CHAPTER 1: INTRODUCTION TO INCOME TAX Assesse in default
Assesse in default refers to a taxpayer who has failed
Income tax to fulfil their tax obligations. When the assesse liable
Income tax is a tax imposed by a government on the to pay taxes but he not paid is known as assesse in
income earned by individuals, businesses, and other default
entities. It is one of the primary sources of revenue for
governments Deemed assesse
The person who bound to pay tax in respect of income
Direct tax of another is called deemed assesse
Direct tax is a type of tax that is levied directly on
individuals or entities based on their income, profits, Assessment year
or wealth. This tax is paid directly by the taxpayer to It is the period of 12 months, which the person
the government. Examples of direct taxes include required to file income tax.it starts from April 1st and
income tax, corporate tax end at March 31st
The income earned during previous year taxable at
Income assessment year
Income refers to the total amount of money or value
earned or received by an individual, business, or Previous year
entity over a specific period. It is the year which proceeding the assessment year.
Income includes wages and salaries, business profits, It is the period where the person earns incomes.
income from profession, rental income, pensions and
annuities, income from self-employment, and other Expected Theory questions From Residential Status
sources. Q. Define ordinarily resident (1)
Q. Define Not ordinarily resident (1)
Casual income Q. Define Non-resident (1)
Income which earned unexpected is called casual Q. Procedure for determine Residential status (3)
income
E.g. winning lottery, horse race, crossword puzzle, Criteria to determine agricultural income
card game, gambling etc. 1. Income derived from land situated in India
Casual incomes are non-repetitive in nature 2. Land is used for agricultural purpose
3. Land is situated in India
Gross total income
It means the total of income of the assesse earn Types of Agricultural Income
during the previous year. In other words it is the sum 1. Income derived from agriculture
total of income from salary, house property, business, 2. Rent or revenue from agricultural land
profession, capital gain and other sources 3. Income from any process used by cultivators to
render the product marketable
Total income 4. Income from sale of product
Gross total income minus deductions, exemptions and 5. Income from building used for agriculture
other adjustments, we will get total income
Income Exempt from tax (Exempted income)
Person 1. Agricultural income from India
The term person includes individual, Hindu undivided 2. Amount received from a Hindu undivided family
3. Share of income of a partner from his firm
family, Partnership firm, Cooperative society,
4. Compensation for disaster-related losses
Company, Local authority etc. 5. Life insurance policy proceeds
6. National Pension System Trust
Assesse 7. Educational scholarship
Every tax payer commonly known as assesse 8. Allowance to MP and MLA
9. Awards made by the government
10. Income from Unit Trust of India
CHAPTER 2: INCOME FROM SALARY Perquisites Taxable in Case of Specified Employees:
1. Facilities like cars, sweepers, gardeners,
Salary watchmen, etc.
It refers to regular payment received by employee 2. Gas, electricity, energy, water, etc.
from the employer. It includes Basic salary, 3. Transportation facilities
Allowances, Perquisites, Wages, Pension, Gratuity,
Commission, Profit in lieu of salary etc. Tax-Free Perquisites:
1. Medical benefits
Allowances 2. Tea and snacks provided in the office
Payment in cash made by the employer monthly other 3. Residential accommodation provided at the
than salary to his employee is termed as an allowance. worksite
4. Expenses on telephone
Types of Allowances 5. Scholarships to employees or their children
Fully Taxable Allowances 6. Rent-free accommodation for High Court and
1. Dearness Allowance Supreme Court judges
2. City Compensatory Allowance
3. Fixed Medical Allowance Profiting lieu of Salary
4. Tiffin Allowance As name suggests, these payments are received by
5. Servant Allowance employee in addition to salary. They include
6. Overtime Allowance 1. Terminal Compensation Payment made by
employee upon termination of the employment
Partially Taxable Allowances 2. Payment from Unrecognized Provident Fund
1. House Rent Allowance 3. Payment under Keyman Insurance Policy
2. Special Allowance to Meet Certain Expenditures 4. Any other amount received by employee from
- Traveling Allowance employer
- Convenience Allowance
- Daily Allowance Provident Fund
- Helper Allowance Employee and his employer put money into employee's
provident fund account every month. The total balance gets
Fully Exempted Allowances to employee at the time of retirement or emergency
1. Foreign Allowance situation.
2. Allowance to High Court and Supreme Court Judges
3. Allowance Paid by the United Nations Organization Types of Provident Fund
(UNO) 1. Statutory Provident Fund: It meant for government
employees, universities, railways, etc.
Perquisite 2. Recognized Provident Fund: A provident fund
It means any benefit given by an employer to his which has been recognized by Commissioner of
employee in terms of kind. It is received in addition to Income Tax.
salary. 3. Unrecognized Provident Fund: A provident fund
neither statutory nor recognized by Commissioner.
Types of Perquisite 4. Public Provident Fund: Any member of the public
Perquisites Taxable in All Employees: can be participated in public provident fund
1. Holiday enjoyment
2. Free food Deductions in Salary
3. Gifts 1. Standard Deduction: It allowed up to Rs. 50,000
4. Use of movable assets per annum
5. Interest 2. Entertainment allowance: It firstly included in the
6. Free loans salary and deduction is allowed.
3. Professional Tax or Employment Tax: It is charged
by state government. It is eligible for deduction.
CHAPTER 3: INCOME FROM HOUSE PROPERTY In other words, if the property generates a net loss
after considering all expenses, the Annual Value
Income from house property would be negative.
Rental income is charged under income from house
property Deductions Regarding income from House
property
Basis of charge (Conditions)
1. The property should consists of any building 1. Standard deduction: 30% of Annual Value
2. The assesse should be the owner of the property 2. Interest on loan for the purchase or
3. The property should not use by the owner for his construction of property in previous year
personal or business purpose 3. Interest on loan for the purchase or
construction of property Preceding the
Types of Rental income previous year
EXEMPTIONS REGARDING INCOME FROM HOUSE
1. Actual Rent (AR): The amount received by the
PROPERTY
owner from the tenant as rent. (1) Income from farm house
2. Fair Rental Value (FRV): The rent charged for a (2) Annual Value of one palace of ex-Indian Ruler.
property similar to the one in question and (3) Income from property owned by:
located in the same area. (i) Local Authority;
3. Municipal Rental Value (MRV): The rental value (ii) Scientific Research Association;
fixed by the municipality for a specific property (iii) Trade Union;
4. Standard Rental Value(SRV): The rent determined (iv)Charitable Trust;
according to Rent Control Act regulations (v) Political Party;
(vi)University or other educational institution
5. Expected Rent (ER): The anticipated rent that the
existing for educational purposes and not for
owner expects to receive from their property.
purposes of profit;
(vii) Hospital or medical institution existing for
Gross Annual Value (GAV)
philanthropic purposes and not for purposes of
It is the total annual rental income received by the
profits.
owner of a property..
We can compute gross annual value by comparing MMR-Maximum Marginal Rate
Actual rent, fair rental value, Municipal rent and The term “Maximum Marginal Rate” (MMR) typically
Standard rent refers to the highest tax rate that applies to the last
increment of income earned by an individual or
Annual Value (AV) business. In the context of income taxation, it signifies
The income that a house property could generate the highest tax bracket or rate that applies to the
in a year. highest portion of taxable income.
In other words it is the sum for which the property
might reasonably be expected to be let from year to
year
Annual value= Gross annual value – (Municipal tax +
unrealised rent)
Negative Annual Value
The Annual Value of a property typically becomes
negative when the property owner incurs more
expenses related to the property (such as property
taxes, maintenance, and interest on loans) than the
rental income they receive from it.
CHAPTER 4: INCOME FROM BUSINESS OR PROFESSION CHAPTER 5: INCOME FROM OTHER SOURSES
Profit or gain from business or profession (sec 28) Income from other source
Following Incomes are considered as Income from Business Income from other source refers to any income that
or Profession does not fall under the category of income from
salary, house property, business or profession, and
capital gain.
1. Business or professional income
2. Received in connection with foreign trade Conditions or Basis of Charge
3. Remuneration to partner 1. The receipt shall be taxable income.
4. Perquisite from business or profession 2. Income does not specifically fall under any other
5. Income from trade or professional association four heads of income.
6. Speculative transaction
Taxable incomes under head income from other
sources
Basis of Charge Following items are taxable/ chargeable under the
head income from other sources.
1. Business or Profession carried out by Assesse
2. Taxes charged on aggregate income from business
1. Dividend
or profession
2. Casual income
3. Profit and gain of both legal and illegal business are
3. Gift
taxable
4. Interest on security
4. Income is profit, not gross received
5. Share premium in excess of market value
5. Profit and loss from speculative business computes
6. Interest by way of compensation
separately
7. Income from letting, machinery, plant, furniture,
etc.
Deductions expressly disallowed.
8. Cash received under keyman insurance policy
1. Salary of Proprietor.
9. Compensation on termination of employment
2. Interest on Capital.
10. Interest on deposit
3. Provision of Bad debt.
11. Director fee
4. Provision on Depreciation.
12. Stipend to trainee
5. Provision on discount on debtors
13. Agricultural income received outside India
6. Income Tax.
14. Insurance commission
7. Wealth Tax.
15. Rent from trademark
8. Donation.
16. Income from private tuition
9. Charity.
17. Interest on income tax refund
10. Gift.
18. Income from undisclosed source
Depreciation
Exemptions in case of income from other sources
Depreciation refers to gradual decreasing in the value
of asset over time. In income tax depreciation can be
1. Agricultural Income
charged only on prescribed eligible assets
2. Gifts from family members or for specific purposes
may qualify for exemptions.
Unabsorbed depreciation
3. Interest on savings bonds or government securities
When one is unable to absorb a portion of
4. Dividend Income from Indian company
depreciation in their book of accounts.
5. Senior Citizen Exemptions or retirees.
the part of depreciation that the assesse fails to claim
as an expense in his/her Income Tax Return due to
TDS - Tax Deducted at Source
insufficient profits during that year
TDS is a mechanism used by governments to collect
income tax from individuals or businesses at the
Block of Assets source of income itself. It requires the payer (e.g., an
For providing depreciation, assets are grouped into employer, a financial institution, or a client) to deduct
blocks. Block of assets refers to a group of assets on a certain percentage of the payment before making
which same rate of depreciation is prescribed. the payment to the recipient
CHAPTER 6: INCOME FROM CAPITAL GAIN Cost of Acquisition
This is the original cost at which you acquired the
Capital Asset capital asset. It includes the purchase price you paid
It is the long-term asset held by a person or business for the asset, along with any associated expenses like
that may be movable or immovable, tangible or brokerage fees.
intangible, e.g. land, building, furniture, goodwill,
jewellery, shares, etc. Cost of Improvement
If you’ve spent money to improve or enhance the
Types of Capital Asset (STCG) capital asset after acquiring it, these expenses are
considered the cost of improvement. This can include
1. Short-term Capital Asset Capital Asset renovation costs, additions, or significant upgrades.
It held by an assesse for less than 36 months
before it transfer. Indexed Cost of Acquisition
2. Long-term Capital Asset Capital (LTCG) This is the cost of acquisition adjusted for inflation
Asset held by SSE more than 36 months before it over time. It’s used to calculate the capital gains on
transfer. long-term assets.
Capital Gain Indexed Cost of Improvement
A profit or gain arises from the transfer of a capital Similar to the indexed cost of acquisition, this
asset, is termed as capital gain. represents the cost of improvements adjusted for
inflation. It’s used for long-term assets to account for
Types of Capital Gain the increase in the value of money over time.
1. Short-term Capital Gain Cost of Transfer
Short-term capital gain arises out of transfer of short- The “Cost of Transfer” typically refers to the expenses
term capital asset and fees incurred when transferring ownership of a
2. Long-term capital gain. property, asset, or investment from one party to
Long-term capital gain arises out of transfer of long- another.
term capital asset. It includes Legal Fees, Registration Fees, Brokerage
Fees or Commissions, Stamp Duty etc.
Basis of charge
1. Asset transfer should be capital asset Setoff and carry forward
2. Asset should be transferred by assesse in previous Setoff
year Loss from a head of income offset or reduces against
3. There should be profit or gain as result of transfer gain from another head of income
of the asset Eg: Loss from business offset against income from
salary
Transfer of Capital Asset Carry forward
Followings are considered as transfer in case of capital It means loss from one year can be carry forward to
asset next or future year for offset income in those years.
Eg: Loss in 2021-2022 carry forward to 2022-23
1. Sale or Exchange of capital asset
2. Extinguishment of any Right in Capital Asset Expected Problem Areas (Mark)
3. Compensatory Acquisition under any Law 1. Income from Salary (8, 3)
4. Conversion of Capital Asset into Stock in Trade 2. Income from Business (8, 3)
5. Conversion of Business into Limited Company 3. Income from Profession (8, 3)
6. Transfer of Right in Immovable Property 4. Income from Other Source (8, 3)
5. Income from House Property (8, 3)
Full Value Consideration 6. Income from Capital Gain (8, 3)
This is the total amount receive for what get in 7. Computation of House Rent Allowance (HRA) (3)
exchange when you sell or transfer a capital asset. It 8. Computation of Rent-Free Accommodation (RFA)(3)
includes money, property, or any other consideration 9. Valuation of Motor Car (3)
you receive for the asset. 10. Computation of Gross Annual Value (GAV)(3)
11. Computation of Gross Annual Value (3)
12. Determination of Residential Status (3)
13. Determination of GTI (Incidances of tax) (3)
