FBT modules

FUNDAMENTALS OF BUSINESS TAXATION
(Computation of Total Taxable Income of an Individual)
Semester – V
BMS
Student Workbook
Edition: 2021
#44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru, Karnataka 560069
V SEMESTER
FOR PRIVATE CIRCULATION ONLY Page 1

V SEMESTER
Program: BMS Semester: V
Subject: Fundamentals of Business Taxation
Total Lecture Hours: 60 Credits: 04
Objectives:
1. The course aims to help students to comprehend the basic principles of the Direct Tax laws.
2. To aware the students about the provisions with procedural requirement of the GST and enable the
students to acquire the basis skill to handle the GST portals.
Module 1: Introduction (10 Hours)

Introduction, Canons of Taxation, Types of Taxes, Definitions- Income, Person, Assessee, Assessment year,
Pervious year, Agricultural Income (Theory Only).
Exempted Incomes U/S 10, Residential Status and Incidence of Tax.
Module 2: Computation of Taxable Income under the different heads of Income (14
Hours)
Income from Salary- Meaning of salary, Allowances, Perquisites, Deductions from salary. (Theory and Problems)
Income from House Property - Basis of Chargeability, Annual Value, Self-occupied and let out property-Deductions
(Theory and Problems)
Profits and Gains of Business & Profession -Definitions, Concepts (Theory only)
Capital Gains - Chargeability-Definitions- Short term and long-term capital gains-Exemptions (Theory only)
Income from other sources - Chargeability-Deductions-Amounts not deductible (Theory only)
Module 3: Computation of Total Taxable Income of an Individual (12 Hours)

Gross total Income- deductions from GTI, Calculation of tax liability- (Rates applicable for respective Assessment
year) Cess, Refund of tax.
Module 4: Customs Act & GST (12 Hours)

Customs Act - Meaning – Valuation for Customs Duty, GST and Customs Duty, Customs Act, 1962 and the related
Rules, Circulars and Notifications; Customs Tariff Act, 1975 and the related Rules.
Module 5: GST (12 Hours)

GST- Overview of GST, Need and Benefits of GST, Taxes to be subsumed in GST, Dual GST Model, Goods and
Services Network, Important Definitions under GST, GST rates, IGST/CGST/SGST, Negative List, Charge of Tax,
Composition Scheme under GST, Input Tax Credit, Reverse Charge, Impact of GST on various Sectors, GST returns.
Reference Books:
1. Dr. Vinod k Singhania – Direct Taxes Law and Practice, Taxman.
2. T N Manoharan – Student’s hand book on Income Tax Law, Snow white.
3. Dr. Vinod k Singhania –GST & Customs Law, Taxmann publications
4. V.S. Datey- Taxmann publications
5. Bhagwati Prasad – Direct Taxes Law and Practice, VishwaPrakashana.
6. Gaur and Narang – Income Tax Law and Practice, Kalyani Publishers.
7. Dr. H C Mehrotra& Dr. S P Goyal– Income Tax Law and Practice, SahityaBhawan Publishers

Income Tax Slab Rate for AY 2022-23 for Individuals:
Individual (resident or non-resident), who is of the age of less than 60 years on the last day of the
relevant previous year:
Net income range Income-Tax rate

Up to Rs. 2,50,000 Nil
Rs. 2,50,000- Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
Resident senior citizen, i.e., every individual, being a resident in India, who is of the age of 60
years or more but less than 80 years at any time during the previous year:

Rs. 3,00,000 – Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
Resident super senior citizen, i.e., every individual, being a resident in India, who is of the age of
80 years or more at any time during the previous year:

Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
Plus:-
 Health and Education cess: - 4% of income tax and surcharge.
 Surcharge: -
Rs. 50 Lakhs to Rs. Rs. 1 Crore to Rs. 2 Rs. 2 Crores to Rs. 5 Rs. 5 crores to Rs. 10 Exceeding Rs. 10
1 Crore Crores Crores Crores Crores
10% 15% 25% 37% 37%
Note: - A resident individual is entitled for rebate under section 87A if his total income does not
exceed Rs. 5, 00,000. The amount of rebate shall be 100% of income-tax or Rs. 12,500, whichever
is less.

Module – I
INTRODUCTION
Tax is levied by the government to form a pool of resources to be used for the collective benefit of the
public. Taxes collected would be used by the government for public welfare programs, maintenance of law
and order in the country, running public sector undertakings etc.
There are two types of taxes – Direct and Indirect. Direct tax is a type of tax where the tax is imposed on a
person and it is paid by the same person. That means the incidence and the impact of tax are on the same
person.
OBJECTIVES OF THIS MODULE:

1. To understand the basic concepts of tax.
2. To know various terminologies used.
3. To give a clear idea about, how individuals are treated under taxing system.
4. To be familiar with the authorities related to income tax and their functioning.
1. Brief History of Income Tax:
The concept of income tax was introduced in India for the first time by Sir James Wilson in the year
1860 in order to recover the expenditure incurred by the Government on account of Sepoy Munity in 1857
(First war of Indian Independence). Thereafter several amendments were made in 1918, 1921 etc. In 1961,
based on the recommendation of the Direct Tax Committee and in consultation with the Law Ministry a Bill
was framed and introduced in the Parliament on 1st September 1961 and the same came to force with effect
from 1st April 1962.
The comprehensive Income Tax Act 1961 includes 14 section and sub section running into
thousands and many amendments which were made since 1961. Finance minister presents budget every
year in the parliament with a view to change rates and laws of income tax if any needed in the interest of the
nation building.
Income tax is levied by the Central Government and administered by Central Board of Direct Taxes
(CBDT). Income tax shall be levied only on those persons whose income exceeds certain limit. Total tax
revenue collected by the Central Government is shared by Central and State Government on the basis of
recommendation of finance commission.
1.2 Legal framework:
Income tax is a direct tax. It is levied and collected from the public who have income more than the
exempted limit for a given financial year. Income tax is a central subject and it is levied, collected,
administered, regulated and monitored by the Central Board of Direct Taxes (CBDT) under the Ministry
of Finance, Government of India. The scope of Income tax subject covers the following aspects. Viz
1. Income Tax Act,1961 (Bare Act – subjected to many amendments from time to time till date)
2. Income Tax Rules 1962
3. Finance Act (passed in the Parliament every year)
4. Judicial pronouncements relating to various issues in Income Tax.
1.3 Tax:

It is compulsory levy under certain conditions and it is meant for the general purposes of the state.
1.3.1 Features of tax:
1) It is compulsory payment to be paid by the citizens who are liable to pay it, hence refused to pay tax is a
punishable offence.
2) It is levied to meet public expenditure incurred by the government in the common interest of the nation.
3) The payment of tax by a person does not entitle him to receive any direct benefits from the government in
return for the tax.
4) There is no direct relationship between the tax paid by the person and the benefits that he may receive as
a result of government expenditure.
5) It has to be paid regularly and periodically as determined by the tax authority.
1.3.2 Types of taxes:
1) Direct Taxes: It is a kind of tax where in incidence and impact is on the same person.
‘Incidence’ means liability to pay tax to the Government and
‘Impact means burden of paying the tax.
E.g. Income Tax, Wealth Tax, Property Tax etc.
Customs Duty, GST
Difference between Direct tax and Indirect Tax
Particulars Direct Tax Indirect Tax

Meaning It is a kind of tax where in incidence andIt is a kind of tax where in ‘incidence’ and
impact is on the same person. ‘impact’ is on two different persons.
Nature of Tax Progressive in nature. Regressive in nature.
Taxable event Taxable income of the Assessee Purchase/Sale/Manufacture of goods
and or rendering of services.
Levy and Levied and collected from the Assessee. Levied and collected from the consumer
Collection but paid or deposited to the exchequer
by the Assessee or Dealer.
Shifting of Tax burden is borne by the person on Tax burden is shifted to the subsequent
Burden whom it is levied. Hence, the burden or ultimate user.
cannot be shifted.
Tax Collection Tax is collected on the income for a year At the time of sale or purchase or
is earned. rendering of services.
Examples Income Tax, Wealth Tax, Property Tax Excise Duty, Customs Duty, Sales Tax,
etc. Service Tax etc.
1.3.3. Principles or Canons of taxation:
1) Canon of Equality:
According to this canon taxes imposed should be in accordance with an individual’s ability to pay. That is
it should be impartial and based on one’s ability to pay.
2) Canon of Certainty: The amount to be paid, the time and the method of payment should be clear and
certain for the tax payers to adjust his/her income and expenditure accordingly.

3) Canon of Convenience: This canon says that the time of payment and the manner payment should be
convenient to the tax payer.
4) Canon of Economy: Every tax involves a collection cost. It is important that the cost of collection should
be the minimum possible. The tax is economical, in the sense that the cost of collection is very small.
5) Canon of Productivity: The tax system should sufficiently yield the revenue needed to meet the
requirements of the state. Productivity again means that the government should not depend upon deficits.
6) Canon of Elasticity: Elasticity is closely connected with fiscal adequacy. This canon implies that yield from
taxation should grow along with increase in population and development of economy.
7) Canon of Simplicity: Calculation of taxable income and taxable liability should be simple and
understandable to the tax payer.
8) Canon of Flexibility: Income tax authorities should revise the tax structure at the right time in order to
meet the changing needs of the economy.
1.4 BASIC TERMINOLOGIES UNDER INCOME TAX:
1.4.1. Income Tax:
It is a tax on the income earned by an assessee during the previous year and the tax is payable in the
assessment year at the rates prescribed by the relevant Finance Act. It is a tax levied by the Central
Government on the income earned by an assessee every year.
1.4.2. Assessment U/S 2(8):
According to section 2(8) of Income Tax Act, 1961 the term assessment means-
1) Computation of total income or taxable income
2) Computing the tax on the income and
3) Imposition of tax liability
1.4.3. Assessment Year U/S 2(9):
Assessment year is defined as “the period of twelve months starting from 1st of April and ending of 31st
March every year”. The current Assessment year is 2022-23.
1.4.4. Previous Year U/S 2 (34)
It is the financial year immediately preceding the Assessment year. In other words, the year in which
income is earned is known as previous year. The previous year for the assessment year 2022-23 is 2021-22.
1.4.5. Difference between Previous year and Assessment year

Previous year Assessment year
The year in which income is earned. The year in which the income of the
previous year is assessed to tax.
It always precedes the assessment year. It always succeeds the previous year.
It may be either a full year or part of the It is always a full year
year.
The present previous year is 2021``-22. The present assessment year is 2022-23.
1.4.6. Exception to the General Rule Previous Year:
Normally all the incomes of the P.Y are assessed to tax in the A.Y. But there are certain exceptions to this
rule. In these cases, the income of a financial year is assessed to tax in the same year. They are:
1) Sec. 172 – Income of non-resident from shipping business.
2) Sec. 174 – Income of persons leaving India either permanently or for a long period of time.
3) Sec. 174 (A) – Income of bodies formed for short duration.
4) Sec. 175 – Income of a person trying to transfer his/her assets to avoid the payment of tax.
5) Sec. 176 – Income of a discontinued business.
1.4.7. Assessee U/Sec 2(7):
An assessee means a person by whom any tax or any other sum is payable under the Income Tax Act of
1961, it includes:
a) Every person in respect of whom any proceeding under this Act has been taken for the assessment of
income or any refund due to him or to such other person.
b) Deemed Assessee.
c) Deemed Assessee in default.
1.4.7(1) Deemed Assessee:
A person may be liable not only for his own income but also on the income of other persons. A person who is
liable to pay any tax or file return of income for the income earned by a minor, agent of non-resident or by
any other person is called Deemed Assessee.
Deemed assessee is a person who is assessable for the income of any other person under this act and
includes the following.
1) The executors or the legal heirs of a deceased person
2) The guardian of a minor, lunatic or idiot having taxable income
3) The agent of any non – resident Indian having income in India.
1.4.7(2) Assessee in Default: When a person is responsible for doing any work under the Income Tax Act
and fails to do it, he is called as assessee in Default. E.g. A company is treated as assessee in default for non-
deduction of TDS.
1.4.8. Person Sec 2(31):
The term person includes:

a) An individual

b) A Hindu Undivided Family
c) A Firm
d) A Company
e) An association of persons/body of individuals
f) A Local Authority
g) Artificial Juridical Person
1.4.9. Income Sec 2(24):
The term income means and includes

1) Profit and gains of business
2) Dividends
3) Voluntary contribution received by a Trust or an Institutions
4) Perquisites of profit in lieu of salary/Allowance
5) Capital Gains
6) Winning from Lottery/ Cross word Puzzle/ Race
7) Sum received under Keyman insurance policies including bonus thereon
8) Gifts as per section 56
9) Any consideration received for issue of share as exceeds the fair market value of shares as referred in clause
of (vii)(b) of section 56(2)
10)Any sum of money referred to in section 56(2)(ix) sum of money received as an advance or otherwise in
course of negotiations for transfer of Capital Asset, if it is forfeited and negotiations do not result in transfer
of such capital asset.
1.4.10. Casual Income:
An income becomes casual income, if it contains the following feature: It is unanticipated, it is non-
recurring in nature, it arises from an unknown source, no specific efforts were put in to earn such income.
For example,
1) Winning from lottery
2) Income from cross word Puzzles and card games
3) Tips given to taxi drivers
4) Prize awarded for coin or stamp collection
1.4.11. Heads of Income:

Different heads of income are:
1) Income from Salary
2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources

Income from Salary All the money you receive while rendering your
job as a result of an employment contract
Income from house Income from house property you own; property
property can be self-occupied or rented out.
Income from Income/loss arising as a result of carrying on a

business and business or profession. Freelancers’ income come
profession under this head.
Income from capital Income earned from the sale of a capital asset
gains (mutual funds or house property).
Income from other Income accrued from fixed deposits and savings
sources account come under this head.
1.4.12. Gross Total Income:
It is the aggregate of the income computed under various heads of income after allowing set-off of losses
according to the provision of Income Tax Act. Section 14 deals with the Gross Total Income and it includes:
1) Income from Salary

2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources
1.4.13. Total Income Sec 5:
Total income of an assessee is Gross Total Income after making deductions u/s 80C to 80U.This is also
called as taxable income.
Exempted incomes
The exempted incomes are given u/s 10(1) to 10 (49) of the act and are not included for the calculation of
total income of the assessee. Some of these incomes are listed below:
1. Agricultural income from a land in India – fully exempted u/s 10(1).

2. Share of income from HUF- fully exempt u/s 10(2)
3. Share of income from firms assessed as firm u/s 184 or 185 is fully exempt u/s 10(2A)

4. Any income from investment by an NRI in bonds and securities –fully exempted u/s10 (4)(i). No
exemption on such bonds issued after 1.6.2002.
5. Any income from interest on Non-resident (external) account – fully exempted u/s 10 (4)(ii).
6. Leave travel concession to an Indian citizen employee – exempted up to limits laid down u/s 10(5)
7. Tax paid by government or an Indian concern on behalf of foreign company (sec 10(6A))
8. Perquisites and allowances given by the government to its employees posted abroad - fully exempted
u/s 10 (7).
9. Any income of employees of foreign countries working in India under co-operative technical assistance
Programme – fully exempted u/s 10(8).
10. Amount of retrenchment compensation given to workers – fully exempted u/s 10(10B)
11. Compensation received in case of any disaster [sec 10(10BC)] – in case an individual or his legal heir
receives any compensation on account of any disaster from central or state Government or a local
authority, the same shall be exempted.
12. Any amount received from life insurance corporation on maturity of policy with or without bonus –
fully exempt u/s 10(10D). The sum assured shall be exempt along with bonus in the following cases:
a) If any sum received from insurance company on insurance of a dependent handicapped member
b) If any sum received from insurance company when a dependent, or a member of family is suffering from a
notified disease,
c) Any sum received under a key man insurance policy
13. Payment received out of statutory provident fund – fully exempt u/s 10(11)
14. Payment received out of recognized provident fund – fully exempt u/s 10(12)
15. House rent Allowance – exempted as per conditions given u/s 10 (13A).
16. Income from certain exempted securities u/s 10(15).
17. Educational scholarships given by government or any other organizations - fully exempt under sec
10(16).
18. Allowances received by MPs/MLAs – exempted u/s 10(17) up to the following extent:
 Daily allowance and Constituency allowance – fully exempted.
19. Any Awards instituted or notified by central or state government in the following fields– fully exempt
u/s 10(17 A)
a) Literary, scientific or artistic work or attainment
b) Services alleviating the distress of the poor, the week and the ailing
c) Proficiency in sports or games
d) Gallantry awards (paramveerchakra, Mahaveer chakra) approved by the government
20. Any pension received by winners of Param veer chakra, Mahaveer chakra and veer chakra and family
pension received by their dependents- fully exempted under sec 10(18)
21. Family pension received by family members of armed forces. u/s 10(19).
22. Annual value of any one palace of an ex-ruler of Indian states shall be fully exempt u/s 10(19A)
23. Income of a local authority – exempted as per conditions given u/s 10(20)
24. Income of a scientific research association – exempted as per conditions given u/s 10(21).
25. Income of a fund set up for welfare of employees or their dependents exempted as per conditions given
u/s 10(23AAA).
26. Any income of a trust or society approved by Khadi and Village Industries Commission u/s 10(23B).
27. Income of mutual fund – exempted as per conditions u/s 10(23D).
28. Income of a venture fund - exempted as per conditions u/s 10(23FA)
29. Income by way of dividend from an Indian company –fully exempted u/s 10(34)
30. Income from units of UTI and other mutual funds (sec 10(35)
Any income by way of:
a) Any income received by way of dividend from a domestic company.

b) Income received in respect of units from the specified company.
31. Income from sale of shares in certain cases [sec 10(36)]
Any income arising from the transfer of a long-term capital asset, being an eligible equity share in a
company purchased on or after march 1, 2003 and before march 1, 2004 and held for a period of twelve
months or more.
32. Any income from long- term capital asset being self-cultivated urban agricultural land on compulsory
acquisition [section 10(37)]- in case of an assessee, being an individual or a Hindu Undivided family, capital
gain arising from the compulsory acquisition of self-cultivated land shall be fully exempted.
33. Income from international sporting event (sec 10(39))
Any specified income of specified persons from any international event held in India shall be fully exempt if:
a) Such event is approved by the international body regulating the international sport relating to such event;
b) It has participation by more than two countries; and
c) It is notified by the central government in this regard.
2.1 Agriculture income
According to Sec 2 (IA) Agriculture income means:

1) Any rent or revenue received from land which is used for agricultural purpose and situated in India.
2) Any income derived from such land by agricultural operations including processing of agricultural
produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.
3) Income attributable to a farm house subject to the condition that building is situated on or in immediate
vicinity of the land and is used as a dwelling house, store house etc.
2.1(a) Examples of Agricultural Income:
1) Income from sale of replanted trees.

2) Rent received from agricultural land.
3) Income from growing flowers and creepers.
4) Share of profit of a partner from a firm engaged in agricultural operations.
5) Interest on capital received by a partner from a firm engaged in agricultural operations.
6) Income derived from sale of seeds, straw, dried Tobacco leaves.
7) Land leased for grazing of animals required for agriculture purpose.
8) Insurance money received for destruction of agricultural produce.
2.1(b) Examples of Non- Agricultural Income:
1) Income from sale of earth for brick making.

2) Income from stone quarries and fishing
3) Income from sale of spontaneously grown trees.
4) Income from dairy farming, poultry farming.
5) Interest received by a money lender in the form of agriculture products.
6) Income of salt produced by flooding the land with sea water.
7) Royalty income from mines.
8) Income from butter and cheese making.
9) Maintenance allowance charged on agriculture land.
10)Remuneration received as an employee of an agriculture farm.
11)Dividend received from a company engaged in agricultural operations.

Illustration
Determine whether the following incomes are agricultural incomes or not.
1. Income from interest on arrears of rent payable in respect of land used for agricultural purpose.
2. Income from use of land for grazing of cattle required for agricultural operations.
3. Income from the sale of trees spontaneously grown.
4. Income from the sale of replanted trees in the forest.
5. Lease rent for letting out a tea estate by the assessee doing the business of growing and manufacturing tea.
Solution:
1. Non-agricultural income as the income is derived from a financial activity and not from direct agricultural
activity.
2. Agricultural income as it is an agricultural activity.
3. Non-agricultural income because no agricultural activity is involved.
4. Agricultural income as there is some agricultural activity involved.
It is agricultural income as the estate is used for agricultural activities
2.1(c) Partly Agricultural Income:
Sometimes, there is composite income which is partially agricultural and partially non-agricultural
income. For certain crops, income tax act gives fixed percentages to segregate agricultural and non-
agricultural incomes. Agricultural income is not taxable and the non-agricultural portion would be taxable.
Table 1.1
PARTLY AGRICULTURAL AND PARTLY NON-AGRICULTURAL INCOME
Crop Rule Agricultural Non-
income agricultural
income
1) Growing and manufacturing of tea 8 60% 40%
2) Rubber manufacturing business 7A 65% 35%
3) Coffee grown and cured by seller 7B(1) 75% 25%
4) Coffee grown and cured, roasted and 7B(1A) 60% 40%
grounded by the seller in India with or
without mixing chicory or other flavoring
agents
2.2. Integration of Agricultural Income with Non-Agricultural Income: [sec 2(2)]:
Agricultural income is exempt from tax u/s 10(1) but it is included in the total income for tax liability
calculation. The object of aggregating the net agricultural income with non-agricultural income is to tax the
non-agricultural income at higher rates.
2.2.1. Conditions for aggregation:

 Integration is done only in case of Individuals, HUF, Firms assessed as association of persons (AOP),
Association of persons, Bodies of individuals, artificial juridical persons.
 Integration is done only if Non-agricultural income of persons mentioned above exceeds the exempted
limits which are Rs.2,50,000 for individuals and HUF, and Rs. 3,00,000 for senior citizens in the relevant
previous year.
 Integration is done if net agricultural income of all these persons exceeds Rs. 5000 in the relevant previous
year, companies and co-operative societies.
2.2.2 Calculation of net agricultural income:
It is computed in accordance with the rules laid down u/s 2(iA) of the Income tax act 1961 and rules 7 & 8 of
the income tax rules 1962. These rules are:
1. Rent or revenue derived from agricultural land will be computed on the same basis which is adopted for
computation of income under the head income from other sources u/s 57 to 59 of the income tax act.
2. Income derived from agricultural operations will be computed as if it is income chargeable to tax under
the head profits & gains of business or profession. Depreciation and loss on the death of animals used in
agricultural operations are allowed as expenses.
3. Income from agricultural house property will be computed as if such income is chargeable to tax under the
head ‘income from house property’ and provisions under section 22 to 27 shall be applicable.
4. For computing share of income from tea business income is computed under rule 8 which shall be
considered to be agricultural income.
5. For computing share of income or loss of a firm assessed as AOP same rules are applicable as provided in
income tax act for computing share of profits and losses from firm assessed as firm.
6. Loss incurred in agriculture will be allowed to be set off only against agricultural incomes.
7. Any sum payable by the person on account of any tax levied by State Govt. on agricultural income will be
allowed as deduction.
8. Where the net result of agricultural income from the various sources stated above in a particular previous
year is a loss, such loss will be disregarded and net agricultural income shall be taken as nil.
2.3 Capital and Revenue:
2.3.1 Introduction
It is necessary to understand the distinction between capital and revenue items to determine the tax
treatment of expenses and incomes. For the understanding of the concepts, it is divided into three parts:
i) Receipts
ii) Expenditure
iii) Losses
Capital Receipt Revenue Receipt

1.Amount of fixed capital received is a capital 1.Amount received as circulating capital is a
receipt. revenue receipt.
2.A receipt in substitution of a source of 2. A receipt in substitution of an income is a
income is a capital receipt. E.g. Compensation revenue receipt. E.g. Bonus received by an

received from his employer for the employee from his employer is a revenue
termination of service is a capital receipt. receipt.
3.An amount received as a compensation for 3. An amount received under an agreement
the surrender of certain rights under an as compensation for loss of future profits is a
agreement is a capital receipt. E.g. Amount revenue receipt. Compensation paid for
paid to a retiring director of a company for breach of agreement is a revenue receipt
not starting a competing business after his
retirement
4. If the asset is used by the assessee as an 4. If the asset is kept in the business as stock
investment then the sale proceeds thereof in trade i.e. for the purpose of making profit
will be a capital receipt. E.g.: Motor car used from its sale then the sale proceeds thereof is
by a business is a capital asset and the sale a revenue receipt. E.g. Sale proceeds of motor
proceed thereof is a capital receipt. cars maintained by vehicle dealer.
5. Subsidies or grants received from the 5. Subsidies or grants received from the
government for specific capital purpose. E.g., government for meeting foreign competition
For any development scheme or renovation or otherwise assisting the trader in his
or modernization is a capital receipt. business are revenue receipts.
6. Insurance money received for a capital 6. Insurance money received for a trading
asset is capital receipt. asset is revenue receipt.
2.3.2. Capital Expenditure and Revenue Expenditure:
Capital expenditure is not deductible from the gross income of the business but the revenue expenditure
is deductible therefore, it is essential to know the difference between the two:
Capital expenditure Revenue expenditure

1. Cost of acquisition and installation of 1. Purchase price of goods bought for
a fixed asset is a capital expenditure. resale along with expenses on their
purchase is revenue expenditure.
2. An expenditure incurred to discharge 2. An expenditure incurred to discharge
a capital liability is a capital expenditure. a revenue liability is revenue
expenditure.
3. An expenditure incurred for acquiring 3. An expenditure incurred for earning
a source of income is a capital expense. an income is a revenue expense.
e.g. acquisition expenses of a business
4. An expenditure incurred for 4. An expenditure incurred for
increasing the earning capacity of a maintaining a fixed asset in good
business by improving its fixed assets is condition is revenue expenditure.
a capital expenditure.
5. Capital expenditure is a non- recurring 5. It is recurring in nature.
item.
6. Expenditure in obtaining capital by 6. Expenditure incurred in raising loans
issuing shares is a capital expenditure. or issuing debentures is revenue
expenditure.
2.3.3 Capital and revenue Losses:
Loss on the sale of a capital asset is a capital loss whereas loss on sale of goods of the business is a revenue
loss. Loss sustained on account of embezzlement done by an employee, destruction of goods or non-

recovery of any amount due in connection with business is a revenue loss. Loss sustained by theft
committed by an employee during usual business hours or outside business hours is a revenue loss being
incidental to the trade.
2.3 Summary:
 Agricultural income from India is exempt from tax.
 Classification of receipts and payments is very essential for determining the taxability of the transaction.
 Capital receipts are not taxed whereas revenue receipts are taxed.
 Capital losses are not allowed as expenses in calculation of taxable income whereas revenue expenses and
losses are allowed to be subtracted from income.
RESIDENTIAL STATUS AND INCIDENCE OF TAX
3.1 Introduction:
Under section 4 of the act income tax is charged on the total income of a person. Section 5 of the act defines
the total income of a person on the basis of his or her residential status. This section divides a person into
three categories:
a) Resident and ordinary resident
b) Resident but not ordinary resident
c) Non-resident.
The status of the assessee is determined every year as it may change.
It refers to the status of an individual, which determined on the basis of his/her total stay in India. Under
section 6, the residential status of an individual is divided into the following categories.
Residential status of an individual
Resident Any one of the basic
Ordinarily Resident Not Ordinarily Non- Resident
3.2. Determination of residential status of individual:

An individual’s residential status is decided number days he or she stayed in India on the basis of
basic conditions and additional conditions.
To get a residential status any one basic condition has to be satisfied will become Resident Suppose
(1) Assessee satisfies one Basic condition U/S6 (1) and Both Additional Basic condition/S 6(6),
He/She is a Resident and Ordinarily Resident.
(2) Assessee satisfies one Basic condition U/S6 (1) and one or none of the Additional Basic
condition/S 6(6) is satisfies he / She becomes Resident but not ordinarily Resident
(3) Assessee does not satisfy any basic conditions will become Non-Resident.
Basic Conditions u/s 6 (1)
(i) An assessee must be in India for a period of 182 days or more during the previous year
OR
(ii) An Assessee must be in India for a period of 60 days or more during the previous year and 365 days in 4
years preceding the relevant previous year.
Exceptions to the 2nd Basic Condition In respect of an individual who is a citizen of India or
person of Indian origin leaves India for employment during an FY, he will qualify as a resident of India only if
he stays in India for 182 days or more. Such individuals are allowed a longer time greater than 60 days and
less than 182 days to stay in India. However, from the financial year 2021-22, the period is reduced to 120
days or more for such an individual whose total income (other than foreign sources) exceeds Rs 15 lakh.
In another significant amendment from FY 2021-22, an individual who is a citizen of India who is not liable
to tax in any other country will be deemed to be a resident in India. The condition for deemed residential
status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in
other countries or territories by reason of his domicile or residence or any other criteria of similar nature.
NOTE 2: Income from foreign sources means income which accrues or arises outside India (except
income derived from a business controlled in India or profession set up in India).
However, W.e.f., Assessment year 2022-23, the finance act 2020 has inserted the following two more
situation wherein a resident person is deemed to be Not Ordinarily Resident’ in India:
a) An Indian Citizen or a person of Indian origin whose total income (other than foreign sources)
exceeds Rs. 15 lakhs during the previous year and who has been in India for the period of120 days
or more but less than 182 days.
b) An Indian Citizen who is deemed to be resident in India as per new section 6(1A).

A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the
aforesaid conditions will be treated as resident but not ordinarily resident.
Exception: II Basic condition is subject to the following exceptions
(i) In case of an assessee who is an Indian citizen leaves India for employment purpose or as a crew member
of an Indian ship.
(ii) In case of an assessee who is of an Indian origin comes to India during the previous year for a visit.
In the above cases 60 days, as suggested u/s 6 (1) shall be replaced by 182. In other words, the second
basic condition shall not be applicable.
Additional Conditions u/s 6(6)
(i) An assessee must be a Resident for 2 or more years out of 10 years preceding the relevant previous year.
AND
(ii) An assessee must have been in India for at least 730 days in 7 years preceding the relevant previous year.
3.3 Types of Residential Status
An individual who satisfies any one of the above Basic conditions u/s 6(1) is treated as a resident for the
previous year.
1) Ordinary Resident (O.R): An individual who satisfies any one of the basic conditions and both the
additional conditions.
2) Not Ordinary Resident (N.O.R): An individual who satisfies any one of the basic conditions and any one
or none of the additional conditions
3) Non-Resident (N.R): An individual who does not satisfy any of the basic conditions will be treated as Non-
Resident; here the additional conditions are irrelevant.
However, from the financial year 2020-21, the period is reduced to 120 days or more for such an
individual whose total income (other than foreign sources) exceeds Rs 15 lakh.
In another significant amendment from FY 2020-21, an individual who is a citizen of India who is
not liable to tax in any other country will be deemed to be a resident in India. The condition for
deemed residential status applies only if the total income (other than foreign sources) exceeds Rs

15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence
or any other criteria of similar nature.
Illustration 1:
Mr. Prakash an Indian citizen left India on 15 August 2021 for the first time to U.K. for the purpose of
employment. He plans to visits India every year and stay here from 15th April to 10th September from 2022
onwards. What will be his residential status for A.Y. 2022-2023?
Solution:
STEP 1:
Basic condition
a) An assessee must be in India for a period of 182 days or more during previous year
Or
b) An assessee must be in India for a period of 60 days more during the previous year and 365 days in 4 years
preceding the relevant previous year.
Additional condition
a) Assessee must be a resident in India at least two out of ten previous years preceding years preceding the
relevant previous year,
And
b) An assessee must have been in India for at least 730 days or more during the seven previous years
preceding the previous year.
STEP 2:

Calculation of Number of Days Stayed
Stay in India during the P.Y.2021 -2022.
1st April 2021 to 15th August 2021 = 137days.
STEP 3:
RESIDENTIAL STATUS
Mr. Prakash being an Indian citizen and left India for the purpose of employment will come under the
categories of exception to 2nd basic condition. Hence 60days or more in second basic conditions will be
replaced by 182 days. Since the basic condition is not satisfied, he is a non-resident for the assessment year
2022– 2023
Illustration 2:
Mr. Ajith went to England for studies on 5th August 2021 and came back to India on 25th February 2022. He
had never been out of India before. What is his residential status for the A.Y 2022– 2023?
Solution:
STEP 1:
Basic condition
a) An assessee must be in India for a period of 182 days or more during previous year
Or
b) An assessee must be in India for a period of 60 days more during the previous year and 365 days in 4
years preceding the relevant previous year.
Additional condition
a) Assessee must be a resident in India at least two out of ten previous years preceding the relevant
previous year,
And
b) An assessee must have been in India for at least 730 days or more during the seven previous years
preceding the previous year.
STEP 2:
Calculation of Number of Days Stayed
Mr.Ajith’s stay in India from during the previous year is as under:

1st April 2020 to 5th August 2020 = 127 days
25th February to 31st March 2021 = 35 days
Total no. Of days = 162 days
He was in India in the earlier previous year completely.
STEP 3:
Residential Status
Mr. Ajith’s stayed in India during the previous year 2021– 2022 for 162 days and satisfies the second basic
condition. Since he leaves India in the previous year for the first time, he has been resident for more than

two years and also stayed for more than 730 days in past preceding years. He satisfies second basic
condition and both the additional conditions.
Hence, he is a resident and Ordinary Resident for the A.Y 2022-23
Illustration 3: Mr. Irfan comes to India for the first time on April 16, 2021. He has stayed in India up to
October 5, 2021. Determine his residential status for the A.Y 2022-23.
STEP 01: Apply Basic Conditions and Additional Conditions (write down)
STEP 02: Calculation of Number of Days Stayed

a) In the previous year – 01/04/2021-31/03/2022
16/04/2021 -05/10/2021 = 173days
b) In preceding to previous years, he has not been in India, as he has come to India for the first time in the
year 2021.
STEP 03: RESIDNETIAL STATUS

Mr. Irfan is not an Indian citizen as he came to India for the first time in the year 2020. His stay in
India is for a total period of 173days. Thus, he does not satisfy any of the basic as well as additional
condition. So, he is considered as a NON-RESIDENT for the AY 2022-2023.
4. During the previous year 2021-22, X, a foreign citizen, stayed in India for just 69 days. Determine his
residential status for the assessment year 2022-2023 on the basis of the following information: (i) During
2018-19, X was present in India for 366 days. (ii) During 2015-16 and 2014-15, X was in Japan for 359 and
348 days respectively and for the balance period in India. (iii) Mrs. X is „resident‟ in India for the
assessment year 2022-2023.  To determine whether he is resident or not —
Step-1 apply the basic conditions
He is resident for previous year 2021-22 as he satisfies the second condition as he was here during the
previous year for 69 days and in the preceding 4 years for 366 days.
Step-2 calculation of number of days stay in India

 To determine whether he is ordinarily resident or not — He should satisfy both of the additional
conditions.
2020-21 Nil Non-resident
2018-19 366 days Resident
2015-16 7 days Non-resident
2014-15 17 days Non-resident
Step -3 Residential Status
And earlier years Nil Non-resident
He was in India for less than 730 days in the 7 preceding previous years.
He is also non-resident in 9 out of 10 previous years preceding the previous year.
Hence, he is “resident but not ordinarily resident”.
Incidence of tax or taxability of total income on the basis of residence:
1) Resident: Total income of any previous year of a person who is an “Ordinary Resident” includes all
income from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India
c) Accrues or arises to him outside India during the previous year.
2) Resident but not Ordinary Resident

The total income of a person who is a resident but not ordinary resident includes all income from whatever
source derived which:
b) Accrues or arises or deemed to accrue or arise to him in India

c) Accrues or arises to him outside India from a business controlled in or a profession setup in India.
3) Non–resident
Total income of a Non-resident includes all income from whatever source derived which:
b) Accrues or arises or is deemed to accrue or arise to him in India during such year.
TERMINAL QUESTIONS:
Section: A
1. What are the types of residents for income tax purpose?
2. Who is a Not Ordinary Resident?
3. Who is Non-resident?
4. When an individual becomes Ordinary Resident?
Section B and C:
1. Mr. James a citizen of West Indies was appointed as sales manager in India on 1stApril 2017 at Mumbai. On
25 January 2020he went to Uganda on deputation for period of 3 years, but left his wife and children in
India. On 1st May 2020 he came to India and took with him his family to Uganda on 30th June 2020. He
returned to India and joined his original job on 24th January 2021. Determine his residential status for the
A.Y 2022-23.
2. Mr. Raj, citizen of U.S. came to India for the first time on 01.05.2017. He stayed here without any break for
3 years and left for Bangladesh. on 01.05.2020. He returned to India on 01.04.2021 and went back to U.S.
on 01.12.2021 He was posted back to India on 20.01.2022. Determine his residential status for the A.Y
2022-23.
3. Vaishak, a foreign national (not being a person of Indian origin), comes to India for the first time on April
15, 2015. During financial years 2016-17, 2017-18, 2019-20, 2021-21,2020-2022he was in India for
130days, 80days, 13 days, 210 days and 75 days respectively. Determine his residential status for the A.Y
2022-23.

4. Mr. Kohli, a citizen of India, is an export manager of Arjun Overseas Limited, an Indian 4 Company,
since 1.5.2017. He has been regularly going to USA for export promotion. He spent the following days
in U.S.A. for the last five years: Previous year ended No. of days spent in USA 31.3.2018 317 days
31.3.2019 150 days 31.3.2020 271 days 31.3.2021 311 days 31.3.2022 294 days Determine his
residential status for assessment year 2022-2023. assuming that prior to 1.5.2017 he had never
travelled abroad.
Incidence of Tax
Chart showing the Incidence of Tax for different types of status:

II- Indian income, CI- Controlled income, EI- Exempted income and FI- Foreign income.
Different types of status

Nati
Resident
Types of income ona Not-
and Non-
l Ordinarily
Ordinarily Resident
inco Resident
Resident
me
1. Income received or deemed to be II
received in India. But received outside Taxable Taxable Taxable
India
2. Income earned or deemed to be II
earned outside India but received in Taxable Taxable Taxable
India
3. Income earned and received in India II
or income deemed to be earned and Taxable Taxable Taxable
received in India
4. Income earned or deemed to be FI
Taxable Not Taxable Not Taxable
earned and received both outside India
5. Income earned and received outside CI
India from the business controlled or
Taxable Taxable Not Taxable
profession setup in India income may
or may not be remitted to India
6. Income earned and received outside FI
India from a business controlled or Taxable Not Taxable Not Taxable
profession setup outside India
7. Past untaxed income brought into EI
Not Taxable Not Taxable Not Taxable
India during the relevant previous year

8. Gift is not an income, If it is less than EI
Rs. 50,000. (If gift is received by an
Not Taxable Not Taxable Not Taxable
individual from a relative or at the time
of marriage or by a will, it is tax free)
9.Gift from a friend exceeding Rs. II
50,000 received in India is an income. Taxable Taxable Taxable
Therefore taxable.
10.Dividend from an Indian company is II
exempted up to10,00,000 in case of a
Taxable Taxable Taxable
resident. Further, in case of non-
resident, it is fully exempted from tax
II
11.Dividend from Cooperative societies Taxable Taxable Taxable
12.Dividend from foreign company II
Taxable Taxable Taxable
received in India
13. Share of profits from HUF EI Not Taxable Not Taxable Not Taxable
TABLE SHOWING NUMBER OF DAYS PER MONTH FOR THE AY 2022-2023

PY: 01/04/2021-31/03/2022 AY:01/04/2022-31/03/2023
MONTH DAYS MONTH DAYS
April 2020 30 October 31
May 31 November 30
June 30 December 31
July 31 January 2021 31
August 31 February 28
September 30 March 31
Illustration 1: Kishan, a foreign national furnishes the following particulars of his income relevant for the
previous year 2021-2022.
1. Profit on sale of plant at London (one half is received in India) 1,46,000.
2. Profit on sale of plant at Delhi (one half is received in London) 1,02,000
3. Salary from an Indian company received in London (one half is paid for services rendered in India) Rs.60,
000.
4. Interest on UK development bonds (entire amount received in London) Rs. 40,000
5. Income from property in London received there Rs. 30,000
6. Profit from a business in Delhi managed from India Rs. 49,000
7. Income from agriculture in London received there, half of which is used for meeting hostel expenses of
his son and remaining amount is later on remitted to India Rs. 25,000.
8. Dividend (gross) received in London from a company registered in India but mainly operating in London
Rs.17,000.
9. Rental income from a property in Nepal deposited by the tenant in a foreign branch of an Indian bank
operating there. Rs. 12,000

10. Gift from a relative in foreign currency (one third of which is received in India and remaining amount
is used for meeting education expenses of Kumar’s son in USA) Rs. 3,90,000.
Determine gross total income of Kishan for the assessment year 2022-223 if he is
a) Resident and ordinary resident
b) Resident but not Ordinary resident, and
c) Non-resident.
Solution:
Computation of Gross Total Income of Kishan for the A.Y 2022-23
Not
Ordinary Non-
Details of Income ordinary
resident resident
resident
1. Profit on sale of plant at London 1,46,000 73,000 73,000
2. Profit on sale of plant at Delhi 1,02,000 1,02,000 1,02,000
3. salary from an Indian company 60,000 30,000 30,000
4. Interest on UK development bonds 40,000 Not taxable Not taxable
5. Income from property in London 30,000 Not taxable Not taxable
6. profit from a business in Delhi 49,000 49,000 49,000
7. income from agriculture in London 25,000 Not taxable Not taxable
8. Dividend from an Indian company 17,000 17,000 17,000
9. Rental income from property in Nepal 12,000 Not taxable Not taxable
10. gift from a relative Exempt Exempt Exempt
Gross total income 4,81,000 271,000 2,71,000
Illustration 2
Mr. Satya gives you the following information being a Resident Ordinary Resident.
1. Salary Rs.80,000 received in Japan for the services rendered in India.
2. Commission received in India for the services given in Sri Lanka Rs.1,40,000.
3. House rent of the house situated in Nepal received in India Rs.30,000.
4. Dividend of a England based company received in India Rs.75,000.
5. Profit of the business situated in Japan brought to India Rs.5,00,000.
Determine the residential status of Mr. Satya for the previous year 2021-22 and explain that on which
income he is liable to pay tax in India.
Compute his taxable income for the AY 2022-2023.
Computation of Total income

Name of the Assessee: Ms. Satya P.Y.2021-2022
Residential status: Resident Ordinary Resident A. Y. 2022-2023
Types of Income NI R
Salary received in Japan for the services rendered in India
1
(Assumed to be computed income) Rs.80,000

Commission received in India for the services given
2
in Sri Lanka Rs.1,40,000.
House rent of the house situated in Nepal received in
4
India Rs.30,000.
5 Dividend of a England based company received in India Rs.75,000.
6 Profit of the business situated in Japan brought to India Rs.5,00,000.
GTI/ TOTAL INCOME 8,16,000
Illustration 3
Mr. Jacob is a foreign national furnishes the following particulars of income relevant for the previous year
2021-2022.
I. Profit on sale of land at London (½ received in India) Rs 1,46,000.
II. Profit on sale of plant at Delhi (1/2 received in London) Rs 1,02,000.
III. Salary (net of salary deduction) from Indian co. received in London Rs 60000.
IV. Interest on U.K. development bonds Rs 60,000. (1/3 is received in India)
V. Income from property in London received there Rs 30000.
VI. Income from agriculture in London received there but later on remitted to India Rs
2500.
VII. Dividend received in London from company registered in India 17000.
VIII. Profit from a business in Delhi, managed from India Rs 49000.
IX. Profit for the year 2019-20 of a business in USA remitted to India during 2020-21 (Not
taxed earlier)
X. Gift from friends 80,000
XI. Dividend paid by an Indian company. Received in Canada ₹20,000
XII, Pension from Indian company received in London
XIII. Profit from business in Indonesia, Controlled from Delhi
Determine gross total income of Mr. Jacob for assessment year 2021-22. If he is
(1) Ordinary resident, (2) Not ordinary resident, (3) non-resident

Previous year2021-2022
Name of the Assessee: Mr. Jacob Assessment Year: 2022-2023
Types of Income NI R NOR NR
Profit on sale of land at London
73000
I (½ received in India) Rs II 73,000 73,000
73,000
1,46,000 FI

Profit on sale of plant at Delhi
II (1/2 received in London) Rs II 1,02,000 1,02,000 1,02,000
1,02,000.
Salary (net of salary deduction)
III from Indian co. received in II 60,000 60,000 60,000
London Rs 60000.
Interest on U.K. development
20,000
IV bonds Rs 60,000. (1/3 is FI 20,000 20,000
40,000
received in India) II
Income from property in
V London received there Rs 30,000 Not taxable Not taxable
30000. FI
Income from agriculture in
VI London received there but later 2,500 Not taxable Not taxable
on remitted to India Rs 2500. FI
Dividend received in London
VII from company registered in 17,000 17,000 17,000
India 17000. II
Profit from a business in Delhi,
VIII 49,000 49,000 49,000
managed from India Rs 49000. II
Past untaxed income is
IX EI Tax free Tax free Tax free
exempted
X Gift from friends II 80,000 80,000 80,000
Dividend paid by an Indian
XI 17,000 17,000 17,000
company. Received in Canada II
Pension from Indian company
XII 36,000 36,000 36,000
received in London II
Profit from business in
XIII Indonesia, Controlled from 1,20,000 1,20,000 Tax free
Delhi CI
GTI 7,19,500 5,74,000 4,54,000
Illustration 4. From the following particulars of Mr. Uday compute his Gross total income for the A.Y.2022-
23 if he is 1. Resident, 2. Not Ordinarily Resident and 3. Non-Resident
(a) Income from business from Raichur Rs. 50,000
(b) Profit from business in U.K. controlled from India Rs 60, 000
(c) Income from house property in Japan not received in India Rs 30, 000
(d) Income from business in India but received in Pakistan Rs 50, 000
(e) Salary received in India for service rendered in USA Rs 70, 000
(f) Interest on deposit with State Bank in Bangalore Rs 10, 000
(g) Profit from business in Ceylon controlled from India (1/3 profit received in India)
Rs 30,000
(h) Salary received in India for service rendered in Kuwait Rs 35, 000
(i) Past untaxed foreign income brought into India Rs 8, 000
(j) Dividend received from Domestic Company Rs 5,000

(k) Interest on Post Office Savings Bank A/c Rs 1,000
(l) Agriculture income earned in Nepal Rs 25,000.
(m) Gift in cash from a relative received in India Rs 60000.
(n) Interest received from a firm in UK later on remitted to India Rs 10000

Previous year2021-2022
Name of the Assessee: Mr.Uday Assessment Year: 2022-2023
(a) Income from business from Raichur II 50,000 50,000 50,000
Not
(b) Profit from business in U.K. controlled from India 60, 000 60, 000
CI Taxable
Income from house property in Japan not received in Not Not
(c) 30, 000
India FI Taxable Taxable
Income from business in India but received in
(d) 50, 000 50, 000 50, 000
Pakistan Rs II
(e) Salary received in India for service rendered in USA 70,000 70,000 70,000
II
(f) Interest on deposit with State Bank in Bangalore 10, 000 10, 000 10, 000
II
Profit from business in Ceylon controlled from India II& 10, 000 10, 000
(g) 10, 000
(1/3 profit received in India) Rs 30,000 CI 20,000 20,000
Salary received in India for service rendered in
(h) 35, 000 35, 000 35, 000
Kuwait Rs II
Not Not Not
(i) Past untaxed foreign income brought into India
EI Taxable Taxable Taxable
(j) Dividend received from Domestic Company 5,000 5,000 5,000

II
Not Not Not
(k) Interest on Post Office Savings Bank A/c
Not Not
(l) Agriculture income earned in Nepal. 25,000
FI Taxable Taxable
(m) Gift in cash from a relative received in India II 60000 60000 60000
Interest received from a firm in UK later on Not
(n) 10,000 10,000
remitted to India CI Taxable
Illustration 5. Following are the incomes of Mr. Vishnu for the previous year 2021-22
a) Received Rs.20,000 in India, which accrued in England.
b) Rs.10,000 earned in India but received in England.

c) Rs.5,000 were earned and received in Africa but brought to India.
d) Rs.10,000 were earned and received in Japan from a business which was controlled and managed in
Japan.
e) Rs.16,000 was untaxed foreign income of some earlier year, which was brought to India in the previous
year.
f) Interest on FD in State Bank of Mysore, Bangalore Rs.1,200.
g) Income from agriculture in Africa, received in India Rs.10,000.
h) Dividends received in U.K from an American Company Rs.10,000.
i) Salary income for three months for working in Indian Embassy's office in Australia and salary received
there Rs.72,000.
j) Income from house property in Mumbai Rs.1,00,000.
k) Interest received on POSB a/c Rs.1,000.
l) Pension income from Belgium for services rendered in India with a limited company Rs.2,20,000.
m) Gift from friends Rs.80,000.
Which of the above incomes are taxable if Mr. Vishnu is – a) Resident and ordinarily resident?
b) Resident but not ordinarily resident c) Non-resident.

Computation of Total Income of Mr. Vishnu
Previous Year: 2021-22
Assessee: Mr. Vishnu Assessment Year: 2022-23
a) Received Rs.20,000 in India, which accrued in
England II 20,000 20,000 20,000
b) Rs.10,000 earned in India but received in England. II 10,000 10,000 10,000
c) Rs.5,000 were earned and received in Africa but
brought to India FI 5,000 NIL NIL
d) Rs.10,000 were earned and received in Japan from a
business which was controlled and managed in Japan FI 10,000 NIL NIL
e) Rs.16,000 was untaxed foreign income of some
earlier year, which was brought to India in the previous
year EI NIL NIL NIL
f) Interest on FD in SBM, Bangalore II 1,200 1,200 1,200
g) Income from agriculture in Africa, received in India II 10,000 10,000 10,000
h) Dividends received in U.K from an American
company Rs.10,000 FI 10,000 NIL NIL
i) Salary income for three months for working in India
Embassy's Office in Australia and salary received there
Rs.72,000 II 72,000 72,000 72,000
j) Income from house property in Mumbai Rs.1,00,000 II 1,00,000 1,00,000 1,00,000
Not Not Not
k) Interest received on POSB A/c
l) Pension income from Belgium for services rendered
in India with a limited company Rs.20,000 II 20,000 20,000 20,000
m) Gift from friends II 80,000 80,000 80,000
Total income 3,38,200 3,13,200 3,13,200
PRACTICAL PROBLEMS
1. Mr. Anish has the following incomes for the previous year 2021-2022
₹

1. Income from salary in India from a company 50,000
2. Dividend from an Indian company received in England and
spent there 10,000
3. Income from house property in India received in Pakistan 20,000
4. Dividend from a foreign company received in England
deposited in a bank there 10,000
5. Income from business in Kolkata, managed from USA 20,000
6. Income from business in USA (controlled from Kanpur) 12,000
7. Income was earned in Australia and received there but brought
into India 25,000
8. His maternal uncle sent bank draft from France as a gift
on his marriage 20,000
Compute the gross total income, if he is:

(i) Resident (ii) Not-ordinary Resident (iii) Non-resident.
2. Mr. Naresh is an Indian Citizen. He left India on 16th July 2020 to England and return to India on 02 Feb
2021. During the Previous Year his details of income were as follows:
(a) Interest on Securities of an Indian Company received in England Rs 22,000
(b) Agricultural Income in Gujarat Rs 30,000
(c) Dividend from Indian Company Rs 10,000
(d) Interest received from a firm in England remitted to India Rs 9,500
(e) Amount brought to India out of past untaxed profit earned in England Rs 22,000
(f) Income from business in Pakistan being controlled from India Rs 15,000
(g) Interest earned & received in England from bank & deposited there Rs20,000
(h) Income from Salary received in India for services rendered in England Rs20,000
Determine his Residential Status & Gross Total Income for the AY 2022-23.
3. Suresh is an Indian citizen went out of India on 28th august 2020 for service in a company in Japan and
came back to India on 1st April 2021 to meet his family. During the year 2021-22, he received the following
incomes:
I. Incomes from salary in Japan Rs 28000.
II. Interest on bonds of central government of India Rs28000
III. Taxable income from shares from foreign company Rs 7500 received in Japan.
IV. Income from agricultural land situated in Punjab Rs 10000
V. Interest received from firm in U.K. remitted to India Rs.9200
VI. Payment from public provident fund Rs 20000.
VII. Commission received in India for the services given in Nepal Rs.10000.
VIII. Profit from business in Srilanka Rs.40000 (business controlled from Chennai) of which Rs15000 was
received in India.
IX. Profit of the business in Nepal brought to India. Rs 50000
X. Amount brought to India out of past-untaxed profit earned in Japan Rs 8000.
XI. Share of income from HUF Rs 12000.
Calculate the gross total income of Krishna after ascertaining his residential status for assessment year
2022-2023.
5. Following are the particulars of Mr. Praful for the previous year 2021-22.

i) Profit on sale of plant at Singapore (on-half is received in India) Rs. 2,50,000.
ii) Profit on sale of property at Bengaluru (one-half received in Hong-Kong) Rs.50,000.
iii) Interest on UK Development Bonds Rs.2,00,000 of which Rs.1,00,000 remitted to India.
iv) Profit from business in Mangalore, the control is from USA Rs.30,000,
v) Income from business Mysuru but received in Holland Rs.5,00,000.
vi) Profit from business in Pakistan controlled from India (40% profit received in India)
Rs.6,00,000
vii) Dividends from domestic company Rs.2,00,000.
viii) Interest on post office Savings Bank Account Rs.1,000.
ix) Past untaxed foreign income brought to India during previous year Rs.2,00,000.
x) Rural agricultural income in India Rs.3,00,000.
xi) Salary and allowances from UNO Rs.3,00,000.
xii) Interest and dividends from units of UTI Rs.20,000.
xiii) Income earned in Australia and received there but brought to India Rs.2,00,000.
xiv) Salary (computed) received in India for services rendered in Sri Lanka Rs.1,50,000. Compute
his taxable income for the A.Y. 2022-23.

Module II
Computation of Taxable Income under the different heads of Income
 Different heads of income are:
 Income from Salary
 Income from House Property
 Profits and gains from Business or Profession
 Capital Gains
 Income from Other Sources
Salary (Section 15 – 17) Salary is the remuneration received by or accruing to an individual, periodically,
for service rendered as a result of an express or implied contract. The actual receipt of salary in the
previous year is not material as far as its taxability is concerned. According to Income Tax Act there are
certain conditions where all such remuneration is chargeable to income tax:
 When due from the former employer or present employer in the previous year, whether paid or not
 When paid or allowed in the previous year, by or on behalf of a former employer or present employer,
though not due or before it becomes due.
 When arrears of salary are paid in the previous year by or on behalf of a former employer or present
employer, if not charged to tax in the period to which it relates.
1.1 Basis of charge:
 Relationship between payer and payee is vital.

 Salaries and wages are not conceptually different. Both are compensation for work done or services
rendered.
 Salary from more than one source or employer also considered.
 Salary from former employer, present or prospective employer shall also taxable.
 Salary income must be real and not fictitious.
 Foregoing of salary: Section 15 taxes salary on ‘’due’’ basis even if it is not received.
 Voluntary payments: Salary perquisites or allowances may be given as a gift to an employee yet they would
be taxable.
Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries”, which
includes:
1) Wages
2) Annuity or pension
3) Gratuity
4) Fees, Commission, allowances perquisites or profits in lieu of salary
5) Advance of Salary
6) Amount transferred from unrecognized provident fund to recognized provident fund
7) Contribution of employer to a Recognized Provident Fund in excess of the prescribed limit
8) Leave Encashment
9) Compensation as a result of variation in Service contract etc.
10)Contribution made by the Central Government to the account of an employee under a notified Pension
scheme.
1.2 Arrears of Salary - Salary in arrears / advance, received in lump sum, is liable to tax in the year of
receipt. Relief can be obtained for salary arrears u/s 89(1) of the Income Tax Act.
1.3 Salary: is paid by the employer to the employee in consideration of the service rendered by him to the
organization. It includes monetary value or non-monetary value of benefits and facilities provided by the
employee. Any amount received other than from employer cannot be termed as salary.
1.4 Computation of taxable income from salary of for the assessment year 2022-23
Format for Computing Taxable Income from Salary

Name of the Assessee: XXX Previous year: 2021-22
Residential Status: - R/NOR/NR Assessment year: 2022-23

Particulars ₹ ₹
1. Basis Pay xxx
2. Advance salary xxx
3. Arrear salary (If it not taxed earlier) xxx
4. Dearness Pay/ Dearness Allowances xxx
5. Fees, xxx
6. Bonus, xxx
7. Commission xxx
8. Allowance’s u/s 17(2) xxx
9. Taxable perquisites u/s 17(3) xxx
10. Profits in lieu of salary xxx
11.Encashment of Earned Leave xxx
12. Employer's contribution to RPF in excess of 12% of salary xxx
13. Accrued Interest on RPF in excess of 9.5% xxx
14. Taxable portion of gratuity xxx
15. Taxable portion of compensation on retirement xxx
16. Taxable portion of compensation on Voluntary retirement xxx

17. Pension from the date of retirement to the end of previous year xxx
18. Taxable portion of the commuted value of pension
xxx
Gross Salary xxxx

Less: Deductions U/s 16

a) Standard Deductions U/S 16(IA) (Maximum limit
of 50,000or gross salary, WEL) xxx
b) Entertainment Allowance U/S 16(ii) xxx
( In case of Government employee) xxx
c) Professional tax U/S 16(iii) xxx
Taxable Income from Salaries xxx
Notes: From the above table No.1 to No.10 (ie from Basic Pay to Profits lieu in salary) is fully taxable.
1.5 Salary sec 17(1)
The term salary includes the following:

a. Wages
b. Any annuity or pensions
c. Any gratuity
d. Any fees, commission, perquisites or profits in lieu of salary
e. Any advance salary
f. Encashment of earned leave salary
g. Employer’s contribution in excess of 12% of employee salary to RPF and interest on RPF in excess of 9.5%
p.a.
h. The contribution made by Central Government to the account of an employee under Pension scheme
referred to in sec. 80CCD.
1.6 Basic Salary: It is fully taxable; there are two methods of calculating Basic Salary,
1) Receipts Basis: Under this method salary will be received at the end of every month. It falls due on the last
date of the same month (1st April 2021 o 31st March 2022).
2) Due Basis: Under this method, salary of any month will be received in the first week of next month. It falls
due on the first day of next month (March 2021-Februray 2022).
1.7 Leave Salary: Section 17 (1) (a)
It is also called as salary in lieu of leave. An assessee is entitled for certain number of leaves as per the
employment contract. If the assessee does not avail such leave, then he can get the salary for the number of
days he has not availed leave.
Leave Salary Received can be classified into two types. They are:
1. Leave Salary received while in service: It is fully taxable for both government employees and non-
government employees.
2. Leave salary received at the time of retirement: It is fully exempt U/S 10(10AA) for government
employee and it is partially exempted U/S 10(10AA) for non–government employee.
Encashment of Leave Salary [Sec. 10(10AA)]

Encashment of leave by surrendering earned leave standing to the employee's credit is known as encashment of leave
salary"
Tax Treatment
Leave salary received during the service period Leave salary received at the time of retirement
Non-Government Government
Government employee i.e employee i.e employee Non-Government Employee
1. Leave encashment actually
received. Total earn leave
(Employees of
((service period x actual earned.
state or Central (Other employees)
leave) - (Actual earn leave used
Government)
x Last drawn Fully tax-free
salary)},
2. Leave salary as per IT law-
[(1 month salary or Actual
earned leave, w.e.l) x
(service period-earned leave
Fully taxable Fully taxable Fully tax free
used) x average salary)
3. 10 months average salary.
4. Maximum limit of Rs.
3,00,000
Note:
1. Average salary means the total of basic salary, dearness pay, dearness allowance enters into all
retirement benefits), commission (if it is based on a fixed percentage of turnover achieved by the
employee), for 10 months immediately preceding the date of retirement, divided by 10.
2. To find out the duration of service period, fraction of the year shall be ignored.
3. If employee receives leave salary from two or more employers in the same year, the maximum limit of
3,00,000 shall be reduced by the amount of leave salary exempted earlier. This provision is applicable for
non-government employees receiving leave salary at the time of retirement.
4. Leave salary paid to the legal heirs of the deceased employee is fully exempt from tax.
5. If total earned leave less leave availed is negative, it must be taken as nil.
Illustration-1
Mr. Nagaraj (resident) was a manager in a Private Company. He sought pre mature retirement from
service on 1st November 2021 after completing 25 years of service. His salary for 10 months
preceding retirement was 36,900. He had seven months leave to his credit on the basis of 30 days
per year which was approved and he was paid 27,300 as salary. Compute the amount of encashment
exempt from tax for P. Y. 2022-21, if his last drawn salary is 3,900.
Solution:

Computation of Taxable Leave Salary
Assessee: Mr. Narasimha Previous Year: 2021-2022

Status: Resident Assessment Year: 2022-23
Category: Non-Govt. Employee
Particulars ₹ ₹
Actual leave salary received (25x1=25-18=7x3,900) 27,300
Less: Least of the following:
1. Actual leave salary received 27,300
2. Leave salary as per IT law (1x 25 = 25-18=7x3,690) 25,830
3. (10x3,690), 10 months average salary 36,900
4. Maximum limit 3,00,000 25,830
Taxable Leave Salary 1,470
Note:
1. Calculation of average salary: average salary = 36,900 = 3,690

10
2. The amount of leave salary exempt from tax is 25,830.
Illustration-2
Mr. Govind (resident) resigned from his service from a public company on 30th November 2021
after completing 24 years and 10 months of service. During his service he was allowed to get 45
days of earned leave for every completed year of service. During his service he had availed 10
months leave and had encashed 6 months leave. On resignation he was paid leave salary of 2,20,000
for his credit of 20 months earned leave. His average salary during the 10 months preceding to the
date of his resignation was 11,000.
Compute his taxable leave salary for the assessment year 2022-23.
Solution:
Computation of Taxable Leave Salary
Assessee: Mr. Kumar

Status: Resident Previous Year: 2021-22
Category: Non-Govt. Employee Assessment Year: 2022-23
Particulars ₹ ₹.

1080 2,20,000
Leave encashment received (45 x 24 = 30 = 36 − 16 = 20) (20 ∗11,000) -
Less: Least of the following:

i) Leave encashment received 2,20,000
ii) Leave salary as per IT law
720
(30*24= = 24 − 16 = 8)(8 ∗11,000) 88,000
30
iii) 10 months average salary (11,000 × 10). 1,10,000

iv) Maximum limit 3,00,000
Exempted amount of earned leave 88,000
Taxable Leave Salary 1,32,000
Last drawn salary is not specified in the problem. Therefore, average salary is assumed to be last drawn
salary, i.e., Rs. 11,000
Illustration-3
Mr. Suresh (resident) retired from ABC Ltd. On 1-11-21 after serving the company for 25 years and 9
months. At the time of retirement his basic pay was Rs. 20,000 p.m. and D.A. of Rs. 800 p.m. [which is
treated as salary for the purpose of all retirement benefits] but it was Rs. 18,000 per month basic and
Rs. 200p.m DA up to 31-7-2021.
He is entitled for 45 days of leave per year of service and has availed 55 days leave and encashed 20
days of leave throughout his service and received a leave salary Rs. 7,28,000. Compute taxable part
of leave salary for the A.Y. 2022-23.
Solution:
Assessee: Mr. Suresh

Status: Resident Previous Year: 2021-22
Category: Non-Govt. Employee Assessment Year: 2022-23
Particulars ₹ ₹.
1,050
Leave encashment received (25 x 45) = (1,125-75) = 30 = 35 ∗20,800) -
Less: Least of the following: 7,28,000

i) Leave encashment received 7,28,000
ii) Leave salary as per IT law
675
(25*30) =750-75= = 22.5 ∗18,980 4,27,050
30
iii) 10 months average salary (11,000 × 10). 1,89,800

iv) Maximum limit 3,00,000
Exempted amount of earned leave 1,89,000
Taxable Leave Salary 5,38,200
Calculation of Average Salary: (Salary from 01-01-2020 to 30-10-2021)

1. Salary = 18,000 x 7 = {1,26,000+ (20,000 x 3) = 60,000) = 1,86,000
2. DA = 200 x 7 = {1,400+ (800 x 3) = 2, 400} = 3,800 AS = 1,89,800/10 = 18,980
Gratuity:
Gratuity is a retirement benefit generally payable at the time of cessation of employment and on the basis
of duration of service.
Gratuity received can be classified into two types. They are:
1. Gratuity received while in service: it is fully taxable for both government and non–government employees.
2. Gratuity received at the time of retirement: This includes
a. Gratuity received by government employees: It is fully exempt
b. Gratuity received by non–government employees who are covered by the payment of gratuity Act 1972 it
is taxable but exemption can be availed U/S 10(10).
c. Gratuity received by non – government employees who are not covered by the payment of gratuity Act
1972 it is taxable but exemption can be availed U/S 10(10).
A) Format of Calculation of Taxable Gratuity (non–government employee when gratuity received is

covered by payment of gratuity act, 1972)
Particulars ₹. ₹.
Actual Gratuity Received XXX
Less: Least of the following is exempted u/s 10(10):
Actual Gratuity received XXX
Maximum amount 20,00,000
15/26 X Last salary Drawn X No. of years completed service XXX
Exempted Gratuity XXX
Taxable Gratuity XXX
NOTE:
1. Salary last drawn comprises of
Basic salary + Dearness allowance of the month of retirement (full month salary should be taken)
2. No. of years of service (rounded off): if it is 6 months or less ignore and if it is more than 6 months round
it off to next year.
B. Calculation of taxable gratuity (non – government employee when gratuity received is not
covered under payment of gratuity act, 1972)
Actual Gratuity Received XXX
Less: Least of the following is exempted u/s
10(10): XXX
Actual Gratuity received 20,00,000
Maximum amount XXX
1/2 X Average salary X No of years completed XXX
service

Exempted Gratuity
Taxable Gratuity XXX
Therefore, taxable gratuity will be actual amount of gratuity received minus exempt U/S 10(10).
NOTE:
1. Average salary: It is the average of last 10 months salary proceeding the month of retirement. It includes
Basic salary
(+) Dearness allowance (if it enters retirement benefit)
(+) Commission at a fixed rate calculated on turnover achieved by assessee.
2. For the service period any fractional month is given in the problem should be ignored (Only completed
number of years must be considered).
Illustration 1.
Mr. Ganesh (resident) employed at a salary of ₹. 6,200 per month. He is also getting DA of ₹. 2,800
per month. He receives ₹. 5,000 as bonus. On 30/5/2021 he retired from his service. He had service
of 29 years and 5 months. He received ₹. 2,00,000as gratuity under the payment of Gratuity Act.
Compute his taxable gratuity for the Assessment year 2022- 2223.
Name of the Assessee: Mr. Ganesh Previous year: 2021-22
Residential Status: - Resident Assessment year: 2022-23

Category- Non Govt employee
Actual Gratuity Received 2,00,000
Less:
Least of the following is exempted u/s 10(10):
1. Actual Gratuity received 2,00,000
2. Maximum amount 20,00,000
3. (15/26) X (9,000 X 29) 1,50,577
Exempted Gratuity (1,50,577)
Taxable Gratuity 49,423
Last drawn salary ---6,200+2,800= 9,000, Service period -29 years (fractional months should
be ignored)
Formulae: 15/26 X Last salary Drawn X No. of years completed service
Illustration 2.

Sri. Moushumi Das is employed at a salary of ₹. 6,000 per month in a seasonal factory. Besides, he
also gets DA at ₹. 2,500 per month and annual Bonus Rs. 5,000. He retires on 30/9/2021. He gets ₹.
1,75,000 gratuities under the payment of Gratuity Act, 1972. He served for 30 years and 7-month,
Compute taxable amount of Gratuity for the Assessment year 2022-22.
computation of taxable gratuity

Name of the Assessee: Sri. Moushumi Previous year: 2021-22
Particulars ₹ ₹
Actual Gratuity Received 1,75,000
Less:
1.Actual Gratuity received 1,75,000
2. Maximum amount 20,00,000
3. (7/26) X (8,500X 31) 70,942
Exempted Gratuity (70,942)

Taxable Gratuity 1,04,058
salary last drawn- 6,000+ 2,500=8,500 Service period 30 years + 1 Month (7months is more than 6
months, so fractional month is converted into one year)
Formulae: 7/26 X Last salary Drawn X No. of years completed service
Illustration 3.
Sri. Venial Patra, received ₹. 60,000 on his retirement on 30/9/2021 as gratuity from his employer
with Whom served for 29 years and 7 months. Compute taxable amount in each of the following
cases: If his salary during calendar year 2020 was ₹. 2,000 and during 2021 was 2,400 and it is due
on 1st of every month. He had worked earlier with a company for 6 years and received 92,000 as
gratuity, which was fully exempted.
1. He is a government employee
2. He is working in a factory (cover under the payment of gratuity Act.)
3. He is working in a commercial office at Delhi.
Solution

1) If Sri. Venial Patra is a Govt employee, entire gratuity amount of Rs.60,000 is exempted from
tax.
2) Computation of taxable gratuity (Under the payment of gratuity Act)
2) computation of taxable gratuity (Under the payment of gratuity Act)

Name of the Assessee: Sri. Venial Patra Previous year: 2021-22
Category-Non Govt employee
Particulars ₹ ₹
Actual Gratuity Received 60,000

Less:
2. Maximum amount (20,00,000-92,000) 19,08,000
3.(15/26) X (2,400X 30)
41538
Exempted Gratuity (41538)
3) computation of taxable gratuity (Not Under the payment of gratuity Act)

Name of the Assessee: Sri. Venial Patra Previous year: 2021-22
Category-Non Govt employee
Particulars ₹ ₹
Actual Gratuity Received

Less: 60,000
2. Maximum amount (20,00,000-92,000) 19,08,000
3.(1/2 x Average salary x service period) (1/2 x 2320x29) 33,640

Exempted Gratuity (33,640)

Notes.
Average salary- (1/11/19 to 30/8/2020)
Form (Nov to Dec)- 2000 x 2= 4000
From (Jan to Aug)- 2400 x 8 =19200 (19,200 +4,000) = 23200/10 = 2320
Fractional month should not be considered therefore serviced period is 29 months.
1.9 Pension U/S 17(1)(ii) – [Exemption U/S10(10A)]
It is the amount received by employee from his employer after his retirement for the service rendered.
Pension received in the employee is only covered here. Any pension received by family members after the
death of employee is discussed under income from other sources. The amount of pension received by an
employee is taxable like salary. If an employee receives a lump sum instead of receiving monthly pension, it
is called commutation of pension.
Commuted pension would be taxed in the following manner:
Tax Treatment
Government employees
(ie, employees of State Non-Government employees
or Central, Local
authority and
statutory corporation If employee receives If employee does not
gratuity receives gratuity
Least of the following Least of the following
is exempt is exempt
1. Actual commuted 1. Actual commuted
Fully exempted from pension received pension received
or or
Tax
1/3 rd of full value 1/2 of full value
of commuted pension of commuted pension

a) Government Employee:
Commuted pension received by government employee is exempt from tax. Govt employee includes central
Govt employee, state Govt employee, employee of a local authority or any Govt employee absorbed into a
public sector undertaking.
b) Non–government employees:
In this case the commuted value of pension is exempt to the following extent:
a) Where the employee receives gratuity, the commuted value of one-third (1/3) of the pension
b) Where the employee does not receive any gratuity, the commuted value of one-half (1/2) of the pension.
c) Any payment received by way of commutation of pension by an individual out of an annuity plan of LIC of
India after 31.7.1996 or any other insurer is fully exempt.
Illustration-1
Mr. Sumeet Basak (resident) retired from services on 31st March 2020. His pension was fixed at
₹.6,000 p.m. He commutes one-half of his pension and received ₹.3,00,000. Find out the taxable
amount of commuted pension, if:
a) He is a government employee.
b) He is a non-Govt. employee who also gets gratuity and c) He is a non-Govt. employee who does
not get any gratuity.
Solution:
Computation of Taxable Pension
Assessee: Mr. Sumeet Basak Previous Year: 2021-22

(a) If Mr. Sunder Basak is a Government employee
Entire commuted pension of 3,00,000 will be
exempted from tax 2,20,000
Total Taxable Commuted Pension Nil
(b) If Mr. Sumeet Basak is a Non Govt. employee,

who also gets gratuity 3,00,000
Commuted pension received
Less: Least of the followings:
1. Actual commuted pension received 100 1
3,00,000
(3,00,000 X X ) 2,00,000 2,00,000
50 3
2.1/3 of full value of commuted pension
Total Commuted Taxable Pension 1,00,000

b) If he is a Non Govt. employee, who does not gets
gratuity Commuted pension received
3,00,000 3,00,000
Less: Least of the followings: (3,00,000 X 100 X 1 ) 3,00,000
2.1/2 of full value of commuted pension
3,00,000
Total Commuted Taxable Pension Nil
Notes. 1.If Mr. Sunder Basak is a government employee

Entire commuted pension up to 3,00,000 will be exempted from tax. In this problem Rs. 2,20,000 is
pension received, it is less than ₹.3,00,000 therefore entire amount of 2,20,000 is exempted from tax.
Illustration-2
Mr. Arun (resident) is getting a pension of 8,000 p.m. from a company. During the P.Y. 2021-22he got his 2/3 pension
commuted and received of 5,08,000. Compute the exempted amount:
(i) if he has also received gratuity

(ii) (ii) if he does not received gratuity.
Solution:
Computation of Taxable Pension
Assessee: Mr. Arun Previous Year: 2021-22

(b) If Mr. Arun is a Non Govt. employee, who also gets

gratuity
Commuted pension received 5,08,000
Less: Least of the followings:
5,08,000
2.1/3 of full value of commuted pension (5,08,000 X 2 X 3 ) 2,54,000
2,54,000
5,08,000
3,81,000 5,08,000

(b) If he is a Non Govt. employee, who does not gets
gratuity
Commuted pension received
Less: Least of the followings: 3,81,000
2.1/2 of full value of commuted pension (3,00,000 X 50 X 2 )

Illustration-3
Mr. Anand a non-government retired employee is getting a pension of 12,000 per month from a company. During the
previous year 2021-22 he got his half of pension commuted and received * ₹. 5,00,000. Compute the exempted
amount of commuted pension for the A.Y. 2022-23 if:
a) He receives gratuity b) He does not receive any gratuity
Solution: Computation of Taxable Pension
Assessee: Mr. Anand Previous Year: 2021-22

Particulars ₹
(b) If he receives gratuity
Exempt: 1/3 of full value of commuted pension 3,33,333
5,00,000 X 2/1 = 10,00,000
10,000,000 X 1/3
(b) If he does not receive gratuity
Exempt: 1/2 of full value of commuted pension 5,00,000
5,00,000 X 2/1 = 10,00,000
10,000,000 X 1/2
Total Commuted Taxable Pension Nil
1.10 Provident Fund (PF) to encourage for the social security for employees, government has setup
various kinds of provident funds. The employee contributes a fixed percentage of salary towards these
funds and in many cases, employer also contributes an equal amount.
The mechanism of PF works like this
1. Every month the employee will be contributing to this fund for his future benefits.
2. Normally the same amount will be contributed by the employer also to the fund.
3. Interest will be earned by investing these funds in some good rated securities.
4. Assessee can withdraw this at the time of leaving the job or retirement or death.

Provident Fund:
Any fund to be provided in the future is known as provident fund. In this fund certain percentage is
deducted from the salary of an employee and an equal sum is contributed by the employer and both the
amounts are deposited in provident fund account by the employer on behalf of employee.
Types of Provident Fund:

1. Statutory Provident Fund (SPF): Any fund maintained as per the Provident Fund Act of 1925 and it
is generally maintained by the employees of Government & Statutory Corporation.
2. Recognized Provident Fund (RPF): Provident Fund which is recognized by commissioner of Income Tax
of the purpose of tax exemption is known as RPF and generally maintained by private companies.
3. Unrecognized Provident Fund (URPF): It is a fund which is not recognized by commissioner of income
tax but still contribution can be made in this fund. Employee of private and unorganized sector will
contribute to this fund.
4. Public Provident Fund (PPF): Any member of the public whether salaried employee or self-employed can
invest in the public provident fund by opening a PPF account at the State Bank of India and its subsidiaries
or any other nationalized banks.
S.No. Particulars SPF RPF URPF PPF

1 Employers Fully Exempted up to To be ignored Not
Contribution Exempted 12% of at the time of applicable
employee’s salary contribution
2 Employees Qualifies Qualifies for Not qualifies for Qualifies
Contribution for deduction u/s deduction u/s for
deduction 80C 80C deduction
u/s 80C u/s 80C
3 Interest on Fully Exempted up to To be ignored Fully
PF Exempted 9.5% p.a. in the year of Exempted
credit
4 Refund from Fully It is fully Employee Fully
Provident Exempted exempted. contribution is Exempted
fund deposit If the employee fully exempted.
has rendered Employers’
continuous contribution
service of 5 years and interest
otherwise it is thereon is taxed
treated as refund under the head
from URPF and income from
accordingly taxed salary.
Interest on
employee
contribution is
taxed under the

head income
from other
sources.
Illustration-1
Calculate the taxable amount of annual accretion to RPF if the following information is provided by
Mr. Kiran (resident)
1. Basic salary @ 10,000 P.m.
2. Commission received by him on the basis of turnover of ₹. 5,00,000@ 10%
3. Employer contribution towards RPF @b15% of salary.
Interest credited on 30th June 2019 to RPF balance @ 14% is ₹. 50,000
Computation of Taxable amount of annual accretion
Name of the assessee: Mr Kiran Previous year 2021 - 22

Status: Resident Assessment year: 2022 -23
Category: Non-Government employee
Particulars Amount (₹.)
Employee towards RPF @ 15% salary
15/100 X (1,20,000 + 50,000) 25,500
Less 12% of salary is exempted

(12% of 1,70,000) (20,400) 5, 100
Interest credited to RPF @ 14%
50,000
Less: Exempted up to 9.5%
(50,000 X 9.5/ 14) ( 33,929 )
Taxable amount of Interest towards RPF 16,071

Taxable portion of annual accretion 21, 171
Illustration- 2
Compute gross salary of Mr. Amit Majumder (resident) for the Assessment year 2022-23 from the
information given below
Basic Salary ₹.4.000 P.m.
DA ₹. 750 p.m. Out of which 300 p.m. enters to pay for employment purpose.
Advanced salary for two months ₹. 10,000

Employers’ contribution to RPF ₹. 800 per month.
Computation of Taxable amount of annual accretion

Name of the assessee: Mr Amit Majumder Previous year 2021 - 22
Status: Resident Assessment year: 2022 -23
Particulars Amount (₹.)
Basic salary (4,000 x 12) 48,000
DA (Which is entered) (300 x 12)
3,600
DA (does not entered) (450 x 12) 5,400 9,000
Advanced Salary for two months 10,000
Employee contribution toRPF (800 X 12) 9,600
Less 12% 0f salary 12/100 (48,000+ 3,600)
6192 3,408
Gross Salary 70,408
1.12 Allowances:
Fixed sum of money given regularly in addition to basic salary to meet a particular purpose are known as
allowances. The types of allowances are:
1) Fully Exempted Allowances:

1. Foreign allowance to Government employee
2. Allowance from UNO
3. Allowances given to judges of High Court and Supreme Court
2) Fully Taxable Allowance

1. Dearness allowance
2. City compensatory allowance
3. Tiffin allowance
4. Fixed Medical allowance
5. Servant allowance
6. Foreign allowance to non-government employee
7. Overtime allowance
8. Deputation allowance
9. Project allowance
10. Warden allowance
11. Lunch allowance
12. Non practicing allowance
13. Marriage allowance
3) Partly Taxable Allowance

(a) Allowance related to official duties: These allowances are exempted to the extent they are spent and
balance is taxable.

1. Uniform allowance
2. Daily allowance
3. Transfer allowance
4. Conveyance allowance
5. Helper allowance
6. Research allowance
7. Professional Development allowance
(b) Allowance related to employee’s personal expenses: A fixe amount determined by Central Government
is exempted irrespective of the actual expenditure incurred.
1. Tribal Area Allowance: Exempted up to ₹. 200 p.m.
2. Compensatory Hill Allowance: Exempted up to ₹. 300 p.m. to ₹. 7,000 p.m. based on the area.
3. Children Education Allowance: Exempted up to ₹. 100 p.m. per child up to a maximum of two children.
4. Child Hostel Allowance: Exempted up to ₹. 300 p.m. per child up to a maximum of two children.
5. Transport Allowance: Exempted up to ₹. 1,600 p.m. and in case of handicapped employee up to ₹. 3,200
p.m.
6. Allowance for transport employees: Exempted to the least of 70% of such allowance or ₹. 6,000 p.m.
whichever is less.
7. Entertainment Allowance: It is the amount paid by employer for availing entertainment services. It is
first added to gross salary and then allowed as deduction u/s 16(ii).
In case of government employee. Least of the following is given as deduction u/s 16(ii):
- Actual Entertainment Received or
- 20% of basic salary or
- Maximum limit of ₹. 5,000
8. House Rent Allowance: It is an allowance given by an employer to an employee to meet the cost of
accommodation which is partly exempted, according to section 10(13A). Exemption for HRA is not
available if the assessee is living in his own house or a house for which he is not paying rent.
Particulars Amount Amount

Actual HRA received xxx
Less: Least of the following is exempted:
Excess of Rent paid over 10% of salary xxx
40% of salary (50% in case of Delhi, Mumbai, xxx
Kolkata and Chennai) xxx
Exempted HRA
Taxable HRA xxx
Salary for HRA:

1. Basic pay
2. Dearness pay
3. Dearness allowance (If it enters into retirement benefit)
4. Commission based on turnover

Excess of Rent paid over 10% of salary xxx
40% of salary (50% in case of Delhi, Mumbai, xxx
Kolkata and Chennai) xxx
Illustration-1
Exempted HRA
Taxable HRA xxx X, who resides in Chennai
gets ₹ 3,00,000 per annum as basic salary. He receives ₹ 50,000per annum as house rent allowance. Rent
paid by him is ₹ 40,000 per annum. Find out the amount of taxable house rent allowance for the assessment
year 2022-23.
Amount Amount
Particulars (₹) (₹)
Actual HRA received 50,000

1) Actual HRA received 50,000
2) Excess of Rent paid over 10% of salary(40,000-
10,000
30,000)( 3,00,000X10%)
3) 50% of salary (50% in case of Delhi, Mumbai,
1,50,000
Kolkata and Chennai)
Exempted HRA -10,000
Taxable HRA 40,000
Illustration-2
X is a resident of Ajmer, receives ₹ 1,92,000 per annum as a basic salary during the previous year
2021-22. In addition, he gets ₹. 19,200 per annum as dearness allowance forming part of basic
salary for computation of all retirement benefits, 7% commission on sales made by him (sales
during the relevant previous year is ₹. 86,000) and ₹.24,000 per annum as house rent allowance.
He however, pays ₹. 21,500 per annum as a house rent. Determined the quantum of house rent
allowance exempt from tax.
Amount Amount
Particulars (₹) (₹)
Actual HRA received 24,000

1) Actual HRA received 24,000
2) Excess of Rent paid over 10% of salary(40,000-
Nil
30,000)( 2,17,220X10%)
3) 40% of salary (50% in case of Delhi, Mumbai,
86,888
Kolkata and Chennai)(being the excess of rent paid
Exempted HRA 24,000
Taxable HRA 0
1.13. Perquisites
Monetary or Non-monetary benefits (either in cash or in kid) received by an employee from an employer
in addition to salary.
Perquisites
Tax free perquisites Taxable perquisites
Taxable in all cases Taxable in hands of

specified employee only
a) Tax free perquisites
1) Computer, laptops given to employee for official or personal use.

2) Employer’s contribution towards Staff Group Insurance Scheme.
3) Employee’s refreshments provided by an employer to all employees during working hours in office.
4) Refreshments during working hours provided outside the place of work upto Rs. 50 per day will be
exempted.
5) Rent free house provided to the judges of High Court, Supreme Court or an officer of parliament or Union
Minister.
6) Amount spent on training of employees or fees paid for refreshing management course.
7) Free ration provided to Defense force.
8) Medical insurance premium paid by the employer.
9) Telephone facility provided by employer to employee.
10) Interest on loan given by the employer is not taxable if the loan amount does not exceed Rs. 20,000.
11) Perquisites given to Government employee who is staying abroad.
12) Gifts in kind if the value is less than ₹. 5,000.
13) Family planning expenses.
14) Products at concessional rate to employee sold by his/her employer.

b) Taxable perquisites in hands of specified cases
Specified employee is one who satisfies any one of the following conditions:
(a) The assessee must be a director employee in the employer company or
(b) If he is the beneficial owner of equity share carrying 20% or more voting power in the employer company
or
(c) The total taxable monetary receipts of the employee from all employers during the Previous Year after
deduction u/s 16 exceed ₹. 50,000.
c)Taxable perquisites in the hands of specified employee
1. Free service of Sweeper, Gardner, Watchman and Personal Attendant: Actual salary paid by employer is
taxable.
2. Free supply of gas, electricity, water supply for household purpose: Manufacturing cost or amount paid by
employer is taxable.
3. Educational institution owned by employer:
(a) If education institution owned by the employer
- If it is for the children of the employee- any amount in excess of Rs. 1,000 per month per child is taxable.
- If it is for other members of the employee – actual cost of the education is taxable.
(b) For outside institutions
4. Leave Travel Concession in India (LTC): Leave travel benefits extended by an employer to an employee for
going anywhere in India along with his family are exempt from tax as the provision of the IT Act. The
exemption is available only in respect of fare for going anywhere in India along with family twice in a block
of four year.
5. Medical Facilities: If the employer reimburses or provides the expenditure incurred by the employee is
taxable as follows:
- If medical treatment is taken from a hospital maintained by the employer – not taxable
- If medical treatment is taken in Government Hospital – not taxable
- If medical treatment is taken in Private Hospital – exempted up to Rs. 15,000
6. Transport facilities by transport undertaking: it is exempted if it is provided by airlines or railways. In case
of other modes of transportation value of such benefit offered to public is chargeable to tax.
d)Taxable Perquisites under all cases u/s 17(2)(d)

Note:
1) For the above cases furnished value will be 10% of cost of furniture or actual hire charges.
RFFA = Unfurnished + Furnished Value
2) Salary for RFA is
1. Basic pay
2. Dearness allowance entering into retirement benefit
3. Dearness pay
4. All taxable allowance
5. Leave encashment
It includes all monetary payment except the following
a) Dearness allowance not entering into retirement benefits
b) Provident Fund contribution and interest there on C) Value of Perquisites
Illustration- 1
Mr. Arunan Lal (resident), Who serviced KSSC Ltd for 25 years 10 months
11days retired from service on 31 Dec 2021. The following were his salary
particulars for the previous year2021-22

1. Basic salary Rs.6,000 per month (up to March 2020 it was 5,000 per
month)
b Dearness pays 20% of basic Pay
c DA – ₹. 1,000 per month (60% enters into pay for all retirement benefits)
d HRA- ₹. 5,000 per month (rent paid ₹. 6,500 at Bangalore).
Conveyance Allowance ₹. 800 per month (completely
e used for official purpose ).
f CCA ₹. 150 per month.
g Motor car (1400 cc) with driver is provided
h. Payment of his LIC premium ₹. 8,000 and education expenses of
his son ₹ 10,000 by the company
i Services of sweeper (Salary ₹. 250 per month)
on the date of retirement, he received a gratuity of ₹. 90,000 and a leave salary of ₹.

70,200. During the service period he had availed leave of 16 months. He had 9
months leave to his credit on the basis of 30 days per year. He also entitled to a
pension of ₹. 1,000 per month. 3/4 of which he got contribution at the end of
February for ₹. 27,000. He also gets refund from URPF ₹. 1,00,000 (Employer
Contribution plus interest there on) Compute Taxable salary for the assessment year
2022-23.
Name of the Assessee: Mr. Arun Lal Previous year: 2021-22

Basic salary (6,000 X 9 ) 54,000
Dearness pay(20%basicg 54000 10,800
gratuity (Note 1) Nil
leave salary encashment 1080
Pension 17,250
Dearness allowances (1000 X9) 9,000
HRA 16,250
conveyance allowances Tax free
CCA 150 X 9 1,350
Motor Car ( 1,800/900 X9 ) 24,300
Payment of LIC premium 8,000
Children education expenses 10,000
Services of Sweeper (250x 9 ) 2,250
Refund from URPF 1,00,000
Gross salary 2,54,950
Less; Deductions U/S 16
1. Standard deductions U/S 16 (ia) 50,000
2. Entertainment allowances Paid U/S 16(ii) Nil

3. Professional Taxes paid U/S 16( iii) Nil -50,000
Taxable salary 2,04,950
Working Notes
I Calculation of taxable gratuity
Actual gratuity received 90,000
Least of the following exempted from Tax
gratuity not received under the act of gratuity 1972
1 1/2 X No. of years of service completed X Average slalary
1/2 X 25 X 7,500 94,500
2 Maximum limit 10,00,000
3 Actual gratuity received 90,000 90,000
Taxable Gratuity Nil

Calculation of gratuity for Average salary ( 1/2/20 to 30 /11/ 20)
Basic salary (5000x2)+ (6,000X8) =( 10000+48,000) = 58,000
Dearness pay 20% of 58,000 11,600
Dearness Allowances 1000 X 10 X 60% 6,000
Commission Nil
Total salary 75,600
2 Leave salary
Actual leave salary received (25X 1 = 25-16 = 9 X 7,800) 70,200
Less least of the following is exempt from Tax
Leave salary as per IT Law (25 X1= 25 -16=9 X 7680) 69,120
Actual leave salary received (25X 1 = 25-16 = 9 X 7,800) 70,200
Specified amount 3,00,000
10x Average salary (7680 X 10) 76,800
-
Exemption 69,120
Taxable leave salary 1080

Calculation of Average salary for leave encashment
Basic salary (5000X 1) + (6000X 9) 59,000
Dearness pays 20% of 59,000 11,800
Dearness allowances 1000X 10X 60% 6,000
Total 76,800
Average Salary= 76800/10 7,680
Last drawn salary = Basic 6,000 + DP 1,200 + DA 600 = 7,800
3 Calculation of Taxable pension
Un commuted pension ( Jan + Feb + March= 1,000 + 1,000+ 250) 2,250
Commuted pension 27,000

Less = Exempted 27,000X 4/3 X1 /3
(12,000) 15,000
Taxable Pension 17,250
4 Calculation of Taxable HRA
Actual HRA received
Calculation of salary for HRA 45,000
Less: Least of the following is Exempted HRA
40% Salary (40%70,200) j(6500 X 9) 28,080
Rent paid -10% 0f of salary (6,500 x9) - (10% of 70,200) =(58,500-7,020 51,480
Actual HRA received (5,000 X 9) 45,000
-
Taxable HRA Exempted 28,080
Taxable HRA 16,920
Calculation of salary for HRA
Basic 54,000
Dearness pays 10,800
Dearness allowances 5,400
Salary 70,200
Mr. Arun lal Monetary income exceeds 50,000
so he is specified employee there for Motor car
and sweeper perquisites is Taxable
Illustration- 2
Following are the particulars furnished by Mr. Jayanth (Resident)

for the year ending 31/3/2021. Net salary received Rs. 1,74,000
after deduction of the following
a) His contribution towards to RPF 16,800
b) Income Tax of Rs. 20,000
c) Housing loan instalment Rs. 12,000
Other Components of his salary are
a) Employers’ contribution to RPF Rs.16,800
b) Interest on RPF (on accumulated balance Rs. 1,15,000) Rs.15,000
c) House rent allowances of Rs 24,000 (the house is in Chennai
and rent paid by him is Rs. 50,000)
d) Conveyance allowance Rs. 1,000 P.M. (60% spent for official purpose)
Entertainment allowances. 500 per month

e) Education allowances for his three children Rs. 48.000
f) Transport allowance Rs. 8,000
g) He paid insurances premium on his own life policy Rs. 10ooo
h) Income tax Rs. 20,000
i) Hostel allowance for his 3 children Rs. 20,000
j) Professional tax paid by the employer Rs. 300P.M. and
paid by Jayanth Rs. 200 per month
k) Reimbursement of medical expenses Rs. 25,000
(treatment taken in a recognized hospital)
i) Education facility to his dependent brother in remote area Rs. 500 P. M.
Compute salary income of Mr. Jayanth for the Assessment Year 2021- 22
Previous Year
Name of the assessee: Mr. Jayanth :2021 - 22
Assessment Year:
Status: Resident 2022-23
Category: Non-Government Employee
1 Basic salary (1,74,000+ 20,000 + 16,800+ 12,000) 2,22,800
Employers’ contribution to Recognised

2 Provident fund 16,800
less: Exemption 12% of salary (26,736) 750
Taxable RPF (Refer Notes 1)
3 Interest on Recognised Provident fund @10%
(15,000/ 1,50,000 X 100) of 10%
Taxable interest is (0.5 %X 15000) (Refer Notes 2)
4 House Rent allowance received 24000

Less: Least of the following is exempt from tax
a) Actual HRA received (24,000)
b) 50% of 2,22,800 1,11,400
c) Excess rent Paid 27,720
Exempted HRA -24000
Taxable HRA Nil
5 Conveyance Allowance (40% only) (Refer Notes 3) 4,800
6 Entertainment allowances (500 X12) 6,000
7 Education Allowance for three children 48,000
Less: Exemption (100 X2=200 X12) (2,400 )
Taxable Education Allowance 45,600

8 Transport Allowance 8,000
9 Hostel Allowance for three children 20,000
Less: Exemption (300 X2=600 X12) (7,200 )
Taxable Hostel Allowance 12,800
10 Professional Tax paid by the employer (300 X 12) 3,600
11 . Reimbursement of medical expenses Tax free
12 Education facility in remote area (500 X 12) 6,000
Gross Salary 3,10,350
Less deduction U/S 16
Standard Deduction/S 16 (ia) 50,000
Professional Tax paid by the employer (3600 + 2400)
6,000 -56,000
Taxable Salary 2,54,350
Notes
1. More than 12% of RPF is Taxable but Jayanth RPF
contribution is less than 12% therefore there is no
taxable RPF,it is Nil
2. As per interest of RPF exempted is 9.5 % whereas
Jayanth is getting10% the difference of
10%-9.5%= 0.5% is Taxable
3. For Conveyance allowance exempted per months. 1600
and Rs.19,200 for Govt employees per year. Out of total
benefit 60% is for official purpose therefore 40% has to be
taken into
consideration
4. Entertainment allowances
Entertainment allowances is first included in the salary then
the deduction has to be made U/S 16(ii)
The tax treatment
1. Under Non-Government employee fully Taxable
2. For Government Employees least of the following
a) Maximum limit of 5,000
b) 20% 0f basic pay or 1/5 of basic pay
c) Actual amount received
Terminal questions:
1. Mr. P was appointed as a manager on 1st July 2012 in the grade of 20,000-500-22000-1000-25000. Find
out his salary for the A.Y. 2022-23 if

a) salary is due on the first day of the next month and
b) Salary is due on the last day of the same month.
2. Mr. A retires from his job on 30th November 2020 after putting 30 years and 7 months service. He
received ₹. 1,80,000 as gratuity under the payment of gratuity Act. His salary including Dearness Allowance
at the time of retirement was ₹ 7,800. Compute taxable gratuity for the A.Y.2022-23
3. Mr. Dinesh an employee of Reliance industries ltd receives ₹.96, 000 as gratuity. He is not covered
under payment of Gratuity Act. He retires from service on 31-12-2020 after 28 years and 9 months
service. At the time of his retirement his monthly salary was Rs.6, 300. Find out the amount of Gratuity
exempt u/s 10(10).
4. Mr. A who is not covered under the payment of gratuity Act, 1972, receives a gratuity of Rs.3, 88,000
when he retires on 23 June 2021 after a service of 34 years 11 months and 20 days. He had received
₹.40,000 as gratuity from the previous employer. His last drawn emoluments are as follows:
Basic 25,000 p.m., D.A. 6,600 p.m., Servant Allowance 600 p.m., Annual increment of basic ₹. 1,000 p.m.
falls due on 1st January every year. Calculate taxable gratuity for the A.Y. 2022-23.
5. Mr. Reddy retires from private service on 30th April, 2020 and his pension
has been fixed at Rs. l500. p.m. He gets 1/2 of his pension commuted during Jan 2020 and gets Rs.
80,000. Compute taxable pension for the A.Y. 2022-23 if:
a) He receives gratuity, b) He doesn't receive gratuity.
6. Mr. Rajiv retired on 31-12-2020 and his pension was fixed at Rs.3,600 p.m. He
got 3/4th of the pension commuted for which he receives Rs. 1, 80,000 from his
employer. Find the taxable pension if:
a) He gets gratuity; b) he does not get gratuity &c) if he is Government employee
7. Mr. Manju a non-government employee receives Rs 96,000 as leave salary at the time of retirement on
1-1-2022. On the basis of following information determine the amount of taxable leave salary for the A.Y.
2022-23. Basic pay Rs 4,800. p.m. since 2020 Duration of service 30 years and 8 months, leave entitlement

for every year of actual service: 1 ½ month Leave availed during service period 25 months Leave due at
the time of retirement (45-25) 20 month
7. Mr. Mohan, a resident of Delhi is working in a private company. His salary particulars are
Basic salary Rs. 10,000 p.m.
- D.A -20% of basic salary (enters for service benefits)
- HRA received Rs. 20,000 p.m.
- Rent paid Rs. 12,000 p.m.
Compute taxable HRA for the Assessment Year 2022-23.
8. Find out the taxable HRA in each of the following cases:

(a) Basic pay Rs.7,000 p.m., Dearness Pay @ 10% of basic pay, Commission based on fixed percentage of
turnover Rs. 12,000 for the whole year. House rent allowance Rs. 2,000 p.m., Actual rent paid by the
assessee Rs. 1,600 p.m., House situated at Agra.
(b) Basic pay Rs.9,000 p.m., Dearness Allowance @ 10% of basic pay, House rent allowance Rs. 1,500 p.m.,
Actual rent paid by the assessee Rs.2,100 p.m., House situated at Mathura.
(c) Basic pay Rs.8,000 p.m., Dearness Allowance @ 10% of basic pay (enters into retirement benefits), House
rent allowance Rs.800 p.m., Actual rent paid by the assessee Rs.2,000 p.m., House situated at Delhi.
9. Mr. Vikas gets a salary of Rs. 13,000. p.m. and he has been provided with a rent-free furnished
accommodation at Manipal (population below 10,00,000). The fair rental value of the unfurnished house
is Rs 20,000. p.a.
He gets D.A. @ 40% salary which is given as per terms of employment.
He gets education allowance of Rs.300. p.m. for education of his son.
The cost of furnishing of the house is Rs.30,000. The employee has been provided with hired air conditioner
for five months and hire charges of Rs 1,000. p.m. is paid by the employer.
Calculate the value of RFA.
10. Mr. Santosh has furnished following particulars:

Salary @ Rs 20,000 p.m., Dearness allowance @ Rs. 1,000 p.m. (it enters into retirement benefits)
Entertainment allowance @ Rs 600 p.m., Bonus Rs 8,400, Cost of furnishing Rs 20,000.
Calculate the value of rent-free house if:

1. The assessee is govt. employee and rent of the fixed by the govt. is Rs 600.pm.
2. The assessee is a semi-government employee working at Chennai and fair rental value of the house is Rs.
2,000 p.m.
3. The assessee is working in a private sector company at Madi Keri (population below 10,00,000 and Fair
Rental Value of the house hired by employer is Rs.6,000 p.m. He is also provided with hired refrigerator
whose hire charges of Rs.600 p.m. are paid by employer.
4. The assessee is working in a private sector at Delhi (more than 25 lakhs) and rental value of the house
not owned by the employer is Rs. 7,000p.m.
Section - C
1) Sri Rama Krishna is employed as an engine driver in southern railway.

a) He is getting Rs. 7,500.p.m.as basic pay, Rs. 2,500 as dearness pay and Rs. 2,500 as dearness allowance.
During the previous year he received the following allowances also:
b) Rs. 16,500 as running allowance
c) Rs. 200 p.m. per child as education allowance for the education of his two sons.
d) One of these sons is living in hostel on whom Sri. Ramakrishna is spending Rs. 800p.m., He is
getting hostel allowance of Rs. 500 p.m. for his son for meeting this expenditure.
e) Rs. 250 p.m. as city compensatory allowance
f) Rs. 400 p.m. as uniform allowance which was fully spent for employment purpose
g) Rs. 1,250 p.m. as House Rent Allowance.
h) Sri. Ramakrishna has taken a house for his residence at Coimbatore at Rs. 1,500p.m. as rent.
i) He contributes 10% of his Basic pay and dearness pay to his statutory fund and the southern
railway also contributes the same.
Compute the salary income of Rama Krishna for the A.Y.2022-2022.
2) Smt. Jyothi’s the principal of a private college in Chennai. She is in the grade of 6,500-200-8,500 since 1st
January 2014.
a) She gets Rs. 6,000 p.m. as dearness allowance and Rs. 200.p.m. as CCA.
b) She has been provided with furnished accommodation by the college. The college is not the owner of the
house. The rental value of the house is Rs. 3,000 p.m. and furniture costing Rs 24,000 has also been
provided by the college.
c) She has been given a small car, which in addition to college work, is used by her for her private purpose
also. The driver's remuneration and all the expenses relating to the use of the car are borne by the college.
d) She has been provided with the facility of a gardener, watchman and a servant who are paid by the college
@ Rs. 150.p.m, Rs. 1, 200.p.m, and Rs. 800 p.m. respectively.
e) She gets LTC for going to a hill station Rs. 26,500. Actual expenses were Rs. 19,650.
f) She contributes 10% of her pay to R.P.F. towards which the college contributes @ 8%.
g) Assume that the salary is due on the 1st day of the next month;
Determine her taxable salary income for the A.Y.2022-23.
3) Mr. Naveen is the Manager of a company at Kolkata since 1st March, 2010. He is in the grade of Rs. 10,000-
500-15,000-750-25,000
a) Dearness allowance @ 20% of his basic pay, half of which enters into retirement benefits.

b) He contributes 14% of his salary to Recognized Provident Fund to which his employer contributes an equal
amount.
c) Interest on PF during the year is Rs. 10,500 at 10.5% p.a.
d) He has been provided with a house owned by the Co., the fair rent of which is Rs. 20,000 per annum.
e) He is getting conveyance allowance of Rs. 500 p.m. for private purposes,
f) Medical allowance of Rs. 400 p.m.
g) Servant allowance of Rs. 400 p.m.
h) His club bills of Rs. 3,000 were also paid by the Company.
i) He received Rs. 60,000 for encashment of leave on 1st September, 2017, being 10 months' leave not availed
of. As per the rules of the company Mr. Nair was entitled to 30 days' leave for every year of service.
j) He had been provided with the facility of a gardener and a cook, who are each paid Rs. 150 p.m. by the
employer.
k) He is also provided with a small car by the employer for official use only.
l) On 15-06-16 the Co. sold a computer to him for Rs. 5,000. The cost of the computer is Rs. 24,900.
Compute Mr. Nair's taxable salary for the assessment year 2022-2023 assuming that salary is due on the
first day of the next month.
4) From the following particulars given below calculate taxable salary for the A.Y2022-2023.
a) Basic pay ₹. 15,000 p.m. (due on last day of month)
b) D.A. 60% of salary (50% forms part of salary from 1 -1 -2014)
c) Bonus-one month's salary
d) Commission ₹. 66,000
e) Leave encashment ₹. 20,000
f) He has engaged an helper at Rs. 1,200 p.m. and his employer pays him ₹. 1,500 p.m. on his a/c
g) Medical bills reimbursed from a notified hospital ₹. 12,000; from a private nursing home ₹. 38,000.
h) Mobile telephone bills paid by employer ₹. 15,000
i) On 1-12-2017 he has taken a loan of ₹. 3, 00,000 from his employer to purchase a car. Rate of interest
charged by employer is 4.75% p.a.
j) Repayment of loan at ₹. 5,000 p.m. is to start after 4 months from the date of taking loan.
k) He has employed a cook for his personal use at ₹. 1,000 p.m. and his employer has reimbursed such amount,
l) He and his employer contribute ₹. 3,000 p.m. each towards RPF.
m) Interested credited on the balance of RPF at 10% is ₹. 20,000.
n) He has been provided with free use of car of 1.81.c.c. car is used partly for personal and partly for office use
5) Mr. Vikas is an employee of HCL Ltd. He supplies you the following particulars of his income.
a) Basic salary ₹. 20,000 p.m.
b) Dearness Allowance ₹. 5,000 p.m. (50% Enters into salary)
c) Fixed Medical Allowance ₹. 1,000 p.m.
d) Education allowance ₹.500 p.m. per child for his three children.
e) Transport allowance ₹. 1,200 p.m.
f) City compensation allowance (CCA) ₹. 100 p.m.
g) Employer’s contribution to RPF at 15% of Salary.
h) Interest Credited to RPF at 905% P.A is ₹. 28,000
i) He is provided with free lunch in office. The cost per meal is ₹. 50.
j) The employer has given him the use of a small car which he uses for both personal and official purposes.
He meets the expenses for personal purpose from out of his pocket.
k) He was also provided with rent free house at Bangalore for which the employer paid a rent of Rs. 9, 000
p.m. He was allowed the use of Furniture costing Rs. 28, 000 respectively.

l) Life insurance premium of Rs. 12, 000 was paid by employer on an insurance policy of Rs. 2,40,000.
Compute his taxable salary for the AY 2022-2023.
6) Mr. Vinayak an employee of Ranchi (population 15 lakhs) based company provides the following particular
of his salary income for the A.Y.2022-2023.
a) Basic salary Rs. 12,000 p.m.
b) Profit bonus Rs. 12,000.
c) Commission on turnover achieved b him Rs. 42,000
d) Entertainment allowance Rs. 2,000 p.m.
e) Club facility provided by his employer Rs. 6,000
f) Transport allowance Rs. 1,000 p.m.
g) Free use of car of more than 1.6 lt capacity for both personal and employment purposes; expenses are met
by employer.
h) Rent free house provided by employer. Rent paid by the employer Rs. 6,000 p.m.
i) Free education facility for three children of the employee (Bill issued in the name of employer) Rs. 22,500.
j) Gas, water and electricity bills issued in the name of employee but paid by the employer. Rs. 16,800
7) Following details are available from P.N. Nair a resident individual for the year ending on 31-3-2019. You are
required to compute his taxable income under the head salary.
a) Salary received Rs. 71,800
b) Income tax deducted at source Rs. 1,200
c) Own contribution to RPF deducted from salary Rs. 8,000
d) Dearness allowance 50% of salary
e) Employers’ contribution to RPF Rs. 8,000
f) Interest on accumulated balance of RPF @ 9.5% Rs. 2,400
g) He is provided with furnished accommodation for residential purposes in Thiruvanthapuram (population exceeds
25 lakhs) owned by his employer, the fair rental of which is at Rs. 4,000 p.m. cost of furnishing is Rs. 45,000.
h) Gardeners’ salary paid by employer is Rs. 3,000 p.a.
i) He is provided with a car of 1.5 lt. capacity by his employer for both personal and office use and expenses of
maintaining and running the car with chauffeur are borne by the employer.
j) He has two life insurance policies: one on his own life for a value of Rs. 80,000 on which annual premium paid
by his employer is Rs. 8,200; and another on the life of his wife for a policy value of Rs. 20,000 on which premium
paid by him is Rs. 1,800.
Compute his salary income for the assessment year 2022-2023.
8) Mr. Eswaran is employed as an engine driver in Southern Railways. He is getting Rs. 7,500 p.m. as basic pay,
Rs, 2,500 p.m. as dearness pay, Rs. 2,500 p.m. as dearness allowance. During the previous year he received the
following allowance also:
a) Rs. 16,500 as running allowance.
b) Rs. 200 p.m. per child as education allowance for his two sons.
c) One of these sons is living in hostel on whom Eshwaran is spending Rs. 800 p.m. he is getting Rs. 500 p.m. for
his son as hostel allowance.
d) Rs. 250 p.m.as city compensatory allowance.
e) Rs. 400 p.m. uniform allowance (fully spent for uniform)
f) Rs. 1,250 p.m. house rent allowance.
g) Mr. Eshwaran has taken a house for his residence at Hassan at Rs. 1,500 p.m. as rent.
h) He contributes 10% of his basic pay and dearness pay to his statutory provident fund and his employer contributes
an equal amount.
Compute income from salary of the assessee for the A.Y. 2022-2023.

9) Mr. Ravi is an employee of a private company in Bangalore. He gives the following information for the A.Y
2022-2023.
a) Basic salary Rs. 16,000 p.m.
b) Dearness allowance Rs. 12,000 p.m. (Rs. 2,000 enters into retirement benefits)
c) City compensatory allowance Rs. 1,600 p.m.
d) Family allowance Rs. 1,200 p.m.
e) Education allowance for two children at Rs. 350 p.m. per child.
f) House allowance Rs. 3,200 p.m. but he pays Rs. 6,000 p.m. as actual rent.
g) Entertainment allowance Rs. 1,500 p.m.
h) Company has provided a telephone at his residence by meeting all the expenses amounting to Rs. 12,000 for the
year.
i) The company paid his income tax of Rs. 1,2000 during the previous year in his taxable income.
j) Conveyance allowance of Rs. 16,000 for visiting the branches.
k) He is allowed to use one motor car of 1.6 liters c.c. both for official and personal purposes.
l) Provision of the following domestic servants who were paid by the company.
m) Watchman Rs. 600 p.m.
n) Sweeper Rs. 360 p.m.
o) Gardner Rs. 360 p.m.
p) Cook Rs. 600 p.m.
q) He and the company contribute 14% of salary toward the RPF
r) Interest on the above fund Rs. 21,000 at 15% p.a.
s) Interest free loan for purchasing home appliance Rs. 1,20,000 (date of loan borrowed 01-04-2017) and assume
SBI lending rate for similar loan on 01-04-2017 is 12% p.a.
t) New Year gift Rs. 7,000.
u) Holiday home facility at Kulu Rs. 26,000.
Compute income from salary.
12. Mr. Prasanth (age 51 years) a Director of LMN (P) Ltd receives the following emolument during the previous
year relevant for the assessment year 2019-20.
a. Basic salary Rs 4,80,000
b. Dearness allowance Rs 48,000 (not forming part of basic pay)
c. Commission 2% of turnover (turnover achieved by X during the previous year Rs 16,00,000) arrears of bonus of
the previous year 2012-13 Rs 9,000 (not taxed earlier),
d. Employer’s contribution towards recognized provident fund Rs 68,000.
e. Interest credited in provident fund account @ 11% on June 3, 2018: Rs 80,000
f. Conveyance allowance Rs 10,000 (60% of which is utilized for official purpose)
g. Education allowance for X, s three sons @ Rs 200 per month per child
h. Rs 7,200 rent – free furnished house in Calcutta (lease rent of unfurnished house paid by the employer Rs 1,80,000
rent of furniture Rs 8,000)
i. Free services of gardener, cook and watchman (salary Rs6,000, Rs 9,000 and Rs 12,000 respectively).
j. On March 10, 2019, LMN (P) Ltd sells imported furniture to X for Rs 10,000 (the furniture was purchased by the
company on June 30, 2012 for Rs 1,90,000 and since then it was used for business purpose)
k. He runs a business. During the previous year, income from the business is Rs 11,02,000.
l. He makes the following payments during the previous year:
i. Own contribution towards recognized provident fund Rs 42,000.
ii. Deposit in Home loan account of the National Housing Bank Rs 6,000 (including advance deposit of Rs 1,000)
iii. Contribution towards National Saving Certificate VIII Issue Rs 1,40,000.
Determine the net income and tax liability for the assessment year 2022-2023.

Income from House Property
Introduction:
This is the second head of income which charges income from house properties by way of rent received or
receivable.
1.1. Basis of charge:
According to Sec 22, Annual value of a property, consisting of any building, or land appurtenant thereto, of
which the assessee is the owner, is chargeable to tax under the head “income from house property”.
Rental income is taxable under the head “income from house property if the following
conditions are satisfied.
a) The property should consist of any building or land appurtenant thereto
b) The assessee should be the owner and
c) The property should not be used by the owner for any business or profession carried on by him
1.2. Explanation:
a) Building and land appurtenant thereto: - Income tax is charged on buildings and land appurtenant
(belonging) thereto. Income from a land which is not part of any building will be charged under income
from other sources.
b) Land appurtenant to building include compound walls, playground, garden etc., in case of non- residential
building car parking spaces, drying grounds, connecting roads in the factory building shall be included in
lands appurtenant to buildings.
c) Buildings include residential houses, warehouses, auditoriums, cinema halls, buildings let out for office use,
dance halls, lecture halls etc.,

1.3. Exceptions to the rule that income from house property is taxable under the head house
property:
The income from following buildings is not taxable under the head house property:
1) Buildings or staff quarters let out to employees – if the assessee lets out staff quarters to his employees
whose residence there is necessary for the efficient conduct of business, then the rent collected by the
assessee is taxable as income from business and not as income from house property.
2) If a building is let out to authorities for locating bank, post office, police station etc., the income is taxable
as business income, provided the dominant purpose of letting out the building was to carry on assessee
business more efficiently.
3) Composite letting of building with other assets: - where the assessee gives on hire, building along with
machinery, plant for a composite rent and the rent of the building is inseparable from other assets, the
income from such letting is chargeable under income from other sources or business income.
4) Income from paying guest accommodation is chargeable under business income.
1.4. Deemed owners:
Deemed owners are not legal owners of the property, but according to Income act they are treated as
owners of the property. In the following circumstances assessee shall be treated as deemed owners:
1) An individual who transfers any house property to his or her spouse, without adequate consideration, or
to a minor child, not being a married daughter shall be deemed to be the owner of the house property so
transferred.
2) The holder of an impartible estate is deemed to be the owner of all the properties comprised in the estate.
3) A member of a co-operative society, company, or an AOP to whom a building or its part is allotted or leased
under a house building scheme shall be deemed to be owner of that property.
1.5. Exemptions regarding income from house property:
 Income from the following sources is not taxable under income tax act.
 Income from a farm house
 Income from property owned by
 Local authority

 Scientific research association
 Trade union
 Charitable trust
 Political party
 University or other educational institutions
 Hospitals or medical institutions
 Income from property used for assessee own business or profession.
 Income from two self-occupied house.
 Income from house meant for self-residence but could not be occupied throughout the previous year on
account of his service or business / profession elsewhere.
1.6. BASIC TERMINOLOGIES UNDER HOUSE PROPERTY:
a) Annual Value: Income from house property does not mean rental income, but it is a sum for which the
building might reasonably be expected to be let from year to year. Annual value of the property is calculated
by considering the municipal valuation of the property; fair rental value, standard rent and actual rent
receivable of the house property Annual value may be Gross Annual Value (GAV) or Net Annual Value
(NAV).
b) Municipal rental value (MRV): It refers to the rental value of the house property fixed by the municipal
authorities to levy the municipal taxes.
c) Fair Rental value (FRV): It refers to the rental value of similar accommodation in the same or similar
locality as determined by local authority or any other competent authority.
d) Standard Rental value (SRV)/ Minimum Rent: It refers to the rental value fixed by the Rent Control
Authority.

e) Annual Rental Value (ARV)/ De-facto Rent: It refers to the rent received or receivable by the owner
of the property. It is also called as de-facto rent. While determining the de facto rent, rent collected for
other services such as water, electricity, garden maintenance and security should be excluded from the
composite rent.
f) Composite rent: It refers to the rent collected by the owner for the house property let out along with
the facilities of water, gardening, stair case lighting, security charges, pump maintenance etc. composite
rent should be split into Annual Rental value and service charges for associated services.
g) Expected Rental Vale (ERV): It refers to the highest of MRV or FRV but subject to a maximum of SRV.
 Unrealized Rent - Unrealized rent is the amount of rent which the owner cannot realize or which is
payable but not paid by the tenant. It is allowed to be deducted from GAV if conditions of Rule 4 are
satisfied. Those conditions are as follows:
 The tenancy is Bonafede.
 The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
 The defaulting tenant is not in occupation of any other property of the assessee;
 The assessee has taken all reasonable steps of insisting legal proceedings for the recovery of the
unpaid rent or satisfies the assessing officer that legal proceedings would be useless.

i)Vacancy Allowance: It relates to rent of vacant period.
Format Determination of Gross Annual Value

Name of the Assessee: Previous Year 2021-22
Status: Assessment Year 2022- 23
Municipal Value
Whichever xxx
Step 1 OR is higher
Fair rental value xxx
Notional Rent xxxx
Notional Rent
Whichever
step 2 ( The resultant of step 1) xxxx
is Less
OR
Standard Rent xxx
Expected Rent xxxx
Expected Rent
( The resultant of step 2 ) Whichever xxx
step 3 OR is higher

Actual rent xxx
1,7.
(Actual rent =Actual rent-Unrealised rent- cost of common facilities)
Gross annual Value before vacancy period loss xxx
Less: - vacancy period loss xx
Gross annual Value xxxx
Computation of gross annual value (GAV)
(b)Computation of income from house property of an L.O.P/D.L.O. P
Gross annual value xxx

Less: municipal taxes “paid by owner” xxx
Xxxx
Net annual value xxx
Less: deduction u/s 24
(i)Standard deduction 30% of NAV.
(ii)Interest on loan:(no limit)
Pre-construction interest 1/5th xxx
Post-construction interest. Xxxx
Income or loss from house property.
1.8. Determination of actual rent:

Sometimes the owner takes upon under an agreement the burden of providing certain facilities to the
tenant, e.g. lift, water pump, electricity, vehicle parking, gardener, etc., in such a case the actual rent
received or receivable minus the cost of providing such facilities will be the actual rent.
If the tenant has undertaken the obligations of the landlord, the amount so paid will be added in rent
received to arrive at the actual rent. However, no adjustment will be made in determination of actual rent
regarding the following:
i) Tax paid by the tenant to the local authority
ii) Repair charges borne by the tenant

iii) Notional interest on deposit taken from the tenant.
Treatment of Pre-Construction period Interest.
Calculate the allowable interest on loan from NAV of the house property.
1. Date of borrowing loan 01-06-2013
2. Date of repayment of loan 10-05-2021

Date of completion of
Construction May-18
4. Amount of loan borrowed Rs. 30,000
5. Interest on Loan 20% P.A
01-06-2013 31-03-2014 30,000 X 20 % X 10 months 5,000
01-04-2014 31-03-2015 30,000 X 20% X 12 months 6,000
01-04-2015 31-03-2016 30,000 X 20% X 12 months 6,000
01-04-2016 31-03-2017 30,000 X 20% X 12 months 6,000
01-04-2017 31-03-2018 30,000 X 20% X 12 months 6,000
Total 29,000
For the first-year loan taken is in the month of June, so the total interest is calculated only for 10 months
in 2013- 2014. The total of 29,000 has to be adjusted from 2017 to 2022
(5 years)
Pre-Construction Period interest deductible in the previous year = 29,000/5= 5,800
Previous year interest (i.e., Current year interest) = 6,000
Total -11,800(5,800 +6,000)
1.9 Treatment of unrealized rent recovered or realized during the P.Y.2021-22 or subsequently {sec
25A & Sec 25AA:}
(i) Any unrealized rent recovered during the previous year, which was disallowed earlier, is not taxable.
(ii) Any unrealized rent recovered during the previous year, which was allowed earlier, is fully taxable as
deemed income.
Note: No standard deduction under Sec 24 is allowed. Similarly, expenses incurred to realize unrealized
rent is also not allowed.
1.10. Deductions from Annual value (Sec 24)
While computing income from house property the following items are to be deducted

i) A sum equal to 30% of Annual value as standard deduction.
ii) Interest on loan taken in respect of house property:
Interest on loan taken for the purpose of purchasing, constructing, reconstructing or repairing the house
property is allowed as deduction on accrual basis.
 House property self-occupied for a part of the previous year and let out for the remaining part of
the previous year:
 In such a case the house shall be treated as let out house property (deemed to be let out house
property).
 More than one house is in occupation of the house:
 Where the owner of the house occupies more than one house for his residence for full previous year,
except one house all other houses are deemed to be let out.
Points to be noted:
 The expected rent would be GAV as the house property is not actually let out.
 The full amount of interest on loan taken for such property shall be allowed to deduct from annual value
u/s 24.
 The assessee can choose the house which would be treated as self-occupied house.
 For the FY 2020-21 and onwards, the benefit of considering the houses as self-occupied has been
extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining
house as let out for Income tax purposes.
Illustration 1
Mrs. Shanthi (resident) owns two houses in Bangalore. She has let-out both the houses throughout the
year for residential purpose.
Assessee: Mrs. Shanthi Previous Year: 2021-22
Assessment Year: 2022-

Status: Resident 23
Particulars House I House II House III
Self-
LOP LOP Occupied
Municipal rental value 4,00,000 12,00,000
or whichever
Fair rental value is higher 7,20,000 7,20,000
Notional rent 7,20,000 12,00,000
Notional rent 7,20,000 12,00,000
or whichever
Standard rent is less 6,00,000 6,00,000
Expected rent 6,00,000 6,00,000
Expected rent 6,00,000 6,00,000
or whichever
Actual rent is higher 4,80,000 8,00,000
Gross Annual Value 6,00,000 8,00,000 Nil House 1 House 2

Less: Municipal tax 40,000 1,20,000 -
Net Annual Value 5,60,000 6,80,000 Nil
Less: Standard
Deduction U/s 24
30% of NAV 1,68,000 2,04,000 -
Interest on borrowed
capital for the previous
year
(7,00,000x12/100) - - 84,000
Income from HP 3,92,000 4,76,000 84000
4,00,00 12,00,00
Municipal value
0 0
7,20,00
Fair Rental value
0 7,20,000
4,80,00
Rent received
0 8,00,000
6,00,00
Standard Rent
0 6,00,000
Repairs 72,000 1,00,000
Municipal Tax paid 40,000 1,20,000
Insurance Premium paid 48,000 70,000
On 1st April 2020, she bought residential house for self-occupation for Rs. 10,00,000 by taking a housing
loan in Canara Bank.
Loan amount was Rs. 7,00,000 and rate of interest 12% p.a.
Compute taxable income from House property for the Assessment Year 2022-23.
Solution:
Computation of Taxable Income from House Property
Computation of Taxable
Income of House
Property
House I Let-out property 3,92,000
House II Let-out property 4,76,000
House II Self occupied
property 84,000

Particulars House A House B House C
Annual fair rent 40,000 35,000 50,000
Municipal valuation 50,000 40,000 50,000
Standard rent 45,000 42,000 55,000
Let out (per month) 3,000 2,500 -
Purpose of use Let out Let out Self
Residential business occupied
Repairs 2,000 - 5,000
Collection charges 3,000 1,000 -
Interest on loan 15,000 5,000 2,000
Taxable Income from

House Property 7,84,000
Illustration 2
Mr. Praveen is the owner of three houses. The particulars are as follows:

Assessee: Mr. Praveen
Previous Year: 2021-22
Status: Resident
Assessment Year: 2022-23

House A House B House C
Particulars Let out
residential LOB Self-Occupied
Municipal rental value 50,000 12,00,000
or whichever
Fair rental value is higher 40,000 7,20,000
Notional rent 50,000 12,00,000
Notional rent 50,000 12,00,000
or whichever
Standard rent is less 45,000 6,00,000
Expected rent 45,000 6,00,000
Expected rent 45,000 6,00,000
or whichever
Actual rent (3,000x4) is higher 36,000 8,00,000
Gross Annual Value 45,000 8,00,000 Nil
Less: Vacancy period
(3,000x4) 12,000 1,20,000 -
Gross/Net Annual
Value 33,000 6,80,000 Nil
Less: Municipal tax
paid Nil Nil Nil
Net annual value 33,000 40,000
Less: Deduction U/s
24 -
(i) 30% of NAV 9,900 12,000 Nil
(ii) Interest on loan 5,000 5,000 2,000
Income from House
Property 8,100 23,000 2,000
Municipal tax is 10% taken for repairs of MV. Municipal tax of House A was paid by tenant, but Municipal
tax of House B was not paid till 31.03.22, municipal tax of House C was paid by owner. House A remained
vacant for 4 months. Compute income from House Property for A.Y. 2022-23.
Solution:
Computation of Taxable Income from House Property
Computation of Taxable Income of House Property
House A 8,100
House B 23,000

House C 2,000
Taxable Income from House Property
29,100
Terminal Questions:
Section – A
1) What is Gross Annual Value?
2) What is Net Annual Value?
3) What do you mean by Municipal Valuation of Property?
4) What is standard rent of property?
5) What are the deductions available U/S 24?
6) What is fair rent property?
7) How do you treat unrealized rent?
8) How do you treat unrealized rent realized?
9) What do you mean by pre construction period?
10)What is meant by composite rent?
Section – B
1) Roopa is the owner of the following house properties. Find out the net annual value for the assessment
year 2022-23.
Particular A B C
Municipal value 1,80,000 1,80,000 3,60,000
Fair rental value 1,92,000 1,68,000 3,96,000
Standard rent 2,04,000 2,40,000 3,00,000
Actual rent (p.a) 2,16,000 1,92,000 2,88,000
Municipal tax paid 12,000 24,000 -
Municipal tax due 12,000 - 24,000
2) Compute GAV from the following information

Particulars A B C D
FRV 1,25,000 1,20,000 1,44,000 1,08,000
MRV 1,20,000 1,25,000 1,08,000 1,44,000
SRV 1,10,000 1,44,000 1,25,000 1,20,000
ARV 1,44,000 1,08,000 1,20,000 1,32,000
Unrealized rent 27,000 10,000 11,000
Vacancy Allowance 24,000 9,000 20,000 22,000
3) Calculate NAV in the following cases:

Particular H-1 H-2 H-3
Municipal value 80,000 1,40,000 1,40,000
Fair rental value 78,000 1,50,000 1,50,000
Standard rent 85,000 1,20,000 1,20,000
Actual rent 72,000 96,000 1,44,000
Unrealized rent 6,000 16,000 12,000
Vacancy Allowance 3 Months 4 Months 2 Months
Municipal tax paid 10% of Municipal value.

4) From the following information compute Net Annual Value of House Property for the A.Y. 2022-2023.
Municipal Value Rs. 1,80,000
Fair Rental Value Rs. 1,00,000
Let out (per month) Rs. 16,000
Standard Rent Rs. 1,20,000
Unrealized rent for one month.
Vacancy Allowance one month.
Municipal tax paid by owner of house property Rs. 20,000
Municipal tax paid by tenant Rs. 10,000
5) Mr. A is the owner of a house. The particulars of which are as follows:

Municipal value Rs. 1,80,000
Faire Rental value Rs. 1,95,000
Standard rent Rs. 1,90,000
Actual rent Rs. 15,500 p.m.
Vacancy period 1 month
Municipal tax paid by owner Rs. 20,500
Determine the taxable income from house property for the A.Y. 2022-23.
6) From the following information compute Net Annual Value of House Property for the A.Y. 2022-23.
Municipal Value Rs. 1,80,000
Fair Rental Value Rs. 1,00,000
Let out (per month) Rs. 16,000
Standard Rent Rs. 1,20,000
Unrealized rent for one month.
Vacancy Allowance one month.
Municipal tax paid by owner of house property Rs. 20,000
8)Arun owns a house in Bangalore. From the particulars given below compute the income from house
property for the P.Y.2021-22.
 Municipal value Rs 1,10,000
 Fair rental value Rs 1,30,000
 Standard rent Rs 1,25,000
 Actual rent per month Rs 12,000
 Municipal taxes paid Rs 11,000
 Expenses on repairs Rs 5,000
 Insurance premium Rs 2,000
 Unrealized Rent Recovered during the year 15,000 of 14-15
SECTION – C
1)From the following particulars of house properties owned by Sri. Viswanath. Compute his income from
house property for the A.Y.2022-23.

Particulars I House II House III House IV House
Municipal value 8,000 9,000 20,000 24,000
Actual rent -- --- 24,000 30,000
Local taxes paid 1,600 1,800 4,000 4,800
Repair charges 1,000 -- 3,000 --
Fire insurance premium 50 150 200 500
Interest on loan for construction 1,180 -- 1,800 4,200
Unrealized rent -- --- 3,000 --
Vacancy period -- -- 3 months ---
The first and second house is self-occupied. The third house is let out for residence and the fourth house is
let out for business. The tenant paid local taxes of the fourth house.2)Mr. Sukruth is the owner of four
houses in Bangalore. He gives the following particulars of these properties.
Use of the House I HP SOP II HP Self III HP LOP IV HP LOP

Business
Rent received - - 66,000 54,000
Fair rental value 60,000 70,000 56,000 90,000
Municipal value 62,000 67,000 70,000 60,000
Municipal Tax 10% - Paid by Paid by Tenant but
Tenant deducted from Rent
Repairs 5,000 3,000 - -
Interest on loan - - - 3,000
Vacancy period 2 months - 1 month -
Find out the Income from House Property for the AY 2022-23.
3)Mr. Chopra owns four houses. The details of these properties are given below for the PY 2021-22.
Self-occupied Self-occupied for
Particulars for Residence Let out Residence Let out
Municipal value 1,20,000 1,32,000 10,80,000 2,20,000
Fair rental value 1,50,000 1,60,000 12,00,000 2,50,000
Standard rent - 1,55,000 10,00,000 2,48,000
Rent receivable per month - 8,000 - 15,000
Vacancy period 3 months 1month - -
Unrealized rent (conditions - - - 6,000
satisfied)
Municipal tax
Paid by Chopra 9,600 4,000 42,000 1,000
Paid by Tenant 6,000 11,000
Interest on loan borrowed
- 8,600 1,00,000 3,900
Compute his total income for the previous year 2021-22.

5)Mr. Kumar owns a house at Delhi. During the previous year 2021-22, 3/4th portion of the house is
occupied for self-residence for full year and 1/4th portion is let out for residential purposes from 1.4.2021
to 31-12-2021on a rent of Rs. 700 p.m. From 1-1-2019 this portion was used for own residency by him.
Municipal valuation of the entire house is Rs. 20,000 and fair rental value is Rs. 24,000. Expenses incurred in
respect of the house property were: Municipal Taxes Rs. 60,000; Repairs Rs. 2,000; Fire insurance premium
Rs. 3,500; Land Revenue Rs. 4,000 and Ground Rent Rs. 200. These expenses were paid during the year
Find out his income from house property for the assessment year 2022-23.
5) Mr. Gurudas owns following four house properties. Other particulars are as follows:
House 3 House 4
House 1 House 2
Let out to a Used for
Particulars Self- Self-
business own
occupied occupied
house business
Municipal value 20,000 50,000 70,000 45,000
Standard rent --- ---- 72,000 48,000
Fair rental value 26,000 60,000 80,000 50,000
Annual rent --- --- 96,000 ----
Vacancy --- --- 1 month ----
Unrealized rent --- --- 16,000 ----
Municipal taxes 5,000 2,000 6,000 4,000
Repairs 4,000 2,000 8,000 5,000
Interest on money
borrowed 8,000 10,000 18,000 ----
(construction)
Determine the house property income of Mr. Gurudas.
6) Mr. Ramachandran owns two houses at Chennai which are let out for residential and business purpose.
Compute his income from house property for the A.Y. 2022-23.
F.R.V. 36,000 1,20,000
Actual Rent 4,000 p.m. 12,000 p.m.
Municipal Rental Value 40,000 1,30,000
Standard rent 38,000 N.A.
Municipal Tax 10%. 10%
Actual repairs expenses 4,000 12,000
Ground Rent 2,000 2,500
Collection Charges 500 1,200
Interest on loan 12,000 48,000
Vacancy period 3 months NIL
Bonafede unrealized rent of current year NIL 36,000
Compute taxable income from house property of Mr. Thomas for the assessment year 2019-20 [Hints:
House 3 is treated as two separate units]

8) Smt. Ramya owns 4 houses. HP 1 is let out for business purpose, HP2 is occupied for own business and
HP3 and HP4 are occupied for own residence. Following particulars are available with respect to these
properties for the PY 2021-22.
Particulars HP1 HP2 HP3 HP4

Municipal value 60,000 10,000 1,36,000 1,90,000
Fair Rental Value 78,000 36,000 1,54,000 1,90,000
Standard Rent 72,400 24,000 1,50,000 1,80,000
Annual Rent 84,000 - - -
Unrealized Rent 7,000 - - -
Municipal tax-Paid
by owner Paid by 3,000 8,000 12,000 16,000
tenant Date of 3,000 - - -
completion of 31-05-2014 31-05-2014 31-03-2014 01-04-15
Construction
Interest on loan for 63,900 - 84,921 1,37,996
pre-construction
Determine Smt. Ramya’s income from house property for the AY 2022-23.
INCOME FROM BUSINESS AND PROFESSION

Introduction
Income from Business or Profession is the third head of income, maximum number of assesses pertain to
this head. Section 22 to 44 of the Income Tax Act 1961 deals with the taxability of income either from
business or profession.
Objectives
1. Understand the meaning of ‘Business’ and ‘Profession’ and the scope of income chargeable to tax
under this head.
2. Identify the expenses, payments that are admissible as deduction and the conditions to avail the
same.
3. Identify the expenditures which are not admissible as deduction.
4. Compute the capital gains from transfer of capital assets in the manner prescribed
5. Compute cost of acquisition and indexed cost of acquisition
6. Identify the income which are chargeable to tax under ‘Income from other sources’
7. Compute the tax on casual income
Chargeability (Section 28)
The following types of incomes are chargeable to tax u/s 28 under the head-profit and Gains of Business:
 Profits and gains of any business.

 Any compensation due or received by a person in connection with termination or modification of
terms and conditions relating to this head.

 Income derived by a trade, profession or similar association from specific services performed for
its members.
 Profit on sale of import licenses, incentives by way of cash compensatory support and draw-back
of duty.
 The value of any benefit or perquisite convertible into money or not arising from business or the
exercise of a profession.
 Any interest, salary, bonus, commission or remuneration received by a partner of a firm assessed
as such.
 Any some whether received or receivable in cash or in kind under an agreement for not carrying
out any activity in relation to any business or profession.
 Income from speculation business.
 Any amount (including bonus) received under a key man insurance policy.
 Interest on securities where such securities are held as stock in trade.
Business u/s 2(13)

Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade,
commerce or manufacture. In simple terms Business means buying, selling and manufacturing of goods to
earn profit.
It is not necessary that there should be a series of transactions in a business, neither repetition nor
continuity of similar transactions is necessary.
Profession u/s 2(36)

Profession means those activities for earning livelihood which requires, intellectual skill and specialized
knowledge e.g. Doctors, Lawyers, Engineers, Chartered Account profession also include vocation.
Vocation refers to any activity which a person practices to earn his livelihood e.g. practice of religion,
painting etc.
Under section 2(36) profession includes vocation.
Vocation means any type of activity in which a person is engaged and earns his livelihood from such
activity. The practice of religion and writing of articles in a magazine is also vocation.
In other words, Vocation is the inbuilt talent/skill which is not acquired or possessed by a systematic
study.
Speculative Business
It means any business in which a contract for the purchase and sale of any commodity including stock and
shares are periodically or ultimately settled otherwise than by the actual delivery or transfer of the
commodity.
Format of Computation of Taxable Income from Business for the AY 2022-23

Net profit as per Profit and Loss A/c XXX
Add:
1) Inadmissible, Non-Business Expenses, Excess expenses XXX
debited to P/L A/c. (Expenses debited to P&L A/c but
not allowable as per IT act)
2) Business Incomes not credited to P&L A/c XXX
3) Over Valuation of opening Stock XXX

4) Under Valuation of Closing Stock XXX XXX
Less:
1) Allowed, Admissible Expenses not debited to P/L A/c
(Expenses not debited to P/L A/c and allowed as per IT XXX
act)
2) Non-Business income credited to P/L A/c XXX
3) Undervaluation of Opening Stock
4) Overvaluation of Closing stock XXX
Taxable Income from Business XXX
XXX XXX
XXX
Disallowed or Inadmissible Expenses

All expenses incurred either directly or indirectly related to business are allowed as business expenses.
However, the following expenses, are disallowed and hence to be added back to the net profit.
1) Personal expense like marriage expense, drawing, premium on life and medical insurance, proprietor
salary, rent paid for own building, saving made in NSC, PF, etc. household expenses like electricity,
telephone uses for residence.
2) Any payment made in excess of 10,000 either in cash or bearer cheque, the entire amount is
inadmissible.
3) Income tax, Wealth Tax or Advance Income Tax paid.
4) Interest on loan, taken for personal purpose.
5) Provision for bad debts, doubtful debts, reserve for future losses.
6) Bonus and commission paid to employees not allowed it is paid after the due date of filing the returns,
(in case of individual 31st July 2021).
7) Sales tax, Customs Duty, Excises Duty, if it is not paid before the due date of filing the returns.
8) Any losses related to Capital in nature like loss on sale of assets.
9) Donation and Charities.
10)Any purchase of Capital Assets, renovation and extension of buildings.
11)Cost of sign board fixed on office premises.
12)Contribution to Staff Welfare Fund and political party.
13)Difference in trial balance.
14) Speculation losses
15) Preliminary expenses 4/5 are disallowed. E.g. Market survey, Discount on issue of shares
16)Interest on capital.
17) Employer’s contribution to URPF is not allowed.
18) Any gratuity not approved or given on ad-hoc basis is not allowed.
19)Expenses related to other heads of income
20) Theft at assesee residence
21) Family planning expenses of the employer is allowed only if the assesse is a company.
22)Personal gifts and presents.
23) Penalties and fines on excise and customs duty.
24) Any amount paid outside India without making TDS (30% of such payment is disallowed)
25)Salary paid to family members who are not professionally qualified.
26) Legal expenses incurred to defend criminal proceeding will not be allowed.
27) Any payment made to non-residents after deducting TDS, and if that TDS amount is not paid on or
before the due date of filing return (30% of such payment is disallowed).

Business Income 6) Profit on sale of import license.
1) Bad debts recovered allowed earlier. 7) Sales tax refund (allowed earlier).
2) Sundry income/sales/commission 8) Smuggling income.
received/discount received/brokerage. 9) Export incentive.
3) Miscellaneous incomes.
4) Interest from debtors.
5) Refund of customs duty.
Allowed Expenses
Expenses incurred for earning the business income are called as allowed expenses. Besides the regular and
common expenses, the following expenses are also treated as business expenses and they allowed to be
deducted from business incomes.
1) Repairs and renewals of business premises. 25) Travelling expenses relating to business
2) Rent/taxes/rates related to business. purpose.
3) Bad debts. 26) Loss of goods or cash embezzled by an
4) Fire insurance paid for buildings and goods employee.
used for business. 27) Depreciation.
5) Expenditure on scientific research. 28) Legal expenses incurred to avoid business
6) Any contribution to approved scientific liability and to defend the assesses title of
research institution, colleges, universities business.
150% of the amount contributed is allowed as 29) Legal expenses for filing Income Tax appeal.
deduction. 30)Deposits made under Tatkal Telephone
7) Group insurance premium paid before the due Scheme or Scheme own your telephone
date.
8) Bonus commission paid before the due date.
9) Sales tax paid before the due date.
10)Theft in office premises.
11)Pooja expenses at office.
12)Employer contribution to RPF
13) Revenue advertisement expenses will be
allowed in full.
14) Demurrage paid to railways.
15)Establishment expenses.
16) Audit fees/salaries to employees/office
expenses.
17) Staff welfare expenses.
18) Interest on loan, if loan is taken for business
purpose.
19) Compensation to retrenched employees in the
interest of the business.
20) Salary to staff.
21)Discount allowed.
22)Guest house and holiday homes expenses.
23)Electricity/telephone bill/water bill related to
business premises.
24)Printing/stationary.

Non-Business Incomes
1) Interest on securities.
2) Agriculture income.
3) Rent received or income from house property.
4) Bad debts recovered but not allowed earlier.
5) Profit on sale of fixed assets and investments.
6) Dividend received.
7) Interest on Deposit, Dividend on UTI and Mutual Funds.
8) Life Insurance Policy amount received.
9) Gifts received from relatives.
10)Income tax refund.
11) Share of Incomes from HUF.
12) Winnings from lottery/cross word puzzles/horse race.
Depreciation
It is a continuous, gradual and permanent fall in the value of an asset due to wear and
tear, passage of time and obsolescence of technology and change of ownership etc.
Depreciation under income tax is to be claimed on the block of assets & not on individual
asset.
Rate of depreciations prescribed according to Income Tax Act 1961

Particulars Rate %
p.a.
I. Buildings
Buildings which are used mainly for residential purposes 5%

except for hotels and Boarding House
Non-residential building like offices, factory, godown. 10%
Books owned by assessees carrying on business in running 40%

lending libraries
II. Furniture and fittings
Any Furniture and Fittings 10%
III. Plant and Machinery
Plant and machinery 15%
FOR PRIVATE CIRCULATION ONLY 86

Motor cars, other than those used in a business of running them 15%
on hire
Motor buses, Motor lorries, and Motor used in a business of

running them on hire
30%
Motor buses, Motor lorries, and Motor used in a business of 45%

running them on hire acquired on or after 23rd August 2019
but before 1st April 2021 and is put to use before 1st April
2021
Water pollution control equipment 40%
Lifesaving Medical equipment 40%
Computers 40%
Books (Annual publication or other than annual publication) 40%

owned by assessees carrying on a profession
Books owned by assessees carrying on business in running 40%

lending libraries
IV. Ships 20%
V. Intangible assets
Intangible assets: Patents, copyrights, technical know-how,

trademarks, licenses, franchises. Etc.
25%
Methods of depreciation
Only WDV Method of charging depreciation is recognized under the Act. However, Power
Generation units have option to claim depreciation on SLM.
1) If assets are newly purchased in the previous year and put to use for less than 180
days then 50% of rate of depreciation will be given.
2) If the block of assets ceases to exist on the last date of the previous year then
depreciation is inadmissible.
3) Additional depreciation

 In case any new plant & machinery is acquiredand installedon or after 01-04-
2005, it shall qualify for additional depreciation.
 Rate of additional depreciation: 20% of actual cost.
 Undertakings set up in any backward area in State of Telangana/West

Bengal/Andhra Pradesh/Bihar during 1 April 2015 to 1 April 2021 : 35% of Actual
Cost of New P&M
Eligibility: The Assessee must be engaged in the business of – (a) Manufacturing or

production of any article or thing, or (b) Generation, transmission or Distribution of
Power
Essential Features of Profits and Gains of Business.
1. Business carried on by the Assessee: It is a must that the business should have
been carried on by the assessee himself during the previous year. It does not
mean that an assessee should physically carry on a business. What is more
important is that he must have right to carry on the business and the business
must have been carried on in the exercise of that right by the assessee either
personally or through his agent or servant. A business may be carried on in India
or outside India. It is the residential status of an assessee which determines the
incidence of tax.
2. Business is carried on during the previous year: The business should have
been carried on during the previous year. The business may be carried on by the
assessee at any time during the previous year. Thus, it is not necessary that the
business should be carried on throughout the year. Sometimes some of the
receipts are taxable as income from business even if no business is carried on by
the assessee in the year of receipt. Following are some of the examples:
 Recovery against any excess payment.
 Sale of an asset used for scientific research.
 Bad debts recovered (allowed as expenditure in the earlier years).
 Any amount withdrawn from special reserve.
 Amounts received relating to a discontinued business.
3. Aggregate income of different businesses is assessed to tax: If an assessee has
different businesses, the profits of all of them will be aggregated and put to tax.
4. Speculation Profits: Profits from speculation business are taxed under the head
–Profits and Gains of Business. However, speculation loss cannot be set-off
against the legal business profits.
5. Income of previous year is put to tax in the following assessment year.
6. Any gain arising on the transfer of a capital asset used in the business cannot be
treated as business income. It can, however, be treated to tax under the head-
Capital Gains.
7. Profit on the revaluation of capital assets is not to be taxed under this head.

8. Anticipated or future profits are not taxable in the current year. But, the real
profits i.e. the profits received or receivable during the year are taxed in the relevant
assessment year.
9. Profits on winding up are not taxable as business income but are liable to tax
under the head-Capital Gains.
Computation of Profits and Gains {Section 29}
The profits and gains of a business or profession are to be computed in accordance

with the provisions of sections 30 to 43 D (sec 29). The list of provisions/allowances is
not exhaustive. We should apply ordinary commercial principles while determining
real and true profits of a business or profession. Sometimes there may be an
expenditure or loss which may not be covered under the above sections 30 to 43 D.
Yet such losses would have to be allowed in order to determine true profits. Some of
the usually occurring types of trading losses are given below:
1. Loss of Stock in trade: Loss of stock- in- trade because of energy action,
freezing of stocks, leakages, by ravages of white ants, fire or negligence etc.
are allowed as deduction. However, any amount recovered shall be treated as
revenue receipt.
2. Loss through embezzlement by employee or agent is allowed as deduction in
computing business income.
3. Loss by theft: If robbery or theft takes place during the normal working hours
of the business, it is allowed as expenditure. Any loss by theft should be
incidental to the operations of the business e.g. theft by a pretended
customer, or loss of cash before being deposited in the bank etc.
4. Loss incurred for standing as surety: Where a trader stands surety for the
debts of another and such guarantee is for the purpose of the trade, any
payment made as a result of such guarantee can be deducted as a business
loss.
5. Loss incurred on account of insolvency of banker with which current account
is maintained by assessee.
6. Loss due to forfeiture of deposit made by the assessee for properly carrying
out of contract for supply of commodities.
7. Loss incurred due to devaluation of rupee in foreign country which is being
utilized in the course of business.
8. Loss due to exchange rate fluctuation of foreign currency held on revenue
account.
General Principles Governing Admissibility of Deductions
Following are the general principles which should be taken into consideration while
allowing deduction in respect of allowances, expenses or losses. As has already been
explained, these are not exhaustive by nature but simply lay some guidelines which

may help us arriving at a decision while allowing or disallowing a particular
deduction.
1. Expenditure must be incidental to the business.

2. Deduction must be in respect of an existing business.
3. Expenditure should relate to the previous year. This depends upon the method of
accounting. Under mercantile system of accounting expenditure is allowed only
when it is related to the previous year. However, under cash system of
accounting, amount actually paid during the year is allowed. There are certain
exceptions with regard to sales tax, excise duty and bonus etc.
4. Expenditure should be in relation to one’s own business.
5. Expenditure incurred should be in the commercial expediency. An expenditure
sometimes need not be for direct and immediate benefit of the business.
6. Expenditure once incurred may give extended benefit to the business, i.e. benefit
of expenditure may be extended beyond the year of expenditure viz. deferred
revenue expenditure.
7. No deduction of expenditure incurred before setting up of a business, except in
the case of preliminary expenses u/s 35 D.
8. Expenditure must have relationship with taxable profits.
9. Estimated losses are not allowed as deduction.
10. Expenditure incurred on wasting assets is not allowed.
11. Expenditure in relation to non-existing liability is not allowed.
12. Expenditure incurred in defending against the breach of law is not allowed e.g.
fines and penalties.
13. Depreciation on investment is disallowed.
14. Revenue expenses are allowed in full, while capital expenses are allowed over a
period of time.
Deduction expressly allowed
Section 30 to 37 contains a list of certain expenses/ deductions which are allowed in

computing the income under this head. While considering these deductions, the
word ’paid’ means actually paid or incurred depending upon the method of
accounting. Under cash system, the word ’paid’ means ‘actually paid’, under
mercantile system the word ’paid’ means ‘actually incurred’.
The following deductions are expressly allowed:
1. Rent, rates, taxes, repairs and insurance of building used for the business (Sec
30): The building may be own building or rented one. As a tenant, any
amount paid towards the current repairs is also deductible. However, any
premium paid towards rented house is not allowed.
2. Repairs and insurance expenses paid in relation to plant and machinery and
furniture are allowed (sec.32): Any expenditure incurred to replace petrol
engine by diesel engine in a jeep to augment the profit is allowed.

3. Depreciation u/s 32: Under Section 32 depreciation on assets is allowed as
deduction while computing income from business or profession. To claim this
deduction following conditions should be satisfied: 1) Assessee should be
owner of the asset. 2) Asset must be used for the business. 3) Such use must
be in the previous year.
4. Site restoration fund (sec. 33 ABA): Deduction in respect of prospecting for or
extraction or production of petroleum or natural gas or both in India and
abroad is allowed. Amount of deduction is- Amount deposited or amount
deposited or 20% of profits, whichever is lesser.
5. Expenditure on Scientific research (sec. 35): Scientific research means any
activity for the extension of knowledge in the fields of natural or applied
science including for the extension of knowledge in the fields of natural
applied science including agriculture, animal husbandry or fisheries. The
following deductions are allowed in respect of expenditure on scientific
research:
a Revenue expenditure on in-house scientific research related to business
[Sec.35 (1) (i)]: Any expenditure of revenue nature incurred on scientific
research related to business is allowed in full. Any expenditure incurred
for the payment of salaries, material within three years immediately
preceding the commencement of business is also allowed.
b Contribution of outsiders [Sec 35 (1)(ii)]: Any amount paid to
 scientific research association which has object of undertaking
scientific research or
 To a university, college, or other institution to be used for scientific
research is deductible at 150% of the sum paid. The research
programme may be related to business or not related to business.
From financial year 2022-22 the rate will be 100%.
 Payment of research in social science to any approved institution,
university or college is deductible at 100% of the sum paid u/s 35 (1)
(ii) & 35(1) (iii).
 Capital expenditure incurred by an assessee who carries on scientific
research himself is fully deductible u/s 35 (2) in that every year in
which it is incurred. Unabsorbed part of such expenditure will be
carried forward and set off as unabsorbed depreciation.
If the asset is sold without having been used for other purposes, the sale
proceeds or deduction allowed whichever is less is treated as business
income if the previous year in which the sale took place. The excess of
sale proceeds over deduction allowed however is taxed as capital gain.
 Contribution of National Laboratory [Sec.35 (2AA)]: Any amount paid

to any national laboratory will get a deduction at 150% of actual
amount given. National Laboratory means a scientific laboratory
functioning at national level under the aegis of the Indian Council of
Agricultural Research, Indian Council of Medical Research or Council of
Industrial and Scientific Research, the Defense Research and
Development Organization, the Department of Electronics, the
Department of Bio-Technology, or the Department of Atomic Energy
and which is approved by the prescribed authority for this purpose.
From financial year 2022-22 the rate will be 100%.
 Any amount of expenditure incurred up to 31-3-2012 on scientific
research by a company engaged in the business of bio-technology,
drugs; pharmaceutical, electronic equipment’s, computers,
telecommunications etc. will get a weighted deduction of 200% (sec. 35
2AA). (vii) Contribution to research & Development: Sec. 35 2 AB
provides for weighted deduction at the rate of 125% in respect of
contribution made to IIT, approved university college etc., towards
research activities. This weighted deduction is in addition to the special
benefit available to a person for in house research. In case of
Biotechnology, Drugs Pharmaceutical companies a weighted deduction
of 200% is allowed.
6. Expenditure incurred on acquisition of patent rights or copy rights (sec.

35A): Where capital expenditure is incurred by the assessee (after 1966 but
before 1-4-1998) on the acquisition of patent rights, copying for the purpose
of business, the whole amount is deductible in 14 equal instalments. Where
the right became effective in any year prior to the previous year in which
expenditure is incurred, the number of completed years which have elapsed
since commencement of the patent shall be reduced from 14 years and the
deduction is allowed in remaining years. In the case of patent rights acquired
on or after 1-4-1998, the expenditure incurred on the acquisition of such
rights shall be capitalized and depreciation u/s 32 is allowed.
7. Expenditure incurred on Technical know-how (Sec.35 AB) : Any sum
paid before 1-4-1998 on the acquisition of technical know-how for use for the
purpose of his business will be allowed as deduction by spreading it equally
over six years, namely, the year in which the lump-sum consideration is paid
and the five immediately succeeding years. Where the knowhow is developed
in a government laboratory, or a laboratory owned by a public sector
company or university, the consideration will be spread over 3 years. But the
know-how acquired after 1-4-1998 will be treated as capital expenditure and
will be depreciated u/s 32.
8. Capital expenditure to obtain license to operate telecommunication
services (Sec. 35 ABB) :Any capital expenditure incurred and actually paid
by an assessee on the acquisition of any right to operate telecommunication
services by obtaining license will be allowed as deduction in equal
instalments over the period starting from the year in which such payment
has been made and ending in the year in which the license comes to an end.
9. Expenditure on eligible project or scheme (Sec. 35 AC): No deduction will
be allowed from business income in respect of expenditure incurred for an

eligible projector scheme on or after 01-04-2018. Eligible project or scheme
means such project or scheme which is meant for promoting social and
economic welfare or uplift of the public as may be certified by the
Government of India on the recommendation of National Committee
Constituted by Central Government consisting of persons of eminence in
public life.
10. Payment of Rural Development Fund (Sec.35 CCA) : Any sum paid to Rural
Development Fund set up and notified by the central Government is fully
deductible. This section applies to the National Poverty Eradication Fund
also. But once this deduction is claimed and allowed u/s 35 CCA, the same is
not allowed as a deduction under any other provision of this Act.
11. Amortization of preliminary expense (Sec .35 AD) : Where any Indian
Company or resident non-corporate assessee incurs after 31st March 1998
any preliminary expenditure, the assessee shall be allowed a deduction of an
amount equal to one-fifth of such expenditure of each of the five successive
previous years beginning with the previous year in which the business
commences. Expenses incurred before 1-4-1998 are to be spread over 10
years preliminary expenses include: expenditure in connection with the
preparation of feasibility report, project report conducting marketing survey,
engineering services, legal charges for drafting agreements, Memorandum of
Association, Printing of Memorandum of Association and registration
expenses. The maximum amount eligible for deduction under this section
shall not exceed 5% of the cost of the project. But in the case of Indian
companies, it is at the option of the company, whether 5% of cost of the
project or 5% of the capital employed in the business of the company.
12. Expenditure for amalgamation or demerger of an undertaking (sec. 35
DD): Where an Indian Company incurred expenditure after 31-3- 1999.
Wholly and exclusively for the purpose of amalgamation of demerger of an
undertaking 20% of such expenditure for each of the five successive years
beginning with the year in which amalgamation of demerger takes place shall
be allowed as deduction.
13. Expenditure on voluntary retirement (Sec. 35 DDA): The amount received
by an assessee in consequence of an employee’s voluntary retirement, the
assessee shall be allowed a deduction of 20% of such expenditure for each of
the five successive previous years beginning with the year in which such
payment was made.
14. Expenditure on prospecting etc. for development of certain minerals
(Sec. 35E) : Any expenditure incurred by an Indian Company or Indian
Resident non-Corporate assessee wholly and exclusively on the prospecting
of any mineral or on the development of mines or other natural deposit of
any such minerals the assessee shall be allowed a deduction of an amount
equal to 1/10th of he such expenditure for each of the ten successive
previous years beginning with the year of commercial production.

Other Deductions (Section 36). While computing profits and gains business or
profession the following other deduction are allowed:
1. The amount of any insurance premium paid in respect of insurance

against risk of damages or a destruction of stocks or stores used for the
business is fully deductible [Sec 36(1)(i)].
2. Insurance premium paid by a federal milk co-operative society is fully
deductible [Sec.36 (1) (ia)].
3. Insurance of health of employees [Sec.36 (1) (ib)]: Any premium paid
under a scheme framed in this behalf by the general Insurance
Corporation of India and approved by the Central Government, shall be
fully deductible.
4. Bonus or commission paid to an employee [Sec.36 (1) (ii): Any bonus
or Commission paid to an employee for services rendered shall be
deductible. But such sum should not, in any way, be paid as profit or
dividend.
5. Interest on borrowed capital [Sec.36 (1) (iii): Any interest paid in
respect of capital borrowed for the purpose of business/profession is
fully deductible. Interest on own capital is not deductible.
6. Employer’s contribution Provident Fund [Sec.36 (1) (iv) (v)]: Any
amount paid by an assessee as an employer by way of contribution
towards Recognized Provident Fund, or an approved superannuation
Fund or approved Gratuity Fund shall qualify for deduction .
7. Loss regarding animals [Sec.36 (1)(iv)] : In respect of animals which
have been used for the purpose of business (not as stock in trade) and
have died or become useless for such for such purpose, deduction is
allowed to the extent of the amount equal to the difference between the
actual cost to the assessee and the amount, if any, realized in respect of
the carcasses of animals. If sale proceeds are Nil then the entire cost will
be allowed as loss.
8. Bad debts[Sec. 36 (1) (vii) and (2)]: Amount of any bad debts of part
thereof, which is written off as irrecoverable in the accounts of the
assessee for the previous year is allowed as deduction subject to the
following conditions:
a The debt has been taken into account in computing the income of
the assessee of the previous year in which the amount is written
off or of an earlier previous year; or
b It represents money lent in the ordinary course of business of
money lending which is carried on by the assessee.
c There must be a debt.
d Debt must be incidental to the business.
e Debt must have been taken into account while computing business
income.

f Debt must have been written off in the books of account of the
assessee.
Notes:
 If the amount of any part thereof of bad debts is recovered at a later

date, the same will be treated as business income of the previous year
during which such recovery takes place.
 Bad debts of a discontinued business or to a successor of the business
are not deductible.
9. Provision for bad debts [Sec .36 (1) (iii a)]: Normally any provision for
bad and doubtful debts is not allowed as deduction. But the same may be
allowed in the case of rural branches of commercial banks.
10. Transfer to special reserve [Sec. 36 (1) (viii)] : The amount transferred
to a special reserve account and maintained by a financial corporation
which is engaged in providing long term finance for industrial or
agricultural or infrastructure development, in India or by a public
company formed and registered in India with the main object of carrying
on the business of providing long term finance for construction or
purchase of houses in India for residential purposes is allowed to the
extent of 20% of its profits.
11. Family Planning Expenditure [Sec. 36 (1) (ix)]: Any bona fide
expenditure incurred by a company for the purpose of promoting family
planning amongst its employees is allowed as deduction. If such
expenditure is of a capital nature. It shall be allowed as a deduction in five
equal annual instalments commencing from the precious year in which
the expenditure is incurred.
12. Contribution of |Exchange Risk Administration Fund [Sec. 36 (1)(x)]:
The contribution made by the public financial institutions to the Exchange
Rick Administration Fund will be allowed as business deduction while
computing their income.
TERMINAL QUESTIONS
Section A – 2 Marks Questions
1. Define Business.
2. How to treat bad debts recovered but disallowed earlier?
3. Mention any four “inadmissible items” while calculating income from business.
4. What is depreciation U/S. 32 (1) of the act?
5. What do you mean by profession?
6. What do you mean by expressly admissible expenses?
Section B and Section C

Problems of Income from Business
1) Mr. Dhoni is the owner of a business. His profit and loss account for the year ending
31-03-2022 was as follows:
Particulars Amoun Particulars Amount
t
To salaries 5,000 By Gross profit 55,000
To Rent rates and taxes 2,900 By Interest on Investments 5,000
To Printing and stationery 750 By Rent received 6,000
To personal expenses 3,000 By Winning from lottery 10,000
To Commission 2,000
To Discount on allowance 450
To Provision for bad debts 1,200
To Postage and telegram 270
To law charge 450
To Advertisement 1,550
To Gifts and presents 150
To Fire insurance premium on 500
stock 1,250
To Sales tax 480
To Repairs and renewal(not for
business) 1,800
To loss on sale of machinery
(used for private purpose) 1,700
To Life insurance premium 740
To Wealth tax 730
To Interest on capital 300
To Audit fee 1,380
To Interest on bank loan 2,500
To Provision for depreciation 3,900
To Provision for income tax 43,000
To Net Profit 76,000 76,000
Additional Information:
1. Actual bad debts were Rs. 500.
2. Actual amount of income tax paid during the year Rs. 4,000.
3. Allowable depreciation as per IT. Rules Rs. 1,500
4. Advertisement expenses include Rs. 450 spent on special advertisement campaign to
open a new shop.
5. He carried out the business in a rented house, 40%(IA) of which is used for his
residence.
6. Rent, rates and taxes include Rs, 2,400 paid as rent of the property during the year.

Compute taxable his income from business for the A. Y. 2022-23.
2) Shri Govind (age 55 years), a Resident of Mumbai submits the following Profit and
Loss A/c for the year ending 31st March 2022.
Particulars Amount Particulars Amount
To opening Stock 1,10,000 By Sales 36,00,00 0

To Purchases 14,00,000 By Closing Stock 2,20,00 0
To Wages 3,00,000
To Gross profit 20,10,000
38,20,000 38,20,000
To Advertisement By Gross Profit
2,00,000 20,10,000
To Salary to staff By rent
6,60,000 2,40,000
To Govind ‘s salary By Commission
1,20,000 1,50,000
To Audit fees By Bad debts recovered
60,000 70,000
To Bad debts (earlier disallowed)
40,000
To Reserve for bad debts By Dividend on SRM Ltd.
50,000 30,000
To General expenses Shares (Gross)
2,50,000
To Municipal tax
24,000
To Fire insurance Premium on
26,000
goods
78,000
To Depreciation
1,60,000
To Patents rights
40,000
To Staff welfare fund
50,000
To Employees R.P.F
1,90,000
To Sales tax
To Donation to NDF 1,00,000
36,000
To premium on Govind’s Life
Insurance
4,16,000
To Net profit
25,00,000 25,00,000
Additional Information:
1. Opening stock and closing stock were overvalued by 10%.
2. Advertisement includes Rs. 1,00,000 being cost of permanent sign board.
3. Business income of Rs. 70,000 was not recorded in the P&L A/c.
4. General expenses include Rs. 50,000 paid for securing business orders and Rs. 60,000
spent on Govind’s birthday
5. Depreciation allowable on all assets including permanent sign board but excluding
patent rights as per IT rules was Rs. 90,000.
6. Patents rights were acquired on 11.10.2019 on which depreciation allowable at 25
7. Purchases include a cash payment of Rs. 30,000 towards purchase of raw materials.
Compute taxable his income from business for the A. Y. 2022-23.

INCOME FROM CAPITAL GAINS
Any profit or gain that arises from the sale of a ‘capital asset’ Under section2(14) is
chargeable to tax under section 45, is a capital gain. This gain or profit comes under the
category ‘income’, and hence assessee will need to pay tax for that amount in the year in
which the transfer of the capital asset takes place. This is called capital gain tax, which can
be short-term or long-term.
Capital gains are not applicable to an inherited property as there is no sale, but only a
transfer of ownership [except such transfers as are given in sections 46 and 47]. The Income Tax
Act has specifically exempted assets received as gifts by way of an inheritance or will.
However, if the person who inherited the asset decides to sell it, capital gains tax will be
applicable. Any gains arising out of transfer of capital asset in the previous year is called
as capital gains. To tax an income under the head capital gains the following conditions
are to be fulfilled.
WHAT IS THE BASIS OF CHARGE [SEC. 45]
Any gain arising from the transfer of a capital asset during a previous year is chargeable to tax under
the head "Capital gains" in the immediately following assessment year, if it is not eligible for
exemption under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GBt. In other words, capital
gain's tax liability arises only when the following conditions are satisfied:
Condition 1 There should be a capital asset.

Condition 2 The capital asset is transferred by the assessee.
Condition 3 Such transfer takes place during the previous year.
Condition 4 Any profit or gains arises as a result of transfer.

Such profit or gains is not exempt from tax under sections
Condition 5 54, 548, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54CB1.
Section 45 in The Income- Tax Act, 1995
45. Capital gains 1

(1) Any profits or gains arising from the transfer of a capital asset effected in the previous
year shall, save as otherwise provided in sections 54, 54B,54D, 54E, 54F, 54G and 54H, 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.
(2) Notwithstanding anything contained in subsection (1), the profits or gains arising
from the transfer by way of conversion by the owner of a capital asset into, or its
treatment by him as, stock- in- trade of a business carried on by him shall be chargeable
to income- tax as his income of the previous year in which such stock- in- trade is sold or
otherwise transferred by him and, for the purposes of section 48, the fair market value of
the asset on the date of such conversion or treatment shall be deemed to be the full value
of the consideration received or accruing as a result of the transfer of the capital asset.
(3) The profits or gains arising from the transfer of a capital asset by a person to a
firm or other association of persons or body of individuals (not being a company
or a co- operative society) in which he is or becomes a partner or member, by way
of capital contribution or otherwise, shall be chargeable to tax as his income of the
previous year in which such transfer takes place and, for the purposes of section 48, the
amount recorded in the books of account of the firm, association or body as the value of
the capital asset shall be deemed to be the full value of the consideration received or
accruing as a result of the transfer of the capital asset.
(4) The profits or gains arising from the transfer of a capital asset by way of distribution
of capital assets on the dissolution of a firm or other association of persons or body
of individuals (not being a company or a co- operative society) or otherwise, shall be
chargeable to tax as the income of the firm, association or body, of the previous year in
which the said transfer takes place and, for the purposes of section 48, the fair market
value of the asset on the date of such transfer shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer.]
(5) Notwithstanding anything contained in subsection (1), where the capital gain arises
from the transfer of a capital asset, being a transfer by way of compulsory acquisition
under any law, or a transfer the consideration for which was determined or approved by
the Central Government or the Reserve Bank of India, and the compensation or the
consideration for such transfer is enhanced or further enhanced by any court, tribunal or
other authority, the capital gain shall be dealt with in the following manner, namely:-

(a) the capital gain computed with reference to the compensation awarded in the first
instance or, as the case may be, the consideration determined or approved in the first
instance by the Central Government or the Reserve Bank of India shall be chargeable as
income under the head" Capital gains of the previous year 2 in which such compensation
or part thereof, or such consideration or part thereof, was first received]; and
(b) the amount by which the compensation or consideration is enhanced or further
enhanced by the court, tribunal or other authority shall be deemed to be income
chargeable under the head" Capital gains" of the previous year in which such amount is
received by the assessee. Explanation. - For the purposes of this subsection,-
(i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost
of improvement shall be taken to be nil;
(ii) the provisions of this subsection shall apply also in a case where the transfer took
place prior to the 1st day of April, 1988 ;
(iii) where by reason of the death of the person who made the transfer, or for any other
reason, the enhanced compensation or consideration is received by any other person, the
amount referred to in clause (b) shall be deemed to be the income, chargeable to tax
under the head" Capital gains", of such other person.]
(6) 3 Notwithstanding anything contained in subsection (1), the difference between the
repurchase price of the units referred to in subsection (2) of section 80CCB and the capital
value of such units shall be deemed to be the capital gains arising to the assessee in the
previous year in which such repurchase takes place or the plan referred to in that section
is terminated and shall be taxed
WHICH ARE THE ASSETS, INCLUDED IN AND EXCLUDED FROM CAPITAL ASSET
"Capital asset" is defined by section 2(14).
"Capital asset" means property of any kind, whether fixed or circulating, movable or
immovable, tangible or intangible. Besides, it includes the following-
1. Any rights in or in relation to an Indian company, including rights of management or

control or any other rights whatsoever.
2. Property of any kind held by an assessee (whether or not connected with his business
or profession).
3. Any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the regulations made under the SEBI Act.
4. Any unit-linked insurance plan (ULIP policy) issued on or after February 1, 2021 to
which exemption under the term of such section 10(10D) does not apply (ie, if
insurance premium payable in any previous year during policy exceeds Rs. 2.50 lakh).
The following assets are excluded from the definition of "capital assets" –
1. Stock-in-trade (other than securities referred to in point 3 above).
2. Personal effects (movable assets).
3. Agricultural land in a rural area in India.
4. A few gold bonds and special bearer bonds (this point does not have any practical
utility).
5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold Monetization Scheme, 2015.
WHAT IS TRANSFER OF CAPITAL ASSET?
Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the

asset or the extinguishment of any rights therein or the compulsory acquisition thereof
under any law [sec. 2(47)]
Certain transactions not included in transfer- For the purpose of section 45, the
following transactions are not regarded as transfers (in other words, in the following
cases, there is no capital gain)
1. Distribution of assets in kind by a company to its shareholders on its liquidation.
2. Any distribution of capital assets in kind by a Hindu undivided family to its members
at the time of total or partial partition.
3. Any transfer of capital asset under a gift or a will or an irrevocable trust (exception-
gift of ESOP shares is chargeable to tax).
4. Transfer of capital asset between holding company and its 100 per cent subsidiary
company, if the transferee company is an Indian company.
5. Transfer of capital asset in the scheme of amalgamation/demerger, if the transferee-

company is an Indian company.6. Transfer of shares in amalgamating
company/demerged company in lieu of allotment of shares in amalgamated
company/resulting company in the above case.
The following transactions are not treated as Transfer:

1. Transfer of asset in a scheme of amalgamation, demerger.
2. Transfer of agricultural land before 01-04-1970.

3. Transfer of debenture or bonds into shares.
4. Transfer of asset in kind at the time of liquidation.
5. Transfer of asset by a parent company to the own subsidiary company.
6. Transfer of asset under gift or will.
7. Transfer of capital asset at the time of partition of HUF.
8. Transfer of capital asset, being a government security, made outside India by Non-
Resident to another Non-Resident.
CAPITAL GAINS HOW COMPUTED [SEC. 48]
Computation of capital gain depends upon the nature of capital asset transferred, viz,
short-term capital asset or long-term capital asset. Capital gain arising on transfer of a
short-term capital asset is short-term capital gain, whereas transfer of long-term capital
asset generates long-term capital gain. The tax incidence is generally higher in the case
of short-term capital gain as compared to long-term capital gain.
The method of computation of short-term and long-term capital gain is as follows:
Computation of short-term capital gain Computation of long-term capital gain

1. Find out full value of consideration 1. Find out full value of consideration
2. Deduct the following:
2. Deduct the following: a. expenditure incurred wholly and
a. expenditure incurred wholly and exclusively in connection with such
exclusively in connection with such transfer
transfer b. indexed cost of acquisition [in some
b. cost of acquisition cases cost of acquisition is deducted]
c. cost of improvement c. indexed cost of improvement (in some
cases cost of improvement is deducted)
3. From the resulting sum deduct the 3. From the resulting sum deduct the
exemptions provided by sections 54B, exemption provided by 54, 548, 54D,
54D, 54G and 54GA. 54EC. 54EE, 54F, 54G, SIGA and 54GB
4. The balance amount is short-term 4. The balance amount is long-term
capital gain. capital gain.
Notes
1. Securities transaction tax is not deductible while computing income under the head
"Capital gains".

WHAT IS FULL VALUE OF CONSIDERATION [SEC. 48]
Full value of consideration is the consideration received or receivable by the transferor in

lieu of assets, which he has transferred. Such consideration may be received in cash or in
kind. If it is received in kind, then fair market value of such assets is taken as full value of
consideration. Full value of consideration does not mean market value of that asset which
is transferred.
 Adequacy of consideration - Adequacy or inadequacy of consideration is not a

relevant factor for the purpose of determining full value consideration. However,
in the case of transfer of land or building (or both), if stamp duty value is more
than 110 per cent of sale consideration, the stamp duty value is taken as full value
of consideration.
 Receipt of consideration-It makes no difference whether (or not) "full value of
consideration" is received during the previous year. Even if consideration is not
received, capital gain is chargeable to tax in the year of transfer.
 If consideration is not determinable- Where in the case of a transfer, consideration
for the transfer of a capital asset(s) is not determinable, then for the purpose of
computing capital gains, the fair market value of the asset shall be taken to be the
full market value of consideration [sec. 50D).
HOW TO FIND OUT EXPENDITURE ON TRANSFER
Expenditure incurred wholly and exclusively in connection with transfer of capital asset
is deductible from full value of consideration. The expression "expenditure incurred
wholly and exclusively in connection with such transfer means expenditure incurred
which is necessary to effect the transfer.
Examples of such expenses are: brokerage or commission paid for securing a purchaser,
cost of stamp registration fees borne by the vendor, travelling expenses incurred in
connection with transfer, litigation expenditure for claiming enhancement of
compensation awarded in the case of compulsory acquisition of assets.
WHAT IS COST OF ACQUISITION

Cost of acquisition of an asset is the value for which it was acquired by the assessee.
Expenses of capital nature for completing or acquiring the title to the property are
includible in the cost of acquisition. Interest on money borrowed to purchase asset is part
of actual cost of asset.
The amount paid for discharge of a mortgage is part of "cost of acquisition", if the
mortgage was not created by the transferor. For instance,
on June 1, 2018, X took a loan of Rs. 5 lakhs by mortgaging his house property. X
could not repay the loan during his lifetime and after his death on July 2, 2020, the
property (with mortgage) is transferred to Mrs. X. Mrs. X transfers the property on
march2, 2022 and before transfer, a sum of Rs. 7.2 lakh is paid to clear the
mortgage. Rs. 7.2 lakh will be deductible as part of cost of acquisition of the
property while calculating capital gains in the hands of Mrs. X. If, however, loan is
taken by Mrs. X. then repayment of loan will not be deductible as part of cost of
acquisition of the property while calculating capital gains in the hands of Mrs. X.
WHAT IS COST OF IMPROVEMENT
Cost of improvement is capital expenditure incurred by an assessee in making any

additions/improvement to the capital asset. It also includes any expenditure incurred to
protect or complete the title to the capital assets or to cure such title. Any expenditure
incurred to increase the value of the capital asset is treated as cost of improvement.
Improvement cost incurred before April 1, 2001-Cost of improvement

incurred before April 1, 2001 is never taken into consideration. This rule
does not have any exception.
HOW TO CONVERT COST OF ACQUISITION/IMPROVEMENT INTO INDEXED COST

OF ACQUISITION/IMPROVEMENT
Indexed cost of acquisition is calculated as follows
( )
′ − ,

Indexed cost of improvement is calculated as follows

Cost inflation index for different previous years
Cost of Inflation Cost of Inflation

Previous Year index Previous Year index
(CII) (CII)
2001-02 100 2012-13 200
2002-03 105 2013-14 220
2003-04 109 2014-15 240
2004-05 113 2015-16 254
2005-06 117 2016-17 264
2006-07 122 2017-18 272
2007-08 129 2018-19 280
2008-09 137 2019-20 259
2009-10 148 2020-21 301
2010-11 167 2021-22 317
2011-12 184 2022-23 331
Financial Assets:
It means the capital assets which comprises of securities, bonds, shares, mutual funds.
Etc.
Short Term Capital Gain: Any gains arising from transfer of Short-term capital asset is
known as short term capital gain.
Long term Capital Gain:
Any again arising from transfer of Long-term capital asset is known as Long- germ capital
gains
a) Indexed cost of Acquisition (If the Assessee acquires the property before 01-04-
2001)
It means inflating the cost of an asset acquired to the present value. Indexation
benefits are available only for long term capital assets. However, the indexation
benefits is a not available in case of debentures, goodwill, intangible assets, bonus
shares and depreciable assets even it is a long term assets.
If the Assessee acquires the property before 01-04-2001
ICOA= − − ( )

Summary of the period of holding:
4.4 Brokerage or Selling expenses:

It is the expenses incurred for transferring the capital asset, the expenses includes,
brokerage, commission and other expenses related to transfer.
4.5 Cost of acquisition:

It refers to the cost incurred by an assessee to acquire the capital asset. It includes all
capital expenses incurred in acquiring the assets.
Cost of Acquisition of certain assets

Asset Cost of Acquisition
Goodwill, if self-generated NIL
Goodwill, if acquired Purchase Price
On Gift / inheritance / distribution of assets of
HUF on partition Cost to the previous owner
Bonus Shares allotted prior to 1st Apr’01 FMV (1st Apr’01)
Bonus Shares allotted post 1st Apr’01 NIL
Rights Shares Amount paid to acquire the shares
Purchase price paid to the renouncer + Price
Rights shares which are purchased by person in paid for acquiring rights shares
whose favor the assessee has renounced the
rights
Cost of acquisition shall have to be adjusted by the Cost Inflation Index to arrive at the
indexed cost of acquisition.
Note: Base year for the purpose for calculation of Indexed cost of acquisition or
improvement has been shifted from 1981-82 to 2001-2002. Accordingly, if any
assessee/previous owner has acquired capital asset prior to 1-4-2001 then he will have
option to choose actual cost of acquisition or FMV as on 1-4-2001 as his cost of
acquisition. Cost of improvement incurred by assessee or previous owner prior to 1-4-
2001 shall be taken as NIL.
b) If the Assessee acquires the property after 01-04-2001
Situation 1: (Before – Before, that is both the previous owner and present owner
acquired the property before 1st April 2001)
Situation 2: (Before – After, that is that the previous owner acquired the property before 1
st April 2001 and the present owner acquired the property after 1st April 2001)
Situation 3: (After – After, that is both the previous owner and the present owner
acquired the property after 1st April 2001)
4.7 Indexed Cost of Improvements:

It is the cost incurred by the assessee for improving the utility of the asset or enhancing
the value of the asset.
- Any cost incurred by the assessee or by the previous owner before 01-04-2001 is to
be ignored and should not be considered for deduction.
- The cost incurred on or after 01-04-2001 will be allowed as deduction.
a) For the Short them capital asset the actual cost of improvement is allowed as
deduction.
b) For Long term capital asset, it will be indexed and allowed as deduction
Exemptions u/s 54 TO 54 G
House property ………1cr
Farm land...........5cr

A. Section 54:
1. Eligible assessee: Individual and HUF

2. Type of asset: The house property transferred should be a long-term capital asset.
3. Transfer(sale) of: Residential house2021-22
4. Purchase or construction of: Residential house
5. Time limit:
a. For purchase: Within 1 year before or within 2 years after the date of transfer
of residential house.
b. For construction: within 3 years after the date of transfer of residential house.
6. Other conditions:
i. Construction should be complete within 3 years from the date of transfer (Date
of commencement of construction, being irrelevant).
ii. No limit on number of properties that can be acquired.
iii. Amount of exemption u/S 54 is:
DETAILS AMT (₹) AMT (₹)
Section 54:
Amount of capital gain XXX
Amount invested in purchase or
construction of residential house XXX
Whichever is less is exempt u/s 54 XXX
i. The new residential property shall not be transferred within a period of 3 years from
the date of its purchase or completion of construction. If transferred (sold) then
exemption given earlier shall be taxable in the previous year of such transfer.
ii. Amount deposited in capital gain account scheme shall also be exempted. however the
deposit amount shall be utilized for the said purpose within the time limit .If not ,then it
shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of
time limit. If the assessee is not utilizing the amount till the expiry of 3 years, if he
withdraws after three years for the said purpose or for other purpose is taxable.
Note: From the AY 2021-22 in order to save tax on long-term capital gains on the sale of
house property one can invest capital gains in two house properties instead of one but this
benefit is available once in a lifetime only if capital gains do not exceed Rs 2 crore.

Section 54B:
1. Eligible Assessee: Individual

2. Type of Asset: Short term or long-term capital asset being transferred which
is an agricultural land.
3. Transfer of: Agricultural land
4. Purchase of: Agricultural land
5. Time limit: The assessee can purchase another agriculture land within 2 years
from the date of transfer.
i. The agricultural land was used by the assessee or his parents for a period
of 2 years immediately before the date of transfer.
ii. The new agricultural land purchased may be in rural or urban area.
However, the transfer (sale) of agricultural land shall be situated only in
urban area (since agricultural land in rural area is not a capital asset U/S
2(14).
i. Amount of exemption u/s 54B is,
DETAILS AMT(₹) AMT(₹)

Amount of exemption U/ S 54B
Amount invested in purchase of new agricultural land
/Amount Invested in capital gain A/c Scheme XXX
Whichever is less is exempt u/s 54B XXX
i. The new agricultural land shall not be transferred within a period of 3 years from the
date of its purchase. If transferred, the exemption given earlier shall be taxable in the
previous year of such transfer.
ii. Amount deposited in capital gain account scheme shall also be exempted. however,
the deposit amount shall be utilized for the said purpose within the time limit. if not, then
it shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of
time limit. If the assessee is not utilizing the amount till the expiry of 2 years, if he

withdraws after three years for the said purpose or for other purpose is taxable. (Capital
gain A/c scheme shall be maintained by nationalized bank).
C. Capital gains on compulsory acquisition of land and building forming part of

industrial undertaking (Sec 54 D):
Section 54D:
1. Eligible Assessee: All persons

2. Type of Asset: Short term or long-term capital asset
3. Transfer of: Compulsory acquisition of land or building forming part of Industrial
undertaking which is compulsorily acquired by Government.
4. Purchase of: Land or building forming part of industrial undertaking
5. Time limit: Within a period of 3 years after the date transfer
i. Such land or building forming part of industrial undertaking was used by the
assessee for at least 2 years before the date compulsory acquisition (Transfer)
ii. Amount of exemption U/S 54D:

Amount of exemption U/ S 54D
The amount invested in purchase or construction of new
land or building forming part of industrial undertaking
XXX
Whichever is less is exempt u/s 54B XXX
i. The new land or building purchased or constructed shall not be transferred within a
period of 3 years from the date of its purchase or construction. If transferred the
ii. Amount deposited in capital gain account scheme shall also be exempted. However,
the deposit amount shall be utilized for the said purpose within the time limit. If not, then
it shall be taxable in the P.Y in which it was utilized for other purpose or on the expiry of
time limit.

D. Capital gain on transfer of any long-term capital asset and invested in specified
assets (Sec 54 EC):
2. Type of Asset: long-term capital asset
3. Transfer of: Any long-term capital asset
4. Investment in: Long- term specified capital asset
5. Time limit: Within 6 months from the date of transfer
i. Long -term specified capital assets
a) National Highway Authority of India (NHAI)
b) Rural Electrification Corporation (REC)
ii. Amount of exemption u/s 54EC:
Amount of exemption U/ S 54EC
The amount invested in long term specified capital asset XXX
Whichever is less is exempt u/s 54EC XXX
i. Maximum amount that can be invested during any financial year is Rs.50,00,000
ii. The investment made in long term specified capital asset shall not be transferred or
liquidated within a period of 3 years from the date of making investment. If transferred,
the exemption given earlier shall be taxable in the previous year of such transfer.
iii. The above investments in specified capital assets are not eligible for deduction U/S
80C.
iv. Amount deposited in capital gain account scheme shall also be exempted.
However, the deposit amount shall be utilized for the said purpose within the time limit.
If not then it shall be taxable in the P.Y in which it was utilized for other purposes or on
the expiry of time limit.
E. Capital gains on transfer of a long-term capital asset other than a house

property, but invested in residential house (Sec 54 F):
Section 54 F:
1. Eligible Assessee: Individual and HUF
2. Type of asset: Long-term capital asset.
3. Transfer (sale) of: Any long-term capital asset other than residential house
4. Purchase or construction of: Residential house

5. Time limit:
a. For Purchase: Within 1 year before or within 2 years after the date of
transfer.
b. For construction: within 3 years after the date of transfer.
i. Construction should be complete within 3 years from the date of transfer.
(Date of commencement of construction, being irrelevant).
ii. The assessee owns not more than 1 residential house on the date of
transfer (other than new residential house)
ii. Amount of exemption U/S 54 F is:
DETAILS
AMT(₹) AMT(₹)
Amount of exemption U/ S 54F
Capital gain x cost of new house /Net sale
consideration XXX
Whichever is less is exempt XXX
(Note: Net sale consideration= Full value consideration - Expenses related to

transfer)
i. The new residential property shall not be transferred within a period of 3 years from
the date of its purchase or completion of construction. If transferred (sold) then
ii. Amount deposited in capital gain account scheme shall also be exempted .however
the deposit amount shall be utilized for the said purpose within the time limit .If not ,then
it shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of
time limit (i.e. Above the time limit) .
F. Capital gain on shifting of industrial undertaking from urban to non-urban areas

(Sec 54 G):
Section 54G:
2. Type of Asset: Short-term or long-term capital asset

3. Transfer of: Land, Building, Plant or Machinery used for the purpose of an
industrial undertaking situated in urban area.
4. Purchase of: Land or building or Plant or Machinery used for the purpose of an
industrial undertaking shifted from urban area to any area other than an urban area
(Rural area or semi urban area).
5. Time limit: Within a period of 1 year before or 3 years after the date transfer
i. Amount of exemption u/s 54GA:
DETAILS
AMT(₹) AMT(₹)
Amount of exemption U/ S 54GA

The amount invested in purchase or construction of new
land or building, Plant or Machinery forming part of
industrial undertaking XXX
Whichever is less is exempt U/S 54GA XXX
ii. The new land or building or plant, machinery purchased or constructed shall not be
transferred within a period of 3 years from the date of its purchase or construction. If
transferred the exemption given earlier shall be taxable in the previous year of such
transfer.
iii. Amount deposited in capital gain account scheme shall also be exempted.
however, the deposit amount shall be utilized for the said purpose within the time limit.
If not, then it shall be taxable in the P.Y in which it was utilized for other purpose or on
the expiry of time limit.
G. Investment on compensation received (Sec 54 H):

In case any asset was taken over by Govt. and additional compensation is received it will
be deemed as income of the year in which it is received and period for reinvestment will
be counted from the date of receipt of such additional compensation.
Illustration: 1
Q1. Ms. Divya residing in Chennai acquired a residential house on 28th May 2003 for Rs.
30,00,000. This house was sold for a consideration of Rs. 2 crores in May, 2021. Brokerage

and other expenses in connection with transfer amounting to Rs. 3 lakhs were spent. In
March 2022, the sale consideration was invested in a residential property for Rs. 60 lakhs
and at the same time a sum of Rs. 25 lakhs were invested in the bonds issued by NHAL A
sum of Rs. 40 Lakhs was invested in long term specified units in July 2021. Compute the
taxable Capital gain for the AY 2022-23.
AY 2022-
Computation of taxable Capital gains 23
Particulars Rs. Rs.
Sale consideration 2,00,00,000
Less: Expenses incurred 3,00,000
Net consideration 1,97,00,000
Less: Indexed cost of acquisition (30,00,000
x301/105) 86,00,000
Gross capital gains 1,11,00,000
Less: Exempt - u/s. 54 Cost of the new house 60,00,000
- u/s. 54EC-NHAI - invested beyond 6 months
- not eligible Nil
- u/s 54EE-specified long term units - invested
within 6 months 40,00,000 1,00,00,000
Taxable Capital gains 11,00,000
Note: Since the amount of Capital gains is less than 2 crores, the assessee has an option
to invest in two residential house properties in India. (This option can only be exercised
once in a lifetime for an assessee).
Income from Other sources
Income from other sources is the fifth and last head of income. Any source of income which
doesn’t fall under any of the other heads of income is chargeable to tax under the head income
from other sources. Examples:
a) Fee, commission and remuneration received by an employee form other than his own
employer.

b) Salary or pension received by an MLA, MP and MLC
c) Income from guest lectures
d) Remuneration received from universities for examination work by a non-employee of the
university.
e) Director’s fee
f) Interest from foreign securities
g) Income from undisclosed sources
h) Composite rent received for letting building along with plant and machinery and
furniture.
i) Rent from letting vacant plot
j) Dividends from Mutual funds, companies etc.
k) Interest on securities
l) Interest on bank deposits
m) Gift received
n) Insurance Commission received
o) Casual income received
p) Family pension received
q) Agriculture income from land situated outside India etc.
r) Any income from paying guest accommodation, sub-letting etc.,
s) Royalty received by the owner of an asset
t) Directors commission for underwriting of shares of new company
u) Gratuity received by the directors, who is not an employee of a company
v) Interest on income tax refunds
w) Rent of subletting
x) Withdrawal of amount under NSS including interest thereon
Securities:
The term security is defined as the document held by a creditor as guarantee of his right to
payment.
It means all the debt should be secured in some way or other. The borrower issues the investor
some document as acknowledgement of debt this called as security.
Types of Securities
1. Tax Free Government Securities:

These are securities issued either by state or central government. They are exempted from tax
under 10(15) and it should not include in total income.
2. Less Tax Government Securities:
These are security issued by the government and interests on these securities are fully taxable
without deducting tax at source.
3. Tax Free Commercial Securities:

These are securities issued by Local authority, Statutory Corporation or a company in a form of
Bonds and Debentures. The tax on interest paid by company, hence it is called as tax-free
securities.
4. Less Tax Commercial Securities:
These are the securities issued by the company and tax will be deducted at source before paying
any interest to the investors.
Bond Washing Transactions:

It refers to selling of a security to friend or relative immediately before the due date for accrual or
receipt of interest and acquiring the securities back after the due date. This practice is usually
adopted by high income class assessee to escape from paying tax, by transferring the securities to
a low-income class assessee.
Cum- Interest Securities:

It is the amount of interest accrued in the duration between the last coupon date and the
settlement date or transaction date. Hence cum interest refers to ‘with interest’.
Ex – Interest Securities:
It is the amount of coupon interest between transaction date or settlement date and the next
coupon date. Hence, it is also known as ‘without interest’.
Deduction available under income from other sources
1. Family pension: 15,000 or 1/3rd of the amount received whichever is less will be allowed
as deduction.
2. Collection charges paid for collecting dividend and interest is deducted provided such
income is chargeable to tax.
3. Any other expenses incurred to earn an income will be allowed as deduction. For example,
depreciation, repairs, insurance etc. incurred on letting out building with plant, machinery and
furniture, expenses on sub-letting, expenses relating to owning and maintain the race horse etc
(except the expenditures incurred for purchasing the lottery tickets)
Tax free Government Securities:

a) Post office Cash Certificates (5 years)
b) Post Office National Saving Certificates (12 years)
c) Post Office Saving Bank A/c, exempted up to Rs. 3,500 and in case of Joint A/c Rs. 7,000 is
exempted.
d) Post office cumulative time deposit A/c
e) Public Account of Post Office Saving A/c (Interest up to Rs. 5,000)
f) Fixed Deposit in Post Office
g) National Plan Certificates (10 years)
h) 12 years National Saving Certificates

i) National Plan Saving Certificates (12 years)
j) National Defense Gold Bonds 1980
k) Special Deposit Scheme 1981
l) Special Bearer Bonds 1991
m) Treasury Saving Deposit Certificate (10 years)
n) Interest on 7% capital Investment Bonds
o) Notified NRI Bonds
p) Interest on Bonds Issued by Local Authority of State Finance Entity notified by Central
Government
q) Interest on Relief Bonds and Saving Bonds
Rates of TDS
Income Rate of TDS
Interest on debentures/securities issued by or on behalf of any local 10%

authority/statutory corporation, listed debentures of a company, any
security of the Central or State Government
Any other interest on securities (including interest on non-listed 10%

debentures
Interest other than interest on securities to a resident 10%
Winning from lottery, horse race or crossword puzzle or card game or other 30%
game of any sort to a resident/ non –resident
Insurance commission to a resident 10%
Frees for professional or technical services to a resident 10%
Tax shall not be deducted at source for the following
a) 4.25% National Defense Bonds

b) National Development Bonds
c) 7 years National Saving Certificate

d) Debentures issued by Co-operative Society or a Public Sector Company or any Institution
notified by Central Government.
e) 6.5% Gold Bonds 1980
f) Any Security of Central or State Government
g) Debentures issued by the company or recognized Stock Exchange provided that the
interest is payable by Account Payee Cheque and the aggregate amount doesn’t exceed Rs. 2,500.
1. Bank Interest on Fixed Deposit: is fully taxable by deducting TDS if it exceeds Rs. 40,000
p.a.
Gross Interest = Net Interest Received x 100/90
2. Gifts received: gifts received from a relative are not taxable and gifts received from
friends or non-relatives exceeding Rs. 50,000 is fully taxable.
3. Insurance Commission Received: is fully taxable. If it is more than Rs. 15,000 it is subject
to TDS.
Gross Commission = Net Amount x 100/90
4. Casual Income: Income from crossword puzzle, lottery, card games if it exceeds Rs. 10,000
and Horse race Exceeds Rs. 10,000 it is subjected to TDS. No expense is allowed as deduction from
these incomes.
Gross Winnings =Net Winning x 100/70
Illustration1
X a resident individual, submits the following particulars of his income for

the previous year ending March31,2022
Interest paid by X
on capital
Date of declaration Amount paid to
Name of the company borrowed
of dividend X
to invest in
shares
A Ltd a foreign company July15,2021 90,000 14,000
B Ltd a foreign company April1, 2021 43,000 50,000
C Ltd an Indian
company October 31,2021 4,00,000 Nil
Rent from letting a factory along with plant and machinery (letting out of plant and machinery):
₹30,600. Collection charges in respect of rent: ₹400. Fire insurance premium in respect of
building ₹600. Fire insurance premium in respect of plant & machinery: 750. Repairs in respect of
building ₹ 4,600. Depreciation of building, plant and machinery ₹ 18,600.
Winnings from lottery on December 1,2021 net amount ₹70,000 Tax deducted at sources ₹30,000

Winning from card game ₹ 13,500(gross) ( Tax deducted by the payer)
Interest on securities issued by the, Government of Japan ₹ 30,670
During the previous year, X has received the following gift:
Amount
Gift from whom Date of Gift (₹)
Gift received from a friend August20,2021 1,00,000
Gift received from friend september10,2021 60,000
Gift from a brother December 30,2021 90,000
Gift received at the time of marriage of X October10, 2021 1,35,000
Gift from grandfather received by will October1, 2021 1,40,000
Gift received from friend september20,2021 20,000
Computation of income from other sources

Previous year-2021-22
Name of the Assessee: Mr.X Assessment Year-
Status: Resident 2022-23
Dividend
A Ltd 90,000
B Ltd 43,000
C Ltd 4,00,00
Total 5,33,000
Less: Interest on borrowed capital

( 14000+50,000+Nil) (deductible doesn’t exceed
20% of ₹5,33,000) -64,000 4,69,000
Rent received 30,600
Less expenses
Collection charges 400
Insurance (600+750) 1,350
Repairs 4,600
Depreciation 18,600
Total -24,950 5,650
Winning from lottery
Net Amount 70,000
AddTax deducted at sources: 30,000 1,00,000
Winning from card games 13,500 1,13,500
Interest on securities of a foreign government 30,670
GIFT
Gift received from August20,2021 1,00,000
Gift received from friend on september10,2021 60,000

Gift from a brother ( gift received from a relative
is not taxable) Nil
Gift received at the time of marriage ( Not taxable) Nil
Gift received by will ( Not Taxable) Nil
Gift received from friend 20,000
Total ( Amount exceeds 50,000 is taxable) 1,80,000
Income from other sources 7,98,820
Terminal Questions
Section A – 2 Marks Questions

1. What is casual income?
2. Mention the various kinds of securities
3. What are bond-washing transactions?
4. State the standard deduction for family pension
5. What are tax free commercial securities?
6. What is the rate of TDS for casual income?
Section B – 5 Marks Questions

1. State the income which is chargeable under the head income from other sources
2. Explain the various kinds of securities
Sections C – 14 Marks Questions

1. From the following particulars compute the income taxable under income from other sources
of Mr. Kiran, compute is taxable income for the A.Y. 2022-23
i. Interest on PO SB a/c Rs.5,000
ii. Interest from National Relief Bonds Rs10,000
iii. Family Pension received Rs. 3,500 per month
iv. Winnings from horse race Rs.1,00,000
v. Lottery won from play win Rs.20,000
vi. Prize amount received from Sikkim lottery Rs. 70,000
vii. Dividend from Reliance ltd Rs.12,000
viii. Dividend from foreign company Rs. 2,500
ix. Dividend from Cooperative society Rs. 5,000
x. Interest on F.D. with State Bank of Mysore Rs.10,000
xi. Interest received on listed bonds of Birla ltd Rs 9,000
xii. Amount invested in 8%, Karnataka govt securities Rs.10,000

xiii. Rs. 20,000 invested in 11.5% tax free securities of Mudra ltd. (unlisted)
xiv. Fees Rs. 12,500
xv. She lives in a house taken on rent for Rs. 9,000 p.m. she had sub-let 1/3rd of the house to Kavitha
on a monthly rent of Rs. 5,000
xvi. She had written some articles in Times of India for which she received Rs 20,000
xvii. She is the author of a text book titled “Art of Cooking” published by Banashankari publishers
amount received Rs18, 000. Amount spent on typing books and telephone Rs. 300, & 1,200
respectively.
Slab rate of tax for the A.Y. 2022-23
INCOME SLAB AND TAX RATES FOR F.Y. 2020-21/A.Y 2021-22

Income Tax Rate & Slab for Individuals & HUF:
1. Individual (Resident or Resident but not Ordinarily Resident or non-

resident), who is of the age of less than 60 years on the last day of the
relevant previous year & for HUF:
TaxRate TaxRate
Taxable income
(Existing Scheme) (New Scheme)
Up to Rs. 2,50,000 Nil Nil
Rs. 2,50,001 to Rs. 5,00,000 5% 5%
Rs. 5,00,001 to Rs. 7,50,000 20% 10%
Rs. 7,50,001 to Rs. 10,00,000 20% 15%
Rs. 10,00,001 to Rs. 12,50,000 30% 20%
Rs. 12,50,001 to Rs. 15,00,000 30% 25%

Above Rs. 15,00,000 30% 30%
2. Resident or Resident but not Ordinarily Resident senior citizen, i.e., every individual,
being a resident or Resident but not Ordinarily Resident in India, who is of the age of
60 years or more but less than 80 years at any time during the previous year:

TaxRate TaxRate
Taxable income (Existing Scheme) (New Scheme)
Rs. 2,50,001 to Rs. 3,00,000 Nil 5%
Rs. 3,00,001 to Rs. 5,00,000 5% 5%
Rs. 5,00,001 to Rs. 7,50,000 20% 10%
Rs. 7,50,001 to Rs. 10,00,000 20% 15%
Rs. 10,00,001 to Rs. 12,50,000 30% 20%
Rs. 12,50,001 to Rs. 15,00,000 30% 25%
Above Rs. 15,00,000 30% 30%
3. Resident or Resident but not Ordinarily Resident super senior citizen, i.e., every
individual, being a resident or Resident but not Ordinarily Resident in India, who is of
the age of 80 years or more at any time during the previous year:

Surcharge:
a) 10% of Income tax where total income exceeds Rs.50 lakh
b) 15% of Income tax where total income exceeds Rs.1 crore
c) 25% of Income tax where total income exceeds Rs.2 crore
d) 37% of Income tax where total income exceeds Rs.5 crore
TaxRate TaxRate
Taxable income (Existing Scheme) (New Scheme)
Rs. 2,50,001 to Rs. 5,00,000 5%
Rs. 5,00,001 to Rs. 7,50,000 20% 10%
Rs. 7,50,001 to Rs. 10,00,000 20% 15%
Rs. 10,00,001 to Rs. 12,50,000 30% 20%
Rs. 12,50,001 to Rs. 15,00,000 30% 25%
Above Rs. 15,00,000 30% 30%
1. Note: Enhanced Surcharge rate (25% or 37%) is not applicable in case of

specified incomes I.e. short-term capital gain u/s 111A, long-term capital
gain u/s 112A & short-term or long-term capital gain u/s 115AD(1)(b).
2. Education cess: 4% of income tax plus surcharge
Note: A resident or Resident but not Ordinarily Resident individual is entitled to rebate
under section 87A if his total income does not exceed Rs. 5, 00,000. The amount of rebate
shall be 100% of income-tax or Rs. 12,500, whichever is less. rebate under section 87A is
available in both scheme I.e. existing scheme as well as new scheme.

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FUNDAMENTALS OF BUSINESS TAXATION

(Computation of Total Taxable Income of an Individual)

FOR PRIVATE CIRCULATION ONLY Page 1

Module 1: Introduction (10 Hours)

Module 3: Computation of Total Taxable Income of an Individual (12 Hours)

Module 4: Customs Act & GST (12 Hours)

Module 5: GST (12 Hours)

FOR PRIVATE CIRCULATION ONLY Page 2

Net income range Income-Tax rate

Net income range Income-Tax rate

Net income range Income-Tax rate

FOR PRIVATE CIRCULATION ONLY Page 3

OBJECTIVES OF THIS MODULE:

1. Brief History of Income Tax:

1.2 Legal framework:

FOR PRIVATE CIRCULATION ONLY Page 4

1.3.1 Features of tax:

1.3.2 Types of taxes:

Particulars Direct Tax Indirect Tax

FOR PRIVATE CIRCULATION ONLY Page 5

1.4 BASIC TERMINOLOGIES UNDER INCOME TAX:

1.4.1. Income Tax:

1.4.2. Assessment U/S 2(8):

1.4.4. Previous Year U/S 2 (34)

1.4.5. Difference between Previous year and Assessment year

FOR PRIVATE CIRCULATION ONLY Page 6

1.4.6. Exception to the General Rule Previous Year:

1.4.7. Assessee U/Sec 2(7):

1.4.7(1) Deemed Assessee:

1.4.8. Person Sec 2(31):

The term person includes:

FOR PRIVATE CIRCULATION ONLY Page 7

1.4.9. Income Sec 2(24):

The term income means and includes

1.4.10. Casual Income:

1.4.11. Heads of Income:

FOR PRIVATE CIRCULATION ONLY Page 8

Income from Income/loss arising as a result of carrying on a

1.4.12. Gross Total Income:

1) Income from Salary

1.4.13. Total Income Sec 5:

1. Agricultural income from a land in India – fully exempted u/s 10(1).

FOR PRIVATE CIRCULATION ONLY Page 9

FOR PRIVATE CIRCULATION ONLY Page 10

2.1 Agriculture income

According to Sec 2 (IA) Agriculture income means:

2.1(a) Examples of Agricultural Income:

1) Income from sale of replanted trees.

2.1(b) Examples of Non- Agricultural Income:

1) Income from sale of earth for brick making.

FOR PRIVATE CIRCULATION ONLY Page 11

2.1(c) Partly Agricultural Income:

2.2. Integration of Agricultural Income with Non-Agricultural Income: [sec 2(2)]:

2.2.1. Conditions for aggregation:

FOR PRIVATE CIRCULATION ONLY Page 12

2.2.2 Calculation of net agricultural income:

2.3 Capital and Revenue:

Capital Receipt Revenue Receipt

FOR PRIVATE CIRCULATION ONLY Page 13

2.3.2. Capital Expenditure and Revenue Expenditure:

Capital expenditure Revenue expenditure

FOR PRIVATE CIRCULATION ONLY Page 14

 Agricultural income from India is exempt from tax.

RESIDENTIAL STATUS AND INCIDENCE OF TAX