Unit 2
Sources and Computation of Taxable Income under the various Heads of Income
Salary income refers to the compensation received by an employee from a current or former employer for the execution of services in connection with employment. Thus, income is taxable as salary under Section 15 only if an employer-employee relationship exists between the payer and payee. Salary income could be in any form such as gift, pension, gratuity, usual remuneration and so on. In this article, we look at various aspects of salary income under the Income Tax Act.
According to Section 17(1) salary includes the following amounts received by an employee from his employer, during the previous year:
- Wages;
- Annuity or pension;
- Gratuity;
- Fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
- Advance of salary;
- Payment received by an employee in respect of any period of leave not availed by him/her;
- The portion of annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable;
- Transferred balance in a recognised provident fund to the extent it is taxable;
- Contribution by the Central Government to the account of an employee under a pension scheme referred to in section 80CCD (i.e., NPS);
A. Allowances – Fully Taxable Allowances –
Allowance is a fixed monetary amount paid by the employer to the employee for meeting some particular expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in the gross salary unless a specific exemption has been provided in respect of any such allowance.
Fully Taxable Allowances:
(i) Dearness Allowance / Additional D.A. / High Cost of Living Allowance -- Fully Taxable.
(ii) City Compensation Allowances (CCA).
(iii) Capital Compensatory Allowance
(iv) Lunch Allowance
(v) Tiffin Allowance
(vi) Marriage / Family Allowance
(vii) Overtime Allowance
(viii) Fixed Medical Allowance.
(ix) Electricity and Water Allowance
(x) Entertainment Allowance. It is fully added in employee’s Salary.
In case of Government employees, a deduction is allowed u/s 16(ii) at the rate of least of following:
(a) Statutory Limit Rs. 5,000 p.a.
(b) 1/5 (20%) the of Basic Salary; or
(c) Actual Entertainment Allowance received.
B. Partly Taxable Allowances: House Rent Allowance, Entertainment Allowance, Transport Allowance, Children Education & Hostel Allowances - Fully Exempted Allowances –
Partly Taxable Allowances:
1. House Rent Allowance (HRA)
Sl no | Mumbai / Kolkata / Delhi / Chennai | Other Cities |
(i) | Allowance actually received | Allowance actually received |
(ii) | Rent paid in excess of 10% of salary | Rent paid in excess of 10% of salary |
(iii) | 50% of Salary | 40% of Salary |
The exemption in respect of HRA is based upon the following factors:
(1) Salary
(2) Place of residence
(3) Rent paid
(4) HRA received.
2. Entertainment Allowance
This deduction is allowed only to a government employee. Non-Government employees shall not be eligible for any deduction on account of any entertainment allowance received by them.
In case of entertainment allowance, the Assessee is not entitled to any exemption but he is entitled to a deduction under section 16(ii) from gross salary. Therefore, the entire entertainment allowance received by any employee is added in computation of the gross salary. The Government employee is, then, entitled to deduction from gross salary under section 16(ii) on account of such entertainment allowance to the extent of minimum of the following 3 limits.
- Actual entertainment allowance received during the previous year.
- 20% of his salary exclusive of any allowance, benefit or other perquisite.
- ₹5,000.
3. Transport Allowance
Any allowance granted to meet the cost of travel on tour or on transfer of duty. "Allowance granted to meet the cost of travel on transfer" includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.
4. Children Education & Hostel Allowances
(a) Children Education Allowance: Exempt up to actual amount received per child or ₹100 p.m. Per child up to a maximum of 2 children, whichever is less.
(b) Hostel Expenditure Allowance: Exempt up to actual amount received per child or ₹300 p.m. Per child up to a maximum of two children, whichever is less.
C. Fully Exempted Allowances –
Some of the allowances, usually paid to Government servants, judges and employees of UNO are not taxable. These are:
- Allowances paid to Govt. Servants abroad: When servants of Government of India are paid an allowance while serving abroad, such income is fully exempt from taxes.
- Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC are not taxed.
- Allowance paid by UNO: Allowances received by employees of UNO are fully exempt from tax.
- Compensatory allowance paid to judges: When a judge receives compensatory allowance, it is not taxable.
“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. “Perquisite” is defined in the section 17(2) of the Income tax Act as including:
(i) Value of rent-free/accommodation provided by the employer.
(ii) Value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer.
(iii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.
(iv) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
(v) The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assesssee.
(vi) Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or an approved superannuation fund to affect an assurance on the life of the assessee or to affect a contract for an annuity.
(vii) The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and
(viii) The value of any other fringe benefit or amenity as may be prescribed.
Exempted/tax free Perquisites:
1. Leave Travel Concession subject to conditions & actual spent only for travels.
2. Computer/ Laptop provided for official / personal use.
3. Initial Fees paid for corporate membership of a club.
4. Refreshment provided by the Employer during working hours in office premises.
5. Payment of annual premium on Personal Accident Policy.
6. Subscription to periodicals and journal required for discharge of work.
7. Provision of Medical Facilities.
8. Gift not exceeding Rs. 5,000 p.a.
9. Use of Health Club, Sports facility.
10. Free telephones whether fixed or mobile phones.
11. Interest Free / concessional loan of an amount not exceeding Rs.20,000 (limit not application in the case of medical treatment)
12. Contribution to recognised Provident Fund / approved super annuation fund, pension or deferred annuity scheme & staff group insurance scheme.
13. Free meal provided during working hours or through paid non-transferable vouchers not exceeding Rs. 50 per meal or free meal provided during working hours in a remote area.
The value of any benefit provided free or at a concessional rate (including goods sold at concessional rate) by a company to the Employees by way of allotment of shares etc., under the Employees stock option plan as per Central Government Guidelines.
B. Taxable Perquisites:
1. Rent Free Accommodation
Valuation of unfurnished residential accommodation provided by the employer: -
(a) Union or State Government Employees- The value of perquisite is the license fee as determined by the Govt. As reduced by the rent actually paid by the employee.
(b) Non-Govt. Employees- The value of perquisite is an amount equal to 15% of the salary in cities having population more than 25 lakh, 10% of salary in cities where population as per 2001 census is exceeding 10 lakhs but not exceeding 25 lakh and 7.5% of salary in areas where population as per 2001 census is 10 lakh or below. In case the accommodation provided is not owned by the employer, but is taken on lease or rent, then the value of the perquisite would be the actual amount of lease rent paid/payable by the employer or 15% of salary, whichever is lower. In both of above cases, the value of the perquisite would be reduced by the rent, if any, actually paid by the employee.
2. Value of Furnished Accommodation-
The value would be the value of unfurnished accommodation as computed above, increased by 10% per annum of the cost of furniture (including TV/radio/ refrigerator/ AC/other gadgets). In case such furniture is hired from a third party, the value of unfurnished accommodation would be increased by the hire charges paid/payable by the employer. However, any payment recovered from the employee towards the above would be reduced from this amount.
3. Value of hotel accommodation provided by the employer-
The value of perquisite arising out of the above would be 24% of salary or the actual charges paid or payable to the hotel, whichever is lower. The above would be reduced by any rent actually paid or payable by the employee. It may be noted that no perquisite would arise, if;
• The employee is provided such accommodation on transfer from one place to another for a period of 15 days or less.
• The employee is provided such accommodation at a mining/ oil exploration/ project execution/ Dam/ Power generation/ off- shore site located in remote area or being of temporary nature having plinth area < 800sq. Ft and not less than 8 kms away from municipality or cantonment limits.
Concessional accommodation
Where the accommodation is provided to the employee at a concessional rate of rent, the value of such accommodation is first determined as if the accommodation were provided free of rent (as explained earlier). From the above value, the rent paid or payable by the employee for the period during which he occupied the house during the previous year, should be deducted. The resulting amount will be added to his salary as value of-concession.
Personal obligations of the employee met by the employer –
1. Electricity/Water/Heater/Gas:
Where employer provides the same from own sources: -
Value of perquisite: - Cost of production
Where employer provides from outside sources: -
Value of perquisite: - Amount Paid by the employer
2. Sweeper/Gardener/Watchman/Domestic Servant:
Value of perquisite: Amount paid by employer
3. Free Education: -
Where employer provides free education in own college: -
Value of perquisite: Fee charged by similar college in nearby area
Where employer provides free education in any other college: -
Value of perquisite: Actual amount paid by employer
4. Free Transport: -
- Free transport facility provided by employee engaged in the business of transportation of passengers/ goods
Value of perquisite: Amount charged when similar services are provided to general public.
- Free tickets to railway and airline employees are exempt
5. Medical Facilities: -
- Medical facilities are provided in a government hospital in India/ Employer owned hospital in India/ a hospital approved by the board are exempt from tax.
- Medical facilities in any other case up to a total value of Rs 15000 is exempt from tax.
- Medical Facilities provided by employer outside India: -
a) Treatment and stay expenditure are exempt up to the limits permitted by RBI
b) Traveling expenditure is exempt where the Gross total income of the assessee is up to 2 Lakhs. IN case of Gross total income being in excess of Rs 2 Lakhs, the traveling expenditure is chargeable to tax.
6. Telephone Facility: -
Telephone facility provided by employer is completely exempt from tax.
Provident fund is a government-managed retirement savings scheme for employees, who can contribute a part of their savings towards their pension fund, every month. These monthly savings get accumulated every month and can be accessed as a lump sum amount at the time of retirement, or at the end of employment.
Provident Funds are of four kinds
(i) Statutory Provident Fund or the Fund to which the Act of 1925 applies (S.P.F.)
- These are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc.,
- The contributions made by the employer are exempted from income taxes in the year in which contributions are made.
- The contributions made by the employee can be claimed as tax deductions under section 80c.
- Interest amount credited during the financial year is not treated as income and hence it is exempted from income tax.
- The redemption amount at the time of retirement is exempted from tax.
- If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.
(ii) Recognised Provident Fund (R.P.F.)
- Any establishment (business entity) which employs 20 or more employees can join RPF. Most of the individuals (who are salaried) generally contribute to this type of Provident Fund. This is one of the popular types of Employees Provident Funds (EPF). (Organizations which employ less than 20 employees can also join RPF if the employer and employees want to do so)
- The business entity can either join the Govt. Scheme set up by the PF Commissioner (or) the employer himself can manage the scheme by creating a PF Trust. All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax (CIT).
- Employer’s contribution in excess of 12% of salary is treated as income of the employee and is taxable. In excess of 12%, the contributions are taxable in the year of contribution.
- Tax Deduction u/s. 80C is available for amount invested by the employee (up to Rs 1.5 Lakh in a Financial Year).
- Interest amount earned (up to 9.5% interest rate) on PF balance (employee’s + employer’s contributions) is tax free. In excess of 9.5%, the interest on contributions is taxable as ‘salary’ in the year in which it is accrued.
- Accumulated funds redeemed by the employee at the time of retirement / resignation are exempt from tax if he/she continues the service for 5 years or more.
(iii) Unrecognised Provident Fund (U.R.P.F.)
- These are not recognized by Commissioner of Income Tax.
- Employer’s contribution is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free in the year of contribution.
- Tax deduction under section 80c is not available on Employee’s contributions.
- Interest earned is not treated as income in the year it is credited and hence not taxable in the year of accrual.
- At the time of redemption / retirement, the employer’s contributions and interest thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.
(iv) Public Provident Fund (P.P.F.)
- Under PPF any individual from public, whether is in employment or not may contribute to this fund.
- The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh Rs. p.a. The amount is repayable after 15 years.
- PPF can serve as an excellent retirement planning / savings tool, for those who do not come under any pension scheme.
- The PPF offers tax benefit under section 80C and the interest earned is also exempt from tax. All the eligible withdrawals are exempted from taxes.
Tax treatment of provident fund
The contribution is made in the Employee Provident Fund (EPF) for the employee’s welfare by the employee and the employer. The deduction is available under section 80C. Provident fund is a kind of security fund in which the employees contribute a part of their salary and the employer also contributes on behalf of their employees. Section 10(11) and 10(12) of the Income Tax Act defines the exemption on the amount added to the provident fund. Additionally, the amount allowed as a deduction on contributing to the provident fund is dealt in section 80C of the Income Tax Act. The types of provident funds are:
- Recognized Provident Fund (RPF) as recognized by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952. It applies to enterprises employing at least 20 employees.
- Unrecognized Provident Fund (UPF) is not recognized by the Commissioner of Income Tax. The employers and employees start these schemes.
- Public Provident Fund (PPF) under Public Provident Fund Act, 1968 is another system of contributing to the provident fund. Self-employed people can also take part in this scheme. A minimum contributing limit of Rs. 500 per annum and a maximum of Rs. 150000 per annum are set.
- Statutory Provident Fund (SPF) is meant for employees of Government or Universities or Educational Institutes affiliated to university.
Section 16 of Income Tax Act, 1961 provides deduction from income chargeable to tax under the head ‘salaries. It provides deductions for the standard deduction, entertainment allowance, and professional tax. Through this deduction, a salaried taxpayer can lower his/ her taxable salary income chargeable to tax.
Standard Deduction under Section 16
With effect from the financial year 2019-20, taxpayers can claim a standard deduction of Rs. 50000 from the salary income, or the actual amount of income, whichever is less. The deduction of Rs. 50000 will also be available on the amount of pension income earned by the assessee. Taxpayers should note that the legislation does not permit the claiming of a loss under the head salaries. Hence, if the salary received is lesser than Rs.50000, the deduction allowed will also accordingly be restricted to the actual amount of salary.
Exemptions
Consequent to the introduction of the standard deduction, the following exemptions have been withdrawn:
- A transport allowance of Rs. 1,600 per month for the purpose of computing between the place of residence and the place of duty. However, the transport allowance of Rs.3200 per month granted to an employee who is deaf and dumb or blind or orthopedically handicapped with the disability of lower extremities would continue to be exempt.
- Any sum funded by an employer in respect of any amount actually incurred by the employee for obtaining host or his family member’s medical treatment either in any hospital, nursing home, clinic or otherwise up to a maximum of Rs. 15,000 in the previous year.
Entertainment Allowance
While calculating gross salary, entertainment allowance is first included. Then a standard deduction is allowed under Section 16(ii). However, entertainment allowance can be claimed only by Government employee up to a maximum of Rs.5000. Where the employee is in receipt of entertainment allowance, the amount so received shall first be included in the salary income and thereafter the following deduction shall be made: A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less.
Professional Tax Paid
State Governments and Local Authorities are empowered to collect professional taxes on professions, trades, callings and employment. The amount of professional tax collected does not exceed Rs.2500 per annum. Under Section 16(iii), a deduction from salary can be claimed by the taxpayer on account of professional tax paid. The deduction for professional tax will be allowed in the year in which the tax is actually paid by the employee. Professional tax due but not paid cannot be claimed as a deduction from salary.
Problems on Income from Salary (excluding retirement benefits)
Q1) Mr. X is the general manager of Plus Steel Ltd. He draws a salary of Rs. SOW/- per month. He retires on 31st December 1989, after completing 26 years and 1.1 months of service. He is entitled to one month earned leave for every year of completed service. He has availed of 20 months earned leave while in service. He has encashed the unutilised earned leave while in service. He has encashed the unutilised earned leave standing to his credit on the basis of last drawn salary. He got an in rent of Rs. 5001- on 1-7-89. Compute the gross salary of Mr.X for the assessment year 2020-21.
Solution:1)
Mr. X. Computation of gross salary for assessment year 2020-21
Salary for 9 months (14-2020 to 31-12-2021)1 3 X Rs. 4500 + 6 X 5000 = 43,500.00
Encashment of earned leave –
Total earned leave to which X
Is entitled 27 months
Less earned leave availed 20 months
Balance of credit 7 months
Cash received on the basis of
Rs. 5000-per month.35,000.00
Less exemption under Section 10 (IOAA)
(a) Actual amount received. Rs 35,000
(b) have salary for the unutilised
Entitled period on the basis of
Average salary drawn during
10 months immediately preceding retirement.
7 X (5 X 4500 + 5 X 5000) 10 4 X Rs. 4750 = Rs. 33,250
(c) Salary for 8 months of: earned leave period
Exempted under the Act. 8 X Rs. 4,750 = Rs. 38,000
(d) Rs. 79,9201- The least is exempt Rs. 33,250 1750
Excess amount is taxed (35,000 - 33,250)
Gross Salary 45,250
Q2) Determine the taxable amount of pension for the assessment year 2020-21 in the following cases.
i) A receives Rs. 1200per month as pension from:
(a) the Central government
(b) a public sector corporation and
(c) a private sector company during previous year 2020-21.
Ii) A retires from government service on 30th April 2020. He gets pension of Rs. 1,2001- per month up to December, 1989 with effect from January 1, 2020 he gets one-third of his pension commuted for Rs. 22,000
Iii) A retires from Tata Steel Company Ltd., in June 39, 2020. He gets pension of Rs. 2,0001- per month up to 31-1-2020. With effect from 1-2-2020 he gets 75% of his pension commuted for Rs. 70,000- at the time of retirement he got Rs. 1,00,000/- as gratuity from the company.
Solution: 2) i) Rs. 14,400- will be taxable as salary in A's hands for 2020-21 assessment year subject to permissible deductions. It does not matter whether he is a government servant, a servant of public sector, or a private sector company. However, since his total income will be below the taxable limit of Rs. 18,00O/ no liability arises for payment of tax.
(ii) Non-commuted pension from May 20-December 20Rs. 1280/- X 8 Rs. 9600
Since A is a government servant the entire
Commuted value of Rs. 22,000/- is exempt from tax.
Uncommuted pension from
1-1-2020 to 31-3-2021 Rs. 12001- X 2/3 X 3 Rs. 2400
Total taxable uncommuted pension Rs. 12000
(iii) Uncommuted pension
From 1-7-2020 to 31-1-2021 Rs. 2000 X 7 Rs. 14000
Commuted value of 75% of pension Rs. 70,000/-
Since A has received gratuity 1/3rd of the commuted value of the whole pension is exempt from tax i.e., Rs.70,000X4/3X1/3 =Rs. 31,1111
Taxable portion of commuted pension Uncommuted pension
From 1-2-21 to 31-3-21Rs. 2,0001- X 114 X 2 ‘. = Rs. 1,000
Taxable pension (subject to standard deduction) = 53,8891
Q3) B, an employee of TR Co. Ltd. Receives Rs. 50,000 as gratuity as par the provisions of Payment of Gratuity Act 1972. He retires in March 1990 after putting in 26 years and 9 months service. At the time of retirement his monthly salary was Rs. 17001- Calculate the taxable gratuity in his hands.
Solution: 3)
Completed year of service 27 years
15 days salary i.e., 1700 X 15/26 = Rs. 980
Limits:
(i) Gratuity received Rs. 50,0001-
(ii) 15 days of wages for each completed year of service Rs. 980 X 27 Rs. 26,460/-
(iii) Rs. 50,000 The exempted portion of gratuity is Rs. 26,460 and the balance of Rs. 23,5401(50,000-26,460) will be taxable in the hands of B as salary.
Q4) Mr. Gaurav Modi is employed in Khadi Samiti in Lucknow. He is in receipt of a salary of Rs. 17,000 p.m. And a dearness allowance of Rs. 2,000 p.m. He contributes 10% of his salary and dearness allowance to a provident fund to which Khadi Samiti contributes 15%. He is provided with a rent-free unfurnished house by his employer. He received Rs. 25,000 as bonus during previous year. The interest credited to his provident fund @ 12% amounted to Rs. 1,000. Compute taxable income of Mr. Gaurav Modi for the assessment year 2020-21, if the P.F. In question is (i) Statutory (ii) Recognized or (iii) Unrecognized. On what amount the assessee is entitled to deduction u/s 80C.
Solution: 4) Computation of Taxable Income of Mr. Gaurav Modi for AY 2020-21
Statutory P.F. Recognized Unrecognized P.F. (Rs.) P.F. (Rs.) P.F. (Rs.)
Salary @ 17,000 p.m. 2,04,0002,04,000 2,04,000
D.A. @ 2,000 p.m.24,000 24,000 24,000
Bonus 25,000 25,300 25,000
Employer’s contribution — 6,840 —
To R.P.F. In excess of 12%
Interest credited to R.P.F.in — 208 —
Excess of 9.5%
Value of rent-free house 10% 25,300 25,300 25,300
Of salary of Rs. 2,53,000
(As population of Lucknow
Exceeds 10 lakhs but does
Not exceed 25 lakhs)
Gross Salary 2,78,3002,85,348 2,78,300
Less: Standard Deduction 50,000 50,000 50,000
Taxable Salary 2,28,3002,35,348 2,28,300
Amount entitled to deduction 22,800 22,800 Nil
u/s 80C
1) Employer’s contribution RPF = 2, 28,000 (Salary + D.A.)
= 2, 28,000 x 3/100 = 6,840
Interest credited = 1000 x100/12 = 8333.33
Excess of 9.5% = 8,333x 2.5/100 = 208
2) Assessee is entitled to deduction u/s 80C, up to a maximum amount of Rs.1,50,000 in respect of his contribution to statutory or recognized provident fund, i.e., 10% of his salary and D.A., say Rs. 22,800. He is not entitled to deduction u/s 80C in respect of his contribution to unrecognized provident fund.
3) Salary = Basic Pay + D. A+ Bonus
= 2,04,000+ 24,000+25,000
= Rs. 2,53,000
Q5) Following particulars are furnished by Mr. Murari, a citizen and resident of India. Compute the taxable income of Mr. Murari for Assessment Year 2020-21
Rs.
a) Basic Salary 86,000
b) House rent allowance (the house is at Kolar and
Rent paid amount to Rs. 60,000) 42,000
c) LIC premium on his own life 5,000
d) Unit linked insurance plan contribution 1,000
e) Premium on his wife’s life 2,500
f) Deposit in 10 years CTD of Post Office 2,000
Computation of Taxable income of Mr. Murari.
Solution:5 Taxable salary of Mr Murari for AY 2020-21
1) Basic Salary 86,000
2) House rent allowance:
a) Actual HRA received 42,000
b) Rent paid in excess of 51,400
10% of salary Rs. 60,000 – Rs. 8,600
c) 40% of salary 34,400
Taxable HRA (Rs. 42,000 – 34,400) 7,600
Gross Salary 93,600
Less: Standard deduction 50,000
43,600
Deduction u/s 80 C
Premium on own life 5,000
Premium on wife’s life 2,500
Payment under unit linked plan 1,000 8,500
Taxable Income 35,100
Basis of Charge [Section 22]:
Income from house property shall be taxable under this head if following conditions are satisfied:
a) The house property should consist of any building or land appurtenant thereto;
b) The taxpayer should be the owner of the property;
c) The house property should not be used for the purpose of business or profession carried on by the taxpayer.
Exempted Incomes from House Property
There are certain cases where income from House property is exempted. As per section 10 of Income Tax Act 1961, below income are exempted and not to be included while calculating the total income of Assessee.
1. [Section 2(1)(c)] Agricultural House Property
Income from such house property which is situated on or in the immediate vicinity of agricultural land which is used for agricultural purposes by cultivator is exempted from tax.
2. [Section 11] House property held for charitable purposes
Any income from a house property held for charitable or religious purposes. Example- Rent received from the shop which is owned by charitable institute and temple.
3. [Section 23(3)] Self-occupied but vacant house
If assessee keeps one of his own houses reserved for self-occupation but is living in a rented house elsewhere or any other place due to his employment or profession the income from such house is taken to be nil while computing his/her total income.
4. House used for own business or profession
If house is used for the purpose of doing own business, then there is no income chargeable to tax under this head from such house property.
5. [Section 10(24)] Property held by registered trade union
Income from a house property owned by a registered trade union is not to be included in its Gross total income.
6. Income from house property held by the
Local Authority, Scientific research institute, political party, educational institute working for spreading education and not to earn profit, medical institute working for spreading medical service and not to earn profit.
7. [Section 23(5)] House Property held as Stock-in-Trade and not let out during the previous year
Where any house property is held as stock-in-trade and the property is not let during the whole or part of the year. The annual value of such property shall be taken as nil for the period of one year from the end of the financial year in which the certificate of completion is obtained.
8. One house property owned by a former ruler of Indian states
Ex-rulers of Indian states may be owning many palaces but only one palace of their choice shall be treated as a self-occupied house and shall be exempted.
9. One self-occupied house
If assessee owns one residential house, the net annual value of the same shall be taken as nil but in case he owns more than one house, then only one of his choices but normally of higher value shall be treated as a self-occupied one and other/others are treated as deemed to be let out.
The income tax categorises your income under two categories for the purpose of taxability of house property income. These are:
Self-Occupied House Property | This is the type of property that is self-owned and used for own residential purposes. This may be occupied by the owner’s family or relative or self. A property that is unoccupied is considered as a self-occupied property for the purpose of income tax. Before the Financial Year 2019-20 if taxpayer owns more than one house property, only one is considered as self-occupied property and rest are assumed to be let out. From 2019-20 onwards two properties are considered as self-occupied properties. |
Let Out House Property | Any house property that is rented for complete or part of the year is considered as a let-out property for income tax purposes. |
Note: Inherited Property Any property inherited from parents, grandparents, etc, can be either considered as self-occupied or let out house property based on the usage as discussed above. |
Deductions from income from house property (Section 24)
Income chargeable under the head ―Income from house property‖ shall be computed after making the following deductions, namely: —
(a) a sum equal to thirty per cent. Of the annual value;
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees:
Amounts not deductible from income from house property (Section 25)
Interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938), on which tax has not been paid or deducted under Chapter XVII-B and in respect of which there is no person in India who may be treated as an agent under section 163 shall not be deducted in computing the income chargeable under the head ―Income from house property.
Problems on Income from House Property (Excluding Pre-Construction interest)
Q1) Mr. Ashok is the owner of a house (not covered under Went Control Act) which is let out at Rs. 1,500 per month. Municipal taxes of the house are Rs. 1,200 (being 10% of the municipal value) out of which Rs. 700 are paid by the tenant. The reasonable rent is Rs. 10,000 per annum. What will be annual value of the house?
Solution:1) Annual value is the highest of the following three less taxes borne by the owner: Rs.
i) Actual rent (1500 x 12) 18,000
Ii) Municipal value 100 (1200 x 100/10) 12,000
Iii) Reasonable, rent 10,000
Annual value Rs. Actual rent 18,000
Less municipal taxes borne by the owner (1200-700) 500
17500
Q2) Mr. X is the owner of two houses (covered under the Rent Control Act) which are let at Rs. 1,000 p.m. And Rs. 1,500 p.m. Municipal taxes on these houses are paid by the owner which amount to Rs. 800 and Rs. 1,000 respectively (being 10% of municipal valuation. The Standard Rents fixed under the Rent Control Act are Rs. 14,000 and Rs. 16,000 per annual respectively. What will be their Annual Value?
Solution:2) Gross annual value is the highest of the following;
First House (Rs) Second House (Rs)
Rent received 12,000 18,000
Standard rent 14,000 16,000
Gross annual value of the first house will Rs. 14,000 and oi the second house it will below Rs.18,000.
Annual Value will be First House (Rs) Second House(Rs)
Gross annual value 14,000 18,000
Less Municipal taxes borne by the owner 800 1,000
13,200 17,000
Thus, annual value of first house is Rs. 13,200 and that of second house is Rs. 17,000.
Q3) From the following particulars compute the adjusted annual value of a house property for the assessment year 2020-21
1) Date of commencement of construction 10th July, 2017.
2) Date of completion of construction 1st May, 2017
3) Let out for the residential purpose on 1st June, 2017 at the rate of Rs, 600 per month.
4) Municipal value of the property Rs. 6,000.
5) Annual municipal taxes paid Rs. 400.
Solution:3)
Gross annual value Rs.7200
(Municipal value or actual rent, whichever is more)
Less municipal taxes Annual value Less statutory deduction
Adjusted or net annual value 400
Annual 6800
Less: Adjusted or net annual value 3600
3200 |
Hence, proportionate annual value for 10'months will be
10x3200/12 = Rs. 2,667.
Q4) From the following information of Mr. A, compute the adjusted annual value of the let-out period of the house for the Assessment Year 2020-21.
Municipal value Rs. 20000
Municipal tax paid Rs. .4,000
House was self-occupied for first six months and for the remaining six months it was. Let out at the rate of Rs. 2,000 p.m.
Solution:4) Gross annual value is highest of the following:
Municipal value 20000
Actual rent (2,000 x 12) 24000
Gross annual value 24000
Less municipal taxes 4000
Annual value 20000
Less 112 of the annual value
For self-occupied period 10000
Adjusted annual value for let out period 10000
Q5) From the following information of Mr. A, compute the adjusted annual value of the let-out portion of the house for the Assessment Year 2020-21. Municipal value Municipal tax paid Rs. 30,000 Rs. 6,000.
House is self-occupied but is 114 of the houses is let out @ Rs. 700 p.m. From 1.1.20
Solution:5) Calculation of Adjusted Annual Value:
Rs.
Gross annual value 33600
Municipal value 30,000
Actual Rent (700 X 4 X 12) 33,600
Less municipal taxes 6000
27600 |
Less 314 of the annual value for self-occupied
Portion for full year 20700
Annual value of 1/4 of the house for full year 6900
Less 3/4 (ie.9/2 of 6,900 for self-occupied portion of the house
For nine months 5,175
Part of the house is let out for 3 months 1,725
Adjusted annual value of part of the house for part of the previous year
The Section 2(13) of the Income Tax Act, 1961, contains an inclusive definition of the term “business”. As per Section 2(13) of the Income Tax Act, 1961, unless the context otherwise requires, the term ‘businesses include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Income from ‘Business’ is chargeable to income-tax under the head “Profits and gains of business or profession” as per Section 28 of the Income Tax Act, 1961.
Profession means exploitation of individuals’ skills and knowledge independently. Profession includes vocation. The word “profession” & “vocation” have not been defined in the Act while as per section 2(36) of the Income Tax Act, 1961, “profession” includes vocation. The word “vocation” is a word of wider import than the word ‘profession”. Following are some of professions as per Rule 6F of the I.T. Rules, 1962:
- Architectural
- Accountancy
- Authorised representative
- Engineering
- Film Artist
- Interior Decoration
- Legal
- Medical
- Technical Consultancy
VOCATION
Vocation implies natural ability of a person to do some particular work e.g., singing, dancing, etc. Here, no training or no qualification is required but having natural ability.
SPECULATIVE BUSINESS
As name suggests, it includes profits/loss from doing speculative transactions i.e., without taking actual delivery of goods. Although profits from the speculative business (e.g., Share trading) are chargeable under this head, they should be maintained and shown separately while e-filing the income tax return.
As per the Income Tax Act, a contract in which the purchase or sale of any commodity including stocks and shares is settled without actual delivery, it is called a Speculative Transaction. Intraday Trading means trading in stock or security by squaring off the trade within the same trading day. Therefore, Equity Intraday Trading is Speculative Business Income.
The method of reporting revenues and expenses adopted by a company is known as an accounting method. There are two major accounting methods used across the world—accrual accounting and cash accounting. The former method reports revenue and expenses when they are received and paid, whereas the latter method reports the revenue and expenses as soon as the transaction occurs.
Cash accounting is the simplest accounting method and is widely used by small businesses. Also, the transaction is only recorded when the cash is spent or received, that is a sale is recorded when the payment is received, and an expense is recorded when a bill is paid. This is the method used by commoners in managing personal finances and works for businesses up to a certain size.
Accrual (mercantile) accounting works based on a matching principle, i.e., the timing of revenue and expense recognition much match. The process of matching revenue with expense draws a better picture of a company's financial condition. In this method, the purchase order is recorded as revenue even though the payment is not received. Similarly, expenses are recorded even though the payment is not yet made.
The third accounting method is the hybrid method, which is a blend of cash and accrual methods along with the essence of many other special accounting methods. This method can be used in internal accounting and for tax purposes.
The Income Tax Act, 1961, has instructed how each of the five heads of income must be recorded. The act says that the salaries, income from house property, and capital gains must be recorded using the accrual method.
For the heads—profits and gains of business or profession and income from other sources, such as business profits, investment income, and professional income—you can choose the cash accounting or accrual accounting method as stated in section 145 of the Income Tax Act. Prior to the enforcement of section 145, the hybrid method was widely used for this.
A. [ Section 30]: Rent, Rates, Taxes, Repairs & Insurance of Buildings Used for the Purpose of The Business
Deductions:
In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed:
- Where the premises are occupied by the assessee:
- As a tenant — the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;
- Otherwise, then as a tenant — the amount paid by him on account of current repairs to the premises;
- Any sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes; However, these are allowable subject to provisions of section 43B i.e., if these expenses are claimed on due basis, the payment of the same must be made on or before the due date of furnishing the return of income under section 139(1) [Ref. Para 6.32];
- Any insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises.
B. [ Section 31]: Repairs & Insurance of Plant, Machinery & Furniture
In respect of machinery, plant or furniture used for the purpose of business, the following deductions are allowable:
- Amount paid on account of current repairs,
- Any insurance premium paid in respect of insurance against risk of damage or destruction of the plant and machinery or furniture.
C. [Section 32]: Depreciation
Depreciation is the diminution in the value of an asset due to normal wear and tear and due to obsolescence. There are different methods for calculation of depreciation under financial accounting. The methods commonly used are:
- Straight line method;
- Written down value method;
The system of claiming depreciation under the Income-tax Act is quite different from financial accounting.
Types of Depreciation Allowance under Income-Tax Act:
The following are the three kinds of depreciation allowance which are allowed under the Income-tax Act:
- Normal depreciation for block of assets [Section 32(1)(ii)].
- Additional depreciation in case of any eligible new machinery or plant (other than ship and aircraft) which has been acquired and installed—
- By an assessee engaged in the business of manufacture or production of any article or things or in the business of generation, transmission or generation and distribution of power [Section 32(1) (ii a)].
- Before 1-4-2020 by an assessee engaged in the business of manufacture or production of any article or things which is set up in a notified backward area in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal.
- Normal asset-wise depreciation for an undertaking engaged in generation or generation and distribution of power [Section 32(1)(i)].
As already mentioned, two methods are commonly used for allowing normal depreciation. In case of block of assets systems, normal depreciation is allowed on the basis of written down value method whereas, in case of power generating or generating and distributing undertaking, depreciation is allowed on the basis of straight-line method on each and every asset separately.
Additional/extra depreciation is allowed @ 20%/35% of the cost of the eligible plant and machinery acquired and installed in the previous year and it is allowed only in first year in which asset is acquired and installed. Such depreciation is, however, deductible while calculating the written down value for the next year.
D. [ Section 36]: Other Deductions
Deductions which are specified Under Section 36 include the following:
D1. [Section 36(1)(i)]: Insurance Premium of Stocks
The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession is allowed as deduction. As already explained paid here means actually paid or incurred according to the method of accounting adopted.
D2. [Section 36(1) (I a)]: Insurance Premium of Cattle
The amount of any premium paid by a federal milk cooperative society towards an insurance on the life of the cattle owned by a member of the primary milk co-operative society is allowed as deduction provided such primary society is engaged in supplying milk raised by its members to such federal milk co-operative society.
D3. [Section 36(1) (I b)]: Insurance Premium on The Health of Employees
It is allowed as deduction if following conditions are satisfied:
The amount of any premium paid by any mode of payment other than Cash by the assessee as an employer to effect or keep in force an insurance on the health of his employees under the scheme framed by.
- The General Insurance Corporation of India, or
- Any other insurer approved by IRDA, and approved by the Government of India
Is allowed as Deduction. There is no monetary ceiling for this deduction.
D4. [Section 36(1)(ii)]: Bonus or Commission Paid to Employees
Bonus or Commission paid to an employee is Allowable as Deduction subject to certain conditions:
- Admissible only if not payable as Profit or Dividend: One of the conditions is that the amount payable to employees as Bonus or Commission should not otherwise have been payable to them as profit or dividend. This is provided to check an employer from avoiding tax by distributing his / its profit by way of bonus among the member employees of his/its concern, instead of distributing the sum as dividend or profits.
- Deductible on Payment Basis: Bonus or Commission is allowed as deduction only where payment is made during the previous year or on or before the due date of furnishing return of income u/s 139.
- However, it can be claimed on Accrual Basis also subject to provisions of section 43B.
D5. [Section 36(1)(iii)]: Interest on borrowed capital
The amount of Interest Paid in respect of Capital Borrowed for the purposes of Business or Profession is allowed as Deduction.
D6. [Section 36(1)(iv)]: Employer's Contribution to a Recognised Provident Fund (RPF) or Approved Superannuation Fund.
Employer’s contribution paid towards Recognized Provident Fund (RPF) or an Approved Superannuation Fund is allowed as Deduction subject to Section 43B. However, contribution to Non-Statutory Fund or Unapproved Fund is Not Allowed as Deduction. In case of contribution towards Superannuation Fund is allowed as Deduction u/s 37.
"Any sum paid" is to be dealt with reference to section 43B of the Income-tax Act i.e., if such sum is payable at the end of the year it will not allowed as deduction on due basis unless the payment of the same is actually made on or before the due date of furnishing the return of income prescribed under section 139(1). However, if the payment is made subsequent to the due date, it shall be allowed as deduction in the year in which it is paid.
D7. [Section 36(1) (iv a)]: Employers' Contribution towards a Pension Scheme.
Any sum paid by the assessee as an employer by way of contribution towards a Pension Scheme, as referred to in Section 80CCD on account of an employee to the extent it does not Exceed 10% of the Salary of the employee in the previous year shall be allowed as Deduction.
D8. [Section 36(1)(v)]: Employer's Contribution to an Approved Gratuity Fund.
Any sum paid by the assessee as an employer by way of contribution towards approved gratuity fund, created by him for the exclusive benefit of his employees under an irrevocable trust, shall be allowed as a deduction subject to the provisions of section 43B.
D9. [Section 36(1) (v a)]: Employer's Contribution towards Staff Welfare Scheme.
Certain employers were deducting amounts from the Salaries of the employees towards certain Welfare Schemes like PF, ESI, etc. but were not crediting it to the employees' accounts even after long periods. This Section was introduced to check such malpractices. Sum deducted from the salary of the employee as his contribution to any Provident Fund or Superannuation Fund or ESI or any other Fund for the welfare of such employee is now treated as an income of the employer as per section 2(24)(x). However, if such contribution is actually paid on or before the 'Due Date' mentioned below the deduction will be allowed for the same under this clause.
D10. [Section 36(1)(vi)]: Allowance in respect of Dead or Permanently Useless Animals
In respect of animals which are used for the purpose of business or profession (not as stock-in-trade) and have died or become permanently useless, the difference between the actual cost of the animals to the assessee and the amount realised (if any) in respect of carcasses or sale of animals is allowable as deduction.
D11. [Section 36(1)(vii)]: Bad Debts
The amount of any Bad Debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be Allowed as a Deduction subject to the provisions of Section 36(2) which are as under: —
- Such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, or
- It represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.
If there is a bad debt on account of sale made, it will be allowed as a deduction because sale has been treated as income. Similarly, in the case of a money lending business if interest is not realisable it will be allowed as a deduction because it has been treated as income either of current year or earlier year.
D12. [Section 36(1) (vii a)]: Provision for Bad and Doubtful Debts relating to Rural Branches of Commercial Banks
- The amount of deduction is given below:
D13. [Section 36(1)(viii)]: Amount carried to Special Reserve Credited and maintained by Special Entity.
Deduction under this section is allowed to a Specified Entity of an amount not exceeding 20% of the profits derived from Eligible Business computed under the head profits and gains of business or profession (before making any deduction under this clause) carried to special reserve account created and maintained by such specified entity.
However, where the aggregate of the amount carried to such reserve account from time to time exceeds 200% of the amount of the paid-up capital and of general reserves of the specified entity, the excess amount is not deductible.
D14. [Section 36(1)(ix)]: Expenditure on Promoting Family Planning amongst the Employees.
This deduction is allowed only to company assessees. Any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees is allowable as deduction in the year in which it is incurred.
Where such expenditure or part thereof is of a capital nature, 1/5th of such expenditure shall be deducted for the previous year, in which it was incurred and the balance shall be deducted in four equal instalments during the subsequent four years
E. [Section 37(1)]: General Deductions
Any expenditure (not being expenditure of the nature described in sections 30 to 36) and not being in the nature of capital expenditure or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed as deduction in computing the income chargeable under the Head "Profits and Gains of Business or Profession".
Conditions for Allowance under Section 37(1):
- Such expenditure should not be covered under the specific sections, i.e., sections 30 to 36.
- Expenditure should not be of capital nature.
- The expenditure should have been incurred during the previous year.
- The expenditure should not be of a personal nature.
- The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
Deductions Expressly Disallowed
There are two kinds of provisions under the Act, - one in respect of what is allowable and other in respect of what is not allowable, i.e., they override the provisions. While determining whether a particular expenditure is deductible or not, the first requirement must be to enquire whether the deduction is expressly prohibited under any other provision of the Income tax Act. If it is not so prohibited, then alone the allow ability may be considered under Sec. 37(1). Sec. 40 and 40A provides for non -deductible expenses or payments. Under Sec. 43B certain deductions are to be allowed only on actual payment.
Following amounts shall not be deducted while computing income under the head profits & gains of business or profession-
1) Interest, royalty, fees for technical services, etc, payable to a non-resident or outside India without deducting TDS and its payment;
2) Interest, commission or brokerage, fees for professional services or fees for technical services payable to any resident person without TDS and its payment;
3) Income Tax;
4) Wealth Tax;
5) Any payment which is chargeable under the head “Salaries”, if it’s payable outside India, or to a non-resident, and the tax has neither been paid in India nor deducted there from;
6) Any payment to provident fund or any other fund established for the benefit of employees of the assessee in respect of whom the assessee has not made effective arrangement to secure that tax shall be deducted at source from any payment made from the fund, which are taxable under the head ‘salaries’;
7) Any tax on non-monetary perquisite actually paid by employer on behalf of employee.
8) Sec. 40 A (2): 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. Related person includes both “Relative” and “Person having substantial interest”.
9) Sec. 40 A (3): Where any expenditure in respect of which payment is made in excess of Rs. 20,000 at a time otherwise than by Account-payee cheque or draft, 100% of such payment shall be disallowed.
10) No deduction shall be allowed in respect of any provision made by assessee for the payment of gratuity to his employees, provided such contribution is not towards an approved gratuity fund or for the purpose of payment of gratuity, that has become payable during the previous year.
11) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards setting-up or formation of, or as contribution to any fund, trust, company, AOP, BOI, society or other institution for any purpose provided such sum is not by way of contribution towards approved superannuation fund, recognised provident fund, approved gratuity fund.
12) Deductions in respect of following expenses are allowed only if payment is made on or before the due date for furnishing return of income.
13) Sec. 43B-Following sums not paid before due date of filing return of income
i. Any sum payable by way of tax, duty, cess, fee, etc.
Ii. Bonus or commission to employees.
Iii. Interest on loan or borrowing from any public financial institutions, etc.
Iv. Interest on any loans and advances from a scheduled bank.
Iv. Leave encashment.
v Contribution to any P.F., superannuation fund, gratuity fund, etc.
Problems on computation of income from Business of Sole Proprietor
Illustration 1: Mr. Amitabh prepared the following profit and loss account of his cloth shop for the year ended 31st March, 2019. Find out his income from business for the AY 2019-20.
Profit and Loss Account (For the year ended 31st March, 2019)
Particulars | Rs | Particulars | Rs |
Salaries and wages | 33,000 | Gross Profit | 3,34,725 |
Rent, etc. | 1,600 | Gifts received from relatives | 275 |
Household expenses | 82,000 |
|
|
Income Tax | 900 |
|
|
Advertisement | 800 |
|
|
Postage expenses | 600 |
|
|
Gifts to relatives | 900 |
|
|
Fire Insurance Premium | 400 |
|
|
Life Insurance Premium | 2,100 |
|
|
Bad Debts Reserve | 800 |
|
|
Audit Fees | 400 |
|
|
Net profit | 211500 |
|
|
Total | 3335000 | Total | 335000 |
|
|
|
|
Illustration 3
The following is the Profit and Loss Account of the Raj Oil Mills for the financial year 2018-19. Compute its business income on the basis of additional information.
Illustration 4
From the Profit & Loss Account for the relevant assessment year, compute income from business of Sri Babu Rao.
Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”.
Types of capital gain
It is of two types-
Figure: Types of capital gain
- Short term capital gain:
Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
2. Long term capital gain:
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months
CHARGEABILITY-
Generally, long-term capital gains are charged to tax @ 20% (plus surcharge and cess as applicable), but in certain special cases, the gain may be (at the option of the taxpayer) charged to tax @ 10% (plus surcharge and cess as applicable). The benefit of charging long-term capital gain @ 10% is available only in following cases:
1) Long-term capital gains arising from sale of listed securities and it exceeds Rs. 1,00,000 (Section 112A);
2) Long-term capital gains arising from transfer of any of the following asset:
a) Any security (*) which is listed in a recognised stock exchange in India;
b) Any unit of UTI or mutual fund (whether listed or not) ($); and
c) Zero coupon bonds (*) Securities for this purpose means “securities” as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956. This definition generally includes shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a like nature in or of any incorporated company or other body corporate, Government securities, such other instruments as may be declared by the Central Government to be securities and rights or interest in securities. ($) This option is available only in respect of units sold on or before 10-7-2014.
Long-term capital gains arising from sale of listed securities
The Finance Act, 2018 inserts a new Section 112A with effect from Assessment Year 2019-20. As per the new section capital gains arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at the rate of 10 per cent of such capital gains exceeding Rs. 1,00,000. This concessional rate of 10 per cent will be applicable if:
a) in a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and
b) in a case a unit of an equity-oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset. The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of following:
a) The actual cost of acquisition of such asset; or
b) Lower of following:
(i) Fair market value of such shares as on January 31, 2018; or
(ii) Actual sales consideration accruing on its transfer. The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as on January 31, 2018. However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its fair market value.
In case of units which are not listed on recognized stock exchange, the net asset value of such units as on January 31, 2018 shall be deemed to be its FMV. In a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.
Long-term capital gains arising from transfer of specified asset
A taxpayer who has earned long-term capital gains from transfer of any listed security or any unit of UTI or mutual fund (whether listed or not), not being covered under Section 112A, and Zero-coupon bonds shall have the following two options: a. Avail of the benefit of indexation; the capital gains so computed will be charged to tax at normal rate of 20% (plus surcharge and cess as applicable). b. Do not avail of the benefit of indexation; the capital gain so computed is charged to tax @ 10% (plus surcharge and cess as applicable). The selection of the option is to be done by computing the tax liability under both the options, and the option with lower tax liability is to be selected.
DEFINITIONS-
CAPITAL ASSET
Capital asset is defined to include:
(a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
(b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992. However, the following items are excluded from the definition of “capital asset”:
(i) any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession;
(ii) personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
“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 stones, and whether or not worked or sewn into any wearing apparel;
b. Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii)Agricultural Land in India, not being a land situated:
a. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
b. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
i. Not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
Ii. Not being more than 6 KMs, if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
Iii. not being more than 8 KMs, if population of such area is more than 10 lakhs. Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year. (iv)61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government; (v) Special Bearer Bonds, 1991; (vi)Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2016.
TRANSFER
Transfer of Capital Asset: Transfer includes –
a) Sale, exchange or relinquishment (give up) of the asset.
b) The extinguishment of any right.
c) Compulsory acquisition under any law.
d) Asset converted into stock in trade.
e) Conversion of business into limited co.
f) Allowing of the possession of any immovable property
g) Maturity of Zero-Coupon Bond
h) Any transaction which effects the enjoyment of any immovable property.
The following are not considered as transfer (Sec 49(1))
Transfer of asset in a scheme of amalgamation
Transfer of agricultural land before 1/4/1970
Transfer of debenture or bonds into shares
Transfer of assets in kind at the time of liquidation
Transfer of asset by a parent company to the own subsidiary company
Transfer of asset under the gift or will
Transfer of capital asset at the time of partition of HUF
COST OF ACQUISITION
The term cost of acquisition' though not defined under the Act denotes the price paid by the owner or the amount, which he has incurred for acquiring the property. While determining the taxable capital gains on sale of property, the owner is entitled to the benefit of cost of acquisition as a deduction from the sale consideration. In simple words, ‘cost of acquisition’ includes all the expenses which is incurred by the owner in purchasing such capital asset.
COST OF IMPROVEMENT
Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset. It also includes any expenditure incurred in protecting or curing the title.
Any capital expenditure incurred by the assessee to make any addition or improvement in the house is treated as 'cost of improvement'. Thus, if renovation cost is in the nature of capital expenditure only then such renovation cost can be considered as 'cost of improvement' for the house property
Short term capital asset:
Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
Long term capital asset
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
Cost Inflation Index (CII) is used to estimate the increase in the prices of goods and assets year-by-year due to inflation. The Cost Inflation Index for the financial year 2021-22 is 317.
Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over time will lead to a rise in the prices.
Who notifies the Cost Inflation Index?
The Central Government specifies the cost inflation index by notifying in the official gazette.
Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.
*Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the cost of the same basket of goods and services in the previous year to calculate the increase in prices.
How is Cost Inflation Index used in Income Tax
Long term capital assets are recorded at cost price in books. Despite increasing inflation, they exist at the cost price and cannot be revalued. When these assets are sold, the profit amount remains high due to the higher sale price as compared to purchase price. This also leads to a higher income tax. The cost inflation index is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes to benefit taxpayers. To benefit the taxpayers, cost inflation index benefit is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.
Capital Gains Exemption can be claimed under the Income Tax Act by reinvesting the amount in either purchasing/ constructing a Residential House or by reinvesting the amount in Capital Gain Bonds.
The seller of the asset either has the option to claim exemption or pay 20% Long Term Capital Gains Tax.
Section 54: Old Asset: Residential Property, New Asset: Residential Property
Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rented) shall be exempt to the extent such capital gains is invested in the
- Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold and/or
- Construction of Residential house Property within a period of 3 years from the date of transfer/sale of property
Provided that the new Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition. If the new property is sold within a period of 3 years from the date of its acquisition, then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt under section 54 earlier. The capital gain arising from this transfer will always be a short-term capital gain.
Quantum of Deduction under Section 54
Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house i.e.
- If the Capital Gains amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt
- If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption
No. Of Houses which can be purchased for claiming Section 54 Exemption
- The Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in construction/purchase of 1 residential house [Introduced vide Finance Act 2014]. Irrespective of the no. Of houses already owned by the person, if he invests the capital gain in construction/purchase of a single residential house – then capital gains exemption can be claimed.
- As an exception to the above rule, in cases where the amount of Capital Gains does not exceed Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in purchase/construction of 2 residential houses. However, this exemption of purchasing 2 residential houses can be claimed only once. This exemption once claimed cannot be claimed in again in any other year. For all other years, investment should be made in construction/ purchase of 1 residential house only. [Introduced vide Finance Act 2019].
To re-iterate, for claiming exemption under Section 54 – the no. Of houses already owned by the person is immaterial. He can still claim exemption by reinvesting the Capital Gains on Sale of House in another Residential House.
Capital Gains Account Scheme
Although as per Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, but the capital gains on the transfer of the original house property is taxable in the year in which it was sold. The Income Tax Return of that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise, the capital gain would become taxable.
To avoid the above situation, the Income Tax Act specifies an alternative in the form of deposit under the Capital Gains Account Scheme.
The Amount of Capital Gain which is not utilised by the Assessee for the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return. The details of deposit i.e., the Date of Deposit and the amount deposited are required to be mentioned in the Income Tax Return while claiming the Capital Gains Exemption. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption.
In case, the assessee deposits the amount in the Capital Gains Account Scheme but does not utilise the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilised shall be charged as Capital Gains of the year in which the period of 3 years is completed from the date of sale of the Original Asset and it will be long term capital gain of that financial year.
Section 54EC: Old Asset: Any Asset, New Asset: Specified Bonds
Gains arising from the transfer of any long-term capital asset are exempt under section 54EC if the assessee has within a period of 6 months after the due date of such transfer invested the capital gain in long term specified bonds as notified by the Govt. For a minimum period of 3 years.
In case where the long term specified asset is transferred or converted into money at any time within a period of 3 years from the date of its acquisition, the amount of capital gain exempt u/s 54EC, shall be deemed to be long term capital gain of the previous year in which the long term specified asset is transferred or converted into money.
If the Assessee even takes a loan or advance on the security of such long term specified asset, he shall be deemed to have converted such long term specified asset into money on the date on which such loan or advance is taken.
These specified binds are usually issued by REC and NHAI and the Interest Rate offered is approx. 5.25%. Tax on the Interest earned is also liable to be paid as the Interest is not tax-free. These are Capital Gain Bonds and not Tax-Free Bonds. The principal invested becomes tax free after the lock-in period but the interest continues to remain taxable.
Budget 2018 Amendment: With effect from Financial Year 2018-19, the benefit of Section 54EC would only be available on sale of Land or Building (whether Residential or Non-Residential). Earlier it was available for all assets but now it would only be applicable for Land or Building. Moreover, from Financial Year 2018-19 onwards, these bonds would be required to be held for minimum 5 years.
Quantum of Deduction under Section 54EC
- Capital Gains shall be exempt to the extent it is invested in the long term specified assets (subject to a maximum limit of Rs. 50 Lakhs) within a period of 6 Months from the date of such transfer.
- Budget 2014 has also introduced an amendment to Section 54EC and from FY 14-15 i.e., AY 15-16 onwards, the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original asset or assets are transferred and in the subsequent financial year does not exceed Rs. 50 Lakhs.
Section 54F: Old Asset: Any Asset, New Asset: Residential House
Any Gain arising to an individual or HUF from the sale of any Long-Term Asset other than Residential Property shall be exempt in full, if the entire net sales consideration is invested in
- Purchase of one residential house within 1 year before or 2 years after the date of transfer of such an asset or in
- Construction of 1 Residential House within 3 years after the date of such transfer
In case the whole sale consideration is not invested and only a part of the sale consideration is invested, exemption shall be allowed proportionately i.e.
Amount Exempt = Capital Gain X Amount Invested
Net Sale Consideration
Exemption under Section 54F not available in following cases
The above exemption would not be available if any of the below mentioned conditions is satisfied: -
- The assessee does not own more than 1 Residential House Property on the date of transfer of such asset exclusive of the one he has bought for claiming exemption under section 54F. (Note: The restriction on No. Of houses already owned is only applicable if the assessee is claiming exemption under Section 54F. As explained above, there is no such restriction if the assessee is claiming exemption under Section 54)
- The assessee purchases any residential house, other than the new asset, within a period of 1 year of the transfer of the old asset.
- The assessee constructs any residential house, other than the new asset, within a period of 3 years after the date of the old asset.
Budget 2014 has also introduced an amendment to Section 54F to be effective from FY 2014-14 and as per this amendment the exemption is available if the investment is made in 1 residential house situated in India.
Exemption under Section 54F would not be allowed if investment is made in 2 houses. The option to invest in 2 houses is available once in lifetime in Section 54 but is not available in Section 54F.
The Assessee also has the option of depositing this amount in Capital Gains Account Scheme as explained in Section 54 above, before the due date of furnishing the Income Tax Return.
e-Book on Capital Gain Tax on sale of Property
As the sale price of each property transaction is huge, the tax applicable also turns out to be huge. And therefore, proper care needs to be exercised while computing the Capital Gains and then using the Exemptions to reduce the Tax Liability.
To help people compute the Tax Liability and the Exemptions in the correct manner, we have authored a simple yet detailed e-book which explains with more than 40 Examples, the manner in which Capital Gains Tax would be levied on sale of Property. All latest case laws have also been explained in this e-book which can be purchased from this link.
The e-book is updated with all latest up to date amendments and the main topics covered in this e-book are: -
- Computation of Capital Gains
- Tax on Sale of Inherited Property
- Tax on Sale of Under-Construction Property
- Sale of Property below Circle Rate/ Stamp Valuation Rate
- How to reduce Tax by claiming Capital Gains Exemptions
- TDS on sale of Property
- 40+ Comprehensive Examples
Income from other sources (Section 56)
(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ―Income from other sources‖, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head ―Income from other sources‖, namely: —
(i) dividends;
(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head ―Profits and gains of business or profession;
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ―Profits and gains of business or profession;
(iv) income referred to in sub-clause (xi) of clause (24) of section 2, if such income is not chargeable to income-tax under the head ―Profits and gains of business or profession‖ or under the head ―Salaries;
(v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004 but before the 1st day of April, 2006, the whole of such sum: Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) 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 clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
Vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 but before the 1st day of October, 2009.
Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority
(f) 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 clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
(f) stamp duty value means the value adopted or assessed or assessable 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;
Other Sources of Income are Stated Below:
1. Income From:
Lottery, Gambling, Batting, Horse Race, Cross Ward, Puzzle
Any other casual income
Interest other than interest on securities
Interest on Securities
Commission (If it is not a part of one’s main Business or Profession)
Family Pension
Royalty
Director’s Fee
Subletting of House
Dividend
Tuition Income
2. Casual Income: TDS is applicable @ 30% on this. It generally received after deduction of tax. Hence it always grosses up while calculating the income under this head as given below:
Gross Income = Net Amount Received * 100/70
3. Lottery Income: If Lottery Income is less than Rs.5000/- then there will be no TDS. Hence no need to gross up.
4. Income from Horse Race: If Income from Horse Race is less than Rs.2500/- then there will be no TDS Hence no need to gross up.
5. Family Pension: Rs.15000/- or 1/3 of Actual Amount received, whichever is less, is exempt.
Taxable = Actual Amount Received – Exempted Amount
Dividend from Indian Co. Is fully exempted.
6. Taxable Dividend: a) Dividend from Foreign Co.
b) Dividend from Co-operative Society
7. Tax free in case of other sources: -
Interest from Capital Investment Bond
Interest on Post Office Savings
Interest on National Relief Bond
Income from UTI
Any Allowance to a M.P. (Member of Parliament)
Deductions to be made in Computing Total Income [Sections 80A to 80U (Chapter VIA)]
The aggregate of income computed under each head, after giving effect to the provisions for clubbing of income and set off of losses, is known as "Gross Total Income". In computing the total income of an assessee, certain deductions are permissible under sections 80C to 80U from Gross Total Income.
These deductions are however not allowed from the following incomes although these incomes are part of Gross Total Income:
- Long-term capital gains.
- Short-term capital gain on transfer of equity shares and units of equity-oriented fund through a recognised stock exchange i.e., short-term capital gain covered under section 111A.
- Winnings of lotteries, races, etc.
- Incomes referred to in sections 115A, 115AB, 115AC, 115ACA, 115AD and 115D.
These deductions are of two types: —
- Deductions on account of certain payments and investments covered under sections 80C to 80GGC.
- Deductions on account of certain incomes which are already included under Gross Total Income covered under sections 80-IA to 80U.
The following expenses are not deductible by virtue of section 58 in computing the income chargeable under the head 'Income from Other Sources’:
PERSONAL EXPENSES [Section 58(1)(a)(i)] - Any personal expenses of the assessee are not deductible.
INTEREST [Section 58(1)(a)(ii)] - Any interest (which is chargeable under the Act in the hands of recipient) which is payable outside India on which tax has not been paid or deducted at source, is not deductible.
SALARY [Section 58(1)(a)(iii)] - Any payment (which is chargeable under the head “Salaries” in the hands of recipient and payable outside India), is not deductible if tax has not been paid or deducted therefrom.
WEALTH TAX [Section 58(1)] - Any sum paid on account of wealth-tax is not deductible.
TDS DEFAULT [Section 58(1A)] - Disallowance provisions pertaining to TDS defaults covered by section 40(a) (I a) are applicable.
AMOUNT SPECIFIED BY SECTION 40A [Section 58(2)] - Any expenditure referred to in section 40A like excessive or unreasonable payments to certain specified persons [Section 40A (2)] and payments exceeding Rs. 20,000 otherwise than by way of account payee cheque [Section 40A (3)];
EXPENDITURE IN RESPECT OF ROYALTY AND TECHNICAL FEES RECEIVED BY A FOREIGN COMPANY [Section 58(3)] - In the case of foreign companies, expenditure in respect of royalties and technical service fees as specified by section 44D is not deductible.
EXPENDITURE IN RESPECT OF WINNINGS FROM LOTTERY [Section 58(4)] - No deduction shall be allowed under any provision of the Act in computing the income by way of any winnings from lotteries, crossword puzzles, races.
However, expenditure incurred by the assessee for the activity of owning and maintaining race horses shall be allowed as a deduction while computing the income from this activity.
Simple problems on Computation of Total income of an Individual.
Q1) A company has accumulated profits of Rs. 30 Lakhs excluding capitalized profits i.e., bonus shares issued in the past of Rs. 10 Lakhs. The company distributed assets of Rs. 25 Lakhs to the shareholders. Compute the amount taxable as dividend if the market value of the asset on the date of distribution is:
(i) Rs. 20 Lakhs (ii) Rs. 35 Lakhs (iii) Rs. 45 Lakhs
Solution:1) Deemed dividend (Accumulated profit) is exempt in the hands of shareholders and is taxable in the hands of company. The company shall be liable to pay distribution tax @ 15% on [grossed up amount + surcharge @12% + Health and Education Cess @ 4%] on the market value of the asset on the date of distribution subject to the maximum extent of profits (capitalized or not).
Hence, the amount of deemed dividend shall be: -
i) Rs. 20 Lakhs.
Ii) Rs. 35 Lakhs.
Iii) Rs. 40 Lakhs (Limited to accumulated profits + bonus shares)
Q2) X Ltd. Share Capital is divided into 20,000 shares of Rs. 10 each. The company reduced its capital by 10% @ Rs. 1 per share. The accumulated profits of the company were Rs. 12,000. Mr. Satish holds 500 shares of the company.
Calculate the amount of deemed dividend of Mr Satish.
Solution:2) X Ltd. Share Capital is divided into 20,000 shares of Rs. 10 each. The company reduced its capital by 10% @ Rs. 1 per share. The accumulated profits of the company were Rs. 12,000. Mr. Satish holds 500 shares of the company.
Calculate the amount of deemed dividend of Mr. Satish. Amount Received by Mr. Satish @ Rs. 1 on
500 shares =Rs. 500
Amount Received from accumulated profit
= Accumulated profit × No of shares held/Total no of shares
= 12,000 ×500/20,000
= Rs. 300
Hence, Rs. 300 is the deemed dividend of Mr Satish and (Rs 500 - Rs 300) Rs. 200 will be treated as refund of his capital.
Q3) Mr. Zubin holds 500 shares (equity) of Rs. 10 each in K.K. Ltd which is an Indian Company. On March 31, 2020, Mr. Zubin received Rs. 3,600 as dividend and 300 bonus shares were also received on the same date. The market value of the shares of the company was Rs. 25 per share. Discuss chargeability to income tax of dividend and bonus shares.
Solution:3)
i) Cash dividend is a gross dividend, therefore, Rs. 3,600, should be included in the total income of Mr. Zubin during the assessment year2020-21. But, dividend from an Indian Company is exempt u/s 10 (34).
Hence, Company shall not pay the tax on such dividend.
Ii) Bonus shares received by Mr. Zubin are also not taxable as they are issued to equity shareholders. For equity shareholders, Bonus is not regarded as dividend.
Q4) Mr Utkarsh gives you the following information regarding his incomes for A.Y. 2020-21.
Rs.
(a) Income under the head salary (computed) 5,50,000
(b) Income from House Property 3,50,000
(c) Dividend from Domestic Company 12,00,000
Compute Tax Payable by Mr Utkarsh for AY 2020-21.
Solution:4)
Computation of Total Income and Tax of Mr Utkarsh for A.Y. 2020-21
Rs. Rs.
(a) Income from Salary 5,50,000
(b) Income from House Property 3,50,000
(c) Income from other sources:
Dividend from Domestic Company 12,00,000
Less: Exemption u/s 10 (34) 10,00,0002,00,000
Total Taxable Income 11,00,000
Tax payable
(a) Tax on Dividend 2,00,000× 10% 20,000
(b) Tax on Bal. Income of
Rs. 9,00,000
(i) First Rs. 2,50,000Nil
(ii) Next Rs. 2,50,000 @ 5% 12,500
(iii) On Balance Rs. 4,00,000 @ 20% 80,000 92,500
Total Tax 1,12,500
Add: Health and Education Cess @
4%4,500
Tax Payable 1,17,000
Q5) Compute income from the other sources of Mr Anupam for A.Y. 2020-21.
Rs.
i) Winning from Horse Race 10,000
Ii) Loss in card games 3,000
Iii) Winning from wager 25,000
Iv) Amount received from winnings of lottery 66,500
v) Winning from T.V. Show (Gross) 50,000
Solution:
Computation of Income from other sources of Mr Anupam for
AY 2020-21
Rs.
i. Winning from horse race 10,000
Ii. Winning from wager 25,000
Iii. Lottery (grossed up)
Rs 66,500 ×100 95,000
100 – 30
Iv. Winning from TV show 50,000
Income from other sources 1,80,000
Q5) The investments of Jitendra on 1st April 2019 were as given below:
i) Rs. 30,000, 10% U.P. Government Loan;
Ii) Rs. 10,000, 10% Debentures of a Jute Mill company.
Iii) Rs. 2,000 Interest received on Debentures of a Co-operative Society.
Iv) Rs. 15,000, 6% Securities issued by a Foreign Government.
v) 7% National Plan Certificates Rs. 10,000.
Vi) Rs. 1,500 received as dividend on units of Unit Trust of India.
Vii) Rs. 3,600 received as interest on less tax Government Securities.
The Bank commission for collecting interest is Rs. 99. Interest on securities being payable in each case on 1st January and 1st July. Find out income from other sources for the assessment year 2020-21.
Solution :5) Computation of Income from Other Sources of Mr. Jitendra for A.Y.
2020-21
Rs.
i) Interest on 10% UP Govt. Loan for 1 year 3,000
Ii) Interest on 10% Debentures of a Jute Mill Company for 1 year 1,000
Iii) Interest on Debentures of a Co-operative Society (Not to be
Grossed up)
2,000
Iv) Interest on foreign government securities (Not to be grossed
Up)900
v) Interest on National Plan Certificates Exempt
Vi) Dividend from U.T.I. (Not to be grossed up) Exempt
Vii) Interest received on less tax govt.
Securities3,600
10,500
Less: Bank Commission for collecting Interest 99
Income from Other Sources 10,401
References:
1. Ahuja, Giri & Gupta, Ravi: Systematic Approach to Incomes Tax
2. Agrawal, B.K.: Income Tax law and practice
3. Agrawal, B.K: Ayakar Vidhan Avam lekhe
4. Chandra, Mahesh & Shukla, D.C.: Income Tax Law and practices
5. Chandra, Girish: Income Tax
Unit 2
Sources and Computation of Taxable Income under the various Heads of Income
Salary income refers to the compensation received by an employee from a current or former employer for the execution of services in connection with employment. Thus, income is taxable as salary under Section 15 only if an employer-employee relationship exists between the payer and payee. Salary income could be in any form such as gift, pension, gratuity, usual remuneration and so on. In this article, we look at various aspects of salary income under the Income Tax Act.
According to Section 17(1) salary includes the following amounts received by an employee from his employer, during the previous year:
- Wages;
- Annuity or pension;
- Gratuity;
- Fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
- Advance of salary;
- Payment received by an employee in respect of any period of leave not availed by him/her;
- The portion of annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable;
- Transferred balance in a recognised provident fund to the extent it is taxable;
- Contribution by the Central Government to the account of an employee under a pension scheme referred to in section 80CCD (i.e., NPS);
A. Allowances – Fully Taxable Allowances –
Allowance is a fixed monetary amount paid by the employer to the employee for meeting some particular expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in the gross salary unless a specific exemption has been provided in respect of any such allowance.
Fully Taxable Allowances:
(i) Dearness Allowance / Additional D.A. / High Cost of Living Allowance -- Fully Taxable.
(ii) City Compensation Allowances (CCA).
(iii) Capital Compensatory Allowance
(iv) Lunch Allowance
(v) Tiffin Allowance
(vi) Marriage / Family Allowance
(vii) Overtime Allowance
(viii) Fixed Medical Allowance.
(ix) Electricity and Water Allowance
(x) Entertainment Allowance. It is fully added in employee’s Salary.
In case of Government employees, a deduction is allowed u/s 16(ii) at the rate of least of following:
(a) Statutory Limit Rs. 5,000 p.a.
(b) 1/5 (20%) the of Basic Salary; or
(c) Actual Entertainment Allowance received.
B. Partly Taxable Allowances: House Rent Allowance, Entertainment Allowance, Transport Allowance, Children Education & Hostel Allowances - Fully Exempted Allowances –
Partly Taxable Allowances:
1. House Rent Allowance (HRA)
Sl no | Mumbai / Kolkata / Delhi / Chennai | Other Cities |
(i) | Allowance actually received | Allowance actually received |
(ii) | Rent paid in excess of 10% of salary | Rent paid in excess of 10% of salary |
(iii) | 50% of Salary | 40% of Salary |
The exemption in respect of HRA is based upon the following factors:
(1) Salary
(2) Place of residence
(3) Rent paid
(4) HRA received.
2. Entertainment Allowance
This deduction is allowed only to a government employee. Non-Government employees shall not be eligible for any deduction on account of any entertainment allowance received by them.
In case of entertainment allowance, the Assessee is not entitled to any exemption but he is entitled to a deduction under section 16(ii) from gross salary. Therefore, the entire entertainment allowance received by any employee is added in computation of the gross salary. The Government employee is, then, entitled to deduction from gross salary under section 16(ii) on account of such entertainment allowance to the extent of minimum of the following 3 limits.
- Actual entertainment allowance received during the previous year.
- 20% of his salary exclusive of any allowance, benefit or other perquisite.
- ₹5,000.
3. Transport Allowance
Any allowance granted to meet the cost of travel on tour or on transfer of duty. "Allowance granted to meet the cost of travel on transfer" includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.
4. Children Education & Hostel Allowances
(a) Children Education Allowance: Exempt up to actual amount received per child or ₹100 p.m. Per child up to a maximum of 2 children, whichever is less.
(b) Hostel Expenditure Allowance: Exempt up to actual amount received per child or ₹300 p.m. Per child up to a maximum of two children, whichever is less.
C. Fully Exempted Allowances –
Some of the allowances, usually paid to Government servants, judges and employees of UNO are not taxable. These are:
- Allowances paid to Govt. Servants abroad: When servants of Government of India are paid an allowance while serving abroad, such income is fully exempt from taxes.
- Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC are not taxed.
- Allowance paid by UNO: Allowances received by employees of UNO are fully exempt from tax.
- Compensatory allowance paid to judges: When a judge receives compensatory allowance, it is not taxable.
“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. “Perquisite” is defined in the section 17(2) of the Income tax Act as including:
(i) Value of rent-free/accommodation provided by the employer.
(ii) Value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer.
(iii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.
(iv) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
(v) The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assesssee.
(vi) Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or an approved superannuation fund to affect an assurance on the life of the assessee or to affect a contract for an annuity.
(vii) The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and
(viii) The value of any other fringe benefit or amenity as may be prescribed.
Exempted/tax free Perquisites:
1. Leave Travel Concession subject to conditions & actual spent only for travels.
2. Computer/ Laptop provided for official / personal use.
3. Initial Fees paid for corporate membership of a club.
4. Refreshment provided by the Employer during working hours in office premises.
5. Payment of annual premium on Personal Accident Policy.
6. Subscription to periodicals and journal required for discharge of work.
7. Provision of Medical Facilities.
8. Gift not exceeding Rs. 5,000 p.a.
9. Use of Health Club, Sports facility.
10. Free telephones whether fixed or mobile phones.
11. Interest Free / concessional loan of an amount not exceeding Rs.20,000 (limit not application in the case of medical treatment)
12. Contribution to recognised Provident Fund / approved super annuation fund, pension or deferred annuity scheme & staff group insurance scheme.
13. Free meal provided during working hours or through paid non-transferable vouchers not exceeding Rs. 50 per meal or free meal provided during working hours in a remote area.
The value of any benefit provided free or at a concessional rate (including goods sold at concessional rate) by a company to the Employees by way of allotment of shares etc., under the Employees stock option plan as per Central Government Guidelines.
B. Taxable Perquisites:
1. Rent Free Accommodation
Valuation of unfurnished residential accommodation provided by the employer: -
(a) Union or State Government Employees- The value of perquisite is the license fee as determined by the Govt. As reduced by the rent actually paid by the employee.
(b) Non-Govt. Employees- The value of perquisite is an amount equal to 15% of the salary in cities having population more than 25 lakh, 10% of salary in cities where population as per 2001 census is exceeding 10 lakhs but not exceeding 25 lakh and 7.5% of salary in areas where population as per 2001 census is 10 lakh or below. In case the accommodation provided is not owned by the employer, but is taken on lease or rent, then the value of the perquisite would be the actual amount of lease rent paid/payable by the employer or 15% of salary, whichever is lower. In both of above cases, the value of the perquisite would be reduced by the rent, if any, actually paid by the employee.
2. Value of Furnished Accommodation-
The value would be the value of unfurnished accommodation as computed above, increased by 10% per annum of the cost of furniture (including TV/radio/ refrigerator/ AC/other gadgets). In case such furniture is hired from a third party, the value of unfurnished accommodation would be increased by the hire charges paid/payable by the employer. However, any payment recovered from the employee towards the above would be reduced from this amount.
3. Value of hotel accommodation provided by the employer-
The value of perquisite arising out of the above would be 24% of salary or the actual charges paid or payable to the hotel, whichever is lower. The above would be reduced by any rent actually paid or payable by the employee. It may be noted that no perquisite would arise, if;
• The employee is provided such accommodation on transfer from one place to another for a period of 15 days or less.
• The employee is provided such accommodation at a mining/ oil exploration/ project execution/ Dam/ Power generation/ off- shore site located in remote area or being of temporary nature having plinth area < 800sq. Ft and not less than 8 kms away from municipality or cantonment limits.
Concessional accommodation
Where the accommodation is provided to the employee at a concessional rate of rent, the value of such accommodation is first determined as if the accommodation were provided free of rent (as explained earlier). From the above value, the rent paid or payable by the employee for the period during which he occupied the house during the previous year, should be deducted. The resulting amount will be added to his salary as value of-concession.
Personal obligations of the employee met by the employer –
1. Electricity/Water/Heater/Gas:
Where employer provides the same from own sources: -
Value of perquisite: - Cost of production
Where employer provides from outside sources: -
Value of perquisite: - Amount Paid by the employer
2. Sweeper/Gardener/Watchman/Domestic Servant:
Value of perquisite: Amount paid by employer
3. Free Education: -
Where employer provides free education in own college: -
Value of perquisite: Fee charged by similar college in nearby area
Where employer provides free education in any other college: -
Value of perquisite: Actual amount paid by employer
4. Free Transport: -
- Free transport facility provided by employee engaged in the business of transportation of passengers/ goods
Value of perquisite: Amount charged when similar services are provided to general public.
- Free tickets to railway and airline employees are exempt
5. Medical Facilities: -
- Medical facilities are provided in a government hospital in India/ Employer owned hospital in India/ a hospital approved by the board are exempt from tax.
- Medical facilities in any other case up to a total value of Rs 15000 is exempt from tax.
- Medical Facilities provided by employer outside India: -
a) Treatment and stay expenditure are exempt up to the limits permitted by RBI
b) Traveling expenditure is exempt where the Gross total income of the assessee is up to 2 Lakhs. IN case of Gross total income being in excess of Rs 2 Lakhs, the traveling expenditure is chargeable to tax.
6. Telephone Facility: -
Telephone facility provided by employer is completely exempt from tax.
Provident fund is a government-managed retirement savings scheme for employees, who can contribute a part of their savings towards their pension fund, every month. These monthly savings get accumulated every month and can be accessed as a lump sum amount at the time of retirement, or at the end of employment.
Provident Funds are of four kinds
(i) Statutory Provident Fund or the Fund to which the Act of 1925 applies (S.P.F.)
- These are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc.,
- The contributions made by the employer are exempted from income taxes in the year in which contributions are made.
- The contributions made by the employee can be claimed as tax deductions under section 80c.
- Interest amount credited during the financial year is not treated as income and hence it is exempted from income tax.
- The redemption amount at the time of retirement is exempted from tax.
- If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.
(ii) Recognised Provident Fund (R.P.F.)
- Any establishment (business entity) which employs 20 or more employees can join RPF. Most of the individuals (who are salaried) generally contribute to this type of Provident Fund. This is one of the popular types of Employees Provident Funds (EPF). (Organizations which employ less than 20 employees can also join RPF if the employer and employees want to do so)
- The business entity can either join the Govt. Scheme set up by the PF Commissioner (or) the employer himself can manage the scheme by creating a PF Trust. All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax (CIT).
- Employer’s contribution in excess of 12% of salary is treated as income of the employee and is taxable. In excess of 12%, the contributions are taxable in the year of contribution.
- Tax Deduction u/s. 80C is available for amount invested by the employee (up to Rs 1.5 Lakh in a Financial Year).
- Interest amount earned (up to 9.5% interest rate) on PF balance (employee’s + employer’s contributions) is tax free. In excess of 9.5%, the interest on contributions is taxable as ‘salary’ in the year in which it is accrued.
- Accumulated funds redeemed by the employee at the time of retirement / resignation are exempt from tax if he/she continues the service for 5 years or more.
(iii) Unrecognised Provident Fund (U.R.P.F.)
- These are not recognized by Commissioner of Income Tax.
- Employer’s contribution is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free in the year of contribution.
- Tax deduction under section 80c is not available on Employee’s contributions.
- Interest earned is not treated as income in the year it is credited and hence not taxable in the year of accrual.
- At the time of redemption / retirement, the employer’s contributions and interest thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.
(iv) Public Provident Fund (P.P.F.)
- Under PPF any individual from public, whether is in employment or not may contribute to this fund.
- The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh Rs. p.a. The amount is repayable after 15 years.
- PPF can serve as an excellent retirement planning / savings tool, for those who do not come under any pension scheme.
- The PPF offers tax benefit under section 80C and the interest earned is also exempt from tax. All the eligible withdrawals are exempted from taxes.
Tax treatment of provident fund
The contribution is made in the Employee Provident Fund (EPF) for the employee’s welfare by the employee and the employer. The deduction is available under section 80C. Provident fund is a kind of security fund in which the employees contribute a part of their salary and the employer also contributes on behalf of their employees. Section 10(11) and 10(12) of the Income Tax Act defines the exemption on the amount added to the provident fund. Additionally, the amount allowed as a deduction on contributing to the provident fund is dealt in section 80C of the Income Tax Act. The types of provident funds are:
- Recognized Provident Fund (RPF) as recognized by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952. It applies to enterprises employing at least 20 employees.
- Unrecognized Provident Fund (UPF) is not recognized by the Commissioner of Income Tax. The employers and employees start these schemes.
- Public Provident Fund (PPF) under Public Provident Fund Act, 1968 is another system of contributing to the provident fund. Self-employed people can also take part in this scheme. A minimum contributing limit of Rs. 500 per annum and a maximum of Rs. 150000 per annum are set.
- Statutory Provident Fund (SPF) is meant for employees of Government or Universities or Educational Institutes affiliated to university.
Section 16 of Income Tax Act, 1961 provides deduction from income chargeable to tax under the head ‘salaries. It provides deductions for the standard deduction, entertainment allowance, and professional tax. Through this deduction, a salaried taxpayer can lower his/ her taxable salary income chargeable to tax.
Standard Deduction under Section 16
With effect from the financial year 2019-20, taxpayers can claim a standard deduction of Rs. 50000 from the salary income, or the actual amount of income, whichever is less. The deduction of Rs. 50000 will also be available on the amount of pension income earned by the assessee. Taxpayers should note that the legislation does not permit the claiming of a loss under the head salaries. Hence, if the salary received is lesser than Rs.50000, the deduction allowed will also accordingly be restricted to the actual amount of salary.
Exemptions
Consequent to the introduction of the standard deduction, the following exemptions have been withdrawn:
- A transport allowance of Rs. 1,600 per month for the purpose of computing between the place of residence and the place of duty. However, the transport allowance of Rs.3200 per month granted to an employee who is deaf and dumb or blind or orthopedically handicapped with the disability of lower extremities would continue to be exempt.
- Any sum funded by an employer in respect of any amount actually incurred by the employee for obtaining host or his family member’s medical treatment either in any hospital, nursing home, clinic or otherwise up to a maximum of Rs. 15,000 in the previous year.
Entertainment Allowance
While calculating gross salary, entertainment allowance is first included. Then a standard deduction is allowed under Section 16(ii). However, entertainment allowance can be claimed only by Government employee up to a maximum of Rs.5000. Where the employee is in receipt of entertainment allowance, the amount so received shall first be included in the salary income and thereafter the following deduction shall be made: A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less.
Professional Tax Paid
State Governments and Local Authorities are empowered to collect professional taxes on professions, trades, callings and employment. The amount of professional tax collected does not exceed Rs.2500 per annum. Under Section 16(iii), a deduction from salary can be claimed by the taxpayer on account of professional tax paid. The deduction for professional tax will be allowed in the year in which the tax is actually paid by the employee. Professional tax due but not paid cannot be claimed as a deduction from salary.
Problems on Income from Salary (excluding retirement benefits)
Q1) Mr. X is the general manager of Plus Steel Ltd. He draws a salary of Rs. SOW/- per month. He retires on 31st December 1989, after completing 26 years and 1.1 months of service. He is entitled to one month earned leave for every year of completed service. He has availed of 20 months earned leave while in service. He has encashed the unutilised earned leave while in service. He has encashed the unutilised earned leave standing to his credit on the basis of last drawn salary. He got an in rent of Rs. 5001- on 1-7-89. Compute the gross salary of Mr.X for the assessment year 2020-21.
Solution:1)
Mr. X. Computation of gross salary for assessment year 2020-21
Salary for 9 months (14-2020 to 31-12-2021)1 3 X Rs. 4500 + 6 X 5000 = 43,500.00
Encashment of earned leave –
Total earned leave to which X
Is entitled 27 months
Less earned leave availed 20 months
Balance of credit 7 months
Cash received on the basis of
Rs. 5000-per month.35,000.00
Less exemption under Section 10 (IOAA)
(a) Actual amount received. Rs 35,000
(b) have salary for the unutilised
Entitled period on the basis of
Average salary drawn during
10 months immediately preceding retirement.
7 X (5 X 4500 + 5 X 5000) 10 4 X Rs. 4750 = Rs. 33,250
(c) Salary for 8 months of: earned leave period
Exempted under the Act. 8 X Rs. 4,750 = Rs. 38,000
(d) Rs. 79,9201- The least is exempt Rs. 33,250 1750
Excess amount is taxed (35,000 - 33,250)
Gross Salary 45,250
Q2) Determine the taxable amount of pension for the assessment year 2020-21 in the following cases.
i) A receives Rs. 1200per month as pension from:
(a) the Central government
(b) a public sector corporation and
(c) a private sector company during previous year 2020-21.
Ii) A retires from government service on 30th April 2020. He gets pension of Rs. 1,2001- per month up to December, 1989 with effect from January 1, 2020 he gets one-third of his pension commuted for Rs. 22,000
Iii) A retires from Tata Steel Company Ltd., in June 39, 2020. He gets pension of Rs. 2,0001- per month up to 31-1-2020. With effect from 1-2-2020 he gets 75% of his pension commuted for Rs. 70,000- at the time of retirement he got Rs. 1,00,000/- as gratuity from the company.
Solution: 2) i) Rs. 14,400- will be taxable as salary in A's hands for 2020-21 assessment year subject to permissible deductions. It does not matter whether he is a government servant, a servant of public sector, or a private sector company. However, since his total income will be below the taxable limit of Rs. 18,00O/ no liability arises for payment of tax.
(ii) Non-commuted pension from May 20-December 20Rs. 1280/- X 8 Rs. 9600
Since A is a government servant the entire
Commuted value of Rs. 22,000/- is exempt from tax.
Uncommuted pension from
1-1-2020 to 31-3-2021 Rs. 12001- X 2/3 X 3 Rs. 2400
Total taxable uncommuted pension Rs. 12000
(iii) Uncommuted pension
From 1-7-2020 to 31-1-2021 Rs. 2000 X 7 Rs. 14000
Commuted value of 75% of pension Rs. 70,000/-
Since A has received gratuity 1/3rd of the commuted value of the whole pension is exempt from tax i.e., Rs.70,000X4/3X1/3 =Rs. 31,1111
Taxable portion of commuted pension Uncommuted pension
From 1-2-21 to 31-3-21Rs. 2,0001- X 114 X 2 ‘. = Rs. 1,000
Taxable pension (subject to standard deduction) = 53,8891
Q3) B, an employee of TR Co. Ltd. Receives Rs. 50,000 as gratuity as par the provisions of Payment of Gratuity Act 1972. He retires in March 1990 after putting in 26 years and 9 months service. At the time of retirement his monthly salary was Rs. 17001- Calculate the taxable gratuity in his hands.
Solution: 3)
Completed year of service 27 years
15 days salary i.e., 1700 X 15/26 = Rs. 980
Limits:
(i) Gratuity received Rs. 50,0001-
(ii) 15 days of wages for each completed year of service Rs. 980 X 27 Rs. 26,460/-
(iii) Rs. 50,000 The exempted portion of gratuity is Rs. 26,460 and the balance of Rs. 23,5401(50,000-26,460) will be taxable in the hands of B as salary.
Q4) Mr. Gaurav Modi is employed in Khadi Samiti in Lucknow. He is in receipt of a salary of Rs. 17,000 p.m. And a dearness allowance of Rs. 2,000 p.m. He contributes 10% of his salary and dearness allowance to a provident fund to which Khadi Samiti contributes 15%. He is provided with a rent-free unfurnished house by his employer. He received Rs. 25,000 as bonus during previous year. The interest credited to his provident fund @ 12% amounted to Rs. 1,000. Compute taxable income of Mr. Gaurav Modi for the assessment year 2020-21, if the P.F. In question is (i) Statutory (ii) Recognized or (iii) Unrecognized. On what amount the assessee is entitled to deduction u/s 80C.
Solution: 4) Computation of Taxable Income of Mr. Gaurav Modi for AY 2020-21
Statutory P.F. Recognized Unrecognized P.F. (Rs.) P.F. (Rs.) P.F. (Rs.)
Salary @ 17,000 p.m. 2,04,0002,04,000 2,04,000
D.A. @ 2,000 p.m.24,000 24,000 24,000
Bonus 25,000 25,300 25,000
Employer’s contribution — 6,840 —
To R.P.F. In excess of 12%
Interest credited to R.P.F.in — 208 —
Excess of 9.5%
Value of rent-free house 10% 25,300 25,300 25,300
Of salary of Rs. 2,53,000
(As population of Lucknow
Exceeds 10 lakhs but does
Not exceed 25 lakhs)
Gross Salary 2,78,3002,85,348 2,78,300
Less: Standard Deduction 50,000 50,000 50,000
Taxable Salary 2,28,3002,35,348 2,28,300
Amount entitled to deduction 22,800 22,800 Nil
u/s 80C
1) Employer’s contribution RPF = 2, 28,000 (Salary + D.A.)
= 2, 28,000 x 3/100 = 6,840
Interest credited = 1000 x100/12 = 8333.33
Excess of 9.5% = 8,333x 2.5/100 = 208
2) Assessee is entitled to deduction u/s 80C, up to a maximum amount of Rs.1,50,000 in respect of his contribution to statutory or recognized provident fund, i.e., 10% of his salary and D.A., say Rs. 22,800. He is not entitled to deduction u/s 80C in respect of his contribution to unrecognized provident fund.
3) Salary = Basic Pay + D. A+ Bonus
= 2,04,000+ 24,000+25,000
= Rs. 2,53,000
Q5) Following particulars are furnished by Mr. Murari, a citizen and resident of India. Compute the taxable income of Mr. Murari for Assessment Year 2020-21
Rs.
a) Basic Salary 86,000
b) House rent allowance (the house is at Kolar and
Rent paid amount to Rs. 60,000) 42,000
c) LIC premium on his own life 5,000
d) Unit linked insurance plan contribution 1,000
e) Premium on his wife’s life 2,500
f) Deposit in 10 years CTD of Post Office 2,000
Computation of Taxable income of Mr. Murari.
Solution:5 Taxable salary of Mr Murari for AY 2020-21
1) Basic Salary 86,000
2) House rent allowance:
a) Actual HRA received 42,000
b) Rent paid in excess of 51,400
10% of salary Rs. 60,000 – Rs. 8,600
c) 40% of salary 34,400
Taxable HRA (Rs. 42,000 – 34,400) 7,600
Gross Salary 93,600
Less: Standard deduction 50,000
43,600
Deduction u/s 80 C
Premium on own life 5,000
Premium on wife’s life 2,500
Payment under unit linked plan 1,000 8,500
Taxable Income 35,100
Basis of Charge [Section 22]:
Income from house property shall be taxable under this head if following conditions are satisfied:
a) The house property should consist of any building or land appurtenant thereto;
b) The taxpayer should be the owner of the property;
c) The house property should not be used for the purpose of business or profession carried on by the taxpayer.
Exempted Incomes from House Property
There are certain cases where income from House property is exempted. As per section 10 of Income Tax Act 1961, below income are exempted and not to be included while calculating the total income of Assessee.
1. [Section 2(1)(c)] Agricultural House Property
Income from such house property which is situated on or in the immediate vicinity of agricultural land which is used for agricultural purposes by cultivator is exempted from tax.
2. [Section 11] House property held for charitable purposes
Any income from a house property held for charitable or religious purposes. Example- Rent received from the shop which is owned by charitable institute and temple.
3. [Section 23(3)] Self-occupied but vacant house
If assessee keeps one of his own houses reserved for self-occupation but is living in a rented house elsewhere or any other place due to his employment or profession the income from such house is taken to be nil while computing his/her total income.
4. House used for own business or profession
If house is used for the purpose of doing own business, then there is no income chargeable to tax under this head from such house property.
5. [Section 10(24)] Property held by registered trade union
Income from a house property owned by a registered trade union is not to be included in its Gross total income.
6. Income from house property held by the
Local Authority, Scientific research institute, political party, educational institute working for spreading education and not to earn profit, medical institute working for spreading medical service and not to earn profit.
7. [Section 23(5)] House Property held as Stock-in-Trade and not let out during the previous year
Where any house property is held as stock-in-trade and the property is not let during the whole or part of the year. The annual value of such property shall be taken as nil for the period of one year from the end of the financial year in which the certificate of completion is obtained.
8. One house property owned by a former ruler of Indian states
Ex-rulers of Indian states may be owning many palaces but only one palace of their choice shall be treated as a self-occupied house and shall be exempted.
9. One self-occupied house
If assessee owns one residential house, the net annual value of the same shall be taken as nil but in case he owns more than one house, then only one of his choices but normally of higher value shall be treated as a self-occupied one and other/others are treated as deemed to be let out.
The income tax categorises your income under two categories for the purpose of taxability of house property income. These are:
Self-Occupied House Property | This is the type of property that is self-owned and used for own residential purposes. This may be occupied by the owner’s family or relative or self. A property that is unoccupied is considered as a self-occupied property for the purpose of income tax. Before the Financial Year 2019-20 if taxpayer owns more than one house property, only one is considered as self-occupied property and rest are assumed to be let out. From 2019-20 onwards two properties are considered as self-occupied properties. |
Let Out House Property | Any house property that is rented for complete or part of the year is considered as a let-out property for income tax purposes. |
Note: Inherited Property Any property inherited from parents, grandparents, etc, can be either considered as self-occupied or let out house property based on the usage as discussed above. |
Deductions from income from house property (Section 24)
Income chargeable under the head ―Income from house property‖ shall be computed after making the following deductions, namely: —
(a) a sum equal to thirty per cent. Of the annual value;
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees:
Amounts not deductible from income from house property (Section 25)
Interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938), on which tax has not been paid or deducted under Chapter XVII-B and in respect of which there is no person in India who may be treated as an agent under section 163 shall not be deducted in computing the income chargeable under the head ―Income from house property.
Problems on Income from House Property (Excluding Pre-Construction interest)
Q1) Mr. Ashok is the owner of a house (not covered under Went Control Act) which is let out at Rs. 1,500 per month. Municipal taxes of the house are Rs. 1,200 (being 10% of the municipal value) out of which Rs. 700 are paid by the tenant. The reasonable rent is Rs. 10,000 per annum. What will be annual value of the house?
Solution:1) Annual value is the highest of the following three less taxes borne by the owner: Rs.
i) Actual rent (1500 x 12) 18,000
Ii) Municipal value 100 (1200 x 100/10) 12,000
Iii) Reasonable, rent 10,000
Annual value Rs. Actual rent 18,000
Less municipal taxes borne by the owner (1200-700) 500
17500
Q2) Mr. X is the owner of two houses (covered under the Rent Control Act) which are let at Rs. 1,000 p.m. And Rs. 1,500 p.m. Municipal taxes on these houses are paid by the owner which amount to Rs. 800 and Rs. 1,000 respectively (being 10% of municipal valuation. The Standard Rents fixed under the Rent Control Act are Rs. 14,000 and Rs. 16,000 per annual respectively. What will be their Annual Value?
Solution:2) Gross annual value is the highest of the following;
First House (Rs) Second House (Rs)
Rent received 12,000 18,000
Standard rent 14,000 16,000
Gross annual value of the first house will Rs. 14,000 and oi the second house it will below Rs.18,000.
Annual Value will be First House (Rs) Second House(Rs)
Gross annual value 14,000 18,000
Less Municipal taxes borne by the owner 800 1,000
13,200 17,000
Thus, annual value of first house is Rs. 13,200 and that of second house is Rs. 17,000.
Q3) From the following particulars compute the adjusted annual value of a house property for the assessment year 2020-21
1) Date of commencement of construction 10th July, 2017.
2) Date of completion of construction 1st May, 2017
3) Let out for the residential purpose on 1st June, 2017 at the rate of Rs, 600 per month.
4) Municipal value of the property Rs. 6,000.
5) Annual municipal taxes paid Rs. 400.
Solution:3)
Gross annual value Rs.7200
(Municipal value or actual rent, whichever is more)
Less municipal taxes Annual value Less statutory deduction
Adjusted or net annual value 400
Annual 6800
Less: Adjusted or net annual value 3600
3200 |
Hence, proportionate annual value for 10'months will be
10x3200/12 = Rs. 2,667.
Q4) From the following information of Mr. A, compute the adjusted annual value of the let-out period of the house for the Assessment Year 2020-21.
Municipal value Rs. 20000
Municipal tax paid Rs. .4,000
House was self-occupied for first six months and for the remaining six months it was. Let out at the rate of Rs. 2,000 p.m.
Solution:4) Gross annual value is highest of the following:
Municipal value 20000
Actual rent (2,000 x 12) 24000
Gross annual value 24000
Less municipal taxes 4000
Annual value 20000
Less 112 of the annual value
For self-occupied period 10000
Adjusted annual value for let out period 10000
Q5) From the following information of Mr. A, compute the adjusted annual value of the let-out portion of the house for the Assessment Year 2020-21. Municipal value Municipal tax paid Rs. 30,000 Rs. 6,000.
House is self-occupied but is 114 of the houses is let out @ Rs. 700 p.m. From 1.1.20
Solution:5) Calculation of Adjusted Annual Value:
Rs.
Gross annual value 33600
Municipal value 30,000
Actual Rent (700 X 4 X 12) 33,600
Less municipal taxes 6000
27600 |
Less 314 of the annual value for self-occupied
Portion for full year 20700
Annual value of 1/4 of the house for full year 6900
Less 3/4 (ie.9/2 of 6,900 for self-occupied portion of the house
For nine months 5,175
Part of the house is let out for 3 months 1,725
Adjusted annual value of part of the house for part of the previous year
The Section 2(13) of the Income Tax Act, 1961, contains an inclusive definition of the term “business”. As per Section 2(13) of the Income Tax Act, 1961, unless the context otherwise requires, the term ‘businesses include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Income from ‘Business’ is chargeable to income-tax under the head “Profits and gains of business or profession” as per Section 28 of the Income Tax Act, 1961.
Profession means exploitation of individuals’ skills and knowledge independently. Profession includes vocation. The word “profession” & “vocation” have not been defined in the Act while as per section 2(36) of the Income Tax Act, 1961, “profession” includes vocation. The word “vocation” is a word of wider import than the word ‘profession”. Following are some of professions as per Rule 6F of the I.T. Rules, 1962:
- Architectural
- Accountancy
- Authorised representative
- Engineering
- Film Artist
- Interior Decoration
- Legal
- Medical
- Technical Consultancy
VOCATION
Vocation implies natural ability of a person to do some particular work e.g., singing, dancing, etc. Here, no training or no qualification is required but having natural ability.
SPECULATIVE BUSINESS
As name suggests, it includes profits/loss from doing speculative transactions i.e., without taking actual delivery of goods. Although profits from the speculative business (e.g., Share trading) are chargeable under this head, they should be maintained and shown separately while e-filing the income tax return.
As per the Income Tax Act, a contract in which the purchase or sale of any commodity including stocks and shares is settled without actual delivery, it is called a Speculative Transaction. Intraday Trading means trading in stock or security by squaring off the trade within the same trading day. Therefore, Equity Intraday Trading is Speculative Business Income.
The method of reporting revenues and expenses adopted by a company is known as an accounting method. There are two major accounting methods used across the world—accrual accounting and cash accounting. The former method reports revenue and expenses when they are received and paid, whereas the latter method reports the revenue and expenses as soon as the transaction occurs.
Cash accounting is the simplest accounting method and is widely used by small businesses. Also, the transaction is only recorded when the cash is spent or received, that is a sale is recorded when the payment is received, and an expense is recorded when a bill is paid. This is the method used by commoners in managing personal finances and works for businesses up to a certain size.
Accrual (mercantile) accounting works based on a matching principle, i.e., the timing of revenue and expense recognition much match. The process of matching revenue with expense draws a better picture of a company's financial condition. In this method, the purchase order is recorded as revenue even though the payment is not received. Similarly, expenses are recorded even though the payment is not yet made.
The third accounting method is the hybrid method, which is a blend of cash and accrual methods along with the essence of many other special accounting methods. This method can be used in internal accounting and for tax purposes.
The Income Tax Act, 1961, has instructed how each of the five heads of income must be recorded. The act says that the salaries, income from house property, and capital gains must be recorded using the accrual method.
For the heads—profits and gains of business or profession and income from other sources, such as business profits, investment income, and professional income—you can choose the cash accounting or accrual accounting method as stated in section 145 of the Income Tax Act. Prior to the enforcement of section 145, the hybrid method was widely used for this.
A. [ Section 30]: Rent, Rates, Taxes, Repairs & Insurance of Buildings Used for the Purpose of The Business
Deductions:
In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed:
- Where the premises are occupied by the assessee:
- As a tenant — the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;
- Otherwise, then as a tenant — the amount paid by him on account of current repairs to the premises;
- Any sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes; However, these are allowable subject to provisions of section 43B i.e., if these expenses are claimed on due basis, the payment of the same must be made on or before the due date of furnishing the return of income under section 139(1) [Ref. Para 6.32];
- Any insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises.
B. [ Section 31]: Repairs & Insurance of Plant, Machinery & Furniture
In respect of machinery, plant or furniture used for the purpose of business, the following deductions are allowable:
- Amount paid on account of current repairs,
- Any insurance premium paid in respect of insurance against risk of damage or destruction of the plant and machinery or furniture.
C. [Section 32]: Depreciation
Depreciation is the diminution in the value of an asset due to normal wear and tear and due to obsolescence. There are different methods for calculation of depreciation under financial accounting. The methods commonly used are:
- Straight line method;
- Written down value method;
The system of claiming depreciation under the Income-tax Act is quite different from financial accounting.
Types of Depreciation Allowance under Income-Tax Act:
The following are the three kinds of depreciation allowance which are allowed under the Income-tax Act:
- Normal depreciation for block of assets [Section 32(1)(ii)].
- Additional depreciation in case of any eligible new machinery or plant (other than ship and aircraft) which has been acquired and installed—
- By an assessee engaged in the business of manufacture or production of any article or things or in the business of generation, transmission or generation and distribution of power [Section 32(1) (ii a)].
- Before 1-4-2020 by an assessee engaged in the business of manufacture or production of any article or things which is set up in a notified backward area in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal.
- Normal asset-wise depreciation for an undertaking engaged in generation or generation and distribution of power [Section 32(1)(i)].
As already mentioned, two methods are commonly used for allowing normal depreciation. In case of block of assets systems, normal depreciation is allowed on the basis of written down value method whereas, in case of power generating or generating and distributing undertaking, depreciation is allowed on the basis of straight-line method on each and every asset separately.
Additional/extra depreciation is allowed @ 20%/35% of the cost of the eligible plant and machinery acquired and installed in the previous year and it is allowed only in first year in which asset is acquired and installed. Such depreciation is, however, deductible while calculating the written down value for the next year.
D. [ Section 36]: Other Deductions
Deductions which are specified Under Section 36 include the following:
D1. [Section 36(1)(i)]: Insurance Premium of Stocks
The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession is allowed as deduction. As already explained paid here means actually paid or incurred according to the method of accounting adopted.
D2. [Section 36(1) (I a)]: Insurance Premium of Cattle
The amount of any premium paid by a federal milk cooperative society towards an insurance on the life of the cattle owned by a member of the primary milk co-operative society is allowed as deduction provided such primary society is engaged in supplying milk raised by its members to such federal milk co-operative society.
D3. [Section 36(1) (I b)]: Insurance Premium on The Health of Employees
It is allowed as deduction if following conditions are satisfied:
The amount of any premium paid by any mode of payment other than Cash by the assessee as an employer to effect or keep in force an insurance on the health of his employees under the scheme framed by.
- The General Insurance Corporation of India, or
- Any other insurer approved by IRDA, and approved by the Government of India
Is allowed as Deduction. There is no monetary ceiling for this deduction.
D4. [Section 36(1)(ii)]: Bonus or Commission Paid to Employees
Bonus or Commission paid to an employee is Allowable as Deduction subject to certain conditions:
- Admissible only if not payable as Profit or Dividend: One of the conditions is that the amount payable to employees as Bonus or Commission should not otherwise have been payable to them as profit or dividend. This is provided to check an employer from avoiding tax by distributing his / its profit by way of bonus among the member employees of his/its concern, instead of distributing the sum as dividend or profits.
- Deductible on Payment Basis: Bonus or Commission is allowed as deduction only where payment is made during the previous year or on or before the due date of furnishing return of income u/s 139.
- However, it can be claimed on Accrual Basis also subject to provisions of section 43B.
D5. [Section 36(1)(iii)]: Interest on borrowed capital
The amount of Interest Paid in respect of Capital Borrowed for the purposes of Business or Profession is allowed as Deduction.
D6. [Section 36(1)(iv)]: Employer's Contribution to a Recognised Provident Fund (RPF) or Approved Superannuation Fund.
Employer’s contribution paid towards Recognized Provident Fund (RPF) or an Approved Superannuation Fund is allowed as Deduction subject to Section 43B. However, contribution to Non-Statutory Fund or Unapproved Fund is Not Allowed as Deduction. In case of contribution towards Superannuation Fund is allowed as Deduction u/s 37.
"Any sum paid" is to be dealt with reference to section 43B of the Income-tax Act i.e., if such sum is payable at the end of the year it will not allowed as deduction on due basis unless the payment of the same is actually made on or before the due date of furnishing the return of income prescribed under section 139(1). However, if the payment is made subsequent to the due date, it shall be allowed as deduction in the year in which it is paid.
D7. [Section 36(1) (iv a)]: Employers' Contribution towards a Pension Scheme.
Any sum paid by the assessee as an employer by way of contribution towards a Pension Scheme, as referred to in Section 80CCD on account of an employee to the extent it does not Exceed 10% of the Salary of the employee in the previous year shall be allowed as Deduction.
D8. [Section 36(1)(v)]: Employer's Contribution to an Approved Gratuity Fund.
Any sum paid by the assessee as an employer by way of contribution towards approved gratuity fund, created by him for the exclusive benefit of his employees under an irrevocable trust, shall be allowed as a deduction subject to the provisions of section 43B.
D9. [Section 36(1) (v a)]: Employer's Contribution towards Staff Welfare Scheme.
Certain employers were deducting amounts from the Salaries of the employees towards certain Welfare Schemes like PF, ESI, etc. but were not crediting it to the employees' accounts even after long periods. This Section was introduced to check such malpractices. Sum deducted from the salary of the employee as his contribution to any Provident Fund or Superannuation Fund or ESI or any other Fund for the welfare of such employee is now treated as an income of the employer as per section 2(24)(x). However, if such contribution is actually paid on or before the 'Due Date' mentioned below the deduction will be allowed for the same under this clause.
D10. [Section 36(1)(vi)]: Allowance in respect of Dead or Permanently Useless Animals
In respect of animals which are used for the purpose of business or profession (not as stock-in-trade) and have died or become permanently useless, the difference between the actual cost of the animals to the assessee and the amount realised (if any) in respect of carcasses or sale of animals is allowable as deduction.
D11. [Section 36(1)(vii)]: Bad Debts
The amount of any Bad Debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be Allowed as a Deduction subject to the provisions of Section 36(2) which are as under: —
- Such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, or
- It represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.
If there is a bad debt on account of sale made, it will be allowed as a deduction because sale has been treated as income. Similarly, in the case of a money lending business if interest is not realisable it will be allowed as a deduction because it has been treated as income either of current year or earlier year.
D12. [Section 36(1) (vii a)]: Provision for Bad and Doubtful Debts relating to Rural Branches of Commercial Banks
- The amount of deduction is given below:
D13. [Section 36(1)(viii)]: Amount carried to Special Reserve Credited and maintained by Special Entity.
Deduction under this section is allowed to a Specified Entity of an amount not exceeding 20% of the profits derived from Eligible Business computed under the head profits and gains of business or profession (before making any deduction under this clause) carried to special reserve account created and maintained by such specified entity.
However, where the aggregate of the amount carried to such reserve account from time to time exceeds 200% of the amount of the paid-up capital and of general reserves of the specified entity, the excess amount is not deductible.
D14. [Section 36(1)(ix)]: Expenditure on Promoting Family Planning amongst the Employees.
This deduction is allowed only to company assessees. Any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees is allowable as deduction in the year in which it is incurred.
Where such expenditure or part thereof is of a capital nature, 1/5th of such expenditure shall be deducted for the previous year, in which it was incurred and the balance shall be deducted in four equal instalments during the subsequent four years
E. [Section 37(1)]: General Deductions
Any expenditure (not being expenditure of the nature described in sections 30 to 36) and not being in the nature of capital expenditure or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed as deduction in computing the income chargeable under the Head "Profits and Gains of Business or Profession".
Conditions for Allowance under Section 37(1):
- Such expenditure should not be covered under the specific sections, i.e., sections 30 to 36.
- Expenditure should not be of capital nature.
- The expenditure should have been incurred during the previous year.
- The expenditure should not be of a personal nature.
- The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
Deductions Expressly Disallowed
There are two kinds of provisions under the Act, - one in respect of what is allowable and other in respect of what is not allowable, i.e., they override the provisions. While determining whether a particular expenditure is deductible or not, the first requirement must be to enquire whether the deduction is expressly prohibited under any other provision of the Income tax Act. If it is not so prohibited, then alone the allow ability may be considered under Sec. 37(1). Sec. 40 and 40A provides for non -deductible expenses or payments. Under Sec. 43B certain deductions are to be allowed only on actual payment.
Following amounts shall not be deducted while computing income under the head profits & gains of business or profession-
1) Interest, royalty, fees for technical services, etc, payable to a non-resident or outside India without deducting TDS and its payment;
2) Interest, commission or brokerage, fees for professional services or fees for technical services payable to any resident person without TDS and its payment;
3) Income Tax;
4) Wealth Tax;
5) Any payment which is chargeable under the head “Salaries”, if it’s payable outside India, or to a non-resident, and the tax has neither been paid in India nor deducted there from;
6) Any payment to provident fund or any other fund established for the benefit of employees of the assessee in respect of whom the assessee has not made effective arrangement to secure that tax shall be deducted at source from any payment made from the fund, which are taxable under the head ‘salaries’;
7) Any tax on non-monetary perquisite actually paid by employer on behalf of employee.
8) Sec. 40 A (2): 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. Related person includes both “Relative” and “Person having substantial interest”.
9) Sec. 40 A (3): Where any expenditure in respect of which payment is made in excess of Rs. 20,000 at a time otherwise than by Account-payee cheque or draft, 100% of such payment shall be disallowed.
10) No deduction shall be allowed in respect of any provision made by assessee for the payment of gratuity to his employees, provided such contribution is not towards an approved gratuity fund or for the purpose of payment of gratuity, that has become payable during the previous year.
11) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards setting-up or formation of, or as contribution to any fund, trust, company, AOP, BOI, society or other institution for any purpose provided such sum is not by way of contribution towards approved superannuation fund, recognised provident fund, approved gratuity fund.
12) Deductions in respect of following expenses are allowed only if payment is made on or before the due date for furnishing return of income.
13) Sec. 43B-Following sums not paid before due date of filing return of income
i. Any sum payable by way of tax, duty, cess, fee, etc.
Ii. Bonus or commission to employees.
Iii. Interest on loan or borrowing from any public financial institutions, etc.
Iv. Interest on any loans and advances from a scheduled bank.
Iv. Leave encashment.
v Contribution to any P.F., superannuation fund, gratuity fund, etc.
Problems on computation of income from Business of Sole Proprietor
Illustration 1: Mr. Amitabh prepared the following profit and loss account of his cloth shop for the year ended 31st March, 2019. Find out his income from business for the AY 2019-20.
Profit and Loss Account (For the year ended 31st March, 2019)
Particulars | Rs | Particulars | Rs |
Salaries and wages | 33,000 | Gross Profit | 3,34,725 |
Rent, etc. | 1,600 | Gifts received from relatives | 275 |
Household expenses | 82,000 |
|
|
Income Tax | 900 |
|
|
Advertisement | 800 |
|
|
Postage expenses | 600 |
|
|
Gifts to relatives | 900 |
|
|
Fire Insurance Premium | 400 |
|
|
Life Insurance Premium | 2,100 |
|
|
Bad Debts Reserve | 800 |
|
|
Audit Fees | 400 |
|
|
Net profit | 211500 |
|
|
Total | 3335000 | Total | 335000 |
|
|
|
|
Illustration 3
The following is the Profit and Loss Account of the Raj Oil Mills for the financial year 2018-19. Compute its business income on the basis of additional information.
Illustration 4
From the Profit & Loss Account for the relevant assessment year, compute income from business of Sri Babu Rao.
Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”.
Types of capital gain
It is of two types-
Figure: Types of capital gain
- Short term capital gain:
Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
2. Long term capital gain:
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months
CHARGEABILITY-
Generally, long-term capital gains are charged to tax @ 20% (plus surcharge and cess as applicable), but in certain special cases, the gain may be (at the option of the taxpayer) charged to tax @ 10% (plus surcharge and cess as applicable). The benefit of charging long-term capital gain @ 10% is available only in following cases:
1) Long-term capital gains arising from sale of listed securities and it exceeds Rs. 1,00,000 (Section 112A);
2) Long-term capital gains arising from transfer of any of the following asset:
a) Any security (*) which is listed in a recognised stock exchange in India;
b) Any unit of UTI or mutual fund (whether listed or not) ($); and
c) Zero coupon bonds (*) Securities for this purpose means “securities” as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956. This definition generally includes shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a like nature in or of any incorporated company or other body corporate, Government securities, such other instruments as may be declared by the Central Government to be securities and rights or interest in securities. ($) This option is available only in respect of units sold on or before 10-7-2014.
Long-term capital gains arising from sale of listed securities
The Finance Act, 2018 inserts a new Section 112A with effect from Assessment Year 2019-20. As per the new section capital gains arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at the rate of 10 per cent of such capital gains exceeding Rs. 1,00,000. This concessional rate of 10 per cent will be applicable if:
a) in a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and
b) in a case a unit of an equity-oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset. The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of following:
a) The actual cost of acquisition of such asset; or
b) Lower of following:
(i) Fair market value of such shares as on January 31, 2018; or
(ii) Actual sales consideration accruing on its transfer. The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as on January 31, 2018. However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its fair market value.
In case of units which are not listed on recognized stock exchange, the net asset value of such units as on January 31, 2018 shall be deemed to be its FMV. In a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.
Long-term capital gains arising from transfer of specified asset
A taxpayer who has earned long-term capital gains from transfer of any listed security or any unit of UTI or mutual fund (whether listed or not), not being covered under Section 112A, and Zero-coupon bonds shall have the following two options: a. Avail of the benefit of indexation; the capital gains so computed will be charged to tax at normal rate of 20% (plus surcharge and cess as applicable). b. Do not avail of the benefit of indexation; the capital gain so computed is charged to tax @ 10% (plus surcharge and cess as applicable). The selection of the option is to be done by computing the tax liability under both the options, and the option with lower tax liability is to be selected.
DEFINITIONS-
CAPITAL ASSET
Capital asset is defined to include:
(a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
(b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992. However, the following items are excluded from the definition of “capital asset”:
(i) any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession;
(ii) personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
“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 stones, and whether or not worked or sewn into any wearing apparel;
b. Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii)Agricultural Land in India, not being a land situated:
a. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
b. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
i. Not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
Ii. Not being more than 6 KMs, if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
Iii. not being more than 8 KMs, if population of such area is more than 10 lakhs. Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year. (iv)61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government; (v) Special Bearer Bonds, 1991; (vi)Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2016.
TRANSFER
Transfer of Capital Asset: Transfer includes –
a) Sale, exchange or relinquishment (give up) of the asset.
b) The extinguishment of any right.
c) Compulsory acquisition under any law.
d) Asset converted into stock in trade.
e) Conversion of business into limited co.
f) Allowing of the possession of any immovable property
g) Maturity of Zero-Coupon Bond
h) Any transaction which effects the enjoyment of any immovable property.
The following are not considered as transfer (Sec 49(1))
Transfer of asset in a scheme of amalgamation
Transfer of agricultural land before 1/4/1970
Transfer of debenture or bonds into shares
Transfer of assets in kind at the time of liquidation
Transfer of asset by a parent company to the own subsidiary company
Transfer of asset under the gift or will
Transfer of capital asset at the time of partition of HUF
COST OF ACQUISITION
The term cost of acquisition' though not defined under the Act denotes the price paid by the owner or the amount, which he has incurred for acquiring the property. While determining the taxable capital gains on sale of property, the owner is entitled to the benefit of cost of acquisition as a deduction from the sale consideration. In simple words, ‘cost of acquisition’ includes all the expenses which is incurred by the owner in purchasing such capital asset.
COST OF IMPROVEMENT
Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset. It also includes any expenditure incurred in protecting or curing the title.
Any capital expenditure incurred by the assessee to make any addition or improvement in the house is treated as 'cost of improvement'. Thus, if renovation cost is in the nature of capital expenditure only then such renovation cost can be considered as 'cost of improvement' for the house property
Short term capital asset:
Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
Long term capital asset
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
Cost Inflation Index (CII) is used to estimate the increase in the prices of goods and assets year-by-year due to inflation. The Cost Inflation Index for the financial year 2021-22 is 317.
Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over time will lead to a rise in the prices.
Who notifies the Cost Inflation Index?
The Central Government specifies the cost inflation index by notifying in the official gazette.
Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.
*Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the cost of the same basket of goods and services in the previous year to calculate the increase in prices.
How is Cost Inflation Index used in Income Tax
Long term capital assets are recorded at cost price in books. Despite increasing inflation, they exist at the cost price and cannot be revalued. When these assets are sold, the profit amount remains high due to the higher sale price as compared to purchase price. This also leads to a higher income tax. The cost inflation index is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes to benefit taxpayers. To benefit the taxpayers, cost inflation index benefit is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.
Capital Gains Exemption can be claimed under the Income Tax Act by reinvesting the amount in either purchasing/ constructing a Residential House or by reinvesting the amount in Capital Gain Bonds.
The seller of the asset either has the option to claim exemption or pay 20% Long Term Capital Gains Tax.
Section 54: Old Asset: Residential Property, New Asset: Residential Property
Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rented) shall be exempt to the extent such capital gains is invested in the
- Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold and/or
- Construction of Residential house Property within a period of 3 years from the date of transfer/sale of property
Provided that the new Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition. If the new property is sold within a period of 3 years from the date of its acquisition, then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt under section 54 earlier. The capital gain arising from this transfer will always be a short-term capital gain.
Quantum of Deduction under Section 54
Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house i.e.
- If the Capital Gains amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt
- If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption
No. Of Houses which can be purchased for claiming Section 54 Exemption
- The Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in construction/purchase of 1 residential house [Introduced vide Finance Act 2014]. Irrespective of the no. Of houses already owned by the person, if he invests the capital gain in construction/purchase of a single residential house – then capital gains exemption can be claimed.
- As an exception to the above rule, in cases where the amount of Capital Gains does not exceed Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in purchase/construction of 2 residential houses. However, this exemption of purchasing 2 residential houses can be claimed only once. This exemption once claimed cannot be claimed in again in any other year. For all other years, investment should be made in construction/ purchase of 1 residential house only. [Introduced vide Finance Act 2019].
To re-iterate, for claiming exemption under Section 54 – the no. Of houses already owned by the person is immaterial. He can still claim exemption by reinvesting the Capital Gains on Sale of House in another Residential House.
Capital Gains Account Scheme
Although as per Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, but the capital gains on the transfer of the original house property is taxable in the year in which it was sold. The Income Tax Return of that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise, the capital gain would become taxable.
To avoid the above situation, the Income Tax Act specifies an alternative in the form of deposit under the Capital Gains Account Scheme.
The Amount of Capital Gain which is not utilised by the Assessee for the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return. The details of deposit i.e., the Date of Deposit and the amount deposited are required to be mentioned in the Income Tax Return while claiming the Capital Gains Exemption. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption.
In case, the assessee deposits the amount in the Capital Gains Account Scheme but does not utilise the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilised shall be charged as Capital Gains of the year in which the period of 3 years is completed from the date of sale of the Original Asset and it will be long term capital gain of that financial year.
Section 54EC: Old Asset: Any Asset, New Asset: Specified Bonds
Gains arising from the transfer of any long-term capital asset are exempt under section 54EC if the assessee has within a period of 6 months after the due date of such transfer invested the capital gain in long term specified bonds as notified by the Govt. For a minimum period of 3 years.
In case where the long term specified asset is transferred or converted into money at any time within a period of 3 years from the date of its acquisition, the amount of capital gain exempt u/s 54EC, shall be deemed to be long term capital gain of the previous year in which the long term specified asset is transferred or converted into money.
If the Assessee even takes a loan or advance on the security of such long term specified asset, he shall be deemed to have converted such long term specified asset into money on the date on which such loan or advance is taken.
These specified binds are usually issued by REC and NHAI and the Interest Rate offered is approx. 5.25%. Tax on the Interest earned is also liable to be paid as the Interest is not tax-free. These are Capital Gain Bonds and not Tax-Free Bonds. The principal invested becomes tax free after the lock-in period but the interest continues to remain taxable.
Budget 2018 Amendment: With effect from Financial Year 2018-19, the benefit of Section 54EC would only be available on sale of Land or Building (whether Residential or Non-Residential). Earlier it was available for all assets but now it would only be applicable for Land or Building. Moreover, from Financial Year 2018-19 onwards, these bonds would be required to be held for minimum 5 years.
Quantum of Deduction under Section 54EC
- Capital Gains shall be exempt to the extent it is invested in the long term specified assets (subject to a maximum limit of Rs. 50 Lakhs) within a period of 6 Months from the date of such transfer.
- Budget 2014 has also introduced an amendment to Section 54EC and from FY 14-15 i.e., AY 15-16 onwards, the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original asset or assets are transferred and in the subsequent financial year does not exceed Rs. 50 Lakhs.
Section 54F: Old Asset: Any Asset, New Asset: Residential House
Any Gain arising to an individual or HUF from the sale of any Long-Term Asset other than Residential Property shall be exempt in full, if the entire net sales consideration is invested in
- Purchase of one residential house within 1 year before or 2 years after the date of transfer of such an asset or in
- Construction of 1 Residential House within 3 years after the date of such transfer
In case the whole sale consideration is not invested and only a part of the sale consideration is invested, exemption shall be allowed proportionately i.e.
Amount Exempt = Capital Gain X Amount Invested
Net Sale Consideration
Exemption under Section 54F not available in following cases
The above exemption would not be available if any of the below mentioned conditions is satisfied: -
- The assessee does not own more than 1 Residential House Property on the date of transfer of such asset exclusive of the one he has bought for claiming exemption under section 54F. (Note: The restriction on No. Of houses already owned is only applicable if the assessee is claiming exemption under Section 54F. As explained above, there is no such restriction if the assessee is claiming exemption under Section 54)
- The assessee purchases any residential house, other than the new asset, within a period of 1 year of the transfer of the old asset.
- The assessee constructs any residential house, other than the new asset, within a period of 3 years after the date of the old asset.
Budget 2014 has also introduced an amendment to Section 54F to be effective from FY 2014-14 and as per this amendment the exemption is available if the investment is made in 1 residential house situated in India.
Exemption under Section 54F would not be allowed if investment is made in 2 houses. The option to invest in 2 houses is available once in lifetime in Section 54 but is not available in Section 54F.
The Assessee also has the option of depositing this amount in Capital Gains Account Scheme as explained in Section 54 above, before the due date of furnishing the Income Tax Return.
e-Book on Capital Gain Tax on sale of Property
As the sale price of each property transaction is huge, the tax applicable also turns out to be huge. And therefore, proper care needs to be exercised while computing the Capital Gains and then using the Exemptions to reduce the Tax Liability.
To help people compute the Tax Liability and the Exemptions in the correct manner, we have authored a simple yet detailed e-book which explains with more than 40 Examples, the manner in which Capital Gains Tax would be levied on sale of Property. All latest case laws have also been explained in this e-book which can be purchased from this link.
The e-book is updated with all latest up to date amendments and the main topics covered in this e-book are: -
- Computation of Capital Gains
- Tax on Sale of Inherited Property
- Tax on Sale of Under-Construction Property
- Sale of Property below Circle Rate/ Stamp Valuation Rate
- How to reduce Tax by claiming Capital Gains Exemptions
- TDS on sale of Property
- 40+ Comprehensive Examples
Income from other sources (Section 56)
(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ―Income from other sources‖, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head ―Income from other sources‖, namely: —
(i) dividends;
(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head ―Profits and gains of business or profession;
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ―Profits and gains of business or profession;
(iv) income referred to in sub-clause (xi) of clause (24) of section 2, if such income is not chargeable to income-tax under the head ―Profits and gains of business or profession‖ or under the head ―Salaries;
(v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004 but before the 1st day of April, 2006, the whole of such sum: Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) 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 clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
Vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 but before the 1st day of October, 2009.
Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority
(f) 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 clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
(f) stamp duty value means the value adopted or assessed or assessable 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;
Other Sources of Income are Stated Below:
1. Income From:
Lottery, Gambling, Batting, Horse Race, Cross Ward, Puzzle
Any other casual income
Interest other than interest on securities
Interest on Securities
Commission (If it is not a part of one’s main Business or Profession)
Family Pension
Royalty
Director’s Fee
Subletting of House
Dividend
Tuition Income
2. Casual Income: TDS is applicable @ 30% on this. It generally received after deduction of tax. Hence it always grosses up while calculating the income under this head as given below:
Gross Income = Net Amount Received * 100/70
3. Lottery Income: If Lottery Income is less than Rs.5000/- then there will be no TDS. Hence no need to gross up.
4. Income from Horse Race: If Income from Horse Race is less than Rs.2500/- then there will be no TDS Hence no need to gross up.
5. Family Pension: Rs.15000/- or 1/3 of Actual Amount received, whichever is less, is exempt.
Taxable = Actual Amount Received – Exempted Amount
Dividend from Indian Co. Is fully exempted.
6. Taxable Dividend: a) Dividend from Foreign Co.
b) Dividend from Co-operative Society
7. Tax free in case of other sources: -
Interest from Capital Investment Bond
Interest on Post Office Savings
Interest on National Relief Bond
Income from UTI
Any Allowance to a M.P. (Member of Parliament)
Deductions to be made in Computing Total Income [Sections 80A to 80U (Chapter VIA)]
The aggregate of income computed under each head, after giving effect to the provisions for clubbing of income and set off of losses, is known as "Gross Total Income". In computing the total income of an assessee, certain deductions are permissible under sections 80C to 80U from Gross Total Income.
These deductions are however not allowed from the following incomes although these incomes are part of Gross Total Income:
- Long-term capital gains.
- Short-term capital gain on transfer of equity shares and units of equity-oriented fund through a recognised stock exchange i.e., short-term capital gain covered under section 111A.
- Winnings of lotteries, races, etc.
- Incomes referred to in sections 115A, 115AB, 115AC, 115ACA, 115AD and 115D.
These deductions are of two types: —
- Deductions on account of certain payments and investments covered under sections 80C to 80GGC.
- Deductions on account of certain incomes which are already included under Gross Total Income covered under sections 80-IA to 80U.
The following expenses are not deductible by virtue of section 58 in computing the income chargeable under the head 'Income from Other Sources’:
PERSONAL EXPENSES [Section 58(1)(a)(i)] - Any personal expenses of the assessee are not deductible.
INTEREST [Section 58(1)(a)(ii)] - Any interest (which is chargeable under the Act in the hands of recipient) which is payable outside India on which tax has not been paid or deducted at source, is not deductible.
SALARY [Section 58(1)(a)(iii)] - Any payment (which is chargeable under the head “Salaries” in the hands of recipient and payable outside India), is not deductible if tax has not been paid or deducted therefrom.
WEALTH TAX [Section 58(1)] - Any sum paid on account of wealth-tax is not deductible.
TDS DEFAULT [Section 58(1A)] - Disallowance provisions pertaining to TDS defaults covered by section 40(a) (I a) are applicable.
AMOUNT SPECIFIED BY SECTION 40A [Section 58(2)] - Any expenditure referred to in section 40A like excessive or unreasonable payments to certain specified persons [Section 40A (2)] and payments exceeding Rs. 20,000 otherwise than by way of account payee cheque [Section 40A (3)];
EXPENDITURE IN RESPECT OF ROYALTY AND TECHNICAL FEES RECEIVED BY A FOREIGN COMPANY [Section 58(3)] - In the case of foreign companies, expenditure in respect of royalties and technical service fees as specified by section 44D is not deductible.
EXPENDITURE IN RESPECT OF WINNINGS FROM LOTTERY [Section 58(4)] - No deduction shall be allowed under any provision of the Act in computing the income by way of any winnings from lotteries, crossword puzzles, races.
However, expenditure incurred by the assessee for the activity of owning and maintaining race horses shall be allowed as a deduction while computing the income from this activity.
Simple problems on Computation of Total income of an Individual.
Q1) A company has accumulated profits of Rs. 30 Lakhs excluding capitalized profits i.e., bonus shares issued in the past of Rs. 10 Lakhs. The company distributed assets of Rs. 25 Lakhs to the shareholders. Compute the amount taxable as dividend if the market value of the asset on the date of distribution is:
(i) Rs. 20 Lakhs (ii) Rs. 35 Lakhs (iii) Rs. 45 Lakhs
Solution:1) Deemed dividend (Accumulated profit) is exempt in the hands of shareholders and is taxable in the hands of company. The company shall be liable to pay distribution tax @ 15% on [grossed up amount + surcharge @12% + Health and Education Cess @ 4%] on the market value of the asset on the date of distribution subject to the maximum extent of profits (capitalized or not).
Hence, the amount of deemed dividend shall be: -
i) Rs. 20 Lakhs.
Ii) Rs. 35 Lakhs.
Iii) Rs. 40 Lakhs (Limited to accumulated profits + bonus shares)
Q2) X Ltd. Share Capital is divided into 20,000 shares of Rs. 10 each. The company reduced its capital by 10% @ Rs. 1 per share. The accumulated profits of the company were Rs. 12,000. Mr. Satish holds 500 shares of the company.
Calculate the amount of deemed dividend of Mr Satish.
Solution:2) X Ltd. Share Capital is divided into 20,000 shares of Rs. 10 each. The company reduced its capital by 10% @ Rs. 1 per share. The accumulated profits of the company were Rs. 12,000. Mr. Satish holds 500 shares of the company.
Calculate the amount of deemed dividend of Mr. Satish. Amount Received by Mr. Satish @ Rs. 1 on
500 shares =Rs. 500
Amount Received from accumulated profit
= Accumulated profit × No of shares held/Total no of shares
= 12,000 ×500/20,000
= Rs. 300
Hence, Rs. 300 is the deemed dividend of Mr Satish and (Rs 500 - Rs 300) Rs. 200 will be treated as refund of his capital.
Q3) Mr. Zubin holds 500 shares (equity) of Rs. 10 each in K.K. Ltd which is an Indian Company. On March 31, 2020, Mr. Zubin received Rs. 3,600 as dividend and 300 bonus shares were also received on the same date. The market value of the shares of the company was Rs. 25 per share. Discuss chargeability to income tax of dividend and bonus shares.
Solution:3)
i) Cash dividend is a gross dividend, therefore, Rs. 3,600, should be included in the total income of Mr. Zubin during the assessment year2020-21. But, dividend from an Indian Company is exempt u/s 10 (34).
Hence, Company shall not pay the tax on such dividend.
Ii) Bonus shares received by Mr. Zubin are also not taxable as they are issued to equity shareholders. For equity shareholders, Bonus is not regarded as dividend.
Q4) Mr Utkarsh gives you the following information regarding his incomes for A.Y. 2020-21.
Rs.
(a) Income under the head salary (computed) 5,50,000
(b) Income from House Property 3,50,000
(c) Dividend from Domestic Company 12,00,000
Compute Tax Payable by Mr Utkarsh for AY 2020-21.
Solution:4)
Computation of Total Income and Tax of Mr Utkarsh for A.Y. 2020-21
Rs. Rs.
(a) Income from Salary 5,50,000
(b) Income from House Property 3,50,000
(c) Income from other sources:
Dividend from Domestic Company 12,00,000
Less: Exemption u/s 10 (34) 10,00,0002,00,000
Total Taxable Income 11,00,000
Tax payable
(a) Tax on Dividend 2,00,000× 10% 20,000
(b) Tax on Bal. Income of
Rs. 9,00,000
(i) First Rs. 2,50,000Nil
(ii) Next Rs. 2,50,000 @ 5% 12,500
(iii) On Balance Rs. 4,00,000 @ 20% 80,000 92,500
Total Tax 1,12,500
Add: Health and Education Cess @
4%4,500
Tax Payable 1,17,000
Q5) Compute income from the other sources of Mr Anupam for A.Y. 2020-21.
Rs.
i) Winning from Horse Race 10,000
Ii) Loss in card games 3,000
Iii) Winning from wager 25,000
Iv) Amount received from winnings of lottery 66,500
v) Winning from T.V. Show (Gross) 50,000
Solution:
Computation of Income from other sources of Mr Anupam for
AY 2020-21
Rs.
i. Winning from horse race 10,000
Ii. Winning from wager 25,000
Iii. Lottery (grossed up)
Rs 66,500 ×100 95,000
100 – 30
Iv. Winning from TV show 50,000
Income from other sources 1,80,000
Q5) The investments of Jitendra on 1st April 2019 were as given below:
i) Rs. 30,000, 10% U.P. Government Loan;
Ii) Rs. 10,000, 10% Debentures of a Jute Mill company.
Iii) Rs. 2,000 Interest received on Debentures of a Co-operative Society.
Iv) Rs. 15,000, 6% Securities issued by a Foreign Government.
v) 7% National Plan Certificates Rs. 10,000.
Vi) Rs. 1,500 received as dividend on units of Unit Trust of India.
Vii) Rs. 3,600 received as interest on less tax Government Securities.
The Bank commission for collecting interest is Rs. 99. Interest on securities being payable in each case on 1st January and 1st July. Find out income from other sources for the assessment year 2020-21.
Solution :5) Computation of Income from Other Sources of Mr. Jitendra for A.Y.
2020-21
Rs.
i) Interest on 10% UP Govt. Loan for 1 year 3,000
Ii) Interest on 10% Debentures of a Jute Mill Company for 1 year 1,000
Iii) Interest on Debentures of a Co-operative Society (Not to be
Grossed up)
2,000
Iv) Interest on foreign government securities (Not to be grossed
Up)900
v) Interest on National Plan Certificates Exempt
Vi) Dividend from U.T.I. (Not to be grossed up) Exempt
Vii) Interest received on less tax govt.
Securities3,600
10,500
Less: Bank Commission for collecting Interest 99
Income from Other Sources 10,401
References:
1. Ahuja, Giri & Gupta, Ravi: Systematic Approach to Incomes Tax
2. Agrawal, B.K.: Income Tax law and practice
3. Agrawal, B.K: Ayakar Vidhan Avam lekhe
4. Chandra, Mahesh & Shukla, D.C.: Income Tax Law and practices
5. Chandra, Girish: Income Tax
Unit 2
Sources and Computation of Taxable Income under the various Heads of Income
Salary income refers to the compensation received by an employee from a current or former employer for the execution of services in connection with employment. Thus, income is taxable as salary under Section 15 only if an employer-employee relationship exists between the payer and payee. Salary income could be in any form such as gift, pension, gratuity, usual remuneration and so on. In this article, we look at various aspects of salary income under the Income Tax Act.
According to Section 17(1) salary includes the following amounts received by an employee from his employer, during the previous year:
- Wages;
- Annuity or pension;
- Gratuity;
- Fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
- Advance of salary;
- Payment received by an employee in respect of any period of leave not availed by him/her;
- The portion of annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable;
- Transferred balance in a recognised provident fund to the extent it is taxable;
- Contribution by the Central Government to the account of an employee under a pension scheme referred to in section 80CCD (i.e., NPS);
A. Allowances – Fully Taxable Allowances –
Allowance is a fixed monetary amount paid by the employer to the employee for meeting some particular expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in the gross salary unless a specific exemption has been provided in respect of any such allowance.
Fully Taxable Allowances:
(i) Dearness Allowance / Additional D.A. / High Cost of Living Allowance -- Fully Taxable.
(ii) City Compensation Allowances (CCA).
(iii) Capital Compensatory Allowance
(iv) Lunch Allowance
(v) Tiffin Allowance
(vi) Marriage / Family Allowance
(vii) Overtime Allowance
(viii) Fixed Medical Allowance.
(ix) Electricity and Water Allowance
(x) Entertainment Allowance. It is fully added in employee’s Salary.
In case of Government employees, a deduction is allowed u/s 16(ii) at the rate of least of following:
(a) Statutory Limit Rs. 5,000 p.a.
(b) 1/5 (20%) the of Basic Salary; or
(c) Actual Entertainment Allowance received.
B. Partly Taxable Allowances: House Rent Allowance, Entertainment Allowance, Transport Allowance, Children Education & Hostel Allowances - Fully Exempted Allowances –
Partly Taxable Allowances:
1. House Rent Allowance (HRA)
Sl no | Mumbai / Kolkata / Delhi / Chennai | Other Cities |
(i) | Allowance actually received | Allowance actually received |
(ii) | Rent paid in excess of 10% of salary | Rent paid in excess of 10% of salary |
(iii) | 50% of Salary | 40% of Salary |
The exemption in respect of HRA is based upon the following factors:
(1) Salary
(2) Place of residence
(3) Rent paid
(4) HRA received.
2. Entertainment Allowance
This deduction is allowed only to a government employee. Non-Government employees shall not be eligible for any deduction on account of any entertainment allowance received by them.
In case of entertainment allowance, the Assessee is not entitled to any exemption but he is entitled to a deduction under section 16(ii) from gross salary. Therefore, the entire entertainment allowance received by any employee is added in computation of the gross salary. The Government employee is, then, entitled to deduction from gross salary under section 16(ii) on account of such entertainment allowance to the extent of minimum of the following 3 limits.
- Actual entertainment allowance received during the previous year.
- 20% of his salary exclusive of any allowance, benefit or other perquisite.
- ₹5,000.
3. Transport Allowance
Any allowance granted to meet the cost of travel on tour or on transfer of duty. "Allowance granted to meet the cost of travel on transfer" includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.
4. Children Education & Hostel Allowances
(a) Children Education Allowance: Exempt up to actual amount received per child or ₹100 p.m. Per child up to a maximum of 2 children, whichever is less.
(b) Hostel Expenditure Allowance: Exempt up to actual amount received per child or ₹300 p.m. Per child up to a maximum of two children, whichever is less.
C. Fully Exempted Allowances –
Some of the allowances, usually paid to Government servants, judges and employees of UNO are not taxable. These are:
- Allowances paid to Govt. Servants abroad: When servants of Government of India are paid an allowance while serving abroad, such income is fully exempt from taxes.
- Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC are not taxed.
- Allowance paid by UNO: Allowances received by employees of UNO are fully exempt from tax.
- Compensatory allowance paid to judges: When a judge receives compensatory allowance, it is not taxable.
“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. “Perquisite” is defined in the section 17(2) of the Income tax Act as including:
(i) Value of rent-free/accommodation provided by the employer.
(ii) Value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer.
(iii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.
(iv) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
(v) The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assesssee.
(vi) Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or an approved superannuation fund to affect an assurance on the life of the assessee or to affect a contract for an annuity.
(vii) The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and
(viii) The value of any other fringe benefit or amenity as may be prescribed.
Exempted/tax free Perquisites:
1. Leave Travel Concession subject to conditions & actual spent only for travels.
2. Computer/ Laptop provided for official / personal use.
3. Initial Fees paid for corporate membership of a club.
4. Refreshment provided by the Employer during working hours in office premises.
5. Payment of annual premium on Personal Accident Policy.
6. Subscription to periodicals and journal required for discharge of work.
7. Provision of Medical Facilities.
8. Gift not exceeding Rs. 5,000 p.a.
9. Use of Health Club, Sports facility.
10. Free telephones whether fixed or mobile phones.
11. Interest Free / concessional loan of an amount not exceeding Rs.20,000 (limit not application in the case of medical treatment)
12. Contribution to recognised Provident Fund / approved super annuation fund, pension or deferred annuity scheme & staff group insurance scheme.
13. Free meal provided during working hours or through paid non-transferable vouchers not exceeding Rs. 50 per meal or free meal provided during working hours in a remote area.
The value of any benefit provided free or at a concessional rate (including goods sold at concessional rate) by a company to the Employees by way of allotment of shares etc., under the Employees stock option plan as per Central Government Guidelines.
B. Taxable Perquisites:
1. Rent Free Accommodation
Valuation of unfurnished residential accommodation provided by the employer: -
(a) Union or State Government Employees- The value of perquisite is the license fee as determined by the Govt. As reduced by the rent actually paid by the employee.
(b) Non-Govt. Employees- The value of perquisite is an amount equal to 15% of the salary in cities having population more than 25 lakh, 10% of salary in cities where population as per 2001 census is exceeding 10 lakhs but not exceeding 25 lakh and 7.5% of salary in areas where population as per 2001 census is 10 lakh or below. In case the accommodation provided is not owned by the employer, but is taken on lease or rent, then the value of the perquisite would be the actual amount of lease rent paid/payable by the employer or 15% of salary, whichever is lower. In both of above cases, the value of the perquisite would be reduced by the rent, if any, actually paid by the employee.
2. Value of Furnished Accommodation-
The value would be the value of unfurnished accommodation as computed above, increased by 10% per annum of the cost of furniture (including TV/radio/ refrigerator/ AC/other gadgets). In case such furniture is hired from a third party, the value of unfurnished accommodation would be increased by the hire charges paid/payable by the employer. However, any payment recovered from the employee towards the above would be reduced from this amount.
3. Value of hotel accommodation provided by the employer-
The value of perquisite arising out of the above would be 24% of salary or the actual charges paid or payable to the hotel, whichever is lower. The above would be reduced by any rent actually paid or payable by the employee. It may be noted that no perquisite would arise, if;
• The employee is provided such accommodation on transfer from one place to another for a period of 15 days or less.
• The employee is provided such accommodation at a mining/ oil exploration/ project execution/ Dam/ Power generation/ off- shore site located in remote area or being of temporary nature having plinth area < 800sq. Ft and not less than 8 kms away from municipality or cantonment limits.
Concessional accommodation
Where the accommodation is provided to the employee at a concessional rate of rent, the value of such accommodation is first determined as if the accommodation were provided free of rent (as explained earlier). From the above value, the rent paid or payable by the employee for the period during which he occupied the house during the previous year, should be deducted. The resulting amount will be added to his salary as value of-concession.
Personal obligations of the employee met by the employer –
1. Electricity/Water/Heater/Gas:
Where employer provides the same from own sources: -
Value of perquisite: - Cost of production
Where employer provides from outside sources: -
Value of perquisite: - Amount Paid by the employer
2. Sweeper/Gardener/Watchman/Domestic Servant:
Value of perquisite: Amount paid by employer
3. Free Education: -
Where employer provides free education in own college: -
Value of perquisite: Fee charged by similar college in nearby area
Where employer provides free education in any other college: -
Value of perquisite: Actual amount paid by employer
4. Free Transport: -
- Free transport facility provided by employee engaged in the business of transportation of passengers/ goods
Value of perquisite: Amount charged when similar services are provided to general public.
- Free tickets to railway and airline employees are exempt
5. Medical Facilities: -
- Medical facilities are provided in a government hospital in India/ Employer owned hospital in India/ a hospital approved by the board are exempt from tax.
- Medical facilities in any other case up to a total value of Rs 15000 is exempt from tax.
- Medical Facilities provided by employer outside India: -
a) Treatment and stay expenditure are exempt up to the limits permitted by RBI
b) Traveling expenditure is exempt where the Gross total income of the assessee is up to 2 Lakhs. IN case of Gross total income being in excess of Rs 2 Lakhs, the traveling expenditure is chargeable to tax.
6. Telephone Facility: -
Telephone facility provided by employer is completely exempt from tax.
Provident fund is a government-managed retirement savings scheme for employees, who can contribute a part of their savings towards their pension fund, every month. These monthly savings get accumulated every month and can be accessed as a lump sum amount at the time of retirement, or at the end of employment.
Provident Funds are of four kinds
(i) Statutory Provident Fund or the Fund to which the Act of 1925 applies (S.P.F.)
- These are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc.,
- The contributions made by the employer are exempted from income taxes in the year in which contributions are made.
- The contributions made by the employee can be claimed as tax deductions under section 80c.
- Interest amount credited during the financial year is not treated as income and hence it is exempted from income tax.
- The redemption amount at the time of retirement is exempted from tax.
- If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.
(ii) Recognised Provident Fund (R.P.F.)
- Any establishment (business entity) which employs 20 or more employees can join RPF. Most of the individuals (who are salaried) generally contribute to this type of Provident Fund. This is one of the popular types of Employees Provident Funds (EPF). (Organizations which employ less than 20 employees can also join RPF if the employer and employees want to do so)
- The business entity can either join the Govt. Scheme set up by the PF Commissioner (or) the employer himself can manage the scheme by creating a PF Trust. All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax (CIT).
- Employer’s contribution in excess of 12% of salary is treated as income of the employee and is taxable. In excess of 12%, the contributions are taxable in the year of contribution.
- Tax Deduction u/s. 80C is available for amount invested by the employee (up to Rs 1.5 Lakh in a Financial Year).
- Interest amount earned (up to 9.5% interest rate) on PF balance (employee’s + employer’s contributions) is tax free. In excess of 9.5%, the interest on contributions is taxable as ‘salary’ in the year in which it is accrued.
- Accumulated funds redeemed by the employee at the time of retirement / resignation are exempt from tax if he/she continues the service for 5 years or more.
(iii) Unrecognised Provident Fund (U.R.P.F.)
- These are not recognized by Commissioner of Income Tax.
- Employer’s contribution is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free in the year of contribution.
- Tax deduction under section 80c is not available on Employee’s contributions.
- Interest earned is not treated as income in the year it is credited and hence not taxable in the year of accrual.
- At the time of redemption / retirement, the employer’s contributions and interest thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.
(iv) Public Provident Fund (P.P.F.)
- Under PPF any individual from public, whether is in employment or not may contribute to this fund.
- The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh Rs. p.a. The amount is repayable after 15 years.
- PPF can serve as an excellent retirement planning / savings tool, for those who do not come under any pension scheme.
- The PPF offers tax benefit under section 80C and the interest earned is also exempt from tax. All the eligible withdrawals are exempted from taxes.
Tax treatment of provident fund
The contribution is made in the Employee Provident Fund (EPF) for the employee’s welfare by the employee and the employer. The deduction is available under section 80C. Provident fund is a kind of security fund in which the employees contribute a part of their salary and the employer also contributes on behalf of their employees. Section 10(11) and 10(12) of the Income Tax Act defines the exemption on the amount added to the provident fund. Additionally, the amount allowed as a deduction on contributing to the provident fund is dealt in section 80C of the Income Tax Act. The types of provident funds are:
- Recognized Provident Fund (RPF) as recognized by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952. It applies to enterprises employing at least 20 employees.
- Unrecognized Provident Fund (UPF) is not recognized by the Commissioner of Income Tax. The employers and employees start these schemes.
- Public Provident Fund (PPF) under Public Provident Fund Act, 1968 is another system of contributing to the provident fund. Self-employed people can also take part in this scheme. A minimum contributing limit of Rs. 500 per annum and a maximum of Rs. 150000 per annum are set.
- Statutory Provident Fund (SPF) is meant for employees of Government or Universities or Educational Institutes affiliated to university.
Section 16 of Income Tax Act, 1961 provides deduction from income chargeable to tax under the head ‘salaries. It provides deductions for the standard deduction, entertainment allowance, and professional tax. Through this deduction, a salaried taxpayer can lower his/ her taxable salary income chargeable to tax.
Standard Deduction under Section 16
With effect from the financial year 2019-20, taxpayers can claim a standard deduction of Rs. 50000 from the salary income, or the actual amount of income, whichever is less. The deduction of Rs. 50000 will also be available on the amount of pension income earned by the assessee. Taxpayers should note that the legislation does not permit the claiming of a loss under the head salaries. Hence, if the salary received is lesser than Rs.50000, the deduction allowed will also accordingly be restricted to the actual amount of salary.
Exemptions
Consequent to the introduction of the standard deduction, the following exemptions have been withdrawn:
- A transport allowance of Rs. 1,600 per month for the purpose of computing between the place of residence and the place of duty. However, the transport allowance of Rs.3200 per month granted to an employee who is deaf and dumb or blind or orthopedically handicapped with the disability of lower extremities would continue to be exempt.
- Any sum funded by an employer in respect of any amount actually incurred by the employee for obtaining host or his family member’s medical treatment either in any hospital, nursing home, clinic or otherwise up to a maximum of Rs. 15,000 in the previous year.
Entertainment Allowance
While calculating gross salary, entertainment allowance is first included. Then a standard deduction is allowed under Section 16(ii). However, entertainment allowance can be claimed only by Government employee up to a maximum of Rs.5000. Where the employee is in receipt of entertainment allowance, the amount so received shall first be included in the salary income and thereafter the following deduction shall be made: A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less.
Professional Tax Paid
State Governments and Local Authorities are empowered to collect professional taxes on professions, trades, callings and employment. The amount of professional tax collected does not exceed Rs.2500 per annum. Under Section 16(iii), a deduction from salary can be claimed by the taxpayer on account of professional tax paid. The deduction for professional tax will be allowed in the year in which the tax is actually paid by the employee. Professional tax due but not paid cannot be claimed as a deduction from salary.
Problems on Income from Salary (excluding retirement benefits)
Q1) Mr. X is the general manager of Plus Steel Ltd. He draws a salary of Rs. SOW/- per month. He retires on 31st December 1989, after completing 26 years and 1.1 months of service. He is entitled to one month earned leave for every year of completed service. He has availed of 20 months earned leave while in service. He has encashed the unutilised earned leave while in service. He has encashed the unutilised earned leave standing to his credit on the basis of last drawn salary. He got an in rent of Rs. 5001- on 1-7-89. Compute the gross salary of Mr.X for the assessment year 2020-21.
Solution:1)
Mr. X. Computation of gross salary for assessment year 2020-21
Salary for 9 months (14-2020 to 31-12-2021)1 3 X Rs. 4500 + 6 X 5000 = 43,500.00
Encashment of earned leave –
Total earned leave to which X
Is entitled 27 months
Less earned leave availed 20 months
Balance of credit 7 months
Cash received on the basis of
Rs. 5000-per month.35,000.00
Less exemption under Section 10 (IOAA)
(a) Actual amount received. Rs 35,000
(b) have salary for the unutilised
Entitled period on the basis of
Average salary drawn during
10 months immediately preceding retirement.
7 X (5 X 4500 + 5 X 5000) 10 4 X Rs. 4750 = Rs. 33,250
(c) Salary for 8 months of: earned leave period
Exempted under the Act. 8 X Rs. 4,750 = Rs. 38,000
(d) Rs. 79,9201- The least is exempt Rs. 33,250 1750
Excess amount is taxed (35,000 - 33,250)
Gross Salary 45,250
Q2) Determine the taxable amount of pension for the assessment year 2020-21 in the following cases.
i) A receives Rs. 1200per month as pension from:
(a) the Central government
(b) a public sector corporation and
(c) a private sector company during previous year 2020-21.
Ii) A retires from government service on 30th April 2020. He gets pension of Rs. 1,2001- per month up to December, 1989 with effect from January 1, 2020 he gets one-third of his pension commuted for Rs. 22,000
Iii) A retires from Tata Steel Company Ltd., in June 39, 2020. He gets pension of Rs. 2,0001- per month up to 31-1-2020. With effect from 1-2-2020 he gets 75% of his pension commuted for Rs. 70,000- at the time of retirement he got Rs. 1,00,000/- as gratuity from the company.
Solution: 2) i) Rs. 14,400- will be taxable as salary in A's hands for 2020-21 assessment year subject to permissible deductions. It does not matter whether he is a government servant, a servant of public sector, or a private sector company. However, since his total income will be below the taxable limit of Rs. 18,00O/ no liability arises for payment of tax.
(ii) Non-commuted pension from May 20-December 20Rs. 1280/- X 8 Rs. 9600
Since A is a government servant the entire
Commuted value of Rs. 22,000/- is exempt from tax.
Uncommuted pension from
1-1-2020 to 31-3-2021 Rs. 12001- X 2/3 X 3 Rs. 2400
Total taxable uncommuted pension Rs. 12000
(iii) Uncommuted pension
From 1-7-2020 to 31-1-2021 Rs. 2000 X 7 Rs. 14000
Commuted value of 75% of pension Rs. 70,000/-
Since A has received gratuity 1/3rd of the commuted value of the whole pension is exempt from tax i.e., Rs.70,000X4/3X1/3 =Rs. 31,1111
Taxable portion of commuted pension Uncommuted pension
From 1-2-21 to 31-3-21Rs. 2,0001- X 114 X 2 ‘. = Rs. 1,000
Taxable pension (subject to standard deduction) = 53,8891
Q3) B, an employee of TR Co. Ltd. Receives Rs. 50,000 as gratuity as par the provisions of Payment of Gratuity Act 1972. He retires in March 1990 after putting in 26 years and 9 months service. At the time of retirement his monthly salary was Rs. 17001- Calculate the taxable gratuity in his hands.
Solution: 3)
Completed year of service 27 years
15 days salary i.e., 1700 X 15/26 = Rs. 980
Limits:
(i) Gratuity received Rs. 50,0001-
(ii) 15 days of wages for each completed year of service Rs. 980 X 27 Rs. 26,460/-
(iii) Rs. 50,000 The exempted portion of gratuity is Rs. 26,460 and the balance of Rs. 23,5401(50,000-26,460) will be taxable in the hands of B as salary.
Q4) Mr. Gaurav Modi is employed in Khadi Samiti in Lucknow. He is in receipt of a salary of Rs. 17,000 p.m. And a dearness allowance of Rs. 2,000 p.m. He contributes 10% of his salary and dearness allowance to a provident fund to which Khadi Samiti contributes 15%. He is provided with a rent-free unfurnished house by his employer. He received Rs. 25,000 as bonus during previous year. The interest credited to his provident fund @ 12% amounted to Rs. 1,000. Compute taxable income of Mr. Gaurav Modi for the assessment year 2020-21, if the P.F. In question is (i) Statutory (ii) Recognized or (iii) Unrecognized. On what amount the assessee is entitled to deduction u/s 80C.
Solution: 4) Computation of Taxable Income of Mr. Gaurav Modi for AY 2020-21
Statutory P.F. Recognized Unrecognized P.F. (Rs.) P.F. (Rs.) P.F. (Rs.)
Salary @ 17,000 p.m. 2,04,0002,04,000 2,04,000
D.A. @ 2,000 p.m.24,000 24,000 24,000
Bonus 25,000 25,300 25,000
Employer’s contribution — 6,840 —
To R.P.F. In excess of 12%
Interest credited to R.P.F.in — 208 —
Excess of 9.5%
Value of rent-free house 10% 25,300 25,300 25,300
Of salary of Rs. 2,53,000
(As population of Lucknow
Exceeds 10 lakhs but does
Not exceed 25 lakhs)
Gross Salary 2,78,3002,85,348 2,78,300
Less: Standard Deduction 50,000 50,000 50,000
Taxable Salary 2,28,3002,35,348 2,28,300
Amount entitled to deduction 22,800 22,800 Nil
u/s 80C
1) Employer’s contribution RPF = 2, 28,000 (Salary + D.A.)
= 2, 28,000 x 3/100 = 6,840
Interest credited = 1000 x100/12 = 8333.33
Excess of 9.5% = 8,333x 2.5/100 = 208
2) Assessee is entitled to deduction u/s 80C, up to a maximum amount of Rs.1,50,000 in respect of his contribution to statutory or recognized provident fund, i.e., 10% of his salary and D.A., say Rs. 22,800. He is not entitled to deduction u/s 80C in respect of his contribution to unrecognized provident fund.
3) Salary = Basic Pay + D. A+ Bonus
= 2,04,000+ 24,000+25,000
= Rs. 2,53,000
Q5) Following particulars are furnished by Mr. Murari, a citizen and resident of India. Compute the taxable income of Mr. Murari for Assessment Year 2020-21
Rs.
a) Basic Salary 86,000
b) House rent allowance (the house is at Kolar and
Rent paid amount to Rs. 60,000) 42,000
c) LIC premium on his own life 5,000
d) Unit linked insurance plan contribution 1,000
e) Premium on his wife’s life 2,500
f) Deposit in 10 years CTD of Post Office 2,000
Computation of Taxable income of Mr. Murari.
Solution:5 Taxable salary of Mr Murari for AY 2020-21
1) Basic Salary 86,000
2) House rent allowance:
a) Actual HRA received 42,000
b) Rent paid in excess of 51,400
10% of salary Rs. 60,000 – Rs. 8,600
c) 40% of salary 34,400
Taxable HRA (Rs. 42,000 – 34,400) 7,600
Gross Salary 93,600
Less: Standard deduction 50,000
43,600
Deduction u/s 80 C
Premium on own life 5,000
Premium on wife’s life 2,500
Payment under unit linked plan 1,000 8,500
Taxable Income 35,100
Basis of Charge [Section 22]:
Income from house property shall be taxable under this head if following conditions are satisfied:
a) The house property should consist of any building or land appurtenant thereto;
b) The taxpayer should be the owner of the property;
c) The house property should not be used for the purpose of business or profession carried on by the taxpayer.
Exempted Incomes from House Property
There are certain cases where income from House property is exempted. As per section 10 of Income Tax Act 1961, below income are exempted and not to be included while calculating the total income of Assessee.
1. [Section 2(1)(c)] Agricultural House Property
Income from such house property which is situated on or in the immediate vicinity of agricultural land which is used for agricultural purposes by cultivator is exempted from tax.
2. [Section 11] House property held for charitable purposes
Any income from a house property held for charitable or religious purposes. Example- Rent received from the shop which is owned by charitable institute and temple.
3. [Section 23(3)] Self-occupied but vacant house
If assessee keeps one of his own houses reserved for self-occupation but is living in a rented house elsewhere or any other place due to his employment or profession the income from such house is taken to be nil while computing his/her total income.
4. House used for own business or profession
If house is used for the purpose of doing own business, then there is no income chargeable to tax under this head from such house property.
5. [Section 10(24)] Property held by registered trade union
Income from a house property owned by a registered trade union is not to be included in its Gross total income.
6. Income from house property held by the
Local Authority, Scientific research institute, political party, educational institute working for spreading education and not to earn profit, medical institute working for spreading medical service and not to earn profit.
7. [Section 23(5)] House Property held as Stock-in-Trade and not let out during the previous year
Where any house property is held as stock-in-trade and the property is not let during the whole or part of the year. The annual value of such property shall be taken as nil for the period of one year from the end of the financial year in which the certificate of completion is obtained.
8. One house property owned by a former ruler of Indian states
Ex-rulers of Indian states may be owning many palaces but only one palace of their choice shall be treated as a self-occupied house and shall be exempted.
9. One self-occupied house
If assessee owns one residential house, the net annual value of the same shall be taken as nil but in case he owns more than one house, then only one of his choices but normally of higher value shall be treated as a self-occupied one and other/others are treated as deemed to be let out.
The income tax categorises your income under two categories for the purpose of taxability of house property income. These are:
Self-Occupied House Property | This is the type of property that is self-owned and used for own residential purposes. This may be occupied by the owner’s family or relative or self. A property that is unoccupied is considered as a self-occupied property for the purpose of income tax. Before the Financial Year 2019-20 if taxpayer owns more than one house property, only one is considered as self-occupied property and rest are assumed to be let out. From 2019-20 onwards two properties are considered as self-occupied properties. |
Let Out House Property | Any house property that is rented for complete or part of the year is considered as a let-out property for income tax purposes. |
Note: Inherited Property Any property inherited from parents, grandparents, etc, can be either considered as self-occupied or let out house property based on the usage as discussed above. |
Deductions from income from house property (Section 24)
Income chargeable under the head ―Income from house property‖ shall be computed after making the following deductions, namely: —
(a) a sum equal to thirty per cent. Of the annual value;
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees:
Amounts not deductible from income from house property (Section 25)
Interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938), on which tax has not been paid or deducted under Chapter XVII-B and in respect of which there is no person in India who may be treated as an agent under section 163 shall not be deducted in computing the income chargeable under the head ―Income from house property.
Problems on Income from House Property (Excluding Pre-Construction interest)
Q1) Mr. Ashok is the owner of a house (not covered under Went Control Act) which is let out at Rs. 1,500 per month. Municipal taxes of the house are Rs. 1,200 (being 10% of the municipal value) out of which Rs. 700 are paid by the tenant. The reasonable rent is Rs. 10,000 per annum. What will be annual value of the house?
Solution:1) Annual value is the highest of the following three less taxes borne by the owner: Rs.
i) Actual rent (1500 x 12) 18,000
Ii) Municipal value 100 (1200 x 100/10) 12,000
Iii) Reasonable, rent 10,000
Annual value Rs. Actual rent 18,000
Less municipal taxes borne by the owner (1200-700) 500
17500
Q2) Mr. X is the owner of two houses (covered under the Rent Control Act) which are let at Rs. 1,000 p.m. And Rs. 1,500 p.m. Municipal taxes on these houses are paid by the owner which amount to Rs. 800 and Rs. 1,000 respectively (being 10% of municipal valuation. The Standard Rents fixed under the Rent Control Act are Rs. 14,000 and Rs. 16,000 per annual respectively. What will be their Annual Value?
Solution:2) Gross annual value is the highest of the following;
First House (Rs) Second House (Rs)
Rent received 12,000 18,000
Standard rent 14,000 16,000
Gross annual value of the first house will Rs. 14,000 and oi the second house it will below Rs.18,000.
Annual Value will be First House (Rs) Second House(Rs)
Gross annual value 14,000 18,000
Less Municipal taxes borne by the owner 800 1,000
13,200 17,000
Thus, annual value of first house is Rs. 13,200 and that of second house is Rs. 17,000.
Q3) From the following particulars compute the adjusted annual value of a house property for the assessment year 2020-21
1) Date of commencement of construction 10th July, 2017.
2) Date of completion of construction 1st May, 2017
3) Let out for the residential purpose on 1st June, 2017 at the rate of Rs, 600 per month.
4) Municipal value of the property Rs. 6,000.
5) Annual municipal taxes paid Rs. 400.
Solution:3)
Gross annual value Rs.7200
(Municipal value or actual rent, whichever is more)
Less municipal taxes Annual value Less statutory deduction
Adjusted or net annual value 400
Annual 6800
Less: Adjusted or net annual value 3600
3200 |
Hence, proportionate annual value for 10'months will be
10x3200/12 = Rs. 2,667.
Q4) From the following information of Mr. A, compute the adjusted annual value of the let-out period of the house for the Assessment Year 2020-21.
Municipal value Rs. 20000
Municipal tax paid Rs. .4,000
House was self-occupied for first six months and for the remaining six months it was. Let out at the rate of Rs. 2,000 p.m.
Solution:4) Gross annual value is highest of the following:
Municipal value 20000
Actual rent (2,000 x 12) 24000
Gross annual value 24000
Less municipal taxes 4000
Annual value 20000
Less 112 of the annual value
For self-occupied period 10000
Adjusted annual value for let out period 10000
Q5) From the following information of Mr. A, compute the adjusted annual value of the let-out portion of the house for the Assessment Year 2020-21. Municipal value Municipal tax paid Rs. 30,000 Rs. 6,000.
House is self-occupied but is 114 of the houses is let out @ Rs. 700 p.m. From 1.1.20
Solution:5) Calculation of Adjusted Annual Value:
Rs.
Gross annual value 33600
Municipal value 30,000
Actual Rent (700 X 4 X 12) 33,600
Less municipal taxes 6000
27600 |
Less 314 of the annual value for self-occupied
Portion for full year 20700
Annual value of 1/4 of the house for full year 6900
Less 3/4 (ie.9/2 of 6,900 for self-occupied portion of the house
For nine months 5,175
Part of the house is let out for 3 months 1,725
Adjusted annual value of part of the house for part of the previous year
The Section 2(13) of the Income Tax Act, 1961, contains an inclusive definition of the term “business”. As per Section 2(13) of the Income Tax Act, 1961, unless the context otherwise requires, the term ‘businesses include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Income from ‘Business’ is chargeable to income-tax under the head “Profits and gains of business or profession” as per Section 28 of the Income Tax Act, 1961.
Profession means exploitation of individuals’ skills and knowledge independently. Profession includes vocation. The word “profession” & “vocation” have not been defined in the Act while as per section 2(36) of the Income Tax Act, 1961, “profession” includes vocation. The word “vocation” is a word of wider import than the word ‘profession”. Following are some of professions as per Rule 6F of the I.T. Rules, 1962:
- Architectural
- Accountancy
- Authorised representative
- Engineering
- Film Artist
- Interior Decoration
- Legal
- Medical
- Technical Consultancy
VOCATION
Vocation implies natural ability of a person to do some particular work e.g., singing, dancing, etc. Here, no training or no qualification is required but having natural ability.
SPECULATIVE BUSINESS
As name suggests, it includes profits/loss from doing speculative transactions i.e., without taking actual delivery of goods. Although profits from the speculative business (e.g., Share trading) are chargeable under this head, they should be maintained and shown separately while e-filing the income tax return.
As per the Income Tax Act, a contract in which the purchase or sale of any commodity including stocks and shares is settled without actual delivery, it is called a Speculative Transaction. Intraday Trading means trading in stock or security by squaring off the trade within the same trading day. Therefore, Equity Intraday Trading is Speculative Business Income.
The method of reporting revenues and expenses adopted by a company is known as an accounting method. There are two major accounting methods used across the world—accrual accounting and cash accounting. The former method reports revenue and expenses when they are received and paid, whereas the latter method reports the revenue and expenses as soon as the transaction occurs.
Cash accounting is the simplest accounting method and is widely used by small businesses. Also, the transaction is only recorded when the cash is spent or received, that is a sale is recorded when the payment is received, and an expense is recorded when a bill is paid. This is the method used by commoners in managing personal finances and works for businesses up to a certain size.
Accrual (mercantile) accounting works based on a matching principle, i.e., the timing of revenue and expense recognition much match. The process of matching revenue with expense draws a better picture of a company's financial condition. In this method, the purchase order is recorded as revenue even though the payment is not received. Similarly, expenses are recorded even though the payment is not yet made.
The third accounting method is the hybrid method, which is a blend of cash and accrual methods along with the essence of many other special accounting methods. This method can be used in internal accounting and for tax purposes.
The Income Tax Act, 1961, has instructed how each of the five heads of income must be recorded. The act says that the salaries, income from house property, and capital gains must be recorded using the accrual method.
For the heads—profits and gains of business or profession and income from other sources, such as business profits, investment income, and professional income—you can choose the cash accounting or accrual accounting method as stated in section 145 of the Income Tax Act. Prior to the enforcement of section 145, the hybrid method was widely used for this.
A. [ Section 30]: Rent, Rates, Taxes, Repairs & Insurance of Buildings Used for the Purpose of The Business
Deductions:
In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed:
- Where the premises are occupied by the assessee:
- As a tenant — the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;
- Otherwise, then as a tenant — the amount paid by him on account of current repairs to the premises;
- Any sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes; However, these are allowable subject to provisions of section 43B i.e., if these expenses are claimed on due basis, the payment of the same must be made on or before the due date of furnishing the return of income under section 139(1) [Ref. Para 6.32];
- Any insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises.
B. [ Section 31]: Repairs & Insurance of Plant, Machinery & Furniture
In respect of machinery, plant or furniture used for the purpose of business, the following deductions are allowable:
- Amount paid on account of current repairs,
- Any insurance premium paid in respect of insurance against risk of damage or destruction of the plant and machinery or furniture.
C. [Section 32]: Depreciation
Depreciation is the diminution in the value of an asset due to normal wear and tear and due to obsolescence. There are different methods for calculation of depreciation under financial accounting. The methods commonly used are:
- Straight line method;
- Written down value method;
The system of claiming depreciation under the Income-tax Act is quite different from financial accounting.
Types of Depreciation Allowance under Income-Tax Act:
The following are the three kinds of depreciation allowance which are allowed under the Income-tax Act:
- Normal depreciation for block of assets [Section 32(1)(ii)].
- Additional depreciation in case of any eligible new machinery or plant (other than ship and aircraft) which has been acquired and installed—
- By an assessee engaged in the business of manufacture or production of any article or things or in the business of generation, transmission or generation and distribution of power [Section 32(1) (ii a)].
- Before 1-4-2020 by an assessee engaged in the business of manufacture or production of any article or things which is set up in a notified backward area in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal.
- Normal asset-wise depreciation for an undertaking engaged in generation or generation and distribution of power [Section 32(1)(i)].
As already mentioned, two methods are commonly used for allowing normal depreciation. In case of block of assets systems, normal depreciation is allowed on the basis of written down value method whereas, in case of power generating or generating and distributing undertaking, depreciation is allowed on the basis of straight-line method on each and every asset separately.
Additional/extra depreciation is allowed @ 20%/35% of the cost of the eligible plant and machinery acquired and installed in the previous year and it is allowed only in first year in which asset is acquired and installed. Such depreciation is, however, deductible while calculating the written down value for the next year.
D. [ Section 36]: Other Deductions
Deductions which are specified Under Section 36 include the following:
D1. [Section 36(1)(i)]: Insurance Premium of Stocks
The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession is allowed as deduction. As already explained paid here means actually paid or incurred according to the method of accounting adopted.
D2. [Section 36(1) (I a)]: Insurance Premium of Cattle
The amount of any premium paid by a federal milk cooperative society towards an insurance on the life of the cattle owned by a member of the primary milk co-operative society is allowed as deduction provided such primary society is engaged in supplying milk raised by its members to such federal milk co-operative society.
D3. [Section 36(1) (I b)]: Insurance Premium on The Health of Employees
It is allowed as deduction if following conditions are satisfied:
The amount of any premium paid by any mode of payment other than Cash by the assessee as an employer to effect or keep in force an insurance on the health of his employees under the scheme framed by.
- The General Insurance Corporation of India, or
- Any other insurer approved by IRDA, and approved by the Government of India
Is allowed as Deduction. There is no monetary ceiling for this deduction.
D4. [Section 36(1)(ii)]: Bonus or Commission Paid to Employees
Bonus or Commission paid to an employee is Allowable as Deduction subject to certain conditions:
- Admissible only if not payable as Profit or Dividend: One of the conditions is that the amount payable to employees as Bonus or Commission should not otherwise have been payable to them as profit or dividend. This is provided to check an employer from avoiding tax by distributing his / its profit by way of bonus among the member employees of his/its concern, instead of distributing the sum as dividend or profits.
- Deductible on Payment Basis: Bonus or Commission is allowed as deduction only where payment is made during the previous year or on or before the due date of furnishing return of income u/s 139.
- However, it can be claimed on Accrual Basis also subject to provisions of section 43B.
D5. [Section 36(1)(iii)]: Interest on borrowed capital
The amount of Interest Paid in respect of Capital Borrowed for the purposes of Business or Profession is allowed as Deduction.
D6. [Section 36(1)(iv)]: Employer's Contribution to a Recognised Provident Fund (RPF) or Approved Superannuation Fund.
Employer’s contribution paid towards Recognized Provident Fund (RPF) or an Approved Superannuation Fund is allowed as Deduction subject to Section 43B. However, contribution to Non-Statutory Fund or Unapproved Fund is Not Allowed as Deduction. In case of contribution towards Superannuation Fund is allowed as Deduction u/s 37.
"Any sum paid" is to be dealt with reference to section 43B of the Income-tax Act i.e., if such sum is payable at the end of the year it will not allowed as deduction on due basis unless the payment of the same is actually made on or before the due date of furnishing the return of income prescribed under section 139(1). However, if the payment is made subsequent to the due date, it shall be allowed as deduction in the year in which it is paid.
D7. [Section 36(1) (iv a)]: Employers' Contribution towards a Pension Scheme.
Any sum paid by the assessee as an employer by way of contribution towards a Pension Scheme, as referred to in Section 80CCD on account of an employee to the extent it does not Exceed 10% of the Salary of the employee in the previous year shall be allowed as Deduction.
D8. [Section 36(1)(v)]: Employer's Contribution to an Approved Gratuity Fund.
Any sum paid by the assessee as an employer by way of contribution towards approved gratuity fund, created by him for the exclusive benefit of his employees under an irrevocable trust, shall be allowed as a deduction subject to the provisions of section 43B.
D9. [Section 36(1) (v a)]: Employer's Contribution towards Staff Welfare Scheme.
Certain employers were deducting amounts from the Salaries of the employees towards certain Welfare Schemes like PF, ESI, etc. but were not crediting it to the employees' accounts even after long periods. This Section was introduced to check such malpractices. Sum deducted from the salary of the employee as his contribution to any Provident Fund or Superannuation Fund or ESI or any other Fund for the welfare of such employee is now treated as an income of the employer as per section 2(24)(x). However, if such contribution is actually paid on or before the 'Due Date' mentioned below the deduction will be allowed for the same under this clause.
D10. [Section 36(1)(vi)]: Allowance in respect of Dead or Permanently Useless Animals
In respect of animals which are used for the purpose of business or profession (not as stock-in-trade) and have died or become permanently useless, the difference between the actual cost of the animals to the assessee and the amount realised (if any) in respect of carcasses or sale of animals is allowable as deduction.
D11. [Section 36(1)(vii)]: Bad Debts
The amount of any Bad Debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be Allowed as a Deduction subject to the provisions of Section 36(2) which are as under: —
- Such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, or
- It represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.
If there is a bad debt on account of sale made, it will be allowed as a deduction because sale has been treated as income. Similarly, in the case of a money lending business if interest is not realisable it will be allowed as a deduction because it has been treated as income either of current year or earlier year.
D12. [Section 36(1) (vii a)]: Provision for Bad and Doubtful Debts relating to Rural Branches of Commercial Banks
- The amount of deduction is given below:
D13. [Section 36(1)(viii)]: Amount carried to Special Reserve Credited and maintained by Special Entity.
Deduction under this section is allowed to a Specified Entity of an amount not exceeding 20% of the profits derived from Eligible Business computed under the head profits and gains of business or profession (before making any deduction under this clause) carried to special reserve account created and maintained by such specified entity.
However, where the aggregate of the amount carried to such reserve account from time to time exceeds 200% of the amount of the paid-up capital and of general reserves of the specified entity, the excess amount is not deductible.
D14. [Section 36(1)(ix)]: Expenditure on Promoting Family Planning amongst the Employees.
This deduction is allowed only to company assessees. Any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees is allowable as deduction in the year in which it is incurred.
Where such expenditure or part thereof is of a capital nature, 1/5th of such expenditure shall be deducted for the previous year, in which it was incurred and the balance shall be deducted in four equal instalments during the subsequent four years
E. [Section 37(1)]: General Deductions
Any expenditure (not being expenditure of the nature described in sections 30 to 36) and not being in the nature of capital expenditure or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed as deduction in computing the income chargeable under the Head "Profits and Gains of Business or Profession".
Conditions for Allowance under Section 37(1):
- Such expenditure should not be covered under the specific sections, i.e., sections 30 to 36.
- Expenditure should not be of capital nature.
- The expenditure should have been incurred during the previous year.
- The expenditure should not be of a personal nature.
- The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
Deductions Expressly Disallowed
There are two kinds of provisions under the Act, - one in respect of what is allowable and other in respect of what is not allowable, i.e., they override the provisions. While determining whether a particular expenditure is deductible or not, the first requirement must be to enquire whether the deduction is expressly prohibited under any other provision of the Income tax Act. If it is not so prohibited, then alone the allow ability may be considered under Sec. 37(1). Sec. 40 and 40A provides for non -deductible expenses or payments. Under Sec. 43B certain deductions are to be allowed only on actual payment.
Following amounts shall not be deducted while computing income under the head profits & gains of business or profession-
1) Interest, royalty, fees for technical services, etc, payable to a non-resident or outside India without deducting TDS and its payment;
2) Interest, commission or brokerage, fees for professional services or fees for technical services payable to any resident person without TDS and its payment;
3) Income Tax;
4) Wealth Tax;
5) Any payment which is chargeable under the head “Salaries”, if it’s payable outside India, or to a non-resident, and the tax has neither been paid in India nor deducted there from;
6) Any payment to provident fund or any other fund established for the benefit of employees of the assessee in respect of whom the assessee has not made effective arrangement to secure that tax shall be deducted at source from any payment made from the fund, which are taxable under the head ‘salaries’;
7) Any tax on non-monetary perquisite actually paid by employer on behalf of employee.
8) Sec. 40 A (2): 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. Related person includes both “Relative” and “Person having substantial interest”.
9) Sec. 40 A (3): Where any expenditure in respect of which payment is made in excess of Rs. 20,000 at a time otherwise than by Account-payee cheque or draft, 100% of such payment shall be disallowed.
10) No deduction shall be allowed in respect of any provision made by assessee for the payment of gratuity to his employees, provided such contribution is not towards an approved gratuity fund or for the purpose of payment of gratuity, that has become payable during the previous year.
11) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards setting-up or formation of, or as contribution to any fund, trust, company, AOP, BOI, society or other institution for any purpose provided such sum is not by way of contribution towards approved superannuation fund, recognised provident fund, approved gratuity fund.
12) Deductions in respect of following expenses are allowed only if payment is made on or before the due date for furnishing return of income.
13) Sec. 43B-Following sums not paid before due date of filing return of income
i. Any sum payable by way of tax, duty, cess, fee, etc.
Ii. Bonus or commission to employees.
Iii. Interest on loan or borrowing from any public financial institutions, etc.
Iv. Interest on any loans and advances from a scheduled bank.
Iv. Leave encashment.
v Contribution to any P.F., superannuation fund, gratuity fund, etc.
Problems on computation of income from Business of Sole Proprietor
Illustration 1: Mr. Amitabh prepared the following profit and loss account of his cloth shop for the year ended 31st March, 2019. Find out his income from business for the AY 2019-20.
Profit and Loss Account (For the year ended 31st March, 2019)
Particulars | Rs | Particulars | Rs |
Salaries and wages | 33,000 | Gross Profit | 3,34,725 |
Rent, etc. | 1,600 | Gifts received from relatives | 275 |
Household expenses | 82,000 |
|
|
Income Tax | 900 |
|
|
Advertisement | 800 |
|
|
Postage expenses | 600 |
|
|
Gifts to relatives | 900 |
|
|
Fire Insurance Premium | 400 |
|
|
Life Insurance Premium | 2,100 |
|
|
Bad Debts Reserve | 800 |
|
|
Audit Fees | 400 |
|
|
Net profit | 211500 |
|
|
Total | 3335000 | Total | 335000 |
|
|
|
|
Illustration 3
The following is the Profit and Loss Account of the Raj Oil Mills for the financial year 2018-19. Compute its business income on the basis of additional information.
Illustration 4
From the Profit & Loss Account for the relevant assessment year, compute income from business of Sri Babu Rao.
Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”.
Types of capital gain
It is of two types-
Figure: Types of capital gain
- Short term capital gain:
Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
2. Long term capital gain:
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months
CHARGEABILITY-
Generally, long-term capital gains are charged to tax @ 20% (plus surcharge and cess as applicable), but in certain special cases, the gain may be (at the option of the taxpayer) charged to tax @ 10% (plus surcharge and cess as applicable). The benefit of charging long-term capital gain @ 10% is available only in following cases:
1) Long-term capital gains arising from sale of listed securities and it exceeds Rs. 1,00,000 (Section 112A);
2) Long-term capital gains arising from transfer of any of the following asset:
a) Any security (*) which is listed in a recognised stock exchange in India;
b) Any unit of UTI or mutual fund (whether listed or not) ($); and
c) Zero coupon bonds (*) Securities for this purpose means “securities” as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956. This definition generally includes shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a like nature in or of any incorporated company or other body corporate, Government securities, such other instruments as may be declared by the Central Government to be securities and rights or interest in securities. ($) This option is available only in respect of units sold on or before 10-7-2014.
Long-term capital gains arising from sale of listed securities
The Finance Act, 2018 inserts a new Section 112A with effect from Assessment Year 2019-20. As per the new section capital gains arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at the rate of 10 per cent of such capital gains exceeding Rs. 1,00,000. This concessional rate of 10 per cent will be applicable if:
a) in a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and
b) in a case a unit of an equity-oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset. The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of following:
a) The actual cost of acquisition of such asset; or
b) Lower of following:
(i) Fair market value of such shares as on January 31, 2018; or
(ii) Actual sales consideration accruing on its transfer. The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as on January 31, 2018. However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its fair market value.
In case of units which are not listed on recognized stock exchange, the net asset value of such units as on January 31, 2018 shall be deemed to be its FMV. In a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.
Long-term capital gains arising from transfer of specified asset
A taxpayer who has earned long-term capital gains from transfer of any listed security or any unit of UTI or mutual fund (whether listed or not), not being covered under Section 112A, and Zero-coupon bonds shall have the following two options: a. Avail of the benefit of indexation; the capital gains so computed will be charged to tax at normal rate of 20% (plus surcharge and cess as applicable). b. Do not avail of the benefit of indexation; the capital gain so computed is charged to tax @ 10% (plus surcharge and cess as applicable). The selection of the option is to be done by computing the tax liability under both the options, and the option with lower tax liability is to be selected.
DEFINITIONS-
CAPITAL ASSET
Capital asset is defined to include:
(a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
(b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992. However, the following items are excluded from the definition of “capital asset”:
(i) any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession;
(ii) personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
“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 stones, and whether or not worked or sewn into any wearing apparel;
b. Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii)Agricultural Land in India, not being a land situated:
a. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
b. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
i. Not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
Ii. Not being more than 6 KMs, if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
Iii. not being more than 8 KMs, if population of such area is more than 10 lakhs. Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year. (iv)61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government; (v) Special Bearer Bonds, 1991; (vi)Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2016.
TRANSFER
Transfer of Capital Asset: Transfer includes –
a) Sale, exchange or relinquishment (give up) of the asset.
b) The extinguishment of any right.
c) Compulsory acquisition under any law.
d) Asset converted into stock in trade.
e) Conversion of business into limited co.
f) Allowing of the possession of any immovable property
g) Maturity of Zero-Coupon Bond
h) Any transaction which effects the enjoyment of any immovable property.
The following are not considered as transfer (Sec 49(1))
Transfer of asset in a scheme of amalgamation
Transfer of agricultural land before 1/4/1970
Transfer of debenture or bonds into shares
Transfer of assets in kind at the time of liquidation
Transfer of asset by a parent company to the own subsidiary company
Transfer of asset under the gift or will
Transfer of capital asset at the time of partition of HUF
COST OF ACQUISITION
The term cost of acquisition' though not defined under the Act denotes the price paid by the owner or the amount, which he has incurred for acquiring the property. While determining the taxable capital gains on sale of property, the owner is entitled to the benefit of cost of acquisition as a deduction from the sale consideration. In simple words, ‘cost of acquisition’ includes all the expenses which is incurred by the owner in purchasing such capital asset.
COST OF IMPROVEMENT
Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset. It also includes any expenditure incurred in protecting or curing the title.
Any capital expenditure incurred by the assessee to make any addition or improvement in the house is treated as 'cost of improvement'. Thus, if renovation cost is in the nature of capital expenditure only then such renovation cost can be considered as 'cost of improvement' for the house property
Short term capital asset:
Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
Long term capital asset
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
Cost Inflation Index (CII) is used to estimate the increase in the prices of goods and assets year-by-year due to inflation. The Cost Inflation Index for the financial year 2021-22 is 317.
Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over time will lead to a rise in the prices.
Who notifies the Cost Inflation Index?
The Central Government specifies the cost inflation index by notifying in the official gazette.
Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.
*Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the cost of the same basket of goods and services in the previous year to calculate the increase in prices.
How is Cost Inflation Index used in Income Tax
Long term capital assets are recorded at cost price in books. Despite increasing inflation, they exist at the cost price and cannot be revalued. When these assets are sold, the profit amount remains high due to the higher sale price as compared to purchase price. This also leads to a higher income tax. The cost inflation index is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes to benefit taxpayers. To benefit the taxpayers, cost inflation index benefit is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.
Capital Gains Exemption can be claimed under the Income Tax Act by reinvesting the amount in either purchasing/ constructing a Residential House or by reinvesting the amount in Capital Gain Bonds.
The seller of the asset either has the option to claim exemption or pay 20% Long Term Capital Gains Tax.
Section 54: Old Asset: Residential Property, New Asset: Residential Property
Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rented) shall be exempt to the extent such capital gains is invested in the
- Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold and/or
- Construction of Residential house Property within a period of 3 years from the date of transfer/sale of property
Provided that the new Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition. If the new property is sold within a period of 3 years from the date of its acquisition, then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt under section 54 earlier. The capital gain arising from this transfer will always be a short-term capital gain.
Quantum of Deduction under Section 54
Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house i.e.
- If the Capital Gains amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt
- If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption
No. Of Houses which can be purchased for claiming Section 54 Exemption
- The Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in construction/purchase of 1 residential house [Introduced vide Finance Act 2014]. Irrespective of the no. Of houses already owned by the person, if he invests the capital gain in construction/purchase of a single residential house – then capital gains exemption can be claimed.
- As an exception to the above rule, in cases where the amount of Capital Gains does not exceed Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in purchase/construction of 2 residential houses. However, this exemption of purchasing 2 residential houses can be claimed only once. This exemption once claimed cannot be claimed in again in any other year. For all other years, investment should be made in construction/ purchase of 1 residential house only. [Introduced vide Finance Act 2019].
To re-iterate, for claiming exemption under Section 54 – the no. Of houses already owned by the person is immaterial. He can still claim exemption by reinvesting the Capital Gains on Sale of House in another Residential House.
Capital Gains Account Scheme
Although as per Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, but the capital gains on the transfer of the original house property is taxable in the year in which it was sold. The Income Tax Return of that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise, the capital gain would become taxable.
To avoid the above situation, the Income Tax Act specifies an alternative in the form of deposit under the Capital Gains Account Scheme.
The Amount of Capital Gain which is not utilised by the Assessee for the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return. The details of deposit i.e., the Date of Deposit and the amount deposited are required to be mentioned in the Income Tax Return while claiming the Capital Gains Exemption. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption.
In case, the assessee deposits the amount in the Capital Gains Account Scheme but does not utilise the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilised shall be charged as Capital Gains of the year in which the period of 3 years is completed from the date of sale of the Original Asset and it will be long term capital gain of that financial year.
Section 54EC: Old Asset: Any Asset, New Asset: Specified Bonds
Gains arising from the transfer of any long-term capital asset are exempt under section 54EC if the assessee has within a period of 6 months after the due date of such transfer invested the capital gain in long term specified bonds as notified by the Govt. For a minimum period of 3 years.
In case where the long term specified asset is transferred or converted into money at any time within a period of 3 years from the date of its acquisition, the amount of capital gain exempt u/s 54EC, shall be deemed to be long term capital gain of the previous year in which the long term specified asset is transferred or converted into money.
If the Assessee even takes a loan or advance on the security of such long term specified asset, he shall be deemed to have converted such long term specified asset into money on the date on which such loan or advance is taken.
These specified binds are usually issued by REC and NHAI and the Interest Rate offered is approx. 5.25%. Tax on the Interest earned is also liable to be paid as the Interest is not tax-free. These are Capital Gain Bonds and not Tax-Free Bonds. The principal invested becomes tax free after the lock-in period but the interest continues to remain taxable.
Budget 2018 Amendment: With effect from Financial Year 2018-19, the benefit of Section 54EC would only be available on sale of Land or Building (whether Residential or Non-Residential). Earlier it was available for all assets but now it would only be applicable for Land or Building. Moreover, from Financial Year 2018-19 onwards, these bonds would be required to be held for minimum 5 years.
Quantum of Deduction under Section 54EC
- Capital Gains shall be exempt to the extent it is invested in the long term specified assets (subject to a maximum limit of Rs. 50 Lakhs) within a period of 6 Months from the date of such transfer.
- Budget 2014 has also introduced an amendment to Section 54EC and from FY 14-15 i.e., AY 15-16 onwards, the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original asset or assets are transferred and in the subsequent financial year does not exceed Rs. 50 Lakhs.
Section 54F: Old Asset: Any Asset, New Asset: Residential House
Any Gain arising to an individual or HUF from the sale of any Long-Term Asset other than Residential Property shall be exempt in full, if the entire net sales consideration is invested in
- Purchase of one residential house within 1 year before or 2 years after the date of transfer of such an asset or in
- Construction of 1 Residential House within 3 years after the date of such transfer
In case the whole sale consideration is not invested and only a part of the sale consideration is invested, exemption shall be allowed proportionately i.e.
Amount Exempt = Capital Gain X Amount Invested
Net Sale Consideration
Exemption under Section 54F not available in following cases
The above exemption would not be available if any of the below mentioned conditions is satisfied: -
- The assessee does not own more than 1 Residential House Property on the date of transfer of such asset exclusive of the one he has bought for claiming exemption under section 54F. (Note: The restriction on No. Of houses already owned is only applicable if the assessee is claiming exemption under Section 54F. As explained above, there is no such restriction if the assessee is claiming exemption under Section 54)
- The assessee purchases any residential house, other than the new asset, within a period of 1 year of the transfer of the old asset.
- The assessee constructs any residential house, other than the new asset, within a period of 3 years after the date of the old asset.
Budget 2014 has also introduced an amendment to Section 54F to be effective from FY 2014-14 and as per this amendment the exemption is available if the investment is made in 1 residential house situated in India.
Exemption under Section 54F would not be allowed if investment is made in 2 houses. The option to invest in 2 houses is available once in lifetime in Section 54 but is not available in Section 54F.
The Assessee also has the option of depositing this amount in Capital Gains Account Scheme as explained in Section 54 above, before the due date of furnishing the Income Tax Return.
e-Book on Capital Gain Tax on sale of Property
As the sale price of each property transaction is huge, the tax applicable also turns out to be huge. And therefore, proper care needs to be exercised while computing the Capital Gains and then using the Exemptions to reduce the Tax Liability.
To help people compute the Tax Liability and the Exemptions in the correct manner, we have authored a simple yet detailed e-book which explains with more than 40 Examples, the manner in which Capital Gains Tax would be levied on sale of Property. All latest case laws have also been explained in this e-book which can be purchased from this link.
The e-book is updated with all latest up to date amendments and the main topics covered in this e-book are: -
- Computation of Capital Gains
- Tax on Sale of Inherited Property
- Tax on Sale of Under-Construction Property
- Sale of Property below Circle Rate/ Stamp Valuation Rate
- How to reduce Tax by claiming Capital Gains Exemptions
- TDS on sale of Property
- 40+ Comprehensive Examples
Income from other sources (Section 56)
(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ―Income from other sources‖, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head ―Income from other sources‖, namely: —
(i) dividends;
(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head ―Profits and gains of business or profession;
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ―Profits and gains of business or profession;
(iv) income referred to in sub-clause (xi) of clause (24) of section 2, if such income is not chargeable to income-tax under the head ―Profits and gains of business or profession‖ or under the head ―Salaries;
(v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004 but before the 1st day of April, 2006, the whole of such sum: Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) 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 clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
Vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 but before the 1st day of October, 2009.
Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority
(f) 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 clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
(f) stamp duty value means the value adopted or assessed or assessable 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;
Other Sources of Income are Stated Below:
1. Income From:
Lottery, Gambling, Batting, Horse Race, Cross Ward, Puzzle
Any other casual income
Interest other than interest on securities
Interest on Securities
Commission (If it is not a part of one’s main Business or Profession)
Family Pension
Royalty
Director’s Fee
Subletting of House
Dividend
Tuition Income
2. Casual Income: TDS is applicable @ 30% on this. It generally received after deduction of tax. Hence it always grosses up while calculating the income under this head as given below:
Gross Income = Net Amount Received * 100/70
3. Lottery Income: If Lottery Income is less than Rs.5000/- then there will be no TDS. Hence no need to gross up.
4. Income from Horse Race: If Income from Horse Race is less than Rs.2500/- then there will be no TDS Hence no need to gross up.
5. Family Pension: Rs.15000/- or 1/3 of Actual Amount received, whichever is less, is exempt.
Taxable = Actual Amount Received – Exempted Amount
Dividend from Indian Co. Is fully exempted.
6. Taxable Dividend: a) Dividend from Foreign Co.
b) Dividend from Co-operative Society
7. Tax free in case of other sources: -
Interest from Capital Investment Bond
Interest on Post Office Savings
Interest on National Relief Bond
Income from UTI
Any Allowance to a M.P. (Member of Parliament)
Deductions to be made in Computing Total Income [Sections 80A to 80U (Chapter VIA)]
The aggregate of income computed under each head, after giving effect to the provisions for clubbing of income and set off of losses, is known as "Gross Total Income". In computing the total income of an assessee, certain deductions are permissible under sections 80C to 80U from Gross Total Income.
These deductions are however not allowed from the following incomes although these incomes are part of Gross Total Income:
- Long-term capital gains.
- Short-term capital gain on transfer of equity shares and units of equity-oriented fund through a recognised stock exchange i.e., short-term capital gain covered under section 111A.
- Winnings of lotteries, races, etc.
- Incomes referred to in sections 115A, 115AB, 115AC, 115ACA, 115AD and 115D.
These deductions are of two types: —
- Deductions on account of certain payments and investments covered under sections 80C to 80GGC.
- Deductions on account of certain incomes which are already included under Gross Total Income covered under sections 80-IA to 80U.
The following expenses are not deductible by virtue of section 58 in computing the income chargeable under the head 'Income from Other Sources’:
PERSONAL EXPENSES [Section 58(1)(a)(i)] - Any personal expenses of the assessee are not deductible.
INTEREST [Section 58(1)(a)(ii)] - Any interest (which is chargeable under the Act in the hands of recipient) which is payable outside India on which tax has not been paid or deducted at source, is not deductible.
SALARY [Section 58(1)(a)(iii)] - Any payment (which is chargeable under the head “Salaries” in the hands of recipient and payable outside India), is not deductible if tax has not been paid or deducted therefrom.
WEALTH TAX [Section 58(1)] - Any sum paid on account of wealth-tax is not deductible.
TDS DEFAULT [Section 58(1A)] - Disallowance provisions pertaining to TDS defaults covered by section 40(a) (I a) are applicable.
AMOUNT SPECIFIED BY SECTION 40A [Section 58(2)] - Any expenditure referred to in section 40A like excessive or unreasonable payments to certain specified persons [Section 40A (2)] and payments exceeding Rs. 20,000 otherwise than by way of account payee cheque [Section 40A (3)];
EXPENDITURE IN RESPECT OF ROYALTY AND TECHNICAL FEES RECEIVED BY A FOREIGN COMPANY [Section 58(3)] - In the case of foreign companies, expenditure in respect of royalties and technical service fees as specified by section 44D is not deductible.
EXPENDITURE IN RESPECT OF WINNINGS FROM LOTTERY [Section 58(4)] - No deduction shall be allowed under any provision of the Act in computing the income by way of any winnings from lotteries, crossword puzzles, races.
However, expenditure incurred by the assessee for the activity of owning and maintaining race horses shall be allowed as a deduction while computing the income from this activity.
Simple problems on Computation of Total income of an Individual.
Q1) A company has accumulated profits of Rs. 30 Lakhs excluding capitalized profits i.e., bonus shares issued in the past of Rs. 10 Lakhs. The company distributed assets of Rs. 25 Lakhs to the shareholders. Compute the amount taxable as dividend if the market value of the asset on the date of distribution is:
(i) Rs. 20 Lakhs (ii) Rs. 35 Lakhs (iii) Rs. 45 Lakhs
Solution:1) Deemed dividend (Accumulated profit) is exempt in the hands of shareholders and is taxable in the hands of company. The company shall be liable to pay distribution tax @ 15% on [grossed up amount + surcharge @12% + Health and Education Cess @ 4%] on the market value of the asset on the date of distribution subject to the maximum extent of profits (capitalized or not).
Hence, the amount of deemed dividend shall be: -
i) Rs. 20 Lakhs.
Ii) Rs. 35 Lakhs.
Iii) Rs. 40 Lakhs (Limited to accumulated profits + bonus shares)
Q2) X Ltd. Share Capital is divided into 20,000 shares of Rs. 10 each. The company reduced its capital by 10% @ Rs. 1 per share. The accumulated profits of the company were Rs. 12,000. Mr. Satish holds 500 shares of the company.
Calculate the amount of deemed dividend of Mr Satish.
Solution:2) X Ltd. Share Capital is divided into 20,000 shares of Rs. 10 each. The company reduced its capital by 10% @ Rs. 1 per share. The accumulated profits of the company were Rs. 12,000. Mr. Satish holds 500 shares of the company.
Calculate the amount of deemed dividend of Mr. Satish. Amount Received by Mr. Satish @ Rs. 1 on
500 shares =Rs. 500
Amount Received from accumulated profit
= Accumulated profit × No of shares held/Total no of shares
= 12,000 ×500/20,000
= Rs. 300
Hence, Rs. 300 is the deemed dividend of Mr Satish and (Rs 500 - Rs 300) Rs. 200 will be treated as refund of his capital.
Q3) Mr. Zubin holds 500 shares (equity) of Rs. 10 each in K.K. Ltd which is an Indian Company. On March 31, 2020, Mr. Zubin received Rs. 3,600 as dividend and 300 bonus shares were also received on the same date. The market value of the shares of the company was Rs. 25 per share. Discuss chargeability to income tax of dividend and bonus shares.
Solution:3)
i) Cash dividend is a gross dividend, therefore, Rs. 3,600, should be included in the total income of Mr. Zubin during the assessment year2020-21. But, dividend from an Indian Company is exempt u/s 10 (34).
Hence, Company shall not pay the tax on such dividend.
Ii) Bonus shares received by Mr. Zubin are also not taxable as they are issued to equity shareholders. For equity shareholders, Bonus is not regarded as dividend.
Q4) Mr Utkarsh gives you the following information regarding his incomes for A.Y. 2020-21.
Rs.
(a) Income under the head salary (computed) 5,50,000
(b) Income from House Property 3,50,000
(c) Dividend from Domestic Company 12,00,000
Compute Tax Payable by Mr Utkarsh for AY 2020-21.
Solution:4)
Computation of Total Income and Tax of Mr Utkarsh for A.Y. 2020-21
Rs. Rs.
(a) Income from Salary 5,50,000
(b) Income from House Property 3,50,000
(c) Income from other sources:
Dividend from Domestic Company 12,00,000
Less: Exemption u/s 10 (34) 10,00,0002,00,000
Total Taxable Income 11,00,000
Tax payable
(a) Tax on Dividend 2,00,000× 10% 20,000
(b) Tax on Bal. Income of
Rs. 9,00,000
(i) First Rs. 2,50,000Nil
(ii) Next Rs. 2,50,000 @ 5% 12,500
(iii) On Balance Rs. 4,00,000 @ 20% 80,000 92,500
Total Tax 1,12,500
Add: Health and Education Cess @
4%4,500
Tax Payable 1,17,000
Q5) Compute income from the other sources of Mr Anupam for A.Y. 2020-21.
Rs.
i) Winning from Horse Race 10,000
Ii) Loss in card games 3,000
Iii) Winning from wager 25,000
Iv) Amount received from winnings of lottery 66,500
v) Winning from T.V. Show (Gross) 50,000
Solution:
Computation of Income from other sources of Mr Anupam for
AY 2020-21
Rs.
i. Winning from horse race 10,000
Ii. Winning from wager 25,000
Iii. Lottery (grossed up)
Rs 66,500 ×100 95,000
100 – 30
Iv. Winning from TV show 50,000
Income from other sources 1,80,000
Q5) The investments of Jitendra on 1st April 2019 were as given below:
i) Rs. 30,000, 10% U.P. Government Loan;
Ii) Rs. 10,000, 10% Debentures of a Jute Mill company.
Iii) Rs. 2,000 Interest received on Debentures of a Co-operative Society.
Iv) Rs. 15,000, 6% Securities issued by a Foreign Government.
v) 7% National Plan Certificates Rs. 10,000.
Vi) Rs. 1,500 received as dividend on units of Unit Trust of India.
Vii) Rs. 3,600 received as interest on less tax Government Securities.
The Bank commission for collecting interest is Rs. 99. Interest on securities being payable in each case on 1st January and 1st July. Find out income from other sources for the assessment year 2020-21.
Solution :5) Computation of Income from Other Sources of Mr. Jitendra for A.Y.
2020-21
Rs.
i) Interest on 10% UP Govt. Loan for 1 year 3,000
Ii) Interest on 10% Debentures of a Jute Mill Company for 1 year 1,000
Iii) Interest on Debentures of a Co-operative Society (Not to be
Grossed up)
2,000
Iv) Interest on foreign government securities (Not to be grossed
Up)900
v) Interest on National Plan Certificates Exempt
Vi) Dividend from U.T.I. (Not to be grossed up) Exempt
Vii) Interest received on less tax govt.
Securities3,600
10,500
Less: Bank Commission for collecting Interest 99
Income from Other Sources 10,401
References:
1. Ahuja, Giri & Gupta, Ravi: Systematic Approach to Incomes Tax
2. Agrawal, B.K.: Income Tax law and practice
3. Agrawal, B.K: Ayakar Vidhan Avam lekhe
4. Chandra, Mahesh & Shukla, D.C.: Income Tax Law and practices
5. Chandra, Girish: Income Tax