds, straw, dried Tobacco leaves.
7) Land leased for grazing of animals required for agriculture purpose.
8) Insurance money received for destruction of agricultural produce.
2.1(b) Examples of Non- Agricultural Income:
1) Income from sale of earth for brick making.

2) Income from stone quarries and fishing
3) Income from sale of spontaneously grown trees.
4) Income from dairy farming, poultry farming.
5) Interest received by a money lender in the form of agriculture products.
6) Income of salt produced by flooding the land with sea water.
7) Royalty income from mines.
8) Income from butter and cheese making.
9) Maintenance allowance charged on agriculture land.
10) Remuneration received as an employee of an agriculture farm.
11) Dividend received from a company engaged in agricultural operations.
2.1(c) Partly Agricultural Income:
Sometimes, there is composite income which is partially agricultural and partially non-agricultural income.
For certain crops, income tax act gives fixed percentages to segregate agricultural and non- agricultural
incomes. Agricultural income is not taxable and the non-agricultural portion would be taxable.
Table 1.1
PARTLY AGRICULTURAL AND PARTLY NON-AGRICULTURAL INCOME
Crop Rule Agricultural Non-
income agricultural
income
1) Growing and manufacturing of tea 8 60% 40%
2) Rubber manufacturing business 7A 65% 35%
3) Coffee grown and cured by seller 7B(1) 75% 25%
4) Coffee grown and cured, roasted and 7B(1A) 60% 40%
grounded by the seller in India with or without
mixing chicory or other flavouring agents
2.2. Integration of Agricultural Income with Non-Agricultural Income: [sec 2(2)]:
Agricultural income is exempt from tax u/s 10(1) but it is included in the total income for tax liability
calculation. The object of aggregating the net agricultural income with non-agricultural income is to tax the
non-agricultural income at higher rates.
2.2.1. Conditions for aggregation:
 Integration is done only in case of Individuals, HUF, Firms assessed as association of persons (AOP),
Association of persons, Bodies of individuals, artificial juridical persons.
 Integration is done only if Non-agricultural income of persons mentioned above exceeds the exempted
limits which are Rs.2,50,000 for individuals and HUF,Rs. 3,00,000 for senior citizens and Rs.5,00,000
for super senior citizens in the relevant previous year.
 Integration is done if net agricultural income of all these persons exceeds Rs. 5000 in the relevant
previous year, companies and co-operative societies.
2.2.2 Calculation of net agricultural income:
It is computed in accordance with the rules laid down u/s 2(iA) of the Income tax act 1961 and rules 7 & 8 of
the income tax rules 1962. These rules are:

1. Rent or revenue derived from agricultural land will be computed on the same basis which is adopted for
computation of income under the head income from other sources u/s 57 to 59 of the income tax act.
2. Income derived from agricultural operations will be computed as if it is income chargeable to tax under the
head profits & gains of business or profession. Depreciation and loss on the death of animals used in
agricultural operations are allowed as expenses.
3. Income from agricultural house property will be computed as if such income is chargeable to tax under the
head ‘income from house property’ and provisions under section 22 to 27 shall be applicable.
4. For computing share of income from tea business income is computed under rule 8 which shall be
considered to be agricultural income.
5. For computing share of income or loss of a firm assessed as AOP same rules are applicable as provided in
income tax act for computing share of profits and losses from firm assessed as firm.
6. Loss incurred in agriculture will be allowed to be set off only against agricultural incomes.
7. Any sum payable by the person on account of any tax levied by State Govt. on agricultural income will be
allowed as deduction.
8. Where the net result of agricultural income from the various sources stated above in a particular previous
year is a loss, such loss will be disregarded and net agricultural income shall be taken as nil.
2.3 Capital and Revenue Items:
2.3.1 Introduction
It is necessary to understand the distinction between capital and revenue items to determine the tax treatment of
expenses and incomes. For the understanding of the concepts, it is divided into three parts:
i) Receipts
ii) Expenditure
iii) Losses
Capital Receipt Revenue Receipt

1.Amount of fixed capital received is a capital 1.Amount received as circulating capital is a
receipt. revenue receipt.
2.A receipt in substitution of a source of 2. A receipt in substitution of an income is a
income is a capital receipt. revenue receipt.
E.g.Compensation received from his employer E.g., Bonus received by an employee from his
for the termination of service is a capital employer is a revenue receipt.
receipt.
3.An amount received as a compensation for 3. An amount received under an agreement as
the surrender of certain rights under an compensation for loss of future profits is a
agreement is a capital receipt. E.g. Amount revenue receipt. Compensation paid for breach
paid to a retiring director of a company for not of agreement is a revenue receipt
starting a competing business after his
retirement
4. If the asset is used by the assessee as an 4. If the asset is kept in the business as stock in
investment then the sale proceeds thereof will trade i.e. for the purpose of making profit from
be a capital receipt. its sale then the sale proceeds thereof is a
E.g.: Motor car used by a business is a capital revenue receipt.
asset and the sale proceed thereof is a capital E.g. Sale proceeds of motor cars maintained by
receipt. vehicle dealer.
5. Subsidies or grants received from the 5. Subsidies or grants received from the
government for specific capital purpose. E.g., government for meeting foreign competition or
For any development scheme or renovation or otherwise assisting the trader in his business
modernization is a capital receipt. are revenue receipts.
6. Insurance money received for a capital asset 6. Insurance money received for a trading asset
is capital receipt. is revenue receipt.
2.3.2. Capital Expenditure and Revenue Expenditure:
Capital expenditure is not deductible from the gross income of the business but the revenue expenditure is
deductible therefore, it is essential to know the difference between the two:
Capital expenditure Revenue expenditure

1. Cost of acquisition and installation of a 1. Purchase price of goods bought for
fixed asset is a capital expenditure. resale along with expenses on their
purchase is revenue expenditure.
2. An expenditure incurred to discharge a 2. An expenditure incurred to discharge a
capital liability is a capital expenditure. revenue liability is revenue expenditure.
3. An expenditure incurred for acquiring a 3. An expenditure incurred for earning an
source of income is a capital expense. e.g. income is a revenue expense.
acquisition expenses of a business
4. An expenditure incurred for increasing 4. An expenditure incurred for
the earning capacity of a business by maintaining a fixed asset in good
improving its fixed assets is a capital condition is revenue expenditure.
expenditure.
5. Capital expenditure is a non- recurring 5. It is recurring in nature.
item.
6. Expenditure in obtaining capital by 6. Expenditure incurred in raising loans or
issuing shares is a capital expenditure. issuing debentures is revenue expenditure.
2.3.3 Capital and revenue Losses:
Loss on the sale of a capital asset is a capital loss whereas loss on sale of goods of the business is a revenue
loss. Loss sustained on account of embezzlement done by an employee, destruction of goods or non-recovery of
any amount due in connection with business is a revenue loss. Loss sustained by theft committed by an
employee during usual business hours or outside business hours is a revenue loss being incidental to the trade.
2.4. RESIDENTIAL STATUS AND INCIDENCE OF TAX
It refers to the status of an individual, which determined on the basis of his/her total stay in India. Under section
6, the residential status of an individual is divided into the following categories.
Residential status of an individual
Resident Non- Resident

Ordinary Resident Not Ordinary

2.4.1. Basic Conditions u/s 6
(i) An assessee must be in India for a period of 182 days or more during the previous year
OR
(ii) An Assessee must be in India for a period of 60 days or more during the previous year and 365 days
in 4 years preceding the relevant previous year.
Exception: II Basic condition is subject to the following exceptions
(i) In case of an assessee who is an Indian citizen leaves India for employment purpose or as a crew
member of an Indian ship.
(ii) In case of an assessee who is of an Indian origin comes to India during the previous year for a visit.
In the above cases 60 days, as suggested u/s 6 (1) shall be replaced by 182. In other words, the second basic
condition shall not be applicable.
2.4.2. Additional Conditions u/s 6(6)
(i) An assessee must be a Resident for 2 or more years out of 10 years preceding the relevant previous
year.
AND
(ii) An assessee must have been in India for at least 730 days in 7 years preceding the relevant previous
year.
2.4.3. Types of Residential Status
An individual who satisfies any one of the above Basic conditions u/s 6(1) is treated as a resident for the
previous year.
1) Ordinary Resident (O.R): An individual who satisfies any one of the basic conditions and both the
additional conditions.
2) Not Ordinary Resident (N.O.R): An individual who satisfies any one of the basic conditions and any one
or none of the additional conditions
3) Non-Resident (N.R): An individual who does not satisfy any of the basic conditions will be treated as Non-
Resident; here the additional conditions are irrelevant.
2.4.4. Incidence of tax or taxability of total income on the basis of residence:
1) Resident: Total income of any previous year of a person who is an “Ordinary Resident” includes all income
from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India
c) Accrues or arises to him outside India during the previous year.
2) Resident but not Ordinary Resident

The total income of a person who is a resident but not ordinary resident includes all income from whatever
source derived which:
b) Accrues or arises or deemed to accrue or arise to him in India
c) Accrues or arises to him outside India from a business controlled in or a profession setup in India.
3) Non–resident
Total income of a Non-resident includes all income from whatever source derived which:
b) Accrues or arises or is deemed to accrue or arise to him in India during such year.
The tax incidence can be understood from the following table:

Whether taxable or not
Not
Incomes Ordinary Non
Ordinary
Resident Resident
Resident
1. Any income earned or deemed to be earned in
Yes Yes Yes
India irrespective of the place of receipt.
2. Any income earned or deemed to be earned in
Yes Yes Yes
India irrespective of the place of accrual.
3. Any income from business setup outside India but
Yes Yes No
being controlled from India.
4. Any other income earned and received outside
Yes No No
India
5. Any past untaxed profit / foreign income brought
No No No
into India, during the previous year.
TABLE SHOWING NUMBER OF DAYS PER MONTH FOR THE AY 2020-2021

PY: 01/04/2019-31/03/2020 AY:01/04/2020-31/03/2021
MONTH DAYS MONTH DAYS
April 2020 30 October 31
May 31 November 30
June 30 December 31
July 31 January 2021 31
August 31 February 28
September 30 March 31
Illustrations:
Illustration 1: Mr. Irfan comes to India for the first time on April 16, 2019. He has stayed in India up to
October 5, 2019. Determine his residential status for the A.Y 2020-21.
STEP 01: Apply Basic Conditions and Additional Conditions (write down)
STEP 02: Calculation of Number of Days Stayed

a) In the previous year – 01/04/2019-31/03/2020
16/04/2019 -05/10/2019 = 173days
b) In preceding to previous years, he has not been in India, as he has come to India for the first time
in the year 2019.
STEP 03: RESIDNETIAL STATUS

Mr. Irfan is not an Indian citizen as he came to India for the first time in the year 2019. His stay in
India is for a total period of 173days. Thus, he does not satisfy any of the basic as well as additional
condition. So, he is considered as a NON-RESIDENT for the AY 2020-2021.
Illustration 2: Kishan, a foreign national furnishes the following particulars of his income relevant for the
previous year 2020-2021.
1. Profit on sale of plant at London (one half is received in India) 1,46,000.
2. Profit on sale of plant at Delhi (one half is received in London) 1,02,000
3. Salary from an Indian company received in London (one half is paid for services rendered in India) Rs.60,
000.
4. Interest on UK development bonds (entire amount received in London) Rs. 40,000
5. Income from property in London received there Rs. 30,000
6. Profit from a business in Delhi managed from India Rs. 49,000
7. Income from agriculture in London received there, half of which is used for meeting hostel expenses of his
son and remaining amount is later on remitted to India Rs. 25,000.
8. Dividend (gross) received in London from a company registered in India but mainly operating in London
Rs.17,000.
9. Rental income from a property in Nepal deposited by the tenant in a foreign branch of an Indian bank
operating there. Rs. 12,000
10. Gift from a relative in foreign currency (one third of which is received in India and remaining amount is
used for meeting education expenses of Kumar’s son in USA) Rs. 3,90,000.
Determine gross total income of Kishan for the assessment year 2020-21, if he is
a) Resident and ordinary resident
b) Resident but not Ordinary resident, and
c) Non-resident.
Solution:
Computation of Gross Total Income of Kishan for the A.Y 2020-21

Not
Ordinary Non-
Particulars ordinary
resident resident
resident
1. Profit on sale of plant at London 1,46,000 73,000 73,000
2. Profit on sale of plant at Delhi 1,02,000 1,02,000 1,02,000
3. salary from an Indian company 60,000 30,000 30,000
4. Interest on UK development bonds 40,000 ----- -----
5. Income from property in London 30,000 ----- -----
6. profit from a business in Delhi 49,000 49,000 49,000
7. income from agriculture in London 25,000 ----- -----
8. Dividend from an Indian company Exempt Exempt Exempt
9. Rental income from property in Nepal 12,000 ---- ----
10. gift from a relative Exempt Exempt Exempt
Gross total income 4,64,000 254,000 2,54,000
TERMINAL QUESTIONS:
Section: A
1. What are the types of residents for income tax purpose?
2. Who is a Not Ordinary Resident?
3. Who is Non-resident?
4. When an individual becomes Ordinary Resident?
Section B and C:
1. Mr. James a citizen of West Indies was appointed as sales manager in India on 1stApril 2015 at Mumbai. On
25 January 2017 he went to Uganda on deputation for period of 3 years, but left his wife and children in
India. On 1st May 2018 he came to India and took with him his family to Uganda on 30th June 2018. He
returned to India and joined his original job on 24th January 2019. Determine his residential status for the
A.Y 2020-21.
2. Mr. Raj, citizen of U.S. came to India for the first time on 01.05.2015. He stayed here without any break for
3 years and left for Bangladesh on 01.05.2019. He returned to India on 01.04.2019 and went back to U.S. on
01.12.2019. He was posted back to India on 20.01.2019. Determine his residential status for the A.Y 2020-
21.
3. Vaishak, a foreign national (not being a person of Indian origin), comes to India for the first time on April
15, 2013. During financial years 2014-15, 2017-16, 2017-17, 2018-19,2020-202120 he was in India for
130days, 80days, 13 days, 210 days and 75 days respectively. Determine his residential status for the A.Y
2020-21.
4. Mr. Anish has the following incomes for the previous year 2020-202120
Rs.
I. Income from salary in India from a company 50,000
II. Dividend from an Indian company received in England and
spent there 10,000
III. Income from house property in India received in Pakistan 20,000
IV. Dividend from a foreign company received in England
deposited in a bank there 10,000
V. Income from business in Kolkata, managed from USA 20,000
VI. Income from business in USA (controlled from Kanpur) 12,000
VII. Income was earned in Australia and received there but brought
into India 25,000
VIII. His maternal uncle sent bank draft from France as a gift
on his marriage 20,000
Compute the gross total income, if he is:

(i) Resident (ii) Not-ordinary Resident (iii) Non-resident.
6. Mr. Satya gives you the following information being a Resident Ordinary Resident.
1. Salary Rs.80,000 received in Japan for the services rendered in India.
2. Commission received in India for the services given in Srilanka Rs.1,40,000.
3. House rent of the house situated in Nepal received in India Rs.30,000.
4. Dividend of a England based company received in India Rs.75,000.
5. Profit of the business situated in Japan brought to India Rs.5,00,000.
Determine the residential status of Mr. Satya for the previous year 2020-2021 and explain that on which
income he is liable to pay tax in India.
Compute his taxable income for the AY 2020-2021.
7. Krishna is an Indian citizen went out of India on 28th august 2018 for service in a company in Japan and came
back to India on 1st April 2019 to meet his family. During the year 2020-2021, he received the following
incomes:
I. Incomes from salary in Japan Rs 28000.
II. Interest on bonds of central government of India Rs28000
III. Taxable income from shares from foreign company Rs 7500 received in Japan.
IV. Income from agricultural land situated in Punjab Rs 10000
V. Interest received from firm in U.K. remitted to India Rs.9200
VI. Payment from public provident fund Rs 20000.
VII. Commission received in India for the services given in Nepal Rs.10000.
VIII. Profit from business in Srilanka Rs.40000 (business controlled from Chennai) of which
Rs15000 was received in India.
IX. Profit of the business in Nepal brought to India. Rs 50000
X. Amount brought to India out of past-untaxed profit earned in Japan Rs 8000.
XI. Share of income from HUF Rs 12000.
Calculate the gross total income of Krishna after ascertaining his residential status for assessment year
2020-2021.
8.Mr. Jacob is a foreign national furnishes the following particulars of income relevant for the previous year
2020-202120.
I. Profit on sale of land at London (½ received in India) Rs 1,46,000.
II. Profit on sale of plant at Delhi (1/2 received in Landon) Rs 1,02,000.
III. Salary (net of salary deduction) from Indian co. received in Landon Rs 60000.
IV. Interest on U.K. development bonds Rs 40,000.
V. Income from property in London received there Rs 30000.
VI. Income from agriculture in London received there but later on remitted to India Rs 2500.
VII. Dividend received in Landon from Co registered in India 17000.
VIII. Profit from a business in Delhi, managed from India Rs 49000.
IX. Rental income from a property in Nepal, deposited by the tenant in a foreign branch of Indian
Bank operating there Rs. 12000.
X. Gift in foreign currency (1/3 of which received in India) 270000.
Determine gross total income of Mr. Jacob for assessment year 2020-21. If he is
(1) Ordinary resident, (2) Not ordinary resident, (3) Non- resident
9. Mr. Naresh is an Indian Citizen. He left India on 16th July 2019 to England and return to India on 02 Feb
2019. During the Previous Year his details of income were as follows:
(a) Interest on Securities of an Indian Company received in England Rs 22,000
(b) Agricultural Income in Gujarat Rs 30,000
(c) Dividend from Indian Company Rs 10,000
(d) Interest received from a firm in England remitted to India Rs 9,500
(e) Amount brought to India out of past untaxed profit earned in England Rs 22,000
(f) Income from business in Pakistan being controlled from India Rs 15,000
(g) Interest earned & received in England from bank & deposited there Rs20,000
(h) Income from Salary received in India for services rendered in England Rs20,000
Determine his Residential Status & Gross Total Income for the AY 2020-21.
10.From the following particulars of Mr. Uday compute his Gross total income for the
A.Y.2020-21 if he is 1. Resident, 2. Not Ordinarily Resident and 3. Non-Resident
(a) Income from business from Raichur Rs. 50,000
(b) Profit from business in U.K. controlled from India Rs 60, 000
(c) Income from house property in Japan not received in India Rs 30, 000
(d) Income from business in India but received in Pakistan Rs 50, 000
(e) Salary received in India for service rendered in USA Rs 70, 000
(f) Interest on deposit with State Bank in Bangalore Rs 10, 000
(g) Profit from business in Ceylon controlled from India (1/3 profit received in India)
Rs 30,000
(h) Salary received in India for service rendered in Kuwait Rs 35, 000
(i) Past untaxed foreign income brought into India Rs 8, 000
(j) Dividend received from Domestic Company Rs 5,000
(k) Interest on Post Office Savings Bank A/c Rs 1,000
(l) Agriculture income earned in Nepal Rs 25,000.
(m) Gift in cash from a relative received in India Rs 60000.
(n) Interest received from a firm in UK later on remitted to India Rs 10000

Module II
Heads of Income tax - I
Salary (Section 15 – 17) Salary is the remuneration received by or accruing to an individual, periodically, for
service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is
not material as far as its taxability is concerned. According to Income Tax Act there are certain conditions
where all such remuneration is chargeable to income tax:
 When due from the former employer or present employer in the previous year, whether paid or not
 When paid or allowed in the previous year, by or on behalf of a former employer or present employer,
though not due or before it becomes due.
 When arrears of salary is paid in the previous year by or on behalf of a former employer or present
employer, if not charged to tax in the period to which it relates.
OBJECTIVES:
1.To know the items treated under the head of income.
2.To consider exemptions accordingly.
3.To evaluate the allowances as per the guidelines of IT authority.
4.To treat various perquisites and bonus.
5.To calculate the total amount of taxable income under the head salary.
1.1 Basis of charge:
 Relationship between payer and payee is vital.

 Salaries and wages are not conceptually different. Both are compensation for work done or services
rendered.
 Salary from more than one source or employer also considered.
 Salary from former employer, present or prospective employer shall also taxable.
 Salary income must be real and not fictitious.
 Foregoing of salary: Section 15 taxes salary on ‘’due’’ basis even if it is not received.
 Voluntary payments: Salary perquisites or allowances may be given as a gift to an employee yet they
would be taxable.
Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries”, which
includes:
1) Wages
2) Annuity or pension
3) Gratuity
4) Fees, Commission, allowances perquisites or profits in lieu of salary
5) Advance of Salary
6) Amount transferred from unrecognized provident fund to recognized provident fund
7) Contribution of employer to a Recognized Provident Fund in excess of the prescribed limit
8) Leave Encashment
9) Compensation as a result of variation in Service contract etc.
10) Contribution made by the Central Government to the account of an employee under a notified Pension
scheme.
1.2 Arrears of Salary - Salary in arrears / advance, received in lump sum, is liable to tax in the year of receipt.
Relief can be obtained for salary arrears u/s 89(1) of the Income Tax Act.
1.3 Salary: is paid by the employer to the employee in consideration of the service rendered by him to the
organization. It includes monetary value or non-monetary value of benefits and facilities provided by the
employee. Any amount received other than from employer cannot be termed as salary.
1.4 Computation of taxable income from salary of for the assessment year 2019-20
Computation of Taxable Income from Salary

Assessee: XXX Previous year: 2019-20
R/S: OR/ROR/NR Assessment year: 2020-21
Particulars Rs Rs
1. Basis Pay xxx
2. Dearness Pay xxx
3. Fees, Bonus, Commission and Advance salary xxx
4. Gratuity xxx
5. Pension xxx
6. Encashment of Earned Leave salary xxx
7. Employer’s contribution to RPF & interest there on in excess of
exempt limit xxx
8. Allowances u/s 17(2) xxx
9. Perquisites u/s 17(3) xxx
10. Profits in lieu of salary xxx
xxx

Gross Salary xxx
Less: Deductions U/s 16 50,000
Standard Deductions U/S 16(i) xxx
a. Entertainment Allowance U/S 16(ii) xxx xxx
b. Professional tax U/S 16(iii)
Taxable Income from Salaries xxx
1.5 Salary sec 17(1)
The term salary includes the following:

a. Wages
b. Any annuity or pension
c. Any gratuity
d. Any fees, commission, perquisites or profits in lieu of salary
e. Any advance salary
f. Encashment of earned leave salary
g. Employer’s contribution in excess of 12% of employee salary to RPF and interest on RPF in excess of 9.5%
p.a.
h. The contribution made by Central Government to the account of an employee under Pension scheme
referred to in sec. 80CCD.
1.6 Basic Salary: It is fully taxable; there are two methods of calculating Basic Salary,
1) Receipts Basis: Under this method salary will be received at the end of every month. It falls due on the last
date of the same month (1st April 2019 o 31st March 2020).
2) Due Basis: Under this method, salary of any month will be received in the first week of next month. It falls
due on the first day of next month (March 2019-Februray 2020).
1.7 Leave Salary: Section 17 (1) (a)
It is also called as salary in lieu of leave. An assessee is entitled for certain number of leaves as per the
employment contract. If the assessee does not avail such leave then he can get the salary for the number of days
he has not availed leave.
Leave Salary Received can be classified into two types. They are:
1. Leave Salary received while in service: It is fully taxable for both government employees and non-
government employees.
2. Leave salary received at the time of retirement: It is fully exempt U/S 10(10AA) for government employee
and it is partially exempted U/S 10(10AA) for non–government employee.
Calculation of taxable amount of leave salary (for Non – government employees):
Actual EL received xxx

Less: Least of the following is exempted U/S 10(10AA)
1. Cash equivalent of leave due at the rate of average salary XX
2. 10 months Average salary XX
3. Maximum limit 3,00,000
4. Actual leave salary received XX xxx

Actual Taxable EL Xxx
Note:
1. Leave at the credit of the employee = Leave entitled – leave encashed/taken
Leave entitled = Actual leave allowed by organization or 30 days for 1 full year of service whichever is less.
2. Average Salary: It is the average of the last 10 months salary preceding the date of retirement. Salary here
should be total of
Basic salary
(+) Dearness allowance (if it enters into service benefit)
(+) Commission at fixed rate calculated on turnover achieved by assessee.
Total Salary
Average Salary 
10
1.8 Gratuity: Gratuity is a retirement benefit generally payable at the time of cessation of employment and on
the basis of duration of service.
Gratuity received can be classified into two types. They are:
1. Gratuity received while in service: it is fully taxable for both government and non–government employees.
2. Gratuity received at the time of retirement: This includes
a. Gratuity received by government employees: It is fully exempt
b. Gratuity received by non–government employees who are covered by the payment of gratuity Act 1972 it is
taxable but exemption can be availed U/S 10(10).
c. Gratuity received by non – government employees who are not covered by the payment of gratuity Act 1972 it
is taxable but exemption can be availed U/S 10(10).
A) Format of Calculation Of Taxable Gratuity (non–government employee when gratuity received is

covered by payment of gratuity act, 1972)
Particulars Rs. Rs.
Actual Gratuity Received XXX
Less: Least of the following is exempted u/s 10(10):
1. Actual Gratuity received XXX
2. Maximum amount 20,00,000
3. 15/26 X Last salary Drawn X No. of years completed service XXX
Exempted Gratuity XXX
Taxable Gratuity XXX
NOTE:
1. Salary last drawn comprises of
Basic salary + Dearness allowance of the month of retirement (full month salary should be taken)
2. No. of years of service (rounded off): if it is 6 months or less ignore and if it is more than 6 months round it off
to next year.
B. Calculation of taxable gratuity (non – government employee when gratuity received is not covered
under payment of gratuity act, 1972)
Particulars Rs. Rs.

Actual Gratuity Received XXX
Less: Least of the following is exempted u/s 10(10):
1. Actual Gratuity received XXX
2. Maximum amount 20,00,000
3. 1/2 X Average salary X No of years completed service XXX
Exempted Gratuity XXX
Taxable Gratuity XXX
Therefore, taxable gratuity will be actual amount of gratuity received minus exempt U/S 10(10).
NOTE:
1. Average salary: It is the average of last 10 months salary proceeding the month of retirement. It includes
Basic salary
(+) Dearness allowance (if it enters retirement benefit)
(+) Commission at a fixed rate calculated on turnover achieved by assessee.
2. Only completed number of years must be considered.
1.9 Pension U/S 17(1)(Ii) – [Exemption U/S10(10a)]
It is the amount received by employee from his employer after his retirement for the service rendered. Pension
received in the employee is only covered here. Any pension received by family members after the death of
employee is discussed under income from other sources. The amount of pension received by an employee is
taxable like salary. If an employee receives a lump sum instead of receiving monthly pension, it is called
commutation of pension.
Commuted pension would be taxed in the following manner:
a) Government Employee:
Commuted pension received by government employee is exempt from tax. Govt employee includes central
Govt employee, state Govt employee, employee of a local authority or any Govt employee absorbed into a
public sector undertaking.
b) Non–government employees:
In this case the commuted value of pension is exempt to the following extent:
a) Where the employee receives gratuity, the commuted value of one-third (1/3) of the pension
b) Where the employee does not receive any gratuity, the commuted value of one-half (1/2) of the pension.
c) Any payment received by way of commutation of pension by an individual out of an annuity plan of LIC of
India after 31.7.1996 or any other insurer is fully exempt.
1.10. Provident Fund (PF):
To encourage savings for the social security of employees, government has setup various kinds of provident
funds. The employee contributes a fixed percentage of salary towards these funds and in many cases, employer
also contributes an equal amount.
The mechanism of PF works like this

1. Every month the employee will be contributing to this fund for his future benefits.
2. Normally the same amount will be contributed by the employer also to the fund.
3. Interest will be earned by investing these funds in some good rated securities.
4. Assessee can withdraw this at the time of leaving the job or retirement or death.
Provident Fund:
Any fund to be provided in the future is known as provident fund. In this fund certain percentage is deducted
from the salary of an employee and an equal sum is contributed by the employer and both the amounts are
deposited in provident fund account by the employer on behalf of employee.
Types of Provident Fund:
1. Statutory Provident Fund (SPF): Any fund maintained as per the Provident Fund Act of 1925 and it is
generally maintained by the employees of Government & Statutory Corporation.
2. Recognized Provident Fund (RPF): Provident Fund which is recognized by commissioner of Income Tax
of the purpose of tax exemption is known as RPF and generally maintained by private companies.
3. Unrecognized Provident Fund (URPF): It is a fund which is not recognized by commissioner of income
tax but still contribution can be made in this fund. Employee of private and unorganized sector will
contribute to this fund.
4. Public Provident Fund (PPF): Any member of the public whether salaried employee or self-employed can
invest in the public provident fund by opening a PPF account at the State Bank of India and its subsidiaries
or any other nationalized banks.
Sl No Particulars SPF RPF URPF PPF

1 Employers Fully Exempted upto To be ignored at Not
Contribution Exempted 12% of the time of applicable
employees salary contribution
2 Employees Qualifies for Qualifies for Not qualifies for Qualifies
Contribution deduction u/s deduction u/s deduction u/s 80C for
80C 80C deduction
u/s 80C
3 Interest on Fully Exempted upto To be ignored in Fully
PF Exempted 9.5% p.a. the year of credit Exempted
4 Refund Fully It is fully  Employee Fully
from Exempted exempted. contribution is Exempted
Provident If the employee fully
fund deposit has rendered exempted.
continuous  Employers
service of 5 years contribution
otherwise it is and interest
treated as refund thereon is
from URPF and taxed under
accordingly taxed the head
income from
salary.
 Interest on
employee
contribution is
taxed under
the head
income from
other sources.
1.12 Allowances:
Fixed sum of money given regularly in addition to basic salary to meet a particular purpose are known as
allowances. The types of allowances are:
1) Fully Exempted Allowances:

1. Foreign allowance to Government employee
2. Allowance from UNO
3. Allowances given to judges of High Court and Supreme Court
2) Fully Taxable Allowance

1. Dearness allowance
2. City compensatory allowance
3. Tiffin allowance
4. Medical allowance
5. Servant allowance
6. Foreign allowance to non-government employee
7. Overtime allowance
8. Deputation allowance
9. Project allowance
10. Warden allowance
11. Lunch allowance
12. Non practicing allowance
13. Marriage allowance
3) Partly Taxable Allowance
(a) Allowance related to official duties: These allowances are exempted to the extent they are spent and
balance is taxable.
1. Uniform allowance
2. Daily allowance
3. Transfer allowance
4. Conveyance allowance
5. Helper allowance
6. Research allowance
7. Professional Development allowance
(b) Allowance related to employee’s personal expenses: A fixe amount determined by Central Government is
exempted irrespective of the actual expenditure incurred.
1. Tribal Area Allowance: Exempted up to Rs. 200 p.m.
2. Compensatory Hill Allowance: Exempted up to Rs. 300 p.m. to Rs. 7,000 p.m. based on the area.
3. Children Education Allowance: Exempted up to Rs. 100 p.m. per child up to a maximum of two children.
4. Child Hostel Allowance: Exempted up to Rs. 300 p.m. per child up to a maximum of two children.

5. Transport Allowance: Exempted up to Rs. 1,600 p.m. and in case of handicapped employee up to Rs.
3,200 p.m.
6. Allowance for transport employees: Exempted to the least of 70% of such allowance or Rs. 6,000 p.m.
whichever is less.
7. Entertainment Allowance: It is the amount paid by employer for availing entertainment services. It is first
added to gross salary and then allowed as deduction u/s 16(ii).
In case of government employee. Least of the following is given as deduction u/s 16(ii):
- Actual Entertainment Received or
- 20% of basic salary or
- Maximum limit of Rs. 5,000
-
8. House Rent Allowance: It is an allowance given by an employer to an employee to meet the cost of
accommodation which is partly exempted, According to section 10(13A). Exemption for HRA is not
available if the assessee is living in his own house or a house for which he is not paying rent.
Particulars Amount Amount

Actual HRA received xxx
Less: Least of the following is exempted:
1) Actual HRA received xxx
2) Excess of Rent paid over 10% of salary xxx
3) 40% of salary (50% in case of Delhi, xxx
Mumbai, Kolkata and Chennai) xxx
Exempted
HRA
Taxable HRA xxx
Salary for HRA:

1. Basic pay
2. Dearness pay
3. Dearness allowance (If it enters into retirement benefit)
4. Commission based on turnover
1.13. Perquisites
Monetary or Non-monetary benefits (either in cash or in kid) received by an employee from an employer in
addition to salary.

Perquisites
Tax free perquisites Taxable perquisites
Taxable in all cases Taxable in hands of

specified employee only
a)Tax free perquisites
1) Computer, laptops given to employee for official or personal use.

2) Employer’s contribution towards Staff Group Insurance Scheme.
3) Employee’s refreshments provided by an employer to all employees during working hours in office.
4) Refreshments during working hours provided outside the place of work upto Rs. 50 per day will be
exempted.
5) Rent free house provided to the judges of High Court, Supreme Court or an officer of parliament or Union
Minister.
6) Amount spent on training of employees or fees paid for refreshing management course.
7) Free ration provided to Defence force.
8) Medical insurance premium paid by the employer.
9) Telephone facility provided by employer to employee.
10) Interest on loan given by the employer is not taxable if the loan amount does not exceed Rs. 20,000.
11) Perquisites given to Government employee who is staying abroad.
12) Gifts in kind if the value is less than Rs. 5,000.
13) Family planning expenses.
14) Products at concessional rate to employee sold by his/her employer.
b)Taxable perquisites in hands of specified cases
Specified employee is one who satisfies any one of the following condition:
(a) The assessee must be a Director employee in the employer company or
(b) If he is the beneficial owner of equity share carrying 20% or more voting power in the employer company
or
(c) The total taxable monetary receipts of the employee from all employers during the Previous Year after
deduction u/s 16 exceed Rs. 50,000.
c)Taxable perquisites in the hands of specified employee
1. Free service of Sweeper, Gardner, Watchman and Personal Attendant: Actual salary paid by employer is
taxable.

2. Free supply of gas, electricity, water supply for household purpose: Manufacturing cost or amount paid by
employer is taxable.
3. Educational institution owned by employer:
(a) If education institution owned by the employer
- If it is for the children of the employee- any amount in excess of Rs. 1,000 per
month per child is taxable.
- If it is for other members of the employee – actual cost of the education is
taxable.
(b) For outside institutions
4. Leave Travel Concession in India (LTC): Leave travel benefits extended by an employer to an employee for
going anywhere in India along with his family are exempt from tax as the provision of the IT Act. The
exemption is available only in respect of fare for going anywhere in India along with family twice in a block
of four year.
5. Medical Facilities: If the employer reimburses or provides the expenditure incurred by the employee is
taxable as follows:
- If medical treatment is taken from an hospital maintained by the employer –
not taxable
- If medical treatment is taken in Government Hospital – not taxable
- If medical treatment is taken in Private Hospital – exempted up to Rs. 15,000
6. Transport facilities by transport undertaking: it is exempted if it is provided by airlines or railways. In case
of other modes of transportation value of such benefit offered to public is chargeable to tax.
7. Motor car facility:
Ownership Expenses Fully Fully Personal Both for official and personal
met by Official ≤ 1,600 CC >1,600 CC
Employer Employer Not a Aggregate of the following: Rs. 1,800 p.m. Rs. 2,400 p.m.
Perquisite  10% of cost of car or + +
Actual hire charges Driver salary Driver salary
 Running and Maintenance Rs. 900 p.m. Rs. 900 p.m.
 Driver salary
Less: Amount collected from
employee
Employee Not a Aggregate of the following: Rs. 600 p.m. Rs. 900 p.m.
Perquisite  10% of cost of car or + +
Actual hire charges Driver salary Driver salary
 Driver salary Rs. 900 p.m. Rs. 900 p.m.
Employee Employer Not a Actual expenses incurred by Rs. 1,800 p.m. Rs. 2,400 p.m.
Perquisite employer + +
Less: Amount collected from Driver salary Driver salary
employee Rs. 900 p.m. Rs. 900 p.m.
Employee Not a Not a Not a Not a
Perquisite Perquisite Perquisite Perquisite
d)Taxable Perquisites under all cases u/s 17(2)(d)

Rent Free Unfurnished Accommodation
Provided to the Govt. employee Provided to the Non-Govt. Employee

As per Govt. Prescribed rates
Owned by employer Hired by employer
 Population > 25 lakhs = 15% of salary

 Between 10 to 25 Lakhs = 10% of salary
 < 10 laksh = 7.5 % of salary
House Accommodation Hotel Accommodation

15% of salary 24% of salary
or or
Rent paid by the employer Rent paid by the employer
(Whichever is less) (Whichever is less)
Note:
1) For the above cases furnished value will be 10% of cost of furniture or actual hire charges.
RFFA = Unfurnished + Furnished Value
2) Salary for RFA is
1. Basic pay
2. Dearness allowance entering into retirement benefit
3. Dearness pay
4. All taxable allowance
5. Leave encashment
It includes all monetary payment except the following
a) Dearness allowance not entering into retirement benefits
b) Provident Fund contribution and interest there on
c) Value of Perquisites
Terminal questions:
1) Mr. Mohan, a resident of Delhi is working in a private company. His salary particulars are
- Basic salary Rs. 10,000 p.m.
- D.A -20% of basic salary (enters for service benefits)
- HRA received Rs. 20,000 p.m.
- Rent paid Rs. 12,000 p.m.
Compute taxable HRA for the Assessment Year 2020-21..
2) Find out the taxable HRA in each of the following cases:

(a) Basic pay Rs.7,000 p.m., Dearness Pay @ 10% of basic pay, Commission based on fixed percentage of
turnover Rs. 12,000 for the whole year. House rentallowance Rs. 2,000 p.m., Actual rent paid by the
assessee Rs. 1,600 p.m., House situated at Agra.
(b) Basic pay Rs.9,000 p.m., Dearness Allowance @ 10% of basic pay, House rent allowance Rs. 1,500
p.m., Actual rent paid by the assessee Rs.2,100 p.m., House situated at Mathura.
(c) Basic pay Rs.8,000 p.m., Dearness Allowance @ 10% of basic pay (enters into retirement benefits),
House rent allowance Rs.800 p.m., Actual rent paid by the assessee Rs.2,000 p.m., House situated at
Delhi.
3) Mr. Vikas gets a salary of Rs. 13,000.p.m. and he has been provided with a rent free furnished
accommodation at Manipal (population below 10,00,000). The fair rental value of the unfurnished house is
Rs 20,000.p.a.
He gets D.A. @ 40% salarywhich is given as per terms of employment.
He gets education allowance of Rs.300.p.m. for education of his son.
The cost of furnishing of the house is Rs.30,000. The employee has been provided with hired air conditioner
for five months and hire charges of Rs 1,000.p.m. are paid by the employer.
Calculate the value of RFA.
4) Mr. Santosh has furnished following particulars:

Salary @ Rs 20,000 p.m., Dearness allowance @ Rs. 1,000 p.m. (it enters into retirement benefits)
Entertainment allowance @ Rs 600 p.m., Bonus Rs 8,400, Cost of furnishing Rs 20,000.
Calculate the value of rent free house if:
1. The assessee is govt. employee and rent of the fixed by the govt. is Rs 600.pm.
2. The assessee is a semi-government employee working at Chennai and fair rental value of the house is
Rs. 2,000 p.m.
3. The assessee is working in a private sector company at Madikeri (population below 10,00,000 and Fair
Rental Value of the house hired by employer is Rs.6,000 p.m. He is also provided with hired refrigerator
whose hire charges of Rs.600 p.m. are paid by employer.
4. The assessee is working in a private sector at Delhi (more than 25 lakhs) and rental value of the house
not owned by the employer is Rs. 7,000p.m.
Section - C
1) Sri Rama Krishna is employed as an engine driver in southern railway.

a) He is getting Rs. 7,500.p.m.as basic pay, Rs. 2,500 as dearness pay and Rs. 2,500 as dearness allowance.
During the previous year he received the following allowances also:
b) Rs. 16,500 as running allowance
c) Rs. 200 p.m. per child as education allowance for the education of his two sons.
d) One of these sons is living in hostel on whom Sri. Ramakrishna is spending Rs. 800p.m., He is
getting hostel allowance of Rs. 500 p.m. for his son for meeting this expenditure.
e) Rs. 250 p.m. as city compensatory allowance
f) Rs. 400 p.m. as uniform allowance which was fully spent for employment purpose
g) Rs. 1,250 p.m. as House Rent Allowance.
h) Sri. Ramakrishna has taken a house for his residence at Coimbatore at Rs. 1,500p.m. as rent.
i) He contributes 10% of his Basic pay and dearness pay to his statutory fund and the southern
railway also contributes the same.
Compute the salary income of Rama Krishna for the A.Y.2020-2021.
2) Smt. Jyothi is the principal of a private college in Chennai. She is in the grade of 6,500-200-8,500 since 1st
January 2014.
a) She gets Rs. 6,000 p.m. as dearness allowance and Rs. 200.p.m. as CCA.

b) She has been provided with furnished accommodation by the college. The college is not the owner of
the house. The rental value of the house is Rs. 3,000 p.m. and furniture costing Rs 24,000 has also been
provided by the college.
c) She has been given a small car, which in addition to college work, is used by her for her private purpose
also. The driver's remuneration and all the expenses relating to the use of the car are borne by the
college.
d) She has been provided with the facility of a gardener, watchman and a servant who are paid by the
college @ Rs. 150.p.m, Rs. 1, 200.p.m, and Rs. 800 p.m. respectively.
e) She gets LTC for going to a hill station Rs. 26,500. Actual expenses were Rs. 19,650.
f) She contributes 10% of her pay to R.P.F. towards which the college contributes @ 8%.
g) Assume that the salary is due on the 1st day of the next month;
Determine her taxable salary income for the A.Y.2020-21.
3) Mr. Naveen is the Manager of a company at Kolkata since 1st March, 2010. He is in the grade of Rs.
10,000-500-15,000-750-25,000
a) Dearness allowance @ 20% of his basic pay, half of which enters into retirement benefits.
b) He contributes 14% of his salary to Recognized Provident Fund to which his employer contributes an
equal amount.
c) Interest on PF during the year is Rs. 10,500 at 10.5% p.a.
d) He has been provided with a house owned by the Co., the fair rent of which is Rs. 20,000 per annum.
e) He is getting conveyance allowance of Rs. 500 p.m. for private purposes,
f) Medical allowance of Rs. 400 p.m.
g) Servant allowance of Rs. 400 p.m.
h) His club bills of Rs. 3,000 were also paid by the Company.
i) He received Rs. 60,000 for encashment of leave on 1st September, 2017, being 10 months' leave not
availed of. As per the rules of the company Mr. Nair was entitled to 30 days' leave for every year of
service.
j) He had been provided with the facility of a gardener and a cook, who are each paid Rs. 150 p.m. by the
employer.
k) He is also provided with a small car by the employer for official use only.
l) On 15-06-16 the Co. sold a computer to him for Rs. 5,000. The cost of the computer is Rs. 24,900.
Compute Mr. Nair's taxable salary for the assessment year 2020-2021 assuming that salary is due on
the first day of the next month.
4) From the following particulars given below calculate taxable salary for the A.Y2020-2021.
a) Basic pay Rs. 15,000 p.m. (due on last day of month)
b) D.A. 60% of salary (50% forms part of salary from 1 -1 -2014)
c) Bonus-one month's salary
d) Commission Rs. 66,000
e) Leave encashment Rs. 20,000
f) He has engaged an helper at Rs. 1,200 p.m. and his employer pays him Rs. 1,500 p.m. on his a/c
g) Medical bills reimbursed from a notified hospital Rs. 12,000; from a private nursing home Rs. 38,000.
h) Mobile telephone bills paid by employer Rs. 15,000
i) On 1-12-2017 he has taken a loan of Rs. 3, 00,000 from his employer to purchase a car. Rate of
interest charged by employer is 4.75% p.a.
j) Repayment of loan at Rs. 5,000 p.m. is to start after 4 months from the date of taking loan.
k) He has employed a cook for his personal use at Rs. 1,000 p.m. and his employer has reimbursed such
amount,
l) He and his employer contribute Rs. 3,000 p.m. each towards RPF.
m) Interested credited on the balance of RPF at 10% is Rs. 20,000.
n) He has been provided with free use of car of 1.81.c.c. car is used partly for personal and partly for office
use
5) Mr. Vikas is an employee of HCL Ltd. He supplies you the following particulars of his income.
a) Basic salary Rs. 20,000 p.m.
b) Dearness Allowance Rs. 5,000 p.m. (50% Enters into salary)
c) Fixed Medical Allowance Rs. 1,000 p.m.
d) Education allowance Rs.500 p.m. per child for his three children.
e) Transport allowance Rs. 1,200 p.m.
f) City compensation allowance (CCA) Rs. 100 p.m.
g) Employer’s contribution to RPF at 15% of Salary.
h) Interest Credited to RPF at 905% P.A is Rs. 28,000
i) He is provided with free lunch in office. The cost per meal is Rs. 50.
j) The employer has given him the use of a small car which he uses for both personal and official purposes.
He meets the expenses for personal purpose from out of his pocket.
k) He was also provided with rent free house at Bangalore for which the employer paid a rent of Rs. 9, 000
p.m. He was allowed the use of Furniture costing Rs. 28, 000 respectively.
l) Life insurance premium of Rs. 12, 000 was paid by employer on an insurance policy of Rs. 2,40,000.
Compute his taxable salary for the AY 2020-2021.
6) Mr. Vinayak an employee of Ranchi (population 15 lakhs) based company provides the following particular
of his salary income for the A.Y.2020-2021.
b) Profit bonus Rs. 12,000.
c) Commission on turnover achieved b him Rs. 42,000
d) Entertainment allowance Rs. 2,000 p.m.
e) Club facility provided by his employer Rs. 6,000
f) Transport allowance Rs. 1,000 p.m.
g) Free use of car of more than 1.6 lt capacity for both personal and employment purposes; expenses are
met by employer.
h) Rent free house provided by employer. Rent paid by the employer Rs. 6,000 p.m.
i) Free education facility for three children of the employee (Bill issued in the name of employer) Rs.
22,500.
j) Gas, water and electricity bills issued in the name of employee but paid by the employer. Rs. 16,800
7) Following details are available from P.N. Nair a resident individual for the year ending on 31-3-2019. You
are required to compute his taxable income under the head salary.
a) Salary received Rs. 71,800
b) Income tax deducted at source Rs. 1,200
c) Own contribution to RPF deducted from salary Rs. 8,000
d) Dearness allowance 50% of salary
e) Employers’ contribution to RPF Rs. 8,000
f) Interest on accumulated balance of RPF @ 9.5% Rs. 2,400
g) He is provided with furnished accommodation for residential purposes in Thiruvanthapuram (population
exceeds 25 lakhs) owned by his employer, the fair rental of which is at Rs. 4,000 p.m. cost of furnishing
is Rs. 45,000.
h) Gardeners’ salary paid by employer is Rs. 3,000 p.a.

i) He is provided with a car of 1.5 lt. capacity by his employer for both personal and office use and
expenses of maintaining and running the car with chauffeur are borne by the employer.
j) He has two life insurance policies: one on his own life for a value of Rs. 80,000 on which annual
premium paid by his employer is Rs. 8,200; and another on the life of his wife for a policy value of Rs.
20,000 on which premium paid by him is Rs. 1,800.
Compute his salary income for the assessment year 2020-2021.
8) Mr. Eshwaran is employed as an engine driver in Southern Railways. He is getting Rs. 7,500 p.m. as basic
pay, Rs, 2,500 p.m. as dearness pay, Rs. 2,500 p.m. as dearness allowance. During the previous year he
received the following allowance also:
a) Rs. 16,500 as running allowance.
b) Rs. 200 p.m. per child as education allowance for his two sons.
c) One of these sons is living in hostel on whom Eshwaran is spending Rs. 800 p.m. he is getting Rs. 500
p.m. for his son as hostel allowance.
d) Rs. 250 p.m.as city compensatory allowance.
e) Rs. 400 p.m. uniform allowance (fully spent for uniform)
f) Rs. 1,250 p.m. house rent allowance.
g) Mr. Eshwaran has taken a house for his residence at Hassan at Rs. 1,500 p.m. as rent.
h) He contributes 10% of his basic pay and dearness pay to his statutory provident fund and his employer
contributes an equal amount.
Compute income from salary of the assessee for the A.Y. 2020-2021.
9) Mr. Ravi is an employee of a private company in Bangalore. He gives the following information for the A.Y
2020-2021.
b) Dearness allowance Rs. 12,000 p.m. (Rs. 2,000 enters into retirement benefits)
c) City compensatory allowance Rs. 1,600 p.m.
d) Family allowance Rs. 1,200 p.m.
e) Education allowance for two children at Rs. 350 p.m. per child.
f) House allowance Rs. 3,200 p.m. but he pays Rs. 6,000 p.m. as actual rent.
g) Entertainment allowance Rs. 1,500 p.m.
h) Company has provided a telephone at his residence by meeting all the expenses amounting to Rs. 12,000
for the year.
i) The company paid his income tax of Rs. 1,2000 during the previous year in his taxable income.
j) Conveyance allowance of Rs. 16,000 for visiting the branches.
k) He is allowed to use one motor car of 1.6 liters c.c. both for official and personal purposes.
l) Provision of the following domestic servants who were paid by the company.
m) Watchman Rs. 600 p.m.
n) Sweeper Rs. 360 p.m.
o) Gardner Rs. 360 p.m.
p) Cook Rs. 600 p.m.
q) He and the company contribute 14% of salary toward the RPF
r) Interest on the above fund Rs. 21,000 at 15% p.a.
s) Interest free loan for purchasing home appliance Rs. 1,20,000 (date of loan borrowed 01-04-2017) and
assume SBI lending rate for similar loan on 01-04-2017 is 12% p.a.
t) New Year gift Rs. 7,000.
u) Holiday home facility at Kulu Rs. 26,000.
Compute income from salary.

12. Mr. Prasanth (age 51 years) a Director of LMN (P) Ltd receives the following emolument during the
previous year relevant for the assessment year 2019-20.
a. Basic salary Rs 4,80,000
b. Dearness allowance Rs 48,000 (not forming part of basic pay)
c. Commission 2% of turnover (turnover achieved by X during the previous year Rs 16,00,000) arrears of
bonus of the previous year 2012-13 Rs 9,000 (not taxed earlier),
d. Employer’s contribution towards recognized provident fund Rs 68,000.
e. Interest credited in provident fund account @ 11% on June 3, 2018: Rs 80,000
f. Conveyance allowance Rs 10,000 (60% of which is utilized for official purpose)
g. Education allowance for X, s three sons @ Rs 200 per month per child
h. Rs 7,200 rent – free furnished house in Calcutta (lease rent of unfurnished house paid by the employer
Rs 1,80,000 rent of furniture Rs 8,000)
i. Free services of gardener, cook and watchman (salary Rs6,000, Rs 9,000 and Rs 12,000 respectively).
j. On March 10, 2019, LMN (P) Ltd sells imported furniture to X for Rs 10,000 (the furniture was
purchased by the company on June 30, 2012 for Rs 1,90,000 and since then it was used for business
purpose)
k. He runs a business. During the previous year, income from the business is Rs 11,02,000.
l. He makes the following payments during the previous year:
i. Own contribution towards recognized provident fund Rs 42,000.
ii. Deposit in Home loan account of the National Housing Bank Rs 6,000 (including advance
deposit of Rs 1,000)
iii. Contribution towards National Saving Certificate VIII Issue Rs 1,40,000.
Determine the net income and tax liability for the assessment year 2020-2021.
Income from House Property
Introduction:
This is the second head of income which charges income from house properties by way of rent received or
receivable.
OBJECTIVES:
1.To understand various treatments of house property.
2.To know different types of house categorized by IT authority.
3.To calculate the amount of interest to be paid on housing loan.
4.To be familiar with various deductions available under house property.
5.To calculate the taxable amount of income from house property.
1.1.Basis of charge:
According to Sec 22, Annual value of a property, consisting of any building, or land appurtenant thereto, of
which the assessee is the owner, is chargeable to tax under the head “income from house property”.
Rental income is taxable under the head “income from house property if the following conditions are satisfied.
a) The property should consist of any building or land appurtenant thereto
b) The assessee should be the owner and
c) The property should not be used by the owner for any business or profession carried on by him

1.2.Explanation:
a) Building and land appurtenant thereto: - Income tax is charged on buildings and land appurtenant
(belonging) thereto. Income from a land which is not part of any building will be charged under income
from other sources.
b) Land appurtenant to building include compound walls, playground, garden etc., in case of non- residential
building car parking spaces, drying grounds, connecting roads in the factory building shall be included in
lands appurtenant to buildings.
c) Buildings include residential houses, warehouses, auditoriums, cinema halls, buildings let out for office
use, dance halls, lecture halls etc.,
1.3.Exceptions to the rule that income from house property is taxable under the head house property:
The income from following buildings is not taxable under the head house property:
1) Buildings or staff quarters let out to employees – if the assessee lets out staff quarters to his employees
whose residence there is necessary for the efficient conduct of business, then the rent collected by the
assessee is taxable as income from business and not as income from house property.
2) If a building is let out to authorities for locating bank, post office, police station etc., the income is taxable
as business income, provided the dominant purpose of letting out the building was to carry on assessee’s
business more efficiently.
3) Composite letting of building with other assets: - where the assessee gives on hire, building along with
machinery, plant for a composite rent and the rent of the building is inseparable from other assets, the
income from such letting is chargeable under income from other sources or business income.
4) Income from paying guest accommodation is chargeable under business income.
1.4.Deemed owners:
Deemed owners are not legal owners of the property, but according to Income act they are treated as owners of
the property. In the following circumstances assessee shall be treated as deemed owners:
1) An individual who transfers any house property to his or her spouse, without adequate consideration, or to
a minor child, not being a married daughter shall be deemed to be the owner of the house property so
transferred.
2) The holder of an impartible estate is deemed to be the owner of all the properties comprised in the estate.
3) A member of a co-operative society, company, or an AOP to whom a building or its part is allotted or
leased under a house building scheme shall be deemed to be owner of that property.
1.5.Exemptions regarding income from house property:
Income from the following sources is not taxable under income tax act.
 Income from a farm house
 Income from property owned by
I. Local authority
II. Scientific research association
III. Trade union
IV. Charitable trust
V. Political party
VI. University or other educational institutions
VII. Hospitals or medical institutions
 Income from property used for assessee’s own business or profession.
 Income from one’s self-occupied house.
 Income from house meant for self-residence but could not be occupied throughout the previous year on
account of his service or business / profession elsewhere.
1.6.BASIC TERMINOLOGIES UNDER HOUSE PROPERTY:
a)Annual Value: Income from house property does not mean rental income, but it is a sum for which the
building might reasonably be expected to be let from year to year. Annual value of the property is calculated by
considering the municipal valuation of the property; fair rental value, standard rent and actual rent receivable of
the house property Annual value may be Gross Annual Value (GAV) or Net Annual Value (NAV).
b)Municipal rental value (MRV): It refers to the rental value of the house property fixed by the municipal
authorities to levy the municipal taxes.
c)Fair Rental value (FRV): It refers to the rental value of similar accommodation in the same or similar
locality as determined by local authority or any other competent authority.
d)Standard Rental value (SRV)/ Minimum Rent: It refers to the rental value fixed by the Rent Control
Authority.
e)Annual Rental Value (ARV)/ De-facto Rent: It refers to the rent received or receivable by the owner of the
property. It is also called as de-facto rent. While determining the de facto rent, rent collected for other services
such as water, electricity, garden maintenance and security should be excluded from the composite rent.
f)Composite rent: It refers to the rent collected by the owner for the house property let out along with the
facilities of water, gardening, stair case lighting, security charges, pump maintenance etc. composite rent should
be split into Annual Rental value and service charges for associated services.
g)Expected Rental Vale (ERV): It refers to the highest of MRV or FRV but subject to a maximum of SRV.
h)Unrealized Rent - Unrealized rent is the amount of rent which the owner cannot realize or which is payable
but not paid by the tenant. It is allowed to be deducted from GAV if conditions of Rule 4 are satisfied. Those
conditions are as follows:
a) The tenancy is bonafide.
b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
c) The defaulting tenant is not in occupation of any other property of the assessee;
d) The assessee has taken all reasonable steps of insisting legal proceedings for the recovery of the unpaid rent
or satisfies the assessing officer that legal proceedings would be useless.
i)Vacancy Allowance: It relates to rent of vacant period.
1,7. Computation of gross annual value (GAV)
Step 1: Determine the highest of MRV or FRV

Step 2: Compare the highest of step 1 with SRV and choose the lowest. That will be ERV. (Expected
Rental value)
Step 3: Calculate Ac. RV :( ARV—URR)
Step 4: Choose the highest of step 2 and step 3 and deduct Vacancy allowance.
(a)Computation of GAV for self-occupied property. (SOP)
Gross annual value Nil

Less: municipal taxes “paid by owner” Nil
Net annual value Nil
Less: deduction u/s 24
(i) Standard deduction 30% of NAV. Nil
(ii) Interest on loan:
a) Pre-construction interest 1/5th
b) Post-construction interest. Xxx
Income or loss from house property. Xxx
(b)Computation of income from house property of an L.O.P/D.L.O.P
Gross annual value xxx

Less: municipal taxes “paid by owner” xxx
Net annual value Xxx

Less: deduction u/s 24 xxx
(i)Standard deduction 30% of NAV.
(ii)Interest on loan:(no limit)
c) Pre-construction interest 1/5th
d) Post-construction interest. xxx
Income or loss from house property. Xxx
1.8. Determination of actual rent:
Sometimes the owner takes upon under an agreement the burden of providing certain facilities to the tenant, e.g.
lift, water pump, electricity, vehicle parking, gardener, etc., in such a case the actual rent received or receivable
minus the cost of providing such facilities will be the actual rent.
If the tenant has undertaken the obligations of the landlord, the amount so paid will be added in rent received to
arrive at the actual rent. However, no adjustment will be made in determination of actual rent regarding the
following:
i) Tax paid by the tenant to the local authority
ii) Repair charges borne by the tenant
iii) Notional interest on deposit taken from the tenant.
1.9 Treatment of unrealized rent recovered or realized during the P.Y.2017-17 or subsequently {sec 25A
& Sec 25AA :}
(i) Any unrealized rent recovered during the previous year, which was disallowed earlier, is not taxable.
(ii) Any unrealized rent recovered during the previous year, which was allowed earlier, is fully taxable as
deemed income.
Note: No standard deduction under Sec 24 is allowed. Similarly, expenses incurred to realize unrealized rent is
also not allowed.
1.10.Deductions from Annual value (Sec 24)
While computing income from house property the following items are to be deducted
i) A sum equal to 30% of Annual value as standard deduction.
ii) Interest on loan taken in respect of house property:
Interest on loan taken for the purpose of purchasing, constructing, reconstructing or repairing the house property
is allowed as deduction on accrual basis.
Points to be noted:
1. Interest on unpaid interest is not deductible.
2. Interest on a fresh loan raised to repay the original loan taken for the above-mentioned purposes is allowed
as a deduction.
3. Any brokerage or commission to raise loan is not deductible.
4. Interest for pre-construction or pre-acquisition period is allowed in 5 equal installments starting from the
year in which the construction is completed.
1.11. Preconstruction period: It starts from the date of borrowing and ends on 31 march immediately
preceding the year in which the property is completed or on the date of repayment of loan, whichever is earlier.
Buildings self-
occupied for
residential
purposes:
The buildings self-

occupied by the
owner for
residential purposes can be classified as under:
1) a) house or part of the house is self-occupied for full previous year
b) Unoccupied house.
2) If House self-occupied for a part of the previous year and let out for rest of the previous year.
3) More than one house used for residential purposes by the owner.
1) Self-occupied house or unoccupied house:

Where a house or part of which;
(i) Is in occupation of the owner for his residential purpose
(ii) Cannot be occupied by the owner due to his employment, business or profession in any other place.

The annual value of such property shall be taken as nil. The following points need to be considered while
calculating the income from the self-occupied house:
1. The self-occupied house shall not be let out during the whole or part of the previous year.
2. If a building consisting of more than one floor, flat or unit and more than one floor, flat or unit is self-
occupied, then annual value of all such units shall be taken nil.
3. If only a part of the house is self-occupied, then the benefit of self-occupancy would be given to that part
only.
4. Municipal taxes are not deductible.
5. Deduction regarding interest in borrowed capital:
(a) If the loan is borrowed before 1.04.1999 –maximum limit for deduction of interest is Rs. 30,000.
(b) If the loan is borrowed after 1.04.1999 – purpose of loan shall determine the maximum limit.
1. Loan taken for acquisition, construction – Rs.2,00,000
2. Loan taken for repairs, renewals – Rs.30, 000.
Note: No limit shall be applicable to let out house property.
Note: (the construction or acquisition must be completed within 3 years from the end of the financial year in
which loan were taken).
2) House property self-occupied for a part of the previous year and let out for the remaining part of the
previous year:
In such a case the house shall be treated as let out house property (deemed to be let out house property).
3) More than one house is in occupation of the house:
Where the owner of the house occupies more than one house for his residence for full previous year, except
one house all other houses are deemed to be let out.
Points to be noted:
a) The expected rent would be GAV as the house property is not actually let out.
b) The full amount of interest on loan taken for such property shall be allowed to deduct from annual value u/s
24.
c) The assessee can choose the house which would be treated as self-occupied house.
d) For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended
to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out
for Income tax purposes.
Terminal Questions:
Section – A
1) What is Gross Annual Value?
2) What is Net Annual Value?
3) What do you mean by Municipal Valuation of Property?
4) What is standard rent of property?
5) What are the deductions available U/S 24?
6) What is fair rent property?
7) How do you treat unrealized rent?
8) How do you treat unrealized rent realized?
9) What do you mean by pre construction period?
10) What is meant by composite rent?
11) How do you determine pre-construction period while calculating interest on borrowed Capital?
12) Define Property.
Section – B
1) Roopa is the owner of the following house properties. Find out the net annual value for the assessment
year 2020-21.
Particular A B C
Municipal value 1,80,000 1,80,000 3,60,000
Fair rental value 1,92,000 1,68,000 3,96,000
Standard rent 2,04,000 2,40,000 3,00,000
Actual rent (p.a) 2,16,000 1,92,000 2,88,000
Municipal tax paid 12,000 24,000 -
Municipal tax due 12,000 - 24,000
2) Compute GAV from the following information

Particulars A B C D
FRV 1,25,000 1,20,000 1,44,000 1,08,000
MRV 1,20,000 1,25,000 1,08,000 1,44,000
SRV 1,10,000 1,44,000 1,25,000 1,20,000
ARV 1,44,000 1,08,000 1,20,000 1,32,000
Unrealized rent 27,000 10,000 11,000
Vacancy Allowance 24,000 9,000 20,000 22,000
3) Calculate NAV in the following cases:

Particular H-1 H-2 H-3
Municipal value 80,000 1,40,000 1,40,000
Fair rental value 78,000 1,50,000 1,50,000
Standard rent 85,000 1,20,000 1,20,000
Actual rent 72,000 96,000 1,44,000
Unrealized rent 6,000 16,000 12,000
Vacancy Allowance 3 Months 4 Months 2 Months
Municipal tax paid 10% of Municipal value.
4) From the following information compute Net Annual Value of House Property for the A.Y. 2020-2021.
Municipal Value Rs. 1,80,000
Fair Rental Value Rs. 1,00,000
Let out (per month) Rs. 16,000
Standard Rent Rs. 1,20,000
Unrealized rent for one month.
Vacancy Allowance one month.
Municipal tax paid by owner of house property Rs. 20,000
Municipal tax paid by tenant Rs. 10,000

5) Mr. Sanjay started construction of his house, on 1-6-2011 took a loan of Rs.3, 00,000 @ 15% p.a. The
construction was completed on 30-11-2014 and repayment date falls on 1-12-2020. Compute interest
payable for the assessment year 2020-21.
6) Mr. Ram borrows Rs 80,000 at 15% p.a on 1st August 2012 for construction of a House Property and the
construction was completed on 31st August 2017 and loan is to be repaid by 31 January 2017. Determine
the Pre-Construction Interest and Post Construction Interest.
7) Mr. A is the owner of a house. The particulars of which are as follows:

Municipal value Rs. 1,80,000
Faire Rental value Rs. 1,95,000
Standard rent Rs. 1,90,000
Actual rent Rs. 15,500 p.m.
Vacancy period 1 month
Municipal tax paid by owner Rs. 20,500
Determine the taxable income from house property for the A.Y. 2020-21.
8) From the following information compute Net Annual Value of House Property for the A.Y. 2020-21.
Municipal Value Rs. 1,80,000
Fair Rental Value Rs. 1,00,000
Let out (per month) Rs. 16,000
Standard Rent Rs. 1,20,000
Unrealized rent for one month.
Vacancy Allowance one month.
Municipal tax paid by owner of house property Rs. 20,000
8)Arun owns a house in Bangalore. From the particulars given below compute the income from house property
for the P.Y.2019-20.
 Municipal value Rs 1,10,000
 Fair rental value Rs 1,30,000
 Standard rent Rs 1,25,000
 Actual rent per month Rs 12,000
 Municipal taxes paid Rs 11,000
 Expenses on repairs Rs 5,000
 Insurance premium Rs 2,000
 Unrealized Rent Recovered during the year 15,000 of 14-15
 Pre construction interest Rs. 3,300
 Post construction interest Rs. 6,600
SECTION – C
1)From the following particulars of house properties owned by Sri. Viswanath. Compute his income from house
property for the A.Y.2020-21.
Particulars I House II House III House IV House

Municipal value 8,000 9,000 20,000 24,000

Actual rent -- --- 24,000 30,000
Local taxes paid 1,600 1,800 4,000 4,800
Repair charges 1,000 -- 3,000 --
Fire insurance premium 50 150 200 500
Interest on loan for construction 1,180 -- 1,800 4,200
Unrealized rent -- --- 3,000 --
Vacancy period -- -- 3 months ---
The first and second house is self-occupied. The third house is let out for residence and the fourth house is
let out for business. The tenant paid local taxes of the fourth house.
2)Mr. Sukruth is the owner of four houses in Bangalore. He gives the following particulars of these properties.
Use of the House I HP SOP II HP Self III HP LOP IV HP LOP

Business
Rent received - - 66,000 54,000
Fair rental value 60,000 70,000 56,000 90,000
Municipal value 62,000 67,000 70,000 60,000
Municipal Tax 10% - Paid by Paid by Tenant but
Tenant deducted from Rent
Repairs 5,000 3,000 - -
Interest on loan - - - 3,000
Vacancy period 2 months - 1 month -
Additional Information:
1) Mr. Sukruth along with his family stayed in Mysore for Two months.
2) IV HP loan amount is used for daughter’s marriage.
Find out the Income from House Property for the AY 2019-20.
3)Mr. Chopra owns four houses. The details of these properties are given below for the PY 2019-20.
Self-occupied Self-occupied for
Particulars for Residence Let out Residence Let out

Municipal value 1,20,000 1,32,000 10,80,000 2,20,000
Fair rental value 1,50,000 1,60,000 12,00,000 2,50,000
Standard rent - 1,55,000 10,00,000 2,48,000
Rent receivable per month - 8,000 - 15,000
Vacancy period 3 months 1month - -
Unrealized rent (conditions - - - 6,000
satisfied)
Municipal tax
 Paid by Chopra 9,600 4,000 42,000 1,000
 Paid by Tenant 6,000 11,000
Interest on loan borrowed
 For the year 2017-17 - 8,600 1,00,000 3,900
 For the pre-construction
period 10,000 25,000 2,10,000 -
The loan was borrowed for acquisition of the properties which was complete during the year 2014-15.
Compute his total income for the previous year 2019-20.
4) Mr. Patnaik is the owner of a house which consists of 3 independent units. Ground floor which is equal to
40% is self-occupied and 1st floor is also equal to 40% and is let-out. Second floor which is equal to 20% is
also let out. Other information’s regarding the house are as follows:
Fair Rental value 90,000 p.a. Municipal valuation 1,00,000 p.a. Standard Rent 80,000 p.a. Municipal
Taxes 10% of MRV Repairs expenses 10,000 p.a. Ground rent 5,000 p.a. Actual rent received: First Floor
unit Rs. 5,000 p.m. Second Floor unit Rs. 2,000 p.m.
First floor unit remained vacant for 2 months. Preconstruction interest on loan is 38,500 and interest on
loan for construction for the P.Y. 2019-20 is Rs. 56,000.
Determine Mr. Patnaik’s house property income for the A/Y 2020-21.
5)Mr. Kumar owns a house at Delhi. During the previous year 2019-20, 3/4th portion of the house is occupied
for self-residence for full year and 1/4th portion is let out for residential purposes from 1.4.2018 to 31-12-2018
on a rent of Rs. 700 p.m. From 1-1-2018 this portion was used for own residency by him. Municipal valuation
of the entire house is Rs. 20,000 and fair rental value is Rs. 24,000. Expenses incurred in respect of the house
property were: Municipal Taxes Rs. 60,000; Repairs Rs. 2,000; Fire insurance premium Rs. 3,500; Land
Revenue Rs. 4,000 and Ground Rent Rs. 200. These expenses were paid during the year Interest on loan for
preconstruction period Rs. 3,600, and interest on loan for construction for the P.Y. 2019-20 Rs. 12,600.
Find out his income from house property for the assessment year 2020-21.
5)Mr. Gurudas owns following four house properties. Other particulars are as follows:
House 3 House 4
House 1 House 2
Let out to a Used for
Particulars Self- Self-
business own
occupied occupied
house business
Municipal value 20,000 50,000 70,000 45,000
Standard rent --- ---- 72,000 48,000
Fair rental value 26,000 60,000 80,000 50,000

Annual rent --- --- 96,000 ----
Vacancy --- --- 1 month ----
Unrealized rent --- --- 16,000 ----
Municipal taxes 5,000 2,000 6,000 4,000
Repairs 4,000 2,000 8,000 5,000
Interest on money
borrowed 8,000 10,000 18,000 ----
(construction)
Determine the house property income of Mr. Gurudas.
6)Mr. Ramachandran owns two houses at Chennai which are let out for residential and business purpose.
Compute his income from house property for the A.Y. 2019-20.
F.R.V. 36,000 1,20,000
Actual Rent 4,000 p.m. 12,000 p.m.
Municipal Rental Value 40,000 1,30,000
Standard rent 38,000 N.A.
Municipal Tax 10%. 10%
Actual repairs expenses 4,000 12,000
Ground Rent 2,000 2,500
Collection Charges 500 1,200
Interest on loan 12,000 48,000
Vacancy period 3 months NIL
Bonafide unrealized rent of current year NIL 36,000
7)Mr. Thomas has three houses in Kolkata details of which are given below:
(a) House No:1 constructed on lease hold land on 31.3.2014 and let out to tenant at a rent of Rs.800 p.m.
municipal taxes are Rs.1,200 per year, 50% of which are paid by tenant. Repair expenses of Rs.500
and ground rent of Rs.900 for the year paid by Mr. Thomas.
(b) House No.2 was taken on lease from Mr. K. David at a rent of Rs.400 per month. It was sub-let at a
rent of Rs.750 p.m. municipal taxes of Rs. 1000 and repairs expenses of Rs.800 for the year are paid
by Mr. Thomas.
(c) House No.3 constructed on his land on 30th June 2006. It consists of two independent equal units and
one is occupied for his residential purpose and the other unit is let out to a tenant at a rent of Rs. 3500
p.m. for residential purposes. The municipal value of the building is fixed at Rs.1,29,000 p.a. The
municipal taxes of Rs.16,000 were paid by Mr. Thomas. Repair charges of Rs.1,000 are equally met
by Mr. Thomas and the tenant. Interest paid on loan taken for construction of building by Mr. Thomas
is Rs.4000 for the year.
Compute taxable income from house property of Mr. Thomas for the assessment year 2019-20 [Hints:
House 3 is treated as two separate units]
8)Smt. Ramya owns 4 houses. HP 1 is let out for business purpose, HP2 is occupied for own business and HP3
and HP4 are occupied for own residence. Following particulars are available with respect to these properties for
the PY 2019-20.
Particulars HP1 HP2 HP3 HP4

Municipal value 60,000 10,000 1,36,000 1,90,000
Fair Rental Value 78,000 36,000 1,54,000 1,90,000
Standard Rent 72,400 24,000 1,50,000 1,80,000
Annual Rent 84,000 - - -
Unrealized Rent 7,000 - - -
Municipal tax-
- Paid by owner 3,000 8,000 12,000 16,000
- Paid by tenant 3,000 - - -
Date of completion 31-05-2014 31-05-2014 31-03-2014 01-04-15
of Construction
Interest on loan for pre 63,900 - 84,921 1,37,996
construction
Determine Smt. Ramya’s income from house property for the AY 2019-20.
9)Mr. Prasanth is the owner of house property in Hyderabad and has been let out for Rs.90,000. The tax payable
by the owner comes to Rs.8,400. In municipal valuation of Rs.84,000. But the landlord has taken an agreement
from the tenant stating that the tenant would pay tax directly to the municipality. The land lore however bears
the following expenses on tenants’ amenities.
Water charges as per agreement is Rs.1000
 Lift maintenance Rs.1000
 Salary to Gardener Rs.1,200
 Lighting of stairs Rs.800
The landlord claims the following deduction:
 Repairs – Rs.30, 000
 Land revenue - Rs.1000
 Collection charges – Rs.2, 000
Legal charges incurred on purchase of land on which property situated Rs.24,000
Compute taxable income from HP.
10) Kiran is the owner of 3 houses. The following are the properties his property for the year ended 31.3.2019.
Particulars House – 1 House - 2 House - 3
Year of construction 2008 2012 2013
Purpose of use Let out to bank Self-occupied Let out for residence
Actual rent received 30,000 - 30,00
Municipal valuation 32,000 28,000 24,000
Municipal tax paid by Kiran 1,200 1,000 30,00
Municipal tax paid by tenant 2,000 1,800 3,000
Total municipal tax 3,200 2,800 3,000
Fire insurance premium 2% 20% 2%
Interest on loan taken for renewal
of the house - 7,000 5,000
Compute taxable income from the house property of Mr. Kiran for the A.Y.2020-21.
11)Mr. Shankar owns three houses in K.G.F. from the following particulars compute his taxable income from
house property for the A. Y. 2020-2021.
Particulars House- I House- II House -III
Municipal value 60,000 90,000 65,000
Fair rent 65,000 1,00,000 60,000
Rent received - 88,000 -
Repairs 1,000 8,000 6,000
Interest on loan taken for house - 10,000 8,000
construction
How used SOP Let out SOP
Municipal tax is calculated 10% on municipal value.

Module-3
Heads of Income tax - II
Profits and Gains from Business or Profession
Introduction
Income from Business or Profession is the third head of income, maximum number of assesses pertain to this
head. Section 22 to 44 of the Income Tax Act 1961 deals with the taxability of income either from business or
profession.
Objectives
1. Understand the meaning of ‘Business’ and ‘Profession’ and the scope of income chargeable to tax under
this head.
2. Identify the expenses, payments that are admissible as deduction and the conditions to avail the same.
3. Identify the expenditures which are not admissible as deduction.
4. Compute the capital gains from transfer of capital assets in the manner prescribed
5. Compute cost of acquisition and indexed cost of acquisition
6. Identify the income which are chargeable to tax under ‘Income from other sources’
7. Compute the tax on casual income
Chargeability (Section 28)

The following types of incomes are chargeable to tax u/s 28 under the head-profit and Gains of Business:
 Profits and gains of any business.
 Any compensation due or received by a person in connection with termination or modification of terms
and conditions relating to this head.
 Income derived by a trade, profession or similar association from specific services performed for its
members.
 Profit on sale of import licenses, incentives by way of cash compensatory support and draw-back of
duty.
 The value of any benefit or perquisite convertible into money or not arising from business or the
exercise of a profession.
 Any interest, salary, bonus, commission or remuneration received by a partner of a firm assessed as
such.
 Any some whether received or receivable in cash or in kind under an agreement for not carrying out any
activity in relation to any business or profession.
 Income from speculation business.
 Any amount (including bonus) received under a key man insurance policy.
 Interest on securities where such securities are held as stock in trade.
Business u/s 2(13)

Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade,
commerce or manufacture. In simple terms Business means buying, selling and manufacturing of goods to earn
profit.
It is not necessary that there should be a series of transactions in a business, neither repetition nor continuity of
similar transactions is necessary.

Profession u/s 2(36)
Profession means those activities for earning livelihood which requires, intellectual skill and specialized
knowledge e.g. Doctors, Lawyers, Engineers, Chartered Account profession also include vocation.
Vocation refers to any activity which a person practices to earn his livelihood e.g. practice of religion, painting
etc.
Under section 2(36) profession includes vocation.
Vocation means any type of activity in which a person is engaged and earns his livelihood from such activity.
The practice of religion and writing of articles in a magazine is also vocation.
In other words, Vocation is the inbuilt talent/skill which is not acquired or possessed by a systematic study.
Speculative Business
It means any business in which a contract for the purchase and sale of any commodity including stock and
shares are periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity.
Format of Computation of Taxable Income from Business for the AY 2020-2021

Particulars Amount Amount
Net profit as per Profit and Loss A/c XXX
Add:
1) Inadmissible, Non-Business Expenses, Excess expenses XXX
debited to P/L A/c. (Expenses debited to P&L A/c but not
allowable as per IT act)
2) Business Incomes not credited to P&L A/c XXX
3) Over Valuation of opening Stock XXX
4) Under Valuation of Closing Stock XXX XXX
XXX
Less:
1) Allowed, Admissible Expenses not debited to P/L A/c XXX
(Expenses not debited to P/L A/c and allowed as per IT act)
2) Non-Business income credited to P/L A/c XXX
3) Undervaluation of Opening Stock XXX
4) Overvaluation of Closing stock XXX XXX
Taxable Income from Business XXX
Disallowed or Inadmissible Expenses

All expenses incurred either directly or indirectly related to business are allowed as business expenses.
However, the following expenses, are disallowed and hence to be added back to the net profit.
1) Personal expense like marriage expense, drawing, premium on life and medical insurance, proprietor salary,
rent paid for own building, saving made in NSC, PF, etc. household expenses like electricity, telephone uses
for residence.
2) Any payment made in excess of 10,000 either in cash or bearer cheque, the entire amount is inadmissible.
3) Income tax, Wealth Tax or Advance Income Tax paid.
4) Interest on loan, taken for personal purpose.
5) Provision for bad debts, doubtful debts, reserve for future losses.
6) Bonus and commission paid to employees not allowed it is paid after the due date of filing the returns, (in
case of individual 31st July 2020).
7) Sales tax, Customs Duty, Excises Duty, if it is not paid before the due date of filing the returns.
8) Any losses related to Capital in nature like loss on sale of assets.
9) Donation and Charities.
10) Any purchase of Capital Assets, renovation and extension of buildings.
11) Cost of sign board fixed on office premises.
12) Contribution to Staff Welfare Fund and political party.
13) Difference in trial balance.
14) Speculation losses
15) Preliminary expenses 4/5 are disallowed. E.g. Market survey, Discount on issue of shares
16) Interest on capital.
17) Employer’s contribution to URPF is not allowed.
18) Any gratuity not approved or given on ad-hoc basis is not allowed.
19) Expenses related to other heads of income
20) Theft at assesee residence
21) Family planning expenses of the employer is allowed only if the assesse is a company.
22) Personal gifts and presents.
23) Penalties and fines on excise and customs duty.
24) Any amount paid outside India without making TDS (30% of such payment is disallowed)
25) Salary paid to family members who are not professionally qualified.
26) Legal expenses incurred to defend criminal proceeding will not be allowed.
27) Any payment made to non-residents after deducting TDS, and if that TDS amount is not paid on or before
the due date of filing return (30% of such payment is disallowed).
Business Income
1) Bad debts recovered allowed earlier. 6) Profit on sale of import license.
2) Sundry income/sales/commission 7) Sales tax refund (allowed earlier).
received/discount received/brokerage. 8) Smuggling income.
3) Miscellaneous incomes. 9) Export incentive.
4) Interest from debtors.
5) Refund of customs duty.
Allowed Expenses
Expenses incurred for earning the business income are called as allowed expenses. Besides the regular and
common expenses, the following expenses are also treated as business expenses and they allowed to be
deducted from business incomes.
1) Repairs and renewals of business premises. 13) Revenue advertisement expenses will be
2) Rent/taxes/rates related to business. allowed in full.
3) Bad debts. 14) Demurrage paid to railways.
4) Fire insurance paid for buildings and goods used 15) Establishment expenses.
for business. 16) Audit fees/salaries to employees/office
5) Expenditure on scientific research. expenses.
6) Any contribution to approved scientific research 17) Staff welfare expenses.
institution, colleges, universities 150% of the 18) Interest on loan, if loan is taken for business
amount contributed is allowed as deduction. purpose.
7) Group insurance premium paid before the due 19) Compensation to retrenched employees in the
date. interest of the business.
8) Bonus commission paid before the due date. 20) Salary to staff.
9) Sales tax paid before the due date. 21) Discount allowed.
10) Theft in office premises. 22) Guest house and holiday homes expenses.
11) Pooja expenses at office. 23) Electricity/telephone bill/water bill related to
12) Employer contribution to RPF business premises.
24) Printing/stationary.
25) Travelling expenses relating to business
purpose.
26) Loss of goods or cash embezzled by an
employee.
27) Depreciation.
28) Legal expenses incurred to avoid business
liability and to defend the assesses title of
business.
29) Legal expenses for filing Income Tax appeal.
30) Deposits made under Tatkal Telephone Scheme
or Scheme own your telephone.

Non-Business Incomes
1) Interest on securities.
2) Agriculture income.
3) Rent received or income from house property.
4) Bad debts recovered but not allowed earlier.
5) Profit on sale of fixed assets and investments.
6) Dividend received.
7) Interest on Deposit, Dividend on UTI and Mutual Funds.
8) Life Insurance Policy amount received.
9) Gifts received from relatives.
10) Income tax refund.
11) Share of Incomes from HUF.
12) Winnings from lottery/cross word puzzles/horse race.
Depreciation
It is a continuous, gradual and permanent fall in the value of an asset due to wear and tear, passage
of time and obsolescence of technology and change of ownership etc.
Depreciation under income tax is to be claimed on the block of assets & not on individual asset.
Rate of depreciations prescribed according to Income Tax Act 1961

Particulars Rate %
p.a.
I. Buildings
Buildings which are used mainly for residential purposes except for 5%
hotels and Boarding House
Non-residential building like offices, factory, godown. 10%
Books owned by assessees carrying on business in running lending 40%

libraries
II. Furniture and fittings
Any Furniture and Fittings 10%
III. Plant and Machinery

Plant and machinery 15%
Motor cars, other than those used in a business of running them on 15%
hire
Motor buses, Motor lorries, and Motor used in a business of
running them on hire 30%
Motor buses, Motor lorries, and Motor used in a business of 45%
running them on hire acquired on or after 23rd August 2019 but
before 1st April 2020 and is put to use before 1st April 2020
Water pollution control equipment 40%
Lifesaving Medical equipment 40%
FOR PRIVATE CIRCULATION ONLY Page

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Computers 40%
Books (Annual publication or other than annual publication) owned 40%

by assessees carrying on a profession
Books owned by assessees carrying on business in running lending 40%
libraries
IV. Ships 20%
V. Intangible assets
Intangible assets: Patents, copyrights, technical know-how,

trademarks, licenses, franchises. Etc. 25%
Methods of depreciation
Only WDV Method of charging depreciation is recognized under the Act. However, Power
Generation units have option to claim depreciation on SLM.
1) If assets are newly purchased in the previous year and put to use for less than 180 days then 50%
of rate of depreciation will be given.
2) If the block of assets ceases to exist on the last date of the previous year then depreciation is
inadmissible.
3) Additional depreciation
 In case any new plant & machinery is acquired and installed on or after 01-04-2005, it shall
qualify for additional depreciation.
 Rate of additional depreciation: 20% of actual cost.
 Undertakings set up in any backward area in State of Telangana/West Bengal/Andhra

Pradesh/Bihar during 1 April 2015 to 1 April 2020 : 35% of Actual Cost of New P&M
Eligibility: The Assessee must be engaged in the business of – (a) Manufacturing or production
of any article or thing, or (b) Generation, transmission or Distribution of Power
Essential Features of Profits and Gains of Business.
1. Business carried on by the Assessee: It is a must that the business should have been carried
on by the assessee himself during the previous year. It does not mean that an assessee should
physically carry on a business. What is more important is that he must have right to carry on
the business and the business must have been carried on in the exercise of that right by the
assessee either personally or through his agent or servant. A business may be carried on in
India or outside India. It is the residential status of an assessee which determines the
incidence of tax.
2. Business is carried on during the previous year: The business should have been carried on
during the previous year. The business may be carried on by the assessee at any time during
the previous year. Thus, it is not necessary that the business should be carried on throughout
the year. Sometimes some of the receipts are taxable as income from business even if no

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business is carried on by the assessee in the year of receipt. Following are some of the
examples:
 Recovery against any excess payment.
 Sale of an asset used for scientific research.
 Bad debts recovered (allowed as expenditure in the earlier years).
 Any amount withdrawn from special reserve.
 Amounts received relating to a discontinued business.
3. Aggregate income of different businesses is assessed to tax: If an assessee has different
businesses, the profits of all of them will be aggregated and put to tax.
4. Speculation Profits: Profits from speculation business are taxed under the head – Profits and
Gains of Business. However, speculation loss cannot be set-off against the legal business
profits.
5. Income of previous year is put to tax in the following assessment year.
6. Any gain arising on the transfer of a capital asset used in the business cannot be treated as
business income. It can, however, be treated to tax under the head-Capital Gains.
7. Profit on the revaluation of capital assets is not to be taxed under this head.
8. Anticipated or future profits are not taxable in the current year. But, the real profits i.e. the
profits received or receivable during the year are taxed in the relevant assessment year.
9. Profits on winding up are not taxable as business income but are liable to tax under the head-
Capital Gains.
Computation of Profits and Gains {Section 29}
The profits and gains of a business or profession are to be computed in accordance with the
provisions of sections 30 to 43 D (sec 29). The list of provisions/allowances is not exhaustive.
We should apply ordinary commercial principles while determining real and true profits of a
business or profession. Sometimes there may be an expenditure or loss which may not be
covered under the above sections 30 to 43 D. Yet such losses would have to be allowed in order
to determine true profits. Some of the usually occurring types of trading losses are given below:
1. Loss of Stock in trade: Loss of stock- in- trade because of energy action, freezing of
stocks, leakages, by ravages of white ants, fire or negligence etc. are allowed as
deduction. However, any amount recovered shall be treated as revenue receipt.
2. Loss through embezzlement by employee or agent is allowed as deduction in computing
business income.
3. Loss by theft: If robbery or theft takes place during the normal working hours of the
business, it is allowed as expenditure. Any loss by theft should be incidental to the
operations of the business e.g. theft by a pretended customer, or loss of cash before being
deposited in the bank etc.
4. Loss incurred for standing as surety: Where a trader stands surety for the debts of another
and such guarantee is for the purpose of the trade, any payment made as a result of such
guarantee can be deducted as a business loss.
5. Loss incurred on account of insolvency of banker with which current account is
maintained by assessee.
6. Loss due to forfeiture of deposit made by the assessee for properly carrying out of
contract for supply of commodities.
7. Loss incurred due to devaluation of rupee in foreign country which is being utilized in the
course of business.

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8. Loss due to exchange rate fluctuation of foreign currency held on revenue account.
General Principles Governing Admissibility of Deductions
Following are the general principles which should be taken into consideration while allowing
deduction in respect of allowances, expenses or losses. As has already been explained, these are
not exhaustive by nature but simply lay some guidelines which may help us arriving at a decision
while allowing or disallowing a particular deduction.
1. Expenditure must be incidental to the business.
2. Deduction must be in respect of an existing business.
3. Expenditure should relate to the previous year. This depends upon the method of accounting.
Under mercantile system of accounting expenditure is allowed only when it is related to the
previous year. However, under cash system of accounting, amount actually paid during the
year is allowed. There are certain exceptions with regard to sales tax, excise duty and bonus
etc.
4. Expenditure should be in relation to one’s own business.
5. Expenditure incurred should be in the commercial expediency. An expenditure sometimes
need not be for direct and immediate benefit of the business.
6. Expenditure once incurred may give extended benefit to the business, i.e. benefit of
expenditure may be extended beyond the year of expenditure viz. deferred revenue
expenditure.
7. No deduction of expenditure incurred before setting up of a business, except in the case of
preliminary expenses u/s 35 D.
8. Expenditure must have relationship with taxable profits.
9. Estimated losses are not allowed as deduction.
10. Expenditure incurred on wasting assets is not allowed.
11. Expenditure in relation to non-existing liability is not allowed.
12. Expenditure incurred in defending against the breach of law is not allowed e.g. fines and
penalties.
13. Depreciation on investment is disallowed.
14. Revenue expenses are allowed in full, while capital expenses are allowed over a period of
time.
Deduction expressly allowed
Section 30 to 37 contains a list of certain expenses/ deductions which are allowed in computing
the income under this head. While considering these deductions, the word ’paid’ means actually
paid or incurred depending upon the method of accounting. Under cash system, the word ’paid’
means ‘actually paid’, under mercantile system the word ’paid’ means ‘actually incurred’.
The following deductions are expressly allowed:
1. Rent, rates, taxes, repairs and insurance of building used for the business (Sec 30): The
building may be own building or rented one. As a tenant, any amount paid towards the
current repairs is also deductible. However, any premium paid towards rented house is
not allowed.
2. Repairs and insurance expenses paid in relation to plant and machinery and furniture are
allowed (sec.32): Any expenditure incurred to replace petrol engine by diesel engine in a
jeep to augment the profit is allowed.

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3. Depreciation u/s 32: Under Section 32 depreciation on assets is allowed as deduction
while computing income from business or profession. To claim this deduction following
conditions should be satisfied: 1) Assessee should be owner of the asset. 2) Asset must be
used for the business. 3) Such use must be in the previous year.
4. Site restoration fund (sec. 33 ABA): Deduction in respect of prospecting for or extraction
or production of petroleum or natural gas or both in India and abroad is allowed. Amount
of deduction is- Amount deposited or amount deposited or 20% of profits, whichever is
lesser.
5. Expenditure on Scientific research (sec. 35): Scientific research means any activity for
the extension of knowledge in the fields of natural or applied science including for the
extension of knowledge in the fields of natural applied science including agriculture,
animal husbandry or fisheries. The following deductions are allowed in respect of
expenditure on scientific research:
a Revenue expenditure on in-house scientific research related to business [Sec.35 (1)
(i)]: Any expenditure of revenue nature incurred on scientific research related to
business is allowed in full. Any expenditure incurred for the payment of salaries,
material within three years immediately preceding the commencement of business is
also allowed.
b Contribution of outsiders [Sec 35 (1)(ii)]: Any amount paid to
 scientific research association which has object of undertaking scientific research
or
 To a university, college, or other institution to be used for scientific research is
deductible at 150% of the sum paid. The research programme may be related to
business or not related to business.
From financial year 2020-21 the rate will be 100%.
 Payment of research in social science to any approved institution, university or
college is deductible at 100% of the sum paid u/s 35 (1) (ii) & 35(1) (iii).
 Capital expenditure incurred by an assessee who carries on scientific research
himself is fully deductible u/s 35 (2) in that every year in which it is incurred.
Unabsorbed part of such expenditure will be carried forward and set off as
unabsorbed depreciation.
If the asset is sold without having been used for other purposes, the sale proceeds
or deduction allowed whichever is less is treated as business income if the
previous year in which the sale took place. The excess of sale proceeds over
deduction allowed however is taxed as capital gain.
 Contribution of National Laboratory [Sec.35 (2AA)]: Any amount paid to any
national laboratory will get a deduction at 150% of actual amount given. National
Laboratory means a scientific laboratory functioning at national level under the
aegis of the Indian Council of Agricultural Research, Indian Council of Medical
Research or Council of Industrial and Scientific Research, the Defense Research
and Development Organization, the Department of Electronics, the Department of
Bio-Technology, or the Department of Atomic Energy and which is approved by
the prescribed authority for this purpose.
From financial year 2020-21 the rate will be 100%.

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 Any amount of expenditure incurred up to 31-3-2012 on scientific research by a
company engaged in the business of bio-technology, drugs; pharmaceutical,
electronic equipment’s, computers, telecommunications etc. will get a weighted
deduction of 200% (sec. 35 2AA). (vii) Contribution to research & Development:
Sec. 35 2 AB provides for weighted deduction at the rate of 125% in respect of
contribution made to IIT, approved university college etc., towards research
activities. This weighted deduction is in addition to the special benefit available to
a person for in house research. In case of Biotechnology, Drugs Pharmaceutical
companies a weighted deduction of 200% is allowed.
6. Expenditure incurred on acquisition of patent rights or copy rights (sec. 35A):

Where capital expenditure is incurred by the assessee (after 1966 but before 1-4-1998) on
the acquisition of patent rights, copying for the purpose of business, the whole amount is
deductible in 14 equal instalments. Where the right became effective in any year prior to
the previous year in which expenditure is incurred, the number of completed years which
have elapsed since commencement of the patent shall be reduced from 14 years and the
deduction is allowed in remaining years. In the case of patent rights acquired on or after
1-4-1998, the expenditure incurred on the acquisition of such rights shall be capitalized
and depreciation u/s 32 is allowed.
7. Expenditure incurred on Technical know-how (Sec.35 AB) : Any sum paid before 1-
4-1998 on the acquisition of technical know-how for use for the purpose of his business
will be allowed as deduction by spreading it equally over six years, namely, the year in
which the lump-sum consideration is paid and the five immediately succeeding years.
Where the knowhow is developed in a government laboratory, or a laboratory owned by a
public sector company or university, the consideration will be spread over 3 years. But
the know-how acquired after 1-4-1998 will be treated as capital expenditure and will be
depreciated u/s 32.
8. Capital expenditure to obtain license to operate telecommunication services (Sec. 35
ABB) : Any capital expenditure incurred and actually paid by an assessee on the
acquisition of any right to operate telecommunication services by obtaining license will
be allowed as deduction in equal instalments over the period starting from the year in
which such payment has been made and ending in the year in which the license comes to
an end.
9. Expenditure on eligible project or scheme (Sec. 35 AC): No deduction will be allowed
from business income in respect of expenditure incurred for an eligible projector scheme
on or after 01-04-2018. Eligible project or scheme means such project or scheme which is
meant for promoting social and economic welfare or uplift of the public as may be
certified by the Government of India on the recommendation of National Committee
Constituted by Central Government consisting of persons of eminence in public life.
10. Payment of Rural Development Fund (Sec.35 CCA) : Any sum paid to Rural
Development Fund set up and notified by the central Government is fully deductible.
This section applies to the National Poverty Eradication Fund also. But once this
deduction is claimed and allowed u/s 35 CCA, the same is not allowed as a deduction
under any other provision of this Act.
11. Amortization of preliminary expense (Sec .35 AD) : Where any Indian Company or
resident non-corporate assessee incurs after 31st March 1998 any preliminary

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expenditure, the assessee shall be allowed a deduction of an amount equal to one-fifth of
such expenditure of each of the five successive previous years beginning with the
previous year in which the business commences. Expenses incurred before 1-4-1998 are
to be spread over 10 years preliminary expenses include: expenditure in connection with
the preparation of feasibility report, project report conducting marketing survey,
engineering services, legal charges for drafting agreements, Memorandum of
Association, Printing of Memorandum of Association and registration expenses. The
maximum amount eligible for deduction under this section shall not exceed 5% of the
cost of the project. But in the case of Indian companies, it is at the option of the company,
whether 5% of cost of the project or 5% of the capital employed in the business of the
company.
12. Expenditure for amalgamation or demerger of an undertaking (sec. 35 DD): Where
an Indian Company incurred expenditure after 31-3- 1999. Wholly and exclusively for
the purpose of amalgamation of demerger of an undertaking 20% of such expenditure for
each of the five successive years beginning with the year in which amalgamation of
demerger takes place shall be allowed as deduction.
13. Expenditure on voluntary retirement (Sec. 35 DDA): The amount received by an
assessee in consequence of an employee’s voluntary retirement, the assessee shall be
allowed a deduction of 20% of such expenditure for each of the five successive previous
years beginning with the year in which such payment was made.
14. Expenditure on prospecting etc. for development of certain minerals (Sec. 35E) :
Any expenditure incurred by an Indian Company or Indian Resident non-Corporate
assessee wholly and exclusively on the prospecting of any mineral or on the development
of mines or other natural deposit of any such minerals the assessee shall be allowed a
deduction of an amount equal to 1/10th of he such expenditure for each of the ten
successive previous years beginning with the year of commercial production.
Other Deductions (Section 36). While computing profits and gains business or profession the
following other deduction are allowed:
1. The amount of any insurance premium paid in respect of insurance against risk of
damages or a destruction of stocks or stores used for the business is fully deductible
[Sec 36(1)(i)].
2. Insurance premium paid by a federal milk co-operative society is fully deductible
[Sec.36 (1) (ia)].
3. Insurance of health of employees [Sec.36 (1) (ib)]: Any premium paid under a
scheme framed in this behalf by the general Insurance Corporation of India and
approved by the Central Government, shall be fully deductible.
4. Bonus or commission paid to an employee [Sec.36 (1) (ii): Any bonus or
Commission paid to an employee for services rendered shall be deductible. But such
sum should not, in any way, be paid as profit or dividend.
5. Interest on borrowed capital [Sec.36 (1) (iii): Any interest paid in respect of capital
borrowed for the purpose of business/profession is fully deductible. Interest on own
capital is not deductible.
6. Employer’s contribution Provident Fund [Sec.36 (1) (iv) (v)]: Any amount paid by
an assessee as an employer by way of contribution towards Recognized Provident

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Fund, or an approved superannuation Fund or approved Gratuity Fund shall qualify
for deduction .
7. Loss regarding animals [Sec.36 (1)(iv)] : In respect of animals which have been
used for the purpose of business (not as stock in trade) and have died or become
useless for such for such purpose, deduction is allowed to the extent of the amount
equal to the difference between the actual cost to the assessee and the amount, if any,
realized in respect of the carcasses of animals. If sale proceeds are Nil then the entire
cost will be allowed as loss.
8. Bad debts[Sec. 36 (1) (vii) and (2)]: Amount of any bad debts of part thereof, which
is written off as irrecoverable in the accounts of the assessee for the previous year is
allowed as deduction subject to the following conditions:
a The debt has been taken into account in computing the income of the assessee
of the previous year in which the amount is written off or of an earlier
previous year; or
b It represents money lent in the ordinary course of business of money lending
which is carried on by the assessee.
c There must be a debt.
d Debt must be incidental to the business.
e Debt must have been taken into account while computing business income.
f Debt must have been written off in the books of account of the assessee.
Notes:
 If the amount of any part thereof of bad debts is recovered at a later date, the same
will be treated as business income of the previous year during which such
recovery takes place.
 Bad debts of a discontinued business or to a successor of the business are not
deductible.
9. Provision for bad debts [Sec .36 (1) (iii a)]: Normally any provision for bad and
doubtful debts is not allowed as deduction. But the same may be allowed in the case
of rural branches of commercial banks.
10. Transfer to special reserve [Sec. 36 (1) (viii)] : The amount transferred to a special
reserve account and maintained by a financial corporation which is engaged in
providing long term finance for industrial or agricultural or infrastructure
development, in India or by a public company formed and registered in India with the
main object of carrying on the business of providing long term finance for
construction or purchase of houses in India for residential purposes is allowed to the
extent of 20% of its profits.
11. Family Planning Expenditure [Sec. 36 (1) (ix)]: Any bona fide expenditure incurred
by a company for the purpose of promoting family planning amongst its employees is
allowed as deduction. If such expenditure is of a capital nature. It shall be allowed as
a deduction in five equal annual instalments commencing from the precious year in
which the expenditure is incurred.
12. Contribution of |Exchange Risk Administration Fund [Sec. 36 (1)(x)]: The
contribution made by the public financial institutions to the Exchange Rick

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Administration Fund will be allowed as business deduction while computing their
income.
Exercises
1. Define Business.
2. How to treat bad debts recovered but disallowed earlier?
3. Mention any four “inadmissible items” while calculating income from business.
4. What is depreciation U/S. 32 (1) of the act?
5. What do you mean by profession?
6. What do you mean by expressly admissible expenses?
Section B and Section C

Problems of Income from Business
1) Following is the Trading and Profit and Loss A/c of Manjunath Enterprises for the year ended
31st March 2020.
Particulars Amount Particulars Amount
To opening Stock 1,24,000 By Sales 33,30,000
To Purchases 7,28,000 By Closing Stock 1,36,000
To Carriage 78,800
To Wages 52,000
To Manufacturing Expenses 63,000
To Gross Profit 24,20,200
34,66,000 34,66,000
To Salaries 2,28,000 By Gross Profit 24,20,200
To Interest on Capital 1,72,000 By Rent from House property 44,000
To Drawings 1,10,000 By Dividend from Tata 10,600
To Rent and taxes 1,54,000 Chemicals 15,000
To Donation 25,000 By Bad debts recovered 18,000
To repairs 61,000 By interest on debentures of M &
To Depreciation 73,000 M Ltd. 8,000
To General Expenses 24,000 By Miscellaneous income 70,400
To Legal charges 6,000 By Gifts from relatives
To IT appeal expenses 10,000
To Audit fees 5,000
To LIC premium 46,900
To Fire insurance premium for good 23,300
To Daughter’s college fees 30,000
To travelling expenses 18,000
To Net profit 16,00,000
25,86,200 25,86,200
1. Stocks are valued 10% below cost
2. Depreciation allowable as per I.T Rules Rs. 54,000
3. Legal charges are in connection with purchase of land.
4. Repairs include Rs. 6,000 related to house property
5. Salaries include Rs. 4,600 paid to a domestic servant
6. 40% of bad debts recovered were disallowed earlier

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Compute taxable income from business for the A. Y. 2020-21.
2) Mr. Dhoni is the owner of a business. His profit and loss account for the year ending 31-03-2020
was as follows:
To salaries 5,000 By Gross profit 55,000
To Rent rates and taxes 2,900 By Interest on Investments 5,000
To Printing and stationery 750 By Rent received 6,000
To personal expenses 3,000 By Winning from lottery 10,000
To Commission 2,000
To Discount on allowance 450
To Provision for bad debts 1,200
To Postage and telegram 270
To law charge 450
To Advertisement 1,550
To Gifts and presents 150
To Fire insurance premium on stock 500
To Sales tax 1,250
To Repairs and renewal(not for 480
business)
To loss on sale of machinery 1,800
(used for private purpose)
To Life insurance premium 1,700
To Wealth tax 740
To Interest on capital 730
To Audit fee 300
To Interest on bank loan 1,380
To Provision for depreciation 2,500
To Provision for income tax 3,900
To Net Profit 43,000
76,000 76,000
1. Actual bad debts were Rs. 500.
2. Actual amount of income tax paid during the year Rs. 4,000.
3. Allowable depreciation as per IT. Rules Rs. 1,500
4. Advertisement expenses include Rs. 450 spent on special advertisement campaign to open a new
shop.
5. He carried out the business in a rented house, 40%(IA) of which is used for his residence.
6. Rent, rates and taxes include Rs, 2,400 paid as rent of the property during the year.
Compute taxable his income from business for the A. Y. 2020-21.
3) Shri Govind (age 55 years), a Resident of Mumbai submits the following Profit and Loss A/c for
the year ending 31st March 2020.

To opening Stock 1,10,000 By Sales 36,00,000
To Purchases 14,00,000 By Closing Stock 2,20,000
To Wages 3,00,000
To Gross profit 20,10,000

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38,20,000 38,20,000
To Advertisement 2,00,000 By Gross Profit 20,10,000
To Salary to staff 6,60,000 By rent 2,40,000
To Govind ‘s salary 1,20,000 By Commission 1,50,000
To Audit fees 60,000 By Bad debts recovered 70,000
To Bad debts 40,000 (earlier disallowed)
To Reserve for bad debts 50,000 By Dividend on SRM Ltd. 30,000
To General expenses 2,50,000 Shares (Gross)
To Municipal tax 24,000
To Fire insurance Premium on goods 26,000
To Depreciation 78,000
To Patents rights 1,60,000
To Staff welfare fund 40,000
To Employees R.P.F 50,000
To Sales tax 1,90,000
To Donation to NDF 1,00,000
To premium on Govind’s Life 36,000
Insurance
25,00,000 25,00,000
1. Opening stock and closing stock were overvalued by 10%.
2. Advertisement includes Rs. 1,00,000 being cost of permanent sign board.
3. Business income of Rs. 70,000 was not recorded in the P&L A/c.
4. General expenses include Rs. 50,000 paid for securing business orders and Rs. 60,000 spent on
Govind’s birthday
5. Depreciation allowable on all assets including permanent sign board but excluding patent rights
as per IT rules was Rs. 90,000.
6. Patents rights were acquired on 11.10.2019 on which depreciation allowable at 25
7. Purchases include a cash payment of Rs. 30,000 towards purchase of raw materials. Compute
taxable his income from business for the A. Y. 2020-21.
DEPRECIATION – 100 %
1. SIGN BOARD
2. PATENTS
4) Following is the P & L A/c of Mr. Shivaji, a Merchant, for the year ending 31st March 2020.
To Rent 60,000 By Gross Profit 5,23,000
To Rates 6,00 By Interest from Debtors 28,000
To Salary to Staff 54,000 By Rent from Property 24,000
To Diwali Pooja Expenses 2,000 By Sundry Income 16,000
To Interest on Loan 1,25,000 By Commission 37,000
To Sundry Expenses 55,000 By Bad debts recovered (LESS) 10,000
To Bad debts 6,000 (Disallowed earlier)
To charity 1,000
To Reserve for Bad debts 2,000
To Entertainment 8,500
To Loss by theft 14,000

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To Sales tax penalty 10,000
6,38,000 6,38,000
1. Salary to Staff includes Salary of Rs. 24,000 of a son, who is a B. Com student and who casually
helps and proprietor salary Rs. 1,000 p.m
2. Rent includes Rs. 12,000 of a shop belonging to assessee himself
3. A Loan of Rs, 60,000 at 15% p.a. is taken from his wife out of funds advanced by him and
interest is included in Interest on Loan.
4. Sundry Expenses include Rs, 9,000 being expenses incurred on Pilgrimage to Haridwar
5. Entertainment includes Rs. 1,500 spent on tea of some guest of a local MLA
6. He earned Rs. 40,000 in gold smuggling and not shown in the books
7. Rates include Rs. 4,000 for property Let out
8. Loss by theft took place when somebody pretending to be a customer stolen a necklace worth R.
6,000 in his shop, Rs. 8,000 was stolen from his house.
9. Sales tax paid and depreciation not taken to P/L(LESS) A/c Rs. 8,000 and Rs. 5,000 respectively.
Compute taxable his income from business for the A. Y. 2020-21.
5) From the P &L A/c of Mr. Ramesh for the year ending 31/3/2020. Compute the Income from
business for the A.Y. 2020-21.
To Office Expenses 40,000 By Gross Profit B/d 6,40,000
To General Expenses 16,000 By Interest on Govt. Securities 11,200
To Interest on Bank Loan 4,000 By Discount received 16,000
To Audit Fees 4,000 By Bad debts recovered ( not 800
To Interest on Capital 12,000 Written of earlier year)
To Rent 20,000 By Sundry receipts 16,000
To Income Tax 16,000 By Dividends 16,000
To Charity 8,000
To Legal Expenses 4,000
To Compensation to Retrenched 20,000
Employee
To Extension of Building 36,000
To Sales Tax 8,000
To Net Profit 5,12,000
7,00,000 7,00,000
1. General Expenses included R. 8,000 towards purchase of Computer.
2. Legal Expenses include Rs. 1,600 penalty by Customs Authority.
3. Rent includes Rs. 8,000 paid as rent of House in which assessee lives.
4. Depreciation allowed Rs. 12,000 as per Income Tax Rules (excluding depreciation on
Computer purchased).
5. Income tax in excessive to the extent of Rs. 5,000.
6. Sales tax includes Ra. 1,000 paid as penalty.
6) From the below given P & L a/c and Additional information of Mr. David. Compute his taxable
business income for A.Y. 2020-21.

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To opening Stock 40,000 By Sales 5,00,000
To Purchases 2,20,000 By Closing Stock 50,000
To Wages 15,000
To Freight 10,000
To Gross profit 2,65,000
5,50,000 5,50,000
To Establishment Expenses 15,000 By Gross Profit 2,65,000
To Salaries 25,000 By Dividend on Shares (Gross) 6,000
To Rent and Taxes 12,000 By Rent from House Property 15,000
To Income Tax 10,000 By Refund of Income Tax 2,000
To Household Expenses 14,000 By Interest on Govt. Securities 1,000
To reserve for Bad debts 5,000 By Bad Debts recovered 5,000
To Advertisement 15,000 (allowed earlier)
To Donation 6,000 By Profit of sale of machinery 3,000
To Sales Tax 20,000 By Miscellaneous income 9,000
To Provision for Income Tax 8,000
To Carriage outward 11,000
To Drawings 4,000
To General Expenses 16,000
To Interest on Capital 9,000
To Bad Debts 7,000
To Repairs 8,000
To Taxes and Insurances 2,500
To Car Expenses 11,000
To Audit Fees 12,000
To Net Profit 75,000
3,06,000 3,06,000
1. Salaries include payment to a relative employee, which is considered to be unreasonable up to
Rs. 6,000.
2. Purchases include two payments of Rs. 30,000 and Rs. 10,000 paid in cash to a supplier.
3. Opening stock is valued at 10% above the cost.
4. Allowable depreciation is Rs. 22,500.
5. 60% of car expenses are for business purposes.
6. General expenses include Rs. 10,000 given to notified research institute for carrying on scientific
research.
7) From P &L A/c of Mr. X, a manufacture. Calculate the Taxable income from business for year
ending 31/03/2020.
To Salary to Employees 95,000 By Gross profit 3,00,000
To Advertisement expenses in cash 24,000 By Interest on securities 14,000
To General Expenses 16,000 By Income from HP 25,000
To Entertainment expenses 22,000 By Bad Debts recovered 12,000
To Bad Debts 1,500 (allowed earlier)
To Drawings by proprietor 24,000 By Profit on sale of Import 80,000
To Sale Tax (due and paid on 6,000 License
01/07/2019)
To Interest on Proprietor’s Capital 7,000

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To repairs 2,500
To Rent 21,000
To Legal Expenses 5,000
To Bonus (due) 6,000
To Bonus to Proprietor 4,000
To Motor Car purchases 72,000
To Expenses on car during the year 12,000
To Donations 2,000
To Provision for Bad debts 6,000
To Net profit 90,000
4,31,000 4,31,000
He gives you the additional information:
1. Rs. 3,000 was spent on the purchase of land and is include in legal expenses.
2. Half of repair expenses bear on let -out building.
3. Depreciation allowable on all assets including Motor Car is Rs. 14,400.
4. Bonus was paid to employees on 30/06/2019.
8) Following is the P & L A/c of Mr. Akash for year ending 31/3/2020. Compute taxable income
from business.
To Salaries 30,000 By Gross Profit 2,35000
To Depreciation 25,000 By Sundry profits 66,200
To Office expenses 18,000
To Travelling expenses 10,000
To Expenses on festival 3,000
To Embezzlement of cash by 10,000
Employee
To Interest 10,000
To Legal expenses 18,000
To Education expenses to his son 8,000
To Sundry expenses 16,500
3,01,200 3,01,200
Adjustment:
1. Salary includes a payment of Rs. 8,000 given to an employee outside India and no tax has
been deducted at source.
2. Written down value of plant and machine Rs. 80,000 as on 1-4-2019 new plant costing Rs.
80,000 has been installed during the month Nov. 2019. Provide depreciation at 15%
3. Festival expenses include a gift of Rs. 2,000 give to relative at the time of his marriage.
4. Sundry expenses include Rs. 5,000 on the maintenance of a guest house.
5. Legal expenses include a payment of Rs. 12,000 given to a tax consultant in connection with
an income tax appeal.
6. Furniture was sold for Rs. 600 and then WDV is Rs. 900.
7. Sundry profits include Rs. 10,000 withdrawn from his PPF.

72 | 125
9) Mr. Krishna runs cement plant. His Profit and Loss A/c for the year ending 31/03/2020 is as
follows:
To Opening stock 40,000 By Sale of cement 12,00,000
To purchase of materials 2,40,000 By Car sold 75,000
To Preliminary expenses 40,000 By Dividend received 82,000
To Wages 20,000 By Refund of excise duty 12,000
To Royalty 35,000
To Excise duty 30,000
To Manager’s salary 40,000
To Interest on loan 20,000
To Income Tax 22,000
To General Expenses 80,000
To Sales tax 35,000
To Salaries and wages 80,000
To Patent purchased 30,000
To Entertainment expenses 17,000
13,69,00 13,69,000
0
Adjustments:
1. Wages include Rs. 5,000 paid to domestic servant.
2. General expenses include Rs. 2,000 for clearing (Selling) machine.
3. Mr. Krishna is the manager of this business.
4. During the previous year he purchased a car for Rs. 1,20,000 which was sold for Rs. 75,000.
5. General expenses include the following:
a) Donation to public hospital Rs. 2,500.
b) Special advertising campaign undertaken in respect of product place in the market Rs.
30,000.
c) Subscription to cement syndicate Rs. 1,000.
d) Employee’s family planning expenses Rs. 9,000.
6. Guest house expenses Rs. 12,000 included in entertainment expenses.
7. Closing stock of finished cement Rs. 90,000 not included in profit and loss a/c.
Income from Profession
Format for computation of Profession Income

Particulars Amount
Professional receipt XXX
Less: Professional expenses XXX
Taxable Income from Profession XXX
Chartered Account/Auditor
Professional Receipt Professional Expense
1. Audit fees 1) Office expenses/rent/salaries
2. Financial consultancy service 2) Printing and Stationery
3. Income from Accountancy work 3) Depreciation on Professional books
4. Gifts and presents from clients 4) Depreciation on furniture/motor car/
5. Income from Appellate Tribunal Appearance office equipment

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6. Tax consultation fees, Examiner’s fees 5) Expenses of motor car.
7. Tuition fees 6) Allowance to clerk
8. Fees from income tax appeal, Remuneration 7) Membership fees
from Articles published in professional 8) OYT expenses (own your Telephone)
journals 9) Stipends to trainees
10) Subscription to CA Institute
Lawyer
1) Legal Income/fees 1) Office rent/expenses/salaries
2) Special commission 2) Law journals
3) Cash gifts and presents from clients 3) Telephone expenses
4) Consultation fees 4) Magazines subscription
5) Remuneration from articles published in 5) Motor car expenses
Professional journals 6) Depreciation on motor car/ furniture/
6) Arbitration fees Office equipment
7) Purchase of professional books
8) Printing and stationery
9) Electricity charges
10) Miscellaneous /general/ office expenses
Doctor
1) Sale of medicines 1) Cost of medicines purchased
2) Consultation and visiting fees 2) Depreciation on surgical expenses
3) Gifts and presents from patients 3) Salaries paid to staff
4) Remuneration from articles published in 4) Rent of clinic/dispensary
Professional journal 5) Purchase of professional books
5) Retainer fees 6) Telephone charges
6) Examiner fees 7) Printing and stationery
8) Motor car expenses
9) Depreciation on motor car/office
equipment/furniture.
Treatment of Cost of Medicine

In case of calculation of cost of medicine, if the cash system of accounting is followed, then the
actual cost of purchases has to be taken as the cost of medicine. If mercantile system of accounting is
followed, then the cost of goods sold has to be taken as the cost of medicine and to be deducted as
professional expenses. (Cost of goods sold = Opening stock + Purchases – Closing stock)
Problems of Doctors
1) Dr. Rekha is a registered medical practitioner, she provides her Receipts and payments A/c for
the year ended 31st March 2020.
To Balance b/d 1,30,000 By Salaries 66,000
To Visiting fees 1,40,000 By Clinic rent 96,000
To Consultation fees 4,76,000 By Motor car expenses 70,000
To Special Medical camp By Driver’s salary 60,000
Remuneration 50,000 By Medical books 30,000

74 | 125
To Rent from H.P 1,20,000 By Motor car purchased 5,00,000
To Gifts 60,000 By Household expenses. 92,000
To Dividend from Sun By Telephone 29,000
Pharma Ltd. 11,600 By Travelling 20,000
To Interest on debentures of By Surgical equipment 33,000
Tata Power Ltd. 18,800 By Balance c/d 10,400
10,06,400 10,06,400
1. Remuneration received for special medical camp was donated to an orphanage.
2. 30% of motor car usage, 20% of travelling expenses and 25% of telephone bills relate to personal
use.
3. Allow depreciation as per IT rules.
4. 50% of gifts are from patients.
5. Medical books include annual publication worth Rs. 10,000 remaining are general medical
books.
Compute taxable professional income for the A.Y. 2020-21.
2) Following is the Receipts and Payments of Doctor Hariprasad for the year ending 31-3-2020.
To Balance b/d 1,20,000 By Clinic rent 25,000
To Consultation fees 65,000 By Staff salary 80,000
To Visiting fees 80,000 By Rent and taxes 25,000
To Sale of medicine 45,000 By Electricity and water charge 14,00
To Operation theater rent 25,000 By purchase of Medical books
To Dividend 25,000 (annual publication) 14,000
By Purchase of surgical equipments 40,000
By Motor car expenses 10,000
By Medical association members fees 5,000
By Audit fees 20,000
By staff welfare expenses 12,000
By Diwali expenses 6,000
By Entertainment expenses 12,000
By Medicine purchase 30,000
By Balance c/d 67,000
3,60,000 3,60,000
1. Gift form patient Rs. 4,000 was given to him by a patient not included in the account.
2. ¼ of motor car expenses relate to personal use.
3. The rate of depreciation on surgical equipment is 40%.
4. Interest received on bank deposits.
5. Audit fee include income tax appeal expenses of Rs. 10,000.
6. Computer his taxable income from profession for the A.Y. 2020-21.
3) Dr. Usharani (age 46), a physician and resident of Mumbai submit the following receipts and
payments account for the year ending 31st March 2020.
To Balance b/d 1,40,000 By Balance c/d
To Consultation fees By Rent of Clinic
2017-18 25,000 2018-19 36,000
2018-19 5,25,000 2019-20 1,44,000 1,80,000

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2019-20 30,000 5,80,000 By Surgical equipments 1,00,000
To Visiting fees 1,60,000 By Computer 50,000
To Winning from lottery (gross) 1,00,000 By Interest on loan (for Profession) 40,000
To Interest on post office savings By Electricity and water 18,000
Bank a/c 60,000 By newspaper and magazines 12,000
To gifts from patients 80,000 By Professional books
To Share from HUF 50,000 (Annual publication) 30,000
To Sale of medicines 2,40,000 By Purchase of medicines 1,00,000
To Loan from bank 3,00,000 By Household expenses 25,000
By Income tax 25,000
By Life insurance premium 36,000
By Gift to mother 24,000
By Subscription to AIMA 20,000
By Subscription to professional journal 10,000
By Car expenses 60,000
By Telephone expenses 30,000
By Lottery tickets 50,000
By Staff salary 2,40,000
By Balance c/d 6,60,000
17,10,000 17,10,000
1. Written down value of car on 31-03-2018 was Rs. 2,00,000 on which 15% depreciation to be
charged. Car is used 60% for profession and 40% for private purpose.
2. Visiting fee due but not received for 2017-18 Rs. 36,000.
3. Closing stock due but not received for 2017-18 Rs. 36,000.
4. Closing stock of medicines Rs. 30,000.
5. Surgical equipment and computers were bought and put to use on 10-09-2018.
Determine taxable income from profession of Dr. Usha rani for the Assessment year 2020-21.
4) Dr. Sharma is a renowned medical practitioner. He furnishes his Receipts and payment account
for the financial year 2019-20.
To Balance b/d 35,000 By Rent of clinic
To Consultation fees 2017-18 1,600
2017-18 50,000 2018-19 14,800
2018-19 70,000 2019-20 16,600
2019-20 12,000 By Electricity and water 12,000
To Visiting fees 30,000 By purchase of Professional Books 18,000
To Loan from bank for professional By Household expenses 17,800
Purposes 1,75,000 By Municipal taxes paid on property 2,000
To Sale of medicines 70,000 By Sales tax on medicine 2,800
To Sale tax on medicine 3,000 By Purchase of motor car 1,45,000
To Gift from patient 50,000 By Fire insurance on property 2,000
To Remuneration from articles By Surgical equipment 47,400
Published in professional By Advance income tax 13,000
Magazine 16,000 By salary to nurse 12,000
To Rent from house property 11,000 By Entertainment expenses 6,000
To Interest on post office 7,000 By Purchase X-ray machine 94,500
By Expenses of IT proceedings 15,000

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By Life Insurance premium 15,000
By Gift to wife 5,000
By Interest on loan 2,000
By loan a/c – installment paid 15,000
By Donation to political party 500
By car expenses 15,000
By purchases of medicines 35,000
By balance c/d 21,000
5,29,000 5,29,000
Compute Dr. Sharma professional income for the A.Y. 2020-21 with the help of following
1. 1/3 of car expense is for personal use.
2. Surgical equipment were purchased and put to use on 10-09-2019.
3. Depreciation on motor car is at 15%, opening stock of medicine is valued Rs. 8,000.
5) From the following Income and Expenditure A/c and additional information of Dr. Patel. Who
maintains books of accounts under mercantile system of accounting, compute taxable income
from profession for the A.Y 2020-21
To Rent of clinic By Consultation fees
2017-18 1,000 2017-18 5,500
2018-19 20,000 2018-19 85,000
2019-20 2,000 2019-20 10,000
To electricity and water 2,200 By Visiting fees 65,000
To Household expenses 15,000 By Loan from bank (for profession) 1,25,000
To Municipal taxes on HP 3,000 By Loan from bank (for personal) 50,000
To Purchase of motor car 1,20,000 By Gift from patients 20,000
To Laptop purchased 30,000 By Remuneration for articles 8,000
To Income tax 12,000 Published in professional journal
To Salary to Compounder 24,000 By Sale of medicines 60,000
To Purchase of books 6,000 By Operation theatre rent 15,000
To Expenses on IT proceedings 8,000 By Rent from house property 12,000
To Life Insurance premium 15,000 By Interest on Post Office NSC 2,000
To Gift to wife 10,000 By Income from Horse Race 30,000
To Interest on loan (profession) 10,000
To Interest on loan (personal) 4,000
To Loan Installment paid 25,000
(profession)
To Donation to a notified temple 10,000
To Car expenses 20,000
To Purchase of Surgical Equipment 30,000
To Purchase of Medicines 35,000
To Excess of Income over 85,300
Expenditure
4,87,500 4,87,500
1. 40% of car expenses are for personal use.
2. Depreciation on car and surgical equipment is at 40% and on laptop and a book is at 40%.
3. Income tax includes Rs. 2,000 profession tax paid to state government.
4. Gift from patients include Rs. 8,000 received on the occasion of marriage from friends.
5. Closing stock of the medicine is Rs. 7,500.

77 | 125
6) Mr. Nataraj is a registered Medical Practitioner, he keeps his books on cash basis and
summarized cash a/c for the year ending 31/03/2020 is as follows:
To Balance b/d 5,850 By Cost of medicines 12,000
To Loan from bank 10,000 By General expenses 450
To Sale of medicines 26,500 By Motor car expenses 6,000
To Consultation fees 16,000 By Salaries 1,200
To visiting fees 3,000 By Rent of dispensary 2,400
To Interest in govt. securities 3,600 By Telephone expenses 500
To Rent from HP 8,000 By Life insurance premium 1,600
To Gift from father-in-law 5,000 By Interest on loan from bank 2,500
To Gift and presents 2,000 By Insurance premium: 200
Car
700 1,200
House property 800
500 1,000
By Local taxes 100
By Travel expenses (personal) 50,000
79,950 By charity 79,950
By Balance c/d
Adjustments:
1. Half of the motor car expenses are in respect of his personal use.
2. Consultation fees include a receipt of Rs. 6,000 as advance for attending a medical camp in April
2019.
3. The written down value of motor car on 01/04/2019 was Rs. 12,720 rate of depreciation 15%.
4. Loan from Bank at 2%.
5. Gifts and presents include Rs. 700 from patients and Rs. 300 received as birthday gifts from
relatives.
6. Closing stock of medicines amounted to Rs. 50,000 but its current market price is Rs. 10,000.
Problems on Chartered Accountants/Auditor
7) The following is the Receipts and Payments a/c of AB practicing Chartered Accountant for the
year ended 31/03/2020.
To Audit fees 20,000 By Office expenses 10,000
To Consultation fees 10,000 By Office rent 15,000
To Appellate tribunal appearance 20,000 By Salaries and wages 12,000
To Miscellaneous income 12,000 By Printing and stationery 2,000
To Interest on govt. securities 12,000 By Subscription to CA Institute 3,600
To rent received 9,000 By Purchase of professional books 2,000
To Presents from clients 10,000 (Annual publication)
By Travelling expenses 6,000
By Interest on bank loan 12,000
By Donation to National Defense Fund 15,000
By Stipend to trainers 18,400

78 | 125
96,000 96,000
Adjustment:
1. Loan from banks was taken for construction of house in which he lives. The municipal value of
the house is Rs. 8,400 and local taxes Rs. 800.
2. ¼ of travelling expenses is not allowed.
Calculate income from profession for the AY 2020-21
8) The following is the Receipts and Payment A/c of Mr. Ramki a Chartered Accountant for the
P.Y ended on 31-03-2020.
To Balance b/d 1,50,000 By Staff salary 3,00,000
To Audit fee 2,00,000 By Stipend to Audit clerks 1,00,000
To Tax consultancy fee 2,50,000 By Office rent 90,000
To Project report fee 2,50,000 By Software development expenses 10,000
To Accounting software charge 50,000 By Office expenses 1,25,000
To Guest lectures in CA institute 25,000 By Books
To Bank interest 25,000  Annual 30,000
To Remuneration as member tax 20,000  Non - Annual 30,000
Reform commission By Car expenses 65,000
By CA institute membership fees 5,000
By Contribution to PPF 50,000
9,70,000 9,70,000
Other information:
1. ¼ car usage is personal.
2. Depreciation on car Rs. 10,000.
3. Depreciation on office furniture Rs. 7,000.
9) Sri Krishna is a CA. He gives you the following Income and Expenditure A/cc for the year
ending 31-03-2020.
Income and Expenditure A/c
Expenditure Amount Income Amount
To Office expenses 15,000 By Audit fees 3,21,000
To Office rent 5,000 By Gift from father in law 10,100
To Books (other than annual 10,000 By Financial consultancy service 16,000
Publication) By Profit on sale on investments 12,900
To Employees salary 10,000 By Accountancy works 55,000
To Personal expenses 2,01,000 By Dividend on units of UTI 2,000
To Donation 4,000 By Interest on deposit in a bank 3,000
To Gifts to relatives 1,000 By Legal fees 20,000
To Subscription for Journal 5,000
To Drawings 20,000
To Interest 1,400
To Income tax 20,000
To Car expenses 4,000
To Household expenses 1,600

79 | 125
To NSCs purchased 10,000
To Purchase of typewriter 5,000
To Purchase of furniture 20,000
To Surplus/Net Income 1,07,000
4,40,000 4,40,000
Adjustments:
1. The car is used equally for professional and personal purpose.
2. Allowable depreciation on car for official purpose Rs. 10,000.
3. Depreciate typewriter @ 15% and furniture @ 10%
4. Staff salaries include Rs. 4,000 paid to domestic servant.
5. Loan was taken for personal use.
6. Allowed depreciation on professional books @ 40%.
7. Office rent Rs. 3,000 though paid is not recorded.
Problems on Lawyers
10) Mr. Anand, an advocate residing in Delhi submits his receipts and payment account for the
previous year 2019-20.
Receipts and Payments A/c
Receipts Amount Payments Amount
To balance b/d 5,000 By Staff salary 28,000
To sitting fees 1,20,000 By Professional books 9,000
To Legal counseling fees 15,000 By Subscription to journals 1,000
To Loan from bank 12,500 By Refreshment charges 2,000
To Rent from property 22,500 By Rent of office 7,500
To Interest on bank F D 10,500 By Telephone charges 9,000
To Dividend from ABC Ltd. 4,000 By Printing charges 1,500
To Share of income from HUF 50,000 By Electric charges 3,000
By Purchase of car 1,25,000
By Computer purchased 25,000
By Car expenses 3,500
By Contribution to PPF 5,000
By NSC purchased 7,000
By B.A.R association fees 1,000
By Balance c/d 12,000
2,39,500 2,39,500
1. ½ of the car expenses pertain to personal use.
2. Depreciation rates – car 45%, computer 40%, books 40%.
3. 25% of telephone expenses pertain to personal use.
4. Half of the electric charges are for house property.
5. Gifts from clients Rs. 5,000 not included in above account.
6. Loan from bank is for personal use.
Compute his total income from profession for the A. Y. 2020-21.
11) Mr. Kishore lives in Bangalore. He is a lawyer; he gives you the following receipts and payment
account for the year ending 31-03-2020.
To opening balance 2,000 By Books purchased (annual

80 | 125
To Arbitration fee 1,00,000 Publication) 1,000
To Salary as part time lecturer 4,000 By Repairs of house 1,200
To Fee received 1,05,000 By Car expenses 1,800
To Interest on bank deposit 1,500 By Local taxes 1,200
To Exam remuneration from 2,500 By Office expenses 3,000
University By Personal expenses 11,000
To Cash received on car sold 20,000 By Purchase of plant for office 1,000
To Shares sold 10,000 By Car purchased 20,000
To Dividend received 1,500 By Life insurance premium 6,000
To Consultation fee 5,000 By Donations 1,100
To Special commission 15,000 By Gifts to daughter 500
To Presents from clients 5,000 By Income tax paid 3,000
To Remuneration from article 6,000 By Income tax appeal expenses 300
Published in professional By Bank deposit 12,000
Journal By PPF deposit 3,000
To Income from betting 2,000 By Balance carried forward 1,87,400
2,66,500 2,66,500
Adjustments:
1. 1/3rd of the building is used for profession and 2/3rd for self-residence.
2. The car is used for professional and personal work equally.
3. Books purchased for teaching Rs. 300 and remaining for profession.
12) Mr. Ranganath is a leading tax consultant who maintains his books of account on cash basis
furnish the following receipts and payments account for the previous year 2019-20. Compute his
professional income.
To Balance b/d 22,000 By books purchases ( annual
To fees from clients Publication) 12,000
For 2018-19 1,50,000 By Computer purchased 30,000
For 2019-20 33,000 By Car expenses 18,000
To gifts and presents 25,000 By Office expenses 40,000
To Interest free loan from a By Salary to staff
Client purchase of car 2,40,000 For 2018-19 32,000
To Winning from lottery 46,000 For 2019-20 8,000
(Gross) 70,000 By Car purchased 3,00,000
To Share from HUF By Income tax 5,000
To Bonus and commission from 14,000 By Professional tax 3,000
the partnership firm By Medical insurance premium 2,000
6,00,000 6,00,000
Adjustments:
1. Car is partly used for official purposes 40%) and partly for personal purpose (60%).
2. Gifts and presents include Rs. 5,000 received from a client.
3. Office expenses include Rs. 5,000 paid as salary to his wife who casually helps him in the office.
4. Depreciate car 45%.
13) Income & Expenditure A/c of Lawyers & Co. for the year ending March 31, 2020

81 | 125
To Expenses 1,50,000 By professional receipts 3,80,000
To Depreciation 20,000 By other fees 90,000
To Remuneration to 1,50,000
partners
Interest on Capital to partners @ 20,000
20 per cent
To Net Profit 1,30,000
4,70,000 4,70,000
Other Information: 1. Expenses include Rs. 18,000 and Rs. 12,000 paid in cash as brokerage to a
single party on a single day. 2. Depreciation calculated as per section 32 is Rs. 40,000 Compute the
total income of the firm.
Capital Gains
Capital Gain:
Any gains arising out of transfer of capital asset in the previous year is called as capital gains. To tax
an income under the head capital gains the following conditions are to be fulfilled.
1. There should be a capital asset.
2. It must have been transferred by the assessee.
3. Transfer should have taken place in the previous year.
4. Gain on such transfer should not be exempt from tax u/s 54, 54B, 54D, 54EC, 54EE, 54F,
54G, 54GA and 54GB
Capital Asset:
According to Section 2(14), capital asset is a property of any kind held by an assessee whether or not
connected with his business or profession and it includes all kinds of property whether movable or
immovable, tangible or intangible, fixed or floating.
Not a Capital asset:

1. Stock in trade, Raw materials and consumable stores held by an assessee for his business or
professions.
2. All personal effects that are all movable assets used for personal purpose except jewelry.
3. 6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defence Gold Bonds 1980, Special
Bearer Bonds 1991.
4. Gold Deposits Bonds 1999.
Transfer:
According to Section 2(47) of Income tax Act 1961 the term transfer includes a sale, exchange or
relinquishment of the asset or extinguishment of any right or the compulsory acquisition under any
law or conversion of the asset into stock in trade.
The following transactions are not treated as Transfer:

1. Transfer of asset in a scheme of amalgamation, demerger.
2. Transfer of agricultural land before 01-04-1970.
3. Transfer of debenture or bonds into shares.
4. Transfer of asset in kind at the time of liquidation.
5. Transfer of asset by a parent company to the own subsidiary company.
6. Transfer of asset under gift or will.

82 | 125
7. Transfer of capital asset at the time of partition of HUF.
8. Transfer of capital asset, being a government security, made outside India by Non-Resident
to another Non-Resident.
Financial Assets:
It means the capital assets which comprises of securities, bonds, shares, mutual funds. Etc.
Short Term Capital Gain: Any gains arising from transfer of Short-term capital asset is known as
short term capital gain.
Long term Capital Gain:

Any again arising from transfer of Long-term capital asset is known as Long germ capital gains
Types of Capital Asset
Short term Long term
Financial Asset Other Than Financial Asset

Other than
Financial Asset
Financial Asset If it is held for more
If it is held for less If it is held for less than12 months or 1 If it is held for more
than12 months or than 36 months or year than 36 months or 3
1 year 3 years years
Brokerage or Selling expenses:

It is the expenses incurred for transferring the capital asset, the expenses includes, brokerage,
commission and other expenses related to transfer.
Cost of acquisition:
It refers to the cost incurred by an assessee to acquire the capital asset. It includes all capital
expenses incurred in acquiring the assets.
-
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 of
HUF on partition Cost to the previous owner
Bonus Shares allotted prior to 1st Apr’01 FMV (1st Apr’01)
Bonus Shares allotted post 1st Apr’01 NIL
Rights Shares Amount paid to acquire the shares
Rights shares which are purchased by person in Purchase price paid to the renouncer + Price paid
whose favor the assessee has renounced the rights for acquiring rights shares

83 | 125
FY CII
Cost of Improvement:
2001-02 100
It is the cost incurred by the assesee to improve the status of
2002-03 105 capital assets. After improvement the value of an improved
2003-04 109 asset will increase. e.g., additions, alterations and repairs made
2004-05 113 for the properties.
2005-06 117
2006-07 122 Indexed cost of Acquisition:
2007-08 129 It means inflating the cost of an asset acquired to the present
2008-09 137 value. Indexation benefits are available only for long term
2009-10 148 capital assets. However, the indexation benefits is a not
2010-11 167 available in case of debentures, goodwill, intangible assets,
2011-12 184 bonus shares and depreciable assets even it is a long term assets.
2012-13 200 a) If the Assessee acquires the property before 01-04-2001
2013-14 220 b)
𝐀𝐜𝐭𝐮𝐚𝐥 𝐜𝐨𝐬𝐭 𝐨𝐫 𝐅𝐚𝐢𝐫 𝐌𝐚𝐫𝐤𝐞𝐭 𝐕𝐚𝐥𝐮𝐞 𝐚𝐬 𝐨𝐧 𝟎𝟏−𝟎𝟒−𝟐𝟎𝟎𝟏 (𝐖𝐄𝐇)
2014-15 240 ICOA= 𝟏𝟎𝟎
2017-16 254 “cost inflation index”, in relation to a previous year, means
2017-17 264 such Index as the Central Government may, having regard to
2018-19 272 seventy-five per cent of average rise in the Consumer Price
2019-2020 280 Index (urban) the immediately preceding previous year to such
previous year, by notification in the Official Gazette, specify in
this behalf. (Refer to CII Table below)

84 | 125
Cost of acquisition shall have to be adjusted by the Cost Inflation Index to arrive at the
indexed cost of acquisition.
Note: Base year for the purpose for calculation of Indexed cost of acquisition or
improvement has been shifted from 1981-82 to 2001-2002. Accordingly, if any
assesee/previous owner has acquired capital asset prior to 1-4-2001 then he will have option
to choose actual cost of acquisition or FMV as on 1-4-2001 as his cost of acquisition. Cost of
improvement incurred by assesse or previous owner prior to 1-4-2001 shall be taken as NIL.
c) If the Assessee acquires the property after 01-04-2001
Situation 1: (Before – Before, that is both the previous owner and present owner acquired the
property before 1st April 2001)
Situation 2: (Before – After, that is that the previous owner acquired the property before 1st
April 2001 and the present owner acquired the property after 1st April 2001)
Situation 3: (After – After, that is both the previous owner and the present owner acquired
the property after 1st April 2001)
Indexed Cost of Improvements:

It is the cost incurred by the assesee for improving the utility of the asset or enhancing the
value of the asset.
- Any cost incurred by the assessee or by the previous owner before 01-04-2001 is to be
ignored and should not be considered for deduction.
- The cost incurred on or after 01-04-2001 will be allowed as deduction.
a) For the Short them capital asset the actual cost of improvement is allowed as
deduction.
b) For Long term capital asset, it will be indexed and allowed as deduction.
Exemptions u/s 54 TO 54 G
A. Section 54:
1. Eligible assessee: Individual and HUF

2. Type of asset: The house property transferred should be a long-term capital asset.
3. Transfer(sale) of: Residential house
4. Purchase or construction of: Residential house
5. Time limit:
a. For purchase: Within 1 year before or within 2 years after the date of transfer of
residential house.
b. For construction: within 3 years after the date of transfer of residential house.
6. Other conditions:
i. Construction should be complete within 3 years from the date of transfer (Date of
commencement of construction, being irrelevant).
pg. 85 FOR PRIVATE CIRCULATION ONLY

ii. No limit on number of properties that can be acquired.
iii. Amount of exemption u/S 54 is:
The Amount of capital gain or xxx
Amount invested in purchase or construction of residential house xxx
Whichever is less is exempt u/s 54 xxx
i. The new residential property shall not be transferred within a period of 3 years from the
date of its purchase or completion of construction. If transferred (sold) then exemption given
earlier shall be taxable in the previous year of such transfer.
ii. Amount deposited in capital gain account scheme shall also be exempted .however the
deposit amount shall be utilized for the said purpose within the time limit .If not ,then it shall
be taxable in the P.Y in which it was utilized for other purposes or on the expiry of time limit.
If the assessee is not utilizing the amount till the expiry of 3 years,if he withdraws after three
years for the said purpose or for other purpose is taxable.
Note: From the AY 2020-21 in order to save tax on long-term capital gains on the
sale of house property one can invest capital gains in two house properties instead of
one but this benefit is available once in a lifetime only if capital gains do not exceed
Rs 2 crore.
B. Section 54B:
1. Eligible Assessee: Individual

2. Type of Asset: Short term or long-term capital asset being transferred which is an
agricultural land.
3. Transfer of: Agricultural land
4. Purchase of: Agricultural land
5. Time limit: The assessee can purchase another agriculture land within 2 years from the
date of transfer.
i. The agricultural land was used by the assessee or his parents for a period of 2 years
immediately before the date of transfer.
ii. The new agricultural land purchased may be in rural or urban area.
However, the transfer (sale) of agricultural land shall be situated only in urban area
(since agricultural land in rural area is not a capital asset U/S 2(14).
iii. Amount of exemption u/s 54B is,

The amount of capital gain or xxx
Amount invested in purchase of new agricultural land /Amount
Invested in capital gain A/c Scheme xxx
Whichever is less is exempt xxx
i. The new agricultural land shall not be transferred within a period of 3 years from the date
of its purchase. If transferred, the exemption given earlier shall be taxable in the previous
year of such transfer.
deposit amount shall be utilized for the said purpose within the time limit .if not ,then it shall
If the assesee is not utilizing the amount till the expiry of 2 years, if he withdraws after three

years for the said purpose or for other purpose is taxable. (Capital gain A/c scheme shall be
maintained by nationalized bank).
C. Capital gains on compulsory acquisition of land and building forming part of

industrial undertaking (Sec 54 D):
Section 54D:
1. Eligible Assessee: All persons

2. Type of Asset: Short term or long-term capital asset
3. Transfer of: Compulsory acquisition of land or building forming part of Industrial
undertaking which is compulsorily acquired by Government.
4. Purchase of: Land or building forming part of industrial undertaking
5. Time limit: Within a period of 3 years after the date transfer
i. Such land or building forming part of industrial undertaking was used by the
assessee for at least 2 years before the date compulsory acquisition (Transfer)
ii. Amount of exemption U/S 54D:
The amount invested in purchase or construction of new
land or building forming part of industrial undertaking xxx
i. The new land or building purchased or constructed shall not be transferred within a period
of 3 years from the date of its purchase or construction. If transferred the exemption given
ii. Amount deposited in capital gain account scheme shall also be exempted. However, the
deposit amount shall be utilized for the said purpose within the time limit. If not, then it shall
be taxable in the P.Y in which it was utilized for other purpose or on the expiry of time limit.
D. Capital gain on transfer of any long-term capital asset and invested in specified
assets (Sec 54 EC):
Section 54EC:
2. Type of Asset: long-term capital asset
3. Transfer of: Any long-term capital asset
4. Investment in: Long term specified capital asset
5. Time limit: Within 6 months from the date of transfer
i. Long term specified capital assets
a) National Highway Authority of India (NHAI)
b) Rural Electrification Corporation (REC)
ii. Amount of exemption u/s 54EC:
The amount invested in long term specified capital asset xxx
i. Maximum amount that can be invested during any financial year is Rs.50,00,000
ii. The investment made in long term specified capital asset shall not be transferred or
liquidated within a period of 3 years from the date of making investment. If transferred, the
exemption given earlier shall be taxable in the previous year of such transfer.

iii. The above investments in specified capital assets are not eligible for deduction U/S 80C.
iv. Amount deposited in capital gain account scheme shall also be exempted. However, the
deposit amount shall be utilized for the said purpose within the time limit. If not then it shall
E. Capital gains on transfer of a long-term capital asset other than a house property,
but invested in residential house (Sec 54 F):
Section 54 F:
1. Eligible Assessee: Individual and HUF
2. Type of asset: Long-term capital asset.
3. Transfer (sale) of: Any long-term capital asset other than residential house
4. Purchase or construction of: Residential house
5. Time limit:
a. For Purchase: Within 1 year before or within 2 years after the date of transfer.
b. For construction: within 3 years after the date of transfer.
i. Construction should be complete within 3 years from the date of transfer. (Date of
commencement of construction, being irrelevant).
ii. The assessee owns not more than 1 residential house on the date of transfer (other
than new residential house)
iii. Amount of exemption U/S 54 F is:
The Amount of capital gain or xxx
Capital gain x cost of new house xxx

Net sale consideration
(Note: Net sale consideration= Full value consideration - Expenses related to transfer)
i. The new residential property shall not be transferred within a period of 3 years from the
date of its purchase or completion of construction. If transferred (sold) then exemption given
deposit amount shall be utilized for the said purpose within the time limit .If not ,then it shall
be taxable in the P.Y in which it was utilized for other purposes or on the expiry of time limit
(i.e. Above the time limit) .
F. Capital gain on shifting of industrial undertaking from urban to non-urban areas

(Sec 54 G):
Section 54G:
2. Type of Asset: Short-term or long-term capital asset
3. Transfer of: Land, Building, Plant or Machinery used for the purpose of an industrial
undertaking situated in urban area.
4. Purchase of: Land or building or Plant or Machinery used for the purpose of an industrial
undertaking shifted from urban area to any area other than an urban area (Rural area or semi
urban area).
5. Time limit: Within a period of 1 year before or 3 years after the date transfer
i. Amount of exemption u/s 54GA:
The amount invested in purchase or construction of new

land or building, Plant or Machinery forming part of industrial
undertaking xxx
ii. The new land or building or plant, machinery purchased or constructed shall not be
transferred within a period of 3 years from the date of its purchase or construction. If
transferred the exemption given earlier shall be taxable in the previous year of such transfer.
iii. Amount deposited in capital gain account scheme shall also be exempted. however, the
deposit amount shall be utilized for the said purpose within the time limit. If not, then it shall
be taxable in the P.Y in which it was utilized for other purpose or on the expiry of time limit.
G. Investment on compensation received (Sec 54 H):

In case any asset was taken over by Govt. and additional compensation is received it will be
deemed as income of the year in which it is received and period for reinvestment will be
counted from the date of receipt of such additional compensation.
Section A – 2 Marks Question

1. Define capital gain.
2. What do you mean by short-term capital asset and long-term capital asset?
3. Give the meaning of capital asset.
4. Define transfer.
5. How will you treat advance money received and forfeited by the assesee?
6. What do you mean by indexed cost of acquisition?
7. What do you mean by indexed cost of improvement?
8. Mention the assets which are not considered as capital asset?

1. Explain the provisions of section 54 of income tax Act under the head capital gain
2. Bring out the difference between exemption u/s 54 and 54F
Section C – 14 Marks Questions

Practical Questions
1. Mr. Rama Krishna owner of a residential house sold it for Rs.15,40,000 in October
2019, which was actually purchased for Rs.1,00,000 in 2006-07. He spent Rs.10,000
for the construction of another room in 2010-11. Expenses incurred in the execution
of sale deed were Rs.10, 000 that were borne by him.
2. From the following information compute the taxable capital gains.

a. Sold a residential house property for Rs. 16,00,000 on 28-02-2020. It was
purchased on 15-03-2000 for Rs.18,400. F.M.V. on 01-04-01 was Rs. 31,000. The
ground floor was constructed on 30-06-07 for Rs. 48,000. First floor was
constructed in 2010 June at a cost of Rs. 1,45,000. Brokerage of Rs. 14,000 was
paid.
b. Sold an agricultural land for Rs. 3,45,500 on 30-06-2019, which was purchased in
October 2006 for Rs. 90,000.
c. Ancestral Jewellery sold on 30-09-2019 for Rs. 4,50,000. It was purchased by
Assessee’s grandmother for Rs. 4000 in 1985. F.M.V. on 01-04-01 was Rs
30,000.
3. Mr. Mohan submits the following particulars of his income for the P.Y.2019-20:

a) He is the owner of two residential houses. He sold one of them costing Rs.2,61,000 on
August 16, 2019 and paid brokerage etc. Rs.20,000, it was acquired in the year 2006-
07 for Rs.6,50,000.
b) He had shares of the face value of Rs.1,50,000 of a limited company that were
purchased for Rs.2,59,000 in May 2009. He sold them for Rs.5,20,000 on 30th
September 2019 (Securities transactions tax paid) and also paid brokerage @ 1% on
the face value of shares.
c) On 30th November 2019, he sold his personal car for Rs.90,000 that was purchased
four years back for Rs.60,000.
d) He sold the listed debentures of a company on 1st August 2019, for Rs.1,71,000, which
were purchased by him for Rs.1,29,000 on 1st February 2019.
e) He sold ancestral ornaments on 1st July 2019 for Rs.28,50,000, which had costed his
grandfather Rs.50,000 in 1985 and whose market value on 1st April 2001 was
Rs.2,50,000.
4.From the following data, you are required to calculate the capital gains for assessment year
2020-21:
Rs.
Site purchased in 1995 value Rs.33,000
Market value of site on 1.4.01 Rs.75,000
Ground floor-cost of construction in 1996-97 Rs.1,50,000
First floor cost of construction in 2002-03 Rs.2,66,000
Sale consideration received in 2019-20 Rs.55,00,000
Investment in new property Rs.10,00,000
Assume that the property being sold and the new property being acquired are both residential.
5.Determine the amount of exemption under Sec 54 and capital gains chargeable to tax in
respect of the following transactions:
 Bharath sells a residential house property in Bangalore for Rs 28,40,000 on April,
23, 2019 which was purchased by him on April 20, 2001 for Rs 2,90,000.
 On June 16, 2019, he purchased a house in Mysore for Rs 12, 70,000 for the
purpose of residence of his daughter.
 On July 18, 2019, he sells the house property in Mysore for Rs 16, 90,000.
1. Mr. Mahindra had two houses. He occupied the first house for residence. He got this
house from his uncle as a gift on 15th July 2003. His uncle purchased this house in
1999 for Rs.56,000. Its fair market value on 1st April 01 was Rs. 70,000. Mahesh
spent Rs.5,000 on its improvement on 10-9-2013 and sold it on 30th November 2019
for Rs.12,00,000. He purchased another house for his residence on 25th February
2019 for Rs.2,00,000.
He had purchased the second house for Rs.60,000 in 1992-93 and had let out for residential
purpose. He sold this house on 15th June 2019 for Rs.3,80,000.
He had purchased some jewelry in 1992-93 for Rs.75,000. On 22nd February 2019 he sold
this jewelry for Rs.4,50,000 and purchased on 15th March 2019 new jewelry for Rs.75,000.
Determine the taxable capital gains of for the assessment year 2020-21.
7.From the following information relating to previous year 2019-20, compute taxable capital
gains of for the Assessment year 2020-21:

Rs.
Purchased agricultural land (Agra city) in 01-02
(Self-cultivated) 1,54,000
Sold the land on 10-8-2019 for 12,00,000
Purchased another piece of agricultural land on 10-10-2019 1,00,000
8.Mr. Suresh owns many properties in India. He sold some of these during the previous year
2019-20.
a) Jewelry costing Rs.80,000(which was acquired in June 2010) was sold for Rs.
5,00,000 in May 2019.
b) House at Calcutta: Let-out for residential purposes. He inherited it in 1994: Sale price on
31-10-2019 Rs.17,00,000. FMV as on 01-04-01 Rs. 1,00,000. Cost of improvement made
during 2011-12 Rs.25,000. Expenses on transfer are Rs. 25,000
c) Household furniture costing Rs.14, 000 in 2002 was sold in March, 2020 for Rs.26, 000.
d) Sale price of Personal car, which was purchased by him in Jan, 2007 for Rs.72,000 was
sold on 1-12-2019 for Rs.45,000. Written down value on 01-04-2019 was Rs.38, 000.
e) Self-cultivated land was sold for Rs.9,40,000 on 01-01-2020 and its cost in 2004-05 was
Rs.80,000. He purchased a new piece of land for his own cultivation for Rs.1,50,000 in June
2019.
Compute taxable capital gains for the A.Y. 2020-21.
9.Mr. Balaji, a rich man of Bangalore has sold the following properties during the year ended
on 31-03-2020
a) A house property sold for Rs. 13,80,000 in October 2019 which was actually purchased for
Rs 1,00,000 in 2004-05. He spent Rs. 10,000 for the construction of another room in
2007-08. Expenses incurred in the execution of sale deed were Rs. 10,000, which was
borne by him.
b) On the death of his father in November 2009, few shares were transferred to him that he
sold in February 2019 for Rs.85, 000. His father purchased these shares for Rs 10,000 in
May 07.
c) He also sold an agricultural land at Kanakpura in Oct, 2019 for Rs.2,50,000, which was
purchased for Rs. 30,000 in Dec, 2019 and invested full sale price within 6 months to buy
another agricultural land at Hassan.
d) He sold his jewelry for Rs. 8,50,000 on Oct,2019, which was purchased in June 09 for
Rs.40,000
e) He sold his household fridge and furniture for Rs. 10,000 in December 2019. The original
cost of furniture and fridge was Rs. 28,000 purchased in 1999.
10.Mrs. Akash purchased one residential flat at Mumbai in 98-99 at the cost of Rs.60,000.
She sold the same during the financial year 2019-20 for Rs.12,50,000. She did not own any
other house. Out of the sale proceeds she bought another house for Rs.3,28,000 and invested
Rs.2,00,000 in bonds issued by National Highway Authority of India within six months from
the date of sale of house u/s 54EC.
i. Is she liable to capital gains tax? And
ii. If yes, how much more she should invest in bonds to avoid payment of any tax?
11.Mr. Chandrashekar sold a house property for a sum of Rs.45,00,000 on 25-12-2019. He

got this property as a gift from his uncle Mr. Krishnamurthy on 15-02-95. His uncle
purchased this house property during 82-83 for a sum of Rs. 28,000. He made an

improvement to the property at a cost of Rs. 35,000 during the year 1989. It’s F.M.V. as on
01-04-01 was Rs. 2,35,000.
Mr. Krishnamurthy had agreed to sell this property to Mr. Ravi for a sum of Rs 1, 10,000
during the year 2001-02 and received a sum of Rs 10,000 as advance money. Mr. Ravi failed
to pay the balance amount within the agreed period and Mr. Krishnamurthy forfeited the
advance money paid by Mr. Ravi.
Mr. Chandrashekar after becoming the owner made an improvement to the property at the
cost of Rs. 1,00,000 during the year 12-13.
He wanted to sell the property during the year 2019 and received advance money of Rs
1,00,000 and forfeited it when the buyer failed to pay the balance amount due. He paid a
brokerage of Rs. 25,000 to sell the property.
Mr. Chandrashekar purchased a new house property for a sum of Rs. 6,00,000 and also
invested a sum of Rs. 3,00,000 in NHAI bonds on 1-2-2020.
Compute the amount of taxable capital gain for the A.Y.2020-21.
12.M/s P.Bros., Ludhiana running an industrial unit were absorbed by Municipal Corporation
to shift their concern from urban area. They shifted their concern during 2019-20 and in this
process sold some of the assets whose details are given below:
Asset acquired in P & M Land June Building

2008 2004 2009
Sale proceeds 11,00,000 16,00,000 14,00,000
WDV on 01-04-2019 4,40,000 - 7,32,500
Cost of acquisition 6,00,000 1,40,000 10,00,000
Amount invested during Dec, 2019
due to shifting 8,00,000 2,00,000 5,00,000
Compute the taxable capital gains for the A.Y. 2020-21.
13. Mr. Chandran sold the following assets in the PY 2019-20:

a. Agriculture land situated at Mysore was sold for Rs.6, 50,000. It was purchased in
2009-10 for Rs.50, 000.
b. Personal car sold for Rs.60, 000 which was purchased in 2001-02 for Rs.2, 10,000.
WDV as on 1.04.2019 Rs.30, 000
c. Jewelry sold for Rs.32,00,000 was purchased on 15th October 1992 for Rs.1,20,000
and its FMV as on 01-04-01 was 2,50,000.
d. Office furniture sold for Rs.50,000 purchased in December 1994 for Rs.20,000 and
WDV as on 1.04.2019 Rs.60,000.
e. Listed debenture sold for Rs.50,000 was purchases on 15th October 1997 for
Rs.45,000
f. Shop located near Mangalore sold for Rs.13,00,000 was purchased for 2,00,000 in
November 04.
The Assessee purchased a new Residential house for Rs.10,00,000. Compute amount of
taxable capital gains.
14. A building of Mr. Akshay is compulsorily acquired by U.P Government. Its cost of
acquisition to the assessee was Rs. 1,72,000 in August 2005. The U.P. Government pays
Rs. 8,75,000 as compensation on 25-05-2019. Mr. Akshay purchased another building for
industrial undertaking for Rs. 2,00,000 on 24-04-2019. Compute the taxable capital gain
for the A.Y. 2020-21.

15. Mr. Ganesh sold some of his properties during the year 2019-20:
1) Household furniture and music system costing Rs. 15,000 in 2004 was sold in March
2020 for Rs. 20,000
2) Business and profession income Rs. 50,000.
3) Machinery was sold on 01-12-2019 for Rs. 50,000 which was purchased on January
2008 for Rs. 80,000 and its WDV on 01-04-2019 was Rs. 40,000.
4) Self-cultivated land was sold for Rs. 6,50,000 and its cost in 1998-99 Rs. 1,00,000.
He purchased a new piece of land for his own cultivation for Rs. 1,20,000 June 2019.
5) He sold ornaments for Rs. 40,00,000 which was purchased by his Grandfather for Rs.
60,000 in 1985 and market value as on 01-04-01 was Rs. 3,00,000
6) Sold 200 bonus shares of a company on 01-09-2019 for Rs. 250/- per share by paying
a brokerage of 1% on selling price. These bonus shares were issued on 01-04-2003
and the market price of these shares on the date of issue were Rs. 100 per share.
Income from Other sources
Income from other sources is the fifth and last head of income. Any source of income which
doesn’t fall under any of the other heads of income is chargeable to tax under the head
income from other sources. Examples:
a) Fee, commission and remuneration received by an employee form other than his own
employer.
b) Salary or pension received by an MLA, MP and MLC
c) Income from guest lectures
d) Remuneration received from universities for examination work by a non-employee of
the university.
e) Director’s fee
f) Interest from foreign securities
g) Income from undisclosed sources
h) Composite rent received for letting building along with plant and machinery and
furniture.
i) Rent from letting vacant plot
j) Dividends from Mutual funds, companies etc.
k) Interest on securities
l) Interest on bank deposits
m) Gift received
n) Insurance Commission received
o) Casual income received
p) Family pension received
q) Agriculture income from land situated outside India etc.
r) Any income from paying guest accommodation, sub-letting etc.,
s) Royalty received by the owner of an asset
t) Directors commission for underwriting of shares of new company
u) Gratuity received by the directors, who is not an employee of a company
v) Interest on income tax refunds
w) Rent of subletting
x) Withdrawal of amount under NSS including interest thereon
Securities:

The term security is defined as the document held by a creditor as guarantee of his right to
payment.
It means all the debt should be secured in some way or other. The borrower issues the
investor some document as acknowledgement of debt this called as security.
Types of Securities
1. Tax Free Government Securities:

These are securities issued either by state or central government. They are exempted from
tax under 10(15) and it should not include in total income.
2. Less Tax Government Securities:
These are security issued by the government and interests on these securities are fully
taxable without deducting tax at source.
3. Tax Free Commercial Securities:
These are securities issued by Local authority, Statutory Corporation or a company in a
form of Bonds and Debentures. The tax on interest paid by company, hence it is called as
tax-free securities.
4. Less Tax Commercial Securities:
These are the securities issued by the company and tax will be deducted at source before
paying any interest to the investors.
Government Securities
Tax Free Government Security Less Tax Government Securities
Fully Exempted Fully Taxable without Deduction

TDS
(No Grossing Up)
Commercial Securities
Tax Free Commercial Securities Less Tax Commercial Securities

(Always to be grossed up)
Either Rate of Interest is given Or If Interest amount is If Interest Rate is
given Interest amount is given given then Gross Up Don’t Gross Up
Bond Washing Transactions:

It refers to selling of a security to friend or relative immediately before the due date for
accrual or receipt of interest and acquiring the securities back after the due date. This practice
is usually adopted by high income class assessee to escape from paying tax, by transferring
the securities to a low-income class assessee.
Cum- Interest Securities:

It is the amount of interest accrued in the duration between the last coupon date and the
settlement date or transaction date. Hence cum interest refers to ‘with interest’.
Ex – Interest Securities:
It is the amount of coupon interest between transaction date or settlement date and the next
coupon date. Hence, it is also known as ‘without interest’.

Deduction available under income from other sources
1. Family pension: 15,000 or 1/3rd of the amount received whichever is less will be allowed
as deduction.
2. Collection charges paid for collecting dividend and interest is deducted provided such
income is chargeable to tax.
3. Any other expenses incurred to earn an income will be allowed as deduction. For
example, depreciation, repairs, insurance etc. incurred on letting out building with plant,
machinery and furniture, expenses on sub-letting, expenses relating to owning and
maintain the race horse etc (except the expenditures incurred for purchasing the lottery
tickets)
Tax free Government Securities:

a) Post office Cash Certificates (5 years)
b) Post Office National Saving Certificates (12 years)
c) Post Office Saving Bank A/c, exempted up to Rs. 3,500 and in case of Joint A/c Rs. 7,000
is exempted.
d) Post office cumulative time deposit A/c
e) Public Account of Post Office Saving A/c (Interest up to Rs. 5,000)
f) Fixed Deposit in Post Office
g) National Plan Certificates (10 years)
h) 12 years National Saving Certificates
i) National Plan Saving Certificates (12 years)
j) National Defense Gold Bonds 1980
k) Special Deposit Scheme 1981
l) Special Bearer Bonds 1991
m) Treasury Saving Deposit Certificate (10 years)
n) Interest on 7% capital Investment Bonds
o) Notified NRI Bonds
p) Interest on Bonds Issued by Local Authority of State Finance Entity notified by Central
Government
q) Interest on Relief Bonds and Saving Bonds
Rates of TDS
Income Rate of TDs
Interest on debentures/securities issued by or on behalf of any local 10%
authority/statutory corporation, listed debentures of a company, any security
of the Central or State Government
Any other interest on securities (including interest on non-listed debentures 10%
Interest other than interest on securities to a resident 10%
Winning from lottery, horse race or crossword puzzle or card game or other 30%
game of any sort to a resident/ non –resident
Insurance commission to a resident 10%
Frees for professional or technical services to a resident 10%
Tax shall not be deducted at source for the following

a) 4.25% National Defense Bonds
b) National Development Bonds
c) 7 years National Saving Certificate

d) Debentures issued by Co-operative Society or a Public Sector Company or any Institution
notified by Central Government.
e) 6.5% Gold Bonds 1980
f) Any Security of Central or State Government
g) Debentures issued by the company or recognized Stock Exchange provided that the
interest is payable by Account Payee Cheque and the aggregate amount doesn’t exceed
Rs. 2,500.
1. Bank Interest on Fixed Deposit: is fully taxable by deducting TDS if it exceeds Rs.
40,000 p.a.
Gross Interest = Net Interest Received x 100/90
2. Gifts received: gifts received from a relative are not taxable and gifts received from
friends or non-relatives exceeding Rs. 50,000 is fully taxable.
3. Insurance Commission Received: is fully taxable. If it is more than Rs. 15,000 it is
subject to TDS.
Gross Commission = Net Amount x 100/90
4. Casual Income: Income from crossword puzzle, lottery, card games if it exceeds Rs.
10,000 and Horse race Exceeds Rs. 10,000 it is subjected to TDS. No expense is allowed
as deduction from these incomes.
Gross Winnings =Net Winning x 100/70
Exercises.

1. What is casual income?
2. Mention the various kinds of securities
3. What are bond-washing transactions?
4. State the standard deduction for family pension
5. What are tax free commercial securities?
6. What is the rate of TDS for casual income?

1. State the income which is chargeable under the head income from other sources
2. Explain the various kinds of securities
Sections C – 14 Marks Questions

1) From the following particulars compute the income taxable under income from other
sources of Mr. Kiran, compute is taxable income for the A.Y. 2020-21
a. Interest on PO SB a/c Rs.5,000
b. Interest from National Relief Bonds Rs10,000
c. Family Pension received Rs. 3,500 per month
d. Winnings from horse race Rs.1,00,000
e. Lottery won from play win Rs.20,000
f. Prize amount received from Sikkim lottery Rs. 70,000
g. Dividend from Reliance ltd Rs.12,000
h. Dividend from foreign company Rs. 2,500
i. Dividend from Cooperative society Rs. 5,000
j. Interest on F.D. with State Bank of Mysore Rs.10,000
k. Interest received on listed bonds of Birla ltd Rs 9,000
l. Amount invested in 8%, Karnataka govt securities Rs.10,000

m. Rs. 20,000 invested in 11.5% tax free securities of Mudra ltd. (unlisted)
n. Fees Rs. 12,500
o. She lives in a house taken on rent for Rs. 9,000 p.m. she had sub-let 1/3rd of the house
to Kavitha on a monthly rent of Rs. 5,000
p. She had written some articles in Times of India for which she received Rs 20,000
q. She is the author of a text book titled “Art of Cooking” published by Banashankari
publishers amount received Rs18, 000. Amount spent on typing books and telephone Rs.
300, & 1,200 respectively.
2) From the following particulars calculate income from other sources

a. Rs. 25,000,8% Govt. of Karnataka securities
b. Rs. 10,000,10% KPTCL Bonds
c. Rs. 1,00,000,12% B.D.A. Bonds
d. Rs. 12,000, 8% Jaipur Municipal Corporation Bonds
e. Rs. 70,000, invested in equity shares of Birla cements ltd. The Company declared 12%
interim dividend on 01-10-2019 and 18% final dividend on 31-03-2020
f. Dividend received from Colgate- India ltd Rs. 12,000
g. Dividend received from Castrol India ltd Rs. 10,000
h. Dividend received from foreign company Rs. 18,000
i. Dividend received from cooperative society Rs. 8,000
j. Interest received from Aditya technologies Tax free bonds (listed) Rs. 9,000
k. Interest received from Chota biscuits ltd, tax free commercial securities,
Rs.8,000(unlisted)
l. Family pension received Rs. 5,000 p.m.
m. Rent received from letting of vacant plot Rs. 1,250 p.m
n. Composite rent received for letting factory 7,500 p.m. expenses incurred, repairs and
maintenance Rs 25,000, allowable depreciation Rs. 28000, Municipal taxes Rs7,000
o. Tips received for working as bar tender Rs. 12,650
p. Agricultural income from India Rs.1,25,000
q. Agricultural income from Punjab (Pakistan) Rs. 22,500
r. Royalty income from stone quarry Rs. 27,500. Expenses incurred Rs. 2,200.
s. The assessee lives in a rented house taken on a monthly rent of Rs. 6,000 and sublets
one -third (1/3rd) for a monthly rent of Rs. 3,000 expenses incurred are repairs and
maintenance Rs 1,500, Collection charges Rs. 150, and municipal taxes Rs. 1,500
t. Winnings from cross-word puzzle Rs. 10,000
u. Received winnings from horse race Rs. 70,000
v. Winnings received from Play-win Rs. 50,000
w. Income from undisclosed sources Rs.10,000
3) Mr. Rama submits the following particulars of his income from other sources for the
previous year ended 31-3-2020
1. Royalty from books written Rs. 40,000 (expenses incurred for this purpose Rs. 4,000).
2. Interest on fixed deposits in a Bank Rs. 30,000 (gross)
3. Family pension form Government of Karnataka annually Rs. 48,000.
4. Winning from horse race Rs. 70,000 (net)
5. Rent from subletting of house Rs. 3,000 per month (Rent paid to owner Rs. 2,000
p.m. and repair expenses Rs. 400).
6. Cash worth Rs. 90,000 was found in his private locker. The source of which could not
be explained by him.

7. Winning from lottery net Rs. 1,40,000 (purchase of lottery Rs. 150)
8. Remuneration from articles published in a magazine Rs. 4,000.
9. Directors fees Rs. 10,000
10. Dividend from Co-operative society Rs. 5,000
11. Dividend from ABC Ltd. Rs. 5,500
12. Interest on bank deposits Rs. 7,000
13. Interest on Central Government Securities Rs. 2,000
4) Mr. Rajesh has received the following incomes during the previous year 2019-20.
Compute taxable income from other sources for the A.Y. 2020-21.
1. Interest received (Net) on listed debentures of UR limited Rs. 5,760.
2. Winnings from Karnataka State Lottery (Gross) Rs. 1,20,000.
3. Interest received on Post Office Saving Bank A/c Rs. 3,500.
4. Dividend received on Shares of SRM Ltd. Rs. 3,500.
5. Dividend (Gross) received from Janata Seva Co-operative Society Rs. 2,500.
6. Family pension received Rs. 30,000 per annum.
7. Dividend received on preference shares Rs. 10,000 per annum.
8. Insurance commission received Rs. 13,500 (expenses incurred in earning Insurance
Commission Rs. 2,500).
9. Interest on securities Rs. 10,000.
5) Mr. Balu has the following incomes during year ending 31st March 2020. Compute his
income from other sources for the A.Y. 2020-21.
1. Dividend declared by X company, Bangalore Rs. 12,000.
2. Interim dividend received on 31-05-2019 Rs. 5,000.
3. Won Gold worth Rs. 25,00,000 from Rajasthan State Lottery.
4. Interest received on Government securities Rs. 20,000
5. During March 2020 he earned Rs. 2,00,000 as prize money on Horse race. These
horses are owned by him and the expenses incurred in maintenance of these horse is
2,10,000.
6. Family pension from Govt. of Karnataka yearly Rs. 42,000.
7. Remuneration from articles published in magazine Rs. 2,000.
8. Cash worth Rs. 1,00,000 was found in his private locker. The source of which could
not be explained by him.
9. Rent from subletting a house Rs. 1,500 p.m. (rent paid to the owner Rs. 1,000 p.m.
and repair expenses Rs. 200.
6) From the following receipts and payment of Mr. Dinesh compute his income under the
head income from other sources.
1. Winnings from MP State Lottery Rs. 28,000.
2. Winning from Horse Race Rs. 1,000.
3. Winning from Rajasthan State Lottery Rs. 3,000.
4. Winnings from Horse Race Rs. 49,000.
5. Winnings from Crossword puzzle Rs. 2,500.
6. Gift received from a friend in London Rs. 1,00,000.
7. Winnings from Card Games Rs. 2,500.
8. Purchase of Lottery tickets Rs. 3,000.
9. Payment for betting Horse Race Rs. 6,000.

7) Mr. Anand, a resident of India has furnished the following income for the previous year
2019-20. Compute his income from other sources for the assessment year 2020-21.
1. Winnings from Crossword Puzzles Rs. 6940.
2. Royalty from Text Book written by him (Gross) Rs. 45,000 (admissible deduction Rs.
12,500)
3. 8% Interest on Rs. 40,000 Debentures.
4. 10% Interest on Rs. 80,000 Karnataka State Govt. Bonds.
5. Rs. 2,000 as interest on Bank Deposits.
6. Dividends from a Domestic Company Rs. 8,000.
7. Income from Undisclosed Sources Rs. 10,000.
8. Interest on Listed Securities (Net) Rs. 8,980.
9. Dividends from Foreign Company gross Rs. 16,000.
10. Winnings from Horse Race Rs. 17,780 (Net).
11. Interests on Debentures of a Local Authority gross Rs. 7,200.
12. Interest on PO Saving Bank A/c Rs. 1,500.
8) Dr. Ashok is a Professor of Economics. He submits the following details and wants you
to compute his taxable income from other sources.
1. He is an author of text and received a royalty of Rs. 45,000. He claims the following
deduction from this amount:
(a) Salary to Clerk for gathering information for him to write the book Rs. 5,000.
(b) Cost of books purchased Rs. 1,000 for reference work in order to write his book.
(c) Telephone expenses of Rs. 800 in connection with printing and publication of the
book.
2. Income from articles published in “Economic Times” Rs. 7,000.
3. He lives in rented house paying a rent of Rs. 4,000 p.m. He has sub-let half portion of
the house for a rent of Rs. 3,000 p.m. Dr. Ashok pays the municipal tax for the whole
house Rs. 4,000.
4. He received Rs. 200 per lecture delivered at the Economic Institution during the year.
He delivered 22 such lectures.
5. As an examiner of various Universities, he received remuneration of Rs. 5,000.
6. His other incomes where:
(a) Winning from Lottery Rs. 21,000 (Net)
(b) Winning from Chess Rs. 1,000.
(c) Interest on Govt. of England bonds Rs. 3,000.
7. Interest on PO Cumulative Time Deposit Rs. 1,000.
8. Interest received on the deposit for a firm Rs. 5,400.
9. Income from agriculture land situated in Srilanka Rs. 70,000.
10. Rs. 8,000 p.m. as scholarship for research work from the UGC.
9) Mr. Suresh submits the following details for his income for the year ending 31st Mach
2020. Compute his taxable income from other sources in A.Y. 2020-21.
1. He lives in a rented house. He pays a rent of Rs. 6,000 p.m. He has sub-let 1/3 portion
of the houses on a rent of Rs. 3,000 per month. He has undertaken the liabilities of
paying municipal taxes Rs.1,500 on the whole house and also repairs whole house
amounting to Rs. 6,000.
2. Income from agriculture land in Bangladesh Rs. 20,000.
3. Dividend from UTI Rs. 4,000.
4. He holds the following investments:
(a) Rs. 1,00,000, 8% tax free commercial securities (not listed).

(b) Rs. 30,000, 7% debentures of JCT Mills Ltd.
(c) Rs. 72,000, 10% tax free debentures of LIC of India (Listed).
(d) 10% UP State Electricity Board Bonds Rs. 10,000.
5. Interest on PO SB A/c Rs. 1,000.
6. Honorarium received for writing articles in magazines Rs. 1,000.
7. He is an examiner of Universities he received Rs. 10,000 as remuneration.
10) Sri. Vishwas has furnished the following particulars of his investments for the P.Y. 2019-
20. Compute taxable income under the head Income from Other Sources.
1. Rs. 10,000 units of UTI (Dividend received Rs. 1,200).
2. Rs. 10,000 POSB A/c which earns interest at 5% p.a.
3. Rs. 10,000 in fixed deposit a/c with Karnataka bank on which interest at 10%.
4. 10% Rs. 20,000 debentures (Listed) of a Tea Co.
5. Rs. 3,000 interest received on the debentures of a cooperative society.
6. Rs. 1,000 interest on National Development Bonds.
7. 10% Karnataka Electricity Bonds Rs. 10,000.
8. Rs. 10,000 in 7 years PO NSC, Interest at 9% p.a. is payable on the same every year.
9. Rs. 36,000 10% tax free debentures of Bangalore Municipal Corporation Interest
payable on March 31st.
10. Interest collected on debentures by an A/c payee cheque Rs. 900 (Gross).
11) Compute the income from Other Sources of Mr. Upendra for the A.Y. 2020-21, who held
the following investments during the previous year 2019-20.
1. Rs. 30,000, 13.5% Securities of a Paper Mill Co., Ltd. (Listed).
2. Rs. 35,000, 11% Securities of a Paper Mill Co. (Listed).
3. Rs. 3,350 received as Interest on Deepak Fertilizers (Listed).
4. Rs. 7,000 received as Interest on Karnataka Govt. Bonds.
5. Rs, 6,000 received as Interest on Tax Free Public Ltd. Co. Securities (Listed).
6. Rs. 30,000, 10% Tax Free Commercial Securities.
7. Rs. 10,000, 10% Central Govt. Securities.
8. Rs. 10,000, 15% Municipal Corp. Bonds.
9. Dividend from Carona Ltd. Rs. 3,200 (Gross).
10. During the year he also won a Karnataka State Lottery, the net amount received was
Rs. 27,600 Interest on all securities is payable on 1st July and 1st January every year,
Bank charged Rs. 200 as collection charges.
12) Sri Raghavendra is MP from Hyderabad. During the year 2019-20, he had the following
income. Compute the taxable income from other sources for the A.Y. 2020-21.
1. As a MP he received salary of Rs. 5,000 p.m. and D.A. of Rs. 22,000 for attending
various sessions.
2. He held the following Investments.
(a) 10% Preference Shares in Sugar works Ltd. of Rs. 10,000.
(b) 1,000 Equity Shares of Rs. 10 each in TATA Ltd. declared, Interim dividend at
10% on 15-03-2019 but paid it on 01-06-2019 and paid a final dividend of 10% on
30-06-2019.
(c) 5% Fixed deposit of Rs. 20,000 is held by him in Indian Bank, Interest is
calculated annually.
3. He won Rs. 10,000 in Crossword Puzzles.
4. He purchased a plot of Land for construction but he couldn’t get the house
constructed and hence let out the plot at Rs. 200 p.m. from 01-10-2019.

5. He had let out Machinery and Furniture and also building at monthly rent of Rs.
10,000. He spent Rs. 2,000 on repairs of Machinery and depreciation allowed in
respect of the above amounted to Rs. 12,000.
13) From the following particulars of Sri Nagaraj, an ordinary resident of India. Compute the
taxable income under the head Income from Other Sources for the P.Y. 2019-20.
1. Dividend in Equity Shares from an Indian Company Rs. 11,000.
2. Director setting fees received from Q Ltd. Rs. 2,500.
3. Income from letting on hire of building and machinery under Lease Rs. 60,00 the
allowable depreciation is Rs. 8,500, repairs Rs. 4,500 and Fire Insurance premium Rs.
500.
4. Dividend from Foreign Company received in New York Rs. 12,000.
5. Interest on Rs. 27,000, 10% tax free debentures (listed) of M/s M & M Ltd.
6. Interest on Rs. 12,000, 7% Capital Investment Bonds of Govt. of India.
7. Rs. 3,000 Interest received from 7% National Plan Certificates.
8. He has taken a house on rent for Rs. 10,000 p.m. and as Let out 40% portion of the
house to a tenant for Rs. 5,000 p.m. he has paid Municipal taxes of whole property
Rs. 2,000 and repairs of the property Rs. 5,000 under the agreement.
9. He is an author of a text book which fetched him a gross Royalty of Rs. 75,000. He
claims Rs. 25,000 salary to the Assistant and Rs. 20,000 other Incidental Expenses.
10. Income from Agricultural Land situated in Indonesia received there Rs. 60,000.
11. Honorarium received for writing articles in Indian Express Rs. 4,000.
12. Received Rs. 35,000 from recognized Lottery Winnings.
14) Compute the Taxable Income from Other Sources of Ms. Padma for P.Y. 2019-20.
1. She gave management consultancy services to entrepreneurs during the year and
received Rs. 55,000 from client. She claims she spent Rs. 5,000 on related travelling.
2. She held the following investment:
(a) Rs. 1,00,000, 9% tax free commercial securities (not listed).
(b) Rs. 30,000, 7% debentures of Carana Mills Ltd.
(c) Rs. 72,000, 10% tax free debentures of LIC of India (Listed).
3. Cash received on the occasion of Marriage Rs. 20,000.
4. A credit in his passbook, the source of which cannot be explained Rs. 10,000.
5. Dividend from a Tea Co. (60%) of Income of the Co. is Agriculture Income).
6. Refund of Money by LIC under Money Back policy Rs. 12,000.
7. Rs. 6,000 Interest received on National Development Bonds.
8. Ground rent for Land received Rs. 12,000.
9. Income from units of Mutual Funds Rs. 5,000.
10. Income from Non-Agriculture Land Rs, 2,000.
11. Interest credited to her in PO Cumulative Time Deposit Rs. 2,000.
12. Agriculture income Rs. 10,000.
13. Dividend received from Reliance Industries Limited Rs. 7,000.
14. Interest on Kiran Vikas Patra Rs. 7,000.
15) Compute income from other sources of Dr. Gokak who held the following investment in
the P.Y. 2019-20.
1. Rs. 1, 10,000, 10% Central Government Securities.
2. Rs. 4,00,000, 10% Commercial securities on X Co. Ltd.
3. Rs, 8,000 (Gross) received as interest on Public Ltd. Co., securities (Listed).
4. Rs. 7,200 received as interest on Karnataka Govt., Securities.

5. Rs. 3,600 received as interest on XYZ Ltd. (Listed)
6. Rs. 300,000, 13.5% securities on Paper Mill Co., (Listed)
7. Interest on POSB A/c Rs. 6,500.
8. For purchasing securities of X. Co., Ltd., he took a loan of Rs. 2,50,000 at 12% p.a.
this loan was taken from his friend in UK. The interest has been paid in UK but no
TDS is made. Bank charged Rs. 2,000 as collection charges.
Interest on all securities is payable on 1st July and 1st January.
16) Mr. Pramod (age 46 years) a Resident of Bangalore provides the following information
for the year ending 31st March 2020.
1. He hold the following investments:
(a) Rs. 2,00,000, 9% tax free commercial securities.
(b) Rs. 1,00,000, 8% listed debentures of SRM Ltd.
(c) Rs. 81,000, 10% tax free debentures of NRM Ltd.
(d) Rs. 40,000, 10% BESCOM, Bonds.
2. Received dividend on T.C.S Ltd. (Gross) Rs. 30,000.
3. Received Dividend form UTI Rs. 8,000.
4. Income from letting out plot of land in Mysore for Rs. 36,000.
5. Composite rent of building along with machinery Rs. 2,50,000.
The following are the expenses on machinery: Depreciation Rs. 6,000 and Repairs Rs.
4,000.
6. He earned a Royalty of Rs. 40,000 from stone quarry and the expenses to earn this
income Rs. 3,000.
7. Salary as M P Rs. 35,000.
8. He earned a dividend from foreign companies grossing Rs. 65,000 of which Rs.
15,000 wad deducted as TDS in that country and the balance was received in India.
9. Unexplained income Rs. 10,000

Module – IV
Deductions from Gross Total Income & Tax Liability of Individuals
Introduction
Income tax is levied on the total income of the previous year of an assessee. Hence, it is
necessary to ascertain his total income. Sometimes an assessee may incur loss from particular
sources of income and unless such loss is set off against other incomes, the net result of the
assessee’s activities during a particular previous year cannot be ascertained and consequently
the tax payable also cannot be determined. For this purpose, the Income-Tax Act provides
certain specific provisions for set-off and carry forward of losses.
Objectives
 Understand the procedure of set off and carry forward
 Identify the assesses eligible for deductions under various sections
 Compute the deductions in respect of various payments and incomes.
 Comprehend the calculation of tax liability and the applicable tax slabs.
Scheme of Set-off and carry forward and set off

The procedure of set off and carry forward operate as follows, subject to the conditions as
prescribed:
1. Intra-head or inter source set-off
2. Inter-head set –off
3. Carry forward of unadjusted losses
4. Order of set-off
Intra –head or inter source set-off (Sec 70):
If there is loss under one source, the same can be set-off against the income under other
source in the same head of income. It is known as Intra head or inter source set off.
Examples:
a. Loss from a Self-Occupied Property can be set off against income from any other house
properties.
b. Loss from one business can be set off against any other business income.
c. STCL can be set off against both STCG and LTCG.
Exception: Intra head set off of losses is allowed for all losses except the following
1. Loss from speculation business cannot be set-off against income from other
business. This can be set-off only against the income from speculation business.

2. Loss from owning and maintaining race horses shall be set-off against income from
horse races only and not against any other income under the head other sources.
3. Loss from an exempted source of income cannot be set-off against any taxable
income.
4. Long term capital losses can be set off only against long term capital gain.
5. Loss on account of lottery cannot be set off against income from lottery, cross word
puzzle, card games, etc.
6. Loss from any source or any head cannot be set off against casual incomes such as
winnings from lottery, horse race, gambling, etc.
Inter-head set-off Sec 71:

Any loss, if it cannot be set off against the same head of income, it can be set off against the
income from other head in same year, it is known as inter head set off.
Examples:
a. Any loss arising under the head income from house property can be set off against income
from any other heads of income including salary income in the same A.Y.
b. Losses arising from business or profession can be set off against any other heads of income
except salary income
Exceptions: Inter head set off is allowed subject to the following exceptions
1. Loss from speculation business cannot be set off against other heads.
2. Loss under the head capital gains cannot be set off against other heads of income.
3. Losses on a/c of lottery or card games cannot be set off against other heads of income.
4. Speculation losses cannot be set off against other heads of income.
5. Loss from owning and maintaining race horse shall be set-off against income from
horse races only and not against any other income under the head other sources.
Carry forward and set off losses:

Losses which cannot be set off under the same head or against income from other heads
during the same assessment year can be carried forward to the subsequent assessment years
and set-off; it is known as carry forward and set off losses.
1) Unabsorbed loss from house property can be carried forward for 8 subsequent A.Y. to
set off under the head house property.
2) Unabsorbed business loss can be carried for 8 A.Ys. to be set-off only from business
income provided the business whose loss is being carried forward continues. Unabsorbed
depreciation can be carried forward till it is fully adjusted from any income during the
succeeding years.
3) Unadjusted capital losses can be carried forward for 8 succeeding A.Ys. to be set off
only against capital gains. If it is short-term, it can be set off either against short-term or
long-term capital gain and in case of long-term capital loss; it can be carried forward and
set off only against long-term capital gain.
4) Unabsorbed loss from the business of owning and maintaining of race horses can be
carried forward for 4 A.Ys.
5) Speculation losses can be carried forward for 4 A.Ys.
Order of Set off:

1) Current year depreciation
2) Current year expenditure on scientific research
3) Brought forward business loss of earlier year

4) Unabsorbed depreciation of earlier year
5) Brought forward scientific research expenditure
Filing of Returns [Losses]

Unless the assessee files the returns of loss U/S 139(3) and gets the loss determined by the
assessing officer, assessee will not be entitled to carry forward and set-off any loss as per the
provisions.
Total Income
In computing the total income of an assessee, the deductions specified under section 80c to
80u shall be allowed from his gross total income.
The aggregate amount of the deductions allowable under this section shall not in any case
exceed the gross total income of the assessee.
Sections 80 C to 80 U specifies the deductions to be made from the Gross Total Income.
Deductions applicable to individual assesses are as follows:
Sl. I.T. Amount of Categories of
Allowance/Perks Allowed
No Sec deduction Assessees
Savings and investments made:
The following qualify for deduction:
 Contribution to SPF, RPF, PPF (up to
Rs.1,50,000) & approved superannuation fund.
 Contribution made for deferred annuity for
Govt. employees.
 LIC premium paid on the life of the assessee,
spouse and children.
Policy issued before 01-04-2012: (Actual
premium paid or 20% of the sum assured WEL)
Policy issued on or after 01-04-2012: (Actual
premium paid or 10% of the sum assured WEL)
Policy issued on or after 01-04-2013 0n a life of
1. 80C a disabled : (Actual premium paid or 15% of
the sum assured WEL)
 Payment made by the employer towards
employee’s group insurance.
 Deposits made in Deposits in Unit Linked
Insurance Plan.
 Amount invested in NSC – VIII issue including
Aggregate
interest accrued thereon.
amount –
 Amount invested in National Saving Scheme. Individuals
650,000
 Amount paid to LIC under JeevanDhara, or
or
JeevanAkshay. HUF
Rs.1,50,000
 Amount invested in notified Pension Fund set
(whichever
up by Mutual Fund or UTI or NHB.
is less)
 Amount deposited with an authority engaged in

Housing Development or Town or Rural
Development.
 Amount deposited or invested in Equity Linked
Savings Scheme.
 Repayment of House Building Loan (only
principal)
 Tuition fees paid for two children only.
 Amount paid as subscription to equity shares or
debentures of any eligible issue.
 Amount paid as subscription to any units of
mutual fund.
 Investment in notified bonds issued by
NABARD.
 5-year time deposit in an a/c under post office
time deposit rules.
 Deposit in an a/c under senior citizens savings
scheme rules.
Amount
invested in a
pension
Contribution to any pension fund: fund set up Individuals
80C
2 by LIC or or
CC
another HUF
insurer or
Rs.1,50,000
WEL.
Actual Allowed to
amount individuals
Contribution to pension scheme of central deposited or employed by
80C
3 government employee: 10% of the the central
CD
employee’s government
salary on or after 1-
WEL 1-2004.
Note: The maximum overall deductions u/s 80C, 80CC & 80CCD shall not exceed Rs.1,50,000
as per Section 80CCE
An Additional
deduction of
Rs.50000 is
80CC Additional Deduction for contribution made allowed over
4 Individuals
D(1B) to New Pension Scheme and above the
limit of
1,50,000 u/s
80CCE
Upto to a
80CC In respect of investment made in Rajiv
5 Individual Maximum of
G Gandhi Equity Saving Scheme
25,000
Medical insurance premium: a) Actual Individuals
6 80D a) Premium paid by cheque on the health Premiu or
of self, spouse or dependent parents or m or HUF

dependent children or Rs.25,000 WEL is 25,000
allowed. WEL
b) For senior citizens (who have attained b) Rs.50,
the age of 65 years) 000.
Preventive health check ( see note-1 given
below)
Medical treatment of a dependent relative:
a) Any expenditure for medical treatment, Rs.75, 000
nursing and rehabilitation of a handicapped for normal
dependent relative disability
Individuals
b) Deposits under LIC, UTI’s Scheme & other &
6 80DD or
IRDA approved insurers for the benefits of Rs.1, 25,000
HUF
physically handicapped dependent in case of
(e.g.LIC’sJeevanAadhar) severe
(Dependent means the spouse, children, parents, disability.
brothers and sisters of the assessee)
Medical treatment of notified diseases of a
dependent:
Actual
a) Actual expenditure incurred on medical
amount paid
treatment of self or dependent relative or
or 40,000 Individuals
a member of HUF suffering from
7 80DDB W.E.L or
terminal disease like, cancer Aids, renal
HUF
failure etc.
b) In case of senior citizen.
Up to
The deduction is available only if the expenses
Rs.1,00,000
are actually spent.
Interest on loan taken for higher studies:
The loan can be taken for his own, spouse or Individuals
8 80E children from any financial institution. Any amount or
The deduction is available for 7 years or until HUF
the loan is repaid whichever is earlier
Payment of interest of Home Loan: an
assessee can be subjected to deduction
subject to.
 this deduction would be allowed provided
that the total value of the loan is not more
than 35,00,000
9 80EE Individual Rs.50,000
 the total value of the house is not more than
50,00,000
 The loan must be sanctioned between
01.04.2016 to 31.03.2017 (Deduction would
be over and the above the Rs.2,00,000
deduction u/s 24)
Payment of interest on home loans:
 This will now be allowed for the loans
sanctioned till the 31st of March 2021.
10 80EEA Individual Rs. 1,50,000
 The individual taxpayer should be a
first-home buyer and should not be
entitled to deduction under section 80EE

Refer the
Donations to approved funds and charitable
11 80G note 2- All Assessee
institutions
below*
Least of the
Payment of house rent: This deduction is following is
allowed for individuals only for rent paid allowed as
without receiving HRA. deduction:
 The assessee must be living in a rented  Statutor
house due to his employment, business or y limit
profession. Rs.5,
 He or his spouse should not have any self- 000 p.m. Individuals
12 80GG occupied house in India or should not own a  Rent or
house at the place where the tax payer paid – HUF
resides. 10% of
Adjusted GTI = GTI – (LTCG + STCG from adjusted
shares subject to STT + Rebatable Income + All GTI
other deductions u/s 80 except 80 GG)  25% of
STT – SECURTITIES TRANSACTION adjusted
TAX GTI
Payment to institutions having rural

Individuals
80GG development program as its object: 100%
13 or
A Whole amount contributed is allowed as deduction
HUF
deduction.
Individuals
80GG Contributions given by any person to 100%
14 or
C political parties: deduction
HUF
Actual
royalty
Individuals
80QQ Royalty Income of authors: received or
15 or
B Rs.3,00,000
HUF
WEL
Actual
royalty Individuals
16 80RRB Royalty on patents: received or or
Rs.3,00,000 HUF
WEL
Actual
Individuals
80 Interest on savings Bank Deposits in Banks, interest or
17 or
TTA Co-operative Banks, Post Office 10,000 p.a
HUF
W.E.L
Fixed
deduction of Individuals
Handicapped assesse
18 80U Rs.75, 000 or
is allowed. HUF
In case of

severe
disability it
is
Rs.1,25,000
Rebate of income tax in case of certain individuals u/s 87A,
Note-1
The payment eligible for deduction includes any premium paid on health insurance
contribution made to Central Government Health Scheme. W.E.F AY 2013-14, any payment
on account of preventive health checkup is also available to the extent of Rs. 5,000 (which is
within the overall maximum limit of Rs.15,000 and 20,000 in case of senior citizen) any
mode of payment for preventive health checkup is eligible for deduction.
Note: Deductions for Donations to Approved Institutions and Funds Section 80G
Donations Qualifying Rate of
Amount deduction
A: No Limit Donations:
 Prime Minister National Relief Fund 100% 100%
 Africa Fund 100% 100%
 Armenia Earthquake Relief Fund 100% 100%
 University of National Eminence 100% 100%
 National Foundation for Communal Harmony 100% 100%
 CM Earthquake Relief Fund, Maharashtra 100% 100%
 AP Chief Minister’s Cyclone Relief Fund 100% 100%
 ZilaSakshartaSamiti 100% 100%
 National Blood Transfusion Council 100% 100%
 Army Central Welfare Fund 100% 100%
 National Illness Assistance Fund 100% 100%
 National Sports Fund 100% 100%
 National Cultural Fund 100% 100%
 Technology Development and Application Fund 100% 100%
 National Defence Fund 100% 100%
 PM National Drought Relief Fund 100% 50%
 National Children’s Relief Fund 100% 100%
 JawaharLal Nehru Memorial Fund 100% 50%
 Indira Gandhi Memorial Fund 100% 50%
 Rajiv Gandhi Foundation 100% 50%
B: With Limit Donation:
1. State Government Actual total Out of Q.A.
2. Local Authority of 1 to 10 or 100% of
3. Educational Institutions 10% of donations
4. Charitable Institutions Adjusted GTI for
5. Sports Institutions WEL is Q.A. promotion
6. Corporation setup to protect the interest of minorities of family
7. Authority constituted for development and housing and planning and
planning of cities and towns sports and
8. Place of art, public worship or historical importance balance at
9. An institution or association engaged in promotion of family 50%
planning in India
10. Any sum paid by a company to Indian Olympic Association
for development of infrastructure and sponsorship of sports

and games in India
Note:
1) Donation must not be given in kind or to a political party or to a particular person.
2)
Adjusted GTI = GTI – (Deductions u/s 80C to 80U except 80G + LTCG +
STCG from shares subject to STT + Rebatable income
Computation of Total income and Tax Liability:
Gross Total Income:

It refers to the aggregate of Income received from all five heads of income before allowing
deductions under sections 80c to 80 U.
Total Income:
It is the total income which is earned from all five heads after making all the deduction under
section 80C to 80U is known as the Total income.
Computation of Total income and Tax Liability:

Assessee: Previous Year :2019-
20
Assessment Year : 2020-21
Calculation of Taxable income
Particulars Rs. Rs.
1) Taxable income from salaries xxx
2) Taxable income from House Property xxx
3) Taxable Profits and Gains from Business or Profession xxx
4) Taxable Capital gain xxx
5) Taxable income from other sources xxx
Gross Total Income Xxx
Less: Deductions U/S 80c to 80U Xxx
Net taxable income Xxx
Tax Liability as per the specified rates (see below) Xxx
Less: Tax paid
 Tax deducted at source xxx
 Advance tax paid xxx
Tax payable / Tax Refund Xxx
Tax on total income is divided into the following parts:

a) Tax on STCG on shares subject to securities transaction tax is at 15%
b) Tax on LTCG on all assets [except on shares subject to STT which is fully exempted
u/s 10(38)] is at 20%
c) Tax on casual income is at 30%
d) On balance total income, tax is calculated at scheduled slab rates.
Slab rate of tax for the A.Y. 2020-21:

Income Tax Slabs for Individual Tax Payers & HUF (Less Than 60 Years Old)
Tax Health and Education

Income Tax Slabs
Rate Cess
Income up to Rs 2,50,000* No tax
Income from Rs 2,50,000 – Rs

5% 4% of Income Tax
5,00,000
Income from Rs 5,00,000 –

20% 4% of Income Tax
10,00,000
Income more than Rs 10,00,000 30% 4% of Income Tax
Income Tax Slabs for Senior Citizens (60 Years Old Or More but Less than 80 Years Old

Income Tax Slabs
Rate Cess
Income from Rs 3,00,000 – Rs

5% 4% of Income Tax
5,00,000

10,00,000
Income Tax Slabs for Senior Citizens(80 Years Old Or More)

Income Tax Slabs
Rate Cess

10,00,000
Note: Charge education cess at 4% (Compulsory education cess at 2% & secondary and
higher Education cess at 1%)

Rounding of Income and Tax:
 Rounding of Income – the amount of total income computed in accordance with the
provisions of IT Act, shall be rounded off to the nearest multiple of Rs.100.
 Rounding of Tax – the amount of tax including TDS, advance tax, interest, penalty,
fine or refund is rounded off to the nearest Rs.10

1. What do you mean by set-off and carry forward of losses?
2. How is speculation loss treated?
3. Mention any two losses which cannot be set-off against income under other head.
4. What do you mean by Inter head Set off?
5. What do you mean by Intra head Set off?
6. Write any four deductions available to an individual assessee.
7. What are the deductions in respect of 80CCC?
8. What is Gross total income?
9. What is total income?
10. List any four items deducted under section 80C.
11. State the provisions of section 80DDB.

1. State the provision regarding set-off and carry forward of losses under the head of income
from other sources.
2. List the losses which can be carried forward and losses which cannot be carried forward.
3. Explain in brief the provision relating to deductions u/s 80G.
4. Write any 10 investments and deposits which are eligible for deduction u/s 80C.
Section C – 14 Marks Questions

Practical Questions
1)The gross total income of Mrs. Rashmi amounted to Rs. 6, 00,000 in the previous year
ended 0n 31-3-2020. She has made the following donations to:
PM Gujarat Earthquake Relief Fund 40,000
Africa (Public Contributions India) Fund 10,000
Approved Educational Institutions 15,000
Approved Temples 35,000
Clothes distributed to the poor 5,000
Municipal Corporation for promotion of family planning 20,000
Compute the amount of deduction admissible u/s 80G for the assessment year 2020-21.
2) Mr. Naveen gross total income is Rs.5, 00,000 in the previous year 2019-20 made the
following donations during the year:
 Rs. 10,000 to Chief Minister’s Earthquake Relief Fund Gujarat.
 Rs. 15,000 to National Foundation for Communal Harmony
 Rs. 40,000 to Corporation approved for promotion of family planning.
 Rs. 25,000 to approved educational institutions.
Compute the amount of deduction admissible to him u/s 80G for the assessment year 2020-
21.

3) Mr. Varun whose gross total income is Rs. 40, 00,000 (includes Rs.10, 00,000 as LTCG)
makes the following donations during the previous year 2019-20.
Rs.
P.M. National Relief Fund 1,00,000
National Defence Fund 2,00,000
Municipal Corporation 1,00,000
C.M.C. Ludhiana for promotion of Family Planning 50,000
To temple of public worship for repairs (notified) 2,00,000
To a college for construction of Commerce Block 1,00,000
To a poor student 10,000
To CM Earthquake Relief Fund, Maharashtra 20,000
Compute his total income for the assessment year 2020-21
4)Mr.Ramesh has income of Rs. 5, 60,000 for the year 2019-20. He gave the following
donations, during the year-:
Rs.
To Andhra Pradesh Chief Minister’s Cyclone Fund 10,000
To an approved fund set up for rural development 15,000
To a University engaged in scientific research 20,000
Compute his total income if:
i) His income consists of Rs. 3,00,000 taxable under the head ‘income from profits and
gains’
ii) He does not have any income under the head ‘income from profits and gains’
5)Mr. Raman, a CA living at Kanpur and is carrying his profession there, furnishes the
following information for the year 2019-20:
a. Professional gain 52,400
b. Rent received from house at Delhi 18000 p.a
c. Municipal taxes 1500 p.a
d. Long term Capital gain 10,000
e. Part-time salary as lecturer 25,000
f. Rent paid at Kanpur 2,000 p.m.
g. Interest on Govt securities 19,000
h. He deposited Rs. 15,000 in PPF a/c
Compute his total income for A.Y 2020-21
6) Mr. X had a GTI of Rs.5, 00,000 which included Rs.10,000 as LTCG for the PY 2019-20.
During the year he made the following donations:
National Defence Fund 10,000
PM National Relief Fund 1,00,000
To Family Planning Association of India 10,000
All India Congress Committee 1,00,000
University of Allahabad (Notified as National 50,000
Eminence)
Notified Charitable Hospital 50,000
In addition to the above he paid LIC premium of Rs.25, 000 on a policy of Rs.1, 00,000.
Compute his Total Income.

7) Mr. A furnishes the following information for the A.Y. 2020-21:
a. Computed salary income Rs.2,27,900
b. Bank interest Rs.1,040
c. Interest on cum. term deposit with post office Rs.20,000
d. Interest in units of mutual funds Rs.10,000
e. LIC premium on a joint life policy with his wife Rs.7,240
f. Investment in PPF Rs.25,200
g. Investment in Equity linked Saving Scheme Rs.10,000
h. He paid Rs.3,000 by cheque as medical insurance premium to GIC for assuring the health
of his family & Rs.2,000 in cash as premium under Mediclaim for his dependent father.
i. His mother is suffering from cancer & he spent 50,000 during the year. For her treatment.
Compute his total income.
8) Compute the deduction u/s 80C and total income from the following information
submitted by Ashok for the P.Y. 2019-20:
a) Gross salary 2,70,000
b) Royalty 27,000
c) Expenses for the royalty received 5,000
d) Interest on bank deposit 13,000
e) Life insurance premium on his own life (sum assured 20,000) 6,000
f) Life insurance premium on the life of his wife 2,000
g) Life insurance premium on the life of his major son (not dependent 2,500
on Ashok)
h) Life insurance premium on the life of his dependent brother 2,000
i) Contribution to RPF 20,000
j) Amount deposited in PPF 15,000
k) Contribution to ULIP 3,000
l) Repayment of housing loan (principal 23,000 & interest 40,000) 63,000
m) Subscription to units of eligible mutual fund 45,000
n) Amount incurred on education of:
 Child Akshata 14,000
 Child Anitha 7,000
 Child Sindhu 5,000 26,000
He had taken a loan from SBM for construction of a residential house
property which was completed in 2010 and using it as SOP
9) The following are the particulars of the income of a Prof. Mahindra.

a. Taxable salary income 2,57,720
b. 8% dividend on 50 shares of Rs.100 each in a Ltd Co.
c. 10% interest on Govt. loan of Rs.25,000
d. Income from interest on bank deposits 400
e. Income from HP (computed) 7,200
f. Profit on sale of shares (STCG covered under STT) 1,500
g. Income from royalty 9,000
h. Examiner ship remuneration 3,700
i. Donation to family planning association of India 30,000
j. He paid by cheque Rs. 12,000 to GIC under Mediclaim
k. He paid Rs. 3,950 as LIC premium.
Find out his total income for the A.Y. 2020-21

10) From the following particulars compute total income of Mr.B, a physically handicapped
person for the A.Y 2020-21:
a. Salary received from employer 1,60,000
b. Annual rental value of LOP 15,000
c. Interest on loan taken to purchase another house which is SOP 20,000
d. He had sold a residential house on 01-04-2019 for 20,00,000. It’s FMV on 01-04-01 was 2,
00,000. Out of capital gains he invested 3, 00,000 in bonds of NABARD notified u/s 54EC.
e. He won Rs. 40,000 in race course betting & 2,000 in a lottery.
f. He paid 6,000 by cheque as premium to secure health insurance policy of GIC.
g. His mother who is dependent on him is suffering from cancer & he spent 46,500 on her
treatment.
h. His minor son is mentally retarded on whose special education; he spent 15,000 during the
yr.
i. He donated 10,000 to Karnataka state C. M’s relief fund.
j. He gave Rs. 2,000 for repair of a notified temple &Rs. 1,500 to family planning association
of India.
11) Total income of Mrs. X for the A.Y. 2020-21 is 10,66,500 which includes LTCG of
7,30,000 and lottery prize of 1,00,000 (TDS deducted 30,000). Calculate her tax liability for
the A.Y. 2020-21:
12) The following are the particulars of income of Mr. X for the P.Y 2019-20:
a) Income from H.P. (computed) Rs.61,200
b) Business income Rs.80,000
c) Dividends from co-operative society Rs.500
d) LTCG – from land Rs.1,000, from shares Rs.800
e) He paid Rs.28,000 as LIC premium on his own life on a policy of 2,00,000
f) He gave 20,000 as donation to a charitable institution approved under sec 80G
g) During the year he deposited 10,000 in an equity linked savings scheme
h) He deposited 12,500 in NSS
Compute taxable income.
13) From the following particulars determine the total income and tax liability of Mr. Rohit
for the P.Y 2019-20
a) Salary computed (computed) Rs.4,50,000
b) H.P. income (computed) Rs.30,000
c) Business income (80,000)
d) STCG Rs. 20,000
e) LTCG Rs. 12,000
f) Winnings from lottery Rs. 50,000
g) Winnings from card games Rs. 16,000
f) Interest on securities Rs. 10,000
g) His savings are:
 Contribution to RPF Rs 1,000 p.m.
 LIC premium paid Rs. 20,000
 LIC premium of major son Rs. 10,000
 LIC premium of father Rs. 10,000
 Contribution towards pension fund of LIC Rs. 12,000
 Own medical insurance premium paid by cheque Rs. 16,000
 Medical claim insurance premium of his father Rs. 8,000 paid in cash

h) His father is handicapped and he spent Rs. 30,000 on his treatment during the year.
He is suffering from a specified disease and during the year spent Rs. 60,000 on the
treatment
i) His son is studying in a management college and he took a loan of Rs 2,00,000 at 12%
from a Nationalized Bank in 2017 for doing MBA
14) From the following particulars compute the total income for the P.Y 2019-20:
a. Royalty on books from Kalyani Publishers Rs.1,65,000
b. STCG Rs. 10,000
c. LTCG Rs. 80,000
d. Interest on bank deposits Rs.18,450
e. Interest on government securities Rs.9,000
f. Dividend from Indian Companies Rs.3,450
g. He paid Rs. 12,000 to LIC under a pension fund
h. He spent Rs. 18,000 on the treatment of his mentally retarded sister who is dependent
on him
i. He paid Rs. 25,000 to UTI to secure an annuity for the benefit of his dependent
handicapped sister.
15) Compute the tax liability of Mr. Arjun for the P.Y. 2019-20 from the particulars given
below:
Gross salary 1,95,000
SOP – FRV 18,000
Municipal taxes 2,000
Interest on loan for construction of house 10,000
Amount repaid against loan taken from HDFC 15,000
Bank interest 6,000
Interest on debentures (Gross) 4,000
Interest on Govt. Securities 4,000
Interest accrued on NSC VIII issue 1,240
Amount contributed to RPF 4,800
LIC premium on a policy of 30,000 4,000
Amount deposited in PPF 4,000
TDS from salary 9,400
Mr. Raghav, manager of a private company at Bangalore has following income, expenses and
investments for the PY 2019-20. He owns a residential flat a Mysore. He also has a
commercial property from which he gets a rent of Rs. 96,000 p.a.
Rs. Rs.
Gross salary 6,22,400 Interest on Bank FD’s(TDS, 1,600) 16,000
LTCG on sale of capital asset 1,20,000 Interest on taxable bonds 6,000
Interest paid on Bank Loan for 30,000 Interest on debentures 12,000
Self-occupied house Repayment of housing loan 40,000
Property tax paid on rented 15,000 towards Principal)
property Dividend from MF & shares of the 10,000
Sale consideration of shares sold 40,000 co’s.
during the year subjected to STT Interest accrued on PPF account 14,000
(LTCG) Amount invested in REC bonds u/s 50,000
STCG on sale of shares subjected 35,000 54EC
to security transaction tax LIC premium paid 25,000

Professional tax deducted 2,400 5-year time deposit with post office 10,000
Interest receive on NSC 8,000 PFF contribution
Infrastructure bond purchased 20,000 Tuition fees paid for child 10,000
NSC purchased 8,000
Medi-claim insurance paid 8,000
15,000
Module 5
Tax planning of individuals
Introduction
In India, there are number of tax saving options for all taxpayers. These options allow for a
wide range of exemptions and deductions that help in limiting the overall tax liability. The
deductions are available from Sections 80C through to 80U and can be claimed by eligible
taxpayers. These deductions are made against the quantum of tax liabilities. There are various
other sections under the Income Tax Act, 1961 that can reduce your tax liabilities such as
exemptions and tax credits.
Objectives:
 Understand the importance of tax planning
 Identify the differences between tax evasion and tax avoidance

Tax Evasion
When any individual makes false claims to reduce his total income or by not providing any
information regarding his total income, then it is called as Tax Evasion. By doing so, his/her
tax liability is reduced, and it will result in less tax being paid by the individual.
Tax Evasion is an illegal act as well as an immoral, anti-social and anti-national act. To deal
with such kind of activities, Direct Tax Laws have made strict provisions which impose
heavy penalties or even tax evaders can be put behind the bars.
How can a person reduce taxable income:-

 By not recording sale made by the person,
 Claiming bad debts or losses which never occurred,
 Making personal expenses as business expenses,
 Claiming false donation made under different sections like u/s 80G,
 By not showing capital gain,
 By not showing income from benami transaction,

 By showing excessive salary paid.
Tax Avoidance
Tax avoidance means reducing your tax liability without breaking any law. In this an
individual looks for loopholes in the law and makes most of those loopholes to reduce the tax
liability.
In simple words, Tax Avoidance is a legal means to reduce assessees tax liability by taking
advantage of lack of provision in the law and it will result in less tax being paid by an
assessee. By using Tax Avoidance, assessee will satisfy all provisions of law but in the same
time assessee will reduce tax liability too. In tax avoidance, no penalties or such things are
imposed. However, now legislature has added a provision in Direct Tax laws to check tax
avoidance.
Tax Planning
Tax planning is a way by which you arrange your financial affairs in such a manner that
without breaking up any law you take full advantage of all Exemptions, Deductions, Rebate
and Reliefs allowed by law so that an individual’s tax liability will be reduced.
Government provides deductions, exemptions, reliefs or rebate for the benefits of economy
and society. Like if you made donation to Scientific research [u/s 8GGA] then it is good for
Society and economy too.
Features and differences between Tax evasion, Tax avoidance and Tax Planning:
1. Nature: Tax planning and Tax avoidance is legal whereas Tax evasion is illegal
2. Attributes: Tax planning is moral. Tax avoidance is immoral. Tax evasion is illegal and
objectionable.
3. Motive: Tax planning is the method of saving tax. However tax avoidance is dodging of
tax. Tax evasion is an act of concealing tax.
4. Consequences: Tax avoidance leads to the deferment of tax liability. Tax evasion leads to
penalty or imprisonment.
5. Objective: The objective of Tax avoidance is to reduce tax liability by applying the script
of law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax
planning is done to reduce the liability of tax by applying the provision and moral of law.
6. Permissible: Tax planning and Tax avoidance are permissible whereas Tax evasion is not
permissible.

 Tax liability of an individual can be reduced through 3 different methods- Tax Planning, Tax
avoidance and Tax evasion. All the methods are different and interchangeable.
 Tax planning and Tax avoidance are the legal ways to reduce tax liabilities but Tax avoidance
is not advisable as it manipulates the law for one’s own benefit. Whereas tax planning is an
ideal method.
Reference: https://www.exidelife.in/knowledge-centre/blogs-and-articles/what-is-tax-evasion-
tax-avoidance-and-tax-planning
Significance of Tax Planning

 Claim Deductions under sections 80C to 80U,
 It will reduce your tax liability and you have to pay less tax,
 Minimize the war between Tax Payer and Tax Administrator, Tax payer wants to pay less tax
and Tax Administrator wants to extract most of the tax, by using Tax Planning this war is
minimized as tax payer is using all legal ways to reduce tax liability,
 Makes Investments: - By tax planning, a Tax payer will invest his money in some good funds
which will result in productive returns for tax payer and transfer money to government for
investment too.
 Helps in growth of economy,
 Makes society grow,
 Money saved by you will result in investment which will result in employment generation.
Definition of Tax planning
Tax Planning can be understood as the activity undertaken by the assessee to reduce the tax
liability by making optimum use of all permissible allowances, deductions, concessions,
exemptions, rebates, exclusions and so forth, available under the statute.
Objectives of tax planning:

Types of tax planning:
Importance of Tax Planning

For Tax payer: -
Tax payer has to pay less tax by using tax planning because he is using all available
exemptions, deductions, reliefs, and rebates. All of this is done within the boundaries of Law.
For Government: -
To use deduction or exemptions you have to invest money in some scheme which results in
your money being transferred back to government and then they can use it to develop the
country.
For Society: -
If government invests or starts any new project or if tax payer invests his saved money, it will
generate employment. Government can invest in better projects which develop society.

Steps in tax planning:
Step 1: Think of tax planning as a financial planning exercise
Step 2: Start early
Step 3: Calculate your tax liability
Step 4: Do your risk profiling
Step 5: Choose the right avenues
Tax planning for individuals:

 Save tax under Section 80C,80CCC,80CCD
 Save tax under Section 80D, 80DD, 80DDB
 Tax planning through home loan
 Save tax through education loan u/s 80E
 Tax planning under Section 80CCG
 Tax planning on long term gains arising on sale of property
 Income tax deduction for donation u/s 80G

Model Question Paper
II Semester B.Com Honors - IFA
Time 3 Hours Taxation Max Marks: 70
Section - A
I. Answer any Eight from the following, Each Carries Two marks each
8x2=16
1. What is capital Expenditure?
2. State any four partially taxable Allowance.
3. Who is a Deemed Assesse?
4. Define salary.
5. Explain about deduction u/s 24 for LOP.
6. What do you mean by vocation?
7. What do you mean by inter head set off?
8. Write any four deductions available for an individual assessee.
9. What is taxable turnover?
10. State two features of VAT.
11. What do you mean by business?
SECTION-B
II. Answer any Six of the following question Each Carries Four Marks
6x4=24
1. Mr. Prayas, an Indian citizen left India on 20th October 2010 for the first time to U.S.
for the purpose of employment. He visits India every year and stays here from 10th
April to
15th September since 2010–2011. What will be his residential status for the A.Y
2020-21.
2. Mr. Mohan, a resident of Delhi is working in a private company. His salary particulars
are :Basic salary ₹ 12,000 p.m., D.A -10% of basic salary (enters service benefits), HRA
received ₹ . 25,000 p.m., Rent paid ₹ . 10,000 p.m.
Compute taxable HRA for the Assessment year 2020-21.
3. From the following information compute the taxable capital gain of Mr. Balu for the A.Y
2020-21:
a) Purchased agricultural Land on 1.4.2004 Rs. 3,00,000
b) Sale of Agricultural Land On 1.10.2019 Rs.40,00,000

c) Invested in purchase of house on 1.2.201I9 Rs.8,00,000
Brokerage paid for sales is Rs. 80000. CII for 2004-05=113; 2020-21=280.
4. Mr. Naveens gross total income was Rs.5, 00,000 in the previous year 2019-20 made
the following donations during the year:
 Rs. 15,000 to Chief Minister’s Earthquake Relief Fund Gujarat.
 Rs. 12,000 to National Foundation for Communal Harmony
 Rs. 45,000 to Corporation approved for promotion of family planning.
 Rs. 20,000 to approved educational institutions.
Compute the amount of deduction admissible to him u/s 80G for the assessment
year 2020-21
5. Explain any 10 exempted income u/s10(10).
6. Discuss with reasons, the admissibility of the following steps while computing profits
and gains of business.
a) Loss due to robbery Rs.5000
b) Income tax paid Rs.5400
c) Sales tax paid during the year Rs.500
d) Outstanding sales tax of previous years paid during the year Rs.50
e) Interest paid on loan taken for daughter’s marriage Rs.6600
7. Explain the merits of VAT.
8. Mr. Sandeep started construction of his house on 1-6-2015 and took a loan of Rs. 3,
00,000 at 12% p.a. The construction was completed on 30-11-2019. Compute the
taxable interest of loan for the AY 2020-21.
Section-C
III. Answer any Two of the following questions
2x10= 20
1. Mr.Vikas is an employee of HCL Ltd. He supplies you the following particulars of his
income.
a) Basic salary Rs.20,000 P.M
b) Dearness Allowance Rs.5,000 PM ( 50% Enters into salary)
c) Fixed Medical Allowance Rs.1,000 PM
d) Education allowance Rs.500 PM per child for his three children.
e) Transport allowance Rs.1,200 PM
f) City compensation allowance (CCA) Rs.100 PM
g) Employer’s contribution to RPF at 15% of Salary.
h) Interest Credited to RPF at 9.5% P.A is Rs.28,000
i) He is provided with free lunch in office. The cost per meal is Rs.50.
j) The employer has given him the use of a small car which he uses for both personal
and official purposes. He meets the expenses for personal purpose from out of his
pocket.
k) He was also provided with rent free house at Bangalore for which the employer
paid a rent of Rs.9, 000 PM. He was allowed the use of Furniture costing Rs.28,
000 respectively.

l) Life insurance premium of Rs.12, 000 was paid by employer on an insurance
policy of Rs.2,40,000. Compute his taxable salary for the AY 2020-21.
2. Siva gives you the following information:
a) He left India for the first time, went to Japan on 10th January 2012 and came back
to India on 22nd June 2012.
b) On 1st September 2013 he went to England and came back to India after 90 days.
c) On 16thJuly 2014 he had gone to Sri Lanka and came back to India after staying
there for100 days.
d) On 2nd December 2014 he had gone to Nepal for 85 days.
e) In the previous year 2019-20 he was out of India for 180 days.
He submits the following details of his incomes for the previous year:
6. Salary Rs.80,000 received in Japan for the services rendered in India.
7. Commission received in India for the services given in Srilanka Rs.1,40,000.
8. House rent of the house situated in Nepal received in India Rs.30,000.
9. Dividend of an England based company received in India Rs.75,000.
10. Profit of the business situated in Japan brought to India Rs.5,00,000.
Determine the residential status of Mr. Siva for the previous year 2019-20 and
explain that on which income he is liable to pay tax in India.
3. Smt. Shobha, a resident individual, submits the following particulars of her income
from other sources for the year ended 31-03-2020:
a) Family pension from the Government of Uttar Pradesh Rs. 42,000. p.a.
b) She has written a book on Botany on which she gets a royalty of Rs.17, 000 from
the publisher. The book is written in Hindi and is recommended for the B.Sc.
class. She has spent Rs. 3,000 on books, stationery, typing, etc. during the
previous year.
c) She has received remuneration for doing invigilation in the University
Examination Rs. 1,000.
d) Remuneration for acting as examiner in the University Examination Rs. 1,800.
e) Cash worth Rs. 1, 00,000 was found in the previous year in her bank locker, the
source of which could not be explained by her.
f) Interest credited to her savings bank account in Allahabad Bank Rs. 800.
g) Interest credited to her recurring deposit account and cumulative time deposit
account in post office was Rs. 700 and Rs. 2,000 respectively.
Compute her taxable income from other sources for the A.Y. 2020-21.
4. a) Compute the invoice value to be charged and amount of tax payable under VAT by
a dealer who had purchased goods for Rs.1,20,000. He incurred expenses of
Rs.10,000 and added a profit Rs.15,000 while selling the same.
(b) Compute the taxable turnover of a dealer in Bangalore Also calculate the amount
of tax payable if rate of Karnataka VAT is 14.5%.
Gross Turnover 4,00,000
Sale of exempted goods 22,500
Cash Discount 8,000
Trade Discount 12,000
Export Sales 40,000

Sale against C Form 60,000
Intra State Sales return within 5 months 4,000
Sale of goods in Gujarat 6,000
Branch transfer on consignment basis 75,000
Section – D
IV. Answer the Following Questions
1x10=10
The following are the particulars of income of Mr. X for the A.Y. 2020-21
a) Income from H.P. (computed) Rs.61,200
b) Business income Rs.80,000
c) Dividends from co-operative society Rs.500
d) LTCG – from land Rs.1,000, from shares Rs.800
e) He paid Rs.28,000 as LIC premium on his own life on a policy of 2,00,000
f) He gave 20,000 as donation to a charitable institution
g) During the year he deposited 10,000 in an equity linked savings scheme
h) He deposited 12,500 in NSS
i) He donated 10,000 to Karnataka state C.M”s relief fund.
j) To temple of public worship for repairs (notified) Rs.50000
k) Donation to family planning association of India 30,000.
Compute his taxable income for the AY 2020-21.
**************

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2. Heads of Income tax – I

3. Heads of Income tax – II

4. Deductions from Gross Total Income & Tax Liability of Individuals

5. Tax planning for Individual

FOR PRIVATE CIRCULATION ONLY P a g e 2 | 125

Module – 1: Introduction to taxation (15 Hrs)

Module-2: Heads of Income tax - I (30 Hrs)

Module -5: Tax planning for Individual (10 hrs)

FOR PRIVATE CIRCULATION ONLY P a g e 4 | 125

INTRODUCTION TO INCOME TAX

OBJECTIVES OF THIS MODULE:

1.Brief History of Income Tax:

1.2 Legal framework:

1.3.1 Features of tax:

1.3.2 Types of taxes:

Difference between Direct tax and Indirect Tax

Particulars Direct Tax Indirect Tax

1.3.3. Principles or Canons of taxation:

FOR PRIVATE CIRCULATION ONLY P a g e 6 | 125

1.4 BASIC TERMINOLOGIES UNDER INCOME TAX:

1.4.1. Income Tax:

1.4.2. Assessment U/S 2(8):

1.4.3. Assessment Year U/S 2(9):

FOR PRIVATE CIRCULATION ONLY P a g e 7 | 125

1.4.4. Previous Year U/S 3

1.4.5. Difference between Previous year and Assessment year

Previous year Assessment year

1.4.6. Exception to the General Rule Previous Year:

1.4.7. Assessee Sec 2(7):

1.4.7(1) Deemed Assessee:

FOR PRIVATE CIRCULATION ONLY P a g e 8 | 125

1.4.8. Person Sec 2(31):

The term person includes:

1.4.9. Income Sec 2(24):

The term income means and includes

1.4.10. Casual Income:

FOR PRIVATE CIRCULATION ONLY P a g e 9 | 125

Income from Income/loss arising as a result of carrying on a

1.4.12. Gross Total Income:

1) Income from Salary

1.4.13. Total Income Sec 5:

FOR PRIVATE CIRCULATION ONLY P a g e 10 | 125

1.5.1 Appointment of Income Tax Authorities (117)

1.5.2. Power and Functions of Central Board of Direct Taxes (CBDT)

1.5.2(1) Powers of CBDT:

1.5.3. Commissioner of Income Tax (CIT)

He is vested with the following powers:

FOR PRIVATE CIRCULATION ONLY P a g e 11 | 125

1.5.4. Income Tax Officer (ITO)

1.6 Procedure of Assessment:

1.6.1 Types of Assessment

1.6.1 (a) Self-Assessment:

1.6.1(b) Assessment on the basis of returns:

1.6.1(c ) Regular Assessment:

ii) Best judgment assessment U/s 144 - are of two types:

1.6.1(d) Re-Assessment (Section 147):

1.6.1(e ) Precautionary Assessment: