IIMS, PUNE

Finance Specialization – Batch 23-25

Direct and Indirect Taxation (Semester 2)

Study Material- Unit 3

Income from Salary: -

Income can be charged under this head only if there is an employer-employee relationship between the
payer and payee. Salary includes basic salary or wages, any annuity, gratuity, advance of salary, leave
encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits. The
aggregate of the above incomes, after exemptions available, is known as Gross Salary and this is charged
under the head income from salary. An allowance is a fixed monetary amount paid by the employer to
the employee for expenses related to office work. Allowances are generally included in the salary and
taxed unless there are exemptions available. Some allowances are fully taxable such as dearness
allowance, city compensatory allowance, overtime allowance, servant allowance and lunch allowance.
Whereas specific exemptions are available for some allowances. Here are some deductions/allowances
which can be claimed.

Standard Deduction: A standard deduction of up to Rs 50,000 in lieu of the earlier conveyance

allowance and medical re-imbursement of Rs 19,200 and Rs 15,000, respectively.
Basic salary along with commissions and bonuses is fully taxable.

House Rent Allowance (HRA): This allowance is given by the employer to take care your rental or
accommodation expenses. The employer can choose to offer you HRA in the salary package irrespective
of whether you live in a rented accommodation or in your own house. It is important to understand how
the income tax department treats HRA to use it efficiently. HRA exemption depends on a simple
calculation and to arrive at HRA, salary is defined as sum total of basic, dearness allowance and a
percentage of commissions of turnover achieved by employee.

Eligibility for HRA exemption

To be eligible for HRA exemption, you must first receive HRA in your salary and live in a rented
accommodation for which you pay the rent. So if you live in a house of your own, you will not be eligible
for HRA exemption.

To claim HRA exemption

You should receive HRA from your employer in your salary
You should live in a rented accommodation for which you pay the rent
Your rent should be more than 10 per cent of your salary

Calculation of HRA exemption

The actual exempt HRA from tax is the lowest of the three possibilities:
Actual HRA received from employer
50 per cent of salary in case of metros or 40 per cent for of non-metros
Actual rent paid minus 10 per cent of salary
Other considerations with HRA
If you stay in a house which belongs to your parents and you pay rent to them, then you can claim HRA.
However, the income that your parents earn will need to be shown in their income tax returns.

Calculating HRA
Ram Prasad's basic monthly salary is Rs 10,000 and the dearness allowance is 80 per cent of the basic.
He resides in Delhi and pays an actual rent of Rs 8,000 a month while his employers pay him a monthly
HRA of Rs 12,000. His annual salary works to: (10,000 x12) + (0.80 x 10,000 x 12) = Rs 2,16,000.

HRA is calculated as
Actual annual HRA received is Rs 1,44,000. Since Ram Prasad is based in Delhi, take 50 per cent of his
salary, which works to Rs 1,08,000.
The actual rent paid is Rs 96,000 and 10 per cent of his salary works to Rs 21,600; the difference being Rs
96,000 - 21, 600 = Rs 74,400
The minimum of these is Rs 74,400. So, Rs 74,400 of HRA is exempt from tax, while the remaining Rs
69,600 is taxed.
Rent receipts need to be produced as proof to your employer to show that you are indeed paying rent
to claim HRA.
If you own a house and have a house loan on it, you can still avail of the HRA benefits along with the
home loan tax benefits. It does not matter where your house is located, as both the home loan income
tax benefits and the house rent allowance benefits can be availed simultaneously. For instance, if your
house is in the same city where you are living on rent, you can justify your choice of staying on rent and
still claim the HRA exemption.

Leave Travel Allowance (LTA): LTA accounts for expenses for travel when you and your family go on
leave. While this is paid to you, it is tax free twice in a block of four years and the travel to avail LTA is
restricted within India. Considering the unusual circumstances over the past one year, for FY21, LTA can
be claimed by producing the purchase bills of any product. However, only one third of its value will be
considered as tax free LTA. Further the purchase should be made between October 12 and March 31st
and must attract a GST of minimum 12%..

Perquisites: Perquisites (or personal advantage) are benefits in addition to the normal salary to which
an employee has a right by way of his employment. Examples of these are rent free accommodation or
car loan. There are some perquisites that are taxable in the hands of all categories of employees, some
which are taxable when the employee belongs to a specific group and some that are tax free.
After the financial year ends, your employer will give you Form 16 which will contain all the earnings,
deductions and exemptions available.

FORM 16
Form 16 is a certificate, in which employer certifies the details about the salary and the tax deducted at
source from the salary during the year. Form 16 is issued once in a financial year, on or before 31st
May of the next year immediately following the financial year in which tax is deducted.Form 16 has two
parts:

Part A- It contains the information of the employer & employee, like name & address, PAN and TAN
details, a period of employment, details of TDS deducted & deposited with the government.
Part B- It contains the details of salary paid, other incomes, deductions allowed, tax payable etc.
Income from House Property: -
Income from House Property in India: The income arising out of a house property either in the form of a
rental income or on its transfer is referred to as ‘income from house property’. In essence, any property
such as house, building, office, warehouse is treated as ‘house property’ under the Income Tax Act. The
‘Income from House Property’ is one of the five heads of income that is taken into account for
calculating the gross total income (GTI) of an assessee during the year. However, there are several
deductions allowed before the income from house property may be taxed. Wondering if there are
different types of house property to take into account? Note this point – the house property can be
either self-occupied, let out or inherited, based on which the taxation will differ.
Income from house property meaning

For the income to be taxed under Income from House Property, the following three conditions need to
be met:
 Firstly, the house property should be a building, land or an apartment
 Secondly, the assessee should be the owner of the property, and
 Lastly, the house property should not be used for business and professional purposes.

Income from house property self-occupied and let-out

The property can be either self-occupied, let-out or an inherited property. For both the self-occupied
property and let-out house property, the income chargeable to tax under the head ‘Income from House
Property’ is to be calculated in a specific manner as per the income tax rules.

Self-occupied house property is the one that the assessee uses for one’s own residential purpose which
may also be occupied by his or her family members.

For income tax purposes, a vacant house is also considered a self-occupied house. However, there can
be exceptions. Sometimes, the assessee is not able to occupy the property owing to employment
concern and no other benefit is derived from it either.

If one has more than two houses, both of them can be considered as self-occupied while any house
other than that is treated as let-out.

Calculation of income from self-occupied house property

When considering self-occupied property, note that the income chargeable to tax under ‘Income from
house property’ is calculated as given below:
 The Gross Annual Value of such property as mentioned above (self-occupied) is considered as
Nil, from which Municipal taxes paid during the year are deducted to arrive at Net Annual Value
(NAV) of the house property.
 From the above mentioned NAV, one is allowed two more deductions under Section 24 – A
Standard Deduction of 30 per cent of NAV is allowed under Section 24 (a) while the deduction
for interest paid on borrowed capital ( home loan) is allowed under Section 24 (b).
 After allowing for Section 24 deductions, the resultant income is chargeable to tax.
However, as the Gross Annual Value of a self-occupied property is Nil, one will always arrive at either a
Nil figure or a negative figure i.e. loss( in case there is a home loan), which can be adjusted against other
heads of income.

How to calculate income from let-out house property

Any house property of the assessee which is given on rent to a tenant even for a few months is to be
considered as a let out house property and income tax from house property is calculated accordingly.
Here are the steps to calculate income from a let-out house property:
 Step 1: Calculate the annual rental amount received
 Step 2: Deduct Municipal Taxes paid during the year to arrive at Net Annual Value (NAV)
 Step 3: From NAV deduct Standard Deduction @ 30 per cent of Net Annual Value and interest
on housing loan, if any to get the final value of Income from Let-out House Property.
With these easy-to-do steps, it is possible to calculate your rent from both self-occupied house property
as well as let-out house property.

Income from Business and Profession: -

Business: It referred to any economic activity carried for earning profits. Economic activity refers to any
trade, Commerce, Manufacturing Activity, Trading Activity or any other concern in nature of all. It is not
compulsory for continuation of similar transaction or a series of transaction or carried the business
permanently.

Profession: It refer that a person provides services against their skill & knowledge like that of CA,
Doctor, Engineer, etc. In Profession a person can earn their livelihood through their intellectual or
manual skills.

Basis of Charge of Income Under Business/Profession:

There are some of the income which are taxable under the head “Profit & gains of Business or
Profession”
 The profit & gains earned by the assesses from the business/profession carried at any time
during the previous year.
 If any person had receive/due any compensation or payment managing the whole or
substantially the whole of the affairs of an Indian Company, in connection with the termination
of his management or the modification of the terms & conditions relating thereto;
 Income derived from performing specific services for its member by trade, profession or any
other similar association.
 Any perquisite or benefit arising from business or profession, whether convertible into money or
not.
 Any Interest income,Commission,Salary or bonus due or received by any partner from that
Company.
 Any amount received under a Key man Insurance Policy including the amount allocated by way
of bonus on such policy.
 Income received from any speculative transaction.
 Any profit received from the transfer of Duty Entitlement Pass book scheme.
 Any Profit Received on the transfer of the Duty Free Replenishment Certificate.
 Any profit received on sale of a license granted under the Imports (Control) Order, 1955, made
under the Imports and Exports (Control) Act, 1947 (18 of 1947)
 Any amount received or receivable,in cash or in kind under such agreements:

If a person not carrying out any activity in relation to any business.

Or

If a person is not sharing any Know-how,patent, copyright, trade-mark, licence, franchise or any other
business or commercial right of similar nature

Income from Capital Gain: -

Capital gain can be defined as any profit that is received through the sale of a capital asset. The profit
that is received falls under the income category. Therefore, a tax needs to be paid on the income that is
received. The tax that is paid is called capital gains tax and it can either be long term or short term. The
tax that is levied on long term and short term gains starts from 10% and 15%, respectively.

Under the Income Tax Act, capital gains tax in India need not be paid in case the individual inherits the
property and there is no sale. However, if the person who has inherited the property decides to sell it,
tax will have to be paid on the income that has been generated from the sale. Some of the examples of
capital assets are jewelery, machinery, leasehold rights, trademarks, patents, vehicles, house property,
building, and land.

Types of Capital Assets

The two types of capital assets are mentioned below:
1. Long Term Capital Asset:
In case individuals own an asset for a duration of more than 36 months, the asset is a long-term capital
asset. Debt-oriented mutual funds, jewelery, etc., that are held for a duration of more than 36 months
will come under this category and there is no 24-month reduction period under such circumstances.

The below-mentioned assets are considered as long-term assets if they are held for a duration of more
than 12 months:
 Zero coupon bonds (not dependent on whether they are quoted or not)
 Unit Trust of India (UTI) units (not dependent on whether they are quoted or not)
 Equity-based mutual funds units (not dependent on whether they are quoted or not)
 Securities that are listed on a stock exchange that is recognized in India. Examples of such
securities are government securities, bonds, and debentures.
 Preference shares or equities that are held in a company that is listed on a stock exchange that
is recognized in India.

2. Short Term Capital Asset:

In case assets are held for a duration of 36 months or less, it can be defined as a short-term capital
asset. However, for immovable assets such as house property, building, and land, the duration has been
reduced from 36 months to 24 months.

Therefore, if an individual wishes to sell a land or house after holding it for a duration of 24 months, the
profit that the individual makes from it comes under long term capital gain.

In case the property has been inherited or given as a gift, the amount of time the property was held by
the previous owner is also considered when determining whether the property can be considered as a
short-term capital asset or a long term capital asset.
The date on which the bonus shares were allotted is considered when determining the category under
which bonus shares or right shares fall

Income from Other Sources: -

1. Income which is not exempt and cannot be charged under the heads of salary, income from house
property, profits and gains from business or profession, or capital gains, form income from other
sources for taxation purpose.

2. All dividends received are taxable under the head of income from other sources.

3. Interest from deposits and bonds are also taxed under Income from other sources.

4. One-time income by way of winnings from lotteries, crossword puzzles, races including horse races,
card games, gambling or betting of any form is treated as income from other sources.

5. Gifts such as any sum of money and movable or immovable property that’s received without
consideration are also taxable under this head.

Incomes which are charged to tax under the head ‘Income from other sources’

‘Income from other sources’ is the residual head of income. Hence, any income which is not specifically
taxed under any other head of income will be taxed under this head.

Further, there are certain incomes which are always taxed under this head. These incomes are as
follows:
 As per section 56(2)(i), dividends are always taxed under this head. However, dividends from
domestic company other than those covered by section 2(22)(e) are chargeable to tax in
accordance with the provisions of section 115BBDA. As per Section 115BBDA, Dividend received
from Domestic Companies upto Rs 10 Lacs will be exempt from Tax and then any amount
received above 10 lacs will be tax at 10%.
 Winnings from lotteries, crossword puzzles, races including horse races, card game and other
game of any sort, gambling or betting of any form whatsoever, are always taxed under this
head.
 Income by way of interest received on compensation or on enhanced compensation shall be
chargeable to tax under the head “Income from other sources”, and such income shall be
deemed to be the income of the year in which it is received, irrespective of the method of
accounting followed by the However, a deduction of a sum equal to 50% of such income shall be
allowed from such income. Apart from this, no other deduction shall be allowed from such an
income.
 Gifts received by an individual or HUF (which are chargeable to tax) are also taxed under this
head.
 In addition to above, following incomes are charged to tax under this head, if not taxed under
the head “Profits and gains of business or profession”.
o Any contribution to a fund for welfare of employees received by the [Section 56(2)(ic)].
o Income by way of interest on securities. [Section 56(2)(id)].
o Income from letting out or hiring of plant, machinery or furniture. [Section 56(2)(ii)].
o Income from letting out of plant, machinery or furniture along with building; both the
lettings are inseparable. [Section 56(2)(iii)].
o Any sum received under a Keyman Insurance Policy including bonus. [Section 56(2) (iv)].