UNIT 3

Meaning of Business Income, Methods of

Accounting, Deductions and
Disallowances, Computation of
presumptive income under Income-tax
Act

5 Sep 2024

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.

It is important to note that the computation and taxation of business income

involve various provisions and regulations under the Income Tax Act.
Taxpayers engaged in business activities are required to maintain proper
books of accounts, comply with tax regulations, and file income tax returns
accurately. It is advisable to consult with a tax professional or refer to the
latest provisions of the Income Tax Act for precise guidance related to
business income in India.
Methods of Business Accounting

There are two main methods of accounting for business income:

●​ 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.

●​ 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.

It is important for businesses to select an appropriate accounting method and

consistently apply it to ensure accurate financial reporting and compliance
with tax regulations. It is advisable to consult with an accountant or financial
professional to determine the most suitable method for a specific business
and to ensure compliance with applicable accounting and tax standards in
India.

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. Here are some common
deductions and disallowances:
Deductions:

●​ 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.

●​ 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.

●​ 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.

●​ Bad Debts:
Deductions are allowed for bad debts that have become irrecoverable and are
written off as per the prescribed conditions and procedures.

●​ Contributions to Provident Fund and Superannuation Fund:

Deductions are allowed for contributions made by employers to recognized

provident funds and approved superannuation funds.

●​ Donations:

Deductions are allowed for donations made to certain specified charitable

institutions or funds, subject to prescribed conditions and limits.

Disallowed Expenses:

●​ 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.

●​ 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.

●​ Fines and Penalties:

Any fines, penalties, or payments related to illegal activities or offenses are

generally disallowed as deductions.

●​ Interest on Unauthorized Loans:

Interest paid on unauthorized loans or loans taken from specified

persons/entities may be disallowed as a deduction.

●​ 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.

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.

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:
Eligible Taxpayers: The presumptive income scheme is available to certain
eligible taxpayers, including:

1.​ Small businesses with a total turnover or gross receipts of up to ₹2

crore (₹1 crore for professionals).
2.​ Professionals engaged in specific occupations such as doctors, lawyers,
architects, engineers, accountants, etc.

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.

●​ 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.

●​ 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.

●​ 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.

●​ 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

25 Apr 2024

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.

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.

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:
 ●​ 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.

●​ Rent and Lease Expenses:

The amount paid as rent or lease for business premises, machinery,

equipment, or vehicles can be deducted.

●​ Salaries, Wages, and Employee Benefits:

The salaries, wages, and other employee benefits paid to employees engaged
in the business are deductible expenses.

●​ Repairs and Maintenance:

Expenses incurred for repairs and maintenance of business assets, such as

buildings, machinery, and equipment, can be deducted.

●​ Advertising and Marketing Expenses:

Expenses incurred for advertising, marketing, promotions, and branding

activities are deductible.
 ●​ 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.

●​ 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.

●​ Insurance Premiums:

Premiums paid for business-related insurance policies, such as fire insurance,

liability insurance, or business interruption insurance, can be deducted.

●​ Professional Fees:

Fees paid to professionals such as accountants, lawyers, consultants, or other

professional service providers are deductible.

●​ Travel and Conveyance Expenses:

Expenses incurred for business-related travel, including transportation,
accommodation, and meals, can be deducted.

●​ Bad Debts:

If there are debts that have become irrecoverable, they can be deducted as
bad debts subject to prescribed conditions and procedures.

●​ 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.
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.

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:

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

It is important to note that the computation of taxable income from business

and profession involves various provisions and considerations under the
Income Tax Act. Taxpayers engaged in business activities should maintain
proper books of accounts, retain supporting documents, and ensure
compliance with tax regulations. Seeking professional advice from
accountants or tax experts is recommended to accurately compute taxable
income and fulfill the statutory requirements.
Meaning of Capital Asset, Basis of
Charge, Exemptions related to capital
gains, Meaning of Transfer, Computation
of taxable capital Gain

25 Apr 2024

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:

●​ 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.

●​ 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.

In the context of taxation, capital assets are subject to capital gains tax. When
a capital asset is transferred, any profit or gain arising from the transfer is
treated as a capital gain, and it is taxable as per the provisions of the Income
Tax Act.

It is worth noting that the Income Tax Act provides certain exemptions and
concessions for the transfer of certain specified assets, such as exemptions
for the sale of a residential house property under certain conditions or benefits
for investments in specified bonds or funds. These provisions aim to
encourage investment and provide tax relief in certain cases.

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:

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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:

●​ 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.
 ●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

It’s important to note that even if there is no physical movement of the asset,
certain transactions or events that result in the transfer of ownership or rights
in a capital asset are considered transfers for taxation purposes.

When a transfer of a capital asset occurs, it may trigger tax implications,

particularly with respect to capital gains tax. The capital gains tax is levied on
the gains or profits arising from the transfer of a capital asset. The
determination of taxable capital gains depends on factors such as the holding
period of the asset (whether it is classified as short-term or long-term), the
cost of acquisition, and the method of computation specified under the Income
Tax Act.

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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.
 ●​ 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:

Description Amount (in INR)

Sale consideration (full value of consideration) 50,00,000

Less: Indexed cost of acquisition 20,00,000

Less: Indexed cost of improvement 5,00,000

Capital gains 25,00,000

 Less: Exemption under Section 54 10,00,000

Taxable capital gains 15,00,000

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.

Note: Please consult with a tax professional or refer to the provisions of the
Income Tax Act for accurate calculations and specific guidance related to your
situation.
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

22 May 2025

Income from Other Sources refers to any income that does not fall under the
specific heads of income such as Salary, House Property, Business or
Profession, or Capital Gains. It is a residual category that includes various
types of income that do not have separate provisions for computation under
specific heads. The basis of charge for income from other sources is
determined by the provisions of the Income Tax Act, 1961 in India.

Important Points basis of charge for income from other sources:

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ 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:

●​ 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.

●​ 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.

●​ Dividend Income above INR 5,000:

Dividend income exceeding INR 5,000 is taxable at the applicable slab rates
without any specific deductions.

●​ 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.

●​ 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.

●​ 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.

●​ Classification of Interest Income:

Interest income earned on securities is generally classified as “Income from
Other Sources” and is taxable under this head.

●​ 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):

●​ 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.

●​ 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.

●​ 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.

●​ 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.

●​ Deductions and Exemptions:

Certain deductions or exemptions may be available to individuals and HUFs

on interest income earned from specific types of securities. For example:

●​ 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.

●​ 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.

●​ 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:

●​ Classification of Lottery Winnings:

Lottery winnings are generally classified as “Income from Other Sources” and
are taxable under this head.
 ●​ 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):

1.​ 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.
2.​ 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.
3.​ 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.

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.

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.
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:

●​ 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.
●​ 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.
●​ 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.
●​ 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.
●​ House Rent Allowance (HRA): HRA received by salaried individuals can
be claimed as a deduction, subject to certain conditions and limits.
●​ 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.
●​ 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:

●​ Personal Expenses: Personal expenses, such as personal travel,

personal phone bills, personal insurance premiums, and personal
entertainment expenses, are not allowed as deductions.
●​ 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.
●​ 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.
●​ Personal Loans and Interest: Interest paid on personal loans or
personal credit card debt is not allowed as a deduction.