DIRECT TAXATION

1. BASICS
1.1. INTRODUCTION
In a Welfare State, the Government takes primary responsibility for the welfare of its citizens, as in matters of
health care, education, employment, infrastructure, social security and other development needs. To facilitate these,
Government needs revenue. The taxation is the primary source of revenue to the Government for incurring such
public welfare expenditure. In other words, Government is taking taxes from public through its one hand and
through another hand; it incurs welfare expenditure for public at large. However, no one enjoys handing over his
hard-earned money to the government to pay taxes. Thus, taxes are compulsory or enforced contribution to the
Government revenue by public. Government may levy taxes on income, business profits or wealth or add it to the
cost of some goods, services, and transactions.

1.2. DIRECT TAX & INDIRECT TAX

There are two types of taxes: Direct Tax and Indirect Tax Tax, of which incidence and impact fall on the same
person, is known as Direct Tax, such as Income Tax. On the other hand, tax, of which incidence and impact fall on
two different persons, is known as Indirect Tax, such as GST, etc. It means, in the case of Direct Tax, tax is
recovered directly from the assessee, who ultimately bears such taxes, whereas in the case of Indirect Tax, tax is
recovered from the assessee, who passes such burden to another person & is ultimately borne by consumers of such
goods or services.

Direct Tax

● Incidence and impact fall on the same person

● Assessee, himself bears such taxes. Thus, it pinches the taxpayer.

● Levied on income

● E.g. Income Tax

● Progressive in nature i.e., higher tax are levied on person earning higher income and vice versa.

INDIRECT TAX

● Incidence and impact fall on two different persons

● Tax is recovered from the assessee, who passes such burden to another person. Thus, it does not pinch the
taxpayer.

● Levied on goods and services. Thus, this type of tax leads to inflation and have wider base.

● E.g. GST, Customs Duty, etc.

 ● Regressive in nature i.e., all persons will bear equal wrath of tax on goods or service consumed by them
irrespective of their ability.

● Useful tool to promote social welfare by checking the consumption of harmful goods or sin goods through
higher rate of tax..

1.3. ADMINISTRATION OF TAX LAWS

The administrative hierarchy of tax law is as follows:

Ministry of Finance

Department of Revenue

Central Board of Indirect Taxes & Customs (CBIC)

Central Board of Direct Tax (CBDT)

Tax point :

■ Both of the Boards have been constituted under the Central Board of Revenue Act, 1963.

■ CBDT deals with levy and collection of all direct tax whereas matters relating to levy and collection of Central
indirect tax are dealt by CBIC.

1.4. SOURCES OF INCOME TAX LAW IN INDIA

1.Income tax Act, 1961 (Amended up to date)

The provisions of income tax extends to the whole of India and became effective from 1/4/1962 (Sec. 1). The
Act contains provisions for (a) determination of taxable income; (b) determination of tax liability; (c) procedure
for assessment, appeals, penalties and prosecutions; and (d) powers and duties of Income tax authorities.

2. Annual Amendments

(a) Income tax Act has undergone several amendments from the time it was originally enacted through the Union
Budget. Every year, a Finance Bill is presented before the Parliament by the Finance Minister. The Bill contains
various amendments which are sought to be made in the areas of direct and indirect taxes levied by the Central
Government.

(b) When the Finance Bill is approved by both the Houses of Parliament and receives the assent of the President, it
becomes the Finance Act. The provisions of such Finance Act are thereafter incorporated in the Income Tax Act.
 (c) If on the 1st day of April of the Assessment Year, the new Finance Act has not been enacted, the provisions in
force in the preceding Assessment Year or the provisions proposed in the Finance Bill before the Parliament,
whichever is more beneficial to the assessee, will apply until the new provisions become effective [Sec. 294]

Note: Besides these amendments, whenever it is found necessary, the Government introduces amendments in the
form of various Amendment Acts and Ordinances.

3. Income tax Rules, 1962 (Amended up to date)

(a) As per Sec. 295, the Board may, subject to the control of the Central Government, make rules for the whole or
any part of India for carrying out the purposes of the Act.

(b) Such rules are made applicable by notification in the Gazette of India.

(c) These rules were first made in 1962 and are known as Income tax Rules, 1962. Since then, many new rules have
been framed or existing rules have been amended from time to time and the same has been incorporated in the
aforesaid rules.

4. Circulars and Clarifications by CBDT

(a) U/s 119, the Board may issue certain circulars and clarifications from time to time, which have to be followed
and applied by the Income tax authorities.

(b) Effect of circulars: These circulars or clarifications are binding upon the Income tax authorities, but the same
are not binding on the assessee. However, assessee can claim benefit under such circulars.

Note: These circulars are not binding on the Income Tax Appellate Tribunal or on the Courts.

5. Judicial decision

(a) Decision of the Supreme Court: Any decision given by the Supreme Court shall be applicable as law till there
is any change in law by the Parliament. Such decision shall be binding on all the Courts, Tribunals, Income tax
authorities, assessee, etc.

(b) Contradiction in the decisions of the Supreme Court: In case, there is apparently contradiction in two decisions,
the decision of larger bench, whether earlier or later, shall always prevail. However, where decisions are given by
benches having equal number of judges, the decision of the recent case shall be applicable.

(c) Decisions given by a High Court or ITAT: Decisions given by a High Court or ITAT are binding on all
assessees and Income tax authorities, which fall under their jurisdiction, unless it is over ruled by a higher
authority.

1.5. BASIC PRINCIPLES FOR CHARGING INCOME TAX [SEC. 4]

1. Income of the previous year of a person is charged to tax in the immediately following assessment year.
2. Rate of tax is applicable as specified by the Annual Finance Act of that year.

Further, though the Finance Act prescribes the rates of tax, in respect of certain income, the Income Tax Act itself
has prescribed specific rates, e.g. Lottery income is to be taxed @ 30% (Sec.115BB), Long term capital gain is to
be taxed @ 20% (Sec.112), short term capital gain on listed shares u/s 111A is to be taxed @ 15%, etc.

3. In respect of income chargeable to tax, tax shall be deducted at source, or paid in advance (wherever applicable).

Sec. 4 is a charging section and it is the backbone of the Income Tax Act. The tax liability arises by virtue of this
section and it arises at the close of a previous year. However, the finalisation of amount of tax liability is postponed
to the assessment year. It follows the rule that the liability to tax is not dependent upon assessment.

1.6. ASSESSMENT YEAR (A.Y.) [SEC. 2(9)]

Assessment year means the period of 12 months commencing on the 1st day of April every year. It is the year (just
after the previous year) in which income earned in the previous year is charged to tax. E.g., A.Y.2019-20 is a year,
which commences on April 1, 2019 and ends on March 31, 2020. Income of an assessee earned in the previous year
2018-2019 is assessed in the A.Y. 2019-20.

Tax point:

■ Duration: Period of 12 months starting from 1st April.

■ Relation with Previous Year: It falls immediately after the Previous Year.

■ Purpose: Income of a previous year is assessed and taxable in the immediately following Assessment Year.

1.7. PREVIOUS YEAR [SEC.3]

Previous Year means the financial year immediately preceding the Assessment Year. Income earned in a year is
assessed in the next year. The year in which income is earned is known as Previous Year and the next year in which
income is assessed is known as Assessment Year. It is mandatory for all assessee to follow financial year (from 1st
April to 31st March) as previous year for Income-Tax purpose.

Financial Year According to sec. 2(21) of the General Clauses Act, 1897, a Financial Year means the year
commencing on the 1st day of April. Hence, it is a period of 12 months starting from 1st April and ending on 31st
March of the next year. It plays a dual role i.e. Assessment Year as well as Previous Year.

Example: Financial year 2018-19 is

• Assessment year for the Previous Year 2017-18; and

• Previous Year for the Assessment Year 2019-20.

1.7.1. Exceptions to the general rule that income of a Previous Year is taxed in its
Assessment Year
This is the general rule that income of the previous year of an assessee is charged to tax in the immediately
following assessment year. However, in the following cases, income of the previous year is assessed in the same
year in order to ensure smooth collection of income tax from the taxpayer who may not be traceable, if assessment
is postponed till the commencement of the Assessment Year:

1. Income of a non-resident assessee from shipping business (Sec. 172)

2. Income of a person who is leaving India either permanently or for a long period (Sec. 174)

3. Income of bodies, formed for a short duration (Sec. 174A)

4. Income of a person who is likely to transfer property to avoid tax (Sec. 175)

5. Income of a discontinued business (Sec. 176).

In this case, the Assessing Officer has the discretionary power i.e. he may assess the income in the same previous
year or may wait till the Assessment year.

1.8. ASSESSEE [SEC 2(7)]

“Assessee” means,

(a) a person by whom any tax or any other sum of money (i.e., penalty or interest) is payable under this Act
(irrespective of the fact whether any proceeding under the Act has been taken against him or not);

(b) every person in respect of whom any proceeding under this Act has been taken (whether or not he is liable for
any tax, interest or penalty) for the assessment of his income or loss or the amount of refund due to him;

(c) a person who is assessable in respect of income or loss of another person;

(d) every person who is deemed to be an assessee under any provision of this Act; and

(e) a person who is deemed to be an ‘assessee in default’ under any provision of this Act.

E.g. A person, who was liable to deduct tax but has failed to do so, shall be treated as an ‘assessee in default’.

1.9. PERSON [SEC. 2 (31)]

The term person includes the following:

(i) an Individual;
(ii) a Hindu Undivided Family (HUF);
(iii) a Company;
(iv) a Firm;
(v) an Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not;
(vi) a Local authority; &
(vii) every artificial juridical person not falling within any of the preceding categories.

[1] On the basis of a well settled principle that “the Crown cannot be charged to tax”, it can be said that
unless otherwise specifically mentioned the Union Government cannot be taxed in India.
 [2] An association of persons or a body of individuals or a local authority or an artificial juridical person
shall be deemed to be a person, whether or not such person or body or authority or juridical person was
formed or established or incorporated with the object of deriving income, profits or gains.
[3] A firm includes limited liability partnership.

Individual
The word ‘individual’ means a natural person, i.e. human being. “Individual” includes a minor or a person of
unsound mind. However, Deities are assessable as juridical person. Trustee of a discretionary trust shall be assessed
as an individual

Hindu Undivided Family (HUF)

A Hindu Undivided Family (on which Hindu law applies) consists of all persons lineally descended from a
common ancestor & includes their wives & unmarried daughters.

■ Only those undivided families are covered here, to which Hindu law applies. It also includes Jain and Sikh
families.

■ Once a family is assessed as Hindu undivided family, it will continue to be assessed as such till its partition.

Company [Sec. 2(17)]

Company means:

[A] any Indian company; or

[B] any body corporate, incorporated under the laws of a foreign country; or

[C] any institution, association or body which is or was assessable or was assessed as a company for any
assessment year on or before April 1, 1970; or

[D] any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is
declared by general or special order of the Central Board of Direct Taxes to be a company.

Indian Company [Sec. 2(26)]

An Indian company means a company formed & registered under the Companies Act, 1956 & includes

[A] a company formed and registered under any law relating to companies formerly in force in any part of India
other than the state of Jammu & Kashmir and the Union territories specified in (c) infra;

[B] a company formed and registered under any law for the time being in force in the State of Jammu &
Kashmir;

[C] a company formed and registered under any law for the time being in force in the Union territories of Dadar &
Nagar Haveli, Goa, Daman & Diu and Pondicherry;

[D] a corporation established by or under a Central, State or Provincial Act;

[E] any institution, association or body which is declared by the Central Board of Direct Taxes (CBDT) to be a
company u/s 2(17).
In the aforesaid cases, a company, corporation, institution, association or body will be treated as an Indian company
only if its registered office or principal office, as the case may be, is in India.

Domestic Company [Sec. 2(22A)]

Domestic company means:

i) an Indian company; or
ii) any other company, which in respect of its income liable to tax under the Act, has made prescribed
arrangements for the declaration and payment of dividends (including dividend on preference share),
payable out of such income, within India.

Foreign Company [Sec. 2(23A)]

Foreign company means a company which is not a domestic company.

Company in which public are substantially interested [Sec. 2(18)]

Following companies are said to be a company in which public are substantially interested:

1. Government Company;

2. A company u/s 8 of the Companies Act, 2013;

3. Mutual benefit finance company;

4. Listed company;

5. Company in which shares are held by co-operative societies;

6. Company which is prescribed by CBDT

Firm
As per sec. 4 of Indian Partnership Act, 1932, partnership means “relationship between persons who have agreed to
share profits of the business carried on by all or any one of them acting for all”. Persons, who enter into such
business, are individually known as partners and such business is known as a Firm. A firm is, though not having a
separate legal entity, but has separate entity in the eyes of Income-tax Act

Tax point:

♦ A partnership firm is a separate taxable entity apart from its partners.

♦ In Income tax, a Limited liability partnership shall be treated at par with firm.

Association of Persons (AOP) or Body of Individuals (BOI)

An AOP means a group of persons (whether individuals, HUF, companies, firms, etc.) who join together for
common purpose(s). Every combination of person cannot be termed as AOP. It is only when they associate
themselves in an income-producing activity then they become AOP. Whereas, BOI means a group of individuals
(individual only) who join together for common purpose(s) whether or not to earn income. Co-heirs, co-donees, etc
joining together for a common purpose or action would be chargeable as an AOP or BOI. In case of income of
AOP, the AOP alone shall be taxed and the members of the AOP cannot be taxed individually in respect of the
income of the AOP

Difference between AOP and BOI

■ In case of BOI, only individuals can be the members, whereas in case of AOP, any person can be its member i.e.
entities like Company, Firm etc. can be the member of AOP but not of BOI.

■ In case of an AOP, members voluntarily get together with a common will for a common intention or purpose,
whereas in case of BOI, such common will may or may not be present.

Local Authority
As per Sec. 3(31) of the General Clause Act, a local authority means a municipal committee, district board, body of
Port Commissioners, Panchayat, Cantonment Board, or other authorities legally entitled to or entrusted by the
Government with the control and management of a municipal or local fund.

Artificial Juridical Person

Artificial juridical person are entities

● which are not natural person;

● has separate entity in the eyes of law;

● may not be directly sued in a court of law but they can be sued through person(s) managing them

E.g: Deities, Idols, University, Bar Council, etc.

Note: Under the Income-tax Act, such person has been provided exemption from payment of tax under separate
provisions of the Act, if certain conditions mentioned therein are satisfied.

1.10. HEADS OF INCOME [SEC. 14]

According to Sec.14 of the Act, all income of a person shall be classified 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.

For computation of income, all taxable income should fall under any of the five heads of income as mentioned
above. If any type of income does not become part of any one of the above mentioned first four heads, it should be
part of the fifth head, i.e. Income from other sources, which may be termed as the residual head.
1.10.1 Significance of heads of income
● Income chargeable under a particular head cannot be charged under any other head.

● The Act has self-content provisions in respect of each head of income.

● If any income is charged under a wrong head of income, the assessee may lost the benefit of deduction available
to him under the correct head.

Finance Ministry has clarified that LPG subsidy received by an individuals in their bank accounts will continue to
be exempt from income tax.

1.10.2. Distinguish between Heads of income and Sources of income

There are only five heads of income as per Sec. 14 of the Act, but the assessee may generate the income from
various sources. In the same head of income, there may be various sources of income. E.g. under the head ‘Income
from house property’, there may be two or more house properties and each house property shall be termed as a
source of income. The source of income decides under which head (among the five heads) income shall be taxable.

1.11. GROSS TOTAL INCOME (GTI) [SEC. 80B(5)]

Gross total income is the aggregate of income under all the five heads of income after adjusting the set-off & carry
forward of losses. Deductions under Chapter VIA is provided from GTI, to arrive at Total income or taxable
income.

Computation of Total Income for the A.Y.

Particulars Amount
1. Salaries ****
2. Income from house property ****
3. Profits and gains of business or profession ****
4. Capital gains ****
5. Income from other sources ****
Gross Total Income ****
Less: Deduction u/s. 80C to 80U ****
Total Income ****

1.12. TAX PLANNING, TAX EVASION AND TAX AVOIDANCE

Tax planning is a way to reduce tax liability by taking full advantages provided by the Act through various
exemptions, deductions, rebates & relief. In other words, it is a way to reduce tax liability by applying script &
moral of law. It is the scientific planning so as to attract minimum tax liability or postponement of tax liability for
the subsequent period by availing various incentives, concessions, allowance, rebates and relief provided in the
Act.

Tax evasion is the illegal way to reduce tax liability by deliberately suppressing income or sale or by increasing
expenses, etc., which results in reduction of total income of the assessee. Tax evasion is illegal, both in script &
moral. It is the cancer of modern society and work as a clog in the development of the nation.

Tax avoidance is an exercise by which the assessee legally takes advantages of loopholes in the Act. Tax
avoidance is a practice of bending the law without breaking it. It is a way to reduce tax liability by applying script
of law only. Most of the amendments are aimed to curb such loopholes.

There are two thoughts about tax avoidance –

a) As per first thought it is legal. Such thought is also supported by various judgments of the Supreme Court,
some of them are as follows:-

Helvering vs. Greggory (1934)

“Anyone may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose that
pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

IRC vs. Duke of Westminster (1936)

“Taxpayer is entitled to so arrange his affairs that the tax under the appropriate Act is less than what otherwise it
could be.”

Inland Revenue Commissioners vs. Fishers Executors (1958)

“The highest in authority, have always recognized that the subject is entitled so to arrange his affairs as not to
attract taxes imposed by the Crown, so far he can do so within the law, and that he may legitimately claim the
advantage of any express terms or any omissions that he can find in his favour in taxing Act. In doing so, he neither
comes under liability, nor incurs blame.”

CIT vs. Raman & Co. (1968)

“Avoidance of tax liability by so arranging commercial affairs that the charge of tax is distributed, is not
prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness
of the device depends not upon considerations of morality, but on the operation of the Income-tax Act.”

Smt. C. Kamala vs. CIT(1978)

“It is quite possible that when a transaction is entered into in one form known to law, the amount received under
that transaction may attract liability under the Act and if it is entered into in another form which is equally lawful, it
may not attract such tax liability. But when the assessee has adopted the latter one, it would not be open to the court
to hold him liable for tax.”

CWT vs. Arvind Narotham(1988)

 “It is true that tax avoidance in an underdeveloped or developing economy should not be encouraged on practical
as well as ideological grounds. One would wish….. that one could get the enthusiasm ….. that taxes are the price of
civilization and one would like to pay that price to buy civilization. But the question which many ordinary
taxpayers very often, in a country of shortages with ostentatious consumption and deprivation for the large masses,
ask is, does he with taxes buy civilization or does he facilitate the waste and ostentation of the few. Unless
ostentation and waste in Government spending are avoided or eschewed, no amount of moral sermons would
change people’s attitude to tax avoidance.”

b) As per second thought it is not a legal way to reduce tax burden and it should be prohibited.

McDowell & Co. Ltd. vs Commercial Tax Officer (1985)

Supreme Court observed - “we think time has come for us to depart from Westminster principle….tax planning
may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning
and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to
dubious methods. It is the obligation of every citizen to pay the honestly without resorting to subterfuges.”

CIT vs B.M. Kharwar(1969)

Supreme Court held – “the taxing authority is entitled and is indeed bound to determine the true legal relation
resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the
taxing authorities to unravel the device and to determine the true character of relationship. But the legal effect of a
transaction cannot be displaced by probing into substance of the transaction.”

1.13. Distinguish between Tax Planning, Tax Evasion, Tax Avoidance and
Tax Management
Tax planning Tax Avoidance Tax Evasion Tax Manageme

Definition It is a way to reduce tax liability by It is an exercise by It is the illegal It is a procedure

taking full advantages provided by the which the assessee way to reduce tax comply with the
Act through various exemptions, legally takes advantage liability by provisions of th
deductions, rebates & relief. of the loopholes in the deliberately law.
Act. suppressing
income or sale or
by increasing
expenses, etc.,
which results in
reduction of total
income of the
assessee.
Feature Tax planning is a practice to follow the Tax avoidance is a Tax evasion is It is
provisions of law within the moral practice of bending the illegal, both in implementation
framework law without breaking it. script & moral. execution part o
taxation
department of a
organisation
Object To reduce tax liability by applying script To reduce the tax To reduce tax To comply with
& moral of law. liability to the minimum liability by the provisions o
by applying script of law applying unfair laws.
 only means.

Approach It is futuristic and positive in nature. It is futuristic but short It is concerned It is a continuou
The planning is made today to avail term in nature, as with past and approach, which
benefits in future loophole of the law will applied after the concerned with
be corrected in future by liability of tax has past (rectificatio
amendments of the law arisen. It is done revisions etc.),
with negative present (filing o
approach to avail return, etc.) &
benefits by killing future (correctiv
the moral of law action).
Benefit Generally, arises in long run. Generally, arises in short Generally, Penalty, interes
run benefits do not prosecution can
arise but it causes avoided
penalty and
prosecution.
Treatment of It uses benefits of the law It uses loopholes in the It overrules the It implements th
Law law. law law.
Practice It is tax saving. It is tax hedging. It is tax It is tax
concealment. administration.
Need It is desirable It is avoidable It is objectionable It is essential.
Morality It is moral in nature. It is immoral in nature It is illegal. It is duty.

1.14. TAX RATES FOR THE A.Y. 2019-2020

Individual/HUF/Association of Persons/Body of Individuals/Artificial Juridical Person

In case of Super Senior citizen

Total Income Range Rates of Income Tax

Up to ` 5,00,000 Nil
5,00,001 to ` 10,00,000 20% of (Total income - ` 5,00,000)
10,00,001 and above 1,00,000 + 30% of (Total income - ` 10,00,000)

Super Senior Citizen means an individual who is resident in India and is of at least 80 years of age at any time
during the relevant previous year (i.e. any resident person, male or female, born before 02-04-1939).

In case of Senior citizen

Total Income Range Rates of Income Tax

Up to ` 3,00,000 Nil
` 3,00,001 to ` 5,00,000 5% of (Total Income - ` 3,00,000)
` 5,00,001 to ` 10,00,000 10,000 + 20% of (Total income - ` 5,00,000)
 ` 10,00,001 and above 1,10,000 + 30% of (Total income - ` 10,00,000)

Senior Citizen means an individual who is resident in India and is of at least 60 years of age at any time during the
relevant previous year. (i.e., a resident person, male or female, born during 02-04-1939 and 02-04-1959)

In case of other Individual/HUF/Association of Persons/Body of Individuals/Artificial Juridical

Person

Total Income Range Rates of Income Tax

Up to ` 2,50,000 Nil
` 2,50,001 to ` 5,00,000 5% of (Total Income - ` 2,50,000)
` 5,00,001 to ` 10,00,000 12,500 + 20% of (Total income - ` 5,00,000)
` 10,00,001 and above 1,12,500 + 30% of (Total income - ` 10,00,000)

Person who born on or after 02-04-1959 or non-resident individual

1.15. Rebate u/s 87A

 Applicable to: Resident Individual
 Conditions to be satisfied: Total income of the assessee does not exceed ` 3,50,000.
 Quantum of Rebate: Lower of the following:
(a) 100% of tax liability as computed above; or
(b) 2,500/-

Example:-

Compute rebate u/s 87A in the following cases:

Particulars Case 1 Case 2 Case 3 Case 4 Case 5 Case 6

Assessee Individual Individual Individual Senior Individual HUF
Citizen
Residential Resident Resident Resident Non- Resident
status Resident
Total 2,60,000 3,12,000 5,25,000 3,40,000 2,60,000 2,65,000
Income
Tax on 500 3,100 17,500 2,000 500 750
above
Rebate u/s 500 2,500 Nil 2,000 Nil Nil
87A
Reason Max. Limit Total Assessee is Assessee is
income non-resident not an
exceeds ` individual
3.5 lacs
Tax after Nil 600 17,500 Nil 500 750
rebate
1.16. Surcharge on tax after rebate u/s 87A
Surcharge at the following rate is also payable on tax as computed above after rebate u/s 87A

Total Income Rate of Surcharge

Total income does not exceed ` 50 lacs Nil
Total income exceeds ` 50 lacs but does not 10% of tax after rebate
exceed ` 1 crore
Total income exceeds ` 1 crore 15% of tax after rebate

1.17. Health & Education Cess

Applicable on: All assessee.

Rate of cess: 4% of Tax liability after Surcharge

2. RESIDENTIAL STATUS
Residential status of an assessee determines the scope of chargeability of his income. Whether a person will be
charged to a particular income or not, depends on his residential status.

Sec. 6 provides the test for residential status for the persons which can be categorized as under:

Person

Individual & HUF Other

Resident in India Non-Resident Resident in India Non-Resident

Ordinarily Resident in India Not-ordinarily Resident in India

2.1. GENERAL POINTS TO BE KEPT IN MIND REGARDING RESIDENTIAL

STATUS OF A PERSON
Different for each previous year Residential status is determined in respect of each
previous year. In other words, residential status
of a person may vary from one previous year to
another previous year.
Single Status for each source of income A person can have only one residential status for
a previous year i.e. he cannot be a resident for
one source of income and non-resident for
another source.
Impact of citizenship Citizenship and residential status are two
different concepts. A citizen of India may not be
a resident in India for the purpose of income-tax.
Country Specific A person can have same residential status in more
than one country.

2.2. DETERMINATION OF RESIDENTIAL STATUS

2.2.1 INDIVIDUAL [SEC. 6(1)]

First of all, an individual is classified as resident or non-resident and again a resident individual may further be
categorized as Ordinarily Resident or Not Ordinarily Resident in India.

Individual

Resident Non-resident

Resident in India
An individual is said to be a resident in India, if he satisfies any one of the following conditions

i) He is in India in the previous year for a period of 182 days or more [Sec. 6(1)(a)]; OR
ii) He is in India for a period of 60 days or more during the previous year AND for 365 or more days during 4
previous years immediately preceding the relevant previous year [Sec. 6(1)(c)]

Tax point: Given Conditions are alternative in nature i.e. assessee needs to satisfy any one condition.

Non-Resident in India
An assessee who is not satisfying sec. 6(1) shall be treated as a non-resident in India for the relevant previous year.

ILLUSTRATION 1 :- Sam came to India first time during the P.Y. 2018-19. During the previous year, he stayed in
India for (i) 50 days; (ii) 183 days; & (iii) 153 days.

Determine his residential status for the A.Y. 2019-20.

Solution :-

(i) Since Sam resides in India only for 50 days during the P.Y. 2018-19, he does not satisfy any of the conditions
specified in sec. 6(1). He is, therefore, a non-resident in India for the P.Y. 2018-19.

(ii) Since Sam resides in India for 183 days during the previous year 2018-19, he satisfies one of the conditions
specified in sec. 6(1). He is, therefore, a resident in India for the P.Y. 2018-19.

(iii) Sam resides in India only for 153 days during the previous year 2018-19. Though he resided for more than 60
days during the previous year but in 4 years immediately preceding the previous year (as he came India first time),
he did not reside in India. Hence, he does not satisfy any of the conditions specified in sec. 6(1).Thus, he is a non-
resident for the P.Y. 2018-19.

ILLUSTRATION 2:- Andy, a British national, comes to India for the first time during 2014-15. During the
financial years 2014-15,2015-16, 2016-17, 2017-18 and 2018-19, he was in India for 55 days, 60 days, 80 days,
160 days and 70 days respectively. Determine his residential status for the assessment year 2019-20.

Solution:-

During the previous year 2018-19, Andy was in India for 70 days & during 4 years immediately preceding the
previous year, he was in India for 355 days as shown below:

Year No. of days stayed in India

2014-15 55
2015-16 60
2016-17 80
2017-18 160
Total 355

Thus, he does not satisfy Sec.6(1) & consequently, he is a non-resident in India for the P.Y. 2018-19.

EXCEPTIONS TO THE ABOVE RULE

In the following cases, condition (ii) of sec. 6(1) [i.e. sec. 6(1)(c)] is irrelevant:
 1. An Indian citizen, who leaves India during the previous year for employment purpose.

Note: A person going abroad in connection with his employment in India, is not covered by above exception
E.g. X is having business in India. During the previous year 2018-19, he visited to Japan for purchasing raw-
material for his business, from there he went to USA for attending a business meeting. Since, X was outside
India in connection with his employment in India, he is not covered by the exception.

2. An Indian citizen, who leaves India during the previous year as a member of crew of an Indian ship.

3. Indian citizen or a person of Indian origin#, who normally resides outside India, comes on a visit to India
during the previous year.

# Person of Indian origin: A person is deemed to be of Indian origin if he or either of his parents or grandparents
were born in undivided India. Here, grand parents may be paternal or maternal.

Tax point: Above assessee shall be treated as resident in India only if he resides in India for 182 days or more in the
relevant previous year.

Points to be kept in mind :-

a) Stay at same place in India is not necessary.

b) Continuous stay in India is not necessary.

c) A person shall be deemed to reside in India, if he is on the territorial waters of India.

For instance, if an individual stays on a ship, which is in the territorial waters of India, then it shall be treated as his
presence in India.

[Territorial water extends to 12 nautical miles (1 nautical miles = 1.1515 miles = 1.853 km) into the sea from the
base line on the coast of India and include any bay, gulf, harbour, creek or tidal river]

2.3. ADDITIONAL CONDITIONS TO TEST WHETHER RESIDENT

INDIVIDUAL IS ‘ORDINARILY RESIDENT OR NOT’ [SEC. 6(6)]

A resident individual in India can further be categorised as

i) Resident and ordinarily resident in India

ii) Resident but not ordinarily resident in India

Resident and ordinarily resident

If a resident individual satisfies the following two additional conditions, he will be treated as resident & ordinarily
resident in India

(a) He has been resident in India [as per sec. 6(1)] in at least 2 out of 10 previous years immediately preceding the
relevant previous year; and

( b) He has resided in India for a period of 730 days or more during 7 previous years immediately preceding the
relevant previous year.
Tax point: To be a Resident & Ordinarily resident in India, one has to satisfy at least one condition of sec. 6(1) &
both the additional conditions of sec. 6(6).

Resident but not ordinarily resident

An individual is said to be Resident and Not Ordinary Resident (RNOR) in India in any previous year if
he satisfies one of the following two conditions:
(a) He is a non resident in India in 9 out of the 10 previous years immediately preceding that year;
and
(b) He is in India for a total period of 729 days or less during the 7 previous years immediately
preceding relevant previous year.
ILLUSTRATION :-

Mr. X, aged 19 years, left India for first time on May 31, 2018.

Determine his residential status for the previous year 2018-19 if:

i) He left India for employment purpose

ii) He left India on world tour.

Solution :-

During the previous year 2018-19, Mr. X was in India for 61 days as shown below –

P.Y Ap Ma Jun Jul Au Se Oc No De Ja Fe Ma Tota

r y e y g p t v c n b r l
2018 30 31 - - - - - - - - - - 61
-19

During the previous year 2018-19, X stayed in India for 61 days.

Further, he was in India for more than 365 days during 4 years immediately preceding the relevant previous year
(as he left India for first time).

(i) Since he left India for employment purpose, condition of sec. 6(1)(c) shall not be applicable on such assessee.
He will be treated as resident in India, if and only if, he resided in India for at least 182 days during the previous
year. Hence, Mr. X is a non-resident in India for the previous year 2018-19.

(ii) Since he left India on world tour, which is not an exception of sec. 6(1), satisfaction of any one condition of
sec. 6(1) makes him resident in India for the previous year 2018-19. As he satisfies 2nd condition of sec. 6(1)
[shown above], he is resident in India. Further, he also satisfies dual conditions specified u/s 6(6) (since he left
India for first time). Therefore, he is an ordinarily resident for the previous year 2018-19.

2.4. HINDU UNDIVIDED FAMILY (HUF) [SEC. 6(2)]

An HUF can be either a resident or non-resident in India.

Again, a resident HUF can further be classified as ‘Ordinarily resident’ and ‘Not ordinarily resident’.

Resident HUF: When the control & management1 of affairs of HUF is wholly or partly situated in India during the
relevant previous year, then it is treated as resident in India.
Control & management means :-

● controlling & directive power;

● actual control & management (mere right to control & manage is not enough);

● central control & management and not the carrying out of day to day affairs. The place of central control &
management is situated where the head, the seat & the directing power is situated.

Non-resident HUF: An HUF is non-resident in India if the control & management1 of its affairs is wholly situated
outside India.

Ordinarily resident in India: If the ‘karta’or manager of a resident HUF satisfies both additional conditions given
u/s 6(6), HUF is said to be an ordinarily resident.

If the ‘karta’ or manager of a resident HUF do not satisfies both additional conditions given u/s 6(6), HUF is said to
be a not-ordinarily resident.

Tax point: Residential status of the karta for the previous year is not important but his status for preceding 10 years
is important.

2.5 COMPANY [SEC. 6(3)]

Resident Company: An Indian company is always a resident in India. A non-Indian company is said to be a
resident in India, if its place of effective management, in that year, is in India.

“Place of effective management” means a place where key management and commercial decisions that are
necessary for the conduct of the business of an entity as a whole, are in substance made.’

Non-Resident Company: If place of effective management, in that year, is not in India, the said company is non
resident in India for the relevant previous year.

Tax point: In case of company, there is no sub-division like ‘Ordinarily resident’ or ‘Not ordinarily resident’.

2.6 FIRM OR AN ASSOCIATION OF PERSONS (AOP) OR BODY OF

INDIVIDUALS (BOI) [SEC. 6(4)]
Resident: A firm or an AOP or BOI is said to be a resident in India, if control & management of its affairs are
wholly or partly situated in India during the relevant previous year. Control & management is vested in hands of
partners in case of firm and principal officer in case of an AOP/BOI.

Non-resident: If control & management of its affairs are situated wholly outside India, then it is a non-resident in
India.

Tax point: In case of firm or BOI or AOP, there is no subdivision like ‘Ordinarily resident’ or ‘Not ordinarily
resident’.

2.7 ANY OTHER PERSON

Resident: Any other assessee will be treated as resident in India if the control & management of its affairs is
situated wholly or partly in India.

Non-Resident: If control & management of affairs of the assessee, are situated wholly outside India, it is a non-
resident in India.

2.8 INCIDENCE OF TAX [SEC. 5]

The following chart highlights the provisions of tax incidence in brief:
 Nature of Income Tax incidence in the case of
Resident & ordinarily resident Resident but not Non resident
ordinarily
resident
Income accrued or deemed to be accrued and Taxable Taxable Taxable
received or deemed to be received in India

Income accrued outside India but received or Taxable Taxable Taxable

deemed to be received in India.

Income accrued or deemed to be accrued in Taxable Taxable Taxable

India but received outside India

Income accrued and received outside India Taxable Taxable Not taxable
from a business controlled in or profession
set-up in India.

Income accrued and received outside India Taxable Not taxable Not taxable
from a business controlled or profession set-
up outside India.

Income accrued and received outside India in Taxable Not taxable Not taxable
the previous year (it makes no difference if
the same is later remitted to India).

Income accrued and received outside India in Not taxable Not taxable Not taxable
any year preceding the previous year and
later on remitted to India in current financial
year.
Note: In case of resident assessee like company, firm etc. (Other than Individual and HUF) in which there is no
classification as ‘Resident but not ordinarily resident’, income accrued and received outside India from a business
controlled or profession setup outside India shall be taxable.
3.INCOME, WHICH DO NOT FORM PART OF TOTAL
INCOME
Sec. 10 enlists the various income which are exempt from tax i.e. does not form part of total income of the
assessee. These are –

1.Agricultural Income [Sec. 10(1)]

2.Member’s Share in Income of HUF [Sec. 10(2)]

Any sum received by an individual as a member of a Hindu undivided family –

● Where such sum has been received out of the income of the family; or

● Where such sum has been received out of the income of an impartible estate belonging to the family.

3.Share of Profit from a Firm [Sec. 10(2A)]

Share in the total income of the firm is exempt in the hands of partner.

4.Interest Income of Non-resident [Sec. 10(4)/(4B)]

● Interest on specified securities or bonds, including premium on redemption of such bonds is exempted in the
hands of a non-resident [Sec. 10(4)(i)]

● Interest on Non-Resident (External) Account in any bank in India to a person who is a resident outside India as
per as defined in sec. 2(w) of the Foreign Exchange Management Act, 1999 or is a person who has been permitted
by the Reserve Bank of India to maintain the aforesaid Account

● Interest on notified savings certificates issued before 1-6-2002 by the Central Government to a non-resident,
being a citizen of India or a person of Indian origin [Sec. 10(4B)]

5.Leave Travel Concession [Sec. 10(5)]

Refer chapter Salaries.

6.Remuneration to Person who is not a Citizen of India in certain cases [Sec. 10(6)]

Following remuneration to an individual who is not a citizen of India shall be exempt

● Remuneration received by him as an official of an embassy, high commission, legation, commission, consulate,
or the trade representation of a foreign state or as a staff of any of these officials provided corresponding Indian
officials in that foreign country enjoy similar exemptions in their country - Sec. 10(6)(ii).

● Remuneration received as an employee of a foreign enterprise for services rendered by him during his stay in
India provided - a. the foreign enterprise is not engaged in any business or profession in India; b. his stay in India
does not exceed 90 days in aggregate; and c. such remuneration is not liable to be deducted from the income of the
employer under this Act - Sec. 10(6)(vi)

● Remuneration for services rendered in connection with his employment on a foreign ship provided his total stay
in India does not exceed 90 days in the previous year - Sec. 10(6)(viii)

● Remuneration received as an employee of the Government of a foreign State during his stay in India in
connection with his training in any undertaking owned by Government, Government company, subsidiary of a
Government company, corporation established by any Central, State or Provincial Act and any society wholly
financed by the Central or State Government – Sec. 10(6)(xi)

7.Tax paid by Government on Royalty or Fees for Technical Service [Sec. 10(6A)]

8.Tax paid by Government on Income of a Non-resident or a Foreign Company [Sec. 10(6B)]

9.Tax paid on Income from Leasing of Aircraft [Sec. 10(6BB)]

Tax paid by an Indian company on income arising from leasing of aircraft, etc. to the Government of a foreign state
or foreign enterprise under an approved agreement entered into with such Indian company engaged in the business
of operation of aircraft, provided such agreement was entered into between 1-4-1997 and 31-3-1999 or after 31-3-
2007.

Tax point: Only tax paid on such income is exempt, however such income is taxable.

10.Fees for Technical Services in Project connected with Security of India [Sec. 10(6C)]

Any income arising to notified foreign company by way of royalty or fees for technical services received in
pursuance of an agreement entered into with Central Government for providing services in or outside India in
projects connected with security of India.

11.Income from service provided to National Technical Research Organisation [Sec. 10(6D)]

Any income arising to a non-resident or to a foreign company, by way of royalty from, or fees for technical
services rendered in or outside India to, the National Technical Research Organisation
12.Allowance or Perquisite paid Outside India [Sec. 10(7)]

Any allowance or perquisite paid outside India by the Government to a citizen of India for rendering services
outside India.

13.Remuneration received for Co-operative Technical Assistance Programmes with an Agreement entered into by
the Central Government in certain cases [Sec. 10(8)]

14.Remuneration received by Non-resident Consultant or Employee or Family Member of such Consultant [Sec.
10(8A), (8B) & (9)]

15.Death-cum-retirement-gratuity [Sec. 10(10)]

Refer chapter Salaries.

16.Commutation of Pension [Sec. 10(10A)]

Refer chapter Salaries.

17.Leave Encashment [Sec. 10(10AA)]

Refer chapter Salaries.

18.Workmen’s Retrenchment Compensation [Sec. 10(10B)]

Refer chapter Salaries.

19.Compensation under Bhopal Gas Leak Disaster Act, 1985 [Sec. 10(10BB)]

20.Compensation for any Disaster [Sec. 10(10BC)]

Any amount received or receivable from the Central Government or a State Government or a local authority by an
individual or his legal heir by way of compensation on account of any disaster, except the amount received or
receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of
any loss or damage caused by such disaster.

21.Payment under Voluntary Retirement Scheme [Sec. 10(10C)]

Refer chapter Salaries.

22.Tax paid by Employer on behalf of Employee on Non-monetary Perquisites u/s 17(2) [Sec. 10(10CC)]

Refer chapter Salaries.

23.Sum received under a Life Insurance Policy [Sec. 10(10D)]

Any sum received under a life insurance policy including bonus on such policy is wholly exempt from tax.
However, exemption is not available on

 . any sum received u/s 80DD(3) or u/s 80DDA(3); or

 any sum received under a Keyman insurance policy; or
 any sum received under an insurance policy issued on or after 1-4-2012 in respect of which the premium
payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured.

24.Payment from Statutory or Public Provident Fund [Sec. 10(11)]

Refer chapter Salaries.

25.Payment from Sukanya Samriddhi Account [Sec. 10(11A)]

any payment from an account, opened in accordance with the Sukanya Samriddhi Account Rules, 2014 made under
the Government Savings Bank Act, 1873.

26.Payment from Recognised Provident Fund [Sec. 10(12)]

Refer chapter Salaries.

27.Payment from National Pension Trust [Sec. 10(12A) & 10(12B)]

Any payment from the National Pension System Trust to an assessee on closure of his account or on his opting out
of the pension scheme referred to in sec. 80CCD, to the extent it does not exceed 40% of the total amount payable
to him at the time of such closure or his opting out of the scheme [Sec. 10(12A)] Any payment from the National
Pension System Trust to an employee under the pension scheme referred to in sec. 80CCD, on partial withdrawal
made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory
and Development Authority Act, 2013, to the extent it does not exceed 25% of the amount of contributions made
by him [Sec. 10(12B)]

28.Payment from Approved Superannuation Fund [Sec. 10(13)]

Any payment from an approved superannuation fund made

● on the death of a beneficiary; or

● to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his
becoming incapacitated prior to such retirement; or

● by way of refund of contributions on the death of a beneficiary; or

● by way of refund of contributions to an employee on his leaving the service (otherwise than by retirement at or
after a specified age or on his becoming incapacitated prior to such retirement) to the extent to which such payment
does not exceed the contributions made prior to 1-4-1962 and any interest thereon.

● by way of transfer to the account of the employee under a pension scheme referred to in sec. 80CCD and notified
by the Central Government

29.House Rent Allowance [Sec. 10(13A)]

Refer chapter Salaries.

30.Notified Special Allowances [Sec. 10(14)]

Refer chapter Salaries.

31.Interest on Securities [Sec. 10(15)]

 Interest, premium on redemption or other payment on notified securities, bonds or certificates

 Interest in the hands of an individual and Hindu undivided family on Specified Capital Investment
Bonds or Specified Relief Bonds
 Interest on specified bonds to non resident or his nominees if such bonds are purchased by a non-
resident Indian in foreign exchange; and
 The interest and principal received in respect of such bonds, whether on their maturity or
otherwise, is not allowable to be taken out of India. Interest on securities held by the Issue
Department of the Central Bank of Ceylon;
 Interest payable to any bank incorporated in a country outside India and authorised to perform
central banking functions in that country on any deposits made by it, with the approval of the RBI,
with any scheduled bank;
 Interest payable on a loan advanced by the Nordic Investment Bank for an approved project;
 Interest payable to the European Investment Bank for financial co-operation agreement;
  Interest payable by a Government, local authority, certain industrial undertakings or financial
institution on money borrowed before 1/6/2001
 Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims or deposits for the
benefit of the victims of the Bhopal gas leak disaster.
 Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold Monetisation Scheme, 2015
 Interest on specified bonds issued by a local authority or by a State Pooled Finance Entity.
 Interest received by a non-resident or a person who is not ordinarily resident, in India on a deposit
made on or after 1-4-2005 in an offshore banking unit referred in the Special Economic Zones Act,
2005

32.Income from Leasing of Aircraft [Sec. 10(15A)]

Any payment made, by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or
an aircraft engine (other than a payment for providing spares, facilities or services in connection with the operation
of leased aircraft) on lease from the foreign Government or a foreign enterprise under an approved agreement. The
agreement must not be entered into

■ between 1-4-1997 to 31-3-1999; and

■ on or after 1-4-2007.

Note: "Foreign enterprise" means a person who is a non-resident.

Tax point: Tax paid on an agreement made between 1-4-1997 and 31-3-1999 is eligible for exemption u/s 10(6BB).

33.Scholarship [Sec. 10(16)]

Scholarships granted to meet the cost of education.

Notes: a. Cost of education also includes incidental expenses incurred for education.

b. The exemption is irrespective of actual expenditure.

34. Daily Allowance, etc. to MP and MLA [Sec. 10(17)]

Any income by way of -

a. Daily allowance received by any person by reason of his membership of Parliament or of any State Legislature or
of any Committee thereof;

b. Any allowance received by any person by reason of his membership of Parliament; c. Constituency Allowance
received by any person by reason of his membership of State legislature;

35.Awards and Rewards [Sec. 10(17A)]

Any payment made, whether in cash or in kind

a. in pursuance of any award instituted in the public interest by the Central Government or any State Government
or by any other approved body; or

b. as a reward by the Central Government or any State Government for approved purposes.

36. Pension to receiver of Gallantry Awards [Sec. 10(18)]

Any income by way of

a. pension received by an individual who has been in the service of the Central or State Government and has been
awarded "Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra" or such other notified gallantry award ; or
b. family pension received by any member of the family of such individual.

37.Family Pension to Widow or Children of Armed Force [Sec. 10(19)]

Family pension received by the widow or children or nominated heirs, of a member of the armed forces (including
para-military forces) of the Union, where the death of such member has occurred in the course of operational
duties, in such circumstances and subject to such conditions, as may be prescribed.

38.Palace of Ex-ruler [Sec. 10(19A)]

The annual value in respect of any one palace, which is in the occupation of an ex-ruler

39.Income of Local Authority [Sec. 10(20)]

Following income of a local authority is exempt:-

a. Income chargeable under the head Income from House Property, Capital Gains or Income from other Sources

b. Income from the supply of commodities (other than water or electricity) or services, within its own jurisdiction

c. Income from the supply of water services or electricity within or outside its jurisdiction.

40.Income of Scientific Research Association [Sec. 10(21)]

Any income of a scientific research association [being approved for the purpose of Sec. 35(1)(ii)] or research
association which has its object, undertaking research in social science or statistical research [being approved and
notified for the purpose of Sec. 35(1)(iii)], is exempt provided such association—

a. applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is
established; and

b. invest or deposit its funds in specified investments.

41.Income of News Agency [Sec. 10(22B)]

Any income of specified news agency (Press Trust of India Ltd., New Delhi) set up in India solely for collection
and distribution of news shall be exempt provided:

a. The news agency applies its income or accumulates it for application solely for collection and distribution of
news; and

b. It does not distribute its income in any manner to its members.

42.Income of Professional Institutions [Sec. 10(23A)]

Any income (other than income chargeable under the head “Income from house property” or any income received
for rendering any specific services or income by way of interest or dividends derived from its investments) of
professional association shall be exempt provided –

a. Such association or institution is established in India having as its object the control, supervision, regulation or
encouragement of the profession of law, medicine, accountancy, engineering or architecture or other specified
profession;

b. Such association or institution applies its income, or accumulates it for application, solely to the objects for
which it is established; and

c. The association or institution is approved by the Central Government.

43.Income of Regimental Fund [Sec. 10(23AA)]

Any income received by any person on behalf of any Regimental Fund or Non-public Fund established by the
armed forces of the Union for the welfare of the past and present members of such forces or their dependants is
exempt.

44.Income of specified Employee Welfare Fund [Sec. 10(23AAA)]

45. Income of specified Pension Fund [Sec. 10(23AAB)]

46. Income of trust for Development of Khadi and Village Industries [Sec. 10(23B)]

47. Income of Khadi and Village Industries Boards [Sec. 10(23BB)]

48. Income of body formed for Administration of Public Religious or Charitable Trusts [Sec. 10(23BBA)]

Any income of any body established under any Central, State or Provincial Act which provides for the
administration of any public, religious or charitable trusts or endowments including Maths, Temples, Gurudwaras,
Wakfs, Churches or other places of public religious worship or societies for religious or charitable purposes.

49.Income of European Economic Community [Sec. 10(23BBB)]

50.Income of SAARC Fund [Sec. 10(23BBC)]

51.Income of ASOSAI-SECRETARIAT [Sec. 10(23BBD)]

52.Income of Insurance Regulatory Authority [Sec. 10(23BBE)]

53.Income of the Central Electricity Regulatory Commission [Sec. 10(23BBG)]

54.Income of the Prasar Bharati (Broadcasting Corporation of India) [Sec. 10(23BBH)]

55. Income of Certain Funds [Sec. 10(23C)]

Any income received by any person on behalf of

 The Prime Minister's National Relief Fund; [sec. 10(23C)(i)]

 The Prime Minister's Fund (Promotion of Folk Art); [sec. 10(23C)(ii)]
 The Prime Minister's Aid to Students Fund; [sec. 10(23C)(iii)]
 The National Foundation for Communal Harmony; [sec. 10(23C)(iiia)]
 The Swachh Bharat Kosh; [sec. 10(23C)(iiiaa)]
 The Clean Ganga Fund; [sec. 10(23C)(iiiaaa)]
 The Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund; [sec. 10(23C)(iiiaaaa)]
 Any other charitable fund or institution notified by the prescribed authority (subject to condition) [sec.
10(23C)(iv)]
 Any trust or institution wholly for public religious purposes or wholly for public religious and charitable
purposes notified by the prescribed authority (subject to conditions) [sec. 10(23C)(v)]
 Any university or other education institutions, (wholly or substantially financed by Governement or
having annual receipt upto ` 1 crore) existing solely for education purposes and not for profit. [sec.10(23C)
(iiia), (iiiad) (vi)]
 Any hospital or other institution (wholly or substantially financed by Governement or having annual
receipt upto ` 1 crore) for treatment of person suffering from illness or mental defectiveness or during
convalescence or requiring medical attention or rehabilitation, existing solely for philanthropic purposes
and not for profit. [sec.10(23C)(iiiac), (iiiae) and (via)]

Notes:

■ Institution covered u/s 23C(iv), (v), (vi) and (via) shall get their accounts audited and furnish the audit report
with return of income.
■ Any amount credited or paid out of income of any institution covered u/s 23C(iv), (v), (vi) and (via), to any other
trust or institution registered u/s 12AA, being voluntary contribution made with a specific direction that they shall
form part of the corpus of such trust or institution, shall not be treated as application of income to the objects for
which such institution is established

■ Anonymous donation referred u/s 115BBC is not exempt.

Any university or other educational institution, hospital or other institution shall be considered as being
substantially financed by the Government for any previous year, if the Government grant to such university or other
educational institution, hospital or other institution exceeds such percentage of the total receipts including any
voluntary contributions, as may be prescribed, of such university or other educational institution, hospital or other
institution, as the case may be, during the relevant previous year.

■ Any concern which have been approved or notified for exemption u/s 10(23C) shall not be entitled to claim any
other exemption (except exemption for agricultural income) u/s 10.

■ Where any income is required to be applied or accumulated, then, for such purpose the income shall be
determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset,
acquisition of which has been claimed as an application of income under this clause in the same or any other
previous year.

■ While computing business income, the provision of sec. 40(a)(ia) and 40A(3) / (3A) shall be applicable.

56.Income of Mutual Fund [Sec. 10(23D)]

Any income of-

a. A Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulation made
thereunder;

b. A Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank
of India and subject to certain notified conditions.

57.Income of Securitisation Trust [Sec. 10(23DA)]

Any income of a securitisation trust from the activity of securitisation.

● "Securitisation" shall have the same meaning as assigned to it,

a. in regulation 2(1)(r) of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt
Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 and the
Securities Contracts (Regulation) Act, 1956; or

b. in clause (z) of sub-section (1) of section 2 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002; or

c. under the guidelines on securitisation of standard assets issued by the Reserve Bank of India;

● "Securitisation trust" shall have the meaning assigned to it in the Explanation below sec. 115TCA

58.Income of Investor Protection Fund [Sec. 10(23EA)]

Income (by way of contribution received from recognized Stock exchange and members thereof) of Investor
Protection Fund set up by the recognised Stock Exchanges in India as the Central Government may by notification
in Official Gazette specify shall be exempt.

59.Income of Credit Guarantee Fund Trust for Small Industries [Sec. 10(23EB)]

60.Income of Investor Protection Fund set up by Commodity Exchange [Sec. 10(23EC)]

61.Income of Investor Protection Fund of Depositories [Sec. 10(23ED)]

Any income, by way of contributions received from a depository, of notified Investor Protection Fund set up in
accordance with the regulations by a depository.

However, where any amount standing to the credit of the Fund and not charged to income-tax during any previous
year is shared, either wholly or in part with a depository, the whole of the amount so shared shall be deemed to be
the income of the previous year in which such amount is so shared and shall, accordingly, be chargeable to income-
tax.

62.Income of Core Settlement Guarantee Fund [Sec. 10(23EE)]

Any specified income of such Core Settlement Guarantee Fund, set up by a recognised clearing corporation in
accordance with the regulations notified by the Central Government. However where any amount standing to the
credit of the Fund and not charged to income-tax during any previous year is shared, either wholly or in part with
the specified person, the whole of the amount so shared shall be deemed to be the income of the previous year in
which such amount is so shared.

63.Income of Ventures Capital Fund or Venture Capital Company [Sec 10(23FB)]

Any income of a venture capital company or venture capital fund from investment in a venture capital undertaking.
However, w.e.f. A.Y. 2016-17, the exemption is not applicable to any income of a venture capital company or
venture capital fund, being an investment fund specified in clause (a) of the Explanation 1 to sec. 115UB

64.Non-business income of Investment Fund [Sec. 10(23FBA)]

Any income of an investment fund other than the income chargeable under the head “Profits and gains of business
or profession”.

65.Income of Unit holder [Sec. 10(23FBB)]

Any income, referred to in sec. 115UB, to a unit holder of an investment fund, being that proportion of income
which is of the same nature as income chargeable under the head “Profits and gains of business or profession”.

♦ For the purposes of sec. 10(23FBA) and (23FBB), “investment fund” shall have the meaning assigned to it in
clause (a) of the Explanation 1 to sec. 115UB.

66.Income of Business Trust [Sec 10(23FC)]

Any income of a business trust by way of

a) interest received or receivable from a special purpose vehicle; or

b) dividend referred to in sec. 115-O(7)

■ “Special purpose vehicle” means an Indian company in which the business trust holds controlling interest
and any specific percentage of shareholding or interest, as may be required by the regulations under which such
trust is granted registration

67.Income of Real Estate Investment Trust [Sec. 10(23FCA)]

Any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any
real estate asset owned directly by such business trust.

68.Distributed Income to unit holder of a Business Trust [Sec 10(23FD)]

Any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being
that proportion of the income which is of the same nature as the income referred to in 10(23FC)(a) or 10(23FCA)
69.Income of Trade Union [Sec. 10(24)]

Any income chargeable under the heads “Income from house property” and “ Income from other sources” of

a. a registered union within the meaning of the Indian Trade Unions Act, 1926, formed primarily for the purpose of
regulating the relations between workmen and employers or between workmen and workmen.

b. an association of registered unions

70.Income of specified Provident Funds, etc. (e.g. RPF, Superannuation fund, Approved gratuity fund) [Sec.
10(25)]

71.Income of Employees' State Insurance Fund [Sec. 10(25A)]

72.Income of Scheduled Tribe [Sec. 10(26)]

Following income of member of a Scheduled Tribe is exempt –

a. from any source in specified areas or States; or

b. by way of dividend or interest on any securities.

– provided he resides in specified area or States.

73.Income of Sikkimese [Sec. 10(26AAA)]

Following income of an individual, being a Sikkimese, is exempt:

i. from any source in the State of Sikkim; or

ii. by way of dividend or interest on securities:

Note: The exemption is not available to a Sikkimese woman who, on or after 1/4/2008, marries an individual
who is not a Sikkimese.

74.Income of an Agricultural produce Market Committee [Sec. 10(26AAB)]

Income of an agricultural produce market committee or board constituted under any law for the time being in force
for the purpose of regulating the marketing of agricultural produce is exempt.

75.Income of Corporation for promoting the Interests of the Members of the Scheduled Castes or the Scheduled
Tribe or Backward Classes [Sec. 10(26B)]

76.Income of Corporation for promoting Interest of Members of a Minority Community [Sec. 10(26BB)]

77.Income of Corporation for the Welfare and Economic Upliftment of Ex-servicemen [Sec. 10(26BBB)]

78.Income of a Co-operative Society for promoting the Interests of the Members of Scheduled Castes or Scheduled
Tribes [Sec. 10(27)]

79.Income of specified Boards [Sec. 10(29A)]

Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board; The Tobacco Board; The
Marine Products Export Development Authority; The Coir Board; The Agricultural and Processed Food Products
Export Development Authority and The Spices Board.

80.Subsidy received from Tea Board [Sec. 10(30)]

Any subsidy received from or through the Tea Board under any scheme for replantation or replacement of tea
bushes or for rejuvenation or consolidation of areas used for cultivation of tea as the Central Government may
specify, is exempt
81.Subsidy received from other Board [Sec. 10(31)]

Any subsidy received from or through the concerned Board (like Coffee Boards, Rubber Board, etc.) under any
such scheme for replantation or replacement of rubber plants, coffee plants, cardamom plants or plants for the
growing of such other commodity or for rejuvenation or consolidation of areas used for cultivation of rubber,
coffee, cardamom or such other specified commodity is exempt.

90.Income of Minor [Sec. 10(32)]

Income up to 1,500 is exempt in respect of each minor child whose income is clubbed u/s 64(1A).

91.Income on Transfer of Units of US 64 [Sec. 10(33)]

Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 where such transfer
takes place on or after the 1st day of April, 2002.

92.Dividend Income [Sec. 10(34)]

Any income by way of dividend declared, paid or distributed by a domestic company. The exemption is not
available on dividend chargeable to tax in accordance with the provisions of sec. 115BBDA.

93.Income of Shareholder on Buy-back of Shares [Sec. 10(34A)]

Any income arising to an assessee, being a shareholder, on account of buy back of shares (not being listed on a
recognised stock exchange) by the company, which pay additional income-tax u/s 115QA.

94.Income from Units [Sec. 10(35)]

Any income (other than income on transfer of unit) on the following units

a. income received in respect of the units of a Mutual Fund specified u/s 10(23D);

b. income received in respect of units from the Administrator of the specified undertaking as defined in the Unit
Trust of India (Transfer of Undertaking and Repeal) Act, 2002

c. income received in respect of units from the company specified in the Unit Trust of India (Transfer of
Undertaking and Repeal) Act, 2002

95.Capital Gain on compulsory Acquisition of Urban Land [Sec. 10(37)]

Refer Chapter Capital Gains

96.Capital Gain on transfer under Land Pooling Scheme for Andhra Pradesh [Sec. 10(37A)]

Refer Chapter Capital Gains

4. HEADS OF INCOME
4.1. INCOME FROM SALARY
BASIC ELEMENTS OF SALARY
● Payer and payee must have employer and employee (or Master & Servant) relationship; and
● Payment must have been made by the employer in such capacity.

Employer-employee relationship
A payment can be construed as salary only if the payer is the employer and payee is the employee of the payer.

● Criteria for employer-employee relationship: The key criteria to hold this relationship is that, employee is
always bound to work as per direction and supervision of the employer.

● Payment in employer’s capacity: To treat any payment as salary it is necessary that payer, being the employer,
must have made the payment in such (employer’s) capacity.

● Contract of service vs contract for service: In “contract of service”, the employer can direct and control the
duties and the manner of performance of employee hence employer-employee relationship exists in such contract.
However, in case of “contract for service” the contractee can simply decide and quote the object or target to be
achieved but cannot decide or direct the manner of performance.

● Agent and Principal: a person is acting as an agent for his principal, any commission or remuneration earned
by the agent is not taxable under the head “Salaries”. This is because, an agent is not the employee of his principal

● Salary received by a partner from its firm shall not be taxable as salary, because there is no employer-
employee relationship between the firm and the partner. Such salary shall be taxable under the head “Profits &
gains of business or profession”.

● Salary received by proprietor from his proprietorship firm is not an income. As proprietor and
proprietorship firm are the same person and no one can earn from himself.

● Remuneration to director from his company can be treated as salary only if the director is employee of the
company, otherwise the same shall be taxable under the head “Income from other sources”.

Note: Directors’ sitting fee is taxable under the head “Income from other sources”.

● Pension received by the widow or legal heir of deceased employee is not taxable as salary as no employer-
employee relationship exists between the payer and the payee. However such amount shall be taxable under the
head “Income from other sources”.

● Remuneration received by Judges is taxable under the head “Salaries” even though they are
not having any employer. Concluding the above discussions, a payment received for services rendered, from a
person other than employer, is not taxable under the head “Salaries” but may be taxed under the head “Profits &
gains of business or profession” or “Income from other sources”.

ILLUSTRATION 1:

State whether the following receipts should be treated as salary or not?

● A teacher receives emoluments in kind from school in which he

teaches.

Yes, it is immaterial whether salary has been received in cash or in kind.

● A teacher of a college receives fees from a University for

checking answer sheets.
 No, as employer – employee relationship does not exist between payer and payee. (College-teacher is not the
employee of the University). Such receipt shall be taxable under the head
‘Income from other sources’.

● A payment made to the Member of the Parliament or

the State legislature.

No, as employer-employee relationship does not exist. A member of the Parliament or the State legislature is not
treated as employee of the Government. Payment received by them shall be taxable under the head “Income from
other sources”.

DEFINITION OF SALARY [SEC. 17(1)]

As per sec. 17(1) of the Income-tax Act, 1961, salary includes the following:

a) Wages;

b) Any annuity or pension;

c) Any gratuity;

d) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages;

e) Any advance of salary;

f) Any payment received in respect of any period of leave not availed of by the assessee;

g) The portion of the annual accretion in any previous year to the balance at the credit of an employee, participating
in recognised provident fund, to the extent it is taxable;

h) Transferred balance in a Recognised Provident Fund to the extent it is taxable.

i) Contribution made by the employer in the previous year, to the account of an employee under a pension scheme
referred to in sec. 80CCD [National Pension Scheme and Atal Pension Yojana].

GENERAL NOTES
● Salary & Wages are identical in the Income-tax Act

● Voluntary Payments: The Act does not make any difference between voluntary and contractual payment. Both
are taxable as salary.

● Remuneration for Extra Work: Where an employee gets extra payment from his employer (in such capacity)
for work performed outside the duties of his office and thus, such payment shall be taxable as salary.

● Salary from more than one source: If an individual receives salary from more than one employer during the
same previous year, salary from each employer shall be accumulated and taxable under the head “Salaries”.

● Salary from former, present or prospective employer is chargeable to tax under the head “Salaries”. E.g.
Pension from a former employer and advance salary from prospective employer shall be taxable under the head
“Salaries”.
 ● Foregoing of salary: Once salary has been earned by an employee, its subsequent waiver does not make it
exempt from tax liability. Such waiver shall be treated as application of the income.

Note: However, where an employee opts to surrender his salary to the Central Government u/s 2 of Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered shall not be taxable.

BASIS OF CHARGE [SEC. 15]

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis,
whichever is earlier.

Hence, taxable salary includes:

a) Advance salary (on ‘receipt’ basis): Salary paid in advance is taxable

under the head ‘Salaries’ in the year of receipt.

Note: Such advance salary shall not be included again in the total income when the salary becomes due.

b) Outstanding salary (on ‘due’ basis): Salary falling due is taxable under the
head ‘Salaries’ in the year in which it falls due.

Note: Such due salary shall not be included again in the total income when it is received. c) Arrear salary: Any
increment in salary with retrospective effect which have not been taxed in the past, such arrears will be taxed in the
year in which it is allowed.

Arrear salary are taxable on receipt basis

PROVISION ILLUSTRATED:-

Mr. X joined A Ltd. for a salary of ` 5,000 p.m. on 1/4/2016. In the year 2017-18 his increment decision was
pending. On 1/4/2018, his increment was finalized as for 2017-18: ` 1,000 p.m. and for 2018-19 ` 1,500 p.m. Such
arrear salary received on 5/4/2018. Find Gross taxable salary. Further, salary of April 2019 has also been received
in advance on 15/03/2019.

Solution:-

Gross taxable salary for the previous year 2018-19 shall be calculated as under:

Particulars Workings Amount

Salary for 2018-19 (5,000 + 1,000 + 1,500) × 12 90,000

Arrear salary for 2017-18 (1,000) × 12 12,000

Advance salary for April 2019 7,500
Gross total salary 1,09,500

Tax point : Method of accounting followed by the employee is irrelevant

COMPUTATION OF SALARY, AT A GLANCE

Computation of income under the head “Salaries” of ….. for the A.Y. 2019-2020
 Particulars Details Amount
Basic Salary *****
Fees *****
Commission *****
Bonus *****
Gratuity *****
Leave Encashment *****
Pension *****
Retrenchment Compensation *****
Compensation received under Voluntary Retirement Scheme *****
Allowances:
Dearness Allowance (DA) /Dearness Pay (DP) *****
House Rent Allowance *****
Children Education Allowance *****
Children Hostel Allowance *****
Entertainment Allowance *****
Medical Allowance *****
Conveyance Allowance *****
City Compensatory Allowance *****
Uniform Allowance *****
Professional Development Allowance *****
Transport Allowance *****
Other Allowances ***** *****
Perquisites u/s 17(2)
Any Obligation of Employee paid by Employer *****
Accommodation *****
Shares and securities issued under ESOP *****
Employer’s Contribution to Superannuation Fund *****
Gas, Electricity & Water *****
Medical Facility *****
Other fringe benefits ***** *****
Leave Travel Concession *****
Contribution of Employer to Provident Fund *****
Interest on Recognised Provident Fund *****
Any other item *****
Gross Salary *****
Less: Deduction u/s 16
(ia) Standard Deduction *****
(ii) Entertainment Allowance *****
(iii) Tax on employment/Professional tax ***** *****
Taxable Salary *****

■ Basic Salary: It is the sum paid by employer to employee as salary and shall be fully taxable.

■ Pay-Scale (Grade system): It is a system of payment where increment scale is pre-known to employee.

E.g. Basic salary is given as 5,000 – 1,000 – 8,000 – 2,000 – 12,000. The above data indicates the increment
schedule. As per this schedule initial payment is ` 5,000 p.m. which will increased by ` 1,000 every year until
salary reaches to ` 8,000 p.m. Once salary reaches to ` 8,000 then increment will be ` 2,000 every year till salary
reaches the scale of ` 12,000. Accordingly, basic salary is calculated.
■ Dearness Allowance (DA) or Dearness Pay (DP): It is an extra amount given to an employee to meet the
burden of inflation or increased cost of living. This is fully taxable.

Note: Sometimes, , it is given that DA/DP is not forming a part of retirement benefit (Leave encashment, Pension,
Provident Fund, etc.). In such case, DA/DP itself shall be fully taxable. However, for calculating taxable Leave
encashment, Pension, HRA, etc., DA/DP will be included in ‘salary’ only if it
forms a part of retirement benefit.

■ Fees: An employee may be given apart from basic salary, extra remuneration for doing specific job under the
terms of employment. Such extra remuneration is termed as fee and shall be fully taxable.

■ Commission: It may be as a percentage of turnover or as a percentage of profit. In either case, it is taxable.

■ Bonus: Bonus may be contractual or voluntary. In either case, it is fully taxable.

(i) Contractual bonus is taxable as bonus whereas voluntary bonus is taxable as perquisite.

(ii) It is taxable in the year of receipt.

(iii) If arrear bonus is received, assessee can claim relief u/s 89(1).

GRATUITY
Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Sec. 10(10)
deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity
received by an assessee other than employee shall not be eligible for exemption u/s 10(10).

E.g. Gratuity received by an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not
employees of LIC of India.

Case A: Gratuity received during continuation of service

Gratuity received during continuation of service is fully taxable in the hands of all employee (whether Government
or non-Government employee).
Case B: Gratuity received at the time of termination of service by Government employee

Gratuity received at the time of termination of service by Government employee is fully exempt from tax u/s
10(10)(i).

Tax point: Government employee, here, includes employee of the Central or the State Government or local
authority but does not include employee of statutory corporation.

Case C: Gratuity received at the time of termination of service by non–government (including foreign
government) employee, covered by the Payment of Gratuity Act

In such case, minimum of the following shall be exempted from tax u/s 10(10)(ii):

1. Actual Gratuity received;

2. ` 20,00,000; or

3. 15 working days salary for every completed year of service [Arithmetically, 15/26 × Completed year of service ×
Salary p.m.]

Notes:-

a) Completed year of service includes any fraction in excess of 6 months. (e.g. 7 years 9 months will be treated as
8 years; 7 years 5 months will be treated as 7 years and 7 years 6 months will be treated as 7 years).

b) Salary here means Basic + DA, last drawn.

Case D: Gratuity received at the time of termination of service by non-government employee (including
foreign government employee) not covered under the Payment of Gratuity Act

Gratuity received at the time of termination of service by non-government employee being not covered under the
Payment of Gratuity Act shall be exempted from tax u/s 10(10)(iii) to the extent of lower of the following:

1. Actual Gratuity received;

2. ` 10,00,000; and

3. 1/2 × Completed year of service × Average Salary p.m.

Notes:-

a) While calculating completed year of service ignore any fraction of the year. (e.g. 7 years 9 months will be
treated as 7 years only)

b) Average Salary here means, Basic + DA# + Commission (being a fixed percentage on turnover) being last 10
months average salary, immediately preceding the month of retirement. (E.g. If an employee retires on 18/11/2018
then 10 months average salary shall be a period starting from Jan’ 2018 and ending on Oct’ 2018).

# If DA is not forming a part of retirement benefit then the same shall not be included in salary for above purpose.
However, DA itself shall be fully taxable.

Case E: Gratuity received after death of employee

The Act is silent on treatment of gratuity received after death of employee. However, on following grounds, it can
be concluded that gratuity received by a legal heir shall not be taxable in the hands of the recipient

●A lump sum payment made gratuitously to widow or legal heir of

employee, who dies while in service, by way of compensation or otherwise is not
taxable under the head “Salaries”. [Circular No.573, Dated 21.08.1990]

●Unutilised deposit under the capital gains deposit account scheme shall not be taxable
in the hands of legal heir. [Circular No.743 dated 6/5/1996] ● Legal representative is
not liable for payment of tax on income that has not accrued to the
deceased till his death.

● Leave salary paid to the legal heir of deceased employee is not

taxable as salary. [Circulars Letter No. F.35/1/65IT(B), dated 5/11/1965].

Further, leave salary by a legal heir of the Government employee who died in harness is not taxable in the hands of
the recipient [Circulars No.309, dated 3/7/1981].

Tax point: If gratuity becomes due before the death of the assessee (no matter when and by whom received), it shall
be taxable in the hands of employee. Whereas if gratuity becomes due after the death of assessee, it shall not be
taxable (even in the hands of legal heir of the assessee).

LEAVE SALARY / LEAVE ENCASHMENT

As per service contract and discipline, normally, every employee is allowed certain period of leave (with pay)
every year. Such leave may be availed during the year or accumulated by the employee. The accumulated leave
lying to the credit of an employee may be availed subsequently or encashed. When an employee receives an
amount for waiving leave lying to his credit, such amount is known as leave salary encashment.
Case A: Leave salary received during continuation of service

Leave salary during continuation of service is fully taxable in the case of the Government employee as well as
other employees [Sec. 17(1)(va)].

Case B: Leave salary received by Government employee on termination of service

At the time of termination of service, leave salary received by the Central or State Government employee is fully
exempted u/s 10(10AA)(i). Taxpoint: Government employee here does not include employee of local authority or
public sector undertaking or foreign Government employee.

Case C: Leave salary received by non-Government employee on termination of service

At the time of termination of service, leave salary received by a non-Government employee (including employee
of foreign Government, local authority, public sector undertaking) is exempted to the minimum of the following
u/s. 10(10AA)(ii):

a) Actual amount received as leave salary

b) ` 3,00,000/

c) 10 × Average salary p.m.

d) To the maximum of 30 days (normally taken as 1 month) average salary1 for every completed year of service2,
subject to deduction for actual leave availed during the tenure of service.

Academically: [{(1 × completed year of service) – leave actually taken in terms of month} × average salary p.m.]
1. Average salary means Basic + DA# + Commission (as a fixed percentage on turnover) being last 10 months
average salary ending on the date of retirement or superannuation. (e.g. if an employee retires on 18/11/2018 then
10 months average salary shall be a period starting from 19th Jan’ 2018 and ending on 18th Nov’ 2018). # If DA is
not forming a part of retirement benefit then the same shall not be included in salary for the above purpose.
However, DA itself shall be fully taxable.

2. While calculating completed year of service, ignore any fraction of the year. E.g. 10 years 9 months shall be
taken as 10 years.

Notes :-

a) Leave encashment received from more than one employer: Where leave encashment is received from more than
one employer in the same previous year, the aggregate amount exempt from tax shall not exceed the statutory
deduction i.e. ` 3,00,000.

b) Earlier deduction claimed for leave encashment: While claiming the statutory amount (i.e. ` 3,00,000) any
deduction claimed earlier as leave encashment shall be reduced from ` 3,00,000.

Case D: Leave salary paid to the legal heir

Leave salary paid to the legal heir of deceased employee is not taxable. [Circulars Letter No. F.35/1/65-IT(B),
dated 5/11/1965]. Further, leave salary received by a legal heir of the Government employee who died in harness is
not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].
PENSION [SEC. 17(1)(ii)]
Pension means a periodical payment received by an employee after his retirement. On certain occasions, employer
allows to withdraw a lump sum amount as the present value of periodical pension. When pension is received
periodically by employee, it isknown as Uncommuted pension. On the other hand, pension received
in lump sum is known as Commuted pension. Such lump sum amount is determined considering factors like the
age and health of the recipient, rate of interest, etc.

Case A: Uncommuted pension

Uncommuted pension is fully taxable in the hands of all employees whether

Government or Non –Government employee.

Case B: Commuted pension received by a Government employee

Commuted pension received by a Government employee is fully exempt from tax u/s 10(10A)(i).

Note: Government employee here includes employee of the Central or State Government, Local authority as well
as employee of Statutory corporation. Judges of the High Court and the Supreme Court are also entitled to the
exemption [Circular No.623 dated 6/1/1992]

Case C: Commuted pension received by an employee who also received gratuity [Sec. 10(10A)(ii)]

One third of total pension (which assessee is normally entitled for) commuted is exempt. Taxpoint: It is immaterial
whether the employee is covered by the Payment of Gratuity Act or not.

Case D: Commuted pension received by an employee who does not receive gratuity [Sec. 10(10A)(ii)]

One half of total pension (which assessee is normally entitled for) commuted is exempt.

Notes:-
a) Pension received by a widow or legal heir of a deceased employee shall not be taxable as salary but taxable u/s
56 as income from other sources (further refer chapter “Income from other sources”.)

b) Where commuted pension is taxable, relief u/s 89 is available.

c) Pension received from United Nations Organisation is not taxable. Further,pension

received by a widow of the United Nations ex-officials from UN Joint
Staff Pension Fund is also exempt

RETRENCHMENT COMPENSATION
Retrenchment means cancellation of contract of service by employer.

Tax Treatment [Sec. 10(10B)]: Any compensation received by a worker at the time of retrenchment is exempted to
the extent of minimum of the following:

a) Actual amount received;

b) ` 5,00,000; or

c) An amount calculated in accordance with the provisions of sec. 25F(b) of

Industrial Dispute Act, 1947 (Under the said Act a workman is entitled to retrenchment
compensation equivalent to 15 days’ average pay, for every completed year of service or any part thereof in excess
of 6 months).

Notes:-

a) In case, where the compensation is paid under any scheme approved by the Central Government nothing shall
be taxable.

b) Compensation received by a workman at the time of closing down of the undertaking in which he is employed is
treated as compensation received at the time of his retrenchment.

COMPENSATION RECEIVED AT THE TIME OF VOLUNTARY RETIREMENT

[SEC. 10(10C)]
If an employee accepts retirement willingly in lieu of compensation then such retirement is known as Voluntary
Retirement. Voluntary retirement compensation received or receivable by an employee is eligible for exemption
subject to the following conditions :-

Conditions for exemption

1. Compensation is received from specified employer

2. Compensation is received as per Voluntary Retirement Scheme (VRS) framed in accordance with prescribed
guidelines*

Amount of exemption

Exemption shall be minimum of the following:-

a) Actual amount received as per guidelines; or

b) b) ` 5,00,000.

Specified Employer :

Any company; or An authority established under Central, State or Provincial Act; or A local authority; or A
Cooperative society; or A specified University; or An Indian Institute
of Technology (IIT); or Any State Government; or The Central
Government; or Notified Institution of Management (IIM Ahmedabad, IIM Banglore, IIM Calcutta, IIM Lucknow,
and the Indian Institute of Foreign Trade New Delhi); or Notified Institution.

Taxpoint:

Voluntary retirement compensation received from the employer being an

individual,firm, HUF, AOP, etc. is fully taxable in the hands of employee.

Note:

■ Where exemption is allowed to an assessee under this section in any assessment year then no deduction is
allowed in any subsequent assessment years. It means deduction under this section is allowed once in life of an
assessee.

■ Where any relief has been allowed to an assessee u/s 89 in respect of voluntary retirement, no exemption shall be
allowed under this section.

ANNUITY [SEC. 17(1)(ii)]

Annuity means a yearly allowance, income, grant of an annual sum, etc. for life or in perpetuity

SALARY RECEIVED IN LIEU OF NOTICE PERIOD

When an employer retrenches an employee then he has to give a proper notice. If an employer fails to do so then he
will have to pay salary equivalent to notice period, apart from retrenchment compensation. Such amount is known
as salary received in lieu of notice period and it is fully taxable.

PROFITS IN LIEU OF SALARY [SEC. 17(3)]

Following receipts are taxable as profits in lieu of salary:

1. The amount of any compensation due to or received by an assessee from his employer or former employer at or
in connection with the (a) termination of his employment, (b) modification of the terms and conditions of
employment.

2. Any payment due to or received by an assessee from his employer or former employer except the following:

● Gratuity exempted u/s 10(10);

● House rent allowance exempted u/s 10(13A);

● Commuted pension exempted u/s 10(10A);

● Retrenchment compensation exempted u/s 10(10B);

● Payment from an approved Superannuation Fund u/s 10(13);

● Payment from statutory provident fund or public provident fund;

● Payment from recognised provident fund to the extent it is exempt u/s 10(12).

3. Any payment from unrecognised provident fund or such other fund to the extent to which it does not consist of
contributions by the assessee or interest on such contributions.

4. Any sum received by the employee under the Keyman Insurance Policy including the sum allocated by way of
bonus on such policy.

5. Any amount due to or received by the employee (in lump sum or otherwise) prior to employment or after
cessation of employment.

ALLOWANCES

Allowance means fixed quantum of money given regularly in addition to salary to meet particular requirement.
The name of particular allowance may reveal the nature of requirement, e.g. House Rent Allowance, Tiffin
Allowance, Medical Allowance etc.

Allowances at a glance
Tax treatment of various allowances are as follows
Following allowances are fully taxable:

House rent allowance (HRA) [Sec. 10(13A) and rule 2A]

An allowance to meet the expenses in connection with the rent of the house, by whatever name called.

Tax Treatment:

Minimum of the following is exempted from tax:

a. Actual HRA received.

b. An amount equal to 50% of salary (when house is situated in a metro city) or 40% of salary1 (when house is
situated in any other place) for the relevant period

c. The excess of rent paid over 10% of salary

[Arithmetically, (Rent Paid – 10% of Salary)]

Salary here means: Basic + D.A. (if it forms a part of retirement benefit) + Commission as a fixed % on turnover.

Notes:-

a) Salary shall be determined on due basis for the period for which the employee occupies rented accommodation
in the previous year and gets HRA.

b) Exemption is not available if employee lives in his own house, or in a house for which he does not pay any rent.

c) For criteria of 50% or 40% of salary as deduction, place of employment is not significant but place where the
house is situated is important.

d) Deduction from HRA depends on Salary of the employee, Amount of HRA, place of residence (not place of
employment), rent paid by the employee.

Special allowance exempt u/s 10(14)

Allowances, deduction from which depends on actual expenditure [Sec. 10(14)(i)]
Tax Treatment of aforesaid allowances:
Minimum of the following shall be exempted:

a) Actual amount received; or

b) Actual expenditure incurred for such purpose.

Allowances, deduction from which do not depend on actual expenditure [Sec. 10(14)
(ii)]

Children Education Allowance

An allowance to meet the expenses in connection with education of children, by whatever name called. Treatment:
Minimum of the following is exempted from tax

a) ` 100 per month per child (to the maximum of two children)

b) Actual amount received for each child (to the maximum of two children)

Children Hostel Allowance

An allowance to meet the hostel expenses of children, by whatever name called. Treatment: Minimum of the
following is exempted from tax –

a) ` 300 per month per child (to the maximum of two children)

b) Actual amount received for each child (to the maximum of two children)

Notes for Children Education Allowance and Hostel Allowance:

a) Child includes adopted child, step-child but does not include illegitimate child and grandchild.

b) Child may be major or minor child.

c) Deduction is available irrespective of actual expenditure incurred on education of child.

Truck Driver’s Allowance

Any allowance (by whatever name called) granted to an employee working in any transport system to meet his
personal expenditure during his duty performed in the course of running of such transport (from one place to
another place), provided such employee is not in receipt of daily allowance.

Treatment: Minimum of the following shall be exempted:

a) 70% of allowance.

b) ` 10,000 p.m.

Taxpoint: If assessee is in receipt of Daily allowance then above allowance shall be fully taxable.

Transport Allowance

An allowance, by whatever name called, to meet the expenditure for the purpose of travelling between the place of
residence and the place of duty.

Available to: Assessee is blind / deaf and dumb / orthopaedically handicapped.

Treatment: Minimum of the following shall be exempted:

a. Actual amount received; or

b. ` 3,200 p.m.

Taxpoint: No exemption is available to the assessee other than specified above.

Allowance to Government employees outside India

As per sec. 10(7), any allowance or perquisite allowed outside India by the Government to an Indian citizen for
rendering services outside India is wholly exempt from tax.

Taxpoint:

1. Assessee must be

a) Government employee

b) Citizen of India; and

c) Working outside India

2. Any allowance or perquisite to such employee shall be exempted u/s 10(7)

Allowance received from UNO (United Nations Organisation)

Basic salary or Allowance paid by the UNO to its employees are
not taxable.

Compensatory allowance under Article 222(2) of the Constitution

It is fully exempt from tax.

Allowance to judges of the High Court or the Supreme Court

Any allowance paid to Judges of the High Court u/s 22A(2) and sumptuary allowance u/s 22C of the “High Court
Judges (Conditions of Service) Act, 1954” is not taxable. Allowance to the Supreme Court Judges u/s 23B of the
“Supreme Court Judges (Conditions of Service) Act, 1958” is also exempt.

Salary to teacher or professor from SAARC Member States [DTAA]

Salary including allowances and perquisites of a teacher or professor or research scholars from SAARC Member
States shall not be taxable if following conditions are satisfied:

1. Such professor, teacher or research scholar is a resident of other SAARC member State (i.e., Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan & Sri Lanka) prior to visiting another member State.
Taxpoint: An individual is deemed to be a resident of a member State if he/she is resident in that member
State in the fiscal year in which he visits the other member State or in the immediately preceding fiscal
year.

2. Such visit is for the purposes of teaching or engaging in research or both at a university or college or similar
approved institution in that other Member State.

3. The remuneration from aforesaid activities in other Member State is exempt for a period of 2 years from the date
of arrival in the other member State.

Allowance or Perquisite to member of Union Public Service Commission [Sec. 10(45)]

Any allowance or perquisite, as may be notified by the Central Government in the Official Gazette in this behalf,
paid to the Chairman or a retired Chairman or any other member
or retired member of the Union Public Service Commission is exempt

PERQUISITE [SEC. 17(2)]

Meaning and Chargeability

In common parlance, perquisite means, any casual emoluments or benefits attached to an office or position, in
addition to salary or wages, which is availed by an employee. In other words, perquisites are the benefits in
addition to normal salary.

As per sec. 17(2) of the Income tax Act, Perquisite includes

i. Value of rent-free accommodation provided by the employer.

ii. Value of concession in rent in respect of accommodation provided to the assessee by his employer.
iii. The value of any benefit or amenitygranted or provided free of cost
or at concessional rate to ‘specified employees’.
iv. Amount paid by an employer in respect of any obligation which otherwise would have been payable by the
employee.

Taxpoint: Any obligation of the employee met by employer shall be taxable on cash basis i.e. in the year
in which amount is paid by the employer. Example: Employer paid employees’ professional tax liability
pertaining to period 2017-18 in April 2018, such perquisite shall be taxable in the previous year 2018-19.
v. Sum payable by an employer, whether directly or through a fund other than recognised provident fund or
approved superannuation fund or deposit-linked insurance fund, to effect an assurance on the life of the
assessee or to effect a contract for an annuity.

Taxpoint: Such sum shall be taxable on accrual basis.

vi. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by
the employer, or former employer, free of cost or at concessional rate to the assessee.
vii. Any contribution in excess of ` 1,50,000 to an approved superannuation fund by the employer in respect of
the assessee.
viii. the value of any other fringe benefit or amenity as may be prescribed.

Notes:

a) Perquisites are taxable under the head “Salaries” only if, they are:

● Allowed by an employer to his employee or any member of his household.

● Resulting in the nature of personal advantage to the employee.

● Derived by virtue of employee’s authority.

b) Perquisite may be contractual or voluntary. In other words, it is not necessary that the benefit must have been
received under an enforceable right.

c) Perquisite may be received from the former, present or prospective employer

d) Member of household includes:

● Spouse (whether dependent or not)

● Parents (whether dependent or not);

● Servants; and

● Children and their spouse (whether dependent or not);

● Dependents.

Specified employees [Sec. 17(2)(iii)]

Specified employee means:

1. A director employee.
Note: It is immaterial
 a) whether he is a nominee of the workers, financial institutions, etc. on the board;
b) whether the employee is full time director or a part time; and
c) whether he was a director throughout the previous year or not.

Taxpoint:
■ A director-employee shall be treated as specified employee of that company only. Example: If Manu is
working with X Ltd. as director-employee and with Y Ltd. as employee only, she will be treated as
specified employee only for X Ltd. and not for Y Ltd.
■ Director even for a day is construed as specified employee of such company.

An employee who has substantial interest in the employer company.

Substantial interest means the employee who beneficially holds 20% or more voting power in the employer
company.

Taxpoint:
■ Such employee shall be treated as specified employee of that company only.
■ The main criteria is beneficial ownership and not the legal ownership.
■ Substantial interest must be held by the assessee individually, and not together with relative.
Example: Mr. Mohan holds 18% equity share of X Ltd. and his wife holds 7% equity share of the same
company. In such case Mr. Mohan will not be treated as specified employee.

2. An employee whose aggregate salary from all employers together exceeds ` 50,000 p.a.

3. For computing the sum of ` 50,000, following are to be excluded/deducted:

a) All non-monetary benefits;
b) Non-taxable monetary benefits;
c) *Deduction u/s 16(ia), 16(ii) and 16(iii) [Discussed later in this chapter]; and
d) Employer’s contribution to Provident Fund.

Taxpoint:
■ Where salary is received from two or more employers, the aggregate salary from all employers shall be
considered for calculation of above ceiling. And if aggregate salary exceeds ` 50,000 p.a. the employee
shall be treated as specified employee of all employers.
Example: Mr. Rohan is working with X & Co. and Y Ltd. His taxable monetary salary from X & Co. is `
36,000 p.a. and from Y Ltd. is ` 45,000 p.a. Since the aggregate salary is more than ` 50,000 p.a. Mr.
Rohan will be treated as specified employee for both the employer i.e. X & Co. and Y Ltd.
■ Even ‘DA not forminga part of salary for retirement benefit’
shall be included in salary, while determining the above limit of `
50,000 p.a.

Exempted Perquisites
Following perquisites are exempted in hands of employee:

1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.

2. Food: Food provided by employer in working place.

3. Recreational facilities: Recreational facilities extended to a group of employees.

4. Goods sold to employee at concessional rate: Goods manufactured by employer and sold by him to his
employees at concessional (not free) rates.

5. Conveyance facility: Conveyance facility provided

● to employees for journey between office and residence and vice versa.

● to the judges of High Court and Supreme Court

6. Training: Amount spent on training of employees including boarding & lodging expenses for such training.

7. Services rendered outside India: Any perquisite allowed outside India by the Government to a citizen of India
for rendering services outside India.

8. Contribution in some specified schemes

● Employer’s contribution to a pension or deferred annuity scheme.

● Employer’s contribution to staff group insurance scheme.

● Annual premium paid by the employer on personal accident policy affected by him in respect of his employee.

9. Loans

● Loan given at nil or at concessional rate of interest by the employer provided the aggregate amount of loan does
not exceed ` 20,000.

● Interest free loan for medical treatment of the diseases specified in Rule 3A.

10. Medical facility: A provision of medical facility at office is exempt.

Note: However, medical allowance is fully taxable.

11. Periodicals and journals: Periodicals and journals required for discharge of work.

12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf of employee by
the employer whether by way of direct payment or reimbursement.

13. Free education facility: Free education facility to the children of employee in an institution owned or
maintained by the employer provided cost of such facility does not exceed ` 1,000 p.m. per child.

Note: Such facility is not restricted to two children as in case of Children Education allowance.

14. Computer or Laptop: Computer or Laptop provided whether to use at office or at home (provided ownership
is not transferred to the employee).

15. Movable assets: Sale or gift of any movable asset (other than car and electronic items) to employee after being
used by the employer for 10 or more years.

16. Leave Travel Concession: Leave Travel Concession (LTC) subject to few conditions.

17. Rent-free accommodation

● Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
● Rent-free furnished residence (including maintenance thereof) to Official
of Parliament, a Union Minister or a Leader of opposition in
Parliament.

18. Accommodation: Accommodation provided

● on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.

● in a remote area to an employee working at a mining site or an onshore exploration site or a project execution site
or a dam site or a power generation site or an offshore site.

19. Tax on non-monetary perquisite paid by employer on behalf of employee. With effect from A.Y. 2003-04 a
new sec. 10(10CC) has been inserted which provides that income tax paid by employer on behalf of employee on
income, being non-monetary perquisite, is not a taxable perquisite.

20. Health club, Sports club facility

PROVIDENT FUND
Provident fund scheme is a saving device in the hands of salaried class. It
is a retirement benefit scheme.Under this scheme, a stipulated sum is regularly
deducted from the salary of the employee as his contribution towards the fund. The employer also, generally,
contributes a similar amount out of his pocket to the fund. The employer’s and employee’s contribution are
together invested in such fund. Interest earned thereon is also credited to the fund of the employee. Thus, provident
fund scheme is a great media to initiate and mobilise small savings to a large scale. On termination of service or
retirement, employee receives the whole accumulated fund, subject to certain conditions.

Hence, provident fund has four components i.e. Employer’s contribution; Employee’s contribution; Interest on
employer’s contribution; and Interest on employee’s contribution

Provident fund is of four types, viz:

a) Statutory Provident Fund (SPF): Statutory provident fund is set up under the provisions of the Provident
Funds Act, 1925. Government and Semi-Government organisations, local
authorities, railways, Universities and recognised educational institutions
maintain Statutory Provident Fund.
b) Recognised Provident Fund (RPF): The provident fund scheme is framed under the Employee’s
Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred as PF Act). The PF Act
covers any establishment employing 20 or more persons. However, any establishment employing less than
20 persons can also join the scheme provided employer and employee both agree to do so. Further, if an
employer creates his own scheme for provident fund then he can do so subject to recognition from the
Commissioner of Income tax.

c) Unrecognised Provident Fund (URPF): If a provident fund scheme is created by an employer, which is
not recognised by the Commissioner of Income tax, then such fund is
known as Unrecognised provident fund.

d) Public Provident Fund (PPF): The Central Government has established a fund for the benefit of public to
mobilise personal savings. Any member of the public, whether salaried or self-employed, can contribute to
 the fund by opening a provident fund account at any branch of the State Bank of India or its subsidiaries or
other nationalised bank. Even a salaried employee can simultaneously become a member of employee’s
provident fund (whether statutory, recognised or unrecognized) and public provident fund. Any amount in
multiple of ` 5 (subject to minimum of ` 500 and maximum of ` 1,50,000 p.a.) may be deposited in this
account. Interest is credited every year but payable only at the time of maturity. Interest earned on this fund
is exempt from tax u/s 10(11).

Deduction from Gross Salary [Sec. 16]

STANDARD DEDUCTION [SEC. 16(ia)]
Lower of the following shall be allowed as standard deduction to all employee:

a. ` 40,000

b. Amount of gross salary

ENTERTAINMENT ALLOWANCE [SEC. 16 (ii)]

Entertainment allowance is initially included in taxable allowances as fully taxable. Thereafter, a deduction is
allowed under this section from gross taxable salary. However, deduction u/s 16(ii) shall be available to the
Government employee only.

Deduction for Entertainment allowance being minimum of the following:

a. Actual Entertainment Allowance

b. ` 5,000/c. 20% of Basic Salary.

Tax point:

■ Deduction allowed shall be irrespective of actual expenditure incurred, whether for office or personal purpose.

■ No deduction is available under this section to a Non-government employee.

TAX ON EMPLOYMENT OR PROFESSIONAL TAX [SEC. 16(iii)]
Tax on employment, profession, trade, etc. levied by a State under Article 276 of the Constitution will be allowed
as deduction on cash basis, whether paid by employee or by employer (on behalf of employee) from gross taxable
salary.

Note: If employer (on behalf of employee) pays Professional tax then:

a. Firstly, it is to be included as taxable perquisite; and

b. Further, it is allowed as deduction u/s 16(iii).

5. INCOME FROM HOUSE PROPERTY

As per sec. 22, the annual value of property consisting of any building or land appurtenant thereto of
which assessee is the owner, other than such portion of such property as he may occupy for the purposes
of any business or profession carried on by him shall be chargeable to income tax under the head “
Income from house property.”

CHARGEABILITY [SEC. 22]

Condition 1: Building or land appurtenant thereto
The term ‘house property’ is not defined in Income tax Act. However, various judicial interpretation have
construed the term house property as –

● any land surrounded by wall having roof or not; and

● any land appurtenant to a building.

Notes

a) Building includes an enclosure of bricks, stone work or even mud walls

b) Building includes residential as well as commercial houses.

c) Vacant land is not a house property. Hence, income from letting of vacant land is not taxable under
this head but taxed as business income or as income from other sources.

d) Roof is not necessary for a non-residential house property. A large stadium or a open air swimming
pool is also considered as building

e) It should be a permanent structure meant for a useful purpose.

f) If a building consists of several flats, then each flat is considered as a separate house property.

g) An incomplete, a ruined or demolished house cannot be termed as house property.

h) Land appurtenant to a building includes car parking area, approach roads, backyards, courtyards, etc.
attached to such building.

Condition 2: Owner
Annual value of a property is assessed to tax only in the hands of the owner even if he is not in receipt of
any income. Any person other than the owner, even though he is in receipt of rent shall not be liable to tax
under this head. That is why, income from sub-letting is not taxable under this head but under the head
‘Income from other sources’.
 E.g. Mr. X being a tenant of a house property acquired it at a monthly rent of ` 10,000 from Mr. Y
(owner of such house property). Mr. X sublets the property to Mr. Z for a monthly rent of ` 12,000.
Income from subletting being ` 2,000 p.m. is taxable as business income or as income from other sources.

Owner includes legal owner, beneficial owner and deemed owner.

Legal owner: Legal owner means a person who has the legal title of the property as per the Transfer of
Property Act, Registration Act, etc.

Beneficial owner: For income tax purpose it is not necessary that the property must be registered in the
name of the assessee. If the assessee is enjoying the property as an owner to full extent he will be treated
as a beneficial owner of such property and will be charged under the head ‘Income from house property’.

Fictional owner or Deemed owner [Sec. 27] : U/s 27, in the following cases, a person shall be treated as
deemed owner of the property and liable to tax (in such case legal owner or beneficial owner shall not be
further liable to tax)

1. Transfer to spouse or minor child [Sec. 27(i)]:

When an individual transfers a house property to
● his or her spouse (not being a transfer in connection with
an agreement to live apart); or
● a minor child (not being a married daughter)

- without adequate consideration, then transferor shall be treated as deemed owner of such property.

E.g.: Mr. X transfers his house property worth ` 5,00,000 to Mrs. X out of love and affection. In such
case, though Mrs. X is the legal owner but Mr. X will be liable to tax as deemed owner of such property.
Note: In case of transfer to spouse, marriage should subsist on both the days i.e., on the day of transfer as
well as on the day when income arises.

Tax point:

■ Transferee must be spouse or minor child other than married daughter.

Transfer must be without adequate consideration.

■ Transferred property must be a house property.

E.g. Mr. X transfers cash of ` 5,00,000 to Mrs. X and Mrs. X purchases a house property from such cash,
then such transfer of cash and subsequent purchase of property shall not attract provision of sec. 27(i).
However, the income from such property shall be clubbed in the hands of Mr. X as per the provision of
sec. 64(1)(iv) [For detail refer chapter Clubbing of Income].

2. The holder of an impartible estate [Sec. 27(ii)]: The holder of an impartible estate (property which is
not legally divisible) is treated as deemed owner of house property. Impartible estate is an estate to which
the assessee has succeeded by grant or covenant.

3. Property held by a member of a company, society or any other association [Sec. 27(iii)]: Property
held by a member of a company, co-operative society or other association of persons to whom a building or a part
thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed
owner of that building or a part thereof.

Tax point:

■ Assessee is the member of a company, co-operative society or other AOP.

■ He has been allotted or leased a building on account of such membership.

■ Though he is not the legal owner of such property, still he will be liable to tax.

4. A person who acquired a property u/s 53A of the Transfer of Property Act [Sec. 27(iiia)]: A person
who is allowed to take or retain possession of any building (or part thereof) in part performance of a contract u/s
53A of the Transfer of Property Act, 1882, is deemed as the owner of that building (or part thereof).

Tax point:

■ Assessee has taken the possession of the property.

■ He has partly performed or promised to perform the contract i.e., he has paid (or is ready to pay) a part of the
consideration.

■ The contract must be in writing. Though sale-deed might not be executed in favour of the buyer, still certain
other document like ‘power of attorney’ or ‘agreement to sell’ has been executed.

5. Lessee of a building u/s 269UA(f) [Sec. 27(iiib)]: A person who acquires any right u/s 269UA(f) in or with
respect to any building or part thereof, by way of lease agreement for a period not less than 12 years is deemed as
the owner of that building (or part thereof).

Notes

a) Lease period should not be less than 12 years [as per sec. 269UA(f)] including extension period.

b) Above provision does not include any right by way of lease from month to month or for a period not exceeding 1
year.

E.g.: X lets out a property to Miss Y on a lease of 9 years. However, Miss Y has a right to renew the lease for
further period of 3 years. In such case, Miss Y shall be deemed as an owner of the property u/s 27. However, if
such right of renewal of lease (for 3 years) is subject to condition that at each occasion it will be renewed for a
period of 11 months, then X will be owner of the property and liable to tax u/s 22.

Condition 3: Property is used for business or profession carried on by the assessee

When a person carries on business or profession in his own house property, annual value thereof is not taxable u/s
22 provided income of such business is chargeable to tax.

Incidences thereof
● Letting out to employees: If an assessee lets out the property to his employee, where such letting out supports
smooth flow of his business, then such letting out shall be deemed to be incidental to business and such rent shall
be chargeable under the head “Profits & gains of business or profession”.
● Letting out to Government Agencies: Where an assessee let out his property to any Government agency for
locating branch of a nationalized bank, police station, post office, excise office, railway staff quarters, etc. for the
purpose of running the business of assessee more efficiently, such letting out shall be deemed to be incidental to
business and such rent shall be chargeable under the head “Profits & gains of business or profession”.

● Letting out to ancillary units: Where an assessee lets out its property to ancillary units, which manufactures
components required by the assessee. Income from such letting out shall be taxable under the head “Profits & gains
of business or profession”.

Letting out property for promotion of own business –vs.- Business of letting out the
property
*Assessee lets out the property for the promotion of its own business or profession

If an assessee carries on business or profession in his own hense properly or lets out the property for smooth
running of his business or profession, income from such property is taxable under the head "Profits & gains
of business or profession".

*Assessee is engaged in the business of letting out of the property

If an assessee is running a business with main object of buying & developing house properties either to let out or to
sell such properties, then annual value of such house properties shall br taxable under the head "Income from
house property". However, profit on scale of house shall be taxable uderthe
head Profits & gains of business or profession.

EXEMPTED PROPERTIES
Income from the following house properties are exempted from tax:

1. Any one palace or part thereof of an ex-ruler, provided the same is not let out [Sec. 10(19A)].

Taxpoint: If the ex-ruler has a house property and the part of which is self-occupied and remaining let out
then only the self occupied part of the house property shall be exempted.

2. House property of a local authority [Sec. 10(20)].

3. House property of an approved scientific research association [Sec. 10(21)].
4. House property of an educational institution [Sec. 10(23C)].
5. House property of a hospital [Sec. 10(23C)].
6. House property of a person being resident of Ladakh [Sec. 10(26A)]
7. House property of a political party [Sec. 13A]
8. House property of a trade union [Sec. 10(24)]
9. A farm house [Sec. 10(1)]
10. House property held for charitable purpose [Sec. 11]
11. House property used for own business or profession [Sec. 22].
COMPUTATION OF INCOME
The chapter is divided into the following categories for the purpose of computation:
● Let out property [Sec. 23(1)]
● Property not actually occupied by the owner [Sec. 23(2)(b)]
● Self-occupied property [Sec. 23(2)(a)].
 ● Partly let out and partly self occupied property [Sec. 23(3)]
● Deemed to be let out property [Sec. 23(4)].
● Recovery of arrears of rent and unrealized rent [Sec. 25A]

LET OUT PROPERTY [SEC. 23(1)]

Computation at a glance Computation of Income from house property of …………. for the Assessment Year
……….

Gross Annual Value (GAV)

Normally, income tax is charged on income, but under the head ‘Income from house property’, tax is not charged
on the rent earned from house property but on the inherent earning capacity of the house property. Such earning
capacity is termed as Annual Value. Annual value is determined considering the following factors:

A) Actual Rent Receivable [ARR]

Any sum receivable as rent of the house property for the previous year is an evidence for determining the
earning capacity of the building. Such actual rent receivable is to be computed on accrual basis. However,
where tenant pays rent, which is influenced by benefits provided by the owner of the property, such rent
must be disintegrated to determine actual rent i.e. De-facto rent of the property.
De facto rent = ARR – Cost of amenities.

Taxpoint: While computing actual rent receivable, outstanding rent shall be considered but advance rent
received during the financial year is not to be considered.

B) Gross Municipal Value

It means the annual value of the property decided by municipality on which they charge municipal tax.
Such valuation may also be taken as evidence of earning capacity of a property. In metro cities (i.e.
Chennai, Delhi, Kolkata, Mumbai), municipal authorities charge tax on Net Municipal Value after giving a
deduction for repairs (being 10% of Gross Municipal value) and an allowance for service taxes (like
sewerage tax, water tax etc. as a % of Net Municipal value).
Hence, the relation between Gross Municipal Value and Net Municipal Value can be concluded as under

C) Fair or Notional rent of the property

 Fair or notional rent of a property means rent fetched by a similar property in the same or similar locality.
Though two properties might not be exactly similar still it is an indicator of rent reasonably expected from
the property. An inflated or deflated rent due to emergency, relationship and such other conditions need
to be adjusted to determine fair rent. For instance, a property was let out to a friend for a monthly rent of
` 2,000 which might be let out to another person at the rate of ` 2,500 p.m. In such case, fair rent of the
property shall be ` 2,500 p.m.
D) Standard rent under the Rent Control Act
Standard rent is the maximum rent, which a person can legally recover from his tenant under the Rent
Control Act prevailing in the State in which the property is situated. A landlord cannot reasonably expect
to receive from a tenant any amount more than Standard Rent. Accordingly, it can be concluded that if
the property is covered by the Rent Control Act then Reasonable Expected Rent (RER) cannot exceed
Standard Rent.

Taxpoint: Reasonable Expected Rent cannot exceed Standard Rent but can be lower than Standard Rent

Computation of Gross Annual Value

Step 1: Calculate reasonable expected rent (RER) of the property being higher of the following:

a) Gross Municipal Value.

b) Fair Rent of the property.

Note: RER cannot exceed Standard Rent.

* Reasonable Expected Rent (RER) is also known as Annual Letting Value (ALV).

Step 2: Calculate Actual Rent Received or Receivable (ARR) for the year less current year unrealised rent (UR)
subject to certain conditions#.

#Unrealised Rent [Rule 4]: Unrealised Rent of current year shall be deducted in full from Actual Rent Receivable,
provided the following conditions are satisfied:

i) The tenancy is bona fide;

ii) The defaulting tenant has vacated the property or steps have been taken to compel him to vacate the
property;
iii) The defaulting tenant is not in occupation of any other property of the assessee;
iv) The assessee has taken all reasonable steps to institute legal proceeding for the recovery of the unpaid
rent or has satisfied the Assessing Officer that legal proceedings would be worthless.
Step 3: Compare the values calculated in step 1 and step 2 and take the higher one.
Step 4: Where there is vacancy and owing to such vacancy the ‘ARR – UR’ is less than the RER, then ‘ARR - UR’
computed in step 2 will be treated as GAV.

TAXES LEVIED BY LOCAL AUTHORITY (MUNICIPAL TAX) [PROVISO TO SEC. 23(1)]

Tax levied by the municipality or local authority is deductible from Gross Annual Value (GAV).
As per sec. 27(vi), taxes levied by a local authority in respect of any property shall include service taxes levied by
such local authority in respect of such property.
Municipal tax includes Service taxes like fire tax, water tax, etc. levied by a local authority. Such taxes shall be
computed as a % of Net Municipal Value and allowed as deduction subject to the following conditions:

1. It should be actually paid during the previous year.

2. It must be paid by the assessee.
Tax point: Unpaid municipal tax or municipal tax paid by tenant shall not be allowed as deduction.
3. It must be related to the previous year or any year preceding the previous year.

DEDUCTIONS U/S 24

The list of deduction u/s 24 is exhaustive i.e., no deduction can be claimed in respect of expenditures which are
not specified under this section e.g., no deduction is allowed for repairs, collection charges, insurance, ground
rent, land revenue, etc.

1. Standard deduction u/s 24(a) 30% of the net annual value is allowed as standard deduction in respect of
all expenditures (other than interest on borrowed capital) irrespective of the actual expenditure incurred.
Note: Where NAV is negative or zero, standard deduction u/s 24(a) is not available.

2. Interest on loan or borrowed capital u/s 24(b) Interest payable on amount borrowed for the purpose of
purchase, construction, renovation, repairing, extension, renewal or reconstruction of house property can
be claimed as deduction on accrual basis.

For the purpose of calculation, interest on loan is divided into two parts:
Other Points:
(a) Interest on borrowed capital is allowed on accrual basis even if the books of account are kept on cash basis.
(b) Interest paid on fresh loan, which is taken to repay the original loan (being taken for above-mentioned
purpose) shall be allowed as deduction.
(c) Interest on new loan, taken for paying outstanding interest on old loan, is not deductible
(d) Amount paid as brokerage or commission, for arrangement of the loan, is not deductible.
(e) Interest on loan taken for payment of municipal tax, etc. is not allowed as deduction.
Amount not deductible from Income from house property [Sec. 25] Any interest chargeable under this Act
which is payable outside India, is not allowed as deduction if:
● on such interest, tax has not been deducted at source and paid
as per the provision of chapter XVIIB; and
● in respect of such interest there is no person in India who may be treated as an agent u/s 163.
SELF-OCCUPIED PROPERTY [SEC. 23(2)(a)]
As per sec. 23(2)(a), a house property shall be termed as self occupied property where such property or part
thereof:
● is in the occupation of the owner for the purposes of his
own residence;
● is not actually let out during the whole or any part of the previous
year; and
● no other benefit there from is derived by the owner.

Treatment :
The annual value of such house or part of the house shall be taken to be nil. If an assessee occupies more than
one house property as self-occupied, he is allowed to treat only one house as self-occupied at his option. The
remaining self-occupied house properties shall be treated as ‘Deemed to be let out’.
 Computation of taxable income of self-occupied property
Net annual value of self-occupied property shall be taken as nil. As a consequence, deduction u/s 24(a)
(standard deduction) shall also be nil. Interest on loan u/s 24(b) shall be allowed, subject to certain ceiling.

Net Annual value

Net Annual value of one self-occupied house property, at the choice of the assessee, is taken as nil. He can choose
that house property as self-occupied through which tax liability can be reduced.
Normally (but not always) house property with higher gross annual value is treated as self-occupied property but it is
advised to calculate total income under the head ‘Income from house property’ by applying each option separately
and then choose the option which reduces total income

Notes
a) Calculation and deduction of interest for the period of pre and post construction, acquisition, etc. is same as
discussed in the case of let out house property.
b) Assessee shall always have nil income or loss upto ` 2,00,000 from a property u/s 23(2)(a).
 UNOCCUPIED PROPERTY [SEC. 23(2)(b)]
Where an assessee has a residential house (kept for self-occupation) and it cannot actually be occupied by the
owner owing to his employment, business or profession carried on at any other place and hence he has to reside
at that place in a building not belonging to him, such house shall be termed as unoccupied property.
Tax point:
■ Assessee has a residential house kept for self-occupation.
■ The house cannot be occupied by the owner owing to his employment and no other benefit is derived from
such house. In case house remains unoccupied by the owner owing to his personal convenience, then no benefit
under this section shall be allowed
■ He has to reside in a house not belonging to him, whether rent is paid for that house or not.

DEEMED TO BE LET-OUT HOUSE PROPERTY [SEC. 23(4)]

Where the assessee occupies more than one house property as self-occupied or has more than one unoccupied
property, then for any one of them, benefit u/s 23(2) can be claimed (at the choice of the assessee) and remaining
property or properties shall be treated as ‘deemed to be let out’.

Treatment:

1.Gross Annual value: Since assessee does not let out such property & do not receive rent, therefore GAV
will be determined from Step 1 only. Step 2, 3 & 4 of calculation GAV are irrelevant.

Tax point: GAV of deemed to be let out property will be the ‘Reasonable expected rent (RER)’of the property.

2.Municipal taxes and deduction u/s 24(a) and 24(b) shall be available as in the case of let out house
property.

PARTLY SELF-OCCUPIED AND PARTLY LET-OUT [SEC. 23(3)]

Where a house or part of the house, which is self-occupied, is let out during any part of the previous year, such
property is termed as ‘Partly self-occupied and partly let out’.

 Self-occupied portion & let out portion shall be treated as two separate house (i.e. Unit
A & Unit B);

● Common value like municipal value, fair rent, standard rent, municipal tax and interest shall be proportionately
divided;

● Income of both units shall be computed separately.