Income Tax Easy

SRCC-Wings of Fire
Topics Covered:
Introduction,
Income Tax Made Easy Residential

Status
House Property
Relevant for DU Semester Exams and Salary
easy understanding of tax. Provisions Capital Gains
explained in a crisp manner to facilitate Deductions
learning. Do practice questions from a
relevant book as the purpose of this doc
is just to clear your understanding.
AY 2016-17
wingsoffiresrcc@gmail.com/9971305545, 75618
Chapter: Residential Status
wingsoffiresrcc@gmail.com 1
Introduction
1. Basics
While computing income tax, income of any person1 is divided into five different categories of income
which are called heads of income. They are as follows:
1. Salary (Sec. 15 to 17): Any benefit due to employer-employee relationship is taxable under this head
2. House Property (Sec. 22 to 27): Any rental income from building is computed under these provisions
3. Business/Profession (Sec 28 to 44DB): Any income from business or profession
4. Capital Gains (Sec 45 to 55A): Income from transfer of capital asset is calculated as per this head
5. Other Sources (Sec 56 to 59): Remaining incomes are taxable here
Income computed under each head shall be added to compute ‘Gross Total Income’. Every
person is then allowed certain concessions from ‘Gross Total Income’ and such concessions are called
‘Deductions under Sec. 80 C to 80U’ and the balance amount is called ‘Total income’. A person is required
to pay income tax on his total income.
2. Tax Rates
A. Individual,
Individual,Every
EveryHUF/
HUF/AOP/
AOP/ Resident Individual
Resident Individual who
who isis 60
60 yrs Resident
ResidentIndividual
Individualwho
whoisis80
80 yrs
2
BOI/
BOI/artificial
artificialjuridical
juridicalperson yrsmore
or or more at any
at any timetime during
during PY2 PY yrs or more
or more at any
at any time
time during
during PY2PY
person
In case of non-resident individual normal slab rates apply and in such cases exemption limit is 2,50,000
B. Firms are taxable at the rate of 30%
C. Domestic Companies are taxable at 30% and foreign companies are taxable at 40%
Additional Points
 Surcharge is applicable as a percentage of income tax
Amount Rate Surcharge however is subject
Any Assessee Nil to marginal relief which is
If net taxable income does not exceed 1 crore not much relevant from
Individual, H.U.F., Firm, AOP, BOI and Artificial Judicial Person examination view. You can
If net taxable income exceeds 1 crore 12 refer to “Miscellaneous” to
Domestic Company
understand it. Other
If net taxable income exceeds 1 crore but does not exceed 10 crore 7
definitions in miscellaneous
If net taxable income exceeds 10 crore 12
Foreign Company however are important.
If net taxable income exceeds 1 crore but does not exceed 10 crore 2
If net taxable income exceeds 10 crore 5
Chapter: Introduction
 Tax calculated above (including surcharge) will be subject to Primary Education Cess @2% and
Secondary and Higher Education Cess [SHEC] @ 1%
 Rebate u/s 87A
Concession from income tax is called as ‘Rebate’ and rebate shall be allowed only to Resident
Individual provided total income is not exceeding Rs.5,00,000 and rebate shall be allowed only up to
Rs.2,000. Cess is applied after permitting rebate and after levying surcharge in case income exceeds
prescribed limit.
 Rounding off of income [Sec. 288A]: The taxable income shall be rounded off to the nearest multiple of
ten rupees
 Rounding off of tax [Sec. 288B]: The amount payable by the assessee3 and the amount of refund due,
under the provisions of the Act shall be rounded off to the nearest multiple of ten rupees.
3. Computation of tax liability (An illustration showing presentation)

Computation of Tax Liability of Mr. Singh for Assessment Year4-2016-17
Particulars Amount
Income under head Salary 3,00,000
Income under head business/profession 1,00,000
Income under head house property 2,00,000
Gross Total Income 6,00,000
Less: deduction under Sec. 80C to 80U 1,50,000
Net Total Income 4,50,000
Tax liability:
On first 2,50,000 – Nil
Remaining 2,00,000 – 20,000 (10%)
Total 20,000
less: Rebate u/s 87A (2,000)
18,000
Add: Cess @ 3% 540
Total tax liability 18,540
Note: Rebate has been allowed since total income is up to 5,00,000 and it is assumed that Mr.
Singh is Resident Individual
In case, Mr. Singh was aged 60 years or more (Senior citizen), tax liability would have been
13,390; in case he was aged 80 years or more (Super Senior Citizen), tax liability would be Nil
Miscellaneous
1. Person [Sec.2(31)]: “Person” includes An individual , A Hindu undivided family , A firm , A company,
An association of persons or a body of individuals, whether incorporated or not , A local authority,
Every artificial juridical person not falling within any of the preceding categories .
2. Previous Year: Previous year means the financial year immediately preceding the assessment year.
In case of newly set up business or profession or a new source of income, the previous year shall start
with the date of setting up of the business/profession or source of income coming into existence and
ending with the said financial year. In other words, it is the year for which income is taxed.
3. Assessee *Sec. 2(7)+: “Assessee” means a “person” by whom any tax or any other sum of money (i.e.,
penalty or interest) is payable under the Act and includes:-
• Every person in respect of whom any proceeding under the act has been taken for the assessment of
his income/loss or
of the income/loss of any other person (clubbing of income) in respect of which he is assessable.
• Every person who has not followed (assessee in default) any provision of the Act.
4. Assessment year: Assessment year means the period of twelve months commencing on the first day of
April every year. For exams, previous year applicable is 2015-16 and accordingly Assessment Year is
2016-17.
5. The common rule of taxing income of the previous year in the following year i.e. assessment year is not
applicable in the following cases-
1. Income of non-resident from shipping:
Where any ship belongs to a non-resident and he earns income by carrying passengers or goods at a
port in India, tax on such income is charged when the ship leaves India
2. Income of persons leaving India either permanently or for a long period of time: Charged to tax in
the year in which he leaves India
3. Income of association of persons or a body of individuals or an artificial juridical person formed for a
particular event or purpose
4. Income of a person trying to alienate their property so as to avoid payment of tax
5. Income of a discontinued business or profession
6. Marginal Relief: As per this, INCREMENTAL TAX [Tax on Income(including surcharge) – Tax on 1 Crore]
should not exceed INCREMENTAL INCOME [Income – 1crore]
For instance, when a person earns Rs. 1 crore, his tax liability (before cess) comes out to be 28,25,000.
But when he earns 1Crore1 lakh, his tax liability is 31,97,600. Thus income increases only by 1 lakh but
tax increases by 372600 (31,97,600 –28,25,000). Applying this principle, the incremental tax cannot
exceed 1 lakh and hence, tax liability will be 29,25,000 (2825000 + 1L) only. On this amount cess will be
calculated.
Try calculating tax on 1crore10 lakh and you will find that there will be no marginal relief.
Residential Status & Scope of Total Income
Residential Status (Sec 6) Scope of total Income (Sec 5, 7 & 9)
Residential Status: Connection of person with the country. Thus taxpayer classified into 3
categories:
1. Resident and Ordinary Resident

2. Resident but not ordinary resident
3. Non Resident
Individual
Resident Non Resident
Ordinarily Resident Not Ordinarily Resident
Resident in India {Sec 6(1)}
1. In India for 182 days or more in PY. OR

2. In India for 60 days or more in PY and for 365 days or more during 4 years
immediately preceding the relevant PY.
Exceptions
Check only condition 1 for following:
An individual, who is citizen of India
1. Left India for business or employment or profession outside India.

2. Or person of Indian origin, having business or profession outside India and has come
to India on a visit.
3. Left India as a member of crew of an Indian ship.
Ordinary Resident Sec 6(6)(a)

Must satisfy both the conditions:
1. Resident in any 2 out of last 10 years preceding the relevant PY. AND
2. Stay in India in last 7 years preceding the relevant PY is 730 days or more.
Chapter: Residential Status and Scope of Income
HUF Control & Management
Resident Non Resident
Ordinarily Resident Not Ordinarily Resident Status of Karta
Resident {Sec 6(2)}

A HUF is resident in India if control and management of its affairs are situated –
# Wholly in India or
# Partly in India and partly outside India
(Control & Management refers to central control not day-to-day business)
Ordinary Resident 6(6)(b)
A resident HUF is an ordinarily resident in India if karta is Ordinary resident.
Partnership Firm / BOI / AOP {Sec 6(2)} & Local Authorities and Artificial Juridical Person
{Sec 6(4)}
Resident
It is resident in India if control and management of its affairs are situated –
# Wholly in India or
# Partly in India and partly outside India
Company {Sec 6(3)}
Indian Company: Always resident irrespective of its control and management.

Foreign Company: If place of effective management is wholly in India.
(Place of effective management means a place where key management and commercial
decisions are made.)
Scope of Total Income {Sec 5}
ROR NOR NR
Income accruing/ arising or Income accruing/ arising or Income accruing/ arising or
deemed to accrue/arise in deemed to accrue/arise in deemed to accrue/arise in
India India India
(Source in India)
Income received or deemed Income received or deemed Income received or deemed

to to be received in India to be received in India
be received in India
Income accruing/ arising Income accruing/ arising
abroad & received abroad abroad & received abroad but -
from a profession set up in
India or business controlled
from India
Section 9
Income deemed to accrue/arise in India
1. Income from business connection in India:
Business connection: Any activity in India in relation to a business. Basically if a person has
business in India as well as outside India it is business connection.
There will be a business connection if any non-resident has business outside India but has
agent in India who:
a) Habitually conclude contracts on behalf of the non-resident (it does not cover only
purchase of goods or merchandise for the non-resident).
b) Habitually maintains in India a stock of goods or merchandise from which he
regularly delivers goods or merchandise on behalf of the non-resident.
c) He habitually secures order in India (mainly or wholly) for the non-resident.
No Business Connection
a) Purchase of goods in India for purpose of exports.
b) Collection of news and views and transmission outside India by NR who is running
news agency or publishing newspaper.
c) Shooting of any cinematographic film in India by a NR
2. If any person is holding shares of Indian company, any capital gain on transfer of such
shares even if shares sold outside India.
3. Salary Income:
a) Income of an individual for service is rendered in India.
b) Salary payable by govt. of India to an Indian citizen for services rendered outside
India
4. Income from any property, asset or source of Income situated in India.

5. Income from transfer of any asset situated in India.
6. Income from Interest

a) Loan taken by Government: Interest income always taxable whether loan used in
India or outside.
b) Loan taken by resident in India: Interest income taxable if loan amount used in India
for any purpose
c) Loan taken by non-resident: Interest income taxable if amount used in India and for
business or profession.

7. Income from Royalty/ Technical fees

a) Government has taken patent right or technical service: Always taxable
b) Resident or Non-resident: Services used in India.
Questions for your understanding
1. Cecilia comes to India, for the first time on April 16, 2013. During his stay in India up to
October 5, 2015, he stays at Delhi up to April 10, 2015 and thereafter remains in Chennai till
his departure from India. Determine his residential status for AY 2016-17. [RNOR]
2. Shane Warne, Australian cricketer, visits India for 100 days every year. Find out his
residential status? [RNOR]
3. X, an individual gives the following information in respect of his income for the previous
year 2015-16:
1. Capital gain on sale of a house situated in Pune (sale consideration is received in Nepal) 5,40,000
2. Salary received in Sri Lanka for rendering service in Tamil Nadu 50,000
3. Interest received from Government of India (it is paid to him in Sri Lanka, the money is utilized by
the Government outside India) 60,000
4. Royalty received from A Ltd. (a foreign company which is non - resident in India) but royalty is
paid for a manufacturing business situated outside India 70,000
5. nterest received from A Ltd., a resident in India (it is paid to him in Sri Lanka, the money is
utilized by A Ltd. for projects situated outside India) 60,000
6. Interest received from A Ltd., a resident in India (it is paid to him in Sri Lanka, the money is
utilized by A Ltd. for projects situated in India) 60,000
Find out the taxable income of X for the assessment year 2016-17 if he is (a) resident and ordinarily
resident, (b) resident but not ordinarily resident, and (c) non-resident.
[Ans. 8,40,000; 7,10,000; 7,10,000]
“Don’t stop when you are Tired, Stop when You are Done”

Chapter: House Property
1. Method of Computation
Gross Annual Value xxx
less: Municipal Taxes xxx
Net Annual Value xxx
less: deductions u/s 24
(i) 24(a): Standard Deduction 30% of NAV xxx
(ii) 24(b): Interest on borrowed capital xxx (xxx)
INCOME U/H HOUSE PROPERTY XXX
2. Annual Value (Section 23)

1. The annual value of any property shall be deemed to be-
(a) The sum for which property might reasonably be expected to let from year to year; or
(b) if the actual rent received or receivable is in excess of the sum referred to in clause (a), the amount
so received or receivable
(c) where the property is let and was 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 sum referred to in clause
(a), the amount so received or receivable
For arriving at annual value, taxes actually paid by owner to any local authority for property, shall be
deducted from above amount
Calculation of GAV (in exams)

a) Fair Rental Value (FRV)
b) Municipal Value (MV)
WHICHEVER IS HIGHER is Expected Rent subject to Standard Rent
i) Expected Rent
ii) Actual Rent Received/Receivable
WHICHEVER IS HIGHER is GAV u/s 23
Question:
A B C D E
Municipal Value 20,000 24,000 36,000 48,000 54,000
FRV 24,000 24,000 40,000 50,000 50,000
SR - 24,000 50,000 - 48,000
AR 18,000 36,000 48,000 84,000 40,000
(Ans 24k, 36k, 48k, 84k, 48k)
Notes w.r.t. Municipal Taxes

They are allowed deduction on PAYMENT BASIS whether for previous/current or future years
They must be paid by owner (Not Tenant)
Municipal tax: Water Tax, house tax, sewerage tax to any local authority (even if situated o/s
India) Taxes to SG/CG/Land Revenue X (No deduction)
Municipal Taxes are calculated on Municipal Value
Section 23(2) : Where the house or part of a house is in the occupation of owner for his own residence, the
annual value of such house or part of house shall be taken to be NIL
Chapter: Income u/h House Property
Section 23(3) : If the house or part of the house is let out for any period, then value shall not be taken as NIL
Question: Mr. Aatish has let out his house for 7 months @2,000p.m. For the remaining period it was S.O.
FRV of the house is 1500 p.m. Compute his income. (Ans-12,600)
If FRV or MV nothing is given, then assume actual rent is equal FRV
Section 23(4) : Where assesse has more than one S.O. house-
a) the annual value shall be Nil only in respect of one house, the assesse may at hs option specify;
b) annual value of other house shall be determined under sub sec. (1) as if such has house or houses had
been let.
3. Deductions from Income u/h House Property (Sec 24)

24(a): A sum equal to 30% of annual value (Not to be given when it is NIL or negative)
24(b): Interest payable on capital for acquiring, constructing, repairing, renewal, reconstruction etc.
For S.O. house interest deduction shall not exceed Rs.30,000
But even in case of S.O. house, deduction allowed shall be up to Rs.2,00,000 if ALL the following
conditions are satisfied:-
(i) Loan is taken for purchase/construction, NOT FOR REPAIR etc.
(ii) Loan was taken on or after 1/4/1999
(iii) Construction of house is completed in 3 years after the year in which loan is taken.
(Certificate of loan is to be furnished)
Some Points
#Interest is allowed deduction on DUE BASIS
#Interest on unpaid interest is not deductible
#Interest on fresh loan taken to repay original loan is allowed deduction
#Interest on capital payable O/S India is also allowed deduction if TDS at source
#List of deductions is EXHAUSTIVE
Question: Mohit has occupied 2 houses, details of which are as follows:-

Particulars I II Compute Income u/h House Property
MV 4,30,000 3,70,000 Points:
FRV 4,90,000 4,00,000 1. Municipal taxes paid were as:
SR 4,42,000 4,30,000 10%- Owner, 5%- Tenant
Municipal taxes 15% 15% 2. Loan was taken after 1/4/1999
Fire Insurance 2,000 3,000
Interest on loan for repair 1,00,000 2,14,000 (Income: 10,100 House I is treated as S.O.)
Any interest on loan before year of completion shall be allowed deduction in 5 equal installments, starting from
the year of completion (Also known as prior period interest). Prior period is the year prior to year if completion.
For instance, Mr. Khan took a loan of Rs.6L on 1/4/12 for construction of house. Loan carries an interest @10% p.a.
Construction is completed on 15/6/15. Entire Loan is O/s as on 31/3/16. Calculate interest that shall be allowed
deduction for the PY 15-16. [Ans 96,000: 60k + 36k]
4. Co-Ownership (Sec.26)
If the property is owned by two or more persons, then the share of each such person shall be included in
his income. If property is S.O. by co-owners then annual value of such property shall be taken to be nil,

each of them, will be entitled to interest deduction of 30,000/2,00,000 Tip: Calculate income as usual and
divide the income in proportion.
Ques. Ramesh and Suresh are two co-owners of property, which has 4 units of identical size. They have
occupied one unit each for their residence. Other 2 units are let out to one tenant at a combined rent of
Rs.4,20,000 p.a. The municipal valuation of the house is Rs.8,00,000. The other details are as follows-
Municipal Taxes paid- 20,000 p.a. Insurance premium Paid 6,000 p.a. Interest on money borrowed (for
repair) 2,10,000 p.a. Compute the income of each Co-owner (Ans 61K each)
5. Unrealised Rent (Explanation to Sec.23)

Rent shall be considered as unrealized only if following conditions are satisfied:-
(i) Tenancy is bona fide
(ii) Defaulted tenant has vacated, or steps hae been taken to compel him to vacate the property
(iii) Defaulting tenant is NOT in occupation of any other property of assesse
(iv) Assessee has taken all the steps to institute legal proceedings for recovery of tenant or satisfies A.O.
that legal proceedings would be useless.
This unrealized rent shall be deducted while calculating Actual Rent Received/Receivable (Alternative
treatment do exist, do not worry)
6. Treatment of Vacancy (There have been alternative views on this topic. The one suggested here is
as per V.K. Singhania’s book. Do not panic in case you follow the other alternative, both are equally
good, but do write a note to that effect)
In case of vacancy,
while calculating Actual Rent, take the entire period without deducting the months of vacancy
Take the higher of the expected Rent and AR
Deduct vacancy loss to determine GAV
Example: FRV-20k p.m. Actual Rent-18k p.m. Vacancy: 1 month Unrealised Rent: 1 month Compute GAV
Solution: Expected Rent- 2,40,000 Actual Rent- 1,98,000 (18,000*11) {here vacancy period has not been
deducted} HIGHER of the two is 2,40,000, from which we shall deduct 18,000 (vacancy loss) to compute
GAV as 2,22,000
7. Recovery of Unrealised Rent (Sec. 25AA)

Where subsequently the assesse has realized any amount, the amount so realized shall be deemed to
be income chargeable under this head (in P.Y. in which it is realized) to the extent it was not charged
EARLIER. This is done whether or not assesse is owner of that property in year of recovery.
8. Special Provisions for arrears of rent received (Sec.25B)

Any amount by way of arrears of rent from property not charged to income tax for any previous year
shall be deemed to income of P.Y. in which such rent is received after deducting 30% of such amount
whether assessee is owner of that property or not.

9. Section 22 is the charging section which states that The Annual value of property consisting of any
buildings and lands appurtenant thereto of which the assesse is the owner shall be chargeable to
Income tax u/h House Property.
If building is self-occupied for the purposes of business or profession, then no treatment will be
done u/h House Property. (However if let out, and other person carries on business/profession,
rent received will be charged u/h house property only)
If building is let out to carry on the business more efficiently, it will be taxable u/h PGBP
Ex; Residential quarters let out to employees, guest house given to customers etc.
If assesse is not the owner of building, rent shall be taxable u/h other sources (sub-letting)
Income from vacant land is taxed u/h Other Sources
Composite Rent (combined rent when H.P. is let out with facilities)
SEPARABLE INSEPARABLE
Entire rent u/h other sources/PGBP
Building Furniture or other (lifts, security etc.)
HP facilities –Other Sources
Question: Harsh let out his house on a rent of 8,000 p.m. FRV of the house is 7,000 p.m. MV is 6,000 p.m.
Municipal taxes 10%, but paid were 10,000. Interest on borrowed capital 20,000; Repair and collection
charges 6,000; Insurance premium of building 7,000. He provided following facilities to tenant which were
included in actual rent: Furniture 500 p.m. Electricity 300 p.m. Gardener 400 p.m. Compute Income u/h
House Property. (Rs.31,800)
Question: Mr. Kumar owns a house which has 3 residential (independent) units. First unit (50% of area) is
let out for residential use on monthly rent of 16,000 which is however self-occupied from Jan 1. Unit 2
comprising, 25% of the floor area is used for own residence while unit 3 comprising another 25% is used
for business. Other particulars are:
(i) MV -3,84,000 (ii) Municipal Taxes-32,000 (iii) Repairs-40,000 (iv) Ground Rent-16,000 (v) Fire
Insurance Premium 16,000 (vi) Land Revenues 9,800 (vii) Interest on capital borrowed for
payment of municipal taxes 14,000
Income from business is 3,60,000 (without debiting house rent and other expenditure). Determine Taxable
Income (4,51,250)
Question(Nov 15): MV-3,20,000 FR-3,40,000 SR-3,00,000 Municipal taxes paid by owner-30,000

Land Revenue (payable) -10,000 Fire Insurance (paid) -10,000 Loan of 20L @9% p.a. from LIC Housing
Finance Ltd. was borrowed for construction on 1/6/11. Construction of house was completed on 10/9/13.
Entire loan is outstanding as at 31/3/16. Compute Income:-
1. Assuming house as S.O.
2. Let out @28,000 p.m. [(2L). (31,800)]

Theory Questions:
1. Define Annual Value of Property. (Refer Sec 23)
2. State the deductions available from annual value of a property. (Refer Sec 24)
3. Explain the provisions of deemed ownership.

Ans: Section 27 provides that the following persons shall be treated as deemed owner of a house
property for the purpose of charging income tax under head “House Property”
In the case of gift to spouse (except when under an agreement to live apart) or minor child (not
being a minor married daughter), transferor shall be deemed as owner.
Holder of impartible estate is deemed as owner. (impartible- Not capable of being parted)
A member of a co-operative society (or company/AOP) to whom a building has been allotted
under a housing scheme
If a person has acquired a property under a power of attorney transaction.
If a person takes a property on lease for 12 years or more.
4. Examples of income which are income from house property even though not taxable under Income u/h
House property
Income from farm house
Property income of a political party
Property income of a trade union
Property income of an educational institution or hospital
House Property held for charitable purpose
“One of Life’s most painful moments comes when we must admit that we
didn’t do our homework, that we are not prepared”

Chapter: Salary
(Doing job calculate your income here)
1. Method of Computation
(i) Basic Salary xxx
(ii) Bonus/Commission xxx
(iii) Allowances xxx
less: Exempt xxx xxx
(iv) Perquisites xxx
(v) Retirement Benefits xxx
less: Exempt xxx
GROSS SALARY XXX
less: deductions u/s 16
(i) Professional Tax xxx
(ii) Entertainment Allowance xxx (xxx)
INCOME U/H Salary XXX
2. Basis of Charge (Sec.15)

Salary is taxable on receipt or due whichever is earlier.
For Instance, if Salary for the month of March is received on 6th April, 2016; it will be taxable in PY15-16
itself as it became due on 31/3. (DUE basis) However, if salary for the month of April is received on 30 th
March, it also becomes taxable for PY 15-16 as though it is not due, but has been received.
3. Basic Calculations
Basic Salary is generally based on grade/pay scale. For exam questions, you must know how much a
particular employee is receiving as basic salary. Pay Scale 40,000-5,000-60,000 implies that an
employee will be given an annual increment of 5k p.m. till he gets 60k p.m., after then he will be
shifted to a new scale. So after 1 year of joining his salary would be 45k p.m.
Example: Calculate taxable salary for PY 15-16, when employee is appointed on 1/2/15 in the pay
scale 30,000 – 6,000 –60,000. (Ans 3,72,00)
4. Allowances
These are fixed monetary expenses paid by employer to employee to meet particular expenses. They
are summarized in the given flow chart.
Question: Sahib is employed Singh Ltd. on a basic salary of 20k p.m. He is also entitled to DA @80% of
basic salary, 40% of which is included in salary as per terms of employment. The company gives him
HRA of which 14k p.m. which was increased to 16k p.m. w.e.f. 1/10/15. He also got an increment of 3k
p.m. in his basic salary w.e.f. 1/1/16. Rent paid by him during PY 15-16 is as under:
April to June 15 –4k p.m. to his parents
July to Nov 15 –9k p.m. for an accommodation in Noida
December –March 16 –18k p.m. for an accommodation in Delhi
CALCULATE TAXABLE HRA (Rs.86,028)
Chapter: Income u/h Salary

Allowances
House Rent Allowance Prescribed Allowance

Sec [10(13A)] Sec 10(14)
Least of the following is exempt

1. HRA received
2. Rent paid – 10% Salary
3. 50% salary for Delhi, Mumbai, Kolkata & Chennai;
40% Salary for any other place
*Salary = B.P + DA (under terms) + Commission (%

based on turnover)
Allowance for official duties by whatever name called Allowance to meet personal expenses
10(14)(i) 10(14)(ii)
Exempt to the extent of allowance

received or amount spent: (ACD HUT)
Exempt to the extent Exempt to extent
1. Academic allowance of received/ limit of certain % of amount
2. Conveyance allowance (Actual exp. irrelevant) Allowance allowed to transport
3. Daily allowance employees working in transport
4. Helper allowance system:
5. Uniform allowance Exempt to the extent of 70% of
6. Travelling allowance allowance or 10,000 whichever is
less
*These all are only for official duties
1. Children education allowance – 100 per month max for 2 children

2. Hostel allowance - 300 per month max for 2 children
3. Transport allowance - 1600/3200* per month (for commuting b/w residence & office)
4. Underground allowance - 800 per month
*3200 to blind/handicapped employee

Fully taxable allowance:
Entertainment Allowance (deduction allowed only 1. Dearness Allowance (DA)-Whether under terms or not
government employee) 2. City Compensatory allowance (CCA)
Deduction to the extent of least of three: 3. Medical Allowance (different from medical facility)
1. Allowance received 4. Lunch/Tiffin Allowance
2. 20% of basic salary 5. Overtime Allowance
3. 5000 6. Servant allowance (different from helper allowance in
*Entire allowance is first added in the salary official duties)
and deducted as deduction u/s 16(ii) 7. Warden Allowance
8. Non-practising Allowance
9. Family Allowance

5. Perquisites
These are basically the benefits in addition to normal salary to which the employee has a right
(benefits in kind). So what we calculate here is taxable value of these benefits in kind. However, do
remember this golden rule that In all the perquisites whenever any amount is recovered from the
employee, the amount recovered shall be deducted from the value of perquisite.
1. Rent Free Accommodation (RFA)

Govt. Others Accommodation in hotel
As per govt. rules a) Owned by employer a. 24% of salary or
(license fees) Population of city where Taxable Amount b. Actual charges
house provided Whichever is less
>25 lakhs 15% of salary
>10 lakhs but upto 25 lakhs 10% of salary (whether govt. or others)
Upto 10 lakhs 7.5% of salary
No perquisite value if
b) Not owned by employer provided for a period not
1) Actual rent or exceeding 15 days And It has
2) 15% of salary been provided on t/f of
Whichever is less employee
Important points:
 Furnished House: If Furniture is also provided then 10% p.a. of actual cost of furniture or
actual hire charges if taken on rent shall be added in the above value.
 Meaning of Salary: Basic Salary + DA (under terms) + bonus + commission (every type) +
taxable portion of all allowances + monetary payments (like leave salary during the job)
from one or more employees.
 Salary from all the employees is taken even if house is provided by one of them.
 Salary is taken only for that period for which house is provided.
Ques. Sharma Ltd. has given a house from 1/1/2015 to the employee in Jagraon, the population of which is 15 lakhs.
Lease Rental of the house is Rs.10,000 p.m. Salary of the employee is Rs.50,000 p.m. Furniture is also provided the
cost of which is Rs.24,000 while WDV is 3,600. Rs.5,000 were incurred on the repair of the house by employer.
Rs.1000 p.m. was recovered from the employee in respect of all such facilities. Find the taxable amount. (Rs.20,100)
2. Sweat Equity Shares or any other specified security FMV

Fair Market Value on the date of allotment when listed when not listed
Less: Amount recovered from the employee Avg. of opening As determined by
Value Taxable in the hands of employee and closing price merchant banker
Ques. Mr. Sahib is working with Star Ltd. which allotted him shares @Rs.8 each when the market value was
Rs.15 each. Sahib sold these shares for Rs.20 each. No. of shares are 50. Discuss the tax implications.
(Rs. 350 taxable u/h Salary and Rs.250 u/h capital gains)

3. Reimbursement for meeting personal Expenditure

If any obligation (liability) of employee is met by employer than it is taxable in the hands of all employees.
4. Value Of Interest free loan

Taxed Not Taxed
1. At rate specified by SBI (on first day of 1. Loan upto Rs.20,000 (if in excess entire
relevant P/Y) amount taxable) or
2. On o/s balance on last day of every month 2. For Specified Diseases
Calculated for the complete month
Ques. Loan of Rs.4,00,000 (for personal purposes) @10% p.a. received on 1/6/2014 repayable in 5 half yearly
instalments of equal amount starting from 31/12/2014. Rate charged by SBI and PNB on similar loans is 16% and
14% resp. (Ans-18,800)
5. Use of Movable Assets

a) Laptops, computer and telephone (even if for personal use) Nil value is taxable
b) Other Assets 10% p.a. of the actual cost (if employer is the owner) or actual hire charges
(if asset taken on rent by employer and then given on rent)
6. Transfer of movable assets

Step 1: Take Purchase Price of employer
Step 2: Take depreciation @fixed rates for this purpose
Note: Depreciation shall be given only if before transfer asset is used for completed year. Ex: Employer used
car for 3 yrs and 11 months and then sold to employee. Dep. in this case to be given only for 3 yrs
Step 3: Deduct the amount charged from employee
Rates of depreciation
Computer – 50% WDV Motor Cars - 20% WDV Other Assets – 10% SLM
Ques. Aatish purchased an asset for Rs.5,00,000 on 1-2-12. He sold this asset to employee Ashish on 1-1-15
for 10,000. Calculate the amount taxable in the hands of Ashish if it is: a) Car b) furniture c) computer
(Ans- 3,10,000 ; 3,90,000 ; 1,15,000)
7. Other benefits
 Value of accommodation and any other expense on holiday
Actual expenditure incurred by employer for the following period shall be taxable:
1. If the official tour is extended as vacation, only for the extended period
2. If any person accompany the employee on official tour, expenditure incurred on such person of the
total tour
 Gift, voucher or token

The amount of such gift shall be taxable as perquisite. But nothing shall be taxable if value of such gifts
in aggregate during the previous year is up to Rs.5,000.

Note: The amount only in excess of Rs.5,000 shall be taxable. Further, if cash/cheque(not in kind is
given), nothing shall be exempt
 Free Meals
1. Tea or snacks provided during working hours – Nil Value is Taxable
It includes coffee, soft drinks and other non-alcoholic drinks
2. Free food –During office hours –up to Rs.50 per meal is exempt. The amount only in excess
of Rs.50 shall be taxable.
 Credit Card or Club Expenditure

1. If expenditure is for official purpose – Nothing is taxable, if complete details of such expenditure is
maintained.
2. If expenditure is for personal purpose – actual expenditure incurred by employer shall be taxable
Note: Even personal expenditure on use of health club, sport facilities shall not be taxable
Perquisites exempt up to limit for all employees
8. Leave Travel Concession

For Whom: Employee or member of his family. Available only for two children, but available for all the
children born before 1.10.1998. Also for multiple births after the first one, exemption allowed for all.
Place of Journey: Within India
Max. no. of exemptions: 2 journeys in block of 4 years. The period of 4 yrs has to be taken as fixed under
the act i.e. 2006-2009, 2010-2013, 2014-2017 and so on
Out of two journey, exemption for one journey can be claimed in the 1 st calendar year after the end of the
block.
Maximum Amount of Exemption
By Air (Economy fare of national carrier) Other than Air

Destination connected by rail: first class Ac rail fare
Destination not connected by rail: 1st class or deluxe fare
Ques. Discuss the amount of exemption of LTC in the following cases:

Allowed by employer (Rs.) Charges by other modes (Rs.)
1. Normal Car 8,000 1. Deluxe bus 5,000
rd
2. 3 Ac 2,000 2. 1st AC 4,000; 2nd AC 3,000
3. Business Class 25,000 3.Economy class 15,000
(Ans- 5,000; 2,000; 15,000)
9. Medical Perquisites
1. Expenditure incurred or reimbursed on any medical treatment provided to an employee or any
member of his family is fully exempt without limit for treatment in any hospital/dispensary
Maintained By: Employer or Govt. or local authority
Approved: By govt. or for a specified disease only for treatment of specified disease
2. Health insurance premium/Mediclaim is fully exempt

3. Expenditure incurred or reimbursed for any amount actually spent by employee for his/her
family member’streatment in any hospital, nursing home or clinic upto MAX. Rs.15,000
Family spouse, children whether dependent or not

Dependent Parents, brothers and sisters of the employee
Ques. Compute the taxable value of perquisite for Tushar, where the employer reimburses the following medical
expenses: 1. Treatment of T by his family physician Rs.8400 2. Treatment Of Mrs. T in a pvt. Nursing home
Rs.7,200 3. Treatment of T’s dependant mother by a pvt. doctor Rs.2400 4. Treatment of T’s brother (not
dependent upon him) Rs. 800 5. Treatment of T’s dependent grandfather Rs.3,000 6. Treatment of T’s
dependent sister in hospital maintained by his employer Rs.500 (Ans 6800)
10. Sweeper, gardener, watchman or personal attendant

Actual Cost to the employer taxable in the hands of employee
11. Gas, Electricity or water

If from own sources – Manufacturing cost per unit taxable
If taken from outside – Amount paid to the outside agency shall be the taxable value
12. Valuation of Motor Car

Owned or hired by employer and used
Exclusively for official Exclusively for private purpose Partly official and partly private
Nil value is taxable
For Car 10%p.a. of cost Only Car Small Car-600p.m.
or hire charges Big Car- 900 p.m.
 Small car: upto 1.6ltrs For Petrol etc. Actual amt. Both Car and Small Car-1800p.m.
 1 ltr=1000cc For driver Actual amt. petrol Big Car- 2400 p.m.
 Part of the month to be ignored For driver 900 p.m.
Actual expenditure is irrelevant
Owned or hired by employee and used
Exclusively for official purpose Partly official and partly private Exclusively for private purpose
Nil Value is taxable Actual expenditure incurred by

Total Actual Expenditure
Less: Actual office use expenses employer shall be taxable
Or
1800 p.m./2400 p.m. + 900 p.m. for
driver whichever is higher
Balance Taxable

Ques. Jain Ltd. provided a car (below 1.6 ltr) alongwith driver to Mr.S partly for official and partly for personal
purpose. The expenses incurred by Jain Ltd. are: Running and maintenance Rs.32,000 Driver’s salary Rs. 36,000.
Compute the perquisite value. What if log book is maintained and it is know that 70% is used for official and 30% for
personal purposes? (Ans- Rs.32,400; same)
Pool of Cars: In case of more than 1 car, which are not used exclusively for official purposes then
a. Value of car shall be 1800 p.m. or 2400 p.m. + 900 p.m. for the driver
b. Value of other cars shall be as if they are used exclusively for personal purposes.
Ques. A is provided 2 cars to be used for official and personal work and the following information is available
Car 1 exceeding 1.6 lt Car 2 below 1.6 lt

Cost of the car 6,00,000 4,00,000
Running and maintenance 40,800 28,000
Salary of driver 24,000 24,000
(Ans- Better for the assessee to assume car 2 as personal)
13. Children education

1. Education facility is owned by the employer or
2. Employer is having some contract with any school
Market Value of such education less 1,000 p.m. per child less amount recovered from employee
3. Neither any school nor any contract, but employer paid the fees or he reimbursed: Actual
Expenditure incurred by the employer
Specified Employee
An employee is specified employee if he falls under any of the following categories:
Director of the Company - employee having 20% or more voting power in the employer company –
Employee having salary more than Rs.50,000 (Salary means all taxable monetary payments, after
deduction u/s 16)
If following services are provided in kind, then they shall be taxable only for employees specified u/s 17(2)
1. Attendants (sweeper, gardener etc.) 2. Water, gas, electricity 3. Education 4. Motor Car
6. Retirement Benefits
Gratuity {Sec 10(10)} –Pension {Sec 10(10A)} –Retrenchment Compensation {Sec 10(10B)} –Voluntary
Retirement {Sec 10(10C)} –Leave Salary {Sec 10(10AA)} –Provident Fund {Sec 10(11), 10(12), 10(13)}
Gratuity {Sec 10(10)}: It means gratuitous payment given by Er to Ee at the time of leaving the job in
recognition of meritorious services. EMPLOYEES OF CENTRAL or STATE GOV. / LOCAL AUTHORITY
ARE EXEMPT.

Gratuity
Recognition under Payment Others

of Gratuity Act 1972
Least of the following is exempt: Least of the following is exempt:

1. Gratuity Received 1. Gratuity Received
2. 10,00,000 2. 10,00,000
3. 15 days salary for each completed year or 3. ½ month salary for each completed year
part thereof in excess of 6 months
*Salary = HRA vali salary (B + D + C)
*Salary = B.P. + D.A. *Salary as average of 10 months preceding
*Salary of last month the month of retirement
*No. of days in a month 26 *No. of days in a month 30
Ques. Rishabh retired on 1.3.2016 after rendering 40 years 9 months of service. He received gratuity of
15,00,000. His salary on retirement was Basic: 15,000 p.m. which got increased from 10,000 p.m. from 4
months prior to 1/3/2016. DA -20% (Not under terms). Calculate the taxable amount of gratuity when he is
covered under gratuity act and when not. [Covered: 10,74,231 Not covered: 12,60,000]
Pension {Sec 10(10A)}

Monthly amount given by the employer after retirement generally as a % of salary
Uncommuted Pension Commuted Pension Family Pension u/s 57

(to exchange sth., Ee asks ER to give lump sum and reduce proportionately)
Received as periodical Ee expired, pension Payment,

TAXABLE for all employees received by family
o Taxable u/h other sources

o Deduction lesser of 1/3 pension or
15,000
Govt. Employee Non Govt. (calculate – STEP 1

Exempt commuted value of 100% pension)
Received Gratuity Didn’t receive gratuity
1/3 of STEP 1 is exempt ½ of Step 1 is exempt
Question: Piyush retires from ABC Co. on June 30, 2015. He gets pension of 2,000 p.m. up to January 31, 2016. On
Feb 1, 2016 he gets 60% of pension commuted for 40,800. Does it make difference if he gets gratuity also. Calculate
taxable pension. (Ans. Gratuity Received: 15,600 + 6800 Gratuity not received: 15,600 + 18,133)

Retrenchment Compensation 10(10B)

Termination of employees because of substantial decline or closure of business. Compensation
paid for retrenchment is called retrenchment compensation.
Least of the following is exempt:
I. Compensation received
II. ₹ 5,00,000
III. 15 days salary (26 days in a month) for each completed year or part in excess of 6
months (Salary As per Industrial Dispute Act, 1947)
Voluntary Retirement Scheme 10(10C)

Least of the following is exempt:
1. Amount received
2. ₹ 5,00,000
3. A) For one completed year job done- 3 months salary
B) Salary for total months left after VRS up to Normal Retirement WHICHEVER IS LESS
Salary- HRA vali salary ( Basic + DA (under terms) + Commission based on turnover)
Question: Ashish is employed in a public co. and is paid a sum of 7L under VRS. The normal age of retirement is 60
years. Ashish was 46 at the time of retirement and had completed 22 years of service. His monthly salary at the
time of retirement was as follows: Basic Pay: 10,000 DA (40% includible): 7,000 H.R.A.: 4,000 Conveyance
Allowance: 1,000 . What is the taxable amount of VRS under IT Act, 1961? (Ans 2,00,000)
Leave Salary 10(10AA)

Employee may surrender his leave and Employer(Er) shall pay salary for such leave, it is called
leave salary & it is taxable in case of all types of employees. However employee can accumulate
leave and get that at the time of retirement. So tax treatment:
Govt. employee Non govt. employee

EXEMPT Least of the following is exempt:
1. Leave salary received
2. ₹ 3,00,000
3. Salary for service of 10 months (300 days)
4. Cash equivalent of unavailed leave salary/leave at credit
 Salary- HRA vali salary : Basic + DA (under terms) + Commission based on turnover
 Average salary of last 10 months immediately preceding date of retirement is taken
 Max. exemption ₹ 3,00,000 even if received from more than 1 employer
 Part of the year ignore
 Leave at credit = Leave entitlement less leave availed or cashed
 Max. leave entitlement can be of 30 days
Question: Determine the amount of taxable leave salary from the following information, employee retires on 1 Jan,
2016: Salary at the time of retirement (per month) Rs. 22,900 (from August onwards) prior to which it was 22,600
p.m. Duration of service 14 3⁄4 years. Leave entitlement for every year of service 45 days. Leave availed while in
service is 90 days. Leave salary paid is 4,12,200 (Ans. 1,84,700)

Provident Fund 10(11), 10(12), 10(13)

Employee gives some amount from his salary to the employer who along with his own contribution
deposits that amount in PF A/c
Statutory PF (EEE) Recognised PF (TTE) Unrecognised PF (EET)
Applicable to govt. department Recognised under the act Not recognised by the act
E - Amount contributed T – Amount contributed over E - Amount contributed

E – Interest 12% of Salary (HRA vali) E – Interest
E - Amount received T – Interest over 9.5% p.a. T - Amount received*
E – Amount received
(EEE – Exempt Exempt Exempt) (EET - Exempt Exempt Taxable)
(TTE- Taxable Taxable Exempt)
*Employee Contribution-Not taxable Employer Contribution- Taxable u/h Salary Interest- Taxable u/h Salary
7. Professional tax
It is paid to the state govt. by professionals like doctors, lawyers, CA’s etc., also known as tax on
employment. It is allowed deduction on PAYMENT basis. If professional tax of an employee is paid by
employer, it is first included in the gross salary of employee (personal obligation met by employer-
perquisite) and then allowed deduction u/s 16.
Note: Meaning of Salary for Different purposes-

1. HRA
2. Leave Salary Basic Salary + DA (under terms/forming part of retirement
3. VRS benefits) + Commission based on turnover
4. Provident Fund Under leave salary (date) & gratuity (month) average salary
5. Gratuity not covered under Gratuity Act of last 10 months is taken
6.Gratuity Covered : Basic + DA(every type)

7. Entertainment allowance : Only basic
8. RFA: Basic Salary + DA (under terms) + bonus + commission (every type) + taxable portion of all allowances +
monetary payments (like leave salary during the job) from one or more employees
“How much can one person motivate oneself, decides one’s success.
Every person has to decide what motivates him/her”
Send your queries at

wingsoffiresrcc@gmail.com/9971305545/9971375618

Chapter: Capital Gains

(If you have sold any capital assets, calculate the profit as per these provisions)
1. Basis of Charge
Any profit or gains arising from the transfer of a capital asset shall be taxable u/h Capital gain.
CAPITAL ASSET + TRANSFER = TAXABLE u/h Capital gain
Capital Assets – It means property of ANY KIND whether fixed or circulating, movable or immovable, tangible
or intangible except
1. Stock in trade
2. Movable property held for use
3. Rural agricultural land
4. Gold deposits bond issued under gold deposit scheme.
Few examples of capital assets:
1. Immovable property like building

2. Jewelry (even if for personal use)
3. Paintings, drawing, work of art etc
Short Term Capital Asset - A capital asset held by an assesse for not more than 36 months immediately prior
to its date of transfer.
(While computing date of holding the date of purchase is included while the date of transfer is excluded)
Long Term Capital Asset (LTCA) - A capital asset which is NOT a short term capital asset.
[If any listed securities (equity/preference shares, debentures, bonds etc.), units of UTI/Equity oriented
mutual fund or zero coupon bonds are held for more than 12 months, then they shall be treated as LONG
TERM.)
2. Method of computation of capital Gain

SALE CONSIDERATION (minus expenditure on transfer) ***
LESS: Cost of acquisition + expenses on purchase. (***)
LESS: Cost of improvement (***)
(When the capital gain arises from the Long term capital assets then cost of asset and improvement shall be
indexed)
Some points:
1. In case any capital asset received as a gift, the period of holding includes the period for which asset is
held by previous owner and the cost of acquisition and improvement is taken as that of the previous
owner. (Manjula J Shah Judgement)
“Chapter: Income U/h Capital Gains”
2. No indexation in case of debentures even if long term. Capital Gain tax rate on debentures is 10%.
3. Cost of acquisition in case of an asset acquired before 1/4/81
- Actual cost of acquisition to the previous owner.
- The fair market value as on 1/4/81
WHICHEVER IS HIGHER
4. In case improvement has taken place before 1.4. 1981, such expenditure is ignored.
Q. Mr. A purchased a house on 1/4/70 for 5000. He built a floor on 1/4/75 with cost of 3000. FMV of the
entire building on 1/4/81 was a) 10000 b) 4500. He sold the building on 1/4/15 for 100000. Compute the
capital gain. CIF for the year 2015-16 is 1081
ANS. Computation of Capital Gains

POH: 1/4/70 -31/3/14, hence LTCA
Case a) Case b)
Sale consideration 100000 100000
Less: Indexed cost of acq. 10000*(1081/100) 5000*(1081/100)
= 108100 =54050
LTCG/LTCL (8100) 45,950
5. (a) If equity shares or units of equity oriented mutual fund and

(b) Sold through recognized stock exchange i.e. security transaction tax is chargeable.
THEN
If long term capital asset – Exempt [Sec. 10(38)]
Short term capital asset – Capital gain taxable @15% [Sec.111A]
6. Special Provision for full value consideration in land & building (Sec. 50C)
If value determined by stamp valuation authority for payment of stamp duty is more than sale
consideration declared by assessee then the value of the authority shall be treated as sale
consideration for computing capital gains.
However, where the assessee claims before the Assessing Officer that value adopted by Stamp duty
authority is more than the fair market value (but he has not disputed or challenged such valuation
under the Stamp Act), then AO may refer the valuation of a capital asset to the valuation officer.
7. Stamp duty paid on purchase is included in the cost of a property.
3. Exemptions from Capital Gains (These are generally asked in the exam, the remaining sections can be
referred in the miscellaneous section)
SEC ASSET TRANSFERRED PERIOD EXEMPTION PRESCRIBED IF NEW ASSET IS

AND NEW ASSET OF USE PERIOD OF SOLD
INVESTMENT
54 Residential house LTCA Capital gain invested Purchase within If sold within 3yr
1yr before or from the date of
Residential house 2yr after purchase, CG
transfer or claimed as an
constructed exemption will be
within 3yr of reduced from
transfer. COA of new asset
54 Any asset LTCA Capital gain invested Six month from If sold within 3yr,
EC (total investment shall the date of taxable as LTCA
Bonds of NHAI, RECI be up to 50 lakh in the transfer
year of transfer and
subsequent year)
54 F Any asset other than LTCA Proportionate net Same as sec 54 Same as sec 54
residential house consideration
invested
Residential house
Q. Mr. Mohit transfers the following assets during the previous year 2015-16.
PARTICULARS GOLD Urban Shares (listed) DEBENTURES
agricultural land Subject to STT (LISTED)
Date of transfer 10/4/2015 15/6/2015 10/4/2015 10/7/2015
Date of acquisition 10/4/2014 12/7/2010 11/5/2014 10/7/2012
Sale consideration 1000000 1200000 900000 750000
Cost of acquisition 300000 250000 385000 400000
Expenses on transfer 50000 20000 15000 40000
Mohit makes the following investments: Compute his total income and tax liability for the assessment year
2016-17-
1. Residential house property purchased for Rs.1200000 on 31/12/15.

2. NHAI bonds purchased for Rs.50000 on 30/01/2016.
3. REC bonds purchased for Rs. 40000 on 15/10/2015.
He has brought forward long term capital loss of Rs.61268 related to assessment year 2013-14. CII for
2010-11: 711; 2011-12: 785; 2013-14: 939 and for 2015-16: 1081.
Sol. Computation of capital gains for the assessment year 2016-17
Particulars Gold Urban agricultural Shares (listed) Debentures

(Short term Land (Long term as Subject to STT (listed)
as Within 3 After 3 years) (short term as (Long term as after
years) within 1 year) 1 year)
(Rs.) (Rs.) (Rs.) (Rs.)
Sale consideration 10,00,000 12,00,000 9,00,000 7,50,000
Less: Expenses on sale 50,000 20,000 15,000 40,000
Net Sale Consideration 9,50,000 11,80,000 8,85,000 7,10,000
Less: Cost of acquisition 3,00,000 3,85,000 4,00,000
Indexed cost of
acq.(250000/711*1081) - 3,80,098
LTCG - 7,99,902 3,10,000
STCG 6,50,000 5,00,000
Less: Exemption U/S 54EC 40,000
Less: Exemption U/S 54F - - -

(799902/1180000*1180000)
(310000/710000*20000) 7,99,902 8,732
Taxable gains 6,50,000 Nil 5,00,000 2,61,268
Less: B/F LTCL 61,268
Taxable capital gains 6,50,000 Nil 5,00,000 2,00,000
Computation of tax
25000+20%
(650000- 500000); 55000
Nil; Nil
500000*15% U/S 111A 75,000
200000*10% U/S 112 20,000
Net taxable income is Rs. 1350000 (650000+ Nil + 500000+ 200000)
Computation of tax:
Total tax (55000+0+75000+200000) 1,50,000
Add: Cess@ 3% 4,500
Net tax payable 1,54,500
#Points for understanding:

1. It is to be noted that since NHAI bonds are purchased after 6 months, no exemption is available.
2. Long term capital loss can be carried forward for a period of 8 years and can be set-off from LTCG only.
3. In cases where exemption u/s 54F is available but we have different assets for which it can be used, we
calculate a percentage as LTCG/Sales Consideration and choose the one with higher figure. In this question,
this ratio comes out to be 67.78% in case of urban agricultural land while 43.66% in case of debentures.
Hence, treatment has been done accordingly. [Tip: 67.78% implies that Rs.1 invested will give .67 as exemption]
4. Shares
1. Brokerage paid on purchase shall be added in cost and on sale deducted from sale consideration.
2. Bonus share cost shall be taken to be nil. However if they were received before 1.4.1981, FMV on
1.4.1981, shall be taken as its cost.
3. Right share – The amount paid to company shall be treated as cost for the shareholder
4. Sale of right share offer – Any consideration on such sale shall be taxable under capital gain whose
cost shall be nil.
5. Purchase of right share offer – For other person cost shall be price paid to seller for offer + price paid
to company.
6. Sweat equity share – FMV of share less amount charged from employee shall be taxable u/h salary.
When these shares are sold then sale consideration less FMV on allotment shall be taxable u/h capital
gain.
7. BUYBACK – Sale price for the shareholder shall be the amount received from the company.
Q. Mr. Piyush received a letter of offer for purchasing 200 shares of A ltd. @ 20 each while the market value
was 30 each. He sold the offer to Mr. Mohit for 2 per share. Mr. Mohit subscribed the share and he was
allotted shares by company. Later he sold the shares at RS.26. Compute the Capital gain for both of them.

Ans. Particulars Piyush Mohit
SALE CONSIDERATION 400 5200

LESS: COA Nil 4400(200*22)
TAXABLE CAPITAL GAIN 400 800
5. Conversion In Stock In Trade – Market value on date of conversion shall be treated as sale
consideration. If asset is long term then index shall be of the year of conversion. But the capital gain shall be
taxed in the year when stock is sold in market.
Q. Mrs. Harshika purchased jewellery of 5,000 on 1/4/89. She converted the jewellery in stock in trade of her
business on 1/4/91 on which date FMV of the jewellery was 12,000. She sold the jewellery for 13,000 from the
business on 1/6/14. Compute the nature of the asset and capital gain for P/Y 91-92 and 15-16.
Ans. POH 1/4/89 to 31/3/91

Short Term Capital Asset
For the p/y 91-92, there is no capital gain hence no tax treatment.
For P/y 15-16
Sale consideration 12000

Less: COA (5000)
Taxable short term Capital gain 7000
Business profit (13000 – 12000) 1000
8. Compulsory acquisition – Capital gain shall be taxable in the year in which such compensation or part
thereof is first received. Enhanced compensation (additional) however will be taxable in which such
increased amount is received. [i.e. in the latter case only amount received shall be taxable and not the
entire increased compensation]
7. Depreciable assets [Sec.50B] – These are treated as short term capital assets and it is compulsory to
claim depreciation on business assets. Therefore on depreciable asset there shall always be STCG.
Land is not depreciable asset.
No Capital gain on Sale- In the following case even if asset is sold still no treatment is done u/h capital gain
1. If there is any asset left in the block(i.e. entire block is not transferred) and
2. Remaining value is positive(sale value is less then block)
Then no treatment is done under capital gain.
8. Tax Rates:
LTCG: 20% + Surcharge + Cess In case of listed securities and zero coupon bonds, LTCG can be paid @10% in
case indexation benefit is not availed.
STCG: As per Slab rates of assessee
No deduction u/s 80C-80U is available from LTCG or STCG u/s 111A
MISCELLANEOUS
SEC ASSET TRANSFERRED AND NEW ASSET PERIOD OF EXEMPTI PRESCRIBED IF NEW
PURCHASED USE ON PERIOD OF ASSET IS
INVESTMENT SOLD
54B Agricultural land Use by him CG Within two year Same as in
(urban only) or by invested after transfer Sec 54
parents for
Agricultural land more than
2yrs
54D Land and building for industrial Used for CG Within 3yr of Same as in
undertaking on compulsory acquisition two years or invested receipt of Sec 54
more compulsory
Land and building for industrial acquisition
undertaking
54G Plant and machinery or land or building All(LTCA + CG Within 1yr before Same as in
used for industrial undertaking in urban STCG) invested or within 3yr Sec 54
area (car and computers are plant, No after transfer.
furniture)
Plant and machinery or land or building

used for industrial undertaking in non-
urban area + Shifting expenses
54GA Plant and machinery or land or building All(LTCA + CG Within 1yr before Same as in
used for industrial undertaking in urban STCG) invested or within 3yr Sec 54
area. after transfer.
Plant and machinery or land or building
used for industrial undertaking in
SEZ + Shifting expenses.
Advance Money Forfeited

Advance money forfeited during the previous year 2014-15 (or any subsequent previous year) is taxable in the
hands of recipient under the head “Income from other sources” in the year in which advance money is
forfeited. However, advance money forfeited during the previous year prior to 14-15 is not taxable as “Income
from other sources”. Instead, it is deducted from the cost for which the asset was acquired or the written
down value or the fair market value, as the case may be, in computing the cost of acquisition.
Transfer of partner to firm & vice-versa
Admission Dissolution
Section 45(3) 45(4)
Taxable in the hands of Partner Firm
Sale Consideration Amount in the books of firm FMV
“If you don’t invest very much then defeat doesn’t hurt very much and winning is not very
exciting too”
Deductions from Gross total income under chapter VI-A (80C-80U)

Deductions are not allowed from:
1. LTCG u/s 112
2. Casual income u/s 58(4)
3. STCG u/s 111A
80C (Deduction for certain Investments) - Allowed only to an individual and HUF
1) Deductions for Self/spouse/children
a) Public provident fund
 Principal amount received on maturity is exempt
 Interest income is exempt from tax and hence will not qualify for deduction
b) National savings certificate (NSC bonds)
 Principal amount received on maturity is exempt
 Accrued interest shall be considered as income (taxable u/h Other Sources) and will qualify for
deduction but accrued interest of last year will not be considered for deduction
c) Unit linked insurance plan of LIC mutual fund
d) Unit linked insurance plan 1971 of UTI
e) LIC policy
 Premium paid cannot exceed 10% of capital sum assured otherwise deduction is allowed for
only 10% (in respect of policy taken before 1.4.2012, 10% shall be taken as 20%)
 If policy holder has paid premium of more than 10% in any year, the entire sum received on
maturity is taxable (except amount received on the death of policyholder)
 Children may be dependent/independent/married/unmarried/step/adopted
 If policy has been taken in the name of a person suffering from disability given u/s 80U or
specified disease u/s 80DDB, 10% shall be taken as 15%. The policy should have been taken
w.e.f. 1.4.2013
2) Deductions for individual or HUF

a) Investment in fixed deposits for 5 years or more with scheduled bank.
 Interest income is taxable
 Principal amount is exempt on maturity
b) Repayment of principal amount of loan (deduction of interest is allowed u/h HP)
 Loan was purchase or construction of residential house property (not commercial)
 Amount was borrowed from central govt., bank, LIC, national housing bank, notified
persons
c) Payment of tuition fees to school, college, university or any other educational institution in
India (not foreign)
 It should be for whole time education
 Maximum 2 children (step or adopted)
d) Five year post office time deposit
 Interest income is taxable
“Chapter: Deductions”
 Principal amount is exempt on maturity

e) Contribution by employee to statutory or recognized provident fund or approved
superannuation fund
f) Notified deposit scheme of NHB
g) Sukanaya Samridhi Yozna account
h) Eligible issue of Indian Public ltd., financial institution, notified mutual fund
i) If only for infrastructure development units of mutual fund notified under 10(23D)
NOTE: Deduction under this section is only allowed if payment has actually been made.
80 CCC- Deduction in respect of contribution to certain pension funds

 Deduction is allowed only to an individual
 Deduction is allowed if the assesse has paid any amount towards any annuity plan of LIC or any other
insurer for receiving pension from pension fund
 Deduction is allowed only out of the income chargeable to tax
 If assesse has surrendered the policy, amount received on account of surrender shall be considered to
be income of the assesse under the head other sources
80CCD- National pension scheme/ notified pension scheme/ CG pension scheme

80CCD (1) - employee contribution
 10% of salary
80CCD(1B) –Additional deduction is now available up to 50,000 for contribution to NPS which shall not be
considered for ceiling of 1,50,000. Employee should thus, utilize his amount under this section first.
80CCD (2) – Employer contribution (this also added to employee’s salary u/h Salary)
 10% of salary and no deduction for amount in excess of 10%
80CCE- 80C+80CCC+80CCD (1) is less than or equal to 150000.
80CCG-Investment in notified equity saving scheme
 Deduction is allowed only to resident individual (ROR/NOR)

 Gross total income does not exceed ₹12 lakh
 Assesse has acquired listed equity shares or listed units of an equity oriented fund
 Assesse is a new retail investor
 Deduction shall be 50% of amount invested but maximum ₹25000
 Deduction shall be allowed for a continuous period of 3 years
 Lock in period is of 3 years from the date of acquisition and if there is violation then deduction earlier
allowed shall be considered to be the income of the year in which shares have been sold
80D- Medi-claim / Medical insurance policy
 If payment is made (otherwise than in cash) towards Medical insurance or CG health scheme or other
notified health scheme
 Preventive health check-up (payment can be in cash)
 Payment is for Wife or husband, dependent children (Premium paid is subject to max. limit of 25000) ,
in case of senior citizen (60 years or more) limit is 30000
 For parents (dependent or independent) separate 25000 and if senior citizen then limit of 30000
 For preventive health check-up max. 5000 for self, spouse, children or parents
 Any payment made on account of medical expenditure in respect of a super senior citizen if no
payment has been made for health insurance is also allowed deduction under this Sec. upto 30,000
80 DD- Dependent disable

 Payment regarding medical treatment, training or deposit of any amt. for dependent disable
 Dependent includes spouse, children, parents, brothers or sisters (not grandparents)
 Deduction allowed- 75000 or 125000 in case of severe disability, irrespective of expenditure
 Dependent should not claim deduction under 80U
80U- Handicapped or severe disability

 Given to self
 Deduction allowed- 75,000 or 1,25,000 in case of severe disability, irrespective of expenditure
80DDB
 Payment for medical treatment of self or dependent relative
 Deduction allowed- expenditure incurred or 40,000 (in case of senior citizen 60,000; in case of super
senior citizen 80,000) whichever is less
 Deduction will be reduced by the amount received under medi claim insurance
80E
 Payment of interest on loans taken from financial institution or any approved charitable institution
 Deduction of actual interest paid (no max. limit)
 Deduction for max. 8 years
 Education can be of self, spouse or children (even if a person is local guardian)
80G
 If donation is given to institution or fund other than 28 notified, deduction allowed shall be 50% of the
qualifying amt.
 Deduction allowed shall be 100% of the qualifying amt. if donation has been given to govt., local
authority, approved institution, approved association
 Qualifying amt.= 10% of adjusted GTI or donation (except 28 notified) whichever is less
 Adjusted GTI= GTI-LTCG-STCG 111A – all deductions u/s 80C-80U (except 80G)
 No deduction is allowed if donation is given in kind under 80G
80GG
 Given in case of payment of rent
 Individual should not be getting any HRA or rent free accommodation
 Assesse should not have any house where he ordinarily resides or performs duties of office or
employment or carries business profession
 Rent has actually been paid
 Deduction allowed is least of the following:
- Rent paid over 10% of adjusted GTI
- 2000 p.m.
- 20% of adjusted GTI
 Adjusted GTI= GTI-LTCG-STCG 111A – all deductions u/s 80C-80U (except 80GG)
 Deduction is allowed even in case of business or profession i.e. assesse need not compulsorily be
employee
80GGA
 Deduction to all assesse (except assesse u/h PGBP)
 Deduction in case of donation or contribution u/s 35, 35AC, 35CCA
 If amt. is paid in cash then deduction is restricted to 10000
80GGB
 Donation by Indian co. to political party or electoral trust
 Payment made otherwise than in cash
80GGC
 Same as above
 Payment is made by any person except local authority or artificial juridical person
80QQB- Royalty on books

 Deduction is allowed only to a resident individual who is an author
 Work should be literary, artistic and scientific nature
 Does not include brochures, diaries, guides, journals, magazines, newspapers, etc.
 Lump sum-Deduction is allowed equal to the amount of royalty income or ₹ 300000 whichever is less
 Amount is not lump sum- up to 15% of the sales value will be allowed as deduction
80RRB- Royalty from patents

 Deduction is allowed only to a resident individual
 Deduction shall be allowed equal to the amount of royalty or ₹ 300000 whichever is less
80TTA-
 Deduction is allowed only to an individual or HUF
 Deduction is allowed if the assesse has interest income on saving bank accounts with any bank,
cooperative bank or post office
 No deduction is allowed from interest on time deposit/ fixed deposit (provided in 80C)
 Deduction is allowed to the extent of ₹ 10,000
Questions for your understanding
1) Income u/h PGBP 10,61,000

Investments made by Tushar are:
a) FD with state bank for 2 years - 5000
b) Investment in NSC - 5000
c) Deposit in PPF in name of major independent son-5000
d) Deposit in PPF in name of minor son -5000
e) Deposit of LIC policy in name of major married independent daughter on 15.9.15 (sum assured -
100000)-5000
f) Payment for LIC policy in name of major married independent son on 11.11.15 (sum assured-
20000)-5000
g) Investment in home loan scheme of NHB-5000
h) Investments in units of mutual fund under scheme 10(23D)-5000
i) Investments in equity shares of infrastructure companies-5000
j) Payment of tuition fees of his son to pvt. coaching centre for coaching in taxation-5000
Solution:
Income u/h PGBP = 10,61,000
Deductions under chapter VI-A:
Deductions u/s 80C:
FD with state bank for 2 years= nil
Investment in NSC= 5000
Investment in PPF(major son)= 5000
Investment in PPF (minor son)= 5000
Payment in LIC= 5000
Payment in LIC (upto 10% of sum assured)=2000
Home loan of NHB= 5000
Investment in equity shares= 5000
Payment of pvt. Coaching= nil
Total income= 1029000
2) Mr. Aatish Bhatia has income from

PGBP: 16,33,330
LTCG: 135000
Casual income: 47000
He has paid premium of mediclaim policy amounting to 20,000 taken in the name of his dependent
grandfather who is a senior citizen and payment was made by cheque on 9.1.2015
He has given premium of jeevan suraksha policy 7000, has donated 12000 to national defence fund,
4000 to Rajiv Gandhi Foundation and 45000 to a charitable institution notified under section 80G (all
donations made by cheque)
a) Compute his total tax liability for A.Y. 15-16

b) Presume in above question assesse has given donation of 25000 to Birla temple notified under 80G
and he has also given a donation of 10000 for family planning to govt.
c) Presume in part (b) donation to govt. for family planning is 50000 by cheque.
Solution:
Part (a):
Income u/h PGBP= 1633330
Income u/h LTCG= 135000
Income u/h other sources = 47000
Gross total income= 1815330
Less: deductions under chapter VI
Deduction u/s 80CCC (jeevan suraksha policy) = 7000
Deduction u/s 80G:
National defence fund (12000*100%) = 12000
Rajiv Gandhi Foundation (4000*50%) = 2000
Charitable institution= 22500
Total Income= 1771830
(adjusted GTI= 1815330-135000-7000= 1673330)
(qualifying amount= 10% of AGTI or donation whichever is less= 45000)
(Deduction= 50% of qualifying amount= 22500)
Tax liability = 353340
Part (b):
Deduction u/s 80G:

Other deductions u/s 80G= 45000
(adjusted GTI= 1815330-135000-7000= 1673330)
(qualifying amount= 10% of AGTI or donation whichever is less=80000)
(50% of qualifying amount =35000+10000=45000)
Tax liability= 346390
Part c:
Deduction u/s 80G:
Other deductions u/s 80G= 85000
(adjusted GTI= 1815330-135000-7000= 1673330)
(qualifying amount= 10% of AGTI or donation whichever is less=120000)
(50% of qualifying amount =35000+50000=85000)
Tax liability= 334030
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SRCC-Wings of Fire

Income Tax Made Easy Residential

3. Computation of tax liability (An illustration showing presentation)

Residential Status & Scope of Total Income

Residential Status (Sec 6) Scope of total Income (Sec 5, 7 & 9)

1. Resident and Ordinary Resident

Resident Non Resident

Ordinarily Resident Not Ordinarily Resident

Resident in India {Sec 6(1)}

1. In India for 182 days or more in PY. OR

Check only condition 1 for following:

An individual, who is citizen of India

1. Left India for business or employment or profession outside India.

Ordinary Resident Sec 6(6)(a)

HUF Control & Management

Resident Non Resident

Ordinarily Resident Not Ordinarily Resident Status of Karta

Resident {Sec 6(2)}

(Control & Management refers to central control not day-to-day business)

Ordinary Resident 6(6)(b)

A resident HUF is an ordinarily resident in India if karta is Ordinary resident.

Company {Sec 6(3)}

Indian Company: Always resident irrespective of its control and management.

Scope of Total Income {Sec 5}

Income received or deemed Income received or deemed Income received or deemed

Income deemed to accrue/arise in India

1. Income from business connection in India:

4. Income from any property, asset or source of Income situated in India.

6. Income from Interest

Chapter: Residential Status and Scope of Income

7. Income from Royalty/ Technical fees

Questions for your understanding

Chapter: Residential Status and Scope of Income

Chapter: House Property

2. Annual Value (Section 23)

Calculation of GAV (in exams)

Notes w.r.t. Municipal Taxes

If FRV or MV nothing is given, then assume actual rent is equal FRV

3. Deductions from Income u/h House Property (Sec 24)

Question: Mohit has occupied 2 houses, details of which are as follows:-

Chapter: Income u/h House Property

5. Unrealised Rent (Explanation to Sec.23)

7. Recovery of Unrealised Rent (Sec. 25AA)

8. Special Provisions for arrears of rent received (Sec.25B)

Chapter: Income u/h House Property

Question(Nov 15): MV-3,20,000 FR-3,40,000 SR-3,00,000 Municipal taxes paid by owner-30,000

Chapter: Income u/h House Property

3. Explain the provisions of deemed ownership.

Chapter: Income u/h House Property

2. Basis of Charge (Sec.15)

Chapter: Income u/h Salary

House Rent Allowance Prescribed Allowance

Least of the following is exempt

*Salary = B.P + DA (under terms) + Commission (%

Exempt to the extent of allowance

1. Children education allowance – 100 per month max for 2 children

*3200 to blind/handicapped employee

Chapter: Income u/h Salary

1. Rent Free Accommodation (RFA)

2. Sweat Equity Shares or any other specified security FMV

Chapter: Income u/h Salary

3. Reimbursement for meeting personal Expenditure

4. Value Of Interest free loan