Professional Documents
Culture Documents
Taxation Direct and Indirect
Taxation Direct and Indirect
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COURSE DESIGN COMMITTEE
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Copyright:
2021 Publisher
ISBN:
978-93-90457-13-7
Address:
4435/7, Ansari Road, Daryaganj, New Delhi–110002
Only for
NMIMS Global Access - School for Continuing Education School Address
V. L. Mehta Road, Vile Parle (W), Mumbai – 400 056, India.
1 Introduction to Taxation 1
2 Residential Status 33
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Profits and Gains of Business or Profession 101
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6 Income from Capital Gains 129
Taxat i o n – D ir e ct a n d I ndir e c t
c u r r i c u l um
Introduction to Taxation: Meaning and Nature of Taxes: Vital Attributes of Taxes; Objectives
of Taxation; Tax Structure; Tax Planning, Avoidance and Evasion; Types of Taxes; Direct Tax;
Indirect Tax; Terms Related to Income Tax (Sections 2 and 3); Heads of Income; Income Tax Rates
and Slabs; Concept of Tax Deducted at Source (TDS); Obligations of a Tax Deductor; Implications
of Not Following TDS Provisions.
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Income from Salaries: Basis of Charge; What is Salary?; Definition of Salary under Section 17(1)
of the Income Tax Act, 1961; Types of Emoluments/Perquisites; Gratuity; Commutation of Pension;
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Leave Encashment; Retrenchment Compensation; Keyman Insurance Policy; Value of Leave
Travel Concession; Valuation in Respect of Unfurnished Rent-Free Accommodation; Provisions
of Educational Facilities for an Employee’s Family; Interest-Free Loan and Loan at Concessional
Rate of Interest; Profits in Lieu of Salary; Medical Facilities Treated as Perquisites; Perquisites for
Motor Cars; Deductions from Salary; Tax Treatment on Provident Funds; Computation of Income
from Salaries.
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Income from House Property: Chargeability of Income from House Property; Basis of Charge
(Section 22); House Property not Chargeable to Tax; Deemed Ownership (Section 27); Annual Value
of House Property (Section 23); Deductions from House Property (Section 24); Special Provisions of
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House Property; Recovery of Arrears of Rent and Unrealised Rent (Section 25A); Property Owned
by Co-Owners (Section 26); Income from Self-Occupied House Property.
Profits and Gains of Business or Profession: General Principles of Business and Profession;
Profits and Gains of Business or Profession (Section 28); Computation of Income from Profits and
Gains of Business or Profession (Section 29); Deductions Expressly Allowable under Section 30-
43D; Deduction for Rent, Rates, Repairs and Insurance of Building (Section 30); Deduction for
Repairs and Insurance of Machinery, Plant and Furniture (Section 31); Deduction for Depreciation
including the Concept of Block of Assets (Section 32); Expenditure on Scientific Research (Section
35); Other Deductions under Section 36(1); General Expenditure for the Purpose of Business or
Profession (Section 37); Amounts not Deductible under Section 40; Section 40A, Section 40A(2),
Section 40A(3) and Section 43B.
Income from Capital Gains: Basis of Charge; Capital Asset under Section 2(14); Capital Assets
and its Types; Short-term Assets and Long-term Assets; Period of Holding; Capital Gains (Section
45); Transfer as Defined under Section 2(47); Computation of Capital Gain (Sections 48 and 50);
Full Value of Consideration; Cost of Acquisition; Cost of Transfer; Cost of Improvement; Capital
Gain on Transfer of Securities; Capital Gain on Transfer of Capital Assets (Other Than Securities);
Indexation; Cost of Inflation Index; Short-Term Capital Gain; Long-Term Capital Gain; Exemptions/
Deductions under Capital Gains (under Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA); Deemed Full Value
Consideration (DFVC): Special Cases.
Income from Other Sources: Incomes Chargeable Under this Head (Section 56); Deductions Allowable
(Section 57); Deductions Not Allowable (Section 58); Deemed Income Chargeable to Tax (Section 59).
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Treatment of a Dependant Who is a Person with Disability (Section 80DD); Deduction in Respect of
Loan Taken for Higher Education (Section 80E); Deduction in Respect of Interest on Deposits in Savings
Account (Section 80TTA) and Deduction in Respect of Interest on Deposits in Case of Senior Citizens
(Section 80TTB); Deduction in the Case of a Person with Disability (Section 80U).
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Exemptions & Rebates: Incomes not included in Total Income (Exemptions under Section 10);
Agricultural Income [Section 10(1)]; Receipts from HUF [Section 10(2)]; Partners Share in the Income
of the Firm [Section 10(2A)]; Income Earned by Non-Resident from NTRO [Section 10(6D)]; Payment
from Provident Fund [Section 10(11)]; House Rent Allowance [Section 10(13A)]; Scholarship [Section
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10(16)]; Clubbed Income of a Minor Child [Section 10(32)]; Rebates and Reliefs.
Set-off and Carry Forward of Losses: Clubbing of Income; Income of Other Persons Included in
Assessee’s Total Income; Concept of Set-off and Carry Forward of Losses; Inter Source Adjustment
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of Losses; Inter Head Adjustment of Losses and Set-off of Brought Forward Losses; Summarised
Provisions of Set-off and Carry Forward of Losses; Computation of Total Income.
Indirect Taxation – Goods and Services Tax: Introduction to GST; Importance of GST; Features and
Benefits of GST; Evolution of GST Goods and Service Tax Network; GST Rates in India; Levy and
Collection of GST (Charging Section); Exemption from GST; Supply of Goods; Input Tax Credit (ITC);
Transfer of Input Tax Credit; Payment of Tax; Reverse Charge and Returns; Offences and Penalties;
E-way Bill.
Introduction to Taxation
Contents
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1.1 Introduction
1.2 Meaning and Nature of Taxes
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1.2.1 Vital Attributes of Taxes
1.2.2 Objectives of Taxation
1.2.3 Tax Structure
1.2.4 Tax Planning, Avoidance and Evasion
Self Assessment Questions
Activity
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1.4 Terms Related to Income Tax (Sections 2 and 3)
Self Assessment Questions
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1.5 Heads of Income
Self Assessment Questions
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1.6 Income Tax Rates and Slabs
Self Assessment Questions
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1.7 Concept of Tax Deducted at Source (TDS)
1.7.1 Obligations of a Tax Deductor
1.7.2 Implications of Not Following TDS Provisions
Self Assessment Questions
Activity
Contents
1.8 Summary
1.9 Descriptive Questions
1.10 Answers and Hints
1.11 Suggested Readings & References
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Introductory Caselet
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The term ‘Assessment Year’ has been defined under Section 2(9)
Case Objective
of the Income Tax Act, 1961. This term refers to a period of 12
months commencing from 1st April every year. The income is This Caselet discusses
earned in the previous year and the same is put to taxation by the the provisions relevant for
determining ‘previous year’ for
Income Tax Department in the immediately following year which
income tax purposes.
is called the assessment year. For example, income earned during
the previous year 2020-2021 is assessable to tax in the Assessment
Year 2021-2022.
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the assessment year. The income which is earned by an assessee
during the previous year is made taxable in the assessment year.
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learning objectives
1.1 INTRODUCTION
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A country is governed by its government. The government is
responsible for maintaining law and order in the country and ensuring
that all its citizens are able to attain basic minimum standard of living.
In all countries, there exists a disparity of income among the rich and
the poor; however, the degree of this disparity may vary. In a country
like India, this disparity is widespread. It is the duty and obligation of
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Taxation is a legal system for assessing and collecting taxes. Under the
taxation system, the government makes it mandatory for all individuals
and corporates earning over and above a particular amount to pay a
part of their income as income tax. The rates at which the income of
an individual and corporate is taxed are set by the Ministry of Finance
and are revised from time to time.
This book will make you aware of the taxation system in India. In
India, various kinds of taxes are levied and collected by different
entities, such as the central government, state government and
various local bodies, such as municipality. Article 265 of the Indian
Constitution, which states that ‘no tax can be collected or levied on
any individual or firm except by the authority of law’, grants the
right to levy taxes exclusively to the government. It means that the
government cannot impose any tax unless it is passed as a law.
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allowed to levy and collect taxes as per Article 256 of the Constitution.
You might have heard about various types of financial charges (taxes
and cesses), such as sales tax, income tax, Value Added Tax (VAT),
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excise duty, customs duty and cess. All these types of taxes can be
classified into two major categories: direct tax and indirect tax. A few
of them are non-existent as they have been subsumed under the newly
introduced Goods and Services Tax (GST).
called the Central Board of Excise and Customs (CBEC) works under
the Department of Revenue, Ministry of Finance, Government of
India.
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1.2.2 Objectives of Taxation
As stated earlier, taxes are an instrument of social and economic
policies in the hands of the government. Other important objectives of
taxation are as follows:
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Revenue generation (Social objective)
Preventing the concentration of wealth in a few hands (Equality
objective)
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Redistribution of wealth (Redistribution objective)
Providing boost to the economy (Economic growth objective)
Reducing unemployment (Employment objective)
Eliminating regional disparities (Regional equality objective)
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a lot of changes in the past few years. Let us revisit the old tax structure
of India which is shown in Figure 1.2:
Income Tax
Direct Tax
Wealth Tax (Now
Excise
Abolished)
Customs
Indirect Tax
VAT/Sales/CST
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Income Tax
Direct Tax
Wealth Tax (Now
Abolished)
New Tax Structure CGST (Central)
Intra-state
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Income tax is a direct tax that is levied by the government of a country
on the personal income of an individual or corporate. Some important
features of Income tax are as follows:
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The incidence and impact of tax falls on the same individual or
assessee.
It is a progressive tax.
It is levied upon and collected from the assessee.
The burden of tax cannot be shifted from one assessee to another.
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Determination of taxable income, tax liability and procedure for Circulars and notifications
issued by the CBDT help
tax assessment, appeal, penalties and prosecutions is done as per in clarifying the scope and
extant laws. meaning of various provisions
of the IT Act. These are used
The Government enacts the law in the Parliament, whereas it is by IT officers and assessees.
administered by the Central Board of Direct Taxes (CBDT). These are binding upon the
IT Assessing Officers. It is
Section 295 of the IT Act empowers the CBDT to frame rules important that CBDT circulars
(called Income Tax Rules) from time to time in order to implement are not in contrast to the
amendments in tax provisions for proper administration of the Act. provisions of the IT Act.
CBDT frames rules which, in turn, prescribe forms, procedures A notification or circular
and principles of valuation of perquisites under the Act. issued by CBDT is also called a
Subordinate Legislation.
Section 119 of the IT Act prescribes that CBDT can issue circulars
and notifications from time to time.
The terms ‘tax planning’, ‘tax avoidance’ and ‘tax evasion’, all are
methods of reducing the tax liability of a person or a corporate body
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anything illegal. This is done for reducing an assessee’s overall tax
liability.
Tax Evasion refers to the use of any illegal methods that lead to the
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reduction of tax liability of an assessee. Tax evasion is achieved using
dishonest means, such as concealing income, claiming excessive
expenditures and forged accounts.
the Constitution.
2. Which of the following is not an objective of taxation?
a. Revenue generation
b. Redistribution of wealth
c. Increasing the GDP of the country
d. Reducing unemployment
3. _________ is a method of reducing an assesee’s tax liability by
using certain illegal methods.
Activity
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As you have studied earlier, the tax system of India is primarily a three-
tier system that includes the central government, state governments
and some local government bodies. The central government levies
income tax, Central GST (CGST) and customs duty. The state
governments have the right to levy taxes, such as State GST (SGST).
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Let us now study direct and indirect taxes in detail.
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1.3.1 Direct Tax
tax, corporate tax, etc. Direct taxes are overseen by the Central Board
of Direct Taxes (CBDT). The CBDT was formed in accordance with
the Central Board of Revenue Act, 1924. The CBDT is headed by a
chairman along with six other members. The chairman acts as the
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1.3.2 Indirect Tax
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the goods and services are
subjected to indirect tax.
Till the F.Y. 2016-17, and for the first quarter of F.Y. 2017-18, India had
in place a host of indirect taxes, such as sales tax, service tax, Central
Excise Duty, Additional Excise Duties, the Excise Duty levied under
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the Medicinal and Toilet Preparations Act, Additional Customs Duty or
the Countervailing Duty (CVD), Special Additional Duty of Customs –
(SAD), Surcharges, Cesses, VAT/Sales tax, Entertainment tax (unless
it is levied by the local bodies), Luxury tax, Taxes on lottery, betting
and gambling, state cesses, surcharges related to supply of goods and
services, and Entry tax.
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The Government of India rolled out the Goods and Services Tax (GST)
on July 01, 2017. GST is a tax that subsumed a number of state and
central indirect taxes. The taxes subsumed under GST are as follows:
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Taxes on advertisements
Purchase tax
Taxes on lotteries, betting and gambling
State surcharges and cesses so far as they relate to supply of goods
and services
India has adopted a dual model of GST under which the GST is levied
and collected by both the Centre and the State. Prior to the introduction
of GST, the Centre was responsible for taxing the manufacturing
of goods, whereas the State was responsible for taxing the sales of
goods. With respect to services, only the Centre had the authority
to levy Service Tax. If GST was to be introduced, this segregation of
power would have become a roadblock. Therefore, an amendment was
made to the Constitution Act, 2016 in order to allow both the Centre
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and the States to levy and collect this tax. All this was done in order to
smoothly implement GST.
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Exhibit
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who are earning less. It
means that progressive taxes
take into consideration the
taxpayer’s ability to pay.
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6. They involve higher They involve lower
administrative costs. It is so administrative costs. It is
because they involve a lot of so because they involve
exemptions. convenient and stable
collections.
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the territorial waters of India including the seabed and subsoil
extending up to 12 nautical miles
the continental shelf and exclusive economic zone extending up to
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200 nautical miles
other maritime zones specified under the Act including the
airspace above its territory and territorial waters
a company
person(s) shall be deemed to
a firm be a person, whether or not it
is formed or incorporated for
an Association of Persons (AOP) or a Body of Individuals (BOI) the purpose of earning profits
or income.
a local authority
every other artificial judicial person not covered above
The term ‘firm’ and ‘partner’ mean the same as defined under the
Indian Partnership Act, 1932. A firm also includes a Limited Liability
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incorporated or not, which is declared to be a company by the
special orders of CBDT
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Assessment – Section 2(8)
As income is the main source which is put to tax, the term ‘income’ has
been exhaustively defined in an illustrative manner under the Act. It
majorly includes the following:
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Dividend
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The financial year in which the income is earned is referred to as the
previous year. It means the financial year which immediately precedes
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the assessment year.
Only one financial year, i.e., 1st April to 31st March is considered as the
previous year for the purpose of the provisions of this Act.
The general rule of taxation states that the income of the assessee
earned in the previous year is charged to tax in the relevant assessment
year. However, there are certain exceptions to this rule. Under these
exemptions, the income of the previous year is assessed to tax in the
same previous year itself.
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India from India in the AY
AOP or BOI or other artificial Amount taxable from the expiry of
judicial person established for a the respective previous year to the
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particular purpose and likely to be date of its dissolution in the AY
dissolved in the current AY
Persons appearing to the Assessing Amount taxable from the expiry
Officer as likely to transfer property of the respective previous year
to avoid tax payment in the AY to the date of commencement of
assessment proceedings in the AY
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4. Capital Gains: Sections 45 to 55A – Profits arising to an assessee
from the sale of capital assets is taxable under this head.
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5. Income from Other Sources: Sections 56 to 59 – Incomes which
are not taxable under the above four heads are to be made taxable
under this head. This head is also known as the residuary head
of income.
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the assessee. Moreover, deemed business profits
and income from discontinued business are also
subjected to tax under this head. The income is
taxable on the basis of receipt method or accrual
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method as regularly followed by the assessee.
Capital Gains It includes incomes or gains arising from the
transfer of a capital asset by the assessee. Capital
gains on sale of capital assets are categorised into
short-term capital gains and long-term capital gains
depending upon the period for which the asset was
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1.6 Income Tax Rates and Slabs
Different tax rates have been furnished for several sections of taxpayers
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and for varied sources of income. Individuals, Hindu Undivided Families
(HUFs), Association of Persons (AOP), Body of Individuals (BOI) or
Artificial Juridical Person (AJP) are taxed as per different income
tax rates. However, companies are taxed at a fixed rate barring some
exceptions. Tax rates applicable to two classes of taxpayers, namely
domestic and foreign companies, for Assessment Year 2021-2022 have
also been discussed. Tax rates applicable to all other categories of
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Senior Citizen
Net Income Range Rate of Income-tax
Assessment Year 2021-22
Up to ` 3,00,000 -
` 3,00,000 to ` 5,00,000 5%
` 5,00,000 to ` 10,00,000 20%
Above ` 10,00,000 30%
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Up to ` 2,50,000 -
` 2,50,000 to ` 5,00,000 5%
` 5,00,000 to ` 10,00,000 20%
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Above ` 10,00,000 30%
Add:
a. Surcharge:
Rate of Surcharge
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Add:
Surcharge
For firms, LLPs and local authority, the rate of income tax is 30%
of total income.
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For co-operative societies, the rates of income tax are as explained
in Table 1.5:
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Table 1.5: Rates of Tax for Co-operative
Societies
Total income (in `) Rates of tax (in %)
Up to ` 10,000 10%
From ` 10,001 to ` 20,000 20%
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The above income tax rates are as prescribed by the Finance Act, 2018.
However, in respect of certain types of income, such as long-term capital
gains under Section 112 or 112A, some specific rates are prescribed by
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the Income Tax Act, 1961, as the case may be. These rates are discussed
along with the relevant sections at appropriate places.
applicable). After allowing for rebate under Section 87A, health and
education cess is levied @ 4% of income tax plus surcharge, if any.
Thus, health and education cess is an additional surcharge computed
on income tax as increased by surcharge and as reduced by rebate, if
any. Net income tax payable is arrived at after the tax is increased by
health and education cess.
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which is a part of the Indian Revenue Service (IRS). TDS is collected
so as to enable the government to maintain a stable revenue source
throughout the year, while at the same time ensuring that people do
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not avoid paying taxes.
called the assessee needs to file a return stating that the TDS has been
deducted and paid to the government. The person or the entity that
deducts the TDS amount is called TDS deductor and it must issue a
TDS certificate to the deductee within a specified time. It is the duty of
a deductor to deduct the appropriate amount of TDS and deposit it to
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Professional fees
Lotteries
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tax rates including
cess.
Accumulated Taxable Part of 192A 10%
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Provident Fund
Interest on Securities 193 10%
Income by way of dividend 194 10%
Interest other than Interest on 194A 10%
Securities
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Some of the important terms used in the TDS concept are shown in
Figure 1.4:
Deductor
Deductee
TDS Returns
TDS Certificate
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Deductor: It refers to a person who is liable to deduct the tax.
Deductee: It refers to a person from whom tax is to be deducted.
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TDS returns: Once the tax is deducted and paid, the deductor has
to file quarterly returns containing the details of the deductee and
payments made.
TDS certificates: After filing the TDS returns, the deductor
is required to issue Form 16A (for non-salary/other payment
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payment is accrued.
Once the return is filed, the department gets to know about the
details of the deductor, deductee and taxes remitted.
TDS allows the regular flow of income.
TDS makes it possible for taxes to be paid on behalf of the individual
at regular intervals and there is no burden at the last moment.
TDS takes care of the time value of money.
The tax deductor has to fulfil a number of duties, some of which are
as follows:
QUICK TIP
Obtain TAN: Tax Deduction and Collection Account Number Any amount of TDS standing
(TAN) is an identification number allotted to tax deductors for tax to the credit of a payee (i.e.
recipient of income) is always
deduction or collection on behalf of its nature of business. It is a adjusted at the time of tax
10-digit alphanumeric number; the first four digits of TAN are a assessment against his final tax
letter of alphabet, followed by five integers and a letter of alphabet. liability.
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For TDS, as well as TCS, the same TAN is to be used. For obtaining
TAN, the tax deductor is required to apply in Form 49B.
Identify the nature of payment: The identification of the nature
of payment is equally important because only after doing so, the
rate at which the tax is to be deducted can be identified.
Deduct tax at the prescribed rates: After identifying the nature
of payment, the tax is to be deducted at the prescribed rates under
different heads at the following instances, whichever is earlier:
At the time of payment or receipt of cash.
At the time of issuance or at the time of receipt of cash or de-
mand draft.
Making credit entries or debit entries to the account of the buy-
er or the seller.
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Remit in the government account in due time: The TDS deducted
is to be deposited in the account of the government by the 7th of
the following month. For example, TDS deducted in the month
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of November shall be deposited by the 7th of December, while the
TDS of March can be deposited by the 30th of April.
File TDS statement on or before the due date: The TDS statement
is prepared and submitted on a quarterly basis, except for the
quarter ending 31st March. For the quarter ending 31st March, the
deadline is 15th May. The due dates of filing the TDS statements
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TDS on payments to residents for salary 24Q
TCS 27EQ
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Tax demand
Penalty
Interest
Prosecution
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Figure 1.5: Penalties for Default in TDS
Activity
Using the Internet, find out the cases where TDS is not deducted.
Make a note of the same.
Select any retail outlet and gather information about the nature of
payments on which TDS is applicable and the rate at which TDS is
deducted.
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1.8 Summary S
Income tax is a direct tax that is levied by the government of a
country on the personal income of an individual or corporate.
Under the IT Act, the Income Tax is charged at the rates that
have been fixed for the year as finalised in the Finance Act for the
Assessment Year.
All those taxes which an assessee can recover from other person(s),
but the liability of payment of which lies with him/her are called
indirect taxes.
Indian GST is based on dual GST model under which both the
centre and the state levy and collect GST.
For the purpose of computation of taxable income under the Act,
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whole income is classified under five major heads: salaries, income
from house property, profits and gains of business or profession,
capital gains and income from other sources.
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Different tax rates have been furnished for several sections of
taxpayers and for varied sources of income. Individuals, senior
citizens, super senior citizens, partnership firms, local authority,
domestic company, foreign company and co-operative societies
are taxed as per different income tax rates.
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Key Words
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g. Previous year
5. Describe major heads of income.
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6. Explain in detail the concept of Tax Deducted at Source.
country
3. Tax evasion
6. True
8. assessment year
12. d. 30%
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14. c. 193
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body or any assessee. Refer to Section 1.2 Meaning and Nature
of Taxes
3. Direct taxes are the taxes that are to be paid by the assessee or
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the taxpayer (person or corporate) directly to the government.
Indirect taxes are taxes which are transferable and the liability
to pay tax is shifted to another person. Refer to Section 1.3 Types
of Taxes
4. As per Section 3 of the Act, ‘previous year’ means the financial
year immediately preceding the assessment year. An HUF refers
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gains; and income from other sources. Refer to Section 1.5 Heads
of Income
6. Tax Deducted at Source (TDS) is defined as a means of collection
of tax by Indian authorities, and is governed by the Income
Tax Act, 1961. TDS is deducted at the prescribed rates and is
mandatory to be filed by certain persons responsible for making
payments. Refer to Section 1.7 Concept of Tax Deducted at
Source (TDS)
Suggested Readings
Bhargava, U. (2017). Taxmann’s Income Tax Act as Amended by
Finance Act, 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Mishra, M. (1999). Freedom of Trade and Commerce and Taxation
in India. New Delhi: Mittal Publications.
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e-References
Tax Laws & Rules > Acts > Income-tax Act, 1961. (2018).
Incometaxindia.gov.in. Retrieved 16 February 2018, from https://
www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx
Income Tax Rates: AY 2018-19 (FY 2017-18) - Smart Paisa. (2018).
Smart Paisa. Retrieved 16 February 2018, from http://www.
smartpaisa.in/income-tax-rates-ay-2018-19-fy-2017-18/
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RESIDENTIAL STATUS
CONTENTS
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2.1 Introduction
2.2 Residential Status of Different Kinds of Assessees
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2.2.1 Residential Status of an Individual
2.2.2 Residential Status of HUF
2.2.3 Residential Status of Firm/AOP/BOI/Local Authority/Artificial
Judicial Person
2.2.4 Residential Status of a Company Assessee
Self Assessment Questions
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Activity
2.3 Scope of Total Income
Self Assessment Questions
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Introductory Caselet
Section 6 of the Income Tax Act, 1961, specifies the basic and
additional conditions for determining residency of individuals. A
person is a resident in India if he satisfies any one of the following
two basic conditions:
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1. The individual is present in India for 182 days or more during
the relevant previous year, or
2. The individual is present in India for 60 days or more during
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the relevant previous year and for 365 days or more during
the immediately preceding 4 years from the relevant previous
year.
preceding the relevant previous year.
In Bret Lee’s case, the period of stay during the previous year
2020-2021 was 102 days (less than 182). However, his stay in India
for the past 4 years was 408 days.
Introductory Caselet
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The previous year 2013-2014 102 days
Total 714 days
learning objectives
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2.1 Introduction
Quick Revision In the previous chapter, we discussed the concept of tax. Let us now
study the concept of residential status.
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All over the world and in India, the chargeability of income tax
depends upon two major factors, namely the scope of income tax and
the residential status of the assessees. There are three basic categories
of assessees for charge of income tax, viz., ordinary resident, not-
ordinary resident and non-resident. Section 6 of the Act contains
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This chapter would also clarify the differences between the concepts
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For the purposes of income tax, tax payers are classified into following NOTE
categories depending upon their residential status: Section 6 – Residence in India
is organised in the following
Resident in India: This may be further classified into following manner:
categories:
6 (1) – Rules for determining
Resident and Ordinarily Resident (ROR) the residential status of an
individual.
Resident but not Ordinarily Resident (RNOR)
6 (2) – Rules for determining the
Non-resident in India residential status of an HUF.
Figure 2.1 shows different categories of residential status in India on 6 (3) – Rules for determining the
residential status of a company.
the basis of the type of ‘person’:
6 (4) – Rules for determining the
residential status of every other
Determination person.
of Residential
Status in India
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Individual/ Firm/AOP/ Any Other
Company
HUF BOI Person
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Non-
Resident Resident Resident
(NR)
Resident and
Non-
Ordinarily
Resident
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Resident
(NR)
(ROR)
Resident but
Not Ordinarily
Resident
(RNOR)
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Basic Condition B: The individual is in India for minimum • I ndian citizen who leaves
India as a crew member of
60 days during the relevant previous year and for minimum 365 an Indian ship during the
days during 4 years immediately preceding the relevant previous previous year.
year.
• I ndian citizen or person of
Indian origin who, residing
However, from the financial year 2020-21, the period is reduced to 120
outside India, visits India
days or more for such an individual whose total income (other than during the previous year.
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For the purpose of calculating Additional Condition A: The individual is resident in India in
the number of days of stay in minimum 2 out of 10 previous years immediately preceding the
India, both the date of arrival in
India and the date of departure
relevant previous year.
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from India shall be taken into Additional Condition B: The individual is in India for 730 days
consideration.
or more during last 7 years immediately preceding the relevant
previous year.
his total income (other than foreign sources) exceeds ` 15 lakh. Also, a
citizen of India who is deemed to be a resident in India (w.e.f FY 2020-
21) will be a resident and ordinarily resident in India.
NOTE Let us now understand the above-mentioned concept with the help of
Income from foreign sources some illustrations.
means income which accrues
or arises outside India (except Illustration 1: Ms. Elizabeth Miller is an American citizen. She always
income derived from a business
dreamt of visiting India. She came to India on 5 August, 2020 and
controlled in India or profession
set up in India). visited four states. She finally left for America on 25 December, 2020.
What will be her residential status for assessment year 2021-2022?
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days but more than 60 days. Therefore, we need to check the Basic
Condition (B). Number of days of stay of Mr White in the four previous
years before the relevant or the current previous year = 500 days
(120+140+130+110). Since Mr White satisfies the Basic Condition B,
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he is a resident for the previous year 2020-2021.
A business may be carried out outside India and its control and
management might be situated in India. In other words, the resident
HUF would be considered ordinarily resident if the Karta of the HUF
satisfies the following conditions:
The Karta has been a resident in India for at least 2 out of the
10 previous years immediately preceding to the relevant previous
year
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The Karta has been in India for minimum period of 730 days
during seven previous years immediately preceding the relevant
previous year
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If one or none of the aforesaid conditions are satisfied, then the HUF
is termed as ‘resident but not ordinary resident’.
Exhibit
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who actually controls the affairs and not merely the one who has the
right to control the affairs. Though, normally, the right to control
the affairs of the family vests with the Karta, however, if the affairs
of the family are controlled by other members of the family in India,
the HUF will be considered as the resident in India even if Karta
stays abroad throughout the previous year.
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a company depends upon the residential status of the company. The
residency is determined as follows:
Study
Resident in India: A company would be considered as resident
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Hint
in India if it is an Indian company or where the place of effective
management of the company during the previous year is in India. Place of effective management
means where the key
Non-resident: A company would be considered as non-resident if commercial and managerial
it is not an Indian company and the place of effective management decisions, essential for
the conduct of business of
of the company during the previous year is also not in India. the entity as a whole, are
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substantially made.
Similarly, a company not satisfying any of the above conditions will
be called a non-resident company. At times, there could be situations
where the same income becomes taxable for the same company in
more than one country. This is called double taxation. The core
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Solution: Since the management and control of Super Mini was partly
in India and partly outside India for the previous year 2020-2021, it
will be considered as non-resident.
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Self Assessment Questions
Activity
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Section 5 of the Income Tax Act, 1961 provides for provisions related
to scope of income of an assessee based on his or her residential
status. The distinction between scope of income of assessees arises
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only because of income which accrues or arises outside India. In
simple words, for ROR assessees, their global income is taxable in
India. Whereas for non-resident assessees, the income which accrues
or arises outside India is not taxed in India at all. In case of RNOR,
the income which accrues or arises outside India shall be taxed in
India only if it is derived from a business or profession controlled from
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India.
Figure 2.2 describes the scope of total income for different assessees:
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Scope of Total
Income
Income which is
Global income is
received/deemed Income received/deemed
taxable in India.
to be received/accrued to be received/accrued or
or arisen/deemed arisen/deemed to accrue
to accrue or arise in India. or arise in India.
Table 2.2 presents the scope of total income and taxability of different
types of incomes of different assessees:
TABLE 2.2: Scope of Total Income and Taxability
of Different Types of Incomes of Different
Assessees
Nature of Income Resident and Resident but Non-Resi-
Ordinarily Not Ordinari- dent
Resident ly Resident
Income accruing or arising outside India and received in India, i.e.,
Indian income
Income received in India Included Included Included
Income deemed to be Included Included Included
received in India
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Income accruing or arising Included Included Included
in India
Income deemed to accrue Included Included Included
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or arise in India
Income accruing or arising outside India and received outside India,
i.e., foreign income
1. From business con- Included Included Excluded
trolled from India or
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profession set-up in
India
2. From a business con- Included Excluded Excluded
trolled outside India or
profession set up outside
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India
Activity
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Income Deemed to be Received in
2.4
India (Section 7)
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In the previous Section, we used four terms, viz., income received,
income deemed to be received, income accrued or arisen and income
deemed to accrue or arise quite extensively. We will discuss the first
two terms in this section while the latter two would be discussed in
the next section. Let us understand the meaning of the terms ‘income
received’ and ‘income deemed to be received’.
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c. Dividend income received by an individual
d. The contribution made by the Central Government or any
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other employer in the previous year to the account of an
employee under a pension scheme referred to in Section
80CCD.
Activity
of accrual under which the revenues and expenses are recorded Study
when earned and incurred and not when cash is received or paid. Hint
Arisen:An expense or revenue is said to have arisen when it Income that has been taxed
emerges or becomes apparent. on accrual basis cannot
be charged to tax again on
Income deemed to accrue/arise: It is defined under Section 9 of receipt. It is so because the
the Act. same amount cannot be taxed
twice and, if done, amounts to
Section 9 states that certain types of income which may actually double taxation.
accrue or arise outside India are deemed to accrue or arise in India
for income tax purposes. Various components of income which are
deemed to accrue or arise in India as per Section 9(1) are explained in
Table 2.3: NOTE
For Section 9(1)(i), business
Table 2.3: Components of Income Deemed to connection means any business
activity carried out in India
Accrue or Arise in India
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by a non-resident through his
Section Income deemed to accrue or arise in India agent; or significant economic
Section 9(1)(i) Income accruing or arising outside India, presence of a non-resident in
India.
directly or indirectly through or from:
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zz any business connection in India
zz any property/asset or source of income in
India
zz transfer of capital asset situated in India
Section 9(1)(ii) Salary earned for services rendered in India
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zz Government
zz Person resident in India – Income deemed
to accrue or arise in India except if royalty
services are utilised for the purpose of busi-
ness or profession carried on outside India or
if royalty services are utilised for making in-
come from any source outside India
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from any source in India
zz Government
zz Person resident in India – Income deemed
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to accrue or arise in India except if technical
services are utilised for the purpose of busi-
ness or profession carried on outside India or
if technical services are utilised for making
income from any source outside India
Illustration 7: Mr Arun, a citizen of UK, came to India for the first time
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Number of days Arun stayed in India in the four years preceding the
previous year = 157 + 73 + 184 + 162 = 576 days.
We need to check the residential status of Arun for the previous years
2019-2020 and 2018-2019.
In 2017-18, he stayed for 162 days and also stayed in the preceding
4 years for 184+73+157+Nil = 414 days. Here, the second basic
condition is being fulfilled. Therefore, Mr Arun is resident in India for
the previous year 2019-2020.
In 2018-2019, he stayed for 184 days which is more than 182 days
required for satisfying the first basic condition. Therefore, Mr Arun is
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resident in India for the previous year 2018-2019.
From the analysis of both the conditions, Arun does not satisfy the
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Compute her income for the Assessment Year 2021-2022 if she is:
i. Resident and ordinarily resident in India (ROR)
ii. Resident but not ordinarily resident in India (RNOR)
iii. Non-resident in India (NR)
Solution: For the given situation, please note that the profit earned
in 2019-2020 is not the income pertaining to the previous year of 2020-
2021.Therefore, it would not be taxable in the Assessment Year 2021-
2022. In addition, gifts received from relatives are not considered
as income. Therefore, the incomes of Ms. Raksha under different
residential statuses would be as follows:
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Rent from property in Punjab, received in 90,000 90,000 90,000
Japan
In the illustration above, note that the tax incidence is the maximum
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Activity
2.6 Summary S
Chargeability of income tax depends upon two major factors,
namely the scope of income tax and the residential status of the
assessees.
The tests of residence for determining the residential status of
different persons are described in Section 6 of the Act.
According to Section 6(1), an individual is treated as resident in
India in the given previous year if he satisfies at least one of the
two basic conditions which include:
Basic Condition (A): The individual was in India for a mini-
mum period of 182 days in the relevant previous year.
Basic Condition (B):
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i. The individual was in India for a minimum of 60 days in
the relevant previous year; and
ii. The individual was in India for a minimum of 365 days
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during the 4 previous years immediately preceding the
relevant previous year.
According to Section 6(2) of the Act, a Hindu Undivided
Family (HUF) is said to be resident in India if the control and
administration of its issues (affairs of the family) are completely or
partially managed in India.
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key words
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1. Explain the criteria for determining the residential status of an
individual assessee.
2. Explain the criteria for determining the residential status of
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a company assessee.
3. Describe the contents and implication of Section 5 of the Income
Tax Act, 1961.
4. Discuss various incomes which are deemed to be received in
India in accordance with Section 7 of the Income Tax Act, 1961.
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India in the given previous year if he satisfies at least one of the
two basic conditions. Refer to Section 2.2 Residential Status of
Different Kinds of Assessees
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2. According to Section 6(3) of the Act, Indian companies are
taxable in India on their worldwide income, irrespective of its
source and origin. Refer to Section 2.2 Residential Status of
Different Kinds of Assessees
3. Section 5 of the Act relates to the scope of total income for the
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Suggested Readings
Bhargava, U. (2017). Taxmann’s Income Tax Act As Amended by
Finance Act 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Ahuja, D., & Gupta, D. (2017). Bharat’s Systematic Approach to
Taxation (37th ed.). Delhi: Bharat Law House.
E-References
Jain, S. (2018). Residential Status and Incidence of Tax on Income
under Income Tax Act, 1961. Indian Tax Updates. Retrieved 8 March
2018, from https://www.indiantaxupdates.com/residential-status-
and-incidence-of-tax-on-income-under-income-tax-act-1961/
Fourth Schedule. (2018). Incometaxindia.gov.in. Retrieved
8 March 2018, from https://www.incometaxindia.gov.in/Acts/
Income-tax%20Act,%201961/1968/102120000002035558.htm#rfn1b
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CONTENTS
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3.1 Introduction
3.2 Basis of Charge
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Self Assessment Questions
Activity
3.3 What is Salary?
3.3.1 Definition of Salary under Section 17(1) of the Income Tax Act, 1961
3.3.2 Types of Emoluments/Perquisites
3.3.3 Gratuity
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CONTENTS
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Introductory Caselet
Mr Baston works with GYT Ltd. and has the following details
for the previous year 2020-2021. His basic salary is ` 10,000 per Case Objective
month. The dearness allowance is ` 7,000 per month, of which This Caselet discusses the
50% is for retirement benefits. The commission earned by him as manner of computation of
a percentage of turnover is 0.1% (turnover during the year being gross salary of an individual
` 50,00,000). He also gets a bonus of ` 42,000 and gratuity of employee.
` 26,000 during the year. In addition, the contribution made by
him in the RPF was ` 20,000 and his employer’s contribution in
the RPF was 20% of the basic salary. The interest accrued in the
RPF was ` 14,000 @ 14% p.a.
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order to assess tax payable on his gross salary under the head of
‘salaries’. A tax advisor of GYT Ltd. computed his gross salary in
the following manner:
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Computation of Gross Salary of Mr Baston for the Assessment Year
2021-2022:
Bonus - 42,000
Gratuity (Gratuity amount received - 26,000
during the tenure of service is fully
taxable)
Employee’s contribution to RPF - -
(not taxable, eligible for deduction
under Section 80C)
Employer’s contribution to RPF 20% × 1,20,000
= 24,000
Less: Amount exempted* 12% {1,20,000 3,960
+ 84,000/2 +
5,000) = 20,040
Interest accrued in the RPF @ 14% 14,000
p.a.
Less: Amount exempted** 9.5/14 × 14,000 4,500
= 9,500
Introductory Caselet
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learning objectives
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3.1 INTRODUCTION
In the previous chapter, you studied about the residential status of
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Quick Revision
different assessees. In this chapter, you will study various provisions
of Income Tax Act and tax incidences on various components of salary
and other perquisites attained by an employee which are offered by
an employer.
For the purpose of taxation, the term ‘salary’ has been defined under
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its in lieu of salary under Section 17(3) has also been described.
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may be.
Activity
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iii. Gratuity gratuity, fees and commission,
pension, leave encashment and
iv. Fees, commission, perquisites, profits in lieu of or in addition to so on.
salary or wages
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Exemptions to certain
v. Advance of salary allowances and perquisites are
computed to the extent specified
va. Leave encashment by applicable provisions of their
relevant sections under the
vi. Annual accretion to the balance at the credit of an employee Income Tax Act. Taxable salary
participating in a Recognised Provident Fund, i.e., RPF under the head ‘Salaries’ is
employer’s contribution in excess of 12% of salary and interest then computed by subtracting
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3.3.3 GRATUITY
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Any amount of gratuity received at the time of retirement or death of
the employee is taxable to the extent as shown is Table 3.1:
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1 Commuted pension received to receive pensions into a lump
× × 100% sum amount which is receivable
3 % of commutation immediately.
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zz If the employee is not in receipt of gratu-
ity, following amount is exempt from the
amount of commuted pension received:
1 Commuted pension received
× × 100%
2 % of commutation
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3.3.5 LEAVE ENCASHMENT
credit for the given year, but he/she does not utilise some or all of those
leaves, then the leaves may either be:
Lapsed (due to non-use)
Encashed each year
Accumulated and encashed after retirement or death
3.3.6 RETRENCHMENT COMPENSATION
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Retrenchment is defined as forced laying off of employees in order to
cut down the payroll. When an organisation decides to retrench cer-
tain workforce, the workmen are entitled to retrenchment compensa-
tion at the time of their retrenchment. Retrenchment compensation
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is governed by the provisions of the Industrial Disputes Act, 1947. As
per Section 10(10B), the retrenchment compensation shall be exempt
from tax to the extent of minimum of the following limits:
Actual amount received as retrenchment compensation
15 days’ average pay for every completed year of service or part
thereof in excess of six months
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` 5,00,000
Any compensation received by the employee in excess of the above
-mentioned amount is taxable as salary.
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By employee on leave
By employee after retirement from service
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By employee after termination of his service
ing children, brothers and sisters, parents and any other individual
wholly dependent upon the assessee.
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Category Taxable Value of Rent-Free Accommodation
Government employee License fee determined by Government rules
Non-Government employee zz 15% of salary (In the city having population
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more than 25lakhs as per 2001 census)
zz 10% of salary (In the city having population
between 10 lakhs and 25 lakhs as per 2001
census)
zz 7.5% of salary (In the city having popula-
tion less than 10 lakhs as per 2001 census)
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However, no perquisite shall be taxable in the above cases if the value NOTE
of education facility per child does not exceed ` 1,000 per month. In The exemption of ` 1,000 per
simple words, if the value of education facility offered by the employer month is allowed only in case of
is more than ` 1,000 per month, then the whole perquisite value is children of an employee and not
subject to tax. any other household member of
the employee.
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3.3.11 INTEREST-FREE LOAN and LOAN AT
CONCESSIONAL RATE OF INTEREST
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Employees (or any member of his/her household) may be provided
interest-free loans or loans at concessional rates by his or her employer.
Interest-free loans and concessional loans are taxable perquisites in NOTE
the hands of all employees. Interest-free or concessional
loan is to be valued as a
However, no tax would be charged if such loans are provided to an perquisite based on the rates of
interest charged by SBI as on the
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The value of specified medical facility for prescribed diseases
reimbursed by an employer in respect of medical treatment of an
employee or any member of his family in a hospital approved by
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the Chief Commissioner. Value of specified medical facility for pre-
scribed diseases reimbursed by an employer in respect of medical
treatment of an employee or any member of his family in a hospital
approved by the Chief Commissioner.
Any medical health insurance premium paid by an employer on
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lows:
Small cars with engines below 1.6 litres of capacity will have a per-
quisite value of ` 1,800 a month.
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Cars with an engine above 1.6 litres of capacity will have a per-
quisite value of ` 2,400 a month, if expenses on maintenance and
running are reimbursed by the employer.
Ifa chauffeur is also provided by the employer, ` 900 per month
should be added to the perquisite value.
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total taxable income.
d. All due salaries will be taxed for Assessment Year 2019-20
6. Which of the following is not a perquisite as defined under
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Section 17(2) of the Income Tax Act?
a. Accommodation at concessional rent
b. Amount of any contribution to an approved superannua-
tion fund by the employer
c. Gratuity amount
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Activity
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Section 16(ia) – Standard Deduction
Section 16(ii) – Entertainment Allowance
Section 16(iii) – Professional Tax
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These deductions are explained in Table 3.7: Study
Hint
Table 3.7: Deductions from Salary The amount actually spent
under Section 16 by the employee towards
entertainment out of the
Name of Deduction Deductible Amount entertainment allowance
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Standard Deduction A standard deduction of ` 50,000 or amount of received from his employer is
gross salary, whichever is lower, is allowed to not relevant.
the employees.
Entertainment Allowance Entertainment allowance received has to be
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Activity
3.5
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TAX TREATMENT ON PROVIDENT
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FUNDS
Provident Fund Scheme refers to a welfare scheme for employees,
wherein a certain percentage of an employee’s salary is deducted each
month as contribution towards the provident fund. The employer also
contributes a certain percentage of the employee’s salary into the fund
each month. This amount is deposited or invested and the interest
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are satisfied.
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his control
Provident Fund is as follows:
For Statutory Provident Fund or Public Provident Fund notified by the ‘Salary means basic salary,
Central Government, employer’s contribution, interest credited, and dearness allowance if provided
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amounts received on retirement, etc., are fully exempt. The employ- in terms of employment
for retirement benefits,
ee’s contribution towards Statutory Provident Fund or Public Provi-
and commission as a fixed
dent Fund is eligible for deduction under Section 80C. percentage of turnover.’
Activity
In this section, you will study how income from salaries is calcu-
lated. Income from salary chargeable to tax is calculated as shown in
Table 3.9:
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+ Arrears of Salary xxx
+ HRA xxx xxx
– Exempted HRA (xxx)
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+ LTA received xxx xxx
– Exempted LTA (xxx)
+ Perquisites xxx xxx
– Exempted Amount (xxx)
+ Other Allowances received xxx xxx
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5. Om Prakash’s company pays a premium of ` 5,000 towards a
life insurance policy in his name. The insurance has been taken
from state insurer, LIC.
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6. Om Prakash’s employer calculated the value of all taxable
allowances as ` 10,000.
7. Om Prakash’s employer calculated the value of rent-free
accommodation as ` 25,000.
8. Om Prakash spent ` 20,000 on his daughter’s hospitalisation and
his employer reimbursed him the maximum allowable amount.
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Activity
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change on her income from salary.
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As per Section 15 of the Income Tax Act, 1961, income charge-
able to tax under the head ‘salaries’ includes any salary due to an
employee, any salary paid or allowed to an assessee in the previous
year, and any arrears of salary paid or allowed to the employee in
the previous year.
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key words
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stantial interest in a company who holds more than 20% of
shares or controls more than 20% of board of directors
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3.8 DESCRIPTIVE QUESTIONS
?
1. Explain the basis for chargeability of income from salary for the
purpose of income tax.
2. Define Salary as per Section 17(1) of the Act.
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taxed.
What is Salary? 3. d. Usually paid on bi-monthly basis
4. c. Employee’s monetary obligation
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paid by employer
5. a. Due salary of March 2018 will be
considered in total taxable income.
6. c. Gratuity amount
7. Section 10(10)
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Amount Amount
Particulars
(in `) (in `)
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Basic salary (` 12,000 × 12) 2,40,000
DA (` 6,000 × 12) 72,000
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Education allowance for two children 3,600
(` 300 × 12)
Less: Exempted value (` 100 × 2 × 12) (2,400) 1,200
HRA (` 4,000 × 12) 4,800
Employer’s contribution in excess of 12% 56,160
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SUGGESTED READINGS
Bhargava, U. (2017). Taxmann’s Income Tax Act As Amended by
Finance Act, 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Ahuja, D., & Gupta, D. (2017). Bharat’s Systematic Approach to
Taxation (37th ed.). Delhi: Bharat Law House.
E-REFERENCES
Deductions allowable to tax payer. (2018). Incometaxindia.gov.in.
Retrieved 21 March 2018, from https://www.incometaxindia.gov.in/
Charts%20%20Tables/Deductions.htm
Perquisite, M. (2018). Medical Treatment/Medical Reimburse-
ment Perquisite - Taxability of Perquisites. teachoo. Retrieved
21 March 2018, from https://www.teachoo.com/160/52/Medi-
cal-Treatment-/-Medical-Reimbursement-Perquisite/category/
Taxability-of-Perquisites/
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Contents
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4.1 Introduction
4.2 Chargeability of Income from House Property
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4.2.1 Basis of Charge (Section 22)
4.2.2 House Property not Chargeable to Tax
4.2.3 Deemed Ownership (Section 27)
Self Assessment Questions
Activity
4.3 Annual Value of House Property (Section 23)
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Activity
4.5 Special Provisions of House Property
4.5.1 Recovery of Arrears of Rent and Unrealised Rent (Section 25A)
4.5.2 Property Owned by Co-Owners (Section 26)
4.5.3 Income from Self-Occupied House Property
Self Assessment Questions
Activity
4.6 Summary
4.7 Descriptive Questions
4.8 Answers and Hints
4.9 Suggested Readings & References
Introductory Caselet
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hands. The tax consultant guided him through the provisions
applicable to the calculation.
From the Gross Annual Value (GAV), the municipal taxed paid by
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property.
Thus, the income from house property was calculated by the tax
consultant in the following manner:
Introductory Caselet
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learning objectives
4.1 Introduction
Quick Revision In the previous chapter, you studied the tax treatment of income
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under the head of ‘salaries’. This chapter will introduce you to income
tax laws and tax treatment of income from house property. For every
income tax assessee, it is mandatory that he/she discloses his/her
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incomes from various sources and attribute each income source to
one of the heads of income. Income from house property is one of the
five heads of income.
Income from house property is the only income that is charged on the
notional basis. It means that the incidence of tax depends not only on
the income earned from the property, but also on the inherent poten-
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tial of the property to earn income. Tax has to be paid even in cases
where no income is being earned. Income from House Property has
been described under Sections 22 to 27 of the Income Tax Act, 1961.
Section 22 of the Act relates to chargeability of the income from house
property.
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In this chapter, you will study about Sections 22 to 27 of the Act related
to income from house property.
Mr Ram has a house. It incorporates a large open area. The house has
been let out at a rent of ` 1,00,000 per month, out of which a lease of
Section 22 of the Income Tax Act 1961, deals with the levying of tax on
house property. As per Section 22 of the Income tax Act, 1961, “Annual Study
value of property consisting of any buildings or lands appurtenant thereto Hint
of which the assessee is the owner other than such portions of such prop- For chargeability of income
erty as he may occupy for the purposes of any business or profession car- from house property, asses-
see must be the owner of
ried on by him the profits of which are chargeable to income tax shall be
the house property. Here,
chargeable to income tax under the head ‘Income from House Property’.” ownership includes deemed
ownership.
According to this section, land, buildings and the lands that are
attached to buildings are chargeable to tax, provided that such house
property is not used for the purpose of business of the assessee’s own
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business, the income of which is chargeable to tax.
For taxing an income under the head, ‘Income from House Property’,
three conditions must be fulfilled, which are as follows:
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1. The property must consist of buildings and lands appurtenant
thereto.
2. The assessee must be the owner of such house property.
3. The property may be used for any purpose, such as renting NOTE
or letting out, but it should not be used by the owner for the
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Income received as rent from furnishing and other facilities (A.C.,
lift, etc.) provided in a rented property.
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Warehousing charges received for keeping merchandise; it is as-
sessable under the head ‘Income From Business Or Profession’.
Income from letting out surplus area of a non-processing plant
building including warehouses.
Income from a building owned or occupied by an agriculturalist
is not chargeable to tax if the building is located in the immediate
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Impartible estate – It refers to a property that is not legally divisi-
ble.
Member of co-operative society/association {Section 27(iii)}: In
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case of allotment or lease of building/part thereof under House
Building Scheme of a co-operative society/association to its mem-
ber, the member shall be the deemed owner. Although the legal
owner of such building/part thereof is the co-operative society/as-
sociation.
A person possessing a property {Section 27(iiia)}: A buyer who is NOTE
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Exhibit
Composite Rent
At times, the house owner rents out the property along with cer-
tain services or facilities, such as lift, A.C., furniture, electricity,
water, etc. The amount received by the owner of the house in such
a case is called composite rent. The composite rent is broken down
into two components, namely income from house rent and income
by way of providing various facilities. The first component is tax-
able under the head ‘Income From House Property’ and the sec-
ond one is taxable under the head ‘Income From Other Sources’.
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b. Self-occupied property of an individual
c. Rent received by the owner of a commercial shop by his
tenant
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d. Residential quarters for employees
4. Mr Manish transfers one of his house properties to his wife
Mrs. Mukta without taking any consideration. If this was not
a transfer in connection with an agreement to live apart, then
Mr Manish will be considered as the ___________ of the house
property.
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Activity
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Look out for at least 4 examples from the real-life situations where
income earned from a property does not come under the gambit of
Sections 22 to 27 of the Income Tax Act, 1961.
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Step I: Determine the gross annual value of house property
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Step II: Deduct the municipal taxes actually paid by the owner in the
previous year from the gross annual value calculated in Step I.
The net annual value obtained after deducting municipal taxes is con-
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sidered to be the annual value of the house property for all purposes
related to the Income Tax Act.
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* (higher of 1 or 2, but not
more than 3)
Solution: Let us calculate the GAV before deductions for each house
property.
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House 2: As the house property is not let out throughout the previous
year, the annual value shall be determined as per clauses (a) and (c) of
Section 23(1) as follows:
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Particulars Amount (`)
Calculate the gross annual value (higher of a and b)
a. Municipal Value or the Fair Rent, whichever is higher 1,80,000
subject to maximum of Standard Rent (Municipal Value
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(1,50,000);
Fair Rent (1,80,000); Standard Rent (2,00,000)
b. Actual rent received or receivable (14,000 × 10) 1,40,000
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GAV 1,40,000
House 3: As the house property is not let out throughout the previous
year, the annual value shall be determined as per clauses (a) and (c) of
Section 23(1) as follows:
Activity
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mined in case of a house property that remains vacant for part of
the year.
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DEDUCTIONS FROM HOUSE PROPERTY
4.4
(SECTION 24)
For the income chargeable under the head ‘Income from House Prop-
erty’, there are only two deductions, namely:
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in five successive financial years starting from the year in which the Study
acquisition/construction was completed. In addition, interest will be Hint
aggregated from the date of borrowing till the end of the previous year
Any interest payable on a fresh
prior to the previous year in which the house is completed and not till loan raised to repay the origi-
the date of completion of construction. nal loan taken for the purposes
specified under Section 24 is
The deductions allowable from NAV while computing the income also allowed as a deduction.
from house property are explained in Table 4.3:
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borrowed capital 24(b) limit
For self-occupied property, only interest on borrowed capital under
Section 24(b) is allowed as a deduction as below:
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A When the loan is Interest on borrowed capital under Section 24(b)
taken for renewal, maximum up to ` 30,000 p.a.
reconstruction or
repair of house
property
B When the loan is 1. The loan is Interest on borrowed capital
taken for construc- taken prior under Section 24(b) maximum
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Activity
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in case of repairs or re-construction of house property.
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SPECIAL PROVISIONS OF HOUSE
4.5
PROPERTY
For computation of income from house property, some issues may
arise in respect of arrears of rent received by the assessee at a later
date, co-ownership of property by two or more persons, and determi-
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While determining the gross annual value, the actual rent received or
receivable shall not include the amount of unrealised rent (i.e., rent
which is not capable of being realised from the tenant). However, this
is true, provided the below conditions specified under Rule 4 are met:
It is a bona fide tenancy.
The defaulting tenant has vacated the property or compelling
steps have been taken against him to vacate.
The defaulting tenant does not occupy any other house property
of the assessee.
The assessee has taken reasonable steps for instituting legal pro-
ceedings to recover the amount of unpaid rent.
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income of such persons.
As per Section 23(2), the annual value of the house property shall be
taken to be Nil in the following cases: Know More
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House property is self-occupied by the assessee for his own resi- In respect of self-occupied or
dence; or unoccupied house property
specified under Section 23(2), no
House property is unoccupied throughout the previous year be- deduction for municipal taxes
shall be allowed.
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This benefit of Nil annual value can be taken only if no other benefit is
derived by the owner from such house property.
Study
Section 23(4) states that if more than two house properties are self-oc- Hint
cupied or unoccupied, then the assessee can avail the benefit of Nil
If one portion of house
annual value in respect of only two house properties chosen at his own property is self-occupied
option. The other house properties shall be deemed to be let out prop- and another portion is let out
erties and GAV shall be computed with respect to the expected rent. during the previous year, the
income from house property
The deductions under Section 24 in case of self-occupied house prop- will be computed separately
erty will be computed as explained in Table 4.3 referred to in Section for the let-out portion and the
self-occupied portion.
4.4: Deductions from House Property.
Please note that in case of let out or deemed to be let out property, the
entire interest amount is allowed as deduction whereas in the case of
self-occupied property, a maximum deduction of ` 30,000 or ` 2,00,000
is allowed depending upon the case.
If a house property is let out for a part of the year and self-occupied for
the remaining part of the year, then the GAV will be determined as per
normal rules as shown in Table 4.2. Expected rent for the whole year is
compared with actual rent for the let-out period. If actual rent is more
than the expected rent, actual rent shall be the GAV. If actual rent is
less than the expected rent, expected rent shall be the GAV.
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a. ` 30,000
b. ` 21,000
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c. ` 15,000
d. ` 20,000
10. For determining income from house property, unrealised rent
is
a. To be deducted from actual rent
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Activity
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The owner of a house property (in whose name the property
stands) is considered as the assessee for the purpose of taxation.
If an individual has given his house property on rent or lease and
derives any income from it, it is termed as ‘income from house
property’.
For taxing an income under the head ‘Income from House Proper-
ty’, three conditions must be fulfilled, which are as follows:
The property must consist of buildings and lands appurtenant
thereto.
The assessee must be the owner of such house property.
The property may be used for any purpose, such as renting or
letting-out, but it should not be used by the owner for the pur-
pose of any business or profession carried on by him, the profit
of which is taxable. If the property is used for own business or
profession, it shall not be taxable.
A deemed owner is an individual who does not have the property
registered in his name, but is liable to pay tax for the income re-
ceived from house property as per Section 27 of the Income Tax
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Act.
The annual value of the property is based on the actual rent re-
ceived by the owner or the amount expected to be received by him/
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her [Actual rent received or receivable (ARR)].
At a broader level, the annual value of the property may be deter-
mined in just two steps:
Step I: Determine the gross annual value of house property; and
Step II: Deduct municipal taxes actually paid by the owner in the
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Key Words
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Topic Q. No. Answer
Chargeability of Income 1. d. either a or b
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from House Property
2. Section 22
3. c. Rent received by the owner
of a commercial shop by his
tenant
4. deemed
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from House Property (Section 24)
e-References
Business.gov.in. (2014). Business Portal of India: Taxation: Taxa-
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CONTENTS
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5.1 Introduction
5.2 General Principles of Business and Profession
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Self Assessment Questions
Activity
5.3 Profits and Gains of Business or Profession (Section 28)
Self Assessment Questions
Activity
5.4 Computation of Income from Profits and Gains of Business or Profession
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(Section 29)
Self Assessment Questions
Activity
5.5 Deductions Expressly Allowable under Section 30-43D
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CONTENTS
5.7 Summary
5.8 Descriptive Questions
5.9 Answers and Hints
5.10 Suggested Readings & References
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Introductory Caselet
Section 40(a)(ia) of the Income Tax Act, 1961 makes certain deduc- Case Objective
tions from profits or gains of business or profession to be inadmis-
This Caselet discusses the
sible, if tax required to be deducted on specified payments has not provisions relating to
been deducted by the assessee. When tax is deductible at source disallowance of certain
on any sum payable to a resident under Chapter XVII-B during expenditure while computing
the previous year, 30% of such sum shall be disallowed if: business or professional
income.
Such tax has not been deducted at source, or
Such tax has been deducted but has not been paid or remitted
to the Government on or before the due date specified under
Section 139(1).
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In cases where tax is deducted in any subsequent year or has been
deducted during the previous year but paid after the due date,
then 30% of such payment shall be allowed as a deduction of the
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previous year in which such payment is made.
learning objectives
5.1 INTRODUCTION
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Quick Revision In the previous chapter, you studied the concept of income from house
property. In this chapter, we will discuss profits and gains of business
or profession. Under Sections 28 to 44DB of the Income Tax Act, 1961,
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we will discuss the chargeability of profits and gains of business or
profession and the scope of income under this head.
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self assessment Questions
Activity
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rying on an export business, such as profit on
sale of import entitlements, customs or excise
duty repayable as a drawback, cash assistance
against exports, and profit on transfer of du-
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ty-free replenishment certificate.
Benefits or perquisites Value of benefits or perquisites arising from
from business or profes- business or profession, whether such perqui-
sion sites are convertible into money or not.
Interest, bonus, commis- Any interest, bonus, commission, salary or
sion, salary or remunera- remuneration due to or received by a part-
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tion received by partner ner from a firm is taxable in his hands to the
extent it can be claimed as a deduction in the
hands of the firm under Section 40(b).
Sum received under Key- Any sum received under Keyman Insurance
man Insurance Policy Policy including sums allocated by way of
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bonus.
Sum received on capital Any sum, whether received or receivable, in
asset being discarded or relation to a capital asset being transferred,
demolished demolished, destroyed or discarded, for
which whole expenditure has been allowed as
deduction under Section 35AD.
FMV of inventory The fair market value of inventory as on the
date on which it is treated as or converted
into a capital asset.
Sum received under an Any sum, whether received or receivable, in
agreement for not carry- respect of an agreement for not carrying out
ing out an activity any activity related to a business or profes-
sion, or for not sharing any know-how, copy-
right, patent, commercial right, etc.
Speculation Business
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of capital expenditure incurred
separate business for the purpose of computation of income by certain businesses specified
from business or profession. (True/False) therein.
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Activity
While computing income under the head ‘Profits and Gains of Busi-
ness or Profession’, certain important principles should be kept in
mind, which are:
Business carried on by the assessee: As per Section 28, the per-
son who is in charge of running the business is always charged.
Therefore, it is not of much importance whether the assessee is do-
ing the business himself or through some of his employees, agents
or managers. The important point is that the business should have
been carried by the assessee at any time during the previous year,
but not necessarily throughout the year or in the assessment year.
The assessee must have the right to carry on the business.
Tax is levied on aggregate income from all businesses/profes-
sions carried out by the assessee during the previous year: The
net outcome of any business or profession carried out by an asses-
see is calculated separately. However, when tax is imposed, out-
comes of all businesses are combined together and on that income,
tax is levied.
Speculation business: The speculation business of an assessee is
kept separate. If there is a profit, it will be taxed with other busi-
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cannot be levied only on notional basis or assumption. Therefore,
profit can be taxed only if it actually occurs.
Business/profession may be legal or illegal: The income from le-
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gal as well as illegal business is taxable under this head.
Business/professional income to be computed for each previous
year: The profits and gains must be taxed in relation to the previ-
ous year.
Negative income from business/profession: As per the prescribed
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As per Section 29, the profits and gains of a business or profession are
computed in accordance with the provisions contained in Sections 30
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Activity
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However, no expenditure is allowed as a deduction if the expenditure Study
is of capital nature. Hint
Where the assessee has occupied the premises as a tenant, then the If the premises are used partly
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for business purposes and
amount of repair can be claimed as a deduction only if the assessee partly for other purposes, then
has undertaken to bear the cost of such repairs to the premises. deduction would be allowed
only to the proportionate
If some part of the premises is sub-let by the assessee, then the amount amount of expenses
of deduction under this section would be limited to rent paid by the attributable to the part of
assessee as reduced by rent recovered from sub-tenant. premises used for business.
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As per the Act, there are two methods for calculating the value of
depreciation. They are the Straight Line Method (SLM) and the Writ-
ten Down Value (WDV) Method.
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you must be aware of the following concepts:
(A) Conditions for claiming depreciation
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(B) Block of assets [Section 2(11)]
(C) Actual cost [Section 43(1)]
(D) Written Down Value (WDV) [Section 43(6)]
(E) Rates of depreciation [Appendix I (Rule 5)]
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No depreciation can be claimed on land.
Asset must fall under the eligible class of assets which includes:
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Tangible assets, such as buildings, machinery, plant and furni-
ture.
Intangible assets, such as know-how, patents, copyrights, trade-
marks, licenses, franchises or any other business or commer-
cial rights of similar nature, being intangible assets acquired
on or after the 1st day of April, 1998.
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Solution: Yes, Mirabai Pvt. Ltd. can claim deduction with respect
to depreciation of restrooms and gym under Section 32 because any
asset (irrespective of whether it is earning income or not) that helps in
business or profession can be claimed for deduction.
(B) Block of assets [Section 2(11)]: As per the Income Tax Act, depre-
ciation is allowed on the block of assets and not on individual assets.
The term ‘block of assets’ refers to a group of tangible assets or a
group of intangible assets in respect of which the same percentage of
depreciation is prescribed. Block of assets has been defined in clause
(11) of Section 2. Tangible assets include buildings, machinery, plant
or furniture. Intangible assets include know-how, patents, copyrights,
trademarks, licenses, franchises or any other business or commercial
rights of similar nature, in respect of which the same percentage of
depreciation is prescribed. Know-how refers to any information or
technique that may assist in the manufacturing or processing of goods
or in the working of a mine, oil-well or other sources of mineral depos-
its. Each block is differentiated as consisting of tangible and intangi-
ble assets on the basis of its unique rate of depreciation.
(C) Actual cost [Section 43(1)]: Section 43 of the Act defines actual
cost. Actual cost means the actual cost of the assets to the assessee,
reduced by that portion of the cost (if any) as has been met directly or
indirectly by any other person or authority.
With effect from 1st April, 2020 (Assessment Year 2021-2022), if any
assessee incurs any expenditure for the acquisition of any asset, the
payment of which has been done by modes other than by cheque or
bank draft or electronic clearing system and such payment exceeds
` 10,000 in a day, then such expenditure will be ignored for determin-
ing the actual cost.
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(D) Written Down Value (WDV) [Section 43(6)]: The percentage of
Hint depreciation as prescribed for each block of assets is applied on WDV
According to Section 43(6), computed at the end of the previous year relevant to the assessment
Written Down Value refers to year. The WDV can be calculated by following certain steps as shown
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the following:
in Table 5.2:
• In case of assets
acquired by the assessee
during the previous year, TABLE 5.2: CALCULATION OF WRITTEN
WDV is the actual cost to DOWN VALUE OF AN ASSET
the assessee.
Particulars Amount (`)
• In case of assets
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acquired by the assessee Opening value of the block of assets at the beginning of the XXX
before the previous previous year
year, WDV is the actual Add: Actual Cost of assets (P&M) acquired during the previ- XXX
cost to the assessee as ous year and belonging to the same block of assets
reduced by the aggregate
Total XXX
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and deprecation rate will be normal if the asset is then used in the
subsequent year.
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1. Buildings Residential buildings except hotels 5%
and boarding houses
Hotels and boarding houses 10%
Purely temporary erections such as 40%
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wooden structures
2. Furniture and Furniture – Any furniture/fittings 10%
fittings including electrical fittings and air
conditioners
3. Plant and ma- Motor car, motor cycle, bike, scooter 15%
chinery other than those used in a business of
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2. Additional depreciation: Even after providing for the normal
depreciation, additional depreciation of 20% (or 35% in some
prescribed cases) of the actual cost shall be allowed for new
plant and machinery acquired and installed by an assessee who
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is engaged in:
i. manufacturing or production of articles or things; or
ii. in the business of generation or generation, transmission and
distribution of power.
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CASES WHERE ASSETS ARE PUT TO USE FOR LESS THAN 180
DAYS IN THE RELEVANT PREVIOUS YEAR
In cases where a newly acquired asset is put to use for less than 180
days in a year, the assessee can claim only 50% of the total deprecia-
tion as deduction. Also, this restriction is also applicable in the case of
additional depreciation of 20% or 35%, as the case may be. In the case
of additional depreciation being charged at half of the rate, the rest
half will be charged in the successive assessment year.
Solution:
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Less: Depreciation of the year
a. Depreciation on opening block 6,00,00,000
@ 15% of 40,00,00,000
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b. Depreciation on additional P&M 45,00,000
(Period of usage less than 180 days,
i.e., from 1st December, 2020 till 31st
March, 2021)
@ 15% of 50% of 6,00,00,000
Total 6,45,00,000
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In the case of unabsorbed losses, the assessee should set off the losses
brought forward as follows:
1. Adjust all the current year depreciations.
2. Now, set off the brought forward business losses (speculative or
non-speculative).
3. Unabsorbed depreciation will now be set off against the business
income.
Solution:
Depreciation = ` 12,00,000
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Income from capital gains = ` 2,00,000 (cannot be adjusted against
unabsorbed depreciation)
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Unabsorbed depreciation = ` 5,00,000
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of scientific research
Amount paid by the assessee to 150% of the expend-
an approved National Laborato- iture is allowed as
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ry/IIT/university/other specified deduction
persons for the purpose of scien-
tific research undertaken under a
prescribed programme
Know More
5.5.5 OTHER DEDUCTIONS under Section 36(1) According to Section 43(4)(i),
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husbandry, agriculture or
fisheries.
Table 5.5: Other Deductions
Section Nature of Expenses Quantum of Deduction Allowable
36(1)(i) Insurance premium Whole amount is allowable
paid against risk of
damage and destruction
of stocks or stores of the
business or profession
36(1)(ib) Insurance premium Whole amount is allowable
paid by an employer
otherwise than by way
of cash to secure an
insurance cover on the
health of his employees
36(1)(ii) Any sum paid by an Whole amount is allowable subject to
employer by way of Section 43B. However, such amount
bonus or commission to should not have been otherwise paya-
employees ble as profits or dividends if it had not
been paid as bonus or commission
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36(1) Employer’s contribution Deduction of amount is allowable to
(iva) by the assessee towards the extent of 10% of salary of employ-
a pension scheme re- ee
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ferred to under Section
80CCD
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Expenditure must not have been incurred on any illegal or prohib-
ited activity.
Expenditure incurred by an assessee on the activities relating to
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corporate social responsibility referred to in Section 135 of the
Companies Act, 2013 shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or pro-
fession.
Activity
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Section Nature of Expenses Quantum of Deduc-
tion Allowable/Dis-
allowable
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40(a)(i) Interest, royalty, fees for technical ser- Whole amount is
vices or other sums payable outside In- disallowable. Howev-
dia or to a non-corporate non-resident/ er, such sum shall be
foreign company in India, on which allowed in the pre-
TDS has not been deducted or after vious year in which
deduction has not been paid within the such TDS is paid
due date specified under Section 139(1) subsequently
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Payment of salary, commission, bonus or any remuneration to a
partner is not deductible. However, deduction shall be allowed
only if all the following conditions are satisfied:
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It is authorised by and in accordance with the terms of part-
nership deed.
It relates to period falling after the date of partnership deed.
The payment is made to a working partner.
The amount of admissible deduction of remuneration is re-
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to Payment made by Assessee
For purposes of Section
Payment made by Payment made to Related Person
40A(2), relative in relation to
an individual includes spouse, Assessee
brother, sister or any lineal Individual A relative of the individual
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zz
ascendant or descendant of the
individual.
zz A person in whose business or profession the indi-
vidual or his relative has a substantial interest
Firm zz A partner of the firm or any relative of such partner
zz A person in whose business or profession the part-
ner or his relative has a substantial interest
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payment/aggregate of payments otherwise than by an account-payee
cheque or bank draft is made in cases and circumstances as covered
under Rule 6DD. The cases of expenses covered under Rule 6DD are
as follows:
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Payment to RBI, SBI, LIC, Cooperative Bank or Primary Agricul-
tural Credit Society
Payment required to be made in legal tender to the Government
Payment made by letter of credit arrangements of bank, telegraph-
ic or mail transfer of bank, credit card, debit card, bills of exchange
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Bonus or commission paid as an employer for services provided
by employees
Interest on borrowings from Public Financial Institution, State Fi-
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nancial Corporation or State Industrial Investment Corporation
Interest on borrowings from Scheduled Bank or Cooperative Bank
except for Primary Agricultural and Rural Bank
Payment as an employer in lieu of any leave standing at the credit
of employees
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Any amount paid or payable to Indian Railways for the use of rail-
way assets
Activity
5.7 SUMMARY
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The income under head ‘Profits and Gains of Business or Profes-
sion’ are covered under Section 28 of the Income Tax Act, 1961.
Incomes chargeable to income tax under the head ‘Profits and
Gains of Business or Profession’ include profits and gains of any
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Amounts not deductible under Section 40 include:
In case of any assessee: any interest, royalty, fees for technical
services or any other sum chargeable; any interest, commis-
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sion or brokerage, rent, royalty, fees for professional services
or fees for technical services payable to a resident, or amounts
payable to a contractor or sub-contractor; etc.
In the case of any firm assessable as such: any payment of sal-
ary, bonus, commission or remuneration, etc.
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key words
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3. Explain the principles that should be kept in mind while
computing income under the head ‘Profits and Gains of Business
or Profession’.
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4. Explain tax provisions related to Section 32 (deduction for
depreciation). Also explain in detail the concept of block of assets.
5. Explain in detail two types of depreciation with the help of an
illustration.
6. Describe various amounts that are not deductible under Section
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40 of the Act.
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HINTS FOR DESCRIPTIVE QUESTIONS
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1. Some of the general principles of business and profession include:
business, profession, and profits and gains. Refer to Section 5.2
General Principles of Business and Profession
2. Section 43 relates to definitions of certain terms relevant to
income from profits and gains of business or profession. Actual
cost means the actual cost of the assets to the assessee, reduced
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SUGGESTED READINGS
Lal, B.B., Income Tax Law and Practice. New Delhi: Konark Pub-
lications.
Manoharan, T., & Hari, G. (2018). Student’s Handbook on Taxation
(31st ed.). Mumbai: Snow White Publications Pvt. Ltd.
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E-REFERENCES
(2018). Retrieved from https://resource.cdn.icai.org/46438bosin-
ter-p4-seca-cp4-u3.pdf
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Income Tax deduction under section 80C, 80CCD, 80CCC. (2018).
Cleartax.in. Retrieved 11 April 2018, from https://cleartax.in-
/s/80c-80-deductions
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CONTENTS
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6.1 Introduction
6.2 Basis of Charge
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Self Assessment Questions
Activity
6.3 Capital Asset under Section 2(14)
Activity
6.4 Capital Assets and its Types
6.4.1 Short-term Assets and Long-term Assets
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CONTENTS
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Self Assessment Questions
Activity
6.17 Short-Term Capital Gain
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Self Assessment Questions
Activity
6.18 Long-Term Capital Gain
Self Assessment Questions
Activity
6.19 Exemptions/Deductions under Capital Gains (Under Section 54, 54B,
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Activity
6.21 Summary
6.22 Descriptive Questions
6.23 Answers and Hints
6.24 Suggested Readings & References
Introductory Caselet
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Mr Amit and its HUF entered into three transactions during the
previous year 2020-2021 and consider whether such transactions
would attract taxability of capital gains.
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Mr Amit acquired gold in 1979 for ` 31,200. He gifted this to his son
on the occasion of his marriage in the previous year 2020-2021. On
the day of transfer, the fair market value of the gold was ` 2,04,000.
As per Section 47(iii), capital assets transferred as a gift are not
regarded as transfer. Therefore, capital gains taxability shall not
arise in the hands of Mr Amit under this situation.
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was acquired by the HUF in 1954 for ` 19,000. As per Section 47(i),
capital assets transferred to family members under the partition of
HUF are not regarded as transfer. Therefore, capital gains taxabil-
ity shall not arise in the hands of HUF under this situation.
In 2000, Mr Amit purchased 60 convertible debentures of a com-
pany for ` 55,000. These debentures are converted by the com-
pany into 600 shares worth ` 98,000 in October 2020. As per Sec-
tion 47(x), conversion of bonds or debentures into any shares
or debentures of the same company is not regarded as transfer.
Therefore, capital gains taxability shall not arise in the hands of
Mr Amit under this situation.
Gain from gift of gold to son on the Taxability in the Does not
occasion of his marriage hands of Mr Amit arise
Gain from distribution of house Taxability in the Does not
property under the partition of HUF hands of HUF arise
Gain from the conversion of deben- Taxability in the Does not
tures into shares hands of Mr Amit arise
Capital gains tax liability does not arise under situations which
are not regarded as transfer.
learning objectives
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>> Describe capital gains on transfer of securities
>> Discuss capital gains on transfer of capital assets (other than
securities)
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>> Explain indexation
>> Describe the cost of inflation index
>> Discuss the exemptions based on certain investments (un-
der Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA)
>> Explain Deemed Full Value Consideration (DFVC): special
cases
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6.1 INTRODUCTION
In the previous chapter, you studied about the profits and gains of
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Quick Revision
business and profession and its related tax treatment. Capital gain
means any profit arising from the transfer of a capital asset (affected
in the previous year) shall be chargeable to income tax. Moreover, it
shall be deemed as the income of the previous year in which the trans-
fer took place. Capital gain takes place only when a capital asset is
transferred. However, if the asset, that has been transferred, is not a
capital asset, then the amount will not be considered as capital gain.
This chapter discusses capital assets under Section 2 (14) and defines
transfer under Section 2(47). It also explains different types of capital
assets and capital gains as well as the period of holding. Further, the
chapter describes full value of consideration, cost of acquisition and
cost of improvement and transfer. Capital gain on transfer of securi-
ties and transfer of capital assets is also discussed. Indexation, cost of
inflation index and exemptions based on certain investments (under
Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA) are also described. Finally,
Deemed Full Value Consideration (DFVC) has been discussed.
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Activity
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Using the Internet, find information on the basis of charge for
Salary Income.
Activity
Make a list of capital assets that are exempted under the head ‘per-
sonal effects’ for an individual.
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A long-term asset is one that is held for more than 36 months. How-
ever, from the financial year 2017-18, this criterion has been revised to
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24 months in the case of immovable property, such as land, building
and house property. For example, Mr A sells his house property after
holding it for a period of 24 months. In this case, any income aris-
ing will be treated as a long-term capital gain. This reduced period
is, however, not applicable to the movable property, such as jewellery,
debt-oriented mutual funds, etc. These items will be classified as long-
term capital assets only if they are held for more than 36 months.
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Capital assets are considered short-term in case they are held for a
period less than 36 months from the date of transfer. This rule applies
to assets transferred after 10th July, 2014 regardless of the date of pur-
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It should be noted that in case these assets are held for a period above
12 months, they will be considered as long-term capital assets.
ber 2015. In this case, the period of holding was less than 36 months.
Therefore, the land will be considered as a short-term capital asset.
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Activity
same on June 30, 2009. The holding period for the security would be
six months. Hence, it would be treated as a short-term asset.
Activity
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Transfer takes place in the previous year
Transfer results in some profit or gain
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Profit or gain so resulted is not exempt from tax under relevant
sections
According to Section 45(1), any profits or gains arising from the trans-
fer of a capital asset effected in the previous year other than certain
exemptions are chargeable to Income Tax under capital gains in the
immediately following assessment year and the year of chargeability
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is the previous year in which the transfer took place. Exemptions from
being charged under this head are covered under Sections 54, 54B,
54D, 54E, 54EA, 54EB, 54F, 54G and 54H.
assets at any time during the previous year from an insurer in lieu
of damage or destruction of any capital asset, then the value of the
money received (or the fair market value) chargeable to tax and the
year of chargeability would be the previous year in which the person
has received the money or asset from the insurer.
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compensation or enhanced compensation. In such a case, the initial
or the enhanced compensation is chargeable to tax. For initial com-
pensation, the year of chargeability is the previous year in which the
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compensation or a part of compensation is received. For the enhanced
compensation, the year of chargeability is the latter of the previous
years in which the compensation is received or the year in which the
competent authority (court/tribunal) passes its final order.
case, the year of chargeability is the previous year in which the certif-
icate of completion of the project or part of the project is issued by the
competent authority.
Activity
Using the Internet, find out when an assessee can claim deductions
under Sections 80C to 80U in the case of income from capital gains.
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(iii) the compulsory acquisition thereof under any law
(iv) in case where the capital asset is converted by the owner thereof
into, or is treated by him/her as, stock-in-trade of a business
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owned by him/her, such conversion or treatment
(v) the maturity or redemption of a zero-coupon bond
(vi) any transaction containing the consent to possess any immovable
property to be taken or retained in part performance of a contract
of nature referred to in Section 53A of the Transfer of Property
Act, 1882
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From the above definition, it can be concluded that the term ‘Trans-
fer’ under the Income Tax is important to understand to compute the
tax liability arising under the head ‘income from capital gains’ arising
from the transfer of a capital asset.
Section 47 of the Income Tax Act defines the transactions which are
not regarded as transfer for purpose of capital gains. Some of the
transactions that are not regarded as transfers for the purpose of cap-
ital gains are as follows:
Any transfer done by distributing capital assets on the total or par-
tial value of the partition of an HUF.
Any transfer of capital asset done under a will or gift or an irrevo-
cable trust.
Any transfer of capital asset from a holding company to any of its
wholly owned Indian subsidiary company or vice versa.
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uity shares of the same company.
Activity
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Make a list of items mentioned in Section 2(47) of the Act, which
cannot be considered as transfers.
Section 50 of the Income Tax Act gives the provisions for computation
of capital gains arising from depreciable assets. Accordingly, in case
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be:
a. ` 1,40,000
b. ` 1,20,000
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c. Not enough information for computation
d. It will be decided by the assessing office
Activity
Using the Internet, explain fair market value and full market value
of a capital asset.
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part of the acquisition.
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which asset is derived.
= (100 × 100)/(2 × 10 × 5)
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gains for any assessee, these costs referred to as the cost of transfer
are permissible for deduction from sale proceeds. For example, in the
case of sale of a house property, following costs may be incurred by the
assessee to carry out the transfer:
Brokerage or commission paid for securing a buyer
Cost of stamp papers
Travelling expenses in connection with the transfer
Where a property has been inherited, expense related to proce-
dures associated with the will and inheritance, obtaining succes-
sion certificate, costs of executor, etc.
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compute tax on capital gains.
Activity
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After acquiring or purchasing any capital asset, the assessee may add
value to the asset by way of improvement or addition to the asset. Know More
The capital expenditure incurred by an assessee in carrying out these The capital expenditure that
is incurred for improving a
additions and improvements in the capital asset is referred to as the
capital asset, but which is not
cost of improvement. It also includes any cost incurred in protect- allowed as a deduction under
ing or curing the title. Therefore, it can be concluded that the cost of any other head of income can
improvement includes all those expenditures incurred by a taxpayer be included under the Cost of
Improvement (COI).
in increasing the value of the capital asset.
Until now, the base year for purposes of tax computation was 1981.
However, this has been revised to the year 2001 with effect from the
financial year 2017-18.
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ground floor only on 1.12.2007 for ` 5,00,000. Later on, by 31.03.2008, he
elevated the sidewalls which were 5 feet tall to 7 feet. The expenditure
incurred in the process was ` 30,000. After a while, he began construct-
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ing the first floor of the house as per the plan incurring an expendi-
ture of ` 40,500 by 31.3.2010. The finishing took place between 1.4.2010
and 28.06.2010 which cost him another ` 80,500. He sold the house on
01.03.2011. Find the cost of improvement and total indexed cost.
CII 2007–08)
= 5,00,000 × (167/129)
Activity
Transaction Tax (STT) has been paid for their transfer. STT is a tax
levied on all transactions (excluding transactions related to commod-
ities and currency) undertaken by the stock exchange. It is levied on
both the buyer and the seller. As taxes have already been paid by the
buyer and seller, capital gains tax is not chargeable on transactions
where STT is paid.
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Balance amount that results after deducting the STCG amount
from the total income is charged at normal rates of tax as applica-
ble.
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Section 111A deals with tax on short-term capital gains in certain
cases. As per Section 111A, if an STCG occurs as a result of the trans-
fer of equity shares and the units of equity-linked fund and if STT has
been paid on such sale, then, a tax of 15% is applicable to such trans-
action. Also, according to this section, if a STCG arises as a result of
transaction that is undertaken on a recognised stock exchange in any
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Section 112 deals with tax on long-term capital gains. This section
describes the tax payable by assessees if their total income includes QUICK TIP
any income that arises as a result of the transfer of a long-term capital If you meet any person
asset that is chargeable under the head of ‘Capital Gains’. The LTCG (assessee) whose total income
tax applicable to various LTCAs and for different persons is presented includes any income which is
categorised as STCG under
in Table 6.1: Section 111A, then you can
suggest him/her get a rebate
Table 6.1: Section 112 – LTCG Tax Applicable on under Section 88.
Transfer of Securities
LTCA Rate of LTCG tax
Unlisted securities of a Transfer made by non-corporate/non-resi-
closely held company dent/foreign company – 10% (no benefit of
indexation and currency fluctuation)
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Others including resident individual/resi- Hint
dent HUF – 20% (with indexation benefit)
In respect of capital gains
Listed securities not traded 10% without benefit of indexation or 20% considered under Section
through a recognised stock with benefit of indexation, whichever is 111A, 112 and 112A, no
exchange and STT not paid more beneficial for the assessee deduction under Chapter VI
A is allowed.
Zero-coupon bonds 10% without the benefit of indexation
Until recently, the long-term capital gains that arise as a result of trans-
fer of listed equity shares or units of equity-oriented fund or units of
business trusts, were exempt from income-tax as per Section 10(38) of
the Act. However, in the budget of 2018 and in the Finance Act, 2018,
this exemption has been withdrawn and a new Section, Section 112A
has been inserted. Section 10(38) now stands deleted. It used to deal
with the long-term capital gains resulting from the sale or transfer of
securities that were not chargeable to tax under the Income Tax Act.
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on a recognised stock exchange in an International Financial Service
Centre and irrespective of whether STT has been paid or not, tax at
rate of 10% is applicable to it.
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Exhibit
The Finance Bill 2018 reintroduced tax on LTCG made from listed
shares and equity-oriented mutual funds. With Effective 1st
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April 2018, LTCG arising from the sale of these shares and equi-
ty-oriented funds that are held for more than 12 months are tax-
able at the rate of 10% if such LTCG exceeds ` 1 lakh in the given
Financial Year.
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For Example:
Higher of –
Original COA i.e., ` 12,000, and
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Lower of –
FMV on 31.1.18 i.e., ` 15,000, and
Sale Price i.e., ` 18,000
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which the total income falls Section 50C deals with the computation of capital gains with respect
short of the maximum amount
not chargeable to tax. The to transfer of immovable property (land and building). If, in a trans-
balance long-term capital fer of a land or building or both, the value received or accrued is less
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gains would be taxed at the than the value adopted or assessed by the stamp valuation authority
rate of 20%. for payment of stamp duty in respect of the transfer, then the value so
adopted or assessed is considered as the FVC received. If the dates of
agreement and registration are different, then the stamp duty value as
on the date of agreement is considered for computing the FVC.
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consideration is obtained
on or before the date of
agreement via account
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payee cheque, bank
draft, ECS, or other spec-
ified electronic modes
(IMPS, UPI, RTGS,
NEFT, Net banking,
debit card, credit card, or
BHIM Aadhar Pay),
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is uncertain or cannot be
calculated
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Illustration 3: Mrs. Shikha purchased a flat in Gurgaon for ` 25 lakhs
on 10th May, 2016 from her colleague, Mr Raj. The stamp duty as deter-
mined by the Stamp Duty Authority amounted to ` 2 lakhs with the
deemed consideration being ` 27 lakhs. Mr Raj had initially purchased
the flat on 21st May, 2011 for ` 12 lakhs. On 10th Nov., 2016, Mrs. Shikha
sold the flat for ` 32 lakhs. Determine the effect of the above transac-
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tions on the assessment of Mrs. Shikha and Mr Raj for the Assessment
Year 2016–17. (Assume that the value for stamp duty purpose in case
of the second sale was not more than the sale consideration.)
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i.e., ` 3,00,000 × (CII of the year of transfer/CII of 1981–82)
Activity
6.15 INDEXATION
The value of money at present will not be the same for tomorrow. The
prices keep on increasing due to inflation. Indexation is a technique
to adjust income payments by means of a Price Index to maintain the
purchasing power of the public in inflation. The actual prices should
not be used while computing the capital gains; rather, these prices
should be indexed in line with the inflation in a country so that people
could obtain the real value from sale of their assets. For computing
capital gains using indexation, the numerator is the index value of
the year in which the asset is sold, while the denominator is the index
value of the year when the asset was purchased. The index value is
derived from the index known as ‘Cost of Inflation Index’.
Activity
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Central Board of Direct Taxes (CBDT) has notified the ‘Cost Inflation
Index’ applicable from financial year 2017-18 (Assessment Year 2018-
19) onwards, with base year shifted to 2001-02, in line with the amend-
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ments made in the budget 2017. Cost Inflation Index as per amended
provisions has been fixed at 280 for financial year 2018-19/Assessment
Year 2019-20, with cost inflation index for base year (financial year
2001-02) at 100.
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
Cost Inflation Index(CII) = (CII for the year the asset was transferred
or sold/CII for the year the asset was acquired or purchased)
Solution: The CII for the year the apartment was purchased is 100.
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The CII for the year the apartment was sold is 148.
The long-term capital gain = Sale value of the asset – indexed cost of
acquisition
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The tax liability for long-term capital gains is charged at 20 per cent.
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Activity
Find the effect on calculation of tax on capital gains using CII and
without using CII.
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applicable).
The same is not applicable to stocks and bonds which are faster-mov-
ing assets compared to real estate or jewellery. In this case, if stocks
and bonds are held for 12 months or less before sale, then the prof-
its or gains arising from them are considered to be short-term capital
gains. However, this rule is valid only to securities listed and traded
on a recognised stock exchange. Section 111A is applicable in case of
STCG arising from transfer of equity shares, units of equity-oriented
mutual-funds, or units of business trust, transferred on or after 1-10-
2004 through a recognised stock exchange and the transaction shall
be liable to securities transaction tax (STT). Such gain is charged to
tax at 15 percent (plus surcharge and cess as applicable).
Activity
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As per the Income Tax Act, immovable property held by an assessee
for more than 36 months before sale shall be considered as long-term
capital asset. Profits or gains arising/accruing thereof, shall be deemed
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to be long-term capital gains (LTCG). For stocks, shares and bonds,
this period is more than 12 months instead of 36 months. Unlisted
securities, on the other hand, will be considered as long-term capital
gains only if sold after 36 months. Such gain is charged to tax at 20
percent (plus surcharge and cess as applicable).
For the financial year 2018–19, in case long-term capital gains on sale
of equity shares/units of equity oriented mutual fund is more than
` 1 lakh, the same will be taxed at 10 percent without the benefit
of indexation. Till 31st March, 2018, taxpayers were offered relief to
exempt capital gains realised up to 31st January, 2018. The capital
gains arising beyond this time period will be taxed at the given rate.
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Debt-oriented mutual funds and preference shares, however, are sub-
ject to general long-term capital gains tax rules. They will be subjected
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to a tax liability at the rate of 20 percent for no-equity assets after
inflation indexation and 10 percent without indexation. Indexation
increases the purchase price and, thus, the capital gain decreases
accordingly. The taxpayer may apply indexation on acquisition and
calculate tax at 20 percent, or compute tax at 10 percent tax without
indexation. Thereafter, he/she may choose the tax slab which is lower
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of the two.
13. For stocks, shares and bonds, the period of holding with
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Activity
EXEMPTIONS/DEDUCTIONS UNDER
6.19 CAPITAL GAINS (Under Section 54,
54B, 54D, 54EC, 54F, 54G, 54GA)
Exemptions under Section 54: Exemptions of Section 54 is appli-
cable to an individual and HUF. It states that any long-term capi-
tal gain arising from the transfer of the residential house property
shall be exempted from the capital gain tax if another residential
property is purchased within one year before transfer or two years
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2 years of the transfer or two years prior to the transfer. specified areas is exempted
from tax under Section 10(37).
Illustration 6: Ravi had purchased certain agricultural land in This exemption is available
1990-91 for ` 1,00,000. The land was being used for agricultural pur- only when such land was used
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pose by him. This land was later sold by him in 2015 for ` 15,00,000. for agricultural purposes for
preceding two years from the
Compute taxable capital gains for Assessment Year 2016-17 if the date of transfer.
agricultural land, which was sold, is rural agricultural land.
Solution: There is no capital gain since rural agricultural land is
not a capital asset.
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given conditions is violated, then the capital gain which was ex-
empted will be taxed as LTCG in the previous year in which the
asset was transferred.
Illustration 8: Mukesh acquired shares of Genesis Ltd. on
10.10.1998 for ` 2,00,000. He later sold these shares on 1.7.2015 for
` 10,00,000. He invests ` 1,00,000 in the bonds of Rural Electrifica-
tion Corporation Ltd. on 1.10.2015. What will be the consequences
if Mukesh takes a loan against the security of such bonds?
Solution: If any loan is taken against the security of such bonds, it
will be treated as if it is converted into money as such capital gain
which was exempt earlier on such bonds shall be treated as long-
term capital gain of the previous year, in which such loan is taken
against the security of such bonds.
Exemptions under Section 54F: Section 54F is applicable when an
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assessee constructs a residential property within 3 years of sales
or purchases a residential property within 1 year before sale or
2 years after the sale of the asset. This is only available to individ-
uals and HUF. The assessee claiming this exemption should not
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have more than one residential property. Furthermore, the asset
sold may be any asset, but the asset acquired must be a residential
property.
Exemptions under Section 54G: Section 54G is only applicable to
industrial undertakings. The exemption is granted for capital gain
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Activity
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from an insurer on and/or full market value of
account of damage/ asset on the receipt date
destruction of capital
asset
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2. 45(2) Conversion of or treat- Full market value of asset on
ment of capital asset into the date of its conversion or
stock-in-trade treatment
Activity
List the main points of Section 50C of the Income Tax Act, 1961.
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Under Section 45(1) of the Income Tax Act, any profits or gains
arising from the transfer of a capital asset effected in the previous
year, unless otherwise provided in Section 54, will 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.
A capital asset is defined to include property of any kind held by
an assessee, whether connected with their business or profession
or not connected with their business or profession.
Capital assets are considered as short-term in case they are held
for a period of not more than 36 months from the date of transfer.
However, the period of holding should be less than 12 months in
the case of shares (equity and preference).
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A long-term asset is one that is held for more than 36 months.
However, from financial year 2017-18, this criterion has been
revised to 24 months in the case of immovable property, such as
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land, building and house property.
The period of holding refers to the time during which an assessee
holds on to a given capital asset.
Any profits or gains arising from the transfer of a capital asset ef-
fected in the previous year unless otherwise provided in Sections
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54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, will be charge-
able to income tax under the head ‘Capital Gains’, and shall be
considered as the income of the previous year in which the trans-
fer of the capital asset took place.
Full value of consideration refers to the amount received/receiv-
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key words
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5. Mr Rai is a salaried employee. He purchased gold worth ` 8,00,000
in the month of December 2016 and sold the same in August 2017
for ` 8,40,000. At the time of the sale, he paid brokerage worth
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` 10,000. Determine the amount of taxable capital gain.
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receivable by the transferor in respect of a capital asset being
transferred, which may be received in cash or kind. Refer to
Section 6.9 Full Value of Consideration
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4. The cost inflation index (CII) is a means to measure inflation
used in the computation of long-term capital gains. Refer to
Section 6.16 Cost Inflation Index
5. Classify the capital gain as short-term or long-term based on
the period of holding. Compute the gain accordingly. Refer to
Section 6.17 Short-Term Capital Gain
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SUGGESTED READINGS
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E-REFERENCES
Cost Inflation Index in India - Check Calculation for FY 2016-17 &
AY 2017-18. (2018).Bankbazaar.com. Retrieved 12 April 2018, from
https://www.bankbazaar.com/tax/cost-inflation-index.html
Satapathy, S. (2018). Set Off and Carry Forward of Losses : [Com-
putation of GTI ] :.Incometaxmanagement.com. Retrieved 12 April
2018, from http://incometaxmanagement.com/Pages/Gross-To-
tal-Income/Set-Off-Carry-Forward-Losses/Set-Off-and-Carry-For-
ward-of-Losses.html
CONTENTS
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7.1 Introduction
7.2 Incomes Chargeable Under this Head (Section 56)
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Self Assessment Questions
Activity
7.3 Deductions Allowable (Section 57)
Self Assessment Questions
Activity
7.4 Deductions Not Allowable (Section 58)
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Activity
7.6 Summary
7.7 Descriptive Questions
7.8 Answers and Hints
7.9 Suggested Readings & References
Introductory Caselet
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from a relative, on the occasion of the marriage of the individual,
under a will or through inheritance, from a local authority or reg-
istered trust, or in contemplation of death of the payer, etc., then
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such receipt is exempted from the applicability of Section 56(2)(x)
and is not taxable.
Section 56(2)(viii) of the Income Tax Act, 1961 provides for taxabil-
ity of any interest received on compensation or enhanced com-
pensation. Such income is deemed to be income of the assessee
in the year of receipt and is taxable under the head ‘Income from
Other Sources’. However, Section 57(iv) allows for a deduction of
50% of such income, i.e., interest on compensation/enhanced com-
pensation.
Introductory Caselet
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n o t e s
learning objectives
7.1 INTRODUCTION
Quick Revision In the previous chapter, you studied about income from capital gains.
In this chapter, you will study about income from other sources in de-
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tail. You will learn about taxable incomes as per Section 56, deduc-
tions applicable as per Section 57 and amounts that are not deductible
as per Section 58. In addition, you will learn about taxable profits as
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per Section 59.
Incomes that are taxable under this head include royalty, income from
interest on bank loans and deposits, ground rent, directors fees, exam-
ination fee obtained by a teacher, agricultural income from outside In-
dia, insurance commission, rent of a plot of land, mining royalties and
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7.2
Head (Section 56)
Section 56 of the Income Tax Act relates to the provisions of ‘Income
from Other Sources’. Under Section 56 (1) of the Act, income of every
kind which is not to be excluded from the total income shall be charge-
able to income tax under the head ‘Income from Other Sources’, if it is
not charged to income tax under any other head of income which in-
cludes incomes from salaries, house property, capital gains, and busi-
ness and profession. Income from other sources is a residuary head of
income, i.e., income which is not taxable under any other head will be
taxable under this particular head.
n o t e s
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(d) previous year
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2. Movable Without consid- The total fair market value
property eration (FMV) of the property if the
received same is more than ` 50,000
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3. Movable For inadequate The difference between the total
property consideration fair market value (FMV) of the
received property and the consideration,
if the difference is more than
` 50,000
4. Immovable Without consid- The total stamp duty value of the
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n o t e s
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money or property received by a trust from an individual where
the trust is established wholly and solely for the benefit of the
relative of the individual
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For the purposes of Section 56(2)(x), the term ‘property’ means any
capital asset of the assessee, namely:
jewellery
drawings
paintings
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archaeological collections
sculptures
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56(2)(viii)}: Any interest income received on compensation or
enhanced compensation payable by the Government on compul-
sory acquisition of land of the assessee shall be taxed under the
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head ‘Income from Other Sources’. Such interest income shall be
deemed to be the income in the year of receipt irrespective of the
method of accounting followed by the assessee.
Consideration in excess of FMV of shares {Section 56(2)(viib)}:
Any consideration received from a resident shareholder for shares
issued by a closely held company to the extent to which it exceeds
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n o t e s
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tion 56.
Activity
n o t e s
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cept dividends under Section banker or other person as remu-
115-O on which corporate neration or commission
dividend tax is leviable) or
interest income on securities
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3. Income received from letting zz Insurance premium paid
out of the plant, machinery zz Depreciation or unabsorbed
or furniture on hire, whether depreciation
with or without building
zz Amount paid on current repairs
to plant, machinery, furniture,
or building
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ceived
5. Any interest income on 50% of interest income
compensation or enhanced
compensation received
6. Any other expenditure (except that of capital nature) incurred
wholly and exclusively for the purpose of earning such income.
Activity
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India, on which tax has not been deducted at source or paid
4. Payment of any expense made to a related person to the extent
to which it is unreasonable or excessive from its Fair Market
Value (FMV) on consideration by the Assessing Officer.
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5. Payment of any expense made to a person otherwise than by
draft/account-payee cheque/ECS through a bank account, if the
aggregate payment exceeds ` 10,000 in a day
6. Any expense connected to income or earnings from lotteries, Study
races including horse races, crossword puzzles, card games, Hint
gambling or other games of such nature Deduction of 30% of the
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7. 30% of any sum or expenditure payable to a resident, if the tax sum on which tax has not
been deducted at source
on it deductible at source, has not been deducted or has been
is also disallowable under
deducted but not paid on or before the due date specified the head ‘Income from
under Section 139(1). Business or Profession’ by
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Activity
n o t e s
7. Bad debt that has been written off and allowed and
subsequently recovered is considered as the _______ year
income in which the sale took place.
Activity
S
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Go through the official Income Tax website and study various claus-
es and sub-clauses applicable to Section 59. Create a report on this
subject.
7.6 SUMMARY
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S Section 56 the Income Tax Act talks about the provisions of ‘Income
from Other Sources’.
Specifically and without prejudice to the provisions of generality
of sub-section (1), following incomes are taxable under the head
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n o t e s
key words
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Assessee: An individual who is liable to pay taxes for himself/
herself or on behalf of somebody else
Dividends: An amount of money paid on a regular basis by a
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company to its shareholders out of its profits
Fair market value: An estimate of the market value of a prop-
erty on the basis of a willing, knowledgeable and unpressured
buyer
Hindu Undivided Family (HUF): A family including all peo-
ple lineally descended from a common ancestor, which includes
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n o t e s
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reasonably paid in relation to income from dividends and
interest income from securities, some expenses in relation to
certain income from plant, machinery or furniture given out on
hire, any expenditure other than that of capital nature, and 50%
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of interest income received through interest on compensation
or enhanced compensation. Refer to Section 7.3 Deductions
Allowable (Section 57)
3. Section 59 lists certain incomes to be treated as incomes such as
incomes related to cessation or remission of trade liabilities, a
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SUGGESTED READINGS
Uma Pat Rai, Ejaz Ahmad. Commentary on the Income Tax Act,
1961 (Act no. 43 of 1961) Together with Finance Act, 1962-1963 and
Rules
India, K. K. Malik. The Income Tax Act, 1961. Eastern Book Co.,
1964
E-REFERENCES
(2018).Taxmann.com. Retrieved 3 April 2018, from https://www.
taxmann.com/budget-2015-16/file/samd307/earlier-section.aspx
Government, C. (2018). Income Tax Act 1961 Section 56 - Citation
23220 - Bare Act | Legal Crystal. Legalcrystal.com. Retrieved 3 April
2018, from https://www.legalcrystal.com/act/23220/income-tax-act-
1961-section-56
Deductions to be made in
Computing Total Income
Contents
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8.1 Introduction
8.2 Deduction vs. Exemption
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Self Assessment Questions
Activity
8.3 Deductions to be Made in Computing Total Income (Section 80A)
Self Assessment Questions
Activity
8.4 Deduction in Respect of Investments/Contributions to Specified Assets
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(Section 80C)
Self Assessment Questions
Activity
8.5 Deduction in Respect of Contribution to Pension Fund (Section 80CCC)
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Contents
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Introductory Caselet
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He goes to a financial advisor to find some measures to save
his tax. The financial advisor suggests him get a life insurance
cover of around ` 80 lakhs to 90 lakhs and invest his savings into
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the PPF account and national savings certificate. He also suggests
Mr Ghai buy mutual funds and medical insurance for his wife and
children.
All these investments are eligible for deduction under Section 80C
of the Income Tax Act, 1961. Thus, by applying all these measures,
Mr Ghai was successful in saving a substantial part of his tax and
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learning objectives
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ability as per Section 80DD
>> List the deductions in respect of loan taken for higher edu-
cation as per Section 80E
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>> List the deductions in respect of interest on deposits in
savings account as per Section 80TTA
>> Describe the deductions in the case of persons with disabili-
ties as per Section 80U
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8.1 Introduction
Quick Revision In the previous chapter, you studied about the tax treatment of income
from other sources as per the Income Tax Act. In this chapter, you will
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This chapter will list all deductions defined under the Income Tax Act
available for taxpayers.
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What is it? It is concession. It is relaxation.
Objective Promoting investments Boosting that specific Section in
and savings of people which tax has been exempted
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Income is Tax-deductible Tax-free
Allowable to Specific people Everyone
Applicable Sections 80C to 80U Section 10
Sections
Is it Yes No
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conditional?
and then deductions can be used to calculate the total income. There
are four categories of the deductions which are as follows:
1. Deduction regarding certain payments: Some examples include
medical insurance premium, life insurance premium paid and
donations to charitable institutions.
2. Deduction regarding certain incomes: Some examples include
royalty on patents and specific incomes from cooperative
societies.
3. Deduction regarding other incomes: Some examples include
interest income on savings account, time deposits, etc.
4. Other deductions: For example, deduction in case of a person
with disability.
The term ‘exemption’ has been derived from the word ‘exempt’, which
implies a sum of money that is not liable to anything. These are those
incomes that are not considerable when computing the total income.
Therefore, such source of income is not included from taxable income
or chargeable to tax.
Some incomes are entirely exempt from tax, which include agricul-
tural income. However, some incomes are partly exempted and the
exemption is provided only to a specific limit. In this case, the exceed-
ing part of the income is subject to tax and, hence, considerable when
calculating the gross total income.
Activity
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tabular report on it.
Deductions to be made in
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8.3 Computing Total Income
(Section 80A)
Study Gross Total Income (GTI) of an assessee is the total of what the asses-
Hint see earns in any previous year under five different heads of income
as specified under Section 14 of the Income Tax Act, 1961. Howev-
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years.
from his/her GTI.
The deductions covered under Chapter VI-A of the Income Tax Act,
1961 are as given in Figure 8.1:
It is also worth clarifying here that certain incomes are not eligible for
deductions. These are long-term capital gains taxable under Section
112/112A, short-term capital gains taxable under Section 111A, win-
nings from lotteries, etc., as referred to in Section 115BB, and some
specified incomes of non-residents including presumptive income.
Hence, the GTI is reduced by these amounts to arrive at the qualifying
limit eligible for deductions under Chapter VI-A.
Exhibit
Individuals opting to pay tax under the new proposed lower per-
sonal income tax regime will have to forgo almost all tax breaks that
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you have been claiming in the old tax structure.
Below is the list of the main tax exemptions and deductions that are
not available for the tax payers if you opt for the new regime;
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The most commonly claimed deductions under section 80C
will go.
Section 80C deductions claimed for provident fund contribu-
tions, life insurance premium, school tuition fee for children
and various specified investments such as ELSS, NPS, PPF,
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cannot be availed.
House rent allowance
Leave travel allowance
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So, all deductions under chapter VIA (like section 80C, 80CCC,
80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG,
80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.) will not
be claimable by those opting for the new tax regime. The above are
part a total of 70 deductions and tax exemptions that will not be
available in the new tax regime.
Section 80DDB
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ment of specified diseases may be made for himself or his dependent
being spouse, children, brothers, sisters, or parents who are mainly
dependent upon the individual for his support and maintenance. In
case of an HUF, the payment for medical treatment of specified diseas-
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es may be made for any member of the HUF.
The amount of deduction is lower of the following:
Amount actually paid
` 40,000 (` 1,00,000 if the payment is made for medical treatment
of a senior citizen).
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Section 80EE
Deduction under this section shall not be allowed if the following con-
ditions are not met:
The loan should have been sanctioned by the financial institution
during the period of previous year 2016-17.
The amount of sanctioned loan should be less than or equal to
` 35 lakhs and the value of residential house should be less than
or equal to ` 50 lakhs.
The assessee should not be the owner of any residential house as
on the date of sanction of loan.
Section 80G
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Nehru Memorial Fund, etc., (Category II) – 50% deduction of
amount donated is allowed to the assessee without any qualifying
limit.
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Donation to Government or local authority for promotion of family
planning, etc., (Category III) – 100% deduction of amount donated
is allowed to the assessee subject to qualifying limit.
Donation to Government or any local authority for other specified
charitable purposes, renovation of notified temple, etc., (Category
IV) – 50% deduction of amount donated is allowed to the assessee
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Section 80GG
Section 80GGA
Section 80GGB
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Deduction under Section 80GGB is allowed to an Indian company in
respect of contribution made by Indian company during the previous
year to a political party or an electoral trust. The amount of deduction
allowable is 100% of the actual contribution made by an Indian com-
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pany otherwise than by way of cash. No deduction shall be allowed if
the contribution is made by the assessee by way of cash.
Section 80GGC
Section 80RRB
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after 01.04.2003. The eligible assessee is one who is registered under
the Patents Act, 1970 as the true and first inventor in relation to an in-
vention (including the co-owner of patents). The amount of deduction
allowed from GTI is ` 3,00,000 or the whole of such royalty income,
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whichever is lower.
Section 80QQB
Activity
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DEDUCTION IN RESPECT OF
8.4 INVESTMENTS/CONTRIBUTIONS TO
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SPECIFIED ASSETS (SECTION 80C)
Deduction under Section 80C is allowed to an individual or an HUF
for making certain payments or contributions in respect of life insur-
ance premium, specified term deposits, provident fund, etc. The eligi-
bility and conditions for claiming deductions under this Section are as
discussed in Table 8.2:
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Asses- Deduction
see from GTI
Individ- Deduction is available in respect of some The amount
ual or specified investments made by an individual or of deduction
HUF an HUF during the previous year. Some of the is equal to
investments which qualify for claiming deduc- the sums paid
tion under this section are as follows: or deposited
zz Payment of life insurance premium on the life subject to the
of specified persons, i.e., individual, spouse, maximum
children or member of HUF limit of
` 1,50,000.
zz Contribution by an employee towards Statu-
tory Provident Fund or Recognised Provident
Fund or Approved Superannuation Fund
zz Any amount deposited in Public Provident
Fund (in the name of individual, spouse or
children)
zz Any amount invested in NSC certificates and
interest accrued thereon
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zz Any amount deposited in five-year post-office
deposit scheme
zz Contribution towards Unit-Linked Insurance
Plan (ULIP) of LIC Mutual Fund
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zz Deposits made in Senior Citizen Saving
Scheme account
zz Subscription to/deposits made in notified
bonds of NABARD
zz Subscription to certain equity shares/deben-
tures or certain units of mutual fund
zz Amount deposited in term deposits with a
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Exhibit
S
Compute the eligible deduction under section 80C for A.Y. 2021-22
in respect of life insurance premium paid by Mr Amit During the
P.Y.2020-21
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Solution:
(`) assured)
(`)
Total 1,26,000
DEDUCTION IN RESPECT OF
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CONTRIBUTION TO PENSION FUND
(SECTION 80CCC) AND DEDUCTION
8.5
IN RESPECT OF CONTRIBUTION
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TO PENSION SCHEME OF CENTRAL
GOVERNMENT (SECTION 80CCD)
Deduction under Section 80CCC is available to an individual in re-
spect of contribution made to an approved annuity plan of LIC or cer-
tain pension funds.
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The eligibility and conditions for claiming deduction under this Sec-
tion are as discussed in Table 8.3:
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The eligibility and conditions for claiming deductions under this Sec-
tion are as discussed in Table 8.4:
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employer the notified pension scheme of tion is restricted to 10%
or self-em- the Central Government, such of salary under Section
ployed as National Pension Scheme. 80CCD(2).
For other assessees, the
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deduction allowed under
Section 80CCD(1) is the
amount of employee’s con-
tribution made which is
restricted to 20% of GTI.
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Activity
Now, let us understand this concept with the help of some illustra-
tions.
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contribution of ` 2,20,000 towards a notified pension scheme by the
Central Government. The GTI of Mrs. Nikky for the Assessment Year
2021-2022 is ` 9,00,000.
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Solution: Now, as per Section 80CCD (1), 20% of the GTI, which is
` 1,80,000 is deductible. However, as per Section 80CCE, the limit of
deduction applicable to Sections 80C, 80CCC, 80CCC(1) is ` 1,50,000.
Therefore, the deduction amount that can be claimed is ` 1,50,000.
With respect to the balance of ` 70,000, Mrs. Nikky becomes eligible
for additional deduction under Section 80CCD(1B) to the maximum of
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Solution:
Activity
S
ment year.
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the individual or his family
member or parents or
member of HUF, provided
such person is a senior cit-
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izen and no other amount
has been incurred to give
effect to the insurance pol-
icy on the health of such
person.
Some important points:
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zz Also, if any amount has been incurred by any mode including cash
payment on account of preventive health-check up of the assessee him-
self, spouse, dependent children and parents, an amount of deduction
equivalent to ` 5,000 is allowed. However, the said deduction is within
and subject to the aggregate limit of deduction of ` 25,000/` 50,000, as
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In case the premium has been paid in cash, would the answer differ?
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Self – Mediclaim pre- ` 10,000 Yes ` 10,000
mium
Spouse – Mediclaim ` 9,000 Yes ` 9,000
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premium
It should be noted that ` 5,000 that has been paid for mother-in-law is
not allowed for deduction because it is not included in the definition
of ‘family’.
Activity
Deduction in respect of
Maintenance including Medical
8.8 Treatment of a Dependent who is
a Person with Disability (Section
80DD)
Deduction under Section 80DD is available to a resident individual
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or HUF for payments in respect of maintenance including medical
treatment of a dependent disabled. The eligibility and conditions for
claiming deductions under this section are as discussed in Table 8.6:
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Table 8.6: Deduction under Section 80DD
Activity
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Deduction in respect of Loan
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8.9 taken for Higher Education
(Section 80E)
Study While computing the gross total income, Section 80E allows an indi-
Hint vidual assessee to claim a deduction in respect of interest payment on
any loan taken for pursuing higher education. The eligibility and con-
For the purpose of Section 80E,
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a financial institution means a ditions for claiming deductions under this Section are as discussed in
banking company to which the Table 8.7:
Banking Regulation Act, 1949
applies or any other financial
institution as may be notified Table 8.7: Deduction under Section 80E
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Activity
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ON DEPOSITS IN SAVINGS ACCOUNT
(SECTION 80TTA) AND DEDUCTION IN
8.10
RESPECT OF INTEREST ON DEPOSITS
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IN CASE OF SENIOR CITIZENS (SECTION
80TTB)
Deduction under Section 80TTA is available to assessees whose GTI
includes any interest income from deposits in a savings account main-
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tained with banks. The eligibility and conditions for claiming deduc-
tions under this Section are as discussed in Table 8.8:
The eligibility and conditions for claiming deductions under this sec-
QUICK TIP tion are as discussed in Table 8.9:
A senior citizen is an individual
of the age of 60 years or more Table 8.9: Deductions under Section 80TTB
at any time during the previous
year. Eligible Assessee Conditions for Claiming Amount of Permissible
Deduction Deduction from GTI
Individual senior Deduction is available to an The amount of deduc-
citizen individual (of age 60 years tion allowed is the lower
or more), who earns inter- of the following:
est income from deposits zz Actual interest, or
with a banking company, a
zz ` 50,000
co-operative society bank,
or a post office. The depos-
its for this purpose may
include time deposits.
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Self Assessment Questions
Activity
ment year.
Activity
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8.12 Summary S
According to Section 80A, the deductions specified under Sections
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80C to 80U covered by Chapter VI-A shall be allowed while com-
puting the total income of the assessee from his/her GTI.
Section 80C (Individual/HUF) allows deduction of up to ` 1,50,000
in respect of Life Insurance Premium (LIC) for policy, deferred an-
nuity, contributions to provident fund (PF), Unit-Linked Insurance
Plan (ULIP) mutual fund, subscription to certain equity shares or
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Key Words
?
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8.13 Descriptive Questions
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1. Write an explanatory note on Section 80A.
2. Explain the deductions applicable as per Sections 80C and
80CCC.
3. Describe Sections 80DD, 80E and 80U.
4. List the conditions for claiming deductions under Section 80TTA
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and 80TTB.
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Interest on Deposits in Case of Senior
Citizens (Section 80TTB)
13. True
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Deduction in the Case of a Person with 14. eighty
Disability (Section 80U)
Suggested Readings
Uma Pat Rai, Ejaz Ahmad. Commentary on the Income Tax Act,
1961 (Act no. 43 of 1961) together with Finance Act, 1962-1963 and
Rules.
India, K. K. Malik. The Income Tax Act, 1961. Eastern Book Co.,
1964.
E-References
(2018). Retrieved 9 April 2018, from https://www.incometaxindia.
gov.in/pages/acts/income-tax-act.aspx
S
List of Income Tax Exemptions for FY 2017-2018 and AY 2018-2019
| Primo Payroll India. (2018). Primo Payroll India. Retrieved 9 April
2018, from https://primopayroll.co.in/blog/2017/07/list-income-tax-
exemptions-fy-2017-2018-ay-2018-2019/
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CONTENTS
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9.1 Introduction
9.2 Incomes not included in Total Income (Exemptions under Section 10)
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9.2.1 Agricultural Income [Section 10(1)]
9.2.2 Receipts from HUF [Section 10(2)]
9.2.3 Partner’s Share in the Income of the Firm [Section 10(2A)]
9.2.4 Income Earned by a Non-Resident from NTRO [Section 10(6D)]
9.2.5 Payment from Provident Fund [Section 10(11)]
9.2.6 House Rent Allowance [Section 10(13A)]
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Introductory Caselet
n o t e s
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HRA is the tax benefit that is available only to salaried individuals
who have an HRA component as part of their salary structure and
are staying in a rented accommodation.
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Section 10(13A) describes the taxability/exemption of HRA. It
states that the least of the following amounts is exempted from
the HRA provided by employers:
Actual HRA received
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Sowmya is living in a metro city but she cannot use this allowance
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for attaining any tax benefit. However, if she wants to, she can pay
the rent to her parents and claim HRA exemption, provided that
the parents own the house. For this, she would need to enter into a
rental agreement with her parents and give them monthly rentals.
This will not only help her save taxes, but it would also be a nice
gesture by financially assisting her parents.
However, it must be noted that her parents will have to show the
rent received from Sowmya in their income as ‘income from house
property’ which would become subject to tax.
learning objectives
9.1 INTRODUCTION
In the previous chapter, you studied the difference between deduc- Quick Revision
tions and exemptions.
There are various incomes which are either not at all taxable or are
taxable partially. You will study such incomes in this chapter. Various
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income items that have been defined in various clauses of Section 10
are excluded from the total income of an assessee. These incomes are
termed as exempted incomes. Consequently, such incomes are not
considered while computing the taxable income of an assessee.
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In this chapter, you will learn about various categories of exempted
incomes under Section 10 of the Act.
SECTION 10)
Section 10 covers the incomes that do not form the part of the taxable
income. These are those incomes on which income tax is exempted. In
other words, no tax is applied on these incomes. Some of the exemp-
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tions under Section 10 of the Income Tax Act, 1961 are discussed in
the next sections.
As per Section 10(1), Agricultural Income; the earnings from agricul- NOTE
ture are totally exempted if it falls within the definition of agricultural In case of individuals/HUF/
income given under Section 2(1A). The reason for totally exempting AOP/BOI, when agricultural
agricultural income is that under the Constitution, the Parliament has income exceeds ` 5,000 p.a. and
no power to levy a tax on agricultural income. However, tax can be when non-agricultural income
exceeds the basic exemption
levied on agricultural income in an indirect way, which is known as
limit, agricultural income and
partial integration of taxes. For example, if an income is made by a non-agricultural income shall
seller of standing crops, who has invested labour and skill to make the be aggregated to determine the
crop sprout out of the land is agricultural income. However, if some- rate at which non-agricultural
one buys a standing crop, and generates profits out of it, that income income is to be taxed.
will not be considered as agricultural income.
identity and any income earned by the HUF is taxable in the hands
of HUF only. Subject to the provisions of sub-section (2) of Section 64,
any sum received by an individual as a member of a Hindu Undivided
Family, where such sum has been paid out of the income of the family,
or, in the case of any impartible estate, where such sum has been paid
out of the income of the estate belonging to the family, is exempt from
tax.
For example, let’s say an HUF earned ` 5,00,000 in the last year and
has already paid tax on his/her income. Mr X is a co-parcener in the
HUF and earns ` 20,000 per month as his salary. In the last year, Mr
X also received ` 1,00,000 from HUF. In this case, Mr X will pay tax
on his taxable salary income but not on the sum he received from his
HUF. This money is not chargeable to tax.
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9.2.3 PARTNER’S SHARE IN THE INCOME OF THE FIRM
[SECTION 10(2A)]
As per Section 10(2A), Share Income of Partner; in the case of a per-
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son being a partner of a firm which is separately assessed as such, his
share in the total income of the firm will be exempt from tax. In other
words, the share of the partner in the firm’s total income determined
in accordance with the profit sharing ratio will be exempted from tax.
For example, if you are a partner of a firm, any amount of money that
you have as a share in the firm’s total income is exempted from income
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tax.
Know More In the Union Budget of 2018, a new clause 6D was added under Sec-
Under Section 10(4), interest
income earned by a non-resident
tion 10. As per this clause, if a non-resident not being a company or a
on his NRE Account (Non- foreign company arises any income by way of royalty from or fees for
resident External Account) is also technical services rendered in or outside India to the National Techni-
exempted from tax. cal Research Organisation (NTRO), then such income will be exempt
from income tax.
For example, if your basic salary is not more than ` 15,000, you need
to contribute 12% of the basic component of your salary every month
towards PF. This amount will be deducted from your income and will
be exempted from tax. You also earn some interest (8.5%) on a yearly
basis, which will also be exempted from tax.
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payment of rent (by whatever name called) in respect of the to any disaster is exempted from
residential accommodation occupied by him. tax under Section 10(10BC).
For example: Mr Kapoor receives ` 3,000 as the basic pay and ` 600 as
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the dearness allowance. His HRA allowance is ` 900 per month, while
he pays ` 1,000 per month as his accommodation in Kanpur Metropol-
itan Area. In this case, we can calculate the taxable HRA as follows:
3. Actual rent paid – 10% of basic salary = (1000 × 12) – 10% (3600
× 12) = 12,000 – 4,320 = ` 7,680
does not exceed ` 1,500 in respect of each minor child whose income
is so includible.
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3. In the case of a person being a partner of a firm, which is
separately assessed as such, his share in the total income of
the firm will be exempt from tax. (True/False)
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4. As per __________, House Rent Allowance (HRA), tax
exemption is available on any special allowance specifically
granted to an assessee by his employer to meet expenditure
actually incurred on the payment of rent (by whatever name
called) in respect of residential accommodation occupied by
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Activity
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Section 87A describes the rebates to be allowed in computing the
income-tax in case of certain individuals. As per this Section, a
resident assessee, whose net taxable income (income after making
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deductions under Section 80) does not exceed ` 5,00,000, can claim
rebate under this Section. The amount of rebate is the lower of
` 12,500 or 100% of the income tax payable. Rebate amount is
deducted from the total tax liability of the assessee. If the tax lia-
bility of the assessee is more than ` 12,500, rebate will be limited
to ` 12,500. If the net taxable income of the assessee is more than
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` 2.5 lakh, no rebate under Section 87A can be claimed. The rebate Know More
under Section 87A can be claimed while filing the tax return. In Apart from individuals, taxpayers
case, an assessee’s tax has been deducted through TDS, he claims such as HUFs, companies and
NRIs cannot claim this benefit.
the same as a refund.
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The format in which rebate and relief under Sections 87A and 89,
respectively can be claimed is shown in Table 9.1:
Activity
S 9.4 SUMMARY
Section 10 covers the income that does not form the part of tax-
able income. These are those incomes on which the income-tax is
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exempted. In other words, no tax is applied on these incomes.
Some of the exemptions under Section 10 of the Income Tax Act,
1961 are:
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Agricultural Income [Section 10(1)]
Receipts from HUF [Section 10(2)]
Partners share in the income of the firm [Section 10(2A)]
Income Earned by Non-Resident from NTRO [Section 10(6D)]
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Key Words
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ANSWERS FOR SELF ASSESSMENT QUESTIONS
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Topic Q. No. Answer
Incomes not included in Total Income 1. Section 10(2)
(Exemptions under Section 10)
2. a. partly taxable
3. True
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4. Section 10 (13A)
5. Income of Minor
Rebates and Reliefs 6. 2.5
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SUGGESTED READINGS
Uma Pat Rai, Ejaz Ahmad. Commentary on the Income Tax Act,
1961 (Act no. 43 of 1961) together with Finance Act, 1962-1963 and
rules
India, K. K. Malik. The Income Tax Act, 1961. Eastern Book Co.,
1964
E-REFERENCES
Satapathy, S. (2018). List of Exempted Incomes (Tax-Free) Under
Section-10. Incometaxmanagement.com. Retrieved 11 April 2018,
from http://incometaxmanagement.com/Pages/Tax-Ready-Reck-
S
oner/Exempted-Incomes/Exempted-Incomes-Under-Section-10.
html
Tax Rebate Under Section 87A. (2018). Cleartax.in. Retrieved 11
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April 2018, from https://cleartax.in/s/income-tax-rebate-us-87
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Contents
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10.1 Introduction
10.2 Clubbing of Income
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10.2.1 Income of Other Persons Included in Assessee’s Total Income
Self Assessment Questions
Activity
10.3 Concept of Set-Off and Carry Forward of Losses
10.3.1 Inter Source Adjustment of Losses
10.3.2 Inter Head Adjustment of Losses and Set-off of Brought Forward
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Losses
10.3.3 Summarised Provisions of Set-off and Carry Forward of Losses
Self Assessment Questions
Activity
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Introductory Caselet
S
Speculation business losses can be set-off only against speculation
business profits. However, losses from other businesses can be
set-off against speculation business gains and gains under other
heads of income except for salaries.
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Losses from speculation business can be carried forward for four
assessment years for set-off against income from speculation busi-
ness. Other unabsorbed business losses can be carried forward
for 8 assessment years for set-off against profits and gains from
business or profession.
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for eight assessment years for set-off against long-term and long-
term/short-term gains, respectively.
learning objectives
10.1 Introduction
In the previous chapter, you studied about Section 10 which covers Quick Revision
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the income that does not form the part of taxable income. In this chap-
ter, you will study in detail about the concept of set-off and carry for-
ward of losses.
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Specific provisions have been made in the IT Act, 1961, for the set-
off and carry forward of losses. Set-off refers to adjustment of losses
against the profits from another source/head of income in the same
assessment year. If losses cannot be set-off in the same year due to
inadequacy of eligible profits, then such losses are carried forward for
the next assessment year for adjustment against the eligible profits of
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that year. The maximum period for which different losses can be car-
ried forward for set-off has been given in the Act.
certain cases, the assessee has to pay tax in respect of the income
derived by another person. These sections counteract the tendency
of the taxpayers to transfer their income or dispose of their property
with a view to avoid or reduce their tax liability.
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Section Nature of Income to be Clubbed Taxability
Section There is a transfer by a person of Such income shall be
60 income accruing to an asset with- included in the total
out the transfer of the asset itself income of the transferor.
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giving rise to such income. It is immaterial whether
such transfer is revocable
or irrevocable.
Section There is a revocable transfer of Such income shall be
61 assets and income arises to any included in the total in-
person on assets obtained by virtue come of the transferor.
of revocable transfer of assets.
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to the son’s wife without adequate wife shall be included in
consideration. the total income of the
transferor (i.e., individ-
ual).
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Section Income arises to any person or Such income shall be
64(1)(vii) AOP from assets transferred oth- included in the total in-
and Sec- erwise than for adequate consider- come of the transferor.
tion 64(1) ation by an individual; where such
(viii) assets are transferred for the imme-
diate or deferred benefit of the
individual’s spouse or son’s wife.
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Section Income arises or accrues to a minor Such income of the minor Study
64(1A) child (including minor married child shall be included in Hint
daughter). the total income of his or Once clubbing of income of a
The clubbing provisions, however, her parent. minor child is done with the
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will not be attracted in case the Such income of the minor income of one of the parents,
income of the minor child accrues child shall be clubbed the same will be clubbed
on account of his manual work, with the income of that with that parent only for the
application of skills, knowledge, parent whose total in- subsequent years unless the
experience, etc. or where the minor come excluding minor’s Assessing Officer considers it
child is suffering from disability as income is higher, where necessary to do otherwise.
specified under Section 80U. the marriage of parents
subsists. Where the
marriage of parents does
not subsist, the income of
the minor child shall be
clubbed with the income
of the parent who main-
tains the minor child.
The parent in whose total
income the minor child’s
income is clubbed, shall
be entitled to an exemp-
tion of maximum ` 1,500
per child in respect of
such income under Sec-
tion 10(32).
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Activity
Regarding the set-off and carry forward of loss, the following points
must be remembered:
Loss from a source of income that is exempted from tax cannot
be set-off against any other income which is taxable. For exam-
ple, loss on the grounds of agricultural activity (which is exempted
from tax) cannot be adjusted against profit or income from any
other taxable source of income.
In any year, if a taxpayer has incurred loss from any source under
a particular head of income, then, the taxpayer may adjust such
loss against income from any other source falling under the same
head of income. This process of adjustment of a loss from a source
under a particular head of income against income from some other
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loss. Different heads of income have different provisions for carry
forward of loss.
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Provisions under the income tax law in relation to carry forward
and set-off of loss from house property:
If the loss from house property is not fully adjusted in the same year in
which the loss incurred, then such loss can be carried forward to the
next year. However, such loss can only be adjusted against the head of
income from house property in the subsequent years. It means that
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As per Section 70 of Income Tax Act, 1961, if the assessee has incurred
losses under a certain income head, then he/she is permitted to adjust
these losses from any other income source under the same head. This
is referred to as intra-head adjustment. A taxpayer is not allowed to
carry out intra-head/inter-source adjustment of loss in the following
cases:
Speculative business losses: Speculative business losses are not
allowed to be set-off against any income other than income from
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ever, loss from other business can be set-off against the profit of
the specified business in a given financial year.
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10.3.2 INTER-HEAD ADJUSTMENT OF LOSSES AND SET-
OFF OF BROUGHT FORWARD LOSSES
loss from one head against income from other heads. Some examples
are as follows:
House property income losses: House property income losses
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can be set-off against profits from other heads. Such loss can be
adjusted against salary income, business income, income from cap-
ital gain, and income from other sources except for casual income.
Non-speculative business losses: Non-speculative business losses
can be set-off under any other head except income from salary.
The Act lays down different provisions for carrying forward of losses
under different heads of income, which are as follows:
House property income losses: As per Section 71(B) of Income
Tax Act, 1961, an assessee can carry forward losses incurred under
the head house property up to a period of eight years immedi-
ately succeeding the assessment year in which the loss has been
incurred. It can be adjusted only against house property income
loss. In this case, the assessee can file the deferred return.
Non-speculative business losses: As per Section 72 of Income
Tax Act, 1961, an assessee can carry forward non-speculative busi-
ness loss up to a period of eight years immediately succeeding the
assessment year in which the loss has been incurred. He/she must
file Income Tax Return (ITR) within the due date prescribed under
Section 139 (1) of Income Tax Act, 1961. The loss can be set-off only
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against business income.
Speculative business losses: Section 73 of the Act specifies that
losses in speculative businesses can be carried forward up to a
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period of four years immediately succeeding the assessment year
in which the loss has been incurred. An assessee must file the ITR
within due date prescribed to carry forward the losses from specu-
lative business. Such loss can be adjusted only against income
from speculation business.
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restricted to the extent of head ‘Income from House
` 2 lakhs Property’
Section Loss Inter-source: Can be Brought forward loss of
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72 from set-off against income one assessment year can
business from another business or be carried forward to the
or pro- profession following eight assess-
fession Inter-head: Can be set- ment years to be set-off
off against income under against income under the
any other head, but not head ‘Profits and Gains of
against income under the Business or Profession’
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set-off against income
main- under any other head income from the activity
taining of owing and maintaining
race race horses
horses
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Section Unab- Inter-source: Can be set- Brought forward loss
32(2) sorbed off against income from of one assessment year
depreci- any business can be carried forward
ation Inter-head: Can be set- to the following any no.
off against income under of assessment years to
any other head except be set-off against income
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Winnings in card game 8,000
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Particulars Amount (in `)
Salary 1,08,000
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Income from house property (` 40,000 – ` 20,000 – (30,000)
` 50,000)*
Profits and gains of Business or profession :
(i) General Business (` 2,00,000 – ` 2,50,000)* (50,000)
(ii) Speculation Business (` 30,000 – ` 40,000) – Balance
loss of ` 10,000 to be carried forward to A.Y. 2022-2023
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Capital gains :
(i) Short-term capital gains (` 30,000 – ` 40,000) (10,000)
(ii) Long-term capital gains 1,00,000 90,000
Income from other sources : [` 50,000 + ` 70,000] 1,20,000
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* Loss from house property can be set-off against salary income and
loss from general business can be set-off against income from other
sources.
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Activity
For the purpose of levy of income tax, the procedure for computation
of total income of an assessee is discussed in Table 10.3 below:
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under such head.
The five heads of income are:
1. Salaries
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2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other Sources
Step 3 The provisions governing a specific head of income are
– Compu- applied to compute the income chargeable to tax under each
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The provisions of residential status are discussed earlier in
Chapter 8 of the book.
Step 8 The Gross Total Income as reduced by the above deductions
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– Com- is referred to as Total Income.
putation Total Income = Gross Total Income – Deductions under
of Total Chapter VI-A
Income
The total income should be rounded off to the nearest multi-
ple of `10.
Step 9 – Tax is computed on the Total Income of an assessee. Slab
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self assessment Questions
Activity
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10.5 Summary S
With a view to reduce tax burden, sometimes assessees with huge
taxable income tend to shift their burden of tax by deliberately
transferring their portions of income to other assessees who do
not have taxable income or are taxed at lower rates of taxes. In
order to curb these practices adopted by assessees, the Income
Tax Department has imposed restrictions by virtue of Sections 60
to 64.
Ifthe loss from house property is not fully adjusted in the same
year in which the loss incurred, then such loss can be carried for-
ward to the next year.
As per Section 70 of Income Tax Act, 1961, if the assessee has
incurred losses under a certain income head, then he/she is per-
mitted to adjust these losses from any other income source under
the same head. This is referred to as intra-head adjustment.
The other method of carrying forward or set-off of losses is through
inter-head adjustments. As per Section 71 of Income Tax Act,
1961, if an assessee incurs loss under one head of income and has
earned any income under other heads of income, he/she is allowed
to adjust the loss from one head against income from other heads.
The losses incurred in the following cases cannot be set-off under
inter-head adjustments:
Speculative business loss
Specified business loss
Capital gain income loss
Loss from owning and maintaining race horses
Gross Total Income is computed by the summation of the net
income calculated under the different heads of income, after giv-
ing consideration to the provisions of clubbing of income, and set-
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off and carry forward of losses.
Key Words
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Clubbing: In case of computation of Gross Total Income of an
assessee, the income of another member of his or her family is
also included and taxed
Inter-head adjustments: After the intra-head adjustments,
the taxpayers can set-off remaining losses against income from
other heads
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6. c. Income of speculation
business
7. True
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Computation of Total Income 8. True
9. Chapter VI-A
Suggested Readings
Niyogi, J. (1929). The evolution of the Indian income tax. London:
P.S. King.
Patwa, C. (2018). INCOME TAX CALCULATION OF PARTNER-
SHIP FIRMS & LLPs FOR F. Y. 2018-19 - RITUL PATWA & CO,
Chartered Accountants. RITUL PATWA & CO, Chartered Accoun-
tants. Retrieved 5 April 2018, from http://blog.ritulpatwa.com/
income-tax-calculation-of-partnership-firms-llps-for-f-y-2018-19/
Singhania, V., & Singhania, K. (2004). Taxmann’s direct taxes. New
Delhi: Taxmann Publications.
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e-References
Income Tax Slab Rates in India for AY 2017-18 and 2018-19 | H&R
Block. (2018). H&R Block India. Retrieved 5 April 2018, from
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https://www.hrblock.in/guides/income-tax-slab-rates/
Lohani, C. (2018). Gross Total Income-Total Income meaning
under Income Tax Act 1961. Abcaus.in. Retrieved 5 April 2018,
from http://abcaus.in/articles/income-tax/gross-total-income.html
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Contents
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11.1 Introduction
11.2 Introduction to GST
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11.2.1 Importance of GST
11.2.2 Features and Benefits of GST
11.2.3 Evolution of GST
11.2.4 Goods and Service Tax Network
11.2.5 GST Rates in India
Self Assessment Questions
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Activity
11.3 Levy and Collection of GST (Charging Section)
11.3.1 Exemption from GST
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Contents
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Introductory Caselet
n o t e s
By subsuming Central and State taxes into a single tax and by Case Objective
offering a set-off of prior stage taxes for all transactions across the
value chain process, GST mitigates the ill effects of cascading and This caselet shows the role
double taxation. This improves liquidity and competitiveness of of GST in eliminating the
cascading effect of taxes
businesses.
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tax credit of CGST/SGST/IGST.
The amount of tax paid to the government, i.e., `360 shall be cal-
culated after netting off the input tax credit availed by Bhargav,
i.e., `1,800 from tax payable on the last transaction, i.e., `2,160,
thus preventing double taxation. The input tax credit of CGST
and SGST is available throughout the supply chain. Similarly, if
there is an inter-state sale, the cross-utilisation of CGST/SGST
and IGST is also allowed.
Introductory Caselet
n o t e s
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The final amount of tax is ultimately recovered from the final con-
sumer, i.e., Chinmay. Thus, GST entails tax to be imposed only on
the value added at each stage, preventing a tax on tax or cascad-
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ing effect. The suppliers are permitted to avail input tax credit
of GST paid on purchases of goods/services, that can be set-off
against tax payable on the supply of goods/services by them at
each subsequent stage.
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learning objectives
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11.1 INTRODUCTION
In the previous chapter, you studied about the provisions related to Quick Revision
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the clubbing of income, set-off and carry forward of losses and process
of computing the total income. You studied tax slab rates applicable
for each of these categories. When it comes to sale and purchase of
goods and services, a new tax structure called Goods and Services Tax
(GST) has been introduced from the year 2017. In this chapter, you
will study GST in detail.
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2016. SGST is introduced as the replacement of all the present
taxes including sales tax, VAT, luxury tax, entertainment tax ,
entry tax, taxes on lottery, betting and gambling. However, it has
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not replaced Octroi, State Cesses and Surcharges. The revenue
accumulated under SGST is solely for the state government.
4. UTGST: UTGST is a constituent of GST in India. GST levied
on the supply of goods and services in the Union Territories like
Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar
Haveli, Daman and Diu, Delhi (National Capital Territory of
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11.2.1 IMPORTANCE OF GST
GST has improved tax governance in two ways. The first one is related
to the self-policing incentive inherent to a VAT. For claiming input
tax credit, dealers have an incentive of requesting documents from
other dealers situated behind him in the VAT chain. The second one is
related to the GST’s dual monitoring structure, one by the Centre and
one by the States. The dual structure has been viewed by the taxpay-
ers and critics with some worry, with a fear that two sources of inter-
face would be involved. However, this structure should also be consid-
ered from a point of view of creating the desired tax competition and
coordination between central and state authorities. In this case, if one
set of tax authorities fails in detecting evasion, the possibility is the
other would not.
To conclude, GST has made the tax structure simple and clear. It has
made the entire Indian market unified, resulting into lower business
costs. It also enables smooth goods movement across India and low-
ers down business transaction costs. It is not applicable for goods and
services exported from India and, therefore, it is good for businesses
oriented to export. As time passes, it would translate into low prices of
consumer goods. Manufacturers, suppliers, retailers and wholesalers
can recover the GST that has been incurred as tax credits on input
costs. This lowers down the cost of running a business, which allows
fair costs for consumers. It brings better compliance and more trans-
parency.
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Dual goods and services tax: GST is an indirect tax structure,
dual in nature, which enables both central government and state
governments to levy the tax.
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Inter-State transactions and the IGST mechanism: Integrated
Goods and Services Tax (IGST) is to be levied by the Centre at the
inter-state level on the distribution of goods and services. The de-
sign of the IGST mechanism guarantees a coherent flow of input
tax credit between any two states. IGST will have to be paid by
the inter-state seller on goods sold by him/her after adjusting for
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IGST, CGST and SGST on his purchases. The state that exports
will transfer SGST’s credit used in IGST’s payment to the Centre.
The claim of IGST’s credit can be done by the dealer who imports,
in his own state only, while releasing the output tax liability (both
the CGST and SGST). The IGST’s credit used in the payment of
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Input Tax Credit (ITC) Set-off: For the taxes that are allowed
against central and state, ITC for CGST and SGST will be allowed
to be taken.
GST on imports: IGST will be levied by the centre on supply of
inter-state goods and services. The centre will levy IGST on the
inter-state supply of goods and services. Goods that are imported
will be subject to customs duty and IGST.
Maintenance of records: To avail, utilise or refund ITC of CGST,
SGST and IGST, separate details in books of account will have to
be maintained by the taxpayer or the exporter.
Administration of GST: The GST Council will be responsible for
the administration of GST and it also acts as the prime policy-mak-
ing body of the GST. The council comprises central and state min-
isters, who are in-charge of the financial body.
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GST Council: The GST Council is a union of the Centre and the
States. Recommendations will be made to the Union and the
States by the Council on vital issues like rates of tax, list of exemp-
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tion, threshold limits, etc. Half of the gross members of the Council
form the GST Council’s quorum.
By subsuming majority of
the indirect taxes, GST implemented. Taxes like Excise duty, Sales tax, CENVAT, Service
implementation has been able to
tax and are no more applicable. All these taxes fall under GST.
ensure a seamless flow of credit
and improve business liquidity. Uniformity of tax rates and structure: GST guarantees that all
indirect taxes and their structures must be common throughout
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the country as this will increase the conviction and comfort of car-
rying out any business. Each state will come under one tax regi-
men only, hence preventing any unhealthy competitions amongst
states. GST proves to be beneficial for all those who do inter-state
business or want to expand their business in other states.
Easy tax filing: For entrepreneurs and small businessmen, the
complicacy that is associated with taxing documentation can be
easily avoided. Filing returns, payment of taxes and the process
of refund is convenient. Tax evasion and corruption has been re-
duced to an extent, making the system more efficient.
Reduction in cost: After GST, dual charges have been eliminat-
ed. Earlier, VAT was applicable on the goods such as cosmetics,
detergents, etc., apart from excise. GST has eliminated these type
of dual charges. Therefore, the prices of goods and services may
decrease, enabling consumers to save more money. GST is advan-
tageous for both the businessman and the consumers.
Better control on leakage: A sturdy IT infrastructure makes it
possible to adapt with GST. The coherent transfer of input tax
11.2.3 EVOLUTION OF GST
The entire timeline of GST and how it has evolved over time is pre-
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sented in Table 11.1:
Lok Sabha
2012 New deadline (i.e., December 31, 2012) was set up by the
then Finance Minister
2014 In the budget speech, the then Finance Minister
announced a compensation of ` 9,000 crore for states.
December The Finance Minister introduces bill in the Lok Sabha
2014
February 2016 New deadline (i.e., April 01, 2016) was set up
January 2017 New deadline to roll out GST was set up (i.e., July 01, 2017)
March 2017 Four key bills (CGST, IGST, SGST and UTGST) are passed
in both houses
May 2017 Four slab rates (i.e., 5%, 12%, 18% and 28%) are unveiled
by the GST council
July 01, 2017 GST rolled out
ture and services to both central and state governments, tax payers
and other stakeholders to implement GST.
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11.2.5 GST RATES IN INDIA
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The rates of GST in India do not come under the provision of the Act
but there was a promise made by Hon. Finance Minister, Shri Arun
Jaitley in the Rajya Sabha for making the upper limit of the tax rate a
part of the law. Thus, 14% is fixed as the upper limit for CGST/SGST
rate and 28% is fixed as the upper limit on IGST rate. Table 11.2 shows
the categories of the tax rates:
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including Pickle Murabba, Chut-
ney, Jam, Jelly, Packed Coconut
Water, and Umbrella, etc. (comput-
ers and processed foods)
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18% (9% of CGST and 9% Hair Oil, Capital goods, Tooth-
of SGST) paste, Industrial Intermediaries,
Soap, Ice-cream, Pasta, Toiletries,
Corn Flakes, Computers, Soups,
and Printers, etc.
28% (14% of CGST and All other items that directly reach
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Exhibit
GSTIN STRUCTURE
The next ten digits of GSTIN signify PAN number of the tax-
payer.
The thirteenth digit of GSTIN signifies the number of registra-
tion in a state.
The fourteenth digit of GSTIN is ‘Z’ by default.
The last digit of GSTIN signifies the check code, which can be
an alphabet or a number.
Exhibit
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registered under the GST Act:
Aggregate turnover: A person whose aggregate turnover in a
financial year is over ` 20 lakhs. This aggregate turnover crite-
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rion is over ` 10 lakhs for the states who fall under the special
category states.
Compulsory GST registration: The persons who are required
to compulsorily get themselves registered under the GST Act
are as follows:
Persons supplying any taxable goods or services at the in-
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ter-state level.
Casual taxable persons supplying any taxable goods or ser-
vices.
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4. Name the body that is the prime policy-making body of the
GST.
5. GSTN provides an analysis of taxpayers’ profile. (True/False)
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6. What is the GST on salt?
a. 0% b. 5%
c. 12% d. 18%
7. Manufacturers, suppliers, retailers and wholesalers can
recover the GST that has been incurred as ________ on input
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costs.
8. The states get input tax credit on ________ and it may be
utilised against the payment of CGST.
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Activity
Randomly pick any ten items up that you use in your daily life.
Against each item, list the rate of GST that is charged on them.
The ‘person’ in the GST act may include any of the following:
Individuals
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Trust
Know More On the basis of the kind of goods or services supplied by a person,
The procedure for registration there are some exemptions for some people from GST registration.
under the GST Act for every The persons who are exempted from GST registration are:
person liable to pay GST and
is detailed under Section 25 of Agriculturists
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the Act.
Persons falling under Threshold Exemption Limit
Persons supplying goods or services that are covered under Nil-
Rated/Exempted category
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Any activity that falls under the taxable category as per GST rules is
called a supply. The government considers an activity as a supply if it
meets any of the following criteria:
Supply of goods or services
Any taxable supply
A taxable person making the supply
Supply that is made in a territory and is taxable
The supply of goods and services that fall under GST can be divided
into two categories, namely Taxable supplies and Non-taxable sup-
plies. Further, classification of these supplies can be divided into dif-
ferent categories on the basis of the nature of the supply.
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rate is greater than 0% fall under the category of regular tax-
able supply.
Nil-rated supplies: The goods and services whose GST rate is
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by default 0% fall under this category.
Zero-rated supplies: The supply of goods or services to a SEZ
unit or exports is taken to be deemed. Whenever anything is
exported, the GST rate associated with them becomes Zero.
However, the GST rate for such items is greater than 0%, when
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supplied in India.
Non-taxable supplies: These supplies refer to the goods and ser-
vices that are not taxable under GST. Further, they can be divided
into the following:
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There are three components based on which the GST tax owed by a Study
person is calculated for a transaction. These components are described Hint
as follows:
Some activities specified in the
1. Place of supply: The determination of the type of transaction, Negative List under Section
7(2) shall be neither treated
whether it is an inter-state, intra-state or an external trade is done
as a supply of goods nor as
through this component. It will determine the GST type associated a supply of services for the
with it. purpose of taxability.
The place from where the goods are delivered becomes the place of
supply. It is the place where the ownership of the goods are changed.
In case, the goods are not moved from one place to another, the loca-
tion of goods at the time of delivery becomes the place of supply.
In case of services, the location of the person who receives the ser-
vice becomes the place of supply. If the services are provided to any
unregistered dealer and the location information is not available, then
the service provider’s location will become the place of supply. The
provisions specially provided to determine the place of supply are as
follows:
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Services related to immovable property
Restaurant services
Admission to events
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Transportation of goods and passengers
Telecom services
Banking, financial and insurance services
If the services are associated with immovable property, then the prop-
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The amount of money that the seller collects for the goods and ser-
vices that he supplies is considered as the value of supply. Addition-
ally, the amount of money that a seller collects from the buyer is also
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In cases, when both parties are related and the value that is reason-
able may not be charged, or the transaction occurs as an exchange,
the GST must be charged on the transactional value of the supplies.
The value of supply enables the parties, which are unrelated, to make
transactions in the normal business course. It is responsible to ensure
that GST is properly charged and collected, irrespective of the full
payment of the value.
The time when goods and services are supplied is considered to be the
time of supply. The time of supply helps the seller to determine the
due date for the tax payment.
At the time of the supply of goods and services, the GST must be paid.
The time of supply is identified on the basis of goods and services.
For goods, the time of supply shall be the earliest of the following dates:
Invoice issue date
For services, the time of supply shall be the earliest of the following
dates:
Invoice issue date
Advance or payment receipt date
The services provision date (in case the invoice is not issued within
a stipulated time)
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a ________.
Activity
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Prepare a list of five Non-GST supplies.
reduction in the tax paid already by them while buying goods for the
company and pay just the balance amount. The buyer receives credit
at every stage in a supply chain for the amount of input tax paid. It can
be used to claim reduction in the amount of GST needed to be paid
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Businesses can claim for ITC excluding the goods and services which
are used for:
Personal use
Supplies exempted
Supplies that are covered by ITC
For claiming ITC, the businesses must comply with the following rules:
A buyer must have a valid tax invoice issued by a registered dealer.
The returns must have been filed by the supplier. ITC can be
claimed on purchases, only if the supplier of the goods complies
with the rules of GST and pays tax to the government.
The buyer must pay for the supplies received to the supplier with-
in a time period of 180 days from invoice issue date in order to
claim for ITC.
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charge
Credits that are blocked
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NOTE Tax invoices and debit notes that are less than a year old qualify to be
Section 2(59) defines the term claimed for ITC. In other cases, ITC can be claimed by earliest of the
‘input’ as any goods other following dates:
than capital goods which are
used or intended to be used The end of the financial year which applies to that invoice followed
by the supplier in the course by the date of filing GST returns for September
of business or furtherance of
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There are some special cases apart from the ones mentioned above
that are eligible for claiming ITC.
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Goods are sent to a job worker for processing by the principal man-
ufacturer. For instance, a company that manufactures bags sends its
half-made bags to the job workers for chain fitting. The manufacturer
is allowed to claim ITC on purchased goods that are sent to job work-
ers.
There are two cases in which ITC is allowed on goods sent to job work-
ers:
1. From the principal manufacturer’s place of business
2. From the goods supplier’s place directly
To enjoy the ITC benefit, the principal manufacturer must receive the
goods back within a year (within 3 years for capital goods).
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If the reversed ITC is less than required
In accordance with the GST law, any person who is taxable can claim
for ITC for the amount of tax paid on the purchase of capital goods
of the company. ITC that falls under the present tax scheme can be
transferred to GST scheme during the migration process.
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To transfer the existing ITC to GST, one needs to file the GST TRAN-1
form on GST common portal. The GST TRAN-1 form can be filed by
logging into the GST portal and fill the electronic GST TRAN-1 form,
which states the tax amount or duty, that needs to be claimed as ITC.
10. A businessman Dinesh bought some items and paid tax on the
basis of the reverse charge. He cannot claim ________.
Activity
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The tax must be paid by every 20th day of the month by every taxpayer
who is registered under GST. An additional interest may be charged
on the due tax if the tax is not paid by the stipulated date. The tax
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returns cannot be filed for next reporting period.
11. The GST payments can be made either through the ITC or
________ available in the E-ledgers.
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Activity
Using the Internet, find out the conditions under which the debit
entry is made in an ITC ledger.
Annual returns and final returns are different from each other. When
a registered taxpayer applies for the cancellation of his registration, NOTE
then the returns filed by that person are called final returns. Filling Under the Composition scheme
the last return is mandatory within three months of the cancellation of GST, the small taxpayers can
avoid paying GST through the
date. The annual return will be filed by every registered person who
normal and tedious mechanism.
pays the tax as a general taxpayer. Instead, taxpayers having a
turnover of less than `1 crore
A registered taxpayer can file his own GST return in different ways. A can opt to pay GST at a fixed
registered taxpayer can file a return of his business invoice online on rate of turnover.
the common GST portal. However, if taxpayers have a huge number of
invoices, then it is very difficult to file on GST portal and it consumes
a lot of time.
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self assessment Questions
Activity
than the earlier taxation schemes. To prevent the misuse and exploita-
tion of the policies, the government has laid down a list of offences
and penalties associated with them. An offence is any non-compliant
or illegal activity performed against the provisions of the GST tax
scheme. A taxpayer found involved in any of such activities is likely to
invoke penalties. A penalty is a form of punishment prescribed in the
law that is enforced against the offence committed by the taxpayers.
Table 11.3 shows the offences along with the activities involved, which
are listed by the in GST Act:
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Acquiring refund from the government in a false manner
Repeated Three short payments of tax in three returns during six con-
short tax secutive tax period
payments
Activity
worth the value of more than ` 50,000 within a state or outside the
state. It aims at a speedy and trouble-free movement of goods all over
India, without any sort of obstacle.
It has replaced the former bill, which used to be a paper bill under
the VAT system with the name of road permit, way bill, etc. It helped
in monitoring the movement of goods to or from a state, to keep an
eye on tax evasion. It was required while transporting goods from the
supplier to the receiver. However, these bills were subjected to the
rules which were specific to a state and had to be generated from the
portals of different states. Earlier, the transporter issued a way bill
and it acted as a receipt that provided details and directives related
to the shipment of the delivery of goods. The details contained the
names of the supplier and the recipient, the source and destination of
the delivery, and the route.
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It is obligatory for all the inter-state shipment of goods valued above
` 50,000. It is also obligatory for intra-state movement of goods. Some
goods including the items that are liable to rot, such as milk and
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milk products, meat, fruits, and vegetables are out of the scope of the
E-way bill. Few other items that do not need the E-way bill include
gold and silver jewellery, cooking gas cylinders, raw silk, wool and
handlooms.
The E-way bill can be generated through the GSTN set-up, before the
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goods begin to move. An E-way bill number (EBN) is allotted after the
E-way bill is produced. The EBN number is available to be accessible
to the transporter, the supplier and the recipient.
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Activity
Search the Internet and discuss at least five cases when e-way bill
is not required.
11.9 SUMMARY S
GST is a consumption-based tax, which means that all the accu-
mulated SGST will complement to the State where the consumer
of the sold goods and services resides.
Goods and Services Tax Network (GSTN) is a joint non-govern-
ment and not-for-profit company set-up by the Central and the
State governments which allocate the IT infrastructure and ser-
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the state governments.
Reverse charge is a mechanism where the person who receives
goods and services is responsible to pay GST rather than the sup-
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plier.
key words
income or profits
Tax evasion: An illegal practice of underpaying or not paying
taxes
Tax compliance: The practice of making payments and produc-
ing and submitting the information sought by the tax authori-
ties
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7. tax credits
8. CGST
Levy and Collection of GST 9. taxable person
(Charging Section)
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Input Tax Credit 10. ITC
Payment of Tax 11. Cash
Reverse Charge and Returns 12. reverse charge
Offences and Penalties 13. offence
E-way Bill 14. False
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SUGGESTED READINGS
V.S. Datey. GST Ready Reckoner
Vashishtha Chaudhary Ashu. GST - A Practical Approach
E-REFERENCES
(2018). Retrieved 13 April 2018, from https://services.gst.gov.in/ser-
vices/gstlaw/gstlawlist
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What is GST in India? Goods & Services Tax Bill Explained. (2018).
Cleartax.in. Retrieved 13 April 2018, from https://cleartax.in/s/gst-
law-goods-and-services-tax
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INTERNATIONAL TAXATION
CONTENTS
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12.1 Introduction
12.2 Concept of International Taxation
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12.2.1 Objectives of International Taxation
12.2.2 Central Principles of International Taxation
Self Assessment Questions
Activity
12.3 Double Taxation
12.3.1 Relief from Double Taxation
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Introductory Caselet
n o t e s
DTAA prevents taxing twice the same income in the hands of the
Case Objective assessee. It helps in cases when a certain income is subjected to
This caselet highlights the use tax both in India and a country outside India. In India, persons are
of Double Taxation Avoidance taxed on the basis of their residential status; and it may be possi-
Agreements (DTAAs) ble that they are taxed on the same income in another country on
the same/any other basis.
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A chartered accountant who balances the books of accounts of the
company suggests that the company should consult the Double
Taxation Avoidance Agreement (DTAA) made by the Indian Gov-
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ernment with US Government.
ensure that the resident country allows a tax credit for the tax
charged on the same income in the source country.
India-US DTAA states that tax will be collected by the Indian gov-
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learning objectives
12.1 INTRODUCTION
In the previous chapter, you have studied about goods and services tax Quick Revision
and its significance.
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Due to the movement of goods on an international scale, each move-
ment may be subject to tax jurisdictions in both the countries. Export
of a good or service from one country is, by its very definition, import
for another country. Thus, the possibility of double taxation can occur.
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For example, if the home country deducts tax on foreign income of
its residents and the foreign country deducts tax on the income of its
non-residents originating in its country, then such income is said to be
subject to double taxation.
Tax Act.
CONCEPT OF INTERNATIONAL
12.2
TAXATION
The system of taxation varies from country to country. These systems
are applicable to the persons or the business entity residing in that NOTE
country. However, when income is earned or remitted from one coun- There is an accepted convention
try to another country, the concept of international taxation comes in international taxation that one
into purview. country cannot enforce tax on
territory of another country.
International taxation involves rules with respect to the taxation of an
entity which operates in more than one country.
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to pay tax and be assessed. For example, if the rules of interna-
tional taxation allow a country to tax an individual in which he
has earned the income, then the assessee shall be assessed in that
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country only and will pay tax to that country only.
To exchange information: International taxation aims to promote
exchange taxation information relating to assesses between the
concerned countries. It also helps in gathering knowledge about
illegal activities conducted by the assessees, if any.
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S
Activity
1. Source rule
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2. Residence rule
The source rule states that the income has to be taxed in the country
in which it is generated irrespective of whether the person is residing
in the source country or in any other country.
The residence rule states that the income has to be taxed in the coun-
try in which the individual resides irrespective of whether the income
is earned in the same country or not.
There are two ways in which relief can be granted from double taxa-
tion. Know More
There are three popular
BILATERAL RELIEF model conventions that are
used in preparing the tax
agreements. They are OECD
Under this method, a double taxation avoidance agreement is estab-
Model Convention, UN Model
lished between the two countries in order to avoid double taxation Convention and US Model
Convention.
Section 90 of the Income Tax Act covers the bilateral relief agreement
between countries. This section provides that the Central Govern-
ment can enter into an agreement with any other country or countries
of the world in order to:
NOTE
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Grant relief with respect to the income which has been earned in
Section 90(2) states that where some other country and has been taxed in that particular country
the DTAA is entered into by the as well as in India
Government, then the Income
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Tax Act provisions would apply Grant relief from tax laws and provisions so as to promote the eco-
only to the extent to which nomic relations through trade and commerce with other countries
they are more beneficial to the
assessee. Avoid double taxation on the income
UNILATERAL RELIEF
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Know More Section 91 of the Income Tax Act covers the provision of unilateral
The specific provisions of the agreements in which no agreement has been established between two
DTAA take precedence over the countries. In case no agreement exists between the countries, relief
general provisions of the Income would be provided by the country on the fulfilment of the following
Tax Act, 1961.
conditions:
The assessee who is under the tax jurisdiction must be a resident
Study in India during the previous years in which the income has been
Hint earned.
Relief is granted under The income should have been earned by him outside India.
Section 91 in the form of a
deduction from Indian income The income is not deemed to be earned by the assessee in India.
tax payable. The deduction is
The assessee has paid taxes on the income earned in the foreign
equal to tax calculated on the
doubly taxed income at Indian country as per the rules of taxation of that country.
rate of tax or rate of tax in the
No DTAA has been established between India and that country in
other country, whichever is
lower. which the assessee has earned the income.
If all the above conditions have been fulfilled by the assessee who has
earned the income and wants a tax relief in India, then such person is
entitled to have the tax relief under the Act.
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PAN card copy duly self-attested in Form 10F
Self-declaration cum indemnity form
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Passport and Visa copy duly attested
A branch office
A factory
A workshop
A sales outlet
FEATURES OF PE
NOTE
As per Section 9(1), for deeming
The features of permanent establishment are as follows: the business income to accrue
or arise in India, there must exist
PE is a fixed place anywhere in India from where business can be a business connection.
conducted exclusively or partially. In contrast, as per DTAA, the
business income of an entity
PE is handled by the clauses of the DTAA and every DTAA has a
is taxable only if there is a
clause for the PE in India. permanent establishment.
An NRI will not be taxed in India until he/she has a PE in India.
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and is a resident in another country.
Activity
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Using the Internet, study how double taxation relief is provided in
countries other than India. Prepare a report on it.
According to Section 195 of the Income Tax Act, 1961, any person
Section 195 identifies TDS rates responsible for the payment of interest to a non-resident or foreign
and deductions on business
transactions with non-residents
company or any other taxable amount in India, not being salaries,
on a daily basis. shall deduct tax at the rates in force at the time of payment.
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Any person should fill the Forms 15CA and 15CB before making pay-
ments to any non-resident individual. Figure 12.1 shows the proce-
dure for Furnishing Form 15CA:
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Remitter
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Obtain the certificate of account (from 15CB).
This form is available at the website www.tin-nsdl.com
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acknowledgement generated. An acknowledgement is generated
on the website which has to be deposited to the bank along with
the certificate of the chartered accountant.
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5. The bank will remit the amount to the payee.
Activity
12.5 SUMMARY
S International taxation is the study of tax laws applicable on indi-
viduals or business enterprises subject to tax laws of different
countries.
The objectives of international taxation are to avoid double taxa-
tion, prevent tax evasion, allocate tax jurisdiction and exchange
information.
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shall at the time of payment, deduct tax at the rates in force.
key words
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Bilateral relief: A method under which a double taxation
avoidance agreement is established between two countries in
order to avoid double taxation on the generation of income of
the individual
Double taxation: A principle of taxation wherein income taxes
are paid twice on the same source of the earned income
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6. True
Double Taxation 7. True
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8. Source
9. Section 90
10. False
11. Double taxation
Implication of Section 195 12. True
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13. 15 CB
14. 15CA
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5. According to Section 195 of the Income Tax Act, 1961, any person
responsible for paying to a non-resident or foreign company any
interest or any other sum chargeable to income-tax in India, not
being salaries, shall at the time of payment, deduct tax at the
rates in force. Refer to Section 12.4 Implication of Section 195
6. Some of the central principles of international taxation include:
Jurisdictional Rights and Source versus Residency – Principle of
Taxation Rights. Refer to Section 12.2 Concept of International
Taxation
SUGGESTED READINGS
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Isenbergh, J. (2005). International Taxation. Foundation Press.
Lymer, A. and Hasseldine, J. (2002). The International Taxation
System. Springer Science+Business Idea, New York.
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E-REFERENCES
International Taxation. Retrieved from http://www.incometaxin-
dia.gov.in/pages/international-taxation.aspx.
Agarwal, R. (2013). What is Double Taxation Avoidance Agree-
ment (DTAA)?. goodreturns.in. Retrieved 30 April 2016, from
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http://www.goodreturns.in/classroom/2013/07/what-is-double-tax-
ation-avoidance-agreementdtaa-193501.html
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CASE STUDIES
CONTENTS
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Case Study 1 Tax Evasion
Case Study 2 Impact of Residential Status on Scope of Total Income
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Case Study 3 Taxability of Gratuity of Mr Rishi Based on the Nature of his
Employment
Case Study 4 Tax Issues Related to Self-Occupied House Property
Case Study 5 Expenditure on Scientific Research
Case Study 6 Capital Gains of Mr Chugh
Case Study 7 Income from Other Sources
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Case Study 12 Unilateral Relief for Double Taxation where no Agreement Exists
with Foreign Country
Case Study 1
n o t e s
TAX EVASION
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Issuance of a credit note of ` 96,000 by FGP Ltd. to the son of
the director of the company as an amount of brokerage payable
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will increase the total income of Mr Parvesh from ` 4,00,000 to
` 4,96,000 and correspondingly reduce the taxable income of FGP
Ltd. This amounts to the recording of a fictitious transaction in
the books of accounts for the purpose of reducing the tax liability
of the company.
This is due to the fact that the company pays tax at a flat rate of
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questions
Case Study 2
n o t e s
Ms. Soumya earns the following incomes pertaining to the Previ- Case Objective
ous Year 2020-2021:
This Case Study discusses the
1. Short term capital gains of ` 15,000 from the sale of shares in
scope of total income based
an Indian company, received in USA. on the residential status. It is
2. A dividend of ` 8,500 from an Indian Company, PR Ltd. with respect to Chapter 2 of
the book.
3. A dividend of ` 11,500 from a German Company, received in
Germany.
4. ` 26,000 agricultural income from land in Madhya Pradesh.
5. Rent of ` 80,000 from a house property in London, deposited
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in London bank and remitted to India later on.
hands of assesses.
ii. For resident but not ordinarily residents, income received or
deemed to be received/income accrued or arisen or deemed
to accrue or arise, in India is taxable in the hands of assesses.
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Case Study 2
n o t e s
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{Agricultural income is exempt under Section 10(1)}
Rent from house proper- 56,000 (80,000 - Nil Nil
ty in London, deposited 24,000)
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in London bank, and
remitted to India later
on
{Income accrued or arisen outside India (Income from property is taken after
allowing 30% deduction)}
Total Income 82,500 15,000 15,000
questions
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meant for retirement benefits as per the terms of employment.
Also, he was eligible to a commission @ 1% of turnover (turn-
over amounted to ` 12,00,000 in the past 12 months). Mr Rishi also
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received a bonus of ` 12,000 p.a.
Under the Income Tax Act, 1961, any gratuity received during the
tenure of service is fully taxable. The amount of exemption avail-
able in respect of gratuity received at the time of retirement/death
of an employee differs under three situations:
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Case Study 3
n o t e s
S
Taxable Gratuity -
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If Mr Rishi is a private sector employee Amount in `
covered by Payment of Gratuity Act
Amount of Gratuity received on retirement 7,00,000
Less: Amount exempt under Section 10(10)(ii) 1,86,923
Least of the following:
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1. ` 7,00,000
2. ` 20,00,000
3. ` {(8,000 + 4,000) × 15/26 × 27}= ` 1,86,923
Taxable Gratuity 5,13,077
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Case Study 3
n o t e s
questions
S
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N
Case Study 4
n o t e s
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tion for each option in accordance with the Income Tax Act, 1961
before deciding what he should do with his new property. The tax
implications for the above alternatives are as follows:
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If the new property is let out on rent: In this situation, the rent
received from the property will be taxed. For example, if Swapnil
is getting a rent of ` 10,000 per month from his property, he will
have to pay tax for his annual rental income, i.e., ` 1,20,000 after
tax deductions including municipal taxes, standard deductions
and interest (if any).
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Case Study 4
n o t e s
questions
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(Hint: Municipal taxes, standard deductions and interest,
etc.)
2. Explain the computation of income from ‘self-occupied
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property’ as per the provisions of the Income Tax Act.
(Hint: Refer to Section 23(2) and 23(4))
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N
Case Study 5
n o t e s
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approved by prescribed authorities.
For calculating the taxable business income for the A.Y. 2021-
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2022, Mr L.P. wishes to claim a deduction of scientific research
expenditures for his business entity, L.P. Ltd. By applying the spe-
cific provisions of Section 35, the deductions shall be allowed as
follows:
Deduction (`)
Allowed
Amount paid for 1,20,000 Section 35(1)(ii)-Contribu- 150% 1,80,000
scientific research tion to notified approved
to approved Indian college/university/institu-
Institute of Scienc- tion/research association
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Case Study 5
n o t e s
S
college/university/institu-
tion/research association
for social science/statistical
research
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Total deduction allowable under Section 35 14,65,000
questions
Case Study 6
n o t e s
S
This house property was sold by Mr Chugh on 11.8.2018 for
` 77,00,000 after incurring expenses of ` 40,000 on the transfer.
The capital gains on such transfer are calculated as follows:
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Financial Year (FY) Cost Inflation Index (CII)
2001-02 100
2003-04 105
2013-14 200
2018-19 280
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2019-20 289
2020-21 301
Case Study 6
n o t e s
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Total Indexed COI 30,76,722
Case Study 7
n o t e s
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4. He won a lottery and earned around ` 3 lakhs.
5. He won ` 3 lakhs by winning a bet in horse race.
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6. He received a gift from his father which is an envelope and
carries around ` 50,000.
7. He received ` 24,000 as gift from his friends on his birthday.
8. His grandfather gifted him ` 2,52,000.
9. He received ` 35,000 as gift on his marriage anniversary.
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questions
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S
(in `) (in `)
Profits and gains of business or 148,000
profession
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Income from Other Sources
1. Lottery Income 110,000
2. Interest on Fixed Deposits 55,000
Gross Total Income 313,000
Less: Deductions allowed under Chapter
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VI-A
1. Deduction under Section 80C
Amount contributed to Public Provi- 150,000
dent Fund
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Case Study 8
n o t e s
questions
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2. Who are eligible for claiming a deduction under Section
80TTB?
(Hint: Resident senior citizens, Refer to Section 80TTB)
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N
S
While computing his taxable income under the head ‘Salaries’, he
desires to claim an exemption of HRA. For this purpose, he goes
through the rules mentioned in the taxation laws.
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Section 10(13A) of the Income Tax Act, 1961 states that HRA is
exempt to the least of the following in the hands of an employee:
HRA actually received during the previous year
Rent paid minus 10% of the salary
50% of salary if accommodation is located in Delhi/Mumbai/
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Chennai/Kolkata
OR
40% of salary if accommodation is located in non-metro cities
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questions
Case Study 10
n o t e s
Cazy and Hazy are two sisters born and brought up in Delhi.
Case Objective While Cazy is settled in Australia after her marriage in 1981, Hazy
This Case Study discusses the is settled in Delhi. Both of them, being aged below 60 years, earn
concept of computation of the the following incomes during the previous year ended 31st March,
total income of an assessee. 2021:
It is with respect to Chapter 10
of the book.
Particulars Cazy (`) Hazy (`)
Pension granted by State Government - 51,000
Pension granted by Australian Government 21,000 -
TECH
INFO Long-term capital gain from the sale of land 1,03,000 49,000
situated in Delhi
Rent received from house property situated in 59,000 31,000
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Delhi
LIC premium paid - 9,000
Australian Life Insurance Corporation 41,000 -
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premium paid at Australia
Short-term capital gain from the sale of shares 21,000 2,49,000
of the listed Indian company, STT paid
Premium on Mediclaim policy paid - 24,000
Contribution to PPF - 18,000
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The taxable income and total tax liability of Cazy and Hazy for the
Assessment Year 2021-2022 are computed as follows:
Case Study 10
n o t e s
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Premium paid on Mediclaim policy - 24,000
- 24,000
Total deduction under Chapter VI-A is restricted 41,000 32,700
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to Gross Total Income exclusive of long-term and
short-term capital gains
Total Income = Gross Total Income – Deductions 1,24,300 2,98,000
Case Study 10
n o t e s
questions
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tax law.
(Hint: Refer to Section 87)
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N
S
industry stakeholders, consumers and the government. It has low-
ered the cost of goods and services, boosted the economy and has
made products and services globally competitive. This is because
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the GST system offers a continuous chain of input tax credits
from producer/service provider’s point up to the final retailer’s/
consumer’s point. A set-off of these credits from GST payable at
various stages of supply, thus, results in taxing the value addition
only at each supply chain stage.
Goods and Services Tax is a type of indirect tax reform that aims
to remove taxation barriers between states, thereby creating
a unified market and provides unrestricted access to the entire
nation to buy, sell, import and export within the country. It has
created a uniform market and the consumers get benefitted from
the reduction of prices of different items.
GST has helped widen the tax base, with the number of registra-
tions crossing 10 million. The growth rate projected by the IMF
after implementing the GST is beyond 8%.
Case Study 11
n o t e s
questions
S
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N
S
Nandita, aged 62 years, was a resident retired employee of Prasar
Bharati. She derived a foreign income of ` 1,10,000 from her
theatrical works. A tax of ` 11,000 was deducted in the foreign
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country and India did not have any Double Taxation Avoidance
Agreement with the said country. Her Indian income amounted
to ` 5,10,000. For tax-saving purpose, she made a contribution
to Public Provident Fund of ` 1,50,000 during the previous year
2018-19. She is worried about the double tax to be paid by her on
the foreign income and seeks advice from a taxation consultant
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on Section 91.
The tax consultant computed the tax liability of Nandita for the
Assessment Year 2021-2022 in the following manner:
Case Study 12
n o t e s
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taxed income at the India tax rate or the rate of tax in the foreign
country, whichever is lower.
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questions
taxation).
2. How can relief be availed if there is no Double Taxation
Avoidance Agreement between two countries?
(Hint: Refer to Section 91).
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