Unit-1

Meaning of Income Tax

 Income Tax is a financial charge levied by the government on individuals, corporations, and
other entities based on their income or profits.
 The primary purpose of income tax is to generate revenue to fund public services,
infrastructure, and government operations.
 Tax rates may vary depending on the level and source of income.
 Individuals are usually taxed on wages, interest, dividends, and capital gains, while businesses
are taxed on their net earnings.
 Each country has its own set of laws and regulations governing how income taxes are assessed,
collected, and enforced.
 Managing income tax obligations requires understanding these laws and often involves filing
annual tax returns.

Need of Income Tax:

1. Revenue Generation: Income tax is a primary source of revenue for governments. These funds
are crucial for financing public services such as education, healthcare, infrastructure, and
defense
2. Redistribution of Wealth: Progressive taxation, where higher income earners pay a larger
percentage of their income in taxes, helps in the redistribution of wealth. This aims to reduce
income inequality and support lower-income groups.
3. Public Infrastructure: Taxes fund public infrastructure projects like roads, bridges, public
transport, and utilities, facilitating economic growth and improving quality of life.
4. Social Services: Income taxes help pay for social services such as unemployment benefits, social
security, and welfare programs that support the disadvantaged and vulnerable populations.
5. Economic Stability: Through fiscal policy, governments can use tax policy to influence economic
conditions, manage economic booms and busts, and encourage consumer spending to prevent
or mitigate recessions.
6. Regulatory Purposes: Taxes on income can be used to enforce regulations, discourage
undesirable behaviors, and encourage beneficial ones. For example, higher taxes on certain
dividends or capital gains can influence corporate behavior and investment strategies.
7. Health and Environment: Tax revenues can be allocated to public health initiatives and
environmental conservation, promoting healthier societies and sustainable practices.
8. Administrative Costs: Income taxes fund the administrative functions of the government,
including legislative, judicial, and executive branches. These are essential for maintaining a
functioning, lawful, and orderly society.

Features of Income Tax:

 1. Progressivity: Most income tax systems are progressive, meaning that the tax rate increases as
the taxable amount increases. This ensures that those with higher incomes contribute a larger
percentage of their income towards public finances, which helps in addressing income
inequality.
2. Taxable Entities: Income tax is levied on individuals, corporations, trusts, and other legal
entities. Each category can be subject to different rules and rates, reflecting their varying ability
to pay taxes.
3. Taxable Income: This includes earnings from employment, profits from business activities, rents,
dividends, and capital gains. The definition of what constitutes taxable income can vary, but it
typically encompasses all the income an entity earns.
4. Deductions and Allowances: To determine the taxable income, taxpayers are allowed to deduct
certain expenses and allowances from their gross income. These can include business expenses,
personal allowances, charitable contributions, and specific incentives for investments.
5. Exemptions and Credits: Income tax systems often provide exemptions (types of income that
are not taxed) and credits (amounts subtracted from the tax due) to promote various social and
economic policies. For example, there may be tax credits for education expenses, for energy-
efficient home improvements, or for childcare.
6. Yearly Assessment: Income tax is typically assessed annually. Taxpayers must file a return each
year to report their income and calculate the tax owed, accounting for any prepayments or
withholdings.
7. Withholding Mechanisms: Many countries implement a withholding tax system where tax on
certain types of income (like wages) is deducted at the source by the employer and paid directly
to the government. This helps in managing cash flow for both taxpayers and the government.
8. Compliance and Enforcement: Tax authorities enforce tax laws and ensure compliance through
audits, penalties, and fines. Compliance is supported by various reporting requirements for
individuals and businesses.
9. Legal Framework: The entire structure and implementation of income tax are governed by
legislation, which defines all aspects of taxation, including rates, exemptions, penalties, and
procedures.

Basis of Charges:
 Basis of charge in income tax law refers to the fundamental rules and criteria that determine
how income tax is imposed on individuals and entities.
 These rules specify what income is taxable, who is liable to pay the tax, and how the tax is
calculated.
1. Residential Status: The tax liability of a person often depends on their residential status in a
country. Typically, residents are taxed on their worldwide income, whereas non-residents are
taxed only on income that is sourced within the country. The specific criteria for determining
residential status vary by jurisdiction.
 2. Source of Income: Income tax is typically charged on various sources of income such as salaries,
business profits, rents, dividends, and capital gains. Each type of income may be taxed
differently based on specific rules set forth in the tax legislation
3. Periodicity: Income tax is generally imposed on an annual basis. The tax year (or fiscal year) may
align with the calendar year or a different annual period, depending on the country's tax laws.
The income earned within this period is assessed for taxation
4. Taxable Entity: Basis of charge extends to all entities capable of generating taxable income. This
includes individuals, corporations, partnerships, trusts, and estates. Each category might have
unique tax rules applicable to it.
5. Income Level: Tax rates often vary based on the level of income. Progressive tax systems have
increasing tax rates for higher income brackets. This basis of charge ensures that those who earn
more pay a higher rate of tax on their additional income.
6. Deductions and Exemptions: Taxable income can be reduced by allowable deductions (such as
business expenses, home mortgage interest, etc.) and exemptions (such as personal or
dependency exemptions). These reduce the gross income to arrive at the taxable income.
7. Tax Credits: Tax credits may be available to reduce the tax liability. These are typically provided
for specific activities, such as education expenses, investment in renewable energy, or childcare.
Tax credits can be nonrefundable or refundable. the latter of which can result in a tax refund
when the credit exceeds the total tax owed.
8. Method of Accounting: The way income and expenses are accounted for tax purposes can affect
the income calculation. Most tax systems allow for cash or accrual basis accounting, each having
different implications for when income and expenses are recognized.
9. Withholding Tax: For certain types of income, such as wages or dividends, tax may be withheld
at the source. This means the payer deducts tax from the payment and remits it directly to the
government, which is then credited against the total annual tax liability of the recipient.

Overview of the Income Tax Act 1961

 The Act outlines the tax implications for various income sources such as salaries, house
property, business or professional profits, capital gains, and income from other sources.
 It details procedures for the assessment, collection, and recovery of taxes, while also specifying
authorities responsible for tax administration.
 Key features of the Income Tax Act include definitions of key terms (such as "previous year" and
"assessment year"), guidelines on residential status and its impact on tax liability, and in-depth
rules regarding the computation of income and deductions.
 The Act provides specific exemptions and deductions that individuals and entities can claim to
reduce their taxable income.

Heads of Income
Income tax is calculated under five main heads of income

1. Salaries: This includes wages, pensions, allowances, and other employment-related payments.
 2. Income from House Property: Covers rent received, minus allowed deductions like municipal
taxes and a standard deduction of 30% for repairs.
3. Profits and Gains of Business or Profession: Computation of this income is based on either cash
or accrual accounting methods.
4. Capital Gains: Tax on profits from the sale of capital assets, differentiated between short-term
and long-term gains.
5. Income from Other Sources: Includes income from dividends, lottery winnings, and interest.

Deductions and Exemptions

 Act provides numerous deductions (under sections like 80C, 80D etc.) which allow taxpayers to
reduce their taxable income by investing in specified instruments, paying for medical insurance,
etc.
 Exemptions are also provided for certain types of income or components of income, like house
rent allowance and travel concessions.

Amendments Over the Years

Since its enactment, the Income Tax Act of 1961 has been amended many times to address new
economic realities and policy priorities.

1. Direct Taxes Code (DTC): Proposed as a replacement for the existing Act to simplify tax
legislation, though it has not yet been enacted.
2. Finance Acts: Passed annually with the Union Budget, these Acts make regular changes to tax
rates, slabs, deductions, and compliance requirements.
3. Goods and Services Tax (GST): Although primarily a reform of indirect tax, the introduction of
GST has influenced income tax through improved tax compliance cross-verification systems.
4. Demonetization and Digital Economy: Post-2016's demonetization, there were amendments
aimed at increasing the tax base and penalizing tax evasion, alongside incentives for digital
transaction systems.
5. COVID-19 Pandemic: Temporary measures were introduced, including relaxation in compliance
timelines and tax relief for donations and healthcare spending.

Concept of Residental Status

 The concept of residential status is crucial in determining a taxpayer's tax liability in various
jurisdictions, including India, under the Income Tax Act, 1961.
 Residential status decides whether a taxpayer is liable to pay tax on their worldwide income or
only on the income that is earned or received within the country.

Determination of Residential Status in India

In India, the Income Tax Act specifies distinct criteria for determining the residential status of
individuals, Hindu Undivided Families (HUFs), companies, and other persons (like firms or associations of
persons). The criteria for individuals are the most detailed, and they are categorized as:

1. Resident:

a) An individual is considered a resident in a financial year if they meet any of the following
conditions:
 They are in India for at least 182 days during the financial year, or
 They are in India for at least 60 days during the financial year and have been in India for a
total of 365 days during the four years preceding the financial year.
b) If neither of these conditions is met, the individual is treated as a Non-Resident.

2. Resident and Ordinarily Resident (ROR):

A resident individual is classified as "Resident and Ordinarily Resident if they meet both of the following
additional conditions:

 They have been resident in India in at least 2 out of the 10 years prior to the relevant year.
 They have been in India for at least 730 days during the 7 years preceding the relevant year.

3. Resident but Not Ordinarily Resident (RNOR):

If a resident individual does not meet these additional conditions, they are considered RNOR.

Residential Status of Companies:

The residential status of companies under the Income Tax Act depends on where the company is
incorporated and where it is effectively managed:

 A company is resident in India if it is incorporated in India or if its place of effective management

(POEM) is in India.
 If neither condition is met, the company is treated as a non-resident.

Types of Residential Status:

1. Resident and Ordinarily Resident (ROR)

A person is classified as a Resident and Ordinarily Resident when they satisfy both the basic conditions
for being considered a resident and additional conditions that relate to their physical presence in the
country in prior years:

 Basic Conditions: These typically include staying in the country for a specified minimum number
of days during the financial year.
 Additional Conditions: These may involve considerations such as physical presence in the
country in the preceding years and the individual's status in prior years.
  Tax Implications: RORs are taxed on their worldwide income, meaning that all income earned or
accrued globally is subject to taxation in their resident country.

2. Resident but Not Ordinarily Resident (RNOR)

Individuals qualify as RNOR if they meet one or more of the basic conditions for residency but do not
fulfill the additional conditions required to be considered Ordinarily Resident.

 Qualification: This status is typically given to those who have recently become tax residents
under the basic conditions or who have not been physically present in the country for a
significant duration over the preceding years.
 Tax Implications: RNORS are taxed on all their income received or deemed to be received in the
country and any income accruing or arising or deemed to accrue or arise in the country. Foreign
income is typically not taxed unless it is derived from a business controlled from or a profession
set up in the resident country.

3. Non-Resident

Individuals are considered non-residents if they do not meet any of the basic conditions for residency.

 Criteria: The specific criteria for non-residency can vary by jurisdiction but usually involve not
spending a significant number of days in the country or not having a permanent home in the
country.
 Tax Implications: Non-residents are only taxed on their income that is received or deemed to be
received in the country, and income that accrues or arises or is deemed to accrue or arise within
the country. They are not taxed on foreign income.

Importance of Residential Status:

The determination of residential status is a critical aspect of tax law, affecting an individual's or entity's
tax obligations significantly. Understanding the importance of residential status can help ensure
compliance with tax regulations, optimize tax liabilities, and avoid legal complications.

1. Tax Liability Determination: Residential status is fundamental in determining the scope of a

taxpayer's income that is subject to tax. Residents generally are taxed on their worldwide
income, including earnings from abroad. In contrast, non-residents are taxed only on income
that is earned or arises in the country. This distinction can have a significant impact on the
amount of tax payable.
2. Prevention of Double Taxation: For individuals who live, work, or have sources of income in
multiple countries, their residential status helps in applying tax treaties between countries,
which are designed to avoid double taxation. Knowing whether one qualifies as a resident or
non-resident can help in claiming benefits under these treaties, ensuring they are not taxed
twice on the same income.
 3. Compliance With Legal Requirements: Determining and declaring one's residential status
accurately is a legal requirement in many jurisdictions. Incorrect reporting can lead to penalties,
interest, and increased scrutiny from tax authorities. Proper determination helps in maintaining
legal compliance and avoiding potential conflicts with tax authorities.
4. Tax Planning and Financial Management: Understanding one's residential status can aid
significantly in tax planning. Individuals and businesses can structure their affairs and time
certain events in ways that minimize tax liabilities based on their status. For example, timing the
sale of an asset or choosing a particular investment can be optimized based on the differing tax
implications for residents versus non-residents.
5. Eligibility for Deductions and Allowances: In many tax jurisdictions, eligibility for various tax
deductions, credits, and allowances depends on the taxpayer's residential status. Residents
often have access to a broader range of tax benefits that can reduce their taxable income.
Knowing your status helps in making informed decisions about investments and deductions to
utilize these benefits effectively.
6. Estate and Inheritance Planning: Residential status also affects the taxation of estates and
inheritances. In many countries, residents are subject to different rules regarding estate taxes
compared to non-residents. Understanding these implications is crucial for effective estate
planning and ensuring that heirs receive the intended benefits without undue fiscal burden.

Definition and Importance

 Total income refers to the aggregate amount of income subject to tax under the law after
making necessary adjustments for deductions and exemptions.
 It forms the basis for computing tax liability and includes various types of income categorized
under different heads as per the tax statutes.

Scope of Total Income:

1. Categories of Income

Under the Income Tax Act, 1961, total income is categorized under five heads:

 Salaries: This includes wages, pensions, bonuses, commissions, and all other forms of
compensation for services rendered.
 Income from House Property: Comprises of rental income from property owned by the
taxpayer, minus allowable deductions such as municipal taxes paid and a standard deduction for
repairs.
 Profits and Gains from Business or Profession: This covers income from business operations or
professional services, including profits on sales, minus business expenses.
 Capital Gains: Includes gains from the sale of capital assets, such as properties, shares, or bonds,
differentiated into short-term or long-term gains based on the period of holding.
 Income from Other Sources: Captures income not covered under other heads, such as interest
from savings accounts, lottery winnings, and gifts.
2. Residency and Its Impact on Scope of Income:

 Residents: Typically taxed on their worldwide income, which means all income earned both
domestically and internationally is aggregated and taxed in India.
 Non-Residents: Only taxed on income that is earned or accrued in India. Foreign incomes for
non-residents are usually not taxed unless they are received in India or arise due to a business
connection in India.
 Resident but Not Ordinarily Resident (RNOR): Similar to non-residents, they are taxed primarily
on their Indian income and foreign income that is received or arises from a business controlled
in or a profession set up in India.

3. Deductions and Exemptions

 Deductions: Available under sections like 80C (investments in provident funds, life insurance,
etc.), 80D (medical insurance), and others specifically designed to encourage savings and
provide relief for certain expenses.
 Exemptions: Certain receipts like agricultural income, specific allowances for government
employees, house rent allowance, and others are exempt from taxation under specific
conditions.

4. Tax Treaties and Relief from Double Taxation:

For residents earning international income and non-residents earning in India, the scope of total income
includes mechanisms to prevent double taxation. India has numerous Double Taxation Avoidance
Agreements (DTAAs) that provide relief either through a tax credit method or an exemption method,
ensuring income is not taxed twice across two different jurisdictions.

Practical Implications and Compliance:

 Compliance Requirements: Taxpayers must accurately report all sources of income in their tax
returns. Compliance involves meticulous record- keeping, especially for those with multiple
income streams or those involved in international business.
 Planning and Strategy: Understanding the scope of total income allows taxpayers to plan their
finances efficiently. By knowing which types of income are taxable and what deductions and
exemptions are available, individuals and businesses can strategize their investments and
expenditures to minimize their tax liabilities.
 Audits and Legal issues: Errors or omissions in reporting income can lead to audits and legal
issues, including penalties and interest on unpaid taxes. Proper understanding and reporting of
total income are crucial to avoid such complications.

Head of Income
 The categorization of income into distinct "Heads" is fundamental for determining how income
is to be reported and taxed.
  This structured approach not only simplifies the assessment process but also clarifies the
applicable rules and rates for different types of income.

1. Income from Salaries: Income from salaries is the most common source for most working individuals.
This head includes wages, pension, bonuses, commissions, and any other remuneration received as a
result of employment. Key components include:

 Basic Salary: The core of income from employment, paid monthly.

 Allowances: Various allowances that may be fully taxable, partly taxable, or entirely exempt,
depending on their nature (e.g.. house rent allowance, travel allowance).
 Perquisites: Benefits or amenities provided by the employer, which could be taxable depending
on their nature (e.g., company car, subsidized loans).
 Retirement Benefits: These include pensions, gratuities, and provident funds, each subject to
specific tax rules.Taxpayers must consider various deductions available under this head, such as
standard deduction, professional tax, and entertainment allowance, to accurately compute their
taxable income from salaries.

2. Income from House Property: This head covers income earned from a property, which is primarily
calculated as the rent received. The computation, however, allows for deductions that can significantly
reduce the taxable income:

 Gross Annual Value (GAV): The rent collected or the reasonable expected rent of the property.
 Net Annual Value (NAV): Calculated by deducting the municipal taxes paid from the GAV.
 Deductions: Standard deduction of 30% of NAV for repairs, regardless of actual expenditure,
and interest on borrowed capital for acquiring or constructing the property. Even unoccupied
properties or those occupied by the owner for personal use have specific tax implications, and
understanding these nuances is crucial

3. Profits and Gains from Business or Profession: This head is designed for individuals engaged in
business activities or professional services. It involves a detailed computation process where gross
receipts are adjusted for various expenses to arrive at the net taxable profits.

 Expenses: All expenses incurred wholly and exclusively for the business are deductible, including
wages, rent, depreciation, and other operational expenses.
 Presumptive Taxation Scheme: Available for small businesses and professionals to simplify
compliance by taxing income at a predefined rate on total turnover or gross receipts.
 Audit Requirements: Mandatory for taxpayers exceeding certain thresholds in turnover or
income.
 Profits from business also include speculative transactions and non-speculative transactions,
each treated differently under tax laws.

4. Capital Gains: Capital gains arise from the sale of capital assets like real estate, shares, bonds, or
mutual funds. The tax treatment varies based on the duration for which the asset was held:
  Short-term Capital Gains (STCG): If assets are held for a short duration (generally less than three
years for real estate and one year for shares and securities), gains are taxed at normal rates.
 Long-term Capital Gains (LTCG): Gains from assets held longer than the durations mentioned
above benefit from a lower tax rate and available exemptions.Taxpayers can claim exemptions
under sections 54 to 54F for reinvestment of gains into specified assets, significantly affecting
the taxable capital gain

5. Income from Other Sources: This is a residual category that includes income not covered by the other
four heads. Common types include:

 Interest: From savings accounts, deposits, bonds, etc.

 Dividends: Generally taxable unless specifically exempted.
 Gifts: Taxable above certain thresholds, depending on the nature and source of the gift.
 Lottery, Game Show Winnings: Taxed at a special rate without any deductions.

Importance of Understanding the Heads of Income:

 Compliance: Accurate reporting under the correct heads is necessary to meet legal
requirements and avoid penalties.
 Optimization of Tax Liabilities: By understanding what deductions and exemptions are available
under each head, taxpayers can plan their activities and investments to minimize their tax
burden.
 Preparation for Assessments: Proper categorization and documentation support smoother tax
assessments and audits.

Income Exempted from Tax

In India, the Income Tax Act, 1961, stipulates various types of income that are exempt from tax. These
exemptions are provided to encourage specific activities, provide relief in certain situations, and help
minimize the financial burdens on individuals in particular circumstances.

1. Agricultural Income (Section 10(1)): Agricultural income is exempt from income tax. This includes
income derived from sources such as agriculture land, farm buildings, and produce raised on land.
However, if agricultural income exceeds INR 5,000, it is included in the total income for rate
purposes, which can effectively increase the tax rate on non-agricultural income.
2. Receipts from Hindu Undivided Family (HUF) Estate (Section 10(2)): Income of a member of a
Hindu Undivided Family (HUF) derived from the family estate is fully exempt from tax under this
section.
3. Share of Profit from a Partnership Firm (Section 10(2A)): Any share of profit received by a partner
from a partnership firm is exempt from tax, as the firm already pays income tax on its earnings.
4. Leave Travel Concession (Section 10(5)): Leave Travel Concession (LTC) provided by an employer
to an Indian citizen for travel within India is exempt to a certain extent under specific conditions
related to travel costs.
 5. House Rent Allowance (HRA) (Section 10(13A)): HRA received from an employer is exempt to the
extent of the least of the following:
 Actual HRA received,
 50% of salary (for metros) or 40% (for non-metros),
 Excess of rent paid over 10% of salary.
6. Allowances for MPs/MLAs (Section 10(17)): Allowances received by Members of Parliament and
State Legislatures are exempt from tax to the extent of allowances to meet expenses incurred in
the performance of duties.
7. Pension (Section 10(10A)): Commuted pension received by government employees is fully
exempt. For non-government employees, it is partly exempt depending on whether they receive
gratuity and the extent of commutation.
8. Gratuity (Section 10(10)): Gratuity received on retirement or death is partially exempt for all
employees. The exemption limits are the least of the following:
 15 days salary based on last drawn salary for each year of service.
 INR 20 lakhs (the maximum exemption limit),
 Actual gratuity received.
9. Provident Fund (Section 10(11) and 10(12)): Statutory provident fund and public provident fund
(PPF) withdrawals are completely exempt from tax.
10. Scholarships (Section 10(16)): Scholarships granted to meet the cost of education are not treated
as taxable income, regardless of the source.
11. Awards and Rewards (Section 10(17A)): Certain approved awards and rewards by the government
are exempt from tax, promoting excellence in various fields.
12. Income of Local Authorities (Section 10(20)): The income of local authorities, which is chargeable
under the head 'Income from house property Capital gains', or 'Income from other sources, is
exempt from tax to encourage local governance and development.
13. Income from Foreign Sovereign Funds (Section 10(23FE)): Income of specified persons including
sovereign wealth funds investing in India in specific assets is exempt subject to certain conditions
aimed at attracting foreign investment.
14. Income of Charitable Trusts and Institutions (Section 11 and 12): Income derived from property
held under trust wholly for charitable or religious purposes is exempt from taxation subject to
conditions of application of income and registration with the Income Tax Department.

Unit-2
Meaning of Salary
 The term "Salary" refers to a form of periodic payment from an employer to an employee, which
may be specified in an employment contract.
 It is typically paid at regular intervals, such as monthly or biweekly, in exchange for the services
that the employee provides to the company.
 Salary is usually determined on an annual basis but is expressed as a monthly or weekly rate.
 Salary forms the basis for employment decisions and reflects the value of the skills, experience,
and potential contributions of the employee to the organization.
 Unlike hourly wages, which are paid based on the number of hours worked, a salary is generally
not directly tied to the number of hours worked.
 Employees on a salary typically continue to receive the same amount regardless of the actual
hours worked, which might include overtime hours not specifically paid for.
 A salary package may include bonuses, benefits, and allowances, such as health insurance,
retirement contributions, and paid vacation.
 In the context of taxation, the salary is considered taxable income, and employers are required
to withhold income tax and other payroll deductions according to applicable laws.
 In India, salary structures are often comprehensive, including various allowances and perquisites
that supplement the basic salary.
 These components are not only crucial for attracting and retaining employees but also have
significant implications for tax planning and liability for both employees and employers.

Allowances
Allowances are fixed monetary amounts paid by an employer to an employee over and above the basic
salary to meet specific types of expenditures.

1. House Rent Allowance (HRA): Provided to meet the cost of rented accommodation. Tax
exemption for HRA is available under Section 10(13A) of the Income Tax Act and is subject to
certain conditions.
2. Dearness Allowance (DA): Offered to employees to offset the impact of inflation. In some cases,
DA forms a part of the retirement benefit salary computation.
3. Conveyance Allowance: Granted to employees to cover travel expenses from home to work and
vice versa.
4. Medical Allowance: Given for medical expenses. However, from AY 2019-20 onward, the
standard deduction has replaced medical and transport allowances.
5. Leave Travel Allowance (LTA): Provided for travel costs when the employee is on leave from
work. LTA is tax exempt under specific conditions related to travel expenses incurred by the
employee during the leave period.
6. Special Allowance: A catch-all category that includes various allowances not specifically
provided for elsewhere, which can vary widely between organizations.
Taxation of Allowances
1. House Rent Allowance (HRA): HRA is partly exempt from tax under Section 10(13A) of the
Income Tax Act. The exemption is the least of the following:
 Actual HRA received.
 50% of salary (for metro cities) or 40% for non-metro cities.
 Rent paid minus 10% of salary.
2. Dearness Allowance (DA): While DA forms a part of the salary, it is fully taxable unless it is a
part of retirement benefits.
3. Conveyance Allowance: Exempt to the extent of expenditure incurred on commuting between
home and office.
4. Leave Travel Allowance (LTA): Exempt to the extent of expenses incurred on travel costs for the
employee and his family twice in a block of four years.
5. Medical Allowance: This allowance is fully taxable. However, medical reimbursement against
actual bills up to INR 15,000 per annum used to be tax-exempt, which was replaced by a
standard deduction in the recent tax reforms.
6. Special Allowance: Any special allowance is generally taxable unless specified otherwise.

Perquisites
Perquisites, or perks, are benefits provided to employees in addition to their regular salaries and
allowances. These are often related to the position of the employee and can be either monetary or non-
monetary. Some perquisites are taxable under the head 'Salaries' in the hands of the employee, while
others might be tax-exempt

1. Company Car: Use of a company-provided car for personal and official purposes. This can be
taxable depending on the usage.
2. Accommodation: Company-provided accommodation. This is taxable based on certain
conditions related to the location and type of accommodation.
3. Stock Options: The option to purchase company stock at a reduced price. The taxation rules for
stock options are specific and depend on the type of plan and the timing of exercise and sale of
stocks.
4. Education Facilities: Free or subsidized education facilities for children, which might be taxable
beyond a certain limit.
5. Club Membership: Free or subsidized membership to clubs, generally taxable unless used
strictly for business purposes.
6. Health Insurance: Often provided for employees and their families, typically not taxable as a
perquisite

Taxation of Perquisites
 1. Accommodation: Perquisites such as company-provided accommodation are taxed on a
concessional value, which depends on factors such as the location of the property, owned or
leased by the employer, and the salary of the employee.
2. Company Car: If a car is provided by the employer and used for both personal and official
purposes, the taxable value of the perquisite is determined based on the engine capacity of the
car and the extent of personal use.
3. Stock Options: Taxation of stock options (ESOPs) occurs at two instances: exercise and sale. At
exercise, the difference between the exercise price and the fair market value of the shares is
taxed as a perquisite. At sale, the gains are taxed as capital gains.
4. Education Facilities: Free or subsidized education provided to the children of the employee is
taxable if it exceeds a certain limit..
5. Club Memberships: Taxable if provided free or at a subsidized rate, unless used exclusively for
business purposes.
6. Health Insurance: Generally, it is not taxable as a perquisite if paid by the employer.

Deduction from Salary

 Deductions from salary are crucial for understanding the net taxable income of an individual
under the Indian Income Tax Act, 1961.
 These deductions allow taxpayers to reduce their taxable income, hence decreasing their tax
liability by accounting for various expenses and investments that the government incentivizes
for social and economic benefits.
1. Standard Deduction: Introduced in the 2018 budget, the standard deduction replaced the
transport allowance and medical reimbursement. For salaried employees and pensioners, this
deduction amounts to INR 50,000 regardless of actual expenses incurred. This simplification
helps reduce the taxable salary income with no need for proof of expense
2. House Rent Allowance (HRA): HRA is a significant component for many employees. The
deduction on HRA is the least of the following three:
 Actual HRA received.
 50% of salary (basic + DA) if residing in a metro city (40% for non-metros).
 Excess of rent paid over 10% of salary (basic + DA). This allowance is particularly beneficial
for those who live in rented accommodations.
3. Section 80C Deductions: One of the most popular sections under the Income Tax Act, Section
80C, allows a deduction of up to INR 1,50,000 from a taxpayer's total income. This can be
claimed through various investments and expenses:
 Life Insurance Premiums
 Public Provident Fund (PPF)
 Employee Provident Fund (EPF)
 National Savings Certificates (NSC)
 Equity-Linked Savings Scheme (ELSS)
 Payment of tuition fees for two children
 Principal repayment on home loan
  Senior Citizens Savings Scheme (SCSS), etc.
4. Section 80D: Medical Insurance Premium: This section offers deductions for premiums paid on
medical insurance. For self, spouse, and dependent children, the limit is INR 25,000 (INR 50,000
if the insured are senior citizens). Additionally, an extra deduction for insurance of parents
(father or mother or both) is available to the extent of INR 25,000 (INR 50.000 if parents are
senior citizens).
5. Section 80E: Interest on Education Loan: The interest paid on an education loan taken for
higher education is deductible under Section 80E. This deduction is available for a maximum of 8
years or till the interest is paid, whichever is earlier. There is no cap on the amount of deduction
under this section.
6. Section 80G: Donations: Donations made to specified relief funds and charitable institutions can
be claimed as a deduction under Section 80G. The amount of deduction depends on the type of
donation made without restriction. it can either be 100% or 50% with or
7. Section 80TTA: Interest on Savings Account: A deduction up to INR 10,000 is allowed on
interest earned from savings bank accounts under Section 80TTA. This is applicable to
individuals and HUFs.
8. Section 80CCD (1B): National Pension System (NPS): Contributions to NPS are eligible for an
additional deduction of INR 50.000 under Section 80CCD (1B), which is over and above the
deduction available under Section 80C.
9. Section 24(b): Interest on Home Loan: For a self-occupied property, interest on home loans is
deductible up to INR 2,00,000 under Section 24(b). If the house property is rented, there is no
maximum limit, but the loss under the head income from house property can be set off only up
to INR 2 lakhs.
10. Leave Travel Allowance (LTA): LTA is tax-free subject to conditions related to travel costs
incurred by the employee during the leave period. The exemption is only for the shortest
distance on a trip and is limited to the actual travel costs involving air, rail, or bus fares by the
shortest route to the destination
11. Professional Tax: Professional tax paid to a state government is allowed as a deduction from
salary income. The amount of deduction is equal to the amount of professional tax paid during
the year.

Exemptions from Salary

 Exemptions from salary are specific provisions allowed under the Indian Income Tax Act, 1961,
which help reduce the taxable income of an individual.
 These exemptions are typically related to allowances that are part of an employee's salary
package.
1. House Rent Allowance (HRA): One of the most significant exemptions for salaried individuals is
the House Rent Allowance. The amount of HRA exempted from taxation is the least of the
following:
 Actual HRA received from the employer.
 50% of the basic salary if living in a metro city (40% for non-metros).
  Excess of rent paid over 10% of salary.

This exemption allows employees living in rented houses to claim a substantial part of their HRA as
non-taxable, subject to the conditions mentioned above.

2. Leave Travel Allowance (LTA): The LTA is an exemption for expenses incurred on travel when on
leave from work. This exemption can be claimed for travel costs for the employee and their
family (spouse, children, and dependent parents and siblings). However, it is limited to travel
within India and is available for two journeys in a block of four years.
3. Standard Deduction: Introduced in the budget of 2018, the standard deduction allows a flat
deduction of INR 50,000 from the taxable salary. This deduction replaced the transport
allowance and medical reimbursement and is applicable to all salaried individuals and
pensioners, simplifying tax compliance with no requirement to submit proofs.
4. Transport Allowance: Transport allowance to an employee with a disability is exempt up to INR
3200 per month. This is specifically designed to facilitate the commute between home and
workplace for physically challenged employees.
5. Children Education Allowance: An exemption is available for children's education allowance up
to INR 100 per month per child for a maximum of two children. Additionally, hostel expenditure
allowance is exempt up to INR 300 per month per child for a maximum of two children.
6. Special Allowances: Certain special allowances are exempt, such as allowances for travel on
tour or on transfer and allowances to meet the cost of travel on conveyance under Section
10(14) of the Income Tax Act. The exemption is limited to the amount actually incurred for the
purpose of business or employment.
7. Helper Allowance: Any allowance to meet the expenditure incurred on a helper where such
helper is engaged for the performance of duties of an office or employment of profit is exempt
to the extent of expenditure actually incurred.
8. Research Allowance: Any allowance granted for encouraging the academic, research and
training pursuits in educational and research institutions is exempt to the extent of expenditure
incurred.
9. Uniform Allowance: Any allowance granted to meet the expenditure incurred on the purchase
or maintenance of uniform for wear during the performance of duties of an office or
employment is exempt to the extent of expenditure actually incurred.
10. Conveyance Allowance: While the general conveyance allowance was subsumed under the
standard deduction, conveyance allowance provided to meet the travel costs from residence to
office is fully exempt if it is part of a special arrangement or is necessary owing to the specific
nature of the job.
11. Driver Salary: If the employee receives an allowance for employment of a driver to drive a
motor vehicle owned or hired by the employee, the allowance is exempt to the extent of
expenditure actually incurred.
12. Professional Tax: The professional tax paid by an employer on behalf of an employee is exempt
from the salary of the employee as it is deemed to be a tax paid by the employer
Computation of Taxable income from Salary
 Taxable Income refers to the amount of an individual's or a corporation's income that is subject
to income tax by the government.
 It is calculated by subtracting allowable deductions, exemptions, and adjustments from gross
income, which includes earnings from employment, dividends, rental income. business profits,
and other sources.
 The exact components of taxable income can vary by country, depending on local tax laws.
Determining taxable income is crucial for filing tax returns and understanding how much tax one
owes.
 It essentially represents the base upon which tax rates are applied to compute the total tax
liability.
 The computation of taxable income from salary is an essential process for salaried individuals
under the Income Tax Act, 1961 in India.
 This computation involves several steps, starting from understanding the components of salary,
identifying exempt portions, and then calculating the net taxable salary

1. Understanding the Components of Salary

Salary for tax purposes includes several components:

 Basic Salary: The core of salary packages, paid monthly.

 Allowances: Various allowances provided by employers, such as House Rent Allowance (HRA),
Dearness Allowance (DA), Leave Travel Allowance (LTA), and others.
 Bonuses: Any bonuses received during the year.
 Commission: This may be a fixed amount or a percentage of turnover achieved by the employee
 Arrears of Salary: Sometimes salary of previous years is paid in the current year, such payments
are also included.

2. Addition of Perquisites

Perquisites are benefits or amenities provided by an employer to employees and are taxable under
specific circumstances. Examples are:

 Accommodation provided by the employer.

 Car facility.
 Stock options.
 Club membership fees.
 Insurance premiums paid by the employer.

3. Inclusion of Retirement Benefits

Any contributions to retirement benefit plans such as a provident fund or gratuity that are taxable
should be included. The taxation rules vary:
  Provident Fund: Employer's contribution exceeding 12% of salary and interest earned above
9.5% is taxable.
 Gratuity: Exempt up to a certain limit under specified conditions.
 Pension: Commutation of pension is partially exempt, while regular pension is taxable

4. Calculation of Gross Salary

Sum up all the components mentioned above to arrive at the gross salary. This will include basic salary,
allowances, perquisites, bonuses, and any other form of remuneration received from employment.

5. Deducting Allowable Exemptions and Deductions

From the gross salary, subtract the exemptions allowed under the Income Tax Act:

 House Rent Allowance (HRA): Exempt subject to conditions related to salary, rent paid, and
place of residence.
 Standard Deduction: A flat deduction of INR 50,000 applicable to all salaried individuals.
 Leave Travel Allowance (LTA): Exempt to the extent of actual travel costs incurred by the
employee for himself/herself and family.
 Special Allowances: Such as children education allowance, hostel allowance which are exempt
up to specified limits.

6. Professional Tax

Professional tax paid during the year can be deducted from the gross salary. The amount of professional
tax deductible is subject to the state legislation where the employee is employed.

7. Computation of Net Taxable Salary

After subtracting exemptions and professional tax from the gross salary, the amount arrived at is the net
taxable salary. This is the amount on which income tax is calculated based on the income tax slabs
applicable for that financial year.

8. Application of Income Tax Slabs

India has progressive tax slabs, which means the tax rate increases as income increases. For the financial
year 2021-2022, for instance, the tax rates for individuals below 60 years are:

 Income up to INR 2,50,000: No tax

 INR 2,50,001 to INR 5,00,000: 5% tax
 INR 5,00,001 to INR 10,00,000: 20% tax
 Above INR 10,00,000: 30% fax

9. Cess and Surcharge

A health and education cess of 4% is applicable on the tax calculated. Additionally, surcharge may be
applicable depending on the income level.

10. Final Tax Liability

Calculate the total tax liability by adding the cess (and surcharge, if applicable) to the tax calculated as
per the slabs. This gives the total tax payable by the individual.

Introduction to Income from House Property:

 Income from house property refers to the rental income or deemed rental income earned by an
individual from a property they own.
 It includes income from residential or commercial properties, self-occupied properties, let-out
properties, and vacant properties.

Computation of Income from House Property:

1. Gross Annual Value (GAV): GAV is the potential rental value of the property or the actual rent
received, whichever is higher.
2. Municipal Taxes: Deduct the municipal taxes paid during the financial year from the GAV to
arrive at the Net Annual Value (NAV).
3. Standard Deduction: Deduct a standard deduction of 30% from the NAV to account for repairs,
maintenance, and other expenses.
4. Interest on Home Loan: Deduct the interest paid on home loan (subject to certain limits and
conditions) from the NAV after deducting the standard deduction.
5. Income from House Property: The final figure obtained after deducting the home loan interest
from the NAV represents the income from house property.

Types of Properties and Tax Treatment:

1. Self-Occupied Property: If an individual owns a property for self-residence, it is considered a
self-occupied property. In such cases, the income from house property is calculated as nil.
However, certain deductions are still available.
2. Let-Out Property: When a property is rented out to tenants, the actual rent received or
expected rent is considered as the GAV. Deductions for municipal taxes, standard deduction,
and home loan interest can be claimed against this rental income.
3. Vacant Property: If a property remains unoccupied for the entire year, it is classified as a vacant
property. The GAV of a vacant property is considered as nil, but deductions for municipal taxes
and home loan interest can still be claimed.

Deductions and Exemptions:

1. Deduction for Municipal Taxes: Deduct the municipal taxes paid during the financial year from
the GAV or NAV.
 2. Standard Deduction: A standard deduction of 30% is allowed on the NAV to account for repairs,
maintenance, and other expenses.
3. Deduction for Home Loan Interest: For let-out properties, the entire interest paid on the home
loan can be claimed as a deduction. For self-occupied properties, the deduction is limited to ₹2
lakh per year.
4. Pre-Construction Interest: For properties under construction, the interest paid during the
construction period can be claimed in five equal installments starting from the year of
completion.
5. Co-ownership and Joint Ownership: In case of co-ownership or joint ownership of a property,
the income and deductions are divided based on the respective shares of ownership.

Set-Off and Carry Forward:

1. Loss from House Property: If the income from house property results in a loss, it can be set off
against other heads of income like salary. business income, or capital gains. Loss from house
property can be carried forward for eight subsequent years and set off against income from
house property only.

Taxation of Income from House Property:

1. Taxable Income: The income from house property, after considering deductions, is added to the
taxpayer's total income and taxed as per the applicable income tax slab rates.
2. Co-owners' Tax Liability: In the case of co-ownership, each co-owner is taxed separately on
their share of income from the property. The share of income is calculated based on the
ownership percentage of each co-owner.

Special Cases and Exemptions:

1. Self-Occupied Property Exemption: If an individual owns only one self-occupied property, no
income tax is payable on it. However, deductions for home loan interest and municipal taxes can
still be claimed.
2. Let-Out Property Loss: If the income from a let-out property results in a loss after considering
deductions, the loss can be set off against other heads of income without any limit.
3. Joint Home Loan: In the case of joint ownership and joint home loans, each co-owner can claim
deductions for home loan interest based on their contribution and share in the loan.

Taxation for Non-Resident Indians (NRIs):

 NRIs who earn rental income from property in India are subject to tax on the income earned.
 TDS (Tax Deducted at Source) is applicable when the tenant is an NRI or when the rental income
exceeds a specified threshold.
 NRIs are also eligible for deductions and exemptions available for residents, such as deductions
for home loan interest and municipal taxes.
Filing Income Tax Returns:
 Individuals earning income from house property need to file their income tax returns using the
appropriate forms
 provided by the Income Tax Department.
 The income from house property is reported under the relevant head of income in the income
tax return form, along with details of deductions and exemptions claimed.

Importance of Documentation and Record Keeping:

 It is crucial to maintain proper documentation related to rental agreements, receipts of rent
received, and payment of municipal taxes.
 Keep records of home loan interest payments, loan statements, and possession dates for
claiming deductions accurately.

Seeking Professional Advice:

 Tax laws and regulations are subject to change, and the computation of income from house
property can be complex in certain situations.
 It is advisable to consult with a qualified tax professional or chartered accountant for
personalized advice and guidance specific to your situation.

Income from House property Basis of charge

 The basis of charge for income from house property in India is determined by the Income Tax
Act, 1961.
 According to the Act, the chargeability of income from house property arises when an individual
earns income from the ownership of a property, whether it is through actual rental income or
deemed rental income.

The following are the key elements that establish the basis of charge for income from house property:

1. Ownership: The income from house property is chargeable to the owner of the property. The
term "owner" includes an individual, a Hindu Undivided Family (HUF), a company, a firm, or any
other legal entity that holds legal ownership or is entitled to receive the income from the
property.
2. Existence of Property: The property must qualify as a "house property" to be subject to tax. A
house property includes any building or land appurtenant thereto, which is used for residential,
commercial, or other purposes.
3. Accrual or Receipt of Income: The chargeability of income from house property is triggered
when the income either accrues or is received by the owner, whichever is earlier. Income is said
to accrue when the owner has the right to receive it, even if it has not been received yet.
 However, if the property is let out, the income is considered to accrue on a monthly or annual
basis, depending on the terms of the lease agreement.
4. Deemed Rental Income: In certain cases, where the property is not actually let out, the income
is determined on a deemed basis. For example, if the property is self-occupied by the owner, a
deemed rental income is calculated based on the standard rent that could have been derived
from a similar property in the same locality.
5. Determination of Annual Value: The annual value of the property is the basis on which the
income from house property is computed. It is the potential rental value that the property is
expected to earn during a financial year. It is calculated based on the higher of the actual rent
received or receivable or the fair rental value of the property.
6. Deductions and Exemptions: After determining the annual value, certain deductions and
exemptions are allowed under the Income Tax Act. These include deductions for municipal taxes
paid, standard deduction of 30% on the net annual value, and deduction of interest paid on
home loans. These deductions help in arriving at the taxable income from house property.
7. Taxation of Income: The taxable income from house property is included in the owner's total
income and taxed as per the applicable income tax slab rates. The income from house property
is subject to progressive taxation, where the tax rates increase with higher income levels.

Determinants of Annual Value

The determination of the annual value of a house property is a crucial aspect in computing income from
house property for taxation purposes in India. The annual value serves as the basis for calculating the
taxable income from the property. The Income Tax Act, 1961 provides guidelines for determining the
annual value, taking into account various factors known as determinants. The key determinants of
annual value are as follows:

Actual Rent Received or Receivable: If the property is let out and rent is received, the actual rent
received or receivable is an important determinant of the annual value. It refers to the rent amount
actually received by the owner during the financial year or the rent that the owner is entitled to receive.

Municipal Valuation: In some cases, municipal authorities assess the property's annual value for the
purpose of levying municipal taxes. The municipal valuation, if available, can be considered as one of the
determinants for calculating the annual value.

Fair Rent: If the property is let out and the actual rent received is lower than the fair rent, the fair rent
can be taken into account as a determinant of the annual value. Fair rent refers to the rent that a similar
property in the same or similar locality would fetch in the open market.

Standard Rent: Standard rent is a predetermined rent fixed by the Rent Control Act in certain cities. If
the property falls within the jurisdiction of Rent Control Act and the actual rent is lower than the
standard rent, the standard rent can be considered as a determinant of the annual value.
Unrealized Rent: If the owner is unable to recover the full rent due to factors like vacancy or default by
the tenant, the unrealized rent can be taken into account as a determinant of the annual value.
Unrealized rent is the rent that remains unpaid and cannot be recovered from the tenant.

Self-Occupation: If the property is self-occupied by the owner, the annual value is determined by
considering a deemed rental value. The deemed rental value is an assumed rental income that the
property would have fetched if it were let out. In such cases, the actual rent received is considered as
nil, and the annual value is based on the deemed rental value.It is important to note that the specific
determinant of annual value depends on the circumstances of each property and the applicable
provisions of the Income Tax Act. The highest of the above determinants is considered the annual value
of the property, and deductions for municipal taxes and standard deduction are applied to arrive at the
net annual value. To determine the annual value accurately and comply with the tax laws, it is advisable
to refer to the latest provisions of the Income Tax Act, consult professional advice, and maintain proper
documentation related to rental agreements and rent receipts.

Deductions and exemptions

Deductions and exemptions play a crucial role in computing taxable income from house property in
India. They help to reduce the overall tax liability by allowing taxpayers to claim certain expenses and
exemptions related to their property. Here are some common deductions and exemptions available for
income from house property:

1. Standard Deduction: Standard deduction of 30% of the Net Annual Value (NAV) is allowed as a
deduction to cover expenses related to repairs, maintenance, and collection of rent. This
deduction is available irrespective of the actual amount spent on these expenses.
2. Interest on Home Loan: Deduction for interest paid on a home loan is available under Section
24(b) of the Income Tax Act. The maximum deduction allowed for self-occupied properties is up
to 2 lakh per financial year. For let-out or deemed let-out properties, the entire interest paid is
allowed as a deduction without any maximum limit. This deduction can be claimed for both the
construction period and the repayment period of the home loan.
3. Municipal Taxes: Deduction for municipal taxes paid during the financial year is allowed under
Section 24(a) of the Income Tax Act. The amount of municipal taxes paid can be deducted from
the Gross Annual Value (GAV) to arrive at the Net Annual Value (NAV) of the property.
4. Pre-Construction Interest: In the case of properties under construction, the interest paid on
loans taken for the construction period can be claimed as a deduction in five equal installments
starting from the year of completion of construction.
5. Co-ownership and Joint Ownership: In the case of co-ownership or joint ownership of a
property, each co-owner can claim deductions in proportion to their share in the property. This
includes deductions for interest on home loan and municipal taxes paid.
6. Self-Occupied Property Exemption: If the property is self-occupied by the owner, the income
from house property is considered as nil. However, certain deductions such as municipal taxes
and interest on home loan can still be claimed.
 7. Loss from House Property: If the income from house property results in a loss after considering
deductions, the loss can be set off against other heads of income such as salary or business
income. The loss from house property can be carried forward for eight subsequent financial
years and set off against income from house property only.

Computation of Taxable income House Property

The computation of taxable income from house property involves several steps and considerations.

Determine the Gross Annual Value (GAV): GAV is the higher of the actual rent received from the
property or the potential rental value of the property. If the property is self-occupied, the GAV is
considered as nil.

Deduct Municipal Taxes: Deduct the municipal taxes paid during the financial year from the GAV to
arrive at the Net Annual Value (NAV).

Apply Standard Deduction: Deduct a standard deduction of 30% from the NAV to account for repairs,
maintenance, and other expenses.

Deduct Interest on Home Loan: If the property is let-out or deemed to be let-out, deduct the interest
paid on the home loan from the NAV after applying the standard deduction. For self-occupied
properties, the maximum deduction for interest on home loan is capped at 2 lakh per financial year.

Compute Income from House Property: The final figure obtained after deducting the interest on home
loan from the NAV represents the income from house property. If the result is a negative value, it is
considered as a loss from house property.

Set-off of Loss: If there is a loss from house property, it can be set off against income from other heads
such as salary, business income, or capital gains. The set-off can be done in the same financial year. If
the loss cannot be fully set off, the remaining loss can be carried forward for up to eight subsequent
financial years and set off against income from house property only.

Add to Total Income: Add the computed income from house property to the taxpayer's total income,
which includes income from other sources, salary, business income, and so on.

Apply Applicable Tax Slab: Calculate the tax liability on the total income, including the income from
house property, as per the applicable income tax slab rates for the financial year.

Example:
• Assumptions:

Property Type: Let-Out

Gross Annual Rent: ₹3,00,000

Municipal Taxes Paid: ₹20,000

Interest on Home Loan: ₹1,50,000

Standard Deduction: 30% of Net Annual Value

Unit-3
Meaning of Business Income
 Business income in india refers to the profits or gains earned by individuals, partnerships, or
companies from their business activities.
 It is a broad term that encompasses income derived from any trade, profession, or commercial
activity.
 Business income is one of the five heads of income as defined by the Income Tax Act, 1961, and
it is subject to taxation under the provisions of the Act.

Business Activities: Business income includes income generated from various business activities such as
manufacturing, trading. providing services, consultancy, professional practice, and any other commercial
ventures.

Profit Motive: Business income is earned with the intention of making a profit. The primary objective of
engaging in business activities is to generate income or gain.

Regularity and Continuity: Business income typically involves regular and continuous activities carried
out over a period of time. It is not a one- time or sporadic transaction but an ongoing commercial
endeavor.

Control and Management: Taxpayer must have control and management over the business activities,
including decision-making, risk-bearing, and ownership of assets.

Separate Entity: Business income is treated as a separate entity from the taxpayer. Even in the case of a
sole proprietorship, the business is considered distinct from the individual.

Accounting Principles: Business income is computed based on the principles of accounting, including the
accrual method of accounting where income and expenses are recognized when they accrue,
irrespective of the actual receipt or payment.

Deductions and Allowances: Tax laws allow various deductions and allowances to be claimed against
business income. These include expenses incurred for business purposes, depreciation on assets,
salaries and wages, rent, interest, insurance, and other allowable business expenses.

Taxation: Business income is subject to taxation under the Income Tax Act. The applicable tax rates for
business income vary based on the legal entity (individual, partnership, or company) and the total
income earned.

Methods of Business Accounting

There are two main methods of accounting for business income:

1. Cash Basis Accounting:

  Under the cash basis accounting method, income is recognized and recorded when it is
received in cash, and expenses are recorded when they are paid in cash.
 This method focuses on the actual inflows and outflows of cash It is relatively simple and
commonly used by small businesses or individuals who do not maintain detailed accounting
records.
 Cash basis accounting does not consider credit transactions or accounts receivable/payable.
2. Accrual Basis Accounting:
 Accrual basis accounting method recognizes income and expenses when they are earned or
incurred, regardless of the timing of cash receipts or payments.
 Under this method, revenue is recorded when it is earned, even if the payment is not
received, and expenses are recorded when they are incurred, even if the payment is not
made.
 Accrual basis accounting provides a more accurate picture of the financial performance and
position of a business over a given period.
 It takes into account credit transactions, accounts receivable, accounts payable, and the
matching principle, which aligns revenues with the expenses incurred to generate them.
 In India, businesses are required to follow the accrual basis of accounting for income tax
purposes, except for certain eligible small businesses that can opt for the cash basis if their
turnover does not exceed the specified threshold.
 In addition to the cash and accrual basis accounting methods, there are also hybrid methods
such as the modified cash basis or the percentage of completion method used in specific
industries or for certain types of transactions.
 These methods may be required or recommended based on the nature of the business,
regulatory requirements, or accounting standards.

Deductions and Disallowances

 Deductions and disallowances refer to the specific expenses and items that are either eligible for
deduction or not allowed to be deducted when computing taxable income.
 These deductions and disallowances are governed by the provisions of the Income Tax Act, 1961
in India.
 It is important for taxpayers to understand the specific deductions allowed and disallowed as
per the applicable provisions of the Income Tax Act.
 Proper documentation and compliance with the prescribed conditions and procedures are
essential to claim eligible deductions and avoid disallowances.
 Consulting with a tax professional or referring to the latest provisions of the Income Tax Act is
advisable to ensure accurate computation of taxable income and compliance with tax
regulations.

Here are some common deductions and disallowances:

Deductions:
 3. Business Expenses: Deductions are allowed for expenses incurred for the purpose of business,
profession, or trade. This includes expenses such as rent, salaries and wages, depreciation,
repairs and maintenance, office expenses, advertising and marketing expenses, insurance
premiums, and other legitimate business expenses.
4. Depreciation: Deduction is allowed for the depreciation of assets used for business purposes.
The depreciation rate and method may vary depending on the type of asset.
5. Interest Expenses: Deductions are allowed for interest paid on loans or borrowings used for
business purposes. This includes interest on business loans, overdrafts, and other forms of
business financing
6. Bad Debts: Deductions are allowed for bad debts that have become irrecoverable and are
written off as per the prescribed conditions and procedures.
7. Contributions to Provident Fund and Superannuation Fund: Deductions are allowed for
contributions made by employers to recognized provident funds and approved superannuation
funds.
8. Donations: Deductions are allowed for donations made to certain specified charitable
institutions or funds, subject to prescribed conditions and limits.

Disallowed Expenses:

1. Personal Expenses: Personal or private expenses are generally not allowed as deductions. These
include expenses related to personal living, clothing, personal entertainment, personal travel, and
other non-business-related expenses.
2. Capital Expenditure: Expenditure incurred for acquiring, improving, or extending a capital asset is
generally not allowed as a deduction. Instead, it may be eligible for depreciation or other capital
allowance deductions.
3. Fines and Penalties: Any fines, penalties, or payments related to illegal activities or offenses are
generally disallowed as deductions.
4. Interest on Unauthorized Loans: Interest paid on unauthorized loans or loans taken from specified
persons/entities may be disallowed as a deduction.
5. Specified Expenses: There may be certain expenses specifically disallowed as deductions under
specific sections or provisions of the Income Tax Act, such as expenses related to club
memberships, entertainment expenses, and certain employee benefits.

Computation of Presumptive income under Income-tax Act.

 Income Tax Act, 1961 in India provides for the computation of presumptive income for certain
specified businesses and professions.
 Presumptive income is a simplified method of calculating taxable income based on a percentage
of gross receipts or turnover, without the need for maintaining detailed books of accounts.
 It is important to note that the presumptive income scheme is optional, and taxpayers have the
choice to opt for it or maintain regular books of accounts and claim actual expenses.
 The scheme aims to provide a simplified method for computing taxable income for eligible
taxpayers engaged in small businesses or professions.
  However, taxpayers should evaluate the pros and cons of the presumptive income scheme and
assess its applicability based on their specific circumstances.
 Consulting with a tax professional or referring to the latest provisions of the Income Tax Act is
advisable for accurate computation of presumptive income and compliance with tax regulations.

Here is an overview of the computation of presumptive income under the Income Tax Act:

1. Eligible Taxpayers: The presumptive income scheme is available to certain eligible taxpayers,
including:
 Small businesses with a total turnover or gross receipts of up to ₹2 crore (₹1 crore for
professionals).
 Professionals engaged in specific occupations such as doctors, lawyers, architects,
engineers, accountants, etc.
2. Presumptive Income Rates: The Income Tax Act prescribes certain percentages as the
presumptive income rates based on the nature of the business or profession. The eligible
taxpayer needs to calculate their gross receipts or turnover and apply the applicable percentage
to determine the presumptive income.

Presumptive Income Calculation:

1. Business Income: For eligible businesses, the presumptive income is generally calculated as a
percentage of the total turnover or gross receipts. The presumptive income rate is different for
different types of businesses. For example, for eligible small businesses, the presumptive income
rate is usually 8% of the total turnover or gross receipts.
2. Professional Income: For eligible professionals, the presumptive income is generally calculated
as a percentage of the gross receipts. The presumptive income rate for professionals is usually
50% of the gross receipts.
3. Expenses and Deductions: Taxpayers opting for the presumptive income scheme are not
required to maintain detailed books of accounts or provide supporting documents for expenses.
However, they are deemed to have claimed all deductions and allowances under the Income Tax
Act. Therefore, no further deductions or allowances are allowed against the presumptive
income.
4. Tax Liability: The presumptive income is treated as the taxable income of the taxpayer. The
taxpayer needs to calculate the tax liability based on the applicable tax rates for the financial
year.
5. Filing of Return: Taxpayers opting for the presumptive income scheme need to file their income
tax return in the applicable forms specified by the Income Tax Act. They need to report their
presumptive income and pay taxes accordingly.

Computation of Taxable income from Business and profession

Computation of Txable income from business and profession involves various steps and considerations
as per the provisions of the Income Tax Act, 1961 in India.
 1. Gross Receipts/Turnover: The first step in computing taxable income from business and profession
is to determine the gross receipts or turnover. Gross receipts refer to the total revenue generated
from the business activities, including sales, fees, commissions, and any other income earned
during the financial year.
2. Deductible Expenses: Once the gross receipts/turnover is determined, eligible business expenses
are deducted to arrive at the gross profit. Deductible expenses include costs incurred for the
purpose of the business or profession. Some common deductible expenses are:
3. Cost of Goods Sold (COGS): For businesses involved in the sale of goods, the cost of acquiring or
producing those goods is deductible. This includes the cost of raw materials, direct labor, and
manufacturing overhead.
4. Rent and Lease Expenses: The amount paid as rent or lease for business premises, machinery,
equipment, or vehicles can be deducted.
5. Salaries, Wages, and Employee Benefits: The salaries, wages, and other employee benefits paid to
employees engaged in the business are deductible expenses.
6. Repairs and Maintenance: Expenses incurred for repairs and maintenance of business assets, such
as buildings, machinery, and equipment, can be deducted.
7. Advertising and Marketing Expenses: Expenses incurred for advertising, marketing, promotions,
and branding activities are deductible.
8. Depreciation: Depreciation expense is allowed for the wear and tear, obsolescence, or
depreciation of business assets over their useful life. The depreciation deduction is calculated
based on the applicable rates and methods prescribed by the Income Tax Act.
9. Interest Expenses: Interest paid on loans or borrowings used for business purposes is deductible.
However, interest on certain unauthorized loans or loans from specified persons/entities may be
disallowed.
10. Insurance Premiums: Premiums paid for business-related insurance policies, such as fire
insurance, liability insurance, or business interruption insurance, can be deducted.
11. Professional Fees: Fees paid to professionals such as accountants, lawyers, consultants, or other
professional service providers are deductible.
12. Travel and Conveyance Expenses: Expenses incurred for business-related travel, including
transportation, accommodation, and meals, can be deducted.
13. Bad Debts: If there are debts that have become irrecoverable, they can be deducted as bad debts
subject to prescribed conditions and procedures.
14. Other Allowable Expenses: There may be various other business-related expenses that are
allowed as deductions, such as office expenses. telephone and internet charges, courier charges,
bank charges, and legal expenses.

It is important to maintain proper records and supporting documents for all deductible expenses to
substantiate the claim during tax assessments.

Depreciation Adjustment:
 After deducting the eligible expenses, the depreciation adjustment is made.
  The net profit or loss is adjusted by adding back the depreciation expense deducted earlier and
subtracting the current year's depreciation expense calculated based on the applicable rates.
1. Other Incomes: Any other incomes earned by the taxpayer, such as rental income from properties,
interest income, or income from investments, should be included in the computation of taxable
income.
2. Deductions and Allowances: Once the net profit or loss from the business or profession is
computed, certain deductions and allowances are applied to arrive at the taxable income. These
include:
3. Deductions under Section 30 to Section 43D: Income Tax Act provides specific deductions and
allowances for different types of businesses and professions. For example, deductions are available
for scientific research expenses, expenditure on patents, copyrights, trademarks. and other eligible
business-related expenses as specified in the relevant sections of the Income Tax Act.
4. Deductions under Chapter VI-A: Taxpayers engaged in business or profession are also eligible for
deductions under Chapter VI-A of the Income Tax Act. These deductions include popular provisions
such as deductions for contributions to the National Pension Scheme (NPS), Employees Provident
Fund (EPF), Public Provident Fund (PPF), life insurance premiums, medical insurance premiums,
donations to charitable institutions, and various other specified deductions.
5. Presumptive Taxation Scheme: Taxpayers meeting specific criteria can opt for the presumptive
taxation scheme, as discussed earlier. Under this scheme, a certain percentage of gross receipts or
turnover is considered as the presumptive income, and no further deductions are allowed. This
scheme simplifies the computation of taxable income for eligible businesses and professions.

Set-off and Carry Forward of Losses:

 If the net profit is negative, i.e., a loss is incurred, it can be set off against income from other
sources in the same financial year.
 If there is still a loss remaining after set-off, it can be carried forward to subsequent years and
set off against future profits for a specified period, subject to certain conditions and limits.
1. Tax Rates and Tax Liability: After arriving at the taxable income, the applicable tax rates are
applied to calculate the tax liability. The income tax rates and slabs vary based on the nature of
the taxpayer (individual, partnership firm, company, etc.) and the total income earned. The
income tax rates are periodically updated through the annual Union Budget presented by the
Government of India.
2. Filing of Income Tax Return: Once the taxable income and tax liability are determined, the
taxpayer is required to file an income tax return in the prescribed format. The income tax return
should reflect the details of the business or profession, including the computation of income,
deductions claimed, tax payments made, and other relevant information.

Meaning of Capital Asset.

 A capital asset refers to any property held by an individual or a business, except for certain
specified items such as stock-in-trade, raw materials, or consumable stores.
  It includes tangible assets like land, buildings, vehicles, machinery, furniture, and intangible
assets like patents, trademarks, copyrights, and goodwill.
 In simpler terms, a capital asset is an investment or property that is acquired for long-term use
or investment purposes rather than for immediate resale or consumption.
 Capital assets are generally held for their potential to generate income or appreciation in value
over time.

The Income Tax Act, 1961 in India defines capital assets for the purpose of taxation. It classifies assets
into two categories:

1. Short-Term Capital Assets: These are assets held for a period of up to 36 months (reduced to 24
months for certain immovable properties like land, buildings, and house property) before their
transfer, Short-term capital assets include shares, securities, and other investments, as well as
movable and immovable properties.
2. Long-Term Capital Assets: These are assets held for more than the specified period, which is
generally 36 months (reduced to 24 months for certain immovable properties). Long-term
capital assets include shares, securities, mutual fund units, real estate properties, jewelry,
artwork, and other assets. The classification of assets as short-term or long-term is important for
determining the applicable tax rates and tax treatment when these assets are sold or
transferred.

Basis of Capital Asset Charge

 The basis of capital asset charge refers to the determination of the cost or value at which a
capital asset is considered for taxation purposes.
 It plays a significant role in computing capital gains or losses when the asset is sold, transferred,
or otherwise disposed of.

The basis of capital asset charge varies depending on the circumstances under which the asset was
acquired. Here are some common scenarios:

1. Purchase of Capital Asset: When a capital asset is acquired through purchase, the basis of
charge is generally the cost of acquisition. It includes the actual purchase price paid to acquire
the asset, along with any associated expenses directly attributable to the acquisition, such as
brokerage fees, legal fees, registration charges, or transfer taxes. The cost of acquisition is
adjusted for any subsequent improvements or additions made to the asset.
2. Inheritance or Gift: In the case of inheriting a capital asset or receiving it as a gift, the basis of
charge is generally the fair market value of the asset on the date of inheritance or gift. This
means that the value of the asset at the time of acquisition is considered the basis for
determining capital gains or losses when the asset is subsequently sold or transferred.
3. Self-Generated Assets: For assets that are self-generated, such as self-constructed buildings, the
basis of charge is determined based on the cost of construction. It includes the cost of materials,
labor, and any other directly attributable expenses incurred during the construction process.
 4. Conversion of Asset: When a capital asset is converted from one form to another, such as
conversion of stock-in-trade to a capital asset or vice versa, the basis of charge is determined
based on the fair market value of the asset on the date of conversion.
5. Government Acquisition: In cases where the government acquires a capital asset through
compulsory acquisition or eminent domain, the basis of charge is determined based on the
compensation received from the government.

Exemptions related to Capital gains

 Exemptions related to capital gains are provisions in the tax laws that provide relief or
exemption from tax liability on certain capital gains earned by taxpayers.
 These exemptions aim to encourage investment, promote economic growth, and incentivize
specific activities.
1. Exemption under Section 54: This exemption applies to long-term capital gains arising from the
sale of a residential house property. If the taxpayer utilizes the entire amount of capital gains to
purchase another residential house property within a specified period (one year before or two
years after the sale) or constructs a new residential house property within three years from the
date of sale, the capital gains are exempt from tax. However, certain conditions need to be met
to claim this exemption.
2. Exemption under Section 54F: This exemption is applicable to long-term capital gains arising
from the sale of any capital asset other than a residential house property. If the taxpayer utilizes
the entire amount of capital gains to purchase a residential house property within the specified
time frame (one year before or two years after the sale) or constructs a new residential house
property within three years from the date of sale, the capital gains are exempt from tax. Similar
to Section 54. certain conditions apply.
3. Exemption under Section 54EC: This exemption allows taxpayers to invest the long-term capital
gains from the sale of any capital asset in specified bonds issued by the National Highway
Authority of India (NHAI) or the Rural Electrification Corporation (REC). The investment must be
made within six months from the date of sale, and the amount invested is eligible for exemption
up to a specified limit. This exemption is available only for long-term capital gains.
4. Exemption under Section 54B: This exemption is applicable to long-term capital gains arising
from the transfer of land used for agricultural purposes. If the taxpayer utilizes the capital gains
to purchase other agricultural land within a specified period, the gains are exempt from tax.
Certain conditions related to the extent of agricultural land and the holding period of the new
land need to be met
5. Exemption under Section 54G: This exemption applies to long-term capital gains arising from
the transfer of an industrial undertaking. If the taxpayer invests the capital gains in acquiring
new assets (such as land, building, plant, machinery) for the purpose of shifting or establishing
an industrial undertaking, the gains are exempt from tax. Certain conditions and timelines need
to be fulfilled to claim this exemption.
6. Exemption under Section 10(38): This exemption applies to long-term capital gains arising from
the transfer of equity shares or units of equity-oriented mutual funds on which securities
 transaction tax (STT) is paid. Such gains are entirely exempt from tax in the hands of the
taxpayer.

Meaning of Transfer
The term "Transfer" refers to the act of disposing of or transferring ownership or rights in a capital asset
from one party to another. It encompasses various transactions involving the sale, exchange, gift, or any
other mode of transferring the asset. The Income Tax Act, 1961 in India defines the term "transfer
broadly to include the following

1. Sale or Purchase: Transfer includes the sale or purchase of a capital asset, where ownership or
rights in the asset are transferred in exchange for a consideration, typically in the form of money.
2. Exchange: Transfer also covers the exchange of a capital asset for another asset, where the
ownership or rights in one asset are exchanged for ownership or rights in another asset.
3. Relinquishment: Transfer includes the relinquishment of a capital asset, where the owner
voluntarily gives up or renounces the ownership or rights in the asset without receiving any
consideration in return.
4. Extinction of Rights: Transfer encompasses cases where any rights in a capital asset are
extinguished, such as the surrender or abandonment of rights, or the expiry of a lease or license
agreement
5. Compulsory Acquisition: Transfer includes instances where a capital asset is compulsorily acquired
by the government or any statutory authority under the law, such as through eminent domain,
nationalization, or acquisition for public purposes.
6. Conversion: Transfer also covers cases where a capital asset is converted into another form, such
as converting stock-in-trade into a capital asset or converting a capital asset into stock-in-trade.

Computation of Taxable capital Gain

 The computation of taxable capital gains involves determining the gains or profits arising from the
transfer of a capital asset and calculating the tax liability on those gains.
 The Income Tax Act, 1961 in India provides specific rules and methods for computing taxable
capital gains.
1. Identify the Type of Asset: Determine the nature of the capital asset being transferred. It can be
classified as a long-term capital asset or a short-term capital asset based on the holding period
of the asset.
2. Determine the Full Value of Consideration: The full value of consideration is the amount
received or expected to be received by the transferor in exchange for the transfer of the capital
asset. It includes any monetary consideration, as well as non-monetary consideration such as
shares, debentures, or any other assets received as part of the transaction.
3. Calculate the Cost of Acquisition: The cost of acquisition represents the actual cost incurred to
acquire the capital asset. It includes the purchase price of the asset along with any expenses
directly related to its acquisition, such as brokerage fees, registration charges. or legal fees. If
 the asset was inherited or received as a gift, the cost of acquisition is determined based on the
fair market value of the asset at the time of inheritance or gift.
4. Determine the Cost of Improvement: If any improvements or additions were made to the
capital asset after its acquisition, the cost of improvement is added to the cost of acquisition. It
includes expenses directly related to the improvement, such as renovation costs, construction
expenses, or any other capital expenditures that enhance the value of the asset.
5. Calculate the Indexed Cost of Acquisition and Improvement: If the capital asset is a long-term
asset, the cost of acquisition and improvement is adjusted for inflation using the cost inflation
index (CII). The indexed cost is computed by multiplying the original cost with the CII of the year
of transfer and dividing it by the CII of the year of acquisition or improvement.
6. Compute the Capital Gains: The capital gains are calculated by subtracting the indexed cost of
acquisition and improvement from the full value of consideration. If the result is positive, it
represents a capital gain. If the result is negative, it represents a capital loss.
7. Apply Exemptions and Deductions: Determine if any exemptions or deductions are applicable
to reduce the taxable capital gains. The Income Tax Act provides specific exemptions for certain
types of transfers, such as exemptions under Sections 54, 54F. or 54EC for investments in
residential property or specified bonds. Deductions under Chapter VI-A may also be applicable.
8. Determine the Taxable Capital Gains: After applying any applicable exemptions and deductions,
the remaining amount represents the taxable capital gains. The tax liability on the taxable
capital gains is calculated based on the applicable tax rates for long-term or short-term capital
gains as per the Income Tax Act

Example:

In the above example, let's assume that a residential property was sold for a sale consideration (full
value of consideration) of INR 50,00,000. The indexed cost of acquisition was determined to be INR
20,00,000, and the indexed cost of improvement was INR 5,00,000. Subtracting these indexed costs
from the sale consideration gives a capital gain of INR 25,00,000.
Applying an exemption under Section 54 of INR 10,00,000, the taxable capital gains are reduced to INR
15,00,000. This amount will be subject to tax at the applicable rates as per the Income Tax Act.

It's important to note that the values provided in the table are for illustrative purposes only, and the
actual computation of taxable capital gains may vary based on individual circumstances and
applicable tax laws.

Important Points basis of charge for income from other sources:

1. Inclusion of Income: The income from other sources includes various types of income such as
interest income, rental income from assets other than house property, dividend income, income
from fixed deposits, income from savings accounts, winning from lotteries, gifts, and certain
allowances and perquisites not covered under other heads.
2. Accrual or Receipt Basis: Income from other sources can be charged to tax either on an accrual
basis or receipt basis, depending on the nature of the income. Under the accrual basis, income is
taxable when it is earned or becomes due, irrespective of whether it is received or not. Under the
receipt basis, income is taxable when it is actually received.
3. Computation of Income: The computation of income from other sources generally involves
deducting any expenses incurred for earning that income. Certain deductions or exemptions may
be available based on specific provisions of the Income Tax Act. For example, in the case of interest
income, deductions may be available for certain expenses directly related to earning that interest
income.
4. Taxation of Gifts: Gifts received in cash or kind above a specified threshold are taxable as income
from other sources, subject to certain exceptions. However, certain gifts received from relatives,
on occasions like marriage, or under certain specified circumstances may be exempt from tax.
5. Taxation of Dividend Income: Dividend income received from domestic companies is taxable
under the head "Income from Other Sources." However, certain dividends may be exempt from
tax based on specific provisions and thresholds.
6. Disallowance of Expenses: Certain expenses or allowances incurred for earning income from other
sources may be disallowed or subject to specific restrictions. For example, expenses incurred for
earning exempt income or personal expenses are generally not allowed as deductions.

Dividend Income
 Dividend income refers to the earnings received by individuals or entities in the form of
dividends from investments in shares or mutual funds.
 Dividends are typically distributed by companies to their shareholders as a share of the profits.
The taxation of dividend income in India is governed by the provisions of the Income Tax Act,
1961.
1. Dividend Distribution Tax (DDT): Historically, in India, companies were required to pay a
Dividend Distribution Tax (DDT) on the dividends declared and distributed to shareholders.
Under the DDT regime, the tax liability was on the company, and the dividend income received
by shareholders was tax-free in their hands.
 2. Removal of DDT and Introduction of New Regime: From the financial year 2020-21 (assessment
year 2021-22), the DDT regime was abolished, and a new tax regime for dividend income was
introduced. Under the new regime, dividend income is taxable in the hands of the shareholders,
subject to certain exemptions and deductions.

Taxation of Dividend Income for Individuals and HUFs:

For individuals and Hindu Undivided Families (HUFs), dividend income is taxed as follows:

1. Dividend Income from Domestic Companies: Dividend income received from domestic companies
is included in the total income of the individual or HUF and is subject to tax at applicable slab rates
as per the income tax brackets. The income is treated as "Income from Other Sources and is taxed
as per the individual's income tax slab.
2. Dividend Income up to INR 5,000: Dividend income up to INR 5,000 received during the financial
year is eligible for a deduction under Section 80TTA This deduction is available for individuals and
HUFs and is in addition to the basic exemption limit.
3. Dividend Income above INR 5,000: Dividend income exceeding INR 5.000 is taxable at the
applicable slab rates without any specific deductions.
4. Taxation of Dividend Income for Companies and Firms: For companies and firms, dividend income
is taxable as per the applicable income tax rates. Dividend income received by companies and
firms is considered as part of their total income and is taxed at the applicable corporate tax rates.
5. Tax Deducted at Source (TDS) on Dividend: Under the new regime, companies are required to
deduct tax at source (TDS) at the rate of 10% on dividend income exceeding INR 5,000 paid to
residents. However, certain exemptions and lower TDS rates are applicable in specific cases, such
as when the shareholder's total dividend income is below the threshold of INR 5,000 or when the
shareholder submits a valid declaration under Form 15G/15H.
6. Taxation of Dividend from Mutual Funds: Dividend income received from mutual funds is taxable
in the same manner as dividend income from domestic companies. The dividend received from
mutual funds is included in the individual's or HUF's total income and taxed as per the applicable
slab rates.

Interest on Securities
 Interest on securities refers to the income earned by individuals or entities from investments in
various types of securities such as government bonds, corporate bonds, debentures, fixed
deposits, and other interest-bearing instruments.
 The taxation of interest income on securities in India is governed by the provisions of the Income
Tax Act, 1961
1. Classification of Interest Income: Interest income earned on securities is generally classified as
"Income from Other Sources" and is taxable under this head.
2. Inclusion in Total Income: The interest income earned from securities is included in the total
income of the individual or entity and is subject to tax at the applicable income tax rates.
Taxation for Individuals and Hindu Undivided Families (HUFs):
1. Taxation of Interest Income from Government Securities: Interest earned from government
securities, such as bonds issued by the Central or State Government, is taxable as per the
individual's income tax slab rates. It is considered as "Income from Other Sources" and forms a
part of the individual's total income.
2. Taxation of Interest Income from Corporate Bonds and Debentures: Interest income earned from
corporate bonds and debentures is also taxable as per the individual's income tax slab rates. It is
treated as "Income from Other Sources and forms a part of the individual's total income.
3. Tax Deducted at Source (TDS) on Interest Income: In many cases, the payer (such as a bank or
financial institution) deducts tax at source (TDS) on the interest income paid to individuals or HUFs.
The TDS rate varies depending on the type of securities and the amount of interest income.
Taxpayers can claim credit for the TDS deducted while computing their final tax liability.
4. Taxation for Companies and Firms: For companies and firms, interest income from securities is
treated as part of their total income and is taxed at the applicable corporate tax rates.
5. Deductions and Exemptions: Certain deductions or exemptions may be available to individuals and
HUFs on interest income earned from specific types of securities.
6. Deduction under Section 80TTA: Individuals and HUFs can claim a deduction of up to INR 10,000
on interest income earned from savings accounts with banks, co-operative societies, or post
offices. This deduction is available under Section 80TTA.
7. Deduction under Section 80TTB: Senior citizens (aged 60 years and above) can claim a deduction
of up to INR 50,000 on interest income earned from deposits with banks, co-operative societies, or
post offices. This deduction is available under Section 80TTB.
8. Exemption for Interest on Government Savings Bonds: Interest income earned from specified
government savings bonds, such as the Senior Citizens Savings Scheme (SCSS) or National Savings
Certificates (NSC), may be eligible for specific exemptions or deductions as per the provisions of
the Income Tax Act.

Winning from Lotteries

 Winning from lotteries refers to the prize money or rewards received by individuals from
participating and winning in lottery games or similar contests.
 In India, the taxation of lottery winnings is governed by the provisions of the Income Tax Act, 1961.
Here's an explanation of the taxation of winning from lotteries in detail
1. Classification of Lottery Winnings: Lottery winnings are generally classified as "Income from
Other Sources and are taxable under this head.
2. Inclusion in Total Income: The winnings from lotteries are included in the total income of the
individual and are subject to tax at the applicable income tax rates.

Taxation for Individuals and Hindu Undivided Families (HUFs)

  Tax Rate: Lottery winnings are taxed at a special flat rate of 30% (plus applicable surcharge and
cess) on the total amount won. This rate is applicable regardless of the individual's income tax
slab rates.
 Tax Deducted at Source (TDS): The organization or entity conducting the lottery is required to
deduct tax at source (TDS) at a rate of 31.2% (including surcharge and cess) on the prize money
exceeding INR 10,000. The TDS is deducted at the time of payment of the winnings.
 Reporting in Income Tax Return: Lottery winners need to report their winnings in their income
tax return under the head "Income from Other Sources." The TDS deducted on the winnings
should also be appropriately mentioned in the tax return.
1. Set-Off and Carry Forward of Losses: In the case of lottery winnings, no set-off or carry forward of
losses is allowed against the winnings. This means that losses from other heads of income cannot be
offset against lottery winnings for tax purposes.
2. Deductions and Exemptions: There are no specific deductions or exemptions available against
lottery winnings under the Income Tax Act. The tax liability is calculated based on the total amount
won and the applicable tax rate.
3. Gift Tax Implications: It's important to note that if an individual receives lottery winnings as a gift
from another person, the gift tax provisions may apply. As per the gift tax rules, if the total value of
gifts received during a financial year exceeds INR 50,000, the recipient may be liable to pay tax on
the excess amount.

Crossword puzzles
Crossword Puzzles and Similar Activities: If you earn income from participating in crossword puzzles or
similar contests, the income is generally taxable as "Income from Other Sources." The income earned is
added to your total income and taxed at the applicable income tax rates.

Horse races, Card games etc.

Income earned from horse racing, including winnings from betting or participating in horse races, is also
considered as "Income from Other Sources." The income is included in your total income and taxed at
the applicable income tax rates. It's important to note that specific provisions and rules may exist for
professional horse race participants or those engaged in horse breeding and training.

Card Games and Other Games of Chance: Income earned from participating in card games, casino
games, or other games of chance is generally considered as "Income from Other Sources." This includes
any winnings or prizes received from such activities. The income is included in your total income and
taxed at the applicable income tax rates. It's important to comply with any reporting requirements and
pay the applicable taxes on such winnings.

 Tax Deducted at Source (TDS): In certain cases, the organizers or entities facilitating these
activities may be required to deduct tax at source (TDS) on the winnings or prize money. The TDS
rates and thresholds can vary, and it's essential to be aware of the applicable TDS provisions and
ensure proper documentation and reporting.
  Deductions and Exemptions: There are no specific deductions or exemptions available for income
earned from crossword puzzles, horse races, card games, or similar activities. The income is
generally taxable as per the applicable income tax rates without any specific deductions.

Permissible Deductions, Impermissible Deductions

Permissible deductions, also known as allowable deductions, are expenses or costs that can be
deducted from your taxable income, thereby reducing your overall tax liability. These deductions are
recognized and allowed by the tax laws of India. On the other hand, impermissible deductions, also
known as disallowed deductions, are expenses or costs that cannot be claimed as deductions for tax
purposes. Here's a brief explanation of permissible and impermissible deductions in India:

Permissible Deductions:

1. Business Expenses: Deductions are allowed for expenses that are incurred wholly and
exclusively for the purpose of business or profession. This includes expenses such as rent,
salaries, wages, office supplies, travel expenses, advertising, and professional fees.
2. Depreciation: Depreciation is allowed as a deduction for the wear and tear of assets used in the
course of business or profession. Different rates of depreciation are prescribed for different
types of assets.
3. Interest Expenses: Interest paid on loans or borrowings used for business purposes can be
claimed as a deduction. This includes interest on business loans, working capital loans, and other
business-related interest expenses.
4. Charitable Contributions: Donations made to registered charitable organizations or institutions
are eligible for deductions under Section 80G of the Income Tax Act, subject to specified limits
and conditions.
5. House Rent Allowance (HRA): HRA received by salaried individuals can be claimed as a
deduction, subject to certain conditions and limits.
6. Medical Expenses: Medical expenses incurred for the treatment of specified illnesses or medical
conditions can be claimed as deductions under Section 80DDB, subject to certain limits and
conditions
7. Education Expenses: Deductions are allowed for tuition fees paid for the education of children
under Section 80C of the Income Tax Act, subject to specified limits and conditions.

Impermissible Deductions:

1. Personal Expenses: Personal expenses, such as personal travel, personal phone bills, personal
insurance premiums, and personal entertainment expenses, are not allowed as deductions.
2. Capital Expenditure: Expenditure on acquiring capital assets, such as land, buildings, vehicles, or
machinery, cannot be claimed as a deduction. However, depreciation on such assets is allowed.
3. Fines and Penalties: Fines, penalties, or any other amount paid for a violation of the law are not
allowed as deductions. Gifts to Family and Relatives: Gifts made to family members or relatives
 are not eligible for deductions, except in specific cases under the provisions of the Income Tax
Act.
4. Personal Loans and Interest: Interest paid on personal loans or personal credit card debt is not
allowed as a deduction.

Unit- 4
Income of other Person included in assesses Total Income
  In Indian tax law, certain incomes earned by another person are included in the total income of the
taxpayer under specific conditions.
 This concept is primarily governed by Sections 60 to 64 of the Income Tax Act, 1961.
 These provisions ensure that individuals cannot avoid taxes by transferring their assets to another
person or by arranging the sources of their income in the names of others while retaining control
over the income
1. Transfer of Income without Transfer of Asset (Section 60): If an individual transfers an asset
from which income is generated without transferring the asset itself, the income from such an
asset is included in the total income of the transferor. For example, if a person retains
ownership of a rental property but directs the rental income to be paid to their child, the
income is still taxed in the hands of the owner.
2. Revocable Transfer of Asset (Section 61): Income from assets transferred under an agreement
that it is revocable or the transfer may be re-assumed by the transferor, is included in the
transferor's total income. A transfer is considered revocable if it contains any provision for the
re-transfer directly or indirectly of the income or assets to the transferor, or gives the transferor
a right to reassume power directly or indirectly over the income or assets.
3. Income from Assets Transferred to Spouse (Section 64): Income arising from the transfer of an
asset to the spouse without adequate consideration is included in the total income of the
transferor. This does not apply if the transfer is in connection with an agreement to live apart, or
under a bona fide commercial transaction.
4. Income from Assets Transferred to Son's Wife (Section 64): Similar to the transfer to a spouse,
any income from assets transferred to the son's wife without adequate consideration is included
in the total income of the transferor
5. Income of a Minor Child (Section 64(1A)): The income of a minor child is included in the total
income of the parent whose total income (excluding the minor's income) is higher. If the
marriage of the parents does not subsist, it will be included in the income of the parent
maintaining the minor child. However, this rule does not apply if the minor child earns income
due to manual work or any activity involving his skill, talent, or specialized knowledge and
experience.
6. Clubbing of Income in Case of Revocable Transfer of Asset (Section 63): This section defines
what constitutes a revocable transfer. It includes any arrangement or provision for re-
assumption of the asset or income, either directly or indirectly, by the transferor.
7. Clubbing Due to Indirect Transfers: If an individual indirectly transfers an asset in such a way
that income from the asset is received by their spouse, that income will also be included in the
income of the transferor.

Meaning of Aggregation of income

Aggregation of income refers to the process of combining different sources of income under various
heads to calculate the total taxable income of an individual in a financial year. Under the Income Tax
Act, 1961 in India, this is a crucial step to determine the accurate tax liability of an individual. The tax
regime in India categorizes income under five main heads, and the aggregation of these ensures that the
income is taxed appropriately according to the rules pertaining to each category.

1. Heads of Income: The Income Tax Act specifies five primary heads of income under which all
earnings must be classified:
 Income from Salaries
 Income from House Property
 Profits and Gains of Business or Profession
 Capital Gains
 Income from Other Sources

Each type of income has its own set of rules for computation and taxation, including permissible
deductions and exemptions.

2. Computation of Income Under Each Head: Before aggregation, income under each head must
be computed separately:
 Salaries: Includes wages, pension, allowances, and other benefits.
 House Property: Calculated as the net annual value minus allowed deductions like municipal
taxes and standard deduction.
 Business or Profession: Net profit after deducting business expenses, depreciation, and
other allowable deductions.
 Capital Gains: Gains arising from the sale of a capital asset, adjusted for indexation and
permissible deductions.
 Other Sources: Includes interest, dividends, lottery winnings, and other miscellaneous
income.
3. Set-off and Carry Forward of Losses: While aggregating income, any losses under one head
(except salaries) can be set off against income from other heads, according to specific rules. For
instance, loss from house property can be set off against salary income. Unabsorbed loss after
such set-off can be carried forward to subsequent years to be set off against income under the
same head.
4. Aggregation of Income: After computing the income under each head and adjusting for any set-
off of losses, all these figures are aggregated. This gives the Gross Total Income (GTI).
5. Deductions Under Chapter VIA: From the Gross Total Income, deductions under various
sections of Chapter VIA (Sections 80C to 80U) are allowed. These include deductions for
investments in specified savings schemes, insurance premiums, educational expenses, donations
to charitable trusts, medical insurance, etc.
6. Calculation of Total Taxable Income: After all deductions are applied, the result is the Total
Taxable Income. This figure is used to compute the income tax liability according to the tax rates
applicable for the financial year.
 7. Clubbing of Income: In cases where the income of another person like a spouse, minor child,
etc., needs to be included in the income of the taxpayer (as discussed in earlier explanations),
this clubbing is done before the final aggregation.
8. Final Tax Computation: The total income is then subjected to the prevailing tax rates to
compute the tax payable. Rebates, relief under Section 89(1), and credit for prepaid taxes (like
advance tax and TDS) are accounted for to arrive at the net tax liability or refund.

Set-off and Carry Forward of Losses

 Set-off and Carry forward of losses are important provisions under the Income Tax Act, 1961,
which help taxpayers reduce their tax liability by adjusting losses against the income or profits of
the current or future years.
 These provisions ensure that taxpayers can seek some relief when they incur losses, allowing them
to manage their financial situations more effectively.

Understanding Set-Off of Losses

Set-off refers to the process of adjusting losses against the income or profit of the same financial year.
There are two types of set-off

1. Intra-head set-off: This allows the taxpayer to set off losses from one source under a particular head
of income against income from another source under the same head. For example, loss from one
house property can be set off against income from another house property.
2. Inter-head set-off: This permits the adjustment of losses from one head of income against income
from another head. For instance, a loss under the head "Income from House Property" can be set off
against salary income or business income.

However, there are restrictions on inter-head adjustments:

 Loss under the head "Capital Gains" cannot be set off against any other head of income.
 Loss from speculative business cannot be set off against any other income except speculative
income.

Carry Forward of Losses

 If the taxpayer cannot fully set off the loss in the same financial year, the unadjusted loss can be
carried forward to subsequent years.
 This is known as carry forward of losses. However, specific rules govern the carry forward process
1. Loss from House Property: Can be carried forward for eight subsequent assessment years and
set off only against income from house property.
2. Business Loss (Non-Speculative): Can be carried forward and set off against profits of any
business or profession (except income from speculation) for eight assessment years.
3. Speculative Business Loss: Can be carried forward for four assessment years but can only be set
off against income from speculative business.
 4. Capital Losses:
 Short-term capital losses can be set off against any capital gains (short-term or long-term).
 Long-term capital losses can be set off only against long-term capital gains
 Carried forward for a maximum of eight assessment years.
5. Loss from Owning and Maintaining Race Horses: Can be carried forward for four assessment
years and set off only against income from owning and maintaining race horses.

Special Considerations
 Unabsorbed Depreciation: Unabsorbed depreciation is treated differently from business losses.
It can be indefinitely carried forward to subsequent years and set off against any head of income
except salary.
 Mandatory Filing of Return: To carry forward losses (except loss from house property), it is
mandatory to file the tax return within the due date specified under section 139(1).

Restrictions on Set-Off and Carry Forward:

 Loss from Exempted Source of Income:Losses from a source of income which is exempt from
tax cannot be set off or carried forward.
 Change in Ownership: In cases of business reorganization, such as amalgamation or demerger,
specific provisions apply regarding the carry forward and set off of accumulated losses.

Section 80 Allowances and Deductions

It's important to note that losses must be set off before any deductions under Chapter VI-A (e.g., Section
80C to 80U) are applied. The net taxable income after setting off the appropriate losses is considered for
these deductions.

Reporting and Documentation

Proper documentation and reporting are crucial for claiming the set-off and carry forward of losses.
Taxpayers need to maintain accurate records of the nature of losses and the income against which these
losses are adjusted. They must also fill out the relevant schedules in the income tax return forms
detailing these losses.

Deductions from Gross Total Income

Deductions from Gross Total Income (GTI) are specific allowances provided under the Income Tax Act,
1961, of India, enabling taxpayers to reduce their taxable income. These deductions are available under
various sections of Chapter VI-A of the Act, each catering to different aspects of expenses and
investments that the taxpayer might incur or make during the year. The purpose of these deductions is
to encourage savings, provide relief for specific expenses, and promote social welfare activities.

Section 80C: Investments and Payments

One of the most popular sections for deductions, Section 80C, allows deductions up to INR 1,50,000 per
year from a taxpayer's GTI. Eligible investments and expenses are:

 Life insurance premiums

 Contributions to Provident Funds (PF), including Public Provident Fund (PPF)
 Investments in National Savings Certificates (NSC)
 Equity-linked savings schemes (ELSS)
 Tuition fees for two children
 Principal repayment on home loan
 Senior Citizens Savings Scheme
 Sukanya Samriddhi Account

Section 80CCC: Pension Contributions

Deductions under this section are for contributions to certain pension funds to the extent of INR
1,50,000. This limit is within the overall ceiling provided under Section 80C.

Section 80CCD: Contributions to Pension Schemes

 80CCD(1): Contributions to the National Pension System (NPS) and Atal Pension Yojana (APY) are
deductible up to 10% of salary (for employees) or 20% of gross total income (for self-employed),
within the overall ceiling of INR 1,50,000 under Section 80C.
 80CCD(1B): An additional deduction for contributions to NPS up to INR 50,000, which is over and
above the limit available under Section 80C
 80CCD(2): Employer's contribution to NPS, deductible up to 10% of the salary of the employee,
which does not come under the INR 1,50,000 limit.

Section 80D: Medical Insurance Premiums

This section offers deductions for premiums paid on medical insurance for self, spouse, children, and
parents. The limits are:

 INR 25,000 for insurance of self, spouse, and dependent children

 An additional INR 25,000 for insurance of parents (INR 50,000 if parents are senior citizens)

Section 80DD: Maintenance Including Medical Treatment of Disabled

Dependents
Deductions of up to INR 75.000 for expenses on medical treatment, including nursing, training, and
rehabilitation of handicapped dependent relatives. If the dependent suffers from severe disability, the
deduction amount rises to INR 1,25,000.

Section 80DDB: Medical Treatment for Specified Diseases

Deductions for amounts spent on treatment for specified diseases, with limits up to INR 40,000 (or INR
1.00,000 for senior citizens).

Section 80E: Interest on Education Loan

Deduction for interest paid on loans taken for higher education for self, spouse, children, or a student
for whom the taxpayer is a legal guardian. There is no upper limit, but the deduction is available for a
maximum of 8 years.

Section 80G: Donations to Charitable Organizations

Deductions for donations to specified relief funds and charitable institutions can range from 50% to
100% of the donation, subject to certain qualifying conditions.

Section 80GG: Rent Paid

For those not receiving house rent allowance, a deduction for rent paid is available under Section 80GG,
subject to certain conditions.

Section 80TTA: Interest on Savings Accounts

A deduction of up to INR 10.000 is allowed on interest earned from savings bank accounts.

Section 80TTB: Interest Income for Senior Citizens

Senior citizens can claim a deduction of up to INR 50,000 on interest earned from deposits.

Rebates and Reliefs

In the Indian Income Tax Act, 1961, rebates and reliefs are provisions designed to reduce the tax burden
on individuals by decreasing the amount of tax payable. These terms often cause confusion, but
essentially, they refer to amounts subtracted from the income tax before calculating the final tax due.

1. Rebate under Section 87A: This is a rebate provided to individual taxpayers whose total income
does not exceed a specified limit. The purpose is to provide relief to lower-income individuals.
For the financial year 2021-2022 (Assessment Year 2022-2023), the rebate under section 87A is
available to a resident individual whose total income does not exceed ₹5,00,000. The amount of
the rebate is 100% of the income-tax or ₹12,500, whichever is less. This means if the total tax
payable before the rebate is less than 12,500, then that amount is the rebate, if more, the
rebate will be ₹12,500.
2. Relief under Section 89(1): When an individual receives salary arrears or advance salary, it may
push their total income into a higher tax bracket, increasing their tax liability disproportionately
for that fiscal year. Section 89(1) provides relief by allowing the taxpayer to claim a reduction in
the tax liability by recalculating tax for the years in which the income would have been received
 normally. The relief works by offsetting the excess tax paid during a year when income is
received as arrears or in advance.
3. Relief for Foreign Taxes (Section 90 & 91): For residents who earn income that is also faxed in
another country, India provides relief to avoid double taxation. Section 90 covers taxpayers who
have paid tax in countries with which India has a Double Taxation Avoidance Agreement (DTAA).
Section 91 provides relief for countries with which India does not have such an agreement. The
relief is generally the lower of the tax paid abroad or the tax payable in India on such foreign
income.
4. Deduction for Interest on Savings Accounts (Section 80TTA)
5. This section offers a deduction up to ₹10,000 on the interest earned from savings bank
accounts. This is beneficial for individuals as it reduces the taxable income derived from interest,
thus indirectly providing relief by lowering the overall tax liability.
6. Deduction for Senior Citizens (Section 80TTB): A higher deduction of up to ₹50,000 is allowed
for senior citizens on the interest income from deposits (bank or post office). This is aimed at
providing relief to senior citizens who rely more on interest income during retirement.
7. Deduction for Persons with Disabilities (Section 80U): Individuals suffering from a physical
disability (including blindness) or mental retardation are entitled to a tax deduction ranging
from ₹75,000 to ₹1,25,000 depending on the severity of the disability. This provides financial
relief by reducing the taxable income.
8. Housing Loan Interest Rebate (Section 24): Interest paid on a home loan for a self-occupied
property is eligible for a deduction up to ₹2,00,000 under this section. This is a significant relief
as it reduces the net taxable income, lowering the overall tax liability for homeowners.

Meaning of Advanced Payment Taxes

 Advance payment of Tax, also known as 'pay-as-you-earn' taxation, is a mechanism in the Indian
tax system where taxpayers are required to pay income tax in the same year that the income is
received.
 This approach ensures that the government receives a steady flow of income throughout the
year and helps taxpayers avoid a large tax liability at the end of the financial year.

Concept of Advance Tax

Advance tax applies to all taxpayers, including salaried, freelancers, and businesses, whose tax liability is
expected to be ₹10,000 or more during the fiscal year. This payment must be made in installments as
specified by the Income Tax Department, rather than as a lump sum payment at the year's end.

Who Should Pay Advance Tax?

Advance tax should be paid by all assesses if their tax liability, after accounting for TDS (Tax Deducted at
Source), is ₹10,000 or more. This includes self-employed individuals, professionals, businessmen, and
companies. However, senior citizens (aged 60 years or above) who do not run a business are exempt
from paying advance tax.
Payment Schedule
The payment of advance tax is divided into installments as follows for individual taxpayers:

 15% of tax liability by the 15th of June

 45% of tax liability by the 15th of September
 75% of tax liability by the 15th of December
 100% of tax liability by the 15th of March

For corporate taxpayers, the schedule is slightly different:

 15% by 15th June

 45% by 15th September
 75% by 15th December
 100% by 15th March

Calculation of Advance Tax

To calculate advance fax, taxpayers must estimate their total income for the year. This includes all
sources of income such as salary, interest, dividends, business profits, and any other income. Then they
must apply the current income tax rates to compute their tax liability for the year. From this figure, they
must subtract any TDS or tax credits available to determine the amount of advance tax due. It's essential
to estimate income as accurately as possible to avoid underpayment or overpayment of tax.

Interest and Penalties for Non-compliance

Failure to pay advance tax can lead to penalties. If advance tax is not paid according to the schedule,
interest under sections 234B and 234C of the Income Tax Act will be applicable. Section 234B deals with
interest for default in payment of advance tax, where if the taxpayer has paid less than 90% of the
assessed tax, interest is charged at 1% per month or part of the month for the unpaid amount. Section
234C addresses the delay in installment payments, charging interest at 1% per month or part of the
month on the differential amount.

Benefits of Paying Advancе Тах

Paying advance tax has several benefits:

1. Avoids Accumulation of Tax Liability: By spreading the tax payment throughout the year,
taxpayers can avoid the burden of a lump sum payment.
2. Reduces Burden of Last-Minute Tax Planning: Paying taxes in advance helps in better financial
planning and avoids last-minute rushes.
3. Helps in Cash Flow Management for Businesses: Regular payment of tax helps businesses
manage their cash flow more efficiently.
 4. Avoids Interest and Penalties: Timely payment of advance tax helps avoid interest charges and
penalties for non-compliance.

How to Pay Advance Tax?

Advance tax can be paid through both offline and online methods. For offline payment, one can deposit
tax using challan 280 in banks designated by the Income Tax Department. Online payments can be made
through the National Securities Depository Limited (NSDL) website or the e-payment portal of the
Income Tax Department

Meaning of Tax Deduction (TDS)

Tax Deduction at Source (TDS) is a mechanism used in the Indian tax system whereby tax is deducted at
the point of income generation rather than at a later date. This system is critical because it collects tax
at the source of the income, thereby minimizing tax evasion and ensuring a steady flow of revenue to
the government. TDS applies to several types of payments, including salaries, interest payments,
commissions, rent, and professional fees, among others.

Understanding TDS
The concept of TDS requires that the payer, or the deductor, must deduct a certain percentage of
money as tax before making the full payment to the receiver, or the deductee. The deductor then
deposits this tax amount to the Central Government account. The deductee from whose income tax has
been deducted at source would be entitled to get credit of the amount deducted based on the Form
26AS or TDS certificate issued by the deductor.

Applicability and Rates

TDS is applicable where the amount paid by a person exceeds certain threshold limits that the Income
Tax Department specifies. The rates of TDS are prescribed in the relevant provisions of the Income Tax
Act, 1961, and vary depending on the nature of income and the status of the recipient. The government
regularly updates these threshold limits and rates to adjust for economic conditions.

Major Payments Subject to TDS:

1. Salaries: Under Section 192, TDS on salary is deducted at the rate applicable to the income tax slab
rates of the individual after considering permissible deductions and exemptions.
2. Interest Payments: Banks and other financial institutions must deduct tax at source on interest
payments exceeding ₹40,000 annually (₹50,000 for senior citizens), at 10% under Section 194A.
3. Contract Payments: Payment to contractors and sub-contractors require TDS under Section 1940
at a rate of 1% in case of individuals/HUFs and 2% in other cases, if the payment exceeds ₹30,000
per contract or ₹1,00,000 annually.
 4. Rent: TDS on rent payments is covered under Section 1941, with the threshold for deduction set at
₹2,40,000 per annum. The rates are 2% for the use of machinery or plant or equipment and 10%
for land or building (including factory building) or land appurtenant to a building.
5. Professional Fees: Section 194J stipulates a TDS rate of 10% on professional fees if the payment
exceeds ₹30,000 annually.

TDS Compliance and Procedure

The deductor is responsible for deducting the correct amount of TDS before making any payment. After
deduction, the deductor must deposit the tax to the government by the 7th of the subsequent month.
Quarterly TDS returns must be filed by the deductor detailing every transaction of TDS deducted and
deposited.

The deductor must also issue a TDS certificate to the deductee. For salaries, this certificate is Form 16;
for non- salary payments, it is Form 16A. These certificates provide details of the amount deducted and
are essential for the deductee to claim credit for TDS.

Importance of TDS:
1. Revenue for the Government: TDS is a significant source of revenue for the government,
enabling it to fund various public expenditures.
2. Minimizes Tax Evasion: Since TDS is collected at the source, it greatly minimizes the chances of
tax evasion by the payees.
3. Ease of Payment: TDS distributes the tax payment throughout the year, making it easier for the
deductee as it reduces the burden of lump sum tax payments.
4. Ensures Regularity: Regular collection of taxes throughout the year ensures that the
government has adequate funds at all times for its various activities and obligations.

Challenges with TDS

While TDS is effective in ensuring timely collection of taxes, it does have some challenges:

1. Complexity: The various thresholds and rates can be confusing for both deductors and
deductees, especially for those not well- versed with tax laws.
2. Cash Flow issues: For some businesses, especially smaller ones, the requirement to deduct tax
at source can lead to cash flow problems.
3. Compliance Burden: The obligation to deduct TDS and deposit it with the government imposes
an administrative burden on businesses, requiring them to maintain detailed records and
comply with multiple procedural requirements.

Computation of Total Income and Tax Liability of individuals

The Computation of Total income and Tax Liability for individuals in India is governed by the Income Tax
Act, 1961.
The process involves several steps, from determining the gross total income across different heads of
income. applying relevant deductions, to calculating the net tax payable after accounting for tax rebates
and credits.

Step 1: Classify Income under the Correct Heads

An individual's income is categorized under five different heads according to the Income Tax Act:

 Income from Salary: Includes wages, pension, allowances, and other benefits received from
employment.
 Income from House Property: Rental income from a property or deemed rental in case the
property is not let out.
 Profits and Gains of Business or Profession: Income from business operations or from practicing
a profession.
 Capital Gains: Income from the sale of capital assets like shares, bonds, property, etc.
 Income from Other Sources: Includes interest on bank deposits, lottery winnings, gifts, etc.

Step 2: Compute Gross Total Income

Add the total income from all the above heads, considering the specific rules for deductions and
exemptions applicable to each head. For example, standard deductions from salary, deductions from
rental income under Section 24, and exemptions on capital gains under various sections.

Step 3: Apply Deductions to Arrive at Gross Total Income

Under Chapter VIA of the Income Tax Act, various deductions are available which can be claimed to
reduce the gross total income. These include:

 Section 80C: Investments in PPF, EPF, life insurance premiums, home loan principal repayment,
etc., up to a limit of ₹1.5 lakh
 Section 80D: Premiums paid for medical insurance.
 Section 80E: Interest paid on education loans.
 Section 80G: Donations to charitable institutions.

Additional deductions for contributions to NPS (National Pension System) under Section 80CCD.

Step 4: Compute Total Income

After deducting the allowable deductions from the gross total income, you get the total income on
which tax will be computed

Step 5: Calculate Tax Liability

Apply the relevant tax rates to the total income. India uses progressive tax rates for individuals which
means higher income is taxed at higher rates. For the financial year 2021-2022, the individual tax rates
(excluding cess and surcharge) are:
  Income up to ₹2,50,000: No tax
 ₹2,50,001 to ₹5,00,000: 5%
 ₹5,00,001 to ₹10,00,000: 20%
 Above ₹10,00,000: 30%

For senior citizens (aged 60 years and above but less than 80 years), the basic exemption limit is
₹3,00,000, and for super senior citizens (aged 80 years and above), it is ₹5,00,000.

Step 6: Add Cess and Surcharge

A health and education cess at 4% is added to the tax calculated. Additionally, surcharge is applicable for
individuals with higher income:

 10% of income tax for total income between ₹50 lakh and ₹1 crore.
 15% of income tax for income above ₹1 crore.

Step 7: Calculate Tax Payable

Add the cess and any applicable surcharge to the income tax calculated to get the total tax liability.

Step 8: Subtract TDS and Advance Tax

Subtract any tax already deducted at source (TDS) and any advance tax paid during the year from the
total tax liability to calculate the net tax payable or refund due.

Step 9: Include Interest under Sections 234A, 234B, 234C if applicable

If there are any delays or defaults in filing the tax return or paying the tax dues, interest under Sections
234A, 234B, and 234C may apply.