Modified direct tax notes ppt

A tax is a compulsory contribution
imposed by a public authority
irrespective of the exact amount of
service rendered to the tax payer in
return and not imposed as a

The direct tax which is paid by individual to the
Central Government of India is known as
Income Tax. It is imposed on our income and
plays a vital role in the economic growth &
stability of our country. For years the
Government is generating revenue through this
tax system. The word 'Tax' originated from the
'Taxation.' which means 'Estimate.' Hence,
'Income Tax' means 'Income Estimate,' which
helps the government to know the actual
economic strength of a person. It is also a way
to set up an economic standard for general
people. It helps the Government to know the
distribution of money among country's people.
4

Money that an individual or business receives in
exchange for providing a good or service or through
investing capital. Income is consumed to fuel day-to-
day expenditures. Most people age 65 and under
receive the majority of their income from a salary or
wages earned from a job. Investments, pensions and
Social Security are primary sources of income for
retirees. In businesses, income can refer to a
company's remaining revenues after all expenses and
taxes have been paid. In this case, it is also known as

Income
from
Salary…
Income
from
House
Property
…
Income
from
Business
&/or
Professio
Income
from
Transfer
or sales of
capital
Other
incomes
…

IMPORTANT DEFINITIONS
 Person u/s 2(31) includes :-
 An Individual,
 Hindu Undivided Family (HUF),
 A Company,
 A Firm,
 An Association of Persons(AOP) or Body of
Individuals (BOI),
 A Local Authority
 Every other Artificial Juridical Person
 Previous Year u/s 2(34) :-
means the year in which income is earned.
8

 Assessment Year u/s 2(9) :-
means the period of 12 months commencing on
the 1st April every year. It is the year (just after
previous year) in which income is earned is
charged to tax. The current Assessment is 2016-
2017.
 Gross Total Income (G.T.I) :-
The aggregate income under the 5 heads of income
(viz. Salary, House Property, Business or Profession,
Capital Gains & Other Sources) is termed as “Gross
Total Income”.
 Total Income (T.I) :-
Total Income of assessee is gross total income as
reduced by the amount permissible as deduction
under sections 80C to 80U.

An employee, whatever he gets from his employer, whether
in cash or in kind, all comes within the purview of
‘income’. Main receipts are as under =
• Salary, advance salary, arrears.
• Various allowances, commission, bonus etc..
•Gratuity, compensation, provident fund and profits in lieu
of salary.
• Perquisites – Such facilities which are provided by the
employer to employee at free of cost or concessional rate.

BASIS OF CHARGE
Income is taxable under head “Salaries”, only if there exists Employer -
Employee Relationship between the payer and the payee. The following
incomes shall be chargeable to income-tax under the head “Salaries”:-
 Salary Due
 Advance Salary [u/s 17(1)(v)]
 Arrears of Salary
Note:
(i)Salary is chargeable on due basis or receipt
basis, whichever is earlier.
(ii)Advance salary chargeable to tax on receipt
basis only.
7/20/2018
11

PARTICULARS AMOUNT AMOUNT
ADD (+) :-
• Basic Salary
• Bonus
• Commission
• Allowances
1. Tax free
2. Taxable
3. Partly taxable
• Facilities
1. Tax free to all
2. Taxable to all
3. Taxable to only specified employee
• Contribution to employer in Recognized Provident Fund (RPF)
over 12% of salary
• Interest on Recognized Provident Fund over 9.5%
…
…
…
…
…
…
…
…
…
…
…
…
…
…
= Gross Salary
LESS (-) :- Deduction under Section 16
• Entertainment Allowance to Government employees [Sec 16 (2)]
•Professional Tax [sec 16 (3)]
(…)
(…)
…
(…)
TAXABLE SALARY XXX

 BASIC SALARY :- Fully taxable. (maybe received hourly,
daily, weekly, monthly, annually.)
 ADVANCE SALARY :- Taxable related to next financial
year.
 ARREARS OF SALARY :- It means outstanding/earlier year
salary received in previous year. If received in earlier year
not taxable, then in previous year it will be taxable,
otherwise taxable.
 BONUS :- If received in previous year, then only taxable;
otherwise exempted.
 COMMISSION :- Fully taxable on due basis.

 PROVIDENT FUND :- Some amount of income of employee is
deducted from Income for his retirement benefit and Employer also
contributed for Employee benefit. Both contributed amount of
employer & employee are deposited under “Provident Fund”, the
amount of which is maintained by Central Government on which
interest paid by them is 8.8% compounded half-yearly.
TYPES OF
PROVIDE
NT FUND
RECOGNISED
PROVIDENT FUND
1. Employees
contribution more than
12% of salary is taxable.
(Salary = basic salary +
dearness allowance
under retirement benefit
+ commission of fixed
percent on turnover)
2. Interest credited on
employees contribution
upto 9.5% is exempted,
excess taxable.
3. After retirement any
amount received from
Fund is fully exempted.
UNRECOGNISED PROVIDENT FUND
1. During service period, employer’s
contribution & interest on it is fully
Exempted.
2. After retirement, any amount
received from fund is fully taxable.
STATUTORY
PROVIDENT
FUND
Fully exempted,
applicable only
for government
employees

Employer’s contribution in excess of 12% of salary to Recognized
Provident Fund :-
If the basic salary is 44,000 and the employer contributes 15% to Recognized
Provident Fund then excess contribution shall be 3% and the following
amount shall be included in the income.
Excess interest credited to Recognized Provident Fund :-
Assumed that 4,400 were credited to Recognized Provident Fund at the rate
of 11% per annum. In this situation, the following amount shall be excess
interest and taxable.
320,1
100
3000,44


600
11
5.1200,4



Allowances :- Cash reimbursement related to
official work other than salary paid in fixed intervals
or fixed amount throughout the year is known as
allowances. There are mainly 3 types as under :-
Allowances
Tax Free
Allowance
Partly
taxable
Taxable
Allowanc
e

Tax Free Allowances :-
A. Foreign Allowance
B. Allowances received by
judges
C. Allowance received from
UNO
TaxableAllowances:-
A. Dearness Allowance
B. Servant Allowance
C. Medical Allowance
D. Entertainment
Allowance
E. No practice Allowance
F. Deputation Allowance
G. Warden/ Procter
Allowance
H. Project Allowance
I. NCC/ NSS/ Sports/
Cultural Allowance
J. City compensatory
Allowance
K. Rural Allowance
L. Overtime Allowance
M. Dog Allowance

Rules for Partially Taxable Allowances :
1.HouseRentAllowance:-
a. For judges of Supreme Court & High Court = Fully exempted.
b. Any person living in own house & this allowance received = Fully
Taxable.
c. Any person living in rental house, least of the following is exempted :
i) house rent allowance received.
ii) rent paid over i.e. (-) 10% of salary
iii) 40 or 50% of salary. It is 50% for Delhi, Mumbai, Chennai & Kolkata
and
if the person is working in any other state it’s 40%.
NOTE :- Salary = Basic Salary + Dearness allowance under retirement benefit +
commission of fixed percent on turnover.
Mr. X’s basic salary is 2,40,000 per annum and he gets 4,000 per month house rent
allowance. He resides in a rental house whose rent is 5,000 per month.
Actual amount 48,000
Less (-) :- Whichever is less
1. Actual H.R.A. [48,000]
2. Actual rent – 10% salary [60,000 – 24,000 = 36,000] (-)36,000
3. 40% of salary (general city) [96,000]
________

2. Child Education Allowance :-
Rs. 100/- per month per child; maximum 2 child is exempted, excess taxable.
3. Children Hostel Allowance :-
Rs. 300/- per month per child; maximum 2 children exempted, excess taxable.
Mr. Prashant Bhansali gets education allowance for 3 children 250 per month for each.
1st Child [(250 - 100) X 12] 1,800
2nd Child [(250 - 100) X 12] 1,800
3rd Child [250 X 12] 3,000
Taxable education allowance = 6,600/-
Mr. Mansukh LAL gets hostel allowance for 2 children 500 per month for each.
1st Child [(500 - 300) X 12] 2,400
2nd Child [(500 - 300) X 12] 2,400
Taxable education allowance = 4,800/-

4. Tribal Area Allowance :-
Rs. 200/- per month exempted; excess taxable.
Mr. Raghuvir Sahu is an officer in a government office at tribal area and receives
500 per month tribal allowance.
[(500 - 200) X 12 = 3,600]
Taxable Tribal Allowance = 3,600/-
5. Transport Allowance :-
(for transport employees) Rs.10,000/- per month or 70% of the allowance
received, whichever is less; exempted and excess taxable.
If an employee spends 1,00,000 as transport expenditure, then he will get
deduction of
70% of 1,00,000 = 70,000
Or
6,000 X 12 = 72,000
Whichever is less.
Taxable Transport Allowance = 70,000/-

6. Special Allowance u/s 10(14)(1) :-
As per this Section, these allowance are given by employer for
obeying or performing the duty. Amount which will be spent for
performing that duty will be tax free. It includes helper allowance,
uniform allowance, car allowance, convenience allowance, daily
allowance, research allowance. Savings are taxable.
Mr. Dilip Koshta receives 10,000 as research allowance. He spends 9,000
for the same purpose and saves 1,000. Exempted research allowance
would be 9,000.
Taxable research allowance = 1,000/-
7. Modified Field Area Allowance :-
(for the army people) Rs. 1000/- per month exempted and excess
taxable.
Major Randhir Singh Khanuja is appointed in Indian Army. He receives
5,000 per month as Modified Field Area allowance.
[(5,000 – 1,000) x 12] = 48,000
Taxable Modified Field Area Allowance = 48,000/-

8. Underground Allowance :-
Rs. 800/- per month exempted and excess is taxable.
Mr. Prakash Jha works for a coal mine company and receives 1,000 per month
as underground allowance.
[(1,000 – 800) x 12] = 2,400
Taxable underground Allowance = 2,400/-
9. Transport Allowance :-
(from residence to office & from office to residence) Rs.1600/- per
month exempted and excess taxable. For handicapped employees Rs.
3200/- per month exempted and excess taxable.
Mr, Manohar Maheshwari is serving in Vikram Cement Ltd. He
receives 1,500 per month as transport allowance.
[(1,500 - 800) x 12] = 8,400
Taxable Transport Allowance = 8,400/-

Facilities or Perquisites :-
1. Taxable Facilities for all Employees :
i. House Facility –
a. Facility provided to Government employees =
-> As per government rules or information given ~ Fully
Taxable.
-> If information is not given, then 10% of salary is taxable
facility.
b. Facility provided to Non-Government employees =
-> If house is not owned by employee, fair rent or 15% of
salary whichever is
less is taxable facility.
-> If house is owned by employee ~
=> population less than 10 Lac : 7.5% salary is taxable
facility.
=> population is between 10-25 Lac : 10% salary is

d. Facility provided in hotel : Rent of hotel or 24% of salary
whichever is less is taxable
facility only if such facility is provided for more than 15
days, otherwise exempted.
e. Facility provided at the time of transfer = (if more than one
house) Any house is
taxable up to 3 months as per the choice of employee;
afterwards both houses are
taxable facility.
NOTE :-
• Salary = Basic Salary + Dearness Allowance under
retirement benefit + commission + bonus + all taxable
allowances.
• If furniture is also provided with house then 10% cost of
furniture is added in the taxable house facility. (Furniture
excludes computer)

2. Taxable facility for special employee :
i. Servant Facility – fully taxable
ii. Children Education Facility – Rs. 1000/- per
month per child exempted and excess is taxable.
iii. Car Facility – Car is provided by employer to employee
a. For official purposes only = fully exempted
b. For personal purposes only = fully taxable
c. For official and personal purpose :
-> For small car i.e. less than 1.6 cc car
=> if expenses are paid by employee ~ Rs. 600/- per
month is
taxable facility.
=> if expenses are paid by employer ~ Rs. 1800/-
SPECIAL EMPLOYEES =
1. Directors
2. Purchases 20% equity
shares of company &
working as employee
3. Taxable Salary exceeds
Rs. 50,000/- annually.
(Basic salary + bonus +
commission + all
taxable allowances =
Gross salary –
employment tax –
entertainment allowance
= Taxable Salary.)
Mr. Prashant Bhansali is working in Ruchi
Soya Ltd. And receives free education facility
in the employer’s school for 2 children costing
1,600 per month per child.
[(1,600 – 1,000) x 2 x 12] = 14,400
Taxable children education facility =
14,400/-

3. Exempted facilities for all employees :
 Refreshment Facility
 Telephone Facility
 Refresher course facility
 Sale of Goods facility
 Group Insurance Scheme facility
 Scholarship facility
 Loan facility – up to Rs. 20,000/- exempted and excess
is taxable as per SBI
rates (applicable from 01-04-2015 on
various loans)
 Free use of computers facility
 Sports Facility
 Any facility to government employee outside India.

INCOME FROM
SALARY WITH
RETIREMENT

When an employee retires from service due
to completion of service period or
compulsory retirement or death or
retrenchment or termination or other reason,
he gets some special receipts from employer.
These retirement benefits are gratuity,
pension, commutation of pension, providend
fund, leave encashment, compensation etc.
These receipts are taxable under the head
‘Income from salaries’. Under the Income tax
act some retirement benefits are fully exempt
and some are exempt upto a certain limit.

GRATUITY – Section 10
(10)Gratuity means a lumpsum amount which is given by the employer to the employee at
the time of retirement considering has length of service.
In case of retirement or death of employee gratuity revceived from employer is exempt
from tax as under –
i) In case of Government employees {Sec. 10(10)(i)} -
Any death cum retirement gratuity received by an employee of the Central
Government, State Government or local authority is wholly exempt from tax. In
other words gratuity received by a Goverment employee is not taxable under the
Income Tax Act.
Mr. Sundram retires from Tamil Nadu Government service on 1st November, 2014
and receives gratuity 72,000. The sum is exempt. So it would not be included in
salary.

*In case of Non-Government employee -
Non-Government employee or private sector employees can be
classified in two categories in respect of Gratuity from Income Tax point
of view -
a) If Gratuity Act 1972 applies.
b) If Gratuity Act does not apply.
ii) In the case of employees covered under the payment of Gratuity Act
1972 {Sec. 10(10)(ii)} -
Payment of Gratuity Act, 1972 is applicable to all the employees engaged in factories,
mines , oil fields, palntations, ports, railway companies, shops or other
establishments. Where 10 or more persons are working. The exemption is in respect
of the gratuity least of the following-
a) 15 days salary for every completed year of service or part thereof in excess of six
months. In case of seasonal workers 7 days’ salary for each season.
b) Maximum limit 10,00,000.
Note :- Gratuity in excess of the aforesaid limits is taxable in the hands of the assessee.

PROCEDURE FOR COMPUTATION OF
TAXABLE GRATUITY
An employee covered under Gratuity Payment Act receives gratuity. The following
procedure should be adopted for finding tax free and taxable amount while computation
of taxable income “Under the head salaries’.
Actual gratuity received
Less - Whichever is less :
i) Actual gratuity received , or
ii) 15 days salary for each completed years.
Salary last drawn × Years × 15
26
iii) Maximum exemption limit rs. 10,00,000
Taxable amount of gratuity
(-)

 In the case of any other employee {section 10(10)(iii)} –
For the employees not covered above (neither Government employee nor covered
under payment of Gratuity Act) the procedure for computation of exempted gratuity
will differ. Any gratuity received by an employee on his retirement or on his becoming
incapacited prior to such retirement or on the termination of his employment or any
gratuity received by widow, children or dependants on his death will be exempted to the
extent given below –
a) Actual Gratuity received, or
b) Half month’s salary for each yaer of completed service; or
c) Rs. 10 Lakhs maximun limit.
Gratuity in excess of the aforesaid limits is taxable in the hands of retired employee
and will included in income from salary.
NOTE : If an employee who has received gratuity in any earlier year from his former
employer, receives gratuity exempted from another employer in a later year, the
aforesaid limit of Rs. 10 Lakhs will be reduced bt the amount of gratuity exempted from
tax in any earlier year.
 Salary means basic salary + Dearness Allowance under the terms of employment +
Commission on sales on percentage basis.
 Average salary is calculated on the basis of average salary received during 10 months
preceding the month in which death or retirement occurs.

PROCEDURE FOR COMPUTATION
OF TAXABLE GRATUITY
A Non-Government employee who is not covered under Payment of
Gratuity Act 1972 receives gratuity on retirement, then tax free and taxable
portion of a gratuity will be calculated as under -
Actual Gratuity received
Less – Minimum of of the following
i) Actual gratuity received, or
ii) Half months’ salary for each completed year
(fraction of the year will be ignored ) –
No. Of completed years × preceding 10 months average salary
2
iii) Maximum limit Rs. 10,00,000
Minimum of aforesaid amounts will be exempted amount
TAXABLE GRATUITY
(-)

An employee retires from a service of a company on August 1, 2014 after
completion of 32 years service. He receives gratuity 2,60,000. His average
salary for last 10 months was 12,500. The employee is not covered under
Payment of Gratuity Act.
Sol :-
Actual Gratuity received 2,60,000
Less :- whichever is less
1. Actual gratuity or (2,60,000)
2. Half month salary for each completed year
of the service (2,00,000) (2,00,000)
 Maximum limit = 10,00,000
----------------------
-
TAXABLE GRATUITY 60,000
Tax free gratuity is 2,00,000/- and taxable gratuity is 60,000/-
000,00,2
2
132500,12



MONTHLY PENSION – Sec.
17
After retirement monthly pension received by an employee whether
Government or Non-Government, is taxable under the head ‘Income from
Salaries’ .
Example : Mr. Raghuveer Yadav retires from services of M.P. Government
on 1st October, 2014 and gets pension Rs. 13,750. The sum shall be
included in the computation of income from salary .
COMMUTATION OF PENSION Sec. 10 (10A)
If a retired employe e receives a lumpsome amount instead of regular
pension, it is called Commutation of Pension. The basis of charging
commuted pension is briefly stated below -
a) In case of a Government employee -
An commuted pension by a Government employee is wholly exempt from
tax. CBDT has clarified that judges of High Courts and Supreme
Courts are also entitled to the exemption. Government employe means
employee of the Central Government, State Government, Local
Aythority or Statutory corporation .

b) In case of Non-Government employee –
If a Non-Government employee commuted his pension and receives
lumpsum amount then such receipt would be exempt upto a certain limit. A
Non-Government employee can avail exemption upto the following extent :-
i) If the employee receives gratuity –
1/3rd portion of the whole(100%) vale of the pension.
ii) If the employee does not receive gratuity –
½ portion of the whole (100%) value of the pension .
Shri Suresh Rathi was retired on 1st December 2014 from Pakiza Textiles Pvt. Ltd.
On 1st January 2015 he received 81,000 lump sum for ½ pension commuted.
When ½ of pension is 81,000, then whole value is 81,000 x 2 = 1,62,000. If
employee received gratuity, so 1/3rd would be exempt. Thus, 1/3 of 1,62,000 =
54,000 would be exempt.
Taxable Pension [81,000 – 54,000] = 27,000/-

a) In the case of a Government employee :
any amount received as cash equivalent of leave salary in respect of the period of earned
leave at his credit at the time of retirement or superannuation is exempt from tax.
b) IN case of Non-Government employee (Semi Government and Private sector
employee) :
it is exempt from tax to the extent of the following –
1. Cash equivalent of the leave salary in respect of the period of earned leave to the
credit of an employee only at the time of retirement or
2. 10 months’ “average salary” ; or
3. The amount not chargeable to tax as specified by the Government Rs. 3,00,000; or
4. Leave encashment actually received at the time of retirement .
Leave salary in excess of the aforesaid limits is taxable in the hands of retired employee and
will be included in salary income.
LEAVE SALARY – Sec. 10 (10AA)

PROCEDURE FOR
COMPUTATION OF TAXABLE
LEAVE SALARY
Leave encashment actually received
Less- Minimum of the following amounts is exempted -
i) Leave encashment actally received
ii) Actual entitlement of leave salary or
iii) 10 months salary
(on the absis of average salary of preceding 10 months) or
iv) Prescribed limit (3,00,000)
TAXABLE AMOUNT OF LEAVE SALARY

Mr. Narottam Patel was retired on 1st December, 2015 from Reliance
Industries Ltd. His salary was 9,600 per month on 1st January 2015. He
received 45,000 for encashment of earned leave for 4 months.
Leave salary received 45,000
Less – minimum of the following :- (38,400)
1. Leave salary received (45,000)
2. Entitlement for 4 months (9,600 x 4 = 38,400)
3. 10 months salary (96,000)
4. Maximum limit (3,00,000)
__________
Taxable amount 6,600
Taxable Leave salary = 6,600/-

COMPENSATION ON RETIREMENT
– Sec. 10 (10B)
Any compensation received by a workman under the
Industrial Disputes Act, 1947, or under any other Act, Rules, Orders,
Notification, Award or contract of services etc., at the time of
retrenchment shall be exempt to the following extent –
i) An amount calculated in accordance with the provisions iof
the Industrial Disputes Act, 1947; or
ii) Such amount as the Central Government may by notification
in the official Gazzete, specify in this behalf; i.e. 5,00,000 or
iii) Compensation actually received.

COMPENSATION ON VOLUNTARY
RETIREMENT – Sec. 10 (10C)
Compensation received by an employee at the time of voluntary retirement is
exempt from tax if the following condition satisfied –
1) Compensation is received at the time of voluntary retirement.
2) Compensation is received by an employee of the following undertakings –
i) Public sector company;
ii) Any other company;
iii) An authority established under a Central, State or Provincial Act,
iv) A local authority.
v) A co-operative society.
vi) A university.
vii) Indian Institute of Technology
viii) Such institute of management as the Central Government may by notification, in
the Official Gazette specify in this behalf.
ix) Central Government or State Government.
3) Maximum amount of exemption is Rs. 5 Lacs.
4) The compensation must be in accordance with the scheme of voluntary retirement.

AMOUNT RECEIVED FROM
PROVIDENT FUND – Sec. 10 (12)
At the time of retirement an employee receives a lumpsum amount
from provident fund. Such amount is treated as under –
a) A Government employee receives amount from Statutory Provident
Fund or G.P.F. is fully exempted.
b) Amount received by a Non-Government employee from Recognised
Provident Fund (including interest) is fully exempted.
c) In case of unrecognised provident employer’s whole contribution with
interest is taxable at the time of retirement under the head salary.
Employee’s contribution to such fund would not be noticeable but
interest credited on such amount will be taxable under the head
‘income from other sources’.

TRANSFERRED BALANCE OF
PROVIDENT FUND - Sec. 17
If unrecognised provident fund is converted in recognised provident
fund during the previous year, then the balance of such fund will be
taxable in the following manner –
i) Share of employer’s contribution will be exempt upto prescribed
limit, 10% of salary upto assessment yeat 1997-98 and 12% from
assessment year 1998-99 onwards. So , excess contribution will be
taxable and included in income from salary.
ii) Interest credited more than at the rate of 12% per annum upto
assessment ywar 2001-02 and there after 9.5% will be taxable .

Any person who is an owner of a house and that
house is used for self-residence or let out, may be
official or residential is liable for tax as such houses
are taxable under this head.
Following houses are exempted :-
• Agriculture income from farm house
•Official house of ex-rulers
•Let out house by Charitable institutes or educational
institutions.

Basis of Charge
 The basis of calculating income from house property
is the annual value.
 This is the inherent capacity of the property to earn
income. The charge is not because of the receipt of any
income but is on the inherent potential of the house
property to generate income.

Conditions to be fulfilled for property income to
be taxable under this head
The property must consist of buildings and lands
appurtenant thereto.
The assessee must be the owner of such house property.
The property may be used for any purpose but should not
be used by the owner for the purpose of any
business or profession carried on by him, the
profits of which are chargeable to tax.

Deemed Owner
It is the legal owner of a house property who is chargeable to tax in
respect of property income.
The following persons are deemed to be owners of the house property
for the purpose of computing income from house property :-
 An individual, who transfers house property otherwise than for
adequate consideration to his or her spouse (not being a transfer in
connection with an agreement to live apart) or to his minor child (not
being a married daughter), is deemed owner of the house property.
 The holder of an impartible estate is a deemed owner of all properties
comprised in the estate.
 A member of a cooperative society, company or other association of
persons, to whom a building or a part thereof is allotted or leased
under a house building scheme of the society, company or association
of persons, is deemed owner of the property.

Composite Rent
In certain cases, the owner charges rent from the tenant not only on account of
rent for the house property but also on account of service charges for various
facilities provided with the house. Such rent is known as composite rent. The said
composite rent can fall under 2 categories:
 Composite rent on account of rent for the property and service charges for
various facilities provided along with the house like lift, gas, water, electricity,
watch and ward, air conditioning etc. In this case such composite rent should
be split up and the portion of rent attributable to the letting of the premises shall
be assessable as “Income from house property”. The other portion of the
composite rent received for rendering services shall be assessable as “Income from
other sources”.
 Composite rent on account of rent for the property and the hire charges of
machinery, plant or furniture belonging to the owner. In this case if the letting of
the property is separable from the letting of the other assets, then the portion of
the rent attributable to the letting of the premises shall be assessable as “ Income
from house property” and the other portion of the composite rent for letting other
assets shall be assessable either as “business income” or as “other sources”. On the
other hand, if the letting of the property is inseparable from the letting of other
assets like machinery, furniture, the entire income would be taxable as “business
income” or as “other sources”.

Gross Annual Value
LESS (-) :- Municipal Tax
…
(…)
= Annual Value
LESS (-) :-
• Standard Deduction
• Interest on loan
(…)
(…)
…
(…)
TAXABLE INCOME/LOSS
FROM HOUSE PROPERTY
xxx

What is Annual Value?
As per section 23(1)(a), the annual value of any property shall be
the sum for which the property might reasonably be expected to be
let from year to year. It may neither be the actual rent derived nor the
municipal valuation of the property. It is something like notional rent
which could have been derived, had the property been let.
Determining Annual Value :-
In determining the annual value there are four factors which are
normally taken into consideration. These are:
Actual rent received or receivable
Municipal Value
Fair rent of the property
Standard rent

Computation of annual value of a
property [Section 23(1)]
As per Income tax, annual value is the value after deduction of
municipal taxes, if any, paid by the owner. Annual value may be
determined in the following two steps:
1) Determine gross annual value
2) From gross annual value, deduct municipal taxes paid by the
owner during previous year.
The balance shall be the net annual value which, as per the
Income tax Act, is the annual value.

Gross Annual Value :-
1. Property not covered under Rent Control Act:
Municipal valuation or fair rent or rent
received, whichever is higher is Gross annual
Value.
2. Property covered under Rent Control Act:
Out of both higher value, whichever is
lower is Gross Annual Value –
i. Standard Rent or rent received, whichever
is higher
ii. Municipal Value or fair rent or rent
received, whichever is higher
NOTE :-
1. If facilities are given to
tenant under agreement
related to house then deduct
it from rent received & then
apply the rules.
2. Unrealized rent means
rent never realized due to
tenant has died or not
willing to pay or has vacant
the house. It is deducted
from rent received if the
following conditions are
satisfied:
A. Tenant has vacant the
house.
B. legal proceedings are
taken against tenant
C. Decision of court is in
favor of owner

Municipal Tax :- Taxes levied by any local authority in respect of
the property i.e. municipal taxes (including service taxes) to be
deducted: Municipal taxes levied by local authority are to be deducted
from the gross annual value, if the following conditions are satisfied:
(a) The municipal taxes have been borne by the owner, and
(b) These have been actually paid during the previous year.
NET ANNUAL VALUE :- The value arrived at after
deducting the municipal taxes, if any, may be referred to as the Net
Annual Value.
From such net annual value, deductions permissible under section 24
(a) & (b) are allowed and the balance is the income under the head
“Income from house property”.
Standard Deducted :- From the net annual value computed, the
assesses shall be allowed a statutory deduction of a sum equal to 30%
of the net asset value. This deduction is allowed towards repairs and
collection of rent for the property, irrespective of any expenditure
incurred.

Interest on loan :- Where the property has been acquired,
constructed, repaired, renewed or reconstructed with borrowed
capital, the amount of interest payable on such capital is allowed as a
deduction.
The amount of interest payable yearly should be calculated separately
and claimed as a deduction every year. It is immaterial whether the
interest has been actually paid or not paid during the year.
Interest on pre-construction period
It may so happen that money is borrowed earlier and acquisition or
completion of construction takes place in any subsequent year.
Meanwhile interest becomes payable.
In such a case interest paid/payable for the period prior to previous
year in which the property is acquired/constructed will be aggregated
and allowed in five successive financial years starting from the
year in which the acquisition/construction was completed.

Different categories of properties
The annual value has to be determined for different
categories of properties. These are:
I. House property which is let out throughout the previous
year
II. House property which is let out and was vacant during
whole or any part of previous year.
III. House property which is part of the year let out and part
of the year self occupied.
IV. House property which is self –occupied for residential
purposes or could not actually be self occupied owing to
employment in any other place.

(A)House property which is let out
throughout the previous year
The annual value of any such property shall be deemed to be:
(a) The sum for which the property might reasonably be
expected to be let out from year to year, or
(b) where the property or any part of the property is let out
and the actual rent received or receivable by the owner in
respect thereof is in excess of the sum referred to in clause
(a), the amount so received or receivable.

Municipal value of house is Rs 95,000, fair rent is Rs 130,000 and standard
rent is Rs 110,000. The house property has been let for Rs 12000 p.m.
Municipal taxes during the year were Rs 40,000. Compute annual value.
Sol:-
(a) Expected rent shall be higher of municipal value (Rs 95,000) or fair
rent (Rs 130,000) but restricted to standard rent (Rs 120,000)
Hence, expected rent = Rs. 120,000
(b) Actual rent received or receivable (12000 x 12) = 144,000.
Gross Annual value shall be higher of expected rent (Rs 120,000) or actual
rent received/receivable (Rs 144,000)
Therefore, Gross annual value = Rs 144,000
Less: Municipal taxes paid (-) Rs 40,000
__________
Net Annual Value = Rs 104,000

(B) House which is let out and was vacant
during the whole or part of previous year
I. Gross annual value where the property is let and was vacant for part of the
year and the actual rent received or receivable is more than the reasonable
expected rent in spite of vacancy period:
The gross annual value in this case shall be whichever is HIGHER. :
(1) The sum for which the property might reasonably be expected to be let
from year to year , or
(2) Actual rent received or receivable

Municipal value of house is Rs 95,000, fair rent is Rs 130,000 and
standard rent is Rs 110,000. The house property has been let for Rs
12000 p.m. and was vacant for one month during the previous year.
Municipal taxes during the year were Rs 40000. Compute annual value.
Sol :-
(a) Expected rent shall be higher of municipal value (Rs 95,000) or fair
rent (Rs 130,000) but restricted to standard rent (Rs 120,000)
Hence, expected rent = Rs 120,000
(b) Actual rent received or receivable (12000 x 11) = 132,000
Gross annual value = Higher of (a) or (b)
Therefore, gross annual value shall be Rs 132,000
Less: Municipal taxes paid (-) Rs 40,000
___________
Net Annual Value = Rs 92,000

II. Gross annual value where the property is let and was vacant for the
whole or part of the year and the actual rent received or receivable owing
to such vacancy is less than the expected rent.
The annual value of the property shall be determined under this situation
if all the following 3 conditions are satisfied:
(1) The property is let,
(2) It was vacant during the whole or part of the previous year.
(3) Owing to such vacancy, the actual rent received or receivable is less
than the expected rent,
In this case, the gross annual value shall be the actual rent received or
receivable.

Municipal value of house is Rs 95,000, fair rent is Rs 130,000 and standard
rent is Rs 110,000. The house property has been let for Rs 12000 p.m. and was
vacant for three months during the previous year. Municipal taxes during
the year were Rs 40000. Compute annual value.
Sol :-
Expected rent Rs 110,000
Actual rent received/receivable (Rs 12,000 x 9) Rs 108,000
As the actual rent received or receivable owing to vacancy is less than the
expected rent, the gross annual value will be actual rent received /
receivable (i.e. Rs 108,000)
Municipal taxes paid Rs 40,000
Net Annual Value (Rs 108,000 – Rs 40,000) = Rs 68,000

(C). House property which is part of the year let
out and part of the year occupied for own
residence
Where a house property is, part of the year let and part of the year occupied
for own residence, its annual value shall be determined as per the
provisions relating to let out property.
In this case, the period of occupation of property for own residence shall
be irrelevant and the annual value of such house property shall be
determined as if it is let. Hence, the expected rent shall be taken for full
year but the actual rent received or receivable shall be taken only for the
period let.

Ajay owns a house property in Delhi whose municipal value is Rs 200,000 and
the fair rent is Rs 240,000. The standard rent is Rs 220,000. It was self
occupied from April to July and from August it was let out for Rs 18,000 p.m.
Compute the annual value of the property if the municipal tax paid during the
previous year was Rs 40,000.
Sol :-
Gross annual value shall be higher of the two :
(a) Expected rent (Municipal value Rs 200,000 or Fair rent Rs 240,000,
whichever is higher) but cannot exceed standard rent (Rs 220,000) Rs
220,000
(b) Actual rent received/receivable for let out period (Rs 18,000*8) Rs 144,000
Hence,
Gross annual value = Rs 220,000
Less: Municipal tax paid (-) Rs 40,000
___________
Net Annual value = Rs 180,000

(D). Computation of income of a property which is self
occupied for residential purposes or could not actually
be self occupied owing to employment
Where the annual value of such house shall be nil:
Where the property consists of a house or a part of a house which:
(a) is in the occupation of the owner for the purposes of his own
residence and no other benefit is derived therefrom; or
(b) Cannot actually be occupied by the owner by reason of the fact that
owing to his employment, business or profession carried on at any
other place, he has to reside at that place in a building not belonging
to him,
The annual value of such a house or part of the house shall be taken to be
NIL.

Where the annual value of such house shall not be nil:
The annual value of self occupied house shall not be nil:
(i)If such house or part of the house is actually let during the whole or any part of the
previous year; or
(ii) any other benefit is derived by the owner from such house.
In the above cases, the annual value of the property shall be determined as if it is a let
out property.
Annual value of one house away from work place
Annual value of one house property, which is not actually occupied by the owner
owing to employment or business/profession, carried on at any other place would be
NIL, subject to the following conditions:
1)The assessee must be the owner of only one house property
2) He is not able to occupy the house property because of his employment, business
etc. away form the place where the property is situated.
3) The property should not have been actually let out or any other benefit is derived
therefrom.
4) He has to reside at the place of employment in a building not belonging to him.

Where assessee has more than one
house for self-occupation
If there are more than one residential houses, which are in the occupation of
the owner for his residential purposes then he may exercise an option to treat
any one of the houses to be self occupied .
The other house(s) shall be deemed to be let out and the annual value shall be
the sum for which the property might reasonably be expected to let from year
to year.
Deduction in respect of one self-occupied house where annual
value is Nil
oWhere annual value of one self-occupied house is nil, the assesse
will not be entitled to the statutory deduction of 30% as the annual
value itself is nil.
o However, the assessee will be allowed deduction on account of
interest (including 1/5th of the accumulated interest of pre
construction period as under:

(a) Where the property is acquired or constructed with capital
borrowed on or after 01/04/1999 and such acquisition or
construction is completed within 3 years of the end of the
financial year in which the capital was borrowed: Actual
interest payable subject to maximum of Rs 150,000 if
relevant certificate is obtained.
(b) In any other case, i.e. borrowed for repairs or renewal or
conditions mentioned in clause (a) are not satisfied:
Actual interest payable subject to a maximum of Rs
30,000.

Special Provisions
 Unrealized Rent realized subsequently:-
Where any rent could not be realized and
the same was allowed as deduction and
subsequently if such amount is realized, such
an amount will be deemed to be the income
from house property of that year in which it
is received.
It is not necessary that the assessee
continues to be the owner of the property in
the year of receipt also.

Arrears of rent received:-
Where the owner of the house property receives arrears
of rent from such a property, the same shall be deemed
to the income from house property in the year of receipt.
 Standard deduction of 30% of the receipt shall be
allowed as deduction towards repairs and collection
charges. No other deduction will be allowed.
 The assessee need not be the owner of the house
property in the year of receipt.

House property owned by co-owners :-
If a house property is owned by two or more persons,
then such persons are known as co-owners. When the
share of each co-owner is definite and ascertainable, it
has been provided that each of the owners will be
assessed individually in respect of share of income
from the property.
When each of the co-owners of a property uses it for
his residence, each of them will also get the
concessional treatment in respect of one self
occupied property.

House property in a foreign country:-
In case of a resident in India, income from property
situated in foreign country is taxable, whether such
income is brought into India or not.
However, if the assessee is a non-resident or resident
but not ordinarily resident in India, income from a
property situated in foreign country will be taxable in
India only when it is received in India during the
previous year.

Loss from house property:-
There can be loss under the head “income from house property”
› In the case of a self-occupied property, the annual value is taken
as nil. No deductions are allowed except for interest on borrowed
capital up to a maximum of Rs 30,000 or Rs 150,000 . Naturally,
therefore, there may be a loss in respect of such house property up
to a maximum of Rs 30,000 or Rs 150,000, as the case may be.
› In respect of any other house property, namely a house
property which is fully let out or part of the year let out etc.,
there are no restrictions on deductions and therefore, there
can be loss under this head in respect of such properties due
to municipal taxes as well as deductions. Similarly,
deductions under section 24 in case of property deemed to be
let out can be more than net annual.

Any income which is arising from business and profession will be
taxable under the head of “Business/Profession” as per the
Sections 30 – 31 of Income Tax Act.
Under Business or Profession, 2 types of accounting system are
required to prepare business transactions. They are :
1. Cash System :- Under cash system only cash transactions are
considered while preparing final accounts. (outstanding
expenses or prepaid expenses if given are also ignored.)
2. Mercantile/Accrual System :- Any income or expenditure will be taken
in computation which is related to the previous year either paid

A. If Profit and loss account or Income
and expenditure account is given
Net profile as per Profit and loss account
Or
Net surplus as per Income and expenditure account
…
ADD (+) :- Disallowed expenses included directly or
indirectly in the debit side of Profit and Loss account.
1. Any type of donation, charity, gift, etc. which is not
related to business
2. Personal gift, present, help
3. Income tax, wealth tax
4. Provision for taxation
5. Penalty or fine
6. Interest on own capital
…
…
…
…
…
…
…
...

7. Any type of reserve or provision
8. Own life insurance premium
9. Personal expenses, domestic expenses, drawings,
expenses on relatives
10. Salary withdrawn by owner
11. Any type of capital expenditure or capital loss
12. Speculation loss
13. Subscription or advertisement to political party
14. Purchase or acquiring cost of patent, copyright
technical know-how is disallowed being capital
expenditure, but 25% depreciation will be allowed
separately
15. Preliminary expenses are allowed in 5 installments so
4/5 portion will be disallowed if whole amount is debited to
Profit and loss account
16. Voluntarily payment to employee or his relatives
17. Excess depreciation
18. Municipal tax, repairs, insurance, etc. relating to let
out property
…
…
…
…
…
…
…
…
…
…
…
…

19. Cash payment more than Rs. 20,000/- for
any business expenditure in a day (100% of such
payment will be disallowed.)
20. Books for profession (not annually published,
capital expenditure disallowed but depreciation
@ 60% will be allowed.)
21. Any other item which is not related to
business.
22. Any income which is related to business but
not credited to profit and loss account.
...
…
…
…
…
LESS (-) :- Expenses or losses which are related
to business but not recorded or less amount
debited to Profit and Loss account.
1. Allowed depreciation
2. Allowed bad debts
3. Due bonus to employees
(…)
(…)
(…) (…)

LESS (-) :- Such incomes and receipts which
are not related to business or profession.
1. Rent from property
2. Interest and dividend from investments
3. Capital receipts
4. Personal gifts
5. Capital gains
6. Any other income
(…)
(…)
(…)
(…)
(…)
(…) (…)
TAXABLE INCOME
FROM BUSINESS OR
PROFESSION
XXX

B. If Receipts and Payment account is
given
ADD :- Professional earnings
1. In case of a doctor
i. Sales of medicines
ii. Consultation fees
iii. Visiting fees
iv. Operation fees
v. Nursing home charges
vi. Gifts from patients
2. In case of a lawyer or C.A.
i. Fees
ii. Audit Fees
iii. Examining fees
iv. Advising Fees
v. Gifts from clients
…
…
…
…
…
…
…
…
…
…
… …

LESS (-) :- Allowed expenses relating to profession.
1. Office expenses
2. Cost of medicine or stationery
3. Rent of clinic or office
4. Salary to employees
5. Interest on loan taken for profession
6. General expenses
7. Expenses of property which is used for his
profession
8. Car and travelling expenses
9. Depreciation
- car 15%
- furniture 10%
- surgical equipments 15%
- books for profession
a. annual publication 100%
b. other books 60%
10.Subscription to association
11.Magazines
12.Other expenses
(…)
(…)
(…)
(…)
(…)
(…)
(…)
(…)
(…)
(…)
(…)
(…) (…)
TAXABLE INCOME FROM BUSINESS OR
PROFESSION
XXX

Dangerous notes
 Insurance premium :- Other than life insurance premium of owner, all premiums
are allowed.
 Patent, copyright and Trademark :- Expenditure on these are 25% allowed.
 Preliminary Expenses – These are 20% allowed.
 Rural and Social Development – 100% allowed.
 Scientific Research – Expenditure on scientific Research is 100% allowed.
 Voluntary Retire Scheme – Expenses on voluntary retire scheme are 20%
allowed.
 Donation – Any donation to Union and Chamber of Commerce (COC) is
allowed but all other donations are disallowed.
 Advertisement – Expenses on advertisement are 100% allowed but advertising
through political party is disallowed and advertising through flow sign board is
10% allowed.
 Outside India Payment – Any payment to outside India are allowed after Tax
Deducted At Source (TDS)

 Depreciation :-
 If any asset is acquired during the previous year and
it is been used for less than 180 days, then half year’s
depreciation will be provided.
 If any machine is purchased in the previous year,
then 20% additional depreciation will also be
provided.

Buildings
Factory, office, godown, showroom, etc
Residential buildings for employees
Buildings used as hotel, boarding houses
Temporary erections
10%
5%
10%
100%
Furniture & Fittings
Furniture including electric fittings 10%
Plant & Machinery
General plant & machinery
Other vehicles (scooter, motor cycle, etc)
Ships
Pollution control equipments
Computers
Motor Cars
Buses, trucks, taxies
15%
15%
20%
100%
60%
15%
30%
Books (for profession)
Annual publication
Other books
100%
60%
Intangible Assets
Patents, copyrights, technical know-how 25%

Income related to contractors under Section 44
(AD) :
8% of the total receipts are taxable income
1. If accounts are not maintained.
2. If receipts of the year are not exceeding Rs. 1
crores
Turnover of a retail Cloth Merchant is 48 lacs during the previous year.
In this case 8% of 48 lacs i.e. 3,84,000 will be deemed income from
business

Income of Transport owners :
Taxable income for either heavy or medium or light
goods vehicle = 7,500 for every month or part of a
month
1. If accounts are not maintained
2. If heavy vehicles are less than 10.
A truck operator assessee owns 2 heavy goods vehicles for 9 months 14 days, 3
medium goods vehicles for 10 months 8 days and 4 light goods vehicles for 7
months 23 days during the previous year. He did not keep any account for
fright receipts and expenses.
A. 2 heavy goods vehicles for 10 months
(9 months 14 days) @ 7,500 per month
[2 x 10 x 7,500] 1,50,000
B. 3 medium go0ods vehicles for 11 months
[3 x 11 x 7,500] 2,47,500
C. 4 light goods vehicles for 8 months
[4 x 8 x 7,500] 2,40,000
Estimated Business Income = 6,37,500/-

Any profit or gain arising from the sale
or transfer of a capital asset is chargeable
to tax under the head ‘Capital Gains’.
Capital asset means property of any type,
whether fixed or circulating, movable or
immovable, tangible or intangible.
Example :- Land, building, plot, gold,
silver, precious metals, jewelery, shares,

Short term Capital assets :- Any asset
held by a person for less than 3 years
and in case of shared, for less than 1
year is known as a short term capital
asset.
Long term Capital Assets :- Any asset
held by a person for more than 3 years
and in case of shared, for more than 1

A. Short Term Capital Asset
Sale of Asset …
LESS (-) :- Selling Expense (…)
= Net Sale …
LESS (-) :-
1. Cost of asset
2. Improvement expense of capital nature
(…)
(…) (…)
TAXABLE SHORT TERM
CAPITAL GAIN
XXX

B. Long Term Capital Asset
Sale of Asset …
LESS (-) :- Selling Expense (…)
= Net Sale …
LESS (-) :-
1. Index Cost of asset
2. Index cost Improvement expense of capital
nature
(…)
(…) (…)
TAXABLE long TERM
CAPITAL GAIN
XXX

Index cost means charging the value of one period
into another.
For any asset acquired prior 01-04-1981, market value
on 01-04-1981 or cost of asset whichever is higher will
be considered as cost of asset for that purpose.
Any improvement expense on capital asset prior 01-
04-1981 is not considered due to market value of 1981
include all such expenses
Business asset on which depreciation is provided are
always short term capital asset. (Written down value on

Short term capital loss is adjusted against long term
capital gain but long term capital loss is adjusted only in
long term capital gain.
For any bonus share received prior 1981, market value
on 1981 is considered cost of bonus share and if received
after 1981, cost is NIL.

Income which is not covered in the first four heads i.e.
Salary
House Property
Business or Profession
Capital Gain
Is taxable under this head ‘Income from other sources’

 Foreign Agriculture Income :- Fully Taxable
Royalty Income :- Fully taxable
Directors Fees :- Fully taxable
Plot let out income :- Fully taxable
Bank interest :- If more than Rs. 10,000/- tax deducted at
source (TDS) at 10%.
Family Pension :- 1/3rd of pension or Rs. 1,500/- whichever is
less is exempted. Example : If Rs. 42,000/- is the family
pension received, then 1/3rd of Rs. 42,000/- i.e. Rs. 14,000/- is

Interest on Securities :-
1. Tax free Government securities = fully exempted.
2. Less tax government securities = fully taxable (No TDS,
hence its taxable)
3. Tax free commercial security = fully taxable (TDS is
always deducted on listed securities at 10% and on unlisted
securities at 20%)
4. Less tax commercial securities = fully taxable (if net
amount is given, it implies tax deducted at source; otherwise
no TDS)
 Indian Company Dividend :- Exempted
 Post office Interest :- Recurring deposit taxable and other
exempted.
 Casual Income :- Taxable and TDS = 30% (lottery, horse
race, etc)

 Income from Non-agricultural land :- Fully taxable
 Income from sub-tenants :- Fully taxable
 Assets let out income :- Fully taxable
 Interest on National Saving Certificate :- Fully taxable
 Income of minor :- Up to Rs. 1,500/- per annum exempted
excess taxable. (It is included in parents income.)
 Cricket player Income :-
1. Test matches in India : 25% of remuneration received
by the player from Cricket Control Board is taxable.
2. Matches outside India : 50% of amount received is
taxable.

Gift received :- In the occasion of marriage or will in cash
or kind, the amount received is fully exempted. In other
cases, received from relatives up to Rs. 50,000/- exempted
and excess is taxable.

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