Direct Taxes – Income Tax

By CA Krishnan Jaikumar
 Introduction
1) Income

2) Previous Year (1/04/2023 - 31/03/2024)

3) Assessment Year (1/04/2024– 31/03/2025)

4) Assessee

5) Person
 Residential Status
• Basic Conditions.
1) He/She should stay in India in the P.Y(2023-2024) for min 182 days or more.
OR
2) a) He/She should stay in India in P.Y (2023-2024) for min 60 days or more.
AND
b) He/She should stay in India in 4PPY’s (2019-20,2020-21,2021-22,2022-2023)
for min 365 days or more.
If he satisfies any 1 condition, he is a Resident of India.
If he doesn’t satisfy any condition, he is a Non-Resident (NR).
 Secondary Conditions (Ordinary Resident)
1) He/She should be a resident for 2 out of 10 PPY’s (2013-14 to 2022-23)

AND

2) He/She should stay in India for min 730 days and more in 7 PPY’s (2016-17 to 2022-23)

If both the condition are satisfied, he is Resident and Ordinary Resident of

India (ROR).

If he doesn’t satisfy both the conditions, he is a Resident but Not Ordinary

Resident (RNOR).
 Exception
1) Indian citizen leaving India in the P.Y. for the purpose of employment.

2) Indian citizen/ person of Indian Origin coming to India in the P.Y for the purpose of a
visit.[Indian Income < 15 Lakhs]
(For any assesse as above, only first basic condition is applicable.)

3) Indian Citizen/POIO coming to India in the P.Y for a visit. [Indian Income >15 Lakhs].
(For the assessee as above, basic conditions shall be as follows.)

• a) Should stay in India for 120 days or more in the. PY.(2023-24)

• b) 365 days or more in 4 PPY’s (2019-20 to 2022-23)
 Residential Status

Resident Non-Resident (NR)

Resident Resident
Ordinary Resident But Not Ordinary Resident
( ROR ) ( RNOR )
 Scope of Total Income

Indian Income Foreign Income

Accrues/Received in India Accrues & Received outside India

Taxability of Income

ROR RNOR NR

Indian Income   

Foreign Income   

Connection from India

1. Past Income Not to be considered in SOTI

2. Agricultural Income

Land in India Land outside India

Exempt Income Taxable Income

3. Remittance: [Not to be considered in SOTI]

 Heads of Income
Salaries Profit & Gains Capital Income from Income
from Business Gains House Property from other
& Profession sources

Computation
Gross Total Income xxx
- Deductions xxx
Net Taxable Income XXX
+ Special Income xxx
Adjusted Net Taxable Income xxx
 Income from Salaries
• Employer Employee Relationship
• Remuneration of a Director
• Remuneration of a Partner – Taxable under PGBP
• Remuneration of a MP/ MLA – Taxable under IFOS

When is Salary Taxable?

1. When salary is due in the previous year
2. When salary is received in the previous year
3. So Taxable Salary in PY = 12 months salary + Advance + Arrears

• Grade Pay System

 Components of Salary
• Basic Salary
• Allowances ( LTA, Travel, Education, DA)
• Perquisites
• Advance/ Arrears
• Bonus
Salary Includes
• Commission
• Post Retirement Benefits
• Profit in lieu of salary
 Provident Fund

Employers Employees
Contribution Contribution

Interest

Therefore Lump sum Amount on Retirement = Employer Contribution + Interest + Employee Contribution + Interest

Amount Statutory PF Recognized PF Unrecognized PF

Employers Contribution Exempt Exempt up to 12% Exempt

Interest Exempt Exempt up to 9.5% Exempt

Lump sum Amount Exempt Exempt Employers Contribution +

Interest = Taxable
 Gratuity

Non Government Employee

Government Employee

Payment of Gratuity Act Applicable Payment of Gratuity Act Not Applicable

 Gratuity received  Gratuity received

 20 lakhs  20 lakhs

EXEMPT
 Last Drawn Salary * 15/26 * NCY  Average Salary of Last 10 Months * 1/2 * NCY

Salary = Basic + DA Salary = Basic + DA + Commission

NCY = Round off Applicable NCY = Round off not applicable

 Pension
Commuted Pension Uncommuted Pension

Government Employee Non-Government Employee

Gratuity Received Gratuity Not Received

Taxable
Fully Exempt 1/3 Amount will be Exempt 1/2 Amount will be exempt

1/3 OR 1/2 is of the Total Pension Amount

 Leave Encashment
Government Employee Non-Government Employee
 ₹ 3,00,000
 Leave encashment received
 10 months salary
Exempt  Leave Entitlement XXX
Less - Leaves Availed ( XXX )
Leave balance ( Leave Credit ) XXX
* Average Salary XXX
Exempt Amount XXX
Leave Entitlement = 1 month * NCY ( No Round off )

NOTE – ANY POST RETIREMENT BENEFIT RECEIVED DURING SERVICE, WILL ALWAYS BE TAXABLE
 Special Points
 Education Allowance Exemption ( ₹ 100 p.m per child, maximum 2 children )
 Hostel Allowance Exemption ( ₹ 300 p.m per child, maximum 2 children )
 Deductions from Gross Salary
1. Standard Deduction = ₹ 50,000
2. Professional Tax
3. Entertainment Tax = 20% of Salary / ₹ 5000 / EA Received, whichever is lower ( Government Employee )
 Leave Travel Allowance – Amount will be exempt only if tour is conducted within India
 Any Retirement Compensation ( VRS, Approved Superannuation Fund ) – Exempt up to ₹ 5,00,000
 Medical Allowance - Fully taxable
 Free Medical Treatment/ Medical expenses reimbursed by Employer – Will be exempt only if the
treatment is in a Employer’s hospital ( Tata ) or Government Hospital ( Sion )
 Health Insurance Premium ( Exempt Perquisite ) , Life Insurance Premium ( Taxable Perquisite )
 Medical Treatment Abroad ( Paid by employer ) – Amount exempt will be as per the limits prescribed by
RBI.
 Income from House Property
Property should be building/ appurtenant land
Assessee must be owner of the property
Property should not be occupied for own business
Annual Value
Deductions
Types of House Properties
 Interest Deduction – Maximum Limit
 Special Points
Computation of Income from House Property
Particulars Amount Amount
a) Fair Rent XXX
b) Municipal Value XXX
c) Higher of a & b XXX
d) Standard Rent XXX
e) Lower of c & d ( Reasonable Lettable Value ) XXX
f) Actual Rent ( Rent per month * no of months property is occupied ) XXX
Gross Annual Value ( Higher of e & f ) XXX
Less – Municipal Taxes paid by owner ( XXX )
Net Annual Value XXX
Less – Deductions
Standard Deduction ( 30% of NAV ) ( XXX )
Interest ( CY / PCI ) ( XXX )
INCOME FROM HOUSE PROPERTY XXX
 Deduction – Interest
• Interest Deduction is for the Home Loan Interest taken for the property
• Interest are of 2 types:-
a) Current Year Interest – Interest due or paid in the PY ( 2022-23 )
b) Pre-Construction Interest – Interest due or paid during the construction period

Example
A took a Home loan of Rs. 2,00,000 @ 10% on 1/04/2014 for construction of the property.
The property was ready on 01/12/2020. Since the property was ready only in the PY2020-21,
the assessee was eligible for interest deduction only from the PY 2020-21. The Interest from
2014-15 to 2019-20 ( 6 years ) will be accumulated, i.e., ( 2,00,000 * 10% * 6)= 1,20,000. This
accumulated interest can be claimed as deduction from 2020-21 but not at one shot, but in
following 5 years. Therefore PCI Deduction in next 5 years = 1,20,000 / 5 = 24,000, which will
be available as deduction in 2020-21, 2021-22, 2022-23, 2023-24 & 2024-25.
 Types of House Properties
Let Out Property ( LOP ) Self Occupied Property ( SOP ) Partly Let Out Property Deemed Let Out Property
( PLOP ) ( DLOP )
The house property The property in which The property is partly LOP If any assessee has more
which is given on rent by assessee ( owner ) stays or and partly SOP. than 2 SOP’s in his name,
the owner to the tenant resides with his family the remaining house
properties will be treated
as DLOP.

While solving the sum of While solving the sum of SOP,

LOP , the solution will the solution will start from
start from Fair Rent till NAV till the end. NAV will be
the end taken as zero.
An assessee can have only 2
SOPs to his name for claiming
the above benefit
 Deduction for Interest ( Maximum Limit )
• Self Occupied Property
• Maximum Interest Deduction
Loan is taken before 01/04/1999 Loan is taken on or after 01/04/1999
₹ 30,000 ₹ 2,00,000
Acquisition, Construction, Repair, Renewal, Acquisition, Construction
Re-construction

Special Points:-
• Any expenses given in the question cannot be claimed as deduction, since your are already provided SD ( 30% )
• But expenses such as lift maintenance charges, water charges, electricity charges, watchman salary can be
claimed. These expenses are deducted from the “Actual Rent”.
• In case the property is vacant for some time during the year, the GAV is taken as Actual Rent , if the Actual Rent is
lower than the RLV due to such vacancy.
 Capital gains
 There must be a capital asset
( Includes movable as well as immovable property)
( Does not include Rural Agricultural Land, Personal Effects except ……………. )
( Jewellery, Archeological Collections, Drawings, Paintings, Sculptures, Any work of Art )

Capital Asset must be transferred

( Sale, Exchange, Compulsory acquisition, extinguishment of rights, etc)

 Transfer should be within the previous year

 There should be profit or gains

 Period Of Holding
• Capital Assets are of two types:-
(a) Short Term Capital Assets
(b) Long Term Capital Assets
An asset is short term or long capital asset, is decided on the basis of POH

Period of Holding Capital Asset

Listed securities
12 months Units of equity oriented fund/UTI

Unlisted Shares
24 months Land or Building or both

Units of Debt oriented fund

36 months Any other capital asset
 Computation of Capital Gains
Particulars Amount

Fair Value of Consideration XXX

Less – Indexed Cost of Acquisition (XXX)
Less – Indexed Cost of Improvement (XXX)
Less – Transfer expenses ( Brokerage, commission,etc) (XXX)
Long term Capital Gain / Short Term Capital Gain XXX
Less – Exemption u/s 54/54EC
Investment in new residential house ( Section 54 ) (XXX)
Investment in RECL & NHAI Bonds ( Section 54EC ) (XXX)
Net Long Term Capital gains XXX
 What is indexing and why to do indexation?
• Indexation basically means to adjust inflation to the values or cost
• The benefit of indexation is only available for long term capital assets
• For doing indexation, you need CII ( Cost Inflation Index )
• CII ( 2023-24 ) – 348, CII ( 2001-02 ) – 100
• Indexed COA = CII (Year of Transfer)/ CII (Year of Acquisition)
• Indexed COI = CII (Year of Transfer)/ CII (Year of Improvement)
For example,
A purchased a house for ₹ 2,50,000 on 01/06/2001, did some repair on the house for ₹
50,000 on 01/04/2015 and finally sold the house for ₹ 75,00,000 on 01/12/2023. The
indexed cost of acquisition and indexed cost of improvement is as follows:-
ICOA = 2,50,000 * 348/100 = ₹ 8,70,000 ICOI = 50,000 * 348/254 = ₹ 68,504
 Exemptions
The Long Term Capital Gains earned on a residential house shall be exempt if it is invested
under the following sections as follows:-
Exemption u/s 54 Exemption u/s 54EC
• Ready Property or Under Construction Property • NHAI or RECL Bonds
• Time Limit • Time Limit
Within 1 year before DOT after 2 years ( RP ) Within DOT 6 months
Within DOT 3 years ( UCP )
• Capital Gains > 2 crores ( 1 Property ) • Maximum Limit of exemption = ₹ 50,00,000
Capital Gains < 2 crores ( 2 Properties )

Special Points :-
• If the capital asset is purchased before 01/04/2001, the Cost of acquisition = Cost of Purchase or FMV as on
01/04/2001, whichever is higher.
• Any improvement done of the capital asset prior to 01/04/2001 has to be ignored.
 Profits & Gains from Business & Profession
There should be a business or profession
It should be carried on by the assessee
It should be carried on during the previous year
Computation of PGBP
Receipts & Payments Account Profit & Loss Account
Business Receipts XXX Net Profit as per P&L XXX
Less – Business Payments XXX Add – Expenses to be disallowed XXX
PGBP XXX Less – Income to be excluded (XXX)
PGBP XXX
In short, be it any format, while calculating PGBP, we have to consider only business incomes & expenses

 Income to be excluded – Exempt incomes, Income Taxable under other heads of income
 Expenses allowed
 Rent, Rates & Taxes
 Repairs & Insurance of Business Assets
 Depreciation
• Asset should be specified asset
• Asset should be owned by Assessee
• Asset should be used for business purpose
( While solving sums, if the question is with P&L format, then the Depreciation on the
debit side shall be disallowed [Accounts], and Deprecation given in the adjustment shall
be allowed [Tax]. )
• Additional Depreciation ( 20% )
• If the asset is put to use for less than 180 days, then the depreciation allowed will be
only 50% of the original rate ( Normal/Additional Depreciation )
 .
 Expenditure on Scientific Research
 Amortization of Preliminary Expenses ( 20% of the total amount allowed for next 5 yrs)
 Employee Insurance/ Stock Insurance
 Payment to employees ( Salaries, wages, bonus, commission )
 Interest ( on owners capital – disallowed, on bank loan – allowed )
 Employers contribution to PF/Pension/ Gratuity Fund
 Bad Debts ( Allowed ), R.D.D ( Disallowed )
 Family Planning Expenditure - ( 20% of the total amount allowed for next 5 yrs)
 General Expenditure
• Revenue Expenditure
• Should not be personal in nature
• Incurred for business purpose
• Permitted by law
 Expenses Disallowed
 Advertisement in Political newspaper, magazine, souvenir, etc
 Payments without TDS
• In case of payment to any non-resident or person outside India, if TDS is not deducted on the
amount remitted or deducted TDS is not deposited, the corresponding expense will be
completely disallowed.
• In case of payment to any resident, if TDS is not deducted on the amount remitted or deducted
TDS is not deposited, the corresponding expense will be disallowed up to 30%.
 Direct Taxes ( FBT, STT, Income Tax, Wealth tax )
 Excessive payment to relative ( Only the excess portion will be disallowed )
 Cash payment exceeding ₹ 10,000 in a single day to a single person ( Entire payment will be
disallowed ). For payment to transporter the limit is ₹ 35,000.
 Unpaid Statutory Liability ( Bonus, PF, Taxes, etc ) – If the liability is not paid within the due date
of filing income tax return, then the entire amount will be disallowed (31 st July, 30th Sept)
 Provisions
 Income from Other Sources
 Dividend
 Winning from Lotteries/Horse Races/ Crossword Puzzle,etc
 Interest on securities ( NSC, KVP, Debentures, FD, TD, RD, loans)
 Income from Machinery, Plant or Furniture Let out
 Key man Insurance Policy
 Excess Consideration for shares
Face Value = ₹ 10, FMV = ₹ 15, Issue Price = ₹ 25, Excess Amount = ₹ 25 -₹ 15= ₹ 10
 Interest on Compensation
 Advance for Capital Asset Forfeited
 Agricultural Income from a place outside India
 Royalty
 .
 Directors board meeting fees
 Ground rent
 Salaries & Allowances received by M.P & M.L.A
 Insurance commission
 Savings bank Interest
 Remuneration from a non-employer
 Interest on Income-tax refund
 Subletting Rent
 Income from undisclosed sources
 family pension
 Receipts without consideration ( Movable / Immovable )
( Taxable only if the value is more than ₹ 50,000 in aggregate )
But the above rule is not applicable in certain cases – When the receipt is from a Relative, on the occasion of
Marriage, under a Will, by way of Inheritance, from a Local authority, from a trust or from a Donor.
 Deductions
 Expenses for collection of Dividend/Interest Income – Upto 20%
 Repairs, Insurance & Depreciation on Assets let out
 Standard Deduction on Family Pension – 1/3rd of such income or ₹ 15,000, whichever is
lower
 Standard Deduction on Interest on Compensation – 50% of the interest
 General Expenditure
 Exempt Incomes
 Agricultural Income
 Sums received by Member from HUF, Partner from Partnership firm
 Disaster Compensation
 Sums received under Life Insurance policy
 Payment from Sukanya Samriddhi Account
 Scholarships ( Education )
 Interest on Securities ( Post office - ₹ 3,500, Tax free bonds, PPF )
 Allowance to M.P & M.L.A ( Daily & Constituency allowance )
 Government Awards & Rewards
 Pension received by recipient of gallantry awards
 Pension to family members of armed forces
 Deductions from Gross Total Income
Particulars Amount
INCOME FROM SALARIES XXX
INCOME FROM HOUSE PROPERTY XXX
CAPITAL GAINS XXX
PROFITS & GAINS FROM BUSINESS & PROFESSION XXX
INCOME FROM OTHER SOURCES XXX
GROSS TOTAL INCOME XXX
LESS – DEDUCTIONS (XXX)
NET TAXABLE INCOME XXX
 Deductions – 80C
 Life Insurance Premium ( Before 01/04/2012 – 20%, After 01/04/2012 – 10% ) ( S/S/C)
 Contribution to PPF
 Employees contribution to PF
 Investment in NSC + NSC Interest
 Unit Linked Insurance Plan
 Dhanaraksha / Jeevan-Dhara / Jeevan-Akshay / Senior Citizens Savings scheme
 ELSS
 Pension Fund of MF/UTI Maximum Limit = ₹ 1,50,000
 Tuition fees of deduction
 New House
 Infrastructure Debentures/ Shares/ Units
 Bank FD/ NABARD Bonds
 Post Office
 Deduction – 80D
Nature of Payment For Deduction
Medical Premium Self + Spouse + Dependent Children ₹ 25,000
( Self/Spouse = Age is 60 years + Indian Resident ) ₹ 50,000
Medical Premium Parents ₹ 25,000
( Any Parent = Age is 60 years + Indian Resident ) ₹ 50,000
Medical Expenditure Self/Spouse/Parents + Age is 80 years + Indian ₹ 50,000
Resident + No existing health insurance policy

Deduction for preventive health checkup – Up to ₹ 5,000, but within the limit of ₹ 25,000 or ₹ 50,000
 Deduction – 80DD & 80U
80DD 80U
Deduction
Handicapped Dependent Handicapped Assessee
Normal Disability ( 40 to 80% ) ₹ 75,000
Severe Disability ( > 80% ) ₹ 1,25,000
Disability less than 40% is not eligible for any deduction

Deduction – 80CCC
 Deduction for investment in Pension Funds
 Maximum Deduction is restricted to ₹ 1,50,000
 80C + 80CCC = ₹ 1,50,000
 Deduction – 80TTA
 Deduction for Savings Bank Interest
 Maximum Deduction is restricted to ₹ 10,000

Deduction – 80E
 Deduction for Interest on Higher Education Loan
 No limit on deduction