TAXATION – DIRECT AND INDIRECT

ANS-1

Introduction
Medical Allowance: Medical allowance is a fixed allowance paid by the employer to the
employee whether or not they avail the medical treatment or whether they show the bills to
substantiate the expenditure. An employee receives this allowance as a part of his/her salary
and it is usually fixed in nature. As per government policies this allowance is mandatory in
public sector. Under the Income tax act 1961, medical allowance is not categorized as an
allowance that bears exemption, so medical allowance is fully taxable.
Medical facilities: Any amount paid by employer in respect of the expenditure caused by an
employee on his medical treatment or treatment of any of his/her family member are comes
under medical facilities. Medical facilities provided by an employer to an employee are
taxable subjects to specific determine limits under provision to section 17(2). However
medical reimbursement is an amount given to employees against particular medical bills
submitted by them. Employees has a benefit to claim up to Rs.15000/-under medical
reimbursement.

Concept & Application

In the given question, Mr.Vinay is an IT associate at Mittal enterprises. The fixed medical
allowance of Rs.10000 per month received by him is fully taxable under the Income tax act
1961. At the end of the year the whole amount of medical allowance will be included in the
income from salary and will be taxed as per the income tax slabs.
Following are the cases when medical facilities are not regarded as taxable perquisites.
1- Treatment in hospital maintained by employer: Medical treatment provided to
employees or any of his/her family member in any hospital maintained by the
employer is not chargeable to tax.
2- Treatment in hospital maintained by government: Medical treatment provided to
employees or any of his/her family member in the hospitals maintained by
government, local authority or any other hospital approved by the government is not
chargeable to tax.
3- Treatment in hospital approved by the chief Commissioner: The value of medical
treatment for prescribed diseases repaid by an employer in regard of an employee or
any member of his family in a hospital approved by the chief commissioner is not
chargeable to tax.
4- Treatment under scheme of central government or IRDA: Any medical health
insurance premium paid by an employer on behalf of an employee on the health of the
employee or member of his family under a plan supported by the central government
or IRDA is tax free.
 Under these provisions, family members include children and spouse of the employees
and dependent parents and siblings of employees.

Medical Treatment outside India:

Expenses incurred by an employer on the medical treatment of an employee or his/her
family member outside India are also treated as tax free perquisite in the following
situations:
1- Any cost of boarding and housing cost incurred on the medical treatment of the
employee or any of their family member in addition to one attendant outside India
would be treated as tax free perquisite to the extent allowed by the Reserve bank of
India.
2- Treatment costs are exempted from tax up to a degree allowed by the Reserve bank of
India.
3- Expenses incurred on the travel of the patient along with one attendant of patient shall
be tax free provided that the gross total income of the employee does not exceed
Rs.200000 p.a. In case of gross total income greater than Rs.200000 p.a. these will be
fully taxable.

Conclusion
In the above question, the amount of Rs.30000/- given by the organization as medical facility
to the employees working in various departments would be treated as tax exempt perquisite if
any one of the above-mentioned conditions are satisfied and there is no fixed or monthly
payment of medical facility to the employees however, they are repaid to the employees for
the expenses caused by them on the medical treatment of his own or his family member.
Thus, the amount of Rs.10000 would be included while calculating the income tax liability
under the income head salary and the employee will be liable to pay taxes on the same as per
the tax slab rates and the amount of Rs.30000 will provide tax benefit to the employee.
 ANS-2

Net Total Income: Net total Income refers to the income which tax payer gets after
calculating all the income under all five heads of income and after deducting the deductions.
These five heads include, Income from salary, Income from house property, Income from
business and profession, Income from capital gains and Income from Other sources. We can
calculate Net total income by adding all the income these five heads and then reducing the
deduction under section 80C & 80U under Income tax act 1961.

Income from Salary

Income from House Property

Income from Business or

Profession

Income from Capital Gains

Income from Other source

Concept & Application

Income from House property: Income under the head house property includes all the
income earned by the assesses from a property. The building and the attached land are
considered as a part of the house property. It is the only income that is charged on the
national basis. It means that the incidence of tax not only on the income earned from the
house property, but also on the inherent potential of the property to earn income. Tax has to
be paid whether income earned or not. Under section of the act, house property does not
include empty areas. Income received from empty areas are charged under the head ‘Income
from other sources’ or ‘Income from business or profession’. If the land is used for his own
business and profession purpose, then no tax is levied under the head of income from house
property. Any rent income or other earnings from land are taxable under the head Income
from house property.
Income from Business or Profession: Income from business or profession is an important
head in the total income of an individual. Let us understand the main terms under this head:
Business: Business refers to any economic activity that is carried out to earn profits.
According to section 2(13), business includes any trade, manufacturer or commerce or any
concern or adventure in the nature of trade, manufacturer or commerce. Business is an
ongoing activity. However, profit from a single venture would also be assessable if the
venture had come to an end after the entire cost had been recovered.
Profession: Profession is an activity which includes special skills to perform. It can be
defined as any job requiring some skills, thought and expert knowledge. For instance,
Teacher, doctor, lawyer and engineer etc. who earn their income through expert skill sets.
Profits and gains: Profit and gains can be explained as the surplus by which the receipts
from the professions exceeds the required expenditure for the purpose of earning those
receipts. Profit shows plus income and loss shows the minus income. Profit is represented in
terms of money or money worth like cash etc.
68 year old Mr.parv running a proprietor business for JAAL enterprises. Computation of his
Net income are as follows:

Income from House property

Gross Annual Value (Note 1) NIL
(-) Municipal taxes paid by owner in PY 0.00
Net Annual Value NIL
(-) Deduction u/s 24
Interest on borrowed capital (Note 2) (20000)
Loss from the head House property (20,000)

Income from Business 11,30,000

(+) Personal expenses on travelling (Note 3) 30,000
11,60,000
(-) Depreciation on furniture 10%) (4500)
(-) Deduction u/s 80C
Mediclaim Premium (30,000)
Subscribed NABARD bonds (1,00,000)
Income from the head business 1025500
Net total income = Income from the head business – Loss from the head house property (Note4)
= 1025500 – 20000
= 1005500

Note1: As per the section 23(2), the annual value of the house property shall be taken NIL in
the case where the house property is self-occupied by the assessee for his own residence.
Note2: Under section 24(b) when the loan is taken for renewal, reconstruction or repair of
self-owned house property then the interest on borrowed capital is allowed as a deduction
maximum up to Rs.30000 p.a.
Note3: Expenses incurred by the owner for his personal purpose is disallowed and thus
excluded while calculating the total income. So, it is added back to in the head income from
business.
Note4: House property income losses can be set-off against income from other heads.
Therefore, the loss of Rs.20000 from the head house property can be set-off against the head
of Income from business.

ANS-3

Set-off and carry forward of Losses:

Set -off of losses implies the adjustments of losses incurred by an assessee against the profit
of that financial year. Carry forward of loss intends that if an assessee incurs losses instead of
profit and they are not being set-off by profits, they can be carried forward to the next
assessment year where they can be set-off against the permissible profit. Losses can be
carried forward to subsequent years in case there are no sufficient profits in the current
financial year. Following are some important points regarding set-off and carry forward of
losses:
 Loss from a source of income that is exempted from tax can not be set-off against any
other income which is taxable.
 In a financial year the losses from one source of income can be set-off from other
source of income under same head of income, it is known as Intra-head adjustment.
 In Inter-head adjustment losses from one head of income can be set-off from other
head of income. An aassessee is allowed to adjust the loss from one head against
income from other heads.
 ANS-3(a)

Set-Off and carry forward from House property provisions under the Income Tax Act
House property income losses can be set-off against income from other heads. Such losses
can be adjusted against business income, salary income, income from other sources and
income from capital gain except for casual income. Casual income refers the income which is
generated by chance, sudden and without any planning, uncertain income and the assessee
cannot depend on it in future.

If the loss from the head house property is not fully adjusted in the same year in which the
loss incurred, then such losses can be carried forward to the following year. However, such
loss can only be set-off against the head of income from house property in the subsequent
years. It means that in the subsequent years, inter-head adjustments would not be
allowed. This value of loss can be carried forward for eight years succeeding the assessment
year in which the loss occurred. The unabsorbed loss from house property can be carried
forward and adjusted against the income from house property only and up to the extent of
Rs.2,00,000/- only.
Filling of return of income under section 80
According to the section 80, the assessee will be eligible to carry forward and set-off the
losses in a specific assessment year only if he files the return of income within a specified
time frame as prescribed under section 139(1). However, in case of loss from the head of
house property an assessee does not need to file the same to be eligible for carrying forward
the losses from house property.
In case of Ms. Swati, who has generated losses from house property can set-off her loss with
other heads of the income in the same assessment year of incurring loss and can carry
forward the unabsorbed loss if any to next eight succeeding year, however in subsequent
years the inter-head adjustment will not be allowed.

ANS-3(b)

Inter-head Adjustment: A loss which could not be set-off within the same head of income
shall be allowed to be set-off from the income of other head in the same assessment year. As
per section 71 of income tax act,1961, if an individual incur loss in one head of income and
has earned any income from other heads of income, then he/she has option to adjust the loss
from one head against income from other heads. But this rule of Inter-head adjustment has
some exceptions which are discussed as follows:
1- Speculative business loss: Any loss computed in respect of speculation business
carried on by assessee shall not be set-off of any other head of income. In basic
 words, speculation business loss can be set-off only against speculation business
income.
2- Loss under the head capital gains: short term capital loss can be set off from short
term and long-term capital gains, however long-term capital loss can be set off only
from long term capital gains. If any capital loss remains unadjusted then such losses
are allowed to be carry forward for future years under the head capital gains only.

3- Specified Business loss: Section 35 AD specifies that losses of specified business are
not permissible to be set-off against any other income except income from specified
business. It means that loss under the head ‘Profits and gains of business or
profession’ can not be set off from income of any other source.

4- Losses from owning and maintain race horses: Loss incurred from the business of
owning and maintain race horses is not allowed to be set-off against any income other
than the same income. So, the inter-head adjustment is not allowed in this case.

5- Losses from Casual income: No loss can be set-off against casual income from
winning lotteries, card games, races, crossword puzzles and any other game or from
betting or gambling of any form of nature. No expenses can be asserted against casual
income.