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PREFACE

PREFACE
The book adopts a fresh and new approach to understand and gain in-depth knowledge of the provision of
taxation relating to Income tax Act in an illustrative manner for the students of CA Inter, CS Executive, CMA
Inter and other taxation students. The law stated in the book is as per the Finance Act 2024 and the problems
are solved keeping in mind the amended provision of the act. The objective of the book is to present the law
in simple and easy language so as to make topics student friendly by illustrating provision in graphical and
tabular manner.

The book has been written keeping in view the new syllabus as notified by the ICSI and ICWAI.

KEY FEATURES OF THE BOOK

a) Suitable for detailed discussion and in depth understanding of the topic: The book covers entire syllabus
at a place along with suitable illustration for concepts for better understanding.

b) Includes most important solved problems: The book contains practical question that will help students
in the application of law.

c) All concepts in simple and easy language: All the provisions have been explained in easy language and
also in graphical and tabular manner to make study easy and simple.

I would like to thank GOD for his constant courage, blessing and everything that has been provided by
Almighty to each one of us. I would also like to thank you MY Family and ALL My Teacher's for their constant
support, faith, blessing, encouragement and guidance.

I would like to Special thank my Parents & My Wife for their constant love, support, encouragement, blessing
and for being a big source of inspiration.

I would like to acknowledge the efforts put in by My Friends who have always motivated and inspired me to
do my best and give my maximum in each and every situation.
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PREFACE

Revised Edition

Amended by Finance ACT, 2024

Book Dedicated to -
MY Parents
&
ALL My Students

"Your Taxation Paper is MY Responsibility "

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 INDEX

PART -A

INDEX

Basic Concepts 1.1 – 1.78

RESIDENCE AND SCOPE OF TOTAL INCOME 2.1 – 2.33

INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S

3.1 – 3.23
TOTAL INCOME

AGGREGATION OF INCOME, SET-OFF AND CARRY

4.1 – 4.35
FORWARD OF LOSSES

DEDUCTIONS FROM GROSS TOTAL INCOME 5.1 -5.78

ADVANCE TAX, TAX DEDUCTION AT SOURCE AND TAX

6.1 -6.96
COLLECTION AT SOURCE

PROVISIONS FOR FILING RETURN OF INCOME AND SELF

7.1 – 7. 43
ASSESSMENT
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CHAPTER - 1 Basic Concepts

INTRODUCTION
1.1 What is the meaning of tax?
Let us begin by understanding the meaning of tax.
Article 366(28) of the Constitution of India defines the term “Taxation” as follows –
“Taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be
construed accordingly.”
Taxes are considered to be the “cost of living in a society”. Taxes are levied by the Governments to meet the
common welfare expenditure of the society.
There are two types of taxes - direct taxes and indirect taxes.

• Direct Taxes: If tax is levied directly on the income or wealth of a person, then, it is a direct tax. The person
who pays the tax to the Government cannot recover it from somebody else i.e. the burden of a direct tax
cannot be shifted. E.g., Income tax.

• Indirect Taxes: If tax is levied on the price of a good or service, then, it is an indirect tax e.g. Goods and
Services Tax (GST) or Custom Duty. In the case of indirect taxes, the person paying the tax passes on the
incidence to another person.

Income Tax
Direct Taxes
TYPES OF TAXES

Tax on undisclosed foreign

income and assets

Goods and services Tax (GST)

Indirect Taxes
Customs Duty
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Why are taxes levied?

The reason for levy of taxes is that they constitute the basic source of revenue to the Government. Revenue so
raised is utilized for meeting the expenses of Government like defence, provision of education, health-care,
infrastructure facilities like roads, dams etc.

Power to levy taxes

The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except by authority of
law.” Accordingly for levy of any tax, a law needs to be framed by the government.

Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the Central and the
State Government. The Parliament and State Legislatures are empowered to make laws on the matters
enumerated in the Seventh Schedule by virtue of Article 246 of the Constitution of India.

Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the Parliament
and the State Legislatures have the authority to make laws for the purpose of levy of taxes.

The following are the lists:

• Union List: Parliament has the exclusive power to make laws on the matters contained in Union List.
• State List: The Legislatures of any State has the exclusive power to make laws on the matters contained in
the State List.
• Concurrent List: Both Parliament and State Legislatures have the power to make laws on the matters
contained in the Concurrent list.

Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seventh Schedule
to Article 246 of the Constitution of India has given the power to the Parliament to make laws on taxes on
income other than agricultural income.

Overview of Income-tax law in India

In this material, we would be introducing the students to the Income-tax law in India. The income-tax law in
India consists of the following components –
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COMPONENTS INCOME ANNUAL INCOME LEGAL

CIRCULARS/
OF INCOME TAX FINANCE TAX DECISIONS
NOTIFICATIONS
TAX LAW ACT ACT RULES OF COURTS

The various instruments of law containing the law relating to income-tax are explained below.

Income-tax Act, 1961

The levy of income-tax in India is governed by the Income-tax Act, 1961. In this book, we shall briefly refer
to this as the Act.

• It extends to the whole of India.

• It came into force on 1st April, 1962.
• It contains sections 1 to 298 and schedules I to XIV.
Ø A section may have sub-sections or clauses and sub-clauses.
- When each part of the section is independent of each other and one is not related with other,
such parts are called a “Clause”. “Sub section”, on the other hand refers to such parts of a section
where each part is related with other and all sub sections taken together completes the concept
propounded in that section.

§ The clauses of section 2 define the meaning of terms used in the Income-tax Act, 1961. Clause (1A)
defines “agricultural income”, clause (1B) defines “amalgamation” and so on. Each one of them is
independent of other clause of the same section.
§ Likewise, the clauses of section 10 contain the exemptions in respect of certain income, like clause
(1) provides for exemption of agricultural income and clause (2) provides for exemption of share
income of a member of a Hindu Undivided Family and so on.

Ø A section may also have Provisos and Explanations.

- The Proviso(s) to a section/sub-section/clause spells out the exception(s)/ condition(s) to the
provision contained in the respective section/ sub-section/ clause, i.e., the proviso spells out the
cases where the provision contained in the respective section/ sub-section/ clause would not
apply or where the provision would apply with certain modification.
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- The Explanation to a section/ sub-section/ clause gives a clarification relating to the provision
contained in the respective section/ sub-section/ clause.

Sections 80GGB and 80GGC provides for deduction from gross total income in respect of
contributions made by companies and other persons, respectively, to political parties or an
electoral trust.

• The Income-tax Act, 1961 undergoes change every year with additions and substitutions brought in by the
Annual Finance Act passed by Parliament. Sometimes, the Income-tax Act, 1961 is also amended through
other legislations like Taxation Laws (Amendment) Act.

The Finance Act

Every year, the Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s
Budget Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of
the President, it becomes the Finance Act. Amendments are made every year to the Income-tax Act, 1961 and
other tax laws by the Finance Act.

The First Schedule to the Finance Act contains four parts which specify the rates of tax -

• Part I of the First Schedule to the Finance Act specifies the rates of tax applicable for the current
Assessment Year. Accordingly, Part I of the First Schedule to the Finance (No. 2) Act, 2024 specifies the
rates of tax for F.Y. 2023-24.
• Part II specifies the rates at which tax is deductible at source for the current Financial Year. Accordingly,
Part II of the First Schedule to the Finance Act, 2024 specifies the rates at which tax is deductible at
source for F.Y. 2024-25.
• Part III gives the rates for calculating income-tax for deducting tax from income chargeable under the
head “Salaries” and computation of advance tax for F.Y. 2024-25 where the assessee exercises the
option to shift out of the default tax regime provided under section 115BAC(1A).
• Part IV gives the rules for computing net agricultural income.

Income-tax Rules, 1962

The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).

§ The CBDT is empowered to make rules for carrying out the purposes of the Act.
§ For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time to time. These
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rules are collectively called Income-tax Rules, 1962.

§ Rules also have sub-rules, provisos and Explanations. The proviso to a Rule/ Sub-rule spells out the
exception to the limits, conditions, guidelines, basis of valuation, as the case may be, spelt out in the
Rule/ Sub-rule. The Explanation gives clarification for the purposes of the Rule.

§ It is important to keep in mind that along with the Income-tax Act, 1961, these rules should also be studied.

Circulars and Notifications

Circulars

• Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify
doubts regarding the scope and meaning of certain provisions of the Act.

• Circulars are issued for the guidance of the officers and/or assessees.
• The department is bound by the circulars. While such circulars are not binding on the assessees, they
can take advantage of beneficial circulars.

Notifications

Notifications are issued by the Central Government to give effect to the provisions of the Act. The CBDT is
also empowered to make and amend rules for the purposes of the Act by issue of notifications which are binding
on both department and assessees.

Legal decisions of Courts

Case Laws refer to decision given by courts. The study of case laws is an important and unavoidable part of
the study of Income-tax law. It is not possible for Parliament to conceive and provide for all possible issues
that may arise in the implementation of any Act. Hence the judiciary will hear the disputes between the
assessees and the department and give decisions on various issues.

The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court is the law of
the land. The decisions given by various High Courts will apply in the respective states in which such High
Courts have jurisdiction.

Note – Case laws are dealt with at the Final level.

CHARGE OF INCOME TAX

Section 4 of the Income-tax Act, 1961 is the charging section which provides that:

I. Tax shall be charged at the rates prescribed for the year by the Annual Finance Act or the
Income-tax Act, 1961 or both.
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II. The charge is on every person specified under section 2(31);

III. Tax is chargeable on the total income earned during the previous year and not the assessment year.
(There are certain exceptions provided by sections 172, 174, 174A, 175 and 176);
IV. Tax shall be levied in accordance with and subject to the various provisions contained in the Act.

This section is the back bone of the law of income-tax in so far as it serves as the most operative provision of
the Act. The tax liability of a person springs from this section.

A person includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals
(BOI), a firm, a company etc.

1. Total Income and Tax Payable

Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the
provisions contained in the Income-tax Act, 1961.

Let us go step by step to understand the procedure for computation of total income of an individual for
the purpose of levy of income-tax –

Step 1 – Determination of residential status

The residential status of a person has to be determined to ascertain which income is to be included
in computing the total income. The residential status as per the Income-tax Act, 1961 can be classified
as under –

RESIDENTIAL STATUS UNDER THE INCOME TAX ACT, 1961

RESIDENT DEEMED NON-

RESIDENT RESIDENT

RESIDENT AND RESIDENT BUT NOT

ORDINARILY RESIDENT ORDINARILY RESIDENT

In the case of an individual, the duration for which he is present in India in the relevant previous year or
relevant previous year and the earlier previous years determines his residential status. Based on the
days spent by him in India, he may be (a) resident and ordinarily resident, (b) resident but not
ordinarily resident, or (c) non-resident.
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The residential status of a person determines the taxability of the income. For e.g., income earned and
received outside India will not be taxable in the hands of a non- resident but will be taxable in case of
a resident and ordinarily resident.

There is also a concept of deemed resident for which presence of individual in India is not required. A
deemed resident is always a resident but not ordinarily resident in India. Determination of residential
status has been discussed in Chapter 2.

Step 2 – Classification of income under different heads

A person may earn income from different sources. For example, a salaried person earns income by way
of salary. He also gets interest from bank savings account/ fixed deposit. Apart from this, if he has
invested in shares, he would be getting dividend and when he sells these shares, he may earn profit on
such sale. If he owns a residential property which he has let out, he would earn rental income.

Under the Income-tax Act, 1961, for computation of total income, all income of a tax payer are classified
into five different heads of income. These are shown below –

SALARIES
HEADS OF INCOME

INCOM FROM HOUSE PROPERTY

PROFITS AND GAINS OF BUSINESS OR PROFESSION

CAPITAL GAINS

INCOME FROM OTHER SOURCES

There is a charging section under each head of income which defines the scope of income chargeable
under that head. These heads of income exhaust all possible types of income that can accrue to or be
received by the tax payer. Accordingly, income earned is classified as follows:

1. Salary, pension etc. earned is taxable under the head “Salaries”.

2. Rental income is taxable under the head “Income from house property”.
3. Income derived from carrying on any business or profession is taxable under the head “Profits and
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gains of business or profession”.

4. Profit from sale of a capital asset (like land, building and shares) is taxable under the head “Capital
Gains”.

5. The fifth head of income is the residuary head. Income which is chargeable to tax under the
Income-tax Act, 1961 but not taxable under the first four heads will be taxed under the head “Income
from other sources”.

The tax payer has to classify the income earned under the relevant head of income.

Step 3 – Computation of income under each head

Income is to be computed in accordance with the provisions governing a particular head of income.

Exemptions: There are certain incomes which are wholly exempt from income-tax e.g., agricultural
income. These incomes have to be excluded and will not form part of total income.

Also, some incomes are partially exempt from income-tax e.g., Commuted pension. These incomes are
excluded only to the extent of the limits specified in the Act. The balance income over and above the
prescribed exemption limits would enter computation of total income and have to be classified under the
relevant head of income.

Deductions: There are deductions and allowances prescribed under each head of income. For example,
while calculating income from house property for let out property, municipal taxes and interest on loan
are allowed as deduction. Similarly, deductions and allowances are prescribed under other heads of
income. These deductions etc. have to be considered before arriving at the net income chargeable under
each head.

These exemptions and deductions would be available to the individual depending upon the regime in which
he pays tax. Tax regime under section 115BAC is the default tax regime which provides for concessional
rates of tax to individuals/HUFs/ AoPs/BoIs/Artificial juridical persons. However, certain exemptions and
deductions are not allowed under the default tax regime. Such assessees have an option to opt out of the
said regime and pay tax under normal provisions of the Act. These tax regimes i.e., the default tax regime
under section 115BAC and optional tax regime under the normal provisions of the Act are discussed in
detail later on in this Chapter.

For detailed discussion on exemptions and deductions under each head, refer to Chapter 3: Heads of
Income.

Disallowance of expenditure in relation to exempt income [Section 14A]

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• As per section 14A, notwithstanding anything to the contrary, expenditure incurred in relation to any
exempt income is not allowed as a deduction while computing income under any of the five heads of
income.
• The Assessing Officer is empowered to determine the amount of expenditure incurred in relation to
such income which does not form part of total income in accordance with such method as may be
prescribed.
• The method for determining expenditure in relation to exempt income for the purpose of disallowance
of such expenditure under section 14A is prescribed by the CBDT.
• The provisions of section 14A regarding disallowance of expenses would apply even in a case where
exempt income has not accrued or arisen or has not been received during the previous year relevant
to an assessment year and the expenditure has been incurred during the said previous year in
relation to such exempt income.

Step 4 – Clubbing of income of spouse, minor child etc.

In case of individuals, income-tax is levied on a slab system on the total income. The tax system
is progressive i.e., as the income increases, the applicable rate of

tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion
of their income to their spouse, minor child etc. to minimize their tax burden.
In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under
which income arising to certain persons (like spouse, minor child etc.) have to be included in the income
of the person who has diverted his income for the purpose of computing tax liability. For detailed
discussion, refer to Chapter 4: Income of other persons included in assessee’s total income.

Step 5 – Set-off or carry forward and set-off of losses

An assessee may have different sources of income under the same head of income. He may have profit
from one source and loss from the other. For instance, an assessee may have profit from his textile
business and loss from his printing business. This loss can be set-off against the profits of textile
business to arrive at the net income chargeable under the head “Profits and gains of business or
profession”.

Similarly, an assessee can have loss under one head of income, say, profits and gains of business
or profession and profits under another heads of income, say, income from house property. There are
provisions in the Income-tax Act, 1961 for allowing inter-head adjustment in certain cases.

However, there are also restrictions in certain cases, like business loss is not allowed to be set-off
against salary income. Default tax regime under section 115BAC puts further more restrictions like loss
from house property cannot be set off from income under any other head. Further, losses which cannot
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be set-off in the current year due to inadequacy of eligible profits can be carried forward for set-off in
the subsequent years as per the provisions contained in the Act. Generally, brought forward losses under
a particular head cannot be set-off against income under another head i.e., brought forward business
loss cannot be set-off against income from house property of the current year. For detailed discussion,
refer to Chapter 5: Aggregation of income, set-off and carry forward of losses.

Step 6 – Computation of Gross Total Income

The final figures of income or loss under each head of income, after allowing the eligible deductions,
allowances and other adjustments, are then aggregated, after giving effect to the provisions for clubbing
of income and set-off and carry forward of losses, to arrive at the gross total income.

Step 7 – Deductions from Gross Total Income

There are deductions prescribed from Gross Total Income. Two types of deductions are allowable
from Gross Total Income - Deductions under Chapter VI- A and deduction under section 10AA. These
deductions would be allowable to the assessee who opts out of the default tax regime and pays tax
under the optional tax regime as per normal provisions of the Act, subject to fulfillment of requisite
conditions stipulated thereunder

DEDUCTIONS FROM GROSS TOTAL INCOME

(in case of an assessee opting out of the default tax regime)

DEDUCTIONS UNDER DEDUCTION UNDER

CHAPTER-VIA SECTION 10AA

DEDUCTIONS IN DEDUCTIONS IN DEDUCTIONS OTHER

RESPECT OF RESPECT OF IN RESPECT OF DEDUCTIONS
CERTAIN PAYMENTS CERTAIN INCOMES OTHER INCOME

Example
Examples Examples Examples Deduction in
• Life Insurance • Employment of new • Interest on case of a
Premium paid employees
deposits in person with
• Contribution to • Royalty income etc. disability
saving account
Provident Fund/ of authors of
• Interest on
Pension Fund certain books other
deposits in case
• Medical than text books
of senior
insurance • Royalty on patents
citizens
• premium paid
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higher
• education
Basic Concepts 1

Examples
• Medical insurance premium paid
• Payment of interest on loan taken for
higher education
• Payment of interest on loan taken for
residential house
• Payment of interest on loan taken for
purchase of electric vehicle
• Rent paid
• Donation to certain funds, charitable
institutions, etc.
• Contributions to political
• parties

However, under the default tax regime under section 115BAC, only select deductions are permissible.
For detailed discussion, refer to Chapter 6: Deductions from Gross Total Income.

Step 8 – Computation of Total income

The income arrived at, after claiming the above deductions from the Gross Total Income is known as the
Total Income. It should be rounded off to the nearest multiple of ₹10 as per section 288A. The process of
computation of total income is shown hereunder –

COMPUTATION OF TOTAL INCOME

Determination of residential status

Classification of Income under 5 heads

Salaries Income from Profits and gains Capital Income from

house property of business or gains other
profession sources
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Compute income under each head applying the charging & deeming provisions and
providing for permissible deductions/exemptions thereunder

Apply the clubbing provisions

Set-off/carry forward and set-off of losses as per the provisions of the Act

Compute Gross Total Income (GTI)

Less: Deductions from Gross Total Income

Total Income (TI)

Step 9 – Application of the rates of tax on the total income

Rates prescribed under section 115BAC of the Income-tax Act for default tax regime

Section 115BAC of the Income-tax Act, 1961 provides for concessional rates of tax to
individuals/HUF/AoPs/BoIs and artificial juridical persons. Under this regime certain
exemptions/deductions are, however, not available like Leave Travel Concession, interest on housing
loan on self-occupied property, deductions under Chapter VI-A [other than section 80CCD(2), 80CCH(2)
or section 80JJAA] etc. The rates given under section 115BAC are the default tax rates unless the
assessee exercises an option to shift out of the said regime. The basic exemption limit under section
115BAC is ₹3,00,000. This means that no tax is payable by an assessee with total income of upto
₹3,00,000. The tax rates under section 115BAC is as follows -

S. No. Total Income Rate of tax

1. Upto ₹3,00,000 Nil

2. From ₹3,00,000 to ₹7,00,000 5%
3. From ₹7,00,000 to ₹10,00,000 10%

4. From ₹10,00,000 to ₹12,00,000 15%

5. From ₹12,00,000 to ₹15,00,000 20%
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6. Above ₹15,00,000 30%

Rates prescribed by the Annual Finance Act under the optional tax regime

Individuals/HUF/AoPs/BoIs and artificial juridical persons, who exercise the option to opt out of the
default tax regime under section 115BAC, have to pay tax as per normal provisions of the Act. Under the
normal provisions of the Act, the rates of tax are prescribed by the Annual Finance Act of the year.

For individuals, HUF etc., the basic exemption limit is ₹2,50,000. This means that, as per the normal
provisions of the Act, no tax is payable by individuals with total income of upto ₹2,50,000. Those
individuals whose total income is more than ₹2,50,000 but less than or equal to ₹5,00,000 have to
pay tax on their total income in excess of ₹2,50,000@5%. Total income between ₹5,00,000 and
₹10,00,000 attracts tax @20%. The highest rate is 30%, which is attracted in respect of income in
excess of ₹10,00,000. The tax rates have to be applied on the total income to arrive at the income-tax
liability.

However, resident individuals enjoy rebate under section 87A in both the tax regimes which are
discussed later on in this chapter.

For certain income (like Long Term Capital Gains, Lottery Income, Specified Short Term Capital Gains
etc.), slab rates are not applicable under both the tax regimes. These incomes are taxable at special rates
of taxation under both the tax regimes. These special rates are contained in the Income-tax Act, 1961
itself.

Step 10 - Surcharge / Rebate under section 87A

Surcharge: Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied
as a percentage of income-tax, where total income exceeds
₹50 lakhs. The rates of surcharge applicable for different slabs of total income are discussed later on in
this chapter.

Rebate under section 87A: In order to provide tax relief to the individual tax payers, section 87A provides
a rebate from the tax payable by an assessee, being an individual resident in India, whose total income
does not exceed ₹7,00,000 under the default tax regime under section 115BAC or ₹5,00,000 under the
normal provisions of the Act if he opts out of the default tax regime. Under the default tax regime, an
individual whose total income exceeds ₹7 lakhs marginally is also entitled to a rebate of the difference
between tax on total income and the amount by which the total income exceeds ₹7 lakhs, when the
former is greater than the latter.

Step 11 – Health and education cess on income-tax

The income-tax, as increased by the surcharge or as reduced by the rebate under section 87A, if
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applicable, is to be further increased by an additional surcharge called health and education cess on
income-tax @4% of income-tax plus surcharge, if applicable.

Step 12 – Alternate Minimum Tax (AMT)

The Income-tax Act, 1961 contains certain profit-linked and investment linked deductions under normal
provisions of the Act to promote investment in various sectors. These tax benefits help to reduce the tax
liability of the taxpayers who exercise the option to opt out of the default tax regime under section
115BAC and become eligible to claim such deductions. In order to preserve the tax base vis-a- vis
profit linked and investment linked deductions, the Income-tax Act, 1961 provides for levy of alternate
minimum tax. Section 115JC provides for minimum tax to be paid by the taxpayers on their total income
without providing profit linked and investment linked deductions. However, the taxpayer can claim the
tax credit of the excess tax paid over the regular income-tax payable.

Individuals/HUF/AoPs/BoIs and artificial juridical persons paying tax under default tax regime under
section 115BAC, are not liable to alternate minimum tax under section 115JC.

For detailed discussion, refer to Chapter 9: Income-tax liability – Computation and Optimisation.

Step 13 – Examine whether to pay tax under the default tax regime under section 115BAC or pay
tax under the optional tax regime as per the regular provisions of the Act
Total income and tax liability of individuals/HUF/AoPs/BoIs and artificial juridical persons may be
computed in accordance with both the default tax regime under section 115BAC and as per the regular
provisions of the Act including provisions relating to AMT, if applicable. Then, such persons can determine
which is more beneficial and accordingly decide whether or not to opt out of the default tax regime
under section 115BAC.

Individuals/HUF/AoPs/BoIs not having income from business or profession can choose whether or not
to exercise the option of shifting out of the default tax regime in each previous year. They may choose
to pay tax under default tax regime under section 115BAC in one year and exercise the option to shift
out of default tax regime in another year.

Step 14 – Advance tax and tax deducted/ collected at source

Although the tax liability of an assessee is determined only at the end of the year, tax is required to
be paid in advance in four installments on the basis of estimated income i.e., on or before 15th June, 15th
September, 15th December and 15th March. However, residents declaring profits under presumptive
taxation scheme (where business or professional income is computed as a percentage of gross
receipts/turnover) can pay advance tax in one installment on or before 15th March instead of four
installments. In certain cases, tax is required to be deducted at source from the income by the payer
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at the rates prescribed in the Income-tax Act,

1961 or the Annual Finance Act. Such deduction should be made either at the time of accrual or at the
time of payment, as prescribed by the Act.

In the case of salary income, the obligation of the employer to deduct tax at source arises only at
the time of payment of salary to the employees. However, in respect of other payments like, fees for
professional services, fees for technical services, interest payable to residents, the person
responsible for paying is liable to deduct tax at source at the time of credit of such income to the
account of the payee or at the time of payment, whichever is earlier. Such tax deducted at source
has to be remitted to the credit of the Central Government through any branch of the RBI, SBI or any
authorized bank within the statutory due dates.

For detailed discussion, refer to Chapter 7: Advance tax, tax deduction at source and tax collection at
source.
Step 15: Tax Payable/Tax Refundable

After adjusting the advance tax and tax deducted/ collected at source, the assessee would arrive at the
amount of net tax payable or refundable. Such amount should be rounded off to the nearest multiple
of ₹10 as per section 288B.
The assessee has to pay the amount of tax payable (called self-assessment tax) on or before the due
date of filing of the return. Similarly, if any refund is due, assessee will get the same after filing the return
of income.

2. Return of Income

The Income-tax Act, 1961 contains provisions for filing of return of income. Return of income is the
format in which the assessee furnishes information as to his total income and tax payable. The format
for filing of returns by different assessees is notified by the CBDT. The particulars of income earned
under different heads, gross total income, deductions from gross total income, total income and tax
payable by the assessee are required to be furnished in the return of income. In short, a return of income
is the declaration of income by the assessee in the prescribed format.

The Act has prescribed due dates for filing return of income in case of different assessees. Companies
and firms have to mandatorily file their return of income before the due date. Other assessees are
required to file a return of income subject to fulfilling of certain conditions.
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IMPORTANT DEFINITIONS
In order to understand the provisions of the Act, one must have a thorough knowledge of the meanings of certain
key terms like ‘person’, ‘assessee’, ‘income’, etc. To understand the meanings of these terms we have to first
check whether they are defined in the Act.

Terms defined in the Act: Section 2 gives definitions of the various terms and expressions used therein. If a
particular definition is given in the Act itself, we have to be guided by that definition. For e.g. the term
‘perquisite’ has been defined under section 17(2) for the purpose of taxation of salaries.

Terms not defined under the Act: If a particular definition is not given in the Act, reference can be made to
the General Clauses Act or dictionaries.
Students should note this point carefully because certain terms like “dividend”, “transfer”, etc. have been given
a wider meaning in the Income-tax Act, 1961 than they are commonly understood. Some of the important
terms defined under section 2 are given below:

Assessee [Section 2(7)]

“Assessee” means a person by whom any tax or any other sum of money is payable under this Act. In addition,
it includes –

• Every person in respect of whom any proceeding under this Act has been taken for the assessment
of
- his income; or
- the income of any other person in respect of which he is assessable; or
- the loss sustained by him or by such other person; or
- the amount of refund due to him or to such other person.
• Every person who is deemed to be an assessee under any provision of this Act;
• Every person who is deemed to be an assessee-in-default under any provision of this Act.
• Every assessee is a ‘person’, but every ‘person’ need not be an assessee.

Assessment [Section 2(8)]

This is the procedure by which the income of an assessee is determined. It may be by way of a normal
assessment or by way of reassessment of an income previously assessed. Assessment Procedure will be dealt
with in detail at the Final level.
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Person [Section 2(31)]

The definition of ‘assessee’ leads us to the definition of ‘person’ as the former is closely connected with the
latter. The term ‘person’ is important from another point of view also viz., the charge of income-tax is on every
‘person’.

Individual

Artificial
juridical HUF
person

Person
Local
Company
Authority

AOP/BOI Firm

We may briefly consider some of the above seven categories of person each of which constitutes a separate
unit of assessment or a separate tax entity.

i. Individual
The term ‘individual’ means only a natural person, i.e., a human being.

§ It includes both males and females.

§ It also includes a minor or a person of unsound mind. But the assessment in such a case may be
made on the guardian or manager of the minor or lunatic

who is entitled to receive his income. In the case of deceased person, assessment would be
made on the legal representative.
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ii. HUF
Under the Income-tax Act, 1961, a Hindu undivided family (HUF) is treated as a separate entity for the
purpose of assessment. It is included in the definition of the term “person” under section 2(31). The levy
of income-tax is on “every person”. Therefore, income-tax is payable by a HUF.

"Hindu undivided family" has not been defined under the Income-tax Act, 1961. The expression is,
however, defined under the Hindu Law as a family, which consists of all males lineally descended from a
common ancestor and includes their wives and daughters.

Some members of the HUF are called co-parceners. They are related to each other and to the head of
the family. HUF may contain many members, but members within four degrees including the head of
the family (Karta) are called co-parceners. A Hindu Coparcenary includes those persons who acquire an
interest in joint family property by birth. Earlier, only male descendants were considered as coparceners.
With effect from 6th September, 2005, daughters have also been accorded coparcenary status. It may
be noted that only the coparceners have a right to partition.

A daughter of coparcener by birth shall become a coparcener in her own right in the same manner
as the son. Being a coparcener, she can claim partition of assets of the family. The rights of a daughter
in coparcenary property are equal to that of a son. However, other female members of the family, for
example, wife or daughter- in-law of a coparcener are not eligible for such coparcenary rights.

The relation of a HUF does not arise from a contract but arises from status. There need not be more
than one male member or one female coparcener w.e.f. 6th September, 2005 to form a HUF. The
Income-tax Act, 1961 also does not indicate that a HUF as an assessable entity must consist of at
least two male members or two coparceners.

Under the Income-tax Act, 1961, Jain undivided families and Sikh undivided families would also be
assessed as a HUF.
Schools of Hindu Law

Dayabaga school West Bengal and Assam

Rest of India except West

Mitakshara school
Bengal and Assam
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The basic difference between the two schools of Hindu law with regard to succession is as follows:

Dayabaga school of Hindu law Mitakshara school of Hindu law

Prevalent in West Bengal and Assam Prevalent in rest of India

Nobody acquires the right, share in the property by One acquires the right to the family property by his
birth as long as the head of family is living. birth and not by succession irrespective of the fact
that his elders are living.
Thus, the children do not acquire any right, share in
the family property, as long as his father is alive and Thus, every child born in the family acquires a
only on death of the father, the children will acquire right/share in the family property.
right/share in the property.

Hence, the father and his brothers would be the

coparceners of the HUF.

iii. Company [Section 2(17)]

For all purposes of the Act, the term ‘Company’, has a much wider connotation than that under the
Companies Act, 2013. Under the Act, the expression ‘Company’ means:
a) any Indian company as defined in section 2(26); or
b) any body corporate incorporated by or under the laws of a country outside India, i.e., any foreign
company; or
c) any institution, association or body which is assessable or was assessed as a company for any
assessment year under the Indian Income-tax Act, 1922 or for any assessment year commencing on
or before 1.4.1970 under the present Act; or

d) any institution, association or body, whether incorporated or not and whether Indian or non-Indian,
which is declared by a general or special order of the CBDT to be a company for such assessment
years as may be specified in the CBDT’s order.

iv. Firm [Section 2(23)]

The terms ‘firm’, ‘partner’ and ‘partnership’ have the same meanings as assigned to them in the Indian
Partnership Act, 1932. In addition, the definitions also include

the terms limited liability partnership and a partner of limited liability partnership as they have been
defined in the Limited Liability Partnership Act, 2008.

In an LLP, since liability of the partners is limited to their agreed contribution therein, it contains
elements of both a corporate structure as well as a partnership firm structure.
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However, for income-tax purposes a minor admitted to the benefits of an existing partnership would also
be treated as partner.

Classes of companies

Domestic
Foreign company
company

Company which has made

arrangement for declaring and A company which is not
Indian company
paying dividend within India out of a domestic company
the income chargeable to tax in
India.

v. Association of Persons (AOP)

When persons combine together for promotion of joint enterprise they are assessable as an AOP, if they
do not in law constitute a partnership. In order to constitute an association, persons must join for a
common purpose or action and their object must be to produce income; it is not enough that the persons
receive the income jointly. Co-heirs, co-legatees or co-donees joining together for a common purpose
or action would be chargeable as an AOP.

For e.g., Mr. Yash, AB & Co. (Firm) and X (P) Ltd. join together to carry on construction activity otherwise
than as a partnership firm, such an association will be recognized as an association of persons.

vi. Body of Individuals (BOI)

It denotes the status of persons like executors or trustees who merely receive the income jointly and
who may be assessable in like manner and to the same extent as the beneficiaries individually. Thus,
co-executors or co-trustees are assessable as a BOI as their title and interest are indivisible. Income-
tax shall not be payable by an assessee in respect of the receipt of share of income by him from BOI
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and on which the tax has already been paid by such BOI. For e.g., mutual trade associations, members
club, etc.

Section 2(31) further explains that an association of persons or a body of individuals shall be treated as
a person, whether or not it was formed with the object of deriving income, profits or gains.
Accordingly, even if such entities have been formed not for earning any income/ profit still they are
"person" for the purpose of the Act and are covered by the provisions of the Act.

Difference between AOP and BOI:

In case of a 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 come 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.

vii. Local Authority

The term “Local Authority” means a municipal committee, district board, body of port commissioners or
other authority legally entitled to or entrusted by the Government with the control or management of
a municipal or local fund.
Note: A local authority is taxable in respect of that part of its income which arises from any business
carried on by it in so far as that income does not arise from the supply of a commodity or service
within its own jurisdictional area. However, income arising from the supply of water and electricity even
outside the local authority’s own jurisdictional area is exempt from tax.

viii. Artificial Juridical Persons

Artificial Juridical Persons are the entities which are not natural persons but are separate entities in
the eyes of law. This is a residual category could cover all artificial persons with a juristic personality
not falling under any other category of persons. Deities, Bar Council, Universities are some important
examples of Artificial Juridical Persons.

Income [Section 2(24)]

1. Definition of Income
The definition of income as per the Income-tax Act, 1961 begins with the words “Income includes”.
Therefore, it is an inclusive definition and not an exhaustive one. Such a definition does not confine the
scope of income but leaves room for more inclusions within the ambit of the term.
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Section 2(24) of the Act gives a statutory definition of income. The following items of receipts are
specifically included in the said definition:—

i. Profits and gains;

ii. Dividends;
iii. The value of any perquisite or profit in lieu of salary taxable under section 17(2)/(3);
iv. Any special allowance or benefit, other than the perquisite included above, specifically granted to
the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties
of an office or employment of profit;

v. Any allowance granted to the assessee to meet his personal expenses at the place where the duties
of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily
resides or to compensate him for the increased cost of living;

vi. The value of any benefit or perquisite whether convertible into money or not, obtained from a
company either by a director or by a person who has a substantial interest in the company or by a
relative of the director or such person and any sum paid by any such company in respect of any
obligation which, but for such payment, would have been payable by the director or other person
aforesaid;

vii. Profits and gains of business or profession chargeable to tax under section
28(ii)/(iii)/(iiia)/(iiib)/(iiic)/(v)/(va);

viii. Deemed profits chargeable to tax under section 41 or section 59;

ix. The value of any benefit or perquisite taxable under section 28(iv);
x. Any capital gains chargeable under section 45;
xi. Any winnings from lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or from gambling, or betting of any form or nature whatsoever. For this purpose,
§ “Lottery” includes winnings from prizes awarded to any person by draw of lots or by chance
or in any other manner whatsoever, under any scheme or arrangement by whatever name
called;
§ “Card game and other game of any sort” includes any game show, an entertainment
programme on television or electronic mode, in which people compete to win prizes or any
other similar game;

xii. Any sum received by the assessee from his employees as contributions to any provident fund (PF) or
superannuation fund or Employees State Insurance Fund (ESI) or any other fund for the welfare
of such employees;

xiii. Any sum received under a Keyman insurance policy including the sum allocated by way of bonus
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on such policy will constitute income;

“Keyman insurance policy” means a life insurance policy taken by a person on the life of another
person where the latter is or was an employee of former or is or was connected in any manner
whatsoever with the former’s business. It also includes such policy which has been assigned to a
person with or without any consideration, at any time during the term of the policy.

xiv. Fair market value of inventory as on the date of its conversion into or treatment as a
capital asset under section 28(via);

xv. Any sum of money received as advance, if such sum is forfeited consequent to failure of
negotiation for transfer of a capital asset [Section 56(2)(ix)];

xvi. Any sum of money or value of property received without consideration or for inadequate
consideration by any person [Section 56(2)(x)];

xvii. Any compensation or other payment, due to or received by any person, in connection with
termination of his employment or the modification of the term and conditions relating thereto
[Section 56(2)(xi)];

xviii. Sum received, including the amount allocated by way of bonus, under a LIP other than under a ULIP
and keyman insurance policy, which is not exempt u/s 10(10D), to the extent the same exceeds the
aggregate of the premium paid during the term of the policy, and not claimed as deduction under
any other provision of the Act [Section 56(2)(xiii)];

[For details, refer to Unit 5 of Chapter 3: Income from Other Sources]

xix. Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement, by whatever name called, by the Central Government or a State
Government or any authority or body or agency in cash or kind to the assessee is included in the
definition of income.

However, subsidy or grant or reimbursement which has been taken into account for determination of
the actual cost of the depreciable asset in accordance with Explanation 10 to section 43(1) shall not
be included in the definition of income.

2. Concept of Income under the Income-tax Act, 1961

§ Regular receipt vis-a-vis casual receipt: Income, in general, means a periodic monetary return
which accrues or is expected to accrue regularly from definite sources. However, under the Income-
tax Act, 1961, even certain casual receipts which do not arise regularly are treated as income for tax
purposes e.g. Winnings from lotteries, crossword puzzles.
§ Revenue receipt vis-a-vis Capital receipt: Income normally refers to revenue receipts. Capital
receipts are generally not included within the scope of income in general parlance. However, the
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Income-tax Act, 1961 has specifically included certain capital receipts within the definition of
income e.g., Capital gains i.e., gains on sale of capital assets like land, jewellery.
§ Net receipt vis-a-vis Gross receipt: Income means net receipts and not gross receipts. Net receipts
are arrived at after deducting the expenditure incurred in connection with earning such receipts. The
expenditure which can be deducted while computing income under each head is prescribed under
the Income-tax Act, 1961. Income from certain eligible businesses/
§ professions is also determined on presumptive basis i.e., as a certain percentage of gross receipts.
[We will discuss in detail in Unit 3 of Chapter 3: Profits and gains of business or profession].
§ Due basis vis-a-vis receipt basis: Income is taxable either on due basis or receipt basis. For computing
income under the heads “Profits and gains of business or profession” and “Income from other
sources”, the method of accounting regularly employed by the assessee should be considered, which
can be either cash system or mercantile system. Some receipts are taxable only on receipt basis,
like, income by way of interest received on compensation or enhanced compensation.
§ Application of Income vis-a-vis Diversion of Income: Application of income means to discharge an
obligation (which is gratuitous or self- imposed) after such income reaches the assessee. Where by
virtue of an obligation by overriding title, income is diverted before it reaches the assessee, it is
known as diversion of income. In case of the former, the income would be taxable in the hands of the
person who applies it, whereas in the case of the latter, it is not taxable (i.e., even if the assessee
were to collect the income he does so on behalf of the person to whom it is payable).

3. Concept of revenue and capital receipts

Students should carefully study the various items of receipts included in the definition of income. Some
of them like capital gains are not revenue receipts. However, since they have been included in the
definition, they are chargeable as income under the Act. The concept of revenue and capital receipts is
discussed hereunder -
The Act contemplates a levy of tax on income and not on capital and hence it is very essential to
distinguish between capital and revenue receipts. Capital receipts cannot be taxed, unless they fall
within the scope of the definition of “income” and so the distinction between capital and revenue
receipts is material for tax purposes.

Certain capital receipts which have been specifically included in the definition of income are
compensation for modification or termination of services, income by way of capital gains etc.

It is not possible to lay down any single test as infallible or any single criterion as decisive, final and
universal in application to determine whether a particular receipt is capital or revenue in nature. Hence,
the capital or revenue nature of the receipt must be determined with reference to the facts and
circumstances of each case.
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Criteria for determining whether a receipt is capital or revenue in nature

The following are some of the important criteria which may be applied to distinguish between capital
and revenue receipts.

Fixed capital or Circulating capital: A receipt referable to fixed capital would be a capital receipt
whereas a receipt referable to circulating capital would be a revenue receipt. The former is not taxable
while the latter is taxable. Tangible and intangible assets which the owner keeps in his possession for
making profits are in the nature of fixed capital. The circulating capital is one which is turned over and
yields income or loss in the process.

Income from transfer of capital asset or trading asset: Profits arising from the sale of a capital asset
are chargeable to tax as capital gains under section 45 whereas profits arising from the sale of a
trading asset being of revenue nature are taxable as income from business under section 28 provided
that the sale is in the regular course of assessee’s business or the transaction constitutes an
adventure in the nature of trade.

India [Section 2(25A)]

The term 'India' means –

i. the territory of India as per Article 1 of the Constitution,

ii. its territorial waters, seabed and subsoil underlying such waters,
iii. continental shelf,
iv. exclusive economic zone or
v. any other specified maritime zone and the air space above its territory and territorial waters.

Specified maritime zone means the maritime zone as referred to in the Territorial Waters, Continental Shelf,
Exclusive Economic Zone and other Maritime Zones Act, 1976.

Agricultural income [Section 2(1A)]

Agricultural income definition is very wide and covers the income of not only the cultivators but also the land
holders who might have rented out the lands. Agricultural income may be received in cash or in kind.

Agricultural income may arise in any one of the following three ways:-

1. It may be rent or revenue derived from land situated in India and used for agricultural purposes.

2. It may be income derived from such land by

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(a) agriculture or

(b) the performance of a process ordinarily employed by a cultivator or receiver of rent in kind to render
the produce fit to be taken to the market or
(c) the sale, by a cultivator or receiver of rent in kind, of such agricultural produce raised or received by
him, in respect of which no process has been performed other than a process of the nature
mentioned in point (b) above.

3. Lastly, agricultural income may be derived from any farm building required for agricultural operations.

Now let us take a critical look at the following aspects:

A. Rent or revenue derived from land situated in India and used for agricultural purposes: The following
three conditions have to be satisfied for income to be treated as agricultural income:
(a) Rent or revenue should be derived from land;
(b) land has to be situated in India (If agricultural land is situated in a foreign country, the entire
income would be taxable); and

(c) land should be used for agricultural purposes.

The amount received in money or in kind, by one person from another for right to use land is termed as
Rent. The rent can either be received by the owner of the land or by the original tenant from the sub-
tenant. It implies that ownership of land is not necessary. Thus, the rent received by the original tenant
from sub-tenant would also be agricultural income subject to the other conditions mentioned above.
The scope of the term “Revenue” is much broader than rent. It includes income other than rent. For
example, fees received for renewal for grant of land on lease would be revenue derived from land.

B. Income derived from such land by

(a) Agriculture

The term “Agriculture” has not been defined in the Act. However, cultivation of a field involving
human skill and labour on the land can be broadly termed as agriculture.

“Agriculture” means tilling of the land, sowing of the seeds and similar operations. It involves
basic operations and subsequent operations.

Note: The term ‘agriculture’ cannot be extended to all activities which have some distant relation to land
like dairy farming, breeding and rearing of live stock, butter and cheese making and poultry farming.
This aspect is discussed in detail later on in this chapter.
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Basic Operations Subsequent Operations

Those operations by agriculturists Operations to be performed after the produce sprouts

which are absolutely necessary for the from the land (e.g., weeding, digging etc.) are subsequent
purpose of effectively raising produce opera- tions. These subsequent operations would be
from the land are the basic operations. agricultural operations only when taken in conjunction
with and as a continuation of the basic operations.

Whether income from nursery constitutes agricultural income?

Yes, as per Explanation 3 to section 2(1A), income derived from saplings or seedlings grown in a
nursery would be deemed to be agricultural income, whether or not the basic operations were carried
out on land.

(b) Process ordinarily employed to render the produce fit to be taken to the market: Sometimes, to
make the agricultural produce a saleable commodity, it becomes necessary to perform some kind of
process on the produce. The income from the process employed to render the produce fit to be taken
to the market would be agricultural income. However, it must be a process ordinarily employed by the
cultivator or receiver of rent in kind and the process must be applied to make the produce fit to be
taken to the market.

The ordinary process employed to render the produce fit to be taken to market includes thrashing,
winnowing, cleaning, drying, crushing etc. For example, the process ordinarily employed by the
cultivator to obtain the rice from paddy is to first remove the hay from the basic grain, and thereafter
to remove the chaff from the grain. The grain has to be properly filtered to remove stones etc. and
finally the rice has to be packed in gunny bags for sale in the market.

After such process, the rice can be taken to the market for sale. This process of making the rice
ready for the market may involve manual operations or mechanical operations. All these operations
constitute the process ordinarily employed to make the product fit for the market. The produce must
retain its original character in spite of the processing unless there is no market for selling it in
that condition.

However, if marketing process is performed on a produce which can be sold in its raw form, income
derived therefrom is partly agricultural income and partly business income.

(c) Sale of such agricultural produce in the market: Any income from the sale of any produce to the
cultivator or receiver of rent-in kind is agricultural income provided it is from the land situated in India
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and used for agricultural purposes. However, if the produce is subjected to any process other than
process ordinarily employed to make the produce fit for market, the income arising on sale of
such produce would be partly agricultural income and partly non-agricultural income.

Similarly, if other agricultural produce like tea, cotton, tobacco, sugarcane etc. are subjected to
manufacturing process and the manufactured product is sold, the profit on such sale will consist of
agricultural income as well as business income. That portion of the profit representing agricultural
income will be exempted.

Apportionment of Income between business income and agricultural income: Rules 7, 7A, 7B & 8 of
Income-tax Rules, 1962 provide the basis of apportionment of income between agricultural income
and business income.

i. Rule 7 - Income from growing and manufacturing of any product - Where income is partially
agricultural income and partially income chargeable to income-tax as business income, the
market value of any agricultural produce which has been raised by the assessee or received
by him as rent in kind and which has been utilised as raw material in such business or the sale
receipts of which are included in the accounts of the business shall be deducted. No further
deduction shall be made in respect of any expenditure incurred by the assessee as a
cultivator or receiver of rent in kind.

Determination of market value - There are two possibilities here:

• The agricultural produce is capable of being sold in the market either in its raw stage or
after application of any ordinary process to make it fit to be taken to the market. In such
a case, the value calculated at the average price at which it has been so sold during the
relevant previous year will be the market value.
• It is possible that the agricultural produce is not capable of being ordinarily sold in the
market in its raw form or after application of any ordinary process. In such case the
market value will be the total of the following:—
- The expenses of cultivation;
- The land revenue or rent paid for the area in which it was grown; and
- Such amount as the Assessing Officer finds having regard to the circumstances in
each case to represent at reasonable profit.

ILLUSTRATION 1
Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory. 30% of
sugarcane produce is sold for ₹10 lakhs, and the cost of cultivation of such sugarcane is ₹5 lakhs. The
cost of cultivation of the balance sugarcane (70%) is ₹14 lakhs and the market value of the same is ₹22 lakhs.
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After incurring ₹1.5 lakhs in the manufacturing process on the balance sugarcane, the sugar was sold for ₹25
lakhs. Compute B’s business income and agricultural income.

SOLUTION

Computation of Business Income and Agriculture Income of Mr. B

Particulars Business Agricultural Income
Income

(₹) (₹) (₹)

Sale of Sugar
Business income
Sale Proceeds of sugar 25,00,000
Less: Market value of sugar- cane (70%) 22,00,000

Less: Manufacturing exp. 1,50,000

1,50,000
Agricultural income
Market value of sugarcane (70%) 22,00,000
Less: Cost of cultivation 14,00,000
Sale of sugarcane 8,00,000

Agricultural Income
Sale proceeds of sugarcane (30%) 10,00,000

Less: Cost of cultivation 5,00,000

5,00,000

13,00,000

ii. Rule 7A – Income from growing and manufacturing of rubber

- This rule is applicable when income derived from the sale of centrifuged latex or cenex or latex based
crepes or brown crepes or technically specified block rubbers manufactured or processed from field
latex or coagulum obtained from rubber plants grown by the seller in India. In such cases, 35% profits
on sale is taxable as business income under the head “Profits and gains from business or profession”,
and the balance 65% is agricultural income which is exempt.
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ILLUSTRATION 2
Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold in the market
for ₹30 lakhs. The cost of growing rubber plants is ₹10 lakhs and that of manufacturing latex is ₹8
lakhs. Compute his total income.

SOLUTION
The total income of Mr. C comprises of agricultural income and business income.
Total profits from the sale of latex= ₹30 lakhs – ₹10 lakhs – ₹8 lakhs= ₹12 lakhs.

Agricultural income = 65% of ₹12 lakhs = ₹7.8 lakhs

Business income = 35% of ₹12 lakhs = ₹4.2 lakhs

iii. Rule 7B – Income from growing and manufacturing of coffee

a) In case of income derived from the sale of coffee grown and cured by the seller in India, 25% profits
on sale is taxable as business income under the head “Profits and gains from business or
profession”, and the balance 75% is agricultural income and is exempt.

b) In case of income derived from the sale of coffee grown, cured, roasted and grounded by the seller
in India, with or without mixing chicory or other flavoring ingredients, 40% profits on sale is taxable
as business income under the head “Profits and gains from business or profession”, and the balance
60% is agricultural income and is exempt.

iv. Rule 8 - Income from growing and manufacturing of tea - This rule applies only in cases where the
assessee himself grows tea leaves and manufactures tea in India. In such cases 40% profits on sale is
taxable as business income under the head “Profits and gains from business or profession”,
and the balance 60% is agricultural income and is exempt.

Rule Apportionment of income in certain cases Agricultural Business

Income Income

7A Income from sale of rubber products derived from rubber 65% 35%
plant grown by the seller in India.
7B Income from sale of coffee
- grown and cured by the seller in India 75% 25%

- grown, cured, roasted and grounded by the seller in 60% 40%

India
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8 Income from sale of tea grown and manufactured by the 60% 40%
seller in India

C. Income from farm building: Income from the farm building which is owned and occupied by the receiver of
the rent or revenue of any such land or occupied by the cultivator or the receiver of rent in kind, of any land
with respect to which, or the produce of which, any process discussed above is carried on, would be
agricultural income.
However, the income arising from the use of such farm building for any purpose (including letting for
residential purpose or for the purpose of business or profession) other than agriculture referred in (1) & (2)
of para 3.6 in pages 1.36 & 1.37 would not be agricultural income.

Further, the income from such farm building would be agricultural income only if the following conditions
are satisfied:

a) The building should be on or in the immediate vicinity of the land; and

b) The receiver of the rent or revenue or the cultivator or the receiver of rent in kind should, by reason
of his connection with such land require it as a dwelling house or as a store house.

In addition to the above conditions any one of the following two conditions should also be satisfied:

i. The land should either be assessed to land revenue in India or be subject to a local rate
assessed and collected by the officers of the Government as such or;
ii. Where the land is not so assessed to land revenue in India or is not subject to local rate:-
a) It should not be situated in any area as comprised within the jurisdiction of a municipality or
a cantonment board and which has a population not less than 10,000 or

b) It should not be situated in any area within such distance, measured aerially, in relation to the
range of population as shown hereunder –

Shortest aerial distance from the Population according to the last

local limits of a municipality or preceding census of which the relevant
cantonment board referred to in item figures have been published before the
a. first day of the previous year

(i) ≤ 2 kms > 10,000

(ii) >2 kms but ≤ 6 kms > 1,00,000

(iii) >6 kms but ≤ 8kms > 10,00,000

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Example:
Area Shortest aerial Population according to the Would Income derived
Distance from the local last preceding census of from farm Building
limits of a municipality which the relevant figures situated in this area be
or cantonment board have been published treated as agricultural
referred to in item a. before the first day of the income?
previous year
(i) A 1 km 9,000 Yes
(ii) B 1.5 kms 12,000 No
(iii) C 2 kms 11,00,000 No
(iv) D 3 kms 80,000 Yes
(v) E 4 kms 3,00,000 No
(v) F 5 kms 12,00,000 No

(vi) G 6 kms 8,000 Yes

(vii) H 7 kms 4,00,000 Yes
(viii) I 8 kms 10,50,000 No

(ix) J 9 kms 15,00,000 Yes

Would income arising from transfer of agricultural land situated in urban area be agricultural
income?

No, as per Explanation 1 to section 2(1A), the capital gains arising from the transfer of urban agricultural
land would not be treated as agricultural income under section 10 but will be taxable under section 45.

Suppose A sells agricultural land situated in New Delhi for ₹10 lakhs and makes a surplus of ₹8 lakhs
over its cost of acquisition. This surplus will not constitute agricultural income exempt under section
10(1) and will be taxable under section 45.

For better understanding of the concept, certain examples of agricultural income and non-
agricultural income are given below:

Example: Agricultural income

- Income derived from saplings or seedlings grown in a nursery.

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- Income from growing of flowers and creepers.

- Rent received from land used for grazing of cattle required for agricultural activities.
- Income from growing of bamboo.

Example: Non-agricultural income

- Income from breeding of livestock.

- Income from poultry farming.
- Income from fisheries.
- Income from dairy farming.

PREVIOUS YEAR AND ASSESSMENT YEAR

PREVIOUS YEAR 2024 - 25 ASSESSMENT YEAR 2025 - 26

Assessment year
The term has been defined under section 2(9). This means a period of 12 months commencing on 1st April every
year. The year in which income is earned is the previous year and such income is taxable in the immediately
following year which is the assessment year. Income earned in the previous year 2024-25 is taxable in the
assessment year 2025-26.

Assessment year always starts from 1st April and it is always a period of 12 months.

Previous year
The term has been defined under section 3. It means the financial year immediately preceding the assessment
year. As mentioned earlier, the income earned during the previous year is taxable in the assessment year.

Business or profession newly set up during the financial year - In such a case, the previous year shall be
the period beginning on the date of setting up of the business or profession and ending with 31st March of
the said financial year.

If a source of income comes into existence in the said financial year, then, the previous year will commence from
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the date on which the source of income newly comes into existence and will end with 31st March of the
financial year.

A is running a business from 1993 onwards. Determine the previous year for the assessment year 2025-26.
Ans. The previous year will be 1.4.2024 to 31.3.2025.

A chartered accountant sets up his profession on 1st July, 2024. Determine the previous year for the
assessment year 2025-26.
Ans. The previous year will be from 1.7.2024 to 31.3.2025.

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

the previous year itself

General Rule
Income of a previous year is assessed in the assessment year following the previous year

Exceptions to this rule

Cases where income of a previous year is assessed in the previous year itself

Shipping Persons AOP/ BOI/ Artificial Persons likely Discontinued

business of leaving Juridical Person to transfer business
non-resident India formed for a property to
particular event or avoid tax
purpose

The income of an assessee for a previous year is charged to income-tax in the assessment year following the
previous year. For instance, income of previous year 2024-25 is assessed during 2025-26. Therefore, 2025-26
is the assessment year for assessment of income of the previous year 2024-25.

However, in a few cases, this rule does not apply and the income is taxed in the previous year in which it is
earned. These exceptions have been made to protect the interests of revenue. The exceptions are as follows:
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i. Shipping business of non-resident [Section 172]

Where a ship, belonging to or chartered by a non-resident, carries passengers, livestock, mail or goods
shipped at a port in India, the ship is allowed to leave the port only when the tax has been paid or
satisfactory arrangement has been made for payment thereof. 7.5% of the freight paid or payable to
the owner or the charterer or to any person on his behalf, whether in India or outside India on account
of such carriage is deemed to be his income which is charged to tax in the same year in which it is earned.

ii. Persons leaving India [Section 174]

Where it appears to the Assessing Officer that any individual may leave India during the current
assessment year or shortly after its expiry and he has no present intention of returning to India, the
total income of such individual for the period from the expiry of the respective previous year up to the
probable date of his departure from India is chargeable to tax in that assessment year.

Suppose Mr. X is leaving India for USA on 10.6.2024 and it appears to the Assessing Officer that he
has no intention to return. Before leaving India, Mr. X may be asked to pay income-tax on the
income earned during the P.Y. 2023-24 as well as on the total income earned during the period
1.4.2024 to 10.06.2024.

iii. AOP/BOI/Artificial Juridical Person formed for a particular event or purpose [Section 174A]

If an AOP/BOI etc. is formed or established for a particular event or purpose and the Assessing
Officer apprehends that the AOP/BOI is likely to be dissolved in the same year or in the next year, he
can make assessment of the income up to the date of dissolution as income of the relevant
assessment year.

iv. Persons likely to transfer property to avoid tax [Section 175]

During the current assessment year, if it appears to the Assessing Officer that a person is likely to
charge, sell, transfer, dispose of or otherwise part with any of his assets to avoid payment of any liability
under this Act, the total income of such person for the period from the expiry of the previous year to the
date, when the Assessing Officer commences proceedings under this section is chargeable to tax in
that assessment year.

v. Discontinued business [Section 176]

Where any business or profession is discontinued in any assessment year, the income of the period
from the expiry of the previous year up to the date of such discontinuance may, at the discretion of the
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Assessing Officer, be charged to tax in that assessment year.

UNDISCLOSED SOURCES OF INCOME

Amount borrowed or
repaid on hundi
[Section 69D]

Unexplained Investments Unexplained expenditure

[Section 69] [Section 69C]

Undisclosed
sources of
income

Investment etc. not

Cash Credits [Section fully disclosed [Section
68] 69B]

Unexplained money
[Section 69A]

i. Cash Credits [Section 68]

Where any sum is found credited in the books of an assessee maintained for any previous year and
the assessee offers no explanation about the nature and source or the explanation offered is not
satisfactory in the opinion of the Assessing Officer, the sum so credited may be charged as income
of the assessee of that previous year.

Unexplained loan or borrowing - Where the sum so credited consists of loan or borrowing or any
such amount, by whatever name called, any explanation offered by the assessee in whose books
such sum is credited shall not be deemed to be satisfactory, unless -

- the person in whose name such credit is recorded in the books of such assessee also offers an
explanation about the nature and source of such sum so credited; and
- such explanation in the opinion of the Assessing Officer has been found to be satisfactory.
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Unexplained Share Capital/ Premium- Any explanation offered by a closely held company in
respect of any sum credited as share application money, share capital, share premium or any
such amount, by whatever name called, in the accounts of such company shall be deemed
to be not satisfactory, unless
- the person, being a resident, in whose name such credit is recorded in the books of such company
also explains about the nature and the source of such sum so credited and
- such explanation in the opinion of the Assessing Officer has been found to be satisfactory

Non-applicability to Venture Capital Fund or Venture Capital Company –These additional

conditions would not apply if the person, in whose name the sum is recorded, is a Venture Capital
Fund or Venture Capital Company registered with SEBI.

ii. Unexplained Investments [Section 69]

Where in the financial year immediately preceding the assessment year, the assessee has made
investments which are not recorded in the books of account and the assessee offers no
explanation about the nature and the source of investments or the explanation offered is not
satisfactory in the opinion of the Assessing Officer, the value of the investments are taxed as
deemed income of the assessee of such financial year.

iii. Unexplained money etc. [Section 69A]

Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or
other valuable article and the same is not recorded in the books of account and the assessee offers
no explanation about the nature and source of acquisition of such money, bullion etc. or the
explanation offered is not satisfactory in the opinion of the Assessing Officer, the money and the
value of bullion etc. may be deemed to be the income of the assessee for such financial year.

iv. Amount of investments etc., not fully disclosed in the books of account [Section 69B]

Where in any financial year the assessee has made investments or is found to be the owner of
any bullion, jewellery or other valuable article and the Assessing Officer finds that the amount
spent on making such investments or in acquiring such articles exceeds the amount recorded in
the books of account maintained by the assessee and he offers no explanation for the difference
or the explanation offered is unsatisfactory in the opinion of the Assessing Officer, such excess
may be deemed to be the income of the assessee for such financial year.
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If the assessee is found to be the owner of say 300 gms of gold (market value of which is
₹25,000) during the financial year ending 31.3.2025 but he has recorded to have spent ₹15,000
in acquiring it, the Assessing Officer can add ₹10,000 (i.e., the difference of the market value of
such gold and ₹15,000) as the income of the assessee, if the assessee offers no satisfactory
explanation thereof.

vi. Unexplained expenditure [Section 69C]

Where in any financial year an assessee has incurred any expenditure and he offers no explanation
about the source of such expenditure or the explanation is unsatisfactory in the opinion of the
Assessing Officer, Assessing Officer can treat such unexplained expenditure as the income of the
assessee for such financial year. Such unexplained expenditure which is deemed to be the income of
the assessee shall not be allowed as deduction under any head of income.

vii. Amount borrowed or repaid on hundi [Section 69D]

Where any amount is borrowed on a hundi or any amount due thereon is repaid other than through an
account-payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the
income of the person borrowing or repaying for the previous year in which the amount was borrowed
or repaid, as the case may be.

However, where any amount borrowed on a hundi has been deemed to be the income of any person,
he will not be again liable to be assessed in respect of such amount on repayment of such amount.
The amount repaid shall include interest paid on the amount borrowed.

RATES OF TAX, SURCHARGE & CESS

Income-tax

Income-tax is to be charged on every person at the rates prescribed for the year by the Annual Finance Act or
the Income-tax Act, 1961 or both.

Surcharge

Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a percentage
of income-tax. Surcharge is presently being levied beyond a particular threshold of income for different
persons. Also, higher rates of surcharge are prescribed for higher thresholds of income. However, under the
special tax regimes for domestic companies and co-operative societies, a uniform surcharge is prescribed
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irrespective of the level of total income.

“Health and Education cess” on Income-tax

The amount of income-tax as increased by the union surcharge, if applicable, should be further increased
by an additional surcharge called the “Health and Education cess on income-tax”, calculated at the rate of 4%
of such income-tax and surcharge, if applicable. Health and education cess is leviable in the case of all
assessees i.e. individuals, HUF, AOPs/BOIs, Artificial Juridical Persons, firms, local authorities, co-operative
societies and companies.

It is leviable to fulfill the commitment of the Government to provide and finance quality health services and
universalised quality basic education and secondary and higher education.

Individual/Hindu Undivided Family (HUF)/Association of Persons

(AOP)/Body of Individuals (BOI)/Artificial Juridical Person
Income-tax

Individual/HUF/AoP/BoI and Artificial Juridical Persons can pay tax at concessional rates under the default tax
regime under section 115BAC. However, he/it has to forego certain exemptions and deductions under this
regime. Alternatively, he/it can exercise the option to shift out of the default tax regime and pay tax under the
optional tax regime as per the regular provisions of the Act at the tax rates prescribed by the Annual Finance
Act of that year.

Default tax regime under section 115BAC of the Income-tax Act, 1961

I. Concessional tax rates

Individuals/ HUF/ AoPs/ BoIs or artificial judicial persons, other than those who exercise the option to
opt out this regime under section 115BAC(6), have to pay tax in respect of their total income (other
than income chargeable to tax at special rates under Chapter XII such as section 111A, 112, 112A, 115BB,
115BBJ etc.) at the following concessional rates, subject to certain conditions specified under section
115BAC(2) –

(i) Upto ₹3,00,000 NIL

(ii) From ₹3,00,001 to ₹7,00,000 5%

(iii) From ₹7,00,001 to ₹10,00,000 10%
(iv) From ₹10,00,001 to ₹12,00,000 15%
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(v) From ₹12,00,001 to ₹15,00,000 20%

(vii) Above ₹15,00,000 30%

II. Conditions to be satisfied

The following are the conditions to be satisfied:

S. Particulars
No.

(1) Certain deductions/exemptions not allowable: Section 115BAC(2) provides that while
computing total income, the following deductions/exemptions would not be allowed:
Section Exemption/Deduction

10(5) Leave travel concession

10(13A) House rent allowance
10(14) Exemption in respect of special allowances or benefit to meet expenses
relating to duties or personal expenses (other than those as may be
prescribed for this purpose)

10(17) Daily allowance or constituency allowance of MPs and MLAs

10(32) Exemption in respect of income of minor child included in the income
of parent
10AA Tax holiday for units established in SEZ
16 a. Entertainment allowance
b. Professional tax

24(b) Interest on loan in respect of self-occupied property

32(1)(iia) Additional depreciation
35(1)(ii),(iia), Deduction in respect of contribution to
(iii) or 35(2AA)
- notified approved research association/ university/college/other
institutions for scientific research [Section 35(1)(ii)]
- approved Indian company for scientific research [Section 35(1)(iia)]
- notified approved research association/ university/college/other
institutions for research in social science or statistical research
[Section 35(1)(iii)]
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- An approved National laboratory/university/IIT/ specified person

for scientific research undertaken under an approved programme
[Section 35(2AA)]
35AD Investment linked tax incentives for specified businesses
80C to 80U Deductions under Chapter VI-A (other than employers contribution
towards NPS under section 80CCD(2), Central Government contribution
towards Agnipath Scheme under section 80CCH(2) and deduction in
respect of employment of new employees under section 80JJAA).

(2) Certain losses not allowed to be set-off: While computing total income, set-off of any loss -
- carried forward or depreciation from any earlier assessment year, if such loss or
depreciation is attributable to any of the deductions referred to in (1) above; or

- under the head house property with any other head of income; would not be allowed.
(3) Depreciation or additional depreciation: Depreciation u/s 32 is to be determined in the
prescribed manner. Depreciation in respect of any block of assets entitled to more than 40%,
would be restricted to 40% on the written down value of such block of assets. Additional
depreciation u/s 32(1)(iia), however, cannot be claimed.

(4) Exemption or deduction for allowances or perquisite: While computing total income, any
exemption or deduction for allowances or

perquisite, by whatever name called, provided under any other law for the time being force in
India would not be allowed.
Additional points:
Loss or depreciation referred to in (2) above would be deemed to have been already given effect to and
no further deduction for such loss or depreciation shall be allowed for any subsequent year.
Where income-tax on total income of the assessee is computed under this section and there is a
depreciation allowance in respect of a block of asset from an earlier assessment year attributable to
additional depreciation u/s 32(1)(iia), which has not been given full effect to prior to A.Y. 2024-25 and
which is not allowed to be set-off in the A.Y.2024-25 due to section 115BAC, corresponding adjustment
shall be made to the WDV of such block of assets as on 1.4.2023 in the prescribed manner i.e., the WDV
as on 1.4.2023 will be increased by the unabsorbed additional depreciation not allowed to be set-off.

III. Time limit for exercising the option to shift out of the default tax regime

a. In case of an assessee having no income from business or profession: Where such

individual/HUF/AoP/BoI or Artificial Juridical person is not having income from business or
profession, he/it can exercise an option to shift out/opt out of the default tax regime under this
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section and such option has to be exercised along with the return of income to be furnished
under section 139(1) for a previous year relevant to the assessment year. In effect, such
individual/HUF/AoP/BoI or Artificial Juridical person can choose whether or not to exercise the option
of shifting out of the default tax regime in each previous year. He/it may choose to pay tax under
default tax regime under section 115BAC in one year and exercise the option to shift out of default
tax regime in another year.

b. In case of an assessee having income from business or profession: Such individual/HUF/AoP/BoI

or Artificial Juridical person having income from business or profession has an option to shift out/
opt out of the default tax regime under this section and the option has to be exercised on or
before the due date specified under section 139(1) for furnishing the return of income for such
previous year and once such option is exercised, it would apply to subsequent assessment years.
Such person who has exercised the above option of shifting out of the default tax regime for any
previous year shall be able to withdraw such option only once and pay tax under the default tax
regime under section 115BAC for a previous year other than the year in which it was exercised.
Thereafter, such person shall never be eligible to exercise option under this section, except where
such person ceases to have any business or professional income in which case, option under (i)
above would be available.

AMT liability not attracted: Individual/HUF/AoP/BoI or Artificial Juridical person paying tax under
default tax regime under section 115BAC is not liable to alternate minimum tax u/s 115JC. Such person
would not be eligible to claim AMT credit also.

Note: It may be noted that in case of Individual/HUF/AoP/BoI or Artificial Juridical person not having
income from business or profession, the total income and tax liability (including provisions relating to
AMT, if applicable under normal provisions) may be computed every year both in accordance with the
regular provisions of the Income-tax Act, 1961 and in accordance with the provisions of section 115BAC,
in order to determine which is more beneficial and accordingly such person may decide whether to pay
tax under default tax regime under section 115BAC or exercise the option to shift out and pay tax under
normal provisions of the Act for that year.

ILLUSTRATION 3
Mr. X has a total income of ₹16,00,000 for P.Y.2024-25, comprising of income from house property and interest
on fixed deposits. Compute his tax liability for A.Y.2025-26 under the default tax regime under section
115BAC.

SOLUTION
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Computation of tax liability of Mr. X for A.Y. 2025-26

Tax liability:
First ₹3,00,000 - Nil
Next ₹3,00,001 – ₹7,00,000 - @5% of ₹4,00,000 = ₹20,000

Next ₹7,00,001 – ₹10,00,000 - @10% of ₹3,00,000 = ₹30,000

Next ₹10,00,001 – ₹12,00,000 - @15% of ₹2,00,000 = ₹30,000
Next ₹12,00,001 – ₹15,00,000 - @20% of ₹3,00,000 = ₹60,000

Balance i.e., ₹16,00,000 minus ₹15,00,000 - @30% of ₹1,00,000 = ₹30,000

= ₹1,70,000

Add: Health and Education cess @ 4% = ₹6,800

= ₹1,76,800

Tax rates prescribed by the Annual Finance Act for optional tax regime

The slab rates for A.Y. 2025-26 applicable to an Individual/HUF/AOP/BOI/ Artificial Juridical Person, which has
exercised the option of shifting out of the default tax regime, are as follows:

(i) where the total income does not exceed ₹2,50,000 NIL

(ii) where the total income exceeds ₹2,50,000 but 5% of the amount by which the total income
does not exceed ₹5,00,000 exceeds ₹2,50,000

(iii) where the total income exceeds ₹5,00,000 but ₹12,500 plus 20% of the amount by which the
does not exceed ₹10,00,000 total income exceeds ₹5,00,000
(iv) where the total income exceeds ₹10,00,000 ₹1,12,500 plus 30% of the amount by which
the total income exceeds ₹10,00,000

For a senior citizen (being a resident individual who is of the age of 60 years or more at any time during
the previous year), the basic exemption limit is ₹3,00,000 and for a very senior citizen (being a resident
individual who is of the age of 80 years or more at any time during the previous year), the basic exemption
limit is ₹5,00,000. Therefore, the tax slabs for these assessees would be as follows –

For senior citizens (being resident individuals of the age of 60 years or more but less than 80 years)
(i) where the total income does not exceed ₹3,00,000 NIL
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(ii) where the total income exceeds ₹3,00,000 but 5% of the amount by which the total income
does not exceed ₹5,00,000 exceeds ₹3,00,000

(iii) where the total income exceeds ₹5,00,000 but ₹10,000 plus 20% of the amount by which the
does not exceed ₹10,00,000 total income exceeds ₹5,00,000

(iv) where the total income exceeds ₹10,00,000 ₹1,10,000 plus 30% of the amount by which
the total income exceeds ₹10,00,000

For resident individuals of the age of 80 years or more at any time during the previous year

(i) where the total income does not exceed ₹5,00,000 NIL

(ii) where the total income exceeds ₹5,00,000 but 20% of the amount by which the total income
does not exceed ₹10,00,000 exceeds ₹5,00,000
(iii) where the total income exceeds ₹10,00,000 ₹1,00,000 plus 30% of the amount by which
the total income exceeds ₹10,00,000

Clarification regarding attaining prescribed age of 60 years/ 80 years on 31st March itself, in case
of senior/very senior citizens whose date of birth falls on 1st April [Circular No. 28/2016, dated 27-
07-2016]

The CBDT has clarified that a person born on 1st April would be considered to have attained a particular age
on 31st March, the day preceding the anniversary of his birthday. In particular, the question of attainment of
age of eligibility for being considered a senior/very senior citizen would be decided on the basis of above
criteria.

Therefore, a resident individual whose 60th birthday falls on 1st April, 2025, would be treated as having
attained the age of 60 years in the P.Y.2024-25 and would be eligible for higher basic exemption limit of ₹3
lakh while computing his tax liability for A.Y.2025-26 under the optional tax regime as per the normal
provisions of the Act. Likewise, a resident individual whose 80th birthday falls on 1st April, 2025, would be
treated as having attained the age of 80 years in the P.Y.2024-25, and would be eligible for higher basic
exemption limit of ₹5 lakh in computing his tax liability for A.Y.2025-26 under the optional tax regime as per
the normal provisions of the Act.

In respect of certain types of income, as mentioned below, the Income-tax Act, 1961 has prescribed specific
rates. The special rates of tax have to be applied on the respective component of total income irrespective
of the tax regime and the slab rates have to be applied on the balance of total income after adjusting
the basic exemption limit.
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S. Section Income Rate of Tax

No.

(a) 112 a. Long term capital gains (other than LTCG taxable as per
section 112A and mentioned in below) arising -
(a) from transfer of capital asset which takes place before 20% with indexation
23.7.2024
(b) from transfer of capital asset which takes place on or after
23.7.2024
- from transfer of any land or building or both by an Lower of 20% with
individual or a HUF, being a resident acquired before indexation or 12.5%
23.7.2024 without indexation
- from transfer of other capital asset 12.5% without indexation

b. Long-term capital gains arising from transfer of unlisted

securities or shares of company in which public are not
substantially interested by non-resident assessee
- If transfer takes place before 23.7.2024 10% without indexation
and foreign currency
fluctuations
- If transfer takes place on or after 23.7.2024 12.5% without indexation
and foreign currency
fluctuations

(b) 112A Long term capital gains on transfer of – 10% on LTCG > ₹1.25
- Equity share in a company lakhs if transfer takes
- Unit of an equity oriented fund place before 23.7.2024
- Unit of business trust 12.5% on LTCG > ₹1.25
Condition for availing the benefit of this concessional rate is lakhs if transfer takes
that securities transaction tax (STT) should have been paid – place on or after
23.7.2024

In case of Time of payment of STT Note: Total exemption in

a P.Y. cannot exceed
Equity shares both at the time of
acquisition and transfer ₹1.25 lakhs.

Unit of equity oriented fund at the time of transfer

or unit of business trust
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(c) 111A Short-term capital gains on transfer of – 15% if transfer takes

- Equity shares in a company place before 23.7.2024
- Unit of an equity oriented fund
- Unit of business trust
The conditions for availing the benefit of this concessional 20% if transfer takes
rate are – place on or after
- the transaction of sale of such equity share or unit should 23.7.2024
be entered into on or after 1.10.2004; and
- such transaction should be chargeable STT.

(d) 115BB Winnings from 30%

- Lotteries;
- Crossword puzzles;
- Races including horse races;
- Card games and other games of any sort;
- Gambling or betting of any form or nature
(other than winning from any online game)
(e) 115BBJ Net winnings from online games 30%

(f) 115BBE Unexplained money, investment, expenditure, etc. deemed as 60%

income under section 68 or section 69 or section 69A or
section 69B or section 69C or section 69D [See discussion
below]

Note – For detailed discussion on taxability of capital gains, please refer Unit 4: Capital Gains of Chapter 4:
Heads of Income.

Unexplained money, investments etc. to attract tax@60% [Section 115BBE]

I. In order to control laundering of unaccounted money by availing the benefit of basic exemption limit,
the unexplained money, investment, expenditure, etc. deemed as income under section 68 or section 69
or section 69A or section 69B or section 69C or section 69D would be taxed at the rate of 60% plus
surcharge @25% of tax. Thus, the effective rate of tax (including surcharge@25% of tax and cess@4% of
tax and surcharge) is 78%.

II. No basic exemption or allowance or expenditure shall be allowed to the assessee under any provision of
the Income-tax Act, 1961 in computing such deemed income.

III. Further, no set off of any loss shall be allowable against income brought to tax under sections 68 or
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section 69 or section 69A or section 69B or section 69C or section 69D.

ILLUSTRATION 4
Mr. X has a total income of ₹16,00,000 for P.Y.2024-25, comprising of income from house property and interest
on fixed deposits. Compute his tax liability for A.Y.2025-26 assuming his age is –

a. 45 years
b. 63 years
c. 82 years

Assume that Mr. X has exercised the option to shift out/ opt out of the default tax regime.

SOLUTION

a. Computation of tax liability of Mr. X (aged 45 years)

Tax liability:
First ₹ 2,50,000 - Nil

Next ₹ 2,50,001 – ₹5,00,000 - @5% of ₹2,50,000 = ₹12,500

Next ₹ 5,00,001 – ₹10,00,000 - @20% of ₹5,00,000 = ₹1,00,000
Balance i.e., ₹16,00,000 minus ₹10,00,000- @30% of ₹6,00,000 = ₹1,80,000

= ₹2,92,500

Add: Health and Education cess@4% = ₹11,700

= ₹3,04,200

b. Computation of tax liability of Mr. X (aged 63 years)

Tax liability:
First ₹3,00,000 - Nil
Next ₹3,00,001 – ₹5,00,000 - @5% of ₹2,00,000 = ₹10,000
Next ₹5,00,001 – ₹10,00,000- @20% of ₹5,00,000 = ₹1,00,000
Balance i.e., ₹16,00,000 minus ₹10,00,000- @30% of ₹6,00,000 = ₹1,80,000
= ₹2,90,000
Add: Health and Education cess@4% = ₹11,600
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= ₹3,01,600
c. Computation of tax liability of Mr. X (aged 82 years)
Tax liability:
First ₹5,00,000 - Nil
Next ₹5,00,001 – ₹10,00,000 - @ 20% of ₹5,00,000 = ₹1,00,000
Balance i.e., ₹16,00,000 minus ₹10,00,000- @ 30% of ₹6,00,000 = ₹1,80,000
=₹2,80,000
Add: Health and Education cess@4% = ₹11,200
=₹ 2,91,200

Surcharge
In case the Individual/HUF/AoP6/BoI and Artificial Juridical Person pays tax under default tax regime under
section 115BAC

Income-tax computed in accordance with the provisions of section 115BAC and/ or section 111A or section 112 or
section 112A or 115BBE or section 115BBJ would be increased by surcharge given under the following table:

Rate of Example
Particulars surcharge
Components of total Applicable rate of
on income- income surcharge
tax

(i) Where the total income 10% Example

(including dividend income and - Dividend ₹ 15 lakhs; Surcharge would be
capital gains chargeable to tax - STCG u/s 111A ₹15 lakhs; levied@10% on
u/s 111A, 112 and 112A) > ₹50 - LTCG u/s 112 ₹25 lakhs; income-tax computed
lakhs but ≤ ₹1 crore - LTCG u/s 112A ₹20 lakhs; on total income of
and ₹1 crore.
- Other income ₹25 lakhs
(ii) Where total income (including 15% Example
dividend income and capital - Dividend income ₹10 Surcharge would be
gains chargeable to tax u/s 111A, lakhs; levied@15% on
112 and 112A) > ₹1 crore but ≤ ₹2 - STCG u/s 111A ₹35 lakhs; income-tax computed
crore - LTCG u/s 112 ₹50 lakhs; on total income of
- LTCG u/s 112A ₹35 lakhs; ₹1.85 crores.
and
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- Other income ₹55 lakhs

(iii) Where total income (excluding 25% Not Example

dividend income and capital exceeding - Dividend income ₹51 Surcharge@15%
gains chargeable to tax u/s 15% lakhs; would be levied on
111A, 112 and 112A) > ₹2 crore - STCG u/s 111A ₹44 lakh; income-tax on:
The rate of surcharge on the - LTCG u/s 112 ₹42 lakhs; - Dividend income
income-tax payable on the - LTCG u/s 112A of ₹51 lakhs;
portion of dividend income and - ₹55 lakh; and - STCG of ₹44
capital gains chargeable to tax - Other income ₹6 crores - lakhs
u/s 111A, 112 and 112A chargeable to tax
u/s 111A;
- LTCG of ₹42 lakhs
chargeable to tax
u/s 112; and
- LTCG of ₹55 lakhs
chargeable to tax
u/s 112A.
Surcharge @ 25%
would be leviable on
income-tax computed
on other income of
₹6 crores included in
total income

(iv) Where total income (including 15% Example

dividend income and capital
- Dividend income ₹40 Surcharge would be
gains chargeable to tax u/s 111A,
lakhs; levied @ 15% on
112 and 112A) > ₹2 crore in cases
- STCG u/s 111A ₹35 lakhs; income-tax computed
not covered under (iii) above
- LTCG u/s 112 ₹42 lakhs; on total income of
- LTCG u/s 112A ₹50 ₹2.77 crore.
lakhs; and
- Other income ₹1.10 crore

Marginal relief

The purpose of marginal relief is to ensure that the increase in amount of tax payable (including surcharge)
due to increase in total income of an assessee beyond the prescribed limit should not exceed the
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amount of increase in total income.

Marginal relief is available in case of such persons paying tax under default tax regime u/s 115BAC
referred to in above i.e., -

Particulars Marginal relief

(i) Where the total income Step 1 - Compute income-tax on total income; and add surcharge@10% on
> ₹50 lakhs but ≤ ₹1 such income-tax (A)
crore Step 2 - Compute income-tax on ₹50 lakhs
Step 3 - Total income (-) ₹50 lakhs
Step 4 - Add the amount computed in Step 2 and Step 3 (B)
Step 5 – Income-tax liability on total income (along with surcharge) would
be the lower of the amount arrived at in Step 1 (i.e., A) or Step 4 (i.e., B).
Consequently, if A>B, the marginal relief would be A – B.

(ii) Where the total income Step 1 - Compute income-tax on total income; and add surcharge@15% on
> ₹1 crore but ≤ ₹2 income-tax (C)
crores Step 2 - Compute income-tax on total income of ₹1 crore + surcharge on
such income-tax@10%
Step 3 - Total income (-) ₹1 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (D)
Step 5 – Income-tax liability on total income (along with surcharge) would
be the lower of the amount arrived at in Step 1 (i.e., C) or Step 4 (i.e., D).
Consequently, if C>D, the marginal relief would be C – D.

(iii) Where the total Step 1 - Compute income-tax on total income; and add surcharge@25%
income > ₹2 crores on income-tax (E)
Step 2 - Compute income-tax on total income of ₹2 crore + surcharge on
such income-tax@15%
Step 3 - Total income (-) ₹2 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (F)
Step 5 – Income-tax liability on total income (along with surcharge) would
be the lower of the amount arrived at in Step 1 (i.e., E) or Step 4 (i.e., F).
Consequently, if E>F, the marginal relief would be E – F.

Note – It is presumed that the total income referred to above does not include dividend income, long term
capital gains taxable under section 112/ 112A and short-term capital gains taxable under section 111A.
In case the total income includes dividend income, long term capital gains taxable under section 112/ 112A or
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short term capital gains taxable under section 111A, surcharge on income-tax computed on such dividend income
and capital gains cannot exceed 15%. This must be kept in mind while computing marginal relief in cases referred
to in (iii) above.

In case the Individual/HUF/AoP /BoI and Artificial Juridical Person exercises the option to shift out of the default
tax regime

Income-tax computed in accordance with normal provisions of the Act or section 111A or section 112 or section
112A or 115BBE or section 115BBJ would be increased by surcharge given under the following table:

Rate of Example
Particulars surcharge Components of total income Applicable rate of
on income- surcharge
tax

(i) Where the total income 10% Example

(including dividend - Dividend ₹ 10 lakhs; Surcharge would be
income and capital - STCG u/s 111A ₹20 lakhs; levied@10% on income-
gains chargeable to tax - LTCG u/s 112 ₹15 lakhs; tax computed on total
u/s 111A, 112 and 112A) > - LTCG u/s 112A ₹20 lakhs; income of ₹ 90 lakhs.
₹50 lakhs but ≤ ₹1 crore and
- Other income ₹25 lakhs

(ii) Where total income 15% Example

(including dividend - Dividend income ₹10 Surcharge would be
income and capital lakhs; levied @15% on
gains chargeable to tax - STCG u/s 111A ₹40 lakhs; income-tax computed on
u/s 111A, 112 and 112A) > - LTCG u/s 112 ₹55 lakhs; total income of ₹1.90
₹1 crore but ≤ ₹2 crore - LTCG u/s 112A ₹35 lakhs; crores.
and
- Other income ₹50 lakhs

(iii) Where total income 25% Example

(excluding dividend Not
income and capital exceeding
gains chargeable to tax 15%
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u/s 111A, 112 and 112A) > - Dividend income ₹51 Surcharge@15% would
₹2 crore but ≤ ₹5 crore lakhs; be levied on income-tax
- STCG u/s 111A on:
The rate of surcharge ₹44 lakh; - Dividend income of
on the income-tax - LTCG u/s 112 ₹42 lakhs; ₹51 lakhs;
payable on the portion - LTCG u/s 112A ₹55 lakh; - STCG of ₹44 lakhs
of dividend income and
and chargeable to tax u/s
capital gains
- Other income ₹3 crores 111A;
chargeable to tax u/s
111A, 112 and 112A - LTCG of ₹42 lakhs
chargeable to tax
u/s 112; and
- LTCG of ₹55 lakhs
chargeable to tax
u/s 112A.
Surcharge@25% would
be leviable on income-
tax computed on other
income of ₹ 3 crores
included in total income

(iv) Where total income 37% • Dividend income Surcharge@15% would

(excluding dividend Not ₹60 lakhs; be levied on income-tax
income and capital exceeding • STCG u/s 111A ₹50 lakhs; on:
gains chargeable to tax 15% • LTCG u/s 112 ₹42 lakhs; • Dividend income of
u/s 111A, 112 and 112A) > • LTCG u/s 112A ₹25 lakhs; ₹60 lakhs;
₹5 crore and • STCG of ₹50 lakhs
• Other income ₹6 crore chargeable to tax
Rate of surcharge on u/s 111A;
the income-tax payable • LTCG of ₹42 lakhs
on the portion of chargeable to tax
dividend income and u/s 112; and
capital gains • LTCG of ₹25 lakhs
chargeable to tax u/s chargeable to tax
111A, 112 and 112A u/s 112A.
Surcharge@37% would
be leviable on th
income-tax computed
on other income of ₹6
crores included in total
income.
(v) Where total income 15% Example
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(including dividend • Dividend income • Surcharge would be

income and capital ₹55 lakhs; levied@15% on
gains chargeable to tax • STCG u/s 111A income-tax
u/s 111A, 112 and 112A) > ₹60 lakhs; computed on total
₹2 crore in cases not • LTCG u/s 112 ₹42 lakhs; income of ₹3.02
covered under (iii) and • LTCG u/s 112A crore.
(iv) above ₹35 lakhs; and
• Other income
₹1.10 crore

Marginal relief

Marginal relief in case of such persons referred to in above under the optional tax regime (as per the normal
provisions of the Act).

Particulars Marginal relief

(i) Where the total Step 1 - Compute income-tax on total income; and add surcharge@10% on
income > ₹50 lakhs such income-tax (A)
but ≤ ₹1 crore Step 2 - Compute income-tax on ₹50 lakhs
Step 3 - Total income (-) ₹50 lakhs
Step 4 - Add the amount computed in Step 2 and Step 3 (B)
Step 5 – Income-tax liability on total income (along with surcharge) would be
the lower of the amount arrived at in Step 1 (i.e., A) or Step 4 (i.e., B).

Consequently, if A>B, the marginal relief would be A – B.

(ii) Where the total Step 1 - Compute income-tax on total income; and add surcharge@15% on
income > ₹1 crore income-tax (C)
but ≤ ₹2 crores Step 2 - Compute income-tax on total income of ₹1 crore + surcharge on
such income-tax@10%
Step 3 - Total income (-) ₹1 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (D)
Step 5 – Income-tax liability on total income (along with surcharge) would be
the lower of the amount arrived at in Step 1 (i.e., C) or Step 4 (i.e., D).
Consequently, if C>D, the marginal relief would be C – D.
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(iii) Where the total Step 1 - Compute income-tax on total income; and add surcharge@25% on
income > ₹2 crores income-tax (E)
but ≤ ₹5 crores Step 2 - Compute income-tax on total income of ₹2 crore + surcharge on
such income-tax@15%
Step 3 - Total income (-) ₹2 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (F)
Step 5 – Income-tax liability on total income (along with surcharge) would be
the lower of the amount arrived at in Step 1 (i.e., E) or Step 4 (i.e., F).

Consequently, if E>F, the marginal relief would be E – F.

(iv) Where the total Step 1 - Compute income-tax on total income; and add surcharge@37% on
income > ₹5 crores income-tax (G)
Step 2 - Compute income-tax on total income of ₹5 crore + surcharge on
such income-tax@25%
Step 3 - Total income (-) ₹5 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (H)
Step 5 – Income-tax liability on total income (along with surcharge) would be
the lower of the amount arrived at in Step 1 (i.e., G) or Step 4 (i.e., H).

Consequently, if G>H, the marginal relief would be G – H.

Note – It is presumed that the total income referred to above does not include dividend income, long term
capital gains taxable under section 112/ 112A and short-term capital gains taxable under section 111A.
In case the total income includes dividend income, long term capital gains taxable under section 112/ 112A or
short term capital gains taxable under section 111A, surcharge on income-tax computed on such dividend income
and capital gains cannot exceed 15%. This must be kept in mind while computing marginal relief in cases referred
to in (iii) and (iv) above.

ILLUSTRATION 5
Compute the tax liability of Mr. A (aged 42), having total income of ₹51 lakhs for the Assessment Year 2025-26.
Assume that his total income comprises of salary income, Income from house property and interest on fixed
deposit. Assume that Mr. A has exercised the option to shift out of section 115BAC.

SOLUTION
Computation of tax liability of Mr. A for the A.Y.2025-26

A. Income-tax (including surcharge) computed on total income of ₹51,00,000

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₹2,50,000 – ₹5,00,000 @5% ₹12,500

₹5,00,001 – ₹10,00,000 @20% ₹1,00,000

₹10,00,001 – ₹51,00,000 @30% ₹12,30,000

Total ₹13,42,500

Add: Surcharge @ 10% ₹1,34,250 ₹14,76,750

B. Income-tax computed on total income of ₹50 lakhs

(₹12,500 plus ₹1,00,000 plus ₹12,00,000) ₹13,12,500

C. Total Income Less ₹50 lakhs ₹1,00,000

D. Income-tax computed on total income of ₹50 lakhs plus the
excess of total income over ₹50 lakhs (B +C) ₹14,12,500

E. Tax liability: lower of (A) and (D) ₹14,12,500

Add: Health and education cess @4% ₹56,500

Tax liability (including cess) ₹14,69,000

F. Marginal Relief (A – D) ₹64,250

Alternative method -

A. Income-tax (including surcharge) computed on total income of ₹51,00,000

₹2,50,000 – ₹5,00,000@5% ₹12,500

₹5,00,001 – ₹10,00,000@20% ₹1,00,000

₹10,00,001 – ₹51,00,000@30% ₹12,30,000

Total ₹13,42,500

Add: Surcharge@10% ₹1,34,250 ₹14,76,750

B. Income-tax computed on total income of ₹50 lakhs

(₹12,500 plus ₹1,00,000 plus ₹12,00,000) ₹13,12,500

C. Excess tax payable (A)-(B) ₹1,64,250

D. Marginal Relief (₹1,64,250 – ₹1,00,000, being the amount
of income in excess of ₹50,00,000) ₹64,250

E. Tax liability (A)-(D) ₹14,12,500

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Add: Health and education cess @4% ₹56,500

Tax liability (including cess) ₹14,69,000

ILLUSTRATION 6
Compute the tax liability of Mr. B (aged 51) under the default tax regime, having total income of ₹1,01,00,000 for
the Assessment Year 2025-26. Assume that his total income comprises of salary income, Income from house
property and interest on fixed deposit.

SOLUTION
Computation of tax liability of Mr. B for the A.Y. 2025-26

A. Income-tax (including surcharge) computed on total income of ₹1,01,00,000

₹3,00,000 – ₹7,00,000@5% ₹20,000

₹7,00,001 – ₹10,00,000@10% ₹30,000
₹10,00,001 – ₹12,00,000@15% ₹30,000
₹12,00,001 – ₹15,00,000@20% ₹60,000

₹15,00,001 – ₹1,01,00,000@30% ₹25,80,000

Total ₹27,20,000
Add: Surcharge@15% ₹4,08,000
Tax liability without marginal relief ₹31,28,000
(B) Income-tax computed on total income of ₹1 crore (₹1,40,000 plus ₹25,50,000) ₹26,90,000
Add: Surcharge@10% ₹2,69,000

₹29,59,000
(C) Total Income Less ₹1 crore ₹1,00,000
(D) Income-tax computed on total income of ₹1 crore plus the excess of total
income over ₹1 crore (B +C) ₹30,59,000

E. Tax liability: lower of (A) & (D) ₹30,59,000

Add: Health and education cess @4% ₹1,22,360

Tax liability (including cess) ₹31,81,360

F. Marginal relief (A-D) ₹69,000

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Alternative method:

A. Income-tax (including surcharge) computed on total income of ₹1,01,00,000

₹3,00,000 – ₹7,00,000@5% ₹20,000
₹7,00,001 – ₹10,00,000@10% ₹30,000
₹10,00,001 – ₹12,00,000@15% ₹30,000

₹12,00,001 – ₹15,00,000@20% ₹60,000

₹15,00,001 – ₹1,01,00,000@30% ₹25,80,000
Total ₹27,20,000
Add: Surcharge @ 15% ₹4,08,000 ₹31,28,000

(B) Income-tax computed on total income of ₹1 crore [(₹1,40,000 plus

₹25,50,000) plus surcharge@10%] ₹29,59,000

(C) Excess tax payable (A)-(B) ₹1,69,000

(D) Marginal Relief (₹1,69,000 – ₹1,00,000, being the amount of income
in excess of ₹1,00,00,000) ₹69,000

(E) Tax liability (A) - (D) ₹30,59,000

Add: Health and education cess @4% ₹1,22,360
Tax liability (including cess) ₹31,81,360

ILLUSTRATION 7
Compute the tax liability of Mr. C (aged 58), having total income of ₹2,01,00,000 for the Assessment Year 2025-
26. Assume that his total income comprises of salary income, Income from house property and interest on
fixed deposit. Assume that Mr. C has exercised the option to shift out of section 115BAC.

SOLUTION

Computation of tax liability of Mr. C for the A.Y. 2025-26

A. Income-tax (including surcharge) computed on total income of ₹2,01,00,000

₹2,50,000 – ₹5,00,000 @ 5% ₹12,500

₹5,00,001 – ₹10,00,000 @ 20% ₹1,00,000
₹10,00,001 – ₹2,01,00,000@30% ₹57,30,000
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Total ₹58,42,500
Add: Surcharge @ 25% ₹14,60,625 ₹73,03,125

B. Income-tax computed on total income of ₹2 crore

(₹12,500 plus ₹1,00,000 plus ₹57,00,000) ₹58,12,500
Add: Surcharge@15% ₹8,71,875
₹66,84,375
C. Total Income Less ₹2 crore ₹1,00,000
D. Income-tax computed on total income of ₹2 crore plus the
excess of total income over ₹2 crore (B +C) ₹67,84,375
E. Tax liability (A) or (D), whichever is lower ₹67,84,375
Add: Health and education cess @4% ₹2,71,375
Tax liability (including cess) ₹70,55,750
F. Marginal relief (A-D) ₹5,18,750

Alternative method
A. Income-tax (including surcharge) computed on total income of ₹2,01,00,000

₹2,50,000 – ₹5,00,000 @ 5% ₹12,500

₹5,00,001 – ₹10,00,000 @ 20% ₹1,00,000

₹10,00,001 – ₹2,01,00,000@30% ₹57,30,000

Total ₹58,42,500

Add: Surcharge@25% ₹14,60,625 ₹73,03,125

B. Income-tax computed on total income of ₹2 crore

[(₹12,500 plus ₹1,00,000 plus ₹57,00,000)
plus surcharge@15%] ₹66,84,375

C. Excess tax payable (A)-(B) ₹6,18,750

D. Marginal Relief (₹6,18,750 – ₹1,00,000, being the amount
of income in excess of ₹2,00,00,000) ₹5,18,750

E. Tax liability (A) - (D) ₹67,84,375

Add: Health and education cess@4% ₹2,71,375

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Tax liability (including cess) ₹70,55,750

ILLUSTRATION 8
Compute the tax liability of Mr. D (aged 65) in a most beneficial manner. He is having total income of ₹5,01,00,000
for the Assessment Year 2025-26. Assume that his total income comprises of salary income, Income from house
property and interest on fixed deposit and is the same under both tax regimes.

SOLUTION

Computation of tax liability of Mr. D under default tax regime for the A.Y. 2025-26

Income-tax (including surcharge) computed on total income of ₹5,01,00,000

₹3,00,000 – ₹7,00,000@5% ₹20,000

₹7,00,001 – ₹10,00,000@10% ₹30,000

₹10,00,001 – ₹12,00,000@15% ₹30,000

₹12,00,001 – ₹15,00,000@20% ₹60,000

₹15,00,001 – ₹5,01,00,000@30% ₹1,45,80,000

Total ₹1,47,20,000

Add: Surcharge@25% ₹36,80,000

₹1,84,00,000

Add: Health and education cess @4% ₹7,36,000

Tax liability ₹1,91,36,000

Computation of tax liability of Mr. D under optional tax regime for the A.Y. 2025-26

A. Income-tax (including surcharge) computed on total income of ₹5,01,00,000

₹3,00,000 – ₹5,00,000 @ 5% ₹10,000

₹5,00,001 – ₹10,00,000 @ 20% ₹1,00,000

₹10,00,001 – ₹5,01,00,000@30% ₹1,47,30,000

Total ₹1,48,40,000

Add: Surcharge @ 37% ₹54,90,800 ₹2,03,30,800

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B. Income-tax computed on total income of ₹5 crore

(₹10,000 plus ₹1,00,000 plus ₹1,47,00,000) ₹1,48,10,000

Add: Surcharge@25% ₹37,02,500

₹1,85,12,500

C. Total Income Less ₹5 crore ₹1,00,000

D. Income-tax computed on total income of ₹5 crore plus the
excess of total income over ₹5 crore (B +C) ₹1,86,12,500

E. Tax liability (A) or (D), whichever is lower ₹1,86,12,500

Add: Health and education cess@4% ₹7,44,500

Tax liability (including cess) ₹1,93,57,000

F. Marginal Relief (A – D) ₹17,18,300

Alternative method
A. Income-tax (including surcharge) computed on total income of ₹5,01,00,000

₹3,00,000 – ₹5,00,000@5% ₹10,000

₹5,00,001 – ₹10,00,000@20% ₹1,00,000

₹10,00,001 – ₹5,01,00,000@30% ₹1,47,30,000

Total ₹1,48,40,000

Add: Surcharge @ 37% ₹54,90,800 ₹2,03,30,800

B. Income-tax computed on total income of ₹5 crore

[(₹10,000 plus ₹1,00,000 plus ₹1,47,00,000) plus surcharge@25%] ₹1,85,12,500
C. Excess tax payable (A)-(B) ₹18,18,300
D. Marginal Relief (₹18,18,300 – ₹1,00,000, being the amount

of income in excess of ₹5,00,00,000) ₹17,18,300

E. Tax liability (A) - (D) ₹1,86,12,500

Add: Health and education cess @4% ₹7,44,500

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Tax liability (including cess) ₹1,93,57,000

It is beneficial for Mr. D to pay tax under default tax regime under section 115BAC, since his tax
liability would be lower by ₹2,21,000 (₹1,93,57,000 - ₹1,91,36,000).

Firm/ LLP/ Local Authority

Income-tax

On the whole of the total income 30%

Special rates for capital gains under sections 112, 112A and 111A would be applicable to Firm/ LLP/
local authority also.
Surcharge

Where the total income exceeds ₹1 crore, surcharge is payable at the rate of 12% of income-tax computed
as above.

Marginal Relief

Marginal relief is available in case of such persons having a total income exceeding ₹1 crore i.e., the total
amount of income-tax (together with surcharge) computed on such income should not exceed the amount of
income-tax computed on total income of ₹1 crore by more than the amount of income that exceeds ₹1 crore.

Co-operative Society
Income-tax rates as per the normal provisions of the Act

(i) Where the total income does not exceed ₹10,000 10% of the total income

(ii) Where the total income exceeds ₹10,000 but ₹1,000 plus 20% of the amount by which the
does not exceed ₹20,000 total income exceeds ₹10,000

(iii) Where the total income exceeds ₹20,000 3,000 plus 30% of the amount by which the
total income exceeds ₹20,000

Note – A manufacturing co-operative society, resident in India, can opt for concessional rates of tax under
section 115BAE and other co-operative societies, resident in India, can opt for concessional rates of tax under
section 115BAD.
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Tax rate in case of a manufacturing co-operative society, resident in India (set up and registered on or
after 1.4.2023 and commences manufacture of article or thing before 31.3.2024) opting for concessional
tax regime u/s 115BAE

15% of income derived from or incidental to manufacturing or production of an article or thing

Tax rate in case of other resident co-operative society opting for concessional tax regime u/s 115BAD:

22% of total income

Note - Co-operative society, resident in India, can opt for concessional rate of tax u/s 115BAD or 115BAE, as the
case may be, subject to certain conditions. The total income of such co-operative societies would be computed
without giving effect to deduction under section 10AA, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35AD, 35CCC,
additional depreciation under section 32(1)(iia), deductions under Chapter VI-A (other than section 80JJAA) etc.
and set off of loss and depreciation brought forward from earlier years relating to the above deductions. The
provisions of alternate minimum tax under section 115JC would not be applicable to a co- operative society
opting for section 115BAD or 115BAE. This section will be dealt with in detail at Final level.

Special rates for capital gains under sections 112, 112A and 111A would be applicable to Co-operative society
also.

Surcharge

a) In case of a co-operative society (other than a co-operative society opting for section
115BAD or section 115BAE), whose total income > ₹1 crore but is ≤ ₹10 crore

Where the total income exceeds ₹1 crore but does not exceed ₹10 crore, surcharge is payable at the rate
of 7% of income-tax computed in accordance with the slab rates given above and/ or section 111A or
section 112 or section 112A.

Marginal Relief
Marginal relief is available in case of such co-operative societies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of income-tax
computed on total income of ₹1 crore by more than the amount of income that exceeds ₹1 crore.

b) In case of a co-operative society (other than a co-operative society opting for section 115BAD
or section 115BAE), whose total income is > ₹10 crore

Where the total income exceeds ₹10 crore, surcharge is payable at the rate of 12% of income-tax
computed in accordance with the slab rates given above and/ or section 111A or section 112 or section
112A.

Marginal Relief

Marginal relief is available in case of such co-operative societies i. e., the total amount of income-tax
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(together with surcharge) computed on such income should not exceed the amount of income-tax and
surcharge computed on total income of ₹10 crore by more than the amount of income that exceeds
₹10 crore.

c) In case of a co-operative society opting for section 115BAD or section 115BAE

Surcharge @10% of income-tax computed under section 115BAD or section 115BAE would be leviable. Since there
is no threshold limit for applicability of surcharge, consequently, there would be no marginal relief.

Domestic Company
Income-tax

If the total turnover or gross receipt in the P.Y.2022-23 ≤ ₹400 crore 25% of the total income

In any other case 30% of the total income

Notes –
• In case of a domestic manufacturing company (set up and registered on or after 1.10.2019 and
commences manufacture of article or thing8 before 31.3.2024) exercising option u/s 115BAB: 15% of
income derived from or incidental to manufacturing or production of an article or thing

• In case of a domestic company exercising option u/s 115BAA: 22% of total income
Domestic company can opt for section 115BAA or section 115BAB, as the case may be, subject to certain
conditions. The total income of such companies would be computed without giving effect to deductions
under section 10AA, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB), 35AD, 35CCC, 35CCD, Chapter VI-A
(except section 80JJAA or section 80M), additional depreciation under section 32(1)(iia) etc. and without
set-off of brought forward loss and unabsorbed depreciation attributable to such deductions. These
sections will be dealt with in detail at Final Level.

Special rates for capital gains under sections 112, 112A and 111A would be applicable to domestic
company also.
Surcharge

A. In case of a domestic company (other than a domestic company opting for section 115BAA or
section 115BAB), whose total income > ₹1 crore but is ≤ ₹10 crore

Where the total income exceeds ₹1 crore but does not exceed ₹10 crore, surcharge is payable at the rate
of 7% of income-tax computed in accordance with the rates given above.

Marginal Relief

Marginal relief is available in case of such companies i.e., the total amount of income-tax (together with
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surcharge) computed on such income should not exceed the amount of income-tax computed on total
income of ₹1 crore by more than the amount of income that exceeds ₹1 crore.

B. In case of a domestic company (other than a domestic company opting for section 115BAA or
section 115BAB), whose total income is > ₹10 crore

Where the total income exceeds ₹10 crore, surcharge is payable at the rate of 12% of income-tax
computed in accordance with the rates given above.

Marginal Relief

Marginal relief is available in case of such companies i.e., the total amount of income-tax (together with
surcharge) computed on such income should not exceed the amount of income-tax and surcharge
computed on total income of ₹10 crore by more than the amount of income that exceeds ₹10 crore.

C. In case of a domestic company opting for section 115BAA or section 115BAB

Surcharge @10% of income-tax computed under section 115BAA or section 115BAB would be leviable.
Since there is no threshold limit for applicability of surcharge, consequently, there would be no
marginal relief.

Foreign Company
Income-tax
Royalties and fees for rendering technical services (FTS) received from Government or an Indian 50%
concern in pursuance of an agreement, approved by the Central Government, made by the
company with the Government or Indian concern between 1.4.1961 and 31.3.1976 (in case of
royalties) and between 1.3.1964 and 31.3.1976 (in case of FTS)
Other income 35%

Special rates for capital gains under sections 112, 112A and 111A would be applicable to foreign company
also.

Surcharge

A. In case of a foreign company, whose total income > ₹1 crore but is ≤ ₹10 crore

Where the total income exceeds ₹1 crore but does not exceed ₹10 crore, surcharge is payable at the rate
of 2% of income-tax computed in accordance with the rates given above.
Marginal Relief

Marginal relief is available in case of such companies i.e., the total amount of income-tax (together with
surcharge) computed on such income should not exceed the amount of income-tax computed on total
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income of ₹1 crore by more than the amount of income that exceeds ₹1 crore.

B. In case of a foreign company, whose total income is > ₹10 crore

Where the total income exceeds ₹10 crore, surcharge is payable at the rate of 5% of income-tax
computed in accordance with the rates given above.

Marginal Relief

Marginal relief is available in case of such companies i.e., the total amount of income-tax (together with
surcharge) computed on such income should not exceed the amount of income-tax and surcharge
computed on total income of ₹10 crore by more than the amount of income that exceeds ₹10 crore.

REBATE FOR RESIDENT INDIVIDUALS [SECTION 87A]

In order to provide tax relief to the individual tax payers, section 87A provides a rebate from the tax payable by
an assessee, being an individual resident in India.

Rebate to resident individual paying tax under default tax regime u/s 115BAC

i. If the total income of the resident individual is chargeable to tax under section 115BAC and the total
income of such individual does not exceed ₹7,00,000, the rebate shall be equal to the amount of
income-tax payable on his total income for any assessment year or an amount of ₹25,000,
whichever is less.

The amount of rebate under section 87A shall not exceed the amount of income-tax (as computed
before allowing such rebate) on the total income of the assessee with which he is chargeable
for any assessment year.

ILLUSTRATION 9
Mr. Raghav aged 26 years and a resident in India, has a total income of
₹6,50,000, comprising his salary income and interest on bank fixed deposit. Compute his tax liability for
A.Y.2025-26 under default tax regime under section 115BAC.

SOLUTION
Computation of tax liability of Mr. Raghav for A.Y. 2025-26

Particulars ₹

Tax on total income of ₹6,50,000

Tax@5%of ₹3,50,000 17,500

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Less: Rebate u/s 87A (Lower of tax payable or ₹25,000) 17,500

Tax Liability Nil

i. If the total income of the resident individual is chargeable to tax under section 115BAC and the total
income of such individual exceeds ₹7,00,000 and income-tax payable on such total income exceeds
the amount by which the total income is in excess of ₹7,00,000, the rebate would be as follows.

Step 1 – Total income (-) ₹7 lakhs (A)

Step 2 - Compute income-tax liability on total income (B) Step 3 - If B>A, rebate under section 87A
would be a B – A.
The amount of rebate under section 87A shall not exceed the amount of income-tax (as computed
before allowing such rebate) on the total income of the assessee.

ILLUSTRATION 10
Mr. Pawan aged 35 years and a resident in India, has a total income of
₹7,15,000, comprising his salary income and interest on bank fixed deposit. Compute his tax liability for
A.Y.2025-26 under default tax regime under section 115BAC.

SOLUTION
Computation of tax liability of Mr. Pawan for A.Y. 2025-26

Particulars ₹

Step 1: Total Income of ₹7,15,000 - ₹7,00,000 15,000 (A)

Step 2: Tax on total income of ₹7,15,000

Tax@10%of ₹15,000 + ₹20,000 21,500 (B)

Step 3: Since B>A, rebate u/s 87A would be B-A
[₹21,500 - ₹15,000] 6,500

15,000
Add: HEC@4% 600

Tax Liability 15,600

Rebate to a resident individual paying tax under optional tax regime (normal provisions of the Act)

If total income of such individual does not exceed ₹5,00,000, the rebate shall be equal to the amount of income-
tax payable on his total income for any assessment year or an amount of ₹12,500, whichever is less.
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The amount of rebate under section 87A shall not exceed the amount of income- tax (as computed before
allowing such rebate) on the total income of the assessee with which he is chargeable for any assessment year.

ILLUSTRATION 11
Mr. Piyush, aged 35 years and a resident in India, has a total income of ₹4,15,000, comprising his salary income
and interest on bank fixed deposit. Compute his tax liability for A.Y.2025-26 if he exercises the option to shift out
of the default tax regime.

SOLUTION
Computation of tax liability of Mr. Piyush for A.Y. 2025-26

Particulars ₹

Tax on total income of ₹4,15,000

Tax@5%of ₹1,65,000 8,250

Less: Rebate u/s 87A (Lower of tax payable or ₹12,500) 8,250

Tax Liability Nil

- Rebate under section 87A is allowed from income-tax computed before adding Health and education
cess on income-tax.
- Rebate under section 87A is, however, not available in respect of tax payable on long-term capital
gains taxable u/s 112A.

PARTIAL INTEGRATION OF AGRICULTURAL INCOME WITH

NON-AGRICULTURAL INCOME
Agricultural income is exempt subject to conditions mentioned in the definition given under section 2(1A).
However, a method has been laid down to levy tax on agricultural income in an indirect way. This concept is
known as partial integration of agricultural income with non-agricultural income. It is applicable to individuals,
HUF, AOPs, BOIs and artificial juridical persons. Two conditions which need to be satisfied for partial integration
are:

1. The net agricultural income should exceed ₹5,000 p.a., and

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2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (i.e., If such person is
paying tax under default tax regime u/s 115BAC, then ₹3,00,000 is the basic exemption limit irrespective of
the age of the person. If such person has exercised the option to shift out of the default tax regime, then,
the basic exemption limit would be ₹5,00,000 for resident individuals of the age of 80 years or more at
any time during the previous year, ₹3,00,000 for resident individuals of the age of 60 years or more
(but less than 80 years) at any time during the previous year and ₹2,50,000 for all others).
Only if non-agricultural income exceeds this limit, partial integration would be required.

It may be noted that aggregation provisions do not apply to company, LLP, firm, co-operative society
and local authority. The object of aggregating the net agricultural income with non-agricultural income is
to tax the non-agricultural income at higher rates.

Tax calculation in such cases is as follows:

Step 1: Add non-agricultural income with net agricultural income. Compute tax on the aggregate amount.

Step 2: Add net agricultural income and the basic exemption limit available to the assessee. Compute
tax on the aggregate amount.

Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated in step 1
i.e., Step 1 – Step 2.

Step 4 : The sum so arrived at shall be –

- increased by surcharge, if applicable,

- reduced by the rebate, if any, available u/s 87A.

Step 5: Thereafter, it would be increased by health and education cess @4%.

The above concept can be clearly understood with the help of the following illustration:

ILLUSTRATION 12
Mr. X, a resident, has provided the following particulars of his income for the P.Y. 2024-25.

i. Income from salary (computed) - ₹10,80,000

ii. Income from house property (computed) - ₹2,50,000
iii. Agricultural income from a land in Jaipur - ₹4,80,000
iv. Expenses incurred for earning agricultural income - ₹1,70,000
Compute his tax liability for A.Y. 2025-26 assuming his age is -
• 45 years
• 70 years
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SOLUTION

a) Computation of tax liability (age 45 years)

Computation of total income of Mr. X for the A.Y. 2025-26 under default tax regime under section
115BAC

For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.

1. Net agricultural income exceeds ₹5,000 p.a., and

2. Non-agricultural income exceeds the basic exemption limit of ₹3,00,000.

His tax liability is computed in the following manner:

Particulars ₹ ₹

Income from salary 10,80,000

Income from house property 2,50,000

Net agricultural income [₹4,80,000 – ₹1,70,000] 3,10,000

Less: Exempt under section 10(1) (3,10,000) -

Gross Total Income 13,30,000

Less: Deductions under Chapter VI-A -

Total Income 13,30,000

Step 1 : ₹13,30,000 + ₹3,10,000 = ₹16,40,000

Tax on ₹16,40,000 = ₹1,82,000
(i.e., 5% of ₹4,00,000 plus 10% of ₹3,00,000 plus 15% of ₹2,00,000 plus 20% of ₹3,00,000
plus 30% of ₹1,40,000)

Step 2 : ₹3,10,000 + ₹3,00,000 = ₹6,10,000

Tax on ₹6,10,000 = ₹15,500

(i.e. 5% of ₹3,10,000)

Step 3 : ₹1,82,000 – ₹15,500 = ₹1,66,500

Step 4 & 5 : Total tax payable = ₹1,66,500

= ₹1,66,500 + 4% of ₹1,66,500 = ₹1,73,160.

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Computation of total income of Mr. X for the A.Y. 2025-26 under normal provisions of the Act

For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
1. Net agricultural income exceeds ₹5,000 p.a., and
2. Non-agricultural income exceeds the basic exemption limit of ₹2,50,000.

His tax liability is computed in the following manner:

Particulars ₹ ₹
Income from salary 10,80,000
Income from house property 2,50,000
Net agricultural income [₹4,80,000 – ₹1,70,000] 3,10,000
Less: Exempt under section 10(1) (3,10,000) -
Gross Total Income 13,30,000
Less: Deductions under Chapter VI-A -
Total Income 13,30,000

Step 1 : ₹13,30,000 + ₹3,10,000 = ₹16,40,000

Tax on ₹16,40,000 = ₹3,04,500

(i.e., 5% of ₹2,50,000 plus 20% of ₹5,00,000 plus 30% of ₹6,40,000)

Step 2 : ₹3,10,000 + ₹2,50,000 = ₹5,60,000

Tax on ₹5,60,000 = ₹24,500

(i.e. 5% of ₹2,50,000 plus 20% of ₹60,000)

Step 3 : ₹3,04,500 – ₹24,500 = ₹2,80,000

Step 4 & 5 : Total tax payable = ₹2,80,000

= ₹2,80,000 + 4% of ₹2,80,000 = ₹2,91,200.

b) Computation of tax liability (age 70 years)

Computation of total income of Mr. X for the A.Y. 2025-26 under default tax regime under
section 115BAC

Tax liability of Mr. X would be same under default tax regime whether he is of age of 45 years of
70 years i.e., ₹1,73,160.
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Computation of total income of Mr. X for the A.Y. 2025-26 under normal provisions of the Act

His tax liability is computed in the following manner:

Step 1 : ₹13,30,000 + ₹3,10,000 = ₹16,40,000

Tax on ₹16,40,000 = ₹3,02,000
(i.e., 5% of ₹2,00,000 plus 20% of ₹5,00,000 plus 30% of ₹6,40,000)

Step 2 : ₹3,10,000 + ₹3,00,000 = ₹6,10,000

Tax on ₹6,10,000 = ₹32,000
(i.e. 5% of ₹2,00,000 plus 20% of ₹1,10,000)

Step 3 : ₹3,02,000 – ₹32,000 = ₹2,70,000

Step 4 & 5 : Total tax payable = ₹2,70,000

= ₹2,70,000 + 4% of ₹2,70,000 = ₹2,80,800.

TEST YOUR KNOWLEDGE

1. Who is an “Assessee”? Explain

2. State any four instances where the income of the previous year is assessable in the previous year itself
instead of the assessment year.

3. Whether the income derived from saplings or seedlings grown in a nursery is taxable under the Income-
tax Act, 1961? Examine.

4. What are the two schools of Hindu law and where are they prevalent? Explain. Also, mention the
difference between the two schools of Hindu Law.

5. What is the difference between an Association of Persons and Body of Individuals?

6. Mr. Sumit, a resident Indian, earns income of ₹15 lakhs from sale of rubber manufactured from latex
obtained from rubber plants grown by him in India and ₹20 lakhs from sale of rubber manufactured from
latex obtained from rubber plants grown by him in Malaysia during the A.Y.2025-26. What would be
his business income, assuming he has no other business?
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7. Mr. Raja, a resident Indian, earns income of ₹10 lakhs from sale of coffee grown and cured in India during
the A.Y.2025-26. His friend, Mr. Shyam, a resident Indian, earns income of ₹20 lakhs from sale of coffee
grown, cured, roasted and grounded by him in India during the A.Y.2025-26. What would be the business
income chargeable to tax in India of Mr. Raja and Mr. Shyam?

8. The Jain HUF in Assam comprises of Mr. Suresh Jain, his wife Mrs. Sapna Jain, his son Mr. Sarthak Jain,
his daughter-in-law Mrs. Preeti Jain, his daughter Miss Seema Jain and his unmarried brother Mr. Pritam
Jain. Which of the members of the HUF are eligible for coparcenary rights?

9. Compute the tax liability under default tax regime of Mr. Kashyap (aged 35), having total income of
₹51,75,000 for the Assessment Year 2025-26. Assume that his total income comprises of salary income,
income from house property and interest on fixed deposit.

10. Mr. Agarwal, aged 40 years and a resident in India, has a total income of ₹6,50,00,000, comprising
long term capital gain taxable @20% under section 112 of ₹55,00,000, short term capital gain taxable
@15% under section 111A of ₹65,00,000 and other income of ₹5,30,00,000. Compute his tax liability for
A.Y.2025-26 under the default tax regime and optional tax regime as per the normal provisions of the
Act assuming that the total income and its components are the same in both tax regimes.

11. Mr. Sharma aged 62 years and a resident in India, has a total income of ₹2,30,00,000, comprising
long term capital gain taxable @12.5% under section 112 of ₹52,00,000, short term capital gain taxable
@20% under section 111A of ₹64,00,000 and other income of ₹1,14,00,000. Compute his tax liability for
A.Y.2025-26 under the default tax regime and optional tax regime as per the normal provisions of the
Act assuming that the total income and its components are the same in both tax regimes.

ANSWERS
1. As per section 2(7), assessee means a person by whom any tax or any other sum of money is
payable under the Income-tax Act, 1961.

In addition, the term includes –

• Every person in respect of whom any proceeding under the Act has been taken for the
assessment of –
- his income; or
- the income of any other person in respect of which he is assessable; or
- the loss sustained by him or by such other person; or
- the amount of refund due to him or to such other person.
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• Every person who is deemed to be an assessee under any provision of the Act;
• Every person who is deemed to be an assessee in default under any provision of the Act.

2. The income of an assessee for a previous year is charged to income-tax in the assessment year following
the previous year. However, in a few cases, the income is taxed in the previous year in which it is
earned. These exceptions have been made to protect the interests of revenue. The exceptions are as
follows:

i. Where a ship, belonging to or chartered by a non-resident, carries passengers, livestock, mail

or goods shipped at a port in India, the ship is allowed to leave the port only when the tax
has been paid or satisfactory arrangement has been made for payment thereof. 7.5% of the
freight paid or payable to the owner or the charterer or to any person on his behalf, whether
in India or outside India on account of such carriage is deemed to be his income which is
charged to tax in the same year in which it is earned.

ii. Where it appears to the Assessing Officer that any individual may leave India during the
current assessment year or shortly after its expiry and he has no present intention of
returning to India, the total income of such individual for the period from the expiry of the
respective previous year up to the probable date of his departure from India is chargeable
to tax in that assessment year.

iii. If an AOP/BOI etc. is formed or established for a particular event or purpose and the
Assessing Officer apprehends that the AOP/BOI is likely to be dissolved in the same year or
in the next year, he can make assessment of the income up to the date of dissolution as
income of the relevant assessment year.

iv. During the current assessment year, if it appears to the Assessing Officer that a person
is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets to avoid
payment of any liability under this Act, the total income of such person for the period from
the expiry of the previous year to the date, when the Assessing Officer commences
proceedings under this section is chargeable to tax in that assessment year.

v. Where any business or profession is discontinued in any assessment year, the income of
the period from the expiry of the previous year up to the date of such discontinuance may,
at the discretion of the Assessing Officer, be charged to tax in that assessment year.

3. As per Explanation 3 to section 2(1A), income derived from saplings or seedlings grown in a nursery shall
be deemed to be agricultural income and exempt from tax, whether or not the basic operations were
carried out on land.
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4. The two schools of Hindu law are Dayabaga school, prevalent in West Bengal and Assam, and Mitakshara
school, prevalent in rest of India.

Under the Dayabaga school of Hindu Law, nobody acquires the right, share in the property by birth
as long as the head of family is living. Thus, the children do not acquire any right, share in the family
property, as long as his father is alive and only on death of the father, the children will acquire right/share
in the property. Hence, the father and his brothers would be the coparceners of the HUF.

Under the Mitakshara school of Hindu Law, one acquires the right to the family property by his birth
and not by succession irrespective of the fact that his elders are living. Thus, every child born in the
family acquires a right/share in the family property.

5. In order to constitute an Association of Persons (AOP), persons must join for a common purpose or
action and their object must be to produce income; it is not enough that the persons receive the
income jointly.

Body of Individuals denotes the status of persons like executors or trustees who merely receive the
income jointly and who may be assessable in like manner and to the same extent as the beneficiaries
individually. Thus, co- executors or co-trustees are assessable as a BOI as their title and interest are
indivisible.

The difference between an AOP and BOI is that in case of a 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 come 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.

6. Since Mr. Sumit is a resident, his global income would be taxable in India. Income of ₹20 lakhs from sale
of rubber manufactured from latex obtained from rubber plants grown by him in Malaysia would be his
business income since it is from rubber plants grown outside India. 35% income from sale of rubber
manufactured from latex obtained from rubber plants grown by him in India would be taxable as
business income and balance 65% would be exempt as agricultural income.
Business income = 35% of ₹15 lakhs + ₹20 lakhs = ₹25.25 lakhs

7. In case of income derived from the sale of coffee grown and cured by the seller in India, 25% income on
such sale is taxable as business income. In case of income derived from the sale of coffee grown,
cured, roasted and grounded by the seller in India, 40% income on such sale is taxable as business
income.

Business income of Mr. Raja = 25% of ₹10 lakhs = ₹2.5 lakhs Business income of Mr. Shyam = 40% of
₹20 lakhs = ₹8 lakhs
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8. Dayabaga school of Hindu law is prevalent in Assam. In Dayabaga school of Hindu law, nobody acquires
the right, share in the property by birth as long as the head of family is living.
Thus, the children do not acquire any right, share in the family property, as long as his father is alive and
only on death of the father, the children will acquire right/share in the property.

Hence, Mr. Suresh Jain and his brother, Mr. Pritam Jain would be the coparceners of the Jain HUF and
are eligible for coparcenary rights.

9. Computation of tax liability of Mr. Kashyap for the A.Y.2025-26 under default tax regime

A. Tax payable including surcharge on total income of ₹51,75,000

₹3,00,000 – ₹7,00,000 @5% ₹20,000

₹7,00,001 – ₹10,00,000 @10% ₹30,000

₹10,00,001 – ₹12,00,000 @15% ₹30,000
₹12,00,001 – ₹15,00,000 @20% ₹60,000

₹15,00,001 – ₹51,75,000 @30% ₹11,02,500

Total ₹12,42,500
Add: Surcharge @ 10% ₹1,24,250 ₹13,66,750

B. Tax Payable on total income of ₹50 lakhs (₹1,40,000 plus ₹10,50,000) ₹11,90,000

C. Total Income Less ₹50 lakhs ₹1,75,000

D. Tax payable on total income of ₹50 lakhs plus the excess of total income over ₹13,65,000
₹50 lakhs (B +C)
E. Tax payable: lower of (A) and (D) ₹13,65,000
Add: Health and education cess @4% ₹54,600

Tax liability ₹14,19,600

F. Marginal Relief (A – D) ₹1,750

Alternative method -

A. Tax payable including surcharge on total income of ₹51,75,000

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₹3,00,000 – ₹7,00,000 @5% ₹20,000

₹7,00,001 – ₹10,00,000 @10% ₹30,000

₹10,00,001 – ₹12,00,000 @15% ₹30,000

₹12,00,001 – ₹15,00,000 @20% ₹60,000

₹15,00,001 – ₹51,75,000 @30% ₹11,02,500

Total ₹12,42,500

Add: Surcharge@10% ₹1,24,250 ₹13,66,750

B. Tax Payable on total income of ₹50 lakhs (₹1,40,000 plus ₹10,50,000) ₹11,90,000
C. Excess tax payable (A)-(B) ₹1,76,750

D. Marginal Relief (₹1,76,750 – ₹1,75,000, being the amount of

income in excess of ₹50,00,000) ₹1,750
E. Tax payable (A)-(D) ₹13,65,000

Add: Health and education cess @4% ₹54,600

Tax liability ₹14,19,600

10. Computation of tax liability of Mr. Agarwal for the A.Y.2025-26 under default tax regime

Particulars ₹

Tax on total income of ₹6,50,00,000

Tax@20% of ₹55,00,000 11,00,000
Tax@15% of ₹65,00,000 9,75,000
Tax on other income of ₹5,30,00,000
₹3,00,000 – ₹7,00,000 @5% 20,000
₹7,00,000 – ₹10,00,000 @10% 30,000

₹10,00,000 – ₹12,00,000 @15% 30,000

₹12,00,000 – ₹15,00,000 @20% 60,000
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₹15,00,000 – ₹5,30,00,000 @30% 1,54,50,000 1,55,90,000

1,76,65,000
Add: Surcharge @15% on ₹20,75,000 3,11,250
@25% on ₹1,55,90,000 38,97,500 42,08,750

2,18,73,750
Add: Health and education cess @4% 8,74,950

Tax Liability 2,27,48,700

Computation of tax liability of Mr. Agarwal for the A.Y.2025-26 under normal provisions of the Act

Particulars ₹

Tax on total income of ₹6,50,00,000

Tax@20% of ₹55,00,000 11,00,000

Tax@15% of ₹65,00,000 9,75,000
Tax on other income of ₹5,30,00,000
₹2,50,000 – ₹5,00,000 @5% 12,500

₹5,00,000 – ₹10,00,000 @20% 1,00,000

₹10,00,000 – ₹5,30,00,000 @30% 1,56,00,000 1,57,12,500
1,77,87,500
Add: Surcharge @15% on ₹20,75,000 3,11,250
@37% on ₹1,57,12,500 58,13,625 61,24,875
2,39,12,375

Add: Health and education cess @4% 9,56,495

Tax Liability 2,48,68,870

11. Computation of tax liability of Mr. Sharma for the A.Y.2025-26 under default tax regime

Particulars ₹

Tax on total income of ₹2,30,00,000

[email protected]% of ₹52,00,000 6,50,000
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Tax@20% of ₹64,00,000 12,80,000

Tax on other income of ₹1,14,00,000
₹3,00,000 – ₹7,00,000 @5% 20,000
₹7,00,000 – ₹10,00,000 @10% 30,000

₹10,00,000 – ₹12,00,000 @15% 30,000

₹12,00,000 – ₹15,00,000 @20% 60,000

₹15,00,000 – ₹1,14,00,000 @30% 29,70,000 31,10,000

50,40,000
Add: Surcharge @15% 7,56,000
57,96,000
Add: Health and education cess @4% 2,31,840

Tax Liability 60,27,840

Computation of tax liability of Mr. Sharma for the A.Y.2025-26 under normal provisions of the Act
Particulars ₹
Tax on total income of ₹2,30,00,000
[email protected]% of ₹52,00,000 6,50,000
Tax@20% of ₹64,00,000 12,80,000
Tax on other income of ₹1,14,00,000
₹3,00,000 – ₹5,00,000 @5% 10,000
₹5,00,000 – ₹10,00,000 @20% 1,00,000
₹10,00,000 – ₹1,14,00,000 @30% 31,20,000 32,30,000

51,60,000
Add: Surcharge @15% 7,74,000
59,34,000
Add: Health and education cess @4% 2,37,360

Tax Liability 61,71,360

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Residence and Scope of Total Income 2

CHAPTER - 2 RESIDENCE AND SCOPE OF TOTAL INCOME

Residence and Scope of Total Income

Residential Status [Section 6] Scope of Total Income [Section 5]

Individual / HUF Firm/LLP/

AOP / BOI /
Individual / Resident Non-
company
HUF but resident
etc. Resident not
Resident and ordinarily
Resident Non- ordinarily resident
Deemed Income
resident
resident received/
resident Non-
Resident (Individual) deemed
resident
and Income which to be
ordinarily is received/ received/
resident Global deemed to be accrued
income is received / or arisen/
taxable in accrued or deemed
Resident
arisen/ to accrue
but not India
deemed to
ordinarily or arise in
accrue or
resident India
arise in India

Income which
accrues or
arises outside
India being
derived from a
business
controlled in
or profession
set up in India
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Residence and Scope of Total Income 2

RESIDENTIAL STATUS [SECTION 6]

The incidence of tax on any assessee depends upon his residential status under the Act. For all purposes
of income-tax, taxpayers (individuals and HUF) are classified into three broad categories on the basis of
their residential status viz.
1. Resident and ordinarily resident
2. Resident but not ordinarily resident
3. Non-resident

Taxpayers (other than individuals and HUF) are classified into two broad categories on the basis
of their residential status viz.

1. Resident
2. Non-resident

The residential status of an assessee must be ascertained with reference to each previous year. A person who
is resident and ordinarily resident in one year may become non-resident or resident but not ordinarily
resident in another year or vice versa.

The provisions for determining the residential status of assessees are:

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Residential Status of Individuals

1. Residential status on the basis of number of days of stay in India - Under section 6(1), an
individual is said to be resident in India in any previous year, if he satisfies any one of the following
conditions:
i. He has been in India during the previous year for a total period of 182 days or more, or
ii. He has been in India during the 4 years immediately preceding the previous year for a total period
of 365 days or more and has been in India for at least 60 days in the relevant previous year.
If the individual satisfies any one of the conditions mentioned above, he is a resident. If both the above
conditions are not satisfied, the individual is a non-resident.

• The term “stay in India” includes stay in the territorial waters of India (i.e. 12 nautical miles into the sea
from the Indian coastline). Even the stay in a ship or boat moored in the
• territorial waters of India would be sufficient to make the individual resident in India.
• It is not necessary that the period of stay must be continuous or active nor is it essential that the stay
should be at the usual place of residence, business or employment of the individual.
• For the purpose of counting the number of days stayed in India, both the date of departure as well as the
date of arrival are considered to be in India.
• The residence of an individual for income-tax purpose has nothing to do with citizenship, place of birth or
domicile. An individual can, therefore, be resident in more countries for tax purposes than one even
though he can have only one domicile

Exceptions:

The following categories of individuals will be treated as resident in India only if the period of their stay
during the relevant previous year amounts to 182 days or more. In other words, even if such persons were in
India for 60 days or more (but less than 182 days) in the relevant previous year, they will not be treated as
resident due to the reason that their stay in India was for 365 days or more during the 4 immediately
preceding years.

I. Indian citizen, who leaves India during the relevant previous year as a member of the crew of an Indian
ship or for purposes of employment outside India, or

II. Indian citizen or person of Indian origin1 who, being outside India comes on a visit to India during
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the relevant previous year.

However, such person having total income, other than the income from foreign sources [i.e., income
which accrues or arises outside India (except income from a business controlled in or profession set up
in India) and which is not deemed to accrue or arise in India], exceeding ₹15 lakhs during the previous
year will be treated as resident in India if -

• the period of his stay during the relevant previous year amounts to 182 days or more, or
• he has been in India during the 4 years immediately preceding the previous year for a total period
of 365 days or more and has been in India for at least 120 days in the previous year.

Stay in India for 120 days in the relevant P.Y. is not a standalone condition. This condition requires stay
in India for 120 days in the relevant P.Y. + 365 days in the 4 years immediately preceding the P.Y.

How to determine period of stay in India for an Indian citizen, being a crew member?

In case of foreign bound ships where the destination of the voyage is outside India, there is uncertainty
regarding the manner and the basis of determining the period of stay in India for an Indian citizen, being a crew
member.

To remove this uncertainty, Explanation 2 to section 6(1) provides that in the case of an individual, being a
citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay
in India shall, in respect of such voyage, be determined in the prescribed manner and subject to the prescribed
conditions.

Accordingly, the CBDT has, vide Notification No.70/2015 dated 17.8.2015, inserted Rule 126 in the Income-tax
Rules, 1962 to compute the period of stay in such cases.
According to Rule 126, for the purposes of section 6(1), in case of an individual, being a citizen of India and a
member of the crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage, not
include the following period:
Period to be excluded
Period commencing from Period ending on
the date entered into the Continuous and the date entered into the Continuous Discharge
Discharge Certificate in respect of joining the Certificate in respect of signing off by that individual
ship by the said individual for the eligible from the ship in respect of such voyage.
voyage
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Meaning of certain term

Term Meaning
Eligible A voyage undertaken by a ship engaged in the carriage of passengers or freight in
voyage international traffic where –

1. for the voyage having originated from any port in India, has as its destination any port
outside India; and
2. for the voyage having originated from any port outside India, has as its destination any
port in India.

ILLUSTRATION 1

Mr. Anand is an Indian citizen and a member of the crew of a Singapore bound Indian ship engaged in
carriage of passengers in international traffic departing from Chennai port on 6th June, 2024. From the
following details for the P.Y. 2024-25, determine the residential status of Mr. Anand for A.Y. 2025-
26, assuming that his stay in India in the last 4 previous years (preceding P.Y. 2024-25) is 400 days:

Particulars Date

Date entered into the Continuous Discharge Certificate in respect of joining the ship 6th June, 2024
by Mr. Anand
Date entered into the Continuous Discharge Certificate in respect of signing off the 9th December,
ship by Mr. Anand 2024

SOLUTION

In this case, since Mr. Anand is an Indian citizen and leaving India during P.Y. 2024-25 as a member of
the crew of the Indian ship, he would be resident in India if he stayed in India for 182 days or more.

The voyage is undertaken by an Indian ship engaged in the carriage of passengers in international traffic,
originating from a port in India (i.e., the Chennai port) and having its destination at a port outside India (i.e., the
Singapore port). Hence, the voyage is an eligible voyage for the purposes of section 6(1).
Therefore, the period commencing from 6th June, 2024 and ending on 9th December, 2024, being the
dates entered into the Continuous Discharge Certificate in respect of joining the ship and signing off from
the ship by Mr. Anand, an Indian citizen who is a member of the crew of the ship, has to be excluded for
computing the period of his stay in India. Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded
from the period of his stay in India. Consequently, Mr. Anand’s period of stay in India during the
P.Y. 2024-25 would be 178 days [i.e., 365 days – 187 days]. Since his period of stay in India during the P.Y.
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Residence and Scope of Total Income 2

2024-25 is less than 182 days, he is a non- resident for A.Y. 2025-26.

2. Deemed resident [Section 6(1A)] – An individual, being an Indian citizen, having total income, other
than the income from foreign sources [i.e., income which accrues or arises outside India (except
income from a business controlled in or profession set up in India) and which is not deemed to
accrue or arise in India], exceeding ₹15 lakhs during the previous year would be deemed to be resident
in India in that previous year, if he is not liable to tax in any other country or territory by reason of his
domicile or residence or any other criteria of similar nature.

However, this provision will not apply in case of an individual who is a resident of India in the previous
year as per section 6(1).

Meaning of “liable to tax” – Liable to tax, in relation to a person and with reference to a country, means
that there is an income-tax liability on such person under the law of that country for the time being in
force. It also includes a person who has subsequently been exempted from such liability under the law
of that country.

• Only Indian citizen can be deemed resident. An individual who is not an Indian citizen but a
person of Indian Origin cannot be deemed resident u/s 6(1A).
• Stay in India is not necessary for being a deemed resident u/s 6(1A).

Resident and ordinarily resident/Resident but not ordinarily resident

Only individuals and HUF can be “resident but not ordinarily resident” in India. All other classes of assessees
can be either a resident or non-resident. A not- ordinarily resident person is one who satisfies any one of
the conditions specified u/s 6(6).

I. If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the
relevant previous year, or
II. If such individual has, during the 7 previous years preceding the relevant previous year, been in India for
a period of 729 days or less, or

III. If such individual is an Indian citizen or person of Indian origin (who, being outside India, comes on a visit
to India in any previous year) having total income, other than the income from foreign sources [i.e.,
income which accrues or arises outside India (other than income derived from a business controlled in
or profession set up in India) and which is not deemed to accrue or arise in India], exceeding ₹15 lakhs
during the previous year, who has been in India for 120 days or more but less than 182 days
during that previous year, or
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Residence and Scope of Total Income 2

IV. If such individual is an Indian citizen who is deemed to be resident in India under section 6(1A).

A deemed resident u/s 6(1A) is always RNOR.

ILLUSTRATION 2

Brett Lee, an Australian cricket player visits India for 100 days in every financial year. This has been his
practice for the past 10 financial years.

(a) Find out his residential status for the assessment year 2025-26.

(b) Would your answer change if the above facts relate to Srinath, an Indian citizen who resides in
Australia and represents the Australian cricket team?

(c) What would be your answer if Srinath had visited India for 120 days instead of 100 days every year,
including P.Y.2024-25?

SOLUTION
a) Determination of Residential Status of Mr. Brett Lee for the A.Y. 2025-26:-

Period of stay during previous year 2024-25 = 100 days

Calculation of period of stay during 4 preceding PYs (100 x 4 = 400 days)

2023-24 100 days

2022-23 100 days

2021-22 100 days
2020-21 100 days

Total 400 days

Mr. Brett Lee has been in India for a period more than 60 days during previous year 2024-25 and
for a period of more than 365 days during the 4 immediately preceding previous years. Therefore,
since he satisfies one of the basic conditions under section 6(1), he is a resident for the A.Y. 2025-
26.

Computation of period of stay during 7 preceding previous years = 100 x 7 = 700 days
2023-24 100 days

2022-23 100 days

2021-22 100 days

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2020-21 100 days

2019-20 100 days
2018-19 100 days
2017-18 100 days

Total 700 days

Since his period of stay in India during the past 7 previous years is less than 730 days, he is a not-
ordinarily resident during the A.Y. 2025-26 (See Note below).
Therefore, Mr. Brett Lee is a resident but not ordinarily resident during the previous year 2024-25
relevant to the assessment year 2025-26.

Note: An individual, not being an Indian citizen, would be not-ordinarily resident person if he satisfies
any one of the conditions specified under section 6(6), i.e.,

i. If such individual has been non-resident in India in any 9 out of the 10 previous years preceding
the relevant previous year, or
ii. If such individual has during the 7 previous years preceding the relevant previous year been in
India for a period of 729 days or less.
In this case, since Mr. Brett Lee satisfies condition (ii), he is a not-ordinarily resident for the A.Y. 2025-
26.

b) If the above facts relate to Mr. Srinath, an Indian citizen, who residing in Australia, comes on a visit to
India, he would be treated as non-resident in India, irrespective of his total income (excluding income
from foreign sources), since his stay in India in the current financial year is, in any case, less than
120 days.

c) In this case, if Srinath’s total income (excluding income from foreign sources) exceeds ₹15 lakh, he
would be treated as resident but not ordinarily resident in India for P.Y.2024-25, since his stay in
India is 120 days in the P.Y.2024-25 and 480 days (i.e., 120 days x 4 years) in the immediately
four preceding previous years.
If his total income (excluding income from foreign sources) does not exceed 15 lakh, he would be
treated as non-resident in India for the P.Y.2024-25, since his stay in India is less than 182 days in
the P.Y.2024-25.

ILLUSTRATION 3

Mr. B, a Canadian citizen, comes to India for the first time during the P.Y. 2020-21. During the financial years
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2020-21 2021-22, 2022-23, 2023-24 and 2024-25, he was in India for 55 days, 60 days, 90 days, 150 days
and 70 days, respectively. Determine his residential status for the A.Y. 2025-26.

SOLUTION

During the P.Y. 2024-25, Mr. B was in India for 70 days and during the 4 years preceding the P.Y. 2024-25, he
was in India for 355 days (i.e. 55+ 60+ 90+ 150 days).

Thus, he does not satisfy the basic condition under section 6(1). Therefore, he is a non-resident for the P.Y.
2024-25.

Residential status of HUF

Resident: A HUF would be resident in India if the control and management of its affairs is situated wholly or
partly in India.

Non-resident: If the control and management of the affairs is situated wholly outside India, it would become
a non-resident.

Meaning of the term “control and management”

• The expression ‘control and management’ referred to under section 6 refers to the central control
and management and not to the carrying on of day- to-day business by servants, employees or agents.
• Control and management means de facto control and management and not merely having the right to
control or manage.
• The business may be done from outside India and yet its control and management may be wholly within
India. Therefore, control and management of a business is said to be situated at a place where the
head and brain of the adventure is situated. Merely because the family has a house in India, where
some of the members reside in the previous year, does not constitute that place as the seat of control
and management of the affairs of the HUF unless important decisions concerning the affairs of the
HUF are taken at that place.

• The place of control may be different from the usual place of running the business and sometimes even
the registered office of the assessee. This is because the control and management of a business need
not necessarily be done from the place of business or from the registered office of the assessee.

• But control and management do imply the functioning of the controlling and directing power at a
particular place with some degree of permanence.
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Resident and ordinarily resident/ Resident but not ordinarily resident

If Karta of resident HUF satisfies both the following additional conditions (as applicable in case of individual)
then, resident HUF will be resident and ordinarily resident, otherwise it will be resident but not ordinarily
resident.

• Karta of resident HUF should be resident in at least 2 previous years out of 10 previous years
immediately preceding relevant previous year.
• Stay of Karta during 7 previous years immediately preceding relevant previous year should be 730 days
or more.

ILLUSTRATION 4

The business of a HUF is transacted from Australia and all the policy decisions are taken there. Mr. E, the Karta
of the HUF, who was born in Kolkata, visits India during the P.Y. 2024-25 after 15 years. He comes to India on
1.4.2024 and leaves for Australia on 1.12.2024. Determine the residential status of Mr. E and the HUF for A.Y. 2025-
26.

SOLUTION

a) During the P.Y. 2024-25, Mr. E has stayed in India for 245 days (i.e. 30+31+30+31+31+30+31+30+1 days).
Therefore, he is a resident. However, since he has come to India after 15 years, he does not satisfy
the condition for being ordinarily resident.
Therefore, the residential status of Mr. E for the P.Y. 2024-25 is resident but not ordinarily resident.

b) Since the business of the HUF is transacted from Australia and policy decisions are taken there, it
is assumed that the control and management is in Australia i.e., the control and management is
wholly outside India. Therefore, the HUF is a non-resident for the P.Y. 2024-25.

Note – If the control and management is in India, even partially, then, the HUF would be resident in India.
In such a case, the residential status of HUF would be resident but not ordinarily resident, since the Karta’s
stay in India is for less than 730 days in the 7 previous years immediately preceding the relevant previous
year.
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Residential Status of a HUF

Is the control and management of its affairs

situated wholly or partly in India?

YES NO

HUF is non-resident
Is Karta resident in India atleast in any 2 PYs out of
10 PYs preceding the relevant PY?
(+)
Is his stay in India for 730 days or more during the
7 PYs preceding the relevant PY?

YES NO

HUF is ROR HUF is RNOR

Residential status of firms, AoPs and BoIs

Resident: A firm, AoP and BoI would be resident in India if the control and management of its affairs
is situated wholly or partly in India.

Non-resident: Where the control and management of the affairs is situated wholly outside India, the
firm, AoP and BoI would become a non-resident.

The residential status of the partners/ members is immaterial while determining the residential status
of a Firm/AOP/BOI.

Residential status of companies

A company would be resident in India in any previous year, if-
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i. it is an Indian company; or
ii. its place of effective management, in that year, is in India.

“Place of effective management” to mean 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 [Explanation to
section 6(3)].

Determination of residential status of a company

Is the company an Indian No Whether POEM of the No The company is a non-

No
company? company is in India in the resident for the relevant P.Y.
relevant P.Y.?

YES
YES

The company is a resident

in India for the relevant P.Y.

Note – The guidelines issued by CBDT for determination of POEM of a foreign company and transition
mechanism for a company which is incorporated outside India, which has not been assessed to tax in India
earlier and has become resident in India for the first time due to application of POEM, has been provided in
Chapter XII-BC. The same will be dealt with at the Final level.

Residential status of local authorities and artificial juridical persons

Resident: Local authorities and artificial juridical persons would be resident in India if the control and
management of its affairs is situated wholly or partly in India.

Non-resident: Where the control and management of the affairs is situated wholly outside India, they
would become non-residents.

SCOPE OF TOTAL INCOME

Section 5 provides the scope of total income in terms of the residential status of the assessee because
the incidence of tax on any person depends upon his residential status in India. The scope of total income of
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an assessee depends upon the following three important considerations:

i. the residential status of the assessee;

ii. the place of accrual or receipt of income, whether actual or deemed; and
iii. the point of time at which the income had accrued to or was received by or on behalf of the
assessee.

The ambit of total income of the three classes of assessees would be as follows:

1. Resident and ordinarily resident (ROR)

The total income of an ROR would, under section 5(1), consist of:

i. income received or deemed to be received in India during the previous year;

ii. income which accrues or arises or is deemed to accrue or arise in India during the previous
year; and

iii. income which accrues or arises outside India even if it is not received or brought into India during
the previous year.

In simpler terms, an ROR has to pay tax on the total income accrued or deemed to accrue, received
or deemed to be received in or outside India during the relevant previous year.

2. Resident but not ordinarily resident (RNOR)

Under section 5(1), the total income of an RNOR would consist of –

i. income received or deemed to be received in India during the previous year;

ii. income which accrues or arises or is deemed to accrue or arise in India during the previous
year; and

iii. income derived from a business controlled in or profession set up in India, even though it accrues
or arises outside India.

Note – All other income accruing or arising outside India which is not received or deemed to be received
or deemed to accrue or arise in India would not be included in his total income.

3. Non-resident

A non-resident’s total income under section 5(2) includes:

i. income received or deemed to be received in India in the previous year; and

ii. income which accrues or arises or is deemed to accrue or arise in India during the previous
year.
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Note: All assessees, whether resident or not, are chargeable to tax in respect of their income
accrued, arisen, received or deemed to accrue, arise or to be received in India whereas a resident
alone (resident and ordinarily resident in the case of individuals and HUF) is chargeable to tax in
respect of income which accrues or arises outside India.

Clarification regarding liability to income-tax in India of a non-resident seafarer receiving

remuneration in NRE (Non-Resident External) account maintained with an Indian Bank [Circular
No.13/2017, dated 11.04.2017 and Circular No.17/2017, dated 26.04.2017]
Income by way of salary, received by non-resident seafarers, for services rendered outside India on a
foreign going ship (with Indian flag or foreign flag) and received into the NRE bank account
maintained with an Indian bank shall not be included in the total income.

Residential Status and Scope of Total Income: Whether the following incomes are to be included in Total
Income?

Scope of total Income Resident and Resident but not Non-Resident

Ordinarily Resident Ordinarily Resident
(ROR) (RNOR)
Income received or deemed to be Yes Yes Yes
received in India during the
previous year
Income accruing or arising or Yes Yes Yes
deeming to accrue or arise in
India during the previous year
Income accruing or arising outside Yes, even if such Yes, but only if such No
India during the previous year income is not received income is derived from a
or brought into India business controlled in or
during the previous profession set up in India;
year Otherwise, No.

ILLUSTRATION 5
From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended 31.3.2025,
compute the total income for the A.Y. 2025-26, if he is:

i. Resident and ordinary resident;

ii. Resident but not ordinarily resident;
iii. Non-resident
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Particulars

(a) Short term capital gains on sale of shares of an Indian Company, received in Germany 15,000
(b) Dividend from a Japanese Company, received in Japan 10,000
(c) Rent from property in London deposited in a bank in London, later on remitted to India 75,000
through approved banking channels
(d) Dividend from RP Ltd., an Indian Company 6,000

(e) Agricultural income from land in Gujarat 25,000

SOLUTION

Computation of total income of Mr. Anirudh for the A.Y. 2025-26

Resident & Resident Non-

Particulars ordinarily but not Resident
resident ordinarily
resident
1) Short term capital gains on sale of shares of an Indian 15,000 15,000 15,000
company, received in Germany
2) Dividend from a Japanese company, received in Japan 10,000 - -

3) Rent from property in London deposited in a bank in 52,500 - -

London [See Note (i) below]
4) Dividend from RP Ltd., an Indian Company 6,000 6,000 6,000

5) Agricultural income from land in Gujarat - - -

[See Note (ii) below]
Total Income 83,500 21,000 21,000

Notes:

1. It has been assumed that the rental income is the gross annual value of the property. Therefore,
deduction @30% under section 24, has been provided and the net income so computed is taken into
account for determining the total income of a resident and ordinarily resident.

Amount

Rent received (assumed as gross annual value) 75,000

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Less: Deduction under section 24 (30% of ₹75,000) 22,500

Income from house property 52,500

2. Agricultural income is exempt under section 10(1).

Meaning of “Income received or deemed to be received”

All assessees are liable to tax in respect of the income received or deemed to be received by them in India
during the previous year irrespective of -

i. their residential status, and

ii. the place of its accrual.

Income is to be included in the total income of the assessee immediately on its actual or deemed receipt. The
receipt of income refers to only the first occasion when the recipient gets the money under his control.
Therefore, when once an amount is received as income, remittance or transmission of that amount from
one place or person to another does not constitute receipt of income in the hands of the subsequent
recipient or at the place of subsequent receipt.

Income deemed to be received in India [Section 7]

Contribution in excess of 12% Contribution by the Amount transferred from

of salary to Recognised Central Government or unrecognised provident
provident fund or interest any other employer in the fund to recognised
credited in excess of 9.5% p.a P.Y. under a pension provident fund (being the
(Annual accretion to the credit scheme referred u/s employer's contribution
of RPF) 80CCD and interest thereon)

Meaning of Income ‘accruing’ and ‘due’

Accrue refers to the right to receive income, whereas due refers to the right to enforce payment of the
same. In other words, when the right to receive income becomes vested in the assessee, it is said to
accrue or arise. For e.g. salary for work done in December will accrue throughout the month, day to day, but
will become due on the salary bill being passed on 31st December or 1st January.
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Similarly, on Government securities, interest payable on specified dates arise during the period of holding,
day to day, but will become due for payment on the specified dates.

Interest on Government securities is usually payable on specified dates, say on 1st January and 1st July.
In all such cases, the interest would be said to accrue from 1st July to 31st December and on 1st January,
it will fall due for payment.

It must be noted that income which has been taxed on accrual basis cannot be assessed again on receipt
basis, as it will amount to double taxation.

With a view to removing difficulties and clarifying doubts in the taxation of income, Explanation 1 to section
5 specifically provides that an item of income accruing or arising outside India shall not be deemed to be
received in India merely because it is taken into account in a balance sheet prepared in India.

Further, Explanation 2 to section 5 makes it clear that once an item of income is included in the assessee’s
total income and subjected to tax on the ground of its accrual/deemed accrual, it cannot again be included in
the person’s total income and subjected to tax either in the same or in a subsequent year on the ground
of its receipt - whether actual or deemed.

Income deemed to accrue or arise in India [Section 9]

Certain types of income are deemed to accrue or arise in India even though they may actually accrue or arise
outside India.

Income deemed to accrue or arise in India [Section 9(1)]

Income accruing or arising Any Business Any property / transfer of

outside India, directly or Connection in asset or capital asset
indirectly through or from India source of situated in
income in India India

Salary earned for services rendered in India

Salary payable by the Government to Indian Citizen for services rendered outside India
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Income deemed to accrue or arise in India [Section 9(1)]

Dividend Interest, if Royalty, if Fees for technical Income arising

paid by payable by payable by services, if outside India,
an Indian payable by being any sum
Company of money paid
outside without
India consideration,
by a resident
Indian to a
non-corporate
A non-resident Government Person resident non-resident
in India or foreign
company or to
If money is borrowed a RNOR, where
and used for the Exceptions aggregate of
purpose of business or such sum >
profession carried on in ₹50,000
India If the money borrowed
and used or technical
services or royalty
If technical services or services are utilised for
royalty services are the purpose of
utilised for the purpose business or profession
of business or carried on outside India
profession carried on
in India or making
income from any If the money borrowed
source in India and used or technical
services or royalty
services are utilised for
making income from any
source outside India

The categories of income which are deemed to accrue or arise in India are:
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1. Any income accruing or arising to an assessee in any place outside India whether directly or
indirectly

• through or from any business connection in India,

• through or from any property in India,
• through or from any asset or source of income in India or
• through the transfer of a capital asset situated in India
would be deemed to accrue or arise in India. [Section 9(1)(i)]
In the case of a non-resident, the following shall not, however, be deemed to accrue or arise in India
[Explanation 1 to section 9(1)(i)]:

i. In the case of a business, in respect of which all the operations are not carried out in India
[Explanation 1(a) to section 9(1)(i)]: In the case of a business of which all the operations are not
carried out in India, the income of the business deemed to accrue or arise in India shall be only such
part of income as is reasonably attributable to the operations carried out in India. Therefore, it follows
that such part of income which cannot be reasonably attributed to the operations in India, is not
deemed to accrue or arise in India.

ii. Purchase of goods in India for export [Explanation 1(b) to section 9(1)(i)]: In the case of a non-
resident, no income shall be deemed to accrue or arise in India to him through or from operations
which are confined to the purchase of goods in India for the purpose of export.

iii. Collection of news and views in India for transmission out of India [Explanation 1(c) to section
9(1)(i)]: In the case of a non-resident, being a person engaged in the business of running a news agency
or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in
India to him through or from activities which are confined to the collection of news and views in India
for transmission out of India.

iv. Shooting of cinematograph films in India [Explanation 1(d) to section 9(1)(i)]: In the case of a non-
resident, no income shall be deemed to accrue or arise in India through or from operations which are
confined to the shooting of any cinematograph film in India, if such non-resident is :
a) an individual, who is not a citizen of India or
b) a firm which does not have any partner who is a citizen of India or who is resident in India; or
c) a company which does not have any shareholder who is a citizen of India or who is resident in India.

v. Activities confined to display of rough diamonds in SNZs [Explanation 1(e) to section 9(1)(i)]: In the
case of a foreign company engaged in the business of mining of diamonds, no income shall be
deemed to accrue or arise in India to it through or from the activities which are confined to display
of uncut and unassorted diamonds in any special zone notified by the Central Government in the
Official Gazette in this behalf.
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Income from property, asset or source of income in India

Any income which arises from any property (movable, immovable, tangible and intangible property) would
be deemed to accrue or arise in India.

1. Hire charges or rent paid outside India for the use of the machinery or buildings situated in India,
2. Deposits with an Indian company for which interest is received outside India etc.
3. Mr. X, resident in New York, USA, has a house property situated in India which has been given on rent by
him. Rent receivable/ received by Mr. X would be taxable in India whether such rent is received by him
in India or outside India as the house property is situated in India.

Income through transfer of a capital asset situated in India

Capital gains arising through the transfer of a capital asset situated in India would be deemed to accrue
or arise in India in all cases irrespective of the fact whether

i. the capital asset is movable or immovable, tangible or intangible;

ii. the place of registration of the document of transfer etc., is in India or outside; and
iii. the place of payment of the consideration for the transfer is within India or outside.

2. Income from salaries earned in India [Section 9(1)(ii)]

Income, which falls under the head “Salaries”, is deemed to accrue or arise in India, if it is earned in
India. Salary payable for service rendered in India would be treated as earned in India.
Further, any income under the head “Salaries” payable for rest period or leave period which is preceded
and succeeded by services rendered in India, and forms part of the service contract of employment, shall
be regarded as income earned in India.

3. Income from salaries payable by the Government for services rendered outside India [Section 9(1)(iii)]

Income from ‘Salaries’ which is payable by the Government to a citizen of India for services rendered
outside India would be deemed to accrue or arise in India.

The following conditions have to be satisfied to treat such income as deemed to accrue or arise in
India:

• Income should be chargeable under the head 'Salaries’;

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• The payer should be Government of India;

• The recipient should be an Indian citizen, whether resident or non-resident in India;
• The services should be rendered outside India.

However, allowances and perquisites paid or allowed outside India by the Government to an Indian citizen
for services rendered outside India is exempt, by virtue of section 10(7).

Exemption under section 10(7) would be available to an assessee irrespective of the regime under which
he pays tax.

ILLUSTRATION 6
Mr. David, an Indian citizen aged 40 years, a Government employee serving in the Ministry of External Affairs,
left India for the first time on 31.03.2024 due to his transfer to High Commission of Canada. He did not
visit India any time during the P.Y. 2024-25. He has received the following income for the F.Y. 2024-25:

S. No. Particulars Amount

(i) Salary (Computed) 5,00,000

(ii) Foreign Allowance [not included in (i) above] 4,00,000
(iii) Interest on fixed deposit from bank in India 1,00,000
(iv) Income from agriculture in Nepal 2,00,000

(v) Income from house property in Nepal 2,50,000

Compute his Gross Total Income for A.Y. 2025-26.

SOLUTION

As per section 6(1), Mr. David is a non-resident for the A.Y. 2025-26, since he was not present in India at
any time during the P.Y. 2024-25.

As per section 5(2), a non-resident is chargeable to tax in India only in respect of following incomes:

a) Income received or deemed to be received in India; and

b) Income accruing or arising or deemed to accrue or arise in India.

In view of the above provisions, income from agriculture in Nepal and income from house property in
Nepal would not be chargeable to tax in the hands of David, assuming that the same were received in Nepal.
Income from ‘Salaries’ payable by the Government to a citizen of India for services rendered outside India
is deemed to accrue or arise in India as per section 9(1)(iii). Hence, such income is taxable in the hands
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of Mr. David, even though he is a non-resident.

However, allowances or perquisites paid or allowed as such outside India by the Government to a citizen of
India for rendering service outside India is exempt under section 10(7). Hence, foreign allowance of
₹4,00,000 is exempt under section 10(7) in the hands of Mr. David.

Gross Total Income of Mr. David for A.Y. 2025-26

Particulars Amount

Salaries (computed) 5,00,000

Income from other sources (Interest on fixed deposit in India) 1,00,000

Gross Total Income 6,00,000

4. Dividend paid by an Indian company outside India [Section 9(1)(iv)]

Dividends paid by an Indian company outside India is deemed to accrue or arise in India and would
be taxable in the hands of shareholders.

5. Interest [Section 9(1)(v)]

Under section 9(1)(v), an interest is deemed to accrue or arise in India if it is payable by -

i. the Government;
ii. a person who is resident in India;

Exception: Where it is payable in respect of any debt incurred or money borrowed and used for
the purposes of a business or profession carried on by him outside India or for the purposes
of making or earning any income from any source outside India, it will not be deemed to
accrue or arise in India.
iii. a person who is a non-resident, when it is payable in respect of any debt incurred or moneys
borrowed and used for the purpose of a business or profession carried on in India by him.
Exception: Interest on moneys borrowed by the non-resident for any purpose in India other
than a business or profession, will not be deemed to accrue or arise in India.

If a non-resident ‘A’ borrows money from a non-resident ‘B’ and invests the same in shares
of an Indian company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue or arise in
India.
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6. Royalty [Section 9(1)(vi)]

Royalty will be deemed to accrue or arise in India when it is payable by -

i. the Government;
ii. a person who is a resident in India

Exception: where it is payable in respect for the transfer of any right or the use of any property
or information used or for the utilization of services for the purposes of a business or
profession carried on by such person outside

India or for the purposes of making or earning any income from any source outside India; or

iii. a person who is a non-resident, only when the royalty is payable in respect of any right,
property or information used or services utilised for purposes of a business or profession
carried on in India or for the purposes of making or earning any income from any source in
India.

Important points:

I. Lumpsum royalty not deemed to accrue arise in India: Lumpsum royalty payments made by a
resident for the transfer of all or any rights (including the granting of a licence) in respect of
computer software supplied by a non-resident manufacturer along with computer hardware under
any scheme approved by the Government under the Policy on Computer Software Export, Software
Development and Training, 1986 shall not be deemed to accrue or arise in India.
II. Meaning of Royalty: The term ‘royalty’ means consideration (including any lumpsum consideration but
excluding any consideration which would be the income of the recipient chargeable under the head
‘Capital gains’) for:
i. the transfer of all or any rights (including the granting of licence) in respect of a patent,
invention, model, design, secret formula or process or trade mark or similar property;
ii. the imparting of any information concerning the working of, or the use of, a patent, invention,
model, design, secret formula or process or trade mark or similar property;
iii. the use of any patent, invention, model, design, secret formula or process or trade mark or
similar property;
iv. the imparting of any information concerning technical, industrial, commercial or scientific
knowledge, experience or skill;
v. the use or right to use any industrial, commercial or scientific equipment
vi. the transfer of all or any rights (including the granting of licence) in respect of any copyright,
literary, artistic or scientific work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting.

Note: Consideration for sale, distribution or exhibition of cinematographic films is covered

within the scope of royalty.
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Residence and Scope of Total Income 2

vii. the rendering of any service in connection with the activities listed above.

The definition of ‘royalty’ for this purpose is wide enough to cover both industrial royalties as well as
copyright royalties. The definition specially excludes income which should be chargeable to tax under
the head ‘capital gains’.

III. Consideration for use or right to use of computer software is royalty within the meaning of section
9(1)(vi)

The consideration for use or right to use of computer software is royalty by clarifying that, transfer of
all or any rights in respect of any right, property or information includes and has always included
transfer of all or any right for use or right to use a computer software (including granting of a licence)
irrespective of the medium through which such right is transferred.

IV. Consideration in respect of any right, property or information – Is it royalty?

Royalty includes and has always included consideration in respect of any right, property or
information, whether or not,

a) the possession or control of such right, property or information is with the payer;
b) such right, property or information is used directly by the payer;
c) the location of such right, property or information is in India.

V. Meaning of Process: The term “process” includes and shall be deemed to have always included
transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal),
cable, optic fibre or by any other similar technology, whether or not such process is secret.

7. Fees for technical services [Section 9(1)(vii)]

Any fees for technical services will be deemed to accrue or arise in India if they are payable by -

• the Government,
• a person who is resident in India

Exception: Where the fees are payable in respect of technical services utilised in a business
or profession carried on by such person outside India or for the purpose of making or earning
any income from any source outside India.

• a person who is a non-resident, only where the fees are payable in respect of services utilised
in a business or profession carried on by the non- resident in India or where such services are
utilised for the purpose of making or earning any income from any source in India.

Fees for technical services means any consideration (including any lumpsum consideration) for the
rendering of any managerial, technical or consultancy services (including providing the services of
technical or other personnel). However, it does not include consideration for any construction,
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assembly, mining or like project undertaken by the recipient or consideration which would be
income of the recipient chargeable under the head ‘Salaries’.

Income deemed to accrue or arise in India to a non-resident by way of interest, royalty and
fees for technical services to be taxed irrespective of territorial nexus (Explanation to section 9)
Income by way of interest, royalty or fees for technical services which is deemed to accrue or
arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be included in the total income
of the non-resident, whether or not –

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.

In effect, the income by way of fees for technical services, interest or royalty, from services utilized in
India would be deemed to accrue or arise in India in case of a non-resident and be included in his
total income, whether or not such services were rendered in India.

ILLUSTRATION 7

Miss Vivitha paid a sum of 5000 USD to Mr. Kulasekhara, a management consultant practising in
Colombo, specializing in project financing. The payment was made in Colombo. Mr. Kulasekhara is a
non-resident. The consultancy is related to a project in India with possible Ceylonese collaboration. Is
this payment chargeable to tax in India in the hands of Mr. Kulasekhara, since the services were used
in India?

SOLUTION
A non-resident is chargeable to tax in respect of income received outside India only if such income
accrues or arises or is deemed to accrue or arise to him in India.
The income deemed to accrue or arise in India under section 9 comprises, inter alia, income by
way of fees for technical services, which includes any consideration for rendering of any managerial,
technical or consultancy services. Therefore, payment to a management consultant relating to project
financing is covered within the scope of “fees for technical services”.
The Explanation below section 9(2) clarifies that income by way of, inter alia, fees for technical
services, from services utilized in India would be deemed to accrue or arise in India in case of a non-
resident and be included in his total income, whether or not such services were rendered in India or
whether or not the non- resident has a residence or place of business or business connection in
India.
In the instant case, since the services were utilized in India, the payment received by Mr.
Kulasekhara, a non-resident, in Colombo is chargeable to tax in his hands in India, as it is deemed
to accrue or arise in India.
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Residence and Scope of Total Income 2

8. Any sum of money paid by a resident Indian to a non-corporate non- resident or foreign company
or to a resident but not ordinarily resident in India [Section 9(1)(viii)]

Income arising outside India, being any sum of money paid without consideration, by an Indian resident
person to a non-corporate non-resident or foreign company or to a RNOR would be deemed to
accrue or arise in India if the same is chargeable to tax under section 56(2)(x) i.e., if the aggregate
of such sum received by a non-corporate non-resident or foreign company or a RNOR exceeds
₹50,000.
You may refer to Unit 5 of Chapter 3 where chargeability of any sum of money received is discussed in
detail.

This deeming provision applies to only sum of money paid outside India to a non-corporate non-resident
or foreign company or to a RNOR, and not in respect of property, movable or immovable, transferred
outside India without consideration or for inadequate consideration to a non-corporate non-resident or
foreign company or a RNOR.

ILLUSTRATION 8

Compute the total income in the hands of an individual aged 35 years, being a resident and ordinarily resident,
resident but not ordinarily resident, and non- resident for the A.Y. 2025-26, assuming that he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A)–

Particulars Amount (₹)

Interest on UK Development Bonds, 50% of interest received in India 10,000

Income from a business in Chennai (50% is received in India) 20,000

Short term capital gains on sale of shares of an Indian company, received in London 20,000

Dividend from British company received in London 5,000

Long term capital gains on sale of plant at Germany, 50% of gains are received in India 40,000

Income earned from business in Germany which is controlled in Delhi (₹40,000 is 70,000
received in India)

Profits from a business in Delhi but managed entirely from London 15,000

Income from house property in London deposited in a Bank at London, brought 50,000
to India (Computed)
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Residence and Scope of Total Income 2

Interest on debentures in an Indian company, received in London 12,000

Fees for technical services rendered in India but received in London 8,000

Profits from a business in Mumbai, managed from London 26,000

Income from property situated in Nepal received there (Computed) 16,000

Past foreign untaxed income brought to India during the previous year 5,000

Income from agricultural land in Nepal, received there and then brought to India 18,000

SOLUTION

Computation of total income for the A.Y. 2025-26

Resident Resident Non-

Particulars and but not resident
ordinarily ordinarily
resident resident

Interest on UK Development Bonds, 50% of interest received 10,000 5,000 5,000

in India
Income from a business in Chennai (50% is received in India) 20,000 20,000 20,000
Short term capital gains on sale of shares of an Indian 20,000 20,000 20,000
company, received in London

Dividend from British company received in London 5,000 - -

Long term Capital gains on sale of plant at Germany, 50% of 40,000 20,000 20,000
gains are received in India

Income earned from business in Germany which is controlled 70,000 70,000 40,000
in Delhi, out of which ₹40,000 is received in India

Profits from a business in Delhi but managed entirely from 15,000 15,000 15,000
London
Income from house property in London deposited in a Bank 50,000 - -
at London, later on remitted to India

Interest on debentures in an Indian company, received in 12,000 12,000 12,000

London
Fees for technical services rendered in India but received in 8,000 8,000 8,000
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London
Profits from a business in Mumbai, managed from London 26,000 26,000 26,000

Income from property situated in Nepal and received there 16,000 - -

Past foreign untaxed income brought to India during the
previous year. - - -
Income from agricultural land in Nepal, received there and
then brought to India 18,000 - -
Income from profession in Kenya which was set up in India,
received there but spent in India 5,000 5,000 -

Gift received on the occasion of his

wedding [not taxable] - - -
Interest on savings bank deposit in State Bank of India
12,000 12,000 12,000
Income from a business in Russia,
controlled in Russia 20,000 - -
Dividend from Reliance Petroleum Limited, an Indian
Company 5,000 5,000 5,000

Agricultural income from a land in Rajasthan [Exempt under

section 10(1)] - -
Gross Total Income 3,52,000 2,18,000 1,83,000
Less: Deduction under section 80TTA
[Interest on savings bank account subject to a maximum of 10,000 10,000 10,000
₹10,000]

Total Income 3,42,000 2,08,000 1,73,000

TEST YOUR KNOWLEDGE

1. Mr. Ram, an Indian citizen, left India on 22.09.2024 for the first time to work as an officer of a company in
Germany. Determine the residential status of Ram for the A.Y. 2025-26.

2. Mr. Dey, residing in US since 1990, visits India for 30 days every year. He came back to India on 1.4.2023 for
permanent settlement. What will be his residential status for A.Y. 2025-26?
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Residence and Scope of Total Income 2

3. Mr. Ramesh & Mr. Suresh are brothers, and they earned the following incomes during the F.Y. 2024-25. Mr.
Ramesh settled in Canada in the year 1996 and Mr. Suresh settled in Delhi. Compute the total income for
the A.Y. 2025-26 assuming that both have exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A).

4. Examine the correctness or otherwise of the statement - “Income deemed to accrue or arise in India to a
non-resident by way of interest, royalty and fees for technical services is to be taxed irrespective of
territorial nexus”.

5. Examine with reasons whether the following transactions attract income-tax in India in the hands of
recipients:
i. Salary payable by Central Government to Mr. John, a citizen of India of ₹7,00,000 for the services
rendered outside India considering that he pays tax as per the provisions of section 115BAC.
ii. Interest on moneys borrowed from outside India ₹5,00,000 by a non- resident for the purpose of
business within India say, at Mumbai.
iii. Post office savings bank interest of ₹19,000 received by a resident assessee, Mr. Ram, aged 46 years
if he exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).
iv. Royalty paid by a resident to a non-resident in respect of a business carried on outside India.
v. Legal charges of ₹5,00,000 paid in Delhi to a lawyer of United Kingdom who visited India to represent
a case at the Delhi High Court.

ANSWERS
1. Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies
any one of the following conditions -
i. He has been in India during the previous year for a total period of 182 days or more, or
ii. He has been in India during the 4 years immediately preceding the previous year for a total period
of 365 days or more and has been in India for at least 60 days in the previous year.

In the case of Indian citizens leaving India for employment, the period of stay during the previous
year must be 182 days instead of 60 days given in (ii) above.

During the previous year 2024-25, Mr. Ram, an Indian citizen, was in India for 175 days only (i.e.,
30+31+30+31+31+22 days). Thereafter, he left India for employment purposes.

Since he does not satisfy the minimum criteria of 182 days stay in India during the relevant previous
year, he is a non-resident for the A.Y. 2025-26.

2. Mr. Dey is a resident in A.Y. 2025-26 since he has stayed in India for a period of 365 days (more
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Residence and Scope of Total Income 2

than 182 days) during the P.Y. 2024-25.

As per section 6(6), a person will be “Not ordinarily Resident” in India in any previous year, if such person,
inter alia,:

a) has been a non-resident in 9 out of 10 previous years preceding the relevant previous year; or
b) has during the 7 previous years immediately preceding the relevant previous year been in India for
729 days or less.

If he does not satisfy either of these conditions, he would be a resident and ordinarily resident.

For the previous year 2024-25 (A.Y. 2025-26), his status would be “Resident but not ordinarily
resident” since he was non-resident in 9 out of 10 previous years immediately preceding the P.Y.
2024-25. He was resident only in the P.Y. 2023-24. Prior to that, he was non-resident in all the
years since his stay in India was only for 30 days each year.

He can be resident but not ordinarily resident also due to the fact that he has stayed in India only
for 546 days [366 days in P.Y. 2023-24 + (30 days x 6 years)] in 7 previous years immediately
preceding the P.Y. 2024-25, which is less than 730 days.

3.
Computation of total income of Mr. Ramesh & Mr. Suresh for the A.Y. 2025-26
S. Particulars Mr. Ramesh Mr. Suresh
No. (non- (Resident)
resident) (₹)
(₹)

1. Interest on Canada Development Bond (See Note 2) 17,500 40,000

2. Dividend from British Company received in London (See Note 3) - 20,000
3. Profits from a business in Nagpur but managed directly from 1,00,000 1,40,000
London (See Note 2)
4. Short term capital gain on sale of shares of an Indian company 60,000 90,000
received in India (See Note 2)
5. Income from a business in Chennai (See Note 2) 80,000 70,000

6. Fees for technical services rendered in India, but received in 1,00,000 -

Canada (See Note 2)
7. Interest on savings bank deposit in UCO Bank, Delhi (See Note 2) 7,000 12,000
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8. Agricultural income from a land situated in Andhra Pradesh (See - -

Note 4)
9. Income from house property at Bhopal (See Note 5) 70,000 42,000
Gross Total income 4,34,500 4,14,000
Less: Deduction under Chapter VI-A
Section 80C - Life insurance premium - 30,000
Section 80TTA (See Note 6) 7,000 10,000

Total Income 4,27,500 3,74,000

Notes:

I. Mr. Ramesh is a non-resident since he has been living in Canada since 1996. Mr. Suresh, is settled
in Delhi, and thus, assumed as a resident and ordinarily resident.
II. In case of a resident and ordinarily resident, his global income is taxable as per section 5(1).
However, as per section 5(2), in case of a non-resident, only the following incomes are chargeable
to tax:
• Income received or deemed to be received in India; and
• Income accruing or arising or deemed to accrue or arise in India.

Therefore, fees for technical services rendered in India would be taxable in the hands of Mr.
Ramesh, even though he is a non-resident.

The income referred to in Sl. No. 3,4,5 and 7 are taxable in the hands of both Mr. Ramesh and
Mr. Suresh since they accrue or arise/ deemed to accrue or arise in India.
Interest on Canada Development Bond would be fully taxable in the hands of Mr. Suresh, whereas
only 50%, which is received in India, is taxable in the hands of Mr. Ramesh.
III. Dividend received from British company in London by Mr. Ramesh, a non-resident, is not taxable
since it is accrued and received outside India. However, such dividend received by Mr. Suresh is
taxable, since he is a resident and ordinarily resident.

IV. Agricultural income from a land situated in India is exempt under section 10(1) in the case of
both non-residents and residents.
V. Income from house property -
Mr. Ramesh Mr. Suresh

Rent received 1,00,000 60,000

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Less: Deduction u/s 24(a) @30% 30,000 18,000

Net income from house property 70,000 42,000

The net income from house property in India would be taxable in the hands of both Mr. Ramesh

and Mr. Suresh, since the accrual and receipt of the same are in India.

VI. In case of an individual, interest upto ₹10,000 from savings account with, inter alia, a bank is
allowable as deduction under section 80TTA.

4. This statement is correct.

As per Explanation to section 9, income by way of interest, royalty or fees for technical services
which is deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be
included in the total income of the non-resident, whether or not -

• non-resident has a residence or place of business or business connection in India; or

• the non-resident has rendered services in India.

In effect, the income by way of fees for technical services, interest or royalty from services utilised in
India would be deemed to accrue or arise in India in case of a non-resident and be included in his total
income, whether or not such services were rendered in India and irrespective of whether the non-
resident has a residence or place of business or business connection in India.

5. Taxability of receipts

Taxable/ Amount Reason

Not liable to
Taxable tax (₹)

(i) Taxable 6,25,000 As per section 9(1)(iii), salaries payable by the Government to a
citizen of India for service rendered outside India shall be deemed to
accrue or arise in India. Therefore, salary paid by Central Government
to Mr. John for services rendered outside India would be deemed to
accrue or arise in India since he is a citizen of India. He would be
entitled to standard deduction of ₹75,000 under section 16(ia).
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(ii) Taxable 5,00,000 As per section 9(1)(v)(c), interest payable by a non-resident on

moneys borrowed and used for the purposes of business carried on
by such person in India shall be deemed to accrue or arise in India in
the hands of the recipient.

(iii) Partly 5,500 The interest on Post office savings bank a/c would be exempt u/s
Taxable 10(15)(i) only to the extent of ₹3,500 in case of an individual a/c.
Further, interest upto 10,000, would be allowed as deduction u/s
80TTA from Gross Total Income. Balance ₹5,500 i.e., ₹19,000 - ₹3,500
- ₹10,000 would be taxable in the hands of Mr. Ram, a resident.
(iv) Not - Royalty paid by a resident to a non- resident in respect of a business
Taxable carried outside India would not be taxable in the hands of the non-
resident provided the same is not received in India. This has been
provided as an exception to deemed accrual mentioned in section
9(1)(vi)(b).

(v) Taxable 5,00,000 In case of a non-resident, any income which accrues or arises in India
or which is deemed to accrue or arise in India or which is received in
India or is deemed to be received in India is taxable in India.

Therefore, legal charges paid in India to a non-resident lawyer of UK,

who visited India to represent a case at the Delhi High Court would
be taxable in India.
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INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S TOTAL
INCOME
3

INCOME OF OTHER PERSONS INCLUDED IN

CHAPTER - 3
ASSESSEE’S TOTAL INCOME

CLUBBING OF INCOME – AN INTRODUCTION

Under the Income-tax Act, 1961, an assessee is generally taxed in respect of his own income. However, there are
certain cases where an assessee has to pay tax in respect of income of another person. The provisions for the
same are contained in sections 60 to 64 of the Act. These provisions have been enacted to counteract the
tendency on the part of the tax-payers to dispose of their property or transfer their income in such a way that
their tax liability can be avoided or reduced.

These provisions can be categorized as follows:

• Income of other persons included in an assessee’s total income [Sections 60-63]
• Income of other persons included in an Individual’s total income [Section 64]

Note - In the case of individuals, income-tax is levied on a slab system on the total income. The tax
system is progressive i.e. as the income increases, the applicable rate of tax increases. Some taxpayers
in the higher income bracket have a tendency to divert some portion of their income to their spouse,
minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions
have been incorporated in the Act, under which income arising to certain persons (like spouse, minor
child etc.) have to be included in the income of the person who has diverted his income for the purpose
of computing tax liability.

INCOME OF OTHER PERSONS INCLUDIBLE IN

ASSESSEE’S TOTAL INCOME
Transfer of income without transfer of asset [Section 60]
1. If any person transfers the income from any asset without transferring the asset itself, such income is
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to be included in the total income of the transferor

2. It is immaterial whether the transfer is revocable or irrevocable and whether it was made before the
commencement of this Act or after its commencement.

Mr. A confers the right to receive rent in respect of his house property to his wife, Mrs. A, without transferring
the house itself to her. In this case, the rent received by Mrs. A will be clubbed with the income of Mr. A.

ILLUSTRATION 1
Mr. Vatsan has transferred, through a duly registered document, the income arising from a godown to his son,
without transferring the godown. In whose hands will the rental income from godown be charged?

SOLUTION
Section 60 expressly states that where there is transfer of income from an asset without transfer of the asset
itself, such income shall be included in the total income of the transferor. Hence, the rental income derived from
the godown shall be clubbed in the hands of Mr. Vatsan.

Income arising from revocable transfer of assets [Section 61]

All income arising to any person by virtue of a revocable transfer of assets is to be included in the total income
of the transferor.
Meaning of revocable transfer [Section 63]
Transfer is deemed to be revocable if—
(a) it contains any provision for the retransfer, directly or indirectly, of the whole or any part of the income
or assets to the transferor, or

(b) it gives, in any way to the transferor, a right to reassume power, directly or indirectly, over the whole or
any part of the income or the assets.

Clubbing provision will operate even if only part of income of the transferred asset had been applied for
the benefit of the transferor. Once the transfer is revocable, the entire income from the transferred
asset is includible in the total income of the transferor.

Exception where clubbing provisions are not attracted even in case of revocable transfer
[Section 62]
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Section 61 will not apply to any income arising to any person if there is –
(i) a transfer by way of trust which is not revocable during the life time of the beneficiary; and
(ii) any other transfer, which is not revocable during the life time of the transferee.

In the above cases, the income from the transferred asset is not includible in the total income of the transferor,
provided the transferor derives no direct or indirect benefit from such income.

If the transferor receives direct or indirect benefit from such income, such income is to be included in his total
income even though the transfer may not be revocable during the life time of the beneficiary or transferee, as
the case may be.

As and when the power to revoke the transfer arises, the income arising by virtue of such transfer will be
included in the total income of the transferor.

Mr. Rajesh transfers his house property to a trust for the benefit of Mr. Ramesh till his death. This is a
situation of irrevocable transfer till the death of Mr. Ramesh. Hence, till then, the income from house
property would be taxable in the hands of the transferee i.e., the trust. However, after the death of Mr.
Ramesh, the income from house property would be included in the total income of Mr. Rajesh as on that
date, the transfer has become revocable.

INCOME OF OTHER PERSONS INCLUDIBLE IN

INDIVIDUAL’S TOTAL INCOME
Clubbing of income arising to spouse
I. Income by way of remuneration from a concern in which the individual has substantial interest
[Section 64(1)(ii)]

i. Remuneration in cash or kind to spouse from a concern in which the individual has a substantial
interest to be clubbed: In computing the total income of any individual, all such income which arises,
directly or indirectly, to the spouse of such individual by way of salary, commission, fees or any other
form of remuneration, whether in cash or in kind, from a concern in which such individual has a
substantial interest shall be included.
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Circumstances when an individual is deemed to have

substantial interest in a concern

Where the concern is a company In any other case

If equity shares carrying 20% or more of

If such person is entitled, or such person and
voting power are beneficially owned by
one or more of his relatives are entitled in the
such person or partly by such person and
aggregate, to receive 20% or more profit of
partly by one or more of his relatives at any
such concern at any time during the P.Y.
time during the P.Y.

The term ‘relative’ in relation to an individual means the husband, wife, brother or sister or any lineal
ascendant or descendant of that individual [Section 2(41)].

ii. Clubbing provisions will not apply where remuneration is received on account of technical or
professional qualifications: Clubbing provisions, however, does not apply where the spouse of the
said individual possesses technical or professional qualifications and the income to the spouse is
solely attributable to the application of his/her technical or professional knowledge or experience.
In such an event, the income arising to such spouse is to be assessed in his/her hands.

iii. Both husband and wife have substantial interest in a concern: Where both husband and wife have
substantial interest in a concern and both are in receipt of income by way of salary etc. from the
said concern, such income will be includible in the hands of that spouse, whose total income,
excluding such income is higher.

Where any such income is once included in the total income of either spouse, income arising in the
succeeding year shall not be included in the total income of the other spouse unless the Assessing
Officer is satisfied, after giving that spouse an opportunity of being heard, that it is necessary to do so.

ILLUSTRATION 2
Mr. A holds shares carrying 25% voting power in X (P) Ltd. Mrs. A is working as a computer software programmer
in X (P) Ltd. at a salary of ₹ 30,000 p.m. She is, however, not qualified for the job. The other income of Mr. A &
Mrs. A are ₹ 7,00,000 & ₹ 4,00,000, respectively. Compute the gross total income of Mr. A and Mrs. A for the
A.Y.2025-
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26 if they are paying tax under default tax regime.

SOLUTION
Mr. A holds shares carrying 25% voting power in X (P) Ltd i.e., a substantial interest in the company. His wife is
working in the same company without any professional qualifications for the same. Thus, by virtue of the
clubbing provisions of the Act, the salary received by Mrs. A from X (P) Ltd. will be clubbed in the hands of Mr. A.

Computation of Gross total income of Mr. A

Particulars ₹ ₹

Salary received by Mrs. A (30,000 × 12) 3,60,000

Less: Standard deduction under section 16(ia) 75,000 2,85,000
Other Income 7,00,000

Gross total income 9,85,000

The gross total income of Mrs. A is ₹ 4,00,000.

ILLUSTRATION 3
Will your answer be different if Mrs. A was qualified for the job?

SOLUTION
If Mrs. A possesses professional qualifications for the job, then the clubbing provisions shall not be applicable.
Gross total income of Mr. A = ₹ 7,00,000 [Other income].
Gross total income of Mrs. A = Salary received by Mrs. A [₹ 30,000×12] less ₹ 75,000, being the standard
deduction under section 16(ia) plus other income [₹ 4,00,000] = ₹ 6,85,000

ILLUSTRATION 4
Mr. B holds shares carrying 30% voting power in Y (P) Ltd. Mrs. B is working as accountant in Y (P) Ltd. getting
income under the head salary (computed) of ₹ 3,44,000 without any qualification in accountancy. Mr. B also
receives ₹ 30,000 as interest on securities. Mrs. B owns a house property which she has let out. Rent received
from tenants is ₹ 6,000 p.m. Compute the gross total income of Mr. B and Mrs. B for the A.Y.2025-26.

SOLUTION
Since Mrs. B is not professionally qualified for the job, the clubbing provisions shall be applicable.

Computation of Gross total income of Mr. B

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Particulars ₹

Income under the head “Salary” of Mrs. B (Computed) 3,44,000

Income from other sources
- Interest on securities 30,000

Gross total income 3,74,000

Computation of Gross total income of Mrs. B

Particulars ₹ ₹

Income from Salary Nil

[Clubbed in the hands of Mr. B]
Income from house property
Gross Annual Value [₹ 6,000 × 12] 72,000
Less: Municipal taxes paid -
Net Annual Value (NAV) 72,000
Less: Deductions under section 24
30% of NAV i.e., 30% of ₹ 72,000 21,600
Interest on loan - 50,400
Gross total income 50,400

II. Income arising to the spouse from an asset transferred without adequate consideration [Section 64(1)(iv)]
i. Transfer of asset (other than house property):
Where there is a transfer of an asset (other than house property), directly or indirectly, from one
spouse to the other, without adequate consideration or otherwise than in connection with an
agreement to live apart, any income arising to the transferee-spouse from the transferred asset,
either directly or indirectly, shall be included in the total income of the transferor-spouse.

ii. Transfer of house property:

In the case of transfer of house property, the provisions are contained in section 27. If an individual
transfers a house property to his spouse, without adequate consideration or otherwise than in
connection with an agreement to live apart, the transferor shall be deemed to be the owner of the
house property and its annual value will be taxed in his hands.

iii. Income from accretion of the transferred asset:

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It may be noted that any income from the accretion of the transferred asset is not to be clubbed with
the income of the transferor. i.e., the income arising on transferred assets alone have to be clubbed.
Income earned by investing such income (arising from transferred asset) cannot be clubbed.

iv. Meaning of adequate consideration:

It is also to be noted that natural love and affection do not constitute adequate consideration.
Therefore, where an asset is transferred without adequate consideration, the income from such asset
will be clubbed in the hands of the transferor.

v. Transferred asset invested in business:

Where the assets transferred, directly or indirectly, by an individual to his spouse are invested by the
transferee in the business, proportionate income arising to the transferee from such investment is to
be included in the total income of the transferor. If the investment is in the nature of contribution of
capital, proportionate interest receivable by the transferee from the firm will be clubbed with the
income of the transferor.

Such proportion has to be computed by taking into account the value of the aforesaid
investment as on the first day of the previous year to the total investment in the business
or by way of capital contribution in a firm as a partner, as the case may be, by the
transferee as on that day.

ILLUSTRATION 5
Mr. Vaibhav started a proprietary business on 01.04.2023 with a capital of ₹ 5,00,000. He incurred a loss of ₹
2,00,000 during the year 2023-24. To overcome the financial position, his wife Mrs. Vaishaly, a software
Engineer, gave a gift of ₹ 5,00,000 on 01.04.2024, which was immediately invested in the business by Mr.
Vaibhav. He earned a profit of ₹ 4,00,000 during the year 2024-25. Compute the amount to be clubbed in the
hands of Mrs. Vaishaly for the A.Y. 2025-26. If Mrs. Vaishaly gave the said amount as loan, what would be the
amount to be clubbed?

SOLUTION
Section 64(1)(iv) of the Income-tax Act, 1961 provides for the clubbing of income in the hands of the individual,
if the income earned is from the assets (other than house property) transferred directly or indirectly to the
spouse of the individual, otherwise than for adequate consideration or in connection with an agreement to live
apart.

In this case, Mr. Vaibhav received a gift of ₹ 5,00,000 on 1.4.2024 from his wife Mrs. Vaishaly, which he invested
in his business immediately. The income to be clubbed in the hands of Mrs. Vaishaly for the A.Y. 2025-26 is
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computed as under:

Particulars Mr. Vaibhav’s capital Capital Total

contribution contribution out of
gift from Mrs.
Vaishaly

Capital as on 1.4.2024 3,00,000 5,00,000 8,00,000

(5,00,000 – 2,00,000)

Profit for P.Y.2024-25 to be 1,50,000 2,50,000 4,00,000

apportioned onthe basis of capital
employed on the first day of the 3 5
4,00,000 × 4,00,000 ×
previous year i.e., as on 1.4.2024 (3:5) 8 8

Therefore, the income to be clubbed in the hands of Mrs. Vaishaly for the A.Y.2025-26 is ₹ 2,50,000.
In case Mrs. Vaishaly gave the said amount of ₹ 5,00,000 as a bona fide loan, then, clubbing provisions would
not be attracted

Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mr. Vaibhav, since he has
received a sum of money exceeding ₹ 50,000 without consideration from a relative i.e., his wife.

III. Transfer of assets for the benefit of spouse [Section 64(1)(vii)]

All income arising directly or indirectly to any person or association of persons, from the assets
transferred, directly or indirectly, to such person or association of persons by an individual without
adequate consideration is includible in the income of the individual to the extent such income is used
by the transferee for the immediate or deferred benefit of the transferor’s spouse.

Clubbing of income arising to son’s wife

I. Income arising to son’s wife from the assets transferred without adequate consideration by the father-
in-law or mother-in-law [Section 64(1)(vi)]
a) Asset transferred without adequate consideration: Where an asset is transferred, directly or
indirectly, by an individual to his or her son’s wife without adequate consideration, the income from
such asset is to be included in the total income of the transferor.

b) Asset transferred invested in the business: For this purpose, where the assets transferred directly
or indirectly by an individual to his or her son’s wife are invested by the transferee in the business,
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proportionate income arising from such investment is to be included in the total income of the
transferor. If the investment is in the nature of contribution of capital, the proportionate interest
receivable from firm will be clubbed with the income of the transferor.

Such proportion has to be computed by taking into account the value of the aforesaid
investment as on the first day of the previous year to the total investment in the business or
by way of capital contribution in a firm as a partner, as the case may be, by the transferee as
on that day.

II. Transfer of assets for the benefit of son’s wife [Section 64(1)(viii)] All income arising directly or indirectly,
to any person or association of persons from the assets transferred, directly or indirectly, without
adequate consideration, to such person or association of persons by an individual will be included in the
total income of the individual to the extent such income is used by the transferee for the immediate or
deferred benefit of the transferor’s son’s wife.

Where any asset is transferred by a person to any other person without consideration or for
inadequate consideration, the provisions of 56(2)(x) would get attracted in the hands of transferee,
if conditions specified thereunder are satisfied.

ILLUSTRATION 6
Mrs. Kasturi transferred her immovable property to ABC Co. Ltd. subject to a condition that out of the rental
income, a sum of ₹ 36,000 per annum shall be utilized for the benefit of her son’s wife.
Mrs. Kasturi claims that the amount of ₹ 36,000 (utilized by her son’s wife) should not be included in her total
income as she no longer owned the property.
Examine with reasons whether the contention of Mrs. Kasturi is valid in law.

SOLUTION
The clubbing provisions under section 64(1)(viii) are attracted in case of transfer of any asset, directly or
indirectly, otherwise than for adequate consideration, to any person to the extent to which the income from
such asset is for the immediate or deferred benefit of son’s wife. Such income shall be included in computing
the total income of the transferor-individual.
Therefore, income of ₹ 36,000 meant for the benefit of daughter-in-law is chargeable to tax in the hands of
transferor i.e., Mrs. Kasturi in this case.

The contention of Mrs. Kasturi is, hence, not valid in law.

In order to attract the clubbing provisions under section 64(1)(viii), the transfer should be otherwise than for
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adequate consideration. In this case, it is presumed that the transfer is otherwise than for adequate
consideration and therefore, the clubbing provisions are attracted. Moreover, the provisions of section 56(2)(x)
would also get attracted in the hands of ABC Co Ltd., if the conditions specified thereunder are satisfied.

Note – If the transfer was for adequate consideration, the provisions of section 64(1)(viii) would not be attracted.

Clubbing of minor’s income [Section 64(1A)]

(i) All income of a minor is to be included in the income of his or her parent.
(ii) However, the income derived by the minor from manual work or from any activity involving his skill, talent
or specialised knowledge or experience will not be included in the income of his parent.
(iii) The income of the minor will be included in the income of that parent, whose total income, excluding
minor’s income, is greater.

(iv) Once clubbing of minor’s income is done with that of one parent, it will continue to be clubbed with that
parent only, in subsequent years. The Assessing Officer, may, however, club the minor’s income with that
of the other parent, if, after giving the other parent an opportunity to be heard, he is satisfied that it is
necessary to do so.

(v) Where the marriage of the parents does not subsist, the income of the minor will be includible in the
income of that parent who maintains the minor child in the relevant previous year.

(vi) However, the income of a minor child suffering from any disability of the nature specified in section 80U
shall not be included in the hands of the parent but shall be assessed in the hands of the child.

(vii) It may be noted that the clubbing provisions are attracted even in respect of income of minor married
daughter.

Exemption in respect of clubbed income of minor [Section 10(32)]

In case the income of an individual (i.e. the parent) includes the income of his minor child in terms of
section 64(1A), such parent shall be entitled to exemption of ₹ 1,500 in respect of each minor child.
However, if income of any minor so includible is less than ₹ 1,500, then, the entire income shall be
exempt.

Exemption under section 10(32) would be available to the parent only if he/she exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A). The same would not be
available to him/her under the default tax regime where he/she computes his/her total income as
per section 115BAC and pays tax at the concessional rates provided thereunder.
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(viii) In case the asset transferred to a minor child (not being a minor married daughter) without consideration
or for inadequate consideration is a house property, then, by virtue of section 27(i), the transferor-
parent will be the deemed owner of the house property. Therefore, the income from house property will
be taxable in the hands of the transferor-parent, being the deemed owner and not in the hands of the
minor child. Consequently, clubbing provisions under section 64(1A) would not be attracted in respect of
such income, due to which the benefit of exemption u/s 10(32) (discussed above) cannot be availed
against such income.

However, if the house property is transferred by a parent to his or her minor married daughter, without
consideration or for inadequate consideration, then, section 27(i) is not attracted. In such a case, the
income from house property will be included u/s 64(1A) in the hands of that parent, whose total income
before including minor child’s income is higher; and benefit of exemption u/s 10(32) can be availed by
that parent in respect of the income so included if he/she exercises the option of shifting out of the
default tax regime provided under section 115BAC(1A).

ILLUSTRATION 7
Mr. A has three minor children – two twin daughters, aged 12 years, and one son, aged 16 years. Income of the
twin daughters is ₹ 2,000 p.a. each and that of the son is ₹ 1,200 p.a. Mrs. A has transferred her flat to her minor
son on 1.4.2024 out of natural love and affection. The flat was let out on the same date and the rental income
from the flat is ₹ 10,000 p.m. Compute the income, in respect of minor children, to be included in the hands of
Mr. A and Mrs. A u/s 64(1A) (assuming that Mr. A’s total income is higher than Mrs. A’s total income, before
including the income of minor children and both Mr. A and Mrs. A exercise the option of shifting out of the default
tax regime provided under section 115BAC(1A).

SOLUTION
Taxable income, in respect of minor children, in the hands of Mr. A is:

Particulars ₹ ₹

Twin minor daughters [₹ 2,000 × 2] 4,000

Less: Exempt under section 10(32) [₹ 1,500 × 2] 3,000 1,000
Minor son 1,200
Less: Exempt under section 10(32) 1,200

Income to be clubbed in the hands of Mr. A 1,000

Note – As per section 27(i), Mrs. A is the deemed owner of house property transferred to her minor son. Natural
love and affection do not constitute adequate consideration for this purpose. Accordingly, the income from
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house property of ₹ 84,000 [i.e., ₹ 1,20,000 (-) ₹ 36,000, being 30% of ₹ 1,20,000) would be taxable directly in
her hands as the deemed owner of the said property. Consequently, clubbing provisions under section 64(1A)
would not be attracted in respect of income from house property, owing to which exemption u/s 10(32) cannot
be availed by her.

ILLUSTRATION 8
Compute the gross total income of Mr. A & Mrs. A from the following information assuming both exercise the
option of shifting out of the default tax regime provided under section 115BAC(1A):

Particulars ₹

a) Salary income (computed) of Mrs. A 2,30,000

b) Income from profession of Mr. A 3,90,000
c) Income of minor son B from company deposit 15,000
d) Income of minor daughter C from special talent 32,000
e) Interest from bank received by C on deposit made out of her 3,000
special talent
f) Gift received by C on 30.09.2024 from friend of Mrs. A 2,500

Brief working is sufficient. Detailed computation under various heads of income is not required.

SOLUTION
As per the provisions of section 64(1A) of the Income-tax Act, 1961, all the income of a minor child has to be
clubbed in the hands of that parent whose total income (excluding the income of the minor) is greater. The
income of Mr. A is ₹ 3,90,000 and income of Mrs. A is ₹ 2,30,000. Since the income of Mr. A is greater than that
of Mrs. A, the income of the minor children have to be clubbed in the hands of Mr. A. It is assumed that this is
the first year when clubbing provisions are attracted.

Income derived by a minor child from any activity involving application of his/her skill, talent, specialised
knowledge and experience is not to be clubbed. Hence, the income of minor child C from exercise of special
talent will not be clubbed.

However, interest from bank deposit has to be clubbed even when deposit is made out of income arising from
application of special talent.

The Gross Total Income of Mrs. A is ₹ 2,30,000. The total income of Mr. A giving effect to the provisions of section
64(1A) is as follows:
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Computation of gross total income of Mr. A for the A.Y. 2025-26

Particulars ₹ ₹

Income from profession 3,90,000

Income of minor son B from company deposit 15,000
Less: Exemption under section 10(32) 1,500 13,500
Income of minor daughter C
From special talent – not to be clubbed -
Interest from bank 3,000
Gift of ₹ 2,500 received from a non-relative is not taxable
under section 56(2)(x) being less than the aggregate limit
of ₹ 50,000 Nil
3,000
Less : Exemption under section 10(32) 1,500 1,500
Gross Total Income 4,05,000

CROSS TRANSFERS
In the case of cross transfers also (e.g., A making gift of ₹ 50,000 to the wife of his brother B for the purchase
of a house by her and a simultaneous gift by B to A’s minor son of shares in a foreign company worth ₹ 50,000
owned by him), the income from the assets transferred would be assessed in the hands of the deemed
transferor if the transfers are so intimately connected as to form part of a single transaction, and each transfer
constitutes consideration for the other by being mutual or otherwise. Thus, in the instant case, the transfers
have been made by A and B to persons who are not their spouse or minor child so as to circumvent the
provisions of this section, showing that such transfers constituted consideration for each other.

The Supreme Court, in case of CIT v. Keshavji Morarji [1967] 66 ITR 142, observed that if two transactions are
inter-connected and are parts of the same transaction in such a way that it can be said that the circuitous
method was adopted as a device to evade tax, the implication of clubbing provisions would be attracted.
Accordingly, the income arising to Mrs. B from the house property should be included in the total income of B
and the dividend from shares transferred to A’s minor son would be taxable in the hands of A, assuming that Mr.
A’s income is higher than that of Mrs. A. This is because A and B are the indirect transferors to their minor child
and spouse, respectively, of income-yielding assets, so as to reduce their burden of taxation.
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ILLUSTRATION 9
Mr. Vasudevan gifted a sum of ₹ 6 lakhs to his brother's wife on 14-6-2024. On 12-7-2024, his brother gifted a
sum of ₹ 5 lakhs to Mr. Vasudevan's wife. The gifted amounts were invested as fixed deposits in banks by Mrs.
Vasudevan and wife of Mr. Vasudevan's brother on 01-8-2024 at 9% interest. Examine the consequences of the
above under the provisions of the Income-tax Act, 1961 in the hands of Mr. Vasudevan and his brother

SOLUTION
In the given case, Mr. Vasudevan gifted a sum of ₹ 6 lakhs to his brother’s wife on 14.06.2024 and simultaneously,
his brother gifted a sum of ₹ 5 lakhs to Mr. Vasudevan’s wife on 12.07.2024. The gifted amounts were invested
as fixed deposits in banks by Mrs. Vasudevan and his brother’s wife. These transfers are in the nature of cross
transfers. Accordingly, the income from the assets transferred would be assessed in the hands of the deemed
transferor because the transfers are so intimately connected to form part of a single transaction and each
transfer constitutes consideration for the other by being mutual or otherwise.

If two transactions are inter-connected and are part of the same transaction in such a way that it can be said
that the circuitous method was adopted as a device to evade tax, the implication of clubbing provisions would
be attracted. It was so held by the Apex Court in CIT vs. Keshavji Morarji (1967) 66 ITR 142.

Accordingly, the interest income arising to Mrs. Vasudevan in the form of interest on fixed deposits would be
included in the total income of Mr. Vasudevan and interest income arising in the hands of his brother’s wife
would be taxable in the hands of Mr. Vasudevan’s brother as per section 64(1), to the extent of amount of cross
transfers i.e., ₹ 5 lakhs.

This is because both Mr. Vasudevan and his brother are the indirect transferors of the income to their respective
spouses with an intention to reduce their burden of taxation.

However, the interest income earned by his spouse on fixed deposit of ₹ 5 lakhs alone would be included in the
hands of Mr. Vasudevan’s brother and not the interest income on the entire fixed deposit of ₹ 6 lakhs, since the
cross transfer is only to the extent of ₹ 5 lakhs.

CONVERSION OF SELF-ACQUIRED PROPERTY INTO THE

PROPERTY OF A HINDU UNDIVIDED FAMILY [SECTION 64(2)]
Section 64(2) deals with the case of conversion of self-acquired property into property of a Hindu undivided
family
(i) Where an individual, who is a member of the HUF, converts at any time after 31-12-1969, his individual
property into property of the HUF of which he is a member or throws such property into the common
stock of the family or otherwise transfers such individual property, directly or indirectly, to the family
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otherwise than for adequate consideration, the income from such property shall continue to be included
in the total income of the individual.

(ii) Where the converted property has been partitioned, either by way of total or partial partition, the
income derived from such converted property as is received by the spouse on partition will be deemed
to arise to the spouse from assets transferred indirectly by the individual to the spouse and
consequently, such income shall also be included in the total income of the individual who effected the
conversion of such property.

(iii) Where income from the converted property is included in the total income of an individual under section
64(2), it will be excluded from the total income of the family or, as the case may be, of the spouse of the
individual.

INCOME INCLUDES LOSS

As per the Explanation 2 to section 64, ‘income’ would include ‘loss’. Accordingly, where the specified income to
be included in the total income of the individual is a loss, such loss will be taken into account while computing
the total income of the individual. It is significant to note that this Explanation applies to clubbing provisions
under both sections 64(1) and 64(2).

DISTINCTION BETWEEN SECTION 61 AND SECTION 64

It may be noted that the main distinction between the two sections is that section 61 applies only to a revocable
transfer made by any person while section 64 applies to revocable as well as irrevocable transfers made only
by individuals.

Clubbing provisions are attracted in respect of income arising from the assets transferred, however,
income arising on accretion of income arising from transferred asset, would not be clubbed except in
case of minor child.

Mr. X transferred debentures of ₹ 50,000 carrying 10% p.a. interest to his wife. The interest income of ₹ 5,000
would be clubbed in the hands of Mr. X. However, in case his wife deposited ₹ 5,000 in fixed deposits @8%
p.a., the interest income of ₹ 400 arising on FDR would not be clubbed in the hands of Mr. X.
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TEST YOUR KNOWLEDGE

I. Mr. Sharma has four minor children - 2 daughters and 2 sons. The annual income of 2 daughters were ₹
9,000 and ₹ 4,500 and of sons were ₹ 6,200 and ₹ 4,300, respectively. The daughter who has income of
₹ 4,500 was suffering from a disability specified under section 80U.

Compute the amount of income earned by minor children to be clubbed in hands of Mr. Sharma assuming
he has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).

II. During the previous year 2024-25, the following transactions occurred in respect of Mr. A.
(a) Mr. A had a fixed deposit of ₹ 5,00,000 in Bank of India. He instructed the bank to credit the interest
on the deposit @ 9% p.a. from 1-4-2024 to 31-3-2025 to the savings bank account of Mr. B, son of his
brother, to help him in his education.

(b) Mr. A holds 75% profit share in a partnership firm. Mrs. A received a commission of ₹ 25,000 from the
firm for promoting the sales of the firm. Mrs. A possesses no technical or professional qualification.

(c) Mr. A gifted a flat to Mrs. A on April 1, 2024. During the previous year 2024-25, Mrs. A’s “Income from
house property” (computed) was ₹ 52,000 from such flat.

(d) Mr. A gifted ₹ 2,00,000 to his minor son who invested the same in a business and he derived income
of ₹ 20,000 from the investment.

(e) Mr. A’s minor son derived an income of ₹ 20,000 through a business activity involving application of
his skill and talent

During the year, Mr. A got a monthly pension of ₹ 10,000. He had no other income. Mrs. A received salary
of ₹ 20,000 per month from a part time job.

Examine the tax implications of each transaction and compute the total income of Mr. A, Mrs. A and their
minor child assuming that they exercise the option of shifting out of the default tax regime provided
under section 115BAC(1A).

III. Mr. A has gifted a house property valued at ₹ 50 lakhs to his wife, Mrs. B, who in turn has gifted the same
to Mrs. C, their daughter-in-law. The house was let out at ₹ 25,000 per month throughout the year.
Compute the total income of Mr. A and Mrs. C.

Will your answer be different if the said property was gifted to his son, husband of Mrs. C?

IV. A proprietary business was started by Smt. Rani in the year 2022. As on 1.4.2023 her capital in business
was ₹ 3,00,000.
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Her husband gifted ₹ 2,00,000 on 10.4.2023 to her and such sum is invested by Smt. Rani in her business
on the same date. Smt. Rani earned profits from her proprietary business for the Financial Year 2023-
24, ₹ 1,50,000 and Financial Year 2024-25 ₹ 3,90,000. Compute the income, to be clubbed in the hands
of Rani’s husband for the Assessment year 2025-26 with reasons.

V. Mr. B is the Karta of a HUF, whose members derive income as given below:

Particulars ₹

i. Income from B' s profession 45,000

ii. Mrs. B' s salary as fashion designer 76,000

iii. Minor son D (interest on fixed deposits with a bank which were gifted to 10,000
him by his uncle)
iv. Minor daughter P's earnings from sports 95,000
v. D's winnings from lottery (gross) 1,95,000

Examine the tax implications in the hands of Mr. and Mrs. B.

ANSWERS
1. As per section 64(1A), in computing the total income of an individual, all such income accruing or arising
to a minor child shall be included. However, income of a minor child suffering from disability specified
under section 80U would not be included in the income of the parent but would be taxable in the hands
of the minor child. Therefore, in this case, the income of daughter suffering from disability specified
under section 80U should not be clubbed with the income of Mr. Sharma.
Under section 10(32), income of each minor child includible in the hands of the parent under section
64(1A) would be exempt to the extent of the actual income or ₹ 1,500, whichever is lower. Mr. Sharma
would be eligible for exemption u/s 10(32) since he has exercised the option of shifting out of the default
tax regime provided under section 115BAC(1A). The remaining income would be included in the hands of
the parent.

Computation of income earned by minor children to be clubbed with the income of Mr. Sharma

Particulars ₹

I. Income of one daughter 9,000

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Less: Income exempt under section 10(32) 1,500

Total (A) 7,500
II. Income of two sons (₹ 6,200 + ₹ 4,300) 10,500
Less: Income exempt under section 10(32)

(₹ 1,500 + ₹ 1,500) 3,000

Total (B) 7,500
Total Income to be clubbed as per section 64(1A) (A+B) 15,000

Note: It has been assumed that:

1. The income does not accrue or arise to the minor children on account of any manual work done by
them or activity involving application of their skill, talent or specialized knowledge and experience;

2. The income of Mr. Sharma, before including the minor children’s income, is greater than the income
of Mrs. Sharma, due to which the income of the minor children would be included in his hands; and

3. This is the first year in which clubbing provisions are attracted.

2. Computation of total income of Mr. A, Mrs. A and their minor son for the A.Y. 2025-26

Particulars Mr. A Mrs. A Minor Son

Income under the head “Salaries”

Salary income (of Mrs. A) - 2,40,000
Pension income (of Mr. A) 1,20,000 -
(₹ 10,000×12)

Less: Standard deduction under

section 16(ia) 50,000 50,000
70,000 1,90,000
Income from House Property [See 52,000 - -
Note (3) below]

Income from other sources

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Interest on Mr. A’s fixed deposit 45,000 - -

with Bank of India
(₹ 5,00,000×9%) [See Note
(1) below]
Commission received by Mrs. A 25,000 70,000 - -
from a partnership firm, in which
Mr. A has substantial interest [See
Note (2) below]
Income before including income 1,92,000 1,90,000 -
of minor son under section 64(1A)

Income of the minor son from the 18,500 - -

investment made in
the business out of the
amount gifted by Mr. A [See
Note (4) below]
Income of the minor son through a - - 20,000
business activity involving
application of his skill and talent
[See Note (5) below]
Total Income 2,10,500 1,90,000 20,000

Notes:
a) As per section 60, in case there is a transfer of income without transfer of asset from which such
income is derived, such income shall be treated as income of the transferor. Therefore, the fixed
deposit interest of ₹ 45,000 transferred by Mr. A to Mr. B shall be included in the total income of Mr.
A.

b) As per section 64(1)(ii), in case the spouse of the individual receives any amount by way of income
from any concern in which the individual has substantial interest (i.e. holding shares carrying at least
20% voting power or entitled to at least 20% of the profits of the concern), then, such income shall
be included in the total income of the individual. The only exception is in a case where the spouse
possesses any technical or professional qualifications and the income earned is solely attributable
to the application of her technical or professional knowledge and experience, in which case, the
clubbing provisions would not apply.

In this case, the commission income of ₹ 25,000 received by Mrs. A from the partnership firm has to
be included in the total income of Mr. A, as Mrs. A does not possess any technical or professional
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qualification for earning such commission and Mr. A has substantial interest in the partnership firm
as he holds 75% profit share in the firm.

c) According to section 27(i), an individual who transfers any house property to his or her spouse
otherwise than for adequate consideration or in connection with an agreement to live apart, shall be
deemed to be the owner of the house property so transferred. Hence, Mr. A shall be deemed to be
the owner of the flat gifted to Mrs. A and hence, the income arising from the same shall be computed
in the hands of Mr. A.

Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mrs. A, since she has

received immovable property without consideration from a relative i.e., her husband.

d) As per section 64(1A), the income of the minor child is to be included in the total income of the parent
whose total income (excluding the income of minor child to be so clubbed) is greater. Further, as per
section 10(32), income of a minor child which is includible in the income of the parent shall be exempt
to the extent of ₹ 1,500 per child.

Therefore, the income of ₹ 20,000 received by minor son from the investment made out of the sum
gifted by Mr. A shall, after providing for exemption of ₹ 1,500 under section 10(32), be included in the
income of Mr. A, since Mr. A’s income of ₹ 1,92,000 (before including the income of the minor child) is
greater than Mrs. A’s income of ₹ 1,90,000. Therefore, ₹ 18,500 (i.e., ₹ 20,000 – ₹ 1,500) shall be
included in Mr. A’s income. It is assumed that this is the first year in which clubbing provisions are
attracted.

Note: The provisions of section 56(2)(x) would not be attracted in the hands of the minor son, since
he has received a sum of money exceeding ₹ 50,000 without consideration from a relative i.e., his
father.

e) In case the income earned by the minor child is on account of any activity involving application of
any skill or talent, then, such income of the minor child shall not be included in the income of the
parent but shall be taxable in the hands of the minor child.

Therefore, the income of ₹ 20,000 derived by Mr. A’s minor son through a business activity involving
application of his skill and talent shall not be clubbed in the hands of the parent. Such income shall
be taxable in the hands of the minor son.

3. As per section 27(i), an individual who transfers otherwise than for adequate consideration any house
property to his spouse, not being a transfer in connection with an agreement to live apart, shall be
deemed to be the owner of the house property so transferred.
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Therefore, in this case, Mr. A would be the deemed owner of the house property transferred to his wife
Mrs. B without consideration.

As per section 64(1)(vi), income arising to the son’s wife from assets transferred, directly or indirectly,
to her by an individual otherwise than for adequate consideration would be included in the total income
of such individual.

Income from let-out property is ₹ 2,10,000 [i.e., ₹ 3,00,000, being the actual rent calculated at ₹ 25,000
per month less ₹ 90,000, being deduction under section 24@30% of ₹ 3,00,000]
In this case, income of ₹ 2,10,000 from let-out property arising to Mrs. C, being Mr. A’s son’s wife, would
be included in the income of Mr. A, applying the provisions of section 27(i) and section 64(1)(vi). Such
income would, therefore, not be taxable in the hands of Mrs. C

In case the property was gifted to Mr. A’s son, the clubbing provisions under section 64 would not apply,
since the son is not a minor child. Therefore, the income of ₹ 2,10,000 from letting out of property gifted
to the son would be taxable in the hands of the son.

It may be noted that the provisions of section 56(2)(x) would not be attracted in the hands of the
recipient of house property, since the receipt of property in each case was from a “relative” of such
individual. Therefore, the stamp duty value of house property would not be chargeable to tax in the
hands of the recipient of immovable property, even though the house property was received by her or
him without consideration.

Note - The first part of the question can also be answered by applying the provisions of section 64(1)(vi)
directly to include the income of ₹ 2,10,000 arising to Mrs. C in the hands of Mr. A. [without first applying
the provisions of section 27(i) to deem Mr. A as the owner of the house property transferred to his wife
Mrs. B without consideration], since section 64(1)(vi) speaks of clubbing of income arising to son’s wife
from indirect transfer of assets to her by her husband’s parent, without consideration. Gift of house
property by Mr. A to Mrs. C, via Mrs. B, can be viewed as an indirect transfer by Mr. A to Mrs. C.

4. Section 64(1) of the Income-tax Act, 1961 provides for the clubbing of income in the hands of the
individual, if the income earned is from the assets transferred directly or indirectly to the spouse of the
individual, otherwise than for adequate consideration. In this case Smt. Rani received a gift of ₹ 2,00,000
from her husband which she invested in her business. The income to be clubbed in the hands of Smt.
Rani’s husband for A.Y.2025-26 is computed as under:

Particulars Smt. Rani’s Capital Total

Capital Contribution
Contribution Out of gift
from
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husband

₹ ₹ ₹
Capital as at 1.4.2023 3,00,000 3,00,000
Investment on 10.04.2023 out of gift received from
her husband 2,00,000 2,00,000

3,00,000 2,00,000 5,00,000

Profit for F.Y. 2023-24 to be apportioned on the
basis of capital employed on the first day of the
previous year i.e., on 1.4.2023 1,50,000 1,50,000
Capital employed as at 1.4.2024 4,50,000 2,00,000 6,50,000
Profit for F.Y.2024-25 to be apportioned on the basis
of capital employed as at 1.4.2024 (i.e., 45 : 20) 2,70,000 1,20,000 3,90,000

Therefore, the income to be clubbed in the hands of Smt. Rani’s husband for A.Y.2025-26 is ₹ 1,20,000.

5. Clubbing of income and other tax implications

As per the provisions of section 64(1A), in case the marriage of the parents subsist, the income of a
minor child shall be clubbed in the hands of the parent whose total income, excluding the income of the
minor child to be clubbed, is greater. In this problem, it has been assumed that the marriage of Mr. B and
Mrs. B subsists.

Further, in case the income arises to the minor child on account of any manual work done by the child
or as a result of any activity involving application of skill, talent, specialized knowledge or experience of
the child, then, the same shall not be clubbed in the hands of the parent.

Tax implications
i. Income of ₹ 45,000 from Mr. B’s profession shall be taxable in the hands of Mr. B under the head
“Profits and gains of business or profession”.

ii. Salary of ₹ 1,000 (₹ 76,000 less standard deduction under section 16(ia) of ₹ 75,000) shall be
taxable as “Salaries” in the hands of Mrs. B.

iii. However, if Mrs. B exercises the option of shifting out of default tax regime, salary of ₹ 26,000 (₹
76,000 less standard deduction under section 16(ia) of ₹ 50,000) shall be taxable as “Salaries”.
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iv. Income from fixed deposit of ₹ 10,000 arising to the minor son D, shall be clubbed in the hands
of the father, Mr. B as “Income from other sources”, since Mr. B’s income is greater than income
of Mrs. B before including the income of the minor child.

v. As per section 10(32), income of a minor child which is includible in the income of the parent shall
be exempt to the extent of ₹ 1,500 per child if such parent exercises the option of shifting out of
the default tax regime provided under section 115BAC(1A). The balance income would be clubbed
in the hands of the parent as “Income from other sources”.

vi. Income of ₹ 95,000 arising to the minor daughter P from sports shall not be included in the hands
of the parent, since such income has arisen to the minor daughter on account of an activity
involving application of her skill

vii. Income of ₹ 1,95,000 arising to minor son D from lottery shall be included in the hands of Mr. B
as “Income from other sources”, since Mr. B’s income is greater than the income of Mrs. B before
including the income of minor child.

viii. Note – Mr. B can reduce the tax deducted at source from such lottery income while computing
his net tax liability.
SIR
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AGGREGATION OF INCOME, SET-OFF AND

CHAPTER - 4
CARRY FORWARD OF LOSSES

Set off and Carry forward & Set off of losses under default tax regime under section 115BAC

Inter-source set-off of losses Inter-head Carry forward and Set-off of

under the same head of income adjustment unabsorbed losses

Unabsorbed business loss can be carried

Exceptions Exceptions forward for maximum 8 AYs for set-off
against profits and gains from business or
profession
Loss from Loss under the head “Profits and gains
of business or profession” cannot be set
speculative
off against income under the head
business Unabsorbed loss from speculation business
“Salaries”
can be carried forward for maximum 4 AYs for
set-off against income from speculation
Long term Loss under the head “Capital gains” business
capital loss cannot be set-off against income under
any other head.
Long-term capital loss can be carried forward
Loss from the for maximum 8 AYs for set-off against long-
activity of Speculation loss and loss from the term capital gains
owning and activity of owning and maintaining
maintaining racehorses cannot be set- off against
Short-term capital loss can be carried
race horses income under any other head
forward for maximum 8 AYs for set-off
against capital gains
Loss from house property cannot be set
off against income under any other head
Unabsorbed loss from the activity of owning and
maintaining race horses can be carried forward for
maximum 4 AYs for set-off against income from the
activity of owning and maintaining race horses
Note -
Following brought forward losses/ depreciation is not allowed to be set off while computing total income under
default tax regime under section 115BAC
1. Brought forward loss from self-occupied house property
2. Brought forward business loss of specified business u/s 35AD
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3. Brought forward business loss on account of deduction u/s 35(1)(ii)/(iia)/(iii) or u/s 35(2AA)
4. Unabsorbed depreciation attributable to additional depreciation u/s 32(1)(iia).

Set off and Carry forward & Set off of losses under normal provisions of the Act

Inter-source set-off Inter-head Carry forward and Set-off of

of losses under the adjustment unabsorbed losses
same head of income
Unabsorbed loss from house property can
Exceptions be carried forward for maximum 8 AYs for
Exceptions set-off against income from house
Loss under the head “Profits and property
Loss from gains of business or profession”
speculative cannot be set off against income
Unabsorbed business loss can be carried
business under the head “Salaries”
forward for maximum 8 AYs for set-off
against profits and gains from business or
Loss under the head “Capital profession
Loss from gains” cannot be set-off against
specified income under any other head.
business u/s Unabsorbed loss from speculation
35AD business can be carried forward for
Speculation loss, loss from maximum 4 AYs for set-off against income
specified business u/s 35AD and from speculation business
Long term loss from the activity of owning
capital loss and maintaining race horses
cannot be set-off against income Unabsorbed loss from specified business
under any other head under section 35AD can be carried forward
Loss from the for indefinite period for set- off against
activity of Loss from house property can be profit from any specified business
owning and set off against income under any
maintaining other head only to the extent of ₹
race horses Long-term capital loss can be carried
2 lakhs
forward for maximum 8 AYs for set-off
against long-term capital gains

Short-term capital loss can be carried

forward for maximum 8 AYs for set-off
against capital gains

Unabsorbed loss from the activity of owning and maintaining race

horses can be carried forward for maximum 4 AYs for set-off against
income from the activity of owning and maintaining race horses
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AGGREGATION OF INCOME
In certain cases, some amounts are deemed as income in the hands of the assessee though they are actually
not in the nature of income. These cases are contained in sections 68, 69, 69A, 69B, 69C and 69D. These are
discussed in detail in Chapter 1.
The Assessing Officer may require the assessee to furnish explanation in such cases. If the assessee does not
offer any explanation or the explanation offered by the assessee is not satisfactory, the amounts referred to
in these sections would be deemed to be the income of the assessee. Such amounts have to be aggregated
with the assessee’s income.

CONCEPT OF SET-OFF AND CARRY FORWARD OF

LOSSES
Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry forward of losses. In
simple words, “Set-off” means adjustment of losses against the profits from another source/head of income in
the same assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits,
then such losses are carried forward to the next assessment year for adjustment against the eligible profits of
that year. The maximum period for which different losses can be carried forward for set-off has been provided
in the Act.

INTER SOURCE ADJUSTMENT [SECTION 70]

1. Inter-source set-off of losses:
Under this section, the losses incurred by the assessee in respect of one source shall be set-off against income
from any other source under the same head of income, since the income under each head is to be computed
by grouping together the net result of the activities of all the sources covered by that head. In simpler terms,
loss from one source of income can be adjusted against income from another source, both the sources being
under the same head.

Loss from one house property can be set off against the income from another house property.

Loss from one business, say textiles, can be set off against income from any other business,
say printing, in the same year as both these sources of income fall under one head of income.
Therefore, the loss in one business may be set-off against the profits from another business
in the same year
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2. Impermissible inter-source set-off:

Inter-source set-off, however, is not permissible in the following cases –
a) Long-term capital loss [Section 70(3)]
Short-term capital loss is allowed to be set off against both short-term capital gain and long-term
capital gain. However, long-term capital loss can be set-off only against long-term capital gain and not
against short-term capital gain.

b) Speculation loss [Section 73(1)]

A loss in speculation business can be set-off only against the profits of any other speculation business
and not against any other business or professional income.
However, losses from other business can be adjusted against profits from speculation business

c) Loss from the activity of owning and maintaining race horses [Section 74A(3)]
Such loss can be set-off only against income from the activity of owning and maintaining race horses.

d) Losses from Specified business [Section 73A(1)]

In case of an assessee exercising the option of shifting out of the default tax regime provided under
section 115BAC(1A), loss in any specified business referred in section 35AD can be set-off only against
any other specified business.

However, losses from other business can be set-off against profits from specified business.

Loss from an exempt source cannot be set-off against income from a taxable source of income.

INTER HEAD ADJUSTMENT [SECTION 71]

Loss under one head of income can be adjusted or set off against income under another head. However, the
following points should be considered:

i. Loss under any head other than capital gains: Where the net result of the computation under any
head of income (other than “Capital Gains”) is a loss, the assessee can set-off such loss against his
income assessable for that assessment year under any other head, including “Capital Gains”.

ii. Loss under the head “Profits and gains from business or profession”: Where the net result of the
computation under the head “Profits and gains of business or profession” is a loss, such loss cannot be
set off against income under the head “Salaries”. It shall be allowed to set off from income under any
other head except “Salaries”.
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iii. Loss under the head “Capital Gains”: Where the net result of computation under the head ‘Capital
Gains’ is a loss, whether short term or long term, such capital loss cannot be set-off against income
under any other head.

iv. Loss under the head “Income from house property”: The loss under the head “Income from house
property” would not be allowable to be set-off against income under the other head if the assessee pays
tax at concessional rate u/s 115BAC.

However, if the assessee exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A) and there is a loss under the head “Income from house property” and the assessee
has income assessable under any other head of income, the maximum loss from house property which
can be set-off against income from any other head is ₹ 2 lakhs. In other words, in such case, the amount
of such loss exceeding ₹ 2 lakhs would not be allowable to be set-off against income under the other
head.

v. Speculation loss and loss from the activity of owning and maintaining race horses cannot be set
off against income under any other head.

vi. Losses from Specified business u/s 35AD: In case of an assessee exercising the option of shifting out
of the default tax regime provided under section 115BAC(1A), loss from specified business referred to in
section 35AD can be set off only against income from any other specified business. Such loss cannot
be set off against income under any other head.

If the income from a source is exempt from tax, loss from that exempt source cannot be set off against
taxable income from a different source or taxable income under a different head.

CARRY FORWARD & SET-OFF OF LOSS FROM HOUSE

PROPERTY [SECTION 71B]
(i) Set-off and Carry Forward & Set-off of losses
a) If the assessee exercises the option of shifting out of the default tax regime provided under section
115BAC(1A): In any assessment year, if there is a loss under the head “Income from house property”,
such loss will first be set-off against income from any other head to the extent of ₹ 2,00,000 during
the same year. The unabsorbed loss will be carried forward to the following assessment year to be
set-off against income under the head “Income from house property”
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b) If the assessee pays tax at concessional rate u/s 115BAC: The loss under the head “Income from
house property” would not be allowable to be set-off against income under any other head. The
unabsorbed loss cannot be carried forward to the following assessment year.

(ii) Maximum period for carry forward & set-off of losses: The loss under the head “Income from house
property” is allowed to be carried forward upto 8 assessment years immediately succeeding the
assessment year in which the loss was first computed.

Once a particular loss is carried forward, it can be set off only against the income from the same head in
the forthcoming assessment years.

ILLUSTRATION 1
Mr. A, aged 35 years, submits the following particulars pertaining to the A.Y.2025-26:

Particulars

Income from salary (computed) 4,00,000

Loss from let-out property (-) 2,20,000
Business loss (-)1,00,000
Bank interest (FD) received 80,000

Compute the total income of Mr. A for the A.Y.2025-26, assuming that
i. He has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
ii. He pays tax under the default tax regime.

SOLUTION

i. Computation of total income of Mr. A for the A.Y.2025-26 under normal provisions of the Act

Particulars Amount Amount

Income from salary 4,00,000

Less: Loss from house property of ₹ 2,20,000 to be restricted to ₹ 2 (-) 2,00,000 2,00,000
lakhs by virtue of section 71(3A)

Balance loss of ₹ 20,000 from house property to be carried forward

to next assessment year
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Income from other sources (interest on fixed deposit with bank) 80,000
Less: Business loss of ₹ 1,00,000 set-off to the extent of ₹ 80,000 (-) 80,000 -
Business loss of ₹ 20,000 to be carried forward for set-off against
business income of the next assessment year
Gross total income [See Note below] 2,00,000
Less: Deduction under Chapter VI-A Nil
Total income 2,00,000

Notes:
(i) Gross Total Income includes salary income of ₹ 2,00,000 after adjusting loss of ₹ 2,00,000 from house
property. The balance loss of ₹ 20,000 from house property to be carried forward to next assessment
year for set-off against income from house property of that year.

(ii) Business loss of ₹ 1,00,000 is set off against bank interest of ₹ 80,000 and remaining business loss of
₹ 20,000 will be carried forward as it cannot be set off against salary income

ii. Computation of total income of Mr. A for the A.Y.2025-26 under default tax regime

Particulars Amount Amount

Income from salary 4,00,000

Income from other sources (interest on fixed deposit with bank) 80,000
Less: Business loss of ₹ 1,00,000 set-off to the extent of ₹ 80,000 (-) 80,000
Business loss of ₹ 20,000 to be carried forward for set-off against
business income of the next assessment year

Gross total income/ Total Income 4,00,000

Notes:
(i) Under the default tax regime, loss from house property of ₹ 2,20,000 cannot be set off against income
under any other head and cannot be carried forward to next assessment year.

(ii) Business loss of ₹ 1,00,000 is set off against bank interest of ₹ 80,000 and remaining business loss of
₹ 20,000 will be carried forward as it cannot be set off against salary income.
SIR
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CARRY FORWARD AND SET-OFF OF BUSINESS LOSSES

[SECTIONS 72]
Under the Act, the assessee has the right to carry forward the loss from business and profession in cases
where such loss cannot be set-off due to the absence or inadequacy of income under any other head in the
same year. The loss so carried forward can be set-off against the profits of subsequent previous years.

Section 72 covers the carry forward and set-off of losses arising from a business or profession.
Conditions
The assessee’s right to carry forward business losses under this section is, however, subject to the following
conditions:
i. The loss should have been incurred in business, profession or vocation.
ii. The loss should not be in the nature of a loss in the business of speculation.
iii. Loss from one business can be carried forward & set-off against the income from any other business:
The loss may be carried forward and setoff against the income from business or profession though not
necessarily against the profits and gains of the same business or profession in which the loss was
incurred.
However, a loss carried forward cannot, under any circumstances, be set-off against the income from
any head other than “Profits and gains of business or profession”

iv. Person who incurred the loss alone is entitled to carry forward & set-off the loss: The loss can be carried
forward and set off only against the profits of the assessee who incurred the loss. That is, only the
person who has incurred the loss is entitled to carry forward & set off the same. Consequently, the
successor of a business cannot carry forward & set off the losses of his predecessor except in the case
of succession by inheritance.

v. Maximum period for carry forward & set-off of losses: A business loss can be carried forward for a
maximum period of 8 assessment years immediately succeeding the assessment year in which the loss
was incurred.

ILLUSTRATION 2
Mr. B, a resident individual, furnishes the following particulars for the P.Y.2024-25:

Particulars Amount

Income from salary (computed) 45,000

Income from house property (24,000)
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Income from non-speculative business (22,000)

Income from speculative business (4,000)
Short-term capital losses (25,000)
Long-term capital gains taxable u/s 112 19,000

What is the total income chargeable to tax for the A.Y.2025-26, assuming that he pays tax under section 115BAC?

SOLUTION

Total income of Mr. B for the A.Y. 2025-26

Particulars Amount Amount

Income from salaries 45,000

Income from house property

Loss from house property can neither be set-off nor can be carried forward, Nil
since Mr. B is paying tax under the default tax regime u/s 115BAC

Profits and gains of business and profession

Business loss to be carried forward [Note (i)] (22,000)
Speculative loss to be carried forward [Note (ii)] (4,000)
Capital Gains
Long term capital gain taxable u/s 112 19,000
Short term capital loss ₹ 25,000 set off against long-term capital gains to (19,000)
the extent of ₹ 19,000 [Note (iii)]

Nil
Balance short term capital loss of ₹ 6,000 to be carried forward [Note (iii)]

Taxable income 45,000

Notes:
• Business loss cannot be set-off against salary income. Therefore, loss of ₹ 22,000 from the non-
speculative business cannot be set off against the income from salaries. Hence, such loss has to be

carried forward to the next year for set-off against business profits, if any.
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• Loss of ₹ 4,000 from the speculative business can be set off only against the income from the
speculative business. Hence, such loss has to be carried forward.

• Short term capital loss can be set off against both short term capital gain and long-term capital gain.
Therefore, short-term capital loss of ₹ 25,000 can be set-off against long-term capital gains to the
extent of ₹ 19,000. The balance short term capital loss of ₹ 6,000 cannot be set-off against any other
income and has to be carried forward to the next year for set-off against capital gains, if any

LOSSES IN SPECULATION BUSINESS [SECTION 73]

The meaning of the expression ‘speculative transaction’ as defined in section 43(5) and the treatment of income
from speculation business has already been discussed under the head “Profits and gains of business or
profession”.

i. Set-off and carry forward & set-off of loss from speculation business: Since speculation is deemed
to be a business distinct and separate from any other business carried on by the assessee, the losses
incurred in speculation business can neither be set off in the same year against any other
nonspeculation income nor be carried forward and set off against other income in the subsequent years.

Therefore, if the losses sustained by an assessee in a speculation business cannot be set-off in the
same year against any other speculation profit, they can be carried forward to subsequent years and
set-off only against income from any speculation business carried on by the assessee. Loss from the
activity of trading in derivatives, however, is not to be treated as speculative loss.

ii. Maximum period for carry forward & set-off of losses: The loss in speculation business can be carried
forward only for a maximum period of 4 years from the end of the relevant assessment year in respect
of which the loss was computed.

iii. When a business of a company deemed to be carrying on a speculation business: The Explanation to
this section provides that where any part of the business of a company consists in the purchase and
sale of the shares of other companies, such company shall be deemed to be carrying on speculation
business to the extent to which the business consists of the purchase and sale of such shares.

However, this deeming provision does not apply to the following companies –

1. A company whose gross total income consists of mainly income chargeable under the heads
“Interest on securities”, “Income from house property”, “Capital gains” and “Income from other
sources”;

2. A company, the principal business of which is –

a) the business of trading in shares; or
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b) the business of banking; or

c) the granting of loans and advances

Thus, these companies would be exempted from the operation of this Explanation. Accordingly, if these
companies carry on the business of purchase and sale of shares of other companies, they would not be deemed
to be carrying on speculation business

CARRY FORWARD & SET OFF OF LOSSES OF SPECIFIED

BUSINESSES [SECTION 73A]
(i) Set-off and Carry forward & set-off of losses of specified business: An assessee exercising the option
of shifting out of the default tax regime provided under section 115BAC(1A) and carrying on specified
business, can claim deduction u/s 35AD in respect of capital expenditure (other than land, goodwill and
financial instruments) incurred in respect of such business, subject to fulfillment of specified conditions.
Any loss computed in respect of the specified business referred to in section 35AD can, however, be set
off only against profits and gains, if any, of any other specified business. The unabsorbed loss, if any, will
be carried forward for set off against profits and gains of any specified business in the following
assessment year and so on.

(ii) Loss can be set-off indefinitely: There is no time limit specified for carry forward and set-off and
therefore, such loss can be carried forward indefinitely for set-off against income from specified business.

Under the optional tax regime, the loss of an assessee claiming deduction under section 35AD in
respect of a specified business can be set-off against the profit of another specified business
under section 73A, irrespective of whether the latter is eligible for deduction under section 35AD.
An assessee can, therefore, set-off the losses of a hospital or hotel which begins to operate after 1st April,
2010 and which is eligible for deduction under section 35AD, against the profits of the existing business of
operating a hospital (with atleast 100 beds for patients) or a hotel (of two-star or above category), even if
the latter is not eligible for deduction under section 35AD.

LOSSES UNDER THE HEAD ‘CAPITAL GAINS’ [SECTION 74]

Carry forward & set-off of losses: Section 74 provides that where, for any assessment year, the net result
under the head ‘Capital gains’ is short term capital loss or long-term capital loss, the loss shall be carried
forward to the following assessment year to be set off in the following manner:
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i. Short-term capital loss: Where the loss so carried forward is a short-term capital loss, it shall be set off
against any capital gains, short term or long term, arising in that year.
ii. Long-term capital loss: Where the loss so carried forward is a long-term capital loss, it shall be set off
only against long term capital gain arising in that year.
iii. Loss under head capital gains: Net loss under the head capital gains cannot be set off against income
under any other head.
iv. Maximum period for carry forward & set-off of loss: Any unabsorbed loss shall be carried forward to the
following assessment year up to a maximum of 8 assessment years immediately succeeding the
assessment year for which the loss was first computed.

Long - term capital gain exceeding ₹ 1,25,000 arising on sale of equity shares or units of equity
oriented fund or unit of business trust on which STT is paid
- in respect of equity shares, both at the time of acquisition and sale and
- in respect of units of equity-oriented fund or unit of business trust, at the time of sale
is taxable under section 112A @10% or 12.5%, as the case may be. Long-term capital loss on sale of such
shares/units can, therefore, be set-off and carried forward for set-off against long-term capital gains by virtue
of section 70(3) and section 74.

ILLUSTRATION 3
During the P.Y. 2024-25, Mr. C has the following income and the brought forward losses:

Particulars

Short term capital gains on sale of shares 1,50,000

Long term capital loss of A.Y.2023-24 (96,000)
Short term capital loss of A.Y.2024-25 (37,000)
Long term capital gain u/s 112 75,000

What is the capital gain taxable in the hands of Mr. C for the A.Y.2025-26?

SOLUTION

Taxable capital gains of Mr. C for the A.Y. 2025-26

Particulars

Short term capital gains on sale of shares 1,50,000

Less: Brought forward short-term capital loss of the A.Y.2024-25 (37,000) 1,13,000
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Long term capital gain 75,000

Less: Brought forward long-term capital loss of A.Y.2023-24 ₹ 96,000 set off (75,000) Nil
to the extent of ₹ 75,000
[See Note below]

Taxable short-term capital gains 1,13,000

Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the unadjusted long-
term capital loss of A.Y.2023-24 of ₹ 21,000 (i.e. ₹ 96,000 – ₹ 75,000) can be carried forward to the next year to
be set-off against long-term capital gains of that year.

LOSSES FROM THE ACTIVITY OF OWNING AND

MAINTAINING RACE HORSES [SECTION 74A (3)]
i. Set-off and Carry forward & set-off of loss: According to the provisions of section 74A(3), the losses
incurred by an assessee from the activity of owning and maintaining race horses cannot be set-off
against the income from any other source other than the activity of owning and maintaining race horses.

ii. Maximum period for carry forward & set-off of losses: Such loss can be carried forward for a maximum
period of 4 assessment years for being setoff against the income from the activity of owning and
maintaining race horses in the subsequent years.

iii. Meaning of certain terms:

Term Meaning

Amount of (i) In case assessee has no income by way of stake money – Amount of revenue
loss incurred expenditure incurred by the assessee wholly & exclusively for the purpose of
by the maintaining race horses.
assessee in
(ii) In case assessee has income by way of stake money - The amount by which
the activity of
such income by way of stake money falls short of the amount of revenue
owning and
expenditure incurred by the assessee wholly & exclusively for the purpose of
maintaining
maintaining race horses. i.e., Loss = Stake money – revenue expenditure for the
racehorses
purpose of maintaining race horses.

Horse race A horse race upon which wagering or betting maybe lawfully made.
Income by way The gross amount of prize money received on a race horse or race horses by the
of stake owner thereof on account of the horse or horses or anyone or more of the horses
money winning or being placed second or in any lower position in horse races.
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ILLUSTRATION 4
Mr. D has the following income for the P.Y.2024-25:

Particulars

Income from the activity of owning and maintaining the race horses 75,000

Income from textile business 85,000

Brought forward textile business loss (relating to A.Y. 2024-25) 50,000

Brought forward loss from the activity of owning and maintaining the race horses (relating 96,000
to A.Y.2022-23)

What is the total income in the hands of Mr. D for the A.Y. 2025-26?

SOLUTION

Total income of Mr. D for the A.Y. 2025-26

Particulars

Income from the activity of owning and maintaining race horses 75,000
Less: Brought forward loss of ₹ 96,000 from the activity of owning and
maintaining race horses set-off to the extent of ₹ 75,000 75,000
Nil
Balance loss of ₹ 21,000 (₹ 96,000 – ₹ 75,000) from the activity of owning and
maintaining race horses to be carried forward to A.Y.2026-27
Income from textile business 85,000
Less: Brought forward business loss from textile business 50,000 35,000
Total income 35,000

Note: Loss from the activity of owning and maintaining race horses cannot be setoff against any other
source/head of income

ORDER OF SET-OFF OF LOSSES

As per the provisions of section 72(2), brought forward business loss is to be setoff before setting off
unabsorbed depreciation. Therefore, the order in which setoff will be effected is as follows –
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(a) Current year depreciation [Section 32(1)];

(b) Current year capital expenditure on scientific research and current year expenditure on family planning,
to the extent allowed.
(c) Brought forward loss from business/profession [Section 72(1)];
(d) Unabsorbed depreciation [Section 32(2)];
(e) Unabsorbed capital expenditure on scientific research [Section 35(4)];
(f) Unabsorbed expenditure on family planning [Section 36(1)(ix)].

ILLUSTRATION 5
Mr. E has furnished his details for the A.Y.2025-26 as under:

Particulars

Income from salaries (computed) 1,50,000

Income from speculation business 60,000
Loss from non-speculation business (40,000)

Short term capital gain 80,000

Long term capital loss of A.Y.2023-24 (30,000)
Winning from lotteries (Gross) 20,000

Compute the total income of Mr. E for the A.Y.2025-26

SOLUTION
Computation of total income of Mr. E for the A.Y.2025-26

Particulars

Income from salaries 1,50,000

Income from speculation business 60,000
Less: Loss from non-speculation business (40,000) 20,000
Short-term capital gain 80,000

Winnings from lotteries 20,000

Taxable income 2,70,000

Note:
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Long term capital loss can be set off only against long term capital gain. Therefore, long term capital loss of ₹
30,000 has to be carried forward to the next assessment year.

SUBMISSION OF RETURN OF LOSSES [SECTION 80]

As per section 80
• business loss under section 72(1),
• speculation business loss under section 73(2)
• loss from specified business under section 73A(2), in case the assessee exercises the option of shifting
out of
• the default tax regime provided under section 115BAC(1A),
• loss under the head “Capital Gains” under section 74(1) and
• loss from activity of owning and maintaining race horses under section 74A(3),
which has not been determined in pursuance of a return filed under section 139(3) can not be carried forward
and set-off. Thus, the assessee must have filed a return of loss under section 139(3) in order to carry forward
and set off of such losses. Such a return of loss should be filed within the time allowed under section 139(1).

This condition does not apply to a loss from house property carried forward under section 71B and
unabsorbed depreciation carried forward under section 32(2).

TEST YOUR KNOWLEDGE

1. Compute the gross total income of Mr. F for the A.Y. 2025-26 from the information given below –

Particulars

Income from house property (computed) 1,25,000

Income from business (before providing for depreciation) 1,35,000
Short term capital gains on sale of unlisted shares 56,000

Long term capital loss from sale of property (brought forward from A.Y. 2024-25) (90,000)
Income from tea business 1,20,000
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Dividends from Indian companies carrying on agricultural operations (Gross) 80,000

Current year depreciation 26,000
Brought forward business loss (loss incurred six years ago) (45,000)

2. Mr. Soohan submits the following details of his income for the A.Y.2025-26:

Particulars

Income from salary (computed) 3,00,000

Loss from let out house property (-) 40,000
Income from sugar business 50,000
Loss from iron ore business for P.Y. 2019-20 (discontinued in P.Y. 2020-21) (-) 1,20,000
Short term capital loss (-) 60,000
Long term capital gain 40,000

Dividend 5,000
Income received from lottery winning (Gross) 50,000
Winnings from card games (Gross) 6,000
Agricultural income 20,000
Short-term capital loss under section 111A (-) 10,000
Bank interest on Fixed deposit 5,000

Calculate gross total income and losses to be carried forward, assuming that he has exercised the option
of shifting out of the default tax regime provided under section 115BAC(1A).

3. Mr. Batra furnishes the following details for year ended 31.03.2025:

Short term capital gain 1,40,000

Loss from speculative business 60,000

Long term capital gain on sale of land 30,000
Long term capital loss on sale of unlisted shares 1,00,000

Income from business of textile (after allowing current year depreciation) 50,000
Income from activity of owning and maintaining race horses 15,000
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Income from salary (computed) 1,00,000

Loss from house property 40,000

Following are the brought forward losses:

i. Losses from activity of owning and maintaining race horses-pertaining to A.Y.2022-23 - ₹ 25,000.
ii. Brought forward loss from business of textile ₹ 60,000 - Loss pertains to A.Y. 2017-18.

Compute gross total income of Mr. Batra for the Assessment Year 2025-26, assuming that he has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). Also
determine the losses eligible for carry forward to the A.Y. 2026-27

4. Mr. A furnishes you the following information for the year ended 31.03.2025:

(i) Income from plying of vehicles (computed as per books) (He owned 5 light 3,20,000
goods vehicle throughout the year)

(ii) Income from retail trade of garments (Computed as per books) 7,50,000
(Sales turnover ₹ 1,35,70,000)
Mr. A had declared income on presumptive basis under section 44AD for the first
time in A.Y.2025-26. Assume 10% of the turnover during the P.Y.2024-25 was
received in cash and balance through A/c payee cheque and all the payments
in respect of expenditure were also made through A/c payee cheque or debit
card.

(iii) He has brought forward depreciation relating to A.Y. 2023-24 1,00,000

Compute taxable income of Mr. A and his tax liability for the A.Y. 2025-26 with reasons for your computation,
assuming that he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).

5. Mr. Aditya furnishes the following details for the year ended 31-03-2025
Loss from speculative business A 25,000

Income from speculative business B 5,000

Loss from specified business covered under section 35AD 20,000
Income from salary (computed) 3,00,000
Loss from let out house property 2,50,000
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Income from trading business 45,000

Long-term capital gain from sale of urban land 2,00,000
Long-term capital loss on sale of shares (STT not paid) 75,000
Long-term capital loss on sale of listed shares in recognized stock exchange (STT 1,02,000
paid at the time of acquisition and sale of shares)

Following are the brought forward losses:

1. Losses from owning and maintaining of race horses pertaining to A.Y. 2023-24 ₹ 2,000.
2. Brought forward loss from trading business ₹ 5,000 relating to A.Y.2020-21
Compute the total income of Mr. Aditya and show the items eligible for carry forward, assuming that he
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

6. Mr. Garg, a resident individual, furnishes the following particulars of his income and other details for the P.Y.
2024-25

Particulars

1. Income from Salary (computed) 15,000

2. Income from business 66,000
3. Long term capital gain on sale of land 10,800

4. Loss on maintenance of race horses 15,000

5. Loss from gambling 9,100

The other details of unabsorbed depreciation and brought forward losses pertaining to A.Y. 2024-25 are
as follows:

Particulars

1. Unabsorbed depreciation 11,000

2. Loss from Speculative business 22,000

3. Short term capital loss 9,800

Compute the Gross total income of Mr. Garg for the A.Y. 2025-26 and the amount of loss, if any that can
be carried forward or not.

7. The following are the details relating to Mr. Srivatsan, a resident Indian, aged 57, relating to the year ended
31.3.2025:
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Particulars

Income from salaries (computed) 2,20,000

Loss from house property 1,90,000

Loss from cloth business 2,40,000

Income from speculation business 30,000

Loss from specified business covered by section 35AD 20,000
Long-term capital gains from sale of urban land 2,50,000
Loss from card games 32,000
Income from betting (Gross) 45,000
Life Insurance Premium paid (10% of the capital sum assured) 45,000

Compute the total income and show the items eligible for carry forward, assuming that he has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A).

8. Mr. Rajat submits the following information for the financial year ending 31st March, 2025. He decides to
pay tax under the default tax regime u/s 115BAC. He desires that you should:
a) Compute the total income; and
b) Ascertain the amount of losses that can be carried forward.

Particulars

(i) He has two let out house property:

(a) House No. I – Income after all statutory deductions 72,000
(b) House No. II – Current year loss (30,000)
(ii) He has three proprietary businesses:
(a) Textile Business:
i.Discontinued from 31st October, 2024 – Current year loss 40,000
ii.Brought forward business loss of A.Y.2020-21 95,000
(b) Chemical Business:
i. Discontinued from 1st March, 2022 – hence no profit/loss
ii. Bad debts allowed in earlier years recovered during thisyear Nil
iii. Brought forward business loss of A.Y. 2021-22 35,000
50,000
(c) Leather Business: Profit for the current year 1,00,000
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(d) Share of profit in a firm in which he is partner since 2009 16,550

(iii) (a) Short-term capital gain 60,000
(b) Long-term capital loss 35,000
(iv) Contribution to LIC towards premium 10,000

9. Ms. Geeta, a resident individual, provides the following details of her income/ losses for the year ended
31.3.2025:
I. Salary received as a partner from a partnership firm ₹ 7,50,000. The same was allowed to the firm.
II. Loss on sale of shares listed in BSE ₹ 3,00,000. Shares were held for 15 months and STT paid on
sale and acquisition.
III. Long-term capital gain on sale of land ₹ 5,00,000.
IV. ₹ 51,000 received in cash from friends in party
V. ₹ 55,000, being dividend income on listed equity shares of domestic companies.
VI. Brought forward business loss of A.Y. 2023-24 ₹ 12,50,000
Compute gross total income of Ms. Geeta for the A.Y. 2025-26 and ascertain the amount of loss that can
be carried forward.

10. Mr. P, a resident individual, furnishes the following particulars of his income and other details for the
previous year 2024-25:

Particulars

1. Income from salary (computed) 18,000

2. Net annual value of house property 70,000

3. Income from business 80,000

4. Income from speculative business 12,000

5. Long term capital gain on sale of land 15,800

6. Long term capital gain on sale of land 9,000
7. Loss on gambling 8,000

Depreciation allowable under the Income-tax Act, 1961, comes to ₹ 8,000, for which no treatment is given
above.
The other details of unabsorbed depreciation and brought forward losses (pertaining to A.Y. 2023-24) are:
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Particulars

Unabsorbed depreciation 9,000

Loss from Speculative business 16,000

Short term capital loss 7,800

Compute the gross total income of Mr. P for the A.Y. 2025-26, and the amount of loss that can or cannot be
carried forward

ANSWERS
1. Gross Total Income of Mr. F for the A.Y. 2025-26
Particulars

Income from house property (Computed) 1,25,000

Income from business

Profits before depreciation 1,35,000

Less: Current year depreciation 26,000
Less: Brought forward business loss 45,000
64,000
Income from tea business (40% is business income) 48,000 1,12,000
Capital gains
Short-term capital gains 56,000
Income from Other Sources
Dividend income (taxable in the hands of shareholders) 80,000
Gross Total Income 3,73,000

Notes:
(i) Dividend from Indian companies is taxable at normal rates of tax in the hands of resident
shareholders

(ii) 60% of the income from tea business is treated as agricultural income and therefore, exempt from
tax;
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(iii) Long-term capital loss can be set-off only against long-term capital gains. Therefore, long-term
capital loss of ₹ 90,000 brought forward from A.Y.2024-25 cannot be set-off in the A.Y.2025-26,
since there is no long-term capital gains in that year. It has to be carried forward for setoff against
long-term capital gains, if any, during A.Y.2026-27.

2. Computation of Gross Total Income of Mr. Soohan for the A.Y.2025-26

Particulars

Salaries
Income from salary 3,00,000
Less: Loss from house property set-off against salary income as per (40,000) 2,60,000
section 71

Profits and gains of business or profession

Income from sugar business 50,000

Less: Brought forward loss of ₹ 1,20,000 from iron- ore business set- (50,000) Nil
off as per section 72(1) to the extent of ₹ 50,000
Balance business loss of ₹ 70,000 of P.Y.2019-20 to be carried
forward to A.Y.2026-27

Capital gains

Long term capital gain 40,000

Less: Short term capital loss of ₹ 60,000 set-off to the extent of ₹ (40,000) Nil
40,000

Balance short-term capital loss of ₹ 20,000 to be carried forward

Short-term capital loss of ₹ 10,000 u/s 111A also to be carried forward

Income from other sources

Dividend (fully taxable in the hands of shareholders) 5,000
Winnings from lottery 50,000
Winnings from card games 6,000
Bank FD interest 5,000 66,000
Gross Total Income 3,26,000
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Losses to be carried forward to A.Y.2026-27

Loss of iron-ore business (₹ 1,20,000 – ₹ 50,000) 70,000
Short term capital loss (₹ 20,000 + ₹ 10,000) 30,000

Note: Agricultural income is exempt under section 10(1).

3. Computation of Gross Total Income of Mr. Batra for the A.Y. 2025-26

Particulars

Salaries 1,00,000
Less: Current year loss from house property (40,000) 60,000

Profit and gains of business or profession

Income from textile business 50,000

Less: Loss of ₹ 60,000 from textile business b/f from A.Y. 2017-18 set-
off to the extent of ₹ 50,000 [See Note 1] 50,000 NIL

Income from the activity of owning and maintaining race horses 15,000
Less: Loss of ₹ 25,000 from activity of owning and maintaining race
horses b/f from A.Y. 2022-23 set- off to the extent of ₹ 15,000 15,000 NIL

Balance loss of ₹ 10,000 to be carried forward to

A.Y. 2026-27 [See Note 2]

Capital Gain
Short term capital gain 1,40,000
Long term capital gain on sale of land 30,000
Less: Long term capital loss of ₹ 1,00,000 on sale of unlisted shares
set-off to the extent of ₹ 30,000 30,000 NIL
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Balance loss of ₹ 70,000 to be carried forward to A.Y. 2026-27 [See

Note 3]

Gross Total Income 2,00,000

Losses to be carried forward to A.Y. 2026-27

Particulars

Current year loss from speculative business [See Note-4] 60,000

Current year long term capital loss on sale of unlisted shares 70,000
Loss from activity of owning and maintaining of race horse pertaining to A.Y.2022-23 10,000

Notes: -
• As per section 72(3), business loss can be carried forward for a maximum of eight assessment years
immediately succeeding the assessment year for which the loss was first computed. Since the eight
year period for carry forward of business loss of A.Y. 2017-18 expired in the A.Y. 2025-26, the balance
unabsorbed business loss of ₹ 10,000 cannot be carried forward to A.Y. 2026-27.

• As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off against
income from any source other than the activity of owning and maintaining race horses. Such loss
can be carried forward for a maximum period of 4 assessment years.

• Long-term capital loss on sale of unlisted shares can be set-off against long-term capital gain on
sale of land. The balance loss of ₹ 70,000 cannot be set-off against short term capital gain or against
any other head of income. The same has to be carried forward for set-off against long-term capital
gain of the subsequent assessment year. Such long-term capital loss can be carried forward for a
maximum of eight assessment years.

• Loss from speculation business cannot be set-off against any income other than profit and gains of
another speculation business. Such loss can, however, be carried forward for a maximum of four
years as per section 73(4) to be set-off against income from speculation business.

4. Computation of total income and tax liability of Mr. A for the A.Y. 2025-26

Particulars

Income from retail trade – as per books (See Note 1 below) 7,50,000
Income from plying of vehicles – as per books (See Note 2 below) 3,20,000
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10,70,000
Less : Set off of b/f depreciation relating to A.Y. 2023-24 1,00,000
Total income 9,70,000
Tax liability 1,06,500

Add: Health and Education cess@4% 4,260

Total tax liability 1,10,760

Note:
(i) Income from retail trade: Presumptive business income under section 44AD is ₹ 8,41,340 i.e., 8% of
₹ 13,57,000, being 10% of the turnover received in cash and 6% of ₹ 1,22,13,000, being the amount
of sales turnover received through A/c payee cheque. However, the income computed as per books
is ₹ 7,50,000 which is to be further reduced by the amount of unabsorbed depreciation of ₹
1,00,000. Since the income computed as per books is lower than the income deemed under section
44AD, the assessee can adopt the income as per books.
However, if he does not declare profits as per presumptive taxation under section 44AD, he has to
get his books of accounts audited under section 44AB, since his turnover exceeds ₹ 1 crore (the
enhanced limit of ₹ 10 crore would not be available, since more than 5% of the turnover is received
in cash). Also, his case would be falling under section 44AD(4) and hence, tax audit is mandatory. It
may further be noted that he cannot declare income under presumptive provisions under section
44AD for next five assessment years, if he does not declared profits as per presumptive provisions
under section 44AD this year.

(ii) Income from plying of light goods vehicles: Income calculated under section 44AE(1) would be ₹
7,500 x 12 x 5 which is equal to ₹ 4,50,000. However, the income from plying of vehicles as per books
is ₹ 3,20,000, which is lower than the presumptive income of ₹ 4,50,000 calculated as per section
44AE(1). Hence, the assessee can adopt the income as per books i.e. ₹ 3,20,000, provided he
maintains books of account as per section 44AA and gets his accounts audited and furnishes an
audit report as required under section 44AB.

It is to be further noted that in both the above cases, if income is declared under presumptive
provisions, all deductions under sections 30 to 38, including depreciation would have been deemed to
have been given full effect to and no further deduction under those sections would be allowable.
If income is declared as per presumptive provisions, his total income would be as under:
Particulars ₹
Income from retail trade under section 44AD [₹ 13,57,000@ 8% plus ₹ 8,41,340
1,22,13,000 @6%]
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Income from plying of light goods vehicles under section 44AE [₹ 7,500 x 12 4,50,000
x 5]
12,91,340
Less: Set off of brought forward depreciation – not possible as it is deemed Nil
that it has been allowed and set off
Total income 12,91,340

Tax thereon 1,99,902

Add : Health and Education cess @4% 7,996
Total tax liability 2,07,898
Total tax liability (rounded off) 2,07,900

5. Computation of total income of Mr. Aditya for the A.Y.2025-26

Particulars ₹ ₹
Salaries
Income from Salary 3,00,000
Less: Loss from house property set-off against salary income as per
section 71(3A) 2,00,000 1,00,000

Loss from house property to the extent not set off i.e. ₹ 50,000 (₹
2,50,000 – ₹ 2,00,000) to be carried forward to A.Y. 2026-27

Profits and gains of business or profession

Income from trading business 45,000

Less: Brought forward loss from trading business of A.Y. 2020-21 can
be set off against current year income from trading business as per
section 72(1), since the eight year time limit as specified under section
72(3), within which set-off is permitted, has not expired. 5,000 40,000

Income from speculative business B 5,000

Less: Loss of ₹ 25,000 from speculative business A set-off as per 5,000 Nil
section 73(1) to the extent of ₹ 5,000

Balance loss of ₹ 20,000 from speculative business A to be carried

forward to A.Y.2026-27 as per section 73(2)

Loss of ₹ 20,000 from specified business covered under section 35AD to

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be carried forward for set- off against income from specified business
as per section 73A.
2,00,000
Capital Gains
Long term capital gain on sale of urban land 75,000

Less: Long term capital loss on sale of shares (STT not paid) set-off as
per section 74(1)]

Less: Long-term capital loss on sale of listed shares on which STT is paid
1,02,000 23,000
can also be set-off as per section 74(1), since long-term capital arising on
sale of such shares is taxable under section 112A 1,63,000
Total Income

Items eligible for carried forward to A.Y.2026-27

Particulars ₹

Loss from House property 50,000

As per section 71(3A), loss from house property can be set-off against any other head
of income to the extent of ₹ 2,00,000 since Mr. Aditya is exercising the option of
shifting out of the default tax regime provided under section 115BAC(1A). As per
section 71B, balance loss not set-off can be carried forward to the next year for set-
off against income from house property of that year. It can be carried forward for a
maximum of eight assessment years i.e., upto A.Y.2033-34, in this case.

Loss from speculative business A 20,000

Loss from speculative business can be set-off only against profits from any other
speculation business. As per section 73(2), balance loss not set-off can be carried
forward to the next year for set-off against speculative business income of that year.
Such loss can be carried forward for a maximum of four assessment years i.e., upto
A.Y.2029-30, in this case, as specified under section 73(4).

Loss from specified business 20,000

Loss from specified business under section 35AD can be set-off only against
profits of any other specified business. If loss cannot be so set-off, the same
has to be carried forward to the subsequent year for set off against income
from specified business, if any, in that year. As per section 73A(2), such loss can be
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carried forward indefinitely for set-off against profits of any specified business.
Mr. Aditya is entitled to deduction u/s 35AD, since he has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A). He can,
accordingly, carry forward loss from such business indefinitely for set off against
profits of any other specified business.

Loss from the activity of owning and maintaining race horses 2,000
Losses from the activity of owning and maintaining race horses (current year or
brought forward) can be set-off only against income from the activity of owning and
maintaining race horses.
If it cannot be so set-off, it has to be carried forward to the next year for set-off
against income from the activity of owning and maintaining race horses, if any, in that
year. It can be carried forward for a maximum of four assessment years, i.e., upto
A.Y.2027-28, in this case, as specified under section 74A(3).

6. Computation of Gross Total Income of Mr. Garg for the A.Y. 2025-26
Particulars ₹ ₹
(i) Income from salary 15,000

(ii) Profits and gains of business or profession 66,000

Less: Unabsorbed depreciation brought forward from A.Y.2024-25

(Unabsorbed depreciation can be set-off against any head of
income other than “salary”) 11,000 55,000

(iii) Capital gains

Long-term capital gain on sale of land 10,800

Less: Brought forward short-term capital loss [Short- term capital loss
can be set-off against both short-term capital gains and long-
term capital gains as per section 74(1)] 9,800 1,000
Gross Total Income 71,000

Amount of loss to be carried forward to A.Y.2026-27

Particulars ₹
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(1) Loss from speculative business [to be carried forward as per section 73] 22,000
[Loss from a speculative business can be set off only against income from
another speculative business. Since there is no income from speculative
business in the current year, the entire loss of ₹ 22,000 brought forward from
A.Y.2024-25 has to be carried forward to A.Y. 2026-27 for set-off against
speculative business income of that year. It may be noted that speculative
business loss can be carried forward for a maximum of four years as per
section 73(4), i.e., upto A.Y.2028-29]

(2) Loss on maintenance of race horses [to be carried forward as per section 15,000
74A]
[As per section 74A(3), the loss incurred in the activity of owning and
maintaining race horses in any assessment year cannot be set-off against
income from any other source other than the activity of owning and
maintaining race horses. Such loss can be carried forward for a maximum of
four assessment years i.e., upto A.Y.2029-30]

(3) Loss from gambling can neither be set-off nor be carried forward.

7. Computation of total income of Mr. Srivatsan for the A.Y.2025-26

Particulars ₹ ₹
Salaries
Income from salaries 2,20,000
Less: Loss from house property since Mr. Srivatsan has exercised the
option of shifting out of the default tax regime provided under section
1,90,000 30,000
115BAC(1A)
Profits and gains of business or profession
Income from speculation business 30,000
Less: Loss from cloth business of ₹ 2,40,000 set off to the extent of
₹ 30,000 30,000 Nil

Capital gains
Long-term capital gains from sale of urban land 2,50,000
Less: Set-off of balance loss of ₹ 2,10,000 from cloth business 2,10,000 40,000
Income from other sources
Income from betting 45,000
Gross Total Income 1,15,000
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Less: Deduction under section 80C (life insurance premium paid) [See
Note (iv) below] 30,000

Total income 85,000

Losses to be carried forward:

Particulars ₹

(1) Loss from cloth business (₹ 2,40,000 – ₹ 30,000 – ₹ 2,10,000) Nil

(2) Loss from specified business covered by section 35AD 20,000

Notes:
i. Loss from specified business covered by section 35AD can be set-off only against profits and gains
of any other specified business. Therefore, such loss cannot be set off against any other income.
The unabsorbed loss has to be carried forward for set-off against profits and gains of any specified
business in the following year. Mr. Srivatsan is entitled to deduction u/s 35AD, since he has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A). Therefore, he
can carry forward loss of ₹ 20,000 from specified business referred u/s 35AD indefinitely for set off
against profits of any specified business.

ii. Business loss cannot be set off against salary income. However, the balance business loss of ₹
2,10,000 (₹ 2,40,000 – ₹ 30,000 set-off against income from speculation business) can be set-off
against long-term capital gains of ₹ 2,50,000 from sale of urban land. Consequently, the taxable
long-term capital gains would be ₹ 40,000.

iii. Loss from card games can neither be set off against any other income, nor can be carried forward.
iv. For providing deduction under Chapter VI-A, gross total income has to be reduced by the amount of
long-term capital gains and casual income. Therefore, the deduction under section 80C in respect
of life insurance premium of ₹ 45,000 paid has to be restricted to ₹ 30,000 [i.e., Gross Total Income
of ₹ 1,15,000 – ₹ 40,000 (LTCG) – ₹ 45,000 (Casual income)]. Mr. Srivatsan is entitled to deduction
u/s 80C, since he has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A).

v. Income from betting is chargeable at a flat rate of 30% under section 115BB and no expenditure or
allowance can be allowed as deduction from such income, nor can any loss be set-off against such
income.

8. Computation of total income of Mr. Rajat for the A.Y. 2025-26

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Particulars ₹ ₹

1. Income from house property

House No.1 72,000
House No.2 (-) 30,000 42,000
2. Profits and gains of business or profession

Profit from leather business 1,00,000

Bad debts recovered taxable under section 41(4) 35,000
1,35,000

Less: Current year loss of textile business (-) 40,000

95,000
Less: Brought forward business loss of textile business for A.Y.2020-
21 set off against the business income of current year 95,000 Nil
3. Capital Gains
Short-term capital gain 60,000
Gross Total Income 1,02,000
Less: Deduction under Chapter VI-A Under section 80C – LIC -
premium paid (not available since he is paying tax under the default
tax regime)
Total Income 1,02,000

Statement of losses to be carried forward to A.Y. 2026-27

Particulars ₹

Brought forward chemical business loss of A.Y. 2021-22 to be carried forward u/s 50,000
72

Long term capital loss of A.Y. 2025-26 to be carried forward u/s 74 35,000

Notes:
• Share of profit from firm of ₹ 16,550 is exempt under section 10(2A)
• Long-term capital loss cannot be set-off against short-term capital gains. Therefore, it has to be
carried forward to the next year to be set off against long-term capital gains of that year
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9. Computation of Gross Total Income of Ms. Geeta for the A.Y. 2025-26

Particulars ₹
Profits and gains of business and profession
Salary received as a partner from a partnership firm is taxable under the head 7,50,000
“Profits and gains of business and profession”
Less: B/f business loss of A.Y. 2023-24 ₹ 12,50,000 to be set- off to the extent
of ₹ 7,50,000 7,50,000
Nil
(Balance b/f business loss of ₹ 5,00,000 can be carried forward to the next year)

Capital Gains
Long term capital gain on sale of land 5,00,000
Less: Long-term capital loss on shares on STT paid
(See Note 2 below) 3,00,000 2,00,000
Income from other sources
Cash gift received from friends - since the value of cash gift exceeds 51,000
₹ 50,000, the entire sum is taxable
Dividend income from a domestic company is fully taxable in the
hands of shareholders 55,000 1,06,000

Gross Total Income 3,06,000

Notes:
1. Balance brought forward business loss of assessment year 2023-24 of ₹ 5,00,000 has to be carried
forward to the next year.

2. Long-term capital loss on sale of shares on which STT is paid at the time of acquisition and sale can
be set-off against long-term capital gain on sale of land since long-term capital gain on sale of
shares (STT paid) is taxable under section 112A. Therefore, it can be set-off against longterm capital
gain on sale of land as per section 70(3).

10. Computation of Gross Total Income of Mr. P for the A.Y. 2025-26
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Particulars ₹ ₹
i. Income from salary 18,000
ii. Income from House Property
Net Annual Value 70,000
Less: Deduction under section 24 (30% of ₹ 70,000) 21,000 49,000

iii. Income from business and profession

a) Income from business 80,000

Less : Current year depreciation 8,000

72,000

Less : Unabsorbed depreciation 9,000 63,000

b) Income from speculative business 12,000

Less : B/f loss of ₹ 16,000 from speculative business set-off to

the extent of ₹ 12,000 12,000 Nil

(Balance loss of ₹ 4,000 (i.e. ₹ 16,000 – ₹ 12,000) can be carried

forward to the next year)

iv. Income from capital gain

Long-term capital gain on sale of land
15,800
Less: Brought forward short-term capital loss
7,800 8,000
Gross total income 1,38,000

Amount of loss to be carried forward to the next year

Particulars ₹

Loss from speculative business (to be carried forward as per section 73) 4,000

Loss on maintenance of race horses (to be carried forward as per section 74A) 9,000

Notes:
i. Loss on gambling can neither be set-off nor be carried forward.
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ii. As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off against
income from any other source other than the activity of owning and maintaining race horses. Such
loss can be carried forward for a maximum period of 4 assessment years.
iii. Brought forward speculative business loss can be set off only against income from speculative
business of the current year and the balance loss can be carried forward to A.Y. 2026-27. It may be
noted that speculative business loss can be carried forward for a maximum of four years as per
section 73(4).
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CHAPTER - 5 DEDUCTIONS FROM GROSS TOTAL INCOME

GENERAL PROVISIONS
The various items of income referred to in the different clauses of section 10 are excluded from the total income
of an assessee. These incomes are known as exempted incomes. “Exemption” means exclusion. A particular
income exempt from tax under section 10 shall not enter into the computation of taxable income. However, there
are certain items of income referred to in section 10 which are not exempted if the assessee pays concessional
rates of tax under the default tax regime u/s 115BAC, namely,

10(5) Leave travel concession

10(13A) House Rent Allowance

10(14) Special Allowances except –

(a) Travelling allowance
(b) Daily allowance
(c) Conveyance allowance
(d) Transport allowance to blind/deaf and dumb/orthopedically handicapped employee

10(17) Daily allowance/Constituency allowance received by any Member of Parliament or of State

Legislatures
10(32) Exemption in respect of income of minor child included in assessee’s total income

“Deduction” in relation to Chapter VI-A and section 10AA refers to the amount that is reduced from gross total
income to arrive at the total income. There are incomes which are included in gross total income but are wholly
or partly allowed as deduction under Chapter VI-A in computation of total income, if the assessee has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A) and pays tax as per the
optional tax regime under the normal provisions of the Act.

Deduction is allowed on specific investments or expenses incurred by the taxpayer to promote the culture of
savings and investments. This could include medical expenditure, donations made to charities, investments
made in specific avenues such as Public Provident Fund (PPF), National Pension Scheme (NPS) etc.
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However, if the assessee pays concessional rates of tax under default tax regime u/s 115BAC, only deduction in
respect of employer’s contribution to NPS u/s 80CCD(2), Central Government’s contribution to Agnipath
Scheme u/s 80CCH(2) and deduction in respect of employment of new employees u/s 80JJAA would be allowed
to the assessee. He cannot claim deduction under any other provision in Chapter VI-A under the default tax
regime.

Section 10AA also provides for a deduction in respect of units established in SEZ from the total income of the
assessee. It is available only if the assessee has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A). This deduction is not available if the assessee pays concessional rates of
tax under the default tax regime u/s 115BAC.

The tax liability is calculated on the “total income” which is arrived after reducing permissible deductions from
gross total income.

Students should note this very important difference between exemption under section 10 and the deduction
under Chapter VI-A/10AA.

Difference between Deduction under Chapter VI-A & section 10AA and Exemption under
section 10
Particulars Deduction Exemption
(in relation to Chapter VI-A and section (contained in section 10)
10AA)

Meaning Investments/ contributions in certain The incomes which are exempt under
instruments (as prescribed under the section 10 will not be included in computing
Income-tax Act). Payments made for gross total income.
certain purposes.
Relevant Sections 80C to 80U in Chapter VI-A and Section 10 of the Income tax Act.
Sections section 10AA of the Income-tax Act.
Manner of First included in the Gross Total Income Not included in the Gross Total Income
treatment and then deductions will be allowed from
Gross Total Income

The important point to be noted here is that if there is no gross total income, then no deductions will be
permissible. This Chapter contains deduction under Chapter VI-A which includes deductions in respect of
certain payments, deductions in respect of certain incomes, deductions in respect of other income and other
deductions. It also includes deduction under section 10AA.
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Section 80A

I. Section 80A(1) provides that in computing the total income of an assessee, there shall be allowed from
his gross total income, the deductions specified in sections 80C to 80U if the assessee has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A)

II. According to section 80A(2), the aggregate amount of the deductions under this chapter shall not, in
any case, exceed the gross total income of the assessee. Therefore, the total income after deductions
will either be positive or nil. It cannot be negative due to deductions.
An assessee cannot have a loss as a result of the deduction under Chapter VI-A and claim to carry
forward the same for the purpose of set-off against his income in the subsequent year.

III. Section 80A(3) provides that in the case of AOP/BOI exercising the option of shifting out of the default
tax regime provided under section 115BAC(1A), if any deduction is admissible under section
80G/80GGA/80GGC1 , no deduction under the same section shall be made in computing the total income
of a member of the AOP or BOI in relation to the share of such member in the income of the AOP or BOI.

IV. The profits and gains allowed as deduction under section 10AA or under any provision of Chapter VI-A
under the heading "C.-Deductions in respect of certain incomes" in any assessment year, shall not be
allowed as deduction under any other provision of the Act for such assessment year [Section 80A(4)].

V. The deduction, referred to in (iv) above, shall not exceed the profits and gains of the undertaking or unit
or enterprise or eligible business, as the case may be [Section 80A(4)].

VI. No deduction under any of the provisions referred to in (iv) above, shall be allowed if the deduction has
not been claimed in the return of income [Section 80A(5)].

Section 80AB
Deductions specified in Chapter VI-A under the heading “C.-Deductions in respect of certain incomes”, shall be
allowed only to the extent such income computed in accordance with the provisions of the Income-tax Act, 1961
is included in the gross total income of the assessee.

Section 80AC: Furnishing return of income on or before due date mandatory for claiming
deduction under Chapter VI-A under the heading “C. – Deductions in respect of certain incomes"

(i) Section 80AC stipulates compulsory filing of return of income on or before the due date specified under
section 139(1), as a pre-condition for availing benefit of deductions under any provision of Chapter VI-A
under the heading “C. – Deductions in respect of certain incomes”.
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Table showing the deductions contained in Chapter VI-A under the heading “C. – Deductions in
respect of certain income”

Section Deduction
80-IA Deductions in respect of profits and gains from undertakings or enterprises engaged
in infrastructure development/ operation/ maintenance, generation/ transmission/
distribution of power etc.

80-IAB Deduction in respect of profits and gains derived by an undertaking or enterprise

engaged in development of SEZ

80-IAC Deduction in respect of profits and gains derived by an eligible start-up from an
eligible business

80-IB Deduction in respect of profits and gains from certain industrial undertakings other
than infrastructure development undertakings

80-IBA Deduction in respect of profits and gains from housing projects/rental housing
projects

80-IE Deduction in respect of profits and gains from manufacture or production of eligible
article or thing, substantial expansion to manufacture or produce any eligible article
or thing or carrying on of eligible business in North-Eastern States

80JJA Deduction in respect of profits and gains from business of collecting and processing
of bio-degradable waste

80JJAA Deduction in respect of employment of new employees

80LA Deduction in respect of certain income of Offshore Banking Units and International
Financial Services Centre

80M Deduction in respect of certain inter-corporate dividends

80P Deduction in respect of income of co-operative societies

80PA Deduction in respect of certain income of Producer Companies

80QQB Deduction in respect of royalty income, etc., of authors of certain books other than
text books

80RRB Deduction in respect of royalty on patents

(ii) The effect of this provision is that, in case of failure to file return of income on or before the stipulated
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due date, the undertakings would lose the benefit of deduction under these sections.

Note: The deductions under section 80-IA to 80-IE, 80JJA, 80LA, 80M, 80P and 80PA in respect of
certain incomes will be dealt with in detail at the Final Level.

ILLUSTRATION 1
Examine the following statements with regard to the provisions of the Income-tax Act, 1961:
a) For grant of deduction under section 80JJAA, filing of audit report in prescribed form is must for a
corporate assessee; filing of return within the due date laid down in section 139(1) is not required.
b) Filing of belated return under section 139(4) of the Income-tax Act, 1961 will debar an assessee from
claiming deduction under section 80QQB if the assessee exercises the option of shifting out of the
default tax regime provided under section 115BAC(1A) (i.e., he pays tax under the optional tax regime).

SOLUTION
a) The statement is not correct. Section 80AC stipulates compulsory filing of return of income on or before
the due date specified under section 139(1), as a pre-condition for availing the benefit of deduction, inter
alia, under section 80JJAA.

b) The statement is correct. As per section 80AC, the assessee has to furnish his return of income on or
before the due date specified under section 139(1), to be eligible to claim deduction under, inter alia,
section 80QQB.

Two types of deductions are allowable from Gross Total Income - Deductions under Chapter VI-A and
deduction under section 10AA which are discussed in this chapter.

Deductions from Gross Total Income

Deductions under Chapter VI-A Deduction under section 10AA

Deductions in Deductions in Deductions in Other

respect of certain respect of certain respect of other Deductions
payments incomes incomes
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DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS

Deduction in respect of investment in specified assets [Section 80C]

[Available only if the individual/HUF exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

i. Deduction in respect of investment/ contributions

Section 80C provides for a deduction from the Gross Total Income of savings in specified modes of
investments. The deduction under section 80C is available only to an individual or HUF exercising the
option of shifting out of the default tax regime provided under section 115BAC(1A). It is not allowable
under the default tax regime under section 115BAC.

The maximum permissible deduction under section 80C is ₹ 1,50,000. The following are the investments/
contributions eligible for deduction –
1. Contribution in Unit-linked Insurance Plan 1971
2. Contribution in Unit-linked Insurance Plan of LIC Mutual Fund
3. Premium paid in respect of Life Insurance policy

Deduction u/s 80C

In respect of policies Premium paid to the extent of 20% of “actual capital sum assured”.
issued before
31.3.2012
In respect of policies Premium paid to the extent of 10% of “actual capital sum assured” i.e.,
issued on or after minimum amount assured under the policy on happening of the insured
1.4.2012 but before event at any time during the term of the policy, not taking into account
1.4.2013 –

(i) the value of any premium agreed to be returned; or

(ii) any benefit by way of bonus or otherwise over and above the sum
actually assured, which is to be or may be received under the policy
by any person.
In respect of policies (a) Where the insurance is on the life of a person with disability or
issued on or after severe disability as referred to in section 80U or a person
1.4.2013 suffering from disease or ailment as specified under section
80DDB.
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Premium paid to the extent of 15% of “actual capital sum

assured” [has the same meaning as described above].
(b) Where the insurance is on the life of any person, other than
mentioned in (a) above
Premium paid to the extent of 10% of “actual capital sum
assured” [has the same meaning as described above].

ILLUSTRATION 2
Compute the eligible deduction under section 80C for A.Y.2025-26 in respect of life insurance premium
paid by Mr. Ganesh during the P.Y.2024-25, the details of which are given hereunder, if Mr. Ganesh has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A) –

Date of issue Person insured Actual capital Insurance premium

of policy sum assured (₹) paid during 2024-
25 (₹)

(i) 30/3/2012 Self 9,00,000 48,000

(ii) 1/5/2018 Spouse 1,50,000 20,000

(iii) 1/6/2021 Handicapped son (section 4,00,000 80,000

80U disability)

SOLUTION

Date of issue of Person insured Actual Insurance Deduct- Remark

policy capital sum premium ion u/s (restricted
assured paid during 80C for to % of sum
(₹) 2024-25 A.Y.2025- assured)
(₹) 26 (₹) (₹)

(i) 30/3/2012 Self 9,00,000 48,000 48,000 20%

(ii) 1/5/2018 Spouse 1,50,000 20,000 15,000 10%

(iii) 1/6/2021 Handicapped 4,00,000 80,000 60,000 15%

Son (section
80U disability)
Total 1,23,000
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ILLUSTRATION 3
What would your answer if Mr. Ganesh pays tax under default tax regime under section 115BAC?

SOLUTION
If Mr. Ganesh pays tax under default tax regime under section 115BAC, he would not be eligible for
deduction under section 80C.

4. Premium paid in respect of a contract for deferred annuity

5. Any sum deducted from the salary payable of a Government employee for securing a deferred
annuity
6. Contribution to SPF/PPF/RPF
Contributions to any provident fund to which the Provident Funds Act, 1925 applies and recognized
provident fund qualifies for deduction under section 80C.
Contribution made to any Provident Fund set up by the Central Government and notified in his behalf
(i.e., the Public Provident Fund established under the Public Provident Fund Scheme, 1968) also
qualifies for deduction under section 80C. Such contribution can be made in the name of the
individual, his spouse and any child of the individual; and any member of the family, in case of a HUF.
The maximum limit for deposit in PPF is ₹ 1,50,000 in a year.

ILLUSTRATION 4
An individual assessee, resident in India, has made the following deposit/payment during the previous
year 2024-25:
What is the deduction allowable under section 80C for A.Y.2025-26 if the assessee has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A)?

SOLUTION

Computation of deduction under section 80C for A.Y.2025-26

Particulars ₹

Deposit in public provident fund 1,50,000

Insurance premium paid on the life of the spouse (Maximum 10% of the assured 22,000
value ₹ 2,20,000, as the policy is taken after 31.3.2012)

Total 1,72,000

However, the maximum permissible deduction u/s 80C is restricted to 1,50,000

7. Contribution to approved superannuation Fund

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Contribution by an employee to an approved superannuation fund qualifies for deduction under

section 80C.

8. Any sum paid or deposited in Sukanya Samriddhi Account

Subscription to any such security of the Central Government or any such deposit scheme as the
Central Government as may notify in the Official Gazette. Accordingly, Sukanya Samriddhi
Scheme has been notified to provide that any sum paid or deposited during the previous year in
the said Scheme, by an individual in the name of –
(a) any girl child of the individual; or
(b) any girl child for whom such individual is the legal guardian
would be eligible for deduction under section 80C.

Exemption on payment from Sukanya Samriddhi Account [Section 10(11A)]

Section 10(11A) provides that any payment from an account opened in accordance with the
Sukanya Samriddhi Account Rules, 2014, made under the Government Savings Bank Act, 1873,
shall not be included in the total income of the assessee. Accordingly, the interest accruing on
deposits in, and withdrawals from any account under the said scheme would be exempt.

9. Subscription to National Savings Certificates VIII

10. Contribution to approved annuity plan of LIC
11. Subscription towards notified units of mutual fund or UTI
12. Contribution to notified pension fund set up by mutual fund or UTI
13. Contribution to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008
14. Subscription to notified deposit scheme
15. Payment of tuition fees to any university, college, school or other educational institution within
India for full-time education for maximum 2 children
16. Repayment of housing loan including stamp duty, registration fee and other expenses
17. Subscription to certain equity shares or debentures
18. Subscription to certain units of mutual fund
19. Investment in five year term deposit
i. for a period of not less than five years with a scheduled bank; and
ii. which is in accordance with a scheme framed and notified by the Central Government in the
Official Gazette

qualifies as an eligible investment for availing deduction under section 80C.

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The maximum limit for investment in term deposit is ₹ 1,50,000.

Scheduled bank means –
• the State Bank of India (SBI)
• a subsidiary bank of SBI, or
• a corresponding new bank constituted under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act
• any other bank, being a bank included in the Second Schedule to the Reserve Bank of India
(RBI) Act, 1934.

20. Subscription to notified bonds issued by NABARD

21. Investment in five year Post Office time deposit
22. Deposit in Senior Citizens Savings Scheme Rules, 2004
23. Contribution to additional account under NPS
Thus, Tier II account is the additional account under NPS, contribution to which would qualify for
deduction under section 80C only in the hands of a Central Government employee.

Summary of investment/ contributions eligible for deduction u/s 80C

S. No. Investment/ contributions

(i) Contribution in Unit-linked Insurance Plan 1971

In case of individual – in the name of individual, his or her spouse or any child of the
individual
In case of HUF – in the name of any member of HUF

(ii) Contribution in Unit-linked Insurance Plan of LIC Mutual Fund

In case of individual – In the name of individual, his or her spouse or any child of the
individual
In case of HUF – In the name of any member of HUF

(iii) Premium paid in respect of Life Insurance policy

In case of individual – on the life of individual, his or her spouse or any child of the
individual
In case of HUF – on the life of any member of HUF

(iv) Premium paid in respect of a contract for deferred annuity

In case of individual – on the life of individual, his or her spouse or any child of the
individual
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(v) Any sum deducted from the salary payable of a Government employee for securing a
deferred annuity [excess over 1/5th of the salary to be ignored]

(vi) Contribution to PPF

In case of individual – in the name of Individual, his or her spouse or any child of the individual
In case of HUF – In the name of any member of HUF

(vii) Contribution to SPF/RPF

(viii) Contribution to approved superannuation Fund

(ix) Paid or deposited in Sukanya Samriddhi Account

a) for any girl child of the individual; or
b) for any girl child for whom such individual is the legal guardian
(x) Subscription to National Savings Certificates VIII

(xi) Contribution to approved annuity plan of LIC or any other notified insurer

(xii) Subscription towards notified units of mutual fund or UTI [ELSS]

(xiii) Contribution to notified pension fund set up by mutual fund or UTI

(xiv) Contribution to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008

(xv) Subscription to notified deposit scheme of public sector co. or authority constituted in India in
relation to housing. For example, public deposit scheme of HUDCO.

(xvi) Tuition fees to by an individual to any university, college, school or other educational institution
within India for full-time education for maximum 2 children of the individual.
(xvii) Repayment of housing loan for purchase/ construction of house property including stamp
duty, registration fee and other expenses for transfer

(xviii) Subscription to certain equity shares or debentures forming part of any approved eligible
issue of capital by a public company or by any public financial institution
(xix) Units of mutual fund subscribed only in eligible issue of capital of any company

(xx) Investment in five year term deposit with a scheduled bank

(xxi) Subscription to notified bonds issued by NABARD

(xxii) Investment in five year Post Office time deposit

(xxiii) Deposit in Senior Citizens Savings Scheme Rules, 2004

(xxiv) Contribution to additional account under NPS (Tier II account), in case of Central Government
employee
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Deduction in respect of contribution to certain pension funds [Section

80CCC]
[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)

a) Eligible assessee: Where an assessee, being an individual, has in the previous year paid or deposited
any amount out of his income chargeable to tax to effect or keep in force a contract for any annuity
plan of LIC of India or any other insurer for receiving pension from the fund set up by LIC or such other
insurer, he shall be allowed a deduction in the computation of his total income.

For this purpose, the interest or bonus accrued or credited to the assessee’s account shall not be
reckoned as contribution.

Note: Where any amount paid or deposited by the assessee has been taken into account for the
purposes of this section, a deduction under section 80C shall not be allowed with reference to such
amount.

b) Maximum Deduction: The maximum permissible deduction is ₹ 1,50,000 (Further, the overall limit of ₹
1,50,000 prescribed in section 80CCE will continue to be applicable i.e. the maximum permissible
deduction under sections 80C, 80CCC and 80CCD(1) put together is ₹ 1,50,000).

c) Deemed Income: Where any amount standing to the credit of the assessee in the fund in respect of
which a deduction has been allowed, together with interest or bonus accrued or credited to the
assessee’s account is received by the assessee or his nominee on account of the surrender of the
annuity plan in any previous year or as pension received from the annuity plan, such amount will be
deemed to be the income of the assessee or the nominee in that previous year in which such withdrawal
is made or pension is received. It will be chargeable to tax as income of that previous year.

Deduction in respect of contribution to pension scheme notified by the

Central Government [Section 80CCD]
i. Pension Scheme of Central Government: It is mandatory for persons entering the service of the Central
Government on or after 1st January, 2004, to contribute 10% of their salary every month towards their
pension account. A matching contribution is required to be made by the Government to the said account.
The benefit of this scheme is also available to individuals employed by any other employer as well as to
self-employed individuals.

ii. Deduction: Section 80CCD provides deduction in respect of contribution made to the pension scheme
notified by the Central Government
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Accordingly, the Central Government has notified the ‘Atal Pension Yojana (APY)’ as a pension scheme,
contribution to which would qualify for deduction under section 80CCD in the hands of the individual.

iii. Quantum of deduction:

a) Section 80CCD(1) provides a deduction for the amount paid or deposited by an employee in his
pension account subject to a maximum of 10% of his salary. The deduction in the case of a self-
employed individual would be restricted to 20% of his gross total income in the previous year.

Deduction u/s 80CCD(1) would be available to an assessee only if he exercises the option of
shifting out of the default tax regime u/s 115BAC(1A) (i.e., if he pays tax under the optional tax
regime – the normal provisions of the Act).

Deduction under section 80CCD(1)

Eligible
Assessee

An individual An Individual
employed by CG on employed by any Any other individual
or after 01.01.2004 other employer

20% of GTI
10% of salary 10% of salary

b) Section 80CCD(1B) provides for an additional deduction of up to ₹ 50,000 in respect of the whole of
the amount paid or deposited by an individual assessee under NPS in the previous year, whether or
not any deduction is allowed u/s 80CCD(1).

c) Whereas the deduction under section 80CCD(1) is subject to the overall limit of ₹ 1.50 lakh under
section 80CCE (i.e., the maximum permissible deduction under sections 80C, 80CCC and 80CCD(1)
put together), the deduction of upto ₹ 50,000 under section 80CCD(1B) is in addition to the overall
limit of ₹ 1.50 lakh provided under section 80CCE.

d) Under section 80CCD(2), contribution made by the Central Government or State Government or any
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other employer in the previous year to the said account of an employee, is allowed as a deduction
in computation of the total income of the assessee.

e) The entire employer’s contribution would be included in the salary of the employee. However,
deduction under section 80CCD(2) would be restricted to,

§ In case of contribution made by the Central Government or State Government - 14% of salary
And
§ In case of contribution made by any other employer – 10% of salary (14% of salary in case
assessee is paying tax as per default tax regime under section 115BAC)

Deduction u/s 80CCD(2) would be available to an assessee irrespective of the regime under
which he pays tax.

1. The limit of ₹ 1,50,000 under section 80CCE does not apply to employer’s contribution to pension
scheme of Central Government which is allowable as deduction under section 80CCD(2).
2. No deduction will be allowed under section 80C in respect of amounts paid or deposited by the
assessee, for which deduction has been allowed under section 80CCD(1) or under section 80CCD(1B).

d) Deemed Income: The amount standing to the credit of the assessee in the pension account (for which
deduction has already been claimed by him under this section) and accretions to such account, shall be
taxed as income in the year in which such amounts are received by the assessee or his nominee on –
a) closure of the account or
b) his opting out of the said scheme or
c) receipt of pension from the annuity plan purchased or taken on such closure or opting out.
However, the amount received by the nominee on the death of the assessee under the circumstances
referred to in (a) and (b) above, shall not be deemed to be the income of the nominee.

Further, the assessee shall be deemed not to have received any amount in the previous year if such
amount is used for purchasing an annuity plan in the same previous year.

1. Exemption on payment from NPS Trust to an assessee on closure of his account or on his opting out
of the pension scheme [Section 10(12A)]
• As per section 80CCD, any payment from National Pension System Trust to an assessee on account
of closure or his opting out of the pension scheme is chargeable to tax.

• Section 10(12A) provides that any payment from National Pension System Trust to an assessee on
account of closure or his opting out of the pension scheme referred to in section 80CCD, to the
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extent it does not exceed 60% of the total amount payable to him at the time of closure or his opting
out of the scheme, shall be exempt from tax.
2. Exemption on payment from NPS Trust to an employee on partial withdrawal [Section 10(12B)]
3. To provide relief to an employee subscriber of NPS, section 10(12B) provides that any payment from
National Pension System Trust to an employee under the pension scheme referred to in section
80CCD, on partial withdrawn made out of his account in accordance with the terms and conditions
specified under the Pension Fund Regulatory and Development Authority Act, 2013 and the
regulations made there under, shall be exempt from tax to the extent it does not exceed 25% of
amount of contributions made by him.

Limit on deductions under sections 80C, 80CCC & 80CCD(1) [Section

80CCE]
This section restricts the aggregate amount of deduction under section 80C, 80CCC and 80CCD(1) to ₹
1,50,000. It may be noted that the deduction of upto ₹ 50,000 under section 80CCD(1B) and employer’s
contribution to pension scheme, allowable as deduction under section 80CCD(2) in the hands of the employee,
would be outside the overall limit of ₹ 1,50,000 stipulated under section 80CCE.

The following table summarizes the ceiling limit under these sections –
Section Particulars Ceiling limit (₹)

80C Investment in LIP, Deposit in PPF/SPF/RPF etc. 1,50,000

80CCC Contribution to certain pension funds 1,50,000
80CCD(1) Contribution to NPS of Government 10% of salary Or
20% of GTI, as the
case may be.

80CCE Aggregate deduction under sections 80C, 80CCC & 80CCD(1) 1,50,000
80CCD(1B) Contribution to NPS notified by the Central Government (outside the 50,000
limit of ₹ 1,50,000 under section 80CCE)
80CCD(2) Contribution by the Central Government or State Government to NPS 14% of salary
A/c of its employees (outside the limit of ₹ 1,50,000 under section
80CCE)
Contribution by any other employer to NPS A/c of its employees
(outside the limit of
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• ₹ 1,50,000 under section 80CCE)

• Where assessee is paying tax as per optional tax regime 10% of salary

• where assessee is paying tax as per default tax regime u/s 14% of salary
115BAC(1A)

For computation of limit under section 80CCD(1) and 80CCD(2), salary includes dearness allowance,
if the terms of employment so provide, but excludes all other allowances and perquisites.

ILLUSTRATION 5
The basic salary of Mr. A is ₹ 1,00,000 p.m. He is entitled to dearness allowance, which is 40% of basic salary.
50% of dearness allowance forms part of pay for retirement benefits. Both Mr. A and his employer, ABC Ltd.,
contribute 15% of basic salary to the pension scheme referred to in section 80CCD. Explain the tax treatment
in respect of such contribution in the hands of Mr. A if he has exercised the option of shifting out of the default
tax regime provided under section 115BAC(1A).

What would be your answer if Mr. A pays tax under the default tax regime under section 115BAC?

SOLUTION

i. Tax treatment in the hands of Mr. A in respect of employer’s and own contribution to pension
scheme referred to in section 80CCD, where Mr. A has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A) [i.e., where Mr. A pays tax under the normal
provisions of the Act]
a) Employer’s contribution to such pension scheme would be treated as salary since it is specifically
included in the definition of “salary” under section 17(1)(viii). Therefore, ₹ 1,80,000, being 15% of basic
salary of ₹ 12,00,000, will be included in Mr. A’s salary.

b) Mr. A’s contribution to pension scheme is allowable as deduction under section 80CCD(1). However,
the deduction is restricted to 10% of salary. Salary, for this purpose, means basic pay plus dearness
allowance, if it forms part of pay.

Therefore, “salary” for the purpose of deduction under section 80CCD for Mr. A would be –

Particulars ₹

Basic salary = ₹ 1,00,000 × 12 = 12,00,000

Dearness allowance = 40% of ₹ 12,00,000 = ₹ 4,80,000
50% of Dearness Allowance forms part of pay = 50% of ₹ 4,80,000 2,40,000
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Salary for the purpose of deduction under section 80CCD 14,40,000

Deduction under section 80CCD(1) is restricted to 10% of ₹ 14,40,000 (as 1,44,000
against actual contribution of ₹ 1,80,000, being 15% of basic salary of ₹
12,00,000)
As per section 80CCD(1B), a further deduction of upto ₹ 50,000 is allowable. 36,000
Therefore, deduction under section 80CCD(1B) is ₹ 36,000 (₹ 1,80,000 - ₹
1,44,000).

₹ 1,44,000 is allowable as deduction under section 80CCD(1). This would be taken into consideration
and be subject to the overall limit of ₹ 1,50,000 under section 80CCE. ₹ 36,000 allowable as
deduction under section 80CCD(1B) is outside the overall limit of ₹ 1,50,000 under section 80CCE.

In the alternative, ₹ 50,000 can be claimed as deduction under section 80CCD(1B). The balance ₹
1,30,000 (₹ 1,80,000- ₹ 50,000) can be claimed as deduction under section 80CCD(1).

c) Employer’s contribution to pension scheme would be allowable as deduction under section

80CCD(2), subject to a maximum of 10% of salary. Therefore, deduction under section 80CCD(2),
would also be restricted to ₹ 1,44,000, even though the entire employer’s contribution of ₹ 1,80,000
is included in salary under section 17(1)(viii). However, this deduction of employer’s contribution of ₹
1,44,000 to pension scheme would be outside the overall limit of ₹ 1,50,000 under section 80CCE i.e.,
this deduction would be over and above the other deductions which are subject to the limit of ₹
1,50,000

ii. Where Mr. A pays tax under the default tax regime under section 115BAC
Mr. A would not be eligible for deduction under section 80CCD(1)/(1B) in respect of his contribution to
pension scheme under the default tax regime under section 115BAC. However, he would be allowed
deduction of upto ₹ 2,01,600, being 14% of salary [₹ 14,40,000, computed in (i) above] under section
80CCD(2) in respect of employer’s contribution to pension scheme. Accordingly, entire employer's
contribution of ₹ 1,80,000 would be allowed as deduction under section 80CCD(2).

ILLUSTRATION 6
The gross total income of Mr. X for the A.Y.2025-26 is ₹ 8,00,000. He has made the following
investments/payments during the F.Y.2024-25 –

Particulars ₹

(1) Contribution to PPF 1,10,000

(2) Payment of tuition fees to Apeejay School, New Delhi, for education of his son 45,000
studying in Class XI
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(3) Repayment of housing loan taken from Standard Chartered Bank 25,000

(4) Contribution to approved pension fund of LIC 1,05,000

Compute the eligible deduction under Chapter VI-A for the A.Y.2025-26 if Mr. X exercises the option of shifting
out of the default tax regime provided under section 115BAC(1A).

SOLUTION

Computation of deduction under Chapter VI-A for the A.Y.2025-26

Particulars ₹
Deduction under section 80C
- Contribution to PPF 1,10,000
- Payment of tuition fees to Apeejay School, New Delhi, for education of his son 45,000
studying in Class XI

- Repayment of housing loan 25,000

1,80,000
Restricted to ₹ 1,50,000, being the maximum permissible deduction u/s 80C 1,50,000

Deduction under section 80CCC

- Contribution to approved pension fund of LIC 1,05,000

2,55,000
As per section 80CCE, the aggregate deduction under section 80C, 80CCC and 80CCD(1)
has to be restricted to ₹ 1,50,000

Deduction allowable under Chapter VIA for the A.Y. 2025-26 1,50,000

Deduction in respect of contribution to Agnipath Scheme [Section 80CCH]

i. Meaning of Agnipath scheme: Agnipath scheme is a Central Government scheme launched in 2022 for
enrolment of Indian youth in the Indian Armed Forces.

ii. Meaning of Agniveer Corpus Fund: The Agniveer Corpus Fund means a fund in which consolidated
contributions of all the Agniveers and matching contributions of the Central Government along with
interest on both these contributions are held.

iii. Features of the Agnipath Scheme: Each Agniveer is to contribute 30% of his monthly customized
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Agniveer Package to the individual’s Agniveer Corpus Fund. Further, the Government will also contribute
a matching amount to the ‘Agniveer Corpus Fund’. The Government will also pay to the subscriber
interest as approved from time to time on the contributions standing in his account.

iv. Deduction: Section 80CCH provides deduction in respect of contribution made in the Agniveer Corpus
Fund by the individual enrolled in the Agnipath Scheme and the Central Government.

v. Quantum of deduction:
a) Section 80CCH(1) provides a deduction for the amount paid or deposited by an assessee, being an
individual enrolled in the Agnipath Scheme and subscribing to the Agniveer Corpus Fund on or after
1.11.2022, in his account in the Agniveer Corpus Fund.

Deduction u/s 80CCH(1) would be available to an individual only if he has exercised the option of
shifting out of the default tax regime provided u/s 115BAC(1A).

b) Under section 80CCH(2), the whole amount of contribution made by the Central Government to the
said account of an assessee in the Agniveer Corpus Fund, is allowed as a deduction in computation
of the total income of the assessee

c) The entire Central Government’s contribution to the Agniveer Corpus Fund would be included in the
salary of the assessee. However, deduction under section 80CCH(2) would be available for the same.

Deduction u/s 80CCH(2) would be available to an individual irrespective of the regime under which
he pays tax.

Exemption on payment from Agnipath Corpus Fund to a person enrolled under the Agnipath
Scheme or to his nominee [Section 10(12C)]
Any payment from the Agnipath Corpus Fund to a person enrolled under the Agnipath Scheme or

to his nominee would be exempt from tax.

Deduction in respect of medical insurance premium [Section 80D]

[Available only if the individual/HUF exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

The following table summarizes the provisions of section 80D –

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S. Nature of payment/ Expenditure on behalf of Deduction

No. expenditure

I 1. Any premium paid,

otherwise than by way of In case of Self, spouse and ₹ 25,000
cash, to keep in force an individual dependent children
insurance on the health
In case of Family member
2. Contribution to Central
HUF
Government Health
Scheme (CGHS)
In case any of the above persons is of the
3. Preventive health check up ₹ 50,000
age of 60 years or more
expenditure
+ resident in India

II (i) Any premium paid, Parents ₹25,000

otherwise than by way of
cash, to keep in force an In case either or both the parents is of the
insurance on the health age of 60 years or more + Resident in India ₹50,000
(ii) Preventive health check up
Maximum ₹ 5,000 allowed as deduction for aggregate of preventive health check-up expenditure, by any
mode including cash, mentioned in I and II (Subject to overall limit of ₹25,000 or ₹50,000, as the case may
be)

III Amount paid on account of For self/spouse/parents + who is of the age of

medical expenditure 60 years or more + Resident in India + no ₹50,000
payment has been made to keep in force an
insurance on the health of such person

Note: In case the individual or any of his family members is a senior citizen, the aggregate of deduction, in
respect of payment of premium, contribution to CGHS and medical expenditure incurred, as specified in (I) & (III)
above, cannot exceed ₹ 50,000.

In case one of the parents is a senior citizen who is covered under mediclaim policy and another is also a senior
citizen but not covered under mediclaim policy, the aggregate of deduction, in respect of payment of medical
insurance premium and medical expenditure incurred, as specified in (II) & (III) above, cannot exceed ₹ 50,000.

FOCUS AREA
• Deduction where premium for health insurance is paid in lump sum [Section 80D(4A)]
i. Appropriate fraction of lump sum premium allowable as deduction: In a case where mediclaim
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premium is paid in lumpsum for more than one year by:

a) an individual, to effect or keep in force an insurance on his health or health of his spouse,
dependent children or parents; or
b) a HUF, to effect or keep in force an insurance on the health of any member of the family,
then, the deduction allowable under this section for each of the relevant previous year would be equal
to the appropriate fraction of such lump sum payment.

ii. Meaning of certain terms

Term Meaning

Appropriate fraction 1 ÷ Total number of relevant previous years

Relevant previous The previous year in which such lump sum amount is paid; and the
year subsequent previous year(s) during which the insurance would be in force.

ILLUSTRATION 7
Mr. A, aged 40 years, paid medical insurance premium of ₹ 20,000 during the P.Y. 2024-25 to insure his health
as well as the health of his spouse. He also paid medical insurance premium of ₹ 47,000 during the year to
insure the health of his father, aged 63 years, who is not dependent on him. He contributed ₹ 3,600 to Central
Government Health Scheme during the year. He has incurred ₹ 3,000 in cash on preventive health check-up of
himself and his spouse and ₹ 4,000 by cheque on preventive health check-up of his father. Compute the
deduction allowable under section 80D for the A.Y. 2025-26 if Mr. A has exercised the option of shifting out of
the default tax regime provided under section 115BAC(1A).

SOLUTION
Deduction allowable under section 80D for the A.Y.2025-26
Particulars Actual Maximum
Payment deduction
₹ allowable ₹
A. Premium paid and medical expenditure incurred for self and spouse
(i) Medical insurance premium paid for self and spouse 20,000 20,000

(ii) Contribution to CGHS 3,600 3,600

(iii) Exp. on preventive health check-up of self & spouse 3,000 1,400
26,600 25,000
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B. Premium paid or medical expenditure incurred for father, who is a

senior citizen
(i) Mediclaim premium paid for father, who is over 60 years of age 47,000 47,000

(ii) Expenditure on preventive health check-up of father 4,000 3,000

51,000 50,000

Total deduction under section 80D (₹ 25,000 + ₹ 50,000) 75,000

Notes:
1. The total deduction under A. (i), (ii) and (iii) above should not exceed ₹ 25,000. Therefore, the expenditure
on preventive health check-up for self and spouse would be restricted to ₹ 1,400, being (₹ 25,000 – ₹
20,000 – ₹ 3,600)

2. The total deduction under B. (i) and (ii) above should not exceed ₹ 50,000. Therefore, the expenditure on
preventive health check-up for father would be restricted to ₹ 3,000, being (₹ 50,000 – ₹ 47,000).

3. In this case, the total deduction allowed on account of expenditure on preventive health check-up of self,
spouse and father is ₹ 4,400 (i.e., ₹ 1,400 + ₹ 3,000), which is within the maximum permissible limit of ₹
5,000.

ILLUSTRATION 8
Mr. Y, aged 40 years, paid medical insurance premium of ₹ 22,000 during the P.Y. 2024-25 to insure his health
as well as the health of his spouse and dependent children. He also paid medical insurance premium of ₹ 33,000
during the year to insure the health of his mother, aged 67 years, who is not dependent on him. He incurred
medical expenditure of ₹ 20,000 on his father, aged 71 years, who is not covered under mediclaim policy. His
father is also not dependent upon him. He contributed ₹ 6,000 to Central Government Health Scheme during
the year. Compute the deduction allowable under section 80D for the A.Y. 2025-26 if Mr. Y has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A).

SOLUTION
Deduction allowable under section 80D for the A.Y.2025-26

Particulars ₹ ₹

(i) Medical insurance premium paid for self, spouse and dependent children 22,000
(ii) Contribution to CGHS 6,000
28,000
restricted to 25,000
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(iii) Mediclaim premium paid for mother, who is over 60 years of age 33,000
(iv) Medical expenditure incurred for father, who is over 60 years of age and
not covered by any insurance 20,000
53,000
restricted to 50,000

75,000

Deduction in respect of maintenance including medical treatment of a

dependant disabled [Section 80DD]
[Available only if the individual/HUF exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

1. Eligible assessee: Section 80DD provides deduction to an assessee, who is a resident in India, being an
individual or Hindu undivided family.
2. Payments qualifying for deduction:
a) Any amount –
o incurred for the medical treatment (including nursing), training and rehabilitation of a dependant,
being a person with disability,
or
o paid or deposited under a scheme framed in this behalf by the Life Insurance Corporation or any
other insurer or the Administrator or the Specified Company2 for the maintenance of a
dependant, being a person with disability

qualifies for deduction.

b) The benefit of deduction under this section is also available to assessees incurring expenditure on
maintenance including medical treatment of persons suffering from autism, cerebral palsy and
multiple disabilities.

3. Quantum of deduction: The quantum of deduction is ₹ 75,000 and in case of severe disability (i.e.,
person with 80% or more disability) the deduction shall be ₹ 1,25,000.

4. Conditions:
a) The scheme should provide for payment of annuity or a lump sum amount for the benefit of a
dependant, being a person with disability,
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i. in the event of the death of the individual or member of the HUF, in whose name subscription was
made; or
ii. on attaining the age of 60 years or more by such individual or the member of the HUF, and the
payment or deposit to such scheme has been discontinued

and the assessee must nominate either the dependant, being a person with disability or any other
person or a trust to receive the payment on his behalf, for the benefit of the dependant, being a
person with disability.

5. Deemed income:
If the dependent, being a person with disability, predeceases the individual or the member of HUF, in
whose name subscription was made, then, the amount paid or deposited under the said scheme would
be the deemed income and chargeable to tax in the hands of the assessee (individual or member of
HUF) in the previous year in which such amount is received by him.

However, such deeming provisions would not apply, to the amount received by the dependent, being a
person with disability, before his death, by way of annuity or lump sum under the scheme mentioned in
II of (a) above i.e., when the individual or member of HUF attains the age of 60 years or more, and the
payment or deposit to such scheme has been discontinued.

6. Meaning of “Dependent”:
Assessee Dependant

(1) Individual the spouse, children, parents, brother or sister of the individual who is wholly or
mainly dependant on such individual and not claimed deduction under section
80U in the computation of his income

(2) HUF a member of the HUF, wholly or mainly dependant on such HUF and not claimed
deduction under section 80U in the computation of his income

ILLUSTRATION 9
Mr. X is a resident individual. He deposits a sum of ₹ 50,000 with Life Insurance Corporation every year for the
maintenance of his disabled grandfather who is wholly dependent upon him. The disability is one which comes
under the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.
A copy of the certificate from the medical authority is submitted. Compute the amount of deduction available
under section 80DD for the A.Y. 2025-26, if Mr. X has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A).

SOLUTION
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Since the amount deposited by Mr. X was for his grandfather, he will not be allowed any deduction under section
80DD. The deduction is available if the individual assessee incurs any expense for a “dependant” disabled
person. Grandfather does not come within the meaning of “dependant” as defined under section 80DD.

ILLUSTRATION 10
What will be the deduction if Mr. X had made this deposit for his dependant father?

SOLUTION
Since the expense was incurred for a dependant disabled person, Mr. X will be entitled to claim a deduction of
₹ 75,000 under section 80DD, irrespective of the amount deposited. In case his father has severe disability, the
deduction would be ₹ 1,25,000.

Deduction in respect of medical treatment etc. [Section 80DDB]

[Available only if the individual/HUF exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

i. Eligible assessee: This section provides deduction to an assessee, who is resident in India, being an
individual and Hindu undivided family. The deduction is available to an individual for medical expenditure
incurred on himself or a dependant. It is also available to a Hindu undivided family (HUF) for such
expenditure incurred on any of its members.

ii. Meaning of “Dependent”:

Assessee Dependent

(1) Individual the spouse, children, parents, brother or sister of the individual or any of them,
wholly or mainly dependant on such individual for his support and maintenance.
(2) HUF a member of the HUF, wholly or mainly dependant on such HUF for his support
and maintenance.

iii. Payment qualifying for deduction: Any amount actually paid for the medical treatment of such disease
or ailment as may be specified by the Board for himself or a dependant, in case the assessee is an
individual, or for any member of a HUF, in case the assessee is a HUF, will qualify for deduction.

iv. Quantum of deduction: The amount of deduction under this section shall be equal to the amount
actually paid or ₹ 40,000, whichever is less, in respect of that previous year in which such amount was
actually paid.
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In case the amount is paid in respect of a senior citizen, i.e., a resident individual of the age of 60 years
or more at any time during the relevant previous year, then the deduction would be the amount actually
paid or ₹ 1,00,000, whichever is less.
The deduction under this section shall be reduced by the amount received, if any, under an insurance
from an insurer, or reimbursed by an employer, for the medical treatment of the assessee or the
dependant.

v. Maximum deduction: The maximum limit of deduction under section 80DDB for these two categories
of dependant are summarized hereunder:

Dependent Maximum limit (₹)

(1) A senior citizen, being a resident individual 1,00,000

(2) Other than a senior citizen 40,000

vi. Condition: No such deduction shall be allowed unless the assessee obtains the prescription for such
medical treatment from a neurologist, an oncologist, a urologist, a hematologist, an immunologist or
such other specialist, as may be prescribed

Deduction in respect of interest on loan taken for higher education

[Section 80E]
[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

1. Eligible assessee: Section 80E provides deduction to an individual-assessee in respect of any interest
on loan paid by him in the previous year out of his income chargeable to tax.

2. Conditions: The loan must have been taken for the purpose of pursuing his higher education or for the
purpose of higher education of his or her relative. The loan must have been taken from any financial
institution or approved charitable institution.

3. Meaning of certain terms:

Term Meaning

(a) Relative Spouse and children of the individual or the student for whom the individual
is the legal guardian
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(b) Higher It means any course of study (including vocational studies) pursued after
education passing the Senior Secondary Examination or its equivalent from any school,
board or university recognised by the Central Government or State
Government or local authority or by any other authority authorized by the
Central Government or State Government or local authority to do so.
Therefore, interest on loan taken for pursuing any course after Class XII or its
equivalent, will qualify for deduction under section 80E.
(c) Period of The deduction is allowed in computing the total income in respect of the
deduction initial assessment year (i.e. the assessment year relevant to the previous
year, in which the assessee starts paying the interest on the loan) and seven
assessment years immediately succeeding the initial assessment year or
until the interest is paid in full by the assessee, whichever is earlier.

(d) Approved It means an institution established for charitable purposes and approved by
charitable the prescribed authority3 or an institution referred to in section 80G(2)(a).
institution
(e) Financial It means –
institution 1. a banking company to which the Banking Regulation Act, 1949 applies
(including a bank or banking institution referred to in section 51 of the
Act); or
2. any other financial institution which the Central Government may, by
notification in the Official Gazette, specify in this behalf

ILLUSTRATION 11
Mr. B has taken three education loans on April 1, 2024, the details of which are given below:

Loan 1 Loan 2 Loan 3

For whose education loan was taken B Son of B Daughter of B

Purpose of loan MBA B. Sc. B.A.

Amount of loan (₹) 5,00,000 2,00,000 4,00,000

Annual repayment of loan (₹) 1,00,000 40,000 80,000

Annual repayment of interest (₹) 20,000 10,000 18,000

Compute the amount deductible under section 80E for the A.Y.2025-26 if Mr. B has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
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SOLUTION
Deduction under section 80E is available to an individual assessee exercising the option of shifting out of the
default tax regime provided under section 115BAC(1A), in respect of any interest paid by him in the previous year
in respect of loan taken for pursuing his higher education or higher education of his spouse or children. Higher
education means any course of study pursued after senior secondary examination.
Therefore, interest repayment in respect of all the above loans would be eligible for deduction.
Deduction under section 80E = ₹ 20,000 + ₹ 10,000 + ₹ 18,000 = ₹ 48,000.

Deduction for interest payable on loan borrowed for acquisition of

residential house property by an individual [Section 80EE]
[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

1. Eligible assessee: An individual who has taken a loan for acquisition of residential house property from
any financial institution. Interest payable on such loan would qualify for deduction under this section.

2. Conditions: The conditions to be satisfied for availing this deduction are as follows –

Value of house ≤ ₹ 50
lakhs

The assessee
should not own any Loan should be
residential house on Conditions sanctioned during
the date of sanction the P.Y.2016-17
of loan

Loan sanctioned ≤ ₹ 35
lakhs

3. Period of benefit: The benefit of deduction under this section would be available till the repayment of
loan continues.
4. Quantum of deduction: The maximum deduction allowable is ₹ 50,000. The deduction of upto ₹ 50,000
under section 80EE is over and above the deduction of upto ₹ 2,00,000 available under section 24 for
interest paid in respect of loan borrowed for acquisition of a self-occupied property.
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5. No deduction under any other provision: The interest allowed as deduction under section 80EE will
not be allowed as deduction under any other provision of the Act for the same or any other assessment
year.

6. Meaning of certain terms:

Term Meaning
(a) Financial o A banking company to which the Banking Regulation Act, 1949 applies; or
institution o Any bank or banking institution referred to in section 51 of the Banking
Regulation Act, 1949; or
o A housing finance company.
(b) Housing A public company formed or registered in India with the main object of carrying
finance on the business of providing long-term finance for construction or purchase of
company houses in India for residential purposes.

ILLUSTRATION 12
Mr. A purchased a residential house property for self-occupation at a cost of ₹ 45 lakh on 1.4.2017, in respect of
which he took a housing loan of ₹ 35 lakh from Bank of India@11% p.a. on the same date. The loan was sanctioned
on 28th March, 2017. Compute the eligible deduction in respect of interest on housing loan for A.Y.2025-26 if Mr.
A has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A), assuming
that the entire loan was outstanding as on 31.3.2025 and he does not own any other house property

SOLUTION

Particulars ₹
Interest deduction for A.Y.2025-26
(i) Deduction allowable while computing income under the
head “Income from house property”
Deduction under section 24(b) ₹ 3,85,000 [₹ 35,00,000 × 11%]

Restricted to 2,00,000

(ii) Deduction under Chapter VI-A from Gross Total Income

Deduction under section 80EE ₹ 1,85,000 (₹ 3,85,000 – ₹ 2,00,000)
Restricted to 50,000
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Deduction for interest payable on loan borrowed for acquisition of

residential house property [Section 80EEA]

[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

1. Eligible assessee: An individual who has taken a loan for acquisition of residential house property from
any financial institution. Interest payable on such loan would qualify for deduction under this section.

2. Conditions: The conditions to be satisfied for availing this deduction are as follows –

Stamp Duty Value of

house ≤ ₹ 45 lakhs

Loan should be
The individual should not own sanctioned by the
any residential house on the Conditions Financial Institution
date of sanction of loan between 1st April, 2019
and 31st March 2022

The individual should not be eligible to

claim deduction u/s 80EE

3. Period of benefit: The benefit of deduction under this section would be available for interest payable
for each assessment year.

4. Quantum of deduction: The maximum deduction allowable is ₹ 1,50,000. The deduction of upto ₹
1,50,000 under section 80EEA is over and above the deduction available under section 24(b) in respect
of interest payable on loan borrowed for acquisition of a residential house property.

5. No deduction under any other provision: The interest allowed as deduction under section 80EEA will
not be allowed as deduction under any other provision of the Act for the same or any other assessment
year.

6. Meaning of certain terms:

Term Meaning
(a) Financial o A banking company, to which the Banking Regulation Act, 1949
institution applies; or
o Any bank or banking institution referred to in section 51 of the Banking
Regulation Act, 1949; or
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o A housing finance company.

(b) Housing A public company formed or registered in India with the main object of
finance carrying on the business of providing long-term finance for construction or
company purchase of houses in India for residential purposes.

In case the assessee pays tax under default tax regime under section 115BAC
acquisition of a residential house
Deduction in respect of interest

No interest deduction u/s 24(b)

payable on loan borrowed for

In case of self-occupied
house property
No deduction u/s 80EEA
property

No limit u/s 24(b). Entire interest payable is

allowable as deduction. However, loss from
house property cannot be set off against
In case of let out or
income under any other head.
deemed to be let out
property

No deduction u/s 80EEA

In case the assessee has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A)

restricted to ₹ 2,00,000 u/s 24(b)

acquisition of a residential house
Deduction in respect of interest
payable on loan borrowed for

In case of self-occupied
house property
Deduction for interest upto ₹ 1,50,000 can be claimed u/s
80EEA over and above deduction u/s 24(b)
property

No limit u/s 24(b). Entire interest payable is allowable as

deduction. However, section 71(3A) restricts set off of loss
from house property against income under any other head
to ₹ 2,00,000.
In case of let out or deemed to be
let out property
If there is a loss from house property and it is more than ₹
2,00,000, interest of ₹ 2,00,000 can be claimed as deduction
u/s 24(b) and balance interest upto ₹ 1,50,000 can be
claimed u/s 80EEA.
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Deduction in respect of interest payable on loan taken for

purchase of electric vehicle [Section 80EEB]
[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

I. Eligible Assessee: An individual who has taken a loan for purchase of an electric vehicle from any
financial institution. Interest payable on such loan would qualify for deduction under this section.
II. Conditions: The conditions to be satisfied for availing this deduction are as follows –

Loan should be taken for purchase of an

electric vehicle

Loan should be sanctioned

The assessee should be
an individual.
Conditions between 1.4.2019 and
31.3.2023

Loan should be sanctioned by a FI

(bank or specified NBFCs)

III. Period of benefit: The benefit of deduction under this section would be available for interest payable
on such loan for each assessment year.
IV. Quantum of deduction: Interest payable, subject to a maximum of ₹ 1,50,000.
V. No deduction under any other provision: The interest allowed as deduction under section 80EEB will
not be allowed as deduction under any other provision of the Act for the same or any other assessment
year.
VI. Meaning of certain terms:

Term Meaning

(a) Financial o A banking company to which the Banking Regulation Act, 1949 applies; or
institution
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o Any bank or banking institution referred to in section 51 of the Banking

Regulation Act, 1949; or
o Any deposit taking NBFC; or
o A systemically important non-deposit taking NBFC i.e., a NBFC which is not
accepting or holding public deposits and having total assets of not less
than ₹ 500 crore as per the last audited balance sheet and is registered
with the RBI.

(b) Electric A vehicle which is powered exclusively by an electric motor whose traction
Vehicle energy is supplied exclusively by traction battery installed in the vehicle. The
vehicle

ILLUSTRATION 13
The following are the particulars relating to Mr. A, Mr. B, Mr. C and Mr. D, salaried individuals, for A.Y. 2025-26 –

Particulars Mr. A Mr. B Mr. C Mr. D

Amount of loan taken ₹ 43 lakhs ₹ 45 lakhs ₹ 20 lakhs ₹ 15 lakhs

Loan taken from HFC Deposit taking Deposit Public sector
NBFC taking NBFC bank
Date of sanction of loan 1.4.2021 1.4.2020 1.4.2020 30.3.2019
Date of disbursement of loan 1.5.2021 1.5.2020 1.5.2020 1.5.2019
Purpose of loan Acquisition of Acquisition of Purchase of Purchase of
residential residential electric electric
house property house property vehicle for vehicle for
for self- for self- personal use personal use
occupation occupation

Stamp duty value of house property ₹ 45 lakhs ₹ 48 lakhs - -

Cost of electric vehicle - - ₹ 22 lakhs ₹ 18 lakhs

Rate of interest 9% p.a. 9% p.a. 10% p.a. 10% p.a.

Compute the amount of deduction, if any, allowable under the provisions of the Income-tax Act, 1961 for
A.Y.2025-26 in the hands of Mr. A, Mr. B, Mr. C and Mr. D if they have exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A). Assume that there has been no principal repayment in
respect of any of the above loans upto 31.3.2025.

SOLUTION
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Particulars ₹

Mr. A
Interest deduction for A.Y.2025-26
a. Deduction allowable while computing income under the head “Income from
house property”
Deduction u/s 24(b) ₹ 3,87,000 [₹ 43,00,000 × 9%]
Restricted to 2,00,000

b. Deduction under Chapter VI-A from Gross Total Income

Deduction u/s 80EEA ₹ 1,87,000 (₹ 3,87,000 – ₹ 2,00,000)
Restricted to 1,50,000

Mr. B
Interest deduction for A.Y.2025-26
1. Deduction allowable while computing income under the head “Income from house
property”
Deduction u/s 24(b) ₹ 4,05,000 [₹ 45,00,000 × 9%]
Restricted to 2,00,000
2. Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEA is not permissible since: Nil
o loan is taken from NBFC
o stamp duty value exceeds ₹ 45 lakh.
Deduction under section 80EEA would not be permissible due to either violation listed
above.

Mr. C
Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEB for interest payable on loan taken for purchase of electric vehicle [ 1,50,000
₹ 20 lakhs x 10% = ₹ 2,00,000, restricted to ₹ 1,50,000, being the maximum permissible
deduction]

Mr. D
Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEB is not permissible since loan was sanctioned before 1.4.2019. Nil
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Deduction in respect of donations to certain funds, charitable institutions

etc. [Section 80G]

i. Eligible assessee: An assessee who pays any sum as donation to eligible funds or institutions, is
entitled to a deduction, subject to certain limitations, from the gross total income.
In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial juridical
person, deduction would be available only if they have exercised the option of shifting out of the default
tax regime provided under section 115BAC(1A). It would not be available if they pay concessional rates of
tax under the default tax regime u/s 115BAC.
In case of companies and co-operative societies, deduction would not be available if they opt for the
special provisions u/s 115BAA/115BAB and section 115BAD/115BAE, respectively. In other words,
deduction would be available only if they pay tax under the normal provisions of the Act.

ii. Quantum of deduction:

There are four categories of deductions. The following table gives the details of the institutions and
funds to which donations can be made for the purpose of claiming deduction under section 80G, –

I Donation qualifying for 100% deduction, without any qualifying limit

(1) The National Defence Fund set up by the Central Government

(2) Prime Minister’s National Relief Fund.
(3) Prime Minister’s Armenia Earthquake Relief Fund

(4) The Africa (Public Contributions-India) Fund

(5) The National Children’s Fund
(6) The National Foundation for Communal Harmony

(7) Approved University or educational institution of national eminence

(8) Chief Minister’s Earthquake Relief Fund, Maharashtra

(9) Any fund set up by the State Government of Gujarat exclusively for providing relief to the
victims of the Gujarat earthquake
(10) Any Zila Saksharta Samiti constituted in any district for improvement of primary education
in villages and towns and for literacy and post- literacy activities
(11) National Blood Transfusion Council or any State Blood Transfusion Council whose sole
objective is the control, supervision, regulation or encouragement in India of the services
related to operation and requirements of blood banks
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(12) Any State Government Fund set up to provide medical relief to the poor
(13) The Army Central Welfare Fund or Indian Naval Benevolent Fund or Air Force Central Welfare
Fund established by the armed forces of the Union for the welfare of past and present
members of such forces or their dependents.
(14) The Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
(15) The National Illness Assistance Fund

(16) The Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund in respect of any State
or Union Territory
(17) The National Sports Development Fund set up by the Central Government
(18) The National Cultural Fund set up by the Central Government

(19) The Fund for Technology Development and Application set up by the Central Government
(20) National Trust for welfare of persons with Autism, Cerebral Palsy, Mental Retardation and
Multiple Disabilities
(21) The Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by
the assessee in pursuance of CSR u/s 135(5) of the Companies Act, 2013
(22) The Clean Ganga Fund, set up by the Central Government, where such assessee is a resident,
other than the sum spent in pursuance of CSR u/s 135(5) of the Companies Act, 2013
(23) The National Fund for Control of Drug Abuse

(24) Prime Minister's Citizen Assistance and Relief in Emergency Situations Fund (PM Cares Fund)

II Donation qualifying for 50% deduction, without any qualifying limit

(1) Prime Minister’s Drought Relief Fund

III Donation qualifying for 100% deduction, subject to qualifying limit

(1) The Government or to any approved local authority, institution or association for promotion
of family planning
(2) Sum paid by a company as donation to the Indian Olympic Association or any other
association/institution established in India, as may be notified by the Government for the
development of infrastructure for sports or games, or the sponsorship of sports and games
in India

IV Donation qualifying for 50% deduction, subject to qualifying limit

(1) Any Institution or Fund established in India for charitable purposes fulfilling prescribed
conditions
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(2) The Government or any local authority for utilisation for any charitable purpose other than
the purpose of promoting family planning
(3) An authority constituted in India by or under any other law enacted either for dealing with
and satisfying the need for housing accommodation or for the purpose of planning,
development or improvement of cities, towns and villages, or both
(4) Any Corporation established by the Central Government or any State Government for
promoting the interests of the members of a minority community
(5) for renovation or repair of Notified temple, mosque, gurdwara, church or other place of
historic, archaeological or artistic importance or which is a place of public worship of renown
throughout any State or States

iii. Qualifying limit: The eligible donations referred to in III and IV should be aggregated and the sum total
should be limited to 10% of the adjusted gross total income. This would be the maximum permissible
deduction.

The donations qualifying for 100% deduction would be first adjusted from the maximum permissible
deduction and thereafter 50% deduction of the balance would be allowed.

Steps for computation of qualifying limit

Step 1: Compute adjusted total income i.e., the GTI as reduced by the following:
I. Deductions under Chapter VI-A, except under section 80G
II. Short-term capital gain taxable under section 111A
III. Long-term capital gains taxable under sections 112 & 112A
IV. Any income on which income-tax is not payable

Step 2: Calculate 10% of adjusted total income

Step 3: Calculate the actual donation, which is subject to qualifying limit (Total of Category III
and IV donations, shown in the table above)
Step 4: Lower of Step 2 or Step 3 is the maximum permissible deduction.

Step 5: The said deduction is adjusted first against donations qualifying for 100% deduction
(i.e., Category III donations). Thereafter, 50% of balance qualifies for deduction under
section 80G.

iv. Other points:

1. Where an assessee has claimed and has been allowed any deduction under this section in respect
of any amount of donation, the same amount will not qualify for deduction under any other provision
of the Act for the same or any other assessment year.
2. Donations in kind shall not qualify for deduction
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3. No deduction shall be allowed in respect of donation of any sum exceeding ₹ 2,000 unless such sum
is paid by any mode other than cash.

4. The deduction under section 80G can be claimed whether it has any nexus with the business of the
assessee or not.
5. As per Circular No.2/2005 dated 12.1.2005, in cases where employees make donations to the Prime
Minister’s National Relief Fund, the Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief
Fund through their respective employers, it is not possible for such funds to issue separate
certificate to every such employee in respect of donations made to such funds as contributions
made to these funds are in the form of a consolidated cheque. An employee who makes donations
towards these funds is eligible to claim deduction under section 80G. It is, hereby, clarified that the
claim in respect of such donations as indicated above will be admissible under section 80G on the
basis of the certificate issued by the Drawing and Disbursing Officer (DDO)/Employer in this behalf.
6. The claim of the assessee for deduction in respect of any donation made to an institution or fund
[referred to in point (1) under (IV) “Donation qualifying for 50% deduction, subject to qualifying limit”],
in the return of income for any assessment year filed by him, will be allowed on the basis of
information relating to said donation furnished by the institution or fund to the prescribed income-
tax authority or person authorized by such authority, subject to verification as per the risk
management strategy formulated by the CBDT from time to time.

ILLUSTRATION 14
Mr. Shiva aged 58 years, has gross total income of ₹ 7,75,000 comprising of income from salary and house
property. He has made the following payments and investments:
i. Premium paid to insure the life of her major daughter (policy taken on 1.4.2018) (Assured value ₹
1,80,000) – ₹ 20,000.
ii. Medical Insurance premium for self – ₹ 12,000; Spouse – ₹ 14,000
iii. Donation to a public charitable institution ₹ 50,000 by way of cheque.
iv. LIC Pension Fund – ₹ 60,000
v. Donation to National Children’s Fund - ₹ 25,000 by way of cheque
vi. Donation to Prime Minister’s Drought Relief Fund - ₹ 25,000 by way of cheque
vii. Donation to approved institution for promotion of family planning - ₹ 40,000 by way of cheque
viii. Deposit in PPF – ₹ 1,00,000
Compute the total income of Mr. Shiva for A.Y. 2025-26 if he exercises the option of shifting out of the default
tax regime provided under section 115BAC(1A).

SOLUTION
Computation of Total Income of Mr. Shiva for A.Y. 2025-26
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Particulars ₹ ₹

Gross Total Income 7,75,000

Less: Deduction under section 80C

Deposit in PPF 1,00,000

Life insurance premium paid for insurance of major daughter 18,000
(Maximum 10% of the assured value ₹ 1,80,000, as the policy is taken
after 31.3.2012)
1,18,000
Deduction under section 80CCC in respect of LIC pension fund 60,000
1,78,000
As per section 80CCE, deduction under section 80C &80CCC is restricted to 1,50,000
Deduction under section 80D

Medical Insurance premium in respect of self and spouse 26,000 25,000

Restricted to
Deduction under section 80G (See Working Note 87,500
below)
Total income 5,12,500

Working Note: Computation of deduction under section 80G

Particulars of donation Amount % of deduction Deduction
donated (₹) u/s 80G (₹)

(i) National Children’s Fund 25,000 100% 25,000

(ii) Prime Minister’s Drought Relief Fund 25,000 50% 12,500

(iii) Approved institution for promotion of 40,000 100%, subject to qualifying 40,000
family planning limit
(iv) Public Charitable Trust 50,000 50% subject to qualifying 10,000
limit (See Note below)
87,500

Note - Adjusted total income = Gross Total Income – Amount of deductions under section 80C to 80U except
section 80G i.e., ₹ 6,00,000, in this case.
₹ 60,000, being 10% of adjusted total income is the qualifying limit, in this case.
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Firstly, donation of ₹ 40,000 to approved institution for family planning qualifying for 100% deduction subject
to qualifying limit, has to be adjusted against this amount. Thereafter, donation to public charitable trust
qualifying for 50% deduction, subject to qualifying limit is adjusted. Hence, the contribution of ₹ 50,000 to
public charitable trust is restricted to 20,000 (being, ₹ 60,000 - ₹ 40,000), 50% of which would be the deduction
under section 80G. Therefore, the deduction under section 80G in respect of donation to public charitable trust
would be ₹ 10,000, which is 50% of ₹ 20,000.

Deduction in respect of rent paid [Section 80GG]

[Available only if the individual/HUF exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

i. Eligible assessee: Assessee, who is not in receipt of HRA qualifying for exemption under section 10(13A)
from employer and who pays rent for accommodation occupied by him for residential purposes.

ii. Conditions: The following conditions have to be satisfied for claiming deduction under section 80GG –
1. The assessee should not be receiving any house rent allowance exempt under section 10(13A).
2. The expenditure incurred by him on rent of any furnished or unfurnished accommodation should
exceed 10% of his total income arrived at after all deductions under Chapter VI-A except section
80GG.
3. The accommodation should be occupied by the assessee for the purposes of his own residence.
4. The assessee should fulfill such other conditions or limitations as may be prescribed, having regard
to the area or place in which such accommodation is situated and other relevant considerations.

5. The assessee or his spouse or his minor child or a HUF of which he is a member should not own any
accommodation at the place where he ordinarily resides or perform duties of his office or
employment or carries on his business or profession; or

6. If the assessee owns any accommodation at any place other than that referred to above, such
accommodation should not be in the occupation of the assessee and its annual value is not required
to be determined under section 23(2)(a) or section 23(4)(a).

7. The assessee should file a declaration in the prescribed form, confirming the details of rent paid and
fulfillment of other conditions, with the return of income

iii. Quantum of deduction: The deduction admissible will be the least of the following:
1. Actual rent paid minus 10% of the total income of the assessee before allowing the deduction, or
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2. 25% of such total income (arrived at after making all deductions under Chapter VI A but before
making any deduction under this section), or
3. Amount calculated at ₹ 5,000 p.m.

ILLUSTRATION 15
Mr. Ganesh, a businessman, whose total income (before allowing deduction under section 80GG) for A.Y.2025-
26 is ₹ 4,60,000, paid house rent at ₹ 12,000 p.m. in respect of residential accommodation occupied by him at
Mumbai. Compute the deduction allowable to him under section 80GG for A.Y.2025-26 if he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A).

SOLUTION
The deduction under section 80GG will be computed as follows:
1. Actual rent paid less 10% of total income
(10 × 4,60,000)
₹ 1,44,000 (−) = ₹ 98,000
100

!"×$,&','''
2. 25% of total income = = ₹ 1,15,000
(''

3. Amount calculated at ₹ 5,000 p.m. = ₹ 60,000

Deduction allowable u/s 80GG [least of (i), (ii) and (iii)] = ₹ 60,000

Deduction in respect of donations for scientific research and rural development [Section 80GGA]
I. Eligible assessee: Any assessee not having income chargeable under the head “Profits and gains of
business or profession”, who makes donations for scientific research or rural development.
An individual, HUF, AoP (other than a co-operative society) or BoI or an artificial juridical person will be
eligible for deduction u/s 80GGA only if they have exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A).

II. Donations qualifying for deduction:

a) Any sum paid by the assessee in the previous year to a research association which has, as its object,
the undertaking of scientific research or to a University, college or other institution to be used for
scientific research;

Such association, University, college or institution must be approved under section 35(1)(ii).
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b) Any sum paid to a research association which has as its object the undertaking of research in social
science or statistical research, University, College or other institution to be used for research in
social science or statistical research.
Such association, University, college or institution must be approved under section 35(1)(iii).

c) Any sum paid by the assessee in the previous year to an association or institution which has as its
object the undertaking of any programme of rural development, to be used for carrying out any
programme of rural development approved by the prescribed authority for purposes of section
35CCA or to an institution or association which has as its object the training of persons for
implementing programmes of rural development.
It has been clarified that the deduction to which an assessee (i.e. donor) is entitled on account of
payment of any sum to
- a research association or university or college or other institution for scientific research or
research in a social science or statistical research or
- an association or institution for carrying out the programme of rural development or
shall not be denied merely on the ground that subsequent to payment of such sum by the assessee,
the approval granted to any of the aforesaid entities is withdrawn.
d) Any sum paid to a public sector company or a local authority or to an association or institution
approved by the National Committee for carrying out any eligible project or scheme.
It has been clarified that the deduction to which an assessee (i.e. donor) is entitled on account of
above shall not be denied merely on the ground that subsequent to payment of such sum by the
assessee, the approval granted to any of the aforesaid entities is withdrawn or the notification
notifying the eligible project or scheme carried out aforesaid entities has been withdrawn.
e) Any sum paid to a rural development fund set up and notified under section 35CCA.
f) Any sum paid by the assessee in the previous year to National Urban Poverty Eradication Fund
(NUPEF).

III. Restrictions on deduction:

1. No deduction under this section would be allowed in the case of an assessee whose gross total
income includes income which is chargeable under the head “Profits and gains of business or
profession.”

2. Where a deduction under this section is claimed and allowed for any assessment year, deduction
shall not be allowed in respect of such payment under any provision of this Act for the same or any
other assessment year.

3. No deduction shall be allowed in respect of donation of any sum exceeding ₹ 2,000 unless such sum
is paid by any mode other than cash.
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4. The claim of the assessee for deduction in respect of any sum referred to under “(ii) Donations
qualifying for deduction” in the return of income for any assessment year filed by him, will be allowed
on the basis of information relating to such sum furnished by the payee to the prescribed income-
tax authority or person authorized by such authority, subject to verification as per the risk
management strategy formulated by the CBDT from time to time.

Deduction in respect of contributions given by companies to political parties [Section 80GGB]

I. Deduction & Conditions: This section provides for deduction of any sum contributed in the previous year
by an Indian company4 to any political party or an electoral trust. However, no deduction shall be allowed
in respect of any sum contributed by way of cash.

II. Meaning of “Contribute”: For the purposes of this section, the word “contribute” has the same meaning
assigned to it under section 293A of the Companies Act, 19565 , which provides that –

a) a donation or subscription or payment given by a company to a person for carrying on any activity
which is likely to effect public support for a political party shall also be deemed to be contribution
for a political purpose;

b) the expenditure incurred, directly or indirectly, by a company on advertisement in any publication

(being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like) by or on behalf
of a political party or for its advantage shall also be deemed to be a contribution to such political
party or a contribution for a political purpose to the person publishing it.
III. Meaning of “Political party”: It means a political party registered under section 29A of the Representation
of the People Act, 1951.

ILLUSTRATION 16
During the P.Y. 2024-25, ABC Ltd., an Indian company,
1) contributed a sum of ₹ 2 lakh to an electoral trust; and
2) incurred expenditure of ₹ 25,000 on advertisement in a brochure of a political party
Is the company eligible for deduction in respect of such contribution/expenditure, assuming that the
contribution was made by cheque? If so, what is the quantum of deduction? ABC Ltd. does not opt for section
115BAA/115BAB.

SOLUTION
An Indian company is eligible for deduction under section 80GGB in respect of any sum contributed by it in the
previous year to any political party or an electoral trust. Further, the word “contribute” in section 80GGB has
the meaning assigned to it in section 293A of the Companies Act, 1956, and accordingly, it includes the amount
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of expenditure incurred on advertisement in a brochure of a political party.

Therefore, ABC Ltd. is eligible for a deduction of ₹ 2,25,000 under section 80GGB in respect of sum of ₹ 2 lakh
contributed to an electoral trust and ₹ 25,000 incurred by it on advertisement in a brochure of a political party.

It may be noted that there is a specific disallowance under section 37(2B) in respect of expenditure incurred on
advertisement in a brochure of a political party. Therefore, the expenditure of ₹ 25,000 would be disallowed
while computing business income/gross total income. However, the said expenditure incurred by an Indian
company is allowable as a deduction from gross total income under section 80GGB.

Deduction in respect of contributions given by any person to political parties [Section 80GGC]
a) Deduction & Conditions: This section provides for deduction of any sum contributed in the previous year
by any person to a political party or an electoral trust. However, no deduction shall be allowed in respect
of any sum contributed by way of cash.

b) Persons not eligible for deduction: This deduction will, however, not be available to a local authority and
an artificial juridical person, wholly or partly funded by the Government.

c) Meaning of “Political party”: It means a political party registered under section 29A of the
Representation of the People Act, 1951.

An individual, HUF, AoP (other than a co-operative society) or BoI would be eligible for deduction u/s 80GGC
only if they have exercised the option of shifting out of the default tax regime provided under section
115BAC(1A). A co-operative society will not be eligible for deduction if it opts for special provisions of section
115BAD/115BAE.

DEDUCTIONS IN RESPECT OF CERTAIN INCOMES

Deduction in respect of employment of new employees [Section 80JJAA]

I. Quantum and period of deduction: Where the gross total income of an assessee to whom section 44AB
applies, includes any profits and gains derived from business, a deduction of an amount equal to 30%
of additional employee cost incurred in the course of such business in the previous year, would be
allowed for three assessment years including the assessment year relevant to the previous year in
which such employment is provided.
II. Conditions to be fulfilled: The deduction would be allowed only subject to fulfilment of the following
conditions:
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The business should not be formed by splitting up, or the reconstruction, of an existing
business

The business is not acquired by the assessee by way of transfer from any other person
or as a result of any business reorganisation

The report of the accountant, giving the prescribed particulars, has to be furnished
before 30th September of the A.Y., being the specified date referred to in Section 44AB
i.e., the date one month prior to due date for filing ROI u/s 139(1)

III. Meaning of certain terms:

Term Meaning

(a) Additional Total emoluments paid or payable to additional employees

employee employed during the previous year.
cost

In the case The additional employee cost shall be Nil, if -

of an (a) there is no increase in the number of employees
existing from the total number of employees employed as
business on the last day of the preceding year;
(b) emoluments are paid otherwise than by an account
payee cheque or account payee bank draft or by
use of electronic clearing system through a bank
account or through any other prescribed electronic
mode [credit card, debit card, net banking, IMPS
(Immediate Payment Services), UPI (Unified
Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Fund
Transfer), BHIM (Bharat Interface for Money)
Aadhar Pay].

In the first The emoluments paid or payable to employees

year of a employed during that previous year shall be deemed to
new be the additional employee cost.
business
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(b) Additional An employee who has been employed during the previous year and
employee whose employment has the effect of increasing the total number of
employees employed by the employer as on the last day of the
preceding year.
Exclusions from the definition:
(a) an employee whose total emoluments are more than ₹ 25,000 per
month; or
(b) an employee for whom the entire contribution is
paid by the Government under the Employees’ Pension Scheme
notified in accordance with the provisions of the Employees’
Provident Funds and Miscellaneous Provisions Act, 1952; or
(c) an employee who does not participate in the recognised provident
fund.
(d) an employee employed for a period of less than 240 days during
the previous year. In case of an assessee engaged in the business
of manufacturing of apparel or footwear or leather products, an
employee employed for a period of less than 150 days during the
previous year; or
Note – If an employee is employed during the previous year for less than
240 days or 150 days, as the case may be, but is employed for a period
of 240 days or 150 days, as the case may be, in the immediately
succeeding year, he shall be deemed to have been employed in the
succeeding year.
Accordingly, the employer would be entitled to deduction of 30% of
additional employee cost of such employees for three years from the
succeeding year.

(c) Emoluments any sum paid or payable to an employee in lieu of his employment by
whatever name called.
Exclusions from the definition:
(a) any contribution paid or payable by the employer to any pension
fund or provident fund or any other fund for the benefit of the
employee under any law for the time being in force; and
(b) any lump-sum payment paid or payable to an employee at the
time of termination of his service or superannuation or voluntary
retirement, such as gratuity, severance pay, leave encashment,
voluntary retrenchment benefits, commutation of pension and
the like.

ILLUSTRATION 17
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Mr. A has commenced the business of manufacture of computers on 1.4.2024. He employed 350 new employees
during the P.Y. 2024-25, the details of whom are as follows –
No. of employees Date of Regular/ Casual Total monthly emoluments per
employment employee (₹)
(i) 75 1.4.2024 Regular 24,000
(ii) 125 1.5.2024 Regular 26,000

(iii) 50 1.8.2024 Casual 24,500

(iv) 100 1.9.2024 Regular 24,000

The regular employees participate in recognized provident fund while the casual employees do not. Compute
the deduction, if any, available to Mr. A for A.Y. 2025-26, if the profits and gains derived from manufacture of
computers that year is ₹ 75 lakhs and his total turnover is ₹ 10.16 crores.
What would be your answer if Mr. A has commenced the business of manufacture of footwear on 1.4.2024?

SOLUTION
Mr. A is eligible for deduction under section 80JJAA since he is subject to tax audit under section 44AB for A.Y.
2025-26 and he has employed “additional employees” during the P.Y. 2024-25.
I. If Mr. A is engaged in the business of manufacture of computers
Additional employee cost = ₹ 24,000 × 12 × 75 [See Working Note below] = ₹ 2,16,00,000
Deduction under section 80JJAA = 30% of ₹ 2,16,00,000 = ₹ 64,80,000.
Working Note:
Number of additional employees
Particulars No. of workmen
Total number of employees employed during the year 350
Less: Casual employees employed on 1.8.2024 who do not participate in 50
recognized provident fund
Regular employees employed on 1.5.2024, since their total 125
monthly emoluments exceed ₹ 25,000
Regular employees employed on 1.9.2024 since they have been 100 275
employed for less than 240 days in the P.Y.2024-25.

Number of “additional employees” 75

Notes –
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1) Since casual employees do not participate in recognized provident fund, they do not qualify as
additional employees. Further, 125 regular employees employed on 1.5.2024 also do not qualify as
additional employees since their monthly emoluments exceed ₹ 25,000. Also, 100 regular employees
employed on 1.9.2024 do not qualify as additional employees for the P.Y.2024-25, since they are
employed for less than 240 days in that year.
Therefore, only 75 employees employed on 1.4.2024 qualify as additional employees, and the total
emoluments paid or payable to them during the P.Y.2024-25 is deemed to be the additional employee
cost

2) As regards 100 regular employees employed on 1.9.2024, they would be treated as additional employees
for previous year 2025-26, if they continue to be employees in that year for a minimum period of 240
days. Accordingly, 30% of additional employee cost in respect of such employees would be allowable as
deduction under section 80JJAA in the hands of Mr. A for the A.Y. 2026-27.

II. If Mr. A is engaged in the business of manufacture of footwear

If Mr. A is engaged in the business of manufacture of footwear, then, he would be entitled to deduction
under section 80JJAA in respect of employee cost of regular employees employed on 1.9.2024, since they
have been employed for more than 150 days in the previous year 2024-25.

Additional employee cost = ₹ 2,16,00,000 + ₹ 24,000 × 7 × 100 = ₹ 3,84,00,000

Deduction under section 80JJAA = 30% of ₹ 3,84,00,000 = ₹ 1,15,20,000.

Deduction in respect of royalty income, etc., of authors of certain books other than text books
[Section 80QQB]

[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]
(i) Eligible assessee & Quantum of deduction: Under section 80QQB, deduction of up to a maximum ₹
3,00,000 is allowed to an individual resident in India in respect of income derived as author or joint
author i.e., the deduction shall be the income derived as author or as joint author or ₹ 3,00,000,
whichever is less.

(ii) Eligible Income:

a) This income may be received either by way of a lumpsum consideration for the assignment or grant
of any of his interests in the copyright of any book.

b) Such book should be a work of literary, artistic or scientific nature, or of royalties or copyright fees
(whether receivable in lump sum or otherwise) in respect of such book.

c) This deduction shall not, however, be available in respect of royalty income from textbook for
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schools, guides, commentaries, brochures, diaries, magazines, newspapers, journals, pamphlets,

tracts and other publications of similar nature.

Note - Where an assessee claims deduction under this section, no deduction in respect of the same
income may be claimed under any other provision of the Income-tax Act, 1961.

(iii) Manner of computation of deduction: For the purpose of calculating the deduction under this section,
the amount of eligible income (royalty or copyright fee received otherwise than by way of lumpsum)
before allowing expenses attributable to such income, shall not exceed 15% of the value of the books
sold during the previous year.

However, this condition is not applicable where the royalty or copyright fees is receivable in lump sum
in lieu of all rights of the author in the book.

(iv) Conditions:
a) Furnishing of certificate in prescribed form: For claiming the deduction, the assessee shall have to
furnish a certificate in the prescribed manner in the prescribed format, duly verified by the person
responsible for making such payment, setting forth such particulars as may be prescribed.

b) Period for repatriation of income earned outside India: Where the assessee earns any income from
any source outside India, he should bring such income into India in convertible foreign exchange
within a period of six months from the end of the previous year in which such income is earned or
within such further period as the competent authority may allow in this behalf for the purpose of
claiming deduction under this section.

The competent authority shall mean the Reserve Bank of India or such other authority as is
authorised under any law for the time being in force for regulating payments and dealings in foreign
exchange.

ILLUSTRATION 18
Mr. Aakash earned royalty of ₹ 2,88,000 from a foreign country for a book authored by him, being a work of
literary nature. The rate of royalty is 18% of value of books. The expenditure incurred by him for earning this
royalty was ₹ 40,000. The amount remitted to India till 30th September, 2025 is ₹ 2,30,000. The remaining
amount was not remitted till 31st March, 2026. Compute the amount includible in the gross total income of Mr.
Aakash and the amount of deduction which he will be eligible for under section 80QQB if he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A).

SOLUTION
The net royalty of ₹ 2,48,000 (i.e., royalty of ₹ 2,88,000 less ₹ 40,000, being expenditure to earn such income)
is includible in gross total income. Deduction u/s 80QQB would be ₹ 1,90,000 as calculated hereunder –
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Deduction in respect of royalty on patents [Section 80RRB]

[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

(i) Eligible assessee: A resident individual who is registered as the true and first inventor in respect of an
invention under the Patents Act, 1970, including the co-owner of the patent and earning income by way
of royalty of a patent registered on or after 1.4.2003.

(ii) Quantum of deduction: Income by way of royalty of a patent registered on or after 1.4.2003, subject to
a maximum of ₹ 3 lakhs.

Note - No deduction in respect of such income will be allowed under any other provision of the Income-
tax Act, 1961

(iii) Eligible income: This exemption shall be restricted to the royalty income including consideration for
transfer of rights in the patent or for providing information for working or use of a patent, use of a
patent or the rendering of any services in connection with these activities.

The exemption shall not be available on any consideration for sale of product manufactured with the
use of the patented process or patented article for commercial use.
(iv) The exemption shall not be available on any consideration for sale of product manufactured with the
use of the patented process or patented article for commercial use.

DEDUCTION IN RESPECT OF OTHER INCOME

Deduction in respect of interest on deposits in savings accounts [Section 80TTA]
[Available only if the individual/HUF exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

(i) Eligible assessee and Quantum of deduction: Section 80TTA provides that in case the gross total income
of an assessee, being an individual or a Hindu Undivided Family, includes any income by way of an interest
on deposits in a saving account (not being time deposits, which are deposits repayable on expiry of fixed
periods), deduction up to ₹ 10,000 in aggregate shall be allowed while computing the total income of such
assessee. Such deduction shall be allowed in case the saving account is maintained with:

1. a banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking
institution referred to in section 51 of that Act);
2. a co-operative society engaged in carrying on the business of banking (including a co-operative land
mortgage bank or a co-operative land development bank); or
3. a post office.
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Deduction under this section would, however, not be available to a senior citizen eligible for deduction
under section 80TTB.

ii. Restrictions:
If the aforesaid income is derived from any deposit in a savings account held by, or on behalf of, a firm, an
AOP/BOI, no deduction shall be allowed in respect of such income in computing the total income of any
partner of the firm or any member of the AOP or any individual of the BOI.
In effect, the deduction under this section shall be allowed only in respect of the income derived in form
of the interest on the saving bank deposit (other than time deposits) made by the individual or Hindu
Undivided Family directly.

Deduction in respect of interest on deposits in case of senior citizens [Section 80TTB]

[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

I. Eligible assessee: A senior citizen (a resident individual who is of the age of 60 years or more at any
time during the relevant previous year), whose gross total income includes income by way of interest on
deposits (both fixed deposits and saving accounts) with –
a) a banking company to which Banking Regulation Act, 1949 applies
b) a co-operative society engaged in carrying on the business of banking (including a co-operative land
mortgage bank or a co-operative land development bank)
c) a Post Office.
I. Quantum of deduction: Actual amount of interest on deposits or ₹ 50,000, whichever is lower.
II. Non-availability of deduction to partner/member, where deposit held by firm/AOP/BOI: Where interest
income is derived from any deposit held by, or on behalf of, a firm, an AOP or a BOI, the partner of the
firm or member of AOP/BOI would not be allowed deduction in respect of such income while computing
their total income

ILLUSTRATION 19
Mr. A, a resident individual aged 61 years, has earned business income (computed) of ₹ 1,35,000, lottery income
of ₹ 1,20,000 (gross) during the P.Y. 2024-25. He also has interest on Fixed Deposit of ₹ 30,000 with banks. He
invested an amount of ₹ 1,50,000 in Public Provident Fund account. What is the total income of Mr. A for the A.Y.
2025-26 if he has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A)?

SOLUTION
Computation of total income of Mr. A for A.Y.2025-26
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Note: In case of resident individuals of the age of 60 years or more, interest on bank fixed deposits qualifies for
deduction upto ₹ 50,000 under section 80TTB.

Though the aggregate of deductions under Chapter VI-A is ₹ 1,80,000, however, the maximum permissible
deduction cannot exceed the gross total income exclusive of long term capital gains taxable under section 112
and section 112A, short-term capital gains covered under section 111A and winnings from lotteries of the
assessee.

Therefore, the maximum permissible deduction under Chapter VI-A = ₹ 2,85,000 – ₹ 1,20,000 = ₹ 1,65,000.

ILLUSTRATION 20
Mr. Gurnam, aged 42 years, has salary income (computed) of ₹ 5,50,000 for the previous year ended 31.03.2025.
He has earned interest of ₹ 14,500 on the saving bank account with State Bank of India during the year. Compute
the total income of Mr. Gurnam for the assessment year 2025-26 from the following particulars, assuming he
has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A):

(i) Life insurance premium paid to Birla Sunlife Insurance in cash amounting to ₹ 25,000 for insurance of
life of his dependent parents. The insurance policy was taken on 15.07.2021 and the sum assured on life
of his dependent parents is ₹ 2,00,000.

(ii) Life insurance premium of ₹ 19,500 paid for the insurance of life of his major son who is not dependent
on him. The sum assured on life of his son is ₹ 3,50,000 and the life insurance policy was taken on
30.3.2012.

(iii) Life insurance premium paid by cheque of ₹ 22,500 for insurance of his life. The insurance policy was
taken on 08.09.2020 and the sum assured is ₹ 2,00,000.

(iv) Premium of ₹ 26,000 paid by cheque for health insurance of self and his wife
(v) ₹ 1,500 paid in cash for his health check-up and ₹ 4,500 paid in cheque for preventive health check-up
for his parents, who are senior citizens.

(vi) Paid interest of ₹ 6,500 on loan taken from bank for MBA course pursued by his daughter.
(vii) A sum of ₹ 5,000 donated in cash to an institution approved for purpose of section 80G for promoting
family planning.

SOLUTION
Computation of total income of Mr. Gurnam for the Assessment Year 2025-26
Particulars ₹ ₹
Profits and gains of business or profession 1,35,000
Income from other sources
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- Interest on Fixed Deposit with banks 30,000

- lottery income 1,20,000
Gross Total Income 2,85,000
Less: Deductions under Chapter VIA [See Note below]
Under section 80C
- Deposit in Public Provident Fund 1,50,000
Under section 80TTB
- Interest on fixed deposits with banks 30,000
1,80,000
Restricted to 1,65,000
Total Income 1,20,000

Notes:
1. As per section 80C, no deduction is allowed in respect of premium paid for life insurance of parents,
whether they are dependent or not. Therefore, no deduction is allowable in respect of ₹ 25,000 paid
as premium for life insurance of dependent parents of Mr. Gurnam.
In respect of insurance policy issued on or after 01.04.2012, deduction shall be allowed for life
insurance premium paid only to the extent of 10% of sum assured. In case the insurance policy is
issued before 01.04.2012, deduction of premium paid on life insurance policy shall be allowed up to
20% of sum assured

Therefore, in the present case, deduction of ₹ 19,500 is allowable in full in respect of life insurance of
Mr. Gurnam’s son since the insurance policy was issued before 01.04.2012 and the premium amount is
less than 20% of ₹ 3,50,000. However, in respect of premium paid for life insurance policy of Mr.
Gurnam himself, deduction is allowable only up to 10% of ₹ 2,00,000 since, the policy was issued on
or after 01.04.2012 and the premium amount exceeds 10% of sum assured.

2. As per section 80D, in case the premium is paid in respect of health of a person specified therein and
for health check-up of such person, deduction shall be allowed up to ₹ 25,000. Further, deduction up
to ₹ 5,000 in aggregate shall be allowed in respect of health check-up of self, spouse, children and
parents. In order to claim deduction under section 80D, the payment for health-checkup can be made
in any mode including cash. However, the payment for health insurance premium has to be paid in
any mode other than cash.

Therefore, in the present case, in respect of premium of ₹ 26,000 paid for health insurance of self
and wife, deduction would be restricted to ₹ 25,000. Since the limit of ₹ 25,000 has been exhausted
against medical insurance premium, no deduction is allowable for preventive health check-up for self
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and wife. However, deduction of ₹ 4,500 is allowable in respect of health check-up of his parents,
since it falls within the limit of ₹ 5,000.

3. No deduction shall be allowed under section 80G in case the donation is made in cash of a sum
exceeding ₹ 2,000. Therefore, deduction under section 80G is not allowable in respect of cash
donation of ₹ 5,000 made to an institution approved for the purpose of section 80G for promotion of
family planning.

4. As per section 80TTA, deduction shall be allowed from the gross total income of an individual or Hindu
Undivided Family in respect of income by way of interest on deposit in the savings account included
in the assessee’s gross total income, subject to a maximum of ₹ 10,000. Therefore, deduction of ₹
10,000 is allowable from the gross total income of Mr. Gurnam, though the interest from savings bank
account is ₹ 14,500.

OTHER DEDUCTIONS
Deduction in the case of a person with disability [Section 80U]
[Available only if the individual exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)]

i. Section 80U harmonizes the criteria for defining disability as existing under the Income-tax Rules with
the criteria prescribed under the Persons with Disability (Equal Opportunities, Protection of Rights and
Full Participation) Act, 1995.

ii. Eligible assessee: This section is applicable to a resident individual, who, at any time during the previous
year, is certified by the medical authority to be a person with disability

The benefit of deduction under this section is also available to persons suffering from autism, cerebral
palsy and multiple disabilities.

iii. Quantum of deduction: A deduction of ₹ 75,000 in respect of a person with disability and ₹ 1,25,000 in
respect of a person with severe disability (having disability over 80%) is allowable under this section.

iv. Conditions:
a) The assessee claiming a deduction under this section shall furnish a copy of the certificate issued
by the medical authority in the form and manner, as may be prescribed, along with the return of
income under section 139, in respect of the assessment year for which the deduction is claimed.
b) Where the condition of disability requires reassessment, a fresh certificate from the medical
authority shall have to be obtained after the expiry of the period mentioned on the original
certificate in order to continue to claim the deduction.
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DEDUCTION UNDER SECTION 10AA

A deduction of profits and gains which are derived by an assessee being an entrepreneur from the export of
articles or things or providing any service, shall be allowed from the total income of the assessee.

In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial juridical person,
deduction would be available only if they have exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A). The deduction would be available only under the optional tax regime, where
they pay tax under the normal provisions of the Act.

In case of companies and co-operative societies, deduction would not be available if they opt for the special
provisions u/s 115BAA/ 115BAB and section 115BAD/ 115BAE, respectively. The deduction would be available if
they pay tax under the normal provisions of the Act.

1. Assessees who are eligible for exemption

Exemption is available to all categories of assessees who derive any profits or gains from an
undertaking, being a unit, engaged in the manufacturing or production of articles or things or provision
of any service. Such assessee should be an entrepreneur referred to in section 2(j) of the SEZ Act, 2005
i.e., a person who has been granted a letter of approval by the Development Commissioner under section
15(9) of the said Act.

2. Essential conditions to claim exemption

The exemption shall apply to an undertaking which fulfils the following conditions:
(i) It has begun to manufacture or produce articles or things or provide any service in any SEZ during
the previous year relevant to A.Y.2006-07 or any subsequent assessment year but not later than
A.Y.2020-21.

However, in case where letter of approval, required to be issued in accordance with the provisions of
the SEZ Act, 2005, has been issued on or before 31st March, 2020 and the manufacture or production
of articles or things or providing services has not begun on or before 31st March, 2020 then, the date
for manufacture or production of articles or things or providing services has been extended to 31st
March, 2021 or such other date after 31st March, 2021, as notified by the Central Government.

For e.g. If the SEZ unit has received the necessary approval by 31.3.2020 and begins manufacture or
production of articles or things or providing services on or before 31st March, 2021, then it would be
deemed to have begun manufacture or production of articles or things or providing services during
the A.Y. 2020-21 and would be eligible for exemption under section 10AA. [The Taxation and Other
Laws (Relaxation of Certain Provisions) Act, 2020]
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(ii) The assessee should furnish in the prescribed form, before the date specified in section 44AB i.e.,
one month prior to the due date for furnishing return of income u/s 139(1), the report of a chartered
accountant certifying that the deduction has been correctly claimed.

(iii) No deduction under section 10AA would be allowed to an assessee who does not furnish a return of
income on or before the due date specified u/s 139(1)

Example: An individual, subject to tax audit u/s 44AB, claiming deduction u/s 10AA is required to
furnish return of income on or before 31.10.2025 for A.Y. 2025-26 and the report of a chartered
accountant before 30.9.2025, certifying the deduction claimed u/s 10AA.

(iv) Deduction under section 10AA would be available to a Unit, if the proceeds from sale of goods or
provision of services is received in, or brought into, India by the assessee in convertible foreign
exchange, within a period of 6 months from the end of the previous year or, within such further period
as the competent authority may allow in this behalf.
The export proceeds from sale of goods or provision of services shall be deemed to have been
received in India where such export turnover is credited to a separate account maintained for that
purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.
Meaning of Competent authority – Competent authority means RBI or such authority as is
authorized under any law for the time being in force for regulating payments and dealings in foreign
exchange.

3. Period for which deduction is available

The unit of an entrepreneur, which begins to manufacture or produce any article or thing or provide any
service in a SEZ on or after 1.4.2005, shall be allowed a deduction of:

(i) 100% of the profits and gains derived from the export, of such articles or things or from services for
a period of 5 consecutive assessment years beginning with the assessment year relevant to the
previous year in which the Unit begins to manufacture or produce such articles or things or provide
services, and
(ii) 50% of such profits and gains for further 5 assessment years.
(iii) So much of the amount not exceeding 50% of the profit as is debited to the profit and loss account
of the previous year in respect of which the deduction is to be allowed and credited to a reserve
account (to be called the "Special Economic Zone Re-investment Reserve Account") to be created
and utilised in the manner laid down under section 10AA(2) for next 5 consecutive years.
However, Explanation below section 10AA(1) clarified that amount of deduction under section 10AA
shall be allowed from the total income of the assessee computed in accordance with the provisions
of the Act before giving effect to the provisions of this section and the deduction under section 10AA
shall not exceed such total income of the assessee.
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Example :
An undertaking is set up in a SEZ and begins manufacturing on 15.10.2010. The deduction under
section 10AA shall be allowed as under:
a) 100% of profits of such undertaking from exports from A.Y.2011-12 to A.Y.2015-16.
b) 50% of profits of such undertaking from exports from A.Y.2016-17 to A.Y. 2020-21.
c) 50% of profits of such undertaking from exports from A.Y.2021-22 to A.Y.2025-26 provided certain
conditions are satisfied.

4. Conditions to be satisfied for claiming deduction for further 5 years (after 10 years) [Section
10AA(2)]
Sub-section (2) provides that the deduction under (3)(iii) above shall be allowed only if the following
conditions are fulfilled, namely:
a) the amount credited to the Special Economic Zone Re-investment Reserve Account is utilised-
1. for the purposes of acquiring machinery or plant which is first put to use before the expiry of a
period of three years following the previous year in which the reserve was created; and
2. until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of
the undertaking. However, it should not be utilized for
i. distribution by way of dividends or profits; or
ii. for remittance outside India as profits; or
iii. for the creation of any asset outside India;

b) the particulars, as may be specified by the CBDT in this behalf, have been furnished by the assessee
in respect of machinery or plant. Such particulars include details of the new plant/machinery, name
and address of the supplier of the new plant/machinery, date of acquisition and date on which new
plant/machinery was first put to use. Such particulars have to be furnished along with the return of
income for the assessment year relevant to the previous year in which such plant or machinery was
first put to use.

5. Computation of profits and gains from exports of such undertakings

The profits derived from export of articles or things or services (including computer software) shall be
the amount which bears to the profits of the business of the undertaking, being the unit, the same
proportion as the export turnover in respect of such articles or things or services bears to the total
turnover of the business carried on by the undertaking i.e.

Profits of Unit in SEZ x Export turnover of Unit SEZ

Total turnover of Unit SEZ
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Clarification on issues relating to export of computer software

Section 10AA provides deduction to assessees who derive any profits and gains from export of articles
or things or services (including computer software) from the year in which the Unit begins to
manufacture or produce such articles or things or provide services, as the case may be, subject to
fulfillment of the prescribed conditions. The profits and gains derived from the on site development of
computer software (including services for development of software) outside India shall be deemed to
be the profits and gains derived from the export of computer software outside India.
Meaning of Export turnover: It means the consideration in respect of export by the undertaking being
the unit of articles or things or services received in India or brought into India by the assessee in
convertible foreign exchange within 6 months from the end of the previous year or within such further
period as the competent authority may allow in this behalf.
However, it does not include
o freight
o telecommunication charges
o insurance
attributable to the delivery of the articles or things outside India or expenses incurred in foreign
exchange in rendering of services (including computer software) outside India.

Clarification on issues relating to deduction of freight, telecommunication charges and other

expenses from total turnover
"Export turnover", inter alia, does not include freight, telecommunication charges or insurance attributable
to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in
rendering of services (including computer software) outside India.
CBDT has, vide circular No. 4/2018, dated 14/08/2018, clarified that freight, telecommunication charges and
insurance expenses are to be excluded both from "export turnover" and "total turnover', while working out
deduction admissible under section 10AA to the extent they are attributable to the delivery of articles or things
outside India.
Similarly, expenses incurred in foreign exchange for rendering services outside India are to be excluded from
both "export turnover" and "total turnover" while computing deduction admissible under section 10AA.

ILLUSTRATION 21
Mr. Y furnishes you the following information for the year ended 31.3.2025:
Particulars ₹ (in lacs)

Total turnover of Unit A located in Special Economic Zone 100

Profit of the business of Unit A 30

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Export turnover of Unit A received in India in convertible foreign exchange on or before 50

30.9.2025
Total turnover of Unit B located in Domestic Tariff Area (DTA) 200
Profit of the business of Unit B 20

Compute deduction under section 10AA for the A.Y. 2025-26, assuming that Mr. Y commenced operations in SEZ
and DTA in the year 2019-20 and Mr. Y has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A).

SOLUTION
50% of the profit derived from export of articles or things or services is eligible for deduction under section
10AA, since F.Y. 2024-25 is the sixth year commencing from the year of manufacture or production of articles
or things or provision of services by the Unit in SEZ. As per section 10AA(7), the profit derived from export of
articles or things or services shall be the amount which bears to the profits of the business of the undertaking,
being the Unit, the same proportion as the export turnover in respect of articles or things or services bears to
the total turnover of the business carried on by the undertaking.
Deduction under section 10AA
= Profit of the business of Unit A x Export Turnover of Unit A x 50%
Total Turnover of Unit A
= ₹ 30 lakhs x 50 x 50% = ₹ 7.5 lakhs
100
Note – No deduction under section 10AA is allowable in respect of profits of business of Unit B located in DTA.

Deductions in respect of certain payments

Section Eligible Assessee Eligible Payments Permissible Deduction

80C Individual or HUF Contribution to PPF, Payment of LIC

premium, etc.
Sums paid or deposited in the Sum paid or deposited, subject to a
previous year by way of maximum of ₹ 1,50,000
o Life insurance premium [Deduction would be available only
o Contribution to PPF/ SPF/RPF if the individual/HUF exercises the
and approved superannuation option of shifting out of the default
fund tax regime provided u/s 115BAC(1A)]
o Repayment of housing loan
taken from Govt., bank, LIC,
specified employer etc.
o Tuition fees to any
Indian university, college,
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school for full-time

education of any two children.
o Term deposit for a fixed period
of not less than 5 year with
schedule bank
o Subscription to notified bonds
of NABARD
o Five year post office time
deposit
o Senior Citizen’s Savings Scheme
Account etc.
o Contribution by Central Govt.
employee to additional account
(Tier II A/c) of NPS referred to
u/s 80CCD

80CCC Individual Contribution to certain pension Amount paid or deposited, subject

funds to a maximum of
Any amount paid or deposited to ₹ 1,50,000
keep in force a contract for any [Deduction would be available only
annuity plan of LIC of India or any if the individual exercises the
other insurer for receiving pension option of shifting out of the default
from the fund. tax regime provided u/s 115BAC(1A)]

80CCD Individuals Contribution to Pension Scheme Employee’s Contribution/

employed by the of Central Government Individual’ Contribution
Central Govt or any An individual employed by the In case of a salaried individual,
other employer; Central Government on or after deduction of own contribution u/s
Any other 1.1.2004 or any other employer or 80CCD(1) is restricted to 10% of his
individual any other assessee, being an salary.
assessee. individual, who has paid or In any other case, deduction u/s
deposited any amount in his 80CCD(1) is restricted to 20% of
account under a notified pension gross total income.
scheme [to his individual pension
Further, additional deduction of
account [Tier I A/c] under
upto ₹ 50,000 is available u/s
National Pension Scheme &
80CCD(1B).
Atal Pension Yojana]
[Deduction u/s 80CCD(1) and
80CCD(1B) would be available only if
the individual exercises the option
of shifting out of the default tax
regime provided u/s 115BAC(1A)]
Employer’s Contribution
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The entire employer’s

contribution would be included in
the salary of the employee. The
deduction of employer’s
contribution under section
80CCD(2) would be restricted to
14% of salary, where the employer is
the Central Government or State
Government; and 10% of salary (14%
under default tax regime), in case of
any other employer. [Deduction u/s
80CCD(2) would be available
irrespective of the regime under
which he pays tax.]

Note – As per section 80CCE, maximum permissible deduction u/s 80C, 80CCC & 80CCD(1) is ₹ 1,50,000.
However, the limit ₹ 1.50 lakh under section 80CCE does not apply to deduction under section 80CCD(2)
and 80CCD(1B).
80CCH Individual Contribution to Agniveer Corpus Individual’ Contribution
Fund Whole of the amount paid or
An individual enrolled in the deposited
Agnipath Scheme and subscribing [Deduction would be available only
to the Agniveer Corpus Fund on or if the individual exercises the option
after of shifting out of the default tax
1.11.2022, who has paid or deposited regime provided under section
any amount in his account in the 115BAC(1A)]
Agniveer Corpus Fund
Central Government’s Contribution
The entire Central Government’s
contribution to the Agniveer Corpus
Fund would be included in the salary
of the assessee. Thereafter,
deduction u/s 80CCH(2) would be
available for the same.

[Deduction u/s 80CCH(2) would be

available irrespective of the regime
under which he pays tax]
80D Individual and HUF Medical Insurance Premium
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(1) Any premium paid, otherwise

than by way of cash, to keep in force
an insurance on the health of –
in case of an self, spouse and
individual depende
Maximum ₹ 25,000 (₹ 50,000, in
children
case the individual or his or her
in case of HUF family member
spouse is a senior citizen)

(2) In case of an individual,

contribution, otherwise than by
way of cash, to CGHS or any other
scheme as notified by
Central Government.

(3) Any premium paid, otherwise

than by way of cash, to keep in Maximum ₹ 25,000 (₹
force an insurance on the health of 50,000, in case either or
parents, whether or not dependent both of the parents are
on the individual. senior citizen(s))
Notes:
(i) Any amount paid, otherwise than Amount paid subject to a cap of ₹
by way of cash, on account of 50,000 (in case one parent is a
medical expenditure incurred on senior citizen, in respect of whom
the health of the assessee insurance premium is paid, and the
or his family member or his parent, other is a senior citizen on whom
who is a senior citizen and no medical expenditure is incurred, the
amount has been paid to total deduction cannot exceed ₹
effect or to keep in force an 50,000)
insurance on the health of such
person.
Amount paid subject to a cap of ₹
(ii) Payment, including cash 5,000, in aggregate (subject to the
payment, for preventive health overall individual limits of ₹
check up of himself, spouse, 25,000/ ₹ 50,000, as the case may
dependent children and parents. be)
[Deduction would be available only
if the individual/HUF exercises the
option of shifting out of the default
tax regime provided u/s 115BAC(1A)]
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80DD Resident Individual Maintenance including medical Flat deduction of ₹ 75,000. In case
or HUF treatment of a dependant of severe disability (i.e. person with
disabled 80% or more disability) the flat
Any amount incurred for the deduction shall be ₹ 1,25,000.
medical treatment (including [Deduction would be available only
nursing), training and rehabilitation if the individual/HUF exercises the
of a dependent disabled option of shifting out of the default
and / or tax regime provided u/s 115BAC(1A)]
Any amount paid or deposited
under the scheme framed in this
behalf by the LIC or any other
insurer or Administrator or
Specified Company and approved
by Board.

Meaning of Dependant
(1) (2)
In case of Dependant
An individual Spouse,
children,
parents,
brothers,
sisters
A HUF Any member
Persons mentioned in column (2)
should be wholly or mainly
dependant on the person
mentioned in corresponding column
(1) for support and maintenance.
Such persons should not have
claimed
Deduction under section 80U in
computing total income of that
year.

80DDB Resident Individual Deduction for medical Actual sum paid or ₹ 40,000 (₹
or HUF treatment of specified diseases or 1,00,000, if the payment is for
ailments medical treatment of a senior
citizen), whichever is less, Minus the
Assessee Amount spent amount received from the
An insurance company or reimbursed
For himself Or his
individual dependant being by the employer. [Deduction would
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spouse, children, be available only if the

parents, brothers or individual/HUF exercises the option
sisters wholly or of shifting out of the default tax
mainly dependant regime provided under section
on the individual for 115BAC(1A)]
support and
maintenance
A HUF For any member

80E Individual Interest on loan taken for higher The deduction is available for
education Interest on loan taken interest payment in the initial
from any financial Institution or assessment year (year of
approved charitable institution. commencement of interest
Such loan is taken for pursuing his payment) and seven assessment
higher education or higher years immediately succeeding the
education of his or her relative i.e., initial assessment year (or) until the
spouse or children of the individual interest is paid in full by the
or the student for whom the assessee, whichever is earlier.
individual is the legal guardian. [Deduction would be available only
if the individual exercises the option
of shifting out of the default tax
regime provided under section
115BAC(1A)]

80EE Individuals Deduction for interest on loan Deduction of upto ₹ 50,000

borrowed from any financial would be allowed in respect of
institution [bank/housing finance interest on loan taken from a FI.
company (HFC)] for Acquisition of
residential house property Conditions:
Loan should be sanctioned during
P.Y.2016-17
Loan sanctioned ≤ ₹ 35 lakhs Value
of house ≤ ₹ 50 lakhs The assessee
should not own any residential
house on the date of sanction of
loan. [Deduction would be available
only if the individual exercises the
option of shifting out of the default
tax regime provided under section
115BAC(1A)]
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80EEA Individual Deduction in respect of interest Deduction of upto ₹ 1,50,000

payable on loan taken from a FI would be allowed in respect of
(bank or HFC) for acquisition of interest payable on loan taken from
residential house property a FI for acquisition of house
property.
Conditions:
o Loan should be sanctioned by a
FI during the period between 1st
April 2019 to 31st March 2022.
o Stamp Duty Value of house ≤ ₹
45 lakhs
o The individual should not own any
residential house on the date of
sanction of loan.
o The individual should not be
eligible to claim deduction u/s
80EE.
[Deduction would be available only
if the individual exercises the option
of shifting out of the default tax
regime provided u/s 115BAC(1A)]

80EEB Individual Deduction in respect of interest Deduction of upto ₹ 1,50,000

payable on loan taken from a FI would be allowed in respect of
(bank or certain NBFCs) for interest payable on loan taken for
purchase of electric vehicle purchase of electric vehicle.
Loan should be sanctioned by a FI
during the period from 1.4.2019 to
31.3.2023.
[Deduction would be available only
if the individual exercises the option
of shifting out of the default tax
regime provided u/s 115BAC(1A)]

80G All assessees Donations to certain funds, charitable institutions etc.

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There are four categories of deductions –

Category Donee
1. 100% deduction of amount Prime Minister’s National Relief Fund,
donated, without anyNational Children’s Fund, Swachh
qualifying limit Bharat Kosh, National Defence Fund,
PM CARES Fund etc.
2. 50% deduction of amount Prime Minister’s Drought
donated, without any Relief Fund.
qualifying limit
3. 100% deduction of amount Government or local authority,
donated, subject to institution for promotion of family
qualifying limit planning etc.
4. 50% deduction of amount Government or any local authority
donated, subject to to be used for charitable purpose,
qualifying limit. other than promotion of family
planning, notified temple, church,
gurudwara, mosque etc.

Calculation of Qualifying limit for Category III & IV donations:

Step 1: Compute adjusted total income, i.e., the gross total income as
reduced by the following:
• Deductions under Chapter VI-A, except u/s 80G
• Short term capital gains taxable u/s 111A
• Long term capital gains taxable u/s 112 & 112A

Step 2: Calculate 10% of adjusted total income.

Step 3: Calculate the actual donation, which is subject to qualifying limit.
Step 4: Lower of Step 2 or Step 3 is the maximum permissible
deduction.

Step 5: The said deduction is adjusted first against donations qualifying

for 100% deduction (i.e., Category III donations). Thereafter, 50% of
balance qualifies for deduction under section 80G.
Note - No deduction shall be allowed for donation in excess of ₹ 2,000, if
paid in cash.
[In case of individuals, HUF, AoP (other than a co- operative society) or BoI
or an artificial juridical person, deduction would be available only if they
exercise the option of shifting out of the default tax regime provided under
section 115BAC(1A)]
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80GG Individual not in Rent paid for residential Least of the following is allowable
receipt of house accommodation as deduction:
rent allowance 1. 25% of total income;
2. Rent paid – 10% of total income
3. ₹ 5,000 p.m.
No deduction if any residential
accommodation is owned by the
assessee /his spouse /minor
child/HUF at the place where he
ordinarily resides or performs the
duties of his office or employment
or carries on his business or
profession.
[Deduction would be available only
if the individual exercises the option
of shifting out of the default tax
regime provided under section
115BAC(1A)]
80GGA Any assessee not Donations for scientific research Actual donation
having income and rural development [No deduction shall be allowed for
chargeable under donation in excess of ₹ 2,000, if
the head “Profits paid in cash]
and gains of [Deduction would be available to
business or individual, HUF, AoP (other than a
profession” co- operative society) or BoI or an
artificial juridical person only if they
exercise the option of shifting out
of the default tax regime provided
u/s 115BAC(1A)]
80GGB Indian company Contributions to political parties Actual contribution (otherwise than
(not opting Any sum contributed by it to a by way of cash)
for section registered political party or an
115BAA/ electoral trust.
115BAB)
80GGC Any person, Contributions to political parties Actual contribution (otherwise than
other than local Amount contributed to a registered by way of cash)
authority and an political party or an electoral trust. [An individual, HUF, AoP (other than
artificial juridical a co-operative society) or BoI would
person funded by be eligible for deduction u/s 80GGC
the Government. only if the assessee exercise the
option of shifting out of the default
tax regime provided u/s 115BAC(1A)]
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Deductions in respect of Certain Incomes

As per section 80AC, furnishing return of income on or before due date is mandatory for claiming
deduction in respect of certain incomes.
Section Eligible Assessee Eligible Income Permissible Deduction
80JJAA An assessee to Deduction in respect of 30% of additional employee cost
whom section 44AB employment of new employees incurred in the previous year.
applies, Deduction is allowable for 3
whose Gross total assessment years including
income includes assessment year relevant to
profits and gains the previous year in which such
derived from employment is provided.
business [Deduction would be available
irrespective of the regime under
which the employer pays tax]

80QQB Resident Royalty income, etc., of authors Income derived in the exercise
individual, being of certain books other than text of profession or
an author books ₹ 3,00,000, whichever is less.
Consideration for assignment or In respect of royalty or copyright
grant of any of his interests in the fee received otherwise than by
copyright of any book, being a way of lumpsum, income to be
work of literary, artistic or restricted to 15% of value of
scientific nature or royalty or books sold during the relevant
copyright fee received as previous year.
lumpsum or otherwise.
[Deduction would be available
only if the individual exercises
the option of shifting out of the
default tax regime provided
under section 115BAC(1A)]
80RRB Resident Royalty on patents Whole of such income or
individual, being a Any income by way of royalty on ₹ 3,00,000, whichever is less.
patentee patents registered on or after [Deduction would be available
1.4.2003 only if the individual exercises
the option of shifting out of the
default tax regime provided u/s
115BAC(1A)]

Deductions in respect of Other Income

Section Eligible Assessee Eligible Income Permissible Deduction

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80TTA Individual or a HUF, Interest on deposits in savings Actual interest subject to a

other than a account Interest on deposits in a maximum of ₹ 10,000. [Deduction
resident senior savings account with a bank, a co- would be available only if the
citizen operative society or a post office individual/HUF exercises the
(not being time deposits, which are option of shifting out of the default
repayable on expiry of fixed tax regime provided u/s
periods) 115BAC(1A)]

80TTB Resident senior Interest on deposits Interest on Actual interest or ₹ 50,000,

citizen (i.e. an deposits (both fixed deposits and whichever is less. [Deduction
individual of the age saving accounts) with banking would be available only if the
of 60 years or more company, co-operative society individual exercises the option
at any time during engaged in the business of banking of shifting out of the default tax
the previous or a post office. regime provided u/s 115BAC(1A)]
year)
Other Deductions
Section Eligible Assessee Condition for deduction Permissible Deduction
80U Resident Individual Deduction in case of a person with Flat deduction of ₹ 75,000, in case
disability of a person with disability. Flat
Any person, who is certified by the deduction of ₹ 1,25,000, in case of
medical authority to be a person a person with severe disability
with disability. (80% or more disability).
[Deduction would be available only
if the individual exercises the
option of shifting out of the default
tax regime provided u/s
115BAC(1A)]

Deduction under section 10AA

Section Eligible Assessee Eligible Income Permissible Deduction

10AA An assessee who Profits derived from exports of such Deduction for 15 consecutive
derives profits from articles or things or export of assessment years
an under- taking, services (including computer Amount of deduction =
being a Unit software). Profits of Unit in SEZ x
established in SEZ, Conditions for deduction Export turnover of Unit SEZ
which begins to a. Proceeds to be received in
Total turnover of Unit SEZ
manufacture or convertible foreign exchange
produce articles or within 6 months from the end of
the P.Y. or such further period as
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things or provide the competent authority may Years 1 to 5 - 100% of such profits
any service on or allow in this behalf. would be exempt in the first five
after 1.4.2005 but b. The report of chartered years;
before 1.4.2021 accountant certifying that the Years 6 to 10 - 50% of such
deduction has been correctly profits in the next five years; and
claimed should be furnished Years 11 to 15 - In the last five
before the date specified in years, 50% of such profits subject
section 44AB. to transfer to SEZ Re-investment
c. Return of income to be filed Reserve Account.
on or before due date u/s 139(1). [In case of individuals, HUF, AoP
(other than a co- operative
society), BoI or an artificial juridical
person, deduction would be
available only if they exercise the
option of shifting out of the default
tax regime provided u/s
115BAC(1A)]

TEST YOUR KNOWLEDGE

1. Examine the following statements with regard to the provisions of the Incometax Act, 1961:
i. During the financial year 2024-25, Mr. Amit paid interest on loan availed by him for his son's higher
education. His son is already employed in a firm. Mr. Amit will get the deduction under section 80E.
ii. Subscription to notified bonds of NABARD would qualify for deduction under section 80C.
iii. In order to be eligible to claim deduction under section 80C, investment/ contribution/ subscription
etc. in eligible or approved modes, should be made from out of income chargeable to tax.
iv. Where an individual repays a sum of ₹ 30,000 towards principal and ₹ 14,000 as interest in respect
of loan taken from a bank for pursuing eligible higher studies, the deduction allowable under section
80E is ₹ 44,000 irrespective of the tax regime.
v. Mrs. Sheela, widow of Mr. Satish (who was an employee of M/s. XYZ Ltd.), received ₹ 7 lakhs on
1.5.2024, being amount standing to the credit of Mr. Satish in his NPS Account, in respect of which
deduction has been allowed under section 80CCD to Mr. Satish in the earlier previous years. Such
amount received by her as a nominee on closure of the account is deemed to be her income for
A.Y.2025-26
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vi. Mr. Vishal, a Central Government employee, contributed ₹ 50,000 towards Tier II account of NPS. The
same would be eligible for deduction under section 80CCD. He has exercised the option of shifting
out of the default tax regime provided under section 115BAC(1A)

2. Examine the allowability of the following if the assessees have exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A):
I. Rajan, a resident individual, has to pay to a hospital for treatment ₹ 62,000 and spent nothing for
life insurance or for maintenance of dependent disabled.
II. Varun, a resident Indian, has spent nothing for treatment in the previous year and deposited ₹
25,000 with LIC for maintenance of dependant disabled.
III. Hari, a resident individual, has incurred ₹ 20,000 for treatment and ₹ 25,000 was deposited with LIC
for maintenance of dependant disabled.

3. For the A.Y. 2025-26, the Gross total income of Mr. Chaturvedi, a resident in India, was ₹ 8,18,240 which
includes long-term capital gain of ₹ 2,45,000 taxable under section 112 and Short-term capital gain of ₹
58,000. The Gross total income also includes interest income of ₹ 12,000 from savings bank deposits with
banks and ₹ 40,000 interest on fixed deposits with banks. Mr. Chaturvedi has invested in PPF ₹ 1,20,000
and also paid a medical insurance premium ₹ 51,000. Mr. Chaturvedi also contributed ₹ 50,000 to Public
Charitable Trust eligible for deduction under section 80G by way of an account payee cheque. Compute
the total income and tax thereon of Mr. Chaturvedi, who is 70 years old as on 31.3.2025, in a tax efficient
manner.

4. Mr. Rajmohan whose gross total income was ₹ 6,40,000 for the financial year 2024-25, furnishes you the
following information:
(i) Repayment of loan taken from SBI for acquisition of residential house (self-occupied) - ₹ 50,000.
(ii) Five-year post-office time deposit - ₹ 20,000
(iii) Donation to a recognized charitable trust ₹ 25,000 which is eligible for deduction under section
80G at the applicable rate.

(iv) Interest on loan taken for higher education of spouse paid during the year - ₹ 10,000.
Compute the total income of Mr. Rajmohan for the A.Y. 2025-26 if he has exercised the option of shifting
out of the default tax regime provided under section 115BAC(1A)

5. Compute the eligible deduction under Chapter VI-A for the A.Y. 2025-26 of Ms. Roma, aged 40 years, who
has a gross total income of ₹ 15,00,000 for the A.Y. 2025-26 and has exercised the option of shifting out
of the default tax regime provided under section 115BAC(1A). She provides the following information about
her investments/payments during the P.Y. 2024-25
SIR
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Sl. Particulars Amount

I. Life Insurance premium paid (Policy taken on 31-03- 2012 and sum 35,000
assured is ₹ 4,70,000)
II. Public Provident Fund contribution 1,50,000
III. Repayment of housing loan to Bhartiya Mahila Bank, Bangalore 20,000

IV. Payment to L.I.C. Pension Fund 1,40,000

V. Mediclaim Policy taken for self, wife and dependent children, premium 30,000
paid by cheque
VI. Medical Insurance premium paid by cheque for parents (Senior Citizens) 52,000

6. Mr. Rudra has one unit at Special Economic Zone (SEZ) and other unit at Domestic Tariff Area (DTA). He
provides the following details for the previous year 2024-25.

Particulars Mr. Rudra Unit in DTA

Total Sales 6,00,00,000 2,00,00,000

Export Sales 5,60,00,000 1,60,00,000
Net Profit 80,00,000 20,00,000

Proceeds from export sales in SEZ received in convertible foreign exchange by 30.9.2025 is ₹ 3,00,00,000.
He has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
Calculate the eligible deduction under section 10AA of the Income-tax Act, 1961, for the Assessment Year
2025-26 if both the units were set up and start manufacturing from 22- 05-2016.

ANSWERS
1.
i. The statement is correct. The deduction under section 80E is available to an individual in respect
of interest on loan taken for his higher education or for the higher education of his relative only if he
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A). For
this purpose, relative means, inter alia, spouse and children of the individual. Therefore, Mr. Amit will
get the deduction under section 80E in respect of interest on loan availed by him for his son’s higher
education, if he exercises the option of shifting out of the default tax regime provided under section
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115BAC(1A). It is immaterial that his son is already employed in a firm. This would not affect Mr. Amit’s
eligibility for deduction under section 80E.

ii. The statement is correct. Under section 80C(2) subscription to such bonds issued by NABARD (as
the Central Government may notify in the Official Gazette) would qualify for deduction under section
80C, if the assessee has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A)

iii. The statement is not correct. There is no stipulation under section 80C that the investment,
subscription, etc. should be made from out of income chargeable to tax.

iv. The statement is not correct. An individual would not be eligible for deduction u/s 80E if he pays
tax under default tax regime under section 115BAC. If he has exercised the option of shifting out of
the default tax regime provided under section 115BAC(1A), deduction under section 80E would be
available in respect of interest paid on education loan. Hence, the deduction will be limited to interest
of ₹ 14,000, if he has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A)

v. The statement is not correct. The proviso to section 80CCD(3) provides that the amount received
by the nominee, on closure of NPS account on the death of the assessee, shall not be deemed to be
the income of the nominee. Hence, amount received by Mrs. Sheela would not be deemed to be her
income for A.Y. 2025-26

vi. The statement is not correct. Contribution to Tier II account of NPS would qualify for deduction
under section 80C and not section 80CCD.

2.
i. The deduction of ₹ 75,000 under section 80DD is allowable to Rajan, irrespective of the amount of
expenditure incurred or paid by him. If the expenditure is incurred in respect of a dependant with
severe disability, the deduction allowable is ₹ 1,25,000.

ii. The assessee Varun has deposited ₹ 25,000 for maintenance of dependent disabled. He is, however,
eligible to claim ₹ 75,000 since the deduction of ₹ 75,000 is allowed, irrespective of the amount
deposited with LIC. In the case of dependant with severe disability, the deduction allowable is ₹
1,25,000.

iii. Section 80DD allows a deduction of ₹ 75,000 irrespective of the actual amount spent on
maintenance of a dependent disabled and/or actual amount deposited with LIC. Therefore, the
deduction will be ₹ 75,000 even though the total amount incurred/deposited is only ₹ 45,000. If the
dependant is a person with severe disability the quantum of deduction is ₹ 1,25,000.
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3. Computation of total income and tax liability of Mr. Chaturvedi for the A.Y. 2025-26 under default
tax regime

Particulars ₹

Gross total income incl. long term capital gain 8,18,240

Less: Deductions under Chapter VI-A -
No deduction would be available under default tax regime u/s 115BAC
Total income 8,18,240

Tax on total income

LTCG ₹ 2,45,000 x 20% 49,000
Balance total income ₹ 5,73,240 13,662

62,662
Add: Health and Education cess @4% 2,506
Total tax liability 65,168

Total tax liability (Rounded off) 65,170

Computation of total income and tax liability of Mr. Chaturvedi for the A.Y. 2025-26 under
the optional tax regime (i.e., the normal provisions of the Act)

Particulars ₹ ₹

Gross total income incl. long term capital gain 8,18,240

Less: Long term capital gain 2,45,000
5,73,240
Less: Deductions under Chapter VI-A
Under section 80C in respect of PPF deposit 1,20,000

Under section 80D (it is assumed that premium of ₹ 51,000 is paid by 50,000
otherwise than by cash. The deduction would be restricted to ₹ 50,000,
since Mr. Chaturvedi is a senior citizen)

Under section 80G (See Notes 1 & 2 below) 17,662

Under section 80TTB (See Note 3 below) 50,000 2,37,662
Total income (excluding long term capital gains) 3,35,578
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Total income (including long term capital gains) 5,80,578

Total income (rounded off) 5,80,580
Tax on total income (including long-term capital gains of ₹ 2,45,000)
LTCG ₹ 2,45,000 x 20% 49,000
Balance total income ₹ 3,35,580 (See Note 4 below) 1,779
50,779
Add: Health and Education cess @4% 2,031
Total tax liability 52,810

Since the tax liability is lower under the optional tax regime (i.e., normal provisions of the Act) as
compared to the default tax regime, Mr. Chaturvedi should exercise the option of shifting out of the
default tax regime provided under section 115BAC(1A)

Notes:
i. Computation of deduction under section 80G:

Particulars ₹

Gross total income (excluding long term capital gains) 5,73,240

Less: Deduction under section 80C, 80D & 80TTB 2,20,000
3,53,240

10% of the above 35,324

Contribution made 50,000

Lower of the two eligible for deduction under section 35,324

Deduction under section 80G – 50% of ₹ 35,324 17,662

ii. Deduction under section 80G is allowed only if amount is paid by any mode other than cash, in case
of amount exceeding ₹ 2,000. Therefore, the contribution made to public charitable trust is eligible
for deduction since it is made by way of an account payee cheque.

iii. Deduction of upto ₹ 50,000 under section 80TTB is allowed to a senior citizen if gross total income
includes interest income on bank deposits, both fixed deposits and savings account.

iv. Mr. Chaturvedi, being a senior citizen is eligible for a higher basic exemption of ₹ 3,00,000
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4. Computation of total income of Mr. Rajmohan for the A.Y.2025-26

Particulars ₹ ₹

Gross Total Income 6,40,000

Less: Deduction under Chapter VI-A

Under section 80C

Repayment of loan taken for acquisition of residential 50,000

house
Five year time deposit with Post Office 20,000

70,000
Under section 80E

Interest on loan taken for higher education of spouse, 10,000

being a relative.
Under section 80G (See Note below)
Donation to recognized charitable trust (50% of ₹ 12,500 92,500
25,000)
Total Income 5,47,500

Note: In case of deduction under section 80G in respect of donation to a charitable trust, the net
qualifying amount has to be restricted to 10% of adjusted total income, i.e., gross total income less
deductions under Chapter VI-A except 80G. The adjusted total income is, therefore, ₹ 5,60,000 (i.e.
6,40,000 – ₹ 80,000), 10% of which is ₹ 56,000, which is higher than the actual donation of ₹ 25,000.
Therefore, the deduction under section 80G would be ₹ 12,500, being 50% of the actual donation of ₹
25,000.

5. Computation of eligible deduction under Chapter VI-A of Ms. Roma for A.Y. 2025-26

Particulars ₹ ₹
Deduction under section 80C
Life insurance premium paid ₹ 35,000 (allowed in full since the same 35,000
is within the limit of 20% of the sum assured, the policy being taken
before 1.4.2012)
Public Provident Fund 1,50,000
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Repayment of housing loan to Bhartiya Mahila Bank, Bangalore 20,000

2,05,000
Restricted to a maximum of ₹ 1,50,000 1,50,000
Deduction under section 80CCC for payment towards LIC pension 1,40,000
fund
2,90,000
As per section 80CCE, aggregate deduction under, inter alia, section
1,50,000
80C and 80CCC, is restricted to

Deduction under section 80D

Payment of medical insurance premium of ₹ 30,000 towards 25,000

medical policy taken for self, wife and dependent children restricted
to
Medical insurance premium paid ₹ 52,000 for parents, being senior
citizens, restricted to 50,000 75,000

Eligible deduction under Chapter VI-A 2,25,000

6. Computation of deduction u/s 10AA of the Income-tax Act, 1961

As per section 10AA, in computing the total income of Mr. Rudra from his unit located in a Special
Economic Zone (SEZ), which begins to manufacture or produce articles or things or provide any services
during the previous year relevant to the assessment year commencing on or after 01.04.2006 but before
01.04.2021, there shall be allowed a deduction of 100% of the profit and gains derived from export of
such articles or things or from services for a period of five consecutive assessment years beginning
with the assessment year relevant to the previous year in which the Unit begins to manufacture or
produce such articles or things or provide services, as the case may be, and 50% of such profits for
further five assessment years

Since Mr. Rudra has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A), he would be eligible for deduction u/s 10AA.

The deduction u/s 10AA would be available only if Mr. Rudra furnishes report of chartered accountant
before the date specified in section 44AB and files return of income on or before due date u/s 139(1).

Since A.Y. 2025-26 is the 9th assessment year from A.Y. 2017-18, relevant to the previous year 2016-17, in
which the SEZ unit began manufacturing of articles or things, it shall be eligible for deduction of 50% of
the profits derived from export of such articles or things, assuming all the other conditions specified in
section 10AA are fulfilled.
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= Profits of Unit in SEZ x Export turnover of Unit in SEZ x 50%

Total turnover of Unit in SEZ

= 60 lakhs x 300 lakhs x 50% = ₹ 22.50 lakhs

400 lakhs

Export turnover of Unit in SEZ is the export sales in SEZ received in convertible foreign exchange by
30.9.2025 which is ₹ 3,00,00,000.

The unit set up in Domestic Tariff Area is not eligible for the benefit of deduction u/s 10AA in respect of
its export profits, in both the situations.

Working Note:
Computation of total sales, export sales and net profit of unit in SEZ

Particulars Rudra Ltd. (₹) Unit in DTA (₹) Unit in SEZ (₹)

Total Sales 6,00,00,000 2,00,00,000 4,00,00,000

Export Sales 4,60,00,000 1,60,00,000 3,00,00,000

Net Profit 80,00,000 20,00,000 60,00,000

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ADVANCE TAX, TAX DEDUCTION AT SOURCE AND TAX

CHAPTER - 6
COLLECTION AT SOURCE

CHAPTER OVERVIEW

Certificate of deduction of tax at a lower rate

Deduction of tax at source [Section 192 to 196]
[Section 197]

Tax deduction at source

No deduction of tax in certain cases [Section

Miscellaneous Provisions [Section 198 to 206AB]
197A]

Advance Tax

Liability to pay Instalments Interest on non-

Computation of advance Credit for payment / short
nadvance tax advance tax
[Section 207 of advance tax tax and due payment or
[Section 209] dates [Section deferment of advance
to 208] 219]
[Section 211] tax [Section 234B &
234C]

TCS for non- filers of income- tax return and non-

Collection of tax at source [Section 206C]
furnishers of PAN [Section 206CCA & 206CC]

Tax collection at source

Difference between TDS and TCS Common Number for TDS and TCS [Section 203A]
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DEDUCTION OF TAX AT SOURCE AND ADVANCE

PAYMENT [SECTION 190]
The total income of an assessee for the previous year is taxable in the relevant assessment year. For example,
the total income for the P.Y. 2023-24 is taxable in the A.Y. 2024-25. However, income-tax is recovered from the
assessee in the previous year itself through –
(1) Tax deduction at source (TDS)
(2) Tax collection at source (TCS)
(3) Payment of advance tax

Another mode of recovery of tax is from the employer through tax paid by him under section 192(1A) on the
non-monetary perquisites provided to the employee.

These taxes are deductible from the total tax due from the assessee. The assessee, while filing his return of
income, has to pay self-assessment tax under section 140A, if tax is due on the total income as per his return
of income after adjusting, inter alia, TDS, TCS, relief of tax claimed under section 89, tax credit claimed to be
set off in accordance with the provisions of section 115JD, in case assessee exercises the option of shifting out
of the default tax regime provided under section 115BAC(1A), any tax or interest payable according to the
provisions of section 191(2) and advance tax.

DIRECT PAYMENT [SECTION 191]

Direct payment of tax - Section 191(1) provides that in the following cases, tax is payable by the assessee
directly –
i. in the case of income in respect of which tax is not required to be deducted at source; and
ii. income in respect of which tax is liable to be deducted but is not actually deducted.

In view of this provision, the proceedings for recovery of tax necessarily had to be taken against the assessee
whose tax was liable to be deducted, but not deducted.

In order to overcome this difficulty, the Explanation to this section provides that if any person, including the
principal officer of a company –
(i) who is required to deduct tax at source; or
(ii) an employer paying tax on non-monetary perquisites under section 192(1A),
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does not deduct, or after deducting fails to pay such tax, or does not pay, the whole or part of the tax, then,
such person shall be deemed to be an assessee-in default.

However, if the assessee himself has paid the tax, this provision will not apply.

DEDUCTION OF TAX AT SOURCE

Salary [Section 192]

1. Applicability of TDS under section 192

This section casts an obligation on every person responsible for paying any income chargeable to tax
under the head ‘Salaries’ to deduct income-tax at the time of payment on the amount payable.

2. Manner of deduction of tax

i. Such income-tax has to be calculated at the average rate of income tax computed on the basis
of the rates in force for the relevant financial year in which the payment is made, on the estimated
total income of the assessee where the employee intimates to the employer his intent to exercise
the option of shifting out of the default tax regime provided under section 115BAC(1A).

ii. Average rate of income-tax means the rate arrived at by dividing the amount of income-tax
calculated on the total income, by such total income.

iii. A deductor, being an employer, has to seek information from each of its employees having income
under section 192 regarding their intended tax regime and each such employee would intimate
the same to the deductor, being his employer, regarding his intended tax regime for each year
and upon intimation, the deductor has to compute his total income, and deduct tax at source
thereon according to the option exercised.

If intimation is not made by the employee, it would be presumed that the employee continues to
be in the default tax regime u/s 115BAC and has not exercised the option to opt out of the default
tax regime. Accordingly, in such a case, the employer has to deduct tax at source, on income under
section 192, in accordance with the rates provided under section 115BAC(1A).

It is also clarified that the intimation would not amount to exercising option under section 115BAC
(6) and the person shall be required to do so separately in accordance with the provisions of that
section [Circular No. 4/2023 dated 5.4.2023].

iv. The concept of payment of tax on non-monetary perquisites has been provided in sections 192(1A)
and (1B). These sections provide that the employer may pay this tax, at his option, in lieu of
deduction of tax at source from salary payable to the employee. Such tax will have to be worked
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out at the average rate applicable to aggregate salary income of the employee and payment of
tax will have to be made every month along with tax deducted at source on monetary payment of
salary, allowances etc.

ILLUSTRATION 1
Mr. A, the employer, pays gross salary including allowances and monetary perquisites amounting to ₹
7,30,000 to his General Manager. Besides, the employer provides non-monetary perquisites to him
whose value is estimated at ₹ 1,20,000. The General Manager is exercising the option to shift out of the
default tax regime and pay tax under the optional tax regime as per the normal provisions of the Act.
What is the tax implication in the hands of Mr. A, the employer and General Manager, the employee?

SOLUTION
Rs.
Gross salary, allowances and monetary perquisites 7,30,000
Non-Monetary perquisites 1,20,000
8,50,000
Less: Standard deduction under section 16(ia) 50,000
8,00,000
Tax Liability 75,400
Average rate of tax (₹ 75,400 / ₹ 8,00,000 × 100) 9.425%

Mr. A can deduct ₹ 75,400 at source from the salary of the General Manager at the time of payment.
Alternatively, Mr. A can pay tax on non-monetary perquisites as under –
Tax on non-monetary perquisites = 9.425% of ₹ 1,20,000 = ₹ 11,310
Balance to be deducted from salary = ₹ 64,090
If Mr. A pays tax of ₹ 11,310 on non-monetary perquisites, the same is not a deductible expenditure as
per section 40(a). The amount of tax paid towards non-monetary perquisite by the employer, however,
is not chargeable to tax in the hands of the employee as per section 10(10CC).

v. In cases where an assessee is employed simultaneously under more than one employer or the
assessee takes up a job with another employer during the financial year after his resignation or
retirement from the services of the former employer, he may furnish the details of the income
under the head “Salaries” due or received by him from the other employer, the tax deducted
therefrom and such other particulars to his current employer. Thereupon, the subsequent
employer should take such information into consideration and then deduct the tax remaining
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payable in respect of the employee’s remuneration from both the employers put together for the
relevant financial year.

vi. In respect of salary payments to employees of Government or to employees of companies, co-

operative societies, local authorities, universities, institutions, associations or bodies, deduction
of tax at source should be made after allowing relief u/s 89(1), where eligible.

vii. A tax payer having salary income in addition to other income chargeable to tax for that financial
year, may send to the employer, the following particulars of:
a) such other income and of any tax deducted under any other provision;
b) loss, if any, under the head ‘Income from house property’ if the assessee intimated to the
employer his intent to exercise the option of shifting out of the default tax regime provided
under section 115BAC(1A).

The employer shall take the above particulars into account while calculating tax deductible at
source.

viii. It is also provided that except in cases where loss from house property has been adjusted against
salary income, the tax deductible from salary should not be reduced as a consequence of making
the above adjustments. Loss from house property would be adjusted against salary where the
assessee intimated to the employer his intent to exercise the option of shifting out of the default
tax regime provided under section 115BAC(1A). However, loss under the head “income from house
property” shall be allowed to be set off against salary and income under any other head subject
to maximum of ₹ 2,00,000.

3. Furnishing of statement of particulars of perquisites or profits in lieu of salary by employer to

employee

Sub-section (2C) provides that the employer shall furnish to the employee, a statement in Form No. 12BA
giving correct and complete particulars of perquisites or profits in lieu of salary provided to him and the
value thereof. The statement shall be in the prescribed form and manner. This requirement is applicable
only where the salary paid/payable to an employee exceeds ₹ 1,50,000. For other employees, the
particulars of perquisites/profits in lieu of salary shall be given in Form 16 itself.

4. Circular issued by CBDT

Every year, the CBDT issues a circular giving details and direction to all employers for the purpose of
deduction of tax from salaries payable to the employees during the relevant financial year. These
instructions should be followed.
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5. Requirement to obtain evidence/ proof/ particulars of claims from the employee by the employer
Sub-section (2D) casts responsibility on the person responsible for paying any income chargeable
under the head “Salaries” to obtain from the assessee, the evidence or proof or particulars of prescribed
claims (including claim for set-off of loss) under the provisions of the Act in the prescribed form and
manner, for the purposes of –
a) estimating income of the assessee; or
b) computing tax deductible under section 192(1).
In case an employee has intimated his employer of his intent to exercise the option of shifting out of
the default tax regime provided under section 115BAC(1A), Rule 26C requires furnishing of evidence of
the following claims by him to the person responsible for making payment under section 192(1) in Form
No.12BB for the purpose of estimating his income or computing the amount of tax to be deducted at
source:

S. No. Nature of Claim Evidence or particulars

1. House Rent Allowance Name, address and PAN of the landlord(s) where
the aggregate rent paid during the previous year
exceeds ₹ 1 lakh.
2. Leave Travel Concession or Assistance Evidence of expenditure

3. Deduction of interest under the head Name, address and PAN of the lender
“Income from house property”
4. Deduction under Chapter VI-A Evidence of investment or expenditure.

Interest on securities [Section 193]

1. Person responsible for deduction of tax at source
This section casts responsibility on every person responsible for paying to a resident any income by
way of interest on securities.

2. Meaning of interest on securities [Section 2(28B)]

Interest on securities means
a) interest on any security of the Central Government or a State Government
b) interest on debentures or other securities for money issued by or on behalf of a local authority or a
company or a corporation established by a Central, State or Provincial Act.

3. Rate of TDS
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Such person is vested with the responsibility to deduct income-tax at the rates in force from the amount
of interest payable.

The rate at which tax is deductible under section 193 is 10%, both in the case of domestic companies
and non-corporate resident assessees.

4. Time of tax deduction at source

Tax should be deducted at the time of credit of such income to the account of the payee or at the time
of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
Where any income by way of interest on securities is credited to any account in the books of account
of the person liable to pay such income, such crediting is deemed to be credit of such income to the
account of the payee and tax has to be deducted at source. The account to which such interest is
credited may be called “Interest Payable account” or “Suspense account” or by any other name.

5. Non-applicability of TDS under section 193

No tax deduction is to be made from any interest payable:
a) on National Development Bonds;
b) on 7-year National Savings Certificates (IV Issue);
c) on debentures issued by any institution or authority or any public sector company or any co-
operative society (including a co-operative land mortgage bank or a co-operative land development
bank), as notified by the Central Government;

Accordingly, the Central Government has, vide Notification No. 27 & 28/2018, dated 18-06-2018,
notified-

1. “Power Finance Corporation Limited 54EC Capital Gains Bond” issued by Power Finance Corporation
Limited {PFCL} and

2. “Indian Railway Finance Corporation Limited 54EC Capital Gains Bond” issued by Indian Railway
Finance Corporation Limited {IRFCL}

Thus, no tax is required to be deducted at source on interest payable on “Power Finance Corporation
Limited 54EC Capital Gains Bond” and “Indian Railway Finance Corporation Limited 54EC Capital Gains
Bond”.

d) on any security of the Central Government or a State Government

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Note – It may be noted that tax has to be deducted at source in respect of interest payable on 8%
Savings (Taxable) Bonds, 2003, or 7.75% Savings (Taxable) Bonds, 2018, only if such interest payable
exceeds ₹ 10,000 during the financial year.

e) on any debentures (whether listed or not listed on a recognized stock exchange) issued by the
company in which the public are substantially interested to a resident individual or HUF. However
• the interest should be paid by the company by an account payee cheque;
• the amount of such interest or the aggregate thereof paid or likely to be paid during the financial
year by the company to such resident individual or HUF should not exceed ₹ 5,000.

f) on securities to LIC, GIC, subsidiaries of GIC or any other insurer, provided –

• the securities are owned by them or
• they have full beneficial interest in such securities.

Interest other than interest on securities [Section 194A]

This section deals with the scheme of deduction of tax at source from interest other than interest on securities.
The main provisions are the following:

1. Applicability of TDS under section 194A

This section applies only to interest, other than “interest on securities”, credited or paid by assessees
other than individuals or Hindu undivided family. However, an individual or Hindu undivided family whose
total sales, gross receipts or turnover from the business or profession carried on by him exceed ₹ 1 crore
in case of business and ₹ 50 lakhs in case of profession during the immediately preceding financial year
is liable to deduct tax at source under this section.

2. Time of tax deduction at source

The deduction of tax must be made at the time of crediting such interest to the account of the payee
or at the time of its payment in cash or by any other mode, whichever is earlier.

Where any such interest is credited to any account in the books of account of the person liable to pay
such income, such crediting is deemed to be credit of such income to the account of the payee and the
tax has to be deducted at source. The account to which such interest is credited may be called “Interest
Payable account” or “Suspense account” or by any other name.

3. Rate of TDS
The rate at which the deduction is to be made is given in Part II of the First Schedule to the Annual
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Finance Act. The rate at which tax is to be deducted is 10% both in the case of non-corporate resident
assessees and domestic companies.

4. Non-applicability of TDS under section 194A

No deduction of tax shall be made in the following cases:
a) If the aggregate amount of interest paid or credited during the financial year does not exceed ₹
5,000.

This limit is ₹ 40,000 where the payer is a –

• banking company;
• a co-operative society engaged in banking business; and
• post office and interest is credited or paid in respect of any deposit under notified schemes.

In respect of (i), (ii) and (iii) above, the limit is ₹ 50,000, in case of payee, being a senior citizen.
The limit will be calculated with respect to income credited or paid by a branch of a banking company
or a co-operative society or a public company in case of:

(i) time deposits with a banking company

(ii) time deposits with a co-operative society carrying on the business of banking; and
(iii) deposits with housing finance companies, provided:
• they are public companies formed and registered in India
• their main object is to carry on the business of providing long-term finance for
construction or purchase of houses in India for residential purposes.

The threshold limit will be reckoned with reference to the total interest credited or paid by the banking
company or the co-operative society or the public company, as the case may be, (and not with
reference to each branch), where such banking company or co-operative society or public company
has adopted core banking solutions.

Section 206A requires every banking company or co-operative society or public company referred to
in above to prepare such statement, for such period as may be prescribed
• if they are responsible for paying to a resident,
• the payment should be of any income not exceeding ₹ 40,000, where the payer is a banking
company or a co-operative society, and ₹ 5,000 in any other case and
• such income should be by way of interest (other than interest on securities)
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The statement should be in the prescribed form and should be delivered to the DGIT (Systems) or
person authorized by him.

b) Interest paid or credited by a firm to any of its partners;

c) Interest paid or credited in respect of deposits under any scheme framed by the Central Government
and notified by it in this behalf;

d) Interest income credited or paid in respect of deposits (other than time deposits made on or after
1.7.1995) with a bank to which the Banking Regulation Act, 1949 applies;

e) Income paid or credited by a co-operative society (other than a co operative bank) to a member
thereof or to such income credited or paid by a co-operative society to any other co-operative
society;

f) Interest income credited or paid in respect of –

• deposits with primary agricultural credit society or a primary credit society or a co-operative
land mortgage bank or a co operative land development bank;

• deposit (other than time deposits made on or after 1.7.1995) with a co-operative society [other
than cooperative society or bank referred to in (i)] engaged in carrying on the business of
banking.

From a combined reading of (e) and (f), it can be inferred that a co operative bank other than
mentioned in (i) above is required to deduct tax at source on payment of interest on time deposit to
its members. However, it is not required to deduct tax from the payment of interest on time deposit,
to a depositor, being a co-operative society.

However, a cooperative society referred to in (e) or (f) is liable to deduct tax if –

1. the total sales, gross receipts or turnover of the co-operative society exceeds ₹ 50 crore
during the financial year immediately preceding the financial year in which interest is
credited or paid; and
2. the amount of interest or the aggregate amount of interest credited or paid, or is likely to be
credited or paid, during the financial year is more than ₹ 50,000 in case of payee being a
senior citizen and ₹ 40,000, in any other case.

Thus, such co-operative society is required to deduct tax under section 194A on interest credited
or paid by it –
• to its member or to any other co-operative society; or
• in respect of deposits with a primary agricultural credit society or a primary credit society
or a co-operative land mortgage bank or a co-operative land development bank or
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• in respect of deposits with a co-operative bank other than a co operative society or bank
engaged in carrying on the business of banking

g) Interest income credited or paid by the Central Government under any provision of the Income-tax
Act, 1961.

h) Interest paid or credited to the following entities:

• banking companies, or co-operative societies engaged in the business of banking, including co-
operative land mortgage banks;
• financial corporations established by or under any Central, State or Provincial Act.
• the Life Insurance Corporation of India.
• companies and co-operative societies carrying on the business of insurance.
• the Unit Trust of India; and
• notified institution, association, body or class of institutions, associations or bodies (National
Skill Development Fund and Housing and Urban Development Corporation Ltd. (HUDCO), New
Delhi have been notified by the Central Government for this purpose).

i) income credited by way of interest on the compensation amount awarded by the Motor Accidents
Claims Tribunal;

j) income paid by way of interest on the compensation amount awarded by the Motor Accidents Claims
Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of
such income paid during the financial year does not exceed ₹ 50,000.

k) income paid or payable by an infrastructure capital company or infrastructure capital fund or

infrastructure debt fund or public sector company or scheduled bank in relation to a zero coupon
bond issued on or after 1.6.2005.

Notes
• The expression “time deposits” [for the purpose of (4)(a), (d) and (f) above] means the deposits,
including recurring deposits, repayable on the expiry of fixed periods.

• Senior citizen means an individual resident in India who is of the age of 60 years or more at any time
during the relevant previous year.

5. Power to the Central Government to issue notification

The Central Government is empowered to issue notification for non-deduction of tax at Source deduction
of tax at a lower rate, from such payment to such person or class of persons, specified in that
notification.
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ILLUSTRATION 2
Examine the TDS implications under section 194A in the cases mentioned hereunder–
1. On 1.10.2023, Mr. Harish made a six-month fixed deposit of ₹ 10 lakh@9% p.a. with ABC Co-operative Bank.
The fixed deposit matures on 31.3.2024.

2. On 1.6.2023, Mr. Ganesh made three nine months fixed deposits of ₹ 3 lakh each, carrying interest@9%
p.a. with Dwarka Branch, Janakpuri Branch and Rohini Branch of XYZ Bank, a bank which has adopted
CBS. The fixed deposits mature on 28.2.2024.

3. On 1.10.2023, Mr. Rajesh started a six months recurring deposit of ₹ 2,00,000 per month@8% p.a. with
PQR Bank. The recurring deposit matures on 31.3.2024.

SOLUTION
1. ABC Co-operative Bank has to deduct tax at source@10% on the interest of ₹ 45,000 (9% × ₹ 10 lakh ×
½) under section 194A. The tax deductible at source under section 194A from such interest is, therefore,
₹ 4,500.

2. XYZ Bank has to deduct tax at source@10% u/s 194A, since the aggregate interest on fixed deposit with
the three branches of the bank is ₹ 60,750 [3,00,000 × 3 × 9% × 9/12], which exceeds the threshold limit
of ₹ 40,000. Since XYZ Bank has adopted CBS, the aggregate interest credited/paid by all branches has
to be considered. Since the aggregate interest of ₹ 60,750 exceeds the threshold limit of ₹ 40,000, tax
has to be deducted@10% u/s 194A.

3. No tax has to be deducted under section 194A by PQR Bank on the interest of ₹ 28,000 falling due on
recurring deposit on 31.3.2024 to Mr. Rajesh, since such interest does not exceed the threshold limit of
₹ 40,000.

Payments to contractors and sub-contractors [Section 194C]

1. Applicability of TDS under section 194C

Section 194C provides for deduction of tax at source from the payment made to resident contractors
and sub-contractors.

Tax has to be deducted at source under section 194C by any person responsible for paying any sum to
a resident contractor for carrying out any work (including supply of labour for carrying out any work) in
pursuance of a contract between the contractor and the –

I. the Central Government or any State Government; or

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II. any local authority; or

III. any statutory corporation; or
IV. any company; or
V. any co-operative society; or
VI. any statutory authority dealing with housing accommodation or for the purpose of planning,
development or improvement of cities, towns and villages or for both; or
VII. any society registered under the Societies Registration Act, 1860; or
VIII. any trust; or
IX. any university established or incorporated by or under a Central, State or Provincial Act and an
institution declared to be a university under the UGC Act, 1956; or
X. any firm; or
XI. any Government of a foreign State or foreign enterprise or any association or body established
outside India; or

XII. any person, being an individual, HUF, AOP or BOI, who has total sales, gross receipts or turnover
from the business or profession carried on by him exceeding ₹ 1 crore in case of business and ₹
50 lakhs in case of profession during the financial year immediately preceding the financial year
in which such sum is credited or paid to the account of the contractor.

2. Time of deduction
Tax has to be deducted at the time of payment of such sum or at the time of credit of such sum to the
account of the contractor, whichever is earlier.

Where any such sum is credited to any account in the books of account of the person liable to pay such
income, such crediting is deemed to be credit of such income to the account of the payee and the tax
has to be deducted at source. The account to which such sum is credited may be called “Suspense
account” or by any other name.

However, no tax has to be deducted at source in respect of payments made by individuals/HUF to a

contractor exclusively for personal purposes.

3. Rate of TDS
The rate of TDS under section 194C on payments to contractors would be 1%, where the payee is an
individual or HUF and 2% in respect of other payees. The same rates of TDS would apply for both
contractors and sub-contractors.
The applicable rates of TDS under section 194C are as follows –
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Payee TDS rate

Individual HUF contractor/sub-contractor 1%

Other than individual/HUF contractor/ sub-contractor 2%

Contractor in transport business (if PAN is furnished) Nil
Sub-contractor in transport business (if PAN is furnished) Nil

4. Threshold limit for deduction of tax at source under section 194C

No deduction will be required to be made if the consideration for the contract does not exceed ₹ 30,000.
However, to prevent the practice of composite contracts being split up into contracts valued at less than
₹ 30,000 to avoid tax deduction, it has been provided that tax will be required to be deducted at source
where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor
exceeds ₹ 30,000 in a single payment or ₹ 1,00,000 in the aggregate during a financial year.

Therefore, even if a single payment to a contractor does not exceed ₹ 30,000, TDS provisions under
section 194C would be attracted where the aggregate of the amounts of such sums credited or paid or
likely to be credited or paid to the contractor during the financial year exceeds ₹ 1,00,000.

ILLUSTRATION 3
ABC Ltd. makes the following payments to Mr. X, a contractor, for contract work during the P.Y.2023-24–
Rs. 20,000 on 1.5.2023
Rs. 25,000 on 1.8.2023
Rs. 28,000 on 1.12.2023
On 1.3.2024, a payment of ₹ 30,000 is due to Mr. X on account of a contract work.
Discuss whether ABC Ltd. is liable to deduct tax at source under section 194C from payments made to
Mr. X.

SOLUTION
In this case, the individual contract payments made to Mr. X does not exceed ₹ 30,000. However, since
the aggregate amount paid to Mr. X during the P.Y. 2023-24 exceeds ₹ 1,00,000 (on account of the last
payment of ₹ 30,000, due on 1.3.2024, taking the total from ₹ 73,000 to ₹ 1,03,000), the TDS provisions
under section 194C would get attracted. Tax has to be deducted@1% on the entire amount of ₹ 1,03,000
from the last payment of ₹ 30,000 and the balance of ₹ 28,970 (i.e., ₹ 30,000 – ₹ 1,030) has to be paid
to Mr. X.
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5. Definition of work
Work includes –
a) advertising;
b) broadcasting and telecasting including production of programmes for such broadcasting or
telecasting;
c) carriage of goods or passengers by any mode of transport other than by railways;
d) catering;
e) manufacturing or supplying a product according to the requirement or specification of a customer
by using material purchased from such customer or its associate, being a person related to the
customer in such manner as defined u/s 40A(2)(b), (i.e., the customer would be in the place of
assessee; and the associate would be the related person(s) mentioned in that section).

However, “work” shall not include manufacturing or supplying a product according to the requirement or
specification of a customer by using raw material purchased from a person, other than such customer
or associate of such customer, as such a contract is a contract for ‘sale’. However, this will not be
applicable to a contract which does not entail manufacture or supply of an article or thing (e.g. a
construction contract).

It may be noted that the term “work” would include manufacturing or supplying a product according to
the requirement or specification of a customer by using material purchased from such customer or its
associate. In such a case, tax shall be deducted on the invoice value excluding the value of material
purchased from such customer or its associate, if such value is mentioned separately in the invoice.
Where the material component has not been separately mentioned in the invoice, tax shall be deducted
on the whole of the invoice value.

6. Non-applicability of TDS under section 194C

No deduction is required to be made from the sum credited or paid or likely to be credited or paid during
the previous year to the account of a contractor, during the course of the business of plying, hiring or
leasing goods carriages, if he furnishes his PAN to the deductor.

In order to convey the true intent of law, it has been clarified that this relaxation from the requirement
to deduct tax at source shall only be applicable to the payment in the nature of transport charges
(whether paid by a person engaged in the business of transport or otherwise) made to a contractor, who
fulfills the following three conditions cumulatively –
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Exemption u/s 194C(6)

•owns ten or less goods carriages at any time during the previous year.
•is engaged in the business of plying, hiring or leasing goods carriages.
•has furnished a declaration to this effect along with his PAN

Meaning of Goods carriage:

Goods carriage means –
§ any motor vehicle constructed or adapted for use solely for the carriage of goods; or
§ any motor vehicle not so constructed or adapted, when used for the carriage of goods.
The term “motor vehicle” does not include vehicles having less than four wheels and with engine capacity
not exceeding 25cc as well as vehicles running on rails or vehicles adapted for use in a factory or in
enclosed premises.

7. Important points
i. The deduction of income-tax will be made from sums paid for carrying out any work or for
supplying labour for carrying out any work. In other words, the section will apply only in relation to
‘works contracts’ and ‘labour contracts’ and will not cover contracts for sale of goods.

ii. Contracts for rendering professional services by lawyers, physicians, surgeons, engineers,
accountants, architects, consultants etc., cannot be regarded as contracts for carrying out any
“work” and, accordingly, no deduction of income-tax is to be made from payments relating to such
contracts under this section. Separate provisions for fees for professional services have been
made under section 194J.

iii. The deduction of income-tax must be made at the time of credit of the sum to the account of the
contractor, or at the time of payment thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier.

ILLUSTRATION 4
Certain concessions are granted to transport operators in the context of cash payments u/s 40A(3) and
deduction of tax at source u/s 194-C. Elucidate.

SOLUTION
Section 40A(3) provides for disallowance of expenditure incurred in respect of which payment or aggregate of
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payments made to a person in a day exceeds ₹ 10,000, and such payment or payments are made otherwise
than by account payee cheque or account payee bank draft or use of electronic clearing system through bank
account or through other prescribed electronic modes.

However, in case of payment made to transport operators for plying, hiring or leasing goods carriages, the
disallowance will be attracted only if the payment made to a person in a day exceeds ₹ 35,000. Therefore,
payment or aggregate of payments up to ₹ 35,000 in a day can be made to a transport operator otherwise
than by way of account payee cheque or account payee bank draft or use of electronic system through bank
account or through other prescribed electronic modes, without attracting disallowance u/s 40A(3).

Under section 194C, tax had to be deducted in respect of payments made to contractors at the rate of 1%, in
case the payment is made to individual or Hindu Undivided Family or at the rate of 2%, in any other case.
However, no deduction is required to be made from any sum credited or paid or likely to be credited or paid
during the previous year to the account of a contractor, during the course of the business of plying, hiring or
leasing goods carriages, if the following conditions are fulfilled:-

i. He owns ten or less goods carriages at any time during the previous year.
ii. He is engaged in the business of plying, hiring or leasing goods carriages;
iii. He has furnished a declaration to this effect along with his PAN.

Commission or brokerage [Section 194H]

1. Applicability and Rate of TDS

Any person other than an individual or HUF, who is responsible for paying any income by way of
commission (other than insurance commission) or brokerage to a resident shall deduct income tax at
the rate of 5%.
However, an individual or HUF whose total sales, gross receipts or turnover from the business or
profession carried on by him exceed ₹ 1 crore in case of business and ₹ 50 lakhs in case of profession
during the financial year immediately preceding financial year in which such commission or brokerage
is credited or paid, is liable to deduct tax at source.

2. Time of deduction
The deduction shall be made at the time such income is credited to the account of the payee or at the
time of payment in cash or by issue of cheque or draft or by any other mode, whichever is earlier.

Even where income is credited to some other account, whether called “Suspense account” or by any
other name, in the books of account of the person liable to pay such income, such crediting shall be
deemed to be credit to the account of the payee for the purposes of this section.
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3. Threshold limit
No deduction is required if the amount of such income or the aggregate of such amount does not exceed
Rs. 15,000 during the financial year.

4. Meaning of “Commission or brokerage”

“Commission or brokerage” includes any payment received or receivable, directly or indirectly, by a
person acting on behalf of another person
§ for services rendered, or
§ for any services in the course of buying or selling of goods, or
§ in relation to any transaction relating to any asset, valuable article or thing, other than securities.

5. Non-applicability of TDS under section 194H

a) This section is not applicable to professional services. “Professional Services” means services
rendered by a person in the course of carrying on legal, medical, engineering or architectural
profession or the profession of accountancy or technical consultancy or interior decoration or such
other profession as notified by the CBDT for the purpose of compulsory maintenance of books of
account under section 44AA.

b) Further, there would be no requirement to deduct tax at source on commission or brokerage

payments by BSNL or MTNL to their public call office (PCO) franchisees.

6. Applicability of TDS provisions on payments by television channels and publishing houses to

advertisement companies for procuring or canvassing for advertisements [Circular No. 05/2016,
dated 29-2-2016]
There are two types of payments involved in the advertising business:
§ Payment by client to the advertising agency, and
§ Payment by advertising agency to the television channel/newspaper company

The applicability of TDS on these payments has already been dealt with in Circular No. 715 dated 8-8-
1995, where it has been clarified in Question Nos. 1 & 2 that while TDS under section 194C (as work
contract) will be applicable on the first type of payment, there will be no TDS under section 194C on the
second type of payment e.g. payment by advertising agency to the media company. However, another
issue has been raised in various cases as to whether the fees/charges taken or retained by advertising
companies from media companies for canvasing/booking advertisements (typically 15% of the billing)
is ‘commission’ or ‘discount’ for attracting the provisions of section 194H.

The CBDT has clarified that no TDS is attracted on payments made by television channels/newspaper
companies to the advertising agency for booking or procuring of or canvassing for advertisements. It is
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also further clarified that ‘commission’ referred to in Question No.27 of the CBDT’s Circular No. 715 dated
8-8-1995 does not refer to payments by media companies to advertising companies for booking of
advertisements but to payments for engagement of models, artists, photographers, sportspersons, etc.
and, therefore, is not relevant to the issue of TDS referred to in this Circular.

ILLUSTRATION 5
Moon TV, a television channel, made payment of ₹ 50 lakhs to a production house for production of programme
for telecasting as per the specifications given by the channel. The copyright of the programme is also
transferred to Moon TV. Would such payment be liable for tax deduction at source under section 194C? Discuss.
Also, examine whether the provisions of tax deduction at source under section 194C would be attracted if the
payment was made by Moon TV for acquisition of telecasting rights of the content already produced by the
production house.

SOLUTION
In this case, since the programme is produced by the production house as per the specifications given by Moon
TV, a television channel, and the copyright is also transferred to the television channel, the same falls within the
scope of definition of the term ‘work’ under section 194C. Therefore, the payment of ₹ 50 lakhs made by Moon
TV to the production house would be subject to tax deduction at source under section 194C.

If, however, the payment was made by Moon TV for acquisition of telecasting rights of the content already
produced by the production house, there is no contract for ‘’carrying out any work”, as required in section
194C(1). Therefore, such payment would not be liable for tax deduction at source under section 194C.

Rent [Section 194-I]

1. Applicability and Rate of TDS
Any person other than individual or HUF, who is responsible for paying to a resident any income by way
of rent, is liable to deduct tax at source.
However, an individual or HUF whose total sales, gross receipts or turnover from the business or
profession carried on by him exceed ₹ 1 crore in case of business and ₹ 50 lakhs in case of profession
during the financial year immediately preceding financial year in which such rent was credited or paid,
is liable to deduct tax at source.

2. Rate of TDS
Tax has to be deducted at the rate of:
§ 2% in respect of rent for plant, machinery or equipment;
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§ 10% in respect of other rental payments (i.e., rent for use of any land or building, including factory
building, or land appurtenant to a building, including factory building, or furniture or fittings).

3. Time of deduction
This deduction is to be made at the time of credit of such income to the account of the payee or at the
time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier.
Where any such income is credited to any account, whether called “Suspense account” or by any other
name, in the books of account of the person liable to pay such income, such crediting shall be deemed
to be credit of such income to the account of the payee and the provisions of this section will apply
accordingly.

4. Threshold limit
No deduction need be made where the amount of such income or the aggregate of the amounts of such
income credited or paid or likely to be credited or paid during the financial year to the account of the
payee does not exceed Rs. 2,40,000.

5. Meaning of Rent
“Rent” means any payment, by whatever name called, under any lease, sub lease, tenancy or any other
agreement or arrangement for the use of (either separately or together) any –
§ land; or
§ building (including factory building); or
§ land appurtenant to a building (including factory building); or
§ machinery; or
§ plant; or
§ equipment; or
§ furniture; or
§ fittings,
whether or not any or all of the above are owned by the payee.

6. Applicability of TDS provisions under section 194-I to payments made by the customers on account
of cooling charges to the cold storage owners
CBDT Circular No.1/2008 dated 10.1.2008 provides clarification regarding applicability of provisions of
section 194-I to payments made by the customers on account of cooling charges to the cold storage
owners.
The main function of the cold storage is to preserve perishable goods by means of a mechanical
process, and storage of such goods is only incidental in nature. The customer is also not given any right
to use any demarcated space/place or the machinery of the cold store and thus does not become a
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tenant. Therefore, the provisions of 194-I are not applicable to the cooling charges paid by the customers
of the cold storage.

However, since the arrangement between the customers and cold storage owners are basically
contractual in nature, the provision of section 194-C will be applicable to the amounts paid as cooling
charges by the customers of the cold storage.

7. No requirement to deduct tax at source under section 194-I on remittance of Passenger Service
Fees (PSF) by an Airline to an Airport Operator [Circular No. 21/2017, dated 12.06.2017]
The primary requirement of any payment to qualify as rent is that the payment must be for the use of
land and building and mere incidental/minor/ insignificant use of the same while providing other
facilities and service would not make it a payment for use of land and buildings so as to attract section
194-I.
Accordingly, the CBDT has, vide this circular, clarified that the provisions of section 194-I shall not be
applicable on payment of PSF by an airline to Airport Operator.

8. Applicability of TDS provisions under section 194-I to service tax component of rental income
CBDT Circular No.4/2008 dated 28.4.2008 provides clarification on deduction of tax at source (TDS) on
service tax component of rental income under section 194-I.

As per the provisions of 194-I, tax is deductible at source on income by way of rent paid to any resident.
Further, rent has been defined in 194-I to mean any payment, by whatever name called, under any lease,
sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together)
any,-
§ land; or
§ building (including factory building); or
§ land appurtenant to a building (including factory building); or
§ machinery; or
§ plant; or
§ equipment; or
§ furniture; or
§ fittings,
whether or not any or all of the above are owned by the payee.
Service tax paid by the tenant doesn’t partake the nature of income of the landlord. The landlord only
acts as a collecting agency for Government for collection of service tax. Therefore, tax deduction at
source under section 194-I would be required to be made on the amount of rent paid/payable without
including the service tax.
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Note - It is possible to take a view that the clarification given in Circular No.4/2008 would apply in the
GST regime also.

Clarification regarding TDS on Goods and Services Tax (GST) component comprised in payments
made to residents [Circular No. 23/2017 dated 19.07.2017]
The CBDT has, vide this circular, clarified that wherever in terms of the agreement or contract between the
payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a resident is
indicated separately, tax shall be deducted at source on the amount paid or payable without including such
‘GST on services’ component.

GST shall include Integrated Goods and Services Tax, Central Goods and Services Tax, State Goods and
Services Tax and Union Territory Goods and Services Tax.

Further, for the purposes of this Circular, any reference to “service tax” in an existing agreement or contract
which was entered into prior to 01.07.2017 shall be treated as “GST on services” with respect to the period
from 01.07.2017 onward till the expiry of such agreement or contract.

9. Clarification on applicability of TDS provisions of section 194-I on lumpsum lease premium paid for
acquisition of long-term lease [Circular No.35/2016, dated 13-10-2016]
The issue of whether or not TDS under section 194-I is applicable on ‘lump sum lease premium’ or ‘one-
time upfront lease charges” paid by an assessee for acquiring long-term leasehold rights for land or any
other property has been examined by the CBDT.

Accordingly, the CBDT has, vide this Circular, clarified that lump sum lease premium or one-time upfront
lease charges, which are not adjustable against periodic rent, paid or payable for acquisition of long-
term leasehold rights over land or any other property are not payments in the nature of rent within the
meaning of section 194-I. Therefore, such payments are not liable for TDS under section 194-I.

ILLUSTRATION 6
XYZ Ltd. pays ₹ 50,000 per month as rent to the Mr. Kishore for a building in which one of its branches is
situated. Discuss whether TDS provisions under section 194-I are attracted.

SOLUTION
Section 194-I, which governs the deduction of tax at source on payment of rent, exceeding ₹ 2,40,000 p.a., is
applicable to all taxable entities except individuals and HUFs, whose total sales, gross receipts or turnover from
the business or profession carried on by him does not exceed ₹ 1 crore in case of business and ₹ 50 lakhs in
case of profession during the financial year immediately preceding financial year in which such rent was
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credited or paid, is liable to deduct tax at source.

Since the rent paid by XYZ Ltd. to Mr. Kishore exceeds ₹ 2,40,000, the provisions of section 194-I for deduction
of tax at source attracted.

The rate applicable for deduction at source under section 194-I on rent paid is 10%, assuming that Mr. Kishore
had furnished his PAN to XYZ Ltd.

Therefore, the amount of tax to be deducted at source = ₹ 6,00,000 x 10% = ₹ 60,000

Payment of rent by certain individuals or Hindu undivided family

[Section 194-IB]
1. Applicability and Rate of TDS
Section 194-IB requires any person, being individual or HUF, other than those individual or HUF whose
total sales, gross receipts or turnover from the business or profession exceeds ₹ 1 crore in case of
business and ₹ 50 lakhs in case of profession in the financial year immediately preceding the financial
year in which such rent was credited or paid, responsible for paying to a resident any income by way
of rent, to deduct income tax @5%.

2. Threshold limit
Under this section, tax has to be deducted at source only if the amount of such rent exceeds ₹ 50,000
for a month or part of a month during the previous year.

3. Time of deduction
This deduction is to be made at the time of credit of such rent, for the last month of the previous year
or the last month of tenancy, if the property is vacated during the year, as the case may be, to the
account of the payee or at the time of payment thereof in cash or by issue of cheque or draft or by any
other mode, whichever is earlier.

4. No requirement to obtain TAN

The provisions of section 203A containing the requirement of obtaining Tax deduction account number
(TAN) shall not apply to the person required to deduct tax in accordance with the provisions of section
194-IB.

5. Meaning of “Rent”
“Rent” means any payment, by whatever name called, under any lease, sub lease, tenancy or any other
agreement or arrangement for the use of any land or building or both.
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6. Deduction not to exceed rent for last month

Where the tax is required to be deducted as per the provisions of section 206AA, such deduction shall
not exceed the amount of rent payable for the last month of the previous year or the last month of the
tenancy, as the case may be [Section 206AA providing for deduction of tax at source at a higher rate is
discussed at length later on in this chapter]

ILLUSTRATION 7
Mr. X, a salaried individual, pays rent of ₹ 55,000 per month to Mr. Y from June, 2023. Is he required to deduct
tax at source? If so, when is he required to deduct tax? Also, compute the amount of tax to be deducted at
source.
Would your answer change if Mr. X vacated the premises on 31st December, 2023?
Also, what would be your answer if Mr. Y does not provide his PAN to Mr. X?

SOLUTION

Since Mr. X pays rent exceeding ₹ 50,000 per month in the F.Y. 2023-24, he is liable to deduct tax at source @5%
of such rent for F.Y. 2023-24 under section 194-IB. Thus, ₹ 27,500 [₹ 55,000 x 5% x 10] has to be deducted from
rent payable for March, 2024.
If Mr. X vacated the premises in December, 2023, then tax of ₹ 19,250 [₹ 55,000 x 5% x 7] has to be deducted
from rent payable for December, 2023.
In case Mr. Y does not provide his PAN to Mr. X, tax would be deductible@20%, instead of 5%.
In case 1 above, this would amount to ₹ 1,10,000 [₹ 55,000 x 20% x 10], but the same has to be restricted to ₹
55,000, being rent for March, 2024.

In case 2 above, this would amount to ₹ 77,000 [₹ 55,000 x 20% x 7], but the same has to be restricted to ₹
55,000, being rent for December, 2023.

Fees for professional or technical services [Section 194J]

1. Applicability and Rate of TDS
Every person other than an individual or a HUF, who is responsible for paying to a resident any sum by
way of –
i. fees for professional services; or
ii. fees for technical services; or
iii. any remuneration or fees or commission, by whatever name called, other than those on which
tax is deductible under section 192, to a director of a company; or
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iv. royalty, or
v. non-compete fees referred to in section 28(va)
shall deduct tax at source at the rate of –
a) 2% in case of fees for technical services (not being professional services) or royalty in the nature
of consideration for sale, distribution or exhibition of cinematographic films; and

b) 10% in other cases.

However, in case of a payee, engaged only in the business of operation of call centre, the tax shall be
deducted at source @2%

2. Time of deduction
The deduction is to be made at the time of credit of such sum to the account of the payee or at the time
of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
Where such sum is credited to any account, whether called suspense account or by any other name, in
the books of accounts of the person liable to pay such sum, such crediting shall be deemed to be credit
of such sum to the account of the payee and tax has to be deducted accordingly.

3. Threshold limit
No tax deduction is required if the amount of fees or the aggregate of the amounts of fees credited or
paid or likely to be credited or paid during a financial year does not exceed ₹ 30,000 in the case of fees
for professional services, ₹ 30,000 in the case of fees for technical services, ₹ 30,000 in the case of
royalty and ₹ 30,000 in the case of non-compete fees.

The limit of ₹ 30,000 under section 194J is applicable separately for fees for professional services, fees
for technical services, royalty and non-compete fees referred to in section 28(va). It implies that if the
payment to a person towards each of the above is less than ₹ 30,000, no tax is required to be deducted
at source, even though the aggregate payment or credit exceeds ₹ 30,000. However, there is no such
exemption limit for deduction of tax on any remuneration or fees or commission payable to director of
a company.

Summary of rates and threshold limit under section 194J for deduction of tax at source

Nature of payment TDS rate Separate Limit

Fees for technical services (not being professional services) 2% ₹ 30,000
Fees for professional services 10% ₹ 30,000
Royalty in the nature of consideration for sale, distribution or 2%
exhibition of cinematographic films
₹ 30,000
Other royalty 10%
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Any remuneration or fees or commission, by whatever name called, 10% Nil

other than those on which tax is deductible under section 192, to a
director of a company
Non-compete fees 10% ₹ 30,000

In case of a payee, engaged only in the business of operation of call centre, the tax shall be deducted at source
@2%

ILLUSTRATION 8
XYZ Ltd. makes a payment of ₹ 28,000 to Mr. Ganesh on 2.8.2023 towards fees for professional services and
another payment of ₹ 25,000 to him on the same date towards fees for technical services. Discuss whether
TDS provisions under section 194J are attracted.

SOLUTION
TDS provisions under section 194J would not get attracted, since the limit of ₹ 30,000 is applicable for fees for
professional services and fees for technical services, separately. It is assumed that there is no other payment
to Mr. Ganesh towards fees for professional services and fees for technical services during the P.Y.2023-24.

4. Non-applicability of TDS under section 194J

i. An individual or a Hindu undivided family is not liable to deduct tax at source.
However, an individual or HUF, whose total sales, gross receipts or turnover from business or
profession carried by him exceeds ₹ 1 crore in case of business or ₹ 50 lakhs in case of profession
in the financial year immediately preceding the financial year in which the fees for professional
services or fees for technical services is credited or paid is required to deduct tax on such fees.

Since this provision requires such individuals/HUFs to deduct tax at source only in respect of
fees for professional services or fees for technical services, it can be inferred that individuals
and HUFs are not required to deduct tax at source under section 194J on royalty and non-
compete fees.

ii. Further, an individual or Hindu Undivided Family, shall not be liable to deduct income-tax on the sum
payable by way of fees for professional services, in case such sum is credited or paid exclusively for
personal purposes.

5. Meaning of “Professional services”

“Professional services” means services rendered by a person in the course of carrying on legal, medical,
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engineering or architectural profession or the profession of accountancy or technical consultancy or

interior decoration or advertising or such other profession as is notified by the CBDT for the purposes
of section 44AA or of this section.

Other professions notified for the purposes of section 44AA are as follows:
a) Profession of “authorised representatives”;
b) Profession of “film artist”;
c) Profession of “company secretary”;
d) Profession of “information technology”.

The CBDT has notified the services rendered by following persons in relation to the sports activities as
Professional Services for the purpose of the section 194J:
a) Sports Persons,
b) Umpires and Referees,
c) Coaches and Trainers,
d) Team Physicians and Physiotherapists,
e) Event Managers,
f) Commentators,
g) Anchors and
h) Sports Columnists.
Accordingly, the requirement of TDS as per section 194J would apply to all the aforesaid professions.
The term “profession”, as such, is of a very wide import. However, the term has been defined in this
section exhaustively. For the purposes of TDS, therefore, all other professions would be outside the
scope of section 194J. For example, this section will not apply to professions of teaching, sculpture,
painting etc. unless they are notified.

6. Meaning of “Fees for technical services”

The term ‘fees for technical services’ means any consideration (including any lump sum consideration)
for rendering of any of the following services:
i. Managerial services;
ii. Technical services;
iii. Consultancy services;
iv. Provision of services of technical or other personnel.
It is expressly provided that the term ‘fees for technical services’ will not include following types of
consideration:

• Consideration for any construction, assembly, mining or like project, or

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• Consideration which is chargeable under the head ‘Salaries’.

7. TPAs liable to deduct tax under section 194J on payment to hospitals on behalf of insurance
companies
The CBDT has, through Circular No.8/2009 dated 24.11.2009, clarified that TPAs (Third Party
Administrator’s) who are making payment on behalf of insurance companies to hospitals for settlement
of medical/insurance claims etc. under various schemes including cashless schemes are liable to
deduct tax at source under section 194J on all such payments to hospitals etc. This is because the
services rendered by hospitals to various patients are primarily medical services and, therefore, the
provisions of section 194J are applicable to payments made by TPAs to hospitals etc.

8. Consideration for use or right to use of computer software is royalty within the meaning of section
9(1)(vi)
As per section 9(1)(vi), any income payable by way of royalty in respect of any right, property or
information is deemed to accrue or arise in India. The term “royalty” means consideration for transfer
of all or any right in respect of certain rights, property or information.
As per Explanation 4 to section 9(1)(vi), the consideration for use or right to use of computer software
would be royalty. This Explanation clarifies that transfer of all or any rights in respect of any right,
property or information includes and has always included transfer of all or any right for use or right to
use a computer software (including granting of a licence) irrespective of the medium through which such
right is transferred.
Consequently, the provisions of tax deduction at source under section 194J would be attracted in
respect of consideration for use or right to use computer software since the same falls within the
definition of royalty as per the provisions of the Income-tax Act, 1961.

The Central Government has, vide Notification No.21/2012 dated 13.6.2012, effective from 1st July, 2012,
exempted certain software payments from the applicability of tax deduction under section 194J.
Accordingly, where payment is made by the transferee for acquisition of software from a resident-
transferor, the provisions of section 194J would not be attracted if-
1. the software is acquired in a subsequent transfer without any modification by the transferor;
2. tax has been deducted under section 194J on payment for any previous transfer of such software; and
3. the transferee obtains a declaration from the transferor that tax has been so deducted along with the PAN
of the transferor.

Payment made by an individual or a HUF for contract work or by way of commission

or brokerage or fees for professional services [Section 194M]
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1. Applicability and rate of TDS

Section 194M provides for deduction of tax at source @5% by an individual or a HUF responsible for
paying any sum during the financial year to any resident-
a) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a
contract; or
b) by way of commission (not being insurance commission referred to in section 194D) or brokerage; or
c) by way of fees for professional services.
It may be noted that only individuals and HUFs (other than those who are required to deduct income-
tax as per the provisions of section 194C or 194H or 194J) are required to deduct tax in respect of the
above sums payable during the financial year to a resident.

2. Time of deduction
The tax should be deducted at the time of credit of such sum or at the time of payment of such sum,
whichever is earlier.

3. Threshold limit
No tax is required to be deducted where such sum or, as the case may be, aggregate amount of such
sums credited or paid to a resident during the financial year does not exceed ₹ 50,00,000

4. Non-applicability of TDS under section 194M

An individual or a Hindu undivided family is not liable to deduct tax at source u/s 194M if -
a) they are required to deduct tax at source u/s 194C for carrying out any work (including supply of
labour for carrying out any work) in pursuance of a contract i.e., an individual or a HUF whose total
sales, gross receipts or turnover from the business or profession carried on by him exceeds ₹ 1 crore
in case of business and ₹ 50 lakhs in case of profession during the immediately preceding financial
year and such amount is not exclusively credited or paid for personal purposes of such individual or
HUF.

b) they are required to deduct tax at source u/s 194H on commission (not being insurance commission
referred to in section 194D) or brokerage i.e., an individual or a HUF whose total sales, gross receipts
or turnover from the business or profession carried on by him exceeds ₹ 1 crore in case of business
and ₹ 50 lakhs in case of profession during the immediately preceding financial year.

c) they are required to deduct tax at source u/s 194J on fees for professional services i.e., an individual
or a HUF whose total sales, gross receipts or turnover from the business or profession carried on by
him exceeds ₹ 1 crore in case of business and ₹ 50 lakhs in case of profession during the immediately
preceding financial year and such amount is not exclusively credited or paid for personal purposes
of such individual or HUF.
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5. No requirement to obtain TAN

The provisions of section 203A containing the requirement of obtaining Tax deduction account number
(TAN) shall not apply to the person required to deduct tax in accordance with the provisions of section
194M.

Note - For the meaning of the terms “Work”, “Professional services” and “Commission or brokerage” refer
sub-heading “3.4 Payments to contractors and sub-contractors [Section 194C]”, “3.8 Fees for
professional or technical services [Section 194J]” and “3.5 Commission or brokerage [Section 194H]”,
respectively.

ILLUSTRATION 9
Examine whether TDS provisions would be attracted in the following cases, and if so, under which section. Also
specify the rate of TDS applicable in each case. Assume that all payments are made to residents.

Particulars of the payer Nature of payment Aggregate of payments

made in the F.Y.2023-24

1. Mr. Ganesh, an individual Contract Payment for repair ₹ 5 lakhs

carrying on retail of residential house
business with turnover of
₹ 2.5 crores in the Payment of commission to Mr. ₹ 80,000
P.Y.2022-23 Vallish for business purposes

2. Mr. Rajesh, a wholesale Contract Payment for 20 lakhs in January, 2024,

trader whose turnover reconstruction of residential 15 lakhs in Feb 2024 and 20
was 95 lakhs in P.Y. 2022- house (made during the period lakhs in March 2024.
23. January- March, 2024)

3. Mr. Satish, a salaried Payment of brokerage for buying a ₹ 51 lakhs

individual residential house in March, 2024

4. Mr. Dheeraj, a pensioner Contract payment made during ₹ 48 lakhs

October-November 2023 for
reconstruction of residential
house

SOLUTION

Particulars of the Nature of Aggregate of Whether TDS provisions are attracted?

payer payment payments in
the F.Y.2023-24
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1. Mr. Ganesh, an Contract ₹ 5 lakhs No; TDS under section 194C is not attracted
individual carrying Payment for since the payment is for Personal purpose.
on retail business repair of TDS under section 194M is not attracted as
with turnover of residential aggregate of contract payment to the
₹ 2.5 crores in the house payee in the P.Y.2023-24 does not exceed ₹
P.Y.2022-23 50 lakh.

Payment of ₹ 80,000 Yes, u/s 194H, since the payment exceeds ₹

commission to 15,000, and Mr. Ganesh’s turnover exceeds ₹
Mr. Vallish for 1 crore in the P.Y.2022-23.
Business
purposes

2. Mr. Rajesh, a Contract ₹ 55 lakhs Yes, u/s 194M, since the aggregate of
wholesale trader Payment for payments (i.e., ₹ 55 lakhs) exceed 50 lakhs.
whose turnover reconstruction Since, his turnover does not exceed 1 crore
was ₹ 95 lakhs in of residential in the P.Y.2022-23, TDS provisions under
P.Y. 2022-23 house section 194C are not attracted in Respect of
payments made in the P.Y. 2023-24.

3. Mr. Satish, a Payment of ₹ 51 lakhs Yes, u/s 194M, since the payment of ₹ 51
salaried individual brokerage for lakhs made in March 2024 exceeds the
buying a threshold of 50 lakhs. Since Mr. Satish
residential is a salaried individual, the provisions of
house section 194H are not applicable in this
case.

4. Mr. Dheeraj, a Contract ₹ 48 lakhs TDS provisions under section 194C are not
pensioner payment for Attracted since Mr. Dheeraj is a pensioner.
reconstruction TDS provisions under section 194M are
of residential also not applicable in this case, since
house the payment of ₹ 48 lakhs does not
exceed the threshold of ₹ 50 lakhs.

TDS on cash withdrawal [Section 194N]

1. Applicability and rate of TDS

Section 194N provides that every person, being
• a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking
institution referred under section 51 of that Act)
• a co-operative society engaged in carrying on the business of banking or
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• a post office
who is responsible for paying any sum, being the amount or aggregate of amounts, as the case may be,
in cash exceeding ₹ 1 crore during the previous year, to any person from one or more accounts
maintained by such recipient-person with it, shall deduct tax at source @2% of such sum

However, if the recipient is a co-operative society, tax is required to be deducted on any sum exceeding
₹ 3 crore.

2. Time of deduction
This deduction is to be made at the time of payment of such sum.

3. Modification in rate of TDS and threshold limit of withdrawal for recipient who has not furnished
return of income for last 3 years
If the recipient has not furnished the returns of income for all the three assessment years relevant to
the three previous years, for which the time limit to file return of income under section 139(1) has expired,
immediately preceding the previous year in which the payment of the sum is made, “the sum” shall mean
the amount or the aggregate of amounts, as the case may be, in cash > ₹ 20 lakhs during the previous
year, and the tax shall be deducted at the rate of –

§ 2% of the sum, where the amount or aggregate of amounts, as the case may be, being paid in cash
> ₹ 20 lakhs but ≤ ₹ 1 crore (₹ 3 crore in case the recipient is a co-operative society)

§ 5% of the sum, where the amount or aggregate of amounts, as the case may be, being paid in cash
> ₹ 1 crore (₹ 3 crore in case the recipient is a co-operative society).

However, the Central Government is empowered to specify, with the consultation of RBI, by notification,
the recipient in whose case this provision shall not apply or apply at reduced rate, subject to the
satisfaction of the conditions specified in such notification.

4. Non-applicability of TDS under section 194N

Liability to deduct tax at source under section 194N shall not be applicable to any payment made to –
i. the Government
ii. any banking company or co-operative society engaged in carrying on the business of banking
or a post-office
iii. any business correspondent of a banking company or co-operative society engaged in carrying
on the business of banking, in accordance with the RBI guidelines
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iv. any white label ATM operator of a banking company or co-operative society engaged in carrying
on the business of banking, in accordance with the authorisation issued by the RBI under the
Payment and Settlement Systems Act, 2007 .

The Central Government may specify, with the consultation of RBI, by notification, the recipient in whose
case section 194N shall not apply or apply at reduced rate, subject to the satisfaction of the conditions
specified in such notification.

Example
The persons referred to in (i) to (vi) in Column (2) of the table below have always been filing their returns of
income on or before the due date u/s 139(1). The persons mentioned in (vii) to (x) in Column (2) of the table below
have not filed their returns of income for the last five years. Determine the liability of deduction of tax at source
u/s 194N by the bank/co-operative bank referred to in column (3) of the table below in each of the following
individual cases, assuming that this is the only withdrawal in the P.Y.2023-24 by the persons referred to in
Column (2).

(1) (2) (3) (4) (5) (6)

Person making Bank/Co Date of Amount of TDS u/s 194N (₹)

the withdrawal operative withdrawal withdrawal
Bank from (₹)
which money
is withdrawn

(i) Mr. Harishit SBI 1.7.2023 1,10,00,000 ₹ 10,00,000 x 2% = ₹ 20,000

(ii) Mr. Pranav SBI 1.8.2023 90,00,000 Nil (since withdrawals < ₹ 1
crore)
(iii) ABC Cooperative SBI 1.9.2023 2,70,00,000 Nil (since withdrawals < ₹ 3
Society crore)

(iv) XYZ Cooperative MNO Co 1.9.2023 3,10,00,000 ₹ 10,00,000 x 2% = ₹ 20,000

Society operative bank

(v) Mr. Vaibhav MNO Co 1.9.2023 2,10,00,000 ₹ 1,10,00,000 x 2% = ₹

operative bank 2,20,000

(vi) A Ltd. MNO Co 1.10.2023 1,05,00,000 ₹ 5,00,000 x 2% = ₹ 10,000

operative bank
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(vii) M/s. DEF & Co., a MNO Co 1.2.2024 90,00,000 ₹ 70,00,000 x 2% = ₹ 1,40,000
firm operative bank

(viii) Mr. Varun BOI 1.2.2024 1,20,00,000 ₹ 80,00,000 x 2% (+) ₹

20,00,000 x 5% = ₹ 2,60,000

(ix) Mr. Rakesh BOI 1.2.2024 45,00,000 ₹ 25,00,000 x 2% = ₹ 50,000

(x) PQR Co-operative BOI 1.2.2024 3,30,00,000 ₹ 2,80,00,000 x 2% (+) ₹

Society 30,00,000 x 5% = ₹ 7,10,000

OTHER TDS PROVISIONS

The other TDS provisions are given below in tabular form –
Section Nature of Threshold Payer Payee Rate of Time of Other relevant points
payment Limit for TDS deduction
deduction
of tax at
source

192A Premature Payment or Trustees of Individual 10% on At the time Exemption from TDS
withdrawal aggregate the EPF (Employee) premature of payment § Withdrawal after
from payment ≥ Scheme or taxable continuous service of
Employees’ ₹ 50,000 any withdrawal. 5 years
Provident authorised § Case of withdrawal
Fund person before continuous
under the service of 5 years and
Scheme –
a) employee opts for
transfer of
accumulated
balance to the new
employer
b) termination is due
to ill health,
contraction or
discontinuance of
business, cessation
of employment etc.
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194 Dividend Amount or The Resident 10% Before Exemption from TDS
(including aggregate Principal shareholder making any Dividend credited or
dividends amount > Officer of a payment paid to -
on ₹ 5,000 in a domestic by any § LIC, GIC, subsidiaries
preference F.Y., in case company mode in of GIC or any other
shares) Of dividend respect of insurer provided the
paid or any shares are owned by
Credited to dividend or them, or they have
an individual before full beneficial
shareholder making any interest in such
by any distribution shares.
mode other or payment § any other person as
than cash of may be notified by
>No dividend. the Central
Threshold in respect of Government insurer
other cases any provided the shares
Of dividend dividend or are owned by them,
paid or before or they have full
Credited to making any beneficial interest in
an individual distribution such shares
shareholder or payment § any other person as
by any of may be notified by
mode other dividend. the Central
than cash Government.
No
Threshold in
other cases

194B Winnings Amount or The person Any Person 30% At the time a) Where the winnings
from any the responsibl of are wholly in kind or
lottery, aggregate e for payment. partly in cash and
crossword of amounts paying partly in kind but the
puzzle or > income by part in cash is not
card game ₹10,000 in a way of sufficient to meet
or other F.Y. such the liability of
game of winnings deduction of tax in
any sort or respect of whole of
from the winnings, the
gambling person responsible
or betting for paying shall,
of any before releasing the
form or winnings, ensure
nature that tax has been
(other than paid in respect of
winnings the winnings.
from any b) Where winnings are
online to be credited and
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game in losses are to be

respect of debited to the
which TDS individual a/c of the
u/s 194BA punter, tax has to be
would be deducted on
applicable) winnings before set-
off of losses.
Thereafter, the net
amount, after
deduction of tax and
losses, has to be
paid to the winner.

194BA Winnings On the net Any person Any person 30% At the end Where the net winnings
from online winnings in responsibl of the F.Y. are wholly in kind or
games a person’s e for partly in cash and
user paying In case, partly in kind but the
account as income by there is part in cash is not
computed in way of withdrawal sufficient to meet the
prescribed such from user liability of deduction
manner. winnings account of tax in respect of
during the whole of the net
F.Y., tax winnings, the person
would be responsible for paying
deducted shall, before releasing
at the time the winnings, ensure
of such that tax has been paid
withdrawal in respect of the net
on net winnings.
winnings
comprised Meaning of certain
in such terms:
withdrawal. Online gaming
In addition, intermediary – An
tax would intermediary that
also be offers one or more
deducted online games.
on the
remaining User – Any person
amount of who accesses or avails
net any computer resource
winnings in of an online gaming
the user intermediary.
account as
User account –
computed
Account of a user
in
registered with an
prescribed
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manner at online gaming

the end of intermediary.
the F.Y.

194BB Winnings Amount or Book Any 30% At the ‘Any horse race’
from horse aggregate Maker or a Person time of includes, wherever the
race of amounts person payment Circumstances so
> ₹10,000 holding necessitate, more
in a F.Y. licence for than one horse race.
horse
racing or
for
arranging
for
wagering
or betting
in any race
course.

194D Insuranc Amount or Any Any 5%, if At the

e aggregate person Resident the time of
Commissi amount > responsibl payee is credit of
on ₹15,000 e for non- such
in a F.Y. paying any corporat income to
income by e the
way of resident account
remunerati 10%, if of the
on Or the payee or at
reward for Payee is the time of
soliciting domestic payment,
or company whichever
procuring is earlier.
insurance
business
(including
the
business
relating
to the
continuan
ce,
renewal or
Revival of
Policies of
insurance)
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194DA Any sum Amount or Any Any 5% of the At the Exemption from TDS
under a aggregate person resident amount time of The sum received
Life amount ≥ responsibl of payment under a life insurance
Insurance ₹1,00,000 e for income policy which fulfills
Policy not in A paying comprise the conditions
fulfilling financial any sum d therein specified under
the year under a section 10(10D).
conditions LIP,
specified including
u/s the sum
10(10D) allocated
by way of
bonus
194G Commissi > ₹15,000 Any Any person 5% At the Time Where income is
on on sale in a F.Y. person stocking, of Credit credited to some
of lottery responsi distributin of such other account,
tickets ble for g, Income to whether called
paying purchasing the “Suspense account”
any or account or by any other
income selling of the name, in the books of
by way of lottery payee or at account of the
commissi tickets the time of person liable to pay
on, payment, such income, such
remunera whichever crediting shall be
tion or is earlier. deemed to be credit
prize (by to the account of
whatever the payee for the
name purposes of this
called) on section.
lottery
tickets

194-IA Payment ≥ ₹50 lakh Any Resident 1% of At the time Meaning of

on (Considerat person, transferor considerat of credit of Consideration for
Transfer of ion for Being a ion for such sum transfer of
certain transfer or transferee transfer or To the immovable property
immovable stamp duty (other than stamp Account of Consideration for
property value) a person duty value, the transfer of immovable
other than referred to whichever transferor property include all
agricultura in section is higher. or at the charges of the nature
l land 194LA No Time of of club membership
responsibl requireme payment, fee, car parking fee,
e for nt of electricity or water
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paying obtaining whichever facility fee,

compensa TAN u/s is earlier. maintenance fee,
tion 203A. advance fee or any
for other charges of
compulsor similar nature, which
y are incidental to
acquisition transfer of the
of immovable property.
immovable
property
other than
rural
agricultural
land)

194K Income on Amount or Any person Any 10% At the time

units other aggregate responsibl resident of credit of
than in the amount > e for such sum
nature of ₹5,000 in a paying any To the
capital F.Y. income in account of
gains respect of the payee
units of a or at the
mutual time of
fund / payment,
Administra whichever
tor of the is earlier.
specified
undertakin
g/
specified
company

194LA Compensat Amount or Any person Any 10% At the time TDS provisions are not
ion on aggregate responsibl Resident of payment applicable on
acquisition amount > e for compensation on
Of certain ₹2,50,000 paying any acquisition of
immovable in a F.Y. sum in the agricultural land in
property nature of India, whether rural or
(other than compensat urban.
agricultural ion or
land enhanced
situated in compensat
India) ion on
compulsor
y
acquisition
of
immovable
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property
(other than
agricultural
land
situated in
India)

194P Pension Basic Notified Specified Rates in Specified senior citizen

(along with exemption specified senior force, means an individual,
interest on limit bank (a citizen where the being a resident in
bank [`3,00,000 banking individual India, who –
account) (in case the company has - is of the age of 75
specified which is a exercised years or more at
senior scheduled the option any time during
citizen pays bank and of shifting the P.Y.;
tax under has been out of the - is having pension
the default appointed default tax income and no
tax as agents regime. other income
regime u/s of RBI u/s Rates except interest
115BAC), 45 of the specified in income
₹ 3,00,000 RBI Act, section received or
/ ₹5,00,000, 1934 115BAC, receivable from
as the case where the any account
may be, if individual maintained by
the pays tax such individual in
specified under the the same
senior default tax specified bank in
citizen has regime. which he is
exercised receiving his
the option pension income;
of shifting and
out of the
- has furnished a
default tax
declaration to the
regime
specified bank.
providing
u/s 115BAC]
Specified bank to
[i.e.,
compute the total
Total
income for the relevant
income
A.Y. of the specified
after giving
senior citizen who
effect to
furnishes declaration in
the
prescribed form, and
deduction
deduct income-tax,
allowable
after giving
under
effect to deduction
Chapter VI-
under
A, if any
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allowable Chapter VI-A, if any

should allowable (on the basis
exceed the of evidence furnished
basic by the specified senior
exemption citizen) and rebate
limit. allowable u/s 87A.
Further, in [CBDT Notification No.
case the 99/2021 dated
individual is 2.9.2021]
entitled to
rebate u/s The provisions of
87A from section 139, relating to
tax payable, filing of return, would
then the not apply to a specified
same senior citizen for the
should be A.Y. relevant to the P.Y. in
given effect which tax has been
to] deducted u/s 194P(1).

194Q Purchase ₹50 lakhs in Buyer, who Any 0.1% of At the time Non-applicability of
of goods a previous is resident sum of credit of TDS u/s 194Q
year responsibl exceeding such sum Transactions on which
e for ₹50 lakhs To the (a) Tax is deductible
paying any account of under any of the
sum to any the seller provisions of the Act;
resident or at (b) Tax is collectible u/s
for the 206C, other than
purchase time section 206C(1H)
of goods. In case of a transaction
of to which both section
Buyer payment, 206(1H) and section
means a whichever 194Q applies, tax is
person is earlier. required to be
whose deducted u/s 194Q.
total sales,
gross Other points
receipts or
Where the sum is
turnover
credited to any
from
account, whether
business
called “Suspense
exceeds
account” or by any
₹10 crores
other name, in the
during the
books of account of the
FY
person liable to pay
immediatel
such income, such
y
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preceding crediting shall be

the FY in deemed to be credit to
which the the account of the
purchase payee for the purposes
of goods is of this section.
carried out.

194R Any Value or Any person Any 10% of Before Where the benefit or
benefit or aggregate (other than resident value or providing perquisite is wholly in
perquisite, of value of an aggre. of such kind or partly in cash
whether benefit or individual value of benefit or and partly in kind but
convertible perquisite > or HUF such perquisite the part in cash is not
into money ₹20,000 in whose benefit or sufficient to meet the
or not, a F.Y. Total sales, perquisite liability of deduction of
arising gross tax in respect of whole
from receipts or of such benefit or
business turnover perquisite, the person
or the does not responsible for
exercise of exceed providing such benefit
a ₹1 crore or perquisite shall,
profession. in before releasing the
case of benefit or perquisite,
The Business ensure that tax has
provisions or been paid in respect of
would ₹50 lakhs the benefit or
apply to in case of perquisite.
any benefit profession
or during the
perquisite, immediatel
whether y
preceding
in F.Y.)
cash or in responsibl
kind or e for
partly in providing
cash and to a
partly in resident,
kind. any
benefit or
perquisite.
In case of
a company,
“person
responsibl
e for
paying”
means the
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company
itself
including
the
Principal
Officer
thereof.

ILLUSTRATION 10
Examine the applicability of the provisions for tax deduction at source under section 194DA in the following
cases –
i. Mr. X, a resident, is due to receive ₹ 4.50 lakhs on 31.3.2024, towards maturity proceeds of LIC policy
taken on 1.4.2021, for which the sum assured is ₹ 4 lakhs and the annual premium is ₹ 1,25,000.
ii. Mr. Y, a resident, is due to receive ₹ 3.95 lakhs on 31.3.2024 on LIC policy taken on 31.3.2012, for which
the sum assured is ₹ 3.50 lakhs and the annual premium is ₹ 26,100.
iii. Mr. Z, a resident, is due to receive ₹ 95,000 on 1.8.2023 towards maturity proceeds of LIC policy taken
on 1.8.2017 for which the sum assured is ₹ 90,000 and the annual premium was ₹ 10,000.

SOLUTION
i. Since the annual premium exceeds 10% of sum assured in respect of a policy taken after 31.3.2012, the
maturity proceeds of ₹ 4.50 lakhs due on 31.3.2024 are not exempt under section 10(10D) in the hands
of Mr. X. Therefore, tax is required to be deducted@5% under section 194DA on the amount of income
comprised therein i.e., on ₹ 75,000 (₹ 4,50,000, being maturity proceeds - ₹ 3,75,000, being the
aggregate amount of insurance premium paid).
ii. Since the annual premium is less than 20% of sum assured in respect of a policy taken before 1.4.2012,
the sum of ₹ 3.95 lakhs due to Mr. Y would be exempt under section 10(10D) in his hands. Hence, no tax
is required to be deducted at source under section 194DA on such sum payable to Mr. Y.
iii. Even though the annual premium exceeds 10% of sum assured in respect of a policy taken after
31.3.2012, and consequently, the maturity proceeds of ₹ 95,000 due on 1.8.2023 would not be exempt
under section 10(10D) in the hands of Mr. Z, the tax deduction provisions under section 194DA are not
attracted since the maturity proceeds are less than ₹ 1 lakh.

ILLUSTRATION 11
Mr. X sold his house property in Bangalore as well as his rural agricultural land for a consideration of ₹ 60 lakh
and ₹ 15 lakh, respectively, to Mr. Y on 1.8.2023. He has purchased the house property and the land in the year
2022 for ₹ 40 lakh and ₹ 10 lakh, respectively. The stamp duty value on the date of transfer, i.e., 1.8.2023, is ₹
85 lakh and ₹ 20 lakh for the house property and rural agricultural land, respectively. Examine the tax
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implications in the hands of Mr. X and Mr. Y and the TDS implications, if any, in the hands of Mr. Y, assuming that
both Mr. X and Mr. Y are resident Indians.

SOLUTION

(i) Tax implications in the hands of Mr. X

As per section 50C, the stamp duty value of house property (i.e. ₹ 85 lakh) would be deemed to be
the full value of consideration arising on transfer of property, since the stamp duty value exceeds
110% of the consideration received. Therefore, ₹ 45 lakh (i.e., ₹ 85 lakh – ₹ 40 lakh, being the
purchase price) would be taxable as short-term capital gains in the A.Y.2024-25. Since rural
agricultural land is not a capital asset, the gains arising on sale of such land is not taxable in the
hands of Mr. X.
(ii) Tax implications in the hands of Mr. Y

In case immovable property is received for inadequate consideration, the difference between the
stamp value and actual consideration would be taxable under section 56(2)(x), if such difference
exceeds the higher of ₹ 50,000 and 10% of the consideration.
Therefore, in this case ₹ 25 lakh (₹ 85 lakh – ₹ 60 lakh) would be taxable in the hands of Mr. Y under
section 56(2)(x).

Since agricultural land is not a capital asset, the provisions of section 56(2)(x) are not attracted in
respect of receipt of agricultural land for inadequate consideration, since the definition of
“property” under section 56(2)(x) includes only capital assets specified thereunder.

(iii) TDS implications in the hands of Mr. Y

Since the sale consideration of house property or the stamp duty value of house property exceeds
₹ 50 lakh, Mr. Y is required to deduct tax at source under section 194-IA. The tax to be deducted
under section 194-IA would be ₹ 85,000, being 1% of ₹ 85 lakhs (higher of ₹ 60 lakhs or ₹ 85 lakhs).

TDS provisions under section 194-IA are not attracted in respect of transfer of rural agricultural
land.

ILLUSTRATION 12
Mr. Sharma, a resident Indian aged 77 years, gets pension of ₹ 52,000 per month from the UP State Government.
The same is credited to his savings account in SBI, Lucknow Branch. In addition, he gets interest@8% p.a. on
fixed deposit of ₹ 20 lakh with the said bank. Out of the deposit of ₹ 20 lakh, ₹ 2 lakh represents five year term
deposit made by him on 1.4.2023. Interest on savings bank credited to his SBI savings account for the P.Y.2023-
24 is ₹ 9,500.
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1. From the above facts, compute the total income and tax liability of Mr. Sharma for the A.Y. 2024-25,
assuming that he has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A).

2. What would be the amount of tax deductible at source by SBI, assuming that the same is a specified
bank? Is Mr. Sharma required to file his return of income for A.Y.2024-25, if tax deductible at source has
been fully deducted? Examine.

3. Is Mr. Sharma required to file his return of income for A.Y. 2024-25, if the fixed deposit of ₹ 20 lakh was
with Canara Bank instead of SBI, other facts remaining the same?

SOLUTION

1) Computation of total income of Mr. Sharma for A.Y.2024-25

Particulars `

I Salaries

Pension (₹52,000 x 12) 6,24,000

Less: Standard deduction u/s 16(ia) 50,000

5,74,000
II Income from Other Sources

Interest on fixed deposit (₹20 lakh x 8%) 1,60,000

Interest on savings account 9,500 1,69,500

Gross total income 7,43,500

Less: Deductions under Chapter VI-A

Under Section 80C

Five year term deposit (₹2 lakh, restricted to ₹1.5 lakh) 1,50,000

Under section 80TTB

Interest on fixed deposit and savings account, restricted to 50,000 2,00,000

50,000, since Mr. Sharma is a resident Indian of the age of 77 years.

Total Income 5,43,500

Computation of tax liability for A.Y.2024-25

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Particulars `
Tax payable [₹43,500 x 20% + ₹10,000] Add: Health 18,700
and Education Cess@4% Tax liability 748
Tax liability (rounded off) 19,448
19,450

2) SBI, being a specified bank, is required to deduct tax at source u/s 194P and remit the same to the Central
Government. In such a case, Mr. Sharma would not be required to file his return of income u/s 139.

3) If the fixed deposit of ₹ 20 lakh is with a bank other than SBI, which is the bank where his pension is
credited, then, Mr. Sharma would not qualify as a “specified senior citizen”. In this case, Mr. Sharma would
have to file his return of income u/s 139, since his total income (without giving effect to deduction under
Chapter VI-A) exceeds the basic exemption limit.

Income payable “net of tax” [Section 195A]

1. Where, under an agreement or other arrangement, the tax chargeable on any income referred to in the
foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then,
for the purposes of deduction of tax under those provisions such income shall be increased to such
amount as would, after deduction of tax thereon, be equal to the net amount payable under such
agreement or arrangement.
2. However, no grossing up is required in the case of tax paid under section 192(1A) by an employer on the
non-monetary perquisites provided to the employee.
3. When an amount is paid net of tax, the taxability has to be calculated by grossing up the amount, since
the tax itself represents the income of the payee.

Interest or dividend or other sums payable to Government, Reserve Bank or certain

corporations [Section 196]

1. No deduction of tax shall be made by any person from any sums payable to
i. the Government; or
ii. the Reserve Bank of India; or
iii. a corporation established by or under a Central Act, which is, under any law for the time being in
force, exempt from income-tax on its income; or
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iv. a Mutual Fund.

2. This provision for non-deduction is applicable when such sum is payable to the above entities by way
of-
i. interest or dividend in respect of securities or shares
(a) owned by the above entities; or
(b) in which they have full beneficial interest or
ii. any income accruing or arising to them.

CERTIFICATE FOR DEDUCTION OF TAX AT A LOWER RATE

[SECTION 197]
1. This section applies where, in the case of any income of any person or sum payable to any person, income-
tax is required to be deducted at the time of credit or payment, as the case may be, at the rates in force
as per the provisions of sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA and
194M.

2. In such cases, the assessee can make an application to the Assessing Officer for deduction of tax at a
lower rate or for non-deduction of tax.

3. If the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-
tax at lower rates or no deduction of income-tax, as the case may be, he may give to the assessee such
certificate, as may be appropriate.

4. Where the Assessing Officer issues such a certificate, then the person responsible for paying the income
shall deduct income-tax at such lower rates specified in the certificate or deduct no tax, as the case may
be, until such certificate is cancelled by the Assessing Officer.

5. Enabling powers have been conferred upon the CBDT to make rules for prescribing the procedure in this
regard.

NO DEDUCTION IN CERTAIN CASES [SECTION 197A]

1. Enabling provision for filing of declaration for receipt of dividend without deduction of tax [Sub-
section (1)]
i. This section enables an individual, who is resident in India and whose estimated total income of the
previous year is less than the basic exemption limit, to receive dividend, without deduction of tax at
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source under section 194 on furnishing a declaration in duplicate in the prescribed form [Form 15G]
and verified in the prescribed manner.

ii. The declaration in the above form is to be furnished in writing in duplicate by the declarant to the
person responsible for paying any income of the nature referred to in section 194. The declaration
will have to be to the effect that the tax on the estimated total income of the declarant of the
previous year in which such income is to be included in computing his total income will be Nil.

2. Enabling provision for filing of declaration for non-deduction of tax under section 192A or 193 or
194A or 194D or 194DA or 194-I or 194K by persons, other than companies and firms [Sub-section
(1A)]

No deduction of tax shall be made under the above provisions of the Act, where a person, who is not a
company or a firm, furnishes to the person responsible for paying any income of the nature referred to
in these sections, a declaration in writing in duplicate in the prescribed form [Form 15G] to the effect
that the tax on his estimated total income of the previous year in which such income is to be included
in computing his total income will be Nil.

3. Filing declaration not permissible if income/aggregate of incomes exceed basic exemption limit
[Sub-section (1B)]
Declaration cannot be furnished as per the above provisions, where
- payments of dividend; or
- payment of premature withdrawal from Employee Provident Fund; or
- income from interest on securities or
- interest other than “interest on securities” or units; or
- insurance commission; or
- payment in respect of life insurance policy; or
- rent; or
- income from units; or
- the aggregate of the amounts of such incomes in (i) to (viii) above
credited or paid or likely to be credited or paid during the previous year in which such income is to be
included exceeds the basic exemption limit.

4. Enabling provision for filing of declaration by resident senior citizens for non-deduction of tax at
source [Sub-section (1C)]
For a resident individual, who is of the age of 60 years or more at any time during the previous year, no
deduction of tax shall be made under section 192A or section 193 or section 194 or section 194A or
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section 194D or section 194DA or section 194EE or section 194-I or section 194K, if such individual
furnishes a declaration in writing in duplicate in Form 15H to the payer, that tax on his estimated total
income of the previous year in which such income is to be included in computing his total income is Nil.
The restriction contained in sub-section (1B) will not apply to resident senior citizens.

5. Non-deduction of tax in certain cases

Payments to notified person or class of persons including institutions/class of institutions etc.
[Sub-section (1F)]

No deduction of tax shall be made or deduction of tax shall be made at such lower rate, from such
payment to such person or class of persons, including institution, association or body or class of
institutions or associations or bodies as may be notified by the Central Government in the Official
Gazette in this behalf. Therefore, in respect of such payments made to notified person or class of
persons, no tax is to be deducted at source or tax is to be deducted at lower rate.

6. Time limit for delivery of one copy of declaration [Sub-section (2)]

On receipt of the declaration referred to in sub-sections (1), (1A) or (1C), the person responsible for
making the payment will be required to deliver or cause to be delivered to the Principal Chief
Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, one copy of the
declaration on or before the 7th of the month following the month in which the declaration is furnished
to him.

MISCELLANEOUS PROVISIONS
Tax deducted is income received [Section 198]
1. All sums deducted in accordance with the foregoing provisions shall, for the purpose of computing the
income of an assessee, be deemed to be income received.

2. However, the following tax paid or deducted would not be deemed to be income received by the assessee
for the purpose of computing the total income
i. the tax paid by an employer under section 192(1A) on non-monetary perquisites provided to the
employees
ii. tax deducted under section 194N

Credit for tax deducted at source [Section 199]

1. Tax deducted at source in accordance with the above provisions and paid to the credit of the Central
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Government shall be treated as payment of tax on behalf of the

- person from whose income the deduction was made; or
- owner of the security; or
- depositor; or
- owner of property; or
- unit-holder; or
- shareholder.
2. Any sum referred to in section 192(1A) and paid to the Central Government, shall be treated as the tax
paid on behalf of the person in respect of whose income, such payment of tax has been made.

3. The CBDT is empowered to frame rules for the purpose of giving credit in respect of tax deducted or tax
paid under Chapter XVII. The CBDT also has the power to make rules for giving credit to a person other
than the persons mentioned in (1) and (2) above. Further, the CBDT can specify the assessment year for
which such credit may be given.

Duty of person deducting tax [Section 200]

1. The persons responsible for deducting the tax at source should deposit the sum so deducted to the
credit of the Central Government or as the Board directs, within the prescribed time.

2. Further, an employer paying tax on non-monetary perquisites provided to employees in accordance with
section 192(1A), should deposit within the prescribed time, the tax to the credit of the Central
Government or as the Board directs.

3. Rule 30 prescribes the time and mode of payment to Government account of TDS or tax paid under
section 192(1A) and Rule 31A provides for submission of quarterly statements by every person
responsible for deduction of tax [depicted in the diagram given in page 7.73]

However, every person responsible for deduction of tax under section 194 IA, 194-IB or 194M have to
furnish to the Principal Director General of Income-tax (Systems) (in case of sections 194-IB and 194M)
or Director General of Income-tax (System) or the person authorised by them, a challan-cum-statement
in Form No.26QB, 26QC or 26QD respectively, within thirty days from the end of the month of deduction
of tax.

Correction of arithmetic mistakes and adjustment of incorrect claim during computerized processing of
TDS statements [Section 200A]

1. At present, all statements of tax deducted at source are filed in an electronic mode, thereby facilitating
computerised processing of these statements. Therefore, in order to process TDS statements on
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computer, electronic processing on the same lines as processing of income-tax returns has been
provided in section 200A.

2. The following adjustments can be made during the computerized processing of statement of tax
deducted at source or a correction statement
i. any arithmetical error in the statement; or
ii. an incorrect claim, if such incorrect claim is apparent from any information in the statement.

3. The term “an incorrect claim apparent from any information in the statement” shall mean such claim on
the basis of an entry, in the statement,
i. of an item, which is inconsistent with another entry of the same or some other item in such
statement;
ii. in respect of rate of deduction of tax at source, where such rate is not in accordance with the
provisions of the Act.

4. The interest, if any, has to be computed on the basis of the sums deductible as computed in the
statement;

5. The fee, if any, has to be computed in accordance with the provision of section 234E. A fee of ₹ 200 for
every day would be levied under section 234E for late furnishing of TDS statement from the due date of
furnishing of TDS statement to the date of furnishing of TDS/ statement. However, the total amount of
fee shall not exceed the total amount of tax deductible/collectible and such fee has to be paid before
delivering the TDS statement.

6. The sum payable by, or the amount of refund due to, the deductor has to be determined after
adjustment of interest and fee against the amount paid under section 200 or section 201 or section
234E and any amount paid otherwise by way of tax or interest or fee.

7. An intimation will be prepared and generated and sent to the deductor, specifying his tax liability or the
refund due, within one year from the end of the financial year in which the statement is filed. The refund
due shall be granted to the deductor.

8. For this purpose, the CBDT is empowered to make a scheme for centralized processing of statements
of TDS to determine the tax payable by, or refund due to, the deductor.

Consequences of failure to deduct or pay [Section 201]

1. Deemed assessee-in-default
Any person including the principal officer of a company –
i. who is required to deduct any sum in accordance with the provisions of the Act; or
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ii. an employer paying tax on non-monetary perquisites under section 192(1A). shall be deemed to be
an assessee-in-default, if he does not deduct, or does not pay or after deducting, fails to pay, the
whole or any part of the tax, as required by or under the provisions of the Income-tax Act, 1961.

2. Non-applicability of deeming provision

Any person (including the principal officer of the company) who fails to deduct the whole or any part of
the tax on the amount credited or paid to a payee shall not be deemed to be an assessee-in-default in
respect of such tax if such payee –
i. has furnished his return of income under section 139;
ii. has taken into account such sum for computing income in such return of income; and
iii. has paid the tax due on the income declared by him in such return of income, and the payer
furnishes a certificate to this effect from an accountant in such form as may be prescribed.

3. Interest Liability
i. A person deemed to be an assessee-in-default under section 201(1), for failure to deduct tax or to
pay the tax after deduction, is liable to pay simple interest @ 1% for every month or part of month
on the amount of such tax from the date on which tax was deductible to the date on which such
tax was actually deducted and simple interest @ 1½% for every month or part of month from the
date on which tax was deducted to the date on which such tax is actually paid [Section 201(1A)].

ii. Such interest should be paid before furnishing the statements in accordance with section 200(3).
iii. Where the payer fails to deduct the whole or any part of the tax on the amount credited or
payment made to a payee and is not deemed to be an assessee-in-default under section 201(1)
on account of payment of taxes by such payee, interest under section 201(1A)(i) i.e.,@1% p.m. or
part of month, shall be payable by the payer from the date on which such tax was deductible to
the date of furnishing of return of income by such payee. The date of deduction and payment of
taxes by the payer shall be deemed to be the date on which return of income has been furnished
by the payee. However, where an order is made by the Assessing Officer for assessee-in-default,
the interest shall be paid by the person in accordance with such order.

iv. Where the tax has not been paid after it is deducted, the amount of the tax together with the
amount of simple interest thereon shall be a charge upon all the assets of the person or the
company, as the case may be.

Certificate for tax deducted [Section 203]

i. Every person deducting tax at source have to issue a certificate to the effect that tax has been deducted
and specify the amount so deducted, the rate at which tax has been deducted and such other particulars
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as may be prescribed.

ii. Every person, being an employer, referred to in section 192(1A) shall, within such period, as may be
prescribed, furnish to the person in respect of whose income such payment of tax has been made, a
certificate to the effect that tax has been paid to the Central Government, and specify the amount so
paid, the rate at which the tax has been paid and such other particulars as may be prescribed.

iii. Certificate of TDS to be furnished under section 203 [Rule 31]

The certificate of deduction of tax at source to be furnished under section 203 shall be in Form No.16 in
respect of tax deducted or paid under section 192 and in any other case, Form No.16A.

Form No.16 shall be issued to the employee annually by 15th June of the financial year immediately
following the financial year in which the income was paid and tax deducted.

Form No.16A shall be issued quarterly within 15 days from the due date for furnishing the statement of
TDS under Rule 31A. Form No. 16B, 16C or 16D shall be issued by the every person responsible for
deduction of tax under section 194-IA, 194-IB or 194M to the payee within fifteen days from the due date
for furnishing the challan-cum statement in Form No. 26QB, 26QC or 26QD, respectively, under rule 31A.

Note – The entire TDS process can be understood at a glance from the diagram given in the next page.
The reference to Rules and Forms are only for the information of students. They are, however, not
required to memorize the Rule numbers and Form numbers for examination purposes.

Mandatory requirement of furnishing PAN in all TDS statements, bills, vouchers and
correspondence between deductor and deductee [Section 206AA]

1. The non-furnishing of PAN by deductees in many cases have led to delay in issue of refund on account
of problems in the processing of returns of income and in granting credit for tax deducted at source.

2. With a view to strengthening the PAN mechanism, section 206AA provides that any person whose
receipts are subject to deduction of tax at source i.e. the deductee, shall mandatorily furnish his PAN to
the deductor failing which the deductor shall deduct tax at source at higher of the following rates
- the rate prescribed in the Act;

- at the rate in force i.e., the rate mentioned in the Finance Act; or

- at the rate of 20%. [5% in case tax is required to be deducted at source u/s 194Q]

For instance, in case of rental payment for plant and machinery, where the payee does not furnish his
PAN to the payer, tax would be deductible @20% instead of @2% prescribed under section 194-I.
However, non-furnishing of PAN by the deductee in case of income by way of winnings from lotteries,
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card games etc., would result in tax being deducted at the existing rate of 30% under section 194B.
Therefore, wherever tax is deductible at a rate higher than 20%, this provision would not have any impact.

3. Tax would be deductible at the rates mentioned above also in cases where the taxpayer files a
declaration in Form 15G or 15H (under section 197A) but does not provide his PAN.

4. Further, no certificate under section 197 will be granted by the Assessing Officer unless the application
contains the PAN of the applicant.

5. Both the deductor and the deductee have to compulsorily quote the PAN of the deductee in all
correspondence, bills, vouchers and other documents exchanged between them.

6. If the PAN provided to the deductor is invalid or it does not belong to the deductee, it shall be deemed
that the deductee has not furnished his PAN to the deductor. Accordingly, tax would be deductible at
the rate specified in (2) above.

Note: The applicability of provisions of section 206AA on non-resident will be dealt with at the Final
Level.

Higher rate of TDS for non-filers of income-tax return [Section 206AB]

1. Section 206AB requires tax to be deducted at source under the provisions of this Chapter on any sum
or income or amount paid, or payable or credited, by a person to a specified person, at higher of the
following rates –
- at twice the rate prescribed in the relevant provisions of the Act;
- at twice the rate or rates in force i.e., the rate mentioned in the Finance Act; or
- at 5%
However, section 206AB is not applicable in case of tax deductible at source under sections 192, 192A,
194B, 194BA, 194BB, 194-IA, 194-IB, 194M6 or 194N.

2. In case the provisions of section 206AA are also applicable to the specified person, in addition to the
provisions of this section, then, tax is required to be deducted at higher of the two rates provided in
section 206AA and section 206AB.

3. Meaning of “specified person” – A person who has not furnished the return of income for assessment
year relevant to the previous year immediately preceding the financial year in which tax is required to
be deducted, for which the time limit for furnishing the return of income under section 139(1) has expired,
and the aggregate of tax deducted at source and tax collected at source in his case is ₹ 50,000 or more
in the said previous year.
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However, the specified person would not include

- a non-resident who does not have a permanent establishment in India7; or

- a person who is not required to furnish the return of income for the assessment year relevant to the
said previous year and is notified by the Central Government in this behalf

ADVANCE PAYMENT OF TAX [SECTIONS 207 TO 219]

Liability for payment of advance tax
1. Tax shall be payable in advance during any financial year, in accordance with the provisions of sections
208 to 219, in respect of an assessee’s current income i.e. the total income of the assessee which would
be chargeable to tax for the assessment year immediately following that financial year [Section 207].

2. Under section 208, obligation to pay advance tax arises in every case where the advance tax payable is
₹ 10,000 or more.

Note - An assessee who is liable to pay advance tax of less than ₹ 10,000 will not be saddled with interest
under sections 234B and 234C for defaults in payment of advance tax. However, the consequences
under section 234A regarding interest for belated filing of return would be attracted.

3. In case of senior citizens who have passive source of income like interest, rent, etc., the requirement of
payment of advance tax causes genuine compliance hardship. Therefore, in order to reduce the
compliance burden on such senior citizens, exemption from payment of advance tax has been provided
to a resident individual-
i. not having any income chargeable under the head “Profits and gains of business or profession”; and
ii. of the age of 60 years or more.
Such senior citizens need not pay advance tax and are allowed to discharge their tax liability (other than
TDS) by payment of self-assessment tax.

Computation of advance tax

1. An assessee has to estimate his current income and pay advance tax thereon. He need not submit any
estimate or statement of income to the Assessing Officer, except where he has been served with notice
by the Assessing Officer.

2. Where an obligation to pay advance tax has arisen, the assessee shall himself compute the advance tax
payable on his current income at the rates in force in the financial year and deposit the same, whether
or not he has been earlier assessed to tax.
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3. In the case of a person who has been already assessed by way of a regular assessment in respect of
the total income of any previous year, the Assessing Officer, if he is of the opinion that such person is
liable to pay advance tax, may serve an order under section 210(3) requiring the assessee to pay
advance tax.

4. For this purpose, the total income of the latest previous year in respect of which the assessee has been
assessed by way of regular assessment or the total income returned by the assessee in any return of
income for any subsequent previous year, whichever is higher, shall be taken as the basis for
computation of advance tax payable.

5. The above order can be served by the Assessing Officer at any time during the financial year but not
later than the last date of February.

6. If, after sending the above notice, but before 1st March of the financial year, the assessee furnishes a
return relating to any later previous year or an assessment is completed in respect of a later return of
income, the Assessing Officer may amend the order for payment of advance tax on the basis of the
computation of the income so returned or assessed.

7. If the assessee feels that his own estimate of advance tax payable would be less than the one sent by
the Assessing Officer, he can file estimate of his current income and advance tax payable thereon.

8. Where the advance tax payable on assessee’s estimation is higher than the tax computed by the
Assessing Officer, then, the advance tax shall be paid based upon such higher amount.

9. In all cases, the tax calculated shall be reduced by the amount of tax deductible at source.

No reduction of ‘tax deductible but not deducted’ while computing advance tax liability

- As per the provisions of section 209, the amount of advance tax payable by a person is computed
by reducing the amount of income-tax which would be deductible at source during the financial year
from any income which has been taken into account in computing the total income.
- Some courts have opined that in case where the payer pays any amount (on which tax is deductible
at source) without deduction of tax at source, the payee shall not be liable to pay advance tax to
the extent tax is deductible from such amount.
- With a view to make such a person (payee) liable to pay advance tax, the proviso to section 209(1)(d)
provides that the amount of tax deductible at source but not so deducted by the payer shall not be
reduced from the income tax liability of the payee for determining his liability to pay advance tax.
- In effect, only if tax has actually been deducted at source, the same can be reduced for computing
advance tax liability of the payee. Tax deductible but not so deducted cannot be reduced for
computing advance tax liability of the payee.
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10. The amount of advance tax payable by an assessee in the financial year calculated by-
- the assessee himself based on his estimation of current income; or
- the Assessing Officer as a result of an order under section 210(3) or amended order under section
210(4)

is subject to the provisions of section 209(2), as per which the net agricultural income has to be
considered for the purpose of computing advance tax.

Instalments of advance tax and due dates

1. Common advance tax payment schedule for both corporates and non corporates [Other than assessees
computing profits on presumptive basis under section 44AD(1) or section 44ADA(1)]:

Due date of instalment Amount payable

On or before 15th June Not less than 15% of advance tax liability
On or before 15th September Not less than 45% of advance tax liability, as reduced by the amount,
if any, paid in the earlier instalment.

On or before 15th December Not less than 75% of advance tax liability, as reduced by the amount
or amounts, if any, paid in the earlier instalment or instalments.

On or before 15th March The whole amount of advance tax liability as reduced by the amount
or amounts, if any, paid in the earlier instalment or instalments.

Note - Any amount paid by way of advance tax on or before 31st March shall also be treated as advance
tax paid during each financial year ending on 31st March.

2. Advance tax payment by assessees computing profits on presumptive basis under section 44AD(1)or
section 44ADA(1)
An eligible assessee, opting for computation of profits or gains of business on presumptive basis in
respect of eligible business referred to in section 44AD(1) or for computation of profits or gains of
profession on presumptive basis in respect of eligible profession referred to in section 44ADA(1), shall
be required to pay advance tax of the whole amount in one instalment on or before 15th March of the
financial year. However, any amount paid by way of advance tax on or before 31st March shall also be
treated as advance tax paid during each financial year ending on 31st March.

3. If the last day for payment of any instalment of advance tax is a day on which the receiving bank is
closed, the assessee can make the payment on the next immediately following working day, and in such
cases, the interest leviable under sections 234B and 234C would not be charged.
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4. Where advance tax is payable by virtue of the notice of demand issued8 by the Assessing Officer, the
whole or the appropriate part of the advance tax specified in such notice shall be payable on or before
each of such due dates as fall after the date of service of notice of demand.

5. Where the assessee does not pay any instalment by the due date, he shall be deemed to be an assessee
in default in respect of such instalment.

Credit for advance tax [Section 219]

Any sum, other than interest or penalty, paid by or recovered from an assessee as advance tax, is treated as a
payment of tax in respect of the income of the previous year and credit thereof shall be given in the regular
assessment.

Interest for non-payment or short-payment of advance tax [Section 234B]

1. Interest under section 234B is attracted for non-payment of advance tax or payment of advance tax of
an amount less than 90% of assessed tax.

2. The interest liability would be 1% per month or part of the month from 1st April following the financial
year upto the date of determination of income under section 143(1) and where a regular assessment is
made, upto the date of such regular assessment.

3. Such interest is calculated on the amount of difference between the assessed tax and the advance tax
paid.

4. Assessed tax is the tax calculated on total income determined under section 143(1) and where a regular
assessment is made, the tax on the total income determined under such regular assessment less
- tax deducted or collected at source.

- any relief of tax allowed under section 89

- any tax credit allowed to be set off in accordance with the provisions of section 115JD, in case the
assessee exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).

Tax on the total income determined under section 143(1) would not include the additional income-tax, if
any, payable under section 140B or section 143.
Tax on the total income determined under such regular assessment would not include the additional
income-tax, if any, payable under section 140B.
Section 140B is discussed in detail in Chapter 8.

5. However, where self-assessment tax is paid by the assessee under section 140A or otherwise, interest
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shall be calculated upto the date of payment of such tax and reduced by the interest, if any, paid under
section 140A towards the interest chargeable under this section. Thereafter, interest shall be calculated
at 1% on the amount by which the tax so paid together with the advance tax paid falls short of the
assessed tax.

Interest payable for deferment of advance tax [Section 234C]

1. Manner of computation of interest under section 234C for deferment of advance tax by corporate and
non-corporate assessees:

In case an assessee, other than an assessee who declares profits and gains in accordance with the
provisions of section 44AD(1) or section 44ADA(1), who is liable to pay advance tax under section 208
has failed to pay such tax or the advance tax paid by such assessee on its current income on or before
the dates specified in column (1) is less than the specified percentage [given in column (2)] of tax due on
returned income, then simple interest@1% per month for the period specified in column (4) on the
amount of shortfall, as per column (3) is leviable under section 234C.

Specified date Specified Shortfall in advance tax Period

%
(1) (2) (3) (4)
15th June 15% 15% of tax due on returned income (-) 3 months
advance tax paid up to 15th June

15th September 45% 45% of tax due on returned income (-) 3 months
advance tax paid up to 15th September

15th December 75% 75% of tax due on returned income (-) 3 months
advance tax paid up to 15th December
15th March 100% 100% of tax due on returned income (-) 1 month
advance tax paid up to 15th March

Note – However, if the advance tax paid by the assessee on the current income, on or before 15th June
or 15th September, is not less than 12% or 36% of the tax due on the returned income, respectively, then,
the assessee shall not be liable to pay any interest on the amount of the shortfall on those dates.

2. Computation of interest under section 234C in case of an assessee who declares profits and gains in
accordance with the provisions of section 44AD(1) or section 44ADA(1):
In case an assessee who declares profits and gains in accordance with the section 44AD(1) or section
44ADA(1), as the case may be, who is liable to pay advance tax under section 208 has failed to pay such
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tax or the advance tax paid by the assessee on its current income on or before 15th March is less than
the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate
of 1% on the amount of the shortfall from the tax due on the returned income.

3. Non-applicability of interest under section 234C in certain cases: Interest under section 234C shall not
be leviable in respect of any shortfall in payment of tax due on returned income, where such shortfall is
on account of under-estimation of or failure to estimate-
- the amount of capital gains;
- income of nature referred to in section 2(24)(ix) i.e., winnings from lotteries, crossword puzzles etc.;
- income under the head “Profits and gains of business or profession” in cases where the income
accrues or arises under the said head for the first time.
- the amount of dividend income other than deemed dividend referred u/s 2(22)(e)
However, the assessee should have paid the whole of the amount of tax payable in respect of such
income referred to in (i), (ii), (iii) or (iv), as the case may be, had such income been a part of the total
income, as part of the remaining instalments of advance tax which are due or where no such instalments
are due, by 31st March of the financial year.

4. Meaning of tax due on returned income Tax due on returned income means the tax calculated on total
income declared in the return furnished by the assessee less
- tax deducted or collected at source
- any relief of tax allowed under section 89
- any tax credit allowed to be set off in accordance with the provisions of section 115JD, in case the
assessee exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).

TAX COLLECTION AT SOURCE

1. Applicability and Rates

i. Sale of certain goods
Under section 206C(1), sellers of certain goods are required to collect tax from the buyers at the
specified rates. The specified percentage for collection of tax at source is as follows:

Nature of Goods Percentage

(a) Alcoholic liquor for human consumption 1% 1%

(b) Tendu leaves 5%
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(c) Timber obtained under a forest lease 2.5%

(d) Timber obtained by any mode other than (c) 2.5%
(e) Any other forest produce not being timber or tendu leaves 2.5%
(f) Scrap 1%
(g) Minerals, being coal or lignite or iron ore 1%

The tax should be collected at the time of debiting of the amount payable by the buyer to his account
or at the time of receipt of such amount from the buyer, whichever is earlier.

Non-applicability of TCS u/s 206C(1) [Section 206C(1A)]

No collection of tax shall be made under section 206C(1), in the case of a resident buyer, if such buyer
furnishes to the person responsible for collecting tax, a declaration in writing in duplicate in the
prescribed form and verified in the prescribed manner to the effect that goods referred to in section
206C(1) above are to be utilised for the purpose of manufacturing, processing or producing articles or
things or for the purposes of generation of power and not for trading purposes.

ii. Lease or a licence of parking lot, toll plaza or mine or a quarry

Section 206C(1C) provides for collection of tax by every person who grants a lease or a licence or
enters into a contract or otherwise transfers any right or interest in any
- parking lot or
- toll plaza or
- a mine or a quarry
to another person (other than a public sector company) for the use of such parking lot or toll plaza
or mine or quarry for the purposes of business. The tax shall be collected as provided, from the
licensee or lessee of any such licence, contract or lease of the specified nature, at the rate of 2%.
Mining and quarrying would not include mining and quarrying of mineral oil. Mineral oil includes
petroleum and natural gas. The tax should be collected at the time of debiting of the amount payable
by the licensee or lessee to his account or at the time of receipt of such amount from the licensee
or lessee, whichever is earlier.

iii. Sale of motor vehicle of value exceeding ₹ 10 lakhs

Section 206C(1F) provides that every person, being a seller, who receives any amount as
consideration for sale of a motor vehicle of the value exceeding ₹ 10 lakhs, shall, at the time of receipt
of such amount, collect tax from the buyer@1% of the sale consideration.
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iv. Remittance under LRS of RBI through an authorized dealer or purchase of an overseas tour
package
Section 206C(1G) provides for collection of tax by every person,
- being an authorized dealer, who receives amount, under the Liberalised Remittance Scheme of
the RBI, for remittance from a buyer, being a person remitting such amount;
- being a seller of an overseas tour programme package who receives any amount from the buyer
who purchases the package

Tax has to be collected at the time of debiting the amount payable by the buyer or at the time of
receipt of such amount from the said buyer, by any mode, whichever is earlier.

Rate of TCS in case of collection by an authorized dealer/ seller of an overseas tour programme
package

S. Amount and purpose of remittance Rate of TCS Rate of TCS

No. upto on or after
30.9.2023 1.10.2023
(i) Where the amount is for purchase of an overseas tour 5% of 5% till ₹7
programme package such amount lakhs,
(without 20%
thereafter
any threshold
limit)
(ii) 1. Where the amount is remitted for the purpose of Nil
education or medical treatment; and (No tax to be collected at
source)
2. the amount or aggregate of the amounts being
remitted by a buyer is less than ₹7 lakhs in a
financial year
(iii) 1. Where the amount is remitted for the purpose other Nil
than mentioned in (ii) above; and (No tax to be collected at
source)
2. the amount or aggregate of the amounts being
remitted by a buyer is less than ₹7 lakhs in a
financial year

(iv) a) where the amount is remitted for the purpose of 5% of the amt or agg. of amts
education or medical treatment; and in excess of ₹7 lakh
b) the amount or aggregate of the amounts in excess
of ₹7 lakhs is remitted by the buyer in a financial
year
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(v) a) where the amount is remitted for the purpose other 5% of the amt 20% of the
than mentioned in (iv) above; and or agg. of amt or
amts in agg. of
b) the amount or aggregate of the amounts in excess
excess of amts in
of ₹7 lakhs is remitted by the buyer in a financial
₹7 lakh excess of
year
₹7 lakh
(vi) (a) where the amount being remitted out is a loan
obtained from any financial institution as defined in 0.5% of the amt or agg. of
section 80E, for the purpose of pursuing any amts in excess of ₹7 lakh
education; and
(b) the amount or aggregate of the amounts in excess of
₹7 lakhs is remitted by the buyer in a financial year

Cases where no tax is to be collected

(i) No TCS by the authorized dealer on an amount in respect of which the sum has been
collected by the seller

(ii) No TCS, if the buyer is liable to deduct tax at source under any other provision of the Act
and has deducted such tax

(iii) No TCS, if the buyer is the Central Government, a State Government, an embassy, a High
Commission, a legation, a commission, a consulate, the trade representation of a foreign
State, a local authority9 or any other person notified by the Central Government, subject to
fulfillment of conditions stipulated thereunder.

Accordingly, the CBDT has, vide notification no. 99/2022 dated 17.8.2022, notified that the
provisions of section 206C(1G) would not apply to a person (being a buyer) who is a non
resident in India in terms of section 6 and does not have a permanent establishment in India.

v. Sale of goods of value exceeding ₹ 50 lakh

a) As per section 206C(1H), tax is also required to be collected by a seller, who receives any amount
as consideration for sale of goods of the value or aggregate of such value exceeding ₹ 50 lakhs
in a previous year [other than exported goods or goods covered under sub-sections (1)/(1F)/(1G)]

b) Tax is to be collected at source @0.1% u/s 206C(1H) of the sale consideration exceeding ₹ 50
lakhs, at the time of receipt of consideration.

c) Tax is, however, not required to be collected if the buyer is liable to deduct tax at source under
any other provision of the Act on the goods purchased by him from the seller and has deducted
such tax.
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vi. Power of the CBDT to issue guidelines

In case of any difficulty arises in giving effect to the provisions of section 206C(1G)/(1H), the CBDT
is empowered to issue guidelines, with the approval of the Central Government, for the purpose of
removing the difficulty.

Every guideline issued by the CBDT shall be laid before each House of Parliament, and shall be
binding on the income-tax authorities and on the person liable to collect tax.

2. Meaning of certain terms

Term Meaning
(i) Overseas For section 206C(1G)
tour program Any tour package which offers visit to a country/(ies) or territory/(ies) outside India.
package It includes expenses for travel or hotel stay or boarding or lodging or any other
expenditure of similar nature or in relation thereto. [Clause (ii) of Explanation to
section 206C(1G)]

(ii) Buyer For section 206C(1H):

A person who purchases any goods but does not include –
a) the Central Government, a State Government, an embassy, a High Commission,
legation, commission, consulate and the trade representation of a foreign State,
or
b) a local authority7; or
c) a person importing goods into India or any other person as the Central
Government may, by notification in the Official Gazette, specify for this purpose,
subject to stipulated conditions.

For section 206C(1):

A person who obtains in any sale, by way of auction, tender, or any other mode,
goods of the nature specified in the Table in point (1) or the right to receive any such
goods but does not include –
a) a public sector company, the Central Government, a State Government, and an
embassy, a high commission, legation, commission, consulate and the trade
representation, of a foreign State and a club, or

b) a buyer in the retail sale of such goods purchased by him for personal
consumption [Explanation to section 206C]
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For section 206C(1F):

A person who obtains in any sale, goods of the nature specified therein, but does
not include –
a) the Central Government, a State Government and an embassy, a High
Commission, legation, commission, consulate and the trade representation of a
foreign State; or
b) a local authority; or
c) a public sector company which is engaged in the business of carrying
passengers. [Explanation to section 206C]

(iii) Seller For section 206C(1H):

A person whose total sales, gross receipts or turnover from the business carried on
by him exceed ₹ 10 crores during the financial year immediately preceding the
financial year in which sale of goods is carried out. However, seller does not include
a person as notified by the Central Government for this purpose, subject to
fulfillment of the stipulated conditions [Clause (b) of Explanation to section
206C(1H)]

For section 206C(1) and section 206C(1F):

- The Central Government,

- a State Government or
- any local authority or
- corporation or
- authority established by or under a Central, State or Provincial Act, or
- any company or
- firm or
- co-operative society
Seller also includes an individual or a HUF whose total sales, gross receipts or
turnover from the business or profession carried on by him exceed ₹ 1 crore in case
of business and ₹ 50 lakhs in case of profession during the financial year
immediately preceding the financial year in which the goods of the nature specified
in the Table in point (1) are sold.
[Explanation to section 206C]

(iv) Scrap Waste and scrap from the manufacture or mechanical working of materials which is
definitely not usable as such because of breakage, cutting up, wear and other
reasons. [Explanation to section 206C]
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3. Higher rate of TCS for non-furnishers of PAN [Section 206CC]

i. The provisions of section 206CC require tax collection at the higher of the following two rates, in
case of failure by the person paying any sum or amount on which tax is collectible at source
(collectee) to furnish PAN [PAN or Aadhar number in case of section 206C(1H)] to the person
responsible for collecting tax at source (collector)
- at twice the rate specified in the relevant provision of the Act
- at 5% [1%, in case tax is required to be collected at source u/s 206C(1H)]

However, the maximum the rate of TCS under this section shall not exceed 20%.
i. Tax would be collectible at the rates mentioned above also in case where the person furnishes a
declaration under section 206C(1A) but does not provide his PAN.

ii. Both the collectee and the collector have to compulsorily quote the PAN of the collectee in all
correspondence, bills, vouchers and other documents exchanged between them.

iii. If the PAN provided to the collector is invalid or it does not belong to the collectee, it shall be deemed
that the collectee has not furnished his PAN to the collector. Accordingly, tax would be collectible
at the rate specified in (i) above.

iv. The provisions of section 206CC do not apply to a non-resident who does not have a permanent
establishment in India.

4. Higher rate of TCS for non-filers of income-tax return [Section 206CCA]

i. Section 206CCA requires tax to be collected at source under the provisions of this Chapter on any
sum or amount received by a person from a specified person, at higher of the following rates
- at twice the rate specified in the relevant provision of the Act;
- at 5%
However, the maximum the rate of TCS under this section shall not exceed 20%.
ii. In case the provisions of section 206CC are also applicable to the specified person, in addition to the
provisions of section 206CCA, then, tax is required to be collected at higher of the two rates provided
in section 206CC and section 206CCA.

iii. Meaning of “specified person” – A person who has not furnished the return of income for assessment
year relevant to the previous year immediately preceding the financial year in which tax is required
to be collected, for which the time limit for furnishing the return of income under section 139(1) has
expired, and the aggregate of tax deducted at source and tax collected at source in his case is ₹
50,000 or more in the said previous year.
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However, the specified person would not include –

- a non-resident who does not have a permanent establishment in India10; or

- a person who is not required to furnish the return of income for the assessment year relevant
to the said previous year and is notified by the Central Government in this behalf.

5. CBDT Clarification relating to certain issues with respect to section 206C(1F)

These amendments in section 206C have given rise to certain issues relating to the scope and applicability
of the provisions. Accordingly, the CBDT has, vide Circular No. 22/2016 dated 8.6.2016, clarified the following
issues in “Question & Answer (Q&A)” format.

Q.1 Whether TCS@1% is on sale of motor vehicle at retail level or also on sale of motor vehicles by
manufacturers to dealers/ distributors?
A. To bring high value transactions within the tax net, section 206C has been amended to provide that the seller
shall collect the tax @ 1% from the purchaser on sale of motor vehicle of the value exceeding ₹ 10 lakhs. This is
brought to cover all transactions of retail sales and accordingly, it will not apply on sale of motor vehicles by
manufacturers to dealers/distributors.

Q.2 Whether TCS@1% on sale of motor vehicle is applicable only to luxury cars?
A. No, as per section 206C(1F), the seller shall collect tax@1% from the purchaser on sale of any motor vehicle
of the value exceeding ₹ 10 lakhs.

Q.3 Whether TCS@1% is applicable in the case of sale to Government Departments, Embassies, Consulates
and United Nation Institutions, of motor vehicle or any other goods or provision of services?
A. Government, institutions notified under United Nations (Privileges and Immunities) Act 1947, and Embassies,
Consulates, High Commission, Legation, Commission and trade representation of a foreign State shall not be
liable to levy of TCS@1% under section 206C(1F).

Q.4 Whether TCS is applicable on each sale of motor vehicle or on aggregate value of sale during the year?
A. Tax is to be collected at source@1% on sale consideration of a motor vehicle exceeding ₹ 10 lakhs. It is
applicable to each sale and not to aggregate value of sale made during the year.

Q.5 Whether TCS@1% on sale of motor vehicle is applicable in case of an individual?

A. The definition of "Seller" as given in clause (c) of the Explanation below sub-section (11) of section 206C shall
be applicable in the case of sale of motor vehicles also.

Q.6 How would the provisions of TCS on sale of motor vehicle be applicable in a case where part of the
payment is made in cash and part is made by cheque?
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A. The provisions of TCS on sale of motor vehicle exceeding ₹ 10 lakhs is not dependent on mode of payment.
Any sale of motor vehicle exceeding ₹ 10 lakhs would attract TCS@1%.

6. CBDT Clarification relating to certain issues with respect to section 206C(1H)

In exercise of the power to issue guidelines, the CBDT has, with the approval of Central Government, vide
Circular no. 17/2020 dated 29.9.2020, issued the following guidelines for removing certain difficulties-

1. Applicability on sale of Motor vehicle:

The provisions of section 206C(1F) apply to sale of motor vehicle of the value exceeding ₹ 10 lakhs.
Section 206C(1H) excludes from its applicability goods covered under section 206C(1F). It may be noted
that the scope of sections 206C(1H) and (1F) are different. While section 206C(1F) is based on single sale
of motor vehicle, section 206C(1H) is for receipt above ₹ 50 lakhs. Hence, in order to remove difficulty
that whether all motor vehicles are excluded from the applicability of section 206C(1H), it is clarified that,
- Receipt of sale consideration from a dealer would be subjected to TCS under section 206C(1H), if
such sales are not subjected to TCS under section 206C(1F)
- In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value of ₹
10 lakhs or less to a buyer would be subjected to TCS under section 206C(1H), if the receipt of sale
consideration for such vehicles during the previous year exceeds ₹ 50 lakhs during the previous
year.
- In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value
exceeding ₹ 10 lakhs would not be subjected to TCS under section 206C(1H) if such sales are
subjected to TCS under section 206C(1F).

2. Adjustment for sale return, discount or indirect taxes:

It is been clarified that no adjustment on account of sale return or discount or indirect taxes including
GST is required to be made for collection of tax under section 206C(1H) since the collection is made with
reference to receipt of amount of sale consideration.

Note – It can be inferred that no adjustment for GST is required to be made under section 206C(1F) also,
since collection is made with reference to receipt of amount of sale consideration.

ILLUSTRATION 13
Mr. Gupta, a resident Indian, is in retail business and his turnover for F.Y.2022-23 was ₹ 12 crores. He regularly
purchases goods from another resident, Mr. Agarwal, a wholesaler, and the aggregate payments during the
F.Y.2023-24 was ₹ 95 lakh (₹ 20 lakh on 1.6.2023, ₹ 25 lakh on 12.8.2023, ₹ 22 lakh on 23.11.2023 and ₹ 28 lakh on
25.3.2024). Assume that the said amounts were credited to Mr. Agarwal’s account in the books of Mr. Gupta on
the same date. Mr. Agarwal’s turnover for F.Y.2022-23 was ₹ 15 crores.
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1. Based on the above facts, examine the TDS/TCS implications, if any, under the Income-tax Act, 1961.
2. Would your answer be different if Mr. Gupta’s turnover for F.Y.2022-23 was ₹ 8 crores, all other facts
remaining the same?

3. Would your answer to (1) and (2) change, if PAN has not been furnished by the buyer or seller, as
required?

SOLUTION
1. Since Mr. Gupta’s turnover for F.Y.2022-23 exceeds 10 crores, and payments made by him to Mr. Agarwal,
a resident seller exceed ₹ 50 lakhs in the P.Y.2023-24, he is liable to deduct [email protected]% of ₹ 45 lakhs (being
the sum exceeding ₹ 50 lakhs) in the following manner-

No tax is to be deducted u/s 194Q on the payments made on 1.6.2023 and 12.8.2023, since the aggregate
payments till that date i.e. 45 lakhs, has not exceeded the threshold of ₹ 50 lakhs.

Tax of ₹ 1,700 (i.e., 0.1% of ₹ 17 lakhs) has to be deducted u/s 194Q from the payment/ credit of ₹ 22 lakh
on 23.11.2023 [₹ 22 lakh – ₹ 5 lakhs, being the balance unexhausted threshold limit].

Tax of ₹ 2,800 (i.e., 0.1% of ₹ 28 lakhs) has to be deducted u/s 194Q from the payment/ credit of ₹ 28
lakhs on 25.3.2024.

Note – In this case, since both section 194Q and 206C(1H) applies, tax has to be deducted u/s 194Q.

2. If Mr. Gupta’s turnover for the F.Y.2022-23 was only ₹ 8 crores, TDS provisions under section 194Q would
not be attracted. However, TCS provisions under section 206C(1H) would be attracted in the hands of Mr.
Agarwal, since his turnover exceeds ₹ 10 crores in the F.Y.2022-23 and his receipts from Mr. Gupta exceed
₹ 50 lakhs.

No tax is to be collected u/s 206C(1H) on 1.6.2023 and 12.8.2023, since the aggregate receipts till that
date i.e. 45 lakhs, has not exceeded the threshold of ₹ 50 lakhs.

Tax of ₹ 1,700 (i.e., 0.1% of ₹ 17 lakhs) has to be collected u/s 206C(1H) on 23.11.2023 (₹ 22 lakh – ₹ 5 lakhs,
being the balance unexhausted threshold limit).

Tax of ₹ 2,800 (i.e., 0.1% of ₹ 28 lakhs) has to be collected u/s 206C(1H) on 25.3.2024.

3. In case (1), if PAN is not furnished by Mr. Agarwal to Mr. Gupta, then, Mr. Gupta has to deduct tax@5%,
instead of 0.1%. Accordingly, tax of ₹ 85,000 (i.e., 5% of ₹ 17 lakhs) and ₹ 1,40,000 (5% of ₹ 28 lakhs) has
to be deducted by Mr. Gupta u/s 194Q on 23.11.2023 and 25.3.2024, respectively.

In case (2), if PAN is not furnished by Mr. Gupta to Mr. Agarwal, then, Mr. Agarwal has to collect tax@1%
instead of 0.1%. Accordingly, tax of ₹ 17,000 (i.e., 1% of ₹ 17 lakhs) and ₹ 28,000 (1% of ₹ 28 lakhs) has to
be collected by Mr. Agarwal u/s 206C(1H) on 23.11.2023 and 25.3.2024, respectively.
SIR
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Overview - TCS u/s 206C(1)/(1F)/(1H) v. TDS u/s 194Q

Particulars 206C(1) 206C(1F) 206C(1H) 194Q

TCS TCS TCS TDS

1. Point of time At the time of debit At the time of At the time of At the time of
or at the time of receipt receipt payment or
receipt, whichever credit, whichever
is earlier is earlier
2. % of TDS/TCS, as Different rates for 1% of sale 0.1% of the 0.1% of the value
the case may be different goods consideration sale of purchases
(See below) consideration exceeding ₹50
exceeding lakhs from a
₹50 lakhs from seller
a buyer

3. Seller Central Govt., State Govt., Local Authority, Seller’s Buyer’s turnover
[206C(1)/(1F)/(1H)] Company, Co-op society, firm, turnover should should exceed
Buyer (194Q) corporation, Individual/HUF whose exceed ₹10 ₹10 crore in the
turnover in F.Y.2022-23 ₹1 crore crore in the F.Y.2022-23
(business)/ ₹50 lakh (profession) F.Y.2022-23

4. Exclusions from
the definition of
buyer
Common Central Govt, State Govt, embassy, High commission,
Exclusions from legation, consulate, commission, trade rep. of a foreign state
206C(1)/(1F)/(1H)

Specific exclusions Public sector Co., a Local authority, Local authority,

club and Buyer in Public sector co. Persons
retail sale of goods engaged in the importing
purchased for business of goods into
personal carrying India or other
consumption passengers notified
persons

Goods 206C(1) 206C 194Q 206C(1H)

(1F)
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TCS TCS TDS TCS

1 Alcoholic liquor for human consumption 1%

2 Tendu leaves 5%

3 Timber obtained under forest lease 2.5%

4 Timber obtained by any other mode 2.5%

5 Any other forest produce not being timber 2.5%

or tendu leaves

6 Scrap 1%

7 Minerals, being coal or lignite or iron ore 1%

If items (1) to (7) are used for Nil, by N.A. Yes, if Nil
manufacturing, processing or producing virtue of turnover of
articles or things or generation of section buyer
electricity and not for trading purposes 206C(1A) exceeds ₹10
crore in the
F.Y.2022-23
and value of
purchases
from seller in
F.Y.2023-24
exceeds ₹50
lakhs
8 Sale of Motor Vehicle of value exceeding - 1% of - -
₹10 lakhs sale
consider
ation
9 Sale of Motor Vehicle of value exceeding - - Yes, if turnover No, if
₹10 lakhs by manufacturer to dealers/ of dealer dealer is
distributers exceeds ₹10 required to
crore in the deduct tax
F.Y.2022-23 at source.
and value of Yes, if
motor vehicles dealer is
purchased not
from required to
manufacturer deduct tax
in the F.Y.2023- at source
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24 exceeds and
₹50 lakhs. manufactu
rer’s
turnover
exceeds
₹10 crore
in the F.Y.
2022-23
and value
of motor
vehicles
sold to
dealer in
F.Y.2023-24
exceeds
₹50 lakhs

10 Sale of Motor Vehicle of value not exceeding - - - -

₹10 lakhs and aggregate value of all motor
vehicles sold by the seller to the buyer ≤
₹50 lakhs in the F.Y.2023-24

11 Sale of Motor Vehicle of value not exceeding - - Yes, if turnover No, if

₹10 lakhs but aggregate value of all motor of buyer buyer is
vehicles sold by the seller to the buyer > exceeds ₹10 required to
₹50 lakhs in the F.Y.2023-24 crore in the deduct tax
F.Y.2022-23. at source.
Yes, if
buyer is
not
required to
deduct
TDS and
seller’s
turnover
exceeds
₹10 crore
in the
F.Y.2022-23

12 Sale of goods other than mentioned in 1 to

11
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If aggregate value of goods sold by seller to - - - -

buyer is ₹50 lakhs or less
If aggregate value of goods sold by the - - Yes, if turnover No, if
seller to buyer is more than ₹50 lakhs of buyer buyer is
exceeds ₹10 required to
crore in the deduct tax
F.Y.2022-23. at source.
Yes, if
buyer is
not
required to
deduct
TDS and
seller’s
turnover
exceeds
₹10 crore
in the
F.Y.2022-23

7. Furnishing of copy of declaration within specified time [Section 206C(1B)]

The person responsible for collecting tax under this section shall deliver or cause to be delivered to the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner one copy
of the declaration referred to in sub-section (1A) on or before 7th of the month next following the month in
which the declaration is furnished to him.

8. TCS to be paid within prescribed time [Section 206C(3)]

Any amount collected under this section shall be paid within the prescribed time to the credit of the Central
Government or as the Board directs.

Time limit for paying tax collected to the credit of the Central Government [Rule 37CA]

Person collecting sums in Period within which such sum

accordance with section Circumstance should be paid to the credit of
206C the Central Government
(1) An office of the (i) where the tax is paid without on the same day
Government production of an income-tax
challan
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(ii) where tax is paid accompanied on or before 7 days from the end
by an income-tax challan of the month in which the
collection is made

(2) Collectors other than an within one week from the last day
office of the Government of the month in which the
collection is made

9. Main differences between TDS and TCS

TDS TCS

(1) TDS is tax deduction at source TCS is tax collection at source.

(2) Person responsible for paying is required - Seller of certain goods is responsible for
to deduct tax at source at the prescribed collecting tax at source at the prescribed rate
rate. from the buyer.
- Person who grants licence or lease (in respect of
any parking lot, toll plaza, mine or quarry) is
responsible for collecting tax at source at the
prescribed rate from the licensee or lessee, as
the case may be.
- Authorised dealer receiving amount for
remittance under the LRS of the RBI or seller of
an overseas tour program package is responsible
for collecting tax at source at the prescribed rate
from the buyer.

(3) Generally, tax is required to be deducted Generally, tax is required to be collected at source at
at the time of credit to the account of the the time of debiting of the amount payable by the
payee or at the time of payment, buyer of certain goods to the account of the buyer or
whichever is earlier. at the time of receipt of such amount from the said
buyer, whichever is earlier.
However, in case of payment of salary,
However, in case of sale of motor vehicle of the value
payment in respect of life insurance policy
exceeding ₹ 10 lakhs and sale of goods exceeding ₹
etc. tax is required to be deducted at the
50 lakhs other than exported goods and goods
time of payment.
mentioned in section 206C(1), tax collection at source
u/s 206C(1F) and 206C(1H), respectively, is required at
the time of receipt of sale consideration.

Note – TCS will be dealt with in detail at the Final level.

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10. Common number for TDS and TCS [Section 203A]

i. Persons responsible for deducting tax or collecting tax at source should apply to the Assessing
Officer for the allotment of a “tax deduction and collection-account number”.

ii. Section 203A(2) enlists the documents/certificates/returns/challans in which the “tax deduction
account number” or “tax collection account number” or “tax deduction and collection account
number” has to be compulsorily quoted.

iii. The requirement of obtaining and quoting of TAN under section 203A shall not apply to such person,
as may be notified by the Central Government in this behalf.

Section Nature of Threshold Payer Payee Rate of Time of

payment Limit TDS deduction
for deduction
of
tax at source

192 Salary Basic Any person Individual Average At the time

exemption responsible for (Employee) rate of payment
limit paying any income of income-
This is taken chargeable under tax
care of in the head “Salaries
computation
of the average
rate of
income-tax.

192A Premature Payment or Trustees of the EPF Individual 10% on

withdrawal aggregate Scheme or any (Employee) premature At the time
from payment authorised person taxable of payment
Employees’ ≥ ₹ 50,000 under the Scheme withdrawal
Provident
Fund
193 Interest on > ₹ 10,000 in a Any person Any 10% At the time
Securities F.Y., responsible for resident of credit of
in case of paying any income such
interest by income to
on 8% Savings way of interest on the
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(Taxable) securities account of

Bonds, the payee
2003/7.75% or at the
Savings time of
(Taxable) payment,
Bonds, 2018. whichever
is
earlier.
> ₹ 5,000 in a
F.Y.,
in case of
interest
on debentures
issued by a
Co. in
which the
public
are
substantially
interested,
paid or
credited to a
resident
individual
or HUF by an
A/c
payee cheque
> No
threshold
specified in
any
other case.
194 Dividend Amount or The Principal Resident 10% Before
(including aggregate Officer shareholder making any
dividends on amount > ₹ of a domestic payment
preference 5,000 in a company by any
shares) F.Y., in case of mode
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dividend paid in respect

or of any
credited to an dividend or
individual before
shareholder making any
by any mode distribution
other or
than cash payment of
> No dividend.
threshold in
other cases

194A Interest Amount or Any person (other Any 10% At the time
other aggregate than an individual Resident of credit of
than interest amount or such
on securities > ₹ 40,000 in HUF whose total income to
a F.Y., sales, gross the
in case of receipts account of
interest or turnover from the payee
credited or business or or at the
paid by profession do not time of
– exceed ₹ 1 crore in payment,
(i) a banking case of business whichever
company; or is
(ii) a co- ₹ 50 lakhs in case earlier.
operative of
society profession during
engaged in the
banking immediately
business; preceding F.Y.)
and responsible for
(iii) a post paying interest
office on other
any deposit than interest on
under securities.
a notified
Scheme.
SIR
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In all the
above cases,
if payee is a
Resident
senior citizen,
tax deduction
limit is >
50,000. > ₹
5,000 in a F.Y.,
in other cases.

194B Winnings Amount or the The person Any Person 30% At the time
from any aggregate of responsible for of payment
lottery, amounts > paying income by
crossword ₹ 10,000 in a way of such
puzzle or F.Y. winnings
card game or
other game
of any sort
or from
gambling or
betting of
any form or
nature

194BA Winnings On the net Any person Any person 30% At the end
from online winnings in a responsible for of the F.Y.
games person’s user paying income by In case
account as way of such there is
computed in winnings from any withdrawal
prescribed online game. from user
manner. account
during the
F.Y.,
tax would
be
deducted
SIR
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at the time
of such
withdrawal
on net
winnings
comprised
in
such
withdrawal.
In
addition,
tax would
also be
deducted
the
remaining
amount
of net
winnings in
the
user
account as
computed
in
prescribed
manner at
the end of
the F.Y. on
194BB Winnings Amount or the Book Maker or a Any Person 30% At the time
from horse aggregate of person holding of payment
race amounts > licence for horse
₹ 10,000 in a racing or for
F.Y. arranging for
wagering or
betting
in any race course.
SIR
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194C Payments to Single sum Central/State Any 1% of sum At the time

Contractors credited or Govt., Resident paid or of credit of
paid > Local authority, contractor credited, if such sum
₹ 30,000 Central/State/ for the to the
(or) Provincial Corpn., carrying payee is an account of
The aggregate company, firm, out Individual or the
of trust, any work HUF contractor
sums credited registered society, (including 2% of sum or at the
or co-operative supply of paid or time of
paid to a society, labour) credited, if payment,
contractor university the whichever
during established payee is any is earlier.
the F.Y. > under other person.
₹ 1,00,000 Central/State/
Provincial Act,
Individual/HUF declared
need not university under
deduct the UGC Act,
tax where sum Govt. of Foreign
is State
credited or or a foreign
paid enterprise,
exclusively for individual/HUF
personal whose
purposes total sales, gross
receipts or
turnover
from business or
profession
exceeds
₹ 1 crore in case of
business or ₹ 50
lakhs
in case of
profession
during the
immediately
SIR
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preceding F.Y.
194D Insurance Amount or Any person Any 5%, if the At the time
Commission aggregate responsible for Resident payee is a of credit of
amount paying any income non- such
> ₹ 15,000 in a by corporate income to
F.Y. way of resident 10%, the
remuneration if the account of
or reward for payee is a the payee
soliciting or domestic or at the
procuring company time of
insurance payment,
business whichever
is
earlier.
194DA Any sum Amount or Any person Any 5% of At the time
under a Life aggregate responsible for resident the amount of
Insurance amount ≥ ₹ paying any sum of payment
Policy not 1,00,000 in a under a LIP, income
fulfilling the financial year including the sum comprised
conditions allocated
specified u/s by way of
10(10D) bonus
194G Commission > ₹ 15,000 in a A Any person 5% At the time
on sale financial year person stocking, of credit
of lottery ny distributing, of such
tickets responsible for purchasing income to
paying any income or selling the
by way of lottery account of
commission, tickets the
remuneration or payee or at
prize (by whatever the time
name called) on of
lottery payment,
tickets whichever
is earlier.
194H Commission > ₹ 15,000 in a Any person Any 5% At the time
or brokerage financial year resident of credit
SIR
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(other than an of such

Individual income to
or HUF whose total the
sales, gross account of
receipts or the
turnover from payee or at
business or the time
profession do of
not exceed ₹ 1 payment,
crore, in case of whichever
business is earlier.
or ₹ 50 lakhs in
case
of profession
during the
immediately
preceding
responsible
F.Y.)
for
paying
commission
or brokerage.
194-I Rent > ₹ 2,40,000 Any Any For P & M At the time
in a (other resident equipment- of credit
financial year person 2% of such
than an individual For land or income to
or HUF whose total building, land the
sales, gross appurtenant account of
receipts to a the
or turnover from building, payee or at
business or furniture or the time f
profession carried fittings -10% payment,
on whichever
by him do not is earlier.
exceed ₹ 1 crore in
case
SIR
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of business or
₹ 50 lakhs in case
of profession
during the
immediately
preceding
responsible
F.Y.)
for
paying rent.
194-IA Payment on ≥ ₹ 50 lakh Any person, being Resident 1% of At the time
transfer of (Consideration a transferor consideration of credit of
certain for transferee (other for transfer such sum
immovable transfer or than or to the
property stamp a person referred stamp duty account of
other than duty value) to value, the
agricultural in section 194LA whichever is transferor
land responsible for higher or at the
paying time of
compensation payment,
for compulsory whichever
acquisition of is earlier.
immovable
property
other than rural
agricultural land)
194-IB Payment of > ₹ 50,000 for Individual/ HUF Any 5% At the time
rent by a (other than Resident of credit of
certain month or part Individual/HUF rent, for
individuals or of a whose the last
HUF month total sales, gross month
receipts or of the
turnover previous
from business or year or
profession carried the last
on month of
by him exceeds ₹ 1
SIR
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crore in case of tenancy, if

business or the
₹ 50 lakhs in case property
of is vacated
profession during during the
the year, as
immediately the case
preceding F.Y.) may
responsible for be, to the
paying rent. account of
the payee
or at the
time of
payment,
whichever
is earlier
194J Fees for > ₹ 30,000 in Any person, other Any 2% - Payee At the time
professional a than an individual Resident engaged only of credit of
or technical financial year, or in the such sum
services/ for HUF; business of to the
Royalty/ each category However, in case operation of account of
Non- of of call centre the payee
compete income. fees for 2% - In case or at the
fees/ (However, professional of fees for time of
Director’s this limit does or technical technical payment,
remuneration not services services or whichever
apply in case paid or credited, royalty, is
of individual/HUF, where earlier.
payment whose total sales, such royalty
made to gross receipts or is
director of a turnover from in the nature
company). business or of consider-
profession ation for sale,
exceeds ₹ distribution
1 crore in case of or
business or ₹ 50 exhibition of
lakhs cinemato-
SIR
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in case of graphic films

profession 10% - Other
during the payments
immediately
preceding F.Y., is
liable to deduct
tax
u/s 194J, except
where fees for
professional
services
is credited or paid
exclusively for his
personal purposes.
194K Income on Amount or Any person Any 10% At the time
units other aggregate responsible for resident of credit of
than in the amount paying any income such sum
nature of > ₹ 5,000 in a in to the
capital gains F.Y. respect of units of account of
a the payee
mutual or at the
fund/Administrator time of
of payment,
the specified whichever
undertaking/ is
specified company earlier.
194LA Compensatio Amount or Any person Any 10% At the time
n on aggregate responsible for Resident of payment
acquisition amount paying any sum in
of > ₹ 2,50,000 the nature of
certain in a compensation or
immovable F.Y. enhanced
property compensation on
other than compulsory
agricultural acquisition of
land situated immovable
in India property
SIR
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194M - Payments > ₹ 50,00,000 Individual or HUF Any 5% At the time

to in a other than those Resident of credit of
Contractors financial year who such sum
- are required to or at the
Commission deduct tax at time of
or brokerage source payment,
- Fees for under section 194C whichever
professional or 194H or 194J is earlier.
services
194N Cash > ₹ 3 crore if - a banking Any person @2% of such At the time
withdrawals the company sum of payment
recipient is a or any bank or In case the of such
co- banking institution recipient has sum
operative - a co-operative not filed ROI
society society engaged in for all the 3
> ₹ 1 crore in carrying on the immediately
case business of preceding
of others banking P.Y.s, for
or which time
- a post office limit u/s
who is responsible 139(1) has
for expired, such
paying any sum, sum shall be
being the amount the amt or
or agg. of amts,
the aggregate of in cash > ₹
amounts, as the 20
case lakh during
may be, in cash the P.Y.
exceeding ₹ 1 TDS
crore/ - @2% of the
₹ 3 crore in case sum, where
the cash
recipient is a withdrawal >
cooperative ₹ 20 lakhs
society, but
≤ ₹ 1 crore/
SIR
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during the ₹ 3 crore in

previous case the
year, to any recipient is a
person co-operative
from one or more society
accounts - @5% of the
maintained sum, where
by the recipient cash
withdrawal
> ₹ 1 crore/
₹ 3 crore in
case
the recipient
is
a co-
operative
society
194P Pension Basic Notified specified Specified Rates in
(along with exemption bank senior force,
interest on limit citizen where the
bank [₹ 3,00,000 (in i.e., An individual has
account) case individual, exercised the
specified being a option of
senior resident in shifting out
citizen pays India, who of
tax - is of the the default
under default age of 75 tax
tax years or regime.
regime u/s more Rates
115BAC), at any time specified in
₹ 3,00,000 / during the section
₹ 5,00,000, as PY; 115BAC,
the - is having where the
case may be, pension individual
if income and pays tax
specified no other under the
senior default tax
SIR
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citizen has income regime.

exercised the except
option of interest
shifting income
out of the received or
default receivable
tax regime from any
providing u/s account
115BAC] [i.e., maintained
total by such
income after individual in
giving the same
effect to the specified
deduction bank
allowable in which he
under is
Chapter VI-A, receiving
if any his
allowable pension
should income; and
exceed the - has
basic furnished a
exemption declaration
limit. to
Further, in the
case the specified
individual is bank.
entitled to
rebate
u/s 87A from
tax
payable, then
the
same should
be
given effect
to]
SIR
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194Q Purchase of > ₹ 50 lakhs in Buyer, who is Any 0.1% of sum At the time
goods a previous responsible for resident exceeding of credit of
year paying any sum to ₹ 50 lakhs such sum
any resident for to the
purchase of goods. account of
Buyer means a the seller
person whose total or
sales, gross at the time
receipts of
or turnover from payment,
business exceeds whichever
₹ 10 is earlier.
crores during the
FY immediately
preceding the FY
in
which the
purchase
of goods is carried
out.
194R Any benefit Value or Any person (other Any 10% of value Before
or perquisite, aggregate than an individual resident or aggre. of providing
whether of value of or value of such such
convertible benefit HUF whose total benefit or benefit or
into money or perquisite > sales, gross perquisite perquisite
or not, ₹ 20,000 in a receipts
arising from financial year or turnover do not
business or exceed ₹ 1 crore in
the exercise case of business
of a or
profession ₹ 50 lakhs in case
The of
provisions profession during
would apply the
to any immediately
benefit or preceding F.Y.)
perquisite, responsible for
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whether in providing to a
cash or in resident, any
kind or partly benefit
in cash and or perquisite.
partly in In case of a
kind. company,
“person
responsible
for paying” means
the company itself
including the
Principal Officer
thereof.

Notes –
1. Section 206AA requires furnishing of PAN by the deductee to the deductor, failing which the deductor has
to deduct tax at the higher of the following rates, namely,
• at the rate specified in the relevant provision of the Income-tax Act, 1961; or
• at the rate or rates in force; or
• at the rate of 20% and in case of section 194-Q, 5%

2. Section 206AB requires tax to be deducted at source under the provisions of this Chapter on any sum or
income or amount paid, or payable or credited, by a person to a specified person, at higher of the following
rates
• at twice the rate prescribed in the relevant provision of the Act;
• at twice the rate or rates in force i.e., the rate mentioned in the Finance Act; or
• at 5%
However, section 206AB is not applicable in case of tax deductible at source under sections 192, 192A, 194B,
194BA, 194BB, 194-IA, 194-IB, 194M11 or 194N.

Meaning of “specified person” –

A person who has not furnished the return of income for the assessment year relevant to the previous
year immediately preceding the financial year in which tax is required to be deducted, for which the time
limit for furnishing the return of income under section 139(1) has expired, and the aggregate of tax
deducted at source and tax collected at source in his case is ₹ 50,000 or more in the said previous year.
SIR
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However, the specified person would not include –

§ a non-resident who does not have a permanent establishment in India; or
§ a person who is not required to furnish the return of income for the assessment year relevant to the
said previous year and is notified by the Central Government in this behalf.

3. In case the provisions of section 206AA are also applicable to the specified person, in addition to the
provisions of this section, then, tax is required to be deducted at higher of the two rates provided in section
206AA and section 206AB.

4. The threshold limit given in column (3) of the table is with respect to each payee.

TEST YOUR KNOWLEDGE

I. Ashwin doing manufacture and wholesale trade furnishes you the following information:
Total turnover for the financial year –

Particulars Rs.

2022-23 1,05,00,000
2023-24 95,00,000

Examine whether tax deduction at source provisions are attracted for the below said expenses incurred
during the financial year 2023-24:

Particulars Rs.

Interest paid to UCO Bank on 15.8.2023 41,000

Contract payment to Raj (2 contracts of ₹ 12,000 each) on 12.12.2023 24,000

Shop rent paid (one payee) on 21.1.2024 2,50,000
Commission paid to Balu on 15.3.2024 7,000

II. Compute the amount of tax deduction at source on the following payments made by M/s S Ltd. during
the financial year 2023-24 as per the provisions of the Income-tax Act, 1961.
SIR
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S. Date Nature of Payment

No.
(i) 1-10-2023 Payment of ₹ 2,00,000 to Mr. R, a transporter who owns 8 goods carriages
throughout the previous year and furnishes a declaration to this effect along
with his PAN.

(ii) 1-11-2023 Payment of fee for technical services of ₹ 25,000 and Royalty of ₹ 20,000 to
Mr. Shyam who is having PAN.

(iii) 30-06-2023 Payment of ₹ 25,000 to M/s X Ltd. for repair of building.

(iv) 01-01-2024 Payment of ₹ 2,00,000 made to Mr. A for purchase of diaries made according to
specifications of M/s S Ltd. However, no material was supplied for such diaries
to Mr. A by M/s S Ltd or its associates.
(v) 01-01-2024 Payment of ₹ 2,30,000 made to Mr. Bharat for compulsory acquisition of his
house as per law of the State Government.

(vi) 01-02-2024 Payment of commission of ₹ 14,000 to Mr. Y.

III. Examine the applicability of TDS provisions and TDS amount in the following cases:
a) Rent paid for hire of machinery by B Ltd. to Mr. Raman ₹ 2,60,000 on 27.9.2023.
b) Fee paid on 1.12.2023 to Dr. Srivatsan by Sundar (HUF) ₹ 35,000 for surgery performed on a member
of the family.
c) ABC and Co. Ltd. paid ₹ 19,000 to one of its Directors as sitting fees on 01-01-2023.

IV. Examine the applicability of tax deduction at source provisions, the rate and amount of tax deduction in
the following cases for the F.Y. 2023-24:
1) Payment made by a company to Mr. Ram, sub-contractor, ₹ 3,00,000 with outstanding balance of ₹
1,20,000 shown in the books as on 31.3.2024.

2) Winning from horse race ₹ 1,50,000 paid to Mr. Shyam, an Indian resident.
3) Rs. 2,00,000 paid to Mr. A, a resident individual, on 22-02-2024 by the State of Uttar Pradesh on
compulsory acquisition of his urban land.

V. Briefly discuss the provisions relating to payment of advance tax on income arising from capital gains
and casual income.
SIR
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ANSWERS

I. As the turnover of business carried on by Ashwin for F.Y. 2022-23, has exceeded ₹ 1 crore, he has to
comply with the tax deduction provisions during the financial year 2023-24, subject to, the exemptions
provided for under the relevant sections for applicability of TDS provisions.

Interest paid to UCO Bank

TDS under section 194A is not attracted in respect of interest paid to a banking company.

Contract payment of ₹ 24,000 to Raj for 2 contracts of ₹ 12,000 each

TDS provisions under section 194C would not be attracted if the amount paid to a contractor does not
exceed ₹ 30,000 in a single payment or ₹ 1,00,000 in the aggregate during the financial year. Therefore,
TDS provisions under section 194C are not attracted in this case.

Shop Rent paid to one payee – Tax has to be deducted@10% under section 194-I as the annual rental
payment exceeds ₹ 2,40,000.

Commission paid to Balu – No, tax has to be deducted under section 194H in this case as the
commission does not exceed ₹ 15,000.

II.
i. No tax is required to be deducted at source under section 194C by M/s S Ltd. on payment to
transporter Mr. R, since he satisfies the following conditions:
§ He owns ten or less goods carriages at any time during the previous year.
§ He is engaged in the business of plying, hiring or leasing goods carriages;
§ He has furnished a declaration to this effect along with his PAN.
ii. As per section 194J, liability to deduct tax is attracted only in case the payment made as fees for
technical services and royalty, individually, exceeds ₹ 30,000 during the financial year. In the given
case, since, the individual payments for fee of technical services i.e., ₹ 25,000 and royalty ₹ 20,000
is less than ₹ 30,000 each, there is no liability to deduct tax at source. It is assumed that no other
payment towards fees for technical services and royalty were made during the year to Mr. Shyam.

iii. Provisions of section 194C are not attracted in this case, since the payment for repair of building on
30.06.2023 to M/s X Ltd. is less than the threshold limit of ₹ 30,000.
iv. According to section 194C, the definition of “work” does not include the manufacturing or supply of
product according to the specification by customer in case the material is purchased from a person
SIR
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other than the customer or associate of such customer. Therefore, there is no liability to deduct tax
at source in respect of payment of ₹ 2,00,000 to Mr. A, since the contract is a contract for ‘sale’.

v. As per section 194LA, any person responsible for payment to a resident, any sum in the nature of
compensation or consideration on account of compulsory acquisition under any law, of any
immovable property, is responsible for deduction of tax at source if such payment or the aggregate
amount of such payments to the resident during the financial year exceeds ₹ 2,50,000. In the given
case, no liability to deduct tax at source is attracted as the payment made does not exceed ₹
2,50,000.

vi. As per section 194H, tax is deductible at source if the amount of commission or brokerage or the
aggregate of the amounts of commission or brokerage credited or paid during the financial year
exceeds ₹ 15,000.

Since the commission payment made to Mr. Y does not exceed ₹ 15,000, the provisions of section
194H are not attracted.

III.
a) Since the rent paid for hire of machinery by B. Ltd. to Mr. Raman exceeds ₹ 2,40,000, the provisions
of section 194-I for deduction of tax at source are attracted.

The rate applicable for deduction of tax at source under section 194-I on rent paid for hire of plant
and machinery is 2%, assuming that Mr. Raman had furnished his permanent account number to B
Ltd.

Therefore, the amount of tax to be deducted at source: = ₹ 2,60,000 x 2% = ₹ 5,200.

Note: In case Mr. Raman does not furnish his permanent account number to B Ltd., tax shall be
deducted @ 20% on ₹ 2,60,000, by virtue of provisions of section 206AA.

b) As per the provisions of section 194J, a Hindu Undivided Family is required to deduct tax at source
on fees paid for professional services only if the total sales, gross receipts or turnover form the
business or profession exceed ₹ 1 crore in case of business or ₹ 50 lakhs in case of profession, as
the case may be, in the financial year preceding the current financial year and such payment made
for professional services is not exclusively for the personal purpose of any member of Hindu
Undivided Family.

Section 194M, provides for deduction of tax at source by a HUF (which is not required to deduct tax
at source under section 194J) in respect of fees for professional service if such sum or aggregate of
such sum exceeds ₹ 50 lakhs during the financial year.
SIR
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In the given case, the fees for professional service to Dr. Srivatsan is paid on 1.12.2023 for a personal
purpose, therefore, section 194J is not attracted. Section 194M would have been attracted, if the
payment or aggregate of payments exceeded ₹ 50 lakhs in the P.Y.2023-24. However, since the
payment does not exceed ₹ 50 lakh in this case, there is no liability to deduct tax at source under
section 194M also.

c) Section 194J provides for deduction of tax at source @10% from any sum paid by way of any
remuneration or fees or commission, by whatever name called, to a resident director, which is not in
the nature of salary on which tax is deductible under section 192. The threshold limit of ₹ 30,000
upto which the provisions of tax deduction at source are not attracted in respect of every other
payment covered under section 194J is, however, not applicable in respect of sum paid to a director.

Therefore, tax@10% has to be deducted at source under section 194J in respect of the sum of ₹
19,000 paid by ABC Ltd. to its director.

Therefore, the amount of tax to be deducted at source: = ₹ 19,000 x 10% = ₹ 1,900

IV.
1. Provisions of tax deduction at source under section 194C are attracted in respect of payment by a
company to a sub-contractor. Under section 194C, tax is deductible at the time of credit or payment,
whichever is earlier @ 1% in case the payment is made to an individual.

Since the aggregate amount credited or paid during the year is ₹ 4,20,000, tax is deductible @ 1%
on ₹ 4,20,000.

Tax to be deducted = ₹ 4,20,000 x 1% = ₹ 4,200

2. Under section 194BB, tax is to be deducted at source, if the winnings from horse races exceed ₹
10,000. The rate of deduction of tax at source is 30%.

Hence, tax to be deducted = ₹ 1,50,000 x 30% = ₹ 45,000.

3. As per section 194LA, any person responsible for payment to a resident, any sum in the nature of
compensation or consideration on account of compulsory acquisition under any law, of any
immovable property, is required to deduct tax at source, if such payment or the aggregate amount
of such payments to the resident during the financial year exceeds ₹ 2,50,000.

In the given case, there is no liability to deduct tax at source as the payment made to Mr. A does not
exceed ₹ 2,50,000.
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COLLECTION AT SOURCE

V. The proviso to section 234C contains the provisions for payment of advance tax in case of capital gains
and casual income.
Advance tax is payable by an assessee on his/its total income, which includes capital gains and casual
income like income from lotteries, crossword puzzles, etc.

Since it is not possible for the assessee to estimate his capital gains, or income from lotteries etc., it
has been provided that if any such income arises after the due date for any instalment, then, the entire
amount of the tax payable (after considering tax deducted at source) on such capital gains or casual
income should be paid in the remaining instalments of advance tax, which are due.

Where no such instalment is due, the entire tax should be paid by 31st March of the relevant financial
year.

No interest liability on late payment would arise if the entire tax liability is so paid.

Note: In case of casual income, the entire tax liability is fully deductible at source @30% under section
194B, 194BA and 194BB. Therefore, advance tax liability would arise only if the surcharge, if any, and
health and education cess@4% in respect thereof, along with tax liability in respect of other income, if
any, is 10,000 or more.
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PROVISIONS FOR FILING RETURN OF

CHAPTER - 7
INCOME AND SELF ASSESSMENT

RETURN OF INCOME
The Income-tax Act, 1961 contains provisions for filing of return of income. Return of income is the format in
which the assessee furnishes information, as self-declaration, regarding his total income and tax payable. The
format for filing of returns by different assessees is notified by the CBDT. The particulars of income earned
under different heads, gross total income, deductions from gross total income, total income and tax payable
by the assessee are generally required to be furnished in a return of income. In short, a return of income is the
declaration of income and the resultant tax by the assessee in the prescribed format.

COMPULSORY FILING OF RETURN OF INCOME

[SECTION 139(1)]
1. As per section 139(1), it is compulsory for companies and firms to file a return of income or loss for every
previous year on or before the due date in the prescribed form.

2. In case of a person other than a company or a firm, filing of return of income on or before the due date
is mandatory, if his total income or the total income of any other person in respect of which he is
assessable under this Act during the previous year exceeds the basic exemption limit.

3. Every person, being a resident other than not ordinarily resident in India within the meaning of section
6(6), who is not required to furnish a return under section 139(1), would be required to file a return of
income or loss for the previous year in the prescribed form and verified in the prescribed manner on or
before the due date, if such person, at any time during the previous year, -

(a) holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity)
located outside India or has a signing authority in any account located outside India; or

(b) is a beneficiary of any asset (including any financial interest in any entity) located outside India.
However, an individual being a beneficiary of any asset (including any financial interest in any entity)
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(c) located outside India would not be required to file return of income under this clause, where, income,
if any, arising from such asset is includible in the income of the person referred to in (a) above in
accordance with the provisions of the Income tax Act, 1961.

Meaning of “beneficial owner” and “beneficiary” in respect of an asset for the purpose of section 139:

An individual who has provided, directly or indirectly, consideration for the

Beneficial
asset for the immediate or future benefit, direct or indirect, of himself or
Owner
any other person

An individual who derives benefit from the asset during the previous year
Beneficiary and the consideration for such asset has been provided by any person,
other than such beneficiary.

Requirement of filing of return of income as per the fourth and fifth proviso to
section 139(1)

A resident other than not ordinarily resident within the meaning of section 6(6)

who is not required to furnish a return of income u/s 139(1)

AND

who at any time during the P.Y.

A OR B

holds, as beneficial is a beneficiary of any asset (including financial

has a signing
owner or otherwise, interest in any entity) located outside India
OR authority in
any asset (including any account
financial interest in located However, where any income arising from such asset is
any entity) located outside India includible in the hands of the person specified in (A) in
outside India. accordance with the provisions of the Act, an individual,
being a beneficiary of such asset, is not required to file
return of income under the fourth proviso.
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4. Further, every person, being an individual or a HUF or an AOP/BOI, whether incorporated or not, or an
artificial juridical person
− whose total income or the total income of any other person in respect of which he is assessable
under this Act during the previous year
− without giving effect to the provisions of Chapter VI-A or section 54/54B/54D/54EC/54F1
− exceeded the basic exemption limit
is required to file a return of his income or income of such other person on or before the due date in the
prescribed form and manner and setting forth the prescribed particulars.

The basic exemption limit is ₹3,00,000 for individuals/HUF/AOPs/BOIs and artificial juridical persons
under default tax regime under section 115BAC. This amount denotes the level of total income, which is
arrived at after claiming the admissible deductions under Chapter VI-A i.e., 80CCD(2), 80CCH(2) and
80JJAA under default tax regime and exemption under section 54/54B/54D/ 54EC or 54F in respect of
capital gain. However, the level of total income to be considered for the purpose of filing return of
income is the income before claiming the admissible deductions under Chapter VI-A and exemption
under section 54/54B/54D/54EC or 54F.

However, in case the assessee has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A), the basic exemption limit would be ₹2,50,000 for
individuals/HUF/AOPs/ BOIs and artificial juridical persons, ` 3,00,000 for resident individuals of the age
of 60 years but less than 80 years and ₹5,00,000 for resident individuals of the age of 80 years or more
at any time during the previous year. Also, the assessee would be eligible for other deductions under
Chapter VI-A subject to fulfilling the stipulated conditions.

5. Any person other than a company or a firm, who is not required to furnish a return under section 139(1),
is required to file income-tax return in the prescribed form and manner on or before the due date if,
during the previous year, such person –

(a) has deposited an amount or aggregate of the amounts exceeding 1 crore in one or more current
accounts maintained with a banking company or a co-operative bank; or
(b) has incurred expenditure of an amount or aggregate of the amounts exceeding ₹ 2 lakh for himself
or any other person for travel to a foreign country; or
(c) has incurred expenditure of an amount or aggregate of the amounts exceeding ₹ 1 lakh towards
consumption of electricity; or
(d) fulfils such other prescribed conditions.

Accordingly, the CBDT has, vide Notification No. 37/2022 dated 21.4.2022, inserted Rule 12AB to provide
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that a person, other than a company or a firm, who is not required to furnish a return under section
139(1), and who fulfils any of the following conditions during the previous year has to file their return of
income on or before the due date in the prescribed form and manner –

i. if his total sales, turnover or gross receipts, as the case may be, in the business > ₹ 60 lakhs during
the previous year; or

ii. if his total gross receipts in profession > ₹ 10 lakhs during the previous year; or
iii. if the aggregate of TDS and TCS during the previous year, in the case of the person, is ₹ 25,000 or
more; or
However, a resident individual who is of the age of 60 years or more, at any time during the relevant
previous year would be required to file return of income only, if the aggregate of TDS and TCS
during the previous year, in his case, is ₹ 50,000 or more.

iv. the deposit in one or more savings bank account of the person, in aggregate, is ₹ 50 lakhs or more
during the previous year.

6. All such persons mentioned in (1) to (5) above should, on or before the due date, furnish a return of his
income or the income of such other person during the previous year in the prescribed form and verified
in the prescribed manner and setting forth such other particulars as may be prescribed.

Meaning of due date:

‘Due date’ means -
i. 31st October of the assessment year, where the assessee, other than an assessee referred to in
(ii) below, is-
(a) a company,
(b) a person (other than a company) whose accounts are required to be audited under the
Income-tax Act,
(c) 1961 or any other law for the time being in force; or
(d) a partner of a firm whose accounts are required to be audited under the Income-tax Act, 1961
or any other law for the time being in force .

ii. 30th November of the assessment year, in the case of an assessee including the partners of the
firm being such assessee who is required to furnish a report referred to in section 92E.

iii. 31st July of the assessment year, in the case of any other assessee.
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Note – Section 92E is not covered within the scope of syllabus of Intermediate Paper 4A: Income-tax Law.
Section 139(1) provides an extended due date, i.e., 30th November of the assessment year, for assessees who
have to file a transfer pricing report i.e., accountant’s report u/s 92E (i.e. assessees who have undertaken
international transactions with associated enterprises). Therefore, reference has been made to this section, i.e.
section 92E, for explaining this provision in section 139(1).

ILLUSTRATION 1
Paras aged 55 years is a resident of India. During the F.Y. 2023-24, interest of` ₹2,88,000 was credited to his
Non-resident (External) Account with SBI. ₹ 30,000, being interest on fixed deposit with SBI, was credited to his
saving bank account during this period. He also earned ₹ 3,000 as interest on this saving account. Is Paras
required to file return of income?

What will be your answer, if he has incurred ₹ 3 lakhs as travel expenditure of self and spouse to US to stay with
his married daughter for some time?

SOLUTION
An individual is required to furnish a return of income under section 139(1) if his total income, before giving
effect to the deductions under Chapter VI-A or exemption under section or section 54/54B/54D/54EC or 54F,
exceeds the maximum amount not chargeable to tax i.e. ₹ 3,00,000 under default tax regime u/s 115BAC and ₹
2,50,000 if exercises the option of shifting out of the default tax regime provided under section 115BAC(1A) (for
A.Y. 2024-25).

Computation of total income of Mr. Paras for A.Y. 2024-25

Particulars

Income from other sources

Interest earned from Non-resident (External) Account ₹2,88,000 [Exempt under section NIL
10(4)(ii), assuming that Mr. Paras has been permitted by RBI to maintain the aforesaid
account]

Interest on fixed deposit with SBI 30000

Interest on savings bank account 3000

Gross Total Income 33000

Less: Deduction under Chapter VI-A (not available under the default tax regime under
section 115BAC) -

Total Income 33000

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In case he exercises the option of shifting out of the default tax regime provided under section 115BAC(1A), he
would be eligible for deduction of ₹ 3,000 under section 80TTA. Accordingly, his total income would be ₹ 30,000.

However, in both regimes, total income of ₹ 33,000, before giving effect to deductions under Chapter VI-A,
would be considered.

Since the total income of Mr. Paras for A.Y.2024-25, before giving effect to the deductions under Chapter VI-A,
is less than the basic exemption limit in both regimes, he is not required to file return of income for A.Y.2024-25.

Note: In the above solution, interest of ₹ 2,88,000 earned from Non-resident (External) account has been
taken as exempt on the assumption that Mr. Paras, a resident, has been permitted by RBI to maintain the
aforesaid account. However, in case he has not been so permitted, the said interest would be taxable. In such
a case, his total income, before giving effect to, inter alia, the deductions under Chapter VI-A, would be
₹3,21,000 (₹ 30,000 + ₹ 2,88,000 + ₹ 3,000), which is higher than the basic exemption limit of ₹ 3,00,000 or
₹ 2,50,000, as the case may be. Consequently, he would be required to file return of income for A.Y.2024-25.

If he has incurred expenditure of ₹ 3 lakhs on foreign travel of self and spouse, he has to mandatorily file his
return of income on or before the due date under section 139(1), even if his income is less than the basic
exemption limit.

SPECIFIED CLASS OR CLASSES OF PERSONS TO BE EXEMPTED

FROM FILING RETURN OF INCOME [SECTION 139(1C)]
• Every person who falls within the ambit of the conditions mentioned under section 139 has to furnish a
return of his income on or before the due date specified under section 139(1).

• For reducing the compliance burden of small taxpayers, the Central Government has been empowered to
notify the class or classes of persons who will be exempted from the requirement of filing of return of
income, subject to satisfying the prescribed conditions.

RETURN OF LOSS [SECTION 139(3)]

1. This section requires the assessee to file a return of loss in the same manner as in the case of return of
income within the time allowed u/s 139(1).
2. Section 80 requires mandatory filing of return of loss u/s 139(3) on or before the due date specified u/s
139(1) for carry forward of the following losses –
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(a) Business loss u/s 72(1)

(b) Speculation business loss u/s 73(2)
(c) Loss from specified business u/s 73A(2) [In case assesse has exercised the option of shifting out
of the default tax regime provided under section 115BAC(1A)]
(d) Loss under the head “Capital Gains” u/s 74(1)
(e) Loss from the activity of owning and maintaining race horses u/s 74A(3)
3. Consequently, section 139(3) requires filing of return of loss mandatorily within the time allowed u/s
139(1) for claiming carry forward of losses mentioned in (2) above.

4. However, loss under the head “Income from house property” u/s 71B and unabsorbed depreciation u/s
32 can be carried forward for set-off even though return of loss has not been filed before the due date.

5. A return of loss has to be filed by the assessee in his own interest and the nonreceipt of a notice from
the Assessing Officer requiring him to file the return cannot be a valid excuse under any circumstances
for the non- filing of such return.

BELATED RETURN [SECTION 139(4)]

Any person who has not furnished a return within the time allowed to him under section 139(1) may furnish the
return for any previous year at any time –

i. before three months prior to the end of the relevant assessment year (i.e., 31.12.2024 for P.Y. 2023-24);
or

ii. before the completion of the assessment,

whichever is earlier.
Hence, belated return cannot be filed after 31st December of the relevant assessment year

REVISED RETURN [SECTION 139(5)]

If any person having furnished a return under section 139(1) or a belated return under section 139(4), discovers
any omission or any wrong statement therein, he may furnish a revised return at any time –

(i) before three months prior to the end of the relevant assessment year (i.e., 31.12.2024 for P.Y. 2023-24);
or

(ii) before completion of assessment, whichever is earlier.

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Hence, belated return cannot be filed after 31st December of the relevant assessment year.

ILLUSTRATION 2
Explain with brief reasons whether the return of income can be revised under section 139(5) of the Income-tax
Act, 1961 in the following cases:
i. Belated return filed under section 139(4).
ii. Return already revised once under section 139(5).
iii. Return of loss filed under section 139(3).

SOLUTION
Any person who has furnished a return under section 139(1) or 139(4) can file a revised return at any time before
three months prior to the end of the relevant assessment year or before the completion of assessment,
whichever is earlier, if he discovers any omission or any wrong statement in the return filed earlier.

Accordingly,
i. A belated return filed under section 139(4) can be revised.
ii. A return revised earlier can be revised again as the first revised return replaces the original return.
Therefore, if the assessee discovers any omission or wrong statement in such a revised return, he can
furnish a second revised return within the prescribed time i.e. at any time before three months prior to
the end of the relevant assessment year or before the completion of assessment, whichever is earlier.
It implies that a return of income can be revised more than once within the prescribed time.

iii. A return of loss filed under section 139(3) is deemed to be return filed under section 139(1), and
therefore, can be revised under section 139(5).

INTEREST FOR DEFAULT IN FURNISHING RETURN OF

INCOME [SECTION 234A]
1. Interest under section 234A is attracted for failure to file a return of income on or before the due date
under section 139(1) i.e., interest is payable where an assessee furnishes the return of income after the
due date or does not furnish the return of income.

2. Simple interest @1% per month or part of the month is payable for the period commencing from the
date immediately following the due date and ending on the following dates –

Circumstances Ending on the following dates

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Where the return is furnished after due date the date of furnishing of the return

Where no return is furnished the date of completion of assessment

3. The interest has to be calculated on the amount of tax on total income as determined under section
143(1) and where a regular assessment is made, on the amount of the tax on the total income determined
under regular assessment, as reduced by the advance tax paid and any tax deducted or collected at
source, any relief of tax allowed under section 89 and any tax credit allowed to be set-off in accordance
with section 115JD, in case the assessee has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A).

4. No interest under section 234A shall be charged on self-assessment tax paid by the assessee on or
before the due date of filing of return.

5. The interest payable under section 234A shall be reduced by the interest, if any, paid on self-
assessment under section 140A towards interest chargeable under section 234A.

6. Tax on total income as determined under section 143(1) would not include the additional income-tax, if
any, payable under section 140B or section 143.

7. Tax on total income determined under regular assessment would not include the additional income-tax
payable under section 140B.

Note – Section 143(1) provides that if any sum is found due on the basis of a return of income after adjustment
of advance tax, relief of tax allowed under section 89, tax deducted at source, tax collection at source and self-
assessment tax, an intimation would be sent to the assessee and such intimation is deemed to be a notice of
demand issued under section 156. If any refund is due on the basis of the return, it shall be granted to the
assessee and intimation to this effect would be sent to the assessee. Where no tax or refund is due, the
acknowledgement of the return is deemed to be intimation under section 156.

SELF-ASSESSMENT [SECTION 140A]

I. Payment of tax, interest and fee before furnishing return of income [Section 140A(1)]
Where any tax is payable on the basis of any return required to be furnished under, inter alia, section
139, after taking into account -
a) the amount of tax, already paid, under any provision of the Income-tax Act, 1961
b) the tax deducted or collected at source
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c) any relief of tax claimed under section 89

d) any tax credit claimed to set-off in accordance with the provisions of section 115JD, in case the
assessee has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A); and

e) any tax or interest payable as per the provisions of section 191(2),

the assessee shall be liable to pay such tax together with interest and fee payable under any provision
of this Act for any delay in furnishing the return or any default or delay in payment of advance tax
before furnishing the return. The return has to be accompanied by the proof of payment of such tax,
interest and fee.

II. Order of adjustment of amount paid by the assessee

Where the amount paid by the assessee under section 140A(1) falls short of the aggregate of the tax,
interest and fee as aforesaid, the amount so paid shall first be adjusted towards the fee payable and
thereafter towards interest and the balance, if any, shall be adjusted towards the tax payable.

III. Interest under section 234A [Section 140A(1A)]

For the above purpose, interest payable under section 234A shall be computed on the amount of tax on
the total income as declared in the return, as reduced by the amount of-

(a) advance tax paid, if any;

(b) any tax deducted or collected at source;
(c) any relief of tax claimed under section 89
(d) any tax credit claimed to be set-off in accordance with the provisions of section 115JD, in case the
assessee has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).

IV. Interest under section 234B [Section 140A(1B)]

Interest payable under section 234B shall be computed on the assessed tax or on the amount by which
the advance tax paid falls short of the assessed tax.

For this purpose “assessed tax” means the tax on total income declared in the return as reduced by the
amount of
• tax deducted or collected at source on any income which forms part of the total income;
• any relief of tax claimed under section 89
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• any tax credit claimed to be set-off in accordance with the provisions of section 115JD, in case the
assessee has exercised the option of shifting out of the default tax regime provided under section

115BAC(1A).

V. Consequence of failure to pay tax, interest or fee [Section 140A(3)]

If any assessee fails to pay the whole or any part of such of tax or interest or fee, he shall be deemed
to be an assessee in default in respect of such tax or interest or fee remaining unpaid and all the
provisions of this Act shall apply accordingly.

UPDATED RETURN OF INCOME [SECTION 139(8A)]

1. Option to furnish updated return - Any person may furnish an updated return of his income or the
income of any other person in respect of which he is assessable, for the previous year relevant to the
assessment year at any time within 24 months from the end of the relevant assessment year. This is
irrespective of whether or not he has furnished a return under section 139(1) or belated return under
section 139(4) or revised return under section 139(5) for that assessment year.

For example, an updated return for A.Y. 2023-24 can be filed till 31.3.2026.

2. Non applicability of the provisions of updated return – The provisions of updated return would not
apply, if the updated return of such person for that assessment year –
(a) is a loss return; or
(b) has the effect of decreasing the total tax liability determined on the basis of return furnished under
section 139(1) or section 139(4) or section 139(5); or
(c) results in refund or increases the refund due on the basis of return furnished under section 139(1)
or section 139(4) or section 139(5).

3. Updated return can be filed if original return is a loss return and updated return is a return of
income – If any person has a loss in any previous year and has furnished a return of loss on or before
the due date of filing return of income under section 139(1), he shall be allowed to furnish an updated
return if such updated return is a return of income.

For example if Mr. X has furnished his return of loss for A.Y. 2023-24 on 31.5.2023 consisting of ₹
5,00,000 as business loss, he can furnish an updated return for A.Y. 2023-24 upto 31.3.2026 if such
updated return is a return of income.
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4. Updated return to be furnished for subsequent previous year in case (3) above - If the loss or any
part thereof carried forward under Chapter VI or unabsorbed depreciation carried forward under
section 32(2) or tax credit carried forward under section 115JD is to be reduced for any subsequent
previous year as a result of furnishing of updated return of income for a previous year, an updated
return is required to be furnished for each such subsequent previous year [In case assessee has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A)].

5. Circumstances in which updated return cannot be furnished: No updated return shall be furnished in
the following scenarios –

S.No. Scenarios Updated return cannot be furnished

(i) Where a person has furnished an updated return

under this sub-section for the relevant
assessment year.
(ii) Where any proceeding for assessment,
for such relevant Assessment Year.
reassessment, recomputation, or revision of
income is pending or has been completed for the
relevant assessment year in his case.

VI. Updated return for the relevant assessment year cannot be furnished by such person or belongs to
such class of persons, as may be notified by the Board in this regard.

Note - There are other circumstances also in which updated return cannot be furnished for the relevant
assessment year. For example, where prosecution proceedings are initiated under the relevant
provisions of the Income-tax Act, 1961. Those circumstances will be dealt with at Final level.

TAX ON UPDATED RETURN [SECTION 140B]

1. Payment of tax, additional tax, interest and fee before furnishing updated return of income
(a) In a case where no return is furnished earlier [Section 140B(1)]
i. Tax to be paid along with interest and fee before furnishing of updating return:
Where no return of income under section 139(1) or 139(4) has been furnished by an assessee and
tax is payable, on the basis of updated return to be furnished by such assessee under section
139(8A), the assessee would be liable to pay such tax together with interest and fee payable
under any provision of this Act for any delay in furnishing the return or any default or delay in
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payment of advance tax, along with the payment of additional tax computed under section
140B(3), before furnishing the return.

The updated return shall be accompanied by proof of payment of such tax, additional income-
tax, interest and fee.

ii. Manner of computation of tax payable on the basis of updated return

The tax payable is to be computed after taking into account the following -
• the amount of tax, if any, already paid, as advance tax;
• the tax deducted or collected at source;
• any relief of tax claimed under section 89; and
• any tax credit claimed to set-off in accordance with the provisions of section 115JD, in case
the assessee has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A).

iii. Interest under section 234A if no earlier return has been furnished
In a case, where no earlier return has been furnished, the interest payable under section 234A
has to be computed on the amount of the tax on the total income as declared in the updated
return under section 139(8A), in accordance with the provisions of section 140A(1A).

(b) In a case where return is furnished earlier [Section 140B(2)]

i. Tax to be paid along with interest before furnishing updated return:
Where, return of income under section 139(1) or 139(4) or 139(5) has been furnished by an
assessee and tax is payable, on the basis of updated return to be furnished by such assessee
under section 139(8A), the assessee would be liable to pay such tax together with interest
payable under any provision of this Act for any default or delay in payment of advance tax, along
with the payment of additional tax computed under section 140B(3) (as reduced by the amount
of interest paid under the provisions of this Act in the earlier return) before furnishing the return.
The updated return shall be accompanied by proof of payment of such tax, additional income-
tax and interest.

ii. Manner of computation of tax payable on the basis of updated return:

The tax payable has to be computed after taking into account the following -
• the amount of relief or tax referred to in section 140A(1), the credit for which has been taken
in the earlier return;
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• the tax deducted or collected at source, in accordance with the provisions of Chapter XVII-
B, on any income which is subject to such deduction or collection and which is taken into
account in computing total income and which has not been included in the earlier return;

• any tax credit claimed, to set-off in accordance with the provisions of section 115JD, which
has not been claimed in the earlier return, in case the assessee has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A); and

the aforesaid tax would be increased by the amount of refund, if any, issued in respect of such
earlier return.

iii. Interest under section 234B where earlier return has been furnished [Section 140B(4)]
In a case where an earlier return has been furnished, interest payable under section 234B has to
be computed on the assessed tax.

“Assessed tax” means the tax on the total income as declared in the updated return to be
furnished under section 139(8A), after taking into account the following:
• the amount of relief or tax referred to in section 140A(1), the credit for which has been
taken in the earlier return, if any;

• the tax deducted or collected at source, in accordance with the provisions of Chapter
XVII-B, on any income which is subject to such deduction or collection and which is taken
into account in computing total income and which has not been included in the earlier
return;

• any tax credit claimed, to set-off in accordance with the provisions of section 115JD, which
has not been claimed in the earlier return, in case the assessee has exercised the option
of shifting out of the default tax regime provided under section 115BAC(1A); and

the aforesaid tax would be increased by the amount of refund, if any, issued in respect of such
earlier return.

iv. Interest under section 234C if earlier return has been furnished
Interest payable under section 234C, where an earlier return has been furnished, has to be
computed after taking into account the total income furnished in the updated return as returned
income.

2. Additional income-tax payable at the time of updated return [Section 140B(3)]

The additional income-tax payable at the time of furnishing the updated return under section 139(8A)
would be-
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S.No. Time of furnishing updated return Additional Income tax Payable

(i) If such return is furnished after expiry of the time available 25% of aggregate of tax and
under section 139(4) or 139(5) of the assessment year and interest payable, as
before completion of the period of 12 months from the end of determined in (1) above
the relevant assessment year;

(ii) If such return is furnished after the expiry of 12 months from 50% of aggregate of tax
the end of the relevant assessment year but before and interest payable, as
completion of the period of 24 months from the end of the determined in (1) above
relevant assessment year.

Computation of Additional income-tax

For the purpose of computation of Additional income-tax”
• tax would include surcharge and cess, by whatever name called, on such tax.
• the interest payable would be interest chargeable under any provision of the Act, on the income as
per updated return furnished under section 139(8A), as reduced by interest paid in the earlier return,
if any.
However, the interest paid in the earlier return would be considered to be nil, if no earlier return has
been furnished.

Note - An updated return furnished under section 139(8A) would be regarded as defective return
as referred u/s 139(9) unless such return of income is accompanied by the proof of payment of
tax as required under
sec%on 140B.
3. Power to CBDT to issue guidelines
In case of any difficulty arises in giving effect to the provisions of this section, the CBDT may issue
guidelines for the purpose of removing the difficulty, with the approval of the Central Government. Every
guideline issued shall be laid before each House of Parliament.

DEFECTIVE RETURN [SECTION 139(9)]

1. Under this section, the Assessing Officer has the power to call upon the assessee to rectify a defective
return.
2. Where the Assessing Officer considers that the return of income furnished by the assessee is defective,
he may intimate the defect to the assessee and give him an opportunity to rectify the defect within 15
days from the date of intimation. The Assessing Officer has the discretion to extend the time period
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beyond 15 days, on an application made by the assessee in this behalf. The period of 15 days will have to
be reckoned from the date on which the communication is served upon the assessee.
3. If the defect is not rectified within the period of 15 days or such further extended period, the return would
be treated as an invalid return. The consequential effect would be the same as if the assessee had failed
to furnish the return.
4. Where, however, the assessee rectifies the defect after the expiry of 15 days or the further extended
period, but before the assessment is made, the Assessing Officer may condone the delay and treat the
return as a valid return.
5. A return of income would be regarded as defective unless the annexures, statements and columns therein
relating to computation of income chargeable under each head of income, gross total income and total
income have been duly filled in.
6. A return of income u/s 139 would also be regarded as defective if it is not accompanied by proof of
payment of taxes, whether by way of advance tax or self-assessment tax.

FEE FOR DEFAULT IN FURNISHING RETURN OF INCOME

[SECTION 234F]
Where a person, who is required to furnish a return of income under section 139, fails to do so within the
prescribed time limit under section 139(1), he shall pay, by way of fee, a sum of ₹ 5,000.

However, if the total income of the person does not exceed ₹ 5 lakhs, the fees payable shall not exceed ₹ 1,000.

PERMANENT ACCOUNT NUMBER (PAN) [SECTION 139A]

1. Sub-section (1) requires the following persons mentioned in column (2), who have not been allotted a
permanent account number (PAN), to apply to the Assessing Officer within the time specified in column
(3) for the allotment of a PAN –

(1) (2) (3)

Persons required to apply for PAN Time limit for making such
application (Rule 114)
(i) Every person, if his total income or the total income of any On or before 31st May of the
other person in respect of which he is assessable under the assessment year for which
Act during any previous year exceeds the maximum amount such income is assessable
which is not chargeable to income-tax
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(ii) Every person carrying on any business or profession whose Before the end of that financial
total sales, turnover or gross receipts are or is likely to year.
exceed ₹ 5 lakhs in any previous year

(iii) Every person being a resident, other than an individual, On or before 31st May of the
which enters into a financial transaction of an amount immediately following financial
aggregating to ₹ 2,50,000 or more in a financial year year

(iv) Every person who is a managing director, director, partner, On or before 31st May of the
trustee, author, founder, karta, chief executive officer, immediately following financial
principal officer or office bearer of any person referred in year in which the person
(iii) above or any person competent to act on behalf of such referred
person referred in (iii) above in (iii) enters into financial
transaction specified therein.

Further, every person who has not been allotted a PAN and intends to enter into such transaction as
prescribed by the CBDT is also required to apply for PAN to the Assessing Officer. Accordingly, Rule
114BA has been inserted to prescribe the following transactions:

Person required to apply for PAN [Rule Time limit for making application for PAN
114BA] [Rule 114]

(i) Every person, who intends to deposit cash in At least 7 days before the date on which he
his one or more accounts with a banking intends to deposit cash over the specified
company, cooperative bank or post office, if limit, i.e., ` 20 lakh or more.
the cash deposit or the aggregate amount of
cash deposit in such accounts during a
financial year is ₹ 20 lakh or more

(ii) Every person, who intends to withdraw cash At least 7 days before the date on which he
from his one or more accounts with a banking intends to withdraw cash over the specified
company, co-operative bank or post office, if limit, i.e., ₹ 20 lakh or more.
the cash withdrawal or the aggregate amount
of cash withdrawal from such accounts during
a financial year is ₹ 20 lakh or more

(iii) Any person, who intends to open a current At least 7 days before the date on which he
account or cash credit account with a banking intends to open such account.
company or a co-operative bank, or a post
Office

2. The Central Government is empowered to specify, by notification in the Official Gazette, any class or
classes of persons by whom tax is payable under the Act or any tax or duty is payable under any other
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law for the time being is force. Such persons are required to apply within such time as may be mentioned
in that notification to the Assessing Officer for the allotment of a PAN [Sub-section (1A)].

3. For the purpose of collecting any information which may be useful for or relevant to the purposes of the
Act, the Central Government may notify any class or classes of persons, and such persons shall within
the prescribed time, apply to the Assessing Officer for allotment of a PAN [Sub-section (1B)].

4. The Assessing Officer, having regard to the nature of transactions as may be prescribed, may also allot
a PAN to any other person (whether any tax is payable by him or not) in the manner and in accordance
with the procedure as may be prescribed [Sub-section (2)].

5. Any person, other than the persons mentioned in (1) or (4) above, may apply to the Assessing Officer for
the allotment of a PAN and the Assessing Officer shall allot a PAN to such person immediately.

6. Such PAN comprises of 10 alphanumeric characters.

7. Quoting of PAN is mandatory in all documents pertaining to the following prescribed transactions
[Section 139A(5)]:

• in all returns to, or correspondence with, any income-tax authority;

• in all challans for the payment of any sum due under the Act;
• in all documents pertaining to such transactions entered into by him, as may be prescribed by
the CBDT in the interests of revenue. In this connection, CBDT has notified the following
transactions vide Rule 114B namely:

S. No. Nature of transaction Value of transaction

1. Sale or purchase of a motor vehicle or vehicle, as defined in the Motor All such transactions
Vehicles Act, 1988 which requires registration by a registering
authority under that Act, other than two wheeled vehicles.

2. Opening an account [other than a time-deposit referred to at Sl. No.12 All such transactions
and a Basic Savings Bank Deposit Account] with a banking company
or a co-operative bank to which the Banking Regulation Act, 1949
applies (including any bank or banking institution referred to in
section 51 of that Act)
3. Making an application to any banking company or a co- operative All such transactions
bank to which the Banking Regulation Act, 1949, applies (including
any bank or banking institution referred to in section 51 of that Act)
or to any other company or institution, for issue of a credit or debit
card.
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4. Opening of a demat account with a depository, participant, custodian All such transactions
of securities or any other person registered under section 12(1A) of
the SEBI Act, 1992.
5. Payment to a hotel or restaurant against a bill or bills at any one time. Payment in cash of
an amount
exceeding ₹ 50,000.
6. Payment in connection with travel to any foreign country or payment Payment in cash of
for purchase of any foreign currency at any one time. an amount
exceeding ₹ 50,000.
7. Payment to a Mutual Fund for purchase of its units Amount exceeding ₹
50,000

8. Payment to a company or an institution for acquiring debentures or Amount exceeding ₹

bonds issued by it. 50,000

9. Payment to the Reserve Bank of India for acquiring bonds issued by Amount exceeding ₹
it. 50,000

10. Deposit with a banking company or a co-operative bank to which the Cash deposits
Banking Regulation Act, 1949, applies (including any bank or banking exceeding ₹ 50,000
institution referred to in section 51 of that Act); or post office during any one day.

11. Purchase of bank drafts or pay orders or banker’s cheques from a Payment in cash of
banking company or a co-operative bank to which the Banking an amount
Regulation Act, 1949 applies (including any bank or banking exceeding ₹ 50,000
institution referred to in section 51 of that Act). during any one day.

12. A time deposit with, - Amount exceeding ₹

• a banking company or a cooperative bank to which the 50,000 or
Banking Regulation Act, 1949 applies (including any bank or aggregating to more
than ` 5 lakh during a
banking institution referred to in section 51 of that Act);
financial year.
• a Post Office;
• a Nidhi referred to in section 406 of the Companies Act,
2013; or
• a non-banking financial company which holds a
• certificate of registration under section 45-IA of the Reserve
Bank of India Act, 1934, to hold or accept deposit from public.
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13. Payment for one or more pre-paid payment instruments, as defined Payment in cash or
in the policy guidelines for issuance and operation of pre-paid by way of a bank
payment instruments issued by Reserve Bank of India under the draft or pay order or
Payment and Settlement Systems Act, 2007, to a banking company banker’s cheque of
or a co-operative bank to which the Banking Regulation Act, 1949, an amount
applies (including any bank or banking institution referred to in aggregating to more
section 51 of that Act) or to any other company or institution. than ₹ 50,000 in a
financial year.

14. Payment as life insurance premium to an insurer as defined in the Amount aggregating
Insurance Act, 1938. to more than
₹ 50,000 in a
financial year.
15. A contract for sale or purchase of securities (other than shares) as Amount exceeding ₹
defined in section 2(h) of the Securities Contracts (Regulation) Act, 1 lakh per
1956. transaction.
16. Sale or purchase, by any person, of shares of a company not listed Amount exceeding ₹
in a recognised stock exchange. 1 lakh per
transaction.
17. Sale or purchase of any immovable property. Amount exceeding ₹
10 lakh or valued by
stamp valuation
authority referred to
in section 50Cmat an
amount exceeding
₹ 10 lakh

18. Sale or purchase, by any person, of goods or services of any nature Amount exceeding ₹
other than those specified at Sl. No. 1 to 17 of this Table, if any. 1 lakh per
transaction.

Minor to quote PAN of parent or guardian

Where a person, entering into any transaction referred to in this rule, is a minor and who does not have
any income chargeable to income-tax, he shall quote the PAN of his father or mother or guardian, as the
case may be, in the document pertaining to the said transaction.

Declaration by a person not having PAN

Further, any person who does not have a PAN and who enters into any transaction specified in this rule,
shall make a declaration in Form No.60 giving therein the particulars of such transaction either in paper
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form or electronically under the electronic verification code in accordance with the procedures, data
structures, and standards specified by the Principal Director General of Income-tax (Systems) or
Director General of Income-tax (Systems).

Non-applicability of Rule 114B

The provisions of this rule shall not apply to the following class or classes of persons, namely:-
• the Central Government, the State Governments and the Consular Offices;
• the non-residents referred to in section 2(30) in respect of the transactions other than a
transaction referred to at Sl. No. 1 or 2 or 4 or 7 or 8 or 10 or 12 or 14 or 15 or 16 or 17 of the Table.

Meaning of certain phrases

Phrase Inclusion

(1) Payment in Payment towards fare, or to a travel agent or a tour operator, or to

connection with travel an authorized person as defined in section 2(c) of the FEMA, 1999
(2) Travel agent or tour A person who makes arrangements for air, surface or maritime
operator travel or provides services relating to accommodation, tours,
entertainment, passport, visa, foreign exchange, travel related
insurance or other travel related services either severally or in
package
(3) Time deposit Any deposit which is repayable on the expiry of a fixed period.

8. If there is a change in the address or in the name and nature of the business of a person, on the basis
of which PAN was allotted to him, he should intimate such change to the Assessing Officer [Section 139A
(5)(d)].

9. Every person who receives any document relating to any transaction cited above shall ensure that the
PAN or the Aadhaar number is duly quoted in the document.

10. Intimation of PAN to person deducting or collecting tax at source

Every person who receives any amount from which tax has been deducted at source shall intimate his
PAN to the person responsible for deducting such tax [Section 139A(5A)].
Similarly, every buyer or licensee or lessee referred to in section 206C shall intimate his PAN to the
person responsible for collecting such tax [Section 139A(5C)]

11. Quoting of PAN in certain documents

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Where any amount has been paid after deducting tax at source, the person deducting tax shall quote
the PAN of the person to whom the amount was paid in the following documents:
• in the statement furnished under section 192(2C) giving particulars of perquisites or profits in lieu of
salary provided to any employee;

• in all certificates for tax deducted issued to the person to whom payment is made;
• in all returns prepared and delivered or caused to be delivered to any income-tax authority in
accordance with the provisions of section 206;
• in all statements prepared and delivered or caused to be delivered in accordance with the provisions
of section 200(3) [Section 139A(5B)].

Also, every person collecting tax in accordance with the provisions of section 206C shall quote PAN of
every buyer or licensee or lessee in the following documents:
• in all certificates issued for tax collected in accordance with the provisions of section 206C(5);
• in all returns prepared and delivered or caused to be delivered to any income-tax authority in
accordance with the provisions of section 206C(5A)/(5B);

• in all statements prepared and delivered or caused to be delivered in accordance with the provisions
of section 206C(3) [Sub-section (5D)].

12. Requirement to intimate PAN and quote PAN not to apply to certain persons
Section 139A(5A)/(5B) shall not apply to a person who –
• does not have taxable income or
• who is not required to obtain PAN
if such person furnishes a declaration under section 197A in the prescribed form and manner that the
tax on his estimated total income for that previous year will be Nil.

13. Inter-changeability of PAN with the Aadhaar number

Every person who is required to furnish or intimate or quote his PAN may furnish or intimate or quote
his Aadhaar Number in lieu of the PAN, if he
• has not been allotted a PAN but possesses the Aadhaar number
• has been allotted a PAN and has intimated his Aadhaar number to prescribed authority in
accordance with the requirement contained in section 139AA(2).

PAN would be allotted in prescribed manner to a person who has not been allotted a PAN but possesses
Aadhaar number.
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Accordingly, the CBDT has, vide Notification No. 59/2019, dated 30.8.2019, provide that any person, who
has not been allotted a PAN but possesses the Aadhaar number and has furnished or intimated or
quoted his Aadhaar number in lieu of the PAN, shall be deemed to have applied for allotment of PAN and
he shall not be required to apply or submit any documents.
Further, any person, who has not been allotted a PAN but possesses the Aadhaar number may apply for
allotment of the PAN under section 139A(1)/(1A)/(3) by intimating his Aadhaar number and he shall not
be required to apply or submit any documents.

14. Quoting and authentication of PAN or Aadhaar number

• Every person entering into such prescribed transactions is required to quote his PAN or Aadhaar
number, as the case may be, in the documents pertaining to such transactions and also authenticate
such PAN or Aadhaar number in the prescribed manner [Section 139A(6A)].

• Every person receiving such document relating to transactions referred to in (a) has to ensure that
PAN or Aadhaar number has been duly quoted in such document and also ensure that such PAN or
Aadhaar number is so authenticated [Section 139A(6B)].

Accordingly, Rule 114BB has been inserted to prescribe that every person has to, at the time of entering
into a transaction specified in column (2) of the Table below, quote his permanent account number or
Aadhaar number, as the case may be, in documents pertaining to such transaction, and every person
specified in column (3) of the said Table, who receives such document, has to ensure that the said
number has been duly quoted and authenticated:

(1) (2) (3)

S. No. Nature of transaction Person

1 Cash deposit or deposits aggregating to ₹ 20 A bank or a co-operative bank or Post

lakhs or more in a financial year, in one or more Master General of a Post Office.
account of a person with a bank or a co-operative
bank or Post Office.
2 Cash withdrawal or withdrawals aggregating to ₹ A bank or a co-operative bank or Post
20 lakhs or more in a financial year, in one or more Master General of a Post Office.
account of a person with a bank or a co-operative
bank or Post Office
3 Opening of a current account or cash credit A bank or a co-operative bank or Post
account by a person with a bank or a co-operative Master General of a Post Office
bank or Post Office
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Note – Quoting of PAN or Aadhaar number is, however, not required in case where the person depositing
money as per Sl. No.1 or withdrawing money as per Sl. No.2 or opening a current account or cash credit
account as per Sl. No.3 is the Central Government, the State Government or the Consular Office.

15. Power to make rules

The CBDT is empowered to make rules with regard to the following:
• the form and manner in which an application for PAN may be made and the particulars to be given
therein;
• the categories of transactions in relation to which PAN or the Aadhaar number, as the case may be,
is required to be quoted on the related documents;
• the categories of documents pertaining to business or profession in which PAN or the Aadhaar
number, as the case may be, shall be quoted by every person;
• the class or classes of persons to whom the provisions of this section shall not apply;
• the form and manner in which a person who has not been allotted a PAN shall make a declaration;
• the manner in which PAN or the Aadhaar number, as the case may be, shall be quoted for
transactions cited in (b) above;
• the time and manner in which such transactions cited in (b) above shall be intimated to the
prescribed authority.

16. Meaning of certain terms

Term Meaning

(i) Aadhaar An identification number issued to an individual by the Authority on receipt

number of the demographic information and biometric information after verifying
the information by the authority. It includes any alternative virtual identity
generated by the Authority in the prescribed manner.

(ii) Authentication The process by which the PAN or Aadhaar number along with demographic
information or biometric information of an individual is submitted to the
income-tax authority or such other prescribed authority or agency for its
verification and such authority or agency verifies the correctness, or the
lack thereof, on the basis of information available with it.

17. Penalty for failure to comply with the provisions of section 139A [Section 272B]
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Section Default Penalty

272B(1) Failure to comply with the provisions of section 139A ₹ 10,000

272B(2) Failure to quote PAN/Aadhaar number in any document referred

to in section 139A(5)(c) ₹ 10,000 for each
Failure to intimate PAN/Aadhaar number as required by section such default
139A(5A)/(5C)
Knowingly quoting or intimating a number which is false

272B(2A) Failure to quote PAN/Aadhaar Number in documents referred to ₹ 10,000 for each
in section 139A(6A) or authenticate such number in accordance such default
with the provisions contained therein

272B(2A) (i) Failure to ensure that PAN/Aadhaar Number is duly quoted in ₹ 10,000 for each
the documents relating to transactions such default
referred to in section 139A(5)(c) or section 139A(6A)
(ii) Failure to ensure that PAN/Aadhaar Number has been duly
authenticated in respect of transactions referred to under
section 139A(6A)
Note – It is necessary to give an opportunity to be heard to the person on whom the penalty under
section 272B is proposed to be imposed.

QUOTING OF AADHAAR NUMBER [SECTION 139AA]

1. Mandatory quoting of Aadhaar Number
Every person who is eligible to obtain Aadhaar Number is required to mandatorily quote Aadhaar
Number:
(a) in the application form for allotment of Permanent Account Number (PAN)
(b) in the return of income

Quoting of Aadhaar Number mandatory in returns filed on or after 1.4.2019 [Circular No. 6/2019
dated 31.03.2019]
As per section 139AA(1)(ii), with effect from 01.07.2017, every person who is eligible to obtain Aadhaar
number has to quote Aadhaar number in the return of income.
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The Apex Court in a series of judgments has upheld the validity of section 139AA. Consequently, with
effect
from 01.04.2019, the CBDT has clarified that it is mandatory to quote Aadhaar number while filing the
return of income unless specifically exempted as per any notification issued under section 139AA(3)
[detailed in point no. (5) in the next page]. Thus, returns being filed either electronically or manually on
or after 1.4.2019 cannot be filed without quoting the Aadhaar number.

2. Mandatory quoting of Enrolment Id, where person does not have Aadhaar Number
If a person does not have Aadhaar Number, he is required to quote Enrolment ID of Aadhaar application
form issued to him at the time of enrolment in the application form for allotment of Permanent Account
Number (PAN) or in the return of income furnished by him.

Enrolment ID means a 28 digit Enrolment Identification Number issued to a resident at the time of
enrolment

3. Intimation of Aadhaar Number to prescribed Authority

Every person who has been allotted Permanent Account Number (PAN) as on 1st July, 2017, and who is
eligible to obtain Aadhaar Number, shall intimate his Aadhaar Number to prescribed authority on or
before 31st March, 2022.

Notwithstanding the last date of intimating/linking of Aadhaar Number with PAN being 31.03.2022, it is
clarified that w.e.f. 01.04.2019, it is mandatory to quote and link Aadhaar number while filing the return of
income, either manually or electronically, unless specifically exempted in cases detailed in point (5)
below.

4. Consequences of failure to intimate Aadhaar Number

If a person fails to intimate the Aadhaar Number, the permanent account Number (PAN) allotted to such
person shall be made inoperative after the date so notified in the prescribed manner.

Accordingly, Rule 114AAA specifies the manner of making permanent account number inoperative.
Sub-Rule Provision

(1) If a person, who has been allotted PAN as on 1st July, 2017 and is required to intimate his
Aadhaar number under section 139AA(2), has failed to intimate the same on or before
31st March, 2022, the PAN of such person would become inoperative and he would be
liable for payment of fee in accordance with section 234H read with Rule 114(5A) i.e., ₹
1,000.
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(2) Where such person who has not intimated his Aadhaar number on or before 31st March,
2022, has intimated his Aadhaar number under section 139AA(2) after 31st March, 2022,
after payment of fee specified in section 234H read with Rule 114(5A), his PAN would
become operative within 30 days from the date of intimation of Aadhaar number.
(3) A person, whose PAN has become inoperative, would be liable for following further
consequences for the period commencing from the date as specified under (4) below
till the date it becomes operative –
• no refund of any amount of tax or part thereof, due under the provisions of the Act;
• interest would not be payable on such refund for the period, beginning with the date
specified under (4) below and ending with the date on which it becomes operative;
• where tax is deductible at source in case of such person, such tax shall be deducted
at higher rate, in accordance with provisions of section 206AA;
• where tax is collectible at source in case of such person, such tax shall be collected
at higher rate, in accordance with provisions of section 206CC:

(4) The consequences in (3) above would be effective from the date specified by the Board
i.e., 1.7.2023 [Circular No. 3/2023 dated 28th March, 2023]

5. Clarification on consequences of PAN becoming inoperative

These consequences would be with effect from 1.7.2023 and continue till the PAN becomes operative. A
fee of ` 1,000 has to be paid to make the PAN operative by intimating the Aadhaar number.
The consequences of PAN becoming inoperative would not be applicable to those persons who have
been provided exemption from intimating Aadhaar number detailed in point (6) below.

6. Provision not to apply to certain persons or class of persons

The provisions of section 139AA relating to quoting of Aadhaar Number would, however, not apply to
such person or class or classes of persons or any State or part of any State as may be notified by the
Central Government.
Accordingly, the Central Government has, vide Notification No. 37/2017 dated 11.05.2017 effective from
01.07.2017, notified that the provisions of section 139AA relating to quoting of Aadhaar Number would
not apply to an individual who does not possess the Aadhaar number or Enrolment ID and is:
• residing in Assam, Jammu & Kashmir and Meghalaya;
• a non-resident as per Income-tax Act, 1961;
• of the age of 80 years or more at any time during the previous year;
• not a citizen of India.
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SCHEME FOR SUBMISSION OF RETURNS THROUGH TAX

RETURN PREPARERS [SECTION 139B]
i. This section provides that, for the purpose of enabling any specified class or classes of persons to
prepare and furnish their returns of income, the CBDT may notify a scheme to provide that such persons
may furnish their returns of income through a Tax Return Preparer authorised to act as such under the
Scheme.

ii. The Tax Return Preparer shall assist the persons furnishing the return in a manner that will be specified
in the Scheme and shall also affix his signature on such return.

iii. A Tax Return Preparer means any individual, other than

• any officer of a scheduled bank with which the assessee maintains a current account or has other
regular dealings.
• any legal practitioner who is entitled to practice in any civil court in India.
• an accountant
• an employee of the ‘specified class or classes of persons’.
who has been authorized to act as a Tax Return Preparer under the Scheme.

iv. The “specified class or classes of persons” for this purpose means any person other than a company or
a person whose accounts are required to be audited under section 44AB (tax audit) or under any other
existing law, who is required to furnish a return of income under the Act.

v. The Scheme notified under the said section may provide for the following -
• the manner in which and the period for which the Tax Return Preparers shall be authorised,
• the educational and other qualifications to be possessed, and the training and other conditions
required to be fulfilled, by a person to act as a Tax Return Preparer,
• the code of conduct for the Tax Return Preparers,
• the duties and obligations of the Tax Return Preparers,
• the circumstances under which the authorisation given to a Tax Return Preparer may be withdrawn,
and
• any other relevant matter as may be specified by the Scheme.
vi. Accordingly, the CBDT has, in exercise of the powers conferred by this section, framed the Tax Return
Preparer Scheme, 2006, which came into force from 1.12.2006.
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Particulars Contents

Applicability The scheme is applicable to all eligible persons.

of the scheme
Eligible person Any person being an individual or a Hindu undivided family.
Tax Return Any individual who has been issued a "Tax Return Preparer Certificate" and a
Preparer "unique identification number" under this Scheme by the Partner Organisation to
carry on the profession of preparing the returns of income in accordance with the
Scheme.

However, the following person are not entitled to act as Tax Return Preparer:
• any officer of a scheduled bank with which the assessee maintains a
current account or has other regular dealings.
• any legal practitioner who is entitled to practice in any civil court in India.
• an accountant.
Educational An individual, who holds a bachelor degree from a recognised Indian University or
Qualification institution, or has passed the intermediate level examination conducted by the
for Tax Return Institute of Chartered Accountants of India or the Institute of Company Secretaries
Preparers of India or the Institute of Cost Accountants of India, shall be eligible to act as Tax
Return Preparer.

Preparation of An eligible person may, at his option, furnish his return of income under section 139
and furnishing for any assessment year after getting it prepared through a Tax Return Preparer:
the Return of
However, the following eligible person (an individual or a HUF) cannot furnish a
Income by the
return of income for an assessment year through a Tax Return Preparer:
Tax Return
• who is carrying out business or profession during the previous year and
Preparer
accounts of the business or profession for that previous year are required to
be audited under section 44AB or under any other law for the time being in
force; or
• who is not a resident in India during the previous year.
An eligible person cannot furnish a revised return of income for any assessment
year through a Tax Return Preparer unless he has furnished the original return of
income for that assessment year through such or any other Tax Return Preparer.

Note - It may be noted that as per section 139B(3), an employee of the “specified class or classes of
persons” is not authorized to act as a Tax Return Preparer. Therefore, it follows that employees of
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companies and persons whose accounts are required to be audited under section 44AB or any other law
for the time being in force (since they are not falling in the category of specified class or classes of
persons), are eligible to act as Tax Return Preparers.

ILLUSTRATION 3
Mrs. Hetal, an individual engaged in the business of Beauty Parlour, has got her books of account for the
financial year ended on 31st March, 2024 audited under section 44AB. Her total income for the A.Y. 2024-25 is
₹ 6,35,000. She wants to furnish her return of income for A.Y. 2024-25 through a tax return preparer. Can she
do so?

SOLUTION
Section 139B provides a scheme for submission of return of income for any assessment year through a Tax
Return Preparer. However, it is not applicable to persons whose books of account are required to be audited
under section 44AB. Therefore, Mrs. Hetal cannot furnish her return of income for A.Y.2024-25 through a Tax
Return Preparer.

PERSONS AUTHORISED TO VERIFY RETURN OF INCOME

[SECTION 140]
This section specifies the persons who are authorized to verify the return of income under section 139.
Assessee Circumstance Authorised Persons

1. I. In circumstances not § the individual himself

covered under (ii), (iii) & (iv)
below

II. where he is absent from § the individual himself; or

India § any person duly authorised by him if this behalf
holding a valid power of attorney from the
individual (Such power of attorney should be
attached to the return of income)
(iii) where he is mentally § his guardian; or
incapacitated from § any other person competent to act on his
attending to his affairs behalf

(iv) where, for any other § any person duly authorised by him in this behalf
reason, it is not possible holding a valid power of attorney from the
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for the individual to verify individual, which should be attached to the

the return return of income.
2. Hindu (i) in circumstances not § the karta
Undivided covered under (ii) and (iii)
Family below
(ii) where the karta is absent § any other adult member of the HUF
from India
(iii) where the karta is mentally § any other adult member of the HUF
incapacitated from
attending to his affairs

3. Company (i) in circumstances not § the managing director of the company

covered under (i) to (vi)
below
(ii)
a) where for any unavoidable
reason such managing any director of the company or any other
director is not able to person as may be prescribed for this
verify the return; or purpose
b) where there is no
managing director
(iii) where the company is not § the managing director of the company (or)
resident in India § a person who holds a valid power of attorney
from such company to do so (such power of
attorney should be attached to the return).
(iv)
Where the company is being § Liquidator
wound up (whether under the
orders of a court or
otherwise); or
where any person has been § Liquidator
appointed as the receiver of
any assets of the company

(v) Where the management of - the principal officer of the company

the company has been
taken over by the Central
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Government or any State

Government under any law
(vi) Where an application for § insolvency professional appointed by such
corporate insolvency Adjudicating Authority
resolution process has
been admitted by the
Adjudicating Authority
under the Insolvency and
Bankruptcy Code, 2016.

4. Firm (i) in circumstances not § the managing partner of the firm

covered under (ii) below
(ii)
a) where for any § any partner of the firm, not being a minor
unavoidable reason such
managing partner is not
able to verify the return;
or
b) where there is no § any partner of the firm, not being a minor
managing partner.
5. LLP (i) in circumstances not § Designated partner
covered under (ii) below
(ii)
a) where for any unavoidable
reason such designated any partner of the LLP or any other person
partner is not able to verify
as may be prescribed for this purpose.
the return; or
b) where there is no
designated partner.

6. Local - § the principal officer

authority
7. Political - § the chief executive officer of such party
party (whether he is known as secretary or by any
other designation)

8. Any other - § any member of the association or the principal

association officer of such association
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9. Any other - § that person or some other person competent to

person act on his behalf.

Any other person in case of company and LLP - The CBDT has, vide Notification No. 93/2021 dated 18.8.2021,
specified that “any other person” referred to in section 140(c) and 140(cd) for company and LLP, respectively,
shall be the person, appointed by the Adjudicating Authority (i.e., National Company Law Tribunal constituted
under section 408 of the Companies Act, 2013) for discharging the duties and functions of an interim resolution
professional, a resolution professional, or a liquidator, as the case may be, under the Insolvency and
Bankruptcy Code, 2016 and the rules and regulations made thereunder.

LET US RECAPITULATE
Section Particulars
139(1) Assessees required to file return of income compulsorily
1. Companies and firms (whether having profit or loss or nil income);
2. a person, being a resident other than not ordinarily resident, having any asset (including
any financial interest in any entity) located outside India held as a beneficial owner or
beneficiary

3. or who has a signing authority in any account located outside India, whether or not
having income chargeable to tax;

4. Individuals, HUF, AOPs or BOIs and artificial juridical persons whose total income before
giving effect to the provisions of Chapter VI-A and sections 54, 54B, 54D, 54EC or 54F
exceeds the basic exemption limit.

5. Any person other than a company or a firm, who is not required to furnish a return under
section 139(1), who duringthe previous year –
• has deposited more than ` 1 crore in one or more
• current accounts maintained with a banking company or a co-operative bank; or
• has incurred expenditure of more than ` 2 lakh for himself or any other person
for travel to a foreign country; or
• has incurred expenditure of more than ` 1 lakh towards consumption of
electricity; or
• fulfils such other conditions as may be prescribed
Accordingly, the CBDT has notified that any person other than a company or a firm, who is
not required to furnish a return under section 139(1) has to file their return of income on or
before due date -
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• if his total sales, turnover or gross receipts, as the case may be, in the business > ` 60
lakhs during the previous year; or(ii) if his total gross receipts in profession > ` 10 lakhs
during the previous year; or (iii) if the aggregate of TDS and TCS during the previous
year,
• in the case of the person, is ` 25,000 or more; or
• However, a resident individual who is of the age of 60 years or more, at any time during
the
• relevant previous year, if the aggregate of TDS and TCS during the previous year, in his
case, is ` 50,000 or more (iv) the deposit in one or more savings bank account of the
person, in
• aggregate, is ` 50 lakhs or more during the previous year.

Due date of filing return of income

1. 31st October of the assessment year, in case the assessee (other than an assessee
referred to in (ii) below) is:
a) a company;
b) a person (other than company) whose accounts are required to be audited; or
c) a partner of a firm whose accounts are required to be audited.
2. 30th November of the assessment year, in the case of an assessee including the
partners of the firm being such assessee who is required to furnish a report referred to
in section 92E.
3. 31st July of the assessment year, in case of any other assessee.

139(3) Return of loss

An assessee can carry forward or set off his/its losses provided he/it has filed his/its return
under section 139(3), within the due date specified under section 139(1).

Exceptions
Loss from house property and unabsorbed depreciation can be carried forward for set-off
even though return has not been filed before the due date.

139(4) Belated Return

A return of income for any previous year, which has not been furnished within the time
allowed u/s 139(1), may be furnished at any time before the:
1. three months prior to the end of the relevant assessment year (i.e., 31.12.2024 for P.Y.
2023- 24); or
2. completion of the assessment,
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whichever is earlier.

139(5) Revised Return

If any omission or any wrong statement is discovered in a return furnished u/s 139(1) or
belated return u/s 139(4), a revised return may be furnished by the assessee at any time
before the:
§ three months prior to the end of the relevant assessment year (i.e., 31.12.2024 for P.Y.
2023- 24); or
§ completion of assessment,
whichever is earlier.
Thus, belated return can also be revised.
234A Interest for default in furnishing return of income
Interest under section 234A is payable where an assessee furnishes the return of income
after the due date or does not furnish the return of income.

Assessee shall be liable to pay simple interest @1% per month or part of the month for the
period commencing from the date immediately following the due date and ending on the
following dates –
Circumstances Ending on the following dates

Where the return is furnished after due date the date of furnishing of the return

Where no return is furnished the date of completion of assessment

However, where the assessee has paid taxes in full on or before the due date, interest
under section 234A is not leviable.

140A Self-Assessment tax

Where any tax is payable on the basis of any return required to be furnished under section
139, after taking into account –
§ the amount of tax, already paid,
§ the tax deducted or collected at source
§ any relief of tax claimed under section 89
§ any tax credit claimed to be set-off in accordance with the provisions of section 115JD,
in case the assessee has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A); and
§ any tax and interest payable as per the provisions of section 191(2)
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the assessee shall be liable to pay such tax together with interest and fee payable under
any provision of this Act for any delay in furnishing the return or any default or delay in
payment of advance tax before furnishing the return.

Where the amount paid by the assessee under section 140A(1) falls short of the aggregate
of the tax, interest and fee as aforesaid, the amount so paid shall first be adjusted towards
the fee payable and thereafter, towards interest and the balance shall be adjusted
towards the tax payable.

139(8)A Updated Return

Any person may, whether or not he has furnished a return under section 139(1) or belated
return under section 139(4) or revised return under section 139(5) for that assessment year,
furnish an updated return of his income or the income of any other person in respect of
which he is assessable, for the previous year relevant to the assessment year at any time
within 24 months from the end of the relevant assessment year.

The provisions of updated return would not apply, if the updated return of such person for
that assessment year –
i. is a loss return; or
ii. has the effect of decreasing the total tax liability determined on the basis of return
furnished under section 139(1) or section 139(4) or section 139(5); or
iii. results in refund or increases the refund due on the basis of return furnished under
section 139(1) or section 139(4) or section 139(5).

No updated return can be furnished by any person for the relevant assessment year, where
–
a) an updated return has been furnished by him under this subsection for the relevant
assessment year; or
b) any proceeding for assessment or reassessment or recomputation or revision of
income is pending or has been completed for the relevant assessment year in his case;
or(c) he is such person or belongs to such class of persons, as may be notified by the
CBDT.

140B Tax on Updated Return

Payment of tax, additional tax, interest and fee before furnishing updated return of
income if no return is furnished earlier - Where no return of income has been furnished
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by an assessee and tax is payable, on the basis of updated return to be furnished by such
assessee under section 139(8A), the assessee would be liable to pay such tax together with
interest and fee payable under any provision of this Act for any delay in furnishing the
return or any default or delay in payment of advance tax, along with the payment of
additional tax computed under section 140B(3), before furnishing the return.

The updated return shall be accompanied by proof of payment of such tax, additional
income- tax, interest and fee.

The tax payable is to be computed after taking into account the following -
§ the amount of tax, if any, already paid, as advance tax
§ the tax deducted or collected at source
§ any relief of tax claimed under section 89; and
§ any tax credit claimed to set-off in accordance with the provisions of section 115JD, in
case the assessee has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A).

In a case, where no earlier return has been furnished, the interest payable under section
234A has to be computed on the amount of the tax on the total income as declared in the
updated return under section 139(8A), in accordance with the provisions of section
140A(1A).

Payment of tax, additional tax, interest and fee before furnishing updated return of
income if return is furnished earlier
Where, return of income under section 139(1) or 139(4) or 139(5) has been furnished by an
assessee and tax is payable, on the basis of updated return to be furnished by such
assessee under section 139(8A), the assessee would be liable to pay such tax together with
interest payable under any provision of this Act for any default or delay in payment of
advance tax, along with the payment of additional tax computed u/s 140B(3), as reduced by
the amount of interest paid under the provisions of this Act in the earlier return, before
furnishing the return.

The updated return shall be accompanied by proof of payment of such tax, additional
income- tax and interest. The tax payable has to be computed after taking into account the
following -
a) the amount of relief or tax referred to in section 140A(1), the credit for which has
been taken in the earlier return
b) the tax deducted or collected at source, in accordance with the provisions of
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c) Chapter XVII-B, on any income which is subject to such deduction or collection and
which is taken into account in computing total income and which has not been
included in the earlier return
d) any tax credit claimed, to set-off in accordance with the provisions of section 115JD,
which has not been claimed in the earlier return, in case the assessee has exercised
the option of shifting out of the default tax regime provided under section
115BAC(1A).
The aforesaid tax would be increased by the amount of refund, if any, issued in respect of
such earlier return.

Additional income-tax payable at the time of updated return

The additional tax payable at the time of furnishing the updated return under section
139(8A) would be –
§ 25% of aggregate of tax and interest payable, as determined above, if such return is
furnished after expiry of the time available under section 139(4) or 139(5) and before
completion of the period of 12 months from the end of the relevant assessment year;
or
§ 50% of aggregate of tax and interest payable, as determined above, if such return is
furnished after the expiry of 12 months from the end of the relevant A.Y. but before
completion of the period of 24 months from the end of the relevant A.Y.

139(9) Defective Return

Where the Assessing Officer considers that the return of income is defective, he may
intimate the defect to the assessee and give him an opportunity to rectify the defect within
15 days from the date of intimation or within such further period, which, the Assessing
Officer may allow in his discretion on an application made by the assessee in this behalf.
If the defect is not rectified within such period, the return would be treated as an invalid
return. Consequently, the provisions of the Income-tax Act, 1961 would apply as if the
assessee had failed to furnish the return.
However, where the assessee rectifies the defect after the expiry of 15 days or further
period allowed by the Assessing Officer but before the assessment is made, the Assessing
Officer may condone the delay and treat the return as a valid return.

234F Fee for default in furnishing return of income

Where a person who is required to furnish a return of income under section 139, fails to do
so within the prescribed time limit under section 139(1), he shall pay, by way of fee, a sum
of ₹ 5,000.
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However, if the total income of the person does not exceed ₹ 5 lakhs, the fees payable
shall not exceed ₹ 1,000

139A Permanent Account Number (PAN)

Quoting of PAN is mandatory in all documents pertaining to the following prescribed
transactions :
§ in all returns to, or correspondence with, any income-tax authority;
§ in all challans for the payment of any sum due under the Act;
§ in all documents pertaining to such transactions entered into by him, as may be
prescribed by the CBDT in the interests of revenue. For example, sale or purchase of a
motor vehicle, payment in cash of an amount exceeding ₹ 50,000 to a hotel against a
bill or bills at any one time, etc.

Inter-changeability of PAN with the Aadhaar number

Every person who is required to furnish or intimate or quote his PAN may furnish or intimate
or quote his Aadhaar Number in lieu of the PAN if he
§ has not been allotted a PAN but possesses the Aadhaar number
§ has been allotted a PAN and has intimated his Aadhaar number to prescribed
authority in accordance with the requirement contained in section 139AA(2).

139AA Quoting of Aadhaar Number

To be quoted by every person on or after 1.7.2017 in the application for allotment of PAN and
in return of income.
If a person does not have Aadhaar Number, the Enrolment ID of Aadhaar application form
issued to him at the time of enrolment shall be quoted.

Every person who has been allotted PAN as on 1.7.2017 and who is eligible to obtain Aadhaar
Number, has to intimate his Aadhaar Number to the prescribed authority on or before
31.3.2022.

If such person has failed to intimate the same on or before 31st March, 2022, the PAN of
such person would become inoperative and he would be liable for payment of fee in
accordance with section 234H read with Rule 114(5A) i.e., ₹ 1,000.
Where such person who has not intimated his Aadhaar number on or before 31st March,
2022, has intimated his Aadhaar number under section 139AA(2) after 31st March, 2022,
after payment of fee specified in section 234H read with Rule 114(5A), his PAN would become
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operative within 30 days from the date of intimation of Aadhaar number.

The consequences of inoperative PAN would be effective from the date specified by the
Board i.e., 1.7.2023 [Circular No. 3/2023 dated 28th March, 2023]

TEST YOUR KNOWLEDGE

1. State with reasons whether you agree or disagree with the following statements:
(a) Return of income of Limited Liability Partnership (LLP) could be verified by any partner.
(b) Time limit for filing return under section 139(1) in the case of Mr. A having total turnover of ₹ 160 lakhs
(₹ 100 lakhs received in cash) for the year ended 31.03.2024 whether or not declaring presumptive
income under section 44AD, is 31st October, 2024.

2. Mr. Vineet exercised the option of shifting out of the default tax regime provided under section
115BAC(1A) and submits his return of income under the optional tax regime (i.e., the normal provisions of
the Act) on 12- 09-2024 for A.Y 2024- 25 consisting of income under the head “Salaries”, “Income from
house property” and bank interest. On 21-12-2024, he realized that he had not claimed deduction under
section 80TTA in respect of his interest income on the Savings Bank Account. He wants to revise his
return of income. Can he do so? Examine. Would your answer be different if he discovered this omission
on 21- 03-2025?

3. Examine with reasons, whether the following statements are true or false, with regard to the provisions
of the Income-tax Act, 1961:
(a) The Assessing Officer has the power, inter alia, to allot PAN to any person by whom no tax is payable.
(b) Where the Karta of a HUF is absent from India, the return of income can be verified by any male
member of the family.

4. Explain the term “return of loss” under the Income-tax Act, 1961. Can any loss be carried forward even if
return of loss has not been filed as required?

5. Mr. Aakash has undertaken certain transactions during the F.Y.2023-24, which are listed below. You are
required to identify the transactions in respect of which quoting of PAN is mandatory in the related
documents-
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S. No. Transaction

1. Payment of life insurance premium of ₹ 45,000 in the F.Y.2023-24 by account payee

cheque to LIC for insuring life of self and spouse

2. Payment of ₹ 1,00,000 to a five-star hotel for stay for 5 days with family, out of which ₹
60,000 was paid in cash
3. Payment of ₹ 80,000 by ECS through bank account for acquiring the debentures of A
Ltd., an Indian company
4. Payment of ₹ 95,000 by account payee cheque to Thomas Cook for travel to Dubai for 3
days to visit relatives
5. Applied to SBI for issue of credit card.

ANSWERS
1.
(a) Disagree
The return of income of LLP should be verified by a designated partner.
Any other partner can verify the Return of Income of LLP only in the following cases:-
• where for any unavoidable reason such designated partner is not able to verify the return, or,
• where there is no designated partner.

(b) Disagree
In case Mr. A offers his business income as per the presumptive taxation provisions of section 44AD
(` 11.60 lakhs or more), then, the due date under section 139(1) for filing of return of income for the
year ended 31.03.2024, shall be 31st July, 2024.

In case, Mr. A wants to declare business income lower than ₹ 11.60 lakhs, he has to get his accounts
audited under section 44AB, since his turnover exceeds ₹ 1 crore, in which case, the due date for
filing return would be 31st October, 2024.

2. Since Mr. Vineet has income only under the heads “Salaries”, “Income from house property” and “Income
from other sources”, he does not fall under the category of a person whose accounts are required to be
audited under the Income-tax Act, 1961 or any other law in force. Therefore, the due date of filing return
for A.Y.2024- 25 under section 139(1), in his case, is 31st July, 2024. Since Mr. Vineet had submitted his
SIR
VG

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PROVISIONS FOR FILING RETURN OF INCOME AND SELF
ASSESSMENT
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return only on 12.9.2024, the said return is a belated return under section 139(4).

As per section 139(5), a return furnished under section 139(1) or a belated return u/s 139(4) can be
revised. Thus, a belated return under section 139(4)can also be revised. Therefore, Mr. Vineet can revise
the return of income filed by him under section 139(4) in December 2024, to claim deduction under
section 80TTA, since the time limit for filing a revised return is three months prior to the end of the
relevant assessment year, which is 31.12.2024.
However, he cannot revise return had he discovered this omission only on 21-03-2025, since it is beyond
31.12.2024.

3.
i. True: Section 139A(2) provides that the Assessing Officer may, having regard to the nature of
transactions as may be prescribed, also allot a PAN to any other person, whether any tax is payable
by him or not, in the manner and in accordance with the procedure as may be prescribed.

ii. False: Section 140(b) provides that where the Karta of a HUF is absent from India, the return of
income can be verified by any other adult member of the family; such member can be a male or
female member.

4. A return of loss is a return which shows certain losses. Section 80 provides that the losses specified
therein cannot be carried forward, unless such losses are determined in pursuance of return filed under
the provisions of section 139(3).

Section 139(3) states that to carry forward the losses specified therein, the return should be filed within
the time specified in section 139(1).

Following losses are covered by section 139(3):

• business loss to be carried forward under section 72(1),
• speculation business loss to be carried forward under section 73(2),
• loss from specified business to be carried forward under section 73A(2), in case the assessee has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
• loss under the head “Capital Gains” to be carried forward under section 74(1); and
• loss incurred in the activity of owning and maintaining race horses to be carried forward under
section 74A(3)

However, loss from house property to be carried forward under section 71B and unabsorbed depreciation
under section 32 can be carried forward even if return of loss has not been filed as required under
section 139(3).
SIR
VG

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5.
Transaction Is quoting of PAN mandatory in related
documents?
1. Payment of life insurance premium Of ₹ No, since the amount paid does not exceed ₹
45,000 in the F.Y.2023- 24 by account 50,000 in the F.Y.2023-24.
payee cheque to LIC for insuring life of self
and spouse
2. Payment of ₹ 1,00,000 to a five-star hotel Yes, since the amount paid in cash exceeds ₹
for stay for 5 days with family, out of which 50,000
` 60,000 was paid in cash

3. Payment of ₹ 80,000, by ECS through bank Yes, since the amount paid for acquiring
account, for the debentures of A Ltd., an debentures exceeds ₹ 50,000. Mode of
Indian company payment is not relevant in this case.

4. Payment of ₹ 95,000 by account payee No, since the amount was paid by account
cheque to Thomas Cook for travel to Dubai payee cheque, quoting of PAN is not mandatory
for 3 days to visit relatives even though the payment exceeds ₹ 50,000
5. Applied to SBI for issue of credit card. Yes, quoting of PAN is mandatory on making an
application to a banking company for issue of
credit card.
SIR
VG

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