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COMPILATION
BY
a State Government or
any authority or
body or agency
in cash or kind to the assessee
If subsidy or grant or reimbursement which is reduced from actual cost of the
asset under section 43 shall not be regarded as income.
Gross total income [GTI] The aggregate of incomes under following five heads is called GTI
: Section 14 1. Income from Salaries
2. Income from house property
3. Income from Profits and gains of business or profession
4. Income from Capital gains
5. Income from other sources
Total Income: Total Income means total amount of income computed by reducing deductions
Section 2(45) from Gross Total Income. In other words, from the Gross Total Income certain
deductions under Section 80C to 80U are allowed and the balance income, after
the deductions, is known as Total Income.
Assessment year : Assessment Year (AY) means the period of 12 months commencing on the 1st
Section 2(9) date of April every year.
Previous year : Previous year means the financial year immediately preceding the assessment
Section 2(34) & year.
Section 3
A financial year is the period of 12 months starting from 1st April till 31st March
of the following year
This is also the accounting year for the Government of India.
The income earned in one financial year is taxable in the next financial year.
The financial year in which income is earned is called Previous Year.
And the financial year in which tax is computed is called Assessment Year.
With effect from (w.e.f.) AY 1989-1990 the previous year has been made
uniform for all persons and is followed in respect of all types of income.
This uniform Previous Year has to be followed for all sources of income.
One financial year plays a dual role. It can be a previous year as well as the
assessment year. In one year, it is assessment year and then, it will become
previous year in the next year.
Previous year in the In the case of a newly set-up business/profession or in the case of a new source
case of newly set-up of income, the previous year is determined as follows-
business/profession The first previous year commences on the date of setting up of the
business/profession (or, as the case may be, the date on which the source of
income newly comes into existence) and ends on the immediately following
March 31. Thus first previous year may be of 12 months or less than 12 months.
The second and subsequent previous years are always financial year of 12
Months each (i.e., April to March).
Connection between Income of Previous Year is taxable in the Previous Year itself at the rate of tax
previous year and applicable in that year
assessment year (a) Income of non-resident from shipping business.
(b) Income of persons leaving India permanently.
(c) Income of bodies formed for short duration.
(d) Income of a person who is transferring his assets with a view to avoiding
payment of tax.
(e) Income of a discontinued business.
Assessee: Section 2(7) Assessee means any person by whom any Tax or any other sum of money is
payable under this Act and includes:
(a) Every person in respect of whom any proceeding under this Act has been
taken for the assessment of:
i.His own income or
ii.Of the income of any other person for which he is liable or
iii.The loss sustained by him or by such other person
(b) Every person who is deemed to be an assessee under any provision of this
Act. (Representative assessee)
(c) Every person who is deemed to be an assessee in default under any provision
of this Act.
Rounding-off Taxable income shall be rounded-off to multiple of ten rupees: Section 288A
Income Tax liability shall be rounded-off to multiple of ten rupees: Section 288B
Exemption vs. EXEMPTION DEDUCTION
Deduction If an income is exempt from tax, it Deduction is generally given from income
is not included in the computation chargeable to tax. Deduction can be less
of income. than or equal to or more than amount of
Exemption can never exceed the income. If amount deductible is more than
amount of income. the amount of income, the resulting amount
will be taken as loss.
Capital receipts vs. CAPITAL RECEIPTS REVENUE RECEIPTS
Revenue receipts Capital receipts are exempt from A receipt referable to circulating capital
tax unless they are expressly would be a revenue receipt.
It is not possible to lay taxable. For instance, capital The circulating capital is one which is
down any single test to gains are taxable under section turned over and yields income or loss in
determine whether a 45 even if they are capital the process.
particular receipt is capital receipts. Revenue receipts are taxable, unless
or revenue in nature. Capital receipts cannot be they are expressly exempt from tax. For
taxed, unless they fall within the instance, income exempt under section
The capital or revenue scope of the definition of 10.
nature of the receipt must “income”
be determined with Certain capital receipts which
reference to the facts and have been specifically included
circumstances of each in the definition of income are
case. compensation for modification or
termination of services, income
by way of capital gains etc.
Tangible and intangible assets
which the owner keeps in his
possession for making profits
are in the nature of fixed capital.
Method of accounting Income chargeable under the head “Profit and gain of business or profession” or
Income from other sources is to be computed in accordance with the method of
accounting regularly employed by the assessee. Thus, it can be cash basis of
accounting or it can be accrual basis of accounting.
In other cases, method of maintaining books of account is irrelevant.
Type of accounting Mainly here are two types of accounting methods – Mercantile system and cash
methods system.
Mercantile System: Under mercantile system, income and expenditure are
recorded at the time of occurrence during the previous year.
Cash System: Under cash system of accounting, revenue and expenses are
recorded only when received or paid.
Provisions to tax black There can be occasions when the Assessing Officer (like Income Tax Office)
money detects black money of assessee like cash credits, unexplained investments,
unexplained expenditure etc,
Under section 68, 69, 69A, 69B, 69C or 69D if the assessee offers no
explanation about the nature and source or the explanation offered is not
satisfactory in the opinion of the Assessing Officer then such cash credits,
unexplained investments, unexplained expenditure etc will be taxable as income.
(i) Cash Credits : Section 68
Where any sum is found credited in the books of the assessee then the sum so
found credited may be charged as income of that previous year in which it has
been found credited.
(ii) Unexplained Investments : Section 69
Where the assessee has made investments which are not recorded in the books
of account the value of the investments will be taxed as income of the that PY in
which investment has been made.
(iii) Unexplained money etc. : Section 69A
Where the assessee is found to be the owner of any money, bullion, jewellery or
other valuable article which is not recorded in the books of account then the
money and the value of bullion etc. will be taxed as income of that PY in which
he is found to be the owner.
(iv) Amount of investments etc., not fully disclosed in the books of
account : Section 69B
Where the assessee is found to be the owner of any bullion, jewellery or other
valuable article and the value of this is not fully disclosed in the books of account
then such difference will be taxable as income of that PY in which such
investment etc is found.
(v) Unexplained expenditure : Section 69C
Where assessee has incurred any expenditure then the Assessing Officer can
treat such unexplained expenditure as the income of the assessee of that PY in
which expenditure has been done.
(vi) Amount borrowed or repaid on hundi : Section 69D
Where any amount is borrowed on a hundi then the amount so borrowed will be
taxable as the income of the PY in which such sum is borrowed.
Basic Conditions
Stay in India is for 182 days or OR Stay in India is for 60*** days
more in the relevant previous or more during the relevant
year previous years
AND
Stay in India is for 365 days or
more during preceeding 4
years from the relevant
previous
Residential status of a
person other than an
individual Taxpayers other Control and management of business affairs
than an individual of the taxpayer are
Wholly in Wholly Partly in India and
India outside partly outside India
India
Hindu undivided family Resident Non-resident Resident
Partnership Firm / LLP Resident Non-resident Resident
AOP / BOI Resident Non-resident Resident
Domestic Company Resident Resident Resident
Artificial juridical person Resident Non-resident Resident
If HUF is resident then it will be either ROR / NOR. It will be ROR if karta
satisfies following Additional Conditions : Section 6(6)(b)
If karta of HUF does not satisfy the two additional conditions then the family is
treated as NOR.
For example it is quite possible that partners of a firm are resident in India but
the firm is controlled from a place outside India and consequently, the firm is a
non-resident in India.
Indian income and Indian Income: Income is Indian Income if any one of following three conditions
foreign income when gets satisfied:
taxable / not taxable 1) If income is received (or deemed to be received) in India and it accrues (or is
deemed to accrue or arise) in Indian.
2) If income is received (or deemed to be received) in Indian but it accrues
outside India.
3) If income is received outside India but it accrues in India.
Solution : An Indian citizen leaves India as a member of crew of an Indian ship or for the purpose of
employment outside India, he will be resident only if he stayed for 182 days or more during the
previous year. As per newly inserted Rule 126 , in case of the time period between 12/8/2017 and
21/1/2018 (both days inclusive) will not be regarded as a stay in India. Thus number of days of stay in
India for the AY 2018-2019 i.e. PY 2017-2018 will be
Month Number of days
April 2017 30
May 2017 (31-29) 2
June 2017 30
July 2017 31
August 2017 11
September 2017 0
October 2017 0
November 2017 0
December 2017 0
January 2018 (31 - 21) 10
February 2018 28
March 2018 31
Total number of days in the year 2017-2018 173
Since stay in India is less than 182 days Mr. J is a non resident of India.
Calculation of Gross total income of Mr. J for the AY 2018-2019 i.e. PY 2017-2018 `
Salary from Government of India accrues and arises in India u/s 7 7,20,000
Foreign Allowances [it is exempt under section 10(7)] NIL
Income from house property (it is a foreign income) NIL
Income from other sources (interest accrued on NSC) 45,000
Gross total income 7,65,000
Solution : During the AY 2018-2019 i.e. PY 2017-2018, he comes to India for 99 days. He is non-resident in
India for the AY 2018-2019 i.e. PY 2017-2018 (he can become resident only if he is in India for at least 182
days during the relevant previous year). If a non-resident receives technical fees from a resident and technical
fees pertains to a project situated in India, technical fees is deemed to accrue or arise in India. Consequently,
technical fees of `50,00,000 is chargeable to tax in India.
Profit from business in Delhi, but managed directly from Malaysia 40,000 -
Cash gift received from a friend on Mrs. Leena’s 50th birthday - 51,000
Income from a business in Pune (Mrs. Geetha receives 50% of the 12,000 15,000
income in India)
Interest on debentures in an Indian company (Mrs. Geetha received the 18,500 14,000
same in Malaysia)
Solution : Mrs. Geetha comes to India for 30 days every year. She is unable to satisfy any of the basic
conditions of section 6(1) and consequently she is non-resident in India. Mrs. Leena is resident and ordinarily
resident (ROR) in India. Income will be calculated as follows
Particulars Nature of Mrs. Mrs.
income Geetha Leena
Income from profession in Malaysia (set up in India) Foreign income Nil --
received there
Interest on American Development bonds, 50% of interest, received in India 46,000 18,000
Profit from business in Mumbai, but managed directly from America 10,000 ---
Fees for technical services rendered in America and received in America. 1,50,000 ---
The services were, however, utilized in India
Interest on savings bank deposit in State Bank of India, Mumbai 4,500 12,000
Solution :
a) If money is borrowed by a non-resident from outside India for the purpose of carrying on business in India,
interest on such borrowed money is deemed to accrue or arise in India in the hands of the recipient of
interest by virtue of section 9.
b) Royalty received by a non-resident from a resident is not taxable in India if royalty pertains to a business or
profession carried on by the payer outside India. This rule is given by section 9.
c) Legal charges - Since service is rendered in India, legal charges received by the lawyer is taxable in India.
d) Salary paid by the Central Government to a citizen of India is deemed to accrue or arise in India by virtue
of section 9, even if service is rendered outside India. Consequently, salary will be taxable in the hands of
John whether he is resident or non-resident. However, any allowance or perquisite paid (or provided) by
the Government outside India is exempt by section 10(7).
Profit from business in Nagpur but managed from London 1,00,000 1,40,000
Fees from technical services rendered in India but received in Canada 1,00,000 NIL
House Property income received in respect of house property in Bhopal 1,00,000 60,000
Solution : Computation of income of Ramesh (non-resident) and Suresh (resident and ordinarily resident)
Ramesh Suresh
` `
Interest on Canada Development Bond (received in India) 17,500 20,000
Interest on Canada Development Bond (received outside India) NIL 20,000
Dividend from a British company received in London NIL 20,000
Profit from a business in Nagpur, but managed directly from London 1,00,000 1,40,000
Short term capital gain on sale of shares of an Indian company 60,000 90,000
Income from a business in Chennai 80,000 70,000
Fees for technical services rendered in India 1,00,000 NIL
Interest on savings bank deposit in UCO Bank, Delhi 7,000 12,000
Agricultural income in India NIL NIL
House property income 1,00,000 60,000
Gross total income 4,64,500 4,32,000
Less: Deduction under section 80C NIL 30,000
Less: Deduction under section 80TTA 7,000 10,000
Taxable income 4,57,500 3,92,000
Brett Lee has satisfied second basic condition and only one additional condition. Therefore he becomes
resident but not ordinary resident.
Salary 5,00,000
Solution : It is assumed that Mr. J is an Indian citizen. Since Mr. J does not come to India during the AY 2018-
2019 i.e. PY 2017-2018, he is non-resident in India. His GTI will be calculated as follows – `
Salary [taxable as it is deemed to be earned in India by virtue of section 9] 5,00,000
Foreign allowance [exempt under section 10(7)] Nil
Salary income 5,00,000
Solution : Mr. J is leaving India for the purpose of employment outside India and thus exceptional case to
section 6 will be applicable. As per exceptional case, if Indian citizen leave India for the employment outside
India and his stay in India is less than 182 days then such Individual is non-resident of India. In the instant case
Mr. J stays in India for the period of 175 days and thus he is non-resident of India.
Solution : Agriculture Income earned from land located in India is exempt u/s 10(1) but if agriculture land is
located outside India then agriculture income is taxable as income from other sources. If agriculture land is in
Malaysia then agriculture income will be taxable in India for resident and ordinary resident of India.
Income from house property in London deposited in a Bank, later on remitted to India. 75,000
Solution : Computation of total income of Mr.Anirudh for the AY 2018-2019 i.e. PY 2017-2018
Particulars ROR (`) NOR(`) NR(`)
Profit on sale of shares in an Indian company received in Germany 15,000 15,000 15,000
Dividend from a Japanese company received in Japan 10,000 NIL NIL
Solution : Non-resident individual is chargeable to tax in respect of only Indian income. For detailed
discussion refer section 5(2)
Answer: True.
STCG on sale of shares in Indian listed company, STT was paid 20,000 2,00,000
Solution : Mrs. Rosy is NR of India and Mrs. Mary is ROR in India. Income will be calculated as follows
Particulars Nature of Mrs. Rosy Mrs. Mary
income (NR) (ROR)
Pension received from the State Government Indian income NIL 10,000
Pension received from the Canadian Government Foreign Income NIL NIL
Long-term capital gain on sale of land at Mumbai Indian income 1,00,000 50,000
STCG on sale of shares in Indian company Indian Income 20,000 2,00,000
House property income from house at Mumbai Indian Income 42,000 21,000
( Rent – 30% )
Gross total income 1,62,000 2,81,000
Less: Deductions Under section 80C
LIC premium paid NIL 15,000
LIC premium to Canadian company 10,000 NIL
Bonds of NABARD 30,000 20,000
Taxable Income 1,22,000 2,46,000
2014-2015 0 Non-Resident
2013-2014 0 Non-Resident
2012-2013 0 Non-Resident
2011-2012 0 Non-Resident
2010-2011 0 Non-Resident
2009-2010 0 Non-Resident
2008-2009 0 Non-Resident
2007-2008 0 Non-Resident
2006-2007 0 Non-Resident
Mr. J has satisfied first basic condition and could not satisfy any of additional condition. Therefore he becomes
NOR during PY 2016-2017.
2014-2015 0 Non-Resident
2013-2014 0 Non-Resident
2012-2013 0 Non-Resident
2011-2012 0 Non-Resident
2010-2011 0 Non-Resident
2009-2010 0 Non-Resident
2008-2009 0 Non-Resident
2007-2008 0 Non-Resident
Mr. J has satisfied first basic condition and satisfies both of additional condition. Therefore he becomes ROR
during PY 2017-2018.
SOLUTION :
1) A person is said to be “NOR” in India if he fails to satisfies both of the conditions given in Section 6(6). This
sub-section relates to only individuals and Hindu Undivided Families. Therefore, only individuals and Hindu
Undivided Families can be NOR. All other classes of assessees can be either a resident or non-resident.
SOLUTION: Computation of Total Income of Shyam and Mohan for the AY 2018-2019 i.e. PY 2017-2018
Particulars Shyam Mohan
(NR) (Resident)
Interest on Australian Development Bonds 18,000 28,000
Dividend from Japanese Company received in Sydney - 12,000
Profit from a business in Mumbai but managed directly from Sydney 13,000 -
Profit on sale of shares of an Indian company received in India 65,000 96,000
Income from a business in Chennai 28,000 32,000
Fees for technical services rendered in Sydney but services utilized in India 1,25,000 -
SOLUTION : Computation of total income of Mr. Ankit for the AY 2018-2019 i.e. PY 2017-2018
Particulars ROR(`) NOR(`) NR(`)
House property income from New York deposited in a bank in New York 63,000 NIL NIL
Fees for technical services rendered in Japan but services utilized in India 50,000 50,000 50,000
Dividend from Australian company, received in Australia 15,500 NIL NIL
Profit on sale of shares of an Indian company, received in Canada 27,500 27,500 27,500
Dividend from Indicom Ltd., an Indian Company NIL NIL NIL
Agricultural income from land in Rajasthan NIL NIL NIL
Total Income 1,56,000 77,500 77,500
SOLUTION : Computation of total income of Mr. Anand for the AY 2018-2019 i.e. PY 2017-2018
Particulars ROR NOR NR
Short term capital gain on sale of shares in an Indian company 25,000 25,000 25,00
Dividend from a South African company, received in South Africa 20,000 -- --
SOLUTION: Determination of Residential Status of Mr. Aryan for the AY 2018-2019 i.e. PY 2017-2018
Mr. Aryan visits India every year for 95 days. Therefore, his period of stay during 4 preceding previous years is
380 days (95 days x 4). Since he satisfies one of the basic conditions, he is a resident for the AY 2018-2019
i.e. PY 2017-2018. Mr. Aryan’s period of stay in India during the past 7 previous years is less than 730 days,
he is a resident but not ordinarily resident for the AY 2018-2019 i.e. PY 2017-2018.
SOLUTION :
Taxable or taxable Reason
Not Taxable
i. Partly Taxable `1,5000 The interest on Post Office Savings Bank Account, would be exempt
under section 10(15) only to the extent of Rs. 3,500 in case of an
individual account. Hence, Rs. 11,500 will be taxable under the head
‘Income from other sources”. Rs.10,000 would be allowed as
deduction under section 80TTA from GTI.
ii. Taxable `5,00,000 Legal charges paid in India to a non resident lawyer of Canada, who
visited India to represent a case at the Madras High Court would be
taxable in India.
iii. Not Taxable `2,00,000 Royalty paid by a resident to a non-resident in respect of a business
carried in France, would not be taxable in the hands of the non-
resident.
SOLUTION : An Indian citizen leaves India as a member of crew of an Indian ship or for the purpose of
employment outside India, he will be resident only if he stayed for 182 days during the previous year.
In case of an individual who is a citizen of India and a member of the crew of a ship, the period of stay in India
shall not include the period of stay on the ship. Therefore, the period beginning from 6/6/17 and ending on
9/12/2017 has to be excluded for computing the period of his stay in India. Accordingly, 187 days
[25+31+31+30+31+30+9] have to be excluded from the period of his stay in India. Consequently, Mr. Alok’s
period of stay in India during the AY 2018-2019 i.e. PY 2017-2018 would be 178 days [365 days – 187 days].
Since his period of stay in India is less than 182 days, he is a non-resident.
SOLUTION : Computation of gross total income of Mr. Suhaan for the AY 2018-2019 i.e. PY 2017-2018
Particulars ROR(`) NOR(`) NR(`)
Income earned from business in France which is controlled from Mumbai, 90,000 90,000 65,000
out of which Rs. 65,000 is received in India
Pension for services rendered in India but received in France 14,000 14,000 14,000
Dividend received in France from a Titanium Inc., a French company 25,000 - -
House Property income in France deposited in a bank in France 59,500 - -
Dividend from Sunset Ltd., an Indian Company - - -
Gross Total Income 1,88,500 1,04,000 79,000
Computation of total income of Mr. Aakash for the AY 2018-2019 i.e. PY 2017-2018
Particulars ROR(`) NOR(`) NR(`)
Interest on Canada Development Bond 40,000 20,000 20,000
Dividend from Malaysian Company received in Malaysia 20,000 - -
Short term capital gain on sale of shares of an Indian company 90,000 90,000 90,000
received in India
Interest on savings bank deposit in UCO Bank, Delhi 12,000 12,000 12,000
Income from profession in Malaysia (set up in India) out of which Rs. 15,000 15,000 10,000
10,000 is received in India
Agricultural income from a land in Gujarat - - -
Income from house property at London 42,000 - -
Gross Total income 2,19,000 1,37,000 1,32,000
Less: Deduction under Section 80TTA 10,000 10,000 10,000
Total Income 2,09,000 1,27,000 1,22,000
SLAB RATES ARE Individuals, HUF, AOP, BOI and every artificial juridical person get their income
taxed on the basis of slab rate. There are 3 slab rates
`2,50,000 to `5,00,000 5%
Slab 2 : This slab applies to every resident male and every resident female whose
age is 60 years or more but age is less than 80 years.
Up to first `3,00,000 NIL
`3,00,000 to `5,00,000 5%
Slab 3 : This slab applies to every resident male and every resident female whose
age is 80 years or more
Up to first `5,00,000 NIL
TAX ON BLACK
MONEY Section 68 - Cash credits in books
Section 69 - Unexplained Investments Levy of higher tax flat @ 60%
Section 69A - Unexplained Money
Section 69B - Undisclosed Investments (plus 25%, surcharge and 3% EC).
Section 69C - Unexplained Expenditures
Section 69D - Amount borrowed on Hundi Effective tax rate shall be 77.25%
SURCHARGE
LEVEL OF INCOME Income is Income is > Income is > Income is
<= `50 lakhs `100 lakhs >
ASSEESEE `50 lakhs But But `1,000 lakhs
Income is < = Income is < =
`100 lakhs `1,000 lakhs
DOMESTIC COMPANY NIL NIL 7% 12%
FOREIGN COMPANY NIL NIL 2% 5%
INDIVIDUAL , HUF , AOP-BOI , NIL 10% 15% 15%
AJP
FIRM , LOCAL AUTHORITY , CO- NIL NIL 12% 12%
OPERATIVE SOCIETY
EDUCATION CESS Education cess is 2% for primary education and 1% for higher and secondary
education. We should not calculate and charge education cess at 3%, it would be
principally wrong.
ROUND OFF U/S 288B Any amount of tax liability shall be rounded off to nearest of `10
REBATE U/S 87A Income tax rebate shall be allowed if both of the following conditions are satisfied:
a) Assessee is an individual who is a resident of India.
b) Total income of such individual is less than or equal to `3,50,000.
The amount of the rebate shall be lower of:
a) Amount of income tax payable on the total income,
b) Maximum limit of `2,500
Education Cess shall be imposed only after allowing rebate u/s 87A
Rebate shall be allowed from the income tax amount of casual incomes
CONCEPT OF In Total Income of resident individuals or resident HUF, if there is:
DEFICIENCY (a) LTCG income which is to be taxed at 20% under Section 112 AND/OR
(b) STCG income which is to be taxed at 15% under Section 111A
And Total Income excluding above said incomes is less than the basic exemption
limit then the deficiency has to be fulfilled from such LTCG or STCG and balance
amount only will be taxed. This deficiency has to be seen excluding LTCG income
u/s 112 and STCG u/s 111A but including casual income. To calculate deficiency,
one can use the following equation:
Deficiency = BEL – (Total Income – LTCG income u/s 112 – STCG income u/s 111A)
If by using this equation we get zero or we get negative amount, then there is no
deficiency.
MARGINAL RELIEF Surcharge is imposed on persons if their total income is more than `50 lakhs / `100
lakhs. Sometimes, additional tax including surcharge but before education cess on
the total income exceeding `50 lakhs / `100 lakhs, will be more than the difference
between the total income and `50 lakhs / `100 lakhs. In such cases, marginal relief
will be provided which is equal to increase in tax less increase in Income.
EXAMINATION QUESTIONS
NOV 2012, 4 MARKS
QUESTION : Calculate the income-tax liability for the AY 2018-2019 i.e. PY 2017-2018 in the following cases:
Mr.A (age 45) Mrs B (age 62) Mr.C (age 81) Mr.D (age 82)
Status Resident Non-Resident Resident Non -Resident
QUESTION : True or False : Surcharge payable by the individual having total income of more than `50 lakhs is
15% of tax for AY 2018-2019 i.e. PY 2017-2018. Answer: True
QUESTION : Exemption limit of income available to a senior citizen is `___________ for AY 2018-2019 i.e. PY
2017-2018. Answer: `3,00,000
QUESTION : Choose the correct answer with reference to the provisions of the Income Tax Act 1961.
QUESTION : Compute the tax liability of Mr. Dherya, aged 58 years, for the AY 2018-2019 i.e. PY 2017-2018,
from the following details:
Rs.
Income from salaries 25,28,000
Profits and gains from business or profession 23,00,000
Income from other sources (Interest on bank Fixed Deposits) 3,82,000
Amount deposited in Public Provident Fund (PPF) 1,30,000
SOLUTION : Computation of tax liability of Mr. Dherya for the AY 2017-2018 i.e. PY 2016-2017
Particulars Rs. Rs.
Income from salaries 25,28,000
Profits and gains from business or profession 23,00,000
Income from other sources (Interest on bank fixed deposit) 3,82,000
Gross total income 52,10,000
Less: Deduction u/s 80C - Amount deposited in PPF 1,30,000
Total Income 50,80,000
Tax liability
Upto Rs. 2,50,000 Nil
Rs. 2,50,000 — Rs. 5,00,000 @ 5% 12,500
Rs. 5,00,000 — Rs. 10,00,000 @ 20% 1,00,000
Rs. 10,00,000— Rs. 40,80,000 @ 30% 12,24,000 13,36,500
Add: Surcharge @ 10%, since total income exceeds `50 Lakhs 1,33,650
Tax Payable 14,70,150
Less: Marginal Relief (See Note below) 77,650
Tax Payable after marginal relief 13,92,500
Add: Primary Education cess @ 2% 27,850
Constitution of India gives power to the State Government to make laws with respect to taxes on agricultural
income. (Entry No. 46 of State List given in 7th Schedule of Constitution of India)
to get PGBP income and Agricultural Income. If the business is being done as a partnership business, then the
salary and interest income of partners shall be taken as business expense only to the extent of the above
mentioned percentages and the balance shall be regarded as Agricultural Income.
Rule 7 : composite activity other than rubber , coffee , tea
Agriculture income Business income
Difference between the cost of cultivation and FMV of FMV of the agriculture produce is considered as
agriculture produce the cost of raw material. In this factory overheads ,
selling overheads and all other expenses shall be
added to calculate the total cost.
Difference between cost and sale price will be
regarded as business income.
Computation of tax if assessee is earning both agriculture income and non-agriculture income
(integration of agriculture and non agriculture income)
1. The assessee is an Individual or HUF or BOI, or AOP Computation of tax
or AJP.
Tax on (Net Agriculture Income + A
2. Non-agricultural income exceeds basic exemption limit.
Agriculture Income) at slab rate
3. Net Agricultural Income exceeds `5,000 pa.
Tax on (Net Agriculture Income + B
basic exemption limit) at slab rate
Tax payable A– B
Apply rebate u/s 87A or C
Surcharge is any and thereafter
add education cess
Tax liability D
EXAMINATION QUESTIONS
MAY 2017 : 4 MARKS
Discuss with brief reasons, whether the following can be regarded as agricultural income, as per the provisions
of the Income-tax Act, 1961.
1) Rent received for letting out agricultural land for a movie shooting and
2) Amounts received from sale of seedlings in a nursery adjacent to the agricultural lands owned by an
assessee.
SOLUTION
1) Allowing movie shootings : Letting out of agriculture land for movie shootings is not an agriculture
income as it is not covered u/s 2(1A) which defines the agriculture income.
2) Income derived from saplings or seedlings grown in a nursery: As per Explanation 3 to section 2(1A)
introduced from 1/4/2009 by FA 2008, any income derived from saplings or seedlings grown in a nursery
shall be deemed to be agricultural income.
Solution: Calculation of Income of Mr. Kamal for the for the AY 2018-2019 i.e. PY 2017-2018
Particulars `
Agricultural Income: [40%]
Sale Value of Paddy 15,00,000
Less: Cost of Cultivation (7,00,000)
Balance Agricultural Income and exempt u/s 10(1) 8,00,000
Business Income [60%]
Sale Value of Rice 30,00,000
Less: Cost of Paddy [FMV of Paddy is taken for computing Business Income as per Rule 7] (24,00,000)
Less: Further Processing Cost (2,00,000)
Business Income and taxable 4,00,000
Solution : Mr. Anil is not justified. As per rule 7B(1) 75% of the amount of `5,00,000 shall be treated as
agriculture income and 25% shall be treated as his business income. Thus , exempt income will be `3,75,000
and not full `5,00,000.
Solution : Income from sale of saplings and seedlings which are grown in nursery, whether grown in pots or
on land, shall be regarded as agriculture income u/s 2(1A)(b) and thus it is fully exempt from tax and it is not
regarded as the business income
Solution : Calculation of Total Income of Mrs. Rinku for the AY 2018-2019 i.e. PY 2017-2018
Particulars `
Income under the head ‘salary’ NIL
Income under the head ‘House Property’ NIL
Income under the head ‘business and profession’ 2,20,000
Income under the head ‘Capital Gains’
LTCG u/s 112 3,00,000
STCG on the shares of Pvt Ltd. Company (ordinary income) 30,000
Income under the head other ‘sources’
Winnings from game shows 20,000
Net Agriculture Income `40,000
Less: Exempt under Section 10(1) `40,000 NIL
Gross Total Income 5,70,000
Less: Deduction under Chapter VI-A of Income Tax Act
Under Section 80C (`40,000 + `20,000) 60,000
Under Section 80CCC NIL
Total Income 5,10,000
NOTE 1: Deduction under section 80CCC is allowed only when premium for pension plan is paid by the
assesse in his own name.
NOTE 2: Loan repayment of housing loan is allowed as deduction under section 80C when loan is taken by the
assesse in his own name. In this case loan is in the name of son and thus deduction under section 80C has
not been allowed.
DEDUCTIONS FROM
GROSS SALARY:
SECTION 16 Entertainment 1. This allowance is first included in salary and
Allowance : thereafter a deduction is allowed
Section 16(ii) 2. Deduction is allowed only to government
employee.
3. Government employee is employee of Central
Government and State Government
4. In case of Government employees, least of
following is exempt from tax.
a. Entertainment allowance received
b. `5,000.
c. 20% of BASIC SALARY
Professional 1. Any amount paid by the employee shall be
Tax : Section allowed as deduction in the year of payment. This
16(iii) means that payment should be made on or before
31/3/PY.
2. If the employer has paid any amount of
Professional Tax on the behalf of the employee,
then it shall be first included in the Gross Salary of
the employee and then the deduction under this
section shall be given.
NOTE: Average Salary - Average Salary drawn during the period of 10 months
immediately preceding the month in which the employee has retired.
NOTE: Salary means BS + DA(R) + commission of % basis of sales
PENSION AFTER 1. Uncommuted pension is fully taxable for all employees whether he is
RETIREMENT Government Employee or Non Government Employee.
SECTION 10(10A) 2. Commuted Pension is full exempt from tax in the case of a Government
Employee
3. Government employee is employee of the Central Government, State
Government, Local Authority and Statutory Corporation.
4. In the case of non-government employee, commuted pension is exempt to
the extent given below:
a) 1/3 X Full pension - if the employee receives Gratuity + Pension.
b) 1/2 X Full pension - if the employee receives only Gratuity.
PENSION AFTER 1. Pension received by the employees of UNO or his/her family members is
DEATH fully exempt from tax.
(FAMILY PENSION) 2. Section 10(18) : Pension received by winners of gallantry awards shall be
fully exempt from tax. Similarly Family Pension received by the family
members after their death is exempt from Tax.
3. Section 10(19) : In case of the death of a member of the armed forces
during the operational duties, Family Pension received by widow or children
or nominee shall be fully exempt from tax.
4. In all other cases : Family Pension and it is taxable under the head of
‘Other Sources’ as per Section 56 for such family member. But deduction
under Section 57 is allowed which is lower of:
(a) 1/3 X Family Pension
(b) Maximum of `15,000
PENSION UNDER NEW 1. Employer’s contribution is first included in salary and then a deduction is
PENSION SCHEME IN available to the maximum of 10% of salary.
THE CASE OF AN 2. Employee’s contribution is deductible under section 80CCD to the
EMPLOYEE JOINING maximum of 10% of salary.
ON OR AFTER
JANUARY 1, 2004 SECTION 10(12A) : AMOUNT PAYABLE AT THE TIME OF CLOSURE
NPS : SECTION 80CCD OR OPTING OUT OF NATIONAL PENSION SCHEME
Any payment from National Pension System Trust referred to in Section
80CCD , to an employee
Due to closure of the pension scheme or
his opting out of the pension scheme
shall be exempt from tax upto 40% of the total amount payable to him.
However, the full amount received by the nominee, on death of the assessee
shall be exempt from tax.
Salary means
Basic Salary +
DA(R)+
Commission as %
of sales
Interest on total Fully exempt Exempt is lower Fully Fully
contribution of exempt exempt
a) Actual Interest
b) 9.5% pa of total
contribution
Payment at Fully exempt Fully exempt if Taxable as follows Fully
Retirement / certain conditions a) Employer’s exempt
death are satisfied contribution –
salary
b)Interest on
employer’s
contribution –
salary
c) Interest on
employee’s
contribution
income from
other sources
RETRENCHMENT 1. Given in the case of termination of services of employee before the normal
COMPENSATION age of retirement.
SECTION 10(10B) 2. Exempt is lower of:
a) Actual amount
b) 15/26 X Avg Salary X Completed Year of service + Fraction > 6 months
c) Maximum of `5,00,000.
3. Average Salary is average of three months of Salary and Salary means
Basic Salary + DA (forming part of the Salary for the retirement benefits) +
Commission if received as fixed percentage of sales.
VOLUNTARY 1. When employee takes retirement before his / her scheduled year of
RETIREMENT retirement then it is called Voluntary Retirement.
SCHEME (VRS) 2. Scheme is also known as Golden Handshake.
SECTION 10(10C) 3. Scheme of VRS is applicable to employees of Public Sector Companies,
local authority, cooperative society, Universities, IIT, IIM, State
Governments and Central Governments
4. Many conditions have been prescribed by the central government for the
scheme of VRS
5. The amount of compensation of employee on the voluntary retirement
should not exceed:
a. Salary X 3 X completed number of years OR
b. Salary X Months of service left before the date of his retirement.
6. Amount received is exempt to the lower of the following:
a. Actual amount received or receivable
b. Maximum limit of `5,00,000.
LEAVE TRAVEL 1. Any benefit related to the fare of journey received by an employee for
CONCESSION (LTC) himself, or his family for travelling to any place in India while on leave or
after retirement is called LTC
2. Family to include spouse, children (whether dependent or not dependent),
dependent parents, dependent brothers and dependent sisters.
3. Exemption available only for two children. But in case of multiple births
after one child, then the exemption is allowed for all children.
4. Amount of exemption: If journey is performed
(a) By air, then exempt is economy class fair of the national carrier by the
shortest route
(b) By rail then exempt is first class AC rail fare of the shortest route.
(c) By any other mode, if destination is not connected by rail then:
i) exempt is first class or deluxe class fare if recognized public transport
system exists
ii) exempt is 1st AC rail fare if public transport system does not exist.
DIFFERENT ALLOWANCES
CITY COMPENSATORY Given to compensate difference is prices between two cities which
ALLOWANCE employee may have to incur due to the transfer from one city to
another. It is always fully taxable
HOUSE RENT ALLOWANCE Given to meet expenses of the house rent. Exempt from tax to the
extent of the least of the following
a. House rent allowance.
b.Rent paid - 10% of salary.
c. 50% of salary in Delhi, Bombay, Calcutta, Madras or
40% of salary in other cases.
CHILDREN EDUCATION 1. Given to meet expenses of education of children.
ALLOWANCE 2. It is exempt to the lower of
a. Actual amount
b. Maximum of `100 pm per child for a maximum of two
children
NOTE : Actual expenditure is not taken into consideration.
NOTE : Allowance for grandchildren is fully taxable.
FOREIGN ALLOWANCE : Exempt from tax if paid outside India by the Central Government or
SECTION 10(7) State Government to an Indian citizen rendering service outside
India
PERSONAL ALLOWANCES :
DEARNESS ALLOWANCES Fully Taxable
(DA), OVERTIME
ALLOWANCE, CITY
COMPENSATORY
ALLOWANCE (CCA),
SERVANT ALLOWANCE /
WARDEN ALLOWANCE,
LUNCH ALLOWANCE,
TIFFIN ALLOWANCE,
FAMILY ALLOWANCE,
MEDICAL ALLOWANCE,
TELEPHONE ALLOWANCE,
CAR ALLOWANCE, DATING
ALLOWANCE, SPLIT DUTY
ALLOWANCE ETC.
SUMPTUARY ALLOWANCE Exempt
TO SERVING CHAIRMAN /
MEMBERS OF UPSC
ALLOWANCE TO RETIRED An allowance (subject to a maximum of `14,000 per month) for
CHAIRMAN AND RETIRED defraying the service of an orderly and for meeting expenses
MEMBER OF UPSC incurred towards secretarial assistance on contract basis, is not
chargeable to tax.
PERQUISITES
RENT-FREE 1. In the case of Government employee (i.e., Central Government employee,
UNFURNISHED State Government employee) Taxable value is the license fee the house
HOUSE per house allotment scheme of the Government.
SECTION 17(2)(i) 2. In the case of non-government employees:
a. If the house is owned by employer: Taxable value is 15% / 10% /
7.5% of salary of employee depending on the population of the city in
which accommodation is provided.
b. If house is taken on lease by employer: Taxable value is either 15%
of the salary or lease rent, whichever is lower.
RENT-FREE 1. Value of furniture will be added to the value of rent-free unfurnished house
FURNISHED HOUSE as computed above.
2. Value of furniture is 10% pa of cost of furniture to the employer or rent
paid / payable of the furnishing by the employer, as the case may be.
DEFINITION OF Employee is specified employee if he satisfies any one of the following three
SPECIFIED conditions:
EMPLOYEE 1. He is a director of the company and is also employee of company.
2. He is the employee with the substantial interest in the company, i.e., he
holds 20% or more of the voting power.
3. His income under the head salary excluding non-monetary perquisites
exceeds `50,000. (`50,000 is the annual limit)
MOTOR CAR 1. If the car is owned / hired by employer and is used by employee
SECTION 17(2)(iii)
RULE 3(2) 1.1 Car is used only for the official purposes: Its PV shall be NIL provided
some specified documents have been maintained.
1.2 Car is used only for the private purposes: Its PV shall be aggregate of
following:
Actual running and maintaince charges
Actual chauffer charges (driver’s salary)
Wear,tear charges, which shall be 10% pa of the historical cost of car.
Actual hire charges will be taken as the perquisite value in the case where car
is hired by the employer.
1.3 Car is used partly for official and partly for personal purposes: Its PV
value shall be calculated as follows:
A) If the running and maintaince charges are met by employer then:
(i) If car’s engine capacity is of 1600 cc or less: `1,800 pm.
(ii) If car’s engine capacity is of more than 1600 cc : `2,400 pm.
B) If running and maintaince charges are met by employee then:
(i) If car’s engine capacity is of 1600 cc or less : `600 pm
(ii) If car’s engine capacity is of more than 1600 cc : `900 pm
2.1 If the car is used only for the official purposes: Its perquisite value
shall be NIL provided some specified documents have been maintained.
2.2 If the car is used for the private purposes: Its perquisite value shall be
taxed under Section 17(2)(iv) , i.e., it shall be fully taxable for both
specified as well as non-specified employees.
2.3 If the car is used partly for official and partly for personal purposes:
Its perquisite value shall be calculated as follows:
NOTES
1) Chauffer: If along with car, chauffer is also provided then `900 pm has to
be added in Perquisite Value of the car in all of the above cases.
2) Power of car : Power of car can be defined in terms of cubic capacity (cc)
or in terms of liters. Therefore 1600 cc may be said as 1.6 liters of engine
capacity.
3) Vehicle other than car: If employer has provided any other vehicle other
than car then its perquisite value shall be `900 pm
4) Pick and drop facility: If employer has provided pick and drop facility
then its perquisite value shall be exempt from tax.
FREE DOMESTIC 1. Actual expenditure of the employer as reduced by any amount paid by the
SERVANTS employee is a taxable perquisite in the hands of an employee.
SECTION 17(2)(iii) 2. If facility of Gardner is provided along with the RFA (owned by employer)
RULE 3(3) then facility of Gardner is not taxable for the employee.
GAS, ELECTRICITY 1. Actual amount spent by the employer as reduced by any amount recovered
OR WATER from the employee is a taxable perquisite in the hands of an employee.
SECTION 17(2)(iii) 2. If facility is provided from own sources of the employer then PV will be
RULE 3(4) number of units consumed X manufacturing cost per unit
FREE EDUCATION 1. Expenditure relating to providing training to employees is not taxable.
FACILITY 2. If education facility is provided to the family members of employee,
SECTION 17(2)(iii) expenditure incurred by the employer is the taxable value of perquisite.
RULE 3(5) 3. If education facility is provided to the family members in an educational
institute owned or maintained by the employer, then reasonable cost of
education in a similar institute in or near the locality is taxable.
4. Up to `1,000 per month per child is not taxable if the employer provides
education facility to the children of an employee in an education institution
owned / maintained by the employer.
5. Scholarship given to the children of the employee is exempt from tax under
Section 10(16).
TRANSPORT FACILITY 1. If the transport facility is provided to the employee then it shall be taxable
SECTION 17(2)(iii) for the specified employee.
RULE 3(6) 2. For this purposes, perquisite value shall be the price at which the benefit is
offered by the employer to the general public.
3. Amount recovered by employer from employee shall be reduced from the
PV.
4. However, any facility to employees working in railways or airlines shall be
exempt from Tax.
EMPLOYEE’S Taxable in all cases
OBLIGATION MET BY
EMPLOYER
SECTION : 17(2)(iv)
PAYMENT OF If the employer has paid life insurance premium on behalf of the employees
INSURANCE PREMIUM then it will be taxable for the employee and further employee can claim
BY THE EMPLOYER : deduction under Section 80C from GTI.
SECTION 17(2)(v)
ISSUE OF SHARES Any share and securities issued by employer to its employees free of cost or
AND SECURITIES at concessional rate shall be taxable for the employee.
UNDER ESOP :
SECTION 17(2)(vi) For Listed equities: Perquisite Value shall be average of opening and closing
price of shares listed on stock exchange on date of exercise of option less any
amount recovered from the employee.
the employee.
5. Health club / sports club facility given uniformly to all employees in
employer’s premises, is not taxable.
6. The initial one time deposits or fees for corporate or institutional
membership, where benefit does not remain with particular employee after
cessation of employment, are exempt.
USE OF EMPLOYER’S 1. PV = 10% pa of actual cost of asset to the employer or hire charges
MOVABLE ASSET LESS: Reduced by any amount recovered from the employee
2. Nothing is taxable in the case of computer/laptop.
SALE OF MOVABLE 1. PV = Book Value – Sale Price
ASSETS 2. Book Value = Actual cost of the employer - Depreciation
3. Depreciation rates are Depreciation is calculated
a) Computer / electronic items: 50% WDV for every completed year
b) car: 20% WDV from date of put to use
c) any other asset: 10% SLM
EXTRA CONCEPTS
ADVANCE SALARY & Advance Salary means that employee has received salary well in advance
ADVANCE AGAINST before it has accrued. Advance against salary means that employee has taken
SALARY a loan against the security of salary which he will receive in future.
ARREAR OF SALARY When salary income is increased from back date and the amount of such
increased salary is received in the current period then such amount is called
arrear of salary. An arrear of salary is taxable on the payment basis and not on
the due basis.
ACCRUAL OF Salary is always deemed to accrue or arise at the place where the services
SALARY INCOME: have been rendered.
SECTION 9 If an employee of the Central / State Government has rendered the services
outside India then his salary will be deemed to accrue or arise in India and
therefore taxable in India as per section 9. However allowances and perquisites
shall be fully exempt from tax.
FOREGOING OF If employee donates his salary then it is a case of foregoing of salary. The
SALARY amount forgone shall always be taxable in the hands of employee.
SURRENDER OF According to Section 2 of Voluntary Surrender of Salaries (Exemption from
SALARY: Taxation) Act 1961 salary surrendered will not be included in computing the
income provided salary is surrendered to the Central Government whether
employee is in public sector or private sector or is a Government employee.
SOLUTION : LTC exemption is available in respect of fare (i.e., air fare, rail fare, bus fare, etc.) for going
anywhere in India along with family. “Family” does not include more than two children. However, children
born out of multiple births after the first child then exemption shall be allowed for all children. In the first
case (daughter born in 2010 and twin sons born in 2012), the entire `80,000 will be exempt (on the
assumption that fare does not exceed fare of Air India).
In the second case (twin sons born in 2010 and daughter born in 2012), exemption will be available for
twin sons but not for daughter. Consequently, the amount of exemption will be `70,000.
Gratuity - Exemption is available under section 10(10) on the basis of the least of the following
a. Gratuity received : `20,51,640
b. Maximum exempt amount : `10,00,000
c. 15/26 x `80,000 x 34 years : `15,69,231
Commuted pension - `4,50,000 is received for commutation of 75% of pension. Commuted value of
100% of pension will be `6,00,000 (i.e.`4,50,000 x 100 / 75). `2,00,000 (being 1/3 x `6,00,000) is exempt
under section 10(I0A).
1) Company reimbursed the medical treatment bill of `40,000 of his daughter, who is dependent on him.
2) Monthly salary of `2,000 of a house keeper is reimbursed by the Company.
3) He is getting telephone allowance of `1,000 per month.
4) Cash gift of `4,700 was given on the occasion of his marriage anniversary.
5) Company pays medical insurance premium to effect an insurance on the health of Mr. Anand `12,000.
6)Motor car’s running and maintenance charges fully paid by employer of `36,000 (The motor car is
owned and driven by Mr. Anand. The engine cubic facility is below 1.60 litres. The motor car is used
for both official and personal purposes by the employee).
7) Value of free lunch provided during office hours is `2,200.
SOLUTION : LTC exemption is available in respect of fare for going anywhere in India along with family.
Family does not include more than two children. However, for children born out of multiple births after the
first child , exemption shall be allowed for all children. In the first case (son: 6 years, twin daughters : 3
years), the entire `58,000 will be exempt (on the assumption that fare does not exceed fare of Air India).
In the second case (twin daughters :6 years, son :3 years), exemption will be available for twin daughters
but not for son. Consequently, the amount exempt will be `53,000 and taxable will be `5,000.
QUESTION : Mr. Gobind received retrenchment compensation of `10,00,000 after 30 years and 4
months of service. At the time of retrenchment, he was receiving Basic Salary of `20,000pm; DA
`5,000pm. Compute his taxable retrenchment compensation.
SOLUTION : U/S 10(I0B), retrenchment compensation is not chargeable to tax to the extent of lower of
(a) Actual amount ie `10,00,000
(b) 15 days’ average salary for every completed year of service or part of year which is more than 6
months `25,000 x 15 / 26 x 30 = `4,32,692
(c) `5,00,000.
Consequently, `4,32,692 is exempt and the balance of `5,67,308 is chargeable to tax.
QUESTION : Medical Allowance received by an employee, the entire amount of which has been spent
by him for medical treatment. Discuss the tax treatment.
Answer: Fully Taxable
QUESTION : Allowances paid by Central Government to Mr. John, a citizen of India `70,000pa for the
services rendered outside India. Discuss the tax treatment.
Answer: Fully Exempt
QUESTION : Mr. Alok, a Government employee retired from service on 31/7/2017 after rendering
service of 25 years and 7 months. He received Gratuity of `7,00,000. His salary at the time of retirement
was as under
Basic Salary `16,000pm
Dearness Allowance `8,000pm
Compute the taxable portion of Gratuity.
If Mr. Alok is not a Government employee but covered by payment of Gratuity Act, 1972, then determine
the taxable and exempt portion of Gratuity.
SOLUTION : If Alok is a Government employee, gratuity of `7,00,000 will be exempt u/s 10(10).
If Alok is a non-Government employee covered by the Payment of Gratuity Act, exemption will be least of
the following
(a) Actual Gratuity Received `7,00,000.
(b) Maximum Limit of `10,00,000
(c) 15 / 26 X `24,000 X 26 = `3,60,000
`3,60,000 will be exempt and the balance of `3,40,000 will be chargeable to tax if Alok is a non-
Government employee.
QUESTION : Mr. Mohit is employed with XY Ltd. on a Basic Salary of `10,000 pm. He is also entitled to
DA @ 100% of Basic Salary 50% of which is included for the retirement benefits. The company gives
him HRA of `6,000 pm which is increased to `7,000 pm with effect from 1/1/2018. He also got an
increment of `1,000 pm in his Basic Salary with effect from 1/2/2018. Rent paid by him during the year
AY 2018-2019 ie PY 2017-2018 is as under:
April and May 2017 : NIL as he stayed with his parents
June to October 2017 : `6,000 pm for an accommodation in Ghaziabad Nov to March 2018
`8,000 pm for an accommodation in Delhi.
Compute his gross salary for the AY 2018-2019 ie PY 2017-2018.
`45,000 from 1/11/2014 to 31/3/2018 were fully met by the employer. The motor car self-driven by
employee.
- Leave travel concession given to employee, his wife and three children (one daughter age 7 years
and twin sons-age 3 years). Cost of air tickets (economy class) reimbursed by the employer `30,000
for adults and `45,000 for three children. Mr. J is eligible for availing exemption this year to the extent
it is permissible in law.
Compute salary income chargeable to tax in the hands of Mr. J for the AY 2018-2019 ie PY 2017-2018
Commuted pension – 2/3 of normal pension is `3,00,000. Commuted value of normal pension will be
`4,50,000 (being `3,00,000 X 3 / 2). As Mr. J has received gratuity at the time of retirement, 1/3 of
`4,50,000 (which comes to `1,50,000) is exempt from tax under section 10(10A). The balance of
`1,50,000 is chargeable to tax.
c) Telephone facility provided to employee and the bill aggregating to `25,000 paid by the employer.
SOLUTION : Fully Exempt as per Rule 3(8)
SOLUTION : Allotment of sweat equity shares – Taxable value shall be calculated as follows-
`
Fair market value on the date of exercise of option (`300 x 1,000) 3,00,000
Less : Amount paid to the employer by Shri Chand (`200 x 1,000) 2,00,000
Taxable value of perquisite chargeable to tax 1,00,000
Cost of acquisition in the hands of Shri Chand (for purpose of calculation gains when sweat equity shares
will be transferred) will be `300 per share (being the fair market value on the date of exercise of option).
SOLUTION : Salary is deemed to be accrued in India u/s 9 and thus taxable in India. However,
allowances and perquisites are fully exempt from tax u/s 10(7)
Encashment of earned leave is exempt from tax to the extent of least of:
(a) Amount received from the employer 75,000
(b) Maximum amount not taxable 3,00,000
(c) 10 X average monthly salary = `10,000 X 10 1,00,000
(d) Avg salary / 30 X unused leave = `10,000 / 30 X 150 ) 50,000
Amount not taxable under section 10 (10AA) : `50,000 and amount taxable is `25,000
SOLUTION : Computation of salary income of Mr. Viren for the AY 2018-2019 ie PY 2017-2018
Particulars Amount Amount
Basic Salary 8,000 x 9 72,000
Dearness Allowance 4,000 x 9 36,000
City compensatory allowance 3,000 x 9 27,000
Pension (25% of BS + DA) 3,000 x 3 9,000
Leave Salary 1,12,000
Less: Exempt u/s 10(10AA) 96,000 16,000
Gratuity 80,000
Less: Exempt u/s 10(10) 48,000 32,000
Taxable salary 1,92,000
7) Personal purchases through credit card provided by the company amounting to Rs. 12.000 was paid
by the company. No part of the amount was recovered from Mr. Sinha.
8) A maruti car which was purchased by the company on 21/5/2014 for Rs. 4,50,000 was sold to the
assessee on 19/8/17 for Rs. 1,80,000.
Compute taxable salary of Mr. Sinha for the AY 2018-2019 ie PY 2017-2018
SOLUTION : Computation of taxable salary of Mr. Sinha for the AY 2018-2019 ie PY 2017-2018
Particulars ` `
Salary [ 51,000 x 12] 6,12,000
Medical facility in the hospital maintained by the company Exempt
Rent free accommodation: 15% of salary 91,800
Valuation of perquisite of interest on loan (5,50,000 x 6%) 33,000
Gift received on occasion of marriage of daughter of Mr. Sinha (7,250 – 5,000) 2,250
Use of Cupboard for 1 month [75,000 x 10/100 x 1/12] 625
Perquisite on sale of cupboard Cost 75,000
Less: Depreciation on straight line method @ 10% for 2 years 15,000
W.D.V. 60.000
Less: Amount paid by the essessee 35,000 25,000
Personal purchase through credit card provided by Company 12,000
Perquisite on sale of Motor Car to Mr. Sinha Car 4,50,000
Less: Depreciation of 1st year @ 20% 90,000
WDV 3,60,000
Less: Depreciation of 2nd year @ 20% on WDV 72,000
WDV 2,88,000
Less: Depreciation of 3rd year @ 20% on WDV 57,600
Value on date of sale to employee 2,30,400
Less : Amount received on sale 1,80,000 50,400
Gross salary 8,27,075
SOLUTION : Computation of total income of Mr. Rishi for the AY 2018-2019 ie PY 2017-2018
Particulars `
Basic Salary 6,00,000
Dearness allowance (40% of basic salary) 2,40,000
Motor car : Perquisite value Rs. 900 per month. 10,800
Cost of laptop Rs. 40,000 less Rs. 5,000, being amount recovered from Mr. Rishi, would be 35,000
chargeable to tax. Since the laptop is immediately transferred on acquisition, there would be
no deduction by way of depreciation.
Accommodation at concessional rent 66,000
Actual lease rent Rs. 3 lakhs or 15% of salary i.e. 15% of Rs. 8,40,000 = Rs. 1,26,000;
whichever is lower. Rs. 1,26,000, being the lower figure, less amount recovered from
employee is the value of perquisite i.e. Rs. 126,000 minus 60,000
Contribution of employer to PF was 15% of basic—salary; Amount contributed above 12% of Nil
basic pay plus dearness allowance is taxable as perquisite. Amount contributed Rs. 90,000
(15% of Rs. 6,00,000). Contribution @ 12% of basic pay and DA is Rs. 1,00,800 (12% of Rs.
8,40,000). Since the amount contributed is less than 12% of basic pay plus DA, there is no
perquisite value
LTC NIL
Professional tax paid by employer 2,000
Gross Salary 9,53,800
Less: Deduction u/s 16(iii) : Professional tax 3,000
Taxable Salary 9,50,800
Solution : Computation of total income of Mr. Madhav for the AY 2018-2019 ie PY 2017-2018
Particulars ` `
Basic salary (22,500 x 12) 2,70,000
Dearness allowance (1/4 of basic salary) 67,500
Transport allowance (2,000 x 12) 24,000
Less. Exemption (1,600 x 12) 19,200 4,800
Facility for use of laptop Nil
Conveyance Allowance 2,000
Expenditure on accommodation while on official duty not a perquisite Nil
Value of lunch provided during working hours (assumed 270 meals) = 270 X 50 Nil
Less: Exempt 270 X 50
Value of concessional accommodation 37,520
Gross Salary and taxable salary 3,81,820
SOLUTION : Computation of taxable salary of Mr. Vansh for the AY 2018-2019 ie PY 2017-2018
Particulars Rs.
Basic Salary [ (Rs. 27,000 x 11) + (Rs. 30,200 x 1) ] 3,27,200
Dearness allowance (30% of basic salary) 98,160
Bonus (Rs. 30,200 x 1.5) 45,300
Employer’s contribution to recognized provident fund in excess of 12% 25,522
(18% - 12% = 6% of Rs. 4,25,360)
Telephone allowance 14,400
Rent-free accommodation 72,759
Medical reimbursement (Rs. 43,000 – Rs. 15,000) 28,000
Notes: For the purposes of valuation of rent free house, salary includes:
(i) Basic salary 3,27,200
(ii) Dearness allowance 98,160
(iii) Bonus 45,300
(iv) Telephone allowance 14,400
Total 4,85,060
15% of salary 72,759
Actual amount of lease rental paid by employer (18,000 x 12) 2,16,000
Therefore, the perquisite value is 72,759.
SOLUTION : Computation of taxable income of Mr. Shyam for the AY 2018-2019 ie PY 2017-2018
Particulars Rs.
Basic salary (Rs. 30,000 x 12) 3,60,000
Dearness allowance @ 30% 1,08,000
Transport allowance Rs. 2,800 x 12 = 33,600
Less: Exemption Rs. 1,600 x 12 = 19,200 14,400
Motor car maintenance borne by employer [Rs. 40,000 – (Rs. 1,800 x 12)] 18,400
Expenditure on accommodation while on official duty. Nil
Value of lunch provided during working hours (value does not exceed Rs. 50 per meal) Nil
Computer provided in the residence of employee by the employer Nil
Solution : Computation of Total Income of Mrs. Shakshi for the AY 2018-2019 ie PY 2017-2018
Basic salary 9,60,000
Dearness allowance 2,64,000
Bonus 1,60,000
Commission (calculated as percentage of turnover) 1,20,000
Entertainment allowance 35,000
Children’s hostel allowance 9,600
Less : Exemption (Rs. 300 x 12 x 2) 7,200 2,400
Interest credited to recognized provident fund account exempt
Rent free unfurnished accommodation 84,000
Contribution to PF by employer 2,00,000
Less : 12% of basic salary, dearness allowance & commission 1,61,280 38,720
Gross salary / Gross Total Income 16,64,120
Less : Deduction under section 80C
Life insurance premium paid for insurance of major daughter 18,000
Contribution to recognized provident fund 2,00,000
2,18,000
Restricted 1,50,000
Deduction u/s 80CCC in respect of LIC pension fund 60,000
2,10,000
As per section 80CCE deduction limited to Rs. 1,50,000 1,50,000
Deduction under section 80D 26,000
Deduction under section 80G Donation to Public Charitable Trust
Rs. 1,50,000 restricted to 50% of Rs. 1,48,812 (10% of adjusted total income) 74,406
Total Income (Rounded Off) 14,13,710
Working Notes : Deduction u/s 80G @ 50% is allowable on donation made to public charitable trust
subject to qualifying limit, which is 10% of adjusted total income i.e., Rs. 1,48,812 [i.e., Gross Total
Income Rs. 16,64,120 (-) Deduction under section 80C / 80CCC Rs. 1,50,000 (-) Deduction under section
80D Rs. 26,000].
Therefore, Rs. 74,406, being 50% of Rs. 1,48,812 is allowable as deduction under section 80G. In this
case, since donation is made otherwise than by way of cash, it qualifies for deduction under section 80G.
Computation of Total Income and tax liability of Mr. Narender for AY 2018-2019 ie PY 2017-2018
Particulars Rs.
Basic salary [(Rs. 50,000 × 7) + (Rs. 60,000 × 5)] 6,50,000
Dearness Allowance (40% of basic salary) 2,60,000
Bonus (Rs. 50,000 + 40% of Rs. 50,000) 70,000
Employers contribution to recognized provident fund in excess of 12% of salary = 4% 26,000
of Rs. 6,50,000
Professional tax paid by employer 2,000
Perquisite of Motor Car (Rs. 2,400 for 5 months) 12,000
Gross Salary 10,20,000
Less: Deduction under section 16 (iii) Professional tax 3000
Taxable salary/ Gross Total Income 10,17,000
Less: Deduction u/s 80C (own contribution to recognised provident fund) 1,04,000
Deduction u/s 80D in respect of medical insurance premium paid by cheque 25,000
Total Income 8,88,000
Type of building This chapter will cover rental income from both residential
building and commercial building.
Building Building means space which has the boundary walls,
which may be with or without roof.
Land attached with If land is attached to building then rent from land is taxable
building as income from house property.
If the land is not attached to the building then rent from
such land is taxable under the head other sources.
Subletting If tenant has let out the property (sub-letting) then income
earned by him shall be chargeable to tax under the head of
Income of Other Sources.
Business to let out If it is the business of the assessee to own and let out the
property on rent the income will be charged to tax under
the head of house property (this point is applicable to
buildings held as stock in trade by property dealer or held
as stock in trade by builders)
INCOME FROM (a)Income from farm building which is in the immediate vicinity of agricultural land
HOUSE and is used as dwelling house or store house.
PROPERTY (b)Property used for own business or profession.
NOT (c)Self-occupied House: Annual Value of one self-occupied house shall be taken to
CHARGEABLE TO be NIL.
TAX (d)Palace of ex-ruler: The Annual Value of one palace in the occupation of ex-ruler
shall be exempt.
(e) HP of a local authority is exempt from tax.
(f) HP of approved scientific research associations is exempt.
(g) HP of an educational institute and hospitals is exempt.
(h) HP of a trade union is exempt.
(i) HP from a house held for charitable or religious purposes is exempt from tax.
(j) HP of a political party is exempt.
STEPS TO
FOLLOW TO Municipal value
CALCULATE higher
ANNUAL VALUE Fair rent lower
Standard rent
Expected rent
Expected rent
Less: Loss of rent due to vacancy
Reasonable rent
higher
Actual rent
NAV IN VARIOUS
1) House Property, which is GAV shall be calculated in the manner given
SITUATIONS :
let out for the entire year. above. Further municipal taxes paid by landlord
SECTION 23
are to be reduced to get NAV
2) House Property let out for GAV shall be calculated in the manner given
part of the year and was above. Further municipal taxes paid by landlord
vacant for the balance are to be reduced to get NAV
part of the year.
3) House Property which is GAV shall be NIL. Further, municipal taxes paid
vacant for full year. by the landlord will be reduced and we will get
negative NAV.
4) House Property is self- GAV shall be NIL. Further, municipal taxes paid
occupied throughout the by the landlord are not allowed to be reduced and
year. therefore we can’t have negative NAV
5) House Property, which is GAV shall be NIL. Further, municipal taxes paid
self-occupied for the by the landlord are not allowed to be reduced and
residential purposes but therefore we can’t have negative NAV
NOTE : Interest for the fresh loan taken to repay original loan is allowed as
deduction.
EXAMINATION QUESTIONS
MAY 2017 – 4 MARKS
Mr. Ganesh owns a commercial building whose construction got completed in June 2016. He took a loan of
`15 lakhs from his friend on 1/8/2016 and had been paying interest calculated at 15% pa. He is eligible for pre-
construction interest as deduction as per the provisions of the Income Tax Act. Mr. Ganesh has let out the
commercial building at a monthly rent of `40,000 during the financial year 2017-2018. He paid municipal tax of
`18,000 each for the financial year 2016-2017 and 2017-2018 on 1/5/2017 and 5/4/2018 respectively.
Compute income under the head ‘House Property’ of Mr. Ganesh for the AY 2018-2019 i.e. PY 2017-2018.
Solution : Calculation of house property income for the AY 2018-2019 i.e. PY 2017-2018
Particulars `
Actual Rent (40,000 X 12) 4,80,000
GAV 4,80,000
Less: Municipal Taxes paid 18,000
NAV 4,62,000
Less : deduction u/s 24(a) (1,38,600)
Less : deduction u/s 24(b) (2,55,000)
Income from house property 68,400
Solution: Calculation of Taxable House Property Income for the AY 2018-2019 i.e. PY 2017-2018
Particulars Let out HP (`) Self Occupied HP (`)
Actual rent received or receivable 3,60,000 -
Gross annual value 3,60,000 NIL
Less: Municipal taxes paid 8,000 NIL
Net annual Value 3,52,000 NIL
Less : Deduction u/s 24(a) 1,05,600 NIL
Less : Deduction u/s 24(b) 4,33,333 2,00,000 (max limit)
House Property Income (1,86,933) (2,00,000)
Add: Recovery of unrealized rent after deducting 30% u/s 25A 84,000
1,20,000 – 30% = 84,000
Net house property income (1,02,933) (2,00,000)
Taxable house property income (3,02,933)
QUESTION : Mr. J has two houses, both of which are self-occupied. The particulars of these are given below:
Particulars House – I (`) House – II (`)
Municipal Valuation per annum 1,20,000 1,15,000
Fair Rent per annum 1,50,000 1,75,000
Standard rent per annum 1,00,000 1,65,000
Date of completion of construction 31/3/1999 31/3/2001
Municipal taxes payable during the year (paid for House II only) 12% 8%
Interest on money borrowed for current year - 55,000
Compute Mr.J’s income from the House Property for the AY 2018-2019 i.e. PY 2017-2018 and suggest which
house should be opted by Mr J to be assessed as self-occupied so that his tax liability gets minimum.
Solution :
a) Yes. Mr J is using his property for his business purposes and thus he can claim depreciation u/s 32
b) Income from sub-letting is taxable under the chapter of Income from other sources and not as income from
house property.
c) When property is taken on lease for more than period of 99 years then the person taking the property on
lease is a deemed ownership under section 27. Income from such property is taxable as income from
house property. When we calculate income from house property we are entitled to deduction under section
24(a) which is 30% of NAV. Thus, he will not be entitled to deduction of 40%.
Solution : Calculation of house property income for the AY 2018-2019 i.e. PY 2017-2018
Particulars House (`)
Municipal Value 1,60,000
Fair Rent 1,50,000
Standard Rent 1,70,000
Expected rent 1,60,000
Less: loss of rent due to vacancy of HP NIL
Reasonable rent 1,60,000
Actual Rent 1,80,000
SOLUTION : Calculation of house property income for the AY 2018-2019 i.e. PY 2017-2018
Particulars House in USA House in Mumbai
Half house Half house is
is let out self occupied
Actual Rent $2,000 X 12 X 65 = 15,60,000 4,92,000 NIL
GAV 15,60,000 4,92,000 NIL
Less: Municipal Taxes paid by $1,500 X 65 = 97,500 37,500 NIL
landlord on / before 31/3/2018
NAV 14,62,500 4,54,500 NIL
Less : deduction u/s 24(a) 4,38,750 1,36,350 NIL
Less : deduction u/s 24(b) NIL 37,000 37,000
Income 10,23,750 2,81,150 (37,000)
Income from house property after set off = 12,67,900
RTP QUESTIONS
RTP MAY 2011
Same question as that of examination question NOV 2013
SOLUTION : Computation of house property income of Mr. X for the AY 2018-2019 i.e. PY 2017-2018
Particulars `
Net Annual value (since house is self occupied) Nil
Less: Deduction u/s.24(b) : Interest paid on borrowed capital 1,92,000
Income from house property of Mr. X (1,92,000)
Computation of income from house property of Mr. Y for the AY 2018-2019 i.e. PY 2017-2018
Particulars Ground floor (SO) First floor
Gross annual value Nil 1,60,000
Less :Municipal taxes (for first floor) (12,000 / 2) Nil 6,000
Net annual value Nil 1,54,000
Less: Deduction u/s 24(a) 30% of NAV Nil 46,200
Less: Deduction u/s 24(b) Interest on borrowed capital 1,25,000 1,25,000
lncome from house Property (1,25,000) (17,200)
QUESTION : In May, 2017, Mr. Aakash recovered rent of `17,000 from Ms. Gunjan, to whom he had let out his
house from June 2011 to August 2013. He could not realise two months rent of `24,000 from her and to that
extent his actual rent was reduced while computing income from house property for AY 2014-2015.
From September 2013 to November 2016, he had let out his property to Mr. Sahil. In October, 2015, he had
increased the rent from `13,000 to `15,000 per month and the same was a subject matter of dispute. The
house remained vacant for three months from December 2016 to February 2017. In April, 2017 the matter was
finally settled and Mr. Aakash received `28,000 as arrears of rent for the period October 2015 to November,
2016. However, in March 2017, Mr. Aakash had already sold this residential house property to Mr. Sagar. Mr.
Aakash, contends that the amount recovered as unrealised rent and arrears of rent in the PY 2017-2018 would
not be taxable in his hands in that year, since he had sold such house property in the PY 2016-2017 itself. Is
the contention of Mr. Aakash correct ? If not, under what head would such income be taxable and compute the
income taxable under that head for the AY 2018-2019 i.e. PY 2017-2018
SOLUTION : Since the unrealised rent was recovered in the AY 2018-2019 i.e. PY 2017-2018, the same
would be taxable in the same year u/s 25A, irrespective of the fact that Mr. Aakash was not the owner of the
house in that year. Further, the arrears of rent was also received in the AY 2018-2019 i.e. PY 2017-2018 and
hence the same would also be taxable u/s 25A, even though Mr. Aakash was not the owner of the house in
that year. Both unrealised rent and arrears of rent would be taxable under the head “Income from house
property”. A deduction of 30% of unrealised rent recovered and arrears of rent would be allowed while
computing income from house property of Mr. Aakash for the AY 2018-2019 i.e. PY 2017-2018.
Computation of income from house property of Mr. Aakash for the AY 2018-2019 i.e. PY 2017-2018
Particulars `
(i) Unrealised rent recovered 17,000
(ii) Arrears of rent received 28,000 45,000
Less: Deduction @ 30% 13,500
Income from house property 31,500
SOLUTION : In this case, Surbhi has more than one house property for self -occupation. As per section 23(4),
Surbhi can avail the benefit of self -occupation (i.e., benefit of “Nil” Annual Value) only in respect of one of the
house properties, at her option. The other house property would be treated as “deemed let-out” property, in
respect of which the Expected rent would be the gross annual value. Surbhi should, therefore, consider the
most beneficial option while deciding which house property should be treated by her as self-occupied.
Since Option 2 is more beneficial, Surbhi should opt to treat House - II as SO and House I as Deemed to be let
out, in which case, her house property income would be `40,000 for the AY 2018-2019 i.e. PY 2017-2018.