BB0019-IncomeTax Valuation Perquisites

BB 0019/BM 0015 (A)
Business Taxation Assessment Year 2008-2009
Contents
Unit 1 Terms and Concepts, Residential Status and Tax Liability Unit 2 Tax-free Incomes, Deductions and Rebates Unit 3 Income from Salaries Unit 4 Income from House Property Unit 5 Profits and Gains of Business or Profession Unit 6 Capital Gains Unit 7 Income from Other Sources Unit 8 Set-off and Carry Forward of Losses References
Edition: Fall 2008
1 31 83 151 195 227 268 291 309
BKID B0881 5 May 2008
th
Brig. (Dr). R. S. Grewal VSM (Retd.) Pro Vice Chancellor Sikkim Manipal University of Health, Medical & Technological Sciences
Board of Studies
Mr. Rajen Padukone Member Academic Senate, Sikkim Manipal University Ms. Vimala Parthasarathy Prof. K. V. Varambally HOD Director Convener Manipal Institute of Management Department of Management & Commerce Manipal Directorate of Distance Education Sikkim Manipal University Prof. Raj Dorai Mr. Jagadeesh Industry Consultant and Assistant Professor Visiting Faculty, IBA, IFIM and BIM, Department of Management & Bangalore Commerce, Directorate of Distance Education, Sikkim Manipal University Mr. Umesh Maiya Mr. R. Ravindra Rao Assistant Professor Senior Faculty Department of Management & Commerce Manipal Institute of Management Directorate of Distance Education Manipal Sikkim Manipal University
Content Preparation Team

Content Writing & Editing Mr.N.S.Gopala Krishna Bhat, MBA, AICWA Principal, Trisha Classes, Udupi Format Editing Mr. Umesh Maiya Assistant Professor Dept. of Management & Commerce Sikkim Manipal University of Health, Medical & Technological Sciences (SMU), Manipal 576 104
Edition: Fall 2008 This book is a distance education module comprising of collection of learning material for our students. All rights reserved. No part of this work may be reproduced in any form by any means without permission in writing from Sikkim Manipal University of Health, Medical and Technological Sciences, Gangtok, Sikkim. Printed and Published on behalf of Sikkim Manipal University of Health, Medical and Technological Sciences, Gangtok, Sikkim by Mr. Rajkumar Mascreen, GM, Manipal
Universal Learning Pvt. Ltd., Manipal 576 104. Printed at Manipal Press Limited, Manipal.
SUBJECT INTRODUCTION
Success is the sweetest yield of all hard work and efforts. It is the result of urge to win and constant efforts towards the achievement of the goal. A modest attempt has been made in this book to ignite the passion for continuous effort. This book contains a compilation of theory, formats, Solved illustrations, theory questions, Self Assessment Questions (SAQ) and Terminal Questions (exercise for practice). Information overload has been avoided and it has been ensured that the book gives the student what he is required and expected to study. It is expected that the student would derive the maximum benefit from the book by adopting the following procedure. Read and understand the theory portions. Understand the manner of deriving the solutions to numerical type questions. Solve the illustrations once again, independently, in order to develop confidence level. Solve the practice questions given at the end of the each chapter. Attend online sessions to gain more knowledge and to clarify any doubts on subject matter. The difficult to understand matters relating Income Tax are explained in a very simple way, which can be understood even by a common man not knowing anything about Income Tax & its Rules. Unit structure has been given for each chapter to have birds eye view of the topics discussed. Various formats have been given to simplify the language of law and to work out the problems easily which is the unique feature of this book. Memorising techniques are also included to remember the difficult provisions of Income Tax Act.
This edition includes important student notes and authors comments for quick reference of simplified Income Tax provisions. Special highlights of latest amendments have also been made in this book. This edition also includes multiple choice questions (MCQs) which are given in the last SAQ of each chapter before the summary to have an idea of type of questions that may be asked in the examination. Today, in India, a large number of salaried employees, businessmen etc. are required to pay income- tax. Law is quite essential for every taxpayer. In fact, tax planning is a must for every incometax assessee. The subject Taxation is intended to give the readers a fairly good idea of the Indian Income tax law applicable for individuals. Taxation covers the following aspects of the Indian Income- tax Act, 1961: Unit 1: This unit covers important Terms and Concepts, Individual Residential Status and incidence of tax liability. Unit 2: This unit covers Tax- free Incomes, Deductions and Rebates. Unit 3: This unit covers Income from Salaries. Unit 4: This unit covers Income from House Property. Unit 5: This unit covers Profit & gains of Business or Profession. Unit 6: This unit covers Capital Gains. Unit 7: This unit covers Income from Other Sources. Unit 8: This unit covers Set-off and carry Forward of losses. This edition is applicable only for the assessment year 2008-09.
Unit 1
Unit 1
Structure: 1.1 1.2
Terms and Concepts, Residential Status and Tax Liability
Introduction Objectives Income Tax An Introduction 1.2.1 Definitions 1.2.2 Charge of Income Tax
1.3 1.4 1.5
Agricultural Income Income Important Terms 1.5.1 Assessee 1.5.2 Person 1.5.3 Assessment Year 1.5.4 Previous Year
1.6 1.7 1.8 1.9
General rule of Income Tax Self Assessment Questions (SAQ1) Residential status Incidence of Tax Liability Illustrations Self Assessment Questions (SAQ2, SAQ3)
1.10 Summary 1.11 Terminal Questions 1.12 Answers to SAQs and TQs
1.1 Introduction
This unit introduces the basic concepts and terms of income tax. It also includes computation of residential status and scope of total income of an individual. The main aim of this unit is to make students to understand the fundamentals of individual income tax.
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Learning Objectives: After studying this unit, you will be able to Understand the various terms and concepts Know the General rule of Income Tax and exceptions Determine the residential status of an individual Know the scope of total income Learn the specific formats
1.2 Income Tax An Introduction

Income tax is a tax on income. It is a direct tax. Its impact and incidence falls on the same person. It is levied with the twin objective of collecting revenue to the state and achieving social justice. Social justice is achieved by causing the people with higher income to pay tax at progressively higher rate. The tax is collected by the Central Government machinery and is apportioned between the Central and State Governments as per the recommendations of Finance Commission, which is appointed every five years. The Central Board of Direct Taxes (CBDT) supervises the entire tax collection process. In India, Constitution is the parent law. All other laws should be enacted without exceeding the framework of the Constitution and subject to the norms laid down therein. The Constitution of India empowers Central Government to levy tax on Income. By virtue of this power and to achieve this objective, the Income-tax Act, 1961 was enacted in the place of the Income-tax Act, 1922 which was prevalent earlier. According to Sec.1 of the Income tax Act, the Act is to be called as The Income-tax Act, 1961 and it extends to the whole of India. It came into force on the 1st day of April 1962, i.e., from assessment year 1962-63 onwards.
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1.2.1 Definitions Section 2 of the Income-tax Act gives definitions of the various terms and expressions used in the Act. Unless the context otherwise requires, these definitions should be applied. The words means, includes and means and includes are used in these definitions and the significance of these terms needs to be understood. When a definition uses the word means, the definition is self-explanatory, restrictive and in a sense exhaustive. It implies that the term or expression so defined means only as to what it is defined as and nothing else. For example, the terms Agricultural Income, Assessment Year, Capital Asset are exhaustively defined. When the legislature wants to widen the scope of a term or expression, and where an exhaustive definition cannot be given, it uses the word includes in the definition. Hence, the inclusive definition provides an illustrative meaning and not an exhaustive meaning. In practical application, the definition could include what is not specifically stated or mentioned in the definition so long as the stipulated criteria are satisfied. To illustrate, reference is drawn to the terms Income, Person, Transfer. When the legislature intends to define a term or expression to mean something and also intends to specify certain items to be included, both the words meanss well as includes are used. Such a definition is not only exhaustive but also illustrative in an exhaustive definition in order to avoid ambiguity and with a view to provide clarity. One can find that these words are used in the definition of terms Assessee, Indian Company, Recognised Provident Fund 1.2.2 Charge of Income Tax As provided in Section 4, the total income of the previous year of every person shall be charged to income tax at the rates prescribed in the
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annual Finance Act as applicable to the relevant assessment year. The income shall be so charged in accordance with and subject to the provisions of the Income tax Act. In respect of income chargeable to income tax, tax shall be deducted at source or paid in advance in accordance with the relevant provisions. Though the Finance Act normally prescribes the rates of tax, in respect of certain types of income the income tax Act has prescribed specific rates. To illustrate section 112 prescribes rate of tax @ 20% in respect of long term capital gains and section 115BB prescribes rate of tax @ 30% for winning from lotteries, races, etc. These provisions along with the specified rates of tax are also referred to and incorporated in the Finance Act. Rates of Tax In the case of Individuals, HUFs, AOPs or BOIs and every artificial juridical person (except where different rates or maximum marginal rates are specifically provided) the tax rates are as follows:
Income Upto Rs. 1,10,000/Above Rs. 1,10,000/- Upto Rs. 1,50,000/Above Rs. 1,50,000/- Upto Rs. 2,50,000/Above Rs. 2,50,000/Tax Slabs for Woman Resident (Below 65 years) Tax Rate Nil 10% 20% 30%
Income Upto Rs. 1,45,000/Above Rs. 1,45,000/- Upto Rs. 1,50,000/Above Rs. 1,50,000/- Upto Rs. 2,50,000/Above Rs. 2,50,000/Tax Slabs for Senior Citizen (Above 65 years) Sikkim Manipal University
Tax Rate Nil 10% 20% 30%
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Income Upto Rs. 1,95,000/Above Rs. 1,95,000/- Upto Rs. 2,50,000/Above Rs. 2,50,000/-
Tax Rate Nil 20% 30%
Surcharge: Surcharge is not leviable if the total income does not exceed Rs. 10,00,000. In a case where the total income exceeds Rs. 10,00,000 surcharge is levied at the rate of 10% on the income tax. Surcharge is payable on income-tax payable after claiming rebate u/s 88E, if any. Surcharge is also payable in respect of tax on long-term capital gains u/s 112 and in respect of winnings from lotteries etc. u/s 115BB. Surcharge is payable even by non-resident assesses. Education Cess: In addition to income tax and surcharge, an additional levy of 2% towards Education Cess to be made on the aggregate of income tax and surcharge payable for the A.Y. 2008-2009. Secondary Higher Education Cess: In addition to income tax, surcharge and education cess, an additional levy of 1% of income tax and surcharge (not including the education cess on income tax) towards Secondary Higher Education Cess in all cases shall be levied so as to fulfil the commitment of the government to provide and finance secondary and higher education for the A.Y. 2008-2009. Marginal Relief: In the case of such individual, HUF, AOP/BOI having a total income exceeding Rs. 10,00,000, the total amount payable as income tax and surcharge on such income shall not exceed the amount by which the income exceeds Rs. 10,00,000. This is called marginal relief
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1.3 Agriculture Income

Since beginning, Agriculture income was not taxed for two reasons firstly it is the state list. Secondly, land revenue is levied on agricultural land. So the people began to treat all their incomes, which have some connection with land, as agricultural income. In order to check such a practice, the income tax Act of 1961 has defined agricultural income. According to Sec. 2 (1) of the Act, Agricultural Income means: 1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. When we go through the above definition three important conditions emerge in order to treat a particular item as Agriculture Income. They are 1. The rent or revenue must be derived from the land. 2. The land must be situated in India. 3. The land must be used for agricultural purposes. The Act has not defined the term agriculture purpose. Agriculture in its root sense means agar a field and culture, cultivation of a field. It is the art or science of cultivating the ground especially in fields or large quantities including the preparation of the soil, the planting of seeds, the raising and harvesting of crops and rearing, feeding and management of livestock, till age, husbandry and farming. Justice Bhagawathi laid following principles to serve as a guide in the determination of the scope of agriculture purposes. i) Basic operations involving human skill and labour upon the land itself such as tilling of land, sowing of seeds etc. must have been performed. ii) Subsequent operations are performed after the produce sprouts such as weeding, tending, pruning, cutting, harvesting and rendering the produce fit for the market.
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iii)
Agriculture does not merely include food and grains. It includes all products from the performance of basic and subsequent operations such as grain, vegetables, fruits, groves, grass, coffee, tea, spices, tobacco, betel etc.
iv)
Mere connection with the land is not enough. Products which grow wild on the land or of spontaneous growth not involving any human labour or skill upon land are not agricultural products.
Some examples of agricultural income: 1. If denuded parts of the forest are replanted and subsequent operations in forestry are carried out, the income arising from the sale of replanted trees. 2. Profit on sale of standing crop or the produce after harvesting by a cultivating owner or tenant of land. 3. Rent of agricultural land received from sub tenants by mortgagee in possession. 4. Income from growing flowers and creepers. 5. Interest on capital received by a partner from the firm engaged in agricultural operations. Some examples of non agricultural income: 1. Annual annuity received by a person in consideration of agricultural land even if it is charged on land, as source of annuity is covenant and not land. 2. Interest on areas of rent in respect of agricultural land, as it is neither rent nor revenue derived from land. 3. Interest accrued on promissory notes obtained by a zamindar from defaulting tenants. 4. Income from sale of forest trees, fruits and flowers growing on land naturally, spontaneously and without the intervention of human agency. 5. Income from sale of wild grass and reeds of spontaneous growth.
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6. Income of sale produced by flooding the land with seawater, as it is not derived from land used for agricultural purpose. A note on partly agricultural income: At times an income may be partly agricultural and partly non-agricultural i.e., chargeable under the head profits and gains from business. For example income of a sugar factory owning farms. Then, the market value of any agricultural produce which has been raised by the assessee and utilised as raw material shall be deducted from the total income. There shall be no deduction in respect of expenditure incurred as a cultivator. The market value shall be deemed to be a) Where the agricultural produce is ordinarily sold in the market, the value calculated as per the average price at which it is sold. b) Where the agricultural produce is not sold in the market, total of the following shall be the market value: i) The expenses of cultivation ii) The land revenue or rent for the land on which it was grown. iii) Reasonable profit. In the case of income from the manufacturing of tea and coffee, 60% of the income derived from the sale of tea and coffee grown and manufactured by the seller in India is deemed to be agricultural income. While computing such income the loss due to planting bushes in replacement of died bushes shall be deducted as an allowance. Similarly in the case of rubber, 65% of the income derived from the sale of rubber latex or cenex is treated as agricultural income.
1.4 Income
An assessee has to pay tax on the income earned by him in the previous year. Hence we must know how the Act defines income. Sec. 2(24) of the Act gives a list of items that are to be treated as income, which is as follows:
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1. Profit and gains 2. Dividend 3. Voluntary contribution received by a trust created for charitable purposes. 4. The value of any perquisite or profit in lieu of salary taxable under the head salaries. 5. The value of any benefit or perquisite obtained by representative assessee or by any beneficiary. 6. The value of any benefit or perquisite obtained from a company either by a director or a person having substantial interest in the company or a relative of the director or such person. 7. Any sum paid by such company in respect of any obligation which, but for such payment, would have been paid by the director or other person. 8. Any sum chargeable to tax under Sec. 28. 9. The value of any benefit or perquisite chargeable under Sec. 28. 10. Any sum recovered in the previous year, which had been allowed as a deduction earlier. 11. Capital gains under Sec. 45. 12. Any winnings from lotteries, crossword puzzles, races including horse race, card games, gambling or betting of any sort. (Sec. 56) The following principles which are mainly based on judicial decisions may be applied to income. 1. Income must come from a definite source. 2. The source must be external. A person cant earn income by trading with himself. Thus pocket money paid by a father to his son is not taxable in the hands of the son. 3. It is not necessary that the income must be actually received. Even accrued incomes are taxable.
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4. Taint of illegality is immaterial. Whether legal or illegal the income attracts tax liability. 5. It is not necessary that the income must be received periodically. Even lump sum receipts are taxable as income. 6. If an item is not treated as income originally, later it cant be treated as an income. E.g. Advance money forfeited. 7. Income may be received in cash or in kind. 8. If there is any dispute regarding the title of income it will not affect the chargeability. 9. Mere relief from expenses is not an income. If the manager forgoes his commission it will not be treated as income in the hands of the company. 10. Where there is a legal charge on the income of a person, to that extent his income is reduced. Thus income in the true sense is the amount of wealth, which comes to a person during a stated period of time.
1.5 Important Terms

1.5.1 Assessee Assessee means a person by whom any tax or any other sum of money is payable under Income Tax Act (sec. 2[7]). Deemed assessee includes legal representatives, agent of a non resident, guardian of an infant etc. 1.5.2 Person (Sec. 2[3]) The term person includes the following i) ii) iii) iv) An individual A Hindu Undivided Family A company A firm
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v)
An association of persons or body of individuals whether incorporated or not.
vi) vii)
A local authority. Every artificial person not covered in the above categories.
1.5.3 Assessment Year: (Sec. 2[9]):(AY) Assessment year means a period of twelve months commencing on 1st April every year. It ends on 31st March. 1.5.4 Previous Year: (Sec. 3): (PY) Till the AY 1988 89, an assessee could have different previous years for different sources of income. In order to bring uniformity in the assessment procedure the Direct Taxes (amendment) Act 1987 has amended Sec. 3 of the I.T. Act with effect from 1-4-1989. The section now reads as follows. Previous year means the financial year immediately preceding the assessment year. In the case of newly set up business or profession the previous year begins with the date of the setting up of the business or profession and ends with the financial year.
1.6 The general rule and exceptions

As the rule, the income of previous year is chargeable to tax during the assessment year. There are certain exceptions to this rule, which are engrafted so as to check the evasion of tax by those assesses who would not be traceable in the assessment year. These exceptions are: 1. Income of a non-resident from shipping business 2. Income of persons leaving India 3. Bodies formed for a shorter duration 4. Transfer of property to avoid tax 5. On discontinued business or profession
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I. Self Assessment Questions (SAQ1) 1. Agricultural Income means: _________________________________________________________ _________________________________________________________ 2. The term Person Includes _________________________________________________________ _________________________________________________________ 3. Assessee means a _______ by whom any tax or any other sum of money is payable under Income Tax Act (sec. 2[7]). 4. As the general Rule, the income of _______ is chargeable to tax during _________.
5. The basic exemption limit for woman resident is given to the extent of
________.
1.7 Residential Status

According to Section 4 of the Income Tax Act income-tax is charged on the income of an assessee earned in the previous year according to the rates fixed by the Finance Act. The tax liability is determined on the basis of residence in India in the previous year. The residential status of an assessee need not be the same for each year. The rules determining the Residential Status are not the same for all the assesses.
RESIDENTIAL STATUS
Resident Non-Resident (NR)
Ordinarily Resident (OR)
Not-Ordinarily Resident (NOR)
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Individual: Sec. 6(1) lays down that if an individual assessee fulfills any one of the following two conditions, he is said to be a resident in India in the relevant previous year: a) He has been in India in that year for a period or periods amounting in all to 182 days or more; or b) He has been in India for a period or periods aggregating 365 days or more during 4 years proceeding the previous year and is in India for a period or periods amounting in all to 60 days or more in the previous year.
Exceptions: i) In the case of an Indian citizen, who leaves India in any previous year for the purpose of employment outside India, or as a member of the crew of an Indian ship, his stay in India in that previous year should be for 182 days or more instead of 60 days referred to in condition (b) given above. ii) In the case of an Indian citizen or a person of Indian origin who is living outside India (whether employed or doing business, or neither employed nor doing business) comes to India in the previous year on a visit for a short spell, his stay in India in that previous year should be for 182 days or more instead of 60 days as referred above. Authors comments: In case of exceptions, the assessee has to fulfill the first basic condition u/s 6(1) i.e. condition (a) in the above table. Condition (b) in the above table does not apply to exceptions as it merges with first condition. Non-resident: Under Section 2(30) of the Income-tax Act, if an individual does not satisfy any one of the basic conditions (specified in the case of a resident), he is said to be a non-resident.
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Not Ordinarily Resident: In addition to fulfilling any one of the basic conditions specified u/s 6(1) if an individual satisfies any of the following two conditions u/s 6(6) he is treated as Not Ordinarily Resident in India in that previous year (a) He has been a non-resident in India in 9 out of 10 years preceding the previous year or (b) He has been in India for a period of not exceeding 729 days during 7 years preceding the previous year. In short, an individual is said to be not ordinarily resident, in India, in any previous year, if he satisfies any one of the two basic conditions and any one of the subsequent conditions. In connection with the rules or conditions relating to resident, the following points may also be noted: Under Section 6(6) of the Income-tax Act, if an individual satisfies any one of the two basic conditions (specified in the case of a resident), but does not satisfy the subsequent conditions (stated in the case of resident), he becomes a not ordinarily resident. Ordinarily Resident: If an individual fails to satisfy both the above additional conditions he is considered as ordinarily resident. In other words, an individual becomes an ordinarily resident if (a) he has been resident in India for two or more years out of 10 preceding previous years and (b) stayed in India for 730 days or more during 7 preceding previous years.
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Illustrations: Problem 1: HARI left India for the first time on 5th March 2005 after having lived here for 15 years. He returned India on 10th Sept 2007. Determine the residential status for the assessment year 2008-2009 Solution: Assessee : Mr. HARI
Assessment Year (AY) : 2008-2009: Previous Year (PY) :2007-2008 India Foreign India
05.03.05
10.09.07
Stay during the PY (10-09-2007 to 31-3-2008) = Sep + Oct + Nov + Dec + Jan + Feb + Mar = 21 + 31 + 30 + 31 + 31 + 29 + 31 = 204 days Years preceding the PY 2006- 07 - NR 2005- 06 - NR 2004- 05 - R 2003- 04 - R 2002- 03 - R 2001- 02 - R 2000- 01 - R 1999-00 - R 1998-99 - R 1997-98 - R
Assessee was in India for more than 182 days in the PY 2007-2008. He fulfilled the first basic condition mentioned u/s 6(1). Hence he becomes a resident . To become a not ordinarily resident, he has to fulfill any one of the additional conditions mentioned u/s 6(6). Assessee was a non resident only for 2 out of 10 years preceding the PY and stayed for not less than 729 days during 7 years preceding the PY (more than 729 days). He failed to fulfill the additional conditions to become not ordinarily resident. In simple he satisfied the conditions for ordinarily resident. Therefore, HARI is an ordinarily resident
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Problem 2: NARAYANA was sponsored by his employer in India for some training in U.S.A. He left India on 3rd June 2007. He came back to India on 5th April 2008. Determine Narayanas residential status for the assessment year 2008-2009, assuming that he did not go out of India previously. Solution: Assessee : Narayana
Assessment Year (AY) : 2008-2009 Previous Year (PY) : 2007-2008
Narayanas stay in India in the previous year 2007-2008 April, 2007 May, 2007 June, 2007 Total Comment: Narayanas stay in India in the previous year 2007-2008 is for 64 days. That means, he satisfies the second basic condition required to be satisfied to be a resident (i.e., his stay in India in the 4 years preceding the previous year was more than 365 days, and during the previous year 2007-2008, his stay in India was more than 60 days). So, he is a resident. Further, he does not satisfy the subsequent condition/s to become not ordinarily resident. So, he is resident and ordinarily resident during the previous year 2007-2008, relevant to the assessment year 2008-2009. Student Note:
It may be noted that he left for U.S.A. only for training, and not for employment. So, the first exception (i.e., stay for 182 days in the previous year) does not apply to him, and only a minimum stay for 60 days in the previous year also applies to him.
30 days 31 days 3 days 64 days (including the day of leaving, i.e., 3rd June)
Problem 3:
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Problem 3: R, a British national, comes to India for the first time during 2003-04. During the financial years 2003 - 2004; 2004-2005; 2005 2006; 2006 2007, 2007 2008 he is in India for 55 days, 60 days, 80 days, 160 days and 70 days respectively. Determine his residential status for the assessment year 2008 2009. Solution: R does not stay for minimum 182 days during the financial year 2007-08. Therefore he fails to fulfill the first basic condition. Having stayed for more than 60 days (actual stay 70 days) during 2007 2008, he has stayed only for 355 days during the preceding four financial years. Thus he fails to fulfill even the second basic condition. Consequently, his residential status for the AY 2008-2009 is that of a non-resident.
Problem 4: (Exception to General Rule) APARNA an Indian citizen left India on appointment by the Government of Korea for the first time on 27.9.2004 to join the duty. During the financial year 2007-2008, she came to India and stayed for 175 days. Determine her residential status for the assessment year 2008-2009. Solution: In this case, during previous year 2007-2008 Aparna has stayed in India for less than 182 days (175 days stay) on her visit. She is covered by the exception and therefore does not fulfill the basic condition. Thus she is a Non-Resident for the A.Y. 2008-2009. Note : For exceptions 2nd basic condition does not apply.
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1.8 Incidence of tax liability (Scope of total income Sec 5)

Tax liability of an assessee is based on his residential status as shown below Resident (i.e., ordinarily Resident): Under Section 5(1) of the Income-tax Act, the total income of ordinarily resident includes the following incomes, from whatever source derived: (a) Income received or deemed to be received in India during that previous year by or on behalf of such person, whether accrued or arisen in India or outside India. (b) Income accrues or arises or is deemed to accrue or arise in India during that previous year, whether received in India or outside India. (c) Income accrues or arises and also received outside India during that previous year from a business controlled from or profession set up in India, whether remitted to India or not. (d) Income accrues or arises and also received outside India during that previous year from any other source (i.e., any source other than the business) controlled from India or profession set up in India. Not Ordinarily Resident: Under Section 5(1) of the Income-tax Act, the total income of not ordinarily resident, includes the following incomes, from whatever source derived: (a) Income received or deemed to be received in India during that previous year, whether accrued or arisen in India or outside India. (b) Income accrues or arises or is deemed to accrue or arise in India during that previous year, whether received in India or outside India. (c) Income accrues or arises and also received outside India during that previous year from a business controlled from India or profession set up in India, whether remitted to India or not.
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Non-Resident: Under Section 5(2) of the Income-tax Act, the total income, of any previous year, of a person, who is non-resident, includes the following incomes, from whatever source derived: (a) Income received or deemed to be received in India, during that previous year, whether accrued or arisen in India or outside India. (b) Income accrues or arisen or deemed to accrue or arise in India during that previous year, whether received in India or outside India. The tax liability (i.e., the scope or extent of the total income) of assessee having different residential status can be summarized as follows: Format 1:
Scope of total income

Kinds of Income OR NOR NR
1. Income received in India 2. Income accrued in India (eg. Business in India, Indian Co, property in India) 3. Income received outside India 4. Income received outside India But business/profession controlled in India
Note: (1) Agriculture Income in India and dividend from Indian Company shares is exempt (2) Past untaxed profits are not taxable (3) The word received means first receipt but not the second receipt. Hence any amount remitted to India is considered as second receipt.
1.9 Illustrations
Problem 5: The following are the incomes of ROBERT for the PY 20072008: (a) Profit from business in Iran received in India Rs. 5000. (b) Income from house property in Canada received in India Rs. 500.
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(c) Income from house property in Pakistan deposited in a bank there Rs. 1,000. (d) Income accrued in India but received in England Rs. 2,000. (e) Profit earned from business in Kanpur Rs. 6,000. (f) Past untaxed foreign income brought into India during the previous year Rs. 10,000. (g) Dividend from a company in Japan Rs. 60,000 (Rs. 30% received in India). From the above particulars, ascertain the taxable income of ROBERT the previous year 2007-2008, if he is (i) resident, (ii) not ordinarily resident and (iii) non-resident
Statement of Total Income of ROBERT for the AY 2008-2009 OR Rs. (i) Profit from business in Iran received in India (ii) Income from House Property in Canada received in India (iii) Profit earned from business in Kanpur (iv) (a) Portion of Dividend from Company in Japan received in India (60,000 30%) (b) Received outside India (60,000 70%) (v) Income accrued in India, but received in England. (vi) Income from House Property in Pakistan deposited in a bank there. (vii) Past untaxed foreign income Total Income 5,000 500 6,000 18,000 42,000 2,000 1,000 NT 74,500 NOR Rs. 5,000 500 6,000 18,000 -2,000 NT NT 31,500 NR Rs. 5,000 500 6,000 18,000 -2,000 NT NT 31,500
Notes: 1. Past untaxed foreign income brought into India during the previous year
is not taxable in the hands of any assessee, as it is an income of the earlier years, and not an income of the previous year. 2. Portion of dividend from a company in Japan, viz., Rs. (60,000 30%) 18,000 is received in India. So, it is taxable in the hands of all the three types of assessee. The remaining portion of dividend, viz., (60,000 70%) 42,000 is income earned and also received outside India
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Problem 6. Following are the taxable incomes of SHARIQ for the previous year 2007-2008
Rs. 1. Salary accrued and received in India
2. Dividend declared in Syria but received in India 3. Profit on hotel business at New York 4. Interest on debentures of a company at Perth, which was received in India 12,000 5. Income from transfer of a long-term capital Asset situated in India 12,000 6. Interest received from Mr. M, a non-resident Indian on the loan provided to him for a business carried on in India 10,000 7. Royalty received in London from K, a resident in India for technical services provided for a business carried on in London 40,000 8. Fees from an Indian company carrying on business at Bangladesh for technical services rendered at Bangladesh 60,000 9. Income from agriculture in India 22,000 Compute the gross total income of Shariq, if he is (i) OR (ii) NOR and (iii) NR. Solution: Statement Total Income of SHARIQ for the assessment year 2008-2009
OR (i) (ii) (iii) (iv) Dividend declared received in India in Syria but 8,000 NOR 8,000 NR 8,000
40,000 8,000 60,000
Interest on debenture of a company at Perth received in India Income from transfer of a long term capital asset situated in India Interest received from a non resident Indian on the loan provided to him for a business carried on in India Fees from an Indian company carrying on business at Bangladesh
12,000
12,000
12,000
12,000
12,000
12,000
10,000
10,000
10,000
(v)
60,000
60,000
60,000 Page No. 21
Unit 1
(vi) (vii)
Salary accrued and received in India Profit of Hotel business at New York
40,000 60,000
40,000 NT
40,000 NT
(viii) Royalty received in London from a resident in India for technical services provided for business carried on in London Gross Total Income
40,000
NT
NT
2,42,000
1,42,000
1,42,000
Notes: 1. Interest received from a non-resident Indian on the loan provided to him for a business carried on in India should be taken as interest on loan received in India. 2. Dividend declared in Syria is taken as dividend received from a foreign company. Hence it is taxable. 3. Agricultural income in India is exempt from tax. Problem 7: Compute the taxable income of ARIF if he is resident, not ordinarily resident and non resident. (2 Marks) 1. Interest on German development Bonds (one third is received in India) Rs. 51,000. 2. Income earned from business in Uganda, which is controlled from Bombay (Rs. 25,000 is receive in India) Rs. 65,000. 3. Dividend from Indian Company Rs. 5,000 4. Agricultural income in Bangalore Rs. 10,000 Solution: Statement Total Income of ARIF for the assessment year 2008-2009
OR 1. Interest on German Development Bonds a) Income received in India rd (1/3 Rs. 51,000/-) b) Income received outside India (2/3 51,000/-) 2. Business Income a) Income received in India b) Income received outside India, business being controlled 3. Dividend from Indian Company 4. Agricultural income in Bangalore Gross Total income Sikkim Manipal University 17,000 34,000 NOR 17,000 NR 17,000 -
25,000 40,000 Exempt Exempt 1,16,000
25,000 40,000 Exempt Exempt 82,000
25,000 40,000 Exempt Exempt 42,000 Page No. 22
Unit 1
Student Notes:
Basic exemption for woman resident instead of Rs 1,10,000 (below 65 yrs) is Rs 1,45,000
Basic exemption for senior citizen is Rs 1,95,000 instead of Rs 1,10,000 Computation of Total income is included in the Unit 8
II. Self Assessment Questions (SAQ 2) 1. Mention the basic conditions u/s 6 (1) to become a resident. _________________________________________________________ _________________________________________________________ _________________________________________________________ _______________________________________________________. 2. Mention the additional conditions u/s 6 (6) to become not ordinarily resident. _________________________________________________________ _________________________________________________________ _________________________________________________________ 3. Mr. Rakshith, a not ordinarily resident earns the following incomes during the previous year. Compute total income (1) Agricultural income in Bangladesh Rs. 10,000 (2) Business income in Pakistan (Controlled from India) Rs. 20,000 (3) Pension from former employer in India, received in Srilanka Rs. 30,000 (4) Interest on Dutch Co. debenture (half which is received in India) Rs. 40,000
Page No. 23
Unit 1
III. Self Assessment Questions (SAQ 3) 1. Past untaxed foreign income brought into India during the P.Y. is taxed to _________. A. Ordinarily Resident B. Not Ordinarily Resident C. Non Resident
D. None.
2. Agriculture income in Pakistan is _______under the head income from other sources to the resident individual A. Partly exempt B. Fully taxable C. Fully exempt D. None of these 3. Mr. Y commenced business on 1 6-2005. His first previous year will be __________. A. 1 6-2005 to 31-12-2005 B. 1 1-2005 to31-12-2005 C. 1 6-2005 to 31-3- 2006 D. 1-4-2005 to 31-3-2006 4. Dividend on shares of Indian company is ____ for the AY 2008-2009. A. Exempt B. Taxable C. Partially exempt D. None of these 5. According to section 2 (1) of IT Act 1961, Agricultural Income means_______ derived from the land, which is situated in India and is used for ____. A. Any income, any purposes
Unit 1
B. Any income, agricultural purposes C. Any rent or revenue, any purposes
D. Any rent or revenue, agricultural purposes

6. Additional basic exemption of 35,000 is available for ______. A. Any citizen B. Senior citizen C. Woman resident D. None of these 7. In case of an individual, who leaves India for the purpose of employment abroad, he must stay at least _______ days during _______ in order to become a resident for the A.Y. 2008 2009. A. 60, 2006 - 2007 B. 60, 2007 2008 C. 182, 2007 2008 D. 182, 2005 2006 8. Compute the taxable income of Mr. X if he is resident, Not ordinarily resident and non resident 1. Interest on Japan development Bonds (one third is received in India) Rs. 51,000. 2. Income earned from business in Korea which is controlled from Bombay (Rs. 25,000 is receive in India) Rs. 65,000. A. 116000, 82,000, 17,000 B. 116000, 116000, 42,000 C. 116000, 82,000, 42,000 D. 116000, 42,000,42,000 9. Following are the income of Ram Prasad for the PY a) b) Profit form business in Iran received in India Rs. 5,000. Income from house property in Iran received in India Rs. 5,000
Page No. 25
Unit 1
c)
Income from house property in Pakistan deposited in a bank there Rs. 10,000
d)
Profit of business established in Pakistan deposited in bank Rs. 20,000, but business controlled in India. Compute the taxable income if he is 1. Ordinarily resident, 2. Not ordinarily resident, 3. Non resident A. 20,000, 10,000, 10,000 B. 40,000, 20,000, 10,000 C. 40,000, 30,000, 20,000 D. 40,000, 30,000, 10,000
10. Mr. R, a not ordinarily resident earns the following incomes during the previous year. Compute total income 1) 2) 3) Agricultural income in Bangladesh Rs. 10,000 Business income in Pakistan (Controlled from India) Rs. 20,000. Pension from former employer in India, received in Srilanka Rs. 30,000. 4) Interest on Dutch Co. debenture (half which is received in India) Rs. 40,000. A. 70,000 B. 90,000 C. 1,00,000 D. None of these
1.10 Summary
Income tax is a direct tax levied on income of a person. An individuals tax liability depends on factors such as the income level, the individuals sex and age. The rates of tax applicable is fixed in the Finance Act of every year. The incidence of tax liability depends on whether a person is a resident, not ordinarily resident or non resident.
Unit 1
1.11 Terminal Questions

1.11 (A) Questions 1. State the different kinds of assessee liable to tax. 2. Define previous year and assessment year. 3. Give the meaning of (a) Person and (b) Assessee. 4. Define income and state the principles applicable to income. 5. What is agricultural income? Give examples of agricultural incomes. 6. Write a note on partly agricultural incomes. 7. Explain the conditions of residential status 8. Define previous year and mention the exceptions to the general rule. 9. Explain the incidence of tax liability (Scope of total income) 1.11 (B) Exercises 1. State the legal status of the following: a) Dr. Bhaskar b) Bharath Bank Ltd. c) AB Trading Co. d) Delhi University (Juridical person) e) Aligarh Panchayat Council. (Local authority) f) Lord Murugan of Palani. (Artificial Juridical person)
2. JYOTHI DSOUZA, is an Indian citizen, she returned from Canada on
10.11.2003. She was there since 1.8.1999. Determine her residential status relevant to the assessment year 2008-2009. 3. Dr. UMESH is an Indian citizen running his clinic in Australia since 15.9.1994. He regularly visits India for 4 months from September to December every year since 1997. During the financial year 2007-2008, he came to India on 20.9.2007 and stayed upto 20.2.2008. Determine his residential status for the previous year 2007-2008. 4. NITHIN came to India for the first time on 1st November, 2001.During his stay in India upto 30th October 2004, he stayed in Mumbai. Determine his residential status for the assessment year 2008-2009.
Unit 1
5. SIDDARTH is an Indian citizen, left India on appointment by the Government of Iran for the first time on 12th September 2004 to join his duty. During the financial year 2007-2008, he came to India and stayed for 80 days. Determine his residential status for the assessment year 2008-2009. 6. The following are the incomes of SHARATH for the PY 2007-2008: 1) 2) 3) 4) 5) 6) 7) Profit from business in Delhi Rs. 7,000. Income accrued in India, but received in Italy Rs. 6,000. Profit from business in England received in India Rs. 5,000. Income from house property in Africa received in India Rs. 4,000. Profit from business established in Iran and deposited in a bank there, the business being controlled from India Rs. 3,000. Income from house property in Pakistan and deposited in a bank there Rs. 2,000. Past untaxed foreign income brought into India during the previous year Rs. 1,000. Compute the total income of Sharath for the assessment year 2008-2009, if he is (a) Resident, (b) Not ordinarily resident and (c) Non-resident. 7. From the following particulars of income of MITHRA KUMAR for the previous year 2007-2008. Compute his taxable income, if he is (a) Resident, (b) Not ordinarily resident and 1. Salary received in India Rs. 25,000. 2. Payment received in England for the services rendered in India Rs. 12,000. 3. Served for 2 months in Indian Embassy situated in U.S.A. and salary received there Rs. 24,000. 4. Business profit earned in the past but remitted to India from Canada in the previous year Rs. 75,000. 5. Income from cultivation of land situated in Bangladesh received there and remitted to India Rs. 15,000.
(c) Non-resident.
Unit 1
6. Interest received on bank deposits in London and received there Rs. 10,000. 7. Gift received from father-in-law in U.S.A. on his birthday Rs. 10,000. 8. Mr. DINESH earns the following incomes during the previous year a) Salary earned in Mangalore, but received in U.S.A. Rs.10,000/b) Profits earned from business in England which is controlled from India Rs.25,000/c) Income from House Property in England Rs.9,000/d) Income from agriculture in Sri Lanka and brought to India Rs. 7,000/e) Dividends from Indian Company received Rs.6,000/f) Income from agriculture in India received in England Rs.22,000/received in India . h) Past untaxed foreign income brought to India during previous year Rs.12,000/Calculate the Gross Total Income of Mr. Dinesh if he is a a) Resident b) Not-Ordinarily Resident and c) Non- Resident g) Interest on Investments in U.S.A. Rs.10,000/- half of which is
1.12 Answers to SAQs and TQs

SAQ 1 1. Refer Para 1.3 2. Refer Para 1.5.2 3. Person 4. Previous Year, Assessment Year 5. Rs. 1,45,000 SAQ 2 1. Refer Para 1.7 2. Refer Para 1.7 3. Rs 70,000
Unit 1
SAQ 3 1. D 2. B 3. C 4. A 5. B TQs 1. 11(A) 1. Refer Para 1.5.2 2. Refer Para 1.5.4 and 1.5.3 3. Refer Para 1.5.2 and 1.5.1 4. Refer Para 1.4 5. Refer Para 1.3 6. Refer Para 1.3 7. Refer Para 1.7 8. Refer Para 1.5.4 and 1.6 9. Refer Para 1.8 1.11 (B) Refer relevant Theories, formats and illustrations for all the problems Additional Hints: Q. No 7 1. Salary for service in the Indian embassy in U.S.A. and received there is salary earned in India. It is taxable in the hands of all the assessee. 2. Gift received from father-in-law in U.S.A. as a birthday gift is not taxable (Sec 10(39)- new amendment). 6. C 7. C 8. A 9. D 10. A
Page No. 30
Unit 2
Unit 2
Structure: 2.1 Introduction
Tax-free Incomes, Deductions and Rebates
Learning Objectives 2.2 Tax-free Incomes Self Assessment Questions (SAQ1) 2.3 2.4 2.5 Deductions from Gross Total Income Rebate of Tax Illustrations Self Assessment Questions ( SAQ2, SAQ3) 2.6 2.7 2.8 Summary Terminal Questions Answers to SAQs and TQs
2.1 Introduction
This unit explains exemptible incomes under section 10, deductions under section 80 and rebate under section 88E. Learning Objectives: After studying this Chapter, you will be able to understand: The various incomes exempt from tax The various deductions from gross total income The various tax rebates Learn the specific formats to remember the provisions
2.2 Tax-free Incomes (Section 10)

An assessee need not pay tax on all the incomes. Section 10 of the act deals with the incomes fully exempted from tax provided they satisfy the conditions specified therein. Followings are tax-free incomes.
Unit 2
2.2.1 Agriculture Income section 10 (1) : ( already discussed) 2.2.2 Share of income from HUF section 10 (2): As HUF is assessed separately, any share of income received by an assessee, as a member of HUF is fully exempt. It is based on the principle of avoidance of double taxation. 2.2.3 Share of income from partnership firm Section 10 (2A): Where a person is a partner of firm which is separately assessed as such, his share in the total inc one of the firm is fully exempt from tax from the assessment year 1993-94 onwards. Casual income: From the assessment year 2003-04 exemption is not available in respect of casual income. Casual income means any receipts, which are of casual and non-recurring in nature. For example winning from lotteries and races etc., Tax is levied at a flat rate of 30% + S.C. 2.2.4 Leave Travel concession Section 10 (5) The value of travel concession received by or due to an Indian citizen from his employer for him or his family in connection within India is exempt subject to the following condition: a) The CBDT is empowered to frame rules regarding the exemption. b) The exemption will be limited to the amount of expenses actually incurred by the employee for the purpose of the travel. He has to maintain an account of actual expenses in order to furnish evidence for claiming LTC. 1. The conditions under the rule 2B are as follows: The amount exempt u/s 10 (5) in respect of LTC received by or due to an individual from his employer in connection with his proceeding: 2. On leave to any place in India
Page No. 32
Unit 2
3. To any place in India after retirement from service or after termination shall be the amount actually spent subject to the following conditions: i) Where journey is by air, economy class air fare by shortest route or actual amount spent, whichever is less ii) Where the journey is by rail, an amount not exceeding the air conditioned iii) Class fare by the shortest route iv) Where the origin and destination are connected by rail and the journey is made by conveyance other than rail an amount not exceeding ii class fare by the shortest route v) Where origin and destination is are not connected by rail and the journey is performed, exemptible amount shall be: i) If there is a recognised public transport system, an amount not exceeding I class or deluxe class fare on such transport by shortest route ii) If there is no such system, an amount equivalent to the airconditioned II class train fare by shortest route as if the journey is by rail. 4. Salary received by a ships crew who is a non-resident foreign national provided his stay in India does not exceed 90 days in the previous year. 5. Tax paid on behalf of non-resident where such income arises in pursuance of the agreement between Government of India & the foreign state. 6. Foreign allowance & perquisites received by an employee of the Government of India outside India provided he is a citizen of India & is rendering service outside India (sec.10 [7])
Page No. 33
Unit 2
7. Remuneration or fees received by non resident consultants & their foreign employees (sec.10 [8a] & [8b]): u/s 10[8a]) the following two incomes of a consultant are exempt: a) Any remuneration received by him out of the funds made available to an international agency under a technical assistance grant agreement between the agency & the foreign state; & b) Any other income, which accrues or rises to him outside India & is not deemed to accrue or rise in India, on which he has to pay tax to the foreign state. Consultant means any individual who either not a citizen of India, or being a citizen of India is not ordinarily resident in India or any person who is nonresident. Sec.10 (8B) provides that the remuneration received by an employee of the consultant referred to in the above para is exempt, provided he is either not a citizen of India, or being a citizen of Indian is not ordinarily resident in India & the contract of service is approved by prescribed authority before the commencement of his service. 2.2.5 Death cum retirement gratuity (sec.10 [10]): Gratuity is an amount paid to an employee on his retirement or to his family members on his death, in appreciation of his past services in an organization. The employer considers the length of service of the employee while paying gratuity. a) Government employees: Any death cum retirement gratuity received by all categories of government employees or an employee of local authority is fully exempt from tax. b) Employees covered under payment of gratuity act 1972: In the case of non-government employees covered under payment of Gratuity Act. 1972, any gratuity received is exempt up to the least of the following.
Page No. 34
Unit 2
i) 15 days salary (7 days for seasonal employment) based on the salary last drawn for each year of completed service or part there of in excess of six months or ii) Rs. 3,50,000 or iii) Actual amount of gratuity received. Format 1: Computation of Exempted and taxable gratuity
Amount of gratuity received Less: Exemption (least of the following) i) 15 days salary based on last drawn salary for completed years (15/26 last salaryno. of years) ii) Statutory limit iii) Actual gratuity received Taxable Gratuity 3,50,000 XXX XXX XXX XXX XXX
Note: Salary for this purpose means Basic + DA. It does not include dearness pay or commission. Salary is calculated by dividing the salary last dawn by 26 (Number of working days in a month). In the case of piece rated employee 15 days salary is calculated based on the average of total wages received during three months immediately preceding the day of retirement. Excess of 6 months should be taken as one year.
Problem 1: After serving for 31 years 8 months, AVINASH retired from TRISHA CO.LTD. on 25th Sep. of the Previous Year. He received Rs. 2,50,000 as gratuity. His salary for the last month was Rs. 12,000. He is covered under payment of Gratuity of act 1972. Find out taxable gratuity.
Page No. 35
Unit 2
Solution: Note: Excess of 6 months should be taken as one year. Computation of taxable gratuity
Amount of gratuity received Less Gratuity exempt u/s 10 (10) least of the following 2,50,000
i) 15 days salary based on last drawn salary for
completed years (15/26 last salary no. of years)(15/26 x12000 x 32)
2,21,538 3,50,000 2,50,000 - 2,21,538 28,462
ii) Statutory limit iii) Actual gratuity received

Taxable Gratuity
Problem 2: After serving for 28 years 6 months and 4 days AKRAM retired from Y Ltd. on 31st August. He received Rs. 3,25,000 as gratuity. His last month basic was Rs. 10,000 and DA Rs 3,000.He is covered under the Payment of Gratuity Act. Compute the taxable gratuity. Solution: Computation of taxable gratuity
Amount of gratuity received Less Gratuity exempt u/s 10 (10) least 15 days salary based on last drawn salary for completed years (15/26 last salary no. of years) (15/26 13,000 29) ii) Statutory limit iii) Actual gratuity received Taxable Gratuity 2,17,500 3,50,000 3,25,000 -2,17,500 1,07,500 3,25,000
Note: 1. Salary for this purpose means Basic + DA i. e 10000 + 3000 =13000 c) Employees not covered under payment of gratuity Act 1972: In the case of Non-government employees not covered by the payment of Gratuity
Unit 2
Act 1972 the amount of gratuity received by him or by his widow, children and dependents on his death exempt up to the least of the following: i) Half month salary for each year of completed service calculated on the basis of average salary for 10 months immediately preceding the month of his death, retirement or termination of service, or ii) Rs. 3,50,000 being statutory limit, or iii) Actual amount of gratuity received. Format 2:
Amount of gratuity received Less: Exempt (least of the following) i) Half months salary for each year of Completed service ( Avg. Salary No. of years) ii) Statutory limit iii) Actual amount received Taxable Gratuity XXXX 3,50,000 XXXX XXX XXX XXXX
Note: Half months salary for each year of completed service calculated on the basis of average salary for 10 months immediately preceding the month of his death, retirement or service While calculating the completed years, any fraction of the year will be ignored. Salary for this purpose means only basic. DA will be included only if the terms of employment provide that it is considered for retirement benefits. Where the commission is paid as a fixed percentage of turnover achieved during those 10 months, it will also be included. When the gratuity is received from more than one employer, the aggregate amount of exemption shall not exceed the maximum exemptible limit.
Unit 2
Problem 3: NAGESH served in NIRANJAN FABRICS LTD for 28 years, 10 months and retired on 31st January. He received Rs. 3,45,000 as gratuity. Salary for the last 10 months 2,41,500. Compute the taxable gratuity if he is not covered under the payment of Gratuity Act, 1972. Solution: Computation of taxable gratuity: (Not Covered)
Amount of gratuity received Less: Exempt (least of the following) i) Half months salary for each year of Completed service ( 24150 28) ii) Statutory limit iii) Actual amount received Taxable Gratuity 3,38,100 3,50,000 3,45,000 (3,38,100) 6,900 3,45,000
Note: 1. Only completed years of service is taken. Fraction of the year should be ignored. 2. Average salary is calculated based on the salary drawn during last 10 months. (241500/10 = 24150) i.e. 24150 282 28 = 338100 Problem 4: ADARSH retires from service on 28th Feb. of the previous year after serving for 30 years, 6 months and 4 days. He received Rs. 2,60,000 as gratuity. His last salary was Basic Rs. 13,000. D.A. Rs. 1,000. The annual increment of Rs. 200 falls due January. Compute his taxable gratuity if: i) He is covered under payment of gratuity act. ii) He is not covered under the gratuity act. Solution: i) Covered under payment of Gratuity Act Note: Salary means Basic + DA i.e. 13000 +1000 =14000
Page No. 38
Unit 2
Amount of gratuity received Less: Gratuity exempt u/s 10 (10) least
2,60,000
i) 15 days salary based on last drawn

salary for completed years (15/26 last salaryno. of years) (15/26 14000 31)
ii) Statutory limit iii) Actual gratuity received

Taxable Gratuity
2,50,385 3,50,000 2,60,000 9615
Solution: ii) Not Covered under payment of gratuity act

Amount of gratuity received Less: Exempt (least of the following) i) Half months salary for each year of completed service ( 12820 30) ii) Statutory limit iii) Actual amount received Taxable Gratuity 192300 350000 260000 192300 67700 260000
Note: 1. Salary means average salary for the last 10 months prior to retirement. 2. D.A. is excluded unless and otherwise stated . 3. Part of the year is to be ignored.
4. Computation of average salary With increment (1 month) 13000 1 = 13000 = 115200 128200 Average salary = 128200 / 10 = 12820 Without increment (9 months) 12800 9
Page No. 39
Unit 2
2.2.6 Commutation of pension section 10 (10A) As per the terms of employment the employee receives pension every month after his retirement from service. Instead of such monthly pension he can opt for lump um amount known as commuted pension. It is considered as tax free as in the case of all types of Government employees. But in the case of private employees it is tax-free to the extent of: i) The Commuted value of 1/3 of the pension received if he receives any gratuity. ii) The Commuted value of 1/2 of such pension in any other case. Where the employee commutes a portion of the pension, the exemptible amount is to be calculated based on the full commuted value. Format 3: A. Computation of Taxable Pension (if gratuity is received)
Pension received Less: Exempt 1/3 of full amount of pension Taxable Pension -XXXX XXXX XXXX
B. Computation of Taxable Pension (if gratuity is not received)

Pension received Less: of full amount of pension Taxable Pension XXXX -XXXX XXXX
Problem 5: GOVINDA retired from service on 31st March and received a commuted pension of Rs. 1,60,000. Find out taxable commuted pension: a) if he is in receipt of gratuity b) if he not in receipt of gratuity.
Page No. 40
Unit 2
Solution: A) If he received gratuity:

Commuted pension received Less: exempt u/s 10 (10A): 1/3 of commuted pension (1/3 X 160000) Taxable commuted pension: - 53333 106667 160000
b) If gratuity is not received:

Commuted pension received Less: exempt u/s 10 (10A) of commuted pension: (1/2 X 160000) Taxable pension - 80000 80000 160000
Problem 6: (Gratuity and Pension) SHRAVAN retired on 31st December after serving 32 years and 10 months. He received Rs. 150000 as gratuity. He also commuted one-half of his pension and received Rs.60000. His average salary for the last 10 months was Rs. 6500 where as the last salary drawn was Rs.6700. Compute the taxable gratuity and taxable commuted pension. Solution: Note: Since it is not stated in the problem, we have to assume that he was not covered under the Payment of Gratuity Act 1972. Computation of Taxable Gratuity (not covered)
Gratuity Received Less: exempt u/s 10 (10) least of the following Gratuity received Statutory Limit months salary for each year of completed service ( x 6500 x 32) Taxable Gratuity 104000 -104000 46000 150000 350000 150000
Page No. 41
Unit 2
Computation of taxable commuted pension

Commuted pension received Less: exempt u/s 10 (10A) 1/3 of full amount of pension [1/3 x (60000 x 2)] Taxable pension -40000 20000 60000
2.2.7 Encashment of leave Section 10 (10AA) Cash equivalent of leave salary received by a Government employee in respect of the earned leave to his credit at the time of retirement is fully exempt in the case of non government employee the exempted amount is subject to a maximum of the least of the following: 1. 10 months salary based on the average salary drawn during the last 10 months before retirement or 2. Amount of salary on the basis of average salary for the approved period for which earned leave has not been availed of 3. The sum not exceeding Rs. 3,00,000 It is to be noted that the non-government employees is entitled to an earned leave of not more than 30 days for each year of service for the purpose of this section. Again salary means only Basic or Basic + DA or Basic + DA + Commission. Where the employee receives such payment in more than one previous year the exemption amount will not exceed the limit so specified as reduced by the amount already received from former employer that has exempt. However any amount paid to the legal heirs of the deceased employee in respect of earned leave to his credit at the time of death is fully exempt. Problem 7: From the following particulars compute taxable portion of earned leave encashed by Kashi Ram Pai at the time of his retirement on 1st August: Earned leave to his credit- 12 months. Average salary for last 10 months Rs. 8,000 Amount received on encashment Rs. 90,000
Unit 2
Solution: Computation of taxable earned leave encashment

Amount received on encashment Less: exempt u/s 10 (10AA): least of the following: i) Actual amount received ii) 10 months salary iii) Amount of salary for approved period (of 12 months) iv) Statutory limit Taxable earned leave encashment 90,000 80,000 96,000 3,00,000 - 80,000 10,000 90,000
2.2.8 Retrenchment Compensation section 10 (10B) Under Section 10 (10B) of the Income-tax Act, retrenchment compensation received by an employee is exempt from tax. The amount so received is exempt from tax to the least of the following: An amount calculated as per the provisions of Industrial Disputes Act 1947 or Amount notified by Government of India Rs. 5,00,000 Actual amount received.
As per industrial disputes Act the amount is calculated at months average salary for every completed years of service or part there of in excess of 6 month s based on the salary for last three calendar months. 2.2.9 Compensation received at the time of voluntary retirement or separation section 10 (10C): As per Section 10 (10C) of the Income-tax Act, any lump sum received by an employee who has completed 10 years of service or completed 45 years of age on voluntary retirement or voluntary separation under the voluntary retirement or voluntary separation scheme is exempt from tax. Salary for this purpose means last drawn salary comprising basic or basic +DA if terms of employment provide and commission paid as a percentage of turnover (for one month)
Unit 2
2.2.10 Tax on perquisites paid by employer Section 10 (10CC) the amount of tax actually paid by an employer, at his option, on perquisite on behalf of an employee is exempt from tax in the hands of the employee. 2.2.11 Payment under Bhopal Gas leak Disaster Act 1985. 2.2.12 Receipt of employees of Public sector companies or local authorities. 2.2.13 Any sum received under a life insurance policy including the sum allocated by way of bonus on such policy except the amount received under a Keyman insurance policy is exempt from tax under Section 10 (10D) of the Income-tax Act of 1961. 2.2.14 Refund from the statutory provident fund received by an employee is fully exempt from income tax under Section 10 (11), 12 and 13 of the Income-tax Act. 2.2.15 Under Section 10 (13A) of the Income-tax Act, house rent allowance received by an employee is exempt from tax subject to certain limit. He exemption is restricted to the least of the following. 2.2.16 House Rent Allowance (sec. 10[13a]): Actual HRA received by the employee for the relevant period, or Excess of actual rent paid over and above 1/10 of salary for relevant period or An amount equal to 50% of the salary, if the accommodation is situated in Mumbai, Chennai, Delhi or Calcutta: 40% of salary, if the accommodation is situated in other cities. Note: Salary for this purpose means only basic: but if DA or DP is considered for retirement purposes, salary means Basic + DA + DP. If commission is paid as percentage of turnover, it is also included. Relevant period means the period during which the house was occupied by the assessee during the previous year.
Unit 2
Format 4:
HRA received Less: HRA exempt u/s 10 (13A) (Least) 1. HRA received 2. Rent paid above 10% of salary (Rent p.a.Sal p.a.) 3. 40% or 50% of salary Taxable HRA
xxx xxx xxx xxx
-xxx xxx
Study the above format as HRA calculation is also important for the next unit i.e., income from salaries. Problem 8: During the previous year Sandhya received a basic of Rs. 3,000 p.m. DA at 50% of basic, CCA at Rs. 500 p.m. and HRA at Rs. 1,000 p.m. She pays a rent of Rs. 1,200 p.m. for the house. Compute the taxable HRA if 1. DA is not considered for retirement benefits. 2. DA is considered for retirement benefits. Solution: DA is not considered:
HRA received 1000 12: Less: exempt u/s 10 (13A): Least of the following) HRA received Rent paid above 10% of salary (120012-300012) 40% of salary (30001240%) Taxable HRA 10800 14400 - 10800 1200 12000 12000
Note: Salary means basic i.e. 3000 12 = 36,000 b) DA is considered:

HRA received Less: HRA exempt u/s 10 (13A) (Least) HRA received Rent paid above 10% of salary (1200 12 - 4500 12) 40% of salary (45001240%) Taxable HRA 12000
12000 9000 21600 -9000 3000
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Note: Salary means basic plus D.A. i.e. (3000 + 1500) 12 = 54,000 Problem 9: From the following particulars compute taxable House Rent Allowance. Basic: Rs 7,200 per month DA: 40% of basic HRA: Rs. 1,800 p.m. where as rent paid Rs. 2,000 p.m. Solution: Computation of taxable HRA
HRA received1,800 X 12 Ex: - Least of the following 1) Actual HRA received 2) Rent paid above 10% of salary (Rent p.a.) (10% of salary) (2,000 X12) (10% 86,400) =(24,000 8,640) 3) 40% of salary (40% of 86,400) Taxable HRA 34,560 - 15360 6240 21,600 15,360 21,600
Note: Salary means only basic =72,000 X 12 = 86,400 Problem 10: From the following particulars of Vishwas compute taxable HRA. Basic: Rs. 6,000 p.m. DA: Rs.2, 500 p.m. (50% enters into retirement benefit) Commission: % of turnover of Rs. 10 lakhs. HRA: Rs. 2,500 p.m. Rent paid for the furnished house at Mumbai Rs. 3,000 p.m. Solution: Computation of taxable HRA
HRA received 2,500 X 12 Ex: - Least of the following 1) Actual HRA received 2) Rent paid above 10% of salary (Rent p.a.) (10% of salary) (3,000 X12) (10% 92,000) 36,000 9,200 3) 40% or 50% of salary (50% of 92,000) Taxable HRA Sikkim Manipal University 26,800 46,000 -26,800 3,200 Page No. 46 30,000 30,000
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Note: The word salary means Basic + DA+ Commission since the commission is given as a percentage of turnover. Salary = Basic + DA + Commission = (6,000 X 12) + (2500 X 50% X 12) + (1/2 % of 10lakh) = 72,000 + 15,000 + 5,000 = 92,000 The accommodation is situated in Mumbai. Hence 50% of the salary should be taken. 2.2.17 Others 1. Under Section 10 (14) of the Income-tax Act, special allowances are exempt from tax to a certain extent. 2. Under Section 10 (15) of the Income-tax Act, interests on certain securities and deposits are exempt from income-tax. Some of those securities and deposits are: 1. 12-year National Savings Annuity Certificates 2. National Defenses Gold Bonds, 1980 3. Special Bearer Bonds, 1991 4. Treasury Savings Deposit Certificates (10 years) 5. Post Office Cash Certificates (5 years) 6. National Plan Certificates (10 years) 7. National Plan Savings Certificates (12 years) 8. Post Office National Savings Certificates (12 years or 7 years) 9. Post Office Savings Bank Accounts 10. Public Account of Post Office Savings Bank Accounts (Interest upto Rs. 5,000 is exempt from tax.) 11. Post Office Cumulative Time Deposits. 12. Special Deposit Scheme, 1981. 13. Non-resident (Non-repatriable) Rupee Deposit Scheme.
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14. Interest on Tax-free Government Securities, if they are covered under Section 10 (15). 15. Interest on Gold Deposit Bonds as notified under Gold Deposit Scheme of 1999. 16. Scheme of Fixed Deposits governed by the Government Savings Certificates (Fixed Deposits) Rules, 1968. 17. Scheme of Fixed Deposits governed by the Post Office (Fixed Deposit) Rules, 1968. 18. Interest on 7% Capital Investment Bonds held by individuals and Hindu undivided families. 19. Interests on 9% Relief Bonds, 1999. 3. Educational Scholarship [Section 10 (16)]: Scholarship granted to meet the cost of education is exempt from tax. It is not necessary that the scholarship should be financed by the government. Once proved that the amount received is scholarship, it is except from tax even if the recipient does not spend the whole amount towards education. 4. Daily allowance of MPs, MLAs, MLCs section 10 (17) 5. Literary, Scientific, Artistic work Awards instituted Central Government or any State Government. 6. Other rewards by central government for any state government. 7. Gallantry Awards 8. Income of Hospital, existing or philanthropic purpose and not for profit. 9. Income of professional institutes such as Indian medical association etc. 10. Income of any authority established for the administration of any public religious or charitable trust or endowments. 11. Income of scheduled tribes residing in tribal areas. 12. Income of political parties.
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13. Income of resident of Ladakh. 14. Minors income [section 10 (32)]: Under Section 10 (32) of the Income-tax Act, if the income of an individual includes the income of his minor child, he can claim exemption upto Rs. 1,500 in respect of each minor childs income, provided the income of the minor child included in the income of the individual exceeds Rs. 1,500. 15. Dividends Section (10(34)): Any income by way of dividends for which Section 115-O applicable is exempt form tax. 16. Income from units of UTI is exempt from tax (Section 10(35)) I. Self Assessment Questions (SAQ 1) 1. Share of Income from partnership firm is taxable under the head income from business or profession. (T/F) 2. Interest received on POSB account is fully exempt from tax. (T/F) 3. Any death cum retirement gratuity received by all categories of government employees or an employee of local authority is __________ from tax. 4. For the calculation of taxable HRA, salary means _________________ _________________________________________________________. 5. Casual Income means ______________________________________ _________________________________________________________.
2.3 General Deductions

From the gross total income, certain allowable deductions are made. The resulting balance is the total income of the assessee. The aggregate amount of deduction u/s 80CCC to 80U cannot exceed the gross total income. These deductions are discussed in the following paragraphs. 2.3.1 Deduction u/s 80C: Section 80C: Deduction under this section can be claimed by an assessee being individual, Hindu undivided family and association of persons, body of
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individuals consisting of only husband and wife governed by the system of community of property in force in Dadra, Nagar Haveli, Goa, Daman and Diu, in respect of the following payments: 1. Life insurance premium and (not exceeding 20% of the actual sum assured) on the insurance policy taken on the life of himself / his spouse, his/ her child or children. However if the assessee discontinues the policy before 2 years premiums have been paid, no deduction will be allowed in respect of year in which the policy is discontinued. Further the deduction allowed in this regard in preceding year will deem to be income of the assessee of the year in which the policy is discontinued. 2. Contribution to (not being repayment of loan) statutory provident fund, superannuation fund or recognized provident fund. 3. Contribution (not being repayment of loan) to 15 years Public provident fund by the individual in his name, in the name of his spouse of children. In the case of HUF subscription can be in the name of any member. 4. Contribution to unit linked insurance plan (ULIP) of UTI in the name of self, spouse or any child, and such unit linked insurance plan of LIC Mutual Fund notified u/s 10 (23D) (Dhanaraksha plan of LIC Mutual Fund) 5. Any sum paid to effect or keeps in force contract for a deferred annuity on the life of the assessee or his/ her spouse or any child. 6. Any sum paid for NSC VIII series. The accrued interest on NSC VI and VIII issue is deemed to be reinvested every year. 7. Amount deposited in 10 or 15 years post office saving sank cumulative time deposit account 8. Deposits under National saving scheme.
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9. Investments in Equity linked savings scheme of Mutual funds specified u/s 10 (23D) subject to maximum of Rs. 10,000 10. Any contribution by individual to any notified pension fund set up by a mutual Fund or by UTI and Kothari Pioneer Mutual Fund. 11. Any payment made towards the cost of purchase or construction of a new residential house property. The deduction will be allowed in respect of payments made during the previous year. The deduction is available in respect of 1. Any payment by way of installment or part payment of the amount due to Housing Board, Co-operative society etc. 2. Any repayment of loans borrowed by the assessee from Government bank or L.I.C. of India or any public company formed in India for providing long term finance for the construction or purchase of residential 3. Stamp duty, registration fee and other expenses incurred for transferring such house to the assessee. 4. Payments made towards the cost of land, of any addition, renovation or repairs of the house carried out after its completion is not qualified for rebate. 12. Subscription to any deposit scheme floated by a public sector company which is engaged in providing long-term finance for construction or purchase of housed in India. 13. Subscription to any deposit floated by any statutory authority formed for satisfying the need of housing accommodation is cities, towns or villages in India. 14. Payment made as tuition fees (other than development fees or donation) to any educational institution situated in India for the purpose of full time education in respect of any two children of the assessee.
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15.
Any amount-invested in The debentures of and equity shares in a public company engaged in infrastructure including power sector: Units of a Mutual Fund (10 (23D) approved by the Board, to be utilised for infrastructure facility. As regards the last one, there is a lock in period of 3 years and they should not be transferred within 3 years of their acquisition. If transferred, the entire amount of rebate allowed earlier is taxed as the income of the year of transfer.
16.
Payment made as subscription to bonds issued by the National Bank for Agriculture and Rural Development (NABARD). (New amendment)
Overall limit: The aggregate of the eligible contributions mentioned above shall be allowed as deduction to the extent of Rs. 1,00,000. Problem 11: (Sec 80C) From the following particulars of Mr. ARAVIND find out the deduction u/s80C: a) Life insurance premium (own life) b) Contribution to unrecognized provident fund c) Deposit in 15 years P.O.S.B.C.T.D.account d) Subscription to national savings certificates 22,000 1,000 10,000 8,000 15,000 8,000 5,000
e) Contribution to Public Provident fund f) Accrued interest on NSC VIII issue
g) LIC premium on mothers policy h) Repayment of bank loan borrowed for construction of the house, Made out of agricultural income i) Tuition fee of one child
20,000 14,000
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Solution: i) LIC premium (own life) ii) Deposit in 15 years P.O.S.C.CTD account iii) Subscription to NSC iv) Interest accrued on NSC v) Contribution to public provident fund vi) Repayment of House Building Advance vii) Tuition fees Deduction u/s 80C 22,000 10,000 8,000 8,000 15,000 20,000 14,000 97,000
Note: Premium on mothers life policy and contribution to URPF are not qualified for deduction u/s 80C. 2.3.2 Deduction in respect of contribution to certain pension funds [Section 80CCC]: Deduction is available only to an individual, resident or non-resident. This deduction is given for any amount paid or deposited by him out of income chargeable to as in an annuity plan of the Life Insurance Corporation of India or any other insurer for receiving pension from the fund set up by the LIC or any other insurance company approved by the Insurance Regulatory and Development Authority. The amount of this deduction is the actual deposit made by the assessee in the previous year or the maximum of Rs. 1,00,000 fixed by the Income-tax Act, whichever is less. 2.3.3 Deduction in respect of contribution to certain pension scheme of Central Government or any other Employer (Section 80 CCD]: Deduction: Amount paid or deposited subject to a limit of 10% of salary 2.3.4 Section 80CCE (Limit on deductions under sections 80C, 80CCC and 80CCD) The aggregate amount of deductions u/s. 80C, 80CCC and 80CCD shall not exceed Rs. 1,00,000/-.
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Problem 12: Mr. Somanna, Director, National Information Centre, furnishes the following particulars for year ending 31.03.2006: a) Investments in NSC Rs. 60,000 b) Life Insurance Premium paid Rs. 30,000 c) Deferred Annuity Plan Rs. 30,000 d) ICICI Pension Plan Rs. 15,000 e) Contribution to Pension Scheme of Govt. (10% of salary) Rs. 25,000 Compute the deduction admissible under chapter VIA for A.Y. 2008-2009. Solution : Deduction u/s under chapter VIA for A.Y. 2008-2009
Particulars 1. Deduction u/s 80C - NSC - LIC Premia - Deferred Annuity Plan Gross amount eligible Deductions u/s 80C restricted to 2. Deduction u/s 80CCC - ICICI Pension Plan Deductions under section 80CCC restricted to 3. Deduction u/s 80CCD - Central Govt. Pension Scheme Gross amount eligible u/s 80CCE Deductions u/s 80CCE restricted to Amount Rs. 60,000 30,000 30,000 1,20,000 1,00,000 15,000 10,000 25,000 1,35,000 1,00,000 Amount Rs.
2.3.5 Deduction in respect of insurance premium paid under medical insurance scheme 80D: Under Section 80D of the Income-tax Act, a deduction from gross total income is allowed to an assessee who is an individual or a Hindu undivided family for insurance premium paid by cheque out of his taxable income under an approved Medical Insurance Scheme of the General Insurance Corporation of India, or any other insurer company popularly known as Mediclaim.
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In the case of an individual, the deduction is allowed in respect of premium paid for insurance on his/her health or on the health of his/her spouse or on the health of his/her dependent children and parents. In the case of a Hindu undivided family, the deduction is given in respect of insurance premium paid for insurance on the health of any member of the family. The amount of deduction allowed is the actual insurance premium paid or Rs. 15,000, whichever is less. Where the insurance is on the health of a senior citizen, the amount of deduction will be the actual premium paid or Rs. 20,000; whichever is less, with effect from the assessment year 2000-01. 2.3.6 Deduction in respect of medical treatment of handicapped dependent 80 DD Under Section 80DD of the Income-tax Act, a deduction is allowed to an individual or a Hindu undivided family assessee in respect of maintenance and medical treatment of handicapped dependent relative. Following amounts deductible: amounts. Expenditure incurred on the medical treatment (including nursing), training and rehabilitation of handicapped or mentally retarded dependent. An amount paid or deposited by the assessee under any scheme of LIC or any other insurer or UTI approved by the CBDT for the maintenance of the handicapped dependent relative or member of the family. The fixed deduction of Rs. 50,000 is available irrespective of amount spent, paid or deposited. If the dependent is a person with severe disability the deduction shall be 75,000 2.3.7 Deduction in respect of medical treatment 80DDB Section 80DDB provides a separate deduction to an assessee who is an individual or H.U.F resident in India for the expenditure incurred for the
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medical treatment of assessee himself or his dependent relative, in the case of an individual, or any member of the H.U.F in respect of specified diseases or ailments. The deduction is the amount actually paid or Rs. 40,000 (Rs. 60,000 in the case of senior citizen whichever is less, as reduced by any amount received form the insurer or reimbursed by the employer 2.3.8 Deduction in respect of payment of interest on loan taken for higher education 80E Under Section 80E, a deduction is allowed to an individual in respect of the repayment of interest on loan taken by him for higher studies to himself or any of his relative (new amendment includes relative also). Relative in relation to individual means the spouse and children of that individual. This deduction is allowed subject to the fulfillment of the following conditions: i) The loan should have been taken from any financial institution or approved charitable institution. ii) The loan should have been taken for the purpose of pursuing higher education. The courses are any branch of engineering, medicine, management or postiii) Graduate courses in any university in pure sciences, applied sciences, including mathematics and statistics. iv) The deduction is allowed for 8 years or till the loan is repaid, whichever is earlier. From assessment year 2006-07 no deduction is allowed in respect of repayment of principal amount. 2.3.9 Deduction in respect of donations to certain funds, charitable institutions, etc 80G: The various donations qualified for deduction can be
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classified into two types. They are (i) Without limit donations and (2) With limit donations. Without limit donations are those donations the whole amount (i.e., 100% of the amount) of which are qualified or eligible for deduction. The following are some of qualified donations: a) Donations without limit: 1) Donation to Jawaharlal Nehru Memorial Fund. 2) Donation to Prime Ministers Drought Relief Fund. 3) Donation to National Childrens Fund. 4) Donation to Indira Gandhi Memorial Trust. 5) Donation to Rajiv Gandhi Foundation. 6) Donation to National Defence Fund. 7) Donation to Prime Ministers National Relief Fund. 8) Donation to Prime Ministers Armenia Earthquake Relief Fund. 9) Donation to the Africa (Public Contributions of India) Fund. Donation to the National Foundation for Communal Harmony. 10) Donation to any university or any educational institution of national eminence as may be approved by the prescribed authority. 11) Donation to the Chief Ministers Relief Fund or the Lieutenant Governors Relief Fund in respect of any State or Union Territory. 12) Donation to any Zila Saksharta Samiti constituted in any district for the purpose of improvement of primary education and for literary and post-literary efforts in villages and towns having a population not exceeding 1 lakh in such district. 13) Donation to National Blood Transfusion Council. 14) Donation to National Illness Assistance Fund. 15) Donation to any Fund set up by State Government for medical relief to the poor.
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16) Donation to the Central Welfare Fund of the Army, the Air Force Central Welfare Fund or the Indian Naval Benevolent Fund. 17) Donation to National Sports Fund to be set up by the Central Government. 18) Donation to Fund for Technology Development and Application set up by the Central Government with effect from the assessment year 2000-01.
19) Donation to National Cultural Fund set up by the Central Government. 20) Contribution by a company as donation to the Indian Olympic Association or to any other Association notified by the Central Government. 21) Any fund set up by the State Government of Gujarat exclusively for providing relief to the victims of earthquake in Gujarat. (Gujarat Earthquake Relief fund) 22) Andra Pradesh Cyclone Relief fund & Tsunami Relief fund 23) Contribution to the National Trust for Welfare of persons with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities. b) Donations with limit: 24) Donation to the Government, local authority or institution approved by the Central Government for promoting family planning in India. 25) Donation to the Government, local authority or institution approved by the Central Government for any charitable purposes other than promoting family planning. 26) Donation to Corporation established for promoting interests of minority community. 27) Indian Olympic association or to any other association notified u/a 10 (23) only for company assesses.
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28) Donation to any fund or institution established for charitable purposes and which fulfils certain conditions specified in Section 80G (5). 29) Donation to any statutory authority set up in India for the purpose of satisfying the need for housing or for planning, development and improvement of cities, towns and villages or for both. 30) Donation for the renovation or repair to any temple, mosque, groupware, church or any other place having historic, archaeological or artistic importance or a place of public worship notified by the Government of India. The rate of deduction allowed for donations on the qualifying amount is: (a) 100% of the qualifying amount of donations to items specified in 6 to 24 of no-limit donations and item 1 specified in with-limit donations. (b) 50% of the balance of qualifying amount of donations. AUTHORS MEMORIZING TECHNIQUE: To memorize the above donation in 4 categories namely, without limit, with limit, 100%and 50% rate study the above donations in the following order and study the given format. I Part 1) Africa Fund 2) University or educational institution of national eminence. 3) National foundation for communal harmony. 4) Prime minister National Relief Fund (PMNRF) 5) Prime Minister Earthquake Relief Fund (PMERF) 6) Chief Minister Earthquake Relief Fund (CMERF) (Maharastra, Karnataka, Gujarat) 7) Chief Ministers Relief Fund 8) Orissa Fund
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9) Andrapradesh Cyclone Relief Fund, Tsunami Relief Fund 10) Zilla Saksharatha Samithi 11) National sports Fund 12) National cultural Fund 13) Fund for technological development. 14) Blood Transfusion Council (Navy, Army, Air force) 15) National Defence Fund 16) Illness Assistance Fund 17) Medical Relief Fund II Part 18) Prime Ministers Drought Relief Fund. 19) Jawaharlal Nehru Fund 20) Indira Gandhi Fund. 21) Rajiva Gandhi Fund 22) National Childrens Fund. 23) Mental Retardation Fund and Multiple Disabilities. III Part 24) Donation to Govt. or local authority for family planning. 25) Donation to Govt. or local authority other than family planning 26) Donation to charitable institution 27) Donation to approved temples, mosques, churches, Gurudwars or any other place having historic importance. 28) Minority community. 29) Educational institution, which is not of national importance. Note: 1) Donation should not be in kind 2) Donation should not be partial to a particular religion or a political party.
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Format 5: (with reference to the above list) Computation of Deduction u/s 80G
Gross total income Other Deductions 80C, 80D, 80DD, 80E, etc. Deduction u/s 80G Without limit (1to 23) XXX XXX XXX With Limit (24 to 29) XXX XXX XXX Or XXX XXX -X X X
10% of ATI (Adjusted Total Income)
XXX XXX
Rate: - 100% (1 to 17) + 24 50% of balance Taxable Income
XXX XXX - XXX XXX
Note: ATI = GTI - Other deductions - Long-term capital gain - Casual income. Problem 13: (Sec 80 G) SRI SWAMY furnishes the following information in respect of donation made during the year: Donation to PMNRF Rs. 4,000. Donation to Rajiva Gandhi Foundation Rs.2, 000. Donation to National Childrens Fund Rs. 5,000 Donation to approved charitable institutions Rs. 10,000 Donation to Mangalore University Rs. 5,000 Donation to a poor boy for higher studies Rs. 2,000 Blankets and clothes worth Rs. 1,5000 to Anathashram.
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Donation for the construction of a guesthouse for a particular religious community Rs. 12,000. His gross total income is Rs. 1,35,000 which includes Rs. 15,000 as interest on bank deposits. Compute his total Income. Solution: Computation of Total Income
Gross Total Income Other deductions: Deduction u/s 80G With Limit (1to23): PMNR Fund Rajiva Gandhi Foundation National childrens Fund Mangalore University With Limit (24 to 29): Charitable institution 10% of ATI 10% of 1,35,000 10,000 Or 13,500 + 10,000 26,000 (whichever is less) Rate: 100% (1to 17)+24 PMNR Fund Mangalore University 50% of Balance (50% of 26,000 9,000) Taxable Income 4,000 5,000 9,000 8,500 -17,500 1,17,500 4,000 2,000 5,000 5,000 16,000 1,35,000 Nill
Note: ATI = GTI other deductions LTCG = 1,35,000 Interest on Bank Deposits is not eligible for deduction as the old section 80L has been withdrawn.
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Problem 14: (Sec 80G) Mr. Abdul donated the following funds to the following institutions a) Prime ministers national relief fund b) National Defence fund c) Approved charitable institution d) Aid to poor students e) Books donated to an approved college f) Municipality, approved for promotion of family planning 10000 20000 30000 2000 6000 10000 10000
g) Mangalore university (of national eminence)
Mr. Abduls gross total income was Rs. 2,70,000. He has incurred an expenditure of Rs.15,000 on the medical treatment of handicapped dependent. Calculate the deduction allowable to him u/s 80G. Solution:
Gross Total Income Other deductions: 80DD expenditure of handicapped 2,70,000 - 50,000 Deduction u/s 80G Without limit PMNR Fund National Defence Fund Mangalore University With Limit (24 to 29): Charitable institution 30,000 Family planning 10,000 10% of ATI 10% of 2,20,000 2,20,000 10,000 20,000 10,000 40,000 40,000 Or 22,000
22,000 62,000 50,000 6,000 -56,000 1,64,000
Rate: 100% (1to 17)+ * 24 PMNR Fund, NDF, MU, *F.P 50% of Balance 50% (62,000 50,000) Taxable Income
50,000 12,000
* Donation to Municipality, approved for promotion of family planning is available for 100%
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Problem 15: (Alternative approach to work out deduction u/s 80G) Compute the deduction u/s 80G in the following cases:
Particulars National Defence Fund Approved public trust PMs National Relief Fund Central Govt. for family planning Approved temple, renovation A 6000 7000 8000 2000 B 5000 10000 8000
GTI of assessee may be commonly assumed as 1 lakh. Each of the assessee is entitled to deduction u/s 80D and 80GGA to the tune of Rs.10000. Solution: Alternative method of computation
Particulars Gross Qualifying Amt. Net Qualifying Amt. Deduction % Deduction Amt.
National Defence Fund Approved Public Trust PMNRF Approved Temple Renovation
6000 7000* 8000 2000*
6000 7000 8000 2000
100 50 100 50
6000 3500 8000 1000
Deduction u/s 80G Rs. 18500 Working note:

Particulars Gross Qualifying Amt. 5000* 10000 8000* Net Qualifying Amt. 1000 10000 8000 Deduction % 50 100 100 Deduction Amt. 500 10000 8000
Approved Public Trust PMNRF Family Planning
Deduction u/s 80G Rs. 18500
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Note: * These amounts qualify subject to the overall limit of 10% of Total income of Rs.90000. The total of these amounts exceeding Rs. 9000 (being 10% of Rs. 90000) is not eligible for deduction. 2.3.10 Deduction in respect of rent paid: (Sec 80GG) Under Section 80 GG of the Income-tax Act, a deduction is allowed to an individual in respect of the rent paid by him for any house occupied by him for his own residence subject to the fulfillment of the following conditions: a) The assessee should be a self-employed person or he should be salaried employee not in receipt of house rent allowance. b) The actual rent paid by the assessee is in excess of 10% of his total income. The term total income, for this purpose, means gross total income as reduced by the various deductions under the Chapter 'Deductions from Gross Total Income' (Sections 80CCC to 80U) except the deduction under Section 80GG. c) The assessee, his/her spouse or his/her minor child or the Hindu undivided family of which he is a member should not own any residential house at the place where the assessee ordinarily resides or performs the duties of his office or employment or carries on his business or profession. d) No claim for concession regarding self-occupied property should be made by the assessee in respect of any accommodation. The amount of this deduction will be the lowest of the following: i) Actual rent paid by the assessee in excess of 10% of adjusted total income. ii) 25% of his total income. iii) Rs. 2,000 per month.
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2.3.11 Deduction for donation for scientific research, or rural development, etc.80GGA The deduction under Section 80GGA is allowed to any assessee who is not having any income under the head Profits and gains of business or profession. The deduction under Section 80GGA is allowed for the following items: i) Any sum paid to an approved scientific research association, university, college or other institution to be used for scientific research. ii) Any sum paid to an approved university, college or other institution to be used for research in social science or statistical research. iii) Any sum paid to an association or institution to be used for carrying out any programme of approved rural development or for training of persons for implementing programme of rural development. The amount of deduction allowed under this Section is 100% of the sums paid. In other words, the entire sum paid is allowed as deduction. 2.3.12 80 GGB: Deduction under this section is allowed in respect of any contribution made by an Indian company to any political party. 2.3.13 80 GGC: Deduction under this section is allowed in respect of contribution made by any person to a political party. 2.3.14 80 U Deduction in case of a person with disability: A deduction to the extent of Rs. 50,000 is allowed while computing the total income of an individual resident with disability as certified by a medical authority. In a case of severe disability the deduction is Rs. 75,000. For this section disability means blindness: low vision: leprosy cured: hearing impairment: Locomotor disability: mental retardation: mental illness: the person suffers from not less than 40% of such disability. Person with severe disability means a person with 80% or more of one or more disabilities.
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KEY POINTS
DEDUCTIONS (Sec. 80) 80C 80CCC 80D Nature of payment LIC premium, NSC, PF. Pension Fund Medical Insurance premium Available amount Max. upto Rs. 1,00,000 Upto Rs. 10,000 Upto Rs. 15,000 (Rs. 20,000 in case senior citizen) Rs.50,000 fixed (severe disability Rs. 75,000) No limit
80DD
Medical treatment of descendant with disability Repayment of interest on educational Loan Donations
80E
80G
100% or 50% and with limits without limit Whichever less - Rent above 10% of ATI - 25% of total income - 2000 p.m.
80GG
Rent paid
2.4 Rebate
Sec. 88E Tax rebate in case of Securities Transaction Tax a) Sec.88E provides for rebate in the case of any assessee whose total income includes income chargeable under the head Profits and Gains of Business or Profession arising from taxable securities transactions. b) Rebate in the nature of deduction shall be allowed from the amount of income-tax on such income arising from such transactions to the extent of the securities transaction tax paid in respect of the taxable securities transactions entered into in the course of business during that previous year.
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c) Such deduction shall be allowed only if evidence of payment of securities transaction tax in Form 10DDB is furnished along with the return of income. The income-tax payable on the income arising from taxable securities transactions shall be computed by applying the average rate of income-tax on such income. Problem No 16. (Rebate u/s 88E) Mr. Naveen has earned a sum of Rs. 2,50,000 as income arising out of Securities transactions business during the previous year 2007-2008. He has paid a sum of Rs. 2,500 as Securities Transaction Tax on above. Calculate his tax liability for the A.Y.2008-2009. Solution: Computation of Tax payable by Mr. Naveen for the A.Y.2008-2009:
Particulars Income-tax payable on total income (as per the slabs) Less: Rebate u/s88E - to the extent of Securities Transaction Tax paid Add: Educational Cess @ 2% on 21,500 (2,500) 21,500 430 21930 Add: SHEC @ 1% on 21,500 215 22145 Rs. 24,000
Students Notes All the rebates available under old section 88 (in respect of PPF< LIC Premium etc.), 88C (upto Rs. 5,000 resident women tax payer), 88B (in respect of senior citizens), 88D (in respect of tax payers whose income does not exceeds Rs.1 lakh) and also deduction under 80L (in respect of Bank Interest, etc), will no longer be available w.e.f. 1-4-2005 (F/Y 2005 06. PY. 2005 06 A.Y. 2006 07)
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The above section have been replaced with 80C where Rs.1lakh invested in various schemes such as LIC premium, employees contribution to PF or RPF, Public provident fund, N S C VIII issue, UTIs Unit Linked Insurance Plan and so on, is deducted from the total income.
The aggregate deduction u/s 80C, 80CCC, & 80CCD shall not exceed Rs. 1 lakh.
2.5 Illustrations
Problem 19: (Sec 80C) From the following particulars calculate deduction u/s80C. a) LIC premium of Rs. 10,000 on own life policy of Rs. 40,000. b) National Savings Certificate VIII issue Rs. 10,000. c) Rs. 50,000 subscribes to Home Loan Account of N.H. bank; interest accrued there on Rs. 8,400. d) Rs. 8,000 paid to the mutual fund of UTI. e) Rs. 4,000 paid to Unit Linked insurance Policy of UTI. f) Rs. 6450 as contribution to Recognized Provident Fund; interest accrued there on Rs. 12,800. g) Contribution to Public Provident Fund Rs.12,000, interest accrued there on Rs. 9,400. h) Repayment of Rs. 12,000, which was taken for extension of the house. i) Rs. 1,000 deposited in Post Office Savings Bank Account. j) Rs. 32,000 subscribed to infrastructure bonds.
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Solution: Computation of deduction u/s 80C

LIC premium NSC VIII issue Deposit in Home Loan Account and interest accrued there on (15,000 + 8,400) Mutual fund of UTI (maximum of Rs. 10,000) ULIP contribution Contribution to Recognized Provident Fund Contribution to PPF Subscription to Infrastructure Bonds Deduction u/s 80C Overall limit 23,400 8,000 2,000 6,450 12,000 32,000 1,03,850 1,00,000 8,000 10,000
Notes: a) Interest accrued on RPF, on PPF, repayment of housing loan taken for reconstruction and deposit in POSB account are not qualified for deduction u/s 80C. Problem 20: From the following particulars furnished by ROBIN SINGH (Professional Cricketer) compute deduction u/s 80C a. LIC premium (own life) b. LIC premium (wife life) c. Unit linked Insurance Plan d. PPF deposits e. Infrastructure bonds f. NSC VIII issue Rs. 12,600 7,400 6,000 30,000 20,000 10,000 7,480 4,520 26,000 10,000 6,800
g. Interest accrued on NSC h. Interest received on NSC matured i. j. Repayment of hosing loan to LICHF Repayment of housing loan to brother
k. Medical Insurance premium.
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Solution:
LIC Premium (own life) LIC Premium (Wife) ULIP PPF deposits Infrastructure bonds NSC VIII Interest accrued on NSC
Computation of Deduction u/s 80C

12,600 7,400 6,000 30,000 20,000 10,000 7,480 20,000 1,13,480 1,00,000
Repayment of housing loan to LIC HF Deduction u/s 80C Overall limit:
Problem 21: (Sec 80C) Mr. Shankar furnishes the following particulars for the year ending 31.03.2008 a) Life Insurance Premium paid Rs. 50,000, capital sum of the policy assured for Rs. 2,00,000. b) Contribution to Public Provident Fund Rs. 30,000 in the name of mother. c) Tuition fess payment Rs. 10,000 each for 3 daughters pursuing full time graduation course in Mumbai; Tuition for son pursuing MBA in Harvard Business School Rs.1,00,000. d) Housing loan principal repayment Rs.24000 to HDFC bank. This property is under construction at Mumbai as on 31.03.2008. e) Principle repayment of Housing loan taken from friend -50000, property is self occupied situated at Chennai. f) Investment in National Savings Certificate Rs.50000. Compute the deduction eligible under section 80C for A.Y.2008-2009.
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Solution Assessee: Mr. Shankar Computation of deduction eligible under section 80C for A.Y.2008-2009
Particulars 1. Life Insurance Premium 2. Contribution to Public Provident Fund 3. Tuition fee 4. Housing Loan Principal repayment 5. Contribution to NSC GROSS AMOUNT ELIGIBLE Deduction under section 80C restricted to Note 1 2 3 4 Amount eligible Rs. 40,000 NIL 20,000 NIL 50,000 1,10,000 1,00,000
Deductions to be made in Computing total income NOTE: 1. Any amount of Life insurance premium paid in excess of 20% of capital sum assured shall be ignored for deduction u/s 80C. In the given case 20% of capital sum assured is Rs. 40,000/- . Whereas the premium paid during the year is RS. 50,000. Therefore, the excess premium of Rs. 10,000 does not qualify for deduction. 2. In the case of Individual, contribution to PPF shall be made in his name, spouse for children to qualify for deduction u/s 80C. As the contribution was made in the name of mother, deduction shall not be allowable. 3. Tuition fee paid is eligible for deduction u/s 80C for maximum of two children. Therefore, R. 20,000 shall be allowed. Tuition fee paid for education institution situated outside India is not eligible for deduction. 4. In order to claim principal repayment on housing loan as deduction, the loan should have been obtained from specified employer/ institution prescribed u/s 80C. Here, since the loan is obtained from friend the repayment is not eligible for deduction.
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II. Self Assessment Questions (SAQ 2) 1. The aggregate of the eligible contributions shall be allowed as deduction u/s 80C is to the extent of Rs _____________. 2. Books donated to an approved college is _______________ for deduction u/s 80G. 3. Unrecognized Provident Fund contributed by the employee is not eligible for deduction u/s 80C. (T/F) 4. Under section 80D where the insurance is on the health of a senior citizen, the amount of deduction will be actual amount paid or Rs 10,000; which ever is less. (T/F). 5. Donation in kind is eligible for deduction u/s 80G. (T/F) III. Self Assessment Questions (SAQ 3) 1. Casual incomes include winnings from _______. A. Lottery B. Horse race C. Card games D. All the above 2. Employees own contribution to statutory Provident Fund is qualified for deduction under section ______. A. 80C B. 80 G C. 80E D. Deduction is not applicable 3. The amount of deduction u/s 80 D is maximum to the extent of _____. A. 15,000 B. 20,000 C. 40,000 D. 60,000
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4. Statutory limit for exemption of an employee covered under payment of gratuity Act 1972 is ________. A. 2,00,000 B. 3,50,000 C. 5,00,000 D. 10,00,000 5. Sec. 80GG is related to A. Medical insurance premium paid B. Repayment of education loan C. Donations D. Rent paid 6. From the following compute adjusted total income for the purpose of section 80G. Gross Total Income - 7,00,000, Long Term Capital Gain - 1,00,000. A. 5,84,000 B. 8,00,000 C. 6,00,000 D. None of these 7. Mr. S gives the following information: i) Basic salary as on 1st Jan. of the PY Rs. 8,200 per month. ii) DA at 40% of basic. iii) HRA at Rs. 2,000 per month iv) Actual rent paid for house Rs. 2,200 per month. v) His annual increment of Rs. 200 falls due on 1st August every year. Compute his taxable HRA. A. 7,360 B. 16,640 C. 16,460 D. 16,700
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8. A retires from service on 28th Feb. of the PY after serving for 30 years, 6 months and 4 days. He received Rs. 2,60,000 as gratuity. His last salary was basic Rs. 13,000, D.a. (fixed) Rs. 1,000. The annual increment of Rs. 200 falls due in Jan. His exempted gratuity is (Not covered under the Act): A. 3,50,000 B. 1,92,000 C. 2,60,000 D. 1,29,300 9. D retired on 31st Dec. after serving for 32 years and 10 months. He received Rs. 1,50,000 as gratuity. He also commuted one half of the pension and received Rs. 60,000. His average salary for the last 10 months was Rs. 6,500 where as the last drawn salary was Rs. 6,700. Compute his taxable gratuity and taxable pension A. 46,000 & 20,000 B. 44,000 & 22,000 C. 48,000 & 20,000 D. 46,000 & 22,000 10. From the following particulars of Mr. SUHAS find out the deduction u/s80C: a) Life insurance premium (own life) b) Contribution to unrecognized provident fund c) Deposit in 15 years P.O.S.B.C.T.D.account d) Subscription to national savings certificates 22,000 1,000 10,000 8,000 15,000 8,000 5,000
e) Contribution to Public Provident fund f) Accrued interest on NSC VIII issue
g) LIC premium on mothers policy h) Repayment of bank loan borrowed for construction of the house, Made out of agricultural income
20,000
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i)
Tuition fee of one child A. 97,000 B. 95,000 C. 85,000 D. 87,000
14,000
2.6 Summary
Tax-free incomes are incomes that are not considered for computing tax. Section 10 deals with such incomes. From the gross total income, certain deductions are made and the resulting balance is the total income. The aggregate amount of deductions cannot exceed the gross total income. These deductions are dealt with under sections 80CCC to 80U. Section 88E provides rebate in case of securities transaction tax.

2.7 (A) Questions 1. Explain the provisions of deduction u/s 80G. 2. Explain the provisions of deduction u/s 80C and what is the maximum limit? 3. Explain the provisions u/s 80GG. 4. Explain rebate u/s 88E. 5. Mention Ten exempted incomes. 6. How do you treat the amount of Gratuity received by an employee during the previous year? 7. State the provisions of encashment of earn leave. 8. State the rules of HRA exemption.
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2.7 (B) Exercises 1. MR. D' SOUZA has paid the following donations during the previous year 2007-2008: Rs. i) The National Childrens Fund ii) The Prime Ministers National Relief Fund iii) Kasturba Medical College Fund iv) For approved charitable institution v) For repairs and renovation of notified Gurudwara vi) Aid to poor student vii) Books donated to an approved college viii) To National Congress (I) Party ix) A municipality duly approved for the purposes of promotion of family planning 1,00,000 2,00,000 2,00,000 4,00,000 2,00,000 50,000 20,000 30,000 80,000
Mr. DSouzas gross total income amounted to Rs. 62,00,000 which includes the interest on tax-free Government securities Rs. 2,00,000 specified under Section 10(15) of the Income-tax Act. Calculate the total income after deducting deduction u/s 80G. 2. From the following particulars, calculate the deduction u/s 80C to Mr. RANJAN for the assessment year 2008-2009 a) Life insurance premium paid on his own policy Rs. 5,000, policy amount Rs. 45,000. b) Life insurance premium paid on the policy of his major son Rs. 3,000, policy amount Rs. 40,000. c) Life insurance premium paid on the policy of his married daughter, Rs. 2,000, policy amount Rs. 18,000. d) Life insurance policy of Rs. 1,00,000 on minor childs life, premium paid Rs. 8,000.
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e) Life insurance policy of Rs. 20,000 on his fathers life, premium paid Rs. 3,000. f) Life insurance premium paid on the policy on his mothers life, Rs. 4,000, policy amount Rs. 30,000. g) Life insurance premium on his brothers life, Rs. 1,000, the brother is dependent on him h) Contribution to recognised provident fund at 20% of basic salary (Basic salary Rs. 1,00,000). i) j) Contribution to public provident fund Rs. 10,000. Deposit in 10-year Post Office C.T.D account Rs. 2,000.
k) Group insurance premium paid Rs. 1,000. l) National Savings Certificate [VIII Issue] purchased Rs.10,000.
m) Deposite in National Savings Scheme, 1992 Rs.5,000. n) Accrued interest on National Savings Certificates [VIII Issue] Rs.1,540. o) Repayment of loan installment to L.I.C. 22,000. The loan was taken for the purchase of a residential flat. p) Deposit in Home Loan Account Scheme of Canara Bank Rs.5, 000. 3. From the following particulars in respect of Mr. ADARSH, an author of books, find out the deduction allowable under Section 80C: i) Life insurance premium on his own life ii) Sum assured on the above policy iii) Contribution to unrecognised provident fund iv) Deposit in 10-year cumulative time deposit account v) Contribution to public provident fund vi) Subscription to National Savings Certificate (VIII Issue) vii) Accrued interest on N.S.C. (VIII Issue) viii) Life insurance premium paid on his mothers life policy 22,000 2,00,000 1,000 10,000 25,000 8,000 8,000 5,000
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ix) Repayment of bank loan borrowed for the construction of the house 21,000
4. Mr. KIRANs gross total income for the previous year 2007-2008 is Rs.40,00,000. He makes the following donations during the previous year: 1. Prime Ministers National Relief Fund Rs. 1,00,000. 2. National Defence Fund Rs. 2,00,000. 3. Rs. 2,00,000 for repair and renovation of notified gurudwara. 4. Rs. 1,00,000 to a local college for construction of commerce block. 5. Rs. 10,000 given as aid to a poor student. 6. Rs. 10,000 worth of books donated to an approved college. 7. Rs. 1,00,000 to an approved charitable institution. 8. Rs. 50,000 to the municipality duly approved for the purpose of promoting family planning. The gross total Income of the assessee includes Rs. 10,00,000 as long-term capital gains. He is also paying life insurance premium of Rs. 26,250 on policies taken on his own life. Compute deduction u/s 80G. 5. From the following information of Mr. UMESH, calculate the deduction under Section 80C for the assessment year 2008-2009 1. Life insurance premium of Rs. 6,000 paid on his own life policy of Rs. 50,000. 2. National Savings Certificate VIII Issue purchased Rs. 10,000. 3. Rs. 5,000 subscribed for the Home Loan Account of the National Housing Bank. 4. Rs. 8,000 paid to the Mutual Fund of U.T.I. 5. Rs. 4,000 contributed to Unit-linked Insurance Policy of U.T.I. 6. Rs. 2,000 contributed to unrecognised provident fund. 7. Rs. 7,000 accrued interest on NSC (VIII Issue)
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8. Repayment of Rs. 12,000 towards the Housing Loan. 9. Rs. 1,000 contributed to Post Office Savings Bank Account. 10. Deposit in National Savings Scheme, 1992 Rs. 5,800. 6. From the information given below, calculate the deduction allowable to Mr. RAMANAN u/s 80C for the assessment year 2008-2009: Gross total income Rs. 5,00,000 a) Life insurance premium paid Rs. 10,000 on his own policy of Rs. 90,000. b) His own contribution to recognised provident fund Rs. 5,000. c) Repayment of loan taken for construction of residential house Rs. 22,000. d) Interest paid on the above loan Rs. 8,000. e) Purchased National Savings Certificates (VIII Issue) Rs. 6,000. f) Contribution to Family Benefit Fund Rs. 100.
g) Accrued Interest on National Savings Certificates (VIII Issue) amounted to Rs. 1,000. h) Life Insurance premium paid by him on his brothers life policy was Rs. 5,000. i) He has attained the age of 65 years during the previous year 20072008. Also compute his tax liability. 7. Find out the amount of the house rent allowance, which shall be included in the income under the head salaries in each of the following cases: 1. Basic pay 12,000 p.m. DA @10% of basic pay, Commission paid on a fixed percentage of turnover of Rs. 24,000 for the whole year. House Rent Allowance 2. Rs.2,000 p.m. Actual rent paid by the assessee Rs. 2,500 p.m. House is situated in Mangalore.
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3. Basic pay Rs. 6,000 p.m. DA of @10% of basic pay, House Rent Allowance Rs. 1,000 p.m. Actual rent paid by the assessee Rs.1,400 p.m. House situated at Udupi. 4. Basic pay Rs. 24,000 p.m. DA @10% of Basic pay House Rent Allowance Rs. 4000 p.m. Actual rent paid by the assessee Rs. 6,000 p.m. House situated at Delhi

SAQ 1 1. False 2. True 3. Exempt 4. Basic + DA (for retirement benefit) + Commission on percentage of turnover. 5. Refer Para 2.2.3 SAQ 2 1. Rs 1,00,000 2. False 3. True 4. Not eligible 5. False (Rs 15,000) SAQ 3 1. D 2. A 3. A 4. B 5. D 6. C 7. A 8. A 9. A 10. A
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TQs 2.5 (A) 1. Refer Para 2.3.9 2. Refer Para 2.3.1 3. Refer Para 2.3.10 4. Refer Para 2.3.8 5. Refer Para 2.2 6. Refer Para 2.2.5 7. Refer Para 2.2.7 8. Refer Para 2.2.16 TQs 2.5(B): Refer relevant Theories, formats and illustrations for all the problems.
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Unit 3
Structure: 3.1 Introduction Learning Objectives. 3.2 3.3 3.4 3.5 3.6
Income from Salaries
Basis of charge and chargeability of salaries Important points regarding income from salaries Meaning of salary Scope of salary Profits in lieu of salary Self Assessment Questions (SAQ1)
3.7 3.8 3.9 3.10 3.11 3.12
Allowances Perquisites Valuation of perquisites Provident funds Allowable deductions under the head Salaries Illustrations Self Assessment Questions (SAQ2, SAQ3)
3.13 3.14 3.15
Summary Terminal Questions Answers to SAQs and TQs
3.1 Introduction
This unit introduces the basic concepts and terms of income from salaries. It also deals with allowances, perquisites, and allowable deductions allowable under the head salaries. Learning Objectives: After studying this unit, you will be able to: Understand the chargeability of salaries and the place of accrual of salary.
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Understand the important points regarding income from salaries. Understand the meaning of salary. Understand profits in lieu of salary, allowances and perquisites. Understand the valuation of important perquisites. Understand the provisions relating to various provident funds. Know the allowable deductions under the head salaries. Compute the income from salaries.
From the purpose of income tax, the gross total income of an assessee is classified under the following 5 heads. 1. Salaries (sec.15 to 17). 2. Income from House Property (sec. 22 to 27). Profits and Gains from Business or Profession (sec. 28 to 44). 3. Profits and Gains from Business or Profession (sec. 28 to 44). 4. Capital Gain (sec. 45 to 55). 5. Income from Other Sources (sec. 56).
3.2 Basis of Charge and Chargeability of Salaries

Under Section 15 of the Income-tax Act, the charge to tax under the head Income from Salaries is either on due basis or on payment basis (i.e., receipt basis), whichever is earlier. U/s 15 the following income shall be chargeable to tax: any salary due from an employer or former employer to an assessee in the whether paid or not; any salary paid or allowed to him in the by an employer or former employer, whether due or not, and any arrears of salary paid or allowed to him in the by an employer or former employer if not charged to tax in any earlier previous year.
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3.3 Following are some important points

1. Place of accrual of salary: If the salary is earned in India it is deemed to accrue or arise in India. If the person is employed in India and goes abroad on leave, any salary paid to him outside India is deemed to have been earned in India. So also if a person retires from employment in India and settles abroad after retirement any pension received by him outside shall be deemed to have been earned in India. 2. Employer-employee relationship: In order to charge an income under the head salaries, there must be employer and employee relationship. A director or an agent receiving fee or commission cant be considered as an employee of the Company. Likewise a MP or MLA is not considered as an employee of the govt., as he is an elected representative of the people. 3. Work of a professional: Every profession involves making successive contacts. Income derived there from is taxed u/s 28. For example the income earned by a lawyer in various cases. On the other hand if he is employed by a company, though he give legal counseling, the income received by him is treated as salary. 4. Salary from more than one employer: If an individual received salary from more than one source (due to change of employment or employment with two or more employers simultaneously) salary from each source is taxable as salaries 5. Incomes received by an employee from persons other than his employer: If any income is earned from a person other than the employer, it will be taxed u/s 58 even if it accrues by reason of his employment. For
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example: valuation remuneration received by collage professors, tuition fees etc. 6. Remuneration of every kind of employee is covered by salaries: Remuneration of every kind of servant or employee, Government or non-Government, and highly or lowly placed, is covered by Salaries. 7. Every kind of remuneration is covered by salaries: Every kind of remuneration, whether salaries or wages, is covered by salaries. That means, no distinction is made between salaries and wages, and both salaries and wages are included under the head Salaries. 8. Payment made after cessation of employment: Payment made by an employer to his employee after the cessation of his employment is also taxable under the head Income from Salaries, if such payment is in connection with the services rendered by the employee in the past. 9. Salary and pension from a foreign Government: Salary and pension received by an employee from a foreign Government for his services in India is taxable under the head Income from Salaries. 10. Family pension: Family pension received by the widow or legal heirs of a deceased employee is taxable under the head Income from other Sources, and not under the head Income from Salaries. 11. Voluntary foregoing of salary is application of income: The voluntary foregoing of salary by an employee, after it has become due to him, is merely an application of his income. So, it is taxable under the head Income from Salaries.
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12.
Surrender of salary: Voluntary surrender of salary by an employee, whether a Government employee or a non-Government employee, to the credit of the Central Government under Section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act of 1961, is exempt from tax, and so, it is not to be included in the salary income of the employee.
13.
Tax - free salary: When an employee is paid tax-free salary, the implication is that the tax payable by the employee in respect of his salary income has been paid by the employer on his (i.e., employees) behalf. As such, when an employee is paid tax-free salary, the amount of salary to be included in the salary income of the employee is, not the net salary received by him, but the gross salary (i.e., the total of the net salary received by the employee plus the amount of tax paid by the employer on behalf of the employee).
14.
Salary of a M.P. or a M.L.A. The salary of a member of parliament is not taxable under the head Income from Salaries, because he is not an employee of the Government, and there is no employer and employee relationship between the Central Government and him. Similarly, the salary of a member of a state legislature is not taxable under the head Income from Salaries, as there is no employer and employee relationship between the State Government and him. It (i.e., the salary of the Member of Parliament or the member of a state legislature) is taxable under the head Income from Other Sources.
15.
Scale of pay or salary grade: Scale of pay indicates the starting basic salary of an employee at the time of his appointment, the increment in his basic salary per year during the service period and the maximum basic salary after which
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there will be no increment in basic salary. For instance, if an employee is appointed in the grade or scale of Rs. 1,500 - 100 - 2,000 - 150 3,500, it means that his basic salary at the time of his employment will be Rs. 1,500, and the increment in his basic salary, after one year of service, will be Rs. 100 per month till his basic salary reaches Rs. 2,000, and thereafter, the increment in his basic salary will be Rs. 150 per month until his basic salary reaches Rs. 3,500, and after his basic salary reaches the maximum level of Rs. 3,500, no annual increment in basic salary will be allowed. 16. Due date of salary It is the date when the salary becomes due. In the case of a Government employee salary becomes due on 1st of next month. In the case of non- Government employees, salary becomes due at the end of each month. Salary is usually taxed on due basis.
3.4 Meaning of Salary

Under Section 17 (1) of the Income-tax Act of 1961, Salary means and includes the following amounts received by or due to an employee: i) Wages ii) Any annuity or pension iii) Any gratuity iv) Any fees, commission, perquisite or profit in lieu of or in addition to salary or wages. v) Any advance of salary. vi) Any payment received by an employee in respect of any period of leave not availed by him (i.e., encashment of earned leave). vii) The annual accretion to the balance to the credit of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax, i.e., employers contribution in excess of 12% of the salary of the employee.
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viii) Interest on recognised provident fund in excess of 9.5%. ix) The aggregate of all sums comprised in the transferred balance of an employee participating in an unrecognised provident fund at the time of its recognition to the extent to which it is chargeable to tax.
3.5 Scope of salary

The term Salary is a very wide term. It includes several items of earnings. The various items of earnings included in salary are: 1. Basic salaries or basic pay: Basic salary or basic pay means regular payments made by an employer to an employee for the services rendered by him (i.e., the employee). So, it is included in the gross salary of the employee. 2. Advance salary: Advance salary refers to salary paid or allowed to an employee in the by an employer before it becomes due. It is included in the gross salary of the employee. 3. Arrears of salary: Arrears of salary paid to an employee in the by a present employer or a former employer is taxable under the head Salaries, if it was not already charged to tax for any particular on due basis. 4. Dearness pay: Dearness pay refers to dearness allowance given on a regular basis under the terms of employment. So, it is regarded as part of basic salary for calculating retirement benefits. It is to be included in the salary income of the employee. 5. Pension: Pension is a periodic payment made by an employer to an employee after his retirement. It is chargeable to tax under the head Income from Salaries.
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6.
Commuted pension: Pension is said to be commuted, when, instead of periodic pension payments, a lump sum is paid to an employee once and for all. Provisions discuses earlier (refer Unit no.2)
7. Gratuity: Gratuity refers to a payment made by an employer to an employee on his retirement, or to his family members on his death, as a token of gratitude, i.e., in appreciation of his past services. Provisions discuses earlier (refer Unit no. 2) 8. Fees or Commission: An employer pays fees or commission to his employee for doing any extra work other than his regular work. Fees or commission may be paid as a percentage of basic salary or as a lump sum as per the agreement. Commission may also be paid to an employee as a fixed percentage based on the turnover (i.e., purchases or sales) achieved by the employee during the year. Fees or commission received is taxable in the hands of the employee under the head Income from Salaries. 9. Bonus: Bonus is a payment made by an employer to his employee either under a legal obligation or voluntarily. It is a taxable income in the hands of the employee under the head Income from Salaries. 10. Annual accretion: Annual accretion refers to the annual addition to or increase in the balance to the credit of an employee participating in a recognized provident fund. A portion of this annual accretion is chargeable to tax under the head Income from Salaries. The chargeable amount of annual accretion comprises:
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i) Employers contribution to the recognised provident fund in excess of 12% of the salary of the employee and ii) Interest accrued on the recognised provident fund in excess of 9.5% per annum. Salary for this purpose means only basic salary. But if the terms of employment so provide (i.e., if dearness allowance (D.A.) is taken into account for the computation of retirement benefits), then, Salary means basic salary plus D.A. Again, if commission is paid as a fixed percentage of turnover or sales achieved by the employee, then, commission also will be included in the term Salary. 11. Leave salary or encashment of earned leave: Leave salary or encashment of earned leave refers to any cash payment received by an employee from his employer in respect of earned leave due to him, but not availed by him. Provisions discuses earlier (refer Unit no.2) 12. Allowances: A detailed discussion of allowances is given under the heading Allowances. 13. Perquisites: A detailed explanation of perquisites is given under the heading Perquisites.
3.6 Profits in Lieu of Salary (Section 17(3))

As per Section 17(3) of the Income-tax Act, profits in lieu of salary include the following: 1. The amount of any compensation due to or received by an employee from his employer or former employer in connection with the termination of his employment or the modification of the terms and conditions of employment.
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2. Any amount due to or received by an employee from an unrecognised provident fund or any other similar fund to the extent to which it is taxable under the head Salaries (i.e., only to the extent of the employers contribution and the proportionate interest on the employers contribution). 3. Any other payment due to or received by an employee from his employer or former employer in appreciation of his services, provided such payment is attributable to or connected with employment. 4. Sum received by an employee under Keyman insurance policy endorsed in his favour by his employer with effect from the 1997-98. 5. Any amount due to or received (whether in lump sum or otherwise) by an assessee from any person before joining any employment or after cessation of such employment with effect from the 2002-03. I. Self Assessment Questions (SAQ 1) a) The Salary of the member of parliament or the member of a state legislature is taxable under the head ________________________. b) Define Salary _________________________________________________________ _________________________________________________________ _________________________________________________________ c. Any death cum retirement gratuity received by all categories of Government employees is _______________________.
3.7 Allowances
The term allowance refers to a cash payment of a fixed amount made by an employer to his employee on a regular basis to enable him (i.e., the employee) to meet certain specific expenses incurred by him for discharging his duties.
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There are a number of allowances. Some of the important allowances are: 1. Dearness allowance (D.A.): Dearness allowance (also known as high cost of living allowance) is an additional payment made by an employer to his employee over and above the basic salary for meeting the increased cost of living. Dearness allowance is a taxable income under the head Salaries. It is included in salaries for computing RFA, HRA, and PF etc. if it is considered for retirement benefits. 2. City compensatory allowance (C.C.A.): City compensatory allowance is an allowance granted by an employer to his employee working in a big city for meeting the extra cost of living prevalent in a big city. It is fully taxable. 3. House rent allowance: House rent allowance is an allowance given by an employer to his employee to enable him to meet the high rents prevailing in a big city. The house rent allowance exempt from tax is the least of the following: a) Actual house rent allowance received by the employee for the relevant period. b) Excess of actual rent paid by the employee over 10% of his salary for the relevant period. c) 50% of his salary, if the house is situated in Mumbai, Kolkatta, Delhi or Chennai, or 40% of his salary, if the house is situated in any other city. As regards the exempted portion of the house rent allowance, the following points may be noted: a) Salary for this purpose means only basic salary. However, if D.A. enters into the computation of retirement benefits, then, salary for this purpose means basic salary plus dearness
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allowance. Again, if commission is paid to the employee as a fixed percentage on turnover achieved by him, then, that commission also should be included in salary. b) Relevant period means the period during which the house was occupied by the assessee during the previous year. Provisions discuses earlier (refer Unit no. 2) Study the format 4. Entertainment allowance: Entertainment allowance is an allowance given by an employer to an employee to enable him to meet the expenses incurred by him for entertaining (i.e., for giving tea, coffee, etc.) to the customers of the employer. Entertainment allowance is first included in gross salary. Then, from the gross salary, certain deduction is allowed for entertainment allowance, if the employee is eligible for deduction for entertainment allowance. 5. Foreign allowance: Foreign allowance is an allowance, usually, given by the Government of India to its employees who are Indian citizens posted outside India. It is fully exempt. 6. Fixed medical allowance: Medical allowance is fully taxed irrespective of the amount spent on medical treatment. 7. Servant allowance: It is fully taxable under the head Salaries in the case of all categories of employees. 8. Deputation allowance: It is fully taxable under the head Salaries. 9. Tiffin allowance: Tiffin allowance is fully taxable under the head Salaries.
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10.
Dinner allowance: Dinner allowance is fully taxable under the head Salaries.
11.
Family allowance: It is taxable in full.
12.
Special Allowances: There are a number of special allowances prescribed by the Central Board of Direct Taxes under Rule 2BB of the Income-tax Rules, as exempt from tax to the extent spent or to the extent specified below, under Section 10(14) of the Income-tax Act. Such special allowances are: a) Travelling allowance or tour allowance: Travelling allowance refers to any allowance granted by an employer to his employee to meet the cost of travel on tour or on transfer (including any sum paid in connection with transfer, packing and transportation of personal effects on such transfer). Generally, the entire amount of travelling allowance is spent by the employee on travelling in connection with his official duties. As such, the travelling allowance is not taxable. It may be noted that, in the examination, unless otherwise stated, one can presume that the entire amount of traveling allowance is spent by the employee for employment purposes. b) Conveyance allowance: Conveyance allowance is a special allowance given by an employer to his employee to meet the expenditure on conveyance in performance of the duties of office. If the amount is fully spent for discharging official duties totally exempt or the other hand if it is given for Pvt. purpose the entire amount is taxable.
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c) Daily allowance: Daily allowance refers to any allowance granted by an employer to an employee, whether on tour or for the period of journey in connection with the transfer, to meet the ordinary daily charges incurred by the employee on account of absence from his normal place of duty. The amount spent for official purpose is tax-free. The unspent amount of daily allowance is taxable under the head Salaries. d) Helper allowance: Helper allowance refers to any allowance granted by an employer to an employee to meet the expenditure on a helper, where such helper is engaged by the employee for the performance of duties of an office. Generally, the entire amount of helper allowance is spent by the employee. As such, the helper allowance is not taxable. However, the unspent amount of helper allowance is taxable in the hands of the employee under the head Salaries. e) Academic allowance: Academic allowance is a special allowance given to an employee to encourage him to undertake academic, research or other professional pursuits. The amount of academic allowance spent for the academic purpose is exempt from tax, and the unspent amount, if any, is taxable under the head Salaries. It may be noted that, in the examination, unless otherwise stated, one can assume that the entire academic allowance is spent for the academic purpose. f) Uniform allowance: Uniform allowance is a special allowance. It is given by an employer to an employee to enable him to meet the expenses incurred by him on the purchase or maintenance of the uniform, which he is required to wear, while doing his official duties.
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It is exempt from tax to the extent of the allowance spent for the purpose. The unspent amount of this allowance, if any, is taxable under the head Salaries. g) Special compensatory allowance (in the nature of border area allowance, remote area allowance, difficult area allowance or disturbed area allowance) This is a special allowance. The exempted portion of this allowance is Rs. 200, Rs. 300, Rs. 750, Rs. 1,050 or Rs. 1,300 per month depending upon the notified place. h) Personal expenses allowance: Personal expenses allowance refers to a special allowance granted to an employee working in any transport system to meet his personal expenses during his duty performed in the course of running of such transport from one place to another place. This allowance is exempt to the extent of 70% of such allowance or Rs. 6,000 per month; whichever is less provided he is not in receipt of any daily allowance. i) Children education allowance: Children education allowance is a special allowance given by an employer to his employee to enable him to meet the cost of his childrens education. It is exempt upto Rs. 100 per month per child upto 2 children j) Children hostel allowance: Children hostel expenditure allowance is a special allowance given by an employer to his employee to enable him to meet the hostel expenditure of his children. It is exempt upto Rs. 300 per month per child upto 2 children.
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k) Transport allowance: Transport allowance is a special allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty and vice versa. This allowance is exempt from tax to the extent of Rs. 800 per month. In this connection, it may be noted that transport allowance granted to an employee who is blind or orthopaedically handicapped, it is exempt from tax to the extent of Rs. 1,600 per month with effect from 1.8.1999 (i.e., with effect from the year 2000-01). 13. Other allowances: There are a number of other allowances, such as project allowance (i.e., an extra allowance given to an employee to work on a special project), marriage allowance, overtime allowance, telephone
allowance, holiday allowance, dog allowance, etc. These allowances are fully chargeable to tax under the head Salaries.
Key Points 1) Dearness allowance, City compensatory allowance (CCA), Medical allowance, Entertainment allowance, Family allowance, etc are fully taxable. 2) Uniform allowance and Traveling allowance are basically exempt. 3) Educational allowance is exempt Rs. 100 per month, per child upto 2 children. 4) Hostel allowance exempt upto Rs. 300 p.m. per child upto2 children. 5) Transport allowance exempt upto Rs.800 p.m. 6) Conveyance allowance to meet the cost of conveyance incurred in connection in the performance of official duties is exempt. If no purpose is mentiontioned for conveyance allowance we can assume that it is transport allowance and is exempt upto Rs. 800 p.m.
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Problem 1: From the following information compute taxable portion of allowance 1) DA Rs. 1,000 p.m. (20% enters into retirements benefits) 2) Medical allowance Rs. 10,000 3) Family allowance Rs. 500 p.m. 4) Education allowance Rs. 150 p.m. for 3 children. 5) Hostel allowance Rs. 400 p.m. for 1 child 6) Traveling allowance Rs.1,000 p.m. Solution: Calculation of taxable allowance
Dearness allowance (1000 X 12) Medical allowance Family allowance (500 X 12) Traveling allowance Education allowance: Actual (150X 12 x 3) 5,400 2,400 4,800 -3,600 1,200 32,200 3,000 (-) Exempted (100 X 12 X 2) Hostel allowance: Actual Exempted (400 X 12 X 1) (300 X 12 X 1) Taxable allowance 12,000 10,000 6,000 Exempt
3.8 Perquisites
According to Section 17 (2) of the Income-tax Act of 1961, perquisite means any casual emolument, fee or profit attached to an office or position, in addition to salary or wages. From this definition, it is clear that perquisite means any casual emoluments attached to an office. In short, perquisite means a personal advantage, which benefits a person by going into his own pocket.
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Under Section 17(2) of the Income-tax Act of 1961, perquisites include the following: 1. Value of rent-free accommodation provided to an employee by his employer. 2. Value of any concession in the matter of rent in respect of any accommodation provided to an employee by his employer. 3. Value of any benefit or amenity granted or provided free of cost or at concessional rate to specified employees. 4. Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the employee himself. 5. Any sum payable by the employer, whether directly or through a fund, to affect an assurance on the life of the employee or to effect a contract for annuity. 6. Value of any other fringe benefits or amenity as may be prescribed. Classification of Perquisites: Perquisites specified under Section 17 (2) may be classified into three categories. They are: First Category (all employees) i) Residential accommodation. ii) Interest- free or concessional loans. iii) Holiday facilities. iv) Free meals v) Gifts vi) Credit car facilities. vii) Club facilities. viii) Use of employers movable assets. ix) Transfer of employers movable assets. x) Any other benefits service right or privilege.
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Second Category (specified employees) i) Motorcar or other conveyances. ii) Domestic servants. iii) Supply of Gas, water, electricity. iv) Free or concessional education. v) Free or concessional transport facility. While computing the value of above perquisites (both categories) any amount recovered, contributed or borne by the employee is deducted and only the balance is chargeable to tax. Specified employees include: i) An employee of a company who is a director thereof ii) An employee of a company who has substantial interests in the company (minimum 20% voting power). iii) An employee of any employer whose net monetary emoluments exceed Rs. 50,000 in the previous year. Net monetary emoluments means all monetary payments or incomes received by an employee from his employer or employers (but not nonmonetary benefits or amenities, such as rent-free accommodation, concession in the rent of accommodation, free supply of gas, electricity and water, free education facilities, free conveyance, etc.), excluding (i) monetary benefits exempt under Sec. 10 and (ii) all the allowable deductions under the head Salaries (deduction for entertainment allowance and profession tax). Examples of perquisites chargeable in the hands of only specified assessee are: 1. Value of gas, electricity or water supplied by the employer to the employee for his personal use free of charge.
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2.
Reimbursement or payment of gas, electricity or water bills by the employer, if the connections are in the name of the employer.
3.
Sweeper, watchman, gardener or any other domestic servant, say, cook, appointed and provided by the employer to the employee for his personal purpose free of charge.
4.
Free education provided by an employer to the employee's family members in an institution run by the employer.
5.
Education bill for the education provided to the employee's family members met by the employer, if the bills are issued in the name of the employer.
6.
Free travel to, and free boarding and lodging at the holiday homes maintained by the employer.
7.
Free use of furniture, refrigerators, heaters, boilers, T.V. set, radio, etc. provided by the employer to the employee.
8.
Any asset sold by the employer to an employee free of cost or at a concessional price. (It may be noted that, in this case, the difference between the market price and the sale price is the value of the perquisite.)
9.
Free or concessional boarding and lodging provided by a hotel to its employee.
10.
Free transport or travel facilities provided by a transport undertaking to an employee or his family members.
11.
Free transport or travel facilities provided by an employer to his employee for going to and coming from the place of work from his residence.
12.
Free educational facility in an institute owned or maintained by the employer to children of employee provided the cost or value does not
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exceed Rs. 1,000 per month per child, with no limit on number of children. 13. Interest free or concessional loan of an amount not exceeding Rs. 20,000. 14. 15. Gift-in-kind of less than Rs. 5,000 in a year. Value of any benefit provided free of cost or at a concessional rate by a company to its employees by way of allotment of shares, debentures or warrants (directly or indirectly) under the Employees' Stock Plan or Scheme in accordance with the guidelines issued by the Central Government is not regarded as a perquisite, and so, it is not charged to tax with effect from the 2001-02. 16. Payment by an employer of the fees of an employee taking refresher courses or management courses, which help the employee to perform his service more efficiently. (In this context, it may be noted that if an employer pays the fees of an employee who attends such courses with a view to improving his own knowledge and his prospects in employment, then, the payment is not tax-free. It is taxable under the head Salaries.) 17. 18. Goods sold by an employer to the employee at concessional rates. Premium paid by an employer in respect of personal accident policy on the life of the employee. 19. 20. 21. Free ration to personnel of armed forces. Perquisites to Government employees posted abroad. Amount spent by an employer for promotion of family planning among his employees. 22. 23. Scholarship to children of employees paid by the employer. Free holiday trips to non-specified employees.
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3.9 Valuation of Various Perquisites

3.9.1 First category (All employees) I. Rent - free accommodation Rule 3(1): For this purpose, the employees are divided into two categories. They are (A) Central and State Government employees In this case, the value of taxable perquisite is equal to the license fee determined by such Government. (B) In the case of any other employee (i.e., private employee) including the employee of a foreign Government: The value of rent-free accommodation provided to a private employee by his employer has to be ascertained as follows: a. Where the accommodation is owned by the employer: (i) 15% of the salary of the employee, if the accommodation is provided in a place having a population of more than 25 lakhs as per 2001 census or (ii) 10% of the salary of the employee exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census, if the accommodation is provided in any other place, in respect of the period during which the said accommodation was occupied by the employee during the previous year. (iii) 7.5% of salary in any other places. It may be noted that in the case of an accommodation owned by the employer, the fair rent or fair rental value of the accommodation is immaterial (i.e., not to be taken into account) for the purpose of determination of the perquisite value of the rent-free accommodation provided to the employee. (Rates of salary for RFA computation have been changed for the assessment year 2008-2009)
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b. Where the accommodation is taken on lease or rent by the employer: In this case, the value of rent-free accommodation is the actual amount of lease rent or rent paid or payable by the employer or 15% of the salary of the employee, whichever is lower. In the above cases if RFA is furnished by the employer, 10% p.a. of original cost of furniture is added to the perquisites value arrived at. If the employer hires the furniture, the actual hire charges paid by the employer must be considered. 'Furniture' for this purpose includes television sets, radio sets, refrigerators, air-conditioners and other household appliances. 'Salary' for this purpose, includes:(i) Basic salary, (ii) dearness pay, (iii) dearness allowance, if it enters into the computation of retirement benefits (If dearness allowance does not enter into the computation of retirement benefits, it should not be included in the term 'salary' for this purpose), (iv) fee (v) commission, (vi) bonus, (vii) taxable portion of all taxable allowances (except D.A.).The value of perquisites specified u/s 17(2) shall never be included. Format 1: Rent Free Accommodation a) Accommodation owned by the company:
1) 7.5%/10%/15% Basic Bonus Fee Commission Taxable allowance 7.5 % or 10% or 15% 2) 10%of cost of furniture or hire charges Taxable RFA XX XX XX XX XX XX XX +X X XX
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Format 2: Rent Free Accommodation b) Accommodation Rented by the employer

15% of Salary: Basic Bonus Fee Commission Taxable allowance Salary 15% of salary Rent paid by co, (whichever is less) 2) (+) 10% of cost of furniture or hire charges Taxable RFA XXX XXXX XXXX XXX XXX XXX XXX or XXX XXX +X X X XXX
Problem 2: From the following information compute rent free accommodation provided to an employee. Basic 10,000 p.m., DA 2,500 p.m., commission Rs. 15,000, Bonus 2 months basic, CCA Rs.1, 000 p.m., Traveling allowance Rs.500 p.m. ( 80%) Used for official Purposes), cost of furniture provided to the accommodation 20,000 (population of the city is 6,00,000). Solution: Computation of Taxable RFA
7.5% of Salary Basic (10,000 x 12) Bonus Commission Travelling allowance CCA (1000 x 12) 7.5% of salary (+) 10% of cost of furniture hire charges (10% of 20,000) Taxable RFA 1,20,000 20,000 15,000 1,200 12,000 168200 12,615 + 2,000
14,615
Note: DA should not be taken as it is not given for retirement benefits

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II. Accommodation at concessional rent Rule17 (2) (ii)): If an employer provides an accommodation to his employee at a concessional rent, the value of concession in the rent of such an accommodation has to be calculated as follows: The value of the accommodation provided by the employer at a concessional rent has to be calculated, as if it is a rent-free accommodation. Then, from that value, the actual rent paid by the employee for the accommodation should be deducted. The resulting balance should be treated as the value of the concession in the rent of the accommodation provided at a concessional rent. Problem 3: (Taxable Rent Free Accommodation) Compute Taxable RFA with the below given information Basic 10,000 p.m., DA 2,000 p.m. (40% is considered for retirement benefit), Bonus-1 month basic, Entertainment Allowance Rs. 500 p.m., Medical allowance RS. 1,000 p.m. The cost of furniture is Rs. 50,000 whereas the company pays Rs. 500 p.m. as hire charges. The company pays Rs. 2,000 p.m. rent to the accommodation. Solution: Computation of taxable Rent Free Accommodation
15% of Salary Basic DA Bonus Commission Entertainment allowance Medical allowance 15% of salary 26,640 less Rent paid by co, (2000 X 12) 24,000 (Whichever is less) (+) 10% of cost of furniture hire charges (500 X 12) Taxable Rent Free Accommodation 1,20,000 9,600 10,000 20,000 6,000 12,000 1,77,600
24,000 + 6,000 30,000
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Problem 4: Assume in the Previous problem employee is paying a rent of Rs 1,000 p.m. Compute taxable Accommodation. Solution: Taxable Accommodation at Concession
15% of Salary 1,77,600 (As valued in previous problem) Rent provide by co. (2,000 X 12) Hire charges (500 X 12) 6,000 30,000 ( -) Rent paid by employee (1,000 X 12) Taxable Accommodation at Concession -12,000 18,000 26,640 Or 24,000 Less 24,000
Credit Card Rule 3 (7)(v): In respect of credit card, the amount of expenses including membership fees and annual fees incurred by the employee or any member of his household, which is charged to credit card (including any add-on-card) provided by the employer or otherwise paid or reimbursed by the employer, will be the value of perquisite chargeable to tax. It is chargeable in the hands of all employees, whether specified or not. Free Loan or Concessional Loan Rule 3 (7) (i): The value of the benefit to the employee on account of interest-free or concessional loan made available to him or any member of his household will be equal to simple interest computed at the rate of 10% per annum in respect of housing loans and conveyance loans. In respect of other loans, it is 13%p.a. Value of Gift Rule 3 (7): The value of any gift or voucher, token in lieu of which such gift may be received by the employee or by any member of his household on
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ceremonial occasions or otherwise will be the sum equal to the amount of such gift. However, if the value of such gift, voucher or token is below Rs. 5,000 in the aggregate during the previous year, the value of the perquisite will be taken as nil. If it is Rs. 5,000 of more, the entire value is taxable. 3.9.2 Second Category (Specified Employee) 1. Gas, electricity or water supply for the household consumption [Rule 34): If the supply of gas, electricity or water is from employer's own sources, the actual manufacturing cost (per unit) incurred by the employer will be the value of perquisite. If the supply of gas, electricity or water is from any outside agency, the amount paid by the employer to the outside agency supplying the gas, electricity or water will be the value of perquisite. 2. Perquisite in respect of Education Facilities Rule 3 (5): The valuation of free education provided by the employer to employees children or any family members, to be included in the salary income of the employee, will be as follows: The value of perquisite in respect of free or concessional educational facilities provided to any member of the household of the employee will be the amount of expenditure incurred by the employer. However, if the cost of such education or the value of such benefit per child does not exceed Rs. 1,000 per month, per child it is fully exempt. 3. Domestic servants: Rule (3) (3) The value of benefit to the employee or any member of his household resulting from the provision of service of a Sweeper, Gardner, Watchman or any other servant by the employer is the actual cost to the
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employer. The salary borne by the employer as reduced by the amount paid by the employee for such service is taken as PV. 4. Free Transport Facility: Rule 3(6): The value of perquisite in respect of transport facility provided by an undertaking engaged in the carriage of passengers or goods to any employee or to any member of his household for personal or private journey free of cost or at a concessional fare in any conveyance owned, leased or made available by any other arrangement will be the value at which such benefit is offered by such undertaking to the public. This perquisite will be taxed in the hands of only specified employee. Perquisites taxable u/s 17(2)(iv): some times the employer may meet the liability of his employee. Then it is taxable under this section. Following are some examples: i) Payment of salary of the servant employed by the employee. ii) Legal expenses incurred to save or defend the employee. iii) Expenses incurred by the employer on contesting the election for Parliament, legislative assembly etc. by his employee. V. Tax free perquisites: Perquisites are, generally, taxable. However, there are certain perquisites which are tax-free, and so, are not taxable in the hands of any employee. The perquisites, which are not taxable in the hands of any employee, are: 1. Tax-free medical facilities Tax-free medical facilities include the following: (i) Free medical aid provided to the employee or his family members in hospitals, clinics or nursing homes maintained by the employer. (ii) Any sum paid by the employer, or reimbursement, by the employer, of the medical expenses incurred by the employee for himself or for the members of his family in hospitals, dispensaries, clinics or
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nursing homes maintained by the Government or local authority, or in a hospital approved under Central Health Scheme or a similar scheme of the State Government for the treatment of its employees. (iii) Any sum paid by the employer or reimbursement by the employer of the medical expenses incurred by the employee for himself or for the members of his family in respect of specified diseases in any hospital approved by the Commissioner of Income-tax. (This perquisite is fully tax-free.) In this case, a certificate from the
approved hospital, specifying the prescribed disease or ailment for which medical treatment was required, and the receipt for the amount paid to the hospital should be attached with the return of income. (iv) Payment or re-imbursement of premium on health insurance of the employee or any member of his family under Section 80D of the Income-tax Act. (This perquisite is fully tax-free.) (v) Reimbursement, by the employer, of the amount spent by the employee in obtaining medical treatment for himself or for his family members from any private hospital or doctor, not exceeding Rs. 15,000 in a year. (vi) Any expenditure incurred by the employer on medical treatment of the employee or any member of employees family outside India and on the cost of travel of the patient and one attendant and cost of stay abroad for the patient and one attendant staying with the patient are exempt subject to the conditions that (i) the expenditure on medical treatment and stay abroad will be exempt only to the extent permitted by the Reserve Bank of India and (ii) the expenditure on travel is exempt only in the case of an employee whose gross total income before including this expenditure does not exceed Rs. 2,00,000.
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2. Free refreshment 3. Subsidized lunch or dinner 4. Telephone bills. 5. Recreational facilities. 6. Refresher courses. 7. Free ration to defense personnel 8. Family planning Expenses 9. Perquisites of Govt. employees posted abroad; 10. Rent free house to High court and Supreme Court Judges. 11. Telephone bills for the telephone installed at the residence of the employee and mobile phone bills paid by the employer. It may be noted that this perquisite is tax-free even if the telephone is used by the employee partly for his private purposes. VI. Fringe benefits or amenities Sec.17 (2) (vi) In terms of provisions contained in sub-clause (vi) of sub-section (2) of section 17 the following other fringe benefits or amenities are prescribed under Rule 3(7) and the manner of valuing such benefits or amenities are also provided. In computing the value of any such fringe benefit or amenity, the amount paid or recovered or borne by the employee or member of his household, as the case may be shall be reduced and only the balance value shall be charged to tax as perquisite. 1) The value of benefit to the employee on account of interest free or concessional loan for any purpose made available to him or any member of his household shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India (SBI) as on the first day of the relevant in respect of loans for the same purpose advanced by it. The rates of interest for various loans advance by SBI as on 01-04-2005 relevant to the 2007-08 are as follows:
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The interest calculation shall be with reference to maximum outstanding monthly balance. For this purpose, maximum outstanding monthly balance means the aggregate outstanding balance for each loan as on the last day of each month. No value would be charged as a perquisite if the loan is available for medical treatment in respect for the diseases specified in Rule 3A or where the amount of loans in the aggregate does not exceed Rs. 20,000. However, if the employee gets reimbursed under any Medical Insurance Scheme for the treatment in respect of which any such loan has been availed, then the benefit of this exemption shall not apply to such loan amount.
CBDT vide Circular No. 15 dt. 12-12-2001-253 ITR 1 (St.) has clarified that for the purpose of his Rule housing or conveyance loans must be for acquiring capital assets, i.e., house or conveyance, as the case may be, and not for repairs thereof, however extensive they may be. For valuing perquisites under this rule, any other method of calculation and adjustment otherwise adopted by the employer shall not be material.
2) If any moveable asset owned or hired by the employer is used by the employee or any member of his household, 10% per annum of the actual cost of such asset or the amount of hire charges incurred by the employer shall be the value of perquisite. This does not apply to assets already covered above and it also does not apply to laptops and computers.
It may be noted that motor cars provided by the employer to his employee cannot be classified as movable asset for the purpose of this Rule. The new scheme of Fringe Benefits levis tax in respect of motor car in the hands of the employer. Therefore, the provision of motor car will not be taxed again in the hands of the employee under this Rule.
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3) If the employer transfers any moveable asset directly or indirectly to the employee or any member of his household, the amount determined by reducing the actual cost of such asset by 10% for each completed year of usage for normal wear and tear shall to taken as the value of perquisite. In the case of computers and electronic gadgets, the normal wear and tear shall calculated at the rate of 50% and in the case of motor cars at the rate of 20% by the reducing balance method.
Students may note that the employee shall be subject to tax only in respect of various perquisites discussed above. In case any other benefit or amenity, service, right or privilege provided to the employee, it shall be covered by the scheme of fringe benefit tax and thereby, subject to tax in the hands of the employer.
3.10 Provident Funds

Meaning of Provident Fund: Provident means to provide for the future. So, a provident fund is a fund, which provides for the future of the employees. It is a fund, which gives retirement benefit to the employees. Kinds of Provident Funds: There are four types of provident funds. They are: 1. Statutory Provident Fund (S.P.F.) 2. Recognised Provident Fund (R.P.F.) 3. Unrecognized Provident Fund (U.R.P.F.) 4. Public Provident Fund. (P.P.F.) 5. Approved Superannuating Fund (A.S.F.). For provident fund contribution, salary includes only basic salary. But if the terms of employment so provide, D.A. also will be included in salary. Again, if commission is paid as a fixed percentage of turnover or
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sales achieved by the employee, then, commission also will be included in salary. 1. Statutory Provident Fund (S.P.F.): Statutory provident fund (also known as Government provident funds) are provident funds, which are governed by the Provident Funds Act of 1925. Government provident funds are also included in this category. The statutory provident funds are maintained by Government
departments, semi-Government institutions, the Reserve Bank of India, the State Bank of India and it subsidiaries, the nationalized banks, railways and statutory corporations, insurance companies, local bodies, universities, colleges and all recognised educational institutions. The important income-tax provisions relating to statutory provident funds are: a) Employees contribution to this provident fund is included in the salary income of the employee. b) Employers contribution to this provident fund is exempt from tax c) Interest earned on this provident fund is also exempt from tax d) Employees own contribution to this provident fund is qualified for deduction under Section 80Cof the Income-tax Act. 2. Recognised Provident Fund (R.P.F.): Provident funds which fulfill the conditions laid down in Part A of IV Schedule of the Income-tax Act of 1961 and are recognised by the CIT are called recognised provident funds. Provident funds to which the Employees Provident Fund Act of 1952 applies are also included in this category. The recognised provident funds are maintained by industrial undertakings, trading firms, scheduled banks etc. The important income-tax provisions relating to recognised provident funds are:
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a) Employees contribution to this provident fund is included in the salary income of the employee. b) Employers contribution to this provident fund is exempt from tax upto 12% of the salary of the employee. c) Interest earned on this provident fund is exempt from tax upto 9.5% per annum. d) Employees own contribution to this provident fund is qualified for deduction under Section 80Cof the Income-tax Act 3. Unrecognised Provident Funds (U.R.P.F.): Unrecognised provident funds refer to all those provident funds, which are not recognised by the CIT. Usually they are maintained by private industrial and commercial undertakings. The important income-tax provisions relating to unrecognised provident funds are: a) Employees contribution to this provident fund is included in the salary income of the employee. b) Employers contribution and interest to this provident fund is exempt from tax, c) When URPF is converted in to RPF, employers contribution and the interest accrued on the employers contribution is charged to tax under the head Salaries. Interest accrued on the employees contribution is charged to tax under the head Income from Other Sources. d) Employees contribution to this provident fund is not qualified for deduction under Section 80C of the Income-tax Act. 4. Public Provident Fund (P.P.F.): Public provident fund was established as per the provisions of the Finance Act of 1968. It came into force with effect from 1st July 1968. It
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is mainly intended for the benefit of selfemployed persons, such as lawyers, doctors, chartered accountants, management consultants, etc. Though this provident fund is mainly intended for the benefit of the selfemployed persons, it is open to any member of the public irrespective of the vocation (i.e., occupation) practiced by him. The important income-tax provisions relating to public provident funds are: a) There is no question of employers contribution to this provident fund. b) Interest accrued on this provident fund every year is exempt from tax, and so, it is not included in the income of the assessee. c) Refund of the accumulated balance from this provident fund to the subscriber at maturity is exempt from tax, and so, it is not included in the income of the assessee. d) Employees own contribution to this provident fund is qualified for deduction under Section 80Cof the Income-tax Act 5. Approved Superannuation Fund (A.S.F.): Superannuation funds are funds created for the purpose of providing pension or retirement benefits to employees. Superannuation funds which are maintained in conformity with the rules laid down in Part B of IV Schedule of the Income-tax Act and approved by the Commissioner of Income-tax for the purpose of Income-tax Act are called approved Superannuation funds. The important income-tax provisions relating to this fund are: a) Employees contribution to this fund is included in the salary b) Employers contribution to this fund is exempt from tax, c) Interest earned on this fund is also exempt from tax, d) Employees own contribution to this provident fund is qualified for deduction under Section 80Cof the Income-tax Act.
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Problem 10: (Taxable provident fund) From the following information compute taxable provident fund. a) Basic Rs. 1,00,000. b) DA Rs. 500 p.m. (20% enters into retirement benefits) c) Employee is contributing 13% of his salary to RPF whereas company is contributing 15% of salary. d) Interest credited there on at 15% is 7,500. Solution: Working note: Salary = Basic + DA = 1,00,000 + (500 X 12 X 20%) = 1,00,000 + 1,200 = 1,01,200
Taxable R P F Employers contribution above12%of salary. I.e., 3% (1,01,200) Interest on RPF above 9.5% p.a. (15 9.5) (7500 X 5.5/15) 2,750 5,786 3,036
3.11 Allowable Deductions under the Head Salaries as per Section 16

While computing the taxable income of an assessee under the head Salaries, certain deductions have to be made from gross salary. The deductions are provided under the Section 16 of the Income-tax Act of 1961. The various deductions provided under Section 16 of the Income-tax Act are: 1. Deduction for Entertainment Allowance: (Section 16 (ii): This allowance is initially included in salaries and later deductible in the hands of Government employee
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The deduction permissible in the case of a Government employee is the lowest of the following amounts: i) Rs. 5,000 or ii) 1/5th of salary or iii) Actual entertainment allowance received 2. Employment Tax or Profession Tax (Section 16 (iii): As per Section 16 (iii) of the Income-tax Act, any amount paid by an assessee as employment tax or profession tax is deductible from gross salary of the employee. Note: Standard deduction Section 16(i) has been withdrawn.
3.12 Illustrations
Problem 11: (Taxable RFA) Mr. LALITH informs you the particulars of salary for ending 31-3-2008: Basic pay Rs. 36,000; DA Rs. 4,800; (not forming part of salary) Bonus Rs. 6,000; Commission Rs.4,000; City Compensatory Allowance Rs. 3,600. Calculate the value of perquisite in respect of rent free furnished house if Mr.Lalith stay in a city with a population (a) 12 lakhs (b) 8 lakhs. Cost of steel furniture provided Rs. 16,000 (WDV is 12,000) Monthly rent of other furniture Rs.300. Solution: Computation of rent-free accommodation:
Salary for this purpose: = Basic + Bonus+ Commission + City compensatory allowance 36,000 + 6,000 + 4,000 + 3,600 = 49,600
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a) Where the Population 12 lakhs: Value of rent free unfurnished accommodation = 10% of salary = 10% of Rs. 49,600 = Rs. 4,960 b) Where the Population 8 lakhs: Value of rent free unfurnished accommodation = 7.5% of salary = 7.5% of Rs. 49,600 = Rs. 3,720 Value of furnished accommodation:
a) Particulars Population 12 lakhs Rs. Value of unfurnished accommodation as computed above Add. Perquisites for value of furniture 4,960 5,200 3,720 5,200 b) Population 8 lakhs Rs.
provided [(10% of Rs. 16,000) + (300 x 12)] Total value of furnished accommodation 10,160 8,920
Note: The word salary for the above computation includes Bonus, Fee, Commission and Taxable allowances. DA is excluded as it doesnt enter into retirement benefits. We have to consider 7.5% salary in city area the population does not exceed 10,00,000 and we have to take 10% of salary in cities having population exceed 10,00,000.
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Problem 13 (Simple Problem): Mr. DAMODAR is an employee of gas Supply Company at Bangalore. He gives you following information for the previous year: 1) Basic salary Rs. 16,000 per month. 2) DA 1,000 p.m. (Rs. 100 p.m. enters into retirement benefits.) 3) Family allowance Rs.300 p.m. 4) City compensatory allowance Rs. 300 p.m. 5) Education allowance for 2 children at Rs. 150 p.m. per child. 6) Hostel allowance for 2 children at Rs. 400 p.m. per child. 7) Entertainment allowance Rs. 700 per month. 8) House rent allowance Rs. 1,200 p.m. but he pays Rs. 2,000 p.m. as rent for accommodation secure by him. 9) Company has provided a free telephone at his residence by meeting the expenses of Rs. 5,000 p.a. 10) He is allowed to motorcar of Rs. 1.6 C.C. for all office purposes. 11) Reimbursement of medical expenses incurred by him was Rs.16, 000. 12) Conveyance allowance of Rs. 5,000 p.a. for visiting branches. 13) Provisions of the following servants and they are paid by the company watchman Rs.1, 100 p.m.; Sweeper Rs. 800 p.m.; Gardner Rs. 600 p.m.; Cook Rs. 750 p.m. 14) Company has contributed to his Recognised provident fund account 13% of Damodars Salary and has credited Rs. 28,000 as interest at 10% p.a. Compute taxable salary
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SOLUTION : Computation of income from salary (AY 2008-2009) I. Basic (16,000 x 12) DA (1,000 x 12) Family allowance (300 x 12) C.C.A. (300 x 12) Education allowance (150 x 12 x 2) Exempt: (100 x 12 x 2) Hostel allowance (400 x 12 x 2) Exempt (300 x 12 x 2) Entertainment allowance (700 x 12) Conveyance allowance II. HRA: HRA received (1,200 x 12) Least of the following is exempt 1. Actual HRA Received (1,200 x 12) 2. Rent allowed 10% of salary (2,000 x 12 ) ( 10% of 1,93,200) 24,000 19,320 3. 40% of salary ( 40% of 1,93,200) 1,92,000 12,000 3,600 3,600 3,600 2,400 9,600 7,200 1,200 2,400 8,400 Exempt
2,23,200
14,400 14,400
4,680 77,280
4,680
9,720
III. Provident Fund: RPF Contribution by employer Above 12% of salary. i.e., 1% of salary (1% of 1,93,200) Interest on RPF above 9.5%p.a. (28,000 X 0.5/10) 10 28,000 0.5 -? IV. Perquisites: 1) Rent free accommodation 2) Accommodation at concession 3) Special Perquisites a.Watchman (1100 x 12) b.Sweeper (800 x 12) c. Gardener (600 x 12) d. Cook (750 x 12) 4) Exempted Perquisites a.Medical facility (Pvt. Hospital) (Exempted upto 15,000) b.Telephone bill Gross salary (-) Deductions b.16 (II) Entertainment allowance c.16 (III) Professional tax or employment tax Taxable salary Sikkim Manipal University
1,932
+ 1,400
3,332
13,200 9,600 7,200 9,000
39,000
1,000 Exempt 2,76,252 NIL NIL
NIL 2,76,252 Page No. 122
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Note: 1. Since DA is included for retirement benefits, the word salary means basic + DA for computation of HRA and provident funds = (1,600 X 12) + (100 X 12) = 1,92,000 + 1,200 = 1,93,200 2. Education allowance is exempt upto100 p.m. per child upto 2 children. 3. Hostel allowance exempt upto Rs. 300 p.m. per 2 children 4. Deduction of entertainment allowance is not available for non-govt. employee. 5. Unless and otherwise stated we have to assume that the medical treatment was done in private hospital and hence exemption can be claimed upto Rs. 5,000. 6. Conveyance allowance for visiting branches fully exempt since it is related to official purposes. Problem 14: (PF Options) Mr. NAYAK is an employee posted at Mangalore. He furnishes the following particulars regarding his income. i) Salary at Rs. 10,000 p.m. ii) DA at Rs. 3,000 p.m. (50% enters for service benefits) iii) He is provided with a car of 1.4 C.C. with chauffeur for his official and private purposes but recovered from his Rs. 500 p.m. iv) Commission Rs. 20,00,000. v) He is provided with a rent- free furnished house and the employer pays Rs. 4,500 p.m. for the house and Rs. 500 p.m. for the furniture. vi) The employee contributes 14% of his salary towards his provident fund and the his employer is contributing the same amount. Interest created during the year @ 14% being Rs. 7,000.
on
turnover
achieved
by
Mr.
Nayak
2%
of
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vii) He paid Rs. 28,000 as Life Insurance Premium on his life. Compute his salary income if Provident fund is: A) Statutory Provident Fund B) Recognised Provident fund C) Unrecognized Provident Fund Solution:
Computation of income from salary Particulars 1) Basic (10,000 X 12) DA (3,000 X 12) Commission (2% of 8,00,000) Provident fund RPF contributed by employer above 12% of salary 2% of salary (2% of 1,54,000) Int. on RPF above 9.5% p.a. (7,000 x 4.5/14) Perquisites RFA 15% of salary (15% of 1,54,000) or rent paid whichever is less Hire charges (500 X 12) 2) Car Fringe Benefit Gross salary (-) Deductions PF contribution U/s 80C Taxable salary 1,72,000 3,080 2,250 1,77,330 172,000 SPF 1,20,000 36,000 16,000 1,72,000 RPF 1,20,000 36,000 16,000 1,72,000 URPF 1,20,000 36,000 16,000 1,72,000
23,100 6,000 NT 2,01,100 21,560 1,79,540
23,100 6,000 NT 2,06,430 21,560 1,84,870
23,100 6,000 NT 2,01,100 NIL 2,01,100
Note: 1) The word salary means Basic + DA (50%) + commission for PF, RFA computations. (1,20,0000 +18,000 + 16000 = 1,54,000) 2) Companys contribution towards SPF and URPF are to be ignored for taxable salary.
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3) Since the company rents the accommodation we have to consider 10% of salary or actual rent paid whichever is less. 4) Free use of Car is taxable in the hands of employer as fringe benefit under Fringe benefit tax. Hence it is not chargeable to employee. Problem 15: (Taxable RFA & Deduction u/s 80C) Compute total income of Mr. ABHAYACHANDRA from the following particulars: (Population of the city is more than 10 lakhs) Basic pay Rs. 10,200 p.m., Dearness allowance Rs. 3,000 p.m, Bonus. 2 month basic, Commission Rs. 8,000 Entertainment allowance Rs. 200p.m.; medical allowance Rs. 100 p.m. Deputation allowance Rs. 500 p.m. Education allowance Rs. 150 p.m. per child for three children. He has been provided with rent-free accommodation, the fair rental value of which is Rs. 40,000. The cost of furniture provided is Rs. 18,000. He contributes 13% of his salary to the recognised provident fund to which his employer contributes Rs. 14,000 p.a. Interest credited on P.F. balance at 13% p.a. amounted to Rs. 26,000. He has provided been with free service of a gardener, a watchman and cook who are paid Rs. 200, Rs.150 and Rs. 80 p.m. respectively. He has provided with free use of 1.8 cc car for both official and private purposes. The company meets all the expenses of its official use. During the year he deposited Rs. 6,000 in N.S.S., invested Rs. 4,000 in ELSS of UTI. Paid Rs. 3,500 as insurance premium on own life policy of Rs. 50,000.
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Solution: Computation of Total Income

I. Basic (10,200 X 12) D A (3,000 X 12) Bonus (2 month basic) 10,200 X 2 Commission Entertainment allowance (200 X 12) Medical allowance (100 X 12) Deputation allowance (500 x 12) Education allowance (150 X 12 X 3) 5,400 (-) Exempt II. Provident fund RPF contribution by employer above 12% of salary. 14,000 (-) 12% of (1,22,400) Interest on RPF above 9.5% p.a (26000 X 3.5/13) III. Perquisites 1) RFA a) 15% of salary Basic Bonus Commission EA MA Dep. All. Education Allowance 1,22,400 20,400 8,000 2,400 1,200 6,000 3,000 1,63,400 b) 10% of cost of Furniture (10% of 18,000) 2) Accommodation at concession 3) Special perquisites a) Motor car (used for both purposes) FBT b) Gardner Sikkim Manipal University 200 X 12 NT 2,400 Page No. 126 24,510 1,800 26,310 Nil -14,688 Nil 7,000 7,000 (100 X 12 x 2) 2,400 3,000 1,99,400 1,22,400 36,000 20,400 8,000 2,400 1,200 6,000
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c) Watchman d) Cook Taxable Salary (GTI) Less: Deduction u/s 80C
150 X 12 800 X 12
1,800 960 5,160 2,37,870 15,912 6,000 4,000 3,500 29,412 2,08,458
RPF by employer (13% of basic i.e., 1,22,400) N.S.S. ELSS of UTI LIC premium (own life) Taxable Income
Note: For the computation of RPF, salary means only basic. For the computation of Rent Free accommodation the word salary means Basic, Bonus, commission and all taxable allowances (except DA) Employees contribution to PF is eligible for Section 80C. Medical allowance is fully taxable where medical facility is exempt upto Rs. 15,000 Free use of Car is taxable in the hands of employer as Fringe benefit under Fringe benefit tax. Hence it is not chargeable to employee. Problem 16: (Net salary) JAYDEV of Mysore provides the following particulars: a) Net salary (after deducting income tax Rs. 4,700 professionals tax Rs. 800 and RPF contribution Rs. 10,000) Rs. 82,000. b) Employers contribution to RPF Rs. 10,000 c) Interest on RPF at 13% p.a Rs. 5,200 d) HRA received Rs.3000 per month e) Actual rent paid for the house Rs.4000 per month. f) Bonus Rs. 8,000
g) Education allowance Rs. 150 p.m. per child for two children.
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h) Family allowance Rs. 200 p.m. i) j) Conveyance allowance Rs. 600 p.m. (actual amount spent Rs.450 p.m.) Reimbursement of medical expenses for treatment in private hospital Rs. 18,000 k) Payment of club bills by the employer Rs. 500 per month. He also donated Rs. 200 to the local school for building construction. Compute taxable salary Solution: Computation of Taxable Salary
I. Basic (82000+4700+800+10000) Bonus Education allowance (150X12X2) = - Exemption Family Allowance (600-450) II. H.R.A. HRA received (750X12) Least of the following is exempt 1. HRA received (750X12) 2. Rent above 10% of salary (8000X12) 10% of 97500 9600- 9750 3. 40% of salary (40% of 97500) III. P.F Employers contribution above 12% of salary 12% of salary 12% 97500 10,000 11,700 1,400 1,400 NIL 39000 Nil NIL 9,000 9000 (100X12X2) = (200X12) 3600 2400 1,200 2,400 1,800 1,10,900 97,500 8,000
Conveyance allowance (150X12)
9,000
Int. on RPF above 9.5% p.a (5200X3.5 /13)
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IV. Perquisites 1) RFA 2) Concessional Rent 3) Special Perquisites 4) FBT 5) Tax free Perquisite Medical Facility (Pvt.hospital)(18000 15000) Gross Salary Less: Professional Tax Taxable salary 3,000 3,000 1,24,300 800 1,23,500 NIL NIL NIL NIL
Note: 1) We have to add back all the deductions made to arrive Basic Salary. 2) Donation to local school is available for deductions u/s 80, but not under salary. 3) Unspent Conveyance allowance is taxable since it is used for private purposes. 4) The word salary for HRA and PF calculations means Basic only i.e. 97500 Problem 17: (URPF conversion) Smt. ARATHI ROY is working as the manager of AMP Co. Ltd Mangalore. She furnishes the following particulars of her income: a) Net salary Rs.81000 after deduction of Rs.4500 for income tax, Rs. 8200 as contribution to the PF, Rs. 6000 as rent of the bungalow and Rs.2500 as LIC premium. b) Bonus Rs.8200 c) Traveling allowance Rs. 12000 (Actual amount spent for traveling Rs.9000)
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d) Reimbursement of medical expenses. Rs. 8000 but actual amount spent for medical treatment being Rs. 10000 e) She lived in a bungalow, owned by the company. The Fair rental value of the bungalow is Rs.12000 p.a. The company also provided a gardener and a cook, the salary paid p.m. being Rs.200 and Rs100 respectively. The company paid Rs.2000 as electricity charges and Rs.500 as water charges. f) She was a member of URPF. On 1st Dec the PF was recognised by the CIT and the balance in URPF of Rs.30000 (including Rs.8000 towards interest) was transferred to RPF. The co. contributes an equal amount to the PF. g) Two of her children are studying in a school and the company reimbursed the school fees of Rs.20000. h) During the previous year she paid Rs.12000 as the installment of the loan taken for the house construction. i) Professional tax paid by her during the year Rs.540.
City population is less than 10 lakhs. From the above compute her Taxable Salary. Solution: Assessee: Smt. Arathi Roy Computation of Total Income for A.Y. 2008-2009
Net Salary Income tax Provident Fund Rent of bungalow LIC Premium Basic Salary Bonus Traveling Allowance (12000-9000) 81000 4500 8200 6000 2500 Rs. Rs.
102200 8200 3000
113400
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PF Employers contribution to URPF and Interest there on is taxable X 30,000 RPF 1) RPF contribution by company above 12% of salary (4m) (8,200 x 4/12) = 2,733 -12% (1,02,200) 4/12 = (4,088) 2) Interest on RPF Perquisites: Accommodation at concessional rent: 7.5% of salary Basic 1,02,200 Bonus 8,200 Taxable T.A. 3,000 7.5% 1,13,400 - Rent Paid by the employee Special Perquisites Electricity & water Gardner (200 x 12) Cook (100 x 12) Free education 20,000 - Ex. 1000x 12 x 2 - 24,000 Exempted perquisites Medical facility (Exempt upto 15,000) Gross salary - Deductions 1) Professional tax Taxable salary
15,000
15,000
Nil Nil
Nil
8,505 6,000 2,500 2,400 1,200
2,505
Nil Nil 6,100 1,37,005 540 1,36,465
Note: 1) Since URPF is converted into RPF during the year P.Y. employers contribution and interest thereon on URPF balance is fully taxable. 2) On 1 Dec PF was recognised. Hence RPF contribution by employer above 12% of salary is taxable for 4 month (1 Dec. to 31 Mar.). Interest on RPF cannot be calculated for part of the year. 3) Unspent traveling allowance is taxable 4) Education facility is exempt upto Rs.1000 p.m. per child.
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5) Since employee is receiving the salary after deduction of rent of the bungalow, rent of the accommodation has been paid by employee. That is why the accommodation is related to concessional rent. It is to be valued as if it is rent free, later, rent paid by the employee is to be deducted. Problem 18: (Fringe benefits: Motor car, free meal etc., interest free loan for home appliances and RFA) Mr. Anil (age: 42 years) receive the following incomes during the year ending March 31, 2007: Salary (@ Rs. 12,500 for 12 months) 1,50,000 Leave travel concession for preceding on leave (actual expenditure on rail fare: Rs. 4,100) 3,800. Tiffin allowance (actual expenditure: Rs. 2,700) 4,000. Reimbursement of ordinary medical expenses for treatment of X and his family members in a private clinic Rs. 31,300 Besides, Anil enjoys the following perks: Free unfurnished flat at Delhi (rent paid by employer: Rs. 80,000). The employer provides two watchmen (salary Rs. 700 per month per person). Free use of Maruthi 800 for official purpose. Car can also be used for journey between office and residence and back and for other domestic purposes (long-book is not maintained by the employer). Free meal (at the place of work): Rs. 14,700 (i.e., Rs. 70 per day for 210 days, amount is directly paid canteen by the employer). Interest-free loan for purchasing home appliances (amount: Rs. 1,20,000: date of taking loan: March 1, 2002. Amount outstanding between April 1, 2005 and November 30, 2005: Rs. 76,000 and after November 30, 2005
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Rs. 50,000). The SBI lending rate for similar loan on April 1, 2005 is 12.75 %. Though the salary falls due on last day of each month, salary of March 2006 is received on April 15, 2006. Determine the taxable income of Mr. Anil Solution: Computation of taxable salary for the AY 2008 2009
Salary Basic Leave Travel concession Tiffin allowance PF Perquisites: a) RFA 15% of salary 1,54,000 Or Rent paid 80,000 (whichever is less) Medical facility 31,300 Less exempt 15,000 Watchman (700X12X2) Interest on free loan 76,000X 12.75%X8/12 = 6,460 50,000X12.75%X4/12 = 2125 Fringe benefits Car and free meal Taxable salary (GTI) Less deduction u/s 80C Taxable income Rs. 1,50,000 Exempt 4,000 Rs.
1,54,000 Nil
23,100 16,300 16,800
8,585 Nil Nil
64,785 2,18,785 Nil 2,18,785
Note: Free Car and meals are taxable in the hands of employer as fringe benefits under Fringe Benefit Tax. Hence it is not chargeable in the hands of employee. Since the accommodation is rented by the employer 20% of the salary or actual rent paid whichever is less should be taken as perquisite value. The word salary means basic and taxable allowance. Tiffin allowance is fully taxable.
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Interest free loan offered is a perquisite to the extent of benefit. Leave travel concession is exempt from the tax.
II. Self Assessment Questions (SAQ 2) 1) Statutory limit for exemption of an employee covered under payment of gratuity Act 1972 is ______________________. 2) According to sec 17(2), _____________ means any casual emoluments, fee or profit attached to an office or position. 3) A Government employee received E.A of Rs. 500 pm, Basic Rs. 50,000 pa. Permissible deduction is ____________________. 4) Employers contribution to SPF is fully exempt in the hands of employee. (T/F) SALARY AT GLANCE
IMPORTANT POINTS REGARDING 'INCOME FROM SALARIES A) B) ALLOWANCES HRA BASIC, BONUS, COMMISSION AND OTHERS ADVANCE SALARY FEES ARREARS OF SALARY TAXABLE GRATUITY TAXABLE PENSION TAXABLE ENCASHMENT EARNED LEAVE
C) PROVIDENT FUNDS D) PERQUISITES RENT FREE ACCOMADATION ACCOMADATION AT CONCESSION SPECIAL PERQUISITES SUPPLY OF GAS, WATER OR ELECTRICITY MOTOR CAR EDUCATION FACILITY Sikkim Manipal University Page No. 134
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SERVANT FREE OR CONCESSIONAL TRANSPORT FACILITY PERSONAL LIABILITY PAID BY THE EMPLOYER EXEMPTED PERQUISITES FRINGE BENEFITS NOT TAXABLE. E) DEDUCTIONS
III. Self Assessment Questions (SAQ 3) 1. According to Sec 17 (2), ___________ means any casual emoluments, fee or profit attached to an office or position. A. Allowance B. Perquisites C. Bonus D. None of the above 2. Compute taxable educational allowance and hostel allowance.
Education Allowance for 2 children Rs. 2400 (including both children). Hostel Allowance for 1 child Rs. 4000 A. Rs. 1,200 and Rs. 400 B. Nil and Nil C. Rs. 1,200 and Rs. Nil D. Nil and Rs. 400 3. Reimbursement of medical bill is exempt upto Rs. __________ (if treatment done in Private Hospital). A. 10000 B. 20000 C. 15000 D. 30000 4. Transport allowance is exempt from tax to the extent of Rs. ______ per month. A. 300
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B. 400 C. 1,500 D. 800 5. RFA is to be considered at ________ % of salary (city population is 6 lakhs). A. 50% B. 10% C. 15% D. 7.5% 6. Mr. D is an employee of a gas supply company at Bangalore. He is allowed to use one motorcar of 1.6 litre C.C. for all office purpose. Taxable perquisite value of motorcar is __________ in the hands of employee. A. Rs. 1,200 per month B. Rs. 1,600 per month C. Rs. 400 per month D. Nil 7. Education allowance is exempt up to Rs. __________ per month per child up to _____________ children. A. Rs. 400 and 2 B. Rs. 200 and 2 C. Rs. 100 and 3 D. Rs. 200 and 3 8. From the following information compute taxable provident fund. Basic Rs. 1,00,000 DA Rs. 500 p.m. (20% enters into retirement benefits) Employee is contributing 13% of his salary to RPF whereas company is contributing 15% of salary.
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Interest credited there on at 15% is 7,500 A. Rs. 5,786 B. Rs. 5,700 C. Rs. 5,000 D. None of these 9. Mr. Akash informs you the particulars of salary for ending 31-3-2008: Basic pay Rs. 36,000; DA Rs. 4,800; (not forming part of salary) Bonus Rs. 6,000; Commission Rs.4,000; city compensatory allowance Rs. 3,600.Calculate the value of perquisite in respect of rent free furnished house if Mr. Akash stay in a city with a population a) 25 lakhs b) 15 lakhs Cost of steel furniture provided Rs. 16,000 (WDV is 12,000) Monthly rent of other furniture Rs. 500. A. Rs. 12,560, Rs.11,320 B. Rs. 10,160 Rs. 8,920 C. Rs. 12,640, Rs.10,160 D. Rs.12,640, Rs. 9,800 10. Compute gross salary from the given below information for tax purpose. Basic Rs.4000 p.m. D.A. Rs.1000p.m. (Rs.100 p.m. enters into retirement benefits) Family allowance-Rs.300 p.m. City Compensatory Allowance-Rs 200 p.m. Education allowance for two children at Rs. 150 p.m. per child. Company provided a free telephone at his residence by meeting the expenses Rs. 5000. Reimbursement of medical expenses Rs.10000. Company contributed 12% to RPF a/c and has credited Rs7000 as interest at 14% p.a. A. 84450 B. 69450
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C. 39450 D. None of the above
3.13 Summary
In order to make it convenient to calculate the tax liability, the incomes are classified into five heads. They are- income from salaries, income from house property, profits or gains from business or profession, capital gains and income from other sources. Sections 15 to 17 deal with salaries. For income to be charged under this head there must be an employer employee relationship. Salary here is a very wide term which includes basic pay, pension, gratuity, leave salary, allowances, perquisites etc. The taxable amount of different allowances and perquisites must be calculated according to the rules and format given in the relevant sections.

3.14 (A) Questions 1. Explain the important points to be considered regarding salaries. 2. What are the incomes chargeable under the head salaries? 3. Explain (a) perquisite and (b) profit in lieu of salary. 4. State the mode of valuation of the following perquisites under the Income-tax rules: (a) Rent-free house, (b) Free-use of motor car. 5. What are the perquisites which are exempt from income-tax? 6. Explain the provisions of the Income-tax Act in respect of the different kinds of provident funds. 7. Explain the deductions allowed in computing the income under the head salaries.
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8. State the perquisites which are taxable in the hands of only specified employees. 3.14 (B) Exercises 1. Mr. SRIKANTH, not being covered by the Payment of Gratuity Act, 1972, retires on January 6, 2008, from Modern Automobiles Ltd. and receives Rs. 60,000 as gratuity after service of 38 years and 8 months. His salary from March 1, to December 31, was Rs. 3,000 per month. What amount of gratuity will be exempt from tax? 2. From the following particulars of Mrs. SHOBHA compute her total salary income appending notes where necessary: Rs. i) Salary Rs. 3,000 per month ii) Bonus iii) Dearness allowance iv) Entertainment allowance (she is getting it from 1.4.1977) v) Employees contribution to recognised provident fund vi) Employers contribution to recognised provident fund vii) Interest on provident fund at 9% viii) Personal expenses of Mrs. Shobas daughter met by the employer ix) Conveyance allowance for private purposes x) Rent-free unfurnished house (in Mumbai) provided by the employer, whose rental value is xi) Watchman engaged by the employer for many years for the security of the residence of Mrs. Shoba, total salary paid to him by the employer xii) Medical expenses of the employee and the free refreshment during office hrs
36,000 6,000 1,800 5,000 4,000 4,720 2,000
1,000 2,000
6,000
1,440
600
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xiii) Club bills of the assessee paid by the employer
400
xiv) Unit-linked insurance plan contribution paid by the employer 1,000 3. BHOJRAJ is the manager of a private company at Kanpur. The particulars of his salary for the previous year 2007-2008 are as under: a) Basic salary Rs. 2,500 per month. b) Dearness allowance at 20% of basic salary (considered for retirement benefits). c) Overtime allowance Rs. 1,800 for the year. d) He is provided with a car of more than 1.6 litre cubic capacity with free service of driver for office and personal use and all the expenses are met by the company. e) Reimbursement, by the employer, of medical expenses Rs. 1,800. f) He is provided with an accommodation at concessional rent, the rent of the house Rs. 2,400 per month being paid by the company, which has collected Rs. 300 per month from him. g) The employer has also provided free services of a gardener at Rs. 200 per month and a domestic servant; whose monthly wages are Rs. 300. h) He was getting Rs. 200 per month as entertainment allowance since 1954. It was raised to Rs. 500 per month on 1.4.1985. i) Profession tax paid by him Rs. 40 per month.
Compute his income from salary for the assessment year 2008-2009. 4. Mr. SAMEER is a manager of a trading company at Mysore. He furnishes the following particulars of his income for the previous year 2007-2008: a) Net salary Rs. 40,800 which is after deducting Rs. 5,000 for incometax, Rs. 4,000 as rent of the bungalow and Rs. 4,200 towards life insurance premium.
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b) Bonus Rs. 4,500. c) Travelling allowance for office duty Rs. 15,000, but the actual expenses being Rs. 12,000. d) Reimbursement of medical expenses Rs. 10,000, but the actual amount spent being Rs. 12,800. e) He lives in a bungalow belonging to the company. Its fair rental value is Rs. 18,000 per annum. A gardener and a cook were provided by the company, the salary paid to them per month being Rs. 200 and Rs. 100 respectively. The company paid Rs. 1,800 as electricity charges and Rs. 200 as water charges. f) He owns a car, but the company pays him Rs. 300 per month as conveyance allowance. g) Two of his children are studying in the school run by the company. The cost of education in a similar institution in that locality is Rs. 100 per month per child. h) He deposited Rs. 200 per month in the public provident fund. i) The company paid Rs. 2,400 as premium on the life policy of Mr. Sameer Compute his total income for the assessment year 2008-2009. 5. RAJARAM receives a gratuity of Rs. 95,000 when he retires on 23.6.2006 after a service of 34 years, 9 months and 23 days. His last drawn emoluments are as follows: Basic salary Rs. 3,600 per month. Dearness allowance Rs. 800 per month (fixed) Servants allowance Rs. 300 per month (fixed) Annual increment of basic salary Rs. 100 per month falls due on 1st January every year.
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Early in his career, Rahim had received Rs. 15,000 as gratuity from a previous employer in respect of which he enjoyed full exemption from tax. Compute the exempted and taxable part of gratuity: a) If he is covered by the Payment of Gratuity Act, 1972. b) If he is not covered by the Payment of Gratuity Act, 1972. (Refer Unit No. 2) 6. The following are the particulars of salary income of JAYANTH who is employed in Chennai for the previous year ended 31st March 2008: Basic Salary Rs. 3,000 per month Dearness allowance 50% of basic salary. Bonus 2 months basic salary. Entertainment allowance Rs. 200 per month (received only since 1.4.1994) Commission for the year Rs. 4,000 City compensatory allowance Rs. 300 per month. He has been provided with a rent-free unfurnished house owned by the employer. The fair rental value of the house is Rs. 2,500 per month. Compute his taxable salary for the assessment year 2008-2009. 7. Mr. SANJAY retired on 30th September of P.Y. and received Rs. 95,640 as earned leave encashment. He had to his credit 9 months approved earned leave. His last drawn basic was Rs. 6,500 and Dearness allowance (fixed) Rs. 1,500. Annual increment of Rs. 300 falls due on 1st July every year. Dearness Allowance was treated as part of salary for retirement benefits. Compute taxable portion of his earned leave.
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8. SURESH is getting a pension of Rs. 600 per month from a private concern. During the previous year, he got his pension commuted and received Rs. 30,000. Compute the exempted commuted pension amount, if he (a) receives gratuity (b) does not receive gratuity.
9. KESHAV is an employee of a firm at Mumbai. The details of his salary and other income are as follows: Rs. Basic pay D.A. (forming part of salary) Education allowance for 2 children Commission at 1% on sales achieved by him. The sales achieved by him Hostel allowance for one child House rent allowance His own contribution to RPF Employers contribution to RPF 1,00,000 3,600 8,000 5,000 7,000 60,000 2,400 2,400
Interest credited to accumulated balance of provident fund at 9% 2,400 He is provided with the services of a cook and a watchman who are paid Rs. 200 and Rs. 120 per month respectively. He is also provided with an ambassador car for official and private purposes. The company meets expenses of the car. He has been living in a rented house and paying Rs.900 p.m. as rent. He paid life insurance premium of Rs. 3,500 on his own life policy of Rs. 50,000. He deposits in 10-year post office savings bank account CTD Rs. 6,000. Compute his total income
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10. Mrs. A. P. SHARMA is employed with Strong Springs Private Ltd. She draws salary of Rs. 1,800 per month and D.A. Rs. 200 per month, which is not a part of salary for superannuation benefits. She is paid a bonus of Rs. 2,450. As the end of March, she took three months salary (Basic Pay + D.A.) in advance and a loan of Rs. 5,000 to meet the expenses of her daughters marriage. She is provided with unfurnished house owned by the Company, the fair rent of which is Rs. 12,000 per annum. She has been provided with the services of a gardener and a watchman. The company pays Rs. 100 per month, and Rs. 80 per month to them respectively. Her two children are getting free education in a school run by the Company. The tuition fee in nearby school is Rs. 60 per month per head. She has been allowed the facility of a driver-driven car of less than 1.6 litre cubic capacity for official and personal purposes. The company also paid income tax of Rs. 1,000 on her salary. She contributes 8% of her pay to a recognised provident fund to which the employer contributes 14%. Interest on the accumulated balance credited at the rate of 9% per annum amount to Rs. 3,300. She has insured her life for Rs. 50,000 and pays Rs. 4,000 annual premium. She also deposited Rs. 1,000 in public provident fund account and invested Rs. 2,000 in National Savings Certificate VIII Issue. Compute the Total Income for the assessment year 2008-2009. (Population of the city is more than 4 lakhs) 11. Mr. GOPAL RAO, who was an employee of XYZ Ltd., Delhi, has furnished the following particulars regarding his income for the financial year 2007-2008: Salary Rs. 2,500 p.m., D.A. Rs. 400 p.m.
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He retired from service on 1st January 2005 after completing 25 years of service in the company. The Company paid him: (i) Rs. 42,000 as gratuity. (Covered under payment of Gratuity Act) (ii) Rs. 1,20,000 from unrecognised provident fund. (iii) Pension of Rs. 750 per month. (iv) He got half the pension commuted on 1st February, and received Rs. 37,500. The assessees monthly salary at the time of retirement was Rs. 2,500. Only half of the provident fund account balance received by him represents employers contribution and interest thereon. Salary and pension become due on the last day of each month. Compute the income under the head salaries of Mr. Gopal Rao. 12. Dr. P. RAMA REDDY is the principal of a university college at Bangalore. He is in the scale of Rs. 2,000 -100- 3,000 from 1.1.2002. He gets 10% of his salary as dearness allowance and 5% of his salary as principal ship allowance. He has been provided with a furnished accommodation by the college, whose fair rental value is Rs. 750 per month and the cost of furniture provided is Rs. 6,000. The college has given him a Maruti car, which is used by him for official as well as private purposes. The college pays the drivers wages and all other expenses. He has been provided with the facility of a gardener, a watchman and a servant, who are paid by the college Rs. 100 per month each. Dr. Reddy contributes 10% of his pay and dearness allowance to a statutory provident fund towards which the college contributes an equal amount. He purchased books on his subject for Rs. 1,000 during the financial year. Compute the total income of Dr. P. Rama Reddy for the assessment year 2008-2009.
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13. Avinash (age 30 years) is in the teaching staff of a well-known private college in Pune. During the PY 2007-2008, he gets the allowing emoluments: Basic salary: RS. 1,86,000: Dearness allowance:
Rs.12,300 (forming part of salary): city compensatory allowance : Rs. 3,100: childrens education allowance : Rs. 2,340 (Rs. 65 per month for 3 children): house rent allowance : Rs. 16,200 (rent paid: Rs. 20,000) and remuneration from the Delhi University for acting as paper setter and examiner: 36,400 (expenditure incurred by X : Rs. 3,400). He gets Rs. 18890 as reimbursement from the employer in respect of expenditure incurred on medical treatment of his family members from a doctor. Besides, he gets Rs. 12,600 as reimbursement from the employer in respect of books and journals purchased by him for discharging his official work. He contributes 11% of his salary to statutory provident fund to which a matching contribution is made by employer. During the year, he spends Rs. 3,000 on purchase of books for teaching purposes (not being reimbursed by the employer). Besides, he makes on expenditure of Rs. 6,000 on maintaining car for going to the college and pays Rs. 16,000 as insurance premium on own life insurance policy (sum assured : Rs. 50,000). Determine the taxable income and tax liability of X for the assessment year 2008-2009. Does it make any difference if education allowance is for the grandchildren of Avinash?
3.15 Answers to SAQs, TQs and MCQs

SAQ 1 1. Income from other sources 2. Refer Para 3.4 3. Fully exempt from tax.
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SAQ 2 1. Rs 3,50,000 2. Perquisites 3. Rs 6,000 4. True SAQ 3 1. B 2. D 3. C 4. D 5. D TQs 3.14 (A) 1. Refer Para 3.3 2. Refer Para 3.5 3. Refer Para 3.8 and 3.6 4. Refer Para 3.9 5. refer Para V Tax Free Perquisites 6. Refer Para 3.10 7. Refer Para 3.11 8. Refer Para 3.9.2 TQs 3.14 (B) Refer relevant Theories, formats and illustrations for all the problems Additional Hints: Q. No. 1 The gratuity exempted is the least of the following: (i) Months salary for each year of completed service, i.e., 3,000 38 = Rs. 57,000. (ii) Actual gratuity received: Rs. 60,000.
6. D 7. C 8. A 9. A 10. B
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(iii) Maximum fixed by the Act: Rs. 3,50,000 Here, salary means average monthly salary for the last 10 months. Here, the average salary for the last ten months from 1st March to 31st December is Rs. 3,000. Here, only completed years of service should be taken into account. Less than full year should be ignored. Q. No. 2 Excess contribution by the employer to RPF to be included in the income: Rs. 400. Personal expenses of the assessees daughter met by the employer is a taxable income to be included in the income of the assessee. Perquisite value of rent-free unfurnished house: Rs. (20% of salary of Rs. 47,000) 9,400 Salary, for this purpose, is; (Basic salary Rs. 36,000 + Bonus Rs.6,000 + entertainment allowable, Rs. 5,000) 47,000. Value of free services of watchman is taxable. Medical expenses of the employee and free refreshment during office hours are exempt from tax. Club bill of the employee paid by the employer is not a taxable income to employee as it falls under FBT. The assessee will get a deduction u/s 80C in respect of contribution to unit-linked insurance plan of Rs. 1,000. Q. No. 3 Deduction for entertainment allowance is Nil. A private employee is not entitled to claim the deduction for entertainment allowance with effect from the assessment year 2002-2003. Reimbursement, by employer, of medical expenses of the employee is a perquisite exempt from tax. So, it should not be included in the income of the assessee.
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Q. No. 6 For the valuation of the perquisite value of the rent-free house, here, salary means basic salary, bonus, commission, CCA and entertainment allowance. In the case of a house owned by the employer, the fair rental value of the house is immaterial for the calculation of the perquisite value of rentfree accommodation. A private employee is not eligible for deduction for entertainment allowance with effect from the assessment year 2002-2003. Q. No. 9 As the rate of interest on RPF does not exceed 9.5%, no interest on R.P.F. will be included in the salary income of the assessee. The perquisite value of the cook and watchman provided by the employer will be the actual salaries paid to them by the employer. Here, salary for house rent allowance exemption and employers contribution to recognised provident fund means basic salary plus D.A. entering into computation of retirement benefits plus commission as a fixed percentage of turnover or sales. Q. No. 10 As the advance salary for 3 months is taken at the end of March, all the three months salary should be taken as advance salary and included in her salary income. The amount of advance salary to be included in her salary income will be three months basic salary + D.A., i.e., Rs. (1,800 + 200 = 2,000 3) 6,000. Loan taken from the employer is a liability, and not an item of income from salary. So, it should not be included in her salary income. Free education provided to employees children in employers institution is a taxable benefit. But it is exempt upto Rs. 1,000 p. m.
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Q. No. 11 Interest on employees contribution to unrecognized provident fund is an income from other sources, and not an income under the head salaries. As the employee retired on 1st January, and commuted his pension only on 1st February, he received one months full pension (i.e., pension for January) at Rs. 750 per month) and two months (i.e., for February and March) half pension (i.e., Rs. 375 per month for 2 months). Q. No. 12 It should be assumed that the salary of every month is payable at the end of every month. There is no separate deduction under the head salaries for books purchased by the employee for his employment. So, no deduction will be allowed for books purchased by the assessee. Here, the employer contributed to employees statutory provident fund at 10% of his basic salary and dearness allowance. That means, D.A. enters into salary for retirement benefits. As such, while calculating the perquisite value of rent-free house, D.A. also should be included in salary.
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Unit 4
Unit 4
Structure 4.1 Introduction Learning Objectives 4.2 4.3 4.4 4.5 4.6
Income from House Property
Property income Introduction Cases where income from house property is not charged to tax Treatment of composite letting Treatment of composite rent Basis of charge regarding the income from house property 4.6.1 4.6.2 Meaning of Annual Value: Computation of annual value (Sec. 23)
4.7
Computation of income from HP under different circumstances 4.7.1 4.7.2 4.7.3 Income from let out property. Income from self occupied property. Income from deemed let out property.
4.8
Deductions allowable under Section 24(1) 4.8.1 4.8.2 Standard Deduction: Interest on loan taken or money borrowed for the property:
4.9
Treatment of unrealized rent received
4.10 Taxation of arrears of rent received 4.11 Treatment of loss from house property 4.12 Illustrations Self Assessment Questions (SAQ1, SAQ2) 4.13 Summary 4.14 Terminal Questions 4.15 Answers to SAQs and TQs
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4.1 Introduction
This unit explains the basic concepts and terms of income from house property. This unit also explains the annual value of house property, deduction from house property such as standard deduction, interest on loan borrowed for the construction/purchase of the house. Learning Objectives After studying this unit, you will be able to understand:
Treatment of composite rent. Allowable deductions under the head Income from house property. Determination of annual value of Self Occupied house property Determination of annual value of Let Out house property Deductions allowable. Computation of income from house property. Treatment of deemed to be Let Out Property and Vacant property Relevant Formats
4.2 Property Income Introduction

Under Section 22 of the Income-tax Act of 1961, under the head Income from House property, an assessee is chargeable to tax on the annual value of property, consisting of any buildings or lands appurtenant thereto, of which he is the owner, and which does he not use for his own business or profession. Under Section 22 of the Income-tax Act, an assessee is chargeable to Income-tax on the annual value of the property only when certain conditions are fulfilled. If the required conditions are fulfilled, the property income is taxable as Income from House Property, even if the house property constitutes the stock in trade of the assessees business, or the business of the assessee is to let out house properties.
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The various conditions to be fulfilled for a property income to be chargeable to tax under the head Income from House Property are as follows: 1. Property must consist of buildings or lands appurtenant thereto: The property must consist of any buildings or lands appurtenant to such buildings. The term building includes buildings relatively permanent and which are used for a variety of purposes, say, for residential purposes, for office uses, for storage, for use as a factory or shop, dance halls, music halls, lecture halls or as public auditorium for stage and cinema shows, as platform, etc. 2. Ownership of the property, but not the occupation or possession of the property, must be in the hands of the assessee: The assessee should be the owner of the property. That is, the legal ownership of the property should be in the hands of the assessee. Mere possession or occupation of the property by the assessee is not sufficient. This is because it is only the legal owner of the property who is chargeable to tax under the head Income from House Property. 3. The house property should not be used by the assessee for his own business or profession: The house property should not be used by the assessee for his own business or profession. If the house property is occupied by the assessee for the purpose of his own business or profession, the profits of which are assessable to tax, the annual value of that house property is not chargeable to tax under the head, Income from House Property. It is exempt from tax. (However, in such a case, the assessee is not entitled to claim any deduction on account of rent in respect of such property, while calculating the profits from business or profession.)
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In the following cases, the income from house property is treated as business income: a. Building or staff quarters let out to employees and others. b. Building let out to authorities for locating bank, post office, police station, central excise office etc. provided the dominant purpose of letting out the building is to enable the assessee to carry on his business more efficiently and smoothly. c. Building let out in composition with other assets such as machinery, plant or furniture. d. Paying-guest accommodation
4.3 Cases where the Income from House property is not charged to Tax
In the following cases, the income from house property is not charged to tax and is excluded from the total income of the assessee: (a) Income from farmhouse (b) Income from property held by a religious or charitable trust (c) Property income of a local authority. (d) Property income of a development authority. (e) Property income of a university, college, etc. (f) Property income of a scientific research association. (g) Property income of a hospital.
4.4 Treatment of composite letting

When a building is let out along with other assets for a composite rent and if the rent of the building can be separated from the rent of the other assets. The rent of the building will be charged to tax under the head "Income from house property", and the rent pertaining to the other assets will be charged to tax under the head "Income from other sources".
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4.5 Treatment of composite rent

When a building is let out to a person along with other amenities or facilities like electricity, cooler, lift, water pump, water tax, etc. for a composite rent. The rent of the building can be separated from the rent of other facilities. The rent pertaining to the building will be charged to tax under the head Income from House Property. The rent pertaining to other facilities will be charged to tax under the head Income from Other Sources. Deemed Ownership: In the following cases an assessee is deemed to be the owner of the property: A. An individual who transfers otherwise than for adequate consideration any property to his or her spouse, or to a minor child not being a married daughter. B. A member of a co- op. society or company, or other association of persons to whom a building or part there of is allotted or leased under a house building scheme. C. A person who is allowed to take or retain possession of any building or part thereof as per the provisions of Transfer of Property Act. D. A person who takes a land on lease and constructs a house upon it.
4.6 Basis of charge regarding the Income from House property

Under Section 22 of the Income-tax Act, the basis of charge as regards the income from house property is the annual value of the property. 4.6.1 Meaning of Annual Value: According to sec. 23 (1) annual value shall be deemed to bea. The sum for which the property might reasonably be expected to let from year to year; or b. Where the property is let and the annual rent received or receivable by the owner is in excess of the reasonable rent, the actual rent received or receivable.
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Where the municipal taxes or repair expenses are borne by the tenant, the rent received or receivable should not be stepped up to calculate defacto rent. Any deposit received from the tenant is a capital receipt. While determining the actual rent notional interest on such deposits should not be added. 4.6.2 Computation of annual value (Sec. 23) Annual value of a property is determined in the following 2 steps: I step: Determine the Gross Annual Value. II step: Deduct the municipal taxes paid by the owner from the GAV. Gross Annual Value of let out property [sec 23(1)] (i) As per the redrafted Section 23, the annual value of a property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year (i.e., the reasonable expected rent of the property). (ii) However, if the property is let out and the actual rent received or receivable is more than the reasonable expected rent, the rent so received or receivable will be the annual value of the property. (iii) In case the property is let out and has been vacant during the whole or any part of the previous year, and owing to such vacancy, the actual rent received or receivable is less than the reasonable expected rent, then, the actual rent so received or receivable will be the annual value of the property. Municipal value: This value is determined by the municipality in order to levy municipal or local taxes. It is arrived at based on many considerations. Fair Rent: It refers to the rent which a similar property can fetch in the same or similar locality if let out for a year. Standard Rent: Standard rent refers to the rent determined under Rent Control Act. The Act provides that where the property is covered under Rent
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Control Act, its expected rent cannot exceed the standard rent. The expected rent can be equal to or less than standard rent. Unrealized Rent: It is the amount of rent which the owner cannot realizes (during the current year) provided the following conditions are satisfied: a. The tenancy is bonafide. b. The defaulting tenant has vacated or steps have been taken to compel him to vacate the property. c. The defaulting tenant is not in occupation of any other property of the assessee. d. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or the Assessing Officer is satisfied with uselessness of the legal proceedings.(Rule 4) Unrealized rent shall be deducted from the actual rent received from the property before computing income from that property Note: Unrealized rent relating to earlier previous years is not allowed for deduction. Summary of the above provisions to arrive GAV Let out Property Format I Annual Municipal Value (AMV) xxx Fair Rental Value (FRV) xxx xxx Standard Rent xxx
High Less
Excepted Rent Actual Rent received
xxx xxx
High
Gross Annual Value of the property
xxxx
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Problem 1: (GAV) Find out GAV in the following cases:

Property Municipal value Fair Rent Rent received Standard Rent A 10,000 12,000 11,000 NA B 10,000 12,000 11,000 11,500 C 10,000 13,000 15,000 14,000 D 10,000 18,000 15,000 12,000 E 10,000 21,000 18,000 24,000
Solution:
A Step 1: Expected Rent Step 2: Rent Received Gross Annual Value 12,000 11,000 12,000 B 11,500 11,000 11,500 C 13,000 15,000 15,000 D 12,000 15,000 15,000 E 21,000 18,000 21,000
Note: Expected rent is calculated as below: Higher of Municipal value or Fair Rental Value Standard Rent Whichever is less, Problem 2. (Vacancy period) Find out GAV in the following cases: Property Municipal value Fair Rent Monthly Rent Standard Rent Vacancy Period Solution:
X Step 1: Expected Rent Step 2: Rent Received Gross Annual Value Sikkim Manipal University 13000 13500 13500 Y 12000 10000 **10000 Page No. 158
xxxx xxxx
Less
X 12000 13000 1500 15000 3 months
Y 14000 15000 2000 12000 7 months
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Note: Property X: Since house was vacant for 3 months the actual rent received should be calculated for 9 months (.e 1500x9). Since rent received is more than Expected rent, rent received is considered as GAV. Property Y: Since house was vacant for 7 months the actual rent received should be calculated for 5 months (i.e.2000 x 5). Since actual rent received is less than the expected rent due to vacant period, the actual rent received should be taken as GAV. **(Compare one year rent receivable with expected rent to find the GAV but not the actual amount of rent received). Determination of Net Annual Value of a Property: From the gross annual value, the municipal taxes of the property paid by the owner should be deducted, and the resulting balance should be taken as the net annual value of the property. It should be noted that the deduction of municipal taxes from the gross annual value of the property is permissible only if the following conditions are satisfied: (i) The municipal taxes should be actually paid by the owner (i.e., the assessee) during the previous year. (ii) If the municipal taxes are not paid by the owner during the previous year (i.e., if they are outstanding during the previous year), then, they should not be deducted from the gross annual value of the property. However, if the outstanding municipal taxes or arrears of municipal taxes are paid by the owners in a later year, then, the actual amount of municipal taxes paid are allowed to be deducted from the gross annual value in that later year. That means, municipal taxes paid by the owner of the house should be deducted only in the year in which they are actually paid, irrespective of whether they are paid for the current previous year or for an earlier previous year.
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4.7 Computation of Income from House Property under different circumstances

The income from house property, under different circumstances, can be computed as follows: 4.7.1. Income from let out property FORMAT 2
Rs. Gross annual value of the property Less Municipal taxes paid by the assessee Net annual value of the property Less Allowable Deductions under Section 24: (a) Standard deduction at 30% of net annual valuexxx (b) Interest on money borrowed for the acquisition, Construction, repair paid or payable Income from let out property - xxx xxx xxx xxx xxx -xxx xxx Rs.
4.7.2 Income from self-occupied property: Annual Value of self-occupied house property Sec. 23(2): Where the property consists of a house or part of a house which is in the occupation of the owner for the purpose of his own residence; or cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him; the annual value of such property or part there of shall be taken as nil.
Sec. 23(2) provides that the above provisions shall not apply if a. The house or part there of is actually let during the whole or any part of the year; b. The owner from derives any other benefit there.
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According to Sec. 23(2), the value of one house or part of a house, which is, self-occupied, is taken as nil. In respect of his house if interest is paid or payable on loan taken for purchase, construction, alteration, renovation or repairs, it will be allowed to be set off against other incomes upto a maximum of Rs.30,000. Where such house has been acquired or completed with capital borrowed on or after 1-4-199, and such acquisition or construction is completed within 3 years from the end of the financial year in which capital was borrowed, the interest paid or payable not exceeding RS. 1,50,000 (as against Rs. 30,000) is allowed. Interest on fresh loan taken to repay the earlier loan raised for aforesaid purpose is also allowable as deduction. The income from self-occupied property has to be computed as follows: FORMAT 3 Rs. Annual value of the property Less Allowable deduction under Section 24: Interest on money borrowed for the property (Rs. 30,000 or Rs. 1,50,000, as the case may be) Loss from self-occupied property 4.7.3 Deemed to be let out Property: Where the assessee owns more than one house and uses them for selfresidence, any one house of his choice shall be treated as self occupied house property and the other houses shall be deemed to be let-out property. It is beneficial for him to treat that house as SOHP the income from of which happens to be the highest. While determining annual value the standard rent fixed under Rent Control Act must also be considered. In other words, in the case of a property occupied by the assessee for the purpose of his residence (deemed to be let out) annual value cannot exceed the amount of standard rent determinable under Rent Control Act.
Nil
xxx xxx
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Problem 3: (Deemed to be let out) Compute the N A.V. from the following details:
Property Municipal value Fair Rent Standard rent A (Rs.) 3,000 36,000 38,000 B (Rs.) 2,400 26,000 NA C (Rs.) 2,600 30,000 28,000 D (Rs.) 2,800 32,000 35,000
All the four houses are self-occupied by the assessee. Municipal taxes are levied at 10% of MV. Solution: It is beneficial for the assessee to treat house A as self-occupied (because its expected rent is the highest) and remaining houses as deemed to be let out.
A (Rs.) Expected Rent Less: Municipal taxes paid Annual Value NA NA NIl B (Rs. 26,000 2,400 23,600 C (Rs.) 28,000 2,600 25,400 D (Rs.) 32,000 2,800 29,200
4. Income from a house property a portion of which is let out and a portion is self-occupied (i.e., income from a house property which is partly let out and partly self-occupied): When a house property comprises independent self-contained units or portions, and a portion of which is let out and a portion is self-occupied, the income from the let-out portion has to be computed separately. 5. Income from a house property which is let out for a part of the previous year and is self-occupied for the remaining part of the previous year: When a house property is let out for a part of the previous year and is self-occupied for part of the previous year, the income from such a property should be computed as if the property has been let out throughout the previous year. So, its income should be computed by applying all the provisions relating to a let out property.
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It may be noted that, in such a case, the period of occupation of the property for self-residence is irrelevant, as that property is treated as though it has been let out throughout the previous year. It may also be noted that, in such a case, while determining the gross annual value of such a property, the reasonable expected rent should be taken for the full year, but the actual rent received or receivable should be taken only for the let out period.
4.8 Deductions allowable under section 24 (1)

4.8.1 Standard Deduction: A standard deduction is allowed for repairs and collection charges. The standard deduction is allowed whether the repair charges are borne by the assessee or by the tenant. The standard deduction is allowed for let out property and for deemed to be let out property. No standard deduction is allowed for self-occupied property and for unoccupied property. The amount of standard deduction permissible is 30% of the net annual value of the property irrespective of the amount spent. 4.8.2 Interest on loan taken or money borrowed for the property: (a) Let out property Whether the assessee keeps his books of account on cash basis or on accrual basis, interest paid or payable by the assessee for the current year on any loan taken or money borrowed for the purpose of purchasing, constructing, reconstructing, renovating or repairing the let out house property is an allowable deduction. The amount of deduction allowable is the entire interest paid or payable. Again, the interest paid or payable for the pre-construction or preacquisition period (i.e., for the construction period preceding the year of completion of construction) on the loan taken or money borrowed for
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acquisition or construction of the house is also deductible in five equal annual installments, i.e., in five previous years, the first installment is deductible in the previous year in which the house was acquired or the construction was completed. For this purpose, pre-construction period means the period commencing from the date of borrowing and ending with 31st March immediately prior to the date of completion of construction or date of acquisition of the property or date of repayment of loan whichever is earlier. (b) Self-occupied property: The normal amount of deduction for interest on loan borrowed prior to 1.4.1999 for the construction, acquisition, renovation or repair of selfoccupied property is upto Rs. 30,000. However, where the property is acquired or constructed with loan borrowed on or after 1.4.1999 and the acquisition or construction of the property is completed within three years from the end of the financial year in which the loan was borrowed, the amount of permissible deduction is upto Rs.1,50,000. It may be noted that the enhanced deduction of Rs. 1,50,000 will be allowed only if the loan is used for the acquisition or construction of the house property, and not for any other purpose like repair or renovation. But the normal deduction of Rs. 30,000 is available not only when the loan is used for acquisition or construction of the house property but also for other purposes, such as repair, renovation or reconstruction of the house property. Problem 4: (Pre Construction Period Interest) Rekha borrowed Rs.3,00,000 on 1-8-00 at 12% p.a. for the construction of his residence house, which was completed on 30-6-2002. Find out the amount of interest allowable, as deduction if principal, remains unpaid.
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Solution Since the loan was borrowed prior to completion, interest paid or payable during pre-construction period can be claimed as deduction in subsequent 5 previous years. Pre-construction period is 1-8-00 to 31-3-2002 i.e. 8+12 = 20 months. Interest Rs. 3, 00,000 X 12/100 X 20/12 = Rs.60, 000. It is spread over 5 P.Y.s 60,000/5 = Rs.12, 000. Every year interest on loan = 300000 x 12% = 36000 The interest allowable as deduction for P.Y.s 2002-03: 36,000+12,000 = Rs.48,000 2003-04: Rs.48000; 2004-05: Rs.48,000 2005-06: Rs.48,000 2007-08: Rs. 48,000 (principal is unpaid).
4.9 Treatment of Unrealized rent recovered (sec. 25A)

Recovery of unrealized rent is chargeable to tax as income from house property in the financial year in which it is recovered No deduction will be allowed against such receipt.
4.10 Taxation of Arrears of rent received

As per Section 25B of the Income-tax Act, if an assessee has received any amount by way of arrears of rent from a house property, which was not charged to tax for any previous year, the arrears of rent received should be deemed to be the income chargeable under the head "Income from House Property". In this case, out of the arrears of rent received, 30% of such arrears of rent received will be allowed as a deduction.
4.11 Treatment of loss from house property

Loss from one house property can be set off against the income from another house property in the same year.
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In case the loss from one house property cannot be set off against the income from another house property in the same year, the loss (i.e., the loss under the head Income from house property) can be set off against the income under any other head in the same year. If the net loss under the head Income from house property cannot be set off against the income under any other head in the same year, that net loss can be carried forward to subsequent assessment years for set off against income from house property for a maximum of 8 assessment years. This provision of carry forward comes into force with effect from the assessment year 1999-2000.
4.12 Illustrations
Problem 5: (Composite Rent) Mr. ASHWIN is the owner of a house property in Kolkata. It has been let out for a composite rent of Rs. 1,20,000 per annum for the house and amenities provided to the tenant. The landlord bears the following expenses on tenants amenities under the agreement: Water charges Rs. 2,000; lift maintenance Rs. 1,500; lighting of stairs Rs. 1,500; salary of gardener Rs. 3,000. The municipal tax paid by the owner is Rs. 12,000, which includes Rs. 2,000 for the earlier years. The landlord claims the following deductions: Repairs Rs. 30,000, Land revenue due but not paid Rs. 1,000; Collection charges Rs. 2,000; ground rent due but not paid Rs. 2,000, Fire insurance premium outstanding Rs. 1,000. Compute the income from house property for the assessment year 2008-2009.
Page No. 166
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Solution: Statement showing Ashwins Income from House Property for the AY
2008-2009 Rs. Gross Annual Value of the property: Rent received for the house: Composite rent received Less: Rent in respect of amenities provided to the tenant (cost of amenities provided to the tenant borne by the landlord): Water charges Lift maintenance Lighting of stairs Salary of gardener Gross annual value of the property Less: Municipal taxes paid by the landlord during the current year Net Annual value of the property Less: Standard Deduction (30% of net annual value, i.e., 1,00,000 30%) Income from house property 30,000 70,000 12,000 1,00,000 2,000 1,500 1,500 3,000 8,000 1,12,000 1,20,000 Rs.
Notes: 1. Here, the rent received is composite rent, i.e., rent for the house and rent for the amenities provided by the landlord to the tenant under the agreement. The rent for the amenities provided is clearly given. The rent for the house let out will be the amount of composite rent, Rs.1,20,000 less the rent for the amenities, Rs. 8,000, i.e., (1,20,000 - 8,000) Rs.1,12,000. So, only the rent of Rs. 1,12,000 should be taken as the rent received for the house let out. 2. The total municipal taxes paid by the landlord during the current year, whether they pertain to the current year or earlier years, should be deducted from the gross annual value of the property.
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3. A standard deduction of 30% of net annual value will be allowed for repairs and collection charges, irrespective of the actual amounts spent on repairs. Problem 6: (GAV) Mr. BALU owns four houses. The particulars regarding the houses are as follows:
House No.1 Rs. Municipal valuation Fair rent Standard rent Actual rent received 15,000 16,000 10,000 9,000 House No. 2 Rs. 18,000 15,000 16,000 20,000 House No. 3 Rs. 20,000 25,000 18,000 House No. 4 Rs. 25,000 30,000 20,000
Determine the gross annual value of each of the four houses for the AY 2008-2009. Solution: House No. 1: a) Reasonable expected rent of the house: Municipal valuation, Rs. 15,000 or fair rent Rs. 16,000, whichever is higher,Rs. 16,000 Standard rent Whichever is less b) Actual rent received whichever is higher: Gross annual value is House No. 2: a) Reasonable expected rent of the house: Municipal valuation Rs. 18,000 or fair rent Rs. 15,000, whichever is higher Rs. 18,000 Standard rent whichever is less
Rs.
Rs. 10,000 10,000 9,000 Rs. 10,000
Rs. 16,000 Rs 16,000

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b) Actual rent received: whichever is higher So, Gross annual value: House No. 3: a) Reasonable expected rent of the house:
Rs. 20,000 Rs. 20,000
Municipal valuation Rs. 20,000 or fair rent Rs. 25,000, whichever is higher b) Actual rent received whichever is higher,: So, Gross annual value: House No. 4: a) Reasonable expected rent of the house: Fair rent Standard rent whichever is less b) Actual rent received Whichever is higher: So, gross annual value is: Rs. 25,000 Rs. 25,000 Rs. 30,000 25,000 20,000 Rs. 25,000 Rs. 25,000 Rs. 18,000
Problem 7: (Preconstruction Period Interest) CHETAN constructed a house property for which he borrowed a loan of Rs. 3,00,000 from the State Bank of India at 12% per annum on 1st October 2000. The construction of the house was completed by the end of January 2002. The house property was let out from 1st July 2002 at Rs. 6,000 per month. The municipal taxes paid during 2008-2009 are Rs. 8,000. Insurance premium paid for the year is Rs. 2,000. Current year's interest on loan is outstanding. Compute the income from house property for the assessment year 2008-2009.
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Solution: Statement of Income of Chetan from House property for the assessment year 2008-2009
Rs. Gross Annual Value of the let out property Rent received (6,000 12) Less: Municipal at taxes Net Annual Value of the property Less : Deduction (i) Standard deduction (30% of NAV i.e., 64,000 30%)19,200 (ii) Interest on the loan for the construction of the house: a) For the pre-construction period: 1/5th of interest on loan of Rs. 3,00,000 at 12% p.a. from 1.10.2000 to 31.3.2001 (i.e., 3,00,000 x12% 6/12=18,000 1/5 ) b) Interest for the current previous year (3,00,000 12%) Income from let out property 36,000 39,600 58,800 5,200 3,600 72,000 8,000 64,000 Rs.
Note: On interest on loan for pre-construction period: Here, the date of completion of the construction of the house is 31.1.2002. So, the pre-construction period is from the date of borrowing of loan, i.e., 1st October, 2000 to 31st March, prior to the previous year 2001-2002 in which the construction of the house is completed, i.e., 31st March, 2001. So, the pre-construction period is 6 months. The total interest for the pre-construction period is: 3,00,000 12% x 6/12 = Rs. 18,000. 1/5th of pre-construction period interest for the current previous year will be: 18,000 1/5 = Rs. 3,600. Problem 8: (Simple Problem) DIANA is the owner of three residential houses and a bungalow. The bungalow is used for her own residence and the other houses are let out.
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The rental value of the houses according to the municipal records is Rs. 21,000 and that of bungalow is Rs. 7,000. Expenses relating to let out houses are: Local taxes 4,000, Land revenue Rs. 500, ground rent Rs. 400, interest on mortgage Rs. 2,000; collection charges Rs.1,500 and fire insurance premium Rs. 800. During the year, the assessee did not undertake repairs. The construction of the above houses was completed on 15.3.1996. The expenses in respect of bungalow are: Municipal tax Rs.1,200, fire insurance premium Rs. 500 and ground rent Rs. 100. Determine her taxable income from house property for the assessment year 2008-2009. Solution: Statement showing DIANAs Income from House Property for the Assessment Year 2008-2009 Rs. Self-occupied property: (Bungalow) Annual value of the property Less: Interest on loan taken Income from self-occupied property (A) Let out Properties: Gross Annual Value of the property: Rental value according to municipal records Less: Local taxes or Municipal taxes Net Annual value Less: Admissible Deductions under the head Income from House Property: Standard Deduction (30% of NAV) (17,000 30%) Income from let out property (B) Income from House Property (A + B)
Rs.
Nil Nil Nil
21,000 4,000 17,000
5,100 11,900 11,900

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Notes: 1. Local taxes (pertaining to let out houses) mean municipal taxes. 2. Unless otherwise stated in the problem, it must be assumed that loan on mortgage is not used for the construction, etc. of the let out houses. If such an assumption is made, interest on mortgage becomes an inadmissible expense. So, it should be ignored. Problem 9: MR. ERROL is the owner of three properties in Agra, the particulars in respect of which are as follows:
Particulars 1. Construction started on 2. Construction completed on 3. Actual rent received 4. Standard rent under Rent Control Act 5. Municipal Valuation 6. Municipal tax paid by owner 7. Municipal tax paid by the tenant 8. Collection charge 9. Insurance premium 10. Interest on loan taken for renovating the house 11. Unrealised rent allowed in the past recovered during the year Rs. 2,000 Rs.150 Rs.150 Rs. 6,000 Rs.10 Rs.3,500 Rs.4,200 Rs.420 Rs.4 5 Rs.50 Rs.10 Rs.30 Rs.260 Rs.1,000 Rs. 900 Rs.45 Not fixed Rs. 17,800 Rs.1,600 I 1.4.91 31.12.92 Rs. 4,500 II 1.8.90 31.1.92 Rs. 1,000 III 1.7.87 31.12.88 Dwelling
Mr. Errol resided in Delhi for three months during the previous year in connection with his business, and for all these three months, his dwelling house at Agra remained vacant. During the period of his stay in Delhi, he did not occupy any other house of his own. Compute Mr. Errols Income from House Property for the assessment year 2008-2009.
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Solution: Statement showing Errols Income from House Property for the A Y 2008-2009
Rs. Property No. I (Let out) Gross annual value (a) Expected reasonable rent of the property Municipal Value Rs. 4,200 Standard Rent Rs. 3,500 Whichever is less (b) Actual rent received Whichever is higher Less: Muncipal tax paid Net Annual Value Std. deduction (30%) Interest on loan Property No. II (Let out): Gross Annual value of the property (a) Expected reasonable rent of the property Municipal Value Rs. 900 Standard Rent Rs.1,000 Whichever is less (b) Actual rent received Whichever is higher Less: Muncipal tax paid by the landlord Net Annual Value of the property Less: Allowable deductions (i) Std. deduction (30% of Net Annual Value) (955 30%) (ii) Interest on loan taken for renovating the House Property No. III (Self Occupied) Annual Value of Property Less: Interest on loan taken Loss from Property Computation of total income from HP Income from Property No. I Income from Property No. II Unrealised rent recovered Less: Loss from Property No. III Loss from House Property Rs. Rs.
3,500
4,500
4,500 420 4,080 1,374 2,706
1,224 150
900 1,000 1,000 - 45 955
287 150 - 437 Nil - 6,000 - 6,000 2,706 518 2,000 5,224 - 6,000 776 518
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Notes: 1. Only the municipal tax paid by the landlord can be deducted from gross annual value. The municipal tax paid by the tenant (for Property No. II) cannot be deducted. 2. As loan is used for renovating the property, interest on loan is an allowable deduction for all the three properties. The entire amount of interest paid is allowed as a deduction. 3. The period of vacancy should not be taken into account for calculating the annual value of self-occupied property. 4. Unrealized rent fully allowed in the past received during the current previous year has to be treated as income from house property, while computing the total income from house property. Problem 10 MR. REHAMAN owns five houses, the municipal valuations of which are Rs.10,000, Rs. 8,000, Rs. 6,000, Rs. 4,000 and Rs. 8,000 respectively. He lives in the first house. In the second house, he runs his business. The other three houses are let out for Rs. 400, Rs. 350 and Rs.1,000 per month respectively. One third portion of the third house is also used by him for residential purpose and the rent of Rs. 400 is received for the remaining two-third portion. A loan of Rs. 50,000 at 10% was taken for the construction of 5th house which began on 1st June, 1997and ended on 31.1.1999. The house was let out from 1.2.1999. For the previous year interest paid by him in respect of the loan amounted to Rs. 5,000. Municipal taxes were assessed and paid at 10% of the Municipal Valuation. Ascertain his income from house property for the assessment year 2008-2009.
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Solution: Statement showing Rehamans income from House Property for the A Y 2008-2009 Rs. Rs. First House (self-occupied): Annual value of Self-occupied property Nil Less: Allowable Deduction under the head Income from House Property: Interest on loan taken for construction, repairs, etc. of the house, if any Nil Nil Income from self-occupied property Second House (used by the assessee for his Nil own business): Third House: (2/3rd portion let out, and 1/3rd portion self-occupied, to be treated as deemed to be let out): (i) Gross annual value of portion let out 4,800 (a) Reasonable expected rent of the property Rs. (Municipal value of portion (6,000 2/3) 4,000 (b) Rent of portion let out Rs.400 per month (400 12) 4,800 whichever is higher Gross annual Value of 2/3 portion of the property is Rs. will be (4,800 2/3 1/3 ) Gross Annual Value of the entire third house Less: Municipal tax paid for the whole house (10% of the municipal value of the third house (6,000 ) Net Annual Value of the property Less: Allowable Deductions under the head Income from House Property: Standard Deduction (30% of net annual value) Income from property
2,400 7,200
600 6,600
1,780 4,820
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Fourth House (Let out): Gross Annual Value of the property (a) Reasonable expected rent of the property (Municipal value) (b) Rent received (Rs. 350 per month) (350 12) 4,200 whichever is higher Less: Municipal tax paid (10% of the municipal value of the fourth house) (4,000 10% ) Net Annual value of the property Less Standard Deduction (30% of net annual value) Income from Property Fifth House (Let out): Gross Annual Value of the property (a) Reasonable expected rent of the property (Municipal Value) (b) Rent received (Rs.600 per month) Whichever is higher Less: Municipal tax (10% of municipal value of the fifth house) (6,000 ) Net annual value Less: Allowable deductions (i) Standard Deduction (30% of net annual value) (6,600 30%) (ii) Interest on loan used for the construction of the house for the previous year 2004-05 (as given in the problem) 5,000 1,980 Rs. 6,000 7,200 4,000
Rs.
4,200 400
3,800 -1,140 2,660 Rs.
7,200 -600
6,600
6,980
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Loss from Property Income from First House Income from Second House Income from Third House Income from Fourth House Less Loss from Fifth House Income from House Property Notes:
380 Nil Nil 4,820 2,660 -380 7,100
1. Here, the assessee uses the first house as well as 1/3rd portion of the third house for his residence. When an assessee uses more than one house for his residence, only one house of assessees choice should be treated as self-occupied, and the other should be treated as deemed to be let out. Accordingly, the first house is treated as self-occupied, and rd portion of the third house is deemed to be let out. 2. The annual value of the self-occupied property should be taken as Nil. The only allowable deduction in respect of self-occupied property is interest on loan taken for construction, repairs, etc. of the property. 3. One-third portion of the third house is deemed to be let out. The gross annual value of the portion of the third house let out has to be ascertained on the basis of the gross annual value of portion of the third house let out. It can be ascertained as follows: The gross annual value of rd portion of the third house let out is Rs. 4,800. So, the gross annual value of rd portion of the third house deemed to be let out should be 4,800 2/3 1/3 = Rs. 2,400. 4. The income from the second house used for his business should be taken as nil. 5. The loan has been used for the construction of fifth house. So, the interest on the loan in respect of the fifth house will be allowed as a deduction.
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The amount of deduction allowable for interest will be: Interest on loan for the previous year 2007-2008, as specifically stated in the problem Rs. 5,000 Interest on loan paid for the pre-construction period of 10 months (i.e., from 1st June, 1996 to 31.3.1997) (50,000 10/12 *10% = Rs. 4,167), Rs. 4,167 This has already been claimed at Rs. 833 in five previous years. So, there will not be any deduction for interest on loan for the preconstruction period for the previous year 2007-2008 Problem No: 11 Income) Raman owns a big house (erection completed on March 31, 2002). The house has three independent units. Unit 1 (50% of the floor area) is let out for residential purpose on monthly rent of Rs. 8,200. Unit 1 remains vacant for 1 month when it is not put to any use. A sum of Rs. 700 could not be collected from the tenant. Unit2 (25% of the floor area) is used by Raman for the purpose of his profession, while Unit3 (the remaining 25%) is utilized for the purpose of his residence. Other particulars of the house are as follows: Muncipal valuation Rs. 60,000, fair rent Rs. 70,000, standard rent under the Rent Control Act Rs. 90,000, municipal taxes Rs. 15,000, repairs Rs. 4,000, interest on capital borrowed for renewal of the property Rs. 36,000, ground rent 6,400, annual chare created under the will by father in favour of Mrs. Raman Rs.9,000 and fire insurance premium paid Rs. 15,000. Income from profession is Rs. 95,000 (without debiting house rent and other incidental expenditure including admissible depreciation on the portion of house used for profession Rs. 8,000). Determine the taxable income of Raman for the assessment year 2008-2009. (50% let-out, 25% SO, 25% own profession-Taxable
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Solution: Computation of Taxable Income

Rs I Unit LO (a) Annual Municipal Value 30,0000 Or Fair Rental Value 35,000 Whichever is High (b) Standard Rent 45,000 or 35,000 Whichever is Less (c) Actual rent received Whichever is High (8200*11 = 90200 700 = 89,500) Less Municipal Tax Paid (15000*50%) Net Annual Value Less: Deduction (a) 30% of NAV (b) Interest On Loan Unit 3 SO (25%) Gross Annual Value Less: Interest on Loan (36000*25%) Rs Rs
35,000 35,000 or 89,500 89,500
7,500 82,000
24,600 18,000
(42,600)
39,400
Nil (9,000)
(9,000)
Unit 2 (25%) Used for profession Income from House Property Income from Profession Professional Income Less: Admissible Expenses Municipal Tax 15,000*25%. Repairs 4000*25% Ground Rent 6400*25% Annual Charges Fire Insurance Admissible Depreciation
Nil 30,400
95,000 3,750 1,000 1,600 3,750 8,000
(18,100)
76,900
Taxable Income
1,07,300
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Problem No: 11 (Property in Mumbai, Delhi & Kolkata Total Income) X has the following properties: 1. Flat in Bombay purchased on June 1, 2007 which is let out on a monthly rent of Rs. 2,000. The building in which the flat is located was completed on May1, 2006. The flat was let out from August1, 2007. 2. Flat in Delhi constructed in 2004 which is self-occupied. 3. Godown in Kolkatta constructed in 2003 which is let out on a monthly rent of Rs. 7,000 (it remains vacant for month). The expenses actually incurred during the year against rental income are:
Bombay Municipal taxes paid during the PY ending Mar. 31 2007 (for 10 Months ending March 31, 2008) Building Co-operative maintenance Charges Electricity charges Fire insurance premium Collection charges Repairs Delhi Kolkata
5,000 1,000 750 20
2,400 900 1,200 1,900
18,000 4,800 648 5,400 11,000
The following further information is given: 1. The flat in Delhi, if let out, would fetch a monthly rent of a Rs. 6,000. However, standard rent of the house according to the Delhi Rent control Act is Rs. 4,000 per month. 2. Other data regarding flat in Bombay and Godown in Kolkata is as follows:
Municipal valuation (annual) Fair rent (annual) Standard rent Unrealized rent Bombay 21,600 22,000 22,500 200 Kolkata 70,000 75,000 74,000 4,000
3. X carries on a business in which he suffered a loss of Rs.800 during the PY 4. X received a consolidated salary Rs.210000 during PY for part-time. 5. X invests Rs. 60000 in NSC (VIII Issue) on March 21, 2008. He also deposits Rs. 70,000 in his public provident fund account in March 31, 2008. Compute total income for the year ending March 31, 2008.
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Solution: Computation of Total Income.

Mumbai flat - Let out AMV (10 Months) 18,000 or FRV 18333 Whichever is high Std Rent 18,750 Whichever is less Actual rent received 16,000 (for 8 months only) Less: Unrealized rent (200) Gross Annual Value Less Municipal Tax paid Net Annual Value Less: Deduction - 30% of NAV Income from Mumbai Flat Delhi Flat Self Occupied Gross Annual Value Less: Interest on Loan Kolkatta Godown Let out AMV 70,000 or FRV 75,000 whichever is High Standard Rent 74,000 Whichever is less Actual Rent received (7000*11.5) 80,500 Less: Unrealized Rent 4,000 Whichever is High Gross Annual Value Less Municipal Tax Paid Net Annual Value Less: Deductions: 30% of NAV Interest on Loan Income From House Property Salary Less: Business Loss Gross Total Income Less: deductions u/s 80c. (Maximum Rs 1,00,000) NSC (viii) PPF Taxable Income
18333 or 18,333 or
15,800 15,800 (5,000) 10,800 3,240 7,560
Nil Nil
Nil
75,000 or 74,000 or
76,500 76,500 18,000 58,500 17,550
40,950 48510 2,10,000 2,58,510 ( 800) 2,57,710 1,00,000
60,000 70,000 1,57,710
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Note 1: Assessee purchased Bombay Flat on 1st June 2007 hence the valuation should be done for 10 months but the flat was let out from 1st August onwards, it means it was vacant for 2 months. Building, Maintenance charges, electricity, collection charges & repairs are not deductible. I. Self Assessment Questions (SAQ 1) 1. Annual value means _________________________________________________________ _________________________________________________________. 2. The amount of standard deduction permissible is _________ % of the net annual value of the property irrespective of the amount spent. 3. Pre construction period means _________________________________________________________ _________________________________________________________. II. Self Assessment Questions (SAQ 2) 1. Annual value of self occupied house property is equal to ____________. A. Fair Rental Value B. Fair Rental Value or Annual Municipal Value, whichever is high C. Expected rent D. Nil 2. The amount of deduction for interest on loan borrowed prior to 1st April 1999 for the construction of self occupied House Property is _________ A. 30,0000 B. 1,50,000 C. 1,00,000 D. Nil
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3. ________ refers to the rent determined under rent control act A. AMV B. FRV C. Standard Rent D. None of these 4. From the following details compute taxable income from House Property. Municipal value Rent received Standard rent Municipal tax paid A. 4320 B. 5320 C. 7500 D. None of these 5. Calculate Preconstruction Period for taxable income from House Property. Loan Borrowed 1.10.1999 Construction completed 30.06.2002 A. 01.04.1999 to 31.03.2002 B. 01.10.1999 to 30.06.2002 C. 01.10.1999 to 31.03.2002 D. None of the above 6. For tax purpose, Pre construction period means the period commencing on the ______ and ending on ____________ prior to the date of completion of construction. A. 1st April, 31st March B. Borrowing date, 31st December C. Borrowing date, 31st March D. 1st January, 31st December
5,000 8,000 6,000 400
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7. Where the assessee owns four houses and uses them for self residence, ____ of his choice shall be treated as self occupied house property and the other houses shall be treated as ____. A. Any two houses, deemed to be let out B. Any one house , deemed to be let out C. All but one house, deemed to be let out D. None of the above 8. Compute taxable income form H.P. for AY 2008-2009. Flat in Mangalore purchased on 1st June 2007 and let out on 1st August 2007 on a monthly rent of Rs. 2,000. The building in which the flat is located was completed on 1st May 2007. Following expenses were paid; Municipal taxes Rs. 5,000. Collection charges Rs. 750, Repairs Rs. 200, Unrealized Rent Rs. 200 A. 10,500 B. 7,560 C. 15,000 D. 11,000 9. Mr. ASHWIN is the owner of a house property in Kolkata. It has been let out for a composite rent of Rs. 1,20,000 per annum for the house and amenities provided to the tenant. The landlord bears the following expenses on tenants amenities under the agreement: Water charges Rs. 2,000; lift maintenance Rs. 1,500; lighting of stairs Rs. 1,500; salary of gardener Rs. 3,000. The municipal tax paid by the owner is Rs. 12,000, which includes Rs. 2,000 for the earlier years. The landlord claims the following deductions: Repairs Rs. 30,000, Land revenue due but not paid Rs. 1,000; Collection charges Rs. 2,000; ground rent due but not paid Rs. 2,000, Fire insurance premium
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outstanding Rs. 1,000. Compute the income from house property for the assessment year 2007-2008. A. 100,500 B. 70000 C. 130000 D. 100,000 10. Mr. A owns four houses. The particulars regarding the houses are as follows:
House No. 1 House No. 2 Municipal Valuation Fair rent Standard rent Actual rent received 15,000 16,000 10,000 9, 000 18,000 15,000 16,000 20,000 House No. 3 20,000 25,000 __ 18,000 House No.4 __ 25,000 30,000 20,000
Determine the gross annual value of each of the four houses for the assessment year 2008-2009. A. 16,000, 20,000, 25,000, 30,000 B. 10,000, 16,000, 25,000, 25,000 C. 10,000, 20,000, 18,000, 25,000 D. 10,000, 20,000, 25,000, 25,000
4.13 Summary
Sections 22 to 27 deal with income from house property. Tax liability in respect of house property arises in the hands of the owner or deemed owner for income from building or land appurtenant thereto. House property used by the assessee for own business is not considered in calculating income from house property. Deductions allowed for let out properties are (i) a standard deduction of 30% of the NAV and (ii) interest on loan borrowed.
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4.14 (A) Questions 1. What is annual value? Explain briefly how the annual value of a property is determined under different circumstances. 2. Explain the deductions allowable from the annual value in computing the income from house property. 3. Explain the provisions of the Income-tax Act of 1961 in respect of the following in computing the income from house property: (a) Vacancy period (b) Unrealized rent (c) Interest on loan borrowed for property. (d) Standard deduction. 4.14 B Exercises 1. Determine the gross annual value of each of the following house properties for the A. Y. 2008-2009: House No.1 Rs. Municipal value Fair rent Rent received Standard rent 20,000 10,000 16,000 17,000 House No. 2 Rs. 18,000 25,000 21,000 24,000 House No. 3 Rs. 35,000 30,000 28,000 House No. 4 Rs. 28,000 32,000 30,000 35,000 House No. 5 Rs. 40,000 45,000 50,000 48,000
2. SRI KRISHNA owns several house properties, the annual rental value of which was Rs. 75,000 including Rs. 15,000 for a bungalow where he resides. He claims the following expenses, viz., fire insurance premium Rs. 200; Rs. 1,000 for interest on loan taken to repair the residential house; Rs. 60 for ground rent and Rs. 5,000 for collection charges of rent. One of the tenants did not pay Rs. 10,000 rent for two months during the year-end.
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Compute his income from house property for the assessment year 20082009. 3. Ms. SNEHA is the owner of three houses in Mysore. She has furnished the following particulars for the previous year ending 31.3.2008: First house: Its municipal value is Rs. 12,000. Ms. Sneha uses it for her own residence. She paid Rs. 1,000 municipal taxes, Rs. 200 fire insurance premium and Rs. 1,000 interest on loan taken for construction of the house. Second house: Its municipal value is Rs. 6,000. It is let out at Rs. 1,000 per month. Ms. Sneha made the following payments: Rs. Municipal tax Land revenue Repairs Legal expenses to get the house vacated Annual charge 600 200 1,000 500 2,000
This house remained vacant for 2 months. Arrears of rent of Rs. 6,000 of the preceding years could not be recovered from the defaulting tenant. The tenant has vacated the house. Third house: The construction of this house was completed in March, 1994. Its municipal value is Rs. 12,000 but the standard rent is Rs. 18,000. It has two identical residential units, each of which has been let out at Rs. 700 per month. He paid municipal taxes Rs. 1,200, ground rent Rs. 600 and interest on loan taken to construct the house Rs. 4,000. One of the units remained vacant for 2 months.
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Compute her income from house property for the assessment year 2008-2009. 4. VALLI owns the following house properties: (a) Flat in Mumbai purchased on 1.6.1994 containing the building completed in April, 1995. The flat was let out for residential purpose on a monthly rent of Rs. 4,000. Municipal valuation is Rs. 40,000 per annum and the municipal tax paid is at 10%. (b) He has also one house property at Dadar for his own residence of the annual value of Rs. 30,000. He spent Rs. 1,000 for repairs and Rs. 5,000 for interest on loan borrowed for construction of the house. (c) He owns a godown at Kalyan and rent received is Rs. 60,000, whereas the municipal value is Rs. 75,000. The municipal tax paid is 10% of the municipal value. He spent 10% of the annual value for collection charges of rent. (d) The other details of the properties are as under: Flat at House at Mumbai Dadar Rs. Rs. 500 200 2,000 1,653 100 1,000 5,000 Godown at Kalyan Rs. 1,000 3,000 7,800
Fire insurance Repairs Interest on loan for construction Annual charge
Compute the income from house property for the assessment year 2008-2009. 5. MR.NAGARAJ is the owner of the following house properties which he claims to be self-occupied. From the following particulars, compute his income from house property for the assessment year 2008-2009:
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First House: Municipal value Rs. 2,500 p.a. He resides in this house with his family. Second House: Municipal value Rs. 10,000 p.a. It is occupied by his three sons who are studying in the university. Third House:Municipal value Rs. 5,000 p.a. It is occupied by his uncle. Land revenue Rs. 500 and insurance premium Rs. 200. Fourth House: Municipal value Rs. 4,000 p.a. Repair expenses incurred Rs. 7,000. The first house was constructed by taking a loan of Rs. 50,000 at 12% p.a. from his friend living in the U.S.A. Interest was paid during the year 2007-2008 without deduction of tax at source. The second house was constructed by taking loan from L.I.C. of India. The assessee has paid Rs. 5,000 towards principal and Rs.1,000 towards interest. Local taxes paid in the case of all houses at 10% of municipal value. 6. Mr. RAVIRAJ is the owner of four buildings at Simla and he furnishes the following particulars in respect of these for the previous year 20072008: 1. The first, of the municipal value of Rs. 4,600, was occupied by him for his own residential purpose. He paid local taxes of Rs. 600. 2. The second, of the municipal value of Rs.12,000, was let out to a business concern. Taxes Rs. 2,400, ground rent Rs. 300 and fire insurance Rs. 100. 3. The third, consisting of three units, was let out for residential purposes on a monthly rent of Rs. 350 per unit. The municipal taxes of the entire house amounted to Rs. 600. He paid Rs. 1,928 towards interest for the loan taken for constructing this building. Collection charges amounted to Rs. 240.
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4. The fourth, of the fair rental value of Rs. 2,500, was used by him for carrying on his business which yielded taxable profits of Rs. 10,000. Compute his income from property for the assessment year 2008 2009. 7. Mr. RAMPRASAD owned a house property at Chennai which was occupied by him for the purpose of his residence. He was transferred to Mumbai in June, 2005 and therefore, he let out the property with effect from 1st July, 2005 on a monthly rent of Rs. 3,000. The corporation tax payable in respect of the property was Rs. 6,000 of which 50% was paid by him before 31.3.2006. Interest on money borrowed for the construction of the property amounted to Rs. 20,000. Compute the income from house property for the AY 2008-2009. 8. (Computation of total Income) (Refer illustrations) MR. FAIZAL has the following properties: (i) Flat in Mumbai purchased on 1st June, 2007 and let on 1st August, 2007 on monthly rent of Rs. 2,000. The building in which the flat is located was completed in May, 2006. (ii) Flat in Delhi constructed in 2000, which is self-occupied. (iii) Godown in Kolkatta constructed in 1999, which is let out on, a monthly rent of Rs. 6,500. The expenses actually incurred during the year against rental income are: Mumbai Rs. Municipal taxes Building co-operative maintenance charges Electricity charges Fire insurance prem Collection charges Repairs
Delhi Rs. 2,400 900 1,200 600
Kolkata Rs. 18,000 6,000
5,000 1,000
750 20
5,400 1,900 1,100
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The following further information is given: (i) The flat in Delhi, if let out, would fetch a monthly rent of Rs. 6,000, though the standard rent would be Rs. 4,000 p.m. (ii) He carries on a business which suffered a loss of Rs.10,000 during the year ended 31st March, 2008. (iii) He received a consolidated salary of Rs. 6,400 per year during the previous year from a part-time employment, which he holds. (iv) Compute his total income for the assessment year 2008-2009.

SAQ 1 1. Refer Para 4.6.1 2. 30% 3. Refer Para 4.8.2 SAQ 2 1. D 2. A 3. C 4. B 5. C TQs 4.14(A) 1. Refer Para 4.6.1 2. Refer Para 4.8 3. Refer para 4.6.2 and 4.8 TQs 4.14(B) Refer relevant Theories, formats and illustrations for all the problems 6. C 7. B 8. B 9. B 10. D
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Additional Hints: Q. No. 2 a) The current years unrealized rent will be deducted from annual rent on the assumption that all the conditions for the allowance of unrealized rent are satisfied. b) The interest on loan taken for repairs to the residential house is taken as interest in respect of self-occupied property. It is an allowable deduction for the self-occupied property. Q. No. 3 a) The reasonable expected rent of the third house is the municipal value of Rs. 12,000, because the standard rent is more than the municipal value. b) The actual rent of the third house is Rs. 1,000 per month for only 10 months, as it has remained vacant for 2 months. c) The actual rent of the third house is Rs. (16,800 1,400) 15,400, as it remained vacant for 2 months. d) The unrealised arrears of rent of past year cannot be deducted from the rent received for the current previous year. e) The interest on loan taken for the construction of the third house, Rs. 4,000 is an allowable deduction in full. Q. No. 5 1. Here, all the houses are claimed by the assessee as self-occupied. When more than one house is self-occupied, only one house is treated as self-occupied, and the other houses are treated as deemed to be let out. The assessee can consider any one house of his choice as selfoccupied. Generally, it is in the interest of the assessee to consider that house with the higher or highest annual value as self-occupied.
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Accordingly, second house with an annual value of Rs. 10,000 is taken as self-occupied. 2. Though the loan taken from the friend in U.S.A. is used for the construction of the first house, the interest paid thereon is not allowed as deduction in respect of the first house, because the interest on loan was remitted by the assessee to his friend in U.S.A. without deducting tax at source. 3. Only the interest paid on loan used for the construction of the second house, viz., Rs.1,000 is allowed as a deduction under the head 'Income from House Property' in respect of the second house. The principal amount repaid, viz., Rs. 5,000 is not allowed as a deduction under the head 'Income from House Property'. However, it is entitled to a tax rebate at 20% under Section 88 of the Income-tax Act. Q. No. 6 1. The annual value of self-occupied property should be taken as Nil. As such, the local taxes, i.e., municipal taxes, paid in respect of the selfoccupied property should be ignored. In respect of self-occupied property, only interest on loan taken for the construction, etc. of the building is allowed as a deduction. No other deduction is allowed. 2. Mere taxes paid in respect of second property should be taken to mean municipal taxes. 3. As the loan is taken for the construction of the property, interest paid on such loan is an admissible deduction in respect of the third property. 4. When his house property is used by an assessee for his own business, and the income of business is taxable under the head "Income from Business or Profession," there is no income from property in the case of such a property. As such, there is no income from property in respect of the fourth house, as it is used by the assessee for his own business.
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Q. No. 7 Here the property is self-occupied for a part of the previous year and is let out for a part of the previous year. So, the income from this property should be computed as though the property has been let out throughout the previous year by applying the provisions applicable to let out property. Q. No. 8 1. The flat in Mumbai was purchased on 1st June. But it was let out only on 1st August. That means, it remained vacant for 2 months. So, rent of this flat should be taken only for 8 months while calculating the gross annual value of this property. 2. The Delhi flat is self-occupied. Its annual value should be taken as Rs. Nil. (So, the rent that this flat would fetch, if let out, and the standard rent are irrelevant.) 3. Building co-operative maintenance charges are nothing but repair charges. The building maintenance charges are not an allowable deduction under the head Income from House Property, as there is a standard deduction for repairs. 4. Electricity charges is not an allowable deduction under the head 'Income from House Property'.
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Unit 5
Structure 5.1 Introduction
Profits and Gains of Business or Profession
Learning Objectives 5.2 5.3 5.4 5.5 5.6 5.7 5.8 Meaning of Business and profession Computation of Profit and gains of Business or Profession Deemed Incomes Deemed Business Profits System of Accounting for Computing Income from Business Rules Governing Depreciation Procedure to be followed for the computation from Business and Profession 5.9 Illustrations Self Assessment Questions (SAQ1, SAQ2) 5.10 Summary 5.11 Terminal Questions 5.12 Answers to SAQs and TQs
5.1 Introduction
This unit explains various terms related to business or profession. It includes classification of allowed items and disallowed items which is relevant for tax purposes. Learning Objectives: After studying this Unit, you will be able to understand: The meaning of the terms Business', 'Profession' and 'Vocation' The incomes chargeable to tax under the head "Profits and Gains of Business or Profession"
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The expenses allowed to be deducted, while computing the Profits and Gains of Business or Profession
The deemed incomes The systems of accounting to be adopted The procedure to be followed for the computation of income from business or profession
The actual computation of income from business or profession Relevant Formats
5.2 Meaning of Business and Profession

Meaning of Business: Sec 2(13) Trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Business means any economic activity carried on with the objective of making profits. Trade: Trade means buying and selling of goods with a view to making profit. Commerce: Commerce is a wider term than trade. If buying and selling of goods for profit is repeated on a large-scale, it is called commerce. Manufacture: Manufacture means making of articles from raw materials, by physical labour or mechanical power, for sale. In short, it is the conversion of raw materials into finished goods for sale at a profit. Profession: U/s 2 (36) profession is defined to include vacation. The word profession implies professed attainments in special knowledge as distinguished from mere skill, special knowledge which is to be acquired only after patient study and application. Eg. Tax experts, Financial
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accountants, architects, engineers, journalists, photographers, doctors, advocates and the like. Vocation: The term vocation has not been defined in the Act. It implies natural ability of a person for some work. It means such activity upon which a person spends major part of his time in order to earn his living such as brokerage, insurance agency, music, dancing etc.
5.3 Computation of Profits and Gains of Business or Profession

Deductions expressly provided (i.e., expressly permissible), while computing the income from profits and gains of business or profession: Sections 30 to 37 of the Income-tax Act have expressly provided for certain deductions. The various deductions expressly provided are: 1. Rent, rates, taxes, repairs and insurance 2. Repairs and insurance of machinery, plant and furniture 3. Depreciation on buildings, machinery, plant and furniture 4. Expenditure on Scientific Research (Section 35) a) Any expenditure paid out or spent on scientific research related to the business (both capital and revenue). Even expenditure incurred during the preceding 3 years before the commencement of business will be allowed in the year of commencement of business. b) Any sum paid to university or college or other institution to be used for research whether related to the business or not is eligible for weighted deduction of 125%. c) Any sum paid to a National Laboratory or University or an Indian Institute of Technology carrying out programme of research as approved will be eligible for 150% of weighted deduction. d) A weighted deduction towards in-house research @ 150% will be allowed in the following cases
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i) It is incurred in the business of research, manufacture or production of any drugs, pharma, electronic equipments. Chemical or any other notified article or thing or for bio-tech. ii) The company has entered into an agreement with prescribed authority as well as prescribed authority approves the same. 5. Expenditure on acquisition of patent rights or copyrights as specified under Section 35A of the Income-tax Act: Any expenditure incurred on patent rights or copy rights is eligible for depreciation @ 25% as per Section 32. Any profit on sale is chargeable to tax. 6. Expenditure on know-how as provided under Section 35AB of the Income-tax Act: Any expenditure incurred on know-how is eligible for depreciation @ 25% as per Section 32. 7. Payments made to associations and institutions for rural
development programmes specified in Section 35CCA: Payment to a National Fund for Rural Development set up and notified by the Central Govt. is deductible @ 100%. 8. Amortisation of certain preliminary expenses as provided in Section 35D of the Income-tax Act: Certain preliminary expenditure incurred by a corporate and noncorporate (resident in India) assessee, before the commencement of business (or after the commencement of business) is eligible for amortization The amortization is allowed in 5 equal installments against the profits of the assessee over a period of 5 years. The maximum limit is 5% of the cost of the project. In the case of Indian company it is 5% of the cost of project or 5% of the capital employed at the option of the company.
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9. Other deductions as provided under Section 36 of the Income- tax Act: FIP on stock Bonus or commission paid to employees Interest paid on capital borrowed Loss arising from the death of animals used in the business Bad debt: The conditions for deductibility of bad debt are: 1. There must be debt 2. Debt must be incidental to the business or profession 3. Debt must have been taken into account while computing assessable income 4. Debt must have been written-off in the books of account 5. Debt must be in respect of the business carried on by the assessee in the previous year. 10. General deductions provided under Section 37 of the Income-tax Act (i.e., admissible expenses other than those specifically covered by other provisions): The following are examples of some of the expenses, which are allowed as deductions under Section 37 of the Income-tax Act: 1. Administrative expenses 2. Commission paid. 3. Sales tax paid 4. Legal expenses. 5. Welfare expenses incurred on the employees by the business. 6. Reasonable expenses on the opening ceremony, Deepavali, etc. 7. Expenses incurred in defending a case for damages for breach of contract.
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8. Cost of installing new telephone. 9. Insurance premium paid. 10. Embezzlement by an employee during the course of business. 11. Normal advertising expenditure. 12. Amount lost in robbery or decoity 13. Presents and gifts given to the employees on the occasion of Deepavali, Christmas, etc. 14. Pension or gratuity paid to employees. 15. Ex-gratia payments to widows and dependants of the deceased employees. 16. Expenditure incurred on raising loans. 17. Loss due to natural causes, such as white ants. 18. Profession tax paid. 19. Annual listing fees paid to a stock exchange by a company. 20. Any expenditure and fees paid in connection with any income-tax proceedings. 21. Payment under 'Own Your Telephone (OYT)' Scheme. 22. Entertainment expenses. 23. Advertisement expenses. 24. Traveling expenses Expenses not allowed (Inadmissible Expenditure): Some examples: 1. Donations or presents, if not exclusively for the purpose of business or profession 2. Gratuity paid to employee as a special case 3. Income tax, wealth tax or fees paid for filing these returns 4. Penalty and damages paid for infringement of law 5. Expenses paid on other heads of income
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11. Payments or expenses expressly disallowed under Section 40A of the Income-tax Act: 1. Unreasonable payments 2. Payments to certain persons or their relatives more than the reasonable amounts for the goods or services obtained from them. 3. With effect from the assessment year 1997-98, if any payment exceeding Rs. 20,000 is not made by a crossed cheque on a bank or a crossed bank draft, and claimed as a deduction, 20% of the whole of such expenditure is disallowed. 4. Personal expenses of the proprietor or proprietors. 5. Drawings of the proprietor or proprietors. 6. Medical expenses of the proprietors. 7. Any capital expenditure. 8. Any provision or transfer to reserves other than those which are expressly allowed in the Income-tax Act. 9. Any charity or presents/ donations. 10. Penalties paid by the assessee for infringement of law. 11. Legal expenses incurred to defend against criminal liability.
5.4 Deemed Incomes

1. Cash credit (Section 68 of the Income-tax Act): 2. Unexplained money (Section 69A of the Income-tax Act 3. Unexplained Investments (Section 69B of the Income-tax Act): 4. Unexplained expenditure (Section 69C of the Income-tax Act):
5.5 Deemed Business Profits

(a) Recovery of loss or expenditure: (b) Remission or cessation of liability: (c) Bad debts recovered: (d) Income of discontinued business
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5.6 Systems of Accounting to be Adopted for Computing Income from Business or Profession:
The computation under this head to be based on the method of accounting regularly and consistently followed by the assessee. The method may be cash or mercantile.
5.7 Rules Governing Depreciation

Depreciation refers to decrease in the value of an asset due to wear and tear, efflux of time or obsolescence. Following are the rules: 1. Depreciation is confined to tangible and intangible assets. Tangible asset means building, machinery plant and furniture. Intangible assets mean patent rights, copy rights, know-how, trade marks, licenses, franchises or any other business or commercial rights of similar nature. 2. The assets must be owned by the assessee 3. In respect of capital expenditure on leased premises the assessee can claim depreciation 4. In respect of assessee being (a) books lending library (b) Profession being the condition that books being annual publications will be eligible for 100% depreciation 5. The depreciation granted should not exceed the original cost Block of assets means a group of assets falling within a class of assets being tangible and intangible assets in respect of which same % of depreciation is prescribed. The WDV of block of assets is calculated in the following manner: 1. The total of the WDV of all the assets falling within that block of assets at the beginning of the previous year is calculated at first. 2. To the above value the cost of any asset falling within the same block purchased during the previous year is added.
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3. From the above value moneys received together with scrap value of any asset sold, discarded or demolished during the previous year is deducted. The balance is taken as WDV of the block of assets at the end of the previous year and depreciation is calculated on such balance. Note: Where in a previous year an asset is purchased and put to use for the purpose of business or profession for less than 180 days, depreciation thereon will be allowed at 50% of the depreciation otherwise allowable. Imp rates of depreciation:
Assets A. Tangible Assets 1. Buildings not used mainly for residence 2. Furniture and fittings including electrical fittings 3. Machinery & Plant a) b) General rate Special rate 1. Computers including software 2. Motor cars B. Intangible Assets Know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature 60 20 25 % of Depreciation 10 15
25
Problem 1.: The WDV of the assets on 1st April of the previous year are as below: Plant & Machinery (25% rate) Rs.250000 Car (20% rate) Rs.100000 Buildings (10% rate) Rs180000 During the year he purchased machinery on 1st July for Rs.50000 and sold the car for Rs. 85000. Find out the admissible depreciation
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Solution:
Particulars WDV on 1 April Add: Additions Less: Transfers
st
Bldgs (10%) 180000
P&M (25%) 250000 + 50000
Car (20%) 100000
(100000)
WDV on 31-3
180000
300000
85000
Depreciation
18000
75000
NIL
Note: Since the block of asset (Car) ceases to exist the WDV of the Car is nil. The loss is treated as STC Loss u/s 50.
5.8 Procedure to be followed for the Computation of Income from Business Profession
Format 1 1. In the case of business where profit and loss account is prepared: Statement of Income from Business for the Assessment Year. . . . .
Particulars Net profit as per profit and loss account Add : Disallowed Exp/ Expenses to be treated separately Less: Admissible expenses not allowed so far Less: Non-business incomes, and non- incomes Less: Bad debts recovered disallowed earlier Add: Deemed Income Add/Less: Adjustment of stock Income from Business + xxxx xxxx xxxx xxxx + xxxx Rs. Rs.
xxxx
xxxx
XXXX Page No. 204
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2. In the case of a Profession: Format 2 Procedure to be followed for the Computation of Income from Profession Statement of Income from Profession for the Assessment Year .....
Particulars Professional Receipts: Less:Professional Expenses Income from Profession Rs. Rs.
xxxx (xxxx)
XXXX
5.9 Illustration
Problem 2 The following is the Profit and Loss Account of RANJAN the year ending March 31, 2008. You are required to ascertain his Income from business and also total income for the year ended on that date:
Rs. Salaries Sundry Expenses Reserve for bad debts Insurance Advertising Income-tax Loss on sale of car Interest on capital Interest on bank loan Charity Life insurance premium (self) Loss on building by fire (uninsured) Depreciation: On building On Furniture Sikkim Manipal University Rs. 1,000 Rs. 200 1,200 Page No. 205 1,500 10,800 Gross profit 1,200 Discount 3,000 Commission 450 Sundry receipts 2,500 2,375 1,200 1,000 1,550 150 550 Rs. 47,672 751 1,205 52
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Gifts to customers (10 wrist watches of Rs. 1,200 each) Difference in trial balance Net profit for the year 12,000 105 10,100 49,680 49,680
The motorcar was used equally for business purposes and for the proprietors private purposes. The amount of depreciation allowable, according to the Income-tax Rules, in respect of building and furniture was Rs. 800 and Rs. 150 respectively. Included in the advertising expenses is a sum of Rs. 1,000 expended on a special advertisement campaign undertaken during the year in respect of product of a company placed recently in the market. Salaries include Rs. 6,000 being the amount drawn by Rajesh during the year against profits. Solution: Mr. Ranjan
Statement of Income from Business for the Assessment Year 2008- 2009 Particulars Net profit as per profit and loss account Add : Disallowed Exps to be treated 1. Reserve for bad debts 2. Income tax 3. Loss on sale of car (Capital nature) 4. Interest on capital 5. Charity 6. LIC premium 7. Loss on building by fire uninsured, capital loss) 8. Excess depreciation charged On building (1000-800) 200 On furniture (200-150) 50 9. Difference in trial balance 10. Drawings of the proprietor Income from Business Sikkim Manipal University Rs. Rs. 10100
3000 2375 1200 1000 150 550 1500
250 105 6000 16130 26230 Page No. 206
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Notes: 1. Since there is no other income and deductions the above amount will be the GTI as well as the total income. 2. Amount on special advertising is allowed as business expenditure 3. Interest on capital & charity are inadmissible expenditures. 4. Interest on loan is an admissible expenditure 5. Difference in trial balance is not an expenditure at all Problem 3: Mr. DINESH is the owner of a shop at Bombay. Determine his business income on the basis of the following combined Trading and Profit and Loss Account for the year ended 31-3-2008:
Rs. To " " " " " " " " " " Opening Stock 1,04,000 By Sales Purchases 10,08,750 " Closing Stock Salaries and Wages 75,000 Rent and Rates 26,000 Commission 11,500 Household expenses 10,000 Income-tax for assessment year 2006-2007 6,100 Advertisement 5,000 Postage and Telegram 1,000 Interest on Capital 4,000 Interest on loan borrowed for the acquisition of fixed assets 5,000 Reserve for Bad Debts 1,400 Depreciation on furniture 8,000 Expenditure on acquisition of know-how (The know-how was acquired and put to use on 1st Jan., 2008) 20,000 Net Profits 4,34,250 17,20,000 Rs. 15,10,000 2,10,000
" " "
"
17,20,000
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Other particulars: 1. Closing stock and opening stock have been consistently valued 10% below cost price. 2. Written down value of furniture on 1.4.2007 was Rs.72,000; allowable rate of depreciation is 10% p.a. 3. Sales include a sum of Rs.41,250 representing the value of goods withdrawn for the purpose of Dineshs family use. These goods were purchased at cost of Rs. 27,850. 4. Household expenses include a contribution of Rs.4,750 towards Public Provident Fund. Solution: Mr. Dinesh
Statement of Income from Business for the Assessment Year 2008- 2009 Particulars Net profit as per profit and loss account Add: Under-valuation of closing stock which increases net profit from business (210000 x 10/90) Less: Under-valuation of opening stock which decreases net profit from business (104000 x 10/90) Add : Disallowed Exps to be treated separately : 1. House-hold exps including contribution to PPF (4750+5250) 2. Income-tax of last A.Y. 3. Interest on capital 4. Reserve for bad debts 5. Expenditure on the acquisition of knowhow after allowing depreciation (20000-2500) 6. Excess depreciation on furniture (8000-7200) Less: Notional Profit on goods withdrawn by Dinesh (41250- 27850) Income from Business 10000 6100 4000 1400 17500 800 39800 485827 13400 472427 Rs. Rs. 434250 + 23333 457583 11556 446027
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Notes: 1. Since there is no other income and deductions the above amount will be the GTI as well as the total income. Problem 4: From the following Profit and Loss Account of Rajesh for the year ended 31st March, 2008, ascertain his taxable profits from business and the total income for the assessment year 2008-2009:
Rs. To Office Salaries To Proprietors salary To Interest on Proprietors capital To General Expenses To Bad debts To Advertisement To Fire insurance premium To Depreciation To Income-tax on last assessment To Advance income-tax paid To Reserve for future loss To Donation to Aligarh University To Legal charges for defending breach of trading contract To Motor car expenses To Net profit 500 1,000 59,500 1,12,500 1,12,500 10,000 5,000 2,000 5,000 2,000 4,500 2,000 4,000 4,000 2,000 10,000 1,000 By Gross Profit By Profit on sale of residential house held for 3 years By Bad debts recovered (not allowed as deduction by the assessing officer in earlier previous year for lack of proof) By Interest from Co operative By Interest on post office cash certificates By Refund of income-tax 1,000 2,000 4,500 5,000 30,000 Rs. 67,500
General expenses include Rs. 1,000 paid as compensation to an old employee whose services were terminated as his continuance in service was considered detrimental to the profitable conduct of the business and Rs. 200 by way of help to a poor university student. The depreciation is found to be in excess by Rs. 1,800. The advertisement cost included one
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wooden show case Rs. 500, calendars and diaries Rs. 1,500. Motorcar expenses include Rs. 500 as motor car expenses for private use of car. The assessee has received demand notices of sales tax amounting to Rs. 10,000, and he has not disputed the liability. Reserve for future losses is meant for this liability. Solution:
Statement of Income from Business for the Assessment Year 2008-2009 Rs. Rs. Net profit as per profit and loss account 59,500 Add: Disallowed Expenses Proprietors salary 5,000 Interest on proprietors capital 2,000 Income-tax on last assessment 4,000 Advance Income-tax paid 2,000 Reserve for future losses 10,000 Donation to Aligarh University 1,000 Motor car expenses connected with private use 500 Excess depreciation 1,800 Help to poor university student 200 Cost of wooden show case included in advertisement 500 27,000 86,500 Less: Disallowed incomes Profit on sale of residential house 30,000 Bad debts recovered (not allowed in earlier previous year) 5,000 Interest on Govt. Securities 4,500 Dividend from dividend from Cooperative society 2,500 Refund of income tax 2,000 Interest on post office cash certificates 1,000 45,000 Taxable Income from Business 41,500 Statement of Total Income for the Assessment Year 2008- 2009 Rs. Income from Business (as computed) Capital gains (short-term) (Profit on sale of residential house held for 3 years, and not for more than 3 years) Income from other sources: Interest on Govt. Securities Sikkim Manipal University Rs. 41,500 30,000
4,500 Page No. 210
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Dividend from Co operative society shares Gross Total Income Less: Allowable Deductions from Gross Total Income: (i) Deduction for donation to Aligarh University, Under Section 80 G (100% of actual donation of Rs. 1,000) Total Taxable Income
2,500
7,000 78,500
1000 77,500
Notes: 1. Actual sales tax paid is an allowable deduction. But reserve for sales tax liability is not allowed as a business expense. As such, reserve for future losses meant for sales tax liability in future is an inadmissible expense for business. 2. Donation to Aligarh University is an inadmissible expense for business. However, a deduction will be allowed for donation from gross total income under Section 80G. As it is donation to Aligarh University, regarded as a university of national eminence, 100% of actual donation given, Rs. 1,000 will be allowed as a deduction. 3. Cost of wooden showcase, a capital expenditure, was regarded as an expenditure incurred on advertisement. As such, it was an admissible expense for business till the assessment year 1997-98. However, with effect from the assessment year 1998-99, it is not allowed as a business expense. 4. Refund of income tax is a non-business income. So, it should be deducted from net profit, while ascertaining the profit from business. Again, it should not be included in the total income of the assessee. 5. Profit on sale of residential house is a capital gain. It is a short-term capital gain, as this house was held just for 3 years, and not for more than 3 years. 6. Bad debts recovered is a non-business income, because it was disallowed in earlier year.
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7. Interest on Govt. Securities has to be included in the income as it is, as there is no tax deducted at source. Problem 5: Dr. NIRAJAN is a renowned medical practitioner. He furnishes his Receipts and Payments Accounts for the financial year 2007-2008:
Rs. To Balance b/d " Consultation fee " Visiting fee 14,000 20,000 30,000 By Rent of Clinic " Electricity and Water " Purchase of Professional books " Household Expenses " Municipal Taxes paid in respect of property " Motor car purchased " Fire insurance in respect of property 6,000 11,000 7,000 " Surgical Equipment " Advance income-tax " Salary to compounder " Amount paid for new telephone connection " Life Insurance premium 30,000 " Gifts to wife " Interest on loan " Loan account installment paid " Donation to political party " Car expenses " Purchase of Medicine " Balance c/d. 2,08,000 4,000 7,800 2,000 24,000 200 4,700 10,000 12,000 3,000 15,000 5,000 2,000 5,000 500 15,000 35,000 54,800 2,08,000 Rs. 6,000 2,000
" Loan from Bank for professional purposes 25,000 " Sale of Medicines " Gifts and presents from patients " Remuneration from articles published in Professional Journal " Rent from House Property " Interest on Post Office National Savings Certificates " Salary received from a medical college for working as a part-time professor 60,000 5,000
Compute his income from profession and also gross total income for the assessment year 2008-2009 after taking into account the following: 1) Dr. Nirajan is insured for Rs. 1,30,000.
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2) One-third of the car expenses are in connection with the personal use. 3) Depreciation on motor car is allowed at the rate of 20%. 4) The construction of the house property was completed in April, 1992. It was let out for residential purposes. 5) Rent of clinic includes Rs.500 paid for last year and Rs.500 paid in advance for next year. 6) Rent of clinic outstanding Rs. 1,000. Solution:
Statement showing Dr. Nirajans Income from profession for the AY 2008 -2009 Rs. Rs. Professional Receipts or earnings: Consultation fee 20,000 Visiting fee 30,000 Sale of medicines 60,000 Gifts and presents from patients 5,000 Remuneration from articles published 6,000 1,21,000 Less: Professional Expenses: Rent of clinic 6,000 Electricity and water 2,000 Depreciation on books (100% depreciation) 4,000 Depreciation on surgical equipments (4,700 25 %) 1,175 Salary to compounder 12,000 Amount paid for new telephone connections 3,000 Interest on loan used for professional purposes 2,000 Purchase of medicines 35,000 Car expenses connected with professional 10,000 Depreciation on motor car used for professional practice (allowable at the rate of 20% of the cost of car) (24,000 X 20%) 4,800 79,975 Income from Profession 41,025
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Statement of Total Income for the Assessment Year 2008- 2009 Rs. Income from salaries Salary received for part-time work (and also gross salary) Less deduction Income from House Property (Let out): Gross annual value of property (Rent from property) Less Municipal tax paid in respect of house property Net annual value of the property Less Standard Deduction (30% of net annual value) Income from Profession (as calculated) Income from other sources: Gross Total income 11,000 2,000 9,000 2,700 6,300 41,025 Nil 77,325 30,000 Nill 30,000 Rs.
Problem 7. Following is the summary of cash transactions of Mrs. Geetha Shet, a practising Chartered Accountant of Pune for the year ended 31.3.2008:
Office expenses Office Rent Salary and wages Stationery and Printing Subscriptions to Institute of Chartered Accountants Books bought (professional) Travelling Expenses Interest on Bank loan Donation to NDF Computer Installation expenses Surplus Rs. 10,000 5,000 17,050 1,000 Audit fees Consultation fee Tuition fees Appellate Tribunal appearance 3,000 Miscellaneous 1,300 Interest on Government security 5,800 Rent received 3,000 Presents from clients 5,000 Personal gifts from fatherin-law 10,000 41,990 1,03,140 1,03,140 Rs. 19,210 10,000 5,000 15,000 20,000 8,880 10,000 10,000 5,050
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Loan from Bank was arranged for construction of a house in which Mrs. Geetha Shet resides. Municipal value of the house is Rs. 8,000 with local tax of Rs. 800 p.a. of the travelling expenses are found to be not
allowable. Compute the total income of Mrs. Geetha Shet. Solution:

Statement of Mrs. Geetha Shets Income from Profession for the A Y 2008 - 2009 Rs. Professional Earnings or Receipts: Audit fees Consultation fee Appellate Tribunal Appearance Presents from clients Tuition fees Miscellaneous receipts Less: Professional expenses : Office expenses Office rent Salary and wages Stationery and printing Subscription to Institute of Chartered Accountants 100% Depreciation on the cost of books Travelling expenses (Allowable 5,800 ) Income from profession 10,000 5,000 17,050 1,000 3,000 1,300 4,350 41,700 37,510 19,210 10,000 15,000 10,000 5,000 20,000 79,210 Rs.
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Statement of Total Income for the Assessment Year 2008-2009

Income from House Property (Let out): Gross Annual value of the property (Rent received) Less: Municipal taxes paid Net Annual value of the property Less: Allowable Deductions Standard Deduction (30% of net annual value) Self-occupied: Annual Value of the Property Less: Allowable Deduction under the head Income from House property Interest on loan used for self-occupied property Income from House Property Income from Profession (as calculated) Income from other sources: Interest on Government securities Gross total Income Less: Allowable Income Deductions from Gross Total 8,880 50,390 3,000 3,000 4,000 37,510 Nil 3,000 7,000 Rs. 10,000 Nil 10,000 Rs.
1. Deduction for donation to National Defence Fund under Section 80G (100% of actual donation of Rs. 5,000 Total Taxable Income
5,000
5,000 45,390
I. Self Assessment Questions (SAQ 1) 1. If any payment exceeding Rs ___________ is paid by ___________ and claimed as a deduction, 20% of the whole of such expenditure is disallowed. 2. Block of asset means _______________________________________ _________________________________________________________. 3. Installation charges of computer is a ________ expenditure hence it is _______ for taxable business income.
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4. List the deemed incomes ------------------------------------------------------------------------------------------II. Self Assessment Questions (SAQ 2) 1. Presents from clients is _______ income for computation of taxable professional income of Mr. Varun, a practicing C.A. A. Disallowed B. Allowed C. Partially allowed D. None of these 2. The rate of depreciation applicable for intangible assets like know how, patent etc. is _______. A. 40% B. 20% C. 100% D. 25% 3. Which of the following is not a deemed business profits. A. Bad debts recovered B. Recovery of loss C. Remission of liability D. Commission received 4. Proprietors salary is _____ for the computation of taxable business income. A. Allowed B. Partially allowed C. Disallowed D. Deductible ---------------------------------------------------------------------------------
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5. Installation charges of computer is a _____ hence it is ____ for taxable business income. A. Revenue expenditure, allowed B. Capital expenditure, disallowed C. Revenue loss, allowed D. Capital loss, disallowed 6. For the computation of taxable business income contribution to staff welfare fund is ____. Amount paid towards staff welfare expenses are____. A. allowed & disallowed B. disallowed & disallowed C. allowed & allowed D. disallowed & allowed 7. For computing tax for business income. i) Loss of stock by fire is ____.
ii) Loss of furniture by fire is _____. A. Admissible and inadmissible B. Inadmissible and admissible C. Admissible and admissible D. Inadmissible and inadmissible 8. Installation charges of computer is a _____ hence it is ____ for taxable business income. A. Revenue expenditure, allowed B. Capital expenditure, disallowed C. Revenue loss, allowed
D. Capital loss, disallowed
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9. The WDV of the assets on 1st April of the previous year are as below: Plant & Machinery (25% rate) Rs.250000 Car (20% rate) Rs.100000 Buildings (10% rate) Rs180000 During the year he purchased machinery on 1st July for Rs.50000 and sold the car for Rs. 85000. Find out the total admissible depreciation A. 93,000 B. 2,00,000 C. 1,35,000 D. 1,65,500 10. Mr. Vikram is a practicing accountant. He also took 40 lectures in a college at Rs. 100 per lecture. His receipts and payment account is given below. Compute his professional income
To Bal B/d To Audit fee To Remuneration for Lectures To Examiners fees To Interest on securities To Rent from LOP To Royalty from a book 4,000 1,500 1,550 3,000 5,000 1,84,550 9500 1,60,000 By Office Expenses By Municipal Taxes By Personal Expenses By Membership fees By LI premium By Scooter purchased By Scooter expenses By Balance C/d 25,000 500 5,000 500 2,000 24,500 12,000 1,15,050 1,84,550
Adjustments: a) Office expenses include Rs. 500 paid as typing charges for repeating a manuscript of his book. b) of the scooter expenses related to personal use c) Interest on securities includes Rs. 775 being interest on Tax Free Government Securities. d) Depreciation allowable on Scooter is at 15%.
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e) Assessee is not the employee of the college and therefore remuneration and examiners fees should be charged to professional income A. 1,32,638 B. 1,65,500 C. 1,35,000 D. 2,00,000
5.10 Summary
Sections 28 to 44 deal with profits or gains from business or profession. This head charges incomes from business, profession and vocation. From the gross receipts, deductions listed under sections 30 to 37 are to be made.

5.11 (A) Questions 1. State whether the following are admissible as deductions in the case of business: (a) Wealth tax (b) Income-tax (c) Arrears of income-tax paid (d) Advance income-tax paid (e) Sales tax 2. State with reasons whether the following are allowable as deductions in the case of a business: (a) Donation to a political party (b) Donation to a religious institution (c) Donation to a university (d) Embezzlement of cash
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5.11(B) Exercises 1. Sri Ram Gopal is the owner of a department store at Chennai. He requests you to compute his total income for the Assessment year 20082009 on the basis of the following Profit & Loss Account for the year ended 31st March, 2008: Dr. Rs. To Opening stock " Purchases " Salaries and Wages " Rent, Rates, etc. " Commission " Household expense " Income-tax for 2006-07 " Advertisement " Postage and Telegram " Interest on Capital " Reserve for Bad Debts " Depreciation on furniture " Net Profit 3,60,000 21,00,000 1,20,000 40,000 27,000 18,000 42,000 10,000 4,000 6,000 5,000 1,000 17,000 27,50,000 The following additional information is given: (a) Stock of goods at the opening as well as at the closing day of the accounting period had been under-valued at 10% of the cost price. (b) Sales include a sum of Rs.50,000 representing the value of goods withdrawn for the use of Sri Ram Gopals family members. These goods were purchased at the cost of Rs.40,000. 27,50,000 By Sales " Closing stock Cr. Rs. 23,00,000 4,50,000
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(c) Depreciation, according to Income-tax Rules, works out 10% of Rs.5,000 being written down value of the furniture on 1-4-2006. 2. The following is the Profit and Loss Account of Raj Oil Mills for the financial year 2007-2008. Compute its business income on the basis of additional information.
Profit and Loss Account Rs. Office Salaries Proprietors salary Interest on capital General expenses Bad debts Advertising expenses Insurance premium (fire) Depreciation Reserve for bad debts Income-tax Advance Income-tax Donation to a school Car expenses Net Profit 15,000 Gross profit 10,000 Profit on sale of car 3,000 Recovery of bad debts 7,000 Interest on Government 1,000 securities 3,700 Dividends 1,500 Gifts on the occasion 5,000 of grahapravesham 3,000 4,000 2,000 2,500 2,000 52,300 1,12,000 (a) General expense include: (i) Rs. 2,500 as compensation paid to an accountant who had to be removed from service in the interest of business. (ii) Rs. 3,300 as contribution paid to the Govt. for laying electric cables for the companys plant.
Rs. 80,000 15,000 5,000
3,500 3,500
5,000
1,12,000
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(b) Depreciation as regards the relevant blocks of assets Rs.3,500. (c) Advertising expenses include Rs.1,000, the cost of a neon- signboard. Expenses (Rs.400) in printing calendars and diaries, are also included therein. (d) In the assessment year 2001-2002, the assessing officer had refused to allow deduction for the bad debts of Rs. 3,000 now recovered. (e) Car expenses include Rs.500 attributable to use of car for personal work. 3. Mr. Bhagwandas is a registered medical practitioner. He keeps his books on cash basis and his summarised cash account for the year ended 31st March, 2008 is as under:
Rs. To Balance b/d. " Loan from Bank " Sale of medicines " Consultation fees " Visiting fees " Interest on investments " Rent from property (Not subject to local taxes) " Honorarium received from a private hospital 2,000 By Cost of medicines Rs. 10,000 2,000 6,000 900 600 600 300 1,800 2,000 180 200 12,120 36,700
3,000 " Surgical equipments 13,250 " Motor car 5,000 " Car expenses 4,000 " Salaries 3,850 " Rent of dispensary 3,600 " General expenses " Personal expenses " Life Insurance premium 2,000 " Interest on loan from Bank " Insurance of property " Balance c/d. 36,700
Compute his total income for the previous year 2007-2008 taking into consideration the following further information: (a) (b) 1/3 rd of motor car expenses are in respect of his personal use. His investments are all in Government Securities.
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(c)
Depreciation allowable on motorcar used for professional practice is Rs.300.
4. Srinivas Prasad is a registered medical practitioner. He has prepared the following Income and Expenditure Account for the year ending 31st March, 2008. You are required to prepare a statement showing his income from profession. Income and Expenditure Account
Rs. Household expenses Car purchased Travelling expenses (Personal) Charity and donations Income-tax Salaries Gifts to daughter Establishment expenses Surgical equipments Books Life insurance premium Wealth tax Interest on capital Surplus 4,000 1,000 2,000 8,000 7,000 1,000 4,000 1,200 2,000 1,000 1,000 8,700 90,900 90,900 20,000 30,000 Consultation fees Visiting fees Gains on race (gross) Share in sale proceeds of an ancestral house Profit on sale of securities Dividend on shares Interest from Post-office savings bank Gifts from father-in-law Bad debts recovered (not allowed in earlier years) Interest on fixed deposits (Gross) 1,300 2,000 600 2,000 34,000 6,000 5,000 Rs. 10,000 20,000 10,000
Rate of depreciation allowable on car is 20% and on surgical equipment is 25%. 5. Mr. Vasanth is practicing as a lawyer at Jaipur. He keeps his books on cash basis and his summerised Receipts and Payments Account for the year ended 31st March 2008 is as under:
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Rs. To Balance b/d " " " " Legal fees Special Commission fees Examiners fees from University Interest on fixed deposit in a bank " Sale proceeds of house Property " Dividend from Co-operative society " Director's fees
Rs.
5,000 By Subscription to law Journals 400 30,000 " Law books purchased 500 " Rent 2,800 " Car Expenses " Office Expenses 300 " Electric Charges " Income-tax 40,000 " Gifts to daughter " Household Expenses 1,000 " Cost of typewriter 100 Purchased for official use " Donation to an approved institute " Car purchased " Life Insurance premium " Balance c/d. 79,700 1,000 22,000 5,000 22,100 79,700 700 1,000 1,500 2,000 5,000 1,000 2,000 1,000 15,000
The following further information is given: 1) Rent and electric charges are in respect of the premises occupied by Vasanth. One-half of the premises is used by him as his residence and the remaining half is for office use. 2) One-half of car expenses is in respect of his personal use. 3) Rs. 2,200 is allowable as depreciation in respect of car used for professional purposes. 4) Life insurance premium has been paid on a policy of Rs.40,000 taken on his own life. You are required to prepare a statement showing his income from profession and also compute his total income for the assessment year 20082009.
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SAQ 1: 1. Rs 2,000, Cash 2. Refer Para 5.7 3. Capital, Disallowed 4. Refer Para 5.4 SAQ 2: 1. B 2. D 3. D 4. C 5. B 6. D 7. A 8. B 9. A 10. A
TQs 5.11: Refer relevant Theories, formats and illustrations for all the problems Additional Hints: Q. No. 1: 1. The notional profit on goods withdrawn by Ram Gopal for his family members, Rs. (transfer price Rs. 50,000 less cost of those goods Rs.40,000) 10,000 should be deducted from net profit to ascertain the income from business. 2. Under-valuation of opening stock, viz. Rs. (3,60,000 should be deducted from net profit. 3. Under-valuation of closing stock Rs. (4,50,000 added to net profit.
10 ) 50,000 should be 90
10 ) 40,000 90
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Unit 6
Unit 6
Structure: 6.1 Introduction Learning objectives 6.2 6.3 6.4 6.5
Capital Gains
What is chargeable under the head capital gains? Meaning of capital gain Meaning of capital asset Types of capital assets 6.5.1 6.5.2 Short term capital assets Long term capital assets
6.6 6.7 6.8
Meaning of transfer in relation to a capital asset Transactions which are not regarded as transfer Types of capital gains 6.8.1 6.8.2 6.8.3 Short term capital gain Long term capital gain Distinction between STCG and LTCG
6.9
Computation of capital gains
6.10 Consideration for the transfer of a capital asset 6.11 Cost of acquisition of capital asset 6.12 Capital gains exempt from tax 6.13 Illustration Self Assessment Questions (SAQ1, SAQ2) 6.14 Summary
6.15 Terminal Questions 6.16 Answers to SAQs and TQs
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6.1 Introduction
This unit explains the basic concepts and terms of Capital gains. It also includes simple problems on computing long term and short term capital gains. Learning Objectives: After studying this Unit, you will be able to: Understand the meaning of capital asset and the types of capital assets. Understand the meaning of capital gain and types of capital gains. Understand the meaning of fair market value. Understand the cost of acquisition of capital asset. Understand the capital gains exempt from tax. Know the format of capital gains. Compute the capital gains under different circumstances.
6.2 What is chargeable under the head capital gains?

As per Section 45 (1) of the Income-tax Act of 1961, profits or gains arising from the transfer of a capital asset affected in the previous year by the assessee is chargeable to tax under the head Capital Gains. The capital gains are chargeable to tax only when the following conditions are satisfied: i) There is capital asset, short-term or long-term. ii) There is the transfer of that capital asset by the assessee. iii) The transfer of the capital asset is affected during the previous year. iv) There arises profit or gain on the transfer of the capital asset. v) The profit or gain on the transfer of capital asset is not exempt from tax under Sections 54, 54B, 54D, 54EC, 54 ED, 54F and 54G of the Income-tax Act.
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Basis of Charge of Capital Gains to Income tax: Capital gains are deemed to be the income of the previous year in which the transfer of the capital asset takes place. That means, capital gains are charged to income-tax on accrual basis, and not on receipt basis.
6.3 Meaning of Capital Gains

Capital gains means any profits or gains arising from the transfer of a capital asset. For instance, if a capital asset is transferred, say, sold, for a price which is higher than its cost of acquisition, the difference between the transfer price (i.e., sale price) and the cost of acquisition will be the capital gains from that asset. According to Section 45 (1) any profit or gain arising from the transfer of a capital asset effected in the previous year by the assessee is charged to tax under the head capital gains if it is not eligible for exemption u/s 54 to 54G. Capital gains include the following: 1. Profits or gains arising from the conversion of a capital asset by the owner into stock-in-trade of his business: This capital gain will be charged to tax, not in the year in which the conversion takes place, but in the year in which the converted stock in trade is sold or otherwise transferred by the owner. In that year (i.e., in the year in which the converted stock is sold or otherwise transferred by the owner), the excess of the fair market value of the capital asset on the date of its conversion (which is considered as its full value of consideration) over its cost of acquisition will be treated as the capital gain, and the excess of its sale price over its fair market value on the date of its conversion will be treated as the income from business. 2. Profits or gains arising from the transfer of a capital asset by a person to a firm in which he is a partner, or to any association of
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persons or body of individuals in which he is a member by way of capital contribution or otherwise: This capital gain will be charged to tax as the income of the partner of the firm or member of the association of persons or body of individuals in the year in which such transfer takes place. The amount recorded in the books of the firm or the association of persons or the body of individuals on the date of transfer as the value of the capital asset will be considered as the sale consideration of the capital asset, and the excess of its sale consideration over its cost of acquisition will be treated as the capital gain. 3. Profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or association of persons or body of individuals: This capital gain will be charged to tax as the income of the firm or association of persons or body of individuals in the previous year in which the transfer (i.e., the distribution of the capital asset) takes place. The fair market value of the capital asset on the date of distribution will be considered as the full value of sale consideration of the capital asset, and the excess of its sale consideration over its cost of acquisition will be treated as the capital gain. 4. Profits or gains arising from the transfer of a capital asset by way of compulsory acquisition under any law: This capital gain will be charged to tax in the hands of the recipient of compensation in the year in which the transfer (i.e., the compulsory acquisition) takes place. 5. Profits or gains arising from the transfer of self-generated goodwill of the business: Profit arising from the transfer or sale of self-generated or self-created goodwill of the business will be treated as the capital gain of the
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transferor of the business in the previous year in which the transfer or sale of self-generated goodwill takes place. In this case, the cost of acquisition of goodwill will be nil, and so, the entire net consideration received for the sale of goodwill will be the capital gain of the transferor. 6. Profit made by a holder of shares on the transfer of shares to the company: As per the Finance Act, 1999, with effect from the assessment year 2000-01, where a company purchases its own shares or any other specified securities, and some consideration is received by the holder of such shares or securities, the difference between the consideration received for those shares or securities and the cost of acquisition of those shares or securities by the holder will be treated as the capital gain of the previous year in which such shares or securities are purchased back by the company. 7. Profit on transfer of asset under slump sale: As per the Finance Act, 1999, with effect from the assessment year 2000-01, any gains arising from slump sale will be chargeable to tax as capital gains. They will be treated as the capital gains of the previous year in which such transfer takes place. 8. Profit on money or other asset received from the insurer under a contract of insurance: As per the Finance Act, 1999, with effect from the assessment year 2000-01, under Section 45(1A), where any person receives any time during the previous year any money or other asset from the insurer under a contract of insurance as a result of damage to or destruction of any capital asset caused by (i) natural calamity, such as flood, earthquake, cyclone, typhoon, etc., (ii) civil disturbance or riots or (iii) enemy action, whether there is war or not, any gain arising from the receipt of such money or other asset will be chargeable to tax as capital
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gain of the previous year in which such money or other asset is received.
6.4 Meaning of capital asset

According to Section 2 (14) capital asset means property of any kind held by an assessee, whether it is connected with his business or profession or not but does not include: a) Any stock in trade, consumable stores or raw materials held by an assessee for the purpose of his business or profession. b) Personal effects of movable nature (including wearing apparel and furniture but excluding jewellery) held for personal use by the assessee or by his family members. c) Agricultural land in India, not being land situated within the limit of any mucipality. d) 6 1/2% Gold Bonds of 1977 or 7% Gold Bonds of 1980 or National Defence Gold Bonds of 1980 issued by the Central Government. e) Gold Deposit Bonds issued under Gold Deposit Scheme, 1999 with effect from 1.4.2000.
6.5 Types of capital assets

Capital assets are of two types, 1) Short-term capital asset and 2) Long-term capital asset. 6.5.1 Short-term capital asset refers to a capital asset held by an assessee for not more than 36 months (or for not more than 12 months) if the capital asset is (i) equity or preference shares of a company, whether quoted or not, (ii) securities like debentures and Government securities listed in a recognised stock exchange in India, (iii) units of UTI, whether quoted or not and (iv) units of a mutual fund specified under Section 10(23D) of the Income-tax Act, whether quoted or not.
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6.5.2 Long-term capital asset is one, which is not a short-term capital asset. In other words, a long-term capital asset is a capital asset held by an assessee for more than 36 months (or for more than 12 months, if the capital asset is shares in a company, securities like debentures and Government securities listed in a recognised stock exchange in India, units of Unit Trust of India and units of a mutual fund specified under Section 10 (23D) of the Income-tax Act). The period of 36 months is to be calculated from the date of acquisition of the asset by the assessee to the date immediately preceding the date of transfer. Where the assessee under gift has acquired the asset or will, the date of acquisition of the previous owner will be considered.
6.6 Meaning of transfer in relation to a capital asset

As capital gains arise from the transfer of a capital asset, it is necessary to know the meaning of the term transfer' in relation to a capital asset. Under Section 2 (47) of the Income-tax Act of 1961, transfer means and includes: a) The sale (i.e., the exchange of a capital asset for money), exchange (i.e., the exchange of one capital asset for another capital asset) or relinquishment (i.e., the giving up) of a capital asset. b) The extinguishments of any rights in a capital asset (i.e., the complete termination of any right in a capital asset), e.g., forfeiture of shares. c) The compulsory acquisition of a capital asset under any law. d) The conversion of a capital asset by the owner into stock-in-trade of his business. e) Any transaction involving the allowing of the possession of any immovable property in part performance of a contract of the nature referred to in the Transfer of Property Act of 1882.
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f)
Any transaction, which has the effect of transferring or enabling the enjoyment of any immovable property.
6.7 Transactions which are not regarded as transfer

The following transactions are not regarded as transfer U/s45. 1. Any distribution of capital assets on total or partial partition of HUF. 2. Distribution of assets in kind, of a company to its shareholders on its liquidation. 3. Any transfer of capital asset in a scheme of amalgamation, by the amalgamating company to the amalgamated company if the
amalgamated company is an Indian Co. 4. Any transfer by way of conversion of debentures for debenture stock or deposit certificate of a company into shares or debentures of that company.
6.8 Types of capital gains

Capital gains are of two types. They are (1) short-term capital gains and (2) long-term capital gains. 6.8.1 Short-term capital gains are capital gains arising from the transfer of short-term capital assets. In other words, short-term capital gains are the capital gains that arise from the transfer of a capital asset which has been held by the assessee for not more than 36 months (or for not more than 12 months, if the capital asset is shares in a company, etc.) immediately preceding the date of its transfer. 6.8.2 Long-term capital gains are capital gains arising from the transfer of long-term capital assets. In other words, long-term capital gains are the capital gains that arise from the transfer of a capital asset which has been held by the assessee for more than 36 months (or for more than 12 months,
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if the capital asset is shares in a company, etc.) immediately preceding the date of transfer. Capital Losses: Capital losses mean any losses arising from the transfer of a capital asset. Just as capital gains are divided into two types, capital losses also can be divided into two types, viz., (1) short-term capital losses and (2) long-term capital losses. Short-term capital losses are capital losses arising from the transfer of shortterm capital assets. Long-term capital losses are capital losses arising from the transfer of longterm capital assets. 6.8.3 Distinction between Long-term Capital Gains and Short-term Capital Gains The main differences between long-term capital gains and short-term capital gains are: 1. Long-term capital gains arise from the transfer of a long-term capital asset, whereas short-term capital gains arise from the transfer of a short-term capital asset. 2. Long-term capital gains are taxed at a lower rate (i.e., at 20%). But short-term capital gains are taxed at the usual rates along with other incomes. 3. While computing the long-term capital gains, the cost of acquisition of the asset and the cost of improvements are indexed. But no such indexation is done, while computing the short-term capital gains. 4. Where a long-term capital asset is acquired before 1st April, 1981, the fair market value as on 1st April, 1981 or the original cost of acquisition, whichever is beneficial to the assessee, is considered. But no such option is available in respect of short- term capital gains.
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5. In the case of long-term capital gains, exemption from tax under Sections 54, 54B, 54D, 54EC, 54ED, 54F and 54G is available. On the other hand, exemption from tax is available in respect of short-term capital gains only under Sections 54B, 54D and 54G.
6.9 Computation of capital gains

Capital gains can be computed as follows: Format 1 Computation of short-term capital gains:
Particulars Sale Proceeds Less: Selling Expenses. Net Consideration Less: cost of acquisition Less: cost of improvement Long-term Capital Gain Less: Exemptions Taxable Short-term Capital gains xxxx xxxx xxxx xxxx xxxx xxxx Rs. xxxx xxxx xxxx Rs.
Format 2 Computation of long-term capital gains:

Particulars Sale Proceeds Less: Selling Exps. Net Consideration Less: Indexed cost of acquisition Less: Indexed cost of improvement Long-term Capital Gain Less: Exemptions Taxable Long-term Capital gains xxxx xxxx xxxx xxxx xxxx xxxx Rs. xxxx xxxx xxxx Rs.
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Observe the difference between the above two formats Indexed cost of acquisition: Indexed cost of acquisition means Cost x Cost inflation index for the year of sale of asset Cost inflation index in which year the asset was Acquired or on 1.4.1981 later of the two Indexed cost of improvement: Indexed cost of improvement means Cost x
Cost inflation index for the year of sale of asset Cost inflation index for the year of sale of asset
The Government of India has notified the following cost inflation index:
Financial year 1981- 82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 2006-2007 CII 100 109 116 125 133 140 150 161 172 182 199 223 519 Financial year 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2005-2006 2007-2008 CII 244 259 281 305 331 351 389 406 426 447 463 497 551
Remember CII for the base year 81-82 & P.Y. 2007- 2008 It may be noted that with effect from the assessment year 1998-99, bonds and debentures, other than the capital indexed bonds issued by the Government, will not be eligible for the benefit of indexation. From the full value of consideration received or accruing as a result of the transfer of the long-term capital asset or the fair market value of the
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long-term capital asset, the indexed cost of acquisition of the long-term capital asset, the indexed cost of improvement to the long-term capital asset and the expenditure wholly and exclusively incurred in connection with the transfer of the long-term capital asset are deducted. The balance is taken as the long-term capital gains. From the balance, exemption for long-term capital gains provided under Sections 54, 54B, 54D, 54EC, 54ED, 54F and 54G of the Income-tax Act is deducted. The resulting balance is known as the taxable long-term capital gain. Problem 1: (Indexed COA and COI) Mr. AMAR purchased a house on 1.4.2000 for Rs.250000. On 1.7.2002 he incurred Rs.50000 towards improvements. He sold the above house on 30.7.2006. Compute the indexed cost of acquisition and indexed cost of improvement. [CII; 2000-2001 406, 2002-2003- 447, 2007- 2008 551] Solution: Indexed cost of acquisition: = Cost x
Cost inflation index for the year of sale of asset Cost inflation index in which year the asset was acquired
Indexed cost of improvement: = Cost x

Cost inflation index for the year of sale of asset Cost inflation index for the year of improvemen t
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6.10 Consideration for the transfer of a capital asset

For the computation of capital gains arising from the transfer of a capital asset, the consideration received for the transfer of that capital asset is required to be taken into account. So, it is necessary to have some idea about the consideration for the transfer of a capital asset. Usually, the consideration for the transfer of a capital asset is the amount received by the assessee on the transfer of the capital asset. However, if the income-tax officer believes that the declared amount of consideration is less than the fair market value of the capital asset, he may take the fair market value of the capital asset on the date of transfer as the amount of consideration for the capital asset.
6.11 Cost of acquisition of capital asset

For the computation of capital gains arising from the transfer of a capital asset, the cost of acquisition of that capital asset is an important factor to be taken into account. So, it is necessary to have some idea about the cost of acquisition of a capital asset. Cost of acquisition of a capital asset means the cost at which that asset was acquired by the assessee. In other words, it refers to the total of all expenditure incurred by the assessee in acquiring the capital asset, such as the purchase price of the asset, expenses on transport, erection or installation expenses, legal expenses for the acquisition, interest paid on the money borrowed for the purchase of the asset, etc. In case the asset has been constructed by the assessee, then, all expenditure incurred by him on its construction will be the cost of acquisition. The cost of acquisition of an asset is determined under different circumstances as follows:
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1. Cost to the previous owner deemed to be the cost of acquisition of the asset: If an asset becomes the property of an assessee in any one of the following special modes of transfer, the cost of acquisition of the asset is the cost at which it was acquired by the previous owner, as increased by the cost of any improvement incurred by the previous owner and by the assessee himself: a) On the total or partial partition of a Hindu undivided family. b) Under a gift, will, succession, inheritance or devolution. c) Under a transfer to a revocable trust or irrevocable trust. d) On the liquidation of the company. e) On the transfer by a holding company to its wholly - owned Indian subsidiary or vice versa. f) On the transfer of a capital asset in a scheme of amalgamation by the amalgamating company to the amalgamated company which is an Indian company. g) On the acquisition of property by a Hindu undivided family where one of its members threw his self-acquired property into the joint family property after 31.12.1969. It may also be noted that the previous owner need not be the immediate owner. He is one who had actually incurred a cost in respect of that asset. If the cost of acquisition of the previous owner cannot be determined, then, the fair market value of the asset on the date when the previous owner acquired the same will be taken as the cost of acquisition of that asset. 2. Options for asset acquired before 1.4.1981: Where an asset was acquired by the assessee before 1.4.1981, the assessee can take the original cost of acquisition of that asset or its fair
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market value as on 1.4.1981, whichever is beneficial to him. (Whichever is higher). If the assessee opts for the fair market value as on 1.4.1981, any capital expenditure incurred on or before 1.4.1981 for improving the asset should be ignored. However, the capital expenditure incurred after 1.4.1981 for improving the asset should be considered. If the assessee opts for the actual cost of acquisition, then, any cost of improvement effected before, on or after 1.4.1981 should be indexed and considered. Problem 2 (Purchase before 1981) SUDHEER POOJARI purchased a house in Mysore for Rs.80000 in 1974. He added two rooms in 1980 at a cost of Rs.20000. in 1985 he gifted the house to his son Sudeer Poojari constructed upstairs at a cost of Rs.50000 in 1988. Y sold the house on 1.9.2007 for Rs.1600000. Compute the taxable capital gains if the FMV on 1.4.81 is Rs.250000. (CII for 81-82 100, 85-86 161 & 2007-2008 551) Solution: Notes: FMV on 1.4.81 or COA (Whichever is higher) 250000 or 80,000 Cost of improvement in 1988-89 Indexed cost of acquisition Indexed cost of improvements (250000 x 551/100) (50000 x 551/161) 250000 50000 1377500 171118
Any improvements before 1-4-1981 should be ignored
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Computation of Long-term Capital Gains Sale Proceeds Less: Indexed cost of acquisition Indexed cost of improvements Long-term capital gains 1377500 171118 1548618 51382 1600000
3. Cost of acquisition of depreciable assets: In the case of depreciable asset WDV on the date of its transfer will be treated as COA. The new system of providing depreciation on block assets is being followed. Sec. 50 deals with computation of capital gains in the case of depreciable assets. Usually there cannot be STC loss except where any block of assets ceases to exist. The block of assets may cease to exist because all assets in the block are sold during the previous year and consideration received there from falls short of WDV plus cost of assets acquired during the year plus expenses incurred to effect the transfer. 4. Cost of acquisition of shares in an amalgamated company: Where shares in an amalgamated company became the property of the assessee in consideration of the transfer of shares held by him in the amalgamating company, the cost of acquisition of those shares will be the cost of the shares held by him in the amalgamating company. 5. Cost of acquisition of bonus shares: Where bonus shares were received in respect of equity shares held in a company by an assessee, the cost of bonus shares to the assessee should be taken as nil, with effect from the assessment year 1996-97. 6. Cost of acquisition of goodwill: Where the goodwill is self-generated or self-acquired, the cost of acquisition of such self-generated goodwill will be nil.
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7. Cost of acquisition of trademark or brand name: As per the Finance Act, 2001, with effect from the assessment year 2002-03, the cost of acquisition of a trade mark or a brand name associated with a business will be the same as that of goodwill of a business. 8. Cost of acquisition of other self-generated assets: As in the case of self-generated goodwill, the cost of acquisition of other self-generated assets like the self-generated tenancy rights, stage carriage permits and loom hours should be taken as nil. Again, with effect from the assessment year 1998-99, the cost of acquisition of own right to manufacture, produce or process any article or thing should be taken as nil. With effect from the assessment year 2003-04, the cost of acquisition of right to carry on business is also taken as nil. If goodwill, tenancy rights, or stage carriage permits is acquired from a previous owner, its cost of acquisition will be its cost to the previous owner. 9. Adjustment of advance money received: Where any advance money received by an assessee on any previous negotiation had been forfeited and retained by him, the same will be deducted from the cost of acquisition of the asset concerned in computing the cost of acquisition of that asset.
6.12 Capital gains exempt from tax

Capital gains in respect of certain transfers, transactions or assets are fully exempt from tax. The various capital gains exempt from tax are as follows: 6.12.1 Capital gains arising to a company from the distribution of its assets in kind among its shareholders on its liquidation: (sec.46)
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6.12.2 Capital gains arising from the transfer of a residential house: (sec.54) Assessee: Individual or HUF Type of asset: long term capital asset Conditions: a) The income is chargeable under income from house property before the transfer b) The assessee has purchased a new residential house within a period of one year before, or two years after the date of the transfer of the old house, or has constructed a new residential house within a period of 3 years after the date of the transfer of the old house. c) The amount of long-term capital gains arising from the transfer of the old residential house has been invested by the assessee on the purchase or construction of a new residential house within the prescribed period as stated above. d) The house is not sold or transferred by the assessee for a period of 3 years from the date of its purchase or construction. If the new house is sold within 3 years along with the fresh capital gains previously exempt capital gains will also be taxed as short-term capital gains. e) Where the amount not utilized it may be deposited in a Capital Gains Accounts Scheme. The amount deposited with a bank under the Capital Gains Accounts Scheme should be utilised by the assessee for the purchase or construction of a new residential house within the stipulated period of 3 years. If the amount deposited is not fully utilised by the assessee for the purchase or construction of a new residential house within the stipulated period of 3 years, the amount not so utilised will be treated as the longterm capital gains of the previous year in which the specified period
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expires. Further, the assessee can withdraw the amount only in accordance with the scheme framed by the Central Government in this regard. 6.12.3 Capital gains arising from the transfer of agricultural land: (Sec 54B) Assessee: Individual Conditions: a) The land transferred may be long-term capital asset or short-term capital asset. b) The land was used for agricultural purposes by the assessee or by his parents at least for a period of 2 years before the transfer. c) The assessee has invested the capital gains arising from the transfer of such agricultural lands on the purchase of another agricultural land in an urban area or in a rural area, within 2 years from the date of such transfer. d) The new agricultural land should not be transferred by the assessee within a period of 3 years from the date of its purchase. If the new agricultural land is transferred by the assessee within a period of 3 years from the date of its purchase, then, the amount of capital gains arising from the transfer of the new agricultural land as well as the amount of capital gains exempted earlier will be charged to tax as the short-term capital gains of the previous year in which the transfer takes place. e) If the amount of capital gains arising from the transfer of the original agricultural land has not been utilised by the assessee for the purpose of purchase of new agricultural land before the due date of filing the return of income, then, it should be deposited by the assessee before the due date of filing the return of income in an account opened, under the Capital Gains Accounts Scheme of 1988, with the State Bank of India, any of its subsidiaries or any of the notified nationalised banks.
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6.12.4 Capital gains arising from compulsory acquisition of land or building forming part of industrial undertaking (Sec 54D) An assessee may be required to shift his industrial undertaking because of the compulsory acquisition of its land and buildings. The conditions for exemption are: a) Such land or building may be short-term or long-term capital asset. b) Such land or building was used by the assessee for the purpose of his industrial undertaking at least for 2 years before the date of such acquisition. c) The assessee has invested the capital gains arising from the transfer (i.e., the compulsory acquisition) on the purchase of a new land or new building within a period of 2 years or on the construction of a new building within a period of 3 years from the date of the receipt of compensation (and not from the date of transfer) with effect from the assessment year 2001-02. d) The new land or building acquired by the assessee should be used by him for his industrial undertaking. e) The new industrial land or building should not be transferred or sold by the assessee within a period of 3 years from the date of its acquisition. f) If the new industrial land or building has been transferred by the assessee within a period of 3 years from the date of its purchase, then, the amount of capital gains arising from the transfer of the new industrial land or building as well as the amount of capital gains exempted earlier will be charged to tax as the short-term capital gains of the previous year in which the transfer takes place. g) If the amount is not invested it can be deposited in Capital Gains Accounts Scheme of 1988, with the State Bank of India, any of its subsidiaries or any of the notified nationalised banks.
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6.12.5 Exemption for long-term capital gains under Section 54EC: a) A Long-term capital has been transferred b) Within 6 months from the date of transfer the assessee should invest the whole or any part of the capital gain in long-term specified assets. c) Specified asset means: 1. National Highway Authority Bonds 2. Rural Electrification Bonds d) Exemption is limited to amount invested or capital gains whichever is less. e) The specified asset must not be sold for a period of 3 years. If sold then previously exempt capital gains will be chargeable to tax. f) A ceiling on investment by an assessee in such long term specified assets has been provided. Investments in such specified assets to avail exemption under section 54 EC, on or after 1-4-2007 will not exceed Rs.50,00,000 in a financial year. 6.12.6 Exemption for LTCG on the transfer of certain listed securities (Sec 54ED) The long-term capital gains arising from the transfer of certain listed securities are exempt provided the following conditions: a) There should be a listed security or a unit of UTI or Mutual Fund. b) The assessee should invest within 6 months from the date of transfer the whole or any part of the capital gain in a specified equity shares c) If the specified equity shares are transferred within one year from the date of their acquisition the capital gains exempted previously will be taxed. 6.12.7 Exemption for LTCG invested on residential house (Sec 54F) Assessee: Individual/HUF Asset: Long-term Capital Asset
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Conditions: (a) The capital gains arise from the transfer or sale of long-term capital asset other than a residential house. (b) Within a period of one year before or 2 years after the date of the transfer of the long-term capital asset, the assessee purchases, or within a period of 3 years after the date of the transfer of the long-term capital asset, the assessee constructs a new residential house by investing the net consideration received. (c) The assessee does not own more than one residential house other than the new residential house purchased or constructed on the date of the transfer of the original long-term capital asset. (d) The assessee does not purchase within a period of 2 years after the transfer of the original capital asset or construct within a period of 3 years after the transfer of the original capital asset any other residential house except the one referred to in (b) above. (e) The new residential house purchased or constructed by the assessee is not transferred by him within a period of 3 years of its purchase or construction. If the new residential house is transferred within a period of 3 years of its purchase or construction, then, the capital gains arising from the transfer of the new residential house will be taken as short-term capital gains, and the long-term capital gains arising from the transfer of the original long-term capital asset, which were exempted from tax earlier, will be treated as long-term capital gains and charged to tax in the previous year in which the new residential house is transferred. (f) If the amount is not invested it may be deposited in Capital gains accounts scheme
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(g) The amount deposited under the Capital Gains Accounts Scheme should be utilised by the assessee for purchasing or constructing a new residential house within the specified period 3 years. (h) If the amount deposited is not utilised by the assessee for purchasing or constructing a new residential house within the specified period of 3 years, capital gain relating to unutilised deposit will be charged to tax as the long-term capital gains of the previous year in which the specified period of 3 years expires. (i) Exemption is proportionate under this section i.e.
Amount invested Net considerat ion Capital gains
6.12.8 Exemption of capital gains arising from the transfer of assets in case of shifting of an industrial undertaking from an urban area to a non-urban area : (54G) Sometimes, an assessee may shift his industrial undertaking from an urban area to a non-urban area. In such a case, he may transfer his capital assets in the nature of plant, machinery, building etc. situated in the urban area to a non-urban area. Under Section 54G of the Income-tax Act, such capital gains will be exempt from tax provided the following conditions are satisfied: (a) Within a period of one year before or three years after the date of transfer, the assessee utilises the capital gains for purchase of new machinery or plant and acquired land or building or constructs building or for expenses. On shifting or for purposes specified by the Central Govt. (b) If the amount is not utilised as above it may be deposited in Capital Gains Accounts Scheme. (c) If the amount deposited is not utilized for the above purpose within 3 years then it is taxed as capital gains.
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Tax on Long-term Capital Gains: Where the total income of an assessee includes long-term capital gains, besides other incomes, on the total taxable income including the short-term capital gains, but excluding the long-term capital gains, tax will be levied at the usual prescribed rates. That means, short-term capital gains are charged to tax at the usual prescribed rates. *However, long-term capital gains are not taxed at the usual prescribed rates. They (i.e., long-term capital gains) are charged to tax at a prescribed flat rate, i.e. at 20% Tax on Short -term Capital Gains: Section 111A: (W.e.f 1.10.2004) Income from short term capital gains from any equity shares of a company which has been effected on or after 1.10.2004 is subject to tax @ 10%.
KEY POINTS For claiming exemption reinvestment needs to be made within the stipulated period as indicated below: Sec. 54 Transferred Asset Residential house Reinvestment Residential house Period 1 year before or within 2 years after transfer for purchase; within 3 years after transfer for construction Within 2 years from transfer Within 3 years for purchase or construction 6 months from transfer Within 1 year before or within 2 years after transfer for purchase; within 3 years after transfer for construction
54B 54D 54EC 54F
Agricultural land Land & Building of industrial undertaking Any long term capital asset Any long term capital asset other than residential house
Agricultural land Similar asset Notified bonds etc. Residential house
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6.13 ILLUSTRATIONS
Problem 3: (capital loss) ARUN sold his only house property occupied by him as residential house for Rs.8 lakhs in the month of December 2007. The house property was purchased by him in the month of February, 1982 for a consideration of Rs.4 lakhs. i) Determine the capital gain. ii) State the exemption available, if he purchases another house. The cost inflation index for the financial year 1981-82 is 100, and for 2007-2008 is 551. Solution: i) Computation of Capital gains for the Assessment Year 2008-2009
Particulars Sale Proceeds Less: Selling Exps. Net Consideration Less: Indexed cost of acquisition (4,00,000 X 551/100) Rs. 8,00,000 8,00,000 22,04,000 Rs.
Long-term Capital Loss
14,04,000
ii) As there is capital loss (and not capital gain), the question of exemption of capital gains from tax, if he purchases another house, does not arise. Note: Here, the indexed cost of acquisition of the house sold is more than the sale proceeds of the house. So, there is capital loss. As the assessee held the house sold for more than 36 months, the capital loss is a long-term capital loss.
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Problem 4: (Agricultural Land, sec. 54B) Mr. RAVI sold his agricultural land in Bangalore on 1.9.2007 for Rs. 14,00,000. He had purchased it for Rs. 3,00,000 on 1.8.1987 which he was cultivating since then. He purchased a new agricultural land on 1.2.2008 for Rs. 5,00,000. The cost inflation index for the financial years 1987-1988 and 2007-2008 were 150 and 551 Compute the taxable gain for the assessment year 2008-2009. Solution: Computation of Ravis Capital gains for the Assessment Year 2008-2009
Particulars Sale Proceeds Less: Selling Exps. Net Consideration Less: Indexed cost of acquisition (3,00,000 X 551/150) Long-term Capital Gain Less: Exemptions u/s 54 B: (Cost of agricultural land purchased) Taxable long term capital gains Rs. 14,00,000 14,00,000 11,02,000 2,98,000 - 2,98,000 NIL Rs.
Problem 5: (Depreciable asset) The written-down value of a block of assets consisting of plant X and plant Y was Rs. 2,40,000 as on 1.4.2006. During the previous year 2007-2008, plant Y was sold for Rs. 5,00,000 and new plant Z was purchased for Rs. 2,00,000. The expenditure incurred for the sale of plant was Rs. 5,000. Compute the capital gains.
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Solution: Computation of capital gain for the assessment year 2008 2009 (STCG)
Particulars Sales Proceeds of plant Y sold during the P.Y. Less: Selling Exps. on the sale of plant Y Net Consideration Written-down value of plant X and Z (1.4.2005) Less: Cost of Acquisition of a new plant Taxable Short-term Capital Gains 2,40,000 2,00,000 440 000 55,000 Rs. 5,00,000 5,000 495 000 Rs.
Notes: 1. Here, the profit on the sale of plant Y is a short-term capital gain, as it is on the sale of depreciable asset. 2. As only a part of the block of assets is sold, deduction will be allowed for the expenditure incurred on the sale of plant. Problem 6 (Acquisition before 1981 sec.54 EC) Mr. DARVADKAR purchased a house in 1967 for Rs. 1,00,000. He died living the property to his son by will in 1988. However he incurred the following amount on improvement in the house: Renovation in 1969 Adding two bathrooms in 1974 Fixing teak panel on wall in 1988 1989 Rs. 45,000 Rs. 65,000 Rs. 25,000
His son David sold the house in October 2007 for Rs. 25,00,000. Calculate capital gain accruing to David assuming that the market value of the house under construction is Rs. 4,00,000 as on 1-4-1981, and he invest Rs. 3,00,000 In 3 years bounds within six months. CII 1988 1989:161, 2007 2008: 551.
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Solution: Since the FMV as on 1-4-81 (Rs. 4,00,000) is higher than the original cost (Rs. 1,00,000), it is beneficial for the assessee to treat FMV as COA. Any improvements before 1-4-1981 should be ignored
Computation of Taxable Capital Gains for the A Y 2008-2009
Particulars Sale Proceeds Less: Selling Exps. Net Consideration Less: Indexed cost of acquisition (4,00,000 X 551/100) Less: Indexed cost of improvement (25000 X 551/161) Long-term Capital Gain Less: Exemptions u/s 54 EC Taxable Long-term Capital gain 85,559 2118441 3,81,559 3,00,000 81,559 22,04,000 Rs. Rs. 25,00,000 25,00,000
Problem 7: (Acquisition before 1981, sec.54) SRIRAM sells his only residential house in Mangalore on 24th August, 2007 for Rs. 31,50,000 and incurred an expenditure of Rs. 20,000 in connection with the transfer. Cost of acquisition of the house for him in 1976 was Rs.1,80,000, and on 1.4.1981, its fair market value was Rs.5,00,000. On 16th January 2002, he purchased a residential flat in Mangalore for Rs. 2,00,000 and deposited Rs.1,50,000 in the capital gains deposit scheme. Compute the taxable capital gains for assessment year 2008-2009. The cost inflation index for 1981-82 is 100 and for 2007-2008 is 551.
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Solution: Computation of Taxable Capital Gains of Sriram for the A Y 2008-2009

Particulars Sale Proceeds of the house sold Less: Selling Exps. Net Consideration Less: Indexed cost of acquisition (5,00,000 X 551/100) Long-term Capital Gain Less: Exemptions u/s 54 For the new residential flat bought For deposit in capital gain deposit scheme Taxable Long-term Capital Gains 2,00,000 1,50,000 3,50,000 25,000 27,55,000 3,75,000 Rs. 31,50,000 20,000 31,30,000 Rs.
Note 1: The expenses incurred on the transfer or sale of the house should be deducted from the sale proceeds of the house, and only the net sale proceeds should be taken into account. Problem 8: (Sale of jewellery, sec.54F: Proportionate Exemption) BHASKAR is a resident of Patna. He did not own any house and lived in a rented house. He had purchased jewellery for Rs. 1,00,000 in 1981. He sold this jewellery in July 2007 for 5,80,000 and invested the sale proceeds in August 2002 in the purchase of two residential houses-one at Patna for Rs. 2,50,000 and the other at Kanpur for Rs. 2,90,000. (i) Is he liable to pay tax on capital gains for the assessment year 20082009? If so, determine the amount of capital gains liable to tax. Would it make any difference if A: (ii) Invested the entire amount of Rs. 5,80,000 in the purchase of only one residential house (iii) Invested Rs. 4,20,000 in the purchase of one residential house at Kanpur and deposited the balance of Rs. 1,20,000 in a Bank. The cost inflation index in 1981-82 was 100 and in 2007-2008, it is 551.
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Solution: i) When he invests the sale proceeds of jewellery in the purchase of two residential houses: Computation of Capital Gains for the A. Y. 2008 2009
Particulars
i) In the is case, Bhaskar is not entitled to exemption from capital gain tax u/s 54F Sale Proceeds of Jewellery Less: Indexed cost of acquisition of jewellery (1,00,000 X 551/100) Taxable Capital gain ii) If In the case, he is entitled to get exemption for long term capital gain tax u/s 54F. Sale proceeds of Jewellery -Indexed cost of acquisition of jewellery (1,00,000 X 551/100) Long term capital gain -Exemption u/s54F (i.e., 580000X 29,000/5,80,000) = Taxable Capital Gain iii) If he invest Rs. 4,20,000 in the purchase of one residential house and deposits the balance of Rs. 1,20,000 in the bank: Sale proceeds of Jewellery Less Indexed cost of acquisition of jewellery Long term capital gain Less Exemption (i.e., 29,000 X 4,20,000/5,80,000) 5,80,000 5,51,000 29,000 5,51,000 29,000 29,000 NIL 5,51,000 29,000 5,80,000 5,80,000
Rs.
Rs.
21,000 8,000
Taxable Capital Gain
Note: U/s 54F, the exempted amount is proportionate to Net consideration.

Capital gain Net considerat ion
i.e. Amount invested x
The amount invested in the bank is not eligible for exemption
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Problem 9: (Multiple Assets) From the following particulars of the capital assets sold by SRIKANTH during the year 2007-2008, compute his capital gain for the assessment year 2008-2009:
Name of the asset Year of acquisition Sale proceeds Rs. 6,00,000 6,00,000 3,50,000 30,000 Cost of acquisition Rs. 40,000 45,000 60,000 80,000 Fair market value as on 1.4.1982 Rs. 1,00,000 1,00,000 50,000
Land Gold Shares (listed) Plant
1960 1970 1978 1995
The written down value of plant was Rs.50, 000 as on 1.4.2007 and was the only plant in that block of assets in his business. The cost inflation index for the financial years 1981-82 and 2007-2008 were 100 and 551 respectively. Solution: Notes: 1. While calculating the indexed cost of acquisition of land, we have to take into account the cost of acquisition of land, viz., Rs.40,000 or its fair market value, Rs.1,00,000, at assessees option, but generally, whichever is higher, i.e., Rs. 1,00,000. Similarly, while calculating the indexed cost of acquisition of gold, we have to take into account the cost of acquisition, viz., Rs.60,000 or its fair market value, Rs.1,00,000 at assessees option, but generally, whichever is higher, i.e., Rs. 1,00,000. So also, while calculating the indexed cost of shares, we have to take into account the cost of acquisition, viz., Rs. 60,000 or its fair market value of Rs. 50,000, whichever is higher, i.e., Rs. 60,000.
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2. In the case of plant, we have to take into account (i.e., deduct from the sale proceeds) only the written-down value of the plant on 1.4.2007. The resulting capital loss is short-term capital loss. 3. Short-term capital loss can be set off against long-term capital gains.
Sale of Land Sale Proceeds of land, sold in the year 2007 - 2008 Less: Selling Exps. Net Consideration Less: Indexed cost of acquisition (1,00,000 X 551/100) Long-term Capital Gains Sale of gold: Sale Proceeds of gold sold in the year 2007 - 2008 Less: Selling Exps. Net Consideration Less: Indexed cost of acquisition (1,00,000 X 551/100) Long-term Capital gain Sale of shares (listed): Sale Proceeds of shares sold in the year 2006 - 2007 Less: Selling Exps. Net Consideration Less: Indexed cost of acquisition (60,000X 551/100) Long-term Capital Gains Sale of plant Sale proceeds of plant sold Less Written-down value of plant on 1.4.2006 Short-term capital loss 30,000 50,000 3,50,000 Nil 3,50,000 3,30,600 19,400 6,00,000 6,00,000 5,51,000 49, 000 6,00,000 6,00,000 5,51,000
49,000
20,000
1. 2. 3. 4. 5.
Long-term capital gain on sale of land Long-term capital gain on sale of gold Long-term capital gain on the sale of shares Total Long-term capital gain Short-term capital loss Net Capital Gain
Rs. 49,000 49,000 19,400 1,17,400 -20,000 97,400
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I. Self Assessment Questions (SAQ 1) 1. Capital Gains means _____________________________________ ______________________________________________________ 2. Short term capital asset means _____________________________ ______________________________________________________. 3. How do you compute the indexed cost of acquisition for a long-term capital asset which is acquired before 1st April, 1981, _____________________________________________________ ______________________________________________________. 4. For claiming exemption U/S 54EC specified assets means _____________________________________________________ ______________________________________________________. 5. Income from STCG from any equity shares of a company which has been effected after 1.10.2004 is subject to Tax @ ____________.
I. Self Assessment Questions (SAQ 2) 1. Exemption u/s 54F is available to _________ A. Short term capital gain B. Long term capital gain C. Both D. None of these 2. Long term capital gain is taxed at a flat rate of ______. A. 15% B. 5% C. 20% D. 30%
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3. Cost of acquisition of bonus shares shall be taken as _______ for A.Y.2008-09. A. M.V. of shares B. F.V. of share C. Nil D. Cannot be answered 4. A short term capital asset is one, which is held by the assessee for not more than____ in case of investments. A. 24 months B. 4 years C. 36 months D. 12 months 5. State whether the given statements are true or false 1. While computing the Short Term Capital Gains, the Cost of Acquisition is indexed 2. Equity shares said to be Long Term Capital Asset, if it is held for more than 12 months A. True, True B. True, false C. False, true D. False, false 6. Compute allowable deduction for interest on loan for purchasing securities under income other sources. Loan borrowed at 15%on 1/12/2003 Rs. 2, 0000 A. 250 B. 500 C. 3,000 D. 1,000
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7. As per Section 45 (1) of the Income-tax Act of 1961, profits or gains arising from the transfer of a ________ affected in the previous year by the assessee is chargeable to tax under the head Capital Gains. A. Any Asset B. Fixed Asset C. Capital Asset D. None of these 8. RAM sells his only residential house in Mangalore on 24th August, 2007 for Rs. 31,50,000 and incurred an expenditure of Rs. 20,000 in connection with the transfer. Cost of acquisition of the house for him in 1976 was Rs.1,80,000, and on 1.4.1981, its fair market value was Rs.5,00,000. On 16th January 2002, he purchased a residential flat in Mangalore for Rs. 2,00,000 and deposited Rs.1,50,000 in the capital gains deposit scheme. Compute the taxable capital gains for assessment year 2007-08. The cost inflation index for 1981-82 is 100 and for 2007-08 is 551. A. 1,35,300 B. 5,50,000 C. 1,85,000 D. 1,20,000 9. Mr. D purchased a house in 1967 for Rs 1,00,000. He died leaving the property to his son by will in1988. However he incurred the following amounts on improvement in the house: Renovation in 1969 Adding two bathrooms in 1974 Fixing leak panels on the wall in 1988-89 Rs. 45,000 Rs. 65,000 Rs. 25,000
His son E sold the house in October 2007 for Rs. 25,00,000.
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Calculate capital gains accruing to him assuming that the market value of the sold house as on 1-4-81 was Rs. 400000 and he invests Rs. 300000 in three-year bonds within six months. CII 1981-82: 100,1988-89: 161, 2003-04: 463: 2007-08: 551 A. 5,76,016 B. 2,70,000 C. 3,00,000 D. 81,559
6.14 Summary
Sections 45 to 55 deal with capital gains. Capital gains arise when a capital asset is transferred. Capital assets may be short term or long term. Cost inflation index factor is taken into consideration when calculating long term capital gains. Certain capital gains are fully exempted from tax. Section 54 to section 54G deal with such gains.

6.15 A Questions 1. What are the kinds of capital assets? 2. What is transfer? What transactions are not regarded as transfer? 3. Give examples of assets, which are not regarded as capital assets. 4. Define cost of acquisition. Describe the provisions relating to acquisition of assets 5. Explain short-term and long-term capital gains. 6. Distinguish between short-term and long-term capital gains. 7. Explain the capital gains which are exempt from tax. 8. Write short notes on: (a) Cost of improvement (b) Indexed cost of acquisition (c) Cost inflation index. (d) Fair value of an asset.
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6.15 (B) Exercises 1. Mr. GANESH provides the following data regarding his transactions for the sale of his residential house for assessment year 2008-2009. Compute the amount of capital gains to be included in the total income. (a) House purchased in 1981-82 (b) House sold in November, 2007 Rs.4,50,000 Rs.24,48,500
(c) Purchased another residential house in Dec. 2005 Rs.1,50,000 The cost of inflation of index for 1981-1982: 100, and for 2007-2008: 551 2. Mr. MANOHAR purchased a residential property in June, 1985 for Rs. 73,150. In Jan. 1988, he remodeled the house spending Rs. 30,000. In 1989-90, he concluded an agreement to sell the property to Aravind who could not pay the consideration amount. Therefore, Manohar forfeited the advance of Rs. 6,650 received from Aravind. In 1990-91, Manohar spent Rs. 18,200 in adding a room to the building. The building was then sold for Rs. 4,30,000 on 30-6-2007. The brokerage paid was at 2% of the transfer consideration. Compute his capital gains. The cost inflation Index for 1985-1986: 133; 19871988:150; 1990-1991:182; 2007-2008:551 3. SRIDHAR had two houses. The first house was occupied by himself for his residential purpose. He got this house from his uncle as a gift on 15.7.1986. His uncle had purchased this house in the year 1972 for Rs.30,000. Its fair market value as on 1.4.1981 was Rs.50,000. He spent Rs.18,200 on its improvement in June, 1990. He sold this house on 30.11.2007 for Rs.3,80,000. He purchased another house for his residence on 25.2.2008 for Rs. 40,000. The second house purchased by him in the year 1978 for Rs.15,000 was let out for residential purpose. This house was also sold on 15.6.2007 for Rs.1,38,000 and its fair market value as on 1.4.1981 was
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Rs.20,000. He purchased another residential house on 18.3.2008 for Rs.40,000. He purchased some jewellery in May, 1987 for Rs.60,000. He sold the same on 22.3.2008 for Rs.1,85,000. The cost inflation index for the financial years 1981-1982, 1987- 1988, 1990-1991 and 2007-2008 were 100, 150, 182 and 551 respectively. Compute his taxable gain for the assessment year 2008-2009 4. Compute the net taxable gain on the basis of the following information: A house was purchased on 1.5.1987 for Rs.2,00,000 and was used as a residence by the owner. The owner had contracted to sell the property in June, 1997 for Rs. 8 lakhs and had received an advance of Rs. 50,000 towards sale. The intending purchaser did not proceed with the transaction and the owner forfeited the advance. The property was sold in July, 2007 for Rs.10,00,000. The owner, from out of the sale proceeds, invested Rs.3 lakh in a new residence in December, 2007. The cost inflation index for the financial year 1987-1988 is 150 and for the financial year 2007-2008 is 551. 5. Mr. REHMAN purchased a house in the year 1975 for Rs. 50,000. He died in the year 1990 leaving the property to his son Abdul. However, he had incurred the following amounts on the improvement to the house. (a) Renovation to the house in the year 1978 Rs. 10,000 (b) Adding two bathrooms in the year 1980 Rs. 20,000. (c) Fixing false ceiling on the roof in April 1987 Rs. 90,000. His son, Abdul sells the house in October 2007 for Rs. 15,00,000. The fair market value of the house as on 1.4.1981 was Rs. 2,00,000. The cost of inflation index for the financial year 1981-82, 1987-88 and 2007-08 were 100, 150 and 551 respectively. Compute the taxable gain arising for the assessment year 2008-2009
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SAQ 1 1. Refer Para 6.3 2. Refer Para 6.5.1 3. Refer Para 6.9 4. Refer Para 6.12.5 5. 10% SAQ 2 1. B 2. C 3. C 4. D 5. C TQs 6.14 (A) 1. Refer Para 6.5 2. Refer Para 6.6 3. Refer Para 6.4 4. Refer Para 6.11 5. Refer Para 6.8 6. Refer Para 6.8.3 7. Refer Para 6.12 8. Refer Para 6.9 TQs 3.14(B): Refer relevant Theories, formats and illustrations for all the problems 6. D 7. B 8. C 9. D
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Additional Hints: Q. No. 1 Indexed cost of acquisition: Rs. 23,35,500 Q. No. 2 Indexed cost of acquisition of the house purchased in June, 1985 after adjusting the advance received forfeited Rs.2,59,500 (73,150 - 6,650) (66,500 551/133) Q. No. 3 1. For determining the period for which the first house was held by the assessee, the starting date to be taken into account is the date on which this house was purchased by his uncle, and not the date on which he got this house as a gift from his uncle. Of course, the closing date will be the date on which this house was sold. 2. For determining the capital gains on the sale of the first house, we should deduct from the sale proceeds, not only the indexed cost of acquisition or fair market value, whichever is higher, but also the indexed cost of improvement to this house, as the improvement was done after the determination of the fair market value, i.e., in June, 1990. 3. There will be an exemption from income-tax for the long-term capital gains resulting from the sale of the first house to the extent of the amount of long-term capital gain invested on the purchase of a new residential house, viz., Rs.1,00,000. 4. There will also be an exemption from income-tax for the long-term capital gains resulting from the sale of the second house to the extent of the amount of long-term capital gains used for the purchase of a new residential house, viz., Rs.40,000.
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Q. No. 4 1. While calculating the indexed cost of the house purchased on 1.5.1987 and sold in July 2007, the cost of acquisition of this house after adjusting (i.e., after deducting) the advance received for sale forfeited, Rs. 1,50,000 should be taken into account. This amount of Rs.1,50,000 can be arrived at as follows: Rs. Cost of acquisition of the house Less: Advance money received forfeit Cost of acquisition of the house after the adjustment is 2,00,000 50,000 1,50,000
2. Out of the long-term capital gain, capital gains used for buying the new house in December, 2002, viz., Rs.3,00,000 is exempt from tax. So, this amount of Rs.3,00,000 has to be deducted from the total long-term capital gains, and only the balance has to be considered as taxable capital gains. Q. No. 5 Since the FMV as on 1-4-81 (Rs.2,00,000) is higher than the original cost (Rs. 50,000), it is beneficial for the assessee to treat FMV as COA. Any improvements before 1-4-1981 should be ignored.
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Unit 7
Unit 7
Structure:
7.1
Income from Other Sources
Introduction Learning Objectives
7.2 7.3 7.4 7.5 7.6 7.7 7.8
Meaning of income from other sources Allowable deductions under the head ''Income from other sources'' Provisions relating to taxation of casual incomes Interest on securities Grossing up of Interest Taxation of gifts Illustrations Self Assessment Questions (SAQ1, SAQ2)
7.9
Summary
7.10 Terminal Questions 7.11 Answers to SAQs and TQs
7.1 Introduction
This unit explains important provisions of Income from other sources. It also includes deductions relevant to this head.
Learning Objectives: After studying this Unit, you will be able to understand: The meaning of dividends and interest on securities. Provisions relating to taxation of dividends and interest on securities. Provisions relating to taxation of winnings from lotteries etc. Compute income from other sources under different circumstances.
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7.2 Meaning of Income from Other Sources

Any income which is not chargeable to tax under any of the preceding four heads is taxed under the head Income from other sources. Under this head following incomes are chargeable to tax. The various incomes, as per Section 56(2) of the Income-tax Act, are: 1. Dividend on shares of companies. 2. Any casual income 3. Income from interest on securities, 4. Any income from letting of building on hire along with machinery or plant " 5. Dividends on shares of cooperative society 6. Interest on bank deposits. 7. Interest on deposits with companies and others. 8. Income of a sub-tenant from sub-letting the whole or part of house property. 9. Remuneration or fees received by an individual, 10. Royalty received 11. Directors' fees. 12. Ground rent received. 13. Income from undisclosed sources. 14. Salary of M.P., M.L.A. or M.L.C. 15. Remuneration received for giving lectures. 16. Remuneration received for writing articles in magazines.
7.3 Allowable deductions under the head ''Income from other sources''
The following deductions are allowed in respect of dividend and interest on securities:
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(a) Collection charges: Commission or remunerations for realizing interest on securities or dividend on share or income from UTI (sec.57 (1)): These charges are usually paid by the assessee to the bank or any other person for collecting interest. If the assessee collects the interest by himself, no deduction is allowed. Usually if collection charges are given as a percentage, it is calculated on the net amount realized. (b) Interest on loan borrowed: Any interest paid on money borrowed for investment in shares, units or securities (and not for any other purposes though invested in securities) is deductible. Even if the investment yields no income, deduction is allowed. (c) Staff welfare schemes (57(ia): Deduction in respect of employees contribution towards staff welfare schemes (57(1a): This deduction is allowed only such sums is credited by the taxpayer to the employees account in the relevant PF before the due date. Due date means the date by which the amount is to be deposited as per contact of service. (d) Repairs and Depreciation (Deduction in the case of letting out of plant, machinery, furniture building (57 (ii)): The following expenses are deductible: a) Current repairs on building; b) Insurance premium against risk of damage or destruction of premises; c) Repairs and insurance of machinery plant and furniture; d) Depreciation on building, plant, machinery, or furniture. (e) Standard Deduction in the case of family pension (57 (iia)): It is allowed at 33 1/3% of such pension or Rs. 15,000 whichever is less.
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7.4 Provisions relating to taxation of winnings from lotteries, crossword puzzles, races including horse races, card games and other games, gambling and betting
Under section 194 B and 194 BB tax is deducted at source at 30.6% on winnings from crossword puzzles, lotteries, card games of any sort exceeding Rs.5000 and winning from horse races exceeding Rs.2500. Hence if the net amount is given, it has to be converted into gross. (Amount received X 100/69.4) TDS on interest on bank deposits is 10.2% where the interest payable to an assessee is Rs.5000 or more.
7.5 Interest on Securities

What is chargeable to tax as Interest on Securities? Following amounts due to an assessee in the previous year are chargeable to tax: 1. Interest on any securities of the Central/State Govt. 2. Interest on debentures or other securities issued by a local authority 3. Interest on debentures issued by an Indian Co. 4. Interest on debentures or other securities issued by a statutory corporation Kinds of Securities
Govt. Securities
Commercial Securities
Less Tax
Tax Free
Less Tax
Tax Free
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Less Tax Securities (Both Govt. and commercial): Less tax securities are those in respect of which the interest accrued is paid to the security holder after the deduction of income tax at the prescribed rates at source by the security issuing authority. The TDS rate for security/debentures of local authority and listed debentures of limited company is 10.2% All other securities 20.4%. Tax Free Govt. Securities: The State/Central Govt. may issue these securities. The actual holder pays the entire interest. The interest on tax free Govt. Securities is fully exempt which are mentioned u/s 10(15). Tax-free commercial securities: In the case of these securities also no TDS is deducted. The security holder paid the actual interest. In reality no company is allowed to issue tax-free securities similar to that of Govt. Securities. The tax on them is paid by the company, which issues tax-free securities. Therefore the income tax paid by security issuing authority is deemed to be the income of the security holder. In other words this should always be grossed up.
7.6 Grossing up of interest

The taxable interest refers amount paid after TDS and referred to as net interest. The procedure of converting net interest into gross interest is
known as grossing up of interest. 1. In the case of tax-free commercial securities: In the case of tax-free commercial securities interest should always be grossed up whether the rate of interest is given or the net amount of interest received is given. (a) In the case of listed securities: Interest received by the assessee x 100/ 89.8
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(b) In the case of non-listed securities: Interest received by the assessee X 100/ 79.6 2. In the case of less tax commercial securities In the case of less tax commercial securities if the rate of interest is given, there is no question of grossing up of interest, as the interest calculated at the given rate of interest is gross interest on securities. On the other hand if the net of amount interest received by the assessee is given then the interest should be grossed up. The grossing up of interest on less-tax securities where the net amount of interest is given, will be done as follows: a) In respect of less tax securities of local authority, less tax securities of statutory corporations and less tax commercial securities listed in a recognised stock exchange in India: Net amount of interest received by the assessee X 100/89.8 b) In respect of less tax commercial securities of companies not listed in a recognised stock exchange in India: Net amount of interest received by the assessee X 100/79.6 No TDS Cases: In respect of interest payable on the following securities, no tax is deducted at source (TDS) 1. National Development Bonds 2. NSC (I issue) 3. 7 year NSC (IV issue) 4. Debentures issued by a co-operative society 5. Securities issued by Central/State Govt.
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Other Important Points Connected with Interest on Securities: There are a few other points connected with interest on securities. They are: 1. Treatment of loss from interest on securities: If, finally, there is a loss from interest on securities then that loss can be set off by the assessee against any other income under the head income from other sources are against income under any other head. 2. Treatment of profit on sale of securities: Profit on sale of securities cannot be treated as an income from interest on securities.
7.7 Taxation of Gifts

Originally gifts tax was Chargeable in the hands of the donor. With the abolition of Gift Tax Act, a gift was neither charged to tax in the hands of the donor was treated as an income of the donee. The Financial Act 2004 has amended sec. 56 of Income tax so as to include a gift received on or after 19-04 by individual or HUF as income. This will not apply to a gift received from any individual who is a relative of such individual out of natural love and affection. Sec. 10(39) provides for exemption of gifts to the extent of the aggregate of such receipts not exceeding Rs. 50,000 and any sum received on the occasion of his marriage. (w.e.f. AY 2006-07)
7.8 Illustrations
Problem 1: (Gifts from relatives and others) From the following particulars of SHRI MAHESH compute his income from other sources: 1. Ground rent of Rs.5000 2. Following interest received a) On fixed deposits from bank Rs.400
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b) From POSB A/c Rs.300 c) Interest on deposit with a firm Rs.600 3. Income from subletting of house taken on rent Rs.5000. Rent paid Rs.3000 4. Gift from brother in law 30000. Gift from other persons 40000 5. Spent Rs.400 for collecting the rent of the house
Solution:
1) Ground rent 2) Interest received on FD in bank Deposit with a firm 3) Income from sub letting Less: Rent paid Rent collection expenses 4) Gifts from others (40,000 25,000) 5) Gift from brother- in-law Income from other sources 400 + 600 5,000 3,000 400 3,400 1,600 15,000 Exempt 22,600 5,000
1,000
Note: 1) Interest of POSB a/c is exempt u/s 10(15) 2) Interest on deposit with a firm has not been grossed up as it does not exceed Rs. 2,500 3) Rent paid and expenses of rent collection are deductible.
4) Gifts from others are exempt upto Rs. 25,000 & from relatives, it is fully
exempt. Problem 2: (Interest on securities) The investments of RAMESH for the year ended 31.3.2008 consisted of the following: a) Rs. 25,000 7% Government securities. b) Rs. 15,000 8% Municipal bonds. c) Rs. 20,000 9% Madras Port Trust bonds. d) Rs. 10,000 7-year Post Office National Savings Certificates.
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e) Rs. 15,000 6% Securities of Foreign Government. f) 7% Government bonds Rs. 18,000.
g) Rs. 20,000 9% Indian Railway Bonds. h) 7% National Plan Certificates Rs. 5,000. He paid commission of Rs. 60 for collecting the taxable interest on the securities. He also paid Rs. 1,200 as interest on bank loan which was taken for the purpose of purchasing the Madras Port Trust Bonds. Compute his income from other sources. Solution: Computation of Income from other sources for assessment Year 2008- 2009
Rs A) Interest on 7% Govt. securities (25,000 7/100) B) Interest on 8% Manipal Bonds (15,000 8/100) C) Interest on 9% Madras Port Trust Bonds (20,000 9/100) D) Interest on 7% Govt. Bonds (18,000 7/100) E) Interest on 6% Securities by a Foreign Government (15,000 6/100) F) Interest on 9% Indian Railway Bonds (20,000 6/100) Less: Allowance Deductions: i) Commission paid for collecting interest ii) Interest paid on loan taken for the purpose of purchasing the Madras Port bonds Income from other sources 60 1,200 1,260 7,450 Rs. 1,750 1,200 1,800 1,260 900 1,800 8,710
Notes: Interest on 7 year Post Office National Saving Certificates and interest on 7% National Plan Saving Certificates are completely exempt from tax under Section 10. Problem 3: (Income from sub letting the house and income of MP) Mr. CHINTU, a resident individual, submits the following particulars of his income for the PY. i) Royalty from a coal mine Rs. 20,000
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ii) Agricultural income in Pakistan Rs. 15,000 iii) Salary for a part time job with a firm Rs. 21,000. iv) Salary as Member of Parliament Rs. 36,000 v) Daily allowance as M.P. Rs. 15,000 vi) His residential house has been taken on rent of Rs. 1,000 p.m., half of which he has sub-let at Rs. 1,200 p.m. vii) Dividend received from a co-operative society Rs. 5,000. viii) He has incurred the following expenses: (a) Paid collection charges Rs. 1,000 for collecting dividends. (b) Rs. 3,000 spent for earning and collecting royalty income. Compute Mr. Chintu's income from other sources for the Assessment year 2008-2009 Solution: Computation of income from other sources for the assessment year 2008-2009
Rs. I) II) III) IV) Royalty from a coal mine Agricultural income in Pakistan Salary as member of parliament Income from sub letting a part of the house taken on rent a) Rent for sub letting (1,200 x 12) b) Rent paid for sublet proportion (1,000 x x 12) Dividend from co- operative society Rs. 20,000 15,000 36,000
14,400 6,000
V)
8,400 5,000 84,400
Less: Allowable deductions: Collection charges for collecting dividend Amount spent for earning and collecting royalty income Income from other source
100 3,000
3,100 81,300
Note: 1) As a statement of total income is not prepared, Income from salary, i.e., salary received for part time job is not taken into account. 2) Royalty from coal mine and Agricultural income from Pakistan is income from other sources.
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3) Daily allowance as M.P. is exempt from tax. 4) Dividend from co-operative society has to be included from other sources as it is without grossing up, because no tax is deducted at source from dividend from co- operative society. Problem 4: (Tax free Com. Securities) Shri RAVIKANTH has the following investments during the previous year 2007-2008: i) ii) (iii) iv) v) vi) Rs. 54,000 - 9% Government Paper Rs. 30,000 - 10% Municipal debentures Rs. 20,000 - 9% Port Trust Bonds Rs. 10,000 - 11% Bombay Development loan Rs. 32,000 - 9% tax-free Govt. Securities [not specified u/s 10(15)] Rs. 37,800 - 10% Tax-free debentures of a company listed in recognised stock exchange in India. vii) Rs. 16,000 - 12% Debentures of a public limited company.
On 1st September, 2004, he bought Rs. 40,000 - 12% U.P. Government loan for Rs. 45,000, the interest on which is payable on 30th June and 31st December. For this purpose, he took a loan of Rs.30,000 from his bankers at 16% and the balance of Rs.15,000 was financed out of a loan taken at 12% for some other purpose. The bank also charged Rs 415 commission on realisation of interest and 1% commission on the purchase of securities. Find out his income from interest on securities.
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Solution: Statement of Income from other sources for the Assessment Year 20082009
Rs. Interest on 9% Govt. Paper (54000 X 9%) Interest on 10% on Municipal Debentures (30000 X 10%) Interest on 9% Port Trust Bonds (20000 X 9%) Interest on 11% Bombay Development Loan (10000 X 11%) Interest on tax free govt. securities (32000 X 9%) Interest on 10% tax free listed debentures (3780X 100/89.8)* Interest on 12% debentures of public ltd co. (16000 X 12%) Interest on 12% UP Govt. Loan (40000 X 12% X 1/2) Less: Deductions Interest paid on loan (for 7 months) [30000 X 16/100 X 7/12] Collection Charges Income from other sources Rs. 4860 3000 1800 1100 2880 4209 1920 2400 22169
2800 415
3215 18954
Note: 1. Interest on 9% tax free Govt. securities is not exempt u/s 10(15) 2. * Interest on Tax free com. Securities is always grossed up. Problem 5: An individual has the following investments during the previous year ended 31.3.2008: a) Rs. 30,000 9% Government paper. b) Rs. 23,000 8% Municipal debentures. c) Rs. 20,000 7.5% Port trust bonds. d) Rs. 16,000 11% Bangalore Development loan. e) Rs. 40,000 7% tax-free Government securities. f) Rs. 20,000 18% tax-free debentures of X Co. Ltd. (listed in recognised stock exchange) only with effect from 1st August 2006. g) Rs. 10,000 13% Debentures of Cotton Co. Ltd. On 1.12.2007, he bought Rs. 20,000 10% Karnataka Government loan for Rs. 25,000. For this purpose, he took a loan of Rs. 20,000 from his bankers at 15% per annum and the balance of Rs. 5,000 were financed out of a
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previous loan taken for some other purpose at 14% per annum. The bank also charged Rs. 200 commission on realisation of interest and 1% commission on purchase of securities. Compute his income from other sources for the assessment year 2008-2009 assuming that interest is payable on each of the above securities on 30th June and 31st December every year. Solution: Statement of Income from other sources for the Assessment Year 2008-2009
Rs. Interest on 9% Govt. Paper (30,000 x 9/100) Interest on 8% Municipal debentures (23,000 x 8/100) Interest on 7 ort trust bonds (20,000 x 15/2 x 7/100) Interest on 11% Bangalore development bonds (16,000 x11100) Interest on 7% tax-free Govt. securities (40,000 x 7/100) Interest on 18% tax-free debenture of X co. Ltd. (listed only st with effect from 1 Aug. 2006) (Grossed up) th 1) First half yearly interest 30 June (20,000 x 18/100 x =1,800 x 100/79.6) st 2) Second half year interest 31 December (20,000 x 18/100 x = 1800 x 100/89.8) Interest on 13% Debentures of Cotton co. Ltd. (10,000 x 13/100) Interest on 10% Karnataka govt. loan (only for half year) (20,000 x 10/100 x ) Interest on loan given to brother Less: allowable deductions: Bank commission for realization of interest. Interest paid to bank on loan borrowed (for 4 months, i.e., 1.12.2007 to 31.3.2008) (20,000 X 15/100 x 4/12) Income from other sources. Rs. 2,700 1,840 1,500 1,760 2,800
2261.31 2004.45 4266 1,300 1,000 1,000 18,166 200 1,000 1,200 16,966
Note: 1) The Karnataka govt. Security purchase on 1.12.2004, and interest on all securities is payable on 30th June and 31st December. So, in this case only one half yearly interest payable on 31st December is received. So,
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only one half yearly interest of Rs. (20,000 x 10/100 x ) 1,000 should be included in the income of the assessee. In this case, it may also note that interest received on this security has to be calculated on the face value of Rs. 20,000, and not on its cost price of Rs. 25,000. 2) Interest paid on the loan of Rs. 20,000 taken from the bank for purchase of securities is an allowable deduction. In this case, the interest allowed as deduction would be the actual interest paid on the loan for 4 months, i.e., from 1.12.2007 to 31.3.2008. It amount to Rs. 20,000 x 4/12 x 15/100: Rs.1, 000. 3) It may be noted that interest paid on loan of Rs. 5,000 purchased for some other purpose but used for purchasing securities is not an allowable deduction. Only interest paid on a loan taken for the purpose of purchasing securities will be an allowable deduction.
Problem 6: Mrs. VASANTHA has the following investments and incomes. Calculate her income from other sources. Rs. 1. Dividend from a company 2. Examinership remuneration 3. Interest on deposits with a firm 4. Royalty from a book 5. Winning from lottery (gross) 6. Rs. 30,000 - 10% Debentures of a company. 7. Rs. 25,000 -12% Tax-free Govt. securities (specified under Section 10(15)) 8. Rs. 20,000 - 13% less tax commercial securities 9. Rs. 36,000 - 10% tax-free debentures of a company
4,800 2,400 1,000 18,000 20,000
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10. Rs. 3,600 as interest on tax-free debentures of company (listed) In July 2007, she sold Rs. 30,000 of 10% debentures of a company for Rs. 32,000. In August 2007, she inherited Rs. 40,000 12% preference shares of XY Co. Ltd. from her father. Interest and dividend on above securities will fall due on 30th June and 31st December of every year. She claims the following deductions. (1) Collection charges of interest Rs. 200. (2) Purchase of lottery ticket, Rs. 2,000. Solution: Computation of income from other sources for the assessment year 2008- 2009
Solution: Computation of income from other sources for the assessment year 2008- 2009 Rs. Interest on 10% debenture of a company (30,000 x 10/100) Interest on 13% less tax commercial securities (20,000x 13/100) Interest on tax free debenture of a company (assumed to be not listed) (after grossing up) (30,000 x 10/100x ) (6,000 x 10/100) (2,100x100/79.6) = 2638.19 Interest on tax free debentures (Listed) (3,600 x 100/89.8) Examinership remuneration Royalty from books Interest on deposits with a firm (without grossing up) Winning from lottery Dividend from preference share for half year Less: allowable deduction Collection charges for interest Income from other sources Rs. 3,000 2,600
1,500 600 2,100
2638 4,009 1,000 2,400 18,000 20,000 Ex 56,047 200 55,847
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Unit 7
Problem 7: (Collection Charges) SRI RANJAN holds following securities on April 1. 1. Rs.30000 6% securities of State Govt. 2. Rs.40000 5% less tax non listed debentures of Swarajya Fertilizers Interest on both these securities is due on Dec 31st every year On January 1st of the previous year he borrowed Rs.25000 @ 7% p.a. and invested it in 10% listed debentures of Malhotra Fabrics Ltd. The interest on which is payable on 30th June and 31st Dec. every year. He paid half % commission to his banker on net amount of interest realized. Determine his income from other sources Solution: Computation of income from other sources
Solution: Computation of income from other sources 1. Rs. 30000 6% securities of State Govt 2. Rs. 40000 5% less tax debentures of Swaraj Fertilizers 3. Rs.25000 10% debentures of Malhortra Ltd Less: 1. Collection charges (3392 x 1/2%) 2. Interest on loan (25000 x 7% x 3/12) 17 438 1800 2000 Nil 3800 455 3345
Notes: 1. Since the debentures of Malhotra Fabrics were purchased after 31st Dec. interest due on 31st Dec is received by and included in the income of the seller. 2. Interest of Rs.438 payable on Rs.25000 borrowed for investing in debentures of Malhotra Fabrics Ltd is deductible even if no investment is accrued during the previous year. 3. Interest on less tax debentures is subject to TDS at 20.4% i.e. 20,000 20.4% = 408 hence collection charges is collected on net interest (3,800 408 = 3,392)
Unit 7
Problem 8: (Dividend on shares, Lottery income) MR. ARJUN furnishes the following particulars of his income for the previous year 2007-2008. Compute his total income. Rs. (i) Dividend on equity shares (ii) Dividend on preference shares (iii) Income from letting on hire of building and machinery under one composite lease (iv) Interest on bank deposits (v) Director's sitting fees received (vi) Ground rent (vii) Income from undisclosed sources (viii) Winning from lotteries (Net) received He claims the following deductions: (a) Collection charges of dividend (b) Allowable depreciation on building and machinery (c) Fire insurance on building and machinery Solution: Computation of income from other sources for the assessment year 2008-2009
Rs. i) Income from letting on hire of building and machinery under one composite lease ii) Interest on bank deposits iii) Directors sitting fee iv) Ground rent v) Income from undisclosed sources vi) Winning from lottery (gross) (as calculated) Less: Allowable deductions: a) Depreciation on building and machinery b) Fair insurance on building and machinery Income from other sources Rs. 27,000 2,500 1,200 600 10,000 10,000 51,300 4,000 100
600 3,200
27,000 2,500 1,200 600 10,000 6,940
Rs. 20 Rs. 4,000 Rs. 100
4100 47,200
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Note: Dividend from Indian Co shares is exempt from tax Lottery income should be grossed up by 100/69.6 (6940 x 100/69.4) I. Self Assessment Questions (SAQ 1) 1. Casual Incomes like card games etc are fully exempt from tax. (T/F). 2. Daily allowance of MPs, MLAs, MLCs, is fully taxed. (T/F). 3. Gift received from relatives fully exempted. (T/F) 4. Dividend received from foreign companies taxable under the head __________ II. Self Assessment Questions (SAQ 2) 1. Ground rent received is chargeable to tax under the head______. A. Income from salary B. Income from other sources C. Income from house property D. None of the above 2. Salary of a MP or MLA is taxable under the head A. Income from salary B. Income from other sources C. Exempt D. None of the above 3. Compute taxable income from other sources i) Ground rent Rs. 5,000 ii) Income from the house taken on a rent of Rs. 5,000, 3,000 A. 13,000 B. 10,000 C. 7,000 D. 3,000 rent paid Rs.
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4. From the following particulars of Sri Mahesh compute his income fro other sources: a) Ground rent Rs. 5000 b) Following interest received: i. On fixed deposits from bank Rs.400 ii. From POSB a/c Rs 300 iii. Interest from deposit with a firm Rs.600. c) Income from sub-letting a house taken on rent Rs.5000. Rent paid Rs.3000. d) Spent Rs. 400 for collecting the rent of the house. A. 7,900 B. 7,600 C. 8,000 D. 9,000 5. Mr. C, a resident individual, submits the following particulars of his income for the PY. i) Royalty from a coal mine Rs. 20,000 ii) Agricultural income in Pakistan Rs. 15,000 iii) Salary for a part time job with a firm Rs. 21,000 iv) Salary as Member of Parliament Rs. 36,000 v) Daily allowance as M.P. Rs. 15,000 vi) His residential house has been taken on rent of Rs. 1,000 p.m., half of which he has sub-let at Rs. 1,200 p.m. vii) Dividend received from a co-operative society Rs. 5,000. viii) He has incurred the following expenses: a) Paid collection charges Rs. 1,000 for collecting dividends. Compute Mr. C's income from other sources for the Assessment year 2008-2009. A. 1,31,800
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B. 81,300 C. 84,400 D. 93,000
7.9 Summary
Incomes which do not fall under any of the other four heads are taxed under this head. Dividend on shares of companies, royalty received, casual income, salary of MP MLA or MLC and interest income are examples of income from other sources. Deductions specified under section 57 and any other expenditure wholly and exclusively incurred for earning the income are allowed.

7.10 (A) Questions 1. State the various incomes taxable under the head Income from Other Sources. 2. Explain the provisions governing interest on securities and discuss the deductions allowable while computing income from other sources. 3. Write short notes securities a) Less tax commercial securities. b) Tax free securities c) Bond washing Transactions 7.10 (B) Exercises 1. Mr. PREETAMS investment during the Previous Year ended 31-3-2008 consisted of the following: a) Rs. 25,000 7% Govt. Securities. b) Rs. 15,000 8% Agra Municipal Bonds.
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c) Rs. 20,000 9% Bombay Port Trust Bonds. d) Rs. 10,000 7-year National Savings Certificate. e) Rs. 15,000 6% Govt. of Japan Bonds. f) Rs. 5,000 7% National Plan Certificates.
Mr. Preetam paid Rs. 60 for collecting taxable interest on securities. Find out his income from other sources. 2. From the following particulars of investments held by Mr. ANAND during the ended 31.3.2008, compute his income from other sources: (a) Rs. 30,000 8% tax-free Government Securities. (b) Rs. 20,000 9% Port Trust Bonds. (c) Rs. 1,00,000 10% Debentures of Sugar Syndicate Ltd. On 1.10.2004 Mr. Anand sold the port trust bonds at a profit of Rs. 2,000 and on the same day he purchased Rs. 32,000 12% municipal debentures after taking a loan of Rs. 10,000 at 16% per annum interest. He paid a commission of Rs. 100 to a banker on purchase and sale of investments. The collection charges amounted to Rs. 20. Interest is payable in each case on 1st January and 1st July every year. 3. Compute Income from other sources of SRI ASHOK: 1) Income from sub-letting of property Rs. 5,000. 2) Royalty income from publication of articles Rs. 2,000. 3) Receipt from letting of plant and machinery Rs. 15,000. 4) Dividend from co-operative society Rs. 500. 5) Interest on fixed deposit in Syndicate Bank Rs. 1,000. 6) Rs. 8,000 won in crossword puzzles. 7) Winnings from lotteries (gross) Rs. 10,000. 8) Rs. 25,000 7% Govt. Securities. 9) 7% National Plan Certificates Rs. 5,600. 10) Rs. 4,000 as interest on less tax Government securities.
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11) Rs. 3,564 as interest on debentures of a company (listed). He claims the following deductions: (i) Repairs to plant and machinery Rs. 200. (ii) Collection charges for interest and dividends Rs. 50.

SAQ 1 1. False (Taxable @30%) 2. False (Exempt from Tax) 3. True 4. Income from Other Sources SAQ 2 1. B 2. B 3. C 4. B 5. B TQs 7.8(A) 1. Refer Para 7.2 2. Refer Para 7.5 & 7.3 3. Refer Para 7.5 TQs 7.8(B): Refer relevant Theories, formats and illustrations for all the problems Additional Hints: Q. No. 1 a) Interest on 7-year National Savings Certificates is exempt from tax. So, it should not be included in the income of the assessee.
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b) Interest on 7% National Plan Certificates is exempt from tax. So, it should not be included in the income of the assessee. Q. No. 2 (a) Interest on 8% tax-free Govt. Securities has to be included in the income of the assessee. (b) Only one half yearly interest on 7% port trust bonds should be taken into account, as it is sold in the middle of the year. (c) Only one half yearly interest on 12% municipal debentures should be taken into account, as this security was purchased only in the middle of the year. (d) Interest paid on loan borrowed will be only for 6 months from 1.10.2004 to 31.3.2005. (e) Profit made on the sale of port trust bonds is a capital gain. It should not be taken into account in income from other sources. (f) Bank commission for purchase and sale of investment is not an allowable deduction in connection with interest on securities. Q. No. 3 (a) Winning from lottery and winnings from cross word puzzle should be included in the income of the assessee without any exemption with effect from the assessment year 2003-04. (b) Interest on National Plan Certificates is exempt from tax. So, it should not be included in the income of the assessee.
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Unit 8
Unit 8
Structure: 8.1 Introduction
Set-off and Carry Forward of Losses
Learning Objectives 8.2 8.3 8.4 8.5 8.6 Set-Off of Losses Carry Forward of Losses Provisions relating to Carry Forward and Set-off of Losses Illustrations on set-off of losses Illustrations on Total Income Self Assessment Questions (SAQ1, SAQ2) 8.7 8.8 8.9 Summary Terminal Questions Answers to SAQs and TQs
8.1 Introduction
This unit explains various provisions relating to set-off and carry forward of losses and computation of total income. Learning Objectives After studying this Unit, you will be able to: Understand the meaning of set-off and carry forward of losses. Understand the provisions relating to set-off and carry forward of losses. Work out problems on set-off and carry forward of losses Know the Key points Compute the total income.
8.2 Set-Off of Losses

It means setting off losses against the income of the same year
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Provisions Relating to Set-off of Losses: The various provisions of the Income-tax Act of 1961 regarding set-off of losses are: 1. Set-off of losses under one source of income against income under another source of income under the same head (or inter-source adjustment of incomes) (Section 70 of the Income-tax Act): Example: loss from one house can be set off against income from another house. Following are the exception to this rule: a. Loss from speculation cannot be set off against income from nonspeculative business. b. Long-term capital loss can be set off only against LTCG. c. Loss from the activity of owning and maintaining racehorses can be set off only against income for such business. d. Loss cannot be set off against winnings from lotteries, crossword, puzzles, horse race, betting of any sort etc. e. Loss from an exempted source of income cannot be set off. 2. Set-off of loss under one head of income against income from another head of income (Section 71 of Income-tax Act): If an assessee has loss from one head and there is no income under the same head, the said loss can be set off against the profits under other head or heads but this provision does not apply to the following losses: a. Loss from speculation (sec 73 (i)) b. Loss under the head capital gains. c. Loss from the activity of owning and maintaining horse races (sec.74 A (3)). d. Loss under the head profits and gains from business/profession cannot be set off against income under salaries (w.e.f 1.4.2005) e. Losses from lottery, crossword puzzle, gambling, card games or betting etc. cannot be setoff against any income
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8.3 Carry Forward of Losses

Where the assessee could not set off the losses in the assessment year of their occurrence, the unabsorbed loss can be carried forward for set off against his income in subsequent years. He should determine the loss in pursuance of a return filled by him. Following losses can be carried forward: 1. Loss under the head income from house property 2. Loss from non-speculative business or profession. 3. Loss from speculation. 4. Short term or long term capital loss. 5. Loss from the activity of maintaining race horses No loss other than the above five can be carried forward for set off purposes.
8.4 Provisions relating to Carry Forward and Set-off of Losses:

It must be noted that only the following losses can be carried forward for setoff in the succeeding years: (i) Loss under the head Income from House Property. (ii) Loss on non-speculative business. (iii) Loss on speculative business. (iv) Capital loss (short-term as well as long-term). (v) Loss from the activity of owning and maintaining race horses. The important provisions of the Income-tax Act relating to carry forward and set-off of losses are: 1. Loss from house property (Section 71B) of the Income-tax Act: From the A.Y.1999-2000 loss from house property (other than unrealized rent) can be carried forward to subsequent 8 A.Ys for set off against in come from house property. 2. Carry forward and set-off of losses from business (Section 72 ): The business loss could not be set off against other incomes of the
Unit 8
assessee during the previous year can carried forward subject to a) Carried forward business loss can be set off against the income from the same business or any other business but not against the other heads of the incomes b) Such carrying business loss is allowed only for a period of 8 years immediately succeeded the A.Y. c) the order of set off is as under i) Current depreciation capital expenditure on scientific research ii) Carry forward business loss iii) Unabsorbed depreciation
iv) Unabsorbed capital expenditure on scientific research v) Unabsorbed development allowance vi) Unabsorbed investment allowance 3. Carry forward of speculation loss (Section 73(2) (4)): Unabsorbed speculation loss can be set off in subsequent years only against speculation profits. It can be carried forward for 8 years from the A.Y. 4. Carry forward of capital losses (Section 74 (1) and (2)): Short-term capital losses: The short term capital loss can be carried forward to subsequent 8 A.Y. and can be set off only against capital gains (Short term or long term) Long-term capital losses: The long term capital loss can be carried forward to subsequent 8 A.Y. but can be set off only against long term capital gain. 5. Carry forward of losses from horse races (Section 74(4)(3) (6)): There is no income from horse race such loss can be carried forward to subsequent 4A.Ys and set off only against income from maintaining race horses.
Business Taxation Assessment Year 2008-2009 KEY POINTS Carry Forward of Losses
Sec. 71B 72 73 74 Nature of loss Loss from house property. Business loss unabsorbed. Speculation business loss. Loss under the head Capital Gains a) Short term capital loss b) Long term capital loss 74A Loss from the activity of owning and maintaining race horses 8years 4 years No. of years 8 years. 8 years. 8 years To be set-off against
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Income form houses property. Income from business or profession. Income from speculation business.
8 years
Short term or long term capital gains Long term capital gains Income from same activity
8.5 Illustrations on Set off and Carry forward of Losses

Problem 1. (Capital losses) From the following particulars of income of MR. VIGNESH for the assessment year 2008-2009, compute his total income: Rs. Income from House Property I Loss from House property II Loss in cloth business Profit from speculation business Long-term capital gain Long-term capital loss Short-term capital loss 11,000 4,000 2,000 40,000 9,000 21,000 5,000
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Solution: Computation of income for the assessment year 2008 2009 Rs. Income from House Property: Income from House Property I Loss from House property II set-of Income from Business: Profit from speculation business Loss in cloth business Income from Capital gains: Long-term capital gain Less Long-term capital loss set off against long term capital gain to the extent possible Long-term capital loss c/f (21,000 9,000) Short term capital loss Total income Note: 1) Loss in cloth business can be set off against profit from speculation business. 2) Long-term capital losses can be set off against the long tern capital gains. The long-term capital losses, which could not be set off during the assessment year 2007-2008 can be carried forward for set off in the future against long-term. Capital gains for assessment years. 3) Capital loss cannot be set-off against other heads of income. 9,000 12,000 5,000 Nil 45,000 Nil 9,000 40,000 2,000 38,000 11,000 4,000 7,000 Rs.
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Problem 2 Mr. ROY is an assessee for the preparation of his income-tax return for the assessment year 2008-2009 gives the following information: Rs. Loss under the head 'business' Capital gain on sale of house property-long-term Capital loss on sale of shares-short-term Loss in respect of property used for the purpose of residence Loss in respect of property let out Share of loss from partnership firm brought forward from the assessment year 2002-2003 60,000 1,00,000 2,00,000 50,000 10,000 25,000
You are requested to compute the total income for the assessment year 2008- 2009. Solution Computation of total income for the assessment year 2008-2009 Rs. Income from house property: Loss from self occupied property Loss from let out property Income from business: Capital gain: Long term capital gain on the sale of house property Short term capital loss on the sale of shares (set off) Total income - 50,000 1,50,000 15,000 2,00,000 10,000 - 25,000 35,000 Rs.
1,00,000
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Unit 8
Problem 3: (Setting off speculation losses) GOKUL submits the following information of the net incomes and losses for the year ended 31st March 2008: Rs. 1. Salary income 2. Income from house property: House A (Income) House B (Loss) 3. Income from business: Cloth business (profit) Hardware business (loss) Speculation (Profit) Speculation (Loss) 4. Capital Gains: Short-term (gain) Short-term (loss) Long-term (gain) 5. Other sources: Loss from card games Interest on Government securities 6. Unabsorbed depreciation Compute his total income 6,000 15,000 5,000 8,000 24,000 8,000 10,000 30,000 10,000 12,000 12,000 17,000 24,000
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Unit 8
Solution: Computation of income for the assessment year 2008 2009

Rs. Salary income Income from House Property: Income from House Property A Loss from House property B Income from Business: Cloth business (profit) Hardware business (loss) Profit from speculation business Speculation Loss set off Capital gains: Short-term capital gain Long-term capital gain Less short-term capital loss set off against long term capital gain to the extent possible Interest on govt. securities Total income Rs. 24,000
10,000 30,000
20,000
10,000 12,000
2,000
12,000 12,000 8,000 8,000 16,000 16,000
Nil
Nil Nil 15,000 17,000
Problem 4: - (The order of set off) A firm furnished the following particulars for A.Y. 2008- 2009 Loss from business 2,00,000 Depreciation allowance for the current year 40,000 Income from house property computed 4,00,000 Items carried forward form earlier years Business loss A.Y.2002-2003, 2,40,000 Depreciation allowance (unabsorbed) 1, 00,000 Compute firms gross total income.
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Unit 8
Solution: Computation of income for the assessment year 2008 2009

Rs. Income from House Property Business loss for current year Rs. 4,00,000 2,00,000 2,00,000 Less current year depreciation 1,60,000 40,000 Less unabsorbed depreciation Gross Total income 60,000 Nil
Note: B/f business loss can be set-off only against income from business or profession. Hence, it will be c/f set off in the following A.Y.
8.6 Computation of Total Income

Problem 5: X (age 42 years) is a salaried employee (salary being Rs. 40,000 per month). During the previous year 2007-2008, he makes the following investment deposits or payments: a) Life insurance premium on the life of his married daughter: Rs. 6,000 (sum assured: Rs. 20,000): b) Life insurance premium on his won life: Rs. 2,700 (sum assured : Rs. 60,000): c) Life insurance premium on the life of his dependent sister: Rs. 10,000: d) Contribution towards Recognised provident fund: Rs. 9,000: e) Contribution towards public provident fund: Rs. 30,000: f) Repayment of loan taken from LIC for purchase of residential house property: Rs. 30,000: g) Contribution towards notified equity- linked saving scheme of UTI ( i.e., MEP 2006) : Rs. 14,000.
Unit 8
Find out the tax liability of X for the assessment year 2008-2009 assuming that income from house property is Rs. 18,600. Solution: Computation of Total income Particulars Income from Salary (40,000 X 12) Income from H.P. Gross total income Less Deduction u/s 80C LIC married daughter (up to 20%) LIC own life LIC sister RPF PPF Repayment of housing loan Equity linked saving scheme 4,000 2,700 9,000 30,000 30,000 14,000 89,700 Or Maximum Limit 1,00,000 Whichever is less Taxable Income 4,08,900 89,700 Rs. Rs. 4,80,000 18,600 4,98,600
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Unit 8
Tax Liability Up to 1,10,000 10% 20% Nil 4, 000 29,780 33,780 Add: Education Cess 2% + 676 34,456 Add: SHEC 1% + 345 34,801 Note: Life insurance premium is eligible up 20% of sum assured u/s 80C . Maximum limit available u/s 80C is Rs. 1,00,000. Refer Tax slabs for Tax Liability (Unit-1)
1,10,000 to 1,50,000 Balance 1,48,900
Problem 6. Find out the taxable income for the assessment year 2008-2009 in the cases of resident individuals given below:
Name of taxpayer Age of the taxpayer during the Income from business Income from profession Salary income and other income Contribution towards NSC VIII Public Provident Fund Investment in notified infrastructure sector X 65 years 90,000 2,00,000 80,000 2,000 Y 60 years 80,000 86,000 90,000 2,000 5,000 Z 68 years 30,000 1,20,000 10,000 2,000 1,000 A 50 yrs. 10,10,000 2,20,000 65,000 6,000 33,000
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Solution: Computation of Total income

Particulars Salary income Bus. / Professional Income GTI (a) Ded. u/s 80 C NSC VIII PPF Infra. Bonds Max.Rs. 1 Lakh Permissible Ded. u/s 80C (b) Taxable Income (a-b) X 65 years 2,00,000 90,000 2,90,000 80,000 2,000 82,000 82,000 2,08,000 Y 60 years 86,000 80,000 1,66,000 90,000 2,000 5,000 97,000 97,000 69,000 Z 68 years A 50Years 1,20,000 30,000 1,50,000 10,000 2,000 1,000 13,000 13,000 1,37,000 2,20,000 10,10,000 12,30,000 65,000 6,000 33,000 1,04,000 1,00,000 11,30,000
Note: Basic exemption limit for women resident (below 65) is Rs. 1,45,000 instead of Rs. 1,10,000. Slabs for Senior Citizen is Rs. 1,95,000 instead of Rs. 1,10,000.
I. Self Assessment Questions (SAQ 1) 1. Unabsorbed speculation loss can be set-off only against ____________. 2. The long term capital loss can be carried forward to subsequent 8 A.Y. but can be set off only against long term capital gain. (T/F) 3. Carrying business loss is allowed only for a period of 4 years immediately succeeding the A.Y
I. Self Assessment Questions (SAQ 2) 1. Loss in crossword puzzles ______ set off against other casual incomes. A. can be B. cannot be C. may be D. is
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2. Capital loss can be set off against ________. A. House property Income B. Business Income C. Capital Gain D. Any Income 3. Short Term Capital Loss can be carried forward to subsequent years for set off ________
A. Short Term Capital Gain B. Long Term Capital Gain C. Short Term Capital Gain or Long Term Capital Gain D. None of the above 4. Speculation loss can be set off against the profits from____. A. Any business B. Any head of income C. None
D. Speculation business only

5. From the following point out the number of years to carry forward of losses. 1. Business loss unabsorbed 2. Loss from the activity of owning and maintaining race horses A. 4 & 8 B. 8 & 4 C. 7 & 4 D. 4 & 7
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6. The following information is given by an assessee for the preparation of his income- tax returns for the assessment year:
Rs.
Loss under the head business Capital gain on sale of house property-long-term Capital loss on sale of share-short-term Loss in respect of property let out Share of loss from partnership firm brought forward from the assessment year 2004-2005
100000 200000 50000 25000 60000
Loss in respect of property used for the purpose of Residence 10000
You are required to compute the total income for the assessment year. A. Rs. 22,500 B. Rs. 20,000 C. Rs. 15,000 D. Rs.170000 7. From the following particulars of income of Mr. B for the assessment year 2008-2009, compute his total income. Rs. Income from House Property I Loss from House Property II Loss in cloth business Profit from speculation business Long-term capital gain Long-term capital loss Short-term capital loss A. 50,000 B. 40,000 C. 45,000 D. 28,000 11000 4000 2000 40000 9000 21000 5000
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Unit 8
8.7 Summary
Loss from one source can be set-off against income from another source under the same head (intra head adjustment) (Section70). Loss under one head of income can be set off against income from another head (inter head adjustment.) (Section 71). The losses which could not be set off in the year can be carried forward to subsequent years. There are exceptions to the above rules.

8.8(A) Questions 1. Write shot notes on: 1. Set off of losses 2. Carry forward of losses 3. Set off of losses under capital gains 4. Set off of speculation losses 8.8(B) Exercise: 1. MR. ANIL, an Indian resident, furnishes the following particulars of his income for the Financial year 2007-2008. You are required to deal with set-off and carry forward of losses: Rs. (1) Income from securities (2) Income from residential house (computed) (3) Profits from rayon business (4) Share of income from a firm (5) Speculation Income (6) Short-term capital gains (7) Long-term capital gains (jewellery)
10,000 5,000 25,000 2,000 2,000 4,000 34,000

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The carry-forward items from the assessment year 2007-2008are: Rs. (1) Loss from Hosiery Business (discontinued in the previous year 2003-2004) (2) Share of loss in a firm (3) Loss from Rayon Business (4) Unabsorbed depreciation (2001-2002) (5) Speculation loss (6) Short-term capital loss 4,000 3,000 2,000 1,000 4,000 6,000
(7) Long-term capital loss (house) (relating toprevious year 2001-2002) 23,000 Current years depreciation is Rs. 500. 2. Mrs. ASWITHA furnishes the following particulars of his income for the assessment year 2008-2009. Compute his Taxable Income. Rs. (a) Income from let out property (computed) (b) Loss from let out property (computed) (c) Profit from cloth business (d) Interest from firm (e) Speculation profit (f) Short-term capital loss (g) Long-term capital gain (h) Interest on debentures of X Ltd.(Gross) (i) Share of loss from firm (j) Dividend (k) Lottery income (gross) (l) Gain from horse race (m) Profit from card games (n) Loss in crossword puzzles (o) Income from owning horses 7,500 5,000 25,000 5,000 3,000 4,000 10,000 8,000 4,000 3,000 20,000 8,000 6,000 3,000 20,000
The following items have been brought forward from the preceding
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assessment year 2008-2009: (i) Loss from radio business discontinued during the previous year 20072008 4,000 (ii) Unabsorbed depreciation (iii) Long-term capital loss for the year 2002-2003 (iv) Loss from owning and maintaining race horses (v) Speculation loss of the year 2001-2002 5,000 2,000 4,000 1,000

SAQ 1 1. Profits from speculation 2. True 3. False (8 Years) SAQ 2 1. B 2. C 3. C 4. D 5. B TQs 8.7(A) 1. Refer Para 8.2 2. Refer Para 8.3 3. Refer Para 8.4 (4) 4. Refer Para 8.4 (3) TQs 8.7(B) Refer relevant Theories, formats and illustrations for all the problems. 6. C 7. C
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References 1. Income Tax Law by T. N. Manoharan 2. Taxation by B. S. Raman 3. Income Tax by G. Shekhar 4. Income Tax by Vinod Singhania 5. Income Tax by Sadashiva Rao
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Business Taxation Assessment Year 2008-2009

1.3 Agriculture Income

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Business Taxation Assessment Year 2008-2009

Business Taxation Assessment Year 2008-2009

Sikkim Manipal University

Business Taxation Assessment Year 2008-2009

1.5 Important Terms

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An association of persons or body of individuals whether incorporated or not.

1.6 The general rule and exceptions

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1.7 Residential Status

Ordinarily Resident (OR)

Not-Ordinarily Resident (NOR)

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Business Taxation Assessment Year 2008-2009

Sikkim Manipal University

Business Taxation Assessment Year 2008-2009

Sikkim Manipal University

Business Taxation Assessment Year 2008-2009

Assessment Year (AY) : 2008-2009 Previous Year (PY) : 2007-2008

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Sikkim Manipal University

Business Taxation Assessment Year 2008-2009

1.8 Incidence of tax liability (Scope of total income Sec 5)

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Scope of total income

Business Taxation Assessment Year 2008-2009

Business Taxation Assessment Year 2008-2009

40,000 8,000 60,000

60,000 Page No. 21

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25,000 40,000 Exempt Exempt 1,16,000

25,000 40,000 Exempt Exempt 82,000

25,000 40,000 Exempt Exempt 42,000 Page No. 22

Business Taxation Assessment Year 2008-2009

Sikkim Manipal University

Business Taxation Assessment Year 2008-2009