Taxation

S.No. Topics

1 Historyandobjectsoftaxation

2 DirectandIndirectTaxes

3 ConceptofTaxandFee

4 Definitions–Assessee,AssessmentYear,PreviousYear,Business,

5 ResidenceSection6,7and9

6 Salariessection15and17

7 IncomefromHousePropertysection22to27

8 ProfitsandGainsofBusinessorProfessionsection28

9 DepreciationAllowancesection32

10 BusinessExpenditureandLosssection37

11 CapitalGainssection45,46,54

1
 12 IncomefromothersourcesSection56to58

History and Objects of Taxation

2
Theword‗tax‘ isderived fromthe Latinwordtaxareortaxo.It means‗toassess the
worthofsomething‘. Taxes are imposed by government forthe use and service
ofthe State. They are levied and collected by the State for the purchase or sale
ofmerchandiseoraservice.Taxesproviderevenuetothestate,andistherefore one
ofthe mostsignificantaspectsofanysystemofadministrationbyanyform of
government.
Thestrengthofaneconomydepends uponhow goodthetaxsystemis.Ajust tax
systemcanpropeltheeconomicgrowthofa countryandleadto itsprosperity. This in
turns makes its citizens happy and more productive. An efficient taxation
policy leads to growth in GDP; it is considered sound if it performs allocative,
distributional and stabilization function inthe economy.
Therearetwotypesoftaxes –directand indirect.Directtaxesarethosethatan entity
remits to the government directly, and include income tax, property tax, etc.
indirecttaxesarethosethatanentityremitsthroughthirdparties.Servicetaxis an
example of indirect tax imposed by the government of India.
Anytaximposedbythegovernment(Central,stateorlocal)hasthefollowing
important characteristics:

 Itismandatory:sinceanyformoftaxisimposedbythegovernmentforthe
benefit ofthe country, it is required by law to pay taxes
 It is a contribution: tax is a contribution made by citizens for the
bettermentoftheircountry.ThegovernmentofIndiaprovidesbasic
healthcare,infrastructure,defence,etc.withthemoneycollectedfrom
taxes
 Itis forpublicbenefit:thepurposeofcollectingtaxes is forthebenefit
andupliftmentofthesocietyingeneral.Taxesarenotsupposedtofavour
specific individuals. Disaster maintenance and rescue is an important
aspect of the money collected in the form of taxes
 It is paid out of income earned or wealth: you pay tax only when you
generate income. Ifan individualdoes not generate a minimumthreshold
income(definedandmodifiedfromtimetotimebythegovernment),they need
not pay some taxes like income tax.
 Itboostseconomy:this isoneofthe mostimportantaspectsofcollecting
taxes. Since the government provides for infrastructure in the formof
roads,trains,powerstations,damns,etc.,itutilizesthetaxrevenuefor
economic growth of the nation

HistoryofTaxationinIndia
Incomeisthemoneythatanindividualorbusinessreceives inexchangefor
providinga good orservices. Aformaltax systemwas inexistence inIndia
sincethetimeofMauryadynasty.Thehigherclassofcitizenscontributed1/6thof
their income as tax. It is said that even before the Mauryas, tax was

3
mentioned inManuSmruti,oneofthe mostancientscripturesofIndia.The
subsequentMughalinvadersbroughtwiththemtheirowntaxationsystem.The
infamous Jeziawas ataximposedonthe non-Islamicpeopleofthe land. In India, it
was abolished by Akbar.
The income taxas we know todaywas first introduced inIndia in1860 bythe
British. It was introduced to compensate for the losses sustained by the
governmentduetotherebellionof1857.Incometaxisdefinedastheannual charge
levied on both earned income (wages, salaries or commission) and unearned
income like dividends, interest or rent. In addition to financing a
government‘soperations,progressiveincometaxationisdesignedtodistribute
wealthcreation more evenly ina populationand to serve as buffer incase of
fluctuations inthe economic cycle. There are two basic types ofincome tax:
personal income tax and corporation income tax.
TheIncomeTaxActwaspassedinIndia in1886,andtherehavebeenconstant
revisions and refinements in the Act since then. After the first World War, a
newIncomeTaxActwas passed,in1918,againtocountertheresidualeffectsof
economic devastation caused by the war. This income tax Act was in place till
1922, when it was replaced by another Act. After 40 years, and 15 years after
India gained freedomfromtheBritish, the incometaxActwas modifiedagain. The
current Income Tax Act has been adopted in1961, and bought into force with
effect from April 1, 1962. It encompasses the whole of India, including
Sikkim, Jammu and Kashmir. The Central Board of Revenue bifurcated and
created a separate Board for Direct Taxes called as the Central Board ofDirect
Taxes underthe aegis ofCentralBoard ofRevenue Act, 1963.
Currently,therearefivebroadheadsunderwhichincomeistaxedbythegovt.of
India:

 Incomefromsalary
 Incomefrombusinessorprofession
 Incomefromcapitalgains
 Incomefromproperty
 Incomefromothersources

Eachsuccessive governmentamendsthe Actwithanaimto finance government

operations, andtotryanddistribute wealthmore evenly. Anoticeable feature ofthe
Income Tax Act ofIndia is that agricultural income inIndia is not taxable.
IncometaxinIndia(andallothercountries)isassessedannuallyforthe previous
financial year.
Indiacurrentlyhasathree-tiersetupfortaxation.Thecentralgovernmentandthe state
government can both impose tax. The State government in turn can
delegatetaxationtothelocalgoverningbodieslikethe municipalcorporations

4
and grampanchayats.ItissaidthatthattheIndiantaxsystemisoneofthe most
complexintheworld, includingthelikesofincometax, wealthtax, property tax,
gifttax, salestax, VAT, customduty, exciseduty(nowreplacedbyGST),
corporatetax, incometaxandaplethoraor othertaxes?Indeed, it is oneofthe
reasonswhythere isahighdemandinIndiaforincometaxconsultants,GST
consultants, auditors, and other professionals.
As a nation evolves, its needs change. India is no exception. No doubt as the
nationprogresses, the taxstructure ofIndia willundergo manyrefinements. For
example, the Goods and Services Tax (GST), which has replaced the Central
and State indirect taxes such as VAT, excise duty and service tax, was
implementedinIndiaonJuly1,2017.GSThasbeenalreadyintroducedinmorethan
160countries,startingfromFrancewhere itwasintroducedwayback in1954. So, it
can be safely said that GST is a tired and tested taxation solution; India need
not worry unnecessarily about its effectiveness.
ObjectivesofTaxation:
The primary purpose of taxation is to raise revenue to meet huge public
expenditure.Mostgovernmentalactivitiesmustbefinancedbytaxation.Butit is not
theonlygoal.Inotherwords,taxationpolicyhassomenon-revenueobjectives.

Trulyspeaking, inthe modernworld,taxationis usedasaninstrumentof economic

policy. It affects the total volume ofproduction, consumption,
investment,choiceofindustriallocationandtechniques,balanceofpayments,
distribution of income, etc.

1. EconomicDevelopment

2. FullEmployment

3. PriceStability

4. ControlofCyclicalFluctuations

5. ReductionofBOPDifficulties

6. Non-RevenueObjective

Objective#1.EconomicDevelopment:
One of the important objectives of taxation is economic development.
Economicdevelopmentofanycountryislargelyconditionedbythegrowthof

5
capitalformation.Itissaidthatcapitalformationisthekingpinofeconomic
development. But LDCs usually suffer from the shortage of capital.

Toovercome the scarcityofcapital, governments ofthese countries mobilize

resources so that a rapid capital accumulation takes place. To step up both
publicandprivateinvestment,governmenttapstaxrevenues.Throughpropertax
planning, the ratio of savings to national income can be raised.

Byraisingtheexistingrateoftaxesorbyimposingnewtaxes,theprocessofcapital
formation can be made smooth. One ofthe important elements ofeconomic
development is the raisingofsavings- income ratiowhichcanbe effectively
raised through taxation policy.

However, proper care has to be taken, regarding investment. If financial

resources or investments are channelized in the unproductive sectors of the
economy the economic development may be jeopardized, even if savings and
investmentratesareincreased.Thus,thetaxpolicyhastobeemployedinsuchaway
that investmentoccurs intheproductivesectors oftheeconomy, includingthe
infrastructural sectors.

Objective#2.FullEmployment:
Second objective is the full employment. Since the level of employment
depends oneffective demand, a countrydesirous ofachieving the goalof full
employmentmustcutdowntherateoftaxes.Consequently,disposableincome
willriseand, hence,demandforgoodsandserviceswillrise.Increaseddemandwill
stimulate investment leadingto a rise in income and employment throughthe
multiplier mechanism.

Objective#3.PriceStability:
Thirdly,taxationcanbe usedtoensurepricestability—ashortrunobjectiveof
taxation. Taxes are regarded as aneffective means ofcontrolling inflation. By
raisingtherateofdirecttaxes,privatespendingcanbecontrolled.Naturally,the
pressure on the commodity market is reduced.

But indirect taxes imposed oncommodities fuel inflationarytendencies. High

commodityprices,ontheonehand,discourageconsumptionand,ontheother hand,
encourage saving. Opposite effect will occur when taxes are lowered down
during deflation.

6
Objective#4.ControlofCyclicalFluctuations:
Fourthly,controlofcyclicalfluctuations—periodsofboomanddepression—is
consideredtobeanotherobjectiveoftaxation.Duringdepression,taxesare lowered
down while during boom taxes are increased so that cyclical fluctuations are
tamed.

Objective#5.ReductionofBOPDifficulties:
Fifthly,taxes likecustomdutiesarealso usedtocontrolimportsofcertain goods
withtheobjectiveofreducingthe intensityofbalanceofpaymentsdifficulties and
encouraging domestic production of import substitutes.

Objective#6.Non-RevenueObjective:
Finally, another extra-revenue or non-revenue objective of taxation is the
reductionofinequalitiesinincomeandwealth.Thiscanbedonebytaxingtherichat
higher rate than the poor or by introducing a systemof progressive taxation.

DIRECTANDINDIRECTTAXES

DirectTaxes IndirectTaxes

Itisleviedonincomeandactivities
Itisleviedonproductorservices.
conducted.

Theburdenoftaxcannotbe shifted
Theburdenoftaxshiftedforindirecttaxes.
incase ofdirect tax.

Itispaidbyonepersonbutherecoversthesamefromanother
Itispaiddirectlybyperson
person i.e. person who actually bear the tax ultimate
concerned.
consumer.

It is paid after the income

reachesinthehandsofthe taxpayer Itispaidbeforegoods/servicereachesthetaxpayer.

Taxcollectionisdifficult. Taxcollectionisrelativelyeasier.

7
 DirectTaxes IndirectTaxes

ExampleIncometax,wealthtax ExampleGST,excisedutycustomdutysaletaxservicetax
etc.

KeydifferencesbetweenDirectandIndirectTaxare
1. Directtaxis leviedandpaidforbyindividuals,Hinduundivided
Families (HUF), firms, companies etc. whereas indirect tax is
ultimatelypaid forbytheend-consumerofgoodsandservices.
2. Theburdenoftaxcannotbeshiftedincaseofdirecttaxeswhileburdencan
be shifted for indirect taxes.
3. Lackofadministrationincollectionofdirecttaxescan maketax
evasionpossible,whileindirecttaxescannotbeevadedasthetaxesare
charged on goods and services.
4. Directtaxcanhelpinreducinginflation,whereasindirecttaxmay
enhance inflation.
5. Directtaxeshavebetterallocativeeffectsthanindirecttaxesasdirect taxes
put lesser burden over the collection of amounts than indirect taxes,
where collection is scattered across parties and consumers‘
preferences of goods is distorted from the price variations due
toindirecttaxes.
6. Direct taxes help in reducing inequalities and are considered to be
progressivewhileindirecttaxesenhanceinequalitiesandareconsidered to
be regressive.
7. Indirecttaxesinvolvelesseradministrativecostsduetoconvenientand
stablecollections,whiledirecttaxeshavemanyexemptionsandinvolve
higher administrative costs.
8. Indirecttaxesareorientedmoretowardsgrowthastheydiscourage
consumptionandhelpenhancesavings.Directtaxes,ontheotherhand,
reduce savings and discourage investments.
9. Indirecttaxeshaveawidercoverageasallmembersofthesocietyaretaxed
through the sale of goods and services, while direct taxes are
collected only from people in respective tax brackets.
10. Additional indirect taxes levied on harmful commodities such as
cigarettes,alcoholetc.dissuadesover-consumption,therebyhelpingthe
country in a social context.

TaxandFeeDifference

8
  Definition:A tax represents money – that a government charges an
individual or business when they perform a particular action or
completeaspecifictransaction.Taxesareleviedinthegreaterinterestsof
the country.
 Measured:Thistaxisoftenassessedasapercentageoftheamountofmoney
involved in the transaction.
 Levycollection:Ataxisalevycollected forgeneralgovernment
services. It is a way to generate revenue by Govt.
 Administrationand Application:Yourtaxes may paythesalaryofa
teacher,policeofficerorbureaucrat.Theymayhelppavearoadorbuild
a school. They may finance the runningofthe localsewage-
treatment plant.
 Example: A tax is applied on the income that a person makes during a
year.Inaddition,ataxisoftenpiecedonthesaleofgoods.incometax,gifttax,
wealth tax, VAT, etc. are examples of tax.

 Definition:Afeeisrelatedtoataxinthat itisalsoachargepaidtothe
governmentbyindividualsorbyabusiness.Feesare mostlyimposedto
regulate or control various types of activities.
 Measured:The fee rate is directlytied to the cost of maintaining the
service.Moneyfromthefeeisgenerallynotappliedtousesotherthanto
provide the service for which the fee is applied.
 Levycollection:Afee isalevycollectedtoprovide aservicethatbenefits the
group of people from which the money is collected. It is
chargedforservicesrenderedbyanindividual/Company/Professionals.
 AdministrationandApplication:Afeeisassessedforanexactingservice,and
the moneycollectedis usuallyearmarked forthatservice.The feethat you
pay for inspecting your assets every other year probably goes directly
to cover the costs.
 Example:However,afeeisspecificallyappliedforthe useofaservice.
Forexample,agovernmentmaychargea feetovisitapark.Stampfee,
driving license fee, Govt. registration fee, etc. are examples of Fee.

Definition

2.InthisAct,unlessthecontextotherwiserequires,—

(1) "agriculturalincome"means—

(a) any rent or revenue derived from land which is used for agricultural
purposesandiseitherassessedtolandrevenueinIndiaorissubjecttoalocalrate
assessed and collected by officers of the Government as such;

9
(b) anyincomederivedfromsuchlandby—

(i) agriculture;or

(ii) theperformancebyacultivatororreceiver ofrent-in-kindofanyprocess

ordinarilyemployedbyacultivatororreceiverofrent-in-kindtorenderthe
produce raised or received by him fit to be taken to market; or

(iii) thesalebyacultivatororreceiverofrent-in-kindoftheproduceraisedor
receivedbyhim, inrespectofwhichnoprocesshasbeenperformedotherthana
process ofthe nature described in paragraph (ii) of this sub-clause;

(c) anyincomederived fromanybuildingownedandoccupiedbythereceiver of

the rent or revenue of any such land, or occupied by the cultivator or the
receiverofrent-in-kind, ofanylandwithrespecttowhich, orthe produce of
which,anyprocess mentioned inparagraphs(ii)and(iii)ofsub-clause(b) is
carried on:

Providedthatthebuildingisonor inthe immediatevicinityofthe land,and isa

building which the receiver of the rent or revenue or the cultivator, or the
receiverofrent-in-kind,byreasonofhisconnectionwiththeland,requiresasa
dwelling house, or as a store-house, or other out-building;

(2) "annualvalue",inrelationtoanyproperty,means itsannualvalueas

determined under section 23;

(3) "AppellateAssistantCommissioner"means apersonappointedtobean

AppellateAssistantCommissionerofIncome-taxundersub-section(1)
ofsection117;

(4) "AppellateTribunal"meanstheAppellateTribunalconstitutedundersection252;

(5) "approvedgratuityfund"meansagratuityfundwhichhasbeenand
continuestobeapprovedbythe Commissionerinaccordancewiththerules
contained in Part C of the Fourth Schedule;

(6) "approvedsuperannuationfund"meansasuperannuationfundoranypartof a
superannuation fund which has been and continues to be approved by the
Commissionerinaccordancewiththerules contained inPartBofthe Fourth
Schedule;

(7) "assessee"meansapersonbywhomincome-taxorsuper-taxoranyothersum
of money is payable under this Act, and includes—

10
(a) every person in respect of whom any proceeding under this Act has been
takenfortheassessmentofhisincomeoroftheincomeofanyotherpersoninrespect
of which he is assessable, or of the loss sustained by himor by such other
person, or ofthe amount of refund due to him or to such other person;

(b) everypersonwhoisdeemedtobeanassesseeunderanyprovisionofthisAct;

(c) everypersonwhoisdeemedtobeanassesseeindefaultunderanyprovisionofthis
Act;

(8) "assessment"includesre-assessment;

(9) "assessmentyear"meanstheperiodoftwelvemonthscommencingonthe1st
day of April every year;

(10) "averagerateofincome-tax"meanstheratearrivedatbydividingthe
amountofincome-taxcalculatedonthetotalincome, bysuchtotalincome;

(11) "averagerateofsuper-tax"meanstheratearrivedatbydividingthe
amountofsuper-taxcalculatedonthetotalincome, bysuchtotalincome;

(12) "Board"meanstheCentralBoardofRevenueconstitutedundertheCentral
BoardofRevenueAct,1924(4of1924);

(13) "business"includesanytrade,commerceormanufactureoranyadventureor
concern in the nature of trade, commerce or manufacture;

(14) "capitalasset"meanspropertyofanykindheldbyanassessee,whetherornot
connected with his business or profession, but does not include—

(i) anystock-in-trade,consumablestoresorrawmaterialsheldforthepurposesof
his business or profession;

(ii) personaleffects,thatistosay, movableproperty(includingwearingapparel,

jewelleryand furniture)held forpersonalusebytheassesseeoranymemberof his
family dependent on him;

(iii) agriculturallandinIndia;

(15) "charitable purpose" includes reliefofthe poor, education, medicalrelief,

andtheadvancementofanyotherobjectofgeneralpublic utilitynot involving the
carrying on of any activity for profit;

11
(16) "Commissioner"meansapersonappointedtobeaCommissionerof
Income-tax under sub-section (1) of section 117;

(17) "company"means—

(i) anyIndiancompany,or

(ii) any association, whether incorporated or not and whether Indian or non-
Indian,whichisorwasassessableorwasassessedundertheIndianIncome-taxAct,
1922 (11 of1922), as acompany forthe assessment yearcommencingonthe 1st
dayofApril, 1947, orwhich is declared by generalorspecialorderofthe Board
to be a company for the purposes of this Act;

(18) "companyinwhichthepublicaresubstantiallyinterested"—Acompanyissaid
to be a company in which the public are substantially interested—

(a) ifitisacompanyownedbytheGovernmentorinwhichnotlessthanfortypercent
of the shares are held by the Government; or

(b) ifitisnotaprivatecompanyasdefinedintheCompaniesAct,1956(1of1956),
and

(i) its shares (not being shares entitled to a fixed rate ofdividend whether with
orwithoutafurtherrighttoparticipateinprofits)carryingnotlessthanfiftypercentof
the voting power have been allotted unconditionally to, or acquired
unconditionallyby, andwerethroughouttherelevantprevious yearbeneficially
held by, the Government or a corporation established by a Central, State or
Provincial Act or the public (not being a director, or a company to which this
clause does not apply);

(ii) thesaidshareswereatanytimeduringtherelevantpreviousyearthesubject
ofdealinginanyrecognisedstockexchangeinIndiaorwerefreelytransferable by the
holder to other members of the public, and

(iii) theaffairsofthecompany, orthesharescarryingmorethanfiftypercentof its

totalvotingpowerwereatnotimeduringtherelevantprevious yearcontrolled or
held by five or less persons.

Explanation1.—Incomputingthenumberoffiveorlesspersonsaforesaid,—

(i) theGovernmentoranycorporationestablishedbyaCentral,Stateor
ProvincialActorcompanytowhichthisclauseappliesshallnotbetakeninto
account, and

12
(ii) personswhoarerelativesofoneanother,andpersonswhoarenomineesofany
other person together with that other person, shall be treated as a single
person.

Explanation2.—Initsapplicationtoanysuchcompanyasisreferred to insub-
clause(2)ofclause(iii)ofsection109, sub-clause(b)shallhaveeffectas iffor
thewords"not lessthanfiftypercent"and"morethanfiftypercent"thewords "not
lessthanfortypercent"and"morethansixtypercent"hadbeen substituted;

(19) "co-operativesociety"meansaco-operativesocietyregisteredundertheCo-
operativeSocieties Act,1912(2of1912),orunderanyotherlaw forthetime being
in force inany State for the registration ofco-operative societies;

(20) "director", "manager"and "managingagent", inrelationto a company,

havethemeaningsrespectivelyassignedtothemintheCompaniesAct,1956(1of
1956);

(21) "Director of Inspection" means a person appointed to be a Director of

Inspectionundersub-section(1)ofsection117,andincludesapersonappointedtobe
an Additional Director of Inspection, a Deputy Director of Inspection oran
Assistant Director of Inspection;

(22) "dividend"includes—

(a) anydistributionbyacompanyofaccumulatedprofits, whethercapitalisedor not,

ifsuchdistributionentails the release bythe companyto its shareholders of all or
any part of the assets of the company;

(b) any distribution to its shareholders by a company of debentures, debenture-

stock, or deposit certificates in any form, whether with or without interest, and
anydistributionto its preference shareholders ofshares bywayof bonus, to the
extenttowhichthecompanypossessesaccumulatedprofits,whethercapitalised or
not;

(c) anydistributionmadetotheshareholdersofacompany onits liquidation,to the

extenttowhichthedistributionisattributabletotheaccumulatedprofitsofthe
company immediately before its liquidation, whether capitalised or not;

(d) any distribution to its shareholders by a company on the reduction of its

capital,totheextenttowhichthecompanypossessesaccumulatedprofitswhich arose
aftertheendoftheprevious yearendingnextbeforethe1stdayofApril,1933, whether
such accumulated profits have been capitalised or not;

13
(e) any payment by a company, not being a company in which the public are
substantially interested, ofanysum(whether as representinga part ofthe assets
ofthe companyorotherwise)bywayofadvance or loantoa shareholder, being a
person who has a substantial interest in the company, or any payment by any
suchcompanyonbehalf, or fortheindividualbenefit, ofanysuchshareholder,
totheextenttowhichthecompanyineithercasepossessesaccumulatedprofits;

but"dividend"doesnotinclude—

(i) a distribution made inaccordance withsub-clause (c) or sub-clause (d) in

respectofanyshareissuedforfullcashconsideration,wheretheholderoftheshare
is not entitled in the event of liquidation to participate in the surplus assets;

(ii) anyadvance or loan made to a shareholder bya company inthe ordinary

courseofitsbusiness, wherethe lendingofmoneyisasubstantialpartofthe
business of the company;

(iii) anydividendpaidbya companywhichis setoffbythe companyagainst

thewholeoranypartofanysumpreviouslypaidbyitandtreatedasadividendwithin
the meaning of sub-clause (e), to the extent to which it is so set off.

Explanation1.—Theexpression"accumulatedprofits",whereveritoccursin this
clause,shallnotincludecapitalgainsarisingbeforethe1stdayofApril,1946,or after
the 31st day of March, 1948, and before the 1st day of April, 1956.

Explanation2.—Theexpression"accumulatedprofits"insub-clauses(a),(b),
(d)and(e), shallincludeallprofits ofthecompanyuptothedateofdistribution or
paymentreferredto inthosesub-clauses,and insub-clause(c)shallincludeall
profits of the company up to the date of liquidation;

(23) "firm", "partner" and "partnership" have the meanings respectively

assigned to them in the Indian Partnership Act, 1932 (9 of1932); but the
expression"partner"shallalsoincludeanypersonwho,beingaminor,hasbeen
admitted to the benefits of partnership;

(24) "income"includes—

(i) profitsandgains;

(ii) dividend;

14
(iii) thevalueofanyperquisiteorprofitinlieuofsalarytaxableunderclauses
(2)and(3)ofsection17;

(iv) the value of any benefit or perquisite, whether convertible into money or
not, obtained from a company either by a director or by a person who has a
substantial interest in the company, or by a relative of the director or such
person, and any sum paid by any such company in respect of any obligation
which,butforsuchpayment,wouldhavebeenpayablebythedirectororotherperson
aforesaid;

(v) anysumchargeabletoincome-taxunderclauses(ii)and(iii)ofsection28or
section 41 or section 59;

(vi) anycapitalgainschargeableundersection45;

(vii) theprofitsand gainsofanybusinessofinsurancecarriedonbya mutual

insurance company or by a co-operative society, computed in accordance
withsection44oranysurplustakentobesuchprofits and gainsbyvirtueof
provisions contained in the First Schedule;

(25) "Income-taxOfficer"meansapersonappointedtobeanIncome-tax
Officer under section 117;

(26) "Indiancompany"meansacompanyformedandregisteredunderthe
CompaniesAct,1956(1of1956),andincludes—

(i) acompanyformedandregisteredunderanylawrelatingtocompanies
formerlyinforceinanypartofIndia(other thantheStateofJammuand
Kashmir);

(ii) inthecaseoftheStateofJammuand Kashmir,acompanyformedand

registered under any Law for the time being in force in that State:

ProvidedthattheregisteredofficeofthecompanyinallcasesisinIndia;

(27) "InspectingAssistantCommissioner"meansapersonappointedtobean
InspectingAssistantCommissionerofIncome-taxundersub-section(1)
ofsection117;

(28) "InspectorofIncome-tax"meansapersonappointedtobeanInspectorof
Income-tax under sub-section (2) of section 117;

(29) "legalrepresentative"hasthemeaningassignedtoitinclause(11)of
section 2 of the Code of Civil Procedure, 1908 (5 of 1908);

15
(30) "non-resident"meansapersonwhois nota"resident",andforthepurposes
ofsections 92, 93, 113and 168, includes apersonwho is not ordinarilyresident
within the meaning of sub-section (6) of section 6;

(31) "person"includes—

(i) anindividual,

(ii) aHinduundividedfamily,

(iii) acompany,

(iv) a firm,

(v) anassociationofpersonsorabodyofindividuals,whetherincorporatedornot,

(vi) alocalauthority,and

(vii) everyartificialjuridicalperson,notfallingwithinanyoftheprecedingsub-
clauses;

(32) "personwho hasasubstantialinterestinthe company", inrelationtoa

company, means a person who is the beneficialowner ofshares, not being
sharesentitledtoa fixedrateofdividendwhetherwithorwithoutarightto
participateinprofits,carryingnot lessthantwentypercentofthe votingpower;

(33) "prescribed"meansprescribedbyrulesmadeunderthisAct;

(34) "previousyear"meansthepreviousyearasdefinedinsection3;

(35) "principalofficer",usedwithreferencetoalocalauthorityoracompanyorany
other public body or any association of persons or anybody of individuals,
means—

(a) thesecretary,treasurer, manageroragentoftheauthority,company,

association or body, or

(b) anypersonconnectedwiththe management oradministrationofthelocal

authority,company,associationorbodyuponwhomtheIncome-taxOfficerhas
served a notice of his intentionoftreating himas the principalofficer thereof;

(36) "profession"includesvocation;

16
(37) "publicservant"hasthesamemeaningasinsection21oftheIndianPenalCode
(45 of 1860);

(38) "recognised provident fund" means a provident fund which has been and
continues to be recognised by the Commissioner in accordance with the rules
contained in Part A of the Fourth Schedule, and includes a provident fund
establishedunderaschemeframedundertheEmployees'ProvidentFundsAct,1952
(9of1952);

(39) "registeredfirm"meansafirmregisteredundertheprovisionsofclause(a)of
sub-section (1) ofsection185 or under that provisionread withsub-section
(7)ofsection 184;

(40) "regularassessment"meanstheassessmentmadeundersection143
orsection144;

(41) "relative",inrelationtoanindividual,meansthehusband,wife,brotheror
sister or any lineal ascendant or descendant of that individual;

(42) "resident"meansapersonwhoisresidentinIndiawithinthemeaningof
section 6;

(43) "tax"meansincome-taxandsuper-taxchargeableundertheprovisionsofthis
Act;

(44) "TaxRecoveryOfficer"means—

(i) aCollector;

(ii) anadditionalCollectororanyotherofficerauthorisedtoexercisethepowers ofa

Collectorunderanylawrelatingtolandrevenue forthetimebeinginforce ina State;
or

(iii) anyGazettedOfficeroftheCentraloraStateGovernmentwho maybe

authorisedbytheCentralGovernment,bynotificationintheOfficialGazette,to
exercise the powers of a Tax Recovery Officer;

(45) "totalincome"meansthetotalamountofincomereferredtoinsection5,
computed in the manner laid down in this Act;

(46) "totalworldincome"includesallincomewhereveraccruingorarising,
except incomes whichare not included inthe total income underanyofthe
provisionsofChapterIIIandexceptanycapitalgainswhichare not includible in
the total income of an assessee;

17
(47) "transfer",inrelationtoacapitalasset,includesthesale,exchangeor
relinquishmentoftheassetortheextinguishmentofanyrightsthereinorthe
compulsory acquisition thereof under any law;

(48) "unregisteredfirm" meansafirmwhichisnotaregisteredfirm.

RESIDENTIALSTATUSOFANINDIVIDUAL-SECTION6
Section5&6oftheIncomeTaxAct,1961aretheguidingsectionsfortaxability of
income ofanytaxpayer inIndia. Section5 ofthe Income TaxAct deals withthe
―ScopeofIncome‖whereassection6helpsindeterminingresidentialstatus
ofanytaxpayerinIndia.DeterminationoftheresidentialstatusundertheIncomeTaxAct
playsanimportantroleindeterminingwhetherincomeofanypersonis
taxableinIndiaornot.Inthisarticle,weshalldiscusstherules fordetermination of
residentialstatus ofan individualtaxpayer and also discuss various amendments
relating to residential status made by Finance Act, 2020 & 2021.

Objectiveofdeterminingresidentialstatus:
Determining the residential status of any assessee is the first and foremost task
for ascertaining the taxable income of such assessee in India. As per section 6,
theresidentialstatusofanytaxpayercanbeclassifiedintotwoparts:
(a) Resident
(b) Non-Resident
In the case of Individual assessees, the Resident can be further classified as
―Resident and Ordinarily Resident‖ (ROR) and ―Resident but not ordinarily
resident‖ (RNOR). However, in case of other assessees, there are only two
categories i.e. Resident and Non-Resident. Finance Act, 2020 has introduced a
concept of ―deemed resident‖ for Resident Individuals which has been so
introduced to curb the incidence of tax evasion. It is to be noted that residential
statusofanyassesseeisascertained inrespect ofeachprevious yearandnotona
particulardate.ApersonwhoisaRORinaparticularpreviousyearmaybecome RNOR
or NR in next year or so.

ResidentialstatusincaseofIndividuals:[Section6(1)/6(1A)/6(6)]
TaxabilityofanindividualvisitingIndia orgoingoutside India has always beena
matterofconcernforthe revenue authorities. Recentamendments made bythe
Governmentby FinanceAct,2020 areinthislinetoplugloopholesinthemanner
ofdeterminationofresidentialstatus ofindividuals &consequential taxabilityof
their income. Residential status of an individual determines whether his global
income shall be taxable in India or not.
Therefore, we willfirst determinetheresidentialstatusofanindividualbased on
numberofdayshestayedinIndiainaccordancewithsection6oftheIncomeTax

18
Act.Onthebasisofhisresidentialstatus,section5oftheActwillgovernushow the
income of resident will be taxable in India.

Accordingtosection6(1),anindividualissaidtobearesidentifhesatisfiesANYof the
following conditions:
(i) HisperiodofstayinIndiaduringthepreviousyearfor182daysormore;OR
(ii) Hisperiodofstay60daysormoreinthepreviousyear+365daysormorein
preceding 4 previous years;

ThesearethePRIMARYCONDITIONSforapersonbeingaresident.However, there
are two exceptions to the above rule.
Exception-1: IfanIndiancitizenwho leaves India in anyprevious
yearasa memberofthecrewofanIndianshipor forthepurposes of
employment outside India, he will be considered as ―Resident‖
ifhisperiodofstayinIndiais182daysormore.Thecondition(ii) as
above need not be checked.
Exception-2:IndiancitizenorapersonofIndianorigin(PIO),who
beingoutsideIndia,comesonavisittoIndiainanyprevious year, he
willbeconsideredas―Resident‖ifhisperiodofstayinIndiais
182daysormore.Thecondition(ii)asaboveneednotbe checked.
There has also been an amendment in section 6(1) of the Income
Tax Act which we will discuss below in the article at appropriate
place.

IndividualresidentcanfurtherbeclassifiedintoRORandRNOR.Forthis
purpose,theprovisionsaregivenbysection6(6)oftheIncomeTaxActasbelow:
A person is said to be ―Resident but not ordinarily resident‖ in
India in any previous year if satisfies ANYONE of the following
conditions-
(a) Ifsuchindividualhas beena non-resident inIndia inany9out of
10 previous years preceding the relevant previous years, OR
(b) Ifsuchindividualhas beeninIndia foraperiodof729days or less
during the 7 previous years preceding the relevant previous year.

To make it simple, an individual is said to be ―Resident and

ordinarily Resident‖ if he satisfies both the following conditions:

19
 (a) Ifsuchindividual hasbeenaresident inIndia inany2years ormore
out of 10 previous years preceding the relevant previous year
AND
(b) His period of stay in India is 730 days or more during the 7
previous years preceding the relevant previous year.
If the individual satisfies both the conditions as above, he is a
‗ResidentandordinarilyResident‘butifhefailstosatisfyanyoneofthe
two conditions he will be ‗Resident but not ordinarily Resident‘.

Notes:
 Residentialstatusistobedeterminedonyear-to-yearbasis.
 Person of Indian Origin (PIO): A person is saidto be of Indian originif
heoreitherofhisparentsoranyofhisgrandparents,wasborninUndivided India.
 Theterm―StayinIndia‖ includes stayintheterritorialwatersofIndia(i.e. 12
nautical miles inthe sea fromIndiancoastalline). Thus, evenstay ona ship
or boat moored inthe territorial water of India will be sufficient to make
the individual as resident in India.
 It is not necessary that the stay in India must be continuous or active
norisitessentialthatthestayshouldbeattheusualplaceofbusiness,residence or
employment of the individual.
 For the purpose of counting the number of days of stay in India, both the
date of arrival and date of departure are considered to be in India.
 The residence of an individual has nothing to do with his domicile, place
ofbirthorcitizenship.Anindividualcantherefore,beresidentinmorethan one
country even though he can have only one domicile.

HowtodetermineperiodofstayinIndiaforanIndiancitizen,beingacrew member
Incaseofforeignboundships,whosedestinationofvoyageisoutsideIndia,there was
uncertainty regarding the manner of determining the period of stay in India for
anIndiancitizenwhoisacrewmemberofsuchship.Forthispurpose, Explanation-2to
section6(1) provides fordeterminationofthestayperiodinthe
prescribedmanner.Accordingly,CBDThas,videNotificationNo.70/2015dated
17.08.2015,insertedRule126intheIncomeTaxRules,1962.According to Rule 126,
incase ofanIndiancitizenwho is a crew memberof a ship, the periodofstayin India
shall, in respect of an eligible voyage, not include the following period:

Periodcommencingfrom Periodendingon

20
 Date entered into the Date entered into the
Continuous Discharge AND Continuous Discharge
Certificateinrespectof Certificate in respect of
joiningtheshipbythesaid signing off by that
individualfortheeligible individual from the ship
voyage. in respect of such
voyage.

Meaningofcertainterms:
(a) ContinuousDischargeCertificate-Thistermhasthemeaningassignedtoitin the
Merchant Shipping (Continuous Discharge Certificate cum Seafarer‘s Identity
Document) Rules, 2001 made under the Merchant Shipping Act, 1958.
(b) Eligible Voyage- A voyage undertaken by a ship engaged in the carriage of
passengers or freight in international traffic where- for the voyage having
originated from any port in India, has as its destination any port outside India;
andforthevoyagehavingoriginatedfromanyportoutsideIndia,hasdestination ofany
port in India.

DefinitionofSalary

Any remuneration received by an employee in consideration of services

rendered by his/her employer is called salary. It included all the monetary
benefits and facilities provided by the employer which are taxable. Taxable
Incomes under Salary Head As per section 15, the following incomes are
taxable under head salaries. 1. Due salary fromthe employer or former
employer2. Salarypaidorallowedtoanassesseeintheprevious year3. Any
arrearsofsalarypaidorallowedtotheassesseeinthepreviousyear4.Salaryreceived
from the present or past employer 5. To avoid the double taxation, when the
assessee received income as a salary is to taxed in advance.

TaxTreatmentProvidentFund

Provident means to provide for the future. Therefore, provident fund means
provide the fund for the future ofemployee. This fund is created bydeducting
any amount fromthe salary of the employee every month at a certain rate and
theemployeralsomakeshisowncontributiontothis fund.Thesecontributions are
invested to earn interest and it credited to employee‘s provident fund
account.Atthetimeofretirement,theemployeegetstheprovidedfundonlump sum
basis with the interest.

21
TypesofProvidentFunds

1.Statutory Provident Fund (SPF): It is regulated by the provident

funds act 1925. It applies to employees of government, semi-
governmentorganisations, localbodies,universitiesandrecognised
educational institutions. 2. Recognised Provident Fund (RPF): A
recognised provided fund is governed by the provident fund act
1952. It recognised by the chiefcommissioner of income tax. This
fund maintainedbyscheduledbanks, factories andseveralbusiness
houses. So, this is private sector undertaking provident fund. 3.
Unrecognised Provident Fund (URPF): It is neither statutory nor
recognised provided fund. Any institution or organisation can
maintainthis fund.ItisrecognisedbytheP.F.commissionernotby the
commissioner of income tax. This type of fund maintained
bytheprivatesectororganisations.4.PublicProvidentFund(PPF): It is
operated underpublic provided fund act 1968. This type offund is
open to everyone so it is suitable to self-employed people. Under
this scheme, an account operated in State Bank of India and
Subsidiary groups or at a branch of any 13 nationalised banks
authorised forthis purpose bythe centralgovernment. The amount
alongwith interest is to be payable after 15 years ofcontribution is
made.

MeaningofsalaryforProvidedfund:BasicSalary+DearnessAllowances(taken for
service benefits) + Commission on Turnover or Sales.

Accumulatedbalanceduetoemployeesparticipatinginarecognisedprovidedfund
shall be exempted on satisfying the following conditions.

1. Theemployeerenderedhis/herservicesfortheperiodof5yearsormoreor
2. Iftheemployee hasnotrenderedcontinuousservicebythereasonof
his/herillhealthorbydiscontinuousoftheemployer‘sbusinessorother
causes beyondthecontroloftheemployee. 3. Ifonthecessationofhis/her
employmenttheemployeeobtainsemploymentwithanyotheremployerand the
accumulatedbalancedueto himis transferredto his accountinrecognised fund
maintained by such other employer. Allowances Fully Exempted
Allowances 1. Allowances receivedbythe governmentemployee for
renderingservices inoutsideIndia 2.House rent allowances to judges of

22
 High Court and Supreme Court 3. Allowances received by the UNO
employees4.AllowancespaidtotheHighCourtJudges5.Transportand
Sumptuary allowances given to chairman and members of UPSC Fully
Taxable Allowances 1. Dearness Allowances, Additional Dearness
Allowances, High Cost of Living Allowances 2. City Compensatory
Allowances3.CapitalCompensatoryAllowances4.LunchAllowances.

IncomefromhousepropertyContents

-
1. Chargeability:Section22.
2. IncomefromHousePropertyExemptfromTax.
3. AnnualvalueDeterminationandFactorsConsideredinDeterminingof
Annual Value.
4. DeductionsAllowedunderIncomefromHouseProperty:Section24.
5. Conditionsforincometobetaxed.
6. Deductionnotallowed:Section25.
7. TreatmentandRulesofUnrealizedRent:Section23(1).
8. UnrealizedRentReceivedSubsequentlyto beChargedtoIncomeTax:
Section 25A, 25AA, 25B.
9. Self-OccupiedHouseProperty.
10. HousePropertyWhichcannotbeLet-OutProperty.
11. VacantHouseProperty.
12. Propertyofco-owners:Section26.
13. Deemed/MiscOwnerofHouseProperty,AnnualChargeetc.Defined:
Section27.
14. ProblemswithSolutiononIncomeFromHouseProperty.
Q: What is meant by annual value of the House Property? What are the
deductionsareallowedfromannualvalueincomputingtaxableincomefromHouse
Property?
Q:Explaintheterm"AnnualValue"andexplainwithexampleshowtheannual value
of rented house if computed.
Q:Howis"Annualvaluedeterminedu/s23oftheIncomeTaxAct?Explainthe
deductions allowable in computing "Income from house Property".

Introduction-

23
This is second head of the income of the assessee is the source from 'House
property'.Section22oftheIncomeTaxAct,1961attractsthetaxontheincome
fromHouseproperty.ItisthetaxontheAnnualValueofpropertyconsistingofany
building, Lands appurtenant there to of which the assessee is the owner.
Ifanyportionofsuchpropertywereoccupiedbytheassesseeasowner, forthe
purposeofanybusinessorprofessioncarriedonbyhim, theincome fromsuch
portionofhousepropertywouldnotbechargeableunderthe head"Income from
house property".

IncomefromHousePropertyischargeabletotaxwhenthefollowingconditionsare
satisfied:

Thereshouldbea HouseProperty.Thepropertyshouldconsistofbuildingand lands

appurtenant thereto.
AssesseeshouldbetheowneroftheHouse property. (Canbelegal/deemed
owner)Assesseeshould not usethe HousePropertyforhisownbusinessor
profession.
Buildingshouldbeapermanentstructure.Itcannotbeatemporarystructure like
exhibitions, tents etc.
Property situated in foreign country shall be taxed similar to the property
situatedinIndia.However,thetaxabilitywilldependontheresidentialstatusofthe
assessee.

 Chargeability:IncomefromHouseProperty:Section22:
Section 22:
Incomefromhousepropertyisthesecondamongstthefiveheadofincome.
Section22 to 27 ofthe Income Tax Act 1961 related to these head ofincome.
AccordingtoSection22theannualvalueofpropertyconsistingofanybuildingor land
appurtenant thereto of which the assessee is the owner shall be
chargeabletoIncomeTaxundertheheadofincomefromhouseproperty.Butifany
portion of such property is occupied by the owner for the purpose of any
business or professioncarried onbyhimthe profits ofwhichbe chargeable to
Income Taxthe annual value ofsuchportion is not chargeable to Income Tax
under this head.
Theannualvalueofpropertyconsistingofanybuildingsorlandsappurtenantthereto
ofwhichtheassesseeistheowner,shallbe chargeableto incometaxunderthe head
"Income from house property".
Theannualvalueofpropertyconsistingofanybuildingorlandsappurtenantthereto
ofwhichthe assessee is the ownershall be chargeable to income tax

24
underthishead.ItisimportanttonotethatifthehousepropertyissituatedoutsideIndia it
is taxable inIndia if the owner-assessee is resident India.
Wherethecompositerentreceivedbytheassesseefromhistenantaswellas
servicesandamenitieslikefurnitureandfixtures,waterandelectricityetc.then
onlythe originalvalue ofsuchpropertyis taxable underthis head, i.e. "Income
from House Property".
Toclearthispoint,pleasenotethefollowingincomeswhichareexcludedfromthe
Income from the House Property.
Thus,anincometobechargeableundertheheadofincomefromhousepropertymust
satisfy the following conditions:

1. IncomefromBuildingsorLandsatAppurtenantthereto-
Income Tax is payable by an assessee on the income of any building or land
appurtenant thereto. Income froman open land not attached to any building is
not chargeable to Income Tax under the head. Income from open land will be
taxed underthisheadonlywhenit isattachedtoabuilding.Openlandattached to a
buildingmaybeintheshapeofcourtyardora compoundorplaygroundoralawn or a
parking place etc. Land attached to building means in case of residential
buildingthewaytothe housegallery, kitchen, garden, playground, garageand a
place for keepinganimals etc. income frombuildingwhether situated inIndia
oroutside India is taxable underthe head 'Income fromHouse Property'.

2. AssesseeshouldbetheowneroftheProperty-
Anassesseeischargeabletoincometaxonincomefrombuildingsorlands
attachedthereto ifheistheownerofsuchbuildingsorlandsattachedthereto.

3. DeemedOwnership-
AccordingtoSection27oftheAct,thefollowingpersonsaretreatedasdeemedowner
of the house property:

i) TransferwithoutAdequateConsideration-
An individual who transfers, without adequate consideration, any house
property to his or her spouse, not being a transfer in connection with an
agreementtoliveapart,ortoaminorchildnotbeingamarrieddaughter,shallbe
deemed to be the owner of the house property so transferred.

ii) HolderofanImpartibleEstate-

25
Theholderofanimpartibleestateshallbedeemedtobetheindividualownerofallthe
properties comprised in the estate.

iii) HouseAllottedorLeasedunderanyHouseBuildingScheme-
Amemberofaco-operativesociety.companyorotherassociationofpersonstowhom
a building or part thereof is allotted or leased under a house
buildingschemeofthesociety,companyorassociation,asthecasemaybe, shall be
deemed to be the owner of that building or part thereof.

iv) PersoninPossessionofanyBuilding-
Aperson,whoisallowedtotakeortoretainpossessionofanybuildingorpartthereof in
part performance of a contract, shall be deemed to be the owner of that
building or part thereof.

v) AcquiringRightsinaBuilding-
Apersonwhoacquires anyrights (excludinganyrightbywayofa leasefrom
monthto monthor foraperiod notexceedingone year) inorwithrespecttoany
buildingorpart thereof, shallbe deemed to be the ownerofthat buildingorpart
thereof.

vi) AcquiringPropertyunderaPowerofAttorneyTransaction-
If a person has acquired a property under a 'Power of Attorney Transaction',
theyshallbedeemedasownerofthepropertythattheymaynotberegistered owner
oftheproperty.Similarly,ifthepurchaserhastakenpossessionofthepropertyor has a
right to enter upon and exercise as of possession on effectively, he shall be
deemed as owner of the property.

4. AnnualValue:
It is not the rent received which is chargeable to tax under the head "Income
from house property"but it is the annual value ofthe house propertywhich is
subject to tax underthis head. Annualvalue is that notionalrent forwhichthe
propertycanreasonablybeletoutfromyeartoyear.Thus,theannualvalueofhouse
propertydoes not meanthe rentreceivedbut it means the expected rentwhich can
reasonably be taken from the house property. Annual value of the
ownershipofpropertyis chargedtotax, irrespectiveofthe factwhetherornot any
income was either actually received or had accrued to the assesse.

5. PropertyinOccupationofOwner'sBusinessorProfession:

26
Ifanassesseeuses his ownhouse propertyoranyportionofit forpurposes of any
business or profession carried on by him, the profits of which are chargeable
to income tax, the income from such house property or fromany
portionofsuchhousepropertywillnotbechargeabletoincometax.Thus,two things
are important in order to exempt the income from house property on
thisground:i)Thebusinessorprofessionmustbeownedbytheownerofhouse
property.

ii) Theprofitsofsuchbusinessorprofessionmustbechargeableto incometax under

Income Tax Act, 1961. If inany year, there is loss inthe said business or
profession,eventhen,theincome fromhousepropertywillnotbechargeableto
income tax. But if any house property has been let out for the purposes of
business or profession, the income from such house property shall be taxable
under the head"Income from house property.

 IncomefromHousePropertyExemptfromTax:
Exemptionofincome fromhousepropertycanbedividedintofollowingtwo
categories:
1) FullyExemptIncomes
2) PartlyExemptIncomes

FullyExemptIncomes:

Inthefollowingcasesincomefrompropertyisnotchargetotax.

1) Farm House : Income from any building owned or occupied by an

agriculturistorreceiverofrent /revenueofsuchlandprovidedthatthebuilding is
intheimmediatevicinityofagriculturallandandisusedasadwellinghouseorasa
store house or other out-building.

2) PropertyHeldforCharitablePurposes:AsperSection11,wherethe
propertyis heldforcharitableorreligiouspurposestheincomefromsuch
property is exempt from tax.

27
3) House Property used for ownBusiness / Profession :It falls under the head
Income fromBusinessandProfessionand althoughno incomewillbederived but
deductions /allowances ofsuch propertyshallbe allowed underthat head.

4) Self-OccupiedHouse:Annualvalueofoneself-occupiedhouseshallbetaken
as nil.

5) House Property of Registered Trade Union [exempt u/s 10 (24)J/Local

Authority(exemptu/s10(20)]:Theincomefrompropertyheldbyaregisteredtrade
union/local authority is not taxable.

6) PalaceofEx-Ruler:Theannualvalueofanyonepalaceintheoccupationofanex-
ruler shall be exempted from tax.

7) Propertyincomeofanapprovedscientificresearchassociationisexemptu/s
10(21).

8) Propertyincomeofanyhospitalorother institutionexistingsolely for

philanthropicpurposesandnotforpurposesofprofit,isexemptu/s10(23C).

9) Propertyincomeofanyuniversityorothereducationalinstitutionexisting
solelyforeducationalpurposeandnotforthepurposeofprofitisexemptus 10(23
C).

10) Propertyincomeofastatutorycorporationoraninstitutionorassociation
financed by the government for promoting the interests of members of
Scheduled Castes or Scheduled Tribes is exempt u/s 10(26 B).

11) Propertyincomeofapoliticalpartyisexemptundersection13-A.

Partly Exempt Incomes :

28
Thefollowingpropertyincomesareincludedintheassessee'stotalincomebutarenot
liable to tax:

1) Income derived by a co-operative society from the letting of godowns or

warehousesforstorage,processingorfacilitatingthemarketingofcommodities,is
wholly deductible u/s 80-P (2) (e).

2) Propertyincomeofaco-operativesocietyisfullydeductible u/s80-P(2)(1).
provided the gross total income of the society does not exceed Rs. 20,000
andthesocietyisnota housingsocietyoranurbanconsumer'ssociety ora
societycarryingontransportbusinessorasocietyengagedintheperformanceofany
manufacturing operations with the aid of power.

 AnnualValue:
AsperSection23(1)(a)theannualvalueofanypropertyshallbethesumfor
whichthepropertymightreasonablybeexpectedtobelet fromyeartoyear. It may
neither be the actual rent derived nor the municipal valuation of the
property.Itissomethinglikenotionalrentwhichcouldhavebeenderived,had the
property been let.

DeterminationofAnnualValue:Section23:

The measureofchargingincometaxunderthis headistheannualvalueofthe

property, i.e., the inherent capacity of a building to yield income. The
expression'annualvalue'hasbeendefined inSection23(1)oftheIncometax Act as:

1. Forthepurposesofsection22,theannualvalueofanypropertyshallbe
deemed to be :
a) Thesumforwhichthepropertymightreasonablybeexpectedtoletfromyear
to year.
b) Wherethepropertyoranypartofthepropertyisletandtheactualrent
receivedorreceivablebytheowner inrespectthereofis inexcessofthesum
referred to in clause (a), the amount so received or receivable.

29
c) Wherethepropertyoranypartofthepropertyisletandwasvacantduring
thewholeoranypartoftheprevious yearandowingtosuchvacancytheactual rent
received or receivable by the owner in respect thereof is less than the sum
referred to in clause (a), the amount so received or receivable.
Providedthatthetaxes leviedbyanylocalauthorityinrespectoftheproperty
shallbededucted(irrespectiveofthepreviousyearinwhichtheliabilitytopaysuch
taxes was incurred by the owner according to the method of accounting
regularlyemployed by him) inprevious year inwhichsuchtaxes are actually paid
by him.

2. Wherethepropertyconsistsofahouseorpartofahousewhich:
a) Isintheoccupationoftheownerforthepurposesofhisownresidence.
b) Cannotactuallybeoccupiedbytheownerbyreasonofthe factthatowingto his
employment, business or profession carried on at any other place, he has to
resideatthatotherplaceinabuildingnotbelongingtohim,theannualvalueofsuch
house or part ofthe house shall be taken to be nil.

3. Theprovisionsofsub-section(2)shallnotapplyif:
a) Thehouseorpartofthehouseisactuallyletduringthewholeoranypartof the
previous year.
b) Anyotherbenefittherefromisderivedbytheowner.

4. Wherethepropertyreferredtoinsub-section(2)consistsofmorethanonehouse
:
a) Theprovisionsofthatsub-sectionshallapplyonlyinrespectofoneofsuch
houses, which the assessee may, at his option, specify in this behalf.
b) The annual value of the house or houses, other than the house in respect of
whichtheassesseehasexercisedanoptionunderclause(a),shallbedetermined under
sub-section (1) as if such house or houses had been let.
Tosayinshortthatannualvalueofpropertyisthesumforwhichtheproperty could
reasonably be expected to let from year to year. Expected rent can be
determined by taking in to the consideration of the following factors.

FactorsConsideredinDeterminingAnnualValue:

Indeterminingtheannualvaluetherearefourfactorswhicharenormallytakeninto
consideration. These are as follows :

30
1) ActualRentReceivedorReceivable(AR)-
Actualrentreceived/receivableisanimportantfactorindeterminingtheannualvalue
of a property though this is not the only decisive factor. The actual rent
couldbedependent uponvarious considerations. Therecouldbecircumstances
where the owner agrees to bear certainobligations ofthe tenant, e.g., the water
and electricity bills of the tenant may be payable by the owner.
In this case, the de facto rent will be calculated by stepping down the rent
received /receivable by the amount spent by the owner on meeting the
obligationofthetenant.Ontheotherhand,ifanyobligationoftheownerismetbythe
tenant, the de facto rent will be computed by stepping up the rent received
/receivablebytheamountspentbythetenant indischargingtheobligationof the
landlord.
Anydepositreceivedfromthetenantforpropertyisacapitalreceiptandthus,itcannot
be treated as income. Further while determining the actual rent, no notional
interest on such deposit should be considered.

2) MunicipalValue(MV)-
This is the value as determined by the municipal authorities for levying
municipaltaxesonhouseproperty.Municipalauthoritiesnormallychargehouse
tax/municipal.taxesonthebasisofannuallettingvalueofsuchhouseproperty, which
is determined by it based upon many considerations.
The local authority makes a periodically survey of all buildings in its
jurisdiction.Suchvaluationmayconsideredforearningcapacityofabuilding. Please
to be noted that such valuation is not a conclusive evidence because in the big
cities the valuation by the local authorities might be high compare to other
cities. e.g. Delhi, Kolkata, Mumbai etc.

3) FairRentoftheProperty(FR)-
Fair rent is the rent which a similar property can fetch in the same or similar
locality,ifitisletforayear.Fairrentofthepropertycanbedeterminedonthebasisofa
rent fetched by a similar property in the same locality.

4) StandardRent(SR)-
Thestandardrent is fixed undertheRentControlAct. Ifthestandardrent has been
fixed for any property under the Rent Control Act, the owner cannot be
expectedtogetarenthigherthanthestandardrentfixedundertheRentControlAct.
Therefore, this is also an important factor indeterminingthe annual value.

31
MunicipalvaluationandFairvalueofthepropertyinwhich,TheHigherof(1)or(2) is
Generally Taken as Expected Rent :

1. ItisimportanttonotethatifthepropertyiscoveredundertheRentControlAct,
then the amount so calculated cannot exceed the "Standard Rent"
determinable under the Rent Control Act.

2. Incomeofrentreceivedfromvacantland.

3. Incomefromthehousepropertyintheimmediatevicinityofagriculturallandand
used as a store house, dwelling house etc. by the cultivators.

 DeductionsAllowedunderIncomefromHouseProperty:Section24:
Incomechargeableunderthehead"Incomefromhouseproperty"shallbecomputed
after making the following deductions, namely :

1) StandardDeduction:
From the net annual value computed, the assessee shall be allowed a standard
deductionofasumequalto30%ofthenetannualvalue.Thisdeductionislikestandard
deduction which is allowed from gross salary.

2) InterestonBorrowedCapital:
Where the property has been acquired, constructed, repaired, renewed or
reconstructedwithborrowedcapital,theamountofanyinterestpayableonsuch
capitalisallowedasadeduction.Theamountofinterestpayableyearlyshould be
calculated separatelyand claimed as a deductionevery year. It is immaterial
whether the interest has been actually paid or not paid during the year. The
following points should also be kept in view:

i) Interestonborrowedcapitalis deductibleon"accrual"basis. Itcanbe

claimedonyearlybasis,eveniftheinterestisnotactuallypaidduringtheyear.

32
ii) Deductionisavailableevenifeithertheprincipalnortheinterestischargedon
property.

iii) Interestonunpaidinterestisnotdeductible.

iv) Nodeductionisallowedforanybrokerageorcommissionforarrangingtheloan.

v) Interest on a fresh loan, taken to repay the original loan raised for the
aforesaidpurpose,is"allowable"asdeduction.Thisruleisapplicableevenifthe
original loan was interest free.

vi) Ifamountborrowedisnotutilizedforacquisition,construction,repairs,etc.,
ofhouseproperty,deductioncannotbeclaimedforinterestdue.Insuchacase, any
deduction already claimed will be withdrawn by re-assessment under
Section 147.

vii) Interest onborrowingcanbe claimed as deductiononlybythe personwho

hasacquiredorconstructedthepropertywithborrowedfund.Itisnotavailable
tothesuccessortotheproperty(ifthesuccessorhasnot utilizedborrowed funds for
acquisition, etc.).

viii) Interestonborrowedcapitalisdeductiblefullywithoutanymaximum
ceiling (in the case of a let out property).
Therearetwotypesofinterest:
i) PostAcquisitionInterest :Amountofdeductionisactualamountofpost
acquisition interest.
ii) PreAcquisitionInterest:Amountofdeductionis1/5thoftotalpre
acquisition interest.

 TheBasicConditionsmustbeSatisfiedforIncometobeTaxedunderthe Head
Income from House Property :
1. Thepropertyconsistsofbuildingsorlandadjacentthereto.
2. Theassesseemustowntheproperty.

33
 3. If the property used for the purpose of business or profession carried on
by him, the profits will be charged to income tax under the Head "Profit
and Gains fromBusiness or Profession". Ifa firmcarries onbusiness ina
buildingownedbytheassessee-partner,noincomefromthesaidpropertywill
be computed in the hands of the partner.
 AmountsNotDeductiblefromIncomefromHouseProperty:Section25
:
Anyinterestchargeableunderthis ActwhichispayableoutsideIndia(notbeing
interest on a loan issued for public subscription before the 1st day of
April,1938).Onwhichtaxhasnotbeenpaidordeductedinrespectofwhichthereis
nopersoninIndiawho maybetreatedas anagent undersection163, shall not be
deducted incomputingthe income chargeable under the head "Income from
house property".

Special Provision for Cases where Unrealized Rent Allowed

asDeductionisRealizedSubsequently:Section25A:(IntheAssessmentYear
2001-02 or Earlier) :

Whereadeductionhasbeenmade underclause(x)ofsub-section(1)ofsection 24 in
the assessment for any year in respect of rent from the property let to a tenant
which the assessee cannot realize and subsequently during any previous
yeartheassesseehasrealizedanyamountinrespectofsuchrent,theamountsorealized
shall be deemed to be income chargeable under the head "Income
fromhousepropertyandaccordinglychargedtoincome-tax(without making any
deduction under section 23 or section 24 as the income of that previous year,
whether the assessee is the owner of that property inthat year or not.
Where any amount of the rent could not be realized by the owner of the
property during any of the previous year/s and subsequently, if such rent is
realized,thensuchamountwillbetreatedasincomefromthehousepropertyofthat
year in which it is received.
Itisnotnecessarythattheassesseemustbeownerofthepropertyevenduringtheyear of
realization of rent.

IncomefromHousePropertyunderDifferentConditions:
 TreatmentofUnrealizedRent(Section23(1)]:

As per the explanation, the actual rent received or receivable mentioned in

Section23(1)(b)and(c)shallnotincludetheamountofrentwhichtheownercannot
realize, subject to the rules made in this behalf.

34
RulesforUnrealizedRent:
Theamountofrentwhichtheownercannotrealizeshallbeequaltotheamountofrent
payable but not paid by a tenant ofthe assessee and so proved to be lost and
irrecoverable where:
1) Thetenancyisbonafide.
2) Thedefaultingtenanthasvacated,orstepshavebeentakentocompelhimtovacate
the property.
3) Thedefaultingtenantisnotinoccupationofanyotherpropertyofthe
assessee.
4) Theassesseehastakenallreasonablestepstoinstitutelegalproceedingsforthe
recovery of the unpaid rent or satisfies the Assessing Officer that legal
proceedings would be useless.

 UnrealizedRentReceivedSubsequentlyto beChargedtoIncomeTax:
Section 25A :
Whereadeductionhasbeenclaimedandallowedtotheassesseeinrespect
ofunrealizedrentinassessmentyear2001-02orpriortothatandsubsequentlythe
assessee realizes any amount respect ofsuch rent, the amounts so realized shall
be deemed to be income chargeable under the head "income from house
property" and accordingly charged to tax as the income of that previous year,
irrespectiveofthe factwhethertheassessee istheownerofthepropertyinthat year or
not.NodeductionunderSection23orSection24whatsoeverwillbeallowedto the
assessee from such unrealized rent recovered.

Section25AA:
Where assessee cannot realize the rent from the property let to tenant and
subsequently the assessee has realized any amount in respect of such rent, the
amountsorealizedshallbedeemedtobetheincomechargeableundertheheadincome
from house property and accordingly charged to the income tax as the income
of that previous year in which such rent is realized whether or not
theassesseeistheownerofthatpropertyinthat year.

Section25B:
1. Thetaxpayeristheownerofanypropertyconsistingofanybuildingsor lands
appurtenant thereto which has been let to a tenant.

35
2. Hehasreceivedanyamount,bywayofarrearsofrentfromsuchproperty,not
charged to Income tax for any previous year.

3. Theamountsoreceived(afterdeductingasumequalto30%ofsuchamount)shall
be deemed be the income chargeable under the head income from house
property.

4. Itistaxableinthepreviousyearinwhichitisreceived.

5. Itistaxableeveniftheassesseeisnottheownerofthatpropertyintheyearinwhich
he has received arrears of rent.

ProvisionofSection25Bareclarificatoryinnatureandshouldbegivenretrospective
elfect. (CIT v/s DOWAGER Maharani Residential
AccommodationWelfareAssociationTrust(2008)217CTR(Raj)497)

 Self-OccupiedHouseProperty:

Self-occupiedhousepropertymeansthehousepropertyusedbyitsownerforhisown
residential purpose. In order to determine the annual value of such house
property, it has been classified into the following:

1) HousePropertyFullyUtilizedthroughoutthePreviousYearfor Self
Residential Purpose (Sec. 23(2)(a)] :
Wherethepropertyconsistsofa houseorpartofa house intheoccupationof
theowner for hisownresidence, theannualvalueofsuchhouseorpartofthe house
shall be taken to be Nil. ifthe following two conditions are satisfied:
i) Thepropertyorpartthereofisnotactuallyletduringwholeoranypartofthe
previous year.
ii) Theownerhasnotderivedanyotherbenefitfromthepropertyduringthe
previous year.

2) HousePropertynotFullyUtilizedforSelfResidentialPurpose(Sec.
23(2)(b) and 23(3)) :

36
Suchhousepropertycanbedividedintothreegroups:

i) HousePropertywhichisnotActuallyOccupiedbytheOwner:
Wherethepropertyconsistsofahouseorpartofahousewhichis notactually
occupiedbytheownerpreviousyearandthefollowingconditionsaresatisfied,the
annual value ofsuch property (house or part ofthe house) shallbe taken to be
'Nil':
a) Thehousepropertyisnotactuallyoccupiedbytheownerbyreasonofthefact
that owing to his employment, business or profession carried on at
anyotherplace;
b) Heresidesatthatotherplaceinabuildingnotownedbyhim;
c) Suchhousepropertyorpartthereofisnotactuallylet-outduringwholeorany
part of the previous year; and
d) Theownerhasderivednootherbenefitfromsuchhouseproperty.

ii) HousePropertyaPartofwhichisSelf-OccupiedandRemainingPart is Let- Out :

Where the property consists of a house which has two or more independent
residentialunits,oneofwhichisself-occupiedforownresidentialpurposesandother
unit or units are let-out, annual value ofsuch house property shallbe computed
as follows:
a) Annualvalueofresidentialunitshallbetakentobe'Nil'.
b) Annualvalueofrentedunitorunitsshallbecomputedinthesamemannerasin
'annual value of let-out house property'.

iii) HousePropertywhichisSelf-Occupied forpartofthepreviousyearand let out

for the remaining part of the previous year :
wherethepropertyconsistsofahousewhichislet out forapartoftheprevious year
and self occupied for the remaining part of the previous year annual value of
searchhousepropertyshallbecomputedasifthepropertyisletoutthroughout the
previous year. No concession for self occupied period will be given.

3) MorethanOneSelf-OccupledHouseProperties[Sec.23(4)]:
If an assessee is owner of more than one house and uses them for his own
residence,theannualvalueofonlyoneoftheseself-occupiedhousesistakenas'Nil'.
Remaining housesshallbedeemedtobelet outandtheirannualvalueshallbe
calculated as let out houses. Which of the houses is treated as self-

37
occupiedwilldepend uponthewilloftheassessee.Thehousesnotchosenby the
assessee as self-occupied are deemed to be let-out houses.

 HousePropertyWhichcannotbeLet-OutProperty:

Where a house propertycannot be let-out or no other benefit canbe derived

fromit, onaccountofanyofthe followingreasons, itsannualvalueshallbe 'Nil' :
1) Thehousepropertyissituatedatsuchaplacewhereitisnotworthliving,
2) The houseiscloseddownbytheownerasitis notworthlivingonaccountof its
being fallen down or being in a state of fallen down.
ThenotionalrentofsuchhouseisNil;hencetheannualvaluewillalsobe Nil.

 VacantHouseProperty:

AccordingtoSection23(2)and(3),wheretheownerhasonlyoneresidentialhouse,
whichcannotactuallybeoccupiedbyhimbyreasonofthe factthatowingto his
employment, business or profession carried on at any other place, he has to
resideatthatotherplace,inabuildingnotbelongingtohim,theannualvalueofthe
houseshallbetakentobeNil,providedthatthe followingconditionsare fulfilled.
1) Suchhouseisnotactuallylet
2) Nootherbenefittherefromisderivedbytheowner.

But to availthe benefit ofthis sectionthe owner will have to prove that he
resided in some other building not belonging to him on account of the
convenienceofhisemployment,businessorprofessionandnotonaccountofhis
personal convenience.
He will have to prove that it was necessary to reside in some other person's
house for the efficient conduct of the business or profession or for efficient
performance of his employment duties. If he resided in his father's house
keepinghisownhouseclosedonlyforhispersonalconvenience,hewillnotgetbenefit
of this section.
But inallthosecaseswhereofficialsanddignitaries,undertheconstitutionof
Indiaandevenotherwisehastoreside inofficialresidences insteadoftheirown

38
residences by reason of their office, they can avail benefit of this section
providedtheirownhouseremainedvacantandtheydidnotderiveanyotherbenefit
from it during the previous year.

 PropertyOwnedbyCo-owners:Section26:

Ifahousepropertyisownedbytwoormorepersons,suchpersonsareknownasco-
owners. Section 26 covers a case if a property is owned by co-owners.
Section26isapplicableifthefollowingconditionsaresatisfied:
1) Thepropertymustconsistofbuildingorbuildingandlandappurtenant
thereto,
2) Itisownedordeemedtobeownedbytwoormorepersons.
3) Therespectivesharesoftheco-ownersaredefiniteandascertainable.

Iftheseconditionsaresatisfied,thentheshareofeachco-ownerintheincomeof the
property (as computed under the head "Income from House Property'")
shallbe included inthetotalincomeofeachsuchperson.The followingpoints
should be noted:
1) Inrespectofpropertyincome,coownersshallnotbeassessedasan
Association of Persons.
2) The concessional tax treatment in respect of self- occupied property is
applicableasifeachsuchpersonisindividuallyentitledtosuchreliefinSection23(2).
3) Incomefrompropertyheldundertrustforcharitableorreligiouspurposesis
exempted from tax under Section 11.

Where property consisting of buildings or buildings and lands appurtenant

theretoisownedbytwoormorepersonsand,theirrespectivesharesaredefinite and
ascertainable, suchpersons shall not inrespect ofsuchpropertybe assessed as an
associationotpersons,buttheshareoleachsuchpersoninthe income fromthe
propertyas computed inaccordance withsections 22 to 25 shallbe included in
his total income.
Section26is mandatory.Co-widows inheritingcertainImmovableproperties in
equalshares would be co-owners.(CrTv/s Indira Balkrishna (1960) 39 1TR 546
(SC).
AfirmhavingonlypropertyincomecannotclaimthestatusofAOPundersection26
inrespectofrentalincome,solongasthepartnership isinoperation.

39
(BalajiEnterprisesv/sCIT(1997)225ITR471(Kar.

 Deemed/MiscOwnerofHouseProperty,AnnualChargeetc.Defined:
Section 27 :

Adeemedowner isanownerbyimplication, althoughhe maynotbetheowner in the

real sense of the word.
However, for taxpurposes, sucha personis treated asanowner and is liable to
taxinthesame mannerasarealowner.Itisnotonlytheownerwho isliabletopaytax on
"Income from House Property'.
Adeemed owner is also liable to tax onsuch incomes. Specific provisions have
beenprovided inthe IncomeTaxActthatdealwithtaxof income froma house.These
basic conditions must be met for income to be taxed under this head :
1) Thepropertyshouldconsistofbuildingorlandadjacenttoit,
2) Theassesseemustowntheproperty,
3) Thepropertymustnotbeusedforbusinessorprofessionoftheassessee.Itmust
be rented out so as to derive rental income.
Therefore, any income froma propertywhich is not owned byanassessee will
not be treated as 'Income from House Property', but as 'Other Income' and
otherprovisionsoftheIncomeTaxActwillapplyinthisconnection.Incertain cases,
an assessee, though not the owner of the property, is deemed to be the
ownerofthe property- he is treated as ownerofthe propertyand income from
that property will be treated as 'Income from House Property'.

AccordingtoSection27oftheAct,thefollowingpersonsaretreatedasdeemed
owner of the house property:

1) TransferwithoutAdequateConsideration:
An individual who transfers, without adequate consideration, any house
property to his or her spouse, not being a transfer in connection with an
agreementtoliveapart,ortoaminorchildnotbeingamarrieddaughter,shallbe
deemed to be the owner of the house property so transferred.

2) HolderofanImpartibleEstate:
Theholderofanimpartibleestateshallbe deemedtobethe individualownerof all the
properties comprised in the estate.

40
3) HouseAllottedorLeasedunderanyHouseBuildingScheme:
Amemberofacooperativesociety,companyorotherassociationofpersonsto whoma
building or part thereof is allotted or leased under a house building scheme of
the society, company or association, as the case may be shall be deemed to be
the owner of that building or part thereof.

4) PersoninPossessionofanyBuilding:
Apersonwhoisallowedtotakeortoretainpossessionofanybuildingorpartthereof
in part performance of a contract, shall be deemed to be the owner of that
building or part thereof.

5) AcquiringRightsinaBuilding:
Apersonwhoacquiresanyrights(excludinganyrightbywayofalease
from monthto month'or for a period not exceedingone year) in or with respect
toanybuildingorpartthereof, shallbe deemedtobe the ownerofthatbuilding orpart
thereof.

6) AcquiringPropertyunderaPowerofAttorneyTransaction:
If a person has acquired a property under a "Power of Attorney Transaction',
they shall be deemed as owner of the property although they may not be a
"registeredowneroftheproperty.Thus,ifunderanyagreementofpurchaseand sale,
the purchaser who has not actually made payment but he is ready to make
payment on its becoming due, the purchase shall be deemed as owner of the
property.Similarly, ifthepurchaserhastakenpossessionofthepropertyorhasa right
to enter upon and exercise acts of possession on effectively, he shall be deemed
as owner of the property.

Forthepurposesofsection22to26:

1. Income from property transferred by an individual without adequate

consideration,tohisspouseorminorchildnotbeingmarrieddaughter,shallbe deemed
to be the owner of the house property so transferred.

2Theholderofanimpartibleestateshallbedeemedtobetheindividualownerofall
the properties comprised in the estate.

41
3.A member ofa co-operative society, company, association ofpersons to
whomabuildingorpartthereofisallottedor leasedundera housebuilding
schemeofthesociety, companyorassociation, asthecase maybe, shallbe
deemed to be the owner of that building or part thereof.

4. Income fromproperty inpossessionofa person in part performance of a

contractofthe naturereferredto insection53AofTransferofPropertyAct 1882
shall be deemed to be the owner of that building or part thereof.

5. A person who acquires any rights (excluding any rights by way of a lease
frommonthto monthortoraperiod notexceedingone year)inorwithrespect
toanybuildingorpartthereof, byvirtueofanysuchtransactionasisreferredto
inclause (f)ofsection269UAshallbe deemed to be the Ownerofthat building or
part thereof.

6. Taxesleviedbyalocalauthorityinrespectofanypropertyshallbedeemed
toincludeServicetaxes leviedbythelocalauthorityinrespectoftheproperty.

Inthesaidsectionthedefinitionofannualcharge(section27(iv)omittedw.e.f.
1/04/2002.

SECTION28PROFITSANDGAINSOFBUSINESSORPROFESSION

UnderSection28oftheIncomeTaxAct,therearecertaincategoriesof incomes
which are taxable. The same have been mentioned below:
1. Incomeorsalaryofprofessionorbusinessthat isbeingpractisedby
anassessee.
2. Anycompensationthatisbeingreceivedbyanindividualunderthe
following circumstances:

 Incaseofanindividualhandlingtheentire orsubstantiallytheentiretyof the

affairsofanyIndiancompany-the managementoftheindividualbeing
terminated, or changes being made in the terms and conditions.

42
  IncaseofanindividualholdinganyagencyinIndia-theagencybeing
terminated, orchanges being madeintheterms andconditions.

 Acorporationcontrolledorownedbythegovernment,atakeoverbythe
government, or management of any business or property.

 Changes madeinthetermsandconditions,ortermination,ofacontract
related to the business of the assessee.

3. Incomethatisreceivedthroughtrade,professionalorasimilarassociationfrom
a specific kind of services being performed for its members.
4. Importorexportthatisrelatedto:
 Profitsonthesalesofanimport/exportlicence
 Assistanceofcashagainstexportunderanygovernmentscheme
 Dutydrawback
 Profits madeonthetransferoftheDEPBorDutyEntitlementPass Book
 Anyprofits madeonthetransferoftheDFRCorDutyFree
Replenishment Certificate
5. Perquisites:Theworthofanyperquisiteorbenefitthat isreceived inthe
course of practising any profession or business.
6. Partners: Any amount of money thatis being receivedby apartnerof a firm,
whichincludesinterests,salaries,bonuses,commissions,orremunerations,etc.
considering that in case of any such amount being disallowed, Section 40
clause (b), the same would not be taxable at the handsof the partner.
7. Non-CompeteFee:Anamountofmoneybeingreceivedfor:
 Nothavingcarriedoutanycompetingprofessionorbusiness;or
 NothavingsharedanyIntellectualPropertyRightsthatare likelyto
assist in the processing or manufacturing of goods, or rendering of
services;
Intellectual Property would include patent, know-how, copyright licence,
trade-mark,franchise,oranyothercommercialorbusinessrightsofsimilar kind,
or technique, or information.
However,theclausementionedabovewouldnotbeapplicationincases mentioned
below:
 An amount that is chargeable under Capital Gains- for the transfer of
therighttoproduce, manufacture,orprocessathingoranarticle,orthe right
to carry out any profession or business;
 Anamountthat isbeingreceived fromthe multilateralfundsofwhat is
knownas the MontrealProtocolonSubstanceswhichdeplete the Ozone
layer.

43
8. KeymanInsurancePolicy:Anyamountofmoneythat isbeingreceived
under the Keyman Insurance Policy, which also includes any bonuses.
9. ConversionoftheInventorytoCapitalAsset:The fair marketvalueofan
inventory, as on the conversion date is taxable under Business Income.
10. 35AD:Incaseofanycapitalassetbeingtransferred, theamountthat is being
received is taxable under the head Profit or Gain fromthat Business
orProfession.

SECTION32DEPRECIATION
Depreciationisanallowanceoncapitalassetsacquiredand putto useand not an
expenditure unlike repairs to machinery, plant or furniture. It need not be
incurredbytheassesseeduringthepreviousyear.Thedepreciationallowancehasto
be calculated on the assets of the assesee as per the methods and rates
prescribed under the income tax law.

Update: Sec 32AC is not applicable from 01-04-2018 onwards Depreciation

under the Income Tax Act is allowed as a deduction, as a percentage on the
writtendown value (WDV) ofthe block of assets as per the rates prescribed in
New Appendix I to the Income Tax Rules, 1962. In case of assets of an
undertaking engaged in generation or generation and distribution if power, the
depreciationis allowedas deductiononthe actualcost i.e. straight-line method
(SLM) individually on each asset at depreciation rates prescribed in Appendix
IA to the Income Tax Rules, 1962 or on WDV of the block of assets. These
categoriesofundertakingsshalloptforchargingdepreciationeitheronSLMorWDV
method. As per Rule 5(1A) of the Income Tax Rules, 1962 the option
shallbeexercisedbeforetheduedatefor furnishingthereturnofincome under
section139(1) ofthe Income Tax Act, 1961. As per the proviso to Rule 5(1A),
the option once exercised shall be final and shall apply to all the subsequent
assessment years.

SECTION37GENERALDEDUCTIONSALLOWEDFORBUSINESSANDPRO
FESSION
Section 37-Any expenditure (not being expenditure of the nature described in
sections30to36and notbeinginthenatureofcapitalexpenditureorpersonal
expenses of the assesse), laid out or expended wholly and exclusively for the
purposesofthebusinessorprofessionshallbeallowed incomputingtheincome
chargeable under the head ―Profits and gains of business or profession‖.
Explanation - For the removal of doubts, it is hereby declared that any
expenditure incurred by an assessee for any purpose which is an offence or
whichisprohibitedbylawshallnotbedeemedtohavebeenincurredforthe
purposeofbusinessorprofessionandnodeductionorallowanceshallbe made
inrespect ofsuch expenditure. (2) Notwithstandinganythingcontained insub-

44
section(1), noallowanceshallbe made inrespectofexpenditure incurredbyan
assessee onadvertisement inanysouvenir, brochure, tract, pamphlet or the like
published by a political party.

Section45to54
WhatareCapitalGains?
Section45ofIncomeTaxAct,1961providesthatanyprofitsorgainsarising
from the transfer of a capital asset effected in the previous year will be
chargeabletoincome-taxunderthehead‗CapitalGains‘.Suchcapitalgainswill be
deemed to be the income of the previous year in whichthe transfer took
place.Inthischargingsection,twotermsareimportant.Oneis―capitalasset‖andthe
other is ―transfer‖.
WhatisaCapitalAsset?According
to section 2(14), a capital asset means –
(a) propertyofanykindheldbyanassessee,whetherornotconnectedwithhis
business or profession;
(b) anysecuritiesheldbyaForeignInstitutionalInvestorwhichhasinvestedin
such securities in accordance with the SEBI regulations.
However,itdoesnotinclude—
(i) Anystock-in-trade[otherthansecuritiesreferredto in(b)above],
consumablestoresorraw materialsheldforthepurposeofthebusinessor
profession of the assessee;
(ii) Personaleffects, that is to say, movable property(includingwearingapparel
and furniture)held forpersonalusebytheassesseeorany memberofhis family
dependent on him, but excludes –
(a) Jewelry;
(b) Archaeologicalcollections;
(c) Drawings;
(d) Paintings;
(e) Sculptures;or
(f) Anyworkofart.
(iii) RuralagriculturallandinIndia
(iv) 6½%GoldBonds,1977,or7%GoldBonds,1980,orNationalDefence Gold
Bonds, 1980, issued by the Central Government;

45
(v) SpecialBearerBonds,1991issuedbytheCentralGovernment;
(vi) GoldDepositBondsissuedundertheGoldDepositScheme,1999notified by
the Central Government.
RuralAgriculturalLandshallmean:-
OnlyruralagriculturallandsinIndiaareexcluded fromthepurviewoftheterm
‗capitalasset‘.Henceurbanagriculturallandsconstitutecapitalassets.Transfer
ofagriculturallandsituated inanyareawithinthejurisdictionofa municipality or
cantonment boardhavinga population of10000 ormore shallbe chargeable to
―Capital Gains‖ including the following limits:-
(i) Aerialdistancefromthelocallimitsofamunicipalityorcantonmentboard≤2
kilometers & corresponding population is > 10,000 ≤ 1,00,000
(ii) Aerialdistancefromthelocallimitsofamunicipalityorcantonmentboard
≤6kilometers&correspondingpopulationis>1,00,000≤10,00,000
(iii) Aerialdistancefromthelocallimitsofamunicipalityorcantonmentboard
≤8kilometers&correspondingpopulationis>10,00,000
ShortTermandLongTermCapitalAssets
Theshort-termcapitalassetisacapitalassetheldbyanassesseefor not more than 36
months immediatelyprecedingthedateofitstransfer.Therefore,acapitalasset
heldbyanassesseefor morethan36 months immediatelyprecedingthedateof its
transfer is a long-term capital asset.
However,asecurity(otherthanaunit)listedinarecognizedstockexchange,or a unit
of an equity oriented fund or a unit of the Unit Trust of India or a Zero
CouponBondwillbeconsideredasalong-termcapitalassetifthesameisheldfor more
than12 months immediatelyprecedingthe date of its transfer. Inthe case
ofImmovableProperty(landorbuildingorboth)hold for morethan24 months then
it will be treated as a long-term capital asset.
Thisimpliesthatanunlistedsecurityand unitofadebt-oriented mutualfund
wouldqualifyasa―long-termcapitalasset‖andbeeligibleforthebenefitof
indexationandaconcessionalrateoftax@20%onlyifitisheldfor―morethan36
months‖.
TaxonLong-TermCapitalGains
Wheresecuritiestransactiontaxisapplicable(incaseofequitysharesand
equity-orientedMF):Ifsecuritiestransactiontaxisapplicable,the long-term
capitalgainis taxableattherateof10%+SurchargeandEducationCess.
Althoughsuchcapitalgainupto Rs.1,00,000is nottaxable undersection112A.
Inallother cases:The long-termcapitalgain is taxable at 20% + Surcharge and
Education Cess.

46
 TaxonShort-TermCapitalGains
Where securities transaction tax is applicable (in case of equity shares and
equity-orientedMF):Ifsecuritiestransactiontaxisapplicable,theshort-term
capital gain is taxable at the rate of 15% + Surcharge and Education Cess.
Inallothercases:Theshort-termcapitalgainistaxableaccordingtotheincometax
slab rate.
HowtocalculatePeriodofHolding?
TherearefewpointstobenotedinregardstotheperiodofholdingofaCapitalAsset:-
(i) Inthecaseofashareheldinacompanyinliquidation,theperiodsubsequent to the
date of liquidation should be excluded.
(ii) Theperiodforwhichtheassetwas heldbytheprevious ownershouldbe taken
into account. For example, the distributionofassetsonthe partitionof HUF, in
case of a gift, succession, inheritance, etc.
(iii) Inthecaseofsharesheldinanamalgamatedcompanyinlieuofsharesinthe
amalgamating company, the period will be counted from the date of
acquisition of shares in the amalgamating company.
(iv) Inthecaseofacapitalassetbeingashareoranyothersecurityorarightto
subscribetoanyshareorsecuritywheresuchright isrenounced infavorofanyother
person, the period shallbe calculated fromthe date ofallotment ofsuchshare
orsecurityor fromthedateofofferofsuchrightbythecompanyor institution
concerned.
(v) Inthecaseofacapitalasset,beinga financialasset,allottedwithoutany
paymentandbasedonholdingofanyother financialassettheperiodshallbe
reckoned from the date of the allotment of such financial asset.
(vi) Inthecaseofacapitalassetbeingshared inanIndiancompany, which
becomesthepropertyoftheassesseeinconsiderationofademerger,theperiod of
holding shall include the period for which the shares were held in the
demerged company by the assessee.
(vii) In the case of a capital asset being equity shares, or trading or clearing
rights,ofastockexchangeacquiredbyapersonpursuanttodemutualizationor
corporatizationofarecognizedstockexchangeinIndiaasreferredtoinclause
(xiii) of section 47, there shall be included while calculating the period of
holdingofsuchassetstheperiod,forwhichthepersonwasamemberoftherecognized
stock exchange immediately before such demutualization or corporatization.

47
(viii) In the case of a capital asset, being any specified security or sweat equity
shares allotted or transferred, directlyor indirectly, bythe employer free ofcost
or at concessional rate to his employees (including former employee or
employees), the period shall be reckoned fromthe date of allotment or transfer
ofsuchspecified securityorsweat equityshares. Specified security‖ means the
securitiesasdefinedinsection2(h)oftheSecuritiesContracts(Regulation)Act, 1956
and,whereemployees‘stockoptionhasbeengrantedunderanyplanorscheme
thereof, includes the securities offered under such plan or scheme.
―Sweat equity shares‖ means equity shares issued by a company to its
employeesordirectorsatadiscountorforconsiderationotherthancashfor
providingknow-howormakingavailablerightsinthenatureofintellectualproperty
rights or value additions, by whatever name called.
(ix) Inthe case ofa capitalasset, beinga unit or units, whichbecomes the
propertyoftheassesseeinconsiderationofatransferreferredtoinsection
47(xviii),thereshallbe includedtheperiod forwhichtheunitorunits inthe
consolidating scheme of the mutual fund were held by the assessee;
(x) In the case of a capital asset, being share or shares of a company, which is
acquired by the non-resident assessee on redemption of Global Depository
Receipts[issuedinaccordancewithanotifiedschemeagainsttheinitialissueof shares
ofanIndiancompany/issue ofexistingshares ofanIndiancompany/shares ofa
public company sold by the Government, and purchased by the non-resident
assessee in foreign currency through an approved intermediary] held by such
assessee, the period shallbe reckoned fromthe date on whicha request for such
redemption was made.
Inrespectofcapitalassetsotherthanthoselistedabove,theperiodofholdingshallbe
determined subject to any rules which the Board may make in this behalf.
WhatarethetypesofTransferinrelationtoCapitalAsset?
Section2(47)providesaninclusivedefinitionof―transfer‖,inrelationtoacapital
asset.
(i) Thesale,exchangeorrelinquishmentoftheasset;or
(ii) Theextinguishmentofanyrightstherein;or
(iii) Thecompulsoryacquisitionthereofunderanylaw;or
(iv) Theownerofacapitalassetmayconvertthesameintothestock-in-tradeofa
business carried on by him. Such conversion is treated as a transfer; or
(v) ThematurityorredemptionofaZeroCouponBond;or
(vi) Part-performanceofthecontract:Sometimes,possessionoftheimmovable
property is given in consideration of part-performance of a contract; or

48
(Vii) Lastly, there are certain types of transactions that have the effect of
transferringorenablingtheenjoymentoftheimmovableproperty.Eventhepowerof
attorney transactions is covered.
Explanation2tosection2(47)clarifiesthat‗transfer‘includesandshallbedeemedto
have always included:
1. Disposingoforpartingwithanassetoranyinteresttherein,or
2. Creatinganyinterestinanyassetinanymannerwhatsoever
- Directly or indirectly, - absolutely or conditionally, - voluntarily or
involuntarilybywayofanagreement(whetherenteredintoinIndiaoroutsideIndia)
or otherwise.
ScopeandYearofChargeability
(i) Receipts from insurance parties [Section 45(1A)]:- Where any person
receivesanymoneyorotherassetsunderanyinsurancefroman insurer,then,
anyprofits or gains arising fromreceipt of such moneyor other assets shallbe
treatedas―Capitalgains‖andshallbedeemedtobethe incomeofsuchperson in the
year of receipt.
(ii) Conversion or treatment of a capital asset as stock-in-trade [Section
45(2)]:-Suchatransactionisatransfer.Theprofitsor gainsarisingfromsuch
conversionortreatmentwillbechargeable toincome-taxas his incomeofthe
previousyearinwhichsuchstock-in-tradeissoldorotherwisetransferredby him.
(iii) Transfer ofbeneficial interest in securities [Section 45(2A)]:- Where any
person has had at any time during the previous year any beneficial interest in
anysecurities, then, anyprofits or gains arising fromthe transfer made bythe
Depositoryorparticipantofsuchbeneficialinterest inrespectofsecuritiesshall be
chargeable to tax as the income ofthe beneficial owner ofthe previous year in
which such transfer took place and shall not be regarded as income of the
depositorywho isdeemedtobetheregisteredownerofthesecuritiesbyvirtue of
section 10(1) of the Depositories Act, 1996.
(iv) Introductionofcapitalassetas capitalcontribution[Section45(3)]:-With the
transfer ofa capitalasset to a firm, AOP or BOI as capitalcontribution or
otherwise,theprofitsorgainsarisingfromsuchtransferwillbe chargeabletotax as
income of the previous year in which such transfer takes place.
(v) Distributionofcapitalassetsonafirm‘sdissolution[Section 45(4)]:-With the
transfer of capital assets by way of distribution of capital assets on the
dissolutionofafirmorAOPorBOIorotherwiseshallbechargeabletotaxasthe
income ofthe firmetc. ofthe previous yearinwhichsuchtransfertakes place.
Forthis purpose, the fair marketvalueoftheassetonthedateofsuchtransfer shall
be the full value of consideration.

49
(vi)Compensation on compulsory acquisition [Section 45(5)]:- When the
Central Government pays compensation for compulsory acquisition of a
building or some other capital asset belonging to a person, capital gains may
arise.Suchcapitalgainsarechargeableasincomeofthepreviousyearinwhichsuch
compensation is received.
EnhancedCompensation:Ifthecourtawards compensationwhichis higherthanthe
originalcompensation,thedifferencethereofwillbechargeabletocapitalgains inthe
year in which the same is received from the government.
WhataretheTransactionswhicharenotregardedasTransfer?
ForthewholelistofTransactions,Clickhere.
Modeofcomputationofcapitalgains
(i) The income chargeable underthe head ‗capital gains‘ shallbe computed by
deductingthe followingitems fromthe full valueoftheconsiderationreceived or
accruing as a result of the transfer of the capital asset:
(1) Expenditureincurredwhollyandexclusivelyinconnectionwithsuch
transfer.
(2) Theindexedcostofacquisitionandindexedcostofanyimprovement
thereto.
(ii) However, no deduction shall be allowed in computing the income
chargeable under the head ―CapitalGains‖ inrespect ofanyamount paid on
accountofsecuritiestransactiontaxunderChapterVIIoftheFinance(No.2)Act,
2004.
As per section48, the cost ofacquisitionwillbe increased byapplyingthe Cost
Inflation Index (CII). Once the cost inflation index is applied to the cost of
acquisition, it becomes an indexed cost of acquisition. This means an amount
whichbears to the cost ofacquisition, the same proportionas CIIforthe year in
whichtheassetistransferredbearstotheCII forthe first year inwhichtheasset was
heldbytheassesseeorfortheyearbeginningon1stApril2001,whicheverislater.
Similarly, indexed cost of any improvement means an amount which bears to
the cost of the improvement, the same proportion as CII for the year in which
theassetistransferredbearstotheCIIforthe yearinwhichthe improvementto the
asset took place.
(iii) CostInflationIndex:Thecostinflationindicesforthefinancialyearssofar have
been notified as under:

Sl.No. FinancialYear CostInflationIndex

(1) (2) (3)

50
1 2001-02 100

2 2002-03 105

3 2003-04 109

4 2004-05 113

5 2005-06 117

6 2006-07 122

7 2007-08 129

8 2008-09 137

9 2009-10 148

10 2010-11 167

11 2011-12 184

12 2012-13 200

13 2013-14 220

14 2014-15 240

15 2015-16 254
16 2016-17 264

51
 17 2017-18 272

18 2018-19 280

19 2019-20 289

(iv) Special provision for non-residents - In order to give protection to non-

residents who invest foreign exchange to acquire capital assets, section 48
contains a proviso. Accordingly, in the case of non-residents, capital gains
arising fromthe transfer of shares or debentures ofan Indian company is to be
computed as follows: The cost ofacquisition, the expenditure incurred wholly
and exclusively in connection with the transfer and the full value of the
consideration are to be converted into the same foreign currency with which
suchshareswereacquired.Theresultingcapitalgainsshallbereconvertedinto
Indiancurrency. The aforesaid mannerofcomputationofcapitalgains shallbe
applied for every purchase and sale of shares or debentures in an Indian
company. Rule 115A is relevant for this purpose. Non-residents and foreign
companiestobesubjecttotaxataconcessionalrateof10%(without indexation
benefit or currency fluctuation) on long-term capital gains arising from the
transfer of unlisted securities [Section 112]
Costofimprovement[Section55]
(1) Goodwillofa business, etc.:Inrelationtoa capitalassetbeinggoodwillofa
business or a right to manufacture, produce or process any article or thing, or
righttocarryonanybusiness, thecostoftheimprovementshall betakentobe Nil.
(2) Anyothercapitalasset:
(i) Where the capital asset became the property of the previous owner or the
assesseebefore1-4-2001, thecostofimprovement means allexpenditureofa
capitalnatureincurredinmakinganyadditionoralterationtothecapitalassetonor
after the said date by the previous owner or the assessee.
(ii) In any other case, the cost of improvement means all expenditure of a
capital nature incurred in making any additions or alterations to the capital
assets by the assessee after it became his property. However, there are cases
wherethecapitalassetmightbecomethepropertyoftheassesseebyanyofthemodes
specified in section 49(1). In that case, the cost of improvement means

52
capitalexpenditureinmakinganyadditionoralterationstothecapitalassetsincurred
by the previous owner.
However,costofimprovementdoesnotincludeanyexpenditurewhichis
deductible in computing the income chargeable under the head ―Income from
houseproperty‖,―Profitsandgainsofbusinessorprofession‖or―Incomefromother
sources‖.
CostofAcquisition[Section55]
(i) Goodwill of a business or a trademark or brand name associated with a
businessorarighttomanufacture,produce orprocessanyarticleorthing,or right
to carryonanybusiness, tenancyrights, stage carriage permits and loom hours
- In the case of the above capital assets, if the assessee has purchased
themfroma previous owner, the cost ofacquisition means the amount ofthe
purchaseprice.Forexample,ifapurchaseastagecarriagepermitfromBfor2 lakh,
that will be the cost of acquisition for A.
(ii) Self-generated assets - There are circumstances where it is not possible to
visualize the cost of acquisition. For example, suppose a doctor starts his
profession.Overtime,thedoctoracquiresalotofreputation. He opensaclinic
andruns it for5years.After5 years hesellstheclinictoanotherdoctorfor₹10 lakh
whichincludes ₹2lakhforhis reputationorgoodwill. Now a questionarises as
tohowto findouttheprofit inrespectofgoodwill.It isobviousthat goodwillis self-
generated and hence it is difficult to calculate the cost of its acquisition.
However,itiscertainlyacapitalasset.
(iii) Otherassets-Inthefollowingcases,thecostofacquisitionshallnotbenil,but
will be deemed to be the cost for which the previous owner of the property
acquired it:
Wherethecapitalassetbecamethepropertyoftheassessee—
(1) OnanydistributionofassetsonthetotalorpartialpartitionofaHindu
undivided family.
(2) Underagiftorwill.
(3) Bysuccession,inheritanceordevolution.
(4) Onanydistributionofassetsontheliquidationofacompany.
(5) Underatransfertoarevocableoranirrevocabletrust.
(6) Underanysuchtransferreferredtoinsections47(iv),(v),(vi),(via)or(viaa).
(7) WheretheassesseeisaHinduundividedfamily,bythemodereferredtoin
section64(2).

53
(iv) Financialassets-Manytimespersonswho ownsharesorothersecurities
becomeentitledtosubscribetoanyadditionalsharesorsecurities.Further,they are
alsoallottedadditionalshares orsecurities withoutanypayment. Suchshares or
securities are referred to as financialassets inthe Income-tax Act. Section
55provides the basis forascertainingthe costofacquisitionofsuchfinancial
assets.
(v) Anyothercapitalasset–
1. Wherethecapitalassetbecamethepropertyoftheassesseebefore1-4-2001cost
ofacquisition means the cost of acquisition ofthe asset to the assessee or the
fair market value ofthe asset on 1-4-2001 at the option ofthe assessee.
2. Where the capital asset became the property of the assessee by any of the
modes specified insection49(1), it is clear that the cost ofacquisitionto the
assessee will be the cost of acquisition to the previous owner. Even in such
cases,wherethecapitalassetbecamethepropertyofthepreviousownerbefore1-4-
2001,theassesseehasgotarighttooptforthefairmarketvalueason1-4-2001.
3. Where the capital asset became the property of the assessee on the
distributionofthecapitalassetsofacompanyonits liquidationandtheassessee has
beenassessedtocapitalgains inrespectofthatassetundersection46,thecost of
acquisition means the fair market value of the asset on the date of distribution.
4. Ashareorastockofacompanymaybecomethepropertyofanassessee under
the following circumstances:
a) Theconsolidationanddivisionofalloranyofthesharecapitalof the
company into shares of larger amount than its existing shares.
b) Theconversionofanysharesofthecompanyintostock,
c) There-conversionofanystockofthecompanyintoshares,
d) Thesub-divisionofanyofthesharesofthecompanyintosharesofsmaller
amount, or
e) Theconversionofonekindofsharesofthecompanyintoanotherkind.
Intheabovecircumstances,thecostofacquisitiontotheassesseewillmeanthecostof
acquisition of the asset calculated with reference to the cost of acquisition of
the shares or stock from which such asset is derived.
(vi) Wherethecostforwhichthepreviousowneracquiredthepropertycannot be
ascertained, the cost of acquisition to the previous owner means the fair
market valueonthedateonwhichthecapitalasset becamethepropertyofthe
previous owner.

54
 ExemptionsavailableunderLong-TermCapitalGains:The
exemptions available on long-term capital gains are:
Profitonsaleoftheresidential house(Section54):
Iftheresidentialhouseproperty,whetheritisself-occupiedorrentedoutissold,you
can avail full exemption, provided:
 TheassesseemustbeanindividualorHinduUndividedFamily.
 Theassesseehasheldthehouseformorethan24months.
 Theassesseehaspurchasedanew houseoneyearbeforethedateof
saleortwoyearsafterthedateofsaleoftheoriginalhouseorifheis
constructinga new house, within3 years fromthe date ofsale ofthe
original house.
 Iftheamountisdepositedinabank undertheCapitalGainsAccount
Scheme, 1988.
 Ifthecostofthenewhouseisequaltoormorethanthecapitalgainearned.
 Ifthecostofthenewhouseislessthanthecapitalgain,thenthe
difference amount is taxed at 20%.
 Ifthenew house issoldwithin3yearsfromthedateofpurchaseor
construction, then the cost of the new house is deducted by the
amount of capital gain exempted on the original house and the
differenceinthesalepriceofthenewhousewillbetreatedasashort-term
capital gain.

Ifthelong-termcapitalgainisinvested inlong-termspecifiedassetsofNHAI or
RuralElectrificationCorporationor Other bonds notified byCentralGovt.
(Section 54EC):
Itisavailablesubjecttothefollowing:
 Theprofitearnedisfromthesaleofalong-termcapitalassetI.e.landor
building or both.
 Theassesseemustinvestapartofthecapitalgainorthewholeofthegainin
specified assets like bonds of NHAI or REC or Other bonds
notifiedbyCentralGovt.within6 monthsfromthedateofsaleofthe
original asset.
 AssesseecaninvestamaximumofRs.50lakhinspecifiedbondsina
financial year.

55
  Theassesseemustretainthenewassetforaminimumof3years(5years
if the bond is issued on or after 1st April 2018).
Profitsfromthesaleofanassetotherthanaresidentialhouseareusedtobuya residential
house (Section 54F):
Thisisavailablesubjecttothefollowingconditions:
 TheassesseemustbeanindividualoraHinduUndividedFamily.
 The long-termcapitalgainshouldbe fromthesaleofanassetthat is not a
residential house.
 Theassesseehaspurchaseda new houseoneyear priortothe dateof
saleortwo yearsafterthedateofsaleoftheoriginalhouseor ifhe is
constructinga new house, withina period of3 years fromthe date of
sale of the original house.
 Ifthecostofthe new houseis not lessthanthe valueofthe assetsold, the
fullamountofcapitalgainisexempt fromincometax.ButIfa partof the
capital gain is invested, then only that part will be exempted
proportionately (I.e. cost of the new house * capital gain
amount/Netconsideration)andthebalanceamountwillbetaxable@20%.
 Ifthe fullamount is not invested tobuya house orconstructa house
then it should be kept in the bank under Capital Gains Account
Scheme,1988.Thedepositamountinthataccountshouldbeutilizedfor
the construction of a house or to buy a new house.
 On the date ofsale ofthe originalasset, the assessee should not own
morethanoneresidentialhouseapartfromthenewhouse.Heshould also
notbuyanotherhouse in2yearsorconstructanewhouse in3years after
such date (apart from the new house).
OtherExemptions:
Thefollowingaretheotherexemptionsallowedoncapitalgains(short-termorlong-
term):
 Section54B:Thecapitalgainearnedonthesaleofagriculturallandwill
havetobereinvested inthepurchaseofagriculturalland.The land must
be used for agricultural purposes for at least 2 years
immediatelybeforethetransfer.Ifthecapitalgainishigherthanthe
amount of purchase cost of the new agricultural land then the
remainingbalance willbe taxed. Ifthe capital gain is less thanthe
purchase cost of the new agricultural land then no tax will be
charged.

56
  Section 54D: Exemption is allowed for capital gain arising from
industriallandorbuildingthathas been compulsorilyacquiredbythe
Government. The asset should have been used for the industrial
purposefor2yearsimmediatelybeforethetransfer.Theexemptionis
allowedonlyifthecapitalgainwillbereinvestedtoacquire landor
building for the industrial purpose.
 Section54G:Exemptionisallowedonthe capitalgainarisingfrom
thetransferofland,building,plantormachinerytoshiftanindustrial
undertakingfromthe urbanarea tothe ruralarea. The exemptionis
allowed provided the capital gain is reinvested to acquire land,
building, plant or machinery in a rural area.
 Section54GA:Exemptionis allowedonthecapitalgainarisingfrom
thetransferofland,building,plantor machinerytoshiftanindustrial
undertaking from the urban area to Special Economic Zone provided
the gain is reinvested to acquire land, building, plant or machinery in
the Special Economic Zone.

Section56and58Incomefromothersources

56. (1) Income of every kind which is not to be excluded from the total income
under this Act shall be chargeable to income-tax under the head "Income from
other sources", if it is not chargeable to income-tax under any of the heads
specified in section 14, items A to E.
(2) Inparticular,andwithoutprejudicetothegeneralityofthe provisions ofsub-
section (1), the following incomes, shall be chargeable to income-tax under the
head "Income from other sources", namely :—
(i) dividends;
(ia) income referredto insub-clause(viii) ofclause(24)ofsection2; (ib)
income referred to in sub-clause (ix) of clause (24) of section 2;
(ic)incomereferredtoinsub-clause(x)ofclause(24)ofsection2,ifsuch
incomeisnotchargeabletoincome-taxunderthehead"Profitsandgainsof
business or profession";
(id)income bywayofinterest onsecurities,iftheincomeisnot chargeable to
income-tax under the head "Profits and gains of business or profession";
(ii) incomefrommachinery,plantorfurniturebelongingtotheassesseeandlet
onhire,iftheincomeisnotchargeabletoincome-taxunderthehead"Profits and
gains of business or profession";
(iii) where an assessee lets on hire machinery, plant or furniture belonging to
him and also buildings, and the letting of the buildings is inseparable from
theletting of the said machinery,plant or furniture, the income from such

57
 letting,ifitisnotchargeabletoincome-taxunderthehead"Profitsandgains of
business or profession";
(iv) incomereferred to in sub-clause(xi) of clause(24) of section 2,if such
incomeisnotchargeabletoincome-taxunderthehead"Profitsandgainsof
business or profession" or under the head "Salaries";
(v) whereanysumofmoneyexceedingtwenty-fivethousandrupeesisreceived
without consideration by an individual or a Hindu undivided family
fromanypersononorafterthe1stdayofSeptember,2004butbeforethe1stday of
April, 2006, the whole of such sum :
Providedthatthisclauseshallnotapplytoanysumofmoneyreceived—
(a) fromanyrelative;or
(b) ontheoccasionofthemarriageoftheindividual;or
(c) underawillorbywayofinheritance;or
(d) incontemplationofdeathofthepayer;or
(e) from any local authority as defined in the Explanation to clause (20)
of section 10; or
(f) from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust or
institution referred to in clause (23C) of section 10; or
(g) fromanytrustorinstitutionregisteredundersection12AA.
Explanation.—Forthepurposesofthisclause,"relative"means—
(i) spouseoftheindividual;
(ii) brotherorsisteroftheindividual;
(iii) brotherorsisterofthespouseoftheindividual;
(iv) brotherorsisterofeitheroftheparentsoftheindividual;
(v) anylinealascendantordescendantoftheindividual;
(vi) anylinealascendantordescendantofthespouseoftheindividual;
(vii) spouseofthepersonreferredtoinclauses(ii)to(vi);
(vi) where any sum of money, the aggregate value of which exceeds fifty
thousand rupees, is received without consideration, by an individual or a
Hindu undivided family, in any previous year from any person or persons
onorafterthe1stdayofApril,2006butbeforethe1stdayofOctober,2009, the
whole of the aggregate value of such sum:
Providedthatthisclauseshallnotapplytoanysumofmoneyreceived—
(a) fromanyrelative;or
(b) ontheoccasionofthemarriageoftheindividual;or
(c) underawillorbywayofinheritance;or

58
 (d) incontemplationofdeathofthepayer;or
(e) from any local authority as defined in the Explanation to clause (20)
of section 10; or
(f) from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust or
institution referred to in clause (23C) of section 10; or
(g) fromanytrustorinstitutionregisteredundersection12AA.
Explanation.—Forthepurposesofthisclause,"relative"means—
(i) spouseoftheindividual;
(ii) brotherorsisteroftheindividual;
(iii) brotherorsisterofthespouseoftheindividual;
(iv) brotherorsisterofeitheroftheparentsoftheindividual;
(v) anylinealascendantordescendantoftheindividual;
(vi) anylinealascendantordescendantofthespouseoftheindividual;
(vii) spouseofthepersonreferredtoinclauses(ii)to(vi);
(vii) whereanindividualoraHinduundividedfamilyreceives,inanyprevious
year,fromanypersonorpersonsonorafterthe1stdayofOctober,2009but before
the 1st day of April, 2017,—
(a) any sum of money, without consideration, the aggregate value of
whichexceedsfiftythousandrupees,thewholeoftheaggregatevalue of
such sum;
(b) anyimmovableproperty,—
(i) withoutconsideration,thestampduty valueof which exceeds fifty
thousand rupees, the stamp duty value of such property;
(ii) foraconsiderationwhichislessthanthestampdutyvalueofthe
propertybyanamountexceedingfiftythousandrupees,the
stampdutyvalueofsuchpropertyasexceedssuchconsideration:
Provided that where the date of the agreement fixing the amount of
consideration for the transfer of immovable property and the date of
registration are not the same, the stamp duty value on the date of the
agreement may be taken for the purposes of this sub-clause:
Providedfurtherthatthesaidprovisoshallapplyonlyinacasewhere the
amount of consideration referred to therein, or a part thereof, has
been paid by any mode other than cash on or before the date of the
agreement for the transfer of such immovable property;
(c) anyproperty,otherthanimmovableproperty,—

59
 (i) withoutconsideration,theaggregate fair marketvalueofwhich
exceeds fifty thousand rupees, the whole of the aggregate fair
market value of such property;
(ii) for a consideration which is less than the aggregate fair market
value of the property by an amount exceeding fifty thousand
rupees, the aggregate fair market value of such property as
exceeds such consideration :
Provided thatwherethestampdutyvalueofimmovablepropertyasreferred
toinsub-clause(b)isdisputedbytheassesseeongroundsmentionedinsub-
section(2)ofsection50C,theAssessingOfficermayreferthevaluationof
suchpropertytoaValuationOfficer,andtheprovisionsofsection50Cand sub-
section (15) of section 155 shall, as far as may be, apply in relation to the
stamp duty value of such property for the purpose of sub-clause (b) as they
apply for valuation of capital asset under those sections :
Provided furtherthatthisclauseshallnotapplytoanysumofmoneyorany
property received—
(a) fromanyrelative;or
(b) ontheoccasionofthemarriageoftheindividual;or
(c) underawillorbywayofinheritance;or
(d) in contemplation of death of the payer or donor, as the case may be;
or
(e) from any local authority as defined in the Explanation to clause (20)
of section 10; or
(f) from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust or
institution referred to in clause (23C) of section 10; or
(g) fromanytrustorinstitutionregisteredundersection12AA;or
(h) by way of transaction not regarded as transfer under clause (vicb) or
clause (vid) or clause (vii) of section 47.
Explanation.—Forthepurposesofthisclause,—
(a) "assessable" shall have the meaning assigned to it in the Explanation
2 to sub-section (2) of section 50C;
(b) "fair market value" ofa property, other than an immovable property,
meansthevaluedeterminedinaccordancewiththemethodasmaybe
prescribed;
(c) "jewellery"shallhavethemeaningassignedtoitintheExplanationtosub-
clause (ii) of clause (14) of section 2;
(d) "property"meansthefollowingcapitalassetoftheassessee,namely:—

60
 (i) immovablepropertybeinglandorbuildingorboth;
(ii) sharesandsecurities;
(iii) jewellery;
(iv) archaeologicalcollections;
(v) drawings;
(vi) paintings;
(vii) sculptures;
(viii) anyworkofart;or
(ix) bullion;
(e) "relative"means,—
(i) incaseofanindividual—
(A) spouseoftheindividual;
(B) brotherorsisteroftheindividual;
(C) brotherorsisterofthespouseoftheindividual;
(D) brotherorsisterofeitheroftheparentsoftheindividual;
(E) anylinealascendantordescendantoftheindividual;
(F) anylinealascendantordescendantofthespouseofthe
individual;
(G) spouseofthepersonreferredtoinitems(B)to(F);and
(ii) incaseofaHinduundividedfamily,anymemberthereof;
(f) "stampdutyvalue"meansthe valueadoptedorassessedorassessable
byanyauthorityoftheCentralGovernmentoraStateGovernmentfor the
purpose of payment of stamp duty in respect of an immovable
property;
(viia) where a firm or a company not being a company in which the public are
substantially interested, receives, in any previous year, from any person or
persons,onorafterthe1stdayofJune,2010butbeforethe1stdayofApril, 2017,
anyproperty, beingshares ofa company not beinga company inwhichthe
public are substantially interested,—
(i) without consideration, the aggregate fair market value of which
exceeds fiftythousandrupees, the whole ofthe aggregate fair market
value of such property;
(ii) for a considerationwhich is less thanthe aggregate fair market value
of the property by an amount exceeding fifty thousand rupees, the
aggregate fair market value of such property as exceeds such
consideration :

61
 Provided that this clause shall not apply to any such property received by
way of a transaction not regarded as transfer under clause (via) or clause
(vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.
Explanation.—For the purposes of this clause, "fair market value" of a
property, being shares of a company not being a company in which the
public are substantially interested, shall have the meaning assigned to it in
the Explanation to clause (vii);
(viib)whereacompany,notbeingacompanyinwhichthepublicaresubstantiallyintere
sted,receives,inanypreviousyear,fromanyperson being a resident,
anyconsideration for issue ofshares that exceeds the face
valueofsuchshares,theaggregateconsiderationreceivedforsuchsharesas
exceeds the fair market value of the shares:
Providedthatthisclauseshallnotapplywheretheconsiderationforissueofshares
is received—
(i) byaventurecapitalundertakingfromaventurecapitalcompanyora
venture capital fund67[or a specified fund]; or
(ii) byacompanyfromaclassorclassesofpersonsas maybenotifiedby the
Central Government in this behalf.
Followingsecondprovisoshallbeinsertedaftertheexistingprovisoto
clause(viib)ofsub-section(2)ofsection56 bytheActNo.23of2019,
w.e.f.1-4-2020:
Provided further that where the provisions of this clause have not been
appliedtoacompanyonaccountoffulfilmentofconditions specifiedinthe
notification issued under clause (ii) of the first proviso and such company
fails to comply with any of those conditions, then, any consideration
received for issue of share that exceeds the fair market value of such share
shallbedeemedtobetheincomeofthatcompanychargeabletoincome-tax forthe
previous year inwhichsuchfailure has takenplace and, it shallalso
bedeemedthatthecompanyhasunder-reportedtheincome inconsequence of
the misreporting referred to in sub-section (8) and sub-section (9) ofsection
270A for the said previous year.
Explanation.—Forthepurposesofthisclause,—
(a) thefairmarketvalueofthesharesshallbethevalue—
(i) as may be determined in accordance with such method as may
be prescribed; or
(ii) asmaybesubstantiatedbythecompanytothesatisfactionofthe
AssessingOfficer,basedon thevalue,onthedateof issueof shares,
of its assets, including intangible assets being goodwill, know-
how, patents, copyrights, trademarks, licences, franchises or
any other business or commercial rights of similar nature,

62
 whicheverishigher;
Followingclauses(aa)and(ab)shallbeinsertedafterclause(a)
ofExplanation to clause (viib) ofsub-section (2) of section 56 by the
Act No. 23 of 2019, w.e.f. 1-4-2020 :
(aa)"specifiedfund"meansafundestablishedorincorporatedinIndiain the
formofa trust or a companyor a limited liabilitypartnership or a
bodycorporatewhichhasbeengrantedacertificateofregistrationas a
Category I or a Category II Alternative Investment Fund and is
regulated under the Securities and Exchange Board of India
(Alternative Investment Fund) Regulations, 2012 made under the
Securities and Exchange Board of India Act, 1992 (15 of 1992);
(ab)"trust"meansatrustestablishedundertheIndianTrustsAct,1882(2 of
1882) or under any other law for the time being in force;
(b) "venture capital company", "venture capital fund" and "venture
capitalundertaking"shallhavethe meanings respectivelyassignedto
them in clause (a), clause (b) and clause (c) of Explanation to clause
(23FB) of section 10;
(viii) income by way of interest received on compensation or on enhanced
compensation referred to in68[sub-section (1) of section 145B];
(ix) any sum of money received as an advance or otherwise in the course of
negotiations for transfer of a capital asset, if,—
(a) suchsumisforfeited;and
(b) thenegotiationsdonotresultintransferofsuchcapitalasset;
(x) whereanypersonreceives,inanypreviousyear,fromanypersonorpersons on or
after the 1st day of April, 2017,—
(a) any sum of money, without consideration, the aggregate value of
whichexceedsfiftythousandrupees,thewholeoftheaggregatevalue of
such sum;
(b) anyimmovableproperty,—
(A) without consideration, the stamp duty value of which exceeds
fifty thousand rupees, the stamp duty value of such property;
69
[(B) for a consideration, the stamp duty value of such property as
exceedssuchconsideration,iftheamountofsuchexcessismore than
the higher of the following amounts, namely:—
(i) theamountoffiftythousandrupees;and
(ii) theamountequaltofivepercentoftheconsideration:]
Provided that where the date of agreement fixing the amount of
consideration for the transfer of immovable property and the date of

63
 registration are not the same, the stamp duty value on the date of
agreement may be taken for the purposes of this sub-clause :
Provided further that the provisions of the first proviso shall apply
only in a case where the amount of consideration referred to therein,
orapartthereof, hasbeenpaidbywayofanaccountpayee cheque or an
account payee bank draft or by use of electronic clearing system
through a bank account 70[or through such other electronic mode as
maybeprescribed], onorbeforethe dateofagreement for transfer of
such immovable property:
Providedalsothatwherethestampdutyvalueofimmovableproperty is
disputed by the assessee on grounds mentioned in sub-section (2)
ofsection50C, the AssessingOfficer mayrefer the valuation ofsuch
propertytoaValuationOfficer,andtheprovisionsofsection50C and sub-
section(15)ofsection155 shall, as faras maybe, applyinrelationto the
stamp duty value of such property for the purpose of thissub-
clauseastheyapplyforvaluationofcapitalassetunderthose sections;
(c) anyproperty,otherthanimmovableproperty,—
(A) withoutconsideration,theaggregatefairmarketvalueofwhich
exceedsfifty thousandrupees,thewholeof theaggregatefair
market value of such property;
(B) for a considerationwhichis less thanthe aggregate fair market
value of the property by an amount exceeding fifty thousand
rupees, the aggregate fair market value of such property as
exceeds such consideration :
Provided that this clause shall not apply to any sum of money or any
property received—
(I) fromanyrelative;or
(II) ontheoccasionofthemarriageoftheindividual;or
(III) underawillorbywayofinheritance;or
(IV) incontemplationofdeathofthepayerordonor,asthecasemaybe;or
(V) fromany localauthorityas defined inthe Explanationto clause (20) of
section 10; or
(VI) from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust or
institution referred to in clause (23C) of section 10; or
(VII) fromorbyanytrustorinstitutionregisteredundersection12A or
section 12AA; or

64
 (VIII) by any fund or trust or institution or any university or other
educational institution or any hospital or other medical institution
referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or
sub-clause (via) of clause (23C) of section 10; or
(IX) bywayoftransactionnotregardedastransferunderclause(i)or71[clause
(iv) or clause (v) or] clause (vi) or clause (via) or clause (viaa) or
clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause
(vid) or clause (vii) of section 47; or
(X) from an individual by a trust created or established solely for the
benefit of relative of the individual.
Following clause (XI) shall be inserted after clause (X) of proviso to
clause (x) ofsub-section (2)ofsection56 bythe Act No. 23 of2019,
w.e.f.1-4-2020:
(XI) fromsuchclassofpersonsandsubjecttosuchconditions,as maybe
prescribed.
Explanation.—
Forthepurposesofthisclause,theexpressions"assessable","fairmarketvalue","j
ewellery","property","relative"and"stampduty value"shallhave the same
meanings as respectivelyassigned to them inthe Explanation to clause (vii).
72
[(xi)anycompensationorotherpayment, due toor receivedbyanyperson, by
whatevernamecalled,inconnectionwiththeterminationofhisemployment or
the modification of the terms and conditions relating thereto.]

65