INDEX

DIRECT TAX
SN Chapter Name No of Questions Page No
1 Introduction to Income Tax Act 22 1.1 – 1.34
2 Residential Status 17 2.1 – 2.27
3 Income Exempt from Tax 04 3.1 – 3.10
4 Income from Salary 42 4.1 – 4.60
5 Income from House Property 24 5.1 – 5.25
6 Profit & Gains of Business or Profession 32 6.1 – 6.76
7 Capital Gain 37 7.1 - 7.54
8 Income from Other Sources 15 8.1 – 8.19
9 Clubbing of Income 10 9.1 – 9.10
10 Set Off and Carry Forward of Losses 07 10.1 – 10.15
11 Permissible Deduction 11 11.1 – 11.36
12 Tax Deducted at Source and Tax Collected 03 12.1 – 12.20
at Source
13 Advance Tax - 13.1 – 13.03
14 Assessment of Various Person 13 14.1 – 14.34
15 Assessment Procedure & Interest 21 15.1 – 15.21
16 Tax Incidence on Company 02 16.1 – 16.16
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CHAPTER
41 1 INTRODUCTION TO INCOME TAX ACT

WHAT IS TAX?

1. Tax is a mandatory payment to be made by the people including Corporate entities to

the Government. In other words, it is a necessary consideration for living in a civilized
society.
2. The Taxation Structure of the country can play a very important role in the working of
economy.
3. Earlier very few people were paying the income tax and hence the government implemented
very high rates to maximize the collection. But currently the government wants more and
more people to fall under the ambit and tax and increase the base of taxpayers. Hence the
government has decreased the rates and intends to realize the collection of taxes from
more people.

WHY THE NEED FOR TAXES?

a. Welfare and Public Services like education systems, health care systems and public
transportation.
b. Energy, water, waste management systems, and Enforcement of law and public order.
c. Maintaining defence forces and securing borders of the country.
d. Funding Research and Development Projects.
e. Development of economic infrastructure, public works, subsidies, and the operation of
government itself.
f. Payment of the state’s debt and the interest thereon.
g. The government, by its own accord cannot raise the funds required for meeting these
expenses. Hence, the people contribute money towards all these expenses through Taxes.
The resource collected from the public through taxation can then be used by the
government for all the above-mentioned purposes.

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CLASSIFICATION OF TAX

TAX

Direct Tax Indirect Tax

Custom Duty
Tax is levied directly on the income

Tax on Goods Import or Export

Income Tax & Services of Goods

GST

Intra – State Inter – State Intra – Union

Supply Supply Territories Supply

CGST SGST IGST UGST CGST

DIRECT TAXES

Direct tax is the payment made by assessee directly to the government after income is
received.

INCOME TAX

It is a tax on income earned for e.g. Tax on salary income.

INDIRECT TAXES

Indirect tax is a tax on commodities and services. Here burden is fall indirectly on the
consumers hence it is called as Indirect tax.

DIFFERENCES BETWEEN DIRECT AND INDIRECT TAXES

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Point of
Direct Tax Indirect Tax
Difference
A tax is said to be direct when If impact of tax is on one person and
Incidence &
impact and incidence of a tax are on incidence on the another, the tax is
Impact
one and same person. called ‘indirect’
Direct tax is imposed on the Indirect tax is imposed on commodities
Burden individual organization and burden of and allows the tax burden to shift.
tax cannot be shifted to others.
Direct taxes are lesser burden then Indirect taxes are borne by the
Viability of Indirect taxes to people as direct consumers of commodities and services
payment taxes are based on Income earning Irrespective of financial ability as the
ability of people. MRP Includes all taxes.
The administrative cost of collecting Cost of collecting Indirect taxes is
Administrative direct taxes is more and Improper very less as indirect taxes are wrapped
Viability administration may result in tax up in prices of goods and services and
evasion. cannot be evaded.
It is levied on supplier of Goods &
Penalty It is levied on the assessee.
Services.
Nature Progressive Regressive

MERITS & DEMERITS OF DIRECT TAX

S N MERITS S N DEMIRITS
1 Equity 1 Evasion
2 Elasticity and productivity 2 Uneconomical
3 Certainty 3 Unpopular
4 Reduce inequality 4 Little incentive to work and save
5 Good instrument in the case of inflation 5 Not suitable to a poor country
6 Simplicity 6 Arbitrary

MERITS & DEMERITS OF INDIRECT TAX

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S N Merits S N Demerits
1 High revenue production 1 Regressive in effect
2 No evasion 2 Uncertainty in collection
3 Convenient 3 Discourage savings
4 Economy 4 Increase inflation
5 Wide coverage
6 Elasticity

OBJECTIVE OF TAXATION & FEATURES OF TAX

Objective of Taxation Features of Tax

1 Revenue 1 Tax is compulsory
2 Redistribution of income and wealth 2 Tax is contribution
3 Social welfare 3 Tax is for public benefit
4 Safety of society from bad and injurious 4
No direct benefit
customs
5 Tax is paid out of income of the tax
payer
6 Government has the power to levy tax
7 Tax is not the cost of the benefit
8 Tax is for the economic growth and
public welfare

INTRODUCTION OF INCOME TAX IN INDIA

1 History of Income Tax

The Income Tax was introduced in India for the first time in 1860 by British rulers
following the mutiny of 1857. The period between 1860 and 1886 was a period of
experiments in the context of Income Tax. This period ended in 1886 when first Income
Tax Act came into existence.
The patters laid down in it for levying of Tax continues to operate even today though in
some changed form.
In 1918, another Act – Income Tax Act, 1918 was passed but it was short lived and was
replaced by Income Tax Act, 1922 and it remained in existence and operation till 31st
March, 1961.

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2 Present Act
On the recommendation of law Commission & Direct Taxes Enquiry Committee and in
consultation with Law Ministry a Bill was farmed. The bill was referred to a select
committee and finally signed by the President on 13th Sept, 1961. This Act came
into force from 1st April 1962 in whole of the country.
3 Constitutional Background Concept of Delegated Legislation
Article 246 of the Indian Constitution, distributes legislative powers including taxation,
between the Parliament of India (Central Government) and the State legislature. Schedule
VII enumerates these subject matters with the use of three lists;
a. List - I (Union List)– Entailing the areas on which only the Central Government is
competent to make laws.
b. List - II (State List)– Entailing the areas on which only the State Legislature can
make laws.
c. List - III (Concurrent List)– Listing the areas on which both the Parliament and the
State Legislature can make laws upon concurrently.
4 The Income Tax Act, 1961
Under the entry 82 of Union List of Constitution of India, the Parliament has
exclusive power to make laws with respect to “Taxes on income other than agricultural
income” Compliance with this power gave birth to the formation of the Income Tax Act.
a. Levy of Income Tax in India is governed by the Income Tax Act, 1961, which came
into force w.e.f 1962.
b. The Income Tax Act, 1961 (hereinafter referred to as “the act” or IT act”) contains
Chapters from I to XXIII, 298 Section and XIV Schedules.
c. IT act provides for determination of Total Income, Tax liability and Procedure for
Assessment, Appeal, Penalties and Prosecutions.
d. Provisions of IT Act undergo changes, based on amendments brought about by the
Finance Act every year.

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FINANCE ACT

FINANCE BILL
2024

The Finance Minister presents Finance Bill in both the houses of

parliament.

It contains various amendments which are sought to be made in the

areas of direct and indirect taxes levied by the Central Government.

Part A of the budget contains proposed

Part B contains the
policies of the government in fiscal
detailed tax proposals.
areas.

Once the finance Bill is approved by the Parliament and gets the
assent of the president, it becomes the finance act.

The rate of tax at which income shall be charged is prescribed in the

schedule I of Finance Act.

The whole management of this Act is handed over to CBDT (Central

Board of Direct Taxes)

Income Tax Rules, 1962 Circular & notification

Supreme Court and High court judgments

6 India [Sec. 2(25A)]

a. The territory of India as per Article 1 of the constitution,
b. Its territorial waters, seabed and subsoil underlying such waters,
c. Continental Shelf,
d. Exclusive Economic Zone, or
e. Any other specified Maritime Zone, and
f. The air space above its Territory and Territorial waters.
7 The Income Tax Rules, 1962
a. The administration of Direct Taxes is vested with Central Board of Direct Taxes
(CBDT).

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b. Under Section 295 of IT Act, CBDT is empowered to frame rules from time to time
to carry out the purpose and proper administration of the Act.
c. All forms, procedures and principles of valuation of perquisites under the Act are
provided in the Rules framed by CBDT.
8 Circulars
a. In exercise of the powers u/s. 119, CBDT issues Circulars and Notifications from time
to time. These Circulars clarify doubts regarding the scope and meaning of the
various provisions of the Act.
b. These Circulars act as guidance for officers and assessee.
c. These Circulars are binding on Assessing Officers but not on assessee and
Courts, ITAT.
d. The Circulars issued by CBDT shall not be contrary to the provisions of the Act.
9 Notifications
Notifications are issued by the Central Government to give effect to the provisions of the
act. The CBDT is also empowered to make & amend rules for the purposes of the act by
issue of notifications which are binding on both department and assesses.
10 Appeal hierarchy

Commission (Appeal)

Income Tax Appellate Tribunal

High Court

Supreme Court

11 Supreme Court & High Court Decision

a. The Supreme Court and the High Court can give judgement only on the question of
law.
b. The Law laid down by the Supreme Court is the law of the land;
c. The decision of High Court will apply in the respective States, within its jurisdiction.

PERSON [SECTION 2(31)]

Person Includes
1 An Individual
2 A Hindu Undivided Family
3 A Company
4 A Firm

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5 An Association of Person or a Body of Individuals.

6 A Local Authority,
7 Every Artificial juridical person not falling within any of the preceding sub-clauses.

1 An Individual
Means a natural person i.e. a human being. It includes a male, female, minor child. However,
income of a minor is now generally included in the income of parents.
2 A Hindu Undivided Family
HUF has not been defined under the tax laws. However, as per Hindu law, it means a family,
which consists of all persons lineally descended from a common ancestor including their
wives and unmarried daughter.
3 A Company Sec. 2(17)
Company includes
 Domestic company [Sec 2(22A)
 Foreign company [Sec 2(23A)]
4 Firm
Section 4 of the Indian Partnership Act, 1932 defines partnership as “relationship
between persons who have agreed to have the profits of business carried on by all or any
of them acting for all”.
5 Association of person (AOP) v/s body of individuals (BOI)
Association of person Body of individuals
1 Created voluntarily. Created by operation of Law.
2 AOP may consist of Individuals or non-individuals. BOI consists of Individuals only.
3 AOP means two or more persons joining together The business run by a widow on her
for a common purpose to earn income, and behalf or on behalf of her children
without an intention to form Partnership. would be assessed as BOI.
4 Co-Heirs, Co-Legatees or Co-Donees joining Co-Executors, Co-Trustees are
together for common purpose/action shall be assessable as BOI.
chargeable as AOP.
If X, Y, & Z join together, it is called as BOI.
Example

If X, ABC Ltd. And PQ & Co. join together for a particular venture then they may be
referred as an AOP.

6 A Local Authority
The expression means Panchayat, Municipality,
7 Artificial Juridical persons
Are the entities, which are not natural persons, but they are separate entities in the
eyes of law.

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Examples of Person
S N Persons Under it Act Status
1 Mr. Sunil Individual
2 A joint family consist of P, Mrs. P and their son S HUF
3 Reliance Industries Ltd. Company
4 Shri Krishna Enterprises, a firm consisting of S & K Firm
5 XYZ Ltd. & Amit AOP
6 A and B are legal heirs of C, carry business without entering BOI
into a partnership
7 Municipal Corporation of Pune A Local Authority
8 Pune University Artificial juridical
Person

ASSESSEE [SECTION 2(7)]

1 Assessee means
Any person who is liable to pay any tax or any other sum under the Income Tax Act,
1961.
2 Assessee includes
a. Every person in respect of whom any proceedings has been taken for the
assessment of
 His Income or Fringe Benefits, or Income of any other person.
 Loss sustained by him or other person.
 Refund due to him or such other person.
b. Every person who is deemed to be an Assessee under the Act
“Deemed Assessee” means a person who is treated an as Assessee under the IT Act.
This would include:
 Trustee of a Trust,
 Legal Representative of a Deceased Person under section 159.
c. Every person who is deemed to be an Assessee in Default
 Fail to deduct and remit TDS (Section 191).
 Fail to pay tax and any other sum demanded (Section 220).

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ASSESSMENT YEAR [SECTION 2(9)]

Assessment year is a year in which income is charged to tax or year in which income tax
is payable. It is a period of 12 months commencing on 1st April every year.

PREVIOUS YEAR [SECTION 3]

Previous year is a year in which income is earned. It is same as Financial Year. All
assesses are required to follow a uniform previous year i.e. the financial year (1st April to 31st
March) as their previous year for income tax purpose. From the AY 1989-90 onwards, all
assesses are required to follow financial year (i.e. April to March) as the previous year. This
uniform previous year has to be followed for all source of income.

Example
If PY 24-25 then, AY is 25-26.
The assessment year 2025 - 26 will commence on April 1, 2025 and will end on March 31,
2026.

1-4-2024 31-3-2025/01-04-2025 31-3-2026

Previous Year for A Y Assessment year for the income

2025-2026 received in P Y 2024 – 2025

Previous year for A Y 2026-27

(Next year)

PREVIOUS YEAR IN CASE OF NEWLY STARRED BUSINESS

In case of Previous year is the period

Business or profession Beginning with the date of setting up of the business & ending on
being newly set-up 31st March of that financial year.
A source of income newly Beginning with the date on which the new source of income comes
coming into existence into existence & ending on 31st March of that financial year.
X set up a business on 3 March, 2025. What is the previous year for the assessment year
2025-2026?

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3-3-2025 31-3-2025/01-04-2025 31-3-2026

Previous Year Assessment year

EXCEPTIONS TO THE GENERAL RULE THAT INCOME OF A PREVIOUS YEAR IS TAXED

IN ITS ASSESSMENT YEAR

PY 2024 – 25 Exception PY 2024 – 25

AY 2025 - 26 AY 2024 – 25

Section Details Assessment

172 Shipping Business of Non-Resident Mandatory
174 Persons leaving India Mandatory
174A AOP / BOI / AJP formed for a particular event or purpose Mandatory
175 Persons likely to transfer property to avoid tax Mandatory
Assessment
176 Discontinued Business is
discretionary

INCOME [SECTION 2(24)]

S N Income Taxable Head

1. Profits and gains PGBP
2. Dividend Other Sources
3. Voluntary contributions Generally exempt under
Section 11 and 12
4. The value of any perquisite or profit in lieu of salary Salary
5. Any special allowance or benefit specifically granted to Salary (Generally exempt)
the employee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office
or employment of profit
6. City Compensatory Allowance/ Dearness allowance Salary
7. Benefit or Perquisite to a Director / a person having Salary (If as per
substantial interest/ relative of director employment agreement)

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Else under Other Sources (If

not in the terms of
employment agreement)
8. Any Benefit or perquisite to a Representative Assessee Other Sources
9. Deemed profits chargeable to tax under section 28 or PGBP
section 41 or section 59.
10. Capital Gain Capital Gains
11. Insurance Profit PGBP
12. Banking income of a Co-operative Society PGBP
13. Winnings from Lottery Other Sources
14. Employees Contribution Towards Provident Fund PGBP if not deposited by the
assessee to the specified fund
15. Amount Received under Keyman Insurance Policy PGBP
16. Amount received for not carrying out any activity: Any PGBP
sum referred to in Section 28(va), i.e. any sum, whether
received or receivable in cash or kind, under an
agreement for -
i Not carrying out any activity in relation to any
business or profession
ii Not sharing any know-how, patent, copyright,
trade- mark, license, franchise or any other
business or commercial right of similar nature or
information or technique likely to assist in the
manufacture or processing of goods or provision for
services
17. Any sum referred to in clause (v) or (vi) of sub-section (2) of Other Sources
section 56
18. Gift received for an amount exceeding Rs. 50,000 Other Sources
19. Any consideration received for issue of shares as Other Sources
exceeds the fair market value of the shares referred in
section 56(2) (viib)
20. Amount received as an advance or otherwise in the Other Sources
course of negotiation for transfer of a capital asset
referred to in clause (ix) of section 56(2)
21. Any sum of money or value of property received without Other Sources
consideration or for inadequate consideration as
referred to in clause (x) of Section 56(2)

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22. Any compensation or payment in connection with Other Sources

termination of employment as referred under clause (xi)
of Section 56(2)
23. Any specified sum received by a unit holder from a Other Sources
business trust with respect to a unit held by him [clause
(xii) of sub- section (2) of section 56]
24. Any sum received, including the amount allocated by way Other Sources
of bonus under a life insurance policy, other than the sum
received under a unit linked insurance policy and keyman
insurance policy which is not to be excluded from the
total income of the previous year in accordance with the
provisions of clause (10D) of section 10, the sum so
received as exceeds the aggregate of the premium paid,
during the term of such life insurance policy, and not
claimed as deduction under any other provision of this
Act, [clause (xiii) of sub-section (2) of section 56]
25. Assistance in the form of a subsidy or grant or cash PGBP
incentive or duty drawback or waiver or concession or
reimbursement (by whatever name called) by the Central
Government or a State Government or any authority or
body or agency in cash or kind to the assessee other than
the subsidy or grant or reimbursement which is taken into
account for determination of the actual cost of the asset
in accordance with the provisions of Explanation 10 to
clause (1) of section 43.

FEATURES OF INCOME

1 Cash vs. Kind

Kind is to be valued as per the rules prescribed and if there is no specific direction
regarding valuation in the Act or Rules. It may be valued at market price.
2 Significance of method of accounting
Where method of accounting is irrelevant Where method of accounting is relevant
In case of income under the head “Salaries”, In case of income under the head “Profit &
“Income from house property” and “Capital gains of business or Profession” and
gains” method of accounting is irrelevant. “Income from other sources” (other than
Dividend) income shall be taxable on cash
or accrual basis as per the method of

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accountancy regularly followed by the

assessee.
3 Notional income
A person cannot make profit out of transaction with himself. Hence, goods transferred
from one department to another department at a profit, shall not be treated as income
of the business.
4 Source of income
Income may be from a temporary source or from a permanent source.
5 Loss
Income also includes negative income.
6 Disputed income
In case of dispute regarding the title of income, assessment of income cannot be
withheld and such income, normally, be taxed in the hands of recipient.
7 Lump-sum receipt
There is no difference between income received in lump sum or in instalment.
8 Reimbursement
More reimbursement of expenses is not an income.
9 Legality
The Act does not make any difference between legal or illegal income
10 Double taxation
Same income cannot be taxed twice.
11 Income by mutual activity
In this regard it is to be noted that in case of mutual activities, where some people
contribute to the common fund and are entitled to participate in the fund and the surplus
arises which is distributed among the contributors of the fund, such surplus cannot be
termed as income.
Exceptions:
 Income derived by a trade, professional or similar association from rendering specific
services to its members shall be taxable u/s. 28(iii).
12 Fair Market Value of Inventory
Fair market value for inventory (which is converted into asset) is treated as income of
the year in which conversion takes place
13 Pin money
Pin money is money received by wife for her personal expenses & small savings made by a
woman from money received from her husband for meeting household expenses. Such
receipt is not treated as income.
Note: Income on investment out of pin money shall be treated as income.
14 Award

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Award received, by a person related to his business or profession, shall be treated as

income incidental to such business or profession.
15 Embezzlement
Money embezzled is a gain to the embezzler and, therefore, falls within the wider
definition of income.
16 Contingent income
A contingent or anticipated income is not taxable.
17 Donation
Receipt on account of “Dharmada” or donation is not taxable in the hands of recipient.
18 Gift
Value exceeds Rs. 50000 without consideration from any person; the value of such asset
will be taxable under the head “Income from other sources”. For further detail refer
chapter “Income from Other Sources”.
19 Subsidy or Grant
Assistance in form of subsidy or a grant or cash incentive or duty drawback or waiver or
concession reimbursement by whatever name called will be taxable as income.
 However, subsidy or grant reimbursement which is taken into consideration for
determination of cost u/s 43(1) shall not be considered as income.
 Subsidy or Grant by Central Government, for the purpose of corpus of a trust or
Institution established by Central Government or a State Government, shall not be
treated as income.
Example:
X Ltd. gets a subsidy from the Orrisa Government set up a chemical fertilizer plant
in a backward area in Orrisa. Subsidy is not given for assisting it in carrying out the
business operations but the object of subsidy is to encourage setting up of industries
in backward area in Orrisa. It is chargeable to tax.

CAPITAL VS REVENUE EXPENDITURES

The Act contemplates a levy of tax on income and not on capital and hence it is very essential to
distinguish between capital and revenue receipts. Capital receipts cannot be taxed, unless they
fall within the scope of the definition of “income” and so the distinction between capital and
revenue receipts is material for tax purposes.
Features of Capital Receipts Features of Revenue Receipts
 Capital receipts are not recurrent in  Revenue is derived directly from a
nature. business's operations.

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 Capital receipts produce funds from non-  It has a direct impact on business profits
operating activities. and losses. As income is collected by a
corporation, it either increases profits or
contributes to losses.
 It either generates a liability or  Benefits from revenue collections might
diminishes an asset. be used for a limited period of time, such
as one accounting or financial year.
 It has no effect on the income  Because the benefits from income

statement; however, capital receipts receipts exist for a limited period of

time, another element comes in the form
affect the balance sheet.
of a recurring nature.
 Disclosure is given in the Trading
and Profit or Loss account, not on
the Balance Sheet.

1. Illustration
State whether the following are capital or revenue receipts/expenses and give your reasons:
1. ABC & Co. received Rs. 5,00,000 as compensation from XYZ & Co. for premature termination
of contract of agency.
2. Sales-tax collected from the buyer of goods.
3. PQR Company Ltd. instead of receiving royalty year by year, received it in advance in lump sum.
4. An amount of Rs. 1,50,000 was spent by a company for sending its production manager abroad
to study new methods of production.
5. Payment of Rs. 50,000 as compensation for cancellation of a contract for the purchase of
machinery with a view to avoid an unnecessary expenditure.
6. An employee director of a company was paid Rs. 3,50,000 as a lump sum consideration for not
resigning from the directorship.

APPLICATION OF INCOME VS DIVERSION OF INCOME

1 Diversion of income
When income is diverted before is accrues to the assessee due to overriding title
then it is called diversion of income. It is not taxable in the heads of assessee.
Example
An employee instructs to his employer to pay a certain portion of his salary to a charity
and claims it as exempts as it is diverted by overriding charge/title

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In the above case income is not diverted because the instruction given by the employee to
employer is not having overriding title. Further here income is first accrued to assessee
then applied. Hence it is called application of income and taxable in hands of assessee.
2 Application of income
When income is applied after is accrues to the assessee due to overriding title then
it is called application of income. It is taxable in the hands of assessee.
Example
A, B and C are co-authors. Entire royalty of Rs.900000 was received by A, Who in turn
paid Rs.300000 each to B and C. Such a payments, is diversion of income.

HEADS OF INCOME [SEC 14]

Distinguish between heads of income and sources of income

Basis Heads of income Source of income
Number There are only five heads of income There can be any number of source of income
Broader In a single head of income, there may A particular source of income shall fall under
term be various sources of income. a particular head.

COMPARATIVE STUDY OF TAX, DUTY AND CESS

Particulars Tax Cess

Nature of payment Compulsory Payment Compulsory Payment
Utilization of General Purpose of the Specific Purpose of the
amount so collected Government. Government.
Based on Revenue Based on tax or duty.
Example Income Tax H & EC

TAX PLANNING, TAX AVOIDANCE, TAX EVASION AND TAX MANAGEMENT

It is way to reduce the tax bill by using advantages allowed by the Act
DEFINITI

Tax Planning
through various exemptions, deductions & relief
ON

It is a way to reduce the tax bill by bending the law without breaking
Tax Avoidance
it.

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It is the way to reduce the tax bill by deliberately suppressing income

Tax Evasion
or over showing expenditure etc.
Tax Management It is a procedure to fulfil all requirements of the Income Tax Act.

Tax Planning It is moral in nature.

NATURE

Tax Avoidance It is immoral in nature but legal

Tax Evasion It is illegal hence immoral in nature
Tax Management It is the duty to comply with the law

Tax Planning It takes advantages gifted by the law

TREATMENT
OF LAW

Tax Avoidance It takes advantages of loopholes in the law

Tax Evasion It violates the law

Tax Management It follows the law

GROSS TOTAL INCOME (SEC. 80 B (5)]

Particulars Rs.
Income from Salary xx
Income from House Property xx
Income from Business or Profession xx
Capital Gains xx
Income from other Sources xx
Less: Set off & Carry forward xx
= Gross Total Income xx
Less: Deduction Under Section 80C to 80U xx
= Taxable Income/ Total Income/ Net Income xx
Income Tax on above income xx
Less: Relief u/s. 87A xx
= Balance xx
Add: Surcharge on Income tax xx
= Tax plus SC xx
Add: 4% Health & Education cess xx
= Tax Liability (Tax + SC + H & EC) xx
Less: Tax deducted at Source / Tax Collected at Source xx
Advance Tax xx
Rebate u/s 86, 89, 90, 90A & 91 xx

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= Tax Payable/ (Refund) xx

ROUNDED OFF OF INCOME [SECTION 288A]

The total income as computed above shall be rounded off to the nearest multiple of ten
rupees.
Income Rounded off
Rs. 79,464.90 Rs. 79,460
Rs. 79,478 Rs. 79,480
Rs. 79,475 Rs. 79,480

ROUNDED OFF OF INCOME TAX [SECTION 288B]

The income tax on taxable income shall be rounded off to the nearest multiple of ten
rupees.
Income Rounded off
Rs. 79,464.90 Rs. 79,460
Rs. 79,478 Rs. 79,480
Rs. 79,475 Rs. 79,480

CHARGING SECTION 4

1 Charging Section
Sec. 4 of the Income Tax Act provides that the shall be charged –
a For any assessment year (AY), at the rate(s) specified in the annual Finance Act for
that year, and
b In respect of the total income of the previous year of every person.
It lays down the rates for charging income – tax in certain cases, rates for deducting income
tax from income chargeable under the head ‘Salaries’ and the rates for computing advance
– tax for the financial year 2024 – 25. i.e. AY 2025 – 26.
First Schedule to Annual Finance Act: It contains four parts, which, as applicable for the
Finance Act, 2024 are as follows:
2 Part I
It specifies the rates at which income tax is to be levied on income chargeable to tax for
the PY 2024 – 25.

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3 Part II
It lays down the rate at which tax is to be deducted at source during the financial
year 2024 – 25. i.e. AY 2025 – 26.
4 Part III
It lays down the rates for charging income – tax in certain cases, rates for deducting income
tax from income chargeable under the head ‘Salaries’ and the rates for computing advance
– tax for the financial year 2024 – 25 i.e. AY 2025 – 26.
5 Part IV
It lays down the rules for computation of net agricultural income.

TAX RATES FOR PY 24 - 25 AND AY 25 - 26

Tax rate Resident Individual age Resident Individual Resident Individual

< 60 during PY (Male & (Age >= 60 during PY) (Age >=80 during PY)
Female), HUF, AOP, Senior citizen (Male & Super senior citizen
BOI & AJP Female) (Male & Female)
NIL 2,50,000 3,00,000 5,00,000
5% 2,50,001 to 5,00,000 3,00,001 to 5,00,000 NA
20% 5,00,001 to 10,00,000 5,00,001 to 10,00,000 5,00,001 to 10,00,000
30% Above 10,00,000 Above 10,00,000 Above 10,00,000
Add: Surcharge Income Rate
50,00,001 to 1,00,00,000 10%
1,00,00,001 to 2,00,00,000 15%
2,00,00,001 to 5,00,00,000 25%
Above 5,00,00,000 37%
Health &
4% on Tax plus Surcharge
Education Cess

AN AOP CONSISTING OF ONLY COMPANIES AS MEMBERS

a In case of an AOP consisting of only companies as members, whose total income > ₹
50 lakhs but is ≤ ₹ 1 crore Where the total income exceeds ₹ 50 lakhs but does not exceed
₹ 1 crore, surcharge is payable at the rate of 10%.
b In case of an AOP consisting of only companies as members, whose total income > ₹
1 crore Where the total income exceeds ₹ 1 crore, surcharge is payable at the rate of 15%.

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c In case of AOP (consisting of only companies as its member), the maximum of rate of
surcharge is 15%.

REBATE U/ 87A

1 Conditions
1 A resident individual whose net income does not exceed Rs. 5,00,000 can
avail rebate u/s. 87A.
2 The amount of rebate is 100% of income tax or Rs. 12,500 whichever is less.
2 Key Notes
a Net income = GTI – Deduction u/s 80C to 80U
b It is to be deducted before H & EC.

NON-RESIDENT ASSESSEE

a For Non-Resident individual exempted income shall be upto Rs. 2, 50,000 irrespective of
Age
b Surcharge: as per table given above
c Health & Education Cess @ 4% on Tax + SC
d Rebate u/s 87A is not available.

2. Illustration
Compute tax if income of Mr. Shahrukh Joshi age 26 years is Rs.7 lac.

3. Illustration
Compute tax if income of Mr. Shahrukh Joshi age 26 years, is Rs.3.3 lakhs

4. Illustration
Compute the tax liability in the following cases:
Assessee Status Rebate u/s Total Income
87A ( y/n) (in Rs.)
(a) Mr. Ladka Resident Individual of 40 years 2,60,000
(b) Mrs. Ladki Non-resident Individual of 65 years 2,75,000
(c) Mr. Hatela Resident Individual of 25 years 4,50,000
(d) Mrs. Pagal Resident Individual of 21 years 5,10,000
(e) Mrs. Sherni Resident individual of 60 years 12,00,000

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(f) Mrs. Nibbi Resident Individual of 80 years 18,00,000

(g) Ms. Laila Resident Individual of 21 years 2,65,500

5. Illustration
Compute tax if income of Mrs. Bajuwali, a resident in India, aged 60 years is Rs. 115 lakhs

CONCEPT OF MARGINAL RELIEF

Increase in income by
Why Relief is given?
Rs 1,00,000
Particulars Difference Rate Tax on Tax on
50,00,000 51,00,000
Up to 2,50,000 2,50,000 Exempt - -
2,50,000 to 5,00,000 250000 5% 12500 12500
5,00,000 to 10,00,000 500000 20% 100000 100000
Above 10,00,000 4000000 30% 1200000
4100000 30% 1230000
Total Tax 1312500 1342500
Add: Surcharge 13,42,500 10% 134250
Tax plus Surcharge 13,12,500 14,76,750
Add: Health & Education Cess @ 4% 13,12,500 4% 52,500 59,070
Tax liability 13,65,000 15,35,820
Tax is increased by Rs
1,70,820

To remove above defect Marginal relief is given as under

1 Meaning
Marginal relief in provided to insure that the additional income tax payable including
surcharge on excess of income over Rs. 50,00,000/ 1,00,00,000/ 2,00,00,000/ 5,00,00,000
is limited to the amount by which the income is more than Rs. 50,00,000/ 1,00,00,000/
2,00,00,000/ 5,00,00,000
2 Applicable to
All assessee
3 How to calculate Marginal relief
Step 1 Compute Tax + SC
Step 2 Marginal Relief = [Difference in Tax – Difference in Income]

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Step 3 Deduct marginal relief computed above [if positive] from Tax + Surcharge on
actual income
Step 4 Add: H&EC
4 Key Note
When increase in income is more than increase in tax Marginal relief shall not be given.
[when step 2 is negative]

6. Illustration
Compute the amount of marginal relief available if the income of Mr. Tiger Wagh is Rs. 51 lakhs
and tax payable

7. Illustration
Compute the amount of marginal relief available if the income of Mr. Raju cha cha is Rs 51.50 lakhs
and tax Payable

8. Illustration
Compute the amount of marginal relief available if the income of Mr. Bandiya is Rs 52 lakhs and
tax Payable

9. Illustration
Income of Mr. Mote is Rs 53,00,000 compute tax payable

10. Illustration
Compute the amount of marginal relief available if the income of Mr. Raju cha cha (Age 62) is Rs
51.50 lakhs and tax Payable

11. Illustration
Compute the amount of marginal relief available if the income of Mr. Raju cha cha (Age 82) is Rs
51.50 lakhs and tax Payable

MARGINAL RELIEF WHEN INCOME EXCEEDS 1CR

12. Illustration
Compute the amount of marginal relief available if the income of Mr. Santra is Rs 1.01cr and tax
Payable

13. Illustration
Compute the amount of marginal relief available if the income of Mr. Santra is Rs 1.02 cr and tax
Payable

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14. Illustration
Compute the amount of marginal relief available if the income of Mr. Bhatura is Rs 10210000 and
tax Payable

15. Illustration
Compute the amount of marginal relief available if the income of Mr. Tappu is Rs 10220000 and
tax Payable

16. Illustration
Compute the amount of marginal relief available if the income of Mr. Mantra is Rs 1.07 cr and tax
Payable

MARGINAL RELIEF WHEN INCOME EXCEEDS 2 CR

17. Illustration
Compute the amount of marginal relief available if the income of Mr. Sada Bahar is Rs 20200000
and tax Payable

18. Illustration
Compute the amount of marginal relief available if the income of Mr. Sada Bahar is Rs 2,12,00,000
and tax Payable

MARGINAL RELIEF WHEN INCOME EXCEEDS 5 CR

19. Illustration
Compute the amount of marginal relief available if the income of Mr. Darwaja is Rs 50200000 and
tax Payable

SPECIAL RATES OF INCOME TAX

Section Income Income tax rates (per cent)

Upto July 22, From July 23,
2024 2024
111A Short term capital gains [FA 2024] 15 20
112 Long term capital gains [FA 2024] 20 12.5

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112A Long term capital gain is excess of Rs. 1 lakh* upto 10 -

july 22, 2024 [FA 2024]
112A Long term capital gain in excess of Rs. 1.25 lakh* - 12.5
from July 23, 2024
[*the aggregate cannot exceed Rs. 1.25 lakh for
the previous year 2024-25] [FA 2024]
115BB Casual Income 30%
115BBG Income on transfer of Carbon Credit 10%

SURCHARGE RATES IN SPECIAL CASES

Surcharge rates in special cases

Different Nature and quantum of income Surcharge on amount of Surcharge an
situations of the assessee (i.e. individual, income tax computed on amount of
HUF, AOP, BOI or an dividend income and income tax
artificial juridical person) income which is taxable computed on
under section 111A/ other incomes
112/ 112A
Situation 1 Total income (including
dividend income and income under
Nil Nil
section 111A/ 112/ 112A) does not
exceeds Rs. 50 lakh
Situation 2 Total income (including
dividend income and income under
section 111A/ 112/ 112A) exceeds 10% 10%
Rs.50 lakh but does not exceed
Rs.1 crore.
Situation 3 Total income (including
dividend income and income under
section 111A/ 112/ 112A) exceeds 15% 15%
Rs.1 crore but does not exceed
Rs.2 crore.
Situation 4 Total income (excluding
dividend income and income under
sections 111A/ 112/ 112A) 15% 25%
exceeds Rs.2 crore but does not
exceed Rs.5 crore.

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Situation 5 Total income (excluding

dividend income and income under
15% 37%
sections 111A/ 112/ 112A)
exceeds Rs.5 crore.
Situation 6 Total income (including
dividend income and income under
section 111A/ 112/ 112A) exceeds 15% 15%
Rs.2 crore (but it is not covered
by Situation 4 and Situation 5).
Important Note: Alternative tax regime for individual / HUF an individual / HUF can opt for
the alternative tax regime within the parameters of section 115BAC. (To be discuss later on)

TAX RATES FOR DOMESTIC COMPANIES

Surcharge
Particulars Tax Rate Income between Above 10 cess
1 cr to 10 cr cr
If turnover of or gross receipt 25% 7% 12% 4%
during PY 22 - 23 dose not exceeds AY 25 -
400 cr [FA 2024] 26
Otherwise 30% 7% 12% 4%

SPECIAL PROVISIONS OF TAX ON CERTAIN INCOME OF DOMESTIC MANUFACTURING COMPANY

AND OTHER DOMESTIC COMPANY AS PER PROVISIONS OF SECTION 115BAA AND SECTION
115BAB OF THE INCOME-TAX ACT, 1961.

(1) (2) (3) (4)

Particulars Section 115BAB Section 115BAA
1 Applicability Domestic manufacturing company Any domestic company
2 Rate of tax 15% 22%
3 Rate of surcharge 10% (compulsory) 10% (compulsory)
4 Effective rate of
tax [including 17.16% 25.168%
surcharge & cess]
5 Conditions to be The company should be set-up and No time limit specified. Both
fulfilled for registered on or after 1-10-2019. existing companies and new
availing the companies can avail benefit.

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concessional rate It should commence manufacturing Need not be a manufacturing

of tax and on or before 31-3-2024. company.
exemption from
MAT.
6 Domestic company can opt for section 115BAA or section 115BAB, as the case may be, subject
to certain cases. The total income of such companies would be computed without giving effect
to deductions under section 10AA, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB),
35(AD), 35CCC, 35CCD, chapter VI – A (except section 80JJA or section 80M), additional
depreciation u/s 32(1)(iia) etc. and without set-off of brought forward loss and unabsorbed
depreciation attributable to such deductions.

TAX RATES FOR FOREIGNCOMPANIES

Assessee Rate of TI <Rs. TI > Rs.1 Crore, but TI > Rs.10 Rate of
tax 1 Crore TI ≤ Rs.10 Crores crores EC + H &
EC
Foreign Companies 35% Nil 2% 5% 4%
(FA 24)

20. Illustration
Compute tax if the income of Dilruba Ltd. (a Domestic Company) during the previous years is 98
lakhs. How would your answer differ if the assessee is a foreign company?

21. Illustration
Compute tax if the income of Dil Dooba Ltd (a Domestic Company) during the previous year is 112
lakhs how would your answer differ if the assessee is a foreign company

FOR OTHER ASSESSEES / PERSONS

Surcharge
Assessee Rate TI <Rs. TI > Rs.1 Crore, but TI > Rs.10 Rate of
of tax 1 Crore TI ≤ Rs.10 Crores crores EC + H &
EC
Firms and LLP 30% 12% 12% 4%
Local Authorities 30% 12% 12% 4%
Co – operative
Societies

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For First Rs.10,000 10%

For Next Rs.10,000 20% 7% 12% 4%
For the Balance 30%
From the assessment year 2023 – 2024, a resident co – operative society can opt for the
alternative tax regime provided under section 115BAD.
Tax rate
22% of total income + SC + Cess
Notes:
 Co-operative society, resident in India, can opt for concessional rate of tax u/s 115BAD
or 115BAE, as the case may be, subject to certain conditions. The total income of such co-
operative societies would be computed without giving effect to deduction under section
10AA, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35AD, 35CCC, additional depreciation
under section 32(1)(iia), deductions under Chapter VI-A (other than section 80JJAA) etc.
and set off of loss and depreciation brought forward from earlier years relating to the
above deductions.
 The provisions of alternate minimum tax under section 115JC would not be applicable to a
co- operative society opting for section 115BAD or 115BAE. This section will be dealt with
in detail at Final level.
 Special rates for capital gains under sections 112, 112A and 111A would be 5.) applicable to
Co-operative society also.

MAXIMUM MARGINAL TAX RATES: MAXIMUM MARGINAL (TAX RATES AT HIGHEST

LEVEL)

Individual / HUF / BOI / AOP / artificial juridical person 42.744%

Firm (including limited liability partnership) 34.944%
Co – operative society 34.944%
Domestic company 29.12%, 34.944%
Foreign company 38.22%
Note – Tax + SC + H & E Cess

ALTERNATIVE TAX REGIME FOR INDIVIDUALS / HUFS AOP/ BOI/ AJP UNDER
SECTION 115BAC

1. Income of individuals and Hindu Undivided Family

For the assessment years 2021-22 to 2023-24, an individual/HUF can opt for the
alternative tax regime under section 115BAC(1). If such option is exercised, the assessee
is governed by the alternative tax regime under section 115BAC. From the assessment

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year 2024-25, the alternative tax regime under section 115BAC is the default tax regime
for an individual/HUF/AOP/BOI/artificial juridical person. However, these assessees can
avail the benefit of regular tax regime by exercising the option under section 115BAC(6).
2. Rate of income tax under the alternative tax regime (Section 115BAC(1))
under the alternative tax regime income tax shall be computed as per the rates given in
the following table:
Sec. 115BAC(1A) – For the assessment Sec. 115BAC(1A) – From the assessment
years 2024 – 25 year 2025 – 26 [FA 24]
Total income Rate of Total income Rate of
Tax Tax
Up to Rs. 3,00,000 Nil Up to Rs. 3,00,000 Nil
From Rs. 3,00,001 to Rs. 5% From Rs. 3,00,001 to Rs. 5%
6,00,000 7,00,000
From Rs. 6,00,001 to Rs. 10% From Rs. 7,00,001 to Rs. 10%
9,00,000 10,00,000
From Rs. 9,00,001 to Rs. 15% From Rs. 10,00,001 to Rs. 15%
12,00,000 12,00,000
From 12,00,001 to Rs. 20% From Rs. 12,00,001 to Rs. 20%
15,00,000 15,00,000
Above Rs. 15,00,000 30% Above Rs. 15,00,000 30%
3. Exemption limit
Exemption limit is Rs. 3,00,000 from the assessment year 2024 – 25). It is applicable even
in the case of senior citizen and super senior citizen
4. Rebate under section 87A
Rebate under section 87A is available. A resident individual (paying tax under the
alternative tax regime) can claim rebate u/s 87A as follows -
Different assessment Total income should Amount of rebate u/s 87A
years not exceed the
amount given below
2021 – 22 to 2023 – 24 Rs. 5,00,000 100% of income tax or Rs. 12,500,
whichever is less
2024 – 25 onwards Rs. 7,00,000 100% of income tax or Rs. 25,000,
whichever is less
22. Illustration
X (30 years) is a resident individual. His income for the assessment year 2025 – 26 is Rs.
7,00,000 (situation 1) or Rs. 7,27,000 (situation 2) or Rs. 7,30,000 (situation 3) or Rs.
7,50,000 (situation 4). He does not want to opt for the regular tax regime.
5. Marginal Relief

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Marginal relief-Rebate under section 87A is subject to marginal relief from the
assessment year 2024 - 25. If net income exceeds Rs. 7,00,000 but does not exceed Rs.
7,22,220, income-tax on such income cannot exceed the amount by which the net income
exceeds Rs. 7,00,000.
6. Tax on other incomes
If an individual / HUF (who has opted for the alternative tax regime) has other incomes
which are taxable under other provisions of Chapter XII (i.e. sections 110 to 115BBG but
other than section 115BAC), then tax on such other incomes will be calculated as per the
rate(s) specified by these sections and balance amount of income will be taxable under
section 115BAC as per the rate given in above table.
7. Surcharge & Education Cess
Surcharge applicable under regular tax regime is also applicable in new scheme except
from AY 24 – 25 for income above 5 crore surcharge rate is 25% instead of 37%
8. Restrictions on deductions/ exemptions (Section 115BAC(2))
The following conditions should be satisfied in order to avail the benefit of lower rate
under the alternative tax regime of section 115BAC:
 Leave travel concession or assistance [sec 10(5)] [Refer chapter 4]
 House rent allowance (section 10(13A)) [Refer chapter 4]
 Special allowance(s) (other than exemption pertaining to (a) travelling allowance,
transfer allowance and conveyance allowance for official purposes, and (b) transport
allowance of Rs. 3,200 per month to an employee who is blind or deaf and dumb or
orthopedically handicapped] [sec. 10(14)]. [Refer chapter 4]
 Allowance to MPs / MLAs (Section 10(17)) [Refer chapter 4]
 Exemption up to Rs.1,500 available in the case of clubbed income of a minor child
(section 10(32)) [Refer chapter 3]
 Special economic zone (section 10AA) [Refer chapter 3]
 Exemption of perquisite in respect of free food and non-alcoholic beverage (ie., Rs. 50
per meal) provided through paid voucher [sec. 17(2) read with rule 3(7)(iii)] [Refer
chapter 4]
 Entertainment allowance deduction (section 16(ii)) [Refer chapter 4]
 Professional tax deduction (section 16(iii)) [Refer chapter 4]
 Interest on housing loan in the case of one or two self – occupied properties (section
24(b)) [Refer chapter 5]
 Additional depreciation (section 32(1)(iia)) [Refer chapter 6]
 Tea / coffee / rubber development account (section 33AB) [Refer chapter 6]
 Site restoration fund (section 33ABA) [Refer chapter 6]
 Deduction for scientific research (section 35(1)(iia)/(iii), 35(2AA)) [Refer chapter 6]

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 Capital expenditure pertaining to specified business (section 35AD) [Refer chapter

6]
 Agriculture extension project (section 35CCC) [Refer chapter 6]
 Deduction under sections 80C to 80U (except employer’s contribution towards NPS
under section 80CCD(2), central government contribution towards Agnniveer corpus
fund under section 80CCH(2), deduction under section 80JJAA and deduction under
section 80LA(1A)). [Refer chapter 11]
Available exemption [Refer chapter 3]
 Interest on public provident fund (as well as final payment at the time of maturity)
will remain exempt under section 10(11) even if a person opts for the alternative tax
regime under section 115BAC.
 Interest on Sukanya Samriddhi Account (as well as withdrawal or final payment from
such account) will enjoy exemption under section 10(11A) even of the concerned person
has opted for the lower tax regime of section 115BAC).
 Exemption under section 10(10) pertaining to gratuity
 Exemption under section 10(10A) pertaining to commutation of pension
 Exemption under section 10(10AA) pertaining to leave encashment
 Exemption under section 10(10B) pertaining to retrenchment compensation
 Exemption under section 10(10C) pertaining to compensation on voluntary retirement
separation
 Exemption under section 10(10CC) pertaining to tax on non-monetary perquisites paid
by employer
 Exemption under section 10(D) pertaining to sum received under a life insurance policy
 Exemption under section 10(12) pertaining to interest and withdrawal from recognized
provident fund
 Exemption under section 10(12A) / (12B) pertaining to payment (including withdrawal)
from NPS
 Exemption under section 10(13) pertaining to payment from approved superannuation
fund.
 Exemption under section 10(14) pertaining to (a) travelling allowance, transfer
allowance and conveyance allowance for official purposes, and (b) transport allowance
of Rs. 3,200 per month to an employee who is blind or deaf and dumb or orthopaedically
handicapped.
 Exemption of Rs. 3,500/Rs. 7,000 under section 10(15) pertaining to interest on Post
Office savings bank account.
 Standard deduction in the case of salaried employee under section 16(ia) (for the
assessment year 2024-25: Rs. 50,000 or salary, whichever is less) (from the
assessment year 2025-26: Rs. 75,000, or salary, whichever is less). [FA 24]

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 Standard deduction in the case of family pension under section 57(iia) (for the
assessment year 2024-25: Rs. 15,000 or 1/3rd of salary, whichever is less) (from the
assessment year 2025-26: Rs. 25,000 or 1/3rd of salary, whichever is less). [FA 24]
 Employer's contribution towards NPS under section 80CCD(2)
 Central Government's contribution towards Agniveer Corpus Fund under section
80CCH(2)
 Deduction under section 80JJAA
 Deduction under section 80LA(1A)
 Relief under section 86/89/89/90/90A/91.
 Tax rebate under section 87A.
9. Adjustment of losses
The total income of the individual / HUF is calculated without adjusting brought forward
loss (and / or additional depreciation) from any earlier year (if such loss / additional
depreciation pertains to any deduction under the aforesaid sections). Moreover, any loss
under the head “Income from house property” cannot be set off with any other income
under any other head of income.
10. Adjustment of depreciated value of block of assets
Brought forward loss / depreciation as mentioned above, shall be deemed to have been
given full effect to and no further deduction for such loss / depreciation shall be allowed
for any subsequent year. However, where unadjusted depreciation in respect of a block
of assets has not been given full effect to prior to the assessment year 2021 – 2022
corresponding adjustment shall be made to the written down value of such block as on
April 1, 2020 in the prescribed manner (if option is exercised for the lower tax regime
under section 115BAC for the assessment year 2021 – 22).
Further, corresponding adjustment shall be made to the written down value of the
block as on April 1, 2023 in the case of an assessee who satisfies the following
conditions –
1 The assessee has not exercised the option under section 115BAC(5) for the alternative
tax regime for the assessment year 2023 - 24 (or earlier).
2 He has opted for the alternative tax regime to pay tax under section 115BAC(IA).
3 There is unadjusted depreciation in respect of a block of asset which has not been
given full effect prior to the assessment year 2024 - 25.
11. Depreciation on prescribed mode
Total income of the individual / HUF is calculated after claiming depreciation (other
than additional depreciation) in such manner as may be prescribed.
12. Alternative minimum tax not applicable
Alternate minimum tax (AMT) under section 115JC is not applicable if the
assessee opts for the alternative tax regime under section 115BAC. Consequently, AMT

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tax credit of earlier years cannot be adjusted against the tax liability which is computed
under section 115BAC.
13. Option (section 115BAC(5))
An individual / HUF (who wants to avail the benefit of lower rate under the alternative
tax regime of section 115BAC) is required to upload an option in prescribed
mode on or before the due date of submission of return of income as follows:
A. Assessee does not have business / profession income
If the assessee does not have business / profession income, the option must be
exercised along with the return of income for every previous year.
B. Assessee has business / profession income
If the assessee (ie., individual/HUF/AOP, etc.) has business/ profession income and
no option is exercised, he will be governed by the alternative tax regime. The assessee
can avail the benefit of regular tax regime by exercising the option under section
115BAC(6). Such option can be exercised by uploading Form No. 10-IEA on or before
the due date of submission of return of income under section 139(1) and such
option once exercised shall apply to subsequent assessment year as
well. However, the option once exercised for any previous year can be withdrawn only
once for a previous year (other than the year in which it was exercised) and thereafter
the person shall never be eligible to exercise the option of availing the benefit of
regular tax regime (except where such person ceases to have any income from business
or profession).
C. Intimation by employee to employer for option the scheme
 The above intimation to the employer shall be only for the purpose of the TDS and
cannot be modified during that year.
 Such intimation to the employer does not amount to exercise of option by the
concerned employee under section 115BAC(5). The concerned employee is required
to exercise the option under section 115BAC(5) at the time of submission of his
return of income (such option could be different from the intimation made to the
employer).
 If the above intimation is not made by the employee, the employer (or deductor)
shall deduct tax at source ignoring the provisions of section 115BAC.
14. From the assessment year 2025 – 26 [option u/s 115BAC(6) to avail the benefit of
regular tax regime]
From the assessment year 2025 – 26 the alternative tax regime u/s 115BAC is the
default tax regime for an individual HUF/ AOP/ BOI artificial juridical person.
However, these assessment can avail the benefit of regular tax regime by exercising the
option u/s 115BAC(6).

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15. How to find out whether (or not) alternative tax regime is better
One can find out net income and tax liability under the regular tax regime and the
alternative tax regime. By comparing tax liability under the old and new regime, one
can find out whether alternative tax regime is better.

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CHAPTER 2 RESIDENTIAL STATUS

1. Introduction
Tax incidence on an assessee depends on his residential status. For instance,
whether an income, accrued to an individual outside India, is taxable in India depends upon
the residential status of the individual in India. Similarly, whether an income earned by a
foreign national in India or outside India is taxable in India depends upon the residential
status of the individual, rather than on his citizenship. Therefore, the determination of
the residential status of a person is very significant in order to find out his tax liability.
2. Criteria to decide residential status
Person Criteria
Individual Period of stay in India
HUF Place of control and Management
Company Place of effective management
Other assessee Place of control and Management
3. Basic rules for determination of residential status of an assesse
a. Residential status is determined for each category of person separately
b. Residential status is always determined for P.Y. because we have to determine the
total income of the previous year only
c. It is to be calculated for every year because it may change from year to year
d. Citizenship of a country and residential status of that country are different
concepts
e. If person is resident in India in the P.Y. relevant to an A.Y. in respect of any source
of income, he shall be deemed to be resident in India for his other source of income.
f. If an individual stays on a ship, which is in the territorial waters of India, then it shall
be treated as his presence in India
g. 24 hrs. Shall be treated as one day
h. It is not essential that stay should be at same place
i. Continuous stay is not required
j. Counting of number of days: If nothing is mentioned about the time of arrival and
departure than the day of arrival and the day of departure both shall be included for
determining residential status of an Individual

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Onus of Proof: The onus of responsibility to prove the Residential Status is explained
below:
a Whether an Assesse is a Resident or a Non-resident is a question of fact and it
KEY NOTES

is the duty of the Assesse to place all relevant facts before the Income Tax
Authorities.
b Sec.6(2) makes a presumption that a HUF, a Firm or AOP has to be a Resident in
India, and the onus of proving that they are not Residents, is on them
c The burden of proving that an Individual or a Company is Resident in India lies on
the Department.
4. All entities are divided in the following categories for the purpose of determining
residential status
a. An individual
b. A Hindu undivided family
c. A firm, AOP / BOI
d. A joint stock company
e. Every other person

Kinds of Residential
Status

Resident Non Resident

Resident and Ordinarily Resident but not

Resident Ordinarily Resident

Residential
Status
An Individual • Resident and ordinary resident
• Resident but not ordinary resident
A Hindu Undivided family • Non-resident

A partnership firm

A company
• Resident
An association of persons • Non-resident

Any other person

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RULES FOR DETERMINING THE RESIDENTIAL STATUS OF AN INDIVIDUAL [SECTION 6[1]]

1. An individual is said to be resident in India if he satisfies any one of the following two
conditions. If he does not satisfy any conditions he becomes Non-resident in India.
Condition Particular
(i) He is in India for a period of 182 days or more in the relevant previous year
Sec. 6 (1)(a)
(ii) He is in India for 60 days or more during the relevant previous year and has
been in India for 365 days or more during four previous years immediately
preceding the relevant previous year. Sec. 6(1) (C).
2. Exceptions to the above rule
a In the following cases, condition (ii) of sec. 6(1) [i.e. sec. 6(1)(c)] is irrelevant:
1 An Indian citizen, who leaves India during the previous year for employment
purpose.
2 An Indian citizen, who leaves India during the previous year as a member of
crew of an Indian ship.
Taxpoint: Above assessee shall be treated as resident in India only if he resides in
India for 182 days or more in the relevant previous year.
b In case of an Indian citizen or a person of Indian origin comes on a visit
to India during the previous year, modified condition (ii) of sec. 6(1) is applicable:
Case Modified condition (ii) of sec. 6(1)
His total income, other than the income He is in India for a period of 120 days or more
from foreign sources, exceeds ₹ 15 (but less than 182 days) during the previous year
lakhs during the previous year and for 365 or more days during 4 previous years
immediately preceding the relevant previous year
[RI + RNOR]
Person of Indian origin
A person is said to be of Indian origin if he or either of his parents or any of his
KEY NOTES

grandparents (maternal & paternal) were born in undivided India.

Income from foreign source
It means income which accrues or arise outside India (except income derived from a
business controlled in or a professional set up in India)

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1. Illustration
Case 1
Shahid Kapoor a British national comes to India for the first time during 2020-21. During the
financial years 2020-21, 2021-22, 2022-23, 2023-24 and 2024-25 he was in India for 55 days 60
days, 80 days, 160 days and 70 days respectively. Determine his residential status for the
assessment year 2025-26.
Case 2
What will be answer in above question if income other than foreign incomes exceeds Rs 1500000
and not liable to pay tax in any other country?

2. Illustration
Miss Katrina, an Indian citizen, left India for first time on 31st March, 2024 for joining job in
Tokyo. She came to India on 11th October, 2024 for only 190 days. Determine her residential
status for P.Y. 2024 - 25.

3. Illustration
Dada, a foreign citizen, comes to India for first time on July 1, 2024 at 2 p.m. He left India on
December 30, 2024 at 12 noon Determine his residential status for previous year 2024-25.

3. Determination of Residential Status of Crew Member of a Ship

The following period shall be treated as outside India
Period beginning from Period ending to
Date entered into the Continuous Discharge Date entered into Continuous Discharge
Certificate in respect of joining the ship by Certificate in respect of the signing off by
the said individual for the eligible voyage that individual from the ship in respect of
such voyage.

4. Illustration
In the Previous year 2024 – 25, Mr. Raju Hatela, Indian Citizen, is Vessel Manager in Star Ocean
Transit Ltd. which operates Freight voyage from Mumbai Port (India) to Colombo Port (Sri Lanka)
on regular basis. It does not involve in transit of Passengers.
Mr. Raju Hatela, being a Crew Member of Ship, provides you the following information about his
voyage during the FY 2024 – 25:
a. Date entered into the Continuous Discharge Certificate (For Joining the ship) – 3.8.2024
b. Date entered into the Continuous Discharge Certificate (Signing off) – 31.12.2024
c. On 1.1.2025, he reached his native place of Mumbai and resigned his job.
Is he a Resident or not for the AY 2025 – 26? Comment.

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Solution

1. Principles
Under section 6(1), any person who stays in India for a period of 182 days or more, during
the Relevant Previous Year is a Resident for that year.
For a Member of the Crew of a Foreign bound Ship leaving India, to determine the period of
Stay in India, the following period shall not be included:
Period beginning from Period ending to
Date entered into the continuous discharge Date entered into Continuous Discharge
certificate in respect of joining the ship Certificate in respect of the signing off by
by the said individual for the eligible voyage. that individual from the ship in respect of
such voyage.
2. Analysis
Period of Exclusion from Stay in India = From 3.8.2024 to 31.12.2024 = 151 days.
3. Conclusion
Since, Mr. Raju stayed in India for a period of 182 days or more (365 days – 151 days) during
the relevant previous year 2024 – 25, he is a Resident for AY 2025 – 26.
The above voyage is an Eligible Voyage as the Ship is engaged in the carriage of freight in
international traffic having originated from a port in India, and has as its destination any port
outside India. (Mumbai Port to Colombo Port).

DEEMED RESIDENT 6(1A)]

(1A) notwithstanding anything contained in clause (1)

An individual shall be deemed to be Resident in India if he/she fulfills following 3 conditions
a. The assesse is an Indian citizen
b. His total income (other than the income from foreign sources) exceeds Rs.15,00,000 during
the relevant previous year, and
c. He is not liable to tax in any other country or territory by reason of his domicile or
residence or any other criteria of similar nature.
If these 3 conditions are satisfied, the individual would be resident but not ordinarily resident
in India. [Deemed RI + RNOR]

5. Illustration
Determine the residential status in the following different cases:
Case A B C D E F G H
Citizenship Foreign India India India Foreign Foreign India Foreign

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Is he person of Yes Yes Yes Yes Yes Yes Yes No

Indian origin
Total income Yes No Yes Yes Yes Yes No No
(excluding income
from foreign
source) exceeds ₹
15,00,000
Liable to pay tax No No No Yes No No No No
in other country
Stay in India 30 30 30 30 138 185 85 85
during the
previous year
Stay in India 380 380 380 380 380 180 380 380
during 4 years
immediately
preceding
previous year
Are dual Yes Yes Yes Yes Yes Yes Yes Yes
conditions given
u/s 6(6) satisfied
Residential NR NR NOR NR NOR ROR NR ROR
Status

ADDITIONAL CONDITIONS TO TEST AS TO WHEN A RESIDENT INDIVIDUAL IS ROR & RNOR [SEC.
6(6)]

Condition Particulars
A He has been resident in India in at least 2 out of 10 previous years
immediately preceding the relevant previous year.
B He has been in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
C a citizen of India, or a person of India origin, having total income, other than the
income from foreign sources, exceeding fifteen lakh rupees during the previous year,
as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for
a period or periods amounting in all to one hundred and twenty days or more but less
than one hundred and eighty – two days; or
D a citizen of India who is deemed to be resident in India under clause (1A).

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NOTE If assessee fulfils both of the above conditions (a and b) then he becomes ROR
KEY

otherwise RNOR.

Analysis of sec 6(1) & 6(1A)

6(1)(a) Stay ≥ 182 Days in PY Or RI in India

6(1)(c) Stay ≥ 60 Days in PY + 365 Days (Last 4 FY.)

Exception

1. i) Leaving India for a Employment 182 Days

in PY &
ii) Leaving India as crew member of a Ship 365 days in
last 4 years
1. Indian Citizen or Person of Indian Origin comes to India on a Visit

Exception

120 Days + Income ≥ 15 Lakh (Indian) RI + RNOR

6(1A) Deemed Resident

(a) Indian Citizen Deemed

All Conditions to be RI +
RNOR Satisfy (b) Total Income ≥ 15 Lakh (Other than Foreign) RNOR

(c) Not Liable to pay Tax in any other country

Note If any of the condition given in Sec 6(1) & (1A) is not fulfil then assessee become NR.

Sec 6(6) Additional Conditions for RI to become ither ROR or RNOR

(i) Resident in India 2 out of 10 PY.

If both conditions fulfilled then
assessee becomes ROR else RNOR
(ii) Stay ≥ 730 days in 7 Years proceeding PY.

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RULES FOR DETERMINING THE RESIDENTIAL STATUS OF HUF [SECTION 6[2]]

Meaning of Control & Management

• Controlling & directive power;
• Actual control & management (mere right to control & manage is not enough);
• Central control & management and not the carrying out of day to day affairs.
The place of central control & management is situated where the head, the seat & the directing
power is situated.

Place of Control & Management Residential status

Fully in India Resident
Partly in India Resident
Fully outside India Non-Resident

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ADDITIONAL CONDITIONS TO TEST AS TO WHEN A HUF IS ROR & RNOR

Condition Particulars
1 Karta has been resident in India in at least 2 out of 10 previous years
immediately preceding the relevant previous year.
2 Karta has been in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
KEY NOTE

If Karta fulfils both of the above conditions then HUF becomes ROR otherwise
RNOR.

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RULES FOR DETERMINING THE RESIDENTIAL STATUS OF COMPANY [SECTION 6 (3)]

A company would be resident in India in any previous year, if –

i. It is an Indian company; or
ii. Its place of effective management, in that year, is in India.
“Place of effective management” to mean a place where key management and commercial decision
that are necessary for the conduct of the business of an entity as a whole are, in substance
made [Explanation to section 6(3)]

Determination of residential status of a company

Is the company No Whether POEM of the No The company is a non-

an Indian company is in India in resident for the
company? the relevant PY? relevant PY

Yes Yes

The company is a
resident in India for the
relevant PY.

Section Company Residential status

6(3)(i) Indian company Always resident in India

6(3)(ii) A foreign company (whose turnover/ It will be resident in India if its place of
gross receipt in the previous year is effective management (POEM), during the
more than Rs. 50 crore) relevant previous year, is in India

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6(3)(ii) A foreign company (whose Always non-resident in India

turnover/gross receipt in the previous
year is Rs. 50 crore or less)

Sr Place of Control Indian Company Foreign Company

Place of Effective Management (POEM)
1 Wholly in India Resident Resident
2 Wholly outside India Resident Non-resident
3 Partly in India and partly outside India Resident Resident

Indian Always resident in

Residential Status of Company

Company India

Place of effective management at

Resident in India
any time in that year, is in India

Other Non-Resident in
Any other case
Company India

PLACE OF EFFECTIVE MANAGEMENT

1 Meaning a "Place of effective management" (POEM) is an internationally recognized

test for determination of residence of a company incorporated in a foreign
jurisdiction. Any determination of the POEM will depend upon the facts and
circumstances of a given case
b The POEM concept is one of substance over form. An entity may have
more than one place of management, but it can have only one Place Of
effective management at any point of time. Since "residence" is to be
determined for each year, POEM will also be required to be determined on
year to year basis.

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2 Criteria The process of determination of would be primarily based on the fact as to

whether or not the company is engaged in active business outside
India

a Place of active business shall be treated as outside india if company fulfils all the
conditions mention below
Passive income Less than 50% of Less than 50% of Payroll expenses of
is 50% or less of total assets total employees employees situated in
its Total Income! situated in India! situated in India or India or resident in
are resident in India! India is less than 50%
of total payroll
expenditure
The average of data of the previous year and two preceding years shall be taken. Where
Company is in existence for a shorter period, then data for shorter period is to be
considered.
Note 1 Income to be computed as per tax laws of the country where such company is
incorporated. Otherwise as per books of account if tax laws of that country does
not require computation
Note 2 The value of assets shall be,
a. Depreciable assets - Average of its value for tax purposes beginning and end
at the of Previous Year.
b. Other assets - Value as per books of account
Note 3 Number of Employees shall be average of number of employees at the
beginning and end of the previous year. Employees shall include persons who are not
directly employed but performs functions similar to employees e.g., contractual
persons.
Note 4 “Payroll” includes cost of salaries, wages, bonus plus employee’s compensation
including pension and social costs borne by employer.
Note 5 Passive income shall be aggregate of,
a. Income from transactions where both the purchase and sale of goods is
from/to its associated enterprises, and
b. Income by way of royalty, dividend, capital gains, interest and rental income
whether derived from associated or non-associated enterprises. Except
interest received by banking company.
Note 6 “Head Office” of a company would be the place where the company’s senior
management and their direct support staff are located or, if they are located at
more than one location, the place where they are primarily or predominantly

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located. A company’s head office is not necessarily the same as the place where the
majority of its employees work or where its Board typically meets.
i. POEM If a company is engaged in active Business outside India
POEM of such company would be presumed to be outside India if the majority meetings
of the Board of Directors (BOD’s) of the company are held outside India.
However, if on the basis of facts and circumstances it is established that the Board of
Directors of the company are standing aside and not exercising their powers of management
and such powers are being exercised by either the holding company or any other person(s)
resident in India, then the place of effective management shall be considered to be in India.

b POEM If a company is not engaged in active Business outside India

In this case, the determination of POEM would be done in two stage process as follow:
i. First stage would be identification or ascertaining the person or persons who actually
make the key management and commercial decision for conduct of the company’s business
as a whole.
ii. Second stage would be determination of place where these decisions are in fact being
made.
The place where these management decisions are taken would be more important than the
place where such decisions are implemented. For the purpose of determination of POEM it
is the substance which would be conclusive rather than the form.

Determination of the location where the decisions are made

i. Primary factors
Some of the guiding principles which may be taken into account for determining the POEM
are as follows:
a. The location where a company’s Board regularly meets and makes decisions may be
the company’s place of effective management provided, the Board -
i. retains and exercises its authority to govern the company; and
ii. Does, in substance, make the key management and commercial decisions necessary
for the conduct of the company’s business as a whole.
b. A company’s Board may delegate some or all of its authority to one or more
committees such as an executive committee consisting of key members of senior
management. In these situations, the location where the members of the executive
committee are based and where that committee develops and formulates the key
strategies and policies for mere formal approval by the full Board will often be
considered to be the company’s place of effective management.

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The delegation of authority may be either de jure (by means of a formal resolution or
Shareholder Agreement) or de facto (based upon the actual conduct of the Board and
the executive committee).
c. The location of a company’s head office will be a very important factor in the
determination of the company’s place of effective management because it often
represents the place where key company decisions are made.
d. The use of modern technology impacts the place of effective management in many
ways. It is no longer necessary for the persons taking decision to be physically present
at a particular location. Therefore, physical location of Board meeting or executive
committee meeting or meeting of senior management may not be where the key decisions
are in substance being made. In such cases the place where the Directors or the persons
taking the decisions or majority of them usually reside may also be a relevant factor.
e. The decisions made by shareholder on matters which are reserved for shareholder
decision under the company laws are not relevant for determination of a company’s place
of effective management.
f. It may be clarified that day to day routine operational decisions undertaken by junior
and middle management shall not be relevant for the purpose of determination of POEM.
ii. Secondary factors
If the above factors do not lead to clear identification of POEM then the following
secondary factors can be considered:
i. Place where main and substantial activity of the company is carried out; or
ii. Place where the accounting records of the company are kept.
It needs to be emphasized that the determination of POEM is to be based on all relevant
facts related to the management and control of the company, and is not to be determined
on the basis of isolated facts that by itself do not establish effective management, as
illustrated by the following examples:
i. The fact that a foreign company is completely owned by an Indian
company will not be conclusive evidence that the conditions for establishing POEM in
India have been satisfied.
ii. The fact that there exists a Permanent Establishment of a foreign entity in
India would itself not be conclusive evidence that the conditions for establishing POEM
in India have been satisfied.
iii. The fact that one or some of the Directors of a foreign company reside in
India will not be conclusive evidence that the conditions for establishing POEM in India
have been satisfied.

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iv. The fact of, local management being situated in India in respect of activities
carried out by a foreign company in India will not, by itself, be conclusive evidence that
the conditions for establishing POEM have been satisfied.
v. The existence in India of support functions that are preparatory and auxiliary in
character will not be conclusive evidence that the conditions for establishing POEM in
India have been satisfied.

6. Illustration
Company Pizza Co. is a sourcing entity, for an Indian multinational group, incorporated in country MacD
and is 100% subsidiary of Indian company (Burger. Co.). The warehouses and stock in them are the only
assets of the company and are located in country MacD. All the employees of the company are also in
country MacD.
i) The average income wise breakup of the company’s total income for three years is 30% of income
is from transaction where purchases are made from parties which are non-associated enterprises
and sold to associated enterprises;
ii) 30% of income is from transaction where purchases are made from associated enterprises and sold
to associated enterprises;
iii) 30% of income is from transaction where purchases are made from associated enterprises and sold
to non-associated enterprises; and
iv) 10% of the income is by way of interest.

7. Illustration
The other facts remain same as that in the variation that Pizza Co. has a total of 50 employees. 47
employees, managing the warehouse, storekeeping and accounts of the company, are located in country
MacD. The Managing Director (MD), Chief Executive Officer (CEO) and sales head are resident in
India. The total annual payroll expenditure on these 50 employees is of Rs. 5 crore. The annual payroll
expenditure in respect of MD, CEO and sales head is of Rs. 3 crore.

8. Illustration
The basic facts are same as in Example 7. Further facts are that all the directors of the Pizza Co. are
Indian residents. During the relevant previous year 5 meetings of the Board of Directors is held of
which two were held in India and 3 outside India with two in country MacD and one in country Dominos.

9. Illustration
The facts are same as in Example 7 but it is established by the Assessing Officer that Although Pizza
Co.'s senior management team signs all, the contracts, for all the contracts above Rs. 10 lakh the Pizza
Co. must submit its recommendation to Burger Co. and Burger Co. makes the decision whether or not
the contract may be accepted. It is also seen that during the previous year more than 99% of the
contracts are above Rs. 10 lakh and over past years also the same trend in respect of value contribution
of contracts above Rs. 10 lakh is seen.

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RULES FOR DETERMINING THE RESIDENTIAL STATUS OF FIRM, AOP & BOI [SECTION 6(4)]

Place of Control and Management situated Status

Fully in India Resident in India
Partly in India Resident in India
Fully outside India Non-Resident

Basic Condition
Control and management of the affairs of Firm,
AOP, BOI

NO
Wholly in
Non - Resident
India

YES

Resident

Wholly in India includes partly in India, partly outside lndia

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HOW TO DETERMINE RESIDENTIAL STATUS OF EVERY OTHER PERSON [SEC. 6])]

Place of Control and Management situated Status

Fully in India Resident in India
Partly in India Resident in India
Fully outside India Non-Resident

RELATIONSHIP BETWEEN RESIDENTIAL STATUS AND INCIDENCE OF TAX [SEC. 5]

In order to understand relationship between residential status & incidence of tax it is necessary
to understand meaning if Indian & Foreign income.

INDIAN INCOME

1 If income is received or deemed to be received in India but accrues or arises or is

deemed to accrue or arise in India
2 If income is received or deemed to be received in India but accrues or arises outside
India during the previous year
3 If income is received outside India but accrues or arises in India during the previous
year.

FOREIGN INCOME

1 Income is not received or not deemed to be received in India

2 Income which does not accrue or arise in India.

INCIDENCE OF TAX [SEC. 5]

For individual and HUF

Nature of income Ordinarily Not ordinarily Non
resident resident resident
Income received in India (no matter where it is Taxable Taxable Taxable
earned)

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Income earned in India (no matter where it is Taxable Taxable Taxable

received)
Income earned and received outside India from a Taxable Taxable Not
source controlled from India Taxable
Income earned and received outside India from a Taxable Not Taxable Not
source not controlled from India Taxable

For Company and Firm and AOP etc

Nature of income Resident Non – resident
Income received in India (no matter where it is earned) Taxable Taxable
Income earned in India (no matter where it is received) Taxable Taxable
Income earned and received outside India from a source Taxable Not Taxable
controlled from India
Income earned and received outside India from a source not Taxable Not Taxable
controlled from India

Remittance v/s Receipt: Receipt is different from remittance. The receipt of income
refers to the first occasion when the recipient gets the money under his control.
•
KEY NOTES

Once amount is received as income any subsequent remittance of amount to India dose
not result income in India.
If income is accrued and received outside India in any year preceding the
• previous year and later on remitted to India in current financial year is not
taxable.

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SECTION 7 AND 9

What is received in India?

Received In India Accrued In India

Sec. 7 Sec. 9

Received In Deemed to be Accrue in Deemed to

India received in India India accrued in India

Any income a) Contribution made by the employer

received in India to the recognised provident fund in a) Income from connection in India
during PY, by any excess of 12% of the salary of the b) Salary earned in India
assessee employee. c) Salary from Govt., by an Indian
chargeable to tax b) Interest credited to the RPF of the citizen for services rendered outside
employee which is in excess of 9.5% p.a. India
c) Transfer balance from the d) Income from dividend paid by an
unrecognised fund to a Recognised Indian Company
Provident fund (It has been discussed in e) Income from interest payable by
the Chapter on Income from salaries). specified person
d) The contribution made, by the f) Income from royalty
Central Government or any other g) Income from technical services
employer in the previous year, to the h) Income from any property/assets or
account of an employee under a source of income in India
notified contributory pension scheme i) Income on transfer of a capital asset
referred to in section 80CCD. situated in India.

BUSINESS CONNECTION [SEC, 9(1) (i)]

Any income which arises through a business connection/ professional connection in India is
deemed to accrue or arise in India.

Meaning of business connection:

1. Includes
It includes a profession connection. It includes a person acting on behalf of a non-
resident and who performs any one or more the following
1. He exercises in India an authority to conclude contracts on behalf of the non-
resident (it does not cover the activity of only the purchase of goods or merchandise for
the non-resident)

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2. He has no such authority but habitually maintains in India a stock of goods or

merchandise from which he regularly delivers goods or merchandise on behalf of the non-
resident.
3. Habitually secures orders in India, mainly or wholly for the non-resident.
Further, there may be situations when the person acting on behalf of the non-resident
secures order for other non-residents. In such situation, business connection for other
non-resident is established if,
a Such other non-resident controls the non-resident or
b Such other non-resident controlled by the non-resident or
c Such other non-resident is subject to same control as that of non-resident.
In all the three situations, business connection is established, where a person habitually
secures orders in India, mainly or wholly for such non-residents.

Mr. A acting on behalf of Mr. X, non-resident

Mr. X, non-resident

Mr. X, non-resident Mr. Y, non-resident

Business connection directly Business connection

established established, if

i) Mr. X is controlled by Mr. Y; or

ii) Mr. Y is controlled by Mr. X or
iii) Commonly controlled by Mr. Z being the
person who controls Mr. X as well Mr. Y.

Agent having independent status are not included in business connection: business
connection, however, shall not be established, where the non-resident carries on business
activity through a broker, general commission agent or any other agent having an
independent status, if such a person is acting in the ordinary course of his business.
4. He habitually plays the principal role leading to conclusion of contracts by the non-
resident and the contracts are –
a. In the name of the non-resident; or
b. For the transfer of the ownership of (or for the granting of the right to use)
property owned (or the non-resident has right to use) by the non-resident; or

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c. For the provisions of services by the non-resident

5. Economic Presence of NR: Moreover from the significant economic presence of a
non-resident in India shall constitute “business connection” in India. “significant economic
presence” for this purpose, shall mean –
a in respect of any goods, services or aggregate of payments arising from such
property carried out by a non-resident transactions during the previous year
with any person in India including exceeds ‘2 crores.
provision of download of data or software
in India
b Systematic and continuous soliciting of The number of users as may be atleast 3
business activities or engaging in lakhs.
interaction with users in India
Further, the above transactions or activities shall constitute significant economic
presence in India, whether or not, -
i The government for such transactions or activities is entered in India;
ii The non-resident has a residence or place of business in India; or
iii The non-resident renders services in India:
However, where a business connection is established by reason of significant economic
presence in India, only so much of income as is attributable to the transactions or
activities referred to in (a) or (b) above shall be deemed to accrue or arise in India.
2. Does Not Include
i In the case of a business, in respect of which all the operations are not carried
out in India [Explanation 1(a) to section 9(1) (i)]
In the case of a business of which all the operations are not carried out in India, the
income of the business deemed to accrue or arise in India shall be only such part of
income as is reasonably attributable to the operations carried out in India. Therefore, it
follows that such part of income which cannot be reasonably attributed to the operations
in India, is not deemed to accrue or arise in India.
ii Purchase of goods in India for export [Explanation 1(b) to section 9(1)(i)]
In the case of non – resident, no income shall be deemed to accrue or arise in India to
him through or from operations which are confined to the purchase of goods in India for
the purpose of export.
iii Collection of news and views in India for transmission out of India
[Explanation 1(c) to section 9(1) (i)]
In the case of a non – resident, being a person engaged in the business of running a news
agency or of publishing newspapers, magazines or journals, no income shall be deemed to
accrue or arise in India to him through or from activities which are confined to the
collection of news and views in India from transmission out of India.

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iv Shooting of cinematograph films in India [Explanation 1(d) to section 9(1)(i)]

In the case of a non-resident, no income shall be deemed to accrue or arise in India
through or from operations which are confined to the shooting of any cinematograph film
in India, if such non-resident is:
a. An individual, who is not a citizen of India or
b. A firm which does not have any partner who is a citizen of India or who is resident in
India; or
c. A company which does not have any shareholder who is a citizen of India or who is
resident in India
v Activities confined to display of rough diamonds in SNZs [Explanation 1(e) to
section 9(1)(i): In order to facilitate the FMCs to undertake activity of display of uncut
diamond (without any sorting or sale) in a Special Notified Zone (SNZ), clause (e) has
been inserted in Explanation 1 to section 9(1)(i) to provide that in the case of a foreign
company engaged in the business of mining of diamonds, no income shall be deemed to
accrue or arise in India to it through or from the activities which are confined to display
of uncut an unsorted diamonds in any special zone notified by the Central Government in
the Official Gazette in this behalf

INCOME FROM PROPERTY IN INDIA 9(1) (i)

Income arising through or from any property or any asset or source of income in India
Ex: Mr. Anil residing in Dubai leases out a building situated in Pune and receives rent in UAE.
Such rental income shall be deemed to accrue or arise in India as the building (i.e. source of
income) is situated in India.

INCOME FROM TRANSFER OF PROPERTY IN INDIA

Income arising through or from the transfer of a capital asset situated in India
Ex: If Anil sells the building situated in Pune to a person Outside India and receives
consideration outside India, such income shall also be deemed to accrue or arise in India as the
property transferred is situated in India.

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SALARY INCOME [SEC(9)(1)(ii)]

1 Salary income shall be deemed to be earned in India if services are rendered in India.
Exception to the above rule
a If salary is payable to-
• Government employee
• who is a citizen of India
• for services rendered outside India
Then such salary (even service rendered outside India) shall be deemed to be earned in
India.
2 Key Note
Any allowances or perquisites paid to above employee shall be exempted u/s 10(7).
3 Pension received in India from abroad
If an assessee, residing in India, receives pension from abroad from past services rendered
in foreign country, then such income shall be treated as income accruing abroad, and shall
not be liable to tax in India.

DIVIDEND INCOME [SEC 9(1) (iii)]

a Any dividend Paid by an Indian company outside India shall be deemed to accrue to
arise in India.
b Dividend income paid to a non- resident by Indian company is deemed to accrue or
arise in India only on payment and not on declaration.

INTEREST, ROYALTY & FEES FOR TECH. SERVICE-WHEN DEEMED TO ACCRUE OR ARISE IN INDIA

1. Accrual of Interest 9(1)(v) in India

Payer Purpose of Payment Is the payment Taxability in the hands of
deemed to accrue receiver
or arise in India
Government Any purpose Yes All Assessee
For carrying on Business No ROR – Taxable NOR – Not
Resident or profession outside Taxable NR – Not Taxable [For
India or earning income NOR or NR – assumed first
outside India receipt not in India]

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Resident For any other purpose in Yes All Assessee

any country
Non- For carrying on business Yes All Assessee
Resident or profession in India
ROR – Taxable NOR –Not
Non- For any other Purpose No Taxable NR – Not Taxable [for
Resident NOR or NR – assumed first
receipt not in India]

2. Accrual of Royalty 9(1)(vi), and Fees for Technical Service 9(1)(vii) in India
Payer Purpose of payment Is the payment Taxability in the hands of
deemed to accrue receiver
or arise in India
Government Any purpose Yes All Assessee
For carrying on business No ROR – Taxable NOR – Not
Resident or profession outside taxable NR – Not taxable [For
India or earning Income NOR or NR – assumed first
outside India receipt not in India]
Resident For any other purpose Yes All Assessee
For carrying on business Yes All Assessee
Non- or profession in India or
resident any other source in India
For any other purpose No ROR – Taxable NOR – Not
Non- taxable NR – Not taxable [For
resident NOR or NR – assumed first
receipt not in India]

DEEMED RECEIPT OF GIFT [SEC. 9(1)(VII)]

When
• a non-resident or a foreign company receives any sum of money referred to in sec.
56(2)(x)
• such receipt is from a resident person
• such money is received outside India
• such money is received on or after 05-07-2019
Then
• such receipt is treated as income deemed to accrue or arise in India.

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PRACTICAL QUESTIONS

10. Illustration
Mr. Andhi Toofan is an citizen. Currently, he is in employment with a multinational company and
posted in Nigeria. During the previous year 2024 – 25, he comes to India for a visit of 122 days.
In earlier 4 years, he is in India for more than 1000 days. Mr. Andhi Toofan wants to know his
residential status for the Assessment year 2025 – 26. His annual income for the previous year
2024 – 25 is as follows –
Rs.
Income from salary, rent, consultancy and interest income earned and received in 28,00,000
Nigeria
Income from business (accrued and received outside India, controlled from 22,00,000
Nigeria)
Income from another business (accrued and received outside India, controlled 7,00,000
from India)
Interest on bank fixed deposits in India 12,00,000
Any other income in India or outside India Nil
Life insurance premium paid in India 90,000

11. Illustration
Dhoni left India on 15/10/1999. After that he came to India for first time on May 2, 2024 & left
India on:
i) June 25, 2024; ii) December 1, 2024.
Determine his residential status for the previous year 2024 - 25 for each of the two cases.

12. Illustration
Mr. Raina, aged 19 years, left India for first time on May 31, 2024. Determine his residential
status under the following situations for the PY 2024 - 25.
i) He left India for employment purpose ii) He left India on world tour.

13. Illustration
Amitabh Bacchan being an Indian citizen got a job offer in England. He wants:
• To stay in India as long as possible; and
• To be non-resident in India.
Advise him, when should he depart for England?

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14. Illustration
Determine the residential status of Miss Anne who was born in china (both of her parents were
born in Argentina and all her grandparents in Cuba) has stayed in India in the PY 24 – 25 for 80
days. Her stay in India during the preceding 10 years is as follows:
PY Nos of Days PY Nos of Days
2023 – 24 175 2018 - 19 NIL
2022 – 23 80 2017 - 18 NIL
2021 – 22 100 2016 - 17 320
2020 – 21 30 2015 - 16 50
2019 – 20 300 2014 - 15 47

15. Illustration
Mr. Hanuman provides following details of income, calculate the income which is liable to be taxed
in India for the A. Y. 2025 - 26 assuming that:
a) He is an ordinarily resident
b) He is not an ordinarily resident
c) He is a non-resident.
Particulars Amount
Salary received in India from a former employer of USA 150000
Income from tea business in Nepal being controlled from India 10000
Interest on company deposit in West Indies (1/3rd received in India) 30000
Profit from a business in Mumbai controlled from UK 100000
Profit for the year 2012 - 13 from a business in Australia remitted to India 200000
Income from a property in India but received in USA 45000
Income from a property in London but received in Delhi 150000
Income from a property in London but received in Canada 250000
Income from a business in Jambia but controlled from Turkey 10000

16. Illustration
State with reasons whether the following attract Income Tax in India in the hands of Recipients:
1. Salary of Rs.7,00,000 paid by Central Government to Mr. John, a Citizen of India, for the
services rendered outside India.
2. Interest on moneys borrowed from outside India Rs.5,00,000 by a Non-Resident for the
purpose of business within India say, at Mumbai.
3. Post office Savings Bank Interest of Rs.12,000 received by a Resident Assessee say, Mr. Ram.
4. Royalty paid by a Resident to a Non-Resident in respect of business carried on outside India.
5. Legal charges of Rs. 5,00,000 paid to a Lawyer of United Kingdom who visited India to
represent a case at the Delhi High Court.

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17. Illustration
From the information given below, find out the net income of Mr. Nirash for the assessment year
2025-26 on the assumption that during the previous year 2024-25, Mr. Nirash was in India for 46
days
Rs.
Salary received outside India from a foreign company for rendering services in
4.50,000
Mumbai (after standard deduction)
Income from operations confined to the purchase of goods in India for the
1,00,000
purpose of export to Brazil
Income from operations confined to shooting of a cinematography film in Mumbai 9,33,500
Dividend from a foreign company (received in India) (foreign company is engaged
4,00,000
in agricultural activities in India)

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INCOME EXEMPT FROM TAX

CHAPTER 3 INCOME EXEMPT FROM TAX

AGRICULTURAL INCOME

 As per Section 10(1) agricultural income is exempt from tax. The Indian
Constitution, however, gives exclusive power to state make provisions with respect to taxes
on agricultural income
 However, it is taken into account to determine tax on non-agricultural income.
 It is, therefore, necessary to study the definition and provisions regarding agricultural
income.

MEANING OF AGRICULTRAL INCOME SEC 2(1A)

1. Any rent or revenue derived from a land, which is situated in India & is used for
agricultural purposes.
a. Rent may be in cash or in kind.
b. Assessee may be the owner or tenant of such land.
2. Any income derived from such land by agricultural operation.
3. Any income derived from such land by
a. The cultivator by processing the agricultural produce raised;
b. The receiver of rent in kind by processing the agricultural produce received; so as to
render it fit for sale in market.
4. Any income derived from such land on sale made by
a.
The cultivator of the agricultural produce raised;
b. The receiver of rent in kind of the agricultural produce received. Without carrying on
any process, other than the process required to render it fit for the market.
5. Any income derived from a building subject to fulfilment of the following conditions
a. The building should be occupied by the cultivator or receiver of rent in kind.
b. The building should be on or in the immediate vicinity of the land, being situated in
agricultural purposes.
c. The building should be used as dwelling house or store-house or other out building.
d. The land is either situated in -
i Rural area; or
ii Urban area and assessed to land revenue / local rates.

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CONDITIONS

1. Land must be situated in India. [Urban/ Rural]

Definition of Urban Area
a. Any area which is comprised within the jurisdiction of a municipality or a cantonment
board having a population of > 10,000/- ; or
b. Any area within such distance, not being more than prescribed kilometres, from the
local limits of any municipality or cantonment board, as the Central Government may
specify in this behalf
c. Rural agriculture land in India i.e., agricultural land in India which is not situated in any
specified area. As per definition, only rural agricultural lands in India are excluded from
the purview of the term ‘capital asset;. Hence urban agricultural lands constitute capital
assets.
Municipality or Cantonment board

Population
Up to 10,000 Agro Land not treated as Capital Asset
Within 10,001 to Agro Land treated as
1,00,000 Capital Asset

Within 1,00,001 to Agro Land treated as Capital Asset Rural Land

10,00,000

More than Agro Land treated as Capital Asset

10,00,000

Local limit 2 Km 6 Km 8 km Beyond 8 Km

Taxpoint: Where such land or building is used for non-agricultural purpose then any income
derived from such land or building shall not be treated as agricultural income.

2. Land used for Agricultural purpose

The Act nowhere defines the term agricultural operations or agricultural purposes. However,
the Supreme Court laid down guidelines for the determination of the scope of these terms
in accordingly for the purpose, agricultural activity is divided into two parts.
a. Basic Operation: It means application of human skill &labour upon the land, prior to
germination, e.g. Tiling of land, sowing of seeds, planting irrigation etc.
Tax point: Any spontaneous growth from land itself (i.e. without any human effort)
cannot be termed as agricultural operation.

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b. Subsequent Operation: It means operations:

 Which fosters the growth and preserves the produce;
 For rendering the produce fit for sale in market, and
 Which are performed after the produce sprouts from the land.
E.g. digging the soil around the growths, removal of undesirable undergrowth’s,
weeding, tending pruning, cutting harvesting etc.
Tax point:
Activity Whether treated as agricultural activity or
not
Mere Basic Operation Agricultural activity
Mere Subsequent Operation Not an agricultural activity
Subsequent operation together with Agricultural activity
basic operation

Agricultural Income Conditions to treat income as Agri income

Land must be situated Land used for Agri

in India Purpose

Subsequent
Rural Area Urban Area Basic Operation
operation

Application of
To Preserve
Human skills &
the Produce
efforts

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INSTANCES OF AGRICULTURAL (AGRO) INCOME

1 Income from growing trade or commercial products like jute, cotton, etc. is an agro
income.
2 Income from growing flowers and creepers is an agro income.
3 Plants sold in pots are an agro income provided basic operations are performed.
4 Remuneration and interest to partner: Any remuneration (salary, commission,
etc.) received by a partner from a firm engaged in agricultural operation is an agro income.
5 Share of profit in a firm engaged in agricultural activity.
6 Any income derived from saplings or seedlings grown in a nursery shall be deemed to be
agricultural income.
7 Compensation received from an insurance company

INSTANCES OF NON-AGRICULTURAL (NON-AGRO) INCOME

1 Salary received by an employee from any business (having agricultural income) is

non-agro income.
2 Dividend received from a company engaged in agricultural operation is non-agro income.
3 Income from fisheries is non-agro income.
4 Income from poultry farming is non-agro income.
5 Income from dairy farming, butter & cheese making etc. is non-agro income.
6 Breeding & rearing of livestock is non-agro income.
7 Interest received by a moneylender in the form of agricultural produce is non-agro income.
8 Profit on sale of standing crops after harvest, where such crops were acquired
through purchase is non-agro income.
9 Royalty income from mines in non-agro income.
10 Remuneration to a Director or Managing Director from a company engaged in
agricultural business is non-agro income. The provision holds good even when such
remuneration is on the basis of certain percentage of net profit.
11 Interest on arrears of rent receivable in respect of agricultural land is non-agro income.
12 Income from a land situated outside India is non-agro income and taxable under the head
“Income from other sources”.
13 Income on supply of water for agricultural operation is non-agro income.
14 Income from sale of trees and grasses grown spontaneously (without any human effort).
Is non-agro income.

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15 Film shooting charges in garden farm house etc.

INSTANCES OF NON-AGRICULTURAL (NON-AGRO) INCOME

The income which is partially agricultural income and partially non-agricultural income
chargeable to tax under the head PGBP.

DISINTEGRATION OF INCOME IN SPECIFIC COMPOSITE BUSINESS

Rule Contents Agricultural Non-Agricultural

7A Growing and manufacturing rubber 65% agricultural 35% taxable
7B Growing and manufacturing coffee grown and 75% agricultural 25% taxable
cured
7B Growing and manufacturing coffee grown, 60% agricultural 40% taxable
cured, roasted and grounded
8 Growing and manufacturing tea 60% agricultural 40% taxable
Salary and interest received by a partner from a firm growing and manufacturing tea,
coffee or rubber: Such remuneration or interest shall be treated as partly agricultural income
and partly business income as started above.

AGRI PRODUCT USED AS RAW MATERIAL

In determining that part which is chargeable to income tax the market value of any agricultural
produce which has been raised by the assessee or received by him as rent in kind and
which has been utilized as a raw material in such business shall be deducted and no
further deduction shall be made in respect of any expenditure by the assessee as cultivator or
receiver of rent in kind.

For the purpose of the above rule market value shall be deemed to be
1 Where the agricultural produce is ordinarily sold in the market, the average price at which it
has been sold, during the relevant previous year; or
2 Where the agricultural produce is not ordinarily sold in the market the aggregate of the
following shall be its market value
a The expenses of cultivation;
b The land revenue or rent paid for the land on which it was grown and

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c The profit which in the opinion of the Assessing Officer is reasonable.

PARTIAL INTEGRATION OF AGRICULTURAL INCOME WITH NON-AGRICULTURAL INCOME IF

a) Assessee is an individual or HUF, A BOI, an AOP or an AJP.

b) Agricultural income exceeds Rs. 5,000, And
c) Non-agricultural income exceeds Basic Exemption limit. [2.5L/ 3L/ 5L]
Then tax shall be calculated in the following manner:
Add agricultural with non-agricultural income and calculate the tax on the aggregate
Step-1
as if it is the total income
Step-2 Compute the tax on (Basic Exemption + agricultural income) as if it is the total income
Step-3 Steps 1 – Step 2 will be the tax payable.
Step-4 Claim Relief u/s. 87A – if Applicable
Step-5 Add SC (if Applicable) Add H & EC
Example Assessee Agri Income Non-Agri Income Total Income
Mr. Sunami 12,000 2,90,000 3,02,000
Mr. Tumeri 4,000 2,90,000 2,90,000
Mr. Humeri 12,000 2,40,000 2,40,000
X Ltd 12,000 2,90,000 2,90,000

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INCOME EXEMPT FROM TAX

PRACTICAL QUESTIONS ON AGRICULTURAL INCOME

1. Illustration
Mr. Nirash Ashawadi age 42 years has non-agro income of Rs. 3,50000 and agro income of Rs.
1,80,000. Compute his tax liability for the A.Y. 2025 - 26.

2. Illustration
Mr. Tom Joshi age 42 years has non-agro income of Rs. 400000 and agro income of Rs. 4,000.
Compute his tax liability for the A. Y. 2025 - 26.

3. Illustration
Full Loss Ltd. grows sugarcane to manufacture sugar. Details for the previous year 2024 - 25 are
as follows:
Particulars Rs. In Lacs
Cost of cultivation of sugarcane (5000 tons) 10
Sugarcane sold in market (1000 tons) 3
Sugarcane used for sugar manufacturing (4000 tons) --
Cost of conversion 5
Salary to staff 6
Sugar produced & sold in market 25
Compute income of Full Loss Ltd.

4. Illustration
Mr. Tony Shinde had estate in Rubber, Tea and Coffee. He derives income from them. He has also
a nursery wherein he grown plants and sells. For the PY 24 - 25 he provides following details of his
income.
a) Manufacturer of Rubber Rs. 5,00,000
b) Manufacturer of Coffee grown and Cured Rs. 3,50,000
c) Manufacturer of Tea Rs. 7,00,000
d) Sale of plants from Nursery Rs. 1,00,000
Compute his income for AY 25 - 26.

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OTHER INCOMES EXEMPT FROM TAX SECTION 10(2) TO (48)

1. Section 10(1) Agricultural Income

Refer chapter Agricultural Income.
2. Section 10(2) Member’s share in income of HUF
3. Section 10(2A) Share in Profit of firm Exempt in the hands of partner
4. Section 10(6) Remuneration of foreign citizens
5. Section 10(7) Allowance or perquisite paid outside India
6. Section 10(10BC) compensation on account of any disaster
7. Section 10(10D) Any sum received under the life insurance policy, including bonus on such
policy.
However, the following sums are not exempt:
A. Sum received from a policy u/s 80DD (Handicap policy)
B. Sum received under a Keyman insurance policy
S N Situation Taxability
1 Premium paid by employer In the hands of employer
2 Premium paid by employee In the hands of employee (salary
income)
3 Premium paid by employee and received after In the hands of family member
the death of employee (IFOS)
C. Any sum received under an insurance policy issued between before 31-03-2012 in respect
of which the premium payable for any year > 20% of the actual capital sum assured;
Exception: any sum received on the death of a person is not taxable
D. Any sum received under an insurance policy issued on or after 01/04/2012 but before
31/03/13 in respect of which the premium payable for any of the years > 10% of the
actual capital sum assured:
Exception: Any sum received on the death of a person is not taxable
E. In case of policy issued on or after 1/4/2013, on life of following persons, 10% shall be
taken as 15%
A person with disability or severe disability as referred to u/s 80U; or Suffering
from disease or ailment as specified in the rules made u/s 80DDB
Exception: Any sum received on the death of a person is not taxable
F. Unit-linked insurance plan (ULIP) issued on or after 01/02/2021
Meaning ULIP has been defined for this purpose, as life insurance policy which
has components of both investment and insurance

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Taxability ULIP issued on or after February 1,2021, if the amount of premium or

aggregate premium payable for any of the previous year during the term
of policy exceeds Rs. 2,50,000.
Exception Any sum received on the death of a person is not taxable
Tax liability Income would be taxable under sec 45 (1B) under the head “Capital Gain”
on redemption and tax liability will be calculated as per sec 112A.
of ULIP
G. Life Insurance Policy issued on or after 01/04/2023
Sum received under a life insurance policy (other than a unit linked insurance policy)
issued on or after April 1, 2023, if the amount of premium/ aggregate premium payable
for any of the previous year during the term of such policy exceeds Rs. 5 lakhs or
10% or 15% of SA
Exception: Any sum received on the death of a person is not taxable
8. Section 10(11A) Payment from Sukanya Samriddhi Account
9. Section 10(12A) Payment from NPS Trust to an assessee on closure of his account or on
his opting out of the pension scheme exempt
10. Section 10(12B) Payment to assessee on partial withdrawal from NPS
11. Sec. 10(12C) Sum received from Agniveer Corpus Fund
12. Section 10(15)
1. Post office savings bank account to an extent of interest of Rs. 3,500 for an individual
account & Rs. 7,000 for a joint account
2. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or
13. Section 10(16) Educational Scholarship
14. Section 10(17) Daily Allowance, etc. to MP and MLA
15. Section 10(17) Awards and rewards
16. Section 10(18) Pensions to gallantry award winners
17. Section 10(19) Family pension to widow or children of armed force
18. Section 10(19A) Palace of ex-ruler
19. Section 10(20) Income of local authority
20. Section 10(21) Income of scientific research association
21. Section 10(22B) Income of news agency [eg: - UNI / PTI]
22. Section 10(23A) Income of professional institutions
23. Section 10 (23BBH) Income of Prasar Bharati broadcasting corporation of India will be
exempt from tax
24. Section 10(23C) Income of hospital
25. Section 10(23D) Income of Mutual fund
26. Section 10(24) Income of trade Union

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27. Section 10(25) Income of provident fund

28. Section 10(26AAA)
29. Section 10(32) Income of Minor
30. Section 10(33) Income on transfer of units of US 64
31. Section 10(34A) Income of a shareholder on account of buy back of shares
32. Section 10(39) Specified income, arising from any international sporting event held in
India
33. Section 10(43)
34. Section 10(48) Sale of Crude oil
35. Section 10(48A) Storage of Crude Oil
36. Section 10(48B) Sale of leftover stock of crude oil
37. Section 10(48C) Exemption in respect of certain income of Indian Strategic Petroleum
Reserves Ltd.
38. Income of certain institution u/s 10(48D)/ 10(48E)
39. Section 10(50) Income arising from any specified service

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CHAPTER
40 4 INCOME FROM SALARY

MEANING

As per Webster’s Dictionary, Salary means earning, emoluments, remuneration, screw, stipend,
wages, etc.
As per common parlance, salary means any payment (whether in cash or in kind) made by an
employer (in such capacity) to his employee for services rendered by him. The key requirement
is that the Payer and Payee must have employer – employee relationship.

DEFINITION OF ‘SALARY’ [SEC. 17(1)]

i. Wages;
ii. Any annuity or pension;`
iii. Any gratuity;
iv. Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages;
v. Any advance of salary;
vi. Any payment received by an employee in respect of any period of leave not availed by him;
vii. The annual accretion to the balance at the credit of an employee, participating in
Recognised Provident Fund, to the extent it is taxable;
viii. Transferred balance to the extent it is taxable;
ix. Contribution made by the Central Government or any other employer in the previous
year, to the account of an employee under a pension scheme referred to in sec. 80CCD.
(Above list is inclusive and not exhaustive)

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DEFINITION OF ‘SALARY’ [SEC. 17(1)]

1. Employer and Employee Relationship

How to decide salary income
• The relationship between payer and payee must be of employer and employee
• Payment made in such capacity only
2. Agent and Principal Relationship
Principal and agent are not having employer and employee relationship, thus, any commission
or remuneration earned by an agent from his principal is not taxable under the head
‘Salaries’, as the agent is not an employee of his principal.
Example: Commission received by consignee from consigner shall not be taxable under the
head ‘salarier’ but under the head PGBP.
3. Nature
Cash or kind or both
4. Salary and wages
Same under Income Tax
5. Salary from more than 1 employer
in case an assessee receivers salary from more than one employer during the same PY., then
salary from all the sources shall be accumulated and taxable under the head ‘salary’.
6. Salary received by a partner from his firm
Partner is not a employee of his firm hence his remuneration shall not be treated as
salary. Such remuneration shall be treated as business income in hands of partner. (Refer
the topic ‘Firm Assessment’ of the chapter ‘Profits & Gains of Business or Profession’.)
7. Director Fee
Director’s sitting fee is given to directors for attending board Meetings and it is taxable
under the Head “Income from Other Sources”
8. Pension to retired employee
For the purpose of salary, consideration may be past, present or future. Even the employer
may be past, present or prospective. Therefore, pension to retired employee shall be
taxable under the head ‘Salaries’ because it is the remuneration from the past employer
for the past services.
9. Pension to legal heir deceased employee
Since the payer and payee are not having employer and employee relationship therefore
such pension cannot be treated as salary. Such income shall be taxable under the head
‘Income from Other Sources’ in the hands of recipient.
10. Remuneration to teacher of a college for checking answer sheets of University.

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Such income cannot be treated as salary as the payer and payee are not having employer
and employee relationship. Such income shall be taxable under the head ‘Income from
Other Sources’
11. Remuneration to teacher of a college for checking answer sheets of the college itself.
Such remuneration shall be treated as salary, as the payer and payee are having employer
and employee relationship.
12. Remuneration to the member of the Parliament or the State legislature.
Such income cannot be treated as salary as the payer and payee are not having employer
and employee relationship. Such income shall be taxable under the head ‘Income from
Other Sources’
13. Salary paid tax-free
This, in other words, means that the employer bears the burden of the tax on the salary
of the employee. In such a case, the income from salaries in the hands of the employee
will consist of his salary income and also the tax on this salary paid by the
employer.

BASIC OF CHARGE [SEC. 15]

1 Salary is taxable on due or receipt basis whichever is earlier.

2 Advance salary is taxable on receipt basis
3 Advance salary V/s. Advance against salary; Advance salary is taxable/s 17(1) (e) on receipt
basis whereas Advance against salary’ is treated a loan hence not taxable
4 Arrears of salary (means any increment with salary on retrospective effect) is taxable on
Receipt basis, if the same has not been subjected to tax earlier on due basis.
5 Even if any part of salary is foregone by the employee voluntarily, still it will be taxable in
his hands.

1. Illustration
Mr. Kadappa is getting salary of Rs. 12,000 pm since 01/06/20 & got increment of Rs. 1,000 on
01/04/24. Calculate his annual salary if:
a) Salary becomes due on the last day of month
b) Salary becomes due on the 1st day of next month.

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2. Illustration
Bajrangi an employee of Bhaijaan Ltd. received Rs. 1, 00,000 as salary including outstanding salary
of last year Rs. 5000 during P Y 24 - 25. However his monthly salary is Rs. 12,000. Find out salary
for the A.Y. 25 - 26.

PLACE OF ACCRUAL OF SALARY

Employee Employer Place of Salary Taxable

service received
Any Any India Any where Yes
Any Any Any where In India Yes
Ordinarily resident in India Any Any where Any where Yes
Indian citizen Government Outside India Any where Yes
Not ordinarily resident in Any Outside India Outside No
India/Non resident India

3. Illustration
Mr. David Government Employee serving in the Ministry of External Affairs left India for the first
time on 31/3/2024 due to his transfer of High Commission of Canada. He did not visit India any
time during previous year 2024 – 25. He has received the following income for the previous year
2024 – 25.
Particulars Rs.
Salary 5,00,000
Foreign allowance 4,00,000
Interest on fixed deposit from bank in India 1,00,000
Income from Agriculture in Pakistan 2,00,000
Income from House Property in Pakistan 2,50,000

1. Basic Salary
It is the amount paid by employer to employees as Salary.
Treatment: Basic salary is fully taxable in the hands of all employees.
2. Fees
Fully taxable in all cases
3. Commission
It may be of following nature
a Commission based on Turnover;
b Commission based on Profit; or

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c Fixed Commission.
Treatment: Fully taxable in all cases.
4. Bonus
Meaning - It may be as per the terms of employment (Contractual Bonus) or otherwise
(Voluntary Bonus)
Treatment: Fully taxable
Contractual bonus Fully taxable as bonus
Voluntary bonus Fully taxable as perquisite
5. Pay Scale [Grade System]
It is a system of payment where increment scale is pre-known to employee, e.g. Basic salary
is given Rs. 6000-2000-12000. This is called as increment schedule. As per this initial
payment is Rs. 6000 which increases by Rs. 2000 per year till salary reaches Rs. 12,000.

4. Illustration
Mr. Sunami is appointed on 1st May 23 on a pay scale of 15,000 – 5,000 – 30,000 what will be the
taxable salary for the PY 2024 – 25

5. Illustration
Mr Badlapur joins Tony Ltd. on 1/10/2020
Salary scale = 16,000 – 2,000 – 30,000
Compute salary of Badlapur for PY 2024 – 25

6. Illustration
Kakesh joins KKR Ltd. 16 Aug. 2021
Salary scale = 6,000 – 1,500 – 19,500
Compute salary of Kakesh for PY 2024 – 25

7. Illustration
Pay scale – 15,000 – 2,000 – 25,000
Date of joining 01/03/2021
Compute salary for PY 25 – 26

8. Illustration
Pay scale – 15,000 – 2,000 – 25,000
Date of joining 01/03/2020
Compute salary for PY 24 – 25 assuming salary due on the last day of the month.
What will be your answer in above question if salary is due on 1st day of next month.

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9. Illustration
Pay scale – 15,000 – 2,000 – 25,000
Date of joining 15/03/2020
Compute salary for PY 24 – 25 assuming Salary due on last day of month.

ALLOWANCES AND THEIR TAXABILITY

Allowance can be defined as a fixed amount either in the form of money or otherwise, given
regularly in addition to salary for the purpose of meeting a particular requirement connected
with the services rendered by the employee or as a compensation for unusual / peculiar
conditions of that service. Following are some allowances paid to employees.
Allowances
Fully taxable under both Fully taxable under default Fully exempt only under the
regimes tax regime/ partly exempt optional tax regime
under the optional tax
regime
i. Entertainment i. House Rent Allowance i. Allowances to High Court
Allowances [u/s 10(13A)] Judges
ii. Dearness Allowances ii. Special Allowances [u/s ii. Salary and Allowances
10(14)] paid by the United
Nations Organization
iii. Overtime Allowance Except iii. Sumptuary Allowance
granted to High Court or
Supreme Court Judges
iv. Fixed Medical Allowance a. Travelling Note: In case (i) and (iii)
Allowance above, the respective
v. City compensatory b. Daily Allowance Acts provide for such
Allowance (to meet exemptions,
increased cost of living in notwithstanding anything
cities) contained in the income
vi. Interim Allowance c. Conveyance tax Act, 1961. In case (ii),
Allowance exemption is provided
vii. Servant Allowance d. Transport under the respective Act,
allowance to blind/ notwithstanding anything
deaf and dumb/ to the contrary contained
orthopedically in any other law.
handicapped
employee

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viii. Project Allowance Note: The exceptions in

ix. Tiffin/ Lunch/ Dinner (a) to (d) above are
Allowance partly exempt under
x. Any other cash Allowance both the tax regime.
xi. Warden Allowance
xii. Non practicing Allowance
Fully exempt under both
xiii. Transport Allowance to
tax regimes
employee other than
Allowance granted to
blind/ deaf and dumb/
Government employees
orthopedically
outside India [Sec 10(7)]
handicapped employee

FULLY TAXABLE ALLOWANCES

1. Dearness Allowance
Dearness Allowance (DA) or Dearness Pay
Meaning - It is an allowance (extra monetary payment) given to the employee in order to
meet the increasing cost of living by whatever name called.
Treatment - Fully taxable in all cases
Dearness allowance may form part of retirement benefit or not, which means that –
A Dearness allowance forming part of retirement benefit
Meaning - Such dearness allowance will be given as monthly regular payment and it shall
be taken as a part of salary for computation of retirement benefit e.g. Gratuity, Pension,
P.F. etc.
Treatment - Fully taxable
B Dearness allowance not forming part of retirement benefit
Meaning - Such dearness allowance will be given as monthly regular payment but it shall
not be taken as a part of salary for computation of retirement benefit e.g. Gratuity,
Pension, P.F. etc.
Treatment - Fully taxable
Key Note:
If in the problem, it has not be given whether DA forms a part of retirement benefit or
not, then students may take their own assumption. The problems have been solved in this
book, assuming DA forms a part of retirement benefit

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2. City Compensatory Allowance

Cost of living in big cities is often more than in smaller towns or villages. To meet such
high cost of living, employees are normally paid with a compensator / allowance
depending upon the size of the city to which he is posted. So when an employee is
transferred from a smaller town to a bigger city, his increased cost is taken care of. Such
allowance is fully taxable.
3. Fixed Medical Allowance
Any fixed medical allowance is fully taxable. However, medical facilities provided by the
employer form part of perquisites and are discussed later.
4. Tiffin Allowance
An allowance to meet the expenditure on refreshment, tiffin, etc.
5. Servant Allowance
An allowance to meet the expenditure incurred on servant.
6. Deputation Allowance
An allowance a given to employee when he is sent on deputation for temporary period.

FULLY EXEMPT ALLOWANCES (TO THE EXTENT OF AMOUNT SPENT):

1. Traveling Allowance
Allowance granted to meet the cost of travel or transfer.
2. Daily Allowance
Allowance, whether, granted on tour or for the period connection with transfer, to meet
the ordinary daily charges incurred by an account of absence from his normal place of duty;
3. Conveyance Allowance
Allowance granted to meet the expenditure incurred on conveyance in performance of
duties of an office or employment of profit, provided that free conveyance is not provided
by the employer,
Note: Conveyance expenditure made for traveling between the place of residence and the
place of duty is covered under the head Transport allowance and not covered under
conveyance allowance.
4. Helper Allowance
Allowance granted to meet the expenditure incurred on a helper where such helper is
engaged for the performance of the duties of an office or employment of profit.
5. Training Allowance
Allowance granted for encouraging the academic, research and training pursuits in
educational and research institutions;

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6. Uniform Allowance
Allowance granted to meet the expenditure incurred on the purchase or maintenance of
uniform for wear during the performance of duties.

Note: Following allowance do not depend upon actual expenditure [Rule 2BB(2)] [always
exempt]
7. Allowance to Govt. employee outside India [Sec. 10(7)]
Any allowance paid or allowed outside India by the Govt. to an India citizen for rendering
services outside India is wholly exempt from tax.
8. Allowances received from UNO
Exempt from tax
9. Allowance to high court and Supreme Court Judges
Exempt from tax
10. Compensatory allowance under article 222(2) of the constitution
Exempt from tax

FULLY/ PARTLY EXEMPT ALLOWANCES

1. House Rent Allowance [Sec. 10(15A)] and

This allowance is given to meet cost of accommodation H.R.A. is partly taxable and partly
exempt from tax as this H.R.A. is to be included in the salary first and then least of the
following is exempt from tax.
a An amount equal to 50% of salary, if residential house is situated at Mumbai, Delhi,
Calcutta or Madras & 40% of salary where residential house in other place, (like Pune).
b House Rent Allowance received by the employee
c Rent paid to landlord – 10% of salary.
• ‘Salary’ for the purpose of this clause means basic salary plus dearness a terms of
employment so provide, and commission based on fixed turnover achieved by an
employee as per the terms of employment
KEY NOTES

• Salary is to be calculated on due basis, i.e. if an employee received any salary in advance
the same is to be excluded for the purposes of valuation.
• The basis for calculation is the location of accommodation and not employment.
• Exemption is not available when employee is staying in his own house.
• Exemption is not available when rent paid is less than 10% of salary.

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10. Illustration
Mr. Daruwala a resident of Ajmer, receives Rs. 48,000 p.m. as basic salary during the PY 24 - 25.
In addition, he gets Rs. 4,800 p.m. as dearness allowance forming part of salary. 7% commission
on sales made by him Rs. 86000 and Rs. 6000 p.m. as a HRA. Rent paid by him Rs. 5,800 per month.
Determine taxable HRA.

Particulars Explanations
2 Hill Compensatory Amount exempt from Rs. 300 per month to Rs. 7,000 per month for
Allowance the specified areas.
3 Border Area Amount exempt from Rs. 200 per month to Rs. 1,300 per month for
Allowance the specified areas.
4 Tribal Area Rs. 200 per month for the tribal areas of Madhya Pradesh, Tamil
Allowance Nadu, Uttar Pradesh, Karnataka, Tripura, Assam, West Bengal, Bihar
and Orissa.
5 Daily Allowance Granted to the employees working in any transport system to meet
his personal expenditure during his duty hours, in the course of
running of such transport from one place to another, provided that
he is not receiving any daily allowance – 70% of such allowance, up to
a maximum of Rs. 10,000 per month, whichever is lower.
6 Children Education Amount of deduction:
Allowance a CEA received or Rs. 100 pm whichever is less Subject to
maximum of two children.
b Deduction is available even if amount is not spent.
c Child includes adopted child, step child.
7 Hostel Allowance Rs. 300per month per child up to a maximum of two children.
Deduction is available even if amount is not spent.

11. Illustration
a) Mr. Shahrukh receives CEA of Rs. 500 per month per child for 3 children. Find out taxable
CEA.
b) Mr. Shahrukh receives CEA of Rs. 500 per month for 3 children. Find out taxable CEA.
c) Mr. Shahrukh receives CEA of Rs. 120, Rs. 100, and Rs. 90 per month per child for 3 children
respectively. Find out taxable CEA.
d) Mr. Shahrukh receives CEA Rs. 90 per month for his daughter. Find out taxable CEA.
e) Mr. Shahrukh Joshi received Rs. 900 per month for 3 children’s towards CEA and HEA

Particulars Explanation

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8 Compensatory Field Rs. 2,600per month for the specified areas.

Area Allowance
9 Compensatory modified Rs. 1,000per month for the specified areas
field area allowance
10 Counter-insurgency Granted to the members of armed forces operating in areas away
Allowance from their permanent locations for a period of more than 30 days
– Rs. 3,900 per month.
11 Transport Allowance Granted to an employee to meet his expenditure for commuting
between his residence and the place of his duty. It is exempt up
to Rs. 1,600 per month & Rs. 3,200 per month for handicapped
employee. (Blind or orthopedically handicapped).
12 Underground Allowance Is granted to an employee who is working in uncongenial,
unnatural climate in underground coal mines. Exemption is Rs.
800 per month.
13 High altitude allowance Is granted to the members of Armed Forces operating in high
altitude areas. The allowance is exempt upto Rs. 1,060 per month
for altitudes of 9,000 to 15,000 feet and Rs. 1,600 for attitudes
above 15,000 feet.
14 Highly active field area Any special allowance granted to the members of armed, forces
Allowance in the nature of special compensatory highly active field area
allowance is exempt upto Rs. 4,200 per month.
Note: Any allowance not covered above shall be fully taxable Example - Telephone/ Mobile/
Laptop/ Computer allowances

12. Illustration
Mr. Banta joined Star Ltd. on 1/4/2024. Details regarding his salary are as follows:
Amount Particulars
Basic 5,000 p.m.
Dearness Allowance 2.000 p.m. (50% considered for retirement benefit)
Education Allowance 1.000 p.m. (he has 1 son and 3 daughters)
Hostel Allowance 2,000 p.m. (none of the children is sent to hostel)
Medical Allowance 1,000 p.m. (total medical expenditure incurred * 3,000)
Transport Allowance 1,800 p.m. (being used for office to residence & vice versa)
Servant Allowance 1,000 p.m.
City compensatory Allowance 2,000 p.m.
Entertainment Allowance 1,000 p.a.
Assistance Allowance 3.000 p.m. (paid to assistant 2,000 p.m.)

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Professional Development 2.000 p.m. (actual expenses for the purpose 2,800 p.m.)
Allowance.
Bonus 24,000 p.a.
Commission 9,000 p.a.
Fees 5,000 p.a.
Compute his gross taxable salary for the assessment year 2025-26. (Assumed not opted for ATR
u/s 115BAC(1A))

MEANING OF PERQUISITES

1. Meaning
Benefits given in cash or Kind.
2. Conditions
Perquisites are taxable under the head ‘Salaries’ only if they are:
a. Allowed by an employer to his employees;
b. Allowed during the continuance of employment.
c. Directly dependent upon service;
d. Resulting in the nature of personal advantage to the employee; &
e. Derived by virtue of employee’s authority.
f. Perquisite is taxable if value is positive.
It is not necessary that a recurring and regular receipt alone is a perquisite. Even a casual
and non-recurring receipt can be perquisite if the aforesaid conditions are satisfied.
3. Specified Employee [Sec. 17 (2) (iii)]
The following categories are treated as specified employees.
1. A director employee in a company.
2. An employee who has substantial interest in the employer company (i.e. holding
beneficial interest in voting power of 20% or more at any time during the previous
year).
3. An employee (not covered above) whose income chargeable under the head ‘Salaries’
(excluding all amenities and benefits), by way of monetary – payments exceeds Rs.
50,000.
For the purpose of calculating monetary payment of Rs. 50,000, the following are to
be excluded/ deducted.
• All non-monetary benefits.
• Monetary benefits which are not taxable under Section 10,
• Deductions under Section 16

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Note: Where salary is received from more than one employer during the relevant previous
year, the aggregate of salaries received from the employers will have to be considered for
determining the status.
4. Non-Specified employee
Any employee other than specified employee is employee as non specifies employee.
5. Members of household includes
• Spouse (whether dependent or not).
• Children and their Spouse (whether dependent or not)
• Parents (whether dependent or not)
• Servants and Dependents.
6. How to find Out value of Perquisite?
Step 1: Find out cost to the Employer
Step 2: (Less) Amount recovered from employee if any.
Step 3: (Less) Amount exempt if any = Value of Taxable Perquisite (if positive)

TAX-FREE PERQUISITES FOR ALL EMPLOYEES [PROVISO TO SEC. 17(2)]

Telephone/ laptop/ Computer provided by an employer to an employee at his residence

Transport Facility Transport facility provided by an employer, being airline or the
railways for the purpose of transport of passengers or goods
to his employees of an either free of charge or at concessional
rate;
Perquisites allowed outside Perquisites allowed outside India by the Government to a
India by the Government citizen of India for rendering services outside India;
Employer’s contribution to Employers contribution to staff group insurance scheme;
staff group insurance
scheme
Annual premium by employer Payment of annual premium by employer on personal accident
on personal accident policy policy effected by him on the life of the employee;
Refreshment Refreshment provided to all employees during working hours in
office premises;
Subsidized lunch Subsidized lunch provided to an employee during working hours
at office or business premises provided the value of such meal
is upto Rs. 50; this exemption is available only if the employee
exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A).
Recreational facilities Recreational facilities, including club facilities, extended to

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employees in general i.e., not restricted to a few select

employees;
Amount spent on training of Amount spent by the employer on training of employees or
employees amount paid for refresher management course including
expenses on boarding or lodging;
Sum payable by employer to Sum payable by an employer to a RPF or an approved
a RPF or an approved superannuation fund or deposit-linked insurance fund
superannuation fund established under the Coal Mines Provident Fund and
miscellaneous provisions act, 1948 or the employees Provident
Fund and Miscellaneous Provisions Act, 1952 upto the limit
prescribed;
Leave travel concession Leave travel concession if the assessee exercises the option of
shifting out of the default tax regime provided under section
115BAC(1A), subject to the conditions specified under section
10 (discussed below)
Note: value of leave travel concession provided to the high court judge or the supreme court
judge and members of his family are completely exempt without any conditions if they exercise
the option of shifting out of the default tax regime provided under section 115BAC(1A).
Medical facilities Employer Hospital Fully exempt
Government hospital Fully exempt
Rent free official residence Rent-free official residence provided to a Judge of a High
Court or the Supreme Court if they exercise the option of
shifting out of the default tax regime provided under section
115BAC(1A);
Conveyance facilities Conveyance facility provided to High Court Judges under
section 22B of the High Court Judges (Conditions of Service)
Act, 1954 and Supreme Court Judges under section 23A of the
Supreme Court Judges (Conditions of Service) Act, 1958 if
they exercise the option of shifting out of the default tax
regime provided under section 115BAC(1A).

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VALUATION OF RENT – FREE ACCOMMODATION PROVIDED BY THE EMPLOYER [SEC. 3(1)

Rent free
Accommodation

Unfurnished Furnished

Government
Employee Other Employee Step1:
(Central / State) Find out value of unfurnished
accommodation

Step 2: Add
a. Purchase by employer 10%
Taken on of original cost or
Value of perquisite = Owned by b. Taken on rent: Rent paid
rent by
Licence fees Payable employer by employer
employer

10%/ 10% of
7.5%/ 5% salary or
of salary rent paid
based on whichever
population is less

a Central and State The value of perquisite is equal to license fee which would have
been determined as payable by the concerned employee.
b Government In accordance with the rules framed by the Government for
employees allotment of houses to its officers.

13. Illustration
Mr. Garib, a Government employee has been provided an accommodation in Madras. Fair rental value
of which is Rs.80,000 and municipal value is Rs.60,000. The licence fee decided by the Government
is Rs.800 p.m. His salary is Rs.3,000 p.m. and sundry allowances are Rs.7,000. Find taxable value of
the perquisite.

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PRIVATE SECTOR EMPLOYEES OR OTHER EMPLOYEES

W.e.f. 01-09-2023, revised rule of valuation shall be applicable. The amended position is
mentioned here-inbelow:
City in which Accommodation is owned by the Accommodation is not
accommodation is provided employer owned by the employer
Having population exceeding 10% of salary for the period during
40 lacs as per 2011 census which the employee occupied the said
accommodation.
Rent paid or payable by
Having population exceeding 7.5% of salary for the period during the employer or 10% of
15 lacs but not exceeding 40 which the employee occupied the said
salary, whichever is
lacs as per 2011 census accommodation.
lower.
Any other city 5% of salary for the period during
which the employee occupied the said
accommodation.

VALUATION OF RENT-FREE FURNISHED ACCOMMODATION

Particulars Rs
Value of unfurnished accommodation as calculated above XXX
Add: Value of furniture -
• If owned by employer, = 10% pa of original cost of furniture XXX
• if hired from third party, = Actual Hire Charges XXX
[If the furniture is provided for a part of the year, valuation will be proportionate]
Value of furnished accommodation XXX
Note:
1 Furniture includes TV sets, radio, refrigerator, other household appliance, AC plant or
equipment
2 Value of furniture is same for government and non-government employees.

ACCOMMODATION OF CONCESSIONAL RATE

Value of Furnished / Unfurnished accommodation as calculated above XXX

Less: Rent for the house / furniture charged by the employer XXX
Value of concessional XXX

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Section 17(2) has been amended so as to provide that the method of computation of perquisite
in respect of rent-free accommodation as well as concession in the matter of rent, shall be
computed in such manner as may be provided by rules. Moreover, it has been clarified that
accommodation shall be deemed to have been provided at a concessional rate if the value of
accommodation computed in such manner (as may be provided by rules) exceeds the rent
recoverable from employees.

VALUATION OF ACCOMMODATION PROVIDED IN HOTEL

The value of perquisite is lower of the following:

• 24% of salary for the period during which accommodation was provided during PY OR
• Actual amount paid to hotel.
If accommodation is provided for less than 15 days & provided to an employee for transfer
from one place to another, perquisite in not chargeable to tax.

Salary for the purpose of valuation includes:

• Basic salary;
• Dearness allowance / pay, if terms of employment so provide;
• Bonus, commission (Fixed + based on T/O), and fees;
• All other taxable allowances (excluding amount not taxable);
• Any monetary payment
Salary shall be taken on due basis & salary received from all employers in respect of
•
the period during which an accommodation is provided will be taken into consideration.
KEY NOTES

For this purpose, salary does not include the following:

Dearness allowance/ pay if it is not taken into account while calculating retirement
i benefits, like provident fund, gratuity, etc., or if it is does not form part of salary
according to terms of employment;
ii Employer’s contributions to provident fund account of an employee;
iii All allowances which are exempt from tax;
iv Value of perquisites [under section 17(2)]*; and
Lump-sum payments received at the time of termination of service or superannuation
v or voluntary retirement, like gratuity, severance pay, leave encashment, voluntary
retrenchment benefits, commutation of pension and similar payments.
General Exemptions:
KEY NOTES

1. Employee working at –
a. Mining sites
b. project execution site
c. Onshore oil exploration site

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d. Dam site
e. Offshore site
f. Power generation site
Situation of the house:
• House should either be located 40 Kms (remote area) away from any town having
population of 20,000 or more, or
• House should be located 8 Kms (rural area) away from local limits of municipality or
cantonment board, provided –
a. The accommodation is of temporary nature, and
b. Plinth area does not exceed 800 square feet
In case of transfer
• Exemption of one house for first 90 days of transfer: Where accommodation is
provided both at existing place & at a new place, the value of only one house, which
2.
has lower value, shall be taxable
• After 90 days: Value of both accommodations shall be taxable, if both of them
are occupied after expiry of 90 days.

14. Illustration
Mr. Rohit Supari has the following salary structure:
Rs.
a) Basic Salary 5000 p.m.
b) DA 3000 p.m. (60% forms a part of retirement benefit)
c) Entertainment Allow. 1000 p.m.
d) Education Allowance 500 p.m. (1 child)
e) Bonus 10000 p.a.
f) Fees 5000 p.a.
g) Professional tax of Employee paid by employer 2000 for the year
h) Fixed commission Rs. 200 per month
i) Commission based on turnover 2% (turnover achieved by employee Rs. 5,00,000)
j) He has been provided a rent-free Accommodation in Mumbai.
Compute taxable value of accommodation in the hands of Mr. Rohit Supari in the following cases:
1. The employer owns such accommodation.
2. The employer owns such accommodation & Furniture provided by employer costing Rs. 45,000.
3. The employer hires such accommodation at a monthly rent of Rs. 900
4. The employer hires such accommodation at a monthly rent of Rs. 900 and furniture taken on
rent by employer Rs. 500 p.m.
5. What will be answer in question 4 if amount recovered from employee is i) Rs 12,000, ii) 18,000

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15. Illustration
Miss Anita as secretary in Sonu Ltd. has earned the following salary during the previous.
Basic salary Rs. 30,000 pm
DA Rs. 5,000 pm (fully forming part)
Bonus Rs. 50,000
Commission Rs. 5,000 pm
Commission on sales turnover @6% of (turnover for the year 40,00,000)
The Co. provides Rent Free Accommodation (owned by the Co.) in Delhi from April to December.
On 1st July she was transferred to branch office in Satara (Population 80,000) where the Co
provided her with a house w.e.f July till the end of the year. Find out the taxable value of rent-
free accommodation

EMPLOYEE OBLIGATION PAID BY EMPLOYER

Where any payment to an employee is met by the employer, it would be taxable in

the hands of that employee irrespective of whether he is a specified employee, or not under
Section 17(2)(iv). Any fees, expenses or otherwise which, if the employer had not incurred, the
employee would have incurred on his own would fall under this clause.
Examples:
a Income tax paid by employer shall be added in income.
b LIP premium paid by employer shall be added in income and deduction u/s. 80C also
available.
c Professional tax paid by Employer shall be added in income and deduction u/s. 16 also
available to government employee.

VALUATION OF SPECIFIED SECURITY OR SWEAT EQUITY SHARES ALLOTTED OR

TRANSFERRED TO THE ASSESSEE

1. Meaning
Sweat equity shares means equity shares issued by a company to its employees or directors
at a discount or for consideration other than cash for providing know-how or
making available rights in the nature of intellectual property rights or value additions, by
whatever name called.
2. Condition
Value of any specified security or sweat equity shares shall be considered as perquisites
in hands of employee if the following conditions are satisfied:
a. Such security or sweat equity shares are allotted or transferred on or after 01-04-
2011.

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b. Such security or sweat equity shares are allotted or transferred by the employer
(former or present) directly or indirectly.
c. Such security or sweat equity shares are allotted or transferred free of cost or at
concessional rate to the assessee.
3. Valuation
Value of such perquisite shall be computed as under:
Particulars Amount
The fair market value for the specified security or sweat equity shares, as ***
the case may be, on the date on which the option is exercised by the assessee
Less: The amount actually paid by, or recovered from the assessee in respect ***
of such security or shares.
Value of perquisite ***
a Option means a right but not an obligation granted to an employee to apply for the
NOTES

specified security or sweat equity shares of a predetermined price.

b Fair market value means the value determined in accordance with the method as may
be prescribed.
4. Tax on perquisite of specified securities and sweat equity shares is required to be
paid in the year of exercising of option. However, where such shares or securities
are allotted by the current employer, being an eligible start-up, the perquisite is
taxable in the year
- After the expiry of 48 months from the end of the relevant assessment year.
- In which sale of such security or share are made by the assessee.
- In which the assessee ceases to be the employee of the employer.
Whichever is earlier. [Refer chapter TDS]

16. Illustration
A company ‘D’ grants option to its employee Chalu on 1st April, 2020 to apply for 100 shares of the
company for making available right in the intellectual property to the employer-company at a pre-
determined price of Rs. 50 per share with date of vesting of the option being 1st April, 2021 and
exercise period being 1st April, 2021 to 31st March, 2025. Employee ‘Chalu’ exercises his option on
31st March, 2025 and shares are allotted transferred to him on 3rd April, 2025.
Fair market values of such share on different dates are as under:
Compute taxable perquisite, if any, in hands of Mr. Chalu for AY 25 - 26.
01-04-2020 01-04-2021 31-03-2025 03-04-2026
Rs. 100 Rs. 180 Rs. 440 Rs. 470

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VALUATION OF MOTOR CAR FACILITY

Car is Car is Used by employee Taxable value

owned by Maintained by for
Office Purpose Not a perquisite
Personal purpose Maintenance + Depreciation (Note 1 &
Employer Employer 2)
Both purpose Rs.1800 or Rs.2400 pm depending upon
capacity of car (Note 3)
Office purpose Not a perquisite
Personal purpose Depreciation
Employer Employee
Both purpose Rs. 600/Rs. 900 pm depending upon
capacity of car [Note 4]
Office purpose Not a perquisite
Personal purpose Maintenance
Both purpose Actual expenditure incurred by the
Employee Employer employer as reduced by Rs. 1800/2400
pm. Depending upon capacity of car or
a higher deduction if prescribed
conditions are satisfied [Note 5]
Any purpose Not applicable
Employee Employee
perquisite

Chauffeur/ Driver Facility

1. Provided with the car facility
If car is used for office purpose. Not taxable
If car is used for personal purposes Driver – Salary is to be added to the value of
perquisite (as computed above).
If car is used for both personal as well as ‘900 p.m. (irrespective of higher or lower
office purposes capacity of car) is to be added as value of
chauffeur perquisites
2. Only driver is provided without car facility
Then driver facility shall be treated as servant facility and shall be fully taxable to the
extent is costs to the employer

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KEY NOTES
1. Maintenance
M = Maintenance cost includes repairs, petrol, driver salary etc.
2. Depreciation
D=Depreciation @ 10% of actual cost of the car. However, if the car is not owned by
employer then actual hire charge incurred by employer shall be considered.
3. Valuation of Car
Rs. 2400 pm in case of higher capacity car [above 1600 CC] and Rs. 1800 pm for lower
capacity car [below 1600 CC].
4. Valuation of Car
Rs. 900 pm in case of higher capacity car and Rs. 600 pm for lower capacity car, Conditions
to be fulfilled for claiming higher deductions.
5. Higher Deduction
The employer has maintained complete details of journey undertaken for official purpose,
which may include date of journey, destination, mileage, and the amount of expenditure
incurred thereon; and the employer gives the certificate to the effect that the
expenditure was incurred wholly and exclusively for the performance of official duties.
6. Used for both Purpose
When car is used for partly private and partly for official purpose then amount recovered
from employee is not allowed a deduction.
7. Part of the Month
The word month denotes completed month. Any part of the month shall be ignored.
8. More than 1 Car
When more than one car is provided to the employees, otherwise than wholly and
exclusively for such car than value of perquisite for.
a. One car shall be taken as used for partly official and partly for personal
b. For other car shall be treated as used for private purpose.
9. Family Member
Member of household includes spouse, children and their spouses parents, servants, &
dependents.
10. Exemptions
• Further reminded, conveyance facility to the judges of High Court or Supreme Court is
not taxable.
• Use of any vehicle provided to an employee for journey from residence to work place or
vice versa shall not be a taxable perquisite.

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17. Illustration
Mr. Salim suleman has been provided a car (1.7 Ltr) by his employer Shaan Ltd. The cost of car to
the employer was Rs. 350000 and maintenance cost incurred by the employer Rs. 30000 p.a.
Chauffeur salary paid by the employer Rs. 3000 p.m. Find taxable value of perquisite for Salim
suleman for the P Y 2024 - 25, if the car is used for:
a) Office purpose
b) Personal purpose
c) Both purpose in case (b) and (c) employee is being charged Rs. 15000 p.a. for such facility.

18. Illustration
Mr. Honey Singh has been provided a car (1.5 Ltr) on 15/7/24. The cost of car to the employer
was Rs. 600000 and maintenance cost incurred by employer Rs. 20000 p.a. Chauffeur salary paid
by employer (Mr. Himesh) Rs. 40000. The car is 40% used for office and 60% for personal purpose.
Charges paid by employee for such facility Rs. 5000 p.a. Find taxable value of perquisite.

19. Illustration
Mr. Yo Yo Sathe has been provided a car (1.5 Ltr) on 1/1/24. The cost of car to the employer was
Rs. 600000 and maintenance cost incurred by Mr. Yo Yo Rs. 20000 p.a. Chauffeur salary paid by
Mr. Yo Yo Rs. 40000.
Find value of perquisite if car is used for a) personal purpose b) both purpose.

20. Illustration
Mr. Sanjay Dutt being a Government employee has a car (1.4 Ltr.) used for office as well as for
personal purpose. During the year, he incurred Rs. 40000 on maintenance and Rs. 20000 on driver’s
salary. The entire cost is reimbursed by employer. Find taxable perquisite.

21. Illustration
Wasim Akram has a car (1.5 Ltr) used for office as well as for personal purpose. During the year
car is used 80% for business purpose being certified by the employer. During the year, he incurred
Rs. 50000 on maintenance and running of such car. The entire cost is reimbursed by the employer.
Find taxable perquisite if assessee wish to claim higher deduction, when:
a) A proper log book is maintained;
b) A proper log book is not maintained.

22. Illustration
Sonu Sood is provided with two cars, to be used official and personal work, by his employer Pappu
Singh. The following information is available from the employer records for computing taxable
value of perk (assuming car 1, is exclusively used by Sonu Sood).
Particulars Car 1 Car 2
Cost of the car 600000 400000

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Running and maintenance (borne by the company) 40800 28,000

Salary of Driver (borne by the company) 24000 24000

VALUATION OF PERQUISITE IN RESPECT OF VEHICLE OTHER THAN MOTOR CAR

Owned Maintained Used Taxable value of perquisites Who Is

by by for chargeable
Office Nil Not
purpose Application
Personal Actual Maintenance + Depreciation @
Employer
purpose 10% of original cost Specified
Both Reasonable proportion of (Maintenance + employee
purpose Depreciation @ 10% of original cost)
Office Nil Not
purpose applicable
Personal Actual maintenance
purpose
Employee Employer Both Actual expenditure incurred by the All employee
purpose employer as reduced by Rs. 900 p.m. or as
reduced by higher sum if prescribed
conditions (as discussed in case of car
facility) are satisfied

FREE DOMESTIC SERVANTS [RULE 3(3)]

If the employee is getting affixed servant allowance, it is fully taxable irrespective of whether
the employee is incurring any expenditure on servants or not.
If an employee has been-provided arent free accommodation (owned by the employer), then the
expenses incurred on maintenance of garden and ground attached to the house including salary
paid to the gardener is not taxable separately.
Servant Appointed by Value of Perquisite Taxable in the hands of
Employer Cost to the employer Specified employee
Employee Cost to the employer All employee

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GAS/ WATER/ ELECTRICITY/ FACILITY

Case Own Source Outside Agency Taxable in the hands of

Facility in the Name of Manufacturing Prices paid to such
All Employees
Employee cost to the agency
Facility in the Name of employer
Specified employees
Employer
KEY NOTES
Where the employee is paying any amount for such facility, the amount so paid by employee
shall be reduced from the value determined above.

FREE OR CONCESSIONAL EDUCATIONAL FACILITIES [RULE 3(5)]

EDUCATION FACILITY

Provided to children of Provided to other

Provided to employee
employee relative of employee

NOT TAXABLE FULLY TAXABLE

Provided by virtue of
Provided in an
employment in an Provided otherwise e.g.
institution owned by
institution not owned by by way of reimbursement
employer
employer

Cost of such education in a similar Cost of such education in a

institution is taxable subject to an similar institution shall be
exemption of Rs. 1000 per month per child taxable (-) amount recovered
less amount recover from employee if any from employee if any

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Taxable value of perquisite is as follows

Case Taxable Value
Free education or training provided to Not taxable
employee
• Where the educational institution is Facility Taxable Value of Perquisite
itself maintained and owned by the provided to
employer; or
• Where free educational facilities Child of the The cost of such education in a
for such member of employee’s Assessee similar institution in or near the
household are allowed in any other locality, less, Rs. 1000 p.m. per child
educational institution by reason of Other family The cost of such education in a
his being in employment of that members similar institution in or near the
employer locality.
• Otherwise Amount of expenditure incurred by the employer in
that behalf
Reimbursement of education Actual reimbursement shall be fully taxable.
expenditure to employee.

Case Taxability in the hands of

In case of reimbursement of School fee of family member of All employee
the employee paid by the employer directly to school.
Other case Specified employee

Key Notes
a Concessional education facility: any amount charged from the employee for such facility
shall be reduced from the taxable value perquisite.
b Child includes adopted child, stepchild of the assessee, but does not include grandchild or
illegitimate child.
c Scholarship: Scholarship to children of employee on basis of their performance shall not
be taxable
d “Member of Household” shall include –
• Spouse, whether dependent or not,
• Children and their spouses, whether dependent or not;
• Parents, whether dependent or not;
• Servants and dependants.

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23. Illustration
Mr. Maharaja Pratap Singh is employed in Edu care Ltd. All family members are dependent on Mr.
Maharaja Pratap Singh. He has been provided education facility from the employer as under:
Person getting education Facility in an institution Actual / Notional Cost
/ training
Mr. Maharaja Pratap Singh Owned by employer 2,000 p.m.
Mrs. Maharaja Pratap Not owned by employer 3,000 p.m. (employee has been
Singh charged for the same Rs.10,000)
Sister in law Owned by employer 800 p.m.
1st Child Owned by employer 700 p.m.
2nd Child Owned by employer 700 p.m.
3rd Child Owned by employer 1,900 p.m.
4th Child Not owned by employer 500 p.m. (Bill reimbursed by
employer)
Grand Child Owned by employer 700 p.m.
Servant Owned by employer 1,200 p.m.
Compute taxable value of perquisite if basic salary of the assessee is Rs. 20, 000 p.m.

FREE TRANSPORT FACILITY [RULE 3(6)]

The facility provided by employer is taxable in the hands of employee on the following
basis:
Case Treatment
If employer is engaged in Amount charged from public for such facility is taxable in the hands
transportation business. of specified employee.
In any other case. Actual cost of employer for such facility is taxable in the hands of
all employees.

In case above facility is provided to employee of Railways & Airlines, nothing shall be
a
chargeable to tax.
KEY NOTES

Any amount charged from the employee for such facility shall be reduced from the
b
above value.
Conveyance facility provided to the employee for journey between office and
c
residence is not taxable.

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INTEREST-FREE LOAN OR LOAN AT CONCESSIONAL RATE OF INTEREST [RULE 3(7)(i)]

Valuation of perquisite in respect of interest fee loan

1. Meaning
If employer gives loan to employee free of interest or at concessional interest, then it will
be taxable perquisite
Notes
• Loan is not a perquisite but interest on such loan shall be treated as taxable perquisite.
• Loan may be given to employee or to any member of his family.
2. Procedural Notes
Interest is calculated on balance of loan as on the last day of each month.
3. Exempted perquisite
Loan up to Rs. 20,000 (aggregate) is exempted perquisite.
If amount of loan exceeds Rs. 20000, interest shall be calculated on total loan amount and
not on the excess amount.
Example: From the following information calculate the amount of loan for the purpose of
taxable interest:
A single loan Rs. 15,000 Nothing shall be taxable
A single loan Rs. 25,000 Rs. 25,000
Two loans Rs. 10,000 and Rs. 8,000 Nothing shall be taxable as loan amount upto Rs.
20,000 in aggregate it exempted.
Two loans Rs. 10,000 and Rs. 11,000 Rs. 21,000 (since the loan amount in aggregate
exceeds Rs. 20,000 hence, the entire loan
amount shall be considered).

Value of Perquisite
(Rate of Interest as per SBI as on 1st April 23 – Rate of interest paid to employer) X O/S loan
at the end of every month X 1/12

24. Illustration
Determine the taxable value of perquisite in the following cases:
a Miss Rani has been granted a housing loan for 4 years of Rs. 100000 interest free as on
1/4/24. (Assume SBI rate 8.6%)
b Miss Pani has been granted a loan for computer Rs. 50000 on 1/7/24 @ 5% interest.
(Assume SBI rate 12%)
c Mr. Mani has been granted a car loan for 5 year of Rs. 200000 @ 7% as on 1/4/24. (Assume
SBI rate 9.25%)

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d Mr. Sharad Pawar has been granted an interest free loan for 3 years for higher study of
Rs. 10000 on 31/7/2024
e Miss Sonam Kapoor has been granted a loan for furniture Rs. 200000 as on 1/7/24 @ 7%.
She has been granted another loan of Rs. 400000 for jewellery @ 5% as on 1/10/24.
(Assume SBI rate 12%)
f Miss Sandhya has been granted a housing loan for 18 years of Rs. 100000 as on 1/7/24.
On 31/12/24, she has been further granted a loan of Rs. 34000 @ 6% for miscellaneous
purpose. (Assume SBI rate 8.6 & 12%)
g Miss Shruti Seth has been granted an interest free loan of Rs. 100000 as on 1/3/25 for
personal purpose with a condition that she must repay the loan in 10 equal monthly
instalments commencing from end of the March 2025. As on 31/3/2025, she paid first
instalment. (Assume SBI rate 12%)
h Mr Alex granted personal loan of Rs 5,00,000 as on 1/4/24 at 6% interest. Loan payable
20,000 per month plus interest. (SBI rate assume 10%)

TRAVELLING/ TOURING/ HOLIDAY HOME EXPENDITURE ON HOLIDAY [RULE 3(7)(ii)]

Valuation of perquisite in respect of travelling, touring, holiday home or any other expenses paid
for or borne or reimbursed by the employer for any holiday availed of by the employee or any
member of his household is taxable in the hands of all employees as per the following table.

Case Taxable value of perquisite

Where such facility is maintained by Notional cost of such facility. In other words, value
employer and is not available uniformly to at which such facilities are offered by other
all employee agencies to the public.
Where the employee is on official tour The amount of expenditure so incurred for the
and the expenses are incurred in respect member of household
of any member of his household
accompanying him.
Where any official tour is extended as a The value will be limited to the expenses incurred in
vacation. relation to such extended period of stay or vacation.
In any other case. Amount incurred by the employer

Any amount charged from employee shall be reduced from the above determined
KEY NOTES

a
value.
The above provisions are not applicable in case of Leave Travel Concession (discussed
b
earlier)

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FREE LUNCH, REFRESHMENT ETC. PROVIDED BY THE EMPLOYER [RULE 3(7)(iii)]

The facility provided by employer is taxable in the hands of employee on the following
basis:
Case Tax Treatment
Tea, snacks or other non-alcoholic beverages in Nil
the form of light refreshment provided during
office hours (including over-time)
Free meals provided during office hours in: Nil
• Remote area; or
• An offshore installation
Free meals provided by the employer during Expenditure on free meals in excess of Rs. 50
office hours: per meal shall be taxable perquisite to the
• At office or business premises; or extent of excess amount.
• Through paid vouchers which are not
transferable and usable only at eating joints
all employees.
In any other case Actual Expenditure incurred by employer –
amount charged to employee
Remote area means an area located at least 40 km. away from town where population not
exceeding 20,000 based on last published census.

GIFT/ VOUCHER/ TOKEN

The value of any gift, voucher or token given to employee or any member of his family shall be
taxable. However it is exempt up to Rs. 5,000
• Any gift in excess of Rs. 5,000 is taxable.
• Gift in cash is always taxable even if it is below Rs. 5,000.

25. Illustration
Determine taxable perquisite in the following cases:
1. Miss Shradha kapoor received a wrist-watch of Rs. 3000 on 17/7/2024 and a golden chain
worth Rs. 12000 on 18/8/24 from her employer, Mr. Shakti Kapoor.
2. Miss Rakhi Gulzar received Rs. 11000 cash-gift from her employer. Gulzar Ltd.
3. Mr. Aniruddh is working with X & Co. a partnership firm. During the year, the employer firm
gifted a diamond ring worth Rs. 80000 to wife of Mr. Aniruddh.

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CREDIT CARD

Expenditure incurred by an employer in respect of credit card facility to employee shall

be treated as under
Case Tax Treatment
Where such credit card is used wholly and exclusively for office Nil
purpose and specified conditions# are satisfied.
Used for Personal Purpose and payment made by employer Fully taxable to all
employee

Specified conditions to be fulfilled to claim that expenses have been incurred wholly and
exclusively for office purpose:
a Complete details in respect of such expenditure are maintained by the employer which may,
inter-alia, include the date of expenditure and the nature of expenditure; and
b The employer gives a certificate for such expenditure to the effect that the same was
incurred wholly and exclusively for the performance of official duty.

CLUB EXPENDITURE [RULE 3(7) (vi)]

Expenditure incurred by employer in respect of club facility to employee shall be treated

as under:
Case Tax Treatment
Where such expenses are incurred wholly and Nil
exclusively for office purpose and specified
conditions are satisfied.
Where health club, sports and similar Nil
facilities are provided uniformly to all
employees by the employer.
Where the employer has obtained corporate • Amount incurred by employer for such
membership of the club and the facility is facility shall be taxable perquisite in the
enjoyed by the employee or any member of his hands of all employees.
household. • However, initial fees paid for obtaining
corporate membership shall not be a
taxable perquisite.
Any payment or reimbursement by the If directly paid by the employer
employer of any expenditure incurred
(including the amount of annual or periodical

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fee) in a club by employee or any member of Any amount incurred by the employer as
his household. reduced by amount charged from the employee
shall be taxable in the hands of all employees
If amount reimbursed by the employer Any
amount reimbursed by the employer shall be
taxable in the hands of all employees.
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and
exclusively for office purpose.
a Complete details in respect of such expenditure is maintained by the employer which may,
inter alia, include the date of expenditure, the nature of expenditure and its business
expenditure;
b The employer gives a certificate for such expenditure to the effect that the same was
incurred wholly and exclusively for the performance of official duty.

USE OF MOVEABLE ASSETS OF THE EMPLOYER [RULE 3(7) (vii)]

If employee (or any member of his household) uses any movable asset (other than the assets
for which provisions have been made) belonging to employer, then such facility is taxable in the
hands of all employees. The value of such benefit is determined as per the following table.
If the asset owned by the employer 10% of the original cost of such asset.
If the asset is hired by the employer Charges paid or payable by the employer.
Notes:
a Any sum charged from the employee shall be reduced from the value determined as
above.
b Use of computer, laptop, etc. (as discussed earlier) is, exempted perquisites.
c Here movable asset does not include car.

26. Illustration
Mr. A. Khan has given music system to Priyanka Chopra on 01-01-25.
Find the value of perquisite.
a) System owned by employer. [cost 20,000]
b) System taken on rent Rs. 500 per month

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TRANSFER OR SALE OF ANY MOVEABLE ASSET TO AN EMPLOYEE [RULE 3(7)(viii)]

Particulars Electronics/ Motor Car Any other asset

Computers
a) Find out cost to Actual cost to Actual cost to Actual cost to
employer employer employer employer
b) Less normal wear & 50% for each 20% for each 10% for each
tear for completed completed year by completed year by completed year of
years of use by reducing balance reducing balance actual cost. [SLM]
employer
method. method
c) Less: Amount Amount recovered Amount recovered Amount recovered
recovered from from employee from employee from employee
employee
Taxable value of (A) – (B) – (C) if (A) – (B) – (C) if (A) - (B) – (C) if
d) perquisite (A) – (B) - Positive positive positive
(C) if Positive.
• Here electronic products does not include household appliances.
• No depreciation shall be charged for a part of the year.

27. Illustration
Sail Ltd. has sold the following assets to its employee Mr. Tarzan Compute taxable perquisite for
PY 24-25.
Assets Date of Purchase Value Date of sale Sale Price
purchase
Computer 1/7/21 200000 18/8/2024 20000
Car 1/4/22 300000 1/3/2025 50000
Television 1/4/19 50000 1/4/2024 2000
Sofa Set 1/4/09 80000 1/7/2024 5000

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MEDICAL FACILITIES SEC. 17 (2)

MEDICAL FACILITY

Medical Allowance In India Outside India

Fully Taxable Employer Govt. Hospital

Hospital Exempt Exempt

Health
Insurance paid Private Hospital
by employer

Exempt Fully taxable

Medical Cost of stay Cost of Travel

Treatment (Employee + (Employee +
Employee one attendant) one attendant)

Fully exempt if Gross

Exempt to the extent total income before
permitted by RBI travelling below
Rs.2,00,000

a) Medical facility provided in India:

Case Treatment
1 Medical facility provided to the employee or his family in a hospital, clinic, Fully
dispensary or nursing home maintained by the employer. Exempted
2 Reimbursement of medical bill of the employee or his family of
• Any hospital maintained by Government or Local Authority or Fully
• Any hospital approved by the Government for its employee exempted

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3 Payment / reimbursement by employer of medical expenses incurred by an

employee on himself/his family in a hospital, which is approved by the CCIT,
for the prescribed diseases (like Cancer, TB, AIDS, etc.) Employee must
attach with the return of Income: Fully
• A certificate from the approved hospital specifying the prescribed exempted
disease or ailment for which hospitalization was required, and
• A receipt for the amount paid to the hospital.

4 Group medical insurance (i.e. Mediclaim) obtained by the employer for his Fully
employees Exempted
5 Any reimbursement by employer of any insurance premium paid by the Fully
employee, for insurance of his health or the health of any member of his Exempted
family.
6 Reimbursement of any medical bill whether for employee or for his family Fully
member. taxable

b) Medical facility provided outside India:

Case Treatment
Medical Expenditure Exempted to the extent permitted by RBI
Case of stay abroad (Patient + Exempted to the extent permitted by RBI
One Attendant / Care taker)
Case of travel (Patient + One Exempted only when gross total income of the employee
Attendant / Care taker) excluding this (cost of travel) perquisite does not exceed Rs.
200000 p.a.
Tax Point: In calculation of gross total income ceiling,
taxable value of medical treatment perquisite and cost of
stay perquisite shall be included.
a Hospital includes a dispensary, a clinic or a nursing home/
KEY NOTES

b For this purpose family means:

Spouse, children of the individual and Parents, brothers, sisters of the individual,
c
wholly or mainly dependent on him.

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COVID MEDICAL TREATMENT EXPENDITURE BY EMPLOYER [SEC. 17(2)]

Section 17(2) has been amended [with effect from the assessment year 2021 - 22] to provide
that any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment [or treatment of any member of his family] in respect of
any illness relating to COVID 19 shall not be treated as perquisite and, consequently, not
chargeable to tax. However, the exemption would be available subject to conditions notified by
the Central Government.

Following is not treated as Perquisites:

Reimbursement of expenditure actually incurred on medical treatment:
1 In respect of any illness relating to COVID-19 subject to conditions notified by the Central
Government.
2 Accordingly, the Central Government has, vide Notification no. 90/2023 dated 5.8.2023,
specified the following conditions –
3 The employee has to submit the following documents to the employer, –
a The COVID-19 positive report of the employee or family member, or medical report
if clinically determined to be COVID-19 positive through investigations, in a hospital
or an in-patient facility by a treating physician of a person so admitted;
b All necessary documents of medical diagnosis or treatment of the employee or his
family member for COVID-19 or illness related to COVID19 suffered within 6 months
from the date of being determined as COVID-19 positive; and
c A certification in respect of all expenditure incurred on the treatment of COVID-19
or illness related to COVID-19 of the employee or of any member of his family.

28. Illustration
Kick Ltd. Reimburses the following expenditure on medical treatment of the son of an employee
Salman. The treatment was done at UK.
1. Travelling expenses Rs. 11400.
2. Stay expenses of UK permitted by RBI Rs. 45000 (Actual expenses Rs. 70000)
3. Medical expenses Permitted by RBI Rs. 50000 (Actual expenses Rs. 70000). Compute the
taxable perquisites for the AY 2025 - 26 in the hands of Salman, if his annual income from
salary before considering medical facility perquisite was (i) Rs. 140000, (ii) Rs. 200000.

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29. Illustration
Compute the taxable value of the perquisite in respect of medical facilities recived by Mr.
Dhokebaaz from his employer during the P.Y. 2024 - 25:
Medical premium paid for insuring health of Mr. Dhokebaaz Rs. 7,000
Treatment of Mr. Dhokebaaz by his Family Dr. Rs. 5,000
Treatment of Mrs. Dhokebaaz in a Govt Hospital Rs. 25,000
Treatment of Mr. Dhokebaaz’s grandfather in private clinic Rs. 12,000
Treatment Mr. Dhokebaaz’s Mother (68 year & dependent) by family Dr. Rs. 8,000
Treatment of Mr. Dhokebaaz’s Sister (dependent) in a nursing home Rs. 3,000
Treatment of Mr. Dhokebaaz’s brother (independent) Rs. 6,000
Treatment of Mr. Dhokebaaz’s father (75 year & dependent) abroad and Rs. 50,000
Expenses of staying abroad of the patient Rs. 30,000

Limits specified by RBI Rs. 75,000

LEAVE TRAVEL CONCESSION [SEC. 10(5)]

If an employee goes on travel (on leave) with his family and travelling cost is reimbursed
by the employer, then such reimbursement is fully exempted.
Notes:
1. Journey may be performed during service or after retirement.
2. Employer may be present or former.
3. Journey must be performed to any place within India.
4. In case, journey was performed to various places together then exemption is limited to the
extent of cost of journey from the place of origin to the farthest point reached, by the
shortest route.
5. Employee may or may not be a citizen of India.
6. Stay cost is not exempt.
Exemption:
Exemption is limited to the amount actually incurred on the travel to the extent as under:

Journey performed Maximum exempted fare

By Air Air economic class fare of shortest route
By Rail Air-Conditioned 1st class fare of shortest
route.
When the place of origin and destination is Same as above.
connected by rail but journey is performed by
any other mode of transport

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When the place of origin and destination is not connected by rail

Where a recognized public transport system First class or deluxe class fare, as the case may
exists be, on such transport.
Where no recognized public transport system Amount equivalent to air-conditioned 1st class
exists. rail fare, for the distance of the journey by the
shortest route, as if journey had been
performed by rail

No exemption can be claimed without performing journey and incurring expenses

A
thereon.
Block-Period: Exemption is available in respect of 2 journeys performed in a block
B
of 4 calendar years commencing from 1st January, 1986.
Carry-forward facility: Where concession is not availed during the preceding block
(whether on one occasion or both), then any one journeys performed in the first
C
calendar year of the immediately succeeding block will be additionally exempted (i.e.
not counted in two journey limit)
KEY NOTES

Family: Family here means:

• Spouse and children of the individual; and
D
• Parents, brothers and sisters of the individual, who are wholly or mainly dependent
on him.
Restriction on number of children: Exemption can be claimed for any number of
children born on or before 30/9/98. In addition, exemption is available only for
E 2 surviving children born on or after 1/10/98.
However, children born out of multiple birth, after the first child, will be treated as
one child only.
Fixed Leave travel allowance: Fixed amount paid to employees by way of leave travel
F
allowance shall not be exempt

30. Illustration
Mr. Red bull made a leave journey (reimbursed by his employer) as under:
Journey Stay cost Travel cost
From Howrah to Darjeeling 5,000 1,000
From Darjeeling to Gangtok 3,000 500
From Gangtok to Mumbai 10,000 6,000
The fare from Howrah to Mumbai is Rs. 6,200. Find the taxable perquisite in hands of Mr. Red bull
for the A.Y. 2025 – 26, assuming this was the 1st Journey in the relevant block.

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31. Illustration
Mr. Rajnikant went to Shrinagar on a holiday on 15/11/2024 with wife and two children (one Son –
age 6 years, twin daughters – age 3 years). They went by aeroplane (economy class) and the total
cost of tickets by his employer was Rs. 58,000. (Rs. 43,000 for adults and Rs. 15,000 for three
minor children). Compute the amount of Leave Travel Concession exempt. Will the answer be any
different if among his three children, the twins are 6 years old and son 3 years old?

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RETIREMENT BENEFITS

GRATUITY [SEC. 10(10)

GRATUITY

Received during the At the time of retirement Death cum

continuation of retirement
Employment gratuity

Government Employee Non-

Fully Taxable to all (Central / State / Local / Government
employee Authority Sec 10(10)(i) Employee

Fully Exempt

Covered by Payment of Not covered by payment of

Gratuity Act 1972 (Sec Gratuity Act (Sec
(10(10)(ii)) 10(10)(iii))

Fully or Partly exempt Fully or Partly Exempt

subject to condition subject to condition

Sr. Cases Tax Treatment

1 Gratuity received during Fully taxable for all employee [Govt. + Non Govt.]
continuation of service
2 Received at the time of The Gratuity received by employees of Central or State
termination of service by Government or Local Authority is fully exempt [Sec.
government employees 10(10)(i)]
2A Received at the time of In case of employees covered by Payment of Gratuity Act,
termination of service by 1972, the amount of exemption is the least of the
non-government employees. following
[Covered by payment of a. Gratuity actually received;
Gratuity Act 1972]
b. Amount specified Rs. 20,00,000

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c. 15/26 X Monthly salary at the time of retirement X

Period of service.

1 How to calculate length of service?

If the period of service is less than 6 months, shall be ignored for this purpose.
If it exceeds 6 months it shall be taken as full year.
Period of service Period to be considered
15 yrs & 4 months 15
15 yrs & 6 months 15
KEY NOTES

15 yrs & 7 months 16

2 Here salary = Basic salary + D.A.
3 In case of seasonal employment period of 15 days shall be replaced by 7 days.
4 Period of service under previous employer: As per case ruling CIT vs P.M. Mehra
(1993) (Bom.), while computing completed year of service, period of service under
previous employer shall be included in total service period for claiming exemption
u/s 10(10) provided the employee has not received gratuity from the previous
employer.

32. Illustration
Dara Singh an employee of Tara Singh Ltd. receives Rs. 78000 as gratuity. He is covered by
payment of gratuity act, 1972. He retires on December 12, 2024 after rendering service of 38
years and 8 months. At the time of retirement his monthly basic salary was Rs. 2400 and DA Rs.
800. Find the amount of gratuity exempt.

Sr. Cases Tax Treatment

2B Received at the time of In case of other employees, the amount of exemption is
termination of service by the least of the following:
non-government employees a Gratuity actually received;
[Not covered by Gratuity
b Amount specified Rs. 20,00,000
Act]
c ½ X avg. monthly salary X period of service.

1 Here salary = Basic salary + D.A. (if applicable) + commission based on fixed % of
turnover.
KEY NOTES

2 Avg. monthly salary is calculated on the basis of avg. salary for the ten months
immediately preceding the month in which the employee has retired. For instance if
employee retires on 15th may, avg. salary will be calculated till 30 April.
3 Fractions are to be ignored.
Period of service Period to be considered

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15 yrs & 4 months 15

15 yrs & 6 months 15
15 yrs & 7 months 15

33. Illustration
Nana Patekar, who is not covered by payment of gratuity act, retires on November 20, 2024 from
Mote Ltd. and receives Rs. 186000 as gratuity after service of 38 years and 10 months. His salary
is Rs. 8000 per month up to July 31, 2024 and Rs. 9000 per month from August 1, 2024. Besides
he gets Rs. 500 per month as dearness allowance (69% of which is part of retirement benefit)
what amount of gratuity will be exempt from tax?

3 Gratuity Received If gratuity becomes due before the death of the assessee (no
After Death of matter when and by whom received) it shall be taxable in the hands
Employee of employee. Whereas if gratuity becomes due after the death of
assessee, it shall not be taxable to assessee as well as legal heir.
4. Gratuity received While claiming the statutory deduction of Rs. 20,00,000 any
from more than one amount earlier claimed as deduction shall be reduced from Rs.
employer 20,00,000. (for any other employee only)

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LEAVE SALARY [SECTION 10(10AA)]

Encashment of leave by surrendering leave standing to the credit of employee is known as

leave encashment.

Leave Salary

Received during period of service Received at the time of retirement

Always Taxable Non -Government employee Government employee

Fully or partly exempt u/s

10(10AA) ii Fully exempt
Least of the following is u/s 10(10AA) i
exempt.

1) Period of earned leave (in Months) X Average monthly

salary.
2) 10 X Average Monthly salary
3) Rs.3,00,000
4) Leave Encashment actually received

Tax Treatment
Case Situation Tax Treatment
A Leave encashment received during Fully taxable for all employee
the continuity of employment
B Received at the time of termination Fully Exempt
of service by government employees
[Central + State]
C Other employees. In case of the non- Leave salary is exempt to the extent of least
Government employees (including local of the following:
authority or public sector employees) a. Rs. 25,00,000
b. Leave encashment actually received.
c. 10 x average monthly salary
d. Period of leave (in months) to the credit
of the employee at the time of his
retirement or leaving the job X average
monthly salary.

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D Received by Legal heirs Not taxable in the hands of legal heir

Here salary means a) basic salary, b) dearness allowance if the terms of employment
A so provide and c) commission based upon fixed percentage of turnover achieved by
the employee.
Average salary should be taken for 10 months immediately preceding the date
KEY NOTES

B
of retirement.
How to find out period of leave earned:
Step 1 Find out duration of service without any fraction.
C Step 1 X leaves allowed by employer or 30 days whichever is less minus
Step 2
leaves taken plus leaves encashed
Step 3 Leaves Unavailed = Step 3 / 30 days

34. Illustration
Compute period of leaves unavailed with the help of following information.
Particulars Case 1 Case 2 Case 3
Period of service 14 yrs 14 yrs & 5 months 14 yrs & 8 month
Leaves allowed by employer per year 20 days 30 days 40 days
Leaves taken 20 days 120 days
Leaves encashed 20 days 110 days

35. Illustration
Mr. Chota Tappu is working in Nota Ltd. Since last 25 years and 11 months. Company allows him 2
months leave for every completed year of service to its employees. During the Job He had availed
20 months leave. At the time of retirement on 10/08/2024 he got Rs. 1,60,000 as leave
encashment. As on that date his basic salary was Rs. 5,000, D.A. was Rs. 2,000 per month and
commission was 5% on turnover + Rs. 2,000 per Month (fixed). Turnover effected by the assessee
during last 12 months Rs. 5,00,000, Mr. Chota Tappu got increment of Rs. 1,000 p.m. from 01/01/24
in basic and Rs. 500 p.m. in D.A. Compute his leave encashment salary.

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PENSION

Meaning
Pension is a periodical payment in consideration of past services of the retired employees. The
pension is payable for the remaining life of the employee. In case of family pension, it is even
paid to the surviving spouse of the deceased employee. Employee can get pension in following
two forms.
Commuted pension It is a lump sum payment in lieu of periodical payment.
Uncommuted pension It is a monthly pension.

PENSION

Commuted Pension Un - commuted Pension

(Lump sum Pension) (Monthly pension)

Government Non -
Fully Taxable to All
Employee Government
Employee
(exempt) Employee

If Gratuity Received
If Gratuity not received then 1/2
then 1/3 of Total
of Total pension is exempt
pension is exempt

Tax Treatment
PENSION GOVT. EMPLOYEE NON GOVT. EMPLOYEE
(Central / State / Local
authority / statutory
corporation)
Uncommuted Fully taxable Fully taxable
Commuted Fully exempt u/s 10(10A)(i) a If gratuity received then 1/3 of total
pension is exempt from tax 10(10A) (ii)
b If gratuity is not received then ½ of
total pension is exempt from tax 10(10A)
(ii)

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Taxability of Uncommuted Pension

Nature of Employee Taxability
A. Uncommuted Pension received by:
a. Employee of UNO Fully Exempt
b. Central Government Employees (Defence Personnel) Fully Exempt under section 10(18)
who have been awarded Gallantry Awards
c. Government and Non-Government Employee Fully Taxable
d. Central Government Employee who joined Fully Taxable
employment on or after 1.1.2004 and received
Pension from the Pension Fund
B. Uncommuted Family Pension received by:
a. Family Members of Central Government Employee Fully Exempt under section 10(18)
who had received Gallantry Awards
b. Family Members of Armed Forces Fully exempt under section 10(18)
and 10(19)
c. Family Members of other Employees Taxable under the head Income
from Other Sources, subject to
deduction under section 57.

36. Illustration
Mr. Kamal Hassan retired on 1/10/2024 receiving Rs.10,000 p.m. as Pension. On 1/2/2025, he
commuted 50% of his pension and received Rs.6,00,000 as Commuted Pension. Compute Taxable
Pension assuming – (a) He is a Government Employee, (b) He is Non-Government Employee, receiving
Gratuity of Rs. 6,00,000 at the time of retirement, (c) He is a Non-Government Employee and is
not in receipt of Gratuity.
KEY NOTE

𝐀𝐦𝐨𝐮𝐧𝐭 𝐑𝐞𝐜𝐞𝐢𝐯𝐞𝐝 𝐨𝐧 𝐂𝐨𝐦𝐦𝐮𝐭𝐚𝐭𝐢𝐨𝐧 𝟔,𝟎𝟎,𝟎𝟎𝟎

Full Value of Pension= = = Rs.12,00,000
𝐑𝐚𝐭𝐢𝐨 𝐨𝐫 𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐨𝐟 𝐂𝐨𝐦𝐦𝐮𝐭𝐚𝐭𝐢𝐨𝐧 𝟓𝟎%

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NATIONAL PENSION SCHEME (NPS)

Employer Contribution to National Pension Scheme:

It is fully taxable as perquisites to the extent of deduction allowed to employer [Refer PGBP
for more discussion]
However, while computing total income of the employee-assessee, a deduction under section
80CCD is allowed to the assessee in respect of the employer’s as well as employee’s contribution
under a pension scheme referred therein. [Deduction under section 80CCD will be discussed in
detail in Chapter - “Deductions from Gross Total Income”]

APPROVED SUPERANNUATION FUND

Tax treatment of contribution to any payment from the fund is as under:

a The employer’s contribution: It is exempt from tax. However, contribution exceeding
Rs. 1.5 lakh will be taxable as perquisite
b The employee’s contribution: It qualifies for deduction u/s 80C.
c Interest on accumulated balance: It is exempt from tax
d Payment from the tax: Section 10(13) grants exemption in respect of payment from the
fund:

PROVIDENT FUND

Provident fund is a retirement benefit scheme. Under the provident fund scheme, a stipulated
amount is deducted from the salary of an employee as his contribution towards the fund. The
employer also puts his own contribution. This money is invested in the gilt-edged securities;
interest earned is also credited to the fund account. The accumulated balance is paid to the
employee at the time of his retirement.

TYPES OF PROVIDENT FUNDS

a Statutory Provident Fund: This fund is maintained by Government and semi-government

organizations, local authorities, railways, universities and recognized educational
institutions.
b Recognized Provided Fund: A provident fund scheme to which the Employee’s Provident
Fund and Miscellaneous Provisions Act, 1952 apply is called as a Recognised Provident Fund.
Any establishment employing 20 or more employees is covered by the Act.

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c Unrecognized Provident Fund: In case, if the scheme mentioned above is not approved by
the Commissioner of Income Tax, the same is called as Unrecognised.

Tax Treatment:
S Particulars Statutory Recognised Unrecognised Public
N Provident Fund Provident Fund Provident Fund Provident Fund
1 Employer’s Exempt from Exempt upto Exempt from tax Employer does
contribution tax 12% of salary. not contribute.
to provident Excess
fund contribution
over 12% of
salary is
taxable.
2 Deduction Available Available Not Available Available
U/s. 80 on
employee’s
contribution
3 Interest Exempt from Exempted @ Exempt from tax Exempt from
credited on tax 9.5% tax
Provident
Fund
4 Lump-sum Exempt from Amount Particulars Tax Exempt from
payment at tax. withdrawn Employer’s Taxabl tax
the time of from RPF is not contributio e as
retirement taxable, n salaries
etc. provided Employees Not
employee contributio taxable
retires or n
terminates job
Interest on Taxabl
after 5 years
employers e as
of continuous
contributio salaries
service.
n
Interest on Taxabl
employees e as
contributio IFOS
n
Here salary = Basic salary + D.A. (if app) + comm., based on fixed % of turnover)
5 Continuous Service
• If employee retires from former employer and joins new employer.

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• Further, RPF balance of such employee with his former employer has been
transferred to the RPF account of such employee with new employer;
Then two employments will be treated as continuation of service.
6 If any amount withdrawn from RPF before 5 years continuous service (without the
reason stated above) then such withdrawal shall be treated as lump-sum withdrawal
from URPF.
7 Transferred balance of URPF to RPF:
if accumulated balance in an URPF account of the employee is transferred to RPF account,
then the URPF will be treated as RPF from the very beginning.
Hence, the excess contribution of the employer of all the years plus excess interest
credited to the fund every year shall be calculated and such aggregated sum shall be
included in the Gross salary of the employee in the previous year in which the conversion
took place provided the whole of the amount in the URPF was transferred to RPF.
Note: The above provisions of sec 10 (11)/(12) have been amended (with effect from the
assessment year 2023 - 24) to provide that the above exemption shall not apply to
interest accrued during the previous year in an employee’s recognized / statutory
provident fund account to the extend it relates to the amount given below –
a Interest on employee’s contribution in excess of Rs. 2,50,000 pr year (if contribution by
the employee is in provident fund in which employer also gives his contribution) or
b Interest on employee’s contribution in excess of Rs. 5, 00,000 per year (if contribution
by the employee is in provident fund in which there is no contribution by the employer of
such person).
Key Note
This restriction will apply only in respect of contribution by an employee on or after April
1, 2022 and taxable income shall be computed in such manner as may be provided by rules.

37. Illustration
Mr. Mugambo has the following salary structure:
Basic pay Rs. 10000 p.m.
DA Rs. 1000 p.m.
Commission (Fixed) Rs. 2000
Entertainment allowance Rs. 2000 p.m.
Mugambo contributes Rs. 20000 to provident fund. His employer also makes a matching
contribution. Interest received Rs 26,000 @ 13%. Compute taxable salary of Mugambo if:
a) Mr. Mugambo is a Government employee and such provident fund is a statutory provident fund.
b) Mr. Mugambo is an employee of Y Ltd. And such fund is a recognized fund.
c) Mr. Mugambo is an employee of Z Ltd. And such fund is an unrecognized fund.
Find out his Gross salary income for A. Y. 25 - 26.

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EMPLOYERS CONTRIBUTION TO RECOGNISED PROVIDENT FUND, SUPERANNUATION FUND

AND NPS [SEC. 17(2)(VII)]

Sub-clause (vii) of section 17(2) has been substituted with effect from the assessment
year 2023 – 24. New sub-clause (vii) provides that the aggregate amount of contribution
made by the employer to the following retirement schemes, in excess of Rs. 7,50,000 per
year, is taxable as perquisite –
a Recognised provident fund
b Scheme of NPS, and
c Approved superannuation fund
Further, a new clause (viia) of section 17(2) has been inserted to provided that annual accretion
by way of interest, dividend or any other amount of similar nature during the previous year to
the balance at the credit of the fund or scheme referred to above shall be treat as perquisite
to the extent it relates to the contribution referred to above (i.e., in excess of Rs. 7,50,000).
Such interest/ dividend/ similar amount shall be included in total income and shall be computed
in the prescribed manner with effect from the assessment year 2024 - 25.

GOVERNMENT CONTRIBUTION TO AGNIVEER CORPUS FUND

Sub-clause (ix) has been inserted in section 17(1) to provide that the contribution made by the
Central Government in the previous year to the Agnveer Corpus Fund account of an individual
shall be included in the income of the assessee under the head “Salaries”. The whole of such
contribution shall be deducted u/s 80CCH(2).

VRS COMPENSATION SEC. 10 (10C)

Compensation received is exempt to the minimum of the following:

a Actual amount received.
b Rs. 5,00,000.

A An Individual, who has retired under the Voluntary Retirement Scheme, should not
KEY NOTES

be employed in another Company of the same management.

B The Individual should not have received any other Voluntary Retirement
Compensation before, from any other Employer and claimed exemption thereon.
C Exemption under section 10(10C) in respect of Compensation under VRS can be
availed by an Individual only once in his lifetime.

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D VRS Compensation received in instalments from the same employer is entitled for
exemption under section 10(10C) and not for amount received from more than one
employer. No exemption under section 10(10C) shall be allowed, if the Assessee has
claimed Relief under section 89 in respect of VRS Compensation. So, the Assessee
shall be allowed to claim either exemption under section 10(10C) or Relief under
section 89.
E Maximum limit: Maximum Amount of compensation on account of Voluntary
Retirement shall not exceed the following:
Note: Salary =Basic Pay + DA (if forming part of Retirement Benefits).
• Last drawn Salary x 3 x No. of fully completed years of service, or
• Last drawn salary x Balance of months of service left.
F The scheme is applicable to employee who has completed 10 years of service or 40
years of age.

ANNUITY

• Meaning Annuity means a yearly allowance, income, grant of an annual sum, etc. for
life or in perpetuity.
• Treatment Case Treatment
Annuity payable by a present employer, Fully taxable as salary.
whether voluntarily or contractual.
Annuity received from an ex – Fully taxable as ‘profit in lieu of
employer. salary u/s 17(3)(ii)
Annuity received from a person other Taxable as per provision of
than employer e.g. from insurer etc. Section 56 as ‘Income from
other sources’.

SALARY RECEIVED IN LIEU OF NOTICE PERIOD

• Meaning When an employer retrenches an employee then he has to give a proper

notice. If an employer fails to do so then he will have to pay salary
equivalent to notice period, apart from retrenchment compensation. Such
amount is known as salary received in lieu of notice period.
• Treatment Fully taxable.

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PROFITS IN LIEU OF SALARY (SECTION 17(3))

1 Compensation due or received from the present / former Employer, in connection with:
a. Termination of employment, or
b. Modification of terms and conditions of employment.
2 Any amount received from an Unrecognized Provident Fund, to the extent of Employer’s
Contributions, along with Interest on such contribution.
3 Sum received under Keyman Insurance Policy, including Bonus thereon, by the Employee.
4 Any sum received either in lump sum or otherwise from any person, either before joining
his employment or after cessation of employment.
5 Any payment excluding 10(1A) / (10B) / (11) / (12) / (13) or (13A) from present or former
employer.
KEY NOTE

Amount of Key man insurance policy received by any person other than employee is taxable
under the head Income from Business or Profession.

DEDUCTION U/S 16

1 Standard deduction [Sec. 16(i)/ (ia)]

Standard deduction is available as follows –
From the Assessment Year 2025 – 26 Standard deduction is Rs. 75,000 or the amount of
gross salary, whichever is lower [FA 24]
2 Entertainment allowance 16(ii)
Employee Treatment
Government Deduction is allowed u/s 16(ii) to the minimum of the following:
Employee a Actual Entertainment Allowance
Central & State b Rs. 5000/-
Gov. c 20% of Basic salary.
Point to be noted: Deduction shall be irrespective of actual
expenditure incurred, Whether for office or for personal purposes.
Non-government Entertainment allowance is fully taxable and No deduction shall be
employee allowed u/s 16 (ii)

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Entertainment Allowance

For Central & State

For non-government
Government employee least of
employee
the following is exempt

1) Rs. 5000
2) 20% of Basic salary
3) Actually received

3 Professional Tax 16(iii)

Employer deducts a certain amount from the salary of the employees as Professional Tax
and deposits the same with the Government. This tax is collected by State Government.
Meaning Professional tax means tax on employment, profession, trade, etc. levied
by a state under article 276 of the Constitution.
Treatment Professional tax paid by Under the head perquisite Fully taxable
employer Under the head deduction Allowed as deduction
on cash basis
(employer + employee)
Professional tax paid by Under the head perquisite Not taxable
employee Under the head deduction Allowed as deduction
on cash basis

38. Illustration
Danny is employed by a firm. During the previous year 2024-25, he gets Rs. 48,000 per month as
salary and Rs. 3,000 per month as entertainment allowance. The employer provides a car 800 CC to
Danny for his official and personal use (expenses of the employer including salary of driver: Rs.
50,000, book of the car is not maintained). Find out the taxable salary of Danny for the assessment
year 2025 - 26 in the following situations-
a Danny pays a sum of Rs. 2,000 on March 3, 2025 on account of professional tax:
b The professional tax of Rs. 2,000 becomes due on March 3, 2025, Danny pays the same on
April 2, 2025;
c Professional tax of Rs. 2,000 is paid by Danny on March 4, 2025 which is reimbursed by his
employer on the same day. Ignore section 115BAC pertaining to alternative tax regime.

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IMPACT OF SECTION 115BAC UNDER THE HEAD SALARY

The below exemptions / deduction will not be allowed to the assessee (i.e. individual or Hindu
undivided family or association of persons (other than a co-operative society), or body of individuals,
whether incorporated or not, or an artificial juridical person) paying tax as per section 115BAC of
the Income tax Act, 1961.
S N Nature of Exemption/Deduction Relating to Salaries New System Existing
of Tax u/s System of
115BAC Tax
A RETIREMENT BENEFIT EXEMPTIONS
Leave Salary u/s 10(10AA) Allowed Allowed
Gratuity u/s 10(10) Allowed Allowed
Commutation of Pension u/s 10(10A) Allowed Allowed
Retrenchment Compensation u/s 10(10B) Allowed Allowed

VRS Compensation u/s 10(10C) Allowed Allowed

Leave Travel Concession u/s 10(5) Not Allowed Allowed
B ALLOWANCES
House Rent Allowance Not Allowed Allowed
Travelling Allowance Allowed Allowed
Conveyance Allowance Allowed Allowed
Daily Allowance Allowed Allowed
Helper Allowance Not Allowed Allowed
Any allowance granted for encouraging the academic, Not Allowed Allowed
research and training pursuits in educational and research
institutions
Uniform Allowance Not Allowed Allowed

Children Education Allowance Not Allowed Allowed

Hostel Expenditure Allowance Not Allowed Allowed
Tribal Area Allowance Not Allowed Allowed
Transport Allowance to Handicapped/ Deaf/ Dumb/ Blind Allowed Allowed
employee
Transport Allowance to other than above employees Not Allowed Not
Allowed

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C Perquisites
Free food and beverage through vouchers provided to the Not Allowed Allowed
employee upto Rs. 50/meal/Tea & snacks

Other exemptions from perquisites e.g. use of Computers, Allowed Allowed

laptops etc
D Deductions u/s 16
Standard Deduction u/s 16(ia) Allowed Allowed
Entertainment Allowance u/s 16(ii) Not Allowed Allowed
Professional Tax u/s 16(iii) Not Allowed Allowed

RELIEF UNDER SECTION 89

1 On account of Where by reason of any portion of an assessee’s salary being paid in

arrears of salary arrears or in advance or by reason of his having received in any one
or advance salary financial year, salary for more than twelve months or a payment of
profit in lieu of salary under section 17(3), his income is assessed at
a rate higher than that at which it would otherwise have been
assessed, the Assessing Officer shall, on an application made to him
in this behalf, grant such relief as prescribed. The procedure for
computing the relief is given in Rule 21A.
2 On account of Similar tax relief is extended to assesses who receive arrears of
family pension family pension as defined in the Explanation to clause (iia) of section
57.
Family pension Means a regular monthly amount payable by the employer to a person
belonging to the family of an employee in the event of his death.
3 No relief at the No relief shall be granted in respect of any amount received or
time of Voluntary receivable by an assessee on his voluntary retirement or termination
retirement or of his service, in accordance with any scheme or schemes of voluntary
termination of retirement or a scheme of voluntary separation (in the case of a
service public sector company), if on voluntary retirement or termination of
his service or voluntary separation has been claimed by the assessee
in respect of the same assessment year or any other assessment year.

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SALARY FROM UNITED NATIONS ORGANISATION

Section 2 of the United Nations [Privileges and immunities] Act, 1947 grants exemption from
income-tax to salaries and emoluments paid by the United Nations to its officials. Besides
salary, any pension covered under the United Nations [Privileges and Immunities] Act and
received from UNO is also exempt from tax.

SALARY FOR DIFFERENT PURPOSE

Payment of Gratuity Act Basic + DA

1972
Other than Gratuity Act Basic + DA (if applicable) + Commission (based on turn over)
Leave Encashment Basic + DA (if applicable) + Commission (based on turn over)
Provident Fund Basic + DA (if applicable) + Commission (based on turn over)
House Rent Allowance Basic + DA (if applicable) + Commission (based on turn over)
Rent Free Accommodation Basic salary + Dearness allowance / pay, if terms of employment
so provide + Bonus + commission + fees + All other taxable
allowances (excluding amount not taxable) + Any monetary
payment (lump-sum payment received at the time of termination
like gratuity, leave encashment, VRS benefits and commuted
pension)
Entertainment Allowance Basic Salary

TAXABILITY OF PERQUISITES AT A GLANCE

Whether it is taxable in the

hands of
Rule/
Perquisites Non-
section Specified
specified
employee
employee
Rule 3(1) Rent-free residential accommodation
Unfurnished
Furnished Yes Yes
Concessional
Hotel accommodation
Rule 3(2) Motor Car

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If car is owned by employer Yes No

If car is owned by employee Yes Yes
Rule 3(3) Free domestic servant
Appointed by employer Yes No
Appointed by employee Yes Yes
Rule 3(4) Gas, electricity or water facility
a If facility is in the name of employer Yes No
b If facility is in the name of employee Yes Yes
Rule 3(5) Free education
In case of reimbursement Yes Yes
In any other case Yes No
Rule 3(6) Free transport
a If employer is engaged in transport
business Yes No
b In any other case Yes Yes
Rule 3(7) Other fringe benefits or amenities
a Interest free loan or concessional rate of
interest
b Traveling / Touring/Holiday Home
expenditure
c Meals /Refreshments Yes Yes

d Gift, voucher or token

e Credit card
f Club membership
g Use of movable assets
h Movable assets sold by employer to its
employee
Rule 3(8) Fair market value of the specified security or
& (9) sweat equity shares allotted to the employee Yes Yes
Sec. 10(5) Leave travel concession No No
Sec. 10 Income tax paid by employer on –
(10CC) Non-monetary No No
Perquisite In any other case Proviso to Yes Yes
Sec. 17(2) Medical facility
In case of reimbursement Yes Yes
In any other case Yes No
Sec. 17(2) Any obligation of employee paid by employer
(iv) (unless otherwise specifically exempted) Yes Yes

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Sec. 17(2) Allotment / Transfer of specified securities or

(vi) sweat equity shares Yes Yes
Sec. 17(2) Contribution in excess of Rs. 100000 to
(vii) superannuation fund Yes Yes

MEANING OF GOVERNMENT EMPLOYEE

Rent Free Gratuity Leave Pension Entertainment

Accommodation Salary Allowance
Central Government
State Government
Local Authority
Statutory Corporation

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PRACTICAL QUESTIONS

39. Illustration
Mr. Balaji employed as production manager in beta ltd, furnish you the following information-
1) Basic salary upto 31/10/24- Rs. 50,000 p.m. Basis Salary from 01/11/24 – Rs.60,000 p.m.
Note: Salary is due and paid on the last day of every month.
2) Dearness Allowance @ 40% of basic Salary
3) Bonus equal to one month salary paid in October 2024 on basis salary plus Dearness Allowance
applicable for that month.
4) Contribution of Employers to Recognized provident fund account of the employees @ 16% of
basic Salary.
5) Professional tax paid Rs.3,000 of which Rs.2,000 was paid by the Employer.
6) Facility of laptop and Computer was provided to Balaji for both official and personal use. Cost
of laptop Rs.45,000 and computer Rs.35,000 were acquired by the company on 01/12/24.
7) Motor car owned by the employer (CC of Engine exceeds 1.60 Litres) provided to the Employee
from 01/11/24 meant for both Official and personal Use. Repair and Running Expenses of Rs.
45,000 from 01/11/24 to 31/03/25 were fully met by the Employer. The motor car was self-
driven by the Employee.
8) Leave Travel Concession given to Employee, his wife and three children (1 daughter aged 7 and
twin sons aged 3). Cost of Air Tickets (Economy class) reimbursed by the Employer was
Rs.30,000 for adults and Rs.45,000 for three children. Balaji is eligible for availing exemption
this year to the extent it is permissible in Law.
Compute the Salary income Chargeable to tax in the hands of Mr. Balaji for Assessment year 2025
- 2026.
Option 1: assesse paying tax under normal tax regime
Option 2: assesse paying tax under section 115BAC

40. Illustration
Nitin is an employee of XYZ ltd. he was appointed on 1st Mar 2024 at a scale of 50000 – 5000 –
70000. He is paid DA (which forms part of retirement benefits) @ 15% of Basic Pay and Bonus
equivalent to 2 month’s salary at end of FY. He contributes 18% of his Basic + DA to a recognized
provident fund, and the contribution is matched by the employer.
He is provided rent free accommodation, hired by the employer, @ 25000 pm. He is also provided
the following benefits / amenities:
a) Medical Treatment of his dependent spouse INR 40000.
b) Monthly salary to housekeeper INR 4000.
c) Telephone Allowance INR 1200 pm.
d) Gift Voucher of INR 4500 on account of his marriage anniversary.
e) Medical Insurance Premium for Nitin, paid by his employer INR 15000.

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f) Motor Car owned and driven by Nitin, and engine capacity within 1.6 liters; used partly for
official and partly for personal purposes. Running & maintenance expenses borne by the
employer INR 36,600.
g) Lunch during office hours valued at INR 2200.
He was also allotted 2000 sweat equity shares in September 2023. The shares were allotted @
INR 227 per share against the FMV of INR 377 per share as on the date of exercise of the option.
Compute the Salary income chargeable to tax.
Option 1: Assessee has not opted for Section 115BAC
Option 2: Assessee has opted for Section 115BAC

41. Illustration
Mr. Samosa retired from the service of M/s Y Ltd on 31/01/2025 after completing service of 30
years and one month. He had joined the company in 1987 at the age of 30 years and received the
following at the time of retirement:
a) Gratuity Rs.6,00,000. He was covered under the payment of gratuity Act, 1972.
b) Leave Encashment of Rs.3,30,000 for 330 days leave balance in his account. He was credited
30 days leave for each completed year of service.
c) As per the scheme of the Company, he was offered a car which was purchased on 01/02/2022
by the company for Rs.5,00,000 Company has recovered Rs.2,00,000 from him from the car.
Company depreciates the vehicles at the rate of 15% on straight Line Method.
d) An amount of Rs.3,00,000 as commutation of pension for 2/3rd of his pension commutation.
e) Company presented him a Gift voucher worth Rs. 6,000 on his retirement.
f) His Colleagues also gifted him a television (LCD) worth Rs.50,000 from their own contribution.

Following are the other particulars:

a) He has drawn a Basic Salary of Rs.20,000 and 50% Dearness Allowance per month for the
period from 01/04/2024 to 31/01/2025.
b) Received pension of Rs.5,000 per month for the period 01/02/2025 to 31/03/2025 after
commutation of pension.
Compute his Gross Total Income from the above for Assessment Year 2025 - 2026.
Option 1: assesse paying tax under normal tax regime
Option 2: assesse paying tax under section 115BAC

42. Illustration
Find basic salary of Mr. Singh having the following salary structure:
a. Net Basic Salary received ₹ 1,00,000
b. Deduction from salary 10% of basic salary as contribution to RPF
c. TDS ₹ 9,000
d. Repayment of earlier loan ₹ 35,000

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INCOME FROM HOUSE PROPERTY

CHAPTER 5 INCOME FROM HOUSE PROPERTY (SEC 22 TO SEC 27)

CHARGEABILITY [SECTION 22]

The annual value of property consisting of any buildings or lands appurtenant thereto
of which assessee is the owner shall be subject to income tax under the head ‘Income from
House Property’ after claiming deduction under section 24. The basis for calculating income
from house property is annual value. This is the inherent capacity of the property to earn
income.
Here appurtenant means approach road to and from public streets, compound, courtyard,
backyard, playground, motor garage etc.

MEANING OF DIFFERENT TERMS

1. Property
The term House Property can be constructed as any land surrounded by wall having roof or
not; and any land appurtenant to a building.
2. Analysis of Property
a Building can be interpreted as an enclosure of bricks, stone work or even mud wall.
b Building includes both residential as well as commercial houses.
c Residential house need to have a roof but a non-residential/ commercial house need not
to have a roof.
d Merely land cannot be treated as House property.
e It should be of a permanent nature meant for useful purpose.
f If any building consists of several flats, then each flat should be considered as a
separate House Property and should be separately taxed.
g An incomplete or ruined house cannot be treated as House property.
3. Example
Whether the following shall be treated as house for the purpose of Sec. 22
Example Answer
Cinema Hall House
Hut House (Reason: Mud wall is sufficient wall)
Stadium House (Reason: Roof is not necessary for commercial house)
Godown House

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Residential house House

Incomplete house Not a house
Ruined housed Not a house

ESSENTIAL CONDITIONS FOR CHARGING INCOME UNDER THIS HEAD

CHARGEABILITY SEC. 22

Condition 1 Condition 2 Condition 3

There must be
property
Should not be
consisting of
Assessee must used by
any Building or
be owner Assessee for this
land
own business
appurtenant
thereto

Deemed owner
Legal owner Beneficial owner
(Sec. 27)

CONDITION 1: THERE MUST BE PROPERTY

Already discussed on previous page.

CONDITION 2: ASSESSE MUST BE OWNER

Assessee must be the owner of the property.

a Owner is the person who is entitled to receive income from the property in his own right.
b The requirement of registration of the sale deed is not warranted.
c Ownership includes both free-hold and lease-hold rights.
d Ownership includes deemed ownership (discussed later in point)

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e The person who owns the building need not also be the owner of the land upon which it
stands.
f The assessee must be the owner of the house property during the previous year. It is not
material whether he is the owner in the assessment year.
If the title of the ownership of the property is under dispute in a court of law, the decision as
to who will be the owner chargeable to income-tax under section 22 will be of the Income-tax
Department till the court gives its decision to the suit field in respect of such property.
A Legal owner The person in whose name property is registered.
B Deemed owner Discussed below

DEEMED OWNER SEC 27

1. The person who transfer property to spouse or minor child without adequate
consideration and (Sec 27(i))
1 Condition
a Transferee must be spouse or minor child other than married daughter.
b Transfer must be without adequate consideration.
c Transferred property must be a house property.
2 Example 1:
Mr. Amir Khan transfer his house property to his wife Mrs. Amin Khan without any
consideration on 1/4/2024. Rental income of such property received by Mrs. Amin
Khan but taxable in the hands of Mr. Amir Khan.
Note: In case of transfer to spouse, marriage should subsist on both the days i.e.,
on the day of transfer as well as on the day when income arises.
Example 2:
Mr. A transfers cash of Rs.5,00,000 to Mrs. A and Mrs. A purchases a house property
from the said cash, then such transfer of cash and subsequent purchase of property
shall not attract provision of section 27(i). However, the income from such property
shall be clubbed in the hands of Mr. A as per the provisions of Section 64(1)(iv). (For
detail refer chapter Clubbing of income)
2. Holder of impartible estate 27(ii)
Mr. X has a property consisting of 4 flats and a terrace. He divided it among his four sons.
Ownership of terrace has not been transferred but given to eldest son. However, remaining
sons are having the right to enjoy the benefit.
In such case, eldest son shall be treated as holder of an impartible estate (i.e. terrace)
3. Property held by a member of co-operative society 27(iii)

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A flat allotted to a member of society under the house building scheme of society. The
member shall be deemed owner of such property.
4. Person who has acquired property under u/s 53A of Transfer of Property Act 27(iia)
X enters into written agreement to purchase a property from Mr. Y for 35 Lakhs. He has
paid the consideration and taken the possession of the property. The sale deed is yet to
be registered. In such case Mr. X will have to pay tax on rental income.
5. A person who has acquired a right in a building under section 269UA (f) [27(iiib)]
Example
Mr. X is owns a property. It is given on lease for a period of 12 years to Mr. Y. In this
case Mr. Y is deemed owner of the HP.

Example
Mr. X is owns a property. It is given on lease for a period of 6 years to Mr. Y. Mr. Y has
right to get renewal of property for further 6 years after the expiry of lease. In this
case Mr. Y is deemed owner of the HP.

CONDITION 3: PROPERTY SHOULD NOT BE OCCUPIED BY THE OWNER FOR HIS

OWN BUSINESS OR PROFESSION

IMPORTANT TERMS

1. Income of Vacate Plot

Vacate plot cannot be treated as HP. Income from vacate plot treated as income from
other source.
2. Disputed Ownership
If title of ownership of a house property is under dispute in a court of law, in such case
person who is in receipt of income or who enjoys the possession of the property is
assessable to tax.
3. Income from Sub-Letting
Income from subletting is taxable as business income or income from other source.
4. Hp Let Out to Employee
When HP is provided by employer to his employees in the interest of his business then
rent received from such HP is treated as business income & not HP income.
5. Composite Rent
If rent is received not only for house property but for other factors too e.g. for furniture,
machinery, other facilities etc then such rent shall be treated as composite rent. Example
rent received from paying guest.

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6. Tax Treatment
Particulars Taxable under the Head
If segregation Entire rent shall be taxable under the head Income from Other
of rent is not Sources or Profit and Gains of Business or profession
given
If segregation Amount received for the use of building shall be taxable under the
of rent is given head ‘Income from House Property’
Amount received for the asset/ amenities shall be taxable under the
then
head ‘Profits & Gains of Business or profession’ or ‘Income from other
Sources’.

HOUSE PROPERTY

Property is separately Property is not separately lettable,

lettable e.g., Hotel business, etc.

Rent can be segregated Rent cannot be Chargeable under IFOS/

segregated PGBP

Rent from House IFOS/ PGBP

Property taxable under
IFHP

Explanation 3 has been inserted in section 28 (with effect from the assessment year 2025-26)
to clarify that any income from letting out of a residential house or a part of the house by the
owner, shall not be chargeable under the head "Profits and gains of business or profession" and
shall be chargeable to tax under the head "Income from house property".
The following points may be noted – [FA 24]
a. The new Explanation is applicable only in the case of residential house. It is not
applicable in the case of a commercial property. For commercial properties, the existing
legal position (as stated above) remains unchanged.
b. If there is a letting out of residential property along with letting out of other assets and
the two lettings are not separable, income would be taxable under section 28 or under
section 56(2) even after the amendment. In other words, Explanation 3 to section 28
cannot override section 56(2)(iii).

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INCOME FROM HOUSE PROPERTY

7. Annual value
Earning capacity of property
8. Municipal Value
This is value as determined by the municipal authorities for levying municipal taxes on
house property.
9. Fair Rent
Fair rent is the rent which a similar property can fetch in the same or similar locality.
10. Standard Rent
The standard rent is the maximum rent which can be collected by landlord. This is fixed
under rent control act
11. Unrealised Rent
Rent due from tenant but not received.
12. Vacancy Allowance
Period for which house remain vacate.
13. Actual Rent Receivable
It is the rent charged for the property during the period the property is actually let out
while, computing ARR,
Outstanding rent should be included whereas advance rent should be excluded. It does not
include vacancy period rent.
1. Illustration
Annual Rent 1,44,000
Unrealised Rent 12,000
Vacancy Allowance 24,000
Actual Rent

2. Illustration
Annual Rent receivable for 10 months 1,44,000
Unrealised Rent 12,000
Vacancy Allowance 24,000
Actual Rent

3. Illustration
Actual rent receivable p.a. 1,44,000
Unrealised Rent 12,000
Vacancy Allowance 24,000
Actual Rent

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INCOME FROM HOUSE PROPERTY

4. Illustration
Actual rent received 1,00,000
Unrealised Rent 10,000
Vacancy Allowance 15,000
Actual Rent
14. Property Situated Outside India
Status of Individual Taxability
Resident Ordinarily Resident Taxable in India
Not Ordinarily Resident / Non If the Rent is first received in India, then Income shall
– Resident be taxable in India
KEY NOTES
• Income accruing or received in Foreign Currency should be converted into India Rupees in
TT Buying Rate on the last day of the previous year. (Rule 115)
• Any tax or expenditure incurred towards earning such income shall be allowed as a
deduction.

EXEMPTED PROPERTIES

Income from the following house properties are exempted from tax:
1 Any one place or part thereof an ex – ruler, provided the same is not let out (Section
10(19A)).
Tax point: If the ex – ruler has a house property and the part of which is self-occupied
and remaining let out then only the self-occupied part of the house property shall be
exempted.
2 House property of a local authority. (Section 10(20)).
3 House property of an approved scientific research association (Section 10(21)).
4 House property of an educational institution (Section 10(23C)).
5 House property of a hospital (Section 10(23C)).
6 House property of a person being resident of Ladakh (Section 10(26A)).
7 House property of a political party (Section 13A).
8 House property of a trade union (Section 10(24)).
9 A farm house (Section 10(1)).
10 House property used for own business or profession (Section 22).
11 House property held for charitable purpose

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COMPUTATION OF INCOME

The chapter is divided into the following categories for the purpose of computation:
1 Let out property (Section 23(1)).
2 Self – occupied property (Section 23(2)(a)).
3 Property not actually occupied by the owner (Section 23(2)(b)).
4 Deemed to be let out property (Section 23(4)).
5 Partly let out and partly self-occupied property (Section 23(3)).
6 Recovery of unrealized rent & Arrears of rent (Section 25A).

COMPUTATION OF INCOME

Let out property Self-occupied

Particulars Details Amount Particulars Details Amount

Gross Annual Value (GAV) **** Gross Annual Value (GAV) Nil
Less: Municipal tax **** Less: Municipal tax Nil
Net Annual Value (NAV) **** Net Annual Value (NAV) Nil
Less: Deductions u/s Less: Deductions u/s
24(a) Standard deduction **** 24(a) Standard deduction Nil
[30% of NAV] [30% of NAV]
24(b) Interest on borrowed **** **** 24(b) Interest on borrowed (***) (***)
capital capital
Income from house property **** Income from house property (***)

IMPACT OF SECTION 115BAC UNDER THE HEAD HOUSE PROPERTY

The below exemptions/ deduction will not be allowed to the assessee (i.e., individual or Hindu
undivided family or association of persons (other than a co-operative society), or body of
individuals, whether incorporated or not, or an artificial juridical person) paying tax as per
section 115BAC of the Income tax Act, 1961.
S N Nature of Exemption/Deduction Relating New System of Tax Existing System
to House Property Section 115BAC of Tax
1 Deduction of Municipal Tax from GAV Allowed Allowed
2 Standard Deduction u/s 24(a) from NAV Allowed Allowed
3 Interest Deduction u/s 24(b) from NAV

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a Let out properties u/s 23(1) Allowed Allowed

b Self-Occupied Property u/s 23(2) Not Allowed Allowed
c Property which is stock in trade u/s Allowed Allowed
23(5)
4 Set off of brought forward House Property Not Allowed if Allowed
losses & brought forward Depreciation related to disallowed
from Current year House Property Income deduction &
exemptions
5 Set off current year House Property loss Not Allowed Allowed
from other Heads

SELF OCCUPIED PROPERTY [SEC. 23(2)(a)]

In case of self-occupied property or unoccupied property [Section 23(1)(c)]

a Where the property is self-occupied for own residence throughout the previous
year, its Annual Value will be Nil, provided no other benefits is derived by the owner form
such property.
b The benefit of “Nil” Annual Value is available only for upto two self-occupied or
unoccupied house properties i.e. for either one house property or two-house
properties.
c The benefits of “Nil” Annual Value in respect of upto two self-occupied house properties
is available only to an individual/HUF.
No deduction for municipal taxes is allowed in respect of such property/properties as
annual value means value determined after deduction of municipal taxes.
Interest deduction u/s 24 of Rs 2, 00,000 shall be for both HP and not each.
2 If assessee is using more than two house property for his residence then GAV of two-
house property as per his choice (maximum municipal value) is taken as nil & other is deemed
to be let out it means calculation for third HP will be like let out property.

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UNOCCUPIED PROPERTY (SECTION 23(2)(b))

1. Meaning
Where an assessee has a residential house (kept for self – occupation) and it cannot be
occupied by the owner due to his employment, business or profession carried on at any
other place and hence he has to reside at that place in a building not belonging to him, such
house shall be termed as unoccupied property.
2. Taxpoint
a Assessee has a residential house kept for self – occupation.
b The house cannot be occupied by the owner owing to his employment and no other
benefit from such house. In case house remains unoccupied by the owner owing to his
personal convenience, then no benefit under this section shall be allowed.
c He has to reside in a house not belonging to him, whether rent is paid for that house
or not.
3. Treatment
Same as self-occupied property
KEY NOTES
a. An assessee can claim benefit u/s 23(2)(a) as well as 23(2)(b) in the same previous year.
(Max 2 HP)
b. An assessee can claim benefit u/s 23(2)(b) even though he has other properties.

5. Illustration
Mr. Tappu has a house property in Mumbai. He married with a Gujrati girl and resides in Surat with
his father – in – law. The property situated in Mumbai was vacant throughout the financial year.
Mr. Tappu wants to claim benefit u/s 23(2)(a) or 23(2)(b). Comment

DEEMED TO BE LET – OUT HOUSE PROPERTY (SECTION 23(4))

Meaning: Where the assessee occupies more than two house property as self – occupied or has
more than two unoccupied property, then for any two of them, benefit u/s 23(2) can be claimed
(at the choice of the assessee) and remaining property or properties shall be treated as ‘deemed
to be let out’. GAV= EXPECTED RENT [APPLY STEP 1]

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INCOME FROM HOUSE PROPERTY

PROPERTY HELD AS STOCK IN TRADE: SEC. 23(5)

Where the building or land appurtenant thereto is held as stock in trade and the property or
any part of the property is not let during the whole or any part of the previous year, the annual
value of such property or part of the property, for the period up to two year from the end
of the financial year in which the certificate of completion of construction of the property is
obtained from the competent authority, shall be taken to be NIL.

HOW TO CALCULATE GROSS ANNUAL VALUE

Steps Particulars Amount

1St Find out reasonable expected rent [RER]
Gross Municipal Value (a) xxx
Fair Rent (b) Xxx
Higher of the [(a) and (b)] [A] Xxx
Standard Rent as per Rent Control Act [B] Xxx
Reasonable Expected Rent [Lower of [(A) and (B)] Xxx
nd
2 Actual rent received / receivable [ARR]
Rent received /Receivable – unrealised Rent Xxx
rd
3 GAV = HIGHER OF 1 OR 2 Xxx
th
4 If GAV is lower due to vacancy allowance then GAV shall be ARR

LET OUT PROPERTY

SITUTATION 1: NO UNRELAISED RENT & NO VANCANCY ALLOWANCE

6. Illustration
Calculate Gross Annual Value for the following house properties. (Rs. in ‘000)
Particulars H1 H2 H3 H4 H5 H6
Gross Municipal Value for the whole 120 130 140 150 160 180
year
Fair rent for the whole year 105 115 135 155 175 168
Standard rent (for whole year) under NA 100 135 180 165 144
the Rent Control Act

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Actual rent receivable 100 110 135 175 200 100

Period of the previous year (in 12 12 12 12 12 10
months)

SITUTATION 2: WHEN THERE IS UNREALSIED RENT BUT NO VACANCY ALLOWANCE

RULE 4: CONDITIONS TO DEDUCT UNDEREALISED RENT

Condition 1 The tenancy is bona fide.

Condition 2 The defaulting tenant has vacated or steps have been taken to compel him to
vacate the property.
Condition 3 The defaulting tenant is not in occupation of any other property of the assessee.
Condition 4 The assessee has taken all reasonable steps to institute legal proceedings for the
recovery of the unpaid rent.

Adjustment for Unrealised Rent

Generally Unrealised rent is deducted from Actual rent received (ARR) or receivable however
Income tax Return however permits deduction of unrealised from GAV (Gross Annual Value) if
this view is taken then Unrealised rent should be deducted only after computing GAV

7. Illustration
Find out the gross annual value in case of the following properties let out the previous year for the
assessment year 2025 - 26.
(Rs. in ‘000)
Particulars H1 H2 H3 H4 H5
Municipal annual value 90 500 30 100 315
Fair rent 300 300 300 300 300
Standard rent under the Rent Control Act 50 800 240 250 500
Actual rent receivable p.a. 120 600 180 360 150
Unrealised rent of the PY 2024-25 (in terms of months) 2 3 1 3 2

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SITUTATION 3: WHEN THERE IS VACANCY ALLOWANCE BUT NO UNREALSIED RENT

WHEN VACANCY ALLOWANCE IS GIVEN

If If
ARR > RER ARR < RER

GAV = ARR Due to VA Other than VA

GAV = ARR GAV = RER

8. Illustration
Find out the gross annual value in case of the following properties for the AY 2025-26
(Rs. in thousand)
Particulars H1 H2 H3 H4 H5 H6
Gross Municipal Value p.a. 200 300 400 500 300 300
Fair rent p.a. 300 600 750 180 200 400
Standard rent under the Rent Control Act p.a. 300 180 280 225 250 240
Actual rent p.a. 600 900 300 240 216 240
Property remains vacant (in number of month) 1 3 2 1 2 1

1 In H1 and H2 Actual rent receivable is already higher than RER therefore vacancy
period is not making any impact (i.e. step 4 of computation discussed in theory) on
GAV.
2 In H3 and H4, ARR is less than RER due to vacancy (otherwise ARR would have been
KEY NOTES

Rs. 3,00,000 & Rs. 2,40,000 respectively). Therefore, GAV will be the ARR computed
in step 2.
3 In H5, ARR is less than RER not only due to vacancy but also due to other factors. In
such case, value of RER shall be taken as GAV.
4 In H6, ARR is less than RER due to vacancy period otherwise ARR would have been
equal to RER.

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SITUTATION 4: WHEN THERE IS VACANCY ALLOWANCE AND UNREALSIED RENT

9. Illustration
Find out the gross annual value in respect of the following properties for the AY 2025-26.
(Rs. in thousand)
Particulars H1 H2 H3
Gross Municipal Value 150 180 120
Fair Rent 140 140 240
Standard Rent 120 240 300
Actual rent if property is let out throughout the previous year 180 300 150
2024 - 25
Unrealised rent of the previous year 2024 - 25 25 40 20
Unrealised rent of the year prior to the previous year 2023 - 30 50 60
24
Period when the property remains vacant (in number of months) 3 1 -

10. Illustration
Find out the gross annual value in respect of the following properties
(Rs. in thousand)
Particulars H1 H2 H3
Value determined by the Municipality for determining Municipal 500 800 600
Tax
Rent of the similar property in the same locality 400 900 600
Rent determined by the Rent Control Act 700 720 700
Actual rent receivable 350 540 600
Unrealised rent of the previous year 2024 - 25 10 Nil 150
Period when the property remains vacant (in number of months) 5 3 2

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INCOME FROM HOUSE PROPERTY

HOUSE PROPERTY WHICH IS PARTLY LET OUT & PARTLY SELF OCCUPIED (Sec. 23 (3)

PROPERTY PARTLY SELF – OCCUPIED / PARTLY LET OUT PROPERTY

Area Wise Time Wise

E.g. 40% SO & 60% LO E.g. 3M SO & 9M LO

AREA WISE DIVISION (FOR E.G. 60% SO & 40% LO)

In this case, a house property consist of two or more independent units and one or more of
which are self-occupied and remaining are let out.
Treatment:
• SO unit & LO unit are treated as separate units.
• M taxes, fair rent, standard rent, municipal value shall be proportionately divided.

11. Illustration
Miss. Priyanka Chopra has a house property having two separate residential units (unit A 40% SO
& unit B 60% LO). Unit B is let out on a monthly rent of Rs. 3,000. With the following further
information, compute Gross Annual Value
Municipal Value - Rs. 1,00,000
Fair rent Rs. 1,20,000
Standard rent Rs. 2,00,000
Municipal tax 10%
Interest on loan Rs. 30,000

TIME WISE DIVISION (FOR E.G. 9 MONTHS SO & 3 MONTHS LO)

Treatment:
• Such property will be treated as let out throughout the year.
• Expected rent shall be taken for the full year but rent should be taken for let period only.

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12. Illustration
Mr. AB baby used his house property for self-occupation till 01/06/2025 and let out the same for
remaining period for rent Rs. 6,000 per month. Compute his taxable income from house property
from the following data.
Municipal Value Rs. 1,00,000
Fair rent Rs. 80,000
Standard rent Rs. 96,000
Municipal tax 16%
Interest on loan Rs. 10,000

MUNICIPAL TAX
Taxes levied by local authority can be summarized through the following table -
Features
1 It includes municipal tax, Sewerage tax, any other tax charged by local authority on the
building.
2 It is allowed as deduction from GAV
3 It shall be compute of a percentage of net municipal value
4 It must be paid during the P.Y., i. e., it is allowed in the year in which it is paid.
Note: Outstanding municipal tax shall not be allowed as deduction.
5 It must be paid by the assessee.
Note: Tax paid by the tenant shall not be allowed as deduction
Note: Even tax paid on property to foreign local authority shall be allowed as deduction from
the gross annual value

INTEREST PENALTIES/ FINE ON MUNICIPAL TAXES ARE NOT ALLOWED AS

DEDUCTION.

• Deduction for municipal tax can exceed GAV i.e. it can turn NAV negative, e.g.,
municipal tax is paid for several past years and the total tax paid exceeds GAV, then
Net annual value (NAV) can be negative.
KEY NOTES

• Advance municipal tax: Whether Advance Municipal Tax Paid by the assessee shall
be allowed as deduction u/s 23(1) is a debatable issue. A through study of the
language of the act is required.
•
So property: No deduction of shall be allowed on account of municipal tax paid as
GAV is taken as NIL. (income is exempt)

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INCOME FROM HOUSE PROPERTY

13. Illustration
Compute net annual value with the following details for the AY 2025 – 26
Particulars H1 H2 H3 H4 H5 H6
Situation at Patna Anand Hyderabad Balurghat Jodhpur Etawa
Municipal value 1,00,000 2,00,000 3,00,000 4,00,000 4,25,000 6,00,000
Gross annual 1,00,000 2,50,000 1,80,000 5,00,000 8,00,000 5,00,000
value
Municipal tax 5,000 10% 5% 20% 12% 10%
for PY
Sewerage tax - 5% 1000 3% 3,750 1,000
Water tax - 3% 5% 2% 5% -

Additional information
a. In case of H3, municipal tax paid for the financial year 1995 – 96 to 2023 – 24 is Rs. 2,00,000.
b. In case of H4, municipal tax paid for the financial year 2025 – 26 is Rs. 3,000
c. In case of H6, all taxes charged by municipality are paid to the extent of 80% (50% by owner
and 30% by tenant).

14. Illustration
Can NAV be negative?

15. Illustration
Find out deduction of municipal tax with the help of following information.
M. value – 20 Lakhs, M. tax – 10% of M. value. 60% house property is let out and 40% self-occupied.
40% M. tax paid by tenant

DEDUCTION UNDER SECTION 24

a Standard deduction u/s. 24 (a) is 30% of net annual value

b Interest on borrowed capital is allowed if capital is borrowed for purchase, construction,
repair, renewal or reconstruction of the house property Sec 24(b).

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INCOME FROM HOUSE PROPERTY

INTEREST ON HP

INTEREST ON HOUSING LOAN

Loan for construction / Purchase Loan for reconstruction / renewal /

(Pre-construction / Post construction) repairs

Self- Self-
Let out Let out
occupied occupied

Interest paid

Maximum Interest
30,000 paid

Loan taken Loan taken on

before 1.4.99 or after 1.4.99

Amount of Acquisition or construction

deduction completed within 5 years from the
interest paid or end of the FY in which the capital
30,000 was borrowed
whichever is +
less Certificate from lender specifying
interest payable

No Yes

Maximum Rs. Maximum Rs.

2,00,000 for
30,000 for
one or two
one or two
self-occupied
self-occupied
properties properties

Note:
Interest for SO house property shall be maximum 2 lakh per year for 2 SOHP.

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INCOME FROM HOUSE PROPERTY

PRE-CONSTRUCTION PERIOD

It is a period commencing on
The date of commencement of construction or the day of borrowing whichever is later and
ending on (a) 31st March immediately prior to the date of completion of construction or (b) date
of repayment of loan whichever is earlier.

PRE-CONSTRUCTION INTEREST

Pre-construction interest is deductible in 5 equal instalment commencing from the previous year
in which the house is acquired or constructed.

16. Illustration
Compute period of five years.
Completion 1st year 2 nd year 3rd year 4th year 5th year Is
of deduction
construction available
in
PY 24-25
20-21 20-21 21-22 22-23 23-24 24-25
24-25 24-25 25-26 26-27 27-28 28-29
17-18 17-18 18-19 19-20 20-21 21-22

Nature of When loan was Allowable

Purpose of Loan
property taken Maximum limit
Self-occupied On or after Construction or purchase of house Rs. 2,00,000
2
1/4/99 property
Self-occupied On or before For Repairs of house property Rs. 30,000
31/3/99
Self-occupied On or Before Construction or purchase of house Rs. 30,000
31/3/99 property
Self-occupied After 1/4/99 For Repairs of house property Rs. 30,000
Let-out Any time Construction or purchase of house No Maximum
property limit

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INCOME FROM HOUSE PROPERTY

In any case, deduction of interest on loan of self-occupied property cannot exceed

1
Rs. 2,00,000 in a year
2 Interest is allowed as deduction on accrual basis.
3 Interest on unpaid interest is not deductible.
KEY NOTES

4 No deduction is allowed for any brokerage for arranging loan.

5 Interest on afresh loan, taken to pay the original loan is allowed a deduction.
6 Interest payable out of India is allowed as deduction if tax is deducted at source
If loan is taken by mortgaging one house property for the construction for
another house property, then the interest on such loan shall be eligible for deduction
7
from the income of the second house, since the purpose for which the loan amount
is used is taken into consideration.

Deductions for Principal and Interest Repayment

Nature Loan from Allowability
Principal Specified person under section 80C Allowed as a deduction under section 80C
Any other Person Not allowed as a deduction u/s 80C
Interest Any Person Allowed as a deduction under section 24(b)

17. Illustration
Following information are provided by an assessee for his house properties for computing
interest on loan allowed u/s 24(b):
Particulars HP 1 HP 2 HP 3 HP 4 HP 5
a. Interest on loan taken for repair of 20,000 30,000 10,000 15,000 25,000
H.P.
b. Interest on loan taken for 20,000 25,000 30,000 17,000 18,000
purchasing H.P. (50% paid)
c. Interest on new loan taken for 10,000 12,000 13,000 14,000 16,000
repaying old loan which was taken
for purchasing H.P.
d. Interest on loan taken for 10,000 10,000 10,000 10,000 10,000
payment of interest on earlier
loan
e. Interest on loan for payment of 2,000 2,000 2,000 2,000 2,000
Municipal tax
f. Interest on loan by mortgaging HP3 -- -- 5,000 -- --
for business purpose
g. Interest on loan for 20,000 -- -- -- --

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INCOME FROM HOUSE PROPERTY

reconstruction of HP1 paid

outside India without deducting
tax at source
h. Interest on loan for -- 20,000 -- -- --
reconstruction of HP2 payable
outside India on which TDS has
not been deducted and no payment
yet been made
i. Interest on loan on mortgage of 10,000 -- -- -- --
HP1 for renovation of HP2

18. Illustration
Calculate pre-construction period from the following information
Constructed Pre-construction
Date of loan taken Date of repayment
completion period
01/06/2016 14/10/2018 10/01/2025
01/06/2016 27/01/2018 20/04/2026
01/06/2018 31/03/2020 10/12/2018
01/04/2024 28/03/2025 28/02/2025
Note:
In case of the year of borrowing and year of completion of construction is the same year
then interest will be compute from the date when the construction was started (and the date of
borrowing and starting date of construction, whichever is later, shall not be taken into
consideration)

19. Illustration
Calculate pre-construction interest for AY 25 - 26 if HP is SO and LO
CASE A B C D
Loan taken 14,00,000 14,00,000 14,00,000 14,00,000
Rate of Interest 12% 12% 12% 12%
Date of borrowing 30/06/19 30/06/19 01/04/16 01/04/24
Date of Completion of 31/12/24 31/12/24 31/12/19 31/12/24
construction
Date of Repayment 31/12/30 31/12/23 31/12/31 31/03/25

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INCOME FROM HOUSE PROPERTY

RECOVERY OF UNREALISED RENT AND RECOVERY OF ARREARS OF RENT [SEC. 25A]

1. Meaning
Where any Unrealised rent is subsequently realized, then such recovery shall be
taxable under the head ‘income from house property’.
Where the rent is increased by landlord (either suo-motu or due to the court instruction)
retrospectively, then the increased rent shall be treated as Arrear rent.
2. Tax Treatment
Recovery shall be taxable after a standard deduction of 30%
3. Features
1 It shall be taxable on cash basis
2 It shall be taxable under the head ‘Income from house property’ whether assessee
owns such house in the year of recovery or not.

20. Illustration
P Y 2020 – 2021
Case 1 Case 2 Case 3
Exp rent 2,00,000 2,00,000 2,00,000
Actual 1,60,000 2,40,000 3,30,000
Less: Unrealized Rent 50,000 60,000 70,000
Net actual rent 1,10,000 1,80,000 2,60,000
GAV 2,00,000 2,00,000 2,60,000
The assessee recovers the unrealized rent during the current previous year as follows –
Case 1: Rs. 50,000
Case 2: Rs. 50,000
Case 3: Rs. 32,000
Calculate the taxable amount

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INCOME FROM HOUSE PROPERTY

CO-OWNERSHIP [SEC. 26]

1. Meaning
If a house is owned by more than one owner than they are known as co-owners.
2. Tax Treatment
Each co-owner shall be taxable separately for his share of income from house
property.
Where the house property is used for self-occupation by co-owners then all of them can
claim benefit u/s 23(2) and interest on loan u/s 24(b) shall be to all the co-owner to the
extent of Rs. 30000/ Rs. 2,00,000 Separately.

• It is mandatory for the co-owners to apply the provisions of sec. 26.

KEY NOTES

• Normally co-owners are taxed as an Association of persons or body of Individual but

for the purpose of this section co-owners of a house are taxed separately as an
individual (not as AOP) for their respective share of income. This is another
exceptional feature of this chapter.

PROPERTY ALLOTTED BY ASSESSEE TO HIS FIRM

If an assessee allots his property to his firm then treatment shall be as under:
Property has been allotted Such property shall be taxable under the head “Profit &
without rent but as his share of gains of business or profession”. CIT vs Narain &
contribution Rabindranath bhol
Property has been let out to the Annual value of a property shall be taxable under the head
firm for a rent “Income from house property”. Ram Narain & Bros vs CIT
Note: If a firm owns a property it shall be taxable in the hands of the firm and not in
hands of partner.

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INCOME FROM HOUSE PROPERTY

PRACTICAL QUESTIONS

21. Illustration
Mrs. Chandramukhi, a Resident Individual, owns a house in USA. She receives rent at $ 1,500 per
month. She paid municipal taxes of $ 1,125 during the previous year 2024 – 25. She also owns a
two storied house in Mumbai, Ground Floor is used for her residence and First Floor is Let Out at
a monthly rent of Rs.10,000. Standard Rent for each floor is Rs.11,000 per month. Municipal taxes
paid for the house amounts to Rs.7,500. Mrs. Chandramukhi had constructed the house by taking
a loan from a nationalized bank on 20/6/2021. She repaid the loan of Rs.54,000 including interest
of Rs.24,000. The Value of one dollar is to be taken as Rs.60.
Compute Total Income from House Property of Mrs. Chandramukhi.
Option 1: Assessee has not opted for Section 115BAC
Option 2: Assessee has opted for Section 115BAC

22. Illustration
Mr. X is the owner of four houses. The following particulars are available:
Particulars House 1 House 2 House 3 House 4
Municipal valuation 16,000 20,000 24,000 5,600
Rent (Actual) — 14,000 20,000 6,800
Municipal taxes 400 1,000 1,200 300
Repairs and collection charges 200 2,500 1,040 460
Interest on mortgage — — — 1,000
Ground rent — 100 — 60
Fire premium 140 — 200 —
Annual charges — — 360 —
House No. 1 is self-occupied.
House No. 2 is let out for business; construction was completed on 1.3.91 and consists of two
residential units.
House No. 3 is 3/4 used for own business 1/4 let out to the manager of the business.
House No. 4 is let out for residential purposes.

His other income is Rs. 30,000. Find out the income of X from house property for the assessment
year 2025-26. Assuming he has not opted for section 115BAC of the Income Tax Act, 1961 and pay
tax under normal tax regime.
Option 1: Assessee has not opted for Section 115BAC
Option 2: Assessee has opted for Section 115BAC

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INCOME FROM HOUSE PROPERTY

23. Illustration
Mogli aged 32 years owns 4 houses which are used by him for his residential purposes:
House 1 House 2 House 3 House 4
Rs Rs Rs Rs
Municipal Valuation 30,000 70,000 92,000 28,000
Fair rent 40,000 58,000 96,000 37,000
Standard rent 37,000 74,000 NA 36,000
Municipal tax paid by Mogli 3,000 16,000 29,000 12,000
Insurance premium 1,000 2,000 11,700 2,810
Interest on capital borrowed for
purchase/ construction (including
th
1/5 of pre-construction periods
interest, wherever applicable) (capital
was borrowed before April 1, 1999 in 11,060 75,900 54,090 85,300
the case of House 1, 3 & 4. In the case
of House 2 capital was borrowed on
April 16, 2016 & the construction was
completed on 01/06/2018
Find out the total income of Mogli:
Income of Mogli from other sources is Rs. 4,75,000
Option 1: Assessee has not opted for Section 115BAC
Option 2: Assessee has opted for Section 115BAC

24. Illustration
Mr. X has taken a loan of Rs. 5,00,000 on 01.10.1999 @ 10% p.a. for construction of a house which
was completed on 01.10.2022 and the house remained self-occupied throughout the previous year
2024-25. The assessee has income under the head salary Rs. 4,00,000. Mr. X has paid life insurance
premium of Rs. 20,000. Compute tax liability for assessment year 2025-26.
Option 1: Assessee has not opted for Section 115BAC
Option 2: Assessee has opted for Section 115BAC

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PROFIT & GAINS OFF BUSINESS OR PROFESSION

CHAPTER 6 PROFIT & GAINS OF BUSINESS OR PROFESSION

INTRODUCTION

This is the third head of income. Under this head profit and gains of business or profession
are chargeable to tax.

1. Sec. 2(13), Business includes

a Trade
b Commerce
c Manufacture
d Any adventure or concern in the nature of trade, commerce or manufacture
Though the definition is not exhaustive, it covers every activity carried out with view to
earn profit.
2. Adventure in Nature of Trade
a Need not be business itself may be similar to business.
b Single transaction can constitute.
c Facts & circumstances of each case will decide.
d Need not be related or allied to existing activity of the assessee must be with object
of earning profit.
3. Sec. 2(36) Profession means
a The term profession involves attainment of specific skills for specific task. Such skills
can be acquired after patience study and application.
b According to Sec. 2(36), ‘Profession’ includes vocation.
c Profits and gains of a business, profession or vocation are chargeable to tax under this
head.
d Distinction between business, profession or vocation does not have any material
significance.
4. Hobby vs Vocation
The term hobby is different from vocation. Income earned through hobby (not by way of
profession) shall be taxable as income from other source.

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METHOD OF ACCOUNTING

Under section 145(1), income chargeable under the heads “Profits and gains of business or
profession” or “Income from other sources” shall be computed in accordance with either the
cash or mercantile system of accounting regularly employed by the assessee.
However, as per section 145B, certain income would be taxable in the following manner:
i Interest received by an assessee on compensation or on enhanced compensation, shall be
deemed to be the income of the year in which it is received. [Such income is taxable under
the head “Income from other sources”.
ii Income referred to in section 2(24)(xviii) i.e. assistance in the form of a subsidy or grant
or cash incentive or duty drawback or waiver or concession or reimbursement, by whatever
name called, by the Central Government or a State Government or any authority or body
or agency in cash or kind to the assessee shall be deemed to be the income of the previous
year in which it is received, if not charged to income tax for any earlier previous year.

BASIS OF CHARGE [SEC 28]

1. Sec. 28 Profit & Gains of any Business or Profession

The profit and gains of any business of profession which was carried by on the assessee
at any time during the previous year;
2. Sec. 28(ii) Compensation or other payment to management agency
a. Any person, by whatever name called, managing the whole or substantially the whole
of
i. The affairs of an Indian company or
ii. The affairs in India of any other company
At or in connection with the termination of his management or office or the
modification of any of the terms and conditions relating thereto;
b. Any person, by whatever name called, holding an agency in India for any part of the
activities relating to the business of any person, at or in connection with the
termination of the agency or the modification of any of the terms and conditions
relating thereto;
c. Any person, for or in connection with the vesting in the Government or any corporation
owned or controlled by the Government under any law for the time being in force, of
the management of any property or business
d. Any person, by whatever name called, at or in connection with the termination or
modification of the terms and conditions, of any contract relating to his business.

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PROFIT & GAINS OFF BUSINESS OR PROFESSION

Accordingly, any compensation received or receivable, whether revenue or capital, in

connection with the termination or the modification of the terms and conditions of
any contract relating to its business shall be taxable as business income
3. Sec. 28(iii) Income of trade or professional associations
Income derived by a trade, professional or similar association from specific services
performed for its members;
4. Sec. 28(iv) Export Incentive
a. Profit on sale of import entitlement license; (iiia)
b. Cash assistance received by any person against exports under any scheme of the GOI;
(iib)
c. Any duty of customs or excise re-paid or re-payable as duty drawback; (iiic)
d. Any profit on the transfer of the Duty Entitlement Pass Book Scheme; (iid)
e. Any profit on the transfer of Duty-Free Replenishment Certificates; (iie)
5. Sec. 28(iv) Perquisite from business or profession
The value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession.
After the amendment these provisions also apply to cases where benefit or perquisite in
provided in cash or in kind or partly in cash or partly in kind.
6. Sec. 28(v) Remuneration & Interest to partner
Any interest, salary, bonus, commission or remuneration, by whatever name called, due to,
or received by, a partner of a firm from such firm:
Provided that where any such sum or any part thereof has been disallowed to the firm u/s
40(b), it shall not be taxable in the hands of partner to that extent;
[For example, if firm pays remuneration or interest of Rs. 50,000 of the partner, but Rs.
23,000 is disallowed u/s 40(b), and only Rs. 27,000 is allowed as deduction to the firm,
then only Rs. 27,000 shall be taxable in the hands of the partner.]
7. Sec. 28(vi) Amount received or receivable for certain agreement
a. Not carrying out any activity in relation to any business; or profession
b. Not sharing any know-how, patent, copyright, trade-mark, license, franchise or any
other business or commercial right of similar nature of information or technique likely
to assist in the manufacture or processing of goods or provision for services
Provided that sub-clause (a) shall not apply to -
a. Any sum, whether received or receivable, in cash or kind, on account of transfer of
the right, which is chargeable under the head “Capital Gains”;
b. Any sum received as compensation, from the multilateral fund of the Montreal Protocol
under the United Nations Environment Program, in accordance with the terms of
agreement entered into with the Government of India
8. Sec. 28(vii) Keyman insurance policy

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PROFIT & GAINS OFF BUSINESS OR PROFESSION

any sum received under a Keyman insurance policy including the sum allocated by way of
bonus of such policy.
9. Sec. 28(viii) Fair market value of inventory on its conversion as capital asset
Fair market value of inventory on the date of its conversion or treatment as capital asset,
determined in the prescribed manner, would be chargeable to tax as business income.
10. Sec. 28(xi) Recovery against certain capital assets covered u/s 35AD
Any sum received or receivable, in cash or kind, on account of any capital asset being
demolished, destroyed, discarded or transferred, if such capital expenditure has been
allowed as a deduction u/s 35AD.
11. Speculative Transaction
It means a transaction in a contract for the purchase or sale of any commodity, including
stocks and shares, is periodically or ultimately settled otherwise than by the actual
delivery or transfer of the commodity or scrip: [Sec. 43(5)]
However the following shall not be deemed to be a speculative transaction.-
a. Hedging contract in respect of raw materials or merchandise entered into by a person
in the course of his manufacturing or merchanting business to guard against loss
through future price fluctuations in respect of his contracts for actual delivery of
goods manufactured by him or merchandise sold by him; or
b. A contract in respect of stocks and shares entered into by a dealer or investor therein
to guard against loss in his holdings of stocks and shares through price fluctuations;
or
c. A contract entered into by a member of a forward market or a stock exchange in the
course of any transaction in the nature of jobbing or arbitrage to guard against loss
which may arise in the ordinary course of his business as such member; or
d. An eligible transaction in respect of trading in derivatives carried out in a recognised
stock exchange; or
e. An eligible transaction in respect of trading in commodity derivatives carried out in a
recognized association which is chargeable to commodities transaction tax.
However the requirement of chargeability of commodities transaction tax is not applicable
in respect of trading in agricultural commodity derivatives from AY 2021 – 22.
Note: Dealing in derivatives will not be treated as speculative transactions subject to
certain condition.

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PROFIT & GAINS OFF BUSINESS OR PROFESSION

BUISNESS INCOME NOT CHARGEABLE UNDER THE HEAD PGBP

"Business income not taxable under the head "PGBP"

Rental income in Dividend on shares

Winnings from
the case of in the case of a
lotteries, races etc
dealer in property dealer in shares

Assessable under Assessable under

Assessable under
the head "Other the head "Other
the head "IFHP"
sources" sources"

INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION, HOW COMPUTED [SEC 29]

The income referred to in section 28 shall be computed in accordance with the provisions
contained in section 30 to 44D.

EXPENSES ALLOWED AS DEDUCTION [SEC. 30 TO 37]

RENT, RATES, TAXES, REPAIRS AND INSURANCE FOR BUILDING [SEC. 30]

Nature of Rent Current revenue Rates & Taxes Insurance

expenses repairs Premium
Owner Not allowed Allowed Allowed allowed
Tenant Allowed Allowed Not allowed Not applicable

KEY NOTES
• Any rent paid to the proprietor shall not be allowed
• Any rent paid to partner shall be allowed as deduction

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PROFIT & GAINS OFF BUSINESS OR PROFESSION

REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE BUT NOT

CAPITAL EXPENDITURE [SEC. 31]

Current revenue repairs Insurance Premium

Owner Allowed Allowed
Taken on hire Allowed Not applicable

DEPRECIATION ALLOWANCE [SEC. 32]

CONDITIONS FOR DEPRECIATION

Used for purpose Used during Depreciation is available

Asset owned
of business or relevant previous on tangible as well as
by assessee
profession year intangible asset

SECTION 32

Additional Depreciation Unabsorbed

Depreciation
depreciation assets sold Depreciation

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DEPRECIATION

Methods of Computation of
Block of assets Exceptions
depreciation depreciation

Others Power Same class of assets

unit Same Rate of
depreciation

WDV SLM WDV

Particulars Amount • When the WDV of a block of

W.D.V. of the block at the beginning of PY XXX asset is reduced to zero
Add: Assets acquired during PY XXX • When block of asset is empty
XXX on last day of previous year
Less: Sale Proceeds of assets sold during PY (XXX) (though the WDV is not zero)
• Imported car
Written Down Value XXXX
• If in the first year in which
Less: Depreciation (XXX)
asset is acquired, it is put to
Opening WDV for 1st day of next year XXX use for less than 180 days.

CONDITIONS FOR CLAIMING DEPRECIATION

1. Assessee must be the owner of the asset

a. Hire purchaser: A hire purchaser though become owner on payment of last instalment
but he can claim depreciation when he put the asset for business use. Depreciation can
be claimed on cash price.
b. Even a beneficial owner can claim depreciation i.e., an assessee need not to be a
registered owner of an asset for the purpose of clamming depreciation.
c. Co-owner can claim proportionate depreciation.
d. A tenant, though not the owner of the asset, but can claim depreciation on the super
construction made by him.
e. A person, who got possession of the immovable property u/s 53A of Transfer to the
property Act against part performance of the contract, can also claim depreciation.
2. Passive use v/s active use

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PROFIT & GAINS OFF BUSINESS OR PROFESSION

The term “USE” of asset for the purpose of calculation of depreciation includes both
active as well as passive use.
Passive use, means ready to use, I.e., if an asset was ready to use for business purpose
during the previous year but was not actually use then, the assessee can claim depreciation
on such asset,
e.g., an assesse can claim depreciation on fire extinguisher purchased by him for business
purpose though it was not actually used by him during the previous year

SIGNIFICANCE OF DATE OF PURCHASE

1) If any asset is acquired during the PY and put to use for less than 180 days then
depreciation shall be restricted to 50% of the amount calculated at the percentage
prescribed.
2) Here use means ready to use.
3) These rules are applicable in the first year, in which an asset is acquired. In subsequent
year if the asset is put to use for sometimes (may be less than 180 days) usual depreciation
is available.
4) Example:
Date of Date of put to AY 26-
Assets Block Rate AY 25-26
Purchase use 27
A 01-04-24 01-04-24 15%
B 01-04-24 01-07-24 15%
C 01-04-24 31-03-25 15%
D 15-04-24 31-01-25 15%
E 01-04-24 01-04-25 15%
F 01-04-24 31-03-26 15%

METHOD OF DEPRECIATON

Depreciation shall be allowed on written down value method at the rates prescribed.
However, in certain cases depreciation is allowed on straight Line method on an application made
by the assessee e.g., in case of Power Sector Undertaking if the assessee applies to the
department then depreciation is allowed on straight line method (discussed later in Terminal
depreciation and Balancing charge).

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PROFIT & GAINS OFF BUSINESS OR PROFESSION

STRAIGHT LINE METHOD

1. Eligible Assessees
Power Sector Units engaged in the business of generation or generation and
distribution of power can charge depreciation on their assets under Straight-Line
Method, at the rates prescribed in Appendix- I of the Income Tax Rules.
2. Eligible Assets
Power Sector Units can claim depreciation on SLM method only on Tangible Assets. For
Intangible Assets, only WDV Method shall be applicable.
3. Usage less than 180 days
In case of newly acquired assets put into use for less than 180 days, depreciation is
allowable at 50% of the normal rate.
4. Option for WDV
a WDV: Power Sector Units can also opt for claiming depreciation under Written down
Value Method.
b Time of exercise of option: They have to exercise such option before the due date of
furnishing the Return u/s 139(1) relevant to the previous year in which they begin to
generate power.
c Nature of Decision: The option once exercised shall be final.
5. Sale in year of First Use
Where the asset is sold or discarded in the previous year in which it is first put to use,
any loss arising there from shall be treated as Capital Loss, i.e. Loss under the head “Capital
Gains.”
6. Transfer of Depreciable Assets by Power Sector Units
Capital Gains on transfer of Depreciable Assets held by Power Sector Units shall be
computed as follows:
Situation Condition Treatment
I Net Consideration is Terminal Depreciation under section 32 = WDV Less Net
less than WDV Consideration
II Net Consideration is Balancing Charge under section 41(2) = Net Consideration
greater than WDV Less WDV
III Net Consideration is Capital Gain = Net Consideration Less Original Cost
greater than Original (Note: Section 48 and 49 applies for Capital Gains)
Cost of Asset Balancing Charge: (Section 41(2)): Original Cost Less
WDV

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KEY NOTES
• Net Consideration = Consideration for Transfer Less Expense of Transfer.
• The amount of Balancing Charge should not exceed the difference between Actual Cost and
the WDV.
• Additional depreciation is not available if the power unit is claiming depreciation under
straight line method i.e. under section 32(1) (i).

1. Illustration
Important less Ltd. is a power-generating unit. On 1-4-2022, it purchased a plant of Rs. 5000000
eligible for depreciation @ 15% on SLM. Compute balancing charge or terminal depreciation
assuming the plant is sold on 21/4/24 for:
A) Rs. 750000 B) Rs. 3000000 C) Rs. 4500000 D) Rs. 5500000.

BLOCK OF ASSET METHOD SEC 32(1) (i) (REDUCING BALANCE METHOD)

Block of asset Sec 2(11)

The term “Block of assets” means a group of assets falling within a Class of assets
comprising-
a Tangible assets, being buildings, machinery, plant or furniture
b Intangible assets, being know-how, patents, copy rights, trade marks, license, franchises or
any other business or commercial rights of similar nature (and from the assessment year
2021-22) not being goodwill of a business or profession, in respect of which the same
percentage of depreciation is prescribed.
c Section 2 (11) – the definition of block of assets under sec 2(11) has been amended to
provide that “Block of assets” shall not include goodwill of a business or profession. To put
it differently, even if goodwill of a business or profession is acquired by purchase for a
valuable consideration, it will not be part of “Block of assets” under sec 2(11)

CALCULATION OF DEPRECIATION

Particulars Rs
WDV of the block at the beginning of the year
Add: Purchased during the year
=
Less: Sold during the year
= Closing balance

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Less: Depreciation
= Closing WDV at the end of the year

BLOCK RATES

PART A - TANGIBLE ASSETS

I Buildings
Block 1 Buildings which are used mainly for residential purposes except 5%
hotels and boarding houses
Block 2 Buildings which are not used mainly for residential purposes 10%
Block 4 Purely temporary erections such as wooden structures 40%
II Furniture and Fittings
Block 1 Furniture and fittings including electrical fittings [“Electrical 10%
fittings” include electrical wiring, switches, sockets, other fittings and
fans, etc.]
III Plant & Machinery
Block 1 i Motor cars other than those used in a business of running them 15%
on hire, acquired or put to use on or after 1-4-1990
Block 2 ii Motors buses, motor lorries, motor taxis used in the business of 30%
running them on hire
Block 5 Computer including computer software Air or water pollution 40%
control equipment
Block 11 Books (annual publications or other than annual publications) 40%
owned by assessees carrying on a profession
Block 12 Books owned by assessees carrying on business in running lending 40%
libraries
Block 13 Plant & machinery (General rate) 15%
IV Ships
Block 1 Ocean-going ships 20%
PART B - INTANGIBLE ASSETS
Know-how, patents, copyrights, trademarks, licences, franchises or any other 25%
business or commercial rights of similar nature, not being goodwill of a business or
profession
Note: Students should refer to Income-tax Rules, 1962 for the detailed classification of assets
under Rule 5(1) and the rates applicable thereto.

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ACTUAL COST OF ASSETS [SEC. 43(1)]

It Means,
The actual cost – cost met directly or indirectly by any other person / authority
a Cost of fixed asset is to include all expenses directly related to acquisition of the
asset, expenses necessary to bring the asset to site, install it and make it fit for use and
expenses incurred to facilitate the use of the asset.
b Provided further that where the assessee incurs any expenditure for acquisition of any
asset or part thereof in respect of which a payment or aggregate of payment made
otherwise than bank or an account payee bank draft or use of electronic clearing
system through a bank account, > Rs. 10,000/-, such expenditure shall be ignored for the
purposes of determination of such cost.
In order to promote digital transactions, the payments or receipts through other notified
electronic modes. Have been proposed to be included in the list of acceptable mode of
payment.

Mode of acquisition Actual cost

Where assessee Purchase Price
himself acquires Add:
the asset. a. Interest on loan for the period upto the date of usage of the asset
b. Freight and Insurance
c. Loading, Unloading Charges
d. Installation and Erection Charges
Less:
a. Any amount met by an Authority or any other person by way of
subsidy or Grant,
b. GST
Assets received Actual cost to the previous owner – depreciation
under Gift, Will or Actually allowed up to AY 87 – 88 and allowable from the AY 88 – 89
Inheritance. onwards as if the asset was the only asset in the block.

2. Illustration
Mr. Honey acquired an asset on 01/01/2006 for Rs. 10, 00,000/- for personal use. He gifts the
asset to his brother Mr. Pony 01/01/2025 [FMV as on that date is Rs. 14, 00,000/-] Mr. Pony such
asset for business purpose

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COST OF ACQUISITION IN OTHER CASES

1. Assets used in Scientific Research subsequently put into use for business
Nil (Since Asset cost wholly deductible under section 35(1)(iv))
2. Inventory converted into capital asset and used for business
Where inventory is converted or treated as a capital asset and is used for the purpose of
business or profession, the fair market value of such inventory as on the date of its
conversion into capital asset determined in the prescribed manner, shall be the actual cost
of such capital asset to the assessee
3. Asset is acquired outside India by a NR and is brought to India and used for the
purpose of his business or profession
Actual cost – depreciation calculated @ rate in force that would have been allowable had
the asset been used in India since the date of acquisition.
4. Interest on capital borrowed
Interest relating to a after the asset is first put to use will not form part of the actual
cost of the asset
5. Adjustment of GST
Where ITC on capital goods has been taken in respect of GST, it shall not form part of
actual cost
6. Subsidy on capital investment
Specified Subsidy: It shall be deducted from actual cost of that asset.
General Subsidy: The proportionate amount of subsidy relatable to the asset shall be
deducted from the cost of respective asset.
7. Pre-Commencement Expenses
Expenses like Salaries, Guest House for Erection Staff, Travelling, etc. pertaining to
setting up of Plant.
8. Trial Run Expenses
Expenses on Trial Run of Plant and Machinery should be added Income from trial run
should be reduced from the cost and not offered as income.
3. Illustration
Katil limited acquired a pressing machine for Rs. 10,00,000. It had incurred Rs. 1,50,000
towards trial run expense in buying steel plates, pressing tools, etc. the product generate
during the trial run was sold for Rs. 40,000. Compute the cost of the machine for the
purpose of charging depreciation. What will be the cost if the trial run income amount to
Rs. 2,00,000.

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9. Loss on Exchange Rate

Increase in Foreign Currency Liability for acquisition of asset due to increase in
Exchange Rate. However, Actual Cost for this purpose means Actual Cost Less Depreciation
till date.
4. Illustration
Me & Mi Ltd. purchased a Machinery from Germany for USD 1,00,000 on 03/11/2023 by
borrowing from East West Bank Ltd. The rate of exchange on the date of acquisition was
Rs. 63.00. The assessee (Me & Mi) took a Forward Exchange Rate on 05/10/2024 when the
Rate specified in the, contract was Rs. 65 per USD. Compute depreciation for AY 24 - 25 &
25 - 26.

BUILDING PREVIOUSLY USED FOR PRIVATE PURPOSE

Mode of Acquisition Cost of acquisition

Building used for private Cost of Acquisition or Construction, as reduced by the
purpose and subsequently Notional/ Deemed Depreciation for the period of personal use.
put into use for the purpose Notional/ Deemed Depreciation: Total Depreciation that would
of business. have been allowable had the Building been used for Business
since its acquisition.

5. Illustration
Mr. Ram Ravan purchased a house property on 01/12/2022 for Rs. 10,00,000 Till 01/05/2024 the
same was self - occupied a residence. On this date, the said building was brought into use for the
purpose of his medical profession
1. What would be the depreciation allowable for the Assessment Year 2025 - 2026 assuming that
he owns no other building and the rate of depreciation is 10%?
2. Will the answer be different if the House Property had been gifted to him by his father, who
had purchased the same on 01/05/2021 for Rs. 9, 00,000?
3. Will the, treatment be the same if the item under consideration was not a Building, but a car?

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DETERMINATION OF WRITTEN DOWN VALUE (WDV) [SEC. 43(6)]: WDV IS DETERMINED AS UNDER

S N Situation WDV
1 Asset acquired during the Actual cost to the assessee
Previous Year
2 Asset acquired in earlier Actual cost to the Assessee Less All depreciation
Previous Year(s) allowed under IT Act.
3 In case Succession, WDV of the Predecessor Company or Transferor
of
Amalgamation or Demerger Company or Demerged Company
4 Where an assessee was not Actual cost of asset (ignoring revaluation) in the xxx
required to compute his books of account
total income for
the Less: Depreciation provided in the books of xxx
purposes of this Act for any account in respect of such previous year or
previous year or years years (ignoring depreciation attributable to
preceding the previous year such revaluation of the asset)
relevant to the assessment = WDV of the asset for charging depreciation xxx
year under consideration, -
5 Where the income of an The WDV of assets acquired before the previous year,
assessee is derived, in part shall be derived by reducing total amount of depreciation
from agriculture and in part on such asset (including the part which is disallowed by
from business chargeable to reason of use for agricultural purposes).
income-tax under the head
“PGBP”,
6 Cost of acquisition goodwill With effect from the previous year 2022 - 23, good will
of a business or profession of a business or profession is not eligible for
depreciation. If value of a block of assets on April 1, 2022
includes goodwill of a business or profession (on which
depreciation was obtained by the assessee in any
preceding year), then depreciated value of goodwill shall
be deducted from the value of the block of assets on
April 1, 2022. For this purpose, depreciated value of
goodwill shall be calculated as if goodwill was the only
assets in relevant Block of assets.

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CHARACTERISTICS OF BLOCK OF ASSETS

a Depreciation is allowed only on assets which are in the block at the end of the PY
b If asset is sold during the year depreciation cannot be claimed.
c Depreciation is calculated on the WDV of block and not on WDV on the asset
d Where any asset is transferred during the year at a Loss, then such loss shall neither be
Terminal depreciation nor-short form capital loss. It’ll only have effect of increasing the
WDV of the block.

6. Illustration
Mr. Tipu is carrying on business of restaurant. He acquired a car on 1/12/2022 for cost of Rs.
20,00,000 on which depreciation rate is 15%. The car is partly used for business purpose and partly
for personal purpose use as follows:
PY 2022 – 2023 40% Business use 60% Personal use
PY 2023 - 2024 50% Business use 50% Personal use
PY 2024 - 2025 60% Business use 40% Personal use
Calculate the depreciation allowable in PY 2024 – 25

7. Illustration
Roshan started a business of designing on 01-04-2023. He acquired a laptop on 01-04-2023 for ₹
50,000 for his business use. Since his gross total income for the previous year 2023-24 is only ₹
55,000/-, he did not file his return of income. During the previous year 204-25, his business income
before depreciation u/s 32 is ₹ 5,60,000. Since he is required to file his return of income for the
assessment year 2025-26, he seeks your advice for computing depreciation. Please compute
depreciation on his behalf assuming that:
a) He is maintaining books of account from 01-04-2023 but did not provide any depreciation on
laptop.
b) He is maintaining books of account from 01-04-2023 and provided depreciation ₹ 8,000 on
laptop.
c) He is maintaining books of account from 01-04-2024.

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RULES WHEN DEPRECIATION IS NOT CHARGED

If WDV is reduced to zero though the block is not empty.

a No depreciation is admissible.
b Excess of sale consideration over the value of block will be treated as short term capital
gain

8. Illustration
On April 1, 2024 WDV is Rs. 50,000 (Dep. 15%). It consist of plants C & D. The assessee purchase
plant of Rs. 25,000 (Dep rate 15%) during PY 24-25 and sells plant C for Rs. 85,000.
Calculate depreciation & capital gain.

If all assets of the block have been transferred and block is empty on the last day of
previous year
a No depreciation is admissible.
b If closing WDV if positive then it will be treated as short term capital loss & if it is
negative it will be treated as short term capital gain

9. Illustration
Don 3 ltd owns two plants A & B. On April 1, 2024 (rate 15%), depreciated value on April 1, 2024
was Rs. 2,37,000. The company purchased plant C on May 31, 2024 for Rs. 20,000. Calculate
depreciation & capital gain if all plants were sold on 30 th March, 2025 for (a) Rs. 55,000, (b) Rs.
3,25,000.

10. Illustration
M/s. Red Chilies Enterprises has written down value in building block (depreciation rate 10%) as on
1/4/24 Rs. 80000. The block consists of two building X and Y. Compute depreciation u/s. 32 for
the A. Y. 2025 - 26 in the following cases:
Case A Building X sold for Rs. 20000 on 1/5/24
Case B Building X sold for Rs. 100000 on 1/1/25
Case C Building X sold for Rs. 100000 and Building S purchased for Rs. 35000 as on
1/7/24.
Case D Building X sold for Rs. 10000 and Building S purchased for Rs. 40000 as on 1/7/24.
Case E Building X sold for Rs. 10000 and Building S purchased for Rs. 40000 as on
11/11/24.
Case F Building X sold for Rs. 200000 and Building S purchased for Rs. 40000 as on
11/11/24.

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Case G Building X and Building Y both sold for Rs. 10000 and Rs. 35000 respectively.
Case H Building X and Building Y both sold for Rs. 10000 and Rs. 35000 respectively as
on 11/11/24. New building T purchased for Rs. 5000 as on 1/7/24.
Case I Building Z purchased for Rs. 40000 on 1/7/23 and the same being put to use on
11/11/24.
Case J Building Q purchased for Rs. 50000 on 1/7/24 but put to use on 11/11/25.
Case K Building R purchased for Rs. 30000 on 1/7/24 but put to use on 11/11/24.
Case L Building S purchased for Rs 10,000 on 1/7/24 but put to use on 11/11/24 & building
x and y sold for Rs. 10000 and Rs. 6000 respectively.

DEPRECIATION IN CASE OF AMALGAMATION, DEMERGER OR SUCCESSION

In the year of
a Amalgamation
b Demerger
c Succession (referred in section 47(xiii) and (xiv) or section 170)
Depreciation under section 32 shall be apportioned between
a The amalgamating company and the amalgamated company
b The demerged company and the resulting company
c The predecessor and the successor
In the ratio of number of days for which the asset was used by them.

ADDITIONAL DEPRECIATION (SECTION 32(1)(iia))

1. Applicability
Applicable to Assessee engaged in the business of manufacture/ production of any
article/ thing or in the business of Generation or Transmission or distribution of
power (only block method).
Note: Deduction not available if assesse opt for ATR u/s 115BAC
2. Eligible Asset
Any new Machinery or Plant acquired and installed after 31.3.2005
3. Ineligible Asset
a. Ships and Aircrafts,
b. Any Machinery or Plant which, before its installation by the assessee, was used either
within or outside India by any other person, or

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c. Any Machinery or Plant installed in any Office Premises or any residential

Accommodation, including accommodation in the nature of a Guest House, or
d. Any Office Appliance or Road Transport Vehicle, or
e. Any Machinery or Plant, the whole cost of which is allowed as a deduction (whether
by way of depreciation or otherwise) in the one previous year.

4. Rate
Rate of Additional Depreciation = 20% of the Actual Cost of Machinery or Plant (once in
life time of assets)
5. Usage Period < 180 days
1. In case of assets newly acquired and put to use in the same previous year for less
than 180 days, the Additional Depreciation shall be provided at 50% of normal rate
applicable, i.e. at 10%.
2. Balance 50% shall be allowed under section 32 in the immediately succeeding previous
year in respect of such asset.

Additional depreciation shall be allowed even if the block has nil or negative
•
value.
Additional depreciation is available only in the year of acquisition and
KEY NOTES

•
installation of plant or machinery and not afterwards.
Additional deprecation shall be subtracted while computing the closing WDV of the
•
respective block.
Additional depreciation is not available if the new plant or machinery is sold in the
•
year of acquisition.

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NEW PLANT & MACHINERY

Acquired by

Power sector undertaking Other assessee

No Additional Depreciation
Installed in
except WDV

Specified Assessee Other premises of the

assessee e.g. office

Road transport vehicle, 2nd Other

No Additional Depreciation
hand machinery; Machineries
machinery on which 100%
deduction is claimed, etc.

Put to use Put to use for ≥

for <180days 180days

No Additional Additional Additional

Depreciation Depreciation @ 10% Depreciation @ 20%

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ANALYSIS OF PLANT AND MACHINERY U/S SEC 32

Section Assessee Nature of Asset < 180 days > 180 days
32 Any Any 7.5% 15%
32(1)(iia) Engaged in specified business Specified 10% 20%
Total 17.5% 35%

11. Illustration
Bhau ltd, a newly formed manufacturing concern, has furnished you the following details to compute
depreciation allowed for the A. Y. 2025 - 26 and 2026 - 27.
Assets Put to use (Date) Cost of Acquisition Rate of
Depreciation
Plant A 02/04/24 500000 15%
Plant B 07/05/24 300000 15%
Plant C 14/12/24 200000 15%
Plant D 05/05/25 100000 15%

SET OFF AND CARRY FORWARD OF UNABSORBED DEPRECIATION SECTION 32(2)

1 The current year depreciation shall be set off

a Against the profits of any business carried on during that year.
b The balance, if any, against income under any other head. [Except salary income]
2 The unabsorbed depreciation can be carried forward for any number of assessment
years and set off against income under any other head except salary
3 The business / profession for which depreciation was originally computed need not be
carried on in the year of set off.
4 For set-off purpose following order should be followed:
a Current year depreciation.
b Brought forward business loss
c Unabsorbed depreciation.

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DEDUCTION UNDER SEC. 33AB FOR TEA, COFFEE OR RUBBER GROWING & MANUFACTURING BUSINESS

1. Nature of business
Assessee must be engaged in the business of growing and manufacturing
a Tea;
b Coffee; or
c Rubber in India.
Note: Deduction not available if assesse opt for ATR u/s 115BAC
2. Condition
1. Deposit of amount: Assessee must have deposited an amount in NABARD or in any Bank
Account as per the scheme approved by the board or Coffee Board or Rubber Board, as
the case may be, with prior approval of the Central Government.
2. Time limit: Amount must be deposited within 6 months from the end of the relevant
previous year.
3. Audit of Accounts: Accounts of the assessee must be audited by a Chartered
Accountant and the audit report should be filed with return of the relevant A.Y. in form
3AC. [to be submitted on 30th sept of relevant AY]
3. Quantum of Deduction
Minimum of the following –
a. Amount so deposited; or
b. 40% of the profit of such business.
Note: Here, profit of such business means income computed under the head “Profit & Gains
of business or Profession” before-
• Allowing any deduction u/s 33AB
• Applying Rule 8/7A/7B and
• Adjusting brought forward business loss.
4. Withdrawal of Deposit
i. Closure of business Taxable
ii. Dissolution of the firm Taxable
iii. Death of an assessee Not Taxable
iv. Partition of a HUF Not Taxable
v. Liquidation of a company Not Taxable
5. Withdrawal of Deduction
a. Any amount released during any PY is not utilized. Such amount shall be treated as
business income of the PY

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b. Any amount released during any PY or withdrawn by the assessee and utilized for the
purchase of –
i. Machinery or plant to be installed in any office premises or residential
accommodation, or guest-house;
ii. Office appliances (not being computers);
iii. Machinery or plant, eligible for 100% depreciation or deduction in 1 PY’
iv. New machinery or plant used in the business of construction, manufacture or
production of any article or thing specified in the Eleventh Scheduled, shall be
deemed to be business income of that PY.
v. When any asset acquired in the scheme is transferred within 8 years from the end
of the PY in which it was acquired, such part of the cost of the asset as is relatable
to the deduction allowed shall be treated as the income of the PY in which the asset
is transferred.
6. Exceptions
a. Where any have been transferred to any Government local authority, statutory
corporation or government company, or
b. Where any transferred is in connection with succession of a firm by a company, provided
that -
• Scheme continues to apply to the company;
• The company takes over all the properties and liabilities of the firm; and
• All the shareholders of the company were partners of the firm.

Notes: Utilisation of such amount

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Amount withdrawn from eligible deposits

Withdrawal of amount Amount withdrawn from the

on closure of business eligible deposit scheme

When amount withdrawn When amount withdrawn is

treated as taxable profit not treated as Income

• Death of the tax payer.

• Closure of business • Partition of HUF.
• Dissolution of firm • Liquidation of company.

DEDUCTION FOR MINERAL OIL BUSINESS [SEC. 33ABA]

1. Nature of business
Assessee must be engaged in the business of prospecting for, or extraction or production
of petroleum or natural gas in India
Note: Deduction not available if assesse opt for ATR u/s 115BAC
2. Conditions to be Satisfied
1 Agreement: Assessee must have entered into an agreement with the Central
Government for such Business
2 Deposit of amount: Assessee must have deposited an amount with State Bank of India
or any other account in accordance with and for the purposes specified in a scheme
approved by the government of India in Ministry of petroleum and Natural Gas.
3 Time limit: The amount must be deposited by end of the relevant previous year.
4 Audit of Accounts: Accounts must be audited & auditor’s report should be filed in form
3AD along with return of income audit report required to be uploaded one month prior
to the due date of submission of return of income (due date of ROI = 31st Oct of AY
3. Deduction
Minimum of the following
a. Amount so deposited; or
b. 20% of the profit of such business

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Notes
a. Here, profit of such business means income computed under the head “Profit &
Gains of Business or Profession” before –
• Allowing any deduction u/s 33ABA and
• Adjusting brought forward business loss.
b. Any amount credited in the special Account or the site restoration account by way of
interest shall be a deposit.
4. Withdrawal of deposit
The amount can be withdrawn only for the purpose specified in the scheme. If such amount
is mis-utilized, it will be treated as taxable profits of that year
5. Withdrawal of deduction
• Any amount on closure- sum payable to the Central Government by way of profit or
production share, shall be chargeable as “PGBP”
• Amount withdrawn & utilized for certain purposes (same as tea deposit account)
• Where any asset is transferred before the expiry of 8 years (same as tea deposit
account)

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EXPENDITURE ON SCIENTIFIC RESEARCH [SEC. 35]

Scientific Research Sec. 35

Research through
In House Research
In House Research outside Agencies
by Bio technology or
Related to the may or may not
in any mfg or prod.
business of Assessee related to business
35(2AB)
of Assessee

Before After 100% of Expenditure

Commencement Commencement incurred shall be allowed

Revenue expenditure & Revenue & Capital

Capital expenditure expenditure allowed
incurred during 3 years as deduction in the
immediately before year in which it is
commencement shall be incurred
allowed as deduction in
the year of
commencement

Scientific Social science

Scientific
research or statistical
research Sec.
approved Sec. research Sec.
35(1)(ii) 100%
35(2AA) 100% 35(1)(iii) 100%
of expenditure
of expenditure of expenditure

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IN- HOUSE RESEARCH [SEC. 35(1)(i)]

1. Condition
It must be related to the business. (Any Assessee)
2. Revenue expenditure
Before commencement of business
Specific revenue expenditure (i.e. Material or salary excluding perquisite) incurred during
3 year immediately preceding the date of commencement of business, shall be allowed as
deduction in the year of commencement of business.
After commencement of business
All revenue expenditure incurred during the year shall be fully allowed
3. Capital Expenditure Sec. 35(1)(iv) /Sec.35(2)
Before commencement of business
Any capital expenditure incurred (excluding land) during 3 years immediately preceding
the date of commencement of business shall be 100% allowed in the year of commencement
in the business.
After commencement of business
Any capital expenditure incurred (excluding land) during the year, shall be 100% allowed.

EXPENDITURE ON IN HOUSE R & D BY COMPANIES (SEC 35(2AB)]

1. Assessee
Company only
2. Eligible business
Bio-technology or any business of manufacture or production of any article or thing.
Not being an article or thing specified in the list of the eleventh schedule
3. Expenditure
Capital or revenue expenditure excluding cost of any land and building
4. Time
No deduction shall be allowed to a company accepting donations u/s 35(1)(iia)(C)
5. Conditions
• The R & D facility approved by the prescribed authority
• The co. has entered into an agreement with the prescribed authority for co-operation
in such R & D facility and fulfils such conditions with regard to maintenance of accounts
and audit thereof and furnishing of reports in such manner as may be prescribed

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• The prescribed authority shall submit its report relation to the approval of the said
facility to the [Principal Chief Commissioner or Chief Commissioner or) (Principal
Director General or) Director General in such from and within such time as may be
prescribed.
6. Deduction
• 100% of revenue and capital expenditure except cost of land & building
• Cost of building is not entitled for weighted deduction but eligible for 100% deduction
u/s 35(1)(iv)
• Cost of any land shall not be allowed any deduction
Note: pre-commencement expenses and cost of building is not allowed under section
35(2AB). Hence they shall be entitled for 100% deduction u/s 35(1) and 35(2)

In House Scientific Research Expenditure – Comparison

Particulars General (Section Specific (Section
35(1) & (2) 35(2AB)
(a) Revenue Expenditure 100% 100%
(b) Capital Expenditure
a. Land Nil Nil
b. Building 100% Nil
c. Others 100% 100%
(c) Prior period expenses being salary, material 100% Nil
used for Scientific Research (Certified by
Prescribed Authority)
KEY NOTE

Where a deduction is allowed in any previous year in respect of any capital expenditure
for scientific research, no deduction u/s. 32 shall be allowed on such assets. [Sec.
35(2)(iv)].

Unabsorbed Capital Expenditure: If on account in inadequacy or absence of profits of

the business, deduction on account of capital expenditure on scientific research cannot be
allowed, fully or partly, the deficiency so arising is to be C/F as if it is unabsorbed depreciation.

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CONTRIBUTION MADE FOR SCIENTIFIC RESEARCH, RESEARCH IN SOCIAL SCIENCE OR

STATISTICAL RESEARCH, ETC.

Section In respect of Quantum of

deduction
35(1)(ii) Contribution to an approved scientific research association, (that 100%
has the object of undertaking scientific research) or an approved
university, college or the institution to be use for scientific
research.
Provided that such association, university, college or other
institution
a. Is for the time being approved, and
b. Is notified in the Official Gazette, by the Central Government;
35(1)(iia) Contribution to a company to be used by it for scientific research 100%
Provided that such company –
a. Is registered in India,
b. Has as its main object the scientific research and development,
c. Is, for the purpose of this clause, for the time being approved
by the prescribed authority in the prescribed manner, and
d. Fulfils such other conditions as may be prescribed; [Sec.
35(1)(iia)(C)]
35(1)(iii) Contribution to a University, college, or other institution to be used 100%
for research in social science or statistical research.
Provided that such association, university, college or other
institution
a. Is for the time being approved, and
b. Is notified in the Official Gazette, by the Central Government;
35(2AA) Contribution to a National laboratory or a university or an IIT or a 100%
specified person, with specific direction that the sum shall be used
to scientific research.
Provided that such university, college or other institution –
a. Is for the time being approved by prescribed authority; and
b. Is notified in the Official Gazette, by the Central Government;
Provided that the prescribed authority shall, before granting
approval, satisfy itself about the feasibility of carrying out the
scientific research and shall submit its report to the Principal Chief
Commissioner or Chief Commissioner or principal Director General
or Director General in such form as may be prescribed

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Note: Deduction not available if assesse opt for ATR u/s 115BAC

SALE OF ASSET USED FOR SCIENTIFIC RESEARCH [SEC. 41(3)]

Sale of asset used for scientific research

Without having been used After being put to use for

for other purpose business purpose

Added to block of assets

SC < deduction u/s 35 SC > deduction u/s 35

Cost = Nil
Amount realised is treated
as business income

To the extent deduction

SC – Deduction allowed On subsequent sale
allowed business
is = capital gains section 50 shall apply
income

If such asset is sold Then cost of such asset will be treated as business income in the
without use year of sale & excess of sale consideration over cost or indexed cost
shall be treated as capital gain.
If such asset is sold Sale consideration shall be subtracted from relevant block of asset
after being used for and cost of acquisition is to be taken as nil.
other purpose.

12. Illustration
'Mr. Arnold sathe has furnished the following particulars relating to payments made towards
Scientific Research for the year ended 31.03.2025:
Particulars (Rs. in lakhs)
1. Payments made to K Research Ltd. 20
2. Payment made to LMN College 15
3. Payment made to OPQ College 10
Note: K Research Ltd. and LMN College are approved Research Institutions
and these payments are to be used for the purpose of Scientific Research
4. Payment made to National Laboratory 8
5. Machinery purchased for in house Scientific Research 25
6. Salaries to research staff engaged in – house Scientific Research 12

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Compute the amount of deduction available u/s 35 of the Income Tax Act, 1961 while arriving at
the Business Income of the Assessee:

AMORTISATION OF TELECOM – LICENCE FEE [SEC. 35ABB]

1. Conditions to be satisfied
a. Assessee has incurred capital expenditure for acquiring any right to operate
telecommunication services.
b. Payment for such expenditure has actually been made.
Note:
1. Such expenditure may be incurred before or after commencement of business.
2. Revenue expenditure may be incurred relating to telecom licence fee shall not eligible
for deduction under section 35ABB. However, assessee can claim deduction under
section 37(1) for such expenditure.
2. Deduction under section 35ABB(1)
Actual expenditure incurred and paid shall be allowed as deduction in equal instalments
over the period for which the license remains in force starting from the year as under:
Case Period starts from
Where the license – fee is paid before The previous year in which such business
the commencement of business. commenced.

When license is acquired after The previous year in which licence fee has been
commencement of business actually paid.
In any other case
Note: No depreciation is allowed on such capital expenditure.

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To claim deduction u/s 35 ABB

following conditions must be satisfied

Incurred for
acquiring any right Expenditure incurred either Payment
Expenditure
to operate before commencement of is
is capital in
telecommunication business or thereafter at any actually
nature
services time during any PY. made

𝐀𝐜𝐭𝐮𝐚𝐥 𝐚𝐦𝐦𝐨𝐮𝐧𝐭 𝐩𝐚𝐢𝐝 In case of

𝐀𝐦𝐨𝐮𝐧𝐭 𝐨𝐟 𝐝𝐞𝐝𝐮𝐜𝐭𝐢𝐨𝐧 = amalgamation
𝐋𝐢𝐟𝐞 𝐨𝐟 𝐭𝐡𝐞 𝐥𝐢𝐜𝐞𝐧𝐜𝐞

Deduction starts from the year in which actual payment of expenditure is made
irrespective of the PY in which the liability for the expenditure is incurred

WHERE SUCH LICENSE IS SOLD IN FULL UNDER SECTION 35ABB(2) AND (3

1 Loss on sale shall be deductible as business loss in the year of sale

2 Profit on sale, to the extent of aggregate of deduction allowed in preceding year(s) shall
be treated as business income.
3 Capital gain treatment: The excess of sale consideration over original cost (or indexed
cost of acquisition) is taxable as capital gain under section 45.
4 Where such licence is transferred in a scheme of amalgamation or demerger: The
amalgamated company or resulting company (being Indian company) as the case may be
shall be entitled to claim deduction under section 35ABB for the residual period as if the
amalgamating or demerged company had not transferred the licence.

13. Illustration
Swadeshi Ltd, which follows mercantile system' of' accounting, obtained license. on 01.06.2024
from the Department of telecommunication for a period of 10 years. The total License Fee payable
is Rs. 18,00,000. The relevant details are:
Year ended 31st March Licence fee payable for the year Payment made
2025 Rs. 10,00,000 30/3/2025 Rs,3,70,000
15/5/2025 Rs.6,30,000
2026 Rs. 8,00,000 28/2/2026 Rs. 5,40,000
Balance of Rs. 2,60,000 is pending as on 31/03/2026.

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Compute the amount of deduction available to the Assessee u/s 35ABB for the PY 24 - 25 & 25 -
26. Can any deduction be claimed u/s 32 also?

DEDUCTION FOR EXPENDITURE ON SPECIFIED BUSINESS: SECTION 35 AD

Deduction = 100% of capital expenditure

Ineligible Expenditure
Any Capital expenditure in respect of which the payment or aggregate of payments made to a
person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee
bank draft or use of electronic clearing system through a bank account, > Rs. 10,000, or
In order to promote digital transactions, the payment through other notified electronic modes
(i.e. e-wallets, etc) has been proposed to be included in the list of acceptable modes of
payments.
Any expenditure incurred on the acquisition of any
• Land, or
• Goodwill, or
• Financial Instrument
Note: Deduction not available if assesse opt for ATR u/s 115BAC

Specified business Commencement

a. Laying and operating a cross country Natural • On or after April 1, 2007, in the case of
Gas or Crude or Petroleum Oil Pipeline laying and operating a cross country
Network for distribution, including Storage natural gas pipeline network for
Facilities being an integral part of such distribution or storage.
network • In other cases, on or after April 1, 2009.
b. Setting up and operating a Cold Chain On or after
Facility, 01/04/2009
c. Setting up and operating a Warehousing On or after
Facility for storage of Agricultural Produce. 01/04/2009
d. Building and operating a Hotel of two stars On or after
or above category as classified \ by the 01/04/2010
Central Government.
e. Building and operating a Hospital with at On or after
least 100 beds for patients. 01/04/2010
f. Developing and building a Housing Project On or after
under a scheme for Affordable Housing 01/04/2010
Slum Redevelopment or Rehabilitation

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Scheme framed by Central or State

Government and notified by CBDT.
g. Developing and building a Housing Project On or after
under a scheme for Affordable Housing 01/04/2011
framed by the Central Government or State
Government and notified by
CBDT[Guidelines asper Notification No.
1/2012]
h. New Plant or in newly installed capacity in an On or after
existing Plant, for production of Fertilizer. 01/04/2011
i. Setting up and operating an Inland Container On or after
Depot or Container Freight Station notified 01/04/2013
or approved under the Customs Act.
j. Bee-keeping and production of Honey and On or after
Beeswax. 01/04/2012
k. Setting up and operating a Warehousing On or after
Facility for storage of Sugar. 01/04/2012
l. Laying and operating a Slurry Pipeline for the or after
transportation of Iron Ore. 01/04/2014
m. Setting up and operating semi-conductor On or after
Wafer Fabrication Manufacturing Unit 01/04/2014
notified by CBDT.
n. Business of developing or maintaining or On or after
operating or developing, maintaining and 01/04/2017
operating a New Infrastructure Facility
Infrastructure facility means
• A road including toll road, a bridge, a rail system
• A highway project including housing or other activities being an integral part of the
highway project
• A water supply project, water treatment system, irrigation project, sanitation or
sewerage system or solid waste management system
• a port airport inland waterway, inland port or the navigation channel in the sea.

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KEY NOTES
1. General to all Eligible Assessees
Prior Period Expenditure
Expenditure incurred wholly and exclusively for the purposes of specified business prior to
the commencement of operation shall be allowed as a deduction in the previous year of
commencement of operation if the amount is capitalized in the Assessees books on the date
of commencement of operations
2. No Deduction
Deduction not allowed u/s 10AA and 80IA to 80RRB in relation to specified business for
the same or any other AY
3. Double Deduction
No deduction in respect of such expenditure shall be allowed under any other section in any
previous year or under this section in any other previous year
4. Set-off or carry forward and set-off of loss from specified business:
The loss of an assessee claiming deduction u/s. 35AD in respect of a specified business can
be set-off against the profit of another specified business u/s. 73A, irrespective of
whether the latter is eligible for deduction u/s. 35AD.
5. Restriction on Use of Asset
1 Any asset in respect of which a deduction is claimed and allowed under this section shall
be used only for the specified business, for a period of 8 years beginning with the
previous year in which such asset is acquired or constructed.
2 Where such asset, is used for a purpose other than the specified business during such
period, the following amount shall be deemed to be the income of the assessee
chargeable under the profit “profit and gains of business or profession” of the previous
year in which the asset is so used
Total amount of deduction so claimed and allowed in one or more previous years XXX
Less: the amount of depreciation allowable u/s 32, as if no deduction under this XXX
section was allowed.

14. Illustration
Win Limited commenced the Business of operating Three Star Hotel in Tirupathi on 01/04/2024.
It furnishes you the following:
Particulars Rs. (in lakhs)
(i) Cost of land (acquired in June 2022) 60
(ii) Cost of construction of hotel building
Financial year 2023 – 2024 30
Financial year 2024 – 2025 150
(iii) Plant and Machineries (all new) acquired during financial year 2024 – 2025 30

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(all the above expenditures were capitalized in the books of the company)
Net Profit before Depreciation for the Financial Year 2024 – 2025 80
Determine the amount eligible for u/s 35AD, for the assessment year 2025 – 26.

CONTRIBUTION FOR RURAL DEVELOPMENT [SEC. 35CCA]

1. Applicable to
All Assessee
2. Condition
Assessee has paid a sum to –
a. To an association institution, which has as its object the undertaking of any programme
of rural development, to be used for carrying out any programme of rural development
approved by the prescribed authority and the assessee furnishes a certificate from
such association or institution; or
b. To an association, which has as its object the training of persons for implementing
programmes of rural development and the assessee furnishes a certificate from such
association or institution; or
c. The National fund for rural development; or
d. To the National Urban Poverty Eradication Fund set up and notified by the Central
Government in this behalf.
3. Deduction
100% of the amount of contribution made.
Note: Expenditure may be related to business or not.
4. Withdrawal of approval
In case, subsequent to the payment made by the assessee, the approval has been
withdrawn then deduction earlier allowed shall not be withdrawn
5. Double deduction
In case, subsequent to the payment made by the assessee, the approval has been
withdrawn then deduction earlier allowed shall not be withdrawn
Note: After claiming deduction u/s 35CCA for the money donated, an assessee is under
no obligation to see the purpose for which the money so donated is being utilised.

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WEIGHTED DEDUCTION OF EXPENDITURE FOR AGRICULTURE EXTENSION PROJECT [SEC. 35CCC]

1. Applicable to
All Assessee
2. Nature of expenditure
Where an assessee incurs any expenditure on agriculture extension project (notified by
the Board in this behalf) in accordance with the guidance as may be prescribed,
3. Deduction
Such expenditure shall be allowed as deduction to the extent 100% of such
expenditure.
4. Conditions
The agricultural extension project shall be considered for notification if it fulfils all of
the following conditions, namely: -
• The project shall be undertaken by an assessee for training, education and guidance
of farmers;
• The project shall have prior approval of the Ministry of Agriculture, Government of
India; and
• An expenditure (Not being expenditure in the nature of cost of any land or building (>
25 lakh rupees is expected to be incurred for the project.
An assessee shall make an application in Form 3C-O to the Member (IT), CBDT for
notification of such project under section 35CCC.
5. No double deduction
Where a deduction under this section is claimed and allowed for any assessment year in
respect of any expenditure, deduction shall not be allowed in respect of such expenditure
under any other provisions of this Act for the same or any other assessment year.

WEIGHTED DEDUCTION FOR EXPENDITURE FOR SKILL DEVELOPMENT [SEC. 35CCD]

1. Applicable to
Company
2. Nature of expenditure
Where a company incurs any expenditure on any skill development project notified
by the board in this behalf in accordance with the guidelines as may be prescribed,
3. Expenditure not covered

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Any expenditure in the nature of cost of any land or building shall not be allowed as
deduction
4. Deduction
Such expenditure shall be allowed as deduction to the extent 100% of such
expenditure.

AMORTIZATION OF PRELIMINARY EXPENSES [SEC. 35D & RULE 6AB]

1. Applicable to
In case of a company: Only Indian company
In case of other assessee: Resident assessee.
2. Meaning
Preliminary expenses means –
1. Expenditure on preparation of project report;
2. Expenditure on preparation of feasibility report;
3. Expenditure on conducting market survey;
4. Expenditure on engineering services.
5. Legal charges for drafting any agreement for the purpose of setting up of business.
6. Legal charges for drafting & printing of Memorandum of Association & article of
Association
7. Registration fees of the company
8. Expenses on public issue of shares of debenture of the company e.g. underwriting
commission, expenditure on prospectus, etc
9. Any other prescribed expenditure
Note:
The assessee shall be required to furnish a statement containing the particulars of this
expenditure within prescribed period to the prescribed income-tax authority in the
prescribed form and manner.
3. Nature of Expenditure
Before the commencement of the Must be incurred for setting up a new undertaking
business or business.
After the commencement of the Must be incurred in connection with the extension
business of any undertaking or setting up a new unit.
4. Condition
Report of a Charted Accountant must be submitted along with the return in the first year
i.e., the year in which such expenditure was first claimed.

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5. Deduction
The total eligible preliminary expense shall be allowed 5 equal instalments starting from
the year in which the business commences or the undertaking expended or the new unit
commences production or operation
6. Total preliminary expense
Total preliminary expenditure cannot exceed
In case of Indian company: 5% of the ‘cost of project’ OR capital employed’ whichever
is higher or amount of preliminary expenses incurred whichever is less
In case of non-corporate resident assessee: 5% of the ‘cost of project’ or amount of
preliminary expenses incurred whichever is less
1 Cost of Project
Means the actual cost of fixed asset namely, land, buildings, leaseholds, plant,
machinery, furniture, fittings and railway sidings, etc., which are shown in the books
KEY NOTES

of the assessee as on the last day of the previous year in which the business is
commenced
2 Capital Employed
Means the capital employed in the business of the company and includes the
aggregate of the issued share capital, debentures and long-term borrowings, as on
the last day of the previous year in which the business is commenced.

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Assessee – Indian company or

non-corporate resident assessee

Preliminary Expenses u/s 35 D No

Satisfy definition of qualifying No deduction
expenditure

Yes
In five equal instalment from the year
in which the business commences or
Actual expenditure subject to extension is completed.
maximum permissible exp. as
computed below

Non-corporate Corporate
assessee assessee

New Extension New Extension

business of business business of business

5% of cost
of project
5% of cost
or 5% of
of project
capital
employed In case of
whichever amalgamation
is more and demerger

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15. Illustration
Jony gaddar Ltd. is an existing Indian Company, which sets up a new industrial unit. It incurs the
following expenditure in connection with the new unit:
Rs
Preparation of Project Report 4,00,000
Market Survey Expenses 5,00,000
Legal charges 2,00,000
Total 11 00 000
The following further data is given:
Cost of Project 30,00,000
capital Employed in the new unit 40,00,000
What deduction is admissible to the Company u/s 35D for Assessment Year 2025 - 2026?

AMORTISATION OF EXPENDITURE IN THE CASE OF AMALGAMATION/ DEMERGER [SEC. 35DD]

Applicable to Indian company

Nature of Company has incurred expenditure wholly & exclusively for the purpose of
expenditure amalgamation or demerger.
Deduction Such expenditure shall be allowed as deduction in 5 equal instalments
commencing for the year in which amalgamation or demerger takes place.

VOLUNTARY RETIREMENT COMPENSATION [SEC. 35DDA]

Applicable to All assessee

Condition Assessee has paid voluntary retirement compensation
Deduction Deduction shall be allowed in 5 equal instalments on cash basis
Classic notes In case of amalgamation or demerger of the company, deduction for
remaining instalments shall be claimed by the new company from the year of
amalgamation or demerger onwards.

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DEDUCTIONS U/S. 36

1. Section 36(1)(i)
Insurance Premium for stocks & Stores is allowed.
2. Section 36(1)(ia)
Insurance premium paid by a Federal milk co-operative society on the lives of cattle, owned
by the members of a primary milk co-operative society affiliated to it.
3. Section 36(1)(ib)
Insurance Premium for health of employee allowed as deduction only if paid by any mode
other than cash.
4. Section 36(1)(ii)
Bonus or Commission to employee is allowed as deduction on paid basis as per Section
43B.
5. Section 36(1)(iii) Interest on Borrowed Capital
Interest on capital borrowed for the purpose of business or profession shall be
allowed as deduction under this section:
Conditions:
1. Assessee must have borrowed money
2. Loan amount must be used for the purpose of business or profession carried on
during the previous year
3. Interest must be incurred on such loan
Other Points:
1. Interest paid to another person: Interest should be paid to another person. Hence,
interest on capital to proprietor is disallowed expenditure. However, interest
on capital to partners is allowed u/s. 40(b) [to be discussed in the chapter ‘Firm
Assessment].
2. Interest paid to relative is allowed as deduction subject to sec. 40A(2) i.e. if the
interest paid is in excess of market rate then excess portion shall be disallowed.
3. Interest on share capital is not allowed.
4. Interest on money borrowed to pay income tax is not allowed.
Note: Interest on money borrowed for payment of GST is allowed as deduction.
5. Interest paid outside India without deducting tax at source is not allowed.
6. Section 36(1)(iiia) Amortization of discount on a zero-coupon bond over the life of
such bond
Tax treatment in the hands of company issuing such bonds:

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a. Discount is deductible on pro rata basis

b. Tax will not be deducted at source u/s 194A by the payer company
Example:
PO Infrastructure Ltd issues Zero Coupon Bond for Face value of Rs. 10 crores (1,00,000
bonds) for Rs. 3 crores repayable after 10 years.
Therefore, Deduction allowable to the company would be the amount of discount on pro
rata basis i.e. Rs. 7 crores will be allowed over a period of 10 years i.e., Rs. 70 lakhs p.a.
Tax treatment in the hands of Investors:
a. Maturity or redemption of zero coupon bonds will amount to transfer u/s 2(47)(iva)
b. If period of holding is more than 12 months and such bonds are transferred then it
shall result in LTCG chargeable to tax @ 10% without indexation u/s 112.
7. Section 36(1)(iv) Employers contribution to RPF/ ASF
Any sum paid1, by the employer towards recognised provident fund or an
approved superannuation fund as per rules specified in the fourth schedule of the
Act is allowed as deduction in full.
Such amount must have been actually paid before the due date of furnishing return [Sec.
43B]
Taxpoint:
• Contribution towards unrecognised provident fund is not allowed as deduction.
• Contribution towards statutory provident fund is allowed as deduction u/s 37(1).
8. Section 36(1)(iva) Employers contribution to NPS
i Section 36(1)(iva) to provide that the employer’s contribution to the account of
an employee under a Pension Scheme as referred to in section 80CCD would be
allowed as deduction while computing business income.
ii However, deduction would be restricted to 14% of salary of the employee in the
previous year. [FA 24]
iii Salary, for this purpose, includes dearness allowance, if the terms of employment so
provide, but excludes all other allowances and perquisites.

16. Illustration
Munnabhai Ltd. contributes 20% of basic salary to the account of each employee under a
pension scheme referred to in section 80CCD. Dearness allowance is 40% of basic salary
and it forms part of pay of the employees.
Compute the amount of deduction allowable u/s 36(1)(iva), if the basic salary of the
employees aggregate to Rs. 10 lakh. Disallowance u/s 40A(9) be attracted, and if so, to
what extent?
9. Section 36(1)(V)

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Employer’s contribution towards an approved gratuity fund, subject to sec. 43B.

10. Section (36)(1)(Va) Any sum received by an employer from his employees as
contribution towards –
• Provident Fund; or
• Superannuation Fund; or
• Any other fund set up under the provision of the Employee’s State Insurance Act,
1948; or
• Any other fund for the welfare of such employees
Is treated as an income of the employer. Subsequently, when such sum is credited
by the employer to the employee’s account in the relevant fund on or before the due date
of crediting such contribution prescribed under the relevant Act#, then deduction is
allowed.
Example: As per the provisions Employee State Insurance Act, 1948 (ESI), all the
contributions under this Act are to be deposited within 21 days of the following
month. Similarly, all contributions under the Employees’ Provident Fund and
Miscellaneous Provisions Act, 1952 must be deposited within 15 days of the following
month.
Taxpoint
If employees contribution is deposited by the employer on or No treatment.
before the due date1
If employees contribution is not deposited by the employer on Taxable as business
or before the due date income.
Due date means the date by which the assessee is required as an employer to credit an
employee’s contribution to the employee’s account in the relevant fund under any Act, rule,
order or notification issued there under or under any standing order, award, contract of
service or otherwise
11. Section (36)(1)(vi) Capital expenditure on the purchase of animals
Sum realize on sale on carcasses or sale of animals, in the PY in which the animals dies or
becomes permanently useless.
12. Section 36(1)(vii) Bad debts
Any debt or part thereof, which becomes bad shall be allowed as deduction.
Taxpoint: It is the assessee, who decides whether a debt has become bad or not and the
Assessing Officer can never insist the assessee for production of proof that the debt had
become bad.
Conditions
1. Debt must be incidental to the business or profession of the assessee. There
must be a close nexus between the debt and the business of the assessee.

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Example: Bad debt arising out of advances made by a lawyer to his client to assist
him in purchasing properties is not admissible as bad debt. As it is not the business
of lawyer to provide loans. Such loss is not allowed in any provision of the Act.
2. The debt has been considered as Income of the assessee of that previous year
or of earlier previous years.
Example: Advance given to supplier for purchase of raw-material later forfeited, is
not allowed as deduction under this section, this is because the same has never been
a part of income. However deduction can be claimed u/s. 37(1).
Exception: Bad debt arising due to insolvency of borrower is allowed as deduction
provided money has been lent in ordinary course of money lending business (even
though such money lent had never been a part of income).
3. It must have been written off in the accounts of the assessee.
Taxpoint: Provision for bad debt is not allowed as deduction.
4. Business must be carried on during the previous year of any part of the previous year.
Taxpoint: Bad debt of a discontinued business is not allowed as deduction even though
the assessee has any other business continued.
5. It must be of a revenue nature
Taxpoint: Bad debt arising due to insolvency of a debtor for sale of an asset (not
goods) is not allowed as deduction.
Notes:
• Bad debt is not allowed as deduction to the assessee who maintains accounts on
cash basis.
• Bad debts are also allowed in the hands of successor of the business.
6. Recovery of bad debts
Particulars Amount
Amount recovered XXXX
Less: Bad debt claimed – Bad debt allowed as deduction XXXX
Taxable bad debt recovery (if positive) XXXX
Note: Such recovery shall be taxable irrespective of the fact whether the business
is continued or not.
13. Sec. 36(1)(ix) Family Planning Expenditure
Applicable to: Company only
Purpose of such expenditure: Such expenditure must have been incurred for promotion
of family planning among its employees.
Quantum of deduction:
a. Revenue expenditure is fully allowed as deduction.

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b. Capital expenditure shall be allowed in 5 equal instalments commencing from the

previous year in which it is incurred.
Treatment in case of sale of asset acquired for family planning:
Treatment shall be in the same manner as in the case of sale of asset used for scientific
Research u/s 41(3).
KEY NOTE: Unabsorbed capital expenditure is carried forward for indefinite period of
time in the same manner as un absorbed depreciation.
14. Sec. 36(1)(xv) Securities transaction tax
Securities transaction tax paid by the assessee in respect of the taxable securities
transaction entered into in the course of his business during the previous year shall be
allowed as deduction. Income arising taxable securities transaction must be included in the
income computed under the head “Profit and Gains of business or profession”.
STT under the head PGBP Allowed expenditure
STT under the head Capital Gain Disallowed expenditure
15. Sec. 36(1)(xvi)
Commodities transaction tax
Commodities transaction tax paid by an assessee in respect of the taxable commodities
transaction entered into in the course of his business during the previous year shall
be allowable as deduction, if the income arising from such taxable commodities transaction
is included in the income computed under the head “PGBP”.

GENERAL DEDUCTIONS [SEC. 37(1)

Any expenditure which is not specifically provided in any provisions (discussed) earlier) in
the Act and fulfils following conditions, shall be allowed as deduction under this section.
1 It must be real and not notional, fictitious or in lieu of distribution of profit.
2 It must be expended wholly & exclusively for the purpose of business or profession carried
on by the assessee.
3 It must have been incurred in the previous year.
4 It must not be a personal expenditure.
5 It must be lawful and not have been incurred for any purpose, which is an offence or
prohibited, under any law.

1. It should be real and not notional, fictitious or in lieu of distribution of profit.

a. Premium paid for loss of profit policy is allowed
b. Interest on loan paid to proprietor is disallowed.
c. Salary paid to proprietor is disallowed.

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2. It should be expended wholly & exclusively for the purpose of business or profession
carried on by the assessee.
a. Expenditure on management of temple in factory premises for recreation of employees
being treated as incidental to business and is allowed as deduction.
b. Expenditure incurred by the company on foreign visit of a director and his wife in
connection with medical treatment of the director is allowed.
c. Insurance premium paid by a firm on life insurance policies of its partners is disallowed.
d. Premium for key man insurance policy is allowed
3. It should have been incurred in the previous year.
a. Anticipated future expenditure or loss (e.g. provision for bad debt) is disallowed.
b. Loss or expenditure relating to any business or profession discontinued before the
commencement of previous year is disallowed.
4. It should not be a personal expenditure
a. A reasonable expense on Diwali & Mahurat is allowed.
5. It should not be a capital expenditure.
a. Litigation expenditure incurred in order to defend or maintain an existing title to the
assets is allowed.
Taxpoint - Litigation expenditure incurred for curing any defect in the title of asset
shall not be allowed (as because it is of capital nature).
b. Legal expenditure incurred to alter the Articles of Association of the company, in
conformity with the amendments in the law is allowed.
Taxpoint - Fee paid to ROC (Registrar of Companies) for alteration of MOA is
disallowed (being a capital expenditure)
c. Expenditure incurred on stamp fee, registration fee etc. on raising loan is allowed.
Taxpoint - Such expenditure incurred for issue of shares is disallowed.
d. Expenses on registration of trademark are allowed.
Taxpoint - Litigation expenditure incurred for registration of shares is disallowed.
e. Compensation paid to a worker in order to dismiss him is allowed.
f. Annual listing fees paid to stock exchanges is allowed.
g. Payment for obtaining tenancy right was in the nature of premium is disallowed.
h. Expenditure on valuation of shares is allowed.
i. Contribution to trade syndicate with a view to prevent uneconomic competition is an
allowed expenditure.
j. Deposit made under “Tatkal Telephone Deposit” scheme is allowed.
Taxpoint - When such deposit is withdrawn, the same shall be treated as taxable
income u/s. 41(1)
k. Expenditure incurred on shifting of administrative office as a result of amalgamation is
allowed.

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l. Substantial repair charges on plant and machinery provided the repair is a current
nature, is allowed.
m. Fees paid for increase of authorized capital is disallowed.
n. Registration expenses paid by the company at the time of registration are disallowed.
o. Expenditure on raising equity and preference share capital is disallowed.
p. Litigation expenditure incurred to protect trade mark of the assessee is allowed.
q. Royalty paid by the assessee for use of trademark of another company is allowed
6. It should be lawful and not have been incurred for any purpose, which is an offence
of prohibited, under any law. (in India or outside India)
Particulars Deduction u/s 37(1)
Penalties imposed for infraction of law Not allowed
Penalty paid on failure to deduct TDS Not allowed
Interest paid in respect of delayed payment on income tax Not allowed
Any interest/ penalty paid under direct tax laws Not allowed
Interest paid to GST department on arrears of GST Allowed
Penalty levied under Central GST Act Not allowed
Demurrage paid to port authorities in connection with release of Allowed as it is not a
confiscated goods fine paid for
infraction of law
Interest paid under Employees Provident Fund & Misc provision Act Allowed
1952
Penalty paid by the assessee contractor for non-completion of Allowed as it is not a
contract within stipulated time fine paid for
infraction of law
settlement amounts should not be allowed as business expenses. To clarify this
proposition Explanation 3 has been amended (with effect from the assessment year 2025-
26) to clarify that "expenditure incurred by an assessee for any purpose which is an offence
or which is prohibited by law shall include any expenditure incurred by an assessee to settle
proceedings initiated in relation to a contravention under any law for the time being in force,
as may be notified by the Central Government [Amendment FA 24]

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EXPENDITURE ON ADVERTISEMENT [SEC. 37(2B)]

In view of section 37(2B), the expenditure incurred by as assessee on advertisement in any

souvenir, brochure, tract, pamphlet or the like, published by a political party, is not deductible.
Any other expenditure on advertisement is government by section 37(1).
Disallowance under section 37(2B) and deduction under section 80GGB – Contribution to
political party is deductible under section 80GGB (if a contribution is made by an Indian
company) or under section 80GGC (if a contribution is made by a person other than an Indian
company). Expenditure by way of advertisement to a magazine owned by a political party is
treated as “contribution” to a political party to the purpose of section 80GGB, but not for the
purpose of section 80GGC. In other words, advertisement expenditure (in a magazine owned by
a political party) is deductible under section 80GGB if the tax payer is an Indian company but
the same is not deductible under section 80GGC if the taxpayer is a person other than an Indian
company.

DISALLOWED EXPENDITURE [SEC. 40]

1. Section 40(a) (i)

Interest royalty, fees for technical services payable to non-resident or
outside India or in India to a non-resident or to a foreign company on which tax is
deductible but not deducted or after deduction not deposited before the time limit shall
be disallowed.
TDS If such expenditure deductible in If such expenditure
the current previous year deductible in any
subsequent previous year
Case 1: Tax is 100 per cent of such If tax is deducted in any
deductible but not expenditure is disallowed in the subsequent year, the
deducted current year expenditure (which is
disallowed in the current
year) will be deducted in the
year in which TDS will be
deposited by the assessee
with the Government
before the due date of
filing return u/s 139(1).

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Case 2: Tax is 100 per cent

such If tax is deposited with the
of
deductible (and is so expenditure is disallowed in the Government after the due
deducted) during the current year date of submission of
current financial year return of income, the
but it is not deposited expenditure (which is
on or before the due disallowed in the current
date of submission of year) will be deductible in
return of income under that year in which tax will
section 139(1) be deposited before the
due date of filing return u/s
139(1).
In case 1 relief is given in (and not in case 2). This relief is available if the
following conditions are satisfied –
1. Tax is deductible on the aforesaid payment but it is not deducted (wholly or partly)
by the payer (i.e. case 1).
2. The payer is not deemed to be an assessee-in-default under the first proviso to
section 201(1). Under the first proviso to section 201(1), the payer is not deemed to
be an assessee – in – default if -
a. The recipient has furnished his return of income under section 139.
b. The recipient has taken into account the above income in such return of income.
c. The recipient has paid the tax due on the income declared in such return of income,
and
d. The payer uploads a certificate to this effect from a chartered accountant in
Form No. 26A.
If the above conditions are satisfied, then for the purpose of section 40(a)(i) it shall be
deemed that the payer has deducted and paid the tax on such amount on the date of the
furnishing of return of income by the recipient

17. Illustration
Details in respect of interest expenditure is given here-in-below. Determine the year of
allowability.
Status of Date on which Actual date Due date Actual date Allowability
Deductee tax is supposed of TDS of of depositing
to be deducted depositing TDS
TDS
Resident 20-7-2024 20-7-2024 7-8-2024 7-8-2024
Resident 20-7-2024 20-7-2024 7-8-2024 2-9-2024
Resident 20-7-2024 20-7-2024 7-8-2024 3-4-2025

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Resident 20-7-2024 20-7-2024 7-8-2024 30-06-2025

Resident 20-7-2024 20-7-2024 7-8-2024 12-12-2025

Resident 20-7-2024 20-7-2024 7-8-2024 3-4-2025

Resident 17-6-2024 17-6-2024 7-7-2024 Not

deposited
Resident 10-11-2024 Not 7-12- Not
deducted 2024 deposited
Non- Resident 20-7-2024 20-7-2024 7-8-2024 7-8-2024

Non- Resident 20-7-2024 20-7-2024 7-8-2024 2-9-2024

Non- Resident 20-7-2024 20-7-2024 7-8-2024 3-7-2025

Non- Resident 16-2-2025 16-2-2025 7-3-2025 10-12-2025

2. Section 40(a)(ia)
In respect of the following payments / credit to a resident, tax is deductible under
Chapter XVII-B of the Income-Tax Act [i.e. sections 192 to 206AA]:
1 Salary 8 Payment in respect of life insurance
policy
2 Interest 9 Payment in respect of deposits under
NSS
3 Dividends 10 Payment on account of certain units
4 Winnings from lottery or crossword 11 Rent
puzzles
5 Winnings from horse races 12 Payment on purchase of immovable
property
6 Payments to contractors 13 Technical/professional fees, royalty,
fees to a part time director.
7 Commission or brokerage [including 14 Payment of compensation on
insurance commission] acquisition of immovable property.
If TDS default is committed in respect of the any payment/ credit given to a
resident, 30 per cent of such expenditure is disallowance in the hands of payment
under section 40(a)(ia). These provisions are given below –

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TDS default If such expenditure deductible in If such expenditure

the current previous year deductible in any
subsequent previous year
Case 1: Tax is 30 per cent of such expenditure is If tax is deducted in any
deductible but not disallowed in the current year subsequent year, the
deducted expenditure (which is
disallowed in the current
year) will be deducted in the
year in which TDS will be
deposited by the assessee
with the Government
before the due date of
filing return u/s 139(1).
Case 2: Tax is 30 per cent of such expenditure is If tax is deposited with the
deductible (and is so disallowed in the current year government after the due
deducted) during the date of submission of
current financial year return of income, the
but is not deposited on expenditure (which is
or before the due date disallowed in the current
of submission of return year) will be deductible in
of income under that year in which tax will
section 139(1) be deposited before the
due date of filing return u/s
139(1).
In case 1 relief is given in (and not in case 2). As per 40(a)(i)
3. Section 40(a)(ib)
a. Any consideration paid or payable to a Non-Resident for a specified service on which
Equalization Levy is deductible under Chapter VIII of Finance Act, 2016, and
b. Such levy has not been deducted or after deduction, has not been paid on or before
the due date specified Sec. 139(1).
Note: Allowed as a deduction while computing Income of the previous year in the year in
which such Levy has been paid.
4. Section 40(a)(ii)
Any sum paid on account of tax or cess levied on profits on the basis of or in proportion
to the profits and gains of any business or profession.
5. Section 40(a)(iib)
Any amount paid by way of Royalty, license fee, service fee which is levied exclusively on
a state government undertaking by state government.

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An authority, a board or a body established or constituted by or under any Act of the

state government or owned or controlled by the state government
6. Section 40(a)(iii)
Salary paid outside India without TDS.
7. Section 40(a)(v) Tax on perquisite paid by the employer
The provisions of 40(a)(v) are given below
1 The employer provides non-monetary perquisites to employees.
2 Tax on non-monetary perquisites is paid by the employer.
3 The tax so paid by the employer not taxable in the hands of employees by virtue of
section 10(10CC).
4 While calculating income of the employer, the tax paid by the employer on non-
monetary perquisites is not deductible u/c 40(a)(v).
8. 40A(2) Amount not deductible in respect of payment to relatives
Any payment made by an assessee to a related person shall be disallowed to the extent
it is excess or unreasonable as per the Assessing Officer.
Definition of related persons:
List of related persons in case of different assessee
For the assessee Related Person means
An Individual Relative
A person in whose business or profession the individual has
substantial interest.
A Company Director of the company or any relative of the director
A person in whose business or profession the company or any of its
director or relative of such director has substantial interest.
Any other company carrying on business or profession in which the
aforesaid company has substantial interest.

E.g. X Ltd. holds 20% equity shares in Y Ltd., the assessee. Further,
X Ltd. also holds 20% equity shares in Z Ltd. Z Ltd. shall also be
considered as relative for Y Ltd. provided Z Ltd. is carrying on
business or profession.
A Firm Partner of the firm or relative of partner
A person in whose business or profession the firm or any of its
partner or relative of such partner has substantial interest.
An AOP A member of the Association or a relative of the member.
A person in whose business or profession the AOP or any of its
member or relative of such member has substantial interest.
An HUF A member of the family or relative of such person

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A person in whose business or profession the HUF or any of its

member or relative of such member has substantial interest.
Any assessee • An individual who has a substantial interest in the business or
profession of the assessee or the relative of such individual.
• A company, which has a substantial interest in the business or
profession of the assessee or the director of such company or
relatives of such a director.
• A Firm/HUF/AOP etc., which has a substantial interest in the
business or profession of the assessee or the partner/member
of such firm/HUF/AOP or relatives of such partner/member.
• A company, one of whose director has a substantial interest in
the business or profession of the assessee or directors of such
company or any relative of such directors.
• Firm, AOP, HUF, one of whose partner/ member has a
substantial interest in the business or profession of the
assessee or any partner/member of such Firm/AOP/ HUF or
any relative of such person.
Excessive or unreasonable: Whether any expenditure is in excess or unreasonable is
to be decided after considering the fair market value of the goods, services or facilities
for which payment is made or the legitimate need of the business or profession of the
assessee or the benefit arising to the assessee therefrom.
Where an assessee sells his goods at a lower rate, there is no expenditure incurred by
him, hence sec. 40A(2) shall not be invoked.
9. 40A(3) Amounts not deductible in respect of expenditure exceeding Rs. 10,000 /
35,000
a. If any payment is made in excess of Rs. 10,000 (In case of plying. Hiring or leasing
Goods carriage above Rs. 35000) otherwise than by a crossed cheque or bank
draft (crossed) then 100% of such expenses will be disallowed.
b. A payment (or aggregate of payment made to person in a day) in respect of the above
expenditure exceeds Rs. 10,000.
In order to promote digital transactions, the payments or receipts through other notified
electronic modes. Have been proposed to be included in the list of acceptable mode of
payment.

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Important Points
• If aggregate of payment made to a person in a day in cash exceeds Rs. 10,000 or
Rs. 35,000, then whole amount will be disallowed u/s 40A(3)
• The expenditure should be revenue expenditure allowable as deduction under any
section under this head. Capital expenditure which is not allowable as
deduction u/s 30 to 37 is not covered u/s 40A(3).

Exception as per Rule 6DD: [Not. No 97/2008 dt 10/10/2008]

a. Payment made to Reserve Bank of India, Banking Company, State Bank of India and its
Subsidiaries, any Co – operative Bank or Land Mortgage Bank, any Primary Agricultural
Credit Society or any Primary Credit Society and Life Insurance Corporation of India.
b. Payment made to Government and as per rules such payment is required to be made in
legal tender
c. Payment through banking system –
1. Any Letter of Credit arrangement through a Bank,
2. A mail or Telegraphic Transfer through a Bank,
3. Book Adjustment from any account in a Bank to any other account in that or any
other bank,
4. Bill of exchange made payable only to a Bank,
5. Use of Electronic Clearing System through a Bank Account,
6. Credit Card and Debit Card,
d. Payment by book adjustment against any liability incurred for goods supplied or
services rendered.
e. Payment made for agricultural or forest produce or produce of animal husbandry or
dairy or poultry or fish or fish products or products of horticulture or apiculture, to
the cultivator, Grower or producer of such products.
f. Payment to Producers of Goods in cottage industry without the aid of power.
g. Payment made in a place which on the date of such payment is not served by any Bank.
h. Any terminal retirement or gratuity payment to an Employee or his legal heirs,
provided the aggregate of the sum payable does not exceed Rs. 50,000.
i. Payment to Employees on temporary posting for a continues period of 15 days or more
if such payment is made after deduction of tax at source and such employee does not
maintain any bank account at such place.
j. Payment made on a day on which banks were closed due to holiday or strike
k. Payment made through Agents who is required to make payment in cash for goods or
services on behalf of the Principal / Assessee
l. Payment through Authorised Dealer or Money Changer against purchase of Foreign
Currency or Travellers’ Cheque

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18. Illustration
Points to be kept in mind Examples
If an assessee makes payment of Yeda Anna paid to Vasuli bhai Rs. 12,000 in cash against
two different bills (none of them his Bill No. 482 of Rs. 6,000 and Bill No. 572 of Rs. 6,000.
exceeds Rs. 10,000) at the same Nothing shall be disallowed under this section.
time to the same person in cash,
provision of sec. 40A(3) is not
attracted.
If an assessee makes payment of a Yeda Anna paid to Vasuli bhai in cash (against bill 421)
single bill (exceeding Rs. 10,000) on Of Rs. 24,000 as follows:
different days to the same person On 7/12/2024 Rs. 8,000
in cash, provision of sec. 40A(3) is On 8/12/2024 Rs. 8,000
not attracted, provided any of the On 9/12/2024 Rs. 8,000
payment does not exceed Rs. Nothing shall be disallowed.
10,000.
Where payment is made over Rs. Yeda Anna paid to Vasuli bhai (against bill 712) of Rs.
10,000 at a time, partly by account 50,000, in form of account payee cheque Rs. 32,000, Rs.
payee cheque & partly in bearer 8,000 in cash and balance Rs. 10,000 in bearer cheque
cheque hence Nothing shall be disallowed.
The provision of sec. 40A(3) is Yeda Anna paid for purchase of building Rs. 90,000 in
attracted only when such cash. Nothing shall be disallowed under this section, as
expenditure is claimed as deduction such amount has not been claimed as deduction u/s. 30 to
u/s. 30 to 37. 37. But Sec 43 (1) shall apply.
If part of the expenditure is Yeda Anna purchased goods from his brother of Rs.
already disallowed under any 14,000 (market value of which is Rs. 8,000) and paid in
provision of this Act. Then cash Rs. 6,000 shall be disallowed u/s. 40A(2) and nothing
disallowance shall be calculated on shall be disallowed u/s. 40A(3) as allowed expenditure
the allowed portion of the does not exceed Rs. 10,000.
expenditure.
The monetary limit for payment to Mr. Yeda Anna made following payment in case to a road
Road Carrier is Rs.35,000. transport operator for their respective bills:
Rs.23,000 to Mr. Akela on 10.5.2024 against his bill no.
540.
Rs.32,000 to Mr. Bandar on 10.12.2024 against his bill no.
770.
Rs. 37,000 to Mr. Hatela on 10.1.2025 against his bill no.
992.

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Payment made to Mr. Hatela shall be disallowed fully

under section 40A(3).

19. Illustration
Determine the amount of disallowances under the head “Profits & gains of business or profession”.
1. Shaktiman Ltd. purchases goods on credit from Yamala Ltd. on 9-9-2024 for Rs. 32,000 which
it pays by a bearer cheque on 11-11-2024.
2. Shkatiman Ltd. purchases raw materials on credit from Yamala who holds 20% equity share
capital in Shaktiman Ltd. amount of bill is Rs. 42,000 (market value Rs. 38,000). The bill is
paid in cash on 14-6-2024.
3. Kilwish Ltd. purchases goods on credit from Geeta Ltd. on 10-4-2024 for Rs. 13,000 and on 16-
4-2024 for Rs. 14,000. Total payment of Rs. 27,000 is made in cash on 1-5-2024.

PROVISION FOR GRATUITY TO EMPLOYEE SEC 40A(7)

In general provision or reserve is not allowed. However, provision for Gratuity is allowed
provided the amount has become due for payment.
For Example: Mr. Arnold Joshi is retired from ABC Ltd on 28/03/2024 and gratuity of Rs. 3
Lac has become due for payment. The employee has not completed formalities till 31/03/2024
and the company has created a provision for Gratuity, such provision is allowed.

CONTRIBUTION BY THE EMPLOYER TO NON-STATUTORY FUNDS (SEC 40A(9))

Any fund other than RPF, SF, AGF, or Pension Fund.

DEEMED INCOME SEC 41

Deduction
already Nature of Receipt treated as Deemed Year in which taxable
allowed u/s income
30-38 Recovery of loss or Expenditure or trading Year in which recovered or
liability which was already allowed, including written off by the assessee by
remission or cessation of liability effected by remission or cessation.
a unilateral act.

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32(1)(i) Balancing charge on assets in respect of which Taxable in the year in which
depreciation is claimed, is sold / discarded / amount becomes due.
demolished / destroyed
Balancing charge = Net Consideration Less
WDV.
35(2) Amount realised on sale of Capital Assets used Year in which transfer takes
for Scientific Research. place
36(1)(vii) Bad Debts earlier allowed subsequently Year in which it is recovered
recovered by the assessee.
36(1)(viii) Amount withdrawn from Special Reserve Year in which it is withdrawn
created.
- Benefit of set-off loss: Unabsorbed loss Deemed Business Income =
pertaining to the year in which the business or Income u/s 41(1)/(3)/(4)/(4A)
profession was discontinued, is permitted to Less: Loss of Discounted
be set off against Deemed Business Income Business.
u/s 41(1)(3)(4)(4A)

CERTAIN EXPENDITURES ALLOWED ONLY IF PAYMENT IS MADE BY DUE DATE OF FILLING OF

RETURN [SEC.43B]

1. Type of expenditure
Following expenditures are allowed only if payment is made by due date of filling of
return
a. Tax, Duty, cess, etc, by whatever name called, payable to Government.
b. Employer contribution to any provident fund, superannuation fund, gratuity fund or
any other fund for the welfare of employees
c. Bonus or commission to employees.
d. Interest on loan to public financial institutions (i.e. ICICI, IFCI, IDBI, LIC and
UTI) or a State financial corporation; or State industrial investment corporation.
da. Any sum payable as interest or any loan or borrowing from a deposit – taking non -=
banking finance company (NBFC) and systematically important non deposit – taking
NBFC
e. Interest on loan to a scheduled bank
f. Leave encashment payable to employee.
g. Any sum payable by Assessee to the Indian Railways for use of Railway Assets.
h. Any sum payable by the assessee to a micro or small enterprise beyond the time-
limit specified in section 15 of the Micro, Small and Medium Enterprises

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Development Act, 2006 would be allowed as deduction only in that previous year in
which such sum is actually paid.
1 Section 15 of the of the Micro, Small and Medium Enterprises Development
Act, 2006 mandates payment of goods or services to supplier, being a micro
or small enterprises by the buyer on or before the date agreed upon
between them in writing i.e., as per the written agreement, which cannot
be more than 45 days from the day of acceptance or the day of deemed
acceptance of any goods or services by a buyer from a supplier. If there is
no such written agreement, the payment shall be made before the appointed
day i.e., within 15 days.
2 If the sum payable by the assessee to a micro or small enterprise is paid as
per written agreement (maximum within 45 days) or within 15 days in case of
no agreement, the deduction can be claimed on accrual basis if mercantile
method of accounting is followed by the assessee.
3 However, if the sum payable by the assessee to a micro or small enterprise is
not paid as per written agreement or within 15 days in case of no agreement,
the deduction would be allowed in the previous year in which it is actually
paid.
Example
Mr. A has purchased goods of ₹ 10,000 from A & Co., a micro enterprise on
1.3.2025. As per the written agreement between them, the payment has to be
made by 5.4.2025. Mr. A follows mercantile method of accounting.
i If Mr. A paid the sum on 2.4.2025
Since Mr. A paid the sum on or before 5.4.2025, the deduction would be
allowed in P.Y. 2024-25.
ii If Mr. A paid the sum on 20.4.2025
Since Mr. A paid the sum beyond the time limit, the deduction would be
allowed in the year of actual payment i.e., P.Y. 2025-26.
Meaning of Micro and Small enterprise
SN Meaning
Manufacturing enterprises and enterprises rendering services
1 Micro Enterprise
Investment in Plant and Machinery or AND Turnover ≤ ₹ 5 crore
Equipment ≤ ₹ 1 crore
2 Small Enterprise
Investment in Plant and Machinery or AND Turnover ≤ ₹ 50 crore
Equipment ≤ ₹ 10 crore
2. Due date of filling or return

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Where audit is compulsory 31st Oct of the A.Y.

In any other case 31st July of the A.Y.
Where assessee has entered into an international transaction 30th Nov of the AY
3. What if late payment or return
Deduction can be claimed in the year of payment
4. Advance payment
Advance payment shall not be allowed
5. What if assessee maintain accounts on cash basis
Sec. 43B shall have no relevance. If an assessee follows cash basis of accounting,
deduction shall be allowed only in the year in which payment is made.
• If outstanding interest of a bank is converted into loan then such conversion shall
not be treated as payment and such outstanding interest shall not be allowed as
deduction.
KEY NOTES

• With effect from the assessment year 2023-24] to provide that conversion of
interest payable into debenture [or any other instrument by which liability to pay is
deferred to a future date], shall not be deemed to have been actually paid.
• Sec. 43B is applicable only on allowed expenditure e.g. Sec. 43B has no impact on
Income tax because is at already disallowed u/s 40(a)

20. Illustration
Debit side of the profit and loss account of Mayank Ltd. shows the following expenses, which have
been due but are outstanding as on 31-3-2025
Payment outstanding on 31-3-2025 First payment Second payment
Particulars Amount Date Amount Date Amount
paid paid
Leave encashment expenses 65,000 01-06-25 15,000 25-12-25 50,000
Interest payable to Bank 14,000 10-06-25 3,000 13-12-25 11,000
Bonus payable to employees 87,000 02-05-25 30,000 30-09-25 57,000
Interest payable to LIC loan 75,000 13-05-25 50,000 10-01-26 25,000
Due date for filing return of income is 31-10-2025
Find out the previous years in which the aforesaid payments are deductible. The company maintains
books of accounts on the basis of mercantile system of accounting.

SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION FOR TRANSFER OF ASSETS OTHER
THAN CAPITAL ASSETS IN CERTAIN CASES [SEC. 43CA]

Section 43CA was inserted with effect from the assessment year 2014-15. By virtue of this
provision, on transfer of land and / or building (other than capital asset), stamp duty value

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adopted / assessed / assessable by stamp duty authority shall be deemed to full value of
consideration for he purpose of computation of income under the head” Profits and gains of
business or profession” if
• Stamp duty value > 110% of consideration

In case of more than one stamp duty value

Where the date of agreement fixing the value of consideration for transfer of the asset and
the date of registration of such transfer of asset are not the same, stamp duty value on the
date of agreement shall be taken as full value of consideration where the amount of
consideration (or a part thereof) has been received by way of an account payee cheque/ draft
or by use of electronic clearing system through a bank account (or through prescribed
electronic mode) on or before the date of agreement for transfer of the asset. Other
provisions of sec 50C will be applicable for the operation of sec 43CA.

COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNTS [SEC. 44 AA]

1 Specified Profession: Legal, medical, engineering, architectural profession or profession of

accountancy, technical consultancy, interior decoration, information technology, company
secretary, authorised representative, film artist or any other profession as is notified by
the Board in the Official Gazette.
2 Following books of account are required to be maintained as per Rule 6F
a. Cash book;
b. Journal, if mercantile system of accounting is followed;
c. Ledger;
d. Carbon copies of machine numbered bills, exceeding ₹ 25, issued by the person; and
e. Original bills wherever issued to the person and receipts in respect of expenditure
incurred by the person or, where such bills and receipts are not issued and
expenditure incurred does not exceed ₹ 50, payment vouchers prepared and signed by
the person.
f. Assessee engaged in medical profession are required to maintain two more books -
• Daily Case Register in Form 3C.
• Inventory records of drugs, medicines and other consumable accessories used in
the profession.

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Case Person falling Turnover or income criteria Maintenance of

under this Accounts
category Existing business New business
A Persons Gross receipts in the Gross total Maintain such books of
carrying on profession exceeds ₹ receipts in the account and other
specified 1,50,000 in all of the profession for documents as prescribed
professions three years immediately that year is by Rule 6F2
preceding the previous likely to exceed
year. ₹ 1,50,000.
B Gross receipts in the Gross total Maintain such books of
profession does not receipts in the account and other
exceed ₹ 1,50,000 in any profession for documents as may enable
one of the three years that year is not the Assessing Officer to
immediately preceding likely to exceed compute their taxable
the previous year. ₹ 1,50,000. income under the Income-
tax Act.
C Persons Profit from such Income/ total Maintain such books of
carrying on a profession or business sales, etc. is account and other
non- specified exceeds ₹ 1,20,000 (in likely to exceed documents as may enable
profession or case of individual & HUF the said amount. the Assessing Officer to
any business ₹ 2,50,000); or compute their taxable
income under the Income-
The total sales or tax Act.
turnover or gross
receipts thereof is in
excess of ₹ 10,00,000
(in case of individual &
HUF ₹ 25,00,000),
- In any of the 3 years
immediately preceding
the P.Y.
D Aforesaid limit does not Income is not Not required to maintain
exceed in all of the 3 likely to exceed any books of account.
years immediately said limit and
preceding the P.Y. total sales,
turnover or
gross receipt is
not likely to

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exceed said
limit.
E An assessee (covered u/s 44AE, 44BB or 44BBB) who claims Maintain such books of
income from such business to be lower than the deemed account & other
income computed in accordance with the respective sections. documents as may enable
F Where the provision of sec. 44AD(4) is applicable and the AO to compute his
income of the assessee exceeds the maximum amount which taxable income under the
is not chargeable to income-tax (i.e. basic exemption limit) Income-tax Act.

Notes
1 Period for which books of account is to be maintained [Rule 6F(5)]: The books of
account and other documents shall be kept and maintained for a period of 6 years*
from the end of the relevant assessment year.
2 Penalty: Where an assessee fails to comply with the provision of sec 44AA, he shall
be liable to pay penalty u/s 271A of ₹ 25,000.
3 As per sec. 2(12A), books or books of account includes ledgers, day-books, cash
books, account-books and other books, whether kept in the written form or in
electronic form or in digital form or as print-outs of data stored in such electronic
form or in digital form or in a floppy, disc, tape or any other form of electro-magnetic
data storage device.

21. Illustration
Vinodi is a person carrying on profession as Film Artist, His Gross Receipts from profession are as
under –
Financial year 2021 – 22 2022 – 23 2023 – 24
Amount Received Rs. 1,15,000 Rs. 1,18,000 Rs. 2,10,000
What is his obligation regarding maintenance of Books of accounts for each Assessment Year u/s
44AA?

WHEN AUDIT OF CERTAIN PERSON IS COMPULSORY [SEC. 44AB]

1. Applicability
Tax audit is applicable in the case of
a. Assessee carrying on any Business where Total Turnover or Gross Receipts
exceeds Rs. 1 Crore, or
If the following 2 conditions are satisfied, compulsory audit is required only if total
sales, turnover or gross receipts in business exceeds Rs. 10 Crore

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1. Aggregate of all receipts in cash during the previous year does not exceed 5%
of such receipt.
2. Aggregate of all payments in cash during the previous year does not exceed 5%
of such payment.
For this purposes, payment/receipts by a cheque / draft, which is not account payee,
shall be deemed to be payment / receipt in cash.
b. Assessee carrying on profession, where Gross receipts exceeds Rs. 50 lakhs, or
c. Assessee carrying on the business referred to u/s 44AD having income exceeding basic
exemption and declaring income lower than prescribed u/s 44AD and > basic exemption
limit.
d. If the provision of section 44 AD(4) are applicable in his case and his income exceeds
the maximum amount which is not chargeable to income tax in any previous year.
2. Tax point
Provided that this section shall not apply to the person who declares profit and gains for
the previous year in accordance with the previous year in accordance with the provision of
sub section (1) of section 44AD and his total sales, turnover or gross receipt as the case
may be in business is<= 200 lakhs in such previous year
3. Consequence of non – compliance:
Defective Return
If the Audit Report obtained under section 44AB is not filed along with the Return of
Income, then the Assessing Officer may treat the return as Defective Return. Presently,
Tax Audit Report should be e – filed, along with the Return of Income.
Penalty under section 271B
Failure To get accounts audited,
To obtain an Audit Report required Assessee is liable to pay a penalty at 0.5% of
under section 44AB, or Gross Turnover/ Receipts or Rs. 1,50,000
To furnish the said report before whichever is less, subject to Section 273B)
the due dates
No penalty shall be leviable, if he proves that there was a reasonable cause of such failure.
(Section 273B)

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PRESUMPTIVE TAXATION SCHEME FOR ASSESSEES ENGAGED IN ELIGIBLE PROFESSION

SPECIAL PROVISIONS FOR COMPUTING INCOME ON ESTIMATED BASIS

44AD 44ADA 44AE
Nature of Any business except the Specified Professions Plying, Leasing or Hiring
Business business referred to in u/s 44AA goods carriages. (Goods
section 44AE. carriages may be owned by
the assessee or taken on
hire purchase or instalment
scheme
Assessee Resident Individual, HUF Resident Individual/ Any Assessee
or a partnership firm, but P. Firm (Not LLP)
not a LLP firm
Not (i) Person claiming
Applicable deduction u/s 10AA
to- or u/s 80IA to 80RRB
in the PY
(ii) Person carrying on
specified profession;
(iii) A person earning
commission or
brokerage income; or
(iv) A person carrying on
any agency business.
Restriction Where an eligible assessee
declares profit for any PY
in accordance with this
section and he declares
profit for any of the next
5 AY’s not in accordance
with this section, he shall
not be eligible to claim the
benefit of this section for
next 5 AY’s [44AD(4)]
Restriction Gross receipts Gross receipts Own not more than 10
on =< Rs. 200 Lakhs. / =< Rs. 50 Lakhs. / goods carriages,
applicability Rs. 300 Lakhs Rs. 75 Lakhs in the anytime during the PY.

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If the amount (or case of an assessee

aggregate of amounts) where the amount (or
receive during the aggregate of
previous year in cash/ amounts) received
bearer or crossed cheque/ during the previous
draft does not exceed 5 year in cash/ bearer
percent of the total or crossed cheque/
turnover/ gross receipts draft does not
of the previous year exceed 5 per cent of
the gross receipts of
the previous year.
Estimated 8% of Gross Receipts 50% of Gross 1. For Heavy vehicle
Income received or receivable Receipts received or Rs 1000 per ton of
during the PY, or higher receivable during the gross vehicle weight or
sum claimed to have been PY, or higher sum unladen weight as the
earned by the assessee claimed to have been case may be, for every
6% of total turnover earned by the month or part of a
or gross receipts which is assessee month
received by an account 2. Other than heavy
payee cheque or an vehicle
account payee bank draft Rs. 7,500 pm or part
or use of electronic during which the
clearing system through a carriage is owned, or
bank account during the [Vehicles owned includes
previous year or before vehicles purchased on Hire
the due date u/s 139(1). purchase or Instalment]
Refer note below
Non- allow Deductions allowable under sections 30 to 38 shall be deemed to have been given
ability of full effect to and no further deduction shall be allowed.
deductions Even in case of a firm, Even in case of a firm, Even in case of a firm,
while salary and interest paid salary and interest paid salary and interest paid
computing to partners is not to partners is not to partners is not
presumptive deductible. deductible. deductible.
income
Depreciation Is deemed to have been claimed and allowed. WDV shall be calculated
Accordingly
Set of other The income from these businesses will be aggregated with other incomes of the
losses assessee, and loss from any other activity can be set off against the estimated
income in accordance with section 70, 71 or 72.

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Chapter VI- Deductions under chapter VI-A will be available to the assessee, from the
A estimated incomes under these sections.
deductions
Advance 100% payable by 15th 100% payable by 15th Required to be paid on
Tax March March relevant dates
Books of The assessee, who files the return, estimating income at prescribed rate or a
Accounts higher income, will not be required to maintain books of account u/s 44AA, nor
and Audit required to get them audited u/s 44AB, in respect of such businesses.
thereof
Can lesser If 44AD(4) applies then Assessee may declare an income lower than the
income be he shall have to maintain specified amount. In such case he shall have to
shown? books of accounts u/s maintain books of accounts u/s 44AA and get them
44AA and get them audited by a CA u/s 44AB, irrespective of the
audited by a CA u/s 44AB turnover -
for that PY + next 5 PY’s
If his TI > basic exemption If his TI > basic Even if TI < = basic
limit exemption limit exemption limit

Meaning of certain terms

1. Heavy goods vehicle
Any goods carriage, the gross vehicle weight of which exceeds 12,000 kilograms.
2. Gross vehicle weight
Total weight of the vehicle and load certified and registered by the registering authority
as permissible for that vehicle.
3. Unladen weight
The weight of a vehicle or trailer including all equipment ordinarily used with the vehicle or
trailer when working but excluding the weight of driver or attendant and where alternative
parts or bodies are used the unladen weight of the vehicle means the weight of the vehicle
with the heaviest such alternative body or part

22. Illustration
Mr. Adhura commenced the business of operating goods vehicles on 01/04/2024. He purchased
the following vehicles during the PY 2024 – 25. Compute his income u/s 44AE for AY 2025 – 26
Gross vehicle weight Number Date of purchase
(in kilograms)
1 7,000 2 10/04/2024
2 6,500 1 15/03/2025
3 10,000 3 16/07/2024

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4 11,000 1 02/01/2025
5 15,000 2 29/08/2024
6 15,000 1 23/02/2025
Would your answer change if the goods vehicles purchased in April, 2024 were put to use only in
July, 2023?

IMPACT OF SECTION 115BAC UNDER THE HEAD PGBP

The below exemptions / deduction will not be allowed to the assessee (i.e. individual or Hindu
undivided family or association of persons (other than a co-operative society), or body of individuals,
whether incorporated or not, or an artificial juridical person) paying tax as per section 115BAC of
the Income tax Act, 1961.
S N Nature of Exemption/ Deduction New System Existing
of Tax u/s System of
115BAC Tax
1 Additional depreciation (section 32(1)(iia)) Not allowed Allowed
2 Tea / coffee / rubber development account (section 33AB) Not allowed Allowed
3 Site restoration fund (section 33ABA) Not allowed Allowed
4 Deduction for scientific research (section 35(1)(iia)/(iii), Not allowed Allowed
35(2AA))
5 Capital expenditure pertaining to specified business (section Not allowed Allowed
35AD)
6 Agriculture extension project (section 35CCC) Not allowed Allowed

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PRACTICAL QUESTIONS

23. Illustration
Examine with reasons, the allow-ability of the following expenses incurred by Mr. Manav, a
wholesale dealer of commodities, under the income-tax Act, 1961 while computing Profit and
Gains from Business or profession for the Assessment Year 2025 – 26
1 Construction of school building in compliance with CSR activities amounting to Rs. 5,60,000.
2 Purchase of building for the purpose of specified business of setting up and operating a
warehouse facility for storage of food grains amounting to Rs. 4,50,000
3 Interest on loan paid to Mr. X (a resident) Rs. 50,000 on which tax has not been deducted.
The sales for the Previous Year 2023 – 24 was Rs. 202 lakhs
4 Commodities transaction tax paid Rs. 20,000 on sale of bullion

24. Illustration
Mr. Jhunjhunwala furnishes you the following trading and profit & loss account for the previous
year ending 30/03/2025.
Rs Rs
Op. Stock 2,40,000 Sales 19,76,900
Purchases 16,60,000 Cl. Stock 4,50,000
Freight and duty 50,000
Wages 1,20,000
Rent, rate and taxes 45,000
Depreciation 48,000
Gross Profit 2,63,000
24,26,900 24,26,900
Office salaries 66,000 Gross Profit b/d 2,63,900
Interest on capital 12,000 Rent of staff quarters 19,000
Bad debts 9,000 Refund of income tax penalty 1,100
Income tax 11,000 Sale price of an old machine 25,000
Expenses of income tax 16,000 Recovery of bad debts, not 6,000
proceedings allowed as deduction in earlier PY
Diwali expenses 3,000 Sundry receipts 35,000
Legal expenses 6,000
Medical expenses of proprietor in 11,000
Govt. Hospital
Staff welfare expenses 4,000
Repairs of staff quarters 11,000

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Telephone expenses 15,000

Bonus payable to employees 30,000
Provision for taxes:
GST 40,000
Municipal taxes of staff quarters 14,000
General reserve 11,000
Entertainment expenses 11,000
Net profit 80,000
Total 3,50,000 Total 3,50,000
You are required to compute the taxable profits from business after taking the following into
consideration:
(i) Purchases include a purchase of Rs. 28,000, whose payment was made by a bearer cheque.
(ii) Opening stock was overvalued by 20% and closing stock was undervalued by 20%.
(iii) Office salaries included Rs. 10,000 paid to Mr. jhunjhunwala.
(iv) Diwali expenses include gift of Rs.1,500 made to relatives.
(v) The written down value of the block consisting of machinery at the start of the year is
Rs.80,000
(vi) The WDV of the block consisting of factory building at the start of the year is Rs. 1,20,000.
An addition was made to building on 1st Aug at a cost of Rs. 40,000. The newly added building
was destroyed by fire and the insurance company paid Rs.41,000 as insurance compensation.
(vii) GST amounting to Rs.30,000 was paid on 25Th June of AY.
(viii) Municipal tax was due as on 31st March but not paid.
(ix) Due date of filing ROI is 31st July.

25. Illustration
Chota bhai [30 years] is a businessman. For the year ending March 31, 2025, net profit as per
profit and loss account is Rs. 29,92,000. It is calculated without taking into consideration the
following expenses:
Particular Rs.
Capital expenditure on family planning for the benefit of employees 6,00,000
Entertainment expenditure incurred at the time when a foreign collaborator 2,10,000
visited Chota Bhai’s factory during December 2024.
Lump sum consideration for purchase of technical know-how 1,00,000
Expenditure on acquisition of patent right for manufacturing chemicals 10,00,000
Salary paid to an employee for the month of January 2025 in cash 10,000
Salary paid to another employee for the month of February 2025 by a bearer 36,000
cheque

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Provision for GST [out of which Rs. 10,000 is paid on September 10,2025 and Rs. 1,00,000
6,000 is paid on December 10, 2025 and the balance amount is disputed and yet
to be paid]
Amount paid to the Cochin University for conducting an approved marketing 25,000
research [research is however, not related to the business of Chota Bhai]
Depreciation available under section 32 on plant and machinery used for 6,64,000
manufacturing purposes
Find out the net income and tax liability of Chota Bhai for the assessment year 2025-26 taking
into consideration the following additional information [ignore section 115BAC pertaining to
alternative tax regime]:
1 Although depreciation is available of Rs. 6,64,000 under section 32. Chota Bhai does not
want to claim it in the current year.
2 During the previous year 2024-25, Chota Bhai has deposited Rs. 1,20,000 in public
provident fund.
3 Chota Bhai gets a Christmas gift of Rs. 60,000 from his elder brother on December 25,
2024.
4 Chota Bhai wants to claim deduction in respect of capital expenditure on family planning
under section 36. Alternatively, the asset which is purchased is eligible for depreciation
under section 32 at the rate of 15 per cent.
5 Chota Bhai has received income-tax refund of Rs. 80,000 on January 10,2025. It includes
Rs. 10,000 being interest on refund paid by the department.
6 Due date of filing of return of income for the assessment year 2025 - 26 is October 31,
2025.

26. Illustration
From the particulars given below compute the business income.
Rs Rs
Salary of staff 2,92,000 Gross profit 8,01,000
Office expenses 8,000 Rent of quarters given to 50,000
employees
Lump sum amount paid to acquire 40,000 Custom duty recovered from 60,000
technical know - how Govt. (not allowed earlier)
Provision for income tax 25,000 Sundry receipt 10,000
Exp. In acquisition of copy right 12,000 Recovery of bad debts 15,000
Cost of extension of office 36,000 (amount disallowed earlier Rs.
building 5,000)
Bad debts 15,000
Legal expenses 12,000

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Expenses on Diwali 15,000

General expenses 7,000
Sales tax 25,000
GST 44,000
Reserve of bad debts 11,000
Bonus 30,000
Legal exp. Regarding income tax 24,000
appeal
Net profit 3,10,000
9,36,000 9,36,000
Other relevant information is:
1. General expenses include expenditure of Rs.5,000 incurred on the training of an employee.
2. GST amounting to Rs.12,000 was due on 31st March the due date of deposit under GST law is
15th May of AY. It is deposited as under:
➢ Rs.5,000 on 29th June of AY
➢ Rs.7,000 on 15th Nov of AY
3. Salary of staff includes a payment of rs.30,000 paid to a relative employee which is considered
to be unreasonable to the extent of Rs.5,000.
4. Provision for income tax is excessive to the tune of Rs.5,000.
5. Bonus of Rs.5,000 which was due on 31st March was paid during the current year on
05/07/2025.
6. Bonus includes Rs. 20,000 due on 31/03/2025 which is paid on 02/11/2026.
7. The particulars about the assets of the business are as under:
➢ Building office WDV on 01/04/2024 Rs.5,00,000
➢ Godown WDV on 01/04/2024 Rs.3,00,000
➢ Plant and machinery WDV on 01/04/2024 Rs.2,80,000
8. Technical knowhow was acquired on 01/11/2024.
9. Due Date of furnishing the return of income is 31/10/2025.

27. Illustration
Mr. Tenzingh is engaged in composite business of growing and curing (further processing) coffee
in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information
pertaining to the year ended 31/03/2025 are given below:
Particulars Rs.
WDV of car as on 01/04/2024 3,00,000
WDV of machinery as on 01 04 2024 (15% rate) 15,00,000
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000

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Sale value of cured coffee 22,00,000

Besides being used for agricultural operations, the car is also used for personal use; disallowance
for personal use may be taken at 20%. The expenses incurred for car running and maintenance are
Rs. 50,000. The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the Assessment Year 2025 – 26. Show
the WDV of the assets as on 01/04/2025.

ASSESSMENT OF FIRM

INTERST / REMUNERATION TO PARTNER OF FIRM [40b]

Interest to partners whether on capital or on loan is allowed as deduction

Conditions 1 Interest must be authorized by the partnership deed.
2 Payment must pertain to a period after the partnership deed.
Deduction Minimum of the following is allowed as deduction
a Actual interest given to partner as per deed.
b Max. 12% p.a. simple interest.

28. Illustration
Case Interest on Rate of Interest Workings Disallowed
capital as per interest allowed as per amount
books of allowed to partnership
account partner deed
A 20000 10% 10%
B 30000 15% 12% (Rs. 30000 / 15) *3
C 30000 15% Deed is silent Interest must be
given as per deed
D 30000 20% 18% (Rs. 30000/20) *8
E 30000 15% 10% (Rs. 30000/15) *5
F 30000 30% 30% (Rs. 30000/30) *18
Applicability of Sec. 40(A) (2): Interest to partner paid at a rate higher than the normal market
rate of interest shall be governed by Sec. 40(A)(2) and excess interest shall be disallowed.

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REMUNERATION TO PARTNER

Remuneration to partner includes salary, fees, commission, bonus, etc

Conditions Remuneration is allowed subject to fulfilment of the following conditions
1 Partner must be a working partner,
2 Remuneration must be authorized by the partnership deed.
3 Payment must pertain to a period after the partnership deed.
Working partner means an individual who is actively engaged in conducting the
affairs of the business or profession of the firm. ‘Time devotion’ is not the
key factor for deciding the status of partner as a working partner.
Deduction Remuneration (in total) is allowed to the minimum of the following
a Actual remuneration allowed to all partners.
b Maximum permissible limit u/s. 40(b) (v) as discussed under.

Maximum permissible limit: [FA 24]

Amount of book-profit Maximum remuneration allowed
In case of loss Rs. 300000
In case of profit
First Rs. 600000 90% of book profit or Rs. 300000, whichever is higher
On balance book-profit 60% of next book profit.

COMPUTATION OF BOOK PROFIT

STEP 1 Find out the net profit of the firm as per Profit and Loss A/c.
STEP 2 Make adjustment as per Sec. 28 to 44DB (including adjustment for interest on
partner’s capital)
STEP 3 Add remuneration to partner, if debited to the Profit & Loss A/c.
STEP 4 Subtract unabsorbed depreciation but do not subtract brought forward business
losses. The resultant figure is book profit
Notes Income from house property, Income from other sources and Capital gains do not
form part of book profit. Deduction under chapter VIA (i.e. 80C to 80U) shall be
ignored for this purpose

29. Illustration
Rao & Jain, a partnership Firm consisting of two partners, report a Net Profit of Rs. 7,00,000
before deduction of the following items:

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1. Salary of Rs. 20,000 each p.m. payable to working partner of the firm (as authorized by the
deed of partnership).
2. Depreciation on Plant and Machinery u/s 32 (computed) Rs. 1,50,000.
3. Interest on Capital at 15% p.a. (as per the deed of partnership). The amount of Capital eligible
for interest is Rs. 5,00,000.
Compute:
1. Book Profit of the Firm u/s 40(b) of the Income Tax Act, 1961.
2. Allowable Working Partner salary of the Assessment year 2025 - 2026 u/s 40(b) of the IT Act,
1961.

30. Illustration
Ramesh and Suresh, partners of PP Traders, furnishes the following details –
Profit and loss account for the year ended 31-3-2025
Particulars Amount Particulars Amount
Bonus paid to employee 50,000 Gross Profit 10,00,000
Interest on loan taken from 45,000 Interest on drawings
bank
Other Expenses 40,000 Ramesh 2,000
Salary to partners Suresh 3,000
Ramesh 2,44,000
Suresh 4,88,000
Interest on capital @ 15%
Ramesh 4,500
Suresh 6,000
Depreciation 40,000
Net profit 87,500
10,05,000 10,05,000
Additional information
1. Depreciation for the year allowed u/s 32 is ₹ 30,000.
2. During the last year, firm has incurred loss of ₹ 8,50,000 (which includes unabsorbed
depreciation of ₹ 50,000).
3. Interest on loan taken from bank is yet to be paid. Compute total income of firm.

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PROFIT & GAINS OFF BUSINESS OR PROFESSION

31. Illustration
Compute deduction allowed
Partner Interest @ 16% Allowed @ 12% Disallowed
Tom 24,000
Dick 48,000
Harry 8,000
Note: Interest allowed in the hands of firm is treated as income of partner and disallowed is
added in the income of firm

32. Illustration
Compute deduction allowed
Book loss 2 Lakh
Partner Remuneration Allowed Disallowed
Tom 2,00,000
Dick 1,50,000
Harry 1,00,000
Total 4,50,000
Note: Remuneration allowed in the hands of firm is treated as income of partner and disallowed is
added in the income of firm.

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CAPITAL GAIN

CHAPTER 7 CAPITAL GAIN [SEC 45 TO 55A]

MEANING & BASIS OF CHARGE [SEC. 45]

Meaning As per section 45(1) profits or gain arising on transfer of a capital asset shall be
chargeable under the head capital gains.
Conditions
1 There should be capital Asset
2 The Capital Assets is Transferred by the Assessee
3 Such transfer takes place during the previous year
4 Such gain is not exempt u/s. 54.

CONDITION 1: THERE SHOULD BE CAPITAL ASSET [SEC. 2(14)]

Capital asset includes

(a) Property of any kind held by an assessee, whether or not connected with his business or
profession
(b) Any securities held by a Foreign Institutional investor which has invested in such
securities in accordance with the SEBI regulations.
(c) Any unit linked insurance policy (ULIP) issued on or after 1/2/2021 to which exemption
under section 10(10D) does not apply on account of –
i Premium payable exceeding ₹ 2,50,000 for any of the previous years during the term
of such policy; or
ii The aggregate amount of premium exceeding ₹ 2,50,000 in any of the previous years
during the term of any such ULIP(s), in a case where premium is payable by a person
for more than one ULIP issued on or after 1/2/2021.
However it does not include following capital asset
1 Any stock-in-trade, consumable stores or raw material held for the purposes of business or
profession.
2 Personal effect means any movable property held for personal use of the assessee or for
any dependent member of his family but excludes.
a Jewellery
b Archaeological Collection
c Drawings.
d Paintings
e Sculptures
f Any work of art.

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CAPITAL GAIN

Note: House Property is immovable property hence shall not be treated as personal effect.
Explanation:
For the purpose of this sub-clause, “jewellery” includes –
a Ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any precious
or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
b Precious and semi-precious stones, whether or not set in any furniture, utensil or other
articles or worked or sewn into any wearing apparel;
3 Rural agriculture land in India i.e., agricultural land in India which is not situated in any
specified area. As per definition, only rural agricultural lands in India are excluded from
the purview of the term ‘capital asset;. Hence urban agricultural lands constitute capital
assets.
Municipality or Cantonment board

Up to 10,000 Agro Land not treated as Capital Asset

Within 10,001 to Agro Land treated as Capital
1,00,000 Asset

Within 1,00,001 to Agro Land treated as Capital Asset

10,00,000

More than 10,00,000 Agro Land treated as Capital Asset

2 Km 6 Km 8 km Beyond 8 Km

4 6.5% gold bonds, 1977, 7% gold bonds, 1980 or National defence gold bonds, 1980 issued
by central government.
5 Special bearer bonds 1991 issued by central government.
6 Gold deposit bonds issued under the gold deposit scheme 1999.
Explanations: For the removal of doubts, it is hereby clarified that “property” includes and shall
be deemed to have always included any rights in or in relation to an Indian company, including
rights of management or control or any other rights whatsoever;

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CAPITAL GAIN

TYPES OF CAPITAL ASSET & POH

1. This distinguishment depends upon the period of holding (POH) of the asset, as
summarized below – [FA 24]
No. Nature of asset STCA LTCA
1. Security listed in the recognised stock exchange in India.
Units of UTI (listed or unlisted) POH <= 12 POH > 12
Units of equity-oriented funds (listed or unlisted) months months
Zero coupon bond (listed or unlisted)
2. Unlisted shares Immovable property being land or building POH <= 24 POH > 24
or both months months
3. Other assets POH <= 24 POH > 24
months months
before before
22/7/2024 22/7/2024
36m 36m
Notes:
1 "Equity Oriented Fund" means a fund set up under a scheme of a mutual fund
specified u/s 10(23D) or under a scheme of an insurance company comprising unit
linked insurance policies to which exemption u/s 10(10D) does not apply on account of
the applicability of the fourth and fifth provisos thereof and:
i) In a case where the fund invests in the units of another fund which is traded on
a recognised stock exchange,
a) A minimum of 90% of the total proceeds of such fund is invested in the units
of such other fund; and
b) Such other fund also invests a minimum of 90% of its total proceeds in the
equity shares of domestic companies listed on a recognised stock exchange;
and
ii) In any other case, a minimum of 65% of the total proceeds of such fund is invested
in the equity shares of domestic companies listed on a recognised stock exchange.
2 "Meaning of Securities"
a Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or a pooled
investment vehicle or other body corporate;
b Derivative;
c Units or any other instrument issued by any pooled investment vehicle;
d Government securities;
e Rights or interest in securities.

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CAPITAL GAIN

Moreover, "securities" does not include any unit linked insurance policy or scrips or any
such instrument or unit, by whatever name called, which provides a combined benefit
risk on the life of the persons and investment by such persons and issued by an insurer.
3 " Market Linked deb or Specified MF "
In case of market linked deb or specified MF covered u/s 50AA of ITA the gains will
be always ST irrespective of POH
2. Period of holding applicable to different assets
Shares (equity or preference) or Debentures or bonds listed in RSE in India 12 months
Shares (equity or preference) or Debentures or bonds listed in SE outside 24 months
India
Unlisted Shares (equity or preference) 24 months
Units of UTI 12 months
Units of equity-oriented MF 12 months
Units of Debts fund or money market mutual fund 24 months
Zero coupon Bonds 12 months
Land or Building or both 24 months
Debenture or bond 24 months
Any other Asset 24 months
3 Period of holding
It means the period for which the asset is held by the assessee. It starts from the day
following the date of acquisition and ends on the date of transfer

Day following the date

Period of holding Date of transfer
of acquisition

1. Illustration
State whether the following assets are short-term capital assets or long-term capital assets:
No. Particulars Nature
of Asset
1 Jewellery purchased on 1/7/2020 and sold on 7/3/2025
2 Shares in Walnut Ltd (unlisted) purchased on 7/7/2023 and sold on
14/9/2025.
3 Personal car purchased on 18/8/1999 and sold on 17/8/2025
4 A residential house used for own occupation constructed on 17/7/1994 & sold
on 15/04/25.
5 Units of UTI purchased on 14/5/2024 and sold on 1/1/2025.
6 Zero coupon bonds purchased on 6/6/2024 and sold on 11/11/2025.
7 Drawings purchased on 1/1/2018 and sold on 12/12/2025.

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8 Shares purchased (listed) on 1/4/23 and sold on 15/09/25.

CONDITION B: MEANING OF TRANSFER

1. Sale
Sale means voluntary conveyance of ‘property’ in the goods by one person to another for
consideration in ‘money’
In case of movable property As per sale of Goods act, 1930
In case of Immovable property As per Transfer of property Act, 1992.
2. Exchange
Exchange means voluntary conveyance of Property in the goods by one person to another for
consideration in kind.
Transfer of loose diamonds
Mr. A Mr. B
Transfer of shares
Key Point: The sale consideration shall be the FMV of the thing received in kind. (on the
date of receipt)
3. Relinquishment: to give up
It means Voluntary conveyance of property in the goods without consideration. For
example gift, will or appointing a trust, etc.
4. Extinguishment: involuntary transfer of rights by one person to another
To extinguish means to put a total end to something. It indicates a complete wipe out,
destruction or annihilation of contract, rights, title, interest or a debt or other obligation
whether the effect is produced by the act of God, or by operation of law or by the act of
party.
Key Points:
1. There should be destruction or extinction of Rights and not Capital asset. (exception
45(1A))
2. If any asset is destroyed by any of the following reasons, destruction shall be deemed
to be transfer. Sec 45(1A):
a. Natural calamity,
b. Riot and civil disturbance,
c. Action taken by enemy or combating an enemy (with or without declaration of war),
d. Accident fire or war
3. In such cases, insurance compensation is deemed to be sale consideration,
4. Accident, Theft not covered by sec 45(1A) & hence insurance claim not be treated as
sale consideration,
5. Voluntary act of extinguishment of rights is not a transfer

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CAPITAL GAIN

5. Compulsory Acquisition under any Law

To be discussed later when we study section 45(5)
6. Conversion of capital asset into stock in trade
To be discussed later.
7. Part performance of contract
Any transaction involving the allowing of the possession of any immovable property to be
taken or retained in part performance of a contract of the nature referred on in section
53A of the Transfer of Property Act, 1882 subject to fulfilment of the following conditions:
• There should be a valid contract of sale
• Transfer should be of an immovable property
• Buyer must have paid the consideration or shall be ready to pay the same
• Seller has transferred the possession to the buyer.
8. Asset allotted by co – op society
Any transaction (whether by way of becoming a member of, or acquiring shares in a co-
operative society, company or other association of persons or by way of any agreement or
any agreement or in any other manner whatsoever.) which has the effect of transferring, or
enabling the enjoyment of any immovable property.
Key Points
1. The shareholder/ members are deemed owners
2. The legal owner is the co-operative society or company
3. There should be a transfer of right to use & enjoyment of any immovable property.
9. The maturity or redemption of Zero-coupon bonds
There is no interest payable on such bonds. Benefits are receivable only at the time of
maturity or redemption.

COMPUTATION OF CAPITAL GAIN [SECTION 48]

1. Computation of Short-term Capital Gain

Particulars Rs.
Full value of consideration XXX
(-) Expenditure on transfer XXX
= Net sale consideration XXX
(-) Cost of acquisition XXX
(-) Cost of improvement XXX
= Short term capital gain XXX
(-) Exemption u/s. 54 XXX
= Taxable STCG XXX
2. Computation of Long-term Capital Gain

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CAPITAL GAIN

Particulars Rs.
Full value of consideration XXX
(-) Expenditure on transfer XXX
= Net sale consideration XXX
(-) Indexed Cost of acquisition XXX
(-) Indexed Cost of improvement XXX
= Long term capital gain XXX
(-) Ded. u/s. 54 XXX
No deduction will be allowed in respect payment of securities transaction tax in computing
income under the head “Capital Gain”.

WHAT IS A FULL VALUE OF CONSIDERATION

a It is a full value of consideration received or receivable by the transferor.

b If consideration received in kind them fair market value of asset is considered as full
value of consideration.
c Even if a consideration received in instalments in different years full value of
consideration is important.

EXPENSES ON TRANSFER

Expenses on transfer include any expenditure incurred whether directly or indirectly for
the purpose of transfer like advertisement expenses, brokerage, and stamp duty. Registration
fees, legal expenses etc. However any expenses which have been claimed as a deduction under
any other provision of the act cannot be claimed as a deduction under this clause.

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CAPITAL GAIN

COST OF ACQUISITION [SEC. 55(2)]

COST OF ACQUISITION

Purchase Price of Asset +

Deemed cost of Indexed cost of
Expenditure incurred to
acquisition acquisition
purchase an asset

Cost to previous owner Inflation adjusted cost of

Sec 49(1) asset

Cost of acquisition of an asset is the value for which it was acquired by the assessee.
Following points should be considered.
1 Cost of acquisition includes expenses incurred in acquiring the assets or completing the
title.
2 Interest on money borrowed for acquiring capital asset will form part of cost of asset. But
after acquisition it will be treated as revenue expenditure.
3 Interest paid by firm to its partner capital contribution for the purchase of capital asset
cannot be treated as part of acquisition.
Note:
cost of acquisition or the cost of improvement shall not include the amount of interest claimed
as deduction u/s 24 or chapter VI-A.

DEEMED COST OF ACQUISITION [SECTION 49(1)]

Cost of Where cost of acquisition Cost of acquisition of previous owner.

acquisition of of previous owner is
an asset ascertainable.
Where cost of acquisition The fair market value of the asset on the date on
of previous owner is which the previous owner had acquired the same
unascertainable shall be deemed to be the cost of acquisition.
Improvement cost of improvement includes improvement expenditure incurred by the
expenditure previous owner.
Period of Period of holding of the previous owner shall be considered for classifying the
holding asset into short term or long-term capital asset.

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CAPITAL GAIN

Indexation Indexation benefit shall be available from the year when the previous owner
benefit on cost first held the property.
of acquisition
Examples
a On the distribution of the assets on total / partial partition of Hindu Undivided Family.
b Under a gift or will.
c By succession, inheritance or devolution;
d On any distribution of assets on the liquidation of a company;
e Under a transfer to a revocable or irrevocable trust;
f On a transfer by a wholly owned Indian subsidiary company to its holding company or vice
versa;
g On any transfer in a scheme of amalgamation of two Indian companies subject to certain
conditions u/s. 47(vi)
h On any transfer in a scheme of amalgamation of two foreign companies subject to certain
conditions.
i On any transfer of a capital asset by the banking company to the banking institution in a
scheme of amalgamation of a banking company with a banking institution;
j On conversion of self-acquired property of a member of a Hindu Undivided Family to the
joint family property.

INDEXED COST OF ACQUISITION (EXPLANATION (III) TO SECTION 48)

Cost inflation index for any year such index as the Central Government may specify after
considering 75% of the average rise in the consumer price index for urban non – manual
employee it will be computed on the basis of Consumer Price Index (Urban)) for the immediately
preceding previous year to such previous year by notification in the Official Gazette.
KEY NOTES
Indexed cost of acquisition has to be ascertained with reference to the date of acquisition and
not with reference to the date when such asset became a capital asset.

Cost Inflation Index for different financial years is as follows:

Financial year Index Financial year index
2001 – 02 100 2013 – 14 220
2002 – 03 105 2014 – 15 240
2003 – 04 109 2015 – 16 254
2004 – 05 113 2016 – 17 264
2005 – 06 117 2017 - 18 272
2006 – 07 122 2018 – 19 280

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CAPITAL GAIN

2007 – 08 129 2019 - 20 289

2008 – 09 137 2020 – 21 301
2009 – 10 148 2021 – 22 317
2010 – 11 167 2022 - 23 331
2011 – 12 184 2023 - 24 348
2012 – 13 200 2024 - 25 363

Indexed cost of acquisition/ improvement is calculated as follows if a long-term capital asset

[barring the exception is transferred prior to July 23, 2024 - (FA 24)
Indexed cost of acquisition (acquired by Assessee)
• Cost of acquisition × Cost inflation index (CII) for the year in which the asset is transferred
CII for the year in which asset was first held by the assessee or 2001 − 02,
whichever is later
When the asset was acquired under the circumstances given by section 49(1) – (acquired
by previous owner)
• CCost inflation index (CII) for the year in which the asset is transferred
Cost of acquisition ×
CII for the year in which asset was first held by the previous owner or 2001 − 02,
whichever is later
Note:
The Bombay High Court in the case of CIT v. Manjula J. Shah [2012] 204 Taxman 691 has held
that indexed cost of acquisition has to be computed with reference to year in which previous
owner first held asset and not year in which the assessee became owner of asset.

COST OF ACQUISITION OF ASSETS ACQUIRED BEFORE 1-4-2001 [SECTION 55(2) (B)]

Acquired by Cost of acquisition

Assessee himself Cost of acquisition or fair market value as on 01-04-2001
whichever is more
Acquired under section 49(1) Cost of acquisition to previous owner or fair market value
mentioned above. as on 01-04-2001 whichever is more.
In case of a capital asset (being land or building or both), the fair market value of such an asset
on April 1, 2001 shall not exceed the stamp duty value of such asset as on April 1, 2001 where
such stamp duty value is available.
Exception: The option is not available in case of –
• Asset on which depreciation is allowed u/s 32(1)(ii)
• Self generated assets (other than bonus share)

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CAPITAL GAIN

COST OF IMPROVEMENT [SEC. 55(1)]

Cost of improvement means expenditure incurred to increase the productive quality of the asset.
It includes all expenditure of a capital nature incurred in making any additions or alteration
to the capital asset.

INDEXED COST OF IMPROVEMENT

COST OF IMPROVEMENT

Capital Expenditure
Deemed cost of Indexed cost of
incurred by an assessee
improvement Improvement
in making any addition to
capital asset

Cost to Previous owner Inflation Adjusted Cost

Index cost of acquisition

It is an amount, which bears to the cost of improvement the same proportion as cost inflation
index for the year in which the asset is transferred bears to the cost inflation index for the
year in which the improvement to the asset book place.
• Cost of improvement does not include any expenditure which is deductible in
computing the income chargeable under the head income from house property.
KEY NOTES

‘Profits and gains of business or profession”, or “income from other sources”. Only
capital expenditure is considered as a cost of improvement Routine expenses on
repairs and maintenance do not form part of cost of improvement.
• Improvement cost incurred by previous owner & assessee before 1.4.2001 shall be
ignored.

HOW TO CLACULATE INDEXED COST OF IMPROVEMENT

Indexed cost of improvement [Explanation (iv) to Section 48)

Cost inflation index for the year in which the asset is transferred
Cost of improvement X
Cost inflation index for the year in which the improvement to the asset took place

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INDEXATION OF COST NOT ALLOWED IN CERTAIN CASES

In the following cases, indexation of cost & improvement shall not be allowed for the assets
specified therein.
1 Debenture or Bonds: In case of transfer of bonds and debentures other than capital
indexed bonds issued by the Government or Sovereign Gold Bond issued by the RBI under
the Sovereign Gold Bond Scheme, 2015 [Sec. 48].
2 Slump Sale: Transfer of an undertaking or division in a slump sale [Sec. 50B]. (Discussed
later in this chapter)
3 Virtual Digital Asset: Transfer of crypto currency [Sec. 115BBH]
4 Equity shares and equity-oriented fund referred to in sec. 112A (Discussed later in
this chapter)
5 Certain transactions by a non-resident: In case of a non-resident, capital gain arising on
the transfer of shares in or debentures of an Indian company acquired in foreign currency.
It will be computed as per First Proviso to sec. 48
6 Transfer of Global Depository Receipt: Transfer of Global Depository Receipt purchased
in foreign currency by a resident individual being employee of an Indian Company [Sec.
115ACA]
7 Transfer of land/ building: on or after 23/07/24 u/s 112 subject to certain conditions (FA
24) [New regime]

2. Illustration
1) Where a house property has been purchased by Vadapav on 1-1-1996 for Rs. 30,000 and the
fair market value of the house as on 1-4-2001 is Rs. 1,20,000, the assessee at to adopt Rs. 1,
20,000 as the cost of acquisition.
2) Where certain shares of a company were purchased by Vadapav on 1-1-1996 at the rate of Rs.
200 per share and the market value of the shares as on 1-04-2001 is Rs. 120 per share the
assessee may not opt for market value and adopt Rs. 200 per share as the cost of acquisition.

3. Illustration
Case 1 – Flop Imran purchased Land on 4-01-1998 for Rs. 60,000. This land was sold by him on
02-09-2024 for Rs. 18,00,000. The market value of the land as on 01-04-2001 was Rs. 1, 20,000.
Expenses on transfer were 2% of Sale price. Compute the capital gain for PY 24-25.
Case 2 – what will be your answer if transfer takes place on 31-12-2024.

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4. Illustration
Case 1: Anna Hajare sells the following capital assets on 11-04-2024
Case 2:
Particulars Non-Listed Shares House Property
Rs. Rs.
Sale consideration 34,00,000 18,00,000
Year of acquisition 03-04 06-07
Cost of acquisition 2,90,000 18,000
Cost of improvement incurred in 10-11 70,000
Compute Capital Gain for AY 25 - 26

5. Illustration
Case 1 – Mr. Power acquired a land in 1998-99 for Rs. 2, 00,000 & gifted it to his major son
Karamati on 16-01-2000, When the market value of the land was Rs. 2, 50,000. The FMV of land
on 01-04-2001 was Rs. 4, 00,000. Karamati sold the land on 14-04-2023 for Rs. 48,00,000.
Compute the capital gain for PY 24-25 assuming that the expenses on transfer were Rs. 1,00,000.
Case 2 – What will be your answer if asset transfer on 02/01/25

6. Illustration
Case 1 – Lalu acquired a house property in 1997-98 for Rs. 2, 00,000 & gifted it to his major son
kalu on 16-01-2013, When the market value of the land was Rs. 2,50,000. The FMV of land as on
01-04-2001 was Rs. 4, 00,000. Mr. Lalu incurred following improvement expenditures:
a) Extension of first floor in June 1999 Rs. 55,000
b) Extension of second floor in June 2006 Rs. 65,000,
Mr. Kalu incurred following improvement expenditures.
c) Extension of Third – floor in June 2014 Rs. 75,000.
d) Extension of Fourth-floor in June 2024 Rs. 65,000, Mr. Kalu sold the House Property on 14-
09-2024 for Rs. 19,00,000. Compute the capital gain for AY 25-26 assuming that the expenses
on transfer were Rs. 1,00,000.
Case 2 – What will be your answer if asset transfer takes place on 01/12/24

7. Illustration
Case 1 – Motabhai acquired the property in the PY 04-05 for Rs. 5,00,000 & paid Rs. 18,000 as
registration charges. Motabhai died on 14-09-07 & the property was transferred to his son
Chotabhai through inheritance. The market value of property as on 14-09-07 is Rs. 21,00,000.
During PY 24 – 25 sold this property for Rs. 65, 00,000. Compute the capital gain for AY 25 - 26
Case 2 – The property was sold for 65,00,000 on 20/07/24

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8. Illustration
Mr. Shahrukh Joshi sold following assets during PY 24 - 25
Particulars HP Jewellery Debentures
Date of Purchase 01/07/16 04/01/12 11/07/99
Date of Sale 31/03/25 31/03/25 31/03/25
Purchase Price 1,14,000 2,00,000 95,000
Sale Price 7,00,000 10,00,000 6,00,000
Compute capital gain for AY 25 - 26.

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COMPUTATION OF CAPITAL GAIN IN CERTAIN CASES

CAPITAL GAIN IN CASE OF INSURANCE CLAIM RECEIVED ON DAMAGE OR

DESTRUCTION OF CAPITAL ASSET [SEC. 45(1A)]

INSURANCE CLAIMS

Before A.Y. 2000-2001 • Destruction should After A.Y. 2000-01

happen by way of
Flood, Typhoon,
CIT Vs. Vania silk Mills Hurricane Cyclone, Any compensation received
Pvt. Ltd. Earth quake or from an insurance company
other convulsion of for the specified damages is
nature treated as transfer.
• Riot or civil
disturbance
• Accidental fire
explosion
• Action by enemy or
action taken in
combating an
enemy

1 Conditions: As per provision of this section, any compensation received from an insurance
company for the specified damage is treated as transfer. Such transfers are liable to
capital gain in the year of the receipt.
Here specified damages mean flood, cyclone, earthquake, riot, civil disturbance,
accidental fire, enemy action etc.
2 Computation of Capital Gain
Condition Treatment
Sale consideration Compensation received or if it is received in
kind then FMV as on the date of the receipt.
Cost of acquisition / cost of improvement / As usual
expenses on transfer
Indexation benefit Available till the year of destruction
Taxable In the year of receipt of compensation.

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• Compensation received for other than specified damages to capital asset shall
be treated as capital receipt and shall not be taxable.
• Compensation received for any damages to non-capital asset may be chargeable
KEY NOTES

u/s 28 or 56. E.g. Compensation received on theft of stock in trade shall be treated
as business income.
• Destruction of asset without insurance: where an asset is destroyed and there is
no insurance or insurance compensation is not received then it shall not be treated as
transfer. Cost of such asset is not allowed as deduction under Income tax Act.

9. Illustration
Lucky Ali has a house property acquired on 18/8/2014 for Rs. 6,00,000. He used the house for his
own residential purpose. On 18/8/18 he incurred capital expenditure on re-construction of house
Rs. 3,00,000. On 14/5/19, he brought office goods (inflammable) worth Rs. 1,00,000 at home to
be delivered to a party staying near to his home. At the night of that day accidental fire took
place and damaged the whole house property, furniture worth Rs. 5,00,000 and business stock.
Insurance claim received on 18/8/24.
1. For the house Rs. 1,00,000 in cash and a new house allotted to him (fair market value of which
is Rs. 46,00,000 on 18/8/23).
2. For house-hold furniture Rs. 2,00,000; and
3. For Stock Rs. 80,000.
State Tax-treatment under the head Capital gains.

UNIT LINKED INSURANCE POLICY RECEIPTS [SECTION 45(1B)]

Where any person receives, at any time during any previous year, any amount, under a ULIP
issued on or after 1.2.2021, to which exemption under section 10(10D) does not apply on account
of –
a Premium payable exceeding ₹ 2,50,000 for any of the previous years during the term of
such policy; or
b The aggregate amount of premium exceeding ₹2,50,000 in any of the previous years
during the term of any such ULIP(s), in a case where premium is payable by a person for
more than one ULIP issued on or after 1.2.2021.
Then, any profits or gains arising from receipt of such amount by such person shall be chargeable
to income-tax under the head “Capital Gains” and shall be deemed to be the income of the such
person for the previous year in which such amount was received. The income taxable shall be
calculated in such manner as may be prescribed.

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10. Illustration
An individual bought multiple ULIPs; the details are as below.
ULIP A X Y Z
Date of issue April 1, 2020 April 1, 2022 April 1, 2022 April 1, 2022
Annual premium Rs 2.5 lakh Rs 1 lakh Rs 1.5 lakh Rs 3 lakh
Sum assured Rs 25 lakh Rs 10 lakh Rs 15 lakh Rs 30 lakh
Consideration received as on Rs 30 lakh
November 1, 2031 as on maturity
Consideration received as on Rs 12 lakh Rs 18 lakh Rs 34 lakh
November 1, 2032
Taxability of maturity proceeds Not taxable Not taxable Not taxable Taxable

CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE [SECTION 45(2)]

Computation of Capital gain:

Conditions Treatment
Sale consideration FMV on the date of conversion
Cost of acquisition / cost of improvement / expenses on As usual
transfer
Indexation benefit Available till the year of
conversion
Taxable In the year in which asset is sold
Difference between actual sale value & Fair value as on the Treated as business income.
date of conversion.

11. Illustration
Majnu is the owner of a car. On 1/4/2024, he starts a business of purchase and sale of motor car.
He treats the above car as part of the stock-in-trade of his new business. He sells the same on
31/3/2025 and gets a profit of ₹ 1 lakh. Discuss the tax implication in his hands under the head
“Capital gains”.

12. Illustration
Surya Singham converts his capital asset (acquired on June 10, 1998 for Rs. 70,000, fair market
value on April 1, 2001 Rs. 1,80,000) into stock in trade March 10, 2010 (FMV Rs. 5,80,000) &
subsequently sells the stock-in-trade so converted for Rs. 11,00,000 on June 10, 2024. Determine
the amount of assessable profits.

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TRANSFER OF SECURITIES BY DEPOSITORY [SECTION 45(2A)]

Computation of capital gain

Conditions Treatment
Sale consideration Value at which shares sold
Cost of acquisition Cost of acquisition & period of holding of any securities, shall be
determined on the basis of the FIFO method. This method is
applicable to dematerialized form. Securities held in physical forms
shall be dealt separately.
Indexation benefit As usual
Taxable In the year in which asset is sold
Expenses on transfer As usual (Except STT)

CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET BY A PARTNER/ MEMBER TO

A FIRM/ AOP/ BOI AS CAPITAL CONTRIBUTION [SECTION 45(3)]

Computation of capital gain

Conditions Treatment
Sale consideration The amount recorded in the books of accounts of the
Firm/ AOP/ BOI as value of such assets.
Cost of acquisition/ cost of As usual
improvement/ expenses on
transfer
Indexation benefit As usual
Taxable In the year in which asset is transfer.
BV/ FMV of such asset is irrelevant to decide sale consideration.

CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET ON ITS DISSOLUTION OF FIRM/AOP/BOI [SECTION 45(4)]

Computation of capital gain

Conditions Treatment
Sale consideration FMV on the date of dissolution
Cost of acquisition/ cost of improvement / expenses on As usual
transfer
Indexation benefit As usual
Taxable In the year in which asset is sold.

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COMPULSORY ACQUISITION OF ASSET [SECTION 45(5)]

1 Where a capital asset has been compulsorily acquired (other than urban agricultural
land) under any law, it will be treated as a transfer of the previous year in which the asset
is compulsorily acquired, Indexation, if required, will be done till the previous year of
compulsory acquisition. However, the capital gain will be taxable in the previous year in which
the compensation is received.
2 Initial compensation / consideration:
Computation of capital gain when initial compensation received
Conditions Treatment
Sale consideration Total compensation received or receivable
Cost of acquisition/ cost of improvement/ As usual
expenses on transfer
Indexation benefit Till the year of acquisition
Taxable In the year in which initial compensation is
received.
Computation of Capital gain when enhanced compensation received
Conditions Treatment
Sale consideration Total enhanced compensation received.
Cost of acquisition/ cost of improvement NIL
Indexation benefit NIL
Taxable In the year in which the compensation is
received & treated as STCG OR LTCG
depending upon original gain.
Interest on enhanced compensation Income from other source
Expenditure on transfer Litigation expenses incurred for receiving
enhanced compensation.
It is possible that the person may die before the enhanced compensation/ consideration is
received and the enhanced compensation / consideration are received by his legal heirs.
Such enhanced compensation / consideration will be taxable in the hands of the person who
receives the same.

13. Illustration
Lalu acquired a house for Rs. 20,000 in 1998-99. On his death in October 2010 the house acquired
by his son Kalu. The market value of the house as on 1-4-2001 was Rs. 80,000. This house was
acquired by the government on 14-3-2017 for Rs. 11,00,000 & a compensation of Rs. 8,20,000 is
paid to him on 25-4-2024 & the balance Rs. 2,80,000 on 14-4-2025. Kalu filed a suit against the
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government challenging the amount of compensation and the court ordered for giving additional
compensation with the suit. The additional compensation is received on 14-3-2026 Rs. 1,25,000.
Legal expenses incurred Rs 3,000. Compute capital gain for various AY.

W.E.F. ASSESSMENT YEAR 2005 – 06 SECTION 10(37) HAS BEEN INSERTED, WHICH PROVIDES
AS UNDER

• Applicable: An individual or an HUF.

• Conditions:
1 Assessee has transferred urban agricultural land (being a capital asset).
2 Such land was used for agricultural purposes by such HUF or individual or his parents
during the period of 2 years immediately preceding the date of transfer.
3 Such land is transferred:
a By way of compulsory acquisition under any law, or
b For a consideration to be determined or approved by the Central Government or
the RBI.
4 The compensation or consideration for such transfer is received by such assessee on
or after 01.01.04.
• Treatment: Income on such transfer shall be exempted.

SEC. 45(5A): CAPITAL GAIN ON TRANSFER OF LAND OR BUILDING OR BOTH, UNDER

DEVELOPMENT AGREEMENT

1. Assessee
Individual or HUF,
2. Asset Transferred
Land or building or both, under a specified agreement
3. “Specified agreement”
means a registered agreement in which a person owning land or building or both,
agrees to allow another person to develop a real estate project on such land or building or
both, in consideration of a share, being land or building or both in such project, whether with
or without payment of part of the consideration in cash
4. Treatment
Sale Stamp duty value on the date of issue of completion certificate of his
consideration share being land or building or both in the project + The consideration
received in cash, if any

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Cost of Proportionate cost of the asset transferred

acquisition
Benefit of Available upto the year in which completion certificate is issued
indexation
Taxable In the year in which completion certificate for the whole or part of the
project is issued by the competent authority
5. Exception
provisions of this sub-section shall not apply where the assessee transfers his share in the
project on or before the date of issue of said certificate of completion, and the capital gains
shall be deemed to be the income of the previous year in which such transfer takes place
and the provisions of this Act, other than the provisions of this sub-section, shall apply for
the purpose of determination of full value of consideration received or accruing as a result
of such transfer.

14. Illustration
Mr. Pati owns a land acquired on 01/02/2007 for Rs. 60,00,000/-. he enters into a registered
agreement with Patni Real Estate on 12/03/2019 to allow development of the same in return on 2
flats and cash consideration of Rs. 80,00,000/-.
The company completes the project and obtains certificate on 10/11/2023 from authority. The
stamp duty value of each flat was Rs. 56,00,000/-.
Compute the capital gain taxable in the hands of Mr. Pati.

BUY BACK OF SHARES [SEC.46A]

1. Transfer
Where a shareholder receives any consideration from the company for purchase of its
own shares or other specified securities, it is a transfer chargeable under the head
Capital Gains.
2. Year of taxability
Such Capital Gain is chargeable to tax in the previous year in which the shares or
securities are purchased by the Company.
3. Capital Gains
Value of consideration received Less Cost of Acquisition or Indexed cost of Acquisition.
4. No Deemed Dividend (Refer chapter 8 IFOS)
In case of buyback of shares, there is no question of Deemed dividend u/s 2(22) (d).
5. In case of buy back of shares effected before 1.10.2024 by domestic companies
In case of buyback of shares (whether listed or unlisted) before 1.10.2024 by a domestic
company, additional income-tax@20% (plus surcharge @12% and cess@4%) is leviable in
the hands of the company. Consequently, the income arising to the shareholders in respect

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of such buyback of shares by the domestic company is exempt under section 10(34A), since
the domestic company is liable to pay additional income-tax on the buyback of shares.
6. In case of buy back of shares effected on or after 1.10.2024 by domestic companies
In case of buyback of shares (whether listed or unlisted) on or after 1.10.2024 by a
domestic company, the sum paid by a domestic company for purchase of its own shares
would be treated as dividend and taxable under the head “Income from other sources” in
the hands of shareholders. No deduction for expenses would be available against such
dividend income.

[SEC 50] CAPITAL GAINS IN THE CASE TRANSFER OF DEPRECIABLE ASSET

Refer PGBP Chapter.

CAPITAL GAINS IN THE CASE OF SLUMP SALE [SECTION 50B]

1 Meaning
Slump sale means the transfer of one or more undertakings for a lump sum
consideration without assigning values to the individual assets and liabilities in such
sales.
Undertaking shall include any part of an undertaking or a unit or division of an
undertaking or a business activity taken as a whole but does not include individual assets or
liabilities or any combination thereof not constituting a business activity.
2 Tax treatment
Normal Sale consideration As usual
Cost of Acquisition or improvement Net worth of the undertaking (TA - TL)
Indexation Benefit Not available
Nature of gain whether short term or long If undertaking is owned and held by the
term. assessee for not more than 36 months,
then capital gain shall be deemed to be
short-term capital gain otherwise long-term
capital gain.
Note: Where an undertaking is owned and
held by an assessee for more than 36 months
immediately preceding the date of its
transfer, then it shall be treated as a long-
term capital asset. It makes no difference
that few of the assets of the undertaking

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are newly acquired (i.e. for less than 36

months)
Net worth shall be the:
Aggregate value of total assets of the undertaking xxxx
Less: Value of liabilities of such undertaking as appearing in the books of xxxx
account.
Net worth xxxx

1. Effect of revaluation
If any change has been made in the value of assets on account of revaluation of assets
etc. then such change in value shall be ignored.
2. The aggregate value of total assets
In case of
• The written down value of block of assets determined in accordance with the
provisions contained in sub-item (c) of section 43(6)(c)(i) in the case of depreciable
assets;
• Nil in the case of capital assets in respect of which the whole of the expenditure has
been allowed or is allowable as a deduction under section 35AD;
• Nil in the case of goodwill of a business or profession (not acquired by the assessee
by purchase from a previous owner); and
• The book value for all other assets.
Moreover, fair market value of the capital assets as on the date of transfer (calculated
in the prescribes manner), shall be deemed to be the full value of the consideration
received/accruing as a result of the transfer of such capital asset.
3. Treatment of stock
In case of slump sale, no profit under the head ‘Profit & gains of business or profession’
shall arise even if the stock of the said undertaking is transferred along with other assets.
4. Carry-forward of losses
In case of slump sale, benefit of unabsorbed losses and depreciation of the
undertaking transferred shall be available to the transferor company and not to the
transferee company.
Report of an Accountant The assessee is required to furnish along with the return of
income, a report of a chartered accountant in Form 3CEA
indicating the computation of the undertaking or division has
been correctly arrived at in accordance with the provisions
of this section.

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15. Illustration
Mr. Gadha is a proprietor of Gang Enterprises having 2 units. He transferred on 01/04/2024 his
unit 1 by way of slump sale for a total consideration of Rs. 25 lacs. Unit 1 was started in the Year
2008 – 09. The expenses incurred for this transfer were Rs. 28,000. His Balance Sheet as on
31/03/2025 is as under:
Liabilities Total (Rs) Assets Unit 1 (Rs) Unit 2 (Rs) Total (Rs)
Own capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation Reverse (for 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
building of unit 1)
Bank loan (70% for unit 1) 2,00,000 Debtors 1,00,000 40,000 1,40,000
Trade creditors (25% for 1,50,000 Other 1,50,000 60,000 2,10,000
unit 1) Assets
Other information:
i) Revaluation reserve is credited by revising upward the value of the building of Unit 1.
ii) No individual value of any asset is considered in the transfer deed.
iii) Other assets of Unit 1 include patents acquired on 01/07/2022 for Rs. 50,000 on which no
depreciation has been charged.
Compute the capital gain for the Assessment Year 25 - 26

VALUATION OF CONSIDERATION IN CASE OF LAND OR BUILDING OR BOTH [SECTION 50C]

Conditions
a. Capital asset being land or building or both is transferred.
b. Value adopted or assessed or assessable by the stamp valuation authority exceeds 110%
of actual consideration.
Tax treatment
Full value of consideration shall be the value adopted or assessed or assessable by any authority
of a State Government (i.e. Stamp Valuation authority) for the purpose of payment of stamp
duty.
Assessable means the price which the stamp valuation authority would have adopted or assessed,
if it were referred to such authority for the purposes of the payment of stamp duty.
Taxpoint: Where value adopted or assessed or assessable by the stamp valuation authority does
not exceed 110% of actual consideration or where such value is less than actual
consideration, then actual consideration shall be considered as full value of consideration.

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16. Illustration
Mr. Raj has a self-occupied house property acquired 10 months ago for ₹ 5,00,000. He sold such
property for ₹ 6,00,000 to Rajshree.
Case (a): Stamp duty authority for the purpose of levying stamp duty adopted value of ₹ 6,25,000.
Case (b): Stamp duty authority for the purpose of levying stamp duty adopted value of ₹ 6,75,000.
Compute capital gain on such transfer.

REFERENCE TO VALUATION OFFICER

1 The assesse may claim before any Assessing Officer that the stamp value exceeds the FMV
of the property as on the date of transfer provided the stamp value has not been dispute
in any appeal or revision or reference before any other authority, court or the High Court.
2 In such case the AO may refer the valuation of the capital asset to a VO.
Case Result
If the value determined by the Valuation Value adopted or assessed or assessable for
Officer exceeds the value adopted or the purpose of stamp duty shall be taken as
assessed or assessable for the purpose of full value of consideration.
stamp duty.
If the value determined by the Valuation Value determined by the Valuation Officer
Officer does not exceed the value shall be taken as full value of consideration.
adopted or assessed or assessable for the
purpose of stamp duty.

SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION FOR TRANSFER OF SHARE OTHER
THAN QUOTED SHARE 50CA

Where the consideration received or accruing as a result of the transfer by an assessee of a

capital asset, being share of company other than a quoted share, is < the FMV of such share
determined in such manner as may be prescribed,
Full value of consideration = FMV on the date of transfer.
Explanation. – For the purpose of this section, “Quoted share” means the share quoted on any
recognised stock exchange with regularity from time of time, where the quotation of such share
is based on current transaction made in the ordinary course of business.
The amended provisions empowers the board to prescribe transaction undertaken by certains
class of persons.

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FAIR MARKET VALUE DEEMED TO BE FULL VALUE OF CONSIDERATION IN CERTAIN CASES

SEC 50D

Where the consideration received or accruing as a result of the transfer of a capital asset by
an assessee is not ascertainable or cannot be determined, then, for the purpose of computing
income chargeable to tax as capital gains, the FMV of the said asset on the date of transfer
shall be deemed to be the full value of the consideration received or accruing as a result of such
transfer.

TREATMENT OF ADVANCE MONEY RECEIVED & FORFIETED [SECTION 51]

1 Where any capital asset, was on any previous occasion, the subject of negotiations transfer,
any advance or other money received and retained by the assessee in respect of such
negotiations, shall be deducted from the cost for which the asset was acquired or the
written down value or the fair market value, as the case may be, in computing the cost of
acquisition.
If advance money is received before 31-3-14 then it is to be reduced from the cost of
acquisition and if it is received on or after 1-4-14 then it shall be taxable as income from
other source.
Advance money received by:
Current owner Subtracted from the cost of acquisition
Previous owner Not to be subtracted
Advance money received & forfeited before 31- Subtracted from the cost of acquisition.
03-14
• In case, advance money received exceeds cost of acquisition, the excess will be a
KEY NOTES

capital receipt, hence not taxable.

• Forfeiture of advance money by the transferor due to default of transferee is not
allowed as capital loss in the hands of transferee.

17. Illustration
Mr. Tango has a house property acquired on 17/7/94 for Rs. 4,00,000. He entered into a contract
with Mr. Charlie for transfer of such house property for Rs. 10,00,000 as on 7/8/96; Mr. Charlie
refused to purchase the property. So, his caution money as well as advance money of Rs. 1,00,000
was forfeited by Mr. Tango. On 7/4/2024, Mr. Tango sold such asset for Rs. 59,00,000. Brokerage
@ ½% of sale value yet to be paid by him. Market value of the property as on 1/4/01 is Rs. 3,50,000.
Compute capital gain in hands of Mr. Tango in the previous year 1997-98 and 2024-25.
What shall be answer if advance money received on 1-4-14

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COST OF ACQUISITION OF SELF GENERATED ASSETS [SECTION 55(2) (a)]

Particulars If acquired by purchase Any other

[or acquired from a case
previous owner as given
section 49(1)(i) to (iv) who
acquired it by purchase]
A Cost of acquisition – Goodwill of a business or Purchase price (or purchase Nil
profession, or a trade mark or brand name price of previous owner)
associated with business or profession, or a
right to manufacture, produce or process any
article or thing, or right to carry on any
business or profession, or tenancy rights, or
stage carriage permits, or loom hours
B Cost of improvement -
B1 Goodwill of a business or right to Nil Nil
manufacture, produce or process any
article or thing or right to carry on any
business or profession
B2 Any asset covered under (A) (supra) but Actual expenditure Actual
not included in (B1) (supra) expenditure
Notes:
1 In case of goodwill of business or profession acquired by the assesse by way of purchase
from a previous owner [either directly or through modes specified under section 49(1)(i) to
(iv)] and any deduction on account of depreciation under section 32 has been obtaines by the
assesse up to the assessment year 2020-21, then the cost of acquisition will be the purchase
price reduced by the depreciation so obtained by the assesse before the assessment year
2021-22.
2 Even if the aforesaid assets were acquired before April 1,2001, the option of adopting the
fair market value on the said date is not available.
Note: Business carried for more than 36m then LTCA otherwise STCA

18. Illustration
Jatin transfer the following assets on 02/05/2024, determine capital gain for the AY 2025 – 26
Particulars Cost FMV Sale value
1/04/2001
Land acquired in 1976 25,000 1,00,000 30,00,000

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Goodwill of business [Business commenced on 1-05- Nil 40,000 2,00,000

1995]
Tenancy right Nil 30,000 3,00,000
Brokerage paid on transfer @ 2%

COST OF ACQUISITION OF BONUS SHARES OR ANY OTHER FINANCIAL ASSET ALLOTTED

WITHOUT PAYMENT [SECTION, 55(aa) (iiia)]

Situations Cost of Acquisition

Bonus shares allotted before April 1, 2001 FMV as on April 1, 2001
Bonus shares allotted on or after April 1, 2001 Nil
Bonus shares allotted before 1.2.2018, on which STT has been paid at the time of transfer
In case of transfer of bonus shares allotted before 1.2.2018 on which STT has been paid at the
time of transfer, the cost would be the higher of
1 Actual cost of acquisition (i.e., Nil, in case of bonus shares allotted on or after 1.4.2001;
and FMV on 1.4.2001, in case of business shares allotted before 1.4.2001)
2 Lower of –
a FMV as on 31.1.2018; and
b Actual sale consideration
Sale consideration As usual
Expenditure on transfer As usual
Period of holding The period of holding will be considered
from the date of allotment of bonus shares

19. Illustration
Mr. Darasingh purchased 1000 shares of Diwar Ltd. @ Rs. 12 per share as on 1/08/1999. Company
declared one bonus share for every two shares held on 31/03/00. As on 7/07/10, Darasingh got
500 shares of the same company as gift from his friend Rakesh (Rakesh acquired such share on
1/04/01 @ 14 per share). As on 1/03/25, company further declared one bonus share for every
five shares held. on 30/03/25 Darasingh sold all the shares @ Rs. 250 each. Find capital gain of
Darasingh.

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CAPITAL GAIN IN CASE OF TRANSFER OF RIGHT SHARE AND RIGHT ENTITLEMENT [SECTION
55(2)(aa)]

1. Right Share
Where, by virtue of holding a share or any other security, (hereinafter this clause referred
to as the financial asset), the assessee becomes entitled to subscribe to any additional
financial asset, then such additional financial asset can be termed as right share [Sec.
55(2)(aa)]. Cost of acquisition of such right share shall be the amount actually paid by
him for acquiring such right share.
2. Right Entitlement
An assessee can endorse his right to acquire additional financial asset (as stated above) in
favour of other person. Such endorsement of right is termed as right renouncement. Cost
of acquisition of such right entitlement shall be taken as nil.
3. Tax treatment of right issue and right entitlements shall be as under
Shares acquired by
Case Right Shares Right Entitlement
Right Renounce
Cost of Acquisition Right issue price Nil Amount paid for
acquisition of right
entitlements +
Amount paid to
company for right
share.
Period of holding The date of The date of The date of
starts from allotment of such declaration of such allotment of such
shares right by the company shares.
Sale consideration Amount changed Amount charged Amount charged
from transferee from transferee from transferee.

20. Illustration
Paneer holds 1000 equity shares in Aloo Ltd. since 1999 (cost of acquisition Rs. 10,000, FMV on 01-
04-2001 Rs. 14,000). Aloo Ltd. offers 2000 right shares of Rs. 10 each to Paneer on June 1st, 2024
at a premium of Rs. 50. Paneer subscribed for 800 rights shares & renounces 1200 shares in
favour of Palak by transferring the right entitlement for a consideration of Rs. 6,000. Paneer
sells 1800 shares in Aloo Ltd. on April 14, 2024 @ Rs. 250 per share.

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SECTION 46 & 47 – TRANSACTIONS NOT REGARDED AS TRANSFER

What does not constitute Transfer?

Section 47 specifies certain transactions which will not be regarded as a transfer, as
below:
• Any distribution of capital assets on total / partial partition of HUF
• Any transfer of a capital asset under a gift / irrevocable trust (doesn’t include ESOP’s)
• Transfer of asset from Holding Company to its wholly owned Indian Subsidiary and vice-
versa
• Transfer of capital asset from amalgamating company to amalgamated company, in a scheme
of amalgamation, as long as the resultant company is an Indian Company
• Transfer of capital asset from demerged company to resulting company, in a scheme of
demerger, as long as the resultant company is an Indian Company
• Transfer / issue of shares by the resulting company to the shareholders of the demerged
company, if such transfer was made in consideration of such demerger
• Transfer of shares by a shareholder, held in the amalgamating company, in a scheme of
amalgamation, if such transfer is made as a consideration, by way of allotment of shares in
the amalgamated Indian company
• Transfer of rupee denominated bonds / any government security, outside India, by a non-
resident to another non-resident
• Redemption of sovereign gold bonds, issued by RBI, by an individual
• Transfer of any capital asset to the Government / University / National Museum / national
Art Gallery, any work of art, book, manuscript, drawing, painting, print
• Transfer made outside India of Rupee Denominated Bond (RDB’s) of an Indian Company,
issued outside India by a non-resident to another non-resident.
• Transfer by way of conversion of bonds / debentures / preference shares into equity
shares of that Company
• Transfer of capital asset under reverse mortgage
• Transfer by a unit holder under consolidation plans / schemes of Mutual Fund.
• With effect from 01st April 2024, transfer of a capital asset being conversion of gold into
Electronic Gold Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt
into gold.
• Transfer of capital assets being bonds or Gold Deposit Receipts (GDR) referred in section
115AC (1) by non-resident to another no-resident outside India
• Any transfer of capital asset being Sovereign Gold Bond issued by RBI under the Sovereign
Gold Bond Scheme 2015 by way of redemption by an individual

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CAPITAL GAIN

• Any transfer of a capital asset, being an interest in a joint venture, held by a public sector
company, in exchange of shares of a company incorporated outside India by the Government
of a foreign State, in accordance with the laws of that foreign State.

EXEMPTIONS UNDER CAPITAL GAIN

CAPITAL GAIN ARISING FROM THE TRANSFER OF RESIDENTIAL HOUSE PROPERTY [SEC. 54]

1. Who can claim exemption

An individual or a HUF
2. Which asset is qualified for exemption?
Residential house property (SO & LO)
3. Which capital asset is eligible for exemption?
Long Term
4. Which asset should be purchased to claim exemption?
Only one / two RHP (Purchased or constructed, old or new) in India
Condition for Purchase of two RHP
1. LTCG does not exceeds 2 cr which means if LTCG exceeds 2cr then assessee can buy
only 1 RHP and not 2.
2. Above option of purchase of 2 RHP is available once in a lifetime which means in
subsequent years assesses can buy only 1 RHP irrespective of amount of Capital gain
3. The above provisions of section 54 have been amended to provide that where the cost
of new residential house exceeds Rs. 10 crore, the amount exceeding Rs. 10 crore shall
not be taken into account for the purposes of computing exemption under section 54.
Moreover, section 54(2) has been amended to provide that for the purpose of deposit
in the capital gains deposit account scheme, the cost of new house in excess of Rs. 10
crore shall not be taken into consideration
5. What is the time limit for acquiring the new asset?
a. For purchase: 1 year backward or 2 year forward from the date of transfer of old
property.
b. For construction: 3 years from the date of transfer.
6. What is capital gain scheme?
a. If the new asset is not acquired up to the date of submission of return of income, then
taxpayer will have to deposit the money in “capital gain deposit account” with a
nationalized bank. If amount is not deposited then capital gain will be taxed in that
particulars year.

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CAPITAL GAIN

b. Even if amount deposited in the scheme, period of acquiring the new asset will be
applicable as above.
c. If amount deposited in scheme is not utilized within the 2/3 years from the date of
transfer of asset then unutilized amount at the end of specified period shall be treated
as LTCG
7. How much is exempt?
Amount invested or capital gains whichever is lower.
8. When exemption will be taken back?
If new asset is transferred within 3 years from the date of its acquisition.
9. What will be tax treatment if exemption is taken back?
In such case, the capital gain on transfer of the new residential property will be calculated
as follows:
Sale consideration of new HP
Less: Original Cost of acquisition minus exemption claimed U/s 54 earlier
= Short/ long term capital gain.

Notes
1 The utilized deposit amount in the Capital Gains Account Scheme, 1988 in the case of an
individual who dies before the expiry of the stipulated period cannot be taxed in the hands
of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised
portion of the deposit does not partake The character of income in their hands but is only a
part of the estate devolving upon them. [Circular No. 743, dated 06/05/1996]
2 The cost of the land is an integral part of the cost of the residential house, whether
purchased or built.

21. Illustration
Parle G sold a residential house on 28-6-2024 for Rs. 22,00,000. He had purchased this house on
1-10-2009 for Rs. 1,20,000 and had spent Rs. 70,000 on improvement of the house during the year
2010-11. He purchased a new house on 21-07-2024 for 17,00,000. This house was also sold by him
on 16-8-2025 for Rs. 21,00,000. He purchased another house on 21.11.2025 for Rs. 10,00,000.
Compute the capital gains for the assessment year 2025-26 and 2026-27. (date of 2025 filing
return 31-07-25)
Compute the following
A) Computation of capital of Mr. Parle G for AY 25-26
B) Will your answer differs if he purchases 2 RHP of 6 lakhs and 11 lakhs respectively.
C) What will be taxable capital gain if he invests Rs. 6,00,000 in Capital gain deposit scheme
instead of purchasing house on 21-07-25.
D) What will be taxable capital gain if he invests Rs. 5,00,000 in Capital gain deposit scheme
instead of purchasing house on 21.08.25.

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CAPITAL GAIN
E) What the maximum time limit to withdraw money from scheme and to purchase HP.
F) What will happen if amount deposited in capital scheme is not utilized with time limit or not
utilized or mis-utilised.

CAPITAL GAIN ARISING FROM THE TRANSFER OF LAND USED FOR AGRICULTURAL
PURPOSE [SEC. 54B]

1. Who can claim exemption?

An Individual
2. Which asset is qualified for exemption?
Agricultural land
3. Which capital asset is eligible for exemption?
Long term as well as short term
Provided the agricultural land was used by the tax payer or his parents, for agricultural
purposes for a period of two years immediately preceding the date of transfer.
4. Which asset should be purchased to claim exemption?
Agricultural land (rural or urban)
5. What is the time limit for acquiring the new asset?
2 years from the date of transfer of agricultural land.
6. What is capital gain scheme?
Applicable
7. How much is exempt?
Amount invested or capital gains whichever is lower.
8. When exemption will be taken back?
If new asset is transferred within 3 years from the date of its acquisition.
9. What will be tax treatment if exemption is taken back?
In such case, the capital gain on transfer of the new agricultural land will be calculated as
follows.
Sale consideration of new HP
Less: Original Cost of acquisition minus exemption claimed U/s 54B earlier
= Short/ long term capital gain.

22. Illustration
Pinkesh has an agricultural land (which is within the municipal limits of Ajmer). Which is sold for
Rs. 30,00,000 on 9/04/2024 Such land was purchased on 9/08/1999 for Rs. 3,00,000 by his father
and since then continuously used for agricultural purpose. Pinkesh acquired such property from his
father for Rs. 2,50,000 on 18/08/2002. Fair market value as on 1/04/2001 is Rs. 2,20,000.
Expenditure incurred on such transfer Rs. 50,000. On 7/07/2025, he purchased another agro-land

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
(in rural area and not treated as capital asset) for Rs. 5,00,000 and sold such agricultural land on
5/06/2026 for Rs. 6,00,000. Compute capital gain.

CAPITAL GAINS ON COMPULSORY ACQUISITION OF LAND AND BUILDING FORMING PART OF

INDUSTRIAL UNDERTAKING [SEC. 54D]

1. Who can claim exemption?

Any assesse
2. Which asset is qualified for exemption?
Land & Building forming part of industrial undertaking.
3. Which capital asset is eligible for exemption?
Long term as well as short term provided industrial undertaking which was compulsory
acquired by the government was used by the taxpayer for industrial purposes for a period
of two years immediately preceding the date of acquisition.
4. Which asset should be purchased to claim exemption?
Land or Building for industrial purpose.
5. What is the time limit for acquiring the new asset?
3 year from the date of receiving initial compensation.
6. What is capital gain scheme?
Applicable
7. How much is exempt?
Amount invested or capital gains whichever is lower.
8. When exemption will be taken back?
If new asset is transferred within 3 years from the date of its acquisition.
9. What will be tax treatment if exemption is taken back?
In such case, the capital gain on transfer of the new land and building will be calculated as
follows.
Sale consideration of new HP
Less: Original Cost of acquisition minus exemption claimed U/s 54D earlier
= Short/ long term capital gain.

23. Illustration
Mr. Daga has a land used for Industrial purpose acquired on 7/07/2012 on partition of his HUF.
The HUF acquired such property for Rs. 1,00,000 on 7/07/2000 (FMV as on 1-4-2001 Rs 2,00,000)
and incurred Rs. 3,00,000 on improvement on such land in the previous year 06-07. Mr. Daga
incurred improvement expenditure Rs. 2,00,000 on 7/07/2013. Such land is compulsorily acquired
by the government for Rs. 28,50,000 on 09/01/2015. Expenditure on such transfer Rs. 1,50,000
and the whole amount received on 9/02/2025. Mr. Daga deposited Rs. 2,00,000 in capital gain

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
deposit account on 31/03/2025. On further litigation expenditure of Rs. 2,50,000. The
compensation being enhanced by Rs. 5,00,000. The enhanced compensation was received on
1/02/2026. On 31/03/2026 the withdrew amount from capital gain deposit account on invested
Rs. 3,50,000 on acquisition of a land for industrial purpose. On 7/05/2026 assessee sold such new
land for Rs. 7,00,000 compute capital gain for several years.

CAPITAL GAINS ON TRANSFER OF ASSETS IN CASES OF SHIFTING OF INDUSTRIAL

UNDERTAKING [SECTION 54G]

1. Who can claim exemption?

Any person
2. Which asset is qualified for exemption?
Land, Building, plant or machinery in order to shift an industrial undertaking from urban
area to rural area.
3. Which capital asset is eligible for exemption?
Short term/ Long term
4. Which asset should be purchased to claim exemption?
Land, Building, plant or machinery in order to shift an industrial undertaking to rural area.
5. What is the time limit for acquiring the new asset?
For purchase: 1 year backward or 3 year forward from the date of transfer
6. What is capital gain scheme?
Applicable
7. How much is exempt?
Amount invested or capital gains whichever is lower.
8. When exemption will be taken back?
If new asset is transferred within 3 years from the date of its acquisition.
9. What will be tax treatment if exemption is taken back?
In such case, the capital gain on transfer of the new agricultural land will be calculated as
follows.
Sale consideration of new HP
Less: Original Cost of acquisition minus exemption claimed U/s 54G earlier
= Short/ long term capital gain.

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CAPITAL GAINS ON TRANSFER OF ASSETS IN CASES OF SHIFTING OF INDUSTRIAL

UNDERTAKING FROM URBAN AREA TO ANY SEZ [SEC. 54GA]

1. Who can claim exemption?

Any person
2. Which asset is qualified for exemption?
Land, Building, plant or machinery in order to shift an industrial undertaking from urban
area to SEZ.
3. Which capital asset is eligible for exemption?
Short term / Long term
4. Which asset should be purchased to claim exemption?
Land, Building, plant or machinery in order to shift an industrial undertaking to SEZ.
5. What is the time limit for acquiring the new asset?
For purchase: 1 year backward or 3 year forward from the date of transfer.
6. What is capital gain scheme?
Applicable
7. How much is exempt?
Amount invested or capital gains whichever is lower.
8. When exemption will be taken back?
If new asset is transferred within 3 years from the date of its acquisition.
9. What will be tax treatment if exemption is taken back?
In such case, the capital gain on transfer of the new agricultural land will be calculated as
follows Sale consideration of new land.

CAPITAL GAINS NOT TO BE CHARGED ON INVESTMENT IN CERTAIN BONDS [SEC. 54EC]

1. Who can claim exemption?

Any assessee
2. Which asset is qualified for exemption?
There should be transfer of a long-term capital asset being Land or building or both.
3. Which asset should be purchased to claim exemption?
Long term capital asset means specified bonds, redeemable after 5 years, issued on or
after 01/04/2018 by the national Highways Authority of India (NHAI) or the Rural
Electrification Limited (RECL) or any other notified by the Central Government in this
behalf.

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Note: The investment made in the long term specified asset noted above by any assessee
during any financial year in which the original assets are transferred and in the subsequent
FY cannot exceed Rs. 50 lakhs.
4. What is the time limit for acquiring the new asset?
6 months from the date of transfer of long term asset.
5. What is capital gain scheme?
Not applicable.
6. How much is exempt?
Amount invested or capital gains whichever is lower.
7. When exemption will be taken back?
If new asset is transferred or converted into money within 5 years from the date of
its acquisition.
8. What will be tax treatment if exemption is taken back?
In such case, the capital gain arising on transfer of original asset which was not charged
to tax, will be treated of long-term capital gain of the respective year.
Note: Taking any loan or Advance on the security of the Specified Asset, is deemed to be
transfer of specified asset on the date on which such loan or advance taken.

24. Illustration
On January 2, 2025, Mr. Ladka sells building for Rs. 99,00,000 (cost of acquisition on March 10,
2008 Rs. 1,05,000). Expenses on purchase and transfer are Rs. 100 and 200, respectively. To get
the benefit of exemption under section 54EC, Mr. Ladka makes the following investments:
1. Purchase of Rs. 40,00,000 NHAI bonds on March 1, 2025.
2. Purchase of Rs. 30,00,000 REC bonds on April 10, 2025.
Find out the amount of exemption under section 54EC.

25. Illustration
Mr. Amir Joshi sells the following long term capital assets on January 11, 2025
Particulars Residential HP Gold Silver Diamonds
Rs. Rs Rs Rs
Sale consideration 3,90,000 8,10,000 2,96,000 6,40,200
Indexed cost of acquisition 70,000 1,15,000 1,78,000 4,30,000
Expenses on transfer 10,000 81,000 6,000 32,000
The due date of filling return of income for the assessment year 2025-26 is July 31, 2025. For
claiming exemption under section 54 and 54 EC, Mr. Amir Joshi purchases the following assets-
Assets Date of Amount
acquisition Rs
Land (for constructing a residential house) April 2, 2025 1,00,000
Bank deposit (for constructing house) August 5, 2025 50,000

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN

Bonds of rural electrification corporation (redeemable on july 5, July 5, 2025 7,50,000

2030)
Bonds of national highways authority of India (redeemable on July 10, 2025 3,05,000
August 10, 2034)
Find out the amount of capital gain chargeable to tax for the assessment year 2025-26

EXEMPTIONS FROM CAPITAL GAINS ON INVESTMENT IN UNITS OF A SPECIFIED FUND [SEC. 54EE]

1. Applicability
All Assessee
2. Asset Transferred
Transfer of Long-Term Capital Asset (Called Original Asset)
3. New Asset to be acquired
Long – Term Specified Asset, (notified by Central Government).
4. What is capital gain scheme?
Not applicable.
5. Time Limit for Investment
6 months from the date of original transfer
6. Limit on Investment Amount in New Asset
• Investment made in the Long –Term Specified Asset by an Assessee during any
financial year does not exceed Rs. 50 Lakhs.
• Investment made by an assessee in the Long-Term Specified Asset, from Capital Gains
arising from the transfer of one or more Original Assets, during the financial year in
which the Original Asset or Assets are transferred and in the subsequent financial
year does not exceed Rs. 50 Lakhs.
7. Amount of Exemption
Amount invested or capital gain whichever is less
8. Holding Period of New Asset
Three Years from the date of its acquisition.
9. Sale of New Asset within holding period
Long Term Capital Gain exempted u/s 54EE shall be deemed to be Income (as LTCG) of the
previous year in which Long Term Specified Asset is transferred.
Note: Taking any loan or Advance on the security of the Specified Asset, is deemed to be
transfer of specified asset on the date on which such loan or advance taken.

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
26. Illustration
Mr. Lover transfers a residential house property (being a long-term capital asset) on December
17, 2024 for Rs. 5,20,00,000 (indexed cost of acquisition: Rs. 90,00,000, expenditure on transfer:
Rs.5,20,000 To get the benefit the of exemption under different sections, he acquires the
following assets —
a) a residential house property on May 20, 2025: Rs. 3,33,86,000;
b) long-term specified assets notified for the purpose of section 54EE —
- on March 10, 2025 Rs 40,00,000
- on June 1, 2025 Rs 30,00,000
c) REC capital gain bonds -
- On March 11 2025 Rs 41,00,000
- On August 1, 2025 Rs 31,00,000
Would it make any difference if transferor is Dildooba Ltd.?

CAPITAL GAINS ON TRANSFER OF A LONG TERM CAPITAL ASSET OTHER THAN A HOUSE
PROPERTY [SEC. 54F]

1. Who can claim exemption?

An Individual or HUF
2. Which asset is qualified for exemption?
Any long term capital asset other than a residential house property provided on the date
of transfer the taxpayer does not own more than one residential house property.
3. Which capital asset is eligible for exemption?
Long term.
4. Which asset should be purchased to claim exemption?
One Residential house property (purchased or constructed, (old or new) in India.
5. What is the time limit for acquiring the new asset?
a For purchase, 1 year backward or 2 year forward from the date of transfer of old
property.
b For construction: 3 years from the date of transfer.
c In case compulsory acquisition above period will start from the date of receiving initial
compensation.
d The above provisions of section 54F have been amended (with effect from the
assessment year 2024-25) to provide that where the cost of new residential house
exceeds Rs. 10 crore, the amount exceeding Rs. 10 crore shall not be taken into
account for the purposes of computing exemption under section 54F. Moreover, section
54F(4) has been amended to provide that for the purpose of deposit in the capital gains

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN

deposit account scheme, the cost of new house in excess of Rs. 10 crore shall not be
taken into consideration
6. What is capital gain scheme?
a If the new asset is not acquired up to the date of submission of return of income, then
taxpayer will have to deposit the money in “capital gain deposit account” with a
nationalized bank. If amount is not deposited then capital gain will be taxed in that
particulars year.
b Even if amount deposited in the scheme period of acquiring the new asset will be
applicable as above.
c If amount deposited in scheme is not utilized within 2 years from the date of transfer
of asset then unutilized amount at the end of specified period shall be treated as LTCG
which will be calculated as under
Unutilised amount X Amount of original Capital gain
Net sale consideration
7. How much is exempt?
Cost of new house X Capital gains
Net Sale Consideration
8. When exemption will be taken back?
Case 1 If new asset is transferred within 3 years from the date of its acquisition or
construction.
Case 2 If the assessee purchases, within a period of 2 years of the transfer of original
asset or constructs within a period of three years of the transfer of such asset,
a residential house other than new house.
9. What will be tax treatment if exemption is taken back?
Case 1 Capital gains which arise on the transfer of the new house will be taken as LTCG/
STCG & exemption which was allowed earlier shall be treated as LTCG of the year
in which the new asset is transferred.
Case 2 Exemption which was allowed earlier shall be treated as LTCG of the year in which
the new asset is purchased or constructed.

27. Illustration
Sale consideration Rs. 5,00,000
Expenses on transfer Rs. 50,000
Indexed cost of acquisition Rs. 3,00,000
Compute capital gain in following cases if amount invested is
a) 4,50,000 b) 5,50,000 c) 3,00,000

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
28. Illustration
Mr. Shahrukh Joshi has sold following assets during the year 2024 – 25.
Items Cost of acquisition Sale consideration Year of acquisition
Land Rs. 10 lacs Rs. 150 lacs 2000-2001
Jewellery Rs. 30 lacs Rs. 120 lacs 2010-2011
On 31/01/2025, he has purchased a residential house of Rs. 30,00,000 for self-occupation as he
had no other house till date. Compute capital gain.

EXEMPTION UNDER MORE THAN ONE PROVISION

An assessee can claim exemption under more than one section (from section 54 to 54GB) if
conditions of the respective sections are fulfilled. E.g. an assessee deriving long term capital
gain on sale of a residential house can claim benefit under section 54 by investing a part of the
capital gain in acquisition of a new residential house property and as well as claim benefit u/s
54E by investing remaining part of the capital gain in acquisition of specified securities.

EXTENSION OF TIME FOR ACQUIRING NEW ASSET OR DEPOSITING OR

INVESTING AMOUNT OF CAPITAL GAIN (SECTION 54H)

1. Applicability
• Where the transfer of the original asset is by way of compulsory acquisition under any
law, and
• Amount of compensation awarded for such acquisition is not received by the assessee on
the date of such transfer.
2. Treatment
The period for acquiring the new asset or the period available to the assessee for depositing
the amount of capital gain in relation to such compensation as is not received on the date of
the transfer, shall be reckoned from the date of receipt of such compensation.

a It is irrespective of anything contained in section 54, 54B, 54D, 54EC and 54F.
KEY NOTE

Enhanced compensation: In case of enhanced compensation, the period for acquiring

b
the new asset shall commence from the date of receipt of such enhanced
compensation.

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CAPITAL GAIN

REFERENCE TO VALUATION OFFICER (SECTION 55A)

With a view to ascertaining the fair market value of a capital asset for the purpose of this
chapter (e.g. section 45(1A), 45(2), 45(4), 55 and 2(47)) the Assessing Officer may refer the
valuation of capital asset to a valuation officer. Cases where reference to valuation officer can
be made:

1. Where the value of the asset as claimed by the assessee is in accordance with the
estimate made by a registered value.
If the Assessing Officer is of opinion that the value so claimed is at variance with its fair
market value.
2. In any other case
If the Assessing Officer is of the opinion:
1 That the fair market value of the asset exceeds the value of the asset as claimed by
the assessee by more than
• 15% of the value of the asset as so claimed; or
• By more than Rs. 25,000 whichever is less
2 That having regard to the nature of the asset and other relevant circumstances, it is
necessary to do so.

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
Analysis of sec 54

Sec. Who can Residential Agricultural Land & Plant & Any LTCA Gold/Silve
claim House Land Building Machinery other r/
exemption Property (Industrial) than RHP Diamond/
Shares
LT ST LT ST LT ST LT ST LT ST LT ST
54 An 
individual
or a HUF
54B An  
Individual
54D Any  
Assessee
(compulsory
Acquisition)
54G Any person  
54GA Any person  
54EC Any 
Assessee
54EE All 
Assessee
54F An 
individual
or HUF
54GB Individual
or HUF

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CAPITAL GAIN

SUMMARY OF SECTION 54

Time limit
New Deposit Revocation of
Sec. Nature Applicable for Exemption
Asset scheme benefit
investment
54 Long term Individual A Within 1 Capital gains Yes If new asset
Residentia or HUF Residentia year before or amount is sold within
l House l House in or 2 years invested, 3 years, then
India after the whichever is benefit
(1 or 2) date of less availed earlier
transfer in will be
case of revoked and
purchase, or shall be
within 3 reduced from
years after cost of new
the date of asset.
transfer, in
case of new
construction
.
54B Agricultur Individual Agricultur Within 2 Capital gains Yes If new asset
al land al Land years after or amount is sold within
used for transfer invested. 3 years, then
agro Whichever benefit
purpose is less? availed earlier
for 2 will be
years by revoked and
him or his shall be
parents. reduced from
cost of new
asset.
54D Land and Any Land and Within 3 Capital gains Yes If new asset
building assessee Building years after or amount is sold within
used for for receipt of invested, 3 years, then
industrial industrial initial whichever is benefit
undertaki undertakin compensatio less. availed earlier
ng for 2 g. n. will be
years. revoked and
shall be
reduced from

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
cost of new
asset.
54G Plant & Any Plant and Within one Capital gain Yes If new asset
machinery assessee. machinery year before or amount is sold within
or land & or land and or 3 year invested 3 years then
building building after the whichever is capital gain
for used for date of lower. will be
industrial industrial transfer. revoked and
under under shall be
taking in taking in reduced from
urban area non-urban cost of new
(LTCA or area or asset.
STCA) meeting
expenses
of
shifting.
54G Plant & Any Plant and Within one Capital gain Yes If new asset
A machinery assessee. machinery year before or amount is sold within
or land & or land and or 3 year invested 3 years then
building building after the whichever is capital gain
for used for date of lower. will be
industrial industrial transfer. revoked and
under under shall be
taking in taking in reduced from
urban area SEZ area cost of new
(LTCA or or meeting asset.
STCA) expenses
of
shifting.
54E Long term Any Specified Within 6 Capital gains No. If bonds are
C capital assessee bonds months or amount redeemed in 3
assets redeemabl after invested. yrs from the
e after 3 transfer Whichever date of acquis
years in Authority is less. ion then
National Rural benefit
Highways Electrificati Max. Rs. 50 availed earlier
Authority on Corp. Ltd. lacs shall be
or Rural revoked and
Electrifica deemed to be
tion Corp. LTCG in the
Ltd. year of
redemption.

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
54E Any long- Any Long term Within 6 Capital gain NO If specified
E term assessee specified months from or amount assets is
capital assets the date of invested transferred/l
asset transfer whichever is oan taken in 3
lower yrs from the
date of acquis
ion then
benefit
availed earlier
shall be
revoked and
deemed to be
LTCG in the
year of
redemption.
54F Any LTCA Individual Residentia Within 1 (Capital Yes If new asset
other than or HUF l house year before Gain/Net is sold within
residentia Assessee or two years consideratio 3 years, or
l house. should not after n) * Amount new asset
own more transfer in invested acquired
than one case of within 3
house. purchase or years, then
3 years earlier
after exemption
transfer in shall be
case of revoked and
construction will be
. deemed to be
LTCG.
54G Long term Individual Equity Within due (Capital Yes If new asset
B residentia or HUF shares of date of Gain/ Net is sold within
l property eligible furnishing consideratio 5 years, then
company return of n *amount capital gain
income invested will be
Such revoked and
company Within 1 will be
shall year from deemed to be
acquire the date of LTCG.
new assets such
subscription
in equity
shares

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN

TAX RATES APPLICABLE TO STCG & LTCG

Long-term capital gain (if Taxable under section 112

securities transaction tax is not
applicable)
Long-term capital gain (if Taxable under section 112A, if a few conditions specified
securities transaction tax is therein are satisfied. If these conditions are not satisfied,
applicable) such gain will be taxable under section 112.
Short-term capital gain (if Taxable like any other income (no special rate)
securities transaction tax is not
applicable)
Short-term capital gain (if Taxable under section 111A
securities transaction tax is
applicable)

SPECIAL RATES OF TAX (FA 24)

Sec. Natures of Income Tax Rate Basic Chapter VI-
exemption A Ded
111A STCG on 15% if Allowed to Not Allowed
1 Equity shares or transfer takes Resident

2 Units of equity-oriented fund place before Individual /

3 Unit of business trust on which 23.7.2024 & HUF

STT is paid at the time of 20% if
transfer. transfer takes

Note: In case of sale on a RSE in place on or

International Financial Service after

Centre in SEZ, payment of STT is 23.7.2024
not required, if consideration is in
foreign currency
Note: Asset which is not covered Normal As per the Allowed
u/s 111A would be chargeable at assessee
normal rates of tax. applicable

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
29. Illustration
Compute tax payable in following cases
Case Assessee STCG u/s STCG Salary / HP/ PGBP/ Deduction u/s
111A IFOS 80C
1 Anil (RI) 200000 350000 50000
2 Anil (RI) 200000 250000 50000
3 Anil (RI) 200000 50000
4 Anil (RI) 300000 50000

Sec. Natures of Income Tax Rate Basic Chapter

exemption VI-A Ded
112 a Long term capital gains (other
than LTCG taxable as per
section 112A and mentioned in
below) arising -
i from transfer of capital asset 20% with Allowed to Not
which takes place before indexation Resident Allowed
23.7.2024 Individual /
ii Shares (STT not paid)/ ZCB 20% with index HUF
10% without
indexation
whichever is
more beneficial
to assessee
iii from transfer of capital asset
which takes place on or
after 23.7.2024
• from transfer of any Lower of 20% Allowed to Not

land or building with indexation Resident Allowed

or 12.5% without Individual /
(residential or
indexation HUF
commercial) or both by an
individual or a HUF,
being a resident acquired
before 23.7.2024
• Other assessee 12.5% without N/A Not
indexation Allowed
• Other assets 12.5% without Allowed to Not
indexation Resident Allowed

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN

Individual /
HUF

30. Illustration
X Y and Z want to ascertain their tax liability pertaining to transfer of land, building given below
X Y Z
Rs. Rs. Rs.
Sale consideration 40,00,000 41,00,000 42,00,000
Stamp duty value 39,00,000 41,50,000 37,00,000
Cost of acquisition 20,000 15,00,000 80,000
Cost of improvement (incurred in the year of 3,000 4,000 6,000
acquisition)
Expenditure on transfer Nil Nil Nil
Date of acquisition May 10, 2004 June 10, July 10, 2005
2005
Date of transfer July 30, 2024 July 25, 2024 July 20, 2024
Income other than capital gain is not more than Rs. 15,00,000 in the above cases

Sec. Natures of Income Tax Rate Basic Chapter

exemption VI-A Ded
112 b Long-term capital gains arising
from transfer of unlisted
securities or shares of company in
which public are not substantially
interested by non-resident
assessee
• If transfer takes place before 10% without
23.7.2024 indexation and
foreign currency
fluctuations
• If transfer takes place before 12.5% without
23.7.2024 indexation and
foreign currency
fluctuations

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN
31. Illustration
Compute tax in following cases (assume date of transfer 12th dec 2024)
Case Assessee STCG u/s STCG LTCG u/s LTCG u/s Salary / Deduction
111A 112A 112 HP/ u/s 80C
PGBP/
IFOS
1 Anil (RI) 300000 2,00,000 50000
(sale of
gold)
2 Anil (RI) 200000 200000 100000
3 Anil (RI) 200000 150000 200000 100000

Sec. Natures of Income Tax Rate Basic Chapter

exemption VI-A Ded
112A Long term capital gains on transfer of – 10% on LTCG > Allowed to Not
• Equity share in a company 1.25 lakhs if Resident Allowed
• Unit of an equity oriented fund transfer takes Individual /

• Unit of business trust place before HUF

Condition for availing the benefit of this 23.7.2024 12.5%
concessional rate is that securities on LTCG > 1.25
transaction tax (STT) should have been lakhs if transfer
paid – takes place on or
after 23.7.2024
In case of Time of payment of Note: Total
STT exemption in a
Equity shares both at the time of P.Y. cannot
acquisition and exceed 1.25
transfer lakhs.
Unit of equity at the time of Note: Rebate u/s
oriented fund transfer 87A is not
or unit of available
business trust
Note: In case of sale on a RSE in International Financial Service Centre in SEZ, payment of STT
is not required, if consideration is in foreign currency

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN

COST OF ASSET REFERRED TO IN [SEC 112(A)]

The cost of acquisition in relation to the long-term capital assets being

• Equity shares in a company on which STT is paid both at the time of purchase and transfer
or
• Unit of equity oriented fund or unit of business trust on which STT is paid at the time of
transfer.
Acquired before 1st February, 2018 shall be the higher of
i Cost of acquisition of such asset; and
ii Lower of
a The fair market value of such asset as on 31/01/18; and
b The full value of consideration received or accruing as a result of the transfer of the
capital asset.
• Benefit of Indexation not available
Notes

• Deduction u/s 80C to 80U is not available

• Rebate u/s 87A is not available

Meaning of fair market value

S N Circumstance Fair Market Value
1 In a case where the capital asset is If there is trading in such asset on such
listed on any recognized stock exchange on 31/01/2018
exchange as on 31/01/2018 The highest price of the capital asset quoted on
such exchange on the said date
If there is no trading in such asset on such
exchange on 31/01/2018
The highest price of such asset on such exchange
on a date immediately preceding 31/01/2018
when such asset was traded on such exchange
2 In a case where the capital asset is a The net asset value of such unit as on the said
unit which is not listed in any date
recognized stock exchange as on
31/01/2018
3 In a case where the capital asset is an An amount which bears to the cost of acquisition
equity share in a company which is the same proportion as CII for the financial year
• Not listed on a recognized stock 2017 – 18 bears to the CII for the first year in
exchange as on 31/01/2018 but which the asset was held by the assessee or on
listed on such exchange on the 01/04/2001, whichever is later.
date of transfer

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN

• Listed on a recognized stock

exchange on the date of
transfer and which became the
property of the assessee in
consideration of share which is
not listed on such exchange as on
31/01/2018 by way of
transaction not regarded as
transfer under section 47

32. Illustration
Consider the following situations (1,000 shares are transacted by Bombay Stock Exchange but
value of 1 equity shares is given below) –
Particulars Situation Situation Situation Situation 4 Situation
1 Rs. 2 Rs. 3 Rs. Rs. 5 Rs.
Cost of acquisition on Sep. a 410 710 900 800 30
20, 2018
Fair market value as per b 730 780 300 1000 100
highest quotation on January
31, 2018
Sale consideration on march c 760 650 910 825 400
15, 2025
Fair market value for the purpose of calculating tax liability under section 112A shall be calculated
as follows-

33. Illustration
Compute tax in following cases
Case Assessee STCG u/s STCG LTCG u/s LTCG u/s Salary / Deduction
111A 112A 112 HP/ u/s 80C
PGBP/
IFOS
1 Anil (NR) 500000 2,00,000 100000
2 Anil (RI) 200000 200000 200000 100000
3 Anil (RI) 200000 150000 200000 200000 100000

SPECIAL CASES OF SURCHARGE

34. Illustration
From the following information find out the tax liability in the cases given below for the AY 25 – 26
(these taxpayers do not want to opt for the alternative tax regime u/s 115BAC) –

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN

Different Dividend Capital u/s – Other Total

taxpayers Rs. 111A 112 112A incomes Rs.
Rs. Rs. Rs. Rs.
Window (46 - 6,00,000 3,00,000 7,00,000 59,00,000 75,00,000
years)
resident
Door (62 - 8,00,000 2,00,000 14,00,000 1,56,00,000 1,80,00,000
years)
resident
Room (41 - 1,00,00,000 68,00,000 2,00,000 70,00,000 2,40,00,000
years)
resident

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 CS EXECUTIVE – JUNE/ DEC 25
CAPITAL GAIN

PRACTICAL QUESTIONS

35. Illustration
Paulomi has transferred 1,000 shares of Hetal Ltd, (Which she acquired at cost of Rs. 10,000 in
01/04/2020 to Dhaval, her brother, at a consideration of Rs. 3,41,476 on 15/05/2024 privately.
Assuming she has no other source of Income, Compute her Total Income and Tax Payable for
Assessment Year 2025 – 26.

36. Illustration
Mr. Paneer (63 years), a resident individual, transfers the following long-term capital asset during
the previous year 2024 – 25 –
Agricultural Silver Debentures Gold
land in urban
area
Date of transfer April 12, 2024 October 7, January 3, February 26,
2024 2025 2025
Sale consideration (in Rs.) 22,75,000 68,86,000 15,76,000 23,10,000
Indexed cost of acquisition 19,32,000 56,10,000 11,78,000
(in Rs.)
Cost of acquisition 5,87,900
Expenditure on transfer (in 5,000 6,000 1,000 10,000
Rs.)
Debentures were purchased in 2018 – 19. Other assets were purchased before April 1, 2018.
Indexed cost of acquisition in calculated by applying cost inflation indexed notified by the
Government. On April 1, 2025, Mr. Paneer owns only one residential house property which is used
for his own residence. For acquiring this property, a loan was taken from a friend in 2020 and
interest on loan for the year 2024 – 25 is Rs. 1,46,000
Mr. Paneer makes following investments –
1. A residential house property of Rs. 18,00,000 is acquired on April 14, 2024.
2. NHAI bonds of Rs. 4,10,000 are purchased on October 5, 2024.
3. REC bonds of Rs. 9,00,000 are purchased on June 1, 2025.
Determine the amount of capital gain chargeable to tax for the assessment year 2025 – 26.

37. Illustration
Mr. X purchased a house on 01.04.2001 for Rs. 2,00,000 and incurred Rs. 3,00,000 on improvement
on 01.07.2003 and it was received by his son Mr. Y on 01.07.2012 and Mr. Y incurred Rs. 4,00,000 on
improvement on 01.07.2014 and the house was sold by him on 01.07.2024 for Rs. 1,00,00,000. He is
entitled to Deduction u/s 80C of Rs. 1,00,000. Compute the tax liability of Mr. Y
Option 1: Assessee has not opted for Section 115BAC
Option 2: Assessee has opted for Section 115BAC

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 CS EXECUTIVE – JUNE/ DEC 25
INCOME FROM OTHER SOURCES

CHAPTER 8 INCOME FROM OTHER SOURCES

INTRODUCTION

This is the last head of income. Any income which is not salary income, house property income,
business income, capital gain is treated as income from other source.
As per Section 56(1), any income, which is not specifically exempted and not chargeable under
any other heads of income, shall be chargeable under the head “Income from other sources”.
Tax point - A receipt shall be taxable under this head if the following conditions are satisfied:

Income

Basis of Charge Income shall not be exempt

Not covered by other head

Section 56(2) lays down a list of incomes, which are taxable under this head. Such list is not
exhaustive. Apart from the income stated in section 56(2) any other income, which is fulfilling
all the above conditions, shall be taxable under this head.

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Income from other sources

General (Sec. 56(1)) Specific (Sec. 56(2))

Any income which is not Following incomes in particular

excluded from the total shall be chargeable to tax
income and not chargeable under the head income from
to tax under any other head other sources only
(All Inclusive)

Examples 1 Dividend
➢ Income from subletting;
➢ Interest on bank deposits
and loans; 2 Wining from Lotteries
➢ Income from royalty (if it is
not an income from Employee’s contribution towards staff
business/profession); 3 welfare scheme
➢ Directors fee;
➢ Ground rent;
➢ Agricultural income from a 4 Interest from securities
place outside India;
➢ Director’s commission for Rental income of Machinery, Plant and
5
standing as a guarantor to furniture
bankers;
➢ Director’s commission for
underwriting shares of new Rental income of letting out of plant
company; machinery or furniture along with letting out
6 of building and the two lettings are not
➢ Examination fees received
by a teacher from a person separable
other than his employer;
➢ Rent of plot of land;
➢ Insurance commission; 7 Sum received under Keyman insurance policy
➢ Mining and royalties;
➢ Casual income;
Interest on compensation or enhanced
8
compensation

9 Gift

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INCOME FROM OTHER SOURCES

DIVIDEND [SEC. 56(2) (I)]

Dividend, in general, means the amount received by a shareholder (whether in cash or in kind) in
proportion to his shareholding in a company whether out of past or present income; or taxable
or exempted income; or revenue or capital income. However, the Income Tax act gives an
inclusive definition of dividend.

Case Tax Treatment

a) Dividend from a domestic company including Taxable in the hands of shareholder.
dividend u/s. 2(22)(e)
b) Dividend from a non-domestic company. Taxable in the hands of shareholder.
c) Dividend from a co-operative society Taxable in the hands of shareholder.
KEY NOTE

Dividend shall be taxable under the head “Income from other sources”, even when shares
are held by the assessee as stock in trade.

Dividend

Dividend paid by Dividend from

Domestic Company Other company

Taxable
Normal Interim Deemed
Dividen Dividend Dividend
d

Taxable Taxable

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DEEMED DIVIDEND 2(22)

Deemed dividend
Sec 2(22)

Sec 2(22)(a) Sec 2(22)(b) Sec 2(22)(c) Sec 2(22)(d) Sec 2(22)(e)

Any Any distribution Distribution Distributio Any payment by

distribution of debentures, on n or way of loan or
entailing debenture- liquidation reduction advance by a
the release stock, deposit of company of capital closely-held
of company certificates and company to a
assets bonus to shareholder, holding
preference substantial interest,
provided the loan
shareholders should not have
been made in the
ordinary course of
business and money-
lending should not
be substantial part
Taxable in the hands of of the company’s
shareholder.e.f 1-4-20 business

Taxable in the hands of shareholder

1. 2(22)(a)
a. Any distribution of accumulated profits, whether capitalised or not, by a company to its
shareholders is deemed to be dividend if it entails the release of company’s assets.
b. Two conditions are essential for this clause.
• The should be distribution from accumulated profits and
• Such distribution must result in the release of the assets of the company.
c. In case of issue of bonus shares there is no release of assets hence issue bonus shares
are not deemed as dividend.
2. 2(22)(b)
Any distribution by a company
a) Debenture stock or deposit certificate to any shareholder or
b) Bonus shares to preference shareholders

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Is deemed as dividend to the extent of Accumulated Profit, whether capitalised or not

(release of assets not necessary).
3. 2(22)(c)
Any distribution made by a company to its shareholders on its liquidation is treated as
dividend to the extent to which such distribution is attributable to the accumulated profits
capitalised or not).
Exception:
1 Redemption of preference shares issued for full consideration is not deemed to be
dividend.
2 Buy back of shares
4. 2(22)(d)
Any distribution to its shareholders by a company on the reduction of its capital to the
extent to which the company possess accumulated profits is deemed to be dividend.
[Same exception as in clause (c)].
5. 2(22)(e)
Any loan or advance (whether in cash or in kind) given by a closely held company,
to the extent of accumulated profit,-
a. To its specified member (i.e. shareholder who legally as well as beneficially holds not
less than 10% voting power in the company); or
b. To any concern (whether HUF, Firm, AOP, BOI or a company) in which such specified
member holds substantial interest; or
A person shall be deemed to have substantial interest in any concern if he beneficially
holds not less than 20% of share of profit in such concern (or 20% of voting power in
case of any company) at any time during the previous year
c. To any other person on behalf of specified member
Note
Loan advanced by a banking company: If a banking company has advanced any loan in the
ordinary course of business to specified member then such loan shall not be treated as
dividend.
6. 2(22)(e) [FA 24]
• Amount received by a shareholder on account of buy-back will be deemed as dividend
under section 2(22) (f) regardless of the quantum of "accumulated profits" of the
distributing company.
• Section 8 has not been amended. Consequently, it is not clear whether (or not) deemed
dividend under section 2(22)(f) will be taxable in the previous year in which buy-back
is offered or in the year when it is actually paid.
• Section 46A has been amended
• Tax will be deductible from buy-back payments within the parameters of section 194.

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INCOME FROM OTHER SOURCES

• The aforesaid amendment shall apply to any buy-back o k of shares that takes place on
or after October 1, 2024.

BASIS OF CHARGE [SEC. 8]

Case Year of taxability

Normal Dividend Year in which it is declared by the company
Interim Dividend Year in which amount of dividend is unconditionally made available
Deemed Dividend u/s Year in which it is distributed or paid by the company.
2(22) (a)/(b)/(c)/(d)
Deemed Dividend u/s Payment of loan or advance to shareholder.
2(22)(e)

1. Illustration
Paru Limited purchase shares in Maru limited in 2014. In August 2024 Paru Ltd. distributed the
shares in Maru Ltd. to its shareholders of the value of Rs. 10 lac. it held a general reserve of Rs.
11 lacs created out of past profits at the time of distribution. Discuss the tax implications.

2. Illustration
Mr. Zor holds 2000 preference shares of Rs. 100 each in a company. Company had reserve worth
Rs. 50, 00,000. Out of these reserves it issued bonus shares in the ratio of 1:4. Market value of
these shares amounts to Rs. 116/- per share. How will they be treated in the hands of Mr. Zor?
3. Illustration
Bahubali Ltd. has issued bonus shares to its equity shareholders. Subsequently company has
reduced its share capital and has refunded Rs. 5 per share to the shareholders, the amount so
received by the shareholders shall be considered to be dividend in the hands of shareholder.

CASUAL INCOME [SEC. 56(2) (ib)]

1. It includes
1. Winning from Lotteries
2. Winning from Horse races, etc;
3. Winning from Crossword Puzzles
4. Winning from Gambling and Betting; or
5. Winning from game show or entertainment program on television or electronic mode e.g.,
Who wants to be a millionaire? Big Brother, etc
6. Online Gaming

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2. Basis of charge
Casual Income shall be taxable on the following basis.
Cases Treatment
In case the assessee maintains books of accounts As per the accounting method followed.
Where no books of accounts are maintained Taxable in the year of receipt
3. Features
• Allow ability of expenditure: No expenditures shall be allowed as deduction from Casual
Income even though such expenditure was incurred wholly and exclusively for the
purpose of earning such income
• Deduction under chapter VIA: No deduction u/s 80C to 80U shall be available from
such income
• Set-Off losses: Losses from any other source or under any other head of income cannot
be set-off from Casual Income.
• Exemption limit: shall not be applicable in case of Casual Income.
• Rebate u/s 87A: Available
4. Tax Rate & TDS
Section Nature of Income TDS Rate No TDS
194 B Winning from Lotteries etc. 30% Rs. 10,000
194BA Winning from any online gaming 30% Not applicable
194BB Winning from horse races 30% Rs. 10,000

5. Key notes
Income of Jockey - Income of jockey shall be taxable under the head “Profits & Gains of
Business or profession”
Winning from a motor car rally - Winning from a motor car rally shall not be considered
as casual income because such an income is the result of application of skill and effort; it
shall be taxable as usual under the “Income from Other Sources”.
Activity of owning and maintaining race horse
• Activity of owning and maintaining race horse shall not be treated as casual income but
taxable under the head ‘Income from other sources’.
• Expenditure incurred in respect of such activity shall be allowed as deduction.
• Such income shall be taxable at the usual rate of tax.
6. Grossing up of income
Gross Income Income before TDS
Net Income Income after TDS.
Note For computation of Income Always consider Gross Income:
Net Income
Gross Income = 1−TDS rate

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INCOME FROM OTHER SOURCES

4. Illustration
Particular Amount
Casual Income (Net) 3,50,000
Compute Gross Income

5. Illustration
Mr. Sunny Singh (Age 65) RI?
Particular Amount
Winnings from KBC 70 Lakhs Net
Expenditure incurred to Earn Above Income 2 Lakhs
Ded u/s 80C 1.5 Lakhs
Loss From Betting 15 Lakhs
Compute Tax Payable

INCOME FROM MACHINERY, PLANT OR FURNITURE LET OUT ON HIRE [SEC. 56(2) (ii)]

• Income from above is taxed under this head.

• If assets are let out as a part of business activity then shall be taxable as business income

INCOME FROM MACHINERY, PLANT OR FURNITURE LET OUT ON HIRE ALONG WITH BUILDING
[SEC. 56(2) (iii)]

1. Feature
Generally income from letting of building is taxable under the head income from house
property, but if such letting is inseparable from letting of machinery, plant or furniture,
then income from such letting is charged to tax under the head income from other sources.
2. Deduction allowed
Deduction allowed against income u/s. 56(2) (ii) & 56(2) (iii):
➢ Current repairs.
➢ Insurance premium paid for machinery, plant, furniture or building.
➢ Depreciation and unabsorbed depreciation.
➢ Any other revenue expenditure in relation to above mentioned income.

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INTEREST ON SECURITIES [SEC. 56(2) (id)]

1. Security means
a. Interest on any security of the Central Government or a state Government.
b. Interest on debentures or other securities issued by or on behalf of:
➢ A local authority.
➢ A company.
➢ A corporation established by a central or state government
2. Tax Treatment
Cases Taxable under the head
The securities are held as stock in trade “Profit & Gains of Business or Profession”
The securities are held otherwise than as “Income from Other Sources”
stock in trade
3. Chargeability
Interest on securities is taxable on the basis of method of accountancy regularly followed
by the assesse (i.e., cash or accrual basis). In case, the assesse does not follow any method
of accountancy such income shall always be taxable on due basis.
4. Expenses allowed as deduction
c. Expenditure allowed as deduction
Collection expenditure
Interest on loan.

ANY SUM RECEIVES UNDER A KEYMAN INSURANCE POLICY [SEC. 56(2) (iv)]

1. Meaning & features

Any sum received under a Keyman Insurance Policy including bonus, if not chargeable
under the head “PGBP” or “Salary”;
Keyman Insurance Policy:
➢ It is a life insurance policy.
➢ It is a policy taken by one person on the life of another person.
➢ The relationship between such persons should either be that of an employer – employee
or any other business relationship.
Explanation to section 10(10D)
2. Example
For example, Mr. A is the chief operating officer of XYZ Ltd. (the company). XYZ Ltd.
heavily dependent upon Mr. A for its business operations and, thus, Mr. A is ‘a key person’ or

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a ‘Keyman’ of the company. Sudden death of Mr. A will seriously affect the business
operations of the company. To insure against such losses, the company may take out an
insurance policy on the life of Mr. A Such a policy is known as ‘Keyman Insurance Policy’.
3. Tax Treatment
In the hands of the person (employer company) taking the policy: Maturity proceeds are
taxable as business income. Premium paid on Keyman Insurance policy is an allowable
expenditure in the hands of the company u/s 37(1).
In the hands of Keyman: Ordinarily, a Keyman insurance policy can mature only in the hands
of the employer company. However, the employer company may assign the policy in favour of
the keyman or his family members.
If the policy is assigned to the employee (Keyman) then it comes within the ambit of ‘profits
in lieu of salary’ u/s 17(3)
if the policy is assigned in the hands of the family members then it is taxable within the
ambit of ‘income from other sources’ u/s 56(2)(iv)
Note: After assignment, the policy will lose the character of a “Keyman Insurance Policy” and,
hence, the ultimate maturity in such a case will be covered by section (10D).

GIFT [SEC. 56(2) (vii)

1. Conditions
• Receipts by any assessee.
• It is received after 1st October 2009.
• It does not fall in exempted category.
• property includes –
a. Immovable property being land or building or both;
b. Share and securities
c. Jewellery
d. Archaeological collections;
e. Drawings
f. Paintings
g. Sculptures;
h. Any work of art; or
i. Bullion
j. Virtual Digital Asset (Crypto Currency)
2. This section shall not apply to any sum of money or any property received
1 From any relative

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INCOME FROM OTHER SOURCES

• In Case of an Individual.
a Spouse of the individual.
b Brother or sister of the individual.
c Brother or sister of the spouse of the individual;
d Brother or sister of either of the parents of the individual.
e Any lineal ascendant or descendant of the individual;
f Any lineal ascendant or descendant of the spouse of the individual;
g Spouse of the person referred to in clauses (ii) to (vi).
• In case of HUF: any member of family
2 On the occasion of the marriage of the individual (whether gift is received from relative
or outsiders).
3 Under a will or by way of inheritance.
4 In contemplation of death of the payer or donor
5 From any local authority
6 From any fund or foundation or university or other educational institution or hospital or
other medical institution or any trust or institution referred to in sec 10(23C)
7 From or by any trust or institution registered u/s 12A / 12AA / 12AB
8 By any fund or trust or institution or any university or other educational institution or
any hospital or other medical institution referred to in sec 10(23C)(iv)/(v)/(vi)/(via); or
If sum or property is received by any person referred u/s 13(3) from any Fund
registered u/s 10(23C) or trust registered u/s 12AA/12AB then such sum shall be
Taxable. [FA,2022]
9 By way of transaction not regarded as transfer u/s 47(i)/ (iv)/ (v)/ (vi)/ (via)/ (viaa)/
(vib)/ (vic)/ (vica)/ (vicb)/ (vid)/ (vii), (viiac) or (viiad) or (viiae) or (viiaf). [FA,2022]
10 From an individual by a trust created or established solely for the benefit of relative
of the individual;
11 From such class of persons & subject to such conditions, as may be prescribed.
12 Received by an Individual, from any person, for medical treatment or treatment of any
member of his family, for any illness related to COVID-19 subject to such conditions,
as CG may Notify. (During FY 19-20 or onwards)
13 Received By a member of the family of a deceased person
a from the employer of the deceased person; or
b from any other person or persons to the extent that such sum or aggregate of such
sums does not exceed 10 lakh rupees,
Where the cause of death of such person is illness related to COVID-19 and the
payment is
i Received within 12 months from the date of death of such person; and
ii Subject to such other conditions, CG may notify

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INCOME FROM OTHER SOURCES

"Family" (For clause 12 & 13), in relation to an individual means

i The spouse and children of the individual; and
ii The parents, brothers and sisters of the individual or any of them, wholly or mainly
dependent on the individual.

Nature of Conditions to be satisfied for Extent of

Category Remarks
Receipt considering Income Income
A Any sum of a During the previous year, The whole of Aggregate
money assessee has received any sum of the aggregate amount of
money (cash, cheque, draft, etc.) value of such cash gift
from one or more persons. sum shall be received
b Such sum is received without considered as during the
income of period shall
consideration.
that previous be
c The aggregate value of such
year. considered.
receipt during the previous year
exceeds Rs 50,000

6. Illustration
Compute amount of gift in following cases:
a. Kareena received cash gift of Rs. 50,000 from Shahid Kapoor on her birthday.
b. Kareena received cash gift of Rs. 80,000 from Shahid Kapoor and Shakti Kapoor on her
birthday.

B Immovable a During the previous year, Assessee The stamp The limit of
property has received immovable property. duty value of Rs. 50,000/-
b Such immovable property is received such property is applicable
without consideration. shall be per incidence.
considered as
c The stamp duty value of such property
income of
exceeds Rs. 50000.
that previous
d Such asset is a capital asset in hands
year.
of recipient.

7. Illustration
Compute amount of gift in following cases:
a. Dipika received HP as a gift from Karan Stamp duty value Rs. 50000
b. Sonam received 2 HP as a gift from Karan stamp duty value Rs. 56,000 and from Vinod of Rs.
36,000.

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INCOME FROM OTHER SOURCES

C Any immovable a During the previous year, Assessee Then The limit of
property has received immovable property. difference Rs. 50000/-
b Such immovable property is between is applicable
received for inadequate stamp duty per incidence.
value and
consideration.
considerations
c Stamp duty value exceeds 110% of
is chargeable
consideration.
to tax.
d Difference between stamp duty
value and consideration exceeds Rs
50,000

Step 1 Check whether, SDV > consideration

Step 2 Calculate 110% of consideration
Step 3 Is step 2 > consideration
Step 4 Is (SDV – consideration) exceeds 50,000
Step 5 Difference as per step 4 is treated as income
Note If any of above conditions is not fulfilled then nothing is taxable

8. Illustration
Compute amount of gift in following cases:
a. Uday Shetty purchased HP for Rs. 25,12,000 from Majnu (stamp duty value Rs. 25,35,000).
b. Shilpa purchased 2 HP. First for Rs. 25,00,000 from Raj (stamp duty value Rs. 28,00,000) and
second for Rs. 26,00,000 from Dhoni (Stamp duty value Rs. 26,30,000)

D Any movable a During the previous year, Assessee has The whole of Aggregate
property received movable property from one or the aggregate amount of gift
more persons. fair market received
b Such movable property is received value of such during the
without consideration. property shall period shall
be considered be
c The aggregate fair market value of
as Income of considered.
such receipts during the previous year
the previous
exceeds Rs. 50000.
year.
d Such asset is a capital asset in hands
of recipient.

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INCOME FROM OTHER SOURCES

9. Illustration
Compute amount of gift in following cases:
a. Aishwarya received gold necklace of (FMV Rs. 45,000) from Salman without any consideration.
b. Raveena received gold necklace of (FMV Rs. 55,000) from Salman without any consideration.
c. On 12-12-24, Sunidhi received shares from his friend of Rs. 36000 (FMV) as a gift. Further
as on 12-01-25, She also received gold chain from Bobby (FMV Rs. 30,000) without any
consideration.

E Any a During the previous year Assessee has The whole of Aggregate
movable received movable property from one or the aggregate amount of gift
property more persons. fair market received
b Such movable property is received for a value of such during the
consideration. property shall period shall
be considered be
c Such consideration is less than the
as Income of considered.
aggregate fair market value of the
the previous
property by an amount exceeding Rs.
year.
50000.

10. Illustration
Compute amount of gift in following cases:
a. On 12-12-24 Jony purchased jewellery from Kishore (FMV Rs. 46,000) for Rs. 30,000.
b. On 12-12-24 Jony purchased jewellery from Kishore (FMV Rs. 96,000) for Rs. 30,000.
c. On 12-12-24, Kajol purchased jewellery from his friend Shahrukh (FMV Rs. 66,000) for Rs.
30,000. Further as on 01-01-25 she also acquired silver utensils (FMV Rs. 1,00,000) from
another friend for Rs. 70,000.

INCOME BY WAY OF INTEREST RECEIVED ON COMPENSATION OR ON ENHANCED

COMPENSATION [SEC. 56(2)(viii)]

It is taxable under the head income from other sources after allowing standard deduction of
50% of such income.

ANY SUM OF MONEY RECEIVED AS AN ADVANCE OR OTHERWISE IN THE COURSE OF

NEGOTIATION FOR THE TRANSFER OF A CAPITAL ASSET IF ON OR AFTER 1-4-14 [SEC 56(2)(ix)]

Already discussed in capital gain

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INCOME FROM OTHER SOURCES

EMPLOYEE’S CONTRIBUTION TOWARDS STAFF WELFARE FUND OR SCHEME [SEC. 56(2)(IC)]

Any amount received or deducted by an employer from employee towards any –

• Provident Fund;
• Superannuation Fund;
• Fund set up under the provisions of Employee’s State Insurance Act, 1948; or
• Other fund set up for the welfare of such employees,
Shall be treated as income of the employer under this head if not taxable under the head
“Profits & gains of business or profession”. Subsequently, when such sum is credited by the
employer to the employee’s account in the relevant fund on or before the due date prescribed
under the relevant Act, then deduction of equal amount is available.
Tax point
• If employee’s contribution taken and No treatment
deposited within time
• If employee’s contribution taken and not Taxable as income from other source if
deposited within time not taxable as business income.

COMPENSATION OR ANY OTHER PAYMENT RECEIVED IN CONNECTION WITH TERMINATION OF

HIS EMPLOYMENT [SECTION 56(2)(XI)]

Any compensation or any other payment, due to or received by any person, by whatever name
called, in connection with the termination of his employment or the modification of the terms
and conditions relating to thereto shall be chargeable to tax under this head.

SUM RECEIVED UNDER A LIFE INSURANCE POLICY [SEC. 56(2)(xii)]

1 It provides mode of computation of taxable income pertaining to sum received under a life
insurance policy.
The computation mode given by section 56(2)(xiii) is not applicable in the following cases -
a Unit-linked insurance policy/keyman insurance policy - The provisions of section
56(2)(xiii) are not applicable in the case of sum received under a unit-linked insurance
policy or keyman insurance policy.
b Exemption under section 10(10D) - Moreover, section 56(2)(xiii) is not applicable if
income is exempt under section 10(10D)

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INCOME FROM OTHER SOURCES

DEDUCTIONS ALLOWABLE IN COMPUTING INCOME FROM OTHER SOURCES [SECTION 57]

The following expenditures are allowed as deductions from income chargeable to tax under
the head ‘Income from Other Sources’:
S N Sections Nature of Income Deductions allowed
1. 57(i) Dividend or Interest on Deduction on account of interest expense and
securities in any previous year such deductions shall not
exceed 20% of the dividend income for
income from units included in the total income
for that Year Without deduction under
section 57.
Any reasonable sum paid by way of commission
or remuneration to banker or any other
person for purpose of realizing dividend or
interest on securities
The above provisions have been amended
(with effect from October 1, 2024) to
provide hat no deduction will be allowed from
money received on account of buy-back of
shares [which is deemed as dividend under
section 2(22)(f)]. In other words, the entire
money received on account of buy-back of
shares (on or after October 1, 2024) will be
taxable under the head "Income from other
sources without any deduction under section
57. [FA 24]
2. 57(ia) Employee’s contribution If employees’ contribution is credited to
towards Provident Fund, their account in relevant fund on or before
Superannuation Fund, ESI the due date
Fund or any other fund setup
for the welfare of such
employees
3. 57(ii) Rental income letting of plant, Rent, rates, taxes, repairs, insurance and
machinery, furniture or depreciation etc.
building
4. 57(iia) Family Pension 1/3rd of family pension subject to maximum
of Rs. 25,000. [FA 24]

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INCOME FROM OTHER SOURCES

5. 57(iii) Any other income Any other expenditure (not being capital
expenditure) expended wholly and exclusively
for earning such income
6. 57(iv) Interest on compensation or 50% of such interest (subject to certain
enhanced compensation conditions)
7. 58(4) Income from activity of All expenditure relating to such activity
Proviso owning and maintaining race
horses

EXPENSES DISALLOWED SEC 58

The following amounts shall not be deducted in computing income chargeable under the head
“Income from other Sources”.
Sections Details
58(1)(a)(i) Personal expenses
58(1)(a)(ii) Interest chargeable to tax which is payable outside India on which tax has not
been paid or deducted at source
58(1)(a)(iii) ‘Salaries’ payable outside India on which no tax is paid or deducted at source
58(1)(a)(iii) Wealth-tax 30% of the sum payable to a resident, on which no tax is paid or
deducted at source.
58(2) Expenditure of the nature specified in section 40A
58(4) Expenditure in connection with winnings from lotteries, crossword puzzles, races,
games, gambling or betting. The prohibition however will not apply in respect of
income of an assessee who is owner of horses maintained for running in horse
races [Section 58(4)]. Further, the amount spent in buying of infructuous tickets
is not deductible as the gross amount will be taxed.

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INCOME FROM OTHER SOURCES

PRACTICAL QUESTIONS

11. Illustration
Mr. Hatela holding 28% of Equity shares in a company took a loan of Rs.5,00,000 from the same
Company. On the date of granting the loan, the company had accumulated Profit of Rs.4,00,000.
The company is engaged in some Manufacturing Activity.
1. Is the amount of loan taxable as Deemed Dividend in the hands of Rahul, if the Company is a
company in which the Public are Substantially Interested?
2. What would be your answer, if the lending Company is Private Limited Company (i.e.) a Company
in which the Public are not Substantially Interested?

12. Illustration
The following details have been furnished by Mrs. Hemali, pertaining to the year ended
31/03/2025:
1. Cash Gift of Rs.51,000 received from her friend on the occasion for her “shastiaptha poorthi”
a wedding function celebrated on her husband completing 60 years of age. This was also her
25th Wedding Anniversary.
2. On the above occasion, a diamond necklace worth Rs.2 Lakhs was presented by her sister living
in Dubai.
3. When she celebrated her daughter’s wedding on 21/02/2025, her friend assigned in Mrs.
Hemali’s favour a fixed deposit held by the said friend in a Schedule Bank, the value of the
Fixed deposited and the accrued interest on the said date was Rs.51,000.
Compute the Income, if any, assessable Income from Other Sources.

13. Illustration
On 10-10-2024, Dipak received a piece of land at Napasar from his friend Rakesh (stamp duty
value Rs. 46,000) as a gift. Such land was acquired by Mr. Rakesh in 2001 for 5.000/-. Further, as
on 01-11-2024, Dipak also received another piece of land at Bikaner (stamp duty value * 30,000)
without any consideration from Anil (acquired in 2023 - 24 for 10,000/-)

On 31-03-2025, Mr. Dipak sold land at Napasar to Kedar for 30,000/- and land at Bikaner to Nath
for 90,000/-. Stamp duty value of such land as on the date of sale is 50,000/- (Napasar) and
85,000/- (Bikaner).

14. Illustration
From the following particulars of Pan masala for the previous year ended 31st March, 2025,
compute the income chargeable under the head “Income from Other Sources”:
S N Particulars Rs
1 Directors fee from a company 10,000

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INCOME FROM OTHER SOURCES

2 Interest on bank deposits 3,000

3 Winnings from lotteries (Net) 35,000
4 Royalty on a book written by him 9,000
5 Lectures in seminars 5,000
6 Interest on loan given to a relative 7,000
7 Interest on debentures of company (listed in a recognised stock 3,600
exchange) net of taxes
8 Interest on Post Office Savings Bank Account 500
9 Interest on Government Securities 2,200
10 Interest on Monthly Income Scheme of Post Office 33,000
He paid Rs. 1,000 for typing the manuscript of book written by him.

15. Illustration
Examine the following transactions in the context of income-tax Act, 1961:
(i) Mr. B transferred 500 shares of R (p) Ltd. To M/s. B Co. (P) Ltd. On 10.10.2024 for ₹
3,00,000 when the market price was ₹ 5,00,000. The indexed cost of acquisition of shares
for Mr. B was computed at ₹ 4,45,000. The transfer was not subjected to securities
transaction tax.
Determine the income chargeable to tax in the hands of Mr. B and M/s. B co. (P) Ltd.
Because of the above said transaction.
(ii) Mr. Chezian is employed in a company with taxable salary income of ₹ 5,00,000. He received
a cash gift of ₹ 1,00,000 from Atma Charitable trust (registered under section 12AB) in
December 2025 for meeting his medical expenses.
Is the cash gift so received from the trust chargeable to tax in the hands of Mr. Chezian?

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CLUBBING OF INCOME

CHAPTER 9 CLUBING OF INCOME

MEANING

When assessee is liable for Income earned by others it is called as clubbing of Income. Section
60 to 64 deals with such incomes.
Section Contents
60 Transfer of income without transfer of asset
61 Revocable transfer of asset
62 Transfer irrevocable for a specified period
63 Definition of transfer & revocable transfer
64 Income of spouse, minor child etc. to be included in income of individual
65 Liabilities of person in respect of Income in duded in the income of another person.

GENERAL RULES

1) Computation of income to be clubbed

The income, which is to be clubbed, shall be first computed in the hands of recipient and
all expenditure related to such income shall be allowed as per the respective provisions of
the Act and thereafter the net income shall be clubbed.
E.g. Standard deduction u/s. 24(a) from income from house property shall be allowed in the
hands of the recipient and thereafter the net income shall be clubbed.
2) Clubbing head
Income shall be, first, computed in the hands of recipient and then clubbing shall be made
head wise e.g. Bank interest of minor child shall be clubbed under the head “Income from
other sources” of parent.
3) Deduction under chapter via
If the clubbed income is eligible for deduction u/s. 80C, then such deduction shall be
allowed to the assessee in whose hands such income is clubbed e.g. if interest on NSC
of the minor is clubbed in the hands of parent u/s. 64(1A) then parent can claim deduction
u/s. 80C.
4) Clubbing of negative income
As per explanation 2 to sec. 64, clubbing of income includes clubbing of negative income
i.e., where an income is liable to be clubbed, loss from the same source shall also be clubbed.
Clubbing provisions is mandatory and shall be applied even in those cases where the
application of such provision causes loss of revenue to the Income Tax Department.

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TRANSFER OF INCOME WITHOUT TRANSFERRING ASSETS [SEC. 60]

Where an income is transferred without transferring the asset yielding such income,
then income so transferred shall be clubbed in the hands of the transferor.
The above provision holds good:
• Whether the transfer is revocable or not, or
• Whether the transaction is effected before or after the commencement of this Act.

1. Illustration
Pikachu owns 5,000, 15% debentures of Hungama LTD. of Rs. 100 each, (Annual Interest
Rs.75,000). On 1st April 2024, he transfers interest income to Doremon his friend, without
transferring the ownership of these debentures.

REVOCABLE TRANSFER [SEC. 61]

If an assessee transfers an asset under a revocable transfer, then income generated

from such asset, shall be clubbed in the hands of the transferor.
Revocable transfer
As per sec. 63(a), a transfer shall be deemed to be revocable if
• It contains any provision for the retransfer (directly or indirectly) of any part or whole of
the income/assets to the transferor, or
• It, in any way gives the transferor a right to re-assume power (directly or indirectly) over
any part or whole of the income/assets.

As per sec. 62(2), income, in any of the above exceptional case, shall be taxable as
under:
Situation Taxable in Hands
KEY NOTE

of
When the power to revoke the transfer arises (whether such Transferor
power is exercised or not)
When the power to revoke the transfer does not arise Transferee

2. Illustration
Discuss the tax treatment in the following cases:
a) Pony has transferred certain securities owned by him to a trust for his married sister. Pyari,
as on 1/7/24. He has the power to revoke the trust at his desire. On 31/3/2025 he revoked
such trust. Income accrued for the previous year 2024-25 and 2025-26 are Rs. 1,20,000 and
Rs. 1,40,000 respectively and such income is received and enjoyed by Pyari.

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b) Majnu transferred his property on 1/4/24 to Laila with a clause that, he will take property back
from Laila whenever he require. Majnu was in need of money on 1/4/25 and he took back
property from Laila. The property yields annual income of Rs. 2,00,000.

c) Seema transferred on 1/4/2024 her property to Neema for the life time of Neema with a
clause that after death of Neema property shall be back to Seema. Neema died on 1/4/25.
Seema has not taken back the property till 31/3/2026 Property yields annual income of Rs.
1,00,000.

REMUNERATION TO SPOUSE FROM A CONCERN IN WHICH THE ASSESSEE HAS SUBSTANTIAL

INTEREST [SEC. 64(1)(ii)]

1. Provision
The total income of an individual shall include income arising (directly or indirectly) to the
spouse by way of salary, commission, fees or any other remuneration (whether in cash
or in kind) from a concern in which such individual has substantial interest.
Note
Any other income, which is not specified above, even if it accrues to spouse from the concern
in which the assessee has substantial interest, shall not be clubbed
2. Meaning of Substantial interest
In case of Company
He beneficially holds not less than 20% of its equity shares at any time during the previous
year. Such share may be held by the assessee or partly by assessee and partly by one or
more of his relatives.
Other Concern
He is entitled to not less than 20% of the profits of such concern at any time during the
previous year. Such share of profit may be held by the assessee himself or together with
his relatives.
Note
Substantial interest need not to be held throughout the year. Even it was held for a day
during the previous year, clubbing provision would be attracted.
3. Meaning of Relatives
Relative here includes spouse, brother or sister or any lineal ascendant or descendant of
that individual [Sec. 2(41)].
4. No clubbing
Income generated through technical / professional qualification of the spouse is not to be
clubbed in the total income of the individual.

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CLUBBING OF INCOME

WHERE BOTH, HUSBAND AND WIFE, HAVE SUBSTANTIAL INTEREST IN A CONCERN

When both, husband and wife, have substantial interest in a concern and both are drawing
remuneration from that concern without possessing any specific qualification.
Tax treatment
Remuneration from such concern will be included in the total income of husband or wife, whose
total income excluding such remuneration, is higher. Where such income is once included in the
total income of either of the spouse, then such income arising in any subsequent years cannot be
included in the total income of the other spouse unless the Assessing Officer is satisfied that
it is necessary to do so. However, Assessing Officer will do so only after giving to the other
spouse an opportunity of being heard.

WHEN BOTH, HUSBAND AND WIFE, ARE NOT HAVING ANY OTHER INCOME

When both, husband and wife, have substantial interest in a concern and both are
drawing remuneration from that concern without possessing any specific
Situation
qualification and both are not having any other income apart from the said
remuneration.
Tax
Remuneration from such concern will not be clubbed.
treatment

COMPUTATION OF SALARY, FEE, COMMISSION, REMUNERATION ETC.

Income prescribed in sec. 64(1)(ii) shall be first computed (allowing all deductions from the
respective income) in the hands of recipient and thereafter net income shall be clubbed in the
hands of the other spouse. E.g. salary remuneration, etc. shall be first calculated as per
provisions of sec. 15 to 17, in the hands of recipient and thereafter, net taxable salary shall be
clubbed in the hands of the other spouse.

3. Illustration
Ram and Mrs. Ram hold 20% and 30% equity shares in Anand Ltd. respectively. They are employed
in Anand Ltd. (monthly salary being Rs. 20,000 and Rs. 30,000 respectively) without any technical
/ professional qualification. Other incomes of Ram and Mrs. Ram are Rs. 70,000 and Rs. 1,00,000
respectively. Find out the net income of Ram and Mrs. Ram for the AY 25-26.

4. Illustration
Mr. and Mrs. Dharmendra both are working in Deol Ltd. Without possessing any technical or
professional qualification. From the following details compute their income for the AY 25-26.
Particulars Mr. Dharmendra Mrs. Dharmendra
Salary from Deol Ltd. Rs. 220000 Rs. 70000

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CLUBBING OF INCOME

Other income Rs. 50000 Rs. 80000

Share of holdings: Case 1 14% 6%
Case 2 3% 17%
Case 3 18% 1%

INCOME FROM ASSETS TRANSFER TO SPOUSE [SEC. 64(1) (iv) & (vii)]

1. Provision
In computing the total income of an individual [subject to the provisions of sec. 27(i)]. Income
arising from assets transferred to spouse without adequate consideration, shall be
included in the income of that individual.
2. Marital Relationship
The relationship of husband and wife must subsist on the date of transfer of assets as well
as on the date of accrual of income i.e. no clubbing provision shall be attracted if:
• Transfer is made before marriage; or
• On the date of accrual of income, transferee is not the spouse of transferor.
3. Form of Asset
There may be change in identity of transferred asset.
4. Investment in business
a. If the asset is invested in a business, the profit & gains arising from such business
shall be clubbed to the following extent:
Profits of the business X Value of the assets aforesaid as on the first day of the previous year
------------------------------------------------------
Total investment in the business as on the said day
b. If the asset is invested as capital contribution in a firm, the interest received from
the firm shall be clubbed to the following extent.

Interest received X value of the asset aforesaid as on the first day of the previous year
-------------------------------------------------------------------------------------------------------
Total investment by way of capital contribution in the firm as on the said day
Note: Remuneration and share of profit of partner will not be clubbed
5. Treatment of Exempt incomes
Exempt incomes are not to be clubbed.
• If money from husband is invested in agricultural land by wife, income from agriculture
shall not be clubbed.
• Loss from the asset is also required to clubbed.

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6. No clubbing
In the following cases clubbing provision shall not be attracted on transfer of property
to spouse:
• When such transfer is for adequate consideration; or
• The transfer is under an agreement to live apart; or
• Where the asset transferred is house property (as such transfer will be governed by
Sec. 27).
• Where the asset is transferred before marriage.
• If on the date of accrual of income, transferee is not spouse of the transferor.

5. Illustration
Mr. Vaitagwadi started a Proprietary Business on 01/04/23 with a Capital of Rs.5,00,000. He
incurred a loss of Rs.2,00,000 during the year 2023 - 2024. To overcome the financial position,
his wife Mrs. Vichitra, a Software Engineer, gave a gift of Rs. 5,00,000 on 01/04/2024, which was
immediately invested in the business by Mr. Vaitagwadi. He earned a profit of Rs. 4,00,000 during
the year 2024 - 2025. Compute the amount to be clubbed in the hands of Mrs. Vichitra for the
Assessment Year 2025 - 2026.
If Mrs. Vichitra gave the said amount as Loan, what would be the amount to be clubbed?

TRANSFER TO SON’S WIFE [SEC. 64(1)(vi)]

In computing the total income of an individual, income arising (directly or indirectly) from assets
transferred to son’s wife (after 31.5.73), without adequate consideration, shall be included in
income of that individual. Afore said relationship must subsist on the date of transfer of assets
as well as on the date of accrual of income.

6. Illustration
Akela (or Mrs. Akeli) transfer a bank deposit of Rs. 25,000 in favour of his (or her) son’s wife
without adequate consideration. Income accrued to son’s wife shall be included in the income of
Mr. Akela.

INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64
(1)(vii)]

Such income shall be clubbed with the income of Individual who has transferred asset without
consideration.

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INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC.
64(1)(VIII)]

Such income shall be clubbed with the income of Individual who has transferred asset without
consideration.

INCOME OF MINOR CHILD [SEC. 64(1A)]

Income of a minor child shall be clubbed with income of the parent whose total income
(excluding this income) is higher. Where any such income is once clubbed with the total income
of either parent, then any such income arising in any subsequent years shall not be clubbed with
the total income of the other parent, unless the Assessing Officer is satisfied. However, the
Assessing Officer will do so only after giving an opportunity of being heard to the other spouse.

WHEN MARRIAGE DOES NOT SUBSIST BETWEEN PARENTS

In case marital relationship does not subsist at the time of accrual of income to the minor child,
income of minor child shall be clubbed with income of that parent who maintains the minor child
during the previous year.
1. Tax point
Income of the minor child shall be clubbed in hands of parent in the following manner:
Marital relation between parents Tax treatment
When marriage subsists With the income of that parent whose total income
excluding this income is greater.
When marriage does not subsist With the income of that parent who maintains the
minor child in the previous year.
2. Exceptions
The above clubbing provision shall not apply in the following cases:
1 The income arises or accrues to the minor child due to any manual work done by him; or
2 The income arises or accrues to the minor child due to his skill, talent, specialized
knowledge or experience; or
3 The minor child is suffering from any disability of nature specified u/s. 80U.
3. Exemption [Sec. 10(32)]
In case income of a minor child is clubbed in hands of parent as per provision of Sec. 64(1A),
the assessee (parent) can claim exemption of an amount being minimum of the following:
a) Rs. 1500; or
b) Income so clubbed.

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4. Tax Point
Such exemption shall be available for each child (irrespective of the number of children)
whose income is so clubbed.
5. Meaning of child
Child in relation to an individual includes a stepchild & adopted child but does not include a
grandchild [Sec. (14B)]
6. Treatment of income of married daughter
Though sec. 27(i) [Deemed owner of house property] specifically excludes married daughter
but sec. 64(1A) does not have this exception, hence income arising to minor married daughter
shall be clubbed in the hands of parent.
7. When neither of the parent is alive
Income of minor child cannot be added with the income of the guardian if the guardian is
not the parent of the minor.

7. Illustration
Mr. & Mrs. Mantri have income under the head “Profits & gains of business or profession” of ₹
3,00,000 and ₹ 4,00,000 respectively. They have 7 children. From the following details compute
taxable income of Mr. and Mrs. Mantri for the A.Y. 2025-26:
• 1st child (aged 26 years) is a chartered accountant. His annual income from profession is ₹
4,00,000. His income from house property for the P.Y. 2024-25 is ₹ 30,000. He has a son (4
years old) who has earned interest on fixed deposit of ₹ 5,000.
• 2nd child (aged 17 years being a married daughter) who is a stage singer, earned income of ₹
1,00,000 during the P.Y. 2024-25. She earned interest on fixed deposit ₹ 8,000. Such fixed
deposit has been made out of such singing income.
• 3rd child (aged 16 years) is suffering from disability specified u/s 80U (to the extent 55%)
blind. He has received interest income of ₹ 40,000 for loan given to a private firm. He is
dependent on Mrs. Mantri.
• 4th child (aged 14 years) has earned income of ₹ 45,000 during the P.Y.2024-25 out of his
physical and mental effort. Expenditure incurred to earn such income is ₹ 15,000. His loss from
house property is ₹ 30,000.
• 5th child (aged 12 years) is a partner in a partnership firm from which he earned interest income
(taxable) of ₹ 40,000 and share of profit of ₹ 35,000. Other two partner of the firm are Mr.
& Mrs. Mantri.
• 6th child (aged 9 years) has 1,000 debentures of ₹ 100 each of a public sector company acquired
through will of his Grandfather. Interest income on such debenture is ₹ 10,000. Expenditure
incurred to collect such interest is ₹ 200. Such debenture was sold and long-term capital gain
earned ₹ 25,000.
• 7th child (aged 7 years) has earned interest on fixed deposit ₹ 500.

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CONVERSION OF SELF ACQUIRED PROPERTY INTO JOINT HUNDU FAMILY PROPERTY [SEC. 64(2)]

Case 1 Where an individual (being a member of HUF) converts (after 31st December
1969) his self-acquired property into property belonging to the family. Is
done by impressing such property with the character of joint family
property or throwing such property into common stock of family.
Case 2 When such an Individual transfers his self-acquired property, directly or
indirectly to the family otherwise than for adequate consideration.
Tax treatment
Before Partition The entire income shall be taxable in the hands of transferor
After Partition Income from the assets attributes to the spouse of transferor.

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PRACTICAL QUESTIONS

8. Illustration
Mr. Anokha is an employee of Larsen limited and has substantial interest in the company. His salary
is Rs. 25,000 p.m. Mrs. Anokha also is working in that company at a salary of Rs. 10,000 p.m. without
any professional Qualification.
Mr. Anokha also receives Rs. 30,000 as Income from securities, Mrs. Anokha owns a House
property which she has let out. Rent Received from such house property is Rs. 12,000 p.m.
Mr. & Mrs. Anokha have three minor children –twin daughter and one son, Income of the twin
daughters is Rs. 2.000 p.a. and that of his son is Rs. 1,200 p.a. compute the Income of Mr. and Mrs.
Anokha.

9. Illustration
Mr. Baval has an income from salary of Rs.3,50,000 and his minor children’s income are under:
(a) Minor Daughter has earned the following income From TV show Rs 50,000
From interest on FD with a Bank (deposited by Mr. Baval from his Income) Rs. 5,000
(b) Minor son has earned the following income:
From the sale of a own painting Rs 10,000 From Interest on FD with a bank (deposited by Mr.
Baval from his income) Rs. 1,000
Compute the Taxable Income and tax liability in the hands of Mr. Baval.

10. Illustration
During the previous Year 2024- 2025 the following transactions occurred in respect of Mr. Albela:
(a) Mr. Albela had a Fixed deposit of Rs.5,00,000 in Bank of India, He instructed the bank to
credit the Interest on deposited at 9% from 01/04/2024 to 31/03/2025 of the saving bank
account of Mr. Banela, son of his brother, to help him in his Education.
(b) Mr. Albela holds 75% share in a partnership firm. Mrs. Albela received a commission of Rs.
25,000 from the firm for promoting the sales of the firm. Mrs. Albela possessed no technical
or professional qualification.
(c) Mr. Albela gifted a flat to Mrs. Albela on April 1st 2024. During the PY the Flat generated a
Net Income of Rs. 52,000 to Mrs. Albela.
(d) Mr. Albela gifted Rs. 2,00,000 to his minor son who invested the same in a business & he got
a share Income of Rs. 20,000 from the Investment.
(e) Mr. Albela’s minor son derived an income of Rs. 20,000 through a business Activity involving
Application of his Skill & Talent.
(f) During the year Mr. Albela got a Monthly pension of Rs. 10,000. He had no other Income. Mrs.
Albela received Salary of Rs. 20,000 per month for a Part Time job.
Discuss the Tax Implications of each transaction & compute the total Income of Mr. Albela, Mrs.
Albela and their minor child.

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SET OFF AND CARRY FORWARD OF LOSSES

CHAPTER 10 SET OFF AND CARRY FORWARD OF LOSSES

WHEN SET OFF IS AVAILABLE?

When these is a Loss in one or more sources under one or more heads of income, the provisions
of set off and carry forward are applicable as under:
• Inter Source Adjustment (Sec. 70)
• Inter head Adjustment (Sec. 71)
• Carry forward of losses.
Notes • Assessee does not have option to set off or not to set off.
• No set off against income which is exempt from tax
• Casual income is to be ignored for set off chapter.

1. Illustration
Particulars Case 1 Case 2
Casual income 2,00,000 (2,00,000)
HP (1,00,000) 1,00,000
Income

INTER SOURCE ADJUSTMENT [SEC. 70]

Under this section loss from any source of income can be set off against same head of income
for the same assessment year.

SR Nature of Loss Set off Available U/s. 70

1 House property loss House property income

2 Speculation business loss Profit from speculation business

2A Non-speculation business loss Profit from speculative, non-speculative &
specified business
2B Loss of Specified Business Sec. 35AD Income of Specified Business Sec. 35AD.

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2. Illustration
Compute business income and Apply Sec 70.
Particulars Case 1 Case 2 case3
Business income 200000 200000 (200000)
Income from specified business (150000) 150000 150000
Speculative income 125000 (125000) 125000

3 Short term capital loss Long term & short-term capital gain
4 Long term capital loss Long term capital gain

3. Illustration
Particulars Case 1 Case 2 Case3
STCG A 20,000 20,000 20,000
B (1,500) (35,000) 10,000
LTCG C 40,000 40,000 40,000
D (30,000) (30,000) (30,000)

5A Losses from activity of maintaining race Income from such business.

horses
5B Winning from lotteries. Crossword Cannot be set off against any income.
puzzles, card games, gambling or
betting.
5C Loss from other source except 5A & 5B Income from other source except casual
income.

4. Illustration
Compute IFOS and Apply Sec 70.
Particulars Case 1 Case 2 Case3
O & M race horses 200000 200000 (200000)
Casual Income (150000) 150000 150000
Other income from source 125000 (125000) 125000

6 Loss from income which is exempt u/s. Cannot be set off against any income.
10

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INTER HEAD ADJUSTMENT (SEC. 71)

Sec. 71 is appliance if loss cannot be set off against Sec. 70.

SR. Nature of Loss Set off Available U/s. 71.

1 House property loss Any income other than lottery, card games,
crossword puzzles, gambling or betting.
2 Non-speculation loss Any income other than salary, lottery, card games,
crossword puzzles, gambling or betting.
3 Loss from other source except Income from other source except casual income.
casual income and income from
owning and maintaining race horse
4 Loss from income which is exempt Cannot be set off against any income.
u/s. 10
Note: While applying Sec 71, first set off loss under the head IFOS except casual Income &
Owing & maintaining horse race as it can not be carried forward.

CARRY FORWARD OF LOSSES

If loss cannot be set off as per provision of sec. 70 & sec. 71 then it is to be carry forward
under the act. The following losses can be carried forward.
a Loss under the head ‘Income from house property’ [Sec. 71B]
b Loss under head “Profits and gains of business or profession” other than speculation loss
[Sec. 72]
c Loss from speculation business [Sec. 73]
d Loss from specified business covered u/s 35AD [Sec. 73A]
e Loss under the head ‘Capital gains’. [Sec. 74]
f Loss from ‘Activity of owning and maintaining race horses’. [Sec. 74A]

Hend or Source of Intra Head Inter Head Carry Forward

income Adjustment u/s 70 Adjustment u/s 71
Income from House With any income With any income Yes
Property under the same head under other head
subject to cap of
2,00,000/-
Profit & Gains of With Speculative No Adjustment Yes
Business or income only

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Profession
(Speculative)
Profit & Gains of Any income under the With any income Yes
Business or head under other head
Profession except salary
Speculative) (Non-
Speculative)
Unabsorbed Any income under the With any income Yes
Depreciation head under other head
except salary
Unabsorbed Specified business No Adjustment Yes
expenditure u/s
35AD
Long Term Capital With Long Term No Adjustment Yes
Loss Capital Gain
Short Term Capital Any Capital Gain No Adjustment Yes
Loss
Owning and Income from such No Adjustment Yes
Maintaining Race activity
Horse
Other loss under the With any income With any income No
head Income from under the same head under other head
Other Sources
Taxpoint
• No loss can be set off against winning from lotteries, crossword puzzles, races, card games,
gambling or betting, etc. [Sec. 58(4) & 115BB)
• Wherever reference is given for unabsorbed depreciation, it includes reference to
unabsorbed capital expenditure on scientific research and unabsorbed capital expenditure
on promotion of family planning among employees

CARRY FORWARD & SET OFF OF LOSS FROM HOUSE PROPERTY [SEC. 71B]

SR Conditions Explanation
1 Against which income loss can be set Income from house property. [Maximum Rs
off 2,00,000]
2 Period of forward carried 8 years immediately succeeding the AY for
which the loss was first computed.

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3 Return of loss (sec. 80) Not necessary to submit in time. Even if belated
return is filed still it can be carry forward.
4 Should the source be continued No

CARRY FORWARD AND SET OFF OF BUSINESS LOSS OTHER THAN SPECULATION LOSS [SEC. 72]

SR Conditions Explanation
1 Against which income loss can be set
off:
a) On account of unabsorbed a) Any Income except Salary and Casual
depreciation, capital expenditure on Income.
scientific research and family
planning.
b) Other remaining business loss it is Against business income only.
not necessary that it should be Set b)
off against income from the same
business
2 Period of carried forward
a) On account of unabsorbed No time limit
depreciation, capital expenditure on
scientific research and family
planning.
b) Other remaining business loss 8 years immediately succeeding the AY for
which the loss was first computed.
3 Return of loss (sec. 80) If assessee fails to file his return of loss on or
before the due date filing return u/s. 139 then
following losses of A. Y. for which return is not
submitted in time cannot be carried forward.
(refer point 1b)
4 Should the source be continued No
5 Who can set off Successor of a business cannot carry forward &
set off the losses of his predecessor except in
the case of succession by inheritance.

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CARRY FORWARD AND SET OFF OF SPECULATION LOSS. [SEC. 73]

1. Meaning of speculative transaction.

Speculation transaction is one which is business settled without actual delivery. It is a
transaction in which a contract for the purchase or sale of commodity including stocks and
shares periodically settled otherwise than by an actual delivery or transfer of the
commodity.
Note: Derivative is not speculation transaction.
2. Against which income loss can be set off.
Speculation business.
3. Period of carry forward
4 years immediately succeeding the AY for which the loss was first computed.
4. Should the source be continued
No
5. Return of Income
Timely as per Sec 139(1)

CARRY FORWARD AND SET OFF OF LOSS FROM SPECIFIED BUSINESS COVERED U/S. 35AD [73A]

SR Conditions Explanation
1 Against which income loss can be set off Against income from other specified business.
2 Period of forward carried No period is prescribed
3 Filling of Return Timely as per Sec 139(1)

CARRY FORWARD AND SET OFF OF CAPITAL LOSS SEC 74

SR Conditions Explanation
1 Against which income loss can be set off Long term capital loss against LTCG
Short term capital loss against LTCG & STCG
2 Period of forward carried which the loss 8 years immediately succeeding the AY for
was first computed.
3 Return of loss (sec. 80) Timely as per Sec 139(1)
4 Should the source be continued No

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CARRY FORWARD & SET OFF OF LOSS FROM ACTIVITY OF OWNING & MAINTAINING RACE
HORSES [SEC. 74A]

SR Conditions Explanation
1 Against which income loss can be set off Income from the business of owning &
maintaining race horses.
2 Period of forward carried which the loss 4 years immediately succeeding the AY for
was first computed
3 Return of loss (sec. 80) Timely as per Sec 139(1)
4 Should the source be continued Yes

CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CHANGE IN CONSTITUTION OF FIRM OR
ON SUCCESSION [SEC. 78]

Where a change occurred in the constitution of a firm, nothing in this chapter shall
entitle the firm to have carried forward and set off so much of the loss proportionate to the
share of a retired or deceased partner are exceeds his share of profits, if any, in the firm in
respect of the previous year.
As per Sec. 78(1), in case of death or retirement of partner (e.g. change in the constitution of
a firm), share of losses of the outgoing partner cannot be carry forward.
Example: A, B and C are partners of ABC & co. sharing profit or loss in the ratio equally. It had
a brought forward business loss in the ratio equally. It had a brought forward business loss ‘.3
lacs for the year 22-23. Later A retired then his proportionate share of loss i.e. 1 lac cannot be
carry-forward.
However, above provision shall not be applicable to unabsorbed depreciation i.e. unabsorbed
depreciation can be carry-forward without any restriction.

CARRY FORWARD AND SET OFF OF LOSSES IN THE CASE OF CERTAIN COMPANIES [SEC. 79]

In case of a company in which the public are not substantially interested, no loss incurred
in any year prior of the previous year shall be carried forward and set off against the income of
the previous year unless of the last day of the previous year the share of the company carrying
not less than 51% of the voting power were beneficially held by persons who beneficially
held share of the company carrying not less than 51% of the voting power on the last day of the
year or years in which the loss was incurred.
Exceptions

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a Nothing contained in this section shall apply to a case where a change in the said voting power
takes place in a previous year consequent upon
• The death of a shareholder or
• On account of transfer of shares by way of gift to any relative of the shareholder
making such gift
b Further nothing contained in this section shall apply to any change in the shareholding of an
Indian company
• Which is a subsidiary of a foreign company as a result of amalgamation of demerger of
a foreign company
• Subject to the condition that 51% shareholders of the amalgamating or demerged
foreign company continue to be the shareholders of the amalgamated the resulting
foreign company.
Amendment FA Act 2018
Above section shall not apply to a company where a change in the shareholding takes place in a
PY pursuant to approved resolution under the Insolvency and Bankruptcy code 2016.

FACILITATING STRATEGIC DISINVESTMENT OF PUBLIC SECTOR COMPANIES [SEC. 79]

• In order to facilitate the strategic disinvestment of public sector companies, the aforesaid
provisions of section 79 have been amended (with effect from the assessment year 2022-
23) to provide that the provisions of sub-section (1) shall not apply to an erstwhile public
sector company subject to the condition that the ultimate holding company of such erstwhile
public sector company, immediately after the completion of strategic disinvestment,
continues to hold, directly (or through its subsidiary or subsidiaries) at least 51 per cent of
the voting power of the erstwhile public sector company in aggregate.
If, however, any of the conditions is not complied with in any subsequent year after the
completion of strategic disinvestment, the provisions of sub-section (1) shall apply for such
previous year and subsequent previous years.
• Erstwhile public sector company-It means a company which was a public sector company in
earlier previous years and ceases to be a public sector company by way of strategic
disinvestment by the Government. Strategic disinvestment-Strategic disinvestment shall
mean sale of shareholding by the Central Government or any State Government in a public
sector company which results in reduction of its shareholding to below 51 per cent, along
with transfer of control to the buyer.

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NO ADJUSTMENT OF LOSS IN SEARCH CASES [SEC. 79A]

Amendment
• In sections 70 to 80, there are specific provisions relating to set off or carry forward and
set-off of losses while computing the income under various heads and with respect to
different classes of persons. However, currently, there is no provision to disallow claim of
set off of losses/unabsorbed depreciation against undisclosed income (corresponding
to difference in stock, undervaluation of stock, unaccounted cash payment, etc.) which is
detected during the course of search or survey proceedings. Moreover, no. distinction is
made between undisclosed income which was detected owing to search and seizure or survey
or requisition proceedings and income assessed in scrutiny assessment in the regular course
of assessment though for incomes falling in section 68, section 69, section 69B, etc., such
restriction is there.
• To disallow aforesaid adjustment of losses, section 79A has been inserted with effect from
the assessment year 2022-23. It provides for the following
1. Section 79A is applicable notwithstanding anything contained in the Act.
2. There is a search initiated under section 132 [or a requisition made under section 132A
or a survey con ducted under section 133A, other than under sub-section (2A) of section
133A].
3. Total income of the concerned assessee includes any undisclosed income. If the above
conditions are satisfied, the assessee will not be eligible to set off, against such
undisclosed income, of any loss [whether brought forward or otherwise, or unabsorbed
depreciation under section 32(2)

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CARRY FORWARD

Type of loss to be carried Income against which For how Should Is it

forward & set off carried forward loss many years the necessary
can be set off in loss can be source be to submit
next year(s) carried continued return of
forward loss in time.
Sec. 71B House property loss Income under the 8 years No No
w.e.f. A.Y. 1999-2000 head “Income from
house property”
Sec. 72 Non-speculation Any income under the 8 years No Yes
business loss Business losses head ‘Profits & gains
(other than depreciation etc.) of business or
profession’ (whether
from speculation or
otherwise)
Sec. 32(2) On account of Any income other than Indefinite No No
unabsorbed depreciation, Income under the years
capital expenditure on head Salaries and
scientific research and family winning from
planning. lotteries, etc.
Sec. 73 Speculation loss Income from 4 years No. Yes
speculation
transaction.
Sec. 73A Loss of specified Income from any Indefinite No Yes
business covered u/s. 35AD specified business. Years
Sec. 74 Capital loss Short Income under the 8 Years No Yes
Term head “Capital gains”
Long Term Long term capital gain 8 years No Yes
Sec. 74A Loss from activity Income from the 4 years Yes Yes
of owing and maintaining race activity of owing and
horses maintaining race
horses

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PRIORITY FOR SET-OFF OF LOSSES

S N Sec. Nature of Losses

1 35(1) Current Scientific research Capital Expenditure
2 32(1) Current Depreciation
3 36(1)(ix) Current year Expenditure on Family planning to the extent allowed
4 72(1) Unabsorbed business losses of previous years
5 32(2) Unabsorbed depreciation of previous years
6 35(4) Unabsorbed Identified research capital expenditure of previous years
7 36(1)(ix) Unabsorbed family planning promotion expenditure of previous year

PREVIOUS YEAR FOR UNDISCLOSED INCOME

UNEXPLAINED CASH CREDITS [SEC. 68]

1 The amount is credited in the books of the Assessee.

2 The Assessee offers no explanation about its nature &source, or (ii) the explanation
offered is not satisfactory.
3 The amount credited is treated as the income of the previous year in which it is found
credit.

UNEXPLAINED INVESTMENTS [SEC. 69]

1 The Assessee has made investments, but has not recorded in his books.
2 He offers no explanation about its nature and source, or the explanation offered is not
satisfactory.
3 The value of the investment made shall be treated as the Income of that financial year in
which the Investment is made.

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UNEXPLAINED MONEY, BULLION OR JEWEL OR VALUABLE ARTICLE [SEC. 69A]

1 The assessee is found to be the Owner of any Money, Bullion or Jewel or other Valuable
Article, etc.
2 Such Money, Bullion, etc. are not recorded in the books of accounts of the Assessee.
3 He offers no explanation about its nature and source of acquisition, or the explanation
offered is not satisfactory.
4 The value of such items shall be treated as the Income of that financial year in which it is
found.

INVESTMENT NOT FULLY DISCLOSED [6SEC. 9B]

1 The Assessee has made Investments, or found to be the owner of Bullion, Jewellery or
other valuable article, but has not fully records in his books of accounts.
2 He offers no explanation about such excess amount, or the explanation offered is not
satisfactory.
3 The excess amount (i.e. to the extent not recorded in the books of account) shall be
treated as the income of that FY.

UNEXPLAINED EXPENDITURE [SEC. 69C]

1 The Assessee has incurred expenditure during the Financial Year.

2 He offers no explanation about the source of such expenditure, or the explanation offered
is not satisfactory.
3 The amount of such expenditure shall be treated as Income of the previous year in which
it was incurred.
4 Such amount shall not be allowed as a deduction under any head of income.

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AMOUNT BORROWED/ REPAID ON HUNDI OTHER THAN BY A/C PAYEE CHEQUE [SEC. 69D]

1 This Section Relates to a situation when any amount is borrowed on a Hundi or is repaid
otherwise than through an Account Payee Cheque.
2 The amount so borrowed or paid shall be treated as Income of the person borrowing or
repaying the amount for the previous year in which the amount was borrowed or repaid.
3 The amount repaid shall include the amount of interest paid on the amount borrowed.
4 No double taxation: Any amount borrowed on Hundi and treated as income u/s 69D shall
not be taxed once again at the time of repayment.

TAX RATE

Unexplained cash @ 60% of such income plus surcharge @ 25% of tax (Effective
credits/investments/ rate of tax is 78%, including health and education cess @ 4%)
money, bullion, jewellery • No deduction is allowable in respect of any expenditure or
etc./ expenditure, etc. allowance against such income.
[referred to in section 68 • Set-off of losses is not permissible against such income.
and sections 69 to 69D]

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PRACTICAL QUESTION’S

5. Illustration
Compute gross total income of Mr. X in following cases:
Sources of Income Case I
Income from house property (A) 30000
Income from house property (B) (10000)
Speculation income 80000
Business income (30000)
Income from activity of owning and maintaining
Race-horses business (A) (50000)
Income from activity of owning and maintaining
Race-horses business (B) 20000
Income from agricultural business (25000)
Short term capital gain (transaction A) 30000
Short term capital gain (transaction B) (10000)
Long term capital gain (transaction A) (30000)
Long term capital gain (transaction B) 10000
Income from lottery 40000
Income from horse races 10000
Income on card games (5000)
Interest on securities 20000

6. Illustration
Mr. Bhola has furnished you the following data:
Income from house property (Rs. 140000)
Salaries Rs. 80000
Income from other sources (Rs. 90000)
Income from lotteries Rs. 350000
Mr. Bhola is seeking your advice relating to set off and carry-forward.

7. Illustration
Mr. Garg, a resident individual, furnishes the following particulars of his Income and other details
for previous year 2024 - 25.
i. Income from salary Rs 16,000
ii. Income from business (before providing depreciation) Rs 66,000
iii. Long term capital Gain on sale of land Rs 10,000
iv. Loss on maintenance of Race horses Rs 15,000
v. Loss from gambling Rs 6,000

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The other details of unabsorbed depreciation and brought forward losses pertaining to
Assessment year 2024 - 2025 are as follows:
(1) Unabsorbed depreciation – 11,000
(2) Loss from speculative business – 22,000
(3) Short term capital loss – 9,800
Compute the gross total income of Mr. garg for the AY 2025 - 26 and the amount of loss, if any,
that can be carried forward, or not.

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PERMISSIBLE DEDUCTION

CHAPTER 11 PERMISSIBLE DEDUCTION

INTRODUCTION

Particulars Rs. In Lakhs Deduction u/s 80C to 80U

1. Salary 20 Yes
2. HP 15 Yes
3. PGBP 18 Yes
4. CG
a. STCG 12 Yes
b. STCG u/s 111A 16 No
c. LTCG 112 10 No
d. LTCG 112A 20 No
5. IFOS
a. Casual Income 30 No
b. Any other income 12 Yes
153
(-) set off & c/f of losses (3)
= GTI 150
(-) Deduction u/s 80C to 80U (74) 150 – 76 = 74
Taxable 76

DIFFERENCE BETWEEN DEDUCTION UNDER CHAPTER VI-A & SECTION 10AA AND EXEMPTION
UNDER SECTION 10

Particulars Deduction Exemption

(in relation to Chapter VI-A and section 10AA) (contained in section 10)
Meaning Investments/ contributions in certain The incomes which are
instruments (as prescribed under the Income- exempt under section 10 will
tax Act). Payments made for certain purposes. not be included in computing
gross total income.

Relevant Sections 80C to 80U in Chapter VI-A and section Section 10 of the Income-
Sections 10AA of the Income-tax Act. tax Act.
Manner of First included in the Gross Total Income and then Not included in the Gross
treatment deductions will be allowed from Gross Total Total Income.
Income.

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DEDUCTIONS AVAILABLE UNDER ALTERNATE TAX REGIME [SEC 115 BAC(1A)]

Sec Details
80CCD (2) employer contribution to NPS
80CCH (2) Contribution by central Gov to Agniveer Corpus fund
80JJAA employment of new workmen
80LA(1A) Certain income of offshore banking units

SEC 80IA: DEDUCTION TO BE MADE IN COMPUTING TOTAL INCOME

1 In computing the total income of an assessee, there shall be allowed deductions u/s 80C to
80U from his GTI
2 No deduction
When opted for ATR Sec. 115BAC
2 The aggregate amount of the deductions under this Chapter shall not exceed the GTI of
the assessee.
4 Where a deduction u/s 80IA to 80RRB is clamed and allowed in respect of profits of any
business specified u/s 35AD for any assessment year, no deduction shall be allowed u/s
35AD in relation to such specified business for the same or any other assessment year.

DEDUCTION NOT TO BE ALLOWED UNLESS RETURN FURNISHED. [SEC. 80AC]

No deduction
When opted for ATR Sec. 115BAC
Where in computing the total income of an assessee, any deduction is admissible u/s 80-IA or
80-IAB or 80-IB or 80-ICor 80-ID or 80-IE, 80JJA, 80LA, 80P, 80PA, 80QQB & 80RRB, no
such deduction shall be allowed to him unless he furnishes a ROI for such assessment year on
or before the due date specified u/s 139(1).

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SECTION 80C

Applicability Individuals / HUF, irrespective of Residential Status

Conditions a Investment or Contribution should be made in approved invested
schemes.
b The payments need not necessarily be made out of income
chargeable to tax.
c Deduction shall be allowed only on payment basis not on accrual
basis.
Maximum Deduction Amount deposited or Rs 1,50,000 whichever is less
Eligible Investments See list below
No deduction u/s When opted for ATR 115BAC
80C

ELIGIBLE INVESTMENTS UNDER SECTION 80C

Nature of Investment / Payment Payments made by

Individual HUF
1. Life insurance premium (including payment made by Self, spouse, child Any
Government employees to the Central Government (child may be member
Employees’ insurance scheme and payment made by a dependent/independent, of HUF
person under children’s deferred endowment Male/Female,
assurance) minor/major or
Insurance premium cannot exceed the maximum ceiling married/unmarried).
given below. (Lock in period 2 years)
Date of issue Policyholder Any other
of policy suffering from
disability/disease
Before 1st 20% of sum 20% of sum
April 2012 assured (max) assured (max)
During 2012-13 10% of sum 10% of sum
assured (max) assured (max)
On or after 1st 15% of sum 10% of sum
April 2013 assured (max) assured (max)
2. Non-Commutable Deferred Annuity without a provision Self, Spouse, Child NA
for Cash Payment in lieu of Deferred Annuity

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3. Deferred Annuity deducted from Government Self, Spouse, Child NA

Employee’s Salary (not exceeding 1/5th of salary)
4. Contribution to Statutory or Recognized Provident Self NA
Fund
5. Contribution to Public Provident Fund – Minimum Self, Spouse, Child Any
Rs.500, Maximum Rs. 1,50,000 per Account as per PPF member
Rules including interest on PPF excluding last year of HUF
6. Contribution to Approved Superannuation Fund Self NA
7. Subscription to National Superannuation Fund Self NA
8. Subscription to Notified Central Government Self, child NA
Securities or Notified Deposit Scheme Sukanya For this Clause, Child
Samriddhi. includes Girls Child for
whom such Person is the
Legal Guardian, if the
Scheme so specifies.
9. Subscription to National Savings Certificate Self NA
(including Interest Accrued)
10. Contribution to Unit Linked Insurance Plan of UTI / Self, spouse, child Any
LIC and continuous for minimum period of 5 years. member
of HUF
11. Contribution to Annuity Plans of Insurance Companies Self, spouse, child Any
(Jeevan, Dhara, Jeevan Akshay, of LIC, Plans of Tata member
AIG Life Insurance Co. etc.) of HUF
12. Subscription to Units of Mutual Funds / UTI (Lock in Self NA
3 years) & tax saver
13. Contribution to Pension Fund of Mutual Fund / UTI / Self NA
National Housing Bank
14. Deposits with National Housing Bank, HUDCO Self NA
15. Deposits with a PSU providing long term finance for Self NA
purchase / construction of Residential Houses in India
16. Deposits with notified Housing Boards set up under Self NA
law, for planning, developing and improvement of cities
/ towns / villages. The amount allowable as tuition fees
shall include any payment of fee to any university,
collage, school or other educational institution In India
17. Any payment by way of tuition fees to any university, Maximum two children NA
college, school or other educational institution

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situated within India for the purpose of full-time

education.
Full-time education includes any educational course
offered by any university, collage, school or other
educational institution to a student who is enrolled
full-time for the said course. Full-time education
includes even play-school activities, pre-nursery and
nursery classes. except the amount representing
payment in the nature of development fees or donation
or capitation fees or payment of similar nature –
18. Housing Loan (Lock in period 5 years) Self NA
For the purpose for construction of a residential house
property the income from which is chargeable to tax
under the head “Income from House Property” where
such payments are made towards or by way of –
1 Any instalment or part payment of the amount due
under any self – financing or other scheme of any
development authority, housing board or other
authority engaged in the construction and sale of
house property on ownership basis; or
2 Any instalment or part payment of the amount due
to any company or co-operative society of which
the assessee is a shareholder or member towards
the cost of the house property allotted to him; or
3 Repayment of principal amount of loan borrowed by
the assessee from –

a The Central Government or any State

Government, or
b Any bank, including a co-operating bank, or
c The Life Insurance Corporation, or
d The National Housing Bank, or
e Any public company u/s 36(1)(viii), or
f Company or co-operative society engaged in
the business of financing the construction of
houses, or
g The Assessees employer being an authority or
a board or a corporation or any other body

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established or constituted under a central or

State Act, or

4 Stamp duty, registration fee and other expenses

for the purpose of transfer of such house property
to the assessee,
19. Subscription to approved Equity Shares or Debentures Self NA
of a Public Company or a Public Financial Institution,
and the entire proceeds of the issue is utilized wholly
and exclusively for Power Generation or
Infrastructure Facility Company [Holding Period
minimum 3 years.]
20. Term Deposit for at least 5 Years with a Scheduled Self NA
Bank in accordance with a Scheme framed and notified
by Central Government.
21. Subscription to notified NABARD Bonds Self NA
22. Deposit under Senior Citizens Savings Scheme Rules, Self NA
2004 (Lock in period 5 years)
23. 5-Year Time Deposit in an account under Post Office Self NA
Time Deposit Rules,1981
24. Contribution to additional account under NPS
Contribution by a Central Government employee to
additional account under NPS [specified account]
referred to in section 80CCD for a fixed period of not
less than 3 years and which is in accordance with the
scheme notified by the Central Government for this
purpose qualifies for deduction under section 80C. It
may be noted that only the contribution to the
additional account under NPS will qualify for deduction
under section 80C. (tier 2 cities)
25. If above lock in period is violated, then entire amount of deduction allowed earlier in
any previous year treated as taxable income in the year in which default is made.

1. Illustration
Compute the eligible deduction under section 80C for A.Y. 2025 - 26 in respect of life insurance
premium paid by Mr. Balma during the P.Y. 2024 - 25, the details of which are given hereunder:
Date of Person Insured Actual capital insurance
issue of premium sum assured paid
policy during 2024 - 25.

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Sum assured Premium

(Rs.) (Rs.)
(i) 14/04/2011 Self 2,50,000 52,000
(ii) 10/05/2012 Spouse 1,80,000 18,500
(iii) 01/06/2020 Handicapped minor Son (Section 80U 4,50,000 72,000
disability)

2. Illustration
Calculate the amount of deduction u/s 80C from following data
₹ in ‘000
Particulars A B C D E F G
Payment of LIC premium 5 8 6 8 4 - 10
LIC policy amount 80 70 50 40 50 - 40
NSC purchased 20 15 18 17 35 85 20
Repayment of housing loan 20 25 10 - 12 - 80
Contribution to Unit linked 10 5 - - 3 2 3
insurance plan
School fee paid for one 10 15 6 18 3 5 -
child
Amount deposited in PPF 5 40 10 6 7 9 -
Notified units of Mutual 50 80 60 10 40 100 Nil
fund
Gross Total Income 370 180 320 190 160 540 75
Total income consists of income under the head “Profit and gains of business or profession” only.

DEDUCTION IN RESPECT OF CONTRIBUTION TO ANNUITY PENSION PLAN [SEC.80 CCC]

1. Applicable to
An individual (irrespective of his status)
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions to be satisfied
• Assessee has paid or deposited any amount under an Insurance annuity pension plan,
whether of the Life Insurance Corporation of India (LIC) or any other insurer.
• The amount must be paid out of taxable income (whether of current year or of any past
year)

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4. Deduction
Minimum of the following –
a Amount so paid or deposited; or
b 1,50,000
5. No deduction
When opted for ATR Sec. 115BAC
Notes:
• Pension or surrender value received from such pension scheme shall be taxable in the
hands on cash basis.
• Interest or bonus accrued as per the scheme shall not be eligible for deduction but shall
be liable to tax.
• If deduction is claimed under section 80C, in respect of the same investment, deduction is
not available under section 80CCC.

SECTION 80CCD CONTRIBUTION TO NATIONAL PENSION SCHEME

Applicable to -
An Individual (irrespective of his residential status)
Quantum of Deduction
1. In case of salaried individual (CG employee or Employed by any other person)
Lower of the following
• The whole of the amount so paid or deposited
• Maximum of 10% [CG employee] of his salary in the previous year
Add: Employers contribution maximum to the extent of 10% of salary 14% of salary in case
assesse opts for ATR [FA 24] & 14% in case of contribution made by central government.
[Sec 80CCD (2)]
Note
• Salary = Basic + DA (if applicable)
• Employer contribution to NPS is treated as salary income.
2. No deduction
When opted for ATR Sec. 115BAC except employer contribution
3. In case of other individual
• The whole of the amount so paid or deposited
• maximum of 20% of his GTI
Add: Further in respect of employee contribution/ Assessees contribution in addition to
10% of salary / 20% of GTI an Additional deduction of Rs 50,000 shall be allowed.
4. Tax at the time of Withdrawal

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The amount standing to the credit of an assessee in NPS for which a deduction has already
been claimed by him and accretions to such account shall be tax as follows -
Provisions
Particulars applicable From
the AY 2021-22
1 Partial withdrawal from NPS (to the extent it does not exceed Exempt
25% of an employee’s contribution) [Sec 10(12B)]
2 Amount received by an employee [or a non-employee (applicable 60% exempt
from the assessment year 2019-20)] on closure of his account
or on his opting out of the NPS. [Sec 10(12A)]
3 In (2) amount is received by a nominee on the death of the Exempt
assesse.
4 Pension received out of NPS. Taxable
5 Amount received in (2), (3), (4) is utilized for purchasing an Exempt
annuity plan in the same previous year
6 Pension received out of annuity plan purchased in (5) Taxable

IMPORTANT NOTE 80C + 80CCC + 80CCD

DEDUCTION U/S 80CCE: LIMIT ON DEDUCTION U/S 80C, 80CCC AND 80CCD

The aggregate amount of deductions under section 80C, section 80CCC and section CCD (other
than deduction in respect of employer’s contribution) shall not exceed Rs. 1,50,000.
No deduction
When opted for ATR Sec. 115BAC

Particulars Amount
Deduction u/s 80C ****
Deduction u/s 80CCC ****
Deduction u/s 80CCD [other than deduction in respect of Employer’s ****
Contribution]
Total [Restricted to maximum of Rs. 1,50,000 u/s 80CCE] *****
Add: contribution of NPS by any individual allowable u/s 80CCD(1B) [sub. To ****
maximum of Rs. 50,000/-]
Add: Employer’s contribution to New Pension System referred to in Sec. 80CCD ****
[Subject to max. of 10% 0r 14% of salary]
Deduction available u/s 80C, 80CCC & 80CCD *****

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3. Illustration
Particulars Case 1 Case 2 Case 3
10% of Salary 90,000 90,000 90,000
Employee Contribution 60,000 1,00,000 1,60,000
Employer Contribution 60,000 1,00,000 1,60,000
Compute deduction u/s 80CCD.

4. Illustration
Compute Deduction u/s 80C, 80CCC & 80CCD
Particulars Case 1 Case 2 Case 3
10% of Salary 35000 60000 35000
Employee Contribution 50000 50000 50000
Employer Contribution 50000 50000 50000
Deduction u/s 80C 45000 75000 15000
Deduction u/s 80CCC 35000 45000 170000

SECTION 80CCH: DEDUCTION IN RESPECT OF CONTRIBUTION TO AGNIPATH SCHEME

Section 80CCH has been inserted (with effect from the assessment year 2023-24).
Deduction under section 80CCH will be applicable if the following conditions are satisfied –
1 The assessee is an individual enrolled in the Agnipath Scheme.
2 No deduction
When opted for ATR Sec. 115BAC except employer contribution u/s 80CCH(2)
3 He subscribes to the Agniveer Corpus Fund on or after November 1, 2022.
• Deduction pertaining to contribution by the assessee [Sec. 80CCH(1)]-
Contribution by the assessee to the aforesaid fund is deductible under section
80CCH(1) in the year in which the amount is paid or deposited.
• Deduction pertaining to contribution by the Central Government [Sec. 80CCH(2)]-
Contribution by the Central Government to the Agniveer Corpus Fund shall be first
included in the income of the assessee under the head "Salaries". The whole of such
contribution shall be deducted under section 80CCH(2).

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SECTION 80D: IN RESPECT OF MEDICAL INSURANCE PREMIUM

1. Applicable to
The taxpayer is an individual (maybe resident/non-resident or Indian citizen/foreign citizen)
or a Hindu undivided family (maybe resident or non-resident).
2. Payment for health insurance
The assessee has made payment for health insurance.
3. No deduction
When opted for ATR Sec. 115BAC
4. Mode of payment:
The premium or medical expenditure must be paid by any mode other than cash. However,
payment shall be made by any mode, including cash, in respect of any sum paid on account of
preventive health check-up.
5. Amount of deduction
Category Assessee Nature of Payment Expenditure on Quantum of
behalf of Deduction
1 Individual a) Payment of Mediclaim Himself/herself, Lower of the
insurance premium; or spouse or following:
b) Contribution to the dependent a) Aggregate of
Central Government children • Premium paid;
Health Scheme or any or
other notified Health • Contribution
.
Scheme made; or
c) Preventive health • Preventive
check-up expenditure health check up
(upto ₹ 5,000)
b) ₹ 25,000 p.a. & Rs.
50,000 for Senior
Citizen (age 60 and
above during
previous year)
2 Individual a) Payment of Mediclaim Parents Lower of the
insurance premium (whether following:
b) Preventive health dependent or not) a) Aggregate of
check-up expenditure • Premium paid;
or

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• Preventive
health check up
(upto ₹ 5,000)
• ₹ 25,000 p.a &
Rs. 50,000 for
Senior Citizen
(age 60 and
above during
previous year).
Note: The deduction for payment made for preventive health check up (for self, spouse,
dependent children and parents) for category 1 & 2 does not exceed in the aggregate
₹ 5,000 subject to overall limit of ₹ 25,000/- or ₹ 50,000/-
3 HUF Payment of Mediclaim Any member of Lower of the
insurance premium the family. following:
a) Premium Paid; or
b) ₹ 25,000
& Rs. 50,000 for
Senior Citizen (age 60
and above during
previous year).
4 Individual Amount paid on account Expenditure Lower of the following:
/ HUF of medical expenditure incurred for any • Medical
provided Mediclaim of the following Expenditure
insurance is not paid on person who is a incurred; or
the health of such person senior citizen: • ₹ 50,000
a. In case of
Individual
• Himself/
herself,
dependent
children; or
• Either or both
of the parents
In case of HUF:
b. Any member
of the family
6. Payment out of taxable income:
The amount must be paid out of income, which is chargeable to tax. However, it is not
necessary that such income relates to current year.

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• Dependent children: Children are said to be dependant if their own resources are not
sufficient enough to support them.
• Where lumpsum health insurance premium is paid (single premium) covering insurance
KEY NOTES

for more than a year, then, deduction is available on proportionate basis.

• For claiming higher deduction of ₹ 50,000, payer need not be a senior citizen but
person insured must be a senior citizen.
• Senior citizen means an individual resident in India who is of the age of 60 years or
more at any time during the relevant previous year

5. Illustration
Compute deduction u/s 80D.
Age below 60
Assessee & his Parents Preventive Total paid Deduction
family health check up allowed.
20,000 40,000 5,000 65,000
25,000 50,000 5,000 80,000
30,000 55,000 30,000 1,15,000
15,000 44,000 7,000 66,000
15,000 60,000 7,000 82,000
30,000 Not paid 5,000 35,000
30,000 30,000 5,000 65,000
40,000 7,000 47,000
15,000 Not paid 7,000 22,000
22,000 48,000 5,000 75,000

SECTION 80DD IN RESPECT OF MAINTENANCE OF DEPENDANT RELATIVE WITH DISABILITY

1. Applicable to
a The taxpayer is resident in India (maybe ordinarily resident or not ordinarily resident).
b The resident taxpayer is an individual (maybe an Indian citizen or foreign citizen) or a
Hindu undivided family.
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions to be satisfied
Assessee has a dependant disable relative

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In the case of Relative includes

Individual Spouse, children, parents, brothers and sisters of the individual.
HUF Any member of the Hindu Undivided Family.
KEY NOTES
• Dependant Relative: A relative is said to be dependant if he wholly or mainly depends
on such individual or HUF for his support and maintenance.
• Disability includes blindness, low vision, leprosy-cured, hearing impairment, locomotors
disability, mental retardation, mental illness.
4. Expenditure on disable relative: assessee has –
Option 1
Incurred any expenditure for medical treatment (including nursing). Training and
rehabilitation of a dependant, being a person with disability; or
Option 2
Paid or deposited any amount in an approved scheme for the maintenance of a disable
dependant being framed by the Life Insurance Corporation any other insurer or the
Administrator or Unit Trust of India.
Under Option 2
The scheme shall provide for payment of annuity or lump sum amount for the benefit of a
dependant, being a person with disability,-
i In the event of the death of the individual or the member of the HUF in whose name
subscription to the scheme has been made; or
ii On attaining the age of 65 years or more by such individual or the member of the HUF.
And the payment or deposit to such scheme has been discontinued. [F Act. 23]
Note: though assessee needs to fulfil the above condition, the amount of deduction shall not
be affected by the actual expenditure incurred on the above two purposes.
5. Quantum of deduction
Relative is suffering from severe, disability (80% or more than 80%) Rs. 125000
Relative is suffering from disability but not severe disability (less than Rs. 75000
80%)
Tax point: Deduction shall be irrespective of actual expenditure incurred i.e. deduction is
statutory in nature.
KEY NOTES
• Above deduction is available for relative of the assessee.
• If Assessee himself is disable, then he can claim deduction for himself under 80U.
• Even if assessee has more than one disable relative still limits remains same.

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SECTION 80DDB IN RESPECT OF MEDICAL TREATMENT

1. Applicable to
A resident individual (irrespective of citizenship) or a resident HUF.
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions to be satisfied
Expenditure incurred on the medical treatment of relative and the himself/herself. The
assessee has, during the previous year actually paid any amount for the medical treatment
of a specified disease or ailment as prescribed in rule 11DD. Expenditure is incurred
for treatment of the assessee himself or for a dependant relative
In the case of Relative
Individual Spouse, children, parents, brothers and sisters of the individual.
HUF Any member of the HUF
Dependant Relative: A relative is said to be dependant if he wholly or mainly depends on
such individual or HUF for his support and maintenance.
4. Medical Certificate
A certificate is required to be furnished along with the return of income.
5. Quantum of deduction
Actual expenditure on medical treatment or Rs. 40,000 & in case of senior & super senior
citizen Rs. 1,00,000 whichever is less, is deductible.
KEY NOTE

Deduction under this section shall be reduced by the amount received, if any under
insurance from an insurer or reimbursed by the employer for the medical treatment of the
person referred to above.

Specified diseases as per rule 11DD are: Neurological disease, Cancer, Chronic Renal failure,
Thalassemia.

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SECTION 80E: REPAYMENT OF LOAN TAKEN FOR HIGHER STUDIES

1. Conditions
• Deduction is available for individual only (irrespective of residential status or citizenship
of the Individual)
• Education loan can be taken for pursuing assessees own education or for the education
of his relatives i.e. (spouse, children or any student for whom the Individual is legal
guardian)
• Loan should be taken from any banking company, approved financial institute and an
approved charitable institution.
• Actual amount of interest paid is available for deduction.
• Higher Education: Means any course of study pursue after passing the Senior Secondary
Examination or its equivalent for from any school, board or university recognized by the
Central Government or State Government or local authority or by any other authority
by the central Government or State Government or local authority to do so;
• Such amount is paid out of his income chargeable to tax.
2. No deduction
When opted for ATR Sec. 115BAC
3. Amount of Deduction
Deduction is available from the year from which assessee start paying interest & 7
immediately succeeding A.Y. (or until the above interest is paid in full whichever is earlier).

INTEREST ON LOAN FOR SPECIFIED HOUSE PROPERTY SEC. 80EE

1. Applicability
Individual (RI/NR)
2. No deduction
When opted for ATR Sec. 115BAC
3. Nature of Expenditure
Payment of Interest on loan taken by Assessee from any Financial Institutional for the
purpose of acquisition of a Residential Property.
4. Conditions:
a Amount of Deduction deduction shall not exceed Rs. 50,000
b Period Beginning from AY 2017-18 and subsequent AY’s
c Loan section period 1/4/2016 to 31/3/2017.

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d Maximum Loan The amount of Loan sanctioned for acquisition of the Residential
Amount House Property does not exceed Rs. 35 lakhs.
e HP Value Value of Residential House Property does not exceed Rs. 50
Lakhs.
f No other house The assessee should not own any Residential House Property
on the date of sanction of loan.
5. No Further Deduction
Where a deduction u/s 80EE is allowed for any interest, deduction shall not be allowed in
respect of such interest under any under provision of this Act for the same or any other
assessment year

DEDUCTION IN RESPECT OF INTEREST PAYABLE ON LOAN TAKEN FOR ACQUISITION OF

RESIDENTIAL HOUSE PROPERTY [SECTION 80EEA]

1. Eligible assessee
An individual who has taken a loan for acquisition of residential house property from any
financial institution. Interest payable on such loan would qualify for deduction under this
section.
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions
The conditions to be satisfied for availing this deduction are as follows:
1. The loan is sanction by a financial institution (i.e. a bank or banking institution or a
housing finance company) during April 1, 2019 and march 31, 2022
2. The stamp duty value of the residential house property does not exceed Rs. 45 Lakh.
The expression “Stamp Duty Value” means value adopted (or assessed or assesable) by
any authority of the Central Government or a State Government for the purpose of
payment of stamp duty in respect of an immovable property.
3. The assesse does not own any residential house property on the date of sanction of
loan.
4. Period of benefit
The benefit of deduction under this section would be available from A. Y. 2020-21 and
subsequent assessment years till the repayment of loan continues.
5. Quantum of deduction
The maximum deduction allowable is Rs. 1,50,000. The deduction of upto Rs. 1,50,000 under
section 80EEA is over and above the deduction available under section 24(b) in respect of
interest payable on loan borrowed for acquisition of a residential house property.

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6. No deduction under any other provisions

The interest allowed as deduction under section 80EEA will not be allowed as deduction
under any other provision of the Act for the same or any other assessment year.

DEDUCTION IN RESPECT OF INTEREST PAYABLE ON LOAN TAKEN FOR PURCHASE OF ELECTRIC

VEHICLE [SECTION 80EEB]

1. Eligible Assessee
An individual who has taken a loan for purchase of an electric vehicle from any financial
institution. Interest payable on such loan would qualify for deduction under this section.
(hybrid car not eligible)
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions
The conditions to be satisfied for availing this deduction are as follows-

Loan should be taken for

purchase of an electric
vehicle

Loan should be sanctioned

The assessee should be an
Conditions during the period between
individual 01/04/19 and 31/03/23

Loan should be sanctioned

by a FI (bank or specified
NBFCs)

4. Period of benefit
The benefit of deduction under this section would be available from AY 2020 - 21 and
subsequent assessment years till the repayment of loan continues.
5. Quantum of deduction
Interest payable, subject to a maximum of Rs. 1,50,000.
6. No deduction under any other provision
The interest allowed as deduction under section 80EEB will not be allowed as deduction under
any other provision of the Act for the same or any other assessment year.

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SECTION 80G DEDUCTION IN RESPECT OF DONATION TO CERTAIN FUNDS, CHARITABLE

INSTITUTIONS

This deduction is available to all assessee, (irrespective of residential status or citizenship

of the individual)
• Donation in kind is not allowed as deduction.
• Donation for a particular community is not allowed as deduction.
• Proof of donation in original should be attached with the return of income.
• Donation in excess of Rs. 2,000 must be paid by Account Payee Cheque.
• No deduction
When opted for ATR Sec. 115BAC
Amount of deduction under Sec. 80G into four parts as follows
A. 100% without limit
Following donations come within this category.
• National Defence Fund
• Prime Ministers National Relief Fund
• National Foundation for Communal Harmony
• An Approved University or Educational Institution & National eminence
• Zilla Saksharata Samiti
• Africa (Public Contribution – India) Fund
• National Blood Transfusion Council.
• Fund setup by State Govt. for medical relief to poor.
• Central welfare fund of the Army and Air force and the Indian Naval Benevolent Fund.
• Andhra Pradesh Chief Minister’s Cyclone Relief Fund.
• National illness assistance fund.
• Chief Minister’s Relief Fund and Lieutenant Governor’s Relief Fund
• National sports development fund or National cultural fund.
• Technology Development Fund set up by Central Government.
• National Trust for welfare of persons with Autism, Cerebral Palsy, Mental Retardation
and Multiple disabilities.
• Donation to the fund set up by the Gujarat Govt. for providing Relief to victims of
earthquake in Gujarat.
• National children fund
• The swatch Bharat Kosh set up by the central government other than sum spent on CSR
activity

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• The clean Ganga fund set up by the Central Government where the assessee is Resident
and amount spent is other than sum spent on CSR activity.
• The National fund for control of Drug abuse constitute u/s 71A of the Narcotic Drugs
and Psychotropic Substance Act 1985.
• Prime Minister’s Armenia Earthquake Relief Fund
• Chief Minister’s Earthquake Relief Fund, Maharashtra
• The National Cultural Fund set up by the Central government
• Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM Cares
Fund)
B. 50% without limit
Following donations come within this category.
• Prime Ministers Drought Relief Fund.
C. 100% with Maximum Limit
Following donations come within this category.
• Government or Local Authority or an approved institution or association to be utilized
for the purpose of promoting family planning.
• Donation by company to Indian Olympic Association or other notified association.
D. 50% with Maximum Limit
Following donations come within this category.
• Any notified temple, mosque, gurdwara, church or other place (for renovation or repairs).
• Any approved institution or fund established in India for charitable purpose.
• Government or any Local authority to be utilized for charitable purposes, other than the
purpose of promoting family planning.
• Any authority set up for dealing with and satisfying the need for housing accommodation
or for the purpose of planning/development of towns, villages, etc.
• Any Corporation established by the Central Government or State Government for
promoting the interest of the members of the minority Community.

Qualifying limit
The eligible donations referred to in C and D should be aggregated and the sum total should be
limited to 10% of the adjusted gross total income. This would be the maximum permissible
education
The donations qualifying for 100% deduction would be first adjusted from the maximum
permissible deduction and thereafter 50% deduction of the balance would be allowed.

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Steps for computation of qualifying limit

Step 1 Compute adjusted total income i.e., the GTI as reduced by the following:
i. Deductions under Chapter VI-A, except under section 80G
ii. Short-term capital gain taxable under section 111A
iii. Long-term capital gains taxable under sections 112 & 112A
iv. Any income on which income-tax is not payable
Step 2 Calculate 10% of adjusted total income
Step 3 Calculate the actual donation, which is subject to qualifying limit (Total of Category
III and IV donations, shown in the table above)
Step 4 Lower of step 2 or Step 3 is the maximum permissible deduction.
Step 5 The said deduction is adjusted first against donations qualifying for 100% deduction
(i.e., Category III donations). Thereafter, 50% of balance qualifies for deduction
under section 80G

6. Illustration
Compute total income of Mr. Batliwala who gives following donations:
Donation Amount Rs.
National Defence Fund 10,000
Prime Minister’s Drought Relief Fund 20,000
Prime Minister’s National Relief Fund 20,000
Prime Minister’s Armenia Earthquake Relief Fund (in kind) 10,000
Local poor people 14,000
GTI of the assessee is 2,00,000 [including Long Term Capital Gain of Rs. 20,000].

7. Illustration
Compute total income for the A. Y. 2025 - 26 of Miss Laila, a resident individual, from the following
details:
Particulars Amount (Rs)
Profits and gains of business or profession 80,000
Income from Other Sources 10,000
Long-term Capital Gains 5,00,000
Payment of medical insurance premium on own life 5,000
Donation to National Foundation for communal harmony 4,000
Donation to the fund set up by the Gujarat Govt. for providing Relief to victims 5,000
of earthquake in Gujarat
Donation to Indira Gandhi Memorial Trust 1,000
Donation to Prime Minister’s Drought Relief Fund 5,000
Donation to Approved Charitable Institution 12,000

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Donation to Central Government for promotion of family planning 3,000

Donation to a poor boy for higher education 10,000
Donation of cloth to an approved institution worth 12,000
Donation to charitable institution for construction of home for a particular 8,000
community

SECTION 80GG: IN RESPECT OF HOUSE RENT PAID

1. Applicable to
Individual (irrespective of the residential status and citizenship of the individual)
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions to be satisfied:
a No House rent allowance Assessee is not receiving House Rent Allowance
(HRA).
b No house at the place of He or his spouse or minor child or HUF of which he is a
employment member, should not own any residential house at a place
where the assessee resides, perform the duties of this
office, or employment or carries on his business or
profession.
c No claim for the benefit of An Assessee should not treat any residential house
self-occupied house property situated at other places as self-occupied property u/s.
23(2)(a) or 23(4) (a).
d Proof for payment of rent A declaration in Form 10BA should be filed for
expenditure incurred by him towards payment of rent.
4. Taxpoint
Rent must be paid for a residential house property whether furnished or unfurnished.
5. Quantum of deduction
Minimum of the following:
1 Rs. 5000 per month
2 25% of adjusted gross total income for the year (referred as Adj. GTI); or
3 The excess of actual rent paid for accommodation over 10% of Adjusted Gross total
income. Arithmetically, [Rent paid – 10% of Adj. GTI].

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KEY NOTES

Calculation of Limit = 10% AGTI

AGTI = GTI – LTCG – STCG u/s. 111A – All deduction u/s. 80C to 80U except 80GG –
Income referred u/s. 115A, 115AB, 115AC etc.

8. Illustration
Compute total income of Sri Bajaj of Delhi from the following data:
Particulars Amount Rs.
Profit & gains of business or profession 80,000
Income from house property (let-out and situated at Kolkata) 40,000
Income from other sources 10,000
Rent paid for office 8,000
Rent paid for residential house. 40,000

SECTION 80GGA: DONATIONS FOR SCIENTIFIC RESEARCH OR RURAL DEVELOPMENT

1. Assessee
Any not having income under the head PGBP.
2. No deduction
When opted for ATR Sec. 115BAC
3. Qualifying sums paid to
• A Scientific Research Association, or to an Approved University, or College or other
institutions to be used for Scientific Research or Research in Social Science or
Statistical Research.
• An Approved Association, Institution, Public Sector Company which has as its object the
training of persons for implementing program of rural development.
• Sum paid to the National Fund for rural development set up and notified by the Central
Government for the purpose of carrying out rural development programmers.
• Sum paid to National Urban Poverty Eradication fund set up and notified by Central
Government.
4. Amount of Deduction
100% of Qualifying Sum
5. Key Note
a) No deduction shall be allowed under this section in respect of any sum exceeding Rs.
2,000 unless such sum is paid by any mode other than cash.

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b) Claim of an assesse for a deduction in respect of any sum referred to in section

80GGA(2), in the return of income for any assessment year field by him, shall be allowed
on the basis of information relating to such sum furnished by the payee to the prescribed
income tax authority (or the person authorised by such authority), subject to
verification in accordance with the risk management strategy formulated by the board
from time to time.

SECTION 80GGB & 80 GGC: DEDUCTION FOR CONTRIBUTION TO POLITICAL PARTIES OR

ELECTORAL TRUST

Particular Sec. 80GGB 80GGC

Applicable An Indian company All assessee except
to • Local authority and
• Every artificial juridical person wholly or partly funded
the Government
Condition Assessee made contribution to any political party or electoral trust during the
previous year Donation must not be in cash
Deduction 100% of contribution so made
No When opted for ATR Sec. 115BAC
deduction

SECTION 80JJA: PROFITS AND GAINS FROM THE BUSINESS OF COLLECTING AND PROCESSING
OF BIO DEGRADABLE WASTE

1. Condition
• Applicable to all assessee
• Gross total income of an assessee includes any profits and gains derived from the
business of collecting, processing and treating bio – degradable waste for-
A. Generating Power
B. Bio-Fertilizers,
C. bio-pesticides, or other biological agents
D. Producing bio – gas and
E. Making pellets, briquettes for fuel and organic manure.
2. No deduction
When opted for ATR Sec. 115BAC
3. Amount of Deduction

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An amount equal to whole of such income for a period of five consecutive assessment years
beginning with the assessment year relevant to the previous year in which such business
commences.

SECTION 80JJAA: DEDUCTION IN RESPECT OF EMPLOYMENT OF NEW WORKMEN

1. Applicable to
All assessee who has income from business and is subject to tax audit u/s 44AB.
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions
1 Business is not acquired by the assessee by way of transfer from any other person or as
a result of any business reorganisation
2 The business of the assessee is not formed by splitting up, or the reconstruction, of an
existing business, Except Sec. 33B
3 Deduction under section 80JJAA is not available unless audit report is submitted with
effect from the assessment year 20-21 audit report in form no. 10DA is required to be
uploaded one month prior to the due date of submission of return of income. If the due
date of submission of return of income is October 31 of the assessment year, audit report
should be uploaded on or before Sep. 30 of the assessment year. Conversely if the due
date of submission of return of income in Nov. 30 of the assessment year, audit report
should be uploaded on or before Oct. 31 of the assessment year.
4. Deduction
An amount equivalent to 30% of Additional Employee Cost (incurred in the course of such
business in the PY) is deduction u/s 80JJAA for 3 assessment years including the AY
relevant to the PY in which such employment is provided.
[even if assesse opt for 115BAC]
5. “Additional Employee”
“Additional Employee” means an employee who has been employed during the PY and whose
employment has the effect of increasing the total number of employees employed by the
employer as on the last date of the preceding year, but does not include –
a An employee whose total emoluments are more than Rs. 25,000 per month
b An employee for whom the entire contribution is paid by the government under the
Employee Pension Scheme notified in accordance with the provisions of the “Employees
Provident Funds and Miscellaneous Provisions Act, 1952;
c An employee employed for a period of less than 240 days during the PY & 150 days in
case of footwear or leather products or

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d An employee who does not participate in the recognised provident fund.

6. Additional employee cost
“Additional employee cost” means total emoluments paid or payable to additional employees
employed during the PY
1 In the case of existing business, the additional employee cost shall be nil, if –
a There is no increase in the number of employees from the total number of employees
employed as on the last date of the preceding year.
b Emoluments are paid otherwise than by an account payee cheque or account payee
bank draft or by use of electronic clearing system through a bank account.
2 In the first year of a new business, emoluments paid or payable to employees employed
during the PY shall be deemed to be the additional employee cost.
7. Emoluments
“Emoluments” means any sum paid or payable to an employee in lieu of his employment by
whatever name called, but does not include employer’s contribution to pension fund/
provident fund/ any other fund for the benefit of employer under any law. Further, it does
not include lump sum payment at the time of termination of service, or superannuation or
voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary
retrenchment benefits, commutation of pension, and the like.

1. Applicable to
• A scheduled bank owning an offshore banking unit in a Special Economic Zone (SEZ); or
• Any other bank incorporated by or under the laws of a country outside India and
having an Offshore banking unit in SEZ.
• Unit of an International Financial Services Center.
Offshore Banking Unit means a branch of a bank in India located in the SEZ and has
obtained the permission u/s 23(1)(a) of the Banking Regulation Act, 1949.
International Financial Services Center means an International Financial Services
Center which has been approved by the Central Government u/s 18(1) of the Special
Economic Zones Act, 2005
2. No deduction
When opted for ATR Sec. 115BAC
3. Taxpoint
• Assessee must be a scheduled bank;
• It has a branch in India located in SEZ
4. Conditions to be satisfied

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• Certificate of a chartered accountant: Assessee must furnish along with the return
of income, a report of a chartered accountant in Form 10CCF, certifying that the
deduction has been correctly claimed.
• Submission of permission: A copy of the permission obtained u/s 23(1)(a) of the
Banking Regulation Act, 1949 or copy of permission or registration obtained under the
International Financial Services Centre Authority Act, 2019 is required to be
furnished along with the return of income.
5. Quantum of deduction
In case of Unit of an International Financial Services Center
For any 10 consecutive assessment years, at the option of the 100% of the
assessee, out of 15 years, beginning with the assessment year relevant income
to the previous year in which the permission, u/s 23(1)(a) of the
Banking Regulation Act, 1949 or permission or registration under the
Securities and Exchange Board of India Act, 1992 or permission or
registration under the International Financial Services Centre
Authority Act, 2019 was obtained.
In any other case
For first 5 consecutive years beginning with the year in which the 100% of the
permission u/s 23(1)(a) of the Banking Regulation Act, 1949 was income
obtained or permission or registration under the SEBI Act, 1992 or
any other relevant law was obtained.
For next 5 consecutive years 50% of the income
6. Income here means
• Income from an offshore banking unit in a SEZ;
• Income from the business referred in Sec. 6(1) of the Banking Regulation Act, 1949
with an undertaking located in a SEZ or any other undertaking which develops or
develops and operates or operates and maintains a SEZ;
• Income from any Unit of the International Financial Services Centre from its business
for which it has been approved for setting up in such a Centre in a Special Economic
Zone;
• Income from the transfer of an asset, being an aircraft or a ship, which was leased
by such unit to a person, subject to the condition that the unit has commenced
operation on or before 31-03-2024.

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DEDUCTION IN RESPECT OF INTER CORPORATE INVESTMENT [SEC. 80M]

With effect from the assessment year 21-22, dividend received by a shareholder from a
domestic company is taxable in the hands of the shareholder. To avoid cascading affect section
80M has been inserted with affect from the assessment year 2021-22.
1. Conditions
The following conditions should be satisfied
1 Assesse is a domestic company (i.e. investor company)
2 Income of the assesse includes dividend from domestic companies, foreign companies
or business trusts.
3 Dividend is distributed by the investor company to its own shareholders before the due
date the date one month prior to the date for furnishing return of income under section
139(1)]
2. No deduction
When opted for ATR Sec. 115BAC
3. Deduction
Deduction under section 80M is-
a aggregate dividend income (as per section 8) of the investor company during the previous
year from domestic or foreign company/companies or business trust(s) [it includes final
dividend interim dividend and even deemed dividend under section
2(22)(a)/(b)/(c)/(d)/(e)];
Mere declaration of dividend is not sufficient - Dividend distributed on or before the "due
date" is taken into consideration. Mere declaration of dividend is not sufficient
Double deduction not possible - Where any deduction, in respect of the amount of dividend
distributed by the domestic company, has been allowed under section 80M in any previous
year, no deduction shall be allowed in respect of such amount in any other previous year.

DEDUCTION IN RESPECT OF CERTAIN INCOME OF PRODUCER COMPANIES [SEC. 80PA]

Section 80PA has been inserted with effect from the Assessment Year 2019 – 20.
1. Conditions
In order to avail of deduction u/s 80PA, the following conditions should be satisfied
a The assesse is a producer company u/s 581A(i) of the Companies Act, 1956
b The total turnover of the producer company is less than Rs. 100 crore in any previous
year.

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c The gross total income of the producer company includes any profits &gains and
derived from “eligible business”.
2. Amount of deduction:
if the above conditions are satisfied, 100 per cent of the profit and gain attributable to
“eligible business” is deductible for the AY 2019 – 20 to 2024 – 25. If the assesse is also
entitled to deduction under any other provision or provisions of Chapter VI – A (i.e., section
80C to 80U), the deduction u/s 80PA shall be allowed from the gross total income as
reduced by the deductions under such other provisions.
3. “Eligible Business”
Only income from eligible business (not from all activities given u/s 581B of the companies
Act) is qualified for deduction under section 80PA. “Eligible Business” for the purpose of
section 80PA means –
4. a The marketing of agricultural produce grown by the members; or
b The purchase of agricultural implements, seeds, livestock or other articles intended
for agriculture for the purpose of supplying them to the members; or
c The processing of the agricultural produce of the members.

SECTION 80QQB: DEDUCTION IN RESPECT OF ROYALTY INCOME OF AUTHORS

1. Applicability
Resident individual being an Author [Joint Author is also included]
2. No deduction
When opted for ATR Sec. 115BAC
3. Source of Income
Any lump sum consideration for the assignment or grant of any of his interests in the
copyright of any BOOK, being a work of literary, artistic or scientist nature, or for
Royalty or Copyrights Fees (in lump sum or per book).
Note: Books does not included Brochures, Commentaries, Diaries, Guides, Journals,
Magazines, Newspapers, Pamphlets, Textbooks for Schools, Track and other publication of
similar nature.
4. Amount of deduction
(a) Whole of such income, or
(b) Rs.3,00,000, whichever is less.
5. Other Conditions
Royalty not received in Lump sum: If Royalty or Copyright Fees is not received in lump sum,
amount in exceed of 15% of value of such book sold during the previous year shall be ignored.

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A Certificate in Form 10CCD, from the payer (person responsible for making such payment).
Should be submitted along with the Returned of Income.
If income is earned outside India:
• It should be remitted within six months from the end of the relevant previous year,
or within such times as extended by RBI.
• A certificate in Form 10TH from RBI or other Authorised Authority should be submitted
along with the return of income.
No deduction shall be allowed under any other provision of this Act in respect of such
Income.

SECTION 80RRB: DEDUCTION IN RESPECT OF ROYALTY ON PATENTS

1. Authority
Resident Individuals, being a patentee in receipt of any income by way of royalty in respect
of a patent registered on or after 1.4.2014 under the patents Act, 1970.
2. No deduction
When opted for ATR Sec. 115BAC
3. Source of Income
(a) Gross Total Income of the patentee includes “Royalty” in respect of the patent, i.e.
consideration for-
4. Amount of deduction
Whole of such income, or (b) Rs.3,00,000, whichever is less.
5. Other Conditions
a. A Certificate in Form 10CCE from the Controller referred u/s 2(1)(b) of the patents
Act, should be submitted along with the Return of Income.
b. No deduction shall be allowed under any other provision of this Act in respect of such
Income.
If income is earned outside India
It should be remitted within six months from the end of the relevant previous year,
or within such time as extended by RBI.
A Certificate in Form 10H form RBI or other Authorised Authority, should be
submitted along with the Return if Income.
6. Patent revoked subsequently [sec.155(17)]
a. When the patent is revoked or the name of the Assessee was excluded from the patents
registered as patentee, the deduction already allowed shall be deemed to be wrongly
allowed, and the assessment shall be rectified u/s 155.

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b. The period of 4 years for rectification shall be reckoned from the end of the P.Y in
which the order of the revocation of the patent is passed.

SECTION 80TTA: INTEREST ON DEPOSITS IN SAVING ACCOUNT

1. Applicable to
An individual or a Hindu Undivided Family.
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions to be Satisfied
Gross total income of an assessee includes any income by way of interest on deposits (not
being time deposit) in a savings account with:
• A banking company;
• A co – operative society engaged in carrying on the business of banking (including a co
– operative land mortgage bank or a co – operative land development bank); or
• A Post Office
4. Quantum of Deduction
Minimum of the following
a. Interest on such deposits in saving account. [all saving bank accounts]
b. Rs. 10,000
KEY NOTES

a As per Sec. 10(15)(i) PO Saving Bank Interest is exempt upto 3,500 in case of individual
and 7,000 in case of Joint Account
No deduction for senior citizen claiming deduction under section 80TTB
b

SECTION 80 TTB: DEDUCTION IN RESPECT OF INTEREST ON DEPOSITS IN CASE OF SENIOR CITIZENS

1 Eligible Assessee
A resident senior citizen (an individual who is of the age of 60 years or more at any time
during the relevant previous year), whose gross total income includes income by way of
interest on deposits with –
a A banking company to which Banking regulation Act, 1949 applies

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b A co-operative society engaged in carrying on the business of banking (including a co-

operative land mortgage bank or a co-operative land development bank)
c A post office.
2 No deduction
When opted for ATR Sec. 115BAC
3 Quantum of deduction: Actual amount of interest on deposits of Rs. 50,000, whichever is
lower.
4 Non-availability of deduction to partner/ member, where deposit held by, or on behalf of,
a firm, an AOP or a BOI, the partner of the firm or member of AOP/ BOI would not be
allowed deduction in respect of such income while computing their total income.

9. Illustration
Mr. Aalsi resident individual aged about 61 years, has earned business income (computed) of Rs.
1,35,000, lottery income of Rs. 1,20,000 (gross) during the PY 2024 – 25. He also has interest on
Fixed Deposit of Rs. 30,000 which banks. He invested an amount of Rs. 1,50,000 in Public provident
Fund Account. What is the total income of Mr. Aalsi for the AY 2025 – 26

SECTION 80U: IN RESPECT OF INCOME OF A PERSON WITH DISABILITY

1. Assessee
Resident Individual (irrespective of citizenship)
2. No deduction
When opted for ATR Sec. 115BAC
3. Conditions
• He is certified by the medical authority to be a person with disability at any time during
the previous year.
• He furnishes certificate issued by the medical authority in the prescribed form.
• Deduction is allowed irrespective of expenditure incurred by the assessee.
4. Who is Person with disability
Person suffering from not less than 80% of any of following disability as certified by
medical authority.
5. Amount of Deduction
Person with 80% or more disability 1,25,000
Otherwise 75,000.
6. Disabilities under Sec. 80U
Blindness, Low vision Leprosy cured, Hearing impairment, Locomotive disability Mental
retardation, Mental illness, Autism (Serious mental condition developed during childhood).
Cerebral Palsy (Brain damage), multiple disability.

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10. Illustration
Mr. Zebra is suffering from low – vision (certified as severe disability). He has following incomes
details:
Net salary Rs. 45,000
Short term capital gain Rs. 45,000
Long term capital gain Rs. 1,50,000
Mrs. Zebra, suffering from leprosy (certified as 50% disable), is fully dependant on Mr. Zebra.
find his total income.

80IAC: SPECIAL PROVISION IN RESPECT OF SPECIFIED BUSINESS

1. Applicability
Assessee being an eligible start-up. (Company or LLP)
2. No deduction
When opted for ATR Sec. 115BAC
3. Meaning of Terms
a. “Eligible Business”
means a business which involves innovation, development, deployment or
commercialisation of new products, processes or services driven by technology or
intellectual property.
From the Assessment Year 2018 – 19 – A business carried out by an eligible start up
engaged in innovation, development or improvement of products or processes or services
or a scalable business model with a high potential of employment generation or wealth
creation.
b. “Eligible Start-Up”
means a company or Limited Liability Partnership engaged in eligible business, which
fulfils the following conditions, namely:
• It is incorporated on or after 1/4/2016 but before 1/4/2024, (F Act. 23)
• The Total Turnover of its business does not exceed Rs. 100 crores in any of the
previous years beginning 1/4/2016 and ending on 31/3/2024, and
• It holds a Certificate of Eligible Business for the Inter-Ministerial Board of
Certification as notified by the Central Government.
c. “Limited Liability Partnership”
(LLP) means a partnership referred to in Sec. (2)(1)(c) of the Limited Liability
Partnership Act, 2008.
4. Quantum of deduction
100% of the profit and gains derived from such eligible Start up business.

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5. Period of Deduction
Deduction can be claimed at the option of the Assessee, for any 3 consecutive assessment
years out of 10 [Fin. Act 20] years beginning from the year in which the eligible start-up
incorporated.
6. Conditions to be satisfied for claiming deduction
a. Bar on Formation Style:
It should not be formed by splitting up or re-construction of an exciting business,
[Rehabilitation u/s 35B is permissible.]
b. Bar and Old Machinery
it should not be formed by transfer of Plant and Machinery previously used for any
purpose, except as under –
Imported Machine: The bar on use of Old Machinery does not apply if –
• Such plant or machinery is imported,
• Such plant or machinery is previously not use in India,
• No Depreciation on such Plant or Machinery is allowed to any person for any
Assessment year
c. Provisions of Sec. 80-IA (5) and (7) to (11) shall be applicable for claiming deduction u/s
80-IAC

SECTION 80IBA: DEDUCTIONS FOR PROFITS & GAINS FROM HOUSING PROJECTS

1. Applicability
All Assessee
2. No deduction
When opted for ATR Sec. 115BAC
3. Nature of Business
Business of developing and building Housing Projects.
Note: Assessee who executes the Housing Project as a Works – Contract awarded by any
person (including Central/ State Govt) is not eligible for Deduction.
4. Quantum of Deduction
100% of the Profits & Gains derived from such Business.
5. Conditions
Project Approval
The project shall be approved by the Authority after 1/6/2016 but on or before 31/3/2022.
[Fin. Act 21]

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The project shall be completed within a period a period of 5 years from the date of approval
by the competent Authority.
Project Completion
• First Approval: if the approval in respect of a Housing Project is obtained more than
once the project shall be deemed to have been approved on the date on which the
Building Plan of such Housing Project was first approved by the Competent Authority.
• Deemed Completion: The project is deemed to have been completed when a Certificate
of Completion of Project as a whole is obtained in writing from the Competent Authority.
Shops and Commercial Establishment
• The built-up area of the shops and other commercial establishment included in the
housing project does not exceed 3%. Of the aggregate built-up area.
Location of project Area of plot of Carpet area of Utilisation or
land on which residential units permissible
project is comprised in the FAR
situated housing project

project is located Not less than Not to exceed 60 Not less than
within the 1,000 square square metres 90%
metropolitan cities metres
given in Note (infra)
Project is located in Not less than Not to exceed 90 Not less than
any other place 2,000 square square metres 80%
metres
6. Allotment Restriction
If a Resident unit is allotted to an individual, no other Residential Unit in the Housing Project
shall be allotted to the Individual or the Spouse or the Minor Children of such Individual.
7. Maintenance of Books
The Assessee maintains separate books of account in respect of the Housing Project.
8. Non completion in 5 years
if the Housing Project is not completed within 5 years from the date of approval, and in
respect of which a deduction has been claimed and allowed u/s 80-IBA, the total amount of
deduction so claimed and allowed in one or more previous years, shall be deemed to be the
income of the Assessee chargeable as “Profits and Gains of Business or Profession” of the
previous year in which the period for completion so expires.
9. No Double Deduction
Where any amount of Profits and Gains derived from the business of developing and building
Housing Projects is claimed and allowed u/s 80-IBA for any AY, deduction to the extent of
such profit and gain shall not be allowed under any other previous of this Act

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11. Illustration
X (34 years) gives the following information for the assessment year 2025 – 26
Salary: Rs. 34,00,000, house rent allowance (HRA): Rs. 6,00,000, HRA exemption u/s 10(13A): Rs.
60,000, dividend income: Rs. 90,000, FD interest: Rs. 2,72,000, deduction u/s 80C: Rs. 1,50,000,
Mediclaim insurance premium: Rs. 25,000, donation to PM cares Fund: Rs. 10,000.
X wants to know whether (or not) he should opt for the regular tax regime by exercising the opt
u/s 115BAC(6).

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TDS & TCS

CHAPTER 12 TAX DEDUCTED AT SOURCE AND TAX COLLECTED AT SOURCE

TAX DEDUCTED AT SOURCE

Introduction
a TDS means pay tax as you earn.
b The main objective of introducing TDS/TCS is quicker realization of tax and effective
realization tax.
c In few cases an individual or HUF cannot deduct TDS if their books of accounts are not
required to be audited.
d Surcharge on TDS for FY 24-25 shall be added in following cases:

Applicability of surcharge and education cess while computing TDS

1 On salary resident or non-resident Surcharge, H&EC shall be considered.
2 Any other payment to resident No. S.C., H&EC
3 Any other payment to non-resident
• Where amount of such payment be Surcharge (5%) H&EC shall considered.
exceeds Rs. 10 crore
• Where amount of such payment exceeds Surcharge (2%) H&EC shall be considered
Rs. 1 crore
• Where amount of such payment does not H&EC shall be considered.
exceed Rs. 1 crore
4 No TDS on GST (mentioned separately on Invoice)
a Time limit for deposit of TDS Refer Table A
5 b Time limit for Quarterly Statement Refer Table B
c Time limit for TDS Certificate Refer Table C

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TAX DEDUCTION AND COLLECTION AT SOURCE

Sec. Nature of Person Recipient Time of Rate of Maximum

payment responsible deduction TDS payment up
to deduct to which
tax tax shall
not be
deducted
192 Salary Employer Employee At the time of Average Basic
payment rate of tax exemption
Limit
Salary Employer is allots any within 14 days –
start up specified from
security/ a expiry of
sweat 48 month
equity from the
shares/ end of
ESOP to relevant AY
its b from the
employees, date of sale
c from the
date of
leaving
organisation

1. Illustration
Compute TDS of Mr. A from the following information
Particular Rs.
Income from salary 11,20,000
(-) deduction u/s 80C to 80U 1,20,000
Taxable salary 10,00,000

192A RPF The Any At the time 10% of Rs 50,000

Trustees of Employee of payment amount
the EPF withdrawn
Scheme within 5
years (on

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employer
contribution)

2. Illustration
Amount withdrawn from RPF within 5 Years – 1,60,000
Above amount includes 40,000 interest and balance employer and employee contribution in equal.
is TDS applicable in above case?

193 Interest on Payer of Resident At the time 10% 1 Central

securities interest on person of payment Govt 8% &
securities or 7.75%
issued by crediting bonds,
(Central or the payee, floating
state whichever rate saving
government, is earlier bonds >
Local 10,000
Authority, 2 Int to Ind/
Company or HUF up to
Corporation 5,000 by
established account
under the payee
central or cheque on
State Act) listed
debentures

3. Illustration
compute TDS in following Cases.
Recipient Interest on Amount Mode of Remarks
listed debenture Payment
Individual/HUF Yes 4000 Cash
Individual/HUF Yes 4000 Online
Individual/HUF Yes 6000 Cash
Individual/HUF Yes 6000 online
Individual/HUF Yes 4000 Cash
Individual/HUF Yes 4000 online

194 Dividend Domestic Resident At the time 10% Rs. 5,000

Company person of payment Amount paid
to Individual

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by any mode
and if
recipient is
LIC, GIC etc

4. Illustration
Compute TDS in following Cases.
Recipient Dividend Mode Remarks
Mr. A. 4000 Cash
Mr. B. 4000 Cheque
X. Ltd. 4000 Cash
LIC 15,000 Online
GIC 15,000 Cash
Mr. A. 8000 Cash
Mr. A. 8000 Cash

194A Interest Any person Resident At the time @10% 1 Rs.

other than other than person of payment 40,000 in
interest on individual or crediting case of
securities and HUF the payee, Bank FD
whose whichever &
accounts is earlier. Recurring
are not Rs
required to 50,000 in
be audited case of
during senior
immediately citizen
preceding 2 In any
previous other
year case Rs.
5000
(limit as
per core
banking
solution)

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TDS & TCS

5. Illustration
Compute TDS in following Cases.
Payer Interest on Amount Recipient Remark
ICICI Bank Saving 96,000 Mr. A.
ICICI Bank F.D./RD 96,000 Mr. A.
ICICI Bank FD/RD 50,000 Mr. A. (Age
69)
ICICI Bank FD/RD 50,000 Mr. A (Age 39)
ICICI Bank FD 40,000 Mr. A.
Mr. A. (Salaried) Loan 6000 Mr. B.
Mr. A. (Audit) Loan 6000 Mr. B.

194B Winning from Any person Any person At the time 30% Rs. 10,000
Lotteries, paying such of payment
etc. income
194BA Winning from Any person Any person At the time 30% Not
any online paying such of payment applicable
game income
194BB Winning from Any person Any person At the time 30% Rs, 10,000
horse races paying such of payment
income

6. Illustration
Payer Nature of income Amount Remarks
Anand lotteries Lotteries 9,000
Anand lotteries Lotteries 12,000
Anand lotteries Online gaming 7,000
Anand lotteries Horse race 12,000
10,000

194C Contract Any Resident At the time Payee is a Rs.30,000

work specified person of payment Individual or (provided
person or crediting HUF 1% aggregate
including the payee, other payee amount
individual whichever 2%. paid
and HUF is earlier during the
whose financial
accounts year does

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are not
required to exceed Rs.
be audited 1,00,000).
during b No TDS
immediately for any
preceding sum
previous credited
year or paid to
contractor
owns 10 or
less goods
carriage
at any
time
during PY
&
providing
PAN.
c contract
of
personal
nature

7. Illustration
compute TDS in following Cases.
Payer Amount Payer recipient Nature Remarks
Mr. A 45,000 Mr. B. Office
Mr. A. 45,000 Mr. C. Personal
X Ltd. 45,000 Y. Ltd Office
Y. Ltd. 17,000
Bills 40,000
45,000 Z. Ltd. Office
23,000
Total 1,25,000
Y. Ltd. 95,000 Transport Office

194D Insurance Any person 5% and 10% Rs. 15,000

Commission for domestic
company

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194DA Payment of Any person Resident At the time 5% upto 30th Rs 1,00,000
life of payment September
Insurance 24 & 2% from
policy 1st October
24 [FA 24]

8. Illustration
compute TDS in following Cases.
Date of Policy SA Premium Maturity Amount Remarks
1/10/11 5 Lakh 1.24 Lakh 6 Lakh
1/10/11 50 k 6000 90000
1/10/13 50 k 12000 90000
1/10/11 5 Lakh 1.24 Lakh 6 Lakh

194E Sports Any person Non- At the time 20% Nil

person or paying resident of payment
entertainer specified foreign or crediting
or NR sports income citizen the payee,
association sportsman whichever
or sports is earlier.
association
or
entertainer

9. Illustration
Calculate the amount of tax to be deducted at source [TDS] on payment made to Ricky Ponting, on
Australian cricketer non-resident in India, by a newspaper for contribution of articles Rs. 25,000.

194EE Deposit in Post Office Any person At the time 10% Rs. 2,500
NSC of payment
194G Commission Any person Any person At the time 5% upto 30th Rs. 15,000
on sale of paying of payment September
lottery commission or crediting 24 & 2% from
tickets on sale of the payee, 1st October
lottery whichever 24 [FA 24]
tickets is earlier
194H Other Any person Resident At the time 5% upto 30th Rs. 15,000
commission other than person of payment September
individual or crediting 24 & 2% from

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and HUF the payee, 1st October

whose whichever 24 [FA 24]
accounts is earlier
are not
required to
be audited
during
preceding
P.Y.
194I Rent Any person Resident At the time Plant & Rs. 2,40,000
(commercial) other than of payment machinery
individual or crediting 2% Other
and HUF the payee, asset 10%
whose whichever
accounts is earlier
are not
required to
be audited
during
preceding
P.Y.

10. Illustration
Compute TDS in following Cases.
Payer Rent Receipt Remarks
Mr. A 2.2 Lakh X. Ltd
Mr. A 3 Lakh Resident Individual
HUF 6 Lakh Resident Individual
X. Ltd 12 Lakh Resident Individual

194 Acquisition Any person Resident At the time 1% of Rs.

IA of immovable who is of payment consideration 50,00,000
property acquiring or crediting
other than such the payee,
rural agro property whichever
land. is earlier
194IB Rent Individual Resident At the time 5% upto 30th Rent <
or HUF of credit of September 50,000 pm
rent for 24 & 2% from

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last month 1st October or part

of previous 24 [FA 24] thereof
year or last
month of
tenancy or
date of
payment
whichever
earlier

11. Illustration
Case A.
Monthly rent 60000 & let out for full year
Case B.
Monthly rent 60000 HP is let out till Dec
Case C.
No Pan Card with landlord for case A

194IC Amount Any Person Resident At the time 10%. Nil

payable of payment
under or crediting
agreement the payee,
specified whichever
under Sec is earlier
45(1A)

194J 1. Prof or Any person Resident At the time 10% & 2% for Aggregate of
technical other than person of payment payment payment
service or individual or crediting being person does not
2. director and HUF the payee, engaged in exceed Rs.
fees (not whose whichever business of 30,000 in a
covered accounts is earlier call centre & FY for each
u/s. 192), are not Royalty of nature
3. Royalty, required to related to except for
4. Any Sum be audited films. director
received during fees. (any
for not preceding amount)
carrying P.Y.
out any

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activity
Sec 28(va)

12. Illustration
Compute TDS in following Cases.
Payer Audit Purpose Amount Remarks
Khushi Yes Professional Fees 25,000
Khushi Yes Professional Fees 45,000
Khushi Yes Call Centre 90,000
Khushi Yes Tech Service 1,18,000 (Including GST)
B. Ltd No Independent Defector 28,000
Khushi Yes Professional Fees 28,000
Khushi Yes Professional Fees 42,000
Khushi Yes Tech. Service 29,000
Khushi Yes Royalty 31,000
Khushi Yes I.D. 26,000

194K Income from Any person Resident At the time Tax shall be Rs. 5000
units person of payment deducted at
or crediting the rate of
the payee, 10%
whichever
is earlier
194M For carrying It may be Resident At the time 5% upto 30th No tax is
out any work, noted that of payment September required to be
By way of only or crediting 24 & 2% deducted
commission, individuals the payee, from 1st where such
By way of and HUFs whichever October 24 sum or, as the
fees for [other than is earlier [FA 24] case may be,
professional those who aggregate
services are amount of
required to such sums
deduct credited or
income-tax paid to a
as per the resident
provisions during the
of section financial year
194C or does not
194H or

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194J] are exceed Rs.

required to 50,00,000.
deduct tax
in respect
of the
above sums
payable
during the
financial
year to a
resident
194N Cash Banking Account At the time Case 1: The
withdrawal company, holder of payment If no ITR is government,
Cooperative file 20 lacks Banking
society, and to 1cr 2% company,
Post office and above Cooperative
1cr 5% society, and
Case 2: Post office,
If ITR is white label
filed 2% of ATM
sum operator, RBI
exceeding
1cr
Note:
For co-
operative
society limit
is 3cr
instead of 1
cr
194LA Compensation Any person Resident At the time 10% Rs. 2,50,000
for responsible of payment
compulsory for such in cash or
acquisition of payment by cheque
immovable or draft or
property by other
(other than mode,
agro land) whichever
is earlier

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194O Payment by ECO E- Tax is 1% upto 30th 1 An

ECO Commerce deductible September Individual
participants by E - 24 & 0.1% or HUF
commerce 1st 2 Gross
from
operator at October 24 amount up
the time of [FA 24] to 5 lakhs
credit of 3 submission
amount of of PAN or
sale of Aadhar
goods / card to
services to ECO
the account
of an E-
Commerce
participants
or at the
time of
payment
thereof o
such e-
Commerce
participants
buy any
mode,
whichever
is earlier
194P No other "Specified Deduction It is not
income bank" of Tax in given in
except Case of section
interest and Specified 194P.
pension in Senior
same bank Citizen
(Age Above
75)
194Q Purchase of Buyer Seller At the time 0.1 % 50 Lakhs
Goods whose of payment
turnover ≥ or crediting
10 Cr. in the payee,
last whichever
is earlier

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financial
year
194R Any Benefit/ any person Any Before 10% 20,000
Perquisite resident releasing
whether in the
cash or in benefits
kind or partly
in cash &
partly in kind
Pertaining to
Business/
Profession
194S Transfer of Any person Any At the time 10% 50,000 for
virtual digital resident of payment specified
asset person or crediting person &
the payee, other than
whichever specified
is earlier person 10,000
during
Financial Year
194T Payment of Partnership Partner At the time 10% 20,000
[FA remuneration firm of payment
24] or interest to or crediting
partner the payee,
whichever
is earlier

INCOME PAYABLE “NET OF TAX” SEC. 195A

Where, under an agreement or other arrangement, the chargeable on any income referred in the
in the foregoing provision of this chapter is to be borne by the person by whom the income
payable, then,
(𝐀𝐦𝐨𝐮𝐧𝐭 𝐩𝐚𝐢𝐝 ∗ 𝐑𝐚𝐭𝐞 𝐨𝐟 𝐓𝐃𝐒)
𝐓𝐃𝐒 =
(𝟏𝟎𝟎 − 𝐑𝐚𝐭𝐞 𝐨𝐟 𝐓𝐃𝐒)

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TABLE A: DUE DATE FOR PAYMENT OF TDS [SEC. 200 READ WITH RULE 30]

S N Deductor Cases Due Date

1 Government Tax paid without production of an income-tax Same day
challan
2 Tax paid accompanied by an income- tax challan 7 days from end of
month
3 Any other Deduction made in the months of April to Feb 7 days from end of
person month
4 If income is credited or paid in the month of 30th April
March

TABLE B: DUE DATE OF FILING QUARTERLY STATEMENT [RULE 31A (2)]

S N Date of ending of the quarter of Due date

the financial year
1 30th June 31th July of the financial year.
2 30th September 31th October of the financial year
3 31st December 31th January of the financial year
4 31st March 31th May of the financial year immediately following
the financial year in which deduction is made.

Quarterly statement of tax deduction/collection:

In respect of tax deducted/collected, quarterly TDS/ TCS statements shall be submitted in
the following forms-
Form no
Tax deduction from salary under section 192 24Q
Tax deduction when deductees are non-resident (not being a company), foreign 27Q
company and persons who are resident but not ordinarily resident
Tax deduction under section 194-IA 26QB
Tax deduction under section 194-IB 26QC
Tax deduction under section 194M 26QD
Tax deduction by specified person under section 194S 26QE
Tax deduction by exchange under section 194S 26QF
Tax deduction in any other case 26Q
Tax collection 27EQ

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TABLE C: TIME LIMITS FOR ISSUE OF CERTIFICATE [RULE 31(3)]

S N Form No. Periodicity Due date

1 16 & 12BA Annual By 15th of June of the financial year immediately
following the financial year in which the income was paid
and tax deducted. [Form 24Q]
2 16A Quarterly Within 15 days from the due date for furnishing the
statement of tax deducted as source under rule 31A.
Form 27D
3 16 B Within 15 days from the due date for furnishing the
(Sec 194 – IA) challan – cum statement in Form No. 26QB
4 16 C Within 15 days from the due date for furnishing the
(Sec 194 – IB) challan – cum statement in Form No. 26QC
5 16D (Sec Within 15 days from the due date for furnishing the
194M) challan – cum statement in Form No. 26QD

TAX DEDUCTION AND COLLECTION ACCOUNT NUMBER (SECTION 203A)

Every person, deducting tax or collecting tax, who has not been allotted a tax – deduction
account number or tax collection account number, shall within specified time, apply to the
Assessing Officer for the allotment of a “tax deduction and collection – account number” in Form
49B.

REQUIREMENT TO FURNISH PERMANENT ACCOUNT NUMBER SEC. 206AA

Any person entitled to receive any sum or income or amount, on which tax is deductible shall
furnish his PAN to the person responsible for deducting such tax, failing which tax shall be
deducted at the higher of the following rates, namely:
a At the rate specified in the relevant provision of this Act; or
b AT the rate of 20%.

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TAX COLLECTION AT SOURCE

MEANING OF IMPORTANT TERMS

1 “Seller” means –
a The Central Government; or
b State Government; or
c Local authority; or
d Statutory corporation; or
e Authority established by or under a Central, State or Provincial Act; or
f Company; or
g Firm; or
h Co – operative society; or
i Individual & HUF
1 If his books of account are required to be audited under section 44AB during the
financial year immediately preceding the financial year in which such goods are
sold. (Applicable up to September 30, 2020).
2 his total sale, turnover or gross recipients from the business or profession carried
on by him exceed Rs. 1 crore in the case of business (or Rs. 50 Lakh in the case
of profession) during the financial year immediately preceding the financial year
in which goods are sold applicable from October 1, 2020)
2 “Buyer” means a person who obtains in any sale (by way of auction, tender or any other
mode) specified goods or the right to receive any such goods but does not include,:
a A public sector company, the Central Government, a State Government and an
embassy, a High Commission, legation, Commission, consulate and the trade
representation, of a foreign state and a club; or
b A buyer in the retail sale of such goods purchased by him for personal consumption.
3 Overseas tour program package
Any tour package which offer visit to a country / (ies) or territory/(ies) outside India. It
includes expenses for travel or hotel stay or boarding or lodging or any other expenditure
of similar nature or in relation thereto.
4 Scrap
Waste and scrap from the manufacture or mechanical working of materials which is
definitely not usable as such because of breakage cutting up, wear and other reasons.

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INTRODUCTION

1. Every seller shall collect tax from the buyer of any specified goods, at the time of -
• Debiting the amount payable by the buyer to the account of the buyer; or
• Receipt of such amount from the buyer,
whichever is earlier.
2. Every person, who grants a lease or a licence or enters into a contract or otherwise
transfers any right or interest in -
• any parking lot; or
• toll plaza; or
• mine or quarry excluding mines or quarrying of mineral oil (mineral oil includes
Petroleum and Natural gas),
• to another person (other than a public sector company) for the use of such parking
lot or toll plaza or mine or quarry for the purpose of business shall collect tax from
the licensee or lessee at the time of:
• Debiting the amount payable by the licensee or lessee to the account of the licensee
or lessee; or
• Receipt of such amount from the licensee or lessee,
whichever is earlier.
3. Every person -
a being an authorised dealer, who receives an amount, for remittance out of India from
a buyer, being a person remitting such amount out of India under the Liberalised
Remittance Scheme of the Reserve Bank of India;
b being a seller of an overseas tour program package, who receives any amount from a
buyer, being the person who purchases such package
shall collect from the buyer at the time of
• Debiting the amount payable by the buyer; or
• Receipt of such amount from the said buyer whichever is earlier,

RATES

1 “Specified goods” includes:

Particulars Rate as a % of the amount
payable by the buyer or
licensee or lessee*
A1 Alcoholic liquor for human consumption 1%
A2 Tendu leaves 5%

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A3 Timber obtained under a forest lease 2.5%

A4 Timber obtained by any mode other than under a forest 2.5%
lease
A5 Any other forest produce (not being timber or tend leaves) 2.5%
A6 Scrap 1%
A7 Specified minerals 1%
2 Lease or a licence of parking lot, toll plaza or mine or a 2%
quarry
3 Sale of motor vehicle of value exceeding ₹ 10 lakhs 1%
4 Remittance under LRS of RBI through an authorized dealer Refer table given below
or purchase of an overseas tour package
Rate of TCS in case of collection by an authorized dealer/ seller of an overseas tour programme
package
Amount and purpose of remittance Rate of TCS
Where the amount is for purchase of an overseas tour 5% till ₹ 7 lakhs, 20%
programme package thereafter
Where the amount is remitted outside India - No TCS upto ₹ 7 lakhs
a) for the purpose of education or medical treatment 5% of the amt or agg. of
amts in excess of ₹ 7 lakh
If amount remitted is out of a loan obtained from any 0.5% of the amt or agg. of
financial institution as defined in section 80E, for the amts in excess of ₹ 7 lakh
purpose of pursuing any education
b) where the amount is remitted for the purpose other than 20% of the amt or agg. of
mentioned in (a) above amts in excess of ₹ 7 lakh
5 Sale of goods of value exceeding ₹ 50 lakh 0.1%

DEPOSIT OF TAX (SECTION 206C(3))

Payment of TCS – Save as TDS

Assessee in default – Same as TDS.
Exception: Provided that any person, other than referred to in sub-section (1D), shall not be
deemed to be an assessee in default in respect of such tax if such buyer or licensee or lessee –
a Has furnished his ROI u/s 139;
b Has taken into account such amount for computing his income; and
c Has paid the tax due on such income,
And the person furnishes a certificate to this effect from CA in prescribed form:

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TDS & TCS

Default 1 per cent per month (from the date on which tax was collectible to the date on
One which tax is actually deposited)
Default two 1 per cent per month (upto march 31st 2025) and 1.5 per cent per month (from
April 1st 2025) (from the date on which tax was actually collected to the date on
which tax is actually paid)

DUE DATE OF FILING QUARTERLY STATEMENT

S N Date of ending of the

quarter of the financial year Due date
1 30th June 15th July of the financial year.
2 30th September 15th October of the financial year
3 31st December 15th January of the financial year
4 31st March 15th May of the financial year immediately following the
financial year in which deduction is made.

COLLECTION OF TAX AT SOURCE AT LOWER RATE (SECTION 206C(9))

Where buyer or licensee or lessee applies to the Assessing Officer in Form 27F, and receives a
certificate authorizing the seller to collect tax at lower rate, seller or lesser may collect tax at
the rate specified in the certificated till the cancellation of such certificate.

CONSEQUENCES WHEN SELLER FAILS TO COLLECT TAX AT SOURCE (SECTION 206C(6))

Any person who is responsible for collecting tax, but fails to do so, shall be liable to pay tax to
the credit of the Central Government.

REQUIRED TO FURNISH PAN BY COLLECTEE. SEC 206CC

Notwithstanding anything contained in any other provisions of this Act, any collectee shall
furnish his PAN to the collector, failing which tax shall be collected at the higher of the
following rates, namely: -
i At twice the rate specified in the relevant provision of this Act; or
ii At the rate of 5%

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TDS & TCS

PRACTICAL QUESTIONS

1. Illustration
Examine the TDS implication under section 194A in the cases mentioned hereunder –
1. On 1/10/2024. Harish made a six-month fixed deposit of Rs. 10 Lakh @9% p.a. with ABC Co-
Operative bank. The fixed deposit matures on 31/03/2025.
2. On 1/6/2024, Mr. Ganesh made three nine-month fixed deposits of Rs. 2 lakh each carrying
interest@9% with Dwarka Branch, Janakpuri branch and Rohini Branches of XYZ bank, a bank
which has adopted CBS. The fixed deposits mature on 28/2/2025.

2. Illustration
State in brief the applicability of TDS provisions, the rate of amount of tax deduction in the
following cases for the Previous Year 2024 – 25.
1. Winning by way of Jackpot in a House Race Rs. 1,00,000.
2. Payment made by a Firm to Sub – Contractor Rs. 3,00,000 with outstanding balance of Rs.
1,20,000 shown in the books as on 31/03/2025.
3. Rent paid for Plant and Machinery Rs. 1,50,000 by a Partnership Firm having Sales Turnover of
Rs. 20 Lakhs and Net Loss of Rs. 15,000.
4. Payment of Rs. 25,000 made to Ricky Ponting, an Australian Cricketer, by a Newspaper, for
contribution of articles.

3. Illustration
Compute the amount of TDS on the following payments made by M/s S Ltd during the Previous
Year 2024 – 25 as per the provisions of the Income Tax Act, 1961 –
S N Date Nature of Payment
1 01/10/2024 Payment of Rs. 2,00,000 to Mr. “R” a transporter who is having PAN.
2 01/11/2024 Payment of fee for Technical Services of Rs. 25,000 and Royalty of Rs.
20,000 to Mr. Shyam who is having PAN
3 30/06/2024 Payment of Rs. 25,000 M/s X Ltd for repair of building.
4 01/01/2025 Payment of Rs. 2,00,000 made to Mr. A for purchase of Diaries made
according to specification of M/s S Ltd. However, no material was
supplied for such Diaries to Mr. A by M/s S Ltd.
5 01/01/2025 Payment of Rs. 80,000 made to Mr. Bharat for Compulsory Acquisition of
his House as per law of the State Government.
6 01/02/2025 Payment of Commission of Rs. 6,000 to Mr. Y

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ADVANCE TAX

CHAPTER 13 ADVANCE TAX

SCHEME OF ADVANCE TAX [SEC. 208]

Where the advance tax liability of the assessee is Rs. 10,000 or more, the assessee should pay
such tax in the previous year itself within the due date.

ADVANCE TAX LIABILITY [SEC. 209]

Particulars Amount Rs.

Estimated Gross Total Income
Less: Deduction under chapter VIA xxxx
Estimated Total Income xxxx
Gross tax liability on Estimated Total Income xxxx
Add: Surcharge (if applicable) xxxx
Total and surcharge payable xxxx
Add: 4% Social Welfare Surcharge xxxx
Total liability after education case xxxx
Less: Tax deducted or collected at source. xxxx
xxxx
Advance Tax Liability xxxx
If Advance tax is payable by Resident Individual, Then Relief u/s. 87 A should be considered.

PAYMENT OF ADVANCE TAX BY THE ASSESSEE OF HIS OWN ACCOUNT (SEC. 210]

An assessee who is liable to pay advance tax is required to estimate his current income
and pay advance tax thereon without having to submit any estimate or statement of income
to the assessing authorities.
Revision After making payment of first/second instalment of advance tax, an assessee
of second can revise the remaining instalment(s) of advance tax in accordance with his
and revised estimate of current income and pay tax accordingly, without any
subsequent requirement of filing the revised estimate of advance tax.
instalment
Payment of advance tax in pursuance of order of Assessing Officer [Sec. 210] - The
provisions are given below -

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ADVANCE TAX

1 The taxpayer is one who had earlier been assessed to income-tax.

2 Inspite of the legal obligation, he has not paid advance tax.
3 The Assessing Officer may pass an order under section 210(3) requiring him to pay advance
tax on his current year's income.
4 The order must specify the different instalments in which the advance tax should be paid.
5 Such order may be passed during the previous year but not later than last day of February.

INSTALLMENTS OF ADVANCE TAX AND DUE DATES [SECTION 211]

Due date of Instalment in Other than 44AD or Eligible assessees carrying on

the relevant previous year 44ADA eligible business u/s 44AD or
44ADA
On or before June 15 15 % of such advance tax
On or before September 15 45% of Advance Tax Payable
On or before December 15 75% of Advance Tax Payable
On or before March 15 100% of Advance Tax Payable 100% of Advance Tax Payable

Key Note
a Any amount paid under section 211 on or before 31st March of the previous year, shall be
treated as advance tax paid during the financial year.
b Provisions of advance tax is not applicable in the following cases:
Where an assessee is a senior citizen and does not have any income chargeable under the
head “Profits and gains of business or profession”. In other words, senior citizen not having
business income is not liable to pay advance tax.
Every income including capital gain, winning from lotteries, Dividend, etc. is subject to
advance tax. However, it is not possible to estimate capital gain or casual gain or dividend,
therefore, where the assesse has paid the whole of the amount of tax payable in respect of
such income:
• As part of the remaining instalments of advance tax which were due; or
• Where no instalments were due, by March 15 of the financial year immediately preceding
the assessment year,
Then it is deemed that all the provisions are complied.

Advance tax instalments in case of Casual income/ Dividend and Capital Gain
Date of earning income
Instalments 12/6/24 15/8/24 1/12/24 1/2/25 20/3/25
15th June

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ADVANCE TAX

15th Sept
15th Dec
15th Mar
Total

c If the last day for payment of any instalment of advance tax is a day on which the receiving
bank is closed the assessee can make the payment on the next working day. In such case,
the mandatory interest leviable under section 234B and 234C would not be charged (Circular
no. 676 dt. 14.1.1994)
d While calculating advance tax, net agricultural income shall also be taken into
consideration for computing tax liability.
e If any assessee does not pay any instalment within due date he shall be deemed to be an
assessee in default in respect of such instalment (Section 218).
f Any sum, other than a penalty or interest, paid by an assessee as advance tax shall be treated
as a payment of tax and credit for such shall be given to the assessee in the regular
assessment (Section 219).

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ASSESSMENT OF VARIOUS PERSON

CHAPTER 14 ASSESSMENT OF VARIOUS PERSON

COMPUTATION OF TOTAL INCOME AND TAX PAYABLE BY AN INDIVIDUAL

Step 1 Determination of residential status

Step 2 Classification of income under different heads
Step 3 Computation of income under each head
Step 4 Clubbing of income of spouse, minor child etc.
Step 5 Set-off or carry forward and set-off of losses
Step 6 Computation of Gross Total Income
Step 7 Deductions from Gross Total Income
Step 8 Computation of Total income
Step 9 Application of the rates of tax on the total income.
Step 10 Surcharge/ Rebate under section 87A
Step 11 Health and Education cess (HEC) on Income-tax
Step 12 Alternate Minimum Tax (AMT)
Step 13 Examine whether to pay tax under default regime under section 115BAC or pay tax
under the optional tax regime as per the regular provisions of the Act
Step 14 Credit for advance tax, TDS and TCS
Step 15 Tax Payable/ Tax Refundable

ASSESSMENT OF INDIVIDUAL

ALTERNATE MINIMUM TAX SEC 115JC

1. Applicability
The provisions shall be applicable to a person, other than a company, whose regular income
– tax payable for a previous year is less than the alternate minimum tax payable.
2. Adjusted total income to be deemed income
If regular income tax payable for a previous year is less than the alternate minimum tax
payable then the adjusted total income shall be deemed to be the total income of that
person for such previous year and he shall be liable to pay tax on such income @ 18.5% of
adjusted total income. From AY 24 – 25 15% in case of co-operative society.
Under section 115JC, alternate minimum tax in the case of a non-corporate assessee is 18.5

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per cent of adjusted total income. In order to promote the development of world class
financial infrastructure in India, section 115JC has been amended (W.e.f. the Assessment
Year 2020 – 21) so as to provide that in case of a unit located in an International Financial
Service Centre, the alternate minimum tax shall be calculated at the rate of 9 per cent.
3. Meaning of Adjusted Total Income
Adjusted Total Income shall be the total income as increased by:
a Deductions claimed under sections 80IA to 80RRB (other than section 80P);
b Deduction under section 10AA; and
c Deduction claimed, if any, under section 35AD as reduced by the amount of depreciation
allowable in accordance with the provisions of section 32 as if no deduction under
section 35AD was allowed in respect of the assets on which the deduction under that
section is claimed. (Bold portion amended by Finance (No.2) Act, 2014 w.e.f. 1.4.2015
i.e. AY 2015 – 16).

Total income Adjusted total income

Salary XX Total income XX
House Property XX (+) Deduction u/s 80IA to 80RRB XX
Profits & Gains of Business or XX (+) Deduction u/s 80AA XX
Profession
Capital Gain XX (+) Deduction u/s 35AD XX
Income from other sources XX XX
(-) Set Off & Carry Forward of (XX) (-) Depreciation on asset 35AD XX
Losses
= Gross Total Income XX = Adjusted total income XX
Deduction u/s 80 (XX)
= Total income/ Net Income XX
Taxable income
Tax on income XX Tax on ATI XX

Whichever is higher

4. Provisions applicable when adjusted total income exceeds Rs.20 lakhs

The above provisions shall not apply to an individual or HUF or an AOP / BOI, whether
incorporated or not, or an artificial juridical person, if the adjusted total income of such
person does not exceed Rs.20 lakhs.
5. Report to be obtained from a Chartered Accountant
Every such person shall obtain a report, in prescribed form, from a chartered Accountant,

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ASSESSMENT OF VARIOUS PERSON

certifying that the adjusted total income and the alternate minimum tax have been
computed in accordance with the provisions of this Chapter and furnish such report on or
before the due date of filing of return under section 139(1).
6. Tax credit for alternate minimum tax (Section 115JD)
The credit for tax paid by a person under section 115JC shall be allowed in accordance with
the provisions of this section as under:
a Tax credit to be allowed = Alternate minimum tax paid – regular income tax payable.
b No interest shall be payable on tax credit so allowed.
c The tax credit so allowed shall be credited forward and set – off during 15 subsequent
assessment years.
d If the regular income tax exceeds the alternate minimum tax, the tax credit shall be
allowed to be set off to the extent of the excess of regular income tax over the
alternate minimum tax and the balance of the tax credit, if any, shall be carried
forward.
7. Note
An amendment has been made under Section 115JEE to provide that even if the assessee
has not claimed any deduction under section 10AA or section 35AD or Chapter VI – A in any
previous year and the adjusted total income of that year does not exceed Rs.20 lakh, it
would still be entitled to set – off his brought forward AMT credit in that year. (Bold
portion amended by Finance (No.2) Act, 2014 w.e.f. 1.4.2015 i.e. AY 2015 – 2016).

1. Illustration
Mr. Aadmi resident individual having a unit located in special economic zone furnishes you with the
following information for the year ended 31-3-2025:
Profit for unit located in SEZ Rs. 30,00,000
Export turnover of unit located SEZ Rs. 72,00,000
Total Turnover or unit located in SEZ Rs. 1,00,00,000
Income from other source Rs. 6,50,000
Investment is public provident fund Rs. 1,00,000
(i) Determine his tax liability for A.Y. 2025-26 after taking into account alternate minimum tax
provisions.
(ii) What would be your answer if profits derived from unit located SEZ is Rs.3,00,000 instead of
Rs.30,00,000?

2. Illustration
Compute tax of the following assessee:
Particulars Mr. W Mr. X Mr. Y A LLP B LLP

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ASSESSMENT OF VARIOUS PERSON

Gross total income being 15,00,000 25,00,000 27,00,000 32,00,000 8,00,000

business income
Deduction u/s 80C 10,000 10,000 10,000 Nil Nil
Deduction u/s 80G 25,000 1,00,000 Nil 1,00,000 1,00,000
Deduction u/s 80IE 7,75,000 Nil 8,00,000 Nil 2,00,000
Total income 6,90,000 23,90,000 18,90,000 31,00,000 5,00,000

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PRACTICAL QUESTIONS

3. Illustration
Ms. Purvi, aged 55 years, is a Chartered Accountant in practice. She maintains her accounts on
cash basis. Her Income and Expenditure account for the year ended March 31, 2025 reads as
follows:
Expenditure ₹ Income ₹ ₹
Salary to staff 15,50,000 Fees earned:
Stipend to articled Assistants 1,37,000 Audit 27,88,000
Taxation services 15,40,300
Consultancy 12,70,000 55,98,300
Incentive to articled 13,000 Dividend on shares of 10,524
Assistants Notebook Ltd., an
Indian company (Gross)
Office rent 12,24,000 Income from UTI 7,600
(Gross)
Printing and stationery 12,22,000 Honorarium received 15,800
from various institutions
for valuation of answer
papers
Meeting, seminar 31,600 Rent received 85,600
and conference From residential
flat let out
Purchase of car (for official
use) 80,000
Repair, maintenance and petrol
of car 4,000
Travelling expenses 5,25,000
Municipal tax paid in respect of 3,000
house property
Net Profit
9,28,224
57,17,824 57,17,824
Other Information:
(i) Allowable rate of depreciation on motor car is 15%
(ii) Value of benefits received from clients during the course of profession is ₹ 10,500
(iii) Incentives to articled assistants represent amount paid to two articled assistants for passing
IPCC Examination at first attempt.

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(iv) Repairs and maintenance of car include ₹ 2,000 for the period from 1-10-2024 to 30-09-
2025.
(v) Salary includes ₹ 30,000 to a computer specialist in cash for assisting Ms. Purvi in one
professional assignment.
(vi) The travelling expenses include expenditure incurred on foreign tour of ₹ 32,000 which was
within the RBI norms.
(vii) Medical Insurance Premium on the health of dependent brother and major son dependent on
her amounts to ₹ 5,000 and ₹ 10,000, respectively, paid in cash.
(viii) She invested an amount of ₹ 10,000 in National Saving Certificate.
(ix) She has paid ₹ 70,000 towards advance tax during the P.Y. 2024-25.
Compute the total income and tax payable of Ms. Purvi for the assessment year 2025-26.

4. Illustration
Mr. Yeda anna carries on his own business. An analysis of his trading and profit & loss for
the year ended 31-3-2025 revealed the following information:
1. The net profit was 11,20,000.
2. The following incomes were credited in the profit and loss account:
a) Income from UTI 22,000 (Gross)
b) Interest on debentures 17,500 (Gross)
c) Winnings from horse races 15,000 (Gross)
3. It was found that some stocks were omitted to be included in both the opening and closing
stocks, the value of which were:
Opening stock 8,000.
Closing stock 12,000.
4. 1,00,000 was debited in the profit and loss account, being contribution to a University
approved and notified under section 35(1)(ii).
5. Salary includes 20,000 paid to his brother which is unreasonable to the extent of 2,500.
6. Advertisement expenses include 15 gift packets of dry fruits costing 1,000 per packet
presented to important customers.
7. Total expenses on car was 78,000. The car was used both for business and personal purposes,
75% of this for business purposes.
8. Miscellaneous expenses included ₹ 30,000 paid to A &Co, a goods transport operator in cash
on 31-1-2024 for distribution of the company's product to the warehouses.
9. Depreciation debited in the books was ₹ 55,000 Depreciation allowed as per Income-tax Rules,
1962 was ₹ 50,000.
10. Drawings ₹ 10,000.
11. Investment in NSC ₹ 15,000.
Compute the total income of Mr. Y for the assessment year 2025-26, assuming that he has not
opted to pay tax under section 115BAC.

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ASSESSMENT OF VARIOUS PERSON

5. Illustration
Mr. Sanban, a retail Trader from Delhi, submits the following trading and profit & loss account for
year ended 31st March, 2025.
Particulars Rs Particulars Rs
Opening stock 10,000 Sales 15,00,000
Purchases 12,50,000 Closing stock 20,000
Gross profit 2,60,000
Total 15,20,000 Total 15,20,000
Salaries 80,000 Gross profit 2,60,000
Rent and Rates 50,000 Interest Received-Savings Bank 5,200
Interest on Loans 25,000 Profit on sale of shares 45,000
Printing and stationary 30,000 Winnings from Lottery (Net of TDS)
(TDS 4,500) 10,500
Postage 15,000 Miscellaneous Income 20,000
Professional fees 40,000
Motorcycle 40,000
(purchased on 31.10.2024)
Loss on Sale of Shares 20,000
Miscellaneous Expenses 10,000
Net Profit 30,700
Total 3,40,700 Total 3,40,700
The following additional information was also provided by Mr. Sanjay-
1. Salary including Rs. 24,000 paid to his employee which was unreasonable to the extent of Rs.
6,000.
2. The whole amount of printing and stationary was paid in cash in a single transaction.
3. The details of Fixed Assets for the year are as follows:
Particulars Rs Rate of
Depreciation
Plant and machinery (WDV as on 01/04/2023) 3,40,000 15%
Furniture and Fixtures (WDV as on 01/04/2023) 1,00,000 10%
Purchase of Motorcycle (31/10/2023) 40,000 15%
Sale of Plant and Machinery 40,000 15%
Sale of Furniture and Fixtures 20,000 10%
4. GST for March 2025, Rs. 6,000 was paid on 30/04/2025. Due date for payment was
25/04/20245
5. Refund of GST Rs. 5,000 relating to the year 2021 - 2022 is included under Miscellaneous
Income.
6. Miscellaneous Expenses include Rs. 10,000 contributed to prime Minister’s National Relief Fund.

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7. Loss on sale of shares represents shares sold within a period of 6 months from the date of
purchase.
8. Profit on sale of shares represents shares held for 2 years & Securities Transaction Tax was
paid on it.
You are required to compute the Total Income of Mr. Sanban AY. 2025 - 26. You are also required
to advise Mr. Sanban, whatever he can show his business income u/s 44AD, i.e. on presumptive
taxation.

6. Illustration
Mrs. Ranipani, a resident aged 50 years is running an acupuncture clinic. Her Income and
Expenditure Account and other relevant information for the year ending 31 st March 2025, are
given below:
Expenditure Rs Income Rs
To Staff Salary 2,40,000 By Fees Receipts 10,00,000
To Clinic Rent 1,20,000 By Dividend from Indian 10,500
Companies
To Medicines and Needles 1,05,000 By winning from lotteries net of 7,000
TDS (TDS Rs. 3,000)
To Depreciation 81,000 By Income-Tax Refund 1,750
To Administrative Expenses 1,52,000
To Donation to Prime Minister’s 20,000
National Relief Fund
To excess of Income over 3,01,250
Expenditure
Total 10,19,250 Total 10,19,250
(i) Depreciation in respect of all assets has been ascertained at Rs. 60,000 as per Income-Tax
Rules.
(ii) Medicines & Needles of Rs. 22,000 has been used for her family.
(iii) Fees Receipts include Rs. 24,000 being honorarium for valuing acupuncture examination answer
books.
(iv) She has also received Rs. 57,860 on maturity of one LIC Policy, not included in the above
Income and Expenditure Account.
(v) She has paid an LIC premium of Rs. 12,000 for self (Sum Assured Rs. 50,000) policy issued
after 31/03/2015
(vi) She has paid Rs. 2,500 for purchase of Lottery Tickets.
From the above, compute total income and tax payable thereon by Mrs. Rani for the AY 2025 - 26.

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ASSESSMENT OF HUF

• Meaning The term Hindu Undivided Family (or Joint Hindu Family) is not defined in the
income-tax Act. The term HUF has the same meaning as in Hindu Law. A
Hindu Undivided Family (HUF) consists of all persons lineally descended from
a common ancestor including their wives and unmarried daughters.
• Taxpoint Only those undivided families are covered here, to which Hindu law applies.

1. An HUF is not the creation of a contract. Its membership arises from status.
KEY NOTES

2. Jain and Sikh families are also treated as Hindu undivided family for the purpose of
income-tax Act. However, Muslim undivided family cannot be treated as HUF.
3. Once a family is assessed as Hindu Undivided family, it will continue to be assessed as
such till its partition.

COMPUTATION OF TOTAL INCOME AND TAX LIABILITY OF HUF

There is no specific provision in income-tax Act for computation of total income of HUF.
Total income and tax liability of HUF shall be computed in same manner as in case of an
individual.
Taxpoint:
H & EC As in case of an individual
Residential Status Refer chapter “Residential Status”
Computation of income under various As usual, however, HUF cannot have any income under
heads the head ‘Salaries’
Clubbing of income As usual:
Sec. 64(1) & (1A) are not applicable in case of HUF as it
is specifically applicable to individual Specially refer
Sec. 64
Setoff & Carry forward of losses As usual
Deductions Refer chapter “Deductions & Relief”
Return and Assessment As usual
Advance tax As in case of an individual.

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Following Points shall be considered:

1 Remuneration Any genuine (not excessive) remuneration paid to the Karta for
to Karta: conducting business of the HUF is allowed expenditure in the hands of
the HUF provided such remuneration is paid under a Bonafide agreement
and is in the interest of the family business.
2 Personal income Income of the member of HUF acquired in his personal capacity shall not
of the be taxable in the hands of HUF.
members: Taxpoint: ‘Stridhan’ is an absolute property of a women, income there
from is not taxable in the hand of HUF.
3 Income from Though the impartible estate belongs to the family, income arising there
impartible from is taxable in the hands of the holder of the ‘estate’ and not in the
estate hands of the HUF.

7. Illustration
Ram (59 years) and his two brothers (Ramesh (57 years) and Somesh (50 years) are engaged in
family business of cultivation of wheat. Last year they had losses to the extent of Rs. 12,000 but
this year, due to good season the Business earned a Profit of Rs. 2,20,000.

The family owns a house property, the municipal valuation of which is Rs. 280000 and the market
rent of similar property is Rs. 2,85,000. The standard rent as per Rent Control Act is Rs. 3,50,000.
The family pays Rs. 48,000 for municipal taxes during the previous year out of which Rs. 20,000
pertains to earlier year which could not be paid due to business loss. Interest on capital borrowed
for repaying original loan for construction of house Rs. 75,000. Further, the rental income of the
property is Rs. 3,10,000.

Dividend received from Indian Company X Ltd. Rs. 12,000.

Interest received on listed debentures Rs.8,10,000 (net).
Compute the total income and Tax liability of the family X (HUF) for the Assessment year 2025-
26.
Option 1: Assessee has opted to pay tax as per the regular scheme.
Option 2: Assessee is paying tax as per Section 115BAC.

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ASSESSMENT OF CO-OPERATIVE SOCIETY

• Meaning Co-operative society means a co-operative society registered under

the Co-operative Societies Act, 1912 or under any other law for the
time being in force in any State for the registration of co-operative
societies [Section 2(19)]
• Computation of Gross total income of a co-operative society is computed under
Total Income different head as per the various provisions of the Act. Further,
deduction u/s. 80G, 80GGA, 80GGC, 80IA, 80IB, 80IC, 80JJA and 80P
are available to a co-operative society.
• Deduction u/s. Applicable to A co-operative society.
80P in respect of
co-operative
societies

Quantum of Deduction
Income derived from Deduction
Specified Activities 100% of income from such activities
Activity other than specified activities Assessee is a consumers’ co-operative
Society Rs. 100000
In any other case Rs. 50000
Following income of any co-operative society is also exempt:
• Interest or dividends from its investments with any other co-operative society.
• Letting of godowns or warehouses for storage, processing of facilitating the marketing of
commodities, and
• Interest on securities or any income from house property, provided certain conditions are
satisfied.
• Taxpoint: The deduction u/s. 80P shall be allowed only if such deduction is claimed in the
return of income.

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SPECIFIED ACTIVITIES

a Banking business or providing credit facilities to its members, or However, w.e.f. 2007-08,
deduction shall not be available to any co-operative bank other than a primary agricultural
credit society or a primary co-operative and rural development bank.
b Cottage Industry; or
c Marketing of the agricultural produce grown by its members; or
d Purchase of agricultural implements, seeds, livestock or other articles intended for
agriculture for the purpose of supplying them to its members; or
e Processing, without the aid of power, of the agricultural produce of its members, or
Collective disposal of the labour of its members; or
f Supplying milk, oilseeds, fruits or vegetables raised or grown by its members to (only in the
case of a primary society).
g A federal co-operative society, being a society engaged in the business of supplying milk,
oilseeds, fruits or vegetables, or
h The Government or a local authority; or
i A Government company or corporation established by or under a Central, State or Provincial
Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or
vegetables, as the case may be, to the public)

CONDITIONS TO BE SATISFIED

a Co-operative society must not be:

1 A housing society; or
2 An urban consumers’ society’ or
3 A society carrying on transport business, or
4 A society engaged in any manufacturing operations with the aid of power.
b Gross total income of such society does not exceed Rs. 20,000.

a Consumers’ co-operative society means a society for the benefit of the consumers.
Urban consumers’ co-operative society means a society for the benefit of the
KEY NOTES

b consumers within the limits of a municipal corporation, municipality, municipal

committee, notified area, committee, town area or cantonment.
c In case, where the assessee is also entitled to deduction u/s. 80-IA, the deduction
u/s. 80P shall be allowed after allowing deduction under aforesaid section.

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Rates of Tax: A co-operative society is liable to pay tax at the following rate:
Income Rate of Tax
Rs. 10,000 10%
Next Rs. 10,000 20%
Balance Income 30%
Tax is further enhanced by H & EC @ 4%.

8. Illustration
X consumer co-operative society furnishes the following particulars of its income in respect of
financial year ended on 31/03/2025, find tax liability of the co-operative society –
Amount
Income from business 2,50,000
Interest received on company deposits 50,000
Interest on deposit with banks 10,000
Income from letting of godown for storage of commodities (computed) 20,000

ASSESSMENT OF AOP/BOI

In case of AOP/BOI income will be determined as under:

1 If any, salary, bonus, commission or remuneration is paid by AOP/BOI to its members, it
will not be deductible [Sec. 40(ba)]
2 Similarly any interest paid by AOP/BOI to its members on loan, capital or borrowings by
whatever name called is not deductible. [Sec. 40(ba)]
3 Total income of the AOP/BOI is taxable either.
• At the rate applicable to an Individual or
• At the maximum marginal rate or (30% + SC + H & EC)
• At the rate higher than maximum marginal rate. (40% + SC + H & EC)

AN AOP CONSISTING OF ONLY COMPANIES AS MEMBERS

a In case of an AOP consisting of only companies as members, whose total income > ₹ 50 lakhs
but is ≤ ₹ 1 crore Where the total income exceeds ₹ 50 lakhs but does not exceed ₹ 1 crore,
surcharge is payable at the rate of 10%.
b In case of an AOP consisting of only companies as members, whose total income > ₹ 1 crore
Where the total income exceeds ₹ 1 crore, surcharge is payable at the rate of 15% (FA.22).

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c In case of AOP (consisting of only companies as its member), the maximum of rate of
surcharge is 15% for AY 2024 & 24 (FA 22).

a Rent paid by AOP/BOI to its members for use of members premises for its business
is allowed subject to 40A(2).
b Commission paid by an AOP to the proprietor business of one of its member is not
allowed as deduction.
c City compensatory allowance paid to member is not allowed as deduction.
d Interest paid by AOP/BOI to members or vice versa.
KEY NOTES

• When interest is paid by the AOP/BOI to any of its member who has paid interest to
the
• AOP/BOI, the amount of interest to be disallowed shall be limited to the amount by
which the payment of interest by AOP/BOI to the member exceeds the payment of
interest by the member to the AOP/BOI.
• Where an individual is a member in an AOP/BOI on behalf or for the benefit of any
other person interest paid by the AOP/BOI to such member or by such individual to
AOP/BOI, otherwise than as member in a representative capacity is not taken into
account, for the purpose of section 40(ba).

9. Illustration
AOP/BOI pays interest of Rs. 6000 to its member Zebra on his loan/capital account and Zebra
pays interest of Rs. 9000 to AOP/BOI on his drawings. Find the amount disallowed & income of
AOP/BOI.

10. Illustration
AOP/BOI pays interest of Rs. 6000 to its member Zebra on his loan/capital account and Y pays
interest of Rs. 9000 to AOP/BOI on his drawings. Find the amount disallowed & income of
AOP/BOI.

COMPUTATION OF TAX OF AOP/BOI:

AOP/BOI When none of the members is When one or more partners is a

a foreign company foreign company
Tax incidence Tax incidence Tax incidence Tax incidence
On AOP/BOI On members On AOP/BOI On members
A) When shares of
members are
determinates

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A1) When none of Income is Share of Share of Share of member is

the members has taxable as if members shall foreign not taxable.
income exceeding the AOP/BOI is be Included in company Shall
maximum amount An Individual taxable income be taxable at
chargeable to tax of members the rate
and if applicable to
AOP/BOI has the company
paid tax then (40%) & the
the members remaining
can claim income is
rebate under taxable at the
section 86. maximum
marginal rate
A2) When one or Income will be Share of As given As given above.
more members has taxed at the member is not above.
income exceeding the maximum taxable.
maximum amount marginal rate.
chargeable to tax
B) When shares of As given above As given above At the rate As given above.
members are applicable to
indeterminate the foreign
company

Rebate u/s 86 is calculated by applying the following steps -

Step 1 Calculate total income of member including share from AOP
Step 2 Calculate tax liability after surcharge and education cess
Step 3 Calculate average rate of tax
Average of tax = Tax liability after surcharge and cess * 100
Total income
Step 4 Rebate u/s 86 = Share from AOP * Average of tax

11. Illustration
DP ltd, D and P are the three partners of AOP having profit sharing ratio of 4.5:2.5:3. Details of
income provided are as follows:
Rs.
DP ltd (Foreign Company) 12 cr
D 35000
P 18000
Taxable income of AOP 235000 (Including LTCG Rs75000)

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You are required to compute tax liability of AOP for AY 2025-26

12. Illustration
DD, D and P are the three partners of AOP having profit sharing ratio of 2:2:1. Details of income
provided are as follows:
Rs.
DD 100000
D 90000
P 110000

Total income of AOP 540000 (Including LTCG Rs. 120000 and STCG under 111A Rs. 80000)
You are required to compute tax liability of AOP for AY 2025-26.

13. Illustration
X and Y, being members of an AOP with equal ratio, furnishes the following details, compute tax
liability of AOP and members:
Profit and loss account for the year ended 31/03/25
Particular Amount Particular Amount
Bonus to employee 5,000 Gross profit 60,000
Other expenses 14,000 Short term capital gain 6,000
Salary to -
X 5,000
Y 5,000
Interest on capital @ 15%
X 5,000
Y 7,000
Depreciation u/s 32 10,000
Net profit 15,000
66,000 66,000
Additional information
1. Other expenses include expenditure of Rs. 4,000, which is disallowed u/s 37.
2. Other personal income of X & Y

X Y
Interest exempt u/s 10(15) Rs. 5,000 Rs. 20,000
Interest on loan Rs. 25,000 Rs. 4,49,000
Brought forward loss from house property Rs. 25,000 Rs. 10,000

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ASSESSMENT OF TRUST

• Charitable trust: PUBLIC CHARITABLE & RELIGIOUS TRUSTS

WHAT IS A TRUST

A trust is an obligation annexed to the ownership of property and arising out of confidence
reposed in and accepted by the owner or declared and accepted by him, for the benefit of
another and the owner.

ESSENTIALS OF A TRUST

Author The person who reposes or declares the confidence

Trustee The person who accepts the confidence
Beneficiaries The person(s) for whose benefit confidence is accepted.
Trust property The subject matter of the trust.
Instrument of the trust Trust Deed.

CHARITABLE PURPOSE: Sec 2(15)

It is defined to include
1 Relief of the poor
2 Education
3 Medical relief
4 Yoga Development
5 Preservation of environment (including watersheds, forests and wildlife) and
preservation of monuments or places or objects of artistic or historic interest
• The word ‘general’ means pertaining to whole class.
• The word ‘Public’ means a body of people at large.
• The word ‘Utility’ means usefulness.
6 The advancement of any other object of general public utility (not a business)

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Trust carrying General Public utility but charging fee

• Advancement of any other object of general public utility shall not be a charitable purpose,
• If it involves the carrying on of any activity in the nature of trade, commerce or business,
or any activity of rendering any service in relation to any trade, commerce or business,
• For a case or fee or any other consideration,
• Irrespective of the nature of use or application, or relation, of the income from such
activity,
• Unless –
i Such activity is undertaken in the course of actual carrying out of such advancement
of any other object of general public utility; and
ii The aggregate receipt from such activity or activities during the previous year, do
not exceed 20% of the total receipt, of the trust or institution undertaking such
activity or activities, of that previous year.

At a glance view of charitable trust:

Trust engaged in the Charitable Condition
object of trust or
not
Relief of the poor Yes None
Education development Yes None
Medical Relief Yes None
Preservation of Yes None
environment
Preservation of
monuments or places or Yes None
objects of artistic or
historic interest
Any other object of Yes It should not carry on any activity in the nature of
general public utility trade, commerce or business, or any activity of
rendering any service in relation to any trade, or
business for a cess or fee or any other consideration
in excess of 20% of receipt

RELIGIOUS PURPOSE

Religious purpose is not defined under the Act. The expression should be taken to include the
advancement, support or propagation of a religion and its tenets (principles or beliefs). It may be
noted that charitable trust may always be public, while a religious trust may be private or public.

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ESSENTIAL CONDITIONS SEC. 11

1 The property should be held under a trust or other legal obligation.

2 The property should be held wholly for charitable or religious purposes.
3 In the case of a charitable trust created on or after 1/4/1962, no part of its income
should ensure directly for the benefit of any particular community or caste. (Exception
are scheduled castes, Scheduled tribes, women and children).
4 In the case of a charitable / religious trust created on or after 1/4/1962, no part of the
income should ensure or utilized directly or indirectly for the benefit of the settlor or
other specified persons.
5 85% of the income shall be applied for charitable or religious purpose or accumulated or
set apart should be invested or deposited in the forms or modes specified in sub-section
(5).
6 The income is to be applied to charitable or religious purposes within India. Exception
is provided in certain circumstances u/s 11(1)(c).
a. Where trust is created on or after 1/4/1952, income can be applied for charitable
purposes outside India which tends to promote international welfare in which India is
interested, or
b. Where trust is created before the 1/4/1952, the income can be applied for such
charitable purposes outside India as provided in the trust deed.
7 If the total income of a trust / institution (without excluding income exempt under section
11 and section 12) exceeds the maximum amount not chargeable to tax, the account of the
trust / institution is required to be audited. With effect from the assessment year 2021
– 2022, the audit report in Form No. 10B shall be uploaded one month prior to the due date
of submission of return of income (if the due date of submission of return of income is
October 31 of the assessment year, audit report should be uploaded on or before
September 30 of the assessment year.
8 Voluntary contributions shall be deemed to be income derived from property held under
trust unless they are made with a specific direction that they shall from part of the corpus
of the trust.
9 Where any income is required to be applied or accumulated or set apart for application,
then, deduction or depreciation will not be allowed in respect of any asset which has been
claimed as application of income under this section in PY.
10 Where a trust or an institution has been granted registration for purposes of availing
exemption under section 11, and the registration is in force for a previous year, then such
trust or institution cannot claim any exemption under any provision of section 10 (other
than that relating to

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a Exemption of agricultural income and exemption under section 10(23C) (applicable

from the assessment year 2016 – 17) and
b Exemption under section 10(46) (applicable from October 1, 2021) for that previous
year.
Moreover, registration for the purpose of section 11 shall become inoperative from the
date on which the trust or institution is approved under section 10(23C) / (46) or October
1, 2022, whichever is later. But in such a case, the trust / institution may apply to get its
registration operative under section 12AB and on doing so, the approval under section
10(23C) / (46) to such trust or institution shall cease to have any effect from the date on
which the said registration becomes operative and thereafter, it shall not be entitled to
exemption under section 10(23C) / (46).

COMPUTATION OF TRUST INCOME (EXPLANATION NO 1 & 2)

FOR THE PY 21 – 22

(i) Income from properties held under trust 20,00,000

(ii) Voluntary contributions (other than corpus donations) 20,00,000
TOTAL INCOME OF THE TRUST 40,00,000
Less: 15% accumulated or set apart to be utilized for charitable or religious 6,00,000
purposes in India later on.
Balance 85% to be applied for charitable/ religious purpose during the PY 34,00,000
Less: Amount actually applied for the above purposes during the PY 8,00,000
(i) Option 1: (Income not realized in the PY) 6,00,000
Where the whole or any part of the income has not been received during the PY,
the trust has exercised the option to apply such income either during the PY in
which it is received or during the immediately following PY.
(ii) Option 2: (Any other reason) 4,00,000
Where the income could not be applied during the PY in which it was derived
for any other reason, the trust has exercised the option to applied the same
in the immediately following PY
(iii) Option 3: (Accumulation for specific purpose) 10,00,000
Trust or institution can exercise the option is writing before the due date
for furnishing the return of income, to accumulate or set apart either the
whole or part of its income for future application. (maximum period is < = 5
years)
Conditions for accumulation
Such person furnishes a statement in the prescribed form and in the
prescribed manner to the Assessing Officer, stating the purpose for which

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the income is being accumulated or set apart and the period for which the
income is to be accumulated or set apart, which shall be<= 5 years;
The money so accumulated or set apart is invested or deposited in the forms
or modes specified in section 11(5);
The statement referred to in clause (a) is furnished on or before the due date
specified u/s 139 for furnishing the return of income for the previous year:
Provided that in computing the period of 5 years referred to in clause (a), the
period during which the income could not be applied for the purpose for which it
is so accumulated or set apart, due to an order or injection of any court, shall be
excluded.
As per sec 139(1) no exemption will be allowed in the statement if ROI are not
filed before the due date of furnishing ROI u/s 139(1)
Balance, if any, is taxable in the hands of the trust or Institution 6,00,000

Option 1 The unutilized amount shall be taxable as the income of the PY immediately following
the PY in which the amount is received.
If Rs. 100 lakhs is received in PY 24-25, it has to be utilized in PY 24-25 or 25-26,
otherwise the utilized amount shall become taxable in PY 25-26.
Option 2 The unutilized amount shall be taxable as the income of the PY immediately following
the PY in which the option was exercised. Rs. 50 lakhs shall be used in the PY 25-26,
otherwise the unutilized amount shall become taxable in the PY 25-26.
Option 3 The unutilized amount shall be chargeable as income of the FY immediately following
the expiry of accumulation period. However, if the non-utilization is due to some
unavoidable circumstances then the AO may, on application allow such income to be
applied for such other charitable/ religious purposes in India as are in conformity
with the objects of the trust/ institution.
Provided that the Assessing Officer shall not allow application of such income by
way of payment or credit to other charitable trusts.
However in case the trust or institution is dissolved, the Assessing Officer may allow
application of such income by way of payment or credit to other charitable trusts in
the year in which such trust or institution was dissolved.

APPLICATION OF INCOME

What is considered as application of income: The following important points should be noted
for application of income:
1 Whenever any loan, taken to fulfil one of the objects of the trust, is repaid then it shall be
taken as application of income.

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In the case of society or charitable trust, with the object of providing free or concessional
2 education to students, advances of any loan to the students for higher studies, it amounts
to application of income. On return of such loan, such amount will be taken as income of the
trust.
3 Application of the amount can be for revenue or capital purpose.
4 Any tax paid out of the current year’s income shall be taken as application for charitable
purpose.
5 Donation given by the trust is an application of income. However it should not be given with
a specific direction that is shall form part of corpus of the other trust.
Amendment:
The Scope of above provision has been extended with effect from the assessment year
2022 – 2023. After this amendment, exemption under section 11 will not be available
pertaining to corpus donation if the following conditions are satisfied:
a Corpus donation is given by an entity covered by section 12AA;
b Corpus donation is given voluntarily with a specific direction that it shall form part of
the corpus of the recipient, and
c Corpus donation is given to an entity covered by section 10(23C)(iv) / (v) / (vi) / (via)
or to a trust registered under section 12AA.
Note: For calculating “application” of income if payment exceeding Rs. 10,000 is made in
cash or by bearer cheque, such payment will be disallowed from the AY 22 – 23. Likewise, if
tax is deductible but not deducted and payment is made to a resident, 30% of such payment
will be disallowed while calculating “application” of income for the AY 22 – 23 (or any
subsequent year).

FORMS OR MODES INVESTMENT SEC. 11(5)

1 Investment in Government savings certificates•;

2 Deposit in any Post Office Savings Bank Account;
3 Deposit in any account with any scheduled bank or a co-operative society engaged in
carrying on the business of banking (including a co-operative land mortgage bank or a co-
operative land development bank);
4 Investment in any Central Government or State Government securities;
5 Investment in units of the Unit Trust of India ;
6 Investment in debentures" of any corporate body, the principal whereof and the interest
whereon are guaranteed by the Central or a State Government ;
7 Immovable property;

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8 Deposits with or investment in any bonds issued by any financial corporation engaged in
providing long-term funds for industrial development in India, if the corporation is eligible
for deduction under section 36(1)(viii) ;
9 Deposits with or investment in any bonds issued by any public company carrying on the
business of providing long-term finance for construction or purchase of house in India for
residential purposes, if the company is eligible for deduction under section 36(1)(viii);
10 Deposits with Industrial Development Bank of India;
11 Any other prescribed form or mode of investment"; and

12 Deposit with or investment in any bonds issued by a public company formed and registered
in the main object of carrying on the business of providing long-term finance for urban
infrastructure in India

13 Any other mode of Investment or Deposits [Rule 17C]

TRANSFER OF CAPITAL ASSET

Exemption of Capital Gain arising on transfer of Capital Asset:

Where a capital asset, held wholly for charitable or religious purposes, is transferred
Amount invested for acquiring another Amount of exemption
capital asset to be so held
Whole of the net sale consideration Whole capital gain
Part of the net sale consideration Amount invested in new asset – cost of the
transferred asset
Ex: if an asset costing 2,00,000 is transferred for 8,00,000: Capital Gain is Rs. 6,00,000.
Now if new asset is acquired at cost of Rs. 8,00,000 or more, the whole capital gain shall be
exempt.
However if new asset is acquired at cost of Rs. 6,40,000/- only then exemption will be Rs.
4,40,000/- (i.e. Rs. 6,40,000 – Rs. 2,00,000).

FORFEITURE OF EXEMPTION SEC. 13

No exemption under section 11 shall be provided to any income of a religious or charitable

trust in the following ceases:
1 If the benefit of income or part of the income arises or is used or applied directly or
Indirectly for the benefit of any person referred to in Section 13(3). Such person is
referred to as ‘interested persons’. [In this case the registration u/s 12AA can also be
cancelled by the commissioner after giving opportunity of being heard to the trustee].

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2 If the funds of the trust are invested/ deposited in any manner otherwise that as specified
U/S 11(5).
3 Similarly, any anonymous donation referred to in section 115BBC shall not be eligible for
Exemption u/s 11.

PERSONS REFERRED TO IN SECTION 13(3)

a The author of the trust or the founder of the institution;

b Any person who has made a substantial contribution to the trust or institution that is to say,
any person whose total contribution at the end of the relevant previous year exceeds Rs.
50,000/-;
c Where such author, founder or person is a Hindu Undivided Family a member of the family;
d Any trustee of the trust or manager (by whatever name called) of the institution.
e Any relative of any such author, founder person, member, trustee or manager aforesaid;
f Any concern in which any of the persons referred to in clauses (a), (b), (c), (d) and (e) has a
substantial interest.
Managing of relative: relative, in relation to an individual, means –
a Spouse of the individual;
b Brother or sister of the individual;
c Brother or sister of the spouse of the individual;
d Any lineal ascendant or descendent of the individual;
e Any lineal ascendant or descendent of spouse of the individual;
f Spouse of a person referred to in sub – clause (ii), (iii), (iv), and (v);
Any lineal descendant of a brother or sister of either the individual or spouse of the individual.

REGISTRATION OF TRUSTS

The provisions of Sections 11 and 12 shall not apply in relation to any trust or institution
unless the following conditions are fulfilled:
1 The person in receipt of the income has made an application for registration of the trust
or institution in the prescribed form and manner to the Principal Commissioner or
Commissioner and such trust or institution is registered under section 12AA;
2 the person in receipt of the income has made an application for registration of the trust
or institution, and subsequently, it has adopted or undertaken modifications of the objects
which do not conform to the conditions of registration, in the prescribed form and manner,
within a period of 30 days from the date of said adoption or modification, to the Principal

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Commissioner or Commissioner and such trust or institution is registered under section

12AA;
3 Notwithstanding anything contained above, the person in receipt of the income has made
an application in the prescribed form and manner to the Principal Commissioner or
Commissioner, for registration of the trust or institution:
i where the trust or institution is registered under section 12A [as it stood immediately
before its amendment by the Finance (No. 2) Act, 1996 or under section 12AA, [as it
stood immediately before its amendment by the Finance Act, 2020] within three
months from the date on which this clause has come into force;
ii where the trust or institution is registered under section 12AB and the period of the
said registration is due to expire, at least six months prior to expiry of the said
period;
iii where the trust or institution has been provisionally registered under section 12AB,
at least six months prior to expiry of period of the provisional registration or within
six months of commencement of its activities, whichever is earlier;
iv where registration of the trust or institution has become inoperative due to the first
proviso to sub- section (7) of section 11, at least six months prior to the
commencement of the assessment year from which the said registration is sought to
be made operative;
v where the trust or institution has adopted or undertaken modifications of the objects
which do not conform to the conditions of registration, within a period of thirty days
from the date of the said adoption or modification;
vi in any other case, at least one month prior to the commencement of the previous year
relevant to the assessment year from which the said registration is sought, and such
trust or institution is registered under section 12AB; [Clause (ac) inserted by Finance
Act, 2020]
4 Where the total income of the trust or institution as computed under this Act without
giving effect to the provisions of section 11 and section 12 exceeds the maximum amount
which is not chargeable to income- tax in any previous year, the accounts of the trust or
institution for that year have been audited by an accountant as defined in the Explanation
to sub-section (2) of section 288 and the person in receipt of the income furnishes along
with the return of income for the relevant assessment year the report of such audit in the
prescribed form duly signed and verified by such accountant and setting forth such
particulars as may be prescribed.
5 The person in receipt of the income has furnished the return of income for the previous
year in accordance with the provisions of sub-section (4A) of section 139, within the time
allowed under that section.

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The Where an application has been made, the provisions of sections 11 and 12 shall apply in
relation to the income of such trust or institution from the assessment year immediately
following the financial year in which such application is made.
[Provided that the provisions of sections 11 and 12 shall apply to a trust or institution, where
the application is made under—
a sub-clause (i) of clause (ac) of sub-section (1), from the assessment year from which
such trust or institution was earlier granted registration;
b sub-clause (iii) of clause (ac) of sub-section (1), from the first of the assessment
years for which it was provisionally registered: [Inserted by Finance Act, 2020]
Provided that where registration has been granted to the trust or institution under section
12AA or section 12AB, then, the provisions of sections 11 and 12 shall apply in respect of any
income derived from property held under trust of any assessment year preceding the aforesaid
assessment year, for which assessment proceedings are pending before the Assessing Officer
as on the date of such registration and the objects and activities of such trust or institution
remain the same for such preceding assessment year:
Provided further that no action under section 147 shall be taken by the Assessing Officer in
case of such trust or institution for any assessment year preceding the aforesaid assessment
year only for non-registration of such trust or institution for the said assessment year.
Rule 17A of the Income-tax Rules, 1962 provides that an application for registration of a trust
shall be made in duplicate in Form No. 10A and shall be accompanied by the following documents:
i where the trust is created or the institution is established under an instrument, the
instrument in original together with a copy thereof and where it is created otherwise
than under an instrument, the document evidencing the creation of the trust or the
establishment of the institution together with one copy thereof. The Principal
Commissioner or Commissioner may accept a certified copy instead of the original
where the original cannot be conveniently produced.
ii where the trust is in existence during any year or years prior to the financial year in
which the application for registration is made, two copies each of the accounts of the
trust for the three years (immediately) preceding the years in which the application
for which the accounts have been made-up.

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PROCEDURE FOR REGISTRATION [SECTION 12AA]

1 Nothing contained in this section shall apply on or after the 1st day of June, 2021.
[Inserted by Finance Act, 2020] In terms of Section 12AA, on receipt of application for
registration, the Principal Commissioner or Commissioner shall call for such documents or
information from the trust or institution as he thinks necessary in order to satisfy himself
about the genuineness of activities of the trust or institution and may also make such
inquiries as he may deem necessary in this behalf. He has to either grant or decline
registration within six months from the end of the month in which the application was
received. If no order is passed within the said six months then it shall be deemed that the
trust has been registered.
2 Where the Principal Commissioner or Commissioner is satisfied that the activities of the
trust or institution are not genuine or are not carried out in accordance with the objects
of the trust or institution then the commissioner may pass an order in writing for the
cancellation of registration granted under section 12AA or under section 12A after giving
an opportunity of being heard.
3 Further, where a trust or an institution has been granted registration or has obtained
registration at any time under section 12A and subsequently it is noticed that the activities
of the trust or the institution are being carried out in a manner that the provisions of
sections 11 and 12 do not apply to exclude either whole or any part of the income of such
trust or institution due to operation of sub-section (1) of section 13, then, the Principal
Commissioner or the Commissioner may by an order in writing cancel the registration of
such trust or institution.
4 However the registration shall not be cancelled under this sub-section, if the trust or
institution proves that there was a reasonable cause for the activities to be carried out in
the said manner.

PROCEDURE FOR FRESH REGISTRATION [SECTION 12AB]

1 The Principal Commissioner or Commissioner, on receipt of an application made under clause

(ac) of sub- section (1) of section 12A, shall, -
a where the application is made under sub-clause (i) of the said clause, pass an order in
writing registering the trust or institution for a period of five years;
b where the application is made under sub-clause (ii) or sub-clause (iii) or sub-clause (iv)
or sub- clause of the said clause,-
i call for such documents or information from the trust or institution or make
such inquiries as he thinks necessary in order to satisfy himself about—

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• the genuineness of activities of the trust or institution; and

• the compliance of such requirements of any other law for the time being in
force by the trust or institution as are material for the purpose of
achieving its objects; and
ii after satisfying himself about the objects of the trust or institution and the
genuineness of its activities under item (A), and compliance of the requirements
under item (B), of sub- clause (i),-
• pass an order in writing registering the trust or institution for a period of
five years;
• if he is not so satisfied, pass an order in writing rejecting such application
and also cancelling its registration after affording a reasonable opportunity
of being heard;
• where the application is made under sub-clause (vi) of the said clause, pass
an order in writing provisionally registering the trust or institution for a
period of three years from the assessment year from which the
registration is sought, and send a copy of such order to the trust or
institution.
2 All applications, pending before the Principal Commissioner or Commissioner on which no
order has been passed under clause (b) of sub-section (1) of section 12AA before the date
on which this section has come into force, shall be deemed to be an application made under
sub-clause (vi) of clause (ac) of sub- section (1) of section 12A on that date.
3 The order under clause (a), sub-clause (ii) of clause (b) and clause (c), of sub-section (1)
shall be passed, in such form and manner as may be prescribed, before expiry of the period
of three months, six months and one month, respectively, calculated from the end of the
month in which the application was received.
4 Where registration of a trust or an institution has been granted under clause (a) or clause
(b) of sub- section and subsequently, the Principal Commissioner or Commissioner is
satisfied that the activities of such trust or institution are not genuine or are not being
carried out in accordance with the objects of the trust or institution, as the case may be,
he shall pass an order in writing cancelling the registration of such trust or institution after
affording a reasonable opportunity of being heard.
5 Without prejudice to the provisions of sub-section (4), where registration of a trust or an
institution has been granted under clause (a) or clause (b) of sub-section (1) and
subsequently, it is noticed that—
a the activities of the trust or the institution are being carried out in a manner that
the provisions of sections 11 and 12 do not apply to exclude either whole or any part
of the income of such trust or institution due to operation of sub-section (1) of section
13; or

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b the trust or institution has not complied with the requirement of any other law, as
referred to in item
[Section 12AB Inserted by Finance Act, 2020]
Levy of tax where the charitable institution ceases to exist or converts into a non-
charitable organization
1 Sections 11 and 12 of the Act provide for exemption to trusts or institutions in respect of
income derived from property held under trust and voluntary contributions, subject to
various conditions contained in the said sections. The primary condition for grant of
exemption is that the income derived from property held under trust should be applied for
the charitable purposes, and where such income cannot be applied during the previous year,
it has to be accumulated and invested in the modes prescribed and applied for such
purposes in accordance with various conditions provided in the section. If the accumulated
income is not applied in accordance with the conditions provided in the said section within
a specified time, then such income is deemed to be taxable income of the trust or the
institution. Section 12AA provides for registration of the trust or institution which entitles
them to be able to get the benefit of sections 11 and 12. It also provides the circumstances
under which the registration can be cancelled. Section 13 of the Act provides for the
circumstances under which exemption under section 11 or 12 in respect of whole or part of
income would not be available to a trust or institution.
2 A society or a company or a trust or an institution carrying on charitable activity may
voluntarily wind up its activities and dissolve or may also merge with any other charitable
or non-charitable institution, or it may convert into a non-charitable organization. In such
a situation, the existing law does not provide any clarity as to how the assets of such a
charitable institution shall be dealt with.
3 In order to ensure that the intended purpose of exemption availed by trust or institution
is achieved, a new chapter has been introduced that provides for levy of additional income-
tax in case of conversion into, or merger with, any non-charitable form or on transfer of
assets of a charitable organization on its dissolution to a non- charitable institution. The
elements of the regime are under:
i The accretion in income (accreted income) of the trust or institution shall be taxable
on conversion of trust or institution into a form not eligible for registration u/s 12AA
or on merger into an entity not having similar objects and registered under section
12AA or on non-distribution of assets on dissolution to any charitable institution
registered u/s 12AA or approved under section 10(23C) within a period of twelve
months from dissolution.
ii Accreted income shall be amount of aggregate of total assets as reduced by the
liability as on the specified date. The method of valuation is proposed to be prescribed
in rules. The asset and the liability of the charitable organisation which have been

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transferred to another charitable organisation within specified time will be excluded

while calculating accreted income.
iii The taxation of accreted income shall be at the maximum marginal rate.
iv This levy shall be in addition to any income chargeable to tax in the hands of the
entity.
v This tax shall be final tax for which no credit can be taken by the trust or institution
or any other person, and like any other additional tax, it shall be leviable even if the
trust or institution does not have any other income chargeable to tax in the relevant
previous year.
vi In case of failure of payment of tax within the prescribed time, a simple interest @
1% per month or part of it shall be applicable for the period of non-payment.
vii For the purpose of recovery of tax and interest, the principal officer or the trustee
and the trust or the institution shall be deemed to be assessee in default and all
provisions related to the recovery of taxes shall apply. Further, the recipient of
assets of the trust, which is not a charitable organisation, shall also be liable to be
held as assessee in default in case of non-payment of tax and interest. However, the
recipient’s liability shall be limited to the extent of the assets received.

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POLYTICAL PARTY

The term ‘Political Party’ is an association or body of Individual citizens of India registered
under the “Representation of the People Act 1961”.
Returns of Income: Political Parties are under obligation to file their Return of Income u/s
139(4B).

CONDITIONS TO CLAIM EXEMPTION BY A POLITICAL PARTY

a The political party keeps and maintains such books of accounts and other documents, as it
would enable the Assessing Officer to property deduce its income there from.
b The political party keeps and maintains a record of each voluntary contribution in excess of
Rs. 20,000 and of the names and address of persons who have made such contributions/
c The accounts of the political party are audited by a chartered Accountant
d No donation > Rs. 2,000/- is received by such political party otherwise than by an account
payee cheque drawn on a bank an account payee bank draft or use of electronic clearing
system through a bank account or through electoral bond.
e In order to promote to digital transactions, the receipt through other notified electronics
modes, (i.e. e-wallets, etc.) have been proposed to be included in the list of acceptable mode
of payment.

CONDITIONS TO CLAIM EXEMPTION BY A POLITICAL PARTY

Incomes exempt from tax:

• Income from house property
• Capital Gains
• Income from Other Sources
• Income by way of Voluntary Contributions.

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INCOME OF ELECTORAL TRUST SEC. 13B

Entire income of an electoral trust is exempt if:

The trust distributes to political parties at least 95% of aggregate donations received by it
during the said previous year along with brought forward surplus. It follows the rules as may be
prescribed by the Central Government.

EQUALISATION LEVY

• The rapid growth of the information and communication technology has resulted in
substantial expansion of the supply and procurement of digital goods and services globally,
including India, and the digital economy is growing at approximately 10% per annum, faster
than the economy as a whole.
• These new business models have brought along with themselves, challenges. The typical
issues / concerns around taxation vis-à-vis e-commerce are:
• Difficulty in characterizing the nature of payment and establishing a link / nexus between
taxable transaction, activity and taxing jurisdiction the difficulty in locating the
transaction, activity and identifying the tax payer
• The Organization for Economic Cooperation and Development (OECD), has recommended
several options to tackle these challenges.
• In order to address these challenges, Chapter VIII of the Finance Act, 2016 titled
“Equalization Levy” provides for an equalization levy of 6% on the amount of consideration
for specified services, received / receivable by a non-resident, not having permanent
establishment in India, from a resident in India, who carries out business / profession, or
from a non-resident who has a permanent establishment in India.

Refer to the table below to understand the various parameters and aspects involved.
Section Subject Provisions
166 Person Every person being a resident in India, who carries out business /
responsible for profession, or a non-resident who has a permanent establishment
deduction of in India shall deduct equalization levy from the amount paid /
equalization levy payable to a non-resident in respect of the specified service
Rate 6% of the amount of consideration for a specified service,
received/ receivable by a non-resident, not having permanent
establishment in India, from a resident in India, who carries out
business/ profession, or from a non-resident who has a permanent
establishment in India, rounded off to the nearest ten rupees

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Threshold Equalization Levy is deductible if the aggregate amount of

consideration for a specified service in a previous year exceeds
INR 100,000
The Equalization Levy so deducted during any calendar month shall
Time-period be paid by every assessee to the credit of the Central Government
by the 7th of following month
Consequence of Any assessee who fails to deduct, would anyway continue to be
failure liable to pay to the credit of the Central Government, the
Equalization Levy by 7th of the following month
167 Furnishing the Every assessee shall, within the time prescribed after the end of
statement the FY, submit a statement in the prescribed Form # 1, on or by
30th June immediately following the FY, setting forth all details for
specified services pertaining to that FY
Revised If the assessee notices omissions / errors / wrong details, he can
Statement furnish a revised statement before the expiry of 2 years from the
end of the FY in which the specified service was provided
Notice by the Where any assessee has failed to file the statement within the
Assessing prescribed time, the A.O. is empowered to issue a notice calling
Officer (A.O.) for the statement and in which case the statement has to be
furnished within 30 days of date of serving of such notice
168 The statement shall be processed, and the amount payable along
with interest if any, shall be computed towards the Equalization
Processing of the Levy. The net amount payable by or refundable to the assessee has
statement to be worked out and an intimation must be served upon the
assessee. However, no intimation is to be sent after the expiry of
one year, from the end of the FY in which the statement is
furnished
169 Rectification of With a view to rectifying a mistake apparent on the record, the
mistake A.O. may amend the intimation and such intimation must be
amended within one year from the end of the FY in which the
intimation sought to be amended was issued
170 Interest on Every assessee who fails to deposit to the credit of the Central
delayed Government, the applicable Equalization Levy, within 7th of the
payments month following the month in which it was deducted, the assessee
shall be liable to pay Interest @ 1% of such levy for every month
/ part of the month of delay
171 Penalty If the assessee fails to deduct the Equalization Levy, in addition
to the Equalization Levy and Interest, penalty equal to the amount
of Equalization Levy that he failed to deduct would be applicable

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If the assessee fails to remit the Equalization Levy so deducted

to the credit of the Government by 7th of the following month, a
penalty of INR 1000 per day would be leviable, subject to a
maximum of the equalization levy that he was to deduct.
172 Penalty for If the assessee fails to furnish the statement within 30th June
delay in of the following FY, or within 30 days of the notice served by the
furnishing the A.O., a penalty of INR 100 per day is leviable on the assesse.
statement
An assessee aggrieved by an order of the A.O., may appeal to the Commissioner of Income Tax
(Appeals) within 30 days of receipt of date of order.
An assessee aggrieved by an order of the Commissioner, may appeal to the Appellate Tribunal
within 60 days of receipt of date of order.
Income from the above activities in the hands of e-commerce operator is exempt under section
10(50), with effect from the assessment year 2021-22. The aforesaid equalisation levy at the
rate of 2 per cent shall not be applicable to consideration received or receivable for e-commerce
supply or services, on or after the August 1, 2024. Consequently, the exemption given to the
aforesaid equalisation levy by section 10(50) will be inapplicable on or after August 1, 2024. In
other words, income arising from e-commerce supply or services made or provided or facilitated
on or after April 1, 2020 but before August 1, 2024 only, shall fall in the ambit of section 10(50).
[FA 24]

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CHAPTER 15 ASSESSMENT PROCEDURE AND INTEREST

FILING OF RETURN

As per provisions of Sec. 139(1), following persons need to file a return of income in the
prescribed form and within the prescribed time.
Section Assessee Size of Income
139(1)(a) A company or a firm Irrespective of size of Income (even where
there is a loss)
139(1)(b) A person (other than an Is required to submit his/its return of income,
individual/ HUF/ AOP/ BOI/ if income exceeds exemption limit
artificial juridical person/
company/ firm)
139(1)(b) Read with sixth proviso Individual/HUF/AOP/BOI/artificial juridical
person is required to submit his/its return of
income, if income [without claiming
deduction under sections 80C to 80U, 54/
54B/ 54D/ 54EC/ 54F/ 54G/ 54GA/ 54GB]
exceeds the amount of exemption limit.
139(1)(b) Read with seventh proviso Any person (other than a company or a firm) who
(applicable with effect from the is not required to furnish the return of income
assessment year 2020-21) under any other provision of section 139(1) and
who during the previous year-
a Has deposited an amount (or aggregate of
the amounts) exceeding Rs. 1 crore in one
(or more) current account(s) in a bank/co-
operative bank; or
b Has incurred expenditure of an (or
aggregate of the amounts) exceeding Rs. 2
lakh for himself (or any other person) for
travel to a foreign country; or
c Has incurred expenditure of an amount (or
aggregate of the amounts) exceeding Rs. 1
lakh towards consumption of electricity; or

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d Has total sales/ turnover/ gross

receipts exceeding Rs. 60 lakh (from a
business)/ Rs. 10 lakh (from a profession); or
e Is subject to TDS/TCS (in aggregate) of
Rs. 25,000 (or more) [Rs. 50,000 (or more)
in the case of senior citizen]; or
f has deposited in one or more savings bank
account (in aggregate) of Rs. 50 lakh (or
more)
139(4A) Trust Must file return if income before exemption u/s.
sec. 11 or 12 exceeds maximum amount not
chargeable to tax.
139(4B) Political party Must file return if GTI before exemption u/s
13A exceeds maximum amount not chargeable to
tax.
139(4C) Scientific research association; Must file return if income before giving effect
News agency; etc. u/s. 10 exceeds maximum amount not chargeable
to tax.
139(4D) Any University/College / other Irrespective of size of Income (even where
institution referred to on Sec. there is a loss)
35(1) (ii) or (iii)

1. Illustration
Whether following assessee is compulsorily required file return of income;
Assessee Taxable Income before deduction Required to file return or
not
Mr. Arnold 500000
Mr. Rock 30000
Fight Club Ltd. 10000
Friends Club Ltd. (-) 20000
• Assessee can file a return of income voluntarily irrespective of its size of income.

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TIME LIMIT FOR FILING RETURN OF INCOME [EXPLANATION 2 TO SEC. 139(1)]

Return should be filed on or before the following due date (of respective assessment year)
Assessee Due date
1. Company
• Where the company is required to furnish a report in Form 3CEB 30th November.
u/s. 92E pertaining to international transaction(s)
• In case of any other company. 31th October
2. Any other assesse
• Where accounts of the assessee are required to be audited 31th October
under any law.
• Where the assesse is a partner in a firm whose accounts are 31th October
required to be audited under any law [or (with effect from the
assessment year 2021-22) the spouse of such partner if the
provisions of section 5A applies to such spouse]
• In any other case. 31st July.

WHEN A RETURN OF LOSS SHOULD BE FILED [SEC. 139(3)]

1. Following assessee need to file return of income irrespective of income or loss.

• A Company.
• A firm, and
• A University College / other institution referred to on Sec. 35(1)(ii) or (iii).
2. An assessee other than above is not compulsorily required to furnish return of loss.
However, the following losses cannot be carried forward if the return of loss is not
submitted within the time allowed u/s. 139(1).
a) Business loss (speculative or otherwise).
b) Capital loss.
c) Loss from the activity of owning and maintaining race horses.
3. Key Notes
a) Loss declared in belated return cannot be carried forward. However, set-off of
losses of current year is not prohibited while computing the total income, even if the
return of loss is filed after the due date.
b) Delay in filing the return of loss may be condoned in certain cases.

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c) Unabsorbed depreciation u/s. 32 and loss under the head “Income from
House Property” can be carried forward even if the loss return is filed after the
due date u/s. 139(1).
d) Although the loss of the current year cannot be carried forward unless the return of
loss is submitted before the due date but the loss of earlier years can be carried
forward if the return of loss of that year was submitted within the due date.

BELATED RETURN [SEC. 139(4)]

Situation If an assessee fails to file return within the time limit allowed u/s. 139(1) or
within the time allowed under a notice issued u/s. 142(1), he can file a belated
return.
Time limit Assessee may file such return before
December 31 of relevant assessment year or the completion of
assessment, whichever is earlier (applicable from the assessment year 2021-
22).
Note However, if an assessee files a belated return, he would be liable to penal
interest u/s. 234A.
Consequences 1 The assessee will be liable for penal interest under section 234A.
of late 2 The assessee shall be liable for late filing fee under section 234F from the
submission assessment year 2018-19 onwards.

2. Illustration
1. What is the time limit under which the assessee can file belated return u/s 139(4)

2. If the return is filed after the completion of assessment but before service of demand
notice, does not return constitute a valid return?

REVISED RETURN [SEC. 139(5)]

1. Situation
If an assessee discovers any omission or wrong statement (Bonafide in nature) in return
originally filed, he can revise his return u/s. 139(5).
2. Conditions to file a revised return
1 Only return filed u/s. 139(1) or in pursuance of a notice u/s. 142(1) can be revised.
Even belated return U/S 139(4) can be revised.

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2 Revised return can be filed only if the assessee discovers any omission or wrong
statement in return originally file in other words, an assessee cannot revise a return
if the omission or error in the original return was pre-known to him.
3. Time limit
Assessee may file such return before
December 31 of relevant assessment year or the completion of assessment,
whichever is earlier (applicable from the assessment year 2021-22).
4. Replacement of original return
Once a revised return is filed, it replaces the original return. This signifies that the revised
return should be complete in itself and not merely an accessory to the original return.
5. Permission
There is no need to seek permission to file a revised return.
6. Revision of revised return
A revised return can again be revised i.e. a second revised return can be filed u/s. 139(5)
for correcting any omission or wrong statement made in the first revised return within such
time (i.e. one year from the whichever is earlier).
7. Revision of loss return

A loss return can be revised.

8. Time limit for assessment in case of revised return
the period of limitation for completion of assessment prescribed u/s. 143(1) will run from
the date of filing of latest revised return.

UPDATED RETURN [SECS. 139(8A), 140B3, 144, 153, 234A, 234B AND 276CC]

Any person may furnish an updated return of his income (or the income of any other person
in respect of which he is assessable under the Act) for the previous year relevant to such
assessment year. The provisions given below pertaining to updated return are applicable from
April 1, 2024 -
1 Time limit -
Updated return under section 139(8A) can be submitted at any time within 24 months
from the end of the relevant assessment year. For instance, updated return for the
assessment year 2024-25 can be submitted on or before March 31, 2026.
2 Who can submit updated return -
Updated return can be submitted by any person whether (or not) he has furnished a
return under section 139(1)/(4)/(5) for an assessment year (herein referred to as the
relevant assessment year).

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Other points -
The following points should be noted
a If a person has sustained a loss for any previous year and he has already submitted
return of loss for that year within due date [as given in section 139(1)], he can furnish
an updated return for that year under section 139(8A) where such return is a return of
income.
b If as a result of submitting updated return under section 139(8A), the quantum of
carried forward loss (or unabsorbed depreciation or MAT/AMT credit) is to be reduced
for any subsequent year, then an updated return shall be furnished for each such
subsequent year.
3 When updated return cannot be submitted
In the following cases updated return cannot be submitted
a If updated return is a return of a loss.
b If updated return has the effect of decreasing the total tax liability determined on the
basis of return furnished under section 139(1)/(4)/(5) or results in refund or increases
the refund due on the basis of return furnished under section 139(1)/(4)/(5), of such
person for the relevant assessment year.
c A person shall not be eligible to furnish an updated return, if
- Search has been initiated under section 132 or books of account, other documents
or any assets are requisitioned under section 132A in the case of such person, or
- a survey has been conducted under section 133A [other than sub-section (2A)) of
that section in the case of such person, or
- a notice has been issued to the effect that any money, bullion, jewellery or valuable
article or thing, seized or requisitioned under section 132 or section 132A in the
case of any other person belongs to such person, or
- a notice has been issued to the effect that any books of account or documents,
seized or requisitioned under section 132 or section 132A in the case of any other
person, pertain or pertains to, or any other information contained therein, relate
to, such person.
This provision is for the assessment year relevant to the previous year in which such search
is initiated, or survey is conducted or requisition is made and any assessment year preceding
such assessment year. For instance, if search is initiated on May 25, 2027, then belated
return cannot be submitted for the assessment year 2027-28 or any preceding assessment
year.
4 Updated return to be accompanied by proof of payment of tax and additional Income
tax -

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By virtue of Explanation (ca) to section 1399), updated return cannot be submitted unless it
is accompanied by proof of payment of tax as required by section 140B (ie, tax and additional
income-tax).

DEFECTIVE RETURN [SEC. 139(9)]

1. Meaning of defective return

A return of Income shall be regarded as defective, in the following cases –
a The Annexures, Statements and Columns in the return of Income have not been duty
filed in.
b The return is not accompanied by the general Details and Specific Details)
2. Time limit for rectification
The assessee must rectify the error within a period of 15 days from the date of
intimation (served on the assessee) or within such extended time as allowed by the Assessing
Officer.
3. Consequence when defect is not rectified
If defect is not rectified within the time limit, the Assessing Officer will treat the return
as an invalid return and provisions of the Act will apply as if the taxpayer had failed to
furnish the return at all.
4. Amendments
A proviso has been inserted in the said explanation empowering the Board to specify (vide
notification) that any of the above conditions shall not apply for a class of assesse or shall
apply with such modifications, as may be specified in such notifications.

RETURN OF INCOME OF CHARITABLE TRUST [SEC. 139(4A)]

Every person who is in receipt of:

Income from property held under the trust or other legal obligation wholly or partly for
charitable or religious purpose; or Income by way of voluntary contribution on behalf of such
trust or institution.
And if such income before allowing exemption u/s. 11 or 12 exceeds the maximum amount which
is not chargeable to tax, must file a return before the due date as per sec. 139(1).
Penalty Where an assessee fails to file return of income under this section, within the time
limit. It shall be liable to pay a penalty of Rs. 100 per day during which such failure
continues [Sec. 272A(2)].

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RETURN OF INCOME OF POLITICAL PARTY [SEC. 139(4B)]

The chief executive officer, (whether such chief executive officer is known as Secretary or by
any other designation) of any political party is required to furnish a return in respect of Income
of such political party, if the amount of gross total income before allowing exemption u/s. 13A
exceeds the maximum amount not chargeable to tax must file a return, if the total income
without giving effect to the provisions of sec. 10 exceeds the maximum amount which is not
chargeable to Income-tax.
Penalty Where an assessee fails to file return of income under this section, within the time
limit, it shall be liable to pay a penalty of Rs. 100 per day during which such failure
continues [Sec.272A(2)].

RETURN OF INCOME OF RESEARCH ASSOCIATION, ETC. [SEC. 139(4C)]

An assessee being –
Section Organization
Sec. 10(21) Research association (including a research association having as
its object undertaking research in social science or statistical
science)
Sec. 10(22B) News agency
Sec. 10(23A) or Sec. Specified association or institution
10(23B)
Sec. 10(23C)(iv) Specified Fund or institution
Sec. 10(23C)(v) Specified trust on institution
Sec. 10(23C)(vi),(iia) / (iia) Any university of other educational institution
Sec. 10(23C)(via) Any hospital or other medical institution
Sec. 10(24) Trade union or an association of such union
Sec. 10(46) Anybody or authority or board or trust
Sec. 10(47) Infrastructure debt fund
Sec. 10(23D) A Mutual fund
Sec. 10(23DA) Securitization trust
Sec. 10(23FB) Venture Capital company or venture capital fund
Of which income before claiming exemption u/s 10, exceeds the maximum amount which is not
chargeable to income-tax must file a return of income.

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Penalty Where an assessee fails to file return of income under this section, within the time
limit, it shall be liable to pay a penalty of Rs. 100 per day during which such failure
continues [Sec. 272A(2)].

RETURN OF INCOME BY A UNIVERSITY / COLLEGE ETC. (SEC. 139(4D)]

Every University, college or other institutions referred to in sec. 35(1)(ii) or (iii) is required to
furnish a return in respect of income or loss irrespective of size of income or loss.

RETURN BY AN INVESTMENT FUND [SEC. 139(4F) [W.E.F. A.Y. 2016-17]

Every Investment Fund as referred u/s 115UB must file return of income irrespective of size
of income.

PERMANENT ACCOUNT NUMBER [SEC. 139]

1. Meaning
Permanent Account Number (PAN) is a 10 characters alpha-numeric code which is used
for identification of the assessee.
2. Who need to apply of PAN
• A person whose total income exceeds exempted limit.
• A person whose turnover / gross receipts is expected to exceed Rs. 5 lac during the
previous year.
• Every person, being a resident, other than an individual, which enters into a financial
transaction of an amount aggregate to Rs. 2,50,000 or more in a financial year.
• Every person who is the managing director, director, partner, trustee, author,
founder, Karta, chief executive officer, principal officer or office bearer of the
person mentioned in (iii) above or any person competent to act on behalf of such
person.
• A charitable trust which is required to furnish return u/s 139(4A)
• A person who requires registration under any GST law must apply for PAN before
making application for registration
• A person who requires registration under the Central Excise Act must apply for PAN
before making application for registration.

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• A person who requires export-import code apply for PAN before making application
for registration.
3. Time limit for making application
Person whose total income exceeds maximum exempted Till 31st May of A.Y.
limit
Person whose turnover is expected to exceed Rs. 500000 Till the end of accounting year
4. Voluntary application
Any person can voluntarily apply for a PAN. Such person need not to file return unless he
falls under criteria of Sec. 139
5. Whom to apply
Application must be made to the person who has been assigned the function of allotment
of PAN. In case no such person then to jurisdictional Assessing Officer
6. Form
Application must be made in Form 49A
7. Fee
Nil, there is no fee for applying for PAN
8. Utility
Since PAN is the identification of the assessee therefore PAN must be quoted on-
• Return of income
• Challans of payment of any sum to the Department.
• Any correspondence with income-tax authority
9. Penalty
If a person fails to apply for PAN or quotes wrong PAN then they shall be liable for a
penalty of Rs. 10000.
10. Suo-Moto Allotment of PAN
• As per Sec. 139A(1B), the Central Government may by notification, specify any class
of person to apply to the assessing Officer, within the prescribed time, for the
allotment of the PAN.
• The Assessing Officer is empowered u/s 139A(2) to allot a PAN to any person other
than the person falling under the category mentioned above.
11. Where to quote PAN
Every person shall quote its PAN on the following documents (illustrative only)
Transactions specified in rule 114B Value of transaction
1. Sale or purchase of a motor vehicle (other All such transactions
than two-wheeler)
2. Opening an account [other than a time- All such transactions
deposit referred to at Sl. No.12 and a Basic

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Savings Bank Deposit Account] with a

bank/co-operative bank
3. Making an application to a bank/co- All such transactions
operative bank/any other company or
institution, for issue of a credit or debit
card
4. Opening of a demat account All such transactions
5. Payment to a hotel or restaurant against a Payment in cash of an amount exceeding
bill or bills at any one time Rs. 50,000
6. Payment in connection with travel to any Payment in cash of an amount exceeding
foreign country or payment for purchase of Rs. 50,000
any foreign currency at any one time
7. Payment to a Mutual Fund for purchase of Amount exceeding Rs. 50,000
its units
8. Payment to a company or an institution for Amount exceeding Rs. 50,000
acquiring debentures/bonds issued by it
9. Payment to the RBI for acquiring bonds Amount exceeding Rs. 50,000
issued by it
10. Deposit with a bank/ co-operative bank/ - Deposit in cash exceeding Rs.
post office 50,000 during any one day
- Deposit in cash exceeding Rs.
2,50,000 during November 9, 2016
and December 30, 2016
11. Purchase of bank drafts/pay Payment in cash for an amount exceeding
orders/banker's cheques from a bank/co- Rs. 50,000 during any one day
operative bank
12. A time deposit with bank/co-operative Amount exceeding Rs. 50,000 or
bank/post office/Nidhi/ non-banking aggregating to more than Rs. 5,00,000
financial company during a financial year
13. Payment for one or more pre-paid payment Payment in cash or by way of a bank
instruments to a bank/co-operative draft/pay order/banker's cheque of an
bank/any other company or institution amount aggregating to more than Rs.
50,000 in a financial year
14. Payment as life insurance premium to an Amount aggregating to more than Rs.
insurer 50,000 in a financial year
15. A contract for sale or purchase of Amount exceeding Rs. 1,00,000 per
securities (other than shares) transaction

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16. Sale or purchase, by any person, of shares Amount exceeding Rs. 1,00,000 per
in a company not listed in a recognised transaction
stock exchange
17. Sale or purchase of any immovable Amount exceeding Rs. 10,00,000 or
property valued by stamp valuation authority
referred to in section 50C at an amount
exceeding Rs. 10,00,000
18. Sale or purchase, by any person, of goods Amount exceeding Rs. 2,00,000 per
or services of any nature other than those transaction
specified at Sl. Nos. 1 to 17 above
12. Person Exempted from quoting PAN
• In case a person is having agricultural income but does not receive any taxable income.
However, such person will have to furnish a declaration in Form 61 in respect of each
prescribed transaction.
• Non-Residents;
• The Central or State Government or Consular Officers is transactions in which they
are payer.
13. Minor to quote PAN of parent or guardian
Where a person, entering into any transaction referred to in this rule, is a minor and who
does not have any income chargeable to income-tax, he shall quote the PAN of his father
or mother or guardian, as the case may be in the document pertaining to the said
transaction.
14. Declaration by a person not having PAN
Further, any person who does not have a PAN and who enters into any transaction specified
in this rule, shall make a declaration in Form No. 60 giving therein the particulars of such
transaction either in paper form or electronically under the electronic verification code in
accordance with the procedures, data structures, and standards specified by the Principal
Director General of Income-tax (Systems) or Director General of Income-tax (Systems).
15. PAN on TDS
PAN is required to be intimated to the person who has deducted the tax at source.
16. Exceptions
In case of an assessee who furnishes to the payer a declaration in writing in the prescribed
form (Form 15G or 15H) and manner to the effect that the tax on his estimated total
income is nil, he is not required to intimate his PAN.
17. [Sec. 139A (5D)]
The person deducting tax at source is required to quote PAN of the payee, PAN of himself
and Tax Deduction Account Number (TAN) of himself in all statements, certificates
furnished u/s 200(3) or 203 or 206

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18. PAN on TCS [Sec. 139A(5D)]

Every person who is responsible for collecting tax in accordance with the provisions of Sec.
206C shall quote PAN of every buyer or licensee or lessee in all certificates furnished in
accordance with the provisions of Sec. 206C(3) or 206C(5) and in all returns prepared u/s
206(5A)/(5B) to the Income tax authority.
Case Form No.
For Indian Citizen / Indian Company / Entitles incorporated in India / 49A
Unincorporated entitled formed in India
For Individuals not being Indian Citizen / Entitles incorporated outside India 49AA
/ Unincorporated entitles formed outside India.

SIGNING OF RETURN U/S. 140

Assessee Case Signed and verified by

Individual In general Individual himself.
Where the individual concerned is Individual himself or by the duly
absent from India. authorized person of such individual.
Where the individual is mentally Guardian of such individual or any
incapacitated. other person competent to act on his
behalf.
Where by any other reason it is not Any person duly authorized by him.
possible for the individual to sign the
return.
Note: When return is signed by any authorized person in that case the return
should be accompanied with power of attorney.
HUF In General Karta
Where the ‘Karta’ is absent from India Any adult member of the family
or is mentally incapacitated.
Firm In general Meaning partner
If due to any reason it is not possible Any adult partner.
for meaning partner to sign or where
there is no managing partner.
Limited In general Designated partner.
liability
partnership
If due to an unavoidable reason such Any partner.
designated partner is not able to sign

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and verify the return, or where there

is no designated partner as such.
Local Principal officer
authority
Political Party Chief Executive Officer In general
Company In general MD
If due to any reason it is not possible Any Director
for MD to sign or where there is no
MD
Any other Any other person Principal Officer.
association

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ASSESSMENT PROCEDURE

Assessment means to assess the income of the assessee i.e. to decide the income and tax liability
of the assessee on the basis of return filed, information gathered or to the best of judgement
of income tax department.
It begins with self-assessment i.e. assessment by the assessee himself.

SELF-ASSESSMENT [SEC. 140A]

In self-assessment, assessee itself is responsible to determine its taxable income, tax

liability and to pay tax accordingly. Provision of Sec. 140A is as follows:
a Where any tax is payable (after deducting relief, advance payment of tax or tax deducted
or collected at source or MAT credit, if any) on the basis of return furnished the assessee
is required to pay such tax before filing the return.
b If any interest is payable for delayed filing of return (u/s. 234A) or default in payment of
advance tax (u/s. 234B) or for deferment of advance tax (u/s. 234C) then such interest
should be paid along with self-assessment tax.

While calculating above interest for the purpose of self-assessment, tax on the total
income declared in the return shall be considered.
a. Where the amount paid by the assessee fails short of the aggregate of tax and
interest, the amount so paid shall first be adjusted towards interest payable and the
KEY NOTE

balance, if any, shall be adjusted towards tax payable.

b. After assessment, any amount paid under this section shall be deemed to have been
paid towards such assessment.
c. If an assessee fails to pay whole or any part of such tax or interest or both in
accordance with the provisions of Sec. 140A, he shall be deemed to be an assessee in
default.
Inquiry before assessment: Notice should be sent to assessee before assessment by
department as under.
In case in delay in furnishing of return of income self-assessment tax shall also include interest
for delay and fee for delay under Section 234.

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INTEREST

IMPORTANT NOTES REGARDING CALCULATION OF INTEREST

Following points are to be noted regarding calculation of interest, whether such interest is
receivable from or payable to the Central Government [Rule 119A].

ROUNDING OFF THE AMOUNT ON WHICH INTEREST IS TO BE CALCULATED

Amount on which such interest is calculated will be rounded off to the multiple of 100 by
ignoring any fraction of 100. E.g. amount on which interest is to be calculated is Rs. 240 or Rs.
290, then it is to be rounded off to Rs. 200 by ignoring fraction of Rs. 40 or Rs. 90.

ROUNDED OFF THE PERIOD FOR WHICH INTEREST IS TO BE CALCULATED

When interest is calculated on monthly basis, any fraction of the month shall be taken as full
month. E.g. interest is to be calculated from 1st August to 5th December, then interest shall
be calculated for 5 months.
When interest is calculated on annual basis, any fraction of the month shall be ignored.

INTEREST FOR DEFAULT IN FURNISHING RETURN OF INCOME [SEC. 234A]

Condition Where a person, who is required to furnish return of Income:

a Fails to furnish a return; or
b Furnishes it after the due date specified u/s. 139(1).
Amount on Particulars Amount Amount
which Rs. Rs.
interest is Tax determined u/s. 143(1) or on Regular assessment XXX
to be Less: Advance Tax paid XXX
charged: Relief u/s. 90 or 90A or 91 XXX
Credit allowed u/s. 115JAA (MAT Credit) XXX
Tax deducted/collected at source XXX XXX
Amount for interest calculation XXX

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Rate of Simple interest @ 1% per month or part thereof.

Interest
Period For every month or part of a month commencing from the day immediately
following the due date for furnishing return for the relevant assessment year
and ending on:
Where the return is furnished after due Date of furnishing return
date
Where the return is not furnished at all Date of completion of
Assessment u/s. 144.
The following amendments have been made to the scheme of section 234A with effect
from April 1, 2022 -
1 An assessee shall be liable to pay simple interest from furnishing after due date or not
furnishing an updated return u/s 139(8A) in addition to return under sub-section (1) or
sub-section (4) of section 139.
2 Under explanation 2 to section 234A(1), “tax on total income as determined under sub-
section (1) of section 143” shall not include the additional income-tax, if any, payable u/s
140B or section 143.
3 Under the aforesaid explanation, “tax on total income determine under such regular
assessment” shall not include the additional income-tax payable u/s 140B.

18 Illustration
Case Last date of Actual date Date of payment Date of Period of
filing return of filing of self- assessment default
return assessment tax
A 31-7-25 31-7-25 31-7-25 15-12-25

B 31-7-25 15-12-25 15-12-25 1-5-26

C 31-7-25 15-12-25 31-7-25 1-5-26

D 31-7-25 Not Filed Not Paid 1-5-26

19 Illustration
Compute interest payable u/s 234A.
Name of the assesse A A Ltd. C
Due date of furnishing return 31st July 32st October 31st July
Date of filing return 4th December 10th Feb Not filed
Date of completion of assessment 1st March 14th April 14th February

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Income as per return Rs. 570000 Rs. 500000 --

Assessed Income Rs. 610000 Rs. 550000 Rs. 1200000
Advance tax paid Rs. 20000 Rs. 25000 Rs. 25000
Tax deducted at source Rs. 12590 Rs. 14000 Rs. 85000
Tax paid along with return Rs. 70000 Rs. 140000 --
Also state interest payable u/s 234A for the purpose of Sec. 140A ignores interest under any
other section.

INTEREST FOR DEFAULT IN PAYING ADVANCE TAX [SEC. 234B]

Condition Where a person, who is required to pay advance tax, fails to pay:
a Advance tax at all; or
b 90% of assessed tax as advance tax.
Meaning of Tax determined u/s. 143(1) or Regular assessment
Assessed
Tax
Less Tax deducted or collected at source;
Less Relief allowed u/s. 90 or 90A or 91;
Less Credit allowed u/s. 115JAA (MAT Credit)
Amount on Particulars Interest
which Where no tax is paid u/s. 140A Assessed tax – Advance tax paid
interest is Where tax is paid u/s. 140A
calculated Period upto the date on which tax as Assessed Tax – Advance tax paid – Tax
per self-assessment is paid paid on Self-Assessment*
Key Note Where amount paid under self-assessment fails short of tax and interest
calculated as per self-assessment, then amount paid shall be first adjusted
towards interest and balance, if any, shall be adjusted towards tax payable.
Rate of Simple interest @ 1% per month or part thereof.
Interest
Period For every month or part of a month commencing from 1st day of April of the
relevant assessment year and ending on the date of determination of tax u/s.
143(1) or on regular assessment.
The following amendments have been made to the scheme of section 234B with effect
from April 1, 2022 -
1 Under explanation 1 and sub-section (3), “tax on total income as determined under sub-
section (1) of section 143” shall not include the additional income-tax, if any, payable u/s
140B or section 143.

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2 For the aforesaid purpose, “tax on total income determined under such regular
assessment” shall not include the additional income tax payable u/s 140B.

20 Illustration
A firm furnished its return of income on 26th June, 2025 showing income of Rs. 1,00,000. The
return shows other particulars as follows:
Advance Tax Rs. 20,000
TDS Rs. 1,000
The AO passed the assessment order enhancing income by Rs. 5,000 on 26/3/2026. Compute
interest u/s. 234B.

FOR DEFERMENT OF ADVANCE TAX [SEC. 234C]

Condition Payment of advance tax is to be made as per the schedule (mentioned in the
chapter “advance Tax”). In case assessee fails to pay the amount or pays
lesser amount as required by the schedule, then assessee will have to pay
interest u/s. 234C for such deferment.
Amount on which interest is payable:
Specified % of tax* on the total income declared in the return filed by the XXX
assesse
Less: Tax deducted/collected at source XXX
Less: Amount of advance tax paid on or before the due date of payment as per XXX
the advance tax payment schedule
Less: Relief allowed u/s. 90 or 90A or 91 XXX
Less: Credit allowed u/s. 115JAA (MAT Credit) XXX
Amount on which interest shall be calculated XXX

*Specified % of tax for calculation of interest under this section.

All assessee On or before June 15 Not less than 15% of tax (Note 1).
other than 44AD On or before Sept. 15 Not less than 45% of tax as reduced by the
amount paid in the earlier instalment (Note 2).
On or before December 15 Not less than 75% of tax as reduced by the
amount paid in the earlier instalments.
On or before March 15 The whole amount of tax as reduced by the
amount paid in the earlier instalments.

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21 Illustration
Eligible Assessee u/s 44AD and 44ADA
Due Date Advance tax payable Interest payable
15th March 100% of tax due on the Simple interest @1% per month for a period of 1 month
income on the amount of the shortfall from 100%

Eg – Mr. mehra’s (not eligible u/s 44AD or 44ADA) tax as per ROI is Rs. 2,00,000/- and he has
paid advance tax Rs. 12,000/- on 13th June, Rs. 65,000 on 10th Sept and Rs. 40,000/- on 13th Dec
and 25,000/- on 15th March. Calculate the interest payable u/s 234C.

SHORTFALL DUE TO CAPITAL GAINS AND CASUAL INCOMES

No interest shall be chargeable on shortfall in the payment of the tax due on the returned
income where such shortfall is on account of under-estimate or failure to estimate -
a The amount of capital gains; or
b Casual income; or
c Income under the head “PGBP” in cases where the income accrues or arises under the
said head for the first time; or
d Dividend received from domestic company
And the assessee has paid the whole of the amount of tax payable on such income, had such
income been a part of the total income, as part of the remaining instalments of advance tax
which are due or where no such instalments are due, by the 31st day of March of the financial
year

1 Where an assessee has paid 12% or more of tax as advance tax on or before June
KEY NOTES

15, then no interest u/s 234C is payable.

2 Where an assessee has paid 36% or more of tax as advance tax on or before
September 15, then no interest u/s. 234C is payable.

Rate of Interest: Simple interest @ 1% per month or part thereof.

Period: 3 months (1 month for last instalment).

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INTEREST FOR EXCESS REFUND GRANTED TO THE ASSESSEE (SECTION 234D)

Condition: Where any refund is granted to the assessee under section 143(1) and:
a No refund is due on regular assessment; or
b The amount refunded exceeds the amount refundable on regular
assessment;
Rate of Simple interest @ ½ % for every month or part of the month.
interest:
Amount on which On the whole or excess amount refunded.
interest is to be
charged:
Period: From the date of grant of refund to the date of such regular assessment.

FEE FOR DIFFICULT IN FURNISHING RETURN OF INCOME 234F

1 Without prejudice to the provisions of this Act, where a person required to furnish a return
of income u/s 139, fails to do so within the time prescribed in section 139(1), he shall pay, by
way of fee, a sum of, -
a Rs. 5,000/-, if the return is furnished after due date

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CHAPTER 16 TAX INCIDENCE ON COMPANY

TAXATION OF COMPANIES INCLUDING FOREIGN COMPANY

COMPANY UNDER THE INCOME TAX ACT, [SECTION 2(17)]

Company means –
1 An Indian Company, or
2 Body corporate incorporated outside India under the laws of a Foreign Country, or
3 Any institution, association or body whether incorporated or not and whether Indian or
non-Indian, which is declared by general or special order of the Board to be a Company.

“INDIAN COMPANY” UNDER THE INCOME TAX ACT [SECTION 2(26)]

“Indian Company” means a Company formed and registered under the Companies Act, 1956
and includes:
1 A Company formed and registered under any law relating to Companies formerly in force in
any part of India other than the State of Jammu and Kashmir and the Union Territories
mentioned below in.
2 A Corporation established by or under a Central, State or Provincial Act.
3 Any institution, association or body which is declared by the Board to be a Company u/s.
2(17).

CLASSES OF COMPANIES

Companies in which public are Substantially Interested (Widely Held Companies): As per
Section 2(18), a company is said to be one in which public are substantially interested in
the following cases:
• Government / RBI It is a Company owned by the Government or the RBI or in which not
Holding less than 40% of the shares are held singly or together by the
Government or the RBI or a corporation owned by that bank.
• Section 8 Company A company which is register under section 8 of companies act 2013.
• Notified by CBDT It is a Company having no share capital and if, having regard to its
objects, the nature and composition of its membership and other
relevant considerations, it is declared by order of the Board to be a
Company in which public are substantially interested.

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• Mutual Benefit It is a mutual benefit finance Company, i.e. a Company which carries on
Company as its principal business, the business of acceptance of deposits from
its members and which is declared to be a Nidhi or mutual benefit
society by the Central Government u/s. 408 of the Companies Act,
2013.
• Shareholding by It is a Company, wherein shares carrying not less than 50% of the
Co-operative voting power have been allotted unconditionally to, or acquired
Society unconditionally by and were throughout the relevant previous year
beneficially held by, one or more co-operative societies.
• Public Limited It is a Company which is not a private Company as defined in the
Company Companies Act, 2013 and fulfils either of the following conditions –
a Listing of shares: Equity shares of the Company, as on the last day
of the relevant previous year, are listed in a recognized stock
exchange in India in accordance with the Securities Contracts
Regulation Act, 1956 and any rules made there under, or
b Holding of Equity: Equity shares of the Company carrying not less
than 50% of the voting power (If the Company is an Indian Company
whose business consists of construction of ships, manufacture or
processing of goods or mining or electricity then not less than 40%
• of the voting power) have been allotted unconditionally to or
acquired unconditionally by and were throughout the relevant
previous year beneficially held by –
i The Government, or
ii A corporation established by a Central, State or Provincial Act,
iii Any Company in which public is substantially interested or any
subsidiary Company of such Company if the whole of the share
capital of such subsidiary Company has been held by the parent
Company or by its nominees throughout the previous year.
• A Company in which the public is not substantially interested is known as a closely held
company.

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RATES OF INCOME TAX FOR THE ASSESSMENT YEAR 2022-23

FOR DOMESTIC COMPANIES

Surcharge
Income
Above
Particulars AY 25-26 between cess
10 cr
1 cr to 10 cr
If turnover of or gross receipt during PY 21-
25% 7% 12% 4%
22 dose not exceeds 400 cr
Otherwise 30% 7% 12% 4%
Key Note
A domestic company can opt for the alternative tax regime provided under section 115BA or
section 115BAA or section 115BAB.

SPECIAL PROVISIONS OF TAX ON CERTAIN INCOME OF DOMESTIC MANUFACTURING COMPANY

AND OTHER DOMESTIC COMPANY AS PER PROVISIONS OF SECTION 115BAA AND SECTION
115BAB OF THE INCOME-TAX ACT, 1961.

(1) (2) (3) (4)

Particulars Section 115BAB Section 115BAA
1 Applicability Domestic manufacturing company Any domestic company
2 Rate of tax 15% 22%
3 Rate of surcharge 10% 10%
4 Effective rate of
tax [including 17.16% 25.168%
surcharge & cess]
5 Applicability of The rate of tax [i.e., 17.16%] is The rate of tax [i.e. 25.168%] is
concessional rate notwithstanding anything contained notwithstanding anything
of tax on total in the Income-tax Act, 1961 but contained in the Income-tax Act,
income of subject to the provisions of 1961 but subject to the
company. Chapter XII, other than section provisions of Chapter XII, other
115BA and 115BAA. than section 115BAand 115BAB.
Note: The implies that this rate [i.e., 17.16% / 25.168%] would prevail
in respect of all income, other than income subject to special rates of
tax under Chapter XII, for which the special rates would continue to
apply. For example, in case of such companies opting for section
115BBA or 115BAB, long-term capital against chargeable to tax under

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section 112 and 112A and short-term capital gains chargeable to tax
under section 111A would be subject to tax at the rates mentioned in
the said sections. However, other income, like short term capital gains
[other than those covered under section 111A], income from house
property and income from other sources would be taxable at the rate
of 17.16% / 25.168%, as the case may be.
6 Conditions to be (i) The company should be set- No time limit specified. Both
fulfilled for up and registered on or existing companies and new
availing the after 1-10-2019. companies can avail benefit.
concessional rate (ii) It should commence Need not be a manufacturing
of tax and manufacturing on or before company.
exemption from 31-3-2024.
MAT. (iii) It should not be formed by
splitting up or the
reconstruction of a
business already in
existence [except in case
of an undertaking formed
No similar condition has been
by reconstruction or revival
prescribed.
of a person of the business
of any undertaking
referred to in section 33B
in the circumstances and
within the period specified
therein]
(iv) It does not use any
machinery or plant
No similar condition has been
previously used for any
prescribed.
purpose [Refer Note at the
end]
(v) It does not use any building
previously used as a hotel or
No similar condition has been
a convention Centre
prescribed.
[meanings assigned in
section 80-ID(6)]
(vi) It should not be engaged in
No similar condition has been
any business other than the
prescribed.
business of manufacture or
production of any article or

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thing and research in

relation to, or distribution
of, such article or thing
manufactured or produced
by it.
7 Common condition The total income should be computed –
for both sections Without providing for deduction under any of the following
for availing the provisions:
concessional rate Section
of tax and 10AA
exemption from
32(1)(iia)
MAT.
33AB
(i) 33ABA
35(1)(ii)/ (iia)/(iii)
35(2AA)
35(2AB)
35AD
35CCC
35CCD
80-IA to 80RRB
Without set-off of any loss carried forward from any earlier
assessment year, if such loss is attributable to any of the
(ii) deductions listed in (i) above [Such loss would be deemed to have
been already given effect to and no further deduction for such
loss shall be allowed for any subsequent year].
By claiming depreciation u/s. 32 determined in the prescribed
(iii) manner. However, additional depreciation u/s. 32(1)(iia) cannot
be claimed.
Note: A domestic company exercising option for availing benefit of
lower tax rate under section 115BAA shall not be allowed to claim set
off of any brought forward loss on account of additional depreciation
for an Assessment Year for which the option has been exercised and
for any subsequent Assessment Year.
Since there is no time line without which option under section 115BAA
can be exercised, a domestic company having brought forward losses
on account of additional depreciation may, if it so desires, exercise the
option after set of the lossess so accumulated.

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8 Applicability of
Not applicable Not applicable
MAT
9 Availability of
Brought forward MAT
set-off of MAT
Since it is a new company, there would be credit cannot be set-off
credit brought
not brought forward MAT credit against income u/s.
forward from
115BAA.
earlier years.
11 Exercise of option The beneficial provisions of this section The beneficial provisions
by the company would apply only if option is exercised in of this section would apply
within the the prescribed manner on or before the if option is exercised in
prescribed time. due date u/s. 139(1) for furnishing the the prescribed manner on
first of the returns of income for any or before the due date u/s.
previous year relevant to A.Y. 2020-21 or 139(1) for furnishing the
any subsequent assessment year. return of income for any
Such option, once exercised, would apply previous year relevant to
to subsequent assessment years. A.Y. 2020-21 or any
Further, once the option has been subsequent assessment
exercised for any previous year, it cannot year.
be subsequently withdrawn for the same Such option, once
or any other previous year. exercised, would apply to
subsequent assessment
Note: The option has to be exercised at years.
the time of furnishing the first of the Further, once the option
returns of income for any previous year. has been exercised for any
If a person fails to so exercise such previous year, it cannot be
option, he cannot exercise the option for subsequently withdrawn
any subsequent previous year. for the same or any other
previous year.

Note: The option can be

exercised even in a later
year, but once exercised,
cannot be withdrawn
subsequently.
Further, where the person
exercises option under
section 115BAA,the option
under section 115BA may
be withdrawn.

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For the purpose of point no. 7(iv) in column (3) of the above table, any machinery or plant
Note which was used outside India by any other person shall not be regarded as machinery or
plant previously used for any purpose, if all the following conditions are fulfilled, namely:
Such machinery or plant was not, at any time previous to the date of the installation by
(a)
the person, used in India;
(b) Such machinery or plant is imported into India from any country outside India;
No deduction on account of depreciation in respect of such machinery or plant has been
allowed or is allowable under the provisions of the Income-tax Act, 1961 in computing the
(c)
total income of any person for any period prior to the date of installation of the
machinery or plant by the person.
Further, where in the case of a person, any machinery or plant or any part thereof
previously used for any purpose is put to use by the company and the total value of the
machinery or plant or part so transferred does not exceed 20% of the total value of the
(d)
machinery or plant used by the company, then, the condition specified that the company
does not use any machinery or plant previously used for any purpose would be deemed to
have been complied with.

1. Tax on Income from transfer of Carbon Credits [Section 115BBG]

Where the total income of an assessee includes any income by way of transfer of carbon
credits, the income- tax payable shall be the aggregate of -
a) The amount of income-tax calculated on the income by way of transfer of carbon credits,
at the rate of ten percent; and
b) The amount of income-tax with which the assessee would have been chargeable had his
total income been reduced by the amount of income referred to in clause (a).
Notwithstanding anything contained in this Act, no deduction in respect of any expenditure
or allowance shall be allowed to the assessee under any provision of this act in computing his
income referred to in clause (a) of sub-section(1).
“Carbon Credit” in respect of one unit shall mean reduction of one tonne of carbon dioxide
emissions or emissions of its equivalent gases which is validated by the United Nations
Framework on Climate Change and which can be traded in the market at its prevailing market
price.
2. Concessional rate of tax to dividends received from Foreign Specified Company
[Section115BBD]
A dividend received from a foreign company is taxed in the hands of a resident taxpayer at
the normal rates applicable to his income. The normal tax rate applicable to an Indian
company is 30% (plus surcharge and cess as applicable), hence, a dividend received from a
foreign company is charged to tax at 30% in the hands of an Indian company. However,
section 115BBD provides a concessional rate of tax in respect of a dividend received by an

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Indian company from a foreign company in which the Indian company holds 26% or more in
nominal
value of the equity share capital. By virtue of section 115BBD, dividends [as defined in
section 2(22) except dividend as defined in section 2(22)(e)] received by an Indian company
from a foreign company in which the Indian company holds 26% or more in nominal value of
the equity share capital is charged to tax at a flat rate of 15% (plus surcharge and cess as
applicable).
No deduction on account of any expenditure or allowance will be allowed from the amount of
the dividend covered under section 115BBD. In other words, the gross amount of dividend
(without deducting any expenditure/allowance) will be taxed at the rate of 15% (plus
surcharge and cess as applicable).

MINIMUM ALTERNATE TAX

LOGIC BEHIND MAT

SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES

It was observe by the law makers that many companies were showing huge profits in the profit
and loss amount as laid in the Annual General Meeting of the shareholders and distributing huge
dividends. At the same time these companies were not declaring any income under the income-
tax Act since their taxable profit as per income-tax Act were NIL. This variance in the profits
as computed as per Companies Act and the profits as computed under the income tax Act was
mainly because of rates of depreciation under the two Acts. The companies provided lesser
depreciation under the Companies Act (by following lower rates of depreciation as per Companies
Act and by following Strength Line Method of Depreciation). At the same time, while computing
the total income under the income-tax Act, the depreciation was claimed as per the Income Tax
Act and the taxable income was compute as NIL.
The law makers felt that such companies which show book profits under the Companies Act and
no income under the income-tax Act must be made to pay a Minimum Tax. Hence, Minimum
Alternate Tax.

MINIMUM ALTERNATE TAX SEC [115JB (1)]

Where in the case of a company the income tax payable on the total income as computed under
income tax act is less than 15% of its book profit, such book profit shall be deemed to be the
total income of the assessee.
MAT to be levied @ 9% in case of unit located in International Financial Services Centre
[Section 115] B(7)]:

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Where the assessee company is a unit located in an International Financial Services Centre and
derives its income solely in convertible foreign exchange, instead of 15% of book profits, MAT
shall be levied @ 9% of book profits.
a) “International Financial Services Centre” shall have the same meaning as assigned to it in
Section 2(q) of the Special Economic Zones Act, 2005.
b) “Unit” means a unit established in an International Financial Services Centre.
c) “Convertible Foreign Exchange” means a foreign exchange which is for the time being
treated by the RBI as convertible foreign exchange for the purposes of the FEMA, 1999
and the rules made thereunder.

COMPUTATION OF TOTAL INCOME

IN THE CASE OF A COMPANY

Surcharge (based on Income)
Health and
Company Tax Rate 1 cr to
Up to 1CR Above 10CR Education cess
10CR
Domestic 30% Nil 7% 12% 4%
Foreign 35% [FA 24] Nil 2% 5%
• Surcharge is subject to Marginal relief.
Minimum Alternate Tax: Tax payable by a non-corporate assessee cannot be less than 15%
•
(+SC+EC+SHEC) of adjusted total income as per Section 115JB.

EFFECTIVE RATE OF MAT

Book Profits Domestic Company Foreign Company
Do not exceed Rs. 1 crore 15.6% 15.6%
Exceeds Rs. 1 crore but do not exceed Rs. 10
16.692% 15.91%
crores
Exceeds Rs. 10 crores 17.472% 16.38%

PROFIT AND LOSS ACCOUNT TO BE PREPARED AS PER PROVISIONS OF THE

COMPANIES ACT 1956 [SEC 115JB (2)]

Every Assessee shall prepare its profit and loss account for the relevant PY in accordance
•
with the provisions of Part II of schedule III of the Companies Act 2013.
Electricity Company, Banking Company or Insurance Company to prepare profit and loss
•
account as per governing Act.

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However such companies have been given an option to prepare its profit and loss account for
• the previous year relevant to AY commencing on or before 1.4.2012 either in accordance with
the provisions of part II and Part III of schedule VI of the companies Act 1956.

PROCEDURE FOR COMPUTATION OF MAT

Step Procedure
1 Compute the Total Income under Income Tax Act, 1961.
2 Compute Book Profit u/s. 115 JB as mentioned below.
3 Compute tax on total income at rates applicable for companies under Income Tax Act.
4 Compute Tax at 15% on Book Profit i.e. Step 2.
5 Tax payable = Higher of Step 3 or Step 4.
6 Avail MAT credit wherever possible u/s 115JAA i.e., the tax payable on Total Income is
higher, then, the difference between the tax on total income and the tax on book profit
as calculated above shall be adjusted from the MAT credit available u/s 115JAA.
Advance tax provisions are applicable to tax payable u/s 115JB hence assessee is liable
Notes

to pay interest under section 234B and 234C. MAT provisions are also applicable to
foreign companies.

HOW TO CALCULATE BOOK PROFIT? [SEC 115JB (1) & 2]

For the purpose of this section, “book profit” means the net profit as shown in the profit and
loss account for the relevant previous year prepared as per sub-section (2) above, AS
INCREASED BY -

No. Add Item Explanation

1 Income tax or provision for income tax including Security transaction Tax:
surcharge and education cess. STT does not represent
Any interest paid under Income tax Act shall be income-tax and shall not be
added. added back. [The same is
allowable while computing the
a)
total income under section
36(l)(xv).
However, STT is to be
disallowed while computing
total income if the income

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from share/ units is

assessable as capital gains.]
Interest under any other
Acts
b)
[allowable while computing the
total income]
Penalties [disallowable while
c)
computing the total income]
Commodities transaction Tax
d) [allowable while computing the
total income u/s 36]
2 Amount transfer to any reserve The reserves shall be added back
irrespective of the fact that such
transfer to reserves is as per the
direction of RBI.
3 Provisions made to meet unascertained liabilities shall Provision for gratuity etc. shall be
be added back added back as it unascertained
liability, however if it is provided
on actuarial valuation then it need
not be added back.
4 The amount by way of provision for losses of The term “the amount by way of
subsidiary companies provision for losses of subsidiary
companies” even includes actual
loss of subsidiary company
debited to profit and loss account.
5 Expenditure relatable to any income to which sec. 10 Income of business referred u/s
(other than Sec 10(38), [Sec.10(38) is deleted by 10AA i.e. SEZ shall be taxable
Fin. Act 18] under minimum alternate tax.
6 Amount of expenditure relatable. To, income, being
share of the assessee in the income of an AOP or BOI,
Interested in A.Y. 2016-17
on which no income-tax is payable in accordance with
the provision of section 86;
7 The amount of expenditure accruing or arising to an
assessee, being a foreign company from
a. The capital gains arising on transactions in
securities; or
b. The interest, royalty or fees for technical services
chargeable to tax at the rate or rate specified in
Chapter XII,

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if the income-tax payable thereon in accordance with

the provisions of this Act, other than the provisions
of this Chapter, is at a rate less than the rate
specified in Section 115JB(1); 15%
8 The amount representing
a) Notional loss on transfer of a capital asset, being
share of a special purpose vehicle to a business
trust in exchange of units allotted by that trust
referred to in clause (xvii) of Section 47; or
b) Notional loss resulting from any change in carrying
amount of said units; or
c) loss on transfer of units referred to in clause (xvii)
of Section 47, if any,
9 Royalty income in respect of patent chargeable to tax
u/s 115BBF will not be subject to the provisions of
Inserted AY 2017-18
MAT w.e.f. AY 2017-2018. Such expenditure shall be
added
10 The amount of depreciation (including revalution) Depreciation as per accounts shall
be added
11 The amount of deferred tax and the provision The term “deferred tax” includes
thereof both deferred tax asset as well as
deferred tax liability.
12 Provision made for diminution in value of asset debited Provision for bad doubtful debts
to p/l shall be added to net profit to find out book amount to diminution in the value
profit. of asset (Debtors) hence shall be
added back while computing book
profits. Provision for diminution in
value of any Investment or asset
as per AS 13 / AS28.
13 Amount standing in the revaluation reserve relating to
the revalued asset which has been retired or disposed
if the same is not credited to the Profit and Loss A/C.
14 Dividend paid or proposed

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No. Less Item Explanation

1 The amount withdrawn from any reserve or
2 Income exempt u/s 10 [except section 10(38)], 11 and 12
3 The amount of depreciation debited to the profit and loss account (excluding the
depreciation on account of revaluation of assets)
4 The amount withdrawn from revaluation reserve and credited to the profit and loss
account, to the extent it does not exceed the amount of depreciation on account of
revaluation of asset
5 Amount of income, being the share of the assessee in the income of an association of
persons or body of individuals, on which no income-tax is payable in accordance with the
provisions of section 86, if any such amount is credited to the profit and loss account;
6 The amount of income accruing or arising to an assessee, being a foreign company
from:
a) The capital gains arising on transactions in securities; or
b) The interest, royalty or fees for technical services chargeable to tax at the rate or
rate specified in Chapter XII,
If such income is credited to the statement of profit and loss and the income-tax payable
thereon in accordance with the provisions of this Act, other than the provisions of this
Chapter, is at a rate less than the rate specified in Section 115JB(1); or
7 The amount representing
a) Notional gain on transfer of a capital asset, being share of a special purpose vehicle
to a business trust in exchange of units allotted by that trust referred to in clause
(xvii) of Section 47; or
b) Notional gain resulting from any change in carrying amount of said units; or
c) Gain on transfer of units referred to in clause (xvii) of Section 47, if any,
8 The amount of loss on transfer of units referred to in Section 47(xvii) computed by taking
into account the cost of the shares exchanged with units referred to in the said clause or
the carrying amount of the shares at the time of exchange where such shares are carried
at a value other than the cost through statement of profit and loss, as the case may be;
or
9 The amount of income by way of royalty in respect of patent chargeable to tax under
section 115BBF; or
10 The aggregate amount of unabsorbed depreciation and loss brought forward in case
of a:
a) Company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal,
on an application moved by the Central Government under section 241 of the
Companies Act, 2013 has suspended the Board of Directors of such company and has

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TAX INCIDENCE ON COMPANY

appointed new directors who are nominated by the Central Government under section
242 of the said Act.
b) Company against whom an application for corporate insolvency resolution process has
been admitted by the Adjudicating Authority under section 7 or section 9 or section
10 of the Insolvency and Bankruptcy Code, 2016.
It may be noted that loss does not include depreciation.
A company would be a subsidiary of another company if such other company holds
more than half in the nominal value of equity share capital of the company. [Amended
by Finance (No. 2) Act, 2019 w.e.f. 01.04.2020 i.e. AY 2020-21]
11 The amount of loss brought forward or unabsorbed depreciation, whichever is less as per
books of account in case of a company other than the company referred to in point 10.
Explanation
(a) The loss shall not include depreciation;
(b) The above provisions shall not apply if the amount of loss brought forward or
unabsorbed depreciation, is nil; or
12 The amount of profits of sick company for the assessment year commencing on and from
the assessment year relevant to the previous year in which the said company has become
a sick industrial company u/s. 17(1) of the SICA, 1985, and ending with the assessment
year during which the entire net worth of such company becomes equal to or exceeds the
accumulated losses.
13 The amount of deferred tax, if any such amount is credited to the statement of profit
and loss.

Key Notes
i. Compulsory filing of return of income and furnishing of report from Chartered Accountant:
The section also provides that every company to which this section applies shall furnish,
before the specified date referred to in section 44AB [words in italics Inserted by Finance
Act, 2020] or in response to a notice under section 142(1)(i), a report from a chartered
accountant certifying that the book profit has been computed in accordance with the
provisions of this section [Section 115JB(3)].
ii. Allowability of carry forward of losses: In respect of the relevant previous year, the
amounts determined under the provisions of section 32(2) or section 72(1)(ii) or section 73
or section 74 or section 74A(3), shall be allowed to be carried forward [Section 115JB(4)].
iii. Applicability of other provisions of the Act: All other provisions of the act shall apply to
every assessee, being a company mentioned in this section [Section 115JB(5)].
iv. Non-applicability of MAT on Certain Incomes: The provisions of this section shall not apply
to,-
• any income accruing or arising to a company from life insurance business referred to in
section 115B;

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TAX INCIDENCE ON COMPANY

• a person who has exercised the option referred to under section 115BAA or section
115BAB.
• MAT provisions would not apply to foreign companies having only specified incomes like
dividend income, royalty income and income from fees for technical services.

MAT CREDIT: SECTION 115-JB

1 Relevant year in which tax credit becomes available: Tax credit becomes available in the
assessment year in which the assessee pays minimum alternate tax in accordance with
provisions of section 115JB.
2 Amount of MAT credit to be allowed: The tax credit to be allowed shall be the difference
of the tax paid for any assessment year under section 115JB (1) and the amount of tax
payable by the assessee on his total income computed in accordance with the other
provisions of this Act.
No interest to be payable: No interest shall be payable on the tax credit allowed under
this section.
3 Period for which tax credit is allowed: The amount of tax credit shall be carried forward
upto 15 years immediately succeeding the assessment year in which tax credit becomes
available.
4 Year in which tax credit shall be set-off: The tax credit shall be allowed set-off in a
year when tax payable on the total income computed in accordance with the provisions of
this Act exceed minimum alternate tax u/s 115JB.
5 Amount of tax credit eligible shall be set-off: Set off in respect of brought forward
tax credit shall be allowed for any assessment year to the extent of the difference
between the tax on his total income and the tax which would have been payable under the
provisions of section 115JB, as the case maybe for that assessment year.
6 Variation of tax credit in certain cases: Where as a result of an order under section
143(1) or 143(3) section 144, section 147, section 154, section 155, section 145D(4), section
250, section 254, section 260, section 260, section 263, or section 264, the amount of tax
payable under this Act is reduced or increased, as the case may be, the amount of tax
credit allowed under this section shall also be increased or reduced accordingly.
7 Credit not to be allowed to successor LLP: In case of conversion of a private company or
unlisted public company into a limited liability partnership under the Limited Liability
Partnership Act, the provisions of this section shall not apply to the successor limited
liability partnership.

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1. Illustration
The Net Profit as per Profit and Loss Account of XYZ Ltd, a Resident Company, for the year ended
31.3.2024 is Rs.190 lakhs arrived at after following adjustments:
1 Depreciation on Assets Rs. 100 lakhs
2 Reserve for Currency Exchange Fluctuations Rs. 50 lakhs
3 Provision for Tax Rs. 40 lakhs
4 Proposed Dividend Rs. 120 lakhs

Following further information are also provided by the company:

a. Net Profit includes Rs.10 lakhs received from a Subsidiary Company.
b. Provision for Tax includes Rs.16 lakhs of tax payable on distribution of profit and of Rs.2 lakhs
of interest payable on Income Tax.
c. Depreciation includes Rs.40 lakhs towards Revaluation of Assets.
d. Amount of Rs.50 lakhs credited to P&L Account was drawn from Revaluation Reserve.
e. Balance of Profit and Loss Account shown in Balance Sheet at the Asset side as at 31.3.2024
was Rs.30 lakhs representing Unabsorbed Depreciation.
Compute the Income of the Company for the year ended 31.3.24 liable to tax under MAT.

2. Illustration
XYZ Limited Profit and Loss Account for the year ended 31.3.2024 shows a Net Profit of Rs.75
lakhs after debiting / crediting the following items:
1. Depreciation Rs.24 lakhs (including Rs.4 lakhs on Revaluation)
2. Interest to Financial Institution not paid before due date of filing return of Income Rs.6 lakhs.
3. Provision for Doubtful Debts Rs.1 lakh.
4. Provision for Unascertained Liabilities Rs. 2 lakhs
5. Transfer to General Reserve Rs.5 lakhs.
6. Net Agricultural Income Rs.16 lakhs.
7. Amount withdrawn from Reserve created during 2019 – 20 Rs.3 lakhs. (Book Profit was
increased by the amount transferred to such Reserve in Assessment Year 2020 – 21).
8. Brought Forward Loss and Unabsorbed Depreciation as per books are Rs. 12 lakhs and Rs.10
lakhs respectively. Compute Minimum Alternate Tax under section 115JB for Assessment Year
2024 – 25.

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