TAXATION LAW

MODULE-I: INTRODUCTION
Introduction and Basic Concepts of Tax Law

 Some definitions under the Income Tax Act, 1961

Person [Section 2 (31)]: “person” includes—
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether
incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding
sub-clauses. (Residuary clause)
Explanation—For the purposes of this clause, an association of persons or a
body of individuals or a local authority or an artificial juridical person shall
be deemed to be a person, whether or not such person or body or
authority or juridical person was formed or established or incorporated
with the object of deriving income, profits or gains;
Thus, Association of persons or a Body of individuals would mean:
 A company incorporated under the Companies Act, 2013
 Association of persons + common purpose + mutual liability – Firm
 Association of persons in case of a company and body of individuals
in case of individuals.
Assessee [Section 2 (7)]
“Assessee” means a person by whom any tax or any other sum of money is
payable under this Act, and includes—
(a) every person in respect of whom any proceeding under this Act has
been taken for the assessment of his income or of the income of any
other person in respect of which he is assessable,

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 (b) every person who is deemed to be an assessee under any provision
of this Act;
(c) every person who is deemed to be an assessee in default under any
provision of this Act;
 Surcharge: Surcharge is levied on income tax at the following rates:
Income over 50 lakh – 10% of the tax payable
Income over 1 crore – 15 % of the tax payable.
Need and Rationale of Taxes
Taxes are collected from citizens by the government to accomplish a series of
objectives, namely:
 To correct externalities: taxes are collected on goods or services where the
social cost is not reflected in the private cost. For example, tobacco is
heavily taxed due to the health problems it causes and because the cost
associated with health care is usually borne by the government. Should this
be the case, production is not a social benefit.
[Externality means a consequence of an industrial or commercial activity
which affects other parties without this being reflected in market prices,
such as the pollination of surrounding crops by bees kept for honey]
 To provide public services: taxes are collected for expenditures that would
be less efficient should they be provided privately (defence and other
partially public expenditures such as health and education).
 To redistribute wealth: the collection of taxes itself serves as a means of
redistribution, as does social spending on programs designed to overcome
poverty and inequality.
Direct and Indirect Taxes
 Direct Taxes, as the name suggests, are taxes that are directly paid to the
government by the taxpayer. It is a tax applied on individuals and
organizations directly by the government e.g. income tax, corporate tax,
wealth tax etc.
 Indirect Taxes are applied on the manufacture or sale of goods and
services. These are initially paid to the government by an intermediary,
who then adds the amount of the tax paid to the value of the goods /

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 services and passes on the total amount to the end user. Examples of these
are GST, Excise Duty, Customs Duty etc.
 Indirect taxes are easy to collect and are much more influential socially.
 States take maximum revenue out of liquor.
 Central Board of Direct Taxes (CBDT) regulates direct taxes in India.
 Central Board of Excise and Customs (CBEC) regulates indirect taxes in
India.

Income Tax – Direct Tax

Financial Year, Previous Year and Assessment Year

 Financial Year (FY): 1st April – 31st March
 Previous year (PY) – The year in which one has earned the income.
 Assessment year (AY) – The year in which one assesses what he earned.
“Assessment year” means the period of twelve months commencing on the
1st day of April every year
 For example, 1st April 2018 – 31st March 2019 – Previous year (P.Y.)
1st April 2019 – 31st March 2020 – Assessment year (A.Y.)
Flat Rate and Slab Rate
 When there is different rate for different levels of Income it is called slab
rate e.g. Income tax for an individual.
 When rates are same irrespective of level of Income it is called flat rate e.g.
Corporate tax, Income tax on capital gain etc.
 In India, income tax is levied on individual taxpayers on the basis of a slab
system where different tax rates have been prescribed for different slabs
and such tax rates keep increasing with an increase in the income slab.
 Such tax slabs tend to undergo a change during every budget.
 There are three categories of individual taxpayers:
1. Individuals (below the age of 60 years) which includes residents as
well as non-residents
2. Resident Senior citizens (60 years and above but below 80 years of
age)
3. Resident Super senior citizens (above 80 years of age)

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Income Tax Slabs for Individual Tax Payers (less than 60 years old) & HUF for PY:
2017-18; AY: 2018-19

Income Tax Slab Tax Rate

Taxable Income up to Rs. 2.5 lakhs No Tax

Taxable Income: 2.5 lakhs – 5 lakhs 5%

Taxable Income: 5 lakhs – 10 lakhs 20%

Taxable Income: more than 10 lakhs 30%

Total tax liability: Income Tax (I.T.) + Surcharge + 3% (of I.T. + Surcharge) Health
& Education Cess

Rates of Surcharge:

 10% (of I.T.) - where total income exceeds 50 lakhs up to 1 crore.

 15% (of I.T.) - where the total income exceeds 1 crore.

Calculation of Income Tax:

Example when the taxable income is 11 lakhs.
 1st 2.5 lakhs: Nil (Exempted)
 2.5 lakhs – 5 lakhs: 5% of 2.5 lakhs i.e. Rs. 12,500/-
 5 lakhs – 10 lakhs: 20 % of 5 lakhs i.e. Rs. 1,00.000/-
 Rest 1 lakh: 30 % of 1 lakh i.e. Rs. 33,333/-
 Total Tax liability = 12,500 +1,00,000 + 33,333 = Rs. 1,45,833/-
 Add 3 % of Rs. 1,45,833 = Rs. 4375/-
 Total Tax liability = Rs. 1,50,208/-
 No surcharge as the income is less than 50 lakhs.

Income Tax Slabs for Senior Citizens (60 Years Old or more but Less than 80
Years Old) for PY: 2017-18; AY: 2018-19

Income Tax Slab Tax Rate

Taxable Income up to Rs. 3 lakhs No Tax

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Taxable Income: 3 lakhs – 5 lakhs 5%

Taxable Income: 5 lakhs – 10 lakhs 20%

Taxable Income: more than 10 lakhs 30%

Same rates for Education Cess and Surcharge.

Income Tax Slabs for Senior Citizens (80 Years Old or More) for PY: 2017-18; AY:
2018-19

Income Tax Slab Tax Rate

Taxable Income up to Rs. 5 lakhs No Tax

Taxable Income: 5 lakhs – 10 lakhs 20%

Taxable Income: more than 10 lakhs 30%

Same rates for Education Cess and Surcharge.

Income Tax, Surcharge, Health and Education Cess for individuals

AY: 2018-19; PY: 2017-18 (Individuals)

 Surcharge: The amount of income-tax shall be increased by a surcharge in

case of an individual at the following rates for AY: 2018-19; PY: 2017-18:
follows:

 @ 10% of such tax, where total income exceeds 50 lakhs but does
not exceed one crore rupees.

 @ 15% of such tax, where total income exceeds one crore rupees.

 Education Cess: The amount of income-tax and the applicable surcharge,

shall be further increased by education cess calculated at the rate of 2% of
such income-tax and surcharge.

 Secondary and Higher Education Cess: The amount of income-tax and the
applicable surcharge, shall be further increased by secondary and higher

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 education cess calculated at the rate of 1% of such income-tax and
surcharge.

 Thus, a total Education cess turns out to be 3% of the (tax + surcharge)

Surcharge = IT X Surcharge Rate

Tax amount with Surcharge = IT + (IT X Surcharge Rate)

= IT + SR

Cess payable = {(IT + SR) X Cess Rate}

Final Tax Payable = (IT + SR) + {(IT + SR) X Cess Rate}

AY: 2019-20; PY: 2018-19 (Individuals)

Surcharge rate – same as AY: 2018-19

Education Cess (@ 2%) and Secondary and Higher Education Cess (@ 1%) i.e. a
total of 3% Cess applicable earlier has now been replaced by Health and
Education Cess – 4% (earlier it was 3%)

Income Tax, Surcharge, Education Cess for Companies

AY: 2019-20; PY: 2018-19 (Domestic Companies)

A domestic company is taxable at 30%. However, tax rate is 25% if turnover or

gross receipt of the company does not exceed Rs. 50 crores.

Plus:
 Surcharge:
 @ 7% of tax where total income exceeds Rs. 1 crore
 @ 12% of tax where total income exceeds Rs. 10 crore

 Health and Education cess: 4% of tax plus surcharge

AY: 2019-20; PY: 2018-19 (Foreign Companies)

A foreign company is taxable at 40%
Plus:
 Surcharge:

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  @ 2% of tax where total income exceeds Rs. 1 crore
 @5% of tax where total income exceeds Rs. 10 crore
 Health and Education cess: 4% of (tax plus surcharge)
Some points
 Tax law should be interpreted strictly and literally.
 Regulatory Bodies for tax administration are:
 CBDT (Central Board of Direct Taxes) – for Direct Taxes
 CBEC (Central Board of Excise and Customs) – for Indirect Taxes
 Tribunals:
 ITAT (Income Tax Appellate Tribunal) – for Direct Taxes
 CESAT (Custom, Excise, Service Tax Appellate Tribunal) – for Indirect
Taxes
 Companies registered under The Companies Act are responsible to pay the
tax on their net income. This tax is called corporate tax. On the other hand,
taxes paid by an individual or Hindu Undivided Family (HUF) on its income is
called income tax.
 “Person” as defined in Section 2 (31) of the Income Tax Act, 1961 includes
an individual, a Hindu undivided family, a company, a firm, an association of
persons or a body of individuals, whether incorporated or not, a local
authority, and every artificial juridical person.

Constitutional Provisions on Taxation

 Article 265 provides that no tax shall be levied or collected except by
authority of law.
The Power to levy tax has been allocated between:
 Parliament
 State Legislature
 Article 246 of the Indian Constitution, distributes legislative powers
including taxation, between the Parliament of India and the State
Legislatures.
 Schedule VII enumerates the subject matters on which the Parliament and
States have the powers to make laws in three lists:
 List I (Union List);

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  List II (State List); and
 List III (Concurrent list)
 List I (Union List) – contains those subjects on which only the Parliament
has the exclusive power to make laws.
List II (State List) – contains those subjects on which only the State
Legislatures are competent to make laws.
List III (Concurrent List) – contains those subjects on which both the
Parliament and the State Legislatures are competent to make laws.
 Article 254: Inconsistency between laws made by Parliament and laws
made by the Legislatures of States: If any provision of a law made by the
Legislature of a State is repugnant (in conflict) to any provision of a law
made by Parliament, or to any provision of an existing law with respect to
one of the matters enumerated in the Concurrent List, the law made by
Parliament shall prevail and the law made by the Legislature of the State
shall, to the extent of the repugnancy, be void.
 Article 249 defines the power of the Parliament to legislate with respect to
a matter in the State List in the national interest. It provides that if the
Council of States (Rajya Sabha) declares by resolution supported by not less
than 2/3rds of the members present and voting that it is necessary or
expedient in national interest that Parliament should make laws with
respect to any matter enumerated in the State List, it shall be lawful for
Parliament to make laws for the whole or any part of the territory of India.
 In order to facilitate the introduction of Goods and Services Tax (GST), the
List I and List II have been widely amended vide 101st Constitution
(Amendment) Act, 2017, and a new Article 246A has been inserted in the
Constitution. According to Article 246A, the Parliament has exclusive power
to make laws with respect to goods and services tax where the supply of
goods, or of services, or both takes place in the course of inter-State trade
or commerce.

Principle of Taxation by Adam Smith

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Adam Smith, the father of modem political economy, has laid down four
principles or cannons of taxation in his famous book "Wealth of Nations". These
principles are still considered to be the starting point of sound public finance.
Adam Smith's celebrated cannons of taxation are:

(1) Principle of Equality,

(2) Principle of Certainty,

(3) Principle of Convenience, and

(4) Principle of economy.

Principle of EQALITY
 The principle of equality or ability is considered to be a very important
canon of taxation.
 By equality we do not mean that people should pay equal amount by way
of taxes to the government. By equality is meant equality of sacrifice, that
is, people should pay taxes in proportion to their incomes. This principle
points to progressive taxation.
 Paying tax according to ability.
 Paying tax on a proportional basis.
 Horizontal equity: Same tax for same income group.
 Vertical equity: More tax for higher income group and less tax for lower
income group.
 It states that the rate or percentage of taxation should increase with the
increase in income and decrease with the decrease in income.

Principle of CERTAINTY

 The tax which one is bound to pay must be certain and non-arbitrary.
 The Canon of certainty implies that there should be certainty with regard to
the amount which taxpayer is called upon to pay during the financial year.
If the taxpayer is definite and certain about the amount of the tax and its
time of payment, he can adjust his income to his expenditure.

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  Lack of certainty in the tax system encourages corruption in administration.
Therefore, it is good for the tax system that individuals should be secured
against unpredictable taxes levied on their wages or other income.
 The tax law should be clear and specific.
 Tax collectors should have little discretion about tax assessment of tax-
payers because this is a great power and hence subject to abuse.

Principle of CONVENIENCE

 By this canon, Adam smith means that the tax should be levied at the time
and the manner which is most convenient for the contributor to pay it. For
instance, if the tax on agricultural land is collected in instalments after the
crop is harvested, it will be very convenient for the agriculturists to pay it.

 Similarly, property tax, house tax, income tax, etc., etc., should be realized
at a time when the taxpayer is expected to receive income. The manner of
payment of tax should also be convenient. If the tax is payable by cheques,
the contributor will be saved from much inconvenience.

Principle of EFFICIENCY/ ECONOMY

 The canon of economy implies that the expenses of collection of taxes

should not be excessive. They should be kept as little as possible, consistent
with administration efficiency.

 If the government appoints highly salaried staff and absorbs major portion
of the yield, the tax will be considered uneconomical.

 Tax will also be regarded as uneconomical if it checks the growth of capital

or causes it to emigrate to other countries.

Constitutional Limitation on Taxing Power

 Art. 13: The taxing power of the State must not contravene Article 13 of the
Constitution, i.e. it must not violate the fundamental rights of citizens.

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  Art.14: It must not deny equal protection of law. Article 14 says that the
State shall not deny to any person equality before the law or the equal
protection of the laws within the territory of India.
 Art. 19 (1) (g): It must not constitute an unreasonable restriction upon the
right to carry out business.
 Art. 27: No tax shall be levied on the proceeds which are specifically
appropriated in payment of expenses for the promotion or maintenance of
any particular religion or religious denomination.
 Art. 285: A state Legislature or any authority within the State cannot tax the
property of the Union.
 Art. 289: The property and income of a State shall be exempt from Union
taxation. However, the Parliament may, by law, tax in respect of a trade or
business of any kind carried on by, or on behalf of, the Government of a
State.
 Art. 301: Imposition of tax should not impede the free flow of trade,
commerce and intercourse.
 Art. 304 (a): Levy of tax must not offend Article 304 (a).
Article 304 (a)
 Enables the legislature of a State to make laws effecting trade and
commerce.
 Enables the imposition of taxes on goods from other states if similar
goods in the State are subjected to similar taxes so as not to
discriminate between the goods manufactured or produced in that
state and the imported goods from other states.
 Article 304 (a) is an exception to Art. 301 which says that no
imposition of tax should impede the free flow of trade, commerce or
intercourse.

Some important points

 Section 4 of the Income Tax Act, 1961 deals with the basis of charge of
Income Tax. It says that where any Central Act enacts that income-tax shall
be charged for any assessment year at any rate or rates, income-tax at that
rate or those rates shall be charged for that year in accordance with, and
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 subject to the provisions of this Act in respect of the total income of the
previous year of every person.
 Here it is relevant to mention that Article 265 of the Constitution says that
no tax can be levied without the authority of law.
 Process of finding Income Tax
(i) Add incomes from all income heads – Gross total income
(ii) Deductions under Section 80 – e.g. Provident Fund subscription, LIC
premium, Interest on house building loan, education loan, NSC etc.
(iii) Remainder amount is the taxable income.

Heads of Income [Section 14 of IT Act, 1961]

All income shall, for the purposes of charge of income-tax and computation of
total income, be classified under the following heads of income:
(i) Salaries.
(ii) Income from house property.
(iii) Profits and gains of business or profession (PGBP)
(iv) Capital gains.
(v) Income from other sources.
Procedure to compute Income Tax
 First, find out the income under all the five heads of income.
 Next, add all the incomes.
 This amounts to “Gross Total Income”.
 Deduct the deductions admissible under Section 80 (e.g. Life Insurance
Premium amount, Provident Fund contribution, Health Insurance Premium,
Interest on Education Loan, House Rent when House Rent Allowance (HRA)
not admissible, Interest on Home loan for first home buyers etc.).
 Remainder amount is “Taxable Income”.
 Calculate the Income Tax as per the Slab Rate.
 Add Surcharge.
 Add Health and Education Cess on (IT + Surcharge). This is the final Tax
payable.

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MODULE II: RESIDENTIAL STATUS
Residence in India
Section 6 (1) of the Income Tax Act, 1961 says that for the purposes of this Act, an
individual is considered to be resident in India if he –
(a) stayed in India for 182 days or more in the relevant previous year; or
(b) stayed in India for 60 days in relevant previous year and for 365 days in
preceding 4 previous years of the relevant previous year.
 Assessment Year (AY): 2018-19
Relevant previous Year (PY): 2017-18
 Person of Indian Origin – If the person or his father or grandfather (both
maternal/ paternal) is born in India.
 A resident of India is not necessarily a citizen of India
 “India” as defined in the Act means the territory of India as referred to in
article 1 of the Constitution, its territorial waters, seabed and subsoil
underlying such waters, continental shelf, exclusive economic zone or any
other maritime zone as referred to in the Territorial Waters, Continental
Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and the
air space above its territory and territorial waters;
 Thus, India includes the following:
 12 nautical miles from the shore – Territorial waters
 Beyond territorial waters – 24 nautical miles – India Custom waters
 Beyond Custom waters – 176 nautical miles – Exclusive Economic
Zone
 Territory of India + 200 nautical miles
 Beyond 200 nm – International waters
Section 6 (1)
Requirements for an individual being considered resident in India
(a) Stayed in India for ≥ 182 days in the relevant PY, or
(b) Stayed in India for ≥ 365 days in 4 previous PYs of the relevant PY, and
≥ 60 days in relevant PY

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e.g. for AY 2018 – 19 – A resident needs to stay in India:
Relevant Previous year: 2017 – 18 60 days +
Preceding 4 Previous years from relevant previous year:
2016 – 17
2015 – 16
2014 – 15 365 days
2013 – 14
Or
Relevant Previous year 2017 – 18  182 days

Q. Mr. A, aged 30 years, an Indian citizen leaves India on 15th October, 2017 for
the first time. Determine his residential status for the year 2018-19.
Ans. PY 2017 – 18
1st April 2017 to 15th October 2017 – 30 + 31 + 30 + 31 + 31 + 30 + 15 = 198 days.
(>182 days). Hence, he is a resident of India for tax purposes for the AY 2018 – 19
The person had continuously lived in India before leaving.
Section 6 (2)
A Hindu undivided family (HUF), firm or other association of persons is said to be
resident in India in any previous year in every case except where during that year
the control and management of its affairs is situated wholly outside India.
Hence, HUF/ Firm/ Association of persons said to be resident when the manager
(Karta) resides –
 Wholly in India, or
 Partly in India and partly outside India
Section 6 (3)
A company is said to be a resident in India in any previous year, if—
 it is an Indian company; or
 its place of effective management, in that year, is in India.
Explanation—For the purposes of this clause “place of effective management”
means a place where key management and commercial decisions that are
necessary for the conduct of business of an entity as a whole are, in substance
made.

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Section 6 (6)
A person is said to be “not ordinarily resident” in India in any previous year if such
person is—
(a) Individual – who has been a non-resident in India in 9 out of 10 previous
years preceding the relevant PY,
or who has been in India for 729 days or less during 7 previous years
preceding the relevant PY.
(b) Hindu undivided family (HUF) – whose manager (Karta) has been a non-
resident in India in 9 out of 10 previous years preceding the relevant PY,
or who has been in India for 729 days or less during 7 previous years
preceding the relevant PY.

Q. Mr. X, an American citizen comes to India for the first time during the Previous
year 2013 – 14. During the financial year 2013 – 14, 14 – 15, 15 – 16, 16 – 17 and
17 – 18, he was in India for 55 days, 60 days, 90 days, 150 days and 70 days
respectively. Determine his residential status for the assessment year 2018 – 19.
Ans.
# A resident of India is not necessarily a citizen of India
AY: 2018 – 19
PY: 2017 – 18
Year wise Periods in which he lived in India :
2013 – 14: 55 days
2014 – 15: 60 days
2015 – 16: 90 days 4 previous years to the relevant PY
2016 – 17: 150 days
2017 – 18: 70 days………… Relevant PY

Requirement for being a resident in India:

≥ 182 days in the relevant PY
Or
≥ 365 days in 4 previous PYs of the relevant PY, and
≥ 60 days in relevant PY

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1st condition
Here, relevant PY is 2017 – 18…………70 days < 182 days……….Condition not
fulfilled
2nd condition
55 + 60 + 90 + 150 = 355
Relevant PY – 70 …………..Condition not fulfilled
Hence Mr. X is not a resident.

Q. Mr. X, an American comes to India for 120 days every year. Find out his
residential status for the A. Y. 2018 – 19.
Ans. AY: 2018 – 19
Relevant PY: 2017 – 18
2nd condition is fulfilled because:
4 previous years to the relevant PY = 120 +120 +120 +120 = 480 days i.e. > 365
days and relevant PY – 120 days i.e. >60 days. Hence, Mr. X is a resident.

Scope of Total Income

The scope of total income of an assessee depends upon the following
considerations:
(i) The residential status of the assessee.
(ii) The place of accrual or receipt of income whether actual or deemed.
(iii) The point of time at which the income had accrued or who has received on
behalf of the assessee.

Income tax status – ROR/ RNOR/ NR

Whether one is an Indian or a foreigner, Income Tax laws of India stipulate that
one must pay tax on the income that is earned or received in India. But, more
importantly, one may be liable to pay tax even on the income that he earns
“outside” India.
 ROR: Resident and ordinarily resident in India
 RNOR: Resident but not ordinarily resident in India
 NR: Non-resident

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ROR – Resident and ordinarily resident in India
The total income consists of:
(i) Income received or deemed to be received in India during the previous year;
(ii) Income accrued or deemed to be accrued in India during the previous year;
(iii) Income which accrues outside India even if it is not received or brought
into India.
# Accrued income: Income which has been earned but not yet received. Income
must be recorded in the accounting period in which it is earned. Therefore,
accrued income must be recognized in the accounting period in which it arises
rather than in the subsequent period in which it will be received.

RNOR – Resident but not ordinarily resident in India

(i) Income received or deemed to be received in India during the previous year;
(ii) Income accrued or deemed to be accrued in India during the previous year
(iii) Income accruing or arising to him outside India is not to be included in his
total income.
NR – Non - Resident
(i) Income received or deemed to be received in India in the previous year.
(ii) Income accrued or deemed to be accrued in India in the previous year.

Indian Income
It is the income received or deemed to be received in India or income accrued or
deemed to be accrued in India or income accrued or deemed to be accrued
outside India but first receipt is in India.
Foreign Income
Income accrued or deemed to be accrued outside India and received outside India
or income accrued outside India from a business or profession controlled from
India.
Source of Income ROR RNOR NR
Indian Income Taxable Taxable Taxable
Foreign Income Taxable Taxable Not Taxable

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MODULE III: SALARY
Salaries – Section 15
The following income shall be chargeable to income-tax under the head
"Salaries"—
(a) Salary due from an employer
(b) Salary received from an employer
(c) Arrear of salary received, if not taxed earlier
Arrear means the due amount of the backdated period.
Deductions from salaries – Section 16
The income chargeable under the head "Salaries" shall be computed after making
the following deductions, namely—
(a) a deduction of 40,000 or the amount of the salary, whichever is less;
(w.e.f. 01.04.2019 i.e. applicable for FY: 2019 – 20)
(b) a deduction in the nature of Entertainment Allowance granted to a
Government Servant (both central and state) to the extent of–
 Actual amount received
 20% of salary Whichever is less
 Rs. 5000
(c) Professional Tax/ Employment Tax – Any sum paid by way of a tax on
employment within the meaning of Article 276 (2) of the Constitution.
Example:
 Basic salary – Rs. 40,000 p.m. i.e. Rs. 4,80,000 p.a.
 Entertainment Allowance – Rs. 500 p.m. i.e. Rs. 6,000 p.a.
 Professional Tax paid by the assessee – Rs. 2,500
 Calculate the salary if the assessee is a (i) a Govt. employee, (ii) a Non-Govt.
employee (for FY: 2018-19)
Gross salary: 4,80,000 + 6,000 = 4,86,000
Deduction u/s 16
 FY 2018 – 19 – Hence no deduction of Rs. 40,000.
 Entertainment allowance:
 Actual amount received: Rs. 6,000
 20% of salary = 4,86,000 X (20/100) = 4,86,000/5 = 96,000

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  Rs. 5000
 Least of the above three = 5,000
 Hence deduction allowed is 5,000
 Professional Tax paid – Rs. 2,500
Net Salary (For Govt. employee) = 4,86,000 – 5000 – 2500 = 4,86,000 – 7500 =
4,78,500
Net Salary (For Non- Govt. employee) = 4,86,000 – 2500 = 4,83,500 (Deduction of
Entertainment allowance is not allowed to Non-Govt. employees)
Salaries include – Section 17
Any monetary or non-monetary benefit provided by an employer to its employee
for service rendered in terms of employment is a salary.
“Salary" includes—
a) Basic salary
b) Wages
c) Annuity
d) Pension
e) Gratuity
f) Leave encashment
g) Commission
h) Bonus
i) Allowances
j) Perquisites
k) Profit in lieu of salary
l) Advance salary
m) Employer’s contribution to the recognized Provident Fund of the employee
and interest thereon
n) Employer’s contribution to the Pension account of the employee referred
to in Section 80CCD
Section 80 contains deductions from the total income - There are various
deductions a taxpayer can claim from his total income which would bring down
his taxable income and thereby reduce his tax outgo e.g. an employee’s
contribution + the employer’s contribution to Pension Fund (cap – 50000)

19
Calculation of total salary of XYZ (FY: 2017 – 18; AY: 2018 – 19) – Non-Govt.
Employee
Particulars Deduction Total (Rs.)
(Rs.)
Basic Salary (Rs. 20,000 X 12) 2,40,000
Dearness Allowance 2,40,000
Entertainment Allowance (Rs. 500 X 12) 6,000
Gross Salary 4,86,000
Less: Deduction u/s 16 (b) and (c)
Entertainment Allowance NA
Professional Tax 2,500 (2,500)
Net Salary 4,83,500

Allowance Perquisites
Monetary benefit provided by the Generally, Non-monetary benefit
employer to bear some specific provided by the employer, e.g.
expenditure, e.g.  Rent-free Accommodation
 House Rent Allowance  Transport Facility
 Transport Allowance  Medical Facility
 Medical Allowance  Servant Facility
 Servant Allowance

 Dearness Allowance (DA) is taxable in whole

 House Rent Allowance (HRA) is partly taxable and partly exempt.
 If one does not receive HRA from his employer and makes payments
towards rent for any furnished or unfurnished accommodation occupied by
him for his own residence, he can claim deduction under section 80GG
towards rent that he pays.

20
Tax exemption on HRA received
The deduction available is the least of the following amounts:
(a) Actual HRA received;
(b) 50% of salary (basic salary + DA) for those living in metro cities
40% for non-metros;
(c) Actual rent paid in excess of 10% of salary (basic salary + DA)
i.e. Actual rent paid – 10% of salary
Salary here is considered as basic plus dearness allowance (if it forms part of
retirement benefits) and commission received on the basis of sales turnover.
However, if no rent is paid by you, then whole HRA received is taxable.
Example:
Mr. A, employed in Delhi, has taken an accommodation on rent for which he pays
a monthly rent of Rs 15,000 during the Financial Year (FY) 2017-18 i.e. Assessment
Year (AY) 2018-19. He receives a Basic Salary of Rs 25,000 monthly along with DA
of Rs. 2000, which forms a part of the salary. He also receives a HRA of Rs
1,00,000 from his employer during the year. What will be the HRA component
that would be exempt from income tax during the FY: 2017-18.
(a) Actual HRA received = Rs. 1,00,000
(b) 50% of salary = [(25,000 + 2,000) X 12]/ 2 = 3,24,000/2 = 1,62,000
50% of salary because Delhi is a metro city;
Salary means basic salary + DA
(c) Rent paid in excess of 10% of salary i.e. Actual rent paid – 10% of salary
=1,80,000 – [10% of (27,000 X 12)]
= 1,80,000 – [10% of 3,24,000]
= 1,80,000 – 32,400
= 1,47,600
Tax exemption on HRA = Least of (a), (b) and (c)
=1,00,000
Thus, in this case, the whole amount of HRA received is exempt from tax.

21
Dearness Allowance (DA) for calculating Tax exemption on HRA
If DA is a part of the salary, it will be included in salary for calculation of HRA. If it
is not a part of salary, it would not be included in salary for calculation of tax
exemption on HRA.

Dearness Allowance (DA) – Whether a part of salary for all retirement benefits
Two situations are there:
 DA is a part of salary for calculating all retirement benefits;
 DA is not a part of salary for calculating all retirement benefits.
If no information about DA is given, it is presumed that it is not a part of salary for
calculating retirement benefits.

Q. Calculate the taxable amount of HRA

Name of the employee A B C D E

Place of Residence Chennai Noida Kolkata BBSR Mumbai
Basic Salary per month 30,000 40,000 50,000 60,000 70,000
HRA per month 6,000 8,000 10,000 11,000 12,000
House Rent paid per month 15,000 15,000 15,000 - 15,000

Particulars A B C
HRA received 72,000 96,000 1,20,000
(a)HRA received 72,000 96,000 1,20,000
(b)50% of salary 1,80,000 2,40,000 3,00,000
(c)Rent paid – 1,44,000 1,32,000 1,20,000
10% of salary
Least of (a), (b) (72,000) (96,000) (1,20,000)
& (c) shall be
exempt from IT
Taxable amount NIL NIL NIL
of HRA

22
 Name of the employee A B C D E
Place of Residence Chennai Noida Kolkata BBSR Mumbai
Basic Salary per month 30,000 40,000 50,000 60,000 70,000
HRA per month 6,000 8,000 10,000 11,000 12,000
House Rent paid per month 15,000 15,000 15,000 - 15,000

Particulars D E
HRA received 1,32,000 1,44,000
(a)HRA received 1,32,000 1,44,000
(b)50% of salary 3,60,000 4,20,000
(c)Rent paid – NA 96,000
10% of salary
Least of (a), (b) NA (no tax (96,000)
& (c) shall be exemption
exempt from IT on HRA if
no rent
paid)
Taxable amount 1,32,000 1,44,000 –
of HRA 96,000 =
48,000

Q.
Basic Salary: 50,000 p.m.
DA: 100% of Basic Salary
HRA: 10000 p.m.
Rent paid: 70000 p.m.
Commission: 2% of turnover; Total Turnover = 20 lakh
Entertainment Allowance: 500 p.m.
Professional Tax paid: 2500
Net Salary if the assessee is a Govt. employee?
Ans.
 Basic Salary = 50,000 p.m. = 6,00,000 p.a.
 D.A. = 50,000 p.m. = 6,00,000 p.a.

23
  Commission = 2% of 20,00,000 = 40,000
 Salary = basic Salary + DA + Commission = 12,40,000
 HRA
 HRA received = 10,000 p.m. = 1,20,000 p.a.
 40% of salary = 12,40,000 X (40/100) = 4,96,000
 Rent paid – 10% of salary = (12X7000) – 1,20,000 = NA
 Least of the above three = 1,20,000
 Deduction admissible = 1,20,000
 Entertainment allowance = 500 p.m. = 6000
 Actual amount received: Rs. 6,000
 20% of salary = 12,40,000 X (20/100) = 24,800
 Rs. 5000
 Least of the above three = 5,000
 Deduction allowed = 5,000
 Professional Tax paid = 2500
 Deduction allowed = 2,500
 Net Salary of the Govt. employee = 12,40,000 – 1,20,000 – 5000 – 2500
= 12,40,000 – 1,27,500
= 11,12,500

What are Perquisites? (Perks) – Section 17 (2) of IT Act

Perquisite includes –
1. The value of rent- free accommodation provided by the employer to the
employee;
2. The value of any concession in the matter of rent with respect to the
accommodation provided by the employer to the employee i.e. value of the
accommodation provided minus the amount charged by the employer.
3. Value of any benefit provided free of cost or at concessional rate in case of
a specified employee.
4. Any sum paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the employee.

24
5. Any sum payable to effect an insurance policy on the life of the employee
or to effect a contract for annuity,
 Premium for the life insurance is only considered perquisite if the
beneficiary is an employee.
 Amount of premium paid can be claimed as deduction u/s 80C
6. Value of equity share provided to the employee either free of cost or at
concessional rate.
7. Any amount of contribution to Superannuation Fund to the extent it
exceeds Rs. 1,00,000.
8. Value of any other fringe benefit provided to the employee except mobile/
telephone/ laptop/ desktop.

25
MODULE IV: INCOME FROM HOUSE PROPERTY

Income from House Property (Section 22 to 27)

 Section 22 of the Act is the charging section.

 Section 22: The Annual Value of Property consisting of any buildings or
lands appurtenant (attached) thereto of which the assessee is the owner,
other than such portions of such property as he may occupy for the
purposes of any business or profession carried on by him the profits of
which are chargeable to income-tax, shall be chargeable to income-tax
under the head “Income from house property”.
 In simple words, the annual value of the property of which the assessee is
the owner, consisting of:
(i) Building; or
(ii) Land appurtenant (i.e. attachment) to that building,
shall be chargeable under the head “Income from house property”.
However, the portion of the land or building being used by the assessee for
business or professional purposes, the profits from which are chargeable
under Income Tax, shall not come under the head “Income from House
property”. The rest of the property shall be chargeable under income from
house property.
What is Annual Value of the Property? – How to determine the Annual Value of
Property (Section 23)
Income from house property is taxable on the basis of annual value. Even if the
property is not let out during the year or let out only for a part of the year,
notional rent receivable is taxable as its annual value.
Annual value of the house property is based on the following factors:
 Actual rent received or receivable – This is the actual rent
received/receivable by the owner of the house property on letting out the
house property.
 Municipal value (MV) – This is the value as determined by the Municipal
authorities for levying Municipal taxes on house property. Municipal

26
 authorities normally charge house tax/Municipal taxes on the basis of
annual letting value of such house property.
 Fair rent (FR) – Fair rent is the rent which a similar property can fetch in the
same or similar locality, if it is let out for a year.
 Standard rent (SR) – The standard rent is fixed under the Rent Control Act.
If the standard rent has been fixed for any property under the Rent Control
Act, the owner cannot be expected to get a rent higher than the standard
rent fixed under the Rent Control Act.
 Expected rent (ER) – Expected rent is the higher value among MV and FR
subject to a maximum of SR.

As per section 23(1), the annual value of such house property shall be deemed to
be:
(a) the sum for which the property might reasonably be expected to let out
from year-to- year, i.e., the expected rent; or
(b) where the property or any part of the property is let out and the actual rent
received or receivable by the owner in respect thereof is in excess of the
sum referred to in clause (a), the amount so received or receivable, i.e., the
actual rent; or
(c) where the property or any part of the property is let out and was vacant
during the whole or any part of the previous year and owing to such
vacancy the actual rent received or receivable by the owner in respect
thereof is less than the sum referred to in clause (a), the amount so
received or receivable, i.e., the actual rent, if any:
Computation of Gross Annual Value (GAV) of House Property

If the actual rent is higher than the Expected Rent (ER), then the annual rent
which would be taken for tax purposes is calculated as follows:
 Find out the Expected Rent (ER).
 Find out the actual rent receivable.
 Whichever is higher of the two, shall be the taxable annual value.
Example:
(a) Municipal value (MV): Rs. 72,000 X 12 = Rs. 8,64,000

27
 (b) Fair Rent (FR): Rs. 90,000 X 12 = Rs. 10,80,000
(c) Standard Rent (SR): Rs. 80,000 X 12 = Rs. 9,60,000
(d) Higher value between MV and FR = Rs. 10,80,000
(e) Expected Rent (ER) = Higher value between MV and FR subject to a
maximum of SR i.e. Rs. 9,60,000
(f) Actual Rent: Rs. 12,00,000
(g) Gross Annual Value: Higher of (e) and (f) i.e. Rs. 12,00,000
Example:
 MV = 20,000/ month X 12 = 2,40,000
 FR = 15000/ month X 12 = 1,80,000
 SR = 18000/ month X 12 = 2,16,000
 ER = MV or FR, whichever is higher subject to a maximum of SR
 Out of MV and FR, higher value is 2,40,000, but ER should not exceed SR
which is 2,16000
 Expected Rent (ER) = 2,16,000
Example:
 MV = 3,00,000
 FR = 3,50,000
 SR = 4,00,000
 ER = MV or FR, whichever is higher subject to a maximum of SR
 Out of MV and FR, higher value is 3,50,000, but ER should be subject to a
maximum of SR which is 4,00,000
 Expected Rent (ER) = 3,50,000

Calculation of Gross Annual Value (GAV) of a property

 Step 1: Calculate the Expected Rent (ER) i.e. Higher value between MV and
FR subject to a maximum of SR.
 Step 2: Actual Rent Received/ Receivable
 Step 3: Amount found in Step 1 and Step 2, whichever is the higher value is
the Gross Annual Value (GAV) of the property.
Example:
 MV = 25,000/month

28
  FR = 30,000/ month
 SR = 28,000/ month
 Rent Received (RR) = 35,000/ month
 ER = Out of MV & FR, whichever is higher i.e. 30,000 p.m. subject to a
maximum of SR i.e. 28,000 p.m.
 ER = 28,000 p.m.
 Given RR = 35,000 p.m.
 GAV corresponds to the higher value between ER and RR
 GAV = 35,000 X 12 = 4,20,000
Example:
 MV = 25,000 p.m.
 FR = 30,000 p.m.
 SR = 28,000 p.m.
 RR = 30,000 p.m.
 ER = Out of MV and FR, the higher value i.e. 30,000 subject to a
maximum of SR i.e. 28,000 p.m.
 ER = 28,000 p.m.
 Given RR = 30,000 p.m.
 GAV = (Higher value of ER and RR) X 12 = 30,000 X 12 = 3,60,000

Example:
 MV = 40,000 p.m.
 FR = 30,000 p.m.
 SR = 35,000 p.m.
 RR = 25,000 p.m.
 ER = Higher value between MV and FR, subject to a maximum of SR
= 35,000 p.m.
 Given RR = 25,000 p.m.
 GAV = (Higher value between ER and RR) X 12 = 35,000 X 12 =
4,20,000

29
Unrealised rent – Rule 4 of the Income Tax Rules, 1962

Unrealized rent is that portion of rental income which the owner could not realize
from the tenant. Unrealized rent is allowed to be deducted from actual rent
received or receivable only if the following conditions are satisfied:
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him
to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the
assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings
for the recovery of the unpaid rent or satisfies the Assessing Officer that
legal proceedings would be useless.
Loss due to vacancy
Loss due to vacancy occurs when a house property becomes vacant for the whole
or part of the year.
Strict interpretation
 Deducting amount due to loss for vacancy from the actual receivable.
 Choosing what is less – the reasonable expected rent or actual receivable
rent after deduction.
 If prior to adjustment, the actual receivable is more than the reasonably
expected rent, then the deducted actual received rent will be the gross
annual value.
Purposive interpretation
 Rigid Process:
 Determining the higher one – Actual receivable rent and reasonably
expected rent.
 Deducting loss due to vacancy from the actual rent received.
 Whichever is higher, is the annual rent received.
 Simple Process:
 Determining the higher one – Actual receivable rent and reasonably
expected rent.
 Deducting loss due to vacancy from the higher one.

30
  The amount remained is the gross annual value.

Purposive interpretation is to be followed every time.

The whole process of determining Annual Value due to loss of income due to
unrealized rent is as follows:

(i) Finding out the reasonable receivable rent (RRR)/ ER:

 MV or FR, whichever is higher but not more than SR.
(ii) Determining Actual rent receivable (ARR):
 Deducting unrealized rent from rent receivable.
(iii) Deducting loss due to vacancy:
 Identifying the higher value in step (i) and (ii)
 Deducting the loss due to vacancy from the higher one.
(iv) The amount remained is the Gross Annual Value.
(v) Determining the tax paid to the Municipal Corporation
 If the municipal tax is paid by the tenant to protect the possession,
then it will not be deducted.
 If the tax is paid by the owner himself or by the tenant on behalf of
the owner, it will be deducted.
(vi) The deducted amount of municipal tax from the Gross annual value will
leave the Net Annual Value.
Net Annual Value = (Gross Annual Value – Municipal taxes)

Example: X, Y, Z, A and B separately own the following properties. (Rs. In

thousands)
Particulars X Y Z A B
MV (Municipal Value) 105 105 105 105 105
FR (Fair Rent) 107 107 107 107 107
SR (Standard Rent) NA 88 88 135 135
AR (Actual Rent) 103 112 86 114 97
Unrealised Rent 1 2 1 2 1
Period of the Previous year (in 12 12 12 12 12

31
months
Period during which the property Nil Nil Nil Nil Nil
remains vacant
ER (Expected Rent)/ RER 107 88 88 107 107
(Reasonable Expected Rent)
Actual Rent Received/ 102 110 85 112 96
Receivable (ARR) = (AR –
Unrealised Rent)
Gross Annual Value 107 110 88 112 107
(Higher of ER and ARR, less
unrealised rent)
Example:
 RER (Reasonable Expected Rent) = 2,50,000 (Also called Reasonable
Receivable Rent, RRR)
 ARR (Actual Rent Received/ Receivable) = 3,00,000 (25,000/ month)
 Loss due to vacancy (4 months) = 25,000 X 4 = 1,00,000
 GAV = (Higher value between RER & ARR) – (Loss due to vacancy)
= (3,00,000 – 1,00,000) = 2,00,000
Example:
 RER = 2,50,000
 ARR = 2,16,000 (18,000/ month)
 Loss due to vacancy (1 month) = 18,000
 GAV = (Higher value of RER and ARR) – (Loss due to vacancy)
= (2,50,000 – 18,000)
= 2,32,000
Example:
 RER = 2,50,000
 ARR = 3,00,000 (25,000/ month)
 Loss due to vacancy (4 months) = 1,00,000
 GAV = (Higher value of RER and ARR) – (Loss due to vacancy)
= (3,00,000 – 1,00,000)
= 2,00,000

32
Example (taking unrealised rent and loss due to vacancy): (Rs. In
thousands)
Particulars X Y Z A B
MV 60 60 60 112 112
FR 68 68 68 117 117
Higher value of MV & FR 68 68 68 117 117
SR 62 62 70 115 115
RER 62 62 68 115 115
ARR (Actual Rent Received) 67 67 73 121 110
UR (Unrealised Rent) 2 6 5 50 40
ARR – UR 65 61 68 71 70
GAV [Higher of (ARR – UR) & 65 62 68 115 115
RER]
LDV (Loss due to vacancy) 1 1 1 1 -
GAV 64 61 67 114 115
Municipal Taxes paid 1 1 1 1 1
NAV (Net Annual Value) 63 60 66 113 114

Deductions from Income from House Property (Section 24)

Income chargeable under the head "Income from house property" shall be
computed after making the following deductions, namely:

(a) a sum equal to thirty per cent of the annual value (Standard Deduction);
(b) where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital, the amount of any interest payable
on such capital.

Deductions u/s 24

Standard Deduction [Section 24 (a)]

Self-occupied property – Not applicable

Let-out/ deemed to be let out – 30% of Net Annual Value

33
 Interest on Loan [Section 24 (b)]

Self-occupied property – to a maximum of 2,00,000

Let-out/ deemed to be let-out – No ceiling

(Purchase/ construction/ repair/ renewal/ re-construction of

house property)

 In case of self-occupied property acquired through loan there are three

considerations for claiming deduction of Rs. 2,00,000 u/s 24
1) Loan is taken for construction or purchasing of new house property.
2) Loan should have been taken in or after 1999. Before 1999, the
ceiling was Rs. 30,000 only.
3) Construction of the house property must have been completed
within three years by the end of financial year in which the loan was
taken.
4) The tax benefit under section 24 is reduced from Rs 2 lakhs to Rs
30,000, if the property is not acquired or construction is not
completed within 3 years from the end of Financial Year in which the
loan was taken. However, the limit of 3 years has been increased to 5
years from Financial Year 2016-17 and onwards.
5) Though pre-construction interest is allowed to be claimed as tax
deducted in 5 equal yearly instalments, which can be claimed
beginning the year in which the construction of property is
completed, the total amount that can be claimed in a year is subject
to a threshold of Rs 2,00,000 in case of a self-occupied house
property.
 Deduction of interest in case of loan against a let-out property
 After getting the loan, during the time period of construction, no
deduction can be claimed as there is no house property.
 The interest paid until the completion of construction may be
claimed after the construction is complete in 5 succeeding financial
years.

34
  The rate of deduction per year will be 1/5th of the total interest paid
until completion of construction.
 As per 2006 notification issued by CBDT, interest of loan that is taken in
order to pay another loan taken to repay a house loan can be claimed as
deduction under section 24.

Deemed Ownership of the House Property (Section 27)

Section 27 of the Income Tax Act defines deemed ownership of the house
property for the purpose of levying tax.
Section 27 of the Income Tax Act describes situations in which an individual shall
be considered as deemed owner of the house property:
 Transfer to spouse without adequate consideration.
Exception – Transfer made in connection with an agreement to live apart.
That is, this kind of transfer made by the owner shall not make him the
deemed owner.
 Transfer to a minor child without adequate consideration.
Exception – Married minor daughter.
 The holder of an impartible estate shall be deemed to be the individual
owner of all the properties comprised in the estate. [Impartible estate
means an estate which cannot be partitioned]
 A member of a co-operative society, company or other association of
persons to whom a building or part thereof is allotted or leased under a
house building scheme of the society, company or association, as the case
may be, shall be deemed to be the owner of that building.
 A person who is allowed to take possession of any building in part
performance of a contract (under section 53A of the Transfer of Property
Act) shall be deemed to be the owner of that building.
 A person who acquires any rights with respect to any building by virtue of
enjoying the property for 12 years shall be deemed to be the owner of that
building.
Exception: Rights acquired by way of lease from month to month or for a
period not exceeding one year.

35
N.B. – If one owns two houses (residential), one would be considered (deemed to
be) as let-out property. The choice will be that of assessee as to which one he
would allow to be taken as let-out property for tax purposes.
If one house is occupied by family members, then it would be considered as
residential.

PROBLEMS

Problem on Deductions from Income from House Property (Section 24)

Income chargeable under the head "Income from house property" shall be
computed after making the following deductions, namely:

(c) a sum equal to thirty per cent of the annual value;

(d) where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital, the amount of any interest payable
on such capital.

Deductions u/s 24

Standard Deduction [Section 24 (a)]

Self-occupied property – Not applicable/ not allowed

Let-out/ deemed to be let out – 30% of Net Annual Value

Interest on Loan [Section 24 (b)]

Self-occupied property – to a maximum of 2,00,000

Let-out/ deemed to be let-out – No ceiling

(Purchase/ construction/ repair/ renewal/ re-construction of

house property)

 In case of self-occupied property acquired through loan there are three

considerations for claiming deduction of Rs. 2,00,000 u/s 24

36
 1) Loan is taken for construction or purchasing of new house property.
2) Loan should have been taken in or after 1999. Before 1999, the
ceiling was Rs. 30,000 only.
3) Construction of the house property must have been completed
within three years by the end of financial year in which the loan was
taken.

4) The tax benefit under section 24 is reduced from Rs 2 lakhs to Rs

30,000, if the property is not acquired or construction is not
completed within 3 years from the end of Financial Year in which the
loan was taken. However, the limit of 3 years has been increased to 5
years from Financial Year 2016-17 and onwards.
5) Though pre-construction interest is allowed to be claimed as tax
deducted in 5 equal yearly instalments, which can be claimed
beginning the year in which the construction of property is
completed, the total amount that can be claimed in a year is subject
to a threshold of Rs 2,00,000 in case of a self-occupied house
property.
 Deduction of interest in case of loan against a let-out property
 After getting the loan, during the time period of construction, no
deduction can be claimed as there is no house property.
 The interest paid until the completion of construction may be
claimed after the construction is complete in 5 succeeding financial
years.
 The rate of deduction per year will be 1/5th (i.e.20%) of the total
interest paid until completion of construction.

Calculate the deduction u/s 24 in the following two situations

Given: Calculation for the FY (or PY) 2017-18 – Self occupied Property
H1 (Home Loan 1) H2 (Home Loan 2)
Interest paid on Loan 1,60,000 2,20,000
during PY (Previous Year)
Date of Loan taken 01.12.2004 01.03.2005

37
Date of Completion of 28.02.2006 31.03.2009
construction
Interest paid on loan 3,00,000 4,50,000
during pre-construction
period.

Find out the deduction available u/s 24 (b) in the two cases.

H1 H2 Remarks
Date of loan taken 01.12.2004 01.03.2005
Financial year in which 2004-05 2004-05 Financial Year is 1st April
the loan was taken to 31st March – FY 2004-
05 stands for 01.04.2004
to 31.03.2005
Date of completion of 28.02.2006 31.03.2009
construction
Financial year in which 2005-06 2008-09
construction was
complete
Gap between the year 1 year 4 years 2005-06/ 2006-07/ 2007-
of loan taking and the 08/ 2008-09
year of completion of
construction
Interest paid during PY 1,60,000 2,20,000
(Previous Year)
Interest paid on loan 3,00,000 4,50,000
during pre-
construction period.
20% of interest paid NA NA pre-construction interest
during pre- is allowed to be claimed
construction period as tax deducted in 5

38
 equal yearly instalments,
which can be claimed
beginning the year in
which the construction
of property is completed
Deduction allowed 1,60,000 30,000 H1- interest paid subject
from taxable income to maximum deduction
u/s 24 (b) allowed i.e. 2,00,000
H2 – Since the house
could not be constructed
within 3 years from loan
taking year, the max.
deductible amount is
30,000 only.

Problems on Income from House Property

The whole process of determining Annual Value due to loss of income due to
unrealized rent is as follows:

(1) Finding out the Reasonable Receivable Rent (RRR):

 MV or FR, whichever is higher but not more than SR.
(2) Determining Actual Rent Receivable (ARR):
 Deducting unrealized rent from rent received.
(3) Deducting loss due to vacancy:
 Identifying the higher value in step (1) and (2)
 Deducting the loss due to vacancy from the higher one.
(4) The amount remained is the Gross Annual Value.
(5) Determining the tax paid to the Municipal Corporation
 If the municipal tax is paid by the tenant to protect the possession,
then it will not be deducted.
 If the tax is paid by the owner himself or by the tenant on behalf of
the owner, it will be deducted.

39
 (6) The deducted amount of municipal tax from the Gross annual value will
leave the Net Annual Value.
(7) Net Annual Value = (Gross Annual Value – Municipal taxes)

Given:
------------------------------------------------------------------------------------------------------------
Municipal Value (MV) = 15,00,000 Municipal Rent paid = 1,50,000
Fair Rent (FR) = 14,00,000 Insurance Premium paid = 15,000
Standard Rent (SR) = 16,00,000 Repair expenses = 2,00,000
Actual Rent Received = 18,00,000 Unrealised Rent =4,50,000

Interest paid on loan during pre-construction period = 4,50,000

Interest paid on loan in Previous Year (PY) = 1,50,000
Completion of construction of house property: 31.12.2015
Determine the income from house property
-------------------------------------------------------------------------------------------------------------
Solution:
MV = 15,00,000
FR = 14,00,000
SR = 16,00,000
Reasonably Receivable Rent (RRR) = MV or FR whichever is higher but not more
than SR
(1) RRR = 15,00,000
(2) Actual Receivable Rent (ARR) = Rent Received – Unrealized Rent
= 18,00,000 – 4,50,000
= 13,50,000
(3) Deducting the loss due to vacancy
Gross Annual Value (GAV) = Higher value of (1) & (2) – Loss due to vacancy
= 15,00,000 – NA
= 15,00,000
Net Annual Value (NAV) = Gross Annual Value – Municipal Rent paid

40
 = 15,00,000 – 1,50,000
= 13,50,000
Deductions u/s 24
(a) Standard Deduction @ 30% of NAV = 30% of 13,50,000 = 4,05,000
(b) Interest on loan taken = 2,40,000
(c) Total deductible amount = 6,45,000
(d) Income from house property = 13,50,000 – 6,45,000 = 7,05,000
-------------------------------------------------------------------------------------------------------------
If Interest paid in the PY = 1,50,000
20% of interest paid during pre-construction period (4,50,000) = 90,000
In this case, deduction under section 24 would be = 1,50,000 + 90,000 = 2,40,000

41
MODULE V: PROFIT AND GAIN FROM BUSINESS AND PROFESSION
Profits and Gains of Business or Profession (Section 28)
The following income shall be chargeable to income-tax under the head “Profits
and gains of business or profession”—
(1) Income arising to any person by way of profits and gains from any business,
profession or vocation carried on by him at any time during the previous
year;
(2) any compensation or other payment due to or received by any person on
account of —
(a) termination/ modification in terms of contract relating to a company.
(b) termination/ modification in terms of contract relating to Indian firm or
Indian agency.
(c) vesting of any management of any property business in favour of
government or any corporation owned or controlled by government.
(d) Income derived by any trade, profession and similar association from
specific services rendered by them to their members.
(e) Any interest, salary, bonus, commission or remuneration by whatever
name called due to or received by partner of a firm will be deemed to be
income from business.
(f) Any sum received under a given insurance policy.
(g) The value of any benefit or perquisite whether convertible into money
or not, arising from a business on exercising of any profession.
(h) In case of an exporter –
i. Profit on sale of import license.
ii. Cash assistance
iii. Duty drawbacks
iv. Any profit on the transfer of the duty entitlement passbook.

42
MODULE VI: CAPITAL GAIN

Charging Section of Capital Gain is Section 45 of the Income Tax Act, 1961.
Section 45: Capital gains: Any profits or gains arising from the transfer of a capital
asset effected in the previous year shall be chargeable to income-tax under the
head "Capital gains", and shall be deemed to be the income of the previous year
in which the transfer took place.
According to Section 2 (14) of the Act “Capital Asset” means
(a) property of any kind held by an assessee, whether or not connected with
his business or profession,
(b) any securities held by a Foreign Institutional Investor which has invested in
such securities in accordance with the regulations made under the
Securities and Exchange Board of India Act, 199;
but does not include:
(i) any stock-in-trade other than the securities referred to in sub-clause
(b), consumable stores or raw materials held for the purposes of his
business or profession;
(ii) personal effects, that is to say, movable property (including wearing
apparel and furniture) held for personal use by the assessee or any
member of his family dependent on him, but excludes jewellery,
archaeological collections, drawings, paintings, sculptures; or any
work of art;
(iii) agricultural land in India;
(iv) Gold Bond;
(v) Special Bearer Bond
(vi) Gold Deposit Bond

What are Personal Effects that are not included in capital asset

Movable property held for personal use by the assessee or his dependents/
members of family are defined as Personal Effects. However, the Personal Effects
do no include:
 Jewellery
 Archaeological collections
 Drawings

43
  Paintings
 Sculptures
 Any work of art.

Transfer in relation to Capital Asset [Section 2 (47)]

“Transfer”, in relation to a capital asset, includes,—
1) the sale, exchange or relinquishment of the capital asset; or
2) the extinguishment of any rights therein; or
3) the compulsory acquisition of capital asset under any law; or
4) Conversion of personal effect into stock-in-trade;
5) Acquisition of possession of immovable property under Section 53 A of
Transfer of Property Act;
6) Co-operative Society, Company, acquisition of property under any housing
scheme;
7) Maturity on redemption of Zero-Coupon Bond

What is a Capital Gain?

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.

Types of Capital Assets?

1. Short-Term capital asset
2. Long-Term Capital Asset
1. Short-Term Capital Asset: An asset which is held for not more than 36 months
or less is a short-term capital asset.
2. Long-term capital asset: An asset that is held for more than 36 months is a
long-term capital asset.

44
Movable property such as jewellery, debt-oriented mutual funds etc. 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. The assets are:
(a) Equity or preference shares in a company listed on a recognized stock
exchange in India
(b) Securities (like debentures, bonds, govt securities etc.) listed on a
recognized stock exchange in India
(c) Units of UTI, whether quoted or not
(d) Units of equity oriented mutual fund, whether quoted or not
(e) 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.

Capital Gain

Short Term Capital Gain Long Term Capital Gain

[Section 2 (42B)] [Section 2 (29B)]
STCG LTCG
Capital Gain arising from the transfer Capital Gain arising from the
transfer
of Short-term Capital Asset of Long-term Capital Asset

When the capital asset is held by an assessee for a period not more than 36
months immediately preceding the date of transfer.
Long-term Capital gain is that which is not a Short-term Capital gain.
Example:
Date of acquisition – 31.12.2010
Date of transfer – 31.12.2013
Property held for a period of 36 months and 1 day – LTCG would be applicable

45
Computation of Capital Gain
 Full value of consideration: XXXXXX
 Less: (-) Cost of Acquisition: XXXXXX
 (-) Cost of improvement: XXXXXX
 (-) Transfer expenses: XXXXXX
 LTCG/ STCG = XXXXXX

Tax on Short-Term and Long-Term Capital Gains

 Tax on long-term capital gain: Long-term capital gain is taxable at 20% +

surcharge and education cess.

 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% +surcharge and education cess.

Computation of Capital Gains Tax

Terms to be understood:

Full value consideration: The consideration received or to be received by the seller

in exchange for his assets, which he has transferred. 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 incurred to make improvements to the capital

asset by the seller. Note that improvements made before April 1, 1981, is never
taken into consideration.

How to Calculate Short-Term Capital Gains?

46
  Start with the full value of consideration
 Deduct the following:
 Expenditure incurred wholly and exclusively in connection with such
transfer
 Cost of acquisition

 Cost of improvement

 This amount is a short-term capital gain

Short term capital gain = [Full value consideration – expenses incurred

exclusively for such transfer – cost of acquisition – cost of improvement]

How to Calculate Long-Term Capital Gains?

 Start with the full value of consideration
 Deduct the following:
 Expenditure incurred wholly and exclusively in connection with such
transfer
 Indexed cost of acquisition
 Indexed cost of improvement
 From this resulting number, deduct exemptions provided under sections
54, 54EC, 54F, and 54B
 This amount is a long-term capital gain

Long-term capital gain = [Full value consideration – Expenses incurred

exclusively for such transfer – Indexed cost of acquisition – Indexed cost of
improvement – expenses that can be deducted from full value for consideration]
Indexed Cost of Acquisition/Improvement
Cost of acquisition and improvement is indexed by applying CII (Cost Inflation
Index). It is done to adjust for inflation over the years. This increases one’s cost
base and lowers the capital gains.
Indexed Cost of Acquisition:
CII (Year of Sale)
= Actual purchase price X
CII (Year of Purchase)
47
Indexed Cost of Improvement:
CII (Year of Sale)
= Actual Cost of Improvement X
CII (Year of improvement)

If the property is purchased before 2001, then one needs to get Fair market value
of the property in 2001 and use that for indexed cost
Capital Gains = Sales Consideration – Indexed Cost of Acquisition

Indexed Cost of Acquisition = Fair Market Value in 2001 X (CII, Year of Sale/ CII,
Year of purchase)
Example 1:
 Purchase of a house on 01.07.2014 = Rs. 20 lakh
 Sold house on 01.05.2018 = Rs. 75 lakh

- Indexed Cost of acquisition = Actual purchase price X (CII, Sale year/ CII,
purchase year) = 20 X (280/ 113) = Rs. 49.55 lakh

- Sale amount = Rs. 75 lakh

- Capital Gain = Sale Price– Indexed Cost of Acquisition = 75 – 49.55 = 25.44

lakh
Example 2:

 Purchased house on 01.07.1999 = Rs. 25 lakh

 Sold house on 01.05.2018 = Rs. 75 lakh
As the house is purchased before the new base year (2001), the fair value of the
house as on 1st April needs to be calculated.
Indexed cost = Fair value (in 2001) X [CII (sale year)/ CII (in 2001) i.e. 100]
Problem – Land and Building
 Date of acquisition: 01. O4. 2016
 Date of Transfer: 01. 12. 2017

48
  Cost of acquisition: Rs. 50,00,000
 Cost of Transfer: Rs. 70,00,000
i.e. the price at which the property was transferred
 Date of improvement: 01. 12. 2016
 Cost of improvement: Rs. 10,00,000
 Transfer expenditure: 1,00,000
Find Capital Gain
For Short – term Capital Gain

Short term capital gain = [Full value of consideration – expenses incurred

exclusively for such transfer – cost of acquisition – cost of improvement]
 Full value of consideration: Rs. 70,00,000
 Less:
 Cost of acquisition: (-) (50,00,000)
 Cost of improvement: (-) (10,00,000) (+) = 61,00,000
 Transfer expenditure: (-) (1,00,000)
 Short -term Capital Gain
= 70,00,000 – 61,00,000 = 9,00,000
For Long – term Capital Gain
Date of acquisition: 01. 04. 2010 (FY: 2010 – 11)
Date of Transfer: 01.12.2017 (FY: 2017 – 18)
Date of Improvement: 01.12.2016 (FY: 2016 – 17)

Long-term capital gain = [Full value consideration – Expenses incurred

exclusively for such transfer – Indexed cost of acquisition – Indexed cost of
improvement – expenses that can be deducted from full value for consideration]
 Full value of consideration received: 70,00,000
 Less:
 Indexed Cost of acquisition
 Indexed cost of improvement
 Transfer expenditure

Indexed cost of acquisition

49
 CII (Year of Sale)
= Actual purchase price X
CII (Year of Purchase)
=50,00,000 X [CII (2017-18) / CII (2010-11)] = 50,00,000 X (272/167)
= 81,43,712.57
= 81,43,713 (Rounded off)
Indexed Cost of Improvement

CII (Year of Sale)

= Actual Cost of Improvement X
CII (Year of improvement)
= 10,00,000 X [CII (2017-18) / CII (2015-16)] = 10,00,000 X (272/ 264)
= 10,30,303.03
= 10,30,303 (Rounded off)
Transfer Expenditure
= 1,00,000
 Full value of consideration: 70,00,000
 Less:
 Indexed Cost of acquisition: (-) (81,43,713)
 Indexed Cost of improvement: (-) (10,30,303) (+) = 92,74,016
 Transfer Expenditure: (-) (1,00,000)

 Long-term Capital Gain

= 70,00,000 – 92,74,016
= (-) 22,74,016
 This means, there is long term capital loss.
Calculation of Capital Gain when stamp duty is given which is nothing but
expenses on transfer of property i.e. land and building
Given:
 Date of acquisition: 01.04.1990 (prior to the base year i.e. 2001-02)
 Date of Transfer: 01.12.2017 (FY: 2017-18)

50
  Cost of acquisition: 10,00,000
 Fair Market Value of property on 01.04.2001 (2001-02): 25,00,000
 Cost of transfer: 70,00,000
i.e. price of sale
 Stamp duty: 10,00,000
 Cost of Improvement: 1,00,000 on 01.04.1995 (prior to the base year 2001-02)
4,00,000 on 01.04.2010 (2010-11)
5,00,000 on 01.04.2016 (2016-17)
Here, Purchase Price i.e. Cost of acquisition would be Fair Market Value as on
01.04.2001 (in the base year 2001-02)
From FY 2017-18, the base year of 2001-02 will be considered instead of any year
prior to 2001-02
Indexed cost of acquisition = (Purchase Price/ FMV2001-02) X {CII (2017-18)/ CII (2001-02)}
= 25,00,000 X {272/ 100}
= 68,00,000
Indexed Cost of Improvement (01.04.1995) i.e. prior to 2001-02 – Not considered
Indexed Cost of Improvement on 01.04.2010 (2010-11)
= (Cost of Improvement) X {CII (2017-18)/ CII (2010-11)}
= 4,00,000 X {272/ 167}
= 6,51,497
Indexed Cost of Improvement on 01.04.2016 (2016-17)
= (Cost of Improvement) X {CII (2017-18)/ CII (2016-17)}
= 5,00,000 X {272/ 264}
= 5,15,152

 Full Value of Consideration received: 70,00,000

 Less:
 Indexed cost of acquisition: (68,00,000)
 Indexed cost of improvement = 6,51,497 + 5,15,152 = (11,66,649)
 Transfer Expenditure (Stamp duty) = 10,00,000
 LTCG = 70,00,000 – { 68,00,000 + 11,66,649 + 10,00,000}

51
 = (-) 19,66,649
There is long term capital loss.
Problem:
Mr. A purchased land and building on 01.01.1991 for Rs. 10,00,000. He sold the
said land and building to Mr. B on 31.12.2017 for 1,00,00,000. Calculate the
capital gain in the hand of A for AY 2018-19 using the following data:
 Stamp duty value of the land and building = 1,10,00,000
 Fair market value (as on 01.04.2001) = 20,00,000
 Improvement done:
 On 01.01.1995 – 2,00,000
 On 01.01.2010 – 5,00,000
 On 31.12.2015 – 6,00,000
Soln.
 Full value of consideration received – 1,00,00,000 (on 31.12.2017 i.e. FY
2017-18) – Corresponding AY is 2018-19
 Stamp duty value – 1,10,00,000 – This will be taken as the full value of
consideration for computing Capital Gain
 Cost of acquisition – 10,00,000 (on 01.01.1991)
 Indexed Cost of acquisition
= (Cost of acquisition/ FMV on 01.04.2001) X {CII (2017-18)/ CII (2001-02)}
= 20,00,000 X {272/100}
= 54,40,000
 Less Indexed Cost of Improvement made on 01.01.1995 – No indexation on
improvement done before 2001 -02, hence not considered
 Less Indexed Cost of Improvement on 01.01.2010 (FY: 2009 – 10)
= (Cost of Improvement) X {CII (2017-18)/ CII (2009-10)}
= 5,00,000 X {272/ 148}
= 9,18,919
 Less Indexed Cost of Improvement made on 31.12.2015 (FY: 2015 -16)
= (Cost of Improvement) X {CII (2017-18)/ CII (2015-16)}
= (6,00,000) X {272/ 254}
= 6,42,520

52
  Transfer Expenditure – NIL
LTCG = [Full value of consideration received/ receivable] – Indexed Cost of
acquisition – Indexed cost of improvement (total) – Transfer expenditure.
= 1,10,00,000 – 54,40,000 – 9,18,919 – 6,42,520 – 0
= 39,98,561
Problem
Mr. A purchased a capital asset on 01.01.2015 for Rs. 1,00,000. He sold the same
capital asset to Mr. B on 31.12.2017.
Fair Market value of the asset as on the date of transfer is Rs. 1,50,000. Calculate
the capital gain in the hand of A for AY 2018-19 if the transfer expenditure of the
asset was Rs. 10,000
Soln.
 Full value consideration received/ receivable – 1,50,000 (on 31.12.2017)
 Cost of acquisition – 1,00,000 (on 01.01.2015)
 Transfer expenditure – 10,000
 Period of holding – 35 months & 30 days i.e. less than 36 months
 Short-term Capital Gain = 1,50,000 – 1,00,000 – 10,000
= 40,000

53
Why is the base year of Cost Inflation Index changed to 2001 from 1981?
Initially, 1981-82 was considered as the base year. But, taxpayers were facing
hardships in getting the properties valued which were purchased before 1st April
1981. Tax authorities were also finding it difficult to rely on the valuation reports.

Hence, the government decided to shift the base year to 2001 so that valuations
can be done quickly and accurately.

So, for a capital asset purchased before 1st April 2001, taxpayers can take higher
of actual cost or FV as on 1st April 2001 as the purchase price and avail benefit of
indexation.
Exemption from Capital Gains
There are certain exemptions available under section 54 of the Income Tax Act
which helps the assessee reduce his capital gains subject to tax.

54
For example: Buying a new residential house could exempt your capital gains
earned from sale of the old house. Also, investment in certain bonds notified by
the government (NHAI bonds) could reduce your capital gains up to Rs 50 lakh.

55
MODULE VII: INCOME FROM OTHER SOURCES
For the purposes of charge of income-tax and computation of total income, all
incomes are classified under the following heads of income:—
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
Income chargeable to tax, not falling under any of the abovesaid four heads, is
known as the income from other sources.
Charging Section of Income from other sources (Section 56)
The following shall be chargeable to income-tax under the head “Income from
other sources”:
(1) Interest on Bank deposit.
(2) Interest on investment.
(3) Dividend.
(4) Winning in lottery, gambling, horse racing etc.
(5) Income from owning and maintenance of race horses.
(6) Interest on compensation or enhanced compensation received during the
previous years.
(7) Gift.
(8) Salary of MP/ MLA/ Director etc.
(9) Income from sub-letting of house property.
(10) Family pension.
(11) Income from paper setting, evaluation, invigilation etc.
Gift

Cash Movable Property Immovable

Property
(Movable Capital Asset) Immovable Capital Asset)

56
Cash
If the aggregate amount of cash received as gift does not exceed Rs. 50,000, the
whole amount is exempted from Income Tax. If the aggregate amount of cash
received as gift exceeds Rs. 50,000, then the whole amount is taxable.
Movable Property

Without consideration Inappropriate consideration

If the aggregate fair market value of If the aggregate difference of fair
the movable property received as gift market value of property and
does not exceed Rs. 50,000, the whole consideration received does not
amount is exempt. exceed Rs, 50,000, the whole amount
is exempt. (concession)
If the aggregate fair market value of If the aggregate difference of fair
the movable property received as gift market value of property and
exceeds Rs. 50,000, the whole amount consideration received exceeds Rs.
is taxable. 50,000, the whole amount is taxable.

Immovable Property

Without consideration Inappropriate consideration

If the Stamp duty value of the
immovable property received as gift
does not exceed Rs. 50,000, the whole
amount is exempt.
If the Stamp duty value of the
immovable property received as gift
exceeds Rs. 50,000, the whole amount
is taxable.
If the difference of Stamp duty value
of property and consideration received
as gift does not exceed Rs, 50,000, the
whole amount is exempt.
If the aggregate difference of Stamp
duty value of property and
consideration received exceeds Rs.
50,000, the whole amount is taxable.

57
Gift received from the following does not come under the head “Income from
other sources” –
 Any relative;
 On the occasion of marriage;
 Under a will or by way of inheritance;
 In contemplation of death of the owner;
 From local authority;
 From any fund or foundation or university or hospital or trust or institution;
 From any charitable trust registered u/s 12 AA.
“Relative” means –
(a) spouse of the individual;
(b) brother or sister of the individual;
(c) brother or sister of the spouse of the individual;
(d) brother or sister of either of the parents of the individual;
(e) any lineal ascendant or descendant of the individual;
(f) any lineal ascendant or descendant of the spouse of the individual;
(g) spouse of the person referred to in items (b) to (f).
Deductions allowed (Section 57)
The income chargeable under the head “Income from other sources” shall be
computed after making the following deductions, namely:—
 Interest on dividend – Commission, remuneration, brokerage charges etc.
 Family Pension – deduction of 1/3rd of the pension or Rs. 15,000, whichever
is less.
Amounts not deductible (Section 58)
Deductions which are not allowed from income from other sources are:
 Any personal expenditure;
 Interest on salary payable outside India, if no tax is paid or deducted;
 Any expenditure incurred for winning lottery, card games, horse races etc.;

58
Problem:
Mr. A gets the following gifts during Previous Year (PY) 2017-18 i.e. FY 2017-18
Date Particulars Amount
01.07.17 Gift from R, a friend, by cheque 50,000
01.09.17 Cash gift from M, brother 1,00,000
01.10.17 Cash gift from B, nephew 1,00,000
01.12.17 Gift of diamond ring by a friend C, on his birthday 75,000
15.12.17 Cash gift of 31,000 each from four friends on the 1,24,000
occasion of his marriage
21.12.17 Cash gift made by wife’s sister on house opening 51,000
ceremony
15.01.18 Cash gift from a close friend of father-in-law 1,51,000
31.01.18 Cash gift made by great grand father 1,51,000
01.02.18 Cash gift received under the will of a friend 1,65,000
15.02.18 Cash gift made by a business friend on his 51,000
birthday
31.03.18 Cash gift made by 3 friends, 25,000 each 75,000

Besides, the above gift, Mr. A purchased a land and building for Rs. 20,00,000 and
Rs. 25,00,000 respectively. The Stamp Duty Value of the said property was Rs.
20,40,000 and 26,00,000 respectively. Calculate income from other sources.
Ans.
Calculation of Income from other sources for PY 2017-18; AY 2018-19
Particulars Cash (Rs.) Movable Immovable
Property (Rs.) Property (Rs.
Gift from R, a friend, by cheque 50,000 - -
Cash gift from M, brother - - -
Cash gift from B, nephew 1,00,000 - -
Gift of diamond ring by a friend C, - 75,000 -
on his birthday
Cash gift of 31,000 each from four - - -

59
friends on the occasion of his
marriage
Cash gift made by wife’s sister on - - -
house opening ceremony
Cash gift from a close friend of 1,51,000 - -
father-in-law
Cash gift made by great grand - - -
father
Cash gift received under the will of - - -
a friend
Cash gift made by a business friend 51,000
on his birthday
Cash gift made by 3 friends, 25,000 75,000
each
Purchase of Land - - -
Consideration amount – 20,00,000
Stamp duty value – 20,40,000***
Purchase of Building - - 1,00,000
Consideration amount – 25,00,000
Stamp Duty Value – 26,00,000***
Total 4,27,000 75,000 1,00,000

Total Income from other sources = 4,27,000 + 75,000 + 1,00,000 = 6,02,000

***
If consideration amount (i.e. purchase price) is equal to or more than the
Stamp Duty Value, it is not considered as Gift.
 Purchase Price = or > Stamp Duty Value – Not a Gift
 Purchase Price < Stamp Duty Value – Difference amount is taken as Gift

60
Problem
Mr. A gets the following gifts during the PY 2017-18
Date Particulars Amount
01.07.17 Cash Gift from great grand father 1,00,000
01.09.17 Gift received from a friend who is seriously ill 51,000
15.01.18 Gift received on the occasion of his marriage 51,000
01.02.18 Cash gift from brother 11,000
Besides this Mr. A won Rs. 1,00,000 from lottery. He claims that the amount of Rs.
10,000 is exempt from tax as the cost of lottery ticket. He purchased a house
property at a consideration of Rs. 25,00,000 (Stamp duty value: 20,00,000). He
also purchased a diamond ring for Rs. 1,00,000 (Fair Market Value: 1,50,000). He
transfers his house property on rent and charged Rs. 10,000/ month for
accommodation and Rs. 5000/ month for furniture. He incurred Rs. 10,000 for the
repair of the rented furniture. Calculate his income from other sources for AY
2018-19.
Ans.
Calculation of Income from other sources of A
Particulars Money/ Movable Immovable Amount
Cash Property Property
(Rs.) (Rs.) (Rs.)
Cash Gift from great grand father - - - -
Gift received from a friend who is - - - -
seriously ill (in contemplation of
death)
Gift received on the occasion of - - - -
his marriage
Cash gift from brother - - - -
Income from lottery - - - 1,00,000
Purchase of House Property - - - -
Consideration value: 25,00,000
Stamp Duty Value: 20,00,000

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Purchase of Diamond Ring - - - -
Consideration Value: 1,00,000 (as diff
Fair Market Value: 1,50,000 does not
exceed
50,000)
Income from renting Furniture - - - 50,000
Less cost of repair
(5000 X 12) – 10,000 = 50,000

Total Income from other sources = 1,50,000

It is to be noted that:
 Rental income received from renting out the house for accommodation
would be treated as income from house property.
 Purchase of diamond ring – Even though the fair market value of the ring is
more than the cost paid, it would not come in the category of income from
other sources.

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MODULE VIII: GOODS AND SERVICES TAX (GST)
 Goods and Services Tax (GST) is an indirect tax (or consumption tax) levied
in India on the supply of goods and services. GST is levied at every step in
the production process, but is meant to be refunded to all parties in the
various stages of production other than the final consumer.
 Goods and services are divided into five tax slabs for collection of tax - 0%,
3%, 5%, 12%,18% and 28%. However, Petroleum products, alcoholic drinks,
electricity, are not taxed under GST and instead are taxed separately by the
individual state governments, as per the previous tax regime.
 The tax came into effect from July 1, 2017 through the implementation of
101st Amendment of the Constitution of India by the Indian government.
The tax replaced existing multiple cascading taxes levied by the central and
state governments.
 The tax rates, rules and regulations are governed by the GST Council which
consists of the finance ministers of centre and all the states. GST is meant
to replace a slew of indirect taxes with a unified tax and is therefore
expected to reshape the country's economy.
 The Goods and Services Tax is based on two Parliamentary Acts – the IGST
(Integrated Goods and Services Tax) Act and the CGST (Central Goods and
Services Tax) Act which were passed in April 2017.
Definitions
 Goods – defined in Article 366 (12) of the Constitution – “goods” includes
all materials, commodities, and articles.
 Service – defined in Article 366 (26 A) vide 101st Amendment of the
Constitution – “Services” means anything other than goods.
 State – defined in Article 366 (26 B) vide 101st Amendment of the
Constitution – “State” with reference to articles 246A, 268, 269, 269A and
article 279A includes a Union territory with Legislature.
Tax Laws before GST
 In the earlier indirect tax regime, there were many indirect taxes levied by
both state and centre. States mainly collected taxes in the form of Value
Added Tax (VAT). Every state had a different set of rules and regulations.

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 Interstate sale of goods was taxed by the Centre. CST (Central State Tax)
was applicable in case of interstate sale of goods. Other than above there
were many indirect taxes like entertainment tax, octroi and local tax that
was levied by state and centre.
 This led to a lot of overlapping of taxes levied by both state and centre.
 For example, when goods were manufactured and sold Excise Duty was
charged by the centre. Over and above Excise Duty, VAT was also charged
by the State. This led to a tax on tax also known as cascading effect of
taxes.
 The following is the list of indirect taxes in the pre-GST regime:
Central Taxes State Taxes
Central Excise duty State VAT/ Sales Tax
Additional duties of excise Central Sales Tax
Excise duty levied under Medicinal Purchase Tax
& Toilet Preparation Act
Additional duties of customs (CVD & Entertainment Tax (other than
SAD) those levied by local bodies)
Service Tax Luxury Tax
Surcharges & Cesses Entry Tax (All forms)
Taxes on lottery, betting &
gambling
Surcharges & Cesses
+ 13 Cesses
+
GST
 Goods on which GST is not applicable (Non-GST goods) are:
 Petroleum crude;
 High-speed diesel;
 Motor spirit (commonly known as petrol);
 Natural gas;
 Aviation turbine fuel; and
 Alcoholic liquor for human consumption.

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Types of GST
 Since GST subsumed indirect taxes of both central government (excise duty,
service tax, custom duty, etc.) and state governments (VAT, Luxury tax,
etc.), both the governments now depend on GST for their indirect tax
revenue.
 Thus, there are four types of GST:
 CGST – Central Goods and Services Tax
 SGST – State Goods and Services Tax
 IGST – Integrated Goods and Services Tax
 UTGST – Union Territory Goods and Services Tax
 Intra-state transactions will carry both CGST and SGST/ UTGST. While
making an intra-state sale (i.e., sale within the same state), the CGST
collected will go to the central government and the SGST collected will go
the respective state government in which sale is made.
 Inter-state transactions will involve IGST which will replace SGST/ UTGST.
 CGST is levied by the Central Government on any transaction of goods and
services tax taking place within a state. It is one of the two taxes charged on
every intrastate (within one state) transaction, the other one being SGST
(or UTGST for Union Territories). CGST replaces all the existing Central taxes
including Service Tax, Central Excise Duty, CST, Customs Duty, SAD, etc.
Both CGST & SGST are charged on the base price of the product.
 SGST is one of the two taxes levied on every intrastate (within one state)
transaction of goods and services. The other one is CGST. SGST is levied by
the state where the goods are being sold/purchased. It will replace all the
existing state taxes including VAT, State Sales Tax, Entertainment Tax,
Luxury Tax, Entry Tax, State Cesses and Surcharges on any kind of
transaction involving goods and services. The State Government is the sole
claimer of the revenue earned under SGST.
 IGST is applicable on interstate (between two states) transactions of goods
and services, as well as on imports. This tax will be collected by the Central
government and will further be distributed among the respective states.

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 IGST is charged when a product or service is moved from one state to
another. IGST is in place to ensure that a state has to deal only with the
Union government and not with every state separately to settle the
interstate tax amounts.
 UTGST is the GST applicable on the goods and services supply that takes
place in any of the five Union Territories of India, including Andaman and
Nicobar Islands, Dadra and Nagar Haveli, Chandigarh, Lakshadweep and
Daman and Diu. This UTGST will be charged in addition to the Central GST
(CGST) explained above. For any transaction of goods/services within a
Union Territory: CGST + UTGST
Various taxes applicable prior to GST regime:
 Excise duty – Manufacturer/ Producer
 Central Sales Tax (CST) – Inter- state transactions
 VAT – Intra-state transactions
 Custom duty – Import/ export of goods
 Service Tax – charged by Central Govt.
Q. A manufacturer produces steel ingots. These ingots are rolled into plates by a
rolling unit of B. C makes furniture from these plates and sells to D.
A B C D
Purchase - 110 165 220
Value Added 100 40 35 30
Sub-total 100 150 200 250
Tax (10%) 10 15 20 25
110 165 220 275
There is cascading effect.
If we take the same figures in GST regime, we find the following results
A B C D
Purchase - 100 140 175
Value Added 100 40 35 30
Sub-total 100 140 175 205
Tax (10%) 10 14 17.50 20.50
110 154 192.50 225.50

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“Goods” includes all materials, commodities, and articles. Goods are movable and
marketable.
Article must fulfil two conditions:
 It should come into existence, and
 It should be capable to move to a market i.e. it must be capable of being
brought and sold in the market.
Cases on moveability
Deputy Commissioner of Customs & Excise v. Tungbhadra Steel Products Ltd.
(2004)
Electric overhead traveling cranes were manufactured by the company for their
own use towards the business of manufacture and installation of hydraulic gates.
These gates were required for the construction of dams and used in multi-
purpose river valley projects. The cranes were considered to be immovable
property and hence cannot be taken as goods.

Mallur Siddeswara Spinning Mills ... vs Commissioner of Customs and Excise

(2004)
It was held that the plants (machinery) which are bolted in frame and which are
capable of being unbolted and shifted from that place are movable property.

Municipal Corporation of Greater Mumbai v. Union of India

In this case, a petrol pump of huge storage capacity which was not embedded in
earth and which could be removed without dismantling was held to be
immovable in nature.

Commissioner of Customs & Excise v. Solid & Correct Engineering Works (2010)
The assessee was engaged in the manufacture of drum/ hot mix plant by
assembling and installing its parts. The components of the machine were fixed by
nuts and bolts to a foundation not because the intention was to permanently
attach it to the earth but because a foundation was necessary to provide a
vibration-free operation to the machine. The court held that the plants
(machinery) in question were not immovable property.
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