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Law of Taxation

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Law of Taxation ......................................................................................................... 1

Syllabus ..........................................................................................................................3
Unit-II ............................................................................................................................. 4
Heads of Income and Computation ............................................................... 5
Income from Salary ............................................................................................ 9
Income from House Property. ....................................................................... 24
Profits and Gains of Business or Profession ............................................... 33
Capital Gains ......................................................................................................58
Income from other sources. ........................................................................... 78

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Syllabus

Unit-I : Constitutional basis of power of taxation — Article 265 of

Constitution of India - Basic concept of Income Tax — Outlines of
Income Tax Law - Definition of Income and Agricultural Income under
Income Tax Act — Residential Status - Previous Year — Assessment
Year — Computation of Income.

Unit-II: Heads of Income and Computation — Income from Salary,

Income from House Property. Profits and Gains of Business or
Profession, Capital Gains and Income from other sources.

Unit-III: Law and Procedure — P.A.N. — Filing of Returns — Payment

of Advance Tax -- Deduction of Tax at Source (TDS) -- Double Tax
Relief — Law and Procedure for Assessment, Penalties, Prosecution,
Appeals and Grievances -- Authorities.

Unit-IV: GST ACT, 2017 – Goods and Services Tax Act, 2017:
Introduction – Background - - Basic Concepts – salient features of the
Act – Kinds of GST - CGST, SGST & IGST – Administration officers under
this Act – Levy and collection of tax – scope of supply – Tax liability on
composite and mixed supplies – Input tax credit – Eligibility and
conditions for taking input tax credit.

Unit-V: GST ACT, 2017:- Registration – persons liable for registration –

persons not liable for registration – procedure for registration –
returns – furnishing details of outward and inward supplies –
furnishing of returns – payment of tax, interest, penalty and other
amounts – tax deducted at source – collection of tax at source –
Demand and Recovery – Advance Ruling – Definitions for Advance
Ruling – Appeals and revision – Appeals to Appellate Authority –
Powers of revisional authority - Constitution of Appellate Tribunal and
benches thereof – offences and penalties.

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Unit-II

Heads of Income and Computation — Income from Salary, Income

from House Property. Profits and Gains of Business or Profession,
Capital Gains and Income from other sources.

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Heads of Income and Computation

As per Section 14, the income of a person is computed

under the following five heads:
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
All earnings are categorised under these heads of income
for calculating tax and the computation of total revenue. The
aggregate income under these heads is termed as "gross total
income". In other words, gross total income means total income
computed in accordance with the provisions of the Act before
making any deduction under sections SOC to SOU.
(1). Income from salary
Any income that is received in terms of the service
provided by a person on a contract of employment is applicable
for taxation under this head. This includes salary, advance salary,
perquisites, gratuity, commission, annual bonus and pension.
This tax head also includes some exemptions, such as House
Rent Allowance (HRA), Conveyance allowance, etc.
An income might be burdened under the head salaries of
a business and representative association between the payer
and the payee. If this connection didn’t exist, the pay wouldn’t
be decided. On the off chance that there is no component of
the business representative association, the payment will be not
assessable under this classification of pay.

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(2). Income from house property

An individual’s income from his or her property or land is
taxable under the head of income from house property. To put
it simply, this head includes the policy for calculating tax on
rental income that is received from properties.
In case a person owns more than one self-occupied house,
then only one house is considered to be occupied and the rest
are considered to be rented out. The taxation occurs on income
received from both commercial and residential property.
The expense on the rental payments from the property is
also the charge on that income. However, if the property isn ’ t
rented out, the cost will be calculated based on the assessed
lease that would have been acquired if the property had been
leased.
The principal pay exposed to the load on a public premise
appears to be from house property. This charge includes income
from residential rental homes and commercial and other
property gains. This pay class also allows for deductions with
the standard deduction, the deduction for municipal taxes paid,
and the deduction for home loan interest.
(3). Income from profits and gains from business or
profession
Any income from the exchange/business/produce/calling
will be burdened under this pay class after deducting endorsed
consumption.
The profits earned from any kind of business or profession
are taxable under this head. In order to determine the amount
on which tax is chargeable, expenses from the total income can

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be subtracted. The types of income that are chargeable under

this head are:
 Profits generated from the sale of a certain license
 Gains earned by an individual during an assessment year
 The profits that an organisation makes on its income
 Cash received on the export of a government scheme
 The benefits that a business receives
 Gains, bonuses or salary that an individual receives due to a
partnership with a firm
(4). Income from capital gains:
Any benefits or gains emerging from the exchange of a
capital resource affected in the financial year will be chargeable
to income tax under capital gains. They will be considered the
pay of the year the exchange occurred except if such capital
increases.
When a person earns profits by transferring or selling an
asset that was held as an investment, that income is taxable
under the head of income from capital gains. A large number of
assets, like gold, bonds, mutual funds, real estate, stocks, etc.,
fall under capital assets.
Capital gains can be further divided into short-term capital
gains and long-term capital gains.
When a person sells his capital assets after holding them
for a period of 36 months or more, they will fall under long-
term capital gain and will have a tax rate of 20%. Alternatively, if
a person sells his capital assets within a period of 36 months,
the tax deduction will be under short-term capital gain at the

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rate of 15%. In the case of securities, this is applicable if he sells

his holdings within 12 months from the purchase date.
(5). Income from other sources:
Among the five heads of income tax, this one includes any
other income that does not have any mention in the above 4
heads. They fall under Section 56(2) of the Income Tax Act and
include income from lottery, bank deposits, gambling, card
games, sports rewards, etc.
Any pay not chargeable to burden under the above
determined four heads will be available under this head of
income. It turns out such revenue isn ’ t excluded from the
calculation of total pay.
Differences between heads of income and sources of income
The heads of income are ways to classify the earnings or
gains of an individual during a given year as per the Income Tax
Act. This is necessary for taxation purposes. They are:
 Income from house or property
 Capital gains
 Income from salaries
 Gains and profits from profession or business
 Income from capital gains
On the other hand, sources of income for any person or
business are monetary sources from which they can earn an
income.
For individuals, they are Salary, Interest, Commission, etc.
In case of businesses, they are Returns on investments, Profits,
and Grants from the government and more.

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Income from Salary

'Salary' is the first head of income. An income can be

taxed under this head if there is a relationship of an employer
and employee between the payer and the payee. If this
relationship does not exist, then the income would not be
deemed to be income from salary.
The income taxable under this head shall be calculated on
the due basis or on the receipt basis, whichever occurs earlier.
Taxable salary shall include taxable allowances, perquisites,
retirement benefits, and profit in lieu of salary. Certain
deductions are also allowed from salary income.
Salary Income is the pay cheque a person gets every
month from his employer. An amount received from the
employer in the form of bonus, allowance, perquisites, etc. is a
part of Salary Income only. Pension received after retirement
(not family pension) is also a part of the head Salary Income.
Salary is chargeable to tax either on ‘due’ basis or on
‘receipt’ basis, whichever is earlier. However, where any salary,
paid in advance, is assessed in the year of payment, it cannot be
subsequently brought to tax in the year in which it becomes
due.
If the salary paid in arrears has already been assessed on
due basis, the same cannot be taxed again when it is paid.
(1) Advance salary: Advance salary is taxable when it is
received by the employee irrespective of the fact whether it is
due or not. It may so happen that when advance salary is
included and charged in a particular previous year, the rate of

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tax at which the employee is assessed may be higher than the

normal rate of tax to which he would have been assessed.
(2) Arrears of salary: Normally speaking, salary arrears must be
charged on due basis.
Salary, perquisite and profits in lieu of salary (Section 17)
The meaning of the term ‘salary’ for purposes of income
tax is much wider than what is normally understood. The term
‘salary’ for the purposes of Income-tax Act, 1961 will include
both monetary payments (e.g. basic salary, bonus, commission,
allowances etc.) as well as non-monetary facilities (e.g. housing
accommodation, medical facility, interest free loans etc.).
Section 17(1) defined the term “Salary”. It is an inclusive
definition and includes monetary as well as non-monetary items.
‘Salary’ under section 17(1), includes the following:
 Wages
 Annuity or Pension
 Gratuity
 Fees, Commission, allowances, perquisites or profits in lieu of
salary
 Advance of Salary
 Amount transferred from unrecognized provident fund to
recognized provident fund
 Contribution of the employer to a Recognised Provident
Fund in excess of the prescribed limit
 Leave Encashment
 Compensation as a result of variation in Service contract etc.
Income from salary taxable during the year shall consist
the following:

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(i). salary due from employer to taxpayer during the previous

year, whether paid or not;
(ii). salary paid by employer to taxpayer during the previous year
before it became due;
(iii). arrear of salary paid by the employer to taxpayer during the
previous year, if not charged to tax in any earlier year.
Remuneration, bonus or commission received by a partner
from the firm is not taxable under the head Salaries rather it
would be taxable under the head business or profession.
Salary Slip:
A salary slip in layman’s terms is a document issued by
employers to their employees every month which contains a
salary breakdown including Basic Salary, HRA, LTA, Bonus paid,
deductions and other components. Salary Slips are generally
given to the employees via email or are delivered on paper.
Importance of Salary Slip
(i). Salary Slip acts as a legal document of employment and
helps employees seek loans, future employment, tax planning,
and government subsidies.
(ii). Proof of Employment: A salary slip serves as legal proof of
employment and against the salary claimed. Since the salary slip
includes the last drawn salary and designation therefore it can
be submitted while applying for travel visas or universities and
colleges.
(iii). Income Tax Planning: It contains the monthly break-up of
earnings and deductions. It also has components that include
tax deductions. TDS helps an employee plan their tax liability in

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advance. The tax is calculated on the take-home salary based on

income tax slabs.
It helps in availing maximum benefits of tax deductions,
rebates, allowances, and concessions within the accepted
bounds under the Income Tax Act of 1961.
(iv). Acquiring Loans: The salary slip helps in setting a credit
limit since it serves as legal proof of the credit-paying ability of
an employee. Further, availing of loans, credit cards, mortgages,
and other borrowing is based on the salary slip.
(v). Access to Government Subsidies: The salary slip can be
used to avail of certain free services. Such services include
medical care, food grains, etc.
Standard Deduction:
The standard deduction was introduced for salaried
taxpayers under Section 16 of the Income Tax Act. It allows
salaried individuals to claim a flat deduction from income
irrespective of actual expenses incurred by the employees. It has
been introduced to bring parity between salaried employees
and self-employed individuals. While self-employed individuals
can claim various business-related expenses as deductions that
bring down their taxable income, no such benefit could be
claimed by most salaried individuals. It is a flat deduction of
Rs.50,000/- from AY 2020-21 to “Income taxable under the head
salaries”.
The eligible amount for this deduction cannot exceed the
salary amount. The maximum amount of deduction will be
Rs.50,000/- or the Salary amount, whichever is lower. This
deduction is not available under New Tax Regime.

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Impact of standard deduction on Pensioners

As per a recent clarification issued by the Income Tax
Department, if a taxpayer has received income from a pension
from the former employer, it shall be taxable under the head
“ Salaries ” . Therefore, taxpayers receiving a pension from their
ex-employers are eligible to claim a standard deduction of
Rs.50,000 or the amount of pension, whichever is less. Further,
the benefit of this deduction will be allowed to pensioners only
if it is taxable as salary income. In case it is charged to tax as
other source income then the benefit of the standard deduction
will not be available.
Retirement Benefits:
Pension
The employer pays a certain amount to its employee after
retirement on a periodic basis for the services rendered by them
during their job. This is known as Pension and it is taxable
under the head Income From Salary.
There are mainly two types of pension:
 Uncommuted Pension: A periodical payment of pension
received by the employee after retirement. Uncommuted
pension is fully taxable to Government and Non-Government
employees under the head Income from Salaries.
 Commuted Pension: A lump sum payment received by the
employee at the time of retirement. In the case of
Government employees commuted pension is fully exempt.
In the case of non-government employees it is as follows:

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Particulars Tax Treatment

⅓ of the pension which he is

Gratuity Received by
normally entitled to receive is exempt
pensioner
from tax

½ of the pension which he is

Gratuity Not Received
normally entitled to receive is exempt
by pensioner
from tax

‘Pension’ and ‘family pension’ are two separate things. An

employer receives a pension after his/her retirement, and
therefore, it is taxable under the head Salary. Whereas family
pension is received by the nominated family members of the
employee after his death. Additionally, for family members who
receive a family pension, it is taxable under the head Income
from Other Sources.
Gratuity
Gratuity is a retirement benefit provided by employer to
employee. An employee becomes eligible for this compensation
on completion of five years of service at that organisation.
However, it is paid only at the time of retirement or resignation
and for that employees are classified into two categories:
 Government employees: Gratuity received by a government
(central/ state/ local) employee is fully exempt from tax for
himself or his family.
 Non-Government employees: In case of non-government
employees the tax treatment is different based on the
applicability of the Payment of Gratuity Act to the employer.

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While calculating number of completed years any fraction

of year in excess of 6 months should be taken as a full year. For
instance, if the period served is 10 years and 7 months, the
number of years completed to be taken is 11.
Leave Encashment Salary
As the name suggests, it is the encashment of unutilised
leaves. Leave encashment salary received during employment is
fully taxable for all employees. If it is received at the time of
retirement then the exemption for employees shall be as
following:
 Government employees: Leave encashment salary received
shall be fully exempt from tax.
 Non- government employees: Least of the following amount
shall be exempt from tax:
 Actual amount received
 Rs. 3 Lakhs
 Last 10 month ’ s average salary (Basic + DA + Turnover
Commission)
 Amount equal to salary earned as leave encashment
earned (total earned leaves shall not exceed 30 days for
every year of service rendered)
As announced in the Budget 2023, the maximum limit of
Rs.3,00,000 has been increased to Rs.25,00,000 from FY 2023-24
(AY 2024-25) onwards.
Voluntary Retirement Scheme
Any compensation received at the time of voluntary
retirement is exempt u/s. 10(10C) subject to fulfilment of the
certain conditions.

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As per this section, the amount that an employee receives

for his/her service in; public sector or any other firms, authority
established under the Central, State or Provincial Act, Co-
operative Societies, Local Authority, Universities, IITs and
Notified Management Institutes etc, are considered to be
exempt to the lowest of the following:
 Three months’ salary (Basic+DA+Turnover Commission) for
each completed year of service (While calculating the
number of completed years any fraction of the year has to
be ignored)
 Salary at the time of retirement multiplied by the balance
months of service left before the date of retirement
 Rs. 5,00,000
 Actual amount received
Section 10(10C) and section 89 are mutually exclusive. It
means that an individual can only claim either exemption u/s
10(10C) or relief u/s 89. Moreover, if one claims an exemption
or relief in any assessment year then it cannot be claimed again
in any other assessment year.
Who is Eligible to Claim VRS?
The list of eligible employees as per Sec 10(10C) who can
claim VRS Exemption includes employees of ‘any other
company’. Thus, private sector employees can claim exemption
subject to the following conditions as per Rule 2BA:
 An employee has completed 10 years of service or
completed 40 years of age (Does not apply to public sector
employees)

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 Can be claimed by all employees including workers and

executives except directors
 VRS Scheme is initiated for a reduction in the existing
strength of the employees so any vacancy caused by the VRS
is not to be being filled up
 The retiring employee shall not be employed in another
company belonging to the same management
Salary Format and its Taxability
S. Component Definition Taxability
No
1 Basic salary This is the fixed It is 100%
component of salary. It is taxable. And a
also the basis for other part of take-
components of Salary. home salary.
2 Dearness Only Government It is 100%
Allowance employees get DA. DA is taxable. And a
(DA) paid to counter the part of take-
inflation impact. It is home salary.
calculated as a percentage
of the Basic Salary.
3 Commutation Granted to cover the cost The lower of
/Transport of travelling between the following
Allowance home and work. will be exempt
from tax:
1. Rs. 1600 per
month or
2. Conveyance
actually

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received
In the case of
handicapped
employees
exemption of
up to Rs.3200
per month is
allowable.
4 HRA HRA is paid to meet the The lower of
house rent expense. This the following
may consist of 40% – 50% will be exempt
of basic salary. from tax:
1. 40%/ 50%*
of Basic Salary
2. Actual rent
paid minus
10% of the
Basic Salary
3. HRA received
from the
employer
In the case No
rent is paid
then HRA will
be 100%
taxable.
*50% if staying
in a metro city.

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5 LTA It allows an employee to The exemption

take on a trip within India. is allowed for
The allowance is based on the actual
actual expenditure expenditure
incurred. An employee incurred for the
can take two trips in a trip subject to
block period of four certain limits.
years. Any
expenditure
incurred during
the trip for
purposes other
than travel will
not be exempt
LTA.
6 Children This allowance is granted The amount of
Education to promote the education exemption will
Allowance of children in India by the be a maximum
Income tax department. of INR 2812.5
per month per
child (Maximum
allowable for 2
children)
7 Children To promote a higher The amount of
Hostel literacy rate this allowance exemption will
Allowance is granted to individuals be a maximum
whose children stay in a of Rs. 8,437 per
hostel for education. month per

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child (Maximum
allowable for 2
children)
8 Underground This allowance is granted The amount of
Allowance to employees working in exemption
(Mines) underground mines. allowable is a
maximum of
Rs. 1060 per
month.
9 Tribal area This allowance is provided An employee
Allowance to the residents of can get an
scheduled, hilly and exemption of a
agency areas such as maximum of
Madhya Pradesh, Tamil Rs. 200 per
Nadu, Karnataka, Uttar month.
Pradesh, Odisha, Tripura
and Assam.
10 Island Duty This allowance is granted The maximum
Allowance to members of the armed amount of
forces who are assigned exemption
duties on islands. allowed to such
employees is
Rs. 3,250 p.m.
11 Allowance to This allowance is granted The amount of
employees of by roadways, railways and exemption
Transport airways in place of the allowable shall
undertaking daily allowance. be least of
following:

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1. 70% of the
amount
received as
allowance.
2. Rs.10,000 per
month.
12 Travelling or These allowances are Total amount
Tour granted to meet with the spent will be
Allowance/ respective expenses. the exempt
Conveyance amount.
Allowance/
Uniform
Allowance/
Daily
Allowance/
Helper
Allowance
(for office
Purpose)/
Research
Allowance
13 Special These allowances are over It is 100%
Allowance and above Basic Salary. A taxable. And a
and performance bonus is part of take-
Performance usually linked to past home salary.
Bonus performance and is
usually paid once or twice
a year.

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Computation of Income under the head Salary:

Components Amount
Basic Salary —
Add: —
1. Fees, Commission and Bonus —
2. Allowances —
3. Perquisites —
4. Retirement Benefits —
5. Fees, Commission and Bonus —
Gross Salary —
Less: Deductions from Salary —
1. Standard Deduction(upto Rs.
—
50,000)
2. Entertainment Allowance u/s
—
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3. Professional Tax u/s 16 —
Net Salary —

Difference between CTC and Take Home Salary

CTC stands for Cost to Company, which is the cost
company bears for an employee. CTC includes the basic salary,
all the allowances/ benefits and the employer’s contribution to
retirement benefits. Allowances and benefits include HRA, LTA,
Special Allowance, Free Meals, etc. and retirement benefits
include the EPF, Gratuity, etc. Additionally, the employer might
offer certain benefits in form of medical insurance, food
coupons, phone bills reimbursed, etc. Therefore, the total cost
to the company includes all such benefits along with the salary.

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Deductions Component and its Taxability

S.
Component Definition Taxability
No
It is a tax on employment.
Professional Tax is
This tax is deducted from
Professional allowed as a
1 salary by the employer
Tax deduction from salary
and deposited to the state
income.
government.
This is a forced
Usually, 12% of the basic
investment since
salary goes towards the
every company with
Employee’s provident
Employee's over 20 employees,
fund. This amount is
2 Provident has to contribute
matched by the employer
Fund (EPF) towards PF. It is
subject to certain limits
allowed as a
which may vary as per
deduction from total
company policies.
income.
This amount
Based on total taxable represents the tax
income, tax is calculated deducted from salary
Tax as per the applicable slab and deposited to the
Deducted rate. This tax is deducted government by
3
at Source from salary by employer employer. This can
(TDS) and deposited to the be lowered by
Government on behalf of utilizing the
employee. deduction limits
optimally.

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Income from House Property.

Sections 22 to 27 of the Income Tax Act deals with the

income tax on computation of the total standard income of a
person that is earned through the house property or land
owned.
The annual value of property consisting of any buildings
or lands appurtenant thereto of which the assessee is the owner,
other than such portions of such portions of such property as
he may occupy for the purposes of any business or profession
carried on by him the profits of which are chargeable to income
tax, shall be chargeable to income tax under the head “income
from house property”.
Income is taxable under the head 'house property' if it
arises from a property consisting of any building or land
connected thereto. For the computation of income under this
head, a house property is classified into three categories:
(a) Let-out
(b) Self-occupied
(c) Deemed let-out house property.
Basics of House Property Tax
A house property could be a house, an office, a shop, a
building or some land attached to the building like a parking lot.
The Income Tax Act does not differentiate between commercial
and residential property. All types of properties are taxed under
the head ‘income from house property’ in the income tax return.
An owner for the purpose of income tax is its legal owner,
someone who can exercise the rights of the owner in his own
right and not on someone else’s behalf.

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When a property is used for the purpose of business or

profession or for carrying out freelancing work – it is taxed
under the ‘income from business and profession’ head. Expenses
on its repair and maintenance are allowed as business
expenditure.
a. Self-Occupied House Property
A self-occupied house property is used for one’s own
residential purposes. This may be occupied by the taxpayer’s
family – parents and/or spouse and children. A vacant house
property is considered as self-occupied for the purpose of
Income Tax.
If an individual owns only one self-occupied property, it is
treated as a self-occupied property for tax purposes. In such
cases, the notional income is not taxable, and individuals can
claim deductions on the home loan interest paid, subject to
certain limits.
Prior to FY 2019-20, if more than one self-occupied house
property is owned by the taxpayer, only one is considered and
treated as a self-occupied property and the remaining are
assumed to be let out. The choice of which property to choose
as self-occupied is up to the taxpayer.
For the FY 2019-20 and onwards, the benefit of
considering the houses as self-occupied has been extended to 2
houses. Now, a house owner can claim his 2 properties as self-
occupied and remaining house as let out for Income tax
purposes.
b. Let Out House Property

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A house property which is rented for the whole or a part

of the year is considered a let out house property for income
tax purposes. The rental income received from such a property
is taxable under the head “Income from House Property”.
Individuals can claim deductions on the municipal taxes paid,
standard deduction and interest on home loans.
c. Inherited Property
An inherited property i.e. one bequeathed from parents,
grandparents, etc. again, can either be a self-occupied one or a
let-out one based on its usage as discussed above.
d. Deemed to be Let-out Property:
This category applies to properties that are not actually
rented out but are deemed to be let out by the tax authorities.
It typically includes properties that are not occupied by the
owner due to employment, business, or other reasons. In this
case, the notional rental income is considered taxable, and
deductions for municipal taxes and interest on home loans can
be claimed.
e. Under Construction Property:
Properties that are under construction or not ready for
occupation are also considered for taxation purposes. In such
cases, individuals cannot claim rental incomes as the property is
not let out. However, once the construction is complete, the
applicable treatment will be determined based on the actual
usage or rental arrangement.
Annual Value (Section 23):
The income from house property is computed on the basis
of its annual value. Various factors such as municipal valuation,

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fair rent, standard rent, and actual rent are considered to arrive
at an annual value.
The rental Income (Annual Value) is taxable under the
head income from house property if the following two
conditions are satisfied:
a) There should be a building and land appurtenant thereto; &
b) The assessee should be the owner of such property.
Building and Land Appurtenant thereto
For chargeability of income under this head, the property
must consist of any building or land appurtenant thereto. For
instance, if any income is derived from vacant land then such
income shall not be chargeable to tax under the head 'Income
from house property' as the property does not consist of any
building. Such rental income is chargeable to tax under the
head 'Income from other sources'.
The land is called land appurtenant to the building if it is
an indivisible part and parcel of a building for its use and
enjoyment by the occupiers, and it is not put to any other use
and is not yielding any income assessable under this head.
Generally, playgrounds, parking lots, garages, backyards,
gardens, etc. are treated as land appurtenant to a building.
Ownership of Property
To become an owner of a property, a person must hold
the legal title of the property in his name. He should be able to
exercise the rights of the owner, not on behalf of the owner but
in his own right. However, in certain situations, despite not
holding the legal ownership of a property, a person is
considered as deemed owner of the property, and, accordingly,

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income from such property is chargeable to tax in his hands

even though he is not the legal owner of such property.
If a person deriving rental income from a property is not
the owner of such property, then the income so derived shall be
chargeable to tax either as business income or residual income
but not as income from house property.
Annual value of house property - when not chargeable:
The annual value of a house property is not chargeable to
tax under this head if the following conditions are satisfied:
(a) The owner of the property utilizes the property to carry on
his business or profession; and
(b) Income of such business or profession is chargeable to tax.
Tax Deduction on Home Loans
a. Tax Deduction on Home Loan Interest: Section 24
House owners can claim a deduction of up to Rs 2 lakh on
their home loan interest, if the owner or his family resides in the
house property. The same treatment applies when the house is
vacant. If the property is rented out, the entire home loan
interest is allowed as a deduction.
However, deduction on interest is limited to Rs. 30,000
instead of Rs 2 lakhs if any of the following conditions are
satisfied:
 The loan is taken on or after 1 April 1999, and the purchase
or construction is not completed within 5 years from the end
of the FY in which loan was availed.
 The loan is taken before 1 April 1999.
 The loan is taken on or after 1 April 1999 for the purpose of
repairs or renewal of the house property.

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If the construction of the property is not completed within

5 years, the deduction on home loan interest shall be limited to
Rs. 30,000. The period of 5 years is calculated from the end of
the financial year in which loan was taken. Interest deduction
can only be claimed, starting in the financial year in which the
construction of the property is completed.
Deduction on home loan interest cannot be claimed when
the house is under construction. It can be claimed only after the
construction is finished. The period from borrowing money until
construction of the house is completed is called pre-
construction period. Interest paid during this time can be
claimed as a tax deduction in five equal instalments starting
from the year in which the construction of the property is
completed.
b. Tax Deduction on Principal Repayment
The deduction to claim principal repayment is available for
up to Rs. 1,50,000 within the overall limit of Section 80C.
Conditions to claim this deduction are-
 The home loan must be for purchase or construction of a
new house property.
 The property must not be sold in five years from the time of
taking possession.
Stamp duty and registration charges
Stamp duty and registration charges and other expenses
related directly to the transfer are also allowed as a deduction
under Section 80C, subject to a maximum deduction amount of
Rs 1.5 lakh.
c. Tax Deduction for First-Time Homeowners: Section 80EE

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Section 80EE recently added to the Income Tax Act

provides the homeowners, with only one house property on the
date of sanction of loan, a tax benefit of up to Rs 50,000.
A new section 80EEA is added to extend the tax benefits
of interest deduction for housing loan taken for affordable
housing during the period 1 April 2019 to 31 March 2020. The
individual taxpayer should not be entitled to deduction under
section 80EE.
Tax Benefits on Home Loans for Joint Owners
The joint owners, who are also co-borrowers of a self-
occupied house property, can claim a deduction on interest on
the home loan up to Rs 2 lakh each. And deduction on principal
repayments, including a deduction for stamp duty and
registration charges under Section 80C within the overall limit of
Rs.1.5 lakh for each of the joint owners. These deductions are
allowed to be claimed in the same ratio as that of the
ownership share in the property.
Where property consisting of buildings or buildings and
lands appurtenant thereto is owned by two or more persons
and their respective shares are definite and ascertainable, such
persons shall not be assessed as an association of person, but
the share of each such person in the income from the property
shall be included in his total income.
Steps to Calculate Income From House Property
a. Determine Gross Annual Value (GAV) of the property: The
gross annual value of a self-occupied house is zero. For a let
out property, it is the rent collected for a house on rent.

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When a property is let out, its gross annual value is the

rental value of the property. The rental value must be higher
than or equal to the reasonable rent of the property determined
by the municipality.
b. Reduce Property Tax: Property tax, when paid, is allowed as
a deduction from GAV of property.
c. Determine Net Annual Value(NAV): Net Annual Value =
Gross Annual Value – Property Tax
d. Reduce 30% of NAV towards standard deduction: 30% on
NAV is allowed as a deduction from the NAV under Section 24
of the Income Tax Act. No other expenses such as painting and
repairs can be claimed as tax relief beyond the 30% cap under
this section.
e. Reduce home loan interest: Deduction under Section 24 is
also available for interest paid during the year on housing loan
availed.
f. Determine Income from house property: The resulting value
is the income from house property. This is taxed at the slab rate
applicable.
g. Loss from house property: When a person owns a self
occupied house, since its GAV is Nil, claiming the deduction on
home loan interest will result in a loss from house property. This
loss can be adjusted against income from other heads.
Exclusions to Income from House Property
Though the computation of income from house property
basically covers every possible building or house that can ever
exist, there are a few exclusions to the same. The following
house properties are excluded from the income computation –

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 Property occupied by owner for the purpose of own

residence
 Single property ownership but the house is not being used
as residence as the owner stays elsewhere due to limitations
of employability
 Farmhouses contributing to agricultural income
 Any one palace in the occupation of an ex-ruler
 Property of a local authority or of any registered trade union
 Property of a member of a Scheduled Tribe;
 Statutory corporation or an institution or association
financed by the Government for promoting the interests of
the members either of the Scheduled Castes or Scheduled
tribes or both
 Any corporation established by the government for
promoting the interests of members of a minority group
 Any cooperative society formed for promoting the interests
of the members either of the Scheduled Castes or Scheduled
tribes or both
 Property Income from the letting of warehouses for storage,
processing or facilitating the marketing of commodities by
an authority constituted under any law for the marketing of
commodities
 Any institution for the development of ‘ Khadi and village
Industries’
 Self-occupied house property of an individual, which has not
been rented throughout the previous year
 House property held for any charitable purposes
 Property of any political party.​

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Profits and Gains of Business or Profession

“Profit and gains of business or profession” is one of the

heads of income under the Income Tax Act. This head is used to
classify or aggregate income which the taxpayer generates
through business or professional activities.
In other words, income from business and profession is
chargeable to tax under the head ‘Profits and Gains of Business
or Profession’ as per the Income Tax Act.
Section 2(13) of the Income Tax Act defines business to
include any trade, commerce or manufacture or any adventure
or concern in the nature of trade, commerce or manufacture.
Profession involves the idea of an occupation requiring
purely intellectual skill or manual skill on the basis of some
special learning or qualification. Vocation refers to any activity
done to earn the livelihood, e.g. Agency work, story or play
writer, brokerage, magic activities, robbery, music, dance, etc.
Income under the head profits and gains of business or
profession include income from business, profession and
vocation. The Act allows deductions for various business
expenses under Sections 30 to 37, covering items like rent,
salaries, repairs, insurance, and depreciation.
However, certain expenses may be expressly disallowed,
and the deductibility of expenses is generally based on the
actual payment basis. Additionally, there are specific provisions
applicable to non-resident/foreign companies, and businesses
may opt for presumptive taxation if they meet certain criteria.
Proper maintenance of accounts and audits are required as per
the Act.

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Profits and gains of Business or Profession (Section 28):

The following incomes are chargeable to tax under the
head Profit and Gains from Business or Profession:
According to Section 28, the following incomes shall be
chargeable to income tax under this head and income will be
computed in accordance with the provisions laid down in
Section 29 to 44DB:
 Profits or gains of any business or profession;
 Any compensation or other payments due to or received by
any person specified in section 28(ii);
 Income derived by a trade, professional or similar association
from specific services performed for its members;
 The value of any benefit or perquisite, whether convertible
into money or not, arising from business or exercise of a
profession;
 Any profit on the transfer of the Duty Entitlement Pass Book
Scheme;
 Any profit on the transfer of the Duty Free Replenishment
Certificate;
 Export incentives for exporters;
 Any interest, salary, bonus, commission or remuneration
received by partner from a firm;
 Any sum received under Keyman Insurance Policy including
Bonus;
 Any sum received for not carrying out any activity in relation
to any business or profession or not to share any know-how,
patent, copyright, trademark, etc.;

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 Any sum received or receivable, in cask or kind, on account

of any capital asset being demolished, destroyed, discarded
or transferred, if the whole of expenditure on such capital
asset has been allowed as a deduction under section 35AD;
 Income from speculative transaction.
Classifying Income according to Section 28:
According to Section 28, the following are the main clause
that requires an income to be charged under profits and gains
of business or profession:
 There should be a business or profession.
 The business or profession should have been carried on by
the assessee.
 The business or profession should be carried on for some
time during the financial year.
 The charge is in respect of the profits and gains of the
financial year of the business or profession.
 The charge extends to any business or profession carried on
by the assessee whether under the taxpayer’s own name or
otherwise.
General Principles for calculating business and profession
income:
(1). Business must be carried on during the previous year.
Business may not necessarily be carried out throughout the
previous year or till the end of previous year. If assessee does
not carry on business at all, Section 28 shall not apply and the
income so called cannot be as Business income.

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However, there are exceptions to this rule and business

though not carried out by the assessee in the year of receipt,
those receipts are still taxable as Income from business:
Section Income
41(1) Recovery against any loss, expenditure or trading
liability earlier allowed as deduction.
41(2) Balancing Charge in case of Electricity companies.
41(3) Sale of capital asset used for scientific research
41(4) Recovery against bad debts
41(4A) Amount withdrawn from Special Reserve
176(3A),(4) Receipt of Discontinued business under Cash
System of Accounting.

(2). Business Loss: A trading loss is deductible in computing

the profit earned by the business if following conditions are
satisfied:
(i). Business loss deductible from income
 Loss of Stock–in Trade due to enemy action, or arising under
similar circumstances or because of destruction by God.
 Loss on account of failure on the part of the assessee to
accept delivery of goods
 Depreciation in funds kept in foreign currency for purchase
of stock-in-trade
 Loss due to exchange rate fluctuations of foreign currency
 Loss arising from sale of securities held in the regular course
of business.
 Loss of cash and securities in a banking company on account
of dacoit.

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 Loss incurred on realisation of amount advanced in

connection with business.
 Loss of security deposit for the purpose of acquisition of
stock-in-trade.
 Loss due to forfeiture of a deposit made by the assessee for
properly carrying out the contract for supply of commodities.
 Loss on account of embezzlement by an employee.
 Loss incurred due to theft or burglary in factory premises.
 Loss of precious stones or watches of a dealer while bringing
them from business premises to his house.
 Loss arising from negligence or dishonesty of employees.
 Loss incurred on account of insolvency of banker with which
current account is maintained.
 Loss incurred due to freezing of the stock-in-trade by enemy
action.
(ii). Business loss not deductible from income:
 Loss which is not incidental to trade or profession, carried on
by the assessee.
 Loss incurred due to damage, destruction, etc. of capital
asset.
 Loss incurred due to sale of shares held as investment.
 Loss of advances made for setting up of a new business
which ultimately could not be started.
 Depreciation of funds kept in foreign currency for capital
purposes.
 Loss arising from nonrecovery of tax paid by an agent on
behalf of the nonresident.
 Anticipated future losses.

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 Provision made by the assessee in respect of nonperforming

assets.
 Loss relating to any business or profession discontinued
before the commencement of previous year.
Income from business Not taxable under Profit and Gains of
Business
Income Chargeability under Head
Rent from House (i). Income from Business of owning and
Property letting out of residential houses is taxable
under the head “Income from House
Property”
(ii). Residential houses let out to the
employees for efficient conduct of
assessee own business is taxable as
business income.
Dividend Income Assessee carrying on business in dealing
in shares and securities and earn income
by way of dividend, is taxable under
“Income from other sources”.
Winnings from Winning from lotteries, races, etc. is
Lotteries, races, etc. taxable under head ‘Income from other
sources’, if it is derived as a regular
business activity.
Interest received on Interest is taxable under the head ‘Income
compensation or from other sources’.
enhanced
compensation.

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Computation of income from business or profession

Section 29 states that profits and gains of business and
profession which are chargeable to tax under section 28 shall be
computed in accordance with the provisions contained in
section 30 to 43D including sections 44 to 44D consisting of
special provisions regarding computation of profits and
deduction of expenditure in certain cases.
General principles for allowing Deduction:
a) Expenditure should have been incurred during the previous
year.
b) Expenditure should be incurred for the purpose of business.
c) Expenditure done before in respect of setting up of business
is not allowed.
d) No expenses in respect of discontinued business is allowed
to be deducted.
e) Reserves/ provisions for contingencies/ anticipated losses
cannot be claimed as a deduction.
f) No deduction is admissible in respect of diminution or
exhaustion of the capital asset from which income is derived.
g) No deduction is allowed in respect of non-taxable business;
like agricultural income in India is exempt.
h) No deduction is allowed in respect of depreciation of
investment.
Depending on the type of accounting system followed by
assessee, expenses will be allowed or treated. If assessee follows
cash basis, expenses will be treated to be paid only when they
have been actually paid and on accrual basis, it will be treated
as paid irrespective of whether they have been paid or not.

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Deductions under Sections 30 to 37:

(1). Rent, rates, taxes, repairs and insurance for buildings
(Section 30):
In respect of rent, rates, taxes, repairs and insurance for
premises, used for the purposes of the business or profession,
the following deductions shall be allowed:
(i). where the premises are occupied by the assessee as a tenant,
the rent paid for such premises, and further if he has
undertaken to bear the cost of repairs to the premises, the
amount paid on account of such repairs;
(ii). where the premises are occupied by the assessee, otherwise
than as a tenant, the amount paid by him on account of current
repairs to the premises.
(iii). any sums paid on account of land revenue, local rates or
municipal taxes;
(iv). the amount of any premium paid in respect of insurance
against risk of damage or destruction of the premises.
(2). Repairs and insurance of machinery, plant and furniture
(Section 31):
In respect of repairs and insurance of machinery, plant or
furniture used for the purposes of the business or profession,
the following deductions shall be allowed:
(i). the amount paid on account of current repairs thereto;
(ii). the amount of any premium paid in respect of insurance
against risk of damage or destruction thereof.
(3). Depreciation (Section 32):
In respect of depreciation of
(i). buildings, machinery, plant or furniture, being tangible assets;

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(ii). know-how, patents, copyrights, trade marks, licences,

franchises or any other business or commercial rights of smiliar
nature, being intangible assets acquired on or after April 1, 1998,
owned, wholly or partly, by the assessee and used for the
purposes of the business or profession, the following deductions
shall be allowed:
(i). in the case of assets of an undertaking engaged in
generation or generation and distribution of power, such
percentage on the actual cost thereof to the assessee as may be
prescribed;
(ii). in the case of any block of assets, such percentage on the
written down value thereof as may be prescribed.
However, no deduction shall be allowed in respect of any
machinery or plant if the actual cost thereof is allowed as a
deduction in one or more years under an agreement entered
into by the Central Government, and any motor car
manufactured outside India unless otherwise provided.
(4). Investment allowance (Section 32A):
In respect of a ship or an aircraft or machinery or plant
which is owned by the assessee and is wholly used for the
purposes of the business carried on by him, there shall be
allowed a deduction, in respect of the previous year in which
the ship or aircraft was acquired or the machinery or plant was
installed, of a sum by way of investment allowance.
(5). Development Rebate & Development allowance:
In respect of a new ship or new machinery or plant which
is owned by the assessee and is wholly used for the purposes of

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the business carried on by him, there shall be allowed a

deduction by way of development rebate. (Section 33)
In respect of planting of tea bushes on any land in India
owned by an assee who carries on business of growing and
manufacturing tea in India, a um by way of development
allowances shall be allowed as a deduction in the manner as
prescribed. (Section 33A)
Where an assessee carrying on business of growing and
manufacturing tea or coffee or rubber in India has, before the
expiry of 6 months from the end of the previous year or before
the date of furnishing the return of his income, deposited any
amount in an Account approved by the Tea Board or Coffee
Board or Rubber board, the assessee shall be allowed a
deduction of sum equal to the amount or the aggregate of the
amounts so deposited, or a sum equal to 40% of profits of such
business, whichever is less.
In case of an assessee, being a Government company or a
public company formed and registered in India with the main
object of carrying on the business of operation of ships, there
shall be allowed a deduction of an amount not exceeding 50%
of the profits derived from the business of operation of ships, as
is debited to the profit and loss account of the previous year in
respect of which the deduction is to be allowed and credited to
a reserve account, to be utilised in the prescribed manner.
(6). Expenditure on scientific research
In respect of expenditure on scientific research, the
following deductions shall be allowed:

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(i). any expenditure laid out or expended on scientific research

relating to the business, not being in the nature of capital
expenditure;
(ii). an amount equal to 1 1/2 times of any sum paid to a
research association which has as its object the undertaking of
scientific research or to a university, college or other institution
to be used for scientific research;
(iii). any sim paid to a company to be used by it for scientific
research
(iv). any sum paid to a research association which has its object
the undertaking of research in social science or statistical
research or to a university, college or other institution to be
used for research in social science or statistical research;
(v). in respect of any expenditure of a capital nature on scientific
research related to the business carried on by the assessee, such
deduction as may be admissible.
(7). Expenditure:
In respect of any expenditure of a capital nature incurred
after the 28th day of February, 1996, on the acquisition of patent
rights or copyrights used for the purposes of the business, there
shall be allowed a deduction equal to the appropriate fraction
of the amount of such expenditure.
Where the assessee has paid any lump sum consideration
for acquiring any know-how for use of the purposes of his
business, 1/6th of the amount so paid shall be deducted in
computing profits and gains of the business of that previous
year, and the balance amount shall be deducted in equal

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installments for each of the five immediately succeeding

previous years.
In respect of any expenditure, being in the nature of
capital expenditure, incurred for acquiring any right to use
spectrum for telecommunication services either before the
commencement of the business or thereafter at any time during
any previous year, and for which payment has actually been
made to obtain a right to use spectrum, there shall be allowed
for each of the relevant previous years, a deduction equal to the
appropriate fraction of the amount of such expenditure.
In respect of any expenditure, being in the capital
expenditure, for acquiring any right to operate
telecommunication services either before the commencement of
the business to operate telecommunication services or
thereafter at any time during any previous year and for which
payment has actually been made to obtain a licence, there shall
be allowed a deduction equal to the appropriate fraction of the
amount of such expenditure.
Where an assessee incurs any expenditure by way of
payment of any sum to a public sector company or a local
authority or to an association or institution approved by the
National Committee for carrying out any eligible project or
scheme, the assessee shall be allowed a deduction of the
amount of such expenditure incurred during the previous year.
An assessee shall be allowed a deduction in respect of the
whole of any expenditure of capital nature incurred, wholly and
exclusively, for the purposes of any specified business carried on

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by him during the previous year in which such expenditure is

incurred by him.
Where an assessee incurs any expenditure on agricultural
extension project notified by the Board in this behalf, then there
shall be allowed a deduction of a sum equal to 1 1/2 times of
such expenditure.
Where a company incurs any expenditure on any skill
development project notified by the Board in this behalf in
accordance with the guidelines as may be prescribed, then there
shall be allowed a deduction of a sum equal to 1 1/2 of such
expenditure.
Where an assessee, being an Indian company or a person
who is resident in India, is engaged in any operations relating to
prospecting for, or extraction or production of, any mineral and
incurs any expenditure, the assessee shall be allowed for each
one of the relevant previous years a deduction of an amount
equal to 1/10th of the amount of such expenditure.
(8). Other Deductions:
The following deductions shall be allowed:
(i). the amount of any premium paid in respect of insurance
against risk of damage or destruction of stocks or stores used
for the purposes of the business or profession;
(ii). the amount of any premium paid by a federal milk co-
operative society to effect or to keep in force an insurance on
the life of the cattle owned by a member of a co-operative
society, being a primary society engaged in supplying milk
raised by its members to such federal milk co-operative society;

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(iii). the amount of any premium paid by any mode of payment

other than cash by the assessee as an employer to effect or to
keep in force an insurance on the health of his employees under
this scheme framed in this behalf;
(iv). any sum paid to an employee as bonus or commission for
services rendered, where such sum would not have been
payable to him as profits or dividend if it had not been paid as
bonus or commission;
(v). the amount of the interest paid in respect of capital
borrowed for the purposes of the business or profession;
(vi). the pro rata amount of discount on a zero coupon bond
having regard to the period of life of such bond calculated in
the prescribed manner;
(vii). any sum paid by the assessee as an employer by way of
contribution towards a recognized provident fund or an
approved superannuation fund, subject to limits as prescribed;
(viii). any sum paid by the assessee as an employer by way of
contribution towards a pension scheme, as referred to in Section
80CCD, on account of an employee to the extent it does not
exceed 10% of the salary of the employee in the previous year;
(ix). any sum paid by the assessee as an employer by way of
contribution towards an approved gratuity fund created by him
for the exclusive benefit of his employees under an irrevocable
trust;
(x). any expenditure incurred by a corporation or a body
corporate, not being in the nature of capital expenditure;

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(xi). any amount of banking cash transaction tax paid by the

assessee during the previous year on the taxable banking
transactions entered into by him;
(xii). any sum paid by a public financial institution by way of
contribution to such credit guarantee fund trust for small
industries as the Central Government may specify in this behalf;
(xiii) an amount equal to the securities transaction tax paid by
the assessee in respect of the taxable securities transactions
entered into in the course of his business during the previous
year, if the income arising from such taxable securities
transactions is included in the income computed under the
head “Profits and gains of business or profession”
(xiv). an amount equal to the commodities transaction tax paid
by the assessee in respect of the taxable commodities
transactions entered into in the course of his business during
the previous year, if the income arising from such taxable
commodities transactions is included in the income computed
under the head “Profits and gains of business or profession”.
(xv). the amount of expenditure incurred by a co-operative
society engaged in the business of manufacture of sugar for
purchase of sugarcane at a price which is equal to or less than
the price fixed or approved by the Government.
Any expenditure, not being in the nature of capital
expenditure or personal expenses of the assessee, laid out or
expended in wholly or exclusively for the purposes of the
business or profession shall be allowed in computing the
income chargeable under the head “Profits and gains of
business or profession”.

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Amounts not deductible:

The following amounts shall not be deducted in
computing the income chargeable under the head “Profits and
gains of business or profession”:
(1). In case of assessee:
(i). any interest, royalty, fees for technical services or other sum
chargeable under this Act;
(ii). any sum paid on account of fringe benefit tax, wealth tax,
(iii). any sum paid on account any rate or tax levied on the
profits or gains of any business or assessed at a proportion of
any such profits or gains;
(2). In case of any firm assessable, any payment of salary, bonus,
commission or remuneration, interest to any partner, shall not
be deducted.
(3). Where the assessee incurs any expenditure in respect of
which a payment or aggregate of payments made to a person
in a day, otherwise than by an account payee cheque drawn on
a bank or account payee draft, no deduction shall be allowed in
respect of such expenditure.
(4). No deduction shall be allowed in respect of any provision
made by the assessee for the payment of gratuity to his
employees on their retirement or on termination of their
employment for any reason;
(5). No deduction shall be allowed in respect of any sum paid
by the assessee as an employer towards the setting up or
formation of, or as contribution to, any fund, trust, company,
association of persons, body of individuals, society, etc., except

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where such sum is so paid for the purposes and to the extent as
prescribed.
(6). No deduction or allowance shall be allowed in respect of
any marked to market loss or other expected loss, except as
provided.
Computation of income from construction and service
contracts (Section 43CB):
The profits and gains arising from a construction contract
or a contract for providing services shall be determined on the
basis of percentage of completion method in accordance with
the income computation and disclosure standards notified
under section 145(2).
Computation of Business Income - Section 44AD
Section 44AD primarily focuses on the computation of
‘Business Income’, which is applicable if the taxpayer is a
resident individual, resident Hindu Undivided Family or a
resident partnership firm, but not an LLP.
In the case of an eligible assessee engaged in an eligible
business, a sum equal to 8% of the total turnover or gross
receipts of the assessee in the previous year on account of such
business or a sum higher than the aforesaid sum claimed to
have been earned by the eligible assessee, shall be deemed to
be the profits and gains of such business chargeable to tax
under the head “Profits and gains of business or Profession”
Where an eligible assessee declares profit for any previous
year in accordance with the provisions of section 44AD, and he
declares profit for any of the five assessment years relevant to
the previous year succeeding such previous year not in

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accordance with Section 44AD(1), he shall not be eligible to

claim the benefit of the provisions of section 44AD for five
assessment years, subsequent to the assessment year relevant
to the previous year in accordance with sub-section 1.
Computing Income under Section 44AD involves the
following aspects:
 The taxpayer should be an eligible owner of a business.
 The annual turnover should not exceed 2 Crores.
 If the turnover does not exceed 2 Crores, the income tax can
be computed on an estimated basis at the rate of 8% of
turnover.
 For the income tax rate of 8%, no further deduction is
allowed under any other sections.
 Deduction on remuneration and interest to partners is not
available from the year 2017-2018.
The list of taxpayers who are not eligible to avail the
benefits of computing the income tax under section 44AD are:
 A person carrying on a profession.
 A person whose income is based on commission or
brokerage.
 A person carrying on any agency business.
 A person whose business is plying, hiring or leasing goods
carriages.
 An assessee who has claimed any deduction under 10A,
10AA, 10B, 10BA, 80HH and 80RRB in the relevant
assessment year.
 Companies incorporated in India- Required to file Form ITR-6

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Computation of Professional Income - Section 44ADA

Section 44ADA primarily focuses on the computation of
‘professional income’. A taxpayer whose gross receipts do not
cross Rs. 50 lakh in the financial year can claim the benefits of
this section to file under the presumptive taxation scheme.
In the case of an assessee, being a resident in India, who
is engaged in a profession referred to in a profession referred to
in Section 44AA(1), and whose total gross receipts do not
exceed fifty lakh rupees in a previous year, a sum equal to fifty
percent of the gross receipts of the assessee in the previous
year on account of such profession not a sum higher than the
aforesaid sum claimed to have been earned by the assessee,
shall be deemed to be the profits and gains of such profession
chargeable to tax under the head “Profits and gains of business
or profession”.
The professionals who are eligible to avail the benefits of
section 44ADA and file ITR-4 return include:
 Legal professionals
 Medical professionals
 Engineering professionals
 Architectural Profession
 Accountancy Profession
 Technical Consultancy
 Interior Decoration
An assessee who claims that his profits and gains from the
profession are lower than the profits and gains and whose total
income exceeds the maximum amount which is not chargeable
to income tax, shall be required to keep and maintain such

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books of account and other documents as required, and get

them audited and furnish a report of such audit in the
prescribed manner.
Computation of profits and gains of business of plying,
hiring or leasing goods or carriages - Section 44AE
Section 44AE pertain to the presumptive taxation scheme
application for taxpayers engaged in the business of plying,
leasing or hiring trucks.
In the case of an assessee who owns not more than 10
goods carriages at any time during the previous year and who is
engaged in the business of plying, hiring or leasing such goods
carriages, the income of such business chargeable to tax under
the head “Profits and gains of business or profession” shall be
deemed to be the aggregate of the profits and gains, from all
the goods carriages owned by him in the previous year,
computed in accordance with sub-section 2 of section 44AE.
Following criteria are applicable for those filing ITR-4
return under section 44AE:
 The taxpayer should be engaged in the business of plying,
hiring and leasing goods carriages.
 He should not own more than 10 goods carriages, the
previous year.
 Income would be calculated on an estimated basis at the
rate of Rs. 7,500/- for every month during which the goods
carriages are owned by the taxpayer.
 Except for remuneration and interest to partners, no
deductions are allowed.

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 If the taxpayer wants to declare lower income, he will have

to maintain books of account and get his account audited
on a compulsory basis.
 The returns should be submitted electronically with a digital
signature.
Computation of profits and gains of Retail Business (S. 44AF):
In the case of an assessee engaged in retail trade in any
goods or merchandise, a sum equal to 5% of the total turnover
in the previous year on account of such business or a sum
higher than the aforesaid sum as declared by the assessee in his
return of income shall be deemed to be the profits and gains of
such business chargeable under the head “Profits and gains of
business or profession”.
Any allowable deduction shall be deemed to have been
already given full effect to and no further deductions shall be
allowed, except as otherwise provided.
The written down value of any asset used for the purpose
of such business shall be deemed to have been calculated as if
the assessee had claimed and had been actually allowed the
deduction in respect of the depreciation for each of the relevant
assessment years.
In computing the monetary limits, the total turnover or the
income from the said business shall be excluded.
An assessee may claim lower profits and gains, if he keeps
and maintains such books of account and other documents as
required, and gets his accounts audited and furnishes a report
of such audit as required.

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Computation of profits and gains of shipping business in the

case of non-residents
In the case of an assessee, being a non-resident, engaged
in the business of operation of ships, a sum equal to seven and
half percent of the aggregate of the amounts specified herein
shall be deemed to be the profits and gains of such business
chargeable to tax under the head “Profits and gains of business
or profession.”
The amounts mentioned above includes the following:
(i). the amount paid or payable to the assessee or to any person
on his behalf on account of passengers, livestock, mail or goods
shipped at any port in India; and
(ii). the amount received or deemed to be received in India by
or on behalf of the assessee on account of the carriage of
passengers, livestock, mail or goods shipped at an port outside
India.
Computation of profits and gains in connection with
business of exploration etc., of mineral oils (Section 44BB):
In case of an assessee, being a on-resident, engaged in
the business of providing services or facilities in connection with,
or supplying plant and machinery on hire used, or to be used,
in the prospecting for, or extraction or production of, mineral
oils, a sum equal to 10% of the aggregate of the amounts shall
be deemed to be the profits and gains of such business
chargeable to tax under the head “Profits and gains of business
or Profession”. The amounts mentioned above includes the
amount paid or payable to the assessee, received or deemed to
be received by or on behalf of the assessee.

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Computation of profits and gains of the business of

operation of aircraft in the case of non-residents:
In the case of an assessee, being a non-resident, engaged
in the business of operation of aircraft, a sum equal to 5% of
the aggregate of the amounts specified shall be deemed to be
the profits and gains of such business chargeable to tax under
the head “Profits and gains of business or Profession”.
The amounts mentioned above includes the following:
(i). the amount paid or payable to the assessee or to any person
on his behalf on account of the carriage of passengers, livestock,
mail or goods from any place in India;
(ii). the amount received or deemed to be received in India by
or on behalf of the assessee on account of the carriage of
passengers, livestock, mail or goods from any place outside
India.
Computing of profits and gains of foreign companies
engaged in the business of civil constructions, etc., in certain
power projects:
In the case of an assessee, being a foreign company,
engaged in the business of civil construction or the business
erection of plant or machinery or testing or commissioning
thereof, in connection with a turkey power project approved by
the Central Government in this behalf, a sum equal to 10% of
the amount paid or payable to the said assessee or to any
person on his behalf on account of such civil construction,
erection, testing or commissioning shall be deemed to be the
profits and gains of such business chargeable to tax under the
head “Profits and gains of business or profession”.

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Computation of income by way of royalties, etc., in case of

foreign companies, non residents:
(1). In the case of an assessee, being a foreign company,
(i). the deduction admissible in computing the income by way of
royalty or fees or technical services rendered from the
Government or an Indian concern in pursuance of an agreement
made by the foreign company with Government or with the
Indian concern, shall not exceed in the aggregate, 20% of the
gross amount of such royalty, or fees as reduced by the gross
amount of such royalty
(ii). no deduction in respect of any expenditure or allowance
shall be allowed in computing the income by way of royalty or
fees for technical services received from Government or an
Indian concern in pursuance of an agreement made by the
foreign company.
(2). The income by way of royalty or fees for technical services
received from Government or an Indian concern in pursuance of
an agreement by a non-resident or a foreign company with
Government or the Indian concern,
 where such non-resident or a foreign company carries on
business in India through a permanent establishment
situated therein, or performs professional services from a
fixed place of profession situated therein, and
 the right, property or contract in respect of which the
royalties or fees for technical services are paid is effectively
connected with such permanent establishment or fixed place
of profession, as the case may be,

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shall be computed under the head “Profits and gains of

business or Profession.
(3). No deduction shall be allowed in respect of
(i). any expenditure or allowance which is not wholly and
exclusively incurred for the business of such permanent
establishment or fixed place of profession in India;
(ii). in respect of amounts paid by the permanent establishment
to its head office or to any of its other offices.
(4). Every non-resident or foreign company shall keep maintain
books of account and other documents in accordance with the
provisions, and get his accounts audited by an account and
furnish along with the return of income, the report of such audit
in the prescribed form.
Computation for deduction in the case of business
reorganization of co-operative bank:
The deduction in a case where business reorganization of
a co-operative bank has taken place during the financial year,
be allowed in accordance with the provisions of section 44DB.
The amount of deductions allowable to the predecessor
co-operative bank under sections 32, 35DD or 35DDA shall be
determined in accordance with the formula: A X B/C.
Where A is the amount of deduction allowable to the
predecessor co-operative bank if the business reorganisation
had not taken place; B is the number of days comprised in the
period beginning with the 1st day of the financial year and
ending on the day immediately preceding the date of business
reorganisation; and C is the total no.of days in the financial year
in which the business reorganisation has taken place.

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Capital Gains

Capital gain is an economic concept defined as the profit

earned on the sale of an asset which has increased in value over
the holding period. An asset may include tangible property, a
car, a business, or intangible property such as shares.
A capital gain is only possible when the selling price of the
asset is greater than the original purchase price. In the event
that the purchase price exceeds the sale price, a capital loss
occurs.
Capital gain is denoted as the net profit that an investor
makes after selling a capital asset exceeding the price of
purchase. The entire value earned from selling a capital asset is
considered as taxable income. To be eligible for taxation during
a financial year, the transfer of a capital asset should take place
in the previous fiscal year.
Financial gains against a sale of an asset are not
applicable to inherited property. It is considered only in case of
transfer of ownership. According to the Income Tax Act, assets
received as gifts or by inheritance are exempted in the
calculation of income for an individual.
Capital gains shall be chargeable to tax if the following
conditions are satisfied:
(i). There should be a capital asset. In other words, the asset
transferred should be a capital asset on the date of transfer;
(ii). It should be transferred by the taxpayer during the previous
year;
(iii). There should be profits or gain as a result of transfer.

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Capital Asset: Capital asset is defined to include:

(i). any kind of property held by an assessee, whether or not
connected with business or profession of the assessee;
(ii). any securities held by a FII which has invested in such
securities in accordance with the regulations made under the
SEBI Act, 1992.
Buildings, lands, houses, vehicles, Mutual Funds, and
jewelry are a few examples of capital assets. Also, the rights of
management or legal rights over any company can be
considered as capital assets. However, the term ‘capital asset’
shall exclude the following:
(i). Any stock, consumables or raw materials that are held for the
purpose of business or profession.
(ii). Goods such as clothes or furniture that are held for personal
use or for any member of his family dependent upon him.
However, jewellery, costly stones, and ornaments made of silver,
gold, platinum or any other precious metal, archaeological
collections, drawings, paintings, sculptures or any work of art
shall be considered as capital asset even if used for personal
purposes;
(iii). specified Gold Bonds and Special Bearer Bonds; [Gold
bonuses issued by the Central Government such as the 6.5%
gold bonus of 1977, 7% gold bonus of 1980 and defense gold
bonus of 1980].
(iv). Land for agriculture in any part of rural India.
(v). Gold deposit bonds that were issued under the gold deposit
scheme (1999) or the deposit certificates that were issued under
the Gold Monetisation Scheme (2015).

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Types of Capital Gain

Depending on the tenure of holding an asset, gains
against an investment can be divided into the following types
(1). Short Term Capital Gain:
If an asset is sold within 36 months of acquisition, then
the profits earned from it is known as short term capital gains.
For instance, if a property is sold within 27 months of purchase,
it will come under short term capital gains.
However, tenure varies in the case of different assets. For
Mutual Funds and listed shares, Long term capital gain happens
if an asset is sold after holding back for 1 year.
(2). Long Term Capital Gain:
The profit earned by selling an asset that is in holding for
more than 36 months is known as long-term capital gains. After
31st March 2017, a holding period for non-moveable properties
was changed to 24 months. However, it is not applicable in case
of movable assets such as jewelry, debt-oriented Mutual Funds,
etc.
Furthermore, a few assets are considered as short-term
capital assets if the holding period is less than 12 months. T list
of assets that are considered according to the rule mentioned
above, is as follows:
 Equity shares of any organization listed on a recognized
Indian stock exchange.
 Securities like bonds, debentures, etc. that are listed on any
Indian stock exchange.
 UTI units, regardless of being quoted or unquoted.

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 Capital gain on Mutual Funds that are equity-oriented,

whether they are quoted or not.
 Zero-coupon bonds.
All the assets mentioned above are considered as long-
term capital assets if they are held for 12 months or more. In
case of any asset acquired by inheritance or gift, then the
period for which an asset is owned by a previous owner is
considered.
Furthermore, in the case of bonus shares or right shares,
the period of holding is considered from the date of allotment.
The duration chart on an income generated against the
sale of assets is as given below–
Type of asset Short Term Long Term
Duration Duration
Immovable assets Less than 2 years More than 2 years
(e.g. real estate)
Moveable Less than 3 years More than 3 years
property(e.g. Gold)
Listed Shares Less than 1 year More than 1 year
Equity Oriented Less than 1 year More than 1 year
Mutual Funds
Debt Oriented Less than 3 years More than 3 years
Mutual Funds

Computation of Capital Gains

Computation of capital gain depends upon the nature of
the capital asset transferred during the previous year, vis-a-vis,
short-term capital asset, long-term capital asset or depreciable

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asset. Capital gain arising on transfer of short-term capital asset

or depreciable asset is considered as short-term capital gain,
whereas transfer of long-term capital asset gives rise to long-
term capital gain.
The calculations of capital gains are dependent on the
type of assets and their holding period. A few terms that an
individual must know before calculating gains against their
capital investments are–
(i). Full Value Consideration: It is the consideration that is
received by a seller in return for a capital asset.
(ii). Cost of Acquisition: The cost of acquisition is the value of
an asset when a seller acquires it.
(iii). Cost of Improvement: The cost of improvement is the
amount of expenses incurred by a seller in making any additions
or alterations to a capital asset.
To calculate the value of short term capital gain, the full
amount of consideration is required to be determined at first.
From the obtained value, cost of acquisition, cost of
improvement and the total expenditure incurred concerning the
transfer of ownership has to be deducted. This resultant value
will be the capital gain on investments.
Capital gains on purchase by company of its own shares or
other specified securities:
Where a shareholder or a holder of other specified
securities receives any consideration from any company for
purchase of its own shares or other specified securities held by
such shareholder or holder of other specified securities, then the
difference between the cost of the acquisition and the value of

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consideration received by the shareholder or the holder of other

specified securities shall be deemed to be the capital gains
arising to such shareholder or the holder of other specified
securities in the year in which such shares or other specified
securities were purchased by the company.
Mode of computation:
The income chargeable under the head “Capital gains”
shall be computed, by deducting from the full value of
consideration received or accruing as a result of the transfer of
the capital asset the following amounts:
(i). expenditure incurred wholly and exclusively in connection
with such transfer;
(ii). the cost of acquisition of the asset and the cost of any
improvement thereto.
In the case of an assessee who is a non-resident, capital
gains arising from the transfer of a capital asset being shares in,
or debentures of, an Indian company shall be computed by
converting the cost of acquisition, expenditure incurred wholly
and exclusively in connection with such transfer, and the full
value of the consideration received or accruing as a result of the
transfer of the capital asset into the same foreign currency as
was initially utilised in the purchase of the shares or debentures,
and the capital gains so computed in such foreign currency shall
be reconverted into Indian currency.
Where long-term capital gain arises from the transfer of a
long-term capital asset, the provision of Section 48(ii) shall have
effect as if for the words ‘cost of acquisition’ and ‘cost of any
improvement’, the words ‘indexed cost of acquisition’ and

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‘indexed cost of any improvement’ had respectively been

submitted.
Indexed Cost of Acquisition
Cost of acquisition of an asset is the amount for which it
was originally acquired by the assessee. It includes expenses of
capital nature incurred in connection with such purchase or for
completing the title of the property.
The cost of acquisition is calculated on the present terms
by applying the CII (Cost Inflation Index). It is done to adjust the
values by taking into account the inflation that takes place over
the years while holding the asset.
Indexed Cost of Improvement
The indexed cost of the improvement is calculated by
multiplying the associated cost of improvement that was
required to the CII of the year divided by the CII of the year in
which the improvement took place.
Cost with reference to certain modes of acquisition:
(1). Where the capital asset became the property of the assessee,
(i). on any distribution of assets on the total or partial partition
of a Hindu Undivided Family;
(ii). under a gift or will;
(iii). (a) by succession, inheritance or devolution, or
(b). on any distribution of assets on the dissolution of a firm,
body of individuals, or other association of persons;
(c). on any distribution of assets on the liquidation of a
company, or
(d). under a transfer to a revocable or an irrevocable trust; or
any other transfer as referred to in Section 47;

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(iv). such assessee being a Hindu Undivided Family

the cost of acquisition of the asset shall be deemed to be
the cost for which the previous owner of the property acquired
it, as increased by the cost of any improvement of the assets
incurred or borne y the previous owner or the assessee, as the
case may be. Previous owner of the property in relation to any
capital asset owned by an assessee means the last previous
owner of the capital asset.
(2). Where the capital asset:
(i). being a share or shares in an amalgamated company which
is an Indian company, became the property of the assessee in
consideration of a transfer, the cost of acquisition of the asset
shall be deemed to be the cost of acquisition to him of the
share or shares in the amalgamating company.
(ii). being a share or debenture of a company, became the
property of the assessee in consideration of a transfer, the cost
of the acquisition of the asset to the assessee shall be deemed
to be the cost of debenture, debenture-stock, bond or deposit
certificate in relation to which such asset is acquired by the
assessee.
(iii). being a share or shares of a company, is acquired by a non-
resident assessee on redemption of Global Depository Receipts
held by such assessee, the cost of acquisition of the share or
shares shall be the price of such share or shares prevailing on
any recognised stock exchange on the date on which a request
for such redemption was made;
(iv). being a unit of a business trust, became the property of the
assessee in consideration of a transfer, the cost of acquisition of

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the asset shall be deemed to be the cost of acquisition to him

of the share;
(v). being a unit or units in a consolidated scheme of a mutual
fund, became the property of the assessee in consideration of a
transfer, the cost of acquisition of the asset shall be deemed to
be the cost of acquisition to him of the unit or units in the
consolidating scheme of the mutual fund.
(3). The cost of acquisition of the shares in the resulting
company shall be the amount which bears to the cost of
acquisition of shares held by the assessee in the demerged
company, the same proportion as the net book value of the
assets transferred in a demerger bears to the net worth of the
demerged company immediately before such demerger.
(4). The cost of acquisition of the original shares held by the
shareholder in the demerged company shall be deemed to have
been reduced by the amount so arrived at.
(5). Where the capital gain arising from the transfer of a capital
asset is deemed to be income chargeable under the head
“Capital Gains”, the cost of acquisition of such asset to the
transferee company shall be the cost for which such asset was
acquired by it.
(6). Where the capital gain arises from the transfer of a property,
the value of which has been subject to income tax, the cost of
acquisition of such property shall be deemed to be the value
which has been taken into account.
(7). Where the capital gain arises from the transfer of an asset
declared under the Income Declaration Scheme, 2016, and the
tax, surcharge and penalty have been paid in accordance with

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the provisions of the Scheme on the fair market value of the

asset as on the date of commencement of the Scheme, the cost
of acquisition of the asset shall be deemed to be the fair market
value of the asset which has been taken into account.
(8). Where the capital gain arises from the transfer of a capital
asset, being a share in the project, in the form of land or
building or both, not being the capital asset, the cost of
acquisition of such asset shall be the amount which is deemed
as full value of consideration.
(9). Where the Capital gain arises from the transfer of a capital
asset, being the asset held by a trust or an institution in respect
of which accreted income has been computed and the tax has
been paid thereon, the cost of acquisition of such asset shall be
deemed to be the fair market value of the asset which has been
taken into account for computation of accreted income.
(10). Where the Capital gain arises from the transfer of a capital
asset, the acquisition of such asset shall be deemed to be the
fair market value which has been taken into account.
Computation of capital gains in case of depreciable assets:
Where the capital asset is an asset forming part of a block
of assets in respect of which depreciation has been allowed
under this Act, the following conditions shall be considered:
(i). where the full value of the consideration received or accruing
as a result of the transfer of the asset together with the full
value of such consideration received or accruing as a result of
the transfer of any other capital asset falling within the block of
the assets during the previous year, exceeds the aggregate of
the following assets:

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(a). expenditure incurred wholly and exclusively in

connection with such transfer or transfers;
(b). the written down value of the block of assets at the
beginning of the previous year; and
(c). the actual cost of any asset falling within the block of
assets acquired during the previous year,
such excess shall be deemed to be the capital gains arising from
the transfer of short-term capital assets.
Where any block of assets ceases to exist as such, for the
reason that all the assets in that block are transferred during the
previous year, the cost of acquisition of the block of assets shall
be the written down value of the block of assets at the
beginning of the previous year, as increased by the actual cost
of any any asset falling within that block of assets, acquired by
the assessee during the previous year and the income received
or accruing as a result of such transfer or transfers shall be
deemed to be the capital gains arising from the transfer of
short-term capital gains.
Slump sale:
According to Section 2(42C) of the Income Tax Act, 1961,
Slump sale means the transfer of one or more undertakings as a
result of the sale for a lump sum consideration without values
being assigned to the individual assets and liabilities in such
sales.
Slump sale refers to transferring a part of a whole of a
business to another firm for a lump sum amount. In slump sale,
the buyer gains ownership of assets, debts, intellectual property,
contracts, staff, and debtors from the seller. However, the seller

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is liable to pay taxes if it realises a profit from the sale under

Section 50B(1) of the Act.
In other words, it is a way by which an undertaking or the
whole business is sold off against a lump sum amount. It is
considered to be an ideal solution for big businesses that are
eyeing to expand their horizons but refrain from indulging in
what seem to be unnecessary and lengthy tax implications.
Computation of capital gains in case of slump sale:
Any profits or gains arising from the slump sale effected in
the previous year shall be chargeable to income tax as capital
gains arising from the transfer of long-term capital assets and
shall be deemed to be the income of the previous year in which
the transfer took place.
Any profits or gains arising from the transfer under the
slump sale of any capital asset being one or more undertakings
owned and held by an assessee for not more than 36 months
immediately preceding the date of its transfer shall be deemed
to be the capital gains arising from the transfer of short-term
capital gains.
In relation to capital assets being an undertaking or
division transferred by way of such sale, the net worth of the
undertaking or the division shall be deemed to be the cost of
acquisition and the cost of improvement, as the case may be.
The net worth shall be the aggregate value of the assets of the
undertaking or division, as reduced by the value of liabilities of
such undertaking or division as appearing in its books of
account.

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Any change in the value of assets on account of

revaluation of assets shall be ignored for the purposes of
computing the net worth. For computing the net worth, the
aggregate value of total assets shall be:
(i). in the case of depreciable assets: the written down value of
the block of assets determined;
(ii). in the case of capital assets in respect of which the whole of
the expenditure has been allowed: nil;
(iii). in the case of other assets: the book value of such assets.
In the case of slump sale, every assessee shall furnish a
report of an accountant along with the return of income. Such
report shall indicate the computation of the net worth of the
undertaking or division, and certify that the net worth of the
undertaking or division has been correctly arrived at in
accordance with the provisions of Section 50B.
Full value of consideration in certain cases:
Where the consideration received or accruing as a result
of the transfer by an assessee of a capital asset, being share of
a company other than a quoted share, is less than the fair
market value of such share determined in such manner as may
be prescribed, the value so determined shall be deemed to be
the full value of consideration received or accruing as a result of
such transfer.
Where the consideration received or accruing as a result
of the transfer of a capital asset by an assessee is not
ascertainable or cannot be determined, then, for the purpose of
computing income chargeable to tax as capital gains, the fair
market value of the said asset on the date of transfer shall be

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deemed to be the full value of the consideration received or

accruing as a result of such transfer.
Advance money received
Where any capital asset was on any previous occasion, the
subject of negotiations for its transfer, any advance or other
money received and retained by the assessee in respect of such
negotiations shall be deducted from the cost for which the asset
was acquired or the written down value or the fair market value
in computing the cost of acquisition.
Where any sum of money, received as an advance or
otherwise in the course of negotiations for transfer of a capital
asset, has been included in the total income of the assessee for
any previous year, then such sum shall not be deducted from
the cost for which the asset was acquired or the written down
value or the fair market value in computing the cost of
acquisition.
Tax Exemptions on Capital Gains
Tax exemptions can be claimed under the following
sections on the profit earned against assets –
1. Section 54: Profit on sale of property used for residence
If an amount earned by selling a residential property is
invested to purchase another property, then the capital
gains earned by transferring the ownership of a property is tax
exempted. However, deductions can be claimed only if the
following conditions are met:
 Individuals are required to purchase a second property
within 2 years of sale or 1 year before transferring the
ownership.

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 In the case of an under-construction property, the purchase

of a second property should be completed within 3 years of
transferring the ownership of the first property.
 Newly acquired property cannot be sold within 3 years of
purchase.
 The newly acquired property is required to be located in
India.
2. Transfer of land used for agricultural purposes (Sec.54B)
Section 54B gives relief to a taxpayer who sells his
agricultural land and from the sale proceeds he acquires
another agricultural land.
Where the capital gain arises from the transfer of a capital
asset being land which, in the two years immediately preceding
the date on which the transfer took place, was being used by
the assessee for agricultural purposes, and the assessee has
purchased any other land for being used for agricultural
purposes within a period of 2 years after that date, then, instead
of the capital gain being charged to income tax as income of
the previous year in which the transfer took place, it shall be
dealt as follows:
(i). if the amount of the capital gain is greater than or equal to
the cost of the land so purchased (new asset), the difference
between the amount of the capital gain and the cost of the new
asset shall be charged as the income of the previous year, and
for the purpose of computing in respect of the new asset, any
capital gain arising from its transfer within a period of 2 years of
its purchase, the cost shall be nil; or

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(ii). if the amount of the capital gain is equal to or less than the
cost of the new asset, the capital gain shall not be charged, and
for the purpose of computing in respect of the new asset any
capital gain arising from its transfer within a period of 3 years of
its purchase, the cost shall be reduced by the amount of the
capital gain.
Following conditions should be satisfied to claim the
benefit of section 54B:
(i). The asset should be agricultural land. It may be a long term
capital asset or short term capital asset;
(ii). The agricultural land should be used by the individual or his
parents for agricultural purpose for a period of 2 years
immediately preceding the date of transfer
(iii). within a period of 2 years from the date if transfer old land,
the taxpayer should acquire another agricultural land.
3. Compulsory acquisition of land and buildings:
Where the capital gain arises from the transfer by way of
compulsory acquisition under any law of a capital asset, being
land or building or any right in land or building, forming part of
an industrial undertaking belonging to the assessee which, in
the 2 years immediately preceding the date on which such
transfer took place, was being used by the assessee for the
purposes of the business of the said undertaking, and the
assessee has purchased any other land or building for the
purpose of shifting or re-establishing the said undertaking
within a period of 3 years, instead of the capital gain being
charged to income-tax, it shall be dealt as follows:

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(i). if the amount of capital gain is greater than the cost of the
land, building, etc., the difference between the amount of the
capital gain and the cost of the new asset shall be charged as
the income of the previous year, and for the purpose of
computing in respect of the new asset any capital gain arising
from its transfer within a period of 3 years of its purchase or
construction, the cost shall be nil;
(ii). if the amount of the capital gain is equal to or less than the
cost of the new asset, the capital gain shall not be charged; and
for the purpose of computing in respect of the new asset, any
capital gain arising from its transfer within a period of 3 years of
its purchase or construction, the cost shall be reduced by the
amount of the capital gain.
The exemption provisions of section 54D of the Income
Tax Act comes into play only if the following norms are satisfied:
1. There is a capital gain on account of compulsory acquisition
of land or building, forming part of the industrial undertaking;
and
2. The assessee has re-invested the amount for acquiring new
land or building for the purpose of shifting or re-establishing
the industrial undertaking
In order to claim the exemption under section 54D of the
Income Tax Act, the assessee is required to satisfy the following:
1. Exemption under section 54D is available to any category of
person on compulsory acquisition of land or buildings (which is
forming part of industrial undertaking).
2. Exemption under section 54D is available to both the Long
Term Capital Asset and Short Term Capital Asset.

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3. It is mandatory that the transferred asset should have been

used for the industrial purpose for a period of at least two years
before the date of acquisition.
4. The transferor is required to invest the amount in purchasing
any other land or building for the purpose of shifting or re-
establishing the industrial units. The said amount needs to be
invested within a period of three years from the date of receipt
of the compensation.
In case all the above measures are satisfied, the assessee
would be eligible to avail exemption benefit under section 54D.
5. Transfer of capital not to be assets charged (Sec.54E)
Section 54E of the Income Tax Act is a provision that
provides relief to taxpayers who have sold a long-term capital
asset and wish to avoid paying tax on the gains from the sale.
Under this section, taxpayers can avoid paying tax on the gains
by investing the proceeds from the sale in specified bonds
within a certain period.
Section 54E is a provision under the Income Tax Act that
provides for exemption of long-term capital gains tax on the
sale of a long-term capital asset, if the proceeds are invested in
specified bonds issued by the National Highways Authority of
India (NHAI) or the Rural Electrification Corporation (REC).
To be eligible for exemption under Section 54E, the
following conditions must be met:
 The asset sold must be a long-term capital asset, which
means that it must have been held for more than 36 months.
 The proceeds from the sale must be invested in the specified
bonds within a period of 6 months from the date of sale.

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 The amount invested in the specified bonds cannot exceed

Rs. 50 lakhs in a financial year.
 The specified bonds must be held for a minimum period of 3
years from the date of investment.
 The exemption under Section 54E is not available to non-
residents.
6. Investment - Section 54EC:
Individuals can claim tax exemptions under Section 54EC if
the capital gains statements are submitted for investments into
specific bonds with the amount earned by selling a property.
The invested amount can be redeemed after 3 years from
the date of sale, but the bonds cannot be sold within the period.
This period has been increased to 5 years with effect from the
financial year 2018-19. Individuals are required to invest in these
special bonds within 6 months of a property sale.
Earning capital gains is much convenient with various
beneficial investment options in the market. Also, if reinvested
correctly, tax incurred on capital gains can be reduced ensuring
higher savings.
7. Investment in residential house (Section 54F):
Exemptions under Section 54F can be claimed when there
are capital gains earned from a long-term asset other than a
residential property. However, the exemption stands invalid if
you sell the new asset within 3 years after purchasing or
construction.
The purchase of a new property should be made within 2
years of earning the capital. Also, in the case of construction, it
has to be completed within 3 years from the date of sale.

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8. Transfer of assets in case of shifting of industrial

undertaking from urban area - Sec.54G:
Where the capital gain arises from the transfer of a capital
asset, being a machinery or plant or building or land used for
the purposes of the business of an industrial undertaking situate
in an urban area, the shifting of such industrial undertaking to
any area, shall be exempt from tax in certain cases.
Section 54G aims to encourage industrial development in
rural areas and SEZ area of the country by providing tax
incentives to taxpayers who reinvest their capital gains in
acquisition of new industrial units in these areas.
Conditions:
The assessee, within a period of 1 year, has:
 Purchased new machinery or plant for the purposes of
business of the industrial undertaking in the area to which
the said undertaking is shifted;
 Acquired building or land or constructed building for the
purposes of his business in the said area;
 Shifted the original asset and transferred the establishment
of such undertaking to such area; and
 Incurred expenses on such other purpose as may be
specified in a scheme framed by the Central Government.
Capital gains can be calculated by deducting expenses
related to sale from sale consideration, and cost of acquisition
and improvement from net sale of consideration. Exemption on
Capital gains is only available for assets held in India. However,
if the asset is gifted, then the exemption cannot be claimed.

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Income from other sources.

Income from Other Sources is one of the five heads of

income subject to taxation under the Income Tax Act, 1961. Any
income that is not covered in the other remaining four heads of
income is taxed under income from other sources. It is referred
to as residuary head of income. Incomes excluded from salary,
house property, business and profession or capital gains are
covered in Income from Other Sources, barring incomes that are
exempt under the Income Tax Act.
Any income which is not chargeable to tax under any
other heads of income and which is not to be excluded from
the total income shall be chargeable to tax as residuary income
under the head “Income from other sources”.
It is a residual category of income that includes various
types of income, such as interest on savings accounts, fixed
deposits, dividends from investments, rental income, and gifts
received etc. This income does not count under any of the other
heads of income.
Section 56:
According to Section 56(1), income from other sources
includes all the income earned from other sources.
Under section 56 of the Act, the following three conditions
must be satisfied for a receipt of earning to come under the
head ‘income from other sources’:
(i). Income;
(ii). such income is not tax-exempt under any other sections of
the Income Tax Act, 1961;

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(iii). such income cannot be categorized as salary, profits, and

gains from business or profession, income from house property,
or capital gains.
Section 56 of the Income Tax Act contains the complete
list of various incomes that are included under the head
“Income from other sources”:
 Dividends from shares, mutual funds, etc.
 Income from lotteries, crosswords, horse races and other
types of gambling and betting
 Any amount received by an employer from employee as
contribution towards provident fund, ESI, Superannuation
fund, etc., if the amount is not deposited into the relevant
fund by the due date.
 Interest received from bank term deposits, company deposits,
etc.
 Advanced payment or capital received during negotiation or
transfer of any capital asset
 Payment received from renting out machinery, plant, etc. if
such income is not treated as “Income from business or
profession”
 Gifts valued in excess of Rs. 50,000 except when received as
gift on the occasion of marriage or
 Income received from the sale of property
Tax Rates and Rules for Income from Other Sources
Depending on the type of income, the tax treatment of
income from other sources can vary. For instance, income
received from lottery winnings, horse races and other types of

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betting are taxed at a flat rate of 30% plus applicable cess. The
income tax slab of the tax payer has no impact in this case.
On the other hand, dividend income from shares and/or
mutual funds are taxable as per the income tax slab rate of the
individual for the applicable financial year. Similarly, there are
different rules for taxation of other types of income from other
sources received by an individual. In the below sections we will
discuss the tax rules when gifts and income from sale of
property are included under the head income from other
sources.
Taxation of Gifts
Gifts received in the form of any money, movable or
immovable property, are also taxable. As per the Income Tax Act,
gifts are considered as money, property (movable / immovable),
land or any other type of asset that is received without
consideration i.e. without any exchange of money or for
inadequate consideration i.e. with payment of an amount lower
than the fair market price.
Some types of gifts are exempt from tax examples include
money/assets received as inheritance through will, gifts received
on the occasion of marriage, gifts received from relatives, etc.
Moreover, under existing tax rules, gifts that are have a fair
market price of less than Rs. 50,000 are also exempt from tax.
If a gift does not fit any of the exempted criteria, the fair
market value of the gift or difference between the fair market
value and actual amount paid will be the net taxable amount.
This net taxable amount is added to the annual income of the

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taxpayer under the head income from other sources and taxed
as per the applicable income tax slab rate.
Gifts not chargeable to tax [Sec. 56(2)(x)]
Any sum of money or property received by any person in
the following circumstances shall not be chargeable to tax:
a) Gifts received from relatives;
b) Gifts received by an individual on occasion of his or her
marriage;
c) Gifts received by way of Inheritance/will;
d) Gifts received in contemplation of death of the payer;
e) Gifts received from any local authority;
f) Gifts received from any fund, foundation, university,
educational institution, hospital, medical institution, any trust or
institution referred to in Section 10(23C); [w.e.f. AY 2023-24, this
exemption is not available if a sum of money is received by a
specified person referred to in section 13(3)].
g) Gifts received from any trust or institution registered under
sections 12A/12AA/12AB [w.e.f. AY 2023-24, this exemption is
not available if a sum of money is received by a specified
person referred to in section 13(3)].
h) Share received as a consequences of demerger or
amalgamation of a company under clause (vid) or clause (vii) of
section 47, respectively.
i) Share received as a consequences of business reorganization
of a co-operative bank under section 47(vicb)
j) From any person, in respect of any expenditure actually
incurred by individual on his medical treatment or treatment of

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any member of his family, for any illness related to COVID-19

(subject to such conditions as prescribed by Govt.).
k) By a member of the family of a deceased person, if cause of
death is illness related to COVID-19:
 From the employer of the deceased person; or
 From any other person or persons to the extent that such
sum doesn’t exceed Rs. 10 lakh.
The member must receive the payment within 12 months
from the date of death of such person and satisfy such other
conditions which may the Central Government may notify in this
behalf
l) from such class of persons and subject to such conditions as
may be prescribed
Tax on Income from Sale of Property
Any property transaction, whether moveable or
immoveable, will have tax levied along with stamp duty.
Property transaction includes both land and property. The full
stamp duty will be taxable if it's an immovable property gifted
without consideration.
In case the property is received after consideration, and
the stamp duty exceeds Rs. 50,000 or 10%, the stamp duty will
be taxable as per the income in the buyer's hand. TDS on
property is also applicable to these transactions.
Moveable property such as gold, securities, shares,
archaeological collections, sculptures, drawings, pictures, bullion,
artwork and such, when received without consideration or at a
reduced price, falls under the tax slab.
Tax Exemptions Applicable to Income from Other Sources

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Various income sources allow deductions at the time of

filing income tax. The deductions allowed in the case are:
 Commission or remuneration for realising interest on
securities or the dividend
 Expenses such as any repair, depreciation on plant, fixtures,
machines, and insurance premiums can be deducted from
the income generated.
 The standard deduction for income from family pension
 Interest on additional compensation or compensation.
Deductions [Sec. 57]:
The following expenditures are allowed as deductions from
income chargeable to tax under the head ‘Income from Other
Sources’:
S.No Section Nature of Income Deductions allowed

Any reasonable sum paid by

way of commission or
Dividend or Interest remuneration to banker or
1. 57(i)
on securities any other person for
purpose of realizing dividend
or interest on securities

Employee’s
contribution towards
If employees’ contribution is
Provident Fund,
credited to their account in
2. 57(ia) Superannuation
relevant fund on or before
Fund, ESI Fund or
the due date
any other fund setup
for the welfare of

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such employees

Rental income letting Rent, rates, taxes, repairs,

3. 57(ii) of plant, machinery, insurance and depreciation
furniture or building etc.

1/3rd of family pension

4. 57(iia) Family Pension subject to maximum of Rs.
15,000.

Any other expenditure (not

being capital expenditure)
5. 57(iii) Any other income expended wholly and
exclusively for earning such
income

Interest on
compensation or 50% of such interest (subject
6. 57 (iv)
enhanced to certain conditions)
compensation

Income from activity

58(4) of owning and All expenditure relating to
7.
Proviso maintaining race such activity.
horses.
Expenses not deductible [Section 58]:
S.No. Section Nature of Income

1. 58(1)(a)(i) Personal expenses

Interest chargeable to tax which is payable

2. 58(1)(a)(ii) outside India on which tax has not been paid or
deducted at source

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‘Salaries’ payable outside India on which no tax

3. 58(1)(a)(iii)
is paid or deducted at source

4. 58(1A) Wealth-tax

5. 58(2) Expenditure of the nature specified in sec. 40A

Expenditure in connection with winnings from

6. 58(4) lotteries, crossword puzzles, races, games,
gambling or betting

Examples:
The following are some of the examples of other receipts
of income that automatically fall under the ‘Income from Other
Sources’ category –
a) Income received from subletting a house property by a
tenant
b) Insurance commissions received by you (i.e., assesse)
c) Casual income
d) Family pension payments received by the lawful heirs of dead
employees
e) Interest earned on deposits with companies and bank
deposits
f) Interest on loans
g) Remuneration received by the Members of Parliament (MP)
h) Rental income earned from a vacant plot of land
i) Agricultural income received from an agricultural land situated
outside of India
j) Interest paid out by the Government on excess payment of
advance tax

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Clubbing of Income
Clubbing of income means adding or including the
income of another person (mostly family members) to one’s
own income. This is allowed under Section 64 of the IT Act.
However, certain restrictions pertaining to specified person(s)
and specified scenarios are mandated to discourage this
practice.
Under the Income-tax Act, 1961, an assessee is generally
taxed in respect of his own income. However, there are certain
cases where an assessee has to pay tax in respect of income of
another person. The provisions for the same are contained in
sections 60 to 64 of the Act. These provisions have been
enacted to counteract the tendency on the part of the tax-
payers to dispose of their property or transfer their income in
such a way that their tax liability can be avoided or reduced.
These provisions can be categorized as follows:
 Income of other persons included in an assessee’s total
income [Sections 60-63]
 Income of other persons included in an Individual’s total
income [Section 64]
Income from other persons, included in Assessee’s total
income:
(1). Transfer of income where there is no transfer of assets:
All incomes arising to any person by virtue of a transfer whether
revocable or not, shall be chargeable to income tax, as the
income of the transferor and shall be included in his total
income. (Section 60.

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It is immaterial whether the transfer is revocable or

irrevocable and whether it was made before the commencement
of this Act or after its commencement.
(2). Revocable transfer of assets: All incomes arising to any
person by virtue of a revocable transfer of assets shall be
chargeable to income tax as the income of the transferor and
shall be included in his total income. (Section 61)
However, any income arising to any person by virtue of
transfer, by way of trust which is not revocable during the
lifetime of the beneficiary or the transferee shall be exempt
from the provisions of section 61. When the power to revoke
the transfer arises, then such income shall be included in the
total income of the transferor.
According to Section 63, Transfer is deemed to be
revocable if:
 it contains any provision for the retransfer, directly or
indirectly, of the whole or any part of the income or assets
to the transferor, or
 it gives, in any way to the transferor, a right to reassume
power, directly or indirectly, over the whole or any part of
the income or the assets.
(3). Income of individual to include income of spouse, minor
child, etc.: According to Section 64, in computing the total
income of any individual, the following incomes shall be
included:
(i). income of the spouse of such individual by way of salary,
commission, fees or any other form of remuneration,

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(ii). income of the spouse, son’s wife or to any other person,

arising from assets transferred by such individual;
(iii). income of the minor child not being a minor child suffering
from any disability; except the income accrued on account of
the manual work done by such minor or any activity involving
application of his skill, talent or specialised knowledge and
experience.
(iv). In case a member of a HUF transfers his individual property
to HUF for inadequate consideration or converts such property
into HUF property, income from such converted property shall
be clubbed in the hands of individual.
Where the specified income to be included in the total
income of the individual is a loss, such loss will be taken into
account while computing the income of the individual.
Where the income from any asset or from membership in
a firm of a person other than the assessee is included in the
total income of the assessee, the person in whose name such
asset stands or who is a member of the firm, shall be liable to
pay that portion of the tax levied on the assessee which is
attributable to the income so included. Where such asset is held
jointly by more than one person, they shall be jointly and
severally liable to pay the tax which is attributable to the
income from the assets so included.
Income of any and every person cannot be clubbed on a
random basis while computing total income of an individual and
also not all income of specified person can be clubbed, as
mentioned in Sections 60 to 64. The provisions of clubbing of
income are applicable only to individuals.

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