UNIT-IV

Treatment of Income from Different Sources

I. Income under the head Salaries

1.1 Salary is defined to include:

a) Wages

b) Annuity

c) Pension

d) Gratuity

e) Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages

f) Advance of Salary

g) Leave Encashment

h) Annual accretion to the balance of Recognized Provident Fund

i) Transferred balance in Recognized Provident Fund

j) Contribution by Central Government or any other employer to Employees Pension Account as referred in Sec. 80CCD

1.2 Points to consider:

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.

c) Income from salary taxable during the year shall consists of following:

i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;

ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;

iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;

Exceptions - Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.

1.3 Place of accrual of salary:

a) Salary accrues where the services are rendered even if it is paid outside India;

b) Salary paid by the Foreign Government to his employee serving in India is taxable under the head Salaries;

c) Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in India.

Exceptions - If a Citizen of India render services outside India, and receives salary from Government of India, it would be taxable as salary deemed to have accrued in India.

1.4 Taxability of various components of salary:

S.No. Particulars Taxability/Exemption

1. Basic salary Fully taxable

2. Dearness Allowance (referred to as ‘DA’) Fully taxable

3. Bonus, fees or commission Fully taxable

A.

Least of the following is exempt:

a) Actual HRA Received
b) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Chennai)
c) Rent paid minus 10% of salary

4. House rent allowance * Salary = Basic + DA (if part of retirement benefit) + Turnover based Commission
Note:
i. Fully taxable, if HRA is received by an employee who is living in his own house or if he does
not pay any rent
ii. It is mandatory for employee to report PAN of the landlord to the employer if rent paid is
more than Rs. 1,00,000 [Circular No. 08 /2013 dated 10-10-2013].

5. Children education allowance Up to Rs. 100 per month per child up to a maximum of 2 children is exempt

6. Hostel expenditure allowance Up to Rs. 300 per month per child up to a maximum of 2 children is exempt

Transport Allowance granted to an employee to meet expenditure for the Rs. 3,200 per month granted to an employee, who is blind or deaf and dumb or orthopedically
7.
purpose of commuting between place of residence and place of duty handicapped with disability of lower extremities

Allowance granted to an employee working in any transport business to meet his Amount of exemption shall be lower of following:
personal expenditure during his duty performed in the course of running of such
8. a) 70% of such allowance; or
transport from one place to another place provided employee is not in receipt of
daily allowance. b) Rs. 10,000 per month.

Conveyance allowance granted to meet the expenditure on conveyance in

9. Exempt to the extent of expenditure incurred for official purposes
performance of duties of an office

10. Travelling allowance to meet the cost of travel on tour or on transfer Exempt to the extent of expenditure incurred for official purposes

Daily allowance to meet the ordinary daily charges incurred by an employee on

11. Exempt to the extent of expenditure incurred for official purposes
account of absence from his normal place of duty

12. Helper/Assistant allowance Exempt to the extent of expenditure incurred for official purposes

Research allowance granted for encouraging the academic research and other
13. Exempt to the extent of expenditure incurred for official purposes
professional pursuits

14. Uniform allowance Exempt to the extent of expenditure incurred for official purposes

Any allowance or perquisite paid or allowed by Government to its employees (an

15. Fully Exempt
Indian citizen) posted outside India
 Allowances to Judges of High Court/Supreme Court (Subject to certain
16. Fully Exempt.
conditions)

C.

1. Standard Deduction Rs. 50,000 or the amount of salary, whichever is lower (Any salaried person & pensioners)

Least of the following is exempt from tax:

Entertainment Allowance received by the Government employees (Fully taxable a) Rs 5,000

2.
in case of other employees) b) 1/5th of salary (excluding any allowance, benefits or other perquisite)
c) Actual entertainment allowance received

Amount actually paid during the year. However, if professional tax is paid by the employer on
3. Employment Tax/Professional Tax. behalf of its employee than it is first included in the salary of the employee as a perquisite and
then same amount is allowed as deduction.

D.

Encashment of unutilized earned leave at the time of retirement of Government

1. Fully Exempt
employees

Least of the following shall be exempt from tax:

a) Amount actually received
b) Unutilized earned leave* X Average monthly salary
c) 10 months Average Salary**
Encashment of unutilized earned leave at the time of retirement of other d) Rs. 25,00,000
2.
employees (not being a Government employee)
* While computing unutilized earned leave, earned leave entitlements cannot exceed 30 days
for each completed year of service rendered to the current employer
** Average salary = Average Salary*** of last 10 months immediately preceding the retirement
***Salary = Basic Pay + DA (to the extent it forms part of retirement benefits)+ turnover based
commission

Least of the following shall be exempt from tax:

a) Amount calculated as per section 25F(b)of the Industrial Disputes Act, 1947;
b) Rs. 5,00,000; or
Retrenchment Compensation received by a workman under the Industrial c) Amount actually received
3.
Dispute Act, 1947 (Subject to certain conditions).
Note:
i. Relief under Section 89(1) is available
ii. 15 days average pay for each completed year of continuous service or any part thereof in
excess of 6 months is to be adopted under section 25F(b) of the Industrial Disputes Act, 1947

Gratuity received by Government Employees (Other than employees of statutory

4. Fully Exempt
corporations)
 Least of following amount is exempt from tax:
1. (*15/26) X Last drawn salary** X completed year of service or part thereof in excess of 6
months.
Death -cum-Retirement Gratuity received by other employees who are covered 2. Rs. 20,00,000
5. under Gratuity Act, 1972 (other than Government employee) (Subject to certain
conditions). 3. Gratuity actually received.
*7 days in case of employee of seasonal establishment.
** Salary = Last drawn salary including DA but excluding any bonus, commission, HRA, overtime
and any other allowance, benefits or perquisite

Least of following amount is exempt from tax:

1. Half month’s Average Salary* X Completed years of service
2. Rs. 20,00,000
Death -cum-Retirement Gratuity received by other employees who are not
6. covered under Gratuity Act, 1972 (other than Government employee) (Subject to 3. Gratuity actually received.
certain conditions). *Average salary = Average Salary of last 10 months immediately preceding the month of
retirement
** Salary = Basic Pay + DA (to the extent it forms part of retirement benefits)+ turnover based
commission

Pension received from United Nation Organization by the employee of his family
7. Fully Exempt
members

Commuted Pension received by an employee of Central Government, State

8. Fully Exempt
Government, Local Authority Employees and Statutory Corporation

9. Commuted Pension received by other employees who also receive gratuity 1/3 of full value of commuted pension will be exempt from tax

10. Commuted Pension received by other employees who do not receive any gratuity 1/2 of full value of commuted pension will be exempt from tax

11. Family Pension received by the family members of Armed Forces Fully Exempt

12. Family pension received by family members in any other case 33.33% of Family Pension subject to maximum of Rs. 15,000 shall be exempt from tax

Least of the following is exempt from tax:

1) Actual amount received as per the guidelines i.e. least of the following
Amount received on Voluntary Retirement or Voluntary Separation (Subject to
13. a) 3 months salary for each completed year of services
certain conditions)
b) Salary at the time of retirement X No. of months of services left for retirement; or
2) Rs. 5,00,000

For taxability of contribution made to various employee’s provident fund and interest arising
14. Employee’s Provident Fund
thereon see Note 3.
 Any payment from the National Pension System Trust to an assessee on closure of his account
or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does
not exceed 60% of the total amount payable to him at the time of such closure or his opting out
15. National Pension System of the scheme.
Note: Partial withdrawal from NPS shall be exempt to the extent of 25% of amount of
contributions made by the employee.

E.

1. Arrear of salary and advance salary Taxable in the year of receipt. However relief under section 89 is available

If an individual receives any portion of his salary in arrears or in advance or receives profits in
2. Relief under Section 89
lieu of salary, he can claim relief as per provisions of section 89 read with rule 21A

Relief from taxation in income from retirement benefit account maintained in a notified
3. Relief under 89A
country in accordance with Rule 21AAA.

F. Other Benefits

Lump-sum payment made gratuitously or by way of compensation or otherwise

1. to widow or other legal heirs of an employee who dies while still in active service Fully exempt in the hands of widow or other legal heirs of employee
[Circular No. 573, dated 21-08-1990]

Ex-gratia payment to a person (or legal heirs) by Central or State Government,

Local Authority or Public Sector Undertaking consequent upon injury to the
2. Fully exempt in the hands of individual or legal heirs
person or death of family member while on duty [Circular No. 776, dated 08-06-
1999]

Salary received from United Nation Organization [Circular No. 293, dated 10-02-
3. Fully exempt
1981]

Salary received by foreign national as an officials of an embassy, high

4. Fully exempt if corresponding official in that foreign country enjoys a similar exemption
commission, legation, consulate or trade representation of a foreign state

Remuneration received by non-resident foreign citizen as an employee of a

foreign enterprise for services rendered in India, if:
a) Foreign enterprise is not engaged in any trade or business in India
5. b) His stay in India does not exceed in aggregate a period of 90 days in such Fully exempt
previous year
c) Such remuneration is not liable to deducted from the income of employer
chargeable under this Act

Salary received by a non-resident foreign national for services rendered in

6. connection with his employment on a foreign ship if his total stay in India does Fully exempt
not exceed 90 days in the previous year.

Salary and allowances received by a teacher /professor from SAARC member

7. Fully exempt
state (Subject to certain conditions).

Notes:

1. Motor Car (taxable only in case of specified employees [See note 4] except when car owned by the employee is used by him or members of his household wholly for personal purposes and for which reimbursement is made by the employer)
S. Circumstances Engine Capacity up to 1600 cc Engine Capacity above 1600 cc
No.

1 Motor Car is owned or hired by the employer

1.1 Where maintenances and running expenses including remuneration of the chauffeur are met or reimbursed by the employer.

1.1- Used wholly and exclusively in the performance of official Fully exempt subject to maintenance of specified documents Fully exempt subject to maintenance of specified documents
A duties.

1.1- Used exclusively for the personal purposes of the employee or Actual amount of expenditure incurred by the employer on the running and maintenance of motor car including remuneration paid by
B any member of his household. the employer to the chauffeur and increased by the amount representing normal wear and tear of the motor car at 10% per annum of
the cost of vehicle less any amount charged from the employee for such use is taxable value of perquisite.

1.1- The motor car is used partly in the performance of duties and Rs. 1,800 per month (plus Rs. 900 per month, if chauffeur is also Rs. 2,400 per month (plus Rs. 900 per month, if chauffeur is also
C partly for personal purposes of the employee or any member of provided to run the motor car) shall be taxable value of perquisite provided to run the motor car) shall be taxable value of perquisite
his household.
Nothing is deductible in respect of any amount recovered from the employee.

1.2 Where maintenances and running expenses are met by the employee.

1.2- Used wholly and exclusively in the performance of official Not a perquisite, hence, not taxable Not a perquisite, hence, not taxable
A duties.

1.2- Used exclusively for the personal purposes of the employee or Expenditure incurred by the employer (i.e. hire charges, if car is on rent or normal wear and tear at 10% of actual cost of the car, if car is
B any member of his household owned by the employer) plus salary of chauffeur if paid or payable by the employer minus amount recovered from the employee.

1.2- The motor car is used partly in the performance of duties and Rs. 600 per month (plus Rs. 900 per month, if chauffeur is also Rs. 900 per month (plus Rs. 900 per month, if chauffeur is also
C partly for personal purposes of the employee or any member of provided to run the motor car) shall be taxable value of perquisite provided to run the motor car) shall be taxable value of perquisite
his household
Nothing is deductible in respect of any amount recovered from the employee.

2 Motor Car is owned by the employee

2.1 Where maintenances and running expenses including remuneration of the chauffeur are met or reimbursed by the employer.

2.1- The reimbursement is for the use of the vehicle wholly and Fully exempt subject to maintenance of specified documents Fully exempt subject to maintenance of specified documents
A exclusively for official purposes

2.1- The reimbursement is for the use of the vehicle exclusively for Actual expenditure incurred by the employer minus amount recovered from the employee
B the personal purposes of the employee or any member of his
household (taxable in case of specified employee as well as
non-specified employee)

2.1- The reimbursement is for the use of the vehicle partly for Actual expenditure incurred by the employer minus Rs. 1800 per Actual expenditure incurred by the employer minus Rs. 2400 per
C official purposes and partly for personal purposes of the month and Rs. 900 per month if chauffer is also month and Rs. 900 per month if chauffer is also
employee or any member of his household. provided minus amount recovered from employee shall be taxable provided minus amount recovered from employee shall be taxable
value of perquisite. value of perquisite.

3 Where the employee owns any other automotive conveyance and actual running and maintenance charges are met or reimbursed by the employer
3.1 Reimbursement for the use of the vehicle wholly and Fully exempt subject to maintenance of specified documents Fully exempt subject to maintenance of specified documents
exclusively for official purposes;

3.2 Reimbursement for the use of vehicle partly for official Actual expenditure incurred by the employer as reduced by Rs. 900 Not Applicable
purposes and partly for personal purposes of the employee. per month

2. Educational Facilities

Taxable only in the hands of specified employees [See note 4]

Facility extended Value of perquisite

to
Provided in the school owned by the employer Provided in any other school

Children Cost of such education in similar school less Rs. 1,000 per month per child (irrespective of numbers of Amount incurred less amount recovered from employee (an exemption of Rs.
children) less amount recovered from employee 1,000 per month per child is allowed)

Other family Cost of such education in similar school less amount recovered from employee Cost of such education incurred
member

2.1 Other Educational Facilities

Particulars Taxable Value of Perquisites

Reimbursement of school fees of children or family member of employees Fully taxable

Free educational facilities/ training of employees Fully exempt

3. Employees Provident Fund

Tax treatment in respect of contributions made to and payment from various provident funds are summarized in the table given below:

Particulars Statutory provident Recognized provident fund Unrecognized provident fund Public provident
fund fund

Employers contribution to provident fund Fully Exempt Exempt only to the extent of 12% of salary* Fully Exempt -

Deduction under section 80C on employees contribution Available Available Not Available Available

Interest credited to provident fund Fully Exempt Exempt only to the extent rate of interest does not Fully Exempt Fully Exempt
See Note exceed 9.5%

Payment received at the time of retirement or termination Fully Exempt Fully Exempt (Subject to certain conditions and Fully Taxable (except employee’s Fully Exempt
of service circumstances) contribution)

* Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits) + turnover based commission

Payment from recognized provident fund shall be exempt in the hands of employees in following circumstances:

a) If employee has rendered continue service with his employer (including previous employer, when PF account is transferred to current employer) for a period of 5 years or more

b) If employee has been terminated because of certain reasons which are beyond his control (ill health, discontinuation of business of employer, etc.)

Note:
No exemption shall be available for the interest income accrued during the previous year in the recognised and statutory provident fund to the extent it relates to the contribution made by the employees over Rs. 2,50,000 in the previous year.

However, if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee
to that fund in excess of Rs. 5,00,000 in a financial year.

4. Specified Employee

The following employees are deemed as specified employees:

1) A director-employee

2) An employee who has substantial interest (i.e. beneficial owner of equity shares carrying 20% or more voting power) in the employer-company

3) An employee whose monetary income* under the salary exceeds Rs.50,000

*Monetary Income means Income chargeable under the salary but excluding perquisite value of all non-monetary perquisites

Introduction

Income is taxable under the head 'house property' if it arises from a property consisting of any building or land appurtenant thereto. For the computation of income under this head, a house property is classified into three categories:

(a) Let-out

(b) Self-occupied

(c) Deemed let-out house property.

The income from house property is computed on the basis of its annual value. Various factors such as municipal valuation, fair rent, standard rent, and actual rent are considered to arrive at an annual value.

About

The rental Income (Annual Value) is taxable under the head income from house property if the following two conditions are satisfied:

a) There should be a building and land appurtenant thereto; and

b) The assessee should be the owner of such property.

Building and Land Appurtenant thereto

For chargeability of income under this head, the property must consist of any building or land appurtenant thereto.

Example: If any income is derived from vacant land then such income shall not be chargeable to tax under the head 'Income from house property' as the property does not consist of any building. Such rental income is chargeable to tax under the head
'Income from other sources'.

The land is called land appurtenant to the building if it is an indivisible part and parcel of a building for its use and enjoyment by the occupiers, and it is not put to any other use and is not yielding any income assessable under this head. Generally,
playgrounds, parking lots, garages, backyards, gardens, etc. are treated as land appurtenant to a building.

Ownership of Property

To become an owner of a property, a person must hold the legal title of the property in his name. He should be able to exercise the rights of the owner, not on behalf of the owner but in his own right. However, in certain situations, despite not holding
the legal ownership of a property, a person is considered as deemed owner of the property, and, accordingly, income from such property is chargeable to tax in his hands even though he is not the legal owner of such property.

If a person deriving rental income from a property is not the owner of such property, then the income so derived shall be chargeable to tax either as business income or residual income but not as income from house property.

When is the annual value of house property not charged to tax?

The annual value of a house property is not chargeable to tax under this head if the following conditions are satisfied:

(a) The owner of the property utilizes the property to carry on his business or profession; and

(b) Income of such business or profession is chargeable to tax.

Computation of Income from House Property

For the computation of income from house property, a house property has to be classified into the following categories:
(a) Let-out;

(b) Self-occupied; and

(c) Deemed let-out.

Profits and gains of business or profession

28 The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",—

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ;

(ii) any, compensation or other payment due to or received by,—

(a) any person by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto ;

(b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;

(c) any person, by whatever name called holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating
thereto;

(iii) income derived by a trade, professional or similar association from specific services performed for its members;
1
[(iv) the value of any benefit or perquisite whether convertible into money or not, arising from business or the exercise of a profession.]

Explanation 1.—The profits and gains of a business shall include the profits and gains of managing agency.

Explanation 2.—Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other
business.

Income from other sources is a residuary head of income and sweeps in all such incomes which fall outside the other four heads of income. However, certain incomes will always be taxable under the head income from other sources, such as winning
from lotteries, gifts, interest on enhanced compensation, etc.

Rules for Taxability of Income

Any income, which is not exempt from tax and has to be included in the total income, shall be chargeable to tax under the head 'Income from Other Sources' if it is not chargeable to income tax under any of the following heads:

1. Salaries

2. Income from house property

3. Profits and gains from business or profession

4. Capital gains

However, certain incomes are always taxable under the head 'income from other sources'.

Computation of Income

Income taxable under the head 'income from other sources' shall be an aggregate of certain incomes specifically taxed under this head and other incomes that are not chargeable under any other head, hence, chargeable under this head. Income
taxable under the head 'income from other sources' shall be computed in the following manner:

Nature of Income Amount

1. Dividend Income xxx

2. Winning from lotteries, etc. xxx

3. Winning from online games (in the nature of lotteries, etc.) xxx

4. Employees' contribution towards the staff welfare scheme xxx

5. Interest on securities xxx

6. Rental income of machinery, plant, or furniture xxx

7. Composite rental income from letting out of plant, machinery, furniture, and building xxx

8. Sum received under Keyman insurance policy xxx

9. Deemed Income of a closely held company xxx

10. Interest on compensation or enhanced compensation xxx

11. Advance money received in the course of negotiations for the transfer of a capital asset xxx

12. Deemed Income xxx

13. Compensation on termination of employment or modification of terms of employment xxx

14. Sum received under a life insurance policy (other than ULIP and keyman insurance policy) in excess of the aggregate premium paid during the policy term xxx

15. Sum received (other than interest/dividend from SPV and rental income from REITs) by a unitholder from a business trust xxx

16. Any other income not taxable under any other head xxx

Less: Attributable expenses (xxx)

Clubbing of income

As the term suggests, clubbing of income means adding or including the income of another person (mostly family members) to one’s own income. This is allowed under Section 64 of the IT Act. However, certain restrictions pertaining to specified
person(s) and specified scenarios are mandated to discourage this practice.

Specified persons to club income

Income of any and every person cannot be clubbed on a random basis while computing total income of an individual and also not all income of specified person can be clubbed. As per Section 64, there are only certain specified income of specified
persons which can be clubbed while computing total income of an individual.

Specified scenarios when you can club income

Specified
Section Specified scenario Income to be clubbed
person

Section Transferring income without

Any person Any income from such asset will be clubbed in the
60 transferring asset either by way of an
hands of the tranferor
agreement or any other way,
Section Transferring asset on the condition
Any person
61 that it can be revoked
Any income arising or accruing to
your minor child where child includes
Section
Minor child both step child and adopted child.
64(1A)
The clubbing provisions apply even
to minor married daughter.
If your spouse receives any
remuneration irrespective of its
nomenclature such as Salary,
Section
Spouse** commission, fees or any other form
64(1)(ii)
and by any mode i.e., cash or in kind
from any concern in which you have
substantial interest*
Direct or indirect transfer of assets to
Section
Spouse** your spouse by you for inadequate
64(1)(iv)
consideration
Any income from such asset will be clubbed in the
hands of the transferor
Income will be clubbed in the hands of higher
earning parent.
Note:
If marriage of child’s parents does not subsist,
income shall be clubbed in the income of that
parent who maintains the minor child in the
previous year
If minor child’s income is clubbed in the hands of
parent, then exemption of Rs. 1,500 is allowed to
the parent.
Exceptions to clubbing
Income of a disabled child (disability of the nature
specified in section 80U)
Income earned by manual work done by the child
or by activity involving application of his skill and
talent or specialised knowledge and experience
Income earned by a major child. This would also
include income earned from investments made out
of money gifted to the adult child. Also, money
gifted to an adult child is exempt from gift tax under
gifts to ‘relative’.
Income shall be clubbed in the hands of the
taxpayer or spouse, whose income is greater
(before clubbing). Exception to clubbing: Clubbing is
not attracted if spouse possesses technical or
professional qualifications in relation to any income
arising to the spouse and such income is solely
attributable to the application of his/her technical
or professional knowledge and experience
Income from out of such asset is clubbed in the
hands of the transferor. Provided the asset is other
than the house property.
Exceptions to clubbing No clubbing of income in
following cases:
a. Where asset is received as part of divorce
settlement
b. If assets are transferred before marriage
 c. No husband and wife relationship subsists on the
date of accrual of income

d. Asset is acquired by the spouse out of pin money

(i.e. an allowance given to the wife by her husband
for her personal and usual household expenses)

Transfer of assets transferred directly

Daughter-in- Any income from such assets transferred is clubbed
64(1)(vi) or indirectly to your daughter in-law
law in the hands of the transferor
by you for inadequate consideration

Transferring any assets directly or

Income from such assets will be considered as your
Any person or directly for an inadequate
income and clubbed in your hands
64(1)(vii) association of consideration to any person or
person association of persons to benefit
your daughter in-law either
immediately or on deferred basis

Transferring any assets directly or

directly for an inadequate
Any person or
consideration to any person or Income from such assets will be considered as your
64(1)(viii) association of
association of persons to benefit income and clubbed in your hands
person
your spouse either immediately or
on deferred basis

In case, a member of HUF transfers

Hindu
Section his individual property to HUF for Income from such converted property shall be
Undivided
64(2) inadequate consideration or converts clubbed in the hands of individual
Family
such property into HUF property

*An individual is said to have the substantial interest in the concern if–

• In case of a company, individual either by himself or along with his relative/s beneficially owns shares having 20% or more voting power (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate
in profits)

• In any other case, such individual either alone or along with his relative/s is entitled to 20% or more of profits in the aggregate of such concern at any time during the previous year.

**Income from reinvestment of clubbed income by a spouse is not clubbed in the hands of individual.

Illustration 1
Mr P owns a shop which fetches a rent of Rs.12,000 per month. He transfers the rent to his friend Mr Q but retains the ownership of the shop.

In this case, because Mr P has transferred the income without transferring the asset. Hence, as per section 60 of the income tax act, Mr P must include the rental income while computing his total income.

Illustration 2
Mr Jay is beneficially holding 21% equity shares of PTK Pvt. Ltd. Mrs Jay is employed as a finance manager in PTK Pvt. Ltd. The monthly salary received from Mrs PTK Pvt. ltd. is Rs. 40,000. Mrs Jay is not having any qualification, experience or knowledge
of finance.
In this situation, Mr Jay has a substantial interest in PTK Pvt. Ltd. with 21% shareholding. But Mrs Jay is employed without any qualification and technical knowledge of finance. Hence, salary or payment received by Mrs Jay from PTK Pvt. Ltd. will be
clubbed with the income of Mr Jay as per section 64(1)(ii) of the income tax act.

In the above case, if Mrs Jay had the qualification and knowledge for the finance manager post in PTK Pvt. ltd., then income earned by Mrs Jay will not be clubbed in the income of Mr Jay.

Illustration 3
Mr Lucky holds gifted Rs. 6,00,000 to his wife. Mrs Lucky has then invested the same amount in the fixed deposit. Mrs lucky receives the interest of 5,000 p.a. from such fixed deposit.

As Mr Lucky has transferred Cash (asset) without adequate consideration and it was converted into another asset by Mrs Lucky. Hence, interest earned of Rs. 5,000 from the converted asset (fixed deposit) will be clubbed in the income of Mr Lucky as
per section 64(1)(iv) of the income tax act.

Note:

• If Mr lucky transfers the cash as a settlement for divorce in the above case, then clubbing provisions will not apply.

• Also, if he transfers the cash before marriage and interest is accrued after marriage, no income shall be clubbed in the hands of Mr. Lucky.

Hence, husband-wife relationship should remain at the time of transfer of asset and also at the time of accrual of income.

Income Tax* Calculation

Calculation on Income Tax is a simple process, provided you have understood the different terminologies and the factors for consideration. A tax calculator can help you derive at the amount. However, you can follow these simple steps to calculate the
Income Tax* based on Tax Slab:

1. Consider the income from different sources that are applicable for Income Tax:
Sources of Income – Income from different sources is accountable in the calculation of Income Tax. Here is a basic list of source information.

• Salary

• Income from house property or buildings in the form of rents

• Capital gains from assets

• Business income

• Other sources

2. Consider exemptions and subtract them from the gross income:

Exemptions - The type of income that can be excluded from gross income while calculating Income Tax is called an Exemption. For example, agriculture income, conveyance allowance, transfer allowance, etc., are exempt from income tax calculation.

3. Calculate the appropriate deductions that apply to your expenses:

Deductions - Deductions refer to the expenses that can be reduced from the taxable income to lower the income tax* payable. For example, there is a standard deduction of ₹50,000 of the salary earned annually for every individual.

Section 80C of the Income Tax Act, 1961 provides a list of deductions that can be availed. Here are a few to be mentioned.

• Deductions for investments made in Public Provident Fund, Equity Linked Savings Scheme, Life Insurance Plans, National Savings Certificate, Senior Citizen Savings Scheme, ULIPs, etc. subject to certain terms and conditions.

• Deductions on interest received on a savings account, paid for house rent, education loan, home loan.

• Deductions for a premium paid on Medical Insurance, money spent on medical expenses for physical disability, donations, etc.
 Using the tax benefit calculator, you can derive the exact amount for these deductions.

4. Derive at the Net Taxable Income and apply the correct tax rate.
Tax Slab - Taxpayers are divided into different groups according to their taxable income to apply the appropriate tax* rate. This concept of grouping is referred to as a tax slab.

Income Rates based on Tax* Slab

The Income Tax Department has announced a ‘New Tax* Regime’ for the Assessment Year, AY21-22.

According to the Old Tax Regime, the tax rates were as listed:

Tax
Income Tax Payable
Rate(%)

Up to ₹2.5 Lakh Nil Nil

₹2.5 Lakh to ₹5 Lakh 5 5% of Taxable Income

₹5 Lakh to ₹10 Lakh 20 ₹12,500 + 20% of the Income above Rs 5 Lakh

Above ₹10 Lakh 30 ₹1,12,500 + 30% of the Income above Rs 10 Lakh

According to the New Tax Regime, the Tax Rates are:

Income Tax Rate(%) Tax Payable

From ₹2.5 Lakh to ₹5 Lakh 5 5% of Taxable Income

From ₹5 Lakh to ₹7.5 Lakh 10 ₹12,500 +10% of Excess

From ₹7.5 Lakh to ₹10 Lakh 15 ₹37,500 + 15% of Excess

From ₹10 Lakh to ₹12.5 Lakh 20 ₹75,000 + 20% of Excess

 From ₹12.5 Lakh to ₹15 Lakh 25 ₹1,25,000 + 25% of Excess

Above ₹15 Lakh 30 ₹1,87,500 + 30% of Excess

However, as per the New Tax Regime that offers lower rates, the taxpayer is not allowed to avail many deductions and exemptions.

In addition to the Income Tax, a surcharge is levied when the Total Income exceeds ₹5 million. The Health and Education Cess is further charged at 4% of the Income Tax* and Surcharge if applicable

Surcharge on Income Tax

Income tax surcharge is an additional charge payable on income tax. It is an added tax on the taxpayers having a higher income inflow during a particular financial year.

Surcharge rates for different taxpayers (Current Rates)

There are different rates of surcharge applicable to different taxpayers under the Income Tax Act, 1961. From 1st April 2023, the highest surcharge rate of 37% shall be reduced to 25% under the new tax regime.

Surcharge Rates for Individual/HUF/AOP/BOI/ Artificial Judicial Person

Net Taxable Income limit Surcharge Rate on the amount of income tax

Less than Rs 50 lakhs Nil

More than Rs 50 lakhs ≤ Rs 1 Crore 10%

More than Rs 1 Crore ≤ Rs 2 Crore 15%

More than Rs 2 Crore ≤ Rs 5 Crore 25%

More than Rs 5 Crore 37%*

*Budget 2023 Update: Under new tax regime, the highest surcharge of 37% has been reduced to 25% which will be applicable from 1st April 2023 (FY 2023-24)

Note:

• Surcharge for AOPs having only companies as its members to 15%. It is applicable to AOPs whose total income during the financial year exceeds Rs 2 crores.

• Surcharge on long term capital gains(LTCG) on listed equity shares, units, etc., has been capped at 15%.

Surcharge Rates for Domestic Company

Net Taxable Income limit Surcharge Rate on the amount of income tax

More than Rs 1 Crore ≤ Rs 10 Crore 7%

More than Rs.10 Crores 12%

Surcharge Rates for Foreign Company

 Net Taxable Income limit Surcharge Rate on the amount of income tax

More than Rs 1 Crore ≤ Rs 10 Crore 2%

More than Rs.10 Crores 5%

Marginal relief for individuals

Case 1: Where the total income* is more than Rs.50 Lakhs but does not exceed Rs.1 crore, the taxpayers have to pay a surcharge at the rate of 10% on the income tax computed.
*Here total income means the net income after all possible deductions or the taxable income. (Calculate your taxes here.)

According to the Income-tax provisions, a al relief will be provided to certain taxpayers up to the amount of the difference between the excess tax payable (including surcharge) on the income above Rs.50 lakhs and the amount of income that exceeds
Rs.50 Lakhs.
Suppose, an individual has a total income of Rs.51 Lakhs in a FY 2022-23.

• He will have to pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax payable will be Rs. 14,76, 750.

• But, if he would have earned only Rs.50 lakhs, then the tax liability would have been Rs.13,12,500 only(excluding cess).

• Isn’t it unfair for the individual? For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,64,250. The individual’s tax liability should be reduced to avoid any such excess tax payable.

• The individual will get a al relief of the difference amount between the excess tax payable on higher income i.e (Rs.14,76, 750 minus Rs.13,12,500 = Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lakhs i.e. (Rs.51,00,000 minus
Rs.50,00,000 = Rs.1,00,000).

• The al relief will be Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000).

• Hence, income tax liability on income of Rs. 51,00,000 will be Rs.14,12,500 (excluding cess)

Case 2: Where the total income is more than Rs.1 crore but less than Rs. 2 crore

• A surcharge of 15% will be levied on the income tax payable.

• A al relief will be provided to the taxpayer up to the amount of difference between the excess tax payable (including surcharge) on income above Rs.1 crore and the amount of income that exceeds Rs.1 crore.

• Suppose, if the total income of an individual is Rs.1.01 crore in any FY, he will have to pay tax inclusive of a surcharge of 15% on the tax computed i.e., total tax payable will be Rs.32,68,875.

• But, if he would have earned only Rs.1 crore, then the tax payable would have been Rs.30,93,750 only. For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,75,125.

• Hence, the individual will get a al relief of the difference amount between the excess tax payable on higher income i.e (Rs.1,75,125 ) and the amount of income that exceeds Rs.1 crore i.e. (Rs. 1,00,000, in this case).

• The al relief will be Rs.75,125 (Rs.1,75,125 minus Rs.1,00,000).

Marginal relief for firms

Where the total income is more than Rs.1 crore, a surcharge of 12% will be levied on the income tax payable. A al relief will be provided to such taxpayers having a total income of more than Rs.1 crore i.e., the income tax payable (including surcharge)
on the higher income should not exceed the income tax payable on Rs.1 crore by more than the amount of income that exceeds Rs.1 crore. To simplify, if the total income of a firm is Rs.1.01 crores, it will have to pay an income tax inclusive of a
surcharge of 12% on the tax computed i.e., total tax payable will be Rs.32,24,000. But, if the total income would have been only Rs. 1 crore, then the tax payable would have been Rs.31,20,000 only. For earning an extra Rs.1,00,000, it will end up paying
income tax of Rs.1,04,000.

Hence, the firm will get a al relief of the difference amount between the excess tax payable on higher income i.e (Rs.1,04,000) and the amount of income that exceeds Rs.1 crore i.e. (Rs.1,00,000, in this case). The al relief will be Rs.4,000 (Rs.1,04,000
minus Rs.1,00,000).

Marginal relief for companies

Case 1: Where the total income of a domestic company is more than Rs.1 crore but does not exceed Rs.10 crore, a surcharge of 7% will be levied on the income tax payable.

Similarly, for foreign companies having total income more than Rs.1 crore but less than Rs. 10 crores, a surcharge of 2% will be levied on the income tax payable.

Marginal relief will only be provided to such companies having a total income of more than Rs.1 crore but less than Rs.10 crores i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.1
crore by more than the amount of income that exceeds Rs.1 crore.
Case 2: Where the total income of a domestic company is more than Rs.10 crores, a surcharge of 12% will be levied on the income tax payable.

Similarly, for foreign companies having total income more than Rs.10 crores, a surcharge of 5% will be levied on the income tax payable.

Marginal relief will only be provided to such companies having a total income of more than Rs.10 crores i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.10 crores by more than
the amount of income that exceeds Rs.10 crores.

Section 80C – Deductions on Investments

Section 80C is one of the most popular and favorite sections amongst taxpayers as it allows them to reduce taxable income by making tax-saving investments or incurring eligible expenses.

• Who can claim Section 80C deduction?: Section 80C deduction can be claimed by Individuals and HUFs

• Maximum deduction allowed under section 80C?: every year from the taxpayer's total income. Companies, partnership firms, and LLPs cannot avail the benefit of this deduction.
Note: The maximum deduction under Section 80C, 80CCC and 80CCD (1) put together is Rs 1.5 lakhs. However, you may claim an additional deduction of Rs 50,000 allowed u/s 80CCD(1B)

Deduction limits under Section 80C, 80CCC, 80CCD(1), 80CCE, 80CCD(1B)

Sections Eligible investments for tax deductions Maximum Deduction

Investment made in Equity Linked Saving Schemes, PPF/SPF/RPF,

80C payments made towards Life Insurance Premiums, principal sum of a Rs 1,50,000
home loan, SSY, NSC, SCSS, etc.

80CCC Payment made towards pension funds Rs 1,50,000

Employed: 10% of basic salary

Payments made towards Atal Pension Yojana or other pension schemes + DA
80CCD(1)
notified by government Self-employed: 20% of gross
total income

80CCE Total deduction under Section 80C, 80CCC, 80CCD(1) Rs 1,50,000

80CCD(1B) Investments in NPS (outside Rs 1,50,000 limit under Section 80CCE) Rs 50,000

Central government
employer: 14% of basic salary
Employer’s contribution towards NPS (outside Rs 1,50,000 limit under
80CCD(2) +DA
Section 80CCE)
Others: 10% of basic salary
+DA
Here are some investment options that are allowed as deduction u/s 80C. They not only help you with saving taxes but also help you grow your money. A quick comparison of the options is tabulated below:

Section 80C Deductions List

Investment options Average Interest Lock-in period for Risk factor

ELSS funds 12% – 15% 3 years High

NPS Scheme 8% – 10% Till 60 years of age High

ULIP 8% – 10% 5 years Medium

Tax saving FD Up to 8.40% 5 years Low

PPF 7.90% 15 years Low

Senior citizen savings scheme 8.60% 5 years (can be extended for other 3 years) Low

National Savings Certificate 7.9% 5 years Low

Till girl child reaches 21 years of age

Sukanya Samriddhi Yojana 8.50% Low
(partial withdrawal allowed when she reached 18 years)

Section 80TTA – Interest on Savings Accounts

• Who can claim Section 80TTA deduction?: Section 80TTA deduction can be claimed by Individuals and HUFs.
Resident Senior Citizens cannot claim deduction under 80TTA but they can claim the deduction under 80TTB.

• Maximum deduction allowed under section 80TTA?: Rs 10,000Note: Section 80TTA does not include interest from from fixed deposits, recurring deposits, or interest income from corporate bonds.

Section 80TTB – Interest From Deposits Held by Senior Citizens

 • Who can claim Section 80TTB deduction?: Section 80TTA deduction can be claimed by Resident Senior Citizens (age 60 or more)
Resident Senior Citizens cannot claim deduction under 80TTA but they can claim the deduction under 80TTB.

• Maximum deduction allowed under section 80TTB?: Rs 50,000

Note: Interest from banks can be either savings, fixed deposits or recurring

As a result, the threshold limit for TDS deduction under Section 194A for senior citizens has been enhanced to Rs. 50,000. Therefore, if their interest income is below Rs 50,000, TDS will not be deducted.

Section 80GG – Income Tax Deduction on House Rent Paid

• Who is eligible to claim deduction under Section 80GG? Those who do not receive HRA in their salary structure but live in rented accommodations.

• Conditions for claiming Section 80GG:

• Taxpayer must be an individual

• Taxpayer must be living on rent and paying rent

• The taxpayer should not have self-occupied residential property in any other place. Also, the taxpayer, their spouse or minor child or their HUF should not own any residential accommodation in the place where they currently reside.

• File Form 10BA

• How much deduction is available Under Section 80GG?

The least of the following is available as deduction:

• Rent paid (-) 10% of adjusted total income*

• Rs 5,000/- per month

• 25% of adjusted total income*

*Adjusted Gross Total Income =

Gross Total Income
Less:
- LTCG, if any, included in total gross income
- STCG u/s 111A
- Deductions u/s 80C to 80U except deduction under section 80GG
- Incomes of NRIs and foreign companies are taxed at a special tax rate, such as incomes u/s 115A, 115AB, 115AC, or 115AD.

An online ITR e-filing software like that of ClearTax can be extremely easy as the limits are auto-calculated. So, you do not have to worry about making complex calculations.

Section 80E – Interest on Education Loan

• Who is eligible to claim deduction under Section 80E? An individual can claim deduction of interest paid on education loan taken for pursuing higher education.

• The education loan can be taken for the taxpayer, their spouse or children or for a student for whom the taxpayer is a legal guardian.

• 80E deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting paid) or till the entire interest is paid, whichever is earlier. There is no ceiling limit on the amount of interest that can be claimed.

Rebate u/s 87A for FY 2021-22, 2022-23, and 2023-24 (AY 2022-23, 2023-24, and 2024-25)

Under both the old and new income tax regimes, the amount of the refund under Section 87A for FY 2021-22 2022-23 [(AY (2022-23) (2023-24)] has remained unchanged. A resident individual with taxable income up to Rs 5,00,000 will be eligible for a
tax rebate of Rs 12,500, or the amount of tax payable (whichever is lower). Under the new income tax regime, the amount of the rebate under Section 87A for FY 2023-24 (AY 2024-25) has been modified. A resident individual with taxable income up to
Rs 7,00,000 will receive a Rs 25,000 tax relief. The former tax regime remains the same, i.e. 12,500 for income up to Rs 5,00,000.

How much is the rebate allowed u/s 87A?

If an individual's total taxable income is up to Rs.7 lakh, they will be eligible for the following tax breaks under the new tax regime for the fiscal year 2023-24:

• Rs.25,000 or the applicable tax (whichever is lower).

• It is the same as earlier Rs.12,500 under the prior tax structure.

Steps to claim a tax rebate under section 87A

• Calculate your gross total income for the financial year

• Reduce your tax deductions for tax savings, investments, etc.

• Arrive at your total income after reducing the tax deductions.

• Declare your gross income and tax deductions in ITR.

• Claim a tax rebate under section 87A if your total income does not exceed Rs 5 lakh.

• The maximum rebate under section 87A for the AY 2022-23 is Rs 12,500.

See the example below for rebate calculation under Section 87A.
For individuals below 60 years of age for AY 2022-23

Source of income (FY 2021-22) Income (Rs)

Gross total income 6,50,000

Less: Deduction* under section 80C 1,50,000

Total income 5,00,000

Income-tax (@ 5% from Rs 2.5 to 5 lakh) 12,500

Less: Rebate u/s 87A 12,500

Tax payable Nil

*You can claim a deduction for tax-saving under Section 80C for eligible investments and expenditures, Section 80D for medical insurance, 80CCD for contribution to NPS, 80G for donations and other deductions to arrive at your total income.

Things to remember while availing rebate under Section 87A

• The rebate can be applied to the total tax before adding a health and education cess of 4%

• Only resident individuals are eligible to avail rebate under this section.

• Senior citizens above 60 years and below 80 years of age can avail a rebate under Section 87A

• Super senior citizens above 80 years of age are not eligible to claim rebates under Section 87A

• The amount of rebate will be lower than the limit specified under Section 87A or total income tax payable (before cess)

• Section 87A rebate is available under the old and the new tax regime

Set off of losses

Set off of losses means adjusting the losses against the profit or income of that particular year. Losses that are not set off against income in the same year can be carried forward to the subsequent years for set off against income of those years. A set-
off could be an intra-head set-off or an inter-head set-off.
Intra-head Set Off

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

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

Exceptions to an intra-head set off:

• Losses from a Speculative business will only be set off against the profit of the speculative business. One cannot adjust the losses of speculative business with the income from any other business or profession.

• Loss from an activity of owning and maintaining race-horses will be set off only against the profit from an activity of owning and maintaining race-horses.

• Long-term capital loss will only be adjusted towards long-term capital gains. However, a short-term capital loss can be set off against both long-term capital gains and short-term capital gain.

• Losses from a specified business will be set off only against profit of specified businesses. But the losses from any other businesses or profession can be set off against profits from the specified businesses.

Inter-head Set Off

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

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

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

• Loss from House property can be set off against income under any head

• Business loss other than speculative business can be set off against any head of income except income from salary.

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

a. Speculative Business loss

b. Specified business loss

c. Capital Losses

d. Losses from an activity of owning and maintaining race-horses

Carry forward of losses

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

These have been discussed here:

Losses from House Property :

• Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred

• Can be adjusted only against Income from house property

• Can be carried forward even if the return of income for the loss year is belatedly filed.

Losses from Non-speculative Business (Regular Business) Loss

• Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred

• Can be adjusted only against Income from business or profession

• Not necessary to continue the business at the time of set off in future years

• Cannot be carried forward if the return is not filed within the original due date.

Speculative Business Loss

• Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred
 • Can be adjusted only against Income from speculative business

• Cannot be carried forward if the return is not filed within the original due date.

• Not necessary to continue the business at the time of set off in future years

Specified Business Loss under 35AD

• No time limit to carry forward the losses from the specified business under 35AD

• Not necessary to continue the business at the time of set off in future years

• Cannot be carried forward if the return is not filed within the original due date

• Can be adjusted only against Income from specified business under 35AD

Capital Losses

• Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred

• Long-term capital losses can be adjusted only against long-term capital gains.

• Short-term capital losses can be set off against long-term capital gains as well as short-term capital gains

• Cannot be carried forward if the return is not filed within the original due date

Let us understand with an example-

Mr P has invested in equity shares. Below are the details related to his capital gain/loss transactions for different years.

STCG Balance STCL

STCL during LTCL during LTCG during STCG
A.Y. during the LTCG taxable and LTCL to be
the year the year the year taxable
year c/f

2015- STCL- 3,000

3,000 1,000 - - - -
16 LTCL- 1,000

2,600
(5,600-
2016- STCL- Nil
- 1,300 5,600 - 3,000) -
17 LTCL- 2,300
Set-off
against LTCL

4,700
(7,000- 2,300-
2017- STCL- Nil
800 - - 7,000 - 800)
18 LTCL- Nil
Set-off against
STCL and LTCL

3,800*
(9,000- 4,000- STCL- Nil
2018-
1,200 4,000 3,000 9,000 3,000* 1,200) LTCL- Nil
19
Set-off against
STCL and LTCL

* Assuming there is 15% tax on STCG and 20% tax on LTCG. The order of adjusting STCL and LTCL is not prescribed in the Act. Hence, the STCL and LTCL are first adjusted with LTCG of the year to reduce the tax liability.
Losses from owning and maintaining race-horses

• Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred

• Cannot be carried forward if the return is not filed within the original due date

• Can only be set off against income from owning and maintaining race-horses only

Time upto which Mandatory to file

Losses to be carried
Section Can be set off against Income losses can be carried return in the year of
forward
forward loss

Unabsorbed Any income (other than

32(2) No time limit No
depreciation salary)

Loss from House

71B Income from house property 8 years No
property

Loss from Normal

72 Income from business 8 years Yes
business

Loss from speculative Income from speculative

73 4 years Yes
business business

Loss from specified Income from specified

73A No time limit Yes
business business

Short term capital gain (STCG)

Short term capital loss
and long term capital gain 8 years Yes
(STCL)
(LTCG)
74

Long term capital loss

LTCG 8 years Yes
(LTCL)

Loss from owning and Income from owning and

74A 4 years Yes
maintaining horse races maintaining horse races