Income Tax treatment of income from different sources

 

Each income has different source of earning and so the provisions for its taxability. Income-tax Act provides for five heads of incomes for computation of taxable income, viz., Salary, Income from House Property, Income from Business or Profession, Capital Gain and Residual Income. Provisions contained under each head of income for computation of taxable income have been discussed in this document. This is updated by Finance Act, 2016.

Treatment of Income from Different Sources

1. Income under the head Salaries

1.1 Salary is defined to include:

a) Wages

b) Annuity

c) Pension

d) Gratuity

e) Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages

f) Advance of Salary

g) Leave Encashment

h) Annual accretion to the balance of Recognized Provident Fund

i) Transferred balance in Recognized Provident Fund

j) Contribution by Central Government or any other employer to Employees Pension Account as referred in 80CCD

1.2 Points to consider:

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.

c) Income from salary taxable during the year shall consists of following:

i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;

ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;

iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;

Exceptions – Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.

1.3 Place of accrual of salary:

a) Salary accrues where the services are rendered even if it is paid outside India;

b) Salary paid by the Foreign Government to his employee serving in India is taxable under the head Salaries;

c) Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in India.

Exceptions – If a Citizen of India render services outside India, and receives salary from Government of India, it would be taxable as salary deemed to have accrued in India.

1.4 Taxability of various components of salary:

S.No. Section Particulars Taxability/Exemption
1. 17 Basic salary Fully taxable
2. 17 Dearness Allowance (referred to as ‘DA’) Fully taxable
3. 17 Bonus, fees or commission Fully taxable
A. Allowances
4. 10(13A)read with Rule 2A House rent allowance Least of the following is exempt:

a) Actual HRA Received

b) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Chennai)

c) Rent paid minus 10% of salary

* Salary = Basic + DA (if part of retirement benefit) + Turnover based Commission

Note:

i. Fully taxable, if HRA is received by an employee who is living in his own house or if he does not pay any rent

ii. It is mandatory for employee to report PAN of the landlord to the employer if rent paid is more than Rs. 1,00,000 [Circular No. 08 /2013 dated 10-10-2013].

5. 10(14) Children education allowance Up to Rs. 100 per month per child up to a maximum of 2 children is exempt
6. 10(14) Hostel expenditure allowance Up to Rs. 300 per month per child up to a maximum of 2 children is exempt
7. 10(14) Transport allowance granted to an employee to meet expenditure on commuting between place of residence and place of duty Up to Rs. 1600 per month (Rs. 3200 per month for blind and handicapped employees) is exempt
8. Sec. 10(14) Allowance granted to an employee working in any transport business to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place provided employee is not in receipt of daily allowance. Amount of exemption shall be lower of following:

a) 70% of such allowance; or

b) Rs. 10,000 per month.

9. 10(14) Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office Exempt to the extent of expenditure incurred for official purposes
10. 10(14) Travelling allowance to meet the cost of travel on tour or on transfer Exempt to the extent of expenditure incurred for official purposes
11. 10(14) Daily allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty Exempt to the extent of expenditure incurred for official purposes
12. 10(14) Helper/Assistant allowance Exempt to the extent of expenditure incurred for official purposes
13. 10(14) Research allowance granted for encouraging the academic research and other professional pursuits Exempt to the extent of expenditure incurred for official purposes
14. 10(14) Uniform allowance Exempt to the extent of expenditure incurred for official purposes
15. 10(7) Any allowance or perquisite paid or allowed by Government to its employees (an Indian citizen) posted outside India Fully Exempt
16. Allowances to Judges of High Court/Supreme Court (Subject to certain conditions) Fully Exempt.
17. 10(45) Following allowances and perquisites given to serving Chairman/Member of UPSC is exempt from tax:

a) Value of rent free official residence

b) Value of conveyance facilities including transport allowance

c) Sumptuary allowance

d) Leave travel concession

Fully Exempt
18. Allowances paid by the UNO to its employees Fully Exempt
19. 10(45) Allowances to Retired Chairman/Members of UPSC (Subject to certain conditions) Exempt subject to maximum of Rs. 14,000 per month for defraying the services of an orderly and for meeting expenses incurred towards secretarial assistant on contract basis.
20. Sec. 10(14) read with Rule 2BB Special compensatory Allowance (Hilly Areas) (Subject to certain conditions and locations) Amount exempt from tax varies from Rs. 300 to Rs. 7,000 per month.
21. Sec. 10(14) read with Rule 2BB Border area, Remote Locality or Disturbed Area or Difficult Area Allowance (Subject to certain conditions and locations) Amount exempt from tax varies from Rs. 200 to Rs. 1,300 per month.
22. Sec. 10(14) read with Rule 2BB Tribal area allowance in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa Up to Rs. 200 per month is exempt
23. Sec. 10(14) read with Rule 2BB Compensatory Field Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) Up to Rs. 2,600 per month is exempt
24. Sec. 10(14) read with Rule 2BB Compensatory Modified Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) Up to Rs. 1,000 per month is exempt
25. Sec. 10(14) read with Rule 2BB Counter Insurgency Allowance granted to members of Armed Forces operating in areas away from their permanent locations. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) Up to Rs. 3,900 per month is exempt
26. Sec. 10(14) read with Rule 2BB Underground Allowance to employees working in uncongenial, unnatural climate in underground mines Up to Rs. 800 per month is exempt
27. Sec. 10(14) read with Rule 2BB High Altitude Allowance granted to armed forces operating in high altitude areas (Subject to certain conditions and locations) a) Up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet) is exempt

b) Up to Rs. 1,600 per month (for altitude above 15,000 feet) is exempt

28. Sec. 10(14) read with Rule 2BB Highly active field area allowance granted to members of armed forces (Subject to certain conditions and locations) Up to Rs. 4,200 per month is exempt
29. Sec. 10(14) read with Rule 2BB Island Duty Allowance granted to members of armed forces in Andaman and Nicobar and Lakshadweep group of Island (Subject to certain conditions and locations) Up to Rs. 3,250 per month is exempt
30. 10(14) City Compensatory Allowance Fully Taxable
31. 10(14) Fixed Medical Allowance Fully Taxable
32. 10(14) Tiffin, Lunch, Dinner or Refreshment Allowance Fully Taxable
33. 10(14) Servant Allowance Fully Taxable
34. 10(14) Project Allowance Fully Taxable
35. 10(14) Overtime Allowance Fully Taxable
36. 10(14) Telephone Allowance Fully Taxable
37. 10(14) Holiday Allowance Fully Taxable
38. 10(14) Any Other Cash Allowance Fully Taxable
B. Perquisites
39. 17(2)(i)

read with

Rule 3(1)

Rent free unfurnished accommodation provided to Central and State Government employees License fees determined in accordance with rules framed by Government for allotment of houses shall be deemed to be the taxable value of perquisites.
40. 17(2)(i)/(ii)

read with

Rule 3(1)

Unfurnished rent free accommodation provided to other employees Taxable value of perquisites

i. If house property is owned by the employer, the taxable value of perquisite shall be:

A. 15% of salary, if population of city where accommodation is provided exceeds 25 lakhs

B. 10% of salary, if population of city where accommodation is provided exceeds 10 lakhs but does not exceed 25 lakhs

C. 7.5% of salary, if accommodation is provided in any other city

ii. If house property is taken on lease or rent by the employer, the taxable value of perquisite shall be:

i. Lease rent paid or payable by the employer or 15% of the salary, whichever is lower

*Salary includes:

a) Basic Pay

b) Dearness Allowance (only to the extent it forms part of retirement benefit salary)

c) Bonus

d) Commission

e) All other allowances (only taxable portion)

f) Any monetary payment which is chargeable to tax

But does not include

i. Value of any perquisite

ii. Employer’s contribution to PF

iii. Benefits received at the time of retirement like gratuity, pension etc.

Note:

1) Rent free accommodation is not chargeable to tax if provided in remote area.

2) Rent free accommodation provided to High Court or Supreme Court Judges, Union Ministers, Leader of Opposition in Parliament, an official in Parliament and Serving Chairman and members of UPSC is tax free perquisite.

3) The value so determined shall be reduced by the amount of rent, if any,  recovered from the employee.

4) If employee is transferred and retain property at both the places, the taxable value of perquisites for initial period of 90 days shall be determined with reference to only one accommodation (at the option of the assessee). The other one will be tax free. However after 90 days, taxable value of perquisites shall be charged with reference to both the accommodations.

41. 17(2)(i)

read with

Rule 3(1)

Rent free furnished accommodation Taxable value of perquisites shall be computed in following manner:

a) Taxable value of perquisite assuming accommodation to be provided to the employee is unfurnished

b) Add: 10% of original cost of furniture and fixtures (if these are owned by the employer) or actual higher charges paid or payable (if these are taken on rent by the employer).

c) Less: The value so determined shall be reduced by the amount of rent, if any, recovered from the employee

42. 17(2)(i)

read with

Rule 3(1)

Accommodation provided in a hotel

Hotel accommodation will not be chargeable to tax if :

a) It is provided for a total period not exceeding in aggregate 15 days in the financial year; and

b) Such accommodation in hotel is provided on employee’s transfer from one place to another place.

Taxable value of perquisite shall be lower of following:

a)  Actual charges paid or payable by the employer to such hotel; or

b)  24% of salary

43. 17(2)(iii)

read with Rule 3(2)

Motor Car / Other Conveyance Taxable value of perquisites (See Note 1 below)
44. 17(2)(iii)

read with Rule 3(3)

Services of a domestic servant including sweeper, gardener, watchmen or personal attendant (taxable only in case of specified employee [See Note 4]) Taxable value of perquisite shall be salary paid or payable by the employer for such services lessany amount recovered from the employee.
45. 17(2)(iii)

read with Rule 3(4)

Supply of gas, electricity or water for household purposes Taxable value of perquisites:

➢ Manufacturing cost per unit incurred by the employer., if provided from resources owned by the employer;

➢ Amount paid by the employer, if purchased by the employer from outside agency

Note:

1. Any amount recovered from the employee shall be deducted from the taxable value of perquisite.

2. Taxable in case of specified employees only [See note 4]

46. 17(2)(iii)

read with Rule 3(5)

Education Facilities Taxable value of perquisites (See Note 2 below)
47. 17(2)(iii)

read with Rule 3(6)

Transport facilities provided by the employer engaged in carriage of passenger or goods (except Airlines or Railways) Value at which services are offered by the employer to the public less amount recovered from the employee shall be a taxable perquisite
48. 17(2)(v) Amount payable by the employer to effect an insurance on life of employee or to effect a contract for an annuity Fully Taxable
49. 17(2)(vi) read with Rule 3(8) ESOP/ Sweat Equity Shares Fair Market value of shares or securities on the date of exercise of option by the assessee lessamount recovered from the employee in respect of such shares shall be the taxable value of perquisites.

Fair Market Value shall be determined as follows:

a) In case of listed Shares: Average of opening and closing price as on date of exercise of option (Subject to certain conditions and circumstances)

b) In case of unlisted shares/ security other than equity shares: Value determined by a Merchant Banker as on date of exercise of option or an earlier date, not being a date which is more than 180 days earlier than the date of exercise of the option.

50. 17(2)(vii) Employer’s contribution towards superannuation fund Taxable in the hands of employee to the extent such contribution exceeds Rs.1,50,000
51. 17(2)(viii) read with Rule 3(7)(i) Interest free loan or Loan at concessional rate of interest Interest free loan or loan at concessional rate of interest given by an employer to the employee (or any member of his household) is a perquisite chargeable to tax in the hands of all employees on following basis:

1) Find out the “maximum outstanding monthly balance” (i.e. the aggregate outstanding balance for each loan as on the last day of each month);

2) Find out rate of interest charged by the SBI as on the first day of relevant previous year in respect of loan for the same purpose advanced by it;

3) Calculate interest for each month of the previous year on the outstanding amount (mentioned in Step 1) at the rate of interest given in Step 2

4) From the total interest calculated for the entire previous year (step 3), deduct interest actually recovered, if any, from employee

5) The balance amount (Step 3-Step 4) is taxable value of perquisite

Nothing is taxable if:

a) Loan in aggregate does not exceed Rs. 20,000; or

b) Loan is provided for treatment of specified diseases (Rule 3A) like neurological diseases, Cancer, AIDS, Chronic renal failure, Hemophilia (specified diseases). However, exemption is not applicable to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

52. 17(2)(viii) read with Rule 3(7)(ii) Facility of travelling, touring and accommodation availed of by the employee or any member of his household for any holiday a) Taxable value of perquisite shall be expenditure incurred by the employer less amount recovered from employee.

b) Where such facility is maintained by the employer, and is not available uniformly to all employees, the value of benefit shall be taken to be the value at which such facilities are offered by other agencies to the public.

53. 17(2)(viii) read with Rule 3(7)(iii) Free food and beverages provided to the employee  1) Fully Taxable: Free meals in excess of Rs. 50 per meal less amount paid by the employee shall be a taxable perquisite

2) Exempt from tax: Following free meals shall be exempt from tax:

a) Food and non-alcoholic beverages provided during working hours in remote area or in an offshore installation;

b) Tea, Coffee or Non-Alcoholic beverages and Snacks during working hours are tax free perquisites;

c) Food in office premises or through non-transferable paid vouchers usable only at eating joints provided by an employer is not taxable, if cost to the employer is Rs. 50(or less) per meal.

54. 17(2)(viii) read with Rule 3(7)(iv) Gift or Voucher or Coupon on ceremonial occasions or otherwise provided to the employee a) Gifts in cash or convertible into money (like gift cheque) are fully taxable

b) Gift in kind up to Rs.5,000 in aggregate per annum would be exempt, beyond which it would be taxable.

55. 17(2)(viii) read with Rule 3(7)(v) Credit Card  a)  Expenditure incurred by the employer in respect of credit card used by the employee or any member of his household less amount recovered from the employee is a taxable perquisite

b)  Expenses incurred for official purposes shall not be a taxable perquisite provided complete details in respect of such expenditure are maintained by the employer

56. 17(2)(viii) read with Rule 3(7)(vi) Free Recreation/ Club Facilities  a)  Expenditure incurred by the employer towards annual or periodical fee etc. (excluding initial fee to acquire corporate membership) less amount recovered from the employee is a taxable perquisite

b)  Expenses incurred on club facilities for the official purposes are exempt from tax.

c)  Use of health club, sports and similar facilities provided uniformly to all employees shall be exempt from tax.

57. 17(2)(viii) read with Rule 3(7)(vii) Use of movable assets of the employer by the employee is a taxable perquisite Taxable value of perquisites

a) Use of Laptops and Computers: Nil

b) Movable asset other than Laptops, computers and Motor Car*: 10% of original cost of the asset (if asset is owned by the employer) or actual higher charges incurred by the employer (if asset is taken on rent) less amount recovered from employee.

*See Note 1 for computation of perquisite value in case of use of the Motor Car

58. 17(2)(viii) read with Rule 3(7)(viii) Transfer of movable assets by an employer to its employee Taxable value of perquisites

a) Computers, Laptop and Electronics items: Actual cost of asset less depreciation at 50% (using reducing balance method) for each completed year of usage by employer less amount recovered from the employee

b) Motor Car: Actual cost of asset less depreciation at 20% (using reducing balance method) for each completed year of usage by employer less amount recovered from the employee

c) Other movable assets: Actual cost of asset less depreciation at 10% (on SLM basis) for each completed year of usage by employer less amount recovered from the employee.

59. 17(2)(viii) read with Rule 3(7)(ix) Any other benefit or amenity extended by employer to employee Taxable value of perquisite shall be computed on the basis of cost to the employer (under an arm’s length transaction) less amount recovered from the employee.

However, expenses on telephones including a mobile phone incurred by the employer on behalf of employee shall not be treated as taxable perquisite.

60. 10(10CC) Tax paid by the employer on perquisites (not provided for by way of monetary payments) given to employee Fully exempt
61. 10(5) Leave Travel Concession or Assistance (LTC/LTA), extended by an employer to an employee for going anywhere in India along with his family*

*Family includes spouse, children and dependent brother/sister/parents. However, family doesn’t include more than 2 children of an Individual born on or after 01-10-1998.

(Subject to certain conditions)

The exemption shall be limited to fare for going anywhere in India along with family twice in a block of four years:

• Where journey is performed by Air – Exemption up to Air fare of economy class in the National Carrier by the shortest route

• Where journey is performed by Rail – Exemption up to air-conditioned first class rail fare by the shortest route

• If places of origin of journey and destination are connected by rail but the journey is performed by any other mode of transport – Exemption up to air-conditioned first class rail fare by the shortest route.

• Where the places of origin of journey and destination are not connected by rail:

* Where a recognized public transport system exists – Exemption up to first Class or deluxe class fare by the shortest route

* Where no recognized public transport system exists – Exemption up to air conditioned first class rail fare by shortest route.

Notes:

i. Two journeys in a block of 4 calendar years is exempt

ii. Taxable only in case of Specified Employees [See note 4]

62. Proviso to section 17(2) Medical facilities in India  a)  Expense incurred or reimbursed by the employer for the medical treatment of the employee or his family (spouse and children, dependent – parents, brothers and sisters) in any of the following hospital is not chargeable to tax in the hands of the employee:

i.  Hospital maintained by the employer.

ii.  Hospital maintained by the Government or Local Authority or any other hospital approved by Central Government

iii.  Hospital approved by the Chief Commissioner having regard to the prescribed guidelines for treatment of the prescribed diseases.

b)  Medical insurance premium paid or reimbursed by the employer is not chargeable to tax.

c)  Any other expenditure incurred or reimbursed by the employer for providing medical facility in India is not chargeable to tax up to Rs. 15,000 in aggregate per assessment year.

63. Proviso to section 17(2) Medical facilities outside India Any expenditure incurred or reimbursed by the employer for medical treatment of the employee or his family member outside India is exempt to the extent of following (subject to certain condition):

a.  Expenses on medical treatment – exempt to the extent permitted by RBI.

b.  Expenses on stay abroad for patient and one attendant – exempt to the extent permitted by RBI.

c.  Expenditure incurred on travelling of patient and one attendant- exempt, if Gross Total Income (before including the travel expenditure) of the employee, does not exceed Rs. 2,00,000.

C. Deduction from salary
1. 16 (ii) Entertainment Allowance received by the Government employees (Fully taxable in case of other employees) Least of the following is exempt from tax:

a) Rs 5,000

b) 1/5th of salary (excluding any allowance, benefits or other perquisite)

c) Actual entertainment allowance received

2. 16(iii) Employment Tax/Professional Tax. Amount actually paid during the year. However, if professional tax is paid by the employer on behalf of its employee than it is first included in the salary of the employee as a perquisite and then same amount is allowed as deduction.
D. Retirement Benefits
Leave Encashment
1. 10(10AA) Encashment of unutilized earned leave at the time of retirement of Government employees Fully Exempt
2. 10(10AA) Encashment of unutilized earned leave at the time of retirement of other employees (not being a Government employee) Least of the following shall be exempt from tax:

a) Amount actually received

b) Unutilized earned leave* X Average monthly salary

c) 10 months Average Salary**

d) Rs. 3,00,000

* While computing unutilized earned leave, earned leave entitlements cannot exceed 30 days for each completed year of service rendered to the current employer

** Average salary = Average Salary*** of last 10 months immediately preceding the retirement

***Salary = Basic Pay + DA (to the extent it forms part of retirement benefits)+ turnover based commission

Retrenchment Compensation
3. 10(10B) Retrenchment Compensation received by a workman under the Industrial Dispute Act, 1947 (Subject to certain conditions). Least of the following shall be exempt from tax:

a) Amount calculated as per section 25F(b)of the Industrial Disputes Act, 1947;

b) Rs. 5,00,000; or

c) Amount actually received

Note:

i. Relief under Section 89(1) is available

ii. 15 days average pay for each completed year of continuous service or any part thereof in excess of 6 months is to be adopted under section 25F(b) of the Industrial Disputes Act,1947

Gratuity
4. 10(10)(i) Gratuity received by Government Employees (Other than employees of statutory corporations) Fully Exempt
5. 10(10)(ii) Death -cum-Retirement Gratuity received by other employees who are covered under Gratuity Act, 1972 (other than Government employee) (Subject to certain conditions). Least of following amount is exempt from tax:

1. (*15/26) X Last drawn salary** X completed year of service or part thereof in excess of 6 months.

2. Rs. 10,00,000

3. Gratuity actually received.

*7 days in case of employee of seasonal establishment.

** Salary = Last drawn salary including DA but excluding any bonus, commission, HRA, overtime and any other allowance, benefits or perquisite

6. 10(10)(iii) Death -cum-Retirement Gratuity received by other employees who are not covered under Gratuity Act, 1972 (other than Government employee) (Subject to certain conditions). Least of following amount is exempt from tax:

1. Half month’s Average Salary* X Completed years of service

2. Rs. 10,00,000

3. Gratuity actually received.

*Average salary = Average Salary of last 10 months immediately preceding the month of retirement

** Salary = Basic Pay + DA (to the extent it forms part of retirement benefits)+ turnover based commission

Pension
7. Pension received from United Nation Organization by the employee of his family members Fully Exempt
8. 10(10A)(i) Commuted Pension received by an employee of Central Government, State Government, Local Authority Employees and Statutory Corporation Fully Exempt
9. 10(10A)(ii) Commuted Pension received by other employees who also receive gratuity 1/3 of full value of commuted pension will be exempt from tax
10. 10(10A)(iii) Commuted Pension received by other employees who do not receive any gratuity 1/2 of full value of commuted pension will be exempt from tax
11. 10(19) Family Pension received by the family members of Armed Forces Fully Exempt
12. 57(iia) Family pension received by family members in any other case 33.33% of Family Pension subject to maximum of Rs. 15,000 shall be exempt from tax
Voluntary Retirement
13. 10(10C) Amount received on Voluntary Retirement or Voluntary Separation (Subject to certain conditions) Least of the following is exempt from tax:

1) Actual amount received as per the guidelines i.e. least of the following

a) 3 months salary for each completed year of services

b) Salary at the time of retirement X No. of months of services left for retirement; or

2) Rs. 5,00,000

Provident Fund
14. Employee’s Provident Fund For taxability of contribution made to various employee’s provident fund and interest arising thereonsee Note 3.
National Pension System (NPS)
15. 10(12A) National Pension System Any payment from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed 40% of the total amount payable to him at the time of such closure or his opting out of the scheme.
E. Arrear of Salary and relief under section 89(1)
1. 15 Arrear of salary and advance salary Taxable in the year of receipt. However relief under section 89 is available
2. 89 Relief under Section 89 If an individual receives any portion of his salary in arrears or in advance or receives profits in lieu of salary, he can claim relief as per provisions of section 89 read with rule 21A
F. Other Benefits
1. Lump-sum payment made gratuitously or by way of compensation or otherwise to widow or other legal heirs of an employee who dies while still in active service [Circular No. 573, dated 21-08-1990] Fully exempt in the hands of widow or other legal heirs of employee
2. Ex-gratia payment to a person (or legal heirs) by Central or State Government, Local Authority or Public Sector Undertaking consequent upon injury to the person or death of family member while on duty [Circular No. 776, dated 08-06-1999] Fully exempt in the hands of individual or legal heirs
3. Salary received from United Nation Organization [Circular No. 293, dated 10-02-1981] Fully exempt
4. 10(6)(ii) Salary received by foreign national as an officials of an embassy, high commission, legation, consulate or trade representation of a foreign state Fully exempt if corresponding official in that foreign country enjoys a similar exemption
5. 10(6)(vi) Remuneration received by non-resident foreign citizen as an employee of a foreign enterprise for services rendered in India, if:

a)  Foreign enterprise is not engaged in any trade or business in India

b)  His stay in India does not exceed in aggregate a period of 90 days in such previous year

c)  Such remuneration is not liable to deducted from the income of employer chargeable under this Act

Fully exempt
6. 10(6)(viii) Salary received by a non-resident foreign national for services rendered in connection with his employment on a foreign ship if his total stay in India does not exceed 90 days in the previous year. Fully exempt
7. Salary and allowances received by a teacher /professor from SAARC member state (Subject to certain conditions). Fully exempt

Notes:

  1. Motor Car (taxable only in case of specified employees [See note 4] except when car owned by the employee is used by him or members of his household wholly for personal purposes and for which reimbursement is made by the employer)

 

S. No. Circumstances Engine Capacity up to 1600 cc Engine Capacity above 1600 cc
1 Motor Car is owned or hired by the employer
1.1 Where maintenances and running expenses including remuneration of the chauffeur are met or reimbursed by the employer.
1.1-A Used wholly and exclusively in the performance of official duties. Fully exempt subject to maintenance of specified documents Fully exempt subject to maintenance of specified documents
1.1-B Used exclusively for the personal purposes of the employee or any member of his household. Actual amount of expenditure incurred by the employer on the running and maintenance of motor car including remuneration paid by the employer to the chauffeur and increased by the amount representing normal wear and tear of the motor car at 10% per annum of the cost of vehicle less any amount charged from the employee for such use is taxable value of perquisite.
1.1-C The motor car is used partly in the performance of duties and partly for personal purposes of the employee or any member of his household. Rs. 1,800 per month (plus Rs. 900 per month, if chauffeur is also provided to run the motor car) shall be taxable value of perquisite Rs. 2,400 per month (plus Rs. 900 per month, if chauffeur is also provided to run the motor car) shall be taxable value of perquisite
Nothing is deductible in respect of any amount recovered from the employee.
1.2 Where maintenances and running expenses are met by the employee.
1.2-A Used wholly and exclusively in the performance of official duties. Not a perquisite, hence, not taxable Not a perquisite, hence, not taxable
1.2-B Used exclusively for the personal purposes of the employee or any member of his household Expenditure incurred by the employer (i.e. hire charges, if car is on rent or normal wear and tear at 10% of actual cost of the car, if car is owned by the employer) plus salary of chauffeur if paid or payable by the employer minus amount recovered from the employee.
1.2-C The motor car is used partly in the performance of duties and partly for personal purposes of the employee or any member of his household Rs. 600 per month (plus Rs. 900 per month, if chauffeur is also provided to run the motor car) shall be taxable value of perquisite Rs. 900 per month (plus Rs. 900 per month, if chauffeur is also provided to run the motor car) shall be taxable value of perquisite
Nothing is deductible in respect of any amount recovered from the employee.
2 Motor Car is owned by the employee
2.1 Where maintenances and running expenses including remuneration of the chauffeur are met or reimbursed by the employer.
2.1-A The reimbursement is for the use of the vehicle wholly and exclusively for official purposes Fully exempt subject to maintenance of specified documents Fully exempt subject to maintenance of specified documents
2.1-B The reimbursement is for the use of the vehicle exclusively for the personal purposes of the employee or any member of his household (taxable in case of specified employee as well as non-specified employee) Actual expenditure incurred by the employer minus amount recovered from the employee
2.1-C The reimbursement is for the use of the vehicle partly for official purposes and partly for personal purposes of the employee or any member of his household. Actual expenditure incurred by the employer minus Rs. 1800 per month and Rs. 900 per month if chauffer is also providedminus amount recovered from employee shall be taxable value of perquisite. Actual expenditure incurred by the employer minus Rs. 2400 per month and Rs. 900 per month if chauffer is also providedminus amount recovered from employee shall be taxable value of perquisite.
3 Where the employee owns any other automotive conveyance and actual running and maintenance charges are met or reimbursed by the employer
3.1 Reimbursement for the use of the vehicle wholly and exclusively for official purposes; Fully exempt subject to maintenance of specified documents Fully exempt subject to maintenance of specified documents
3.2 Reimbursement for the use of vehicle partly for official purposes and partly for personal purposes of the employee. Actual expenditure incurred by the employer as reduced by Rs. 900 per month Not Applicable

2. Educational Facilities

Taxable only in the hands of specified employees [See note 4]

Facility extended to Value of perquisite
Provided in the school owned by the employer Provided in any other school
Children Cost of such education in similar school less Rs. 1,000 per month per child (irrespective of numbers of children) less amount recovered from employee Amount incurred less amount recovered from employee (an exemption of Rs. 1,000 per month per child is allowed)
Other family member Cost of such education in similar school less amount recovered from employee Cost of such education incurred

2.1 Other Educational Facilities

Particulars Taxable Value of Perquisites
Reimbursement of school fees of children or family member of employees Fully taxable
Free educational facilities/ training of employees Fully exempt

3. Employees Provident Fund

Tax treatment in respect of contributions made to and payment from various provident funds are summarized in the table given below:

Particulars Statutory provident fund Recognized provident fund Unrecognized provident fund Public provident fund
Employers contribution to provident fund Fully Exempt Exempt only to the extent of 12% of salary* Fully Exempt
Deduction under section 80C on employees contribution Available Available Not Available Available
Interest credited to provident fund Fully Exempt Exempt only to the extent rate of interest does not exceed 9.5% Fully Exempt Fully Exempt
Payment received at the time of retirement or termination of service Fully Exempt Fully Exempt (Subject to certain conditions and circumstances) Fully Taxable (except employee’s contribution) Fully Exempt

* Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits) + turnover based commission

Payment from recognized provident fund shall be exempt in the hands of employees in following circumstances:

a) If employee has rendered continue service with his employer (including previous employer, when PF account is transferred to current employer) for a period of 5 years or more

b) If employee has been terminated because of certain reasons which are beyond his control (ill health, discontinuation of business of employer, etc.)

4. Specified Employee

The following employees are deemed as specified employees:

1) A director-employee

2) An employee who has substantial interest (i.e. beneficial owner of equity shares carrying 20% or more voting power) in the employer-company

3) An employee whose monetary income* under the salary exceeds Rs.50,000

*Monetary Income means Income chargeable under the salary but excluding perquisite value of all non-monetary perquisites

II. Income under the House Properties

2.1 Basis of Charge [Section 22]:

Income from house property shall be taxable under this head if following conditions are satisfied:

a) The house property should consist of any building or land appurtenant thereto;

b) The taxpayer should be the owner of the property;

c) The house property should not be used for the purpose of business or profession carried on by the taxpayer.

2.2 Computation of income from house property:

Income from a house property shall be determined in the following manner:

Particulars Amount
Gross Annual Value
Less: Municipal Taxes
Net Annual Value ****
Less: Standard deduction at 30% [Section 24(a)]
Less: Interest on borrowed capital [Section 24(b)]
Income from house property ****

2.3 Gross Annual value [Sec. 23(1)]

The Gross Annual Value of the house property shall be higher of following:

a) Expected rent, i.e., the sum for which the property might reasonably be expected to be let out from year to year. Expected rent shall be higher of municipal valuation or fair rent of the property, subject to maximum of standard rent;

b) Rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy

Out of sum computed above, any loss incurred due to vacancy in the house property shall be deducted and the remaining sum so computed shall be deemed to the gross annual value.

2.4 Deductions:

Description Nature of Deductions
Municipal Taxes Municipal taxes including service-taxes levied by any local authority in respect of house property is allowed as deduction, if:

a) Taxes are borne by the owner; and

b) Taxes are actually paid by him during the year.

Standard Deduction[Section 24(a)] 30% of net annual value of the house property is allowed as deduction if property is let-out during the previous year.
Interest on Borrowed Capital *

[Section 24(b)]

a) In respect of let-out property, actual interest incurred on capital borrowed for the purpose of acquisition, construction, repairing, re-construction shall be allowed as deduction
b) In respect of self-occupied residential house property, interest incurred on capital borrowed for the purpose of acquisition or construction of house property shall be allowed as deduction up to Rs. 2 lakhs. The deduction shall be allowed if capital is borrowed on or after 01-04-1999 and acquisition or construction of house property is completed within 5 years.
c) In respect of self-occupied residential house property, interest incurred on capital borrowed for the purpose of reconstruction, repairs or renewals of a house property shall be allowed as deduction up to Rs. 30,000.

* Any interest pertaining to the period prior to the year of acquisition/ construction of the house property shall be allowed as deduction in five equal installments, beginning with the year in which the property was acquired/ constructed.

* Deduction for interest on borrowed capital shall be limited to Rs. 30,000 in following circumstances:

a) If capital is borrowed before 01-04-1999 for the purpose of purchase or construction of a house property;

b) If capital is borrowed on or after 01-04-1999 for the purpose of re-construction, repairs or renewals of a house property;

c) If capital is borrowed on or after 01-04-1999 but construction of house property is not completed within five years from end of the previous year in which capital was borrowed.

2.4.1 Deduction for interest on housing loan [Section 80EE]

Deduction of up to Rs 50,000 shall be allowed to an Individual for interest payable on loan taken for the purpose of acquisition of a house property subject to following conditions:

a)  Loan has been sanctioned by Financial institution during the financial year 2016-17;

b)  The amount of loan sanctioned does not exceed Rs 35,00,000;

c)  The value of residential property does not exceed Rs 50,00,000;

d)  The assessee does not own any residential house property on the date of sanction of loan;

e)  Where deduction has been allowed under this section, no deduction shall be allowed in respect of such interest under any other provision.

2.5 Computation of Income from House Property

S. No. Property Type Gross Annual Value of the property Deduction for municipal taxes Net Annual Value of the property Standard Deduction Interest on borrowed capital
1. One self-occupied house property Nil Nil Nil Nil Deduction for interest on borrowed capital is allowed up to Rs. 30,000 or Rs. 2,00,000, as the case may be.
2. House property could not be occupied by the owner due to employment or business carried on at any other place Nil Nil Nil Nil Deduction for interest on borrowed capital is allowed up to Rs. 30,000 or Rs. 2,00,000, as the case may be.
3. Let out property To be computed as per provisions of Section 23(1) Allowed on actual payment basis Gross annual value lessMunicipal taxes 30% of Net Annual Value Entire amount of interest paid or payable on borrowed capital shall be allowed as deduction. Pre-construction interest shall be allowed as deduction in 5 annual equal installments (Subject to certain conditions).
4. More than one-self occupied property Only one property selected by the taxpayer will be considered as self-occupied house property and all other properties shall be deemed to be let-out for the purpose of computation of income under the head house property.
5. A self-occupied property let-out for the part of the year The house will be taken as let-out property and no concession shall be available for the duration during which the property was self-occupied.
6. One part of the property is let-out and other part is used for self-occupied purposes Each part of the property shall be considered as separate property and income will be computed accordingly

2.6 Composite Rent:

If letting out of building along with movable assets i.e., machinery, plan, furniture or fixtures, etc. forms part of a single transaction and are inseparable, the composite rent shall be taxable under the head “Profits and gains from business or profession” or “Income from other sources”, as the case may be. On the other hand, if the letting out of building is separable from letting of other assets, then income from letting out of building shall be taxable under the head “Income from house property” and income from letting out of other assets shall be taxable under the head “Profits and gains from business or profession” or “Income from other sources”, as the case may be.

2.7 Treatment of unrealized rent and arrears of rent [Explanation to section 23(1)]

2.7.1 Deduction for unrealized rent:

Unrealized rent is that portion of rental income which the owner could not realize from the tenant. Unrealized rent is allowed to be deducted from actual rent received or receivable only if the following conditions are satisfied:

a) The tenancy is bona fide;

b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;

c) The defaulting tenant is not in occupation of any other property of the assessee;

d) The taxpayer has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

2.7.2 Arrears of rent or recovery of unrealized rent [Section 25A]

Amount received in respect of arrears of rent or any subsequent recovery of unrealized rent shall be deemed to be the income of taxpayer under the head “Income from house property” in the year in which such rent is realized or received (whether or not the assessee is the owner of that property in that year).

Further, 30% of such rent shall be allowed as deduction.

2.8 Co-owner and Deemed Owner

2.8.1 Property owned by co-owners [Section 26]:

If house property is owned by co-owners and their share in house property is definite and ascertainable than the income of such house property will be assessed in the hands of each co-owner separately. For the purpose of computing income from house property, the annual value of the property will be taken in proportion to their share in the property. In such a case, each co-owner shall be entitled to claim benefit of self-occupied house property in respect of their share in the property (subject to prescribed conditions). However, where the shares of co-owners are not definite, the income of the property shall be assessed as that of an Association of persons.

2.8.2 Deemed owner [Section 27]:

Income from house property is taxable in the hands of its owner. However, in the following cases, legal owner is not considered as the real owner of the property and someone else is considered as the deemed owner of the property to pay tax on income earned from such house property:

1. An individual, who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred;

2. The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate;

3. A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme shall be deemed to be the owner of that building or part thereof;

4. A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 shall be deemed to be the owner of that building or part thereof;

5. A person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in section 269UA(f), shall be deemed to be the owner of that building or part thereof.

III. Profits and Gains from Business and Profession

3.1 Chargeability:

The following incomes are chargeable to tax under the head Profit and Gains from Business or Profession:

S. No. Section Particulars
1. 28(i) Profit and gains from any business or profession carried on by the assessee at any time during the previous year
2. 28(ii) Any compensation or other payment due to or received by any specified person
3. 28(iii) Income derived by a trade, professional or similar association from specific services performed for its members
4. 28(iiia) Profit on sale of a license granted under the Imports (Control) Order 1955, made under the Import Export Control Act, 1947
5. 28(iiib) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of Government of India
6. 28(iiic) Any duty of Customs or Excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971.
7. 28(iiid) Profit on transfer of Duty Entitlement Pass Book Scheme, under Section 5 of Foreign Trade (Development and Regulation) Act, 1992
8. 28(iiie) Profit on transfer of Duty Free Replenishment Certificate, under Section 5 of Foreign Trade (Development and Regulation) Act 1992
9. 28(iv) Value of any benefits or perquisites arising from a business or the exercise of a profession.
10. 28(v) Interest, salary, bonus, commission or remuneration due to or received by a partner from partnership firm
11. 28(va)  a) Any sum received or receivable for not carrying out any activity in relation to any business or profession; or

b) Any sum received or receivable for not sharing any know-how, patent, copyright, trademark, licence, franchise, or any other business or commercial right or information or technique likely to assist in the manufacture of goods or provision of services.

12. 28(vi) Any sum received under a Key man Insurance policy including the sum of bonus on such policy
13. 28(vii) Any sum received ( or receivable) in cash or in kind, on account of any capital assets (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital assets has been allowed as a deduction under section 35AD
14. Explanation to section 28 Income from speculative transactions. However, it shall be deemed to be distinct and separate from any other business.
15. 41(1) • Remission or cessation of liability in respect of any loss, expenditure or trading liability incurred by the taxpayers

• Recovery of trading liability by successor which was allowed to the predecessor shall be chargeable to tax in the hands of successor. Succession could be due to amalgamation or demerger or succession of a firm succeeded by another firm or company, etc.

• Any liability which is unilaterally written off by the taxpayer from the books of accounts shall be deemed as remission or cessation of such liability and shall be chargeable to tax.

16. 41(2) Depreciable asset in case of power generating units, is sold, discarded, demolished or destroyed, the amount by which sale consideration and/ or insurance compensation together with scrap value exceeds its WDV shall be chargeable to tax.
17. 41(3) Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds together with the amount of deduction allowed under section 35 exceed the amount of the capital expenditure, such surplus or the amount of deduction allowed, whichever is less, is chargeable to tax as business income in the year in which the sale took place.
18. 41(4) Where bad debts have been allowed as deduction under Section 36(1)(vii) in earlier years, any recovery of same shall be chargeable to tax.
19. 41(4A) Amount withdrawn from special reserves created and maintained under Section 36(1)(viii) shall be chargeable as income in the previous year in which the amount is withdrawn.
20. 41(5) Loss of a discontinued business or profession could be adjusted from the deemed business income as referred to in section 41(1), 41(3), (4) or (4A) without any time limit.
21. 43CA Where consideration for transfer of land or building or both as stock-in-trade is less than the stamp duty value, the value so adopted shall be deemed to be the full value of consideration for the purpose of computing income under this head.
22. 43D As per RBI Guidelines, Interest on bad and doubtful debts of Public Financial Institution or Scheduled Bank or State Financial Corporation or State Industrial Investment Corporation, shall be chargeable to tax in the year in which it is credited to Profit and Loss A/c or year in which it is actually received, whichever happens earlier.
23. 43D Similarly as per NHB Guidelines, Interest on bad and doubtful debts of housing finance company, shall be chargeable to tax, in the year it is credited to P & L A/c or year in which it is actually received by them, whichever is earlier.
24 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 Govt. or State Govt. or any authority or body or agency to the assessee would be included in definition of income as referred to in Section 2(24). However, in the following cases subsidy or grant shall not be treated as income:

i)  The subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of Section 43;

ii)  The subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be.

3.2 Deductions under Sections 30 to 37

Amount deductible, while computing, Profits and Gains of Business or Profession are:-

Section Nature of expenditure Quantum of deduction Assessee
30 Rent, rates, taxes, repairs (excluding capital expenditure) and insurance for premises Actual expenditure incurred excluding capital expenditure All assessee
31 Repairs (excluding capital expenditure) and insurance of machinery, plant and furniture Actual expenditure incurred excluding capital expenditure All assessee
32(1)(i) Depreciation on

i) buildings, machinery, plant or furniture, being tangible assets;

ii) know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature, being intangible assets

Allowed at prescribed percentage on Straight Line Method for each asset

Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than one hundred and eighty days in that previous year, the deduction in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset.

Assessees engaged in business of generation or generation and distribution of power

Note:

Taxpayers engaged in the business of generation or generation and distribution of power shall have the option to claim depreciation either on basis of straight line basis method or written down value method on each block of asset.

32(1)(ii) Depreciation on

i) buildings, machinery, plant or furniture, being tangible assets;

ii) know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature, being intangible assets

Allowed at prescribed percentage on WDV method for each block of asset

Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than one hundred and eighty days in that previous year, the deduction in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset.

All assessees
32(1)(iia) Additional depreciation on new plant and machinery (other than ships, aircraft, office appliances, second hand plant or machinery, etc.).

(subject to certain conditions)

Additional depreciation shall be available @20 % of the actual cost of new plant and machinery.

Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than one hundred and eighty days in that previous year, then deduction of additional depreciation would be restricted to 50% in the year of acquisition and balance 50% would be allowed in the next year

All assessee engaged in

– manufacture or production of any article or thing; or

– generation, transmission or distribution of power (if taxpayer is not claiming depreciation on basis of straight line method)

Proviso to Section 32(1)(iia) Additional depreciation on new plant and machinery (other than ships, aircraft,office appliances, second hand plant or machinery, etc.))

(Subject to certain conditions)

Additional depreciation shall be available @35 % of the actual cost of new plant and machinery.

Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than one hundred and eighty days in that previous year, then deduction of additional depreciation would be restricted to 50% of actual cost in the year of acquisition and balance 50% would be allowed in the next year

Note:

1. Manufacturing unit should be set-up on or after 1st day of April, 2015.

2. New plant and machinery acquired and installed during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020

All assessees- where an assessee sets up an undertaking or enterprise for production or manufacture of any article or thing in any notified backward area in state of the state of Andhra Pradesh, Bihar, Telangana or West Bengal.
32AC Deduction under section 32AC is available if actual cost of new plant and machinery acquired and installed by a manufacturing company during the previous year exceeds Rs. 25/100 Crores, as the case may be.(Subject to certain conditions) 15% of actual cost of new asset Company engaged in business or manufacturing or production of any article or thing
32AD Investment allowance for investment in new plant and machinery if manufacturing unit is set-up in the notified backward area in the state of Andhra Pradesh, Bihar, Telangana or West Bengal(Subject to certain conditions) Investment allowance shall be available @15 % of the actual cost of new plant and machinery in the year of installation of new asset.

Note:-

1) New asset should be acquired and installed during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020.

2) Manufacturing unit should be set-up on or after 1st day of April, 2015.

3) Deduction shall be allowed under Section 32AD in addition to deduction available under Section 32AC if assessee fulfils the specified conditions

All assessee who acquired new plant and machinery for the purpose of setting-up manufacturing unit in the notified backward area in the state of Andhra Pradesh, Bihar, Telangana or West Bengal
33AB Amount deposited in Tea/Coffee/Rubber Development Account by assessee engaged in business of growing and manufacturing tea/Coffee/Rubber in India Deduction shall be lower of following:

a) Amount deposited in account with National Bank for Agricultural and Rural Development (NABARD) or in Deposit Account of Tea Board, Coffee Board or Rubber Board in accordance with approved scheme; or

b) 40% of profits from such business before making any deduction under section 33AB and before adjusting any brought forward loss.

(Subject to certain conditions)

All assessee engaged in business of growing and manufacturing tea/Coffee/Rubber
33ABA Amount deposited in Special Account with SBI/Site Restoration Account by assessee carrying on business of prospecting for, or extraction or production of, petroleum or natural gas or both in India Deduction shall be lower of following:

a) Amount deposited in Special Account with SBI/Site Restoration Account; or

b) 20% of profits from such business before making any deduction under section 33ABA and before adjusting any brought forward loss.

(Subject to certain conditions)

All assessee engaged in business of prospecting for, or extraction or production of, petroleum or natural gas or both in India
35(1)(i) Revenue expenditure on scientific research pertaining to business of assessee is allowed as deduction (Subject to certain conditions). Entire amount incurred on scientific research is allowed as deduction.

Expenditure on scientific research within 3 years before commencement of business (in the nature of purchase of materials and salary of employees other than perquisite) is allowed as deduction in the year of commencement of business to the extent certified by prescribed authority.

All assessee
35(1)(ii) Contribution to approved research association, university, college or other institution to be used for scientific research shall be allowed as deduction (Subject to certain conditions) 175% of sum paid to such association, university, college, or other institution is allowed as deduction.

150% of sum paid to such association, university, college or other institution is allowed as deduction (applicable from AY 2018-19)

Note:- From the AY beginning on or after the 1st day of April, 2021, the deduction shall be equal to the sum so paid.

All assessee
35(1)(iia) Contribution to an approved company registered in India to be used for the purpose of scientific research is allowed as deduction (Subject to certain conditions) 125% of  sum paid to the company is allowed as deduction

Entire sum paid to the company is allowed as deduction

(applicable from AY 2018-19)

All assessee
35(1)(iii) Contribution to approved research association, university, college or other institution with objects of undertaking statistical research or research in social sciences shall be allowed as deduction (Subject to certain conditions) 125% of sum paid to such association, university, college, or other institution is allowed as deduction

Entire sum paid to such association, university, college or other institution is allowed as deduction

(applicable from AY 2018-19)

All assessee
35(1)(iv)read with 35(2) Capital expenditure incurred during the year on scientific research relating to the business carried on by the assessee is allowed as deduction (Subject to certain conditions) Entire capital expenditure incurred on scientific research is allowed as deduction.

Capital expenditure incurred within 3 years before commencement of business is allowed as deduction in the year of commencement of business.

Note:

i. Capital expenditure excludes land and any interest in land;

ii. No depreciation shall be allowed on such assets.

All assessee
35(2AA) Payment to a National Laboratory or University or an Indian Institute of Technology or a specified person is allowed as deduction.

The payment should be made with the specified direction that the sum shall be used in a scientific research undertaken under an approved programme.

200% of payment is allowed as deduction (Subject to certain conditions).

150% of payment is allowed as deduction (applicable from AY 2018-19)

Note:-

From the A.Y. beginning on or after the 1st day of April, 2021, the deduction shall be equal to the sum so paid.

All assessee
35(2AB) Any expenditure incurred by a company on scientific research (including capital expenditure other than on land and building) on in-house scientific research and development facilities as approved by the prescribed authorities shall be allowed as deduction (Subject to certain conditions).

Expenditure on scientific research in relation to Drug and Pharmaceuticals shall include expenses incurred on clinical trials, obtaining approvals from authorities and for filing an application for patent.

200% of expenditure so incurred shall be allowed as deduction.

150% of expenditure so incurred shall be allowed as deduction (applicable from AY 2018-19)

Note:

i. Company should enter into an agreement with the prescribed authority for co-operation in such research and development and fulfils conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.

ii.  From the A.Y. beginning on or after the 1st day of April, 2021, the deduction shall be equal to the expend the so incurred.

Company engaged in business of bio-technology or in any business of manufacturing or production of eligible articles or things
35ABA Capital expenditure incurred and actually paid for acquiring any right to use spectrum for telecommunication services shall be allowed as deduction over the useful life of the spectrum. Deduction will be available in equal installments starting from the year in which actual payment is made and ending in the year in which spectrum comes to an end.

Note:

If spectrum fee is actually paid before the commencement of business, the deduction will be available from the year in which business is commenced.

All Assessee engaged in telecommunication services
35ABB Capital expenditure incurred for acquiring any license or right to operate telecommunication services shall be allowed as deduction over the term of the license. Deduction would be allowed in equal installments starting from the year in which such payment has been made and ending in the year in which license comes to an end. All Assessee engaged in telecommunication services
35AC Expenditure by way of payment of any sum to a public sector company/local authority/approved association or institution for carrying out any eligible scheme or project (Subject to certain conditions). Actual payment made to prescribed entities. However, a company can also claim deduction for expenditure incurred by it directly on eligible projects.

Note:-

No deduction in any A.Y. commencing on or after the 1st day of April, 2018

All assessee. However, deduction for direct expenditure is allowed only to a company
35AD Deduction in respect of `expenditure on specified businesses, as under:

a) Setting up and operating a cold chain facility

b) Setting up and operating a warehousing facility for storage of agricultural produce

c) Building and operating, anywhere in India, a hospital with at least 100 beds for patients

d) Developing and building a housing project under a notified scheme for affordable housing

e) Production of fertilizer in India

(Subject to certain conditions)

150% of capital expenditure incurred for the purpose of business is allowed as deduction provided the specified business has commenced its operation on or after 01-04-2012.

100% of capital expenditure will be allowed to be deducted from the assessment year 2018-19 onwards

Note: If such specified businesses commence operations on or before 31-03-2012 but after prescribed dates, deduction shall be limited to 100% of capital expenditure.

All assessee
35AD Deduction in respect of expenditure on specified businesses, as under:

a) Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network;

b) Building and operating, anywhere in India, a hotel of two-star or above category;

c) Developing and building a housing project under a scheme for slum redevelopment or rehabilitation

d) Setting up and operating an inland container depot or a container freight station

e) Bee-keeping and production of honey and beeswax

f) Setting up and operating a warehousing facility for storage of sugar

g) Laying and operating a slurry pipeline for the transportation of iron ore

h) Setting up and operating a semi-conductor wafer fabrication manufacturing unit

i)  Developing or maintaining and operating, or developing, maintaining and operating a new infrastructure facility

(Subject to certain conditions)

100% of capital expenditure incurred for the purpose of business is allowed as deduction provided specified businesses commence operations on or after the prescribed dates. All assessee

Note: Such deduction is available to Indian company in case of following business, namely;-

i) Business of laying and operating a cross-country natural gas or crude or petroleum oil pipeline network

ii)  Developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility.

35CCA Payment to following Funds are allowed as deduction:

a) National Fund for Rural Development; and

b) Notified National Urban Poverty Eradication Fund

Actual payment to specified funds All assessee
35CCC Expenditure (not being cost of land/building) incurred on notified agricultural extension project for the purpose of training, educating and guiding the farmers shall be allowed as deduction, provided the expenditure to be incurred is expected to be more than Rs. 25 lakhs (Subject to certain conditions). 150% of the expenditure (Subject to certain conditions)

Note:-

100% deduction shall be allowed from the 1st day of April, 2021

All assessee
35CCD Expenditure incurred by a company (not being expenditure in the nature of cost of any land or building) on any notified skill development project is allowed as deduction (Subject to certain conditions). 150% of the expenditure (Subject to certain conditions)

Note:

(i) No deduction shall be allowed to a company engaged in manufacturing alcoholic spirits or tobacco products.

(ii) 100% deduction shall be allowed for the AY beginning on or after the 1st day of April, 2021

Company engaged in manufacturing of any article or providing specified services
35D An Indian company can amortize certain preliminary expenses (up to maximum of 5% of cost of the project or capital employed, whichever is more) (Subject to certain conditions and nature of expenditures) Qualifying preliminary expenditure is allowable in each of 5 successive years beginning with the previous year in which the extension of undertaking is completed or the new unit commences production or operation. Indian Company
35D Non-corporate taxpayers can amortize certain preliminary expenses (up to maximum of 5% of cost of the project) (Subject to certain conditions and nature of expenditures) Qualifying preliminary expenditure is allowable in each of 5 successive years beginning with the previous year in which the extension of undertaking is completed or the new unit commences production or operation. Resident Non-corporate assessees
35DD Expenditure incurred after 31-3-1999 in respect of amalgamation or demerger can be amortized by an Indian Company Expenditure is allowed as deduction in five equal installments in 5 previous years starting with the year in which amalgamation or demerger took place. Indian Company
35DDA Expenditure incurred under Voluntary Retirement Scheme is allowed as deduction. Each payment under VRS is allowed as deduction in five equal installments in 5 previous years. All Assessee
35E Qualifying expenditure incurred by resident persons on prospecting for the minerals or on the development of mine or other natural deposit of such minerals shall be allowed as deduction (Subject to certain conditions). Eligible expenditure is allowed as deduction in ten equal installments in 10 previous years. Resident persons
36(1)(i) Insurance premium covering risk of damage or destruction of stocks/stores Actual expenditure incurred All Assessee
36(1)(ia) Insurance premium covering life of cattle owned by a member of co-operative society engaged in supplying milk to federal milk co-operative society Actual expenditure incurred All Assessee
36(1)(ib) Medical insurance premium paid by any mode other than cash, to insure employee’s health under (a) scheme framed by GIC of India and approved by Central Government; or (b) scheme framed by any other insurer and approved by IRDA Actual expenditure incurred All Assessee
36(1)(ii) Bonus or commission paid to employees which would not have been payable as profit or dividend if it had not been paid as bonus or commission Actual expenditure incurred All Assessee
36(1)(iii) Interest on borrowed capital (Subject to certain conditions) Interest paid in respect of capital borrowed for the purposes of the business or profession shall be allowed as deduction. However, if capital is borrowed for acquiring an asset, then interest for any period beginning from the date on which capital was borrowed till the date on which asset was first put to use, shall not be allowed as deduction. All Assessee
36(1)(iiia) Discount on Zero Coupon Bonds (Subject to certain conditions) Pro-rata amount of discount on zero coupon bonds shall be allowed as deduction over the life of such bond Specified Assessee
36(1)(iv) Employer’s contributions to recognized provident fund and approved superannuation fund [subject to certain limits and conditions] Actual expenditure incurred All Assessee
36(1)(iva) Any sum paid by assessee-employer by way of contribution towards a pension scheme, as referred to in section 80CCD, on account of an employee. Actual expenditure not exceeding 10% of the salary* of the employee

*Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits)+ turnover based commission

All Assessee – Employer
36(1)(v) Employer’s contribution towards approved gratuity fund created exclusively for the benefit of employees under an irrevocable trust shall be allowed as deduction (Subject to certain conditions). Actual expenditure not exceeding 8.33% of salary of each employee All Assessee – Employer
36(1)(va) Deposit of employee’s contributions in their respective provident fund or superannuation fund or any fund set up under Employees’ State Insurance Act, 1948 Actual amount received if credited to the employee’s account in relevant fund on or before due date specified under relevant Act All Assessee – Employer
36(1)(vi) Allowance in respect of animals which have died or become permanently useless (Subject to certain conditions) Actual cost of acquisition of such animals less realization on sale of carcasses of animals All Assessee
36(1)(vii) Bad debts which have been written off as irrecoverable (Subject to certain conditions) Actual bad debts which have been written off from books of accounts

Note:-

However, if amount of debt or part thereof has been taken into account in computing the income of assessee on basis of income computation and disclosure standards notified under Section 145(2) without recording the same in accounts then, such debt shall be allowed in the previous year in which such debt or part therof becomes irrecoverable. It shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts.

All Assessee
36(1)(viia) Deductions for provision for bad and doubtful debts created by certain banks, financial institutions and non-banking financial company (Subject to certain conditions).

Note

Deduction in respect of bad debts actually written off under section 36(1)(vii) shall be limited to that amount of bad debts which exceed the provision for bad and doubtful debts created under section 36(1)(viia).

Deductions for provision for bad and doubtful debts shall be limited to following:

(a) In case of scheduled and non-scheduled banks: Sum not exceeding aggregate of 7.5% of total income (before any deductions under this provision and Chapter VI-A) and 10% of aggregate average advances made by rural branches of such bank;

(b) In case of Financial Institutions: Up to 5% of total income before any deductions under this provision and Chapter VI-A; and

(c) In case of foreign banks: Up to 5% of total income before any deductions under this provision and Chapter VI-A

(d) In case of non-banking financial company: Up to 5% of total income before any deduction under this provision and chapter VI-A

Banks, Public Financial Institutions, Non-banking financial company, State Financial Corporation, State Industrial Investment Corporations
36(1)(viii) Deduction under this provisions is allowed to following entities in respect of amount transferred to special reserve account:

a) Financial Corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India; or

b) Public company registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of residential houses in India.

[Subject to certain conditions]

Deduction shall be allowed to the extent of lower of following:

a) Amounts transferred to special reserve account

b) 20% of profits derived from eligible business

c) 200% of paid-up capital and general reserve (on last day of previous year)minus balance in special reserve account (on first day of previous year)

Specified financial corporations or public company
36(1)(ix) Expenditure incurred by a company on promotion of family planning amongst employees is allowed as deduction 1) Entire revenue expenditure is allowed as deduction

2) Capital expenditure shall be allowed as deduction in five equal installment in five years

Company
36(1)(xii) Any expenditure incurred by a notified corporation or body corporate constituted or established by a Central, State or Provincial Act, for the objects and purposes authorized by the respective Act is allowed as deduction Actual expenditure incurred (not being in the nature of capital expenditure) Notified corporations
36(1)(xiv) Contribution to Credit Guarantee Trust Fund for micro and small industries is allowed as deduction Actual expenditure incurred Public Financial Institutions
36(1)(xv) Securities Transaction Tax paid Actual expenditure incurred if corresponding income is included as income under the head profits and gains of business or profession All Assessee
36(1)(xvi) Amount equal to commodities transaction tax paid by an assessee in respect of taxable commodities transactions entered into in the course of his business during the previous year is allowed as deduction Actual expenditure incurred if corresponding income is included as income under the head profits and gains of business or profession All Assessee
36(1)(xvii) Amount of expenditure incurred by a co-operative society engaged in the business of manufacture of sugar for purchase of sugarcane. Deduction would be allowed the extent of lower of following:

a) Actual purchase price of sugarcane, or

b) Price of sugarcane fixed or approved by the Government

Co-operative society engaged in the business of manufacture of sugar
37(1) Any other expenditure [not being personal or capital expenditure and expenditure mentioned in sections 30 to 36] laid out wholly and exclusively for purposes of business or profession Actual expenditure incurred All Assessee
37(2B) Expenditure on advertisement in any souvenir, brochure etc. published by a political party shall not be allowed as deduction Not Allowed All Assessee

3.3 Amount expressly disallowed under the Act

Section Description
40(a)(i) Any sum (other than salary) payable outside India or to a non-resident, which is chargeable to tax in India in the hands of the recipient, shall not be allowed to be deducted if it was paid without deduction of tax at source or if tax was deducted but not deposited with the Central Government till the due date of filing of return.

However, if tax is deducted or deposited in subsequent year, as the case may be, the expenditure shall be allowed as deduction in that year.

40(a)(ia) Any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance if it was paid without deduction of tax at source or if tax was deducted but not deposited with the Central Government till the due date of filing of return.

However, where in respect of any such sum, tax is deducted or deposited in subsequent year, as the case may be, the expenditure so disallowed shall be allowed as deduction in that year.

40(a)(ib) Any sum paid or payable to a non-resident which is subject to a deduction of Equalisation levy would attract disallowance if such sum was paid without deduction of such levy or if it was deducted but not deposited with the Central Government till the due date of filing of return.

However, where in respect of any such sum, Equalisation levy is deducted or deposited in subsequent year, as the case may be, the expenditure so disallowed shall be allowed as deduction in that year.

Note: This provision has beeninserted by the Finance Act, 2016, w.e.f. 1-6-2016

40(a)(ii) Any sum paid on account of any rate or tax levied on the profits and gains of business or profession is not deductible
40(a)(iia) Wealth-tax or any other tax of similar nature shall not be deductible
40(a)(iib) Amount paid by way of royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on (or any amount appropriated) a State Government undertaking by the State Government shall not be deductible.
40(a)(iii) Salaries payable outside India, or in India to a non-resident, on which tax has not been paid/deducted at source is not deductible.
40(a)(iv) Payments to provident fund or other funds for employees’ benefit shall not be deductible if no effective arrangements have been made to ensure deduction of at source from payments made from such funds to employees which shall be chargeable to tax as ‘salaries’.
40(a)(v) Tax paid by the employer on non-monetary perquisites provided to employees is not deductible if the tax so paid is not taxable in the hands of employees by virtue of Section 10(10CC).
40(b) Following sum paid by a partnership firm to its partners shall not be allowed to be deducted:

1) Salary, bonus, commission or remuneration paid to non-working partners;

2) Remuneration or interest paid to the partners is not in accordance with the terms of the partnership deed;

3) Remuneration or interest to partners is in accordance with the terms of the partnership deed but relates to any period prior to the date of the deed;

4) Interest to partners is in accordance with the terms of the partnership deed but exceeds 12% per annum;

5) Remuneration to partners is in accordance with the terms of the partnership deed but exceeds the following permissible limit:

a) On first Rs. 3 Lakhs of book profit or in case of loss – Rs. 1,50,000 or 90% of book profit, whichever is more;

b) On the balance of the book profit – 60% of book profit

40(ba) Interest, salary, bonus, commission or remuneration paid by Association of Persons or Body of Individuals to its members shall not be allowed as deduction (Subject to certain conditions).
40A(2) Any payment to related parties (relatives, directors, partner, member of HUF/AOP, person who has substantial interest in business of the taxpayer, etc.) in respect of any expenditure shall be disallowed to the extent such expenditure is considered excessive or unreasonable by the Assessing Officer having regard to its fair market value.
40A(3)/(3A) An expenditure, which is otherwise deductible under any provision of the Act, shall be disallowed if payment thereof has been made otherwise than by account payee cheque/bank draft and it exceeds Rs. 20,000 (Rs. 35,000 in case of payment made for plying, hiring or leasing goods carriages) in a day (Subject to certain conditions and exceptions).
40A(7) Provision for payment of gratuity to employees, other than a provision for contribution to approved gratuity fund, shall not be allowed as deduction (Subject to specified conditions).

Gratuity actually paid (or payable) during the year and contribution to approved gratuity fund is allowed as deduction.

40A(9) Any sum paid as an employer for setting up or as contribution to any fund, trust, company, AOP, BOI, Society or other institution (other than recognized provident fund, approved superannuation fund, approved gratuity fund or pension scheme referred to in section 80CCD) shall not be allowed as deduction deduction if such contribution or payment is not required by any law.

3.4 Expenses deductible on actual payment basis

The following expenses shall be allowed as deduction if such expenditure are actually paid on or before the due date of filing of return of income:-

Section Particulars
43B(a) Any Tax, Duty, Cess or Fees under any Law
43B(b) Any contribution to Provident Fund/Superannuation Fund/Gratuity Fund/Welfare Fund
43B(c) Bonus or Commission paid to employees which would not have been payable as profit or dividend
43B(d) Interest on Loan or Borrowings from Public Financial Institutions/State Financial Institutions etc.
43B(e) Interest on loan or advance from bank
43B(f) Payment of Leave Encashment
43B(g) Sum payable to the Indian Railways for the use of railway assets.

3.5 Other provisions

Section Particulars Provision
42 Special allowance in case of business of prospecting etc. for mineral oil (including petroleum and natural gas) in relation to which the Central Government has entered into an agreement with the taxpayer for the association or participation (Subject to certain conditions). Following deductions shall be allowed as deductions:

a) Any infructuous exploration expenditure

b) Expenditure on drilling or exploration activities or services, etc.

c) Allowance in relation to depletion of mineral oil, etc.

43A Special provisions consequential to changes in rate of exchange of Currency (Subject to certain conditions). Any increase or decrease in the liability incurred in foreign currency (to acquire a capital asset) pursuant to fluctuation in the foreign exchange rates shall be adjusted with the actual cost of such asset only on actual payment of the liability.
43C Acquisition of any asset (except stock-in-trade) by the taxpayer in the scheme of amalgamation or by way of gift, will etc. Cost of acquisition of any asset (except stock-in-trade) acquired by the taxpayer in the scheme of amalgamation or by way of gift, will etc. from the transferor (who sold it as stock-in-trade) shall be the cost of acquisition in the hands of transferor as increased by cost of any improvement made

3.6 Provisions applicable to Non-Resident/Foreign Company

Section Particulars Limit of exemption or Computation of income/deduction Available to
44B read with172 Income from shipping business shall be computed on presumptive basis (Subject to certain conditions). 7.5% of specified sum shall be deemed to be the presumptive income Non-resident engaged in shipping business
44BB Income of a non-resident engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils shall be computed on presumptive basis (Subject to certain conditions). 10% of specified sum shall be deemed to be the presumptive income Non-resident engaged in activities connected with exploration of mineral oils
44BBA Income of a non-resident engaged in the business of operation of aircraft shall be computed on presumptive basis (Subject to certain conditions). 5% of specified sum shall be deemed to be the presumptive income Non-resident engaged in the business of operating of aircraft
44BBB Income of a foreign company engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with turnkey power projects shall be computed on presumptive basis (Subject to certain conditions). 10% of specified sum shall be deemed to be the presumptive income Foreign Company
44C Deduction for Head office Expenditure (Subject to certain conditions and limits) Deduction for head-office expenditure shall be limited to lower of following:

a) 5% of adjusted total income*

b) Head office exp. as attributable to business or profession of taxpayer in India

* In case adjusted total income of the assessee is a loss, adjusted total income shall be substituted by average adjusted total income

** Adjusted total income or average adjusted total income shall be computed after prescribed adjustments i.e. unabsorbed depreciations, carry forward losses, etc.

Non-resident
44DA Deduction of expenditure from royalty and FTS received under an agreement made after 31-03-2003 which is effectively connected to the PE of non-resident in India (Subject to certain conditions) Expenditure incurred wholly and exclusively for the business of PE or fixed place of profession in India shall be allowed as deduction. Non-resident

3.7 Accounts and Audit

Section Particulars Threshold
44AA Compulsory maintenance of prescribed books of account – Specified Profession

(Subject to certain conditions and circumstances)

Persons carrying on specified profession and their gross receipts exceed Rs. 1,50,000 in all the three years immediately preceding the previous year
44AA Compulsory maintenance of books of account – Other business or profession

(Subject to certain conditions and circumstances)

1) If total sales, turnover or gross receipts exceeds Rs. 10,00,000 in any one of the three years immediately preceding the previous year; or

2) If income from business or profession exceeds Rs. 1,20,000 in any one of the three years immediately preceding the previous year

44AB Compulsory Audit of books of accounts (Subject to certain conditions and circumstances) 1) If total sales, turnover or gross receipts exceeds Rs. 1 Crore in any previous year, in case of business; or

2) If gross receipts exceeds Rs. 50 Lakhs in any previous year, in case of profession.

3.8 Presumptive Taxation

Section Nature of business Presumptive income
44AD Income from eligible business can be computed on presumptive basis if turnover of such business does not exceed two crore rupees.

Note: If an assessee opts out of the presumptive taxation scheme, after a specified period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter. [Section 44AD(4)]

(Subject to conditions)

Presumptive income of eligible business shall be 8% of gross receipt or total turnover.
44ADA Income from eligible profession u/s 44AA(1) can be computed on presumptive basis if the total gross receipts from such profession do not exceed fifty lakh rupees in a previous year.

(Subject to conditions)

Presumptive income of such profession shall be 50% of total gross receipt.
44AE Presumptive income of business of plying, hiring or leasing of goods carriage if taxpayer does not own more than 10 goods carriage (Subject to certain conditions) Rs. 7,500 for every month during which the goods carriage is owned by the taxpayer

IV. Income under the Capital Gains

4.1 Chargeability:

Capital gains shall be chargeable to tax if following conditions are satisfied:

a) There should be a capital asset. In other words, the asset transferred should be a capital asset on the date of transfer;

b) It should be transferred by the taxpayer during the previous year;

c) There should be profits or gain as a result of transfer.

4.2 Meaning of Capital Asset [Sec 2(14)]

Capital Asset is defined to include:

a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.

b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the term ‘capital asset’ shall exclude the following:

a) Stock-in-trade, consumable stores, raw materials held for the purpose of business or profession;

b) Movable property held for personal use of taxpayer or for any member of his family dependent upon him. However, jewellery, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures or any work of art shall be considered as capital asset even if used for personal purposes;

c) Specified Gold Bonds and Special Bearer Bonds;

d) Agricultural Land in India, not being a land situated:

I. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population not less than 10,000;

II. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

i, not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;

ii. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or

iii. not being more than 8 KMs , if population of such area is more than 10 lakhs.

e)  Deposit certificates issued under the Gold Monetisation Scheme, 2015

4.3 Type of Capital Assets

A. Short Term Capital Asset

Capital asset held for not more than 36 months immediately prior to the date of transfer shall be deemed as short-term capital asset. However, following assets held for not more than 12 months shall be treated as short-term capital assets:

a) Equity or preference shares in a company which are listed in any recognized stock exchange in India;

b) Other listed securities;

c) Units of UTI;

d) Units of equity oriented funds; or

e) Zero Coupon Bonds.

Note: Unlisted shares held for not more than 24 months immediately prior to the date of transfer shall be treated as short-term capital asset.

B. Long Term Capital Asset

Capital Asset that held for more than 36 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as long-term capital asset.

4.4 Period of Holding

The period of holding shall be determined as follows:

Different situations How to calculate the period of holding
Shares held in a company in liquidation The period subsequent to the date on which the company goes into liquidation shall be excluded.
Capital asset which becomes the property of the assessee in the circumstances mentioned in section 49(1) read with section 47 [i.e., when an asset is acquired by gift, will, succession, inheritance or the asset is required at the time of partition of family or under a revocable or irrevocable trust or under amalgamation, etc.] The period for which the asset was held by the previous owner should be included (cost of acquisition in this case shall be computed in the manner provided in Para 4.10)
Allotment of shares in amalgamated Indian company in lieu shares held in amalgamating company The period of holding shall be computed from the date of acquisition of shares in the amalgamating company.
Right shares The period of holding shall be computed from the date of allotment of right shares.
Right entitlement The period of holding will be considered from the date of offer to subscribe to shares to the date when such right entitlement is renounced by the person.
Bonus shares The period of holding shall be computed from the date of allotment of bonus shares.
Issue of shares by the resulting company in a scheme of demerger to the shareholders of the demerged company The period of holding shall be computed from the date of acquisition of shares in the demerged company.
Membership right held by a member of recognised stock exchange In case of shares as well as trading/clearing rights, the period for which the person was a member of the stock exchange immediately prior to such demutualization/corporatization shall be included.
Flat in a co-operative society The period of holding shall be computed from the date of allotment of shares in the society.
Sweat equity shares allotted by employer The period of holding shall be reckoned from the date of allotment or transfer of such equity shares (applicable from the assessment year 2008-09)
Unit of a business trust [allotted pursuant to transfer of shares as referred to in section 47(xvii)] The period of holding shall include the period for which shares were held by the assessee.
Units allotted to an assessee pursuant to consolidation of two or more scheme of a mutual fund as referred to in Section 47(xviii) The period of holding of such units shall include the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee.
Shares in a company acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in Section 115AC(1)(b) The period of holding of such shares shall be reckoned from the date on which a request for such redemption was made.
Transactions in shares and securities not given above:
 1)  Date of purchase (through stock exchanges) of shares and Securities

2)  Date of transfer (through stock exchanges) of shares and securities

3)  Date of purchase/transfer of shares and securities (transaction taken place directly between parties and not through stock exchanges)

4)  Date of purchase/sale of shares and securities purchased in several lots at different points of time but delivery taken subsequently and sold in parts

5)  Transfer of a security by a depository (i.e., demat account)

 a)  Date of purchase by broker on behalf of investor.

b)  Date of broker’s note provided such transactions are followed up by delivery of shares and also the transfer deeds.

c)  Date of contract of sale as declared by parties provided it is followed up by actual delivery of shares and the transfer deeds.

d)  The FIFO method shall be adopted to reckon the period of the holding of the security, in cases where the dates of purchase and sale cannot be correlated through specific number of scrips.

e)  The period of holding shall be determined on the basis of the first-in-first-out method.

4.5 Meaning of Transfer [Section 2(47)]

“Transfer”, in relation to a capital asset, includes:

(i) Sale, exchange or relinquishment of the asset;

(ii) Extinguishment of any rights in relation to a capital asset;

(iii) Compulsory acquisition of an asset;

(iv) Conversion of capital asset into stock-in-trade;

(v) Maturity or redemption of a zero coupon bond;

(vi) Allowing possession of immovable properties to the buyer in part performance of the contract;

(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

4.6 Transactions which are not regarded as transfer [Section 47]

Following transactions shall not be regarded as transfer (subject to certain condition). Hence, following transaction shall not be charged to capital gains:

Section Particulars
46(1) Distribution of asset in kind by a company to its shareholders at the time of liquidation
47(i) Distribution of capital asset on total or partial partition of HUF
47(iii) Transfer of capital asset under a gift or will or an irrevocable trust
47(iv) Transfer of capital asset by a company to its wholly owned subsidiary company
47(v) Transfer of a capital asset by a wholly owned subsidiary company to its holding company
47(vi) Transfer of capital assets in a scheme of amalgamation
47(via) Transfer of shares in an Indian company held by a foreign company to another foreign company under a scheme of amalgamation of the two foreign companies
47(viab) Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a foreign company to another foreign company under a scheme of amalgamation (subject to conditions)
47(viaa) Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution
47(vib) Transfer of capital assets by the demerged company to the resulting company in a demerger
47(vic) Transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company
47(vica) Any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a business reorganization.
47(vicb) Any transfer of capital asset (being shares) held by a shareholder in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any shares in the successor co-operative bank in a scheme of business reorganization
47(vicc) Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a demerged foreign company to resulting foreign company in case of demerger (subject to conditions)
47(vid) Transfer or issue of shares by the resulting company to the shareholders of the demerged company in a scheme of demerger
47(vii) Allotment of shares in amalgamated company in lieu of shares held in amalgamating company
47(viia) Transfer of capital assets (being foreign currency convertible bonds or GDR) by a non-resident to another non-resident
47(viib) Transfer of capital assets (being a Government security carrying periodic payment of interest) outside India through an intermediary dealing in settlement of securities by a non-resident to another non- resident
47(viic) Redemption of capital asset being sovereign gold bond issued by RBI under the Sovereign Gold Bond Scheme, 2015
47(ix) Transfer of a capital asset (being work of art, manuscript, painting, etc.) to Government, University, National museum, etc.
47(x) Transfer by way of conversion of bonds or debentures into shares
47(xa) Transfer by way of conversion of bonds [as referred to in section 115AC(1)(a)] into shares or debentures of any company
47(xi) Transfer by way of exchange of a capital asset being membership of a recognized stock exchange for shares of a company
47(xii) Transfer of land by a sick industrial company which is managed by its workers’ co-operative
47(xiii) Transfer of a capital asset by a firm to a company in the case of conversion of firm into company
47(xiiia) Transfer of a capital asset being a membership right held by a member of a recognized stock exchange in India
47(xiiib) Transfer of a capital asset by a private company or unlisted public company to an LLP, or any transfer of shares held in the company by a shareholder, in the case of conversion of company into LLP
47(xiv) Transfer of a capital asset to a company in the case of conversion of proprietary concern into a company
47(xv) Transfer involved in a scheme of lending of securities
47(xvi) Transfer of a capital asset in a transaction of reverse mortgage made under a scheme notified by the Government
47(xvii) Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units allotted by that trust to the transferor
47(xviii) Transfer of units of a mutual fund pursuant to consolidation of two or more schemes of equity oriented mutual fund or of two or more schemes of a mutual fund other than equity oriented mutual fund
47(xix) Transfer of units of a mutual fund from one plan to another pursuant to consolidation of plans within scheme of mutual funds.

4.7 Computation of capital Gain:

Computation of capital gain depends upon the nature of the capital asset transferred during the previous year, vis-à-vis, short-term capital asset, long-term capital asset or depreciable asset. Capital gain arising on transfer of short-term capital asset or depreciable asset is considered as short-term capital gain, whereas transfer of long-term capital asset gives rise to long-term capital gain.

The capital gains on transfer of capital asset shall be computed in the following manner:

Short-term capital assets

[Section 48]

Long-term capital assets

[Section 48]

Depreciable asset

[Section 50]*

Full value of consideration

Less: Cost of acquisition of asset

Less: Cost of improvement

Less: Expenditure incurred wholly and exclusively in connection with such transfer

Full value of consideration

Less: Indexed Cost of acquisition (See Note 1)

Less: Indexed Cost of Improvement (See Note 1)

Less: Expenditure incurred wholly and exclusively in connection with such transfer

WDV of block of asset at the beginning of previous year

Add: Actual cost of assets falling within that block acquired during the year

Less: Full value of consideration of assets transferred during the year

Less: Expenditure incurred wholly and exclusively in connection with such transfer

* Short-term capital gain or loss from sale of depreciable asset will arise only in the following two situations:

a) When on last day of the previous year, WDV of the block of asset isnil; or

b) When on last day of the previous year, block ceases to exist.

Note 1Indexed Cost of Acquisition and Improvement [Second Proviso to Section 48]

a) In case of transfer of long-term capital assets, indexed cost of acquisition and indexed cost of improvement shall be deducted from the full value of consideration;

b) Indexed cost of acquisition and Indexed cost of improvement shall be computed with reference to Cost Inflation Index (‘CII’) in the following manner:

Indexed Cost of Acquisition = [(Cost of Acquisition) × (CII for the year of transfer)]  
(CII for the year of acquisition or for the Financial Year 1981-82, whichever is later)  

 

Indexed Cost of Improvement = [(Cost of Improvement) × (CII for the year of transfer)]  
CII for the year of Improvement  

However, there are some cases where benefit of indexation is not available, which are as under:

Section Capital Asset Transferor
Third proviso to section 48 Bonds or debentures.

Note: However, indexation benefit is available on two type of bonds, namely,-

•  Capital indexed bonds (issued by the Government)

•  Sovereign Gold Bond (issued by the RBI under the Sovereign Gold Bond Scheme, 2015)

Any person
112 Capital gains arising from transfer of unlisted shares (which is taxable at concessional rate of 10%) as calculated without giving effect to first proviso to Section 48 Non-resident
50A Depreciable asset (other than an asset used by a power generating unit eligible for depreciation on straight line basis) Any person
50B Undertaking/division transferred by way of slump sale as covered by section 50B Any person
115AB Units purchased in foreign currency as given in section 115AB Offshore fund
115AC Global depository receipts (GDR) purchased in foreign currency as given in section 115AC Non-resident
115ACA Global depository receipts (GDR) purchased in foreign currency as given in section 115ACA Resident individual – employee
115AD Securities as given in section 115AD Foreign Institutional

Investors

CII in relation to a previous year means such index, as Central Government notifies on year to year basis.

The Central Government has notified the following Cost Inflation Indexes:

Financial Year CII Financial Year CII Financial Year CII
1981-82 100 1993-94 244 2005-06 497
1982-83 109 1994-95 259 2006-07 519
1983-84 116 1995-96 281 2007-08 551
1984-85 125 1996-97 305 2008-09 582
1985-86 133 1997-98 331 2009-10 632
1986-87 140 1998-99 351 2010-11 711
1987-88 150 1999-00 389 2011-12 785
1988-89 161 2000-01 406 2012-13 852
1989-90 172 2001-02 426 2013-14 939
1990-91 182 2002-03 447 2014-15 1024
1991-92 199 2003-04 463 2015-16 1081
1992-93 223 2004-05 480 2016-17 1125

4.8 Computation of capital gain in case of sale of shares or debentures of an Indian company purchased by a non-resident in foreign currency [ first proviso to section 48]

In such a case, capital gain shall be determined as under:-

Full Value of Consideration (X) Find out sale consideration in Indian currency and convert it into same foreign currency, which was used to acquire the capital asset, at average exchange rate* on the date of transfer.
Cost of acquisition (Y) Find out the cost of acquisition in Indian currency and convert it into foreign currency at average exchange rate on the date of acquisition.
Expenditure on sale (Z) Find out the expenditure on transfer in Indian currency and convert it into same foreign currency at average exchange rate on the date of transfer (not on the date when expenditure is incurred).
Capital gain (X-Y-Z) The capital gains as computed in after reducing the cost of acquisition and expenditure from the full value of consideration shall be reconverted into Indian currency at buying rate** on the date of transfer.

* Average exchange rate means the average of the telegraphic transfer buying rate and telegraphic transfer selling rate of the foreign currency initially utilised in the purchase of capital asset.

** Buying rate is the telegraphic transfer buying rate of such currency.

4.9 Full Value of Consideration

Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value (‘FMV’) of such assets shall be taken as full value of consideration.

However, in the following cases “full value of the consideration” shall be determined on notional basis as per the relevant provisions of the Income-tax Act, 1961:

S. No. Nature of transaction Section Full Value of Consideration
1. Money or other asset received under any insurance from an insurer due to damage or destruction of a capital asset 45(1A) Value of money or the FMV of the asset (on the date of receipt)
2. Conversion of capital asset into stock-in-trade 45(2) FMV of the capital asset on the date of conversion
3. Transfer of capital asset by a partner or member to firm or AOP/BOI, as the case may be, as his capital contribution 45(3) Amount recorded in the books of accounts of the firm or AOP/BOI as the value of the capital asset received as capital contribution
4. Distribution of capital asset by Firm or AOP/BOI to its partners or members, as the case may be, on its dissolution 45(4) FMV of such asset on the date of transfer
5. Money or other assets received by share- holders at the time of liquidation of the company 46(2) Total money plus FMV of assets received on the date of distribution less amount assessed as deemed dividend under section 2(22)(c)
6. Buy-back of shares and other specified securities by a company 46A Consideration paid by company on buyback of shares or other securities would be deemed as full value of consideration. The difference between the cost of acquisition and buy-back price (full value of consideration) would be taxed as capital gain in the hands of the shareholder.

Note: if shares are not listed on a recognized stock exchange, domestic companies would liable to pay additional tax at 20% under section 115QA on the distributed income (i.e. buy-back price as reduced by the amount received by the company for issue of such shares)

7. Shares, debentures, warrants (‘securities’) allotted by an employer to an employee under notified Employees Stock Option Scheme and such securities are gifted by the concerned employee to any person Fourth Proviso to Section 48 Fair Market value of securities at the time of gift
8. In case of transfer of land or building, if sale consideration declared in the conveyance deed is less than the stamp duty value 50C The value adopted or assessed or assessable by the Stamp Valuation Authority shall be deemed to be the full value of consideration

Note: Where the date of agreement (fixing the amount of consideration) and the date of registration for the transfer of property are not the same, the value adopted or assessed or assessable by Stamp Valuation Authority on the date of agreement may be taken as full value of consideration.

9. If consideration received or accruing as a result of transfer of a capital asset is not ascertainable or cannot be determined 50D FMV of asset on the date of transfer (applicable from the assessment year 2013-14)

4.10 Cost of Acquisition

Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee. It includes expenses of capital nature incurred in connection with such purchase or for completing the title of the property.

However, in cases given below, cost of acquisition shall be computed on notional basis:

S. No. Particulars Notional Cost of Acquisition
1. Additional compensation in the case of compulsory acquisition of capital assets Nil
2. Assets received by a shareholder on liquidation of the company FMV of such asset on the date of distribution of assets to the shareholders
3. Stock or shares becomes property of taxpayer on consolidation, conversion, etc. Cost of acquisition of such stock or shares from which such asset is derived
4. Allotment of shares in an amalgamated Indian co. to the shareholders of amalgamating co. in a scheme of amalgamation Cost of acquisition of shares in the amalgamating co.
5. Conversion of debentures into shares That part of the cost of debentures in relation to which such asset is acquired by the assessee
6. Allotment of shares/securities by a co. to its employees under ESOP Scheme approved by the Central Government a) If shares are allotted during 1999-2000 or on or after April 1, 2009, FMV of securities on the date of exercise of option

b) If shares are allotted before April 1, 2007 (not being during 1999-2000), the amount actually paid to acquire the securities

c) If shares are allotted on or after April 1, 2007 but before April 1, 2009, FMV of securities on the date of vesting of option (purchase price paid to the employer or FBT paid to employer shall not be considered)

7. Property covered by section 56(2)(vii) or (viia) The value which has been considered for the purpose of Section 56(2)(vii) or (viia)
8. Allotment of shares in Indian resulting company to the existing shareholders of the demerger company in a scheme of demerger Cost of acquisition of shares in demerged company ? Net book value of assets transferred in demerger ? Net worth of the demerged company immediately before demerger
9. Cost of acquisition of original shares in demerged company after demerger Cost of acquisition of such shares minus amount calculated above in point 8.
10. Cost of acquisition of assets acquired by successor LLP from predecessor private company or unlisted public company at the time of conversion of the company into LLP in compliance with conditions of Section 47(xiiib) Cost of acquisition of the assets to the predecessor private company or unlisted public company
11. Cost of acquisition of rights of a partner in a LLP which became the property of the taxpayer due to conversion of a private company or unlisted public company into the LLP Cost of acquisition of the shares in the co. immediately before conversion
12. Depreciable assets covered under Section 50 Opening WDV of block of assets on the first day of the previous year plus actual cost of assets acquired during the year which fall within the same block of assets
13. Depreciable assets of a power generating unit as covered under Section 50A* WDV of the asset minus terminal depreciation plus balancing charge
14. Undertaking/division acquired by way of slump sale as covered under section 50B Net worth of such undertaking
15. New asset acquired for claiming exemptions under sections 54, 54B, 54D, 54G or 54GA if it is transferred within three years Actual cost of acquisition minus exemption claimed under these sections
16. Goodwill of business or trade mark or brand name associated with business or right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy right, stage permits or loom hours a) If these assets were acquired by gift, will, etc., under section 49(1) and the previous owner had purchased these assets: Cost of acquisition to the previous owner

b) If the owner has purchased these assets: Actual cost of acquisition

c) If these assets are self-generated: Nil

17. Right shares Amount actually paid by assessee
18. Right to subscribe to shares (i.e., right entitlement) Nil
19. Bonus shares a) If allotted to the assessee before April 1, 1981: Fair market value on that date

b) In any other case: Nil

20. Allotment of equity shares and right to trade in stock exchange, allotted to members of stock exchange under a scheme of demutualization or corporatization of stock exchanges as approved by SEBI a) Cost of acquisition of shares: Cost of acquisition of original membership of the stock exchange

b) Cost of acquisition of trading or clearing rights of the stock exchange: Nil

21. Capital asset, being a unit of business trust, acquired in consideration of transfer as referred to in section 47(xvii) Cost of acquisition of shares as referred to in section 47(xvii) [applicable from AY 2015-16]
Units allotted to an assessee pursuant to consolidation of two or more scheme of a mutual fund as referred to in Section 47(xviii) Cost of acquisition of such units shall be the cost of acquisition of units in the consolidating scheme of the mutual fund
Shares in a company acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in Section 115AC(1)(b) Cost of acquisition of such shares shall be calculated on the basis of the price prevailing on any recognized stock exchange on the date on which a request for such redemption was made.
24. Any other capital asset: a) If it became property of taxpayer before April 1, 1981 by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner or FMV as on April 1,1981, whichever is higher

b) If it became property of taxpayer before April 1, 1981: Cost of acquisition or FMV as on April 1, 1981, whichever is more

c) If it became property of taxpayer after April 1, 1981 by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner

d) If it became property of taxpayer after April 1, 1981: Actual cost of acquisition

* Terminal Depreciation/Balancing Charge:

a) Balancing Charge = Sales ConsiderationWDV of the depreciable asset

b) Terminal Depreciation = WDV – Sales Consideration

When a depreciable asset (which was subject to depreciation on straight line basis) of a power generating units is sold, discarded, demolished or destroyed then terminal depreciation shall be deductible from sale consideration while computing capital gains, or balancing charge is taxable in the relevant year, as the case may be.

4.11 Cost to the Previous Owner [sec. 49(1)]

Cost to the previous owner shall be deemed to be the cost of acquisition in the hands of the taxpayer in cases where a capital asset becomes the property of the assessee under any of the modes given below:

a) On any distribution of assets on the total or partial partition of a HUF

b) Under a Gift or Will;

c) By Succession, Inheritance or Devolution;

d) On any distribution of assets on dissolution of a firm, BOI or AOP (where such dissolution had taken place at any time before the 01-04-1987);

e) On any distribution of assets on liquidation of a company;

f) Under a transfer to a revocable or an irrevocable trust;

g) On any transfer by a holding company to its wholly owned Indian subsidiary company;

h) On any transfer by a wholly owned subsidiary company to its Indian holding company;

i) On any transfer by the amalgamating company to the Indian amalgamated company;

j) In a scheme of amalgamation, any transfer of shares held in a Indian company by a amalgamating foreign company to the amalgamated Foreign company;

k) Consequent to transfer of share(in a scheme of amalgamation as referred to in Section 47(viab) of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company held by amalgamating foreign company to the amalgamated foreign company.

l) Consequent to transfer of capital asset by the demerged company to the resulting Indian company. (in case of demerger)

m) Consequent to transfer of share (in case of demerger as referred to in Section 47(vic) of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company held by a demerged foreign company to resulting foreign company.

n) Any transfer, in a scheme of amalgamation of a banking company with a banking institution;

o) On any transfer in a scheme of business reorganization of a cooperative bank;

p) On any transfer in a scheme of conversion of private company or unlisted company into LLP;

q) On any transfer in case of conversion of Firm or Sole proprietary concern into Company;

r) By HUF where one of its members has converted his self-acquired property into joint family property.

Note:

Where previous owner has also acquired the property in the aforesaid manner the ‘previous owner’ of the property shall be construed as the last previous owner who acquired the property by means other than those stated above.

4.12 Cost of Improvement [Sec. 55(1)(b)]

Cost of improvement, in relation to the capital assets shall include all capital expenditure incurred in making addition or alteration to the capital assets by the assessee or the previous owner. However, cost of improvement does not include any expenditure incurred prior to 01-04-1981. Cost of improvement shall be computed in the following manner:

S. No. Particular Cost of Improvement
1. In relation to goodwill of a business, right to manufacture, produce any article or thing or right to carry on business or profession NIL
2. In relation to capital asset which becomes property of the assessee or previous owner before 01-04-1981 Any expenditure of capital nature incurred on or after 01-04-1981
3. In relation to capital asset which becomes property of the assessee or previous owner before 01.04.1981 by way of any mode specified under Section 49(1) Any expenditure of capital nature incurred on or after 01-04-1981 by the assessee or the previous owner
4. In relation to capital asset which becomes property of the assessee or previous owner on or after 01.04.1981 Any expenditure of capital nature incurred by the assessee or the previous owner
5. In relation to capital asset which becomes property of the assessee or previous owner on or after 01-04-1981 by way of any mode specified under Section 49(1) Any expenditure of capital nature incurred by the assessee or the previous owner

4.13 Rates of tax on capital gains:

1. Short Term Capital Gains

a) Short-term capital gains shall be included in the gross total income of the taxpayer and will be taxed at the normal rates;

b) Short-term capital gains arising from transfer of Equity Shares, Units of an Equity Oriented Funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed at 15% under Section 111A;

Note:-

Now benefit of reduced rate of tax (i.e., 15%) shall be available w.e.f. 1-4-2016 even in respect of income arising from transfer of units of a business trust which were acquired by assessee in lieu of shares of special purpose vehicle as referred to in section 47(xvii).

2. Long Term Capital Gains

a) Long-term capital gains are subject to tax at 20%;

b) Long-term capital gains arising from transfer of listed securities, units or a zero coupon bonds shall be taxable at lower of following:

  • 20% after taking benefit of indexation; or
  • 10% without taking benefit of indexation.

c) Long-term capital gains arising to a non-residents or foreign company from transfer of unlisted securities shall be taxed at without giving benefit for indexation;

d) Long-term capital gains arising from transfer of listed securities, units of equity oriented or a unit of business trust which is chargeable to STT shall be exempt from tax under Section 10(38).

Note:

1. Now exemption from capital gains under Section 10(38) shall be available w.e.f. 1-4-2016 even in respect of long-term capital gains arising from transfer of units of a business trust which were acquired in lieu of shares of special purpose vehicle as referred to in section 47(xvii) and on which securities transaction tax has been paid.

2. Now exemption from long term capital gains under section 10(38) shall be available w.e.f April 1, 2017 even where STT is not paid, provided that –

–  transaction is undertaken on a recognised stock exchange located in any International Financial Service Centre, and

–  consideration is paid or payable in foreign currency

4.14 Reference to valuation officer [Section 55A]

With a view to ascertaining the fair market value of a capital asset, the concerned Assessing Officer may refer the valuation of the capital asset to a Valuation Officer appointed by the Income-tax Department in the following cases:

1)  Where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer (who works in a private capacity under a licence issued by the Board and his valuation is not binding on the Assessing Officer), but the Assessing Officer is of opinion that the value so claimed is at variance with the fair market value of the asset;

2)  Where the Assessing Officer is of opinion that the fair market value of the asset exceeds the value of the asset by more than Rs. 25,000 or 15 per cent of the value claimed by the assessee, whichever is less; or

3)  Where the Assessing Officer is of opinion that, having regard to nature of an asset and relevant circumstances, it is necessary to make a reference to the Valuation Officer

4.15 Deduction/ Exemption under Capital Gain

Particulars Section 54 Section 54B Section 54D Section 54EC Section 54EE Section 54F Section 54G Section 54GA Section 54GB
Eligible taxpayers Individual and HUF Individual and HUF Any person Any person Any Person Individual and HUF Any person Any person Individual and HUF
Capital gains eligible for exemption Long-term Short-term or Long-term Short-term or Long-term Long-term Long-term Long-term Short-term or Long-term Short-term or Long-term Long-term
Capital gains arising from transfer of Residential House property Agriculture land used by taxpayer or by his parents or HUF for agriculture purposes in last 2 years before its transfer Compulsory acquisition of land or building forming part of industrial undertaking (which was used for industrial purposes for at least 2 years before its acquisition). Any long-term capital asset Any long-term capital asset Any long term asset (other than a residential house property) provided on date of transfer taxpayer does not own more than one residential house property (except the new house) Land, building, plant or machinery, in order to shift industrial undertaking from urban area to rural area. Land, building, plant or machinery, in order to shift industrial undertaking from urban area to SEZ. Residential property (house or a plot of land)
Note:
Provisions of this section shall not apply to any transfer of residential property made after March 31, 2017. However, in case of an investment in eligible start-up, the residential property can be transferred up to March 31, 2019.
Assets to be acquired for exemption One residential house property Agricultural land (may be in urban area or rural area) Land or building for shifting or reestablishing said industrial undertaking Bond of NHAI or REC, etc. Units of such fund as may be notified by Central Government to finance start-ups One residential house property Land, building, plant or machinery, in order to shift industrial undertaking to rural area. Land, building, plant or machinery, in order to shift industrial undertaking to SEZ. Subscription in equity shares of an eligible company.
Note:
1. W.e.f. April 1, 2017, eligible start-up is also included in definition of eligible company.
2. The eligible company should utilize the amount of subscription for purchase of new assets (i.e., plant and machinery except vehicle, office appliances, computer or computer software etc.). However, In the case of eligible startup, the new asset shall include computers or computer software.
Time limit for acquiring the new assets Purchase: within 1 year before or 2 years after date of transfer

Construction: within 3 years after date of transfer

Within 2 years after date of transfer Within 3 years from date of receipt of compensation Within 6 months from date of transfer Within 6 months after the date of transfer of original asset Purchase: within 1 year before or within 2 years after date of transfer

Construction: within 3 years after date of transfer

within 1 year before or 3 years after date of transfer Within 1 year before or within 3 years after date of transfer Investment by the assessee –
Before due date for furnishing of return under Sec. 139(1).
Investment by the company – within 1 year from date of subscription.
Exemption Amount Investment in new assets or capital gain, whichever is lower Investment in agricultural land or capital gain, whichever is lower Investment in new assets or capital gain, whichever is lower Investment in new assets or capital gains, whichever is lower, however, subject to Rs. 50 lakhs. Investment in new assets or capital gains, whichever is lower, however, subject to Rs. 50 lakhs. Investment in new assets X capital gain/net consideration Investment in new assets or capital gain, whichever is lower Investment in new assets or capital gain, whichever is lower Investment in new assets X capital gain/net consideration
Withdrawal of exemption If new asset is transferred within 3 years of its acquisition If new asset is transferred within 3 years of its acquisition If new asset is transferred within 3 years of its acquisition If new asset is transferred or it is converted into money or a loan is taken on its security

within 3 years of its acquisition

If new asset is transferred within a period of 3 years from the date of its acquisition.
Note:
Where assessee takes loans or advance on security of such specified asset, he shall be deemed to have transferred such asset on the date on which such loan or advance is taken.
a) If new asset is transferred within 3 years of acquisition,

b) if another residential house is purchased within 2 years of transfer of original asset;

c) if another house is constructed within

3 years of transfer of original asset

If new asset is transferred within 3 years of acquisition If new asset is transferred within 3 years of acquisition If equity shares in company or new asset acquired by company is sold or transferred within a period of 5 years from date of acquisition.
Deposit in Capital gains deposit scheme before due date under Sec. 139(1) Yes Yes Yes No No Yes Yes Yes Yes

Capital Gain Account Scheme 1988
a) The scheme is open to all taxpayers, who wish to claim exemption under Sections54,54B, 54D, 54F, 54G or 54GB.

b) If taxpayer could not invest the capital gains to acquire new asset before due date of furnishing of return, the capital gains can be deposited before due date for furnishing of return of income in deposit account in any branch of a nationalized bank in accordance with Capital Gain Account Scheme 1988.

V. Income from Other Sources

Any income which is not chargeable to tax under any other heads of income and which is not to be excluded from the total income shall be chargeable to tax as residuary income under the head “Income from Other Sources”.

5.1 Basis of Charge [Sec. 56]:

Income chargeable to tax under the head “Income from other sources” shall include following:

S. No. Nature of income taxable as residuary income
1. Dividends

Note:

Dividend received from domestic company shall be exempt from tax under Section 10(34) if it is chargeable to dividend distribution tax under Section 115-O. However, as per section 115BBDA (as inserted by Finance Act, 2016), in the case of resident individual/HUF/firm, dividend shall be chargeable to tax at the rate of 10% if aggregate amount of dividend received during the year exceeds Rs. 10,00,000.

2. Income by way of winnings from lotteries, crossword puzzles, races including horse races, card games, gambling or betting of any form or nature whatsoever
3. Any sum received by an employer from his employees as contribution towards PF/ESI/ Superannuation Fund etc., if same is not deposited in the relevant fund and it is not taxable under the head ‘Profits and Gains from Business or Profession’.
4. Interest on securities, if not taxable under the head ‘Profits and Gains of Business or Profession’
5. Income from machinery, plant or furniture belonging to taxpayer and let on hire, if income is not chargeable to tax under the head ‘Profits and Gains of Business or Profession’
6. Composite rental income from letting of plant, machinery or furniture with buildings, where such letting is inseparable and such income is not taxable under the head ‘Profits and Gains of Business or Profession’
7. Any sum received under Keyman Insurance Policy (including bonus), if not taxable under the head ‘Profits and Gains of Business or Profession’ or under the head ‘Salaries’
8. In the following cases, any sum of money or property received by an individual or HUF from any person (except from relatives or member of HUF or in given circumstances, see note 1) shall be taxable under the head ‘Income from other sources’:

a) If any sum is received without consideration in excess of Rs. 50,000 during the previous year, the whole amount shall be chargeable to tax;

b) If an immovable property is received without consideration and the stamp duty value exceeds Rs. 50,000, the stamp duty value of such property shall be chargeable to tax;

c) If immovable property is received for consideration which is less than the stamp duty value of property by an amount exceeding Rs. 50,000, the difference between the stamp duty value and the consideration is chargeable to tax;

d)  If movable properties* is received without consideration and the aggregate fair market value of such properties exceeds Rs. 50,000, the whole of aggregate fair market value of such properties shall be chargeable to tax

e)  If movable properties is received for consideration which is less than the aggregate fair market value of properties by an amount exceeding Rs. 50,000, the difference between the aggregate fair market value and the consideration is chargeable to tax.

9. If shares in a closely held company are received by a firm or another closely held company from any person without consideration or for inadequate consideration, the aggregate fair market value of such shares as reduced by the consideration paid, if any, shall be chargeable to tax.

Note: Nothing would be chargeable to tax if taxable amount doesn’t exceed Rs. 50,000.

10. If a closely held public company receives any consideration for issue of shares which exceed the fair market value of such shares, the aggregate consideration received for such shares as reduced by its fair market value shall be chargeable to tax.

Note: This provision is not applicable in the following cases:

a) Where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or venture capital fund.

b) Where the consideration for issue of shares is received by company from class or classes of person as notified by the Government.

11. Interest received on compensation or enhanced compensation
12. Any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset shall be charged to tax under this head, if:

a) Such sum is forfeited; and

b) The negotiations do not result in transfer of such capital asset.

* ‘Movable property’ shall include shares, securities, jewellery, archaeological collection, drawings, paintings, sculptures, any work of art or bullion etc.

5.1.1 Gifts not chargeable to tax [Sec. 56(2)(vii)]

Any sum of money or property received by an individual or HUF in the following circumstances shall not be chargeable to tax:

a) Gifts received by an individual from his relatives;

b) Gifts received by an HUF from any of its Member;

c) Gifts received by an individual on occasion of his/her marriage;

d) Gifts received by an individual or HUF under a will or by way of Inheritance;

e) Gifts received in contemplation of death of the payer;

f) Gifts received from any local authority;

g) Gifts received from any fund, foundation, university, educational institution, hospital, medical institution, any trust or institution referred to inSection 10(23C);

h) Gifts received from any trust or institution registered underSection 12AA.

i) Share received as a consequences of demerger or amalgamation of a company under clause (vid) or clause (vii) of section 47, respectively.

j) Share received as a consequences of business reorganization of a co-operative bank under section 47(vicb)

** ‘Relative’ shall mean:

  1. Spouse of the individual
  2. Brother or sister of the individual
  3. Brother or sister of the spouse of the individual
  4. Brother or sister of either of the parents of the individual
  5. Any lineal ascendant or descendant of the individual
  6. Any lineal ascendant or descendant of spouse of the individual
  7. Spouse of the person referred in point 2-6 above

5.2 Deductions [Sec. 57]:

The following expenditures are allowed as deductions from income chargeable to tax under the head ‘Income from Other Sources’:

S.N. Section Nature of Income Deductions allowed
1. 57(i) Dividend or Interest on securities Any reasonable sum paid by way of commission or remuneration to banker or any other person for purpose of realizing dividend (other than dividends referred to in section 115-O) or interest on securities
2. 57(ia) Employee’s contribution towards Provident Fund, Superannuation Fund, ESI Fund or any other fund setup for the welfare of such employees If employees’ contribution is credited to their account in relevant fund on or before the due date
3. 57(ii) Rental income letting of plant, machinery, furniture or building Rent, rates, taxes, repairs, insurance and depreciation etc.
4. 57(iia) Family Pension 1/3rd of family pension subject to maximum of Rs. 15,000.
5. 57(iii) Any other income Any other expenditure (not being capital expenditure) expended wholly and exclusively for earning such income
6. 57 (iv) Interest on compensation or enhanced compensation 50% of such interest (subject to certain conditions)
7. 58(4)Proviso Income from activity of owning and maintaining race horses. All expenditure relating to such activity.

5.3 Expenses not deductible [Section 58]:

S.N. Section Nature of Income
1. 58(1)(a)(i) Personal expenses
2. 58(1)(a)(ii) Interest chargeable to tax which is payable outside India on which tax has not been paid or deducted at source
3. 58(1)(a)(iii) ‘Salaries’ payable outside India on which no tax is paid or deducted at source
4. 58(1A) Wealth-tax
5. 58(2) Expenditure of the nature specified in section 40A
6. 58(4) Expenditure in connection with winnings from lotteries, crossword puzzles, races, games, gambling or betting

 

 

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