1. INCOME TAX LAW OF INDIA by : DR. T.K.

JAIN AFTERSCHO OL centre for

social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india
FOR PGPSE PARTICIPANTS mobile : 91+9414430763
2. My words .... Ours is a great country with immense entrepreneurial potential. However,
our legal system and taxation system is so cumbersome that our creativity and talent is
wasted / unnecessarily diverted in these sectors. I wish that these are simplified so that an
ordinary entrepreneur can understand these without help from any expert. I wish that more
people should become entrepreneurs, rather than becoming an expert in avoiding taxation.
Let us wish that some likeminded person is able to reach policy making level and is able to
change these. I have tried to simplify Indian legal system and taxation system for Indian
entrepreneurs but it is so complicated that even if you simplify it, it will remain
complicated. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and
contribute to the development of nation, but our systems and processes force him to adopt
unfair means ..
3. For whom ? ? ? Primarily for those who have basic understanding of accounting,
bookkeeping, Indian legal system, and Income tax Act. We believe that this document will
help our future entrepreeurs (PGPSE participants) to gain basic understanding of Income tax
law in India.
4. Links for basic understanding http://www.scribd.com/doc/11629358/Income-Tax-Law-ofIndia http://www.scribd.com/doc/24555340/Basics-of-Accounting-Book-Keeping
http://www.scribd.com/doc/11629083/Factories-Act-1948
http://www.scribd.com/doc/11629283/Funds-Flow-Statement
http://www.scribd.com/doc/11953668/The-Employees-State-Insurance-Act-ESI-Act
5. WHO IS A PERSON ? Sec. 2 (31) : person includes individual, HUF, local authority, firm,
company, artificial person etc. For determining the tax liability, we have to see its location /
residential status
6. Who is assessee? Sec. 2(7) : a person by whom any tax is payable
7. What is year? Assessment year as per sec. 2(9) : the year in which inome is being assessed
for tax it is of 12 months. Previous year as per sec. 3 : the year for which inome is being
assessed for tax it is the year just before assessment year.
8. What is income ? Sec. 2(24) : any profit, dividend, salary, profit in lieu of salary,
perquisites, benefits, voluntary contributions received by trusts, cash benefits under various
provisions of sec 28, capital gain etc. (it is a very wide definition and includes income from
all the sources including income from lottery, speculative business etc. )
9. Income heads There are 5 heads of income : salary house property capital gain business
and profession other income

10. Residential status of individual There 3 possibilities : resident and ordinary resident
resident and not ordinary resident non-resident
11. 2 basic Conditions for Residents 1. at least 182 days of stay in India during previous year
OR 2. at least 60 days of stay in India during previous year + 365 days of stay in 4 years
preceeding the previous year
12. 2 additional conditions for ordinary residents 1. resident in at least 2 out of previous 10
years AND 2. stay of at least 730 days during last 7 years before the previous year.
13. HOW TO DETERMINE RESIDENTIAL STATUS OF ARTIFICIAL PERSONS For
companies and other artificial persons, you have to see where their management and control
is located. Residential status depends on their management and control at the time of
income .
14. What is taxable out of the following : 1. income acrued and received in India : taxable for
all 2. income earned and received out of India : taxable only incase of ROR (resident and
ordinary resident) 3. Income acrued / received out of India from a business controlled in
India : not taxable for NR only
15. Vivek has been in India as under : 2001 : 20 days 2002: 30 days 2003 : 40 days 2004 : 50
days and so on till 2009. answer : he is a resident because he remained for 100 days during
2009 and for >365 days during past 4 years, but he will not be ROR as he stayed for less than
730 days in 7 years.
16. Rohit has been in India as under : 2009 : 20 days 2008: 30 days 2007 : 40 days 2006 : 50
days and so on . answer : he is a non-resident because he remained for only 20 days during
2009
17. Special circumstances regarding basic conditions If an individual leaves India for
employment or as a member of crew - then instead of 60 we have to take 182 days. A person
of Indian origin settled abroad and comes to India for a visit only in that case also take 182
days instead of 60 days.
18. Rohit's friend Jenifer is from Indian origin. She comes to visit India from 1 March to 31
October, determine her residential status From 1/3 to 31/10 we have : 245 days, thus she is
resident but not ordinary resident
19. Which of these are taxable ? 1. amount received under keyman insurance policy and
under Sec. 80 DD 2. Bonus received from notified govt. Securities 3. educational scholarship
4. daily allowance received by MP
20. Solution None is taxable the are tax free under sec. 10D, 10(15), 10(16), 10(17)
respectively

21. Vivek opens a trade union and has lots of earning in that union. Is the income taxable ?
No it is tax free as per sec. 10(24)
22. Vivek sets up a new business on May 15, 2008.What is the previous year for the
assessment year 2009-10. The previous year will be 15 May 2008 to 31 March 2009
23. What are included in salary ? Salary include all pay, allowances, bonus, perquisites
(facilities provided to employees, which can be evaluated in money), commission, etc. By
what ever name called. In salary head, we add the following to salary : employer's
contribution to PF, taxable perquisites under sec. 17(2) , ESOPs, DA, other allowances
24. What is taxable HRA? HRA is exempt to the extent of the least of the following : 1.Rent
paid - 10% of salary (basic+DA+commission) 2. 40% salary (50% in case of 4 Metros) 3.
Actual allowance received
25. Is PF taxable ? There are 3 types of PF : 1. statutory (govt.) 2. recognised 3. unrecognised
statutory PF is fully exempt employer's contribution in recognised PF is tax free to the extent
of 12%, rest are exempt. Unrecognised PF is taxed only when the employee collects payment
(employee's contribution is exempt, but interest is taken in income from other sources)
26. Superannuation fund Tax free under sec. 10(13)
27. Ravi works in a non-govt. Office. He retires on 31 March after 15 years of service . His
salary in Jan March was 24000 pm, but before that it was 20000 pm. He gets Rs. 2 lakhs as
leave encashment. How much is taxfree? 1. average for 10 months : (24*3 + 20*7) = 21,200
for 10 months : 212000 2. for 1month for each year of service 15*21200= 318000 3. Rs. 3
lakhs. 4. actual amount 2 lakh So the least of above Rs. 2 lakhs is taxfree.
28. Arun joined on 1/1/85, but fixation was done on 1/7/06 @ 26600 in payscale of 25000800-33000. He retires on 1/12/6. He was paid 3.3 lakhs as gratuity. Determine taxability.
Average for 10 months : (5 * 25800 + 5*26600)/10 =26200 The least of following is taxfree :
1. 15/26* 22*26200 = 332538 2. Rs. 3.5 lakhs 3. actual amount : 3.3 lakhs thus Rs. 3.3 is
taxfree (if gratuity act was not applicable the 1 st amount will be 1/2*21*26200 =275100,
which will be taxfree here we will take 21 years, as only completed years will be counted.)
29. Retrenchment compensation It is paid at the time of retrenchment (leaving the employee)
following is tax free (least of the following ) : 1. 5 lakhs 2. 15 days's wages for number of
years worked (round of to greater amount, if more than 6 months. )
30. V.R.S. PAYMENTS LEAST OF THE FOLLOWING IS EXEMPT : 1. 5 LAKHS 2. Last
salary * 3 * number of completed years of service (sec. 10(10c)
31. Earned Leave As usual free for govt. Employees for others least of the following : 1. 3
lakhs 2. 10 month's salary 3. : 30 days credit for each year of service (salary = average for the
last 10 month salary = salary+DA+commission)

32. Pension Uncommuted : monthly payments it is taxable for all commuted : - lump sum
payment As usual free for govt. Employees for others : commuted pension is taxfree to the
following levels : 1/3 rd if gratuity is paid if gratuity is not paid
33. Gratuity ? It is a lumpsum payment at the time of retirement and it is taxfree for govt.
Employee. For others it is taxfree to the least of the following : 1. 3.5 lakhs (this has increase
now, checkout) 2. 15/26 for each year of service
34. How to value furnished accommodation ? If it is owned by employer, - 10% of cost of
furnishing if it is hired the actual expenses paid by employer as rental charges
35. How to value domestic servant facility :? If the employer has provided domestic servant
facility to employee, the actual amount spent by employer is perquisite of employee.
36. How to value educational facility ? Actual money spent by employer is taken as
perquisite when the employer is providing education to the children of the employees. If
the educational instituiton is being managed by employer, then it is taken as NIL (provided
the expenditure by employer is upto Rs. 1000 per month per child ).
37. Interest free loans When employer provides interest free loan the perquisite is taken at
specified rates. If it is concessional rate the difference of rates is taken as perquisite. The
rates are : personal loan : 12.75%, car loan 7.5%, housing loan : 8% (these rates are regularly
updated you have to know the latest slabs).
38. Medical facility Annaul reimbursement of medical bills upto Rs. 15000 is tax free. Free
medical facility in employer's hospital is tax free. Treatment abroad for employee / his family
is taxfree upto Rs. 2 lakhs. (these limits are revised by govt, so check the latest limits).
39. Free lunch ? It is taxfree provided the value of lunch is not more than Rs. 50 similarly
tea, refreshments etc. Provided free to employee are tax free. Money spent by employer on
training of employee is also tax free.
40. Professional tax ? ? Money spent by employer as professional tax is once added and then
its deduction can be claimed. So once add it as perquisite and then claimits deduction under
sec. 16 (iii)
41. Who is specified employee? Who is director or who has 20% voting power in company
or who gets salary (including perquisites ) of Rs. 50000 or more per annum. Car, gas, and
other facilities are taxable only on Specified Employees.
42. Deduction for : Entertainment allowance (sec. 16(ii) It is exempt for govt. Employees to
the least of following : 1. 5000 2. 1/5 th of salary 3. actual allowance
43. Rohit opens a venture capital fund to promote entrepreneurs and has lots of earning in
that fund. Is the income taxable ? No (sec. 10(23fb)

44. Gautam sets up a unit in Noida export processing zone. Is the income taxable? No (sec.
10A )
45. Vivek launches a mutual fund and get it registered with RBI and AMFI. Is the income of
mutual fund taxable ? No (sec. 10 (23D)
46. Bothra and Surana Carpets is a 100% export oriented unit. Is the income taxable ? No
(subject to some conditions) Sec. 10 B
47. Rohit launches Bachao Political Party and earns huge money by way of donations from
people and by renting out office premises. Is the income taxable ? No (sec. 13A)
48. What is agriculture income? As per sec. 2(1a) : any income from land used for agriculture
purpose including income from farm house. Calculate total income of a person including
agriculture income and then reduce the amount of tax by the amount of tax which is worked
out only on agriculture income.
49. Example : Rohit's income from agriculture is 2 lakhs and other income is 360000, what is
his tax liability? First add these : = 560000 Suppose Tax on this amount is Rs. 10000 now
calculate tax on only agriculture income ( 2 lakh + 1,60,000 as minimum base tax free
income) : suppose tax on this is Rs. 6000 so Rohit will have to pay : 10000-6000 = 4000 so
Agriculture income is the best means to avoid tax.
50. Ashok retires from government service. He gets following : Gratuity Pension VRS
compensation HRA Super annuation fund LTC which of these are taxable ?
51. Solution All these are tax free subject to some limitations read sec. 105, 10(10),
10(10A, and 10AA, 13A) for details.
52. What is a gratuity ? When an employee retires, he receives gratuity from his employer. If
he has worked for minimum 5 years, he may get gratuity. The amount of gratuity is exempt to
the least of the following : 1. Rs. 350000 2. 15/26 * number of years worked 3. actual
gratuity for government employee the gratuity is tax free.
53. What is Payment of Gratuity Act 1972 It is the main law regarding payment of gratuity. If
an employee is not working in govt. Department, then payment of gratuity should be as per
this act. However, in some cases this law is not applicable and in that case the calculation
of tax free gratuity is little bit different (instead of 15/26, we have to take half month salary).
54. For the assessment year 2007-8, Vivek has agriculture income of Rs. 58000 and nonagriculture income of 120000 what is his tax liability? First calculate income tax on (120+58)
= 178000 first 1 lakhs = free next 50000 = 10% so 5000, 28000 * 20% 5600 now calculate
on 58000 add 1 lakh, (free limit) : 158000 tax on 50000= 5000, 20% on 8000 = 1600 net tax
liability : (5000+5600-5000-1600)= 4000 answer

55. While retiring Man Mohan gets Rs. 4 lakhs as earned leave. He worked for 25 years. His
average salary during last 10 month = 20000. Tax free (sec. 10(10AA) : least of the following
: 1. 20000*10 = 2 lakhs (10 months) 2. 3 lakhs 3. 30 days for each year worked : 25*20000 =
5 lakh the minimum is 2 lakh, so it will be taxfree.
56. Sharukh Khan retired from SBI on VRS. He got Rs. 10 lakhs. His salary = 20000, DA =
20000. He worked for 20 years with SBI He had 20 more years of service left. Min. Of the
following is taxfree (sec. 10(10c)) 1. 3months for number of years : 20*3*40 = 2400000 2. 5
lakhs 3. No. Of month's salary : 20 * 40000 = 8 lakh 4. actual amount = 10 lakh thus only 5
lakh will be taxfree.
57. Nandan Nilekani gets HRA of 2 lakhs per month in Delhi, his monthly salary is Rs. 20
lakhs. He pays Rs. 1 lakh as monthly house rent. Find taxability? Least of the following is
taxfree : (sec. 10(13A) rule 2A) 1. rent paid 10% salary = 1 2 lakh = zero 2. 50% of
salary = 10 Lakhs * 12 3. actual allowance : 2 Lakhs per month. So Zero is tax free all is
taxable.
58. Income from House Property Calculate the following in the same sequence : 1. Actual
rent / receivable rent (A) 2. Municipal value (b) 3. fair rent (c) 4. standard rent (d), compare b
with c and take higher amount and let us call it E. Now compare E with D, take the lower
amount. This is ERR (expected reasonable rent). Let us call it F. Compare it with actual rent,
take higher amount. Deduct municipal tax, get gross annual value, deduct interest paid and
other deduction, get net annual value.
59. Municipal value 40, fair rent 40, standard rent 40, rent received 80, what is gross annual
value. Higher of municipal value and fair rent = 40 lower of standard rent and 40 = 40
compare 40 with actual rent and take higher = 80 this is the answer.
60. MV = 96, FR = 80, SR = 82, AR = 79, WHAT IS GROSS VALUE Higher of MV & FR =
96 Lower of this and SR = 82, higher of this and AR = 82 answer = 82 answer
61. MV = 96, FR = 98, SR = 97, AR = 97.5, WHAT IS GROSS VALUE Higher of MV & FR
= 98, lower of this and SR = 97, higher of this and AR = 97.5 answer
62. MV = 84, FR = 80, SR = 60, AR = 79, WHAT IS GROSS VALUE Higher of MV and FR
= 84 lower of this and SR = 60 higher of this and AR = 79 answer
63. What are the deductions from Gross value in house property? First of all deduct
municipal taxes, to find NAV. Then deduct statutory deduction @30% interest on borrowed
capital. Interest on prior period (period before construction of property) is also allowed in 5
instalments. These deductions are given in sec. 24. (a & b)
64. Inadmissible deductions Following deductions are not permitted : 1. unrealised rent
realised later. Suppose you didnt realise rent of Rs. 5000 in year 2000, now you realise it, this
amount will be added back this year in house income. (because it was allowed as deduction
earlier). 2.

65. Amitabh has 2 houses, one is SOH and the other is rented. He gets Rs. 20000 p.m. As
rent. MV = 2 lak, FR =3 SR=4 municipal tax = 10000, He got AR for 10 months, interest
paid : 50000, total preconstruction interest Rs. 4 lakh. Higher of MV & FR = 3, compare this
with SR = 3, compare with AR = 3 Less municipal tax = 10000 Annual value = 2,90,000 less
statutory deduction (24a) 87000 interest deduction (24b) 50000+80000 =1.3 (this is allowed
upto Rs. 1.5 lakhs) net value = 73000 answer
66. Can housing income have negative value ? Yes, because exemption in interest is granted.
Suppose your House income is 20000, but interest deduction allowed (sec. 24) is Rs. 40000,
so it will be negative . But it cant be negative due to statutory deduction or deduction due to
repairs of house property.
67. BJP gives its building on rent. Can congress ask BJP to give tax on housing income? No
it is exampt for political parties, it is tax free.
68. Can an assessee claim rebate for repairs, colouring of building? No = Sec. 24 provides for
rebates. This is an exhaustive list only two rebates are permitted : 1. standard deduction
(30%) 2. Interest for loans No other rebate is allowed however, if the government allows
other rebate it will be permitted.
69. Rohit has 3 identical buildings. 1. for residence 2. for business 3. for rent (residential).
Total fair rent 60000, total rent received Rs. 30000Total municipal tax 18000 but only 9000
paid. Total interest on housing loan : 6000 FR = 20000 (only for let out building) AR =
30000 higher of FR & AR = 30000 less municipal tax = 3000 less sec 24 ded. 8100 interest =
2000 net = 16900 answer
70. Income from business and profession 4 conditions : 1. business must be carried out by
assesee 2. business must be carried out during previous year 3. profit has to be calculated as
per accounting system (mercantile or cash) 4. all the profits from all the units to be combined
to arrive at income from business
71. What is business ? Very wide meaning includes all professions, trade, manufacture,
services, vocation etc.
72. Is illegal business taxable here? Yes - in the same way as a legal business
73. If business is not carried out in the previous year then .... It is essential condition that
business should be carried out during previous year even if for 1 day. Some exceptions are
like : recovery of old bad debts. Etc.
74. Which is not allowed expenditure / deduction ? Capital expenditure payments out of
India / consultancy fees / interest / commission etc. which has been made without making
TDS expenditure not related to business cash payments above Rs. 20000 (other than banks
and specified govt institutions) read sec. 40 A and 43 B for details

75. You have to pay Rs. 5000 as excise duty, but you have not yet paid it, can you claim
deduction? No for such expenses (govt. Dues etc. ) only after payment you can claim it
(even if you are following mercantile system based on accruel)
76. You have paid Rs. 50 lakh for buying a patent, can it be claimed as deduction? No it is
capital expenditure you can claim depreciation on this.
77. You purchased a Van of Rs 3 lakhs to promote family welfare of employees, is it allowed
as deduction? It is again capital expenditure as per sec. 36(1)ix) it is allowed in 5
instalments so 60000 each year is allowed
78. In order to pay income tax you take loan and pay interest of Rs. 1000, is it allowed as
deduction? No
79. You spend Rs. 3000 for issue of debentures, is it allowed ? Yes it is related to business
80. You spend Rs. 4 lakh as VRS compensation to director, is it allowed? Yes - it is related to
business however as per sec. 35DD, it is allowed in 5 equal instalments
81. You sold out your import licence in market, is this a income under business ? Yes
82. You take a building on rent and for that pay stamp duty and registration charges, is it
allowed? Yes - it is related to business
83. You pay huge amount of money as entertainment expenditure and travel expenditure is
it allowed? Yes if it is for business there is no limit
84. You receive Rs. 3 lakhs as duty drawback when you export, is it taxable ? Yes it is
revenue receipt as per Income tax act.
85. A manager died. The company received Rs. 5 lakh under keyman insurance policy. Is it a
revenue of company? Yes it is treated as revenue.
86. You spend Rs. 2 lakhs to defend a case relating to protection of your trademark. Is it
allowed? Yes
87. A cashier embezzles Rs. 5 lakhs. Is it allowed as deduction? Yes it is a business related
loss
88. A CA firm pays Rs. 40000 as professional tax. Is it allowed as deduction? Yes
89. You make a provision of Rs. 5 lakh for gratuity payment (it is non-recognised gratuity
fund) No it will not be allowed as deduction
90. You pay Diwali bonus to employees, is it allowed? Yes

91. You pay bonus as per payment of bonus act, is it allowed? Yes
92. You give Rs. 5 lakhs as advertisement for pamplets published by a political party. Is it
allowed? No but if you give your own advertisements, it is allowed without limit.
93. Your company maintains a guest house for VIPs. The expenditure of Rs. 5 lakhs have
been made. Is it allowed? Yes without limit.
94. You make cash payment of 7 lakhs in a village where there is no bank. Is it allowed?
Generally cash payments above Rs. 20000 are not allowed. But exceptions are provided as
per rule 6DD, cash payment is allowed if there is no bank in that place or banks are closed
due to strikes etc.
95. You pay Rs. 3 lakhs for breach of contract. Is it allowed ? No if it is related to capital
assets / building etc. If it is related to goods that you buy or day to day business, it is allowed
96. You pay Rs. 4000 for legal fees when you dismiss a worker, is it allowed? Yes
97. You shift your business place and pay Rs. 10 lakhs. Is it allowed It is a capital
expenditure - not a revenue expenditure so not allowed
98. Expenses in new issue of share / rights issue / bonus issue of shares? These are all capital
expenses hence not allowed
99. Expenses on preparation of project report for a new product launch? Not capital
expenses unless it is just an extension of your existing product
100. You increase authorised capital and for that pay rs. 5 lakhs as fees etc. Not allowed as
it is capital expenditure
101. You spend Rs. 4 lakhs on personal travel. Is it allowed? No not related to business
102. You spend Rs. 10 lakhs 5 years back but claim for that now? Not allowed as
expenditure should have been incurred in the previous year (subject to some exceptions)
103. You pay Rs. 3000 as municipal taxes on your office building? Yes
104. You pay insurance premium on goods, is it allowed? Yes
105. You provide for Depreciation of Rs. 10 lakhs, is it allowed Yes but depreciation has to
be calculated as per the provisions in Sec. 32 of Income tax act. So the amount allowed may
differ the depreciation rates have to be the same as provided in income tax act.
106. Can you charge depreciation on straight line method ? No as per Income tax act only
WDV is allowed

107. What are the blocks of assets? As per sec. 2(11) there are 4 blocks : 1. buildings 2. plant
3. furniture 4. intangible assets. Again each of these can be of various sub-blocks for
example rate of depreciation is different for residential building from office building
108. Buildings : ? There are 5 types of buildings : a. residence 5% b office 10% c. hotels :
20% d New office buildings et.c 40% e temporary : 100%
109. Plants It is of 6 types : general 25% cars 20% bus 40% containers 50% computer 60%
pollution control : 100%
110. Furniture It is of 2 types : office 15% others 10%
111. Intangile assets Rate of depreciation : 25%
112. You pay Rs. 20000 penalty due to your failure to deduct TDS from salary of employee?
It is also not allowed
113. You spend Rs. 5000 on litigation expenses for an outstanding loan which is not
related to your regular business? No not allowed
114. You spend Rs. 2000 to defend employee in a criminal case related to your business? Yes
it is allowed
115. You spend interest for borrowing money to buy shares in another company ? Yes it is
allowed
116. You delay tax payment and pay interest on the payment, is it allowed? Yes
120. You pay Rs. 3000 as income tax penalty, is it allowed? Not allowed
121. What is the rate of depreciation on the following : Computers used in office Bus for
employees office furniture Factory Machine House of MD Guest House Patent
122. Solution Computers used in office 60% Bus for employees 20% office furniture 10%
Factory Machine 15% House of MD 5% Guest House 10% Patent 25%
123. Capital gain Appreciation in value of assets come as capital gain. Sec. 45 : it is of 2
types : short term and long term short term : upto 3 years long term : - more than 3 years
(except shares, securities etc. - where it is 12 months)
124. What is capital assets? All assets, excluding the following : 1. stock 2. movable property
excluding jewellery 3. agriculture land not located in municipality 4. gold bond / special
bearer bond / gold deposit scheme
125. How to compute capital gain? 1. find sale price (transfer price) date of transfer and date
of acquisition (date will be the date of registration / delivery / possession as per Transfer of

property act / relevant law) 2. find cost of acquisition, cost of improvement and cost of
transfer, undertake necessary indexation 3. find net benefit
126. What is notional cost of acquisition ? If someone has gifted you a car, what is your cost
of acquisition, (nil) but we will take here notional cost of acquisition. The cost incurred by
the person who gifted you will become your cost of acquisition.
127. What is indexed cost of acquisition ? Rohit bought a house in 1984 in 1 lakhs and sold it
in 2004 in 5 lakhs, what is the capital gain? Index in 1984 was 125 and in 2004 it was 480 so
use the following formula to find indexed cost : 480/125 * 1lakh= 3.8 lakh, capital gain = 53.8 = 1.2 lakhs.
128. How to find index factor ? It is called cost of inflation index. Its base is 1981-82 you can
find it : http://incometax.indlaw.com/display.aspx?791408D0-A994-4972-B1AC852C578ADE17 so find it out for the year of purchase and for the year of sale. Formula :
index in year of sale / index in year of purchase
129. Deductions from capital gain ? Sec. 54 : if you sale a residential house and have capital
gain, your capital gain will be taxfree if you buy anothe residential house within 2 years after
or 1 year before the sale or construct a new house in 3 years after date of sale of equivalent
amount (otherwise it will be proportionately).
130. What is capital gains account scheme 1988? If you have yet to decide about which
house to buy, then you can deposit your sale proceeds in a capital gains account scheme so
that you may avoid payment of capital gain.
131. Agriculture land Sec. 54B If you sale an agriculture land and buy another agriculture
land in a period of 2 years, your capital gain is taxfree. (available only to individual)
132. Sec. 54EC : invest inspecified bonds If you buy specified investments you can avoid
capital gain. It is for long term capital gain the investments must be made for a minimum
period of 3 years. The list of securities / investments are prescribed (for example bonds
issued by NABARD) .
133. A constructed house in 31December 2006. he took loan of Rs. 3 lakh @ 12% on 1/6/5
and Rs. 2 lakh on 1/4/6 @ 14%. Municipal value of house 1 lakh. M. Tax. 12000. he resides
in that house Value of the house : Nil (it is self occupied) deduction (for interest )
preconstruction period : (19 month interest on 3 @12%: =57000 9 month interest on 2 @14%
=21000) = 78000 * 1/5= 15600 Now : 36000+28000 = 64000 total : 79600 this will be
adjusted with income from other head or with income of this head next years.
134. Explanation Pre construction period interest is divided in 5 instalments and spread out in
5 years. The preconstruction interest in the previous case was 78000 which we will allow in 5
years eqully. The income in the head income from house property is negative here.

135. Std. Rent 36, Fair rent 45, municipal value 30, actual rent 20 what will you take a Gross
annual value ? Higher of MV and FR = 45 lower of this and SR = 36 Higher of this and AR =
36 so Gross annual value = 36 answer
136. Ravi Borrowed Rs. 5 lakh @ 10% on 1/4/99 and construction of house was done on
1/4/1. what is the interest deduction allowable now? Preconstruction period : 2 years :
interest is 10000, which would be allowed from 2001-2 to 2005-6 (Rs. 20000 each year) So
now it will not be allowed. Interest for 2008-9 : 50000 per annum will be available.
137. What are the popular deductions ? Investment 80C Medican insurance sec 80D PF /
Pension funds Sec. 80 CCC Medical payments : 80DD & DDB repayment of loan 80E
donation 80G Rent paid 80GG Scientific research association 80GGA
138. What is 80C If you invest in LIC premium / approved insurance premiums / mutual
funds / infrastructure bonds etc. You get deductions upto Rs. 1 lakhs (in some cases more
than Rs. 1 lakhs also for example infrastructure bonds). See the list of specified securities /
investments for this. The primary purpose is to encourage individual / HUF to save money
and invest.
139. How much can you claim on medical expenses as deduction? If you spend money on a
person dpeendent on you and that person has disability : from Rs. 50000 to 75000 is
available depending on diability (sec. 80DD) if you spend on your own treatment upto Rs.
60000 is available as deduction (sec. 80DDB)
140. Can loan for higher education help you in tax deduction? Yes : Sec. 80E : upto 40000 is
allowed or loan for higher education in 8 instalments.
141. How does 80C help in encouraging people to invest? As per this section, you can claim
upto Rs. 1 lakh (in some cases more than Rs. 1 lakh) if you invest in LIC premium /
insurance premium, mutual funds / fresh issues / specified securities thus this section is
primarily to encourage people to invest.
142. How does income tax encourage people to go for medical insurance? In India most
people dont go for medical insurance (unlike west), so in order to encourage people to go for
it, there is 80D, which gives deduction of Rs. 10000/15000 for medical insurance premiums.
143. How does income tax encourage private pension schemes? There is no pension scheme
in private sector and govt. Is also now withdrawing pension schemes. Thus in order to
encourage people to plan for future / old age, there is 80ccc - if you invest in pension plan of
any insurance company, you get deduction upto Rs. 10000.
144. How does income tax encourage people to contribute to national relief and
rehabilitation? There is sec. 80G, which gives a list of institutions where you can donate and
avail upto 100% deductions. In this list National defence fund and PM's national relief fund
are also there, thus if you donate money there, you can claim upto100% deductions for the
donated amount.

145. Can you claim deduction for house rent paid ? Yes sec. 80GG - the minimum of the
following is deductible : 1. rent paid 10% total income 2. 25% of adjusted total income 3.
Rs. 2000 per month.
146. How does income tax encourage you to go for rural development / science? If you set up
a rural development organisation / science research organisation, then all the donations given
to your organisation will be eligible as deductions in the hand of donor as per Sec. 80GGA
147. How does income tax encourage units to go for sustainable development If you set up a
unit to process biodegradable wastes this unit will be able to enjoy 100% income tax
benefits as per sec. 80JJA. So 100% profits are tax free.
148. Income tax as encouraging employments? Companies can claim 30% deductions for
wages paid for new employees hired during the year. Sec. 80JJAA
149. Support to physically challenged Deduction upto Rs. 75000 is available to physically
challenged persons (sec. 80U)
150. How does income tax act encourage infrastructure sector? 100% tax free profits for 10
years if you set up an infrastructure development unit like for power generation, telecom,
industrial park etc.
151. How does sec. 80IB help entrepreneurs ? There are special deductions available for
various units : 100% tax free profit for 5 years in backward area any unit (additional
deductions also available). Tax free 30% profit for ship operation company for 10 years
taxfree 50%/30% for hotels for 10 years 50% profit for multiplex/ convention centres for 5
years 100% profit for housing projects etc.
152. How does income tax promote health care ? There are many deductions / facilities
availalbe : Sec. 80IB : 100% taxfree profit for 5 years if you set up a 100 bed (or more)
hospital in rural areas.
153. How does income tax encourage food processing industry? 100% taxfree profit for 5
years and 25/30 % taxfree profit for next 5 years if you set up food processing / fruit packing
unit (sec. 80IB)
154. Rajiv's salary is Rs. 1.8 lakhs. He deposits Rs. 30000 in medical insurance, and takes
LIC jeewan suraksha policy for Rs. 10000. Discuss his tax liability. He also spends Rs.
30000 on medical treatment of his wife? He will get deductions for all these : 10000 for
medical insurance (sec. 80D) 30000 for medical expenses (sec. 80DD) 10000 for lic Jewan
suraksha (Sec. 80CCC)
155. What are rules regarding TDS? It is the responsibility of every company / firm to collect
TDS. Following payments can be made only after TDS: 1 salary 2. interest 3 insurance
commission 4. professional fees 5. income of lottery / games etc.

156. Salary payment As per sec. 192 employer has to collect TDS before payment of salary.
If the employee gives form no. 13 then salary can be paid without TDS. If salary payment
is less than the maximum amount not chargeable to tax, then no TDS is required.
157. Rules regarding HRA Employer should collect hourse rent receipts if house rent is more
than Rs. 3000 (check out the latest rules).
158. Donations by employees... If employee has made donations to approved funds under
80G (like PM's national relief fund), then the employer has to keep that in mind while
making deductions.
159. Rouding off of salary The total salary need to be rounded off to multiple of 10. for
example 233222 will be 233220
160. Other income of employee As per sec. 192 (2b) employee may be asked to give details
of his other income, which shall also be taken into account while collecting TDS. (rule 26B)
161. Income from interest Every bank / company / instutitons will collect TDS at specified
rates while making payment of interest (sec. 193) TDS rate is 10% for listed debentures 20%
for non-listed debentures etc. Or collect form no 13 (for nil TDS)
162. When can you make payment without TDS? If the other person submits the following :
form no. 13 form No. 15G
163. Interest payment limits without TDS As per sec. 194A, interest payment by any person
above Rs. 5000 and Rs. 10000 (in case of banks) annually will require TDS / form no. 13/
form no. 15G
164. Is TDS required on govt. Bonds also? This is where our law is lopsided. No TDS is
required in case of National Defence bonds , NSC, Gold Bonds etc. (most of the govt.
Securities).
165. TDS on insurance premium ? Sec. 194D requires TDS @ 10% / 20% or form no. 13 if
there is insurance premium payment above Rs. 5000. 20% incase of companies
166. TDS for rent.. As per sec. 194I if rent payment annually is more than Rs. 1.2 lakhs,
then TDS @15% is required (check out the latest rates). In case of companies, the rate is
20%. or form. NO. 13 is required
167. TDS on brokerage Any amount of brokerage above 2500 requires TDS @ 10% (sec.
194H)
168. TDS on mutual funds If investor sells back his units, there is TDS (sec. 194f)
169. National savings scheme If payment in NSS is more than 2500, TDS @20% has to be
collected

170. Payment to sports associations etc. Requires TDS Sec. 194E : you have to collect TDS
while making payments to non-resident sports associations etc.
171. What is penalty if TDS is not collected? Interest @1% per month + tax as required. (sec.
201 )
172. Forms to be filled up Form no. 24 / 26 has to be filled as online tax accounting system
giving details of TDS collected. This has to be done quarterly. Penalty for delay : Rs. 100 per
day.
173. Penalties ... relating to TDS Imprisonment upto 7 years + fine (sec. 276B) 100 per day
fine (Sec. 272A (2)) Rs. 10000 if TAN is not obtained (sec. 272BB) 100 per day if TDS
certificate is not issued (sec. 272A(2))
174. Service tax.. Service tax was introduced in 1994 on the recommendation of Dr. Raja C.
Chelliah committee report. Initially the rate was 5%, but now it is more than 10% more and
more services are put in the ambit of service tax every year. Excise Department administers
this tax.
176. ADVANCE TAX - companies Upto 15% - 15 june upto 45% - 15 september upto 75% 15 Dec. Upto 100% - 15 March
177. Advance tax-non-corporates Nil - 15 june upto 30% - 15 september upto 60% - 15 Dec.
Upto 100% - 15 March
178. Failure to pay advance tax If assessee doesnt pay advance tax or the advance tax paid is
less than 90% of assessed tax, the assessee will have to pay interest as per Sec. 234A,B,C. which is 1% per month.
179. What happens if there is excess payment of advance tax? There will be refund. If there
is excess refund, there is a provision of interest @.5% p.m. on this excess amoount. Read sec.
234D and 143(1) for details
180. Which are the important tax authorities? Sec. 116 : CBDT Directors / commissioners of
Income tax additional director / joint directors/ deputy directior / asst. Director ITO recovery
officers
181. Powers of income tax officers As per section 132, they can search documents and seize
them for a period upto 30 days (sometimes even more than 30 days). They can call for
additional information (sec. 133) they can carry out detailed investigation and these will be
equal to judicial proceedings (sec. 136)
182. What is the last date for filing income tax return ? For companies / partners of a firm /
an individual whose accounts have to be audited 30 October for others (individuals) : 31
July .

183. Who should sign the income tax return ? In case of individual himself in case of
companies MD in case of other bodies : the principal officer responsible for this.
184. What is assessment The income tax department can undertake assessment after
examination of documents / enquiry as per sec. 142 or they can make assessment as per sec.
143 or they can make best judgement assesment as per sec. 144 if assesee has failed to
furnish return.
185. What is the rate of tax on partnership? 30% + surcharge as applicable for capital gain :
20% +surcharge there must be a partnership deed and the partnership should actually be there
to get the status of partnership in income tax act.
186. What are rules regarding partnership taxation? You have to follow partnership rules,
which are little bit different from partnership act. For example : there is a maximum limit to
the remuneration that you can pay to a partner as per Income tax act. This amount is
specifiedin Sec. 44A. There is also a maximum rate of interest on capital that can be paid to
partners. (12%)
187. What is maximum remuneration for partnership in profession? For first 1 lakh of profit
Rs. 50000 or 90% of profit (whichever is more) for next 1 lakh: 60% for remaining profit :
40%.
188. What is maximum remuneration for partnership in business other than profession? For
first 75000 of profit Rs. 50000 or 90% of profit (whichever is more) for next 75000 lakh:
60% for remaining profit : 40%.
189. Taxation of companies .... Company (sec. 2(17) has wide meaning here and includes
foreign companies (sec. 2(23A) and public companies (2(18) also.
190. What is a publicly held company It is defined in sec. 2(18) :; at least 50% capital is
distributed to common public or it is registered under sec. 25 of companies act.
191. What is amalgamation and demerger ? Amalgamation (sec. 2(1b) is merger of two
companies after merger, at least 75% shareholders should become holder of new company
demerger is the situation when a company splits into two.(sec. 2(19AA)
192. What is MAT Minimum alternate tax when a company is not liable to pay tax, it has to
pay MAT at least as per rules rate of MAT is 7.5% sec. 115Jb : when 7.5% of book profit
exceeds tax, then tax will be 7.5% of these book profits.
193. How to compute book profit Adjust the following in profit : add these back 1. income
tax 2. dividend 3. reserves 4. provision for loss of subsidiary reduce these : 1. losses brought
forward 2. amount withdrawn from reserves and provisions

194. Is foreign company also liable to pay MAT ? Yes they have to maintain accounts as
per sec. 594 (Indian company has to maintain as per sec. 209) . only companies from
Netherlands dont have to pay MAT.
195. WHAT ABOUT EXCESS MAT? If excess MAT is paid, the company gets credit for this
and it can carry forward such credit for 5 years.
196. Which losses cannot be adjusted with other heads of income? Loss from speculation
business / race horses long term capital loss
197. What is limitation regarding interhead loss adjustment (sec. 71)? Loss from business
and profession cant be adjusted with salary these cant be adjusted with other head : Loss
from speculation business / race horses long term capital loss
198. What loss can you carry forward infinitely ? Loss of banking company (72aa) or of a
firm succeeded by a company (sec. 72A6) and of demerged company or of unabsorbed
depreciation of amalgamated company other losses can generally be carry forward for 8
years.
199. Loss from speculation business and race horses These losses cant be adjusted with other
profits they can be carried forward for 4 years only.
200. What are deemed income? Cash credits (sec. 68) unexplained investments (sec. 69)
unexplained jewellery, expenditure, money, etc. Investment not fully disclosed amount
borrowed / repaid on hundi.
201. Presumptive income If the business is small, income tax department takes presumptive
income (it assumes that business has some % of total receipt as profit). For example : civil
construction work (sec 44AD) : 8% income from total receipt Transport vehicles for rent (sec
44AE) : 3500 Per month per heavy vehicle / 3150 for light vechicle retail store (sec 44AF) :
5% from total receipt
202. How to carry forward losses from house property You can carry forward it for 8 years
and adjust it with income in this head. (71b)
203. Loss from speculation business carry forward Carry forward it and adjust with income
from this head in 8 years.
204. Loss from ordinary business Unabsorbed depreciation it can be carried forward
infinitely - there is no time limit other business loss 8 years
205. Loss from capital gain - carry forward Carry forward it for 8years short term can be
adjusted with short term / long term but : long term capital loss can be adjusted only with
long term capital gain

206. Loss from race horses Sec. 74A : carry forward and adjust in next 4 years with gain
from this head
207. FORM NO 3A,3B,3D These are forms of audit statements to be subimtted audit by a
Chartered Accountant failure penalty Rs. 1 lakh / .5% of turnover audit form has to be
submitted by 31 october
208. What are specified professions ? Medicine (doctor), lawyer, chartered accountants etc.
Are specified professions. They alsohave to maintain accounts as per sec. 44AA some of the
essential documents required are : cash book, ledger, journal, vouchers, bills, receipts,
209. What can be method of accounting as per Income tax law ? Either cash system or
mercantile (accruel) system Sec. 145 clause 11
210. How to value : closing stock Add all excise and other govt. Dues that have been paid.
211. Depreciation .... Charge depreciation as per income tax rules. Give proper disclosures
clause : 14
212. Credits in P & L accounts... Business and profession income includes following credits :
1. duty drawback 2. sale of import licence 3. cash assistance received from govt. All these
incomes are chargeable to tax. They have to be added to income from business and
profession (sec. 28, clause 13 )
213. Tea / coffee / rubber Read sec.33AB : - there is a tea / coffee / rubber development
account to be opened with NABARD. 40% turover or actual amount deposited in that
account is allowed as deduction (whichever is less). Your tea turnover is 30 cr you deposit
Rs. 3 lakh in deposit account, how much deduction under 33AB : Rs. 3 lakhs (lower of 3 lakh
/ 12 crore).
214. Petroleum / natural gas exploration Sec. 33ABA : 20% of turnover / money deposited in
development account (as per scheme of government of India) is allowed as deduction.
215. Promotion of scientific research Sec. 35 : money spent on research as per this section
150% is allowed as deduction. It is for both capital and revenue expenditure if instead of
carrying out research, the assessee gives donation to a national research organisation /
laboratory 125% of expenditure is allowed as deduction.
216. Social / rural development promotion by income tax law... Sec. 35AC : money spent
through PSU for public development allowed as deduction Sec. 35CCA : money spent
through national fund for rural development / poverty removal- allowed as deduction
217. Preliminary expenses ... When you start a new project, you have to prepare feasibility
report and carry out market research / survey. You also have to prepare MOA and AOA and
other documents to start the company. These come in preliminary expenses. They are allowed

in 5 instalment. It can be upto 5% of the project cost / capital employed whichever is higher
(sec. 35D)
218. Exploration of minerals Money spent on exploration of minerals (upto 4 years before
commercial operations) is allowed in 10 equal instalments as per sec. 35E.
219. EXPENSES NOT ALLOWED ......(from business and profession) Personal expeses
capital expenses expenses on pamplets / brochures etc. Penalties / fine expenses on clubs (see
details)
220. Expenses allowed ONLY if actually spent (even if acruel system followed) Leave
encashment gratuity / superannuation fund contribution bonus / commission paid interest on
loan taken from financial institutions any tax / duty / cess / charge / govt. Levy etc. (sec. 43B
clause 21)
221. Auditor to give details of following : Brought forward losses (cl. 25) TDS (cl. 27) cost
audit report (sec. 233 B of company act, cl.30) GP / NP to turnover ratios , stock turonver
ratio, material consumed / finished goods (cl.32)
223. Global reach ... Open offices in all important cities and spread social entrepreneurship
across the country ... spread love for humanity and organise voluntary groups all over the
country with our support. Join us, we can change the world through our constructive efforts.
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