CHAPTER 1

BASICS OF INCOME TAX

1.1 What is Tax –

Tax is a fee charged /amount collected by a Government on a product, income or
activity, for meeting the expenses of Government like defence, provision of
education, health-care, Social welfare, infrastructure facilities like roads, dams etc.
“Tax is compulsory contribution from the person to the government to defray the
expense incurred in the common interest of all without reference to special benefits
conferred” - Prof Seligman
Characteristics of Tax:
- Tax is compulsory
- Tax is contribution
- Tax is for public benefit without direct benefit
- Government has power to levy tax
- Tax is levied on income, product or activity.

1.2 There are two classifications of taxes – direct taxes and indirect taxes.

Direct Taxes: - The person paying the tax bears the incidence. The impact and
incidence of tax are on same person. Tax burden cannot be shifted. e.g. income-tax,
Wealth tax, Stamp duty etc.,

Indirect Taxes: The person paying the tax passes on the incidence to another
person. Tax is on one person and incidence is on other. The tax burden can be
shifted. e.g. GST, Excise duty, Customs duty, VAT

1.3 Power to levy taxes

No tax can be levied without authority of law – Article 265. The Power to levy taxes
should be permitted by Constitution. Constitution of India gives the power to levy
and collect taxes, whether direct or indirect, to the Central and State Government.
The Union and State Government are empowered to levy taxes by virtue of Article
246 of the Constitution of India.

Seventh Schedule to Article 246 contains three lists which enumerate the matters
under which the Union and the State Governments have the authority to make
laws for the purpose of levy of taxes. The following are the lists:

Page 1 of 101
 (i) Union List: Central Government has the exclusive power to make laws on
the matters contained in Union List. Eg: Income Tax, Customs Duty,
Excise duty, Tax on shares/stocks transactions etc.
(ii) State List: State Government has the exclusive power to make laws on
the matters contained in the State List. Eg: VAT, Profession Tax, Stamp
duty, State excise on liquor, Road tax etc.,
(iii) Concurrent List: Both Central and State Governments have the power to
make laws on the matters contained in the Concurrent list.
Note : GST though not under concurrent list is in the nature of concurrent tax – Article
246A of the Constitution

2. INCOME TAX ACT 1961

Page 2 of 101
Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I
of Seventh Schedule to Article 246 of the Constitution of India has given the power
to Central Government to levy taxes on income other than agricultural income. It
came into force on 1st April, 1962.

2.1 COMPONENTS OF INCOME TAX

- Income Tax Act : The Act containing all the provisions relating to levy,
collection, penalties and administration of Income Tax. It contains 298
sections and XIV schedules
- Income Tax Rules : Containing the procedural and compliance matters
- Annual Finance Act : Containing the annual amendments to Income Tax Act
and other central revenue Acts. Usually referred as Union Budget. The
budget of Feb 2023 is called Finance Act 2023
- Circulars & Notifications : Circulars for providing guidance, clarifications,
reliefs. Notifications to give effect to provisions of income tax act.
- Legal Decisions: Decisions on Income Tax matters by Supreme Court, High
Court and Income Tax Tribunals

2.2 Levy of Income Tax

Income-tax is a tax levied on the total income of the previous year of every
person(Section 4).A person includes an individual, Hindu Undivided Family (HUF),
Association of Persons(AOP), Body of Individuals (BOI), a firm, a company etc.

2.3 Total Income and Tax Payable

Page 3 of 101
Income-tax is levied on an assessee’s total income. Such total income has to be
computed as per the provisions contained in the Income-tax Act, 1961. The
procedure for computation of total income of an individual is as below:
Step 1 – Determination of residential status
Step 2– Computation of income under each head - Salaries, House property, Business

and profession, Capital Gains and Income from other sources

Step 3 – Clubbing of income of spouse, minor child etc.

Step 4 – Set-off or carry forward and set-off of losses

Step 5 – Computation of Gross Total Income
Step 6 – Deductions from Gross Total Income

Step 7 – Computation of tax liability on total income and tax payable

Page 4 of 101
3. IMPORTANT DEFINITIONS

a) Person - Section 2(31) : Includes

i) Individual
ii) Hindu undivided Family
iii) Company (includes Domestic Company
and Foreign company)
iv) Firm (Includes LLP)
v) Association of persons or body of
individuals

vi) Local Authority

vii) Every artificial juridical person not covered above.

b) Assessee [Section 2(7)]

“Assessee” means a person by whom any tax or any other sum of money is payable
under this Act. It includes –
• Every person in respect of whom any proceeding under this Act has been taken
for the assessment of
his income or loss;
the income or loss of any other person in respect of which he is assessable; or
the amount of refund due to him or by such other person.
• Every person who is deemed to be an assessee
• Every person who is deemed to be an assessee-in-default.

c) Income [Section 2(24)]

The definition of income as per the Income-tax Act, 1961 begins with the words
“Income includes”. Therefore, it is an inclusive definition and not an exhaustive
one. At present, the following items of receipts are specifically included in
income:—
i) Profits and gains from business or profession
ii) Dividends.
iii) Voluntary contributions received by a trust, certain research association or
universities, educational institutions, hospitals, medical institutions or an
electoral trust.

Page 5 of 101
iv) All allowances or benefits or perquisites received in the course of employment.
v) Deemed profits chargeable to tax under section 41 or section 59.
vi) Any capital gains chargeable under section 45.
vii) The profits and gains of any insurance company, Banking company or
cooperative society.
viii) Any winnings from lotteries, cross-word puzzles, races including horse races,
card games, gambling, or betting of any form or nature whatsoever.
ix) Any sum received by the assessee from his employees as PF, ESI,
Superannuation or any employee welfare contributions
x) Any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy will constitute income.
xi) Any sum, in cash or kind for not carrying out any activity in relation to any
business or profession; or not sharing any know-how, patent, copy right,
trade-mark, licence, franchise, or any other business or commercial right of a
similar nature, or information or technique.
xii) Any consideration received for issue of shares as exceeds the fair market value
of the shares.
xiii) Any money received as advance and is forfeited.
xiv) Any sum of money or value of property received without consideration or for
inadequate consideration by any person.
xv) Any sum received as subsidy or grant or cash incentive or duty drawback or
waiver or concession or reimbursement from Central Government or a State
Government or any authority or body or agency in cash or kind

d) Previous year – Section 3

Previous year means the financial year immediately preceding the assessment year.
In case of Business or profession newly set up, or a source of income coming into
existence for the first time during the year, then the previous year shall be the
period beginning on the date of setting up of the business or profession or the
source of income coming into existence and ending with 31st March.

Certain cases when income of a previous year will be assessed in the previous
year itself

Page 6 of 101
Apart from above income from undisclosed sources like unexplained credits,
unexplained investment, unexplained expenditure etc., will be taxed in respective
year, which will be dealt in detail in subsequent chapter.

e) Assessment year – Section 2(9)

Assessment year means a period of 12 months commencing on 1st April every year.
The year in which income is earned is the previous year and such income is taxable
in the immediately following year which is the assessment year. Income earned in
the previous year 2020-21 is taxable in the assessment year 2021-22

4. INCOME TAX RATES -

Will be explained and discussed after computation of taxable income from all five
heads of income, Chapter VI-A deductions and computation of Total (Taxable)
income.

UNIT 1 – Part B
RESIDENTIAL STATUS AND SCOPE OF TOTAL INCOME

Page 7 of 101
1. RESIDENTIAL STATUS AND SCOPE OF TOTAL INCOME

1.1 RESIDENTIAL STATUS [SECTION 6]

The incidence of tax on any assessee depends upon his residential status under the
Act. The residential status of an individual must be applied and tested for each of
the previous years independently. For all purposes of income-tax, taxpayers are
classified into three broad categories on the basis of their residential status viz.
a) Resident and ordinarily resident
b) Resident but not ordinarily resident
c) Non-resident
d) Deemed Resident but not ordinarily resident

1.2 Basic Conditions

Under section 6(1), an individual is said to be resident in India in any previous
year, if he satisfies any one of the following conditions:
(i) He has been in India during the previous year for a total period of 182 days or
more, OR

Page 8 of 101
(ii) He has been in India for at least 60 days in the previous year AND has been in
India during the 4 years immediately preceding the previous year for a total
period of 365 days or more and
Exceptions to Condition (ii) - (Condition not to be applied)
a) Indian citizens, who leaves India in any previous year as a member of the
crew of an Indian ship or for purposes of employment outside India, or
b) Indian citizen or person of Indian origin whose total income excluding income
from foreign sources exceeds Rs. 15 Lakhs, being outside India, comes on a
visit to India in any previous year

1.3 Additional Conditions

(i) If such individual has been resident in India in any 2 out of the 10 previous
years preceding the relevant previous year, or
(ii) If such individual has during the 7 previous years preceding the relevant
previous year been in India for a period of 730 days or more.

1.4 TYPES OF RESIDENTS – INDIVIDUAL

1) Resident / Resident and ordinarily resident : If the individual satisfies any

one of the basic conditions and both additional conditions.

2) Resident but not ordinarily resident: If the individual satisfies any one of the
basic conditions but does not satisfy both additional conditions.

3) Non Resident - If both the basic conditions are not satisfied, the individual is a
non-resident.

4) Deemed Resident - An individual who is non resident is deemed to be

resident but not ordinarily resident if
a) He is citizen of India
b) His total income excluding the income from foreign sources exceeds Rs.
15 Lakhs during the previous year
c) He is not required to pay tax in any country by reason of his domicile or
any other criteria.

1.5 Practice questions

Page 9 of 101
1) Bret lee an Australian Citizen visits India for 100 days every financial year since

past 10 years including the FY 2024-25. Find out residential status for AY 2025-

26

2) Mr. C, a Japanese citizen left India after a stay of 10 years on 1.06.2022. During

the financial year 2023-24, he comes to India for 46 days. Later, he returns to

India for 1 year on 10.10.2024. Determine his residential status for the A.Y.2025-
26

3) Mr E who was born in Kolkota is visits India during the PY 2024-25, after 15

years. He comes on to India on 01.04.2024 and leaves for Australia on

01.12.2024. Determine the residential status of E for AY 2025-26. Would your

answer differ if he had left India on 25.09.2024

4) Ram an Indian Citizen, left India on 22.09.2024 for the first time to work as an

officer in Germany. Determine residential status for AY 2025-26

5) Dey residing in USA since 1990 came back to India on 01.04.2024 for

permanent settlement. What will be his residential status for AY 2025-26

6) B, a Canadian Citizen, comes to India for the first time during 2020-21. During

financial years 2020-21, 2021-22, 2022-23, 2023-24 & 2024-25, he was in India
for 55 days, 60 days, 90 days, 150 days, 70 days respectively. Determine his

residential status for AY 2025-26

7) L, an UAE Citizen living in UAE since last 16 years. He regularly visits India for social

purposes. His details of days of visit to India were: 2024-25 – 71 days 2023-24 – 73
days, 2022-23 – 59 days, 2021-22 – 61 days, 2020-21 – 170, 2019-20– 150 days,

Page 10 of 101
 2018-19 -12 days and earlier to that 50 days every financial year. What will be your

answer if L was an Indian Citizen.

2. Scope of Total Income – Section 5

Nature of income R.O.R R.N.O.R / Non
Deemed Resident
RNOR
1 Income received in India,
irrespective where ever earned Taxable Taxable Taxable
2 Income earned in India,
irrespective wherever received Taxable Taxable Taxable
3 Income earned and received
outside India :
a) From business controlled or Taxable Taxable Not Taxable
profession set up in India
b) Any other source Taxable Not Taxable Not Taxable

2.1 Income deemed to accrue in India: - Section 9

The following incomes shall be deemed to be earned / to accrue in India
even if they actually are earned outside India
1) Income through or from any business connection in India,
2) Income from property, asset or source of income in India
3) Income through transfer of a capital asset situated in India
4) Income from salaries for past services rendered in India
5) Income from salaries payable by the Government for services rendered
outside India
6) Dividend paid by a Indian company outside India
7) Interest, Royalty or fee for technical services paid by:
a) Government
b) A resident except when the source of such income is used for any
business or profession outside india

Page 11 of 101
 c) A non resident only when the source of such income is used only
for business or profession in India.

2.2 Practice Questions

1) Calculate the Total income, if the assesse is Resident and ordinary
individual, Resident but not ordinarily resident and Non Resident
i) Capital gains on sale of shares in Indian company, transacted and
received in Singapore - Rs. 85,000
ii) Pension received in Singapore in respect of employment in India Rs.
3,00,000
iii) Dividend from PTE Ltd a Singapore Company Rs. 89,000
iv) Computed rental income from property in Singapore (30% received in
India) Rs. 1,80,000
v) Income from business in India but controlled fully from Singapore Rs.
4,00,000
vi) Interest on debentures of RL Limited an Indian company, Rs. 95,000
vii) Fee for technical service received from Government of India for service
rendered in Australia Rs. 98,000
viii) Professional Income received in Australia for services rendered to a
Indian Company in Australia Rs. 92,000
ix) Agriculture income from land in Malaysia – Rs. 90,000
x) Income from profession in Malaysia (set up India) received there – Rs.
85,000
xi) Dividend from PQR Limited an Indian Company received in Malaysia –
Rs. 10,000
xii) Interest received in Malaysia from Fixed Deposit in SBI branch in
Malaysia – Rs. 65,000

Page 12 of 101
Page 13 of 101
 3. EXEMPTED INCOMES

Agricultural Income:
Section 2 (1A) of the Income Tax Act, 1961 defines “agricultural income” as
an income under the following three sources:
(i) Any rent or revenue derived from land which is situated in India and is
used for agricultural purposes:

Page 14 of 101
(ii) Any income derived from such land by agricultural operations including
processing of agricultural produce, raised or received as rent in kind or any process
ordinarily employed by cultivator or receiver of rent-in-kind so as to render it fit for
the market, or sale of such produce.

(iii) Any income derived from any building which must be on or in the immediate
vicinity of the land. It must be used by the assesee as a dwelling house or store-
house or an out-building, in connection with the land. It must also satisfy the
following conditions

a) The Land should be assessed to land revenue

b) It should not be situated in any area as comprised within the jurisdiction of
a municipality or a cantonment board and which has a population not less
than 10,000. Or It should not be situated in any area within such distance,
measured aerially, in relation to the range of population

Page 15 of 101
4. Gist of Exempted Incomes:

Page 16 of 101
Page 17 of 101
 INCOME FROM SALARIES

The term ‘salary’ has been defined differently for different purposes in the Act. The
definition as to what constitutes salary is very wide. It is an inclusive definition and
includes monetary as well as non-monetary items.
‘Salary’ under section 17(1), includes the following:
(i) wages,
(ii) any annuity or pension,
(iii) any gratuity,
(iv) any fees, commission, perquisite or profits in lieu of or in addition to any
salary or wages,
(v) any advance of salary,
(vi) leave salary or leave encashment,
(vii) the annual accretion to the balance of recognised provident fund to the
extent it is taxable
(viii) the contribution made by the Central Government or any other under a
pension scheme referred to in section 80CCD

Charging Provision – Section 15

a) Salary received by an employee from employer whether due or not
b) Salary due to an employee from his employer whether received or not
c) Arrears of salary

Computation of Taxable Salary - Default Regime

Basic Salary XXXX
Pension XXXX
Dearness Allowance / pay (whether forming part, not forming
part, in terms, not in terms, either full or in part) XXXX
All monetary payments / allowances received by the
employee by whatever name called except for below
exemptions, if eligible XXXX
Transport allowance up to 3,200 per received by a disabled
employee
Official tour allowance / Daily allowance on official duties /
Coveyance allowance for official duties
Taxable value of contribution to PF/ Interest on PF
Taxable value of perquisites XXXX
Taxable Gratuity XXXX
Taxable Commuted pension XXXX
Taxable leave encashment XXXX
Taxable Voluntary compensaion XXXX
Taxable Retrenchment compensation XXXX
Gross Salary XXXX
Less : Standard deduction XXXX
Taxable income from salary XXXX

PROVIDENT FUNDS
[Section 10(11), 10(12) & 10(13)]

Page 18 of 101
Particulars Statutory P.F Recognised P. F Urecognised P.F
Section Reference 10(11) 10(12) -
Employer's Exempt to the
Not Taxable in the year of
Contribution to Not Taxable extent of 12% of
Contribution
the Fund Salary
Employee's
Deduction u/s Deduction u/s
Contribution to No Benefit Available
80C available 80C available
the Fund
Exempt up to
Interest Credited Not Taxable at the time of
Exempt 9.5% rate of
to the Fund Credit
Interest
Lump sum
amount Exempt subject to Taxable as per Note 2
Exempt
withdrawn from Note 1 below below
the Fund

Notes: -

1. Interest on contribution only up to 2,50,000 during the year is exempt. If

employer does not contribute to the RPF, the interest on contribution only
up to 5,00,000 is exempt.
2. The accumulated balance due and becoming payable to an employee
participating in a Recognised Provident Fund is exempt only under the
following circumstances: -
o In the case of an employee who has been in service for a continuous
period of at least 5 years.
o In case the employee has not rendered service for a continuous period
of 5 years, then: -
▪ if his retirement is due to
o Ill-health
o Contraction or discontinuance of the employer's
business
o Other reasons beyond the control of the employee
o In case employee has not rendered service for continuous period of 5
years, and if the balance in fund is transferred to PF account with new
employer or to NPS fund
3. Any payment made under the Unrecognised Provident Fund is taxable as
under: -
o To the extent of Employer's Contribution and Interest thereon, taxable
as "Salaries".
o To the extent of Employee's Contribution - not taxable. However,
Interest thereon is taxable as "Income from Other Sources".
4. Any payment made from an ASAF is exempt in the following circumstances:
-
o On the death of a beneficiary; or
o By way of refund of contributions on his death; or
o To an employee in lieu of or in commutation of an annuity
▪ On his retirement at or
▪ After a specified age or
▪ On his becoming incapacitated prior to such retirement, or
Refund of contributions prior to 01.04.1962, on such event

Page 19 of 101
 PERQUISITES
Perquisite - Definition
The term ‘perquisite’ is defined by section 17(2) to include the following:
a) the value of rent free accommodation
b) The value of any concessional Rent free accomodation
c) The value of any benefit or amenity granted or provided free of cost or at
concessional rate in any of the following cases in case of specified employees
(i) by a company to an employee in which he is a director;
(ii) by a company to an employee being a person who has substantial
interest in the company (i.e. 20% or more of the voting rights of the
company);
(iii) by any employer (including a company) to an employee to whom the
provisions of (i) & (ii) do not apply and whose income under the head
‘salaries’ (whether due from, or paid or allowed by, one or more
employers) exclusive of the value of all benefits or amenities not provided
for by way of monetary benefits exceeds 50,000
d) Any sum paid by the employer in respect of any obligation of employee
e) Any sum to effect an assurance on the life of the assessee or to effect a contract
other than a recognised provident fund or approved superannuation fund or
deposit-linked insurance fund
f) the value of any specified security or sweat equity shares free of cost or at
concessional rate.
g) the aggregate amount of any contribution to recognized provident fund, an
approved superannuation fund or national pension scheme to the extent it
exceeds 7,50,000.
h) the value of any other fringe benefit or amenity as may be prescribed by the
CBDT

Valuation of Perquisites under Rule 3

A – RENT FREE ACCOMODATION

1. ACCOMODATION - UNFURNISHED

Page 20 of 101
 Category of Value of unfurnished accommodation
Employer
Accommodation License fee determined by Central/State government
provided by
Central/State Less: Rent Actually paid by employee
Government
Accommodation A) Where accommodation is owned by employer
provided by any Population as per 2011 Census Valuation
other employer a) More than 40 lakhs 10% of salary
b) More than 15 lakhs and less 40 lakhs 7.50% of salary
Note : Rent paid c) Less than 15 Lakhs 5% of salary
by employee shall
be deducted B) Where accommodation is taken on lease or rent by the
employer
Actual amount of lease rental paid or payable by the employer or
10% of salary whichever is lower

2. VALUATION OF FURNISHING – The Value of furnishing is uniform for all the

category of employees as below

Nature of furnishing Valuation

Furniture owned by employer 10% of actual cost of furniture
Furniture taken on rent or lease by Actual hire charges paid by employer
employer

3. VALUATION – HOTEL ACCOMMODATION:

The Value of hotel accommodation is uniform for all category of employees. The
value is 24% of salary or actual charges paid by employer whichever is lesser.

4. Notes:
1) Salary = Basic + DA (forming part of retirement benefits)+taxable value of
allowance + all monetary payments by whatever name called, but shall not
include value of perquisite and employer’s contribution to RPF.
2) Any amount recovered or received from employer is deducted from the
prescribed valuation
3) Exempted Accommodations :
a) Accommodation provided in rural area provided to an employee working at
mining site or an onshore oil exploration site, or a project execution site or a
dam site or power generation site or an offshore site. Remote area means an
area located at least 40 kilometers away from a town having population of
not exceeding 20,000
b) Accommodation of temporary nature having plinth area of 800 sft or less
and located at least 8 km away from the local limits of municipality or
cantonment board provided to an employee working at a mining site or an
onshore oil exploration site or a project site or a dam site or a power
generation site or an offshore site is not chargeable
c) Where on account of transfer of an employee, he is provided with
accommodation at the new place of posting while retaining the

Page 21 of 101
 accommodation at other place, the value of perquisite in respect of one
accommodation at the option of employee is not chargeable for a period of 90
days.
d) Hotel accommodation provided to an employee on account of transfer from
one place to another, is not chargeable if the aggregate period does not
exceed 15 days

B. MOTOR CAR:

C. OTHER PERQUISITES

PERQUISITE VALUATION
Sweeper, gardener, Actual cost to the employer
watchman, personal Less: Amount recovered if any
attendant
Supply of gas, electric energy,
Water

Page 22 of 101
 a) From own source Manufacturing cost
b) From outside source Actual expenditure incurred or reimbursement
Less: Amount, if any recovered
a) If in an institution owned by employer or or
facility is provided owing to his employment –
Free or concessional Perquisite shall be cost of similar education
Educational facilities for However if children studying then the value in excess
any member of of Rs. 1,000 per month per child is only taxable
employees household b) Other institutions- Actual expenditure or
reimbursement
Less: Amount, if any recovered
Interest free Concessional Interest amount, as per SBI rates as on 1st day of
loan previous year on maximum outstanding monthly
balance
Less: Interest recovered employee,
(Petty loan upto Rs. 20,000 or loan for medical
treatment in respect of diseases specified under
Rule3A not taxable provided not reimbursed under
any Medical Insurance Scheme)
Free food and non Amount of expenditure incurred by the employer
alcoholic beverages Less: Amount recovered from the employee
Gifts/Vouchers or token to Value of such gift
employees However, such value to be considered Nil, if the value
of gift per employee during the previous year in
aggregate is below Rs. 5,000.
Memberships and annual fees Actual amount of expenditure or reimbursement
Less: Amount relating to official duties & Amount, if
any recovered from the employee for such benefit or
amenity.
Use of movable assets (other 10% of actual cost of the asset or the amount of rent
than Laptops) paid or payable
Less: Amount, if any recovered
Transfer of movable Actual cost of movable asset
asset to the employee Less: 10% of depreciation for each completed year
direct or indirectly which such assets was put to use by the employer
(In case of computer and electronic items 50 percent
and motor car 20 percent by reducing balance
method)
Less: Amount, if any recovered
Any other benefits or
Cost to employer (based on arm’s length transaction)
amenities, services, rights or
Less: Amount, if any recovered
privilege
Equity stock options Fair Market Value of the specified securities or
scheme (ESOP) sweat Equity Share on the date on which the option
SEE NOTE BELOW is exercised by the employee
Less: Amount, if any recovered

Note : For determining the fair market value, Rule 3(8) prescribes method for
determining the fair market value of specified security or Sweat Equity Share on
the date on which the option is exercised by the employee is as follows:

a) In case where the company is listed on the recognized stock exchange, the
fair Market shall be average of the opening price and closing price of the
share on the date of exercising option on the stock exchange.

Page 23 of 101
 b) Where the share is listed on more than one recognized stock exchanges,
FMV shall be average of the opening price and closing price of the share on
the date of exercising option on the recognized stock exchange which records
highest volume of trading in the shares.
c) Where there is no trading in the share on any recognized exchange, Fair
Market Value shall be the value of the share in company as determined by a
merchant banker on the date of exercising option.

Medical Facilities
Expense incurred or reimbursed by the employer for the medical treatment of the
employee or his family (spouse and children, dependent – parents, brothers and
sisters) in any of the following hospital is not chargeable to tax in the hands of the
employee:
a) Hospital maintained by the employer.
b) Hospital maintained by the Government or Local Authority or any other
hospital approved by Central Government
c) Hospital approved by the Chief Commissioner having regard to the
prescribed guidelines for treatment of the prescribed diseases.
d) Medical insurance premium paid or reimbursed by the employer.
Expenditure on medical treatment outside India, including stay expenses for
patient and one attendant to the extent permitted by RBI. Travel expenses
exempted only if he Gross total income of the employee is less than Rs.2,00,000/-
Exempted perquisite
The following perquisites are exempt from tax in all cases -
1) Telephone provided by an employer to an employee at his residence;
2) Goods sold by an employer to his employees at concessional rate
3) Privilege passes and privilege ticket orders granted by Indian Railways to its
employees;
4) Perquisites allowed outside India by the Government to a citizen of India for
rendering services outside India;
5) Employer’s contribution to staff group insurance scheme;
6) Payment of premium on personal accident policy on the life of the employee;
7) Refreshment provided to all employees during working hours in office premises;
8) Amount spent on training of employees
9) Subsidized lunch or dinner provided to an employee;
10) Recreational facilities, including club facilities, extended to employees in general
i.e., not restricted to a few select employees;
11) Amount spent on training of employees or amount paid for refresher
management course including expenses on boarding and lodging;
12) Medical facilities subject to certain prescribed limits;
13) Rent-free official residence provided to a Judge of a High Court or the Supreme
Court; Officer of Parliament, Union Minister and a Leader of Opposition in
Parliament;
14) Conveyance facility provided to High Court Judges under section 22B of the
High Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges
under section 23A of the Supreme Court Judges (Conditions of Service) Act,
1958.

PRACTICE QUESTIONS – A

1. Pooja an employee of SAP limited furnishes the details of her salary as

below:
- Basic Salary Rs.35,000 p.m.
- Dearness allowance in terms of employment Rs. 15,000 p.m

Page 24 of 101
 - Variable pay Rs. 20,000 p.m
- Travel allowance Rs. 6,000 p.m
- House rent allowance Rs. 21,000 p.m. (she pays rent of Rs. 23,000 at
Bengaluru)
- SAP contributes Rs. 7,500 pm to recognized provident fund.
- Medical allowance Rs. 3,000 p.m.
- Telephone allowance Rs. 2,500 p.m.
- Annual bonus 8% of basic+DA+variable pay

Calculate taxable salary.

2. Vishal employed with DM Limited on a monthly basic salary of Rs. 70,000.

He also gets monthly Dearness Allowance (DA) in terms of employment – Rs.
28,000, Transport allowance Rs. 3,000, Medical allowance Rs. 4,000,
Children education allowance Rs. 500 (he has 2 children studying), Hostel
expenditure allowance Rs. 1000 (he has one child staying in hostel), Helper
allowance Rs. 10,000 (he spent Rs. 8,000 PM on helper), Official tour
allowance Rs. 4,000 (he spent Rs. 32,000 during the year on official tours)
and House Rent allowance of Rs. 25,000 per month. He stays in rented
house at Delhi on monthly rent of Rs. 30,000. DM ltd contributes to RPF
14% of his basic plus DA. Interest @ 10% earned on RPF during the year
amounting to Rs. 1,82,000. He is given a car of 2 litre engine capacity to be
used by him both for official and personal purpose. Compute Taxable salary
of Vishal.

3. Amit received the following monetary payments and benefits from his
employer during the year 2024-25
- Basic Salary Rs. 65000 PM
- Dearness pay Rs. 25000 PM
- Commission Rs. 4500PM
- Annual bonus Rs. 50000
- Medical allowance Rs. 4000PM
- Conveyance allowance Rs. 3000 PM
- Children education hostel expenditure allowance Rs. 1000 PM (he has
two children studying and one child staying in hostel)
- Research allowance Rs. 3000 PM. (Spent Rs. 28,000 on research)
- Free Rent free furnished house at Hyderabad having population of 60
Lakhs. This house is owned by employer and the cost of furnishing
owned is Rs. 3,50,000.
Calculate Taxable salary for AY 2025-26

4. Mohan employed with ND Ltd furnishes the following particulars of his

employment benefits for the year ending 31st Mar 2025
a) Monthly basic pay Rs. 40,000 up to Nov 2024. He got increment of
3,500 from Dec 2024
b) Dearness pay @ 40% of basic of which 60% taken for retirement benefits
c) Commission on turnover @ 1%. During the year turnover attributable to
him was 72 Lakhs
d) Telephone allowance Rs. 2,000 PM

Page 25 of 101
 e) Conveyance allowance Rs. 3,000 PM
f) Helper allowance Rs. 6,000 PM. Mohan pays salary of 5,000 PM to the
helper.
g) Contribution to Recognised Provident fund Rs. 9,000 per month
h) Interest credited to RPF account Rs. 73,200 on the balance of 7,32,000
i) Concessional rent free house at Chennai, for which employer pays rent
of Rs.12,000 PM. The employer recovers Rs. 3,000 pm from mohan
towards this accommodation
j) Reimbursement of medical expenses of mohan and his family Rs. 82,000
k) A car of 1.7 liter engine capacity for official and personal use along with
a driver
Calculate the taxable salary

5. Nina is Director-Marketing of VIP Limited. She received the following

emoluments and benefits from VIP Ltd during the year:
a) Basic Salary – Rs. 85,000 PM up to June 2024, thereafter Rs. 97,000 PM
b) DA – 1/3rd taken for retirement benefits – Rs. 60,000 PM
c) Bonus – Rs. 1,20,000
d) Commission on turnover @ 0.50%. Turnover attributable to her during the
year is 3.50 Crores
e) Entertainment allowance – Rs. 16,000 PM.
f) Travel Allowance Rs. 6,000 PM
g) A rent free furnished house at Bangalore (having population 55 Lakhs). The
cost of furnishings of the said house is Rs. 4,30,000. In addition to this an
Air Conditioner taken on hire by VIP Ltd at Rs. 2,500 PM is installed at the
house from November 2024. VIP limited recovers rent of Rs. 6,000 per
month for the house provided.
h) A Car of 1.8 Litres engine capacity with driver for both official and personal
use.
i) Medical treatment of Rs. 2,28,000/- reimbursed towards treatment in
approved Hospital.
j) A domestic help and security guard is provided at residence of NINA for
which the VIP Ltd pays salary of Rs. 11,000 PM each.
k) Reimbursement of electricity & water bill of NINA – Rs. 28,200
l) One child of NINA is studying in a school owned by VIP ltd and comparable
fees by VIP limited from others is 55,000/- Also VIP ltd re-imbursed Rs.
60,000/- towards college fees of another child studying in another
institution.
m) Nina has availed loan of Rs. 12,00,000/- @ 4% PA from VIP Ltd for purchase
of a plot. Of this she repaid Rs. 2,00,000/- on 01.12.2024. The interest rate
charged by SBI on plot loans is 11%.
n) On her birthday she received gift wrist watch valued Rs. 12,500 from VIP Ltd
o) Contribution to approved superannuation fund Rs. 2,20,000/-
p) She is allotted 1000 Sweat equity shares @ Rs. 200 per share in June 2024.
The average listing price on the date of allotment is Rs. 300 per share
q) A car owned by VIP limited was sold to Nina in Dec 2023 for Rs. 3,30,000/-
This car was purchased in May 2019 by VIP Ltd at Rs. 11,50,000/-
r) Nina is provided refreshments and lunch during office hours. The value of
refreshments is Rs. 14,200 during the year and the value of lunch consumed
for 280 days is 26,500/-
s) A mobile phone costing Rs. 1,20,000/- is given to use exclusively for
personal purpose.
t) NINA paid profession tax of Rs. 2,000/- during the year
Compute Taxable Salary of NINA for Assessment year 2025-26

Page 26 of 101
ALLOWANCES FULLY EXEMPT
1) Allowance paid by Government to Indian citizen serving outside India – 10(7)
2) Allowances to high court Judges and sumptuary allowance to high court &
supreme judges
3) Allowances including salary received by employee of UNO
4) Allowances received by member of parliament or State legislature u/s 10(17)

PROFITS IN LIEU OF SALARY

A. GRATUITY – SECTION 10(10)

1. While in Service - Fully Taxable

2. On Death or Retirement – Exemption will be

a) Government employees : Fully exempt
b)

Page 27 of 101
Notes: -

a. Where gratuity is received more than once, either from more than one employer
in the same previous year, or, over several previous years, then the total gratuity
exemption cannot exceed the statutory limit, i.e., Rs.20,00,000.

b. In the case of the Gratuity payment covered by Payment of Act: - Salary means :
Last drawn basic salary + DA. The completed year in excess of 6 months will be
taken as full completed year

c. In the case of the Gratuity payment NOT covered by Payment of Act: - Salary
means : Average of 10 months salary comprising of Basic Pay + Dearness
Allowance, if terms of employment provide + Commission as a Fixed Percentage on
Turnover. The completed year of service means each completed year of service and
part of the year is ignored.

B. Pension [Section 10(10A) & 10(18)(i)]

1. Un-commuted Pension – Regular pension

Fully Taxable

2. Commuted Pension

(A) Government Employee - Fully Exempt

(B) Other Employees

Page 28 of 101
 (a) Receiving Gratuity Also

One-third of the Total amount which the employee would have received had
he Commuted is whole Pension, is exempt

(b) Not Receiving Gratuity

One Half of the Total amount which the employee would have received had
he Commuted is whole Pension, is exempt

C. Leave Salary Exemption [Section 10(10AA)] : Leave salary received while in

service is fully taxable for all employees. If received on retirement, the
exemption will be

• Leave standing at credit is calculated on the basis of leave not availed by

employee on the basis of 30 days for each completed year of service.
• Average salary to be computed on the Basic + DA in terms of
employment + commission on turnover

D. Retrenchment Compensation Exemption [Section 10(10B)]

1. Under a scheme approved by Central Government - Fully Exempt

2. Others : Lower of

• Amount determined as per the Industrial Dispute Act, 1947

• Rs.5,00,000.

E. Salary Exemption for Voluntary Retirement Compensation u/s

[Section 10(10C)]

• Exemption for Voluntary Retirement/Separation is available only to

employees of

Page 29 of 101
 1. Public Sector Company; Statutory Corporations; Any other Company;
University; Indian Institute of Technology; Notified Institute of
Management; Any State Government; The Central Government of
India; Local Authority; Co-operative Societies
2. Specially Notified Persons or Any other Institution, having importance
throughout India or in any State or States, notified by Central
Government of India

For this purpose, Last drawn Salary = (Basic Pay + Dearness Allowance (if
terms of employment provide) + Commission as a Fixed Percentage on
Turnover) of the last month before Voluntary Retirement.

PRACTICE QUESTIONS - B

6. Shankar retired on 31st October 2024 after serving 18 years and 7 months.
He received gratuity of Rs. 23,96,000. At the time of retirement his monthly
salary comprised of Basic 85,000/- DA 45,000/-. He was also entitled for
commission @ 2% on turnover and the turnover achieved by him during the
period Dec 2023 to Sep 2024 is 36 Lakhs. Determine taxable gratuity if
Shankar is:
i. Government employee
ii. covered under Gratuity Act
iii. Not covered under Gratuity Act

7. Sughosh retired on 30.06.2024 and is entitled to monthly pension of 30,000.

He commuted his 40% of pension and received 3,60,000/-. Calculate the
taxable value of pension if
1. He is Government Employee
2. He is non government employee & he received gratuity at the time of
retirement.
3. He is non government & he not received Gratuity at the time of
retirement

8. Satish retired on 31st October 2024 after serving 18 years and 7 months. He
received leave encashment of Rs. 23,96,000. While in service he has taken
leave of 7 months. At the time of retirement his monthly salary comprised of
Basic 85,000/- DA 45,000/-. He was also entitled for commission @ 2% on

Page 30 of 101
 turnover and the turnover achieved by him during the period Jan 2024 to
Oct 2024 is 36 Lakhs. Determine taxable leave encashment if he is:
a) Government employee
b) Non Government employee

9. Ashish voluntarily retired from ABD ltd on 31st Jan 2025 and received the
following:
i. Gratuity NOT covered under payment of gratuity act – Rs. 28,22,300
ii. Leave encashment – Rs. 5,88,000
iii. Voluntary retirement compensation – Rs. 6,50,000
iv. Accumulated balance in Recognised provident Fund – Rs. 9,85,000
He rendered service of 15 years 5 months. He has taken leave of 6 months
while in service. He was drawing basic salary of Rs. 52,000 and DA of Rs.
18,000 before retirement. After retirement he is entitled to pension of Rs.
25,000 per month. He Commuted his 60% of pension on 01st March 2025
and received Rs. 7,30,000/-
Compute taxable salary for assessment year 2025-26

DEDUCTION FROM GROSS SALARY

Standard Deduction: A Standard deduction of Rs. 75,000/- or actual salary shall be

allowed as deduction from Gross salary.

COMPUTATION OF SALARY IF THE EMPLOYEE OPTS FOR OPTIONAL TAX REGIME

Computation of Taxable Salary Rs.

Computation of taxable salary under default tax regime XXXX
Less : Allowances exempted as detailed hereinafter XXXX
Less : Value of perquisite in respect of food @ 50 per meal XXXX
Less : Leave Travel Concession XXXX
Gross Salary XXXX
1. Standard Deduction: A Standard deduction of Rs. 50,000/- or actual
salary shall be allowed as deduction from Gross salary.
2. Entertainment Allowance: As Deduction given from gross salary only
for Government employees to the extent of least of Rs. 5,000/-; or
1/5th of basic salary or Actual E/A
3. Profession Tax : Profession tax paid by employee or deducted from
employee shall be allowed as deduction.

Page 31 of 101
TAXABLE SALARY XXXXXX

TAXABILITY OF ALLOWANCES GIVEN TO EMPLOYEES

A .Allowances partially exempt u/s 10(14)

1. The following allowances are exempt to the extent actually spent for the purpose given:
a) Travel allowance to meet the cost of travel on tour or transfer
b) Conveyance allowance to meet the conveyance expense on official duties
c) Daily allowance on official tour or for period of journey in connection with transfer
d) Helper allowance
e) Academic/research allowance
f) Uniform Allowance

2. The following allowances are exempt to the extent of amount specified

Nature of allowance Amount exempted
a) Children education allowance Rs.100 per month per child max 2 children
b) Children hostel expenditure
allowance Rs.300 per month per child max 2 children
c) Transport allowance for
commuting between place of In case of physically handicapped Rs.3,200 per
residence and office month
d) Transport allowance to an
employee working in transport Rs.10,000 PM or 70% of allowance whichever is
undertakings lower

3. House Rent Allowance: Sec 10(13A) - HRA exempt from tax to the extent of
least of the following three amounts:
a) House Rent Allowance actually received by the assessee
b) Excess of rent paid over 10% of salary for relevant period
c) An amount equal to 50% of salary (If accommodation is situated in Mumbai,
Kolkata, Delhi, Chennai) ‘Or’ an amount equal to 40% of salary (if
accommodation is situated in any other place) for relevant period
Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms part of
salary for the purpose of retirement benefits), Commission based on fixed percentage
of turnover achieved by the employee

4. Entertainment Allowance: As Deduction given from gross salary only for Government
employees to the extent of least of Rs. 5,000/-; or 1/5th of basic salary or Actual E/A

C. Fully taxable allowance: All the allowances except above by whatever name
called are fully taxable. Such allowances include : Dearness Allowance, medical
allowance, City compensatory allowance, lunch allowance, overtime allowance,
servant allowance, non practicing allowance, family allowance etc.,

Page 32 of 101
CHAP IV-C: INCOME FROM HOUSE PROPERTY

Chargeability: Sec 22 – The annual value of property is chargeable under this head if the
following conditions are satisfied

- property consists of land or buildings appurtenant thereto

- assessee is the owner, (deemed owner included)
- the property should not be used by the owner for the purpose of his OWN business or
profession.
- Property held as stock in trade. However the annual value of property shall be nil for a
period of 2 years from the end of financial year in which certificate of completion is
received and thereafter chargeable to tax on deemed rental value.

Page 33 of 101
Deemed ownership: Sec 27 – In the following cases legal ownership may vest with one person
whereas taxability is cast on another who is deemed to be the owner.

a) Transfer to spouse or minor child without adequate consideration or transfer to spouse

not in connection with an agreement to live apart
b) Holder of impartible estate
c) A member of co-operative society or other AOP to whom a building or part thereof is
allotted or leased under a House building scheme.
d) Property in possession or retained in part performance of contract in the nature referred
to in Section 53A of TOPA Act.
e) A person who acquires rights referred to in Sec 269UA(f) i.e, lease hold rights of land or
property for more than 12 years

Types of properties:

a) Let out property

b) Self occupied property
c) Deemed let out property
d) Partly let out partly self occupied
e) Co-ownership

Let out property:

Format showing the computation of income from house property:

Gross annual value XXX

Less: Municipal taxes or property tax XX

Net annual value XXX

Less: Deductions u/s24

a) 30% of annual value XX

b) Interest on loan
Income from house property XX

XXX

Determination of Gross annual value: Sec 23(1)

GAV shall be higher of Fair rent, Municipal valuation, or Actual rent but shall not exceed
Standard rent except where actual rent is more than standard rent.

OR

Page 34 of 101
Step 1: Higher of Municipal value or FRV

Step 2: Least of - Step 1 or Standard rent

Step 3:Higher of - step 2 or Actual rent(rent receivable–unrealized rent)

Compute GAV in respect of following properties

Properties A B C D E F

Municipal value 20000 26000 36000 42000 48000 45000

Fair rent 24000 24000 40000 42000 50000 50000

Standard rent NA 22000 50000 40000 NA 48000

Actual rent 18000 36000 48000 46000 54000 42000

Unrealised rent 4000 9000 32000

Adjustment for unrealized rent: Expl 1 to 23(1)

In computing the gross annual value, the unrealized rent is excluded from the actual rent
receivable, if the following conditions are satisfied

i) the tenancy must be bona fide

ii) the defaulting tenant has vacated or steps have been taken to vacate the property
iii) the defaulting tenant is not in occupation of any other property
iv) assessee has taken reasonable steps to institute legal proceedings for recovery of
unpaid rent or satisfies the assessing officer that legal proceedings would be useless

GAV in case of property is vacant during the previous year:

1) Compute GAV as per normal rule after taking into adjustment for unrealized rent if any.
2) From the above deduct loss due to vacancy (to be calculated on the basis of actual rent
realizable)
Compute GAV in the following cases:

X Y Z A B

Municipal value 140 180 180 140 231

Fair rent 145 185 185 145 262

Standard rent 142 175 175 142 241

Annual rent receivable (12 months) 168 168 168 168 252

Unrealised rent 14 42 1 70 42

Page 35 of 101
Vacancy in months 1/2 1 1 3 5

Municipal Tax:

Municipal tax paid by the assessee (owner) is allowed as deduction from GAV. It is allowed as
deduction on payment basis irrespective of the previous year to which it relates.

Deductions from Net annual Value U/s 24:

a) Standard Deduction:
- 30% of NAV is allowed as deduction.
- This deduction is allowed to assessee to cover the expenses like collection charges,
repairs, insurance premium, ground rent etc.,
- The deduction is allowed irrespective of actual amount spent.

b) Interest on loan:
i) Interest payable on loans borrowed for the purpose of acquisition, construction,
renovation, repairing or reconstruction can be claimed as deduction.
ii) Interest relating to year of completion of construction can be fully claimed in the year
irrespective of date of completion
iii) Interest accrued during the construction period preceding the previous year of completion
of construction can be accumulated and claimed as deduction over a period of 5 years in
equal installments commencing from the year of completion of construction. – Pre
construction interest
iv) The assessee should furnish a certificate from the person to whom interest is payable.
v) If second loan is taken to repay original loan then the interest on second loan is
deductible

An assesssee took a loan of Rs.30,00,000 @ 9% p.a. on 1-6-21 from a bank for construction of
a house. The construction is completed on 15-1-2025. The entire loan is still outstanding.
Compute the interest allowable for AY 2025-26

Page 36 of 101
 Self-Occupied Property:

Where the property is self occupied throughout the previous year, OR the owner could
not occupy the property because of his staying in other place due to his employment or
profession, the same is termed as Self Occupied Property. A person can occupy
MAXIMUM two houses for self occupation and both houses will be regarded as Self
occupied property.

Computation of Income from Self Occupied property:

a) Gross annual value is NIL

b) No deduction allowable in respect of municipal taxes
c) Since NAV is nil, standard deduction not available.
d) If the Assessee opts for optional Tax regime : Interest on loan borrowed (including
pre-construction interest) for construction or acquisition is allowed up to Rs.2,00,000 (for
both self occupied properties) if the loan is borrowed on or after 1-4-99 & the
acquisition or construction is completed within 5 years from the end of financial year in
which the loan was borrowed. However loan borrowed for repairs, renewals, or
renovation the deduction is restricted to Rs.30,000. If the loan is borrowed prior to 1-4-
99 for acquisition, construction, repairs, renewals, renovation etc, the deduction allowable
will be restricted to Rs.30,000.
e) If the Assessee is in default tax regime : No deduction of Interest allowed. Effectively
meaning the Income from SOP is nil.

Deemed let out property:

If the assessee owns more than TWO house property for self occupation then the
income from any of TWO such property shall be considered as self occupied property.
The other house properties shall be deemed to be let out properties, at the option of
assessee

Partly let out and partly self occupied

a) Portion of party let out and portion let out
If a portion of property is let out is independent unit, then the income from such
portion shall be computed as let out property and income from self occupied portion is
computed as self occupied property
Municipal value or fair rent if not given separately, shall be apportioned between the let out
portion and self occupied portion either on area or built up space or such other reasonable
basis

Page 37 of 101
 b) Property let out for the part of year and self occupied for other part:
If a property is self occupied for few months and let out for the other months, then the income
from the property shall be computed as if the property is let out for the whole of previous year.

Inadmissible expenses – Sec 25

In case of interest on loan borrowed is payable outside India, deduction shall be allowed only if
tax is deducted at source or tax is paid

Unrealised rent or arrears of rent received subsequently charged to tax

The rent received by an assessee, which was unrealized earlier, is deemed to be income
(to the extent it has not been included in annual value earlier) chargeable under the
head “Income from house property”. It is chargeable in the year in which the rent is
received, whether or not the assessee is the owner of that property.
Similarly the arrears of rent received is also taxable in the year in which it is received.
A Deduction 30% is allowed from both arrears and unrealized rent which is offered to
tax

Co-ownership – Sec 26: If a property is owned by two or more persons, each co-owner is
chargeable for his share of income from the property. The income chargeable under house
property is divided among the co-owners according to their agreed share. Each individual co-
owner is eligible for benefit of SOP. However if the shares are not known the income from such
property is taxable as AOP.

Composite Rent: Where the amount is received by the owner not only on account of the rent
but also for various facilities provided like lift, gas, water, electricity, air conditioning etc., the
amount so received is termed as composite rent. Such amount received is split up and the
portion attributable to letting out of premises is chargeable under house property, and the
balance under income from other sources. However if the composite rent cannot be bifurcated
the entire income is chargeable under income from business or under head other sources.

Questions

1) Manish owns a property which is let out to a charitable institution on a monthly

rent of Rs. 40,000. The Municipal value, fair rental value and standard rent of

Page 38 of 101
 this property are Rs. 6,00,000; Rs. 6,60,000; Rs. 6,30,000 respectively. It is let
out at lesser value as the tenant is engaged in charitable activities. Manish paid
municipal tax of Rs. 18,000 during the year. Calculate income from house
property.

2) L Owns a flat which is let out on monthly rent of Rs. 30,000. This flat was vacant
for 2 months. The Municipal value, fair rental value and standard rent of this flat
is Rs. 2,88,000; 3,72,000 and Rs. 3,84,000. He paid municipal tax of Rs. 14,000
during the year. He had taken loan of Rs. 20,00,000 on booking of flat on
01.08.2021 and the flat was handed over to him on 01.02.2024. The loan is still
outstanding. Calculate income from house property.
3) Mr. R completed construction of property on 01/08/2024 and let out on monthly rent of
Rs. 28,000. The municipal value of property is 2,40,000/- and Fair rental value is Rs.
2,16,000/-. He has taken loan of Rs. 10,00,000 @ 9% pa on 01.03.2024 for
construction of this property. Compute income from house property for AY 25-26

4) From the following particulars given, Compute income from house

property if the Assessee is in default tax regime.

House A :Self- Occupied House: Interest for the year 2023-24 on Loan
taken for purchase of this house, Rs. 3,00,000. Loan taken during 2018-19

House B: Let out House Property: Let out on monthly rent of Rs.
1,20,000. Municipal tax paid Rs. 45,000. Loan of Rs. 60,00,000/- @ 9% PA,
taken on 01.06.2018; Date of completion of property 31.01.2021. Principal
outstanding as on 01.04.2024 - Rs. 60,00,000/-; Principal repaid on
01.09.24 - Rs. 14,00,000/-

5) Mr. X owns one residential house in Mumbai. The house is having two units. First
unit of the house is self-occupied by Mr. X and another unit is rented for Rs.
58,000 p.m. The rented unit was vacant for 2 months during the year and rent of
one month could not be realised. The particulars of house for the previous year
2024-25 are as under:

Standard rent: Rs 14,22,000 p.a.

Municipal Valuation: Rs 14,60,000 p.a.

Fair rent: Rs 14,45,000 p.a.

Municipal Tax: 3% of municipal valuation (paid)

Light and Water Charges: Rs 5,000 p.m.

Interest on Housing loan during the year : Rs 4,08,000

Page 39 of 101
 Insurance charges: Rs 30,000 p.a.

Compute income from house property of Mr. X for the AY 2025-26

considering that he opts to pay tax under optional tax regime.

6) Ganesh has three houses, all of which are self-occupied. The Particulars of
the houses for the PY 2023-24 are as under

Particulars House 1 House 2 House 3

Municipal value 3,00,000 3,60,000 3,30,000
Fair Rent 3,75,000 2,75,000 3,80,000
Standard rent 3,50,000 3,70,000 3,75,000
Date of completion of construction 31.03.01 31.03.04 01.04.18
Municipal Tax paid 12% 8% 6%
Interest on loan taken for 1,75,000
purchase
Interest on loan taken for repairs 55,000
Compute Ganesh’s Income from House property for AY 2025-26 and suggest which
of the houses should be opted by Ganesh to be assessed as self occupied so that
his tax liability is minimum if he is in
a) If he is in default tax regime
b) If he is in optional tax regime

7) Abhi owns a building consisting of 6 residential flats of which 4 are let

out on monthly rent of Rs. 16,000/- each and 2 flats is used for his own
residence. Rent of 2 months from one flat could not be realized and one
flat remained vacant for 4 months. The other details of the building for
the year are:
a) Municipal Value – Rs. 10,76,000
b) Fair rental value – Rs. 12,00,000
c) Municipal taxes – Rs. 80,000 of this 64,000 was paid.
d) Collection charges –Rs. 16,200
e) Security charges for building – Rs. 84,000
f) Repairs to building – Rs. 14,000
g) Interest on loan taken for repairs of building – Rs. 3,30,000
Compute Taxable income from house property for Assessment year
2025-26

Page 40 of 101
 UNIT 3

INCOME UNDER HEAD BUSINESS OR PROFESSION

Sec 2(13) Business: business includes any trade, commerce or manufacture

or any adventure in the nature of trade, commerce or manufacture.

Sec 2(36) Profession: Profession includes vocation.

Sec 28 – Chargeability
The following incomes are chargeable to tax under head “Profits and gains of
business or profession”.

i) Profits and gains of business or profession carried on by the assessee

during the previous year.

Page 41 of 101
ii) Income of any trade, professional or similar association from specific
services
iii) Any compensation in connection with termination or modification of any
terms relating to affairs of company, agency business or any other
business
iv) in case of an assessee carrying on export business, the following export
incentives
a) profit on sale of import entitlements or EXIM scrip
b) Cash assistance
c) Excise or customs duty drawback.
v) The value of benefit or perquisite, whether convertible into money or not,
arising from business or profession
vi) Any interest, salary, bonus, commission or remuneration due to or
received by a partner of a firm from such firm.
vii) Any sum received under keyman insurance policy including the sum
allocated by way of bonus on such policy.
viii) Income from speculative transaction
ix) Fair market value of stock converted into capital asset.
x) Any sum whether received or receivable in cash or in kind for
a) not carrying out any activity in relation to any business
b) not sharing any know-how, patent, copyright, trademark, licence,
franchise or any other business or commercial right of similar nature or
information or technique likely to assist in the manufacture or processing
of goods or provision of services.

A. COMPUTATION OF INCOME FROM BUSINESS:

1) The taxable income under the head income from business or profession is
computed on either of following basis
i. Estimation method (presumptive income) in case of specified
category of persons and subject to conditions.
ii. Regular method based on financial statements prepared as per regular
books of accounts and applying the provisions contained in Section 29
to Section 43D of the income tax act.
2) The estimation of income by eligible assessee is optional and not
compulsory.

B. ESTIMATED INCOME IN CERTAIN CASES:

1) Sec 44AD:
a. Eligible Assessee : Individual, HUF and Partnership Firm (other than LLP
b. Eligible business : Any business not being :- specified profession; Agency
business; hiring or leasing of goods carriages or income in the nature of
commission or brokerage

Page 42 of 101
c. Turnover Limit : Total turnover or gross receipt should not exceed 200
Lakhs. In case the aggregate receipts by way of cash is less or equal to
5%, the turnover should not exceed 300 Lakhs.
d. Rate of Tax : 8% of total turnover or gross receipts. However in case of
amounts received through bank during previous year or before due date of
filing income tax return, the rate shall be 6% of gross receipts. Assessee
can declare higher rate of income.
e. Other points:
i) All deductions under section 30 to 38 including depreciation are
deemed to be have been allowed
ii) The written down value of the fixed assets is deemed to have been
calculated
iii) Assessee is not required to maintain books of account as required
under section 44AA
iv) Not required to get his accounts audited
v) Advance tax need to be paid in instalments but can be paid by 15 th
March of financial year.
vi) If declares income lower than prescribed rate, then has to maintain
books of accounts and compulsorily get the accounts audited
irrespective of turnover
vii) If the assessee opts out of presumptive income scheme then for the
next five assessment years he cannot opt for the presumptive
income scheme

2) Sec 44ADA– SPECIFIED PROFESSIONALS

a. Eligible Assessee : Individual, HUF and Partnership Firm (other than
LLP) engaged is specified professions like legal, medical, engineering,
architect, accounting, etc.,
b. Turnover Limit : Total turnover or gross receipt should not exceed 50
Lakhs. In case the aggregate cash receipts is less or equal to 5%, the
turnover should not exceed 75 Lakhs.
c. Rate of Tax: 50% of total turnover or gross receipts. Assessee can
declare higher rate of income
d. Other points : Same as Section 44AD

3) Section 44AE – TRANSPORT BUSINESS

a. Eligible Assessee : Any person engaged in business of plying or hiring of
goods carriages and owning less than or equal to 10 goods vehicles.
b. Rate of Tax: In case of heavy goods vehicle Rs. 1,000 per month per ton
of vehicle weight. In case of other vehicles, 7,500 Per month per vehicle.
Assessee can declare higher rate of income
c. Other points : Same as Section 44AD

Page 43 of 101
 IL-1 The following are the information of different assessees, all being
individuals, engaged in business during Previous year 2025-26

Particulars Assessees
A B C D
Total Turnover 1,80,00,000 1,60,00,000 2,50,00,000 2,80,00,000
Amounts received 1,60,00,000 1,10,00,000 2,40,00,000 2,40,00,000
in electronic modes
Examine whether the above assessee’s can opt for Section 44AD and if they
can, compute taxable business income.

IL-2 The following are the information of different assessees, all being
individuals, engaged in notified profession during Previous year 2025-26

Particulars Assessees
P Q R S
Total Turnover 45,00,000 70,00,000 65,00,000 80,00,000
Amounts received in 30,00,000 73,50,000 40,00,000 79,00,000
electronic modes
Examine whether the above assessee’s can opt for Section 44AD and if they
can, compute taxable professional income.

C. BUSINESS / PROFESSION INCOME UNDER REGULAR METHOD

1) Sec 29 – The income referred to u/s 28 will be computed in accordance

with the provisions of Sec 30 to 43D

ADMISSIBLE DEDUCTIONS SECTIONS 30 TO 37

Page 44 of 101
2) Sec – 30 Expenditure relating to building: Rent paid, insurance
premium, current repairs, local taxes on owned building used for business

3) Sec 31 Expenses relating to machinery, plant and furniture: Current

repairs and insurance premium

4) Sec – 32 Depreciation:
a) Depreciation is allowed in respect of block of assets.
b) Sec 2(11) Block of assets: means group of assets falling within
class of assets comprising
i. Tangible assets being building, machinery, plant or furniture
ii. Intangible assets being know-how, patents, copyrights,
trademarks, licence, franchise or any other business or
commercial right of similar nature.

c) Points / Conditions on depreciation:

i. Assessee should be the owner. Fractional ownership recognized
ii. Asset should be used in the previous year for the purpose of business. If
acquired & put to use for less than 180 days, 50% of normal depreciation
is allowed
iii. Depreciation allowed under WDV method. However undertakings
engaged in generation or generation & distribution of power can claim
depreciation under SLM.
iv. The asset the value of which is more than 10,000 should NOT be
purchased by cash
v. Additional depreciation – (allowed only if assessee opts for optional (old)
tax regime). A further depreciation of 20% in addition to normal
depreciation is allowed subject to following conditions:
a) assessee engaged in manufacture of any article or thing
b) Allowed only on plant and machinery, installed for production
purpose.
c) Plant and machinery should not be a used / old one
d) Not allowed on office appliances and vehicles

d) Written down value:43(6)

Opening value of block as on 1st day of previous year xxxx
Add: Actual cost of assets acquired during the previous year in the same
block xxxx
Lee: Monies payable in respect of any asset which is sold, discarded, xxxx
demolished or destroyed in that block including any scrap value xxxx
Written down value for the purpose of depreciation xxx
Less: Depreciation
Closing WDV Xxxx

Page 45 of 101
 e) Rates of Depreciation:
Nature of asset Rate
- Residential buildings 5%
- Non residential buildings including hotels 10%
- Purely temporary erections such as wooden structure 40%
- Furniture & fittings including electrical fittings 10%
- Motor cars, other than running them on hire 15%
- Motor buses; motor lorries; and motor taxies used in business of 30%
running them on hire
- Aeroplanes, Aero engines 40%
- Computers including computer software 40%
- Air pollution, water pollution or solid waste control equipments 40%
- Energy Saving devices; renewal energy devices; rollers in flour
mills,; sugar works & steel industry 40%
- Plant & machinery 15%
- Books including annual publications or used in libraries 40%
- Intangible assets 25%

5) Scientific Research Expenditure: The following allowed as deduction:

a) Any revenue or capital expenditure (other than cost of land) for in house
scientific research related to business of assessee.
b) Any contribution to Notified research association / university / college/
company engaged in scientific research / National laboratory / University
/ IIT / Statistical research association, even if the research is not related
to business of assessee.
6) Sec 36 – Other deductions : The following deductions are permitted to
be claimed:
- Insurance premium Stocks and stores
- Insurance premium of health of employees
- Bonus or commission to employees
- Interest paid on borrowed capital
- Contribution from Employees towards welfare fund account
- Allowance for dead or permanent useless, animals used for the business
- Bad debts
- Contribution to approved welfare fund like PF ESI etc of employees, if paid
within due dates under respective acts.
- Provision for bad debts by banks & Public Financial institutions subject to
conditions.

7) Sec 37 – General expenditure : Any other expenditure will be allowed as

deduction if it satisfies all the below conditions:
a) not being expenditure specified in sec 30-36
b) not being capital or personal nature
c) not being for any purpose which is an offence or is prohibited by law

Page 46 of 101
 d) expended wholly or exclusively for purpose of business
However the following expenses are not allowed even if all above conditions
are satisfied

a) Expenses incurred for any purpose which is an offence or which is

prohibited by law.
b) expenditure incurred on advertisement in any souvenir, brochure,
pamphlet or the like published by a political party.
c) Corporate Social responsibility (CSR) expenditure incurred by companies
under companies act

INADMISSIBLE EXPENSES / EXPENSES NOT ALLOWED IN COMPUTING

BUSINESS INCOME

8) Inadmissible Expenditure:
a) Sec 40(a) :Any interest, royalty, fees for technical services or any other
sum chargeable to tax payable outside India or to non resident, on which
tax is not deducted at source. If remitted in subsequent previous year,
deduction allowed in that previous year.

b) Sec 40(a) : Any sum claimed as expenditure on TDS is deductible but not
deducted or tax so deducted not paid within the same previous year or
within due date of filing return of income, then 30% of such expenditure
shall be disallowed. If remitted in subsequent previous year, deduction
allowed in that previous year.

c) Sec 40(a) : Income Tax, wealth Tax, tax on perquisite of employee,

including interest thereon.

d) Sec 40(b) : In case of partnership firm, interest on capital / loan of

partners in excess of 12% pa and partners salary beyond specified limits.

e) Sec 40A(2) : Payments made in respect of goods, services or facilities

provided by specified persons which is considered to excessive and
unreasonable shall be disallowed. Specified person for individual means
Relative & person in whose business the individual or his relative has
substantial interest, that is 20% of share in profits.

f) Sec 40A(3) : Any payment for expenditure in respect of which payment

in respect of Rs.10,000 is made in a day otherwise than by electronic
modes. However in respect of payment made for plying, hiring or leasing
goods carriages, the limit is Rs.35,000. There are few exceptions to this
provision contained in Rule 6DD of Income Tax Rules.

Page 47 of 101
 g) Sec 40A(7) Provision made in respect of payment of gratuity except for
approved gratuity fund.

h) Sec 40A(9) Contribution made to unrecognized or non-statutory welfare

funds.

i) Sec 43B: The following expenses if not actually paid during the previous
year or within the due date of filing return of income: -
a) tax, duty, cess, or fee, by whatever name called under any law for
time being in force
b) Bonus or commission to employees
c) Interest on loan or advance from a PFI, SFC’s, SIIC, or scheduled bank
including co-op bank
d) Leave salary
e) contribution to any provident fund or superannuation fun or gratuity
fund or any other welfare fund of employees
f) Amount payable to Indian Railways
g) Any sum due to Micro and small enterprise which remains unpaid
beyond 45 days if any agreement exists for payment or 15 days if son
such agreement exists.
If these payments are made in any subsequent year, the same will be
allowed as deduction in that year.

TAX AUDIT

9) Sec 44AB Audit of accounts:

It is compulsory in the following cases to get the books of accounts audited by a
Chartered Accountant.

a) In case of any person having turnover exceeding Rs. 10 Crore irrespective

of category of person or nature of redeipts
b) In case a person carrying on business and not covered under section
44AD, or 44AE and if the turnover is greater than 1 Crore but less than 10
Crore, only if the receipts or expenditure is greater than 5% by way of
any cash.
c) In case of Individual or Firm, if gross receipts from specified profession
exceeds Rs. 50 lacs or 75 lakhs as the case be and not covered u/s 44ADA
d) In case of a person covered u/s 44AD or 44AE or 44ADA and declares
profit at lesser than the rates prescribed therein.

Page 48 of 101
 Practice Questions

Question 1

From the following information on plant and machinery used by assesse engaged
in business of manufacture of goods. Calculate the eligible depreciation as per
section 32 of the Income Tax Act for Previous year 2025-26, if the assessee is in
default tax regime.
- Opening written down value of Machine A – Rs. 13,50,000 and Machine B
– 8,00,000
- Machinery C purchased on 18.09.2024 – Rs. 4,00,000
- Machinery B sold on 20.09.2024 – Rs. 6,00,000
- Machinery D purchased on 15.03.2025 – Rs. 7,00,000
- Rate of depreciation 15%
What will be the depreciation if the assessee opts for optional tax regime.

Question 2
RR is engaged in business of transportation goods furnishes the details of his
transactions relating to the vehicles used in transportation for the year ending
2025-26
OPENING WRITTEN DOWN VALUE
- Motor lorry A –Rs. 12,20,000
- Motor lorry B –Rs. 6,30,000
- Motor lorry C –Rs. 15,00000
PURCHASED DURING THE YEAR
- Motor lorry D- Rs. 16,00,000 on 01.07.2024
- Motor lorry E –Rs. 8,50,000 on 04.09.2024
- Motor lorry F – Rs. 12,00,000 on 30.03.2025
SOLD DURING THE YEAR
- Motor lorry B –Rs. 7,50,000 on 01.05.2024
- Motor Lorry C – Rs. 12,00,000 on 30.03.2025
Calculate Depreciation (rate of depreciation 30%) for FY 2024-25 and WDV as on
31.03.2025

QUESTION 3
Calculate depreciation allowable for assessment year 2025-26 from the following
information in case of BB Ltd engaged in manufacture of computers, assuming
he has not opted for optional tax regime.
i. Factory Building – Opening WDV 10% 5,00,000
ii. Plant & Machinery Opening WDV 15% 18,00,000
Additions :

Page 49 of 101
 30.06.2024 1,00,000
31.12.2024 1,00,000
31.01.2025 60,000

Sale – 01.12.2024 4,00,000

iii. Furniture Opening WDV – 10% 1,00,000
iv. 2 Computers purchased on 01.01.2025 – 40% 1,60,000
v Motor Car Opening WDV – 15% 1,20,000
One of the computer is installed for manufacturing process. The Machinery
purchased on 31.12.2024 is a used machinery.
What will be the allowable depreciation if BB ltd has opted to pay tax u/s
115BAC (Default Tax regime)

QUESTION 4
Shastri, an individual carries on own business. An analysis of his trading and profit and loss
account for the year ended 31 st March 2025 revealed the following information:
The net profit was Rs. 11,20,000
- The amounts credited to P/L Account include Dividend from UTI 22,000; Interest
on debentures 17,500 & winning from races Rs. 15,000
- It is found that some stocks were omitted from opening stock valued Rs. 8,000
and closing stock valued 12,000
- Rs.1,00,000 debited to profit and loss account being contribution to university
approved under section 35
- Advertisement includes 150 gift packets of dry fruits costing Rs. 1000 each given
to important customers
- Car expense Rs. 78,000 debited to p/l. 3/4th is for business purpose
- Misc expenses include Rs. 30,000 paid by cash to goods transport operator and
Rs. 28,000 paid towards advertisement
- Depreciation debited to books was Rs. 55,000. Depr as per income tax rules was
Rs. 50,000.
- No deduction of tax at source has been made on interest of Rs. 95,000/- paid
- Bonus of Rs. 84,000 debited to p/l account is still not paid
- Rs.81,000 towards contribution to Recognised provident fund of employees of
which Rs. 24,000 is only paid.
- GST penalty of Rs. 24,000 is debited to profit and loss account
- Rs. 14,000/- for sponsoring education of a poor child debited to P/L a/c
- Investments Purchased Rs. 15,000 debited to p/l account.
Compute Income from business of Shastri for Assessment year 2025-26.

QUESTION 5
Pvt Ltd, a company engaged in software development services furnishes the following profit
and loss account for the year ending 31 st March 2025

Page 50 of 101
 Particulars Rs. Particulars Rs.
To Salaries 56,00,000 By Gross receipts 1,30,00,000
To Rent 11,00,000 By interest on Income Tax
To Repairs and maintenance 3,00,000 refund 1,00,000
To Development expenses 4,00,000
To Professional Charges 5,00,000
To Travelling 4,00,000
To Staff welfare 3,00,000
To Audit fees 2,00,000
To Business promotion 1,00,000
To Interest on bank loan 2,00,000
To loss on sale of car 2,00,000
To Depreciation 3,00,000
To Provision for Tax 8,00,000
To Net profit 27,00,000
1,30,00,000 1,30,00,000

i) Rent includes Rs. 3,00,000 on which tax is not deducted at sources

ii) Business promotion includes Rs. 20,000 towards fine and penalties
iii) Travelling of Rs. 50,000 is paid by cash
iv) Travelling expense include Rs. 70,000 towards personal travel of directors.
v) Interest on bank loan is yet to be paid and salary of Rs. 6,00,000 is paid on
15.04.2025.
vi) Depreciation as per income tax is Rs. 2,00,000
vii) Repairs and maintenance include Rs. 1,00,000 on purchase of air conditioner.

QUESTION 6
Mr Peter an architect submits his Income and expenditure and other information as detailed
herein:
Particulars Rs. Particulars Rs.
To Salaries 33,00,000 By Gross professional 1,80,00,000
To Bonus 2,00,000 Receipts
To Rent 4,00,000 By Interest 25,000
To Professional Charges 4,00,000 By Dividends 38,000
To income Tax 6,00,000 By Profit on sale of
To GST 12,00,000 securities 2,00,000
To Electricity charges 1,00,000 By income tax refund 30,000
To Travelling 5,00,000
To Staff welfare 3,00,000
To Audit Fees 1,00,000
To Commission 3,00,000
To Business promotion 4,00,000
To Depreciation 3,00,000
To Excess of income 1,01,93,000
1,82,93,000 1,82,93,000

Other information:

Page 51 of 101
 i) Business promotion includes Rs. 3,00,000 towards food, catering, decoration, gifts
etc on account of inauguration expenses on shifting his office to a new premises.
The guests included his clients, staff, family and friends
ii) Travelling expense included travel expense of son’s vacation to dubai amounting
to Rs. 85,000
iii) GST payment includes GST penalty of Rs. 2,00,000
iv) TDS is not made on professional charges payment of Rs. 1,00,000
v) A provision is made for bonus and is not yet paid
vi) Commission includes Rs. 50,000 paid by cash

Mr Peter intends to offer his taxable professional income on presumptive basis u/s 44ADA of
the Act. Explain whether he can do so, with all relevant conditions of the said section and
compute his taxable professional income.

QUESTION 7
Mr Sumo, an individual, gives the following Trading and Profit and loss account for the year
ending 31st March 2025
Particulars Rs. Particulars Rs.
To Opening Stock 71,000 By Sales 2,32,00,000
“ Purchases 1,86,99,000 “ Closing Stock 2,00,000
“ Wages 5,70,000
“ Gross profit 40,60,000
2,34,00,000 2,34,00,000
To Administrative Expenses 17,83,000 By Gross Profit 40,60,000
“ GST penalty 5,000
“ GST paid 1,10,000
“ General Expenses 54,000
“ Interest on Bank 60,000
“ Depreciation 2,00,000
To Net profit 20,48,000
40,60,000 40,60,000
Following are the further information
- Administrative charges include Rs. 46,000/- paid as commission to his brother.
The commission amount at market rate is Rs. 35,000
- The closing stock has been undervalued by Rs. 40,000
- He paid Rs. 33,000 in cash to a transport carrier and included in wages. He also
paid one time cash payment of Rs. 85,000 on purchases
- Wages include Rs. 90,000 on which tax is not deducted at source
- General expense include Raju’s life insurance premium of Rs. 8,000/- and staff
medical insurance premium Rs. 4,000
- Interest on bank actually paid up to 31.03.2025 is Rs. 20,000/-; Rs. 15,000 paid in
June 2025 and balance yet to be paid.
- GST paid is for FY 2019-20, on account of completion of GST assessment,
wherein it was found that the said amount was short paid during that year.
Sumo intends to offer his business income on presumptive basis u/s 44AD of the Act. Explain
whether he can do so with all relevant conditions and based on your explanation, compute
taxable business income for AY 2025-26.

Page 52 of 101
Question 8
Printer, an individual is engaged in marketing business and submits the following
is the profit and loss account for the previous year ending 31st March 2025
Particulars Rs Particulars Rs
To Business Expenses 145000 By Commission received 1800000
To Salaries 336000 By Bad debts recovered 63000
By Refund of
To Income Tax Payable 10000 Income Tax 42000
To Interest on Income Tax 5000 By Interest on FD 18000
To GST 90000
To Depreciation 60000
To Employers Contribution to
RPF 12000
To Commission 24000
To Staff welfare 82000
To Provision for Bad Debts 7000
To Bad debts 5000
To Sundry Expenses 120000
To Net Profit 1027000
13,23,000 13,23,000
Additional Information:
a) Salary include Rs. 18,000 paid to his son who works on part time basis in
his business
b) 25% of Income Tax and GST have been paid before the due date of
Furnishing Return and balance still unpaid
c) The depreciation as per income tax rules is Rs. 23,000
d) TDS is not deducted on commission.
e) Salary include an one time payment of Rs. 15,000 by cash
f) Staff welfare includes an office outing cost of Rs. 29,000/-
g) Sundry expense includes Rs. 14,000/- towards gift of articles given to
customers, and Rs. 6,000 towards gift to his another son.
h) Printer incurred Rs. 51,000/- towards travel and stay expense on trip to
dubai. The trip was to explore business opportunity which could not
materialise.
i) Contribution Provident fund is yet to be paid
Compute the taxable business Income for the assessment year 2025-26

Question 9
Explain the provision relating to computation of professional income on presumptive basis
with all relevant conditions and compute taxable professional income of Mr N, a lawyer who
submits his below income and expenditure account:
Expense Rs. Income Rs.

Page 53 of 101
 To Salaries 18,00,000 By Gross receipts 49,00,000
To Rent 6,00,000 By Interest 1,00,000
To Professional charges 3,00,000 By Rent 2,00,000
To Travelling 2,00,000 By Dividend 3,00,000
To Stationery 50,000
To Staff welfare 1,00,000
To Repairs 1,50,000
To Depreciation 2,00,000
To Fuel expenses 3,00,000
To Income Tax 2,00,000
To Profession Tax 10,000
To Net Income 15,90,000
55,00,000 55,00,000
- Rent includes Rs. 45,000 paid by cash
- Salary includes Rs. 1,50,000 which is not paid, but due
- Staff welfare includes Rs. 30,000 towards office staff outing at a resort
- Repairs include Rs. 68,000 towards repair of car
- Fuel expenses is on account of fuel bills of car and depreciation wholly pertains to
car which is as per provisions of income tax act.
- It is estimated that 30% of usage of car is for personal purpose.
Mr N Intends to declare the professional income as per above transactions and not opt for
Section 44ADA. Compute is taxable professional income with a explanation of the additional
compliance that he has to get done with respect to his professional income.

Question 10
State with reasons in support of relevant provisions of Income tax act, the allowability of the
below expenses / payments in computing taxable business income:
i) Provision for payment of gratuity Rs. 6,00,000 of which Rs. 2,00,000 is paid in
July 2025 and balance remains un paid
ii) Payment of Rs. 30,000 to a transporter, salary of Rs. 20,000 and GST of Rs.
90,000 by cash
iii) Royalty of Rs. 50,000 to a Non resident on which Tax is not deducted at source as
the recipient did not agree to bear the TDS
iv) Professional fee of Rs. 90,000 paid to specified relative of which Rs. 30,000 is
considered to be excessive
v) Advertisement of Rs. 1,20,000 paid towards advertisement in a publication owned
by political party
vi) Penalty of Rs. 50,000 for violation of GST provisions
vii) Income tax and interest on income Tax Rs. 1,00,000

Page 54 of 101
 IV-E: INCOME CHARGEABLE UNDER HEAD CAPITAL GAIN

Essential conditions for taxing capital gains:

1) there must be a capital asset

2) the capital must have been transferred
3) the transfer takes place during the previous year
4) profits or gains arises on such transfer.

A. CAPITAL ASSET
i) Sec 2(14) Capital Asset:
Capital asset means

- property of any kind held by the assessee whether or not connected with
his business or profession
- Securities held by foreign institutional investors in accordance with sebi
regulations
but does not include:

i) stock in trade, consumables or raw materials held for purpose of

business or profession
ii) personal effects that is movable property held by the assessee or any
member of his family including wearing apparel and furniture. Personal
effect should not be jewellery, paintings, archaeological collections,
drawings, sculptures or work of art
iii) agricultural land in Indian not being land situated in specified area

Page 55 of 101
 iv) gold deposit bonds under Gold deposit scheme 1999/ Deposit certificate
issued under Gold monetization scheme.

ii) Short Term Capital Asset

Capital asset held by an assessee for 24 months or less than 24 months
immediately preceding the date of its transfer is Short term capital asset.
However, in case of a security listed in a recognized stock exchange, or a unit of
an equity oriented fund or a unit of the Unit Trust of India or a Zero Coupon
Bond will be considered as a long-term capital asset if the same is held for more
than 12 months immediately preceding the date of its transfer

iii) Long Term capital Asset

A capital asset which is not a short term capital asset is Long term capital asset.
An asset which is held for more than 12 months in case of listed securities, 24
months in case any other asset will be considered as long term capital asset.

iv) Period of inclusion / exclusion for Long term or short term capital asset

Page 56 of 101
Case Exclusion/inclusion of period
Property acquired in any of modes Period of holding of asset by previous
specified u/s 49(1), like gift, will etc., owner shall be included

bonus shares Period from the date of allotment of

such financial asset shall be
reckoned.

*************************************************************

B. TRANSFER / SALE

i) Sec 2(47) Transfer includes:

i. sale, exchange or relinquishment of the asset
ii. extinguishments of any rights therein
iii. compulsory acquisition of capital asset under any law
iv. conversion or treatment of capital asset into to stock in trade
v. maturity or redemption of zero coupon bonds
vi. any transaction involving allowing of the possession of an immovable
property to be taken or retained in part performance of contract of the
nature referred in Sec 53A of TOPA 1882
vii. any transaction whether by way of acquiring shares in or by way of
becoming a member of co-op society company or other association of
person or by way of any arrangement or agreement or in any other
manner which has the effect of transferring, or enabling the enjoyment
of, any immovable property.

ii) Sec 47 - Transaction not regarded as transfer:

1. Transfer of capital asset in total or partial partition of HUF

2. Transfer of capital asset by way of gift will or irrevocable trust, by an
individual or HUF
3. Transfer by Holding company to its wholly owned Indian subsidiary
company
4. Transfer by Subsidiary company to its 100% holding Indian company
5. Transfer by Amalgamating company to amalgamated Indian Company
6. Transfer by demerged company to resulting Indian company or vice versa.

Page 57 of 101
7. Transfer of shares in amalgamating company in lieu of shares in in
amalgamated Indian company
8. Transfer of shares by the shareholder of a demerged company in a scheme
of demereger in consideration of the shares transferred or issued in the
resulting company
9. Transfer of Govt security outside India by one Non resident to another non
resident.
10. Redemption of sovereign Gold Bonds.
11. Transfer of capital asset being any work of art, archeological or scientific or
art collection, any book manuscript, painting, drawing, etc., to the
government or university or notified museums, art gallery or approved
institutions.
12. Conversion of debentures, debenture stock, deposit certificate of company
into shares or debentures of that company
13. Conversion of preference shares into equity shares.
14. Transfer of capital asset where the proprietary concern or Firm is converted
into a company subject to conditions
15. Transfer of capital asset under reverse charge

***********************************************************

C. SCOPE OF CHARGEABILITY

i) Scope and year of chargeability- Sec 45

Transaction Year of chargeability Consideration

(1) Transfer of capital Previous yr. in which Consideration for transfer

asset transfer takes place

(2) Conversion of capital Previous yr in which FMV as on date of

asset in to stock in stock in trade is sold conversion
trade

(3) Transfer of capital Previous year in which Value recorded in the

asset by a partner/ transfer takes place books of the
member to the firm/ firm/AOP/BOI
AOP/BOI

(4) Transfer of capital Previous year in which Fair market value as on

asset by way of transfer takes place date of transfer
distribution on
dissolution or

Page 58 of 101
 otherwise of a firm or
AOP/BOI

(5) Transfer of capital Previous year in which The initial or enhanced

asset by way of compensation is compensation received
compulsory received
acquisition under any
law

(6) Individual or HUF Previous year in which Stamp duty value of his
entering into certificate of share in project plus
agreement for completion for whole payments received if any
development of or part of project
project received

D. Sec 48 – Computation of Capital gain:

I) If transfer takes place on or after 23.07.2024

Full value consideration A

Less: Expenses in connection with transfer B

Net consideration( A-B) C

Less: Cost of acquisition / Cost of improvement D

Gross capital gains E

Less Exemption u/s 54B & 54D for short term capital gain

U/s 54, 54B, 54D, 54EC & 54F for long term gain F

Net capital gain G

II) Computation of Capital gain: If transfer takes place up to

22.07.2024

Page 59 of 101
Full value consideration A

Less: Expenses in connection with transfer B

Net consideration( A-B) C

Less: Cost/Indexed cost of acquisition / Cost of improvement D

Gross capital gains E

Less Exemption u/s 54B & 54D for short term capital gain

U/s 54, 54B, 54D, 54EC, 54EE & 54Ffor long term gain F

Net capital gain G

E. TAX RATES ON CAPITAL GAINS

Sec Nature of Gain Tax rate

111A STCG on listed equity shares or Flat 15% for transfer up to

units of equity oriented funds if STT 22.07.2024 and 20% thereafter
paid OR in recognized stock
exchange located in International
Financial Services Centre

112A LTCG exceeding Rs. 1,25,000/- on Flat 10% for transfer up to

listed equity shares or units of 22.07.2024 and 12.50%
equity oriented funds, if STT paid. thereafter

OR in recognized stock exchange

located in International Financial
Services Centre

112 a) LTCG on any other Listed 10% without indexation or 20%

security or zero coupon bonds with indexation
b) LTCG on unlisted securities or
shares in case of non
residents or foreign
company

Page 60 of 101
 c) Unlisted securities 10% for Non residents and foreign
companies without indexation or
currency fluctuation

Other assessees – 20%

d) LTCG on any Other assets:

i. Land or building or both held
by resident individual or HUF a) 20% for transfer up to
(Note: For the purpose of Total 22.07.2024
income, capital should be computed b) 20% with indexation benefit
without indexation benefit or 12.50% without
indexation benefit for
irrespective of date of transfer)
transfer on or after
23.07.2024
ii. Any other long term capital 20% for transfer up to 22.07.2024
asset other than above and 12.50% for transfer on or
after 23.07.2024
Any other short term capital gain not Normal applicable rates
covered in Section 111A above

Other points:

1) In case of resident individual or HUF, the STCG taxable u/s 111A OR LTCG
taxable u/s 112A or 112, shall be reduced by the unexhausted basic
exemption limit and the balance only will be tax at special rates
2) Deduction under Chapter VIA cannot be claimed against the gains taxable
u/s 111A, 112A or 112

****************************************************

F. SALE CONSIDERATION

Page 61 of 101
 i) Immovable property – Deemed consideration – Sec 50C :
In a case where the consideration received or accruing as a result of the
transfer of land or building or both, is less than the value adopted or assessed
for the purpose of payment of stamp duty, the value so adopted for the purpose
of stamp duty purpose shall be the value of consideration.

Situation Consideration

Stamp duty value does not exceed The actual sale consideration
110% of Sale consideration

Assesee accepts the stamp duty Stamp duty valuation

valuation.

Assessee disputes the stamp duty The valuation as finally accepted for
valuation under the Stamp Act, stamp duty purpose

Assessee claims that the stamp duty If value determined by valuation

valuation exceeds the FMV officer is less than stamp valuation,
then such value.

If the value determined by valuation

officer is more than stamp duty
valuation, then value adopted for
stamp duty valuation.

ii) Unlisted Shares – Section 50CA –

If the consideration received from sale of unlisted shares is less than the FMV of
the share as on date of transfer, then the FMV of share shall be taken as sale
consideration

iii) Consideration not determinable : Section 50D –

In case of any asset, the consideration if not determinable shall be the fair
market value on the date of such transfer.

Page 62 of 101
 iv) Any other Asset –
The actual transaction value for the capital asset dealt with.

****************************************************************
*

G. COST OF ACQUISTION AND IMPROVEMENT

i) Determination of cost of acquisition : Sec 49 & Sec 55

Nature of asset Cost of acquisition

Asset acquired by the assessee Actual cost incurred by the assessee

Assessee acquired an asset in Cost to the previous owner

specified modes such as gift, will,
inheritance, amalgamation etc

Goodwill of business, trade mark , If purchased – Purchase price;

brand name, right to mfr, produce or
process, right to carry or business,
tenancy rights, stage carriage In other cases – NIL
permits or loom hours

Shares of amalgamated Cost of shares of amalgamating company

Allotment of additional financial asset Amount actually paid

Shares in resulting company Cost of shares of demerged company in

proportion to net asset transferred

Financial asset allotted without NIL

payment - Bonus shares
If allotted prior to 1.4.01 FMV on 1.4.01
may be taken.

Page 63 of 101
Asset acquired prior to 1-4-01 In case of Immovable properties, the
Stamp duty value as on 01.04.2001. Any
other asset FMV as on 01.04.2001

Sale of depreciable asset Opening WDV + Cost of asset acquired

during the year – 50

Property received as gift taxable Income offered at the time of receipt of

under income from other sources gift

Inventory converted into capital FMV of inventory on date of conversion

asset and sold

ii) Cost of Improvement : Sec - 55(1)

1. Any capital expenditure incurred towards the improvement of capital asset
and not allowed as deduction under any other head of income can be
claimed as cost of improvement.
2. In relation to capital asset being goodwill of business, right to manufacture,
produce or process any article or thing, or right to carry on any business
cost of improvement shall be taken to be nil
3. Cost of improvement incurred prior to 1-4-01 is not considered.

iii) Indexed Cost of acquisition/Improvement: -

1. The benefit of indexation available on transfer of long term capital asset only
on long term capital assets transferred before 23.07.2024, excluding on
depreciable assets, bonds and debentures.
2. In case of transfer of capital asset being land or building or both, by a
resident individual or HUF, on or after 23.07.2024, the benefit of indexation is
available at the option of assessee.

iv) COST INFLATION INDEX NUMBERS

Page 64 of 101
 *******************************************************

H. EXEMPTIONS FROM CAPITAL GAINS:

Sec Applic Asset sold New Asset Conditions Exemption

ability

Page 65 of 101
54 Individ Residential If Capital gain is Within 1 year Capital gains or
ual house less than 2 Crores before or 2 years amount invested
– Two Residential after house is Not exceeding 10
(Long Term) House in India purchased, or Crores, whichever
HUF within 3 years is less
If more than 2 Cr – constructed
One Residential
house

54B Individ Urban Agriculture Land used by him or his Capital gains or
ual Agricultural parent in 2 years amount invested
land immediately the whichever is less
date of transfer for
Long term or agricultural purpose
short term
Within 2 years for
transfer purchase
agricultural land

54EC Any Any Long Bonds of NHAI or Amount to be Capital gains or

term Capital Rural Electrification invested Within 6 amount invested
Assess asset or notified bonds months from date whichever is less.
ee of sale.
Max 50L
exemption

54F Individ Any asset One residential - should not own Capital gains
ual, other than house in India more than one
Net consideration
HUF residential house on transfer
house date x

(Long Term) - within 1 year Amount invested

before or 2 years [not exceeding 10
after purchased, or crores]
within 3 years
constructed
(gains/Net
consideration x
invested [not
exceeding 10
crores)

Under sec 54 54B where the new asset acquired, is transferred within a

period of 3 years from the date of its acquisition, the cost of such asset shall

be reduced by the amount of capital gain exempted earlier and the short

Page 66 of 101
 term capital gains shall be computed after deducting such reduced cost of

acquisition

Under sec 54F if the specified asset or the new asset is transferred within a

period of three years then the capital gain exempted earlier shall be taxed in

the previous year in which such asset is transferred.

Capital gains accounts scheme: The amount of capital gain u/s 54, 54B, 54F

which is not utilized by the assessee for the purchase of new assets within the

time allowed for the purpose, can be deposited in an account under Capital

Gains Accounts Scheme.

i) the deposit shall be made before furnishing the return of income or

within the due date for furnishing the return of income u/s139(1),
whichever is earlier
ii) the deposit shall be made in an account with a bank or institution
approved for the purpose
iii) the amount deposited can be withdrawn for utilization in accordance
with the scheme for specified purpose
iv) if the amount not utilized for acquiring the new asset within the period
stipulated under respective sections, to the unutilized amount shall be
treated as the capital gain of the previous year in which the period
specified in the above provisions expires. However for Sec 54F only
proportionate gain will be taxable.

**********************************************************

PRACTICE QUESTIONS

1. Priya sold an urban agricultre land on 10.05.2024 for Rs. 85,00,000/- She
paid brokerage of 1% on sale value. This property was purchased by her in
Aug 2016 for Rs. 36,00,000/- Calculate taxable capital gains. CII for 2016-
17 – 264 and 2024-25 - 363

Page 67 of 101
 2. Seal sold the following assets during FY 2024-25
a) Personal Motor Car for Rs. 8,50,000/- on 15.07.2024. This was purchased
by him in 2015 for Rs. 7,00,000/-
b) Plant and machinery on which depreciation is claimed in his business, for
Rs. 21,50,000/- on 31.08.2024. This machinery was purchased at Rs.
30,00,000/- in June 2014 and the WDV as on 01.04.2024 is Rs.
16,00,000/-
c) Personal jewellry for Rs. 18,50,000, on 18.08.2024, which was received by
him as gift on his marriage in 1998. The FMV as on 01.04.2001 was Rs.
3,50,000
d) A house property for Rs. 99,00,000/- on 10.08.2024, on which he paid
brokerage of 2%. He had purchased a vacant plot at Rs. 6,00,000 in 2006-
07 and constructed house in 2009-10 at Rs. 15,50,000.
All the proceeds from above sale is used to repay his loans and liabilities, except
for an amount of Rs 25,00,000 which is used for purchase of residential flat in
Dec 2024
Compute taxable gain for PY 2024-25
CII 2001-02 : 100; 2024-25 - 363; 2014-15 :240; 2006-07 :122; 2009-10 :
148.

3.
Vikas a member HUF of received his share of residental house property from
HUF which got partitioned on 01.05.2018. This property was acquired by
HUF on 30.09.2013 for Rs. 20,00,000/-.
His father expired on 28.02.2024 and vikas inherited another residential
property of his father. This property was purchased by his father on
01.03.2023 for Rs. 14,00,000.
Both these properties were sold by Vikas on 31.12.2024 at Rs. 49,00,000/-
of the property received from HUF and at Rs. 82,00,000/- of property
received by inheritance.
He has purchased a residential flat in May 2024 at Rs. 30,00,000. Calculate
taxable gains.

4.
Mr.Roy aged 55 years owned a Residential house in Gaziabad. It was
acquired by Mr.Roy on 10-10-2007 for Rs. 18,00,000. He sold it for
Rs.1,85,00,000 on 4-11-2024. The stamp valuation authority of the fixed
value of the property at Rs. 1,90,00,000. The assessee paid 2% of the sale
consideration as brokerage on the sale of the said property.

Mr.Roy acquired a residential house property at kolkata on 10-12-2024 for

Rs. 47,00,000 and purchased Rural electrification bonds for Rs. 3,00,000 on
10-4-2025 and Rs. 5,00,000 on 15-6-2025. He deposited Rs. 4,00,000 on

Page 68 of 101
 6-7-2025 and Rs.9,00,000 on 1-11-2025 in the capital gain deposit scheme
in a Nationalised bank for purchase of another residential house property in
kolkata.
Compute the capital gain chargable to tax for the Assessment year 2025-26.

5.
Mr. Martin, a resident individual, sold his residential house property on 08-
08-2024 for Rs.80 lakhs which was purchased by him for Rs. 12,50,000 on
05-05-2006. The stamp duty valuation assessed by sub registrar was Rs.98
lakhs.
He paid Rs. 1 lakh as brokerage for the sale of said property.
He bought another house property on 25-12-2024 for Rs. 15 lakhs.
He deposited Rs.5 lakhs on 10-11-2024 in the capital gain bond of National
Highway Authority of India (NHAI).
He deposited another Rs.10lakhs on 10-07-2025 in the capital gain deposit
shceme with SBI for construction of additional floor of house property.
Compute income under the head “Capital Gains” for the A.Y 2025-26 with
supporting explanations for exemption claimed.

6. Mr.Vivan furnishes the following data for the previous year ending
31.03.2025
a) Unlisted equity shares of AB Ltd ., 10,000 in numbers were sold on
31.07.2024, at Rs.950 for each share.
b) The above shares of 10,000 were acquired by Vivan in the following manner:
I. Received as gift from his father on 1.06.2000 (5000 shares) the fair
market value on 1.04.2001 Rs.200 per share.
II. Bonus shares received from AB Ltd . on 21.7.2008 (2,000 shares).
III. Purchased on 1.9.2023 at the price of Rs.350 per shrare (3,000
shares).
c) He Purchased one residential house at Rs.45 lakhs, on 1.5.2025 from the
sale proceeds of shares. He is already owning a residential house, even
before the purchase of above house.
You are require to compute the taxable capital gain.

7. Ajay purchases a house property with Ground Floor building in 1991 for
Rs. 20,06,000. He made the following additional improvements to the
property:
- Cost of construction of First Floor in 1993-94 – Rs. 1,90,000
- Cost of Construction of Second floor in 2003-04 – Rs. 4,50,000
- Reconstruction of whole property in 2013-14 – Rs. 15,50,000
The fair market value of property on 1st April 2001 is Rs.28,50,000. This house
is sold by ajay on 10th Sep 2024 for Rs. 5.50 Crores. The stamp duty value
assessed for this property is Rs. 6,20,00,000 which ajay or the purchaser have
not objected for. Ajay paid commission @ 2% on sale value.
From the sale consideration received ajay purchases two residential houses in
March 2025, one for Rs. 1.30 crores and another for Rs. 2.10 crores.
compute capital gains for Assessment year 2025-26.

Page 69 of 101
 CHAP IV F – INCOME FROM OTHER SOURCES

A. Sec 56 – Chargeability
The following income shall be charged to tax under head “income from other
sources”

a) Dividends
b) Income by way of winning from lotteries, cross word puzzles, races
including horse race, gambling, betting etc.
c) Incomes like interest on securities; letting of machinery, plant or furniture
together with or without building; employees contribution to welfare funds
etc if not charged under head business or profession
d) Sum received under keyman insurance policy if not charged under head
‘salaries’ or under ‘business or profession’
e) Interest on compensation or enhanced compensation
f) Any advance received against sale of capital asset and forfeited.
g) Sum of money or property received by any person as detailed below:

Page 70 of 101
 a) The sum is not taxable if received
e) from a relative
f) on occasion of the marriage of individual
g) under a will or by way of inheritance
h) in contemplation of death of payer
i) received from local authority
j) received from any fund, foundation, university, other educational
institution, hospital, medical institution,, any trust, or institution
referred in section 10(23C), charitable institute registered u/s 12AA
k) from such class of persons and subject to conditions as may be
prescibed
b) Relative means:
a) Spouse of individual
b) Brother or sister of individual
c) Brother or sister of spouse of individual
d) Brother or sister of either of the parents of individual
e) Any lineal ascendant or descendant of the individual
f) Any lineal ascendant or descendant of the spouse of individual
g) Spouse of the person referred in b – f

B. Sec 57 – Deductions:
a) In respect of family pension a sum equal to 33.33% of the pension or
Rs.15,000 whichever is less.
b) In case of dividend deduction of interest on funds taken for investment in
securities subject to limit of 20% of such income.
c) In case of lease rental on letting of machinery, plant and furniture with or
without building, the following shall be deducted; a) Repairs b) Insurance
c) depreciation
d) Interest received on compensation or enhanced compensation – 50% of
such interest.
e) Any other expenditure not being capital expenditure, wholly and
exclusively for purpose of earning income.

Page 71 of 101
 C. Sec 58 – Inadmissible expenses
a) personal expenses
b) wealth tax
c) expenses of the nature specified in 40A
d) any interest or salary chargeable under this act and paid outside India
without TDS
e) Cash payment in excess of Rs. 10,000
f) No deduction shall be allowed in respect of winnings from lotteries, cross
word puzzles, card games, races include horse race, gambling betting etc

D. Exempted income under head income from other sources

a) Interest on notified securities, bonds, annuity certificates or other savings
certificates. – Tax free bonds of Indian Railway finance corporation, NHAI,
RECL, HUDCL, Indian infrastructure Co Ltd., Power finance corporation
etc.,
b) Interest on Non resident external account
c) Interest on Sukanya samruddhi account
d) Interest on post office savings account up to Rs. 3,500 in case of single
account and Rs. 7,000 in case of joint account
e) Family pension received by member of armed forces, where the death has
occurred in course of operational duties
f) Family pension received by member of armed forces, who has been
awarded notified gallantry award

E. Tax rates of income under the head other sources

Nature of income Tax rates

Casual incomes like lottery Flat 30%, without any deductions. Basic
winnings, races, betting, tv show exemption limit cannot be used. +
etc., surcharge if applicable + health cess 4%
Unexplained cash credits, 60% income tax
investments, money, bullion, 25% Surcharge on Income Tax
jewellery or expenditure 4% of health cess on IT and Surcharge
Effective rate 78%

Other incomes under income from Regular normal applicable rates

other sources

1) Following information compute taxable income from other sources

a) Income from interest on fixed deposit with SBI Rs 12,000.
b) Interest on listed bonds of a public sector company Rs 17,940[net of TDS
of 10%].
c) Interest on post of savings bank account Rs. 12,000
d) Royalty on publication of a book in Economics Rs 30,000, he incurred Rs
9,000 as incidental expenses in connection with publication of the book.

Page 72 of 101
e) Income from coffee plantation in Coorg Rs 90,000.
f) Divided received from a co-operative society Rs 16,000.
g) Lottery winnings received Rs 34,550[net of TDS of 30%]
h) Family pension on account of Mrs X (who was government employee and
expired in 2014) Rs. 1,98,000 during the year
i) Purchase of immovable property at Rs. 15,00,000 and the stamp duty
value as on date of purchase is Rs. 15,80,000.
j) Received Gift from Son in law Rs. 25,000. He also received gifts worth Rs.
52,000 from his friends on his birthday.

Page 73 of 101
CLUBBING OF INCOME

Page 74 of 101
Page 75 of 101
SET OFF AND CARRY FORWARD OF LOSSES

Page 76 of 101
Page 77 of 101
Page 78 of 101
 Chapter VI-A Deductions

1. Deduction under Chapter VI-A covers sections 80C to 80U

2. The aggregate deductions under Chapter VI A cannot exceed the
Gross total income
3. Chapter VIA deductions not allowed from Long Term capital gain,
Short term capital gain taxable u/s 111A, winnings from lotteries,
cross words, card games etc;
Section Nature of benefit
&
Eligibility
80C,80C The following investments & payments, inter alia, with a maximum
CC, limit of Rs I,50,000 are eligible for deduction:
80CCD,
- a) Life insurance subject to limit of 10% of sum assured
Individ b) Deferred annuity payments
uals c) Contributions made to Employees Provident Fund Scheme, Public
and Provident Fund, recognized provident fund, approved
HUF superannuation fund
d) Subscription National Savings Certificates
e) Contribution to notified unit linked insurance plan of LIC, Mutual
Fund.
f) Subscription to notified deposit scheme or notified pension fund set
up by National Housing Scheme
g) Repayment of principal amount borrowed for purchase/
construction of residential house property
h) Payment of tuition fees for the full time education of 2 children
i) Investment in 5 year term tax saving fixed deposit with scheduled
bank.
j) Stamp duty paid on purchase of residential house property
k) Amount deposited under senior citizen saving scheme
l) Subscription of NABARD Bonds
m) Amount deposited in five year time deposit scheme in post office
n) Amount deposited in Sukanya Samvruddhi account
o) Contribution to pension plan scheme of Central Govt, upto 10% of
salary and matching contribution by the Employer. Even self
employed contribution to notified pension scheme eligible. –
Additional extra deduction of 50,000 allowed for this
contribution over and above Rs. 1,50,000/-
80-D Medical Insurance Premium -
Individ a) Insurance premium on health of self, spouse and children,
uals / deduction up to Rs. 25,000/-. In case individual or spouse is
HUF senior citizen deduction up to Rs. 50,000/-
b) Insurance premium on health of parents deduction up to Rs.
25,000/-. In case any of parent is senior citizen deduction up to
Rs. 50,000/-
c) Amount paid otherwise than by way of cash towards medical
expenditure incurred on health of assesse or his family member
or his parent who is senior citizen but not covered under medical

Page 79 of 101
 insurance policy
d) Payment for preventive health check up of self, spouse, parents
or children – deduction up to Rs. 5,000. (but subject to overall
limits of Rs. 25,000 / 50,000 state above.
80-DD – Deduction of Rs. 75,000/- where any expenditure has been incurred for
In/HUF the medical treatment of a dependant being person with disability. In
case of severe disability, enhanced deduction of Rs. 125,000/-.
80-DDB Expenses actually incurred on medical treatment of specified diseases
– In/HUF and ailments, up to Rs. 40,000/-.
In the case of senior citizens, enhanced deduction of Rs. 1000,000/- is
available.
80-E : Deduction allowed for Interest on loan taken from financial
institution/approved charitable institution for pursuing specified higher
education of self, spouse or children. (for a maximum period of 8 years
from the year of repayment).
80EEA Interest on loan taken from bank or Financial institution up to Rs.
1,50,000, if the following conditions satisfied
- Loan should be taken during bw 01.04.19 to 31.03.21
- Stamp duty value of the house to be less than or = 45 Lakhs
- The individual should not own any house on date of sanction
80EEB Interest on loan taken for purchase of electric vehicle from bank or
financial institution up to Rs. 1,50,000, if loan is taken after 01.04.2019
80-G – (1)Donations to funds of national imp.@ 100%
IND (2)Donation to other approved funds, trusts, charitable institutions etc.
@50% restricted to 10% of Gross Total Income.
(3) sums paid for renovation ,repair of notified religious buildings
restricted to 10% of Gross Total Income.
(4) any sum to IOA or any notified sports asso/institution restricted to
10% of Gross Total Income.
80-GG _ Rent paid by any person who is not employed or not in receipt of HRA.
Ind Deduction permitted to the extent of least of following :
a) 25% of Gross total income (after deduction of other sections)
b) Rent paid minus 10% of Gross total income
c) Rs. 5,000 per month.
80 GGB Donation by individuals to registered Political parties.
80 GGC Donation by companies to registered Political parties
80-QQB Deduction up to a maximum of Rs. 3 lakh of income received by way of
royalty or copyright fee for any book of literary, artistic or scientific
IND nature.
80-RRB Deduction up to a maximum of Rs. 3 lakh of income received by
– IND way of royalty in respect of a patent.
80TTA – Interest received on Savings bank account up to Rs. 10,000
In/HUF
80TTB – Deduction allowed for Senior citizen (60 years or more) up to Rs.
Individ 50,000 against interest earned on deposit with any bank or co-
ual operative society.
80U – Deduction of Rs. 75,000/- for an individual being a person with
IND disability. In case of severe disability, enhanced deduction of Rs.
125,000/- is available.
For exam sums, read only the bold font sections.

Page 80 of 101
 CONTENT OF CIA 3

1. ASSESSMENT PROCEEDINGS

1.1 Meaning of assessment: Every taxpayer has to furnish the details of

his income to the Income-tax Department. These details are to be
furnished by filing up his return of income. Once the return of income
is filed up by the taxpayer, the next step is the processing of the return
of income by the Income Tax Department. The Income Tax Department
examines the return of income for its correctness. The process of
examining the return of income by the Income-Tax department is called
as “Assessment”. Assessment also includes re-assessment and best
judgement assessment under section 144.

1.2 Under the Income-tax Law, major assessments given below:

• Self Assessment under Section 139(1) – Assessment by assessee on
his own
• Assessment under section 143(1), i.e., Summary assessment without
calling the assessee.
• Assessment under section 143(3), i.e., Regular assessment.
• Assessment under section 144, i.e., Best judgment assessment.
• Assessment under section 148, i.e., Income escaping assessment/ Re
Assessment
• Assessment after search - Regular Assessment u/s 143(3) followed

A. SELF ASSESSMENT – Own assessment by tax payer under section

139(1)
i) Every person who is having taxable income or loss is required to
compute taxable income as per Income tax Act after claiming the
permissible deductions and exemptions.
ii) He is also required to compute his tax liability, and after adjusting his
credit of advance tax and TDS the tax payable if any to be paid.
iii) After payment of tax he is required to file his return of income which
completes the self assessment process on the part of assessee.
iv) If no assessment is done by the Income tax department under any of
the foregoing cases, the self assessment itself becomes the final
assessment.

B. SUMMARY ASSESSMENT - Assessment under section 143(1)

Page 81 of 101
 This is a preliminary assessment and is referred to as summary assessment
without calling the assessee (i.e., taxpayer).
i) Scope of assessment under section 143(1)
Assessment under section 143(1) is like preliminary checking of the return
of income. At this stage no detailed scrutiny of the return of income is
carried out. At this stage, the total income or loss is computed after making
the following adjustments (if any), namely:-
(i) any arithmetical error in the return; or
(ii) an incorrect claim
(iii) disallowance of wrong loss claimed
(iv) disallowance of expenditure indicated in the audit report
However, no such adjustment shall be made unless an intimation is given to
the assessee of such adjustment either in writing or in electronic mode.
Further, the response received from the assessee, if any, shall be considered
before making any adjustment, and in case where no response is received
within 30 days of the issue of such intimation, such adjustments shall be
made.
ii) Procedure of assessment under section 143(1)
• After correcting arithmetical error or incorrect claim (if any) as discussed
above, the tax and interest and fee, if any, shall be computed on the basis of
the adjusted income.
• An intimation shall be prepared or generated and sent to the taxpayer
specifying the sum determined to be payable by, or the amount of refund
due to the taxpayer.
• The acknowledgement of the return of income shall be deemed to be the
intimation in a case where no sum is payable by or refundable to the
assessee or where no adjustment is made to the returned income.

iii) Time-limit
Assessment under section 143(1) can be made within a period of one year
from the end of the financial year in which the return of income is filed.

C. REGULAR ASSESSMENT - Assessment under section 143(3)

This is a detailed assessment and is referred to as scrutiny assessment. At
this stage a detailed scrutiny of the return of income will be carried out is to
confirm the correctness and genuineness of various claims, deductions, etc.,
made by the taxpayer in the return of income.
i) Scope of assessment under section 143(3)
The objective of scrutiny assessment is to confirm that the taxpayer has not
understated the income or has not computed excessive loss or has not
underpaid the tax in any manner.
Page 82 of 101
 To confirm the above, the Assessing Officer carries out a detailed scrutiny of
the return of income and will satisfy himself regarding various claims,
deductions, etc., made by the taxpayer in the return of income.
ii) Procedure of assessment under section 143(3)
• If the Assessing Officer considers it necessary or expedient to ensure that
the taxpayer has not understated the income or has not computed excessive
loss or has not underpaid the tax in any manner, then he will serve on the
taxpayer a notice requiring him to attend his office or to produce or cause to
be produced any evidence on which the taxpayer may rely, in support of the
return.
• Notice under section 143(2) should be served within a period of three
months from the end of the financial year in which the return is filed.
• The taxpayer or his representative (as the case may be) will submit all
documents online and will place his arguments, supporting evidences, etc.,
on various matters/issues as required by the Assessing Officer.
• After verifying such evidence and taking into account such particulars as
the taxpayer may produce and such other evidence as the Assessing Officer
may require on specified points and after taking into account all relevant
materials which he has gathered, the Assessing Officer shall, issue a notice
if the income of the assessee is to be increased or loss to be decreased as
compared to his income filed in his return of income.
• The Assessee shall furnish online the objections with supporting evidences
or documents if any specific to the issues raised in show cause notice. If
necessary the Assessee may ask for video conference (VC) hearing will will
be afforded. Thereafter the Assessing officer considering the objections filed
and submissions made in writing or through VC, by an order in writing,
make an assessment of the total income or loss of the taxpayer and
determine the sum payable by him or refund of any amount due to him on
the basis of such assessment.
• The time limit to complete the assessment is 12 months from the end of
assessment year.

D. BEST JUDGEMENT ASSESSMENT Assessment under section 144

This is an assessment carried out as per the best judgment of the Assessing
Officer on the basis of all relevant material he has gathered, in cases where
the taxpayer fails to comply with the requirements specified in section 144.
i) Scope of assessment under section 144
As per section 144, the Assessing Officer is under an obligation to make an
assessment to the best of his judgment in the following cases:-
• If the taxpayer fails to file the return required within the due date
• If the taxpayer fails to comply with all the terms of a notice issued under
section 142(1).
• If the taxpayer fails to comply with the directions issued under section
142(2A) for compulsory Audit.
• If after filing the return of income the taxpayer fails to comply with all the
terms of a notice issued under section 143(2), i.e., notice of scrutiny
assessment.

Page 83 of 101
• If the assessing officer is not satisfied about the correctness or the
completeness of the accounts of the taxpayer or if no method of accounting
has been regularly employed by the taxpayer.

ii) Procedure of assessment under section 144

• If the conditions given above calling for best judgment are satisfied, then the
Assessing Officer will serve a notice on the taxpayer to show cause why the
assessment should not be completed to the best of his judgment.
• If the Assessing Officer is not satisfied by the arguments of the taxpayer and
he has reason to believe that the case demands a best judgment, then he
will proceed to carry out the assessment to the best of his knowledge.
• All the procedure stated under regular assessment is to be followed here

E. INCOME ESCAPING ASSESSMENT/ RE-ASSESSMENT - Assessment

under section 147 read with section 148, 148A:
SECTION 147:
- The Reassessment proceedings are conducted u/s 147
- Any income chargeable to tax, if has escaped assessment, such
income may be re-assessed, subject to provisions of Section 148 to
Section 153 of the Act.
- The Re-Assessment proceedings will be completed by reassessing the
income, or recomputing the loss or depreciation or any other
allowance and deductions claimed by passing an order u/s 148
- Before making Assessment u/s 147, the Assessing Officer subject to
provisions of 148A, issue notice u/s 148.
SECTION 148A - PROCEDURE
- Before issuing any notice u/s 148, the Assessing officer shall follow
the procedure as specified in Section 148A
- The Assessing officer shall issue notice u/s 148A, by providing the
opportunity of being heard to show cause as to why notice u/s 148
should be issued. Such notice shall accompany the information
which suggest the income having escaped assessment.
- On receipt of notice u/s 148A, the assessee shall furnish his reply
within the period allowed in notice.
- Considering the reply of the assessee and the material available on
record, the Assessing officer shall pass an order with the prior
approval of specified authority whether the case is deemed to fit or not
for reopening
- However this procedure need not be followed where the assessing
officer has issued information u/s 135A of the Act

SECTION 148 – REASSESSMENT NOTICE

- If the case is found to be fit for reopening, Notice u/s 148 is issued
along with copy of order passed u/s 148A(3)
- No Notice shall be issued unless the Assessing officer has information
to suggest that income chargeable to tax has escaped assessment. If

Page 84 of 101
 such information is received under section 135A, No notice shall be
issued without approval of specified authority.
- The notice requires the Assessee to file his return of income (even if
already filed originally) for the assessment year specified in the notice
within 3 months from the end of the month in which notice is issued.
- Accordingly the Assessee shall furnish a fresh return of income even
the return is already filed for the given assessment year.
- The copy of notice shall be accompanied by a order u/s 148A(3),
wherever such order is required to be made.
- The information which suggest the income has escaped assessment
can be any of the following:

SECTION 149 – TIME LIMIT

- Notice under section 148 must be issued within 3 years and 3 months
from the end of the Assessment year.
- However if the Assessing officer has in his possession books of
accounts, documents or evidence related to any asset or expenditure
which shows that the income chargeable to assessment is 50 Lakhs or

Page 85 of 101
 more, then notice can be issue up to 5 years and 3 months from the
end of relevant assessment year.

F. BLOCK ASSESSMENT (SEARCH ASSESSMENT)

- Block assessment is undertaken in cases of search u/s 132 is
conducted on assessee on or after 01.09.2024 or requisition u/s 132A
is made on the assessee on or after 01.09.2024
- Block assessment is undertaken and completed for a period of six
assessment years preceding the previous year of search
- The Assessments if any, pertaining to the block period shall stand
abated and fresh assessment is made
- After the completion of search proceedings, the Assessing officer shall
issue notice to assessee to file his return of income for the block
period.
- Upon the return of income filed by assessee, considering such return
and based on the documents and information available on with the
Assessing officer which were obtained during the course of search or
subsequently, shall proceed to assess the income for the block period
including the undisclosed income. The undisclosed income shall be
the income determined in the Assessment order minus the income
filed by the assessee prior to the date of search for such block period.
- The losses including unabsorbed depreciation of earlier years will not
be set off against the undisclosed income.
- The block assessment will be completed within 12 months from the
end of month in which the search proceedings were completed.
- The rate of tax on undisclosed income shall be 60%, plus applicable
surcharge and cess.
- Interest u/s 234A, 234B or 234C will not be levied nor penalty u/s
270A will be levied. However if the return is filed beyond the time
allowed, interest @ 1.50% p.m on the tax.
- Penalty @ 50% of the tax will also be levied.

2. ASSESSMENT PROCEEDINGS

2.1 Meaning of assessment: Every taxpayer has to furnish the details of

his income to the Income-tax Department. These details are to be
furnished by filing up his return of income. Once the return of income
is filed up by the taxpayer, the next step is the processing of the return
of income by the Income Tax Department. The Income Tax Department
examines the return of income for its correctness. The process of
examining the return of income by the Income-Tax department is called

Page 86 of 101
 as “Assessment”. Assessment also includes re-assessment and best
judgement assessment under section 144.

2.2 Under the Income-tax Law, major assessments given below:

• Self Assessment under Section 139(1) – Assessment by assessee on
his own
• Assessment under section 143(1), i.e., Summary assessment without
calling the assessee.
• Assessment under section 143(3), i.e., Regular assessment.
• Assessment under section 144, i.e., Best judgment assessment.
• Assessment under section 148, i.e., Income escaping assessment/ Re
Assessment
• Assessment after search - Regular Assessment u/s 143(3) followed

A. SELF ASSESSMENT – Own assessment by tax payer under section

139(1)
i) Every person who is having taxable income or loss is required to
compute taxable income as per Income tax Act after claiming the
permissible deductions and exemptions.
ii) He is also required to compute his tax liability, and after adjusting his
credit of advance tax and TDS the tax payable if any to be paid.
iii) After payment of tax he is required to file his return of income which
completes the self assessment process on the part of assessee.
iv) If no assessment is done by the Income tax department under any of
the foregoing cases, the self assessment itself becomes the final
assessment.

B. SUMMARY ASSESSMENT - Assessment under section 143(1)

This is a preliminary assessment and is referred to as summary assessment
without calling the assessee (i.e., taxpayer).
i) Scope of assessment under section 143(1)
Assessment under section 143(1) is like preliminary checking of the return
of income. At this stage no detailed scrutiny of the return of income is
carried out. At this stage, the total income or loss is computed after making
the following adjustments (if any), namely:-
(i) any arithmetical error in the return; or
(ii) an incorrect claim
(iii) disallowance of wrong loss claimed
(iv) disallowance of expenditure indicated in the audit report
However, no such adjustment shall be made unless an intimation is given to
the assessee of such adjustment either in writing or in electronic mode.
Further, the response received from the assessee, if any, shall be considered

Page 87 of 101
 before making any adjustment, and in case where no response is received
within 30 days of the issue of such intimation, such adjustments shall be
made.
ii) Procedure of assessment under section 143(1)
• After correcting arithmetical error or incorrect claim (if any) as discussed
above, the tax and interest and fee, if any, shall be computed on the basis of
the adjusted income.
• An intimation shall be prepared or generated and sent to the taxpayer
specifying the sum determined to be payable by, or the amount of refund
due to the taxpayer.
• The acknowledgement of the return of income shall be deemed to be the
intimation in a case where no sum is payable by or refundable to the
assessee or where no adjustment is made to the returned income.

iii) Time-limit
Assessment under section 143(1) can be made within a period of one year
from the end of the financial year in which the return of income is filed.

C. REGULAR ASSESSMENT - Assessment under section 143(3)

This is a detailed assessment and is referred to as scrutiny assessment. At
this stage a detailed scrutiny of the return of income will be carried out is to
confirm the correctness and genuineness of various claims, deductions, etc.,
made by the taxpayer in the return of income.
i) Scope of assessment under section 143(3)
The objective of scrutiny assessment is to confirm that the taxpayer has not
understated the income or has not computed excessive loss or has not
underpaid the tax in any manner.
To confirm the above, the Assessing Officer carries out a detailed scrutiny of
the return of income and will satisfy himself regarding various claims,
deductions, etc., made by the taxpayer in the return of income.
ii) Procedure of assessment under section 143(3)
• If the Assessing Officer considers it necessary or expedient to ensure that
the taxpayer has not understated the income or has not computed excessive
loss or has not underpaid the tax in any manner, then he will serve on the
taxpayer a notice requiring him to attend his office or to produce or cause to
be produced any evidence on which the taxpayer may rely, in support of the
return.
• Notice under section 143(2) should be served within a period of three
months from the end of the financial year in which the return is filed.
• The taxpayer or his representative (as the case may be) will submit all
documents online and will place his arguments, supporting evidences, etc.,
on various matters/issues as required by the Assessing Officer.

Page 88 of 101
• After verifying such evidence and taking into account such particulars as
the taxpayer may produce and such other evidence as the Assessing Officer
may require on specified points and after taking into account all relevant
materials which he has gathered, the Assessing Officer shall, issue a notice
if the income of the assessee is to be increased or loss to be decreased as
compared to his income filed in his return of income.
• The Assessee shall furnish online the objections with supporting evidences
or documents if any specific to the issues raised in show cause notice. If
necessary the Assessee may ask for video conference (VC) hearing will will
be afforded. Thereafter the Assessing officer considering the objections filed
and submissions made in writing or through VC, by an order in writing,
make an assessment of the total income or loss of the taxpayer and
determine the sum payable by him or refund of any amount due to him on
the basis of such assessment.
• The time limit to complete the assessment is 12 months from the end of
assessment year.

D. BEST JUDGEMENT ASSESSMENT Assessment under section 144

This is an assessment carried out as per the best judgment of the Assessing
Officer on the basis of all relevant material he has gathered, in cases where
the taxpayer fails to comply with the requirements specified in section 144.
i) Scope of assessment under section 144
As per section 144, the Assessing Officer is under an obligation to make an
assessment to the best of his judgment in the following cases:-
• If the taxpayer fails to file the return required within the due date
• If the taxpayer fails to comply with all the terms of a notice issued under
section 142(1).
• If the taxpayer fails to comply with the directions issued under section
142(2A) for compulsory Audit.
• If after filing the return of income the taxpayer fails to comply with all the
terms of a notice issued under section 143(2), i.e., notice of scrutiny
assessment.
• If the assessing officer is not satisfied about the correctness or the
completeness of the accounts of the taxpayer or if no method of accounting
has been regularly employed by the taxpayer.

ii) Procedure of assessment under section 144

• If the conditions given above calling for best judgment are satisfied, then the
Assessing Officer will serve a notice on the taxpayer to show cause why the
assessment should not be completed to the best of his judgment.
• If the Assessing Officer is not satisfied by the arguments of the taxpayer and
he has reason to believe that the case demands a best judgment, then he
will proceed to carry out the assessment to the best of his knowledge.
• All the procedure stated under regular assessment is to be followed here

Page 89 of 101
E. INCOME ESCAPING ASSESSMENT/ RE-ASSESSMENT - Assessment
under section 147 read with section 148, 148A:
SECTION 147:
- The Reassessment proceedings are conducted u/s 147
- Any income chargeable to tax, if has escaped assessment, such
income may be re-assessed, subject to provisions of Section 148 to
Section 153 of the Act.
- The Re-Assessment proceedings will be completed by reassessing the
income, or recomputing the loss or depreciation or any other
allowance and deductions claimed by passing an order u/s 148
- Before making Assessment u/s 147, the Assessing Officer subject to
provisions of 148A, issue notice u/s 148.
SECTION 148A - PROCEDURE
- Before issuing any notice u/s 148, the Assessing officer shall follow
the procedure as specified in Section 148A
- The Assessing officer shall issue notice u/s 148A, by providing the
opportunity of being heard to show cause as to why notice u/s 148
should be issued. Such notice shall accompany the information
which suggest the income having escaped assessment.
- On receipt of notice u/s 148A, the assessee shall furnish his reply
within the period allowed in notice.
- Considering the reply of the assessee and the material available on
record, the Assessing officer shall pass an order with the prior
approval of specified authority whether the case is deemed to fit or not
for reopening
- However this procedure need not be followed where the assessing
officer has issued information u/s 135A of the Act

SECTION 148 – REASSESSMENT NOTICE

- If the case is found to be fit for reopening, Notice u/s 148 is issued
along with copy of order passed u/s 148A(3)
- No Notice shall be issued unless the Assessing officer has information
to suggest that income chargeable to tax has escaped assessment. If
such information is received under section 135A, No notice shall be
issued without approval of specified authority.
- The notice requires the Assessee to file his return of income (even if
already filed originally) for the assessment year specified in the notice
within 3 months from the end of the month in which notice is issued.
- Accordingly the Assessee shall furnish a fresh return of income even
the return is already filed for the given assessment year.
- The copy of notice shall be accompanied by a order u/s 148A(3),
wherever such order is required to be made.
- The information which suggest the income has escaped assessment
can be any of the following:

Page 90 of 101
SECTION 149 – TIME LIMIT
- Notice under section 148 must be issued within 3 years and 3 months
from the end of the Assessment year.
- However if the Assessing officer has in his possession books of
accounts, documents or evidence related to any asset or expenditure
which shows that the income chargeable to assessment is 50 Lakhs or
more, then notice can be issue up to 5 years and 3 months from the
end of relevant assessment year.

F. BLOCK ASSESSMENT (SEARCH ASSESSMENT)

- Block assessment is undertaken in cases of search u/s 132 is
conducted on assessee on or after 01.09.2024 or requisition u/s 132A
is made on the assessee on or after 01.09.2024
- Block assessment is undertaken and completed for a period of six
assessment years preceding the previous year of search
- The Assessments if any, pertaining to the block period shall stand
abated and fresh assessment is made
- After the completion of search proceedings, the Assessing officer shall
issue notice to assessee to file his return of income for the block
period.

Page 91 of 101
 - Upon the return of income filed by assessee, considering such return
and based on the documents and information available on with the
Assessing officer which were obtained during the course of search or
subsequently, shall proceed to assess the income for the block period
including the undisclosed income. The undisclosed income shall be
the income determined in the Assessment order minus the income
filed by the assessee prior to the date of search for such block period.
- The losses including unabsorbed depreciation of earlier years will not
be set off against the undisclosed income.
- The block assessment will be completed within 12 months from the
end of month in which the search proceedings were completed.
- The rate of tax on undisclosed income shall be 60%, plus applicable
surcharge and cess.
- Interest u/s 234A, 234B or 234C will not be levied nor penalty u/s
270A will be levied. However if the return is filed beyond the time
allowed, interest @ 1.50% p.m on the tax.
- Penalty @ 50% of the tax will also be levied.

INPUT TAX CREDIT

INTRODUCTION
The GST regime promises seamless credit on goods and services across the entire supply
chain with some exceptions like supplies charged to tax under composition scheme and
supply of exempted goods and/or services. ITC is considered to be the lifeline of the GST
regime. In fact, it is the provisions of ITC which essentially make GST a value added tax
i.e., collection of tax at all points of supply chain after allowing credit of tax paid at earlier
points.

RELEVANT DEFINITIONS
❖ Input means any goods other than capital goods used or intended to be used
by a supplier in the course or furtherance of business.
❖ Input service means any service used or intended to be used by a supplier in

Page 92 of 101
 the course or furtherance of business.
❖ Input tax in relation to a registered person, means the central tax, State tax,
integrated tax or Union territory tax charged on any supply of goods or services
or both made to him and includes—
(a) the IGST charged on import of goods;
(b) CGST
(c) IGST
(d) SGST / UTGST
(e) CGST / SGST/ IGST paid on reverse Charge
but does not include the tax paid under the composition levy.
❖ Zero-rated supply means any of the following supplies of goods
or services or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone (SEZ)
developer or a Special Economic Zone unit.
❖ Exempt supply means supply of any goods or services or both which attracts nil
rate of tax or which may be wholly exempt from tax and includes non-taxable
supply.

❖ Taxable supply means a supply of goods or services or both which is leviable to

tax under CGST Act.

ELIGIBILITY AND CONDITIONS FOR

TAKING INPUT TAX CREDIT

Eligibility and conditions for taking input tax credit

(1) The person intending to take credit shall be a registered person.
(2) The goods, services or both are used or intended to be used in the course or
furtherance of business.
(3) He should be in possession of tax invoice or debit note issued by the registered
supper
(4) He should have received the goods or services
(5) The input tax should have actually paid to the Government by the person issuing the
invoice. (should be reflecting in GSTN Portal)
(6) The payment for receipt of goods or services should be made within 180 days from
the date of invoice. If not paid the credit already taken shall be reversed along with
interest till the date of reversal

Page 93 of 101
 (7) In case of capital goods, depreciation on input tax shall not be claimed
(8) The input tax must be claimed within due date of filing GST returns for September
of next financial year.

INELIGIBLE INPUT TAX – The following input tax credit is not allowed irrespective of
fact of the same being used for business purposes:
1) The credit of any goods or service used in supply of exempted supply.
2) If common inputs / services used for supply of both taxable and exempted supply,
then proportionate credit of exempted supply.
3) Motor vehicles of all kind, Vessels and aircraft unless used in business of further
sale, transportation of passengers / goods or imparting training / driving
4) Insurance, repairs and maintenance of any vehicle, vessel or aircraft
5) Food and beverages, outdoor catering, beauty treatment, health services, membership
of club or fitness centre
6) Rent a cab service
7) On construction of immovable property unless engaged in business of construction.
8) Goods or services used for personal consumption
9) Input tax on stolen, lost or destroyed goods
10) Inputs tax on purchase from composition dealer.

SEQUENCE OF UTILISATION OF INPUT TAX

Input Tax First to be Balance to be

utilized for utilized for
IGST IGST CGST or SGST
CGST CGST IGST
SGST SGST
IGST

Note : SGST can be utilized for IGST only after CGST is fully utilized.

PRACTICE QUESTIONS

1) Explain the provision relating to registration under GST law and the procedure of
registration. Also calculate GST liability from the information given below:
BNM and Co., furnishes the following details for the Month Oct 2024
Sale of Taxable items Rs. 57,00,000
Supply of Taxable items supplied to SEZ Rs.3,00,000
Sale of Exempted items Rs. 12,00,000
Purchase of Taxable items within Rs. 12,00,000
Purchase of Taxable items from outside the state Rs. 25,00,000

Page 94 of 101
Purchase of Exempted items – Rs. 15,00,000
Amount paid to an individual for service of security guards – Rs. 25,000
Monthly rent paid Rs. 5,50,000.
Telephone bill paid Rs. 20,000
Salary paid to regular staff – Rs.2,00,000
New computer, printer and software purchased for office use – Rs.1,30,000
All the transactions unless stated are within the state and GST rate is 18%

2) Explain the conditions for claiming GST input tax credit and from the below
information calculate the total GST liability.
XY Limited engaged in trading business submits the following details of its transactions for
the month July 2024, from which you are required to calculate the GST liability.
a) 18% Taxable value of Inter state (outside state) supply – Rs. 12,00,000
b) 18% Taxable value of intra state (within State) supply – Rs. 28,00,000
c) 12% Taxable value of Inter State (outside State) Supply – Rs. 12,00,000
During the month July 2024, its expenditure all of which except for purchases from outside
state are received from within state, comprised of
d) 18% Taxable value of purchases within state – Rs.25,50,000
e) 12% Taxable value of Purchases from outside state – Rs,15,00,000
f) Exempted value of Purchases within state – Rs. 16,00,000
g) Legal charges – Rs. 60,000 – GST 18%
h) Transportation charges – Rs. 85,000 – GST 5%
i) Rent – Rs. 1,50,000 – GST 18%
j) Telephone Charges – Rs. 12,000 – GST 18%
k) Printing & Stationery 30,000 – GST 12%
l) Electricity charges – Rs. 12,000
m) Salaries – Rs. 3,25,000

3) What is input Tax under GST Law. State any 4 conditions to claim input tax and 4
ineligible input tax. Also calculate GST liability from the information given below:
SM cranes engaged in business of supplying cranes on hire. Their transactions during the
month Aug 2024 were:
- Gross value of bill for service within state – Rs. 14,80,000
- Gross value of bill for service outside state – Rs. 5,20,000
- Transportation charges paid for transporting cranes – Rs. 1,20,000
- Purchase of second hand crane for Rs. 3,00,000
- Import of crane on which customs duty of Rs. 1,85,000 and IGST of Rs. 88,000 is
paid
- Office rent – Rs. 28,000; telephone charges – 5,000; audit fees – Rs. 10,000 paid
during the month.
Total GST rate on outward supplies and inward supplies to be assumed at 18%, but for
transportation which is 5%
Calculate Net GST payable by SM Cranes for the month Aug 2024.

Page 95 of 101
 4) What is CGST, SGST, IGST, UTGST and compensation Cess. Explain. Also from the
following information calcuate GST liabiltiy.
MNS a Chartered accountancy firm, submits the following details of its transactions for the
month August 2024: GST rate on all supplies to be taken at 18%
- Bills raised for audit and consultancy services to clients located within the state Rs.
6,30,000
- Bills raised for audit and consultancy services to clients located outside the state Rs.
5,00,000
- Advance fees received for an assignment which is yet to commence – Rs. 1,00,000
- Reimbursement of travel and stay expenses from clients – Rs. 60,000
Their expenses/payments (all within state) during the month included the following.
- Office Rent – 30,000
- Salaries – Rs. 1,20,000
- Telephone expenses – Rs. 7,000
- Legal charges – Rs. 10,000
- Purchase of computer – Rs. 25,000
- Purchase of car in the name of firm – Rs. 3,00,000

5) Explain the eliblity crieteria for a suppler to opt composition scheme under GST and
rates of tax under GST scheme. Also from the following information claculated GST
liability.
Federal Cranes is engaged in business of providing cranes on hire. Its transactions during the
month Jan 2025 are:
INCOMES / RECEIPTS
- Hire charges for cranes supplied within the state – Rs. 50,00,000
- Hire charges for cranes supplied outside the state - Rs. 20,00,000
- Hire charges for cranes supplied to a SEZ unit - Rs. 4,00,000
- Sale proceeds on disposal of old crane within state Rs. 12,00,000
EXPENSE / PAYMENTS
- Diesel and oil for cranes and vehicles –Rs. 28,00,000
- Drivers, helpers and administration salary and allowances – Rs. 7,50,000
- Man power supply charges paid to an individual – Rs. 40,000
- Spare parts / tyres for cranes purchased – Rs. 3,50,000
- Office rent, telephone bill, printing & stationery, consultancy charges - Rs. 1,20,000
- Food and beverages to employees and customers – Rs. 9,000
- Old crane imported from Germany on which IGST paid was Rs. 3,85,000
All the transactions are exclusive of taxes and unless stated are within the state. GST rate
wherever applicable is 18%.

6) State the transactions which are neither considered as supply of goods or services as
per Schedule III of GST Act. Also calculate GST liability from the information given
below:
The abstract of monthly transactions of San Technology engaged in manufacture of
Computers for the month Jan 2025 is as below:
INCOME
Sale of Computers within state Rs. 64,00,000

Page 96 of 101
Sale of Computers outside state Rs. 36,00,000
Export of computers Rs. 32,00,000
EXPENSE/ PAYMENTS
Intra state Purchase of inputs for manufacture of computers Rs. 14,00,000
Import of inputs for manufacture of computers Rs. 52,00,000
Purchase of inputs from Composite dealer within state Rs. 4,00,000
Royalty to a company in US for software included in computers Rs. 6,00,000
Transportation charges on purchases Rs. 1,50,000
Wages & Administrative Salaries Rs. 2,69,000
Rent, Advertisement, telephone, consulting etc., Rs. 4,50,000
Car purchased Rs. 12,00,000
Food and beverages to employees Rs. 88,000
- All the above values are exclusive of taxes wherever applicable
- IGST rate on computers is 18%, Transportation 5%.
- Customs duty of Rs. 1,08,000 and IGST of Rs. 1,34,000 is paid on import of inputs

7) Briefly explain the provisons relating to composition Scheme under GST Law, and
from the below information calculate the total GST liability.
All in one store furnishes the following details for the Month Feb 2025
Aggregate value of items sold in store
Taxable items Rs. 57,00,000
Taxable items supplied to SEZ Rs.3,00,000
Exempted items Rs. 12,00,000
Items not leviable for GST Rs. 3,00,000
Aggregate value of items procured for sale
Taxable items Rs. 12,00,000
Taxable items from outside the state Rs. 25,00,000
Exempted items – Rs. 15,00,000
Items not leviable for GST Rs. 2,00,000
Charges paid to an individual for service of security guards – Rs. 25,000
Monthly rent paid Rs. 5,50,000.
Telephone bill paid Rs. 20,000
Salary paid to regular staff – Rs.2,00,000
New computer, printer and software purchased for office use – Rs.1,30,000
Other information
All the transactions unless stated are within the state.
GST rate on all transactions wherever applicable is 18%.
All the values stated above are exclusive of taxes.

8) What is reverse charge mechanism under GST law. State any 8 goods or services
which are liable under reverse charge. Also from the below data calculate GST
liability:
TTL, engaged in trading business submits the following details of its transactions for the
month Dec 2024, from which you are required to calculate the GST liability.

Page 97 of 101
 a) 18% Taxable value of Inter state (outside state) supply – Rs. 12,00,000
b) 18% Taxable value of intra state (within State) supply – Rs. 28,00,000
c) 12% Taxable value of Inter State (outside State) Supply – Rs. 12,00,000
During the month Dec 2024, its expenditure all of which except for purchases from outside
state are received from within state, comprised of
d) 18% Taxable value of purchases within state – Rs.25,50,000
e) 12% Taxable value of Purchases from outside state – Rs,15,00,000
f) Exempted value of Purchases within state – Rs. 16,00,000
g) Legal charges – Rs. 60,000 – GST 18%
h) Transportation charges – Rs. 85,000 – GST 5%
i) Rent – Rs. 1,50,000 – GST 18%
j) Telephone Charges – Rs. 12,000 – GST 18%
k) Printing & Stationery 30,000 – GST 12%
l) Electricity charges – Rs. 12,000
m) Salaries – Rs. 3,25,000

COMPOSITION LEVY, REGISTRATION, TAX INVOICE, EWAY BILL

COMPOSITION LEVY
Composition scheme under the law is for small businesses. This is to bring
relief to small businesses so that they need not be burdened with the
compliance provisions under the law. Thus, an option has been provided
where they can opt to pay a fixed percentage of turnover as fees in lieu of tax
and be relieved from the detailed compliance of the provisions of law

The Provision relating to composition levy are as below:

A) Optional Scheme : This Scheme is optional and available only for
eligible for only certain category of taxable persons
B) Eligibility :
i) A registered person engaged in supply of goods and whose aggregate
turnover during the preceding financial year did not exceed Rs. 1.50
Crores (75 lakhs in case of Special category states – Meghalaya,
Tripura, Sikkim, Manipur etc). Can also provide services but not
exceeding 10% turnover or Rs. 5,00,000/- which ever is higher.
ii) A registered person engaged in supply of only Services and whose
aggregate turnover during the preceding financial year did not exceed
Rs. 50 Lakhs. Should not be engaged in supply of goods or should
be a person operating restaurant.
iii) A person providing restaurant service

Page 98 of 101
 iv) A Manufacturer engaged in manufacture of ice cream and other
edible ice, pan masala, Aerated water, tobacco or tobacco substitutes
not eligible
v) Should not be engaged in Inter state supply of goods or services.

C) Rates of Tax :
i) Goods – CGST 0.50% and SGST 0.50%
ii) Restaurant – CGST 2.50% and SGST 2.50%
iii) Service Provider – CGST 3.0% and SGST 3.0%

D) Conditions
i) Cannot collect tax on supply of goods or services except for
restaurant service
ii) Not eligible to take any input tax credit
iii) The option shall automatically lost once the turnover exceeds the
prescribed limits.
iv) The tax invoice must state that he is registered under composition
levy.
v) The option must be exercised at the time of registration or in case of
already registered suppler before the commencement of financial year
by filing electronic form.

REGISTRATION
A) Persons liable for registration
i) Every supplier whose aggregate turnover in a financial year exceeds
Rs. 20 Lakhs (10 Lakhs in case of special category states). Note the
Government has issued power to state governments to enhance the
limit for supply of goods only to Rs. 40 Lakhs and as on date few
states have notified.
ii) A person exclusively making supply of exempted goods or services
need not obtain registration irrespective of turnover.
iii) Every casual trader who does not have a fixed place of business,
irrespective of his turnover
iv) A person who is required to pay tax under reverse charge mechanism
v) E-Commerce operator, irrespective of no supplies not made on its
own.
vi) A agent who makes taxable supply on behalf of its principal
irrespective of agent’s turnover
vii) Input service distributor
viii) A person who is required to deduct tax at source or collect tax at
source.

B) Procedure for registration

i) Register online with GSTN portal with a mobile number and e mail id

Page 99 of 101
ii) Submit online application for registration with GSTN Portal along
with documents like PAN Card, Adhar Card, Copy of Bank
Statement, documentary Proof of business place, Photos in case of
individuals. In case of partnership firm the partnership deed along
with details of all partners. In case of company MOA & AOA.
iii) The online application to be filled with all prescribed particulars like
name of business, address, nature of goods or services to be supplied
etc.,
iv) If the application and the documents found to be in order,
registration will be granted in 3 working days. If any deficiency the
proper office will issue notice requiring clarification to be submitted
within 7 days and upon submission of clarification registration will
be granted
v) If the officer believes that physical verification of business place is
required, he may get such verification done and only his satisfaction
shall grant registration within 15 days after verification.

TAX INVOICE & E-WAY BILL

A) Every supplier of goods or services shall compulsorily issue tax invoice

for every supply of goods or service containing the details like
description of supply, quantity of goods, value of supply, GST charged
and such other particulars as may be prescribed.

B) Electronic Way Bill (Eway Bill):

i) E way bill is a electronic document generated on the GSTN Portal
evidencing the movement of goods
ii) Every registered person who causes movement of goods in relation
to supply or reasons other than supply of a value exceeding Rs.
50,000/- shall compulsorily raise an E way bill containing the
details in relation to such supply including the value of supply.
iii) The person in charge of conveyance of carrying the goods must
carry such E Way bill till the destined delivery and shall be
furnished for verification whenever intercepted by the proper
officer.
iv) The validity of E way bill shall be one day for every 100 Kms and in
case of Over dimensional cargo it is one day for every 20 Kms.
Goods should the destination place within such validity period.

PAYMENT OF TAX & RETURNS

A) PAYMENT OF TAXES and RETURNS

Page 100 of 101

i) The GST shall be paid by internet banking, credit/debit cards,
NEFT or RTGS modes only.
ii) The GST liability of a particular shall be paid within 20 th of
subsequent month.
iii) Every registered supplier shall submit the following returns in
electronic form in GSTN portal:
a) GSTR 1 containing the details of outward supplies within on
monthly basis within 10th of subsequent month.
b) GSTR 4 containing the details of outward suppliers within 18th
of subsequent month of quarter.
c) GSTR 3B containing details of all transactions on monthly basis
within 20th of Subsequent month
d) GSTR 9 Annual return for a Normal Tax payer, within 31 st Dec
of next financial year
e) GSTR 9A Annual return for person registered composition levy,
within 31st Dec of next financial year

Page 101 of 101