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Basic concepts of Income Tax

The Income Tax law in India consists of the following components:

1. Income Tax Act, 1961: The Act contains the major provisions related to Income Tax
in India.
2. Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which
looks after the administration of Direct Tax. The CBDT is empowered to make rules for
carrying out the purpose of this Act.
3. Finance Act: Every year Finance Minister of Government of India presents the
budget to the parliament. Once the finance bill is approved by the parliament and get the
clearance from President of India, it became the Finance Act.
4. Circulars and Notifications: Sometimes the provisions of an act may need
clarification and that clarification usually in a form of circulars and notifications which has
been issued by the CBDT from time to time. It includes clarifying the doubts regarding the
scope and meaning of the provisions.

Types of Taxes
Taxes are levied by the government on the taxpayer. Taxes are broadly divided into two parts
namely, Direct Tax and Indirect Tax. Direct Tax is levied directly on the income of the
person. Income Tax and Wealth Tax are the part of Direct Tax. Whereas, in indirect taxes, the
person who pays the tax, shifts the burden to the person who consumes the goods or services.
Before 2017 the Indirect Tax comprises of various taxes and duties like Service Tax, Sales
Tax, Value Added Tax, Customs Duty, Excise Duty and etc. From July 1st, 2017 all such
Indirect Taxes are submerged in one tax law which was named as ‘The Goods and Services
Tax Act, 2017”.

Basic Concept of Income Tax Act

“Income Tax is levied on the total income of the previous year of every person”.  To
understand the basic concept.It is very important to know the various other concepts.

Concept of Income
In common parlance, Income is known as a regular periodic return to a person from his
activities. However, the Income has broader classified in Income Tax law. The Income Tax
Act, even take consideration of income which has not arisen regularly and periodically. For
instance, winning from lotteries, crossword puzzles, income from winning of shows is also
subject to tax as per income tax.

The Income includes income from:

Cash or Kind
 Income in terms of Cash is not the only way to receive income, it can also be received in
terms of a kind. The calculation of income from kind is subject to different treatments in both
Direct and Indirect Tax. When the income is received in kind, its valuation will be made.

Legal or Illegal Income

A man of ordinary prudence may think that the illegal income may not be falling under the
concept of income, but income tax does not make any distinction between the income
received from a legal or illegal source. In CIT v. Piara Singh, the Supreme Court held that
the loss of business of smuggling shall be allowed for deduction under Income Tax. The
rationale behind the decision was that the smuggling activity is also regarded as a business.
Therefore, the confiscation of currency notes employed in smuggling activity is a loss which
arises directly from the carrying on of the business.

Temporary or Permanent

As per Income Tax Act, there is no distinction in computing income whether nature is
temporary or permanent.

Receipt basis or Accrual basis

Income arises either on receipt basis or accrual basis. It may accrue to a taxpayer without its
actual receipt. The income in some cases is deemed to accrue or arise to a person without its
actual accrual or receipt. Income accrues where the right to receive arises.

Gifts 

Gifts up to Rs. 50,000 received in Cash do not constitute tax liability. Gifts in kind having the
fair value maximum up to Rs. 50,000 is not liable to tax. However, the whole amount will be
taxed if the value exceeds the prescribed limit. Moreover, the treatment of valuation of the
gift is different in the different situation especially gifts received on occasion of marriage.

Lump sum or Instalments 

Income Tax does not make any distinction in computing income, whether it receive in lump
sum or instalment.

Moreover, the income is defined in Section 2(24) of the Act.

Person

Income tax is levied on the total income of the previous year of every person. In general
terms, the meaning of a person can be interpreted in a short term. Whereas, as per Section 2
(31), Person includes:

1. an individual,
2. a Hindu undivided family (HUF),
3. a company,
4. a firm,
5. an association of persons (AOP) or a body of individuals (BOI), whether
incorporated or not,
6. a local authority, and
7. every artificial juridical person (AJP), not falling within any of the preceding sub-
clauses.

The definition of Person starts with the word includes, therefore, the list is inclusive, not
exhaustive.

Assessee

An assessee is a taxpayer means a person who under the income tax act is subject to pay taxes
or any other sum of money, as defined under section 2 (7) of the Act. The expression ‘any
other sum of money’ includes other such obligations payable, for instance fine, interest,
penalty and other tax etc.

Assessment Year

“Assessment Year” means the year in which income of the previous year of an assessee is
taxed. The timed lap of assessment year is of twelve months beginning from the 1st April
every year. The period starts from 1st April of one year and ending on 31st March of next
year. Broadly, assessment year is defined under section 2 (9) of the Act.

Previous Year

Income earned during the year is taxable in the next year. The definition of “Previous Year”
is given under section 3 of the Act. Previous Year is the year in which income is earned.
Previous year is the financial year immediately preceding the relevant assessment year. From
1989-90 onwards, every taxpayer is obliged to follow financial year (i.e., April 1st of one
year to March 31st of next year) as the previous year.

For a newly set up business or profession, the first previous year will start from the day from
which that business or profession has commenced, but the period of ending will remains
same (i.e., 31st March).

Heads of Income

As per Income tax, section 14 classifies income under five heads:

1. Income from salaries

2. Income from House Property
3. Profits and gains of business and profession
4. Capital Gains
5. Income from other sources

Tax Rates
 The Income is taxed at the rates prescribed by the relevant Finance Act. The tax levied on the
basis of a slab system where different tax rates have been directed for the different slab. In
India, there are three categories of individual taxpayers:

1. An individual below the age of 60 years,

2. A senior citizen above the age of 60 years, but below the age of 80 years,
3. A super senior citizen above 80 years of age.

The tax slab varies according to the different persons.

Surcharge

The Surcharge is commonly known as Tax on Tax. It is an additional tax levied on the
taxpayers on a special group of people. It is an additional tax liability levied on the person
having more income than prescribed.

 Education Cess and Secondary Higher Education Cess

The amount of income tax shall be increased by an Education Cess on Income Tax by 2%
and Secondary and Higher Education Cess by 1% of the tax liability.

Residential status and Tax incidence

The residential status of a person is required to be determined for each assessment year in
order to determine the scope of total income. The basis of determination of residential status
in respect of each person is laid down under the provisions of section 6 which are analyzed
hereinafter.

Residential status of an Individual under Income Tax Act, 1961

Residential status of an individual for income-tax purposes depends on the physical stay of
the individual in India. Based on the period of stay in India in a given financial year, an
individual may be classified as:

 Resident
 Not ordinarily resident (NOR)
 Non-resident (NR).

Tests of residence under the act

 A. An individual is a resident in India if he stays in India for:

 At least 182 days during a financial year

 At least 60 days during a financial year and 365 days or more during the 4 years
preceding that fiscal year.

Exceptions to the above:

 The 60-day period mentioned above will be substituted for 182 days in case of the
following persons:-


o  A citizen of India who leaves the country as a crew member of an Indian ship
or for the purposes of employment outside India
o A Citizen of India or PIO who visits India in any previous year.

B. An individual is an NOR in India if:

 He is an NR in India in 9 of 10 financial years preceding the relevant fiscal year

 His stay in the 7 years preceding the relevant financial year is in the aggregate 729
days or less.

C. An individual is an NR in India if:

  He does not satisfy any of the two conditions mentioned in A above.

Non-Resident Indian (NRI)

An NRI is defined as a citizen of India or a PIO who is not a resident.

Person of Indian Origin (PIO)

A person shall be deemed to be of Indian origin if he or either of his parents or grandparents

were born in an undivided India.

Residential Status of HUF – Sec 6(2)

A HUF is said to be resident in India when during that year control and management is
situated wholly or partly in India. In other words it will be non-resident in India if no part of
the control and management of affairs is situated in India.

Control and management lies at the place where decision regarding the affairs of the HUF are
taken.

A resident HUF is said to be resident and ordinarily resident in India if the karta of the HUF
satisfies both the following conditions:

1. He has been resident in India for at least 2 out of 10 previous years immediately preceding
the relevant previous year

And

2. He has been in India for 730 days or more during 7 previous years immediately preceding
the relevant previous year.

If the karta of HUF does not satisfy any or both of the above conditions, then HUF shall be
resident but not ordinarily resident in India.

Residential Status of Firms, AOP, BOI etc – Sec 6(2), 6(4)

A Firm, AOP, BOI etc is said to be resident in India when during that year control and
management is situated wholly or partly in India. In other words it will be non-resident in
India if no part of the control and management of affairs is situated in India.

Control and management lies at the place where decision regarding the affairs of the firms etc
are taken.

Residential Status of Companies – Sec 6(3)

Indian Company is always resident in India

Foreign Company is resident in India if control and management of its affairs is situated

wholly in India during relevant previous year i.e. if all the board meetings of the foreign
company is held in India, then it shall be resident, otherwise non-resident.

Relation between residential status and incidence of tax [Section 5]

Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the
place and time of accrual of receipt of income:

Indian Income and foreign income

Indian Income: Any of the following three is an Indian income:

i) If income is received (or deemed to be received) in India during the previous year and at
the same time it accrues (or arises or is deemed to accrue or arise) in India during the
previous year;

ii) If income is received (or deemed to be received) in India during the previous year but it
accrues (or arises) outside India during the previous year;

iii) If income is received outside India during the previous year but it accrues (or arises or is
deemed to accrue or arise) in India during the previous year;

Foreign income: If the following conditions are satisfied, then such income is foreign
income:

i)   Income is not received (or not deemed to be received) in India; and

ii) Income does not accrue or arise (or does not deemed to accrue or arise) in India.

The provisions of residential status are tabulated as below:

Whether income is received Whether income accrues

(or deemed to be received) (or arises is deemed to
Status of Income
in India during the relevant accrue or arise) in India
years during the relevant years.

Yes Yes Indian Income

Yes No Indian Income

No Yes Indian Income

No No Foreign Income

Incidence of tax for different taxpayers is as follows:

Incidence of tax in India for Individuals and Hindu Undivided Family (HUF):
 Resident and
Resident but not Non-
  ordinarily
ordinarily resident resident
resident

Indian Income Taxable Taxable Taxable

Foreign Income

If it is business income and

Not
business is controlled wholly or Taxable Taxable
taxable
partly in from India

If it is income from profession Not

Taxable Taxable
which is set up in India taxable

If it is business income and

Not
business is controlled from Taxable Not taxable
taxable
outside India

If it is income from profession Not

Taxable Not taxable
which is set up outside India taxable

Any other foreign income (like Not

Taxable Not taxable
salary, rent, interest etc.) taxable

Any other taxpayer (like company, firm, co-operative society, association of persons, body of
individuals, etc):

Resident Non-resident

Indian Income Taxable Taxable

Foreign Income Taxable Not taxable

Conclusion:
 Indian Income: Indian income is always taxable in India irrespective of the residential status
of the taxpayer;

Foreign Income: Foreign income is taxable in the hands of resident in case of a firm, co-
operative society, association of persons, body of individuals or resident and ordinarily
resident in case of individuals and HUFs in India. Foreign income is not taxable in the hands
of non-resident in India.

In the hands of resident but ordinarily resident taxpayer, foreign income is taxable only if it is

 Business income and business is controlled wholly or partly in from India; and
 Income from profession which is set up in India

Income exempted from Tax

There are some incomes which do not form part of total income and thus, are also called as
income exempt from tax. Such exempted incomes are given under section 10 of the Income-
tax Act, 1961.

Some of those incomes are explained below:

Agricultural income [Sec. 10(1)]:

Agricultural income in India is totally exempt from tax. However, such income is to be
aggregated in case of certain assessees for the purpose of determining rate of tax on non-
agricultural income.

Receipts by a member from a HUF [Sec. 10(2)]:

Any sum received by an individual as a member of a Hindu Undivided Family either out of
income of the family or out of income of estate belonging to the family is exempt from tax.

Share of profit received by a partner from a firm [Sec. 10(2A)]:

In case of a person being a partner of a firm which is separately assessed as such, his/ her
share in the total income of the firm is exempt from tax.

Interest on Non-resident (External) Account [Sec. 10(4)]:

In the case of an individual who is not resident in India, any income by way of interest on
money standing to his credit in a Non-resident (External) account in any bank in India shall
be exempt from tax if certain conditions are satisfied.

Remuneration to persons who are not citizens of India [Sec. 10(6)]:

In case of an individual who is not a citizen of India, the following income shall be exempt
from tax:
 Remuneration received by diplomats, etc.
 Remuneration received by a foreign national as an employee of a foreign enterprise.
 Non-resident employed on a foreign ship.
 Remuneration of employee of foreign Government during his training in India.

Allowance or perquisites outside India [Sec. 10(7)]:

Any allowances or perquisites paid or allowed, as such, outside India by the Government to a
citizen of India, for rendering services outside India, are exempt.

Payments under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 [Sec.
10(10BB)]:

Any payments made, under the above Act or any scheme made thereunder, shall be exempt
from tax in the hands of the recipient.

Exemption for compensation received or receivable on account of any disaster [Sec.

10(10BC)]:

Any amount received or receivable from the Central Government or a State Government or a
local authority by an individual or his legal heir by way of compensation on account of any
disaster shall be exempt from tax.

However, the exemption is not allowable in respect of amount received or receivable to the
extent such individual or his legal heir has been allowed a deduction under the Income-tax
Act on account of any loss or damage caused by such disaster.

Tax on non-monetary perquisites paid by employer [Sec. 10(10CC)]:

The tax actually paid by the employer on a perquisite provided to the employee [other than
the perquisite provided by way of monetary payment within the meaning of section 17(2)]
shall be exempt from tax in the hands of the employee.

Provident Fund [Sec. 10(11)]:

Any payment from a provident fund to which the Provident Fund Act, 1925 applies or from
Public Provident Fund set up by the Central Government shall be exempt from tax.  

Educational scholarships [Sec. 10(16)]:

Scholarships granted to meet the cost of education are exempt from tax. In order to avail the
exemption, it is not necessary that scholarship should be financed by the Government.

Daily allowances of Members of Parliament [Sec. 10(17)]:

The following incomes shall be exempt from tax in the hands of the persons specified:
 Daily allowance received by any person by reason of his membership of Parliament or
of any State Legislature or of any Committee thereof;
 Any allowance received by any person by reason of his membership of Parliament
under the Members of Parliament (Constituency Allowance) Rules, 1986;
 Any constituency allowance received by any person by reason of his membership of
any State Legislature under any Act or Rules made by that State Legislature.

Pension received by certain awardees/ any member of their family [Sec. 10(18)]:

Any income by way of pension/ family pension received by an individual or any member of
his family shall be exempt from tax if such individual has been in the service of Central/ State
Government and has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or
such other gallantry award as may be notified.

Exemption of the family pension received by the family members of armed forces
(including para-military forces) personnel killed in action in certain circumstances [Sec.
10(19)]:

Where the death of a member of the armed forces (including para-military forces) of the
Union has occurred in the course of operational duties, in such circumstances and subject to
such conditions as may be prescribed, the family pension received by the widow or children
or nominated heirs, as the case may be, shall be exempt from tax.

Annual value of one palace of the ex-ruler [Sec. 10(19A)]:

The ‘annual value’ in respect of any one palace which is in occupation of an ex-ruler is
exempt from tax, provided such annual value was exempt before 28.12.1971 by virtue of any
law or order then prevailing.

Income of minor clubbed in the hands of a parent [Sec. 10(32)]:

Under section 64(1A), the income of a minor child is includible in the total income of the
parent under the circumstances mentioned therein, section 10(32) provides that such parent in
whose income the minor’s income is included shall be entitled to exemption to the extent
such income does not exceed of ` 1,500 in respect of each minor child, whose income is so
includible. In other words, the exemption shall be allowed to the extent of the income of each
minor child included or ` 1,500 per child, whichever is less.

Capital gain on transfer of units of US-64 exempt if transfer takes place on or after 1-4-
2002 [Sec. 10(33)]:

Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964
where the transfer of such asset takes place on or after 1-4-2002, shall be exempt from tax.

Dividend to be exempt in the hands of the shareholders [Sec. 10(34)]:

Any dividend declared, paid or distributed by a domestic company shall be liable to dividend
distribution tax @ 15% plus surcharge @ 10% plus education cess @ 2% plus secondary and
 higher education cess @ 1% of the amount so declared, distributed or paid. Hence, such
dividend received by the shareholders shall be exempt from tax in their hands.

Income from units to be exempt in the hands of the unit-holders [Sec. 10(35)]:

Like dividends, income received on units of UTI (now known as specified undertaking and
specified company) and Mutual Funds covered under section 10(23D) shall be exempt from
tax in the hands of the unit-holders.

Exemption of long-term capital gain arising from sale of shares and units [Sec. 10(38)]:

Any income arising from the transfer of a long-term capital asset, being an equity share in a
company or a unit of an equity oriented fund shall be exempt from tax provided:

 Such equity shares are sold through recognized stock exchange, whereas units of an
equity oriented fund may either be sold through the recognized stock exchange or may be
sold to the mutual fund.
 Such transaction is chargeable to securities transaction tax.

Exemption of amount received by an individual as loan under reverse mortgage scheme

[Sec. 10(43)]:

Any amount received by an individual as a loan, either in lump sum or in instalment, in a

transaction of reverse mortgage referred to in section 47(xvi) shall be exempt from tax.
 UINT-2
Income from salaries
SECTION I – Understanding Your Payslip
1. Basic Salary

This is a fixed component in your paycheck and forms the basis of other portions of your
salary, hence the name. For instance, HRA is defined as a percentage (as per the company’s
discretion) of this basic salary. Your PF is deducted at 12% of your basic salary. It is usually
a large portion of your total salary.

2. House Rent Allowance

Salaried individuals, who live in a rented house/apartment, can claim house rent allowance or
HRA to lower tax outgo. This can be partially or completely exempt from taxes. The income
tax laws have prescribed a method for computing the HRA that can be claimed as an
exemption.

Also do note that, if you receive HRA and don’t live on rent your HRA shall be fully taxable.

3. Leave Travel Allowance

Salaried employees can avail exemption for a trip within India under LTA. The exemption is
only for the shortest distance on a trip. This allowance can only be claimed for a trip taken
with your spouse, children, and parents, but not with other relatives. This particular
exemption is up to the actual expenses, therefore unless you actually take the trip and incur
these expenses, you cannot claim it. Submit the bills to your employer to claim this
exemption.

4. Bonus

The bonus is usually paid once or twice a year. Bonus, performance incentive, whatever may
be its name, is 100% taxable. Performance bonus is usually linked to your appraisal ratings or
your performance during a period and is based on the company policy.

5. Employee Contribution to Provident Fund (PF)

Provident Fund or PF is a social security initiative by the Government of India. Both

employer and employee contribute a 12% equivalent of the employee’s basic salary every
month toward employee’s pension and provident fund. An interest of about 8.55% from FY
2017-18 (earlier it was 8.65%) gets accrued on it. This is a retirement benefit that companies
with over 20 employees must provide as per the EPF Act, 1952.

6. Standard Deduction
 Standard Deduction has been reintroduced in the 2018 budget. This deduction has replaced
the conveyance allowance and medical allowance. The employee can now claim a flat Rs.
50,000 (Prior to Budget 2019, it was Rs. 40,000) deduction from the total income, thereby
reducing the tax outgo.

7. Professional Tax

Professional tax or tax on employment is a tax levied by a state, just like income tax which is
levied by the central government. The maximum amount of professional tax that can be
levied by a state is Rs 2,500. It is usually deducted by the employer and deposited with the
state government. In your income tax return, professional tax is allowed as a deduction from
your salary income.

Broadly your CTC will include:

1. Salary received each month.

2. Retirement benefits such as PF and gratuity.
3. Non-monetary benefits such as an office cab service, medical insurance paid for by
the company, or free meals at the office, a phone provided to you and bills reimbursed by
your company.

Your take-home salary will include:

1. Gross salary received each month.

2. Minus  allowable exemptions such as HRA, LTA, etc.
3. Minus  income taxes payable (calculated after considering Section 80 deductions).

SECTION III – Retirement Benefits

1. Exemption of Leave Encashment
Check with your employer about their leave encashment policy. Some employers allow you
to carry forward some amount of leave days and allow you to encash them while others prefer
that you finish using them in the same year itself. The amount received as compensation for
leave days accumulated is referred to as leave encashment and it is taxable as salary.

Exemption of leave encashment from tax:

It is fully exempt for Central and State government employees. For non-government
employees, the least of the following three is exempt.

1. 10 months average salary preceding retirement or resignation (where average salary

includes basic and DA and excludes perquisites and allowances)
2. Leave encashment actually received. (this is further subject to a limit of Rs 3,00,000
for retirements after 02.04.1998)
3. Amount equal to salary for the leave earned (where leave earned should not exceed 30
days for every year of service)
 The amount chargeable to tax shall be the total leave encashment received minus exemption
calculated as above. This is added to your income from salary.

2. Relief Under Section 89(1)

You are allowed tax relief under Section 89(1), when you have received a portion of your
salary in arrears or in advance, or have received a family pension in arrears. Calculate the
Tax Relief Yourself

1. Calculate the tax payable on the total income, including additional salary in the year it
is received.
2. Calculate the tax payable on the total income, excluding additional salary in the year
it is received
3. Calculate the difference between Step 1 and Step 2
4. Calculate the tax payable on the total income of the year to which the arrears relate,
excluding arrears
5. Calculate the tax payable on the total income of the year to which the arrears relate,
including arrears
6. Calculate the difference between Step 4 and Step 5
7. The excess amount at Step 3 over Step 6 is the tax relief that shall be allowed.

Note that if the amount at Step 6 is more than the amount at Step 3, no relief shall be allowed.

3. Exemption on Receipts at the Time of Voluntary Retirement

Any compensation received on voluntary retirement or separation is exempt from tax as per
the Section 10(10C). However, the following conditions must be fulfilled

1. Compensation received is towards voluntary retirement or separation

2. Maximum compensation received does not exceed Rs 5,00,000.
3. The recipient is an employee of an authority established under the Central or State
Act, local authority, university, IIT, state government or central government, notified institute
of management, or notified institute of importance throughout India or any state, PSU,
company or a cooperative society.
4. The receipts are in compliance with Rule 2BA.

No exemption can be claimed under this section for the same AY or any other if relief under
Section 89 has been taken by an employee for compensation of voluntary retirement or
separation or termination of services. 
Note: Exemption can only be claimed in the assessment year the compensation is received.

4. Pension
Pension is taxable under the head salaries in the income tax return. Pension is paid out
periodically on a monthly basis usually. You may also choose to take pension as a lump sum
(also called commuted pension) instead of a periodical payment. At the time of retirement,
you may choose to receive a certain percentage of your pension in advance.
 Commuted and Uncommuted Pension Commuted pension or lump sum received may be
exempt in certain cases. For a government employee, commuted pension is fully exempt.
Uncommuted pension or any periodical payment of pension is fully taxable as salary.

5. Gratuity
Gratuity is a retirement benefit that employers provide for their employees. The employee is
entitled to receive gratuity when he completes five years of service at that company. It is,
however, only paid on retirement or resignation. Gratuity received on retirement or death by a
central, state or local government employee is fully exempt from tax for the employee or his
family. The tax treatment of your gratuity is different, depending on whether your employer
is covered by the Payment of Gratuity Act. Check with your company about its status, and
then proceed to calculate.

If your employer is covered by the Payment of Gratuity Act, then the least of the following
three is tax-exempt.

1. 15 days salary based on the salary last drawn for every completed year of service or
part thereof in excess of 6 months.

For simplicity sake, this is calculated as last drawn salary x number of years in employment x
15/26 (where last drawn salary is Basic salary and DA and number of years in service is
rounded off to the nearest full year)

2. Rs 20,00,000
3. Gratuity actually received

If your employer is not covered under the Payment of Gratuity Act, the least of the
following three is tax-exempt.

1. Half month’s salary for each completed year of service. While calculating completed
years, any fraction of a year shall be ignored.

SECTION IV – Basics of Income Tax

1. Income Chargeable to Tax
Your income is not equal to your salary. You could earn income from several other sources
other than your salary income. Your total income, according to the Income Tax Department,
could be from house property, profit or loss from selling stocks or from interest on a savings
account or on fixed deposits. All these numbers get added up to become your gross income.

All the money you receive while rendering your job as a result
Income from Salary
of an employment contract
 Income from house Income from house property you own; property can be self-
property occupied or rented out.

Income from other Income accrued from fixed deposits and savings account
sources come under this head.

Income from capital Income earned from the sale of a capital asset (mutual funds
gains or house property).

Income from
Income/loss arising as a result of carrying on a business or
business and
profession. Freelancers income come under this head.
profession

2. Tax Rates
Add up all your income from the heads listed above. This is your gross total income. From
your gross total income, deductions under Section 80 are allowed to be claimed. The resulting
number is the income on which you have to pay tax.

3. TDS on Salary
TDS is tax deducted at source. Your employer deducts a portion of your salary every month
and pays it to the Income Tax Department on your behalf. Based on your total salary for the
whole year and your investments in tax-saving products, your employer determines how
much TDS has to be deducted from your salary each month.

For a salaried employee, TDS forms a major portion of an employee’s income tax payment.
Your employer will provide you with a TDS certificate called Form 16 typically around June
or July showing you how much tax was deducted each month.
Your bank may also deduct tax at source when you earn interest from a fixed deposit. The
bank deducts TDS at 10% on FDs usually. A 20% TDS is deducted when the bank does not
have your PAN information.

4. Form 16
Form 16 is a TDS certificate. Income Tax Department mandates all employers to deduct TDS
on salary and deposit it with the government. The Form 16 certificate contains details about
the salary you have earned during the year and the TDS amount deducted.

It has two parts – Part A with details about the employer and employee name, address, PAN
and TAN details and TDS deductions.

Part B includes details of salary paid, other incomes, deductions allowed, tax payable.
5. Form 26AS
Form 26AS is a summary of taxes deducted on your behalf and taxes paid by you. This is
provided by the Income Tax Department. It shows details of tax deducted on your behalf by
deductors, details on tax deposited by taxpayers and tax refund received in the financial year.
This form can be accessed from the IT Department’s website.

6. Deductions
The lower your taxable income, the lower taxes you ought to pay. So be sure to claim all the
tax deductions and benefits that apply to you. Section 80C of the Income Tax Act can reduce
your gross income by Rs 1.5 lakhs. There are a bunch of other deductions under Section 80
such as 80D, 80E, 80GG, 80U etc. that reduce your tax liability.

Income from House Property

Basics of House Property
A house property could be your home, an office, a shop, a building or some land attached to
the building like a parking lot. The Income Tax Act does not differentiate between a
commercial and a residential property. All types of properties are taxed under the head
‘income from house property’ in the income tax return. An owner for the purpose of income
tax is its legal owner, someone who can exercise the rights of the owner in his own right and
not on someone else’s behalf.

When a property is used for the purpose of business or profession or for carrying out
freelancing work – it is taxed under the ‘income from business and profession’ head.
Expenses on its repair and maintenance are allowed as business expenditure.

1. Self-Occupied House Property

A self-occupied house property is used for one’s own residential purposes. This may be
occupied by the taxpayer’s family – parents and/or spouse and children. A vacant house
property is considered as self-occupied for the purpose of Income Tax.

Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer,
only one is considered and treated as a self-occupied property and the remaining are assumed
to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.

For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has
been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied
and remaining house as let out for Income tax purposes.

2. Let Out House Property

A house property which is rented for the whole or a part of the year is considered a let out
house property for income tax purposes
 3. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be
a self occupied one or a let out one based on its usage as discussed above.

Steps to Calculate Income From House Property

Here is how you compute your income from a house property:

1. Determine Gross Annual Value (GAV) of the property: The gross annual value of
a self-occupied house is zero. For a let out property, it is the rent collected for a house on
rent.
2. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV
of property.
3. Determine Net Annual Value(NAV): Net Annual Value = Gross Annual Value –
Property Tax
4. Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a
deduction from the NAV under Section 24 of the Income Tax Act. No other expenses such as
painting and repairs can be claimed as tax relief beyond the 30% cap under this section.
5. Reduce home loan interest: Deduction under Section 24 is also available for interest
paid during the year on housing loan availed.
6. Determine Income from house property: The resulting value is your income from
house property. This is taxed at the slab rate applicable to you.
7. Loss from house property: When you own a self occupied house, since its GAV is
Nil, claiming the deduction on home loan interest will result in a loss from house property.
This loss can be adjusted against income from other heads.

Note: When a property is let out, its gross annual value is the rental value of the property.
The rental value must be higher than or equal to the reasonable rent of the property
determined by the municipality.

Income from profits and gains of business

and profession
In view of Section 2(13), business includes any:

(a) Trade

(b) Commerce

(c) Manufacture

(d) Any adventure or concern in the nature of trade, commerce or manufacture. It covers

every facet of an occupation carried on by a person with a view to earning profit.

 The word “business” is one of large and indefinite import and connotes something
which occupies attention and labour of a person for the purpose of profit.
 Business arises out of commercial transactions between two or more persons. One
cannot enter into a business transaction with oneself.

As per section 2(36), profession includes vocation. As profits and gains of a business,
profession or vocation are chargeable to tax under the head “Profits and gains of business or
profession”, distinction between “business”, “profession” and “vocation” does not have any
material significance while computing taxable income. What does not amount to “profession”
may amount to “business” and what does not amount to “business” may amount to
“vocation”.

1. Business Incomes Taxable under the head of ‘Profit and Gains of

Business or Profession’ (Section 28).
Under section 28, the following income is chargeable to tax under the head “Profits and gains
of business or profession”:

 Profits and gains of any business or profession;

 Any compensation or other payments due to or received by any person specified in
section 28(ii);
 Income derived by a trade, professional or similar association from specific services
performed for its members;
 The value of any benefit or perquisite, whether convertible into money or not, arising
from business or the exercise of a profession;
 Any profit on transfer of the Duty Entitlement Pass Book Scheme;
 Any profit on the transfer of the duty free replenishment certificate;
 Export incentive available to exporters;
 Any interest, salary, bonus, commission or remuneration received by a partner from
firm;
 Any sum received for not carrying out any activity in relation to any business or
profession or not to share any know-how, patent, copyright, trademark, etc.;
 fair market value of inventory as on the date on which it is converted into, or treated
as, a capital asset determined in the prescribed manner;
 Any sum received under a Keyman insurance policy including bonus;
 any sum received (or receivable) in cash or kind, on account of any capital asset
(other than land or goodwill or financial instrument) being demolished, destroyed, discarded
or transferred, if the whole of the expenditure on such capital asset has been allowed as a
deduction under section 35AD;
 Income from speculative transaction.

2. Business Income Not Taxable under the head ‘Profit and Gains of
Business or Profession’
In the following cases, income from trading or business is not taxable under section 28, under
the head “Profits and gains of business or profession”:

Rental income in the case of Dealer in Property:

 Rent of house property is taxable under section 22 under the head “Income from house
property”, even if property constitutes stock-in-trade of recipient of rent or the recipient of
rent is engaged in the business of letting properties on rent.

Dividend on Shares in the case of a Dealer-in-Shares:

Dividends on shares are taxable under section 56(2)(i), under the head “Income from case of
a dealer-in-shares other sources”, even if they are derived from shares held as stock-in-trade
or the recipient of dividends is a dealer-in-shares. Dividend received from an Indian company
is not chargeable to tax in the hands of shareholders (this rule is subject to a few exceptions).

Winnings from Lotteries, etc.

Winnings from lotteries, races, etc., are taxable under the head “Income from other sources”
etc. (even if derived as a regular business activity).

Interest received on Compensation or Enhanced Compensation:

Such interest is always taxable in the year of receipt under the head “Income from other
sources” (even if it pertains to a regular business activity). A deduction of 50 % is allowed
and effectively only 50 % of such interest is taxable under the head “Income from other
sources”.

Profits derived from the aforesaid business activities are not taxable under section 28, under
the head “Profits and gains of business or profession”. Profits and gains of any other business
are taxable under section 28, unless such profits are exempt under sections 10 to 13A.

3. Mode of Taxation on Certain Incomes (Section 145B)

Section 145B has been inserted by the Finance Act, 2018. It is applicable from the
assessment year 2017-18 onwards. It provides mode of taxation of the following incomes:

1. Interest received by an assessee on compensation or on enhanced compensation, shall

be deemed to be the income of the year in which it is received (however, it is taxable under
section 56 under the head “Income from other sources”).
2. The claim for escalation of price in a contract or export incentives shall be deemed to
be the income of the previous year in which reasonable certainty of its realization is achieved.
3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or
waiver or concession or reimbursement) as referred to in section 2(24)(xviii) shall be deemed
to be the income of the previous year in which it is received, if not charged to income tax for
any earlier previous year.

4. Basic Principles for computing income Taxable under the head ‘Profit and
Gains of Business or Profession’

1. Business or profession carried on by the assessee:

Business or profession should be carried on by the assessee.

2. Business or profession should be carried on during the previous year:

Income from business or profession is chargeable to tax under this head only if the business
or profession is carried on by the assessee at any time during the previous year (not
necessarily throughout the previous year). There are a few exceptions to this rule.

3. Income of previous year is taxable during the following assessment year:

Income of business or profession carried on by the assessee during the previous year is
chargeable to tax in the next following assessment year. There are, however, certain
exceptions to this rule.

4. Tax incidence arises in respect of all businesses or professions:

Profits and gains of different businesses or professions carried on by the assessee are not
separately chargeable to tax. Tax incidence arises on aggregate income from all businesses or
professions carried on by the assessee. If, therefore, an assessee earns profit in one business
and sustains loss in another business, income chargeable to tax is the net balance after setting
off loss against income. However, profits and losses of a speculative business are kept
separately.

5. Legal ownership vs. beneficial ownership:

Under section 28, it is not only the legal ownership but also the beneficial ownership that has
to be considered. The courts can go into the question of beneficial ownership and decide who
should be held liable for the tax after taking into account the question as to who is, in fact, in
receipt of the income which is going to be taxed.

6. Real profit vs. anticipated profit:

Anticipated or potential profits or losses, which may occur in future, are not considered for
arriving at taxable income of a previous year. This rule is, however, subject to one exception:
stock-in-trade may be valued on the basis of cost or market value, whichever is lower.

7. Real profit vs. Notional profit:

The profits which are taxed under section 28 are the real profits and not notional profits. For
instance, no person can make profit by trading with himself in another capacity.

8. Recovery of sum already allowed as deduction:

Any sum recovered by the assessee during the previous year in respect of an amount or
expenditure which was earlier allowed as deduction, is taxable as business income of the year
in which it is recovered.

9. Mode of book entries not relevant:

The mode or system of book-keeping cannot override the substantial character of a

transaction.
10. illegal business:

The income-tax law is not concerned with the legality or illegality of a business or profession.
It can, therefore, be said that income of illegal business or profession is not exempt from tax.

UNIT-3
Income from Capital Gains
Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain.
This gain or profit is considered as income and hence charged to tax in the year in which the
transfer of the capital asset takes place. This is called capital gains tax, which can be short-
term or long-term. Capital gains are not applicable when an asset is inherited because there is
no sale, only a transfer. However, if this asset is sold by the person who inherits it, capital
gains tax will be applicable. The Income Tax Act has specifically exempted assets received
as gifts by way of an inheritance or will.

Here are some examples of capital assets: land, building, house property, vehicles, patents,
trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in
relation to an Indian company. It also includes rights of management or control or any other
legal right. The following are not considered capital asset:

1. Any stock, consumables or raw material, held for the purpose of business or
profession
2. Personal goods such as clothes and furniture held for personal use
3. Agricultural land in rural India
4. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds
(1980) issued by the central government
5. Special bearer bonds (1991)
6. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates
issued under the Gold Monetisation Scheme, 2015

Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a
municipality or cantonment board, having a population of 10,000 or more is considered a
rural area. Also, it should not fall within a distance (to be measured aerially) given below –
(population is as per the last census).

Distance Population

2 kms from local limit of

If the population of the municipality/cantonment board is
municipality or cantonment
more than 10,000 but not more than 1 lakh
board
6 kms from local limit of
If the population of the municipality/cantonment board is
municipality or cantonment
more than 1 lakh but not more than 10 lakh
board
8 kms from local limit of If the population of the municipality/cantonment board is
 municipality or cantonment
more than 10 lakh
board
Types of Capital Assets
Short-term capital asset An asset which is held for a period of 36 months or less is a short-
term capital asset. The criteria of 36 months have been reduced to 24 months in the case of
immovable property being land, building, and house property, from FY 2017-18.

For instance, if you sell house property after holding it for a period of 24 months, any income
arising will be treated as long-term capital gain provided that property is sold after 31st
March 2017.

Long-term capital asset An asset that is held for more than 36 months is a long-term capital
asset. The reduced period of the aforementioned 24 months is not applicable to movable
property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-
term capital asset if held for more than 36 months as earlier.

Some assets are considered short-term capital assets when these are held for 12 months or
less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what
the date of purchase is). The assets are:

1. Equity or preference shares in a company listed on a recognized stock exchange in

India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock
exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they are
considered as long-term capital asset. In case an asset is acquired by gift, will, succession
or inheritance, the period for which the asset was held by the previous owner is also
included when determining whether it’s a short term or a long-term capital asset. In the case
of bonus shares or rights shares, the period of holding is counted from the date of allotment of
bonus shares or rights shares respectively.

Tax on Short-Term and Long-Term Capital Gains

Tax on long-term capital gain: The Long-term capital gain is taxable at 20%.

Tax on short-term capital gain when securities transaction tax is not applicable: If
securities transaction tax is not applicable, the short-term capital gain is added to your income
tax return and the taxpayer is taxed according to his income tax slab.

Tax on short-term capital gain if securities transaction tax is applicable: If securities

transaction tax is applicable, the short-term capital gain is taxable at the rate of 15%.

Tax on Equity and Debt Mutual Funds

 Gains made on the sale of debt funds and equity funds are treated differently. Funds that
invest heavily in equities, usually exceeding 65% of their total portfolio, is called an equity
fund.

Effective 11 July 2014 On or before 10 July 2014

Fund
s Short-
Short-Term Long-Term
Term Long-Term Gains
Gains Gains
Gains

At tax slab At tax slab 10% without indexation or

Debt At 20% with
rates of the rates of the 20% with indexation
Funds indexation
individual individual whichever is lower

Equity
15% Nil 15% Nil
Funds

Change in Tax Rules for Debt Mutual Funds

Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital
asset. It means that investors would have to remain invested in these funds for at least three
years to take the benefit of long-term capital gains tax. If redeemed within three years, the
capital gains will be added to one’s income and will be taxed as per one’s income tax slab.

Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for those held
over a shorter period.

Full value consideration The consideration received or to be received by the seller as a

result of transfer of his capital assets. Capital gains are chargeable to tax in the year of
transfer, even if no consideration has been received.

Cost of acquisition The value for which the capital asset was acquired by the seller.

Cost of improvement Expenses of a capital nature incurred in making any additions or

alterations to the capital asset by the seller. Note that improvements made before April 1,
2001, is never taken into consideration.

How to Calculate Short-Term Capital Gains?

1. Start with the full value of consideration

2. Deduct the following:
o Expenditure incurred wholly and exclusively in connection with such transfer
o Cost of acquisition
o Cost of improvement
3. This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred exclusively for
such transfer Less cost of acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

1. Start with the full value of consideration

2. Deduct the following:
o Expenditure incurred wholly and exclusively in connection with such transfer
o Indexed cost of acquisition
o Indexed cost of improvement
3. From this resulting number, deduct exemptions provided under sections 54, 54EC,
54F, and 54B
4. This amount is a long-term capital gain

Long-term capital gain= Full value consideration

Less : Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement Less:expenses that can be deducted from full value for
consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the
sale or transfer of the capital asset are allowed to be deducted. These are the expenses which
are necessary for the transfer to take place.)

As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity
oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per
annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity
oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.

In the case of sale of house property, these expenses are deductible from the total sale
price:

1. Brokerage or commission paid for securing a purchaser

2. Cost of stamp papers
3. Travelling expenses in connection with the transfer – these may be incurred after the
transfer has been affected.
4. Where property has been inherited, expenditure incurred with respect to procedures
associated with the will and inheritance, obtaining succession certificate, costs of the
executor, may also be allowed in some cases.

In the case of sale of shares, you may be allowed to deduct these expenses:

1. Broker’s commission related to the shares sold
2. STT or securities transaction tax is not allowed as a deductible expense

Where jewellery is sold, and a broker’s services were involved in securing a buyer, the cost
of these services can be deducted. Note that expenses deducted from the sale price of assets
for calculating capital gains are not allowed as a deduction under any other head of the
income tax return, and these can be claimed only once.

Income from other sources

Income from other sources is a residual category used to classify income that is not
classified taxed under any other head of income. Income from other sources must be
calculated by the taxpayer based on the mercantile system used by the taxpayer, i.e cash basis
or accrual basis. In this article, we look at income from other sources in detail along with list
of allowed deductions.

Items Classified as Income from Other Sources

Apart from income that cannot be classified under any other heads, there are certain types of
incomes which are always taxed under income from other sources. Such incomes are as
under:

 Dividends are always taxed under income from other sources. However, dividends
from domestic company are normally exempt from tax, as the company declaring dividend
pays dividend distribution tax.
 Winnings from lotteries, crossword puzzles, races including horse races, card game
and other game of any sort, gambling or betting of any form is classified as income from
other sources.
 Interest received on compensation or on enhanced compensation is taxed under the
head “Income from other sources”.
 Gifts received by an individual or HUF (which are chargeable to tax) are also taxed
under this head.

The following types of income can be classified as Income from Other Sources, if it
is not taxed under the head “Profits and gains of business or profession”:

 Any contribution to a fund for welfare of employees received by the employer.

 Income received by way of interest on securities.
 Income from letting out or hiring of plant, machinery or furniture.
 Income from letting out of plant, machinery or furniture along with building; both the
lettings are inseparable.
 Money received under a Keyman Insurance Policy including bonus.

Tax Deduction Allowed for Income from Other Sources

The following deductions can be claimed while computing income from other sources:

 Commission or remuneration for realizing dividends or interest on securities.

 Any sum received by an employer from employees as contribution towards any
welfare fund of such employees is first included as income of the employee, and if the
employer credits such sum to the employee’s account under the relevant fund on or before the
due date (of such fund), then such amount (i.e., employee’s contribution) is deductible from
the income of the employer.
 Current (not capital) repairs, insurance premium and depreciation in respect of plant,
machinery, furniture and buildings are deductible from rent income earned by letting out of
plant, machinery, furniture and building, which are chargeable to tax.
 A deduction of lower of Rs. 15,000 or 33 1/3% of such income is available in case of
income in the nature of family pension (i.e., regular monthly amount payable by the employer
to the family members of the deceased employee).
 Deduction is available in respect of any other expenditure (not being in the nature of
capital expenditure) laid out or expended wholly and exclusively for the purpose of making
or earning such income during the relevant previous year.

Tax Deduction NOT Allowed

The following deductions cannot be claimed while computing income from other sources:

 Personal expenditure
 Interest chargeable and payable outside India on which tax has not been paid or
deducted at source.
 Amount paid which is taxable under the head “Salaries” and payable outside India on
which tax has not been paid or deducted at source.
 Sum paid on account of wealth-tax that is not deductible.
 Amount specified under section 40A is not deductible.

Set off and Carry forward of losses

Set off of losses means adjusting the losses against the profit/income of that particular year.
Losses that are not set off against income in the same year, can be carried forward to the
subsequent years for set off against income of those years. A set-off could be:

1. An intra-head set-off
2. An inter-head set-off

a. Intra-head Set Off

The losses from one source of income can be set off against income from another source
under the same head of income.

For eg: Loss from Business A can be set off against profit from Business B where Business A
is one source and Business B is another source and the common head of income is
“Business”.

Exceptions to an intra-head set off:

1. Losses from a Speculative business will only be set off against the profit of the
speculative business. One cannot adjust the losses of speculative business with the income
from any other business or profession.
2. Loss from an activity of owning and maintaining race-horses will be set off only
against the profit from an activity of owning and maintaining race-horses.
3. Long-term capital loss will only be adjusted towards long-term capital gains.
Interestingly, a short-term capital loss can be set off against long-term capital gain or short-
term capital gain.
4. Losses from a specified business will be set off only against profit of specified
businesses. But the losses from any other businesses or profession can be set off against
profits from the specified businesses.

b. Inter-head Set Off

After the intra-head adjustments, the taxpayers can set off remaining losses against income
from other heads.

Eg. Loss from house property can be set off against salary income

Given below are few more such instances of an inter-head set off of losses:

1. Loss from House property can be set off against income under any head
2. Business loss other than speculative business can be set off against any head of
income except income from salary.

One needs to also note that the following losses can’t be set off against any other head of
income:

1. Speculative Business loss

2. Specified business loss
3. Capital Losses
4. Losses from an activity of owning and maintaining race-horses

Carry forward of losses

After making the appropriate and permissible intra-head and inter-head adjustments, there
could still be unadjusted losses. These unadjusted losses can be carried forward to future
years for adjustments against income of these years. The rules as regards carry forward differ
slightly for different heads of income. These have been discussed here:

Losses from House Property:

 Can be carry forward up to next 8 assessment years from the assessment year in
which the loss was incurred
 Can be adjusted only against Income from house property
 Can be carried forward even if the return of income for the loss year is belatedly filed.

Losses from Non-speculative Business (regular business) loss:

 Can be carry forward up to next 8 assessment years from the assessment year in
which the loss was incurred
 Can be adjusted only against Income from business or profession
 Not necessary to continue the business at the time of set off in future years
 Cannot be carried forward if the return is not filed within the original due date.

Speculative Business Loss:

 Can be carry forward up to next 4 assessment years from the assessment year in
which the loss was incurred
 Can be adjusted only against Income from speculative business
 Cannot be carried forward if the return is not filed within the original due date.
 Not necessary to continue the business at the time of set off in future years

Specified Business Loss under 35AD:

 No time limit to carry forward the losses from the specified business under 35AD
 Not necessary to continue the business at the time of set off in future years
 Cannot be carried forward if the return is not filed within the original due date
 Can be adjusted only against Income from specified business under 35AD

Capital Losses:

 Can be carry forward up to next 8 assessment years from the assessment year in
which the loss was incurred
 Long-term capital losses can be adjusted only against long-term capital gains.
 Short-term capital losses can be set off against long-term capital gains as well as
short-term capital gains
 Cannot be carried forward if the return is not filed within the original due date

Losses from owning and maintaining race-horses:

 Can be carry forward up to next 4 assessment years from the assessment year in
which the loss was incurred
 Cannot be carried forward if the return is not filed within the original due date
 Can only be set off against income from owning and maintaining race-horses only

Points to note:

1. A taxpayer incurring a loss from a source, income from which is otherwise exempt
from tax, cannot set off these losses against profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from
lotteries, races, card games, betting etc.

Clubbing of income
‘Its all in the family’. It may seem ordinary to invest money for a non earning spouse by way
of fixed deposits, or other income earning assets or to set up bank accounts, mutual funds or
other investments for children to provide for their needs in future. Usually, you are only taxed
for your own income, but under certain special circumstances some incomes are ‘clubbed’
along with your income and you may be liable to pay tax on such clubbed income.

The intention here is to make sure there is no tax that escapes, in case an individual is moving
assets or incomes in the family. In a situation where you have incurred a loss, such loss
(wherever allowed to be adjusted against an income) is also not allowed to be transferred to
anyone and will be ‘clubbed’ to your income.

Let’s understand in what circumstances you may attract this ‘clubbing’ of income –

In the case of Assets Transfer to Anyone

Transfer of Income – no transfer of assets: When you retain the ownership of an asset but
decide to transfer its income by doing an agreement or any other way, the Act will still
consider that income as your income and it will be added to your total income for taxation
purposes.

Transfer of Asset – which is revocable: When you transfer the ownership of an asset and
make such transfer revocable, income from such an asset will continue to be added to your
income.

Clubbing of Spouse’s Income

Here are some situations when your spouse’s income will get clubbed to your income and
you’ll have to pay tax on it-

(1) Your spouse receives a salary from a company or a firm in which you have a substantial

interest, then such salary will be clubbed with your income. Substantial Interest means you
alone or with your relatives (husband, wife, brother, sister or your lineal ascendant or
descendant) hold equity or voting power of a company which is 20% or more. Or in case of a
firm you are entitled to 20% or more of the profits. Also, if both of your receive an income
from such a firm or company, it will get taxed in the hands of the person whose taxable
income is higher. There is one exception to this – if your spouse receives the salary due to
his/her application of technical or professional knowledge & experience then such salary will
be taxed in the hands of the person receiving it and not clubbed.

(2) You transfer an asset to your spouse directly or indirectly without receiving adequate

consideration (does not include where asset is transferred as part of a divorce settlement) –
income from this asset will be clubbed with your income. For example – where the husband
to reduce his tax liability transfers an asset worth Rs 1,00,000 to his wife for Rs 25,000 .
3/4th of the income from this asset will be taxed in the hands of the husband. If he receives no
consideration, in that case the entire income from this asset will be clubbed with the
husband’s income. Although the clubbing provisions here exclude house property – but in
case you transfer a house property to your wife and do not receive adequate consideration, as
per the Act, you will still be considered the ‘deemed owner’ and the income from the asset
will be clubbed with your income.
(3) You transfer an asset to a person or an association of persons, directly or indirectly,
without adequate consideration, so that the benefit arises to your spouse either now or on a
deferred basis, income from such an asset will be clubbed with your income.

(4) Assume a situation where you provide money to your spouse (who is non working) and
that money is invested by the spouse and a certain income is generated (from such money that
you gave your spouse).The income that arises from such investment done by her can be
clubbed to your income. However, if your spouse reinvests the income portion and earns
further income then such income may not be clubbed with your taxable income.

Clubbing of Income of Minor Child (less than 18 years old)

(1) Some families make fixed deposits in the name of a minor child. Income of a minor is
taxable in the hands of the parent whose total income is higher (before including the minor’s
income). If the parents are divorced it is clubbed with the person who is maintaining the
child. There is one exception to this rule – if the minor has earned an income because of his
own manual work, or used his talent or specialized knowledge & experience OR in case of a
minor who is disabled (based on definition of disability in Section 80U) and earns an income,
such income will not be clubbed.

(2) When your minor child’s income is clubbed to your income – exemption is available up to
Rs 1500 for each such minor child. Which means if clubbed income is more than Rs 1500, Rs
1500 is the maximum exemption, however if clubbed income is say Rs 800 (less than Rs
1500) exemption is limited up to such lesser amount, Rs 800 in this case.

Clubbing of Income of a Major Child (18 or more than 18 years old)

You may be giving over some money to your major child (who may not be earning), in this
case if the major child invests that money – any income from these investments will not be
taxable in your hands but will be taxed in the hands of the major child. So therefore, there
will be no clubbing of income in case of a major child.

Clubbing of Income of a Son’s Wife

You transfer an asset to your son’s wife directly or indirectly without receiving adequate
consideration – income from this asset will be clubbed with your income. Or you transfer an
asset to a person or AOP, for the immediate or deferred benefit of your son’s wife, without
adequate consideration, directly or indirectly – income from this asset will be clubbed with
your income

Deduction of Tax at Source

TDS stands for tax deducted at source. As per the Income Tax Act, any company or
person making a payment is required to deduct tax at source if the payment exceeds
certain threshold limits. TDS has to be deducted at the rates prescribed by the tax
department.
 The company or person that makes the payment after deducting TDS is called a
deductor and the company or person receiving the payment is called the deductee. It is
the deductor’s responsibility to deduct TDS before making the payment and deposit the
same with the government. TDS is deducted irrespective of the mode of payment–cash,
cheque or credit–and is linked to the PAN of the deductor and deducted.

TDS is deducted on the following types of payments:

 Salaries
 Interest payments by banks
 Commission payments
 Rent payments
 Consultation fees
 Professional fees

However, individuals are not required to deduct TDS when they make rent payments or
pay fees to professionals like lawyers and doctors.

TDS is one kind of advance tax. It is tax that is to be deposited with the government
periodically and the onus of the doing the same on time lies with the deductor. For the
deductee, the deducted TDS can be claimed in the form of a tax refund after they file
their ITR.

TDS Return
A deductor has to deposit the deducted TDS to the government and the details of the
same have to be filed in the form of a TDS return. A TDS return has to be filed quarterly.
Different types of TDS deductions have to be filed using different TDS return forms.
UNIT-4
Deductions from Gross Total Income
Gross Total Income (GTI) means the aggregate of income computed under each head as per
provisions of the Act. GTI is computed after giving effect to the provisions for clubbing of
incomes and set off of losses, but before making any deductions under Chapter VIA of the
Act. In order to compute ‘Total Income or Net Total Income’, deductions under Chapter VIA
are considered and adjusted from GTI. The aggregate amount of deductions under Chapter
VIA cannot exceed GTI of the assesse. For the purpose of calculating Income Tax Total
Income will be considered.

Deductions Available under Chapter VIA

Section Brief Information about the Section Deduction Limit

Amount paid or deposited towards life insurance, 80C + 80CCC+
contribution to Provident Fund set up by the 80CCD(1) should be
Government, recognized Provident Fund, less than or equal to
contribution by the assessee to an approved Rs. 1,50,000
superannuation fund, subscription to National
Savings Certificates, tuition fees, payment/
80C
repayment for purposes of purchase or construction
of a residential house and many other investments.
For full list, please refer to section 80C of the
Income-tax Act. ( The aggregate amount of
deduction under section 80C, 80CCC and
80CCD(1) shall not exceed Rs. 1,50,000/- )
Deduction in respect of Payment of premium for
annuity plan of LIC or any other insurer. Deduction
is available upto a maximum of Rs. 150,000/-.
80CCC
The premium must be deposited to keep in force a
contract for an annuity plan of the LIC or any other
insurer for receiving pension from the fund.
80CCD (1) Deduction for contribution in pension scheme
notified by the Government to the extent of 10% of
salary in case of employees and 10% of total
 income in case of others.
Contribution to National Pension Scheme. The
80CCD deduction is in addition to the maximum deduction
Rs. 50,000
(1B) of Rs. 1,50,000/- available under 80C, 80CCC and
80CCD(1).
Contribution by employer in pension scheme
80CCD (2) Max 10% of salary.
notified by the Government
upto 50% of the
80CCG Investment in Rajiv Gandhi Equity Saving Scheme amount invested 
( Max. of Rs. 25,000 )
Medical Insurance Premium for Self and family
members.
For self, spouce and children ( any one age < 60
Rs. 25,000
yrs )
For Parents – Father or mother or both (any one
80D Rs. 25,000
age < 60 yrs)
For self, spouce and children ( any one age > 60
Rs. 30,000
yrs )
For Parents – Father or mother or both (any one
Rs. 30,000
age > 60 yrs)
Deduction in respect of maintenance including Rs. 1 lac – severe
80DD medical treatment of dependent who is a person diability
with disability. Rs. 50,000 – others
Medical treatment of specified disease or ailment
80DDB Max Rs. 40000
for self or dependent relative.
Interest on loan taken for pursuing higher
80E No limit
education of self or family members or a relative.
upto either 100% or
80G Eligible Donations 50% with or without
restriction
House Rent ( for self employed and emp. Who have
80GG Rs. 60,000
not recived HRA )
80TTA Interest on Saving accounts Rs. 10,000
Severe Disability – Rs.
1,00,000
80U Person with disability. 
General Disability –
Rs. 50,000

Assessment of individual’s income
 1. Self-Assessment
The assessee himself determines the income tax payable. The tax department has made
available various forms for filing income tax return. The assessee consolidates his income
from various sources and adjusts the same against losses or deductions or various exemptions
if any, available to him during the year. The total income of the assessee is then arrived at.
The assessee reduces the TDS and Advance Tax from that amount to determine the tax
payable on such income. Tax, if still payable by him, is called self-assessment tax and must
be paid by him before he files his return of income. This process is known as Self-
Assessment.

2. Summary Assessment
It is a type of assessment without any human intervention. In this type of assessment, the
information submitted by the assessee in his return of income is cross-checked against the
information that the income tax department has access to. In the process, the reasonableness
and correctness of the return are verified by the department. The return gets processed online,
and adjustment for arithmetical errors, incorrect claims, disallowances etc are automatically
done. Example, credit for TDS claimed by the taxpayer is found to be higher than what is
available against his PAN as per department records. Making an adjustment in this regard can
increase the tax liability of the taxpayer.

After making the aforementioned adjustments, if the assessee is required to pay tax, he will
be sent an intimation under Section 143(1). The assessee must respond to this intimation
accordingly.

3. Regular Assessment
The income tax department authorizes the Assessing Officer or Income Tax authority, not
below the rank of an income tax officer, to conduct this assessment. The purpose is to ensure
that the assessee has neither understated his income or overstated any expense or loss or
underpaid any tax.

The CBDT has set certain parameters based on which a taxpayer’s case gets picked for a
scrutiny assessment.

1. If an assessee is subject to a scrutiny assessment, the Department will send a notice

well in advance. However, such notice cannot be served after the expiry of 6 months from the
end of the financial year, in which return is filed.
2. The assessee will be asked to produce the books of accounts, and other evidence to
validate the income he has stated in his return. After verifying all the details available, the
assessing officer passes an order either confirming the return of income filed or makes
additions. This raises an income tax demand, which the assessee must respond to accordingly.

4. Best Judgement Assessment

This assessment gets invoked in the following scenarios:
1. If the assessee fails to respond to a notice issued by the department instructing him to
produce certain information or books of accounts
2. If he/she fails to comply with a Special Audit ordered by the Income tax authorities
3. The assessee fails to file the return within due date or such extended time limit as
allowed by the CBDT
4. The assessee fails to comply with the terms as contained in the notice issued under
Summary Assessment

After providing the assessee with an opportunity of being heard, the assessing officer passes
an order based on all the relevant materials and evidence available to him. This is known as
Best Judgement Assessment.

5. Income Escaping Assessment

When the assessing officer has sufficient reasons to believe that any taxable income has
escaped assessment, he has the authority to assess or reassess the assessee’s income. The time
limit for issuing a notice to reopen an assessment is 4 years from the end of the relevant
Assessment Year. Some scenarios where reassessment gets triggered are given below.

1. The assessee has taxable income but has not yet filed his return.
2. The assessee, after filing the income tax return, is found to have either understated his
income or claimed excess allowances or deductions.
3. The assessee has failed to furnish reports on international transactions, where he is
required to do so.

Assessment, in the case of some taxpayers, could close quickly while for some, it could prove
to be quite gruelling. In case you are not comfortable dealing with income tax officers, it is
suggested that you take the help of a Chartered Accountant to help you with your case.