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Direct Taxation: Intermediate
Direct Taxation: Intermediate
Paper 7
DIRECT TAXATION
Study Notes
SYLLABUS 2022
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PAPER 7 : DIRECT TAXATION
SECTION - A
Syllabus Structure:
The syllabus in this paper comprises the following topics and study weightage:
1.1 Basic Concepts, Basis of Charge and Capital & Revenue Receipts
T
ax is the compulsory levy by the government on income, commodity, services, activities or transaction.
The word ‘tax’ derived from the Latin word ‘Taxo’. Taxes are the basic source of revenue for the
government, which are utilized for the welfare of the people of the country through government policies,
provisions and practices. Income Tax is levied on the total income of the previous year of every person,
subject to residential status of that person. Further, few of the income of the person are not subject to income tax,
those income are termed as exempted income.
Basic Reasons to impose taxation
To provide basic facilities for every citizen of the country: Whatever money is received by the government
from taxation is spent by it for the welfare of the citizens of the country. Some of the services provided by
the government are: health care, electricity, roads, education system, free houses for the poor, water supply,
police, firefighters, judiciary system, disaster relief, taking care of bridges and other things of public welfare.
To finance multiple governments: All the local governments of the state like village panchayats, block
panchayats and municipal corporations receive funds from the finance commission.
Protection of the life: Taxpayers receive the protection of life and wealth from the government in case of
external aggression, internal armed rebellion or any other situation.
Article 246 read with Schedule VII divides the subject matter of law made
by the legislature into three categories:
¾¾ Union list (only the Central Government has the power of legislation on
subject matters covered in the list)
¾¾ State list (only the State Government has the power of legislation on
subject matters covered in the list)
¾¾ Concurrent list (both Central & State governments can pass legislation on
subject matters). If a state law relating to an entry in List III is repugnant
to a Union law relating to that entry, the Union law will prevail, and the
state law shall, to the extent of such repugnancy, be void. (Article 254).
1 Kunnathat Thathunni Moopil Nair –vs.- The State of Kerala 1961 AIR 552 (SC)
2 According to Article 112 of the Indian Constitution, the Union Budget of a year is a statement of the estimated receipts and expenditure of
the government for that particular year. Union Budget is classified into Revenue Budget and Capital Budget.
Revenue budget includes the government’s revenue receipts and expenditure. There are 2 kinds of revenue receipts - tax and non-tax revenue.
If revenue expenditure exceeds revenue receipts, the government incurs a revenue deficit. Capital Budget includes capital receipts and
payments of the government. Loans from public, foreign governments and RBI form a major part of the government’s capital receipts. Fiscal
deficit is incurred when the government’s total expenditure exceeds its total revenue.
Note: Besides these amendments, whenever it is found necessary, the Government introduces amendments in
the form of various Amendment Acts and Ordinances.
3. Income tax Rules, 1962 (Amended up to date)
(a) As per Sec. 295, the Board may, subject to the control of the Central Government, make rules for the
whole or any part of India for carrying out the purposes of the Act.
(b) Such rules are made applicable by notification in the Gazette of India.
(c) These rules were first made in 1962 and are known as Income tax Rules, 1962.
Since then, many new rules have been framed or existing rules have been amended from time to time and the
same has been incorporated in the aforesaid rules.
4. Circulars and Clarifications by CBDT
(a) U/s 119, the Board may issue certain circulars and clarifications from time to time, which have to be
followed and applied by the Income tax authorities.
(b) Effect of circulars: These circulars or clarifications are binding upon the Income tax authorities, but the
same are not binding on the assessee. However, assessee can claim benefit under such circulars.
Note: These circulars are not binding on the Income Tax Appellate Tribunal or on the Courts.
5. Judicial decision
(a) Decision of the Supreme Court: Any decision given by the Supreme Court shall be applicable as law till
there is any change in law by the Parliament. Such decision shall be binding on all the Courts, Tribunals,
Income tax authorities, assessee, etc.
(b) Contradiction in the decisions of the Supreme Court: In case, there is apparently contradiction in two
decisions, the decision of larger bench, whether earlier or later, shall always prevail. However, where
decisions are given by benches having equal number of judges, the decision of the recent case shall be
applicable.
(c) Decisions given by a High Court or ITAT: Decisions given by a High Court or ITAT are binding on all
assessees and Income tax authorities, which fall under their jurisdiction, unless it is over ruled by a higher
authority.
Determination of the first previous year in case of a newly set-up business or profession or for a new source
of income
In case of Previous year is the period
Business or profession being Beginning with the date of setting up of the business & ending on 31st March
newly set-up of that financial year.
A source of income newly Beginning with the date on which the new source of income comes into
coming into existence existence & ending on 31st March of that financial year.
Note: Calender year cannot be considered as previous year though calender year is followed as accounting
year by a person
Exceptions to the general rule that income of a Previous Year is taxed in its Assessment Year
This is the general rule that income of the
previous year of an assessee is charged to
tax in the immediately following assessment
year. However, in the following cases, income
of the previous year is assessed in the same
year in order to ensure smooth collection of
income tax from the taxpayer who may not
be traceable, if assessment is postponed till
the commencement of the Assessment Year:
¾¾ an Individual;
¾¾ a Hindu Undivided Family (includes Jain and Sikh
family);
¾¾ a Company;
¾¾ a Firm (includes LLP);
¾¾ an Association of Persons (AOP) or a Body of
Individuals (BOI), whether incorporated or not;
¾¾ a Local authority; &
¾¾ every artificial juridical person not falling within
any of the preceding categories.
Illustration 1:
Determine the status of the following:
Case Status
(a) Howrah Municipal Corporation Local authority
(b) Corporation Bank Ltd. Company
(c) Mr. Amitabh Bachchan Individual
Case Status
(d) Amitabh Bachchan Corporation Ltd. Company
(e) A joint family of Sri Ram, Smt. Ram and their son Lav and Kush HUF
(f) Calcutta University Artificial juridical person
(g) X and Y who are legal heirs of Z BOI
(h) Sole proprietorship business Individual
(i) Partnership Business Firm
(j) Reserve Bank of India Artificial juridical person
Cash vs. Kind Income may be received in cash or in kind. Income received in kind is to be valued as per
the rules prescribed and if there is no specific direction regarding valuation in the Act or
Rules, it may be valued at market price.
Significance Method of accounting is irrelevant In case of income under the head “Salaries”,
of method of “Income from house property” and “Capital gains”
accounting method of accounting is irrelevant.
Method of accounting is relevant In case of income under the head “Profits & gains
of business or profession” and “Income from other
sources” (other than Dividend) income shall be
taxable on cash or accrual basis as per the method
of accountancy regularly followed by the assessee.
Notional income A person cannot make profit out of transaction with himself. Hence, goods transferred
from one department to another department at a profit, shall not be treated as income of
the business.
Source of income Income may be from a temporary source or from a permanent source.
Capital vs. A capital receipt is not liable to tax, unless specifically provided in the Act, whereas, a
Revenue receipt revenue receipt is not exempted, unless specifically provided in the Act. (Further refer
following heading)
Loss Income also includes negative income.
Disputed income In case of dispute regarding the title of income, assessment of income cannot be withheld
and such income, normally, be taxed in the hands of recipient.
Lump-sum receipt There is no difference between income received in lump sum or in installment.
Reimbursement Mere reimbursement of expenses is not an income.
Legality The Act does not make any difference between legal or illegal income.
However,
a. subsidy or grant or reimbursement which is taken into account for determination of the
actual cost of the asset as per Explanation 10 to sec. 43(1) is not taxable separately.
b. the subsidy or grant by the Central Government for the purpose of the corpus of a trust
or institution established by the Central Government or a State Government
- shall not be taxable.
3 Finance Ministry has clarified that LPG subsidy received by an individuals in their bank accounts will continue to be exempt from income tax.
1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
For computation of income, all taxable income
should fall under any of the five heads of income
as mentioned above. If any type of income does not
become part of any one of the above mentioned first
four heads, it should be part of the fifth head, i.e.
Income from other sources, which may be termed as
the residual head.
Tax liability actually worked out (₹) 4,876.49 6,452.50 8,738.92 5,132.75
Expenses
Similarly, a capital expenditure is not allowable as expenses, unless specifically allowed in the Act, whereas, a
revenue expenditure is allowable as expenses, unless specifically disallowed in the Act. Based on a number of
judicial pronouncements, the following principles are worthwhile to note:
1. Acquiring asset or advantage of enduring nature: Bringing into existence an asset or advantage of enduring
nature4 would lead to the inference that the expenditure disbursed is of a capital nature.
2. Capital assets belonging to third parties: Even though a expenditure results in the creation of a capital asset,
if the capital asset belongs to a third party, such expenses will be treated as revenue expenditure.
3. Profit-earning process: Where the outgoing expenditure is so related to the carrying on or the conduct of
the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of
an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the
business, the expenditure may be regarded as revenue expenditure
4. Object of the transaction: The object of the transaction which has impact on the business, the nature of trade
for which the expenditure is incurred and the purpose thereof, etc.
5. Fixed capital -vs.- Circulating capital: An item of disbursement may be regarded as of a capital nature when
it is relatable to a fixed capital, whereas if it is related to circulating capital or stock-in-trade it would be treated
as revenue expenditure.
6. Expenditure on removing restriction: Where the assessee has an existing right to carry on a business, any
expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction
or disability would be on revenue account, provided the expenditure does not result in the acquisition of any
capital asset.
7. Payment made to rival dealer to ward off competition in business would constitute capital expenditure
8. If the expenditure is a part of the working expenses in ordinary commercial trading, it is not capital but revenue
expenditure.
9. If the expenditure is incurred for the initial outlay or for extension of business or substantial replacement of
equipment, it is capital expenditure but if it is incurred for running the business or is laid out as part of the
process of profit making, it is revenue in character.
10. If expenditure is incurred for ensuring the regular supply of raw material, maybe for period extending over
several years, it is on revenue account
11. When an owner incurs expenditure on additions in a building which enhances its value the expenditure can be
of a capital nature. But, if a tenant incurs an expenditure on a rented building for its renovation, he does not
acquire any capital asset, because the building does not belong to him and, ordinarily, such an expenditure will
be of a revenue nature.
12. Acquisition of the goodwill of the business is acquisition of a capital asset, and, therefore, its purchase price
would be capital expenditure. It would not make any difference whether it is paid in a lump sum at one time
or in instalments distributed over a definite period. Where, however, the transaction is not one for acquisition
of the goodwill, but for the right to use it, the expenditure would be revenue expenditure
13. Expenses incurred by the assessee for the purpose of creating, curing or completing the title is capital
expenditure and on the other hand if such expenses are incurred for the purpose of protecting the same, it is
revenue expenditure.
Illustration 2
Birla Ltd., a cement manufacturing company, entered into an agreement with a supplier for purchase of additional
cement plant. One of the conditions in the agreement was that if the supplier failed to supply the machinery
within the stipulated time, the company would be compensated at 5% of the price of the respective portion of
the machinery without proof of actual loss. The company received ₹ 8.50 lakhs from the supplier by way of
liquidated damages on account of his failure to supply the machinery within the stipulated time. What is the nature
of liquidated damages received by Birla Ltd. from the supplier of plant for failure to supply machinery to the
company within the stipulated time — a capital receipt or a revenue receipt? [CMA – Inter Dec. 2011]
Answer:
In the case of CIT -vs.- Saurashtra Cement Ltd. (2010) 325 ITR 422, the Apex Court has held that the damages
were directly and intimately linked with the procurement of a capital asset, which lead to delay in coming into
existence of the profit-making apparatus. It was not a receipt in the course of profit earning process. Therefore,
the amount received by the assessee towards compensation for sterilization of the profit earning source, not in the
ordinary course of business, is a capital receipt in the hands of the assessee.
Annexure
TAX RATES FOR THE A. Y. 2024-25
Default Tax Regime for Individual / HUF / AOP / BOI / AJP [Sec. 115BAC]
Applicable to
Individual / HUF / AOP (other than co-operative society) / BOI / AJP
Rate of Tax
Under this tax regime, income tax shall be computed at the option of the assessee considering the following rate:
Total income Rate of tax
Upto ₹ 3,00,000 Nil
From ₹ 3,00,001 to ₹ 6,00,000 5%
From ₹ 6,00,001 to ₹ 9,00,000 10%
From ₹ 9,00,001 to ₹ 12,00,000 15%
From ₹ 12,00,001 to ₹ 15,00,000 20%
Above ₹ 15,00,000 30%
Taxpoint: If a person opts for this regime, ₹ 3,00,000 shall be considered as basic exemption limit irrespective
of his age. In other words, for all category of individual i.e, senior citizen, super senior citizen and others, basic
exemption limit is ₹ 3,00,000
Conditions to be satisfied: Total income of the assessee does not exceed ₹ 7,00,000.
Quantum of Rebate: Lower of the following:
a. 100% of tax liability as computed above; or
b. ₹ 25,000/-
Marginal relief is available even total income exceeds ₹ 7,00,000 [available upto ₹ 7,27,770]
Marginal relief = Positive value of (Tax on income – Income in excess of ₹ 7,00,000)
Example 3
Surcharge at the following rate is also payable on tax as computed above after rebate u/s 87A
* Where the total income includes dividend, any income chargeable u/s 111A, 112 and 112A, the surcharge on the
amount of income-tax computed on that part of income shall not exceed 15%. In other words, surcharge higher than
15% is applicable only on tax on income other than dividend, income covered u/s 111A, 112 and 112A. Moreover,
in case of an AOP consisting of only companies as its member, the rate of surcharge shall not exceed 15%.
Marginal Relief
Example 4: Compute tax liability of the assessee (52 years) whose total income is:
(Case 1) ₹ 49,90,000 (Case 2) ₹ 50,10,000; (Case 3) ₹ 60,00,000
To provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above ₹50
lakh or ₹ 1 crore or 2 crores or 5 crores, the concept of marginal relief is designed.
Condition: Total income exceeds ₹ 50,00,000 (or ₹ 1 crore or 2 crores or 5 crores)
Relief: Marginal relief is provided to ensure that the additional income tax payable including surcharge on excess
of income over ₹ 50,00,000 or ₹ 1,00,00,000 or ₹ 2,00,00,000 or ₹ 5,00,00,000 is limited to the amount by which
the income is more than ₹ 50,00,000 or ₹ 1,00,00,000 or ₹ 2,00,00,000 or ₹ 5,00,00,000
Marginal relief = Calculated Surcharge - 70% (Income – ₹ 50,00,000)] (if positive)
Or
Marginal relief = [(Income tax + surcharge) on income] – [(Income tax on ₹ 50,00,000) + (Income –
₹ 50,00,000)]
Similar relief shall also be provided where income exceeds marginally above ₹ 1 crore or ₹ 2 crores or ₹ 5 crores.
In that case, the aforesaid equation shall be changed accordingly.
Now, computation of tax liability is made after considering marginal relief:
Particulars Working Case 1 Case 2 Case 3
Liability [A] 13,09,500 13,15,500 16,12,500
Add: Surcharge B = [10% of (A)] Nil 1,31,550 1,61,250
Tax and surcharge 13,09,500 14,47,050 17,73,750
Less: Marginal relief [(B) –{70% (50,10,000 – 50,00,000)}] Nil 1,24,550 Nil
Effective Surcharge [C] Nil 7,000 1,61,250
Liability after surcharge [A + C] 13,09,500 13,22,500 17,73,750
Add: Health & Education 4% of above 52,380 52,900 70,950
cess
Total Rounded off u/s 288B 13,61,880 13,75,400 18,44,700
Taxpoint: The concept of marginal relief is not applicable in case of cess.
An Individual / HUF/AOP/BOI/AJP can opt for alternative tax regime u/s 115BAC. The provision relating to
sec. 115BAC will be discussed in subsequent chapter.
Quick MCQs:-
T
he taxability of a person depends upon his residential status in India for any particular previous year. The
term residential status must not be confused with an individual’s citizenship in India. An individual may be
a citizen of India but may not be a resident for a particular previous year. Similarly, a foreign citizen may
be a resident of India for the purpose of income tax for a particular previous year. Residential status of an assessee
determines the scope of chargeability of his income. Whether a person will be charged to a particular income or
not, depends on his residential status.
Sec. 6 provides the test for residential status for the persons which can be categorized as under:
Resident in India
An individual is said to be a resident in India, if he satisfies any one of the following conditions -
(i) He is in India in the previous year for a period of 182 days or more [Sec. 6(1)(a)]; or
(ii) He is in India for a period of 60 days or more during the previous year and for 365 or more days during 4
previous years immediately preceding the relevant previous year [Sec. 6(1)(c)]
Taxpoint: Given Conditions are alternative in nature i.e. assessee needs to satisfy any one condition.
Non-Resident in India
An assessee who is not satisfying sec. 6(1) shall be treated as a non-resident in India for the relevant previous year.
Illustration 3
Sam came to India first time during the P.Y. 2023-24. During the previous year, he stayed in India for (i) 50 days;
(ii) 183 days; & (iii) 153 days. Determine his residential status for the A.Y. 2024-25.
Solution:
(i) Since Sam resides in India only for 50 days during the P.Y. 2023-24, he does not satisfy any of the conditions
specified in sec. 6(1). He is, therefore, a non-resident in India for the P.Y. 2023-24.
(ii) Since Sam resides in India for 183 days during the previous year 2023-24, he satisfies one of the conditions
specified in sec. 6(1). He is, therefore, a resident in India for the P.Y. 2023-24.
(iii) Sam resides in India only for 153 days during the previous year 2023-24. Though he resided for more than 60
days during the previous year but in 4 years immediately preceding the previous year (as he came India first
time), he did not reside in India. Hence, he does not satisfy any of the conditions specified in sec. 6(1). Thus,
he is a non-resident for the P.Y. 2023-24.
Illustration 4
Andy, a British national, comes to India for the first time during 2019-20. During the financial years 2019-20,
2020-21, 2021-22, 2022-23 and 2023-24, he was in India for 55 days, 60 days, 80 days, 160 days and 70 days
respectively. Determine his residential status for the assessment year 2023-24.
Solution:
During the previous year 2023-24, Andy was in India for 70 days & during 4 years immediately preceding the
previous year, he was in India for 355 days as shown below:
Taxpoint:
¾¾ However, if such individual has satisfied either of the basic conditions, then he shall be treated as resident
in India u/s 6(1).
¾¾ Further note that the exception is not applicable in case of foreign citizen even if he is a person of Indian
origin.
¾¾ If these conditions are satisfied, then such individual shall be deemed as resident irrespective of number
of days of his stay in India.
In case of an individual, being a citizen of India and a member of the crew of a ship, the period or periods of
stay in India shall, in respect of an eligible voyage, not include the period beginning on the date entered into the
Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and
ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual
from the ship in respect of such voyage. In simple words, in the Continuous Discharge Certificate the date of
joining is recorded as 1st January 2020 and the date of ending the voyage is recorded as 31st January 2020, then
the entire period of 31 days shall be excluded from his stay in India
“Eligible voyage” shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where-
(i) for the voyage having originated from any port in India, has as its destination any port outside India; and
(ii) for the voyage having originated from any port outside India, has as its destination any port in India.’.
Illustration 5
Miss Pal, an Indian citizen, left India for first time on 1st April, 2023 for joining job in Tokyo. She came to India on
11th Jan, 2024 for only 170 days. Determine her residential status for P.Y. 2023-24.
Solution:
Number of days Miss Pal stayed in India can be calculated as under:
P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
23-24 1 - - - - - - - - 21 29 31 82
24-25 30 31 29 - - - - - - - - - 89
Since she left India for employment purpose, hence for becoming resident she has to stay in India for at least 182
days. However, she is in India for only 82 days during the previous year, thus she is a non-resident for the P.Y.
2023-24.
Points to be kept in mind
(a) Stay at same place in India is not necessary.
(b) Continuous stay in India is not necessary.
(c) A person shall be deemed to reside in India, if he is on the territorial waters of India5. For instance, if an
individual stays on a ship, which is in the territorial waters of India, then it shall be treated as his presence in
India.
5 Territorial water extends to 12 nautical miles (1 nautical miles = 1.1515 miles = 1.853 km) into the sea from the base line on the coast of India and
include any bay, gulf, harbour, creek or tidal river
Additional conditions to test whether resident individual is ‘Ordinarily resident or not’ [Sec. 6(6)]
A resident individual in India can further be categorised as -
(i) Resident and ordinarily resident in India (ii) Resident but not ordinarily resident in India
Taxpoint: If aforesaid conditions are satisfied, then such individual shall be deemed to be resident but not
ordinarily resident even though he has satisfied both conditions specified u/s 6(6).
Provision Illustrated
Determine the residential status in the following different cases:
Case A B C D E F G H
Citizenship Foreign India India India Foreign Foreign India Foreign
Is he person of Indian origin Yes Yes Yes Yes Yes Yes Yes No
Total income (excluding income from Yes No Yes Yes Yes Yes No No
foreign source) exceeds ` 15,00,000
Liable to pay tax in other country No No No Yes No No No No
Stay in India during the previous year 30 30 30 30 138 185 85 85
Stay in India during 4 years immediately 380 380 380 380 380 180 380 380
preceding previous year
Are dual conditions given u/s 6(6) Yes Yes Yes Yes Yes Yes Yes Yes
satisfied
Residential Status NR NR NOR NR NOR ROR NR ROR
Note 1 2 3 4 5 6 7 8
1. He is not an Indian citizen, hence sec. 6(1A) is not applicable. Further his stay in India during the previous year
does not exceed 120 days.
2. His total income does not exceed ₹ 15,00,000.
3. All conditions of sec. 6(1A) are satisfied.
4. He is liable to pay tax in other country.
5. His stay in India exceeds 120 days (but does not exceed 182 days)
6. He has satisfied one condition of sec. 6(1) [i.e. 182 days criteria] and dual conditions of sec. 6(6)
7. He is not satisfying any of the condition provided in sec. 6(1)
8. He has satisfied one condition of sec. 6(1) [i.e. 182 days criteria] and dual conditions of sec. 6(6)
Illustration 6
Mr. X, aged 19 years, left India for first time on May 31, 2023. Determine his residential status for the previous
year 2023-24 if:
(i) He left India for employment purpose
(ii) He left India on world tour.
Solution:
During the previous year 2023-24, Mr. X was in India for 61 days as shown below –
P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
23-24 30 31 - - - - - - - - - - 61
During the previous year 2023-24, X stayed in India for 61 days. Further, he was in India for more than 365 days
during 4 years immediately preceding the relevant previous year (as he left India for first time).
(i) Since he left India for employment purpose, condition of sec. 6(1)(c) shall not be applicable on such assessee.
He will be treated as resident in India, if and only if, he resided in India for at least 182 days during the
previous year. Hence, Mr. X is a non-resident in India for the previous year 2023-24.
(ii) Since he left India on world tour, which is not an exception of sec. 6(1), satisfaction of any one condition of
sec. 6(1) makes him resident in India for the previous year 2023-24. As he satisfies 2nd condition of sec. 6(1)
[shown above], he is resident in India. Further, he also satisfies dual conditions specified u/s 6(6) (since he left
India for first time). Therefore, he is an ordinarily resident for the previous year 2023-24.
Illustration 7
X came India for first time on July 24, 2019. From July 24, 2019 to December 25, 2020 he was in India. Again,
he came to India on August 5, 2023 for employment purpose & left India on November 25, 2023 permanently.
Determine his residential status for the previous year 2023-24 assuming -
Year Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
23-24 - - - - 27 30 31 25 - - - - 113
Further, he was in India for more than 365 days during 4 years immediately preceding the previous year as shown
below:
Year Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
19-20 - - - 8 31 30 31 30 31 31 29 31 252
20-21 30 31 30 31 31 30 31 30 25 - - - 269
21-22 - - - - - - - - - - - - -
22-23 - - - - - - - - - - - - -
As he satisfies condition given in sec. 6(1)(c), he is a resident in India.
Further, he was resident during 2 out of 10 years immediately preceding the relevant previous year but he was in
India only for 521 days in 7 years immediately preceding the relevant previous year. As he is not satisfying dual
conditions of sec. 6(6), he is a resident but not ordinarily resident in India for the previous year 2023-24.
Note: His status shall remain same in both the cases as -
(a) Foreign citizens are not covered by ‘exceptions to sec. 6(1)(c)’.
(b) Coming in India for employment purpose is not covered by ‘exceptions to sec. 6(1)(c)’.
Illustration 8
X, a foreign citizen, resides in India during the previous year 2023-24 for 83 days. Determine his residential status
for previous year 2023-24 assuming his stay in India during the last few previous years are as follows -
Solution:
During previous year 2023-24, X was in India for 83 days & during 4 years immediately preceding the previous
year, he was in India for 378 days as shown below:
Thus, he satisfies one of the conditions specified u/s 6(1) & consequently, he becomes resident in India in the P.Y.
2023-24. Further, to determine whether X is an ordinarily resident or not, he needs to satisfy both conditions laid
down u/s 6(6).
Condition (i) of sec. 6(6) requires that an individual should be resident in India for at least 2 out of 10 years
preceding the relevant previous year. X was resident in India for 8 out of 10 years immediately preceding the
previous year. Thus, he satisfies this condition.
Condition (ii) of sec. 6(6) requires that an individual should be present in India for at least 730 days during 7 years
preceding to relevant previous year. X was in India for 1090 days during 2016-17 to 2022-23. Hence, he satisfies
this condition also.
X satisfies condition (ii) of sec. 6(1) as well as both the conditions of sec. 6(6). Thus, he is a resident and ordinarily
resident in India for the previous year 2023-24.
Illustration 9
Ram provides following details of income, calculate the income which is liable to be taxed in India for the
A.Y.2024-25 assuming that –
Test Yourself
1. Mr. Rupankar Roy, an Indian Citizen, left India for the purpose of employment in USA for the first time
on 1st October, 2023. He came back to India on 30th March, 2024 for visit and returned back to USA after
staying 20 days in India. During the previous year 2023–24, he earned the following Income:
(i) Interest earned in USA ₹ 5,00,000 and credited in USA.
(ii) Interest received in India out of Fixed Deposit in Bank ₹ 1,20,000.
Determine his residential status and Tax Incidence in India for the A.Y. 2024-25
2. Mr. Ajnabi provides following information regarding his income of P.Y. 2023-24. Compute income liable to
be charged in India in the following cases:
a) He is an ordinarily resident b) He is not an ordinarily resident. c) He is a non-resident
Particulars ₹
Business income from USSR received in India 10,000
Business income earned in India received in Pakistan 20,000
Salary income from a company of UK situated in India 15,000
Interest on German Development Bond (2/5th received in India) 60,000
Income from agriculture in Nepal received there but later on remitted to India 1,81,000
Income from property in Jakarta received outside India 86,000
Income earned from business in UAE which is controlled from Delhi (₹ 15,000 received in 65,000
India)
Past untaxed profit of 15-16 brought to India during previous year 10,43,000
Profit from a business in Madras and managed from outside India 27,000
Profit on a sale of a building in India but received in Sri Lanka 14,80,000
Pension from a former employer in India received in USSR 36,000
Hints
1. Resident and ordinarily resident; ₹ 6,20,000/- 2. ₹ 19,80,000; ₹ 16,77,000; ₹ 16,27,000
Salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian
flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in
the NRE account maintained with an Indian bank by the seafarer.
ii) Interest credited on the above balance by a rate exceeding 9.5% [Sec. 7(i)]
b) The transferred balance in recognised provident fund, to the extent liable to income tax [Sec. 7(ii)]
c) The contribution made, by the employer in the previous year, to the account of an employee under a pension
scheme notified u/s 80CCD [Sec. 7(iii)]
d) Tax Deducted at source [Sec. 198]
e) Deemed profit.
f) Income from undisclosed sources
Income Salary Salary from Income Income from Income Income Deemed
from earned Govt. by an from interest from from receipt
connection in India Indian citizen dividend payable by royalty technical of gift
in India for services paid by specified services by non-
rendered outside an Indian person resident
India company
Sec. Sec. 9(1) Sec. 9(1)(iii) Sec. 9(1) Sec. Sec. 9(1) Sec. 9(1) Sec. 9(1)
9(1)(i) (ii) (iv) 9(1)(v) (vi) (vii) (viii)
Quick MCQs:
3. Incomes which accrue or arise outside India but are received directly into India are taxable in case of –
(a) Resident only
(b) Both Ordinarily Resident and NOR
(c) Non-Resident
(d) All Assesses
5. R was born in England, his parents were born in India in 1952. His grand parents were born in South
Africa. RB shall be a-
(a) Person of India Origin
(b) Foreign National
(c) Artificial Person
(d) Citizen of India
6. R a person of Indian Origin visited India on 03.10.2023 and plans to stay here for 185 days. During 4
years prior to previous year 2024-25, he was in India for 750 days. Earlier to that he was never in India.
For A.Y. 2024-25, RE shall be-
(a) Resident and Ordinarily Resident in India
(b) Resident but not Ordinarily Resident in India
(c) Non-Resident
(d) Deemed Resident
7. Asha leave India for the first time on 24-12-2023, Determine her Residential status for the AY 2024-2025.
(a) Resident
(d) Resident and Ordinary Resident
(c) Resident and Not Ordinary Resident
(d) Non-Resident
9. Interest paid by a Resident for any other purpose other than carrying on business or profession, outside
India is deemed to accrue or arise in India, if the receiver is a
(a) Non-Resident
(b) Resident and Ordinary Resident
(c) Resident and Not Ordinary Resident
(d) All of the above
10. Determine residential status of Chidambaram which carries out its transactions in Malaysia. Its affairs are
partly controlled from India. The Karta of HUF, Mr. Chidambaram who is from Chennai visits India on
01-06-2022 and leaves to Malaysia on 10-02-2023. He has not visited India for the past 11Years.
(a) Non-resident
(b) Resident but not ordinarily resident
(c) Deemed resident
(d) Resident and ordinarily resident
11. Share of Profit of Mr. Vivek who is Partner in M/S.VIVA & Co. is-
(a) Exempt from tax
(b) Taxable as his Business Income
(c) Taxable as his Salary
(d) Taxable as Income from Other Sources
16. The maximum amount on which Income – Tax is not chargeable in case of HUF for AY 2024-25 is –
(a) ` 2,50,000
(b) ` 5,00,000
(c) ` 3,00,000
(d) ` 2,00,000
18. The total income of the assesse has been computed as ` 2,53,494.90. For rounding off, the Total Income
will be taken as –
(a) ` 2,53,500
(b) ` 2,53,490
(c) ` 2,53,495
(d) ` 2,53,400
19. Undisclosed Income u/s. 68 to 69D are charged to tax at the effective rate of –
(a) 60% only
(b) 78% (Inclusive of surcharge @ 25% & HEC @ 4%)
(c) 75% (inclusive of surcharge @ 25%)
(d) 100%
A
griculture income is exempt under the Indian Income Tax Act. The reason for exemption of agriculture
income from Central Taxation is that the Constitution gives exclusive power to make laws with respect to
taxes on agricultural income to the State Legislature.
1.3.1 Meaning
By virtue of sec. 2(1A), agricultural income means -
(c) The building should be used as dwelling house or store-house or other out building.
(d) The land is either situated in –
(i) Rural area; or
(ii) Urban area6 and assessed to land revenue / local rates.
Taxpoint:
¾¾ Where such land or building is used for non-agricultural purpose then any income derived from such land
or building shall not be treated as agricultural income.
¾¾ Income derived from land being let out for storing crop shall not be agricultural income.
¾¾ Building should be owned and occupied by the land-holder if he receives rent or revenue from the land.
On the other hand, in case of cultivator or receiver of rent in kind, it is enough that the building is
occupied by him.
(a) Profit on transfer of agricultural land: Profit on transfer of agricultural land shall not be treated as
agricultural income.
(b) Nexus between agro-activity and agro-income: There must be a close nexus between agro-activity
and agro-income. Income by way of sale of commodity, being different from what is raised and
processed, is not agricultural income. E.g. Assessee growing mulberry leaves to feed silkworms
and to obtain silk-cocoons, income on sale of such silk-cocoons shall not be treated as agricultural
income.
$
Agriculture or Agricultural operations or Agricultural purposes: The Act nowhere defines the term agricultural
operations or agricultural purposes. However, the Supreme Court laid down guidelines for the determination of the
scope of these terms in CIT -vs.- Raja Benoy Kumar Sahas Roy. Accordingly, for the purpose, agricultural activity
is divided into two parts:
Population, according to the last preceding census of which the relevant figures have been published before the first day of the previous
year, shall be considered.
7. Any fee derived from land used for grazing of cattle, being used for agricultural operation, is an agro income.
8. Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income
Agricultural Non-Agricultural
Rule Case
Income Income
8 Assessee is engaged in the business of growing and 60% of income 40% of income
manufacturing tea in India
E.g., If an assessee earns ₹ 5 lakh (as per sec. 28) from the business of growing & manufacturing tea
in India, then his business income will be ₹ 2 lakh (i.e., 40% of ₹ 5 lakh) & agro income will be ` 3
lakh (i.e. 60% of ₹ 5 lakh)
Agricultural Non-Agricultural
Rule Case
Income Income
7A Assessee is engaged in the business of growing and 65% of income 35% of income
manufacturing rubber in India
Assessee is engaged in the business of growing and manufacturing Coffee in India
7B(1) ¾¾ Coffee grown and cured by the seller in India 75% of income 25% of income
7B(1A) ¾¾ Coffee grown, cured, roasted and grounded by the 60% of income 40% of income
seller in India, with or without mixing chicory or
other flavouring ingredients
Salary and interest received by a partner from a firm growing and manufacturing tea, coffee or rubber:
Such remuneration or interest shall be treated as partly agricultural income and partly business income as stated
above.
Any other case
For computing agricultural income from a business having both agricultural as well as non-agricultural income,
1. Assessee is required to prepare two Profit or Loss statements, one for agro-business & another for non agro-
business
2. Agro expenses debited to Agro Profit or Loss and non agro expenses shall be debited to Non agro-business
Profit or Loss
Note: Non-apportionable expenditure, related to composite business of agriculture and non-agriculture, is
fully charged to non-agricultural business.
3. Market value of any agricultural produce, which is utilised as raw material in such business, is to be treated as
income for agro-business and expenditure for non agro-business.
Illustration 10
X Ltd. grows sugarcane to manufacture sugar. Details for the previous year 2023-24 are as follows:
Particulars ₹ in lacs.
Cost of cultivation of sugarcane (5,000 tons) 10
Sugarcane sold in market (1,000 tons) 3
Sugarcane used for sugar manufacturing (4,000 tons) -
Cost of conversion 5
Sugar produced & sold in market 25
Compute income of X Ltd.
Solution:
Computation of income of X Ltd. for the A.Y. 2024-25 ₹ in lacs
Treatment
Step 1: Compute income tax on total income of assessee including Agro-income.
Step 2: Compute income tax on (Agro-income + Maximum exempted limit)
Step 3: Tax liability before cess = (Tax as per step 1) - (Tax as per step 2)
Illustration 11
Mr. X aged 42 years has non-agro income of ₹ 3,25,000 and agro income of ₹ 2,55,000. Compute his tax liability
for the A.Y. 2024-25.
7 On the recommendation of the Committee on Taxation of Agricultural Wealth and Income headed by Dr. K. N. Raj
Solution:
Computation of tax liability of Mr. X for the A.Y. 2024-25
Particulars ₹
Income Tax on ₹ 5,80,000 (i.e. agro income ₹ 2,55,000 + non agro ₹ 3,25,000) 28,500
Less: Tax on ₹ 5,05,000 (i.e. agro income ₹ 2,55,000 + maximum exempted limit ₹ 2,50,000) 13,500
Tax liability 15,000
Less: Rebate u/s 87A 12,500
2,500
Add: Health & Education Cess (4% of ₹ 2,500) 100
Tax and cess payable (Rounded off u/s 288B) 2,600
Test Yourself
1. Mr. X aged 62 years has non-agro income of ₹ 3,25,000 and agro income of ₹ 2,55,000. Compute his tax
liability for the A.Y. 2024-25.
2. Mr. Y aged 62 years has non-agro income of ₹ 3,75,000 and agro income of ₹ 2,55,000. Compute his tax
liability for the A.Y. 2024-25.
3. Mr. Z aged 82 years has non-agro income of ₹ 6,75,000 and agro income of ₹ 2,55,000. Compute his tax
liability for the A.Y. 2024-25.
4. Mr. A aged 32 years has non-agro income of ₹ 2,25,000 and agro income of ₹ 5,55,000. Compute his tax
liability for the A.Y. 2024-25.
Hints
1. Nil; 2. ₹ 2,600; 3. ₹ 36,400; 4. Nil
Illustration 12
Mr. Tony had estates in Rubber, Tea and Coffee. He derives income from them. He has also a nursery wherein he
grows plants and sells. For the previous year ending 31.3.2024, he furnishes the following particulars of his sources
of income from estates and sale of plants. Compute taxable income:
(a) Manufacture of Rubber ₹ 5,00,000.
(b) Manufacture of Coffee grown and cured ₹ 3,50,000.
(c) Manufacture of Tea ₹ 7,00,000.
(d) Sale of plants from nursery ₹ 1,00,000.
Solution:
Computation of income of Mr. Tony for the A.Y. 2024-25
Test Yourself
1. Mr. Krishna Daripa, engaged in growing and manufacturing of tea, furnished the following information for
the previous year 2022-23
Sale of Tea ₹ 15,00,000
Growing and manufacturing expenses of tea ₹5,00,000
You are required to compute the taxable income of Ms. Krishna Daripa for the A. Y. 2024-25.
Hints
1. ₹ 4,00,000
Illustration 13
State the tax treatment of the following income -
(a) A is employed in an agricultural farm and entrusted with tilling of land, his remuneration being 50% of the net
profits earned by the farm.
(b) C receives a dividend of ₹ 12,000 from a company whose entire income is derived from agricultural operations
only.
(c) D of Kolkata earns an income of ₹ 12,000 from agricultural land owned by him and situated in Bangladesh.
Such income is received in Bangladesh.
(d) F receives ₹ 600 on account of interest on loan on the mortgage of land which is used for agricultural purposes.
(e) G earns an income of ₹ 1,200 from lease of land for grazing of cattle required for agricultural operations.
(f) H receives ₹ 400 on account of interest on arrears of rent in respect of land used by tenant for agricultural
operations.
(g) Income from the sale of replanted trees where the denuded parts of the forest are replanted and subsequent
operation in forestry are carried out.
(h) Income from sale of trees of forest which are of spontaneous growth and in relation to which forestry operations
alone are performed or Income from sale of wild grass of spontaneous growth
Solution:
(a) Since Mr. A is an employee of the concern, therefore his income shall be taxable under the head ‘Salaries’ and
shall not be treated as agricultural income. However, if Mr. A is a partner of the concern then such income shall
be treated as agricultural income.
(b) Dividend received from a company (engaged in agricultural business) cannot be treated as agricultural income.
Such dividend shall be taxable under the head “Income from other sources”.
(c) Any income from a land situated outside India is not an agro-income and taxable under the head “Income from
other sources”. It is to be noted that such income shall be taxable only if the assessee is an ordinarily resident
in India.
(d) Interest on loan on the mortgage of land used for agricultural purpose is not an agro-income.
(e) Any rent derived from land used for grazing of cattle, used for agricultural operation, is an agro-income.
(f) Interest on arrears of rent receivable in respect of agricultural land is non-agricultural income.
(g) Assume replantation of trees has been done with application of basic operation on land. Hence such income is
agro-income.
(h) Income from sale of trees, grass grown spontaneously and without any human effort is non-agricultural income.
(i) It will be treated as agricultural income.
(j) Income from sale of jute produced in land situated in Bangladesh is not treated as agricultural income. For the
purpose of this, land should be situated in India.
(k) Income from Poultry farming is not an agricultural income because such income is not derived from land.
(l) Income from growing flowers in garden is as an agricultural Income as the same is derived from a land by
performing agricultural operations on it.
(m) Income from sale of tobacco leaves after being dried to make it fit for sale is an agricultural income.
(n) Income from fisheries or poultry or dairy is not considered as agricultural income as the same is not derived
from land.
(o) Since the land in situated outside India, hence income is not considered as agricultural income.
(p) It is not an agricultural income as no agricultural operation has been carried on the land.
Quick MCQs:
2. An Assessee is engaged in the business of growing and manufacturing of rubber, the agricultural income
in that case shall be-
(a) 40% of the income from such business
(b) 60% of the income from such business
(c) 65% of the income for such business
(d) None of above
4. If a Company declares divided out of Agricultural Income, such dividend declared by the Company shall
be-
(a) Exempt in the hands of the Shareholder
(b) Not be subject to any Income Tax, either in the hand of Company or the Share holders
(c) Included in the Total Income of the Company
(d) Taxable in the hands of the Shareholders.
(a) the foreign enterprise is not engaged in any business or profession in India;
(b) his stay in India does not exceed 90 days in aggregate; and
(c) such remuneration is not liable to be deducted from the income of the employer under this Act - Sec.
10(6)(vi)
Remuneration for services rendered in connection with his employment on a foreign ship provided his total
stay in India does not exceed 90 days in the previous year - Sec. 10(6)(viii)
Remuneration received as an employee of the Government of a foreign State during his stay in India in
connection with his training in any undertaking owned by Government, Government company, subsidiary of a
Government company, corporation established by any Central, State or Provincial Act and any society wholly
financed by the Central or State Government – Sec. 10(6)(xi)
Tax paid by Government on Royalty or Fees for Technical Service [Sec. 10(6A)]
Tax paid by Government on Income of a Non-resident or a Foreign Company [Sec. 10(6B)]
Tax paid on Income from Leasing of Aircraft [Sec. 10(6BB)]
Tax paid by an Indian company on income arising from leasing of aircraft, etc. to the Government of a foreign
state or foreign enterprise under an approved agreement entered into with such Indian company engaged in the
business of operation of aircraft, provided such agreement was entered into between 1-4-1997 and 31-3-1999 or
after 31-3-2007.
Taxpoint: Only tax paid on such income is exempt, however such income is taxable.
Fees for Technical Services in Project connected with Security of India [Sec. 10(6C)]
Any income arising to notified foreign company by way of royalty or fees for technical services received in
pursuance of an agreement entered into with Central Government for providing services in or outside India in
projects connected with security of India.
Income from service provided to National Technical Research Organisation [Sec. 10(6D)]
Any income arising to a non-resident or to a foreign company, by way of royalty from, or fees for technical services
rendered in or outside India to, the National Technical Research Organisation
Allowance or Perquisite paid Outside India [Sec. 10(7)]
Any allowance or perquisite paid outside India by the Government to a citizen of India for rendering services
outside India.
Death-cum-retirement-gratuity [Sec. 10(10)]
Refer chapter Salaries.
Commutation of Pension [Sec. 10(10A)]
Refer chapter Salaries.
Leave Encashment [Sec. 10(10AA)]
Refer chapter Salaries.
Workmen’s Retrenchment Compensation [Sec. 10(10B)]
Refer chapter Salaries.
Compensation under Bhopal Gas Leak Disaster Act, 1985 [Sec. 10(10BB)]
Compensation for any Disaster [Sec. 10(10BC)]
Any amount received or receivable from the Central Government or a State Government or a local authority by
an individual or his legal heir by way of compensation on account of any disaster, except the amount received or
receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of
any loss or damage caused by such disaster.
Payment under Voluntary Retirement Scheme [Sec. 10(10C)]
Refer chapter Salaries.
Tax paid by Employer on behalf of Employee on Non-monetary Perquisites u/s 17(2) [Sec. 10(10CC)]
Refer chapter Salaries.
8 If policy is issued between 01-04-2003 and 31-03-2012, premium payable for any of the years during the term of the policy exceeds 20% of
the actual capital sum assured
9 Where policy is issued on or after 01-04-2013 and Insured is disable or severe disable as per sec. 80U or suffering from disease specified u/s
80DDB – 15%
Any payment from a provident fund to which the Provident Funds Act, 1925, applies or from any other notified
provident fund set up by the Central Government is exempt.
Exceptions
Interest accrued during the previous year in the account of an employee maintained by the fund shall not be
exempted to the extent it relates to the following amount:
13. Interest payable to a non-resident by a unit located in an International Financial Services Centre in respect of
monies borrowed by it on or after 01-09-2019
Taxpoint: Tax paid on an agreement made between 1-4-1997 and 31-3-1999 is eligible for exemption u/s 10(6BB).
Any income of any body established under any Central, State or Provincial Act which provides for the administration
of any public, religious or charitable trusts or endowments including Maths, Temples, Gurudwaras, Wakfs, Churches
or other places of public religious worship or societies for religious or charitable purposes.
Income of European Economic Community [Sec. 10(23BBB)]
Income of SAARC Fund [Sec. 10(23BBC)]
Income of ASOSAI-SECRETARIAT [Sec. 10(23BBD)]
Income of Insurance Regulatory Authority [Sec. 10(23BBE)]
Income of the Central Electricity Regulatory Commission [Sec. 10(23BBG)]
Income of the Prasar Bharati (Broadcasting Corporation of India) [Sec. 10(23BBH)]
Income of Certain Funds [Sec. 10(23C)]Amended
Any income received by any person on behalf of
1. The Prime Minister’s National Relief Fund or the Prime Minister’s Citizen Assistance and Relief in Emergency
Situations Fund (PM CARES FUND); [sec. 10(23C)(i)]
2. The Prime Minister’s Fund (Promotion of Folk Art); [sec. 10(23C)(ii)]
3. The Prime Minister’s Aid to Students Fund; [sec. 10(23C)(iii)]
4. The National Foundation for Communal Harmony; [sec. 10(23C)(iiia)]
5. The Swachh Bharat Kosh; [sec. 10(23C)(iiiaa)]
6. The Clean Ganga Fund; [sec. 10(23C)(iiiaaa)]
7. The Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund; [sec. 10(23C)(iiiaaaa)]
8. Any other charitable fund or institution notified by the prescribed authority (subject to condition) [sec. 10(23C)
(iv)]
9. Any trust or institution wholly for public religious purposes or wholly for public religious and charitable
purposes notified by the prescribed authority (subject to conditions) [sec. 10(23C)(v)]
10. Any university or other education institutions, (wholly or substantially financed by Government or having
annual receipt of prescribed limit upto ₹ 5 crores) existing solely for education purposes and not for profit.
[sec.10(23C)(iiiac), (iiiad) (vi)]
11. Any hospital or other institution (wholly or substantially financed by Government or having annual receipt
upto ` 5 crores) for treatment of person suffering from illness or mental defectiveness or during convalescence
or requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for profit.
[sec.10(23C)(iiiac), (iiiae) and (via)]
Income of Credit Guarantee Fund Trust for Small Industries [Sec. 10(23EB)]
(c) a domestic company, set up and registered on or after 01-04-2021, having minimum 75% investments in
one or more of the companies or enterprises or entities referred to in item (b); or
(d) a non-banking financial company registered as an Infrastructure Finance Company as referred to in
notification number RBI/2009-10/316 issued by the Reserve Bank of India or in an Infrastructure Debt
Fund, a non-banking finance company, as referred to in the Infrastructure Debt Fund - Non-Banking
Financial Companies (Reserve Bank) Directions, 2011, issued by the Reserve Bank of India, having
minimum 90% lending to one or more of the companies or enterprises or entities referred to in item (b)
(e) a Category-I or Category-II Alternative Investment Fund regulated under the Securities and Exchange
Board of India (Alternative Investment Fund) Regulations, 2012, having 50% investment in one or more
of the company or enterprise or entity referred above or in an Infrastructure Investment Trust referred to
in sec. 2(13A)(i)
Capital Gains of Resultant Fund [Sec. 10(23FF)]
Any income of the nature of capital gains, arising or received by a non-resident or a specified fund, which is on
account of transfer of share of a company resident in India, by the resultant fund or a specified fund to the extent
attributable to units held by non-resident (not being a permanent establishment of a non-resident in India) in
such manner as may be prescribed, and such shares were transferred from the original fund, or from its wholly
owned special purpose vehicle, to the resultant fund in relocation, and where capital gains on such shares were not
chargeable to tax if that relocation had not taken place.
Income of Trade Union [Sec. 10(24)]
Any income chargeable under the heads “Income from house property” and “ Income from other sources” of -
(a) a registered union within the meaning of the Indian Trade Unions Act, 1926, formed primarily for the purpose
of regulating the relations between workmen and employers or between workmen and workmen.
(b) an association of registered unions
Income of specified Provident Funds, etc. (e.g. RPF, Superannuation fund, Approved gratuity fund) [Sec.
10(25)]
Income of Employees’ State Insurance Fund [Sec. 10(25A)]
Income of Scheduled Tribe [Sec. 10(26)]
Following income of member of a Scheduled Tribe is exempt –
(a) from any source in specified areas or States; or
(b) by way of dividend or interest on any securities.
–– provided he resides in specified area or States.
sikkimese male or his father or brother from same father or parental grand father were domiciled in Sikkim on or
before 26.04.1975.
Income of an Agricultural produce Market Committee [Sec. 10(26AAB)]
Income of an agricultural produce market committee or board constituted under any law for the time being in force
for the purpose of regulating the marketing of agricultural produce is exempt.
Income of Corporation for promoting the Interests of the Members of the Scheduled Castes or the Scheduled
Tribe or Backward Classes [Sec. 10(26B)]
Income of Corporation for promoting Interest of Members of a Minority Community [Sec. 10(26BB)]
Income of Corporation for the Welfare and Economic Upliftment of Ex-servicemen [Sec. 10(26BBB)]
Income of a Co-operative Society for promoting the Interests of the Members of Scheduled Castes or
Scheduled Tribes [Sec. 10(27)]
Income of specified Boards [Sec. 10(29A)]
Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board; The Tobacco Board; The
Marine Products Export Development Authority; The Coir Board; The Agricultural and Processed Food Products
Export Development Authority and The Spices Board.
Subsidy received from Tea Board [Sec. 10(30)]
Any subsidy received from or through the Tea Board under any scheme for replantation or replacement of tea
bushes or for rejuvenation or consolidation of areas used for cultivation of tea as the Central Government may
specify, is exempt
Subsidy received from other Board [Sec. 10(31)]
Any subsidy received from or through the concerned Board (like Coffee Boards, Rubber Board, etc.) under any
such scheme for replantation or replacement of rubber plants, coffee plants, cardamom plants or plants for the
growing of such other commodity or for rejuvenation or consolidation of areas used for cultivation of rubber,
coffee, cardamom or such other specified commodity is exempt.
Income of Minor [Sec. 10(32)]
Income up to ₹ 1,500 is exempt in respect of each minor child whose income is clubbed u/s 64(1A).
Income on Transfer of Units of US 64 [Sec. 10(33)]
Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 where such transfer
takes place on or after the 1st day of April, 2002.
Income of Shareholder on Buy-back of Shares [Sec. 10(34A)]
Any income arising to an assessee, being a shareholder, on account of buy back of shares by the company,
which pay additional income-tax u/s 115QA.
Dividend of IFSC unit [Sec 10(34B)]
Dividend income of IFSC unit involved in aircraft leasing business from a company in IFSC engaged in aircraft
leasing business in IFSC is exempt.
Capital Gain on compulsory Acquisition of Urban Land [Sec. 10(37)]
Refer Chapter Capital Gains
Capital Gain on transfer under Land Pooling Scheme for Andhra Pradesh [Sec. 10(37A)]
Refer Chapter Capital Gains
Specified Income, Arising from any International Sporting Event [Sec. 10(39)]
Any specified income, arising from any international sporting event held in India, to the person(s) notified by the
Central Government in Official Gazette, if such international sporting event –
(a) is approved by the International body regulating the international sport relating to such event;
(b) has participation by more than 2 countries;
(c) is notified by the Central Government in the Official Gazette for the purpose of this clause.
Note: For the purpose of this clause “the specified income” means the income, of the nature and to the extent,
arising from the international sporting event, which the Central Government may notify in this behalf.
Reconstruction or Revival of Power Generation Subsidiary Company [Sec. 10(40)]
Any income of any subsidiary company by way of grant or otherwise received from an Indian company, being its
holding company engaged in the business of generation, transmission or distribution of power, if such receipts is
for the settlement of dues in connection with reconstruction or revival of an existence business of power generation.
Note: The above clause is applicable if reconstruction or revival of any existing business of power generation is by
way of transfer of such business to the Indian company notified u/s 80-IA (4)(v)(a)
Income of a Non-profit Body or Authority specified by the Central Government [Sec. 10(42)]
Any specified income arising to a body or authority which -
has been established or constituted or appointed under a treaty or an agreement enterted into by the Central
Government with tow or more countries or a convention signed by the Central Government;
is established or constituted or appointed not for the purpose of profit;
is notified by the Central Government.
Reverse Mortgage [Sec. 10(43)]
Any amount received by an individual as a loan, either in lump sum or in instalment, in a transaction of reverse
mortgage is exempt.
New Pension Trust [Sec. 10(44)]
Any income received by any person for, or on behalf of, the New Pension System Trust is exempt
Specified Income of notified body or authority or Board or Trust or Commission [Sec. 10(46)]]
Any specified income arising to a body or authority or Board or Trust or Commission (by whatever name called),
or a class thereof, which —
(a) has been established or constituted by or under a Central, State or Provincial Act, or constituted by the Central
Government or a State Government, with the object of regulating or administering any activity for the benefit
of the general public;
(b) is not engaged in any commercial activity; and
(c) is notified by the Central Government in the Official Gazette
However, the Central Government may, by issuing notification, extend the period of exemption for a further
period, not exceeding 5 more consecutive assessment years, subject to fulfilment of such conditions as may be
specified in the said notification;
Equalization Levy [Sec. 10(50)]
Any income arising from any specified service provided on or after the date on which the provisions of Chapter
VIII of the Finance Act, 2016 comes into force or arising from any e-commerce supply or services made or
provided or facilitated on or after 01-04-2020 and chargeable to equalisation levy under that Chapter.
However, the income shall not include and shall be deemed never to have been included any income which is
chargeable to tax as royalty or fees for technical services in India under this Act read with the agreement notified
by the Central Government u/s 90 or 90A.
Expenditure related to Exempted Income [Sec. 14A]
For the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred
by the assessee in relation to income, which does not form part of the total income under this Act. Where the AO is
not satisfied with the correctness of the claim of such expenditure by assessee, he can determine the disallowable
expenditure in accordance with the method prescribed by the CBDT.
The provisions of this section shall be applicable even in a case where the income, not forming part of the total
income, has not accrued or arisen or has not been received during the previous year relevant to an assessment
year and the expenditure has been incurred during the said previous year in relation to such income not
forming part of the total income.
Special Provision in respect of Newly established Units in SEZ [Sec. 10AA]
Applicable to: All assessee
Conditions to be satisfied
1. The assessee is an entrepreneur as defined in Sec.2(j) of SEZ Act, 2005.
2. The undertaking has begun or begins to manufacture or produce articles or things or provide services on or
after 01/04/2005 but not after 31/03/2021 in any SEZ.
3. New Business: Business should not be formed by splitting up or reconstruction of an existing business.
Exception:
However, this condition is not applicable when conditions given u/s 33B are satisfied, which are as follows -
(a) The business of an industrial undertaking carried on in India is discontinued in any previous year by
reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by
the assessee being used for business purpose.
(b) Such damage was caused due to -
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of
war),
(c) Such business is re-established, reconstructed or revived by the assessee at any time before the expiry of
3 years from the end of previous year in which such damage was caused.
4. New Plant and Machinery: Such undertaking should not be formed by transfer of machinery or plant
previously used for any purpose.
Exception:
(a) A plant or machinery is deemed as a new asset if the following conditions are satisfied -
(i) Such plant or machinery is imported into India;
(ii) Depreciation on such asset has not been allowed under this Act to any person; and
(iii) The assessee was the first user of such asset in India.
(b) Where the total value of old plant and machinery transferred to the new business does not exceed 20% of
total value of plant and machinery used in such business, then this condition is deemed to be satisfied.
Taxpoint: Usage of old plant and machinery upto 20% of total value of plant and machinery is allowed.
5. A report of a chartered accountant in specified Form must be uploaded one month prior to the due date of filing
return of income.
Quantum of Deduction
Period Deduction
For first 5 years from Profits of the business of the undertaking × Export turnover
the commencement of Total turnover of the business carried on by the undertaking
operation
For next 5 years 50% of [Profits of the business of the undertaking × Export turnover]
Total turnover of the business carried on by the undertaking
For next 5 years 50% of [Profits of the business of the undertaking × Export turnover]
Total turnover of the business carried on by the undertaking
Conditions: Such profit must be credited in reserve account called “SEZ Re-
investment Allowance Reserve A/c”.
Utilisation of such Reserve:
¾¾ Such reserve shall be utilised for the purposes of acquiring new machinery
or plant, which is first put to use before the expiry of a period of next 3 years
following the previous year in which the reserve was created.
¾¾ Until the acquisition of new machinery or plant, such reserve can be utilised
for any purpose of the business of the undertaking other than for distribution by
way of dividends or profits or for remittance outside India as profits or for the
creation of any asset outside India.
Export turnover means -
It means the consideration in respect of export by the undertaking, being the Unit of articles or things or
services received in or brought into, India but does not include:
1. Freight, telecommunication charges and insurance attributable to the delivery of the articles or things
outside India;
2. Expenses incurred in foreign exchange in providing technical services outside India.
Quick MCQs:-
1. Income that do not form part of the total Income are called
(a) Exempt Income
(b) Deduction
(c) Excluded Income
(d) None of the above
5. Which of the following income would be exempt in the hands of a Sikkimese Individual?
(a) Only income from any sources in the State so of Sikkim
(b) Only income by way of dividend
(c) Only income from interest on securities
(d) All of the above
Exercise
A. Theoretical Questions:
¾¾ Multiple Choice Questions:
1. Out of the following which one is not a capital receipt?
a. Dividend on investment
b. Bonus Shares
c. Sale of know-how
d. Compensation received for vacating business place
2. Which of the following is Casual Income?
a. Dividend income
b. Winning from lotteries
c. Interest received
d. Pension received
3. Which of the following receipt is not included in the term ‘Income’ under the Income-tax Act,
1961?
a. Profits and gains of Business or Profession
b. Profit in lieu of salary
c. Dividend
d. Reimbursement of travelling expenses
4. A person is said to be a person of Indian origin if –
a. He or either of his parents were born in undivided India
b. He or either of his siblings were born in undivided India
c. He or either of his parents or either of his grandparents were born in undivided India
d. He was born in India
5. Income received in India in the previous year is taxable in the hands of –
a. Resident
b. Non-Resident
c. All assessee irrespective of residential status
d. Not Ordinarily resident
6. An individual is said to be resident in India if –
a. He has a house in India
b. He is in India in the previous year for a period of 182 days or more
c. He is in India for a period of 30 days or more during the previous year and for 365 or more
days during 4 previous years immediately preceding the relevant previous year
d. His parents are Indian citizen
B. Numerical Questions
¾¾ Multiple Choice Questions
1. An individual (aged 28 Years) born in India left for first time for employment in France on
30.10.2023. His visit outside India is for the first time. His residential status for the assessment
year 2024-25 will be –
a. Resident and ordinarily resident
b. Resident but not ordinarily resident
c. Non-resident
d. Residential Status is not applicable
2. Income of ₹ 3,00,000 is received in Sri Lanka by an ordinarily resident of India. But later on
₹ 50,000 is remitted to India –
3. An individual is said to be a resident in India in the previous year (in which the Feb month has 29
days) if he is in India in that year for a period of ___.
a. 182 days or more
b. 183 days or more
c. 70 days or more
d. 150 days or more
4. Mr. X is engaged in growing and manufacturing tea in India. His income from this activity is
₹ 1,40,000. His agriculture income will be –
a. ₹ 70,000
b. ₹ 84,000
c. ₹ 1,40,000
d. ₹ 56,000
[Answer : 1-a ; 2-a ; 3-a ; 4-b]
¾¾ Unsolved Case
1. Parikshit (aged 25 years) is engaged in growing and manufacturing tea in India. His profit for the
previous year 2023-24 amounts to ₹ 10,00,000 which includes profit of ₹ 2,00,000 from sale of
green leaves plucked in his own garden. He has no other income during the year.
On the basis of aforesaid information, you are requested to answer the following:
a. What would be his agricultural income?
b. What would be his tax liability for the relevant assessment year
[Answer : [Hints: (a) ₹ 6,80,000; (b) ₹ 1,560]]
¾¾ References:
https://www.incometaxindia.gov.in/
https://www.incometax.gov.in/
https://www.indiabudget.gov.in/
2.1 Salaries
� Apply the knowledge to ascertain the gross total income of the person
Salaries 2.1
Salary is the recompense or consideration given to a person for the pains he has bestowed upon another’s business”
– Stroud’s Judicial Dictionary
Employer-employee relationship
A payment can be construed as salary only if the payer is the employer and the payee is the employee of the payer.
Criteria for employer-employee relationship : The key criteria to hold this relationship is that, employee is
always bound to work as per the direction and supervision of the employer.
Payment in employer’s capacity : To treat any payment as salary it is necessary that the payer, being the
employer, must have made the payment in such (employer’s) capacity.
Contract of service vs contract for service : In “contract of service”, the employer can direct and control the
duties and the manner of performance of the employee hence employer-employee relationship exists in such
contract. However, in case of “contract for service” the contractee can simply decide and quote the object or
target to be achieved but cannot decide or direct the manner of performance.
Agent and Principal : If a person is acting as an agent for his principal, any commission or remuneration
earned by the agent is not taxable under the head “Salaries”. This is because, an agent is not the employee of
his principal.
Salary received by a partner from its firm shall not be taxable as salary, because there is no employer-
employee relationship between the firm and the partner. Such salary shall be taxable under the head “Profits &
gains of business or profession”.
Salary received by proprietor from his proprietorship firm is not an income. As proprietor and proprietorship
firm are the same person and no one can earn from himself.
Remuneration to director from his company can be treated as salary only if the director is employee of the
company, otherwise the same shall be taxable under the head “Income from other sources”.
Note : Directors’ sitting fee is taxable under the head “Income from other sources”.
Pension received by the widow or legal heir of deceased employee is not taxable as salary as no employer-
employee relationship exists between the payer and the payee. However, such amount shall be taxable under
the head “Income from other sources”.
Remuneration received by Judges is taxable under the head “Salaries” even though they are not having any
employer.
Concluding the above discussions, a payment received for services rendered, from a person other than employer, is
not taxable under the head “Salaries” but may be taxed under the head “Profits & gains of business or profession”
or “Income from other sources”.
Illustration 1 :
State whether the following receipts should be treated as salary or not?
A teacher receives emoluments in kind from school in which he teaches.
Yes, it is immaterial whether salary has been received in cash or in kind.
A teacher of a college receives fees from an University for checking answer sheets.
No, as employer – employee relationship does not exist between payer and payee. (College-teacher is not the
employee of the University). Such receipt shall be taxable under the head ‘Income from other sources’.
A payment made to the Member of the Parliament or the State legislature.
No, as employer-employee relationship does not exist.
A member of the Parliament or the State legislature is not treated as employee of the Government. Payment
received by them shall be taxable under the head “Income from other sources”.
Solution :
Gross taxable salary for the previous year 2023-24 shall be calculated as under :
Retirement Benefits
2.1.6 Gratuity
Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Sec. 10(10)
deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity
received by an assessee other than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received
by an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of India.
Treatment :
In case of an employee of a seasonal establishment: 15 days shall be replaced by 7 days. (i.e., 7 × Completed
26
year of service × Salary p.m.)
In case of a piece-rated employee: 15 days salary would be computed on the basis of average of total wages
(excluding wages paid for over time) received for a period of 3 months immediately preceding the termination
of his employment.
Illustration 2 :
Ashok, an employee of ABC Ltd., receives ₹ 8,05,000 as gratuity under the Payment of Gratuity Act, 1972. He
retires on 10th September, 2023 after rendering service for 35 years and 7 months. The last drawn salary was
₹ 32,700 per month. Calculate the amount of gratuity chargeable to tax.
Solution :
Computation of taxable gratuity of Mr. Ashok for the A.Y. 2024-25 :
Notes :
a. While calculating completed year of service ignore any fraction of the year. (e.g. 7 years 9 months will be
treated as 7 years only)
b. Average Salary here means, Basic + DA# + Commission (being a fixed percentage on turnover) being last
10 months average salary, immediately preceding the month of retirement. (E.g. If an employee retires on
18/11/2023 then 10 months average salary shall be a period starting from Jan’ 2023 and ending on Oct’ 2023).
#
If DA is not forming a part of retirement benefit then the same shall not be included in salary for above
purpose. However, DA itself shall be fully taxable.
Illustration 3 :
Mr. Oldman retired from his job after 29 years 6 months and 15 days of service on 17/12/2023 and received gratuity
amounting ₹ 4,00,000. His salary at the time of retirement was basic ₹ 6,000 p.m., dearness allowance ₹ 1,200 p.m.,
House rent allowance ₹ 2,000, Commission on turnover 1%, Commission on profit ₹ 5,000. He got an increment
on 1/4/2023 of ₹ 1,000 p.m. in Basic. Turnover achieved by assessee ₹ 1,00,000 p.m. Calculate his taxable gratuity
if he is a —
a. Government employee
b. Non-Government employee, covered by the Payment of Gratuity Act;
c. Non-Government employee not covered by the Payment of Gratuity Act
Solution :
a. Government employee: Taxable amount: Nil as per section 10(10)(i).
b. & c. Other cases :
Computation of taxable gratuity of Mr. Oldman for the A.Y. 2024-25 :
Particulars 1 2 3 4 5 6 7 8 9 10 Total
Feb’23 Mar Apr May June July Aug Sept Oct Nov
Basic 5,000 5,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 58,000
D.A. 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 12,000
Commission 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 10,000
Total 80,000
Average salary = ₹ 80,000 / 10 months 8,000
Test Yourself
1. Mrs. Payal retired from Pajeb Ltd. on 29/8/2023 after completing 30 years 9 months of service and received
a gratuity of ₹ 2,00,000. Her last drawn salary: Basic ₹ 10,000 p.m. + DA ₹ 5,000 p.m. + Commission
being a fixed percentage on turnover ₹ 2,000 p.m. (turnover evenly accrued during the previous year) +
Commission on Profit ₹ 23,000 for this year. Her last increment was on 1/1/2023 in Basic ₹ 1,000 and in DA
₹ 500. Find taxable gratuity assuming that she is not covered by the Payment of Gratuity Act.
Hints
1. Nil;
Legal representative is not liable for payment of tax on income that has not accrued to the deceased till his
death.
Leave salary paid to the legal heir of deceased employee is not taxable as salary. [Circulars Letter No.
F.35/1/65-IT(B), dated 5/11/1965]. Further, leave salary by a legal heir of the Government employee who died
in harness is not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].
Taxpoint : If gratuity becomes due before the death of the assessee (no matter when and by whom received), it
shall be taxable in the hands of employee. Whereas if gratuity becomes due after the death of assessee, it shall
not be taxable (even in the hands of legal heir of the assessee).
Illustration 4 :
Mrs. X is working with ABC Ltd. since last 30 years 9 months. Her salary structure is as under :
Basic ₹ 5,000 p.m. Dearness allowance ₹ 3,000 p.m.
On 15/12/2023, she died. State the treatment of gratuity in following cases:
Case 1 : Mrs. X retired on 10/12/2023 & gratuity ₹ 4,00,000 received by her husband (legal heir) as on 18/12/2023.
Case 2 : Husband of Mrs. X received gratuity on 18/12/2023 falling due after death of Mrs. X.
Mrs. X is covered by the Payment of Gratuity Act.
Solution :
In Case 1, Computation of taxable gratuity in hands of Mrs. X for the A.Y. 2024-25 :
Treatment :
Notes :
a. Leave encashment received from more than one employer: Where leave encashment is received from more
than one employer in the same previous year, the aggregate amount exempt from tax shall not exceed the
statutory deduction i.e. ₹ 25,00,000.
b. Earlier deduction claimed for leave encashment: While claiming the statutory amount (i.e. ₹ 25,00,000) any
deduction claimed earlier as leave encashment shall be reduced from ₹ 25,00,000.
Illustration 5 :
a. Mr. Bhanu is working in Zebra Ltd. since last 25 years 9 months. Company allows 2 months leave for every
completed year of service to its employees. During the job, he had availed 20 months leave. At the time of
retirement on 10/8/2023, he got ₹ 1,50,000 as leave encashment. As on that date, his basic salary was ₹ 5,000
p.m., D.A. was ₹ 2,000 p.m., Commission was 5% on turnover + ₹ 2,000 p.m. (Fixed p.m.). Turnover effected
by the assessee during last 12 months (evenly) ₹ 5,00,000. Bhanu got an increment of ₹ 1,000 p.m. from
1/1/2023 in basic and ₹ 500 p.m. in D.A. Compute his taxable leave encashment salary.
b. How shall your answer differ if the assessee had taken 2 months leave instead of 20 months, during his
continuation of job.
Solution :
Working :
1. Completed year of service: 25 years 9 months = 25 years
2. As per sec. 3(35) of the General Clauses Act, 1897, month shall mean a month reckoned according to the
British calendar e.g. the period commencing from 7th September & end on 6th October shall be a month.
3. Salary here means Basic + Dearness Allowance + Commission on turnover (last 10 months average from the
date of retirement)
Oct’ Aug
22 Jan’ 10
Particulars Nov Dec Feb Mar April May June July Total
(21 23 Days
days)
Basic 2,710 4,000 4,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 1,613 47,323
D.A. 1,016 1,500 1,500 2,000 2,000 2,000 2,000 2,000 2,000 2,000 645 18,661
Commission 500000 × 5% × 10/12 20,833
Total 86,817
Average salary i.e. ₹ 86,817 / 10 months 8,682
Monthly fixed commission is irrelevant. Commission as fixed percentage of turnover is to be considered.
Computation of taxable leave encashment salary of Mr. Bhanu for the A.Y. 2024-25
Test Yourself
1. Miss Mamta has been working with X Ltd. for last 20 years and 11 months. Before that, she was employed
in Y Ltd. wherefrom, she received leave encashment ₹ 40,000 (fully claimed as deduction).
On 31/7/2023, she has taken voluntary retirement from X Ltd. and received leave encashment ₹ 3,00,000. At
the time of retirement, her monthly salary detail was as under:
Basic Salary ₹ 5,000, D.A. ₹ 2,000, Commission as a % on turnover ₹ 2,000 p.m. (Turnover accrued evenly
throughout the year). Her last increment was ₹ 1,000 in basic salary fell due on 1/1/2023.
X Ltd. allows 20 days leave to its employees for each completed year of service. During continuation of
service she availed 160 days leave. Find her taxable leave salary.
Hints
1. ₹ 2,30,400;
One third of total pension (which assessee is normally entitled for) commuted is exempt.
Taxpoint: It is immaterial whether the employee is covered by the Payment of Gratuity Act or not.
Case D : Commuted pension received by an employee who does not receive gratuity [Sec. 10(10A)(ii)]
One half of total pension (which assessee is normally entitled for) commuted is exempt.
Notes :
a. Pension received by a widow or legal heir of a deceased employee shall not be taxable as salary but taxable u/s
56 as income from other sources (further refer chapter “Income from other sources”.)
b. Where commuted pension is taxable, relief u/s 89 is available.
c. Pension received from United Nations Organisation is not taxable. Further, pension received by a widow of the
United Nations ex-officials from UN Joint Staff Pension Fund is also exempt
Illustration 7 :
Mr. Amit has retired from his job on 31/3/2023. From 1/4/2023, he was entitled to a pension of ₹ 3,000 p.m. On
1/8/2023, he got 80% of his pension commuted and received ₹ 1,20,000. Compute taxable pension if he is:
Case a) Government employee; Case b) Non-Government employee & not receiving gratuity;
Case c) Non-Government employee (receiving gratuity, but not covered by the Payment of Gratuity Act)
Solution :
Computation of taxable pension of Mr. Amit for the A.Y. 2024-25 :
Particulars Case a Case b Case c
Details Amount Details Amount Details Amount
Uncommuted Pension
- 1/4/2023 to 31/7/2023 (₹ 3,000x4) 12,000 12,000 12,000
- 1/8/2023 to 31/3/2024 (₹ 600 x 8) 4,800 16,800 4,800 16,800 4,800 16,800
Commuted Pension 1,20,000 1,20,000 1,20,000
Fully exempted u/s 10(10A)(i) 1,20,000 Nil
Exempted u/s 10(10A)(ii) 75,000 45,000
(½ of ₹ 1,50,000#)
Exempted u/s 10(10A)(ii) 50,000 70,000
(1/3 of ₹ 1,50,000#)
Taxable Pension 16,800 61,800 86,800
# Commuted Amount for 80% of pension = ₹ 1,20,000. Commuted amount for 100% of pension = ₹ 1,50,000
Test Yourself
1. Mr. Narayan retired from service on 1/6/2023. As on that date, his monthly salary was Basic ₹ 5,000 p.m.,
Commission on turnover 5%. Total turnover achieved by him during last 10 months (occurred evenly)
₹ 5,00,000. On retirement, after 20 years 6 months of service, he received gratuity ₹ 5,00,000, leave salary
₹ 3,00,000. He is entitled to pension of ₹ 1,500 p.m. On 1/1/2024, he commuted 60% of his pension and
received ₹ 90,000. Compute gross salary assuming he is covered by the Payment of Gratuity Act.
Hints
1. ₹ 7,34,608;
Note: Salary here means [Basic + DA (if forms a part of retirement benefit) + fixed percentage of commission
on turnover], last drawn.
# Specified Employer
Any company; or An authority established under Central, State or Provincial Act; or A local authority; or A Co-
operative society; or A specified University; or An Indian Institute of Technology (IIT); or Any State Government;
or The Central Government; or Notified Institution of Management (IIM Ahmedabad, IIM Banglore, IIM Calcutta,
IIM Lucknow, and the Indian Institute of Foreign Trade New Delhi); or Notified Institution.
Taxpoint: Voluntary retirement compensation received from the employer being an individual, firm, HUF, AOP,
etc. is fully taxable in the hands of employee.
Note:
Where exemption is allowed to an assessee under this section in any assessment year then no deduction is
allowed in any subsequent assessment years. It means deduction under this section is allowed once in life of
an assessee.
Where any relief has been allowed to an assessee u/s 89 in respect of voluntary retirement, no exemption shall
be allowed under this section.
2.1.14 Allowances
Allowance means fixed quantum of money given regularly in addition to salary to meet particular requirement. The
name of particular allowance may reveal the nature of requirement, e.g. House Rent Allowance, Tiffin Allowance,
Medical Allowance etc.
Allowances at a glance :
Allowances Meaning
City Compensatory An allowance to meet personal expenses, which arise due to special circumstances,
Allowance or to compensate extra expenditure by reason of posting at a particular place.
Tiffin Allowance An allowance to meet the expenditure on tiffin, refreshment etc.
Medical Allowance An allowance to meet the expenditure on medical treatment etc.
Servant Allowance An allowance to meet the expenditure of servant for personal purpose.
Illustration 9 :
Compute the taxable house rent allowance of Mr. Abhijeet from the following data :
Basic Salary ₹ 5,000 p.m., D.A. ₹ 2,000 p.m., HRA ₹ 4,000 p.m., Rent paid ₹ 4,000 p.m. in Pune.
On 1/10/2023, employee hired a new flat in Kolkata at the same rent as he was posted to Kolkata.
Solution :
Computation of taxable house rent allowance of Mr. Abhijeet for the A.Y. 2024-25 :
Test Yourself
Basic salary ₹ 5,000 p.m., D.A. ₹ 2,000 p.m. (40% does not form a part of retirement benefit), HRA ₹ 5,000
p.m. Rent paid by assessee for a house in Kolkata ₹ 4,000 p.m. Find taxable HRA.
Hints
1. ₹ 22,800;
Allowance Meaning
An allowance, by whatever name called, to meet the cost of travel on tour. Cost of travel
Travel or transfer
includes any sum paid in connection with transfer, packing and transportation of personal
Allowance
effects on such transfer.
An allowance, by whatever name called, granted on tour (or for the period of journey in
Daily Allowance connection with transfer) to meet the ordinary daily charges incurred by employee on
account of absence from his normal place of duty.
Any allowance granted to meet the expenditure on conveyance in performance of duties of
the office, provided free conveyance is not provided by the employer.
Conveyance
Allowance Taxpoint : Expenditure for covering the journey between office and residence is not treated
as expenditure in performance of duties of office and consequently not covered under this
allowance. (Refer Transport allowance)
Any allowance (by whatever name called) to meet the expenditure of assistant or helper,
Helper / Assistant provided such helper is appointed for the performance of duties of an office.
Allowance
Taxpoint : Servant allowance is fully taxable.
Any allowance, by whatever name called, granted to encourage academic, research
Research
and other professional pursuits. This allowance may also be termed as Professional
Allowance
Development / Academic allowance
Any allowance, by whatever name called, to meet the expenditure on purchase or
Uniform maintenance of uniform wear, during the performance of duties of an office.
Allowance Taxpoint : Uniform allowance is different from Dress allowance. Dress allowance is fully
taxable.
Tax Treatment of aforesaid allowances :
Minimum of the following shall be exempted :
a. Actual amount received; or
b. Actual expenditure incurred for such purpose.
Allowances, deduction from which do not depend on actual expenditure [Sec. 10(14)(ii)]
Children Education Allowance
An allowance to meet the expenses in connection with education of children, by whatever name called.
Treatment : Minimum of the following is exempted from tax -
a. ₹ 100 per month per child (to the maximum of two children)
b. Actual amount received for each child (to the maximum of two children)
Children Hostel Allowance
An allowance to meet the hostel expenses of children, by whatever name called.
Treatment : Minimum of the following is exempted from tax -
a. ₹ 300 per month per child (to the maximum of two children)
b. Actual amount received for each child (to the maximum of two children)
Notes for Children Education Allowance and Hostel Allowance :
a. Child includes adopted child, step-child but does not include illegitimate child and grandchild.
b. Child may be major or minor child.
c. Deduction is available irrespective of actual expenditure incurred on education of child.
Illustration 10 :
Mr. Laloo Singh, received education allowance of ₹ 80 p.m. for his 1st child, ₹ 90 p.m. for his 2nd child and ₹ 120
p.m. for his 3rd child. He also received hostel allowance of ₹ 1,000 p.m. None of his children are studying. Find
taxable Children Education Allowance and Hostel allowance.
Solution :
Computation of taxable children education allowance for Mr. Laloo Singh for the A.Y. 2024-25 :
Illustration 11 :
Mr. & Mrs. X have three children and two of them are not studying. Both Mr. & Mrs. X are working in A Ltd. and
getting children education allowance ₹ 500 per month and hostel allowance ₹ 1,000 per month. Compute taxable
children education allowance and hostel allowance.
Solution :
Computation of taxable allowance of Mr. & Mrs. X for the A.Y. 2024-25 :
Mr. X Mrs. X
Particulars
Details Amount Details Amount
Education allowance (₹ 500 x 12) 6,000 6,000
Less : Exemption (₹ 100 x 12 x 2) 2,400 3,600 2,400 3,600
Hostel Allowance (₹ 1,000 x 12) 12,000 12,000
Less : Exemption (₹ 300 x 12 x 2) 7,200 4,800 7,200 4,800
Taxable Allowance 8,400 8,400
Test Yourself
1. Mr. Anand has six children. He receives Children education allowance ₹ 1,000 p.m. and Hostel allowance
₹ 1,500 p.m. None of his children are studying. Compute taxable allowances.
2. Mr. Sushank has only one child aged one year. His employer allows him Education allowance ₹ 80 p.m. and
Hostel allowance ₹ 1,000 p.m. His child has neither been sent to school nor to any hostel. Compute taxable
allowances.
Hints
1. ₹ 20,400; 2. ₹ 8,400
Transport Allowance
An allowance, by whatever name called, to meet the expenditure for the purpose of travelling between the place of
residence and the place of duty.
Available to: Assessee is blind / deaf and dumb / orthopaedically handicapped.
Treatment : Minimum of the following shall be exempted :
a. Actual amount received; or
b. ₹ 3,200 p.m.
Taxpoint : No exemption is available to the assessee other than specified above.
Allowance to Government employees outside India
As per sec. 10(7), any allowance or perquisite allowed outside India by the Government to an Indian citizen for
rendering services outside India is wholly exempt from tax.
Taxpoint :
1. Assessee must be -
a. Government employee b. Citizen of India; and c. Working outside India
2. Any allowance or perquisite to such employee shall be exempted u/s 10(7)
Allowance received from UNO (United Nations Organisation)
Basic salary or Allowance paid by the UNO to its employees are not taxable.
Compensatory allowance under Article 222(2) of the Constitution
It is fully exempt from tax.
Allowance to judges of the High Court or the Supreme Court
Any allowance paid to Judges of the High Court u/s 22A(2) and sumptuary allowance u/s 22C of the “High Court
Judges (Conditions of Service) Act, 1954” is not taxable. Allowance to the Supreme Court Judges u/s 23B of the
“Supreme Court Judges (Conditions of Service) Act, 1958” is also exempt.
Salary to teacher or professor from SAARC Member States [DTAA]
Salary including allowances and perquisites of a teacher or professor or research scholars from SAARC Member
States shall not be taxable if following conditions are satisfied :
1. Such professor, teacher or research scholar is a resident of other SAARC member State (i.e., Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan & Sri Lanka) prior to visiting another member State.
Taxpoint : An individual is deemed to be a resident of a member State if he/she is resident in that member
State in the fiscal year in which he visits the other member State or in the immediately preceding fiscal year.
2. Such visit is for the purposes of teaching or engaging in research or both at a university or college or similar
approved institution in that other Member State.
3. The remuneration from aforesaid activities in other Member State is exempt for a period of 2 years from the
date of arrival in the other member State.
Illustration 12 :
Mr. Mugal joined Star Ltd. on 1/4/2023. Details regarding his salary are as follows :
Particulars Amount (in `)
Basic 5,000 p.m.
Dearness Allowance 2,000 p.m. (50% considered for retirement benefit)
Education Allowance 1,000 p.m. (he has 1 son and 3 daughters)
Hostel Allowance 2,000 p.m. (none of the children is sent to hostel)
Medical Allowance 1,000 p.m. (total medical expenditure incurred ₹ 3,000)
Transport Allowance 1,800 p.m. (being used for office to residence & vice versa)
Servant Allowance 1,000 p.m.
City compensatory Allowance 2,000 p.m.
Entertainment Allowance 1,000 p.m.
Assistants Allowance 3,000 p.m. (paid to assistant ₹ 2,000 p.m.)
Professional Development Allowance 2,000 p.m. (actual expenses for the purpose ₹ 8,000 p.m.)
Bonus 24,000 p.a.
Commission 9,000 p.a.
Fees 5,000 p.a.
Compute his gross taxable salary for the assessment year 2024-25.
Solution :
Computation of gross taxable salary of Mr. Mugal for the A.Y. 2024-25 :
Particulars Details Amount Amount
Basic Salary 60,000
Bonus 24,000
Commission 9,000
Fees 5,000
Allowances
Dearness Allowance 24,000
Education Allowance 12,000
Less : Exemption (₹ 100 x 2 x 12) 2,400 9,600
Hostel Allowance 24,000
Less : Exemption (₹ 300 x 2 x 12) 7,200 16,800
Medical Allowance 12,000
Transport Allowance 21,600
Less : Exemption Nil 21,600
Servant Allowance 12,000
City Compensatory allowance 24,000
Entertainment Allowance 12,000
Assistance Allowance 36,000
Less : Exemption (Being actual expenditure) 24,000 12,000
Professional development allowance 24,000
Less : Exemption (Actual expenditure max. of amount received) 24,000 Nil 1,44,000
Gross Taxable Salary 2,42,000
Illustration 13 :
Miss Sonal, being a citizen of India and Government employee has following salary details :
(Amount in `)
Basic Salary 2,000 p.m.
Dearness Allowance 3,000 p.m.
Dearness Pay 1,000 p.m.
Fees 50,000 p.a.
House Rent Allowance 5,000 p.m. (Rent paid for Kolkata house ₹ 4,000 p.m.)
Children Education allowance 3,000 p.m. (She is having one adopted child)
Children allowance 1,000 p.m.
Hostel allowance 2,000 p.m.
Dress Allowance 5,000 p.m. (Actual expenditure ₹ 10,000 p.m.)
Uniform Allowance 2,000 p.m. (Actual expenditure ₹ 1,000 p.m.)
Tiffin Allowance 1,000 p.m.
Education Allowance for her own education 2,000 p.m. (Actual expenditure ₹ 1,500 p.m.)
Compute her gross salary for the assessment year 2024-25.
Solution :
Computation of gross taxable salary of Miss Sonal for the A.Y. 2024-25 :
Illustration 14 :
In the above illustration, how shall your answer differ if Miss Sonal is working outside India and rent paid for the
house in Japan.
Solution :
Computation of gross taxable salary of Miss Sonal for A.Y. 2024-25 :
Particulars Amount
Basic Salary 24,000
Fees 50,000
Gross Taxable Salary 74,000
Note : Since, Miss Sonal, being Government-employee and citizen of India, is working outside India. Hence, all
allowances paid to her by the Government are exempted u/s 10(7).
Notes :
a. Perquisites are taxable under the head “Salaries” only if, they are :
¾¾ Allowed by an employer to his employee or any member of his household.
¾¾ Resulting in the nature of personal advantage to the employee.
¾¾ Derived by virtue of employee’s authority.
b. Perquisite may be contractual or voluntary. In other words, it is not necessary that the benefit must have been
received under an enforceable right.
c. Perquisite may be received from the former, present or prospective employer
d. Member of household includes :
¾¾ Spouse (whether dependent or not) ¾¾ Parents (whether dependent or not); ¾¾ Servants; and
¾¾ Children and their spouse (whether dependent or not); ¾¾ Dependents.
$
Specified employees [Sec. 17(2)(iii)]
Specified employee means :
1. A director employee.
Note : It is immaterial -
a. whether he is a nominee of the workers, financial institutions, etc. on the board;
b. whether the employee is full time director or a part time; and
c. whether he was a director throughout the previous year or not.
Taxpoint :
¾¾ A director-employee shall be treated as specified employee of that company only.
Example 4 : If Manu is working with X Ltd. as director-employee and with Y Ltd. as employee only, she will
be treated as specified employee only for X Ltd. and not for Y Ltd.
¾¾ Director even for a day is construed as specified employee of such company.
2. An employee who has substantial interest in the employer company.
Substantial interest means the employee who beneficially holds 20% or more voting power in the employer
company.
Taxpoint :
¾¾ Such employee shall be treated as specified employee of that company only.
¾¾ The main criteria is beneficial ownership and not the legal ownership.
¾¾ Substantial interest must be held by the assessee individually, and not together with relative.
Example 5 : Mr. Mohan holds 18% equity share of X Ltd. and his wife holds 7% equity share of the same
company. In such case Mr. Mohan will not be treated as specified employee.
3. An employee whose aggregate salary from all employers together exceeds ₹ 50,000 p.a.
For computing the sum of ₹ 50,000, following are to be excluded/deducted :
a. All non-monetary benefits;
b. Non-taxable monetary benefits;
c. *Deduction u/s 16(ia), 16(ii) and 16(iii) [Discussed later in this chapter]; and
d. Employer’s contribution to Provident Fund.
Taxpoint :
¾¾ Where salary is received from two or more employers, the aggregate salary from all employers shall be
considered for calculation of above ceiling. And if aggregate salary exceeds ₹ 50,000 p.a. the employee
shall be treated as specified employee of all employers.
Example 6 : Mr. Rohan is working with X & Co. and Y Ltd. His taxable monetary salary from X & Co.
is ₹ 36,000 p.a. and from Y Ltd. is ₹ 45,000 p.a. Since the aggregate salary is more than ₹ 50,000 p.a. Mr.
Rohan will be treated as specified employee for both the employer i.e. X & Co. and Y Ltd.
¾¾ Even ‘DA not forming a part of salary for retirement benefit’ shall be included in salary, while determining
the above limit of ₹ 50,000 p.a.
Exempted Perquisites
Following perquisites are exempted in hands of employee :
1. Tea or snacks : Tea, similar non-alcoholic beverages and snacks provided during working hours.
2. Food : Food provided by employer in working place.
3. Recreational facilities : Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate : Goods manufactured by employer and sold by him to his
employees at concessional (not free) rates.
¾¾ in a remote area to an employee working at a mining site or an onshore exploration site or a project
execution site or a dam site or a power generation site or an offshore site.
19. Tax on non-monetary perquisite paid by employer on behalf of employee. With effect from A.Y. 2003-04 a
new sec. 10(10CC) has been inserted which provides that income tax paid by employer on behalf of employee
on income, being non-monetary perquisite, is not a taxable perquisite.
20. Health club, Sports club facility
* Discussed later in this chapter
Taxpoint : Employees of a local authority or a foreign government are not covered under this category.
II) Other Employees (residual category)
The value of perquisite is determined as per the following table:
ii. the value of perquisite of such an accommodation shall be the amount calculated as per residual
category (II) considering as if the accommodation is owned by the employer.
Illustration 15 :
Mr. Chauhan has the following salary structure :
a) Basic Salary ₹ 5,000 p.m. b) Entertainment Allowance ₹ 1,000 p.m.
c) Education Allowance ₹ 500 p.m. (he has 3 children) d) DA ₹ 3,000 p.m.
e) Fees ₹ 5,000 p.a. f) Bonus ₹ 10,000 p.a.
g) Professional tax of employee paid by employer ₹ 2,000 for the year
h) He has been provided a rent-free accommodation in Mumbai.
i) 60% of DA only forms part of retirement benefits
Compute taxable value of accommodation in the hands of Mr. Chauhan in the following cases :
I) The employer owns such accommodation.
II) The employer hires such accommodation at a monthly rent of ₹ 900.
Solution :
Taxable value of rent-free accommodation for the A.Y. 2024-25 :
Illustration 16 :
In above illustration, how shall answer differ if the property is situated in a city where population is only 14,60,000.
Solution :
Taxable value of rent free accommodation for the A.Y.2024-25 :
Illustration 17 :
Miss Stuti has the following salary structure :
₹
Illustration 18 :
iii) Academic development allowance ₹ 1,000 p.m., expenditure incurred ₹ 700 p.m.
She has been provided with a rent-free accommodation in Purulia. On 1/7/2023, she was posted to Kolkata. A new
house further allotted to her on same date. But she surrendered her Purulia house only on 31/12/2023. Rent paid
by employer for Purulia House ₹ 500 p.m. while Kolkata house is owned by the employer. Find her gross taxable
salary.
Solution :
Computation of gross taxable salary of Miss Khushi for the A.Y. 2024-25 :
Test Yourself
1. Mr. Raja is the employee of an Indian company. He has been provided a rent-free accommodation in Mumbai
on 1/4/2023 for which the employer is to pay a monthly rent of ₹ 3,000. During the year, employer paid rent
of ₹ 30,000 (2 months rent is outstanding). On 1/9/2023, furniture of ₹ 4,00,000 owned by the employer is
also provided. His Basic salary is ₹ 10,000 p.m. and DA is ₹ 5,000 p.m. Find taxable value of perquisite.
Hints :
1. ₹ 50,333;
Valuation of accommodation provided at concessional rent
Valuation will be made as if the rent-free accommodation is provided and the amount so computed will be reduced
by the rent payable by the employee.
Taxpoint : The above rule of valuation shall be applicable in case of the Government employee also.
Test Yourself
1. Mr. Saket has been provided an accommodation in Patna (owned) with furniture (hire charges paid by
employer ₹ 10,000). His salary details are as under :
¾¾ Basic ₹ 10,000 p.m.
¾¾ D.A. ₹ 2,000 p.m.
¾¾ Transport allowance ₹ 3,000 p.m.
¾¾ Bonus ₹ 10,000 p.a.
¾¾ Fee ₹ 5,000 p.a.
¾¾ Rent paid by employee is ₹ 1,000 p.m. for such house.
Find taxable value of perquisite.
Hints
1. ₹ 27,250;
Such accommodation is provided for a period not exceeding in aggregate 15 days; and
Such accommodation is provided on transfer of employee from one place to another place.
Note : If the employee pays any rent, the value so determined shall be reduced by the rent actually paid or payable
by the employee
Taxpoint :
Salary here has the same meaning as in the case of rent-free accommodation.
Above rule shall be applicable whether the assessee is a Government or a Non-Government employee.
If the facility is provided for more than 15 days, then the perquisite is exempt for first 15 days and thereafter
taxable. E.g. if facility has been provided for 45 days then taxable perquisite shall be only for last 30 days.
Hotel includes licensed accommodation in the nature of motel, service apartment or guest house.
Particulars Amount
The fair market value of the specified security or sweat equity shares, as the case may be, on the ***
date on which the option is exercised by the assessee
Less : The amount actually paid by, or recovered from the assessee in respect of such security or ***
shares
Value of perquisite ***
Notes : Option means a right but not an obligation granted to an employee to apply for the specified security or
sweat equity shares at a predetermined price.
Chauffeur / Driver
If chauffeur is also provided, then salary of chauffeur is further to be added to the value of perquisite (as computed
above). However, if car is used for both i.e. official and personal purpose then ₹ 900 p.m. (irrespective of higher or
lower capacity of car) is to be taken as value of chauffeur perquisite.
Notes :
a. If motor car is provided at a concessional rate then charges paid by employee for such car, shall be reduced
from the value of perquisite.
b. The word “month” denotes completed month. Any part of the month shall be ignored.
c. When more than one car is provided to the employee, otherwise than wholly and exclusively for office purpose,
the value of perquisite for -
¾¾ One car shall be taken as car is provided partly for office and partly for private purpose i.e. ₹ 1,800 or ₹
2,400 p.m. (plus ₹ 900 p.m. for chauffeur, if provided); and
¾¾ For other car(s), value shall be calculated as car(s) are provided exclusively for private purpose.
d. Conveyance facility to the judges of High Court or Supreme Court is not taxable.
e. Use of any vehicle provided to an employee for journey from residence to work place or vice versa is not a
taxable perquisite.
Illustration 20:
Sonam, has been provided a car (1.7 ltr.) by his employer Vikash Ltd. The cost of car to the employer was ₹3,50,000
and maintenance cost incurred by the employer ₹ 30,000 p.a. Chauffeur salary paid by the employer ₹3,000 p.m.
Find value of perquisite for Sonam for the A.Y. 2024-25, if the car is used for:
a) Office purpose. b) Personal purpose. c) Both purposes.
In case (b) and (c), employee is being charged ₹ 15,000 p.a. for such facility.
Solution :
a. Nil, as car is used for office purpose.
b. Taxable value of car facility :
Illustration 21 :
Mr. Piyush has been provided a car (1.5 ltr.) on 15/7/2023. The cost of car to the employer was ₹ 6,00,000 and
maintenance cost incurred by employer ₹ 20,000 p.a. Chauffeur salary paid by employer (Mr. Ratan) ₹ 4,000 p.m.
The car is 40% used for office and 60% for personal purpose. Charges paid by employee for such facility ₹ 5,000
p.a. Find taxable value of perquisite.
Solution :
Taxable value of perquisite :
Illustration 22 :
Mr. Vikram being a Government employee has a car (1.7 ltr.) used for office as well as for personal purpose. During
the year, he incurred ₹ 40,000 on maintenance and ₹ 20,000 on driver’s salary. The entire cost is reimbursed by
employer. Find taxable perquisite.
Solution :
Taxable perquisite in the hands of Mr. Vikram :
As the car is owned by the assessee & maintained by the employer, taxable value of perquisite shall be -
Actual expenditure incurred by the employer as reduced by ₹ 2,400 p.m. (in case of 1.7 ltr.) and ₹ 900 p.m. for
driver’s salary. Hence, taxable amount shall be -
Illustration 23 :
Wasim has a car (1.5 ltr.) used for office as well as for personal purpose. During the year car is used 80% for
business purpose being certified by the employer. During the year, he incurred ₹ 50,000 on maintenance and
running of such car. The entire cost is reimbursed by the employer. Find taxable perquisite if assessee wish to claim
higher deduction, when – (a) A proper log book is maintained; (b) A proper log book is not maintained
Solution :
a. When log book is maintained
Taxable perquisite in the hands of Wasim
Actual expenditure incurred by the employer is reduced to the extent it is used for office purpose, as a proper
record is kept and duly certified by employer.
Illustration 24:
Amit is provided with two cars, to be used official & personal work, by his employer Raj. The following information
is available from the employer records for computing taxable value of perk (assuming car 1, is exclusively used
by Amit).
Illustration 25 :
Mr. Vijay, manager, has been provided the following car facilities by Kishan Ltd. (his employer) :
Case a) Mr. Vijay holds 17% of equity share capital and 30% of preference share capital of Kishan Ltd. and his wife
holds 13% equity share capital of the same company. Assume his total salary during the year other than perquisite
is ₹ 40,000;
Case b) Mr. Vijay holds 25% equity share capital of the employer company.
Solution :
Case a) Since Mr. Vijay is not a specified employee & employer owns all cars therefore car facility shall not be
taxable.
Case b) Since Mr. Vijay holds substantial interest in employer-company hence he is a specified employee.
As employee has been provided 2 cars, used for office as well as for personal purpose, therefore he will have to opt
one car as for ‘office as well as personal purpose’ & the other car for personal purpose. In the given case, assessee
has two options -
Option 1) Car A is used for office as well as personal purpose and car B is used for personal purpose.
Option 2) Car A is used for personal purpose and car B is used for office as well as personal purpose.
Option 1 Option 2
Particulars Workings
Car A Car B Car C Car A Car B Car C
Car used for Both Personal Personal Personal Both Personal
₹ 2,400 x 12 28,800
10% of ₹ 5,00,000 + ₹ 60,000 1,10,000
10% of ₹ 2,00,000 20,000 20,000
10% of ₹ 3,00,000 + ₹ 50,000 80,000
₹ 1,800 x 12 21,600
Total 1,58,800 1,21,600
As option 2 has lesser taxable value, hence assessee will opt for option 2 & taxable value shall be ₹ 1,21,600.
Who is
Owned by Maintained by Used for Taxable Value of perquisite
Chargeable
Not
Office purpose Nil
Applicable
Actual Maintenance + Depreciation @ 10% Specified
Personal purpose
of Original cost employee
Solution :
Taxable Amount
Servant
Case a Case a
Watchman 24,000 Nil
Cook 36,000 36,000
Maid servant 12,000 Nil
Sweeper 6,000 6,000
Gardener (since Rent free accommodation, owned by employer, is provided) Nil Nil
Taxable Perquisite 78,000 42,000
Note : Where the employee is paying any amount for such facility, the amount so paid by employee shall be
reduced from the value determined above.
* However, Hon’ble Punjab & Haryana High Court in the case of CIT –vs.- Director, Delhi Public School (2011) 202 Taxman 318 has held that if value
of perquisite exceeds ₹ 1,000/-, then entire amount shall be taxable.
Who is chargeable?
Notes :
c. Any amount charged from the employee for such facility shall be reduced from the above value.
d. Contribution made under an Educational Trust, created for the children of particular group of employees, is not
taxable.
Case Treatment
If employer is engaged in transportation business. Amount charged from public for such facility is taxable
in the hands of specified employee.
In any other case Actual cost of employer for such facility is taxable in
the hands of all employees.
Notes :
a. In case above facility is provided to employees of Railways & Airlines, nothing shall be chargeable to tax.
b. Any amount charged from the employee for such facility shall be reduced from the above value.
c. Conveyance facility provided to the employee for journey between office and residence is not taxable.
2.1.24 Valuation of perquisite in respect of interest free loan or concessional rate of interest
[Rule 3(7)(i)
Perquisite in respect of interest free loan or loan
at concessional rate of interest to th]e employee
or any member of his household by the employer
or any person on his behalf, is not taxable if
aggregate amount of loan given by the employer
(or any other person on his behalf) does not
exceed ₹ 20,000. The taxable value of such
perquisite shall be determined as per the rate
as on the 1st day of the relevant previous year
charged by the State Bank of India in respect of
loans for the same purpose advanced by it.
Notes :
a. Maximum outstanding monthly balance: Interest is calculated on the maximum outstanding monthly
balance. Maximum outstanding monthly balance means the aggregate outstanding balance for each loan as on
the last day of each month.
b. Loan for medical treatment: Nothing is taxable if loan is given for medical treatment of the employee or any
member of his household in respect of diseases specified in rule 3A. However, such exempted loan will not
include the amount that has been reimbursed by an insurance company under any medical insurance scheme.
c. Concessional interest: Any interest paid by the employee to the employer for such loan shall be reduced from
the above computed value. If rate of interest charged by the employer is higher than the above rate, nothing is
taxable as perquisite.
d. Amount on which interest shall be calculated: If loan amount is more than ₹ 20,000, interest shall be levied
on total loan amount, rather than the excess amount.
e. Treatment of outstanding loan taken earlier: Interest on loan, taken before insertion of this provision, shall
also be treated as taxable perquisite. [Circular No.15/2001dated 12/12/2001]
Notes :
a. Any amount charged from employee shall be reduced from the above determined value.
b. The above provisions are not applicable in case of Leave Travel Concession (discussed earlier)
Solution :
1. Taxable perquisite in the hands of Shradha shall be ₹ 15,000 (being ₹ 3,000 + ₹ 12,000)
2. Taxable perquisite in the hands of Rakhi shall be ₹ 11,000.
3. Taxable perquisite in the hands of Mr. Anirudha shall be ₹ 80,000.
Where expenses (including membership and annual If directly paid by the employer
fees) are incurred by the employee or any member
Any amount incurred by the employer as reduced by
of his household, which is charged to a credit card
amount charged from the employee shall be taxable in
(including any add-on card) provided by the employer
the hands of all employees
or otherwise, are paid or reimbursed by the employer.
If amount reimbursed by the employer
Any amount reimbursed by the employer shall be
taxable in the hands of all employees.
#
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for office
purpose :
a. Complete details in respect of such expenditure are maintained by the employer which may, inter-alia, include
the date of expenditure and the nature of expenditure; and
b. The employer gives a certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duty.
If the asset is owned by the employer 10% of the original cost of such asset.
If the asset is hired by the employer Charges paid or payable by the employer
Notes :
a. Any sum charged from the employee shall be reduced from the value determined as above.
b. Use of computer, laptop, etc. (as discussed earlier) is exempted perquisite.
c. Here movable asset does not include car.
2.1.31 Valuation of the perquisite in respect of movable assets sold by an employer [Rule
3(7)(viii)]
If the sale price is less than
the written down value
(calculated as per method and
rate mentioned below) then the
difference would be treated as
perquisite and taxable in the
hands of all employees.
Rates and methods of
depreciation for different types
of assets are as follow :
Illustration 28:
X Ltd. has sold the following assets to its employee, Mr. Amit. Compute taxable perquisite.
Particulars Amount
Less : Depreciation from 1/7/2022 to 30/6/2023 @ 50% 25,000
WDV as on 1/7/2023 25,000
Less : Depreciation from 1/7/2023 to 18/8/2023 (as not being a complete year) Nil
WDV as on the date of sale 25,000
2. Calculation of WDV of Car :
Particulars Amount
Purchase value 3,00,000
Less : Depreciation from 1/4/2021 to 31/3/2022 @ 20% 60,000
WDV as on 1/4/2022 2,40,000
Less : Depreciation from 1/4/2022 to 31/3/2023 @ 20% 48,000
WDV as on 1/4/2023 1,92,000
Less : Depreciation from 1/4/2023 to 1/3/2024 (as not being a complete year) Nil
WDV as on date of sale 1,92,000
3. Calculation of WDV of television :
Particulars Amount
Purchase value 50,000
Less : Depreciation from 1/4/2018 to 31/3/2023 @ 10% 25,000
WDV as on the date of sale 25,000
4. Depreciation on sofa set is charged @ 10% as per straight-line method. Since the asset is used for more than
10 years, hence its WDV will be Nil.
Test Yourself
1. Mr. Lucky has been provided furniture for household use on 1/7/2023, original cost to employer being
₹ 5,00,000 on 17/8/2019. On 1/2/2024, such furniture being sold to the assessee for ₹ 60,000. Find taxable
perquisite for the previous year 2023-24.
Hints
1. ₹ 2,69,167;
Case Treatment
1. Medical facility provided to the employee or his family in a hospital, clinic, dispensary or Fully Exempted
nursing home maintained by the employer.
2. Reimbursement of medical bill of the employee or his family of -
¾¾ Any hospital maintained by Government or Local Authority; or Fully Exempted
¾¾ Any hospital approved by the Government for its employee.
Case Treatment
3. Payment/reimbursement by employer of medical expenses incurred by an employee
on himself/his family in a hospital, which is approved by the CCIT, for the prescribed
diseases (like Cancer, TB, AIDS, etc.)
Employee must attach with the return of income -
Fully Exempted
¾¾ a certificate from the approved hospital specifying the prescribed disease or ailment
for which hospitalisation was required; and
¾¾ a receipt for the amount paid to the hospital.
4. Group medical insurance (i.e. Mediclaim) obtained by the employer for his employees. Fully Exempted
5. Any reimbursement by employer of any insurance premium paid by the employee, for Fully Exempted
insurance of his health or the health of any member of his family.
6. Reimbursement of medical bill of the employee or his family in respect of any illness Fully Exempted
relating to Covid 19 subject to certain restrictions
b. Medical facility provided outside India
Case Treatment
Medical Expenditure Exempted to the extent permitted by RBI.
Cost of stay abroad (Patient + One Exempted to the extent permitted by RBI.
Attendant/Care taker)
Cost of travel (Patient + One Exempted only when gross total Income of the employee excluding this
Attendant/Care taker) (cost of travel) perquisite, does not exceed ₹ 2,00,000 p.a.
Taxpoint : In calculation of gross total income ceiling, taxable value of
medical treatment perquisite and cost of stay perquisite shall be included.
Notes :
a. Hospital includes a dispensary, a clinic or a nursing home.
b. For this purpose ‘family’ means :
¾¾ Spouse, children of the individual; and
¾¾ Parents, brothers, sisters of the individual, wholly or mainly dependent on him.
c. Fixed Medical Allowance is fully taxable.
d. The expenditure on medical treatment by the employer may be by way of payment or reimbursement.
e. The perquisite is taxable in the hands of specified employee, however if the bills are issued in the name of
employee and reimbursed by the employer, then it shall be taxable in the hands of all employees.
Illustration 29:
Find taxable amount of perquisite in the following cases :
1. Y has been allowed a fixed medical allowance of ₹ 2,000 p.m.
2. Apart from reimbursement of petty medical bill of ₹ 25,000, Z and his family get medical treatment in a
dispensary maintained by the employer. Value of facility provided to Z and his family members during the
previous year are as follows :
Particulars Amount
a. Z 2,000
b. Mrs. Z 5,000
c. Major son of Z (independent) 8,000
d. Minor daughter of Z 25,000
e. Dependent younger brother of Z 8,000
f. Independent younger sister of Z 10,000
g. Dependent sister-in-law 5,000
Solution :
1. Medical allowance is fully taxable, hence the taxable amount is ₹ 24,000
2. Taxable perquisite in hands of Mr. Z is as under :
Particulars Amount
a. Z Nil
b. Mrs. Z Nil
c. Major son of Z (independent) Nil
d. Minor daughter of Z Nil
e. Dependent younger brother of Z Nil
f. Independent younger sister of Z 10,000
g. Dependent sister-in-law 5,000
h. Reimbursement of medical bill 25,000
Taxable Perquisite 40,000
Illustration 30:
Himalaya Ltd. reimburses the following expenditure on medical treatment of the son of an employee Karan. The
treatment was done at UK :
1. Travelling expenses ₹ 1,15,000.
2. Stay expenses at UK permitted by RBI ₹ 45,000 (Actual expenses ₹ 70,000).
3. Medical expenses permitted by RBI ₹ 50,000 (Actual expenses ₹ 70,000).
Compute the taxable perquisites for the assessment year 2024-25 in the hands of Karan, if his annual income from
salary before considering medical facility perquisite was (i) ₹ 1,50,000; (ii) ₹ 2,00,000.
Solution :
Taxable value of perquisite in hands of Mr. Karan is as under :
Particulars Workings Details Case 1 Case 2
Medical expenditure Amount paid in excess of RBI permission
and actual expenditure shall not qualify
₹ 70,000 – ₹ 50,000 ₹ 20,000 ₹ 20,000
for exemption.
Stay cost Stay cost in excess of RBI permission
and actual expenditure shall not qualify
₹ 70,000 – ₹ 45,000 ₹ 25,000 ₹ 25,000
for exemption.
Travel cost Travel cost (Note) Nil ₹ 1,15,000
Total taxable perquisite ₹ 45,000 ₹ 1,60,000
Note : Travel cost shall be eligible for exemption only if gross total income of the assessee does not exceed
₹ 2,00,000, which can be evaluated as under :
Notes :
c. Carry-forward facility: Where concession is not availed during the preceding block (whether on one occasion
or both), then any one journey performed in the first calendar year of the immediately succeeding block will be
additionally exempted (i.e. not counted in two journey limit)
d. Family: Family here means -
¾¾ Spouse and children of the individual; and
¾¾ Parents, brothers and sisters of the individual, who are wholly or mainly dependent on him.
e. Restriction on number of children: Exemption can be claimed for any number of children born on or before
30/9/1998. In addition, exemption is available only for 2 surviving children born on or after 1/10/1998.
However, children born out of multiple birth, after the first child, will be treated as one child only.
f. Fixed Leave travel allowance: Fixed amount paid to employees by way of leave travel allowance shall not
be exempt.
g. The exemption u/s 10(5) is for travel cost and does not include stay cost or other cost.
Whether it is taxable
in the hands of
Rule / Section Perquisites Specified Non-specified
employee employee
Rent-free residential accommodation
- Unfurnished
Rule 3(1) - Furnished Yes
- Concessional
- Hotel accommodation
Whether it is taxable
in the hands of
Rule / Section Perquisites Specified Non-specified
employee employee
Motor car
- If car is owned by employer Yes No
Rule 3(2)
- If car is owned by employee Yes Yes
Free domestic servant
- Appointed by employer Yes No
Rule 3(3)
- Appointed by employee Yes Yes
Gas, electricity or water facility
- If facility is in the name of employer Yes No
Rule 3(4)
- If facility is in the name of employee Yes Yes
Free education
- In case of reimbursement Yes Yes
Rule 3(5)
- In any other case Yes No
Free transport
- If employer is engaged in transport business Yes No
Rule 3(6)
- In any other case Yes Yes
Rule 3(7) Other fringe benefits or amenities
- (i) - Interest free loan or concessional rate of interest
- (ii) -Traveling / Touring / Holiday Home expenditure
- (iii) - Meals / Refreshments
- (iv) - Gift, voucher or token Yes
- (v) - Credit card
- (vi) - Club membership
- (vii) - Use of movable assets
- (viii) - Movable assets sold by employer to its employee
Fair market value of the specified security or sweat
Rule 3(8) & (9) Yes
equity shares allotted to the employee
Sec. 10(5) Leave travel concession No No
Income tax paid by employer on -
Sec.10(10CC) - Non-monetary perquisite No No
- In any other case Yes Yes
Medical facility
Proviso to
- In case of reimbursement Yes Yes
Sec. 17(2)
- In any other case Yes No
Any obligation of employee paid by employer (unless
Sec. 17(2)(iv) Yes Yes
otherwise specifically exempted)
Whether it is taxable
in the hands of
Rule / Section Perquisites Specified Non-specified
employee employee
Allotment/transfer of specified securities or sweat
Sec.17(2)(vi) Yes Yes
equity shares
Sec.17(2)(vii) Contribution to superannuation fund Yes Yes
* W.e.f. A.Y. 2022-23, section 10(11)/(12) has been amended to provide that exemption shall not be available to the interest income accrued during the
previous year in the provident fund account of the employee to the extent it relates to the amount of the contribution made by such person exceeding
₹ 2,50,000 [₹ 5,00,000, if contribution by such person is in a fund in which there is no contribution by the employer of such person] in a previous
year in that fund.
2. The amount or the aggregate of amounts of any contribution made to the account of the assessee by the
employer:
(a) in a Recognised Provident Fund (RPF);
(b) in the scheme referred to in sec. 80CCD(1) [i.e., NPS]; and
(c) in an approved superannuation fund,
- in excess of ₹ 7,50,000 in a previous year shall be taxable
Taxpoint : There is combined upper limit of ₹ 7,50,000 in respect of employer’s contribution in a year to NPS,
superannuation fund and recognised provident fund and any excess contribution is taxable.
3. The annual accretion (like interest, dividend, etc.) during the previous year to the balance at the credit of the
aforesaid fund or scheme to the extent it relates to the contribution referred above shall be taxable
Taxpoint : Such accretion shall be included in the total income and shall be computed in such manner as may
be prescribed.
4. Central government contribution to Agniveer Corpus Fund is fully taxable. However, deduction is available
u/s 80CCH.
Illustration 31 :
Mr. X has the following salary structure –
Notes :
1. Contribution to statutory and unrecognised provident fund is fully exempted.
2. Contribution to recognised provident fund is exempt upto 12% of salary. Salary for such purpose –
Particulars Amount
Basic 1,20,000
Commission (as fixed) Nil
Dearness allowance 12,000
Total 1,32,000
Test Yourself
1. Miss Sanchita has the following salary structure, compute her gross salary for the A.Y.2024-25 :
a. Basic 5,000 p.m.
b. D.A. 2,500 p.m. (60% forms a part of retirement benefit)
c. Commission on turnover 20,000 during the year
d. Medical allowance 1,000 p.m.
e. She contributes 14% of her salary to RPF. Her employer contributes a similar amount.
f. Interest credited to this fund during the year is ₹ 3,000 @ 12% p.a.
Hints
1. ₹ 1,24,585;
Transferred Balance (Conversion of URPF to RPF) [Rule 11(4) of Part A of the Fourth schedule]
An organisation maintaining URPF, may later get recognition from Commissioner of Income tax. In such case, the
accumulated balance under URPF shall be converted to RPF. Tax treatment of such transferred balance will be as
under :
Calculation is made of all sums comprised in the transferred balance that would have been liable to income tax if
the recognition of the fund had been in force from the date of institution of the fund. However, in case of serious
accounting difficulty, the Commissioner may make a summary calculation of such aggregate.
Such aggregate sum is deemed to be the income received by the employee in the previous year in which the
recognition of the fund takes effect.
Note : On taxability of such conversion, assessee cannot claim relief u/s 89(1).
Illustration 32 :
Mr. Sharma has been appointed as an accountant of ABC Ltd as on 1/4/2021, since then he is working with the
same company. The salary structure and increment details are as under:
Basic ₹ 5000 - 1000 - 8000 -1500 - 14000
D.A. ₹ 3000 – 500 – 5000 – 1000 - 10000
He and his employer contribute to URPF 14% of basic and DA.
Every year 9% interest is credited to such fund. As on 1/4/2023, the fund gets recognition. Hence, the accumulated
balance in URPF was transferred to RPF. Comment on tax treatment of such transferred balance.
Solution :
Statement showing treatment of transferred balance :
Illustration 33:
Compute taxable Entertainment allowance & net salary of Sri Hanuman Prasad from the following data :
Basic salary ₹ 8,000 p.m. D.A. ₹ 2,000 p.m. Taxable perquisite ₹ 35,000, Entertainment Allowance ₹ 4,000 p.m.
Out of such allowance ₹ 20,000 is expended and balance amount is saved. Assuming he is:
a. Government employee b. Non-Government employee.
Solution :
Computation of taxable income of Sri Hanuman Prasad for the A.Y.2024-25 :
Illustration 34 :
Mr. Rohit a non-Government employee has the following salary details :
Solution :
Computation of taxable salary Mr. Rohit for the A.Y.2024-25 :
Sometimes net basic salary is given after deduction of TDS, Loan repayment, PF deduction etc that needs to
be grossed up as under :
Net Salary = Gross Salary – Employee’s contribution to provident fund – TDS – loan repayment by employee
– other deduction from salary (if any).
Example 7 : Find basic salary of Mr. Singh having the following salary structure :
c. TDS ₹ 9,000
Net basic salary = Basic salary – TDS – Loan repayment – Contribution to RPF
1,44,000 = 0.9X
Illustration 35 :
Mr. Bharat of Siliguri is offered an employment by Vimal & Co. Ltd., Kolkata on a basic salary of ₹ 5,500 p.m.
Other allowances are dearness allowance (not forming part of salary for retirement benefits) ₹ 4,000 p.m., medical
allowance ₹ 1,000 p.m. and bonus being 1 month’s basic salary. The company gives an option to him either to
take a rent-free accommodation in Kolkata of the fair rental value of ₹ 1000 p.m. or to accept a cash house rent
allowance of ₹ 1,000 p.m. He decides to accept house rent allowance and takes a house in Kolkata at a monthly
rent of ₹ 1,000.
Do you think he has made a wise choice from tax advantage view? State reasons.
Solution :
Computation of Gross Taxable Salary of Mr. Bharat for the A.Y.2024-25 :
Illustration 36:
Following are the particulars of income of Mrs. S. Choudhury for the Previous Year 2023-24 :
a. Basic salary @ ₹ 15,000 per month.
b. Dearness Allowance @ 60% of salary.
c. Medical Allowance @ 600 per month (Actual expenditure ₹ 5,000).
d. House Rent Allowance received @ ₹ 6,000 per month and she pays rent of ₹ 7,200 per month for her house in
Durgapur.
e. City compensatory allowance ₹ 1,500 per month.
f. She owns a car which she is using for official purposes. Her employer reimburses her @ ₹ 3,000 per month.
g. She is contributing ₹ 2,100 per month towards a recognized provident fund. The employer is also contributing
the same amount. Interest credited to R.P.F @ 11% ₹ 2,200.
h. She paid ₹ 1,800 as professional tax during the year.
Compute income from salary of Mrs. Choudhury for the assessment year 2024-25.
Solution :
Computation of Taxable Salary of Mrs. S Choudhury for the A.Y.2024-25 :
Quick MCQs:-
1. Salary received by the Partner of a Firm is charged under the head
(a) Salaries
(b) Business Income
(c) Other Sources
(d) Its exempt from tax
3. Salary is a taxable on
(a) Receipt basis
(b) due basis
(c) due to receipt basis whichever is earlier
(d) due or receipt basis whichever is later.
7. Encashment of Leave Salary at the time of retirement is fully exempt in the case of-
(a) Central Government Employee
(b) State Government Employee
(c) Both Central and State Government Employees
(d) Government Employee and Employee of Local Authority.
10. For an employee in receipt of Hostel Expenditure Allowance for his 3 children, the maximum annual
allowance exempt u/s 10(14) is –
(a) D 10, 8000
(b) D 7,200
(c) D 9, 600
(d) D 3, 600
A
s per sec. 22, the annual value of property consisting of any building or land appurtenant thereto of
which assessee is the owner, other than such portion of such property as he may occupy for the purposes
of any business or profession carried on by him shall be chargeable to income tax under the head
“Income from house property.”
It is an exceptional feature of this head that rather than actual income from house property, earning
capacity of house property is taxable. As stated u/s 22 that “annual value” of the property is taxable rather
than actual income of the property. (Annual value being discussed in later part of this chapter)
Mrs. X purchases a house property from such cash, then such transfer of cash and subsequent purchase of
property shall not attract provision of sec. 27(i). However, the income from such property shall be clubbed
in the hands of Mr. X as per the provision of sec. 64(1)(iv) [For detail refer chapter Clubbing of Income].
2. The holder of an impartible estate [Sec. 27(ii)] : The holder of an impartible estate (property which is not
legally divisible) is treated as deemed owner of house property. Impartible estate is an estate to which the
assessee has succeeded by grant or covenant.
3. Property held by a member of a company, society or any other association [Sec. 27(iii)] : Property held
by a member of a company, co-operative society or other association of persons to whom a building or a part
thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed
owner of that building or a part thereof.
Taxpoint :
¾¾ Assessee is the member of a company, co-operative society or other AOP.
¾¾ He has been allotted or leased a building on account of such membership.
¾¾ Though he is not the legal owner of such property, still he will be liable to tax.
4. A person who acquired a property u/s 53A of the Transfer of Property Act [Sec. 27(iiia)] : A person who
is allowed to take or retain possession of any building (or part thereof) in part performance of a contract u/s
53A of the Transfer of Property Act, 1882, is deemed as the owner of that building (or part thereof).
Taxpoint :
¾¾ Assessee has taken the possession of the property.
¾¾ He has partly performed or promised to perform the contract i.e., he has paid (or is ready to pay) a part of
the consideration.
¾¾ The contract must be in writing. Though sale-deed might not be executed in favour of the buyer, still
certain other document like ‘power of attorney’ or ‘agreement to sell’ has been executed.
5. Lessee of a building u/s 269UA(f) [Sec. 27(iiib)] : A person who acquires any right u/s 269UA(f) in or with
respect to any building or part thereof, by way of lease agreement for a period not less than 12 years is deemed
as the owner of that building (or part thereof).
Notes :
a. Lease period should not be less than 12 years [as per sec. 269UA(f)] including extension period.
b. Above provision does not include any right by way of lease from month to month or for a period not
exceeding 1 year.
E.g. : X lets out a property to Miss Y on a lease of 9 years. However, Miss Y has a right to renew the lease
for further period of 3 years. In such case, Miss Y shall be deemed as an owner of the property u/s 27.
However, if such right of renewal of lease (for 3 years) is subject to condition that at each occasion it will
be renewed for a period of 11 months, then X will be owner of the property and liable to tax u/s 22.
Condition 3: Property is not used for business or profession carried on by the assessee
When a person carries on business or profession in his own house property, annual value thereof is not taxable u/s
22 provided income of such business is chargeable to tax.
Incidences thereof
Letting out to employees: If an assessee lets out the property to his employee, where such letting out supports
smooth flow of his business, then such letting out shall be deemed to be incidental to business and such rent
shall be chargeable under the head “Profits & gains of business or profession”.
Letting out to Government Agencies: Where an assessee let out his property to any Government agency
for locating branch of a nationalized bank, police station, post office, excise office, railway staff quarters,
etc. for the purpose of running the business of assessee more efficiently, such letting out shall be deemed to
be incidental to business and such rent shall be chargeable under the head “Profits & gains of business or
profession”.
Letting out to ancillary units: Where an assessee lets out its property to ancillary units, which manufactures
components required by the assessee. Income from such letting out shall be taxable under the head “Profits &
gains of business or profession”.
Letting out property for promotion of own business –vs.- Business of letting out the property :
Rent including charges for amenities or services like garden facility, food, lighting, etc. or other separable
assets (like machinery, plant, furniture): If the owner of house property gets composite rent for both property
as well as for services rendered or other separable asset, such composite rent shall be treated as under :
Doctrine of mutuality
Sec. 22 levies tax on annual value of house-property and not on actual income from house property. In case of a
club, which provides recreational facilities exclusively to its member and their guest and not to any non-members,
it is considered as a non-profit seeking person and run on no-profit no-loss basis. Such club is running on the
principle of mutuality and its members are not entitled to any share of profit. In the case of such a mutual concern,
not only the surplus of the organisation but also the annual value of the club house shall be exempted from tax.
Though two properties might not be exactly similar still it is an indicator of rent reasonably expected from
the property. An inflated or deflated rent due to emergency, relationship and such other conditions need to be
adjusted to determine fair rent.
For instance, a property was let out to a friend for a monthly rent of ₹ 2,000 which might be let out to another
person at the rate of ₹ 2,500 p.m. In such case, fair rent of the property shall be ₹ 2,500 p.m.
D. Standard rent under the Rent Control Act
Standard rent is the maximum rent, which a person can legally recover from his tenant under the Rent Control
Act prevailing in the State in which the property is situated. A landlord cannot reasonably expect to receive
from a tenant any amount more than Standard Rent. Accordingly, it can be concluded that if the property is
covered by the Rent Control Act then Reasonable Expected Rent (RER) cannot exceed Standard Rent.
Taxpoint : Reasonable Expected Rent cannot exceed Standard Rent but can be lower than Standard Rent
Computation of Gross Annual Value
Step 1 : Calculate reasonable expected rent (RER) of the property being higher of the following:
a. Gross Municipal Value.
b. Fair Rent of the property.
Note : RER cannot exceed Standard Rent.
* Reasonable Expected Rent (RER) is also known as Annual Letting Value (ALV).
Step 2 : Calculate Actual Rent Received or Receivable (ARR) for the year less current year unrealised rent (UR)
subject to certain conditions#.
#Unrealised Rent [Rule 4]: Unrealised Rent of current year shall be deducted in full from Actual Rent
Receivable, provided the following conditions are satisfied :
i) The tenancy is bona fide;
ii) The defaulting tenant has vacated the property or steps have been taken to compel him to vacate the
property;
iii) The defaulting tenant is not in occupation of any other property of the assessee;
iv) The assessee has taken all reasonable steps to institute legal proceeding for the recovery of the unpaid rent
or has satisfied the Assessing Officer that legal proceedings would be worthless.
Step 3 : Compare the values calculated in step 1 and step 2 and take the higher one.
Step 4 : Where there is vacancy and owing to such vacancy the ‘ARR – UR’ is less than the RER, then ‘ARR -
UR’ computed in step 2 will be treated as GAV.
In nutshell, GAV shall be computed as under :
Steps Particulars Amount
Compute Reasonable Expected Rent [RER]
Gross Municipal Value (a) ****
Fair Rent (b) ****
1st
Higher of the (a) and (b) [A] ****
Standard Rent [B] ****
Reasonable Expected Rent [Lower of (A and B)] [C] ****
Actual Rent Received or Receivable (ARR) – Unrealised Rent of the current year
2nd ****
(UR) [D]
Step Particulars H1 H2 H3 H4 H5 H6
Calculation of RER
Gross Municipal Value (a) 120 130 140 150 160 1501
Fair Rent (b) 105 115 135 155 175 1401
Higher of the [(a) and (b)] [A] 120 130 140 155 175 150
Standard Rent [B] NA 100 135 180 165 1201
1st RER [Lower of (A) and (B)] 120 100 135 155 165 120
2nd ARR 100 110 135 175 200 1001
3rd Gross Annual Value 120 110 135 175 200 120
1.
In case of H6, previous year period is of 10 months, which denotes that construction or acquisition of such house
property was completed on 1st of June of the previous year, therefore, Municipal Value, Fair Rent and Standard
Rent has been proportionately reduced.
Particulars H1 H2 H3 H4 H5
Municipal annual value 90 500 30 100 315
Particulars H1 H2 H3 H4 H5 H6
Gross Municipal Value p.a. 200 300 400 500 300 300
Fair rent p.a. 300 600 750 180 200 400
Standard rent under the Rent Control Act p.a. 300 180 280 225 250 240
Actual rent p.a. 600 900 300 240 216 240
Property remains vacant (in number of month) 1 3 2 1 2 1
Solution :
1. In H1 and H2 Actual rent receivable is already higher than RER therefore vacancy period is not making any
impact (i.e. step 4 of computation discussed earlier in theory) on GAV.
2. In H3 & H4, ARR is less than RER due to vacancy (otherwise ARR would have been ₹ 3,00,000 & ₹ 2,40,000
respectively). Therefore, GAV will be the ARR computed in step 2.
3. In H5, ARR is less than RER not only due to vacancy but also due to other factors. In such case, value of
RERshall be taken as GAV.
4. In H6, ARR is less than RER due to vacancy period otherwise ARR would have been equal to RER.
Illustration 41 :
X owns a house property in Pune, details relating to which are Municipal value ₹ 2,00,000 p.a., Fair rent ₹ 1,80,000
p.a., Standard rent ₹ 2,10,000 p.a. It is let out throughout the previous year (rent ₹ 10,000 p.m. up to 15/10/2023
and ₹ 12,000 p.m. thereafter). The property is transferred by X to Y on February 28, 2024. However, Y failed to
recover rent for March, 2024. Find gross annual value of the property in the hands of X and Y for the A.Y. 2024-25
Solution :
Since the property being sold to Y on 28/02/2024 hence previous year period for X is 11 months and for Y is 1
month, accordingly gross annual value shall be :
X Y
Steps Particulars
(11 months) (1 month)
Fair rent (FR) 1,65,000 15,000
Municipal Value 1,83,333 16,667
Higher of the above [A] 1,83,333 16,667
Standard Rent (SR) [B] 1,92,500 17,500
1st RER [Lower of A and B] [C] 1,83,333 16,667
2nd ARR – Unrealised Rent [D] 1,19,000# Nil1
3rd Gross Annual Value [Higher of C and D] 1,83,333 16,667
#
Calculation of Rent Receivable for 11 months 1.
₹ 12,000 – ₹ 12,000
[(₹ 10,000 * 6.5 months) + (₹ 12,000 * 4.5 months)] = ₹ 1,19,000
Particulars H1 H2 H3
Gross Municipal value 150 180 120
Fair rent 140 140 240
Standard rent 120 240 300
Actual rent if property is let out throughout the previous year 2023-24 180 300 150
Unrealised rent of the previous year 2023-24 25 40 20
Unrealised rent of the year prior to the previous year 2022-23 30 50 60
Period when the property remains vacant (in number of months) 3 1 -
Solution :
Working: Calculation of ARR – Unrealised Rent
H1 : [{(1,80,000/12) * 9} – 25,000] = ₹ 1,10,000
H2 : [{(3,00,000/12) * 11} – 40,000] = ₹ 2,35,000
H3 : [1,50,000 – 20,000] = ₹ 1,30,000
Computation of Gross Annual Value : (₹ in ‘000)
1 In H1, ARR is less than RER due to vacancy [otherwise ARR would have been ₹ 86,667 {being (₹ 65,000/9) *
12}]. Therefore, GAV will be the ARR computed in step 2.
2 In H2, Actual rent receivable is not less than RER, therefore vacancy period is not making any impact (i.e. step 4
of computation discussed earlier in theory) on GAV.
Illustration 44 :
Find out the gross annual value in respect of the following properties : (₹ in thousands)
Particulars H1 H2 H3
Value determined by the Municipality for determining Municipal tax 500 800 600
Rent of the similar property in the same locality 400 900 600
Rent determined by the Rent Control Act 700 720 700
Actual rent receivable 350 540 600
Unrealised rent of the previous year 2023-24 10 Nil 150
Period when the property remains vacant (in number of months) 5 3 2
Solution :
Computation of Gross Annual Value : (₹ in thousands)
Step Particulars Working H1 H2 H3
Higher of GMV and FR (RER
1st RER 500 720 600
cannot exceed SR)
2nd ARR less Unrealised rent 340 540 450
3rd Higher of above Higher of Step 1 & Step 2 500 720 600
(ARR less Unrealised rent) if there [{ARR/(12 – vacancy period)} *
Working 570
would have been no vacancy 12] - Unrealised rent 590 720
Is value of Step 2 less than step 1
Yes Yes No
due to vacancy
If yes than step 2 will be GAV
4th Gross Annual Value 340 540 600
otherwise step 3 shall be GAV
Test Yourself
1. Find out the Gross Annual value in respect of the following properties for the A.Y. 2024-25
(₹ in thousands)
Particulars H1 H2 H3
Gross Municipal value 150 180 120
Fair rent 140 140 240
Standard rent 120 240 300
Actual rent if property is let out throughout the previous year 2023-24 180 300 150
Unrealised rent of the previous year 2023-24 25 40 20
Unrealised rent of the previous year 2021-22 30 50 60
Period when the property remains vacant (in number of months) 3 1 -
Hints
1. H1: ₹ 1,10,000; H2: ₹ 2,35,000; H3: ₹ 2,40,000
2.2.6 Taxes levied by local authority (Municipal Tax) [Proviso to Sec. 23(1)]
Tax levied by the municipality or local authority is deductible from Gross Annual Value (GAV). As per sec. 27(vi),
taxes levied by a local authority in respect of any property shall include service taxes levied by such local authority
in respect of such property. Municipal tax includes Service taxes like fire tax, water tax, etc. levied by a local
authority.
Such taxes shall be computed as a % of Net Municipal Value and allowed as deduction subject to the following
conditions :
1. It should be actually paid during the previous year.\
2. It must be paid by the assessee.
Taxpoint : Unpaid municipal tax or municipal tax paid by tenant shall not be allowed as deduction.
3. It must be related to the previous year or any year preceding the previous year.
Taxpoint :
Tax paid to foreign local If property is situated in a foreign country, tax paid to foreign local authority shall
authority be allowed as deduction
Tax exceeds GAV In case municipal tax paid includes tax paid for several past years and the total
(Negative NAV) amount of tax so paid by the owner exceeds GAV, then Net Annual Value (NAV)
can be negative.
Refund of tax Refund of Municipal tax paid for a property is not taxable u/s 22.
Advance Municipal Tax Municipal tax paid in advance is not allowed, as the Act provides that “the taxes
paid by the assessee levied by any local authority in respect of property shall be deducted, irrespective
of the previous year in which the liability to pay such taxes was incurred by the
owner.” [Proviso to sec. 23 of Income tax Act, 1961]
As per the above language it is construed that for claiming deduction in respect
of municipal tax, such tax must have already been levied by the local authority.
Hence payment of municipal tax in advance (liability in respect of which has not
yet incurred) shall not be allowed as deduction in the year of payment.
Illustration 45 :
Compute net annual value with the following details for the A.Y. 2024-25 :
Particulars H1 H2 H3 H4 H5 H6
Situated at Patna Anand Hyderabad Balurghat Jodhpur Etawa
Municipal Value ₹ 1,00,000 ₹ 2,00,000 ₹ 3,00,000 ₹ 4,00,000 ₹ 4,25,000 ₹ 6,00,000
Gross Annual Value ₹ 1,00,000 ₹ 2,50,000 ₹ 1,80,000 ₹ 5,00,000 ₹ 8,00,000 ₹ 5,00,000
Municipal tax for P.Y. ₹ 5,000 10% 5% 20% 12% 10%
Sewerage tax - 5% ₹ 1,000 3% ₹ 3,750 ₹ 1,000
Water Tax - 3% 5% 2% 5% -
Additional information :
a. In case of H3, municipal tax paid for the financial year 1995-96 to 2022-23 is ₹ 2,00,000.
b. In case of H4, municipal tax paid for the financial year 2024-25 is ₹ 3,000.
c. In case of H6, all taxes charged by municipality are paid to the extent of 80% (50% by owner and 30% by
tenant).
Solution :
Computation of Net Annual Value for A.Y. 2024-25 : (Amount in ₹)
Particulars H1 H2 H3 H4 H5 H6
Gross Annual Value (a) 1,00,000 2,50,000 1,80,000 5,00,000 8,00,000 5,00,000
Less : (i) Municipal Tax 5,000 20,000 2,15,0003 80,0001 51,000 30,0002
(ii) Sewerage tax - 10,000 1,000 12,000 3,750 5002
(iii) Water Tax - 6,000 15.000 8,000 21,250 -
Total (b) 5,000 36,000 2,31,000 1,00,000 76,000 30,500
Net Annual Value [(a) – (b)] 95,000 2,14,000 (-), 51,000 4,00,000 7,24,000 4,69,500
Municipal tax is calculated on municipal value.
Notes :
1. Though municipal tax is allowed on cash basis (only if paid by owner) but advance municipal tax is not
allowed.
2. Municipal tax paid by tenant is not allowed as deduction.
3. ₹ 2,00,000 (being municipal tax of past years paid during the year) + 5% of ₹ 3,00,000 (municipal tax of
current year paid during the year).
The list of deduction u/s 24 is exhaustive i.e., no deduction can be claimed in respect of expenditures which are
not specified under this section e.g., no deduction is allowed for repairs, collection charges, insurance, ground rent,
land revenue, etc.
1. Standard deduction u/s 24(a)
30% of the net annual value is allowed as standard deduction in respect of all expenditures (other than interest
on borrowed capital) irrespective of the actual expenditure incurred.
Note : Where NAV is negative or zero, standard deduction u/s 24(a) is not available.
Test Yourself
1. Calculate standard deduction available in the following cases (₹ in ‘000)
Particulars H1 H2 H3 H4 H5
Gross Annual Value 80 60 30 20 50
Municipal Tax paid 10 20 10 00 10
Repair Charges 2 20 - 5 -
Rent Collection Charges 5 10 2 20 -
Hints
1. H1: ₹ 21,000; H2: ₹ 12,000; H3: ₹ 6,000; H4: ₹ 6,000; H5: ₹ 12,000
d. Amount paid as brokerage or commission, for arrangement of the loan, is not deductible.
e. Interest on loan taken for payment of municipal tax, etc. is not allowed as deduction.
Amount not deductible from Income from house property [Sec. 25]
Any interest chargeable under this Act which is payable outside India, is not allowed as deduction if :
on such interest, tax has not been deducted at source and paid as per the provision of chapter XVIIB; and
in respect of such interest there is no person in India who may be treated as an agent u/s 163.
Illustration 46 :
Following information are provided by an assessee for his house properties for computing interest on loan allowed
u/s 24(b) :
Illustration 47 :
Calculate interest on loan allowed for assessment year 2019-20 to 2024-25 from the following information :
Loan was taken on 1/1/2015 ₹ 5,00,000 @ 12% p.a.
Construction commenced on 1/8/2015. Construction completed on 31/3/2020. Repayment made as under :
1.
₹ 3,00,000 * 12% ₹ 2,00,000 * 12%
2.
3.
On ₹ 2,00,000 @ 12% for 3 months ₹ 6,000
On ₹ 1,00,000 @ 12% for 9 months ₹ 9,000
Total ₹ 15,000
Test Yourself
1. As on 1/1/2018, Mr. Fantoosh borrowed ₹ 5,00,000 @ 10% p.a. from State Bank of India, to be repaid in
two equal installments on 1/4/2023 and 1/4/2027. Construction completed on 17/6/2021. Due to liquidity
problem, he borrowed ₹ 3,50,000 @ 8% from his friend on 1/4/2023 and paid 1st installment of previous
loan. Calculate interest on loan allowed for assessment year 2024-25.
Hints
1. ₹ 77,500
Illustration 48 :
Mr. Rajesh owns two house properties both of which are let out. Compute his income from the following details :
Particulars H1 H2
Situated at Gaya Mumbai
Gross Municipal value 1,00,000 2,00,000
Fair rent 95,000 2,10,000
Standard rent 90,000 2,00,000
Actual rent receivable 1,00,000 1,80,000
Unrealised rent of current year 8,000 2,000
Other Information :
a. Loan taken for construction is still unpaid.
b. Municipal tax of H1 is still unpaid, while, that of H2 is half paid by tenant.
Solution :
Computation of income from house property of Mr. Rajesh for the A.Y. 2024-25 :
Note : Unpaid municipal tax and municipal tax paid by tenant is not allowed.
#.
Computation of Gross Annual Value :
Particulars Details H1 H2
Reasonable Expected Rent Higher of GMV or FR subject to SR 90,000 2,00,000
Actual Rent Receivable – Unrealised Rent 92,000 1,78,000
Gross Annual Value Higher of above 92,000 2,00,000
is in the occupation of the owner for the purposes of his own residence;
is not actually let out durin g the whole or any part of the previous year; and
no other benefit there from is derived by the owner.
Treatment : The annual value of such house or part of the house shall be taken to be nil.
If an assessee occupies more than two house properties as self-occupied, he is allowed to treat only two houses as
self-occupied at his option. The remaining self-occupied house property(ies) shall be treated as ‘Deemed to be let
out’. [Treatment of ‘deemed to be let out’ property is discussed later in this chapter.]
Combination Treated as
Fully self occupied Self occupied property
Partly self occupied & partly vacant Self occupied property
Partly self occupied & partly let out Partly self occupied & partly let out (discussed later)
Partly self occupied & partly use for business purpose Self occupied to the extent used for self occupation
Note :
Available to Benefit u/s 23(2)(a) can be claimed by an Individual and HUF. The benefit is not
available to other assessee like company, firm, etc.
When owner want to It is not necessary that once a house property is treated as self-occupied it shall
change his option be continuously treated as self-occupied. Such option may be changed every year
without any permission.
When owner occupies When the assessee occupies his house but not in the capacity of owner then benefit
a house in some other under this section cannot be claimed. E.g. Owner let out the house to his employer &
capacity gets back the property as rent free accommodation. In such case, though the owner
himself occupies the property but as an employee of the tenant & not as an owner. In
such case, property shall be treated as let-out & not self-occupied.
When more than one If an assessee has a house property, which consist of two or more residential units
house property used in a & all such units are self-occupied used in a combined form, the annual value of the
combined form entire house shall be taken as nil as there is only one property, though it has more
than one residential unit.
Particulars Amount
Net Annual Value Nil
Less : Interest on borrowed capital u/s 24(b) ***
Income from house property (***)
Standard deduction u/s 24(a) is not available
Maximum Interest
Conditions
allowed in aggregate
Where loan is taken on or after 1/4/1999 and following conditions are satisfied -
1. Loan is utilized for construction or acquisition of house property on or after 1-4-
1999;
2. Such construction or acquisition is completed within 5 years from the end of the
financial year in which the capital was borrowed; and
3. The lender certifies that such interest is payable in respect of the loan used for the
acquisition or construction of the house or as refinance of the earlier loan outstanding ₹ 2,00,000
(principal amount) taken for the acquisition or construction of the house.
In any other case ₹ 30,000
Taxpoint : In any case, deduction in respect of interest on loan on self-occupied properties cannot exceed
₹ 2,00,000 in a year.
Notes :
a. Calculation and deduction of interest for the period of pre and post construction, acquisition, etc. is same as
discussed in the case of let out house property.
b. Assessee shall always have nil income or loss upto ₹ 2,00,000 from properties u/s 23(2)(a).
In nutshell, treatment of interest on loan is as under :
Nature of property When loan was taken Purpose of loan Allowable
(Maximum limit)2, 3
Self-occupied On or after 01/04/1999 Construction or purchase of ₹ 2,00,000
house property1
Self-occupied On or after 01/04/1999 For Repairs of house property ₹ 30,000
Self-occupied Before 01/04/1999 Construction or purchase of ₹ 30,000
house property
Self-occupied Before 01/04/1999 For Repairs of house property ₹ 30,000
Let-out Any time Construction or purchase of No maximum limit
house property
1. Subject to other two other conditions. If other two conditions are not fulfilled, then maximum limit is restricted
to ₹ 30,000.
Illustration 49 :
Mr. Pandey, owner of three houses in Chennai, furnished the following information. Compute his income from
house property for the assessment year 2024-25 :
Solution :
Computation of Income from House property of Mr. Pandey for the A.Y. 2024-25 :
Working :
Computation of Gross Annual Value of House 1 :
Particulars House 1
Municipal Value (A) 2,00,000
Fair Rent (B) 2,50,000
Illustration 50 :
Sri Jayram has a house property used for own residence for 9 months and for remaining 3 months of the previous
year, it was unused. Gross Municipal value of the property ₹ 6,00,000 p.a. Fair Rent ₹ 5,00,000, Standard Rent
₹ 4,00,000. He incurred repair expenditure of ₹ 10,000 & paid municipal tax ₹ 5,000 during the year. Compute
income from house property in the following cases for the A.Y. 2024-25 :
1. He borrowed ₹ 1,00,000 @ 12% (simple interest) on 17/8/1998 for purchase of the house property and such
amount as well as interest is still unpaid.
2. He borrowed ₹ 10,00,000 @ 12% (simple interest) on 17/8/1998 for purchase of the house property and such
amount as well as interest is still unpaid.
3. He borrowed ₹ 5,00,000 @ 12% (simple interest) on 17/8/1999 for construction of the house property,
construction of which was completed on 31/3/2000 and such amount is still unpaid.
4. He borrowed ₹ 20,00,000 @ 18% (simple interest) on 17/8/1999 for construction of the house property,
construction of which was completed on 31/3/2000 and such amount is still unpaid.
5. He borrowed ₹ 1,80,000 @ 15% on 1/4/1998 and further borrowed ₹ 10,00,000 @ 10% on 17/8/1999 for
construction of the house property and such amount is still unpaid. Construction completed on 1/2/2000.
6. He borrowed ₹ 5,00,000 @ 12% on 1/4/2001 for repairs of the house property.
7. He borrowed ₹ 1,80,000 @ 15% on 1/4/1998 and further borrowed ₹ 20,00,000 @ 14% on 17/8/1999 for
construction of the house property and such amount is still unpaid. Construction completed on 1/2/2000.
Solution :
Computation of income from house property in different cases :
Notes :
1. As loan was taken before 1/4/1999 hence, the maximum ceiling is ₹ 30,000.
2. As loan was taken on or after 1/4/1999 for the construction of house property, which is completed within 5
years from the end of financial year in which such loan was taken, hence the maximum ceiling is enhanced to
₹ 2,00,000. It is assumed that required certificate has been furnished.
3. Maximum ceiling is ₹ 2,00,000.
4. If loan was taken before 1/4/1999 as well as on or after 1/4/1999 then the total interest allowed in aggregate
cannot exceed ₹ 2,00,000. However, the limit for interest allowed in respect of loan taken prior to 1/4/1999
shall be ₹ 30,000. Since the first loan is taken on 1/4/1998 and construction completed on 1/2/2000. Hence the
pre-construction period is 1998-99, for which interest ₹ 27,000 (i.e. ₹ 1,80,000 * 15%) shall be allowed in 5
equal installments i.e. ₹ 5,400 every year. However, such pre-construction period interest is allowed only for 5
years i.e. from 1999-2000 to 2003-2004, therefore such interest shall not be allowed in subsequent year. Total
eligible interest on first loan is ₹ 27,000 (i.e. Pre-construction period interest Nil + Post construction period
interest ₹ 27,000). Further eligible interest on second loan is ₹ 1,00,000 (i.e. 10% of ₹ 10,00,000). Hence the
total allowable interest u/s 24(b) shall be ₹ 1,27,000.
5. The enhanced limit is only for construction or acquisition of house property, here the loan is taken for repair
purpose for which maximum ceiling is ₹ 30,000.
6. If loan was taken before 1/4/1999 as well as on or after 1/4/1999 then the total interest allowed in aggregate
cannot exceed ₹ 2,00,000. However, the limit for interest allowed in respect of loan taken prior to 1/4/1999
shall be ₹ 30,000. Since the first loan is taken on 1/4/1998 and construction completed on 1/2/2000. Hence the
pre-construction period is 1998-99, for which interest ₹ 27,000 (i.e., ₹ 1,80,000 * 15%) shall be allowed in 5
equal installments i.e. ₹ 5,400 every year. However, such pre-construction period interest is allowed only for 5
years i.e. from 1999-2000 to 2003-2004, therefore such interest shall not be allowed in subsequent years. Total
eligible interest on first loan is ₹ 27,000 (i.e., Pre-construction period interest Nil + Post construction period
interest ₹ 27,000), i.e. within the ceiling of ₹ 30,000. Further eligible interest on second loan ₹ 2,80,000 (i.e.
14% of ₹ 20,00,000). However, the total ceiling of interest in case of self occupied property cannot exceed ₹
2,00,000, hence the total allowable interest u/s 24(b) shall be ₹ 2,00,000.
Note: Since the assessee receives the benefit of rent-free accommodation hence she will be further taxed under the
head ‘Salaries’ for perquisite being rent-free accommodation.
Particulars Amount
Net Annual Value Nil
Less : Interest on borrowed capital u/s 24(b) ***
Income from house property (***)
Notes :
a. An assessee cannot claim benefit u/s 23(2)(a) as well as 23(2)(b) in the same previous year.
b. An assessee can claim benefit u/s 23(2)(b) even though he has other house properties.
1. Gross Annual value: Since assessee does not let out such property & do not receive rent, therefore GAV will
be determined from Step 1 only. Step 2, 3 & 4 of calculation GAV are irrelevant.
Taxpoint : GAV of deemed to be let out property will be the ‘Reasonable expected rent (RER)’of the property.
2. Municipal taxes and deduction u/s 24(a) and 24(b) shall be available as in the case of let out house property.
Illustration 52 :
Compute income under the head ‘Income from house property’ of Sri from the following information :
Particulars H1 H2 H3 H4
Used for Self occupied Self occupied Self occupied Own Business
Situated at Mumbai Abu Kolkata Hyderabad
Gross Municipal Value 3,00,000 2,00,000 7,00,000 3,00,000
Solution :
In the given case, there are two options :
Option 1 : Take H1 & H3 as Self-Occupied (S/O) and H2 as Deemed to be Let-Out (DLO)
Option 2 : Take H1 as Deemed to be Let-Out (DLO) and H2 & H3 as Self-Occupied (S/O)
Option 3 : Take H3 as Deemed to be Let-Out (DLO) and H1 & H2 as Self-Occupied (S/O)
Total income under the head house property shall be computed applying each option separately and then the option,
which yields least income under this head, shall be opted.
Notes :
1. In case of H1 & H2 loan was taken prior to 1/4/1999.
2. Since loan was taken for construction on or after 1/4/1999.
3. Since H4 is used for own business purpose so it is not taxable under this head.
Total income under the head Income from house property as per option 1 is (-) ₹ 1,81,000
Computation of Income from house property of Sri for the A.Y. 2024-25 :
1) Area wise division 2) Time wise division 3) Area as well as Time wise division
Solution :
Computation of Income from house property of Miss Paro for the A.Y. 2024-25 :
Unit A Unit A
Particulars Working
Details Amount Details Amount
Gross Annual Value 1 Nil 72,000
Less : Municipal Tax Nil 6,000
Net Annual Value Nil 66,000
Less : Deduction u/s
24(a) Standard Deduction Nil 19,800
24(b) Interest on loan 40:60 12,000 12,000 18,000 37,800
Income from house property (-) 12,000 28,200
Income under the head ‘Income from house property’ 16,200
(Case 2) Time wise division - In such case, the house property is self occupied by the assessee for a part of the year
and let out for remaining part of the year.
Treatment :
In such case, assessee will not get deduction for the self-occupied period and income will be computed as if the
property is let out throughout the year. In this regard, it is to be noted that the reasonable expected rent (RER) shall
be taken for the full year but the actual rent receivable (ARR) shall be taken only for the let-out period.
Illustration 54 :
Mr. Rana used his house property for self-occupation till 1/8/2023 and let out the same for remaining period for
rent of ₹ 6,000 p.m. Compute his income from house property from the following details:
Municipal value ₹ 1,00,000, Fair Rent ₹ 80,000, Standard Rent ₹ 96,000, Municipal tax 16%, Interest on loan
₹ 10,000
Solution :
Computation of income from house property of Mr. Rana for the A.Y. 2024-25 :
Illustration 55 :
How shall your answer differ if in the above illustration, property is let out to tenant from 1/4/2023 to 1/12/2023
and from 1/12/2023 to 1/3/2024, it was self-occupied. Standard rent of such property is ₹ 50,000.
Solution :
Computation of Income from house property of Mr. Rana for the A.Y. 2024-25 :
Illustration 56 :
Miss Rani used her house property for self-occupation till 1/9/2023 and let out the same for remaining period for
rent of ₹ 6,000 p.m. Municipal tax paid ₹ 5,000, interest on loan accrued ₹ 10,000. Compute her taxable income
from house property.
Solution :
Computation of income from house property of Miss Rani for the A.Y. 2024-25 :
Steps Particulars Working Details Amount
Fair Rent (Note) ₹ 6,000 * 12 72,000
1. Reasonable Expected Rent Fair Rent 72,000
2. Actual Rent Receivable ₹ 6,000 * 7 42,000
3. Gross Annual Value Higher of RER and ARR 72,000
Less : Municipal Tax 5,000
Net Annual Value 67,000
Less : Deduction u/s
24(a) Standard Deduction 30% of NAV 20,100
24(b) Interest on Loan 10,000 30,100
Income from house property 36,900
Note : Since the property has been let out for 7 months @ ₹ 6,000 p.m., therefore fair rent of the property is ₹
72,000 (being ₹ 6,000 * 12).
Illustration 57 :
Mr. Ajnabi has a house property in Cochin. The house property has two equal dimension residential units. Unit 1 is
self occupied throughout the year and unit 2 is let out for 9 months for ₹ 10,000 p.m. and for remaining 3 months
it was self-occupied. Compute his taxable income from the following details :
Municipal value ₹ 2,00,000, Fair Rent ₹ 1,60,000, Standard rent ₹ 3,00,000, Municipal tax 10% (60% paid by
assessee), Interest on loan ₹ 40,000, Expenditure on repairs ₹ 20,000.
Solution :
Working
1. Computation of Gross Annual Value (GAV)
2. Municipal tax = 10% of ₹ 2,00,000 = ₹ 20,000 being divided in the ratio 1:1 between Unit 1 and Unit 2. Out of
such Municipal tax only 60% is paid, therefore, Municipal tax allowed as deduction in case of Unit 2 is only
₹ 6,000 [i.e. ₹ 20,000 * ½ * 60%].
3. Interest on loan is divided in unit A and unit B in 1:1 as both units are of equal dimension.
Computation of income from house property of Mr. Ajnabi for the A.Y. 2024-25
Unit 1 Unit 2
Particulars Working
Details Amount Details Amount
Gross Annual Value 1 Nil 1,00,000
Less : Municipal Tax 2 Nil 6,000
Net Annual Value Nil 94,000
Less : Deduction u/s
24(a) Standard Deduction Nil 28200
24(b) Interest on loan 3 20,000 20,000 20000 48,200
Income from house property (-) 20,000 45,800
Conclusion : Income under the head Income from house property is ₹ 25,800 (being ₹45,800 – ₹20,000).
Illustration 58 :
Mr. Lucky Ali owns a house property let out since 1/4/2019 to a school for monthly rent of ₹ 10,000. There was
no change in rent till 31/3/2023. On 1/4/2023, as per court decision rent was increased to ₹ 12,000 p.m. with
retrospective effect from 1/4/2021 and duly paid by school in the same year. Legal expenditure for such suit has
been incurred by Mr. Ali ₹ 30,000. Discuss tax treatment u/s 25A.
Solution :
Arrears rent belongs to the period 1/4/2021 to 31/3/2023 i.e., for 24 months.
Arrears rent received = ₹ 2,000 * 24 months = ₹ 48,000
Such rent is taxable in the year of receipt as under :
Particulars Amount
Arrears of rent received 48,000
Less : Standard deduction u/s 24(a) equal to 30% of such rent 14,400
Income from house property u/s 25A 33,600
Note: Legal expenditure is not deductible.
Illustration 59 :
X Ltd. has two house properties both of which are vacant. Municipal value of 1st house property is ₹ 1,00,000 and
that of 2nd is ₹ 80,000. It has computed income from house property as under :
Illustration 60 :
Mr. Abul Hasan owns three houses at Ranchi. He furnishes the following particulars for the previous year 2022-23 :
House No. I : The house was constructed in 2022 and let out to a friend at a monthly rent of ₹ 10,000 upto
31.1.2024 and thereafter, it was let out at its fair rent of ₹ 15,000 per month. He has paid
₹ 15,000 as municipal taxes @ 10% of Municipal Value. He has also paid fire insurance
premium of ₹ 2,000.
House No. II : Ground floor is let out @ ₹ 20,000 p.m. first floor, identical to ground floor, is occupied by
him for his residence. Municipal taxes paid @ 20% amounted to ₹ 80,000.
House No. III : The house was constructed in 2012 and is used for his business. The annual value of this
house is ₹ 1,00,000 and he spent ₹ 5,000 as municipal taxes and ₹ 2,000 for repairs.
Other information :
A loan of ₹ 40,00,000 has been taken on 01-6-2021 for construction of House No. II. Construction of the house was
completed on 01-6-2022. He repaid the entire loan on 31-12-2023. Interest on loan is payable @ 12% p.a. Compute
his income from house property for the A.Y. 2024-25.
Solution :
Computation of Income from House Property of Mr. Abul Hasan for the A.Y. 2024-25 :
Workings :
1 Fair Rent : Since 1st house is let out by assessee to his friend @ ₹ 10,000 p.m. and the same property is let out to
other tenant @ ₹ 15,000 p.m., this signifies that 2nd house has fair rent ₹ 15,000 * 12 = ₹ 1,80,000.
2 Calculation of Interest to be deducted in A.Y. 2024-25
Illustration 61 :
Sarju Middey is the owner of 2 houses in Kolkata. From the following particulars of the houses, compute his
income from house property for the assessment year 2024-25 :
House A : Let-out to an employee of the business of Sarju @ ₹ 5,000 p.m. which is necessary for the purpose
of business. Municipal tax paid ₹ 3,000 and interest on loan taken for purchasing the house
amounted to ₹ 9,000.
House B : The house consists of 3 identical flats. First flat is used by him for his own business. Second flat is
used by him for his own residence. The third flat is let out at a monthly rent of ₹ 15,000. Municipal
taxes paid @ 5% amounted to ₹ 20,250.
Other information :
a. Unrealised rent for the P.Y. 2023-24 relating to third flat of House B amounted to ₹ 10,000.
b. A loan of ₹ 20,00,000 was taken on 01.07.2020 for construction of the House B. Construction of House B was
completed on 01.06.2022. Interest on loan is 12% p.a. No repayment was made.
Quick MCQs:-
1. The basis of chargeability of income under the head income from house property is
(a) Rental value
(b) Annual value
(c) Value fixed by the government
(d) None of the above
5. A has two house properties. Both are self-occupied. The Annual Value-
(a) of both house shall be Nil
(b) one house shall be Nil
(c) of no house shall be Nil
(d) Both (a) & (b)
6. “A” borrowed D 5,00,000 at 12% p.a on 01-04-2015 for construction of house property which was
completed on 15-03-2024 and let out. The amount is still unpaid. The deduction on account of interest for
the previous year 2023-24 shall be-
(a) D 60,000
(b) D 96,000
(c) D 1,80,000
(d) D 2,40,000
8. Megha received D 30, 000 as arrears of rent during the previous year 2023-24. The amount taxable under
section 25A would be_______
(a) Nil
(b) D 21,000
(c) D 30,000
(d) D 25,000
9. Ms. Shilpa let out a property for D 20,000 per month during the year 2022-23. The municipal tax on the
let-out property was enhanced retrospectively. Hence, she paid D 60,000 as municipal tax which included
arrears of municipal tax of D 45,000.Her income from house property is-
(a) D 1,80,000
(b) D 1,26,000
(c) D 1,57,500
(d) D 1,36,500
10. Jaya and Vijaya are co-owners of a self-occupied property. They own 50% share each. The interest paid
by each co-owner during the previous year 2023-24 on loan (taken for acquisition of property during the
year 2004) is D 2,05,000. The amount of allowable deduction in respect of each co-owner is –
(a) D 2,05,000
(b) D 1,02,500
(c) D 2,00,000
(d) D 1,00,000
Notes
1. Profit Motive: If the motive of an activity is pleasure only, it shall not be treated as business activity.
2. Business vs Profession: An income arising out of trade, commerce, manufacture, profession or vocation
shall have the same treatment in Income tax Act. However, a little segregation is required to be made between
business and profession while applying sec. 44AA, sec. 44AB, sec. 40AD, sec. 44ADA, etc. (discussed later
in this chapter).
2.3.2 Income chargeable under the head Profits & gains of business or profession [Sec. 28]
Sec. 28 enlists the incomes, which are taxable under the head ‘Profits & gains of business or profession’:
1. Profits & gains of any business or profession [Sec. 28(i)]: Any income from business or profession including
income from speculative transaction shall be taxable under this head.
2. Compensation to Management agency [Sec. 28(ii)]: Any compensation/other payment due to or received -
By In connection with
Any person managing the affairs of an Indian
company Termination or modification of terms and conditions of
Any person managing the affairs of any company his appointment
in India
Any person holding an agency in India for any part
Termination of agency or the modification of terms and
of the activities relating to the business of any other
conditions in relation thereto
person
The vesting in the Government or in any corporation
Any person owned/controlled by the Government, of the
management of any property or business.
The termination or the modification of the terms and
Any person
conditions, of any contract relating to his business
3. Income of trade or professional association’s [Sec. 28(iii)]: Income derived by a trade, professional or
similar association from rendering specific services to its members shall be taxable under this head.
Note: This is an exception to the general principle that a surplus of mutual association cannot be taxed.
4. Export incentive [Sec. 28(iiia) (iiib) & (iiic)]: An export incentive in form of -
¾¾ Profit on sale of import license or duty entitlement pass book. [Sec. 28(iiia)/(iiid)/(iiie)]
¾¾ Cash assistance received/receivable by an exporter under a scheme of the Government of India [Sec.
28(iiib)]
¾¾ Duty draw back (received/receivable) for export e.g. duty drawback, etc. [Sec. 28(iiic)]
5. Perquisite from business or profession [Sec. 28(iv)]: The value of any benefit or perquisite, whether
convertible into money or not, arising from business or profession shall be taxable under this head.
Example 1: If an authorized dealer of a company receives a car (over and above his commission) from the
company on achieving sale-target then market value of such car shall be taxable under the head ‘Profits &
gains of business or profession’.
6. Remuneration to partner [Sec. 28(v)]: Any interest salary, bonus, commission or remuneration received by
a partner from the firm (or Limited Liability Partnership) shall be taxable as business income in the hands of
the partner to the extent allowed in hands of firm (or Limited Liability Partnership) u/s 40(b).
7. Amount received or receivable for certain agreement [Sec. 28(va)]: Any sum, whether received or
receivable in cash or in kind, under an agreement for -
¾¾ not carrying out any activity in relation to any business or profession; or
¾¾ not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business or
commercial right of similar nature or information or technique likely to assist in the manufacture or
processing of goods or provisions for services.
Exceptions: The aforesaid provision is not applicable in respect of the following:
a. any sum received or receivable in cash or in kind on account of transfer of the right to manufacture,
produce or process any article or thing; or right to carry on any business or profession, which is chargeable
under the head Capital gains;
b. any sum received as compensation from the multilateral fund of the Montreal Protocol on Substances that
Deplete the Ozone Layer under the United Nation Environment Programme, in accordance with the terms
of agreement (whether or not in writing, whether or not intended to be enforceable by legal proceedings)
entered into with the Government of India
8. Keyman Insurance Policy [Sec. 28(vi)]: Any sum received under a Keyman Insurance Policy including
bonus on such policy. As per sec. 10(10D) Keyman insurance policy is a life insurance policy taken by a person
on the life of another person who is or was -
¾¾ an employee of the first mentioned person; or
¾¾ in any manner whatsoever connected with the business of the first mentioned person.
and includes such policy which has been assigned to a person, at any time during the term of the policy, with
or without any consideration
9. Conversion of stock into capital asset [Sec. 28(via)]: The fair market value of inventory as on the date on
which it is converted into, or treated as, a capital asset. (Discussed later in the chapter)
10. Recovery against certain capital assets covered u/s 35AD [Sec. 28(vii)]: Any sum received or receivable
(in cash or kind) on account of any capital asset (other than land or goodwill or financial instrument) being
demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been
allowed as a deduction u/s 35AD (Discussed later in this chapter).
General Points
1. Chargeability: As per sec. 145(1), income chargeable under the head “Profits & gains of business or
profession” or “Income from other sources”, shall subject to the provision of sec. 145(2), is to be computed in
accordance with the method of accounting (i.e. either on cash or on accrual basis) regularly followed by the
assessee. However, there are certain expenditures specified u/s 43B, which shall be deductible only on cash
basis.
As per sec. 145(3), where the Assessing Officer is not satisfied about the correctness or completeness of
the accounts of the assessee, or has not been regularly followed by the assessee, or income has not been
computed in accordance with the notified standards, the Assessing Officer may make an assessment in the
manner provided u/s 144 i.e. Best Judgment Assessment.
2. Negative income: Income includes negative income i.e. loss.
3. Notional profit: A person cannot do business with himself, hence notional profit is not taxable. E.g. If proprietor
withdraws goods costing ₹ 10,000 for personal use at an agreed value of ₹ 12,000 then profit of ₹ 2,000 shall
not be taxable.
4. Anticipated profit or loss: Anticipated or potential profit or loss, which may or may not arise in future are not
considered for deriving taxable income.
5. Legality of business: There is no difference between legal or illegal business from income tax point of view.
Even income of illegal business shall be taxable.
6. Compilation of income of all business or profession: If an assessee carries on several business or profession,
then income from all business or profession shall be merged together.
7. Business or profession must be carried on during the previous year. Income is chargeable under the head
“Profits & gains of business or profession” only if the business is carried on by the assessee during the previous
year. It is not necessary that the business should continue throughout the year or till the end of previous year.
Exceptions
However, in the following cases, income may be charged under the head Profits & gains of business or
profession even though the business is not carried on during the previous year:
Sections Details
176(3A)/(4) Applicability: Where any business or profession is discontinued in any year and any sum
received after the discontinuance.
Treatment: The sum so received shall be deemed to be the income of the recipient & charged
to tax accordingly in the year of receipt, if such sum would have been included in the total
income of the person who carried on the business had such sum been received before such
discontinuance
*41(1) Recovery of any amount earlier allowed as deduction
*41(2) Balancing charge in case of power sector unit
*41(3) Sale of an asset used for scientific research
*41(4) Bad debt recovery which was earlier allowed as deduction
*41(4A) Amount withdrawn from a reserve created u/s 36(1)(viii)
* Discussed later in this chapter
2.3.3 Incomes not taxable under the head Profits and gains of business or profession
Following incomes are though in the nature of profits and gains of business or profession, shall not be taxable under
this head:
1. Rent from house property is taxable u/s 22 under ‘Income from house property’ even though -
¾¾ the assessee is engaged in the business of letting out properties on rent; or
¾¾ such property is held as stock in trade
Note: However, where letting of house supporting the smooth running of the business (i.e. incidental to
business), then such income shall be taxable under this head.
2. Dividend on shares is taxable u/s 56(2)(i) under the head ‘Income from other sources’ even though the
assessee deals in shares and such shares are held as stock in trade. The provision is not applicable in case of
interest on securities held as stock in trade.
3. Winning from lotteries, races etc. are taxable under the head ‘Income from other sources’ even if such
income is derived through regular business activity.
Treatment of lottery ticket held as stock in trade: However, where an assessee deals in lottery tickets and
some of the lottery tickets remained unsold, any winning from such unsold lottery ticket shall be treated as
incidental to business and taxed under the head ‘Profits and gains of business or profession
4. Exempted income by virtue of sec. 10, 11 or 13A.
5. Sum taxable under the head ‘Capital gains’ for the purpose of sec. 28 (va) shall not be taxable under this
head. E.g. profit on sale of route permit shall not be taxable under the head ‘Profits & gains of business or
profession’.
2.3.6 Rent, rates, taxes, repairs & insurance for building [Sec. 30]
Rent, rates, taxes, repairs & insurance for premises used for the purpose of business or profession shall be allowed
under this section. Points to be noted in this regard:
1. Use of building: The building is to be used for the purpose of business or profession. However, if the building
is not exclusively used for the purpose of business or profession then deduction shall be restricted to a fair
proportion of above expenditure which the Assessing Officer may determine [Sec. 38(2)].
2. Notional Rent: Rent paid to proprietor is disallowed but rent paid by firm to its partner for using his premises
is an allowed expenditure.
3. Current repair vs Capital repair: Only current repairs are allowed as deduction. Capital repairs are not
allowed as deduction whether the assessee occupies the building as a tenant or as a landlord.
Current repair (irrespective of the amount involved) means -
a repair incurred to preserve and maintain an existing asset; and
a repair which does not result in a new or fresh advantage.
4. Municipal taxes: Rates & taxes (for e.g. land revenue, municipal tax, etc) are deductible on cash basis [Sec.
2.3.7 Repairs & insurance of machinery, plant & furniture [Sec. 31]
Repairs & insurance of plant, machinery & furniture are allowed as deduction. Points to be noted in this regard:
1. Use of asset: The asset must be used for the purpose of business or profession. However, if the asset is not
exclusively used for the purpose of business or profession then deduction shall be restricted to a fair proportion
of above expenditure, which the Assessing Officer may determine [Sec. 38(2)].
2. Current repair vs Capital repair: Only current repairs are allowed as deduction.
Example 2:
¾¾ Heavy expenditure incurred for replacement of part of a ship without creating any asset is deductible
¾¾ Any expenditure on the replacement of petrol engine by a diesel engine on his vehicle is allowed u/s 31.
3. Rent for furniture, plant or machinery: Only repairs & insurance of machinery, plant & furniture is covered
under this section. Rent paid for use of such assets is deductible u/s 37(1).
Condition 1: Asset must be owned by the Condition 2: Asset must be used for the purpose of business or
assessee. profession during the previous year.
Notes
¾¾ Beneficial owner: Assessee need not be a
registered owner, even a beneficial owner ¾¾ Passive use -vs.- Active use: Use includes active use
can claim depreciation. as well as passive use. Active use means actual use of the
property for the purpose of business or profession. Whereas
passive use includes “ready to use”. It means, if a property
¾¾ Co-owner: In case of joint ownership,
was not actually used for business or profession but was
depreciation is allowed on proportionate
ready to use in the previous year, in such case, assessee can
basis.
claim depreciation on such assets
¾¾ Property acquired on hire purchase: In ¾¾ Partly used for business or profession: As per sec.
case of hire purchase, the buyer can claim 38, if an asset is partly used for business or profession
depreciation even though he does not get and partly used for personal purpose, then proportionate
legal title of the asset till he pays the last depreciation (as determined by the Assessing Officer) shall
instalment. be allowed.
¾¾ Capital expenditure on a property by ¾¾ House property let out to tenant for smooth running
the lessee: Where an assessee being a of the business: If an assessee lets out a property to his
lessee of a property incurs any capital employee and where such letting-out supports smooth
expenditure by way of improvement, flow of his business, then rent received from employee
extension, super construction, etc. on a shall be chargeable under the head “Profits & gains of
building being used for his business or business or profession” and such property shall be eligible
profession, he is entitled to depreciation for depreciation u/s 32. Similarly, where an assessee makes
in respect of such capital expenditure. available his property to any Government agency for
locating branch of a nationalized bank, police station, post
¾¾ Sec. 53A of Transfer of Property Act:
office, tax office, railway staff quarters, etc. for the purpose
Possessor of an immovable property u/s
of running the business of assessee more efficiently, then
53A of Transfer of Property Act can claim
such letting out shall be deemed to be incidental to business
depreciation even though he is not the
and depreciation on such building shall be allowed u/s 32.
registered owner of the property.
Method of Depreciation
Depreciation shall be allowed on written down value method at the rates prescribed.
Calculation of depreciation (at a glance)
Particulars Amount
W.D.V of the block at the beginning of the previous year ***
Add: Assets (falling within the block) acquired during the previous year ***
ABC
Less: Sale Proceeds of assets (falling within the block) sold during the previous year [$subject to (DE)$
max. of ABC]
Written Down Value [# XYZ cannot be negative] XYZ#
Less: Depreciation (as a % on XYZ) (***)
Opening WDV for 1st day of next year ****
Extract of depreciation-rate
Block Nature of Asset
Buildings1 5% Residential building other than hotels and boarding
Buildings 10% Non residential building, godown, office, factory, etc. including hotels and boarding
Buildings 40% Temporary construction
Furniture 10% Any furniture including electrical fittings
Plant/Machinery 20% Ocean going ships, vessels, speed boats
Plant/Machinery 30% Motor car (including lorries and buses) used for hiring purposes
Motor car, other than used in a business of running them on hire, acquired and put
Plant/Machinery 30%
to use between 23-08-2019 and 31-03-2020
Motor buses, motor lorries and motor taxis used in a business of running them on
Plant/Machinery 45%
hire, acquired and put to use between 23-08-2019 and 31-03-2020
Computer including computer software
Plant/Machinery 40%
Books owned by a professional
Plant/Machinery 40% Air or water pollution control equipment
Plant/Machinery 15% Oil Wells
In general (if nothing is mentioned regarding nature of plant & machinery and
Plant/Machinery 15%
including motor car not used for hiring purpose)
Intangible assets3 25% Acquired after 31/3/98
1.
Buildings include roads, bridges, culverts, wells (excluding oil wells) and tube wells.
2.
Plant does not include tea bushes or live stocks or buildings or furniture & fittings.
3
Patent, Know-how, Copy-rights, Trade-mark, Licences, Franchises and other business or commercial right of
similar nature (it does not include goodwill)
Illustration 62:
M/s Anita Enterprises has written down value in furniture block (depreciation rate 10%) as on 1/4/2023 ₹ 80,000.
The block consists of two furniture X and Y.
Compute depreciation u/s 32 for the A.Y. 2024-25 in the following cases:
Case A Furniture X sold for ₹ 20,000 on 1/5/2023
Case B Furniture X sold for ₹ 1,00,000 on 1/1/2024
Case C Furniture X sold for ₹ 1,00,000 and Furniture S purchased for ₹ 35,000 as on 1/7/2023
Case D Furniture X sold for ₹ 10,000 and Furniture S purchased for ₹ 40,000 as on 1/7/2023
Case E Furniture X sold for ₹ 10,000 and Furniture S purchased for ₹ 40,000 as on 11/11/2023
Case F Furniture X sold for ₹ 2,00,000 and Furniture S purchased for ₹ 40,000 as on 11/11/2023
Case G Furniture X and Furniture Y both sold for ₹ 10,000 and ₹ 35,000 respectively.
Case H Furniture X and Furniture Y both sold for ₹ 10,000 and ₹ 35,000 respectively as on 11/11/2023. New
Furniture T purchased for ₹ 5,000 as on 1/7/2023.
Case I Furniture Z purchased for ₹ 40,000 on 1/7/2023 and the same being put to use on 11/11/2023.
Case J Furniture Q purchased for ₹ 50,000 on 1/7/2023 but put to use on 1/11/2024.
Case K Furniture R purchased for ₹ 30,000 on 1/7/2022 but put to use on 11/11/2023.
Case L Furniture S purchased for ₹ 10,000 on 1/7/2023 but put to use on 11/11/2023 and Furniture X and Y
sold for ₹ 10,000 and ₹ 6,000 respectively.
Case M Furniture R purchased for ₹ 30,000 on 1/7/2023 and sold the same for ₹ 40,000 on 11/11/2023.
Case N Sold Furniture X and Y for ₹ 95,000 on 1/7/2023 & purchased Furniture R for ₹ 30,000 on 11/11/2023
Case O Sold Furniture X for ₹ 90,000 on 11/7/2023 and following Furniture put to use -
¾¾ Furniture A on 18/12/2023, purchased on 17/12/2023 for ₹ 30,000;
¾¾ Furniture B on 18/2/2024, purchased on 15/8/2023 for ₹ 50,000;
¾¾ Furniture Z on 18/4/2023, purchased on 17/7/2022 for ₹ 60,000;
¾¾ Furniture P on 8/12/2023, purchased on 17/5/2022 for ₹ 10,000;
¾¾ Furniture Q on 1/4/2024, purchased on 31/3/2024 for ₹ 20,000.
Assume in all cases new furniture is charged to deprecation @ 10%
Solution :
Computation of depreciation for the A.Y. 2024-25
#
Sale Proceeds cannot exceed Opening WDV as increased by actual cost of asset acquired during the previous
year. Excess, if any, shall be considered as short term capital gain.
Illustration 63:
Mr. X, a grower and manufacturer of tea, purchased machinery (15%) on 10-04-2022 for ₹ 10 lakh. He computed
depreciation for A.Y. 2024-25 as given below; needs your comment on his working:
Particulars Amount
10,00,000
Less: Depreciation for the P.Y. 2022-23 [₹ 10,00,000 * 15% * 40%] 60,000
(As he is engaged in the business of growing and manufacturing tea; hence 60% is considered as
part of agricultural income)
Less: Depreciation for the P.Y. 2023-24 [₹ 9,40,000 * 15% * 40%] 56,400
Further, compute his business income for A.Y. 2024-25 assuming that his income before depreciation and without
reducing element of agricultural income is ₹ 8,00,000/-
Solution :
The method of computation of depreciation followed by Mr. X is not correct as Expl. 7 to sec.43(6) provides that:
“Where the income of an assessee is derived, in part from agriculture and in part from business chargeable to
income-tax under the head “Profits and gains of business or profession”, for computing the written down value of
assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire income
is derived from the business of the assessee under the head “Profits and gains of business or profession” and the
depreciation so computed shall be deemed to be the depreciation actually allowed under this Act.”
The correct computation of depreciation is as follow:
Particulars Amount
Opening W.D.V. as on 1/4/2022 Nil
10,00,000
Particulars Amount
Income before depreciation and without reducing element of agricultural income 8,00,000
Provision Illustrated
B Ltd., a newly formed manufacturing concern, has furnished you the following details to compute Depreciation
allowed for the A.Y. 2023-24 and 2024-25:
Assets Date of Acquisition Cost of Acquisition Rate of depreciation
Plant A 02/04/2022 5,00,000 15%
Plant B 07/05/2022 3,00,000 15%
Plant C 15/12/2022 2,00,000 15%
Plant D 05/05/2023 1,00,000 15%
Solution:
Computation of Additional Depreciation
Additional depreciation
Assets Rate Cost
A.Y. 2023-24 A.Y. 2024-25
Plant A 20% 5,00,000 1,00,000 Nil#
Plant B 20% 3,00,000 60,000 Nil#
Plant C 10% 2,00,000 20,000 20,000
Plant D 20% 1,00,000 Nil 20,000
Total 1,80,000 40,000
Calculation of Depreciation u/s 32 of Plant (15%) for the A.Y.2023-24 and 2024-25
Particulars Details Amount
W.D.V. as on 1/4/2022 -
Add: Purchase during the year 10,00,000
10,00,000
Less: Sale during the year Nil
10,00,000
Depreciation (normal) [(₹ 8,00,000 * 15%) + (₹ 2,00,000 * 15% * ½)] 1,35,000
Additional depreciation (as computed above) 1,80,000 3,15,000
W.D.V. as on 1/4/2023 6,85,000
Add: Purchase during the year 1,00,000
7,85,000
Less: Sale during the year Nil
7,85,000
Depreciation (normal) [₹ 7,85,000 *15%] 1,17,750
Additional depreciation (as computed above) 40,000 1,57,750
W.D.V. as on 1/4/2024 6,27,250
Illustration 64:
An industrial undertaking, which commenced the manufacturing activity with effect from 1st September, 2023 has
acquired the following assets during the previous year 2023-24:
Asset Reason
Factory building As it is not plant and machinery
Machinery-F As it is a second hand machinery
Asset Reason
Motor car As it is a road transport vehicle
Air conditioner As it is installed in office
Particulars Amount
W.D.V of the block at the beginning of the previous year ***
Add: Purchase during the previous year ***
Mno
Less: Sale consideration for assets sold (to the maximum of mno) (****)
Pqr
Less: WDV (Note) of the asset sold under slump sale (abc)
[Value of deduction at this stage i.e. abc cannot exceed pqr]
XYZ
Less: Depreciation (as a % on XYZ) (***)
WDV of the block at the end of year ****
Note: Written down value of the asset sold under slump sale
Particulars Amount
Original cost of asset sold under slump sale ***
Less: Depreciation (actual) allowed on such asset in respect of any previous year (***)
commencing before 1987-88
Less: Depreciation (notional) that would have been allowable from the previous year (***)
1987-88 onwards as if the asset is only asset in the relevant block.
Written down value of the asset sold under slump sale ***
Note: Additional depreciation is not available to the assessee who claims depreciation as per Straight-Line Method.
Illustration 65:
Important Ltd. is a power-generating unit. On 1-4-2021, it purchased a plant of ₹ 50,00,000 eligible for depreciation
@ 15% on SLM. Compute balancing charge or terminal depreciation assuming the plant is sold on 21/4/2023 for:
A) ₹ 7,50,000 B) ₹ 30,00,000 C) ₹ 45,00,000 D) ₹ 55,00,000
Solution :
Computation of capital gain or balancing charge or terminal depreciation for the A.Y.2024-25
Amount
Particulars Note
A B C D
Written down value as on 1/4/2023 1 35,00,000 35,00,000 35,00,000 35,00,000
Less: Sale Proceeds 7,50,000 30,00,000 45,00,000 55,00,000
Balance 27,50,000 5,00,000 (-) 10,00,000 (-) 20,00,000
Terminal depreciation 27,50,000 5,00,000 Nil Nil
Balancing Charge 2 Nil Nil 10,00,000 15,00,000
Short term capital gain 2 Nil Nil Nil 5,00,000
Notes
1. Computation of Written down value as on 1/4/2023
Particulars Amount
Original cost 50,00,000
Less: Depreciation for the year 2021-22 7,50,000
WDV as on 1/4/2022 42,50,000
Less: Depreciation for the year 2022-23 7,50,000
WDV as on 1/4/2023 35,00,000
2. Balancing charge cannot exceed accumulated depreciation claimed on such asset. The total negative balance
in case D is ₹ 20,00,000 but the accumulated depreciation is ₹ 15,00,000 only. Hence, balancing charge is
restricted to ₹ 15,00,000 & the balance i.e. ₹ 5,00,000 shall be treated as short-term capital gain.
Test Yourself
1. Taj Electric Supply Company Ltd. which was charging depreciation on straight line method and whose actual
cost of the asset was ₹ 20,00,000 and written down value ₹ 18,72,300 sold the said asset during 2023-24 after
2 years. What will be the tax treatment for assessment year 2024-25 if the asset is sold for:
i. ₹ 30,000;
ii. ₹ 18,72,300;
iii. ₹ 19,80,000;
iv. ₹ 21,00,000
Hints
(i) ₹ 18,42,300 Terminal Depreciation (ii) Nil (iii) ₹ 1,07,700 Balancing Charge (iv) ₹ 1,27,700 Balancing charge
and ₹ 1,00,000 Short Term Capital Gain
In all the cases, no further depreciation is allowable to the assessee in respect of such asset.
WDV at the time of first transfer or the price paid for reacquisition,
Reacquisition of transferred asset
whichever is lower
Building used for personal purpose Cost of purchase or construction of the building as reduced by the notional
subsequently brought into business depreciation by applying the rate applicable on the date of such conversion
Asset, which was acquired outside Actual cost to the assessee, as reduced by an amount equal to the amount of
India, is brought by a non-resident depreciation calculated at the rate in force that would have been allowable
assessee to India and used for had the asset been used in India for the said purposes since the date of its
the purposes of his business or acquisition by the assessee
profession
Illustration 66:
Dr. R purchased a house property on 1-12-2021 for ₹ 10,00,000. Till 1-12-2023, the same was self-occupied as a
residence. On this date, the building was brought into use for the purpose of his medical profession. What would
be the depreciation allowable for the assessment year 2024-25?
Solution :
In case a building is used for personal purpose subsequently brought into business, the cost of acquisition shall
be the purchase or construction cost of the building as reduced by the notional depreciation by applying the rate
applicable on the date of such conversion. In the given case cost of asset for the business shall be computed as
under:
Particulars Building
Rate of depreciation 10%
Cost of building on 1.12.2021 10,00,000
Less: Depreciation (Being used for less than 180 days hence, depreciation charged 50% of normal 50,000
depreciation i.e. ₹ 10,00,000 * 50% * 10%)
WDV on 31.3.2022 9,50,000
Less: Depreciation 95,000
WDV on 31.3.2023 8,55,000
Computation of depreciation u/s 32
Cost of building on 1/4/2023 8,55,000
Depreciation for the year 2023-24 85,500
WDV on 01.04.2023 7,69,500
Illustration 67:
Roshan started a business of designing on 01-04-2022. He acquired a laptop on 01-04-2022 for ₹ 50,000 for his
business use. Since his gross total income for the previous year 2022-23 is only ₹ 55,000/-, he did not file his return
of income. During the previous year 2023-24, his business income before depreciation u/s 32 is ₹ 5,60,000. Since
he is required to file his return of income for the assessment year 2024-25, he seeks your advice for computing
depreciation. Please compute depreciation on his behalf assuming that:
a. He is maintaining books of account from 01-04-2022 but did not provide any depreciation on laptop.
b. He is maintaining books of account from 01-04-2022 and provided depreciation ₹ 8,000 on laptop.
c. He is maintaining books of account from 01-04-2023.
Solution :
Computation of depreciation in various cases:
Illustration 68:
A car was purchased by S on 10.8.2019 for ₹ 3,25,000 for personal use is brought into the business of the assessee on
01.12.2023, when its market value is ₹ 1,50,000. Compute the actual cost of the car and the amount of depreciation
for the Assessment year 2024-25 assuming the rate of depreciation to be 15%.
Solution :
Computation of depreciation on car for the A.Y. 2024-25
Particulars Amount
Cost of the car (Note 1) 3,25,000
Less: Depreciation @ 15% (Note 2) 48,750
Closing W.D.V. 2,76,250
1. As per explanation 5 to Sec. 43(1), where any building used for personal purpose subsequently brought into
business, then the cost of purchase or construction of the building as reduced by the notional depreciation
by applying the rate applicable on the date of such conversion shall be taken as actual cost of such building.
However, such provision is applicable only in case of building.
2. Where an asset is acquired by the assessee during the previous year and is put to use in the same previous year
for less than 180 days, the depreciation in respect of such asset is restricted to 50% of the normal depreciation.
However, in the case, car was not acquired in the P.Y. 2023-24, hence such provision is not applicable.
Illustration 69:
Compute depreciation u/s 32 for the A.Y. 2024-25 from the following information:
a. W.D.V. of plant and machinery (15%) as on 01-04-2023 ₹ 10,00,000
b. Plant D acquired on 10-07-2023 for ₹ 5,00,000/-. ₹ 1,00,000 has been paid in cash to the vendor and balance
amount has been paid through an account payee cheque. Such plant was put to use on the same day.
c. The assessee is engaged in the business of manufacturing of industrial paints.
Solution :
Computation of depreciation for A.Y. 2024-25
Particulars Amount Amount
WDV as on 01-04-2023 10,00,000
Add: Actual cost of Plant D acquired during the year [₹ 5,00,000 – ₹ 1,00,000] 4,00,000
14,00,000
Less: Depreciation for the P.Y. 2023-24 [₹ 14,00,000 x 15%] 2,10,000
Less: Additional Depreciation for the P.Y. 2023-24 [₹ 4,00,000 x 20%] 80,000 2,90,000
WDV on 01-04-2023 11,10,000
Treatment
The amount by which such liability is increased or reduced at the time of making the payment (irrespective of the
method of accounting adopted by the assessee) shall be added to or deducted from the actual cost (as reduced by
depreciation already claimed) of the asset
Taxpoint
If such increase or decrease arises after the depreciable asset is transferred (but block exists), then such increase
or decrease shall be adjusted in the WDV. If, however, block is cease to exist, then such amount shall be treated
as capital receipt or expenditure.
Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by
any other person or authority, the liability so met shall not be taken into account for the purposes of this section.
Illustration 70:
Narang Textiles Ltd. purchased a machinery from Germany for Euro 1,00,000 on 03-09-2022 through a term
loan from Fortune Bank Ltd. The exchange rate on the date of acquisition was ₹ 65. The assessee took a forward
exchange rate on 05-10-2023 when the rate specified in the contract was ₹ 67 per USD. Compute depreciation for
the assessment years 2023-24 and 2024-25. Ignore additional depreciation.
Solution :
Computation of Depreciation
Particulars Amount
Opening W.D.V. as on 1/4/2022 Nil
Add: Assets purchased during the year [Euro 1,00,000 * 65] 65,00,000
65,00,000
Less: Depreciation for the P.Y. 2022-23 [₹ 65,00,000 * 15%] 9,75,000
Opening W.D.V. as on 1/4/2023 55,25,000
Add: Difference in Conversion rate [Euro 1,00,000 * 2] 2,00,000
57,25,000
Less: Depreciation for the P.Y. 2023-24 [₹ 57,25,000 * 15%] 8,58,750
Opening W.D.V. as on 1/4/2024 48,66,250
2.3.18 Special deduction for assessee engaged in Tea, Coffee or Rubber growing &
manufacturing business [Sec. 33AB and Rule 5AC]
Applicable to All assessee carrying on business of growing and manufacturing of the followings in India:
a. Tea; b. Coffee; or c. Rubber
Conditions to be 1. Deposit of amount: Assessee must deposit (hereinafter referred to as special account) an
satisfied amount in:
¾¾ National Bank for Agriculture & Rural Development (NABARD) in an account
maintained by him in accordance with, and for the purpose specified in the scheme
approved by Tea Board, Coffee Board or Rubber Board, as the case may be; or
¾¾ An account in accordance with, and for the purpose specified in a scheme approved by
Tea Board or Coffee Board or Rubber Board, as the case may be, with prior approval
of the Central Government.
2. Time of deposit: The amount must be deposited within 6 months from the end of the
previous year or before the due date of furnishing the return of income, whichever is
earlier.
3. Audit of accounts: Accounts of assessee should be audited by a chartered accountant &
the report of an auditor in Form 3AC is required to be uploaded one month prior to the
due date of filing of return
Note: In case, where the assessee is required under any other law to get his accounts
audited, it shall be sufficient compliance if such assessee gets the accounts audited under
such law and furnishes the report in Form 3AC.
Quantum of Minimum of the following -
Deduction
a. Amount so deposited (as discussed above); or
b. 40% of the profit of such business computed under the head “Profits & gains of business
or profession” before allowing any deduction u/s 33AB and before adjusting brought
forward business loss.
Other points
1. Excess Deposit: Any excess deposit made during a previous year is not treated as deposit made for the next
year(s).
2. Restriction on utilisation of amount for certain purposes: No deduction shall be allowed in respect of any
amount, being credited in special account, utilised for the purpose of:
¾¾ Purchase of plant or machinery to be installed in any office premises / residential accommodation /
accommodation in the nature of guest-house.
¾¾ Purchase of any office appliances (other than computer)
¾¾ Purchase of any plant or machinery, the entire cost of which is allowed as deduction in form of depreciation
or otherwise in any one previous year.
¾¾ Purchase of any plant or machinery to be installed in an industrial undertaking for constructing,
manufacturing or producing any items specified in Schedule XI of the Act.
Note: If any amount is so utilised, then the whole of such amount so utilised shall be deemed to be the profits
and gains of business of the previous year in which such misutilisation takes place.
During continuation of business: The amount credited to such special account shall be withdrawn only for
the purpose(s) specified in respective schemes.
If the amount so withdrawn is not utilised for the specified purpose in the same previous year then the amount
not so utilised shall be treated as income of the year.
On closure of business: Apart from the specified purpose(s) of scheme, the amount deposited may be
withdrawn in the following circumstances: -
¾¾ Where an amount standing to the credit of the assessee in the special account is utilised by the assessee
for the purposes of any expenditure in connection with such business in accordance with the scheme, then
such expenditure shall not be allowed in computing the income chargeable under the head ‘Profit and gains
of business or profession’.
¾¾ Where the assessee is a firm, AOP or BOI, then deduction under this section shall not be allowed in
computation of income of any partner/member.
¾¾ Where any deduction in respect of an amount deposited in any special account has been allowed in any
previous year, no deduction shall be allowed in respect of such amount in any other previous year.
5. Restriction on sale of new asset: If any asset is acquired as per the scheme, then such asset cannot be sold or
transferred within 8 years from the end of the previous year in which it was acquired. If such asset is sold or
otherwise transferred, then such part of the cost of such asset as is relatable to the deduction allowed earlier
under this section will be treated as profit.
¾¾ Sale or transfer to the Government, local authority, statutory corporation or Government company.
¾¾ Sale or otherwise transfer, in connection with the succession of a firm by a company, provided the following
conditions are satisfied –
a. All assets & liabilities of firm (immediately before succession) become the assets & liabilities of the
company.
b. All shareholders of the company were partners of the firm immediately before the succession.
c. The scheme continues to apply to the company in the manner applicable to the firm.
Other points
1. Excess Deposit: Any excess deposit made during a previous year is not treated as deposit made for the next
year(s).
2. Restriction on utilisation of amount for certain purposes: No deduction shall be allowed in respect of any
amount, being credited in special account or site restoration account, utilised for the purpose of -
¾¾ Purchase of plant and machinery to be installed in any office premises / residential accommodation /
accommodation in the nature of guest-house.
¾¾ Purchase of office appliances (other than computer)
¾¾ Purchase of a plant or machinery, the entire cost of which is allowed as deduction in the form of depreciation
or otherwise in computation of business income of any one previous year.
¾¾ Purchase of a plant or machinery to be installed in an industrial undertaking for constructing, manufacturing
or producing any items specified in Schedule XI of the Act.
Note: If any amount is so utilised, then the whole of such amount shall be deemed to be the profit and gains of
business of the previous year in which such mis-utilisation takes place
During continuation of business: The amount credited to such special account or the site restoration account
shall be withdrawn only for the purpose(s) specified in respective scheme.
If the amount withdrawn in a year is not utilised for the specified purpose in the same previous year then the
amount not so utilised shall be treated as income of the year.
On closure of account: Where any amount standing to the credit of the assessee in the special account or in
the site restoration account is withdrawn on closure of the account during any previous year, the following
amount shall be deemed to be the profits & gains of business or profession (whether business is continued or
not) -
Particulars Amount
Amount so withdrawn from the account ****
Less: Amount, if any, payable to the Central Government by way of profit or
(****)
production share as provided in the agreement u/s 42
Taxable amount ****
Note: In case of closure of business, the amount stated above shall be taxable as if the business is in existence.
4. Double deduction is not permissible
¾¾ Where any amount standing to the credit of the assessee in the special account or site restoration account is
utilised by the assessee for the purpose of any expenditure in connection with such business in accordance
with the scheme, then such expenditure shall not be allowed in computing the income chargeable under the
head ‘Profit and gains of business or profession’.
¾¾ Where the assessee is a firm, AOP or BOI, the deduction under this section shall not be allowed in the
computation of the income of any partner/member.
¾¾ Where any deduction in respect of any amount deposited in any special account or site restoration account
has been allowed in any previous year, then no deduction shall be allowed in respect of such amount in
any other year.
5. Restriction on sale of such asset: If any asset is acquired as per the scheme, then such asset cannot be sold
or transferred within 8 years from the end of the previous year in which it was acquired. If such asset is sold
or otherwise transferred, then such part of the cost of the asset as is relatable to the deduction allowed shall be
treated as taxable profit under the head “Profits & gains of business or profession”, in the year in which the
asset is transferred. However, in the following cases, the provision shall not be applicable -
¾¾ Sale or otherwise transfer to the Government, local authority, statutory corporation or Government
Company.
¾¾ Sale or otherwise transfer, in connection with the succession of a firm by a company, subject to following
conditions:
a. All assets and liabilities of the firm, immediately before the succession became assets and liabilities
of the company.
b. All the shareholders of the company were the partners of the firm immediately before succession.
c. The scheme continues to apply to the company in the manner applicable to the firm
2.3.20 Scientific Research [Sec. 35]
Scientific research means any activity for the extension of knowledge in the fields of natural or applied science
including agriculture, animal husbandry or fisheries [Sec. 43(4)]
Such research can be categorised either as -
a. In-House research : Research done by the assessee himself (in connection with his business)
b. Research through : Any sum paid to outside agencies, engaged in scientific research, to be used for
outside institutions scientific research
In-House research
Revenue After Where the assessee himself carries on scientific research related to his
expenditure commencement of business and incurs revenue expenditure, such expenses are allowed
business as deduction in the year in which such expenditure is incurred by the
sec. 35(1)(i)
assessee.
Before Following revenue expenditures (certified by the prescribed authority)
commencement of incurred during 3 years immediately before commencement of business,
business shall be allowed as deduction in the year of commencement of business –
¾¾ Payment of salary to an employee engaged in scientific research
(excluding perquisite).
¾¾ Purchase of materials used for scientific research.
Capital After Any capital expenditure incurred (other than land) for scientific research,
Expenditure commencement of related to the business of the assessee, will be allowed as deduction in
business full. 100% deduction shall be allowed for such capital expenditure, in the
sec.35(1)(iv)
year in which the expenditure is so incurred.
/sec.35(2)
Before Any capital expenditure incurred (other than land) during 3 years
commencement of immediately preceding the year of commencement of business shall
business be deemed to have been incurred in the year in which the business
commenced and is allowed as deduction in that year.
Note: Where a deduction is allowed in any previous year in respect of any capital expenditure
for scientific research, no deduction u/s 32 shall be allowed on such assets. [Sec. 35(2)(iv)]
Notes: In-house research for a purpose not related to the business of the assessee shall not be allowed as deduction.
In-house research & development expenses incurred by certain companies [Sec. 35(2AB)]
Applicable to Company engaged in the business of bio-technology or any business of manufacture or production
of any article or thing (other than those specified in the 11th Schedule)
Conditions to 1. The expenditure shall be incurred on in-house scientific research and development facility
be satisfied including capital expenditure (other than expenditure in the nature of cost of any land or
building).
2. In-house research and development facility shall be approved by the Secretary, Department
of Scientific and Industrial Research.
3. The assessee must enter into an agreement with the prescribed authority -
¾¾ for co-operation in such research and development facility; and
¾¾ fulfils such conditions with regard to maintenance of accounts and audit thereof and
furnishing of reports in such manner as may be prescribed.
100% of the expenditure incurred on in-house research and development facility shall be allowed.
Notes
Deduction If the above conditions are not satisfied, then deduction may be claimed as per the provision
of sec. 35(1)(i) or sec. 35(2).
Where deduction is allowed in any previous year in respect of any capital expenditure under
this section, then no deduction u/s 32 shall be allowed on such asset.
Institution Purpose
Any payment to National Laboratory or a University Scientific research undertaken under programme
or Indian Institute of Technology or a specified person. approved by the prescribed authority (whether related
[Sec. 35(2AA)] to business or not)
Any payment made to a notified (by the Central
Government) research association or to an approved Scientific research (whether related to business or not)
university, college or other institutions3 [Sec. 35(1)(ii)]
Any payment made to a notified (by the Central
Research in Social science or Statistical Research
Government) research association, university, college or
(whether related to business or not)
other institution3 [Sec. 35(1)(iii)].
Any payment to an approved Indian company (main
object of whom is scientific research & development)3 Scientific research (whether related to business or not)
[Sec. 35(1)(iia)]
1.
National laboratory means a scientific laboratory functioning at the national level under the aegis of the Indian
Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific and Industrial
Research, the Defence Research and Development Organisation, the Department of Electronics, the Department
of Bio-Technology or the Department of Atomic Energy and which is approved as National Laboratory by the
prescribed authority.
2.
Such association, University, college or institution must be approved in accordance with prescribed guidelines
and must be notified by the Central Government.
3.
The deduction in respect of any sum paid to the research association, university, college or other institution or
company shall be allowed on the basis of a certificate issued by the donee.
Other points
1. Such association, University, college or institution must be approved in accordance with prescribed guidelines
and must be notified by the Central Government.
2. Withdrawal of approval: Deduction shall not be denied merely on the ground that subsequent to the payment
made by the assessee, the approval granted to the association, university, IIT, etc. has been withdrawn.
3. Carry forward of unabsorbed scientific research expenditure: Unabsorbed capital expenditure can
be carried forward for unlimited years and set off in any subsequent assessment year(s) like unabsorbed
depreciation.
4. Effect of amalgamation [Sec. 35(5)]: Provisions of sec. 35 shall apply to the amalgamated company, as it
would have been applied to the amalgamating company, if the latter had not transferred such asset.
Illustration 71:
Dynamic India & Co. commences production on 16/8/2023. It incurred the following expenses related to scientific
research, find deduction u/s 35 for the P.Y. 2023-24.
Solution :
Computation of deduction u/s 35 to Dynamic India & Co. for the A.Y. 2024-25
15/10/2023 Paid to a scientist (not the employee of the company) 35(1)(i) 30,000 30,000
18/11/2023 Paid to approved National laboratory 35(2AA) 60,000 60,000
15/12/2023 Purchase
1,50,000)
of land & building (excluding cost of land ₹ 35(2) 5,00,000 3,50,000
Note
1.
Expenditure (whether revenue or capital) incurred before 3 years immediately preceding the year of commencement
of business shall not be allowed as deduction.
2
Expenditure incurred within 3 years prior to commencement of business: Only material and salary (other than
perquisite) of research personnel shall be allowed as deduction
Sale consideration to the extent of cost of such asset shall be taxable as business income
Without having been in the year of sale. The excess of sale consideration over original cost (or indexed cost of
used for other purpose acquisition) is taxable as capital gain u/s 45. This is applicable even if the business is not
in existence in that year)
Sale consideration shall be subtracted from relevant block of assets. It is to be noted that
After being used for
at the time of conversion of scientific research asset into normal business asset, the cost
other purposes
of acquisition shall be taken as nil in the relevant block.
Illustration 72:
Awishkar Enterprises purchased machinery for ₹ 5,00,000 as on 18/8/2022 for scientific research.
On 17/7/2023, the research work being completed. On 31/3/2024, the machinery being sold for -
Case 1) ₹ 1,00,000
a. After using the same for business purpose other than scientific research. The WDV of the respective block is
₹ 4,80,000. Depreciation rate 15%.
b. Without using the same for any other purpose
Case 2) ₹ 7,00,000
a. After using the same for business purpose other than scientific research. The WDV of the respective block is
₹ 4,80,000. Depreciation rate 15%.
b. Without using the same for any other purpose
State tax implications
Solution :
Tax impact in case 1(a) and 2(a)
Particulars Case 1(a) Case 2(a)
Opening WDV of the block 4,80,000 4,80,000
Add: Addition during the year being machinery earlier used for scientific research Nil Nil
Less: Sale value of the machinery [ Max. to the extent of (Opening WDV +
#
(1,00,000) (4,80,000)#
Addition made)]
Written down value before charging depreciation 3,80,000 Nil
Less: Depreciation @ 15% (57,000) Nil
Written down value after charging depreciation 3,23,000 Nil
Short term capital gain [@ Excess sale proceeds] Nil 2,20,000@
*
Date of commencement of business (on or after)
Warehousing facility Hotel Slum redevelopment Fertilizer Inland container depot Warehousing
for storage of 01-04-2010 01-04-2010 01-04-2011 01-04-2012 facility for
agricultural produce Hospital Affordable housing Cold chain facility Bee-keeping for storage of
01-04-2009 01-04-2010 01-04-2011 01-04-2009 01-04-2012 Sugar
Slurry pipeline for transportation of iron-ore semi-conductor wafer fabrication manufacturing unit Infrastructure facility 01-04-2012
01-04-2014 01-04-2014 01-04-2017
Other Points ¾¾ Option: The deduction under this section is optional in nature. For claiming deduction
under this section, assessee is required to claim the same.
¾¾ No Double Deduction: No deduction for such expenditure shall be allowed to the assessee
under any other section in any previous year or under this section in any other previous year.
Further, the assessee shall not be allowed any deduction u/s 10AA or 80HH to 80RRB in
respect of the specified business for the same or any other assessment year.
¾¾ Restriction of use of the asset: Any asset in respect of which a deduction is claimed and
allowed under this section shall be used only for the specified business, for a period of 8
years beginning with the previous year in which such asset is acquired or constructed.
Consequences of usage of asset otherwise than for specified purpose: Where such asset
is used for a purpose other than the specified business during that period, then following
amount shall be deemed to be the income of the assessee chargeable under the head
“Profits and gains of business or profession” of the previous year in which the asset is so
used:
The total amount of deduction so claimed and allowed in one or more previous ***
years
Less: Depreciation allowable in accordance with the provisions of section 32, as ***
if no deduction under this section was allowed
Deemed Income ***
However, the provision of reversal of deduction shall not be applied to a company which
has become a sick industrial company u/s 17(1) of the Sick Industrial Companies (Special
Provisions) Act, 1985, during that period.
¾¾ Actual cost of asset for depreciation: The actual cost of any capital asset for the purpose
of computing depreciation, on which deduction has been allowed to the assessee u/s 35AD,
shall be treated as ‘nil’.
¾¾ Treatment of Realisation: If the whole of the expenditure on capital asset has been allowed
as a deduction u/s 35AD, any sum received or receivable (in cash or kind) on account of
such capital asset being demolished, destroyed, dis¬carded or transferred shall be taxable
as business income.
¾¾ Carry forward and set off of losses [Sec. 73A]: Any loss, computed in respect of such
specified business shall be set off only against profits and gains, if any, of any other specified
busi¬ness. Further, if there is no such profit or such loss is not fully adjusted with such
profit, the unabsorbed loss shall be carried forward for set off against the profits and gains, if
any, of any specified business in the next assessment year and so on. [Further Refer Chapter
‘Set-off and Carry Forward]
¾¾ Transfer of operation: Where the assessee builds a hotel of two-star or above category
as classified by the Central Government and subsequently, while continuing to own the
hotel, transfers the operation thereof to another person, the assessee shall be deemed to be
carrying on the specified business.
¾¾ Inter-unit transfer: Where -
Similar, deduction is also available u/s 35ABA for capital expenditure incurred for acquiring any right to use
spectrum for telecommunication services
Illustration 73:
Telefast Ltd., a company providing telecommunication services, obtain a telecom licence on 20-4-2023 for a period
of 10 years which ends on 31-3-2033 (licence fee being ₹ 18 lakh). Find out the amount of deduction u/s 35ABB
of the Income Tax Act, 1961, if:
(a) the entire amount is paid on 6-5-2023; (b) the entire amount is paid on 1-4-2024;
(c) the entire amount is paid in equal installments on 30-4-2023; 30-4-2024 and 30-4-2025
Solution :
Tax consequence u/s 35ABB in several previous years
Illustration 74:
Twinkle Enterprises has acquired a telecom licence. Details in respect of such licence are as under:
Particulars Particulars
Acquisition cost ₹ 1,00,000 Life of licence 10 years
Date of purchase 16/8/2022 Licence sold 100%
Payment terms Lump sum Date of sale of licence 15/3/2025
Date of first payment 16/8/2022 Sale value ₹ 1,20,000
State the tax consequence in the several previous years up to 2024-25 related to such transactions.
Solution :
Tax consequence u/s 35ABB in several previous years up to 2024-25
Particulars Licence A
Deduction u/s 35ABB(1) in previous year:
2022-23 10,000
2023-24 10,000
2024-25 Nil1
Business income on sale of licence u/s 35ABB(3) in the P.Y.2024-25 20,0002
Capital gain on sale of licence in the P.Y.2024-25 20,0002
1. No deduction is available in the previous year in which licence is 100% sold or otherwise transferred.
2. Sale of licence
Illustration 75:
Tweety Enterprises has acquired telecom licence. Details in respect of this licence are as under:
Particulars Particulars
Acquisition cost ₹ 3,00,000 Life of licence 7 years
Date of purchase 14/7/2020 Licence sold 40%
Payment terms Lump sum Date of sale of licence 12/12/2022
Date of first payment 14/7/2021 Sale value ₹ 1,20,000
State the tax consequence in the several previous years up to 2023-24 related to such transactions.
Solution :
Tax consequence u/s 35ABB in several previous years up to 2023-24
Particulars Amount
Deduction u/s 35ABB(1) in previous year:
2020-21 Nil1
2021-22 50,0001
2022-23 50,0001
2023-24 20,0002
Business income on sale of licence u/s 35ABB(3) in the P.Y.2023-24 Nil
Capital gain on sale of licence in the P.Y.2023-24 Nil
1. Though licence was acquired in the previous year 2020-21 but payment was made in the previous year 2021-
22, hence deduction shall be available u/s 35AAB(1) in 6 years (7 year – 1 year) starting from the year 2021-
22. Amount of deduction will be ₹ 3,00,000/6 = ₹ 50,000.
2. Sale of part of licence B
2.3.23 Payment to associations and institutions for carrying out rural development
programmes [Sec. 35CCA]
Where an assessee incurs any expenditure by way of payment of any sum—
a. to an association or institution, which has as its object the undertaking of any programme of rural development,
to be used for carrying out any programme of rural development approved by the prescribed authority and the
assessee furnishes a certificate from such association or institution ; or
b. to an association or institution, which has as its object the training of persons for implementing programmes
of rural development and the assessee furnishes a certificate from such association or institution; or
c. the National fund for rural development; or
d. to the National Urban Poverty Eradication Fund set up and notified by the Central Government in this behalf,
the assessee shall, be allowed a deduction of the amount of such expenditure incurred during the previous year.
Double deduction is not permissible: Where a deduction under this section is claimed and allowed for any
assessment year in respect of any expenditure, deduction shall not be allowed in respect of such expenditure u/s
80G or any other provision of this Act.
Withdrawal of approval: Deduction shall not be denied merely on the ground that subsequent to the contribution
made by the assessee, the approval granted to such programme, etc. has been withdrawn.
2. Legal charges for drafting any agreement between the assessee and any other person for any purpose related to
the setting up or conduct of business of the assessee.
3. Legal charges for drafting & printing of Memorandum of Association & Articles of Association (in case of
company-assessee only).
4. Registration fees under provisions of the Companies Act, 1956 (in case of company-assessee only).
5 Expenses in connection with public issue of shares in or debentures of the company being underwriting
commission, brokerage & charges for drafting, typing, printing & advertisement of the prospectus (in case of
company-assessee only).
6. Any other prescribed expenditure.
Tax Treatment
An Indian company or a resident non-corporate assessee.
Applicable to Taxpoint: A foreign company, which is resident in India, is not covered under this
section.
1. Assessee has incurred certain amount as preliminary expense.
2. Purpose of expense
¾¾ Where such expense is incurred before commencement of business then expense
must be incurred for setting up a new undertaking or business.
¾¾ Where such expense is incurred after commencement of business then expense
Conditions must be incurred in connection with extension of any undertaking or in connection
with setting up a new unit.
3. Report of a chartered accountant: In the case of a non-corporate assessee, an
audit report from a chartered accountant should be submitted one month prior to the
due date of filing of return relating to the year in which such expenditure was first
claimed.
In case of non-corporate resident assessee 5% of the ‘cost of project1’.
Total preliminary
expense (maximum
amount) eligible for 5% of the ‘cost of project1’ or ‘capital
In case of Indian company
deduction employed2’ whichever is higher
1/5th of the total eligible preliminary expense is allowed in 5 equal annual installments
Amount of deduction starting from the year in which the business commences or unit expanded or the new unit
commences production or operation.
In case of transfer of undertaking under the scheme of amalgamation or demerger, the
amalgamated company or resulting company (being Indian company) shall be entitled to
Effect of claim deduction u/s 35D for the residual period as if the amalgamation or demerger had
amalgamation or not taken place [Sec. 35D(5) & (5A)].
demerger
Note: In the year of amalgamation or demerger, deduction shall be available to
amalgamated company or resulting company as the case may be.
1
Cost of Project
In case of new business: Actual cost of fixed assets (being land, buildings, leaseholds, plant machinery, furniture,
fittings and railway sidings) which are shown in the books of the assessee as on the last day of the previous year in
which the business commences.
In case of an existing business: Actual cost of fixed assets (being land, building, leaseholds, plant, machinery,
furniture, fittings and railway-sidings) which are shown in the books of the assessee as on the last day of the previous
year in which the extension of industrial undertaking is completed or new industrial undertaking commences
production or operation, in so far as such fixed assets have been acquired or developed in connection with the
extension of the industrial undertaking or setting up of the new industrial unit.
2
Capital employed
In case of new business: The aggregate of issued share capital, debentures & long-term borrowings as on the last
day of the previous year in which the business commences.
In case of existing business: The aggregate of the issued share capital, debentures and long term borrowings as on
the last day of the previous year in which the extension is completed so far as such capital etc. have been issued or
obtained in connection with the extension of the business.
Illustration 76:
Jardine Ltd. is an existing Indian company, which sets up a new industrial unit. It incurs the following expenditure
in connection with the new unit:
Particulars Amount
Preparation of project report 4,00,000
Market survey 5,00,000
Legal and other charges for issue of additional capital required for the new unit 2,00,000
Total 11,00,000
The following further data is given:
Particulars Amount
Cost of project 30,00,000
Capital employed in the new unit 40,00,000
What is the deduction admissible to the company u/s 35D?
Solution :
Calculation of admissible preliminary expenditure
Particulars Amount
Cost of project (A) 30,00,000
Capital employed (B) 40,00,000
Condition: Assessee has incurred any expenditure, by way of compensation to employees in connection with their
voluntary retirement.
Quantum of deduction: 1/5th of expenditure so paid for a period of 5 years commencing from the year in which
such expenditure was paid.
Effect of amalgamation or demerger: In case of transfer of undertaking under the scheme of amalgamation or
demerger, the amalgamated company or resulting company (being Indian company) as the case may be, shall be
entitled to claim deduction u/s 35DDA for the residual period as if the amalgamation or demerger had not taken
place.
Effect of succession of business: Where there has been eductibledn of business, whereby a firm or proprietary
concern is succeeded by a company fulfilling the conditions laid down in sec. 47 (xiii) & (xiv) or a private company
or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in sec.
47 (xiiib), the provisions of this section shall apply to the successor concern, as they would have applied to the
predecessor, if eductibledn of business had not taken place. Further, it is to be noted that:
a. No deduction shall be allowed to amalgamating company, demerged company, a firm, proprietary or other
concern in the previous year in which amalgamation, demerger or succession, as the case may be, takes place.
b. No deduction shall be allowed in respect of such expenditure under any other provisions of the Act.
A comparative study of Sec. 10(10C) {under the head “Salaries”} and Sec. 35DDA {under the head “Profits
& gains of business or profession”}
Exemption u/s 10(10C) for “Compensation for voluntary retirement” is not available to employee of the
partnership firm, HUF, proprietorship firm, etc. Deduction u/s 35DDA can be claimed by all assessee.
Exemption u/s 10(10C) for “Compensation for voluntary retirement” is available only if the scheme is
approved by the Board. Deduction can be claimed u/s 35DDA even if the scheme is not approved by the Board.
Taxpoint
In case of transfer of undertaking (of an Indian company) in a scheme of amalgamation or demerger, the
amalgamated company or resulting company (being Indian company) shall be entitled to claim deduction u/s
35E for the residual period as if no amalgamation or demerger had taken place.
No deduction shall be allowed to amalgamating company or demerged company in the previous year in which
amalgamation or demerger takes place.
No deduction shall be allowed in respect of such expenditure under any other provisions of this Act.
4. Need of borrowed capital: Whether borrowed money is needed or not, is at the discretion of the assessee and
income tax authority cannot examine the same. It is sufficient that money has been borrowed and applied in the
business and the need of such borrowings cannot be challenged by the Assessing Officer
5. Interest on share capital is not allowed
6. Interest on borrowings made for acquiring & installing assets:
Project for constructing a hospital with at least 100 beds for patients.
Infrastructure capital fund [Sec.2(26B)] means
Such fund operating under a trust deed established to raise money by the trustees for investment by way of acquiring
shares or providing long term finance to any enterprise or undertaking wholly engaged in the following business:
Business referred u/s 80IA, 80IAB
Any undertaking developing and building a housing project referred u/s 80IB(10)
A project for constructing a hotel for not less than 3 star category.
Project for constructing a hospital with at least 100 beds for patient
2.3.37 Contribution towards Notified Pension Scheme U/s 80CCD [Sec. 36(1)(iva)]
Any sum paid by the assessee, as an employer, by way of contribution towards a pension scheme, as referred to in
section 80CCD, on account of an employee is allowed as deduction.
Maximum Limit: Such contribution should not exceed 10% of the salary of the employee in the previous year.
“Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances
and perquisites
- is treated as an income of the employer. Subsequently, when such sum is credited by the employer to the employee’s
account in the relevant fund on or before the due date of crediting such contribution prescribed under the relevant
Taxpoint
lent in ordinary course of money lending business (even though such money lent had never been a part of
income)
3. It must have been written off in the accounts of the assessee.
Taxpoint: Provision for bad debt is not allowed as deduction.
¾¾ Exception: Where the amount of such debt has been taken into account in computing the income of the
assessee of the previous year in which the amount of such debt becomes irrecoverable or of an earlier
previous year on the basis of notified Income Computation and Disclosure Standards (ICDS) without
recording the same in the accounts, then, such debt shall be allowed in the previous year in which such
debt becomes irrecoverable and it shall be deemed that such debt has been written off as irrecoverable in
the accounts.
4. Business must be carried on during the previous year or any part of the previous year.
Taxpoint: Bad debt of a discontinued business is not allowed as deduction even though the assessee has any
other business continued.
5. It must be of a revenue nature
Taxpoint: Bad debt arising due to insolvency of a debtor for sale of an asset (not goods) is not allowed as
deduction.
Notes
a. Bad debt is not allowed as deduction to the assessee who maintains accounts on cash basis.
b. Bad debts are also allowed in the hands of successor of the business.
Particulars Amount
Amount recovered ******
Less: Bad debt claimed – Bad debt allowed as deduction ******
Taxable bad debt recovery ******
Note: Such recovery shall be taxable irrespective of the fact whether the business is continued or not.
2. Where an assessee fails to deduct the whole or any part of the tax but is not deemed to be an assessee in
default under the first proviso to section 201(1), then, it shall be deemed that the assessee has deducted
and paid the tax on such sum on the date of furnishing of return of income by the resident payee.
This relaxation is not available where the payer has deducted tax but fails to deposit such tax to the
credit of the Central Government.
As per first proviso to sec.201(1), the payer is not deemed as an assessee in default:
i. Such resident recipient has furnished his return of income u/s 139
ii. Such resident recipient has taken into account such sum for computing income in such return
of income; and
iii. Such resident recipient has paid the tax due on the income declared by him in such return of
income,
iv. The payer furnishes a prescribed certificate to this effect from a chartered accountant
3. Commission or brokerage includes any payment received or receivable by a person acting on behalf of
another person for services rendered (not being professional services) or for any services in the course
of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or
thing, not being securities.
c. Consideration on which Equalisation Levy is applicable [Sec. 40(a)(ib)]
Any consideration paid or payable to a non-resident for a specified service on which equalisation levy is
deductible and such levy:
i. has not been deducted or
ii. after deduction, has not been paid on or before the due date of furnishing return of income.
Taxpoint: Where in respect of any such consideration, the equalisation levy has been deducted in any
subsequent year or has been deducted during the previous year but paid after the due date of furnishing return
of income, such sum shall be allowed as a deduction in computing the income of the previous year in which
such levy has been paid.
d. Income tax (Indian or foreign) [Sec. 40(a)(ii)]
Even, income tax paid by the assessee on income of predecessor is not deductible. The term “tax” includes any
surcharge or cess, by whatever name called, on such tax.
Taxpoint: Professional tax is an allowed expenditure [Circular No. 16 & 18 dated 18/9/69]
e. Wealth-tax [Sec. 40(a)(iia)]
f. Royalty, licence fees, etc. payable by State Government Undertaking [Sec. 40(a)(iib)]
Any amount
a. paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge,
by whatever name called, which is levied exclusively on; or
b. which is appropriated, directly or indirectly, from,
a State Government undertaking by the State Government.
Note: State Government undertaking includes—
i. a corporation established by or under any Act of the State Government;
ii. a company in which more than 50% of the paid-up equity share capital is held by the State Government;
iii. a company in which more than 50% of the paid-up equity share capital is held by the entity referred to in
above clauses (whether singly or taken together);
iv. a company or corporation in which the State Government has the right to appoint the majority of the
directors or to control the management or policy decisions, directly or indirectly, including by virtue of
its shareholding or management rights or shareholders agreements or voting agreements or in any other
manner;
v. an authority, a board or an institution or a body established or constituted by or under any Act of the State
Government or owned or controlled by the State Government;
and if the tax has not been paid in India thereon nor deducted therefrom [Sec. 40(a)(iii)]
h. Any payment to a provident fund or any other fund established for the benefit of employees of the assessee
in respect of whom the assessee has not made effective arrangement to secure that tax shall be deducted at
source from any payment made from the fund, which are taxable under the head ‘Salaries’ [Sec. 40(a)(iv)]; and
i. Any tax on non-monetary perquisite [which is exempt in the hands of employee u/s 10(10CC)] actually paid
by employer on behalf of employee [Sec. 40(a)(v)].
Relative u/s 2(41) means the spouse, brother, sister or any lineal ascendant or descendant of that individual.
Person having substantial interest: A person is deemed to have substantial interest in the business or
profession, if
i. in a case, where the business or profession is carried on by a company, such person is at any time during
the previous year, the beneficial owner of equity share carrying not less than 20% of voting power;
ii. in any other case, such person is at any time during the previous year, the beneficially entitled to not less
than 20% of the profits of such business or profession.
than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank
account or through other prescribed electronic modes[Sec. 40A(3)]
Treatment: 100% of such payment shall be disallowed.
Exception: In the case of payment made for plying, hiring or leasing goods carriages (hereinafter referred to as
Road Transport), the limit of ₹ 10,000 has been increased upto ₹ 35,000.
Taxpoint: The monetary limit for attracting sec.40A(3) are as follows:
Example 13:
Points to be kept in mind Examples
If an assessee makes payment to Mr. X against
a bill of ₹ 50,000 on a same day but at different
Entire ₹ 50,000 shall be disallowed u/s 40A(3)
time but each time the amount of payment does
not exceed ₹ 10,000.
If an assessee makes payment of two different X paid to Y ₹ 12,000 in cash against his Bill No.482 of ₹ 7,000
bills (none of them exceeds ₹ 10,000) at the same and Bill No.572 of ₹ 5,000.
time to the same person in cash, provision of sec.
40A(3) is not attracted. Nothing shall be disallowed under this section.
X paid to Y in cash (against bill 421) of ₹ 23,000 as follows -
If an assessee makes payment of a single bill
(exceeding ₹ 10,000) on different days to the On 7/12/2023: ₹ 8,000
same person in cash, provision of sec. 40A(3) is On 8/12/2023: ₹ 9,000
not attracted, provided any of the payment does On 9/12/2023: ₹ 6,000
not exceed ₹ 10,000.
Nothing shall be disallowed.
Where payment is made over ₹ 10,000 at a time,
partly by account payee cheque & partly in cash X paid to Y (against bill 712) of ₹ 50,000, in form of account
but the payment in cash alone at one time does payee cheque ₹ 42,000, bearer cheque ₹ 3,000 and in cash ₹
not exceed ₹ 10,000, assessee is not attracted by 5,000. Nothing shall be disallowed.
sec. 40A(3).
If part of the expenditure is already disallowed X purchased goods from his brother of ₹ 14,000 (market
under any provision of this Act, then disallowance value of which is ₹ 8,000) and paid in cash. ₹ 6,000 shall be
shall be calculated on the allowed portion of the disallowed u/s 40A(2) and nothing shall be disallowed u/s
expenditure. 40A(3) as allowed expenditure does not exceed ₹ 10,000.
Mr. X made following payment in cash to a road transport
operator for their respective bills:
The monetary limit for payment to Road Carrier - ₹ 23,000 to Mr. A on 10-05-2023 against his Bill No. 540
is ₹ 35,000 - ₹ 32,000 to Mr. B on 10-12-2023 against his Bill No. 770
- ₹ 37,000 to Mr. C on 10-01-2024 against his Bill No. 992
Payment made to Mr. C shall be disallowed fully u/s 40A(3)
Where an allowance has been made in the
assessment year in respect of any liability Mr. X purchased goods on credit on 7/7/2023 for ₹ 60,000 and
incurred by the assessee for any expenditure claimed the expenditure as deduction in the A.Y. 2024-25. On
and subsequently during any previous year the 7/7/2025 he paid to creditor ₹ 60,000 in cash.
assessee makes any payment in respect thereof
in a sum exceeding ₹ 10,000 otherwise than by Since amount has been paid in cash in excess of ₹ 10,000,
a account payee cheque or account payee bank therefore the allowance originally made shall be considered as
draft, the allowance originally made shall be income of the previous year in which such payment has been
considered as income of the previous year in made i.e. P.Y.2025-26.
which such payment has been made.
Exceptions: Any provision made by the assessee for the purpose of payment of a sum -
by way of any contribution towards an approved gratuity fund; or
for the purpose of payment of any gratuity, that has become payable during the previous year;
- shall be allowed as deduction.
Taxpoint:
If payment is not made before the date mentioned above, then no allowance shall be allowed in respect of the
outstanding liability. Deduction can, however, be claimed in the year of payment.
The method of accounting followed by the assessee is irrelevant.
Sec.43B is applicable only on those expenditure which are allowed under the provisions of this Act, if an
expenditure is already disallowed under the provision of this Act, payment of such expenditure within time
shall not be sufficient to make it an allowed expenditure. E.g. Income tax paid ₹ 5,000 before due date of filing
of return, is not allowed as deduction.
1.
In general, due date for furnishing return of income u/s 139(1)
- Where audit of books of account is compulsory under any law : 31st October* of the A.Y.
- In any other case : 31st July of the A.Y.
Any sum payable means a sum for which the assessee incurred liability in the previous year even though such
2.
sum might not have been payable within that year under the relevant law i.e. liability must have been accrued
whether falls due or not.
Notes
1. Sec.43B is applicable only if the assessee is following mercantile system of accounting. However, if an assessee
follows cash basis of accounting, deduction shall be allowed only in the year in which payment is made, even
though the payment has been made on or before due date of filing of return.
2. The provision that “for claiming deduction, payment must be made on or before the due date of filing of
return” shall be applied only for the relevant previous year in which such liability is incurred. If payment is
made afterwards, deduction shall be allowed in the previous year in which payment is actually made, without
considering the due date of filing of return.
Example 14: Mr. X paid professional tax ₹ 10,000 related to previous year 2019-20 on 7/5/2023. Deduction
for such expenditure shall be allowed in the P.Y 2023-24 and not in P.Y.2022-23.
3. Where outstanding interest on loan (taken from Banks, NBFC, PFIs, etc.) is converted into loan debenture or
any other instrument by which the liability to pay is deferred to a future date, then such interest is not deemed
as interest paid.
4. Where a deduction in respect of the aforesaid expenditure is allowed in an earlier year on accrual basis the
same will not again be allowed as deduction under this section on payment basis.
5. As per sec. 36(1)(va), any sum received by an employer from his employees as contribution towards provident
fund, superannuation fund, any other fund set up under the provision of the ESI Act, 1948 or any other fund
for the welfare of such employees, is treated as an income of the employer. Subsequently, when such sum is
credited by the employer to the employee’s account in the relevant fund on or before the due date of crediting
such contribution prescribed under the relevant Act, then deduction is allowed. If such contribution is not
deposited within time allowed as per the provisions of the relevant Act, the deduction shall never be allowed,
i.e. not now then never.
Illustration 77:
Debit side of the profit and loss account of Mayank Ltd. shows the following expenses, which have been due but
are outstanding as on 31-3-2024
* 30th November, in case of assessee required to furnish Audit Report u/s 92E
Section Contents
41(1) Recovery against any deduction (given below)
41(2) Balancing charge (discussed earlier)
41(3) Sale of asset used for scientific research (discussed earlier)
41(4) Recovery of Bad debts (discussed earlier)
41(4A) Withdrawal from special reserve created by financial corporation u/s 36(1)(viii)
176(3A) & (4) Recovery after discontinuance of business or profession (given below)
Recovery against any deduction [Sec. 41(1)]
Conditions
1. Where an allowance or deduction is allowed in any assessment year in respect of loss, expenditure, or trading
liability incurred by the assessee; and
2. Subsequently during any previous year such assessee has obtained, whether in cash or in any other manner
any amount in respect of such loss, expenditure, or any benefit in respect of such trading liability by way of
remission or cessation thereof.
Treatment: The amount obtained or benefit accrued shall be deemed to be the profits & gains of business or
profession and chargeable to income tax as income of the previous year in which such benefit is obtained.
Notes
1. The provision holds good, whether the business or profession in respect of which such allowance or deduction
has been made is in existence in that year or not.
2. The first and the most necessary ingredient for the application of sec. 41(1) is that an allowance or deduction
must have been made previously while computing the taxable income
3. Where benefit has been obtained by the successor in business, such benefit shall be taxable in hands of
successor.
Recovery after discontinuance of business or profession [Sec. 176(3A) and (4)]
Condition: Business or profession is discontinued in any year due to death or retirement of the person carrying on
such business or profession.
Treatment: Any sum received after such discontinuance shall be deemed to be the income of the recipient and
chargeable to tax in the year of receipt.
Person
Turnover or income criteria
falling
Case
under this Maintenance of Accounts
category Existing business New business
An assessee (covered u/s 44AE, 44BB or 44BBB) who claims Maintain such books of account
E income from such business to be lower than the deemed income & other documents as may
computed in accordance with the respective sections. enable the AO to compute
Where the provision of sec. 44AD(4) is applicable and income of the his taxable income under the
F assessee exceeds the maximum amount which is not chargeable to Income-tax Act.
income-tax (i.e. basic exemption limit)
Specified Profession: Legal, medical, engineering, architectural profession or profession of accountancy, technical
1.
consultancy, interior decoration, information technology, company secretary, authorised representative, film artist
or any other profession as is notified by the Board in the Official Gazette.
2.
Following books of account are required to be maintained as per Rule 6F
a. Cash book;
b. Journal, if mercantile system of accounting is followed;
c. Ledger;
d. Carbon copies of machine numbered bills, exceeding ₹ 25, issued by the person; and
e. Original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or,
where such bills and receipts are not issued and expenditure incurred does not exceed ₹ 50, payment vouchers
prepared and signed by the person.
f. Assessee engaged in medical profession are required to maintain two more books -
¾¾ Daily Case Register in Form 3C.
¾¾ Inventory records of drugs, medicines and other consumable accessories used in the profession.
Notes
1. Period for which books of account is to be maintained [Rule 6F(5)]: The books of account and other documents
shall be kept and maintained for a period of 6 years* from the end of the relevant assessment year.
2. Penalty: Where an assessee fails to comply with the provision of sec 44AA, he shall be liable to pay penalty
u/s 271A of ₹ 25,000.
3. As per sec. 2(12A), books or books of account includes ledgers, day-books, cash books, account-books and
other books, whether kept in the written form or in electronic form or in digital form or as print-outs of data
stored in such electronic form or in digital form or in a floppy, disc, tape or any other form of electro-magnetic
data storage device.
Exception 2: If the following conditions are satisfied, then the higher threshold limit of ₹ 10 crore shall be
applicable for a person carrying on business:
a. aggregate of all amounts received including amount received for sales, turnover or gross receipts during
the previous year, in cash, does not exceed 5% of the said amount; and
b. aggregate of all payments made including amount incurred for expenditure, in cash, during the previous
year does not exceed 5% of the said payment.
In nutshell, applicability of tax audit in case of business assessee are as under:
Case Applicability
Turnover exceeds ₹ 10 crore Applicable
Turnover does not exceed ₹ 2 crore and assessee is covered u/s 44AD Not applicable
Turnover does not exceed ₹ 10 crore and aforesaid conditions are satisfied Not applicable
Turnover does not exceed ₹ 10 crore but exceed ₹ 1 crore and aforesaid
Applicable
conditions are not satisfied (assessee is not covered u/s 44AD)
2.3.62 Special provision in case of income of public financial institutions, etc. [Sec. 43D]
Notwithstanding anything to the contrary to any other provision of the Act following shall be applicable:
Subsidy: Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) shall be deemed to be the income of the previous year
in which it is received, if not charged to income-tax in any earlier previous year.
Illustration 78:
X Co., a firm, is engaged in the business of trading of cloth (turnover of 2023-24 being ₹ 57,80,000, out of which ₹
25,00,000 has been received in account payee cheque). It wants to claim the following deductions:
Particulars Amount
Salary and interest to partners [as permitted by sec. 40(b)] 60,000
Salary to employees 4,90,000
Depreciation 2,70,000
Cost of materials used 35,90,000
Other expenses 13,45,000
Total 57,55,000
Net profit (₹ 57,80,000 – ₹ 57,55,000) 25,000
Determine the net income of X & Co. for the assessment year 2024-25 assuming that (i) taxable interest income is
₹ 90,000; (ii) Long term capital gain is ₹ 1,40,000; and (iii) the firm is eligible for a deduction of ₹ 15,000 under
sec. 80G.
Solution :
Since turnover from business does not exceed ₹ 2 crore, hence sec. 44AD is applicable. However, income computed
as per provision other than provision of sec. 44AD is less than estimated income, hence, the firm may be assessed
for such lesser income provided following conditions are satisfied –
a. Maintain books of account as prescribed u/s 44AA; and
b. Get accounts audited u/s 44AB.
Where it maintains accounts and gets it audited
Computation of total income of X & Co. for the A.Y. 2024-25
Particulars Amount
Profits and gains of business or profession: Income from cloth business 25,000
Capital gains: Long term capital gain 1,40,000
Income from Other Sources: Interest Income 90,000
Gross Total Income 2,55,000
Less: Deduction u/s 80G 15,000
Total Income 2,40,000
It is assumed that all the expenditures are allowed.
Where it does not maintain account or fails to get accounts audited
Computation of total income of X & Co. for the A.Y.2024-25
5. Effect if assessee declares lower income: An assessee can declare his income lower than the estimated income
as per provision of this section. In such case he will have to:
¾¾ Maintain books of account and other documents as required u/s 44AA if his total income exceeds the
maximum exemption limit; and
¾¾ Get his accounts audited and furnish a report of such audit as prescribed u/s 44AB (irrespective of amount
of turnover or gross receipts) if his total income exceeds the maximum exemption limit.
Note: Assessee can change his option from year to year
However, he has to comply with the requirements of both sec. 44AA and 44AB in respect of his other
businesses. Further to note that in computing the monetary limits u/s 44AA and 44AB, the gross receipts or
income from the said business shall be excluded.
8. Effect if assessee declares lower income: An assessee can declare his income lower than the estimated
income as per provision of this section. In such case he will have to
¾¾ Maintain books of account and other documents as required u/s 44AA; and
¾¾ Get his accounts audited and furnish a report of such audit as prescribed u/s 44AB irrespective of amount
of turnover or gross receipts.
Note: Assessee can change his option from year to year.
Illustration 79:
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2023, he owns 10 trucks (out
of which 6 are heavy good vehicles of (unladen weight of each is 20 ton)). On 2/5/2023, he sold one of the heavy
goods vehicles & purchased a light goods vehicle on 6th May, 2023. This new vehicle could however be put to use
only on 15-6-2023.
Compute the total income of Mr. Sukhvinder for the A.Y. 2024-25, taking note of the following data:
2.3.67 Computation of income from construction and service contracts [Sec. 43CB]
The profits and gains arising from a construction contract or a contract for providing services shall be determined
on the basis of percentage of completion method in accordance with the ICDS.
Taxpoint:
Profits and gains arising from a contract for providing services:
Case Method
Contract for providing services with duration of not more than 90 days Project completion method
A contract for providing services involving indeterminate number of acts over Straight line method
a specific period of time
Notes
¾¾ Where the assessee is a company, (not being a company in which the public are
substantially interested) and the sum so credited consists of share application money,
share capital, share premium or any such amount by whatever name called, any
explanation offered by such assessee-company shall be deemed to be not satisfactory,
unless:
–– the person, being a resident in whose name such credit is recorded in the books of
such company also offers an explanation about the nature and source of such sum
so credited; and
–– such explanation in the opinion of the Assessing Officer aforesaid has been found
to be satisfactory:
¾¾ Where the sum so credited consists of loan or borrowing or any such amount, by
whatever name called, any explanation offered by such assessee shall be deemed to be
not satisfactory, unless,—
–– the person in whose name such credit is recorded in the books of such assessee also
offers an explanation about the nature and source of such sum so credited; and
–– such explanation in the opinion of the Assessing Officer aforesaid has been found
to be satisfactory
However, if the person, in whose name the sum (share application or loan or borrowing)
referred to therein is recorded, is a venture capital fund or a venture capital company as
referred to in sec.10(23FB), then the aforesaid notes are not applicable.
General Illustrations
Illustration 80:
Mr. Sunil is a practicing Chartered Accountant. He also runs a private coaching institute. His bank accounts for the
year ended 31/3/2024 is given below:
Receipts ₹ Payments ₹
To Balance b/f 20,000 By Office expenses 18,000
Receipts ₹ Payments ₹
To Audit fees 2,00,000 By Municipal tax on property 800
To Income from other professional work 1,00,000 By Coaching expenses 800
To Coaching fees 1,200 By Personal expenses 5,000
To Interest on Investment 2,000 By Membership fees 500
To Examiner’s fees 1,000 By Life insurance premium 13,000
To Rent from property 5,000 By Income tax 5,000
By Motor Car purchased 1,80,000
By Motor Car expenses 10,200
By Insurance of property 1,600
By Balance c/d 94,300
3,29,200 3,29,200
Additional Information
a. 20% of motor car expenses is in respect of profession.
b. Depreciation allowance for motorcar is ₹ 27,000, if wholly used for profession.
c. Outstanding fees on 31-3-2024 ₹ 2,000. Whereas ₹ 500 receivable from Mita is considered as bad.
d. Outstanding fees of P.Y. 2020-21 ₹ 10,000 received during the year, which is included in the audit fees.
e. Office expenses include payment of ₹ 2,000 incurred during the previous year 2022-23.
Compute his gross total income for the A.Y. 2024-25 assuming he maintains accounts on cash basis.
Solution :
Computation of total income of Mr. Sunil for the A.Y. 2024-25
Particulars Workings Details Details Amount
Income from house property
Gross Annual Value Rent received 5,000
Less: Municipal tax 800
Net Annual Value 4,200
Less: Deduction u/s
24(a) Standard Deduction 30% of NAV 1,260
24(b) Interest on loan Nil 1,260 2,940
Profits & gains of business or profession
Audit fees 2,00,000
Income from other professional work 1,00,000 3,00,000
Less: Expenses allowed
Office expenses 18,000
Illustration 81:
From the following particulars of Shri Khote for the year ending 31st March, 2024, find out his taxable income from
business for the assessment year 2024-25:
Particulars ₹ Particulars ₹
To Opening Stock 1,20,000 By Sales 2,14,20,000
To Purchases 2,10,00,000 By Profit on sale of import licence 5,000
To Salaries 25,000 By Gift received 24,000
To Legal Expenses 10,000 By Closing Stock 2,00,000
To Bad Debts 5,000
To Rent 50,000
To Interest on loan 2,500
To Depreciation 15,000
To Income tax paid 2,000
To Outstanding Customs Duty 25,000
To Advertisement 2,000
Particulars ₹ Particulars ₹
To Legal expenses 12,000
To Contribution towards URPF 5,000
To General expenses 17,500
To Traveling expenses 1,00,000
To Net Profit 2,58,000
2,16,49,000 2,16,49,000
In computing the income, the following facts are to be taken into consideration:
1. Interest on loan is paid to brother of Shri Khote for loan taken for payment of advance income tax.
2. During the previous year 2018-19, assessee had claimed ₹ 45,000 as bad debt out of which only ₹ 35,000 was
allowed. During the previous year, he recovers ₹ 25,000.
3. Contribution towards unrecognised provident fund was paid within time.
4. Legal expenses include ₹ 2,000 paid for preparation of income tax return.
5. Stock is undervalued by 10%.
6. Gift received was given by a supplier for achieving target sale.
7. Outstanding customs duty has been paid on 31-12-2024.
8. During the previous year, he comes to know that his former employee had embezzled cash of ₹ 5,000 on 31-
3-2023, which was not accounted for.
9. Traveling expenses include ₹ 50,000 being cost of trip to Singapore by an employee for 10 days. However,
only 8 days of trip is useful to business and 2 days has been allowed as holiday to employee.
10. Rent includes expenditure on extension of shed on rented building ₹ 26,000. However, such extension was
completed on 1-5-2024 with total cost of ₹ 50,000.
11. General expenses includes –
¾¾ Salary of ₹ 1,200 paid to domestic servant.
¾¾ Compensation of ₹ 2,000 paid for retrenchment of an employee.
Compute his business income for the A.Y. 2024-25
Solution :
Computation of Profits and gains of business or profession of Shri Khote for the A.Y. 2024-25
Illustration 82:
During the previous year 2023-24, profit and loss account of Shri Raj, proprietor of Raj Enterprises engaged in the
business of readymade garments, shows profits of ₹ 1,50000. With the following information, compute his taxable
income from business –
a. Interest on capital ₹ 5,000
b. Purchases include goods of ₹ 12,000 from his younger brother in cash. However, market value of such goods
is ₹ 9,000.
c. Interest paid outside India ₹ 1,00,000 without deducting tax at source.
d. Penalty paid to Government for non-filing of GST return ₹ 5,000
e. Penalty paid to customer for non-fulfilling of order within time ₹ 10,000
f. Bad debts ₹ 1,00,000. Money has been advanced for purchase of Building.
g. Revenue expenditure on promoting family planning among employees ₹ 10,000.
h. Premium paid on health of employees ₹ 6,000 in cash
i. Premium paid on health of his relatives ₹ 6,000 in cheque
j. Employer’s contribution to RPF ₹ 12,000. One-half of the amount is paid after due date as per relevant Act
but before 31-3-2024.
k. Employees contribution to RPF ₹ 10,000. ½ of the amount is paid after due date as per relevant Act.
l. Interest on late payment of professional tax ₹ 1,000 (yet to be paid)
m. Interest on loan from State Bank of India ₹ 10,000 (₹ 5,000 is not paid till due date of filing of return)
n. Interest on late refund from income tax department ₹ 500
o. Sale includes sale to Raj ₹ 10,000. (Cost of such goods ₹ 8,000; Market value of such goods ₹ 12,000)
p. He received ₹ 80,000 from a debtor at a time in cash.
q. Recovery of bad debt ₹ 10,000 (out of which ₹ 8,000 was allowed as deduction during A.Y.2018-19)
r. Depreciation (being not debited in accounts) ₹ 20,000 allowed as deduction u/s 32
Solution :
Computation of Profits and gains of business or profession of Shri Raj for the A.Y. 2024-25
10. Employer’s contribution towards RPF is allowed if payment is made before due date of filing of return
irrespective of fact that such payment was made after due date prescribed in the relevant Act.
11. Any sum received from employees as their contribution towards RPF is allowed only when such sum has been
credited to such fund within the due date prescribed in the relevant Act [Sec. 36(1)(va)].
12. Interest on late payment of professional tax is not a penalty but compensatory in nature. Hence, it is allowed
u/s 37(1). Further such interest is not governed by the provisions of sec. 43B.
13. Any interest payable to any scheduled bank is allowed on cash basis [Sec. 43B]. Hence, unpaid amount is
disallowed.
14. Any expenditure of personal nature is not allowed. Further, no one can earn from a transaction with himself.
Hence, sale made to himself is not treated as income.
15. Bad debt recovery is treated as income in the year of recovery to the extent of bad debt allowed in the earlier
year [Sec. 41(4)]
16. Interest on late refund of income tax is taxable under the head ‘Income from other sources’.
17. Receipt from debtor ₹ 80,000 in cash is not attracted by provision of sec. 40A(3).
Quick MCQs:-
1. Under the head Business & Profession, the method of accounting which an assessee can follow shall be –
(a) Mercantile System only
(b) Cash System only
(c) Mercantile or Cash System at the assessee’s wish
(d) Hybrid System
2. Sums received by an employer from Keyman Insurance Policy taken on the life of the employee shall be-
(a) Exempt
(b) Taxable under the head Business and Profession
(c) Taxable under the head Other Sources
(d) Taxable in the hand of the employee
4. A car is imported after 01-04-2023 by N Ltd. from London to be used by its employee. N Ltd. shall be
allowed depreciation on such car at-
(a) 15%
(b) 40%
(c) Nil
(d) None of the above
5. Unabsorbed Depreciation which could not be set of in the same assessment year, can be carried forward
for –
(a) 8 Years
(b) Indefinitely
(c) 4 years
(d) None of above
6. Unabsorbed Depreciation brought forward from an earlier year of a particular business can be set off
from-
(a) The same business
(b) any head of income
(c) any Business Income
(d) any head of income except salary but first form business income.
7. The maximum deduction for Site Restoration Fund under Section 33ABA shall be-
(a) the amount deposited in scheme
(b) 20%of the profits from such business
(c) 20% of the amount deposited in the scheme
(d) Lower of (a) and (b)
8. If an Assessee carries on any Scientific Research related to his business, he shall be allowed deduction u/s
35 on account of –
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Both Revenue and Capital Expenditure
(d) Both Revenue and Capital Expenditure
9. Donation for Social of Statistical Research shall be allowed as deduction to the extent of –
(a) 50% of the donation so made
(b) 100% of the donation so made
(c) 125% of the donation so made
(d) 150% of the donation so made.
10. In case of Non-Company assessee, the total Preliminary Expenses incurred are allowed as deduction of
the extent of –
(a) 2% of the cost of the project
(b) 5% of the cost of the project
(c) 10% of the cost of the project
(d) None of the above
11. Capital Expenditure incurred on family planning amongst employees of the Company assessee is allowed
as deduction-
(a) in full
(b) in 5 equal installments
(c) in 10 equal installments
(d) None of above.
12. Deduction under Section 37(1) shall be given for expenditure of-
(a) Revenue Nature
(b) Capital Nature
(c) Both Revenue and Capital Nature
(d) None of above
13. Tax audit is compulsory in case a person is carrying on business whose gross Turnover/Sales /Receipts,
as the case may be, exceeds-
(a) D 10 Lakhs
(b) D 60 Lakhs
(c) D 1 Crore
(d) None of the above
14. If the Assessee opts for presumptive income scheme under section 44AD or 44AE, then the assessee
shall:
(a) not be entitled to any deduction u/s 30 to 37
(b) be entitle to deduction u/s 30 to 37
(c) Some are entitled
(d) Some are not entitled to deduction u/s 30 to 37
15. For an eligible new industrial undertaking fulfilling the conditions, additional depreciation in respect of a
machinery costing D 10 lakhs acquire and installed on 04-10-2023 is-
(a) D 1,00,000
(b) D 1,50,000
(c) D 2,00,000
(d) None of the above.
Where any unit linked insurance policy (ULIP), is issued on or after 01-02-2021 and the premium payable for any of the previous year during the term
of such policy exceeds ₹ 2,50,000
Where the premium is payable, by a person, for more than one ULIP, issued on or after 01-02-2021, the exemption shall apply only with respect to those
ULIP, where the aggregate amount of premium does not exceed the aforesaid limit in any of the previous year during the term of any of those policies.
“Property” includes any rights in or in relation to an Indian company, including rights of management or
control or any other rights whatsoever
- but does not include the following:
1. Stock in trade
Stock in trade, consumable stores or raw materials held for business or profession.
However, any securities held by a Foreign Institutional Investor which has invested in such securities in
accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 shall not
be treated as stock-in-trade
Treatment of profit on sale of stock
Such profit shall be taxable under the head “Profits & gains of business or profession”
2. Personal effect
Personal effect means any movable property held for personal use of the assessee or for any dependent member
of his family but excludes the followings:
Taxpoint
¾¾ An immovable property and aforesaid assets held for personal use are not personal effect and hence are
capital assets. E.g. a house property even though used for personal purpose cannot be treated as personal
effect and shall fall within the definition of capital assets.
¾¾ Securities are not personal effect.
¾¾ Personal effect includes wearing apparel, furniture, car, cycle, scooter used by the assessee for personal
purpose.
¾¾ Intangible asset does not have personal effect.
#
Jewellery includes –
¾¾ ornaments made of gold, silver, platinum, any other precious metal or any alloy containing one or more
of such precious metals. It is immaterial whether or not such ornaments contain any precious or semi-
precious stones and whether or not such ornaments are worked or sewn into any wearing apparel;
¾¾ precious or semi precious stones whether or not set in any furniture utensil or other article or worked or
sewn in any wearing apparel. E.g. loose diamond shall be treated as jewellery.
Treatment of profit on sale of personal effect
Any income on transfer of personal effect shall not be treated as capital gain. Such income is in the
nature of capital receipt and hence shall not be taxed under any head.
3. Agricultural land in rural area
Agricultural land in India is not a capital asset except the following –
a. land which is situated within the jurisdiction of any Municipality (whether known as a municipality,
municipal corporation, notified area committee, town area committee, town committee, or by any other
name) or Cantonment Board having population of 10,000 or more; or
b. in any area within the distance, measured aerially,—
The Institute of Cost Accountants of India 259
Direct Taxation
6.5% Gold Bond, 1977 7% Gold Bonds, 1980; and National Defence Gold Bond, 1980
5. Special Bearer Bond
Special Bearer Bond, 1991 issued by the Central Government are not capital asset.
Note: It is not necessary that the assessee should be the initial subscriber.
Exceptions
In the following cases, an asset shall be termed as a short-term capital asset (STCA) if it is held for not more than
following period before the date of transfer:
12 months 24 months
� Equity or preference share in a company (listed in India) ¾ ¾ Equity or preference share in an unlisted
company
¾¾ Any security e.g. debenture, Government securities, etc. ¾¾ Immovable property being land or building
(listed in India) or both
¾¾ A unit of an equity oriented fund* (whether quoted or not)
¾¾ Zero-Coupon Bonds (whether quoted or not)
¾¾ Units of UTI (whether quoted or not)
Short-term capital gain (STCG) arises on transfer of short-term capital assets (STCA) and long-term capital gain
(LTCG) arises on transfer of long-term capital assets (LTCA). However, any gain on transfer of an asset on which
depreciation is allowed as per WDV method u/s 32(1)(ii) shall be taxable as short-term capital gain (irrespective
of their period of holding) [Sec. 50].
a. Period after liquidation: In case of shares, if company goes into liquidation, the period after the date of
commencement of liquidation is to be excluded.
b. Date of transfer: For calculating the period of holding of a capital asset, the date on which the asset is
transferred is to be excluded.
c. Conversion of preference shares into equity shares: In such case, period of holding includes the period for
which the preference shares were held by the assessee. Similarly, period of holdings of units in the consolidated
plan of the scheme of the mutual fund includes the period for which units in a consolidating plan of a mutual
fund scheme were held by the assessee.
* The Apex Court in the case of Vodafone International Holdings B.V. –vs.- UOI [2012] 204 Taxman 408 has held that the transfer of shares of the
foreign holding company do not results in an extinguishment of the foreign company control of the Indian company and it also does not constitute an
extinguishment and transfer of an asset situated in India. Transfer of the foreign holding company’s share off-shore, cannot result in an extinguishment
of the holding company right of control of the Indian company nor can it be stated that the same constitutes extinguishment and transfer of an asset/
management and control of property situated in India.
To nullify the decision of the Apex Court, Finance Act, 2012 has inserted the said explanations w.r.e.f. 01-04-1962.
to hold’ or ‘to surrender’. Hence, relinquishment means act of surrendering. In other words, it means interest of a
person in a property is either given up, abandoned, or surrendered but the property in which right is relinquished
continues to exist.
Taxpoint:
Right of the assessee in the asset is given up or abandoned;
Asset itself continues to exist after such relinquishment and becomes the property of someone else.
There must be mutual consent of the parties. A unilateral action of writing off the claim in the books of account
cannot be treated as relinquishment.
Extinguishment of any right in an asset
Extinguishment literally means ‘to put a total end to’ or ‘total destruction’ or ‘blot out of existence’ or ‘annihilation’.
Extinguishment does not mean extinguishment of asset itself but to extinguishment of holder’s right to the asset
and such right cannot be held by someone else
Incidences of extinguishments –
Cancellation of licences: Abandonment of a project and termination of industrial licence, shall be treated as
transfer.
Reduction of share capital: When a part of the share capital is paid to the shareholder by a company, such
reduction of share capital shall be treated as extinguishment of proportionate right in the shares and such
shareholder shall be liable to capital gain.
When there is a reduction of capital by a company and amounts are distributed to shareholder, such amount
has two components –
¾¾ Distribution attributable to accumulated profits i.e. chargeable as deemed dividend u/s 2(22)(d);
¾¾ Distribution attributable to capital i.e. subject to tax u/s 45
Forfeiture of share: Forfeiture or surrender of shares indicates extinguishment or relinquishment of right of
shareholder in such shares, which have been forfeited by the company. As in CIT vs Vania Silk Mills Pvt. Ltd
it was held that the term extinguishment includes all possible transactions which results in the destruction,
annihilation, termination, cessation or cancellation of any right in an asset whether corporeal or incorporeal.
Though there is no consideration in case of share forfeiture or surrender, still such transaction shall be treated
as transfer and liable to capital gain.
Compulsory acquisition of an asset under any law
Normally, sale means a mutual will full agreement between two or more parties. But for the purpose of sec. 2(47),
transfer includes compulsory acquisition of any property under any law in force.
Conversion of asset into stock in trade by the owner
Generally, a transfer requires two or more parties, but in Income tax Act even one party’s involvement may
constitute transfer. As per sec. 2(47)(iv) where an asset is converted by the owner into or treated by him as ‘stock
in trade’ of the business carried on by him, such conversion or treatment shall constitute transfer.
Any transaction of immovable property u/s 53A of the Transfer of Property Act
Any transaction of immovable property in which possession is allowed against part performance of the contract
shall be treated as transfer [Sec. 53A of the Transfer of Property Act, 1882].
Any transaction which has enabled the enjoyment of any immovable property
Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property whether
by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of
persons or by way of any agreement or any arrangement or in any other manner, is treated as transfer.
Property held by a member of a company, co-operative society or other association of persons to whom a building
or a part thereof is allotted or leased under House Building Scheme of the company or association, is treated as
deemed owner of that building or a part thereof.
Under the scheme of owning flats in co-operative housing societies, the legal ownership in the flats can be said
to vest in the individual members themselves and not in the co-operative societies. Therefore for all purposes
including attachment and recovery of tax, etc. the individual member should be regarded as the legal owner.
Taxpoint
Assessee is a member of a company, co-operative society or other AOP.
He has been allotted or leased a building on account of such membership.
Section Transaction
Any distribution of capital assets in the event of liquidation by a company to its shareholders shall
46(1)
not be treated as transfer in the hands of company.
47(i) Any distribution of capital assets on the total or partial partition of an HUF.
Any transfer of a capital asset under a gift or will or an irrevocable trust.
47(iii) Exception: Gift of shares acquired through Employees Stock Option Plan (ESOP) shall be treated
as Transfer
47(iv) Any transfer of a capital asset by a 100% holding company to its Indian subsidiary company.
47(v) Any transfer of a capital asset by a 100% subsidiary company to its Indian holding company
Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the
amalgamated company if the amalgamated company is an Indian company.
47(vi)
Taxpoint
¾¾ Transfer must be in a scheme of amalgamation.
¾¾ Transferee company must be an Indian company.
Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an
Indian company, by the amalgamating foreign company to the amalgamated foreign company, if –
a. At least 25% of the shareholders of the amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company; and
b. Such transfer does not attract tax on capital gains in the country, in which the amalgamating
47(via) company is incorporated
Taxpoint
¾¾ Such transfer is in a scheme of amalgamation by the amalgamating foreign company to the
amalgamated foreign company.
Section Transaction
¾¾ Transferred asset must be a capital asset being a share or shares held in an Indian company.
¾¾ At least 25% of the shareholders of the amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company.
¾¾ Such transfer does not attract tax on capital gain in the country, in which the amalgamating
company is incorporated.
Any transfer of a capital asset by a banking company to a banking institution in a scheme of
47(viaa) amalgamation of such banking company with such banking institution sanctioned and brought into
force by the Central Government u/s 45(7) of the Banking Regulation Act, 1949.
Any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company,
(referred to in the Explanation 5 of sec.9(1)(i)), which derives, directly or indirectly, its value
substantially from the share or shares of an Indian company, held by the amalgamating foreign
company to the amalgamated foreign company, if:
47(viab)
a. at least 25% of the shareholders of the amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company; and
b. such transfer does not attract tax on capital gains in the country in which the amalgamating
company is incorporated.
¾¾ Any transfer, in a relocation, of a capital asset by the original fund to the resulting fund;
¾¾ Any transfer by a shareholder or unit holder or interest holder, in a relocation, of a capital asset
being a share or unit or interest held by him in the original fund in consideration for the share
or unit or interest in the resultant fund.
Taxpoint
¾¾ Original fund means a fund established or incorporated or registered outside India, which
collects funds from its members for investing it for their benefit and fulfils the following
conditions:
a. the fund is not a person resident in India;
b. the fund is a resident of a country or a specified territory with which an agreement
referred to in sec. 90or 90A has been entered into; or is established or incorporated or
registered in a notified country or a specified territory;
c. the fund and its activities are subject to applicable investor protection regulations in the
47(viiac) &
country or specified territory where it is established or incorporated or is a resident; and
(viiad)
d. fulfils such other conditions as may be prescribed;
¾¾ Relocation means transfer of assets of the original fund, or of its wholly owned special purpose
vehicle, to a resultant fund on or before 31-03-2023, where consideration for such transfer is
discharged in the form of share or unit or interest in the resulting fund to,—
a. shareholder or unit holder or interest holder of the original fund, in the same proportion
in which the share or unit or interest was held by such shareholder or unit holder or
interest holder in such original fund, in lieu of their shares or units or interests in the
original fund; or
b. the original fund, in the same proportion as referred above, in respect of which the share
or unit or interest is not issued by resultant fund to its shareholder or unit holder or
interest holder;
¾¾ Resultant fund means a fund established or incorporated in India in the form of a trust or a
company or a limited liability partnership, which—
Section Transaction
a. has been granted a certificate of registration as a Category I or Category II or Category III
Alternative Investment Fund, and is regulated under the Securities and Exchange Board
of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and
Exchange Board of India Act, 1992 or International Financial Services Centre Authority
Act, 2019; and
b. is located in any International Financial Services Centre as referred to in sec. 80LA(1A)
Any transfer of capital asset by India Infrastructure Finance Company Ltd to an institution
47(viiae) established for financing the infrastructure and development, set up under an Act of Parliament and
notified by the Central Government.
Any transfer of capital asset, under a plan approved by the Central Government, by a public sector
47(viiaf) company to another notified public sector company or to the Central Government or to a State
Government
Any transfer, in a scheme of demerger, of capital asset by the demerged company to the resulting
47(vib)
company, if the resulting company is an Indian company.
Any transfer, in a scheme of demerger, of a capital asset, being a share or shares held in an Indian
company, by the demerged foreign company to the resulting foreign company, if –
a. The shareholders holding not less than three-fourths in value of the shares of the demerged
foreign company continue to remain shareholders of the resulting foreign company; and
b. Such transfer does not attract tax on capital gain in the country, in which the demerged foreign
company is incorporated:
47(vic) Taxpoint:
¾¾ Such transfer is in a scheme of demerger by the demerged foreign company to the resulting
foreign company.
¾¾ Transferred asset must be a capital asset being a share or shares held in an Indian company.
¾¾ Shareholders holding not less than 75% in value of the shares of the demerged foreign company
continue to remain shareholders of the resulting foreign company
¾¾ Such transfer does not attract tax on capital gains in the country, in which the demerged foreign
company is incorporated
any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to
47(vica)
the successor co-operative bank or to the converted banking company
Any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or
shares held by him in the predecessor co-operative bank if the transfer is made in consideration of
47(vicb)
the allotment to him of any share or shares in the successor co-operative bank or to the converted
banking company
Any transfer in a demerger, of a capital asset, being a share of a foreign company (referred to in
the Explanation 5 of sec. 9(1)(i)), which derives, directly or indirectly, its value substantially from
the share or shares of an Indian company, held by the demerged foreign company to the resulting
foreign company, if:
a. the shareholders, holding not less than 3/4th in value of the shares of the demerged foreign
47(vicc)
company, continue to remain shareholders of the resulting foreign company; and
b. such transfer does not attract tax on capital gains in the country in which the demerged foreign
company is incorporated.
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in
case of demergers referred above.
Section Transaction
Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders
47(vid) of the demerged company if the transfer or issue is made in consideration of demerger of the
undertaking.
Any transfer by a shareholder, in a scheme of amalgamation, of share(s) held by him in the
amalgamating company, if –
47(vii) a. The transfer is made in consideration of the allotment to him of any share or shares in the
amalgamated company except where the shareholder itself is the amalgamated company, and
b. The amalgamated company is an Indian company.
Any transfer of a capital asset, being foreign currency convertible bonds or Global Depository
Receipts referred to in sec. 115AC(1), made outside India by a non-resident to another non-resident.
Taxpoint:
47(viia) ¾¾ Transferred asset must be either ‘foreign currency convertible bonds’ or ‘Global Depository
Receipts’.
¾¾ Transfer has been made by a non-resident to another non-resident.
¾¾ Transfer has been made outside India.
Any transfer, made outside India, of a capital asset being rupee denominated bond of an Indian
company issued outside India, by a non-resident to another non-resident
47(viiaa) Taxpoint: In case of non-resident, any gains arising on account of appreciation of rupee against a
foreign currency at the time of redemption of rupee denominated bond of an Indian company held
by him, shall be ignored for the purposes of computation of full value of consideration under this
section
Any transfer of a capital asset, being—
bond or Global Depository Receipt referred to in sec. 115AC(1); or
rupee denominated bond of an Indian company; or
47(viiab) derivative, or
other notified securities
made by a non-resident on a recognised stock exchange located in any International Financial
Services Centre provided the consideration for such transaction is paid or payable in foreign
currency.
Any transfer of a capital asset, being a Government Security carrying a periodic payment of
47(viib) interest, made outside India through an intermediary dealing in settlement of securities, by a non-
resident to another non-resident
Any transfer of Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme,
47(viic)
2015, by way of redemption, by an assessee being an individual.
47(viid) Transformation of physical gold into e-gold receipts and vice-versa made as per SEBI Act 1992
Any transfer of a capital asset being a work of art, archaeological, scientific or art collection,
book, manuscript, drawing, painting, photograph or print, to the Government or a University or the
47(ix) National Museum, National Art Gallery, National Archives or any such other public museum or
institution as may be notified by the Central Government in the Official Gazette to be of national
importance or to be of renown throughout any State or States.
47(x) Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates
in any form of a company into shares or debentures of that company.
Any transfer by way of conversion of bonds referred to in sec. 115AC(1)(a) into shares or
47(xa)
debentures of any company
Section Transaction
Any transfer by way of conversion of preference shares of a company into equity shares of that
47(xb)
company
Any transfer of a land of a sick industrial company, made under a scheme prepared and sanctioned
u/s 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 where such sick industrial
company is being managed by its workers’ co-operative. Such transfer must have been made
47(xii)
during the period commencing from the previous year in which the said company has become a
sick industrial company and ending with the previous year during which the entire net worth of
such company becomes equal to or exceeds the accumulated losses.
Any transfer of a capital asset by a firm to a company as a result of succession of the firm by a
company in the business carried on by the firm subject to following conditions:
a. All assets and liabilities of the firm relating to the business immediately before the succession
become the assets and liabilities of the company.
b. All the partners of the firm immediately before the succession become the shareholders of the
company in the same proportion in which their capital accounts stood in the books of the firm
on the date of succession.
c. The partners of the firm do not receive any consideration or benefit, directly or indirectly, in
any form or manner, other than by way of allotment of shares in the company; and
d. The aggregate of the shareholding in the company of the partners of the firm is not less than
50% of the total voting power in the company and their shareholding continues to be as such
47(xiii) for a period of 5 years from the date of succession.
Taxpoint
¾¾ Transfer must have taken place as a result of succession of the firm to a company.
¾¾ All assets and liabilities related to the business must have been transferred.
¾¾ All the partners become the shareholders of the company in their capital ratio (as on the date
of the succession)
¾¾ The whole consideration shall be paid by allotment of shares in the company
¾¾ Partners (altogether) must hold atleast 50% of the total voting power of the company
¾¾ Lock in period for above share is 5 years from the date of succession.
Any transfer of a capital asset to a company in the course of demutualisation or corporatisation
of a recognized stock exchange in India as a result of which an association of persons or body of
individuals is succeeded by such company, subject to the following conditions –
a. All assets and liabilities of the AOP or BOI relating to the business immediately before the
succession become the assets and liabilities of the company;
b. The demutualisation or corporatisation of a recognized stock exchange in India is carried out
in accordance with a scheme for demutualisation or corporatisation which is approved by the
SEBI
Any transfer of a membership right of a recognized stock exchange in India for acquisition of shares
and trading or clearing rights in that recognized stock exchange in accordance with a scheme for
demutualisation or corporatisation which is approved by SEBI
47(xiiia)
Any transfer of -
a. a capital asset or intangible asset by a private company or unlisted public company (hereafter
referred to as the company) to a limited liability partnership (LLP); or
Section Transaction
b. a share(s) held in the company by a shareholder as a result of conversion of the company into
a limited liability partnership (LLP)
shall not regarded as a transfer, if following conditions are satisfied:
i. All the assets and liabilities of the company immediately before the conversion become the
assets and liabilities of the LLP;
ii. All the shareholders of the company immediately before the conversion become the partners
of the LLP and their capital contribution and profit sharing ratio in the LLP are in the same
proportion as their shareholding in the company on the date of conversion;
iii. The shareholders of the company do not receive any consideration or benefit other than by way
of share in profit and capital contribution in the LLP;
47(xiiib)
iv. The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall
not be less than 50% at any time during the period of 5 years from the date of conversion;
v. The total sales, turnover or gross receipts in business of the company in any of the 3 previous
years preceding the previous year in which the conversion takes place does not exceed ₹ 60 lakh;
vi. The total value of the assets as appearing in the books of account of the company in any of the 3
previous years preceding the previous year in which the conversion takes place does not exceed
₹ 5 crore; and
vii. No amount is paid (directly or indirectly) to any partner out of balance of accumulated profit
standing in the accounts of the company on the date of conversion for a period of 3 years from
the date of conversion.
Where a sole proprietary concern is succeeded by a company in the business carried on by it as
a result of which the sole proprietary concern sells or otherwise transfers any capital asset to the
company, subject to following conditions –
a. All assets and liabilities of the sole proprietary concern relating to the business immediately
before the succession become the assets and liabilities of the company;
b. Proprietor holds not less than 50% of the total voting power in the company and his shareholding
continues to remain as such for a period of 5 years from the date of succession; and
c. The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any
form or manner, other than by way of allotment of shares in the company.
47(xiv)
Taxpoint
¾¾ Transfer must have taken place as a result of succession of the proprietorship concern to a
company.
¾¾ All assets and liabilities related to the business must have been transferred.
¾¾ The whole consideration shall be paid by allotment of shares in the company.
¾¾ Proprietor must hold at least 50% of the total voting power of the company.
¾¾ Lock in period for above share is 5 years from the date of succession.
Note: Sec. 47(xiii) & (xiv) exempts the capital gain on transfer of capital asset and not stock in
trade. Therefore, if stock is transferred at profits, it will be taxable as business income.
Section Transaction
Any transfer in a scheme for lending of any securities under an agreement or arrangement, which
47(xv) the assessee has entered into with the borrower of such securities and which is subject to the
guidelines issued by the SEBI or the RBI.
Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and
47(xvi)
notified by the Central Government
Any transfer of a capital asset, being share of a special purpose vehicle (referred to in sec. 10(23FC))
47(xvii)
to a business trust in exchange of units allotted by that trust to the transferor.
Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating
scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a
unit or units, in the consolidated scheme of the mutual fund.
The exemption is available only the consolidation of two or more schemes of equity oriented fund
or of two or more schemes of a fund other than equity oriented fund.
“Consolidated scheme” means the scheme with which the consolidating scheme merges or which
is formed as a result of such merger.
47(xviii)
“Consolidating scheme” means the scheme of a mutual fund which merges under the process of
consolidation of the schemes of mutual fund in accordance with the Securities and Exchange Board
of India (Mutual Funds) Regulations, 1996 made under the Securities and Exchange Board of India
Act, 1992.
In the case of a capital asset, being a unit or units, which becomes the property of the assessee in
consideration of a transfer referred to in this clause, period of holding shall includes the period for
which the unit or units in the consolidating scheme of the mutual fund were held by the assessee.
Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating
47(xix) plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset,
being a unit or units, in the consolidated plan of that scheme of the mutual fund.
2.4.7 Computation of Capital Gains [Sec. 48]
Short-term Capital Gain means the gain arising on transfer of short-term capital asset [Sec. 2(42B)].
Long-term Capital Gain means the gain arising on transfer of long-term capital asset [Sec. 2(29B)].
Note: No deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect
of any sum paid on account of securities transaction tax.
The meaning of terms used in the computation:
i. Sale consideration (full value of consideration)
It refers to sale value of the asset (in form of money or money’s worth).
Consideration in installments: In case, consideration is receivable in installment in different years, the entire
value of the consideration shall be taxable in the year of transfer.
Fair market value deemed to be full value of consideration in certain cases [Sec. 50D]: Where the
consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable
or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair
market value* of the said asset on the date of transfer shall be deemed to be the full value of the consideration
received or accruing as a result of such transfer.
ii. Expenses on transfer
It means any expenditure incurred wholly and exclusively in connection with such transfer such as, brokerage
or commission incurred for securing buyer, cost of stamp and registration fee by the vendor, traveling expenses,
etc. It is reduced from sale consideration to get net sale consideration.
Notes
a. Expenditure must be necessary to affect the transaction and should not be vague
b. Expenditure on transfer may be incurred prior to or after completion of transfer
c. If expenditure has been allowed as deduction under any other heads of income then the same cannot be
claimed as deduction u/s 48.
iii. Cost of Acquisition [Sec. 55(2)]
Cost of acquisition includes expenditure incurred for acquiring the asset or completing the title of the asset.
For instance –
¾¾ Sum paid for discharge of mortgage debt to clear charge over the property (created by previous owner) is
a part of cost of acquisition.
¾¾ Litigation expenditure incurred by a shareholder to get the shares registered in his name will form part of
cost of acquisition of shares.
iv. Cost of Improvement [Sec. 55(1)(b)]
Cost of improvement means an expenditure incurred to increase the productive quality of the asset. It includes
all expenditures of a capital nature incurred in making any additions or alterations to the capital asset.
Notes
a. Any expenditure which is deductible in computing the income chargeable under any other head of
income shall not be treated as cost of improvement.
b. An expenditure incurred by a shareholder to file a suit to amend articles of association, which results in
appreciation of value of share shall be treated as cost of improvement.
Example 17:
Mr. Divesh had purchased a golden ring as on 17/8/2022 for ₹ 20,000. On 1/05/2023, he has sewn a diamond on
* Fair market value means the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date and
where such price is not ascertainable, the price as may be determined in accordance with the rules made under this Act.
it costing ₹ 25,000. On 1/08/2023, he sold such ring for ₹ 80,000 and incurred brokerage for arranging customer
₹ 5,000. Compute capital gain.
Solution :
Computation of capital gain of Mr. Divesh for the A.Y. 2024-25
Particulars Details Amount
Sale consideration 80,000
Less: Expenses on transfer 5,000
Net sale consideration 75,000
Less: i) Cost of acquisition 20,000
ii) Cost of improvement 25,000 45,000
Short Term Capital Gain 30,000
Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the
improvement to the asset took place
Illustration 83
On 23rd December, 2023, Rajat sold 500 grams of gold, the sale consideration of which was ₹ 14,00,000. He had
acquired this gold on 20th August, 2000 for ₹ 4,00,000. Fair market value of 500 grams of gold on 1st April, 2001
was ₹ 3,60,000. Find out the amount of capital gain chargeable to tax for the assessment year 2024-25.
Solution :
Computation of capital gains of Rajat for the A.Y. 2024-25
Illustration 84:
Mr. Anand has purchased a house property as on 17/08/2002 for ₹ 5,00,000. On 1/05/2004, he constructed a new
floor on the same house at a cost of ₹ 2,50,000. On 1/10/2023, he sold such house for ₹ 18,00,000 and incurred
brokerage @ 2% for arranging customer. Compute capital gain.
Solution :
Computation of capital gain of Mr. Anand for the A.Y. 2024-25
assets received by a 100% Indian subsidiary company from its holding company or received by an
Indian holding company from its 100% subsidiary company or received by an amalgamated Indian
company from the amalgamating company, asset received on conversion of a company into LLP, etc.
h. Asset (being a self-acquired property of a member) received by an HUF from its member [Sec. 49(1)
(iv)].
B. In certain cases (stated below) cost of acquisition of the capital asset shall be:
a. Where capital asset, being equity share of a company, became the property of the assessee on conversion
of preference shares into equity shares of that company, the cost of acquisition of corresponding
preference shares shall be considered as cost of acquisition of such converted equity shares [Sec.
49(2AE)]. Similarly, cost of units in the consolidating plan of the scheme of the mutual fund shall be
deemed to be the cost of units in a consolidated plan of a mutual fund scheme.
b. Assets covered u/s 56(2)(x) [Sec. 49(4)] [Refer chapter ‘Income from Other Sources’]
c. Conversion of inventory into capital assets [Discussed later on]
d. Where the capital asset, being share or shares of a company, is acqired by a non-resident assessee on
redemption of Global Depository Receipts referred to in sec. 115AC(1)(b) held by such assessee, the
cost of acqisition of the share or shares shall be the price of such share or shares prevailing on any
recognised stock exchange on the date on which a request for such redemption was made.
In the case of a capital asset, being share or shares of a company, which is acquired by the non-
resident assessee on redemption of Global Depository Receipts referred to in sec. 115AC(1)(b) held
by such assessee, the holding period shall be reckoned from the date on which a request for such
redemption was made
e. In case of capital asset being declared under the Income Declaration Scheme, 2016, and the tax, surcharge
and penalty have been paid as per the Scheme on the fair market value of the asset as on the date of
commencement of the Scheme (01-06-2016), the cost of acquisition of the asset shall be deemed to be
the fair market value of the asset which has been taken into account for the purposes of the said Scheme*.
f. Where the capital asset, being a unit of a business trust, became the property of the assessee in
consideration of a transfer as referred to in sec. 47(xvii), the cost of acquisition of the asset shall be
deemed to be the cost of acquisition to him of the share referred to in sec. 47(xvii)
“Business trust” means a trust registered as an Infrastructure Investment Trust or a Real Estate
Investment Trust, the units of which are required to be listed on a recognised stock exchange, in
accordance with the regulations made under the Securities Exchange Board of India Act, 1992 and
notified by the Central Government in this behalf [Sec. 2(13A)]
g. The cost of acquisition of a unit in the segregated portfolio shall be the amount which bears, to the cost
of acquisition of a unit held by the assessee in the total portfolio, the same proportion as the net asset
value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio
immediately before the segregation of portfolios. The cost of the acquisition of the original units held by
the unit holder in the main portfolio shall be deemed to have been reduced by the amount as so arrived
Taxpoint
¾¾ While computing period of holding in case of capital asset, being a unit in a segregated portfolio, the
period, for which the original unit or units in the main portfolio were held by the assessee, shall be included.
¾¾ SEBI has, vide circular SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018, permitted creation
of segregated portfolio of debt and money market instruments by Mutual Fund schemes. As per the SEBI
* In case of an immovable property declared under the scheme, the period for which such property is held shall be reckoned from the date on
which such property is acquired if the date of acquisition is evidenced by a deed registered with any authority of a State Government. If it
is not evidenced then from 01-06-2016.
circular, all the existing unit holders in the affected scheme as on the day of the credit event shall be allotted
equal number of units in the segregated portfolio as held in the main portfolio. On segregation, the unit
holders come to hold same number of units in two schemes –the main scheme and segregated scheme.
Various aspects of Sec.49(1) discussed below:
Where cost of acquisition of
Cost of acquisition of previous owner.
Cost of previous owner is ascertainable.
acquisition of an Where cost of acquisition The fair market value of the asset on the date on which the
asset of previous owner is previous owner had acquired the same shall be deemed to
unascertainable be the cost of acquisition.
Where a capital asset became the property of the assessee by any of the modes specified in
Improvement
sec. 49(1), cost of improvement includes improvement expenditure incurred by the previous
expenditure
owner.
Period of holding of the previous owner shall be considered for classifying the asset into short
Period of holding
term or long-term capital asset.
Indexation
benefit on cost of Indexation benefit shall be available from the year acquisition.
acquisition
Index of the year of transfer
Taxpoint: Indexed cost of acquisition = Cost of acquisition ×
Index of the year of acquisition
Indexation
benefit on cost of Indexation benefit shall be available from the year of acquisition*.
improvement
Index of the year of transfer
Taxpoint: Indexed cost of improvement = Cost of improvement ×
Index of the year of improvement
Previous owner means the last owner who acquired such asset through a mode other than the modes mentioned
above.
Illustration 85:
Mrs. Parminder has jewellery, being gifted on 1/04/2005 by her brother Jitendar. Jitendar acquired such asset
for ₹ 60,000 as on 1/07/1995. On 1/07/2002, Jitendar has sewn a diamond worth ₹ 25,000 in such jewellery. On
1/04/2009, Mrs. Parminder incurred polish expenditure on such jewellery costing ₹ 5,000. As on 1/04/2023, Mrs.
Parminder sold such jewellery for ₹ 12,00,000. Brokerage @ 1% of sale value was paid by her. The fair market
value of the jewellery as on –
1/04/2001 is ₹ 2,00,000; 1/04/2005 is ₹ 5,00,000; and 1/04/2023 is ₹ 7,50,000.
Compute capital gain in hands of Mrs. Parminder for the A.Y. 2024-25.
Solution :
Computation of capital gain in the hands of Mrs. Parminder for the A.Y. 2024-25
Particulars Working Details Amount
Sale consideration 12,00,000
Less: Expenses on transfer 1% of ₹ 12,00,000 12,000
Net sale consideration 11,88,000
* In case of CIT –vs.- Manjula J Saha 16 Taxmann 42 (Bombay), the Hon’ble Bombay High Court has held that index benefit is available from the year
in which asset was acquired by the previous owner or for the year beginning on the 1st day of April, 2001, whichever is later.
In nutshell
1. If an asset is acquired before 1/04/2001 then its cost of acquisition will be higher of a) Actual cost of
acquisition or b) Fair market value of the asset as on 1/04/2001.
2. Any cost of improvement before 1/04/2001 shall not be considered.
3. Index benefit shall be available from the year when the improvement expenditure incurred whether by
current owner or by the previous owner.
4. In order to find out whether an asset is short term or long term capital asset, the period of holding of previous
owner shall be considered
Cases where indexation benefit is not available even on transfer of long term capital asset
Debenture or Bonds: In case of transfer of bonds and debentures other than capital indexed bonds issued by
the Government or Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015
[Sec. 48].
Slump Sale: Transfer of an undertaking or division in a slump sale [Sec. 50B]. (Discussed later in this chapter)
Virtual Digital Asset: Transfer of crypto currency [Sec. 115BBH] (Discussed later in this chapter)
Equity shares and equity oriented fund referred to in sec. 112A (Discussed later in this chapter)
Certain transactions by a non-resident: In case of a non-resident, capital gain arising on the transfer of
shares in or debentures of an Indian company acquired in foreign currency. It will be computed as per First
Proviso to sec. 48 (discussed later in this chapter). Further, in case of transaction u/s 115AB, 115AC, etc. index
benefit is not available.
Transfer of Global Depository Receipt: Transfer of Global Depository Receipt purchased in foreign
currency by a resident individual being employee of an Indian Company [Sec. 115ACA]
Illustration 86:
Miss Isha has 1,000 10% Debentures of X Ltd. acquired on 17/04/2009 for ₹ 120 each. As on 1/02/2024, she sold
such asset for ₹ 1,45,000. Brokerage @ ½ % of sale value was paid by her. Compute capital gain.
Solution :
Computation of capital gain in the hands of Miss Isha for the A.Y. 2024-25
* Where any capital asset has previously undergone negotiation for its transfer, any advance or other money received and retained by the
assessee (not by the previous owner) on or before 31-03-2014 in respect of such negotiation shall be deducted from the cost for which the
asset was acquired or the WDV or the fair market value, as the case may be.
Taxpoint: Where any sum of money, received as an advance or otherwise in the course of negotiations for transfer
of a capital asset, has been included in the total income of the assessee for any previous year as per sec. 56(2)(ix),
then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or
the fair market value, as the case may be, in computing the cost of acquisition.
If compensation
Compensation so received
received is in cash
Sale consideration
If compensation Fair Market value (as on date of receipt) of
received is in kind assets received as compensation.
Cost of acquisition / Cost of improvement
As usual
/ Expense on transfer
Indexation benefit available (if any) Till year of destruction
Taxable In the year of receipt of compensation
Tax rate As applicable in the year of receipt of compensation
Note: Compensation received for damage of machinery shall be treated u/s 41(1) to the extent expenditure incurred
on repair and renovation of damaged machinery and such repair and renovation expenditure shall be allowed u/s 31.
However, compensation in excess of repair & renovation expenditure shall be treated as capital receipt and shall not
be liable to tax. Sec. 45(1A) shall not be applicable as there is no transfer of capital asset.
Compensation received for any other damages to capital asset: Compensation received for any other damages
of capital asset (e.g. loss of capital assets due to theft, road accident or sunk of ship due to technical error, etc.) shall
be treated as a capital receipt and shall not be taxable.
Compensation received for any damages to non-capital asset: A revenue receipt may be chargeable u/s 28 or 56.
E.g. compensation received on theft of stock in trade shall be taxable as business income.
Destruction of asset without insurance: Where an asset is destroyed and there is no insurance or insurance
compensation is not received, neither sec. 45(1A) nor sec. 45 shall be attracted and destruction of asset shall not be
treated as transfer. Cost of such asset destroyed is not an allowable loss under the Income Tax Act.
Example 2: Mr. X acquired a residential building for self occupation on 5/5/2020 for ₹ 90 lacs. On 7/4/2023, the
property caught fire. No insurance was made. Such loss of ₹ 90 lacs is not an allowable loss under Income tax Act.
Illustration 87:
Lucky has a house property acquired on 18/08/2009 for ₹ 6,00,000. He used the house for his own residential
purpose. On 18/08/2012 he incurred capital expenditure on re-construction of house ₹ 3,00,000. On 15/05/2023, he
brought office goods (inflammable) worth ₹ 1,00,000 at home to be delivered to a party staying near to his home. At
the night of that day accidental fire took place and damaged the whole house property, furniture worth ₹ 5,00,000
and business stock.
Insurance claim received on 18/08/2023 –
1. for the house ₹ 1,00,000 in cash & a new house allotted to him (fair market value of which is ₹ 44,00,000 on
18/08/2023);
2. for house-hold furniture ₹ 2,00,000; and
3. for stock ₹ 80,000.
State –
–– Tax-treatment under the head Capital gains.
–– How shall your answer differ if such compensation is received by the assessee on 15/04/2024.
Solution :
As the damage occurred due to accidental fire, such case is governed by the provision of sec. 45(1A)
Computation of capital gain in the hands of Lucky for the A.Y. 2024-25
2.4.15 Capital gain on conversion of capital assets into stock in trade [Sec. 45(2)]
From A.Y. 1985-86 onwards, conversion of capital assets into stock in trade shall be treated as transfer u/s 2(47).
For computation of capital gain, various terms to be interpreted are as under:
Illustration 88:
Ali has 10,000 shares of X (P) Ltd. acquired on 15/05/1981 for ₹ 12 each. On 15/07/1983 he converted 6,000 of
such shares into stock in trade. On that date, market value of such share was ₹ 15 each. On 1/05/2007, he further
converted 2,000 of such shares into stock in trade. On such date, market value of the share was ₹ 30 each. On
17/02/2024, he sold all shares for ₹ 225 each. Brokerage incurred 2%. State tax treatment. Fair market value of such
shares as on 01-04-2001 was ₹ 16/-
Solution :
In the given case, shares held by Ali can be divided into three categories –
Category A: 6,000 shares being converted into stock in trade as on 15/07/1983: Sec. 45(2) is applicable on the
conversion effected on or after 1/04/1984. Hence, on conversion of 6,000 shares, sec. 45(2) shall not be applicable.
Hence, on transfer of such asset no capital gain arises.
Category B: 2,000 shares being converted into stock in trade as on 1/05/2007: As per sec. 45(2), such conversion
shall be deemed to be transfer u/s 2(47) and shall be liable to tax in the year of actual sale. For this purpose, fair
market value as on date of conversion (₹ 30 each) shall be treated as sale consideration and fair market value on 01-
04-2001 shall be considered as cost of acquisition. The difference between actual sale value (₹ 225) and fair market
value as on date of conversion (₹ 30 each) shall be treated as business income.
Category C: 2,000 shares (remaining) held as investments: Transfer of such share shall be liable to capital gain.
Computation of capital gain in the hands of Ali for the A.Y. 2024-25
Category B Category C
Particulars
Details Amount Details Amount
Sale consideration 2,000 * ₹ 30 60,000 2,000 * ₹ 225 4,50,000
Less: Expenses on transfer Nil 2% of ₹ 4,50,000 9,000
Net Sale Consideration 60,000 4,41,000
Less: i) Indexed cost of acquisition 2,000*16*129/100 41,280 2000*16*348/100 1,11,360
ii) Indexed cost of improvement Nil Nil
Long Term Capital Gain 18,720 3,29,640
Computation of Profits & gains of business or profession in the hands of Ali for the A.Y. 2024-25
Category A Category B
Particulars
Details Amount Details Amount
Sale consideration 6,000 * ₹ 225 13,50,000 2,000 * ₹ 225 4,50,000
Less: Expenses on transfer 2% of ₹ 13,50,000 27,000 2% of ₹ 4,50,000 9,000
Net Sale Consideration 13,23,000 4,41,000
Less: Cost of goods sold ₹ 151 * 6,000 90,000 ₹ 302 * 2,000 60,000
Profits & gains of business or profession 12,33,000 3,81,000
1. Provision of sec. 45(2) shall be applicable from A.Y. 1985-86, since such shares are converted before A.Y.
1985-86, hence the difference between cost price (₹ 12) and market price (₹ 15) on the date of such conversion
shall neither be liable to capital gain nor business income. Further cost of goods sold shall be taken as fair
market value as on the date of such conversion i.e. ₹ 15.
2. Fair market value of share on conversion of such asset into stock in trade.
Illustration 89:
ABC & Co. has three partners A, B and C sharing profit or loss in the ratio 5:3:2. They admitted D as a new
partner on 31/03/2023 for 1/5th share and D is to bring ₹ 2,00,000 as his capital which he brought in form of
furniture (earlier used in his home) ₹ 50,000 immediately & further brought jewellery of which fair market value
is ₹ 2,00,000 on 2/04/2023 (however such assets was recorded in the books at ₹ 1,60,000). D had acquired such
jewellery for ₹ 45,000 on 7/07/2001. Compute capital gain in the hands of Mr. D.
Solution :
In the given case, Mr. D brought two assets:
a. Furniture, being a personal effect, is not a capital asset and hence, not liable to capital gain.
b. Jewellery being a capital asset, hence liable to capital gain as under –
Computation of capital gain in the hands of Mr. D for the A.Y. 2024-25
c. one or more of its partners or members, as the case may be, of such specified entity ceases to be partners
or members; or
d. one or more new partners or members, as the case may be, are admitted in such specified entity in such
circumstances that one or more of the persons who were partners or members, as the case may be, of
the specified entity, before the change, continue as partner or partners or member or members after the
change; or
e. all the partners or members, as the case may be, of such specified entity continue with a change in their
respective share or in the shares of some of them;
Treatment
In the hands of specified entity u/s 9B
Any profits and gains arising from such deemed transfer of capital asset or stock in trade or both, as the case may
be, by the specified entity shall be:
deemed to be the income of such specified entity of the previous year in which such capital asset or stock in
trade or both were received by the specified person; and
chargeable to income-tax as income of such specified entity under the head “Profits and gains of business or
profession” or under the head “Capital gains”
for aforesaid purposes, fair market value of the capital asset or stock in trade or both on the date of its receipt
by the specified person shall be deemed to be the full value of the consideration received or accruing as a result
of such deemed transfer of the capital asset or stock in trade or both by the specified entity.
In the hands of specified entity u/s 45(4)
Any profits or gains arising from such receipt by the specified person shall be chargeable as income of such
specified entity under the head “Capital gains”.
It shall be deemed to be the income of such specified entity of the previous year in which such money or capital
asset or both were received by the specified person.
Transfer of stock in trade shall be treated as business profit
Method of computation of profits or gains
Such profits or gains shall be determined in accordance with the following formula:
A=B+C-D
where,
A = Income chargeable as capital gains of the specified entity
If the value of “A” is negative, its value shall be deemed to be zero.
B = Value of any money received by the specified person from the specified entity on the date of such receipt;
C = Fair market value of the capital asset received by the specified person from the specified entity on the
date of such receipt.
D = Balance in the capital account (represented in any manner) of the specified person in the books of account
of the specified entity at the time of its reconstitution.
The balance is to be calculated without taking into account the increase in the capital account of the
specified person due to revaluation of any asset or due to self-generated goodwill or any other self-
generated asset.
“Self-generated goodwill” and “Self-generated asset” mean goodwill or asset, as the case may be,
which has been acquired without incurring any cost for purchase or which has been generated during
the course of the business or profession.
Taxpoint
When a capital asset is received by a specified person from a specified entity in connection with the reconstitution
of such specified entity, this provision shall operate in addition to the provisions of sec. 9B and the taxation
under the said provisions thereof shall be worked out independently.
compensation or consideration is received by any other person, the gain so computed in case of enhanced
compensation or consideration shall be deemed to be the capital gain, of such other person.
Tax treatment of reduced compensation [Sec. 45(5)(c)]
Where in any assessment year, such compensation or consideration (whether original or enhanced) referred above
is reduced by any court, tribunal or other authority, then capital gain of that year shall be recomputed considering
the compensation or consideration so reduced by such court, Tribunal or other authority.
Illustration 90:
Sunil has a house property acquired on 7/07/1995 for ₹ 3,00,000. He incurred improvement expenditure on such
property ₹ 70,000 on 16/08/2000 and ₹ 50,000 on 17/07/2010. Market value of such property as on 1/04/2001 is
₹ 4,50,000. On 16/08/2013, such property is compulsorily acquired by the Government and compensation decided
at ₹ 11,50,000. 20% of the compensation received on 31/03/2024 and balance on 2/06/2024.
On further appeal, on 16/08/2024 enhanced compensation is declared by the Government ₹ 2,00,000. Expenditure
incurred to get enhanced compensation is ₹ 11,000. Such compensation received on 18/08/2025. Compute income
under the head Capital Gains of Sunil for the assessment year 2024-25, 2025-26 and 2026-27.
Solution :
Computation of capital gains of Sunil for the A.Y. 2024-25
Particulars Working Details Amount
Sale consideration 11,50,0001
Less: Expenses on transfer Nil
Net sale consideration 11,50,000
Less: i) Indexed cost of acquisition ₹ 4,50,0002 * 2204/100 9,90,000
ii) Indexed cost of improvement3 ₹ 50,000 * 2204/167 65,868 10,55,868
Long Term Capital Gain 94,132
1. The initial compensation (i.e. ₹ 11,50,000) decided by the Government shall be treated as sale consideration.
2. Cost of acquisition is the original cost of acquisition (i.e. ₹ 3,00,000) or Fair market value as on 1/04/2001 (i.e.
₹ 4,50,000) whichever is higher.
3. Cost of improvement incurred before 1/04/2001 is to be completely ignored.
4. Though the property was compulsorily acquired by the Government in the P.Y 2013-14 but the compensation
was received in the P.Y.2023-24, therefore the amount shall be taxable in the P.Y. 2023-24, however indexation
benefit shall be available till the previous year 2013-14.
Computation of capital gains of Mr. Sunil for the A.Y. 2025-26: As the assessee has not received enhanced
compensation during the P.Y.2024-25, hence nothing is taxable in the A.Y. 2025-26.
Computation of capital gains of Mr. Sunil for the A.Y. 2026-27
In case of enhanced compensation, the cost of acquisition shall be taken as nil and the nature of capital gain shall
be same as that of initial compensation.
2. Such land was used for agricultural purposes by such HUF or individual or his parents during the period of 2
years immediately preceding the date of transfer.
Conditions
2. Such asset is transferred under the Land Pooling Scheme covered under the Andhra Pradesh Capital City Land
Pooling Scheme (Formulation and Implementation) Rules, 2015 made under the provisions of the Andhra
Pradesh Capital Region Development Authority Act, 2014
b. Transfer of land pooling ownership certificate issued under the scheme to the assessee in respect of transfer
referred in (a);
c. Transfer of reconstituted plot or land received by the assessee against transfer mentioned in (a) within 2 years
from the end of the financial year in which the possession of such plot or land was handed over to him.
Taxpoint: Where such reconstituted plot or land is not transferred within said 2 years, the cost of acquisition of
such capital asset shall be deemed to be its stamp duty value as on the last day of the 2nd financial year after the end
of the financial year in which the possession of the said capital asset was handed over to the assessee.
Such assessee transfer capital asset being land or building or both under a specified agreement to another
person
¾¾ Specified agreement means a registered agreement in which a person owning land or building or both,
agrees to allow another person to develop a real estate project on such land or building or both, in
consideration of a share, being land or building or both in such project, whether with or without payment
of part of the consideration in cash
Treatment
Sale consideration Stamp duty value on the date of issue of completion certificate of his share being land
or building or both in the project + The consideration received in cash, if any.
Cost of acquisition Proportionate cost of the asset transferred
Benefit of indexation Available upto the year in which completion certificate is issued
Taxable In the year in which completion certificate for the whole or part of the project is issued
by the competent authority
Taxpoint
The cost of acquisition of capital asset, being share in the project, in the form of land or building or both,
(covered under aforesaid provisions), shall be the amount which is deemed as full value of consideration while
computing capital gain u/s 45(5A).
Competent authority means the authority empowered to approve the building plan by or under any law for the
time being in force.
Where the assessee transfers his share in the project on or before the date of completion certificate, in that case,
aforesaid provision is not applicable and the capital gains shall be taxable in the previous year in which such
transfer takes place. Further, capital gain shall be computed as per other provisions.
2.4.22 Capital gain on distribution of assets by companies in its liquidation [Sec. 46]
On liquidation of a company, after payment of all its outside liabilities, remaining assets are disposed off in any of
the following two manners:
1. Remaining assets are sold in the market and sale proceeds distributed among shareholders.
2. Remaining assets itself are distributed among shareholders.
Above transaction shall be treated as under for computation of capital gain.
Tax Treatment in the hands of Company [Sec. 46(1)]
At the time of liquidation of company, any transfer by way of distribution of assets among its shareholder is not
treated as transfer for the purpose of capital gain. Hence, in case 2 when assets are directly distributed among
shareholders, nothing shall be charged to tax under the head ‘Capital gains’.
On the other hand, in case 1, when assets are sold in market (thereafter sale proceeds is distributed among
shareholders), then such sale of assets by the company in market shall be treated as transfer and chargeable under
the head ‘Capital gains’ as under:
Notes
a. When distribution is made by liquidator, and the amount of distribution is less than the total amount of
Shareholders’ Fund, the distribution is deemed to take place in proportion of share capital and accumulated
profit as appears immediately before the distribution in the books of account of the company. [Refer Dividend
in chapter “Income from other sources”]
b. Payment in installments by the liquidator to shareholders: In case payment is received by the shareholder
in installments then the cost of acquisition shall be deducted from the earlier installment(s). Once the cost of
acquisition is absorbed by the earlier installment then subsequent installment (less expenditure on transfer)
shall be fully taxable.
c. The distributed asset may not be a capital asset, still provision of sec. 46(2) shall be attracted. E.g. if on
liquidation, company distributed its rural agricultural land (not being a capital asset) to its shareholder. Such
shareholder shall be liable to capital gain, as the transferred asset (on the part of shareholder) is share in the
company
Illustration 91 :
Balance sheet of Purva India (P) Ltd. as on 31/12/2023
Liabilities Amount Assets Amount
Equity Share capital of ₹ 10 each 8,00,000 Land 6,00,000
Preference Share capital 1,00,000 Building (WDV as per IT Act) 3,00,000
Reserves 2,00,000 Machinery (WDV as per IT Act) 4,00,000
Loan 6,00,000 Current Asset 10,00,000
Creditors 6,00,000
23,00,000 23,00,000
Additional information
Company went into liquidation on the balance sheet date and all current assets and building realized at book value.
The realized money was applied in payment of outside liabilities and preference shareholder. Utkarsh is a holder
of 10% equity share and 20% preference share of the company. Equity shares were originally acquired by him on
16/08/2002 at face value. However, he subscribed to preference share on 1-04-2022, which was issued at par. He
received a part of land (MV ₹ 5,00,000) and cash (for preference share) ₹ 20,000. Compute capital gain in hands
of company & Utkarsh.
Solution :
Computation of capital gain for the A.Y. 2023-24 in the hands of Purva India (P) Ltd
As per sec. 46(1), at the time of liquidation of company, any transfer by way of distribution of assets to its
shareholders is not treated as transfer for the purpose of capital gain. However, if any asset is sold in the market
the same shall be liable to capital gain.
In the given case, only one capital asset is sold i.e. building and the same being sold at book value, hence no capital
gain liability arises in the hands of company.
Computation of capital gain for the A.Y.2024-25 in the hands of Utkarsh
Particulars Working Details Amount
In case of equity share
Sale consideration 4,80,0001
Less: Expenses on transfer Nil
Net Sale Consideration 4,80,000
Less: i) Indexed cost of acquisition (10% of ₹ 8,00,000) * 348/105 2,65,143
ii) Indexed cost of improvement Nil 2,65,143
Long Term Capital Gain 2,14,857
In case of Preference share
Sale consideration 20,000
2.4.24 Transfer in case of total or partial partition of HUF [Sec 47(i) & 49(1)]
As per sec. 47(i), any distribution of capital assets in kind by HUF on its total or partial partition is not treated as
transfer u/s 47(i). However, when such assets is further transferred by its member then tax treatment shall be as
under:
Cost of acquisition of new Cost of old asset (convertible debentures) shall be taken as cost of acquisition of new
asset asset (converted share).
Holding Period Starts from the date of acquisition of such debenture [Rule 8AA]
Benefit of indexation shall be available from the date of allotment of new asset
Indexation benefit
(converted share)
Note: Indexation benefit is not applicable in case of debenture
Sale consideration Redemption price, Maturity value or sale proceeds as the case may be.
Cost of acquisition of new asset As usual
Determination of nature of asset Long term capital asset if held for more than 12 months.
Indexation benefit Benefit of indexation shall not be available.
Notes:
1. Tax rate: Long term capital gain on such bond shall be taxed at 10% without indexation.
2. Tax treatment in hands of issuing company: Discount (i.e. the difference between the amount receivable
by the issuing company and the amount payable by such company on maturity or redemption of such bond)
shall be allowed as deduction u/s 36(1)(iiia) on pro rata basis during the life of the bond.
Provision Illustrated
Mr. Raj has a self-occupied house property acquired 10 months ago for ₹ 5,00,000. He sold such property for ₹
6,00,000 to Rajshree.
Case (a): Stamp duty authority for the purpose of levying stamp duty adopted value of ₹ 6,25,000.
Case (b): Stamp duty authority for the purpose of levying stamp duty adopted value of ₹ 6,75,000.
Compute capital gain on such transfer.
Solution
Computation of capital gain
Case Result
If the value determined by the Valuation Officer
Value adopted or assessed or assessable for the purpose of
exceeds the value adopted or assessed or assessable
stamp duty shall be taken as full value of consideration.
for the purpose of stamp duty
If the value determined by the Valuation Officer does
Value determined by the Valuation Officer shall be taken
not exceed the value adopted or assessed or assessable
as full value of consideration.
for the purpose of stamp duty
Taxpoint: Where the valuation is referred to the Valuation Officer, sale consideration of the asset shall be taken as
minimum of the following –
Value adopted or assessed or assessable for the purpose of stamp duty;
Value determined by the Valuation Officer.
Provision Illustrated
Mr. Rajesh has a self-occupied house property acquired on 15/11/2022 for ₹ 6,00,000. He sold such property for
₹ 5,00,000 to Jayshree as on 18/08/2023. Stamp duty authority for the purpose of levying stamp duty adopted
value of ₹ 10,00,000.
Assessing Officer for computing capital gain on such transfer is taking sale consideration ₹ 10,00,000 u/s 50C. On
request of Mr. Raj, the matter being referred to Valuation Officer and value determined by the Valuation Officer is
₹ 9,00,000. Compute capital gain on such transfer.
Solution
Computation of capital gains in the hands of Mr. Raj for the A.Y. 2024-25
Illustration 92:
Mr. A, who transfers land and building on 2-01-2024, furnishes the following information:
a. Net consideration received ₹ 10 lakhs;
b. Value adopted by stamp valuation authority, which was not contested by Mr. A ₹ 12 lakhs;
c. Value ascertained by Valuation Officer on reference by the Assessing Officer ₹ 13 lakhs;
d. This land was distributed to Mr. A on the partial partition of his HUF on 1-04-2001. Fair market value of the
land as on 1-04-2001 was ₹ 1,00,000.
e. A residential building was constructed on the above land by Mr. A at a cost of ₹ 2,00,000 (construction
completed on 1-12-2004) during the Financial Year 2004-05.
Compute capital gain.
Solution :
Computation of capital gain of Mr. A for A.Y. 2024-25
Treatment of self-generated asset generated before 1/4/2001: If aforesaid assets are developed or purchased
before 1/4/2001, the option of adopting fair market value shall not be applicable and even in such case the cost of
acquisition shall be computed as per the above table.
Depreciable Asset: Where the capital asset, being goodwill of a business or profession, in respect of which a
deduction on account of depreciation u/s 32(1) has been obtained by the assessee upto assessment year 2020-21,
the cost of acquisition (being purchase price) shall be reduced by the depreciation obtained by the assessee.
Cost of improvement [Sec. 55(1)(b)]
In case of goodwill, right to manufacture or produce any article or right to carry on any business or profession, cost
of improvement shall always be nil.
Treatment of other self-generated assets
Sec. 55(2)(a) gives an exhaustive list of self-generated capital assets which are liable to tax. Any other self-
generated asset (excluding bonus shares and right entitlements), not mentioned above, shall be out of purview of
tax i.e. fully exempted.
Instances of other self-generated assets transfer of which does not amount to capital gains:
Transfer of trees grown spontaneously (self-generated)
A self-generated formula if cost of its acquisition or improvement cannot be reasonably ascertained.
Taxpoint: Tax treatment on transfer of such assets shall be as under –
Goodwill of a business or profession, right to carry on a business or profession, right to manufacture or process
any article
Sale consideration Actual
Cost of acquisition Nil
Cost of improvement Nil
Expenditure on transfer Actual
Capital gain Sale consideration less expenditure on transfer
Tenancy right, stage carriage permits, loom hours, trade-mark & brand name associated with the business
Sale consideration Actual
Cost of acquisition Nil
Cost of improvement Actual
Expenditure on transfer Actual
Sale consideration less cost (or indexed cost) of improvement less expenditure on
Capital gain
transfer.
The above rule is applicable only in the case of self-generated asset.
Illustration 93:
Liza transferred the following assets on 2-05-2023, determine capital gain for the A.Y. 2024-25
Solution :
Computation of capital gains in the hands of Liza for the A.Y. 2024-25
Illustration 94 :
Mr. Rocky purchased 1,000 shares of Azad (P) Ltd @ ₹ 12 per share as on 1/08/1998. Company declared one bonus
share for every two shares held on 31/03/2000. As on 7/07/2006, Rocky got 500 shares of the same company as gift
from his friend Rakesh (Rakesh acquired such share on 1/04/2001 @ ₹ 14 per share). As on 1/03/2023, company
further declared one bonus share for every five shares held. On 1/01/2024, Rocky sold all the shares @ ₹ 50 each.
Find capital gain of Mr. Rocky.
Solution :
Number of shares held by Mr. Rocky
Total number of
Shares No. of shares
shares to the date
Original share 1,000 1,000
Bonus share declared on 31/03/2000 [1,000 shares/2] 500 1,500
Share received as gift from Rakesh as on 7/07/2006 500 2,000
Bonus share declared on 1/03/2023 [2,000 shares/5] 400 2,400
Computation of capital gains in the hands of Mr. Rocky for the A.Y. 2024-25
Bonus share
Bonus share
Original acquired Gifted
Particulars Workings acquired
share before shares
after 1/4/2001
1/4/2001
No of shares held 1,000 500 500 400
Cost of acquisition per share Note ₹ 14 ₹ 14 ₹ 14 Nil
Sale consideration Shares held * ₹ 50 50,000 25,000 25,000 20,000
Less: Expenses on transfer Nil Nil Nil Nil
Net Sale Consideration 50,000 25,000 25,000 20,000
Less: Indexed cost of 1,000*₹ 14*348/100 48,720 - - -
acquisition 500 * ₹ 14 * 348/100 - 24,360 - -
500 * ₹ 14 * 348/122 - - 19,967 -
Less: Cost of acquisition - - - Nil
Less: Indexed cost of
Nil Nil Nil -
improvement
Less: Cost of improvement - - - Nil
Long Term Capital Gain 1,280 640 5,033 -
Short Term Capital Gain - - - 20,000
$
Unit shall mean:
a. a unit of a business trust defined u/s 2(13A);
b. a unit defined in the Explanation to sec. 115AB i.e., unit of mutual fund specified u/s 10(23D) or of Unit Trust
of India; or
c. beneficial interest of an investor in an Alternative Investment Fund, defined in regulation 2(1)(b) of the
Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the
Securities and Exchange Board of India Act, 1992, and shall include shares or partnership interests
#
Record date means such date as may be fixed by –
a. a company;
b. a Mutual Fund or the Administrator of the specified undertaking or the specified company referred to in the
Explanation to sec. 10(35); or
c. a business trust defined in sec. 2(13A); or
d. an Alternative Investment Fund defined in regulation 2(1)(b) of the Securities and Exchange Board of India
(Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India
Act, 1992,
for the purposes of entitlement of the holder of the securities or units, as the case may be, to receive dividend,
income, or additional securities or units without any consideration, as the case may be
Illustration 95 :
Mr. A purchased 5,000 units of a mutual fund as on 10/10/2023 @ ₹ 80. On 1/11/2023, the fund declares 4 bonus
units for every 5 units held. The record date for declaring bonus is 01/11/2022.
On 01/12/2023, Mr. A sold 2,500 original units @ ₹ 20.
On 10/01/2024, Mr. A sold 1,000 bonus units @ ₹ 25.
On 12/02/2024, Mr. A sold remaining 2,500 original units @ ₹ 30.
On 14/03/2024, Mr. A sold remaining 3,000 bonus units @ ₹ 45.
All units sold to his friend. Compute capital gain.
Solution :
Computation of capital gain of Mr. A for the A.Y.2024-25
2.4.32 Capital gain in case of transfer of right share and right entitlement [Sec. 55(2)(aa)]
Right Share: Where, by virtue of holding a share or any other security, (hereinafter this clause referred to as the
financial asset), the assessee becomes entitled to subscribe to any additional financial asset, then such additional
financial asset can be termed as right share [Sec. 55(2)(aa)]. Cost of acquisition of such right share shall be the
amount actually paid by him for acquiring such right share.
Right Entitlement: An assessee can endorse his right to acquire additional financial asset (as stated above) in
favour of other person. Such endorsement of right is termed as right renouncement. Cost of acquisition of such
right entitlement shall be taken as nil.
Tax treatment of right issue and right entitlements shall be as under:
Illustration 96:
Mr. Raunak purchased 1,000 shares of Zey (P) Ltd @ ₹ 12 per share as on 1/08/2022. As on 1/05/2023, company
declared one right share for each share held @ ₹ 15 each. Mr. Raunak renounced 40% of such right in favour of
Miss Rani @ ₹ 2 per share and for balance, he subscribed to the company. On 1/07/2023, Mr. Raunak and Miss
Rani sold all the shares to one of their friend @ ₹ 50 each. Find capital gain of both the assessee.
Solution :
Working: Details of shares and right entitlements transferred
2.4.34 Capital Gain on Virtual Digital Assets [Sec. 115BBH r.w.s 2(47A)] New
As per sec. 2(47A), virtual digital asset means:
a. any information or code or number or token (not being Indian currency or foreign currency), generated
through cryptographic means or otherwise, by whatever name called, providing a digital representation of
value exchanged with or without consideration, with the promise or representation of having inherent value,
or functions as a store of value or a unit of account including its use in any financial transaction or investment,
but not limited to investment scheme; and can be transferred, stored or traded electronically;
b. specified non-fungible token or any other token of similar nature, by whatever name called;
c. any other notified digital asset
Taxpoint: The Central Government may exclude any digital asset from the definition of virtual digital asset.
Tax Treatment
Rate of tax
Any income from the transfer of any virtual digital asset (VDA) shall be taxable @ 30%.
Computation of income on transfer of such assets
While computing such income:
d. Deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or set off of any
loss shall not be allowed to the assessee.
e. Set off of loss from transfer of the virtual digital asset shall not be allowed against other income
f. Loss from transfer of the virtual digital asset shall not be allowed to be carried forward to succeeding assessment
years.
g. Index benefit is not allowed.
In nutshell,
Cost of acquisition ü Allowed (without index)
Other expenditure (like improvement expenses, Not allowed
û
expenses on transfer, etc.)
Loss on transfer of VDA û No adjustment with other income
Loss from other activities û No adjustment with income on transfer of VDA
Carry forward of loss on transfer of VDA û Not allowed
Taxpoint: Where VDA has been held as investment, the income on transfer shall be taxable under the head
Capital Gains, however, if VDA has been held for trading purpose, the income may be taxable as business income.
However, in either of the case, computation shall be made as per aforesaid provision and rate of tax will be 30%.
* In case of individual, HUF, AOP, BOI and other artificial person, surcharge on dividend income and income covered u/s 111A , 112 and 112A cannot
exceed 15%. In nutshell, applicable surcharge are as under:
Situation % of Surcharge
Total income including income covered u/s 111A, 112 and 112A does not exceed ₹ 50 lakhs Nil
Total income including income u/s 111A, 112 and 112A exceeds ₹ 50 lakhs but does not exceed ₹ 1 crore 10%
Total income including income u/s 111A, 112 and 112A exceeds ₹ 1 crore but does not exceed ₹ 2 crore 15%
Total income excluding income u/s 111A, 112 and 112A exceeds ₹ 2 crore but does not exceed ₹ 5 crore 25%
Total income excluding income u/s 111A, 112 and 112A exceeds ₹ 5 crore 37%
Total income including dividend, income u/s 111A, 112 and 112A exceeds ₹ 2 crore, if case is not falling under any of the 15%
aforesaid situations
Solution :
Computation of tax for the A.Y.2024-25
Particulars Other income STCG
Income ₹ 1,66,000 ₹ 1,30,000
Exemption limit on which no tax is charged i.e. ₹ 2,50,000 ₹ 1,66,000 ₹ 84,000
Nil ₹ 46,000
Tax rate Nil 15%
Tax ₹ 6,900
Less: Rebate u/s 87A ₹ 6,900
Tax after Rebate u/s 87A Nil
Add: Health & Education Cess Nil
Tax Liability (Rounded off) Nil Nil
Short-term capital gain in any other case: In any other case, short-term capital gain is to be taxed as per usual
rates, as applicable to any other income.
Tax on long term capital gain in certain cases [Sec. 112A]
Applicable to: All assessee
Conditions:
a. The total income of the assessee includes income chargeable under the head “Capital gains”;
b. The capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit
of an equity-oriented fund* or a unit of a business trust;
c. Securities Transaction Tax (STT) has been levied:
Capital Asset STT has been paid
Equity share in a company STT has been paid on acquisition and transfer of such capital asset.
Exception:
In the following cases, condition of levying STT on acquisition is
not applicable:
a. Equity share acquired before 01-10-2004
b. The nature of acquisition which is notified (like IPO, ESOP,
etc.) [Notification No. 60/2018 dated 01-10-2018]
* “Equity Oriented Fund” means a fund set up under a scheme of a mutual fund specified u/s 10(23D) or under a scheme of an insurance company
comprising unit linked insurance policies to which exemption under clause (10D) of the said section does not apply on account of the applicability of
the fourth and fifth provisos thereof, and:
i. in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,:
a. a minimum of 90% of the total proceeds of such fund is invested in the units of such other fund; and
b. such other fund also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognised stock
exchange; and
ii. in any other case, a minimum of 65% of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a
recognised stock exchange.
Taxpoint:
¾¾ The percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual
average of the monthly averages of the opening and closing figures.
¾¾ In case of a scheme of an insurance company comprising ULIP to which exemption u/s 10(10D) does not apply on account of the applicability
of the fourth and fifth provisos thereof, the minimum requirement of 90% or 65%, as the case may be, is required to be satisfied throughout the
term of such insurance policy.
Example 20: Mr. Nishith, a resident aged 40 years, has other income of ₹ 70,000 and LTCG u/s 112A ₹ 3,65,000.
He shall be liable to tax as follows –
Computation of tax liability
Particulars LTCG u/s 112A Other income Total
Taxable income 3,65,000 70,000 4,35,000
Exempted up to ₹ 2,50,000 #(₹ 2,50,000 – ₹ 70,000) 1,80,000# 70,000 2,50,000
Balance 1,85,000 Nil 1,85,000
Tax rate @applicable on income in excess of ₹ 1,00,000 10%@ Slab
Tax liability before rebate 8,500 Nil 8,500
Less: Rebate u/s 87A NA
Tax after rebate 8,500
Add: Health & Education Cess 340
Tax and Cess Payable 8,840
Example 21: Joseph, a non-resident has LTCG ₹ 1,00,000. He shall be liable to tax @ 20% on LTCG, i.e. ₹ 20,000
(₹ 1,00,000 * 20%) (plus cess), even total income does not exceed maximum exempted limit.
Deduction under chapter VIA [Sec. 112(2)]: No deduction under chapter VIA (i.e. u/s 80C to 80U) is
available against LTCG.
Option available on capital gains in respect of shares, securities and units [Proviso to Sec. 112]
Applicability
Long-term capital asset being security listed in any recognized stock exchange in India are transferred –
As per sec. 2(h) of the Securities Contracts (Regulation) Act, 1956, securities include:
i. Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature
in or of any incorporated company or other body corporate.
ii. Government securities.
iii. Such other instruments as may be declared by the Central Government to be securities.
iv. Rights or interest in securities.
Treatment
Capital gain may be calculated and assessed in any of the following two options:
Illustration 98:
Mr. Jadu has sold following assets on 31/03/2024:
Solution :
Computation of capital gain of Mr. Jadu for the A.Y. 2024-25
Alternative 1) Taxing LTCG at higher rate (20%) and allowing benefit of indexation
Alternative 2) Taxing LTCG at lower rate (10%) and not allowing indexation benefit
Particulars Land Government securities Debenture
Sale consideration No such 1,00,000 1,00,000
option
Less: Expenditure on transfer 5,000 2,000
available
Net Sale consideration 95,000 98,000
Less: Cost of acquisition (Note) 10,000 20,000
Less: Cost of improvement - -
Long Term Capital Gain 85,000 78,000
Tax on Long Term Capital Gain @ 10% 8,500 7,800
[Subject to alternative 1 (given above)]
Tax liability for LTCG Lower of
1,03,892 8,500 7,800
(alternative 1) & (alternative 2)
1.
As benefit of indexation is not available.
2.4.36 Deduction from capital gain on sale of residential house property [Sec. 54]
Applicable to Individual or HUF
1. Assessee has transferred a long-term residential house, income of which is taxable under
the head “Income from house property”.
2. Assessee must acquire one new residential house within prescribed time limit.
Alternate Option
When Available: Where the amount of the capital gain does not exceed ₹ 2 crore.
Option: The assessee may, at his option, purchase or construct two residential houses in
India
Restriction: Where during any assessment year, the assessee has exercised this option, he
shall not be subsequently entitled to exercise the option for the same or any other assessment
Conditions year. That means, the option is available once in lifetime of the assessee.
The new residential house should be in India.
Taxpoint:
¾¾ Capital asset must be a long term capital asset.
¾¾ Property must be a residential house whether let-out or self occupied.
¾¾ Income of such property must be taxable u/s 22.
¾¾ Land transferred appurtenant to a house property (assessable u/s 22) together with such
house property, also qualifies for deduction u/s 54.
¾¾ The new residential house(s) may not be taxable u/s 22. e.g. a new house acquired for the
residence of employees shall be eligible for deduction.
Within a period of ‘1 year before, or 2 years after, the date of transfer’
For Purchase Example 6: If a property is transferred on 17/8/2022, then the new house
property may be purchased at any time between 17/08/2021 to 17/8/2024.
Within a period of 3 years after the date of transfer.
Time limit for
acquisition of For Construction Construction may start at any time but must be completed within stipulated
new assets time
Scheme of
Applicable [Refer ‘Capital Gains Account Scheme’ given below].
deposit
In case of compulsory acquisition of such capital asset by the Government, the time limit shall
start from receipt of compensation or part thereof.
Minimum of the following:
Deduction ¾¾ Investment in the new asset(s) [excess of ₹ 10 crore is not considered]; or
¾¾ Capital gain
If the newly acquired residential house is transferred within 3 years from the date of
acquisition of new assets, then the benefit availed earlier shall be revoked. Such revoked
Revocation of income shall be reduced from cost of acquisition of new asset.
benefit If the amount held in Capital Gains Deposit Account Scheme (1988) is unutilized, then
such amount shall be taxable as long-term capital gain in the previous year in which the period
of 3 years from the date of transfer expires.
Notes
1. Legal title of the house: Holding of legal title is not necessary. It is sufficient that assessee has made the full
(or substantial) payment within the time limit even though the transfer deed has not been registered and the
possession is given after stipulated time.
2. Transfer of part of house: Exemption u/s 54 is available on sale of part of the house if the same is an
independent unit.
3. Treatment of Land: The cost of land is integral part of the residential house.
4. Treatment in hands of legal heir: The benefit of sec. 54 is also available to the legal heir of deceased assessee
provided he fulfills conditions of sec. 54.
Capital Gains Accounts Scheme, 1988
Introduction If the new asset is not acquired till the due date of submission of return of income#, then the
taxpayer will have to deposit the money in ‘Capital Gains Deposit Account’ with a nationalized
bank. The proof of deposit should be submitted along with the return of income. On the basis
of actual investment and the amount deposited in the deposit account, exemption will be given
to the taxpayer.
Due date of filing of return being 31st October (where audit is required) & 31st July (in any
#. *
other case)
Utilisation of The taxpayer is to acquire a new asset by withdrawing from the deposit account.
amount New asset must be acquired within specified time, provided in the relevant section.
If deposit The unutilized amount will become chargeable to tax in the previous year in which the specified
amount remains time limit expires. Chargeable amount shall be –
unutilized
For sec. 54, 54B, 54D, 54G, 54GA: Unutilised amount
For sec. 54F & 54GB: Unutilised amount × Capital gain [Capital gain in excess of ₹ 10 crore
is not considered]
Net sale consideration [excess of ₹ 10 crore is not considered]
Nature of gain It will be taxable as short term or long-term capital gain depending upon the status of the
original capital gain.
Notes
a. The unutilized amount can be withdrawn by the taxpayer after the expiry of the aforesaid time limit.
b. The unutilized amount in Capital Gain Account Scheme (1988), in hands of legal heir of deceased individual,
cannot be taxed. [Circular No.743 dated 6/5/1996]
Illustration 99:
Mr. Sidhartha has a residential house property taxable u/s 22. Such property is acquired on 12/08/2005 for
₹ 2,00,000. The property is sold on 1/03/2024 for ₹ 25,00,000. He acquired another residential house on 31/03/2024
for ₹ 17,00,000 for self-occupation. On 1/03/2025, he sold such new residential house for ₹ 30,00,000. Compute
his capital gain for the A.Y. 2024-25 and 2025-26.
Solution :
Computation of capital gain of Mr. Sidhartha for the A.Y. 2024-25
2.4.37 Deduction from capital gain on transfer of agro land [Sec. 54B]
Applicable to Individual or HUF
1. Assessee must have transferred a capital asset being an agricultural land (whether long
term or short term).
Taxpoint: A rural agricultural land is not a capital asset hence on transfer of rural land
no capital gain arises.
2. Such agricultural land must have been used by the individual or his parents or by such
HUF for agricultural purposes for at least 2 years, prior to its transfer.
Notes
a) An agricultural land, acquired for a period of less than 2 years before the date of
Conditions transfer and used for agricultural purpose from the date of acquisition, shall not be
eligible for deduction.
b) Where the assessee obtains land on partition of HUF, the above condition is satisfied
if the assessee and HUF taken together have used the land for agricultural purpose
for at least 2 years immediately before the transfer.
c) Where an assessee was using the property as a tenant and later on purchased the said
property, then while calculating the period of 2 years (as stated above), the period
during which assessee was using the property as tenant shall also be included.
3. Assessee must purchase a new land for agricultural purpose. The new land may be in
urban area or rural area.
2.4.38 Deduction from capital gain on compulsory acquisition of land and building forming
part of industrial undertaking [Sec. 54D]
Applicable to All assessee
1. Assessee must have transferred a capital asset being a land or building or any right
therein, forming part of an industrial undertaking.
Taxpoint: Asset may be a short term or long-term capital asset.
2. Such capital asset has been compulsorily acquired under any law for the time being
in force.
3. Such capital asset was used for industrial purpose by the assessee for at least 2
years prior to its transfer.
Conditions Notes
a) A land or building acquired for a period of less than 2 years and used for
industrial purpose from the date of acquisition, shall not be eligible for
deduction.
b) Where the assessee obtains such capital asset on partition of HUF, the above
condition is satisfied if the assessee and HUF taken together have used the
asset for industrial purpose for at least 2 years immediately before the transfer
c)
Where an assessee was using the property as a tenant and later on purchased
the said property then while calculating the period of 2 years (as stated above),
the period during which assessee was using the property as tenant shall also
be included.
4. Assessee must purchase any other land or building or construct a building, for the
purpose of shifting or reestablishing the said undertaking or setting up another
industrial undertaking
Time-limit for Within 3 years after the date of receipt of compensation or any part thereof.
acquiring assets Scheme of deposit Applicable [Refer ‘Capital Gains Account Scheme’].
Minimum of the following:
Deduction ¾¾ Investment in the new asset; or
¾¾ Capital gain
If the newly acquired land or building is transferred within 3 years from the date
of acquisition of new assets, then the benefit availed earlier shall be revoked. Such
revoked income shall be reduced from cost of acquisition of new asset.
Revocation of benefit
and its treatment If the amount held in Capital Gains Deposit Account Scheme (1988) is unutilized,
then such amount shall be taxable as short term or long-term capital gain (depending
on the nature of gain on original transfer) in the previous year in which the period of 3
years from the date of receipt of compensation expires.
Illustration 100:
X Ltd. has a building acquired on 17/08/2022 for ₹ 5,00,000. The assessee, as a tenant, earlier used the building,
for industrial purpose since last 7 years and even after purchase it is continuously used for industrial purpose.
Such building is compulsorily acquired by Government at an agreed value of ₹ 12,00,000 as on 15/07/2023. The
compensation was received on 1/03/2024. The written down value of the block (consist of 3 buildings) as on
1/04/2023 is ₹ 7,50,000.
The company acquired a new building for industrial purpose for ₹ 2,00,000 as on –
Case A) 31/03/2024; Case B) 2/04/2024. Determine his taxable capital gain.
Solution :
X Ltd. purchased the building on 17/8/2022 and transfer took place on 15/07/2023, i.e. after acquisition of ownership,
asset is used for industrial purpose for less than 2 year. However, the assessee was using the same building for
industrial purpose as a tenant before acquisition, for a period of 7 years hence it can claim the benefit of sec. 54D.
Computation of capital gain in the hands of X Ltd. for the A.Y. 2024-25
Particulars Case A Case B
Written Down Value as on 1/04/2023 7,50,000 7,50,000
Add: Acquisition of new asset during the year 2,00,000 -
9,50,000 7,50,000
Less: Sale value of asset (compensation received from Government) 12,00,000 12,00,000
Short Term Capital gain 2,50,000 4,50,000
Less: Exemption u/s 54D 2,00,000 2,00,000
Taxable Short Term Capital Gain 50,000 2,50,000
2.4.39 Deduction from capital gain on acquisition of certain bonds [Sec. 54EC]
Applicable to All assessee
1. Assessee must have transferred any long-term capital asset being land or building
or both.
2. Assessee acquires ‘long term specified assets’.
Long-term specified asset means any bond redeemable after 5 years, issued by
Conditions a. the National Highways Authority of India (NHAI);
b. the Rural Electrification Corporation Ltd.;
c. Power Finance Corporation Limited;
d. Indian Railway Finance Corporation Limited;
e. any other bond being notified by the Central Government
2.4.40 Deduction from capital gain on investment in units of a specified fund [Sec. 54EE]
Applicable to All assessee
1. Assessee must have transferred any long-term capital asset.
2. Assessee acquires ‘long term specified assets’.
Conditions
Long-term specified asset means a unit or units, issued before 01-04-2019, of such
fund as may be notified by the Central Government
Time limit for acquisition
Within 6 months after the date of transfer
of new assets
Minimum of the following:
¾¾ Investment in the new asset; or
¾¾ Capital gain
Amount of Deduction Taxpoint:
¾¾ The investment made by an assessee in the long-term specified asset, from capital
gains arising from transfer of one or more original assets, during the financial
year in which the original asset or assets are transferred and in the subsequent
financial year does not exceed ₹ 50 lakhs
Earlier benefit shall be revoked if such bond is transferred or converted into money
within 3 years of its acquisition or a loan is taken on security of the new asset within
the said period.
Revocation of benefit
Taxpoint: In case where an assessee takes any loan or advance on the security of such
specified asset, he shall be deemed to have converted such specified asset into money
on the date on which such loan or advance is taken.
Treatment of revoked Such revoked income shall be treated as long-term capital gain in the year of transfer
income of new asset.
Scheme of deposit Not applicable
2.4.41 Deduction from capital gain on transfer of capital assets other than residential
house property [Sec. 54F]
Applicable to Individual or HUF
Conditions 1. Assessee must have transferred a long-term capital asset other than a residential house
property.
2. Assessee must acquire one residential house within prescribed time limit, income of
which is taxable u/s 22.
3. Such new house should be situated in India.
4. Assessee does not own more than one residential house property, income of which is
taxable u/s 22 (other than new house), on the date of transfer.
5. Assessee does not purchase, within 2 years, or construct, within 3 years of transfer of
the original asset, any other residential house, income of which is taxable u/s 22.
Time limit for For Purchase Within a period of ‘1 year before, or 2 years after, the date of transfer’.
acquisition of new For Construction Within a period of 3 years after the transfer
assets
Construction may start at any time but must be completed within
stipulated time
Scheme of
Applicable [Refer ‘Capital Gains Account Scheme’].
deposit
Note: In case of compulsory acquisition the time limit starts from the date of initial receipt
of compensation.
Amount of Minimum of the following:
Deduction
Investment in the new asset x Capital gain
¾¾
Net Sale consideration#
¾¾ Capital gain
Illustration 101:
Sonu has jewellery acquired on 17/07/2010 for ₹ 5,00,000. On 18/08/2013 Sonu incurred improvement expenditure
on such jewellery by adding diamond to it worth ₹ 3,00,000. On 18/08/2021, he transferred such jewellery to his
friend Monu for ₹ 40,00,000.
Sonu already has a self-occupied house property in Lucknow, however on 17/03/2022 he purchased another
residential house property for ₹ 30,00,000 for the purpose of letting out.
As on 5/04/2023, his friend offered him house worth ₹ 25,00,000 (Value for Stamp duty purpose is only ₹ 14,00,000/-
) for ₹ 15,00,000 only & Sonu purchased the same.
On 7/04/2024, Sonu sold the new house acquired from his friend for ₹ 19,00,000. Value determined for the purpose
of stamp duty purposes ₹ 22,00,000 and market value as on the date of transfer is ₹ 26,00,000. Compute capital
gain in hands of Sonu for several years.
Solution :
Computation of capital gain of Sonu for the A.Y. 2023-24
Particulars Workings Details Amount
Sale consideration for Jewellery 40,00,000
Less: Expenditure on transfer Nil
Net sale consideration 40,00,000
Less: Indexed cost of acquisition ₹ 5,00,000 × 317 / 167 9,49,102
Less: Indexed cost of improvement ₹ 3,00,000 × 317 / 220 4,32,273 13,81,375
Long term capital gain 26,18,625
Less: Exemption u/s 54F [₹ 30,00,000 / ₹ 40,00,000 x ₹ 26,18,625] 19,63,969
Taxable Long term capital gain 6,54,656
Computation of capital gain of Sonu for the A.Y. 2024-25: Since the assessee acquired another house property
therefore the earlier exemption availed u/s 54F shall be revoked and shall be liable to long term capital gain. Hence
taxable long-term capital gain for the A.Y.2024-25 is ₹ 19,63,969.
Computation of capital gain of Sonu for the A.Y. 2025-26
Illustration 102:
Mr. X has sold following assets during the year 2023-24
Items Cost of acquisition Sale consideration Year of acquisition
Land ₹ 10 lacs ₹ 150 lacs 1998-99
Jewellery ₹ 30 lacs ₹ 120 lacs 2008-09
On 31/03/2024, he has purchased a residential house of ₹ 30,00,000 for self occupation as he had no other house
till date. Compute capital gain.
Solution :
Computation of capital gains in the hands of Mr. X for the A.Y. 2024-25
Particulars Details Land Jewellery
Sale Consideration 1,50,00,000 1,20,00,000
Less: Expenses on transfer Nil Nil
2.4.42 Deduction from capital gain on transfer of capital assets in case of shifting of
industrial undertaking from urban areas [Sec. 54G]
Applicable to All assessee
Conditions 1. Assessee must have transferred a capital asset, being –
¾¾ A machinery or plant or building or land; or
¾¾ Any rights in building or land,
¾¾ used for the purposes of the business of an industrial undertaking situated in an
urban area.
2. Such transfer is effected in the course of shifting of such industrial undertaking to any
area other than an urban area.
3. Assessee has within a period of 1 year before, or 3 years after, the date of transfer —
a.
purchased new machinery or plant for the purpose of business of the industrial
undertaking in the area to which the said undertaking is shifted;
b. acquired building or land or constructed building for the purposes of his business
in the said area;
c. shifted the original asset and transferred the establishment of such undertaking
to such area; and
d. incurred expenses on such other purpose as may be specified in a scheme framed
by the Central Government for the purposes of this section.
Time limit for Within 1 year before, or 3 years after, the date of transfer.
acquiring new asset. Scheme of deposit Applicable [Refer ‘Capital Gains Account Scheme’].
Illustration 103 :
X Ltd. is shifting its undertaking from Jaipur to Napasar (other than urban area). In this regard it sold its 4
machineries and 2 sets of furniture during the previous year 2023-24 as under –
Illustration 104:
Raj Ltd. has an industrial undertaking operating in an urban area. During the year 2023-24, it sold its two machineries
for ₹ 2,00,000 and ₹ 3,80,000 in course of shifting its industrial undertaking from urban area to rural area. The
written down value of the block (consists of 4 machineries) as on 1/04/2023 was ₹ 3,50,000.
The company incurred ₹ 20,000 expenses on other purposes as specified in a scheme framed by the Central
Government for the purposes of this section. Determine its taxable capital gain, if the company acquired new
machinery for industrial purpose for ₹ 50,000 as on –
Case A) 28/03/2024; Case B) 12/04/2024
Solution :
Computation of capital gain in the hands of Raj Ltd. for the A.Y. 2024-25
Particulars Case A Case B
Written Down Value as on 1/04/2023 3,50,000 3,50,000
Add: Acquisition of new asset during the year 50,000 Nil
4,00,000 3,50,000
Less: Sale value of assets 5,80,000 5,80,000
Short Term Capital gain 1,80,000 2,30,000
Less: Exemption u/s 54G – for new machinery purchased 50,000 50,000
2.4.43 Deduction from capital gain on transfer of capital assets in case of shifting of
industrial undertaking from urban areas to Special Economic Zone [Sec. 54GA]
Applicable to All assessee
Conditions 1. Assessee must have transferred a capital asset, being –
¾¾ A machinery or plant or building or land; or
¾¾ Any rights in building or land,
–– used for the purposes of the business of an industrial undertaking situated in an
urban area.
2. Such transfer is effected in the course of shifting of such industrial undertaking to
Special Economic Zone (SEZ).
Note: The SEZ may be developed in any urban area or any other area.
3. Assessee has within a period of 1 year before, or 3 years after, the date of transfer -
i. purchased new machinery or plant for the purpose of business of the industrial
undertaking in the SEZ to which the said undertaking is shifted;
ii. acquired building or land or constructed building for the purposes of his
business in the SEZ;
iii. incurred expenditure on shifting the original asset and transferred the
establishment of such undertaking to such SEZ; and
iv. incurred expenses on such other purpose as may be specified in a scheme
framed by the Central Government for the purposes of this section.
Time limit for acquiring Within 1 year before, or 3 years after, the date of transfer.
new asset.
Scheme of deposit Applicable [Refer ‘Capital Gains Account Scheme’].
Amount of Deduction Minimum of the following:
¾¾ Amount expended for the above purposes [as stated in (a) to (d) above];
¾¾ Capital gain
Revocation of benefit If the newly acquired assets are transferred within 3 years from its date of acquisition,
and its then the benefit availed earlier shall be revoked. Such revoked income shall be subtracted
Treatment from cost of acquisition of newly acquired assets.
If the amount held in Capital Gains Deposit Account Scheme (1988) is unutilized, then
such amount shall be taxable as short term or long-term capital gain (depending on the
nature of gain on original transfer) in the previous year in which the period of 3 years
from the date of transfer expires.
2.4.45 Extension of time for acquiring new asset or depositing or investing amount of
capital gain [Sec. 54H]
Applicability ¾¾ Where the transfer of the original asset is by way of compulsory acquisition under any
law; and
¾¾ Amount of compensation awarded for such acquisition is not received by the assessee on
the date of such transfer.
Treatment The period for acquiring the new asset or the period available to the assessee for depositing the
amount of capital gain in relation to such compensation as is not received on the date of the
transfer, shall be reckoned from the date of receipt of such compensation.
Notes
a. It is irrespective of anything contained in sec. 54, 54B, 54D, 54EC and 54F.
b. Enhanced Compensation: In case of enhanced compensation, the period for acquiring the new asset shall
commence from the date of receipt of such enhanced compensation.
Case Condition
Where the value of the asset as claimed If the Assessing Officer is of opinion that the value so claimed is at
by the assessee is in accordance with the variance with its fair market value
estimate made by a registered valuer.
Quick MCQs:-
2. Distribution of assets by a Company at the time of liquidation shall be regarded as a transfer and subject
to Capital Gain-
(a) in the hands of the Company
(b) in the hands of the Shareholders
(c) in the hands of both Company as well as Shareholders
(d) neither in the hands of a Company nor in the hands of Shareholders.
3. If share are acquired on conversion of debentures, the cost of acquisition of such share shall be-
(a) Market Value of Shares on the date of conversion
(b) Market Value of the debentures on the date of conversion.
(c) Cost of acquisition of the debentures.
(d) None of above.
4. The cost of acquisition of shares under Employees Stock Option Scheme shall be-
(a) Fair Market Value of Shares on the date of offer
(b) Fair Market Value of the shares on the date of exercise of option
(c) Fair Market Value of share on the date of vesting of option.
(d) Price at which it was offered to the employee.
5. Conversion of Capital Asset into Stock in Trade will result into Capital Gain of the previous year-
(a) in which such conversion took place
(b) in which such converted asset is old or otherwise transferred
6. Where a Partner transfers any Capital Asset into the business of Firm, the sale consideration of such asset
to the Partner shall be-
(a) Market Value of such asset on the date of such transfer
(b) Price at which it was recorded in the books of the firm
(c) Cost of such asset to the Partner
(d) Leas of the above
7. Where the entire block of the depreciable assets is transferred after 36 months, there will be-
(a) Short-Term Capital Gain
(b) Long-Term Capital Gain
(c) Short- Term Capital Gain or Loss
(d) Long- Term Capital Gain or Loss
8. For claiming exemption u/s 54, the assessee should purchase Residential Property with in –
(a) 2 years after the date of transfer
(b) 3 years after the date of transfer
(c) 1 year before or 2 years after the date of transfer
(d) 1 year before & 3 years after the date of transfer.
10. Exemption under Section 54F shall not be allowed if the assessee, on the date of transfer, owns-
(a) any Residential House
(b) a Residential House which is let out
(c) a Hose which is self occupied
(d) more than one Residential House.
11. For claiming exemption u/s 54G, the assessee shall acquired the new asset within-
(a) 2 years from the date of transfer
(b) 3 years from the date of transfer
(c) 1 year before or 2 years after the date of transfer
(d) 1 year before or 3 years after the date of transfer
Income chargeable under this head if not charged under the head ‘Profits and gains of business or profession’
or under the head ‘Salaries’-
11. Any sum (including bonus) received under a Keyman Insurance Policy [Sec. 56(2)(iv)]
Keyman Insurance Policy means a life insurance policy taken by a person on the life of another person, who is
either the employee or is connected in any manner with the business of the former person [Explanation to Sec.
10(10D)]
12. Any compensation or other payment, due to or received by any person, in connection with the termination of
his employment or the modification of the terms and conditions relating thereto. [Sec. 56(2)(xi)]
13. Receipts from life insurance policy issued on or after 01.04.2023, if premium payable for any of the previous
years during the term policy exceeds ₹ 5,00,000 [except in the event of death of policy holder].
Apart from above, the following incomes are also chargeable under this head by virtue of sec. 56(1). In this
regard it is to be noted that the following list is merely indicative and not exhaustive.
1. Income from sub-letting of a house property.
2. Interest on bank deposits.
3. Interest on company deposits, interest on loans, etc.
4. Remuneration received from a person other than his employer for evaluation of answer scripts. However, if
such remuneration is received from employer, then the same will be taxable under the head “Salaries”.
5. Rent from a vacant land.
6. Insurance commission.
7. Income from undisclosed sources
8. Income from private tuition.
9. Interest on income tax refund.
Taxpoint: Income tax refund itself is not an income.
10. Family pension received by the family members of a deceased employee [discussed later]
11. Dividend received from a co-operative society.
12. Directors’ sitting fee for attending Board Meetings.
13. Income from activity of owning and maintaining race-horses.
14. Stipend to trainee.
15. Interest on employee’s contribution towards unrecognized provident funds at the time of payment of lump
sum amount
2.5.2 Casual Income: Winning from lotteries, crossword puzzles, etc. [Sec. 56(2)(ib)]
Winnings from -
1. Lotteries;
2. Crossword puzzles;
Method of grossing up of income / Conversion of income received into gross income in case of casual income
Sometime in the problem, lottery income received is given rather than lottery income. In such case, students
are required to gross up the lottery income received. Relation between lottery income earned and lottery income
received is as under -
Lottery income received = Lottery income earned – Tax deducted at source on such income#
#
Tax deducted at source: By virtue of sec. 194B & 194BB, tax is deductible at sources @ 30% on payment in
respect of winning from lotteries, etc.
Procedure of grossing up, in case of resident individual or HUF, are as follow-
Lottery Income Received = Gross Lottery Income – TDS @ 30% on Gross Lottery Income.
Lottery Income Received = 70% of Gross Lottery Income
Lottery Income Received
Gross Lottery Income =
70%
Note: Tax is not deducted in following cases, hence, there is no need of grossing up.-
a. If the amount of winning from lottery etc. or horse race is not more than ₹ 10,000.
b. In case of winning from gambling, betting, on-line gaming and racing other than horse race e.g. camel races,
etc.
2.5.3 Income from machinery, plant or furniture let on hire [Sec. 56(2)(ii)]
Income from letting of machinery, plant or furniture on hire is charged to tax under this head, if such income is not
chargeable under the head “Profits and gains of business or profession”.
Notes
a. Any income by way of letting out an asset as a part of business activity or as commercial asset shall be taxable
under the head “Profits & gains of business or profession”.
b. In case of temporary discontinuance of business due to any reason without any intention of the assessee to part
with or close the business, if the business assets are leased out for a certain period, then such lease rent shall
be taxed under the head “Profits & gains of business or profession”.
2.5.4 Income from machinery, plant or furniture let on hire along with building (Composite
Rent) [Sec. 56(2)(iii)]
Generally, income from letting of building is taxable under the head Income from house property; but if such
letting is inseparable from letting of machinery, plant or furniture, then income from such letting is charged to tax
under the head “Income from other sources” if not taxed under the head “Profits & gains of business or profession”.
[Further refer the chapter “Income from house property”].
Notes
1. If letting of such building alone is acceptable, then income from letting of building is taxable under the head
‘Income from house property’.
2. Mere knowledge of rent charged against each asset does not make it separable, unless and until the property
is separately letable.
2.5.5 Deductions allowed against income u/s 56(2)(ii) & 56(2)(iii) [Sec. 57(ii) & (iii)]
By virtue of sec. 57(ii) and (iii), following expenditures are deductible from such income:
1. Current repairs shall be allowed as deduction [as per sec. 30(a)(ii) or 31(i)].
2. Insurance premium paid for machinery, plant, furniture or building [as per sec. 30(c) or 31(ii)]
3. Depreciation and unabsorbed depreciation (as per sec. 32).
4. Any other revenue expenditure expended, during the previous year, wholly and exclusively for earning such
income.
Notes
Lump-sum payment made gratuitously or by way of compensation or otherwise to the widow or other legal heirs
of an employee, who dies while still in service, is non-taxable income.
Ex-gratia payment made to the widow or other legal heir of an employee, who dies while still in active service
would not be taxable as income provided it is paid by the Central Government or State Government or local
authority or Government or public sector undertaking.
Illustration 105:
Sunder died on 31st July 2023 while being in Central Government service. In terms of rules governing his service,
his widow Mrs. Sunder is paid a family pension of ₹ 10,000 p.m. and dearness allowance of 40% thereof. State
whether the amount of family pension is assessable in her hands, and if so, under what head of income. Can she
claim any relief/deduction on such receipt? Compute taxable income for the assessment year 2024-25 and tax
thereon.
Solution :
Computation of gross total income of Mrs. Sunder for the A.Y.2024-25
Provisions Illustrated
Cash Gift
a. Mr. Anand received cash gift of ₹ 1,00,000 from his friend Mr. Lathi as on 10-10-2023
₹ 1,00,000 shall be considered as income of Mr. Anand for A.Y. 2024-25
b. As on 12-11-2023, Mr. Ajay received cash gift of ₹ 25,000 each from his 3 friends (one of them is a non-
resident)
Since aggregate amount of gift exceeds ₹ 50,000, hence, entire amount of gift i.e., ₹ 75,000 shall be considered as
income of Mr. Ajay for A.Y. 2024-25
Gift of immovable property
a. As on 10-01-2024, Mr. Pati received a piece of land (stamp duty value is ₹ 75,000) from his friend Mr. Raja
without any consideration. Such land was acquired by Raja in 2001-02 for ₹ 10,000.
Consequence of such gift in hands of Mr. Pati
i. Since stamp duty value of the property exceeds ₹ 50,000, hence ₹ 75,000 shall be considered as income
of Mr. Pati u/s 56(2)(x) for A.Y. 2024-25.
ii. By virtue of amended provisions of sec.49(4), cost of acquisition of such land in hands of Mr. Pati shall
be ₹ 75,000. Suppose as on 03-06-2025, Mr. Pati sold such land for ₹ 2,00,000 (stamp duty value as on
that date is ₹ 2,00,000), computation of capital gain in hands of Mr. Pati for A.Y. 2026-27 are as under:
Particulars Amount
Sale Consideration 2,00,000
Less: Expenses on transfer Nil
2,00,000
Less: Cost of acquisition$ 75,000
Short term capital gain# 1,25,000
$
Since the transferred capital assets has been subject to income tax u/s 56(2)(x) in the A.Y.2024-25, the
cost of acquisition of such asset shall be deemed to be the value which has been taken into account for the
purpose of sec.56(2)(x) i.e., ₹ 75,000 – Sec.49(4). Further, it is to be noted that sec. 49(1) (i.e., in case of
gifted assets, cost of previous owner shall be considered as cost of acquisition in hands of the assessee) is
not applicable.
#
As per explanation 1 to sec. 2(42A), while determining holding period of capital asset, being asset
acquired through gift, period of holding of previous owner shall also be included. However, this rule is
not applicable in case where such gift is subject to income tax u/s 56(2)(x).
Reason for non-applicability of said explanation
The explanation 1 to sec. 2(42A), inter-alia, provides the following:
“(b) in the case of a capital asset which becomes the property of the assessee in the circumstances
mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held
by the previous owner referred to in the said section.”
Since the said explanation is applicable only in circumstances covered u/s 49(1). However, assets taxable
u/s 56(2)(x) is covered u/s 49(4).
Consequence of such gift in hands of Mr. Raja
Mr. Raja has transferred the capital asset by way of gift, which is not considered as transfer (sec. 47),
hence no tax is required to be paid by him. The segregation of gift u/s 49(1) or u/s 49(4) is applicable only
for determining cost of acquisition in the hands of transferee. However, sec. 47 (which provides the list
of transaction do not constitute transfer) does not provide any segregation.
b. On 10-10-2023, Dipak received a piece of land at Napasar from his friend Vikash (stamp duty value ₹ 46,000)
as a gift. Such land was acquired by Mr. Vikash in 2001 for ₹ 5,000/-. Further, as on 01-11-2023, Dipak also
received another piece of land at Bikaner (stamp duty value ₹ 30,000) without any consideration from Anil
(acquired in 2021-22 for ₹ 10,000/-)
On 31-03-2024, Mr. Dipak sold land at Napasar to Kedar for ₹ 30,000/- and land at Bikaner to Nath for ₹
90,000/-. Stamp duty value of such land as on the date of sale is ₹ 50,000/- (Napasar) and ₹ 85,000/- (Bikaner).
Consequence of such gift in hands of Mr. Dipak
1. Applicability of sec.56(2)(x): Nothing shall be taxable as stamp duty value (at the time of gift) of
property at each occasion does not exceed ₹ 50,000/-.
2. Cost of acquisition: Since the value of the asset is not subject to income-tax u/s 56(2)(x), hence cost of
acquisition of previous owner shall be considered as cost of acquisition of such assets in hands of Dipak.
Consequently, cost of acquisition of land at Napasar is ₹ 5,000/- and that of land situated in Bikaner is
₹ 10,000/-
3. Period of Holding: Since the value of the asset is not subject to income-tax u/s 56(2)(x), hence period
of holding of previous owner shall also be included in the holding period of Dipak.
4. Computation of capital gain on transfer: Computation of capital gain in hands of Dipak are as under:
Particulars Land at
Napasar Bikaner
Sale Consideration (Being higher of the following – Sec.50C)
- Actual Consideration 30,000 90,000
- Stamp duty value 50,000 85,000
50,000 90,000
Less: Expenses on transfer Nil Nil
50,000 90,000
Less: Indexed Cost of acquisition [₹ 5,000 * 348 / 348]* 5,000 -
Less: Cost of acquisition - 10,000
Long term capital gain 45,000 -
Short term capital gain - 80,000
Consequence of such gift in hands of Mr. Vikash and Mr. Anil
Mr. Vikash and Mr. Anil has transferred the capital asset by way of gift, which is not considered as transfer
(sec. 47), hence no tax is required to be paid by him.
* Alternatively, index benefit may be taken from the date of acquisition of such land by Vikash
3. Capital Gain: Computation of Capital gain for A.Y. 2026-27 are as under.
Particulars Amount
Sale Consideration (Higher of ₹ 1,75,000 and ₹ 1,60,000 – Sec.50C) 1,75,000
Less: Expenses on transfer Nil
1,75,000
Less: Cost of acquisition 30,000
Short term capital gain #
1,45,000
#
It is to be noted that this is not the case of gift, hence period of holding commenced from 10-01-2024.
Consequences in hands of Mr. Uday
Computation of capital gain in hands of Mr. Uday for A.Y. 2024-25
Particulars Amount
Sale Consideration (Higher of ₹ 75,000 and ₹ 30,000 – Sec.50C) 75,000
Less: Expenses on transfer Nil
75,000
Less: Indexed cost of acquisition [₹ 25,000 × 348 / 122] 71,311
Long term capital gain 3,689
b. As on 10-02-2024, Mundhra Services Pvt Ltd purchased a piece of land (stamp duty value is ₹ 7,50,000) from
one of the friend, Mita, of the Director, against consideration of ₹ 3,90,000. Mita has acquired such land for
₹25,000 in 2000 (Fair Market Value as on 1-4-2001 was ₹ 32,000). On 10-04-2025, the company has sold such
land for ₹ 10,75,000 (stamp duty value ₹ 12,50,000/-).
Consequences in hands of Mundhra Services Pvt Ltd
1. Applicability of sec.56(2)(x): Since the difference between stamp duty value of the land (as on 10-02-
2023) and actual consideration exceeds ₹ 50,000, hence, the provision of sec. 56(2)(x) is applicable.
Consequently, ₹ 3,60,000/- shall be considered as ‘Income from Other Sources’ in hands of the company
in the A.Y.2024-25.
2. Cost of acquisition: ₹ 7,50,000 shall be considered as cost of acquisition of such land in hands of the
company.
3. Capital Gain: Computation of Capital gain for A.Y. 2026-27 are as under
Particulars Amount
Sale Consideration (Higher of ₹ 10,75,000 and ₹ 12,50,000 – Sec.50C) 12,50,000
Less: Expenses on transfer Nil
12,50,000
Less: Cost of acquisition 7,50,000
Short term capital gain #
5,00,000
#
It is to be noted that this is not the case of gift, hence period of holding commenced from 10-02-2024.
Particulars Amount
Sale Consideration (Higher of ₹ 7,50,000 and ₹ 3,90,000 – Sec.50C) 7,50,000
Less: Expenses on transfer Nil
7,50,000
Less: Indexed cost of acquisition [₹ 32,000 x 348 / 100] 1,11,360
Long term capital gain 6,38,640
c. On 10-10-2023, Suresh purchased a piece of land from his friend Anuj (stamp duty value ₹ 46,000) for
₹ 30,000. Further, as on 01-11-2023, he also purchased house property (stamp duty value ₹ 1,50,000) from
Ajay for ₹ 1,00,000. Further, as on 01-01-2024, his another friend Jitu give him a house property without any
consideration (stamp duty value ₹ 35,000). Jitu purchased such property on 10-04-2001 for ₹ 5,000/-
Consequences in hands of Suresh
1. Applicability of sec.56(2)(x): Nothing shall be taxable as the difference between stamp duty value of
property and actual consideration at each occasion does not exceed ₹ 50,000/-.
2. Cost of acquisition and period of holding: Since the value of the asset is not subject to income-tax u/s
56(2)(x), hence cost of acquisition and period of holding thereof are as under:
Property Cost of acquisition Period of holding commenced from
Land purchased from Anuj ₹ 30,000 10-10-2023
House purchased from Ajay ₹ 1,00,000 01-11-2023
House received from Jitu Cost of previous owner 10-04-2001 (However, index benefit is
i.e. ₹ 5,000 available from F.Y. 2023-24)
Consequences in hands of Anuj, Ajay and Jitu
Anuj and Ajay: Capital gain shall be computed. Provision of sec.50C is applicable.
Jitu: No treatment
d. On 10-10-2023, Sonam purchased a piece of land from her friend Shweta (stamp duty value ₹ 12,54,000) for
₹ 12,00,000.
Consequences in hands of Sonam
i. Applicability of sec.56(2)(x): Since the difference between actual consideration and stamp duty value
does not exceed 10% of actual consideration (being ₹ 1,20,000 i.e., 10% of ₹ 12,00,000), hence nothing
shall be taxable u/s 56(2)(x) even though the difference between actual consideration and stamp duty
value exceeds ₹ 50,000.
ii. Cost of acquisition: ₹ 12,00,000
Consequences in hands of Shweta
Similarly, ₹ 12,00,000 being actual consideration shall be considered as full value of consideration.
e. On 10-10-2022, Priya purchased a piece of land from her friend Monica (stamp duty value ₹ 4,45,000) for
₹ 4,00,000.
Particulars Kishore
Sale Consideration 30,000#
#
Sec. 50C is not applicable in case of movable property
Less: Expenses on transfer Nil
30,000
Less: Cost of acquisition 25,000
Short term capital gain 5,000
b. On 10-10-2023, Janak purchased jewellery from his friend Giri (fair value ₹ 66,000) for ₹ 30,000. Further, as
on 01-11-2023, he also purchased silver utensil (fair value ₹ 1,00,000) from another friend for ₹ 75,000.
Consequences in hands of Janak
Applicability of sec. 56(2)(x): The difference between fair market value and actual consideration are as
follow:
Capital gain shall be computed. However, it is to be noted that sec. 50C is not applicable on movable asset
Exceptions
This section shall not apply to any sum of money or any property received
1. from any relative#.
#
Relative here means—
In case of an individual
6. by an individual, from any person, in respect of any expenditure actually incurred by him on his medical
treatment or treatment of any member of his family, for any illness related to COVID-19 subject to prescribed
conditions
7. by a member of the family of a deceased person,—
A. from the employer of the deceased person (without limit); or
B. from any other person or persons (aggregate upto ₹ 10 lakh),
where
i. the cause of death of such person is illness related to COVID-19
ii. the payment is received within 12 months from the date of death of such person; and
iii. any other prescribed conditions are satisfied
Taxpoint: Family here means -
Spouse and children of the individual; and
Parents, brothers and sisters of the individual, who are wholly or mainly dependent on him.
8. from or by any fund or foundation or university or other educational institutions or hospital or other medical
institutions or any trust or institution referred u/s 10(23C), provided it is not received by any person referred
to in sec. 13(3).
9. from or by any trust or institution registered u/s 12A or 12AA or 12AB, provided it is not received by any
person referred to in sec. 13(3).
10. from an individual by a trust created or established solely for the benefit of relative of the individual.
11. by way of distribution at the time of total or partial partition covered u/s 47(i)
12. by way of transactions in the nature of amalgamation or demerger covered u/s 47(iv) or (v) or (vi) or (via) or
(viaa) or (vib) or (vic) or (vica) or (vicb) or (vid) or (vii) or (viiac) or (viiad) or (viiae) or (viiaf).
13. from such class of persons and subject to such conditions, as may be prescribed.
14. Exemption of Compensation on account of Disaster [Sec. 10(10BC)]: Any amount received or receivable
from the Central Government or a State Government or a local authority by an individual or his legal heir by
way of compensation on account of any disaster, except the amount received or receivable to the extent such
individual or his legal heir has been allowed a deduction under this Act on account of any loss or damage
caused by such disaster.
Other Points
1. Fair market value of a property, other than an immovable property, means the value determined in accordance
with the method as may be prescribed;
2. Property (including virtual digital assets) means the following capital asset of the assessee, namely
2.5.8 Share premium in excess of fair market value [Sec. 56(2)(viib)] Amended
Where a company, not being a company in which the public are substantially interested, receives, in any previous
year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such
shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be
treated as income of the company.
2.5.10 Employee’s contribution towards staff welfare fund or scheme [Sec. 56(2)(ic)]
Any amount received or deducted by an employer from employee towards any -
Provident Fund;
Superannuation Fund;
Fund set up under the provisions of Employee’s State Insurance Act, 1948; or
Other fund set up for the welfare of such employees,
shall be treated as income of the employer under this head if not taxable under the head “Profits & gains of business
or profession”. Subsequently, when such sum is credited by the employer to the employee’s account in the relevant
fund on or before the due date prescribed under the relevant Act, then deduction of equal amount is available.
Taxpoint
Case Treatment
When the securities are held as stock-in-trade Interest on securities is charged to tax under the head
‘Profits & gains of business or profession’
When the securities are held otherwise than as stock- Interest on such securities is charged to tax under the
in-trade. head ‘Income from other sources’
Chargeability: It is taxable as per cash basis or due basis, depending on the method of accounting regularly
followed by the assessee. However, where no method of accountancy is followed, then it shall always be taxable
on due basis.
Due date of interest: Interest shall be taxable when such interest falls due. Interest on securities shall not accrue
on day-to-day basis. It accrues on the due date of interest as prescribed by the issuing authority. Entire interest shall
be charged in the hands of assessee who holds security on such date (irrespective of the date of acquisition of such
security). E.g. Mr. X acquired debenture of A Ltd. as on 7/9/2022. Due date of interest on debenture is 31st March
every year. Interest on such debenture shall be taxable in hands of Mr. X for the whole year.
Taxpoint: In case of death of assessee before the due date, the income of the whole year shall be taxable in the
hands of recipient of income.
Grossing-up of interest if it is given net of TDS: Sometime in the problem, Interest income received is given
rather than Interest earned. In such case, students are required to gross up the interest income received. Relation
between interest income earned and interest income received is as under:
Interest income received = Interest income earned – Tax deducted at source on such income#
Accordingly, Gross income from interest = [Interest received * 100/ (100 - TDS rate i.e.10%)]
#
Tax is required to be deducted @ 10%. However, in certain cases, tax is not required to be deducted (For further
details refer Chapter Tax Deducted at Source)
a. Any distribution of accumulated profits (whether capitalized or not), which results in the release of assets of
the company [Sec. 2(22)(a)]
Notes
1. Treatment of bonus share: Bonus share declared by the company to its equity share-holders shall not
be treated as dividend as there is no release of asset.
2. Valuation: In case of release of asset other than cash, the market value of the asset and not the book
value shall be considered as deemed dividend in the hands of shareholder.
3. Exception: Above provision is not applicable in case of amalgamation
b. Any distribution of -
¾¾ Debenture, debenture-stock, deposit certificates in any form whether with or without interest to its
shareholders (equity as well as preference); and
¾¾ Shares to preference shareholders by way of bonus,
- to the extent to which company possess accumulated profit (whether capitalized or not) [Sec. 2(22)(b)]
Taxpoint: Such distribution shall be treated as dividend in the hands of recipient even there is no release of
assets of the company.
c. Distribution made on liquidation to the extent to which company possess accumulated profit immediately
before liquidation (whether capitalized or not) [Sec. 2(22)(c)]
Notes
1. Payment to preference shareholder: Any distribution of asset made in respect of preference share
(issued for full cash consideration) shall not be treated as dividend.
2. Distribution out of profits earned after liquidation: Any distribution made out of profits earned after
the date of liquidation shall not be treated as dividend u/s 2(22)(c).
3. Exception: Above provision is not applicable in case of amalgamation
d. Distribution made on reduction of capital of the company to the extent it possesses accumulated profit (whether
capitalized or not) [Sec. 2(22)(d)]
Exception: Any distribution in respect of preference share shall not be treated as dividend.
e. Any payment (whether in cash or in kind) by a company in which public are not substantially interested to the
extent of accumulated profit (excluding capitalized profit) -
i. by way of loan or advance to its equity shareholder, who is beneficial owner of the shares, holding not
less than 10% of voting power in the company (hereinafter referred as specified shareholder);
Taxpoint
The shareholder should have atleast 10% voting power as on the date of when loan is given.
ii. by way of loan or advance to a concern (whether HUF, Firm, AOP, BOI or a Company) of which such
specified shareholder is a member or partner at the time of such payment and has substantial interest# in
such concern; or
Substantial interest: A person shall be deemed to have substantial interest in a concern, if he is beneficially
#
entitled to not less than 20% of income of such concern (20% of voting power in case of company) at any
time during the previous year.
Taxpoint:
The clause is applicable where –
a. Such shareholder holds at least 10% voting right in the payer company as on the date when
loan is given;
b. Such specified shareholder is a member or partner in the payee concern as on the date of loan;
and
c. Such shareholder should have atleast 20% share in profit / voting power in the payee concern
at any time during the previous year.
iii. by way of loan or advance to any person on behalf of or for the benefit of such specified shareholder
[Sec. 2(22)(e)]
Notes
a. No exemption on repayment of such loan: Loan to a specified-shareholder is treated as deemed
dividend even if such loan or any part of such loan was refunded before the end of previous year.
b. Advance means an advance given in the nature of loan (with or without interest), which shall be refunded
to the company. Trade advances which are in the nature of commercial transactions would not fall within
the ambit of the word ‘advance’ in sec. 2(22)(e).
Exceptions
a. Set-off of loan with forthcoming declaration of dividend: In case the loan granted to member is
adjusted with the forthcoming dividend, then such dividend (newly declared) shall not be taxable in the
hands of shareholder who adjusted such loan.
b. Advance or loan in the ordinary course of business: Sec. 2(22)(e) is not applicable if an advance
or loan is made by a company in the ordinary course of its business, where the lending of money is
substantial part of the business of the company.
Taxpoint: In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss,
as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating
company on the date of amalgamation.
Exceptions
Following payments shall not be treated as ‘Dividend’ -
1. Any payment made by a company on buy-back of shares
Note: Above provision shall not apply in computing the income of an assessee, being the owner of horses
maintained by him for running in horse races, from the activity of owning and maintaining such horses.
General Illustrations
Illustration 106:
Compute taxable income under the head Income from other sources of Mrs. X from the following data:
Particulars Amount
Private tuition fee received 10,000
Winning from lottery 2,000
Award from KBC (a TV show) [Gross] 3,20,000
Pension from employer of deceased husband 25,000
Interest on bank deposit 25,000
Directors fee (Gross) 5,000
Letting out of vacant land 25,000
Remuneration for checking the examination copy of employer’s school 10,000
Remuneration for checking the examination copy of C.A 10,000
Income tax refund 5,000
Interest on income tax refund 100
Composite rent (related expenditures are ₹ 5,000) 10,000
Rent on sub-letting of house property (rent paid to original owner ₹ 12,000) 20,000
Income tax paid 2,000
Payment made for personal expenses 18,000
Payment made to LIC as premium 2,000
Solution :
Computation of income of Mrs. X under the head Income from other source for the A.Y. 2024-25
Particulars Details Amount
Private tuition fee received 10,000
Casual income
Winning from lottery 2,000
Award from KBC (a TV show) [Gross] 3,20,000
Pension 25,000
Less: Standard deduction
1)1/3rd of amount received (i.e. ₹ 8,333)
2)₹ 15,000 8,333 16,667
Interest on bank deposit 25,000
Director’s fee 5,000
Letting out of vacant land 25,000
Remuneration for checking the examination copy of employer school Taxable as Salary ---
Remuneration for checking examination copy of CA 10,000
Income tax refund Not an income ---
Interest on income tax refund 100
Composite rent 10,000
Less: Expenditure 5,000 5,000
Rent on sub-letting of house property 20,000
Less: Rent paid to original owner 12,000 8,000
Income from Other Source 4,26,767
Note: Payment of income tax and personal expenses is not deductible in any case.
Illustration 107:
Shri Anil follows cash basis of accounting and has furnished the Receipts & Payment A/c of previous year 2023-24
for computing his income:
Solution :
Computation of income from other sources of Anil for A.Y.2024-25
Particulars Details Details Amount Amount
Interest on debenture of A Ltd. ₹ 16,200 / 90% 18,000
Interest received on letting of assets 1,50,000
Less: Expenses paid
Collection charges 1,000
Repair 5,000
Capital repairs3 Nil
Depreciation 4,000 10,000 1,40,000
Gift from father [As received from relative] Nil
Ground rent received 600
Income from other source 1,58,600
Notes
Since assessee follows cash basis of accounting, hence, income shall be chargeable and expenditure shall be
allowed on cash basis.
Debenture income required to be grossed up.
Capital repairs are not allowed.
Interest paid outside India without deducting tax at source shall not be deductible expenditure.
Quick MCQs:-
2. Income from Lottery, Crossword Puzzle, Race, Card Games etc., are taxable at:
(a) Normal Slab Rate of Income Tax like any other income
(b) Flat Rate of 20%
(c) Flat Rate of 30% plus Surcharge, if applicable,
(d) Flat Rate of 30% plus Surcharge of 10%
3. Winning from Lotteries, Crossword Puzzles, Horse Races & Other Races, Card Game, etc. are casual
income & hence-
(a) fully exempt
(b) exempt upto D 5,000
(c) fully taxable
(d) None of above
4. Gift of D 5,00,000 received on 10th July 2023 through Account Payee Cheque from a non-relative
regularly assessed to income-tax, is-
(a) A Capital Receipt not chargeable to tax
(b) Chargeable to tax as Income from Other Sources
(c) Chargeable to tax a Business Income
(d) Exempt upto D 50,000 & balance chargeable to tax under Other Sources.
5. Adi received D 70,000 from his friend on the occasion of his birthday.
(a) Entire amount of D 70, 000 is taxable
(b) D 25,000 is taxable
(c) The entire amount is exempt
(d) None of the above
6. Family Pension received by a widow of a member of the armed forces where the death of the member
has occurred in the coursed of the operational duties in the circumstances and subject to prescribed
conditions, is -
(a) Exempt upto D 3,00,000
(b) Exempt upto D 3,50,000
(c) Totally exempt u/s 10(19)
(d) Totally chargeable to tax.
7. Mr.X, aged 61 years, earned dividend of D 12,00,000 from ABC Ltd. In P.Y. 2023-24. Interest on loan
taken for purpose of investment in ABC Ltd., is D 3,00,000. Income included in the hands of Mr. X for
P.Y. 2023-24 would be-
(a) D 12,00,000
(b) D 9,60,000
(c) D 9,00,000
(d) D 2,00,000
8. If the converted property is subsequently partitioned among the members of the family, the income
derived from such converted property as is received.
(a) as the income of the karta of the HUF
(b) as the income of the spouse of the transferor
(c) as the income of the HUF.
(d) as the income of the transferor- member
Exercise
A. Theoretical Questions:
¾¾ Multiple Choice Questions:
1. Which of the following is not taxable under head ‘Salaries’?
a. Remuneration paid to the lecturer of a college for setting a question paper by a university.
b. Salary received by a member of the Parliament.
c. Commission received by an employee director of a company.
d. Both (a) and (b) above
2. If a domestic servant is engaged by the employer and salary is paid by him, the perquisite is
a. Taxable in the hands of all employees
b. Not taxable in the hands of both specified and non-specified employers
c. Taxable in the hands of specified employees only
d. Taxable to the extent of ₹ 120 per person in the hands of all employees.
3. Which of the following is taxable under the head ‘salaries’?
1. Salary received by a Member of State Legislature.
2. Commission received by an employee director of a company.
3. Family pension received
4. Both (a) and (b) above
4. Who among the following is a specified employee?
a. A director of a company
b. An employee drawing a salary of ₹ 15,000 p.m.
c. A person who is an owner of equity shares carrying 10% voting power in the employer
company.
d. Both (a) and (b) above
5. Net Annual Value of a self-occupied property treated as such is:
1. Fair Rent
2. Nil
3. Reasonable Expected Rent as reduced by municipal tax paid during the previous year.
4. None of the Above
6. A house property located outside India is:
a. Taxable in hands of all assessee
b. Taxable in hands of non resident assessee
c. Taxable in hands of resident and ordinarily resident assessee
d. Exempted from tax in India.
e. None of the Above
B. Numerical Questions
¾¾ Multiple Choice Questions
1. An individual purchased a painting on 01-11-2023 for ₹ 5,00,000 though fair market value of the
asset is ₹ 5,25,000. Income taxable u/s 56(2)(x) is:
a. ₹ 25,000 i.e., difference between market value and actual consideration
b. Nil as this is not gift
c. Nil as difference between market value and actual consideration does not exceed ₹ 50,000
d. The provision of sec. 56(2)(x) is not applicable for any transaction entered during P.Y. 2022-
23.
[Answer : 1- c]
2. Compute the total depreciation allowance for the year ending 31.3.2024:
a. Original cost of motor car as on 31.3.2023 ₹ 12,00,000.
3. Shri Ansh furnishes the following particulars of his incomes for the previous year 2023-24. Compute
his income under the head “Income from other sources”.
₹
Dividend on equity shares 600
Dividend on preference shares 3,200
Income from letting on hire of building & machinery under composite lease 17,000
Interest on Bank Deposits 2,500
Directors sitting fees received 1,200
Ground rent received 600
Income from undisclosed sources 10,000
Income from lotteries received 70,000
The following deductions are claimed by him:
Collection charges of dividend 20
Allowable depreciation on building and machinery 4,000
Fire insurance on building and machinery 100
[Answer : Hints. ₹ 1,31,000]
4. Mr. Bose in an Indian resident and employed in a company. During 2023–24 financial year his
income was as under:
i. Basis salary ₹ 20,000 per month.
ii. Dearness allowance 30% of basic salary (50% of which forms part of salary for retirement
purpose)
iii. Medical allowance ₹ 500 per month (Actual expenses for the year was ₹ 4,000)
iv. He and his employer both contributes @ 15% of salary towards a Recognised Provident Fund
and interest credited to RPF @ 12.5% p.a. amounted to ₹ 5,000 during the previous year.
v. He is provided with a furnished accommodation in Kolkata. The company owns the house
and cost of furniture provided is ₹ 50,000.
vi. He is also given a 1.6 liters cubic capacity self driven car for both personal and office use.
Entire expenses are borne by the company
vii. He is provided by his employer with fee gas and electricity costing ₹ 12,000 for private use.
viii. He paid ₹ 1,600 towards professional tax and his employer paid ₹12,000 as insurance
premium on his life.
ix. He contributed ₹ 12,000 towards medical insurance premium, ₹25,000 towards PPF, ₹10,000
towards Prime Minister’s Drought Fund and ₹ 12,000 to an approved association for
promoting family planning.
On the basis of aforesaid information, you are requested to answer the following:
¾¾ What would be his taxable allowances?
¾¾ What would be value taxable perquisite in his hands?
¾¾ What would be his total income?
[Answer : Hints: (a) ₹ 78,000; (b) ₹ 92,900; (c) ₹ 2,61,380]
¾¾ References:
https://www.incometaxindia.gov.in/
https://www.incometax.gov.in/
https://www.indiabudget.gov.in/
1. To acquire application-oriented knowledge and skill for appreciating various provisions of the Income
Tax Act, 1961 and attain abilities to solve problems while computing tax liabilities.
2. To attain abilities to apply various provisions of direct taxation laws, including assessment to identify
the impacts thereof on business decisions.
3. To gather knowledge of various compliance related provisions of direct taxation laws and attain
abilities to ensure due compliance to avoid any eventual risks.
Understanding the relationship between various sources of income and heads of income
assessee in whose hands such income is clubbed. E.g. If interest on saving bank account of the minor is
clubbed in the hands of parent u/s 64(1A) then parent can claim deduction u/s 80TTA.
Clubbing of negative income
As per explanation 2 to sec. 64, clubbing of income includes clubbing of negative income i.e. where an income
is liable to be clubbed, loss from the same source shall also be clubbed. Clubbing provisions is mandatory
and shall be applied even in those cases where the application of such provision causes loss of revenue to the
Income tax department.
Revocable transfer
As per sec. 63(a), a transfer shall be deemed
to be revocable if -
It contains any provision for the
retransfer (directly or indirectly) of any
part or whole of the income/assets to the
transferor; or
It, in any way, gives the transferor a
right to re-assume power (directly or
indirectly) over any part or whole of the
income/assets.
Exceptions [Sec. 62]
As per sec. 62(1), the provision of sec. 61 shall not apply to an income arising to a person by virtue of -
i. A transfer by way of creation of a trust which is irrevocable during the lifetime of the beneficiary;
ii. Any transfer which is irrevocable during the lifetime of the transferee; or
iii. Any transfer made before 1.4.61, which is not revocable for a period exceeding 6 years.
In any case, the transferor must not derive any benefit (directly or indirectly) from such income.
Note: As per sec. 62(2), income, in any of the above exceptional case, shall be taxable as under -
Case Answer
Harish has transferred certain securities owned Since the asset has been transferred under a revocable clause,
by him to a trust for his married sister, Harsha, hence, by virtue of sec. 61, income accrued on securities during
as on 1/7/2022. He has the power to revoke the the previous year 2022-23 ₹ 1,20,000 and 2023-24 ₹ 1,50,000,
trust at his desire. On 31/3/2024, he revoked though received by Harsha, shall be taxable in the hands of
such trust. Income accrued for the previous Harish.
year 2022-23 and 2023-24 are ₹ 1,20,000 and
₹ 1,50,000 respectively and such income is
received and enjoyed by Harsha.
Raja transferred his property on 1/4/2022 to Since asset has been transferred under a revocable clause, hence,
Rani with a clause that, he will take property by virtue of sec. 61, income accrued on such property shall be
back from Rani whenever he requires. Raja chargeable in hands of Raja for previous year 2022-23 as well as
was in need of money on 1/4/2023 and he took for 2023-24. This is because all income arising to the transferor
back property from Rani. The property yields by virtue of any revocable transfer shall be chargeable in hands
annual income of ₹ 2,00,000. of the transferor as and when the power to revoke the transfer
arises whether or not such power has been exercised. Since Raja
had the power of revocation from beginning therefore income
shall be clubbed in his hand from the date of transfer.
Seema transferred on 1/4/2022 her property Since asset has been transferred which is irrevocable during the
to Neema for the life time of Neema with a lifetime of the transferee hence, by virtue of sec. 62, income
clause that after death of Neema, property shall accrued on such property shall be chargeable in hands of Neema
be back to Seema. Neema died on 1/4/2023. for the P.Y. 2022-23. However, income for the P.Y. 2023-24
Seema has not taken back the property till shall be chargeable in hands of the Seema as because after death
31/3/2024. Property yields annual income of ₹ of Neema, Seema got the power to revoke the transfer and when
1,00,000. the power to revoke the transfer arises, income is clubbed in
hands of transferor even the power has not been exercised.
He beneficially holds not less than 20% of its equity shares at any time during the previous
In case of
year. Such share may be held by the assessee or partly by assessee and partly by one or more
company
of his relatives.
He is entitled to not less than 20% of the profits of such concern at any time during the previous
Other concern
year. Such share of profit may be held by the assessee himself or together with his relatives.
Relative here includes spouse, brother or sister or any lineal ascendant or descendant of that individual [Sec.
2(41)].
Exception
Income generated through technical or professional qualification# of the spouse is not to be clubbed in the total
income of the individual.
#
Technical or professional qualification: The term technical or professional qualification must be construed
in a liberal manner as the term has not been defined in the Act. It does not necessarily relate to technical
or professional qualification acquired by obtaining a certificate, diploma or degree or in any other form,
from a recognised body like University or Institute. It can be treated as fitness to do a job or to undertake
an occupation requiring intellectual skill and also includes technicality generated through experience, skill
etc. Technical qualification includes specialization in a particular subject (e.g. accountancy, management,
commerce, science, technology etc.).
Notes
Where both, husband and wife, have substantial Remuneration from such concern will be included in
interest in a concern the total income of husband or wife, whose total income
When both, husband and wife, have substantial interest excluding such remuneration, is higher.
in a concern and both are drawing remuneration from that Where such income is once included in the total income
concern without possessing any specific qualification. of either of the spouse, then such income arising in
any subsequent years cannot be included in the total
income of the other spouse unless the Assessing Officer
is satisfied that it is necessary to do so. However,
Assessing Officer will do so only after giving to the
other spouse an opportunity of being heard.
When both, husband and wife, are not having any Remuneration from such concern will not be clubbed.
other income
When both, husband and wife, have substantial interest
in a concern and both are drawing remuneration from that
concern without possessing any specific qualification
and both are not having any other income apart from the
said remuneration.
Computation of salary, fee, commission, Income prescribed in sec. 64(1)(ii) shall be first
remuneration etc computed (allowing all deductions from the respective
income) in the hands of recipient and thereafter net
income shall be clubbed in the hands of the other spouse.
E.g. salary, remuneration, etc shall be first calculated as
per provisions of sec. 15 to 17, in the hands of recipient
and thereafter, net taxable salary shall be clubbed in the
hands of the other spouse.
Illustration 2:
Ram and Mrs. Ram hold 20% and 30% equity shares in Anand Ltd. respectively. They are employed in Anand
Ltd. (taxable salary being ₹ 2,40,000 p.a. and ₹ 3,60,000 p.a. respectively) without any technical or professional
qualification. Other incomes of Ram and Mrs. Ram are ₹ 70,000 and ₹ 1,00,000 respectively. Find out the net
income of Ram and Mrs. Ram for the assessment year 2024-25.
Solution :
When both husband and wife have substantial interest in a concern & both are drawing remuneration from that
concern without possessing any specific qualification, then remuneration from such concern will be included in
the total income of husband or wife, whose total income excluding such remuneration, is higher. In the given case,
Since Mrs. Ram has higher income therefore salary of Mr. Ram will be clubbed in hands of Mrs. Ram.
Computation of gross total income of Ram and Mrs. Ram for the A.Y. 2024-25
Illustration 3:
Mr. & Mrs. Om both are working in A Ltd. without possessing any technical or professional qualification. From the
following details compute their income for the A.Y. 2024-25:
Illustration 4:
Mr. & Mrs. X working in A Ltd. without possessing any qualification. From the following details compute their
income for the A.Y. 2024-25:
3.1.6 Income from asset transferred to spouse [Sec. 64(1)(iv) & (vii)]
Asset transferred to Spouse [Sec. 64(1)(iv)]
In computing the total income of an individual [subject to the provisions of sec. 27(i)], income arising from assets
transferred to spouse without adequate consideration, shall be included in the income of that individual.
Taxpoint: In the following cases clubbing provision shall not be attracted on transfer of property to spouse -
When such transfer is for adequate consideration; or
The transfer is under an agreement to live apart; or
Where the asset transferred is house property (as such transfer will be governed by Sec. 27)
Notes
Marital relationship The relationship of husband and wife must subsist on the date of transfer of assets as
well as on the date of accrual of income i.e. no clubbing provision shall be attracted if -
¾¾ transfer is made before marriage; or
¾¾ on the date of accrual of income, transferee is not the spouse of transferor.
Pin money Income from assets acquired by spouse out of pin money or household savings is not
subject to clubbing
Sec. 27(i) -vs.- Sec. Where such transferred asset is a house property then the same will not be covered by
64(1)(iv) in case of sec. 64(1)(iv) but governed by sec. 27(i) [Deemed owner in case of Income from house
transfer of house property]. In this regard following instances are notable -
property ¾¾ Mr. X transferred his house property (worth ₹ 15,00,000) in favour of Mrs. X
out of love and affection without any consideration. Income generated from such
property is ₹ 1,00,000 shall be taxable in the hands of Mr. X by virtue of sec. 27(i)
without attracting provision of sec. 64(1)(iv).
¾¾ Capital gain generated on transfer of such property shall be first computed in the
hands of Mrs. X and then shall be clubbed in hands of Mr. X by virtue of sec. 64(1)
(iv).
¾¾ Mr. X gifted Mrs. X ₹ 15,00,000 out of love and affection. Mrs. X purchased
a house property from such gifted money. Income generated from such house
property is ₹ 1,00,000. Such income shall be first computed in hands of Mrs. X and
then shall be clubbed in the hands of Mr. X by virtue of sec. 64(1)(iv).
Nature of Consideration must be measurable in terms of money. Therefore, natural love and affection,
consideration spiritual or religious benefit cannot be treated as adequate consideration.
Inadequate If property has been transferred Mr. X transferred 1000 10% debentures of ₹ 100 each
consideration to spouse or son’s wife directly or (Market value ₹ 100 each) to Mrs. X for ₹ 25,000.
indirectly for a consideration which Income earned at the end of the year on such debenture
is inadequate, then only the part of ₹ 10,000.
income which is referable to transfer
Treatment: ₹ 2,500 (i.e. ₹ 10,000 * ₹ 25,000 / ₹
for inadequate consideration, shall be
1,00,000) shall be taxable in hands of Mrs. X and
clubbed.
remaining ₹ 7,500 (i.e. ₹ 10,000 – ₹ 2,500) shall be
clubbed in the hands of Mr. X.
Form of Asset The asset so transferred need not Mr. X transferred to Mrs. X securities worth ₹ 5,00,000.
remain in its original form. Mrs. X exchanged such securities for a house property.
Income from such property shall also be liable to
clubbing u/s 64(1)(iv).
Accretion of Income arising to the transferee from Mr. X transferred to Mrs. X shares of a foreign company
asset the accretion of such property shall worth ₹ 5,00,000. Mrs. X received bonus share on such
not be clubbed in the total income of shares. Dividend on original shares shall be clubbed in
the transferor. the hands of Mr. X but dividend on bonus shares shall
not be clubbed and taxable in the hands of Mrs. X.
Capital gain Profit on sale of property, which is gifted to spouse or son’s wife, shall be clubbed in hands of
the transferor.
Income on Income arising to the transferee from Mr. X transferred to Mrs. X shares worth ₹ 5,00,000.
income the accumulated income of such Mrs. X sold such shares for ₹ 6,00,000 (i.e. earned a
property is not to be clubbed. profit of ₹ 1,00,000) and acquired 12% Debentures of
another company.
Capital gain of ₹ 1,00,000 and interest on debenture
of ₹ 60,000 (i.e. 12% of ₹ 5,00,000) shall be clubbed
in hands of Mr. X u/s 64(1)(iv). However, interest on
debenture of ₹ 12000 (i.e. 12% of ₹ 1,00,000) shall not
be clubbed and taxable in the hands of Mrs. X.
Asset Where an asset is transferred under a trust for the benefit of spouse or son’s wife the provision
transferred of sec. 64(1) shall be applicable. It does not make any difference even if the assessee appoints
under a trust himself as a trustee.
Treatment After the death of either husband or wife clubbing provision of Sec. 64(1)(iv) will not be
after death attracted, as a widow or widower is not a spouse.
Cross Gift If the Assessing Officer is convinced Mr. A gifted his property to Mrs. X and Mr. X gifted
that some gifts are inter-related equivalent another property to Mrs. A.
with each other in a circuitous way,
Treatment In such case it is apparent that such
and there is an intention to evade
transactions are interrelated and are parts of the same
provisions of sec. 64(1), he may
transaction. In such case income from such property of
apply the provisions of sec. 64(1).
Mrs. A and Mrs. X shall be clubbed in hands of Mr. A
and Mr. X respectively.
Asset invested If assets so transferred, is invested in business then tax treatment shall be as under:
in the business
Type of business Income to be clubbed
Income of such business * Value of such assets as on the 1st day of the P.Y.
Proprietary
Total investment in the business by the transferee as on the same day
Interest on capital * Value of such assets as on the 1st day of the P.Y.
Partnership
Total investment in the firm by the transferee as on the same day
Taxpoint: Profit from the firm shall not be clubbed as it is exempted u/s 10(2A).
Illustration 5:
Mr. X gifted 1,000 shares of a non-domestic company worth ₹ 6,00,000 (acquired on 15/3/2022) to Mrs. X out of
natural love and affection as on 15/4/2023.
On 31/1/2024, Mrs. X received dividend ₹ 60,000 on such shares in India.
On 1/2/2024, Mrs. X sold such shares for ₹ 10,00,000 and received consideration in India.
Show tax treatment, if on 1/2/2024, Mrs. X invested ₹ 10,60,000 in -
Case A A house property from which rent accrued in the previous year 2023-24 is ₹ 53,000.
Case B A newly formed partnership firm and contributed initial capital. Interest received (taxable portion) on
such contribution ₹ 13,250 and share of profit ₹ 20,000.
Case C A newly started proprietorship business & contributed capital, profit accrued for the year is ₹ 42,400.
Solution :
Statement showing treatment of provision of sec. 64(1)(iv) in hands of Mr. X for the A.Y. 2024-25
Particulars Amount
Sale consideration 10,00,000
Less: Cost of acquisition 6,00,000
Short term capital gain 4,00,000
Treatment: Since the shares have been gifted by Mr. X to Mrs. X the provision of sec. 64(1)(iv) shall be
applicable and such gain shall be taxable in hands of Mr. X.
Note 2: Computation of Income from house property of Mrs. X for the A.Y. 2024-25
Particulars Amount
Gross Annual Value 53,000
Less: Municipal tax Nil
Net Annual value 53,000
Less: Deduction u/s 24(a) [being 30% ₹ 53,000] 15,900
Income from house property 37,100
Note 3: Statement showing distribution of income between Mr. X & Mrs. X
Assets transferred to AOP or other person for the benefit of spouse [Sec. 64(1)(vii)]
In case an asset is transferred to other person or an association of persons, otherwise than for adequate consideration,
for immediate or deferred benefit of spouse, then income on asset so transferred shall be clubbed in the hands of
the transferor (to the extent income from such asset is for the immediate or deferred benefit of his or her spouse).
Income from assets transferred to son’s wife [Sec. 64(1)(vi) & (viii)]
The provisions are enumerated here-in-below:
Exceptions
The above clubbing provision shall not apply in
the following cases -
1. The income arises or accrues to the minor
child due to any manual work done by him;
or
2. The income arises or accrues to the minor
child due to his skill, talent, specialised
knowledge or experience; or
3. The minor child is suffering from any
disability of nature specified u/s 80U.
Be careful, there is no exception for minor married daughter like exception to sec. 27 (Deemed Owner)
Clubbing in Where any such income is once clubbed with the total income of either parent, then any
subsequent year(s) such income arising in any subsequent years shall not be clubbed with the total income of
the other parent, unless the Assessing Officer is satisfied. However, the Assessing Officer
will do so only after giving an opportunity of being heard to the other spouse.
Child Child in relation to an individual includes a stepchild & adopted child but does not include
a grandchild [Sec. 2(15B)]
Income of married Though sec. 27(i) [Deemed owner of house property] specifically excludes married
daughter daughter but sec. 64(1A) does not have this exception, hence income arising to minor
married daughter shall be clubbed in the hands of parent.
When neither of Income of minor child cannot be added with the income of the guardian if the guardian is
the parent is alive not the parent of the minor.
Capital gain Profit on sale of the property, which is gifted to minor child, shall be clubbed in hands of
parent as per the provision of sec. 64(1A)
Income of the Income of that year shall be treated as under:
year when minor
attains majority Income arose to the period Clubbing provision
When child does not attain age of majority Such income shall be clubbed in hands of
parent
When child attains the age of majority and Such income shall not be clubbed and
afterwards taxable in hands of assessee himself (i.e.
child)
Illustration 6:
Mr. & Mrs. Mantri have income under the head “Profits & gains of business or profession” of ₹ 3,00,000 and
₹ 4,00,000 respectively. They have 7 children. From the following details compute taxable income of Mr. and Mrs.
Mantri for the A.Y. 2024-25:
1st child (aged 26 years) is a chartered accountant. His annual income from profession is ₹ 4,00,000. His
income from house property is ₹ 30,000. He has a son (4 years old) who has earned interest on fixed deposit
of ₹ 5,000.
2nd child (aged 17 years being a married daughter) who is a stage singer, earned income of ₹ 1,00,000. She
earned interest on fixed deposit ₹ 8,000. Such fixed deposit has been made out of such singing income.
3rd child (aged 16 years) is suffering from disability specified u/s 80U (to the extent 55%) blind. He has
received interest income of ₹ 40,000 for loan given to a private firm. He is dependent on Mrs. Mantri.
4th child (aged 14 years) has earned income of ₹ 45,000 out of his physical and mental effort. Expenditure
incurred to earn such income is ₹ 15,000. His loss from house property is ₹ 30,000.
5th child (aged 12 years) is a partner in a partnership firm from which he earned interest income (taxable) of
₹ 40,000 and share of profit of ₹ 35,000. Other two partner of the firm are Mr. & Mrs. Mantri.
6th child (aged 9 years) has 1,000 debentures of ₹ 100 each of a public sector company acquired through will of
his Grand father. Interest income on such debenture is ₹ 10,000. Expenditure incurred to collect such interest
is ₹ 200. Such debenture was sold and long-term capital gain earned ₹ 25,000.
7th child (aged 7 years) has earned interest on fixed deposit ₹ 500.
Solution :
Computation of total income of Mr. and Mrs. Mantri for the A.Y. 2024-25
3.1.8 Conversion of self acquired property into HUF Property [Sec. 64(2)]
Applicability
Tax-Treatment
For the purpose of computation of total income of such individual for any assessment year commencing on or after
1/4/1971, the income derived from such converted property (property so converted or transferred by individual to
HUF) or any part thereof shall be deemed to arise to the individual and not to the family.
Where the converted property has been the subject matter of partition (whether partial or total) amongst the
members of the family, the income derived from such converted property as is received by the spouse shall be
clubbed in the hands of transferor.
Taxpoint:
any money or investment for the time being representing the proceeds of sale thereof; and where the property is
converted into any other property by any method, such other property.
Note: Asset need not be in its original form.
Illustration 7:
Mr. Todi is a member of HUF. It consists of Mr. Todi, Mrs. Todi, Mr. Todi’s major son (Mr. A) & Mr. Todi’s minor
son (B)
On 1/4/2022, Mr. Todi transferred his house property acquired through his personal income to the HUF without
any consideration.
On 1/7/2023, HUF is partitioned and such property being divided equally.
Net annual value of the property for the P.Y. 2022-23 is ₹ 80,000 & that for the P.Y. 2023-24 is ₹ 1,00,000. State
tax treatment for both the years.
Solution :
Computation of income from house property in the hands of Mr. Todi for the A.Y. 2023-24
Particulars DetailsAmount
Net Annual Value (NAV) 80,000
Less: Standard deduction u/s 24(a) 30% of NAV 24,000
Income from house property 56,000
Tax treatment for the A.Y.2023-24: Since Mr. Todi transferred his house property acquired out of personal
income to his HUF without adequate consideration, therefore income generated from such house property i.e.
₹ 56,000 shall be clubbed in hands of Mr. Todi as per provision of sec. 64(2).
Tax treatment for the A.Y.2024-25: In the previous year 2023-24, partition took place on 1/7/2023; hence the
treatment shall be as under:
Particulars Details Amount
Net Annual Value (NAV) 1,00,000
Less: Standard deduction u/s 24(a) 30% of NAV 30,000
Income from house property 70,000
Income earned till partition from April’ 2023 to June’ 2023 i.e. ₹ 17,500 [(₹ 70,000/12) * 3] shall be clubbed in
hands of Mr. Todi and income earned after partition i.e. ₹ 52,500 [(₹ 70,000/12) * 9] shall be divided among the
family members. However, as per provision of sec. 64(2) income of Mrs. Todi shall be clubbed in hands of Mr.
Todi.
Particulars Mr.Todi Mrs.Todi Mr. A B
Income from house property before partition clubbed in hands of
Mr. Todi as per sec. 64(2) 17,500 - - -
Share of Income from house property ₹ 52,500/4 13,125 13,125 13,125 13,125
Income clubbed as per provision of sec. 64(2) + 13,125 (13,125) - -
Income clubbed as per provision of sec. 64(1A)1 + 13,125 - - (13,125)
Less: Exemption u/s 10(32) (1,500) - - -
Total income from house property 55,375 Nil 13,125 Nil
1.
It is assumed that Mrs. Todi has no other income.
Notes
Such liability cannot exceed the value of assets so transferred.
Where any such asset is held jointly by more than one person, they shall be jointly and severally liable to pay the
tax which is attributable to the income from the assets so included.
Taxpoint: After application of provisions of clubbing (on transfer of property without adequate consideration as
discussed above in several sections), income is taxable and tax liability arises in the hands of the transferor. But
sec. 65 empowers the income tax authorities to serve demand notice (in respect of tax on clubbed income) upon
transferee.
Illustration 8:
A proprietary business was started by Smt. S. Mundhra in the year 2020. As on 1.4.2022 her capital in business
was ₹ 3,00,000.
Her husband, Shri V. Mundhra, gifted ₹ 2,00,000, on 10.04.2022, which amount Smt. S invested in her business
on the same date. Smt. S earned profits from her proprietary business for the financial years 2022-23, ₹ 1,50,000
and financial year 2023-24 ₹ 3,90,000. Compute the income, to be clubbed in the hands of S’s husband for the A.Y.
2024-25.
Solution :
Where asset transferred to spouse is invested in the proprietary business then proportionate share being calculated
in following manner shall be clubbed in the hands of transferor:
Income of such business * Value of such assets as on the 1st day of the P.Y.
Total investment in the business by the transferee as on the 1st day of the P.Y.
= ₹ 3,90,000 * ₹ 2,00,000 / ₹ 6,50,0001 = ₹ 1,20,000
Hence, ₹ 1,20,000 shall be clubbed in the hands of husband of Smt. S
1.
Computation of total investment in the business on 1-4-2023
Particulars Amount
Investment as on 1-4-2022 ₹ 3,00,000
Add: Investment of gift from husband on 10-4-2022 ₹ 2,00,000
Add: Net profit earned during the year 2022-23 (assumed reinvested in the business) ₹ 1,50,000
Total investment in the business as on 1-4-2022 ₹ 6,50,000
Income arising from accretion to transferred asset shall not be liable to clubbing.
Assume, Net profit earned during the year 2022-23 is retained in the business.
Alternatively, one can assume that net profit earned during the year 2022-23 is withdrawn. In such case income to
be clubbed shall be computed as under:
Income of such business * Value of such assets as on the 1st day of the P.Y
Total investment in the business by the transferee as on the 1st day of the P.Y.
= ₹ 3,90,000 * ₹ 2,00,000 / ₹ 5,00,000 = ₹ 1,56,000
Hence, ₹ 1,56,000 shall be clubbed in the hands of husband of Smt. S
1.
Computation of total investment in the business on 1-4-2023
Particulars Amount
Investment as on 1-4-2022 ₹ 3,00,000
Add: Investment of gift from husband on 10-4-2022 ₹ 2,00,000
Total investment in the business as on 1-4-2023 ₹ 5,00,000
Illustration 9:
Mr. Singh is a trader. Particulars of his income and those of the members of his family are given below. These
incomes relate to the previous year ended 31st March, 2024:
Particulars Amount
Income from business (Mr. Singh’s) 90,000
Salary derived from an educational institution by Mrs. Singh. She is the principal of the 50,000
institution
Interest on company deposits derived by Master Deep Singh (minor son). These deposits were 12,000
made in the name of Deep Singh by his father’s father about 6 years ago.
Receipts from sale of paintings and drawings made by minor Dipali Singh (minor daughter of 60,000
Mr. & Mrs. Singh and noted child artist)
Income by way of lottery earnings by Master Dipindar Singh (minor son of Mr. Singh) 6,000
Discuss whether the above will form part of the assessable income of any individual and also compute the assessable
income of Mr. Singh.
Solution :
Computation of Total Income for the A.Y. 2024-25
Amount
Particulars Details
Mr. Singh Mrs. Singh Minor Daughter
Salaries
Salary of Mrs. Singh 50,000
Profits and gains of business or profession
Business income 90,000
Sale of paintings & drawings (made by daughter) 60,000
Amount
Particulars Details
Mr. Singh Mrs. Singh Minor Daughter
Income from other sources
Interest income of 1st minor son 12,000
Less: Exemption u/s 10(32) 1,500 10,500
Lottery Income of 2nd minor son 6,000
Less: Exemption u/s 10(32) 1,500 4,500
Gross Total Income 1,05,000 50,000 60,000
Less: Deduction under Chapter VI A Nil Nil Nil
Total Income 1,05,000 50,000 60,000
Illustration 10:
Balu is the Karta of a HUF, whose members derive income as given below:
Particulars Amount
Income from Balu’s own business 50,000
Mrs. Balu a dermatologist (taxable salary) 80,000
Minor son Deepak (earning interest on fixed deposits with ABC Ltd., which were gifted to him
15,000
by his grandfather)
Minor daughter Priya gave a dance performance and received remuneration 1,00,000
Deepak got winnings from lottery (gross) 2,00,000
Explain how the above will be taxed.
Solution :
Computation of Total Income for the A.Y. 2024-25
Illustration 11:
Ram & Mrs. Ram submit the following particulars of their income relevant for the assessment year 2024-25:
1. Mrs. Ram receives a salary of ₹ 30,000 (computed) and taxable allowance of ₹ 22,500 from G Ltd. in which
her father-in-law holds 25% of equity share capital and she herself holds 10% of equity capital.
2. Ram receives a salary of ₹ 11,340 (computed) from S Ltd., in which Mrs. Ram, her sisters and brother hold
21% of equity share capital.
3. Ram is a (10% share) partner in EFG, a partnership firm, which is engaged in the business identical to G
Ltd. and receives ₹ 75,000 as salary and interest from the firm during the relevant previous year. None of the
relatives of Ram has any interest in the firm.
4. Mrs. Ram is employed by the firm EFG on a salary of ₹ 9,000 p.a. (computed)
5. Interest of minor daughter of Ram from a partnership firm is ₹ 43,500
6. Mrs. Ram transferred ₹ 1,00,000 on 20-5-1973 and ₹ 70,000 on 15-6-1973 to her daughter-in-law, who invested
the aforesaid fund in a partnership firm at 12% p.a. Out of interest income, her daughter-in-law has purchased
debentures in an Indian companies and during the previous year she receives ₹ 2,000 as interest.
Find out taxable income of Mr. and Mrs. Ram on the following assumptions:
a. That Ram is not a beneficial shareholder in G Ltd. throughout the previous year.
b. That Ram holds 10 shares in G Ltd. only during 15 days of the previous year.
Solution :
Computation of total income for A.Y. 2024-25
Case a Case b
Particulars
Mr. Ram Mrs. Ram Mr. Ram Mrs. Ram
Salary from G Ltd. (computed) 52,500 52,500
Salary from S Ltd. (computed) 11,340 11,340
Business income (salary and interest from EFG) 75,000 75,000
Salary from EFG (computed) 9,000 9,000
Interest income of son’s wife (int. on deb.)# 8,400 8,400
Income of minor daughter 42,000 42,000
(₹ 43,500 – ₹ 1,500) [sec. 10(32)]
Total Income 75,000 1,23,240 1,69,500 28,740
#
for transfer before 31-5-1973 clubbing is not applicable
Quick MCQs:-
1. Clubbing provisions under Sec. 64(1)(vi) are applicable where the asset is transferred by an individual for
inadequate consideration to –
(a) Daughter’s Husband
(b) Son’s Wife
(c) Major Son
(d) Major Daughter
2. As per Sec. 64(1A), income accruing to a minor shall be clubbed in the income of –
(a) Father
(b) Mother
3. If any income has to be clubbed under Sec. 64, it will be clubbed under the head
(a) Income from Other Sources
(b) Relevant Head to which it belongs
(c) Choice of assessee
(d) None of the above
4. Where a member of a HUF has converted or transferred his self-acquired property for inadequate
consideration into joint family property, income arising there from is taxable.
(a) As the income of the Transferor Member
(b) In the hand of the HUF
(c) In the hands of Karta of HUF
(d) Completely exempt from tax
5. Mr. Grits cash D 1,00,000 to his brother’s wife Mrs. B, Mr. B gifts cash of D 1,00,000 to Mrs . A From
cash gifted to her, Mrs. A invests in a fixed deposit, income there from is D 10,000. Aforesaid D 10,000
will be included in the total income of –
(a) Mrs. A
(b) Mr. B
(c) Mrs. A
(d) Mrs. B
Example 1: Computation of Income under the head “Capital gains” of Mr. X for the A.Y. 2024-25
Particulars Case A Case B
Short term capital gain 80,000 (90,000)
Long term capital gain (40,000) 1,20,000
Income under the head “Capital gains” 80,000 30,000
b. Loss of a speculation business can be set off only against the profits of a speculation business, under the head
‘Profits and gains of business or profession’. However, loss from a non-speculative business can also be set off
against income from speculation business [Sec. 73(1)]
Example 2: Computation of “Profits & gains of business or profession” of Mr. X for the A.Y. 2024-25
Particulars Case A Case B
Speculation business 80,000 (90,000)
Non speculation business (40,000) 1,00,000
Profits & gains of business or profession 40,000 1,00,000
c. Loss of a specified business covered u/s 35AD can be set off only against the profits of other specified
business. However, loss from a non-specified business can be set off against income from specified business.
d. Loss incurred in activity of owning and maintaining race horses can be set off against income from such
activity only [Sec. 74A]
Example 3: Computation of “Income from other sources” of Mr. X for the A.Y. 2024-25
Taxpoint: Above provisions provides restriction on losses, however income from aforesaid source (i.e. a to d)
is available for setting off any loss from any other source under the same head.
e. Loss from a source, income of which is exempt u/s 10, cannot be set off against any income.
f. No loss can be set off against winning from lotteries, crossword puzzles, races, card games, gambling or
betting, etc. [Sec. 58(4) & 115BB]. Similarly, set off of losses is not permissible against unexplained income,
investment, money, etc. chargeable u/s 68 / 69A / 69B / 69C / 69D [Sec. 115BBE]
Example 4: Computation of “Income from other sources” of Mr. X for the A.Y. 2024-25
Illustration 12:
Compute gross total income of Mr. X in following cases -
Case I Case II
Particulars
Details Amount Details Amount
Income from House Property
House Property A 30,000 40000
House Property B (10,000) 20,000 (25000) 15,000
Profits & Gains of Business or Profession
Speculation income 80,000 (70000) Nil3
Other business (30,000) 50,000 50,000
Income from agricultural business (Exempted) Nil Nil
Capital Gains
Short term capital gain
Transaction A 30,000 (20000)
Transaction B (10,000) 20,000 5000
Long term capital gain
Transaction A (30,000) 45000
Transaction B 10,000 Nil2 (2000) 28,000
Income from other sources
Casual income
Income from lottery 40,000 -
Income from horse races 10,000 25000
Case I Case II
Particulars
Details Amount Details Amount
Income on card games (losses not to be considered) Nil 50,000 Nil 25,000
Income from activity of owning & maintaining race-horses
Business (A) (50,000) 10000
Business (B) 20,000 Nil 1
(6000) 4,000
Other income
Interest on securities 20,000 10,000
Gross Total Income 1,60,000 1,32,000
Losses to be carried forward
1.
Loss from activity of owning & maintaining race horse (30,000) -
2.
Long term capital loss (20,000) -
3.
Speculation loss - (70,000)
head, e.g. business loss, shall be allowed to be set off against income from activity of owning and maintaining
race-horses.
Taxpoint: Above provisions provides restriction on losses, however income from aforesaid source (i.e. a to d)
is available for setting off any loss from any other head of income.
e. Loss under the head ‘Income from house property’: Loss in excess of ₹ 2,00,000 under the head ‘Income
from house property’ cannot be set off with income under other heads of income.
Example 6: Computation of “Gross total income” of Ms. M for the A.Y. 2024-25
Particulars Case A Case B
Profit and gains of business or profession 2,80,000 2,80,000
Income from house property (20,000) (2,30,000)
Gross total income 2,60,000 80,000
f. Loss under the head Profits and Gains of Business or Profession: Loss under the head “Profits and gains of
business or profession” cannot be setoff from income under the head “Salaries”.
g. Loss from a source, income of which is exempt u/s 10: Such loss cannot be set off against any taxable
income.
h. Income from winning from lotteries, etc.: Any loss cannot be set off against winning from lotteries, crossword
puzzles, races, card games, gambling, betting, etc. [Sec. 58(4) & 115BB]. Similarly, set off of losses is not
permissible against unexplained income, investment, money, etc. chargeable u/s 68 / 69A / 69B / 69C / 69D
[Sec. 115BBE]
Example 7: Computation of “Gross total income” of Mr. X for the A.Y. 2024-25
Particulars Case A Case B
Salaries 1,20,000 1,20,000
Profits and gains of business or profession (50,000) (30,000)
Income from house property 20,000 (20,000)
Gross total income 1,20,000 1,00,000
Illustration 13 :
Compute gross total income of Mr. Jacky from following data -
Source of income Amount
Income under the head ‘Salaries’ 2,60,000
Income from house property (A) 60,000
Income from house property (B) (2,80,000)
Speculation income 20,000
Business income (1,30,000)
Income from activity of owning and maintaining race-horses (1,50,000)
Income from agricultural business (1,25,000)
Short term capital gain 30,000
Long term capital gain (1,00,000)
Income from lottery 10,000
Income from horse races 1,70,000
Interest on securities after adjusting interest expenses and other expenses (70,000)
Solution :
Computation of gross total income of Mr. Jacky for the A.Y.2024-25
Test Yourself
1. Compute Gross Total Income for the assessment year 2024-25 and losses to be carried forward.
Particulars Amount
Net Profit from cotton business 1,60,000
Net loss from automobile business (90,000)
Loss from house property in Kolkata (75,000)
Income from house property in Mumbai 70,000
Loss from Speculative business (1,20,000)
Income from Salary 72,000
Short term capital loss on jewellery (1,20,000)
Long term capital gain on Shares 90,000
2. From the following information, compute income of Ms. Tewari for the P.Y. 2023-24:
Particulars Amount (₹ )
Income from house 1 (let out) 2,00,000
Loss from house 2 (self-occupied) 50,000
Salary Income 5,00,000
Loss from non-speculative Business 3,00,000
Income from speculative Business 1,00,000
Short Term Capital Loss 60,000
Long term Capital gain 50,000
Hints
1. Gross Total Income: ₹ 1,37,000; 2. ₹ 5,00,000
Solution :
Computation made by Smart is incorrect, as because first intra head set-off shall be made, thereafter inter head
set-off can be made. The correct computation is shown below -
Computation of total income and tax liability of Smart for the A.Y. 2024-25
Particulars Details Amount
Profits & Gains of Business or Profession
Income from business A 4,50,000
Income from business B u/s 70 (10,000) 4,40,000
Capital Gains
Long term capital gain 20,000
Income from other sources 50,000
Gross Total Income 5,10,000
Less: Deduction u/s 80C to 80U -
Taxable Income 5,10,000
Tax liability 16,640
2. Priority of set off u/s 71: The Act does not lay any priority relating to set off of losses, hence, losses
which cannot be carried forward should be adjusted first.
Illustration 15 :
Mr. Bhola has furnished you the following data –
Income from house property (₹ 1,30,000)
Salaries (Net) ₹ 80,000
Income from other sources (₹ 90,000)
Income from lotteries ₹ 3,50,000
Mr. Bhola is seeking your advice relating to set off and carry-forward.
Solution :
Statement showing application of sec. 71
Particulars Amount
Salaries 80,000
Income from house property (1,30,000)
Income from other sources
Winning from lotteries 3,50,000
Other income (90,000)
Gross total income 3,50,000
Conclusion
Casual income shall be fully taxable as no loss can be set off against such income. 3,50,000
Losses to be carried forward
a) Loss under the head “Income from house property” (1,30,000)
b) Loss under the head “Income from other sources”, as such loss cannot be carried forward. Nil
Income under the head ‘Salaries’ is first adjusted with the loss under the head ‘Income from other sources’ as the
same cannot be carried forward. Though loss under the head ‘Income from other sources’ is ₹ 90,000 and such
loss could be adjusted with income under the head ‘Salaries’ only to the extent of ₹ 80,000 still the remaining loss
of ₹ 10,000 cannot be carried forward.
3. Mandatory feature of sec. 70 and 71: Assessee is bound to follow sec. 70 and 71, there is no choice
or option whether to set off the loss or not. Even partial set off is not permissible when entire loss can
otherwise be set off.
Illustration 16:
Mr. Tej Singh has the following income details – ₹
Particulars Amount
Income from house property (10,000)
Salaries 4,80,000
Income from other sources 30,000
Gross total income 5,00,000
Carry forward of loss under the head income form house property 20,000
– Comment
Solution :
Assessee is bound to follow sec.70 and 71 and there is no choice or option whether to set off the loss or not. Even
partial set off is not permissible when full loss can otherwise be set off. Hence in the given case income of Mr. Tej
Singh shall be ₹ 4,80,000 (carry forward of loss shall not be permissible) as computed under:
Particulars Amount
Income from house property (30,000)
Salaries 4,80,000
Income from other sources 30,000
Gross total income 4,80,000
4. Set-off of clubbed income: From the clubbed income, one can set off the losses.
3.2.6 Loss under the head ‘Income from House Property’ [Sec. 71B]
Loss under the head ‘Income from house property’ can be carried forward and can be set off against income under
the same head only.
Period for which carry-forward shall be allowed: 8 assessment years immediately succeeding the assessment
year in which such loss is first computed.
Filing of return: Loss under the head ‘Income from house property’ can be carried forward even when a belated
return is filed [as sec. 80 and 139(3) are not applicable to sec. 71B].
Illustration 17:
Compute Gross total income of Mrs. Shikha from following details for the A.Y.2024-25 ₹
Income from house property A 60,000
Income from house property B (1,50,000)
Income from house property C 1,00,000
Income from other sources 1,00,000
Losses u/s 22 for the A.Y. 2023-24 (30,000)
Losses u/s 22 for the A.Y. 1998-99 (15,000)
Losses u/s 56 for the A.Y. 2023-24 (45,000)
Solution :
Computation of gross total income of Mrs. Shikha for the A.Y. 2024-25
Particulars Details Details Amount
Income from house property
House property A 60,000
House property B (1,50,000)
House property C 1,00,000 10,000
Loss u/s 22 for the A.Y. 2023-24 2
(10,000) Nil
Income from other sources 1,00,000
Gross Total Income 1,00,000
Notes
1. Remaining unabsorbed loss relevant to the A.Y. 2023-24 ₹ 20,000 (i.e. ₹ 30,000 – ₹ 10,000) shall be carried
forward to subsequent assessment years (maximum up to A.Y. 2031-32).
2. Loss under the head ‘Income from house property’ relevant to the A.Y. 1998-99, cannot be carried forward.
3. Loss under the head ‘Income from other sources’ cannot be carried forward.
4. Sec. 71 shall apply only after application of sec. 70. Hence, current year loss of house property B cannot be
set off against income from other sources.
3.2.7 Carry forward & set off of business loss other than speculation loss [Sec. 72]
Loss under the head “Profits and gains of business or profession” (other than speculation loss) can be carried
forward and set off against income under the same head.
Note: For this purpose business profit includes profits derived from a business activity but assessable under the
heads other than ‘Profit and gains of business or profession’, e.g. Dividend income when shares are held as stock,
though taxable under the head ‘Income from other sources’ but business loss can be set off against such income.
Period for which carry-forward shall be allowed: 8 assessment years immediately succeeding the assessment
year in which such loss is first computed.
Academic note: In the assessment year 2023-24, losses prior to the assessment year 2015-2016 cannot be set off.
Exceptions to the above period
1. Closure of business due to specified reasons [Sec. 33B]
Situation: Where any loss remains unabsorbed of a business undertaking, which is discontinued due to
damages caused by -
i. flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
ii. riot or civil disturbance; or
iii. accidental fire or explosion; or
iv. action by an enemy or action taken in combating an enemy (whether with / without a declaration of war)
Condition: Such business is re-established, reconstructed or revived by the assessee, within a period of 3 years
from the end of the previous year in which such mishap took place.
Treatment: Losses of such business [including the past eligible losses (to be carried forward)] shall be
adjusted with profit of the year in which business is so revived and if the loss cannot be wholly setoff, then it
shall further be allowed to be carried forward for 7 years.
2. Set off of losses relating to the year of closure of business against deemed profit [Sec. 41(5)]
Situation: Where any part of loss (not being a speculation loss), which arose during the previous year remains
unabsorbed in the previous year in which business ceased to exist.
Treatment: Such loss shall be allowed to be carried forward for any number of years (without restriction of 8
years) against income chargeable to tax u/s 41(1); (3); (4); (4A).
Taxpoint: Such loss can be set off even if the return of loss is not submitted in time.
Notes
1. Business need not be continued: The business losses can be carried forward, even the business in respect of
which the loss was originally computed, is not carried on during the previous year.
2. Filing of return in time: As per sec. 80, the business loss cannot be carried forward unless it is determined in
pursuance of a return filed by the assessee u/s 139(3), within time as prescribed u/s 139(1).
3. Treatment of unabsorbed depreciation, etc.: Unabsorbed depreciation, unabsorbed scientific research
expenditure and unabsorbed family planning expenditure are not covered by sec. 72. Such losses can be
carried forward for any number of years.
4. Order of set off: In case of insufficient profit, losses shall be set off in the following order:
a. Current year’s depreciation [Sec. 32(1)], capital expenditure on scientific research [Sec. 35(1)] and
capital expenditure on family planning [Sec. 36(1)(ix)];
b. Brought forward business or profession losses [Sec. 72(1)],
c. Unabsorbed depreciation [Sec. 32(2)], unabsorbed expenditure on family planning [Sec. 36(1)(ix)],
unabsorbed capital expenditure on scientific research [Sec. 35(4)]
5. Loss from specified business covered u/s 35AD (i.e, cold chain facility, cross-country natural gas pipeline,
etc.) shall be adjusted only from profit from specified business [Further refer sec.73A].
6. Assessee must be same who incurred the loss: Business losses can be carried forward and set off against the
profits of the assessee who incurred the loss i.e. assessee must be same to carry forward the loss. However,
this rule has the following exceptions –
a. Amalgamation: Business losses and unabsorbed depreciation of an amalgamating company can be set-
off against the income of the amalgamated company if the amalgamation is within the meaning of sec.
72A of the Income tax Act. (Discussed later in this chapter).
b. Succession: Business losses and unabsorbed depreciation of a proprietary concern or a partnership firm
or a specified company succeeded by a company or limited liability partnership as per sec. 47(xiii),
(xiiib) and (xiv), can be carried forward by succeeded company or limited liability partnership.
c. Inheritance: As per sec. 78(2), where the assessee acquires the business through inheritance, losses of
such business may be carried forward for balance number of years.
d. Demerger: In case of demerger, loss of demerged company shall be carried forward and set-off by
resulting company. (Discussed later in this chapter).
Note: In following case losses cannot be carried forward
i. Business, of an HUF where the business of the HUF is taken over by the Karta of HUF;
ii. Proprietorship business taken over by a firm in which proprietor is one of the partner;
iii. A firm being succeeded by another firm;
iv. A firm where the business of the firm is taken over by one of the partner of the firm,
Illustration 18:
Mr. Arun is running several businesses since last so many years. From the following details, compute his taxable
business income:
3.2.9 Carry forward and Set off of Speculation loss [Sec. 73]
1. Speculative transaction means a transaction in which contract for purchase and sale of any commodity
including stock and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer
of the commodity or scripts. [Sec. 43(5)]
2. As per explanation to sec. 73, where any part of the business of a company consists of purchase and sale of
shares of other companies, such company shall be deemed to be carrying on speculation business to the extent
of purchase and sale of shares. However, this rule is not applicable in case of companies -
a. of which gross total income mainly consists of income which is chargeable under the head “Income from
house property”, “Capital gains”, and “Income from other sources”; or
b. of which principal business is the business of trading in shares or banking or granting of loans and
advances.
Notes: Above explanation covers only transactions of purchase and sale of shares. Debentures, units of
UTI or of Mutual Funds are not covered by this explanation.
Treatment
Losses from speculative transactions or business can be carried forward and set off against income from speculative
business only.
Period for which carry forward shall be allowed: 4 assessment years immediately succeeding the assessment
year in which such loss is first computed.
Academic note: In the assessment year 2024-25, losses prior to the assessment year 2020-21 cannot be set off.
As per sec. 73(3) in respect of allowance on account of depreciation or capital expenditure on scientific research,
the provisions of sec. 73 shall not apply it can be carried forward to any number of years.
Notes
1. Continuity of business: It is not necessary that the same speculation business must be continued in the year
of carry forward and set off of the losses.
2. Filing of return: As per sec. 80, the loss cannot be carried forward unless it is determined in pursuance of a
return filed by the assessee u/s 139(3), within time as prescribed u/s 139(1)
3. Derivative Trading: An eligible transaction in respect of trading in derivative referred to in sec.2(ac) of the
Securities Contracts (Regulation) Act, 1956 carried out in a recognised stock exchange shall not be treated
Illustration 19:
Compute total income of X Ltd. under following cases –
Business A: Business of Ice cream
Business B: Business consists of purchase and sale of shares of other companies (being treated as speculative
business as per explanation of sec. 73)
Case 1 Case 2 Case 3 Case 4
Particulars
A B A B A B A B
Income of P.Y. 2023-24 80,000 20,000 75,000 85,000 (56,000) 1,50,000 3,00,000 (50,000)
B/f loss of P.Y. 2022-23 70,000 65,000 85,000 50,000 90,000 65,000 30,000 90,000
Unabsorbed depreciation - - - - - - - 20,000
Solution :
Computation of total income of X Ltd. for the A.Y. 2024-25
Case 1 Case 2 Case 3 Case 4
Particulars
A B A B A B A B
Income of P.Y. 2023-24 80,000 20,000 75,000 85,000 (56,000) 1,50,000 3,00,000 (50,000)
Income after sec. 70 80,000 20,000 75,000 85,000 - 94,000 3,00,000 (50,000)
B/f loss of P.Y. 2022-23 70,000 65,000 85,000 50,000 90,000 65,000 30,000 90,000
Unabsorbed depreciation - - - - - - - 20,000
10,000 (45,000) (10,000) 35,000 (90,000) 29,000 2,50,0001 (50,000)
Taxable income after
application of sec. 72 & 10,000 25,000 Nil 2,50,000
73 for the A.Y. 2024-25
P.Y.23-
24
P.Y. P.Y.
Loss to be carried forward (50,000)
- 2022-23 2022-23 - -
to next assessment year P.Y.22-
(45,000) (61,000) 23
(90,000)
Unabsorbed depreciation
- - - - - - - -
to be carried forward
1.
After adjusting unabsorbed depreciation of business B.
3.2.10 Carry forward & set off of loss from specified business covered u/s 35AD [Sec.73A]
Losses from specified business covered u/s 35AD can be carried forward and set off against income from other
specified business (whether eligible for deduction u/s 35AD or not).
Period for which carry-forward shall be allowed: No time limit is prescribed.
Filing of return: As per sec. 80, the loss cannot be carried forward unless it is determined in pursuance of a return
filed by the assessee u/s 139(3), within time as prescribed u/s 139(1).
Illustration 20:
MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on 1-4-2023. The company
incurred capital expenditure of ₹ 40 lakh during the period January, 2023 to March, 2023 exclusively for the above
business, and capitalized the same in its books of account as on 1st April, 2023. Further, during the Previous Year
2023-24, it incurred capital expenditure of ₹ 2.5 crore (out of which ₹ 1 crore was for acquisition of land) exclusively
for the above business. Compute the income under the heading “profits and gains of business or profession” for the
assessment year 2024-25, assuming that MNP Ltd. has fulfilled all the conditions specified for claim of deduction
u/s 35AD and has not claimed any deduction under Chapter VI-A under the heading “C.-Deductions in respect of
certain incomes”. The profits from the business of running this hotel (before claiming deduction u/s 35AD) for
the A.Y. 2024-25 is ₹ 80 lakhs. Assume that the company also has another existing business of running a four-star
hotel in Kanpur, which commenced operations 5 years back, the profits from which was ₹ 130 lakhs for assessment
year 2024-25.
Solution :
Computation of business income of MNP Ltd. for A.Y. 2024-25
Particulars ₹ in lakhs
Income from specified business covered u/s 35AD [Working 1] (110)
Income from another hotel business 130
Profit and gains of business or profession 20
Working 1: Computation of income from specified business u/s 35AD
Particulars ₹ in lakhs ₹ in lakhs
Net profit from specified business before deduction u/s 35AD 80
Less: Deduction u/s 35AD being capital expenses incurred
- Capital expenditure incurred in earlier year 40
- Capital expenditure incurred in the previous year less cost of acquisition of land 150 190
Income from specified business covered u/s 35AD 110
3.2.11 Carry forward and set off of capital loss [Sec. 74]
Losses under the head ‘Capital gains’ can be carried forward and set off against income under the same head,
subject to the restriction that the loss on transfer of long-term capital assets can be set off only against long term
capital gain.
Taxpoint: Loss on transfer of short-term capital assets can be set off against any income under the head capital gain
(whether short-term or long-term).
Period for which carry-forward shall be allowed: 8 assessment years immediately succeeding the assessment
year in which such loss is first computed.
Academic note: In the assessment year 2024-25, losses prior to the assessment year 2016-2017 cannot be set off.
Filing of return: As per sec. 80, the loss cannot be carried forward unless it is determined in pursuance of a return
filed by the assessee u/s 139(3), within time as prescribed u/s 139(1).
Illustration 21:
Compute taxable income under following cases for the A.Y. 2024-25:
Case 1 Case 2 Case 3 Case 4
Particulars
STCG LTCG STCG LTCG STCG LTCG STCG LTCG
Income of the P.Y. 2023-24 1,00,000 (30,000) (30,000) 1,00,000 1,00,000 (20,000) (30,000) 1,00,000
B/f loss of P.Y. 2022-23 50,000 - - 50,000 60,000 50,000 10,000 20,000
Solution :
Computation of taxable income for the A.Y.2024-25
3.2.12 Carry forward and set off of losses from activity of owning and maintaining race
horses [Sec. 74A]
In case of an assessee, being the owner of horses maintained by him for running in horse races (race horses), the
amount of loss incurred by the assessee in the activity of owning and maintaining race horses in any assessment
year shall be set off only against income from the activity of owning and maintaining race horses.
Period for which carry forward shall be allowed: 4 assessment years immediately succeeding the assessment
year in which such loss is first computed.
Notes
1. Continuity of activity: Activity of owning and maintaining race horses must be carried on by the assessee in
the previous year in which set off is claimed.
2. Treatment of other race animals: Sec. 74A states only about losses from activity of owning and maintaining
race horses, other race animals are governed by sec. 72.
3. Filing of return: To claim benefit of carry forward, return of loss u/s 139(3) must be filed within time as per
sec. 139(1).
4. Horse Race: Horse race means a race upon which wagering or betting on horses may be lawfully made.
5. Amount of loss incurred by the assessee in the activity of owning and maintaining race horses means—
Particulars ₹
Amount of expenditure (not being in the nature of capital expenditure) laid out or expended by him
wholly and exclusively for the purposes of maintaining race horses ***
Less: Income by way of stake money ***
Loss incurred in the activity of owning and maintaining race horses ***
‘Income by way of stake money’ means the gross amount of prize money received on a race horse by the
owner thereof.
Test Yourself
1. From the following information, compute Mr. Rahaman’s total income and the amount of loss to be carried
forward for the assessment year 2024-25:
₹
a. Income from house – 1 40,000
b. Loss from house – 2 30,000
c. Income from garment business 50,000
d. Loss from Jute business 25,000
e. Loss from speculative business 15,000
f. Long term capital gain 30,000
From the assessment year 2023-24, the balance of following losses were brought forward:
a. Loss from the garment business ₹ 10,000
b. Long-term capital loss ₹ 10,000
c. Loss from house property ₹ 10,000
Hints
1. ₹ 1,35,000
Quick MCQs:-
1. Mr. B incurred Short Term Capital Loss of D 10,000 on Sale of Shares through the National Stock
Exchange. Such Loss can be set –off-
(a) Only against Short Term Capital Gains
(b) Against both STCG and LTCG
(c) Against any head of Income
(d) None of the above.
2. Loss under the head Income from House Property can be carried forward-
(a) Only if the return is furnished before the due date mentioned u/s 13(1)
(b) Even if the return is not furnished
3. Loss on account of owing & maintaining the race horses can be carried forward
(a) for 8 years
(b) for 4 years
(c) indefinitely
(d) None of the above
4. The maximum period for which Speculation Loss can be carried forward is
(a) 4 Years
(b) 8 Years
(c) Nil
(d) Any number of years
5. Brought forward loss from house property of D 3,10,000 of A.Y 2023-24 is allowed to be set-off against
income from house property of A.Y. 2024-25 of D 5,00,000 to the extent of –
(a) D 2,00,000
(b) D 3,10,000
(c) D 2,50,000
(d) D 1,00,000
DEDUCTIONS
From Gross Total Income (being aggregate of income under five heads), assessee can claim several deductions
as specified in chapter VIA on fulfillment of prescribed conditions as laid down in the respective section. After
allowing these deductions, total income of the assessee is arrived & tax is charged on it at the prescribed rates.
3.3.2 Deduction u/s 80C in respect of LIC premium, contributions to PF, etc.
Applicable to
An Individual or a Hindu Undivided Family (whether resident or non-resident)
Condition to be satisfied
Assessee has made a deposit or an investment in any one or more of the listed items (as given below) during the
previous year.
Particulars Notes
Category A
Applicable to Individual & HUF both
1. Life insurance premium paid by a 1. Insurance policy can be taken on life of the following:
person to effect or to keep in force a. In case of an individual: Himself, spouse and child
an insurance policy (life policy or (whether major or minor) of such individual;
endowment policy) [Sec. 80C(2)(i)]
b. In case of HUF: Any member of the HUF.
2. Maximum limit: Premium on insurance policy in excess of
following % of the actual sum assured shall be ignored.
Insured is disable2 or Insured is
Policy issued suffering from disease any other
specified u/s 80DDB person
Upto 31-03-2012 20% 20%
During P.Y. 2012-13 10% 10%
On or after 01-04-2013 15% 10%
3. Actual capital sum assured in relation to a life insurance policy
shall mean the minimum amount assured under the policy on
happening of the insured event at any time during the term of the
policy, not taking into account:
i. the value of any premium agreed to be returned; or
ii. any benefit by way of bonus or otherwise over and above
the sum actually assured, which is to be or may be received
under the policy by any person.
2. Contribution made towards Public 1. Subscription should be in the name of following persons:
provident fund (PPF). [Sec. 80C(2) a. In case of individual: Such individual, his spouse and
(v)] child (whether major or minor);
b. In case of HUF: Any member of HUF.
2. Contribution must not be in form of repayment of loan
2
Disable or severe disable as referred to in sec. 80U
Particulars Notes
3. Any subscription to National Savings 3. If contribution is made in joint names, the person who has
Certificates, VIII Issue and IX Issue contributed the money is eligible to claim deduction.
[Sec. 80C(2)(ix)] 4. An individual can claim deduction in respect of certificates
purchased in the name of his spouse or minor child.
5. Treatment of accrued interest: Deduction is also available on
accrued interest which is reinvested. i.e., interest upto penultimate
year of lock-in-period is eligible for deduction.
4. Contribution for participating in the Contribution can be made in the names of following persons:
Unit-linked Insurance Plan (ULIP) In case of individual: Such individual, spouse and child (major or
of Unit Trust of India (UTI) or ULIP minor) of such individual;
of LIC Mutual fund u/s 10(23D) In the case of HUF: Any member of HUF.
formerly known as Dhanraksha
1989. [Sec.80C(2)(x)]
5. Sum paid to effect or keep in force a
contract for notified annuity plan of
the LIC or any other insurer. [Sec.
80C(2)(xii)]
6. Subscription to notified units of a Eligible scheme: Equity Linked Saving Scheme, 2005.
specified Mutual fund u/s 10(23D)/
administrator or the specified
company as referred in sec. 2 of UTI.
[Sec. 80C(2)(xiii)]
7. Any sum paid as subscription to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008
Home Loan Account Scheme or
notified pension fund of the National
Housing Bank. [Sec 80C(2)(xv)]
8. Any sum paid as subscription to Such deposit scheme shall be of -
a notified deposit scheme. [Sec. Public sector companies engaged in providing long-term finance
80C(2)(xvi)] for construction or purchase of houses in India for residential
purpose; or
Any authority constituted in India for the purpose of satisfying
the need for housing accommodation or for the purpose of
planning, development or improvement of cities, towns, villages
or for both.
9. Any payment for purchase or # Specified person includes -
construction of a residential house i. the Central or State Government; or
property (the income from which
ii. any bank, including a co-operative bank; or
is chargeable to tax under the head
“Income from house property), by iii. the National Housing Bank; or
way of - iv. Life Insurance Corporation; or
v. any 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; or
Particulars Notes
a. any instalment due under vi. any company in which the public are substantially interested or
any self-financing or other any co-operative society, where such company or co-operative
scheme of any development society is engaged in the business of financing the construction
authority, housing board or of house; or
other authority engaged in the
vii. the assessee’s employer where such employer is an authority
construction and sale of house
or a board or a corporation or any other body established or
property on ownership basis;
constituted under a Central or State Act;
or
viii. the assessee’s employer where such employer is a public
b. any instalment due to any
company or public sector company, or a university established
company or co-operative
by law or a college affiliated to such university or local authority
society of which the assessee
or co-operative society.
is a shareholder or member
towards the cost of the house Notes:
property allotted to him; or Any expenditure in respect of which deduction is allowable u/s
c. repayment of the amount 24 is not eligible for deduction.
borrowed by the assessee from Repayment of loan borrowed for acquiring commercial property
specified person# are not entitled for deduction.
d. stamp duty, registration fee and Repayment of loan taken for repair, alteration, renovation,
other expenses for the purpose addition are not eligible for deduction
of transfer of such house
property to the assessee [Sec.
80C(2)(xviii)]
10. Any amount invested in - Eligible issue of capital means an issue made by a public company
a. Debentures of or equity shares formed and registered in India or a public financial institution and the
in an eligible issue of capital; or entire proceeds of the issue are utilized wholly and exclusively for the
purpose of any business referred to in sec. 80IA(4).
b. Eligible issue of capital of any
public financial institution. [Sec.
80C(2)(xix)]
11. Subscription to units of any mutual
fund u/s 10(23D) provided amount
of subscription to such units is
subscribed only in the eligible issue
of capital [Sec. 80C(2)(xx)]
12. Investment as term deposit for a
period of 5 years or more with a Such term deposit scheme shall be framed and notified by the Central
scheduled bank. [Sec. 80C(2)(xxi)] Government.
Particulars Notes
14. Senior Citizens Savings Scheme
Rules, 2004 [Sec. 80C(2)(xxiii)]
Particulars Notes
8. Contribution to a specified account
(i.e., NPS Tier-II account) of the
notified pension scheme referred to
in sec. 80CCD for a fixed period of
not less than 3 years by an employee
of the Central Government
Notes
1. Deduction not available in certain cases: Deduction is not available from short-term capital gain covered
u/s 111A and long-term capital gain.
2. Cash basis: For the purpose of Deduction u/s 80C, amount paid, invested or deposited shall be considered
on payment basis. Payments, which have become due during the previous year but not paid till the end of the
previous year, shall not be eligible for deduction. Above rule holds good, even though the assessee follows
mercantile system of accounting.
Quantum of deduction
Deduction under this section shall be minimum of the following:
Aggregate of the eligible contributions, expenditure or investments (discussed above)
₹ 1,50,000
Illustration 22:
Calculate the amount of deduction u/s 80C: ₹ in ‘000
Particulars A B C D
Gross total income 520 150 90 - 30
Amount invested/contributed /expended in specified items 175 70 100 50
Deduction u/s 80C 150 70 90 Nil
Illustration 23:
Calculate the amount of deduction u/s 80C from following data ₹ in ‘000
Particulars A B C D E F G
Payment of LIC premium 5 8 6 8 4 - 10
LIC policy amount 80 70 50 40 50 - 40
NSC purchased 20 15 18 17 35 85 20
Repayment of housing loan 20 25 10 - 12 - 80
Contribution to Unit linked insurance plan 10 5 - - 3 2 3
School fee paid for one child 10 15 6 18 3 5 -
Amount deposited in PPF 5 40 10 6 7 9 -
Notified units of Mutual fund 50 80 60 10 40 100 Nil
Gross Total Income 370 180 320 190 160 540 75
Total income consists of income under the head “Profit and gains of business or profession” only.
Solution :
Calculation of deduction u/s 80C (₹ in ‘000)
Particulars A B C D E F G
Aggregate of investment u/s 80C(2)
Payment of LIC premium 5 7* 5* 4* 4 - 4*
*(to the maximum of 10% of policy amount)
NSC purchased 20 15 18 17 35 85 20
Repayment of housing loan 20 25 10 - 12 - 80
Contribution to ULIP 10 5 - - 3 2 3
School fee paid for one child 10 15 6 18 3 5 -
Notified units of Mutual fund 50 80 60 10 40 100 Nil
Deposit in PPF 5 40 10 6 7 9 -
Total 120 187 109 55 104 201 107
Gross Total Income 370 180 320 190 160 540 75
Deduction u/s 80C 120 150 109 55 104 150 75
Lock in period
Lock in period in following cases -
Life Insurance Policy: The Life insurance policy (point 1) cannot be surrendered unless premium for 2 years on
such policy has been paid.
Housing Loan: The house acquired (point 10) cannot be transferred before 5 years from the end of financial year
in which the possession of such property is obtained by assessee.
Unit Linked Insurance Plan: The participation in plan (point 5) cannot be ceased before contribution in respect
of such participation has been paid for 5 years.
Shares or debentures of infrastructure company or power company or mutual fund: Equity shares, debentures,
etc. (point 11) cannot be sold or otherwise transferred within 3 years from the date when name of the assessee for
those shares or debentures has been entered in the register of member or debenture holder by the company or the
Mutual fund.
Investment in Senior Citizen Saving Scheme / Post office Time Deposit: Such amount, including interest accrued
thereon, shall not be withdrawn by the assessee from his account, before the expiry of 5 years from the date of its
deposit. However, any amount received by the nominee or legal heir of the assessee, on the death of such assessee,
shall not be included.
Consequence in case of violation of lock in period
If the above lock in period is violated, then entire amount of deduction allowed earlier in any previous year, shall
be treated as taxable income in the year in which default is made.
1. Amount paid under an annuity plan: During the previous year, assessee has paid or deposited a sum under
an annuity plan of the Life Insurance Corporation of India (LIC) or any other insurer for receiving pension
from the fund referred to in Sec. 10(23AAB).
2. Payment out of taxable income: The amount must be paid out of income which is chargeable to tax. However,
it is not necessary that such income relates to current year.
Quantum of deduction
Minimum of the following -
a. Amount deposited; or
b. ₹ 1,50,000
Other Points
a. Treatment of Interest or Bonus accrued: Interest or bonus accrued or credited as per the scheme to the
assessee’s account shall not be eligible for deduction.
b. Withdrawal from such fund [Sec. 80CCC(2)]: Any amount received by the assessee or his nominee
as pension; or on surrender of such annuity is taxable in the hands of recipient in the year of receipt.
Note: Interest or bonus received from such fund shall also be taxable.
c. Deduction u/s 80C [Sec.80CCC(3)]: Deduction u/s 80C will not be available for the amount paid or
deposited and for which deduction has been claimed u/s 80CCC.
3
Central or State
3.3.5 Deduction u/s 80CCE: Limit on deductions u/s 80C, 80CCC and 80CCD
The aggregate amount of deductions under section 80C, section 80CCC and section 80CCD [other than deduction
in respect of employer’s contribution and additional deduction u/s 80CCD(1B)] shall not exceed ₹ 1,50,000.
Taxpoint: An assessee can claim deduction u/s 80C, 80CCC & 80CCD:
Particulars Amount
Deduction u/s 80C ****
Deduction u/s 80C ****
Deduction u/s 80CCD [Other than deduction in respect of Employer’s Contribution and additional ****
deduction u/s 80CCD(1B)]
Total [Restricted to maximum of ₹ 1,50,000 u/s 80CCE] *****
Add: Contribution to the pension scheme by any individual allowable u/s 80CCD(1B) [Sub. to a ****
maximum of ₹ 50,000/-]
Add: Employer’s contribution to New Pension System referred to in Sec. 80CCD [Subject to max. ****
of 10% or 14% of salary]
Deduction available u/s 80C, 80CCC & 80CCD *****
Illustration 24:
X completed his studies on 1-04-2023 and was immediately employed by X Ltd. on the following terms:
Basic Salary ₹ 20,000 p.m.
DA ₹ 5,000 p.m. (forming a part of retirement benefit)
Bonus ₹ 50,000
During the year, his employer contributed ₹ 33,000 to the pension scheme being notified u/s 80CCD of the Income
Tax Act, 1961. X also contributed similar amount. His income from house property is ₹ 50,000. During the year he
contributed ₹ 15,000 to pension plan of LIC, to PPF ₹ 1,00,000 and paid LIC premium of ₹ 16,000 (Policy value ₹
1,20,000). Compute his total income.
Solution :
Computation of total income of X for the A.Y.2024-25
Particulars Amount Amount Amount
Salaries
Basic (₹ 20,000 * 12) 2,40,000
Bonus 50,000
Dearness allowances (₹ 5,000 * 12) 60,000
Contribution to pension scheme 33,000
Gross Salary 3,83,000
Less: Standard Deduction u/s 16(ia) 50,000 3,33,000
Income from house property 50,000
Gross Total Income 3,83,000
Less: Deduction u/s
80C - LIC premium to maximum of 10% of Policy value (i.e. 10% 12,000
of ₹ 1,20,000)
- Contribution in PPF 1,00,000 1,12,000
80CCC (Pension plan of LIC) 15,000
80CCD (Notified pension scheme)
- Own contribution being lower of:
a) Amount contributed i.e. ₹ 33,000
b) 10% of (Basic and DA forming part of retirement 30,000
benefit), i.e., 10% of (₹ 2,40,000 + ₹ 60,000)
1,57,000
As per sec.80CCE, total deduction u/s 80C + 80CCC + 80CCD 1,50,000
(other than employer’s contribution) cannot exceed ₹ 1,50,000
80CCD(1B): Contribution to NPS (Amount not claimed above 3,000
subject to max. of ₹ 50,000/-)
80CCD(2): Employer contribution
a) Amount contributed i.e. ₹ 33,000
b) 10% of (Basic and DA forming part of retirement benefit), 30,000 1,83,000
i.e., 10% of (₹ 2,40,000 + ₹ 60,000)
Total Income 2,00,000
Deduction u/s 80CCH in respect of contribution to ACF contribution to Agniveer Corpus Fund is fully allowed as
deduction.
4
Contributory Health Service Scheme of the Department of Atomic Energy
Expenditure on
Category Assessee Nature of Payment Quantum of Deduction
behalf of
3 HUF Payment of Mediclaim Any member of the Lower of the following:
insurance premium# family.
a. Premium Paid; or
b. ₹ 25,000
Senior Citizen
Where the person, for whom such
premium is paid, is a senior citizen,
then maximum limit of deduction
shall be increased to ₹ 50,000 instead
of ₹ 25,000.
4 Individual Amount paid on account Expenditure Lower of the following:
/ HUF of medical expenditure incurred for any of Medical Expenditure incurred; or
provided mediclaim the following person
insurance is not paid on who is a senior ₹ 50,000
the health of such person citizen:
In case of Individual
a. Himself/herself,
spouse; or
b. dependent
children; or
c. Either or both
of the parents
In case of HUF:
a. Any member of
the family
Note:
The deduction for category 4 is available only from the overall limit of category 1 or category 2
or category 3 respectively. In other words, maximum deduction under category 1, 2, 3 and 4 are as
under:
Category Maximum Deduction
Category 1 & 4 ₹ 50,000/-
Category 2 & 4 ₹ 50,000/-
Category 3 & 4 ₹ 50,000/-
Dependent children: Children are said to be dependant if their own resources are not sufficient enough to support
them.
#
Such mediclaim insurance policy should be in accordance with the scheme framed in this behalf by -
¾¾ General Insurance Corporation of India (GIC) & approved by the Central Government (i.e. Mediclaim
insurance policy); or
¾¾ Any other insurer who is approved by the Insurance Regulatory and Development Authority.
2. Mode of payment: The premium or medical expenditure must be paid by any mode other than cash. However,
payment shall be made by any mode, including cash, in respect of any sum paid on account of preventive
health check-up.
3. Payment out of taxable income: The amount must be paid out of income, which is chargeable to tax. However,
it is not necessary that such income relates to current year.
Taxpoint:
Where lumpsum health insurance premium is paid (single premium) covering insurance for more than a year,
then, deduction is available on proportionate basis.
For claiming higher deduction of ₹ 50,000, payer need not be a senior citizen but person insured must be a
senior citizen.
Senior citizen means an individual resident in India who is of the age of 60 years or more at any time during
the relevant previous year
Illustration 25:
X, 40 years old, paid following sums by cheque -
Illustration 26:
Mr. Ram (38 years) has incurred following expenses:
Particulars ₹
Mediclaim Insurance premium paid for himself 9,000
Mediclaim Insurance premium paid for spouse 8,000
Mediclaim Insurance premium paid for dependent children 6,000
Mediclaim Insurance premium paid for father (62 years) 18,000
Preventive health-check up expenditure for father 6,000
Preventive health-check up expenditure for himself (paid in cash) 4,000
Compute deduction available to Mr. Ram u/s 80D.
Solution :
Computation of deduction u/s 80D available to Mr. Ram
Illustration 27:
Mr. Shyam (40 years) has incurred following expenses:
Particulars ₹
Mediclaim Insurance premium paid for himself 12,000
Mediclaim Insurance premium paid for spouse 11,000
Mediclaim Insurance premium paid for dependent children 6,000
Mediclaim Insurance premium paid for mother (76 years) 18,000
Preventive health-check up expenditure for mother 8,000
Medical expenditure incurred for father (78 years) 39,000
Compute deduction available to Mr. Shyam u/s 80D.
Solution :
Computation of deduction u/s 80D available to Mr. Shyam
Illustration 28:
Mr. Rahim (55 years) has incurred following expenses:
Particulars ₹
Mediclaim Insurance premium paid for himself 10,000
Mediclaim Insurance premium paid for spouse 10,000
Mediclaim Insurance premium paid for dependent children 5,000
Mediclaim Insurance premium paid for mother (76 years) 9,000
Mediclaim Insurance premium paid for father (82 years) 39,000
Preventive health-check up expenditure for father 6,000
Particulars ₹
Medical expenditure incurred for father 14,000
Compute deduction u/s 80D.
Solution :
Computation of deduction u/s 80D available to Mr. Rahim
3.3.7 Deduction u/s 80DD in respect of maintenance of dependant disable relative Amended
Applicable to
A resident individual (irrespective of citizenship) or a resident HUF
Conditions to be satisfied
1. Assessee has a dependant disable relative:
a. Dependant Relative
Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999
(i.e., a person suffering with 40% or more of one or more ‘disabilities’ as certified by a medical authority).
Disability includes blindness, low vision, leprosy-cured, hearing impairment, locomotor disability, mental
retardation, mental illness.
3. No benefit u/s 80U to disable relative: The disable individual has not claimed benefit u/s 80U.
4. Expenditure on disable relative: Assessee has -
¾¾ incurred any expenditure for the medical treatment (including nursing), training and rehabilitation of a
dependant, being a person with disability; or
¾¾ paid or deposited any amount in an approved scheme for the maintenance of a disable dependant being
framed by the Life Insurance Corporation or any other insurer or the Administrator# or Unit Trust of India.
Taxpoint
The scheme shall provide for payment of annuity or lump sum amount for the benefit of a dependant,
being a person with disability,—
i.in the event of the death of the individual or the member of the HUF in whose name subscription to
the scheme has been made; or
ii. on attaining the age of 60 years or more by such individual or the member of the HUF, and the
payment or deposit to such scheme has been discontinued.
Note: Though assessee needs to fulfill the above condition, the amount of deduction shall not be affected by
the actual expenditure incurred on the above two purposes.
4. Medical certificate: Assessee shall furnish a copy of the certificate issued by the medical authority$ along
with the return of income in respect of the assessment year for which the deduction is claimed.
$
Medical authority means medical authority as per Sec. 2(p) of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995 or such other medical authority as may,
by notification, be specified by the Central Government for certifying “autism”, “cerebral palsy”, “multiple
disabilities”, “person with disability” and “severe disability” referred to in sec. 2(a), 2(c), 2(h), 2(j) and 2(o)
of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act, 1999 (i.e., specified hospital or institution.)
Quantum of deduction
Treatment: After the expiry of previous certificate, deduction under this section shall be allowed only if a
new certificate is obtained from the medical authority and a copy thereof is furnished along with the return of
income.
b. Treatment when handicapped person predeceases [Sec. 80DD(3)]
Condition: Where the assessee has deposited any amount in annuity plan of LIC or UTI, etc. for the benefit of
disabled person and such person predeceases.
Treatment: Any amount received from such annuity plan shall be deemed to be the income of the assessee of
the previous year in which such amount is received by the assessee.
However, nothing shall be taxable where amount is received by the dependant, being a person with disability,
before his death, by way of annuity or lump sum on attaining the age of 60 years or more by such individual
or the member of the HUF, and the payment or deposit to such scheme has been discontinued.
Illustration 29:
Compute total income of Sri Bhandari from following information:
Taxable salary (Net) ₹ 75,000
Income from other sources ₹ 20,000
Agricultural income ₹ 4,000
He deposited in LIC annuity plan ₹ 18,000
He paid medical insurance premium by cheque for his dependant blind mother (certified as severe disable person),
aged 68 years, ₹ 20,000.
Solution :
Computation of Total income of Sri Bhandari for the A.Y. 2024-25
Conditions to be satisfied
1. Expenditure incurred on the medical treatment of relative: The assessee has, during the previous year,
actually paid any amount for the medical treatment of a specified disease or ailment as prescribed in rule
11DD. Expenditure is incurred for treatment of the assessee himself or for a dependant relative#.
#
Dependant Relative
Quantum of Deduction
Patient Deduction shall be minimum of the following
Senior citizen ¾¾ [(Actual expenditure incurred by assessee) – (Amount reimbursed by employer or
medi-claim received)]
¾¾ [₹ 1,00,000 – (Amount reimbursed by the employer or mediclaim received)]
Other ¾¾ [₹ 40,000 – (Amount reimbursed by the employer or mediclaim received)]
¾¾ [(Actual expenditure incurred by assessee) – (Amount reimbursed by employer or
mediclaim received)]
Note: In any case, the total deduction cannot exceed ₹ 1,00,000
Illustration 30:
Find the amount of deduction u/s 80DDB for the following cases:
3.3.9 Deduction u/s 80E in respect of repayment of loan for higher education
Applicable to
An Individual (irrespective of residential status and citizenship of the individual).
Conditions to be satisfied
1. Loan from specified institution: The assessee had taken a loan from -
¾¾ a financial institution; or
Financial Institution means a banking company to which the Banking Regulation Act, 1949 applies
(including any banking institution referred to in sec. 51 of that Act) or any other specified financial
institution.
¾¾ an approved charitable institution
Approved Charitable Institution means an institution established for charitable purposes and approved by
the prescribed authority u/s 10(23C) or an institution referred to in Sec. 80G(2)(a)
2. Purpose of loan: The loan must have been taken for the purpose of pursuing higher education of himself/
herself or for any other following persons:
a. Spouse b. Children (dependent or not); or c. the student for whom the individual is the legal guardian
“Higher education” means any course of study pursued after passing the Senior Secondary Examination or its
equivalent from any school, board or university recognised by the Central Government or State Government or
local authority or by any other authority authorised by the Central Government or State Government or local
authority to do so
3. Payment of interest: The assessee pays interest on such loan.
4. Payment out of taxable income: The amount must be paid out of income chargeable to tax. However, it is not
necessary that such income relates to the current year.
Quantum of deduction
Amount paid during the year by way of payment of interest.
Maximum permissible period for which deduction is available [Sec.80E(2)]
Deduction under this section shall be allowed for the initial assessment year and 7 assessment years immediately
succeeding the initial assessment year$ or until interest is paid by the assessee in full, whichever is earlier.
$
Initial Assessment Year means the assessment year relevant to the previous year, in which the assessee starts
repaying the loan or interest thereon.
Taxpoint
¾¾ The deduction is available for a maximum period of 8 consecutive years.
¾¾ The period starts from the year in which the assessee starts paying the interest on such loan.
3.3.10 Deduction u/s 80EE in respect of interest on loan taken for residential house property
Applicable to
Individual (resident or non-resident)
Conditions to be satisfied
1. Loan: The assessee has taken loan for acquisition of the residential house property
2. Sanction of Loan: The loan has been sanctioned by the financial institution5 during the Previous Year 2016-17.
3. Amount of Loan: The amount of loan sanctioned for acquisition of the residential house property does not
exceed ₹ 35 lakhs.
5
"Financial institution" means a banking company to which the Banking Regulation Act, 1949 applies including any bank or banking institution
referred to in sec. 51 of that Act or a housing finance company.
"Housing finance company" means a public company formed or 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.
4. Value of Residential Property: The value of the residential house property does not exceed ₹ 50 lakhs.
5. No other residential property: The assessee does not own any residential house property on the date of sanction
of the loan.
Quantum of Deduction
Minimum of the following:
a. Interest on loan payable for the previous year
b. ₹ 50,000
Other Points
Double deduction is not available: Where a deduction under this section is allowed for any interest, deduction shall
not be allowed in respect of such interest under any other provisions of the Act for the same or any other assessment
year.
Taxpoint: It is irrelevant whether such interest pertains to pre-construction period or post construction period.
Provision Illustrated
Compute deduction u/s 80EE in the following cases:
(₹ in lakh)
Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7
Assessee P Q R S T U X (HUF)
Date of Sanction of Loan 01-10-16 01-10-16 01-10-16 01-10-16 01-10-16 01-10-15 01-10-16
Amount of loan ₹ 30 ₹ 20 ₹ 40 ₹ 20 ₹ 10 ₹ 20 ₹ 20
Value of the property ₹ 40 ₹ 55 ₹ 50 ₹ 35 ₹ 35 ₹ 35 ₹ 35
Other residential property No No No Yes No No No
owned by the Assessee on the
date of sanction
Interest for the P.Y. ₹ 1.20 ₹ 1.20 ₹ 1.80 ₹ 1.20 ₹ 0.40 ₹ 1.00 ₹ 1.20
Deduction u/s 80EE ₹ 0.50 Nil Nil Nil ₹ 0.40 Nil Nil
Notes 1 2 3 4 5 6 7
1. Assessee can claim ₹ 70,000 being excess interest, as deduction u/s 24(b)
2. As value of the property exceeds ₹ 50 lac hence, deduction u/s 80EE is not available. However, assessee can
claim deduction u/s 24(b)
3. As amount of loan exceeds ₹ 35 lac hence, deduction u/s 80EE is not available. However, assessee can claim
deduction u/s 24(b).
4. As assessee owns other residential house property on the date of sanction of loan, hence, deduction u/s 80EE
is not available. However, assessee can claim deduction u/s 24(b)
5. Assessee can claim ₹ 40,000 as deduction u/s 80EE
6. Loan was not sanctioned during the previous year 2016-17
7. The deduction u/s 80EE is not available to HUF, however, assessee can claim deduction u/s 24(b).
3.3.11 Deduction u/s 80EEA in respect of interest on loan taken for certain house property
Applicable to
Individual (resident or non-resident) not eligible for deduction u/s 80EE
Conditions to be satisfied
1. Loan: The assessee has taken loan for acquisition of the residential house property from any financial institution.
2. Sanction of Loan: The loan has been sanctioned by the financial institution (as defined u/s 80EE) during 01-
04-2019 to 31-03-2022.
3. Value of Residential Property: The stamp duty value of the residential house property does not exceed ₹ 45
lakhs.
4. No other residential property: The assessee does not own any residential house property on the date of sanction
of the loan.
5. No deduction u/s 80EE: The assessee is not eligible for deduction u/s 80EE.
Quantum of Deduction
Minimum of the following:
a. Interest on loan payable for the previous year
b. ₹ 1,50,000
Other Points
Double deduction is not available: Where a deduction under this section is allowed for any interest, deduction shall
not be allowed in respect of such interest under any other provisions of the Act for the same or any other assessment
year.
Provision Illustrated
Compute deduction u/s 80EEA in the following cases:
(₹ in lakh)
Case 1 Case 2 Case 3 Case 4 Case 5 Case 6
Assessee A B C D E F (HUF)
Date of Sanction of Loan 01-10-21 01-10-21 01-10-21 01-10-21 01-10-18 01-10-20
Amount of loan ₹ 30 ₹ 30 ₹ 40 ₹ 30 ₹ 20 ₹ 20
Stamp Duty Value of the property ₹ 40 ₹ 55 ₹ 45 ₹ 35 ₹ 35 ₹ 35
Other residential property owned by the
No No No Yes No No
Assessee on the date of sanction
Interest for the P.Y.2021-22 ₹ 2.20 ₹ 1.20 ₹ 1.20 ₹ 1.20 ₹ 1.00 ₹ 1.20
Deduction u/s 80EE ₹ 1.50 Nil ₹ 1.20 Nil Nil Nil
Notes 1 2 3 4 5 6
1. Assessee can claim ₹ 70,000 being excess interest, as deduction u/s 24(b)
2. As value of the property exceeds ₹ 45 lac hence, deduction u/s 80EEA is not available. However, assessee can
claim deduction u/s 24(b)
3. Deduction cannot exceed interest on loan.
4. As assessee owns other residential house property on the date of sanction of loan, hence, deduction u/s 80EEA
3. Proof of donation: Proof of donation, in original, should be attached with the return of income.
Other Points
a. Specified funds or organizations: Specified Funds or Organisations are divided into two categories:
ii. On which limit is not applicable (Item No.1 to 26 given in the list) (hereinafter referred as Category A
Organisation).
iii. On which limit is applicable (Item No.27 to 33 given in the list) (hereinafter referred as Category B
Organisation).
b. Double deduction is not permissible: Where deduction under this section has been allowed, the same shall
not qualify for deduction under any other section for the same or any other Assessment Year
c. Risk Verification: Claim of the assessee for a deduction in respect of any donation made to an institution or
fund to which the provisions of sec. 80G(5) apply, shall be allowed on the basis of information relating to said
donation furnished by the institution or fund to the prescribed income-tax authority or the person authorised
by such authority, subject to verification in accordance with the risk management strategy formulated by the
Board from time to time.
Taxpoint:
¾¾ The limit is applicable only on category B organizations or funds.
¾¾ The limit is applicable on qualifying amount of donation and not on deduction.
¾¾ The limit is not on individual donation but on aggregate donation.
Computation of quantum of deduction
Particulars Amount
100% or 50% of donation to category A organizations or funds ***
Add: 100% or 50% of donation to category B organizations or funds (subject to the Limit#) ***
Deduction u/s 80G ***
#
Limit: 10% of Adjusted Gross total income (hereinafter referred as Adj. GTI)
Adjusted GTI = Gross total income – Long term capital gain – Short term capital gain covered u/s 111A - All
deductions u/s 80C to 80U other than deduction u/s 80G - Income referred u/s 115A, 115AB,
115AC, etc.
Taxpoint: While calculating Adjusted GTI, casual income like winning from lotteries, etc. shall be included.
List of specified organizations or funds
14. Fund set up by a State Government for medical relief to the NA 100%
poor
15. Army Central Welfare Fund or Air Force Central Welfare NA 100%
Fund or Indian Naval Benevolent fund
16. Andhra Pradesh Chief Minister’s Cyclone Relief Fund NA 100%
17. National Illness Assistance Fund NA 100%
6
The sum is eligible u/s 80G only if the amount is not spent as Corporate Social Responsibility u/s 135(5) of the Companies Act, 2013.
7
The sum is eligible u/s 80G only if the amount is not spent as Corporate Social Responsibility u/s 135(5) of the Companies Act, 2013.
Illustration 31:
Compute total income for the A.Y.2024-25 of Miss Dipika, a resident individual, from the following details:
Particulars Amount
Profits and gains of business or profession 80,000
Income from Other Sources 10,000
Long-term Capital Gains 5,00,000
Payment of medical insurance premium on own life 5,000
Donation to National Foundation for communal harmony 4,000
Donation to the fund set up by the Gujarat Govt. for providing Relief to victims of earthquake 5,000
in Gujarat
Donation to Prime Minister’s Drought Relief Fund 6,000
Donation to Approved Charitable Institution 12,000
Donation to Central Government for promotion of family planning 3,000
Donation to a poor boy for higher education 10,000
Donation of cloth to an approved institution worth 12,000
Donation to charitable institution for construction of home for a particular community 8,000
Solution :
Computation of total income of Miss Dipika for the A.Y. 2024-25
$
Statement showing amount of deduction u/s 80G:
Computation of limit
Adjusted GTI GTI – LTCG – Deductions other than deduction u/s ₹ 5,90,000 – ₹ 5,00,000 – ₹ 5,000 = ₹
80G 85,000
Limit 10% of Adj. GTI 10% of ₹ 85,000 = ₹ 8,500
Application of limit: There is restriction on amount of donation qualifying under this section. If assessee opts to
adjust qualifying amount with donation made to approved charitable institution, then he is eligible for deduction
to the extent of 50% only. So, it is beneficial for him to adjust qualifying amount, first, with donation made to
the ‘Central Government for promotion of family planning’ as it is eligible for 100% deduction. Hence, donation
shall be restricted -
Donation to Central Government for promotion of family planning 3,000
Donation to approved charitable institution (₹ 8,500 – ₹ 3,000) 5,500
Total 8,500
Donations which are not eligible for deduction u/s 80G are stated below:
Donation Reason
Donation to a poor boy for higher education Donation has not been given to a specified organization
Donation of cloth to an approved institution Donation has been made in kind
Donation to charitable institution for construction of Amount donated is for the benefit of a particular
home for particular community community
3. No claim for the benefit of self-occupied house property: Assessee should not treat any residential house
situated at other places as self-occupied property u/s 23(2)(a) or 23(4)(a).
4. Proof for payment of rent: A declaration in Form 10BA should be filed for expenditure incurred by him
towards payment of rent.
Taxpoint: Rent must be paid for a residential house property whether furnished or unfurnished.
Quantum of deduction
Minimum of the following:
i. ₹ 5,000 per month;
ii. 25% of Adjusted Gross total income for the year (referred as Adj. GTI); or
iii. The excess of actual rent paid for accommodation over 10% of Adjusted Gross total income.
Arithmetically, [Rent paid - 10% of Adj. GTI]
Note
Adjusted GTI = Gross total income – Long term capital gain – STCG taxable u/s 111A - All deduction u/s 80’s
other than sec. 80GG – Income u/s 115A, 115AB, 115AC, etc.
Taxpoint: While calculating Adjusted GTI, casual income like winning from lotteries etc. shall be included.
Treatment in case of accommodation at concessional rent provided by employer
Where an assessee has been provided an accommodation by his employer at concessional rent, then rent paid by
him shall be:
deducted while valuing such perquisite; and
eligible for deduction u/s 80GG.
Illustration 32:
Compute total income of Sri Bajaj of Delhi from the following data:
Particulars Amount
Profits & gains of business or profession 80,000
Income from house property (let-out and situated at Kolkata) 40,000
Income from other sources 10,000
Rent paid for office 8,000
Rent paid for residential house 40,000
Solution :
Calculation of total income of Sri Bajaj for the A.Y. 2024-25
Particulars Amount
Profits & gains of business or profession 80,000
Income from house property 40,000
Income from other sources 10,000
Gross Total Income 1,30,000
Less: Deduction u/s 80GG #
27,000
Particulars Amount
Total Income 1,03,000
#
Computation of deduction u/s 80GG
Particulars Working Details Amount
Least of the following shall be deductible:
1. ₹ 5,000 per month ₹ 5,000 * 12 60,000
2. 25% of Adjusted Gross total income 25% of ₹ 1,30,000# 32,500
3. Excess of rent paid over 10% of Adj. GTI ₹ 40,000 - (10% of ₹ 1,30,000 )
#
27,000 27,000
#
Adjusted GTI = Gross total income – Long term capital gain – Short term capital gain covered u/s 111A - All
deduction under 80’s other than section 80GG – Income u/s 115A, etc. = ₹ 1,30,000
Note: Rent paid for office is irrelevant for the purpose of Sec. 80GG.
3.3.15 Deduction u/s 80GGA in respect of donations for scientific research, etc.
Applicable to
An assessee, who is not having any income under the head “Profits & gains of business or profession”.
Conditions to be satisfied
1. During the previous year, assessee paid any sum -
Withdrawal of approval: Deduction shall not be denied merely on the ground that subsequent to the contribution
made by the assessee, the approval granted (or notification notifying eligible projects) has been withdrawn.
Risk Verification: Claim of the assessee for a deduction in respect of any sum referred to in sec. 80GGA(2), shall
be allowed on the basis of information relating to said sum furnished by the payee to the prescribed income-tax
authority or the person authorised by such authority, subject to verification in accordance with the risk management
strategy formulated by the Board from time to time.
3.3.17 Deduction in respect of contributions given by any person to political parties [Sec.
80GGC]
Applicable to
All assessee except local authority and every artificial juridical person wholly or partly funded by the Government
Condition
Assessee has contributed any sum (by any mode other than cash), in the previous year, to any political party or
an electoral trust.
Quantum of deduction
100% of such contribution made in the previous year.
3.3.18 Deductions in respect of profits and gains from industrial undertakings or enterprises
engaged in infrastructure development, etc. [Sec. 80-IA]
Deduction under this section is available for industrial undertaking engaged in the following business–
Infrastructure Facility
Industrial parks or special economic zone;
Power generation, transmission and distribution
Infrastructure facility
Applicable to
Indian Company or any consortium (combination) of such company or by an authority or a board or a corporation
or any other body established or constituted under any Central or State Act.
Conditions to be satisfied
1. Nature of business: The enterprise should carry on the business of -
a. Developing; or
b. Operating and maintaining; or
c. Developing, operating and maintaining,
- any infrastructure facility.
Infra-structure facility means —
a. A road including toll road, a bridge or a rail system;
b. A highway project including housing or other activities being an integral part of the highway project;
c. A water supply project, water treatment system, irrigation project, sanitation and sewerage system or
solid waste management system;
d. A port, airport, inland waterway or inland port or navigational channel in the sea.
2. Agreement: Assessee has entered into an agreement with the Central Government or a State Government or a
local authority or any other statutory body for -
i. developing; or
ii. operating and maintaining; or
iii. developing, operating and maintaining
- a new infrastructure facility.
3. Commencement of business: It has started or starts operating & maintaining the facility on or after the 1-4-
1995 but before 01-04-2017.
Quantum of Deduction
iv. Every assessee shall maintain separate accounts for such activities & shall submit a certificate in Form
10CCC from an accountant, specifying the amount credited to the reserve account and the amount
utilised during the relevant previous year for the highway project.
Notes
a. Method of computation of profit of housing or other activities, which are an integral part of the highway
project
In case of Period
Industrial park 1-4-1997 to 31-3-2011
Special Economic Zone 1-4-2001 to 31-3-2006
Quantum of Deduction
100% of profit derived from such business for any 10 consecutive years out of 15 years commencing from the year
in which the undertaking begins to operate.
From the date of application of sec. 80-IAB, no deduction shall be available u/s 80-IA for SEZ notified on or after
1-4-2005.
Conditions to be satisfied
1. Nature of business: Such undertaking is set up in India for the generation or generation and distribution of power.
2. Commencement of business: Such undertaking commences business during the following time schedule:
In case of Period
Generation of power 1-4-1993 to 31-3-2017
Transmission or distribution by laying a network of new transmission or distribution
1-4-1999 to 31-3-2017
lines
Substantial renovation and modernization1 of the existing transmission or distribution
1-4-2004 to 31-3-2017
lines
“Substantial renovation and modernisation” means an increase in the plant and machinery in the network
1.
of transmission or distribution lines by at least 50% of the book value of such plant and machinery as on the
1-4-2004.
3. New Business: Business should not be formed by splitting up or reconstruction of an existing business.
Exception
However, this condition is not applicable in the following cases:
¾¾ In case of reconstruction, splitting up or reorganization of State Electricity Board;
¾¾ In case when conditions given u/s 33B are satisfied, which are as follows -
a. The business of an industrial undertaking carried on in India is discontinued in any previous year by
reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned
by the assessee being used for business purpose.
b. Such damage was caused due to -
i. flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
ii. riot or civil disturbance; or
iii. accidental fire or explosion; or
iv. action by an enemy or action taken in combating an enemy (whether with or without a declaration
of war),
c. Such business is re-established, reconstructed or revived by the assessee at any time before the
expiry of 3 years from the end of previous year in which damage was caused.
4. New Plant & Machinery: Such undertaking should not be formed by transfer of machinery or plant previously
used for any purpose.
Exception
i. In case of reconstruction, splitting up or reorganization of State Electricity Board;
ii. A plant or machinery is deemed as new asset if the following conditions are satisfied -
a. Such plant or machinery is imported into India;
b. Depreciation on such asset has not been allowed under this Act to any person; and
c. The assessee was the first user of such asset in India.
iii. Where the total value of old plant and machinery transferred to the new business does not exceed 20%
of total value of plant and machinery used in such business, then this condition is deemed to be satisfied.
Quantum of Deduction
100% of profit derived from such business for any 10 consecutive years out of 15 years commencing from the year
in which the undertaking begins to operate.
Note: In case of undertaking engaged in transmission or distribution by laying a network of new transmission or
distribution lines, deduction shall be limited to the extent of profit derived from laying of such network of new
lines.
b. the total turnover of its business does not exceed ₹ 100 crore in the previous year relevant to the
assessment year for which deduction is claimed; and
c. it holds a certificate of eligible business from the notified Inter-Ministerial Board of Certification.
Eligible business means a business carried out by an eligible start up engaged in innovation, development
or improvement of products or processes or services or a scalable business model with a high potential of
employment generation or wealth creation.
Conditions to be satisfied
1. Eligible Business: The assessee should be engaged in the eligible business
2. New Business: Business should not be formed by splitting up or reconstruction of an existing business.
Exception
However, this condition is not applicable when conditions given u/s 33B are satisfied, which are as follows -
¾¾ The business of an industrial undertaking carried on in India is discontinued in any previous year by
reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by
the assessee being used for business purpose.
¾¾ Such damage was caused due to -
i. flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
ii. riot or civil disturbance; or
iii. accidental fire or explosion; or
iv. action by an enemy or action taken in combating an enemy (whether with or without a declaration of
war),
¾¾ Such business is re-established, reconstructed or revived by the assessee at any time before the expiry of
3 years from the end of previous year in which damage was caused.
3. New Plant and Machinery: Such undertaking should not be formed by transfer of machinery or plant
previously used for any purpose.
Exception
i. A plant or machinery is deemed as new asset if the following conditions are satisfied -
a. Such plant or machinery is imported into India;
b. Depreciation on such asset has not been allowed under this Act to any person; and
c. The assessee was the first user of such asset in India.
ii. Where the total value of old plant and machinery transferred to the new business does not exceed 20%
of total value of plant and machinery used in such business, then this condition is deemed to be satisfied.
Quantum of deduction
100% of profit derived from such business for 3 consecutive assessment years out of 10 years commencing from
the year in which such eligible start-up is incorporated.
Other Points
a. Where any deduction is allowed under this section, then deduction shall not be allowed under any other
provisions.
3.3.21 Deduction in respect of profits and gains from certain industrial undertakings other
than infrastructure development undertakings [Sec. 80-IB]
Deduction under this section is available to undertaking engaged in –
1. Industrial undertaking
2. Mineral oils
3. Processing, preservation and packaging of fruits or vegetables, meat or integrated business of handling, storage
& transportation of foodgrains
2. New Business: Business should not be formed by splitting up or reconstruction of an existing business.
Exception: Refer sec. 80-IAC.
3. New Plant and Machinery: Such undertaking should not be formed by transfer of machinery or plant
previously used for any purpose.
Exception: Refer sec. 80-IAC.
4. No. of worker: Such industrial undertaking employs specified number of workers -
* in blocks licensed under the VIII Round of bidding for award of exploration contracts (hereafter referred to
as “NELP-VIII”) under the New Exploration Licencing Policy announced by the Government of India vide
Resolution No. O-19018/22/95-ONG.DO.VL, dated 10th February, 1999 or in blocks licensed under the IV
Round of bidding for award of exploration contracts for Coal Bed Methane blocks. The deduction shall not
apply to blocks licensed under a contract awarded after 31-03-2011 under the New Exploration Licencing
Policy announced by the Government of India vide Resolution No. O-19018/22/95-ONG.DO.VL, dated 10-
02-1999 or in pursuance of any law for the time being in force or by the Central or a State Government in any
other manner.
Quantum of Deduction
100% of the profits derived from such business for a period of 7 consecutive years starting from assessment
year relevant to the previous year in which the undertaking commences the commercial production or refining of
mineral oil.
Processing, preservation and packaging of fruits or vegetables, meat or integrated business of handling,
storage & transportation of foodgrains [Sec.80-IB (11A)]
Applicable to
All assessee
Conditions to be satisfied
1. The undertaking shall be engaged in -
¾¾ the business of processing, preservation and packaging of fruits or vegetables; or
¾¾ the business of processing, preservation and packaging of meat and meat products or poultry or marine
or dairy products; or
¾¾ the integrated business of handling, storage and transportation of foodgrains.
2. Commencement of operations: The aforesaid business begins to operate on or after following period:
3.3.22 Deduction in respect of profits and gains from Housing Projects [Sec. 80-IBA]
Applicable to
All assessee
Conditions to be satisfied
1. Housing Project or Rental Housing Project: The assessee is engaged in the business of
a. developing and building housing projects; or
b. developing and building rental housing project.
Housing project shall be a project which fulfils the following conditions:
a. The project is approved by the competent authority after 01-06-2016, but on or before 31-03-2022.
b. The project is completed within a period of 5 years from the date of approval by the competent authority.
Where the approval in respect of a housing project is obtained more than once, the project shall be
deemed to have been approved on the date on which the building plan of such housing project was
first approved by the competent authority;
The project shall be deemed to have been completed when a certificate of completion of project as a
whole is obtained in writing from the competent authority.
c. The carpet area of the shops and other commercial establishments included in the housing project does
not exceed 3% of the aggregate carpet area.
d. The project should satisfy the following measuring criteria:
3.3.23 Special provisions in respect of certain undertakings in North- Eastern States [Sec.
80-IE]
Applicable to
All assessee
Conditions to be satisfied
1. Time and Nature of business: The assessee begins following activity during 01-04-2007 and 31-03-2017:
a. manufacture or production of any eligible article or thing; or
Eligible article or thing means the article or thing other than the following:
i. Tobacco and manufactured tobacco substitutes;
ii. Pan masala;
iii. Plastic carry bags of less than 20 microns as specified by the Ministry of Environment and Forests;
and
iv. Goods produced by petroleum oil or gas refineries.
b. undertakes substantial expansion; or
Substantial expansion means increase in the investment in the plant and machinery by at least 25% of
the book value of plant and machinery (before taking depreciation in any year), as on the first day of the
previous year in which the substantial expansion is undertaken.
c. carry on any eligible business.
i. hotel (not below two star category);
ii. adventure and leisure sports including ropeways;
iii. providing medical and health services in the nature of nursing home with a minimum capacity of
25 beds;
Quantum of deduction
100% of the profits and gains of such business for a period of 10 consecutive assessment years, beginning from the
assessment year relevant to the previous year in which such undertaking begins to manufacture or produce articles
or things, or completes substantial expansion.
Other Points
a. Double deduction is not available.
b. Power of Assessing Officer to recomputed profit: Refer sec. 80-IA
c. Profit from such business is only source of income: Refer sec. 80-IA
d. No deduction shall be allowed if the deduction has not been claimed in the return of income.
3.3.24 Deduction u/s 80JJA in respect of profits and gains of business of collecting and
processing of bio-degradable waste
Applicable to
All assessee
Conditions to be satisfied
Assessee is engaged in business of collecting and processing or treating of bio-degradable waste for –
a) generating power; or b) producing bio-fertilizers, bio-pesticides or other biological agents; or c) producing bio-
gas; or d) making pellets or briquettes for fuel; or e) organic manure.
Quantum of deduction
100% of the profit derived from such business for a period of 5 consecutive years from the year of commencement
of such business.
Other Points
a. Double deduction is not allowed.
b. Inter-unit transfer: Refer sec. 80-IA
Additional employee means an employee who has been employed during the previous year and whose
employment has the effect of increasing the total number of employees employed by the employer as on the
last day of the preceding year, but does not include:
a. an employee whose total emoluments are more than ₹ 25,000 per month; or
b. an employee for whom the entire contribution is paid by the Government under the Employees’ Pension
Scheme notified in accordance with the provisions of the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952; or
c. an employee employed for a period of less than 240 days (150 days in case of an assessee who is engaged
in the business of manufacturing of apparel or footwear or leather products) during the previous year; or
Taxpoint: Where an employee is employed during the previous year for a period of less than 240 days (or
150 days), but is employed for a period of 240 days (or 150 days) in the immediately succeeding year, he
shall be deemed to have been employed in the succeeding year.
d. an employee who does not participate in the recognised provident fund.
Emoluments means any sum paid or payable to an employee in lieu of his employment by whatever name
called, but does not include:
a. any contribution paid or payable by the employer to any pension fund or provident fund or any other fund
for the benefit of the employee under any law for the time being in force; and
b. any lump-sum payment paid or payable to an employee at the time of termination of his service or
superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary
retrenchment benefits, commutation of pension and the like.
Provision Illustrated
ABC Ltd., an existing company appoints following employees during the F.Y. 2023-24.
Case No. of employees Date of appointment Salary (in ₹ per person per month)
1 10 02-May-2023 25,000
2 15 01-June-2023 28,000
3 20 01-March-2024 24,500
Compute deduction u/s 80JJAA
Solution
Computation of deduction u/s 80JJAA
3.3.26 Deduction u/s 80LA in respect of certain incomes of Offshore Banking Units Amended
Applicable to
A scheduled bank owning an offshore banking unit in a Special Economic Zone (SEZ); or
Any other bank incorporated by or under the laws of a country outside India and having an Offshore banking
unit in SEZ.
Unit of an International Financial Services Center.
Offshore Banking Unit means a branch of a bank in India located in the SEZ and has obtained the permission
u/s 23(1)(a) of the Banking Regulation Act, 1949.
International Financial Services Center means an International Financial Services Center which has been
approved by the Central Government u/s 18(1) of the Special Economic Zones Act, 2005.
Taxpoint:
Assessee must be a scheduled bank;
It has a branch in India located in SEZ
Conditions to be satisfied
1. Certificate of a chartered accountant: Assessee must furnish along with the return of income, a report of a
chartered accountant in Form 10CCF, certifying that the deduction has been correctly claimed.
2. Submission of permission: A copy of the permission obtained u/s 23(1)(a) of the Banking Regulation Act,
1949 or copy of permission or registration obtained under the International Financial Services Centre Authority
Act, 2019 is required to be furnished along with the return of income.
Quantum of deduction
b. No double deduction
c. Return of income in time: Refer sec. 80-IA
Case 1 Case 2
Royalty or fee is not more than 15% of value of Royalty or fee is more than 15% of value of the book
the book
Taxpoint: In case of royalty or copyright fees i.e. not a lump sum consideration, deduction shall be restricted
to 15% of the value of books (before allowing expenses attributable to such income) sold during the previous
year.
Computation of deduction
Income Deduction
Income received in Lump sum
Minimum of the following –
Income earned in
a. 100% of such income (Receipts – Expenditure relating to such income)
India
b. ₹ 3,00,000
Minimum of the following –
Income earned a. Money brought into India in convertible foreign exchange within time limit –
outside India Expenditure incurred relating to such income
b. ₹ 3,00,000
Income received in a mode other than lump sum
Minimum of the following -
Income earned in a. 100% of income (Receipts – Expenditure relating to such income)
India b. 15% of sale value of the book – Expenditure relating to such income
c. ₹ 3,00,000
Minimum of the following -
a. Money brought in India in convertible foreign exchange within time limit–
Income earned Expenditure incurred relating to such income
outside India
b. 15% of sale value of the book – Expenditure incurred relating to such income
c. ₹ 3,00,000
Other point
a. Double deduction is not allowed
b. Return of income in time: Refer sec. 80-IA
c. No deduction shall be allowed if the deduction has not been claimed in the return of income.
A resident individual (irrespective of citizenship of the individual), being a patentee (i.e. owner or co-owner of a
patent)
Patentee means a person(s) who is true and first inventor of the invention and whose name is entered on the Patent
register as the patentee (as owner or co-owner of a patent) in accordance with the Patent Act, 1970.
Conditions to be satisfied
1. Nature of income: Assessee has earned income (either in India or outside India) by way of royalty in respect
of patent registered on or after 1-4-2003 under the Patents Act, 1970.
Taxpoint:
¾¾ Royalty, in respect of a patent, means consideration (including any lump sum consideration) for—
i. the transfer of all or any rights (including the granting of a licence) in respect of a patent; or
ii. the imparting of any information concerning the working of, or the use of, a patent; or
iii. the use of any patent; or
iv. the rendering of any services in connection with the activities referred above.
However, when such income is earned from a source outside India, then –
¾¾ Remittance: Such receipts should be brought into India by the assessee in convertible foreign exchange#
within 6 months from the end of the previous year or within such further period as the competent authority*
may allow in this behalf; and
¾¾ Certificate in Form 10H: The assessee must furnish a certificate in the Form 10H from the prescribed
authority along with his return of income
#
Convertible foreign exchange means foreign exchange which is for the time being treated by the Reserve
Bank of India as convertible foreign exchange for the purpose of the Foreign Exchange Regulation Act,
1973 and any rules made there under.
* Competent authority means the Reserve Bank of India or such other authority as is authorized under any
law for the time being in force for regulating payments and dealings in foreign exchange.
2. Certificate to be attached: Assessee must furnish a certificate in Form 10CCE duly signed by the prescribed
authority along with the return of income.
Prescribed authority here means Controller u/s 1(b) of the Patent Act, 1970
Quantum of deduction
Case Deduction
Minimum of the following -
Income earned in India ¾¾ 100% of such income; or
¾¾ ₹ 3,00,000
Minimum of the following -
Income earned outside India ¾¾ Income in respect of money brought into India in convertible foreign
exchange within prescribed time limit; or
¾¾ ₹ 3,00,000
Deduction should not exceed the royalty amount as per licence: Where a compulsory licence is granted in
respect of any patent under the Patents Act, 1970, the income by way of royalty for the purpose of allowing
deduction under this section shall not exceed the amount of royalty under the terms and conditions of a licence
settled by the Controller under that Act.
Notes
a. Revocation of patent
Situation: Where the patent is revoked by the Controller or the High Court and the assessee is subsequently
disqualified as patentee.
Treatment: Earlier deduction allowed under this section shall be deemed to be wrongly allowed and Assessing
Officer has the power to rectify the assessment-order within 4 years from the end of the previous year in which
such order of the High Court or the Controller was passed
b. Double deduction is not permissible
c. Return of income in time: Refer sec. 80-IA
d. No deduction shall be allowed if the deduction has not been claimed in the return of income.
8
“Time deposits” means the deposits repayable on expiry of fixed periods.
Quantum of deduction
Minimum of the following
a. Interest on such deposits in saving account
b. ₹ 10,000
Other Points
As per Notification No. 32/2011 dated 03-06-2011, interest on Post Office Saving Bank is exempt u/s 10(15(i)
to the extent of the interest of ₹ 3,500 (in case of single account) and ₹ 7,000 (in case of joint account)
Where such income is derived from any deposit in a savings account held by, or on behalf of, a firm, an association
of persons or a body of individuals, no deduction shall be allowed under this section in respect of such income
in computing the total income of any partner of the firm or any member of the association or any individual of
the body.
3.3.32 Deduction in respect of interest on deposits in case of senior citizens [Sec. 80TTB]
Applicable to
Senior Citizen
Conditions to be satisfied
Gross total income includes any income by way of interest on deposits with:
–– A banking company applies;
–– A co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage
bank or a co-operative land development bank); or
–– A Post Office
Quantum of deduction
Minimum of the following
a. Interest on such deposits
b. ₹ 50,000
Other Point
Where such income is derived from any deposit held by, or on behalf of, a firm, an association of persons or a
body of individuals, no deduction shall be allowed.
Quantum of Deduction
Assessee is suffering from severe disability (i.e. disability to the extent of 80% or more) ₹ 1,25,000
Assessee is suffering from disability but not severe disability (i.e. disability to the extent of
₹ 75,000
40% or more but less than 80%)
Deduction under this section is irrespective of actual expenditure incurred i.e. deduction is statutory.
Disability, Person with disability and Person with severe disability: Refer Sec.80DD
Other points
Revision of medical certificate
Condition: Where the extent of disability requires reassessment after a period stipulated in the aforesaid certificate.
Treatment: After the expiry of previous certificate, deduction under this section shall be allowed only if a new
certificate is obtained from the medical authority and a copy thereof is furnished along with the return of income.
Note: Deduction u/s 80U is for disable-assessee whereas deduction u/s 80DD is for dependant disable-relative
Illustration 33:
Mr. X, is suffering from low-vision (certified as severe disability). He has following incomes details -
Illustration 34:
Preeti furnished following details -
Particulars Amount
Income from Business
Business A (Readymade garments) 50,000
Business C (Processing bio-degradable wastes) (started during previous year) 25,000
Long term capital gain 25,000
Short term capital gain 65,000
Saving Bank interest 2,000
Interest on deposits with IDBI 1,000
Interest paid on loan taken for deposits in IDBI 1,200
Interest on NSC (including last year interest ₹ 1,500) 4,200
Investment in NSC 500
LIC premium paid on the life of dependent blind mother (Sum assured ₹ 1,00,000) 12,000
Investment in LIC annuity plan 8,000
Donation to National Defence Fund 12,500
Compute her total income and tax liability.
Solution :
Computation of total income of Preeti for A.Y.2024-25
Note
Salary for the purpose of –
6. Deduction under Section 80-IB in respect of specified or other hotel shall be allowed to
(a) an Indian Company
(b) any assessee
(b) an Indian Company or a person other than Company resident in India.
(c) an Indian Company with a paid up capital of a t lest D 5,00,000
7. Deduction u/s 80JJAA in respect of employment of new workers shall be allowed to-
(a) any assessee to who Sec.44AB applies
(b) an Indian company
(c) an Indian Company or a person other than Company resident in India
(d) None of above
8. For an individual deriving income, investment in PPF for him and his Spouse for the Financial Year 2023-
2024 is D 85,000. Eligible amount for deduction U/s 80C is –
(a) D 85,000
(b) D 70,000
(c) D 1,00,000
(d) None of the above.
9. Where an individual has repaid in the 2nd year, D 20,000 towards principal and D 60,000 totally towards
eligible education loan from an approved bank, the deduction available u/s 80E is –
(a) Nil
(b) D 60,000
(c) D 40,000
(d) D 20,000
10. The maximum amount which can be donated in cash for claiming deduction under section 80G for the
P.Y. 2023-24 is –
(a) D 5,000
(b) D 10,000
(c) D 10,000
(d) D 2,000
Particulars Amount
Salaries ***
Income from house property ***
Profits and gains of business or profession ***
Capital gains ***
Income from other sources ***
Gross Total Income ****
Less: Deductions u/s 80C to 80U (subject to Max. of GTI before casual income, STCG covered u/s ***
111A & LTCG)
Total Income / Taxable Income (Rounded off u/s 288A) ****
Illustration 36:
Determine the tax liability of Mr. Ratan, who is a handicapped, for the A.Y.2024-25:
Particulars Amount
Net salary 2,85,000
Annual value of let-out house property 60,000
Lottery income 50,000
Taxable business & profession income 50,000
He paid LIC premium 10,000
Mr. Sunil deposited in LIC annuity plan ₹ 12,000 & paid medical insurance premium ₹ 5,000.
Solution :
Computation of Total Income of Mr. Ratan for the A.Y. 2024-25
Particulars Details Amount
Salaries
Net salary 2,85,000
Income from house property
Annual value of let-out house property 60,000
Less: Standard deduction u/s 24(a) 18,000 42,000
Profits & gains of business or profession 50,000
Income from other sources
Lottery income 50,000
Gross Total Income 4,27,000
Less: Deduction u/s
80C (LIC Premium) 10,000
80CCC (Deposit in LIC annuity plan) 12,000
80D (Medical insurance premium paid) 5,000
80U (Assessee is handicapped) 75,000 1,02,000
Total Income 3,25,000
Computation of Tax liability of Mr. Ratan for the A.Y. 2024-25
Illustration 37:
Compute taxable income and tax liability of Sri Dev from the following information:
a. He is working with X Ltd. for a basic of ₹ 24,000 p.m. and dearness allowance ₹ 2,000 p.m. Bonus ₹ 50,000
b. He and his employer contribute to RPF @ 6% of salary.
c. His income from business & profession is ₹ 52,000
d. During the year, interest on fixed deposit ₹ 5,000
e. LIC premium paid ₹ 4,000
Solution :
Computation of Total Income of Sri Dev for the A.Y. 2024-25
Particulars Amount
LIC premium paid 4,000
Employees contribution to RPF (6% of basic and DA) 18,720
Total 22,720
Illustration 38:
Anil (aged 67 years) is an employee of a Government organisation at Burdwan. During the year ending 31.3.2024,
he received the following income from his employer:
₹
Salary 20,000 p.m.
Dearness allowance 4,000 p.m.
Entertainment allowance 6,500 p.m.
Annual bonus 20,000
Rent-free unfurnished accommodation of which licence fee is ₹ 30,000 whereas fair rental value is ₹ 1,00,000.
Find his taxable income and tax liability for the assessment year 2024-25 on the basis of the following further
information:
a. His own contribution to a Provident Fund is ₹ 30,000 and his employer’s contributed the same amount.
b. He pays life insurance premium ₹ 30,000 p.a.
Solution :
Computation of Total Income of Anil for the A.Y. 2024-25
Particulars Details Amount Amount
Salaries
Basic salary 2,40,000
Bonus 20,000
Allowances:
Dearness allowance 48,000
Entertainment allowance 78,000 1,26,000
Perquisite u/s 17(2):
Rent free accommodation Licence fee 30,000
Employer’s contribution to PF Contribution to SPF Nil
Gross Taxable Salary 4,16,000
Particulars Amount
Insurance premium 30,000
Employee’s own contribution to SPF 30,000
Total 60,000
Illustration 39:
Mrs. Ria (age 46 years), a professor in a college furnishes the following particulars of her income for the previous
year 2023–24:
₹
a. Income from salary 3,51,000
b. Income from House Property
i. Rent Received 24,000
ii. Municipal Tax 2,000
c. Income from other sources
iii. Bank interest on fixed deposit 12,000
iv. Dividend from Indian Company 10,000
v. Examiner’s remuneration from Calcutta University 5,700
c. Deposited in P.P.F. 40,000
d. Own Contribution to R.P.F. 12,000
e. Paid premium on insurance on own health 16,000
f. Donated ₹ 10,000 to National Relief Fund and ₹ 15,000 to a trust registered u/s 80G(5)
From the above information, compute total income and tax liability of Mrs. Ria for the assessment year 2024–25.
Solution :
Computation of total income of Mrs. Ria for the A.Y. 2024-25
Illustration 40:
Sri Chandan Saha furnished the following information for the previous year 2023-24:
₹
Income from salary (net) 6,00,000
Income from house property 1,40,000
Short-term capital loss 15,000
Long-term capital gain 40,000
Interest on bank fixed deposit 25,000
Dividend from Indian Company 10,000
He made the following payments:
i. Life insurance premium on own life ₹ 25,000 (sum assured ₹ 2,00,000 taken on 15.10.2023)
Step 1 Compute regular income tax liability (before Cess) of the assessee covered A ****
under these provisions
Step 2 Compute Adjusted Total income of the assessee i.e. *****
Total income of the assessee **** B
Add:
Deduction claimed u/s 80H to sec. 80RRB (other than sec. 80P) *** C
Deduction claimed u/s 35AD less Depreciation u/s 32 *** D
Deduction u/s 10AA *** E
Adjusted Total Income **** F
Note:
i. If ‘C’, ‘D’ and ‘E’ is zero, then these provisions are not applicable to any assessee.
ii. if ‘F’ does not exceed Rs.20 lakh, then these provisions are not applicable in case of an
Individual / HUF / AOP / BOI / Artificial juridical person. However, the provision is
applicable on LLP / Firm.
Step 3 Compute Alternate Minimum Tax (AMT) [Being 18.5% of Adjusted Total G=F* ****
Income] 18.5%
Step 4 Income Tax liability Higher of A ****
&G
Add: Health & Education Cess **
Tax liability after Cess ****
Impact where AMT is applicable i.e., case where value of Step 3 is higher than value of Step 1
a. Adjusted total income (as computed in step 2) shall be deemed as total income of the assessee.
b. Tax liability of the assessee shall be 18.5% (+ surcharge + cess) of adjusted total income of the assessee.
Exceptions
¾¾ In case of a unit located in an International Financial Services Centre and derives its income solely in
convertible foreign exchange, AMT shall be computed considering 9% (instead of 18.5%) of adjusted
total income.
¾¾ In case of co-operative society, AMT shall be computed considering 15% (instead of 18.5%) of adjusted
total income.
Taxpoint: Rate of AMT are as under:
Provision Illustrated
Compute tax of the following assessee:
Rate of Tax
Under this tax regime, income tax shall be computed at the option of the assessee considering the following rate:
If a person opts for this regime, ₹ 3,00,000 shall be considered as basic exemption limit irrespective of his
age. In other words, for all category of individual i.e, senior citizen, super senior citizen and others, basic
exemption limit is ₹ 3,00,000
Rebate u/s 87A is available. Threshold limit ₹ 7,00,000 with marginal rebate.
Computed tax is further increased by applicable surcharge (not exceeding 25%), if any, and health and
education cess
If any income is taxable at special rate u/s 110 to sec. 115BBG [except sec. 115BAC(IA)], such income shall
be taxable at that special rate of tax.
Other Points
Full effect of loss and depreciation: The loss and depreciation referred above shall be deemed to have been
given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent
year. Where there is a depreciation allowance in respect of a block of assets which has not been given full
effect to prior to the assessment year 2021-22, corresponding adjustment shall be made to the written down
value of such block of assets as on 01-04-2020 in the prescribed manner (if the option is exercised for a
previous year relevant to the assessment year 2021-22).
Exercise of option: The provision of this section shall not apply unless option is exercised in the prescribed
manner by the person:
Where the person has income Within the due date specified u/s 139(1) for furnishing the returns of
from business or profession income for any previous year relevant to the assessment year and such
option once exercised shall apply to subsequent assessment years
Where the person not having Alongwith the return of income to be furnished u/s 139(1) for a previous
aforesaid income year relevant to the assessment year
Withdrawal of option: In case person having income from business or profession, option once exercised for
any previous year can be withdrawn only once for a previous year other than the year in which it was exercised
and thereafter, the person shall never be eligible to exercise option. However, if such person ceases to have
any income from business or profession in which case, he may exercise the option for that assessment year.
Where the person fails to satisfy the conditions in any previous year, the option shall become invalid in respect
of the assessment year relevant to that previous year and other provisions of this Act shall apply, as if the option
had not been exercised for the assessment year relevant to that previous year.
Further where the option was exercised by a person having income from business or profession, in the event
of failure to satisfy the conditions, it shall become invalid for subsequent assessment years also and other
provisions of this Act shall apply for those years accordingly.
Alternate Minimum Tax: In case, the person has opted for this scheme, the provision of alternate minimum
tax (AMT) u/s 115JC is not applicable. Consequently, any credit of AMT cannot be adjusted against tax
liability computed u/s 115BAC(IA).
Example 8:
Akhil, 35 years, has provided following details relating to his income for the previous year 2022-23:
a. Income from business ₹ 15,00,000
b. Income from saving bank interest ₹ 12,000
c. Interest on PPF ₹ 36,000
d. Investment in PPF ₹ 1,50,000
You are requested to compute his tax liability and advise him whether he should opt for alternative tax regime u/s
115BAC(IA).
Solution :
Computation of Income and tax liability of Mr. Akhil for A.Y. 2024-25
Taxpoint: All coparcener must be the member of the family but all members need not be coparcener of
the family.
ii. Coparcener acquires interest in the property of the HUF by birth. A person may acquire membership in
HUF otherwise than by birth.
iii. Member of the family who is not a coparcener of the family has no right to claim partition.
Taxpoint: A child in the womb of his mother is entitled to share of HUF property, on partition.
Partial Partition means a partition, which is partial as regards the persons constituting the Hindu undivided
family, or the properties belonging to the Hindu undivided family, or both.
Person entitled to share on partition
Following persons can claim share on partition:
Treatment in case of partial partition taken place after 31-12-1978 [Sec. 171(9)]
Where a partial partition has taken place among the members of an HUF after 31-12-1978, then -
no claim that such partial partition has taken place shall be inquired into u/s 171(2)
no finding regarding partition shall be recorded u/s 171(3).
such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken
place;
each member or group of members of such family immediately before such partial partition and the family
shall be jointly and severally1 liable for any tax, penalty, interest, fine or other sum payable under this Act by
the family.
1
. Liability of any member or group of members aforesaid shall be computed according to the portion of the
joint family property allotted to him or it at such partial partition.
Taxpoint: Even though such tax, penalty etc. relates to the period, before or after such partial partition.
G
enerally, tax on the income earned in the previous year is paid in the respective assessment year, but in
certain cases, an assessee may be required to pay tax during the previous year itself, as Advance tax.
The scheme of advance tax is based on the concept “Pay as you earn”. Under this scheme assessee needs
to estimate its income and tax liability of the previous year and pay tax on basis of such estimation in
the previous year itself. For instance, income earned during the previous year 2021-22 is normally taxable in the
assessment year 2022-23, however under the scheme of Advance tax, assessee is required to pay tax on estimated
income of previous year 2021-22 in the previous year itself.
Applicable to
All assessee irrespective of his residential status and citizenship
Scheme of Advance tax [Sec.208]
Where the advance tax liability# of the assessee is ₹ 10,000 or more, the assessee should pay such tax in the
previous year itself within the due date$.
# Advance tax liability [Sec. 209]
Particulars Amount
Estimated Gross Total Income ****
Less: Deduction under chapter VIA ****
Estimated Total Income ****
$
Due date for payment of advance tax [Sec. 211]
An eligible assessee in
respect of an eligible
business referred to in On or before March 15 100% of advance tax liability
2. Compute the tax liability on above estimated income at the rates in force during the financial year and
reduce rebate, If any.
3. Add surcharge (if applicable).
4. Add Health and Education cess.
5. Deduct tax deducted or collected at source.
6. The amount so derived is the advance tax payable.
Where the advance tax payable is ₹ 10,000 or more, an appropriate percentage thereof should be deposited.
Procedure for subsequent installments
i. Check if estimate of income made earlier requires revision.
ii. If not, deposit appropriate amount of second, third or fourth installment of advance tax.
iii. If estimate of income needs revision, then make a revised estimate and compute tax liability thereon.
iv. Determine advance tax payable in subsequent installments after deducting amount paid in earlier
installments.
v. Deposit such advance tax.
b. On receipt of order from the Assessing Officer [Sec. 210(3) or (4)]
The A.O. may pass an order and issue a notice of demand u/s 156 requiring the assessee to pay advance tax.
Conditions to be satisfied for issuing such order
¾¾ The assessee has already been assessed by way of a regular assessment in any previous year.
¾¾ The Assessing Officer is of opinion that such person is liable to pay advance tax.
¾¾ Such order can be passed at any time during the financial year but not after last day of February.
¾¾ Such order must be made in writing.
¾¾ Such order also specifies the amount of advance tax and the installments thereof to be paid by the assessee.
Note: Such order can be issued even if assessee has paid any installment of advance tax during the year,
which is, in the opinion of the Assessing Officer, not as per provision of sec. 211.
Determination of advance tax by the Assessing Officer
The amount determined by the Assessing Officer shall be the higher of the following –
¾¾ Tax on latest assessed income as per regular assessment; or
¾¾ Tax on income declared by the assessee in the return relating to the previous year subsequent to the
previous year for which regular assessment has been made.
Procedure to be followed by assessee on receipt of such order
Advance tax to be paid by Whether intimation to AO is
Case
the assessee required
Where income estimated by the Assessing On the basis of the order of
No
Officer is correct the Assessing Officer
Where assessee estimates his current
On the basis of his own
income to be higher than that estimated No
estimate
by the Assessing Officer
Illustration 41:
Find out the amount of advance tax payable by Mr. A on specified dates under the Income tax Act, 1961 for the
financial year 2023-24:
Case 1: Since amount of advance tax payable is less than ₹ 10,000, assessee is not liable to pay advance tax.
Case 2:
Alternate 1 Alternate 2
Date
Working Amount Working Amount
15-06-2023 15% of ₹ 25,560 3,834 15% of ₹ 25,560 3,834
15-09-2023 30% of ₹ 25,560 7,668 [(45% of ₹ 25,560) – ₹ 3,834] 7,668
15-12-2023 30% of ₹ 25,560 7,668 [(75% of ₹ 25,560) – (₹ 3,834 + ₹ 7,668)] 7,668
15-03-2024 25% of ₹ 25,560 6,390 [100% of ₹ 25,560 – (₹ 3,834 + ₹ 7,668 + ₹ 7,668)] 6,390
Total 25,560 Total 25,560
Illustration 42:
Find out the amount of advance tax payable by ABC Ltd. on specified dates for the F.Y. 2023-24:
Solution :
Computation of total income of ABC Ltd. for the previous year 2023-24
Particulars Amount
Profits and gains of business or profession 1,75,000
Capital gains: Long term capital gains 2,50,000
Income from other sources: Bank Interest 10,000
Total Income 4,35,000
Computation of tax liability of ABC Ltd. for the previous year 2023-24
Advance tax on LTCG Advance tax on income other than LTCG Total
Date
Working Amount (a) Working Amount (b) (a + b)
15-06-2023 As LTCG occurred on
Nil 15% of ₹ 37,170 5,576 5,576
31/7/2021
15-09-2023 (45% of ₹ 37,170) –
(45% of ₹ 52,000) – Nil 23,400 11,151 34,551
(₹5,576)
15-12-2023 (75% of ₹ 52,000) – (₹ (75% of ₹ 37,170) – (₹
15,600 11,151 26,751
23,400) 5,576 + ₹ 11,151)
15-03-2024 (100% of ₹ 37,170) – (₹
(100% of ₹ 52,000) – (₹
13,000 5,576 + ₹ 11,151 + ₹ 9,292 22,292
23,400 + ₹ 15,600)
11,151)
Total 52,000 37,170 89,170
Illustration 43:
Find out the amount of advance tax payable by A on specified dates for the financial year 2023-24:
Solution :
Computation of tax liability of A for the previous year 2023-24
Particulars ₹
Tax on ₹ 5,97,000 (i.e. agricultural income ₹ 86,000 + non-agricultural income ₹ 5,11,000) 31,900
Less: Tax on ₹ 3,36,000 (i.e. agro income ₹ 86,000 + maximum exempted limit ₹ 2,50,000) 4,300
Tax liability 27,600
Less: Rebate u/s 87A Nil
27,600
Add: Health & Education cess 1,104
Tax and cess payable 28,704
Less: TDS 4,704
Advance tax payable 24,000
Advance tax to be paid on specified dates –
Alternate 1 Alternate 2
Date
Working Amount Working Amount
15-06-2023 15% of ₹ 24,000 3,600 15% of ₹ 24,000 3,600
15-09-2023 30% of ₹ 24,000 7,200 [(45% of ₹ 24,000) – ₹ 3,600] 7,200
15-12-2023 30% of ₹ 24,000 7,200 [(75% of ₹ 24,000) – (₹ 3,600 + ₹ 7,200)] 7,200
15-03-2024 25% of ₹ 24,000 6,000 [100% of ₹ 24,000 – (₹ 3,600 + ₹ 7,200 + ₹ 7,200)] 6,000
Quick MCQs:-
2. The benefit of payment of advance tax in one installment of or before 15th March is available to assessees
computing profits on presumptive basis-
(a) only under section 44AD
(b) under section 44AD and 44ADA
(c) under section 44AD and 44AE
(d) under section 44AD, 44ADA and 44AE
I
3.6.1 Meaning
t is a measure, in which person who are making payment of income are responsible to deduct tax from such
income (at specified rates) and pay only net amount. Tax so deducted (called TDS) shall be deposited with the
Government’s treasury within the stipulated time. The payer will issue a certificate in Form 16 or 16A9 to the
payee and the payee will get credit for TDS and his tax liability shall be reduced to that extent. In nutshell,
the provisions are merely a mode of collection of income tax and a check on tax evasion through proper control
and information.
Objects
Quicker realisation of tax.
Effective realisation of tax.
There are several provisions in the Act for TDS10, being discussed infra:
9
All deductors (including Government deductors who deposit TDS in the Central Government Account through book entry) shall issue TDS certificate
generated through TIN central system and which is downloaded from the TIN website with a unique TDS certificate number.
10
As per provision of sec.206AA, if resident payee fails to provide his PAN, tax is required to be deducted at the rate mentioned in respective section or
20%, whichever is higher. [The sec.206AA is discussed later in the module]
otherwise deductible. For this purpose, tax shall be determined at the average of income-tax computed on the
basis of the rates in force for the financial year, on the income chargeable under the head “Salaries”. It is to
be noted that tax paid on non-monetary perquisites by the employer shall not be considered as income of the
employee.
3. Particulars of perquisites: The employer shall furnish a statement to the employee (whose salary exceeds
₹ 1,50,000) giving correct and complete particulars of perquisites or profits in lieu of salary provided to
employee and the value thereof in Form 12BA provided salary of such employee exceeds ₹ 2,00,000.
4. Salary from more than one source: As per Sec. 192(2), where assessee is working simultaneously with more
than one employer, he may furnish to any one employer at his choice, details (in Form No. 12B) of income
taxable under the head “Salaries” due to or received by him from other employer(s) and such employer shall
deduct tax on aggregate salary.
5. Treatment of other income: As per Sec. 192(2B), where an assessee who receives any income chargeable
under the head “Salaries” has, in addition, any income chargeable under any other head of income for the same
financial year, he may (or may not) furnish to employer the particulars (in plain paper) of—
¾¾ such other income (only income and not loss)
¾¾ tax deducted on such other income as per provision of this chapter;
¾¾ the loss, if any, under the head “Income from house property” (Losses under any other head are not to be
considered)
Tax deducted u/s 192 shall be higher of the following:
¾¾ Tax deductible from income, that would be so deductible, if loss under the head ‘Income from House
Property’, other income (only income) and the tax deducted thereon had been taken into account.
¾¾ Tax deductible from income under the head “Salaries”, that would be so deductible (after adjusting loss
under the head Income from house property), if the other income (or loss) and the tax deducted thereon
had not been taken into account.
6. Evidence of claim: The responsible person shall, for the purposes of estimating income of the assessee or
computing tax deductible, obtain the evidence or proof or particulars of prescribed claims (including claim for
set-off of loss) from the assessee in such form and manner as may be prescribed.
7. TDS on ESOP: ESOPs have been a significant component of the compensation for the employees of start-ups,
as it allows the founders and start-ups to employ highly talented employees at a relatively low salary amount
with balance being made up via ESOPs. ESOPs are taxed as perquisites u/s 17(2). The taxation of ESOPs is
split into two components:
i. Tax on perquisite as income from salary at the time of exercise.
ii. Tax on income from capital gain at the time of sale.
The tax on perquisite is required to be paid at the time of exercising of option which may lead to cash flow
problem as this benefit of ESOP is in kind. In order to ease the burden of payment of taxes by the employees
of the eligible start-ups or TDS by the start-up employer, it is provided that for the purpose of deducting or
paying tax, a person, being an eligible start-up [u/s 80-IAC], responsible for paying any income to the assessee
being such perquisite, deduct or pay, as the case may be, tax on such income within 14 days:
a. after the expiry of 48 months from the end of the relevant assessment year; or
b. from the date of the sale of such specified security or sweat equity share by the assessee; or
c. from the date of which the assessee ceases to be the employee of the person;
–– whichever is the earlier.
The tax shall be deducted or paid at the rates in force of the financial year in which the said security or sweat
equity share is allotted or transferred.
Similar provision is applicable, in case, employee is paying tax directly (in case tax is not deducted).
Provision Illustrated
Mr. X working in Y Ltd. furnishes the following, compute the tax to be deducted at source by Y Ltd.
Solution
Computation of tax to be deducted at source by Y Ltd
Rule 8 of Part A of the Fourth Schedule provides the accumulated balance due and becoming payable to an
employee participating in a recognised provident fund shall be exempted:
a. if he has rendered continuous service with his employer for a period of 5 years or more; or
b. if, though he has not rendered such continuous service, the service has been terminated by reason of the
employee’s ill-health, or by the contraction or discontinuance of the employer’s business or other cause
beyond the control of the employee; or
c. if, on the cessation of his employment, the employee obtains employment with any other employer, to the
extent the accumulated balance due and becoming payable to him is transferred to his individual account in
any recognised provident fund maintained by such other employer.
Taxpoint: If the accumulated balance paid to the assessee is exempt then tax is not required to be deducted.
Rate of TDS: 10%
Any person entitled to receive any amount on which tax is deductible shall furnish his Permanent Account
Number (PAN) to the person responsible for deducting such tax, failing which tax shall be deducted at 20%.
When TDS is not applicable: Aggregate amount of such payment to the payee is less than ₹ 50,000.
When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.
Taxpoint: Where any amount is credited to any account (for e.g. “Interest payable account” or “Suspense account”)
instead of Payee account, such crediting shall be deemed to be credit of such income to the account of the payee.
Rate of TDS: 10% (No surcharge, health and education cess)
Exemption or relaxation from the provision:
When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorizing the payer to
deduct tax at lower rate or deduct no tax; [Refer sec.197]
When a declaration in Form 15G (in duplicate) is furnished by the assessee to the payer [Refer sec.197A]
Note: No tax shall be deducted at source if during the financial year, interest payable by the payer to payee does not
exceed ₹ 5,000.
However, following persons are responsible to deduct tax at source on interest other than interest on securities paid
or payable to a resident person if during the financial year, interest paid/payable exceeds ₹ 40,000 (₹ 50,000 in case
payee is a senior citizen):
A banking company;
Co-operative society engaged in carrying on the business of banking;
Post office in respect of notified scheme
Taxpoint: In case of interest payable by banking company or co-operative society or housing company, such limit
shall be computed with reference to branch. However, where payer has adopted Core Banking Solution (CBS), the
aforesaid limit shall be computed with reference to entity and not branch.
When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.
a. the total sales, gross receipts or turnover of the co-operative society exceeds ₹ 50 crore during the
financial year immediately preceding the financial year in which the interest is credited or paid; and
b. the aggregate of the amounts of such interest, credited or paid, during the financial year is more than
₹ 50,000 in case of payee being a senior citizen (₹ 40,000 in other cases).
Interest credited or paid in respect of deposits under any notified scheme like NSC, Indira Vikas Patra, Kisan
Vikas Patra and Post office Monthly Income Account.
Interest credited or paid in respect of deposits (other than time deposits and recurring deposit) with a banking
company.
¾¾ TDS is also required to be deducted on Recurring Deposits.
Interest credited on the compensation amount awarded by the Motor Accidents Claims Tribunal;
Interest paid on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount
of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial
year does not exceed ₹ 50,000
Interest credited or paid by the Central Government under any provision of the Income Tax Act or the Wealth-
tax Act, 1957
Income which is paid or payable by an infrastructure capital company or infrastructure capital fund or
infrastructure debt fund or a public sector company or scheduled bank in relation to a Zero Coupon Bond
issued on or after 1-6-2005 by such company or fund.
Income by way of interest referred to in sec. 10(23FC)
Interest on FDRs, made in the name of the Registrar General of the Court or the depositor of the fund on the
directions of the Court, will not be subject to TDS till the matter is decided by the Court. However, once the
Court decides the ownership of the money lying in the fixed deposit, the provisions of section 194A will apply
to the recipient of the income
Exemption or relaxation from the provision
When the recipient applies to the assessing officer in Form No. 13 and gets a certificate authorizing the payer
to deduct tax at lower rate or deduct no tax. [Refer sec.197]
When a declaration in Form 15G is furnished by the assessee to the payer [Refer sec.197A]
Adjustment for short-deduction
The person responsible to deduct tax may at the time of making any deduction, increase or reduce the amount to
be deducted for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure
to deduct during the financial year.
3.6.7 TDS on Winning from lotteries or cross word puzzles, etc. [Sec. 194B]
Who is responsible to deduct tax: Any person responsible for paying to any person any income by way of winning
from any lottery or crossword puzzle or card game and other game of any sort, exceeding ₹ 10,000 in aggregate.
Taxpoint: If income is more than ₹ 10,000 in aggregate (say ₹ 12,000), then tax shall be deducted on the whole
amount (i.e. ₹ 12,000).
Rate of TDS: 30% (in case of non-resident payee, applicable surcharge, health and education cess shall also be
considered)
f. Any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and
satisfying the need for housing accommodation or for the purpose of planning, development or improvement
of cities, towns and villages, or for both; or
g. Any society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act
in force in any part of India; or
h. Any trust; or
i. Any University established or incorporated by or under a Central, State or Provincial Act and an institution
declared to be a University u/s 3 of the University Grants Commission Act, 1956; or
j. Any Government of a foreign State or a foreign enterprise or any association or body established outside India;
or
k. Any firm; or
l. Individual or a HUF or an association of persons or a body of individuals (if not covered by aforesaid cases),
has total sales, gross receipts or turnover from business or profession carried on by him exceeding ₹ 1 crore in
case of business or ₹ 50 lakh in case of profession during the financial year immediately preceding the financial
year in which such sum is credited or paid to the account of the contractor.
Note: However, no individual or a HUF shall be liable to deduct income-tax where amount is credited or paid
exclusively for personal purposes of such individual or any member of HUF.
When tax cannot be deducted:
Case 1
When following conditions are satisfied then tax cannot be deducted:
i. Any sum credited or paid in pursuance of any contract, the consideration for which does not exceed ₹
30,000; and
Taxpoint: The limit of ₹ 30,000 is on individual contract.
ii. Where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during
the financial year does not exceed ₹ 1,00,000
Case 2
When following conditions are satisfied then tax cannot be deducted:
a. Amount is paid or payable to a resident contractor during the course of plying, hiring or leasing goods
carriage (here-in-after referred to as transport operator).
b. Such operator furnishes his Permanent Account Number (PAN) to the payer.
c. Where such contractor owns 10 or less goods carriages at any time during the previous year and furnishes
a declaration to that effect along with his PAN to the person paying or crediting such sum.
Taxpoint: Tax is not required to be deducted even if amount of payment exceeds Rs. 1,00,000/-
When tax shall be deducted: At the time of payment or crediting the party, whichever is earlier.
Rate of TDS:
3.6.13 Payments in respect of deposits under National Savings Scheme, etc.[Sec. 194EE]
Who is responsible to deduct tax: Any person [i.e. post office] responsible for paying an amount (either principal
or interest) referred to in sec. 80CCA(2)(a) [i.e. National Saving Scheme, 1987]
Note: Tax shall not be deducted at source if the aggregate amount of such payments to the payee during the
financial year is less than ₹ 2,500.
When tax shall be deducted: At the time of payment.
Rate of TDS:
3.6.14 TDS on repurchase of units of Mutual Fund or Unit Trust of India [Sec. 194F]
Who is responsible to deduct tax: The person responsible for paying to any person any amount referred to in
section 80CCB(2) [i.e. mutual fund or UTI]
3.6.16 TDS on commission, etc. other than insurance commission [Sec. 194H]
Who is responsible to deduct tax: Following persons are responsible to deduct tax at source on commission or
brokerage (other than commission on insurance) to a resident person -
Any person, other than individual or HUF; &
Individual or HUF whose total sales, gross receipts or turnover from business or profession carried on by him
exceeding ₹ 1 crore in case of business or ₹ 50 lakh in case of profession during the financial year immediately
preceding the financial year in which such sum is credited or paid.
Note:
1. No tax shall be deducted if the aggregate amounts of commission or brokerage credited or paid during the
financial year to the payee does not exceed ₹ 15,000.
2. No deduction shall be made on any commission or brokerage payable by Bharat Sanchar Nigam Limited or
Mahanagar Telephone Nigam Limited to their public call office franchisees.
When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.
Rate of TDS: 5%
Exemption or relaxation from the provision
When the recipient applies to the Assessing Officer in Form No. 13 and gets a certificate authorising the payer to
deduct tax at lower rate or deduct no tax [Refer sec.197]
When commission is retained by an agent
Where commission or brokerage is retained by the consignee/agent while remitting the sale consideration, the
consignor/principal will have to deposit the tax deductible on the amount of such retained commission - [Circular
No.619]
Other Points: Commission or brokerage includes any payment received or receivable, directly or indirectly, by a
person acting on behalf of another person for services rendered (not being professional services) or for any services
in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or
thing, not being securities.
Other Points
Payment by an individual reimbursed by the company: Where an employee or an individual representing
a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel,
the question of tax deduction at source would not normally arise (except where he is covered u/s 44AB). This
is because, it is the employee or such individual who makes the payment and the company merely reimburses
the expenditure. [Circular No. 5/2002, dated 30-7-2002]
Lump sum lease premium or one-time upfront lease charges, which are not adjustable against periodic
rent, paid or payable for acquisition of long-term leasehold rights over land or any other property are not
payments in the nature of rent within the meaning of sec. 194-I. Therefore, such payments are not liable for
TDS u/s 194-I [Circular 35/2016 dated 13-10-2016]
3.6.18 TDS on transfer of certain immovable property other than agricultural land [Sec.
194-IA] Amended
Who is responsible to deduct tax: Any person, being a transferee, responsible for paying (other than the person
referred to in sec. 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable
property (other than rural agricultural land)
“Immovable property” means any land (other than rural agricultural land) or any building or part of a building.
“Rural agricultural land” – as discussed in Chapter ‘Capital Gain’
When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.
Rate of TDS: 1% of such consideration or stamp duty value of such property, whichever is higher.
When TDS cannot be made: Where both the consideration for the transfer of an immovable property and stamp
duty value of the property are less than ₹ 50 lakh.
Consideration for transfer of any immovable property shall include all charges of the nature of club membership
fee, car parking fee, electricity or water facility fee, maintenance fee, advance fee or any other charges of
similar nature, which are incidental to transfer of the immovable property;
Other Points:
The deductor is not required to obtain Tax Deduction Account Number as required u/s 203A.
When TDS cannot be made: Where rent for a month or part thereof does not exceed ₹ 50,000
Other Points:
The deductor is not required to obtain Tax Deduction Account Number as required u/s 203A.
As per provision of sec. 206AA, if payee fails to provide his PAN, TDS is required to be deducted @ 20%.
However, deduction under this section shall not exceed the amount of rent payable for the last month of the
previous year (or the last month of the tenancy).
When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.
Individual or HUF, whose total sales, gross receipts or turnover from business or profession carried on by him
exceeding ₹ 1 crore in case of business or ₹ 50 lakh in case of profession during the financial year immediately
preceding the financial year in which such sum is credited or paid.
Note: Tax cannot be deducted if the aggregate amount of such fees credited or paid during the financial year to the
payee does not exceed:
Note: ₹ 30,000 limit is not on individual transaction. If several professional bills in a year together exceed the
amount of ₹ 30,000, tax shall be deducted, even though any individual bill amount does not exceed ₹ 30,000.
Taxpoint: U/s 194C limit of ₹ 30000 was on individual transaction, whereas u/s 194J limit of ₹ 30,000 is applicable
on all transactions together made during the year.
No threshold limit is provided for director fees. i.e., TDS is applicable even amount is less than ₹ 30,000.
When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.
Rate of TDS:
3.6.24 Payment of certain sums by certain individuals or Hindu undivided family [Sec.
194M]
Who is responsible to deduct tax: An individual or a Hindu undivided family (other than those who are required
to deduct income-tax as per the provisions of sec. 194C, 194H or 194J) responsible for paying following sum during
the financial year:
i. any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in
pursuance of a contract,
ii. any sum to any resident by way of commission (not being insurance commission referred to in section 194D)
or brokerage or
iii. any sum to any resident by way of fees for professional services
Note: Tax cannot be deducted if the aggregate amount of such sum credited or paid to a resident during the financial
year does not exceed ₹ 50 lakh
When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.
Rate of TDS: 5%
Other Point: The payer is not required to obtain TAN. He shall deposit the tax deducted under this section by
using his PAN.
Exemption or relaxation from the provision
When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorising the payer to deduct
tax at lower rate or deduct no tax [Refer sec. 197]
Case Rate
In case of defaulter
- Aggregate payment exceeds ₹ 20 lakh but does not exceed ₹ 1 crore 2%
- Aggregate payment exceeds ₹ 1 crore 5%
In any other case 2%
Defaulter means the recepient who has not filed the returns of income for all of the 3 assessment years relevant to
the 3 previous years, for which the time limit to file return of income u/s 139(1) has expired, immediately preceding
the previous year in which the payment of the sum is made to him
Note: In case of co-operative society ₹ 3 crore is considered instead of ₹ 1 crore.
Exception
The provision is not applicable if payment is made to:
a. the Government;
b. any banking company or co-operative society engaged in carrying on the business of banking or a post office;
c. any business correspondent of a banking company or co-operative society engaged in carrying on the business
of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the
Reserve Bank of India Act, 1934;
d. any white label automated teller machine operator of a banking company or co-operative society engaged in
carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India
under the Payment and Settlement Systems Act, 2007;
e. such other person or class of persons, which the Central Government may, by notification in the Official
Gazette, specify in consultation with the Reserve Bank of India.
f. Other notified person
Other Point: Tax deducted u/s 194N is not considered as deemed receipt of income.
Purchase Return: The tax is required to be deducted at the time of payment or credit, whichever is earlier. Thus,
before purchase return happens, the tax must have already been deducted u/s 194Q on that purchase. If that
is the case and against this purchase return the money is refunded by the seller, then this tax deducted may be
adjusted against the next purchase against the same seller. No adjustment is required if the purchase return is
replaced by the goods by the seller as in that case the purchase on which tax was deducted u/s 194Q has been
completed with goods replaced.
The provisions of this section shall not apply to a transaction on which:
tax is deductible under any of the provisions of this Act; and
tax is collectible u/s 206C other than a transaction to which sec. 206C(1H) applies.
194O -vs.- 194Q: If tax has been deducted by the e-commerce operator on a transaction u/s 194-O [including
transactions on which tax is not deducted on account of 194-O(2)], that transaction shall not be subjected to
tax deduction u/s 194Q.
Though sec. 206C(IH) provides exemption from TCS if the buyer has deducted tax at source on goods
purchased by him, to remove difficulties it is clarified that this exemption would also cover a situation where
instead of the buyer the e-commerce operator has deducted tax at source on that transaction of sale of goods by
seller to buyer through e-commerce operator.
194O -vs.- 206C(1H): Similarly, if a transaction is both within the purview of section 194-O as well as sec.
206C(1H), tax is required to be deducted u/s 194-O. The transaction shall come out of the purview of sec.
206C(1H) after tax has been deducted by the e-commerce operator on that transaction. Once the e-commerce
operator has deducted the tax on a transaction, the seller is not required to collect the tax u/s 206C(1H) on the
same transaction. It is clarified that here primary responsibility is on e-commerce operator to deduct the tax u/s
194-O and that responsibility cannot be condoned if the seller has collected the tax u/s 206C(1H). This is for
the reason that the rate of TDS u/s 194-O is higher than rate of TCS u/s 206(1H).
194Q -vs.- 206C(1H): If a transaction is both within the purview of sec. 194-Q as well as sec. 206C(1H), the
tax is required to be deducted u/s 194-Q. The transaction shall come out of the purview of sec. 206C(1H) after
tax has been deducted by the buyer on that transaction. Once the buyer has deducted the tax on a transaction,
the seller is not required to collect the tax u/s 206C(1H) on the same transaction. However, if, for any reason,
tax has been collected by the seller before the buyer could deduct tax u/s 194-Q on the same transaction, such
transaction would not be subjected to tax deduction again by the buyer. This concession is provided to remove
difficulty, since tax rate of deduction and collection are same in section 194Q and sec. 206C(1H).
The provision is not applicable in case of following transactions:
a. Transaction in securities and commodities traded through recognised stock exchange
b. Transaction in electricity, renewable energy certificate and energy saving certificate through power
exchanges [Circular 13/2021 dated 30-06-2021]
Person responsible for providing means the person providing such benefit or perquisite, or in case of a company,
the company itself including the principal officer thereof
When tax shall be deducted: Before providing such benefit or perquisite to a resident.
Rate of TDS: 10% of the value or aggregate of value of such benefit or perquisite
When TDS is not applicable: Where the value or aggregate of value of the benefit or perquisite provided or likely
to be provided to such resident during the financial year does not exceed ₹ 20,000
Taxpoint
Where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such
part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite,
the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite,
ensure that tax required to be deducted has been paid in respect of the benefit or perquisite
3.6.30 TDS on Payment on transfer of virtual digital asset [Sec. 194S] New
Who is responsible to deduct tax: Any person responsible for paying to any resident any sum by way of
consideration for transfer of a virtual digital asset.
When tax shall be deducted: At the time of credit of such sum to the account of the resident or at the time of
payment of such sum by any mode, whichever is earlier
Where any sum is credited to any account, whether called “Suspense Account” or by any other name, in the books
of account of the person liable to pay such sum, such credit of the sum shall be deemed to be the credit of such sum
to the account of the payee
Rate of TDS: 1%
When TDS is not applicable: No tax shall be deducted in a case, where:
a. wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or
b. partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of
tax in respect of whole of such transfer,
the person responsible for paying such consideration shall, before releasing the consideration, ensure that
tax required to be deducted has been paid in respect of such consideration for the transfer of virtual digital
asset.
The certificate shall be valid for such period of the previous year as may be specified in the certificate, unless
it is cancelled by the Assessing Officer at any time before the expiry of the specified period.
The certificate shall be valid only with regard to the person responsible for deducting the tax and named
therein.
The certificate shall be issued direct to the person responsible for deducting the tax under advice to the person
who made an application for issue of such certificate
Computation of lower rate [Rule 28AA]
The existing and estimated liability shall be determined by the Assessing Officer after taking into consideration the
following:
i. tax payable on estimated income of the previous year relevant to the assessment year;
ii. tax payable on the assessed or returned income, as the case may be, of the last 3 previous years;
iii. existing liability under the Income-tax Act,1961 and Wealth-tax Act,1957;
iv. advance tax payment for the assessment year relevant to the previous year till the date of making application;
v. tax deducted / collected at source for the assessment year relevant to the previous year till the date of making
application
In nutshell, the Assessing Officer may issue a certificate for deduction of tax at source at lower rate calculated in
the manner specified below:
Furnishing of statement in respect of payment of any income to residents without deduction of tax [Sec.
206A]
Any banking company or co-operative society or public company referred to in sec. 194A(3) responsible
for paying to a resident any income not exceeding ₹ 40,000 , where the payer is a banking company or a co-
operative society, and ₹ 5,000 in any other case by way of interest (other than interest on securities), shall
prepare such statement in such form, containing such particulars, for such period, verified in such manner and
within such time, as may be prescribed, and deliver or cause to be delivered the said statement to the prescribed
income-tax authority or to the person authorised by such authority.
The Board may require any person, other than above, responsible for paying to a resident any income liable
for deduction of tax at source under Chapter XVII, to prepare such statement in such form, containing such
particulars, for such period, verified in such manner and within such time, as may be prescribed, and deliver
or cause to be delivered the said statement to the income-tax authority or the authorised person referred above.
The person responsible for paying to a resident any of the aforesaid income may also deliver to the income-tax
authority, a correction statement for rectification of any mistake or to add, delete or update the information
furnished in the statement delivered in such form and verified in such manner, as may be prescribed.
Duty to furnish statement
Any person after paying the tax collected to the credit of the Central Government prepare following quarterly
statements:
of the amount computed under clause (b) and clause (c) against any amount paid u/s 200 or 201 or 234E
and any amount paid otherwise by way of tax or interest or fee;
e. an intimation shall be prepared or generated and sent to the deductor specifying the sum determined to
be payable by, or the amount of refund due to, him under clause (d); and
f. the amount of refund due to the deductor in pursuance of the determination under clause (d) shall be
granted to the deductor
Time Limit: Such intimation shall not be sent after the expiry of 1 year from the end of the financial year in
which the statement is filed.
For the purposes of processing of statements, the Board may make a scheme for centralised processing of
statements of tax deducted at source to expeditiously determine the tax payable by or refundable to the deductor.
#
An incorrect claim apparent from any information in the statement shall mean a claim, on the basis of an entry,
in the statement:
i. of an item, which is inconsistent with another entry of the same or some other item in such statement;
ii. in respect of rate of deduction of tax at source, where such rate is not in accordance with the provisions
of this Act;
In case any declaration becomes invalid, the deductor shall deduct the tax at source accordingly.
No certificate u/s 197 shall be granted unless the application made for the purpose contains the Permanent
Account Number of the applicant.
The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in
all the correspondence, bills, vouchers and other documents which are sent to each other.
Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee,
it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor.
In the case of a non-resident, not being a company, or a foreign company and not having PAN, the provisions
of sec. 206AA shall not apply in respect of payments in the nature of interest, royalty, fees for technical
services and payments on transfer of any capital asset, if the deductee furnishes the specified details and the
documents to the deductor [Notification 53 dated 24-06-2016]
For the purpose of this rule, tax includes interest, penalty and payment of any amount by a deductor by way of
Tax Deducted at Source (TDS) or Tax Collected at Source (TCS).
An assessee can make electronic payment of taxes also from the account of any other person. However, the
challan for making such payment must clearly indicate the Permanent Account Number (PAN) of the assessee
on whose behalf the payment is made. It is not necessary for the assessee to make payment of taxes from his
own account in an authorized bank.
Exception
i. The authorised dealer shall not collect the sum, if aggregate of the amounts being remitted by a buyer is
less than ₹ 7,00,000 in a financial year and is for a purpose other than purchase of overseas tour program
package.
Taxpoint: If remittance is more than ₹ 7,00,000 (say ₹ 8,00,000), then tax shall be collected on excess
amount (i.e. ₹ 1,00,000).
ii. The authorised dealer shall not collect the sum on an amount in respect of which the sum has been
collected by the seller.
iii. The provision is not applicable, if the buyer is:
a. liable to deduct tax at source under any other provision of this Act and has deducted such amount;
b. the Central Government, a State Government, an embassy, a High Commission, a legation, a
commission, a consulate, the trade representation of a foreign State, a local authority as defined in
the Explanation to sec. 10(20) or any other notified person
4. Every person, being a seller, who receives any amount as consideration for sale of any goods of the value or
aggregate of such value exceeding ₹ 50,00,000 in any previous year shall at the time of receipt of such amount,
collect from the buyer, a sum equal to 0.1% of the sale consideration exceeding ₹ 50,00,000 [Sec. 206C(1H)]
Exception
¾¾ The provision is not applicable in case of goods being exported out of India or motor vehicle or any goods
covered in point 3 above.
¾¾ If the buyer has not provided the Permanent Account Number or the Aadhaar number to the seller, tax
shall be collected @ 1%
¾¾ The provisions shall not apply, if the buyer is liable to deduct tax at source under any other provision of
this Act on the goods purchased by him from the seller and has deducted such amount.
Taxpoint: For the purposes of this:
a. Buyer means a person who purchases any goods, but does not include:
i. the Central Government, a State Government, an embassy, a High Commission, legation, commission,
consulate and the trade representation of a foreign State; or
ii. a local authority; or
iii. a person importing goods into India or any other notified person
b. Seller means a person whose total sales, gross receipts or turnover from the business carried on by him
exceed ₹ 10 crore during the financial year immediately preceding the financial year in which the sale of
goods is carried out, but does not include notified person
Meaning of important terms [for points 1 to 3]
1. “Seller” means -
a. The Central Government; or
b. State Government; or
c. Local authority; or
d. Statutory corporation; or
e. Authority established by or under a Central, State or Provincial Act; or
f. Company; or
g. Firm; or
h. Co-operative society; or
i. An individual or a HUF, whose total sales, gross receipts or turnover from the business or profession
carried on by him exceed ₹ 1 crore in case of business or ₹ 50 lakh in case of profession during the
financial year immediately preceding the financial year in which such goods are sold.
2. “Buyer” (for specified goods other than motor car) means a person who obtains in any sale (by way of auction,
tender or any other mode) specified goods or the right to receive any such goods but does not include, —
i. A public sector company, the Central Government, a State Government and an embassy, a High
Commission, Legation, Commission, consulate and the trade representation, of a foreign state and a
club; or
ii. A buyer in the retail sale of such goods purchased by him for personal consumption.
Buyer in case of motor car means a person who obtains in any sale, motor care, but does not include:
a. the Central Government, a State Government and an embassy, a High Commission, legation,
commission, consulate and the trade representation of a foreign State; or
b. a local authority; or
c. a public sector company which is engaged in the business of carrying passengers
3. “Specified goods” includes:
i. Alcoholic Liquor for human consumption
ii. Tendu leaves;
iii. Timber;
iv. Any forest-produce;
v. Scrap.
vi. Specified minerals i.e., coal, lignite and iron-ore
vii. Motor car value of which exceeds ₹ 10 lakhs
Rate of TCS
Rate as a % of the amount payable by
Particulars
the buyer or licensee or lessee*
1. Alcoholic liquor for human consumption 1%
2. Tendu leaves 5%
3. Timber obtained under a forest lease 2.5%
4. Timber obtained by any mode other than under a forest lease 2.5%
5. Any other forest produce (not being timber or tendu leaves) 2.5%
6. Scrap 1%
7. Specified minerals 1%
8. Motor car value of which exceeds ₹ 10 lakh 1%
9. Parking lot, toll plaza, mining and quarrying 2%
10. In case of point 3
a. if the amount being remitted out is a loan obtained from
any financial institution as defined in sec. 80E, for the 0.5%
purpose of pursuing any education
b. In other case 5%
11. In case of point 4 0.1%
* However, where the purchaser or licensee or lessee is a non-resident non-corporate assessee or a non-domestic
company, then surcharge (if any applicable), health and education cess is also required to be deducted alongwith
aforesaid rates.
Note: “Scrap” means waste and scrap from the manufacture or mechanical working of materials which is definitely
not usable as such because of breakage, cutting up, wear and other reasons.
Special provision for TCS for non-filers of ITR [Sec. 206CCA] Amended
Where tax is required to be collected at source under the aforesaid provisions, on any sum or amount received by
a person from a specified person, the tax shall be collected at the higher of the following rates:
at twice the rate specified in the relevant provision of the Act; or
at the rate of 5%.
Taxpoint
If the provisions of sec. 206CC is applicable to a specified person, in addition to the provisions of this section,
the tax shall be collected at higher of the two rates provided in this section and in sec. 206CC.
Specified person means
a. a person who has not furnished the return of income for the assessment year relevant to the previous year
immediately preceding the financial year in which tax is required to be collected, for which the time limit
for furnishing the return of income u/s 139(1) has expired; and
b. the aggregate of TDS and TCS in his case is ₹ 50,000 or more in the said previous year
However, the specified person shall not include a non-resident who does not have a permanent establishment in
India. Permanent establishment includes a fixed place of business through which the business of the enterprise
is wholly or partly carried on.
Quick MCQs:-
2. Liability to deduct tax at source in case on income from interest on securities arises at the time of –
(a) Payment of interest
(b) Accrual of interest
(c) Credit of interest to the account of the payee / interest payable account or payment thereof whichever
is earlier.
(d) None of the above
3. The rate of TDS in case of listed debentures for the financial year 2023-24 is –
(a) 20%
(b) 21%
(c) 10%
(d) 10% but where income exceeds D 8,50,000, 10% plus surcharge @ 10%.
4. Mothi has won a state government lottery of D 1,00,000 on 11-10-2023. The state government should
deduct tax on such winning amounting to –
(a) D 30,900
(b) D 33,000
(c) D 29,070
(d) D 30,000
5. No tax is to be deducted at source if the amount credited / paid to the contractors during the relevant
previous year does not exceed –
(a) D 1,00,000
(b) D 30,000
(c) D 30,000 at one time or D 1,00,000 in aggregate in a FY.
(d) None of above
6. Mr.X a resident Indian, wins D 10,000 in a lottery. Which of the statement is true?
(a) Tax is deductible u/s. 194B @ 30%.
(b) Tax is deductible u/s. 194B @ 30.9%
(c) No tax is deductible at source
(d) None of the above
Mandatory furnishing of return in case of high value transactions [7th proviso to sec. 139(1)]
A person (other than firm and company), who is not required to furnish a return as per aforesaid provision, and who
during the previous year:
a. has deposited an aggregate amount exceeding ₹ 1 crore in one or more current accounts maintained with a
banking company or a co-operative bank; or
b. has incurred expenditure of an aggregate amounts exceeding ₹ 2 lakh for himself or any other person for travel
to a foreign country; or
c. has incurred expenditure of an aggregate amount exceeding ₹ 1 lakh towards consumption of electricity; or
d. fulfils such other conditions as may be prescribed,
Illustration 44:
Whether following assessee is compulsorily required to file return of income–
3.7.2 Scheme for submission of return through Tax Return Preparers (TRP) [Sec. 139B]
A TRP is an individual who has been authorized to enable any specified class(es) of person1 to prepare and furnish
their returns of income. The scheme framed under the above provision shall specify:
The manner in which the TRP shall assist the person furnishing the return of income
The educational and other qualifications to be possessed,
The training and other conditions required to be fulfilled, by a person to act as a TRP,
The code of conduct for the TRP,
Duties and obligation of the TRP
For Individuals having Income from Salaries, one house property (does not have any brought forward
loss), other sources [Interest (does not have any loss under the head) etc. but except winnings from
lottery or income from race horses] and having total income upto ₹ 50 lakh
However, the form is not to be used by an individual who:
a. has any brought forward / carry forward loss under the head ‘Income from House Property’;
b. has assets (including financial interest in any entity) located outside India;
c. has signing authority in any account located outside India;
d. has income from any source outside India;
(Sahaj) f. has claimed deduction u/s 57, other than deduction from family pension;
g. is a director in any company;
h. has held any unlisted equity share at any time during the previous year;
i. is assessable for the whole or any part of the income on which tax has been deducted at source in
the hands of a person other than the assessee;
j. has claimed any relief of tax u/s 90 or 90A or 91;
k. has agricultural income, exceeding ₹ 5,000;
l. has total income, exceeding ₹ 50 lakh;
m. has income of the nature referred to in section 115BBE;
3.7.5 Time limit for filing return of income [Explanation 2 to Sec. 139(1)]
A return should be filed on or before the following due date (of respective assessment year):
11
Also spouse of such partner if the provisions of section 5A applies to such spouse
Case Fee
Total income does not exceed ₹ 5 lakh ₹ 1,000
Total income exceeds ₹ 5 lakh ₹ 5,000
3.7.7 When a return of loss should be filed [Sec. 139(3)]
An assessee, other than few, is not compulsorily required to furnish return of loss. However, the following losses
cannot be carried forward if the return of loss is not submitted within the time allowed u/s 139(1) -
a. Business loss (speculative or otherwise);
b. Capital loss;
c. Loss from the activity of owning and maintaining race horses
d. Loss from business specified u/s 35AD
Notes
a. Loss declared in belated return cannot be carried forward. However, set-off of losses of current year is not
prohibited while computing the total income, even if the return of loss is filed after the due date.
b. Delay in filing the return of loss may be condoned in certain cases
c. Unabsorbed depreciation u/s 32 and loss under the head “Income from house property” can be carried forward
even if the loss return is filed after the due date u/s 139(1).
d. Although the loss of the current year cannot be carried forward unless the return of loss is submitted before
the due date but the loss of earlier years can be carried forward if the return of loss of that year was submitted
within the due date.
Illustration 45:
State the time allowed u/s 139(4) to submit a belated return for the P.Y. 2023-24 in the following cases -
a. No assessment is made u/s 144.
b. Assessee failed to respond to notice u/s 142(1), served on 5/11/2024 (time allowed in such notice to submit
return is 5/12/2024) but no assessment is made u/s 144.
c. Assessee failed to respond to notice u/s 142(1), served on 5/10/2024 (time allowed in such notice to submit
return is 5/11/2024) and assessment u/s 144 is completed on 7/12/2024.
d. Assessee failed to respond to notice u/s 142(1), served on 5/10/2024 (time allowed in such notice to submit
return is 5/11/2024) and assessment u/s 144 is completed on 7/12/2024. However, assessee has received the
assessment order on 5/1/2025.
Solution :
Note: Updated return of income [Sec 139(8A)] can be filed within 24 months from the end of relevant assessment
year whether original return of income is filed or not.
the taxpayer rectifies the defect after the expiry of the period of 15 days or such extended period but before the
assessment is completed, the Assessing Officer can condone such delay.
Consequence when defect is not rectified: If defect is not rectified within the time limit, the Assessing Officer
will treat the return as an invalid return and provisions of the Act will apply as if the taxpayer had failed to furnish
the return at all.
Note: Currently, the assessee is required to furnish paper-less return. i.e., no documents, proof or report (other than
some specified report required to be furnished electronically) is required to be attached with return of income. In
this regard, return of income shall not be considered as defective return. However, the assessee should retain these
documents, proof or report with himself. If called for by the income-tax authority during any proceeding, it shall
be incumbent upon the assessee to furnish/produce the same.
No updated return shall be furnished by any person for the relevant assessment year, where:
a. an updated return has already been furnished by him for the relevant assessment year; or
b. any proceeding for assessment or reassessment or recomputation or revision of income is pending or has
been completed for the relevant assessment year in his case; or
c. the Assessing Officer has information in respect of such person for the relevant assessment year in his
possession under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976
or the Prohibition of Benami Property Transactions Act, 1988 or the Prevention of Money-laundering
Act, 2002 or the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,
2015 and the same has been communicated to him, prior to the date of furnishing of return under this
sub-section; or
d. information for the relevant assessment year has been received under an agreement referred to in sec.
90 or 90A in respect of such person and the same has been communicated to him, prior to the date of
furnishing of return under this sub-section; or
e. any prosecution proceedings under the Chapter XXII have been initiated for the relevant assessment
year in respect of such person, prior to the date of furnishing of return; or
f. he is such person or belongs to such class of persons, as may be notified by the Board in this regard.
If any person has sustained a loss in any previous year and has furnished a return of loss in the prescribed from
within the time allowed u/s 139(1) and verified in the prescribed manner and containing such other particulars
as may be prescribed, he shall be allowed to furnish an updated return where such updated return is a return
of income.
zz If the loss or any part thereof carried forward or unabsorbed depreciation carried forward or tax credit
carried forward u/s 115JAA or u/s 115JD is to be reduced for any subsequent previous year as a result
of furnishing of updated return for a previous year, an updated return shall be furnished for each such
subsequent previous year.
Time limit for filing updated return: At any time within 24 months from the end of the relevant assessment year.
Taxpoint: The updated return is accompanied by the proof of payment of tax as required u/s 140B
if such return is furnished after expiry of the time available u/s 139(4) 25% of aggregate of tax (+ surcharge
or (5) and before completion of the period of 12 months from the end + cess) and interest payable on tax
of the relevant assessment year calculated above
if such return is furnished after the expiry of 12 months from the end of 50% of aggregate of tax (+ surcharge
the relevant assessment year but before completion of the period of 24 + cess) and interest payable on tax
months from the end of the relevant assessment year calculated above
Quick MCQs:-
1. Mr. Z, a salaried individual, has a total income of D 8 lakhs for A.Y 2024-25. He furnishes his return of
income for A.Y 2024-25 on 28th August, 2024. He is liable to pay fee of –
(a) upto D 1,000 under section 234F
(b) D 5,000 under section 234F
(c) D 10,000 under section 234F
(d) Not liable to pay any fee
2. Which of the following returns can be revised under Section 139(5)?
(i) A return of income filed u/s. 139(1)
(ii) A belated return of income filed u/s. 139(4)
(iii) A return of loss filed u/s. 139(3)
(a) Only (i)
(b) Only (i) and (ii)
(c) Only (i) and (iii)
(d) (i), (ii) and (iii)
PAN 3.8
Permanent Account Number (PAN) is an alpha-numeric (ten characters) code given to a person by income tax
department for the purpose of identification of the assessee. A person can have only one PAN.
12
Following are specified transactions (further PAN or Aadhar number is required to be quote on any document pertaining to such transactions)
1. Cash deposit or deposits aggregating to ₹ 20 lakh or more in a financial year, in one or more account of a person with a banking company or a co-
operative bank to which the Banking Regulation Act, 1949 applies or a Post Office;
2. Cash withdrawal or withdrawals aggregating to ₹ 20 lakh or more in a financial year, in one or more account of a person with a banking company
or a co-operative bank to which the Banking Regulation Act, 1949 applies or a Post Office;
3. Opening of a current account or cash credit account by a person with a banking company or a co-operative bank to which the Banking Regulation
Act, 1949 applies or a Post Office
Case Form
For Indian Citizen / Indian Company / Entities incorporated in India / Unincorporated entities formed 49A
in India
In other cases 49AA
b. Suo-moto allotment of PAN
¾¾ As per sec 139A(1B) for the purpose of collecting any information which may be useful for the purposes
of the Act, the Central Government may, by way of notification, specify any class of person to apply
within prescribed time to the AO for allotment of PAN.
¾¾ Section 139A(2) empowers the Assessing Officer to allot a PAN to any person other than the person
falling under the categories mentioned above.
13
Specified applicant may apply for allotment of PAN through a common application form notified by the Central Government
B. PAN or Aadhar Number must be quoted in documents pertaining to certain prescribed transactions
[Sec. 139A(5)(c) & Rule 114B]
Every person shall quote its PAN or Aadhar in all documents pertaining to following transactions entered into
by him –
1. *Transactions relating to sale or purchase of a motor vehicle (other than two wheeled vehicles), which
requires registration.
2. *Opening an account [other than a time-deposit and a Basic Savings Bank Deposit Account] with a
banking company or a co-operative bank
3. Making application for issue of a credit card or debit card.
4. *Opening of a demat account
5. Payment in cash exceeding ₹ 50,000 to a hotel or restaurant against a bill or bills at any one time
6. Payment in cash exceeding ₹ 50,000 in connection with travel to any foreign country or payment for
purchase of any foreign currency at any one time
7. *Payment exceeding ₹ 50,000 to any mutual fund for purchase of its units.
8. *Payment exceeding ₹ 50,000 to a company or an institution for acquiring debentures or bonds issued
by it
9. Payment exceeding ₹ 50,000 to RBI for acquiring bonds issued by it.
10. *Deposit in cash exceeding ₹ 50,000 during any one day with a banking company or a co-operative bank
As per Rule 114BB, PAN or aadhar is required to quote in case of cash withdrawal or withdrawals
aggregating to ₹ 20 lakh or more in a financial year, in one or more account of a person with a
banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies or a
Post Office
11. Purchase of bank drafts or pay orders or banker’s cheques from a banking company or a co-operative
bank in cash for an amount exceeding ₹ 50,000 during any one day
12. *A time deposit of an amount exceeding ₹ 50,000 or aggregating to more than ₹ 5 lakh during a financial
year with: (i) a banking company or a co-operative bank; or (ii) a Post Office; or (iii) a Nidhi referred to
in section 406 of the Companies Act, 2013; or (iv) a non-banking financial company
13. Payment in cash or by way of a bank draft or pay order or banker’s cheque of an amount aggregating to
more than ₹ 50,000 in a financial year for one or more pre-paid payment instruments, as defined in the
policy guidelines for issuance and operation of pre-paid payment instruments issued by Reserve Bank of
India u/s 18 of the Payment and Settlement Systems Act, 2007, to a banking company or a co-operative
bank
14. *Payment aggregating to more than ₹ 50,000 in a financial year as life insurance premium to an insurer
15. *A contract for sale or purchase of securities (other than shares) where transaction value exceeds ₹ 1
lakh
16. *Sale or purchase, by any person, of shares of a company not listed in a recognised stock exchange
where transaction value exceeds ₹ 1 lakh
17. *Sale or purchase of any immovable property where amount exceeds ₹ 10 lakh or stamp value exceeds
₹ 10 lakh
18. Sale or purchase, by any person, of goods or services of any nature other than those specified above
where transaction value exceeds ₹ 2 lakh
Note
i. Where a person, entering into any of the aforesaid transaction, is a minor and who does not have any income
chargeable to tax, he shall quote the PAN of his father or mother or guardian, as the case may be, in the
document pertaining to the said transaction
ii. Any person who does not have a PAN and who enters into any of the aforesaid transaction, he shall make a
declaration in Form No.60 giving therein the particulars of such transaction.
iii. The provisions of this rule shall not apply to the following class or classes of persons, namely:
–– the Central Government, the State Governments and the Consular Offices;
–– the non-residents in respect of the transactions other than a transaction referred above with *.
C. PAN or Aadhar Number on TDS & TCS Certificate
a. On TDS: Every person is required to intimate his PAN to the person who has deducted the tax at source
[Sec. 139A(5A)].
Exceptions
This provision is not applicable to an assessee who furnishes to the payer a declaration in writing in the
prescribed form (Form 15G or 15H) and manner to the effect that the tax on his estimated total income is
nil.
The person deducting tax at source is required to quote –
PAN of the payee;
PAN of himself;
Tax Deduction Account Number (TAN) of himself,
–– in all statements, certificates furnished u/s 200(3) or 203 or 206 [Sec. 139A(5B)].
b. On TCS: Every person responsible for collecting tax in accordance with the provisions of sec.206C
shall quote PAN of every buyer or licensee or lessee in all certificates furnished in accordance with the
provisions of sec. 206C(3) or 206C(5) and in all returns prepared u/s 206C(5A)/(5B) to the Income-tax
authority [Sec. 139A(5D)]
Every buyer or licensee or lessee is required to intimate his PAN to the seller who has collected the tax
at source [Sec. 139A(5C)]
Other Point
Every person entering into such transaction shall quote his PAN or Aadhaar number in the documents pertaining
to such transactions and also authenticate such PAN or Aadhaar number [Sec. 139(6A)]
Every person receiving any document relating to such transactions shall ensure that PAN or Aadhaar number
has been duly quoted in such document and also ensure that such PAN or Aadhaar number is so authenticated
[Sec. 139(6B)]
–– Authentication means the process by which the PAN or Aadhaar number alongwith demographic
information or biometric information of an individual is submitted to the income-tax authority or such
other authority or agency as may be prescribed for its verification and such authority or agency verifies
the correctness, or the lack thereof, on the basis of information available with it.
Quick MCQs:-
1. An individual client has consulted you on the matter of PAN. He is carrying on the business of sale &
purchase of electronic appliances. His turnover is D 3,00,000 and the profit is D 75,000 for the P.Y 2023-
24. He has asked you to provide him threshold of turnover, if any, exceeding which he has to apply for
PAN.
(a) More than D 2,00,000
(b) More than D 2,50,000
(c) More than D 3,00,000
(d) More than D 5,00,000
A
ssessment means to assess the income of the assessee i.e. to decide the income and tax liability of the
assessee on the basis of return filed, information gathered or to the best of judgment of income tax
department. It begins with self-assessment i.e. assessment by the assessee himself.
Solution :
Amount payable together with filing return for the A.Y.2024-25
Time Limit for audit report: The audit report shall be furnished by the assessee within the period specified by the
Assessing Officer. The Assessing Officer has power to extend such period on an application made by the assessee
or suomotu. However, the aggregate period (fixed originally and extended) shall not exceed 180 days from the date
on which such direction is received by the assessee.
Form of audit report: The chartered accountant shall submit the report in Form 6B to the assessee. Thereafter
such report is to be submitted by the assessee to the Assessing Officer within such period as allowed by the
Assessing Officer.
Audit fees: The audit fees and audit expenditure shall be determined by the Principle Chief Commissioner /
Principle Commissioner / Chief Commissioner / Commissioner (which shall be final) and paid by the Central
Government.
Consequences of failure to get books of account audited: In case assessee fails to get books of account audited,
it -
will be liable to Best Judgment Assessment u/s 144; and
attracts penalty and prosecution.
Note: Penalty etc. are attracted only if there is a default by the assessee. If accountant nominated by the Commissioner
refuses to audit the accounts, the assessee cannot be held responsible
c. the sum payable by (or the amount of refund due to), the assessee shall be determined after adjustment of the
tax, interest and fee, if any, by any TDS, TCS, advance tax paid, any relief, tax paid on self-assessment and
any amount paid otherwise by way of tax, interest or fee;
d. an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be
payable by, or the amount of refund due to, the assessee; and
e. the amount of refund due to the assessee in pursuance of the determination shall be granted to the assessee.
f. An intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee
is adjusted but no tax or interest or fee is payable by, or no refund is due to, him.
Time limit for intimation: No intimation shall be sent after the expiry of 9 months from the end of the financial
year in which the return is made. The period of limitation will run from the date of filing of latest revised return.
Notes
An incorrect claim apparent from any information in the return shall mean a claim, on the basis of an entry,
in the return,—
a. of an item, which is inconsistent with another entry of the same or some other item in such return;
b. in respect of which the information required to be furnished under this Act to substantiate such entry has
not been so furnished; or
c. in respect of a deduction, where such deduction exceeds specified statutory limit which may have been
expressed as monetary amount or percentage or ratio or fraction;
The acknowledgment of the return shall be deemed to be intimation where either no sum is payable by the
assessee or no refund is due to him.
In case, where refund becomes due to the assessee u/s 143(1) and the Assessing Officer is of the opinion,
having regard to the fact that a notice has been issued u/s 143(2) in respect of such return, that the grant of
the refund is likely to adversely affect the revenue, he may, for reasons to be recorded in writing and with the
previous approval of the Principal Commissioner or Commissioner, as the case may be, withhold the refund
up to the date on which the assessment is made [Sec. 241A]
Exercise
A. Theoretical Questions:
¾¾ Multiple Choice Questions:
1. Mr. X’s minor daughter earned ₹ 50,000 from his special talent. This income will be clubbed with –
a. The income of Mr. X
b. The income of Mrs. X
c. Mr. X or Mrs. X, whoever’s income is higher
d. It will not be clubbed
6. Advance tax is required to be paid by all assessee only if estimated advance tax liability is
a. ₹ 5,000 or more
b. ₹ 10,000 or more
7. TDS is not required to be deducted u/s 194A if the amount of interest on loan does not exceed:
a. ₹ 5,000
b. ₹ 2,500
c. ₹ 7,500
d. ₹ 20,000
9. Where assessment has not been completed, belated income tax return for assessment year 2024-25
can be filed upto:
a. 31.12.2024
b. 31.01.2025
c. 31.03.2025
d. 31.12.2025
10. When assessment has not been completed, revised return can be filed within ______ from the end
of the relevant previous year.
a. 9 months
b. 6 months
c. 12 months
d. 2 years
[Answer : 1-d; 2-b; 3-b; 4-d; 5-b; 6-b; 7-a; 8-c; 9-a; 10-a]
¾¾ Short Essay Type Questions
1. Discuss the provisions under IT Act in respect of clubbing of remuneration of spouse
2. Discuss whether long term capital loss can be adjusted against STCG
3. State the provision relating to deduction u/s 80D
4. Who is liable to pay advance tax?
5. Who is liable to file return of income mandatorily?
B. Numerical Questions
¾¾ Multiple Choice Questions
1. Mr. A gifted debenture of ₹ 1,00,000 to his wife. She received ₹ 10,000 interest which she reinvests
and earns ₹ 1,000. This ₹ 1,000 will be taxable in the hands of –
a. Mr. A
b. Mrs. A
c. Not Taxable
d. Mr. A or Mrs. A, at the choice of the Assessing Officer
2. Mr. A has three minor children deriving interest from bank deposits to the tune of ₹ 2,000, ₹ 1,300,
₹ 1,600 respectively. Exemption available under section 10(32) of the Income Tax is –
a. ₹ 4,900
b. ₹ 4,300
c. ₹ 4,500
d. ₹ 5,000
[Answer : 1-b; 2-b]
1. From the following incomes and losses for the Previous Year 2023-24, compute Gross Total
Incomes of Mr. Sen:
₹
Income from Business A 2,00,000
Loss from Business B 1,20,000
Long term Capital Gain 50,000
Short term Capital Loss 35,000
Bank Interest on fixed deposit 10,000
Brought forward loss of the year 2020-21 are as follows:
Loss from Business B 40,000
Long term Capital Loss 20,000
[Hints: ₹ 50,000]
2. Mrs. R Mukherjee furnished the following information for the previous year 2023-24:
Particulars Amount
Donation to Prime Minster’s National Relief Fund 15,000
Donation to Jawaharlal Nehru Memorial Fund 10,000
Donation to a notified temple 30,000
Particulars Amount
Donation of cloth worth ₹ 10,000 to Bharat Sevashram Sangha to be distributed among Ayla
victims
Donation to an approved University 2,000
Gross Total Income 3,00,000
Payment of life insurance premium on the life of her daughter ₹ 20,000 (Policy value ₹ 2,00,000)
Compute total income
[Hints: ₹ 2,44,000]
¾¾ Unsolved Case
Shri Mayur has two minor children named Lakshmi (age 10) and Sarath (age 14). Following details
pertain to the minor children for the year ended 31.03.2024:
i. Minor Lakshmi won Carnatic music competition in TV channel and was awarded cash prize of
₹ 2,00,000.
ii. Minor Lakshmi received cash gifts from friends of Mayur ₹ 43,000. No single gift exceeded
₹ 10,000.
iii. Minor Sarath received gift of gold chain whose fair market value was ₹ 80,000 from his maternal
uncle on the occasion of his 14th birthday. He also received cash gift of ₹ 12,000 from friends of
Mayur on his birthday.
iv. Out of accumulated savings of daughter Lakshmi, one vacant land was acquired. The stamp duty
value of the land ₹ 3,60,000. The documented value of the land ₹ 3,20,000.
On the basis of aforesaid information, you are requested to answer the following:
a. What will be the income liable to be clubbed in hands of Shri Mayur on account of Lakshmi?
b. What will be the income liable to be clubbed in hands of Shri Mayur on account of Sarath?
c. What will be the income liable to be taxed in the hands of Lakshmi?
[Hints: (a) ₹ 41500; (b) ₹ 10,500; (c) ₹ 2,00,000]
¾¾ References:
https://www.incometaxindia.gov.in/
https://www.incometax.gov.in/
https://www.indiabudget.gov.in/