ITL Notes by Notebook LM

UNIT 1: Income Tax Concept, Types Direct and Indirect Tax, Canons of
Taxation

Income Tax Concept

●​ Income tax is a government-levied tax on income earned by individuals, businesses,

and other entities, serving as a primary source of government revenue to fund public
services and infrastructure.
●​ In India, it is governed by the Income Tax Act, 1961.
●​ Individuals and businesses are required to pay tax on income earned during a financial
year (1st April to 31st March).
●​ Tax is calculated on income after deducting exemptions and deductions allowed by
the Act.
●​ Income is classified into categories such as salary income, business/profession
income, capital gains, and income from other sources.
●​ Tax rates and slabs vary based on income level and are periodically revised for
fairness.
●​ Non-compliance with tax laws can lead to penalties and legal action.

Types of Taxes

1.​ Direct Tax:​

○​ Levied directly on the income or wealth of an individual or business.

○​ The burden of payment falls directly on the earner.
○​ Examples: Income tax, wealth tax (abolished in 2015), capital gains tax,
corporate tax, and securities transaction tax (STT).
○​ Considered progressive because those with higher income or wealth pay a
higher percentage.
○​ Features: Direct relationship to taxpayer's income/wealth, progressive taxation,
paid directly to the government, assessment based on IT Act 1961, and
provisions for deductions/exemptions.
○​ Basis of Charges: Determined by income, wealth, residential status, and tax
rates.
2.​ Indirect Tax:​

○​ Levied on the consumption of goods and services.

○​ The burden is passed on to the consumer through higher prices.
○​ Examples: Goods and Services Tax (GST), Excise duty, Customs duty, Sales
tax, Service Tax, and Value Added Tax (VAT).
 ○​ Considered regressive as everyone pays the same rate regardless of income,
which can disproportionately burden lower-income earners.

Canons of Taxation Principles outlined by Adam Smith in ‘The Wealth of Nations’ (1776),
serving as foundations for tax systems.

●​ Canon of Equality:​

○​Taxes should be levied in proportion to the ability to pay.

○​Higher incomes/wealth should pay a higher percentage.
○​Ensures fair distribution and a progressive tax system.
○​Challenges include factors affecting ability to pay (family responsibilities, health)
and tax evasion/avoidance.
●​ Canon of Certainty:​

○​ Amount, time, and manner of payment should be clear and certain.

○​ Tax laws and regulations should be consistent and predictable.
○​ Provides clarity for taxpayers, reduces confusion, encourages compliance, and
lowers administrative costs.
●​ Canon of Convenience:​

○​ Taxes should be collected in a manner convenient for taxpayers.

○​ Collection should be at a convenient time and place, with a simple and efficient
administrative process.
○​ Encourages compliance and reduces administrative burden on tax authorities.
●​ Canon of Economy:​

○​ Taxes should be levied efficiently and cost-effectively.

○​ Minimize tax administration costs and maximize revenue while minimizing
economic impact on taxpayers.
○​ Ensures an efficient system, promotes economic growth, and creates a stable
business environment.
●​ Canon of Flexibility:​

○​ The tax system should be flexible enough to accommodate changes in the

economic and social environment.
○​ Tax laws should be adaptable to changing circumstances (e.g., new
technologies, demographic trends, crises).
○​ Allows the government to respond to unexpected events like economic crises or
natural disasters.

Income Tax (as per Income Tax Act 1961 and amendments): Basic
Concepts, Residential Status, Scope of Total Income
Basic Concepts The Income Tax Act 1961 outlines various concepts crucial for tax compliance
and liability management:

●​ Income: Tax is levied on income from salaries, wages, profits, capital gains, rent,
interest, dividends, and other sources.
●​ Assessment Year (AY): The year following the financial year in which income is earned
and taxes are paid (e.g., FY 2021-22 -> AY 2022-23).
●​ Residential Status: Individuals are categorized as Resident, Non-Resident, or Resident
but Not Ordinarily Resident (RNOR), which determines their tax liability.
●​ Tax Deductions: Provisions allowing reduction of taxable income for expenses like
medical, education, or charitable contributions.
●​ Tax Slabs: Different income levels have varying tax rates, with higher incomes taxed at
higher rates.
●​ Tax Returns: Taxpayers must file returns detailing income, deductions, and tax paid,
used by the Income Tax Department to assess liability.
●​ Advance Tax: Mechanism for paying tax liability in installments during the financial year,
mandatory for estimated tax liability over Rs. 10,000.
●​ Tax Refunds: Issued if tax paid exceeds liability, after verification of returns.
●​ Penalties: Imposed for non-compliance, such as non-filing, late payment, or incorrect
declaration.
●​ Tax Audit: Required for businesses/professionals with certain turnover/income levels,
conducted by a Chartered Accountant to ensure compliance.

Residential Status It determines an individual's tax liability for a financial year.

●​ Resident: An individual is a resident if they stayed in India for:

○​ 182 days or more in that financial year.
○​ OR at least 60 days in that financial year AND 365 days in the preceding
four financial years.
●​ Non-Resident: An individual who does not satisfy either of the above conditions.
●​ Resident but Not Ordinarily Resident (RNOR): An individual who satisfies any one of
the following conditions:
○​ Has been a non-resident in India for nine out of the ten preceding financial
years.
○​ OR has stayed in India for a minimum of 729 days in the preceding seven
financial years.
●​ Tax Implications based on Residential Status:
○​ Resident: Taxed on global income (income earned in India and outside India).
○​ Non-Resident: Taxed only on income earned in India.
○​ RNOR: Taxed on income earned in India and on income earned outside India
that is received or deemed to be received in India.
○​ Tax rates for residents are progressive; for non-residents and RNORs, they are
fixed at 30% for most income types.
○​ Residents are eligible for more deductions and exemptions than non-residents.
Scope of Total Income Refers to the total income earned by an individual during a financial
year that is subject to tax.

●​ Categories of Income:
○​ Income from Salaries: Remuneration from employment (salary, bonus,
commission, etc.).
○​ Income from House Property: Rental income or income from property transfer.
○​ Income from Business or Profession: Income from trade, commerce,
manufacturing, or professional services.
○​ Income from Capital Gains: Profit from the sale of capital assets (property,
stocks, bonds).
○​ Income from Other Sources: Any income not falling into the above categories
(interest, dividends, royalties).
●​ Deductions and Exemptions: The Act specifies deductions (e.g., investments in
Provident Fund, PPF, Life Insurance Premiums, NPS) and exemptions (e.g., agricultural
income, long-term capital gains).
●​ Global Income: Indian residents must report their global income (including income
earned outside India) for taxation.
●​ Non-Cash Benefits: Scope of Total Income includes non-cash benefits like perquisites
and allowances (rent-free accommodation, company cars, club memberships).

Heads of Income, Income which do not form a part of Total Income

Five Heads of Income Income is classified into five heads for taxation purposes, each with its
own rules, exemptions, and deductions:

1.​ Income from Salaries: Includes all income from employment, such as basic salary,
allowances, perquisites, bonus, commission, and pension.
2.​ Income from House Property: Income from owned property, such as rent or income
from transfer of ownership.
3.​ Profits and Gains of Business or Profession: Income from any business or
professional activity (trade, manufacturing, professional services).
4.​ Capital Gains: Profits from the sale or transfer of a capital asset (property, stocks,
bonds, mutual funds).
5.​ Income from Other Sources: Residual category covering all income not covered under
the other four heads (interest on savings, fixed deposits, dividends, royalties).

Income which do not form a part of Total Income (Exempt Incomes) Certain incomes are
exempt from tax but must still be disclosed in the income tax return:

●​ Agricultural income: Income from agricultural land in India is exempt, though filing may
be required if income exceeds a threshold.
●​ Interest on tax-free bonds: Interest from certain government bonds for specific
projects.
 ●​ Dividends from domestic companies: Exempt in the hands of the recipient (company
pays dividend distribution tax, historically).
●​ Long-term capital gains on listed securities: If held for more than one year.
●​ Gifts: Received from specified relatives or on occasions like marriage or inheritance.
●​ Leave travel allowance (LTA): Received from employer for travel expenses, subject to
conditions.
●​ Gratuity: Received on retirement/termination, up to a certain limit.
●​ Scholarships: Received by students for education.
●​ Provident fund: Employer contributions up to a limit.
●​ Life insurance proceeds: Maturity or death benefits.

Agriculture Income and its Taxability

Definition: Income derived from land situated in India used for agricultural purposes, including
agricultural operations, rent from agricultural land, and income from farm buildings.

Taxability:

●​ Generally, agricultural income is exempt from tax in India to encourage farming.

●​ Exceptions:
○​ Agricultural income exceeding Rs. 5,000: Requires filing an income tax return
and disclosure.
○​ Income from farming activities carried out outside India: Taxable in India if
earned by an Indian resident and not exempt in the country where earned.
○​ Income from agricultural land situated outside India: Taxable in India.
○​ Agricultural income earned by companies and other entities: Not exempt
and taxable at applicable rates; the exemption applies only to individuals and
HUFs.
●​ Basis of Taxation: Net agricultural income, calculated by deducting expenses from
gross agricultural income.
●​ Deductions allowed: Expenses related to cultivation (seeds, fertilizers, labour), rent
paid for leased land, interest on agricultural loans, and depreciation on farm machinery.

UNIT 2: Meaning of Salary, Basis of Charge, Conditions of Chargeability,

Allowances, Perquisites, Deductions and Exemptions, Computation of
Taxable Income from Salary

Meaning of Salary

●​ Salary refers to payment received by an employee from an employer for services

rendered.
●​ Governed by the Payment of Wages Act, 1936, and the Code on Wages, 2019.
●​ Components:
○​ Basic Salary: Fixed core compensation.
 ○​ Dearness Allowance (DA): To counteract inflation, a percentage of basic salary.
○​ House Rent Allowance (HRA): For rental accommodation expenses, varies by
salary and city.
○​ Conveyance Allowance: Covers transportation expenses for commuting.
○​ Medical Allowance: Covers medical expenses.
○​ Special Allowances: Additional components like food or entertainment
allowances.

Conditions of Chargeability (for Salary Income) Criteria determining if salary is subject to

income tax:

●​ Residential Status: Determines tax liability (resident or non-resident).

●​ Income Threshold: Minimum income level above which tax is payable.
●​ Source of Income: Salary for services rendered in India is taxable regardless of
residential status.
●​ Exemptions and Deductions: Provisions like HRA, LTA, investments, and medical
expenses can reduce taxable salary.
●​ Reporting and Compliance: Accurate reporting in income tax returns is essential.

Allowances Monetary benefits paid by employer for specific purposes:

●​ House Rent Allowance (HRA): Partially or fully taxable based on conditions.

●​ Dearness Allowance (DA): Fully taxable.
●​ Conveyance Allowance: A specific amount may be exempt, subject to limits.
●​ Medical Allowance: Partially or fully taxable unless specific exemptions apply.

Perquisites Non-monetary benefits or facilities provided by the employer, generally taxable

based on nature and value:

●​ Rent-free or concessional accommodation.

●​ Company-provided vehicles.
●​ Club memberships.
●​ Interest-free or low-interest loans.
●​ Employee stock options (ESOPs).
●​ Household goods/services.
●​ Free or subsidized meals.
●​ Gift vouchers.

Deductions and Exemptions (for Salary Income) Provisions to reduce taxable income:

●​ Deductions:
○​ Standard Deduction: A flat amount for salaried individuals and pensioners
(introduced in Finance Act, 2018).
○​ Section 80C Deductions: For investments (PF, PPF, NSC, ELSS) and expenses
(life insurance premiums) up to ₹1.5 lakh.
 ○​ Home Loan Interest (Section 24(b)): Up to ₹2 lakh for self-occupied property,
no upper limit for let-out property.
○​ Medical Insurance Premiums (Section 80D): Varies by age of insured.
●​ Exemptions:
○​ House Rent Allowance (HRA) Exemption: Portion may be exempt based on
rent paid, HRA received, and city.
○​ Leave Travel Allowance (LTA) Exemption: On expenses incurred for leave
travel, subject to conditions.
○​ Gratuity Exemption: Up to certain limits on retirement/resignation.
○​ Transport Allowance: A fixed amount can be exempt.

Computation of Taxable Income from Salary

1.​ Determine Gross Salary: Total income from employment including basic, allowances,
perquisites, bonuses, commissions.
2.​ Exclude Exempted Allowances and Perquisites: Deduct exempted amounts (HRA,
LTA, certain conveyance).
3.​ Calculate Taxable Salary: Gross Salary minus exempted allowances/perquisites.
4.​ Include Taxable Perquisites: Add value of taxable non-monetary benefits.
5.​ Deduct Standard Deduction: Subtract the flat standard deduction amount.
6.​ Consider Deductions: Subtract eligible deductions under Sections 80C, 80D, 24(b)
etc..
7.​ Arrive at Net Taxable Income: Result after all deductions.
8.​ Apply Applicable Tax Slab: Calculate tax based on total income and slab rates.
9.​ Consider Rebates and Tax Credits: Apply any applicable rebates (e.g., Section 87A)
or credits.
10.​Calculate the Final Tax Liability: Final amount payable after all adjustments.

Income from House Property, Basis of charge, Determinants of Annual

Value, Deductions and Exemptions, Computation of Taxable Income House
Property

Introduction to Income from House Property

●​ Refers to rental income or deemed rental income from owned property.

●​ Includes residential or commercial properties, self-occupied, let-out, and vacant
properties.
●​ Computed based on rental income, property type, deductions, and exemptions, after
deducting municipal taxes, standard deduction, and home loan interest.

Basis of Charge Arises when an individual earns income from ownership of a property:

●​ Ownership: Income is chargeable to the legal owner (individual, HUF, company, etc.).
●​ Existence of Property: Must be a "house property" (building or land appurtenant).
 ●​ Accrual or Receipt of Income: Charge triggered when income accrues or is received,
whichever is earlier.
●​ Deemed Rental Income: For self-occupied properties, a deemed rental income (based
on standard rent) may be calculated.
●​ Determination of Annual Value: Basis for computation; higher of actual rent or fair
rental value.
●​ Deductions and Exemptions: Allowed to arrive at taxable income.
●​ Taxation of Income: Included in total income and taxed progressively.

Determinants of Annual Value Factors for calculating the potential rental value of a property:

●​ Actual Rent Received or Receivable: For let-out property.

●​ Municipal Valuation: Assessed by municipal authorities for taxes.
●​ Fair Rent: Rent a similar property would fetch in the open market.
●​ Standard Rent: Predetermined rent under the Rent Control Act.
●​ Unrealized Rent: Rent that remains unpaid and cannot be recovered.
●​ Self-Occupation: Deemed rental value considered (actual rent is nil).
●​ The highest of these determinants is considered the annual value.

Deductions and Exemptions Help reduce tax liability on house property income:

●​ Standard Deduction: 30% of Net Annual Value (NAV) for repairs/maintenance.

●​ Interest on Home Loan (Section 24(b)): Up to ₹2 lakh per year for self-occupied
properties; entire interest allowed for let-out/deemed let-out properties.
●​ Municipal Taxes: Deductible from Gross Annual Value (GAV).
●​ Pre-Construction Interest: Claimable in five equal installments from completion year.
●​ Co-ownership/Joint Ownership: Deductions claimed in proportion to ownership share.
●​ Self-Occupied Property Exemption: Income is considered nil if only one such property
is owned, but deductions for municipal taxes and home loan interest are still claimable.
●​ Loss from House Property: Can be set off against other income heads in the same
year or carried forward for eight subsequent years (against house property income only).

Computation of Taxable Income from House Property

1.​ Determine Gross Annual Value (GAV): Higher of actual rent or potential rental value
(nil for self-occupied).
2.​ Deduct Municipal Taxes: From GAV to get Net Annual Value (NAV).
3.​ Apply Standard Deduction: 30% of NAV.
4.​ Deduct Interest on Home Loan: From NAV (after standard deduction), capped at ₹2
lakh for self-occupied.
5.​ Compute Income from House Property: Final figure after deductions (can be a loss).
6.​ Set-off of Loss: Against other income heads in the same year; if remaining, carried
forward for up to eight years (against house property income only).
7.​ Add to Total Income: The computed income is added to the taxpayer's total income.
8.​ Apply Applicable Tax Slab: Calculate tax liability based on total income.
UNIT 3: Meaning of Business Income, Methods of Accounting, Deductions
and Disallowances, Computation of presumptive income under Income-tax
Act

Meaning of Business Income

●​ Refers to profits or gains from trade, profession, or commercial activity by

individuals, partnerships, or companies.
●​ One of the five heads of income under the Income Tax Act, 1961.
●​ Characteristics:
○​ Business Activities: Income from manufacturing, trading, services, consultancy,
professional practice.
○​ Profit Motive: Primary objective is to generate profit.
○​ Regularity and Continuity: Involves ongoing commercial endeavor, not
one-time transactions.
○​ Control and Management: Taxpayer has control over activities,
decision-making, risk-bearing.
○​ Separate Entity: Business is distinct from the taxpayer, even for a sole
proprietorship.
○​ Accounting Principles: Computed based on accounting principles, generally
accrual method.
○​ Deductions and Allowances: Various deductions for business expenses,
depreciation, salaries, rent, interest, etc..
○​ Taxation: Subject to taxation, with rates varying based on legal entity.

Methods of Business Accounting

1.​ Cash Basis Accounting:

○​ Income recognized when received in cash.
○​ Expenses recorded when paid in cash.
○​ Simple, often used by small businesses; does not consider credit transactions.
2.​ Accrual Basis Accounting:
○​ Income and expenses recognized when earned or incurred, regardless of cash
flow.
○​ Provides a more accurate picture of financial performance.
○​ Accounts for credit transactions, accounts receivable/payable, and matching
principle.
○​ Required for income tax purposes in India, except for certain small
businesses below specified turnover thresholds.
●​ Hybrid methods also exist for specific industries.

Deductions and Disallowances Expenses eligible or not eligible for deduction when
computing taxable income:

●​ Permissible Deductions:
 ○​ Business Expenses: Incurred wholly and exclusively for business (rent,
salaries, repairs, advertising, professional fees).
○​ Depreciation: For wear and tear of business assets.
○​ Interest Expenses: On loans for business purposes.
○​ Bad Debts: That have become irrecoverable.
○​ Contributions to Provident Fund and Superannuation Fund: By employers.
○​ Donations: To specified charitable institutions.
●​ Impermissible Deductions (Disallowed Expenses):
○​ Personal Expenses: Non-business related expenses (personal travel, clothing,
entertainment).
○​ Capital Expenditure: For acquiring, improving, or extending capital assets
(depreciation is allowed, not the full cost).
○​ Fines and Penalties: For illegal activities or violations of law.
○​ Interest on Unauthorized Loans: Or loans from specified persons/entities.
○​ Specified Expenses: Certain club memberships, entertainment expenses,
employee benefits.
○​ Gifts to Family and Relatives: Except in specific cases.
○​ Personal Loans and Interest: Interest paid on personal loans is not allowed.

Computation of Presumptive Income A simplified method for certain specified businesses

and professions, based on a percentage of gross receipts or turnover, without needing detailed
books of accounts.

●​ Eligible Taxpayers:
○​ Small businesses with turnover/gross receipts up to ₹2 crore.
○​ Professionals (doctors, lawyers, architects, engineers, accountants) with gross
receipts up to ₹1 crore.
●​ Presumptive Income Rates:
○​ Business Income: Generally 8% of total turnover or gross receipts.
○​ Professional Income: Usually 50% of gross receipts.
●​ Expenses and Deductions: Taxpayers are deemed to have claimed all deductions
and allowances; no further deductions are allowed against presumptive income.
●​ Tax Liability: Presumptive income is treated as taxable income.
●​ Filing of Return: Taxpayers file returns in applicable forms, reporting presumptive
income.
●​ Optional: The scheme is optional; taxpayers can choose to maintain regular books and
claim actual expenses.

Computation of Taxable Income from Business and Profession (Detailed)

1.​ Gross Receipts/Turnover: Total revenue generated.

2.​ Deductible Expenses: Costs incurred for business/profession (COGS, rent, salaries,
repairs, advertising, depreciation, interest, insurance, professional fees, travel, bad
debts, office expenses).
 3.​ Depreciation Adjustment: Add back depreciation deducted earlier, then subtract
current year's depreciation.
4.​ Other Incomes: Include other incomes (rental, interest, investments).
5.​ Deductions and Allowances:
○​ Sections 30 to 43D: Specific deductions for scientific research, patents, etc..
○​ Chapter VI-A: Deductions for NPS, EPF, PPF, life/medical insurance, donations.
○​ Presumptive Taxation Scheme: If opted for, a percentage of gross receipts is
considered income, with no further deductions.
6.​ Set-off and Carry Forward of Losses: Losses can be set off against other income in
the same year; unabsorbed losses can be carried forward.
7.​ Tax Rates and Tax Liability: Apply applicable tax rates based on taxpayer nature and
total income.
8.​ Filing of Income Tax Return: File return with details of business/profession income,
deductions, and tax payments.

Meaning of Capital Asset, Basis of Charge, Exemptions related to capital

gains, Meaning of Transfer, Computation of taxable capital Gain

Meaning of Capital Asset

●​ Any property held by an individual or business, excluding stock-in-trade, raw

materials, or consumable stores.
●​ Acquired for long-term use or investment to generate income or appreciation.
●​ Classification by holding period for taxation purposes:
○​ Short-Term Capital Assets: Held for up to 36 months (24 months for certain
immovable properties).
○​ Long-Term Capital Assets: Held for more than the specified period (generally
36 months, 24 months for certain immovable properties).
●​ Subject to capital gains tax when sold or transferred.
●​ Certain exemptions and concessions exist (e.g., for residential house property,
investments in specified bonds).

Basis of Capital Asset Charge Determines the cost or value of an asset for taxation when
computing capital gains/losses:

●​ Purchase: Cost of acquisition (purchase price + directly attributable expenses like

brokerage, legal fees, registration) adjusted for improvements.
●​ Inheritance or Gift: Fair market value on the date of inheritance or gift.
●​ Self-Generated Assets: Cost of construction (materials, labor, direct expenses).
●​ Conversion of Asset: Fair market value on the date of conversion (e.g., stock-in-trade
to capital asset).
●​ Government Acquisition: Compensation received from the government.

Exemptions Related to Capital Gains Provisions offering relief from tax liability on certain
capital gains:
 ●​ Section 54: Long-term capital gains from sale of residential house property are
exempt if used to purchase another residential house (1 year before or 2 years after
sale) or construct (within 3 years).
●​ Section 54F: Long-term capital gains from sale of any capital asset (other than
residential house) are exempt if used to purchase another residential house (1 year
before or 2 years after sale) or construct (within 3 years).
●​ Section 54EC: Investment of long-term capital gains from any capital asset in
specified bonds (NHAI, REC) within six months, up to a limit.
●​ Section 54B: Long-term capital gains from transfer of agricultural land are exempt if
used to purchase other agricultural land within a specified period.
●​ Section 54G: Long-term capital gains from transfer of industrial undertaking are
exempt if invested in new assets for shifting/establishing an industrial undertaking.
●​ Section 10(38): Long-term capital gains from transfer of equity shares or
equity-oriented mutual funds where STT is paid are entirely exempt.

Meaning of Transfer The act of disposing of or transferring ownership or rights in a capital

asset. Includes:

●​ Sale or Purchase: Ownership transferred for consideration.

●​ Exchange: Ownership of one asset for another.
●​ Relinquishment: Voluntarily giving up ownership rights without consideration.
●​ Extinction of Rights: Surrender or abandonment of rights, expiry of lease.
●​ Compulsory Acquisition: By government or statutory authority.
●​ Conversion: Asset converted into another form (e.g., stock-in-trade to capital asset).
●​ Even without physical movement, transactions transferring ownership/rights are
considered transfers for tax purposes.

Computation of Taxable Capital Gain

1.​ Identify Type of Asset: Short-term or long-term based on holding period.

2.​ Determine Full Value of Consideration: Amount received/expected from transfer.
3.​ Calculate Cost of Acquisition: Actual cost + direct expenses; for inherited/gifted, fair
market value at acquisition.
4.​ Determine Cost of Improvement: Expenses enhancing asset value after acquisition.
5.​ Calculate Indexed Cost of Acquisition and Improvement: For long-term assets,
costs are adjusted for inflation using the Cost Inflation Index (CII).
6.​ Compute Capital Gains: (Full Value of Consideration) - (Indexed Cost of Acquisition +
Indexed Cost of Improvement). Positive result is gain, negative is loss.
7.​ Apply Exemptions and Deductions: Reduce taxable gains using sections like 54, 54F,
54EC, or Chapter VI-A.
8.​ Determine Taxable Capital Gains: Remaining amount after exemptions; taxed at
applicable rates for long-term or short-term gains.
Income from Other Sources Basis of Charge, Dividend, Interest on
securities, Winning from lotteries, Crossword Puzzles, Horse Races, Card
games etc. Permissible deductions impermissible deductions

Basis of Charge for Income from Other Sources

●​ Residual category for income not falling under Salary, House Property,
Business/Profession, or Capital Gains.
●​ Inclusion of Income: Interest income, rental income from assets other than house
property, dividend income, income from fixed deposits/savings accounts, winnings from
lotteries, gifts, certain allowances/perquisites not covered elsewhere.
●​ Accrual or Receipt Basis: Taxable when earned (accrual) or when actually received
(receipt), depending on income nature.
●​ Computation of Income: Generally involves deducting expenses incurred for earning
that income.
●​ Taxation of Gifts: Gifts (cash/kind) above a threshold are taxable, with exceptions for
gifts from relatives, on marriage, etc..
●​ Taxation of Dividend Income: From domestic companies, taxable under this head.
●​ Disallowance of Expenses: Expenses for earning exempt income or personal
expenses are generally not allowed.

Dividend Income

●​ Earnings from investments in shares or mutual funds, distributed by companies to

shareholders.
●​ Historical (DDT Regime): Companies paid Dividend Distribution Tax (DDT), and
dividends were tax-free for shareholders.
●​ New Regime (from FY 2020-21): DDT abolished; dividend income is now taxable in
shareholders' hands.
●​ Taxation for Individuals and HUFs:
○​ From domestic companies, included in total income and taxed at applicable slab
rates under "Income from Other Sources".
○​ Dividend income up to INR 5,000 is eligible for deduction under Section
80TTA.
○​ Income exceeding INR 5,000 is taxable without specific deductions.
●​ Taxation for Companies and Firms: Taxable at applicable corporate tax rates.
●​ Tax Deducted at Source (TDS): Companies deduct 10% TDS on dividend income
exceeding INR 5,000 paid to residents (with exceptions for Form 15G/15H).
●​ Taxation from Mutual Funds: Taxable similarly to domestic companies, at applicable
slab rates.

Interest on Securities

●​ Income from investments in various securities (government/corporate bonds,

debentures, fixed deposits).
 ●​ Generally classified as "Income from Other Sources".
●​ Included in total income and taxed at applicable rates.
●​ Taxation for Individuals and HUFs:
○​ From government securities, corporate bonds, and debentures: Taxable at
applicable slab rates.
○​ TDS: Payer often deducts TDS, for which taxpayers can claim credit.
●​ Taxation for Companies and Firms: Taxable at applicable corporate tax rates.
●​ Deductions and Exemptions:
○​ Section 80TTA: Deduction up to INR 10,000 on interest from savings
accounts (banks, co-operative societies, post offices).
○​ Section 80TTB: For senior citizens (60+), deduction up to INR 50,000 on
interest from deposits (banks, co-operative societies, post offices).
○​ Exemption for interest on specified government savings bonds (SCSS, NSC).

Winning from Lotteries, Crossword Puzzles, Horse Races, Card games etc.

●​ Winnings from Lotteries:

○​ Classified as "Income from Other Sources".
○​ Taxed at a special flat rate of 30% (plus surcharge and cess) on the total
amount won, regardless of slab rates.
○​ TDS: Organization deducts 31.2% TDS on prize money exceeding INR 10,000.
○​ Reported in income tax return.
○​ No set-off or carry forward of losses allowed against lottery winnings.
○​ No specific deductions or exemptions available.
○​ Gift tax provisions may apply if winnings are received as a gift (over INR 50,000
threshold).
●​ Crossword Puzzles and Similar Activities:
○​ Income is taxable as "Income from Other Sources" at applicable income tax
rates.
●​ Horse Races, Card Games, and Other Games of Chance:
○​ Income is considered "Income from Other Sources" and taxed at applicable
income tax rates.
○​ TDS may be applicable on winnings or prize money.
○​ No specific deductions or exemptions available.

UNIT 4: Computation of Total income and Tax Liability of individual and

HUF, Income of Other persons included in assessee’s total income,
Aggregation of Income and Set-off and carry forward of losses, Deductions
from Gross Total Income, Rebates and Reliefs

Computation of Total Income and Tax Liability (Individual & HUF)

1.​ Determine Residential Status: Resident, Non-Resident, or RNOR.

 2.​ Categorize Income: Classify income into Salary, House Property, Business/Profession,
Capital Gains, Other Sources.
3.​ Calculate Gross Total Income: Sum of income from all heads.
4.​ Deductions: Subtract permissible deductions under various sections (e.g., 80C for
investments, 80D for health insurance, 80G for donations, 80E for education loan
interest, 24 for home loan interest).
5.​ Compute Total Taxable Income: Gross Total Income minus total deductions.
6.​ Apply Applicable Tax Slabs and Rates: Determine rates based on taxable income.
7.​ Calculate Tax Liability: Apply tax rates to taxable income.
8.​ Include Applicable Cess: Add health and education cess.
9.​ Claim Rebates and Credits: Apply reliefs like Section 87A rebate.
10.​Pay Tax or Seek Refunds: Through advance tax, self-assessment tax, or TDS; claim
refund if overpaid.

Income of Other Persons Included in Assessee’s Total Income (Clubbing of Income) This
concept applies when income is transferred to another person (spouse, minor child, etc.) to
reduce tax liability, and that income is then "clubbed" with the transferor's income for taxation.

●​ Spouse’s Income (Section 64): If income is transferred to a spouse (unless for an

agreement to live apart), it's included in the transferor's income.
●​ Minor Child’s Income (Section 64(1A)): Income earned by a minor (under 18) is
clubbed with the parent whose total income is higher. This applies to income from
manual work, skill application, or assets/investments transferred by the parent.
●​ Transfer of Assets: If assets are transferred without adequate consideration to avoid
tax, income from such assets is treated as the transferor's income.

Aggregation of Income and Set-off and Carry Forward of Losses

●​ Aggregation of Income: The process of combining income from all different heads
(Salary, House Property, Business/Profession, Capital Gains, Other Sources) to
calculate total income after deductions/exemptions.
●​ Set-off of Losses:
○​ Inter-head Set-off: Losses from one head of income can be offset against
income from any other head in the same assessment year (e.g., house property
loss against salary).
○​ Intra-head Set-off: Losses can be offset against income from the same head in
the same assessment year (e.g., business loss against business income).
●​ Carry Forward of Losses: If losses cannot be fully set off in the same year, they can be
carried forward to future years:
○​ Losses from house property and capital gains can be carried forward for up to
8 assessment years.
○​ Business loss (non-speculation) can be carried forward for up to 8 assessment
years.
○​ Speculation business loss can be carried forward for up to 4 assessment
years.
 ○​ Losses from owning/maintaining racehorses can be carried forward for up to 4
assessment years.

Deductions from Gross Total Income Specific expenses, investments, or contributions

subtracted from Gross Total Income to reduce taxable income:

●​ Section 80C: Investments/expenses up to ₹1.5 lakh (Life Insurance, EPF, PPF, NSC,
tax-saving FDs, tuition fees, home loan principal, ELSS, Sukanya Samriddhi Yojana).
●​ Section 80D: Medical insurance premiums for self, spouse, children, parents (limits vary
by age).
●​ Section 80G: Donations to specified charitable organizations (subject to limits).
●​ Section 80E: Interest paid on education loans (for up to 8 years).
●​ Section 80TTA: Deduction up to ₹10,000 on interest from savings bank accounts.
●​ Section 80GGA: Donations for scientific research or rural development.
●​ Section 80U: For individuals with disabilities.
●​ Section 24: Interest paid on home loans (up to ₹2 lakh for self-occupied properties).

Rebates and Reliefs Provisions providing tax benefits and reductions in tax liability:

●​ Rebate under Section 87A: Available to individual taxpayers whose total income is
below ₹5 lakh, allowing a rebate of up to ₹12,500.
●​ Relief for Senior Citizens (60+): Higher exemption threshold and potentially lower tax
rates.
●​ Relief for Very Senior Citizens (80+): Further tax relief, including higher exemption
thresholds and reduced rates.
●​ Relief for Medical Treatment of Specified Diseases (Section 80DDB): Deductions for
expenses incurred.
●​ Relief for Rent Paid (Section 80GG): For individuals not receiving HRA, paying rent for
accommodation.
●​ Relief for Donations to Political Parties (Section 80GGC): Deductions for donations
to registered political parties.
●​ Relief for Start-ups: Tax relief for a specified period for eligible start-ups.
●​ Relief for Export-oriented Units (EOUs) and Special Economic Zones (SEZs):
Various tax benefits to encourage export activities.